The AI Rally's Weak Spot: Oracle's Warning Sign

0:06Welcome everybody to this week's episode of the art of investing brought to you by IG the Global Investment Platform. Joining me as always, Chris CJ Fellingham. Hey Rich. And Mark Spiceholden. Hi Rich. Now it's been 10 days since we were last on air, gents. So I have promised not to mention the football, but completely unrelated topic. Today's big subject of the day, we're going to talk about CDS or credit default swaps and explain how they are very important in today's current market, especially around AI. And we're also going to discuss when CDS became very topical when Argentina dealt an almost knockout blow to English fund managers about 20 years ago.

0:51So before it gets messy in here, we're going to this week's portfolio. Right, gents. So on to the portfolio straight away then. Just a reminder, this is the only podcast in the world that gives you a live portfolio, putting our money where our mouths are, taking all our thoughts gathered in the podcast and putting them into a model portfolio, which we bring you each week. Your capital is at risk. The value of your shares, ETFs and ETCs can fall as well as rise, which could mean getting back less than you originally put in. This content is for information purposes only and is not investment advice.

1:28Past performance is not an indication of future results. This week, a plus 0.4 % performance. Spice, take us through the winners of the week. The second week in a row, we've had copper and BlackRock World mining towards the top of it. BlackRock World mining up 3.3 % this week, copper up 3.1%. And in the main, that's due to a very good performance from gold and silver, both up about 5 % since we last reported. And copper is up 3.1%, as you can see. And part of that is due to the fact that copper has been given a big boost by the fact that Chile, who are the biggest copper producers in the world, they produce about a quarter of all the world's copper, basically have dropped their production significantly.

2:14It's down about 13 to 14 % so far this year. So you're taking the world's biggest copper producer, taking the production down. And part of that is their minds are getting old. They're running out of parts to make the machines that make the drilling, that make the copper. And so they're struggling on all fronts. And that's not a problem that's going to be sorted very quickly. Well, that's it, because a lot of times it's from strikes, isn't it? Every couple of years we see BHP and Escondida fighting over the rights and the wages for the workers. But this sounds like a bigger problem. It is a bigger problem.

2:48And like I say, it's not going away quickly. And at the same time, of course, demand is picking up because everyone wants to put copper into the AI machine that is out there that goes into data centers and computers. Come on, guys, before you carry on and keep lathering over copper, what is Escondida? So Escondida is one of the largest copper mines in the world. And it's a huge site in northern Chile and partly owned by BHP. And Rio Tinto. and Rio Tinto. The next biggest producer is the Democratic Republic of Congo, who are obviously now more famous than they were before in football. Another team who were beaten by England.

3:30Another? Yeah, and there were other ones. But they're the second biggest with about 14%, 15%. And then another South American country, Peru, down with 12%. Before you get to China, 8%. And then the US. So, you know, the top five producers in the world produce about 61 % of all the world's copper. And you've got problems in quite a few of those countries. So that's the top two, but there are another two there. And I just want to get the old drum roll. Because it's not often you see the FTSE 250 and the FTSE 100 up there. And I'm sure our listeners who have endured the positioning in those for some time will be happy that once in a blue moon, the FTSE 250 has got on there.

4:14Spice, tell us about those. Well, that's quite a simple one. And our new leader and new chancellor have been less scary than I think we might have thought they would be. Certainly, they're making the right noises. And we'll obviously discuss this in quite a lot more detail later on. But initially, the noises coming out of number 10 and number 11 Downing Street are both sort of gently reassuring in that they're looking like they're going to be cost-cutting measures initially. We'll get to see how they're going to pay for those. But the markets took heart from that. So that's good and probably brought a few international investors back into the fold.

4:50And it's a story of rotation yet again this week because it is equities at the bottom of the leaderboard as well. Nikkei 225 down 2.7 % on the week. Our Indian MSCI ETF down 1.2 % on the week. And the XLI Industrials ETF down 0.5 % as well. So what's been going on around the rest of the world, Spice? That's a pretty simple reason. And that is the oil price has gone up to$95,$96, the Brent oil price. And both Japan and India are huge consumers of oil and have to import a lot of oil. They don't make it themselves. And likewise, the US industrial companies, obviously, oil is a big input cost for industrial companies.

5:33So, oil, oil, oil, oil, all the way down there. But in addition to that, in Japan, the Bank of Japan this week, and maybe we'll talk about that when we talk about bonds a bit later, being CJ's area of expertise. The Bank of Japan have said that they're potentially willing to sort of accelerate the interest rate rises that everyone's expecting. But at the moment, everyone's expecting an interest rate rise of a quarter percent every six months or so. There's suggestions from them that they may accelerate that a bit because they're trying to defend the currency, which we've talked about before, which is sticking around the 163 yen against the US dollar.

6:08That's considered a sort of a threshold. And other ways of trying to intervene to support that hasn't really worked. So now they're resorting to say maybe we'll have to put interest rates up quicker. In India, there's a slightly different issue. I don't know if you would have heard that Trump has started imposing tariffs again around the world. And one of the places where he's targeted is generic drug production. Now, most drugs have a patent which lasts for 20, 25 years, and they're protected from price competition and other competitors coming in and copying that for that period of time. But when they come off of patent, then a new drug company can come in, or they're called generic producers.

6:45They come and they produce exactly the same drug. They just call it something different. And they charge literally a tenth of the price. And those countries obviously want lower drug prices, so they sort of encourage that. Now, India, about 8 % to 10 % of the Indian stock market is from generic drug companies who make these generic drugs. And Trump's come in and said, unless you start producing generic drugs in the US, by 2028, we're going to put 100 % tariffs on all of your drugs. And that will rise to 200 % in 2029 if you don't do it. So he's got his tariff gun out again. And India actually got a bit of a slap from that this week.

7:23Okay, so put those all together and that leaves us up 0.4 % for the week, which gives us a grand total of 23.1 % since inception and up 10.5 % year to date. Now, we will come back to the portfolio after we go through today's two topics of the day, which include Andy Burnham coming to office and appointing the new chancellor and the effects on the FTSE 100 and 250. And then also, of course, those credit default swaps and how they are affecting the Oracle share price, but the wider AI trade as a whole. But first, as always, let's go on to the rest of the Spice Market Update. Thanks very much, Rich.

8:03Right. Well, it's been another week of very strong oil prices. I mentioned there where we talked about the portfolio. Brent hits$96. That's up 30 % from its recent lows in the past six weeks or so. So, it's not very good at all for companies that use oil. And that's kept a lid on stock markets generally. So, we've seen for the second week running no new all-time highs, we've seen actually some other areas, huge volatility moving in there. So until Friday last week, the semiconductor chips market was down 20%. So in a bear market, remember, something falls 20%, we call it bear market. Chips entered a bear market until Friday last week.

8:42And since then, they've had quite a good bounce, really, funny enough. So there's huge volatility. Korea has been up and down like you wouldn't believe. They have this thing called a sidecar. So when the market moves more than 5 % in Korea, they impose a 15-minute stop, and that's called a sidecar. They allow the market to calm down, and then off it goes again. Well, we have those sort of stops or breaks in certain markets everywhere around the world. In the US, you have them as well. In the US, it's slightly different. The market has to fall 7%. The S &P falls 7%. They impose a break in the market.

9:1715 minutes later, you start again. And then if it falls 13%, They do another 15-minute break, and it will 20%, another 15-minute break. So those happen very rarely. I think the biggest impact of a break I've ever seen was the night of the US election, 2016, Trump coming to power for the first time. And the S &P futures were down 5%. And it went into that 15-minute holding break. And for some reason, at that exact point, everybody started to think, well, this could be positive for the market. and that was the lowest the market's been ever since, I think. And I think it ended up 3 % on the day, so an 8 % rally from that low.

9:58Yeah, exactly. I was working through the night there, Standard Life, but that's another story. I didn't last more than another day after that. And yet I was the only one who said that Trump was going to get in, funny enough. Of course, these are known as circuit breakers. Yeah. Yes, that's it. So the official terminology for those in the financial markets is these are circuit breakers. And I think they are really for people who are in the markets to sort of take a step back and go, oh, my God, what am I going to do next? And hopefully, some answer comes, which isn't, sell more. But unfortunately, that does happen.

10:34I mean, I mentioned it because in Korea, you've had eight of these sidecars or circuit breakers in the last week. So we've had moves more than 5%. They stop for five minutes and they start again. In the UK, we have a slightly different way of doing it. It happens to ordinary one stock. If a stock moves more than 10%, then they basically sort of put a break in it for again 15 minutes or so and then wait for everyone to calm down, put it into an auction and off you go again. One other place that's been suffering quite badly, actually, is our friend SpaceX. So Elon Musk's had a bit of a tough week because his IPO is SpaceX, which he still owns, I think, 83 % or so of.

11:10Basically, it's well below its IPO price, so it's a flotation price. It floated, remember, at 135. It went up to 230. There's now 115, 116, as we talk about this on our podcast. That's halved from its high already. It's a huge volatility. And as if that wasn't enough, his other company, Tesla, had a 5 % fall last night, overnight, because they had results. And although electronic vehicle sales are very good, and we've talked before in previous podcasts about the way electronic vehicle sales have been doing well because of the high oil price, that actually beat expectations. but he's spending more money than expected on trying to get robo-taxis in and androids and everything else that he's doing within Tesla.

11:54So the capex was great and expected. That caused the fall. Another very, very big company, one of the magnificent seven, Google or our friends Alphabet, had a 4 % fall last night. Same reason. Great results. In fact, revenues showing they're actually getting some return on some of this investment they're getting was actually better than expected, But they increased their capital expenditure for this year to up to between$195 and$205 billion, which is 5 % more than expected. Shares went down as a result. So, you know, that story we've been following now for a few weeks, a few months probably, that where the CapEx has been great in expected, the shares fall.

12:32So now all eyes on Microsoft. And Microsoft is going to be the huge bellwether for the sector. And there is a sweet spot. If they raise CapEx figure by about 20%, the whole AI trade will still be in vogue and everybody will be happy. Microsoft will get away with it. If they increase it by more than that, people will start to question, right, Microsoft, what's the return on investment going to be there? And of course, if they don't increase it by as much, then all the other stocks are at risk from dropping back. It's a huge week next week because we've got not just Microsoft, but you've got Meta.

13:07They're the ones who led the charge on this. they're probably way ahead of everyone else, and they've got their results next week, as have Amazon. So by the end of next week, we will have had pretty much all of the magnificent seven, except for NVIDIA Report and Apple. So it'll be very interesting to see how that goes. But for now, all eyes on that capital expenditure side. In the old world, you know, we've had companies like AT &T, which is the American telecoms company. Their shares were good. Oh, tech's doing better. They've got subscribers going up. Wow. And they managed to do it on cutting prices.

13:38Can you get more patronising to the old world than say, gosh, wow, gee whiz. AT &T, you remember those, yeah. It's like BT and Vodafone. Ah, yeah. Can you stop watching my portfolio? Still in your portfolio, yeah. It's still in the old world. Philip Morris, who make the cigarettes, you know, basically their shares are up 5 % despite a dollar hit. They were good. I'm going to run through the AMC cinemas that you know you'll go to the cinema. Their shares are very good. Their shares are up 20%. They had good results. They've got a good release schedule. Richemont, the owners of Cartier. Those of you who have been buying your wives or girlfriends presents from Cartier, you've done them a huge favor.

14:23Their sales doubled at Cartier. So their shares are up 8%. Once got a helicopter ride from Cape Town with the chairman's family of Richemont. It was very nice. we dropped down into their back garden, which is their own little three-hole golf course. Do you want to tell us a bit more about how this happened? Was this work or pleasure? Friend of a friend. Oh, yeah. So anyway, the mother came to pick us up in the Range Rover from the helicopter pad and was driving us back to the house. And she was listening to a horse race. And she was cheering on this horse. And I said, oh, have you got a bet on?

14:59She goes, oh, no, we own it. And so it was their horse running at that time. so yes you do mix in the right circles Rich it's not like me and Spice who are busy making ends meet all the time it's you who are living these sort of things sorry CJ how was your day yesterday I had a super day I've got some great pictures of the king and the queen it was lovely mate and did you mention the art of investing to him no I did I did take some pictures of various things with the art of investing on it there but I did manage to mention it to the king and this was at your flower show in your back garden the Sandringham flower show But hey, some of us live really exciting lives.

15:37The other things I wanted to bring out, there's been another four bids for UK companies this week. For companies that are worth over£100 million in market capitalization, we've had four bids. Companies that I've been aware of in the market since for 40-odd years since I've been going. So there's a company called Mighty who do facilities management. They were taken out for£3.1 billion. And the bidder, being a US private equity company, funny old game, paid 47 % more than the prevailing share price beforehand. Another great engineering company, Rotor, this time a Swiss company, ABB, came in and paid a 73 % premium for them.

16:14That's unbelievable. And they've agreed to be taken out. And then there's smaller companies called Gooch and House Go, which is a photonic and precision optics company, 49 % premium. I own some of those. Woo! Do you? I do. Wow, wow. Trust me. Trust me, it's an old one, but it's always good news. And then one that was close to my heart, because I thought it was the old chippy, Ramsden's, and I thought it was Harry Ramsden's, but no, it's Ramsden's financial services in the northeast of England. Again, taken out for another 49 % premium. Got some of those. Four companies this week. Four. I mean, it's not often I compliment Spice, because I've known him for a long time.

16:49It doesn't pay you to do that. But, you know, he brought up 10 days ago, this statistic about, I think it was 27 to one, 27 firms being taken out for every one IPO. And I've now seen that written all over the press now. And lots of people are now talking about it. So maybe that's one of the reasons also behind why the FTSE 100 and FTSE 250 have had a slightly better week, that people have suddenly said, you know what, there is a shrinking amount of equity here. And maybe, just maybe, the new government might listen to it. So, I mean, there's a couple of other things that have been happening. In the background, we've been talking about how bad the Chinese economy is and how bad the Chinese stock markets have been.

17:26And that's been weighing on the Emerging Markets Index that we own. It's been one of the negatives. Remember, China is still about a third of the emerging markets index. Well, what's called their national team, and our friend JP came on and explained what the national team is. They're basically a group of investment organizations beholden to the Chinese government. They've started buying shares in bulk in the Chinese stock markets this week. So, they managed to get their tech sector up 9%. And they pushed up their main Shanghai Composite Index by about 3 % or 4%. So, they've been pretty good. So the US buys its own stocks.

18:00Trump says, I like this, gets all his mates into that. The Chinese are doing it. The Japanese have done a fair run. We've seen the Japanese doing it. We've seen the Koreans do it. Why don't the Europeans do it? And we sell ours. We just sell it. We sell them to me. Oh, no. But I mean, joke aside, the Chinese stock markets have underperformed the emerging markets by 65 % over the last five or six years. So there's a reason why they're going in there. They just think you have to have quite buoyant stock markets to encourage investment and have healthy capital markets so companies can borrow, invest, etc.

18:35And if you don't have that, then languish and your economy suffers. And China have clearly worked out that that is working against them. Sorry, I thought we were on to the UK there. We're not far away from it, I tell you. But I just wanted to cover off on that in the market report before we go on. But today we have the European Central Bank have their meeting and no change is expected. CJ, anything to add this week on your side? I think it's just worth just saying the oil price moving up means that bonds have generally ticked higher in yield. Higher in yield means lower in price. I'm taking a bit of time to warm you guys up today, clearly.

19:11And we're now pricing in another quarter point rise in most markets. And now most markets are pricing in two by December. So two in the UK, two in the US, and two in Europe. And that's putting things under pressure again. So where we've had relief, we're now finding strain. But interestingly, equities are holding up even with these expectations. And so it's just showing you what we've said before. If things move slowly, the market can cope. But if we start to discount more interest rate rises happening more quickly, then equities might suffer. We don't see that happening in the short term, but that's where the risk is.

19:52That's number one. I was quite surprised to see the US yields where they are this week went towards the long end. 20-year at 5.15%. 5.15%. And there was an article in Bloomberg, a pretty meaningless article, but just drew people's attention to it, that they've now been there above 5 % for longer than any period in the last 15 years, 20 years. So just making the point, the 30-year yield, so that's the yield you get for holding a 30-year US government bond, is 5.15%. So when I look at buying NVIDIA on 20 times multiple, or I look at buying SpaceX on no profit, I can buy the US government bond on 5.15.

20:34What level does it have to get to before people just say, you know what, I'm just going to buy US bonds? That's still the important question. It's very important. The next week, we have the Federal Reserve meeting again. So they come around very quickly, don't they? This is the second meeting of the new Federal Reserve Chairman Kevin Walsh. And the market's beginning to sort of jitter about whether they are actually going to do anything. Still, the majority view is that they're not going to make any changes to interest rates next week. And that likely first change will be in September, probably followed again by another one in December.

21:07So, two rises by the end of the year. That's what the market's discounting. But there's a few jitters around with the oil price up where it is now, that actually those may be brought forward a little bit. And we've also got the Bank of England who report next week. They're not expected to change anything. And also, as I mentioned earlier on, the Bank of Japan also have a meeting next Thursday. So, you know, it's going to be what we call Central Banks Week. So we've got the ECB today, as I mentioned earlier. So people are getting a little nervous as to what might happen. The only commentary on monetary policy that I pulled out this week, which I thought was meaningful, was what Spice already mentioned about the Bank of Japan, where they talked about maybe increasing the speed at which they raise rates.

21:50That, I think, is quite worrying. That's why Japan is at the bottom of the performance list. And then the final thing I wanted to mention was SpaceX. We spent lots of time talking about this for the last four or five weeks. SpaceX came at, and SpaceX said,$135. Everyone thought, oh, those stupid index funds. They're going to have to buy ridiculous prices. Let's all just buy it. Let's all just buy it. Let's all just buy it. gets to$230. It's now halved since that time. And so it's really interesting and shows you how much hot air there was in SpaceX at that time. Probably now, it's probably at a level which somebody, not me, because as you know, I'm a value investor, would find to be an acceptable level.

22:33But it just shows you how much bull momentum, how much sentiment was in there driving it up to that 220 level. And until that sorts itself through, maybe there'll be a little bit more stickiness. Well, the worrying thing as well is that you haven't even seen these lockups come off. And the lockups, meaning that the insiders, i.e. those that have held SpaceX before the IPO, they are eligible to sell their shares now in three weeks' time, and then in six weeks' time, and then in nine weeks' time, more and more are able to sell their stock. So the free flow as they call it is about to go higher because there's going to be more shares out there.

23:16But, and Spice might have a view on this, 17 % short base already because people know this. So a lot of funds are shorting the stock thinking that they can sell it at 150, 140, 130 because then they'll come back in to buy it as these inside holders sell the stock as soon as they're allowed to. It's a very dangerous game being short. We've talked a number of stocks that have gone up 50 % or 100 % because the short guys have got caught as the shares move the other way. And personally, I wouldn't bet against Elon Musk. There's a reason why he's the richest man on the planet. And, you know, he might have a trick or two up his sleeve.

23:58But, yeah, I mean, who knows? But as you say, the supply-demand imbalance is looking pretty much in favor of falling further. But as you say, it's already fallen a long way, halved from its recent peak. So, you know, will it go further? Personally, I think we're probably getting towards the bottom. That's just personal view. Now, CJ, a lot has changed in the UK since we last met. We've got a new prime minister. We've got a new chancellor. What are you thinking? Gosh, what a question. The easy one for me today. If I start with a few words, then we can all sort of join in. I mean, it's clearly far too early to actually know or see what is going to happen.

24:37And of course, we don't know much about Andy Burnham. There are some things we can, though, glean from what's available in the press or what people have said. I mean, there's the old joke that's going around at the moment, which is a Corbynite, a Brownite and a Blairite go into the pub. and the barman asks, what do you want, Andy? And that's because he has been in each of their governments. And so he seems to be able to make everybody think that he's got a lot of agreement with everything that they're saying. Not a lot of evidence there of being able to make that tough decision, a lot of evidence of being able to get on well with everybody.

25:21Well, that's not what we need as a country. And then when we look at the outcomes for Manchester, I mean, people say, you've got to look at Andy Burnham. He's done a great job at Manchester, Manchesterism, as they call it. So I was very intrigued to read an article. Now, this was in the Telegraph on the 8th of July. I've checked it. It's an accurate article, but it was quite interesting how it mentioned it and nobody else did. The headline was Manchester suffers steepest fall in living standards. It claimed that Manchester had had the largest fall among major English cities in its real disposable income between 2017 and 2023.

26:01What it said was that the real disposable income per head in 2023 in Manchester was£16 ,500. And that's below Sheffield, Newcastle and Liverpool and 41 % below London. It was also marginally below Manchester's level when Andy Burnham became mayor in 2017. Now, clearly, the Telegraph have got an axe to grind, and that's what they're saying there. But what that is putting doubt is as to what's actually been the benefit of Manchesterism. So, you know, with all those provisos in place, Len then looked at his choices for Chancellor. He's appointed a guy called John Healy to be Chancellor. Now, those with a long memory will remember that we have had a Healy as Chancellor before.

26:50And he sent us to the IMF for a very big loan because we effectively defaulted. This was in 1976. That was a Labour government again. They were subsidizing lots and lots of things. And they tried to solve a cost of living then, which they had created themselves. So the omens are not great as we stand. It could have been worse. We could have got Ed Bacon Sandwich Miliband, but we avoided that Kerrbull. So that's good news. And the other thing that's quite good news, I think, is that remember that the UK asset market is priced for disaster already. So catastrophe is needed to mean it will go lower.

27:33Just bad probably means things rally. And we've seen a strong rally this week. Now, what do I really think? The good news about Healy is, to me, he was the Treasury Minister within Blair's government with Brown as the Chancellor. So he is viewed to having a bit of a sort of Blairite approach to the economy. And therefore, I think that, you know, we can think that's not as bad. Manchester's superior growth rate over the last 25 years, we're not saying we're not doing this bit with the Telegraph article, But the longer term growth rate, 2003, 2026, has been really good. So he understands the importance of working with the private sector.

28:18So I think that those things can be seen as positive. We will see as things are announced. The negative is still the very difficult parliamentary Labour Party who think that the magic money tree still exists and is there for harvesting before this parliament runs out. So we don't have a lot to go on. I've told a lot of cheap jokes here. At the end of the day, I think he understands why growth is important. I think he understands that working with the private sector is important. But only over the next few weeks and months will we find out the truth. What we really need is him to come out now and the Chancellor come out and say, we recognize we need growth and to stop speculation over the summer about more bigger tax rises.

29:07because that will destroy confidence and keep us all in a very depressed state of mind. So far, so good, but very early days. What do you guys think? A very smart appointment in Chancellor from a political side of things because, of course, Healy was Minister of Defence and then resigned because he wanted more money and more money to invest in defence. so Burnham saw that he could have the problem in the back benches of this continuing this real debate whether we should be spending more of our budget on defense well you get rid of that problem because you appoint him as chancellor and suddenly it's his problem and it's not yours to find more money to spend on defense so he's taken away quite a big problem in his in his backbench is there.

30:00That doesn't mean that it's necessarily good for the country or the best choice of chancellor, but it's good for his politics. So just on that first, then we get Spice. But one of the things that Healy has talked about is defense bonds. And I will be very, very interested to hear what you guys think. And then I'll give my view afterwards. So maybe Spice, you wrap it up in your other thoughts as well and then come back to Rich. What do you think about the idea of defense bonds. For people who are listening, that basically means that he says, I'm going to raise 20 billion this year and it's all going to the Ministry of Defense and we're going to call them war loan.

30:36Oh, we used to have one of those, didn't we? Yeah, we did. We've only just paid that back. But, you know, very low coupon bond. So when I made a low coupon, I mean a low interest rate paid on it. Very long maturity date sometime in the future. I'm basically saying, we need this to fund our defense market. Please bear with us and let us do that. So I'd like to know what you think of that. But Spice, let's go first to you on what you think about the new government and then come back on that. I was going to mention the fact that there was this chatter about potential war bond. And we have actually touched on that in this podcast before.

31:10NATO requires that members of NATO spend 3.5 % of the gross domestic product or what the country produces each year on defence going forward. It used to be 2.5%. It's gone up to 3.5 % because guess what? Russia and Ukraine and obviously now what's going on in the Middle East has made that more pressing. And, you know, a lot of European countries who are part of NATO are a long, long way behind that. Germany, et cetera, are a long way behind. And so every country around the world is having to scramble for this extra money to spend on defence. And we are certainly part of that, although we have been spending quite well over the years.

31:45I personally am in favour of having a war bond, But the trouble is you're going to have to have one every year because this is 3.5 % of your gross domestic product every year for the foreseeable future. From my mind, that's at least 10 to 20 years probably going forward. Now, it's interesting that the gilt market, you touched on, you know, bond yields have been rising around the place. But 30-year gilt, so the government bonds that mature in 30 years' time, hit an interest rate of 5.75 % this week, which is the highest they've been since 2020. that is obviously the market getting ready maybe for this extra issuance of sort of government bonds to pay for the giveaways and maybe defence as well.

32:25But, you know, already he's come in and given some nice, you know, sort of sound bites for the press about the fact he's going to get rid of the homeless, sleeping rough people all over the country. Well, my daughter works in Manchester and she will tell you that that is still a major problem in Manchester and yet that was one of his cornerstone policies when he became mayor and there's still a big problem in Manchester with that. He also says, oh, I'm going to remove VAT on electricity bills, you know, until April next year,£48 a year. Woo-hoo, you know. You know, CJ wouldn't spend that on a bottle of wine, you know, but hey.

32:59And it's funny, he took it away from digital IDs, which wasn't even funded anyway. So there's already some tricks of the trade going on, which is why the bond market, I think, have been a bit like, ooh. But nevertheless, he's talking about maybe a cap on bus fares or cutting business rates this morning. He said he's going to cut business rates on pubs and social clubs and live music venues around the country, which, by the way, is great. I think that's really good. And those businesses have been really struggling in the last few years. We know that the number of pubs are just closing, hundreds and hundreds a year.

33:28So that's a positive thing. And actually, that's one of the reasons the mid-250, and we've talked about this before, actually benefits from some of these potential cuts in costs going on. Sadly, the oil price has been working the other way. But if those things come through, that's a positive. And I think it's one of the reasons the mid-250s done well. But the question is how it gets paid for. And I still wouldn't want to be owning UK government bonds in whatever form until we know about that. And it's very easy to give things away. Very difficult to get them paid for. The important point is that we needed something different desperately.

34:02And, you know, I saw it when I lived in New Zealand. Jacinda Ardern came from a PR background. That was her degree. and Burnham is just naturally charismatic and he is the change that was desperately needed from Starmer. So at this point, with all the policies that are coming through and the changes and the way it's been delivered, then I'm not surprised by the optimism that we're seeing in the FTSE 250. And it goes back to your point on expectations. The expectations priced in are pretty dramatic already. So as long as it's not that bad, then we've got upside. What happens in the longer term, I think that a lot of countries have got big debt issues anyway.

34:46So that's not just our problem. But for now, I'm liking the things that I'm hearing so far. Yeah, but you see at the moment, it's just hearing, isn't it? You've got to see it. You know, he may be good at presenting. He may be able to put a meme together, whatever that is, and all those sorts of things. But we need to see what he actually delivers. Because what he said after his first cabinet meeting was, you know, we'll have no unfunded promises. And the first thing they decide is unfunded. I think I can get optimistic, but I need to see what is actually going on. My view on the war bonds, by the way, is I think he can issue as many war bonds as he'd like on one proviso.

35:23If Healy stands up and he says, I'm going to issue 15 billion of war bonds each year for the next 10 years, right? The market goes, oh, that's a lot. If he then says at the same time, but the rest of my budget will be reducing, I'm going to cut some costs. I can't cut the whole lot, but you're going to see me make progress in cutting costs on the rest of it. I think the market will say, okay, we can see how this could work because the spending on defense and the trying to focus it on the UK companies should help to grow the economy and cutting some of the costs will stop the public sector crowding out the private sector, which is what's going on at the moment.

36:10There is a way you can do it. But just saying, I want to do war bonds and I want to do all this other stuff and I want to tax the rich more and I want to do this, that and the other will be a disaster. Why are war bonds traded at a lower yield? They are not traded at a lower yield. They basically want to, when they issue war bonds, they want to have the optionality of having to repay them long time in the future. And therefore what they do is they tend to not have a end date So war loan was an irredeemable bond. So you've got the same amount of interest forever. And they have a very low coupon.

36:44So it doesn't cost the exchequer very much. So the whole point is to say, lend us your money. We'll pay you a secure amount of income, but we won't pay it back until we are back on the straight and narrow. Am I right in remembering that the war bonds that came from the Second World War were only redeemed during the great financial crisis because interest rates went basically to zero. And so there was a 3.5 % yield on these things. And they go, I've got to pay 3.5 % out there when actually we can borrow money at zero. It would undoubtedly have been part. They would see they could refinance them essentially.

37:19So that would undoubtedly be part of it. But there's a very good proof point there. You bought them in the 40s, 1940s. It's not the 1840s, Rich, 1940s. I don't remember that, by the way, just so you remember. But you bought them in the 1940s, you didn't get your money back until it finished the crisis. Right, now all this talk of debt brings us nicely onto our next subject, which is the credit default swap. You might have heard of these in movies like The Big Short, and of course they did come into relevance in the financial crisis. But now they're starting to rear their ugly heads again because of Oracle.

37:57Now, Oracle is in a very interesting situation at the moment, that it has really invested in data centers and GPUs to put in those data centers. And it has basically gone all in to the AI trade. The level of debt that they've taken on has risen to$137 billion. But the market's real worry is now in the future, they've got commitments of a further$260 billion. Now, that takes their complete debt pile, including current and in the future, to the same size as their equity or the market cap of their shares. So the market's starting to get worried. And we've heard a lot this week about talk of the CDS spread.

38:45Now, Credit default swap is when the lender of that debt can buy some insurance. And that's quoted in percentage terms. So, for example, at the moment, Oracle debt is trading with a 2 % CDS, which means for every$100 million that is lent to Oracle, you can insure that debt for$2 million. CJ, is this something that you came across in your time as a fund manager in the bond market? Well, when I first started, Rich, no, because they didn't have CDS at that stage. When credit became a larger part of people's portfolios, sort of in the late 90s, 2000s, that sort of time, people started to say, well, hold on a minute.

39:30What new things can I invent that people can trade in the derivative space where I can lose more money if I want to? And people came up with a thing called a credit default swap. And as you've said, it's a derivative contract that transfers the credit risk of a borrower from one party to another. So you said just now, if I owned the bonds, I could buy a credit default swap, which is effectively buying insurance against it going wrong. But I don't have to own the bonds. I can be a hedge fund. I can be a speculator who says, I think that company is going bust. So I'm just going to buy the credit default swap anyway.

40:12So it gets more people involved than just the people who own the underlying loan, which hopefully makes a better market and hopefully allows that market to be quite good then at efficiently judging whether somebody's going to go bust or not. And just to put some numbers on that, the total market or the outstanding contracts on the$127 billion of Oracle debt at the moment is$23 billion. So it's a fairly chunky liquid market. But like you say, it's not necessarily the debt holders of Oracle debt that are involved in that. It is any private equity fund that has involvement in the AI area. And it's some of the banks as well.

41:00It's a way for everybody to hedge their exposure to that sector. So which is why the numbers are so big and it is so important. Now, there's things that people should remember just before we go any further with the credit default swap. You need a reference entity, i.e. who is the thing who you're having the CDS on. So in this case, it would be Oracle. There's a protection buyer, the person who wants to buy protection. Now, that might be me because I own debt already and I think they might be going bust. It might be me because I own exposure to Nvidia and I'm worried about Nvidia. I can't maybe do it in Nvidia, but I can do it in Oracle.

41:37It might be a naughty hedge fund me who says, oh, I think I can get people really worried if I start selling this or moving it the price. There's lots of different versions of me on show today. There's the protection seller and that's the person who says, I'm very relaxed about the risk of Oracle in this case. I'm happy to take the amount of money up front, this price, and that will compensate me for the risk of it going bust. And the final and most important thing with a credit default swap is the credit event. You need a definition of what is bankruptcy or failure to pay because in the past when this market was first developed, there were, shall we say, loose language about some of these things and therefore various bad actors could make things happen which triggered a default in theory, but actually the company wasn't defaulted at all.

42:33So those are the things to remember. We've seen Oracle down 50 % on the back of this. Everybody's watching the CDS. And as we've said, $5 or$6 billion could really move this thing out. Is there occasions where hedge funds might play in the CDS market, but have huge positions in the equity as well? you will find all sorts of people want to buy that insurance, including some equity holders. Some equity holders will say, I'm a bit worried about this. Now, I could sell my shares, but I'm not that worried. But what I could do is I could buy some insurance on the credit side because I know that I'll get a compensation there if something does go wrong with the shares.

43:20So there's all sorts of people buying it. And when things get difficult in CDS, it normally reads through into the share price. So your point is absolutely true. Those CDS prices moving higher will undermine the share price because at some stage, they've got to come back and borrow more money. And people are saying, well, hold on, you want to borrow more money and the credit ratings are not good and the risk premium is going up. You're going to have to pay more for it. So you can get a bit of a vicious cycle going where the CDS drives the shares, the shares then fall, they drive the CDS, the CDS, and it carries on like that until somebody steps in and stops it or there's a problem.

44:06Perhaps there'll be more opportunity for Donald Trump to buy some. Perhaps he shouldn't buy any shares. Perhaps he should buy the CDS. Well, it's interesting because Intel was in a very similar situation and was struggling. and along come the US government by 10 % of Intel, the shares doubled and then doubled again. And no problems from CDS, funny enough, because in theory, you've got the US government standing behind Intel now with a 10 % stake. So, interesting. But it is interesting in that respect where the equity goes lower as the CDS goes higher because another option, of course, is not for them to go to the debt markets, but to raise more equity.

44:42Do you want to just explain how raising equity is another option to raise that cash. Yeah, I'm sure those of you who have been invested in any sort of stocks and shares will have heard of rights issues or placings. So these are where companies, rather than issue more bonds, basically decide to borrow money by issuing more shares. And you might have, for every one share, we'll give you another new share, but we'll give you a discount on the new share of maybe 20%. So you would say, well, I'll buy that because it's 20 % cheaper than one they have. But of course, one and one makes two, and then you have to sort of work out the average price there.

45:15And the same with placings. If they don't want to raise that much money, they might come along and just say, we're going to try and raise, I don't know,£100 million. And we'll just issue sort of£100 million shares at£1 each. And then we'll get an extra£100 million. They issue it to certain people. Again, they do it at a discount to the current share price, which makes it attractive to new buyers or potential existing holders who want to get more but at a lower price. And that's another way of doing it. It's a very common procedure. It happens all over the world. And no one really blinks and hides in the eye.

45:43But the share price tends to move down a bit on the back of it because one, you immediately ask, why do they want to raise the money? If it's for an acquisition, it might be for restructuring. It might be to invest in their business or potentially very wise management issues that you need to deal with. And it's, you know, if they do it during distressed times, then the bigger the discount needs to be to persuade new shareholders to buy the new shares. And that was what we saw in Rolls-Royce in 2022, wasn't it? Rolls-Royce had to come with a huge dilution to shareholders. And it's this dilution idea that the people shorting Oracle at the moment can go for and really think that they can benefit from.

46:26So just to tie this back to the portfolio, what we've seen in the past two weeks is a lot of chatter about new Chinese models. And these Chinese models called Quen and Kimi, as well as, of course, DeepSeek are now being used by firms throughout the world. So for example, you're not just going to have ChatGPT or choose between ChatGPT and Claude. If you have a coding need, then you might use Claude. But if you want the lowest cost, you go to Quinn. And if you want a real good research piece, then you could go to chat GPT. But the important movement in the last few weeks is this expectation. It's not winner takes all anymore.

47:11So therefore, OpenAI might not have the pricing power that it used to in the AI space. And that's called into question, it's dominance, or the dominance of Anthropic, for example. Now, the reason that that is important with the CDS and with Oracle in particular, is because of these huge future commitments that Oracle has made and the debt that it's going to spend on data centers, its main client of 50 % of the contract is OpenAI. So if OpenAI doesn't have the pricing power and it doesn't have the dominance that it used to, will it be able to pay the contracts that it's got with Oracle? And that's why people are worried about Oracle equity.

47:59And it's why it's so important for the whole market now. Because if you don't have the use for the data centers, you don't buy as many GPUs. You don't need as much memory. And that's why the NASDAQ has just started to rattle a little bit. And we've seen a lot of rotation out of AI names and infrastructure names into other areas such as software. I mean, even this week is very interesting. I bring up that AMD or Advanced Micro Devices have basically investing$5 billion into Anthropic, which own Claude. So it's a very similar thing. And in return for that$5 billion, Claude or Anthropic are basically guaranteeing to give AMD a huge order for new chips to put into their computing power.

48:46And so the vicious circle goes on. As you say, chat GBT. This is very common. There's lots of these circular deals going on. And that's what's been worrying markets. And we've seen a big sort of de-rating of these companies over the last three months. You know, NASDAQ sort of has been struggling all year. It's been going sideways. You know, the big magnificent seven all peaked back in October last year. They're starting to do a bit better now, actually, because, you know, we're starting to see that maybe we saw this week with Alphabet and Google. They are getting revenues now. Revenues are 85 % in the business that is basically sort of the backbone of what they're doing with.

49:22Yeah, that's never mattered to NASDAQ, getting earnings. I mean, NASDAQ's been about not having any earnings. Now you've got them, which is boring. It is. Well, I mean, Amazon, just on that. Remember, Amazon for years and years and years didn't make any money because they were investing so heavily in the business. And they grew the business. The company became, you know, one of the first trillion dollar companies. And then suddenly they started making money. I went, oh, crikey, you know, now I can value it properly because there's nothing better than just an idea to value something. Hope beats facts every day of the week.

49:53Exactly. One day, Rodders, we could all be billionaires. So this is the really interesting, like nobody's saying that AI is not going to work or AI is going to create huge changes throughout the world. But it's just whether it's going to have pricing power. And so will these companies have big earnings and a return on the investment that they've made? Or will it just be a lot of low-cost tokens that the Chinese come in and flood the market? And therefore, you actually don't have these big American companies make the super profits. Well, you're missing the obvious point here. Donald will stop that happening.

50:34Because he will say, if you are a US company in any way, shape or form, you use Chinese technology for this, we won't allow you to sell your products into government or into other parts of the US. He's basically sort of closing in America to be all American. The Chinese will try undoubtedly and they will be cheaper. This is what started the problem is that 10 days ago now, Apple have done a deal with a Chinese memory provider, the DRAM, and it's been allowed. It's been allowed to go through. So is there a clear cutoff between US firms and Chinese technology or not? And that started to be called into question.

51:13Well, I mean, you know, there is this huge inflation, and tokenflation it's called, actually. We're talking to a friend of ours, Chris and I, who's building an AI model for stock selection, etc., and doing a great job of doing it. But he was telling us that tokens you buy in things like Clawed to do the work for you, The price got tenfold in the last six months. Yeah, but what that says is what Rich says, really. What that says is that if they can be vulnerable to competition, question, we don't let it happen. But if they can, they ain't going to win it because they need to make it go up ten times to get the return on capital that they've put in.

51:52You could argue it's too cheap before that. Well, you could argue that, but you could also argue that maybe the Chinese will keep doing it cheaply. I mean, these are all questions, I think probably for another day, but they show you, linking back to where you started, that the CDS is worrying about the credit quality of Oracle. And then the Oracle stock price is going, we're worried at what the CDS is telling us. So then the Oracle share price goes down lower. The CDS says, look at that share price. That's not telling us good things. So he's got to break that circle at some stage, I suppose what I'm saying.

52:25and it's always tricky to work out exactly what that's going to be. And that's what we're debating here and now. And for the portfolio, what is becoming more apparent is that there's a piece of software that sits in the middle now. So in corporates, everybody's using AI and they've got different tasks. So let's say we've got three different tasks. Spice has got a very complicated one to do and it's going to take a lot of computes, right? Right. I've got a very simple one. What time does the cinema start tonight? And then CJ wants to make a nice little picture to send to his wife. Right. Now, our three tasks before one company that was going to use Claude, and that would create all these, the expense and the demand for Claude tokens.

53:16Now companies are putting through a software aggregator, and that is choosing what's the most efficient route. So people aren't just having one AI anymore. They're having access to a whole range of them, which means that token prices across the board are coming lower and you've got more efficiency. And my Google search, essentially, is done at a very, very cheap, quick cost. So all the capex that's getting spent, does it actually have a return on investment? And right, so we're going into things that will take longer than just this podcast to go into, but I do a real preparation for you. Jeremy Grantham, who is a very clever investor, a value investor, but he's written a book on perma bears and how to create one and whatever.

54:07All about you, Chris. No, no. It was unfair, actually. I'll take it. I'll take it. I'll take it. If you want to really understand some of these arguments and you want to talk to him, He will argue the return on capital has not changed in 300 years. And everybody thinks it's suddenly moved up. It hasn't. And everyone's competing against each other. And so in the short term, things may move around a lot. But actually, in the long term, nothing has really changed. But look, let's not get too much into that now. We can come back to that. I think what Spice would argue, but I'm not letting him argue it, is if we look at our portfolio, we don't have a lot of exposure to AI.

54:47We've managed to keep him out of NASDAQ for some time, rightly or wrongly. I mean, we can look back. I'm sure we've had some good decisions, bad decisions. We had the VanEck, which had a good bounce this week because crypto's done a bit better. And there's been a bounce in some of these things. But overall, it's done nothing and it's been pretty poor. S &P has been mixing it around a bit as well. So I would argue we're already reflecting a view that we don't really believe what's going on there. That's what I've been trying to reflect anyway. if I failed and I'm not a very good chairman. But actually, at the end of the day, that's where we are.

55:22So I think the better question for us is, and this we'll have to wait for next week when maybe we can rehearse a few arguments on this, have we got enough negativity towards AI in our portfolio, i.e. from where we could be? Or actually, is there a buying opportunity starting to surface in some of these things? Because we all know that if they start to get very excited again, they'll be up 25 % before you can say, gosh, I'm a bit slow buying that. So I think those are good arguments to have. I like the way our portfolio's performed this week. With all the uncertainty around, we've had some good performance in there.

55:59I'm not suggesting any changes unless anybody's shouting anything at me. I'm looking at you both. I penciled on my little pad that I was going to bring up maybe buying some Nasdaq. There we go.

56:13Because you've had a huge derating of some of these very hot areas of the market. And yet the S &P 500, for example, and NASDAQ are only a few percent off their all-time highs. And there has been this rotation. Now, as you say, you just need one or two examples of where they are starting to make a good return. And these things will absolutely race again and take off. And the other area which will make you laugh is the mid-250 in the UK going up to full weighting, going up to 10%. Because I think we've had peak burn them in terms of bad stuff. We've got a window now until April next year when they have the budget.

56:49That's when, you know, perhaps we'll have to be a bit more nervous. But in between now and then, all the things he seems to be doing is about reducing costs for companies and hopefully for individuals, which plays into the UK domestic economy on a positive front. The main beneficiary of that would be the UK 250. Just things on my notepad. We don't have to discuss them now. No, I think we should discuss that. Let's make a mark for next week. we want to discuss the NASDAQ and the FTSE 250. We'll have a bit more evidence then on some of the earnings in the US. That's important. And a bit more evidence about what Burnham's saying in the UK.

57:22I don't dispute either of them because NASDAQ hasn't done anything and because the FTSE 250 is so lowly rated, it's only gone up a little way. It could go a lot further. Let's leave those for next time. So I'm suggesting no change this week. Good. We'll pass that one. And a few, a few got away with that. Okay, Rich, back to you. So there we go. We've given everybody the opportunity to front run us next week. Excellent. If they can move the NASDAQ, they're bigger than we are. They can certainly move the FTSE 250. Will there be a 250 left next year with all the takeovers? It might be the FTSE 238 or something.

58:00Yeah, it's going to get rebranded. Gentlemen, thank you very much. That is us out of time for the week. In fact, we've run over. So the sunshine is calling. Now, if there are any questions on email, where should people get in contact with us? The Art of Investing at IG.com Thank you very much. Give us a like, give us a subscribe, and we look forward to seeing you next week.