Geopolitical Uncertainty – James Aitken, Louis-Vincent Gave, and Marko Papic (EP.440)

26:37From here on out, the U.S. is going to be very, very nice to Latin America. Meanwhile, Latin America is one of the most undervalued asset class out there. You can buy Brazilian tips for 8 % real, a 15 % phenomenal on the 10-year. Why wouldn't we do that all day, every day, and twice on Sunday? You got to absolutely back up the truck, I think, on Latin American assets. Looking around the world, other obvious assets to me are assets that have been absolutely decimated because they were perceived to be the big losers in the unipolar U.S. world. Everything linked to China obviously stands out. The one that stands out the most to me is Chinese distressed debt.

27:13Chinese distressed debt was trading at 50, 60 cents on the dollar. When Russia invaded Ukraine, they decided China's uninvestable. Everybody redeemed. There was no markets. This stuff is still trading at 10 cents on the dollar at a time when, again, China is going to be stimulating. So you can buy Chinese distressed debt at 10 cents on the dollar, knowing that the banks are going to go into overdrive. To me, that seems like an amazing risk reward. Europe, the valuations aren't that cheap, but again, you're going to have the fifth book challenge. All that to say that in this world that reorders, new opportunities are emerging here and there that to me seem pretty obvious.

27:51James? Two follow-ups for our friends. Firstly, Louis, there's been a lot of commentary again this week. The usual analytical mistake, which is always China must. The China must XYZ viewed through the prism of Western capitalism markets is not a great way to think about it. You know where I'm going with this, the China must deval stories running hot again this week. Can you just talk to that for a second for us all? Sure, happy to. Look, China's running a trade surplus of 1.1 trillion US dollars. There is no problem of competitiveness of Chinese industry. Meanwhile, I invite all your listeners, if they don't know where they want to go on a holiday, go to China.

28:31It is now so cheap. You can stay at the Four Seasons in Beijing or the Rosewood in Shanghai, et cetera, for 200, 250 US a night. These are as nice in a hotel as you've ever stayed in. China today is super competitive. You can buy really nice electric cars for$9 ,000. If you want to self-drive on Tesla, that's$8 ,000, and you still need to buy the car. China is so competitive today, it is crazy. China doesn't need a devaluation. China's problem is first and foremost that consumer and business confidence has been crushed. crushed by a number of government decisions, being crushed by the fears of the trade war.

29:12COVID has been crushed by the real estate busts, being crushed by many things. If you want to boost consumer confidence and business confidence, you actually raise the currency. You don't devalue it. James, I think here we're at a super interesting crossroad where if in the next six months China does devalue the RMB, it would have been a big policy mistake. I'll add one last thing on this. The fact that the yen is going up very rapidly now gives them probably more comfort, more room to revalue the renminbi. If you're China today, your main competitor for your industry is now Japan, especially when the yen was so cheap.

29:46Thank you for that. Ted, if I may go back to Marco and just respond. Let's be clear for our listeners. We're not talking the end of U.S. exceptionalism full stop. I think to drill down a bit, we're talking about a probable end to US outperformance versus other parts of the world. I think that's the essence of it. I'm always intrigued when any market anywhere and anything is described as exceptional. That's not to pick a fight with it. But if you compare that with a position that's well-researched in anything that's described as uninvestable, you've probably got a very interesting portfolio, particularly if it's tilted to the uninvestable that most people just can't be bothered to investigate.

30:32To take it one step further, we do need to keep an open mind about what Marco said. Are the clients I work with blanket selling US assets? They are not. For the past month and a half, the tactical ones have been increasing their dollar hedge ratios versus various currencies, which is the first step. And a lot of them had pretty low hedge ratios because they didn't need to hedge. Being unhedged, overweight US equities has been a great winner, not least for Japanese retail investors in their nicer accounts. And that's just one example. It's been a great winner for every private bank. It's been a great winner for the world to be unhedged, overweight US equities.

31:14And then you have this. So in some cases, you may need to trim risk and certain equity exposures, but you certainly focus on the currency first and foremost. To see the euro up 2 % two days in a row tells you that there's some very powerful capital flows coming out of dollars into euros. The currencies of massive surplus countries are outperforming, which makes perfect sense. But amidst this turbulence, Ted, I think the key is that there are a lot of things that will get thrown out. And if you've got a fully funded balance sheet, which applies to most of your audience in the most wonderful way, now's the time to sharpen the pencil.

31:54To see some of the world's largest pools of capitals putting in a bid effectively being net liquidity providers to specific assets. And let's be clear, not at a beta level, not at an index level. that's not right, on very specific assets, whether they be particular bonds or particular currencies in some cases, or most of all, specific equities, which just got smashed in considerably, is absolutely the right thing to do. And that's probably the mindset for every long-term, fully funded pool of capital and generic term for sovereign wealth, endowment, foundation, family officers, sharpen the pencil.

32:33Because Marco's right. I mean, it's a difficult transition, to put it mildly, but you can imagine a path through this eventually. It may not mean US asset outperformance continues. It may mean that we prefer other jurisdictions. And I think that's probably true to Louis' point. But it doesn't mean people give up on the United States altogether. It doesn't mean they quit. It just means there's a difficult transition. If you believe there is a path through it on a six to nine month basis, then now's the time to sharpen your pencil and be a net liquidity provider on assets. We're going to take a quick break in the action to tell you about SRS Aquium.

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34:00Learn more at srsaquium.com. That's S-R-S-A-C-Q-U-I-O-M.com. And now, back to the show. Marco, at the top, you mentioned the constraint of the 10-year. I'm surprised we've gone this far without even mentioning what Scott Besant is studying all the time. How do you think about the constraints of the U.S. bond market and the reaction function? I mentioned to various members of the U.S. administration 12 months ago that Trump would be a human steepener. They were not happy with that characterization. One of them actually said, quote unquote, every time you say that on Bloomberg, I got to go after you and clean up your mess.

34:44And I was like, sorry, but this is the beauty of working in independent research. I don't really care. That's first. The second thing is it's been proven absolutely correct. When the Fed cut rates, every traditional fixed income investor was like, you got to go long duration. That was the wrong call. And that really alarmed the White House. Actually, I would argue that Scott Besson is the treasury secretary today because of that move. What we know about this White House is that, yes, they don't really care about equities that much. But let's leave that aside. I do think they are watching bond yields day in, day out.

35:20I think that they had this scenario in their head that a shallow recession early in the term would be awesome. Private sector in the United States of America has never been less leveraged. Households basically have as clean of a balance sheet as ever. Households have made$10 trillion in real estate over the last five years. And if you get yields down, not only would they start buying homes again, but they might dip into that home equity through HELOCs. So you have this bonanza. All you need to do is bring the tenure down. And that hasn't happened. they're going to struggle to bring the tenure substantively below 4%.

35:59I think 3.5 % is the best they could hope for. And that's just not enough really to restart some sort of re-leveraging of the private sector because American households don't want to re-leverage at those levels. So I think this is the biggest constraint. Now, there are many other constraints. America sells CapEx goods. America sells expensive stuff. You're going to start seeing SOE-adjacent entities start canceling those orders. You've got the House and the Senate of talking about taking away tariff rights from President Trump. It's not going to happen, but they're talking. Finally, I think I've got so many polls, Ted, before or after election, they all say the same thing.

36:35Trade and tariffs, least important issue for Americans. The least, by far. I don't think Trump is stupid. I think if he had a superpower, it would be that he can sniff out where the median voter is. And I think he must know he's burning a ton of political capital and an issue nobody cares about in America. James? There's lots of theories floating around as to why the bond market reversed the way it did. Of course, there has been some deleveraging, but more specifically, it's been people stopping out. It is not the treasury basis trade unwinding. The treasury basis trade this week has been fine.

37:13The treasury basis trade does not explain what happened. Nor, as Louis would attest, does the convenient but incorrect rumor that, oh, China must be bashing treasuries and just ignore that. It is true to say that there was unwind of some massive swap spread positions, which were established on the notion, which is true, that financial regulatory reform is coming. They're going to ease up the denominator of leverage ratio, which gives people more capacity to intermediate treasuries, which means theoretically swap spreads should be higher, aka wider. So it was logical to put those positions on. But when one person bows them out in size, and there's no one on the other side of the trade, and then everything starts to correlate with everything else, off we go everywhere from treasuries to gilts to Japan.

38:03And the biggest blow up of all this week was actually New Zealand. How about that? Lovely country, but nobody's really watching. What we've been reminded of this week, and we all know that this is something Scott knows as well, there is not enough private sector balance sheet capacity to intermediate this enormous stock of treasuries. It's a capacity problem, and it's even more of a capacity problem when you look at the expected borrowing coming from Europe now, based on the pivot that Marco and Louis have described. There's going to be a lot of bonds that need to be taken down in a lot of jurisdictions that are deploying fiscal policy to offset this shock.

38:42So we have some people would dramatize it as capital wars. I think that's a bit much. But I think we can safely say that there's this growing competition for capital. The people that look after their creditors will probably be okay. The people that work hand in hand with their financial systems to make sure they're able to intermediate all of this will probably be okay. But unsurprisingly, in a competition for capital and a competition for funding, the big net surplus countries win. And the irony is, when Scott eventually gets to deregulation and freeing up some of the constraints in the leverage ratio, it should serve to dramatically improve the functioning of the treasury market.

39:28And that would be a good thing. Everything we've talked about so far is the liquid markets. and there's a healthy amount of sophisticated portfolios that are in the private markets. Would love to hear how you think about longer term, the implications of all this for all the assets held in the private markets. I find it very interesting. I sort of introduced geopolitics and politics. That's what I hang my hat on. For most of my career doing that, private investors have just not been interested in anything that I write about or the allocators on the other side. The head of alts is usually like, meh, whatever.

40:04I don't need this. I'm in it for seven, 10 years. I can ride these geopolitical alpha moments. But my view is that geopolitics is not a short-term thing. You should almost always fade it. It's really a long-term impact. What's happening right now in the US, and I don't want to be too facetious or critical, but the US is starting to trade in many ways like an emerging market. So if you are in it for seven to 10 years in an illiquid way, you do have to start asking yourself, where is this headed? ChatGPT is formulating critical policy. The great master race of penguins of Herd Island is seen as a competitor.

40:45That's a bad look. And obviously, if you want to talk about where US assets are massively overbid, I think privates are even worse than public. There just really hasn't been much of a private equity play in Europe or anywhere else. There was a huge one in China. That was the alternative. If you were a private, if you were head of alts at a sovereign welfare or pension fund, that's where you let your hair down. And of course, that was cut off five years ago. I think that there's a problem here in the privates. Number one, the overweight US in privates is egregious. And number two, we have a human capital problem where we don't even have actual asset managers in private equity, private credit, in venture buyouts in non-US markets.

41:28Now, that's starting. But if you're an allocator sitting in a long-term investment shop, you are literally emailing me, James, and Louis and saying, hey, do you have anyone in Europe who does private equity? How do I do this? There's a mismatch. This is the case also with emerging markets in general. There are two macro hedge funds dedicated to emerging markets today. Two of them. There's none doing commodities. Most commodity asset managers became crypto and digital asset managers. What we're really offering to the asset managers is a business development idea. It's time to start taking Europe seriously.

42:03It's time to start taking Latin America seriously. Let's diversify out of US privates. Louis? I was smiling because one of my dad's favorite saying is that if you can sell a fund, you probably don't want to buy it. It's been very easy to sell private credit. It's been very easy to sell private equity. I think if we take a step back, If you think your typical private wealth client in the U.S., 55-year-old, starting to think of his retirement, maybe conservative, let's say 50 % long-dated bonds, 50 % equities, that guy over the past three years is down 11%. Against an inflation that is up 11%. So in real terms, that guy is down 22%.

42:43Now, funnily enough, against that backdrop, the private credit manager, the private equity manager tells you, oh, I'm up 15 % a year. Over that same three-year period, against loans and equity markets that are flat to down, the private equity and the private credit managers are nominally up 50%. This either stretches the imagination, or if it's true, in the coming cycle, these guys are bound to be massive forces of capital. They've outperformed so much that the rebalancing that you're going to see in every pension fund, in every endowment, away from these strategies back towards listed equities or back towards, frankly, just bonds, it should be relentless.

43:25Yes, I think if you're running a manning management firm, instead of thinking, okay, should we launch a private credit fund? The reality is the endowments, they're already overallocated. Pension funds are already overallocated. But if you're a young aspiring money manager, you should be launching an equity fund. You should be launching an EM fund. And even if you're doing it with very little money, that's the trade for the next 10 years. That's where the capital is going to go because it's the part of the markets that's completely under allocated. It's the part of the market you also know does structurally well when the U.S.

44:00dollar goes down. Private credit, private equity were essentially strong dollar trades. Emerging markets, commodities are weak dollar trades. We're entering into a weak dollar world, move away from what's been over allocated towards the place that there's been absolutely no allocation. James? Louis, do you know any firms in Hong Kong that offer Chinese distressed fixed income and credit? I do. What a relief. We're describing a world where we may benefit for thinking about where the crowds are not. We may be a little bit early, but now is a great time to try to identify skilled managers and how we can win from partnering with the flow of money from surplus capital into different things.

44:48Finding capacity can be tricky. There's probably a fair bit of capacity when it comes to Chinese fixed income and credit and distressed in general, although perhaps not as much as the world needs. I agree on dedicated EM funds who are probably licking their chops, particularly on the back of dollar weakness. All of that is good. But there's something else that you've reminded me of. Look, I think all of us are a little bit skeptical about how private everything might perform if we have two quarters of really poor growth in the United States. Because at a minimum, we're going to have a rising default premium, even if we don't have actual defaults.

45:25how does private XYZ perform if cash flows are effectively turned off for two quarters? That's different to COVID because inflation is above target. And by the way, we haven't even talked about the Fed yet, which is extraordinary, but such is the world we're in. Come to think of it, if we were having this exact conversation in April 2020, it would have been Fed, Fed, Fed, Fed, Fed, Fed, Fed, Fed, and here we are. So inflation's above target, so we can't rely on the Fed. But in parallel with private everything, who have been the biggest beneficiaries of the endless recycling of global surpluses into every type of US asset?

46:03Who have been the toll collectors? And the answer is listed asset managers in the United States and the private equity, private everything juggernauts in particular. They have crushed it. Now, people are going to say, uh-oh, this sounds pretty bad. No. These guys, as they demonstrate every time they talk, are not sitting there waiting to be hit by a bus. These guys are collectively the best financial engineers and the best businessmen I've ever met and worked with. They are so savvy. Now, people are cynical. Why is XYZ building out the private client side of their private everything business because they can see the world's changing.

46:46They can see that you can't be totally reliant on global institutional capital coming into your strategy. You need to diversify and subject to regulatory approval. If you've got the track record, the expertise and the skills to offer vehicles to retail investors, you should try to do it. And these guys have been preparing for different regimes and different cycles and they know their share prices might come down. They know there's going to be underperforming assets. They know, they know, they know. And they run various scenarios. The reason they have all built massive wealth solutions businesses on the side to look after and invest the capital of the families they've bought businesses from is to give them the balance sheet to help them manage through more difficult times during this transition, however long it is.

47:34We'd be more surprised if we didn't start to read more stories about private something been under pressure. More stories about people who didn't read the prospectus and tried to get the money out and they couldn't and all this kind of stuff. A bit like B-Read and B-Cred a couple of years back. All this hullabaloo. Well, that's what the product's there for. That's what it does. We're going to hear more about that. We're going to hear about difficulties. The share price of these guys are going to be under pressure. It's going to be uncomfortable for people who misjudge their liquidity or worse, did not pre-fund their liquidity commitment into a private strategy because that always gets drawn down at the bottom, doesn't it, Ted?

48:11Things will get thrown out. Things will get sold at silly prices. Conceptually, if we can find something that is heretofore uninvestable or not much coverage, and I like the example of Brazilian tips. I like the example of the human steepening. Long-term real and nominal discount rates are probably going to be high for a while. No kidding. Anything that's over-reliant on low and predictable discount rates is probably going to be shaken down. Great. Should we buy it? Almost everything we've talked about, there is a view that each of the three of you have about problems in the U.S., and particularly, say, the U.S.

48:49equity market. That, to me, sounds like a consensus from three people that rarely like to be in the consensus. I wanted to ask you, even if you don't believe it, if you were shorting your own view, Two, is there a path through for the U.S. where this shared view that there's a problem, end of U.S. exceptionalism, that the play is to move assets out of the U.S. ends up being wrong? Of course there is. Absolutely. The number one risk to, oh my gosh, this is all going to get really rough and stay rough, is that in the middle of next week, the president says, I just had a good phone call with my great friend Xi Jinping.

49:30You want to be short on that? That's out there somewhere. Now, that sort of stuff for all the chaos compels you to change your mind. It doesn't mean everyone piles back in to treasuries or US assets in general. Well, I'm pretty confident if we saw that, there'd be another hell of a rally. No doubt about it. How about longer term though? Credibility, credibility, credibility. That's what you need first and foremost is credibility. And if you are a country with a large current account deficit and trade deficit, the facts are you need foreign money to hold it all together or at least to balance it out.

50:06That's unavoidable. So credibility, first and foremost, consistency, and then a resolution of all these discussions. You've got to drop all the talk, however robust and sincere you think it is, about taxing foreign capital. You've got to soften the talk about traffic lights because the four of us might be in a green light country. But if we own all the same things as the red light and the orange light countries, guess what? They own a lot more of the same thing than we do. So just because we're on the green light, if the orange and red light people need to sell, we're going to get hit by a bus as well.

50:39So there's a whole range of things there that we're not actually seeing quite yet. We all appreciate and understand that Scott's trying to hold it together and I hope he succeeds. But boy, oh boy, it's a hell of a job when you're not quite sure what the boss is going to say. And you're in some kind of family dispute with the commerce secretary. You've got Peter Navarro, who went to jail for the president after Jan 6th, who's like, I'm just going to throw hand grenades everywhere. But hopefully, we might be working our way through the worst of this chaos. And if we are, that is a good thing. I can jump in here.

51:11And I think if he gets a deal with China, which I think he will, I don't think that's good for US assets relative to the rest of the world. I do agree. Assets will rip. That's why I think we probably reached the bottom at 4 ,800. I think what would require U.S. assets to outperform the way they did last five years, I honestly think that the bar for that is geopolitical crises around the world, a restart of conflict, military conflict. At this point, given the valuation of the U.S. relative to the rest of the world, I think that's the only way that you can have safe haven flows going back to the U.S.

51:44in some sort of a panicked way. My baseline, even before President Trump got elected, that's why I started with the unsexy story of fiscal policy. I truly believe that what built American, quote unquote, exceptionalism is Ozempic. It's steroids. It's fiscal policy. And that's just not going to continue. But I think that 2001 recession is a good framework for long term capital allocators. What we're going through, forget President Trump for a second, forget the penguins, forget the tariffs. I just think that if you had a recession in 2025 anyways, you would have had the dollar go flat. not really rally as it usually does as a counter-cyclical asset.

52:24And I think you would follow that with five years of underperformance of US assets. That's my mental framework. The only way to really get away from a global asset allocation over the next five years, I think, would be some sort of a geopolitical calamity. For example, China decides it's time to go, America's mean, domestic political pressures are there, and that leads to a reversal. Well, Marco, I really appreciate that very rosy scenario for what could make the U.S. continue to outperform. Louie? Yeah, mine wasn't that far off from Marco's. My starting point is the U.S. is more expensive than everywhere else.

52:59Usually the combination of high valuation and bad momentum is a pretty poor one. You can live with high valuation for a long time, as long as you have the best momentum. You're back to the situation of thinking, okay, how can we move to a world where the U.S. reattracts the marginal dollar of capital? So that can, I think, one of three things. The first is the U.S. has a great technological breakthrough. I think in the past decade, 15 years, you really had two different things in the U.S. at the same time. You had the shale revolution. Suddenly, the U.S. had a dramatically lower cost of energy than anybody else, and it was a huge advantage.

53:37Of course, you had the smartphone revolution, which was very much centered on the U.S., which in time also led to AI. There was the perception that the U.S. had this great advantage in AI. Right now, the feeling is, okay, the AI thing was overplayed and China's caught up. We also know that when China enters the room, profits walk out. So there's not going to be any profit in AI forever. And that's the situation that a lot of the American big tech companies are today. Either you can change that part of the equation. There's a new technological breakthrough, a new share revolution, a new something that delivers massive productivity gains.

54:14And right now, I don't see what it is, a possibility. Or the other is that either China or Europe self-employed economically. Europe has this Damocles sword over its head with the euro, which pops up every three, four, five years. I don't think it pops up over the next couple of years, but that's one possible scenario where you get another round of euro crisis and then everybody flies back into the U.S. again. I really don't believe that's going to happen, but you said be the devil's advocate. And the other one would be a really bad problem in China, probably a political problem, riots, and the regime legitimacy coming under question, which, again, is completely not my scenario.

54:54But you asked me to be devil's advocate. I think as we close, it might be fun to do a round of winners and losers over the next year. Who do you think? What markets are the winners and losers? James, go ahead. I'll just say simplistically, Canada's a winner. I think Europe generally is a winner. I think Japan is a winner. And that starts from currency. And then around that, there's all sorts of other assets that fall out. I think commodities, generically, remarkably, are probably a winner too, but I'm less confident. So I'll just say simplistically to set the scene, Canada, Europe, Japan, and then other things.

55:34And losers? Losers in terms of underperformance is exactly what we've been discussing. The US is generally okay when all is said and done, but it's not quite as exciting as some of these other parts of the world because there's a bit of a credibility deficit that might take some time to close. Marco? Non-aligned countries are the winner. And this is what Louis is saying as well. The non-aligned movement was not much of a movement during the Cold War. It was kind of a joke. And maybe I'm biased because I am from Yugoslavia and we kind of started that. So there you go. Those are the winners. I also like Europe a lot.

56:10I think that one of the things we didn't have time to talk about today is that Europe is going to be absolutely drowned in its tsunami wave of LNG supply that will crash on its shores over the next two years. This whole deindustrialization debate is wrong. I also like hard tech over soft. So that's kind of the Peter Thiel bits over bytes. In terms of losers, I think that the first three months of this year, forget liberation date and post. But if you just look at asset performance in January, February, and March, that is the truth. If you're a long-term capital allocator, go back, look at the performance January, February, March.

56:45That's the truth. You see who the winners and losers are, and that I think is going to continue for five years. Louis? I 100 % agree with that. I think the trends that have started this year are the trends that we're going to be stuck with for the foreseeable future. Look, the big shift in the world is that for the past 10, 15 years, everything was organized to essentially deliver goods to the U.S. consumer. The U.S. consumer was at the center of our universe, and this is no longer the case. I'll start off with the losers. The first one is the U.S. consumer. Whenever you have a currency devaluation, it's actually taking money away from the consumer and giving it to the producer.

57:19Anybody geared to U.S. consumption, I think, is going to be struggling. I've written a number of pieces on this. I have big concerns on U.S. corporate debt. I look at 2020 and 2021 were massive years of issuance for U.S. corporate debt. back then in the months that followed COVID, interest rates were essentially at zero. And so it was almost criminal for a CFO not tap the market. And they did. Everybody tapped the market. But with all the money that was raised, they didn't turn around and build factories or add capacity. Most companies just turned around and bought back their stock. Show me the incentives, I'll tell you the outcome.

57:56You had a roaring equity bull market driven by record share buybacks. Most corporate debt is issued on a five-year basis. The second half of this year and the first half of next year, the rollovers are gargantuan. At a time when the appetite of foreigners for U.S. dollar assets is going to be very, very limited. Selling bonds in a weakening currency is very hard. Spreads are already starting to widen. This corporate debt will have to be sold to U.S. investors. Now, we talked about U.S. investors already. Your pension funds and your endowments are all loaded up with private equity and private credit that's not returning capital.

58:33They've taken losses on equities and they've taken losses on listed bonds. And now they're going to have to turn around and buy yet more corporate bonds with what money? To me, the losers are first and foremost on the U.S. assets. On the winners, I completely agree with Canada. Undervalued currency, you're going to see a big increase in domestic infrastructure spending. You're also going to get political pressure on all the Canadian pension funds that are massive to repatriate capital and to bring back money from the U.S. You're going to get the same pressure on European pension funds. All of a sudden, being invested in the U.S., for me, the big winners, I already mentioned Latin American, whether debt, whether equity, whether currencies.

59:14And I also agree with Marco. When two big dogs fight, the best thing you can do is not get in the middle. Being a non-aligned country is great. I also think in a new Cold War era, everyone's going to be stocking up commodities, especially whether you believe in the Cold War or not. I think you have to believe that the U.S. security umbrella isn't what it used to be. Whether you're in Japan, whether you're in South Korea, whether you're in Thailand, whether you're in Saudi Arabia, you just make commodity stocks. You buy the copper, you buy the lithium, you buy whatever else you might need. and stock-offs, I am bullish commodities.

59:52And finally, I'm also very bullish on financials. Going back to Marco's point, you look at the first three months of this year, and frankly, you look at most of last year, financials were outperforming in pretty much every major market. For me, there's two kinds of bull markets. Bull markets link to productivity gains, and that's usually tech, and that's what we've had in the past 15 years. And there's bull markets linked to essentially expanding financial leverage. That's what we had in the first decade of this century. I think that's what we're starting again. I want to take it out with one last question for each of you, which is, as you're looking at what is changing, what is the one, the piece of information that you're studying most closely or the piece of information you wish you knew?

1:00:39For me, it's ignoring nearly every headline and going to the primary source of everything that someone's alleged to have said, which requires effort. There's been plenty of examples over the past week in particular of things that people, oh, have you seen this? Not true. Oh, this is what's causing this. Not true. Not true. Not true. So as hard as it is for people who I subjectively identify as the key players, I go to the source, I go to the transcripts. In terms of the one thing I wish I knew now, it's frankly the obvious one. Who's going to call who first? Is Xi Jinping going to call Trump or is Trump going to call Xi Jinping?

1:01:23I've really got that on the top of my mind. One of the things that I think is very important as investors start to incorporate politics and geopolitics more and more into their toolbox is just to understand that while you as a human being really cares about absolute levels of risk, the market is not human. It's inhumane. It's a discounting mechanism. And I go back to that COVID, the market couldn't care less about hospitalizations, deaths, this, that, or the other. So when the second derivative of geopolitical risk collapses, when it becomes negative, even if the absolute level is still very high, It's game over.

1:02:03You need to move on. We start to desensitize. And this is very difficult for 90 % of investors to do. Once the news becomes less negative, that's all the market needs. Even though you yourself are still very concerned about people dying in Ukraine, people dying in hospitals from COVID, and so on and so on. What I want to know, quite frankly, Ted, I'd love to know what Trump is trading. I just want to know his PA. hey, if I had an insight into that, I think I would add a lot of value to my clients. Louis? For me, the main question is what we're going through is a reallocation away from the U.S.

1:02:42to other markets, which has been my scenario for a while, or whether we're in the middle of a massive global margin call where everything collapses at once, which is what it felt like earlier this week. This is the bifurcation. Now, usually the global margin call happens when there's a lot of hidden leverage somewhere that you just didn't foresee. What I don't know, and I wonder if there is hidden leverage today, where is it? My fear is that over the past 10 years, private banks all around the world, private banks in Europe, in Asia, in America, have made a lot of money selling structured products to private clients that essentially the clients where it's selling involved.

1:03:24They sold products where it's like, okay, I tell you why NVIDIA, but if NVIDIA goes down 50%, then you lose all your money. But if NVIDIA keeps going up, you make the NVIDIA returns plus 5 % or something. And the banks have made a lot of money because the fees on all these products were very handsome. So my fear is this, is that you have a lot of private clients around the world today that think they are very wealthy. And in the market's adversarial events, it's not that they'll go down 30%, it's that they'll go down 100%. And of course, it'll be like a Madoff event. All these people are going to holidays in Saint-Maurice or in Aspen and going to Saint-Tropez, spending money because they've got all this money at Madoff.

1:04:04And from one day to the next, you realize the money's not there. You get this huge air pocket. Now, Madoff was$10 billion. This is on hundreds, if not trillions of dollars worth of structured products that have been sold. It's extremely hard to quantify, but this overhang of structured product is what leaves me terrified and struggling to sleep sometimes at night when I go to bed thinking about it. Louis, Marco, James, thanks so much in this crazy markets for taking the time to share your thoughts. This is a real treat to be with these guys and be with you, Ted. Thank you. Oh, it's a treat for me as well.

1:04:36Thank you so much for all of you. This was awesome. Thanks for listening to the show. To learn more, hop on our website at capitalallocators.com, where you can join our mailing list, access past shows, learn about our gatherings, and sign up for premium content, including podcast transcripts, my investment portfolio, and a lot more. Have a good one, and see you next time.