Big Tech’s Tipping Point Is Here: Jim Mellon On Biggest Short Of All Time

0:00I think it's a sort of a general tipping point in markets, and I've been calling it too early. You have seen that the U.S. market has not done well this year, actually, compared to other markets around the world. And I don't think most people appreciate that, although the U.S. market has done well over the last five years. It's been highly concentrated in what it's done. Now it's really looking pretty bad. And I think the main signal for that was the SpaceX thing, which I wrote in the master investor letter was the biggest short of all time. And so it has proved it's down 50 % now from its high, which is incredible for such a big IPO.

0:35And it exposed so many weaknesses in the US financial system. If I had to choose markets now, I would say UK smaller companies are extremely attractive. And you can see UK companies being picked off one by one, three or four a week, which is tragic. But hopefully there'll be other companies that come along and replace them, which is why I'm quite bullish on the UK. But we're talking there about P ratios are between 10 and 11. Pre-cash flow yields of about 9%, dividend yields of 4 % to 5%. It's extraordinarily attractive. I think we just repeat Muhammad Ali, dance like a butterfly and sting like a bee.

1:09You've got to be a gorilla in these markets. If you think that you can lay down your portfolio for the next 20 years and you'll be fine, then I think you're making a big mistake. And if you feel hesitant about the markets, just don't go into them. Don't feel that you have to be involved at all times and just wait it out. there'll be an opportunity to buy much cheaper. Welcome to the Master Investor Podcast with me, Wilfred Frost, where we celebrate and learn from the success of the greatest investors, business leaders, and politicians in the world, giving you, our listeners, the edge. The Master Investor Podcast is sponsored by LSEG, Interactive Brokers, the World Gold Council, and BNY Investments.

1:50Please do remember the views expressed in this podcast are for general information purposes only. Nothing in the podcast constitutes a financial promotion, investment advice, or a personal recommendation. More on that in the show notes. My guest today is my great friend, podcast co-founder and the legendary investor, Jim Mellon, who comes back to the podcast for the fourth time. I'm delighted to say, Jim. Very happy to be here. Welcome back. I'm very delighted that you didn't use the word veteran investor. No, but you just have. I know, because obviously I have a sore spot about it. Yeah, and that's not a very nice word to use.

2:33So I hope the other members of the press don't. And Jim, great to have you back. And we want to get straight into the action. And I didn't know whether to rejig things with oil prices pulling back today, but maybe we'll get to that next. But first off, we've had most of the mega cap tech earnings now for this quarter. Clearly haven't gone down that well with the market. one or two of them, massive single-day sell-offs like IBM and Google. What's your takeaway of some of those earnings and reactions to them? Yeah, well, I just looked up the MAG7 performance since the June 24th highs, and the average looks like to be down 30%, which is incredible, considering how big they are as a component of the S &P and also in terms of their huge size in funds.

3:20and I guess it's basically because there's investor fatigue setting in with the whole tech thing. There's an understanding that these companies are moving from being cash flow positive, we know this, to being generally speaking cash flow negative and in some cases maybe Oracle in a pretty precarious place and an understanding that there is no real sign that they're going to make any money out of all the expenditure they're making. So the business model has changed, not for the best. And the business they've gone into doesn't look like being a profitable one for a very long time to come, if ever.

3:55Do you feel like sentiment, whatever the sort of median investor is, has shifted to be net negative towards those business models yet? Or is it just the start of a tipping point? I think it's a sort of a general tipping point in markets. And I've been calling it too early. But you have seen that the US market has not done well this year, actually, compared to other markets around the world. And I don't think most people appreciate that. Although the US market has done well over the last five years, it's been highly concentrated in what it's done. Now, it's really looking pretty bad. And I think the main signal for that was the SpaceX thing, which I wrote in the master investor letter was the biggest short of all time.

4:38And so it has proved it's down 50 % now from its high, which is incredible for such a big IPO. And it exposed so many weaknesses in the US financial system. Down 50 % from its high, which obviously it surged to after IPO, but I think critically below its IPO price now. By a big chunk. Yeah, IPO at 135. It's at about 115, I think, in the morning. Do you think looking back that will mark the peak of this sort of subset of the tech market? I'd hate to make that forecast because I get them wrong generally. So I would say in my heart of hearts, yes, but probably 50-50. but it's hard to see what's going to recatalize it because you've seen all these darlings of the market, including the semiconductor stocks, which were up so much, falling back quite a lot.

5:24The semis are down 20 % from their peak now, and they're not displaying any signs of wanting to go back up in a hurry. Do you think there are any cheap US tech stocks at the moment? Yeah, I think there probably are, but it's a bit like the 2000 bust when the US tech stocks really fell a lot. Amazon was down, as everyone knows, famously by 95 % from peak to trough. It was a pretty good company, but it went down with the rest of them. So the good girls go down with the bad. And I think that we're going to see all of them underperform for quite a while, even though there are great ones out there.

6:00And I know that you've mentioned Microsoft as being a great exemplar, and it is. It's a compounding company, but it could just tread water for a couple of years, if not more. Yeah, this business model, the core business model, could be under threat as well at the moment. We shall see. Just finally, one that has moved in the opposite direction in the last couple of weeks is Apple. It's flat from its height. Okay. But in a relative sense, it's outperformed. And its market cap is pretty much at its all-time highs. If you look at that, obviously, they haven't overspent on AI, which was a question mark for them for most of the last 12 months.

6:38It's kind of interesting that the market suddenly decided to reward that in a relative sense. But it's multiples on a traditional price to sales or price to earnings assessment is as high as it's ever been. Yeah, maybe it's the safe haven in the tech area. And the fact they didn't spend and they're not spending, I think their capital expenditure this year is one tenth that of the other Mag7 companies put together, basically, which is incredible, frankly. They'll probably just buy in the AI or buy a failed company, of which there will be plenty. Let's talk about implications for the Iran war restarting.

7:17I mean, it's interesting timing to ask you about this because we had 11, 12 days in a row of the US hitting Iran overnight each night. And then we've had two in a row where they haven't done so. So just assess for us what you think is going on there. And if this two days is a temporary hiatus and the war does persist, the strait does remain closed for months from now, how big a hit is that, do you think, to the global economy? I think that the global economy is finding ways of getting around the Straits of Hormuz. The Saudis are managing to find ways of exporting their oil quite successfully. The UAE is building at rapid pace another port beyond the Straits of Hormuz.

8:03I think that the Straits of Hormuz could end up being, you know, not as important as people think. And already you're seeing China has found ways of producing oil consumption, drawing down its oil reserves and so forth. And the U.S. is pumping large amounts of oil and gas. So I'm not particularly concerned about that. But I do think this war could go on for a very long time because who's going to end it? I mean, you know, possibly the current hiatus is due to the fact that the U.S. has run out of missiles to do the big attacks on Iran. It's possible. I mean, I've been reading about the fact they just don't have enough patriots.

8:42And Iran's sending up these very cheap drones and the U.S. is using million-dollar missiles to shoot them down. It's an unsustainable business model or war model. You know, I think it was a foolhardy war to get into. I think most people would agree with that now. But getting out of it, it's a lot harder than getting into it. And he has his ally, Israel, which doesn't want the war to stop and will do everything it can to prolong it, I would imagine. Now, let's talk about oil prices. First phase of the war, oil went from, if we talk about Brent, went from 60, 70 up to 115, settled at 70 when the peace deal was signed and then got up to 99 last week.

9:21And it's about 91 this morning. It's pulled back a bit this morning. You last joined us in January, Jim, and very, very loud and clear. you made a big call for energy stocks and oil and gas stocks, which turned out to be a fantastic call, obviously, with the war that then began at the start of March. Where do you stand now on those energy stocks? Oil is obviously elevated from where it started the year, but off its, you know, April highs. Yeah, I don't think oil is going to go to 150. I think demand destruction will be well entrenched before then. As I mentioned earlier, I don't think the Straits of Hormuz is as a big deal as people thought.

10:03So we do have oil and gas stocks. I trade the oil market in and out because I feel that every time there's a threat, the oil price goes up. It's time to short it. Every time there's a lull, it's probably time to buy it. So that's what I've been doing. And it's been fine so far. I don't know how long that will last for. But I would say that I do think the North Sea stocks are very attractive because they are going to drill in the North Sea. I mean, clearly, Burnham has recognized that this is an issue that is going to damage labor, particularly hard in Scotland, but elsewhere around the country, that the Miliband argument for not drilling is just a very poor argument.

10:42In fact, it's not an argument at all. And that the UK North Sea companies will probably gain tax advantages, will be allowed to drill more than just beyond Rosebank and Jackdaw. and those stocks could look very, very good. So you're looking at companies like Ithaca as an example, which are big companies being attractive. So that's the area in which I've been focusing my attention in the oil and gas sector. And how have they traded in the last year? Well, they've traded well because the oil price is up and gas price for that matter and also because there's an anticipation that there'll be a relaxation of these really punitive rules which have discouraged.

11:27You know, it is absolutely true that we buy a lot of gas from Norway, which is right adjacent to our own fields, and that we're paying Norway to do stuff we could be doing ourselves. It's crazy, frankly. And at the start of the year in January when you joined us, making a big call for the broader kind of either oil majors globally or some of the sort of services names and gas names in the US, Have you faded some of those positions? Definitely. Because, you know, the pricing has moved up and they're not as attractive as they were. I mean, we were looking at oil and gas as being then in January as being something between three and four percent of the indices in the United States.

12:06It having been in the 70s and 80s above 20 percent. It's crazy because energy is the the important transformer of of capital and labor into output, basically. And there is no substitute for fossil fuels for the foreseeable future. And they still represent a huge part of the world's energy consumption. But that percentage went up and it went up to a level which I deemed to be sufficiently attractive to let it go, basically. That's really interesting. Let's touch on yields, which has obviously picked up in the last month quite significantly, partly because of the war restarting. But I think it's broader than that.

12:50It was a factor, by the way, that Jamie Dimon warned about very clearly in our last episode and referred people back to that if they haven't gone to it yet. Do you think the pickup in yields is a sort of range bound factor that we shouldn't get too worried about? Or is there a probability or a risk that this is a real tipping point for global debt markets? That's a very good question. Basically, I don't see it being a tipping point yet, but I do see the escalation in debt in major economies around the world as being a future tipping point. Because at some point, you know, the debt levels will be so high that the price of that debt will have to go up to compensate for the fundamental risks that the governments are going to try and inflate their way out of the debt.

13:38But at the moment, the signals from an economic point of view are quite mixed. You know, the U.S., there's a good chance it's going to, the Fed will raise interest rates a little bit this week. There's a good chance it won't. It should raise interest rates because I think the monetary policy in the United States has been a little bit on the loose side. But the employment is very mixed. You know, you're seeing general employment being quite strong. but wage growth is weak. It's very weak actually at the moment. It's down below 3 % in the United States and that's not consistent with an inflationary boom.

14:16It's definitely not an inflationary boom going on in the United States. So I would say that we're in this range and in fact if I do occasionally trade bonds I would just trade the range. We're probably towards the upper end of the range at the moment so bonds are a buy and I would only buy the long dated ones because you don't get a sufficient leverage on the short-dated ones.

15:04This podcast is sponsored by Interactive Brokers. Building wealth starts with the right broker, and Interactive Brokers helps you reach your goals with powerful tools, global market access, low costs, and unmatched financial strength. That's why the best informed investors choose IBKR. Learn more at ibkr.com forward slash master investor. A bit this interesting, you think that ultimately Besant and Walsh and Trump will keep a lid on the potential disaster scenario of US Treasuries falling out of bed? for the moment because there's still sufficient foreign capital coming into the U.S. to allow it to continue in the way it's been going.

15:52But you know, in the next Senate, I think you probably know this as well, Social Security will become effectively bankrupt. It won't have enough money. So they'll have to print more money to pay for Social Security in the U.S. They have less discretion to cut expenditures in the U.S. and they have no desire, as far as I can see, to cut expenditures and their fiscal deficit continues to be awful. In fact, it's much worse than Japan's as an example. Do you think that there are other countries that could drag yields higher or the US is the anchor? I mean, clearly UK yields have been a focal point.

16:26Japan, you mentioned France, could be an interesting one with the presidential election next year. Or will the US kind of dance to its own tune? US is by far the most important. Japanese yields have to go up. The Bank of Japan has not been taking the necessary measures to tighten. But, you know, the inflation in Japan is definitely something that they haven't experienced for a very long time, so they're probably not used to it. It's like a sort of runaway horse being confronted with a human being for the first time. They don't really know what to do, but they're going to have to tighten policy, and that will obviously affect, hopefully, my very bad call on the Japanese yen so far.

16:58But I think the US is the most important. In the UK, I think things are okay here, actually. I don't think they're as bad as people think. I mean, obviously, it could be a lot better. France is interesting, but it has the sort of overarching backing of the European Central Bank. Whether that's good for forever is another matter. But their debt is much, much worse than the debt here. Yeah, they've got a big problem. I think it'd be interesting as we approach the election next year, whether political instability affects their yields in a standalone way. Clearly, in the meantime, they're backed by Germany and the rest of the ECB, but we shall see.

17:38It's going to be a very interesting presidential race there. Let's talk about the yen then. Yeah. Firstly, just remind our viewers why you have been very bullish on the yen long term. Yeah, well, it's partly because Japan is incredibly cheap. Now, that's an anecdotal point, but it is absolutely true. So I don't know if you know this, but the Japanese economy and the British economy are roughly speaking the same size and gross national output. And if you go to Japan, that should not be the case because they have twice the population. And ostensibly, Japan is a pretty advanced economy. So there's something fundamentally wrong with the pricing in Japan, as indeed there is in China, for that matter.

18:26Secondly, although Japan is indebted, its corporations are stuffed full of cash. Its consumers have very large savings, as we all know, and are not indebted. And Japan basically sells its bonds to its domestic audience, so it's not dependent on foreign inflows. It has a large current account. From time to time, it has a large current account surplus. Certainly, it's a much better trade position than the United States is. But most importantly, Japan is by far the biggest international creditor. It owns more assets around the world than any other country. And at some point, I don't know when that is, and I've got that timing completely wrong.

19:06the Japanese and there's already signs that the Ministry of Finance the Bank of Japan are trying to encourage investors to bring back money into the country the Japanese will as they always do stampede back into their own assets and what those assets are I don't know and that will improve the value of the yen I don't know how much by it but it's definitely been a bad call of mine and it goes against the fundamental principle that I always tell people I have which is that a foolish consistency is the hobgoblin of a small mind. In other words, you have to change your mind. And I've been very adamant on this particular position.

19:43Maybe I'm wrong, but I have my cash reserves, a lot of them in Japanese yen. It's not been great, but it's not been a disaster because I'm not a currency speculative person. I'm not taking on billions of dollars like George Soros or anything like that. But I do think that at some point, this call, of course, every call eventually will be right. But you've got to look at the long end of the Japanese bond market. You can get something like 4 % on that. If they get to 5 % of the yields in Japan, they're as attractive as US yields. And fundamentally, it's a much better bet, basically. And I mean, listen, it's interesting that you have continually reassessed the position and you do stick with it.

20:23In the short term, clearly it's interesting that you think the Fed is going to hike potential. Maybe the risk of a Fed hike is higher than the market expects. Are those types of factors priced in again in the short term? Do you think that would hit the yen to the downside in the short term? Or is it not really reacting too much to those yield differentials? I think the differentials now are not nearly as great as they were when you basically had zero against 4%. At the long end, 4 % against 5%. And any hike by the Fed will be a quarter of a percent. It will be de minimis. And it's probably, I would say the market is expecting 40, 60 that there's a hike this week.

21:04And just elaborate for a little bit on, you mentioned China there, because there's sort of similar arguments towards the start of the year, towards the Chinese Yuan and the yen. But the Yuan has sort of responded. So why has there been a difference, do you think, there? It's because you can't trade in the yuan, basically. It's as simple as that. I mean, if you and I wanted to put our money into Chinese yuan, it's almost impossible for us to do it. You can if you're a Hong Kong-based person with a yuan account, but fundamentally it's really hard to trade in it. And so that's the reason, whereas the yen is extremely liquid and is subject to huge flows of capital, trade, and speculation, basically.

21:48And then just remind people the scale of your conviction if we're at 160-ish. Yeah. If your view plays out, where does it go to? Well, someone said that the Japanese yen tends to halve over a 10-year period and then double in a two-week period. And so I would say that we're looking at – and the yen has gone, by the way, from 80 to way above 200 in its range in the last 25 years against the U.S. dollar. And I would say that we could see 110 to 120 on the Japanese yen against the US dollar. And I recommend that if anyone wants to just check out how cheap Japan is, just go and look at hotel prices or prices of meals.

22:34And you can live in Japan, in Tokyo, for, I would say, at least half the price, less than half the price of London. Hi, guys. It's Wilf. I hope you're enjoying this episode. just a quick reminder to please hit follow or subscribe on your podcast or video app so that you never miss an episode and if you've got time please do give us a five star rating and leave us a comment it really helps other people find the podcast too now back to the episode and for people a lot more on this um i suggest they go back to our episode with louis gav from gav cow we talked about that as it relates to uh china as well and how cheap it is to to stay in you know a four seasons in Beijing compared to London or New York and also in Tokyo.

23:22Jim, let's talk about gold and silver because, again, this is a call you got very right from your first appearance on the podcast over a year ago. You're very bullish over a long period of time. And obviously, they surge into the start of the year and you tempered your enthusiasm then. Gold peaked at 5 ,200 earlier this year. It settled around 4 ,100. Silver peaked at 110 earlier this year, and it settled down around half that level-ish at around 60. What's your view for each of those two, short-term, long-term from here? Well, short-term, I think they're still going to be under pressure, you know, and it's very hard to cut through the noise on gold and silver because there are so many bulls on both of them, you know, who are sort of demented bulls.

24:08They've been bulls for 50 years, basically who never see any opportunity to sell and maybe get back in there. But what I would say is that over the long term, they're both going to do very well. They're going to preserve your capital, which is what they're designed to do. I'm not in gold and silver at the moment, except for the miners. Silver miners are very difficult. There's only a few of them. But there are plenty of gold miners out there which are making very large profits, even with gold at 4 ,000 rather than 5 ,500. And they're all in sustaining costs of the production, generally speaking, around$2 ,000, even despite inflation and some of the inputs go up to make a mine cost.

24:53So they're generating huge amounts of cash and some of them forward hedge. So there are gold miners out there. I highly recommend that people look at those generating huge amounts of money. And as long as gold doesn't go down to, say, 3 ,000 or 2 ,500, which I don't think it will, because the central banks still remain buyers of gold, then I think they're extremely good buys. It's the same with oil and gas. You know, sometimes you buy the oil and gas. Sometimes you buy the stocks. At the moment, you buy the gold and silver stocks. Give us a few examples. Well, I've got – I own Equinox, which is a company that sort of morphed, and it's a very big Canadian producer.

25:34So it's one of the very largest producers. It's probably, I mean, if I said it was selling at three times cash flow, I think that's pretty accurate. I own a, which I've owned for a long time, something called metals exploration because we sold our Condor gold into it. And that looks very cheap, very leveraged to the price of gold. So, I mean, those are two examples, but there's plenty of other ones out there that, you know, or just buy the gold ETF, you know. The gold miners ETF. Yeah, yeah, exactly. Rather than the underlying gold ETF. Let's talk about different geographies, Jim. And you mentioned that the US hasn't been the best performer this year geographically.

26:17Which are the sort of countries or regions of the equities that you hold at the moment that you're most drawn to? Are you doing it company specific or are there countries that you think stand out? Yeah, again, a great question, because I think you should be pretty nimble on your feet at the moment in the current market. You know, if you looked at the markets at the beginning of this year and we just sat there and said, well, this is what we're going to do for the whole of the year. Almost certainly we have ended up losing money because of the massive churn. Like we're just talking about the Mag 7, you know, drawdowns of 30 percent from June.

26:52It's incredible. and that's applied to markets almost everywhere. But if I had to choose markets now, I would say UK smaller companies are extremely attractive. There are plenty of investment trusts out there that sell at discounts that are stuff all of these and you can see UK companies being picked off one by one, three or four a week, which is tragic, but hopefully there'll be other companies that come along and replace them, which is why I'm quite bullish on the UK. But we're talking there about P ratios are between 10 and 11, free cash flow yields of about 9%, dividend yields of 4 % to 5%.