Pitch Summary:
Natural Resources Partners (NRP) is positioned to generate significantly higher cash flows for unitholders due to an expected debt paydown in 2025. The company is asset-light, high-margin, and consistently cash-flow-generative, making the current valuation too low, especially with a projected 15–20% free cash flow yield at current depressed met coal prices.

BSD Analysis:
NRP’s business model benefits from its royalty structure, which allows it to maintain high margins without the operational risks associated with mining. The anticipated debt reduction will further enhance its financial flexibility, potentially leading to increased distributions to unitholders. The market may be undervaluing NRP due to current low coal prices, but the company’s strong cash flow generation and asset-light model provide a buffer against commodity price volatility. As coal prices recover, NRP’s valuation could see a significant re-rating.

Pitch Summary:
Lifeway Foods is poised for a potential acquisition by its largest shareholder, Danone, at a premium to current prices. The ongoing family feud within Lifeway’s founding family is nearing resolution, with Edward and Ludmila Smolyansky moving to replace the board and CEO Julie Smolyansky. This change is expected to facilitate serious negotiations with Danone, which has already shown interest with offers of $25 and $27 per share. Danone’s acquisition of Lifeway would align with its strategy to expand in the gut health and microbiome space, leveraging Lifeway’s dominant position in the US kefir market.

BSD Analysis:
The strategic acquisition of Lifeway by Danone could unlock significant synergies, given Danone’s extensive distribution and marketing capabilities. Lifeway’s current market share in the US kefir market is substantial, and under Danone’s ownership, there is potential for accelerated growth and cost efficiencies. The recent legal actions and proxy battles underscore the urgency and likelihood of a transaction. Despite the board’s initial resistance, the financial and strategic rationale for a sale is compelling, especially with Lifeway’s strong financial performance and growth projections. The potential for a higher offer from Danone remains, as the acquisition would provide a unique opportunity to dominate the US kefir market.

Pitch Summary:
Chewy, Inc. has demonstrated significant growth since its inception, leveraging exceptional customer service to capture market share in the pet industry. Despite initial unprofitability, the company has made strides towards financial stability, particularly under the leadership of CEO Sumit Singh, who has focused on maintaining operational independence and refining profitability. The pandemic further accelerated Chewy’s revenue growth, doubling from $4.8 billion in 2019 to over $10 billion in 2022. With an 8% market share and revenue growth at twice the market rate, Chewy is positioned to continue its upward trajectory by differentiating itself through superior customer service and strategic market positioning.

BSD Analysis:
Chewy’s strategic focus on customer service and operational independence has been pivotal in its growth story. The acquisition by PetSmart provided a financial cushion, allowing Chewy to expand rapidly without immediate profitability pressures. The appointment of Sumit Singh as CEO marked a turning point, with a clear focus on profitability and market expansion. The pandemic acted as a catalyst, boosting online sales as more consumers turned to digital platforms for pet supplies. Chewy’s ability to grow its market share and revenue at a rate double that of the overall market highlights its competitive advantage. The company’s continued investment in customer experience and operational efficiency is likely to sustain its growth momentum in the evolving pet industry landscape.

Description:
Is geopolitics really about ideology? Or is it a global portfolio reallocation? In this conversation, Dr. Warwick Powell reframes …

Transcript:
Today’s conversation will make you rethink about the geopolitical tension we’re watching all over the world and see it as nothing more than a mass global exercise of portfolio reallocation. And some countries are doing this far better than others. My guest today is crowd favorite Dr. Warwick Powell. And this conversation does get a little bit abstract. So I want you to remember that framework as you’re listening to it. Everything he’s talking about, the geopolitical narratives, the global competition, different economic incentives and trade aggression, all of this are various expressions of portfolio reallocation at a scale we’ve never seen before. This is the J Martin show where we dissect the greatest minds in geopolitics and finance. And here is Dr. Warwick Powell. Enjoy. >> This is Jay Martin. >> All right, I’m back with Dr. Warwick Powell. crowd favorite. It’s, you know, I get you on the show about twice per year. It’s always a highlight. I love chatting with you and I have a long list of things that we’re going to discuss today. So, thanks for making the time. >> Absolutely pleasure to be with you again. >> Here’s where I want to start, Dr. Powell. You know, I feel like uh we’re now just over one year into the American president’s uh first second term, second term, and I would assess that he has been quite consistent with his rhetoric. Rhetoric’s been aggressive, but consistently aggressive. What might have changed recently is the rest of the world’s response to that rhetoric. We’re seeing it on the margin. Little statements made, little policies, little trade agreements here and there. And I’m wondering if that’s part of a different trajectory that we’re going to begin to witness here. Is that assessment fair? Are you seeing any of the same signs? And if so, tell me about it. Yeah, look, I think the world is um finally calibrating to what a second Trump presidency means, not just in the short term, but what some of its longerterm structural legacies are likely to be. Of course, President Trump’s term in office uh shouldn’t be read in isolation either. In large part, his rhetoric and his policy priorities are a response to a combination of uh political challenges domestically, but also a particular American reading of why those challenges exist and what’s going on in the world that’s affecting American interests. The way that the rest of the world seems to be responding is that it uh has now come to a view that the uh changes that are being occasioned by things like tariff wars and other more imperial interventions particularly in things like Venezuela periodic talk of Canada being the 51st state, Greenland um interventions in global oil markets not by intervening in oil markets themselves, but by interdicting um oil tankers, um is an attempt by the United States to hang on to something of a a a period of global economic primacy. But my sense is that around the world there is a judgment that that’s not possible. the United States will cause some mayhem, disruptions uh along the way, but there are changes of foot that require countries to change their own attitudes not only to the United States, but to reapproach the state of the world in recognition of the world as it is, not as it perhaps once was or even as some might wish it to And I’m thinking in particular of how countries like Canada and the UK I think have reached a conclusion that the changes in the world are of such moment that they are not simply a temporary effect of President Trump, but are actually symptomatic of structural transformations that uh mean that the world isn’t going to go back to the way it was and as a result of that countries need to recalibrate their domestic and international structural postures. Canada for instance I think has reached a view again I don’t say this judging whether their assessment’s right or wrong but it’s clear that the current Canadian government this new carni government has concluded that the world uh demands a new posture from Canada it can no longer be as dependent upon one market as it has historically been 70% of exports have been destined for the United states and that is not a viable long-term position. And that means Canada must do other things because if it is to diversify its economic relationships, it must invest in the infrastructure that makes it possible. You can’t export LG to the rest of the world if you don’t have LG terminals that enable exporting LG to the rest of the world. You can’t export other energy products that Canada is rich in without the infrastructure to get that energy, stick it on ships and move it to other parts of the world. Canada is rich in uh raw materials and food commodities. To get those to market will require additional infrastructure development in transportation, storage and logistics. The other thing that seems to be very interesting is that uh again just on Canada for the moment and I’ll touch on the UK as well in a tick is that Canada itself is trying to get ahead of the curve now on the next generation of manufacturing and I’m particularly talking about uh EVs. So, the Canadian motor vehicles industry has historically been very intertwined with the supply chains um of Detroit. And we know that the assembly of motor vehicles in Detroit often includes parts that have literally um hopped backwards and forwards across the border as they’ve been transformed into useful things ultimately to to go into a motor vehicle. Those sorts of arrangements are coming under incredible stress. the trade agreements that have existed between Canada and the United States are likely to be radically overturned in ways that will disrupt the operations of these industries and supply chains. And so again, it looks like that the government is seeking to get ahead of all of that, leapfrog um the uh the old motor vehicle industry, if you will, and give itself some options to continue developing an advanced manufacturing sector, but in ways that are no longer tied or excessively tied to the supply chains of the United States. So that’s Canada. The UK is doing something similar. Um we saw the UKPM visit China what in the last um couple of weeks um towards the end of um beginning of February and uh and that speaks to a recognition that the old transatlantic economic model has come to an end. that the United States is no longer anchoring a global economic model in which the global west or the uh the global north, the advanced economies occupy center stage and that the uh center of economic gravity is shifting increasingly to the east and that’s an unavoidable reality, not a temporary blip um but a structural transformation in the way that the world economic system works. And China sits at the heart of all of that. So these are new realities that I think um are dawning on capitals around the world, but in ways that are now manifesting themselves in decisions to structurally change policy. Not just, you know, carry on and hope to get through the next term and maybe see what happens post Trump 2.0, zero but literally come to a view that the world has fundamentally changed and national economic policy must change with it >> and when you say you know there are changes a foot you know towards the the beginning of your your response there you know this is obviously bigger than Trump and that’s what you explained this is you know we’ve got a president’s in the hot seat right now whose certain policies are aggressive but this is just one chapter in a much longer book that was begun to to have been written long before he took the seat when you see and I I agree and anybody who watches most people who watch my show are investors first and they understand the nature of portfolio rebalancing when you become overweight a certain asset class that’s not as certain as it once was and that’s effectively the situation that Canada’s in 70% of your trade with one economy is fine as long as that economy is showing you signs of consistency and predictability um but predictability is out the window So, we don’t know about consistency, right? And that’s $2 billion of goods every day that crosses the US uh Canada border. And for really good reason, right? It’s never going to be more cost effective than to drop product across a land border as opposed to shipping it overseas. But, you know, there’s a lot of headlines and coverage about about Canada’s limited trade partnership with China that was, you know, uh negotiated a few weeks ago. um and most of the coverage seem to make a lot of it and say this is Canada pivoting away from the United States into the hands of China. When you actually look at the bones of the deal, it’s quite limited. You know, the highlight was the EV sector as you touched on. Canada can now import like 59,000 BYD or Chinese-made EVs per year at a 6% tariff as opposed to 100%. >> And it’s important to remember that the only reason Canada had 100% tariffs on Chinese EVs was because the US did it right. It was not a Canadian policy. It was just a we’ll follow suit policy from >> you know reasons for that could be debated. But you know is that fair that this is not a country like Canada cuz other countries doing the same thing? It’s not a pivot away from the American market so much as it is it’s just smart diversification of your portfolio. >> Yeah. Look, I I I describe it as diversification. It’s a bit like when people talk about ddollarization. I tend to sort of react a little bit poorly to that because I think that what’s really going on is currency multipularity, right? So, it’s really about diversification as opposed to rejecting something. Of course, the de facto result um is that you are diminishing your exposure to the US market or to the US dollar system. But it’s not a rejection per se. It’s literally a a recognition that diversification is is critical to long-term risk mitigation and and the the EV stuff is actually I think very symbolic of this because as you say the tariff reduction is only applied to a very small number of motor vehicles. The Canadian motor vehicles market is you know close to 2 million new cars a year. So 59,000 cars is nothing right. Um so it’s in a sense symbolic but it is a way in which I think the structural changes can then be opened up partly as a rhetorical point. So it’s partly about managing the politics of it and to open up the the the public policy space to engaging with supply chains that ultimately can deliver new production capabilities. So if you looked at the long jur economic systems are basically energy transformation systems right we uh human beings find ways of harnessing the energy of nature whether it’s energy that’s um been compressed and stored in the ground for a long time or the energy that comes from other natural forces and we transform that by combining it with materials into things that um human societies find useful. Now over time the efficiency of that conversion process diminishes. So this is the idea of energy return on energy invested and it’s agnostic to the source of energy. It literally is a question of the amount of energy that you must spend to get a certain amount of energy available to you tomorrow in your second time period. And as time goes by, what happens is is that the easy to access energy sources um progressively become less available and they become more expensive to access. Not just financially expensive, but expensive in energetic terms. You’ve got to spend more energy on the creation of the equipment that you need, on operating the equipment that you need to get to the materials that you need to then be able to do something with. So you know if you look at oil for example you know a barrel of oil does the work of many years of humans right this is the amazing thing. So the amount of energy committed to extracting one barrel of oil today is actually a lot more energy than it used to be 30 40 years ago. So these are the structural changes happening globally. The United States whilst it had a period of incredible abundance in shale in particular is now confronting a situation where the energetic costs of accessing that is growing. So it’s becoming less energy efficient. ditto um you know place like China which of course doesn’t have as much um you know energy in the ground and has had to find other ways of harnessing energy in ways that are energetically efficient and this underpins I think the economic questions and it also underpins the geopolitical questions because functional societies in the end are the ones who can harness and make available a greater amount of surplus surplus energy on top of the energy that they need to reproduce themselves. And that surplus energy takes the form of all the things that people enjoy, services, health care, investment in knowhow, culture, education, um as well as all the material goods that people have in their house to make their lives more comfortable. That is embodied energy. And that is possible because of the energetic efficiency of the systems we’ve created. When you take that into account, Canada um and the global west has had 200 to 300 years of incredible energetic efficiency both in terms of being able to source energy and then it’s had amazing machines to make use of that energy in incredibly efficient ways. That era is coming to an end. Not in the sense that we’ve reached peak this or peak that, but simply that it’s getting more and more expensive, which means we have less and less surplus available. And as less and less surplus is available, the societies come under stress because we need this surplus to in a sense deal with the um to to overcome the entropic nature, the fragmentaryary um chaotic nature of the energetic and natural systems in which we are embedded and uh and and countries have to adapt to this, right? You have to adapt to it. So, not only do you have a problem with um uh markets that are unstable and you need that because markets ultimately provide the closure to these systems, at the end of the day, what you make you’ve got to um sell, right? To close the system and to start again. And um and if you don’t have dependable markets that enable you to close that circuit out, uh you run the risk that all the commitments that you’re making to building fixed capital in infrastructure um becomes wasted. Canada, I think, needs and understands it needs to invest substantially in fixed capital. But to do that, it needs to have access to as many markets as possible. Now investing in fixed capital to the extent that it needs to do whilst relying on one market alone is extremely risky and so the structural decision has been made that it must diversify so as to justify and make possible the investments in the fixed capital that have long been not made and have long been the complaints of many people in Canadian industry and communities. that now need to be made. But we’re seeing this elsewhere in Europe. We’re starting to see serious conversations again about energy, right? We had this sort of glib approach to energy 3 years ago where it got caught up in geopolitics and russophobia and all of that stuff. and now having, you know, bragged to the world that uh that the European Union economy is going to become um free of Russian energy come 2027. Uh it’s now dawned on them all that they are now dependent upon energy sources from the United States, which are even more expensive. And that’s brought home this issue that without energy security and energy sovereignty, you’ve got nothing, right? And you see this happening across the board. Now, how does a place become energy sovereign? It needs access to energy from nature, whatever that happens to be. And it needs technologies that enables it to harness all of that. Now, that’s going to be drilling for stuff, digging stuff up, harnessing things from the sun, harnessing things from the wind, and of course, new technologies or old technologies that are improving all the time in things like nuclear um uh electrolization for hydrogen so that you can have stores of energy etc etc. So we’re entering into a period of dramatic change because the foundational energy substrate of the modern world is changing. >> So a few things you said there and am I correct to define fixed capital as long-term productive infrastructure? That’s what’s been lacking right from the Canadian economies, from Euro zone economies, from the American economy for sure pretty much across the board. We’ve outsourced the buildout of long-term productive infrastructure. That’s that’s fixed capital. That’s what the West is now kind of rushing to build out. And when you talk about the you know the efficiency the um energy return on um investment um you’re not just describing the procurement of the energy from nature as you described it. It’s not just getting the supply. It’s then the conversion of that energy into something productive into some of that fixed capital. And there’s inefficiencies all along the way. Not just um you know thinking about the the um the allocation of financial resources to get those things built and how often financial resources are misallocated. Bringing up the cost of producing fixed capital assets because of how much money is wasted on speculative financial assets and abstractions that aren’t productive long term. Is this like a fair >> assessment? So you’ve got two issues, right? You’ve got a financial issue which is a way in which we account for things and we use money to mobilize other resources whether it’s human beings or um the the resources that um that that nature provides to us to to go and do things with. But we’ve also got raw energy questions and um when we go and do things when we engage in work we expend energy ourselves. So human beings are energetic machines too right? We um absorb energy um through the food that we eat um and we convert that and um and we convert that into brain power, brain activity, design as well as you know physical movement etc etc and we combine all of this together with latent energy in raw materials to transform all of that into something else. Um so you know aluminium is a great example um where you know people often say that aluminium is essentially congealed electricity right and um and it’s because all these things that we have everything that we have that we wear is in a sense embodied energy. So if we take um uh the the chairs, the microphones, the shirts, the ties, all of this exists because there’s energy committed to the transformation of materials. And this energy ultimately dissipates through time because it it has wear and tear and it eventually rots and collapses and goes back to nature in another form. So thermodynamics tells us that energy is of a finite quantity, but its form changes. And so uh the processes we’re engaged in is how we harness and transform and hold energy as stable as we can so that we can use it later. Um so uh this fixed capital question of course means we’re having to hold commit a lot of energy to create something that then has a form that isn’t usable for something else. And that’s the key bit. Once you’ve built a big machine >> and it’s taken an incredible amount of effort to create this machine, >> that machine can’t be used for something else. You can’t take um a uh a fracking machine or a or a tunnel borer and say, “Well, you know, that didn’t work out so well, so let’s take that capital and um and let’s um harvest um rape seed with it.” You can’t do it. Um, so once fixed capital becomes fixed, we’re kind of stuck with the fact that we’ve used up a bunch of energy to have available to us something that may be usable or may not. And this is the issue around energy return on energy invested. We’ve got two dimensions. One is the production itself. But then once you’ve got something, is it usable? And the financial system is how we account for it and how we mobilize it. because finance is really a claim on f on the future. Um it’s our it’s our ability to reach into the future today and say I’m going to have a right to access something later to use something to consume it or what have you. And that’s what finance allows us to do. Um and and so if these two worlds become too disconnected with each other, we end up with excessive abstractions that are disconnected from what the world is capable of delivering for us. Right? So we got to the world’s got to c we’ve got to cash out the the abstractions at some point. Um um because humans can’t live on abstractions. We need food. So, we got to be able to cash out the the the claim with real food. We need to cash out the claim with real oil that goes into a machine that makes it spin around to do something that we want it to do. Right? So, if we have too much abstraction against what the world can do for us, then well, what tends to happen of course is what we call in monetary terms inflation, right? All right. Um, but we get asset inflation as a result. And we see this across the board. So the west over the last 30 years has seen a massive explosion of abstractions. We can call it financialization. Whilst the fundamental real economy substrate has been um watered down or hollowed out. And so now the west is confronted with an environment where it has more abstractions than you can poke a stick at, but actually has no way of um cashing out those abstractions with things that societies actually need and find useful. And so what does it do? Well, it converts or swaps those abstractions with the people who actually do create things. Right? This is called trade, right? But in the end, um without the ability to um have some level of real economy, thermodynamic substrate within your own society, it doesn’t actually have very much at all. And I think that uh there is a a realization in the west that you cannot have a functional society that is totally hollowed out. Human societies are very interesting things because we of course have many abstractions that entertain us. Um we are more than just eating machines, right? We are thinking um we’re cultural. Um and so there are many things about a functional society and a functional civilization that goes beyond just mere energetic stuff which is why these surpluses are so important. Because if we don’t have the surpluses to be able to build the cultural centers, to be able to um support the creative classes and the arts and things, well, what are we, right? We become nothing more than amoeba, right? We just reproduce ourselves and survive. But human beings and human societies and human civilizations are more than that. And so the West is confronting a crisis. um it’s confronting a crisis because all the things that made it a great human civilization um are also the things that this particular civilization has discarded and I don’t mean sort of specific cultural things but I mean the energetic substrates that made it possible >> and so you know at a certain level you’re discussing um investment strategy right and in this case is energy and >> you know maybe analogy, I hope it’s not a stretch, would be often, let’s say, you know, a subscriber of this show puts $1,000 into a company that they think is pretty cool and they buy a,000 shares priced at a dollar a share. Uh, but they’re wrong and shares tank down to 10 cents and they feel like they just lost $1,000. the money just disappeared. And headlines be written about the capital that was just um just destroyed when in reality capital wasn’t destroyed. It’s just that somebody else has it now. That $1,000 is in whoever’s pocket sold those shares. And the purchaser of the shares doesn’t have the $1,000, but they do have the shares they purchased. Right? It was just a poor investment. There’s very low utility in your 10-centent shares now. You could cash cash it out for $100, but somebody else has that capital and they can put it to productive use, >> right? there’s a winner and loser in the trade. >> Well, and we’ve just got to distinguish between certain things, right? So, getting sort of conceptual clarity is I think quite useful. money capital um cash if you will uh whether it comes in credit form or in um in in in postredit form um is very very flexible um and it circulates within the system and as you say you know moving it from one account to another doesn’t destroy that money capital it simply circulates it in other ways that money capital is related to something else though and it’s related to a uh a claim or a right on something which is the shares. So the shares give the holder some rights to something in the future which may be nothing by the way um but nonetheless there are some claims that those shares enable someone to have in relation to the future whether it’s uh uh future money capital inflows um or future capital growth which means valuation growth. Um, but that that money capital has also been injected into a process or theoretically could be injected into a process that harnesses energy to create fixed capital, right? To have available uh fixed capital capabilities to do other things. Of course, somebody could take that money and go and buy themselves a house and they there is a fixed capital that enables a certain kind of thing to happen, right? great parties possibly, right? But in the case of a company, the idea is that that money capital is then used to mobilize the harnessing of energy and the transformation of materials into things that then create other things that lots of other people find useful, right? because that’s how you generate the inflows of more money capital in the processes of circulation so that the holder of the shares gets what their shares entitle them to get which is a periodic inflow of money capital by way of dividend. So um an individual’s experience with money capital is very different from how the system actually deals with capital. Money capital circulates and in fact continually expands and it expands by way of new credit which injects money into the system and also by way of government deficits which also creates net new liquidity into the system. The system needs this because money is actually something that pushes the system towards creating things for the future. Without an expansion of liquidity in the system, the system actually grinds to a screaming halt. Right? there is a tendency of course that available liquidity doesn’t all circulate at the same time. So if you’re expecting um growth to happen on the basis of a finite amount of available stock of liquidity, you’ll never get growth. It’s impossible. Um um you know, if there’s a million dollars in the system and 10% of that isn’t spent because it’s held as savings or it’s dormant for one reason or another, only 900,000 is available to circulate. Right? that doesn’t give you capital accumulation, right? It just circulates the same amount and of course it ultimately gets concentrated in the hands of a small number. So the system actually needs an expansion of liquidity, right? The system needs that and what investors of course are hoping for is that the activities that they engage in give them a better grab at a portion of that expanded liquidity than some other activity. That’s all that’s going on. Um so we got to understand what enables that circulation system to happen and why it is that certain kinds of activities at particular moments in time have a larger claim on expanding liquidity than other things and um and that of course in hindsight is a great investment. >> Right. Okay. Now let me ask you, do you think that you’re seeing an honest correction in um in in capital allocation from these western countries who as you stated are confronting the crisis that they self-made over the last few decades and now have to deal with as global trade kind of unwinds? Not yet. Not yet. Okay. In large part because um the amount of abstraction is so great that the only correction that can in a sense happen is for these places to for the for a period of time become actually more expensive and um and in material terms lower standard of living systems. Um because uh we’ve got a a a a bloating of the asset value base without a commenurate capacity in the productive base. And that correction needs to take place, which means you’ve got to be able to um expand the the fixed capital productive part of an economic system. Um, and to do that means transferring real energetic resources, not monetary resources per se, but real energetic resources into things that actually generate new energetic value. The problem, as I see it at the moment, is that we still have um a massive uh incentive within the system for monetizing profits through trading in uh fictitious capital. So we’ve we’ve got such a huge amount of liquidity in the system that the only way the system absorbs it is by creating shares, derivatives, FX trading, etc., etc. It’s the only way in which the system can actually keep a lid on inflation by pushing inflation into assets. It needs to actually unwind that. It also needs to I think really have a much more sophisticated understanding of the relationship between energy and information systems. So the the the boom in AI is a great crystallization of how information itself is an energy problem. And information theoretically for a long time has been seen as um as something which is uh counter entropic, right? So the more information we have, the better the decisions that we make, the less chaotic the world is meant to be. Um but not all information actually is like that at all. Um in fact uh you know we have lots of information that um can be create more chaos that can be wasteful that is noise that is misleading that is energetically expensive to have but which actually doesn’t deliver a net energetic positive outcome in terms of system efficiency and I think we see this problem manifest itself in the way that AI is rolling out at the moment. So we’ve got massive commitments to all sorts of infrastructure that’s needed for computational capability without any sense that this computational capability will deliver a net positive energetic outcome. Huge amounts of energy will be consumed to deliver a range of information and data and the jury is out as to whether a lot of that will actually be energetically net positive. And the reason why I’m having doubts about some of this is because of the speed at which some of these AI projects are now going down the path of um uh uh AI enabled versions of only fans, right? Is that a net energetically positive contribution to the social economic system as a whole? Arguably not. um AI into um uh higher volume, higher velocity financial trading. Is that net energetically positive for the system as a whole? I’d argue no. Fantastic for those who are in the business of monetizing fictitious capital, but not that useful for a system that is running short on thermodynamic capabilities. So um so I think we’ve got some very interesting challenges in terms of this issue of capital rebalancing in western societies at large. Um uh too much money capital in fictitious capital, too much money capital being converted into fixed capital for um uh information noise and not enough into things that will actually deliver net um energetic positive outcomes. These are the problems. So, you know, I asked you if you were seeing uh a a smartening up of strategy in these western economies. You said not yet. And your your rationale was there’s still way too much speculative action sucking up those resources. Whether that’s speculative asset bubbles, you know, weird financial vehicles like derivative trading and derivative speculation sucking up that capital and putting it to unproductive use. And we fix that seriously. And your AI analogy sort of test hundreds of billions of dollars we’re going to invest in the human resources and the raw materials that will go into building out these data centers so that we can realize the promise of an AI powered future. But if history is precedent, the first business models that tend to hit the street with profitability are, you know, spins on, as you mentioned, AI companionship and AIdriven gambling and stock trading, right? Which again are not they’re not productive end use assets. So it’s energy in and then energy into AI companions and you know, we’re not looking at long-term productive assets. >> That’s right. And the other dimension of this Jame is that as this happens it also draws energy away from other things right and it creates um uh uh the energy halves and the energy have nots both at a at a social household level. So there are people who will of course find it difficult to pay for the electricity that they need. But it also creates what economists call a Dutch disease problem which is that it creates um a a a rapid rise in the cost of a particular resource. Um so in this case electricity um that makes it very difficult for um other downstream sectors that aren’t involved in AI to be able to sustain their business models because those business models which is embedded energy machines equipment and humans hired at a certain amount of money presupposed energetic input costs at a certain level. But if those energetic input costs rise way more than the structure can actually sustain, then those industries themselves will suffer. And so AI runs the potential not only of being in a sense an energetic sync in its own right, a net negative energetic system. is also going to undermine the energetic transformation viability of other things such such as the manufacturing that many countries in the west are hoping to revitalize. Um, if you make electricity too expensive, then those other industries are going to find it very, very hard to do the things that they need to do. Whether it’s to be able to afford the machinery and equipment that they need, which of course is only made with energy or to operate these machines, right? um to be able to create the things that they need in a way that achieves a level of utilization that makes uh it efficient and effective for those machines to have been uh developed and and implemented in the first place and ultimately for people at the other end of the system um to be able to afford them. Right? So uh so AI is a very interesting case study at the moment of both a a a an explicit risk of being an energy a net energy sync as well as being an a a a destroyer of positive energy potential elsewhere in the economy. which is interesting because you could look at the buildout of AI data centers as investment in fixed capital. We’re building this long-term productive infrastructure and you’re saying yes, but what’s the output of that infrastructure, right? It’s not the end. That’s just the the machine, but what does that machine produce at the end of the day? We sunk the capital in to build it and that seemed productive, but what comes out of that, right? And unless that uh is raising living living standards, increasing productivity and driving FDI into the country, like who cares, right? It’s more energy. >> Correct. And and if in the process of creating this, it’s destroyed the capabilities of other parts of the economy. >> It’s actually created a bigger problem than it has solved. And I think we’re starting to see this across all parts of the United States in particular that um where communities are actually starting to to feel the pinch today both from rising electricity costs on their households but also industries are suffering rising electricity costs and that flows through to um reduced profitability. It flows through to reduce investment capabilities. It flows through to reducing employment, right? Um, and all of these cascading effects of increased energy input costs are starting to manifest themselves in the American political economy. Um, when of course the headline is we’ve got GDP growth, we know that over 50% of that is underpinned by building data centers. But those data centers in creating topline GDP growth is actually destroying other parts of the economy. Now that is not actually um uh in the end a a um a very productive way for capital allocation to to take place. fantastic for those who are exposed to the rising um market capital value of the stocks today. But at some point um unless those stocks are backed by productive you know purpose um the only thing that will keep those stocks high is constant good news >> and speculation underpinned by liquidity expansion. >> Right. Yes. And that’s >> the only thing now the system has evolved into one that drives liquidity expansion largely to keep that part of the economy buoyant. Right? So when you look at the S&P 500, it’s incredibly buoyant and it’s largely underpinned by liquidity expansion. Right? But then you look at the wages, the real wages of say the 60% bottom to the next 60% of the American workforce. Those people over the last 20 to 30 years have experienced real wages growth of less than 5%. And in the bottom 20% it’s been less than 3%. In other words, they they’ve had negligible welfare improvements because the liquidity in the system is no longer going into things that actually make their lives better. It’s going into all these other things. Right? So that’s the problem of the capital misallocation um that I think has unfolded over 40 years um and uh is now starting to and the reason why politicians are getting concerned about this is in part because the accumulated effects on the living standards of people has reached a point where more and more people are angry. Right? And uh and so a response emerges. Whether that response delivers a viable outcome is always an open question. But the last 15 years across western societies in particular, the response has been a growing amount of dissatisfaction and anger at the structure of the political economy. And Trump 1.0 Z was a reflection or or or a function of that. Trump 2.0 is a reflection and a function of that. Right? >> The concerns and issues, the problems that uh Prime Minister Trudeau faced was a function of that. the problems in the UK that the growing disqu in the European Union where you know alternative parties of both the the the right and the left um challenging the status quo that’s happening because the system is no longer delivering the material foundations of a functional life for more and more people let alone a functional enriching existence for society at much, >> you know. Okay. So, I mean, I want to ask you, is anybody doing this? Well, and we’ll get there in a minute. I just just because you mentioned, and I’ I’ve mentioned it since you did twice, but I think people are sleeping on this, the the the impact of these AI companion models is absolutely horrifying. And and you know, I like your take on the AI data centers as potentially net negative, which as an like, you know, I use many different AI platforms in my business. I’m a testament to the unlock of productivity. I now do the work of five or six J Martins from three years ago. No question. And everybody on my team is the same. They’ve doubled or tripled their output. Um, and that’s in direct relation to their training on AI. It’s been a massive unlock for small businesses that that I connect with myself and all my peers. Um, but that’s just one application and the other is, you know, the this uh this this emerging AI companion trend is like it’s the ultimate blow to productivity because it’s a blow to reproductivity. I mean, that’s how I see it, right? This is like dangerous stuff. It keeps me up at night. I’m I’m not kidding. Um, okay. So, but my question was, is anybody doing this right? you know, are you seeing any economies and you could look at like I mean I may push back. Let me try to play devil’s advocate and say, well, in the last 8 months, the Trump administration has been directly investing in mining companies, uh, something they’ve never done before, and taking equity stakes in MP Materials, you know, lithium Americas, US Antimony, Trilogy Metals, Canada’s now following suit with the special projects office. They’ve woken up to the fact that after 40 years of globalization, they don’t own anything and it’s a problem now, right? And so they’re directly allocating capital and I don’t think the governments, you know, are very sophistic allocators, but they’re doing it and we’ll see what happens here. Um, is that any like uh progress on the margin that somebody could have faith or confidence in? And second part of that question, are any economies globally, Dr. Powell, setting a good example here? Have they been and are they? >> Look, it’s a it’s a question of priorities and I think that uh As I said, you know, I don’t think places are doing it particularly well yet. Um because I think many of the skills that are needed to be able to do these things well um haven’t existed for a long time. Um and so people in government, people in industry are having to find their way again. Um so when financial engineers uh became more important within corporations uh and the genuine capabilities of people who handled materials and um and workflows and processes, the nuts and bolt stuff progressively disappeared and retired out. um you’ve got stripped out societies um of people who actually aren’t that good at doing things. Um now I’m not advocating that, you know, modern societies go back to a world of manual labor. Far from it. Um but it is that that sensibility to the fact that um we’ve got to be focused on what I call use values as much as we’ve been focused on exchange values. So when the priority has been on monetizing exchange values through financial engineering as opposed to creating more efficient processes by which use values come into existence. In other words, things that people find useful. Um then we have lost sight of um the things that actually make societies and civilizations work well. and um and the concentration of the monetization processes is tied directly to those who own the assets upon which the monetization takes place. So we’ve got some structural issues around how over 40 to 50 years ownership of capital has also actually become incredibly concentrated and there’s plenty of data which shows that um in the US again I look at um across every industry sector uh you know 70 80% of um capital in these industries is owned by a very very small number of individuals or firms. None of that’s actually very very good because you do need a certain level of competitive tension to um uh uh create uh to to to remove the foundations for rent seeking which is the ability to monetize value um rather than be able to push people to energetic efficiency. Right? So you need a system with intense competition um to deliver the the benefits of efficiencies by way of surpluses for households, lower prices, more things um and also to enable um uh enterprises themselves to have access to alternative energy sources. in light of the fact that over time the prevailing energy sources become less efficient. So we’re constantly need needing to rejuvenate our energy inputs. Right? So it’s this input output quotient this this this ratio this relationship at a systemwide level and we’ve neglected that. Um this requires a different level of sensibility. It requires a sensibility to the world both through natural sciences, material sciences, engineering and those sorts of things that I think has been um stripped out uh in uh many western societies. Developing countries are actually better at it at the moment possibly because they’ve confronted these realities and need to address them. These are foundational problems that they have had to deal with. Societies that have had, you know, limited energy, limited transportation, um, limited value adding capability. They’ve had to focus on building all of that. Advanced societies have in a sense lost that capability and that sensibility. you look at the um literacy and numeracy levels or standards in say the United States again and I use the US as the example because in many ways it was the leading country of the west right and it and it exemplifies also some of the real challenges in the west um literacy and numeracy levels today are you know at levels well they’re worse than they were 20 years ago um that’s a problem because you don’t have productive capabilities in terms of dealing with the world if people don’t have high levels of literacy and numeracy. It’s as simple as that. You got to invest in your people in the end without without smart people. >> Um how how do you use AI smartly and know that AI is actually doing something useful for you if you’re not educated yourself? >> Yeah. Yeah. 100%. And you know, as you’re saying that, I’m thinking, you know, I’m wondering how much of this is just like the the natural economic growth cycle of a prosperous country. You know, you see this cycle repeated again in history where, you know, a country begins poor and they know they’re poor, so they act poor. But if they get productive, if they invest in education and can uplift the knowledge base of that population, they they become productive and they become rich, but they still think like they’re poor because that’s the recent memory and that’s very productive place to live. But as the cycle progresses, they become rich and now they know they’re rich and so they act rich, right? And that’s a that’s a fun lifestyle until productivity declines because you outsource the middle class output drops, lifestyle goes up and eventually you’re poor and you still think you’re rich and that’s the problem, right? That’s kind of where the developed world has landed today. And I don’t know if you know when I I asked you are any countries doing this well and you’re like well un or developing countries are you know they’ve figured it out or they’ve confronted it and maybe they have or maybe they’re just earlier in that cycle right they haven’t had the >> I think it’s a combination of both right I think the combination of both because I do think that um you know muscle memories evolve as you become wealthier and more comfortable. You know, we often say that, you know, when you’ve got it so good, you sort of forget how it is that you’ve got it so good and you become complacent and you take lots of things for granted. Um, now again, it doesn’t mean that the only way to have high standards of living is to suddenly become, >> you know, the industrial economies of the midentth century. That’s not the way to become wealthy in the 21st century in terms of living standards. The way to maintain high living standards is I think um through a number of things. One is to constantly be focused on the overall energy efficiency of the system at large. Without that, you’ve got no energy surplus. So that’s actually your foundation. To do that, you need smart people. You need people who are focused on the the the way the world is in a naturalistic sense, right? that um uh you know we we live on a physical world. We have developed a whole range of understandings of that world through um science that actually allows us to understand the energetic dynamics of that world. Um we so we need to be focused on the energetic dynamics. We actually need to understand that monetization um if left unattended uh becomes uh too too large compared to that world because the creation of promises which is what money is you know it’s a promise to be able to do things you know tomorrow that process is actually really quick um quick and low cost you can just create promises easily but and you need to do that. So this is the the sort of contradiction or the tension in the system. We need to constantly create more promises for the system to expand. But at the same time, if that growth rate exceeds the ability of the real economy to keep up, then you’ll end up with problems. So you’ve constantly got to moderate the amount of liquidity growth in the system, number one, but then you’ve got to actually moderate the circuits that that liquidity channels through. If that growth in liquidity ends up doing nothing more than going through these circuits of fictitious capital formation and monetization without augmenting the fundamental energy efficiency of the system at large, then in the end it’s not going to actually do what you want it to do. You’ll end up with a a a smaller proportion of people who are monetarily incredibly wealthy because they own lots of things, but you’ll actually end up with a society that is increasingly fragile because you’ve stripped away the ability of the society to have the surplus energy that you need for people to have meaningful lives. So, we got to return to some of that. We need to actually have a better relationship with the with information technologies that is actually again focused on does it actually contribute to a net positive energy outcome in terms of energy return on energy invested or is it just creating noise. >> Right? If it’s just creating noise, then we’re creating a rod for our own back. And um and and maybe we just need um social and political leaders who kind of call time on the exuberance of um you know, hyper financialization. Um it’s been a fantastic ride >> for most of us, right? You know, we’ve lived through an era of incredible financialization, hyper financialization. Um, but uh the thermodynamic foundations of societies that actually made all of that possible are just not evolving and developing as quickly as our hyperfinancialized world is. And at some point, reality actually bats last and will call that in. And that’s what I think’s happening at the moment. It’s calling it in. And um and we need to become more grounded again. Lots of things to do, by the way. Lots of things to invest in that enables us to become more energetically grounded again. >> Give me an example. I want one a couple examples. >> Um energy systems. Um uh again I say this uh in an agnostic fashion because some parts of the world will have a high uh energy return on energy invested possibility um with a certain energy type and others won’t. It just depends on you know the distribution of the gifts of nature. I think that there are real potentials around things like battery technologies that will ultimately deliver all sorts of new ways in which we um are able to stabilize energy and make that available to humans. Um I think we need to have a focus on how information systems AI actually feeds into um uh processes, workflows such as um automations that will uh be more energetically efficient again. So if you take um uh you know something that we’re wearing and you say well you know how many kilogjles of energy does that embody today through its life um well our aim is to actually reduce the amount of um you know energy um that was required for the production of this um so and to make it last longer so that we get um a better energy return on energy invested. Can we do that? Right. So there’s going to be developments in material sciences that enables us to do that. Um there’s some stuff that I’ve been working on which is um some nano technologies that enable um the movement the the energy from our own movement in our bodies to be captured as electricity, right? That can then power little devices that we have, maybe even power um you know AI glasses for example. Um and that electricity actually comes from the energy of our own movement and the movement of materials against our body because that’s energy being dissipated. Right? So um there are some very interesting things there. Um we can apply energy same technologies into things like um internet of things devices which can power devices that allows us to um capture data around um our our our um ecology, our oceans. um not by having you know expensive energy systems but by having things that convert movement into usable energy. So there’s some interesting stuff um and uh but again uh you know we’ve got to have a sensibility to this um that ultimately grounds us back into the fact that we are um at root um material and energetic beings. >> Reality bats last. I love that line, man. That hit. I’m uh going to use that one. Dr. Powell, look, I know we’re out of time, so thank you so much for coming on the show today. It’s it’s always a pleasure catching up with you and and I encourage everybody to check out uh your Substack. >> Um what’s the handle that we should push him to? I subscribe to >> pal um.substack.com. And look, it’s been great today. I know today got a little bit abstract but I guess I hope in this process it also gives people some conceptual tools to navigate what’s going on. Um you know we could have spoken specifically about you know LNG for example but I think that um for an audience that is interested in the macro questions around asset allocation capital resource commitments prioritizations having a conceptual apparatus that says yes no maybe silly not silly is actually a useful thing to do. Well I hope it’s useful for you and your audience anyway. Yeah, 100%. And yes, it was abstract. But you know, you’ve written a series of articles on this concept of thermodynamics. And okay, plug for AI. I often take your highly academic articles and create a layman’s term version for myself. >> Share them with me. Honestly though, like it’s super handy and I’ll just I’ll throw your essays in in chat GBT, hit conversation mode, and I’ll just debate the subject matter till I understand it, you know, until I can say something back to somebody I don’t believe I fully get it. You know what I mean? >> And it’s fun. Anyways, um appreciate your time, Dr. Powell. Uh warwick.pal.com orsubstack on Substack. Y >> you’re very active on the uh on your Substack. even just like posting even if it’s not an essay, you’re on there almost daily, >> if not daily. So, thanks for your time today and I look forward to next time. >> All right, man.

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Description:
Gavekal CEO Louis Gave joins me today for an insightful (and timely) conversation about emerging markets, China’s …

Transcript:
In 2018, the US
punched China on the nose and China
couldn’t punch back. Instead, China went
to the gym and it got fit and it got
strong, and we forced them to do this. It’s not that
China’s caught up. China has now
leapfrogged the west and is doing better. Hi, I am Ed D’Agostino,
and today I have a great conversation
for you talking about emerging markets. China’s manufacturing
edge, Japanese bond yields. And the broken
relationship between Canada and the us. My guest is none
other than Louis Gave of Gavekal Research. Welcome to Global
Macro Update, Louis Gave, it’s
always good to see you, my friend. Thank you for
taking some time. Thanks for
having me, Ed. Good to be here. I think our last
discussion got about a quarter million
views, so, uh, really? I know what we said. Yeah. Alright. It did. It did. So. Pretty cool. Must be. Must be the new beard
you’re sporting. I think, yeah, this is, I call
this my Louis look. Well, there you go. This is my Louis look. Yeah. That’s how you done, that’s how you
boost the ratings. That’s right,
that’s right. I, I highly doubt it. I think it’s, I think
it’s more on your side of the screen. But anyway, I wanna
talk to you about emerging markets, right? Us investors are
discovering emerging markets all of
the sudden, right? Like it is now becoming
in vogue, uh, hear hearing about it in,
in, in places that I’d never expected to hear
about emerging markets before, but it’s. You know, people are
talking about it, but not really understanding
what it is, right? This is just the
biggest blob you can imagine, right? Everything outside
of the US so, so, so can, can you help? Investors understand it
and, and how to think about it and what you
look for when you’re investigating em. I don’t really love
the term em, um, yeah, it’s, it’s, it’s terrible. Yeah. Yeah. I think it was a
term invented in the seventies. I think Fidelity. Uh, and, and
invented it. And essentially it was a
term, it was like, yeah, whatever’s left, right? You had Europe, you
had Japan, you had, uh, you had the, the
US and everything that was left was at that
time, pretty small. Um, and, and they
thought, okay, how do we like, love
this together? It was really a
marketing invention. Bunch, a bunch of people
that are completely different, but the one
thing they did have in common back then. Was they had very
positive demographics. You know, it was
basically young countries, countries
where you had, where more than half of the
population was under 30 years old, uh, you
know, steep pyramid of age, et cetera. And now they don’t even
have that in common. You look, you look at
some of the em, like some South Korea, like
China, like Taiwan, that, that are all still
considered emerging markets, quote unquote. Uh, these guys actually
have the very worst demographics in,
in the whole world. And so, uh, all this
to say, I don’t really love the term em, but
I realize that’s how we classify it and that’s
how money managers, you know, in, in the world
in which you have to fill a box, uh, you’re
either a US growth guy or Europe value guy. And so you’re an EM guy. And, you know, as, as a
firm, we’ve, we’ve had a pretty strong EM slant,
but, um, I think within em, what you find. Is, uh, so the first
difference that has evolved from back
in the seventies and eighties, the first
difference, you know, they don’t even have
the common demographics, uh, uh, anymore. The other big change
is that if you go back to the seventies, the
eighties and nineties, even the early two
thousands, most of the emerging markets were
essentially dependent on foreign capital. And, and you saw this
time and time again, you would have a
problem in Thailand. So because Thailand got
hit, all of a sudden foreign investors were
like, oh, you know what? Sell Indonesia. Sell, sell Malaysia. Not because of
anything linked to those countries, but
simply because I’m taking losses over
here and therefore I’m getting redemptions. I have to sell
what I can. And before you
know it, a problem that had started
in Thailand, you’d get Brazil that got
crushed and Argentina would get crushed. Um, now the good news
is I think this, this is definitely no,
no longer the case. Partly because the
marginal buyer in emerging markets no
longer is a foreign investor sitting in
London or New York or, or Dallas or Miami. Uh, but increasingly
the marginal buyer in most emerging
market is now local. Um, and you see this,
where you see this the most clearly is actually
in Latin America. Where in Latin America,
you go to countries like Chile, like Colombia,
like Peru, like Mexico. And you’ve had the birth
of a genuine domestic pension fund industry,
and all this started more than 30 years
ago, but when you first start a pension fund,
you have peanuts in it. Yeah. But 30 years of
compounding returns, plus 30 years of people
putting money in and countries like Chile, I
think there’s about $600 billion now in Chile
and pension fund money. You might say, okay,
that’s, uh, that’s not that big relative to
some of the pension funds you have in the
us, but for a small market like Chile, it
matters because what ends up happening
is that your Chilean pension fund will
always have a domestic bias towards Chilean
assets and the Peruvian pension fund to the
Peruvian assets, the Colombian, and, and
so what happens now is that if and when, for
whatever reason, there’s a dip in the markets. Then the, your Chilean
pension fund will say, oh, there’s a dip
in the Chilean peso. There’s a dip in
Chilean bonds. There’s a dip in the
Chilean equity market, and they’ll buy it. And so in, in a way that
before in a lot of these markets, you really
didn’t have a sort of buyer of last resort. And, and if once
foreigners decided to leave, once foreigners
decided, why am I even investing in Indonesia? It’s like it’s creating
headaches for me. It’s all over the place. Bad politics, whatever. Just get me out. Uh, and once they
decided that there was essentially no
market and the thing would, would absolutely
collapse through the, through the floor. Um, and now you
actually do have local institutions
that, that step in. So the very structure
of most emerging market financial markets that
have changed and I think has, uh, so they’re now
far more stable, or at the very least, there’s. Uh, the downside
risk, I think is less than it, uh, it used
to be in the past. Uh, so having said
all this, uh, I’m still, you know, I
keep saying I hate the term emerging markets. I keep using it. Um, if you, if you want
to think about emerging markets in general,
and historically I think you’ve had
really two main kinds. You’ve had the
kinds that were the commodity exporters. That made money, uh,
exporting commodities. So here you can
think Brazil, you can think Chile, you can
think Saudi Arabia. Frankly, most of South
Africa, most of Africa. Um, all the guys,
uh, and these guys historically have tended
to be very tied to the commodity cycles. And here I think they’ve
become less tied to the commodity cycle. Thanks. In part to the birth
of these domestic, uh, domestic pension
funds, et cetera. It’s reduced their
volatility somewhat. So that was your, your,
your first part of the, the, the, the EM base. Um, and then. You had the other guys
who tended to be more the commodity importers. And so if all prices,
for example, shut up, they, they would
struggle countries like Korea, like Taiwan,
like China, like India, uh, where big
rise in commodities might actually
negatively affect them. Uh, and here, within,
within that group essentially had a split
between the countries that were, where the
cycle was essentially export led, again,
Korea, Taiwan, you know, at typically
export led economies. And countries that
where the cycle was far more, um, domestic,
domestically, domestic demand driven. Uh, and here the
obvious one is India. So all this to say
that the broader emerging market space
is, is now extremely, extremely diverse. And I’m, I’m belaboring
the point, but there’s been another massive,
massive shift in, in recent years is
that historically. Emerging markets were
always highly dependent on the US dollar, uh,
highly dependent on the US dollar for a
number of reasons. Uh, but one of them was
if you needed to fund a new power plant, uh,
a new dam, a canal, or you know, anything, a
port, typically most of the infrastructure
investments that you needed as an
emerging market, uh, and you needed a
lot, it was typically funded in US dollars. It might be funded
through loans of the World Bank or the
Asia Development Bank. Or through loans,
uh, done by Bank of America or Citibank,
if it was in Latin America, et cetera. But most of the, the big
time funding occurred in, in US dollar. So when the price of
the US dollar would go up, that would
mean that the cost of capital for all these
guys would go up a lot. And so they, they
would get strangled. Uh, so, so that was the,
the first thing, I think the second reason, they
were all very dependent on the US dollar. Is that in most emerging
markets, most people didn’t really trust
their policymakers, didn’t really trust. Their own currency. Very often they’d had to
deal with high inflation not that long ago. Whether you’re Brazil
or in Indonesia or Philippines, you, you’d
have had high inflation. You know, you and I
are in our fifties. We would’ve had at
least two decades of, if we were Brazilian or
Indonesian, we would’ve experienced at least two
decades of uncomfortably high inflation. Which leads you to not
trust your currency. And so in most emerging
markets, people think in two currencies. They think in their own
IE Taiba to Indonesian or P or Mexican peso. And they think
in US dollars. So when the US
dollar goes up, most rich people have a
tendency to say, oh, US dollars going up. Get rid of my Mexican
peso, put it, put it in, in US dollars. So the, the US dollar,
uh, the most emerging markets have always
traded as a sort of anti-US dollar as
a result of this, because that knife
cuts both ways. When the US dollar
goes down, they repatriate capital
and they buy, they buy back local assets,
uh, the, at least the rich people do, but
also increasingly the local pension funds. So the, the weight of
the US dollar has always been super important. And that’s one
part that is also changing a little bit. And you know, I’ve
talked a lot about this, uh, at the various
SIC conferences over the past 10 years. How China’s now going
around to emerging markets and saying,
Hey, you want a tractor? Uh, you can buy this
tractor from me at a 3% interest rate
in r and b loans. Um, you want me to
build you a railroad? You want me to buy,
build you a nuclear power plants? I can do all
these things. Uh, and you don’t
even need dollars. You, you fund yourself
in Remin B and now you are seeing
countries, whether you’re ethiopias, your
Kenyas, your zombies saying, you know what? I’m transferring all my
USR debt to a remin B debt because I get to
do so at a, I get to fund myself at a much
lower interest rate. And you have countries
like Indonesia, like Thailand, that have
shifted most of their trade with China,
and China’s now their biggest trade partner. Into reb. And so the dependency
on the US dollar is also not what it used
to be, uh, which is actually great news
for emerging markets in general because
if you’re dependent on one currency, it’s
the old story, right? If you have one client,
you don’t have a client, you have a boss. Uh, and if you have, if
you can fund yourself in many currencies,
then if and when there’s a next crisis
in the us, which is what happened in 2008. 2008, US banks
hit the wall. The, the US banks
say to Indonesia, sorry, we can’t lend
you money right now. And so Indonesian trade
with Korea and with China and with Taiwan,
it just imploded. It just went to zero. ’cause they couldn’t
fund the trade because American
banks wouldn’t do it. Not because of anything
linked to Indonesia, simply because American
banks were getting lost. So to tomorrow, if
that happened again, well that trade can be
funded in, in Remin B, so that provides a sort
of backstop to emerging markets that that
didn’t exist before. So on all that front,
on, on on many front, the landscape for
emerging markets is shifting very,
very rapidly in front of our eyes. How much is coincident
to the fact that the dollar is, has
been getting weaker and commodities
have been going up? Like what, what’s the
relationship today? Success has many
fathers, right? And when, when you look
at the fact that EM has been outperforming in
24, again, outperforming in 25, that EM equity
markets are, are ripping away, uh, that em
bond markets are also massively outperforming
DM bond markets. Uh, you can, you can
point to many things and it’s, uh, you know, it’s
hard to isolate one. And there’s also the
element of, of chicken and the egg thing. Well, you know, once
the momentum builds up. So again, I’m a
Chilean pension fund. My currency’s
not going up. My equity market is
outperforming the us. That’s definitely
because copper’s going up and you know,
the, the fact that copper’s going up is
helping fuel stronger growth in my economy. But here I am and
I’m picking a number out of thin air. But let’s say I am in
my equity book, I’m 50% domestic equities
and 50% US equities. For 15 years, the
US equity thing was outperforming, and
for the past two, it’s now underperforming. So now I’m thinking,
hmm, maybe I should be 60, 40 or 70 30. So I start to sell some
of my US to repatriate money, and as I do, the
dollar goes down and the cha peso comes up. Uh, and so it all feeds,
uh, it all feeds into, uh, into each other. And, uh, then the next
thing that happens is actually the pension
fund in the us. It starts to realize,
hold on, emerging markets are starting
to outperform. Maybe we, you know, we
don’t have enough in emerging markets, or we
don’t have any, maybe we should have some. And, and you know,
these trends, once the momentum starts, I
think you need a pretty big event for, for
the momentum to stop. Um, and right now all
the signs are pointing to towards happening. Now the reality is
we haven’t really seen the flows yet. Uh, you, you pointed
out in your introduction that em is now the
big buzzword and everybody’s talking
about it, et cetera. But, you know, look at
the shares outstanding of something like E
Em, um, the, the big em, uh, uh, equity. Uh, ETF, uh, you know,
it’s picked itself up from the floor,
but we’re, we’re definitely not at highs. And, and so wherever
you care to look and you look at the
investor positioning, um, the, you know, it’s
not, I, I, I don’t, I really don’t think
we’ve seen the flows. Uh, we’re we’re, we’re
just at the beginning of a longer term trend. So do you think
it’s early days? I think it’s
very early days. Okay. Sorry about the
dog barking in the background. No, no. This is the post COVID
where, you know, this is the world we’re in. Sorry. Uh. That dog’s an idiot. Uh, he’s, he doesn’t like
em clearly. That’s bad about us
referring to it there a job, actually. So, uh, on this, uh,
an anecdote, I was at Tencent recently
visiting the company and they have a
new, uh, zoom sy zoom like system. So Tencent is one of
the big, uh, Chinese tech companies,
and they have. A new, a zoom, zoom,
uh, like business where that essentially blocks
out all the noise except your voice. Uh, they, they’ve
got an AI that trains like, after two or
three minutes, it manages to block out
absolutely everything. You could be, I could
be here banging a pot, but with a dog barking
in the background and somebody ringing
the doorbell and it doesn’t pick it up. Nothing. Wow. That’s why you, that’s
why you need to do your next zoom call on. Uh, so that, so that
we, so that we don’t, so that we don’t get this, um, I, I will
work on that. Ever since you
and I last spoke. Uh, and I’ve been
admittedly pretty, pretty hawkish on China. And you’ve, you, you’ve
spent your career there, uh, or adjacent to there
and, and seen firsthand just what has happened. I. And I’m reading a
former, the book, I’m finally getting
around to reading Break Breakneck, right. The, the book that your
former colleague Dan Wang wrote fascinating. Just, just like the
opening line or or page in that where he is
like, America is run by lawyers and China is
run by engineers like. That says so much. That’s basically
the book. Yeah. It could come there, but it really, it really
hit me like, wow, that is so I finally get it. How much of that is
spreading that, that mentality, that, that
engineering, that build, that that growth
mentality is spreading. Beyond China into
the rest of Asia. ’cause what, you know,
what I hear is that the, the middle class
in a lot of Asian countries is growing. Uh, people are happy. Um, uh, quality of
life has gone up and, and anyone who flies
in any airport in the US and then leaves the
US and goes to an an emerging market, they
come back saying how. Behind We are depends on the
emerging market. Uh, like if you go to
China, yes, the airports are nice, but I, I just
spent, uh, a week I was in, in Egypt, then I
went to the Middle East, then I went to, uh,
through the Middle East and I went to India. And so it depends on
the airports on which you’re talking about. But, uh, my go-to
line for years at the SIC conferences. Was that when China
enters a room, profits walk out. Uh, and uh, as a result,
you know, for years and years I was an
uber bull on Chinese fixed income, and I was
always more skeptical on Chinese equities
until essentially the COVID lockdown and
when China reopened, uh, and I, I turned
bullish on Chinese equities too early. Um, but, uh, the,
the past couple years have been
pretty good because. I think what most people
miss about China, uh, and what you’ve just
sort of scratched the surface on is the
extent o uh, around which over the past
really seven or eight years, China has now
leapfrogged the western industry after industry. Uh, essentially what
happened was that when the US decided to
weaponize its, uh, the semiconductor supply
chain, uh, against, uh, China in 2018. Uh, the Chinese
leadership kind of freaked out and they
said, you know what? If the US blocks us from
semiconductors today, tomorrow, it could
be chemical products, or it could be auto
parts, it could be any number of things. We have no choice
but to de westernize our supply chain. We can’t be dependent
on the west on anything. So, so we’re gonna
grab all of our savings, which they
did, and we’re gonna reallocate those away
from real estate, away from consumption. And towards, um,
towards industry. Um, so it’s almost
like in 2018 the US punched China on the
nose and China couldn’t pa pa punch back. Uh, instead ’cause
it was too weak at the time. Instead, China went to
the gym and it got fit and it got strong and we
forced them to do this. We, we, maybe you said
you could say they were gonna do it all along,
but I think we forced ’em to do it in an
accelerated timeline. And they did so at
great sacrifices to themselves, you know,
getting fit, getting strong meant that the
real estate market went down by a third,
equity markets went down by two thirds,
and, and consumption absolutely cratered. Um, but it meant that
when Trump came back in 25 and decided, I’m
not just gonna punch China on the face,
I’m also gonna punch Canada and I’m gonna
punch Europe and I’m gonna punch absolutely
everybody in the room. China was the one that
could, could stand up and say, you know what? You want to
go, let’s go. Um, gloves off. Boom. Off we go. You tariff me. I tariff you. You embargo me. I embargo you. And very quickly the US
was forced to back down. Uh, and we talked
about this before. The US was forced
to back down. Trump started talking
about a G two world, and the US shifted
its foreign policy to saying, you know what? Don’t road doctrine. What we care about is
the Western hemisphere. The Pentagon publishes
a paper saying, look, we got everything we
need in Latin America. We don’t have to
care about Europe. We don’t have to
care about Asia. What matters is right
here, right now, we have cheap labor,
cheap uh, commodities in Latin America. And by the way,
this refocus of US policy towards Latin
America is massively bullish Latin America. Uh, I think I mentioned
it, I mentioned this at the SIC last year. It’s massively bullish
for Latin America because the big problem
in Latin America is that every 10 or 15 years,
these guys somehow run out of dollars. Uh, and when they do,
everything collapses. Now, when they run
out of dollars, the US steps in, as they did
in Argentina, uh, this summer and say, Hey,
you’re out dollars. We don’t want
China coming in. So here’s 20 billion. Here’s 40 billion. And so you’ve removed
from Latin America now the single
biggest risk, which was a dollar crisis. Uh, and, and so now
bond yields are gonna go down 200 basis
points a year, bond yields in Brazil, in
in Chile, and Colombia and Peru and Argentina. They all went down two
to 300 basis points last year, and they’re gonna
go down another 200 basis points this year. And when interest
rates go down 200 basis points a year, that’s
a huge tailwind for equity prices, for
house prices, for, for, for consumption. So Latin America has
started what I think is a triple merit scenario
of rising exchange rates, falling, uh,
real interest rates and rising asset prices. And. There’s many ways
you can play that. You know, last year
Latin American debts was, you know, we
run a LA debt fund. It was up 35% last year. Um, and just basically
on government debt. And I’m not saying it’s
gonna be up another 35% this year, but it’s
already up, you know, up a good bit this year. Uh, it’s, this is, and,
but you could say, well, you’ve done better if
you’ve done equities. And that’s true,
like equities did even better. Um, so, so many, many
ways to, uh, to, to, to skin a account. But coming back to
China, what you’ve had for seven or eight
years is China take all of China’s savings,
which are massive. Push them down the
pipe of building up industrial value added,
essentially making sure we have the best car
companies in the world. We have the best
solar panel companies. We have the best train. We have essentially
anything linked to transportation, anything
linked to factory automation and robotics. Anything linked
to telecom, data transmission, and
anything linked to electricity generation,
transportation and storage. It’s not that China’s
caught up ’cause it was far behind
seven years ago. China has now
leapfrog the west and is doing better. You know, the in 2020,
you know, if I had said China’s gonna
be the biggest car exporter in the world. People would’ve laughed. And in 2023, this is,
this happened in 2026, people are looking
at Chinese cars. There’s now an article
a week in the Wall Street Journal or in
the New York Times saying, Hey, I test
drove this latest car, and it’s like the nicest
car I’ve ever driven. The the fourth
C, the fourth CEO bought to show me
S seven and brought it back, and he’s
driving that to work. Because China now
produce like BYD is producing cars where
you have drones that fly ahead of you to warn
you if there’s deers on the road or if there’s
a hail of ba, a bale of hay that fell, or a
tractor or BYD is also producing a car that’s
now, and it’s, you can buy it, uh, that goes
495 kilometers an hour. Uh, the, it’s the
fastest car in the world and it’s not even close. Amazing. So, you know, the
idea that this could have happened just
five years ago Yeah. Would, uh, would’ve
seemed laughable, but here we are. And this is where
I go back to my old saying that if, um,
if China enter a room, profits walk out. I don’t know if
it’s true anymore. It used to be true
because China used to produce cheap
goods cheaply and crush everybody’s
margins along the way. What you now have in
China, which is new. Is you have companies
that are genuinely, uh, world-class companies
making products that actually nobody can
compete with and making margins along the way. I’ll, I’ll give
you an example. I’m sorry I’m being
long-winded, but I’ll, I’ll, I’ll
give you an example. A company called Huai,
uh, it’s actually listed in nasdaq,
listed in Hong Kong. Uh, they, and full
disclosure, it’s one of my biggest positions. Um, and Huai, uh, is
a Lidar manufacturer. Uh. And so, you know, the,
the whole debate around lidars is, is, is
that what we need for autonomous vehicle in
the futures or are we gonna go with cameras? So Elon Musk five
years ago comes out and says, forget lidars. It’s not, you know,
it’s not gonna work. Cameras are the future. When Elon Musk said
this, and so he actually said, we can use ’em for
our, our space rockets. We use the lidars for
our space rockets, but we’re not gonna
use ’em for our cars. Because five years
ago, the lidars would cost 50,000 US dollars. Um, uh, to, to equip
today, equipping a car with lidars
cost 200 US dollars cheaper than a
camera, right? Yeah. They brought, they
brought her side, brought the cost down
99.5% and they still make 30% profit margins. And so now actually,
lidars, they used to be, oh, is that gonna be the
future for autonomous driving or not? It’s actually
shifted now. Lidars. Are being put in every
Chinese cars for safety reasons, because if you
have a LIDAR in your car, the risk of a fatal
accident goes down 70%. So now lidars
are like airbags. It’s like, yeah, right. I was just
gonna say that. It’s the cost
of a seatbelt, right? Yeah. At 200 bucks, why
wouldn’t you have one? And in China it’s, it’s
gonna move to where very soon you won’t be able
to insure your car if it doesn’t have a lidar. And I think that’s
gonna move like this everywhere
around the world. So a company like Huai
is now signing up. BMW is now signing up,
uh, Mercedes and even the military Humvees,
this is hilarious. The US military
Humvees use huai lidar. So, uh, all this,
all this to say these types of companies
like CATL, like BYD. Like, uh, Huai,
uh, these types of companies did not exist
in China five years ago, 10 years ago. But because you’ve
had such a focus of policy of we gotta
move up the industrial value chain very, very
quickly, we’re gonna throw money at it. We’re also gonna
throw people at it because 20 years ago,
China was graduating a million university
students a year. Now he graduates 12
million university students a year,
and he graduates. More engineers than
the rest of the world combine X India. Um, so you throw money
at the problem, you throw people at the
problem, and before you know it, you start to
actually have companies. That are actually
pretty interesting in their own right. Yeah. And the innovation, I
mean, your point about the cars, Felix Soff
told me that he, he was in China last year
and drove around in a car that was better
than his Porsche. Uh, and, and, and
cost a lot less pro, probably less, less
than half the price. Yeah. Yeah. Is it Shenzhen? That is the city that’s
sort of known as the, uh, innovation ca or
manufacturing capital? So there’s
several actually. So if you, if you
think of sort of the, the tech hubs
of China, Shenzhen is definitely one of them. That’s where you have
BYD, that’s where you have, uh, Tencent. That’s where you
have, uh, Huawei. Uh, so that, so that’s
definitely one of them. Another big city for
tech and innovation is Hong Zou. So Shenzhen’s
a massive city. It’s a first tier city. I mean, Hong Jo is a
big city as well, but not as big as Shenzhen. But in Hong Zou you have
the, the Jjg Institute of Technology, which is
increasingly becoming a little bit like the MIT
of, uh, of China in Jji. Uh, this is where you
have uni tree, you know, the robotics
company that you saw all the robots
dance over Chinese. It’s where deep
seek came out from. But most importantly,
it’s where Alibaba, uh, is based and
out of Alibaba. You’ve had a lot
of offshoots. Um, then, uh, then
frankly, you know, Shanghai is still, is
still another, you know, big, big hub of a very
interesting company. So in Shanghai you have. Uh, so Hosai is in
Shanghai and Horizon Robotics and neo cars. And so you really have,
I think if you want to think of hubs, you,
you have ch you have three big hubs in China. Just like look, the
US is also a massive, China’s a massive
economy and the US you have the Silicon
Valley and, and that is essentially is shezhen. But you know, the whole,
the whole area around Austin, uh, has, has a
lot of things going on. Uh, the whole, uh,
the broader Seattle and, you know, in
Seattle you have what? You have Microsoft,
you have Amazon, you have Expedia. So you, you can have
several hubs and China, China does as well. The reason why I bring
it up is I’ve, I’ve heard three different
venture-backed engineers, uh, all,
all from Silicon Valley, say separately
of each other. The US desperately
needs to build its own Shenzhen, which just
that statement from an American entrepreneur
more than one in a week is like, it’s just mind
blowing how fast things have changed and how far
behind the US I think is the US is very far in
advance in some things. And yeah, I mean, look,
uh, in manufacturing the US isn’t there
anymore, but then you have to question,
do you even want to be in manufacturing? Uh, because
manufacturing is also evolving so rapidly
now, you could say, well, we need to be in
manufacturing because, you know, we need jobs
and all that stuff. That, that would
be a Donald Trump kind of worldview. The reality though. Is that the high-end
manufacturing in China is also happening
with no jobs. I think I’ve told you
this joke before about how the, the factory
of the future has in China has one, one
German Shepherd and one security guard, and
the the security guard is there to feed the
German Shepherd and. The German Shepherd
is there to bite the security guard
if he tries to touch the machine. Uh, and, and so
that’s, you know, the, the, you go to
these factories, you know, show me you can
visit, show me has dark factories just outside. Show me is a big, uh,
cell phone manufacturer and auto manufacturer. Uh, they have dark
factories outside of, uh, there’s a dark
factory outside of Beijing that I think
produces about 3 million phones a year. Uh, there’s not a
single worker, like literally it’s just
a dark factory. So, uh, you could
say, oh, well the US needs some of that. Yeah. Uh, but what’s
the point? Well, is the
point resiliency. That’s right. The point is national
security resiliency, who knows what the
future’s made of? It’s better to
produce it at home. Um, and, but, and,
and, and I get that. Like, I, I think that’s
a very valid argument to be very clear. And if you want to
go down this path, then you also have to
be cognizant of the fact that it takes
a lot of investment in, uh, in power
grids, uh, a lot of investment in machinery. Um, now the reality in,
in things that turn out to be pretty cyclical, raw materials,
processing of raw materials, all that stuff. Absolutely. Uh, some of the stuff
is polluting, et cetera. And so China’s gone
down this path. Uh, the US you know,
could have gone down this path. You’ve, you’ve had 0%
interest rates in, in essence, for 20 years,
and I’m exaggerating, but interest rates
have been super low for 20 years now. And over the past 20
years, you’ve had zero investment in the grid. You, you produce
essentially as much electricity today as
you did 20 years ago. Uh, China used to
produce 20 years ago, half as much
electricity as the US and today produces
twice as much as the US. Uh, so, you know,
production of electricity in China has
essentially gone four x. Um, so over that same
period, so the, the, you know, that was a,
a cognizant investment. The US took the zero
interest rate and said, this is awesome. We’re gonna do
share buybacks. Uh, this is this. This is awesome. We we’re gonna do
private equity. Uh, we’re gonna gear
up the balance sheet of every business
out there, um, and, and we’re gonna get
ourselves very wealthy. Um, now what’s
interesting is a lot of the wealth that’s
been created, to your point, has been
financial engineered. It’s not like we’ve
massively, uh, increased our capacity of
productions, whether in the US and Europe. Um. But we did get richer,
at least on paper. So let’s switch
gears for a second, because you spend,
you spend part of your year in Canada. Yep. There’s a lot of
tension between our two countries, which,
you know, two, two. Two years ago, um,
would I even two years ago, I think would not
have been, not, have not, not have been,
uh, something, uh, uh, the average Canadian
or an American would’ve would’ve foreseen. Right. But there’s a lot
of tension now. Let them win a Stanley
Cup for once and uh, they’ll get over it. What sport is that? Is it exactly? What’s your
take on that? I mean. You know, there’s a
lot of theories as to why it’s happening. Um, a a a lot of,
and it goes back to China, right? Like, like there’s
one theory, there’s a, there’s a reporter
in your country, Sam Cooper, who um, does a
lot of work on, on, on the CCPs infiltration of
the Canadian government. And I’ve been dying
to ask you like, what do you, what do you
think about this? So I’m gonna make like
a Jesuit priest and answer your question
or another question. Um, I, I’m. I was actually having
dinner with a friend of mine who’s works for
the State Department, uh, and he was saying,
you know, it’s really a shame that our
relationship with Canada is so bad right now. And I said, you
know, who’s your relationship good with,
uh, like beyond who’s your who, honestly,
who’s jokes aside? Who is your
relationship good with? And he said, oh,
we have a great relationship with Japan. And I said,
yeah, okay, fine. That’s like taking your
sister to the prom. Uh, like, you know,
Japan, Japan is essentially a colony. Uh, you’ve got troops,
troops all over the country, and they’ve
always done what you’ve told them to do. You tell ’em to
revalue the end, they revalue the end. You tell ’em to buy
us treasuries, they buy us treasuries. Um, so, so today,
uh, it’s funny because 20 years ago. The idea that China,
or even 10 years ago, the idea that China
could have any friends internationally would’ve
seemed like a joke. Uh, and, and I said, I
was saying this at the time, China 10, 12 years
ago, a didn’t really have much of a foreign
service, but China didn’t have friends. It had clients. So it had a few
countries like Pakistan or North
Korea that depended on China, but it really
didn’t have friends. Uh. You know, today, who,
who does the US have a good relationship with? In, in, in all
honesty, jokes aside. Um, so yeah, the, the
relationship isn’t great with Canada, but has the
US tried to have a good relationship with Canada
in the past few years? Uh, I’m not sure that
it has, so I don’t think you can be too surprised
if you, you know, if you poke people in the eye
and spit in their face. After a while, they
turned their back. Uh, and um, so I
think that that’s where, that’s where
Canada is today. I think it’s
understandable. Um, what’s baffling
to me, uh, as a proud Frenchman is that
we Europeans, uh, continue to be absolute
doormats, uh, to, to the United States. Um, and uh, and I
don’t really quite understand why, because
we’re actually far less dependent on the United
States than Canada. There is. Canada is like,
pretty much like massively dependent
on the United States. Um, so Canada’s room
to maneuver is much more limited than,
uh, than Europe’s room to maneuver. But then I guess
you could say. Canada’s, uh, the threat
of the US to Canada is probably more acute. You know, the whole
calling Carney a governor, the whole,
uh, and he continues to do it, right? Trump continues to
call Governor Carney. It’s, uh, you know,
that’s, that was maybe funny the first
time, but you do it, it was kind of funny
actually the first time. But, but you continue
to do it, uh, and it becomes, you are like,
you know, if the US did. If the US did wanna
invade, if the US did wanna invade Canada,
it probably could. But so now, like
it’s something that you would’ve never
considered before as a Canadian, uh, and
now all of a sudden it’s like, it’s,
it’s on the table. Uh, and so yeah,
it’s, uh, I would say that repairing the
relationship, uh, really doesn’t depend on,
uh, the U on Canada. It depends
more on the us. Uh, now having
said all this. Um, to your, to your
question as is the Canadian government
controlled by the CPC? Uh, I, I’m doubtful
that it is, uh, in, in your mind. I think if it was, they
would’ve already built the pipelines through
British Columbia to sell the order to the Chinese
and Stu, and Stu being basically a hundred
percent dependent on the US for all their oil
and natural gas exports. If really the, the
Canadian government was controlled by the CPC. You would’ve seen, uh,
a lot more, uh, activity on, on that front. So if, if I look at,
at the fact, if, if the Chinese government
really does control the Canadian government,
what have they done with that control that
has benefited China? Uh, I, I can’t name
a single thing. A single policy taken
by Canada in the past 10 years that has
massively benefited China to the detriment
of everybody else. Uh, now this doesn’t
mean that maybe China hasn’t tried to control
the Canadian government. But I, I can’t really
see any indication that they’ve been
successful at it. I guess the one thing
that I’ve learned from spending just, just
a little bit of time in Washington DC is
that a lot of things happen that most
people have no idea. Yes. Happens of course. Um, and you hear
about it, the things in the news, and, and
then you learn that, you know, that was a
reaction to something that was done by us. Whichever side you’re
on and whichever one starts it, there’s,
there’s, there’s just so much happening. Alright, let’s
get off of that. Well, I wanna
ask you about. Um, the carry trade,
um, the yen has been getting stronger. Uh, the, the, the
Japanese carry trade, is it really unwinding? And what are the
implications for the global market, if it is? So, let me, let
me be, uh, first totally honest. If you told me
if we’d done this call two years ago. And you said, Louis,
you know, by when 2026 rolls around JGB,
long yields will be three and a half, 4%. I would’ve said, oh
my God, like this is gonna be a bloodbath. Uh, this is
gonna be right. Uh, no, I’m, I’m
being dead honest. Yeah, I know, I know. And obviously I would’ve
been dead wrong. So you’ve had a massive
sell off at the long end of the JGB bond
market, uh, the, of the Japanese government
bond market and, um. Considering the nature
of that blood bath, I think markets have been
remarkably well behaved. Um, now looking forward,
I think Jgb can, will continue to sell off
because, um, uh, you now have a, a new government
in, uh, Japan that essentially can rewrite
the Constitution, uh, because they have the,
the necessary, uh, majority in parliament
and can move to spend a lot more money on
defense, which she very clearly wants to do. Uh, and run much bigger
budget deficits, which she also clearly,
clearly wants to do. So, you know, that’s
the, that’s the, the, the, the path, uh,
of which we’re going. And by the way, yields
rising in Japan means that it’s gonna be
very hard to get any kind of bond rally
in the US or in, uh, Europe, or in any
major markets because Japanese savers will
continue to gradually repatriate money. Now, having said that,
yields at the long end have gone up a lot. And again, sure it’s
gone up from one 60 to 1 54 or wherever it is
today, but it, you know, the again, is, remains
stupidly undervalued. And so what we haven’t
really seen is Japanese investors say, okay, I’m
bringing back my money. And, and I think the
reason for that is that there is no appetite to
be in long-dated bonds. Uh, long dated bonds
have been Japanese. Long day bonds have been
the worst performing asset class on a one
year, three year, five year, 10 year view. They’ve been the
the worst asset class by far. And most people. And Japan have
absolutely no interest in trying to catch
that falling knife, uh, because they see
a government that is gonna keep spending
money because they see A BOJ that’s still
sitting on its hands. So I think we probably
don’t get the, the, the big unwinding of
the carry trade and the Japanese really
repatriating their, all their savings. We probably
don’t get that. Until, uh, we probably
don’t get that until short rates in Japan
are, at least at the level of Japanese
inflation, which is basically two point
a half, 3% until the BOJ, you know, raises
interest rates from the below 1% where they
are today to two 50. So I think you need
essentially, really 150 basis points of interest
rates rising at the. Uh, at the short end in
Japan for, for the, the carry trade to really,
to really implode. And, and I’m not
sure the BOG is gonna give us that, like,
it’s, it right now. It doesn’t look like it, it’s 150 basis points,
but doesn’t sound like a lot, but it’s a massive,
massive increase. I, no, it’s big. It’s baked. Yeah. But Japan, it’s baked, so
I, I, I don’t think we’re gonna get it. Okay. Especially in the face
of a, of a government that just got a, a
big popular mandate to, to keep spending
a lot of money. Last question Louis. ’cause I could, I mean,
I could talk to you for four hours here and I
wanna be respectful. Um, years ago you said
that, uh, energy had taken the place of bonds
in terms of being anti, anti-fragile asset. You still believe it, so believe it. Look, I think we’re in,
we live in a globally inflationary environment
where every government is falling very easy
fiscal policy where every central bank is
following too easy a monetary policy where
the risk to the system isn’t that growth
collapses, but that inflation picks up. And that inflation
pick up, typically the trigger for that,
the catalyst for it is higher energy prices. Um, and so, you know,
we live in a world right now where growth
is fine, everything’s humming along, markets
are moving higher. Uh, and I think
what will, what will eventually put an end
to this is a spike in energy prices. I don’t know when
it happens, but, uh, I, so I, you’re
absolutely right. You know, I said,
look, the 60, 40, 60 equity, 40 bonds. Of yester years is over. You now need to be
60 equity, 20, 20 gold, 20, uh, 20
bonds, uh, 20 energy and the 20 energy. You know, that portfolio
did fine in 22. I mean, it survived
in 22 and 22 when all prices spiked and
bonds went down, and equities went down. Equities and bonds
both went down 20% energy doubled. So if you had 20%
in, uh, in energy. Uh, then that doubled
and everything else was down 20. So you were still okay. Uh, and you fought,
you fought to, to, to live another day. Uh, you lift a
fight another day. And so, uh, I very much
think that, uh, we’re, we’re having at least
20, if not 25 or 30% of your portfolio in
energy in various forms, whether it’s equity,
uh, energy, equities, whether it’s out of
the money calls on, on oil, whether it’s coal,
uh, even if it’s solar. Like, you know,
some people have ESG constraints, et cetera. So go out and
buy some solar. Um, but you need,
you need that energy buffer because. Uh, if and when the,
the thing comes to an end, it will be
because of energy, probably my favorite
person to, to speak with on anything
related to portfolio construction or, or, or
the non-US perspective. Uh, I always appreciate
your time, Louis. Thank you so much. Thanks so much, ed. Great to see you.

Pitch Summary:
DingDong is an attractive acquisition target for Meituan, as it operates in the highly competitive instant commerce sector in China. Despite being a smaller player, DingDong has managed to maintain profitability for seven consecutive quarters, with over 1,000 warehouses and $3.5 billion in revenue. The acquisition by Meituan at a 20% premium to its market cap is a strategic move to consolidate market share in a sector where major players like Alibaba, JD, and Meituan are heavily investing. The deal includes a $717 million cash offer for DingDong’s China business, providing a significant premium to its current valuation.

BSD Analysis:
The acquisition of DingDong by Meituan is a strategic response to the intense competition in the instant commerce sector, where major players are willing to incur losses to gain market share. DingDong’s decision to sell is prudent, given the financial muscle of its competitors and the challenges faced by standalone companies in this space. The deal also allows DingDong’s parent entity to extract up to $280 million in additional cash before the transaction closes, further enhancing shareholder value. This acquisition aligns with Meituan’s strategy to dominate the instant commerce market, leveraging DingDong’s established infrastructure and customer base.

Pitch Summary:
Coupang, the dominant e-commerce platform in South Korea, has seen its stock price drop by about 50% over the past three months due to a data breach incident. Despite the headlines, the breach involved a former employee accessing personal data, not a cyberattack or systemic failure. The market appears to be overreacting, pricing the breach as an existential threat, which it is not. South Korean consumers are unlikely to abandon Coupang due to its unmatched convenience and delivery speed. The company is expected to address the security lapse, pay any fines, and continue its operations. Upcoming earnings on February 26th may serve as a positive catalyst.

BSD Analysis:
Coupang’s business model benefits from South Korea’s high population density, allowing it to offer rapid delivery services that are difficult for competitors to match. The company’s end-to-end fulfillment network is a significant competitive advantage, creating a moat that would be costly and time-consuming for others to replicate. The recent data breach, while serious, does not compromise payment information and is unlikely to deter customers who value the convenience Coupang provides. The market’s reaction seems disproportionate, presenting a buying opportunity for investors who recognize the company’s long-term potential. With earnings approaching, there is potential for positive news to drive a recovery in the stock price.

Pitch Summary:
Comstock Inc. has transitioned from a precious metals mining company to a leader in solar panel recycling, a niche with significant growth potential. The company is commissioning a 100,000-ton-per-year facility in Q1 2026, with plans to expand to multiple facilities by 2030. The economics of their solar business are promising, with projected annual profits of $55 million per facility. Comstock’s technology is efficient, producing clean end products without harmful emissions, and has received R2V3 certification, enhancing its credibility. The market is not fully pricing in Comstock’s potential, offering a compelling risk/reward opportunity.

BSD Analysis:
Comstock’s solar panel recycling technology addresses key industry challenges, such as high costs and contamination issues, positioning it as a leader in this emerging market. The company’s low CAPEX requirements and high throughput capabilities provide a competitive advantage over rivals like Solarcycle. Comstock’s strategic partnerships and MSAs with major players ensure a steady supply of panels, mitigating supply risks. While there are risks related to scaling and competition, Comstock’s strong market positioning and technological edge make it well-suited to capture significant market share. The company’s clean balance sheet and recent capital raise further support its growth trajectory.