Transcription
It's the old story with tequila shots, right? You, you never know when you've had too much until, when you've had enough, until you've had too much.
>> Right. Exactly. Yeah.
>> And that's, that's the story, that's the story of every boom. You, you never know, uh, when you've had enough until you've had too much.
Welcome to Thoughtful Money. I'm Thulful Money founder and your host, Adam Tugert. Very excited for today's discussion. Um, international stocks have, uh, outperformed the S&P, or at least are outperforming the S&P, so far again here in 2026. They also outperformed it in 2025. Is that where the opportunity increasingly is going to lie for investors? To find out, we're very fortunate to be speaking today with Louis Gav, founding partner and CEO of Gavk. Louie, how are you?
>> I'm doing great, thanks. How are you doing?
>> I'm doing very well. Thanks so much for joining us while you're on the road.
>> Pleasure. It's great to be again. Great to be with you.
>> All right. Well, Louie, look, um, I always love talking to you because, um, you're one of the, the relatively few people that I interview whose focus is really primarily, uh, markets outside of the US. But one of the things that I appreciate very much about you is that you spend most of your time outside of the US. Um, so you really have a very, um, you know, on-the-ground view of a lot of these markets.
And in our past couple conversations, you know, you have been pretty optimistic about where the opportunity, uh, lies, meaning the majority of it, do you think you see outside the US? And as I said there in the intro, uh, past couple years, international markets actually have beat the S&P. So, let me ask you this. Um, what right now, what trends, international or otherwise, are grabbing your attention the most as an investor right now?
So, to be honest, the trends internationally are not that different from trends you see in the US. I mean, this year it's very much been a case where if you bought semiconductors, if you own semiconductor stocks, you've had a monster year, and if, and if you didn't, then you didn't. Uh, and it, to be honest, it's, it's been that plain simple.
And you see this in the divergence, uh, within the international markets. So, Korea this year, uh, has absolutely ripped, um, and Korea, of course, is extremely heavy on, uh, with Samsung electronic, SKH, um, obviously Taiwan with TSMC. Japan also has a lot of semiconductors. So, North Asia has done exceptionally well. Um, the rest really has done pretty poorly.
If you look, uh, at year-to-date, some of the big European markets like Germany and France, it's been a little lackluster. Uh, Hong Kong has been extremely, extremely disappointing. And here there's, there's an interesting divergence between, uh, Chinese stocks listed in China that have done well over the past 12 months. Uh, Shanghai has done okay, Shenzen has, has crushed it, and Hong Kong, which is actually down over the past 12 months.
Uh, so a divergence. Uh, there's a few factors behind this divergence, but one of the biggest, uh, factors is that in China you have a fair amount of tech hardware stocks listed, semiconductor names, but other, other guys in the tech hardware chain, and in Hong Kong you don't. Um, and so it's in that respect, I think if you look at the US performance this year, if you own software stocks, you've had a miserable year, uh, just as if you're on healthcare, and if you're on stables, and if you're on a lot of consumer discretionaries, you've had a pretty miserable year in the US. If you're on tech hardware stocks, you've laughed all the way to the bank and you've had a monster year.
And you know, I think that trend has been a global trend. So, you know, in the introduction, you said, "Oh, uh, international stocks have, have outperformed this year." You strip out the semiconductors, but then again, you strip out the semis. I, I should do the exercise actually, if you strip out the semis out of the US, because in the US, semiconductors are now 18% of the index, which is kind of, it's kind of mind-blowing, right? I mean, here you have the sector that historically is perhaps one of the most cyclical and most capital-intensive sectors, um, and everybody's like, "Oh yeah, I can't get enough of this," um, at a time when essentially the, the capital intensity of the AI industry, capital intensity of the, of the semiconductor industry, would, you know, would, it would make steelmakers blush, uh, with embarrassment, the, the level of capital intensity this is.
Um, and, and I'm not, you know, you look at the Asian markets, you now have three stocks in the Asian markets: TSMC, Samsung, SKHEX, that almost make up a third of the, 30% of the index. Um, so, uh, so yes, like Asia, the Asia Msei, you could say, has outperformed this year, but again, you strip out those three semiconductor stocks and you get a very, very different picture.
>> Okay. So, it sounds like kind of the breadth of the international market is not very good, and, and the breadth of the US market isn't so great either. But, but, but, but is the international market perhaps even more reliant/vulnerable to what happens with semis?
>> So, I think one key difference perhaps between some of the international markets in the US has been the performance of financials. Um, and I spent a lot of time looking at how banks are performing. I like to look at them as a little bit of a leading indicator. At the end of the day, they're the pulsating hearts of our, of our system, right? When, when banks do well, usually the economy does decently because it moves, it means money's moving around, banks are making money. It's sort of happy days. And, and when banks do badly, it's sort of a warning signal. Um, it doesn't mean that the whole system is going to collapse, of course, but it's, it's one of these, you know, indicators that, that people should pay attention to.
So, if I think this year, what's, what's fascinating to me has been the divergence in performance between financials around the world. Uh, and that if you look at Japan, financials have absolutely crushed it. Uh, they've monster performance by financials in Japan, which makes sense to, to the extent that you've had a big, big steepening of the yield curve over there, uh, that you are seeing a pick up in capital spending across the board, that the Japanese economy, uh, uh, is seeing a lot of fiscal stimulus. There's, there's lots of reasons behind this outperformance.
You're also seeing, uh, decent performance from Korean, uh, financials. Frankly, Chinese financials have also done well. Um, interestingly, in your part of the world, Canadian financials have crushed it. Uh, Canadian financials are having a monster year, which is somewhat, perhaps a little bit counterintuitive, since a lot of people, uh, expected them to do badly on the back of, uh, the Canadian real estate troubles and the fact that, you know, Canada's been essentially flirting with a recession now for, for the past few, few quarters.
Um, meanwhile, go south of the border and you look at the US, where the economy has been quite strong, where on paper things should be, you know, should be going gangbusters, uh, according to most of the economic data, and the banks really haven't done very much. I mean, it's not been a disaster, don't, don't get me wrong, but it's been sort of, yeah, sort of sideways trading for, for most, both the big banks and the regional banks. Um, so anyway, I think that's one key difference perhaps between the US markets today and the global markets is that when you look at the, at the underbelly, uh, the fact that in most, in international markets, banks are doing okay gives me a little more comfort.
>> Okay. Um, let me go back to the, the, um, semi/AI trade right now. Um, I don't know what the percentage is internationally, but I just saw a stat the other day that, uh, AI and AI-related stocks now comprise 45% of the S&P, not the NASDAQ, but the S&P, right? So, it, it's such a, a huge part of, um, the market value of the major indices. Now, it's also a huge part of our GDP growth, right? All the, the spending the hyperscalers are doing. So, to your point, you know, people are, are, are jumping on this extremely cyclical bandwagon like it's just going to be a rocket ride to the moon, right?
Um, how concerned are you about what life looks like when the honeymoon is over here, uh, on this trade? Um, I mean, maybe it's going to power higher for many more years. It's certainly surprised a lot of people in its strength so far, but, you know, certainly the semi market is very cyclical, right? But also the AI market, you know, it's, it's, it's a technology revolution. We've been through several of these. We kind of know how they, they work where you, you basically don't know how high is, and so you build until you realize in retrospect we overbuilt, right?
And, um, uh, so, so we kind of have this very probable kind of day of reckoning ahead. And I was just reading something yesterday that was really fascinating about, um, say, unlike the railroads, right? Where we overbuilt the railroads. We over, we overbuilt track and then we had dormant track for a number of years, and then, and then the economy kind of caught up with it, right? Same thing with, with internet, with the dark fiber, right? We had a bunch of dark fiber, then it finally got used by the second generation.
With compute, it's a little bit different because the chips become pretty outdated pretty quickly. And I was reading that the replacement cost of a data center, you know, replacing the chips and everything in there, it's about two-thirds the cost of building the data center in the first place. So, there's this maybe slowly dawning realization here that both the life cycle of what we're building right now, even though we're spending tons of money on it, isn't very long, and the cost of, of upkeep is quite high. So, I'm, I'm not, I'm not trying to say this is a fatal comp plea, but do you worry that at some point the honeymoon is over, and because the, the markets and the economy of so many of these countries, including the US, are so dependent on this trade, there might be a hell of a hangover?
>> Yeah. It's, uh, the old story with tequila shots, right? You, you never know when you've had too much until, when you've had enough, until you've had too much.
>> Right. Exactly. Yeah.
>> And that's, that's the story, that's the story of every boom. You, you never know, uh, when you've had enough until you've had too much. And, and, um, and so, yeah, look, uh, I think when you look, you mentioned the broadband boom. If you look at how much money was spent on broadband in, uh, in the, in the late 1990s, uh, basically from '94 to 2000, it comes out to about, in today's dollar. Back then it was $500 billion. In today's dollar, it's about $900 billion.
>> Okay.
>> Um, but are we going to spend just this year in the US? Well, actually, I think it's more maybe.
>> I think, I think according to McKenzie, between, uh, this year and 2030, we're supposed to spend $6.7 trillion, uh, in AI.
>> Um, which means that, you know, to justify this kind of spending, and given the depreciation rate you just highlighted, um, and given the profit margins that you could assume, etc., you need the AI industry to generate roughly two trillion a year of revenue. I mean, you know, ballpark, to justify this kind of capex. Not only are we nowhere near that, you need two trillion a year every year between now and 2030.
>> Yeah.
>> Um, not only are we nowhere near that, but to put things in context, the, the whole advertising industry, so from the Google and Facebook ads to the shirt on, you know, the, the, the, the logo on the Manchester United shirts, the, the ad on the side of the bus, to the ad in the FT. Uh, the, the global advertising industry is roughly one trillion a year. Uh, so you need the AI, like right now, to start making sense, to start making twice the annual revenue of the, the global advertising industry. Like, the numbers, to your point, are, are just so big.
You look at AI capex, it basically accounted for more than three-quarters of the increase in GDP growth. Um, so, um, and so I think that's, that's the big challenge right now is that on the one hand, we are very clearly in a market that is massively driven by FOMO, uh, by the fear of missing out. Um, you have a market that's pretty concentrated. That you have semiconductors that have moved from being 10% of the S&P 500 to 18% of the S&P 500, and roughly the same amounts for the world MSCI, excuse me, in, in the past two years, as I think everyone, especially people working in the financial industry, get to use these products and think, "Oh my God, these are awesome! You know, here's Claude, here's Chad GPT, I can do so much with it. How do I get exposure to it in my, uh, in my portfolio?"
And there have been very few ways to do that, right? To, to get exposure. So, you fall back on the semiconductors, it's like, "Well, it's a boom. I'll buy the pigs and shovels." Um, and, and by the way, when you go back to the picks and shovels of the $900 billion that was spent in the late '90s. Um, so that's roughly a seventh of what we need to spend today, and, or what we're supposed to spend today. Um, and a lot of companies did go bust on that. You, you'll remember Nortell Networks, you'll remember Lucent. Those were global crossing.
>> Global crossing.
>> Those were pigs and shovels guys. Um, you know, Lucent was a pick and shovels guy. And not, not to mention all the, the pets.com, etc. So, look, I think the, the story of every boom and bust is a story of, of FOMO, of excitement, and we don't get excited about crappy products. Uh, the reason everybody got excited about, um, don't worry, the hair looks great. Uh, the, uh, um, the, uh, the, we did, you know, the story, the reason we got so excited about the internet, uh, was that it was very exciting, uh, and to this day, the stories back in the late '90s of how internet was going to change the way we were going to work, how the internet was going to change the way we were going to entertain ourselves, how we were going to shop, uh, how we were going to relate to each other. All that turned out to be true, and in perhaps in a much bigger way than anybody expected. But along the way, still a lot of people went bust, and it's the history of every, of every capital cycle.
So, the big challenge, I think, right now for any investor is to look at this boom and decide, "Okay, this AI thing may be very much for real." Um, but where are we in this capex cycle? Do the numbers still make sense? And if you think the numbers don't make sense, and I think you, you think the numbers are getting very stretched. I think the numbers are getting very stretched, then it makes sense to, you need to not, to have the discipline to not let the FOMO take over. You need to, you need to have to say, "You know what, uh, good for some people, you know, they're getting rich, great for them."
Um, you need to have the, and, and it's, you know, this is the part of the cycle that can be quite painful. And you need to have the discipline to say, "You know what, there's other stories out there. There's other great stories on which I can make money without, without, uh, all this, uh, uh, you know, all of this uncertainty and frankly massive risk and being crowded." Because I think when you look at an investment, you have to look at it through four prisms. You have to look at the fundamentals, and today there's no doubt that the fundamentals on AI are exciting, but the numbers look very stretched. You have to look at it through momentum, and here the momentum is undeniably very strong. You have to look at the investor positioning, and here the investor positioning looks crowded. And then finally, you look at valuations, and, and this is the big challenge today, is the valuations make no sense.
Now, if you look at asset classes through these four prisms, there's other places that make sense, frankly, other parts of the market that are, that are doing decently. Uh, you know, we mentioned the financials in a lot of, in a lot of markets that are performing very well. Perhaps that's not a bad place to redeploy capital.
One of the, I think I've argued with you in the past, and, um, and I've written a lot of pieces in the past couple of years highlighting that there's a lot, you know, very exciting changes occurring all across Latin America: political change, corporate governance changes, uh, growth of local pension funds, all of which argue for a rerating of local assets that are deeply, deeply undervalued. Uh, today we, today we have the results of the Colombian election. It's yet another election after Salvador, after Argentina, after, uh, Bolivia, after Ecuador, after Chile, after Peru. Uh, now we have Colombia, uh, with a, with a pretty pronounced rightward shift, um, and, and policies that are likely to be much more market supportive.
So, you don't, there's other, I guess the point I'm making is, um, there's other stories, but, but the AI story, and by the time you get to the big IPOs, to the, to the, you know, every front, um, every headline in the newspaper being, uh, being about AI. The question is, you know, what, what edge do I bring to the table? Like, what do I know that the market doesn't know? Um, and this isn't to say that this thing can't go, keep going on, but what you're essentially playing is a momentum game. And then, you know, the question has to be, what hedge do I have in this momentum game?
>> And, and personally, I'm not, personally, I'm not sure I have any.
>> So, yeah, I'm, I'm curious on that, and that was actually a great framework, and I really liked your, your, um, what four prisms that you look through. Um, so Lou Goff, not sorry, Gauk, but Louis Gov, what is he saying right now from an investing standpoint? Is it time to start walking away from the AI trade because it's so stretched and there could be this big hangover, and we don't know when it's going to be, but we're, the party's gone on for long enough that you don't have an edge now, and it's time to get out and get into some of these other markets? Are you still playing it halfway?
>> Um, so it's, it's funny because, look, this is a debate we have internally, um, and, and that I have been losing internally. So, if, uh, the manager of our Asian opportunities, uh, fund, uh, Alfred Hoe, has had a monster year. He's been playing the semiconductor stocks. I've been very wary about it. Uh, he's been right. He's been right and I've been wrong. Um, and, uh, to, to answer your question, um, I would have been wary about AI much earlier, uh, and I had been wary, so I'm not sure I'm the right guy to ask about, uh, about that, the AI trade, because I'm not sure I've had a lot of added value, uh, on this, uh, for the past year.
Um, what I do think there is, is I think there's tremendous opportunities in other parts of the market, um, that are, uh, that are less talked about, that are less crowded, where the value is much more attractive, um, and where perhaps you're going to get just a lot less heartbreak down, down the road.
>> Okay. And you've noted a few for us like Latin, South America, financials, etc. Um, let me ask you this, and I'm not trying to, you know, sow concern, but, um, I'll just ask it directly. Can the AI complex go through a correction without the world getting kind of pulled into a global recession?
>> Uh, that's a great question. Uh, and that's the one I'm struggling with right now. You know, our framework, we start off with the idea that economic activity is driven by changes in, sorry, that asset prices, asset prices are driven by changes in economic activity and inflation.
>> And that this, this essentially gives you four scenarios. Uh, you have the deflationary boom. Now, the deflationary boom is the natural state of capitalism. Every entrepreneur, every CEO wakes up every morning thinking, "How can I produce more with less?" Right? This is, this is the task of every businessman. Um, how do I produce more with fewer workers, less energy, less copper, less anything?
>> And that's the promise of AI, that it will hopefully let you do an awful lot more with a lot less. Yeah.
>> Exactly. It's the promise of technology in general. It's the promise of capitalism, period.
>> Sure. Yeah.
>> It's what capitalism is great at producing.
>> Always gets better.
>> Yeah. Um, so that's the natural state. But I would say the natural state of democracies is the inflationary boom, because every politician, or almost every politician, wakes up every morning thinking, "How can I promise more to voters without having to pay for it?"
>> Yeah.
>> Uh, and, and so the natural state of capitalism is the deflationary boom. The natural state of democracies is the inflationary boom. And then every now and then you get an inflationary bust, which is typically when energy prices spike for whatever reason. When energy prices spike, um, you get an inflationary bust because economic activity is energy transformed.
And then every now and then, which gets me to your question, you get a deflationary bust. And a deflationary bust is a period when essentially the, uh, you've had too much capex. The system got too excited about something, an invention or a new territory being discovered or something, and the banks have essentially gone bust. Um, you get a deflationary bust when the banks have leaned too far above their skis, uh, put out too much credit, and, uh, and they start getting bust.
This is why, going back to something I was saying earlier, I spend a lot of time looking at how banks are behaving, uh, both banks, how much are they lending, uh, but also, uh, their relative performance, because when you start to see banks meaningfully underperform, that's, that's a, that's a warning sign.
So, to answer your question right now, um, are we in a phase where there's too much excitement, where there's too much capital spending, where all the capex is going to be done, uh, is going to be found out to, to not have the returns that was expected, uh, which is exactly the conditions you need to get to a deflationary bust?
>> I think the answer is yes. Uh, I think the, the, the, you know, the, the maths, as we were saying, the numbers are so big that the scope for deflationary bust is there. Um, then you get to the next question. Have the banks been funding massively this, this boom? Um, it's not evident. Now, the problem is, we know that in every bust, all of a sudden, like it always feels like the banks aren't overexposed, and then when things start to go bust, we find out that they are.
>> That's right. Back to your tequila.
>> Yeah. Yeah. Exactly. It's like, it's the story. It's like the story of every boom and bust. It's you come in thinking, "No, the banks will be fine this time. They learned the lesson." Uh, and then somehow the banks are exposed because money is fungible. They ended up lending to something else, but that money ended up going into AI.
Um, it's, um, and so I don't think we can say just no, it's not going to happen. Having said that, um, the, the bank share performance isn't pointing in that direction right now. Um, and, you know, in most countries that the performance of bank shares don't seem to be flashing big red signals. Um, so I think that of all the, the four, so that's the first reason.
The second reason, um, you know, is a big bust likely right now? The US is running budget deficits of roughly 7% of GDP, by the way, in a boom. Uh, so to get to a big recession environment, you first have to overcome this massive fiscal stimulus of a US government that is essentially running itself absolutely crazy.
>> Sorry, but along with a tsunami of private spending on AI capex.
>> Yeah. Yeah. So, so you put all that together, it's like, ah, like the maths are hard to get to a, to a recession. Uh, the math tomorrow,
>> Yeah.
>> Tomorrow. But, but it sounds like you are afraid that we, we will at some point if, if there's something that compromises those flows.
So, I think of the four, of the four quadrants today, the least likely remains the deflationary bust because of today's fiscal policies, because of today's monetary policies. Um, and, um, and so I think, you know, the way, the way you want to build a portfolio is first you have to determine which of these four scenarios. Very often it's not about picking winners, it's about avoiding losers. So, you want to, you want to find the scenario that is the least likely to happen. And for me, the least likely to happen remains the deflationary bust. That's why, that's why I've been a bear on government bonds, uh, for, for the, for really since co, um,
>> Because when you go crazy on fiscal policy, the odds of a deflationary bust kind of disappear by the wayside. Bonds become sort of useless in your portfolios. Um, because what happens if you go through your four quadrants? If you're in a deflationary bust, you buy government bonds. If you're in a deflationary boom, you buy growth stocks. If you're an inflationary boom, you buy value stocks and metals. And if you're an inflationary bust, you buy energy. Um, those are essentially the, the, this is how you build your portfolio.
And if you think, "You know what, I don't want a headache. I'm just going to buy all four asset classes, rebalance once a year, and go to the beach," uh, you usually do fine. You usually compound at about four or 5% real over the long term. Um, if you want to do better, you eliminate one of these assets. Uh, and today for me, the one you continue to eliminate is the deflationary bust. So, you keep, you keep diversifying between the three.
And where I think you have the highest odds, to be honest, remains the inflationary boom. Uh, it remains the inflationary boom because we had a chance at an inflationary bust if oil prices moved to 120 bucks, but we didn't go there for reasons we can discuss if you want. Uh, we, we didn't end up going there. Um, and I think the odds of us going there now that the whole situation seems to be resolved, the odds of us going there are pretty low. So, if we don't get 100 to $120 on oil, and if the US government continues to run budget deficits of 7% of GDP, I think the highest odds are, you know, you're going to be in an inflationary boom.
>> Okay. And if I took good notes here, you said an inflationary boom. Value stocks and metals.
>> Exactly. And financials because you typically get a steeper yield curve.
>> Okay. Um, all right. So, I was going to ask about this. Um, I was going to ask you about bonds, but I'm glad you brought it up without me having to prompt because the last time you were on, we did a deep dive into you saying the 60/40 model's dead because bonds don't really do their job anymore. Seems like you think that's still the case.
>> Very much so.
>> All right.
>> The new portfolio, the new portfolio, you know, my 2021 book, I hate to plug my book, but I'll do it anyway. Uh, my 2021 book, "Avoiding the Punch," the, the whole book, the, the premise was, look, the 60/40 is dead. What you now need is 60 equity, 20% energy, 20%, uh, 20% metals. Uh, and, uh, and then once you decide that, it's like, "Okay, which metal do I want right now? Which equities do I want right now? And how do I express the energy?" Um, and those become the important question to a well-built portfolio. But bonds, bonds for an asset class have been dead for five years. And I think without a, a, a meaningful change in fiscal policy and a meaningful change in monetary policies, uh, in, in the Western world, uh, I think bonds stay dead.
>> All right. And, you know, I think we talked about, I'm sure we talked about this last time, but of course that begs the question, I mean, the bond market is huge. So, when, when does that money start really waking up to this and start following you into these other markets, energy and metals, which, you know, the energy market's decent size, but it's nothing compared to the bond market, and the metals market's tiny? Um, so presumably those things would go through pretty massive price upward price transformations, uh, if indeed some small but material percentage of, of bond capital flows into there.
>> Um, so I, so a few, a few things here. First, I think a lot of the money that's in bond market is stuck there for regulatory reasons that incidentally keep on increasing every year. So, if you're an insurance company, uh, if you're a pension fund, uh, depending on which part of the world you operate out of, the regulatory constraints keep on increasing, and, um, and you have to own more and more bonds. Uh, so, so, so that's, uh, that, that's number one.
>> Do, do you expect that to change over time as, as bondholders just keep bitching that like, "I'm just losing out to inflation here"?
>> Well, so, okay, let's take the, the example of France, my own country. Uh, in France, most people save in life insurance policies because it's, uh, you essentially, it's tax-free saving from a capital gains perspective. So, you buy yourself a life insurance policy, and it's, it's tax advantageous. So, the government has essentially organized itself so that all the money has to go into life insurance policies. Um, and then once the money's in life insurance policies, um, every, every five years the life insurance are told, "You know what, being 30% in equities really is a little too risky. Maybe you should be 20, maybe you can only have 20% in equities."
Now, if you're in a life insurance policy, you don't have the option of saying, "You know what, I want 20% in gold."
>> Uh, you don't have that option.
>> You have the option of owning French bonds or German bonds, and increasingly that's it. Um, and so, um, so there's, I think everywhere around the world what we are seeing is, uh, through the, you know, in essentially regul increases in regulation, uh, frankly, creeping capital controls, money being shoveled into our, our domestic bond markets, um, whether, whether you like it or not.
Um, and so, uh, so, you know, for how easy is it for an American? Well, I guess now you could say for Americans a bit different with your 401ks that you guys can control. You have the option of say buying a GLD, ETF, etc. But even so, buying gold isn't that easy in America,
>> Right? Well, and a lot of 401ks won't let you buy GLD. They'll, they'll give you six options and that's it of what you can invest in. Yeah.
>> And, and, and if you're a pension fund, if you're, I don't know, the, the pension fund of the state of Texas or the state of Mississippi, etc., do you have 10% in gold to 20% in gold? No way. No way.
>> No way. Although, I will say from talking to some pension experts, these pension funds still have a lot of private junk in them. So,
>> Yeah.
>> Might be hard for them to buy gold, but they still are buying some stuff they probably have no business owning. But yeah.
>> Yeah. Yeah. Know that. So, but I mean, here that's a, that's a whole other debate as to why the private markets grew from one trillion to 15 trillion in the space of essentially 20 years. Um,
>> And that was done on the promise of, uh, high double-digit returns and very low volatility, uh, which obviously we're finding out 15 years later has not always been met. It's been met by some, but not by the large majority of, uh, of that 15 trillion that was raised. Partly because it's one thing to deliver high returns and low volatility on one trillion. Doing it on 15 trillion is much more challenging. It's the whole history of capitalism. The more money flows into something, usually the lower, lower the returns.
>> Right. Right. A lot of big numbers.
>> But so, no, look, going back, going back to bonds. Um, look, I've lived, uh, my entire career, I'm 52 years old. I've lived my entire career with Westerners making fun of Japan, looking at Japan and saying, "These guys are, you know, when Japan first adopted zero interest rates, everybody thought these guys are nuts." Uh, and then within a few years, everybody was doing zero interest rates.
>> Then they did, then they did QE, and then everybody thought, "Oh, these guys are nuts." Uh, then they did negative interest rates. Same story. And now what are we seeing in Japan? We're seeing short rates at 1% and inflation at three and a half, uh, and a yield curve with 300 basis points between the one to 30 years. And I think this is exactly what's going to happen in most of the Western world. Uh, because at the end of the day, that's the only way we can deal with, with our debt situation.
Um, or let me put it to you another way. The Fed has now failed to meet its 2% inflation target for 64 months in a row. 64 months where the Fed has failed to hit its 2% inflation target. If you failed at your job for 64 months in a row, you'd, you'd probably have, find your employer telling you, "We'd like you to find employment elsewhere."
>> Uh, so, you know, when you see them fail 64 months in a row, it comes to two possibilities. Either, A, they're really terrible at their job, option one, or option two, they're that, not, that's not really the goal. Uh,
>> It's no longer a bug, it's a feature.
>> It's no longer a bug, it's a feature. That's what they were. And here's the reality: five years ago they were telling us they were going to do that. They were telling us they were going to let inflation run higher for longer. They were telling us that the way you deal with 100% debt to GDP is by essentially financial repression, trapping people in bonds, making sure that you have three or 4% inflation rate and you give people three or 4% on bonds. This is where we are.
While this is still the case, maybe one day the bond markets will rebel and you'll start to see six or 7% on 10-year bonds, and it'll be worthwhile to go there. Until that day, it's, it, it's, you know, and I think before we get to that day, we'll be where we are in Japan with 300 basis points on the yield curve.
Now, in Japan, it start, maybe, you know, you start to think, "Okay, bonds start to get interesting." Currency's been crushed, bonds have been crushed. Um, and Japan, unlike the United States, has a net foreign position that is absolutely enormous. Um, while the US has roughly 90% of negative net, uh, um, uh, investment position with the rest of the world, Japan has an 80%, uh, negative, sorry, positive position, uh, relative to the rest of the world.
And so, you have to wonder at some point, as yields go up, when do the Japanese start repatriating capital? Um, and for me, that will be when they finally start doing, that'll be the big, the next big leg down on bond markets everywhere, because what they'll do is they'll be selling Treasuries. They'll be selling French OATS, they'll be selling French boons to buy back their own JGB markets. And the question, when they start to sell the French OATS, the question will be to whom and at what price.
>> Mhm. Um, super interesting. What does your gut tell you in terms of how close we are to that moment?
>> I think, I think it's a story for the next 12 months.
>> Yep. I think it's a story for the next 12 months because the, the yen is now so cheap, and the JGB yields are, uh, are starting to move higher. More importantly, the BOJ is starting to raise rates, uh, and starting to sound a little more inflation hawkish. Um, I think politically, inflation is starting to become a genuine problem in Japan.
>> So, the BOJ is going to have to start doing something. So, I, yeah, I, I think that's, well, let me, look, I'm not saying it is going to happen, but in your, your list of risks, uh, for the market, I think that one should be right up there.
>> So, our good mutual friend David Haye, uh, from Evergreen goal, um, has come on this program and, and, and kind of rung a warning bell about this. Um, I, I, I, this is what I told him to position it as, and you can disagree with this, but, um, you know how Mike Green talks about the giant mindless robot, uh, here in the US with passive capital flows, uh, where I, I sort of talked about the trend that David's talking about as sort of the Godzilla trend, um, which is, uh, basically these, these large Asian countries basically pulling their assets out of the West.
Um, and as you said, I mean, Japan owns a ton of US assets. I don't think people realize how much US, pardon me,
>> Three and a half trillion.
>> Three and a half trillion. I mean, it's,
>> Just to put, to put a number on it, that's, that's 10% of US GDP.
>> Yeah. Yeah.
>> It's not inconsequential.
>> Yeah. And he mentioned that I think Korea has already announced a national program where if you basically repatriate foreign assets, I think you get to sell them taxree. They're like, they're like capital gains free in Korea. Correct.
>> Well, so, okay, so what Korea did last year, uh, which has been a key driver for their market going absolutely bananas. Um, and they, at the end of last year, they said, "Look, uh, you guys have done great owning Bitcoin, Microsoft, uh, you know, Facebook, etc."
>> Nvidia.
>> Nvidia. Well, because if you look, um, Korean investors are actually very aggressive growth investors. They were amongst the biggest investors in my friend Kathy Woods, uh, ARC funds. They love the QQQs. If you look at, you know, the QQQ is run by Invesco, like how much they sell in Korea, etc. So, these guys love that kind of stuff.
Um, anyway, the government came out at the end of last year, the end of '25, and said, "Hey, okay, you've done great there. Um, if you sell now," and I can't remember how much time, but it was a fairly limited period of time, "um, and repatriate your money and buy domestic assets. Um, you get capital gains free if you sell, and from now on there'll be no capital gains at home, but if you keep buying abroad, there'll be capital gains on Microsoft." So, so now all of a sudden I'm thinking, "Oh,
>> I was going to buy Micron, but if I buy SKH heinix, you know, I don't get capital gains taxed here, and I get capital gains taxed over there."
>> That's amazing. That's still in place.
>> Yep. No, no, no. So, this is, this is very much in play. So, uh, and obviously the market goes nuts, and I think there's, there's the perception that at some point maybe Japan could do this, like, because you have, you have a prime minister in Japan that is very nationalistic. Um, that is very keen on spending a lot of money domestically on re-industrializing Japan, on building a new defense industry in Japan. Not that different from everything President Trump talks about. Uh, essentially, not that different a program.
Um, and one ways to fund this cheaply, of course, would be to repatriate, to repatriate money, um, all the money that is current, the three and a half trillion that, that I just mentioned. So, again, but I think Japan doing this would risk the eyeire of a US government. If, if Japan did this, I, I don't think it would go down very well with President Trump. So, imagine your Takahishi, your prime,
>> He only got two more years though. They can just wait him out, right?
>> Well, well, here's the thing. Does he have, does he have two more years again? Your prime minister Takahishi. You're probably thinking,
>> Are you not thinking, "Maybe I wait for the midterms? See how President Trump does. If he loses the midterm and essentially loses political power, because by then you'll be a lame duck,"
>> Because the Republican party will always be, already be starting to plan the postTrump era.
>> Um,
>> Like, does it not, if I'm her, I'm just putting myself in her shoes, and I want to do this, but I'm afraid of Trump. I'm probably thinking, "I'll wait for the midterms, and maybe by December, by November, December, I don't have to be afraid of Trump anymore, because Trump, Trump will have other things. If he loses the midterm, then there's going to be impeachments. You'll have other, you'll have other,"
>> Sure. You'll have, you'll have,
>> He said, "Yeah. He said, 'Look, my life's going to be hell if we lose.'" Yeah.
>> Yeah. Yeah. You'll have other concerns, so I can go ahead and do it then.
Um, and so this is, now you mentioned my friend Mike Green's analogy with the robot. Um, which I think is very correct. But my green's robot moves slow but steady.
>> Yeah.
>> It's like constant flows into NDCS, etc. I think the Japanese, uh, flows have been slow and steady on the way in. I think on the way out there, they'll be anything but, because what will happen is either you could get a policy change like you did in Korea, option one, or option two, um, you could still get, you could simply get the, the Japanese government turning to the GPI of the big public pension fund and saying, "Hey, you know what? It's time for you to repatriate, repatriate money."
Uh, and one of the issues in Japan is that when the GPIF does something, it gives a green light to everybody else who was thinking about doing the same thing. It's, it, it, it can create these huge flows where, "Oh, the GPIF is doing it, therefore I should do it as well." Uh, because if I'm running, the reality is if I'm running a pension fund in Japan, I don't know, for the firemen or the dentists or whoever, uh, I'm not paid to take risk. Uh, I, I took that job because, you know, it's, it's a pretty stress-free job and I get to go play golf at 3 p.m. And all I have to do really is copy whatever the GPIF, which is by far the biggest pension fund in the country, is doing. I copy this and I'm never going to get fired. And it's, you know, and I can go play golf at three.
Um, so the big risk is, is that unlike, uh, our friend Mike's, uh, robot which is slow and steady, this one turns out to be actually quite, make a big move.
>> All right. So, um, I'm pulling up a, I'm pulling up an image here I want to show you here. Um, all right. So, we got Godzilla versus the giant robot here, right? And,
>> Did you just make that?
>> No. No.
>> I just, I just pulled it off the internet.
>> Um,
>> Okay.
>> But, uh, what I hear you saying is, is so round one of Godzilla versus the giant robot probably goes to Godzilla. Um, because those, those initial flows if this were to happen would be sort of fast and furious versus the giant robot's slow and steady, right? Um, so okay, so we, we, we could have a matchup between these two giants. You know, Louis is not saying it's definitely going to happen, but he's saying if it happened in the next 12 months, thisish or so wouldn't shock him.
So, this is not necessarily going to happen coincidentally, but we were talking about the pain that a correction in the AI sector would cause the world. Um, and certainly the US. Um, it, there could be a one-two punch here where the AI complex starts to go through a correction and these Asian countries start really taking their assets out. I, I'm again, I'm not calling for this. I'm not saying you're calling for this, but there, two shoes that could drop here, right?
>> Well, it's Murphy's law, right? When things start to go wrong, it's, you know, many things start to go wrong. And the reality is today in the US, the exciting story is the AI story. Uh, if, if that one starts to break, it gives you, it encourages investors to pull their money out anyway. Uh,
>> Because,
>> Which actually then slows the robot down.
>> Yeah. Yeah. Yeah. Which then slows the robot down, etc. It's the, um, now, uh, so this.
is now incidentally the the Godzilla uh scenario to hedge is pretty easy. Uh today you can buy some out-of-the-money calls on the yen for fairly little money because the the FX, one of the interesting things I think in 2026 has been how the volatility on FX has been so low given all the geopolitical uncertainties. And you know, we've had some pretty big moves in equities, we've had some pretty big moves in bond markets. The FX have been sort of rock steady.
So today, today the VIX in FX is is very cheap. So you can, you can hedge yourself against the Godzilla effect by buying calls on the yen. I think at, you know, pretty attractive levels, acknowledging that sort of every 7 to 10 years that the yen moves 10 big figures in like a week every now and then, right? And then when that happens, it creates all sorts of ramifications.
So, uh, I think investing, you have to, you make your scenario. And for me, again, today the scenario is we're in an inflationary boom. Uh, we have very easy fiscal policies. We have an oil price that seems capped at about 100 bucks. And the reason the oil price is capped at 100 bucks is simple enough is that China stops buying at that price.
Um, just like it's, uh, it's also, there's a floor at around 65 bucks because at that price, China buys all it can. So you've got an oil price which is between 65 and 100, which incidentally is a level that most people can live with. Around 100, it starts to hurt some of the poor countries like India, Sri Lanka, Pakistan, etc. But, uh, but it's not a disaster either. So, right, 70, apparently in the US, they say 70 bucks is kind of like the sweet spot, which is almost halfway between what you're talking about. Yeah.
So, so, so you're in that trading band. So if you think, okay, at at 100, I know that China backs off from the market. For me, this is one of the big lessons of the swarm moose crisis is China is the price setter of oil today. Uh, this is what I think we have to take away from this moose crisis. Forget what happens in the Middle East, forget what happens in US policies, etc. The bottom line is China buys as much oil as it can at 65 and stops buying at 100, and that's enough to regulate the market.
Um, and so if you start off with that premise, um, then I think we're, I think we are in an inflationary boom where again, financials do well, value stocks around the world do well, metals should do well, um, where there's a lot of exciting things going on. Latin America thrives. U and yes, yes, I take your point against that. You still have a bull market going on in AI. And I would say great for them. You know, happy days.
Um, it's, uh, I, I think that the fundamentals of that AI trade are looking very, very stretched, but, you know, um, it's, you know, they're, they're doing their thing. Um, we are in this inflationary boom. The one thing that could perhaps question this inflationary boom for me, yes, you pointed out a big blow-up in AI. So, if that happened, we'd have to perhaps get worried. But, but now it doesn't seem to be happening.
The other would be a sharp rise in the yen. Now, here's the thing is hedging the sharp rise in the yen is very cheap. Like, I can, I can, I can hedge that risk very, very cheaply. So, I'm, I'm happy to do so. The problem with hedging the AI bust is it's not a super, it's a, it's a hard one to hedge because it's, uh, like, how, how do you hedge the the AI bust? You could say, well, short the semiconductors, but, you know, if, if you've done that in the past six months,
right? You, you, you die until you're right. Yeah.
Yeah. Yeah. You've gotten absolutely crushed. Say, okay, buy puts on the NASDAQ, but the volatility is pretty high. They're expensive.
Um, so here's the only way you, like, if you do get the big AI bust one day, what's going to be, what's going to happen? Most likely the dollar tanks. I think, I think the dollar tanks because one of the main reasons the dollar, the US, the US is running twin deficits of 12% of GDP today.
Uh, so that means that the US needs to keep attracting foreign capital and for the dollar to stay even. And the way the dollar, the way the US keeps attracting foreign capital is by having really exciting stories. And today, the AI is the exciting story. So if the AI story goes bust, I think the dollar goes down, partly because if AI goes bust, the Fed's going to crush interest rates, etc.
So, um,
so your yen hedge actually helps in that scenario too.
Exactly. So, I think it, it goes both ways. Uh, it's, and if you think those are the, the two big risks out there, uh, the yen hedge. Now, to be very clear, if none of these things happen, you'll make money on all the rest. You'll lose money on your yen hedge, your yen puts,
but it's cheap anyways. You're kind of happy to let it go, right?
Yeah.
Exactly. It's like fire insurance for your house. Uh, it's like you're happy when you don't collect. Uh, so you buying yen calls for me today is essentially buying house insurance for your portfolio, like fire insurance for your portfolio.
All right. Um, well, that it's been a great discussion, Lou. Thank you. And again, thanks for making the time to do this while you've been on the road. Um, I think we've just put together a pretty interesting portfolio construction for folks that are find your arguments here compelling. Uh, so thanks for being so specific. I had a couple questions that we didn't really have a chance to get to and they're not, they're not fair questions to ask you to just tack on here at the very end. If I can though, let me ask for your, your very short answer on this and then I promise we can go deep into it the next time you're on.
Is China in recovery right now or is it, is it, uh, regressing?
Uh, so China is, um, it's an interesting, it's a tough one to answer shortly, but
um,
um,
what you're seeing in China, you've seen essentially a decade where all of China's savings have gone into industry and into building industrial supply chains. I think we discussed this in the past. I've done a number of podcasts on this. This has allowed for China to leapfrog the West in industry after industry, especially in anything linked to transportation, anything linked to electricity generation and storage and transmission, anything linked to telecoms, anything linked to factory automation and robotics.
Um, and so what you're seeing now in China for the first time ever is the emergence of world-class companies. Uh, for most of my career, when you went to China and you saw a company, you met a company that was producing a good that was a little worse than what was produced in the world for much cheaper and for essentially no margin. And as an investor, it's hard to get excited about that, right? And you look at this, you're like, okay, so you produce something pretty crappy at a cheap price for no margin, okay, fine. I'll put an eight times P on that.
Um, what you now have is the emergence of genuine world-class companies. And this is new. This is like Japan in the 1960s. Now, against that, so this is the positive story. And as a result, China's exports continue to absolutely boom. Uh, China's exports are absolutely thriving.
Um, and so, um, so, so that part of the economy is gangbusters.
Yeah. And sorry to interrupt, but but the China story there is not, it's not just a world-class product, it's potentially a world-class product at an even better price.
Yes. Yeah. Yeah. Yeah. No, for sure. Uh, partly because the currency is just stupidly undervalued. You look at China today, China has the cheapest cost of capital, the cheapest cost of electricity, and the cheapest cost of labor. So conceptually, the place should be going gangbusters, and the exports are going gangbusters. But the economy is not, to answer your question, because consumer confidence and business confidence have been absolutely crushed, absolutely crushed by the real estate bust, by, uh, government interference on on what the banks could do and where the money could go.
So, um, so you have this sort of very divergent economy where some parts are doing extremely well. Uh, and but everything linked to consumption remains, uh, deeply problematic. Uh, and so everything, and this keeps coming through the numbers. The retail, the latest retail sales have been disappointing.
Um, now, the one sort of small ray of hope on on that front, um, is that in the big cities, you're now clearly starting to see real estate bottom. Uh, if you look at Shanghai, if you look at Hong Kong, if you look at Shenzhen, um, you've seen real estate prices start to come back up, and you've seen real estate transactions come up, and you're seeing rental yields go up a fair amount.
Um, but, uh, this is still, uh, this is true in the very big cities. It's definitely not true across the country. It's not true in the smaller cities.
Um, and, and I think for, for China to, for the consumer to really recover, he needs reprieve on his balance sheet. He needs, he needs the, basically, you need the real estate to stop falling.
Okay. Um, well, like I said, we can get into this in greater detail next time, but, um, so near-term, you're going to see how this game sort of plays out. But long-term, are you kind of optimistic that China will eventually get past this and then be able to take advantage of a lot of the?
I am, I am, because again, you are starting to see the emergence of world-class companies, um, which as an investor, you know, for the longest time, I, I was, every time I spoke about China, it was to say that you wanted to buy Chinese bonds. Uh, that the best investment out there were where, where Chinese government bonds, uh, which, by the way, are up about 5% this year when US Treasuries are down and, um, and German bonds are down, etc. That the investment that made sense in China was bonds. But in recent years, uh, as I saw the emergence of these world-class companies, I've started to to change my tune and say, you know what, there's now actually really quality companies to to buy in China. And I think, look, I, I think when you look at China, it's always the big question is, do you want to talk about the economy or do you want to talk about the market? Because these, a lot of people equate one with the other,
but it's not always the case. Remember in, in the US, you had the real estate bust in 2008. I'm sure you remember.
Um, and after that, everybody was running around saying, "Oh my God, it's going to be a lost decade. It's going to be, we're the new Japan. It's going to be low single-digit returns forever. GDP growth is going to stink." Now, the reality is GDP growth in the US between 2009 and essentially 2017, 2018 did stink. It was below, it was below par pretty much every year. This is why and budget, like budget deficits kept on expanding, and this is why Trump got elected in 2016. Most people were miserable.
Um, and we forget this because the stock market kept doing very, very well. Now.
Right?
And it's the same story in China. You have a stock market, Hong Kong's not done well this year, but Shanghai and Shenzhen have done very well against an economy that's just not doing that great. Why? Same conditions. You have because you have fairly weak growth and because you have low inflation, there are no constraints to Chinese policymakers. So just like the Fed, you do QE1, QE2, QE3, QE infinity, push money into the system that ended up going into equities and pushing equities higher in 2009, 10, 11, 12, 13. So is China doing the same thing today? Oh, so China could do the same thing today.
Okay. All right. Thank you for letting me unfairly tack it on the end here. One last thing I'm going to squeeze into and then we'll wrap up. Um, and again, just a short answer here. We can expound later.
You know, I'm incapable of short answers.
No. Um, but just this week, we had another kind of Deepseek surprise out of China where, you know, apparently the latest models from Deepseek are quite competitive with a lot of the cutting-edge LLMs here in America. Um, and so, uh, you know, obviously that speaks to China's capabilities here, but, but it also raises another question. Um, you know, so much of of of the future here is dependent upon these capex investments, right? That that they're going to be made in this space. But what if China really starts showing the, you know, the hyperscalers that, you know, what it, you don't need as much capex to get the performance you want out of these models? Could, could actually be again, a threat to the AI sector here because if the capital spending decides to cool off by 20 or 30%? You mentioned what six trillion over the next four years or something like that? Like that's a lot of money.
Yeah. So look, um, I, I think the big question on the AI is is the one you just highlighted. I think in the US, there's a sort of arms race to have the the best performing, uh, and to try to get to AGI as quickly as possible and and to dominate that and and a feeling, uh, perhaps because of the previous business models of Amazon, of Uber, etc., that if you're number one, uh, then you'll capture the whole market.
Uh, and and so there's there's that feeling that and then once you capture the market,
and sorry to interrupt, but that thinking is that war is going to be won on hardware,
right? Whoever has the most compute power, right? Where where China is basically saying, you can maybe win it on software instead, right?
So, so there is that. But there's the war on, you have to be the biggest because then you capture the market. And when once you capture the, once people essentially subscribe to Anthropic, then or to ChatGPT, or to whatever else, then you have them in forever. So, so that's one vision. And so in that, in that vision, what people are essentially doing now is is saying, we need to produce the best Ferrari. And in the process of doing it, we're going to sell Ferraris for $2,000 to people. And so all of us right now are getting, you know, Anthropic or, uh, or Claude, you know, for for nuts, for a lot less money than it should be, given how much it costs to produce. And we're like, wow, this is awesome.
Um, and I guess the aim is to get us hooked and then down the road to say, actually, you got to pay the full price for the Ferrari.
China's model to, to is very different. Is actually to get to work, all you need is a Toyota. Sure, Ferrari is great, but we, you know, most people don't need all those bells and whistles. Uh, so we're going to produce models that can do 95% of what the US models can do, uh, and can do it for 5% of the cost.
Right. Uh, and, and so it'll be interesting to to see who wins, whether, you know, people do want the the 100% and are willing to pay, uh, tons and tons of money, or whether most people say, you know what, I, I'm fine with a Toyota to get to work. Thank you.
And I think the car is a good analogy because, yeah, maybe corporate America, there are some things where you're really going to need a Ferrari, but most people, they just need to get to work on time, right?
Just to get to work on time. And the reality is, if all you need to do is get to work on time, whether you have a Ferrari or Toyota, you're getting there in the same place because you're getting stuck in the same traffic jam and you're getting stopped at the same traffic light.
So you're going to gravitate for the one that's 95% cheaper, right?
Exactly. And you're going to like, slow drive slowly in the school zone. Uh, so whether you're in a Ferrari or in or in a Toyota. So whether you have a Ferrari or Toyota, you're getting to work at the same time.
Okay.
And that, that's that's how I look at it. I appreciate you looking at these, uh, thinking of these at the very end here, but, you know, again, to me, that is yet another potential threat to the AI, uh, capex, uh, boom that we're all dependent on at this point.
Perhaps I should say a BYD instead of a Toyota.
Yes. Well, that's much more apt. Exactly. Um, okay, so Lou, this has been great. Thank you so much. For folks that would like to follow you and your work in between now and your next appearance on this channel, where should they go?
Absolutely. Uh, the best place to go is, uh, at gaffcal.com, uh, where everything we do is, uh, you know, we, is on there. Uh, you also mentioned Evergreen Gaffcal, which is our US private wealth arm, and, um, you can go to that website as well. There's also a link from our gaffcal.com website. Uh, I'm also on Twitter. I, I don't tweet a ton, but I'm, I'm on there on X. Uh, but, uh, I, I'll, I'll put the occasional piece, uh, on there. I actually just posted an interview I did where I actually was in your chair interviewing my business partner Anatol, uh, about some of the recent developments. So people should check that out because I thought Anatol did a great job. And, um, yeah, that, that's roughly it.
All right, folks. Well, look, please join me in thanking Louie for giving so much of his time and and such great specificity in his answers here, um, by hitting that like button and then clicking on the subscribe button below as well as that little bell icon right next to it. And if you would like to get some help with potentially putting into practice in your portfolio any of the insights or ideas that Louie mentioned here, as usual, highly recommend you, uh, you do that under the guidance of a good professional financial advisor. If you don't have one advising you, especially if you don't have one that has perhaps much, um, international expertise, consider talking to one of the financial advisors that Thoughtful Money endorses. These are the firms you see with me on this channel week in and week out. To do that, just fill out the very short form at thoughtfulmoney.com. Only takes you a couple seconds to fill out the form. These consultations are totally free. There's no commitments involved. It's just a service these firms offer to be as helpful to as many investors as possible. Louis, my friend, uh, it's been wonderful. Well, good luck with the rest of your travels while you're on the road for business and really look forward to seeing you back on the channel again here soon.
Thank you very much. Great to see you.
All right, and everybody else, thanks so much for watching.