James Aitken On Why The Price Of Ai Will Pop Kevin Warsh Gold And Inflation

TITLE: James Aitken on why the price of AI will pop, Kevin Warsh, gold and inflation CHANNEL: Behind the Balance Sheet DATE: 2026-06-18 ---TRANSCRIPT--- From time to time there are colossal secular trends in the world that drive everything. These secular trends arrive, some people [music] 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 [music] it, not overthink it, and imagine how big it could be, and how to drag everything up with it. And then I happily admit that I was a bit too slow to understand the impact of AI, and now I get it. And if AI, if the China property boom is the right analog for AI, then our challenge is actually to not overthink it, and not question it, and just try [music] to understand how we stay with it without losing money. 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 [music] it. Or I could more gently say, look, here’s the actual McKinsey data on AI adoption. Here’s all the bottlenecks that we see all around the world in everything. We have a bottleneck in bottlenecks, bottleneck squared.

So bottlenecks create [music] inflation? Well, yes, there’s a risk. So James, welcome back. You’re in a very small group of people. I’ve 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 a 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 3 years ago? Good to see you again, and thank you for having me back. 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. No, it’s good to see you, and uh here we are in the West End of London on the during this extraordinary freakish English weather. Um I’m loving it. Everybody’s complaining that it’s 30°. I I’m not complaining. I mean, I think it’s great. It’s It’s almost like being back home in Australia, but there we are. Um Yeah, I think it’s that it’s interesting that the question I’ve been asked most over the last 9 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 does the bubble pop? It doesn’t matter what the asset class is, but isn’t that an 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 that’s interesting, isn’t it? It’s not Well, obviously, there’s sub questions about straights of four moves 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, you know, metaphorically, I’m working with all Well, I am working with all these extraordinary investors all around the world across every asset class, jurisdiction, mandate, etc. But very roughly, it’s broken down into two buckets. There are people outside the AI ecosystem looking in trying to understand it. 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 CoreWeave’s 9 million with an 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. [snorts] And the distinction between the two, and I think this applies to me, to be very clear, I can barely wrap my head around 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 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. Well, we know it’s accelerating, right? Yeah. Yeah. I would agree What it 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 what I was doing wrong? [laughter] No. No. No. No. Here we are on Behind the Balance Sheet therapy couch, but um No, it’s like you There’s 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. Yeah. Reminding them of what they know to be true. And 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 on AI adoption. Here’s all the bottlenecks that we see all around the world in everything. We have a bottleneck in bottlenecks. Bottlenecks squared.” The world’s usage of a Claude 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? So, bottlenecks create inflation. 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, you know, 30 years ago by Alan Greenspan. And more officially like by Bernanke sort of 14 15 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 uh 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 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 we’re going to focus on resilience over efficiency, which is the inverse of the past several decades, we’re implicitly we’re making a decision that we’re not [snorts] going to slow demand and slow everything down and crash things to get back to 2% just for the sake of 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% than 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 remember it, all this discussion about long-term bond yields and everything else, where 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 flipped the switch from efficiency optimizing everything to, you know, from just in just-in-time to just-in-case, etc., right? 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 high 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 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. And you can live with a bit higher bond yields. 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. They 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 it we didn’t have a crash. We didn’t have a recession. The point being that you know, 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. We shall find out. But in that environment, presumably, we should expect those stocks with further out cash flows to do less well. So, we should be But that’s not what’s happening in the market, is it? I mean, you What you’re saying is duration is going to be something that we should have less of. But, isn’t they’re not really those stocks aren’t really underperforming, are they? Was was some are like 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 example of the 10-year note in the United States, the average clearing price is closer to 5% in nominal terms or two 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 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. And you’re expecting the markets to continue to muddle through. I mean, you’re not nervous. No. No, I mean, look, nervous about market structure, single stock leveraged ETFs, the casino-like characteristics of modern financial markets, polymarket cashe. What 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 we take it too far. Now, how far’s too far? I don’t know. Do we diminish the impact of the retail hordes 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 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 have 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 the problem, right? 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 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 on nothing. And if you understand that’s because there’s an air pocket of market like liquidity, and actually the fundamentals of that particular business is 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 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 2 years. And Well, hang on, 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. And are you focusing on any particular areas of the market? I mean, obviously the AI plumbing. 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 like you and like our friends listening, 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 and they’re more disciplined, it seems to me. I mean, you you might have a different opinion, but the new management, if you will, like a like a trotty at Rio and and BHP and others, you know, 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 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, but 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’re saying well placed to capture higher spreads and margins for years to come, and I think the world’s slowly discovering that. So, I spend a lot of time on the you know, it’s a bit of a cliche, but it is the picks and shovels of the AI CapEx burn. 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 Rio’s, and many others that we could name. Look, the Glencore’s, and you keep it simple, right? And you trust management, and disciplined 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 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. It’s an extraordinary story about this business and this company and what they’re doing. And how like so many of these, um, they too 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 [clears throat] very nice conversation, and a lot of fun, and and some fancy wine. Um, and one of the other guests I’d sort of vaguely heard of, and we’re 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 you, 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 supplies of any company on earth, let alone Bloom Energy’s key supplies, are saying in their earnings calls that we expect Bloom Energy’s um compound growth over the between now and 2030 to go up by 30 per you know it’s all there in the public domain and Bloom Energy’s share price is sort of oscillating and not doing much. And then suddenly it rips. You know, 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 and 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 GE even over and everything else. [snorts] 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 people going to do?” And just understanding that and listening to this guy talk for an hour and he’s Look, if I might say so, he’s like so many of the great investors you and I know. He’s he or so many people in markets I’ll say very diplomatically somewhere on the spectrum. Because it’s all about pattern recognition. Mhm. 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. Um to be very clear for our listeners, 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. It’s probably all over for Bloom Energy because it’s in my Substack the other other day, but Oh, no. What’s quite interesting about that is it’s a very good illustration of disruption. Absolutely right. And you need to be very aware of that at that sort of thing. Absolutely right. And it’s not to be very clever and say it’s all over for Ajeev and over anything like that. It’s not. It’s just to be aware of the disruption that is happening right under our noses. And Stephen, it goes back to that that um metaphor I used before. And to be clear, it’s not very precise, but just like so many of my clients, I’m on the outside of AI 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 actually happening and the dynamics. And um I’ve been very lucky there. I went to a talk um Ed Conway was interviewed by my friend Jingle Davis. another book coming out. Yeah. I can’t wait to read it. Ed’s book it was just fantastic. So well researched. Absolutely fantastic. Yeah. He was saying um how important physical economy is. And and of course that’s true. Do you think investors have underinvested in that? Is it I mean the miners are like 1 and 1/2% of the You read my mind, yeah. Yeah, I mean materials 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 so fascinating is these essential businesses we’re talking about so many of them are ones that we systemically defunded under the manage- 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 I 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, we’ll 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 seem ready to go. Now, if I want to be cynical and talk about the flip side of all of this, 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? [laughter] [gasps] So, oh no, no, commodities aren’t cyclical. No, they’re always cyclical because eventually the supply comes. Eventually, [snorts] 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 2030. Yeah, well, it might even be be further away than that. But, um are there any of those commodity markets that you’re concerned about? Everything’s pretty positive? Well, it’s not so much concerned, it’s just I think that the way you would expect, whether it be copper. I mean, look, it’s it’s it’s all a function of supply constraints, isn’t it? And 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&A because it’s cheaper to buy it than develop it. So, that’s obviously coming. And I’m sure all the P&J’s 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 be a 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 confiscation of Russian assets, made perfect sense for all other central banks in 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 shamozzle, which it is a shamozzle, 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 politicians 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, and more accurately when the price diverges from the narrative. That’s always a flag, isn’t it? Yeah, no, absolutely. 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 it? 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. 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 a a straightforward supply and demand, and this has been exactly the opposite of what you expect. And but have you any thoughts about what we should be looking for other than the price as to where it goes next? Well, I think it’s 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 that would be my guess. So, the next test for me for gold, in terms of are the long-term structural bias still there? It’s 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 give or 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, I 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, a 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 want to watch Yeah, I mean, obviously, if interest rates are going to be higher then that’s a another headwind. Yeah. But, you you mentioned the the Fed, and we we better get the new Fed chairman out the way, because normally, the new Fed chairman gets tested by the bond markets, but they want to see what he’s made of, or she’s made of. And um what’s going to happen? How are they going to test him? Well, I’ll shock no one by saying Kevin is a very ambitious man. Or what Always has been, and he has been lobbying for the job, as everyone in Washington knows, assiduously for not just the last 2 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 market would broadly 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 or and 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 I’d be wary of that. And I’d pay 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. Good statement. Did you Did you 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 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 all 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? I 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. Hm. It’s not It could have been a lot worse, right? 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 he’s, 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 the balance sheet, aka quantitative tightening, this that and the other.” 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 going to rush out and flog all sorts of Treasuries and agency mortgage-backed securities. They’re not going to do that. They’re going to think about it in a structural way. And for the first time since 2008, 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 uh post-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, I my gentle 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 Fed’s avoided for too long.” 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 1,000 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, behindthebalancesheet.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. I like to take a quiet moment for myself first thing in the morning. Get myself right on the inside before, you [music] know, the chaos begins. Venture capital is an extremely competitive business. So, if you’re not playing to win, why be here? We’re investing across the frontier. Aerospace, deep tech, industrials, manufacturing, and AI. I have to get familiar and dangerous with new industries and technologies [music] daily. That’s where where AlphaSense comes in. I spend a lot of time wearing down the control F button on my keyboard, [music] searching through individual documents. What I love about AlphaSense is the document Q&A [music] is huge for understanding what key insights are quickly. But, I think what it’s really [music] saving me is peace of mind, knowing that these are trusted sources. I’m not starting from scratch. There’s a lot of noise out there, and AlphaSense gets me the signal. Um, they they employ a lot of people, a lot of economists, and turns out that they’re probably better than somebody like you in charge and getting rid of all the Well, I wouldn’t I don’t think they’re that desperate. No, no. Well, you’d probably have to improve your your sartorial skills. Yes, I mean, I think I think long trousers and and no tennis shirts might be the way forward, yes. you know, but as long as you’re comfortable. But, where does that leave dollar? Again, you 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 got 1,500 emails, you got Bloomberg, you got WhatsApp. Where do you start? You got to go into the sales meeting and you got to go into the morning. You got no you got no headspace. You’re always on the back foot all day, which is absolutely terrible, terrible situation to be in. So, where do you start? You’ve got people opining on everything. The COVID experts are now the energy experts, are 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 the 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 I say to my I think we said this last time. I can’t remember, forgive me. 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 were 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 cost pass through profit margins and 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 do you see? Get Make yourself more iron and less comfortable. Free up their headspace. And then come back to me. Let’s have a chat. Let’s compare notes and let’s think about how we avoid making everyone else’s mistakes. Cuz 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-placed concerns about market structure, passive, quantum mental 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. 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 that’s spectacular. But you see these things. How How is You know, here’s a 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, Prysmian in Italy. Now, there is one of the world’s great companies. Prysmian. They make cables. They make them very well. Five [snorts] years ago, or maybe seven years ago, one of my clients said to me, “There’s these guys in Italy. They’re a 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 at this thing. Have you heard about AI? This was 10 years ago. They’re [snorts] doing this, they’re doing that. They’ve got the ship. Unsurprisingly, it’s called the Leonardo da Vinci. One of the world’s most They’re doing all these things. They’re telling me already that their forward order book for the next 2 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 then limit duration day last year it was a bit higher but it was dumped 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 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 the phrase here in the UK is moral 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’d 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 moral premium as well or execution premium or Trump people or whatever it is. Okay. So, why aren’t you selling the dollar? Now, all things considered, the dollar is remarkably bid. 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. Dollar-yen would not still be locked limit up, which is interesting in itself.

The yen’s dirt cheap, right? 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. But why is it? I mean, I I I the Swiss when it the Swissy when it was tied to the Euro. Yeah, 120. And I said, “Well, this is just like ridiculous.” And I And it just seemed to me like Sterling and the RM. And Well, why wouldn’t you fill your boots with Swiss francs? And which I did. And then I came into work one morning and So, it was you that knocked it out. [laughter] And And I know Oh, that’s quite good. And there was sort of panic on the floor and I The first thing I did was pick up the phone to my Mhm. Oh, that’s that’s a mistake. No, that’s a mistake. And and cut half my position. Yeah. And I mean, the yen just looks exactly the same, but it seems to take forever for the currency markets to wake up to this. Hang on. Let’s Let me just push back gently on that, okay? Oh, you can push back. You don’t need to be gentle. No, I like to be gentle. I like to be gentle. Um I I’ve you know, I started my career in foreign exchange 34 almost 35 years ago in in Macquarie Bank in Sydney. And youngest ever employee age nine. I was I was I think I was 10. Um [laughter] Um and you 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 yen. Why? Well, simply because Japan is an enormous exporter of capital. And if they’re doing something whether be selling dollars or buying dollars, it probably impacts the entire dollar complex. And we’ve seen another example of that recently. Dolly yen broke 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 Sanae Takaichi 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 [snorts] been so many you know, rash not not rational but so much commentary over the past 3 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 Topix, 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. But the point here is like lower down the list. 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 you’re bearish dollars and the yen’s not playing. In other words, the yen’s it’s rallying It’s very hard to stay bearish dollars. And there’s a few things in motion at the moment where the ECB’s probably going to 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. It’s unusual for you not to have an opinion. I mean Well, just on FX. I mean, 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 sell dollar for 5 years. Okay. But that’s tying up a lot of capital and there’s a lot of other things happening in the world. That’s the only thing I say. It’s like, okay, what’s the opportunity now? But 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. Last time we spoke, we discussed this idea about the Japanese banks repatriating. They’ve got They’re sitting on massive profits on the currency. And the 30-year JGBs bought 4.3 now. Well, that’s going to be pretty attractive if you’re a domestic bank. I mean, isn’t it likely that they will all start to bring money back? I mean, Only if they have a hole in their balance sheet, but they don’t. They’re earning enormous spreads. They’re 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 [snorts] it’s 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 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 cuz if it was bad enough, they’d just sell everything else and bring it home. Which is not a great day for the rest of the world, but there we are. So, what you’re really saying is that if the dollar starts to weaken, and then they lose confidence in the dollar, Right. then it will slide. But as long as it doesn’t go down, it’s probably okay. I I think it’s a sequencing thing because the yen for a whole bunch of structural reasons. I mean, the current account surplus rising. Jap- Japan exporting all sorts of important defense kit 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 got to be tilted towards Japan somehow. Hopefully, you can find it at an attractive price, although that’s increasingly difficult. And at some point, you think the yen’s going to rip. But it keeps not doing it. And if I just put up dolly yen on a blank piece of paper 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 10 people would say that thing’s going to explode higher. Right? Yeah, yeah, I know. That’s that’s the test 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 Bessent betting on Abenomics when dolly yen was 80, which is 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 Yen is Japanese portfolio flows. Yeah. And they’re not reversing. In fact, they’re still going out and it’s a remarkable thing. I wanted to talk about China, but while I remember, I just wanted to ask you your thoughts about the the S&P has got an amazing amount of dispersion now. I mean, it’s like, in theory, never been a better time to be a stock picker. In practice, quite hard to outperform. But this um opportunity set is really amazing. Why why is that happening now? Do you have Have you got any explanations for for it? At one level, it speaks to how efficient the equity market can be. Mhm. I mean, to see dispersion such as we’re seeing within the Mag 7 is extraordinary. I mean, it’s like Nvidia, just well, up until very recently, just sideways, sideways, sideways, sideways. You know, and I said to actually said to one client in February, “Am 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 it’s it’s doing better and it’s actually becoming less expensive, but I hope they bought it, but but yeah, that I don’t have a good answer for that. I just 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 It’s extraordinary and that’s been the case for a little while now. I regret I have no good answer for that. I just observe 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 I regret I don’t know. And you’ve any view on this sort of imminent IPOs of SpaceX, OpenAI, Anthropic, and what that will do to Yeah, Paul made a Whatever I mean, Mr. Druckenmiller, a man who never spoke when he managed other people’s money, now speaks all the time. And 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. But when Paul Jones speaks, I really learn it. Cuz they’re 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, you got it it it I’ve it’s so impressive.” Whereas others might be say, “Thanks, but you know, that’s life.” [snorts] But Paul first and foremost is 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 I’ve never heard of it, yeah. Have you heard it? Yeah. Yeah, yeah, yeah. Um or 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 I 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. You know, SpaceX and OpenAI and then goodness knows what else to come. Massive unlock and distribution of massive P&L to 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 with SpaceX. You [snorts] 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 CommSec 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 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 they haven’t been many IPOs. SpaceX is a big one. Open AI, 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 price is to me is perhaps less interesting than 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’s 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 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 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 IPO will be recycled into anything private or liquid. It will go back into public markets, and that will be worth watching as well. Oh, this is interesting. I mean, I 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 and a run 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 rude building costs and everything else. Obviously, they’ve restored the damage in Ras Laffan and Qatari LNG and everything else. They’re not going to be exporting capital, let alone to the United States, and they’re all a bit peeved at Mr. Trump. Okay. But, it’s really hard to sell something you 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 everything 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. No, I mean, I think this is going to be fascinating in all for all sorts of reasons. I mean, one you know, the US retail market market 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 at the valuations they’re talking about, right? 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 the IPO, and having that big 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 it’s in the benchmark, so I I kind of I’ve got to mitigate my risk. It’s a It’s It’s 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 that’s not great, but we Again, look, we’ll find out. Well, it’s fascinating. I think it goes in the index at 3x the free float. 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 to sell. But you see, this is there’s another aspect to this. Every is every CEO of every listed company knows that a big chunk of the re-rating game is getting into XYZ index and then working your way up from the Russell to 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 that you tick a box as part of a waiting of an index. And everyone’s trying to do that. You know, anyone who’s trying to do an IPO they 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 That’s reality. I It’s not I’m not saying it’s great, but it’s reality. Now, last time we spoke you were quite right on China because you said, you know, it kind of muddled through and property’s been a drag, but hasn’t, you know, a disaster and it it it is 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’re going to invest in the US, you’re going to invest in the physical manifestation, or you can invest in China. Are many of them doing that? Not really. No, they’re not. It’s It’s kind of interesting. They’re not. I mean, they’re they’re investing in China. Yeah. And they’ve done pretty well since you know, the the the starting pistol, if you will, was Jack Ma being rehabilitated. Yeah. That was it. You didn’t need to read another China research report. Oh, Jack Ma’s back. That’s it. Go. 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.” And it’s I think it’s worked beyond their wildest dreams in Seoul. And Xi Jinping’s like, “Well, 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 was the starting gun and and 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 it’s interesting that compared to 2 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 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 3 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 in 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 policy makers in the West for real 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. Oh, 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 for coming. See you next time. I’ll see you actually in 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. Interesting thing you 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. do. I don’t know why, but [laughter] Stop it. Stop it. What do those elite investors, what do they do differently? Ah, 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, yeah. That’s the second step. Let me give you an example of an extraordinary amount of work 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. Well, 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 [snorts] 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 a key to staying in the game. You know, pragmatism versus dogmatism. And this chap learned it very early on. He I say you for 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 saying 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 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 important’s going on. I might not know what it is, I just know something important’s going on, 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 [snorts] 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 in balance? Am I doing this? Am I doing that? In other words, am I in the right state of mind to to put this bet on, whatever it is. Whereas most of us and dare I say it certainly applies to me, we think we know something, it’s like, oh, let’s have a go. Let’s 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 something about this asset that I think’s 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, is like, “If I’m going to trade, it’s going to be 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 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 euro’s there in Tokyo, I think the spooz are going to be there.’ You know, you’ll always get it within 10 basis points. So, most of the time, nothing’s happening. So, it’s like, ‘All right.’ Some days, he will notice things. Again, we go back to pattern recognition. We’re 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 his screen, go through all these prices, rates, commodities, everything digital. And [snorts] then he’ll go back and say, “Is anyone talking about that thing that’s starting to move in Korea?” No. “I’m smelling something. I’ll put one bet on that.” And then it keeps going. And then he’ll add and add and add. It could be Dolly and it could could be whatever. He’s a macro guy. 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 cuz 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. All right, that’s Machiavellian, but that’s what it’s about. Be less stupid than everyone else. And then, take full advantage of their mistakes. Now, 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&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’ll start there and then I’ll check in time inside myself. And if it all lines up, I’ll have a red-hot go. 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 be patterns or just is really extraordinary. Now, of course, you’ve been doing it long enough, it becomes ingrained. Mhm. You know, it becomes habits. But, for me, so many of these people are I’m I’m not saying idiosyncratic, that’s wrong or iconoclastic. They’re just so wonderfully weird. Wonderfully weird. And that’s their edge. 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. Yeah, well, we know that, right? We know It’s interesting you say that, because I always spend a lot of time looking at share prices, and I was I always found it puzzling why you know, people tend to write off technical analysis. And they say, “Well, actually, you know, the share price is like the most important piece of information.” Yes, it’s how we keep score. How about this for How about this for a um to to encapsulate what we’re discussing? So many people approach investing and trading and whatever as I am right. That’s where you start. Or a 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? Very different. 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. But this guy is 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?” And he’s 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 up the phone. Just bangs everything out. Cuz he Yeah. He believes it’s you You 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 position because his back started hurting? You know, there actually is something to that. Oh, no, I I absolutely 100%. And your friend that um thinks about how he feels, does he keep a diary of how he’s feeling? right. Does that Do you do that? I’ve started doing it this year for a number of reasons, but you know, I actually find it quite helpful because it it it the first level it gets some of your more ridiculous thoughts out of your head, which is good. All right? That’s a good thing. But also just as a cross-check and as a discipline to say, “Okay, I thought X, I thought Y.” And it’s sins of commission and sins of omission. You know, I knew that. Not just hindsight, but actually I wrote that down and I didn’t action it and I 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 wine, second. Um You know, and you see patterns like, “Right, stop it cuz that’s harming my performance.” That’s where it’s useful. So, you drinking less red wine or Yes. Really? Yes, I am. Marginally. Marginally. Oh, yeah. But I am. I I just have bits and pieces, but yeah, you just notice the difference when you’re feeling a little bit foggy and you’re not. Huge difference. So, um what are you reading? What What’s the What would you really recommend to listeners? It’s hard to know where to start because I’m always reading so many things. I thought you recommended the Barton Biggs book. Really good. Really, really good. Wealth Won Wisdom. Biggs had a job on Wall Street, investment strategist, wide following. You know, he’s working investment bank, 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’ve 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 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 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. 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. Oh, yeah. I can’t wait to read it. I mean, I I think it’s fascinating. It’s a very, very 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 my friend that client who seems to have benefited massively from understanding what makes him tick. Um I’ve got so 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 if I can send you a brief update in the so-called show notes of a selection would be brilliant. You promised to do that last time you never did it. So Whoops. Well well you hold me to it now. I do apologize. We’ve got three We’ve got three normally have I normally have three or four books on the go because books 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. 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 another level of intelligence and intuition and it takes you away from thinking about you know, what’s the price of gasoline going to do if the Straits of Hormuz 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 gentleman called Andy Stumpf. uh 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. So, there’s So, it’s Look, I’m just going to I’ve been going down a bit of rabbit hole this year about mental health because I think it’s very important and interesting in understanding myself and understanding you know, to be blunt, how is it that I’ve been able to do what I do for 35 years in finance? And so, 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? You know, this 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 that’s great, but why? Better late than never try to find that out, right? Well, I think that’s fairly obvious. I don’t know why you can’t work it out, but if we do this again in 3 years, Well, I hope we can. Well, I’m Well, hopefully we’ll do it sooner than that. But, if we do it again in 3 years, what do you think we’ll realize that we didn’t understand today? 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’m I I I wonder about I think that from an investment perspective, okay? From time to time, there are colossal secular trends in the world that drive everything. Now, I’m not saying it’s the right analogue, 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 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 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. The 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, 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 then I happily admit that I was a bit too slow to understand the impact of AI, and now I I get it. And if AI if it’s the China property boom is the right analog for AI then our challenge is actually to not overthink it, and not question it, and just try 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 3 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 luck- 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 education courses at the end of 2024 because it was with a very great man, Richard Zeckhauser. Now, Zeckhauser is one of the world’s great bridge players. He’s also one of the world’s greatest decision theory um professors. So, everyone should look up Richard Zeckhauser. And even at the end of 24, he and his colleague Dan Levy, and Zeckhauser’s 80 years old, not prone to overstatement, and he stood up to a bunch of us at the exec executive education at before a bunch of us at the exec 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 Zeckhauser, with his brainpower, 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 3 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, you know? 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 3 years, it’s that we might have underestimated how big this is. Well, hopefully it will still be me in person, but it might be just the avatar. With just the AI questions. 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. I think I think you’re on a safe wicket here. Not a sticky one. But But yeah, I I do wonder about that and you you’re 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. They say, “Oh, that’s amazing.” I said, “No, no, it’s a human.” [snorts] It’s a human. It’s a 40-something Londoner who’s a 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 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 to 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, etc., etc. 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. Well, James, it’s always a pleasure to talk to you. Thank you so much for your time. Thank you, Stephen. Good to see you. Behind the 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 [music] only. Nothing in this podcast should be construed as investment advice or relied upon for investment decisions. Always do your own research.