Transcription
Today, we are very excited to be speaking with Stephen Dover, our Chief Market Strategist and Head of the Franklin Templeton Institute. Stephen built Franklin Templeton's Korea coverage team, and his deep insights into that market explain the Korean discount and outlook. We have a great discussion on AI and the mega IPOs. He also explains that the surprise winner in the AI race could be China, and how the West is completely underestimating that possibility. What inning are we in in the AI trade and the AI buildout? Tune in and find out.
Stephen, welcome to the show.
Thank you. It's great to be here. Thank you for having me.
Tell us a little bit about your, just a little bit about your role. What, you know, what does it mean to be Chief Market Strategist at Franklin Templeton?
Yeah, I think it's probably interesting a little bit, maybe to be, I know a little bit about my history. I've worked for Franklin Templeton mostly on the equity side for the last 30 years. I was responsible for developing our overseas offices, including the office in Korea, starting in 2000. So, I started our local Korean office, and I've probably been to Korea 25 or 30 times. Um, I went from that to being head of equity. So, all the equity teams reported to me at Franklin Templeton. Then in, um, 2020, Franklin Templeton doubled in size as we acquired Legg Mason and several private investment groups, and we no longer had the role of head of equity, cuz we have a lot of different teams. So, we needed someone, I guess, to be able to speak for the Franklin Templeton investment teams, chair the investment committee, um, and be the the the general central point for the investment teams to our clients. And that's when I became this role of Chief Market Strategist, spokesperson for the firm on the investment side, and also started the Franklin Templeton Institute, where we try to provide investment insights and thought leadership that are not directed towards any particular products.
You know, it sounds a little bit like you're almost like the director of national intelligence or something, where you're, you're, you're talking to all these different teams. You're trying to, is it would be accurate to say you try to synthesize the different things you hear into a picture where, you know, something, it's more globally clear for the clients?
Yeah, depending on how you count it, Franklin Templeton has 20 different investment teams. We highly value the autonomous nature of our portfolio managers. We've always done that. Um, and that's one of the great strengths of Franklin Templeton, but it's hard to put it all together. So, I get to chair the discussions, which I just did last week, of our different investment, uh, thinkers, what they think, and then I try to synthesize and put that together. Um, you mentioned, you mentioned like being the head of intelligence or something, but I have to say, I feel very lucky. This is a very fun job. I'm very interested in investing. I'm very interested in listening to different insights, but I'm also very keen on trying to share those insights with investors.
Well, you know, it's good that you, you mentioned your, your extensive background in Korea, because I think Korea has intruded into the investment consciousness, uh, certainly over the past, you know, weeks and months. That's, you know, the tremendous rally in Korean assets, but particularly over the past couple of weeks. I find myself, you know, what's happening in the middle of the evening? Let's see what the KOSPI's doing, because it could be moving 10%. Um, so, well, let's just start with that. I, it has had a tremendous rally. Uh, the PE, the forward PEs are still, I think, for Samsung and SK Hynix, uh, are still quite low compared to what their equivalents in the US. Um, and these two stocks are somewhere, depending on what the day, 50 to 55% of the entire index. How do we think about that? That's just something with the Mag Sevens only probably 35% at its height. How do you, how do we look at something like that?
It's interesting you say the Mag Sevens only 35%. We think that's a problem.
But not, not compared to the Korean index. So, let's frame this. First of all, as we all know, Korea's traded at a discount for a long time. And so having these two stocks be so significant has helped Korea, but also President Yoon's market reforms to try to narrow the Korean discount, I think have been part of the structure, at least from a foreigner's perspective. Foreigners, at least foreigners like us who invest in investments that are mutual funds or broadly available to the public, have restrictions on how much of any particular company or country we can put into, we can put into our funds. So, it would be, it'd be almost impossible to have an active Korean fund available to foreigners because the limit on an individual company holding it, it depends a little bit on the regulation, but it's about 10 or 15%. Not even close to the two big companies in Korea. So, that's why it's been the passive strategies that have been the way for foreigners to invest in Korea. I have to say, compared to my first trip to Korea, I guess 26 years ago, I'm thrilled to see the growth of the importance of Korea and the mark of Korea, Korean wave, if you will, globally, culturally, whether that's movies or cosmetics, but also within, within industry. So, I've been a big fan and promoter of Korea for a long time. But even given that, I, I certainly didn't see what was ahead this year. So, looking back at the start of the year, we can, we can talk about how I was looking at things at the start of the year and how it changed, but one of those was really investing in emerging markets and particularly Asia. And we were positive on Asia in general, and Taiwan and Korea specifically. But honestly, I didn't see what was happening. I think the issue now for, for foreigners is this kind of funny combination, pretty significant increases in prices, but as you mentioned, still relatively less expensive than companies outside of Korea. A kind of, um, a weakness in the currency, which theoretically, with all that money coming into Korea, you would expect the opposite. You would have expected a very strong currency, and that's somewhat unexplainable. And then not as much diversity in return with the other Korean companies and economy as you might expect. I know that locally, even though it's been a fairly short rise, it's created distortions locally in Korea, in your real estate market and all kinds of places. I'm talking to you from the San Francisco Bay Area, where the rise in AI stocks has also very much distorted our local market, real estate market, and other markets as well. I think the punchline from looking at this from a foreign investor perspective is that we're still quite positive on emerging markets in general, and Taiwan and Korea specifically.
And they're, but I think I read, saw recently that they're the, the combination of Korea and Taiwan are half of the MSCI, which is also remarkable in its own right. Um, so would it be a?
So, sorry, it is remarkable. Um, I, um, I should have said in my background, [laughter] as part of my background, I was head of emerging markets at Franklin Templeton for a couple of years and have, have many years of experience in emerging markets. And so, um, you know, if you look at the history of emerging markets and the history of Korea, particularly, Korea's been, um, going to break out of emerging markets into developed markets for a long time. And certainly, anyone who's traveled to all the emerging markets would say that Korea and Taiwan are completely different category than the rest of the emerging markets. But, but as you know, recently, probably more because of the market liquidity and reforms, Korea's remained an emerging market. And so, I think that is one of the reasons that I have recommended, um, foreign investors invest in emerging markets in Korea specifically, because I personally think that Korea is misplaced as an emerging market. It shouldn't sit in the same category, um, as, uh, well, certainly most of the other countries in, in emerging markets. But you can see from an index point of view, they need Korea to kind of pull along, uh, the rest of the emerging markets, which, um, might be positive for the index providers, but isn't necessarily positive for Korea.
Right. You, you mentioned something briefly, the Korean discount. I'm not familiar with that. Briefly, what was responsible, I guess, for the Korean discount that now is, you know, sort of getting priced away?
Yeah, so the Korean discount is Korea's [clears throat] been the strong, um, I don't think, well, I can absolutely tell you that foreigners, in particularly, um, Americans, do not have the appreciation for the miracle of Korea. That Korea in the mid-1950s was one of the poorest countries in the world, in, in line with many of the countries in, in Africa, and that Korea has had the most consistent long-term growth of any country in the world. And of course, that's been eclipsed a little bit by China, bigger economy, and has had, has had more growth, growth recently. But Korea is the miracle country of the last 75 years, although not necessarily appreciated globally. In fact, I am certain that if I talk to 100 Americans, no one's going to repeat what I just said. But that said, Korea has not had the windfall market appreciation that perhaps it deserves for the amazing growth that it has had over this period of time. So, that Korea discount has been that for Korea's growth, it has sold traditionally at a discount compared to other markets, particularly developed markets, than it should. And you mentioned, even today, Korea's at a, Korea's cheaper, despite the appreciation, Korea's cheaper than developed markets. Why? First of all, I think that it's really been the, the lack of transparency within Korea, the structure of the markets. That's the excuse that the index providers have used to not include Korea in a developed market. And I think that that has caused a situation where Korea has been thrown in with Malaysia or the Philippines or South Africa or Brazil, instead of thrown in with developed markets. And so, that has caused some of that discount as well. And I think that it's changed dramatically over the last many years, but the emerging market index traditionally was a commodities index or an export index. It wasn't really, certainly a high-tech index, which is what it is now. So, when we were telling people to invest in emerging markets at the end of last year, actually even before that, but it's been 2 years. But anyway, at the end of last year, we were making the case that from an American perspective, and even from a European perspective, to be overly concentrated in the United States is a risk, and that to diversify that risk, you should invest in emerging markets, subset of emerging markets, Taiwan and Korea. Now, clearly, I don't, someone's taken that advice, not necessarily my advice, that, but done that, and that's why you've had such a run-up in Korea.
I'm trying to think of this simply because I, you know, I cut my teeth as a foreign exchange trader, and we're pretty simple and FX. I think I saw SK forward PE 7 and Nvidia's forward PE is 22. So, would it be, would it be, could you extrapolate that and say, you know, even if SK, just using them as an example, doubled or perhaps close to trebled in price, then they would be sort of where Nvidia is, which is at 22 forward PE, is not so, you know, outrageous?
The simple answer to that is yes, but the likelihood of that happening is de minimis. I think Korea will continue to trade at a discount. It's just, will that discount narrow? Emerging markets have traded at a discount forever. So, I don't see that, I don't see that closing anytime soon dramatically, but it's already closed, you know, this, this last year. Um, not sure Nvidia would be the, would necessarily be the mark, you know, that that SK is likely to, uh, to hit. If I may talk about the Korean discount, um, SK is a good example of that because foreign investors could not, it's, it's changing, but foreign investors could not invest, uh, directly in SK. So, it was restricted, and because it didn't have the flow, um, it was, uh, sold at a, or or or priced at a discount. Um, it's been some innovative foreigners who figured out how to put SK in their indexes, Korean indexes, that have caused some of that flow into Korea. In fact, the irony for the, um, for the SK market is that in order to get into SK Hynix, many foreign investors invested in a broader ETF or index, which also improved the value of the other companies in the index, even though the target wasn't them. The target was, um, SK.
Rising tide and lifting up every boat. Uh, so, let's, let's, let's move back across the, um, across the Pacific to the US. I mean, you know, certainly the first half was a wild, a wild ride. If you said, you know, we'd have a war in Iraq, uh, sorry, Iran, and, um, and oil is where it is, and we had a huge sell-off, and then a remarkable recovery. Um, W-, when you just look at where it stands now, what's your read for, you know, broad, you know, broadly thematically for the second half in the US?
Well, the short answer is it's damaging, definitely. Um, so, if you and I were to talk, talk at the end of last year, I would have told you the future looks bright, um, between now and June, June 29th or 30th, or whatever day today is, um, we think the markets are going to be up. We think there's going to be broad performance. What else would I have told you? I'd have told you I think inflation's going to drop, and I think rates are going to drop, um, a couple of times. Fast forward to today, um, right about the market, but the, excuse me, equity market, very wrong about the fixed income market, which has basically, um, been flat. I think if your question's about what is the long-term implications of the Gulf War, I think first of all, lucky for the world, the worst case didn't happen. Um, why? Because countries, including Korea, uh, reduced the amount of electricity, um, and oil that it was using, and we were able to, if you will, hold our breath, uh, for the length of, of the war that happened. Um, that said, uh, many people, when the war started, thought that this would cause a recession or or a slowdown in growth. That didn't happen. It's very important why, and I'll get to that in a moment, but it did pass through an inflation. So, bond markets have not done well. It now looks as likely that rates will go up as they will go down, but certainly, uh, the Fed is on hold for a while. Um, that's a short-term implication, uh, that'll work through the market. What's longer term? Longer term is the change in trade and the change in how countries are going to think about, um, providing energy for themselves. So, I'm sorry, I'm not privy to all of the local Korean press, but what I am certain of is that Korea is rethinking now how it will get its energy supplies and will never go back to where it was before. So, I think one of the great investment opportunities now is in energy infrastructure. Um, if you, speaking of emerging markets, if you look at those, um, countries in the MENA region, especially places like Dubai, are terribly hurt. It'll be several years before they get their tourism back. But all those countries that were shipping their oil through the strait are now looking at at building pipelines in the opposite direction. So they become less dependent on on oil that goes through the strait. But you have to look around the world. Korea is looking around the world at areas around China and other places that straits might be closed. The agreement since World War that the United States had to have free and open seas for travel has been broken. And that's a long-term structural problem. So risk has permanently increased, and that has to be taken into account. So maybe all that sounds a little bit negative. Why haven't, why the markets been up? Why, why despite all that has everything looked good? And the answer is pretty simple. It's AI capital spending. AI capital spending has so overridden consumption and everything else that it almost doesn't matter the geopolitics and everything else because of that capital spending. So I think that's very frustrating for a lot of people who look at markets and say, "Gosh, if oil prices go up or there's not enough oil, that's got to be bad for the global economy." It is. But there's just such an override, at least in the short term, with this infrastructure spending. What country should have been really hurt and gone into a recession if, um, prices go up and you can't get oil, how about Korea? Couldn't be good for Korea. And yet, Korea's market has doubled just because of AI capital spending.
Different people, folks who, you know, some folks said, you know, I guess the big balls, we know who some of them are, they're saying we're in the third year of an eight-year buildout. And that seems, you know, very, very optimistic. So, what inning, to use a, you know, our baseball metaphor, what inning do you think we are in in terms of that AI capital spend? Are we going to, the other day Micron reported and said, you know, we have, we're going to have massive demand outstripping supply through 2027 into 2028. So, you know, how deep are we into this the spending binge, so to speak?
Well, let me try to give you a nuanced answer to that. I think that for AI as a technology, we're in the very early innings. Um, it is remarkable, um, you know, I would usually talk about two or three-year trends, but it's remarkable how much AI has changed and enhanced every three to six months. Um, and probably will continue to do that for the next three to five or, or, or more years. So, um, but that said, in terms of AI as a market, as a market narrative, um, I think we're in the middle to later innings. And all the things that you said is what the market is pricing in. And so, remember the important thing, um, for investors isn't what's happening, it's what's going to happen. And what the market is pricing in. So, yes, Micron, um, had wonderful numbers, but then Micron stock jumped, right? It's priced, it's priced into, it's priced into the market. So, what has to go right? At some point, we actually have to see AI moving from capital expenditure to productivity in the economy. And fortunately, historically, whenever there's a lot of capital expenditure, what follows is an increase in productivity. So, we think that's going to happen, but it hasn't been proven yet. It's unclear how productive and useful those data centers are going to be 5 years, 10 years into the future. Technology changes so far, not being an expert on this, but there's the possibility that those data centers could be obsolete in 5 or 10 years if, if more efficient chips that use lower energy and, and less water happen. I think we're moving from a market that's really building to a market that's going to need cash flow. And we're also, while the chips [clears throat] and the, the building blocks of AI, those companies have increased in profitability dramatically, the users, the AI companies themselves are now dealing with higher expenses. And it's unclear who's going to win from that, and it's unclear how those prices are going to be passed on. But at this point, the cost of compute, the cost of compute is greater than the cost of the, of what comes to the client. It works right now because those costs are not being passed on. It works right now because people are so enthusiastic about the return on their capital that they're willing to to give massive amounts of capital to these companies to invest. But at some point, I think that there'll be a reevaluation of that. How, how might that happen? Well, if some of these companies go public and there's greater insights to their financials, there'll be a greater demand for return from them. We were wildly enthusiastic about the AI companies when they were financing their capital expenditure through their cash flow. That's a, that's an amazing situation. But we're past that tipping point and we're to a point where now there's a massive increase in debt. Um, if history, if history is precedent, some of that debt will not be paid back.
You mentioned just now winner, and I've spoke to a number of folks and different folks have different views and, you know, there, there, there was one interesting view. Um, person said that actually I think the hyperscalers are going to end up being the winners. And he actually specifically thought it would be Google. Who would be a surprise winner or winners of this AI race? I mean, the sort of the winners take most, uh, you know, kind of idea.
I don't know who you were talking to, but it would have been interesting his views 18 months or 2 years ago when everybody thought Google and Alphabet were going to be the losers. So, easier to say now than it was to say, uh, beforehand. I don't think all of the hyperscalers going to make it. I don't know who's not going to make it, but you know, they are, that's one of the reasons there's so much capital spending. They're all having to do the spending cuz they all know there's only going to be two or three winners. And talking to our analysts, it's very difficult to figure out who the winner is. And to use Alphabet Google as an example, they looked like a loser, uh, a year ago, 18 months ago. Now they look like the winner. Okay, so what's the big surprise? What could really happen? The really big surprise, I think to me, is China could be the winner. China has a very different model, the open source model, and a lower cost model than than the US has. And I'm not predicting that China will win this, but it does concern me somewhat as an American when I hear, "Don't worry, the US is 3 months ahead of China."
It's not a long time.
People go on 3-month vacations.
So I think that the hubris and conceit of the West sometimes conceals what might really be going on in other places. And I've asked a lot of people who know a whole lot more than me, are you concerned about China or what about China? And I'm, I haven't gotten an answer that I really like. It's overly dismissive. I've been to Asia, I don't know, hundreds of times, more than 100 times certainly, and it's always very interesting to be there. And when I travel to Asia, I just, I just realize that Americans often don't really understand Asia very well and don't realize how competitive it really is.
That's a, that's a very good point. I think Franklin Templeton recently said an S&P, you know, 500 target of 7400, 7800. 7400, 7800. Are you comfortable with that that range for year-end? I, I don't know exactly when that call, you know, what that call was for.
Yeah, yeah, so that was, you know, that's been our call for a while. So, you know, we ticked the box, we're there.
We're there now, and that gives another another 5% or so up in the market potentially by the end of the year. So, let me give several remarks on that. I think the first remark is that from the beginning of the year till now, the market, while being up, is not more expensive because of the phenomenal earnings growth. And so, one of the big points that we keep repeating is that what drives the market is earnings growth. And that's why there's this dichotomy between kind of how people are feeling and, and kind of the economy in general versus the market. Right now, we have a lot of earnings growth. So, if we continue to have earnings growth, the market can grow without the price to earnings ratio growing. I'm slowing down what I'm saying because I think it's a super important point that we can continue to have growth in the market without the market getting more expensive. And that's kind of what we expect to continue. Where we have to keep our eye on the ball is the quality of that earnings growth. Some of that earnings growth, ironically, comes from markups from underlying companies, especially AI companies, that those AI companies own. So, about 12% of earnings growth comes from just market appreciation. That's circular, and that's not going to happen. The quality of earnings as it becomes increasingly prone to leverage rather than cash flow, which I already mentioned, that would be something that we look at. Now, yes, at the beginning of the year, our motto was invest broadly and abroad. So, what did we mean by broadly? Avoid, not avoid, but don't overweight the Mag Seven stocks, invest elsewhere. And that's proven, especially small caps, and that's proven to be a good decision and something that we look at. Small caps are still having higher earnings growth than the market in general. Small caps have underperformed for probably at least five, if not 10 years. So, there's a, there's a very big catch-up there. I think that it's very important as stock pickers to try to look at what companies are going, how companies are going to be impacted by AI. The second part of invest broad and abroad means outside of the United States. So, we were recommending that people as of the beginning of the year, recommending that investors invest in Japan and emerging markets. Emerging markets has had a, a very big increase in earnings growth. Thank you, Korea, for for being a good part of that, and Taiwan. But, it's also true about Brazil, Latin America, and other countries as well. So, we remain positive on investing in emerging markets, as well as as Japan, which I can talk about if you want me to. What is the case now for most Americans, and I would say certainly most Europeans, Asians I'm not so clear on, is that both because of market appreciation and preference, they're overweight the United States. Emerging markets, Japan, Korea, don't have to outperform greatly in terms of earnings and economy to outperform in terms of the market because they just aren't at those valuation levels and price for perfection in the same way that the American market is.
I want to go back for a second to you said, you know, you're not predicting it, but certainly China could be the winner because their model is, you know, sort of a lot cheaper, maybe three or six months behind, not quite bleeding edge. Is it possible to monetize, you know, if you think that China could be, you know, there's an outside chance that they could be the winner, how would you go about trying to monetize that?
One of the things that I like to say to investors is the market is not the economy. So, I first studied, it's a, it's a trivia thing about me, is that I studied in China in the early '80s. I studied Marxist economics, especially Maoist economics. So, I'm not sure whether that's done me any good, but it definitely [laughter] a different perspective than than most economists. So, um, what a remarkable period of time China has gone through overall. And as that very young person studying at that time, and if I'd known forward how much China was growing, I would have thought, "My goodness, you want to put all your money in China. Certainly not that dodgy United States economy, which didn't look so good at the time." And indeed, China's economy has grown at a rate three times faster than the American economy. But ironically, the American market has appreciated three or four times that of the Chinese market, depending on the period. I say all of that because the market is not the economy, and China's very hard to monetize. It's, it's, it has a higher risk level. The, the government can extract profits from companies, and companies aren't driven to have market returns in the same way that they are in the United States. So, I think it's hard to monetize, and that makes it even worse for American companies, cuz you're dealing with American companies who have to monetize versus Chinese companies that, um, are maybe not directly subsidized by the government but don't have that, that same discipline. Over time, I think market discipline is very positive, and so, um, I think that's one of the reasons that America's done so well. It's one of the reasons that Korea's done so well. But in the short term, that can be very disruptive. So, I'm giving you a bad answer to your question. Um, we are overweight the tech companies in China and, and have some, um, belief in those, but, but they have to be, um, um, bought at, at a lower price because there's so much leakage in the profits getting to the shareholders.
I think you're right. A part of the, recently, [clears throat] I guess, President Xi sort of is certainly deemphasized, sort of, you know, getting wealthy. They're talking about national pride and other things. And, you know, when you don't target the, you know, you don't target wealth, sometimes you don't necessarily get it. So, I mean, I think it's a very good point. It's not a bad answer. It's the accurate answer. Unfortunately, it is hard to monetize. Um, I do want to, I know I've taken a lot of your time. I want to get your thoughts on these mega-cap IPOs. And we've had SpaceX, um, you know, trading sort of where it opened, more a little bit higher. Um, but then we have, looks like we have a couple more down the coming down the pipe, Anthropic and OpenAI, later this year. Is this, there are people who argue that this is a late cycle signal that we've got, you know, these things are sucking up too much capital and there isn't enough resources to really put into them without taking it out of, um, you know, out of other investments. So, do you look at it as some sort of signal that we're getting these monster IPOs after a tremendous rally?
Short answer, no. Let me give you some perspective. First of all, the United States since the late '90s has had very few overall IPOs, and the actual market in terms of number of companies and number of shares has shrunk. And many companies have stayed private for much longer. So, even with these mega-cap IPOs, America is still doesn't have as much in the, in the, in the, uh, public sector, um, as it had 20, 30 years ago. Secondly, um, the American market has had a windfall for the last 20 years of share buybacks. This would be something in contrast with Korea and other countries. It's complicated, but primarily for tax and profitability reasons, companies have in essence, um, leveraged and done the share buybacks. So, almost all companies are smaller in that sense than they were 5 years ago or 10 years ago. So, um, what this has done is created an enormous private market in the United States, and that's why we see, uh, such a growth in private market investments, um, in the United States, but those private markets have been capped. And they haven't, they haven't been able to find a way to be profitable and return money to the, um, investors. And so, IPOs can be quite healthy in that sense. So, I think my short way of answering your question is that IPOs do not necessarily indicate or end bull markets. That said, bad IPO discipline absolutely ends bull markets. So, if we see a bunch of companies that really shouldn't be public start to go public, then that is a very bad sign and could be a sign of the end of the bull market, but that's not what we're looking at. We're looking at the companies that we spent most of our time discussing, the hyperscalers, um, and these amazing growth companies going, um, public. Um, I think that, as I alluded to earlier, those companies having more disclosure will be very interesting as well and cause, uh, cause some more discipline.
You know, I, last question. You, you promised to talk about Japan, and Japan, I think we, you [clears throat] know, people see it, but sort of don't really understand it. Just, just some quick thoughts on Japan.
Maybe people don't understand Japan, but, um, people know, people who have, have some, some time on Earth, uh, know that Japan was so expensive, you couldn't, you know, you couldn't buy a cup of coffee in Japan. It was so expensive. And now Japan is so cheap that it's a tourist, uh, destination, even for Koreans, but certainly.
6 months ago. It was great.
It's great and cheap and wonderful. It's a wonderful place. So, take that into account, you know, as part of how you think about it. Uh, Japan is cheap. Um, and the currency is dramatically undervalued, has been undervalued, and unfortunately, there is no real catalyst to see Japan's currency increase, at least in the short term, even though, you know, we now have positive interest rates in Korea, excuse me, in Japan after a, uh, a long period of time. But Japan got itself in the terrible situation in the early '90s when it had its great, um, implosion, particularly real estate implosion, of not marking it down. Um, and that's the great difference between what the West did after they, um, after the crisis in around 2008, and what Japan did, and, and some of that is the West learned from Japan. So, banks, everyone were stuck holding, holding debt that actually was worthless but not marked down. And unfortunately, they've had to fast forward over 30 years to write all that down, and that's where they are now. And Japan is now, um, much more efficient. The government is much more pro the market. I think that probably the trend in Japan, Japan has been a great capital exporter for the last 30 years. If you were Japanese, you looked for, because the yields were so low, you looked at yields anywhere. And I think a lot of that capital on the margin will come back to Japan. That's Japanese capital, but also some foreign capital as well. So, Japan has been undervalued for a long period of time. A lot of market experts have predicted that Japan would return, and it hasn't, but at this point, we're pretty positive on Japan. I don't see the catalyst for the currency changing, but I'm hoping that, you know, in a couple years when you want to go to Japan, it's very expensive for your, for your holiday, and that would be one of the ways that Japan. By the way, I hope Korea becomes much more expensive for, for people visiting it as well, as just in terms of another currency that I hope to see appreciate.
I better get there soon. I know I promised that was the last question, but what you said just made me think about China and their real estate problem. Have they marked it down and are they going to do it, or are they going to potentially experience some of what Japan experienced in the '90s and the 2000s?
Well, China is experiencing, so I mentioned, um, I mentioned the not marking down the real estate, which China has that same problem. But, I didn't mention in Japan is that was the tipping point of demographics for Japan as well. And China's demographics are even worse. So, so China has some very deep, but well-known, structural problems. Japan did, that didn't ultimately work was massive fiscal spending, which is why Japan has more, a greater fiscal deficit than any other developed country. It's, you know, about double the United States, which isn't good. China hasn't done that. It probably needs fiscal stimulus. What we've thought about China for a long period of time, and most foreign experts, which I put in quotes because I don't know if I trust the foreigners, but the Chinese don't, maybe rightly so, is that they need to move to a more consumption economy. Not unlike what Korea's done as well. But, they don't, they don't really want to do that. So, I think, I think the answer to your question is China still has some real rough spots ahead. And it doesn't have the same wealth creation coming from AI that the rest of the world does. That's not, that's not the model that that China has. So, I'm going kind of back to that question you had before about capitalizing on on China's AI growth, I think it could be very good for China as an economy, but I don't think it, it's creating the wealth in the same way that AI is in Korea and in the West.
Well, Stephen, thank you so much for your time. Feels like we could talk for hours, but I, we certainly can't do that, but we look forward to having you back on the show again. Thank you so much.
Thank you.
[music]