Shownotes Transcript
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Today's number, $75,000. That's how much a ticket to the Met Gala costs, but you have to get invited first. Ed, I don't know if you saw the poll in Vogue that showed that 29% of women have never masturbated in the same poll as men.
It showed that 29% of men masturbated over the phone. I don't know why I find that so funny.
I'm in Hamburg, Ed. How are you? How are you? Welcome to Rob G. Marcus. It's not even that funny. Yeah, it's not even that funny. I think you're just in a good mood. Last week, I went to my own gala. I went to the- I need to interrupt you, Scott. You don't have to pronounce it Gala. Gala. I'm sorry. It's the Met Gala. There we go. Met Gala. Gala. Gala. You went to Princeton, right? Anyways, but last week, I had to go to the- No, I'm just a person. Shut the fuck up. I'm telling a joke.
Last week, I was invited to the premature ejacula gala, and I came in my jeans. Okay. Aren't we interviewing the head of J.P. Morgan today? That fits, doesn't it? Yeah, we got a big guest on today. Yeah. Okay. Hopefully, he's still down. What's going on with you? I'm doing all right. It's a pretty rainy, foggy, disgusting day in New York. Apparently, it's going to rain throughout the entire week.
So it's a good thing you left, I guess. I'm coming back tomorrow. Oh, is that right? That sucks. I was hoping for a nice spring week in New York. No, no, no. It's very, very ugly in New York right now. It is beautiful here. Where, in Hamburg? Yeah. I mean, it's gorgeous. Have you ever been here? No. I think you'd like it. You come across as very German to me. You're big and handsome and kind of boring. You're sort of...
You're very German. You'd fit right in here. Hell yeah. You'd be like, I loves your content. Oh, yes. It's the one that speaks about the men that are lonely, no? Ja? Everyone's so nice here. Can I get a selfie? It looked like a pretty good crowd. Oh, we're big in Germany. I'm pretty impressed by that event. What is that event? They were like...
thousands of people in that audience. Oh, I'm our online marketing rock stars. I spoke, I'm not exaggerating. I think, I think I spoke in front of 11,000 people. Yeah. It looked like a stadium. Yeah. I used to get really nervous. I don't even get nervous anymore. I don't know. I think it's because I'm barreling so fast towards death. It's like, who cares?
Who cares how it goes? That's good. That's a superpower. Yeah. What did you do? Wait, it's the weekend. What is it, Tuesday? What did you do? Have I seen you? I don't think I've seen you. What did you do this weekend, this past weekend? Um... Okay, that's fascinating. Get to the headlines. Now it's the time to buy...
I hope you have plenty of the wherewithal. President Trump has authorized a 100% tariff on films produced outside of the U.S., calling the issue a, quote, national security threat. Netflix, Disney, Warner Brothers Discovery, and Paramount Stocks all fell on that news. However, the White House clarified that no final decisions have been made.
OpenAI has scrapped its plans to become a for-profit entity, opting to keep the company under the control of its non-profit board. CEO Sam Altman said the change won't affect access to a $30 billion investment from SoftBank, which was partially tied to that restructuring.
And finally, Warren Buffett announced he is stepping down as CEO of Berkshire Hathaway. The stock fell 5% following the board's unanimous approval of Greg Abel, who is the vice chairman of non-insurance operations. He will come in as Warren Buffett's successor. Scott, let's talk about these movie tariffs, this next set of tariffs from Trump that
um, on Hollywood, I, I should point out, you know, I think the trend here that Trump is trying to address is,
He's not wrong in what is happening, in the idea that production is moving out of the US. It's moving away from Hollywood and towards foreign markets. That is actually true. We're increasingly seeing this content that's filmed in places like the UK, Canada, Australia, New Zealand. Actually, most of the Best Picture nominees at the Oscars this year were filmed outside of America.
And I would imagine that the data point that was placed on Trump's desk here, and which he is reacting to with this new tariff order, is that US-based spending on big budget films has fallen 26% in the past two years. And meanwhile, in the UK and Canada, spending has increased. So his diagnosis here is correct. We are seeing production moving into foreign nations, right?
As usual, though, my view is his treatment is just god-awful. Let's hear your views on this move. Oh, first off, when he threatens a tariff, it has about as much impact as when I threaten to take my 14-year-old's phone away. It's like—I mean, at some point, everyone just—I mean, okay, the stocks were down 2%, 3%, 4%. I don't know if they're back today, but I—
If this were real, if they thought there was any legitimacy, if this president actually did what he said around tariffs, he is doing what he said he would do around some of the other issues. But tariffs, I mean, I don't even know how you would calculate this tariff. The most recent thing I've seen is that they would tariff the amount of the subsidy that goes into that film.
And you could argue that, all right, what they're doing is sort of the equivalent of dumping, and that is a subsidized production in Canada, which brings the pricing down. And then they dump that less expensive film back into the U.S. I guess you could make an argument for that. But states do the same thing. On the original scripted Netflix drama that I am an executive producer of, I don't know if you heard this, I'm doing a drama about big tech.
We're likely going to shoot in New Jersey because New Jersey is offering a 30% tax rate. And Netflix, which has made a lot of people a lot of money and is employing a lot of people in Los Gatos, those people have made a shit ton of money. Now, it has come at the expense of a lot of production executives in Los Angeles, you know, the caterers, the gaffers, the sound people, as now I think over half of Netflix's content budget is spent overseas. Right.
So this is an issue. I don't know how you would even tariff it. And it's also the wrong fight to pick because we are a net exporter. There's very few industries we dominate, maybe with the exception of universities or you maybe can argue weapons. Well, it's not true of technology as well. But one of the industries we absolutely dominate is media. And this is a gift to a lot of nations who would like to say, okay, you're going to tariff us 100% on content coming back to the U.S.,
We're going to tariff any content media from the US. The next Fantastic Four, Avengers, Big Bang Theory. We're going to tariff 100% because we'd like to prop up our own media efforts and make them, you know, exit them from competitive pressures. If you want to save Hollywood...
you need to figure out a way to make it cheaper to make these movies. And I don't know exactly how you do that, but it probably means something like what you were describing with your Netflix show in New Jersey, where there are rebates and tax incentives that make the economics make more sense. If you really want to save Hollywood, that's how you do it. But instead, what he's doing here is he's made the only viable economic model, which is foreign production, he's just gone and made it more expensive.
which is only going to accelerate the death of Hollywood.
So, yes, maybe production will come back to America if these tariffs go through, but it's not going to make it cheaper. It's going to make it more expensive. You know, there's a reason why production moved away. And who's going to bear the brunt of the price increases? I mean, maybe it'll be Hollywood, but if it's not Hollywood, it's consumers. It just means your monthly Netflix bill is going to go way up, your Max bill, your Hulu bill, whatever it is. If Netflix, all of a sudden, if Ted Saranda says we're going from $12.99 a month to $17.99 because of tariffs...
You know, you have 300 million people or whatever it is, 80% of the households in America have Netflix. We're like, well, okay, I'll vote for the guy that'll bring my Netflix costs down. And it's not this guy. He'll realize that. He'll start having, getting calls from Hollywood saying, look, we don't think this works. We don't know how you do it.
And he'll say, I'll come up with some sort of weird exemptions and gymnastics. Exactly what he did with Apple. And by the way, you made this point, but it's like the parallels with Apple, it's identical. It's like, oh my God, the iPhone price is going to go up. People are going to be upset. And then he concedes to Apple and he makes the exemption. Yeah. And even if these things go through, which they won't, it's the small and medium-sized production companies and documentary filmmakers that get hurt, not the big guy that's worth anything.
you know, several hundred billion dollars. But this won't go through. The notion somehow that we're, you know, we've been the losers here. I don't know if you saw Buffett's statement, his kind of goodbye or farewell speech, but he was so intelligent. His comments were so insightful, basically saying,
The current administration takes this win-lose approach to the global economy. That's right. Zero-sum game. Yeah, they believe that because China's done well, it must mean that we've done poorly. No, you have to—and I was guilty of this when I was a young man. I used to think that the less I could pay people or the better end of every deal, I would do better. And then what you realize is that if your business partners make really good money, you're going to have a great partnership with it. If the people working for you make really good money, you're going to have a great company if you can figure out a way to do that.
That it's absolutely when other people prosper, you're going to prosper. And he basically said other nations need to prosper. And if you think that if their children aren't doing well, you can protect our children from that, that's really naive. Yeah, it's what Ryan Peterson said. It's trade is a positive sum game. It's econ 101. These guys think it's zero sum. There are some certain zero sum games such as dabbling in Trump coin.
But the rest of the economy, if you're establishing real value, it's positive sum games. It just doesn't make any sense. Well, by the way, I saw you, you little whore. I saw you on the Bulwark podcast with Tim Miller and another young guy. You were very good. Actually, let's play a clip of that.
So there's this saying in crypto, which is have fun being poor. If you need such a level of distraction that you can't figure out a way to save a little bit more money than you spend, if you're so bored by the phrase S&P 500, which is not that big of a deal and it's actually not that complicated, if you just do a tiny bit of Googling, my response to you is have fun being poor.
That's what I would say to you. Fucking reading me for filth, bro. Eat that shit, Cam. It's the same thing that I would say to the people who supported Donald Trump, who thought they were going to reshore all these jobs into America. And now we've got tariffs, which is a tax on consumption, which is going to largely affect poor people. Have fun being poor. You were very good. Oh, thank you. Appreciate that. Let's talk about OpenAI, which is...
abandoning these plans to become a for-profit entity. That's the headline, at least. Just some context here. OpenAI, you might remember, it was originally a non-profit organization. It was sort of this research lab where they were investigating the impact of AGI. They eventually started building products and raising money, and then they changed their structure. And the way they did it
They created this new for-profit subsidiary company that was still controlled by the non-profit entity. But this subsidiary company, that was a for-profit that could focus on maximizing profits, maximizing shareholder value in the same way any other company would. Now, as of last year, the plan was to completely detach from the non-profit structure and
You know, they wanted to cut ties with this nonprofit entity and this for-profit subsidiary would become its own company. It would basically become a regular company. And that was the plan. And you might remember this was the contingency upon which some of these investors like SoftBank invested in their latest round. Okay, so they're scrapping that plan. They're going to remain under the control of the nonprofit board.
They're also turning the for-profit entity into what's known as a public benefit corporation or a PBC. This is basically just another term for a company that makes money but also pursues some sort of social goal. So,
I think this is all a giant distraction, a giant head fake. I think it's all meaningless language. I can get into that. But before I do that, Scott, your reactions. I've always thought that public benefit corporations are essentially massive virtue signaling. These VCs say it's a public benefit corporation, but as long as I get 200x, you know, I'm fine with calling it whatever. I don't really understand what it is other than a bunch of hand-waving and virtue signaling companies.
That is any different about a public benefit corporation. That's right. And now they're lifting the cap. They're saying, well, the original investors don't get capped at 100x. They're uncapped. I have no idea how effectively this changes anything other than semantics, nomenclature, etc.
and some sort of more jazz hands that this company is not going to pursue shareholder value. The only substantive change is what you just said about getting rid of the capped profit structure, which they talked about for a long time. They said, we're not a normal company because you can only make 100x return, which is hilarious because 100x return is just gigantic. So it's not really saying much, but they're getting rid of that now.
And so actually it's an unlimited profit. It's just a regular company now. So that's the only substantive change here. So I love what you say there, nomenclature engineering. That's exactly what this is. This is so meaningless now.
And just such a load of bullshit. The fact that we're even reporting on it and saying that they're scrapping their for-profit plans, that's not true at all. Of course they're going ahead with being a for-profit. Just a few reasons why it's meaningless. One,
Public benefit corporation, as you say, this is a seriously bullshit concept. It's the same as ESG in the sense that it's all talk, no action. It's this new legal entity that was formed in the 2010s. I think it should never have existed. But you basically just say that you are pursuing a social goal.
And you show like a little bit of evidence that you're trying to do that. Some like annual report saying, look, we're trying to benefit society. And if you do that, then you qualify legally as a PBC, a public benefit corporation. Any company could qualify. Like if Exxon wanted to be a public benefit corporation, it could be. They could just like explain how they're fighting for climate change, whatever it is. So that's the first thing. The second thing is they're getting rid of the cap profit structure.
The third thing that I would point out, as I've said before, SoftBank said they would cut their investment if OpenAI didn't become a full for-profit by the end of the year. So I was very interested to see when this news came out what SoftBank would do. Would they cut the investment from $30 billion to $20 billion like they said they would? And what do you know, they're not cutting their investment. Why aren't they doing that? Why are they keeping their original $30 billion?
Because they got rid of the cap profit clause. So their issue is resolved now. They can still make a ton of money and it's just a regular investment. So that's the third point. The fourth and final point that I would say here, the only thing that makes OpenAI even slightly resemble a nonprofit is the fact that the board of the nonprofit entity technically governs them.
But if OpenAI wanted to just go full steam ahead and print money, there's no chance in hell that that board is going to get in the way. And the reason I say that is because this has already been tested back in 2023.
when the non-profit board thought that Sam Altman was... They had a loss of faith in the CEO, Sam Altman, and they tried to fire him. And what happened? Sam Altman was just reinstated, and then they just installed an entirely new board of people who weren't against him. So all of this is to say...
None of this news actually matters. This is all just bullshit corporate speak to make you think that OpenAI is some like nonprofit. It's just a company. It's like any other company, which by the way, is not a bad thing. Like I think companies are great and they can do great things, but I'd love if they could just be honest about that
Recognize upfront, yeah, our goal is to make money. Enough with Sam Altman going to these Senate hearings and saying, I don't have any financial stake in OpenAI. I don't care about making money. Like, everyone cares about making fucking money here. And that's okay. It's not a bad thing. But we don't need to just pretend that it's like some sort of charity. It's not. It's a company. Just as I read through this, it becomes...
I think more clear that likely what happened here is the following. They have this nuisance lawsuit from Musk. And I think their lawyers came back, OpenAI's lawyers came back and said, say you're becoming a PBC and you inoculate yourself from this lawsuit.
That fundamentally you have the same dynamics are in place here, but you become less prone to any legal argument that Musk is making. And to clarify, Elon Musk filed a lawsuit against OpenAI saying you're not allowed to become a for-profit company, you were established as a non-profit. So to your point, yeah, maybe they're just doing this to make the concession and not have to fight the lawsuit. In which case...
maybe the nomenclature engineering is actually a great idea. Yeah, I think what he was really saying is, Sam, you're not allowed to make more money than me and have 7 million kids. Anyways. Let's talk about Warren Buffett, who is retiring as the CEO of Berkshire Hathaway. Um,
A pretty big moment in the business news world, Scott. I think you made this point when we were talking that CNBC's gonna have like a seven-day wake for the guy. He's not dead, but he's retired. Technically speaking, it shouldn't be a big deal because the guy's 94 years old. He said he was gonna retire. Now he's retired. He's even still staying on as chairman of the company.
But I think the reason that it's important is because the reaction has been so gigantic in the news and in social media. Because I think that what that tells you is that there was something about this guy, this seemingly regular dude who lived in Omaha, Nebraska, whose favorite food is a quarter pounder with cheese from McDonald's. Something about him just captured people's imaginations. And I don't think it's just that he was rich.
You know, you got Larry Ellison, you got Steve Ballmer, you got Sergey Brin, all these guys who made as much or more money than him. None of them have had anywhere near the level of impact that he's had. And I guess I've just been thinking like, you know, what do people love about Warren Buffett? What has made him such an iconic figure in our industry? I think it's two things.
that are quite rare today and that are especially rare in the business world and in the investing community. First thing is he was an uniquely humble person. This is a guy who's lived in the same house for 65 years.
His favorite restaurant is a diner in Omaha. He's never cared about the money and the yachts and the jets and the spaceships, all the stuff that you see with the Mark Zuckerbergs and the Elon Musks. And I think it's just refreshing to see that from a billionaire. So that's the first thing. The second thing, and this is the part that I admire about him, is that he was a uniquely sensible person.
I mean, I just think about all of the investments that he could have made with Berkshire Hathaway, that all of these other investors got carried away with. The crypto, the SPACs, these sort of unprofitable moonshot tech bets where you could have seen a thousand X return, or at least that's what these guys pitch. You know, he could have got involved in any of this stuff.
And he's got such a cult following, he could have really pumped as much as he wanted to, but he was never distracted by that. You know, you look at his portfolio, every item is a sensible, value-based product.
safe investment. He was laser focused on value investing. And I think that's what I admire most about him, how sensible he is, especially in a world where you look at all these billionaires, they only seem to make sense like 5% of the time. In some, these kind of swashbuckling maverick finance guys, especially in the investment community, they have a tendency to be, I don't know, what's the term? Assholes.
And this guy isn't. This guy came across as pretty kind, married to the same woman, living in the same house. One of the things he always said that I adopted, I basically stole, was that the most important decision you'll make your whole life, he gave a lot of life advice, was who you decide to marry. And also just someone who is in some ways caring for, my dad's 94, he'll be 95, and
His mental acuity and his sharpness at 94 is just simply remarkable. My dad was in the Royal Navy, incredible fitness his whole life, genetically blessed. And I can tell you, at 94, just wait till you're taking care of a parent at 70 or 80, you're going to realize...
This guy is not only remarkable, he's incredibly lucky. And it says a lot that the day that a 94-year-old CEO retired, the stock dropped 5%. Like, if you told me that sentence, I'd be like, okay, the stock's going to skyrocket. People are probably waiting for this guy to retire. But total opposite. I mean, people still trust him so deeply. And they have good reason to. Just a number here.
Berkshire Hathaway stock since 1964 has returned 5.5 million percent. If you invested $10,000 in 1965, it would be worth $26.7 million versus $1 million in the S&P 500. Massively outperformed the S&P for many, many years, which is almost impossible to do as an investment manager. I will end with one Buffett quote that I love. Someone asked him, what does it mean to be rich?
He responded, quote, "'If there is a place that is warm in the winter and cool in the summer, and you do what you love doing, you will be fine. You are rich if you are working around people you like. You will make money if you are energetic and intelligent. This society lets smart people with drive earn a very good living. You will be no exception.'"
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Welcome back. Here is our conversation with Michael Semblist, the Chairman of Market and Investment Strategy for J.P. Morgan Asset and Wealth Management. Michael, thank you very much for joining us on Profiting Markets. You're welcome. Morning. You are in charge of Investment Strategy at J.P. Morgan. J.P. Morgan is probably the largest financial institution in the world.
You have what I would consider like the front row seat to what's happening in the capital markets. I mean, I think about where Scott and I are situated. We comment on stuff, we make predictions, but we're in sort of row D or E. You are kind of court side. So I'm very grateful to have you on today. I want to start with a trend that Scott and I have been discussing a lot on this show, which we have been calling the global rotation. This idea that
After tariffs, something happened and the flows of capital globally started to shift or rotate away from the U.S. and into foreign markets. And that the consequences of that could be systemic, structural, permanent, however you want to call it.
What are you seeing from your seat? I've talked to Jamie and a lot of other people about this because I know they have a lot of conversations with people in Washington. I think they have a Fabergé egg situation here that they don't appreciate, which is they're doing all of this after a period of several trillion dollars of inflows into the United States from foreign markets, whether it's credit markets, real estate markets, equity markets, etc.
And if you look at something called the net international investment position, which measures this kind of thing, U.S. liabilities to foreigners have never been higher in absolute terms or as a share of GDP or as a share of anything you want to normalize it by. So it's a peculiar time to do something that might inadvertently result in a sell America thesis. So far, the movements have been small.
But you're absolutely right. The average globally large money manager, sovereign wealth fund, insurance company, endowment and foundation is massively overweight United States assets versus the rest of the world. So the starting point is that elevated risk-taking in the United States. When you say the movement has been small so far—
What do you mean by that? Because at the same time, you're explaining how the – I mean, from what I've seen and from what I've read, it's the biggest jump we've ever seen in terms of outflows converting into inflows into other markets. So in what sense is it small? Where are we on that spectrum? It's small relative to the –
trillions of dollars over many years that came in. Yeah. Right? So you can have the largest ever outflow that's only 6% of the cumulative inflows. Right. So that's why I'm... That's why this is a very potentially imbalanced situation. And you remember...
in the 80s when they thought the dollar was overvalued and they tried to just nudge it down a little bit and then they lost control of it and then they had to have another accord later to stabilize the dollar. These things are not, these things don't behave linearly. You can't just encourage a little bit of capital to leave the United States. That's hard to do. And one of the charts that we monitor is this thing called a sell America thesis. And it's technical, but it's
How many times over, let's say, any three-month period did U.S. interest rates go up, the dollar goes down 5%, equities are down, let's say, 10%, and U.S. equities underperform the rest of the world by 10%? That happened last month for the first time since 1982. So...
To me, that was a bit of a warning signal. That was the same week that they started to trot out Besant as opposed to some of the other protagonists here to try to calm markets and stabilize things. But they have to be very careful with this massive amount of capital that's flowed into the United States. I mean, the average institutional account –
is substantially underweight Europe, Japan, and now China after several years of Chinese economic inequity underperformance. So the starting point is really important to think about. Good to see you, Michael. So one of our core theses here is that markets are cyclical. And if you look at the U.S., especially if you include enterprise value or debt, that the market, the U.S. market is just quite frankly maybe overvalued. And that if you see multiple contraction,
the types of which we think it's going to happen, it's going to be very difficult for any U.S. company's earnings to outrun that multiple contraction. And that is we are, and I'm just doing this personally, I'm selling down my U.S. equities and I'm investing in Asian and European equities. And the thesis is pretty simple. The reason we get 24, 26 times $1 of earnings in the U.S. is
Risk aggressiveness, great universities, IP, rule of law, consistency. And some of those things seem to be not as dependable as they once were. And we might see a re-rating down. And some do buy our thesis that
It's time to sell U.S. and buy overseas. Yeah. Thank you, Michael. Well, you had the perfect storm in favor of massive U.S. overweights. I've been, you know, I'm the one that directs our asset allocation. And I started writing about overweights to the U.S. against the rest of the world right after the financial crisis.
And it was about 2010. So we've been writing this for a really long time. And one of the triggers, by the way, that was interesting was for all the grief that the politicians get about the financial crisis,
The stress testing that Geithner did was pretty real. And that was a signal to them that they were serious about cleaning up some of the excesses in the banking system that took place. So that was the catalyst for us to kind of get started on this U.S. exceptionalism theme. And then we started looking at other things, which is sector by sector by sector, the U.S., and this is still true today, has higher ROE and higher ROA than their counterparts in Japan and in Europe and in China.
So, but some of those things are starting to erode a little bit. But the U.S. outperformance wasn't just a multiple story. It was actually, you know, profitability, leverage, asset turnover, and stuff like that, too. Part of the question we're trying to figure out here is, you know, clearly something has been triggered, right?
that could unwind this American exceptionalism theme. And the question is whether it is now sort of irreversible. I mean, we've been making analogies to landslides and to rivers, this idea that something happened and now the slide, it's just a natural force. It's going to happen. The Capitol's going to move out of America. And I think this is the thing that I'm trying to think in my head. Is it as big of a natural event or...
Or is it something that could be reversed if, say, we elect a new president in four years or whatever it is? When I talk to our institutional clients, they're starting to do bits and pieces of this, but begrudgingly, because at the end of the day...
All of the policies that you've cited about the United States still doesn't introduce labor mobility into Europe. It still doesn't address the housing overhang in China. I mean, there are some headwinds. If there were ever two regions that would make it difficult for you to switch from point A to point B, China and Europe give you plenty of agita. So I think the process happens slowly. The administration has a chance within the next –
eight to nine weeks to change the narrative on this. I have no idea if they're going to.
I don't understand many... I can't make coherent sense of some of the policies that seem to conflict with each other. Do you think Jamie Dimon does? I mean, you're one of the closest people to him. What is... If you could say, what do you think he thinks of it? I can't speculate on that. I mean, I know Jamie likes the, you know, we need more energy, right? So...
And we need more transmission lines. We need more pipelines. So he likes that part of their policy. But if they really want more energy for everyone everywhere, why did they pull the rug onto the Empire Wind Project in the New York Harbor, which was ready to go and already funded? Why are they putting...
taxes on not just consumer goods, but capital goods, which are going to raise the cost of transformers and pipe equipment and everything else that's needed to build nuclear plants. So there are too many parts of the policies that don't necessarily jive neatly. Jamie also has talked publicly about
And this is probably the number one thing that the CEOs are hanging on to. But it reminds me a little bit of the CEOs felt good about this a few months ago. And now it reminds me of people sketching. When I went to college in the Boston area and it snowed, the locals would come out in the snow and hang on to the back of the truck. And they called it sketching in the road. The CEOs are sketching now. But what they're hanging on to is this deregulatory agenda. You know, in the banking system, for example—
The banks would like to see the supplementary leverage ratio no longer have to include capital held against treasuries. There's millions of examples of like that in every industry, and that's what the CEOs would like to see. I don't know how much of it they're going to get. I don't know how much of it is going to be based on politicking rather than kind of policymaking.
But that's probably the one thing that they're hanging on to right now desperately. When you look at foreign markets, say we want to diversify out of the U.S., say we want to get into these other markets, what markets should we be focusing on? Should we be looking at Europe, China, India? What are some of the macro factors that you're taking into account as you evaluate these other foreign markets and their investment value?
There's this range of fundamentals and valuation, meaning the lower the valuations are, the less time I'm practically going to spend on the fundamentals. If you show me a market that's trading at a 5PE, I don't need the fundamentals to look great, and I'm getting compensated for how bad they might be. So...
Before last fall's Chinese stimulus announcement, the country was trading at about a nine and a half P.E. You were getting a lot of compensation for all the uncertainty and the mess going on there. China then rallied a bit. But so if we take that frame of reference, Europe looks okay. The fundamentals maybe get a little better with more fiscal spending in Germany. But
You still have a lot of issues around profitability of European companies. They've now introduced a carbon border adjustment tax mechanism that makes it more expensive. Energy prices, broadly defining them, are twice as high as they are in the U.S., maybe two and a half times high. And so there are parts of the U.K. and Germany that are deindustrializing energy.
they don't have a tech sector, right? That's one of the reasons for the U.S. outperformance versus Europe is their tech sector is minimal. And that's why they're constantly talking about service sector tariffs, pillar two arrangements and things like that, because they want to tax U.S., the U.S. big tech companies, because they don't really have some of their own. So Europe's a value market, right? Energy, banking, a little bit of health, you know, large cap pharma and stuff like that.
And so there are some good companies that are 3% to 5% dividends, pretty consistent global platform companies that we own some. But they're not going to kind of take off and give you tech or biotech-like performance. Japan is the one that's interesting to me, right? There aren't too many places with tons of liquidity, right? And you named the ones that we need to be talking about. There's not enough liquidity in the Bovespa and places like that to really move a lot of money. So...
Japan's interesting because for the first time in like 30 years, Japan is really focused on shareholder value, which is some crazy number, like 50 or 60% of the Japanese market trades below one times book. Oh my God. The number in the US is 4% or something.
They've now said, okay, you have to do special dividends, you have to do spinoffs, and if you don't take steps to reverse that, you could be delisted. I don't think they're serious about that, but they're moving a lot of Japanese companies to do things they haven't done in a while. One of my really informal indicators is how many colleagues of mine have been asked questions
normally against their will to relocate to Japan to work on corporate finance, you know, spinoffs and M&A activity. And that number for the first time in like 30 years is starting to go up.
So, that's a sign that there are things going on in the corporate sector which are focused on shareholder value rather than the other constituencies that the Japanese equity market is usually focused on. Michael, you'd said a few minutes ago that the administration had about six or eight weeks to correct the narrative. What if they don't? Assuming they stay very true to the course and start announcing, even if they dial back a little bit, but they continue to announce, dial back a little bit tariffs,
What's your projection? How do you think this plays out in the U.S. economy? It's hard because a lot of what we do as investors is look at prior cycles, prior examples, just to measure elasticities. And they're now putting in
what looks like the largest tariff hike on record in a faster time than the Smoot-Hawley tariffs were applied, you know, almost 100 years ago. So we're trying to figure it out. As you've all read, the port traffic has collapsed. Freight rates have collapsed. We're trying to figure out what happens in a world where there's a gargantuan, whether it's 50% or 100%, doesn't matter. You have a gargantuan reciprocal tariff rate on China that's
10% on a lot of other countries, plus various product-specific tariffs they haven't even announced yet. Are people going to stop importing? Are people going to route Chinese goods through other intermediaries and repackage them? Are people going to find a way to get, you know, less workable goods, but from places with lower tariffs? I meet with CEOs all the time. They're in the middle of trying to figure it out. But there's
Right now, we're in one of those things that happens where the hard data still looks good, right? If you looked at the weekly Dallas Fed Economic Index of economic conditions and stuff like that, logistics index, retail sales, all that stuff looks normal, but the forward-looking indicators are crashing. And normally, the average amount of time it takes for those two things to reconverge, either with the surveys going up or the hard data coming down, is about 60 to 90 days. So I think they've got about 60 to 90 days left
To refocus the market's energy on some of their supply side strategies. But I just, I can't really tell what the priorities are. Right at the same time that we should have been talking about less tariffs, the president announced 100% movie tariff.
Um, and even though that's a, even though it's a digital good and not a physical one, when there's a will, there's a way, right? You, you could apply a hundred percent tariffs on the point of transaction between us media companies when they're paying for that foreign content. So, um, yeah.
It's not large enough to move the needle on the whole economy, but it's a signal that they're still going in a lot of different directions at the same time. Aren't we setting the table for stagflation? Bits and pieces of it, yeah. You no longer have the stagflation environment in the 1970s.
Was aided and abetted. And that's, sorry, let's just get a quick, quick explainer. What is stagflation? Weak growth and inflation happening at the same time, right? Which people until then didn't think could happen because it felt like a bird flying in two directions at once. But it split itself in half and it did. So...
You know, it was exacerbated at the time by Nixon had 100 days of wage and price controls because of the OPEC oil embargo. You had a highly unionized workforce. So every time there was an increases in prices, it turned around and got recycled at the increased wages. Some of those things don't exist. U.S. oil and gas and natural gas liquid production is at an all-time high. And so you don't have some of those same mechanisms.
But one of the mystifying things is the administration continues to maintain that foreign entities pay for tariffs. OK, so two things about that. Number one, in 2018, during the first leg of all this, there were tariffs on appliances, steel and wash and washing machines and stuff and furniture. In none of those cases did foreign exporters absorb the cost.
Their import prices were unchanged, which means that some combination of U.S. importers through profits and margins or consumers through prices paid for them. So far, year to date, we have this thing called a Trump tracker, which is online, and it's got all sorts of charts on growth and shipping and employment and inflation and stuff like that. On one of the first pages, we have this table, which is what's happening to the FOB prices, which are the import prices into the U.S. before any customs or tariffs or anything like that.
If the administration's thesis is correct, those prices would be dropping because that would be foreign exporters wanting to maintain market share in the face of tariffs. They have not changed. They are unchanged. So if you put a 20% or 30% tariff on something and its FOB price doesn't change, that's an indication that the U.S. is going to pay for it either through margins or through consumer prices. And you kind of saw this.
If this wasn't the case, the administration would not have reacted as hyperbolically as it did to this Amazon issue about them disclosing explicit tariff prices on imported goods from China. I mean, if the underlying fundamentals were playing out the way that they thought they would, they wouldn't need to get so upset about that. It strikes me if he's now willing to tariff media—
Have you guys considered or what do you think would be the likely implication of a little bit of it? I always like to wax nostalgic. When I got out of college in 1987, the premier job was to be an investment banker for Salomon Brothers, Credit Suisse. You know, all these companies have kind of gone away and maybe Goldman Sachs, Morgan Stanley, etc.
And JP Morgan was a bit of an afterthought. And over the last 40 years, you guys have, you know, arguably you're the premier financial institution in the world. You're worth more than the seven largest European banks combined. It's been a banner run for you guys. When you saw those tariffs yesterday or two days ago announced on 100% on movies, do you worry that your industry is next? That he's going to somehow come up with this notion that we have lost and that
you know, Deutsche Bank has been taking advantage of us and implement massive tariffs on financial products coming in from abroad? And what would that do to your industry? Do you think that could happen? I think after 100—I mean, there's only 100 days we're talking about. Anything is possible, right? The United States has a services surplus. And again, this is something Jamie's talked about publicly. One of the risks of all the tariff stuff is that other countries—
retaliate against U.S. services surplus because there's not that much non-agricultural goods exports that they can retaliate against.
So, yeah, I mean, people that provide insurance, money management, you know. But, you know, look, to the administration's point, the deck is already kind of stacked against U.S. banks operating in other markets. That is a real issue. There are real tariff and non-tariff barriers that exist in other countries. So the preconditions that the administration is reacting to
We're definitely up for debate and discussion. The question is, you know, is a grenade the right way to address them? I can't imagine how many people ask you for investment advice. I would bet the guy delivering you a newspaper or your landscaper or your friends are constantly trying to sequester you and say, Michael, where should I put my 401k? Given the way the environment, given the context and the atmospherics,
What point in history can you point to that's sort of similar to this, if there is one? And two,
If you're, say, your ed's age, right, and you're saving and just starting to invest, how do you play this market? Do you just do what you're supposed to do, dollar cost average in, ETFs? Things have changed so dramatically here that I would think that you probably have to rethink or at least adapt your investment strategy and then talk about someone who's a little bit older. How do you play this market given the current dynamics? There are a few things.
And I'm not a technician, but there's a few technical things, breakpoints that you have to keep in mind. One of which is, and I mentioned this before about the trade-off between valuations and fundamentals. At one point, the equity market was down 20% in the United States. It was a brief moment earlier this year, but it was down 20%. When the markets are down 20%, there's a dynamic that takes place, which is all of a sudden there's this metaphorical crypt that opens up and
the financial media all of a sudden, you know,
Nouriel Roubini and Albert Edwards and Soros and all kinds of negative market voices tend to reappear like ghosts whenever the market's down to tell you how it's going to get so much worse. And I've published this thing over the years called the Armageddonists where every time there's a correction, then they come out and tell you how much worse it's going to get. And I plot how much money you make if you take the other side of that. Yeah.
Since World War II, when the equity markets have been down 20%, if you invest at that point, 85% of the time a year from then, you've made some money, usually double-digit returns.
I can't explain why because, you know, the reasons why we're different every time. But a rapid 20% correction over a short period of time tends to flush out a lot of the weak hands and reset the market for better fundamentals. And, you know, I still don't know if that's going to happen this time. I think the market rally has been too fast here and is underappreciating the hard data decline that's going to be taking place when it rolls through in May and June. But,
if volatility is going to be as high as we think it's going to be, as a personal investor, you kind of have to take advantage of some of those moments to average into your long-term goals. That's number one. Number two, something that other countries have figured out better is that
3% contributions to qualified savings plans is too small a number, right? The average company in the United States only sequesters 3% of your pre-tax income to go into savings plans. In other countries, it's six to eight. And so I always tell, I don't speak to young people a lot, but when I do, I tell them that they should be substantially increasing their annual contributions to pre-tax plans because the equity returns of the future may not match the ones of the past.
And despite 15 years of U.S. equity outperformance, at this point, you're being compensated to not have just a U.S.-only portfolio for the reasons that we discussed earlier. Yeah. Have you changed anything in your strategy at J.P. Morgan since the tariffs? I think that's the other question we've been trying to address. We know that there is potentially a global shift on the table. We know that we should now be paying more attention to foreign markets, right?
We know that the American exceptionalism trade is now at risk. But I think the question we've been trying to figure out in this podcast is, do we make a shift today? Or do we kind of wait and see and see how things shake out? I'd just be interested to know, at J.P. Morgan...
Where do you land on that question? We anticipated some of this. I had an outlook for this year that was called the alchemists of a guy that was doing all sorts of weird experiments. And I actually said, prepare for a 10 to 15% decline. I think they're going to break something. And so then, you know, when it happened, we were prepared to kind of take advantage of some of those dislocations. But yes, coming into this year,
We were running at close to maximum U.S. weights versus the rest of the world. I wouldn't say that our end game is a portfolio that is regionally weighted according to some kind of normal scale.
global weighting, right? I think we'll still end up overweight the U.S. versus the rest of the markets, but not nearly as much as we had been. I mean, the fundamentals of what's going on in machine learning and artificial intelligence are still pretty powerful trends, but
Microsoft's earnings reports kind of blew the door off what they're doing with AI. The other companies don't break it out, unfortunately, as much as we would like. But there are still some powerful drivers of profitability there. Yeah, you're no longer, for the reasons that Scott mentioned, you're no longer compensated to set it and forget it in a U.S.-only portfolio. Stay with us.
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We're back with Profit Markets. Do you think we're potentially, we've kind of put ourselves in a pretty vulnerable position and we could be subject to a capital war where just a few nations could coordinate and take the tenure up substantially and quite frankly,
just put us in a really ugly spot. Do we risk a capital war? On paper, yes. First, China has been gradually and slowly dialing down their exposure to both treasury and agency paper, and as a percentage of outstanding debt are at a much lower rate than they used to be. As it relates to Japan specifically, they are still very much under the U.S. military and nuclear umbrella.
And this is just my own personal opinion. They would be very reluctant to jeopardize that by participating in some kind of capital war against the United States. They still live in a pretty dangerous part of the world. And while the U.S. is clearly signaling a period of isolationism, at least over the next three and a half years –
My view is that the ties between the U.S. and Japan are too deep for that kind of thing right now. What's your viewpoint on America's deficits and debt levels right now and how that likely impacts our economy over the next few years?
One thing that didn't change it was Doge instead of $2 trillion and $1 trillion. I had this top 10 list that I put together at the start of the year of things that I thought might happen. And one of them was $150 billion in Doge savings in 2026, which almost looks spot on their claimed amount. And
Plenty of right-wing people from the Cato Institute to the Manhattan Institute are saying those numbers are going to be very difficult to actually hit, and there's lots of double counting and nonsense in there. Oh, wow. So it won't be Doge's issue. The big issue for investors is this. By the early 2030s, 100% of U.S. tax revenue, as it's now collected, will be needed to pay interest on the debt and entitlements.
So it's like a household that makes money, but only enough for rent and food, but nothing for kind of clothes, transportation or other things that you need. That's obviously an unsustainable environment. A country can't survive if 100 percent of revenues are dedicated to just interest entitlements. Something will have to happen before then.
you know, and there's any number of things that could happen. But that's the big picture issue. There's not enough non-defense discretionary spending to cut. You know, in fairness to Doge, there wasn't enough for them to cut in the places they were cutting, right? And we already had the Budget Control Act of 2011, which cut non-defense discretionary spending. So, you know, if...
As this crossover point that I'm mentioning gets closer in the early 2030s, the United States is going to have some very difficult decisions to make about taxation, entitlement spending. And, I mean, if you want, I can give you three or four things that will probably have to happen between now and then from a policy perspective that some people would find jolting. The first one of which is they're going to have to test the means test Medicare.
So wealthy people are just not going to get the same Medicare benefits despite the fact they paid into the system. It's going to have to get means tested just like social security does. Um,
they're probably going to have to do something funny to the payroll tax. Right now, the payroll tax only applies up to, what is it, $125,000, $130,000. They would probably have an exemption. They call it a donut hole until, let's say, $300,000 or $400,000 in adjusted gross income. But then from then to affinity, reapply the payroll tax, right? They'll probably have to be a federal tax on municipal bonds based on your income.
Right. So these are all things that have shown up in Simpson-Bowles proposals. The committee, there's something called the Committee for Responsible Federal Budget. They constantly put these things out. So all of the widgets that will have to happen are
are kind of known, but they're politically unpopular. Grover Norquist is going to throw a fit. But those are some of the things that are going to have to happen in order to avoid that crossover point from hitting. And it will probably be catalyzed by, Scott, as you mentioned, a continued decline in Abu Dhabi and Japan, like continued decline, gradual, in foreign ownership,
of treasuries and agency bonds, combined with, at some point, the rating agencies downgrading the United States and saying, we're going to give the country a year or two to right the ship, otherwise we'll downgrade it. For reasons I don't think I have to go into, I don't think the rating agencies would take that decision under the current administration. We talk a lot about inequality on this podcast, and we just saw this report where the top 19 households in America now own
1.8% of all U.S. household wealth. Meanwhile, the bottom 50% own 3%. And that 1.8% number is up from around, I think it was 0.1% in 1980. In other words, this is an increasingly unequal society. The rich, the very rich are getting crazy rich. The rest of America is sort of flatlining in terms of real wage growth.
Where is this all headed? Like, I look at it as a young person, and I think about it because we're talking about the deficits and we're talking about, you know, what's due for young people in America. Does the level of wealth inequality as a wealth manager at one of the top financial institutions in the world, does the level of wealth inequality in America concern you? And if things continue at the current clip,
Where is this all going? It concerns me for a number of reasons. First of all, it's terrible for society. It's led to massive increased political polarization to the point where the country can't get things done. The percentage of moderates in the House and the Senate are at the lowest levels in over 100 years. And for that reason, some of the stuff that you talked about
The CHIPS bill was supposed to help. The infrastructure bill was supposed to help. The energy bill was supposed to help. And now the administration, despite saying they want to do things to help people that have been left behind, are talking about gutting the programs that were passed to help them. So, yeah, I'm concerned about that. And again, some of the priors that have led the administration to pursue certain policies are very clear. When China was allowed into the World Trades Organization in 2001—
It was a fantastic boon for profits, a boon for consumers in terms of low prices, but a disaster for manufacturing communities. Industrial production has basically flatlined since that date. So there are important discussions that have to be had about everything from tariffs to domestic investment to subsidies to marginal tax rates, etc.
I just, I think the administration's policies aren't necessarily like if, if you believe that 30 years of globalization left too many people behind, you'd need the kind of superstar, a team of policymakers to figure out how to unwind parts of it with a scalpel, focus the benefits on the people who need them while not, while not wrecking the capital markets in the process.
And the jury's out whether or not this administration is comprised of people with those kinds of skills and vision and competence. Is it?
But I'm very concerned about some of those wealth inequality issues. And, you know, the dam will break at some point and we will have a wealth tax in the United States. It's just a question of the level that it will be set at. Final question for me, Michael. A lot of young people listen to this show. I'm sure many who are listening would love to know more about
you and your success in your career, how to be like Michael Semblist? What would be your number one piece of advice to a young person listening to this podcast? It could be about
career. It also could be about life. How do we become successful? I didn't really have a linear plan. You know, I went with the wind. You know, the opportunities opened up. I took advantage of them. I joined J.P. Morgan in 1987. As you mentioned, the bank didn't even have underwriting powers then, and I was in some back office financial position for many years. I will say that the world has gotten more jargonified
since 1987. In every position, you know, it's medicine or science or sports investing or whatever it is, it's gotten super jargonified. So for young people, you have to be prepared to converse in the language of the day. And I remember I used to read Barron's, and when I started, I didn't understand 80% of it. But I
I took a highlighter. I highlighted all the stuff I didn't understand. I put it in a folder and I waited until I had a chance to ask somebody that would explain it to me. And you have to have the discipline to do that. You can't be
You can't want to go into a field and not understand what people are saying or let things kind of pass over your head and you'll get to it later. You have to have the discipline to understand what that person is saying. And the interesting part is a bunch of the times, once you learn about it, you'll realize that guy was wrong and he was saying something that didn't make any sense. But if I could make just one more observation, because, Scott, I've listened to lots of your
podcasts and TED Talks and different things. By the way, my wife is a huge groupie of yours. Oh, thanks for saying that. Something happened to the psyche of investors because I've been doing this long enough to have seen it.
The Great Depression was this kind of distant thing, like the Civil War or, you know, the fall of the Roman Empire. And then all of a sudden, within one 10-year period, we had two 40% declines in the equity market, something that hadn't happened since the Great Depression. The first one, 2001, 2002, and then 2009 when we hit like 666, the mark of the devil in March of 2009. Because that happened and because so many people
of the fundamental drivers, particularly of the second one, were obscured and not understood until after the fact. Investors ever since have lived with this sense of, is the next one the big one? I live on a seismic fault. And I think that's one of the mistakes that some of the Armageddonists make is having lived through that experience, they can't shed the notion that I have to prepare for another 40% decline in the equity market.
Whereas the kind of standard recession is more kind of a 12 to 20 percent decline, both in equity markets and in earnings. So that's part of what happened, I think, to the fundamental psyche of the country after experiencing that. And as the person in charge of our investment strategy in a three and a half to four trillion dollar business, I have to make sure that
that we don't let that kind of psyche affect us as we're going through these different business cycles. And one of the most important charts that I show everybody is in every, in almost every single business cycle, equity markets, bottom first, then GDP, then industrial production, then payrolls, then high yield delinquencies, then, you know, the housing markets. And so
Almost by definition, we have to be taking risk at times when everything else looks terrible. But that's because all of those other things tend to bottom after the equity markets do. So that's just another fundamental axiom of investing that I think it's important for people to understand. I need to acknowledge that I tend to be – I'm a glass half empty kind of guy. I was telling people that Tesla was wildly overvalued at $30 a share yesterday.
I like what you're saying. You always need to think about what could go right. Is that the way I would be reductive around it? There's few people that see more data than you and Jamie. You literally are at the helm of the bobsled. You work with the wealthiest people and institutions in the world and see how they're allocating capital and how they're thinking about things. My sense is that pretty much the entire world and wealthy people and organizations and governments are rerouting their entire supply chain around America right now.
that they no longer see us as the reliable partner that they once viewed us as, and that we're going to see tremendous structural damage, even if he pulls the knife out of the back of the global economy and says, just kidding around all these tariffs, that the injury is going to be there and take years to heal. I have never seen...
Or here's my thesis. I believe this is the biggest own goal in the U.S. since our entry into Iraq. Your thoughts? Yes, on both. I remember in around 2016, I added up all of the money spent on the Iraq war, and it was about $2.5 trillion. And I made all these charts of the things that you could have done with $2.5 trillion instead.
you know, pre-K, universal pre-K, free college tuition, all that kind of stuff. So yeah, that was... National rail, high-speed rail. Yes, high-speed rail. I mean, and you could have wasted a bunch of it too. So yes, absolutely. The world's a pretty resilient place. And so I guess I'm a little more optimistic than you that if this administration is forced to
by economic and market conditions to modify course, that eventually the way the global economy and markets function, there'll be some normalization. And also, remember, there are some subset of people that are elated about what's going on. And so when I talk to some of our clients, I'll say whether you're elated or despondent about what's going on, let me give you a couple of things. In 1954...
Eisenhower deported a million people on a much smaller population, a million people. And it turned out to be a disaster, contributed to a terrible recession in 56, 57. And two years later, the deportations were 80,000. So just the public support and congressional support for the program evaporated. In the late 1800s, Trump talks about McKinley a lot, loves McKinley. The McKinley tariffs were put in place.
The next midterm elections, the Republicans lost 100 seats in the House because the economic consequences were bad and people reacted to them. So if a lot of what you and I are talking about doesn't go right, there are – you know, the electoral process has ways of correcting some of these things. And my discussions with European policymakers, you know, behind closed doors –
And just other people that are kind of watching this, CEOs from other parts of the world, they're not ready to throw in the towel. They've definitely picked it up and they're watching. But they're going to wait to see how some of these things play out before making some irrevocable decisions that they wouldn't be able to reverse. The administration –
on April 11th, added hundreds of codes to this exclusion list because it realized that the United States doesn't have any domestic production of certain things and tariffing them would just make them more expensive. So they're reacting in certain ways to certain things at certain times. And my belief is that before this is all done,
They will have to make substantial modifications. As to the long-term damage, I'm worried about it. Look, I gave a webcast a couple weeks ago, and I don't know if you guys saw this, but I ended the webcast by saying I've talked about most of the things I wanted to say, but not everything, because we don't live in the kind of environment where people can necessarily say all the things they think anymore.
that's going to have to change, right? And if that doesn't change, then I would buy more into your thesis about the permanence of some of these things. Michael Sanbus is the chairman of Market and Investment Strategy for J.P. Morgan Asset and Wealth Management, a global leader in investment management and private banking with $6 trillion of client assets under management worldwide. He is responsible for the development of market and investment insights across the firm's institutional funds and private banking businesses.
Michael joined J.P. Morgan in 1987. He's previously served as chief investment officer for the firm's global private bank and head strategist for emerging markets fixed income. You can discover more of his insights by reading Eye on the Market, his newsletter, or you can listen to his podcast by the same name, Eye on the Market. Michael, this was a real pleasure. Really appreciate you joining us. Thank you for coming on. Thanks, Michael. Thank you very much. Thank you, Scott.
This episode was produced by Claire Miller and engineered by Benjamin Spencer. Our associate producer is Alison Weiss. Mia Silverio is our research lead. Isabella Kinsel is our research associate. Dan Chalon is our intern. Drew Burrows is our technical director. And Catherine Dillon is our executive producer. Thank you for listening to Profiteer Markets from the Vox Media Podcast Network. If you like what you heard, give us a follow and join us for a fresh take on markets on Monday.
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