173: The End of US Equity Dominance? With Chris Wood, Global Strategist and Author of 'Greed and Fear'
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Welcome to the Money Maze podcast. If this is your first time joining us, I'm the host, Simon Brewer. And in this show, we talk to proven leaders and thinkers from the worlds of business, investing and beyond. To stay up to date with every episode, please do sign up to our newsletter via moneymazepodcast.com.

episodes are also published on our YouTube channel and we're active on all major social media platforms thank you for listening Chris you have just made a bold prediction we're

which is the US stock market has reached its all-time relative peak, similar to Japan in 1989. And for those who weren't hanging around, as we were back then, Japan reached about 45% of the world index. And at that point, I checked it, the US was only 33% of the world index. And here we stand today with the US, depending on the index, around 65%, 67%.

Your last two pieces of research contain these statements. Instead of Trump's Liberation Day, you called it Impoverishment Day. And that Trump, secondly, is the bull in the China shop, with lots of irony we'll come back to. So welcome back. You appeared July last year. As we were saying, a lot has changed. It was exceptionally well received on audio and on YouTube. You have a multi-thousand follower base, previously from CLSA and now at Jefferies. And you are one of the world's most

respected strategist. And in my mind, you are particularly refreshing since you say it as you see it, or in practice, write it as you see it in your weekly piece, Greed and Fear. So welcome back. Thank you, it's good to see you.

Are you enjoying this new environment? Well, it hasn't been short of things to write about, Simon. But I have to say, I wasn't expecting the tariff agenda to be implemented as aggressively as it clearly was. Like most people, I thought it was a significant part of negotiating tactic. Although we have to admit, Donald Trump has always been entirely consistent. He's always believed in tariffs since the late 80s. And he told everybody he's going to implement the tariffs.

But various people around him, including the Treasury Secretary, sort of made comments implying it was a negotiating tactic. So when you actually got the implementation of the tariffs, that's why you had the market impact. The key stock market point is very simple. Tariffs are just plain bearish for everybody. And I'm going to pause you there because there are six things on my list today. One is U.S. equities peak or pause. Number two, dollar inflation.

To paraphrase Nixon's treasury secretary, our currency, but your problem. Number three, where else in equities and FX should we go? Number four, Bitcoin and gold, parallel bull markets, question mark. Number five, bond bearish. And number six, private equity and private debt, indigestion, or to quote Irving Berlin, there may be trouble ahead.

So, nice short agenda. Chris, I was looking at the data. So, the foreign ownership of US equities is almost at 20%, which is its highest since 1952. But it's been with some interruptions on a secular uptrend. And our mutual friend, Will Nutting, who alerted me to one of your recent pieces of research, which got us having this conversation, and he publishes Nut Stuff, which is a really, really useful investment tool as a piece of research. He

He started with the first question, which is, do you think that your view on the U.S. is a function of its simple valuation? Or is it because you actually don't think that the U.S. is capable of finding those 10 or so new world-class companies that historically derived 40% of stock market returns? Yeah.

The relative call, I think, is easily the absolute call. But 67% of world market capitalization is just a huge percentage given the US contribution to economic growth. So by saying it's most the base cases we've reached in all time, it doesn't mean to say the US has to necessarily collapse. But it does mean that you're likely taking a long term bearish view on the

US dollar. But the thing that to me, the thing that actually most singled out the potential that this was the all-time peak late last year, was suddenly in the fourth quarter of last year, we got this universal use of the phrase American exceptionalism, which

which I didn't really hear this until late last year. And that really seemed to me to be the sort of language you would have reached at a major top. Plus, I don't really understand what people were talking about when they referred to American exceptionalism in a financial context. Because to me, the one area where the US is truly exceptional in the financial context is the ability to print the reserve currency of the world, which is obviously a great privilege.

But the irony of recent developments is the Trump agenda threatens to torpedo that big privilege. And we're going to come to the dollar in a minute. But let's just stay with the US stock market because the other interesting thing is this dispersion. So I think I'm right in saying that the small cap underperformance in the US in the first quarter versus large cap is the biggest in 25 years. They're

are quite interesting valuation opportunities all over the US, which has shrunk. I think they're only half the number of listed companies than they were 20 years ago. But how do we think about that issue? And is it simply that the small are too small to make the difference to the index and the large are, as we have Rob Arnott on, who very eloquently deconstructed the NVIDIA valuation case last year and basically said, I'm going to use my words, not his, that stock price is an accident waiting to happen.

Right, but NVIDIA did achieve amazing profit margins. So it made sense to buy NVIDIA aggressively the day the AI thematic entered the market when we had the Microsoft purchase of GB Chat. But like every year for the last several years, many US strategists were calling for a broadening out of the US stock market, i.e. that the smaller caps would start to perform. But obviously, every year it hasn't happened. And we have the continued domination of big tech.

But the start of this year, even before this tariff noise, my concern was that the mark, the risk, if you were in the big tech stocks at the start of 2025 was nothing to do with tariffs. It was that the market would start to question whether they'd be able to monetize this incredible amount of investment they're spending on AI. So last year, the estimates are the big hyperscalers spent 220 billion U.S.,

This year, they're guiding for about 350 billion US. This is a huge amount of investment, and so no one can be sure whether it's going to be monetizable. However, that was my concern at the start of this year. But then what happened is the most important development this year actually has not been the tariffs. It's been what I call the deep-seek moment, because the deep-seek moment basically raised a huge question mark

on whether this CapEx was necessary and would be monetizable. And the DeepSeq moment basically told you, sent the signal that these so-called large language models

will likely to just be commodities and risk becoming commoditized. And you have the virtue, unlike many of us, of sitting and spending a lot of time in Asia. And so how realistic is it that the deep seek and others really are able to do a lot of what's being done at a lower price? And how does the Asian business community reflect on this AI approach?

So there's three big things on the deep sea moment. First of all, to people who know China and Asia, it wasn't really a surprise that the Chinese are ahead in many areas. But I would say to the general investor sitting in New York and London, this was a big shock. Or indeed, to tech analysts sitting in the US. I don't think they had any understanding of that. Plus,

The dialogue and interaction between China and the US particularly, or even private sector people, has reduced significantly in the last several years. So I think that was a big shock to the general investor sentiment, less so to people in Asia. Second, DeepSeek sent a message that these American efforts to stop China acquiring advanced semiconductors, which has been ongoing in the last several years,

would probably end up backfiring on the US because basically this has created a huge incentive for China to do it on itself. And at the same time, it's deprived US tech companies of a lot of revenues because the biggest customer for many of these tech companies like NVIDIA is China. Third, DeepSeek sent this message that a lot of these CapEx, they could be overspending. So I reduced my tech allocation just on the DeepSeek moment.

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So we're going to talk a little bit about what else and where as we go through this conversation. But I guess that whilst there's always noise around data points and a lot of them are backward looking, if you introduce this much uncertainty into the corporate environment,

and the consumer environment, does a recession essentially become the most likely outcome? And how could you have anything other than a bear market in a recession? Yeah, well, on the tariffs, clearly, we've got a lot of anecdotal evidence today, which hasn't yet shown up in the data of throughput in California ports collapsing, orders being cancelled. So that's going to show up in the next few weeks. So logically, that should be bearish for US equities.

Now, on the other hand, we could get a total U-turn tonight on the tariffs. I'm not predicting that. I'm just saying it's not impossible. Well, it is interesting because, as you know, Scott Besson appeared on the show and he appears to have been the pragmatist here. But I suppose he's dealing with a greater and unknowable force in Trump. Yeah, so we can't be sure Scott Besson knew the details of the original tariff announcement because it didn't come out of the Treasury. Right.

But the way the tariffs were calculated with a very kind of crude focus on bilateral deficit in goods definitely shocked many investors. So that, of course, leads us into a conversation about the dollar. I mentioned earlier on, it was, I think, John Connolly, who was Nixon's Treasury Secretary in 71, who said, you know, our currency, your problem. You know, even before the comment about US exceptionalism, which, like you, I thought was sort of absurd. Yeah.

And we've been around long enough to know how the world moves in cycles. There's been a lot of talk about U.S. hegemony, some of which was understandable because of the U.S. occupation of the world stage. But if we think about the dollar, do you think that this is a proper pivot where there is a risk there?

to both its value and its supremacy. It's not the base case. The base case, the dollar remains the world's reserve currency for now. But clearly, it's always seemed to me a matter of time before this privilege erodes. Because since Richard Nixon broke the last link with gold, which is, I think, 1971, 72, the practical reality is the dollar paper standard has had no discipline attached to it.

So in that sense, it can be abused. Now, there was a big inflation in the 70s, but Paul Volcker actually reimposed the credibility of the dollar by implementing very tough monetary policy, high real rates. Then we had a bull market in treasury bonds after Paul Volcker crunched inflation from 1980 to 2020. But that massive money printing triggered by the pandemic clearly was a signal that the fiscal situation in the US was getting extreme.

which has continued ever since. But the irony right now is that the Trump agenda threatens to accelerate the demise of the US dollar paper standard. Because we've seen US treasury bonds in recent weeks sell off at a time when the data is flashing recession risks.

So the only way to rationalize that behavior is the market is worrying about fiscal distress in the U.S. in a downturn because of a collapse in revenues. And we're talking about debt-to-GDP in the U.S. circa 125% and rising. We're talking about the interest on the current debt now being even greater than the whole amount spent on defense. So the key number, Simon, I would say is this, that net interest payments –

And entitlements, which are primarily Social Security and Medicare, in the last 12 months have been running at 96% of total government receipts. So something gives. Is it that there is a disinclination to own debt and yields must rise to a level to encourage people to come in? No, it's either that or they formally institute policies of financial repression

forcing US banks to own treasury bonds, even in extremists following the Japanese and fixing the long-term bond yield, in which case the pressure goes from selling bonds to selling the dollar. But the other very dramatic development we've had in recent weeks is we not only had treasury bonds sell off on data flashing recession, we had the US dollar sell off on a risk-off move.

In the last 30 years, we've never had the US dollar sell off on a risk-off move in the markets. The dollars rallied on the risk-off move. There's been a so-called flight to quality. So the market's saying the dollar's no longer quality and the market's saying treasury bonds are no longer quality. And would you believe in both of those statements on a three-year to five-year view? Yeah, but the key point is this market action has happened. So it's telling you the risks of Donald Trump's running with this tariff policy.

But the irony is that this paper by the chairman of the Council of Economic Advisers, Stephen Mirram, which is basically discussing a so-called proposed Mar-a-Lago accord, the whole thesis of this paper is that having the reserve currency of the world is a burden, not a privilege.

Which to me is completely illogical. It's the other way around. Well, and it was Giscard d'Estaing, the French president, who first coined the expression, it was the exorbitant privilege that the US can borrow so cheaply and print endlessly. But of course, there is a price. The piper has to be paid. But if you step back, the dollar has these fragilities, the sort of San Andreas fault lines running underneath it.

some of which are becoming more exposed. You then go, what else can I buy in the world of currencies? And I'm not going to talk about gold and Bitcoin at this stage. The euro has won some acceptance, but not universal. The yen has become marginalized. Sterling, the same thing. The Chinese yuan is not convertible. What are your choices?

The euro has gone from almost parity to, I think, 113, 114. I mean, it's not hard for the euro to go for 120. That's not an extreme forecast. But the two most solid paper currencies in the recent years, I would have said Swiss franc and Singapore dollar.

Right. I might add to that Norwegian kroner, fantastically underpinned by its reserves, very inexpensive Canadian dollars and Aussie dollars relative to purchasing power parity. So there are choices. It's just that for large allocators, the dollar is the, you know...

When you think about that joining the asset equity question and the dollar question, if you are a euro or sterling-based investor, does that actually make you more bearish about total returns? Yes, because the fact is, even after this underperformance, it's not that big an underperformance so far. I mean, U.S. equities are just in absolute terms much more expensive than other equity markets. Yeah. And there's also, as you said earlier, there's record foreign ownership of U.S. equities.

both in Asia and Europe, going at the end of last year. On a price-to-sales basis, the US made a double top. The reason why I like price-to-sales as opposed to price-to-earnings is you have much more aggressive accounting in the US. We have non-gap adjusted accounting. So EPS is very hyped up. And the analysts have a tendency to take the earnings per share at face value.

So price to sales takes out that distortion. And my ex-colleague from Vantage, Andrew Valey, has been producing some terrific long-term data, which absolutely shows that. And yet the market hasn't cared because the market never cares until afterwards. That point I was just making has no relevance from a market timing standpoint. The other thing, though, you said it's that big indexation in the U.S.,

So you have huge ownership in S&P tracking ETFs or Nasdaq tracking ETFs. So you have a real risk in a decline that we overshoot on the downside because everybody owns the same stocks. And there's no valuation flaw in that case. No. So there's definitely a real risk of an overshoot in US equities on the downside. And

I don't want to put words into your mouth, but are you saying that the re-emergence of the active manager is upon us? It should be. Well, I think the active manager and the active ETF, both. Right. The two are linked. Yes. Well, that would be healthier. But I'm not saying you sell all your US equities, but it's just common sense in my view to allocate more money this year to Europe, to China, I would say Japan also, and to India if I just single out four big markets.

We talked in your last interview about the Asian opportunity. I think that anybody running the valuation sees how inexpensive lots of good quality Chinese companies and Hong Kong listed companies. We were just talking, I was in Hong Kong recently, and at the margin, things seemed a little better. And yet the sort of the unknowable is the geopolitical tension, China versus US with the Taiwan equation.

How does one manage that as a global investor, given that uncertainty? The practical reality is that basically, since Xi Jinping has had this embraced again, the private sector, that real risk is reduced in China. So I would say money in Asia, UK, Europe is now buying Chinese stocks, even global funds, not just global emerging market funds.

But I would also say that global funds based in the US are still scared to buy Chinese stocks because they have this political risk because they're perceived as investing in the enemy.

And if you were to lean back, accepting the danger of such sort of geopolitical forecasting, how might the China-US relationship develop over the next few years? Well, it could still improve dramatically. The bottom line right now is the simple point to understand is that the US has no leverage over China, in my view.

Literally zero leverage. Therefore, Donald Trump has overplayed his hand if this is a poker game because he hasn't got the ace up his sleeve. And the Chinese have made it crystal clear that they're going to follow the US action. So when the US initiated all these tariff hikes, the Chinese just responded. But the Chinese line is we're not going to initiate the tariff cut because you guys started this. And I think it was Apollo who pointed out last week that actually revenues...

derived from S&P companies from China is six times the level of US exports to China. Yes, there's a lot of American companies exporting from. So this is one of the things not, I think, fully understood by the current US president. There's an awful lot of US and indeed multinationals generally who still export out of China. Obviously, they're also in China to access the domestic Chinese market.

Now, in the old days, I would have said the U.S. has one very important point of leverage over China, and that is that the U.S. has the weapons. But one of the consequences of this Ukraine situation is that it's become clear that actually even the U.S. ability to get a lot of the supplies required by the military, the components, not just the rare earths, come from China.

Is it possible to say anything knowable or predictable in the context of China's ambitions for Taiwan? No, I don't think the Chinese want to escalate Taiwan at all. The risk is, though, that the more this US-China situation deteriorates, the more there may be a political pressure on the Chinese president to be more assertive on Taiwan, just so he's not looking like a pansy.

And as somebody pointed out, he's a man who has probably suffered a tough upbringing and hostile regimes and the rest of it. So if you are exposed to that sort of adverse environment, which hasn't been the case with Mr. Trump, you might be better equipped for tough times. Yeah, but he doesn't need to attack Taiwan. He simply needs to blockade it. Just like in the old days when there was this dispute between Britain and China over Hong Kong.

The Chinese made it clear more than once they could just turn the water off. So I'm not expecting the Chinese to escalate that, no. So before we continue this conversation, we're going to take a short break to have a note from our sponsors.

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When I looked at your recommended long-only asset allocation for dollar-based pension funds... Yeah, US dollar-based pension. I've had that since 2003. Okay. And for those who haven't read it, they might be surprised. The allocation is very simple. You only have five line items. 40% physical gold, 30%...

30% Asian ex-Japan equities, 20% unhedged gold mining stocks, and 10% Bitcoin. Now, I thought I had a large allocation to gold and gold stocks, but that actually makes mine look somewhat more modest. And one of our sponsors, the World Gold Council, will be absolutely delighted, you know, and that's not why you're here. But tell me, let's start with gold, because there's obviously been a rush of interest, an elevation in the price. The cynical part of me goes, oh my gosh, Goldman Sachs has just upgraded it with a big

new target. I haven't heard them mention gold in the last decade. That'd be my own view and not just them. And then actually I did go and have a look at, in as much as it's very difficult to answer the question, how do you value gold? But if you look at it versus purchasing power parity, we're back at a peak that we haven't seen since 1980. And after that followed a 22-year bear market. So

How do we think about that big gold proposed weight and the world we're in? Well, I've had that weighting more or less since 2002, 2003. Right. I mean, I've changed it a bit of the mark. The biggest change in that portfolio was introducing Bitcoin. Okay, but let me, I want to just stay with gold. But on the gold thing, so actually, the surprise to me is the gold should have gone higher earlier. Given the massive increase in the Fed balance sheet we've seen recently,

since 2008-9. And the understatement of CPI, which I think I'm right in saying, but somebody may correct me, is at least three quarters hedonically adjusted. I think that came in under Clinton. They adjust the inflation rate, which of course massages it lower because you're getting more in the way of leather seats or computing power, etc.

But the real, so gold entered the bear market from 2011, because the bull market in gold up to 2011 was basically driven by Asian buying primarily. But then we had this bear market in gold, but the real signal that gold was starting to move again really happened after the Russian invasion of Ukraine, or what's described as invasion.

which then prompted the freezing of the Russia's foreign exchange reserves, which I think clearly genuinely shocked central banks, governments everywhere outside the G7 world.

because that's the only way to explain why G7 central banks ever since then have been big net buyers of gold. And that goes back to your point of the lack of an alternative to the dollar. So that's the only way to explain why gold... Because gold then basically broke the correlation with real rates. Gold kept rising despite the fact that the dollar was strong, and the dollar was strong because the Fed was raising rates. So your view is...

That allocation, you wouldn't change it. You think this goes higher. So if that's correct, the biggest mislicted trigger of a big correction in gold is...

today would be Donald Trump doing a deal with the Russians on Ukraine, which leads to all Russian sanctions being removed. And we just go back to a normal world between Russia and the G7. But with the rest of the world going, hang on a second, if we step out of line, our assets can be seized. Yes. But that would in my view, that development, which is not impossible, could lead to a correction goal, but it's a correction I would buy. Understood. But you know, that's a big if.

And I understand you're 20% in gold stocks. I mean, 20%, you know, is a very punchy allocation, but these gold stocks have been left behind, although they've lifted off the bottom. Well, the gold mining stocks, they've been an orphaned asset class.

Apart from a small group of specialist investors, I can tell you most general fund managers never look at gold mining stocks. That's only just beginning to change. Could be. But a gold mining stock that's well run and generates free cash flow outperforms gold. The problem is there have been a lot that haven't been involved. But right now, today, we're in a perfect situation for gold mining stocks because gold is high, but the energy costs have gone down.

So their profit margins should be rising. Another problem for gold mining stocks there in the last 20 years is a lot of the retail money wanted to buy gold went into ETFs. Chris, that leaves us with item number five in this asset allocation, which is 10% in Bitcoin. You've been early. You've been consistent. How has your thinking changed? Yeah.

Yeah, well, I put Bitcoin in when it became possible for institutions to have custody arrangements to own crypto, i.e. to own Bitcoin. Because before that, you had to own it on some, what do you call it? I mean, an institution couldn't do it. So that was, I think, from memory beginning 2020.

So that was fine. But I would say the Bitcoin story is because my base premise is that Bitcoin is a digital equivalent of gold. But you have to believe the Bitcoin formula. And my base case is it made sense to own some Bitcoin because you couldn't be sure that the millennials and younger would ever buy gold.

And nothing that you see or hear discourages you from having quite a lot of conviction. Because let's face it, 10% is not a marginal position. No, no. But I want to make clear that I'm only owning Bitcoin. I'm not owning any other crypto. That's a point worth making because Donald Trump... So it's positive for crypto that Donald Trump championed crypto because it looks like it's going to be given more regulatory clarity.

But there's a risk it all backfires because the other day he proposed some US crypto standard, which included not only Bitcoin, but other crypto assets. See, these other crypto assets are basically tech protocols, the equivalent of tech stocks. And they're either going to go up in value or collapse in value depending on whether they're used. There's no way I want a global pension fund to own assets like that. So I'm purely...

in crypto but if you said to me you can only own gold or bitcoin i'm owning gold i understand well we just had nick carey who's been a guest who is the founder of blockchain.com and he was making a similar point is there a lot of pretenders in there yes that could be very dangerous but bitcoin has not only stood the test of time but it's been able to reinforce all sorts of the necessary i suppose defenses and authenticity really passed some major stress tests

And actually, but what if you if you own Bitcoin, what to give you a real comfort level, you want to see Bitcoin decouple completely from Nasdaq in a world where Nasdaq is declining. Got it. And for the record, since you and I had the last interview, I actually have.

bought a little bit and a little bit more. So there you go. It's still a lot, lot less than my gold exposure. So the other day, you know, the other day, Nasdaq went down 3%, Bitcoin went up 3%. Obviously, Nasdaq doesn't go down. That's not an issue. But for Bitcoin to be what we believe it is, it has to decouple from a declining Nasdaq. Okay, so let's turn back to the world of fixed income. You have so

said clearly again unambiguously and consistently that we started a g7 bond bear market yeah i put that to spring 2020 when they printed all the money for the pandemic yeah because that really made the fiscal situation particularly in the u.s that much more precarious

So where do you want to own fixed income? So my view, and I've got a global sovereign debt portfolio, in terms of government paper, I wanted to own local currency emerging market government bonds. So what's been subject to due diligence on the individual country. So what's been very encouraging is this local government bonds

Local currency emerging market government bonds massively outperformed G7 government bonds in the last few years, even though the dollar was strong. So the dollar started weakening. They should outperform more. And your favorites? No.

Right. Now, my favorite used to be China, but the yield went down a lot. But I still have a bit in China, but I have India, I have Indonesia. I'm less keen on Indonesia now. I was very keen. I recently put in Brazil, which is a bit risky, but the 10-year yield is about 15%.

So if Brazil becomes remotely orthodox, that's a very attractive return. These are local currency bonds. Now, if I'm going to buy US dollar bonds, personally, I would rather buy the long-term bonds of the best quality US corporates.

which are far superior balance sheets than the federal government. You have made that point, and it is interesting because it's not an often made point, but I think it is absolutely fair that what we take for being risk-free may prove to be anything other. The key point is the notion that G7 government bonds are risk-free is not based on any logic whatsoever. It's simply a convention.

But it's a convention everybody believed in, apart from a few eccentrics. But right now, we've got empirical evidence that they're not risk-free because you've seen treasury bonds sell off on data which should lead to them being bought, i.e. weakening data, because of supply concerns. The other issue on US treasuries is the short duration, i.e. big rollover risk, because about 50% of the paper gets rolled over the next two years.

The Treasury Secretary's aim must, of course, be to try and get that long-term yield down so he can do more refinancing. So the big risk of your position like me coming at the start of this year, there was a risk that the Treasury bonds could have a major rally. And that was if Elon Musk really achieved his incredibly ambitious agenda, which first stated was to cut $2 trillion of spending from the federal government budget by the middle of 26th.

Now, let's say that really happens. I would have to say that's dollar. But I wouldn't want to be short the dollar or the long-term treasury bond that that's going on. But hasn't that number now come down to 150 million? It has. I'm just saying at the start of this year. But it was also clear that if such a thing really happened...

While I think it would be incredibly good from a productivity standpoint, the US economy, a medium term view, it was going to lead to a big deflationary hit in the US economy. So the question was always, how would Donald Trump react when this became clear? But actually, as of today, now, it's not clear whether Elon Musk is still involved. It's clear he's leaving Dodge, and it's not really clear if he's involved in the administration or not. This is not clear to me. What's 100% clear is that Elon Musk doesn't believe in the tariff agenda.

So let's turn to something you have written about. You've had a strong view for a while. I'm going to put them together. You may wish to put them apart. Private equity and private debt. We know how it's become an asset class of choice. We know how particularly private debt is now appearing in more and more institutional portfolios. We also know that the world of private equity is euphemistically dealing with indigestion. But

Even Howard Marks, who was a guest the other day, said anybody who thinks the next 20 years for private equity is going to be like the last 20 needs to rethink. How do you assess the risks attached to those two assets? Well, I think the two, they're basically connected at the hip because the data suggests, I'm not pretending to be an expert, but I've read various reports. The data suggests that 70% of private credit is funding private equity. So in that sense, they're directly connected.

And it's clear that the private equity deals have been much more negatively correlated into rising interest rates in the US than for the big listed corporates. The big listed corporates locked in borrowing costs when they were very low, when these bond yields were very low, whereas the companies bought by private equity were borrowing on floating rates.

So, I think if there's a real downturn, this is where the problems are going to emerge. When I say a real downturn, a US recession. So, let's just play that through because if all of the debt origination was in the banking system, you have a set of safeguards and rails around it. You're now dealing with a vast amount of debt that's been issued out of the private sector, which sits out of that regulatory framework. Just sort of talk me through the potential playbook.

Yeah, so in a normal cycle, first of all, it was commercial banks extending the loans. There are loan officer examiners.

whose job is to make the banks to check they're making the adequate provisions for deteriorating loans. And you know, the US has a very long established bank examiners. But in this case, the banks are not the big guys doing the lending because they've been heavily regulated. Similarly, historically, if you had a slowdown coming, you'll be looking at spreads widening in the high yield bond market, what they call the junk bond market. Now that started to happen.

But in my view, where the real loans we made in this cycle are not via the bank lending, not via the issuance of bonds, it's been private credit.

So if there's a growing problem in private credit, there's not going to be any market signal because they haven't got credit spreads. Clear. And they're not incentivized, actually. So then, first of all, there's no credit spread. Second, they're not incentivized to clear the problem, admit to a problem in the loan, because then they can no longer book revenue from the loan. Whereas what they often do is do payments in kind. Picks. So they roll up the interest.

But if you're running a private credit fund, you're a bit like a fund manager. So you're paid on an annual management fee and you're paid on the performance fee.

And if you're running out, so far as I understand it, if you're running interest on a PIK basis, not a cash basis, you can still book that to your performance fee. So my simple point is there's no credit spreads and there's no bank examiners. But this market, I believe, is right. This is very much, obviously, private credit is everywhere, but it's basically first and foremost in the U.S.,

and it's probably bigger than the high-yield market now. So I said I'd ask you six questions. I have, but I'm not going to ask you two more. One is that the often overlooked area that's been in a bear market is

and I'm intrigued with, but I definitely don't understand enough about it, is the world of industrial commodities. There is a rebuild, there is a rearming, there is a rewiring, and lots of commodities have been hard hit because of fears of recession, etc. Do you look at that space and would you be surprised if, in fact, commodities outperformed equities on a three-year view? They could do, but right now you've got this tariff issue. So, so long as that tariff issue...

is not taken off the table, the commodities are at risk simply because it's increasing the chance of a downturn. The moment that tariff risk comes off, then clearly it becomes more interesting. In terms of something like iron ore, though, you're never going to get... I personally think the Chinese property market is bottoming out in the major cities, but I'm not...

I'm not expecting another big investment cycle. In the case of oil, it's got depressed again. But the one thing people need to worry about in energy is just like the Chinese shocked people with DeepSeek. What I'm now hearing is that solar combined with improving battery storage technology in China is now about to get cheaper than coal.

So that's true, which I think it is. That's a big deal. But I have to say, I've been a bit surprised how weak oil is, but that's partly because Saudi agreed to increase production.

Before we conclude, Chris, you've alluded to some of these other geographies. You spent a lot of time in India. I'd just like to talk about where does the India investment opportunity sort of stack up in this global order? Right. Well, the interesting thing about India is we had quite a – India was extremely expensive late last summer. We had the small caps trading at well over 30 times earnings.

So we had a pretty healthy correction in India, particularly in the small caps, before this tariff noise hit markets in general. So to that extent, India is not as expensive as it was. And I just think India is a good market to have some money in because it's primarily a domestic story.

It's not front and center in the tariff issue. It's going to try and avoid picking sides. It's going to try and stay out of this US-China conflict. So I just think it's got some diversification merit. And then you move on to good companies. And then you move up to Japan. It might well be that we're in a strengthening yen environment for some time. How do you assess Japan? The best story in Japan is simply this ongoing corporate governance reform, which we see growing evidence of.

So we just had news relating to Sony and Toyota. So that's the positive story. The yen should be appreciating, but my guess is not dramatically. But it's more of a bottom-up driven story.

And the other big market in Asia, China. And China's trading about 10 times earnings. And the China market can do very well if the Chinese consumer goes from being pathologically cautious to normally cautious. And hopefully that is starting to happen. I suspect the Chinese population, I think, will be behind their leadership on this whole US-China thing. So the biggest risk in China is simply that

The Americans decide to do what they're threatened, but I think it's unlikely, but they're threatened. So it's possible that is to delist all Chinese ADRs. But if you see that happening, that's just a massive opportunity for the people to buy China at extra stress levels.

And as we turn nearshore, UK and Europe, Europe is being given the draggy report about what they should do but haven't. And now we have the recognition that they need to spend more in lots of directions. I think, well, in Europe, you see, you've got a – I definitely would have raised allocation to Europe because – You would raise. Sorry, say that again. Yeah, I have done. Yeah, because you have a catalyst, which you don't have – you have a potential negative in catalysts in the US. I don't know if I've actually implemented all these tariffs.

In China, it's a question of you have a potential negative catalyst from these tariffs. But in Europe, we've had a big positive catalyst. That is, we've had this... Basically, the Germans have announced a fiscal revolution. They've passed the debt break and...

And based on everything that's been said and indicated, they're going to crank up fiscal policy. So the one big country which has real fiscal room, so that's just pro-growth from a Europe standpoint. But the real bullish development for European assets, which has not yet happened, but which definitely can happen, that is if this new German chancellor, Mr. Merz, decides to positively embrace

The proposals on Mario Draghi's paper to the EU Commission last, I think it was summer, where he basically said Europe's turning into a museum. We need to invest 800 billion euro a year upgrading digital physical infrastructure, and we have to actively embrace market banking union.

Now, when that first came out, the Germans said, we're not interested in this too much debt. If, which I think has got to be a real possibility, the Germans embrace this, then that will be viewed very positively by investors in Europe.

So Chris, we have gone around the world, which has been terrific and what I hope for in having you back with some very clear messages. But the one question I asked you last time you were here was about the UK Premier League. And it turns out that on YouTube, you had more people click on that particular comment about it. Now I have to ask you the question.

Chelsea, a better season. My question is, has Todd Burley done the right thing buying it? And Todd Burley, by the way, we're hosting the Money Maze Allocators Summit at the end of this year for two days at London Stock Exchange. We think Todd Burley is coming and we will be able to ask him these questions directly. How do you assess Chelsea and the transaction? I have to say, this is probably the most boring Premier League season since the Premier League started. LAUGHTER

A lot of you are Liverpool supporters. That's true. But I think even a Liverpool supporter would admit it because Liverpool did very well, but they didn't have much competition. And I think one thing that they risked killing the golden goose by this TV programming, I'm hearing more and more complaints by supporters because they keep changing the dates and having weird times.

That doesn't answer the Chelsea question. Chelsea's performance this season, I would say, is a disappointment to most Chelsea supporters, yeah. So for the moment, you would say that acquisition is one that is as yet unproven? To the supporters, yeah. To the owners? And financially unproven too, because the strategy is not really working, but it's also a highly risky strategy because it involves signing young players on very long-term contracts.

And you can't be sure a young player is going to work out, right? Well, you know more about this than I do, Chris. But look, it's still the most powerful franchise in the UK has, right? So Chris, if I was to summarise, and thanks again to Will Nutting's input here, and we'll be featuring some of the work that he does. I'm off to see Nutting. Okay, well, you can tell him that we are very grateful. However, you've made very clear and...

and underpinned with very well thought out logic that the US's extraordinary performance as reflected in the

growth, the value, the ubiquity of US equities in portfolios at levels that we haven't seen in our careers is being threatened quite legitimately. And you say peak relative allocation. We've talked about the dollar and why the fault lines are very clear. And this could be a new era that we are just beginning.

Why Bitcoin and gold both feature and you're not deterred by appreciation. In fact, quite the opposite. In Bitcoin's case, I think that you are looking for further evidence of the de-correlation with risk assets. And whether you're a bond investor or in PE and private debt, there are reasons that you should be more concerned rather than not. Yeah. Well, at one point I didn't mention on the PE private credit. Yeah.

is that there's this mentality out there that if an asset's volatile, it's risky. So that's one reason...

People have allocated so much money to private equity, private credit, alternative assets in general. So some of the major US endowments have 30%, 40% in alternative assets. But this idea that an asset is not, if it's volatile, it's risky, in my view, is a nonsense. And Cliff Asness, who appeared last year, describes this as volatility laundering. Yes, I agree with him. The near-term risk, because precisely because they own so much

of this alternative assets, which in a world where there's a recession, they won't be able to sell. The risk is they have to sell, which they do precisely what they did in 2009, when they're in a similar position, the big endowments, they sell the tradable securities.

But the distance this time from 2009 is in 2008-9 when they did the forced selling, they sold emerging market equities like India and China because they were very popular then. This time they'll be selling US equities because they don't own emerging market equities.

That's a good point. And the news that broke last week, which I think will get more traction, is Yale's move to reduce maybe as much of a third of its private equity portfolio, which is certainly over 30% of its total assets, which was very interesting. With that, Chris, maybe you're becoming an annual feature on the MoneyBase podcast. So great to see you again. Thank you for coming in today. Thank you.

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