Our 3 Portfolio Buys This Week Amidst Nvidia Controversy

0:00On today's Art of Investing with NVIDIA's share price on its knees, Spice looks at whether it's now a fair price and CJ lays his cards on the table. Hopefully it's his credit cards because he's in buying mood for the portfolio.

0:19Welcome to the Art of Investing live from the IG studios in the heart of the city of London. Now, another volatile week since you last had us on air. But CJ, before we go into everything, we've been nominated for this Good Money Guide Award again, haven't we?

0:37Rich McDonald: Once again, Rich, we have been nominated in the Good Money Guide for an Award. And we're going to put the link in the notes below. And you will find us very close to the top of the list of contributors. then there are three categories which we think we we stand a good chance of scoring well in one is best financial podcast one is best investment educator and one is best youtube influencer and we'd love everybody out there to support us if they feel they possibly can we are the defending champions so everybody wants to knock us off our perch so please help us if you can but it's not just us there's a certain rich on markets someone who i think we might know who's also been nominated feel free to support rich but not in any of our categories otherwise i should be very angry it's fair very fair good stuff so yes if uh if you have the time then in the show notes below you'll find that link but on to more important things that spice market update well thank you very much rich it's great to be in the new studio actually quite interesting Anyway, on to markets.

1:52In the last few weeks, we've seen the oil price now fall over 20%. Today, it's up 3 % because there's a bit of nerves about the Straits of Hormuz peace deal potentially coming through. Maybe the Iranians are trying to play the card on the nuclear side again. But either way, that's a massive fall. 20 % down is a really big fall. And ordinarily, you'd expect that to be helping equity markets. But sadly, I can't report any new all-time highs in equity markets this week. and mainly probably because this time last week when we recorded, we're in the midst of a really big sell-off, if you remember, led by NASDAQ and all the AI stocks.

2:26Right in the midst of it. Right in the midst of it. And, you know, you've seen some big de-ratings of some of these big stocks. Now, interestingly, since then, we've seen some stability return to the market. The chip sector, the Philadelphia Semiconductor Index, is up about 4 % on the week, as I talk to you now. And the Magnificent 7 is flat. but basically it's it's looking at those people who have either had news positive news flow or the ones who are the early spenders that seem to be the beneficiaries which we talked about a little bit last week in the review now we've also had some interesting economic data which we'll come on to later but give or take that economic data has led to the u.s dollar being very strong it's up one percent this week and it's taken real yields if you remember cj's explained that a number of times, but real yields have risen and that's weighed on gold and silver, which we're doing very well until yesterday when we had the US CPI numbers.

3:20And I'll say I'll talk about that a little bit later. Well, I think now that you've mentioned those moves, it's worth telling everybody because they'll be wondering what has happened to our portfolio in the last week. Well, gents, you might not have seen these numbers, but we're down again, down 0.5 % on the week. That leaves us up 9.3 % for the year though, and 21.9 % since inception. So it's been a difficult week, but probably off the lows because the portfolio last week was snapped on the Wednesday, wasn't it, when everything was good? And then we recorded on the Thursday while the NASDAQ was at the lows.

4:00That was a nerve-wracking night. Certainly was. I was across in Rome, and I remember looking at my phone and the updates, And it just, the downdraft in that last hour of trade was particularly concerning. But thankfully, since then, what a recovery.

4:17Rich McDonald: As a longer term investor myself, I wasn't actually worried about it at all. We talked about it in the podcast. We'd thrown around what we thought was going to happen. And actually, I think personally, being down a half percent this week, I recall it was quite a result. given all the uncertainty that was around given the election you know were they going to support ai were they not going to support ai what's going to happen with the oil price all these other things going on and not least of which as mark has already indicated where real yields have risen on the back of the economic data we'll talk about more in detail why that's happened and what that's implying i actually think we you know it's a pretty flat week is a bit of a result so i'm taking that in the positive column.

5:00Rich McDonald: Now, as the chairman, I have to because it's been about four in a row where it's been in the negative column. So I've got to take some positives. I'm a bit like Michael Carrick, the manager of Man United. I don't know if he still is, but I've got the changing room still, I think. Well, that's fair. So when we were recording last week, down 6 % on the NASDAQ, you probably would have taken down half a percent on the week. Yeah, I think I would have done. And, you know, as we see quite often, these things have a big flush, as it were, where people panic out right at the very lows. And hopefully we saw that last Thursday.

5:34I'm not saying that is definitely the lows, but it felt like there was a lot of panic, panicky selling late on in the afternoon and the evening. And deleveraging and hedge funds being forced out of positions. It was one of those very short term, just perfect storms, wasn't it? Exactly. Actually, I read some data from Goldman Sachs that are saying in that week, in that end of the week, they saw huge hedge fund deleveraging. So remember, hedge funds, they don't just have 100 % invested, they might have 500 % of the original money they have invested or even bigger, 10 times what they probably have as assets in the background.

6:09And that leveraging was taken down very rapidly. So they were forced selling probably into that down wave, which would have meant they had to crystallize losses. And we've already started to see some very big hedge funds sort of report very big losses. Certainly for October, there were some very big ones. The UK's biggest hedge fund manager is a guy called Greg Coffey. He used to work at GLG. He had his worst month ever in October. He was down 6%. And that's without knowing what he's done in November. And clearly that was actually led by the AI stuff. But we've seen Goldman saying there's been huge deleveraging.

6:42interestingly we saw ing the dutch bank put a whole book of data center debt that they'd collated together and they put it up for sale now we won't find out whether anyone's going to buy that until the end of this week i think i was looking that there's a sort of deadline for the end of this week as to see who wants to buy that but there are apparently buyers sniffing around so maybe again someone like the dutch panicking out may have been the bottom who knows fingers crossed um i mean you know it's been an interesting week for corporate news and we've had quite a lot of reassurance so as i'm talking now actually things like the nasdaq's up one and a half percent and doing quite well um and we've had that's despite things like nvidia which have had a very difficult week because their leader not just the company itself but uh yeah mr jensen has been a bad boy um and uh and clearly if he if he has been seeing a chinese spy you know out of hours then there'll be interesting sort of backlash on Trump who apparently was briefed on that a year ago.

7:39On a very strange afternoon where Trump on Air Force One took the rest of the tech leaders to China, stopped off in Alaska Jensen didn't get the invite but then suddenly arrived on his private jet in Alaska and joined the flight for the rest of the trip. So that's when Trump allegedly was briefed that Jensen had been out making friends. You know, this is the world's second biggest company. And at its worst point, I think yesterday, it was down about 10%, 12 % from its recent sort of, you know, level. And it's now down, you know, about 20 % from its recent highs. More than that. More than that, yeah.

8:22I think we probably need to define Spy, don't we? Because it's not like she's been trained by the CCP and, you know, has targeted Jensen specifically. He is meant to have started a relationship with her when she was at this company in Singapore. And the company in Singapore called Megaspeed has become a big part of NVIDIA sales. And at that point, she was approached by the Chinese spies to...

8:51Rich McDonald: Be a spy. Well, to gather intelligence. Guys, it's all getting too confusing to me. I think we're probably going down a rabbit hole, let's be honest. But what we're saying is it's important that he still stays there and he's still going to be in charge of the strategy because the company's prospered so much under his tutorship. The reason why this is a bigger deal than his indiscretions is that Megaspeed accounts for a large part of NVIDIA sales, especially in that region. Now, of course, their market exposure to China is 0%, but their sales to Singapore are 20%. So the question is, and what was alleged, is that NVIDIA has been selling chips to Megaspeed.

9:37Megaspeed paid for the chips from a company called Apex Enterprises. And what has come to light is that Apex Enterprises is owned by Alibaba. so alibaba has been financing all these purchases of nvidia chips so if that's up to 20 percent of nvidia sales therefore you've got to take that um out of the multiple because i would assume that congress will say no more sales to mega speed and no more sales to singapore they've been clamping down on the chinese sales and it's interesting this week the chinese tech sector has had a difficult week. It's actually had much worse sort of downdraft than sort of any other markets like NASDAQ, et cetera.

10:24So I think, you know, again, you'll see this, US investors have probably been pulling out of some of those Chinese investments because you know what will happen. The Americans will slam on the brakes and say no more sales to China, which is interesting because they've got a big summit with President Xi and President Trump in the next few weeks. And there's meant to be sort of trade deals being announced there that will be friendly for everyone. But we'll see. I mean, look, we don't want to dwell on it too much. more importantly this time next week they'll have their results out and people will scrutinize those more than usual i mean it is still the world's biggest second biggest company so on the 17th of november next week we will get their results and they will have market moving consequences i'm sure either up or down but as a betting man my instinct is that they'll probably have quite good results because jensen won't want to be seen to be an idiot and yes he might have done something foolish in his personal life, but I think he will want to be seen as a safe pair of hands as a chief executive of the world's second biggest company.

11:20It does put it question CEO behavior, doesn't it? Another one is, of course, CoreWeave. CoreWeave that reported numbers last night. I'm sure we're about to go into the numbers. They were rocking, weren't they? They were. I mean, the shares are up 14 % this morning, up 25 % on the week. Remember, it was only a couple of weeks ago that they were the epicenter of all the AI sell-off as people worried about them having to borrow money at 17 % and their insurance, their CDS or my credit default swaps to ensure a million dollars was going to cost you like$150 ,000 of debt. There's been a big rally in that.

11:54I haven't looked at it today, but it's rallied quite strongly. The reason the results were good is they beat on expectations and they beat on the outlook. More importantly, they pointed out that they have something like$66 billion of debt and lease commitments going forward, which is a very scary number. But they also pointed out they've got$132.5 billion of contracted revenues over the next few years. So more than enough to possibly pay and cover that debt. Now, remember, these companies make a huge margin. So there will be enough profit there as long as they don't keep spending at the same rate they have done.

12:29And the market's not going to let them spend at the same rate they have done. So actually, you've seen a very good bouncing call. That's certainly helped sentiment towards the AI sector. I just wonder when we're talking about CEO behavior, it was very much in his interest, the CEO of CoreWeave, to produce the best results possible. Now, we all know that there's sometimes a bit of an option for CEOs to keep a little bit in their pocket for a rainy day. You know, you can move some contracts around and the dates and the accounting measures. Now, Michael Intratore would have every incentive to make these results look as good as possible, right?

13:07There will be nothing left for the contracts that were finishing any time around that time. You can be certain that every single contract and every single financing agreement possible has gone into this quarter. so that tends to make it harder in the next quarter the one after that so i would just be very conscious that if the core we share price rallies and we find it drop down again in the next six months back down to the lows then he won't have anything in the earnings

13:42Rich McDonald: to pull out of the bag i think the point you're making is a very good point which is for everybody listening, most CEOs are going to be putting everything in or keeping things back or trying to massage things so their stock price goes up. CoreWeave is not about its stock price, I'm afraid. CoreWeave is about its debt prices. And therefore, it wants to show that it's not going bust at all. It can argue my shares aren't going anywhere for a bit. They're going to be pretty boring. It doesn't need to pull anything out for equities. What it needs to do is make sure the credit holders are happy holding that credit.

14:17Rich McDonald: And if they need to come back to the market to refinance things, they can do that. So I think that's probably a good distinction. You know, if you're trying to impress the credit markets, you put everything in there you possibly can. If it's the equity guys, you might keep a bit back for the fourth quarter results, as Spice would say to us, where suddenly, majestically, every company beats its forecast, stock goes up and they all get paid in equity. So it's an interesting distinction. So that CDS we watch more carefully even than the extra price. Yeah, and one of the things I can remember from all the years that I've been investing in markets is that it's always been what lead indicator do you look at?

15:01Rich McDonald: And before the CDS market, it was always actually look at the stock price. Because if the stock price is going down rapidly, it's probably telling you there's a problem. And therefore, as a bondholder, you've got to be careful. Now you've got these CDSs, these credit default swaps. So you can watch those and they will give you advanced warning of what's going on. It was interesting what Mark said, that before the numbers came out, a couple of days before, the CDS started to fall in yield. So rise in price, basically saying we're more relaxed. So obviously somebody new or the market's efficient, however you want to say it.

15:37Rich McDonald: But it's those CDS prices of a call that are most important. I mean, some of our listeners don't appreciate it that in the bond markets or the credit markets, there is no such thing as insider dealing. In the equity markets, there is insider dealing. So if the debt holders sort of want to push a company very hard about their finances, then they can quite often get the sort of the information that an equity holder wouldn't get, which is why maybe the debt moves sooner and the CDS moves sooner as well. But also they also announced that they've got$9 billion of prepayments from customers out of that$32.5 billion of future revenue.

16:17So there's enough to pay the interest charges for a foreseeable future.

16:21Rich McDonald: Could I just say before you go further, you know, for the benefit of any compliance people listening, there are Chinese walls between the various parts of these organisations to make sure there is no leakage between one set of information in one part of your company to another part of the company. So in my day, high yield guys, junk bond guys couldn't talk to the equity guys because they might be in possession of data that others weren't. And that would be then inside information. Of course, we do not condone anything like that in any way of shape or form. Right. So moving on. Moving on. So it's not just being all about Core, even NVIDIA, although actually they've been very important parts of the sentiment drivers this week.

16:58OpenAI had an update yesterday. Remember, they own ChatGPT and they delayed their IPO into next year. But they pointed out that their quarterly revenue topped$10 billion last quarter. That's up 50 % on the previous quarter. So they're seeing accelerating growth. So it's obviously not just about OpenAI. There is a hotly anticipated IPO next week of Anthropic, who own Claude, which is another AI engine, as we know, competes with ChatGBT. And there's a lot of speculation around about that out there. But it's not just those two that people are looking. There's been some very good tech results out there as well.

17:34SoftBank, who own big stakes in things like OpenAI, also had their results this week. Their shares were up 14%. This is one of Japan's biggest companies and their shares are at 14%. They made a$7 billion loss. But of course, people don't worry too much about that.

17:51Rich McDonald: When did facts ever get in the way of a good story? Exactly. Exactly. What we're basically saying is last week, we got to Thursday and it was a bit of a dire time when we recorded, as you say, NASDAQ was down on its backside and it was suffering badly.

18:11Rich McDonald: And there's Markets that were hit hard have bounced back strongly. And there's been some encouraging stuff in it with the core weave. And some of these bigger stories and rumors haven't come to pass. But it's still early days yet, isn't it? Because we still don't know what the US political landscape is going to be like for the data centers. And we won't know that for some time. Obviously, SoftBank, Japan's biggest company, one of their biggest companies. Infineum, which is one of Germany's biggest tech companies, actually had results as well this week. Their shares are up 7 % on the back of it.

18:45They've seen an acceleration like everyone in this AI data center demand. But interestingly, so their revenues are up 13%, but their operating profits are up 40%, which means they're starting to make profits out of some of this data center equipment that they're selling in. Now, these are quite early on in that cycle because they are selling equipment that goes into the data centers. but that's still very good a very good number to show that there is profitability associated with these sales which a lot of skeptics out there would tell you there isn't but clearly the market took that well and away from tech i mean the only thing that i thought was really interesting is boeing have announced their orders they've seen the strongest october for new orders for 30 years wow so now given it takes you five plus five to seven years from ordering an airplane into getting it delivered to being able to fly it and use it in your sort of network.

19:34They've clearly looked through what's been happening in the Gulf War. And that's partly as well because the oil price has come down, as I mentioned, significantly last week. And one of the biggest costs for airlines is obviously fuel. And with that coming down, it's maybe given them a bit of confidence to go out there and place some orders. So pretty positive there. The only other thing really of this week that's been really important is there's been two big bits of economic data out of the United States. First of all, last Friday, we had the payrolls numbers. Remember, this is where they look at their employment data.

20:06And they saw a creation of 165 ,000 jobs. And people were looking for just 65 ,000. And the unemployment levels fall into 4.1%, which also was a big surprise. So it shows the underlying economy is growing really strongly. And even though a couple of weeks ago, we talked about how many jobs are being cut because of AI, there are other jobs out there being created that more than offsets that, which is a great sign. Let's hope that happens in the UK and Europe and the rest of the world. But it's certainly showing that actually in America, the overall economy is benefiting, not just the AI side. But then yesterday, and this is Wednesday recording this, so Tuesday, we had bad inflation data at the UK.

20:48Now, this is the consumer price index out of the US. Did I say the UK?

20:52Rich McDonald: You said the UK. Your normal bias against the UK is coming out, but I'm here to defend or the Britannia. Well, if you'd said about the UK, the number would be way too low here, I would have realised very quickly. The CPI, the Consumer Price Index, was up 0.4 % last month, and it was expected to be up 0.3%. And, you know, okay, that doesn't seem like a big difference. But the core inflation underneath that was a rise of 0.3 % against an expectation of 0.2%. Now, with that, that drove a very big change in the betting odds, if you like, or the probability of an interest rate rise at the next Federal Reserve meeting.

21:28I think it's on the 9th of December. And there was beforehand a 83 % chance of a quarter percent rise. And that's jumped to 85%. You said, well, that's not much, is it really? But beforehand, there was a 17 % chance of no rise. That's now risen to a 15 % chance of a half percent rise. So 50 basis points. Now CJ over there, They can see him rubbing his hands with glee because he's been pointing out that central banks are so far behind the curve. They need to get on with these rate rises to nip this potential inflation sort of problem in the bud. But what I would point out here as an optimist, as I always would be, when that CPI data was taken, the oil price was sort of$20,$25 higher than it is today.

22:15So you might just have picked the peak in that.

22:18Rich McDonald: You can always find some way to be bullish these days, can't you? So the story two weeks ago was unemployment is going to increase massively because of AI, the efficiency. Unemployment doesn't increase massively. It falls massively. But that's good news as well. It's all good news. Welcome to equities. So what do you think? 50 bips? No, no. I don't believe that at all. We talked over several weeks about my wonderful calling of the bond market, which has been wrong for the last three or four weeks because it's rallied, you know, 30 or 40 basis points. But my view has been that the economy is like a super tanker and it's bloody difficult to slow it down.

22:59Rich McDonald: And once it's stopped, it's bloody difficult to start it. And what we're seeing here, in my opinion, is exactly that happening. The economy is going along very nicely. Thank you very much. it's going to take a lot to slow it. And I see no evidence of anybody really trying to slow these things down. And Mark says there, and he's absolutely right to say, oil prices form quite a lot. So you can hear everybody saying now, well, maybe they won't raise rates because the oil price has fallen. And as long as we keep that going, we're not getting what I would call proactive. we're not getting ahead of the curve what i mean by that is that if if you're tightening rates more than expected you'd be you'd be sort of being ahead of the curve and if you're doing them less than expected you're behind the curve i think the uk is miles behind the curve i think the u.s is behind the curve europe is the only place that ever gets ahead of the curve because they do try and keep their inflation low.

23:57Rich McDonald: But everywhere else, they are much too slow. And I think it was reassuring for someone with my views, who's, as I said, been on the wrong side of it for the last three weeks, to see that as we return to fundamentals, the fundamentals are strong economy, high inflation, rates have got to go higher. So it's not going to be 50 bips, but it should be. If it was 50, I would have a different view of overall for the markets, because if it did 50, it's saying we've got to do something about this we're going to get ahead of the curve and when when central banks get ahead of the curve when they do more than it's expected you start to worry they might do a bit too much and slow the economy down you might get a recession so then risk markets will get very worried but whilst you do it um slowly whilst you're behind the curve which is where we are now risk markets will say this is great we've got inflation we've got a strong economy, all's fine.

24:54Rich McDonald: Now, so if they do something unexpectedly aggressive, then I will have to rethink where we are in the cycle. I don't see that at the moment. And therefore, I'm very relaxed that bonds are not something I want to put my money in. I'd rather have my money in risk markets. But what it sounds like is the market is starting to price. And instead of one increase per quarter, then it could be one increase per meeting it could start to get to that level but i was i was thinking about this yesterday well i was thinking about this this morning at home exactly this thing i remember crises where they cut rates at six o 'clock in the evening whether there's a meeting or not how many times do you ever hear them raising rates at six o 'clock in the evening when there's no meeting never it's an asymmetric profile and that's what the situation is here so if we suddenly they suddenly said if If they study surprises, I said, we're going to raise rates intrametting.

25:50Rich McDonald: Or if they're raised at 50 basis points, then I'm starting to worry. But until we get to that stage, I'm going to stay relaxed. Now we know why Kevin Warsh started his speech at Jackson Hole the way he did. He talked about there are two different types of hike that you can do around Wyoming. One is a fast hike and it's very frantic and one is a very leisurely hike. now he decided to go on the leisurely hike but it sounds like the market's trying to push him into this very aggressive i'm not sure whether you would say the market was trying to push him into it but i think the market is realizing as you say in your analogy which way he's following and so until they see him take that shortcut straight up the north face of the eiger rather than around the sides they're going to say this is great for risk assets risk assets can continue to do well, we don't have to worry too much.

26:48Rich McDonald: And that's where I think we are. I don't see any central bank coming across to me in any way, shape or form, overly concerned about inflation. And therefore, at the moment, stay committed to risk assets and enjoy the ride is my view. Remember, the Americans do have another remit as well, which is make sure the economy does well. Here's the ball. Here comes the ball. So, look, I mean, let's get it in perspective. All they've done effectively is put in an extra interest rate rise over the next 12 months when they've taken it out sort of two months ago. So they've just put it back in. So now the hot money is for three interest rate rises between now and this time next year.

27:27And so the equity market can take that. If they came all next month, then there'll be an initial shock and then they'll go, let's behind this, let's move on. But in the meantime, I think they're giving a quite clear message that they want to run the economies hot, as a terminology that an equity guy would use. And as Chris says, you want to be in risk markets when that's happening. And if there's a bit of inflation around, remember the best hedge against inflation as an asset is equities over the long period of time. Right in the first episode we ever did in this podcast, we pointed out that the real returns, and those are returns above inflation, over the last 125 years have averaged about 6.5 % real, so overinflation for equities.

28:09For bonds, it's about 1 % of a cash you lose money relative to inflation. That's one of the reasons we have a decent skew to equities in our portfolio, even when there's quite a lot of inflation around. And even though there might be some small interest rate rises coming through, because they're small compared to history.

28:24Rich McDonald: And let's reinforce that, just reinforce that. Holding risk assets, holding equities over the long term is the best way of insulating yourself against inflation. All the records show. And that's what is important when we think about how we construct our portfolio.

28:54results. Well, talking about assets that insulate you against inflation, thankfully, we had a couple of them in the portfolio this week. And that saved us with the BlackRock Mining Trust up 2.5 % on the week. We've had gold in the portfolio as well. That's up 0.6 % on the week. And then the Eurostox 600 also up 0.6 % on the week. So those were the three that we benefited from. the hurt locker has been the nikai yet again the volatility there unbelievable down 3.4 percent on the week s &p 500 russell 2000 and the nasdaq were the other laggards so gents down half a percent as we said somewhat relieved and um yeah thankfully the snap wasn't taken last thursday gents what do we think there is there anything that that jumps out as a performer that reassures you even more or concerns you?

29:52Rich McDonald: I'll look at the overall return, as I say. To me, when we were recording the podcast Thursday last week, NASDAQ was falling through our fingers. It was four and a half, 5 % down. S &P was down. Everything else was down. It was looking very ugly. It could have gone anywhere. But what I like is the fact that the markets seem to have recognized the sense we were talking. They were obviously listening to podcasts. And buying was the right thing to do into that weakness because then things recovered nicely. My only regret is I didn't listen more to you and Spice because last week you were saying, buy 5 % or 7.5 % and me being a little bit of a wussy, I bought 2.5%.

30:39Rich McDonald: Well, at least I bought 2.5 % Nasdaq. I could have bought 2.5 % something not very exciting. And I think that was up 4, 4, 4.5 % from when we bought it. But clearly, we should have bought some more because that was a good low level to buy things. Mr. Cautious Chairman. Yeah. Well, you know, slow and steady. The rabbit and the tortoise. We're talking about rabbits, Spice. We're hoping to have Lee Freeman Shore back on soon, aren't we? Yes. Now, next week, he's going to be on the podcast. As long as he can get his flights on time, he'll be joining us, which will be great. very interesting talking about his new book stock market maestros which he wrote co-wrote with claire flynn who you remember we had on the podcast a few months ago so that should be a really interesting podcast and um you know when we had him on last time we had huge positive impact and positive comments back about his uh his performance so so if we if we were just to broaden out from for a moment to where we are um we were recording last week and thursday we said when the Nasdaq was doing badly.

31:42Rich McDonald: Here we are. We're now the Wednesday after. And things have done a bit better. The Nasdaq has rallied nicely from those lower levels. S &P as well. Big flotation next week. You know, how well is the market going to travel into that? Is Nasdaq going to rush up to give that a good launch? Or is that going to be a problem? And what does that mean for some of these other markets? I mean, I feel, as I say, that we took the right view last week. We didn't panic into the uncertainty of the election result. We looked at the valuation of the markets and decided it was time to buy. Have we missed it now?

32:26Rich McDonald: Should we be buying more? What's everybody's thoughts? So I heard an interesting sort of commentary on Bloomberg this week that was saying that now the US technology sector has their lowest valuation since 2010. And the forward multiple, the forward PE ratio is lower than the S &P 500s. You know, this has not happened for a couple of decades. And that makes me sort of more and more positive on it. As we've said, I think there's a lot of people being thrown babies out with the bathwater. We've now had some reassuring numbers, even from the worst in the category, like Corweave, that people have thought that's the one that's going to go bust and then it will bring everything else with it.

33:10We've had some reassuring numbers there with some proper data rather than speculation. So I think the low is in, as they say, in the markets.

33:18Rich McDonald: So why isn't the market, you know, if we believe the market's a reasonably efficient vehicle, why is it not roaring ahead making us have to pay up to buy it why is it letting us buy it still i don't know five percent down from the all-time highs maybe still five six percent maybe a little bit more because you've got three months of a delay now so the the path ahead in texas right because we know texas is the epicenter of the data center world of everything of yeah yeah Get your 10-gallon home. I see you two remind me a bit of Dallas, actually, don't you? I wish I'd been in Dallas. So, yeah, 41 % of data center builds there in 2020.

34:03Astronomical importance. And not just Texas, you've got Ohio and Georgia as well. And Virginia. Very important. And I just fancy the way the market reacted on Friday, we had a decent bounce. On Monday, we had a further bounce. I fancy that all these hedge funds that have got advisors in Washington on both sides of the red and blue, I fancy that they've heard some reassuring messages over the weekend. What they didn't expect was to walk in to the Jensen and Spy Story on Monday. So, you know, the fact that the Nasdaq still went up despite NVIDIA being down 5%, I think that is roaring away.

34:49Rich McDonald: Oh, okay. Okay. I see your point. Okay. Okay. And then the other thing, of course, is that, you know, oil. I mean, whatever, you know, I've, as you know, said over a long time that the bond yields will not be too affected by oil. And I feel quite vindicated by that. When oil went up to$115, bond yields didn't move up sharply. And equally, when it's gone from$118 down to$90, they haven't fallen sharply either. In fact, they've risen a bit. So that's negated a bit, that linkage. But that must help with the view about where earnings are going to be and where that inflation outlook is. and so you've had the oil price moving in the right direction which has helped comfort people but what you're thinking also is that there's been some voldemort whispering as well to make sure that the horses don't get frightened and run away but we also talked last week and said look the democrats would be absolute idiots if they put a complete kibosh on any new building data centers they they might want to slow it down they might make it more expensive to do but they're not going to stop it because half of the US growth is coming from AI and the associated areas.

36:04Now, what sort of politician wants to do that just two years ahead of a presidential election? That would be very, very foolish. One with a huge mandate from the people, 40 out of 41 ballots saying we want data center builds stopped. That is a pretty big mandate to go against. Well, there's nimbyism everywhere, isn't there? So I'm sure the people of Texas will probably maybe do that. But if they said, we're going to stop oil drilling in Texas, guess what would happen? There'd be a massive uproar and Trump would be back in power before you knew it.

36:35Rich McDonald: Just because they don't intend to slow it down doesn't mean they don't make a mistake and make it slow down. Yeah, that's true. The fact is, though, if the market falls sharply, the Democrats have just invested in the stock market as everybody else. And Nancy Pelosi has been known to be a brilliant fund manager um with with inside no no sorry um allegedly um and uh and and so you know to me you know it's it's not clear that it's anybody's interest to crush the market what it might be is to just cause people to double think and slow slow things down with that and i think that's what you're detecting isn't it yeah from what you're saying from what you're hearing in in texas it's it's a little bit like when we all came back from covid and we all wanted to travel and we all wanted to go out to restaurants, right?

37:26You suddenly have a huge demand, you have a huge inflation spike. That's what we've had in the world of memory and chips. If that's smoothed out over five years instead of build everything tomorrow, then you take a lot of the pricing power out and there's time for supply to come on the market. So these excessive profits that the memory companies like Micron, SanDisk, TSMC have been making, those disappear.

37:59Rich McDonald: But you're not relaxed by that, by the fact that the market... No, the excess disappears. But I feel slightly more relaxed in the sense that the derating that's gone on already in these things is so enormous, you could argue that they're already pricing in a reduction in the top line, but a better confidence of that is being priced in, which is why they have moved down, but they've not collapsed. Do you not feel comfortable that the market's doing its job properly from what it's done there? The market's doing its job properly, but come back to me when the headlines are Micron profit warning. Okay, so you want to see the evidence that on the profit warning, they're actually starting to rally a little bit.

38:45Yeah, I would imagine they would fall on the first few companies that warn, and then after that. But you're absolutely right. The nuclear stocks, the infrastructure ones have been massacred. So the market has performed very efficiently, but you still have to get the actual numbers come out that cause all the analysts downgrades, and then I think we'll be in a better place. Spice, what do you think of that, mate? Yeah, I mean, I said last week, I think there's going to be elongation of the cycle.

39:16Rich McDonald: Elon Musk. And Elon's done very well this week, by the way. Yeah. He's been hit very hard on the midsons. Well, because there's no planning permissions in space. Exactly. Exactly. So, you know, he's had a very good week. But joke inside, there is – if you – I said last week, if you elongate this cycle, there'll be a couple of things. The people who have already invested will be the major beneficiaries. The magnificent seven have been going for this, going hell for leather for 18 months, even earlier some of them. Meta was a stray out of the blocks, you know, a while ago. So they should benefit because they can reap the rewards of having already invested from the people.

39:53Because the demand is there. The demand for computers is there. Not the demand that we thought, though. That's the difference. Well, you're talking about memory, but I'm talking about the overall demand. Everything that goes into a data center. ChatGPT just said their revenue is up 50 % from last quarter. So these things are on a massive trajectory. Exponential. Exponential, exactly. No, exponential. Exponential. so the interesting thing though also is that if you elongate this cycle the cost of capital will come down because there isn't this this massive clamor for borrowing money in the debt market or from private investors or wherever it happens to be and that that lower cost of capital is a lower hurdle for you to make profits above it and therefore get a higher return on investment ultimately and that i think the markets will ultimately reward now getting from a to b you know is is an uncertain path of course it is i said i said a long time ago i think that the next quarter as we go into next year is when we'll start to see some of those returns sort of pick up um and you know i say there are some signs in even in these results that the returns on that investment are sort of a little bit better than perhaps the skeptics have thought make your money

41:05Rich McDonald: move with ig with zero commission and no annual fees back your next move with ig download the app and get started ig trade invest progress but aren't the benefits going to everybody else now because the the cost isn't going to be the same but the benefits are very much in in all the whether it's the pharmaceutical companies right pharmas have had an incredible last month Yeah, we talked about the Democrats love drugs. Pharmaceuticals. Allegedly, yeah. But also, the companies that are going to reap the rewards of AI, if it doesn't cost them as much and the cost of funding is lower, then I can see why the broadening out trade continues rather than the rush back into all the AI infrastructure stocks.

42:01Rich McDonald: Yeah, and that has been a feature, definitely. You've seen a lot more broadening out going on. But of course, that's then more affected by the overall activity level and the monetary policy level, because that dictates whether people can afford to buy their compute tokens by how well the company's doing and how much they want to spend on this stuff. It's a really difficult discussion as to which hair is going to benefit. But I swing back to what I said earlier. Whilst the central banks are not aggressive against inflation, whilst they're gently following market expectations for interest rates rather than leading them, that tells me the overall market levels are going up.

42:45Rich McDonald: Now, I'm not sure what's going to lead and what's going to follow, but I'm pretty sure they're going to be moving upwards. Now, I wanted to just ask you guys, because you're far better than I am at this stuff, and that is the gold and the silvery type stuff. I remember when oil was really high, we were saying one of the reasons why gold and silver would do badly is because the money was going into oil, and that money wasn't therefore available for central banks to buy these other things. So you would expect as the oil price fell for gold and silver to do better, and they started doing better. It started working that way.

43:19Rich McDonald: But now they've returned back down again. What do you think's the main drive there? Is it this cost of capital, real yields rising, bond yields selling off yesterday? Is that driving them more? Is there something else going on there that we're not thinking about? I don't think it's one or the other. I think the reality is it's probably both. So ordinarily, gold and silver were doing really well. They were. They were doing really well. And then along came the CPI, that inflation data out of the US yesterday, and crash bang wallop, they came back. But they come straight right down to the lows again.

43:49Rich McDonald: nothing most of the lows went down to those as well so that's another thing like them yeah but equities took it in their stride they came off but they didn't go down to the lows and i like to look at these sort of relative performances because then you can see where the strength is if these things go straight to the low or very close to those immediately what it tells you is the rally wasn't built on much and so i'm just trying to work out when i think about you know we're sitting here with two and a half percent in gilts and 20 in cash and we want to you know allocate more money back because we think it's we're feeling a little bit better about the environment well at least i'm thinking a bit better about my environment where does that money go where's it best should you be heading into some of these things which are closer to the lows than other things or do we steer clear that's really what i'm trying to get from you guys because you're experts i'm not an expert in this So I wouldn't pretend that I am.

44:43I certainly agree with that because, like Spice says, and I agree, if this cycle is elongated, the cost of capital is going to come down. And that perhaps is why the Federal Reserve doesn't think it has to be so aggressive on raising rates. So therefore, you get easier monetary policy. You get the oil price coming down, which means that all those other governments can come back in and start to buy gold again. And I think the upside in gold, in my opinion, is the highest out of all of them. You're fighting this real yield argument. The oil prices tick the box. That's a very big plus for me. And we said buy gold under$4 ,000 has been my sort of natural strategy.

45:28And we've had a couple of chances to do that in the last six months. And we're quite close to it again today, I think, but we're not far off it. but that it was doing very well as i said until that real yield popped up um and i think that's the thing we have to watch most because we've got about four weeks until the federal is the next federal reserve meeting well we'll find out and then it'll be quiet over christmas um uh but yeah i i like i like gold um i said i'm a dip buyer of gold uh silver i'm less convinced about because i think you're so damaged by that massive run it had earlier in the end then the collapse and then there's sort of hybrid which is to buy the blackrock world mining which we own a decent amount of and has done very well my favorite is still copper i have to say i still think copper is the place to be um and uh i'm sort of happy to stick by that but yeah i i think that um the other thing that would would be helpful for commodities which we've left out is the u.s dollar now the u.s dollar has had a one percent move higher this week because of uh those right rise that rise in the real yield driven by the higher inflation data and the higher interest rates and the higher jobs as you say rich um but if the dollar started to come back a bit i think you would see gold and silver go and the precious metals particularly but all commodities remember are priced in dollars and they benefit from a falling dollar okay so if i if i put my cards

46:48Rich McDonald: on the table i'm i'm sort of thinking it's time to buy put some more money to work um should have bought more last week you guys recommended i should but i was a little bit cautious but we bought some so that's good but i think we need to buy some more because i think that with the job data coming out nice and strong and the response i'm expecting i think the markets will travel well into the end of the year and usually it's a good time as well to travel into the end of the year there are risks around some of the flotation stuff of next week is a risk and jensen and stuff like that but interesting you know nvidia's down five six percent and markets are still up so So, you know, so I want to buy some stuff.

47:29Rich McDonald: Now, the first place I look is Japan because Japan has done pretty poorly, but I think is starting to recover nicely again. And where I look at it on my charts, I quite like that. So I'm not taking any opposition to that. I'm going to buy two and a half. No discussion space. No, there's no discussion. I'm happy to do that. I like Japan. But on the other two and a half, on the other two and a half, so let's say we're going to put in five, what should we do? Now, there are three choices to me. One is we buy NASDAQ because it's off the highs. You could argue all the stale positions have been pushed away.

48:13Rich McDonald: The hedge funds were massively long, aren't long of it anymore. And suddenly it can have room to run before everybody gets over their skis again. So that's one place that you could put it. the second place you could put it in my view is into um something like a nasdaq so an em or somewhere like that i'm going to say three things but i'm actually now going to say four because that's i'm allowed to the third place we can put it is into some of the commodities i'm slightly against that myself a because of the way they've come back and the sense we've we've got 17.5 % of the portfolio in these sorts of things already, which is a lot.

48:54Rich McDonald: So if they do well, we're going to do pretty well anyway. So my final thing, though, is what about something new, something more linked to the AI techie side? We talked before about the VanEck crypto and blockchains thing, which is all about data centers and Bitcoin and that sort of thing. That's an idea. And it's moved better over the last week. But what about the momentum ETF or something like that? Momentum has been absolutely destroyed as an investment factor. That's what these hedge funds lost money on because they've all been in the momentum trade. They've got stuff. What do you guys think?

49:33Rich McDonald: So two and a half we're going to put in Japan. That's done. What am I going to do with the other two? I will be persuaded by my team on the other two and a half. First of all, I wouldn't put gold in with other commodities. I think the... Oh, separate, all right. Yeah. So copper, I agree with spice. I think that's great, but I want more confidence on the economy and all this infrastructure build. Gold, I think, is separate. Gold takes us more towards the defensive angle, but plus we get this huge upside of a monetary easing. So I would feel a lot more safer in there. I think it's far too early to look at NASDAQ.

50:11But it's bounced so aggressively that what happens next, was that a dead cat bounce? Was it when you push a beach ball underwater and you see it flip up? We just have no idea what's going to come out of the Democrats camp and what's going to come out of NVIDIA numbers with Jensen. How many chips are they selling into China? Or Singapore?

50:35Rich McDonald: Via. So you would say two and a half into gold would be your choice. So Japan and gold, spice? I like the EM trade instinctively. I know we got India wrong. And, you know, I'm guilty of saying let's cut it because it was annoying the hell out of me. We had a question about that. We did have a question about that. So it ties into what we're talking about as well. So Hannah, thank you for your question. She's asking on television and social media, she saw all the recommendations were don't panic on this market dropping yesterday. Now, remembering that the S &P is only 5 % from the all-time highs.

51:15In what circumstance is it right to sell? And maybe it's not a panic. Maybe it's just, right, I've had a great run. My ISA is looking really good. It's off the highs. But if everybody says, don't panic sell, then what if I never sell? What circumstances is it right to take some profit and take some money, move it into cash as we did earlier?

51:44Rich McDonald: If I give you my view, then please join in. So to me, I sort of think about it in terms of different types of investors. If you're an aggressive investor, you're in the market the whole time. You might decide, I'm going to sell something because I can use that capital better elsewhere. Now, if you're a professional investor, that's fine. But I'm going to take it that our question is coming from someone who isn't a professional investor. And so to me, I think the critical thing is when your view of the fundamentals change, then you probably need to change your positioning. and you can see how that makes sense but i can give you a very good example mark just mentioned it of where we didn't do that and we cocked up that's a technical term obviously technical term but it's uh but it's it's the same which however you describe it we got it wrong we had an india holding and we were bored of it i was bored of it it was down eight percent everything else had gone up massively it never did anything better when everything else did badly it did well but because everything else did well it did badly i mean it was useless so we decided well we're going to sell it so that impatience came in the emotion came in it wasn't a fundamental judgment it was oh god this is so boring let's use the money elsewhere completely the wrong thing to do because we've sold it and in the last few weeks it's gone up seven percent so therein lies how we sensible people in the investment world can get it completely wrong if we forget the rules which are look at the fundamentals if you haven't changed your view stick with it and just ignore it because in time it it'll come true spice what are your thoughts well look it's it's never wrong to take a profit okay you've got a profit a loss no no but my point is if you've got a profit it's never wrong to take a profit and i told you my stories about wealth managers they don't want to sell something because it could create you a capital gain and then you'll have to pay tax doing a trade because a tax is the wrong idea that tax needs to be taken out of the equation um and i think that you know if you if you're in a position to make a capital gain well thank you god you know off you go and take that profit potentially or run it but the point i admire the way of thinking about it is if i think if you started if you got to a point where unlike the central banks being behind the curve as we talked about earlier on but getting ahead of the curve that would endanger the earnings that have companies outlook and the real economy might get negatively affected and if the growth went from positive to negative that's a really bad signal and that would be a difficult time for for equities particularly if interest rates were going up in the background but that's the fundamental change absolutely exactly exactly right but then if you that because just as quickly the central banks turn around and go oh we've done this we've done too much we put you know we've jumped both feet on the brake that's been a mistake let's put our foot back on the accelerator off you go again and you could look at full very quickly because central banks can move very quickly as we know we've seen it during but they tend to move quickly during crisis as you said you know and covid is a case in point the great financial crisis all those sort of things the other area where i really believe equities suffer badly is during deflation not disinflation inflation still have inflation but it'll be falling but if it goes negative it means that companies can't put their prices up and most companies have higher costs each year because they're having to pay people you know more or you know they can't cut salaries it's very difficult to do it but if their prices are going down they have no choice but to cut jobs and try and get the cost back elsewhere deflation is a horrendous backdrop but what you're saying go back to the question the question is when would you sell and you what if if you're a if you're a semi-passive investor buy and hold investor generally the only time you're going to sell is when your fundamental view changes which is all for those reasons i'm not denying any of that but you're we're basically agreeing here we are on those fundamentals rich it's interesting how you you take india as the example here because what turns out to have been the case was that India was something that was negatively correlated to the rest of our equity positions.

56:07And we perhaps didn't really read it like that. So it was one of the more defensive positions that we had. So maybe it's about looking at your whole portfolio. And if you find that everything in your portfolio is tech, AI, NASDAQ, and the MAG7, then yes it is a very good idea to to reduce some of that exposure but if it is something like India or gold miners or utilities that is you know moves differently goes up when your other stuff goes down and vice versa then you know maybe it is better to keep it yeah and I think that that's a very

56:50Rich McDonald: good point I think you've got to look at the characteristics of the holdings in your portfolio I suppose what I'm saying is, the real point of what I'm saying is, impatience about a return is never a good reason to sell anything. It might be a reason to look at it and say, should I do something about it or not? But then you need to take into account these other aspects, which are far more about what's it doing in your portfolio and what are the fundamentals of it like? And the fundamentals are still good. It's a defensive situation. But because it had done badly, you get rid. Completely the wrong thing to do.

57:23Rich McDonald: Hands up. My error. That was a little sidetrack away from Spice. To answer the question, where does the two and a half go? Spice, two and a half. Where does it go? Given the time, we want the brief version. Emerging markets is down 10 % still, even after a 6-7 % move off its lows recently. It got hit very hard. Some of the biggest names out there hit very hard. China and the US have a big trade meeting coming up with Trump and Xi in the next few weeks. I think that the Chinese spy thing will blow over. Who knows? But that is clearly a risk. But China has been an underperforming part of the emerging markets for a long time now.

58:04If India is actually performing it better, you get some India in there. And I do think that we're in a recovery mode for AI-related stocks. And the biggest ones, some of the biggest ones and the most aggressively bought ones, when people were positive about that, are sitting in Taiwan and Korea. And I think there's more to go.

58:23Rich McDonald: Okay, so I think that's easy then. So we're going to have one for everybody. Two and a half Japan. You're going to have two and a half gold and you're going to have two and a half emerging markets. Let's get going. Let's move it in there. When did this become a democracy? The other becoming chairman. It's the midterms. Yeah, the votes hurt me. I now know I've got to behave now. I now know I've got to behave. So that's what I'm doing. So that's what we'll do today. we'll do two and a half into Japan, two and a half into emerging market, two and a half into gold. We're going to sell our two and a half gilts and we're going to sell five cash.

59:02Rich McDonald: Okay? Excellent. Right. Let me just write that down. That's a wrap. Do it before I change your mind, Spice. So on that revelation that we've got seven and a half percent going back into the market, then we're almost done. I promise. If you've made it this far, then thank you very much. In fact, you know what? I think we should reward people that have made it this far. thank you very much for listening to our requests for reviews like if you're listening on Spotify or on Apple podcasts we're very close to 250 reviews at the moment which we are told is a big landmark so if you wouldn't mind reviewing down below that would be fantastic and also thank you again if you have voted for us in the good money guide so if you've made it this far email us in because we've still got the red and yellow cards that the gents signed at the live at lords we never actually gave them away that night because the raffle was too full of cricket bats and cricket tops so if you would like signed red and yellow cards then write into the email and we will select a winner and get them out to you as a little thank you for making it to the full hour and we promise we're going to stop there.

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