Transcription
Boring for six months now. I'm having fun. And so this is so existential that I think the trend just keeps going; it keeps staying in motion. And I think it's a really good thing for America. I mean, our dollar's overvalued; it's destroyed jobs here; it's kind of hollowed out the economy. I don't think Maga is bullish US equity; it might be really bullish uh, US nominal GDP. Uh, Trump never really explains what the plan is, but through his actions you can kind of tell that he wants flyover country to win again. They haven't won in 40 years, and if they have to use tariffs, and they if they have to do some things that are not so good for Corporate America, well, that that's okay. He doesn't mind breaking some things. I mean, he's said a couple of times now he doesn't care, like if his tweets take the stock market down. I mean, if Maga succeeds, Manhattan and uh, California and Chicago end up as smoking craters, and you know, somewhere in the middle of this country is going to boom. Is it time to increase exposure to international markets?
Hi everyone, Maggie Lake, and today I am talking macro with Harris Cuperman, founder and CIO of Petorian Capital Management.
Hi Cuppy. It's great to see you.
Great to have you on.
It's great to be back on. It's been a while.
It it has. And um, I it's such an interesting time to catch up with you. First of all, have have you been how how are things?
Things are great. Things are always great.
I know you have you have that attitude, and I love it so much. Plus you're sitting in the sunshine most of the time, so I think it helps. You got a lot of vitamin D, which is good.
I'm sitting this office, stop trading, and your gun uh, but there's a lot listen, markets are doing things again too, right? So that's
Yeah. Yeah. It was boring for six months; now I'm having fun.
Exactly. So a lot of people listening know you, but for those who don't or might be newer, just give us an overview on your approach to investing.
So I do what's called inflection investing, or what I call inflection investing. Uh, we look at uh, sectors and industries and parts of the market that have been ignored, unloved, destroyed a lot of capital; they give people PTSD. When you mention them, and as a result, people just stop paying attention; they get really, really cheap. And we try to show up at a moment in time where things are going to inflect, where things are going to start actually getting better, and the share price will go up. And the whole point of this is that you know, if we get it wrong—we get a lot of these wrong—uh, I get my money back because there's so little built in in terms of expectations that um, I'm buying really cheap assets. And if it works—and a lot of them work—hopefully we're going to make uh, five times our money or better over the next two, three years. And I know it's going to be volatile; I know it's going to be scary; I know it's going to be weird. But if you buy things for way less than uh, replacement cost, you buy them at a single-digit cash flow multiple, you buy things with buybacks and dividends where the people behind them are good people, usually good things happen to you. And you know, I'm a growth investor, but I but I start from a point of value investing effectively, and that's what inflection investing is.
That's that's your 45-second pitch.
Yeah. I love it. I think that's really good because it's really interesting. We we're coming out of an environment where everyone wants to buy the winners, so it's it's a it's a very different way of approaching it. Um, look, we've uh, had we've had two tough years because everyone bought Nvidia, and no one likes my names, and my names are doing pretty okay. And you know, I think people are going to start buying my names because the past few weeks they have been, and usually when my stuff starts going up, it keeps going up. So we're you mentioned um, inflection points, and we we've got a couple of big themes that people are saying we're going to regime change. I just want to get your thoughts on it. One of them is that uh, there's talk that we're entering a period that favors an actively managed fund; active management is back over passive. Do you agree, or do you think that's too broad a generalization or too soon to say that?
Look, I agree with you, but if you asked me this question 10 years ago, I would have also agreed with you. You know, if you asked me in 10 more years, I'm probably still gonna agree with you. I don't know. I don't know why you'd buy a passive. So here's a funny thing. Okay, so um, this is off topic a little, but uh, I did a little test to my father because he owns the S&P 500; it's most of his retirement savings, right? And I said, Dad, um, what percent of your of your net worth, of your retirement account in the S&P 500 do you think? His test looks—he he doesn't care much for Elon Musk—and he goes, those 500 stocks is a little bigger, so maybe it's like uh, half a 1%. I go, No, Dad, it's like 4% of your net worth. I'll make up the number, but it's it's something like that. And he goes, What? And then I'm like, So what percentage of your net worth do you think is NVIDIA? Like we both agree this AI thing's a total flop. And he's like, I don't know, maybe if Tesla is like 4%, maybe it's like 1%. I'm like, No, it's bigger than Tesla; it's like six or 7% of your net worth. He goes, Wait a second, I have like 10% of my net worth in two things that I think are worthless. And I'm like, Yeah, Dad, you—there's 20 ticker symbols that are half your net worth, and they're really overvalued. And I think as people start doing this exercise, they're going to have the same uh, kind of shock and awe that my dad did. My my Dad's too old to be investing in Tesla, and you know, I don't know what he should be investing in, but it's not that they shouldn't be buying Nvidia at the top of the cycle, but you know, that's what he owns. And I think a lot of people are going to look at this and say, You know, there's a bunch of things I could buy at five times earnings; maybe I should buy some of that. And as that starts and the momentum kind of wears off, I think you see uh, passive underperform as opposed to having performed for a long time. I think active might have its day in the sun, maybe not. I don't know; it's a hard—it's a—it's like turning the Titanic, you know, because so many people just kind of push it into those 401(k)s. So whether whether it should be the way or whether it will be the way are two really different different conversations, but I think it's interesting because of the backdrop we're in. I could see why people are making this case or at least trying to encourage people like you did to say, like, if you're passive and you're investing in passive things, make sure you you understand what you actually own.
You know.
Yeah, but then my dad, I don't think he's changed anything. What he's going to do, buy munis? Like that's even worse than buying Tesla. I don't know. I I love that you didn't sort of give him a pitch for your fund, Cuppy. He's he's made enough money in my fund; he's good; he's good to go; he's taking care of. Okay, so um, but but you but you are actively managing, so how are you feeling about the macro backdrop right now?
So I think there's a couple of things going on, um, to start with, and I think this is really important. Um, the US is like this capacitor, you know; it absorbs energy, and it releases energy. You know, it absorbs, and then poof, it releases. I think that's what we've been doing for the better part of a decade, you know, 20 years, like really since uh, the bottom in let's say 2009. We've been absorbing the world's energy; you know, all the capital comes to us. And partly this is because our markets are just better companies, you know, higher return on capital businesses, growing businesses. I I I understand why US equity markets should trade at a premium. Um, partly this is because because of our massive trade deficits, where people earn in dollars, and dollars tend to appreciate, so they want to save in dollars, and their choices aren't very good outside of equities, and they just buy equities. They they see the S&P 500 as uh, inflation-protected uh, bonds. And you know, if you look at the yields, I mean, it's not such a bad decision. I mean, it's roughly the same yield, and you get um, you know, inflation protection. I understand why people would, you know, want to own this instead of 10-year—I mean, sorry, Scott Bessent, but no one wants 10-years—um, and so I understand why the capital keeps flowing, and it's it's you know, an energy capacitor that's overcharged now. And you needed a political change; that's the only thing that'll change it. I don't think Maga is bullish US equity; it might be really bullish uh, US nominal GDP, but it's going to happen in a way where wages go up, and you know, the percentage of the pie that goes to labor—I mean, Scott Bessent told you that what the plan is—uh, Trump never really explains what the plan is, but through his actions you can kind of tell that you know, he wants flyover country to win again. They haven't won in 40 years; he—that's his core base—and he wants to see them get a bit more of the capital. And if they have to use tariffs, and they if they have to do some things that are you know, maybe not so good for Corporate America, well, that that's okay. He doesn't mind uh, breaking some things. I mean, he's said it a couple of times now he doesn't care, like if his tweets take the stock market down. There's a very different Trump than last cycle, where I mean, last cycle, let's be realistic, he would tweet at some television personalities most of the day; he'd get in about two rounds of golf, and then he'd tweet about how great the stock market was doing. Like that that was his day every single day, seven days a week. And this time he's actually doing stuff. Uh, you can agree or disagree with it, but these the things he's doing aren't good for equities, and he just seems indifferent. Um, and I think long term they'll be great for the US economy and great for the stock market, but if you take an economic system that's built up over 30, 40 years, and you realign it, and you say, Look, we're going to take our deficits down from a trillion a year to some number half that big, and we're going to put tariffs up to do this, and we're going to take the US dollar down to do this, and we have some like big-picture steps we're going to do, well, that's not good for equities. Like I mean, you could have told yourself that. And I wrote a couple of blog posts about this. Uh, I think Maga is terrible for equities. And so what you're seeing happening over the last uh, two months well, is two things. Um, I think one you're seeing being um, a lot of portfolio managers—okay, like we all think in a US-centric way, but I think a lot of portfolio managers are international; you know, they sit overseas; you know, maybe even some of the big guys like CalPERS; you know, they they think globally; they have a benchmark; their benchmark is uh, every every global equity. And for a very long time they've been overweight US because US has done better, and that's the way you outperform your benchmark, and they've gotten you know, big salary, big bonus, got promoted. You know, I'm thinking of guys like sovereign wealth funds, you know, central banks, you know, like Swiss National Bank basically you know, just owns max s now. Um, you know, I'm thinking of these big pools of capital, and suddenly in the last 75 days uh, the international markets are doing a lot better than the US markets. I have a list of international markets up more than 15%; some of them more than 20. I mean, the US market is kind of unchanged on the year, but Big Tech is down 10, 15. So if you're overweight Big Tech and you're underweight you know, emerging markets like Germany or you know, real frontier markets like the UK, which keeps hitting new new highs, you know, the real shithole places that no one wants to invest in um, you know, you're underweight; like you're down a thousand basis points against your benchmark. And you know, in prior years when you were up 200, 300 basis points against your benchmark, they give you a giant bonus. When you're down a thousand basis points against your benchmark and 75 days into the year, I mean, you're worried about getting fired, and the only thing you know how to do to catch up to your benchmark is you sit there and pray that US tech has an uptick and that emerging markets have a down day and you can reallocate money. And you're so big, you know, you're thinking not single stock; you're thinking, I'm going to pull a billion dollars out of this bucket and put a billion dollars into this bucket, and you know, you're going to move the market when you do that because you can do that every day for the next 100 days. And you know, you're praying just for an uptick so you can get some liquidity to get a better price, but there's like a hundred guys in the same seat as you who are also praying for that outcome. As a result, it's not going to happen. That's why you know, these two things are trending, and they're diverging. And the guy who was down a thousand basis points, he shows up to the office the next day, he's down 1100, then 1200; this is against benchmark. Um, you're not allowed to you know, miss by 50 basis points. And so this is so existential that I think the trend just keeps going; it keeps staying in motion. And I think it's a really good thing for America. I mean, our dollar's overvalued; it's destroyed jobs here; it's kind of hollowed out the economy. I mean, it's kind of funny to think about you you know, the William Jennings Bryan Cross of Gold, well, that's Nvidia. Nvidia has taken in all the world's capital, and it's enslaved you know, 200 million people in flyover country. And as this capacitor releases this energy, you know, these people have futures again. I think it's great. I mean, it's terrible if you own Nvidia stock, but it's great for everyone else; it's great for people overseas too. Because when you think of a guy who sits in Brazil or you know, that's a country that has a weak currency—has a weak currency because local Brazilians export; they earn dollars, and they want to keep their money offshore—keep a little hush-hush, and they go buy US equity. And as a result, there's no investment capital in Brazil; the currency keeps depreciating, which means they have to keep interest rates you know, abnormally high; they're running like 8% real rate, which is unheard of you know, even globally, especially in a down market. And as a result, you know, business can't borrow; business can't grow; the economy is kind of eh. And that's Nvidia's fault too. You know, Nvidia has gone around and enslaved you know, 7 billion people, seven and a half billion people, and you know, 100 million people in in in in the you know, tier-one world that own equities; they're doing great; everyone else has just been enslaved. And it's finally reversing now, and I think it's a great thing; it's so exciting for me as an investor. I mean, it's really terrible though if you're sitting in Zurich and you run a you know, global portfolio of global equity, and you're a thousand basis points below benchmark. But those guys have had a good decade; I'm not crying for them.
Yeah, exactly. And again, you know, if you're if you're managing, you're supposed to be at least sort of looking ahead a little bit, not being—everyone's in; they're too big.
Yeah. They're just going to always trail; that that—but they sort of accept that. Like I said, they're supposed to trail by 50, 100 basis points, not you know, a thousand.
So so you bring up a really interesting—first of all, I love the idea of the of the sort of you know, energy um, that I think that's such a great way to look at it. Um, and your point about sort of trapped capital, you know, not being invested where it needs to be, I think is also amazing. Do you get the sense—because we have seen markets like Germany, Chinese equities; we've seen international outperforming—I mean, throw gold in there too, by the way—but do you think that that's it's early that those—you don't think that big institutional money is even in that trade yet? I mean, no, sort of—I mean, but let's think of your typical you know, sovereign wealth fund guy; he's supposed to be you know, he's 50% underweight UK because you know, the UK is going through a horrible depression; the guys running it are lunatics; you know, well, it goes up every day; you can't be 50 basis points; you know, Germany—I mean, weren't those guys supposed to live in caves and go hunt mammoths or something? Like they have no electricity; it goes up every day; what do you do? You know, I mean, Italy was supposed to be this museum you go to because pasta is real cheap; I mean, it goes up every day; what do you do? You have to buy it. Like I'm not laughing at any of the state of—there are some real problems—but your frontier market goes up, and your your job isn't to analyze the problems; I mean, the problems are priced in apparently, and now the markets are going up because all these countries are kind of looking at themselves and realizing they're sort of the laughingstocks of the world. And I'm not saying they're going to fix the problem, but at least they they're talking about talking about fixing the problem. And when you start talking about talking about fixing the problem, guys say, You know, this thing is at four times cash flow, and maybe the earnings stop declining, and Maga can go up a little, and then you think, Huh, why not? Let's take it to 10 times cash flow. And that's happening across all these things that no one owns; there's no institutional ownership anymore; there's no block; there's no liquidity; I mean, no one even does like research coverage on this stuff. I mean, go go to Europe and learn about some of these companies; these things have no analyst coverage anymore; like they don't exist; they—I mean, look, we're long a ton of Brazil; there's no one playing in Brazil anymore; there's nobody—I mean, look at Colombia; I mean, look at all these places. Like I want to talk about some some some baskets of emerging markets, but first thing you have to understand this trade flow thing: we're 75 days in; there's a reason why markets trash, and why the first you know, 30 to 75 days like sets the trend for the year, and usually it trends for like two or three years. I mean, I did this study that if you bought the the winning sector uh, on January 1, you know, a year after like 80% of the time you outperform a year or two too. And this is because you have these big pools of capital that never get a chance to reallocate, and they always trail the benchmark. And I mean, look, there's a reason that Nvidia is basically down every day; I mean, you know, unchanged is the new up for Nvidia; it's because everyone owns too much Nvidia, and no one owns any uh, Brazil; you know, no one owns any Southeast Asia; they should instead; you know, they own uh, too much semiconductor; they own too much Apple; I mean, like this capacitor is just so—what's the—I think keep going.
Yeah. What's the—so it—I imagine there are you know, folks listening to this and thinking, Yeah, like me, guilty; you know, all of us are probably overexposed to some of those names. Um, but the idea of having to turn your lens internationally is probably a little daunting to them. You have a lot of experience in this; I mean, you've done not only emerging markets but like real frontier stuff; I think what I would consider um, remembering our conversation about Mongolia. Um, so you know, you've got the you've got the chops for that, but um, but it's probably a little bit daunting; it's something they haven't done. How do you think about or what's a what's a way to think about doing this? Is it like everything goes up internationally? Do you have to be careful about how you allocate if you're looking internationally, especially if you haven't been using that muscle in a while?
Well, look, first thing, not everything goes up internationally; there's good and bad stories; there's a lot of in-between. Uh, that's why you do research; that's why you go learn. There's uh, fortunately a lot of ETFs now that didn't exist you know, the last—think of the last DM cycle was 2002 to 2008, and then I kind of extended it because China did too much stimulus, and it kind of gave a lease on life to a couple of commodity exporters—let's just call it 2002 to 2008—you know, back then you had to set up local custody, local banking relationships; like you had have local brokers; oftentimes you had to go and do like an apostille; you'd have to like fly to the airport locally and you know, have your broker meet you at the airport; you didn't want to you know, have to clear customs. Like now it's easier; this is this an ETF; it's dollar-denominated; uh, they charge you 50 basis points; it's liquid; um, you don't have to choose individual companies, though a lot of them have F tickers or GDRs; it's a lot easier now. I think the first step is just go buy the ETF. I mean, look, you're going to get some good ones; you're going to get some bad ones; you're going to get a lot of middle-of-the-road; it'll roughly track you know, what the pension funds are doing; the pension funds don't choose individual stocks in Chile; they just buy the ETF; you know, if their benchmark is you know, five basis points of Chile, they just go to five, and I I think you're going to see a lot of that. So that's the first step. The second step is go do research. I mean, a lot of these companies now desperately want foreign capital; they want foreign investors; they've been starved of capital to the point where they actually put out corporate presentations in English, and they hired some young kid that speaks perfect English that could explain to you what's happening. And they might not legally have to translate the the financials into English; they do. Um, it's all available. I mean, I remember this is before we even had Google Translate; you'd have to go hire some kid to go translate something for you, and it was translated poorly. Like it's come a long way; it's it's normalized a lot. I mean, Google Translate will solve 99% of your problems. Like I I think the playing field's a lot more even now, and which is why this reallocation is happening faster too. I mean, that's why these guys are so far offside, you know, 75 days in—actually, no, 65 days in.
Yeah. So do you think that the the the flows are going to benefit—I mean, it's interesting because we've seen developed markets—I you were joking about the um, you know, UK being an emerging—but you see Europe performing, and and emerging markets—like they would have been different at one point—that's Europe is an emerging market; maybe that's the hard truth.
Sorry.
I mean, look, uh, we have probably better power reliability here in Puerto Rico than they do in Germany; it's extraordinary that we're there. What about this whole Ukraine thing? Does that change, or are you active in Europe; are you looking in as well? And does that change your view about Europe? A lot of people are bullish because they think Europe's going to spend spend on defense, but it seems like it's still a big unknown with its relationship with Russia.
Oh, I mean, look, Europe is next door to Russia; they might not like Russia, but they have to have a relationship. I mean, cutting off Russia is really dumb; Europe's energy poor; Russia's energy rich; like there should be a deal to be made. You know, good statesmen make deals. Um, and they don't have to like each other; they just have to have a deal. Um, you know, will they spend a lot on defense? Maybe. Um, I don't know; Europe's his always been a giant war zone; it's like the white people's Middle East. Um, like they they like they like war, you know. Um, they they kind of take a little you know, 80-year sabbatical, and I think they might get back into it. I don't know. But look, I I don't really know what what what's best for uh, Europe. I I mean, I'd rather than spend money on infrastructure as opposed to weapons; I mean, weapons are the thing that governments spend on that has the lowest multiplier; I mean, probably a negative multiplier. Um, I think they could build infrastructure; they could do education; I mean, we know the infrastructure is lacking. Um, I think that's a lot that Europe could do that would be value added for Europe. I'd rather see them do that, but if they spend money on weapons, and it creates a lot of jobs, and it puts money in the ecosystem, any fiscal stimulus is good fiscal stimulus; it makes stocks go up. You know, I'm not European; I wish them the best, but I'm not trying to decide what's best for them; I'm just going to watch what they're doing and hope to make some money for my clients; that's that's all I can do, right?
Do you—when you when you look at an uh, emerging market or any any international market—I know you think Europe is an emerging market—but let's just say international markets—are you a top-down or do you go bottom-up? Like are you looking at sector? Are you looking at geography based on some macro conditions?
All of the above.
How do you how do you approach it?
All of the above. You know, I'm an all-of-the-above guy. Look, uh, I've been investing in the US now for 25 years; I have a lot of friends in the US. If uh, I ask a friend of mine, Hey, what do you think of this company? There's a good chance they know all the dirt. You know, I could kind of selectively ask, Hey, I think this guy is going to know this sector. Um, I don't have that in uh, overseas, and I don't have that level of trust with management teams that I know they're good people. You know, uh, international markets have a long history of stealing money from guys like me, and so you know, I'm very skeptical. And so we don't take as big of positions in individual names; we tend to do more of a basket approach; it tends to be more top-down; you know, I think with certain regions that are going to do very well, uh, I tend to focus on more financial assets; I just tend to think that those have more leverage to fund flows; you know, you know, we tend to buy brokers and stock exchanges and things where you need a certain level of trust to gain market share, and they tend to get fund flows because uh, foreign guys usually end up throwing capital at it. Um, and so that that tends to be just where I focus my attention. I mean, we own some small-cap businesses that are doing idiosyncratic things, but um, it's really a top-down approach; it's always been how you approach emerging markets. Um, and the two things that work in emerging markets is—and it depends which market—is consumer; you know, you go buy the Coca-Cola bottler; that's the most you know, obvious thing; you assume you know, Coca-Cola or Nestlé or whoever it is has proper corporate governance, maybe, and um, you know, if the economy does okay, the consumer does better. And you know, I believe they strongly in s-curves, which means that as per capita income goes up, they consume more Western quality stuff—well, I want to say quality; that's a wrong word—actually, poisonous for them—but it—they they they consume more Western stuff. And so you know, you buy the Coca-Cola bottler; you buy the guy who has the KFC franchise; like those sort of things have historically done really well with good corporate governance, and um, they they tend to get high multiples at near the end of the cycle, so you get earnings growth and multiple expansion, which means you get, you know, multibagger upside. And that tends to be where I buy. But go to my head; I'd buy the stock exchange every day of the week. I mean, let's talk about Latin America fast, cuz I I think it's a unique story. Um, Latin America historically does like 20 years of communism, 20 years of military dictatorship; communism, dictatorship; they they've now tried democracy for a change, um, and uh, it's kind of been this weird middle road of like communism-like but not full communism, um, and each of these countries has been kind of mired in its own problems. I mean, talking about the big countries, you know, on one extreme you have like Argentina, which has been historically a disaster for 100 years; you know, on the other extreme, maybe of Chile, which has probably done the best. Um, they've all had uh, this election cycle, you know, the current one, except for Argentina; they've gone hard left, and so the economy has been terrible; people are miserable; things aren't going very well; they tend to be commodity-exporting countries, which uh, also is bad because you know, the global economy isn't very good now, so commodity prices are low. And what's interesting is that they're all going right right now. So you saw Milei; uh, he inherited probably the worst hand in poker possible; he got you know, the two, four offsuit; he's making the best of it. Uh, what, 25? He's making the best of it, right? And I think he's done really good with a terrible hand. Uh, you you look at you know, what's happening in El Salvador; I mean, it's even a worse hand; it was a war zone, and Bukele brought peace, and now hopefully he can build the economy. Uh, I think bringing peace is really hard; building an economy is easier. Um, but you look at what's happening as as those two are role models now for the rest of Latin America; they they have huge approval ratings domestically, but also in the rest of the Spanish-speaking world. And uh, you look at uh, you know, Chile; uh, Boric's going to be out; you look at uh, Colombia; Petro's going to be out; you look at Brazil; Lula's going to be out; like all these people are polling terribly, and uh, you know, Peru is is going to go right also; these are the really large blocks. Uruguay went center-left; that's not really terrible. Um, I think you're going to have have a continent that goes right, and it's a commodity continent; it's going right at exactly the time when uh, China and Europe are stimulating; um, they need some commodities, and um, Latin America trades a lot with Latin America, and so I think you see a lot of domestic trade too. I think the economy is going to do really well. I think the real important thing is that you know, remember remember the Cross of Gold; when the dollar is at 105, emerging markets do terribly um, because their cost of capital is too high, and they can't reinvest, and they just buy Nvidia. If Trump desperately wants the dollar—I don't know, maybe not 70, but 85, 90—I think he'll be able to get it there. And if he does, well, then your cost of capital goes down in Latin America; people go sell their Nvidia, and they they reinvest domestically, and I I think it would be this really a reflexively self-fulfilling thing for the whole region. I think you should buy you know, all sorts of things there. Uh, but going back to my stock exchange thing, I mean, the Brazilian Stock Exchange, B3, is a top-10 stock exchange by uh, trading volume, by market cap. Um, you can buy it at like 10 times earnings. Uh, I think the earnings are going to go up a lot if Brazil recovers, and foreigners like me start buying Brazilian stocks. Uh, this huge operating leverage—they buy back I don't know, 50 basis points of the shares outstanding every month; they pay you a dividend. Um, I can see a scenario—I'm not saying this is like my you know, best-case scenario or most likely—I see a scenario where the earnings double, and the market multiple goes to more of a global market stock exchange multiple, 20 to 30 times, and you maybe make four or five times your money; maybe you get some currency appreciation; I mean, things could be really good. I I can build you a scenario where it goes 10 times, but I don't want people to laugh at me. Uh, but look, they've just been through the ringer in Brazil, and look, it could always get worse, but how much worse could it get? I mean, you're buying something at 10 times earnings, like has a 10% you know, annual shareholder return—half dividends, half buyback—like I don't think I'm going to lose too much; maybe I lose 10%. Like and so you look at these sort of scenarios, and it's just like, you know, give me give me more, you know? And I I I
You have over a billion people that are, you know, G to see economic growth as opposed to really slow growth, um, and then China trades with all of Southeast Asia; should be good for them. You know, it should be good for, you know, everyone really. You know, we've had this weird Moment In Time, uh, after 2022 where the US said, okay, we have too much inflation; we're just going to, you know, stop everything, take rates high up, and and stop everything. And we had been the engine of growth the last uh five, six, seven years because China, you know, they had their Crackdown on growth, you know, earlier, and then they did the whole covid lockdown thing. And so China was kind of non-growing, and then Europe's been doing this weird uh woke climate communism thing, which I don't really understand, but you, you know, um, they sort of brainwashed everyone into the idea that they're going to, you know, bicycle around and save the weather, and I don't know. I mean, I've been to Europe; I'm, you know, it's funny, and you see a bunch of guys in Denmark on their bicycles; it's freezing cold, and the weather's crap, and they just love it because, you know, they're saving the weather. But, you know, Europe decided this was the future for them, and as a result, they've had no economic growth for 15 years. And so you had like the three main centers of economic growth that all shut off. I mean, in Japan, you know, was in a mess too; that's the fourth one. Well, Japan started waking up first, but Japan can't work when the other three are are asleep. China seems like it's waking up. Um, Europe, I guess this week decided they want a different path; uh, I don't know what that path is; it might just be more woke communism, but um, they are at least doing something with fiscal, and Trump I think really wants to see nominal GDP growth here, and it's going to be a little messy and bumpy as he re-sets the the entire US economy. And, you know, I wish I could tell you I knew what his plan was, but I'm not sure he fully understands, you know, all the steps along the way; he seems to kind of be just winging it, but I I think he knows where he wants to get to, which is half the battle. And so I think you see the world kind of waking up again, and that really should be good for commodity exporters; it should be good for everyone actually. I mean, you want to be long nominal GDP; um, it'll be an inflationary nominal GDP, but I think it'll be, you know, net good for, you know, Prosperity. Yeah.
And I mean, it's it's funny because it sounds um like a very hopeful message, but there have been people who agree with you. Uh, I talked to Juliet de Clerk last year, and she was saying that this kind of shock to the system might be the rebalance that's that's needed for all the reasons you just laid out, but the interim to get there is very dicey, right? Like there there is potentially a lot of pain, and I I I think that people wonder, and the fear is that does something break, does something probably go wrong, a lot of things maybe, and can that sort of derail the whole thing, you know, like if you've got some sort of crazy systemic event that happens out of that, and does that cause, um, you know, well, I think you're G to see a lot of things break. I mean, look, we've had a world where people thought you could, you know, value commercial real estate at a two cap and borrow money at one and a half and somehow make the math work, and now that piece of, you know, cement is worth a seven cap, and it doesn't work anymore. You know, you have negative equity. You know, people, the whole generation of people my age, a little younger, decide they didn't want to, you know, finish college; they were going to go build dog walking apps because SoftBank would give you a billion dollars for a dog walking app, and suddenly those guys probably have to go get real jobs, but the real jobs aren't Tech programming. I mean, America's short on welders; like those guys have to go back to University, learn how to weld, and if you learn how to weld, you're not going to get a million stock options that might be worth a billion dollars; you're going to end up having a middle-class home, and, you know, I think there's a lot of people with very aspirational mindset that might not be fulfilled. I mean, they might be very happy; I mean, my parents, middle class, they're super happy, but it I don't think you get that um that oh wow, you know, SoftBank bought us for a billion dollars, and I'm 26; like I think that world is ending now. And, you know, the the the world now needs, you know, earnings and cash flow and producing, you know, things that people actually want as opposed to things you can just dump on the stock exchange because, like I said, Maga is bearish stocks, and if the S&P goes from, you know, 6,000 to 4,000, not only, you know, do valuations drop by a third, but the incremental dollar probably doesn't go into, you know, hyper-speculative Tech things; it goes into things that produce cash flow and produce things that we can sell and barter with the rest of the world. Yeah, somebody uh uh someone said to me, money is moving away from Planet Palo Alto; good, good. I mean, if Maga succeeds, Manhattan and uh California and Chicago end up as smoking craters, on Washington DC, that that's the one that is the biggest smoking Crater of all, and, you know, somewhere in the middle of this country is going to boom. I think people forget that in say 1975, uh, you know, Manhattan was bankrupt; I mean, New York City was bankrupt, and Dallas was the center of all economic activity in the United States, and it took about 40 years from the center of gravity to move fully the other direction, and now the center of gravity might just go back; maybe it's not going to be, you know, Dallas; it's going to be somewhere else; maybe it ends up being Austin, or, you know, maybe it ends up being, you know, some City that hasn't even been identified, you know, with 100 thousand people, but I think the center of gravity is is moving away, and if Maga succeeds, those Coastal places that have, you know, prospered on cheap credit and the ability to pump and dump uh speculative Ventures onto the stock exchange or lever up, you know, assets like private Equity, I think that world disappears; that that goes away; those those guys all get shredded, and the guy who produces something useful that we can sell overseas um is going to do really well.
It's so interesting because this is the first time that anyone's mentioned the psychological shift. I mean, everyone sees the gutting of the middle class; um, you know, many of us grew up mid-middle class, and we sort of people understand in some fundamental way that that that has disappeared, and that's a negative thing, but no one's really asked, is everyone ready to go back to that, um, you know, that's a that's a change, as you said, because even if you're not, I mean, there are very few number-wise of those people who are getting their apps bought for a billion dollars from SoftBank, but the idea that you might be able to do that is kind of, I mean, it's kind of that like 10x or go home; it's the reason people trade crypto, right? Is that they want to get rich; that's a whole story; let's leave crypto for a different interview. You know what I mean? It's that YOLO idea that like I I gotta I gotta hit it big, or what's the point of even trying? Everyone's gambling on their phone for that same reason. You know, so psychologically, are people going to be content with a middle class? I don't know that I've ever heard anyone ask that question before. Well, I mean, they can still do speculative things in their free time, um, or you in you you find the new thing that the world needs. Um, look, everyone doesn't have to be doing Venture Capital all the time; I mean, people need to produce stuff that the world needs. I think the bigger question really is like look at the Maga 50, whatever; the stocks go up every year, and so as a result, they don't have to pay the employees; they they pay the employees some de minimus, you know, cash salary, as little as they can get by with, and they give them stacks of stock options, and as a result, these companies show huge amounts of cash flow, huge earnings, because it's always, you know, X SBC, and suddenly, you know, if the stock stops going up for two years, well, how do you uh incentivize these people? How do you, you know, retain these people? You know, these guys are used to being, you know, you work at someone like a Microsoft; you're used to making, you know, some huge amount of money, and 75% of it is is is uh stock options, and suddenly you say, I don't really want stock options; I want cash; like I can't buy groceries with stock options; I want cash, and suddenly all these companies stop being as profitable, and I think that's a bigger change.
Let me ask you about something you said before, since we're talking about technology; you think AI, you don't you don't believe in the AI Revolution; you think this is overstated, the the the stock value of Nvidia aside, um, and the overvaluation there, just the AI in general; you don't you don't buy that. Look, AI is going to make everyone more productive; um, it's going to be it's an interesting technology; in certain industries, it's going to be very important; in some industries, it's going to be, you know, inconsequential. I think of AI very much like like Microsoft Excel; I can't for the life of me manage, you know, manage to contemplate a world without Microsoft Excel. You know, I have models; I use it all the time; it's super useful; I don't pay anything for it; you know, we have a Microsoft license; probably 7 cents a year of our Microsoft license goes to Microsoft Excel; it's it's not really like a profit center for Microsoft; they've done zero to make it better, uh, and that's because there's, you know, there's Google Sheets; there's 10 other free versions, so it's a non-profit center with multiple competitors offering the exact same product, and as a result, it's kind of an afterthought; it's it's huge productivity gains; there's no revenue, and you can't have a business without Revenue. Um, look, there's like 30 of these things now that are pretty good; it's probably a couple hundred I've never heard of. Um, you know, do you use chat GPT? Do you go to, you know, Grok? Do you go to Perplexity? It's all free; I mean, all they want to do right now is, you know, try use my product; you know, we're worth more; you know, try use my product the second time today; we're worth way more; they're just trying to raise more money, and I don't see how that ever changes, um, because there's no revenue, and if you charge me to use it, I'll use the free one, and that's the Trap they're all in. And look, that it's not it's good; it's not that good; it'll be better in two years; I get that there's, you know, flaws, and sometimes gives you gibberish back, and but I understand it's evolving; it's G to be a better product, but I don't know who pays for it. There's something like a half trillion dollars gone into this, and I think chat GPT has four billion of Revenue, and I mean a negative gross margin; like that's the entirety of half trillion dollars, and it's not even growing very fast anymore; it's kind of, you know, stalling, stalling out in a way. I think it's just an economic disaster for these guys. I mean, the new AI race is going to be the the race to get out of data center contracts; like that's the AI race in my mind; that's G to again trouble for trouble for that sector. So oh, look, we're short; uh, we don't short very often, but we're actually short.
Really? You feel you feel that strongly about it? Oh, I think these things are going to lose 80% of their value. So across the whole AI space, or is there anything that uh I don't want to name some names; it's a tiny little; we don't short much; it's a it's a passion project more than anything else; a passion project. So let me ask you, so in this situation, when we're talking about you really thinking a lot of the opportunity is um in this big shift that's happening and internationally and the kind of rebalance of the global economy, um, I know that you're not afraid to weather volatility and stick with an investment if you have a high degree of conviction, or you know you've done your work, and you and you feel that, but how do you manage in an environment where there seems like there is so much uncertainty? How can you how can you decide? How do you how do you do that? Do you just keep your time frame short? Do you stay nimble? Because you know you your bullet is China right now, um, long China, and you're interested in Europe; you're playing in Europe. I mean, I've I've had conversations with people in the last two weeks who feel like Europe will not survive this; they will splinter; the European Union's done, and that China is so has so many off-balance-sheet liabilities, and they are so Overexposed on the real estate bubble, and their people are that it's like this huge anchor, and it's hard for them to navigate, and so there's like there's so nobody there seems to be such an unknown in how this rebalance will play out, and who will get hurt, who will Thrive; how do you how do you manage an environment where there seems like there was so much uncertainty? Oh, you just show to office and expect to be down a lot, and when your expectation is, you know, Trump's going to tweet something, and I'm going to lose 10% of my portfolio; when that's your expectation because that's that's a realistic expectation, well, then every day is a better day because it's usually not as bad as you worry it might be. Um, no, that look, investing is volatile; we've had this weird world where realized volatility has been super low for a bit, and you know, Trump's a Madman with an iPhone, and it's going to be more vola-tile, but look, there's going to be an election in Brazil in Q4 of 26; it's highly, you know, likely that Lula is not the winner; it's actually likely that he drops out of the race sooner; he's not in good health, and his pollings are visible. Um, the day Lula steps away, Brazil is going to go up limit for like a week; like I need to outlast Lula; like I don't care about Trump. You know, Europe, I think they've kind of realized that you can't run a modern economy without without electricity; um, they're going to a solution; it's going to be good; stocks will go up; I mean, Trump will probably kind of poke him in the eye a couple times along the way, but you kind of know where it's going, and it's just gonna be a really vola-tile world, and I don't think you can get caught up in in the short term. I mean, I look at my screens all the time, and every 30 minutes it all moves really fast, and and I go, oh, Trump tweeted again, and I grab my iPhone; I gotta go find a stupid tweet and then be like, oh yeah, this is dumb, you know, but like you just kind of get used to it; I think eventually the world will just get used to it. I mean, we went through four years of this last time; by the end of it, we were really numb. I mean, look, we we chose a dead guy as president because we got sick of it, and now like I literally missed the the calm, sedate hand of Joe Biden; you know, he woke up, kind of pooped his pants, went back to sleep; like nothing happened, and I kind of missed that, you know, compared to this frantic activity now. I'm about to make it a political judgment; I think actually uh Trump's gonna get the country into a better place than Biden; uh, I mean, Biden got us into such a mess that you need someone like Trump, but there's a way to accomplish these goals that's um I think uh less chaotic, but I'm a Trader, and I live on volatility, and I'm not I'm not saying this has been bad for me; it's been actually quite lucrative, uh, but I don't know; it's it's we're two months into the Trump presidency and a rif vacation; I know. I think I think a lot of people feel that way; I don't even know what's going to happen this summer; can people even take vacation given the the news flow? I mean, I think we're going to have to time it around Washington's vacation.
So the devaluation of the dollar; how do they get that? They want you said you mentioned they want the Dixie around, I U just a lower number. Yeah, a lower number, at least; how does that happen? How do they achieve that? I mean, the first step is you just make everyone hate us. I mean, I mean, imagine you're running the, you know, the the Swiss Central Bank, and you own a ton of Maga 7even, or you're running, you know, the the the Norwegian oil fund, and these people that come up to you, and it's like, why are you guys overweight oil? You know, why why are you guys overweight the US? That place has gone totally Rogue; I mean, it's it's like it's like Idiocracy in charge, you know, like like we need to, you know, take take some exposure off; let's go back to Benchmark because that place is a little crazy over there, and you know, you know, you're going to wake up one day, and Trump's gonna be like, you know, we're gonna have as we're gonna have a bonds that's for Americans; we're G to have c bonds for the Chinese; we might not pay them interest; would have e bonds; maybe we'll pay the Europeans, but they have to play ball, you know, like you don't think that tweet's coming. And so I think people want to get out in front of that; that's why you see not just equities, but you see bonds dropping. Yeah, and it's all moving kind of together; I mean, bonds are rallied lately in the last week or two, but I mean, I think the trend is down, and I think that's people trying to get Capital out of the US, and that's how he's gonna get the dollar lower. You know, all the foreign money; I mean, think go back to the Brazilian guy; he makes money in dollars exporting a product; keeps his money offshore; probably puts it in a Swiss bank or, you know, Cav Corp; he goes buys his Nvidia, and suddenly he's saying, maybe I don't want so much, you know, US asset, and so he sells his Nvidia; he has dollars; maybe I don't really want dollars anymore; I'll go buy some euros; I'll I'll go buy, you know, a nice Vineyard in Spain, or maybe I'll even bring the money home and invest domestically, and I think that's happening across millions of people that move capital and let's say get the dollar down, and maybe there's some method to this absolute Madness of his. I think that people think that, but then that's there's the risk, right? We don't really know; I mean, like can there seems to be an awful lot of faith being put in Scott Bent and how like this idea that the people around him have a plan and they know what's happening, but well, Scott Bent is the only adult supervision in the room, so let's hope is a plan. Sorry, I'm I'm really skeptical, Jad; that's why we love you; Cy, we all need a a reality check for sure.
Uh, do you um do does inflation come with this? Are we looking at of higher inflation in the US? Yeah, I mean, look, I think Trump and Bent were saying two different things; Bent keeps saying he wants to outrun it; he wants to basically run nominal at a higher rate than uh the deficit, and as a result, you know, deleverage over time; you know, he wants to run; I don't want to put words in his mouth; let's run 10 nominal; let's keep the deficit at seven; we're going to have 300 bips of deleveraging, and over four years of this term, we're going to take, you know, debt to GDP down by 12 points. You know, I think that's how he thinks of this; I don't really know how Trump thinks of this, um, you know, right now he's throwing hand grenades around, but um, I think they they kind of have a similar view, and if you're G to run 10 nominal and let's say, you know, well, ignore what the inflation rate is; I don't believe the number; I mean, they tell me it's 3%, but you know, I want to sign up for that program; I mean, we just redid our Health employee our health plan for the employees, and they raised it 8% on me; uh, I want to sign up for that 3% Healthcare, um, but everything in my life is up like 10, you know, so I don't believe this three, but just go with it; if you're going to run at 10 nominal, you're gonna have some inflation; if you take the dollar down and uh you're G to have some tariffs, well, then everything you import, and we re-import a lot, is going to cost more, um, offset by some efficiency gains as they get government regulations out of the way and hopefully make things, you know, function a little better, but overall, I think, you know, Step One is probably going to be reorientation to slow down the economy, and then they're going to look at an acceleration, probably start six months from now; I mean, this midterms, they can't, you know, wait too long in the re-acceleration; so sometime this fall we start re-accelerating, and it's going to be inflationary; I mean, it's inevitable, you know, and I don't think it's a bad thing; I mean, in some ways, inflation might be the cure for what ails the US. I mean, think back to 2022 inflation; they said it was eight or nine; I mean, I think it was like more like 15, but it felt really good; you know, every company was beating earnings; you know, you talk to people, and things are busy; restaurants are busy; you know, everyone's happy; you know, a little bit of inflation isn't a problem; I mean, it's terrible if you, you know, locked in uh, you know, a bunch of, you know, five-year debt at 150 bips on your commercial real estate at a two cap; it's really terrible if you're Blackstone, and suddenly you have to start giving wages, you know, wage growth to people, but think back to what happened in 2022; Blackstone would and complain to the FED because they're all buddies, and they said, look, we're not going to hit our IRR Target because all the wages, you know, all the peasants want wages growth; you know, we're going to miss the target, so they slam shut the economy, um, and look, they fought inflation, but I'm not sure if inflation is really the problem; it's just like another, you know, fact of life, um, right, but if if you're going to be able to survive inflation, you you have to have wages; like the sequence matters, right? I mean, I know that Trump wants to reconstitute the working-class, middle-class jobs back, but if you don't have those wages, you know, that'll feed inflation; if you're not getting that right away, then you then I mean, it was what everyone went to the polls for because they hate inflation, right? No, people don't hate inflation; people hate uh when their wages don't keep up with inflation; right? Inflation isn't the problem; I mean, look, Biden did surprisingly well in the midterms, um, as a very unpopular president, um, that's because the economy was doing okay; he he did surprisingly well, you know, versus historically a midterm, you know, first-term president because the economy was good, and that was with Peak inflation; it it was when they imported 20 million migrants and, you know, clamped down in everyone's wage growth that everyone got grumpy. You know what Trump's doing when he closes off the border and maybe some deportations, maybe not, is that you're gonna see wage growth for the bottom third, and uh I think that's really great for America because they're the ones with the highest propensity to spend; I mean, if you gave me capital, I wouldn't know what to do with it; to buy QIPs; like there's nothing I can I can't I've run out of capacity to consume anymore, and um, you know, well, I'm in a special place, but um, I think, you know, the average person, if you give them $100, they're going to go out to dinner, and then that's going to be money in the economy that recycles and recycles, and that's why we saw before, and that's why the economy did so well because people were getting on the bottom of the third were getting wage growth, and I mean, look, it's it's it's it's annoying for people at the top because, you know, you know, your cleaning lady wants a bit more money, and you got to dinner, and it's crowded; you have to get a reservation; everything costs a bit more, and it's kind of annoying for the guys at the top; that's why they went and, you know, complain to Jay Powell; they said, look, we're not gonna hit our IRR, and by the way, you know, little Timmy's Middle School is just went up 30 grand a year, yeah, and you know, like that that's the thing that, you know, controls the the economy in a way, you know, but no, I think what Trump's going to do will create a lot of economic growth; I think it's going to be really messy, and I think you need to reset your mindset of how the world's going to work; it's going to work a lot more like in the 1950s, and you know, dog walking apps weren't the thing in the 1950s; America made, you know, stuff that people wanted and that we wanted domestically, and everybody remembered really good times; it was a great time.
Are you so when we're talking, and we'll we'll close the circle on this, when we're talking about this big flow internationally and capital reallocating elsewhere everywhere in the world, maybe, um, two things to do: is there is there someplace that you don't like, or um an area that is just a no-go for you in this reset? I think there's a lot; I don't want to make any enemies; I I like people from all sorts of places; you know, these countries that are on the wrong side of the the cycle, you know, and they need to come back to the right side, side of the cycle, um, you know, you just a lot of this is driven by politics, um, you know, for better or worse, uh, there socialist politics get you re-elected, but then they they they leave, you know, everyone mired in poverty, and that's why the next guy comes in, goes to the right; that's why countries tend to every election cycle swing back and forth; you find a nice middle balance, which is fine, you know, but during the, you know, four or six years you go left, you want to avoid; in the four or six years, you basically want to buy about a year before it swings, and um, you know, you kind of accept that; so this country is going the wrong direction; you stay away. Um, I mean, there's a bunch of no-go zones where there's no rule of law, or mean usually no no liquid stock market, so it's it's a fine also, right? So it's not going to be on on on the sort of where where most people would default to. Then the next question is, are are do you still have exposure to the US, or are you really um leaning on the international side of things, and and think the best opportunities are there, or do you also see opportunity in the US, just maybe in different places than it would have been a couple years ago? I mean, we have some US; we've taken it way down; I mean, there's some there's some businesses here that I think will do quite well; there's some things where look, they're really good businesses; they're maybe not doing so great right now; they might do a little worse next quarter, and look, I think if they uh turn things around starting Q3, because remember there's a midterm, they have to turn around; I could suffer through six bad months because I think uh on the other side it's really going to look pretty, and I'm probably going to average down, but these are businesses that are, you know, some of them doing kind of mediocre; some of them are doing quite well, even though it's it's a little bit tough. I'd say in the US, it's more for us now to look for opportunities; stuff you want to buy this fall; I think we're gonna have a little baby growth scare; call it a recession; I don't know what you want to call it, and I think there're going to be a lot of things that are really levered to the consumer; I think the lower third consumer does really well, and I want to own that, but not yet; timing is everything. Cubby, it's always great to catch up with you, um, and sort of get your worldview, and appreciate you pulling out the lens because it's so easy to get really sucked into the headlines right now, and they're coming fast and furious, and I feel like everyone um just feels all kilter because of that, so it's really nice to be able to talk a little bit big picture and how you're kind of shutting out the noise and how you're thinking about the world, so I appreciate it. Thanks. Thanks for having me on; it's no one usually wants to hear what I have to say, so I'm honored someone asked me. I don't believe that at all, but thank you.