Winners and Losers After DeepSeek — ft. Robert Armstrong
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Today's number, $15,000. That's a new cost for a permit to climb Mount Everest, up 36%.

from the previous fee. True story, Ed. On May 25, 2001, a blind man named Eric Wallenheimer summited Everest. When asked how he felt, he said, I'm going to kill this fucking guide dog. That's good, Ed. That's good. I don't hear anybody laughing. The producers aren't laughing. Do I need to go back to the porn jokes?

Is that what's going on here? Anyways, today, welcome to Property Markets. In today's episode, oh, time to get that $15,000 so we can summit Everest. Today's episode is presented by Fundrise, and we're speaking with Robert Armstrong, U.S. financial commentator for the Financial Times. But first...

Ed, what's going on? I'm doing very well, Scott. How are you doing? Well, that was exciting banter. Jesus, bitch. I don't pay you to be a fucking robot. Literally, AI just fired AI. Now AI is going to fire Ed. It says banter. Come up with something interesting. What's going on, Ed? Let's start over. It's called a conversation.

I'm doing very well. It's very nice in New York. All right, enough of you. Claire, bomb in here. We need someone with actual personality. We need some salsa on this trip. What did you do this weekend, Claire? Oh, I went to St. Bart's, Scott. My boss sent me. Oh, my gosh. Really?

Really? It's true. Really? Yeah, he's very generous. That's right. That's right. And how many of you went? And what did you guys do? What were the lows and the highs of the French Caribbean island? There are no lows, I don't think. Seven of us went. We had three pools between our two villas, so it was a lot of swimming time. Went to Nikki Beach, danced to Barry White.

Had a wonderful time. I'm glad. And I heard that Ed didn't attend because he's decided he's better than everyone else. That's right. What are your thoughts? He's decided he doesn't want to fraternize with... I tried to get him to join late. He just couldn't swing it. Yeah, well, I had an engagement party, so it's actually called being a good friend. But yeah, we'll take it. Was it your friend's engagement party or your girlfriend's friend? It was my friend's. Oh, nice. And where was it and what did you do? It's just like...

Just like, oh, open gifts and pretend we'd like the gifts. What was it? Pretty standard party at a bar and we had some music and we celebrated our buddy and he's the first of our friends to get engaged. So that was quite exciting. Yeah.

So, you know, I had to be there. And I've been to St. Bart's. I know what it's like. So, you know, the novelty is lost on me. Well, smell you. Okay. Yeah, I've been—so just so you know, I've been to St. Bart's 14 times, and every time it gets a little bit better. Typical Gen Z fashion. You didn't ask me what I did this weekend, so I'll tell you. I—

I also went somewhere formidable. I had my 14-year-old for the weekend. And, you know, I hate kids, so having them alone is especially upsetting. So we decided to jump on the Eurostar Saturday morning, and we went to Paris, and we went and saw a PSG play.

Which was amazing. I don't know if you guys have heard this, but Paris is an incredible city and PSG fans are fantastic. Interesting. Who was playing? Like, who were the players on the pitch? They played Rennes. Rennes. Rennes. Is that what it's called? Yeah, Rennes. And they tied, which was a big bummer for PSG. What was the score? 1-1. I'm bored by this banter. Let's move on to...

Let's move on to the headlines. I think this is maybe our worst opening of a show ever, but we're going to bring it back. Well, it was clearly the wrong time for you to give up meth, bitch. I hire you to stay addicted and be interesting. No, no, you're the crazy guy. I'm the straight guy who just reads the headlines now. Is that it? All right. All right, straight man. Read the headlines. Now is the time to fly. I hope you have plenty of the wherewithal. Take it easy.

Tech stocks plunged as investors feared the deep-seek a Chinese AI startup could upend US tech dominance. The company says it successfully trained its AI model at a fraction of the cost of competitors. Nvidia shares tanked 17%, erasing almost $600 billion in value, and that's the largest single stock market sell-off in US history. Investors sold a record level of private equity stakes last year amid a slowdown in deal-making.

Global trading volumes in the secondary markets reached $162 billion. That's up 45% from the previous year. And finally, the unemployment rate for recent college graduates hit its highest level in two years. Meanwhile, MBA grads are facing record unemployment too. Only 84% of graduates from the top 15 business schools this year found jobs within three months of graduating. That's down from 92% in 2019. Scott, your thoughts, starting with...

this crazy news with DeepSeek, which has just completely roiled the markets. What's your reaction to DeepSeek? Yeah, who would have thought that China would come up with something cheaper? I mean, it's just so... It's classic. It's so interesting, right? It just kind of made sense and...

It feels as if, and I'm guilty of this, the U.S. is so far ahead in everything. Everyone else is an idiot. No one else can do anything around AI. And then China says, all right, we're going to figure out a workaround.

for you holding back your chips. And it's already been tempered a little bit today around some rumors that in fact they aren't being forthcoming about the processing power required to do this and what type of chips they actually use, but there's just no getting around it. This is a tectonic shift in the market or the perception of what's going to happen here. And I wonder if

So far, there are no winners, right? Chinese stocks didn't go up. I mean, this trillion dollars that the market shed last night, is it just the market correcting or is that money going to flow somewhere else? And I thought, well, it'll be Chinese stocks. No, they weren't really up. I thought, well, would it be pharmaceutical stocks or companies that would have to spend a lot of money? In other words, is there a layer of companies that...

don't have enough capital or focus or expertise to be in the AI business themselves, but we're going to have to spend a shit ton of money on AI that now aren't going to have to. The cost advantage of DeepSeek, they claim, is 90-95% cheaper for business and free for individual users versus OpenAI's $20 a month subscription. I'm actually using the $200 a month one so I can play with Sora.

In terms of training efficiency, it's at least 10 times less expensive to train using only 2,000 NVIDIA GPUs compared to tens of thousands for similar models. In the energy savings, it operates with just 5% to 12%, or about a tenth of the energy of comparable AI models. In energy stocks, Siemens Energy and Constellation fell more than 20% on Monday. The drawdown was just as vicious in energy stocks. It also, I mean, there's a few things here. One, when

An economy as diverse as ours becomes as concentrated in tech from a valuation standpoint. There's a risk where, you know, it's not that you're too big to fail. It's just that if you sneeze, the entire market's going to catch a cold. The Magnificent Ten represent something like 27% of the stock market. If we're half the world's valuation, then 13% of the world's economy, arguably, are going to take their cues from the Magnificent Ten, and many of them have been driven up by AI. NVIDIA,

Nvidia's 17% drop on Monday erased nearly $600 billion in value. That's more than the entire—I mean, think about this. Nvidia shed the Mexican stock market. That's just staggering. It also is going to inspire some really interesting conversations around trade. I mean, in terms of game theory, what if we had not prohibited or embargoed these sophisticated chips from China? Would they have gone full throttle into this CapEx race and not developed this workaround, or would they have done it differently?

Yeah. It's sort of like bootstrapping a company. It's like an argument that if there's scarcity, it actually drives innovation because you get efficient, you get lean, and that's exactly what they've done here. 100%. What are your thoughts? Well...

First, we should probably just assess the damage. As you said, NVIDIA down 17%, Broadcom down 17%, Oracle down around 15%. I mean, just huge damage. The total market value lost so far is more than a trillion dollars. And I think it's probably worth just clarifying exactly why everyone is selling.

You know, this became a story over the weekend when this new AI app, DeepSeek, became very successful and it quickly became the number one app on the App Store. But that's not the thing that spooked investors. What really spooked investors was how cheap it was to build this model and to run this model. So, you know, as you said, the costs, the savings on cost are enormous. They say that it cost them less than $6 million to develop this.

You compare that to OpenAI, which is spending $5 billion a year. They also said that they did this with only 10,000 GPUs, which is significantly fewer than the number of GPUs OpenAI uses. And in addition, the GPUs that DeepSeek has been using are cheaper and worse. And despite all of that, they are coming out with basically the same results as ChatGPT. And that's a...

That's a huge problem because, as we've discussed on this show, the whole thesis in the markets right now is this AI CapEx thesis. You've got Microsoft spending $80 billion on data centers this year. You've got Meta spending $65 billion. You have Stargate last week saying they're going to spend $500 billion. And then suddenly we learn we can just build all of this on the cheap. So what's the point in any of that stuff?

So that's sort of the sell-side argument that we're seeing for NVIDIA and specifically all of the AI infrastructure companies. Now, the buy-side argument, I think, is more interesting. The possibility that actually we should buy the dip here. I'm sort of leaning on that argument because my reaction, and I could be totally proven wrong, but my reaction is that we are basing all of this

off of something that a Chinese company said about how much it costs to build their product. And my question is, why are we believing them? Like, why are we assuming that everything they're saying about how much this cost is true? Because what we know about China...

China lies a lot about a lot of stuff. They lie about their economy. They lie about GDP growth. They lie about inflation. They even, like, disappear economists and people who, and whistleblowers, who say anything bad about the country. We've seen this countless times, even in the past year in China. So why wouldn't they lie about this too?

I mean, I'm sure there is a lot of actual innovation here. The fact that it's open source, it's certainly cheaper to run. But in terms of building the thing, $6 million in a couple of months, I just, it's a pretty simple thesis, but like, I just don't really believe them. But I'm curious to get your thoughts. Look, the thing that we know is for real is that the model itself is very robust, right?

And say it's not a tenth, say they exaggerated and it's half as expensive. It's still kind of a paradigm shift.

And in general, what you see in most consumer markets is that over time, the market evolves to a zero and one. And what I affectionately refer to as the Walmart Tiffany effect or Android iOS. And that is there's a lowest cost layer that a lot of people use that gets mass adoption and figures out an ad model or a lower margin business model.

And then there's iOS, and that is the phone costs three times the average monthly salary of a citizen in Hungary. So I either want something that's super robust for more complicated, bespoke, artisanal uses, or I want just a decent, reasonable facsimile at the lowest cost possible. Look, at the end of the day, I'm a huge fan of competition, even if that competition comes from overseas.

So this is super interesting, and I wonder if there are specific companies or if this is just going to be something where it increases the productivity of the nation, but that productivity or those gains aren't crammed into a small number of companies, which you could argue is.

is actually quite healthy. Yeah, we'll talk more about it with Robert Armstrong in a moment. Moving on to private equity, this is so interesting because last week we were talking about hedge funds and specifically how investors are allocating out of hedge funds in these record numbers. And our rough conclusion is that maybe alternative investments are, you know, at least compared to these simple passive ETFs, maybe they're on the way out.

And now we're seeing this headline in private equity, where investors are selling their private equity stakes in record numbers up 45% from the year before, up 20% from the previous record in 2021. And it's kind of perhaps a similar dynamic happening here. So do you think this is...

similar to what we're seeing in the hedge fund industry where private equity is kind of going out of fashion. It's an interesting thought. So the tail that wags the dog here is there's been such a deep freeze in IPOs that the exits of the liquidity events that PE usually counts on have not been there. So a lot of people, essentially, whether it's

An institutional investor that needs to fund pensions for its teachers or even another fund that wants to get liquidity events so it can continue to make its own investments. The hunger for liquidity right now is getting greater and greater and greater, and these exits aren't there. And so if you're an institution that was counting on

a decent amount of liquidity in three to five years, and it's been five to seven, a secondary market evolves. And I wonder, I would bet there's opportunity in secondary markets because there's a lot of dislocation or inefficiency. What do I mean by that? It is not easy to put a value on a private company held by a private equity company. It's not, the price discovery there is really disingenuous.

So immediately when I heard this story, I thought, is there an opportunity to find somebody really good who knows how to buy these firms? Where you want to be on the right side of a trade is when you're on the other side of a for-seller. Now, these folks have, generally speaking, so much money that there probably aren't that many for-sellers. But I think that's what you're seeing come to light here. But I think it's probably an opportunity as an asset class. I mean, these funds are going to find exits at some point.

Maybe it's not going to be in the next 12 months, but certainly one, two, or three years. The idea that you could go in there, buy these steaks at a significant discount, I mean, that's generally speaking...

On the secondary markets, these stakes trade at around a 10% discount to the net asset value. So you go in there, buy at a discount, give it like a couple of years, we'll probably see some more M&A, we'll probably see the IPO market kind of at least begin to come back over the next year or so. You'll probably make some serious cash. So I see this the same way. I'm kind of like, this is an amazing investment idea, I think. Maybe you should get involved. There you go. This...

NBA headline. I mean, we're seeing unemployment among bachelor degree grads as well. But I think the most stark thing that's happening is the unemployment in the MBA graduate scene. And this is the most striking statistic to me. Almost a quarter of Harvard and Stanford's job-seeking MBA grads, so these grads are still looking for work,

almost a quarter of them, three months post-graduation, are still unemployed today. And that's a record high. And it's just astounding to me because, you know, these are the top schools in the world. The idea that you could have graduated with an MBA from Harvard and or Stanford, and you're still struggling to find work. To me, that is just unprecedented. So, you know,

A lot of people in that position, I'm sure they listen to this program, certainly a lot of MBA students. What would be your advice, Scott, to someone who might be in that position right now who just got their degree, they're going out into the world, and now they can't find any work? Well, okay, so first I just want to put this in historical context. When I graduated from the House School of Business in 1992, it was a recession. Forty percent of us had jobs on graduation, which means most of us did not.

And

You know, this isn't, we've had such a bull run among MBAs. I had someone in HR from Amazon call me and say, if you send us names of your most talented students, other than a background check, we'll hire them. At one point, if I had a class of 160 kids, 30 of them were going to Amazon for the summer for an internship, and all of them were getting offers. I mean, big tech was hoovering up human capital like it was going out of business. They have slowed their hiring.

In addition, I wonder if this is in fact an externality of AI, and that is,

What you've seen, the investment banks stopped hiring as many MBAs because what they decided is for cultural reasons, they wanted to find good undergrads and train them and then just hold on to them. So they stopped. They dramatically reduced their MBA hiring. And I wonder if you're, I mean, if you're a consulting firm, you're probably of the mind that we're going to take our existing employee force. We're going to upgrade them with AI training.

And we don't need any more human capital. We're going to increase over the next three years our associates' productivity by 10% a year. And in three years, three analysts are going to be able to do the work of four or five. So we should scale back our hiring. And also, MBAs, the average compensation for MBAs, because big tech drove up the price because of the demand, is

All of a sudden, big tech was the bigger, badder employer than investment banks and started bidding up salaries. And the average salary of a Stern grad with bonus and options was $212,000. That's the average. So every person making $120,000 going into something not as sexy, there was someone making $320,000 in investment banking or private equity or big tech even.

So I wonder if some of it is MBAs, quite frankly, have just priced themselves a little bit out of the market. AI is seeping in. But this is kind of, if you're an MBA from a top school, it's not that you don't have a job. It's that you don't have a job that you want. And so all of these kids could get a job, I think. I'm sure my email box is going to get loaded up with, okay, bitch, get me a job.

But MBA is typically the kids I come across in school are so talented, so credentialed,

They're kind of like pre-screened Navy SEALs. They're just so ready to work, so good at what they do, so credentialed, so talented with technology. They understand accounting. They understand cost accounting, finance, marketing. These are athletes. And if they have to take a cut in pay or be a little bit more aggressive in terms of location where they move to or the job or the prestige of the firm, so be it. But I think these people are still going to be fine.

We'll be right back after the break for our conversation with Robert Armstrong. If you're enjoying the show so far, hit follow and leave us a review on ProfitGMarket, wherever you get your podcasts.

Support for the show comes from the Fundrise Innovation Fund. The investing world seems to be bending towards democratization, but venture capital always felt like it may be one of the last ivory towers to fall. It requires a lot of capital, the right relationships, etc., etc. That's probably why when the Fundrise Innovation Fund launched promising to democratize venture capital, there was a lot of skepticism. But the progress they've made in a few years is hard to argue with the Innovation Fund.

Thank you.

Welcome back. Here's our conversation with Robert Armstrong, U.S. financial commentator for the Financial Times. Robert, thank you for joining us once again. You're kind of our regular at this point. It's good to see you. It's really great to be back. And what a great day to be talking about markets.

So I think we both know where we're going to start here, which is DeepSeek, which has wiped out more than a trillion dollars in market value so far in basically a couple of days. What is your view on DeepSeek? Is this reaction warranted or is this much ado about nothing, as they say? First thing we can say is that it is notable that

that none of the people who are on the wrong end of all that lost money are saying that this is a fraud or indeed anything less than a major breakthrough in AI. So people who own AI startups, people who run OpenAI and all these other companies, they are all saying in one voice, this technology is for real. This is different. The people at DeepSeek have made a step forward. They're not saying...

This isn't all it's cracked up to be. It's a wicked Communist Party trick or whatever else they might say. So that's important. I would put the issue like this. We had a certain vision on Friday of what the future economic structure of the AI industry would be. And that vision of that economic structure is significantly changed as of now. So I would say the price changes are warranted because, in short...

We were living in hope, fear, or anticipation that this would be an industry with a competitive structure that looks like other big tech industries. In other words, very much winner-take-all, one company dominating. And now we have a vision of the AI industry where it is much more competitive and the profits are shared.

And indeed, much of the value might be captured by consumers rather than companies. So that changes the picture a lot. I just want to go back to what you said there about people not believing that this is a communist party conspiracy. And by the way, I'm not one of those people. I'm very suspicious of this. And there was one thing that...

was said by Alexander Wang, and this is the CEO of this company, Scale AI, which is one of these big AI software companies. And he said this at Davos. And this is just a slight, you know, a slight suspicion that he raised, which is that

DeepSeek claimed that they only used 10,000 GPUs. And he made the point that he believes that they actually have access to another 50,000 GPUs. But they're unable to disclose this because those GPUs are H100s and those are banned in China technically because of these export controls in America. So that was an example. And by the way, I don't know how he knows this. I don't know if it's even true.

But I sort of latched onto that statement and my reaction was, okay, well, if this guy knows something about this GPU wrinkle, which is probably, if it's true, a little bit more than a wrinkle, then what else don't we know about this company? I mean, you might summarize comments like that as saying that the cost to train up this model was not as low as the company claimed. Yes. Right? So a lot of the excitement is they say they trained this thing up for 6 million bucks or whatever.

which is like several orders of magnitude less than what we were told it costs to train up a competitive AI model. That is a very big deal. And indeed, something like that could be true. I can only speculate along with anyone else. But what we do know is that this model has now been released and

And people are running it on their own computers and really liking the results. And it's just out there now, right? You know, and the principles behind it. As one person in the industry put it to me yesterday, they've released enough information so that...

You can run it yourself, use it yourself, not necessarily build it yourself, build a competitive model, but enough that you can really operate this thing yourself. So in a way, a genie has been let out of the bottle that cannot be put back in. The thing that struck me was that for the drawdown or all of the focus on

the big players, NVIDIA, Oracle, you saw an equally vicious, maybe even more aggressive drawdown in the energy stocks. Yes. The nuclear guys, Constellation,

So my question is, who's on the right side of this trade? Are there Chinese companies? Are there other companies? Does Google do better because it might not be threatening search? I'm trying to find an analogy here, and the closest I could come up with is that we thought PCs were going to change the world, and PC manufacturing wasn't a great business. It ended up being software. Do you find any other sort of historical...

analogies or economic history that you think can be applied to what's going on here? Well, one thing we might say is that if it is in fact true that what we have discovered is that AI models are much cheaper to build and even run than we thought before, the people who are on the right side of this trade is everyone. Olivier Blanchard-

The Economist tweeted this morning that – or yesterday that this may have been the largest one-day increase in the future value of total factor productivity in the history of the world. Right? So – and, you know, that's very optimistic and it may not – you know, it may not turn out to be as good as that. But so the analogy I would point to is something like the airline industry, right?

which is an incredible industry in terms of what it gives us and what it can do for us. The fact it moves all these people around the world, you know, tens or hundreds of thousands every day through the air very quickly. Very few of them die.

Right. It's like amazing thing. And it is a terrible industry economically because all the value of it has been captured by the passengers basically, because the business has very low barriers to entry. And, you know, it's like, you know, it's all, I think of the grocery market. I mean, like grocery stores are amazing things too. And it's a terrible business. So anyway, so I think that's one thing I would say, but to get to your question, what companies are the winners just speculating that,

If you are a company that builds applications really well, and AI could be useful in those applications, in the world we lived in last Friday, having a great AI model behind your applications either involved building your own, having your own data centers at incredible expense, or

going to ask open AI or whoever the dominant player turned out to be, pretty please, can I run my application on top of your brilliantly good AI model? Now maybe you can run your applications and you can run the AI model on your own computers. You don't have to ask somebody else for their help. And it's not that expensive. So maybe this is great for Google.

Maybe this is great for Microsoft, who were shoveling money on the assumption that they had to build it themselves at great expense. And then they wake up on Tuesday morning and they say, maybe we don't have to own it at all. It won't be at great expense. So maybe their CapEx budget, their basically investment budget, just went down and their revenues did not. That's possible. It will be fascinating. This week we start to get...

the quarterly results from the big techs and they go on into next week. And what I'll be listening for, and I think a lot of people will be listening for, is what do they say about their investment budget? The first question on the analyst call is going to be, given what we have seen, Google, Microsoft, Amazon, whatever, from DeepSeek, does this change your plans for capital expenditure?

And it'll be fascinating to see what they answer. Two companies that haven't been affected by this are Apple and Meta. Apple's stock actually increased when the market opened. Meta's fell a little bit, but then it interestingly kind of rebounded and climbed back up. Meanwhile, all of the peers in AI and AI-related stocks, they all tanked. Give us the rundown. Why

Or Apple and Meta not implicated in any of this? Well, Apple was of the great big techs. It was the one that wasn't shoveling money at AI. And last week, I mean, I wrote about Apple last week and comments I got back were like, you know, Apple is overvalued because it doesn't have an AI strategy. It's not building up this capacity. It's not spending enough. Nah, nah, nah. And like, is anybody saying that this week?

Maybe they are saying like, maybe Tim Cook had the right idea. Like, let these other dummies get in a big money fight with this new technology. I'll just wait to see what happens. And then when the winner, when the smoke clears and there's a winner, then I'll pick my strategy. Right. And maybe, maybe that was a cagey approach. I keep saying maybe, and I know that's frustrating probably for you and for listeners, but I think Ed, you know, you nailed it that

This has happened very quickly, and there's necessarily an element of speculation in all of this. And where does this leave Stargate? That was the big news from a week ago, half a trillion dollar investment over four years. Is that now just null? Yeah, maybe it's like, can I have my money back? I was interested that Oracle stock fell a lot yesterday, which I wouldn't normally have expected.

But maybe the – Oracle was a major funder and supporter of this. Maybe – frankly, I didn't quite understand that because they haven't spent the money yet, right? So if it turns out they don't need to spend the money –

What's the harm? Maybe there's something I don't know here, but I was surprised to see Oracle stock hit the way that it was. It's an interesting thesis that if you went one layer down to the companies that were allocating a significant amount of money to develop their own

I think of a company like an Expedia or Airbnb who are going to have to probably put aside $1,500, $200, $300 million over the next three or four years in CapEx if they might come out and say,

We're going to be able to build this stuff, and we think we'll get all of the great taste with the calories of this huge CapEx. I wonder if there's a layer down that will benefit. Yeah, or they would have had to basically rent capacity from somebody else. So whether it's OpEx or CapEx, either way, that's money going out the door. I would argue the market has come to the recognition that it's no longer – the market used to be about innovation as opposed to investment. And then since Amazon and Netflix, it's just prioritized who can invest the most.

And this feels to me like somewhat of a swing back towards, no, it really is about innovation, not just who has the most money. But if that, in fact, is true, and the big guys are really going to get hurt here, their drawdowns, as dramatic as they were, because they're talking about the gross dollar amount, $600 billion shed from NVIDIA, but it just kind of takes them back to where they were in October.

It's like a little bit, call me when they're down 80%. Yeah. It's not the bubble popping. It's not. It's not. It's taking a break. We did not see a bubble pop yesterday. It just kind of went back to where it was a few minutes ago in the world of this party. I mean, I defer to you guys again on the technology, but one thing a lot of people are saying this morning is NVIDIA's chips are still the best.

So however good this model is, it's even better if you run it on the best chips, right? You know what I mean? It's like if you have the technological edge in kind of processing power per unit of energy, whether it's in general computing or AI or whatever, that's still a hell of a good business at the end of the day. What kind of effect do you think this could have on Chinese stocks and the Chinese stock market? I mean, that market has been...

pretty lackluster in the past year. We had this little bump in September when we thought that we were going to see some serious stimulus. It's kind of since fallen back down a little bit. Does this mean good things for China? Is this going to sort of revive investor interest in China, do you think? Well, what I've long said about Chinese stocks, and by the way, this is a belief that I have that I really hope I am proven wrong on, is that they're uninvestable.

Because the overlap between what the companies are trying to achieve and their relationship with investors abroad and what the government wants and what policy is and so forth, you just don't really own the thing, especially if you're a foreigner. So...

I mean, it's one of these asset classes you can gamble on, but not invest in. So I don't know. I mean, what this certainly proves, which by the way, people were saying a lot of this before Monday, is that the Chinese AI startups are doing amazing stuff. I mean, our FT writers have been writing about this for months, that something like this would happen. So everybody knows...

that exciting things are happening within the chinese corporate economy that doesn't fix any of the structural problems with outsiders investing there stay with us support for the show comes from the fundrise innovation fund think of the five biggest names in ai today how many of those companies do you own shares of probably not many maybe

One, maybe two. Why is that? Because the open AIs and anthropics of the world are still private. That means unless you're an employee or a VC, you're out of luck. So it isn't hard to see why venture capital has been one of the most prized asset classes in the world. But unless you're worth eight or nine figures, you likely don't have access to these funds. The Fundrise Innovation Fund is different. It's already raised more than $150 million. It holds a portfolio of pre-IPO tech companies that are valued at tens or even hundreds of billions of dollars. And most importantly, it's a

It's open to investors of all sizes. Visit Fundrise.com slash PropG to check out the Innovation Funds portfolio and start investing today. Relevant disclaimers can be found at the end of the show and at Fundrise.com slash Innovation. We're back with PropG Markets. I'm going to pivot us to what's happening in Washington. We've had Trump talking a lot about interest rates, which is quite relevant as we have this Fed meeting this week. Trump is demanding interest rates come down. He's made some

kind of wild comments last week. He said that he knows interest rates better than they do, they being the Federal Reserve. Does he have a point in any way? Should interest rates be coming down or should the Fed be holding steady on rates right now? Okay, let me make a preliminary comment about this. If any other president in the last 40 years had said in public that

I am going to demand that interest rates come down, and I'm going to talk to that stupid chair of the Federal Reserve about it. The bond market would have freaked out. There would have been cats and dogs living together. It would have been chaos. It would have been the front page story of every newspaper in the world. And when Trump says this, we get a shrug.

Because nobody knows, is it true? Is it not true? Is the old man just talking again? You know, can he do this? Will he do it? And you just, it's such a wild comment that the market didn't know how to respond, so it did nothing. Right. Now, should interest rates come down? You might argue that that very comment means that interest rates should go up. Because if you have a president who,

who is meddling with the independence of the Federal Reserve. Maybe the president can get short-term interest rates down. And there's cases of this in history, Lyndon Johnson basically threatening to physically harm the chair of the Fed if he didn't line up. But

If rates are artificially pushed down at the short end, it makes all the sense in the world that at the business end, the long end, they should go up, right? Because now I'm scared whether the Fed can do its job without the president fiddling around, right? So if anything, the comment itself makes interest rates go up. Now, are interest rates where they should be?

The US economy, by every indication that I know of, almost every indication, I should say, indicator I can think of, is growing above its long-term trend rate, meaning we're growing at like 2.5%, 3%. Given the population and productivity and everything else, trend growth is like 1.5% to 2%. So economy running hot.

inflation, and you can argue how you want to cook your inflation numbers till you're blue in the face, but inflation pretty clearly above the Fed's target. So economy growing faster than trend, inflation still above target. And you're telling me the Fed should cut? Why exactly? Right? Now you could say, you know, unemployment is going up. You could make an argument, but it's not a very easy argument to make.

Right. These numbers, you can always have a fight about what the employment numbers are telling you and et cetera. But right now, it looks like a perfect time not to do anything to interest rates, as far as I can tell. So the US, 5% of the world's population, a quarter of its GDP, and right now it's about half.

the value of all stocks globally or the S&P. The US stock market represents 50% of all stocks globally, which, and if you use that, and I think it's a safe bet to say that's a proxy for private market valuations, it's saying that the US is worth as much as the rest of the world.

And I want to bring this down to an investment strategy and get some stock recommendations. I am, when faced with this question, if someone offered me one share in the U.S. or one share in the rest of the world, and they were both priced the same, as much as I love the U.S., as bullish as I am, I would pick the rest of the world to outperform at the same price as the U.S. And so I am slowly but surely rotating out of U.S. stocks and

into international stocks. You've written a lot about European stocks and stocks in the UK. Do you think that's a rotation or a reversal of the flows of capital is here? And specifically, what do you think of European and UK markets? Okay, point number one, there's no question that the US market deserves a premium. What we're discussing is how big that premium ought to be.

So the U.S. is growing faster than any other advanced economy and seems to be growing sustainably faster than any other U.S. economy. Its workers are the most productive. It has tremendous energy resources.

It is an open capital market that outside capital is always gagging to get into. So you have the most availability of capital for like young companies with good ideas. There's a reason where the innovation economy, all of this is true. And so, you know, the,

The price you pay for a dollar of European profits today and the price you pay for a dollar of US profits, you should be paying more for the US for the same dollar because it's going to grow more in the future. That dollar is going to get bigger at a faster rate. Has this gone too far? Probably. However you measure US asset valuations, they are at the very, very top of their historical range. Whether you want to talk about the equity risk premium or

Price to earnings multiples, the size of corporate valuations versus the size of the whole economy, everything is at the top. So the question you have to ask, is America's lead against the rest of the world really that much bigger than it was 10 years ago when these valuations were lower?

The US was ahead then too, right? So I think your strategy is a good one. I would never, in my own case, or telling my mom what to do, I would never say, get out of the United States. And this has happened to me. So I think I've said this on the show before, but this is the anecdote in my own case. I had a globally rebalanced, a globally balanced portfolio when I started investing seriously 15 or 20 years ago.

Over the last 15 to 20 years, it's become a US-dominated portfolio because the US stuff has done so much better. And now I'm looking at it and I'm saying, in retrospect, I wish I was 100% US at the beginning. It's natural to think that. You know, you want to stick with your winners. But rebalancing out of the asset that is wildly outperformed into the asset that's underperformed, that probably makes sense. Now you say, do you like European or...

UK markets. Very interesting question. One feature of those markets is that they are very, their mix is very much towards what we call value stocks or value industries. So you're talking about a lot of banks, industrials companies, energy, oil and gas. There's not a lot of kind of, as it were, sexy growth companies over there.

Right? And so you have to look a little bit hard. And in the column, we have been looking. And the thing is, the European companies, the UK companies that do have America-like growth multiples are priced almost like American companies. Right? The difference in valuation between a really growthy European and UK stock and a US growthy stock is really not that great.

This is for big caps, companies that people all follow anyway. But so alas, the market, when it comes to individual stocks, it's pretty efficient. So what you're betting on then is a kind of like European or UK comeback. Can these economies get over the trouble that they're in right now, the persistently low growth, the

You know, they're in a terrible situation where their inflation situation and their growth situation is worse than ours. You know, can they break out of that cycle?

I just feel like everybody hates Europe so much right now that it has to have upside. To read the newspaper, even the FT, you'd think Europe was about to disappear from the map. Totally agree. It's like, can it be this bad? Are there specifics? I'm a fan of Fallen Angels. I was looking at Nova Nordisk, which has been cut in half. Are there specific sectors or names that you're looking at in Europe or the UK? Yeah.

I mean, pharma is interesting, right? Because pharma is an area where Europe has always had great companies, not only Novo Nordisk, but Novartis, the big British ones, AstraZeneca, et cetera, et cetera. Those are really product stories. So it's not like the...

You have a view on the individual products of the individual companies. But what about the industrial stocks over there? When this horrible time in Ukraine is behind us and may it end well, who's going to rebuild that country? I think that's an interesting question.

So, you know, there's, you know, very good defense contractors in the UK, like all of these, you know, if Europe is going to rebuild its military capacity with some encouragement from our president over here, who's going to benefit from that, right? Yeah.

That's an interesting question. I want to get your thoughts on what's happening with immigration. Trump is making good on his promise of this very strict immigration policy. He's suspended the asylum process. He's starting to actually deport people. In sum, it's happening.

What does that do? What does that mean for us as investors? What does a large immigration crackdown mean for the economy? And how might that translate to the markets? This is a tricky question, and I will address it with the famously arcane theory of supply and demand. Illegal immigrants are some 5% of the American workforce.

Plus, I mean, the thing about undocumented immigrants is they tend to be undocumented. So they're a bit hard to count. But let's say it's 5% of the workforce. Now, let's say you're going to either scare or move half of them out of the country. Now you've reduced the workforce by 2.5%. Supply of labor down. Cost of labor says, I learned back in supply and demand school,

And I also learned in inflation school that the kind of inflation that tends to be self-perpetuating is wage inflation. So like everybody's worried about whether tariffs are inflationary. Maybe, maybe not. It's tricky to say. A hundred different variables. If you do real, not just throwing out the criminals, but throwing out a significant proportion of the illegal workers in this country, that does sound a bit inflationary to me. And that will matter.

The other thing is the labor cost will not be distributed equally across the workforce. What businesses are we talking about? Hospitality, agriculture, and home building.

Right? You know? And so, and at the same time, by the way, for home building, that Trump doesn't want to let any Canadian lumber into the country. In other words, groceries and housing. Yeah, groceries and housing. Now, there's already stories coming out of California that nobody's showing up to pick the oranges. It's orange season in California. I don't know how true these stories are. I wait to find out. But like in a week like this, maybe you don't show up for work just in case. Right? Yeah.

And so is somebody going to pick all the oranges? Well, in a couple of weeks, we'll know. But that seems significant to me. But I don't know. Like, what's interesting from my point of view is that the market is not really reacting to this stuff. Homebuilder stocks have stopped going up. They had a great couple of years and they've stopped going up, but they haven't fallen. You know, the market doesn't know how far this stuff is going to go. And this is the incredible, the persistent theme with all things Trump and markets is

markets don't know which of the things he says are true and which are just talk. And in general, the market is dealing with that uncertainty by just kind of being a deer in the headlights. So final question, Robert, the 10 years at about, I've said on this show that I think the adult in the administration is the 10 year. Yes, that's correct.

It's at 4.6% today. Everything we've been talking about, and I'm bringing some bias here a bit,

We did immigration policy. What you said, people think agriculture is dominated by immigrants or undocumented workers. That's 14%. It's 17% in construction. So you look at the cost to rebuild or places like Los Angeles or just general, we need a lot more housing in the country. You talk about deficits, which I think are inflationary. I would argue that tariffs are ultimately inflationary. It just feels...

It feels as if, well, I'll ask you. I think the 10-year is going over. Five. I think we might see a 5.5% 10-year by the end of the year. I think the notion that he's demanding that interest rates come down, I think the bond market says, hold my beard. Yeah, I agree. That's exactly the point I was making. Talking that way makes it go up. So what are your, if you had to try and play 10-year bingo, end of the year, end of 2025, any thoughts? Fuck.

Yeah. Again, if I knew the direction of interest rates, man, I would be a rich man, not a journalist. But let me put a framework around your question, at least, that some listeners might. There's three basic reasons that the 10-year has could explain, three basic factors that could explain why the 10-year has risen as much as it has and why it might rise more. One of them you just referred to, inflation expectations.

Now, by a lot of measures, inflation expectations have risen, but not by as much as the 10-year. So now we turn to the other two factors. Another is uncertainty. If I don't know what is going on with monetary or fiscal policy over the years to come, I demand more yield from my treasury investment just to cover, to ensure me against the uncertainty.

So that's number two, how much of the raise is just not knowing and demanding more yield because I don't know. And the final one is growth expectations. If I think growth is going to rip over the next five or 10 years or even two years, that pushes long-term yields up. So there's a real growth component of yields.

So you have to kind of think about, of those three, which are dominating and which will continue to move? I think a lot of what we've seen is people really are increasing their growth expectations. I would say that's part of it, and you shouldn't look past it. If you look at surveys of things like business confidence, they're really coming up. Investor confidence, household confidence. So I think part of this is people, whatever else they may be expecting, are expecting a little bit more growth from the U.S. economy.

So that may be part of the story here. But I agree with you. Inflation is the thing that moves it fastest and could potentially move it the most, as we just learned in the last couple of years. So that's the one you've got to think about first, but you can't think about it in isolation from the other two. Robert Armstrong is the U.S. commentator for the Financial Times and writes the Unhedged newsletter. Previously, he was the FT's U.S. financial editor and chief editorial writer. Before becoming a journalist, he worked in finance and studied philosophy. Robert?

Thank you so much. We always learn a lot when we have you on. You guys always ask great questions, so it's great to be here. I don't know if my answers are any good, but the questions are right on. We'll let the listeners decide. Okay. That's what we say in our dark nights of the soul in this business. We'll leave it to the reader to figure out. Exactly. Thanks for joining us. Thanks, guys. Thanks, Robert. Cheers. Scott, you and Robert both expressed this desire to rebalance your portfolios, to look outside of the U.S.,

for some more balance. More of a practical question, how often do you reevaluate the overall balance of your holdings? And how often do you think listeners should be doing the same? - So I think of rebalancing as the other side of the coin or the action from the reaction or the decision to diversify. And I didn't realize how powerful and important diversification was. I was always all in on one company thinking that's how you got really rich.

And both in 2000 and 2008, that lack of diversification basically took me from someone who was wealthy to someone who was very much not wealthy. So now when I think of rebalancing, what I do is it's not that I sell stocks to get out. What I do is when I have a liquidity event, I think, okay, where should I invest where I'm not already really concentrated? Rebalancing when you're in your 20s and 30s. As soon as you have an asset base of, say, more than six figures and something, you're

Sometimes you have to go all in on a house because it's your first house you need to borrow from your in-laws, etc. Sometimes you have to go all in on a business to start a business. But once you have a decent or a nest egg or something resembling real capital, you need to think immediately, okay, I don't want to be that idiot Scott Galloway.

and go back to zero because it's not only financially stressful, it's emotionally and mentally really stressful. If you have a company that's doing well and it's raising money, take some money off the table. Ask your board if you can take some money in a secondary. If you have one stock that gets above 50 or 60% because it's NVIDIA and it's gone up tenfold, sell some of it and balance. Don't be an idiot like me. Don't end up with 70, 80, 90%

of your net worth in one asset, no matter how attractive that asset may seem. Red envelope is going public on the NASDAQ. Credit Suisse, First Boston, and Frank Wachon are taking this public. It's going to be worth a billion dollars. Daddy's looking at jets. And then he wasn't. Take some money off the table the moment you have the opportunity to, and more than 50% of your net worth is in any one asset. Do not be profiteering.

This episode was produced by Claire Miller and engineered by Benjamin Spencer. Our associate producer is Alison Weiss. Mia Silverio is our research lead. 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 liked what you heard, give us a follow and join us for a fresh take on markets on Monday. Five times the news.

Thank you.

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