ICYMI: The Risks to US Exceptionalism

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2:09Ben Inker:Bloomberg Audio Studios. Podcasts. Radio. News. You're listening to Bloomberg Businessweek with Carol Masser and Tim Stenevek on Bloomberg Radio. Well, the dollar fell. Long dated bond yields rose and stocks wavered as President Trump's push to remove Fed Governor Lisa Cook fueled concerns about central bank independence and inflation risks. It's not just that, though. It's also NVIDIA tomorrow. We've been saying there's a lot riding on that report. It's the world's biggest stock. It makes up three percent of the global market cap of all public companies. We'll bring those numbers to you as soon as they cross tomorrow.

2:48This is the backdrop for our conversation with Ben Inker. He's co-head of asset allocation portfolio manager at GMO. It's the Boston-based asset manager co-founded by Jeremy Grantham with$70 billion in assets under management. Ben looks closely at mega cap concentration. So yeah, NVIDIA certainly on his radar. He joins us from Boston. Ben, we're going to talk about the MAG7 in the US in the context of the rest of the world. But first, the threat of Fed independence, what we were just talking about with Endo Curran, who covers the global economy, the president saying he will fire Fed Governor Lisa Cook.

3:21If he is successful, does it change your view of U.S. markets? It probably doesn't change my view all that much because we're pretty skeptical of at least the U.S. stock market these days. It would have it would create some more concerns for us about U.S. bonds and create more concern about the U.S. dollar, because I think if the president is successful in bullying the Federal Reserve into lowering interest rates more than the economy warrants, the two places that that comes out are long term bonds and the dollar and the dollar, by virtue of being quite overvalued today, could fall really quite hard.

4:08Do the president's attacks on the Federal Reserve of confirm your skepticism, does it essentially give you evidence that saying, hey, we are right in our call to be skeptical of U.S. equities right now? Well, we do think it is part of one of the key problems for U.S. companies right now. The U.S. stock market is trading at a big premium to the rest of the world. That is an issue. The U.S. dollar is very overvalued. That is an issue. But the other thing we really worry about for the U.S. is the U.S. is facing a series of supply shocks that the rest of the world is not. So we've got the tariffs, which increase inflation and decrease economic activity.

4:46We've got the move against immigrants, which tends to do the same. And then we've got this uncertainty problem where we have an administration that makes its decisions apparently by tweet and where you really don't know week to week what is going to happen. And That makes it very difficult for U.S.-based businesses to make good long-term investment decisions. This is part and parcel of that problem. So while I certainly hope the administration does not succeed in pushing a FUD governor off of the board on the basis of a criminal referral, because you can have a criminal referral on just about anyone for just about no reason at all.

5:32So I hope it doesn't happen. And if it does, it's another sign of policy uncertainty in a country that is suddenly awash in it.

5:42Ben Inker:And we know that you are a skeptic of U.S. equities because of their high valuations, but the Magnificent Six dominate U.S. equity performance. What breaks their momentum and what will you replace them with if they falter? Yeah, I mean, to be clear, we are quite skeptical of the fact that the average U.S. company trades at a big premium to the average company in the rest of the world. The Magnificent Six, which is the Magnificent 7x Tesla, because Tesla is not only a very different company, it's also a much, much more expensive company than the rest. The Magnificent Six have been extraordinary in their ability to continue to grow at a scale where other companies in the past have really hit limits to growth.

6:25Now, they're trading around 30 times earnings on average. That's Lord knows that's not cheap. If they can maintain their kind of past levels of growth, it's still a perfectly reasonable valuation for them. The question is, can they maintain it? We're not honestly sure. One of the things that is very different from the past is they have hugely ramped up their aggregate CapEx. These were always very capital light businesses, had wonderful free cash flow. And today they are investing in aggregate hundreds of billions of dollars in property, plant and equipment. And it's a huge bet that they are going to be able to make a lot of money out of AI.

7:07Will that come true? I don't know. If it does not, it is one of the most, you know, economically meaningful bets we've ever seen from the stock market and could be a real problem for them.

7:22Ben Inker:Why do you think U.S. premium has persisted despite stronger growth overseas? You know, it's funny. I think some of it is the reflected glow of the MAG-6. Because of the MAG-6, the aggregate S &P has done better fundamentally. Right now, that fundamental outperformance is a piece of it. The dollar has been a big source of the outperformance because the dollar has appreciated by a lot over the last decade versus every other currency. on the planet. And then the valuation in the U.S. over the last decade has really expanded relative to the rest of the world. But there is this base of sort of fundamental outperformance, all of which is owed to the Mag-6.

8:06So the Mag-6 have been amazing over the last decade. They're expensive, but they're amazing. The rest of the U.S. has not been amazing, but has still captured some of the glow because they've been more associated with the MAG-6 than companies outside the U.S. And that I just don't see how it's sustainable because those companies are going to have to do a lot better than they have in the past to justify their valuations. We're speaking with Ben Anker, co-head of asset allocation, portfolio manager at GMO, of course, the co-founded firm by Jeremy Grantham,$70 billion in assets under management. Ben, on the valuation side, when it comes to the MAG-6, I know you've talked about U.S.

8:58stocks being more highly valued than international stocks. And if we look at stocks in the U.S., obviously, that's based on where investors think they're going to go. You said it could be justified if they continue their growth rate as the way they've been growing in recent years. What would you say, though, to someone who says, well, the U.S. is a unique environment from a regulatory perspective, from an economic power perspective, from an international relations perspective. And there is this premium in the U.S. because, well, we have a regulatory environment that allows for that, that essentially says, OK, well, that is justified.

9:37that the rest of the world doesn't have. And indeed, we haven't seen outperformance of the rest of the world, save for the first few months of this year. We'll see what the future brings. But doesn't the U.S. deserve to have a premium on it based on those factors? Look, if the U.S. deserves to have a premium, it would be on the basis of having a higher return on capital than we have in the rest of the world. There are plenty of countries where there are not a lot of regulations over what companies do. Most of the emerging world doesn't have that many regulations. The return on capital isn't necessarily that brilliant.

10:11They aren't wonderful places to operate. The U.S. has been a good place for businesses to operate. One, we are a very big market. Two, we have had a regulatory system that is very rules-based, very kind of slow to change. And it has been a good base to try to sell to the rest of the world. All of that is under threat right now. The U.S. is not such a brilliant place to be as a base for the rest of the world because things like steel and aluminum costs a lot more in the U.S. than they do anywhere else on Earth because we have the big tariffs on them. From a regulatory perspective, while the biggest, you know, the biggest victims might be companies providing wind power or looking to do so, we today operate in a world where the regulatory environment is much less predictable.

11:09And unfortunately, we also now operate in an environment where it is pretty clear that the way you want to get ahead, at least as a very large cap company, is getting in the good graces of the government, which is a very different game than we have had for the last 80 years in the U.S. And that, you know, that pushes towards rent seeking behavior. It pushes towards corrupt behavior. It is not a situation where you would say, aha, these are the companies that should be trading in a premium for the rest of the world. That is more like what we have seen in countries like Russia or China, where in general, people have said, oh, well, if you're going to invest there, you better have a discount to make up for the fact that you don't know what the government is going to do.

11:58And the incentives for companies are not necessarily profit maximizing for shareholders. You know, speaking of Washington and we're going to have more questions on this, the president is having a cabinet meeting right now. We're monitoring it. if he does start to take questions, we will bring you those questions and answers as soon as we get them. Check out Live Go on the Bloomberg Terminal to see that right now. Ben, on that, the idea of the U.S. government taking a stake in these companies, as you mentioned, it does concern you. We did hear from Howard Ludnick earlier on CNBC who said the idea of taking a stake in a defense company such as Lockheed Martin, for example, could be talked about at a certain point in the future.

12:40What's the warning that you have for U.S. involvement, U.S. government involvement in private enterprise? Well, you know, the basic problem is as the government gets more involved in private enterprise, the needs of shareholders take a back seat. And that isn't obviously, you know, that that isn't necessarily the absolute worst thing in the world. But we do see and we have seen time and time again where businesses are more answerable to the government than they are to their standard owners, you get less good business decisions. Now, on the other hand, if you are a defense contractor, it may well be in your interest to have the government take a stake, because if you are one where the government has not taken a stake, maybe you're less likely to win the next competition.

13:33Ben, speaking of the president, we got to leave it there. Ben Inker, co-head of asset allocation portfolio manager at GMO.

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