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The Bull Market You Don’t Want to Believe | Rupert Mitchell on China vs. the Mag Seven
00:54:55
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- [00:00]
A
I was always impressed by the progress that China was making while I, while I was there. But, you know, just in the last five years, it's gone into warp speed. I really think that we're in the foothills of potentially an 8 to 10 year bull market here. And you know, obviously valuation is a catalyst, but, you know, there are some global quality stocks in China right now that are trading at, you know, dirt cheap valuations. The Capex time bomb that is, is, is is sitting underneath, you know, the, the Mag seven drivers of, of the S and P returns in the last 10 years. Is, is, is more of a liability at these valuations than an opportunity.
- [00:51]
B
You're watching Excess Returns. I'm Matt Zigler and today let's put this squirrel to work. Hailing from a land down under its blind squirrel, macro's own Rupert Mitchell. Welcome back to Access Returns.
- [01:02]
A
Good evening, Matt, how are you?
- [01:04]
B
I'm doing fantastic. Good afternoon. What are we saying?
- [01:08]
A
18 hours, really easy. 18 hours ahead of me right now.
- [01:12]
B
Perfect. You have your coffee, I'll sip on some water. And let's get into some stuff. We're going to do a macro overview. You brought a bunch of slides with you. I can't wait to go through charts because, you know, I love your charts. But when we start here or before we start, I want to dive into. Nobody likes outside of the U.S. the Mag 7 is everything. Have you not heard, sir? And here you go with your worldly travels, going off to China, writing it about it on the blind squirrel on the substack. And like, this is why I read you, this is why I subscribe to your stuff. Talk to me about this trip to China you just took and why you're, why you're all bulled up feeling right now.
- [01:53]
A
So yeah, I was in, in Hong Kong last week and actually, you know my friend Eric Renander, he and I recorded a little podcast for Maggie Lake, which is, I think hitting the airwaves right now. I mean timestamp today we are Wednesday after the close, New York time, I think that's going out on Maggie's the Market House substack right now as we're talking. But I'll give you the tops of the trees for sure. It's my third trip up to Hong Kong so far this year. With every visit, I am detecting a, you know, an increasing buzz. As I was saying, saying the other day, talk to, talk to someone in Hong Kong or Shenzhen about the, the trade war and they, they give you that sort of Don Draper look, I, I don't think of you at all. You know, business confidence is, is pumping there, right? Listen, unsurprising, you know, you know, 10, 10 fiscal impetus. You're, you're gonna, of GDP. You're gonna, you're gonna, you're gonna see a lot of things popping. But I went back into the mainland for the first time since COVID just a trip over the border. Shenzhen went to go and see BYD went to go and see Tencent, went to go and see Yubi Tech, which is one of the robotics companies. Listen, I was always impressed by the progress that China was making while I, while I was there. But you know, just in the last five years it's gone into warp speed. You know, byd, you know, not quite sure that anything touching automotive can be a great stock, but what an awesome company right now. And then Tencent, which has been a lazy long for me since the October 2022 lows. You know, they've got deca corns hiding behind every corner. Right. You know, your mind's eye around, you know, Tencent being the WeChat infrastructure plus some video games and a cloud business. You know, check that opinion at the gate. It is, you know what that, what they're doing across less CapEx intensive AI dare I say. And we can talk about the what I the contrast in a second. They, they are, they are a one one stop shop for, for, for all aspects of the, of the China story right now. So yeah, I'm super bulled up. So you know, spending a week with Louis Gov is always going to, is always going to put some sort of, you know, what's it, what's it, what's some nitro under your China bullishness. But you know, I was, I was already getting there by myself.
- [04:54]
B
What do you think it is about? Why now? Why in 2025 are they hitting this inflection point? And especially with the we're not even worried about tariffs or trade war attitudes. Why, what culturally is happening now that's helping drive this?
- [05:11]
A
Well, they're bearing, they're enjoying the fruits of a decade long Made in China 2025 Industrial Policy Plan. And you know, this is playing out exactly as they intended when they kicked this off in 2015. You know, they have a globally dominant auto industry now. You know, actually it's just not auto, it's just everything in advanced manufacturing. You know, the, you know, shoring up the supply chains of all of these industries, you know, was a strategic masterstroke. I think it's almost impossible for the rest of the world. To replicate that now. And I think that, you know, it's not in their interest to abuse that chokehold, right, unless someone, someone forces their hand. And we saw an attempt this year to force that hand which didn't go so well. I think that's why we're talking about me and G being best mates and the G2, which is exactly what G wanted at the end of the day to be taken seriously as an equal pole in, in, in, in geopolitics.
- [06:31]
B
Where do you think this takes us? Sticking on China for just one more point. How far does this have to go now that it's hitting lockstep?
- [06:39]
A
So I, I mean we can look at some, we can look at some numbers in a second, but I think we are, you know, yes, China's been in a bull market for nearly 24 months right now. I think you can, I think you can safely say, I mean it was, it was, it was with a bit of a hiccup. It was this, this Chinese stock start to, started to move in January of 2024. Obviously you know, everyone in New York went, woke up when David Tepper started saying buy China in September of that year. But they, they'd already been on the move from earlier that year. But I really think that we're in the, the foothills of potentially an 8 to 10 year bull market here. And you know, obviously valuation is a catalyst but you know, there are some global quality stocks in China right now that are trading at, you know, dirt cheap valuations. Dirt cheap valuations. Which kind of, kind of brings me on to, I mean this, yeah, perfect segue.
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B
The chart of truth. Get enough here.
- [07:43]
A
This is the chart of truth that we've talked about before. This is the weekly chart of truth. Now this doesn't actually include China, right? This is, this is the S&P 500 versus the MSCI ether, which is the developed world ex us, right? And obviously we had that sort of massive correction in what had been a sort of 15 year out, well, 12 to 15 year outperformance by US equities over international equities through to May. And then we, you saw the, the weekly, the weekly bounced off the 200 week moving average back in May. And you know, initially quite an aggressive bounce, right, Getting a little bit of a tail rin because the, really the dollar did nothing over the course of, over the course of your summer and it's starting to perk up. I, I wonder if that's more of a sort of risk off factor than everyone changing their mind about hedging Dollar exposures to dollar based exposure to financial assets. I still think that developed markets ex US are in for a significant period of outperformance versus the what has been the only game in town for the last 10 to 15 years. Ultimately what's, what's, what's, what's carrying the fight back is some resuscitated excitement about artificial intelligence. You know let's not rehash that debate. I think that ultimately the you know the capex time bomb that is, is, is, is sitting underneath, you know the Mag 7 drivers of the S and P returns in the last 10 years is more of a liability at these valuations than an opportunity. And I think the real reason that everyone loved these businesses was that they were spewing cash with no liabilities and this AI has turned the business model on its head. Now contrast what I was suggesting when contrast that with where someone like Tencent, one of the big AI leaders in China right now their capex is only 10% of revenues right now. They are not betting the farm but they're getting equally intriguing outcomes. They're not aiming, they're not aiming for digital God at all cost. They're just using LLMs to make their individual verticals a bit more powerful. So I thought that was, thought that was intriguing. And yet we've still got and this is just global policy risk and US policy risk. I mean over a 10 year time frame. Yeah geopolitical sort of tape bombs are not hitting us every single minute of every single day but we're still at pretty elevated levels. And you know there is to my mind there's been a sort of process of political containment of policy chaos since May which is always at risk of breakout at any time and ultimately getting back to you know, this whole business of train stopping. I mean if you look at the way in which the rating and this is a trend pe so it's a bit like a cape so it sort of smooths out the averages. You're looking at a trend PE that's doubled in US equities in the last decade. That is a tough act to follow and to beat. Right. And to my mind continuation of that trend is entirely reliant on, it's going to be entirely reliant on flows. Now if the rest of the world, and we haven't even, we've talked about China but em generally rest of world equities generally take even as just a fraction of the flows. This thing is these ratings are decided you know at the margin and ultimately yes, I mean the pe could go up. And the biggest drivers of S and P earnings over the last decade have been the Mag 7. And it's pretty clear with this, this investment they've got going on that it's unclear. I'm not going to be any make, I'm not going to fall into definitive statement traps. But it's not clear where the earnings are coming from from this AI span. So you know, it's, it's flows and whether or not the market is simply prepared to ignore temporarily missing earnings over the over, over, over the next, over the next, next sort of if you like cycle and you, you look at where the US is here in here in red and this is, this is just, this is just Global Equity Forward PE's year to date you've got the boxes one standard deviation around the mean and the brackets are the min and max for the year. I mean we've seen some re rating by ex US equities. I mean particularly in Europe, you're right at the top of the range. But you know, in absolute terms, apart from the obvious outlier in Asia which is India, which is, you know, still absurdly expensive. I, I've given up trying to short it for the time being. I was, I was, you know, I, I, I've spent enough time in my career trying to do business in India to, to get worried about trip paying, paying four and a half times book for banks. Right, right. Actually it's not quite as much as that, that, that, that, that's what it was you know, a few years ago. You're still looking at some of the most expensive stocks in the planet really justified by you know, this kind of idea that India is going to be the next China opportunity spouted vocally by the people that are saying that China is uninvestable. The irony is not lost. So it's, it's, it's so I think, I think the opportunity from at least in my mind really exists outside, outside US equities. I'm not saying they're going down, I'm just thinking that they can just be wading through treacle for a, for a reasonable period of time.
- [14:42]
B
Inside of this how do you think about, how do you parse out the impact of the MAG 7 top 10 of the S and P, the growthiest of growth, highestly most highest valued stocks in the index versus the other, the other 493. Because when we start to look at the differences like those flows are going into just a very concentrated number of names in the US is all of the US the problem. And at the index level, it's the whole thing. Or do you parse those as two separate beasts right now?
- [15:14]
A
Well, I mean, I think it is the same thing really, Matt. I mean, ultimately, given that, I mean, you know, without straying into my green territory, without, given, given the dominance of, you know, just the force of numbers of how passive money flows into the US Stock market, you know, by definition, these guys suck all the oxygen out of the room. You know. Yeah, the, the other, the other, the forgotten 493. You know, ultimately sometimes feel, feel like, feel like, feel like they're in a different market.
- [15:52]
B
I think we need to coin them the forgotten 493.
- [15:55]
A
Officially the forgotten 493. It's got a catchy, catchy.
- [15:58]
B
It's got a catchy catchiness to it.
- [16:01]
A
So, yeah, the passive flows will keep coming while the economy is still humming. Right. Because it's 401ks, it's retirement savings, etc. And it's, and it's buybacks. Right now, how much money do the big tech companies have for buybacks if they're investing so much money in data centers? That's a question mark for me. You know, white collar 401k flows, you know, is that impacted by AI itself? Right. And then you've got demographics. At some point, do the boomers peel off their cues and buy some bonds? Wouldn't be my choice. But, you know, I can see, I can, I can see the appeal. And you're, you're far, you're far closer to those conversations, Matt, as a planner than, than, than I am. But, you know, certainly, certainly all of my boomer readers still, still love their Q sips and still love playing with stocks. But, you know, they probably don't spend, spend much time talking to planners. Right?
- [17:12]
B
Yeah. And we are seeing, I mean, we're always seeing some sign of it. You always know somebody who's taking a little bit off the table or asked to do something. But this is a question.
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A
Sure. You're begging them to do. I'm sure you're begging them to do it from time to time.
- [17:26]
B
Yes. Years of begging and being reminded how wrong some of that begging's been. But yes, point taken.
- [17:33]
A
So, I mean, let's talk while we're talking about Bill. I love. So I'm, I'm using, I'm. The charts I'm using are from my friends at Augur Infinity. And their software just makes the most beautiful, beautiful charts to my mind. But I mean, so here we've got this is where the entire curve has been over the course of this year. Right. And I guess my general point here is you've got a bond market that is trying to tell you that people should be buying bonds, not stocks. Right now we've definitely got yields coming down and I'm no fan of bonds as a diversifier. I do my diversification elsewhere. But you've got the bond market. One interpretation that the bond market is saying that the economy is slowing down. Right. By contrast, the credit markets do not give a right. They are, you know, we're trading, we're trading, we're bumping along the lows in credit. Now I've written a bit about that over the course of the summer. My real sense here is that you've got a situation where private credit has taken the real dross out of the high yield bond market and by default the, the, the traded high yield bond market has been really upgraded in quality. Now I've got a very big credit hedge on with very moderate expectations about how the yield, how the spread blowout might be when as and when and if we do get a real credit event rather than just whispers and rumors about cockroaches. You know, ultimately what does a spike high before there is some kind of monetary intervention? What does a spike high in the high yield OAS look like? I think it's probably, you know, it's not much more than 700, 750 over. We're not talking about a plus 10 plus 12% type credit event before there's an intervention. But I think at that point you need to take a very serious look at flipping this credit hedge into a long hyg exposure or long high yield bonds. If you're capturing at that point almost a double digit yield on what is a very upgraded credit index. I could find myself long, long, long, long corporates for the first time in a while.
- [20:21]
B
I want to spend a second on that idea because I think that that's really important to both the impact that private credit has likely had on what's in the index which you've written about and then why that represents if we do see a spread blowout, blowout giant air quotes, yeah, that creates a pretty interesting opportunity and what's actually in this index now because the index composure has changed materially and not enough people are talking about that point. I want to hear.
- [20:47]
A
Yeah, I think it's, I think and 1-80s are the most difficult thing to do in finance, let alone people like me in the narrative game. Right. What you mean you're saying Completely the opposite of what you've been saying in the last 18 months. But I've flagged it very clearly. I will be a buyer. Well, so, so, so two lines you've got on here is, you know, I don't have an isda, right? So I can't be mucking around in the, in, in the, in the, in the credit swap, credit default swap market. But you know, there is a, there is an ETF out there. There's an ETF for everything these days. But short junk bond SJB is the Pro Shares, is the Pro Shares sort of credit hedge. And essentially this is, and I've written about this in, in detail in the past, but I mean look, look how it tracks against the High Yield Oasis. Um, it's a very, very low cost of carry instrument. Essentially it is a, a box of T bills plus the, plus the swap. So versus shorting HYG or shorting HYG H or buying puts or put spreads on H, H Y G. This is, this is just something that you can sit, sit in sit in and hang out.
- [22:05]
B
I want to drill in just one more point on this because you've written about it. That change in the exposure inside of the index. How do we know that those credits have gotten better? Why is this a different vehicle now? Why does this make you excited to own it if those spreads blow out even a little bit?
- [22:23]
A
Yeah, you'd be really surprised. The kind of names that are in the High Yield Index right now. I mean, I remember sort of, you know, it's like opening up a dirty nappy sometimes looking inside the High Yield Index at times, but you go, wow. I mean, so the quantity of, the quantity of sort of fallen angels in there. And of course when you, when you have a credit event, there's an acceleration in fallen angels as well. So just the simple act of reacting positively to the credit event will give you an increased share of, of Fallen Angels at a better price. So I mean, you know, it's, it's, you know, having having been nowhere near corporate credit for a long time, you know, I, I suspect we're going to get served up an opportunity, you know, tough to put a time on it. I, as I said with this SJP SJB product, I can, I can hang out in here with a very low cost of carry for, for a long period of time and wait for when and if it happens. I mean my, my, my outcome is, you know, you know, just a bit of opportunity cost and at that point.
- [23:41]
B
It'S basically understanding at the portfolio level, it's a rebalancing strategy. It's literally saying I don't like this valuation. Now if I got here I would like it. Here's the case why. And I'm going to flip from A to B. Even though that means turning your story on its head and having some people go, didn't you just say this opposite thing?
- [23:59]
A
Yeah, exactly, exactly. Now we talked about this chart before actually no, I didn't talk about it with you last time. But the, but this, this, this comes down to, you know, why, you know, bonds, we've talked about corporate bonds potentially being part of where I am and I'm not, not allergic to bonds everywhere on the planet. I have some significant exposure to em, local currency, fixed income. You know, it's, it's really, it's really an issue of it really an issue of central bankers that you trust, right? So this is, this is the Post war rolling 12 month stock bond correlation. And you know, listen, I've heard people discuss this on your show. It's something I've been banging on about for, for three years now is that, you know, the whole risk parity miracle that still underpins your entire industry, Matt, was really a sort of a fluke of time, right? We had a period between 2000 and 2020 where we had this negative correlation between stocks and bonds and it was even more exciting for a global investor, for a non dollar investor because you got the risk off dollar kicker when equities sold off as well. And so far over the course of the last six months, right, from almost perfect positive correlation, we're seeing a track back. I don't think we're going to dip back into negative correlation again. I think, I think we might, we might, we might see a bit of a bounce if it gets anywhere near that zero line. Either way, zero is not a hedge, right? You know, you need this to be properly negatively correlated for that, for that whole 60, 40 thing to work, the risk parity thing to work.
- [26:05]
B
And it's, it's the first time in this blip of history where the alternatives argument has actually made sense, which is a bit terrifying with the sale of alternatives into this environment. But the point stands.
- [26:18]
A
Let's talk about alternatives. So I mean I do a number of things as an alternative to owning the classic sort of treasury block in a portfolio. And this is my beta portfolio. So this is bushy, We've talked about bushy before, Matt. This is, this is basically 70% of what I do, right? This is 70% of my, what I do and you know, I do the, I do the sex and violence elsewhere but this is, this is a portfolio of currently I think it's 23 US listed ETFs. There's a couple of mutual funds in there. Right. But essentially, you know, anyone with an interactive broker's account can, can, can, can own this portfolio. As you can see, it's incredibly defensive at the moment. You know, I'm almost 20% in cash and SJB and that's increased a little bit recently because I sold some precious metal miners last week which were quite a big part of the thematic equity book in there. But my big diversifier which has been a bit of a, frankly it's been a bit of a tough year is my allocation to CTAs and trend. You know they are, you know, still fighting their way out of their first, you know, their largest drawdown in a long, long time. But you know, and, and also the way in which this market has worked into the summer, I, I, I do worry has sucked them into some long positions that are looking pretty vulnerable. But you know this is, this is, this is the, this is the, this is the challenge for a control freak like me. I've just got to let them do their cooking. Right. I sometimes, sometimes love to see that they're completely fading my discretionary macro views. Right. But that's the point of them there. I mean, and I'm totally sold on the fact that you know, momentum, the momentum strategy, which is what they are at heart they are a price only strategy, has been the most successful investment strategy over time. I just don't consider myself to be a desperately good momentum investor. So I outsource it to the CTAs and then you've got the emerging market, local currency, fixed income, that purple cheese underneath there. I've got an awful lot of precious metals. But my goal component, which is the largest by far I, I've got hedged out into, I, I colored was about three and a half weeks ago and it's collared out a zero cost collar on the GLD out until January. I think we probably correct in time in gold from here just for a few months, take a pause, get, we need a few more people to get bored and look at and start looking, looking, looking at other things. I think the miners chop around a bit as well. You know, I'm probably, I'm, I've got, I've got a very clear idea of where I will get back into the gold and silver miners and it's, it's, it's above where we are right now.
- [29:47]
B
Do you want to spend just one more minute on the precious metals in particular? Can you separate the price of the metals themselves from the miners and how you're viewing them right here?
- [29:57]
A
So, so the, the, the physical metal exposure is a, is a sort of constant. The, the miners, you know, I thought I was adding them quite late in March, April this year and then, you know, they proved, what do I know? I, eventually, I, eventually as I, as I alluded to, you know, sold them the other day because I'm a terrible momentum investor. But it did look as though the momentum had stalled. And so, you know, I'm, I'm happy to get back into them when the momentum has went. Well, basically when the chart sort of repaired itself.
- [30:37]
B
Is the view there too that just with some chart repair with, with like you said, people have to get bored, chase another unfortunately, pun intended shiny object. And then once that comes back, you still think the medium to longer term case is there for these mining companies and for the metals themselves.
- [30:59]
A
You know, these, these guys are minting cash, you know, a $4,000 an ounce gold and energy prices suppressed. These businesses are a lot more efficient than they were. I mean the gold miners have earned a terrible rap over the years as destroyers of shareholder value. I think capital allocation discipline has been beaten into them with a blunt instrument over the course of the last 10 to 15 years. And actually almost to the extent that they're sort of scared of their own shadow right now, I thought it was, it was, it was, it was, it was such a, such, you know, when, when, when, when the ticker symbol gold is given up by one of the major miners, that's a pretty good indicator of where we are from a, from a sentiment perspective. I'm talking about Barrick certainly, I'm talking about Barrick. When Barrick Gold became Barrick Mining and gave up the ticker gold, I mean that, that's just, that's just wild. You can't make that up. It's almost as good an indicator as when a country ETF gets shut down. You know, that a massive bull market case in point. You know, one of my international exposures is, is afk, the Africa etf. Now I, I, I, I got, you know, Africa, African equities have had an amazing run this year and I, I sort of first allocated there in around November of 2020 fall. You know, one of the key signposts for me was the closure of a couple of single country ETFs in Africa. There was an Egypt one that went, there was a Nigeria one that went. Always, always a good sign. When you see, when you see sector ETFs or country ETFs being closed, have a dig, have a closer look, see what else he can be doing around that.
- [32:57]
B
Spend an extra second on this one with me. You have an investment banker's experience of setting up and launching product products, investment products in different corners of the world. Frame out for somebody who hasn't thought this way about this problem before of a country ETF A being created in the first place and sold to investors and then them going, not such a good idea. We're no longer happy with this. We're going to shut this down. Why does that get you so excited when they're going to kill off one of these products? Can you just walk through that logic?
- [33:29]
A
The way you see it, it's simply a sentiment thing, Matt. I mean, ultimately, you know, etf, etf, ETF shops are commercial beasts and they have a, you know, there's a cost of doing business in terms of keeping these marketed and keeping these, you know, out there. And there is a, there is a critical mass threshold at which it no longer makes sense. And I'm afraid, you know, we as a collective, as human investors are terrible timers when it comes to, you know, when you should no longer, when, when, when the collective wisdom is that we're no longer interested in say Nigeria or, or Egypt. Both, both currencies. Both, both countries that had significant currency devaluations. Now, currency devaluations, unless you're Argentina, which is sort of unique and they need to, seem to, need to do one every sort of three or four years. Currency value devaluations typically mark the low. Right. You know, if it's, if it's typically a once and done, it's, it's taking the IMF medicine, it's whatever. And you know, usually building out of that rubble can create sort of generational opportunities. Now I was telling you before we sat down that I sat down to record a podcast yesterday. Actually it was the day before yesterday with my friend Scott Osheroff, who runs the Uzbekistan Fund for Asia Frontier Capital. Really interesting guy. He's been a frontiersman all his life. Myanmar, Mongolia, and now he hangs out in the stars. Now, okay, before everyone, before everyone zones out and says, I'm not, I'm not buying a, I'm not buying a frontier equity fund in, in, in Kazakhstan. Although actually it's quite attempting, attempting sort of minimum know, I think, I think non US Investors can, can, can put in ten grand. But the Uzbekistan story is about to be one of those classic when Frontier Em becomes real em and starts attracting some, some dollars. They've hired, they've hired Templeton to run a privatization fund. So they're going to drop all of these major stakes in state owned enterprises into a London listed closed end fund which is just going to be, I mean I think that's going to be a classic coffee can investment. You're buying, you're buying banks that are growing book at books. Book at 30% per annum at 1.2 times book and on a two to three times PE. You've got to my point about emerging market local currency, fixed income. You've got a classic hawkish emerging market central bank. You know they've got, you know you've got inflation, you've, you, you've got inflation at around 8% but you can earn 16, 70% in front end bills in the SOM, the Uzbeki SOM. You know, every time these guys do a euro bond deal in dollars or euros, it's sort of multiple times inscribed them. And this is, you know, the thing about emerging market central bankers is they have no choice but to manage real rates first and keep those positive because otherwise they lose the currency. What we're dealing with in the west is a kind of game of chicken with the classic Triffin Dilemma. Right. And my suspicion and fear is that we're just going to see a series of, of, of currencies getting let go and, and, and competitive devals. But we're not going to see that in any. That's. It's fast in my view and it's.
- [37:36]
B
Fascinating to hear a story like that because especially when you get down to the, the rate of growth in those banks, the valuations of these companies, you could not be a. That is the true polar opposite scenario of what we're painting for the US including with, with a, with a flow perspective of you saying, taking this, putting it in this fund structure. We now have a flow argument. We have flows plus valuations on the argument and that feels like the opposite of what we're talking about for the U.S. yeah.
- [38:05]
A
So. So Templeton had a roadshow just about three weeks ago in Tashkent. Right. And the who's who of emerging market investing and global family offices all showed up there. Yeah, I mean I just think it's a really interesting. I'm writing it up this weekend. I'm publishing the conversation probably on Saturday I think and then I'm writing up a detailed note on it. It's just something to get your homework done ahead of Q1 next year when this deal happens or if you're so impatient, you can give Scott a call, put some money in his fund. But what's so interesting, I mean you know we've got the whole, you know, Uzbekistan is the storm that's really got its together right? And you know, it is the belt buckle of the belt and Road. It is 38. A popular, a young population of 38 million great natural resources. You know, the state owns the world's fourth largest gold mine. You know the, the sovereign balance sheet is in, you know, unbelievably good shape. They get plenty of remittance income as well. I mean I think, I think it's, it's ticking so many boxes for me.
- [39:25]
B
It's so interesting. So now speaking of hunting out these things, we gotta talk about the acorns. Take me, take me to the acorns.
- [39:33]
A
Well, so yeah we spent a bit.
- [39:35]
B
Of time.
- [39:37]
A
We'Ve spent a bit of time talking about the beta portfolio. I mean the sex and violence happens elsewhere in terms of, you know, some of the themes are pretty common. There's, it's a lot of international ideas. You know most of my ideas in, in the US in US equities at the moment are on the short side. I've, you know, I think that the, with, with the, with the, with the sort of K shaped outcome in the economy, discretionary spending is, is definitely impacting the numbers for the, for the, for the restaurants and particularly the fast casual names like Carver, Chipotle, Wingstop are just incredibly expensive still. Even after yeartodate sort of 40 plus percent corrections. Right. Carver missed earnings again the night before last. And you know it's, it's still trading at $15 million per outlet. Right. I mean I, you know I actually wrote up this, wrote up this idea in detail in the, in this, in the suffer. I think you knew this because we talked about my life before. I grew up in the restaurant business and this was the tough lot of the innkeeper was. And I wrote up but, but just, just, just sort of running around and this sort of reflects where I've been in, in the acorns. I have been long China for, for, for two, two years. But I really try and stay in what I call sort of lower beta. Well what are lower beta exposures to China? I don't really want to be hit with drawdowns for you know, hot money changing its mind. I am having tolerated a round trip in the refiners in the U.S. refiners and back into the global refiners. That's low energy making sense of junk. That was what we were talking about with the high grading of the high yield index.
- [41:58]
B
Peace.
- [41:59]
A
I've got a degenerate natural gas trade on for this winter. I'm my favorite weather guru is talking about a top five. Buy an extra jacket Matty because it could be a top five cold winter post.
- [42:12]
B
The park is out already my friend.
- [42:14]
A
The park is it. Yeah, I've had a great run with the Amazon of Africa and that's New York Stock exchange listed junior which I wrote up in the summer. The layaway fallacy this is buy now, pay later now I got stopped out pretty rapidly out of shorts in both the firm and in Apple the Cupertino rent seeker. I think those opportunities are coming back. I'm long Gulf equities so uae, Qatar and Saudi. I think that's a really interesting restructuring of the economy that's going on.
- [42:55]
B
Not just a comedy festival. A lot going on over there too.
- [42:58]
A
There's a lot going on over there and then just the esoteric stuff in the rates market. So little history lesson. At the tail end of the Clinton administration the treasury stopped issuing 30 year paper 30 for about three and a half years. And I think and while I'm no massive fundamental long duration fixed income fan I think there's a risk of an accident in the, you know in a, in a, in a sort of not designed but an accidental shortage of on the run 10 year paper. And so I've, I've, I've, I, I, I'm, I'm running a, I'm running, running a little esoteric position just in case, just in case that accident happens. But yeah so we go everywhere we are geography agnostic, asset class agnostic sector agnostic. It's wherever those nuts can be discovered.
- [44:05]
B
I want to go into just a couple of these just a little bit further. I want an update on both the global energy at basket. How you're thinking about the offshore companies. How are you thinking about just like the way you talked about the gold miners. Talk to me about the energy complex, the energy businesses of the world. It's been a weird year and it doesn't seem tell that story.
- [44:30]
A
Yeah. So I'll start from how am I positioned in energy right now? So I talked about adding back global refiners. I mean I, I still think that these businesses are trading well they are trading at massive discounts to their replacement costs. No one's in a massive hurry to build these assets and I think we're going to be using them for way, way longer than anyone ever talks about in an IEA fantasy. Over the course of the, over the course of the past 10 years. I'm long Canadian EMP, so I've got a basket of Canadian producers. Those are the only producers that I own right now. And I'm also, I've also been on the roller coaster that is the offshore drillship players. Over the, over the. But you know, fortunately I, I got into those really early. You know, late arrivals to the offshore party have worn sort of massive 80 plus percent drawdowns. Again, it's a similar argument to the refiners. The world is not building any more drill ships and ultimately we're still going to carry on consuming oil. I really feel that all of the forecasts around oil demand studiously seek to sit behind a viewpoint that the Global south or whether it's India, whether it's Africa are going to carry on consuming less than a barrel per capita of oil per annum versus you guys are almost at 30, right? Energies at the base of Maslow's pyramid of needs. The idea that the other 7 billion people in the world aren't going to want the kind of energy that we take for granted just doesn't make any sense to me. And it sort of ties into my China point. A lot of the assumptions around emerging market energy demand are based around passenger vehicles and passenger vehicle adoption. Well, if BYD is selling hybrids into Africa for less than $5,000, all of a sudden you've got to totally tear up your old model in terms of vehicle penetration, right? These guys are. The grid infrastructure in parts of the emerging world is not going to be there to support immediate vehicle electrification. But if BYD can sell you a five grand hybrid, all of a sudden you're going to start seeing per capita consumption of energy goods increase in those parts of the world. And then I've got my Strategic Petroleum Reserve. So this is another bond replacement. I don't see why energy should not be considered a real asset. And so, you know, whilst it's been a chaotic year at the front of, at the front of the crude curve, my exposure to long dated WTI and Brent futures contracts, you know, has really just been a bit of a flatline. You know, I, I'm not, I'm not, I'm not, I'm not, not yet in a position that I'm going to be able to pick up a roll yield when I, when I switch my December 27th for December 30th. But I'm happy to wait. I mean, I just think that a barrel of energy should be viewed as a real asset. And I'm not talking about, I actually tend to have sympathy that we are going to have higher front end energy prices. I hope for the sake of the rest of our portfolios that doesn't happen too dramatically and too quickly. But I can see us back to a triple digit barrel at some stage. But how that happens is really the important thing for the rest of our portfolios.
- [49:01]
B
How about an update too? And this is still, I know you just referenced it a moment ago. Family history in the restaurants. They gave you a really interesting perspective on what was going on in the fast casual food chain and everything else that this was. Was this the tough lot of the innkeeper? Okay, great. So maybe just lay out what you saw going on there because you have a long dated family history with this. But then I'd like to hear your state of the consumer view for where we are coming into the end of 2025 as well.
- [49:32]
A
Well, I've always maintained that a restaurant owner has a better feel, you know, for the real economy than almost any other industry. I remember growing up in the business and my mother and stepfather would feel every single minor bump in the road in UK GDP between, you know, 1980 and 2005 when, when they, when they sold that place. And you know, interestingly, restaurant share prices in the US have been a really good leading indicator of personal consumption. They see it coming first. I, you know, you just need to scan through the transcripts now that, you know, the, you know, some of these restaurant names, particularly in the fast casual space have been kind of, all have had almost mimetic quality over the last 10 years. And the market's been prepared to value them based on a massive expansion of their footprint. You know, we're going to have 10,000 stores around outlets around the world. And so they've been valued on almost like a sort of total addressable market type multiple. At the end of the day, you know, these, these businesses need to be, you know, need to be valued according to their P and L. And we're seeing same store sales decline. We're seeing massive hits to discretionary incomes in key cohorts. Whether it's young people who are suddenly, you know, repaying student loans, whether it's, whether it's, you know, lower income cohorts disappearing completely. So you know, classic example now I'm not, I'm not short the fast food chains, the McDonald's and the, and, and the, and the yum brands. I mean, ultimately, they're, they're, they're slightly different. Business models are sort of more sort of private equity style, sort of, you know, franchise models. But if you talk about them by way of an example, you know, they'll often talk about people shopping down to qsr, you know, when, when economic times are tough. But that shopping down effect, I. E. When, when wealthier cohorts start moving and moving, moving down to Macy D's, that, that effect does not compensate in any way for the loss of the lower income cohort if they're no longer spending, because that, that cohort is just so much bigger. And then further up the value chain, you know, ultimately there is a massive shortage of people that are prepared to pay $25 for a bowl of slop from Chipotle these days. And, you know, I, I think, I think, you know, I actually, I actually took this restaurant idea to this ideas conference in Hong Kong last week. Even after it had a pretty good run from August, there'd been a sort of slight resetting in October. And I think we're, I think we're ready for another run. And we just had, you know, a handful of earnings this week. And to be honest, you know, the, you know, keep an eye on short interest levels, keep an eye on sort of oversold sort of RSI metrics. But, you know, I think that this, this, this trade has another couple of innings.
- [52:55]
B
It's ideas like this is the way you frame this out, which make me such a fan of your work. Rupert, if people want to find more, they want to bug you on the Internet. Where are you sending them today?
- [53:06]
A
It's so easy, it's blind. Squirrelmacro.com you can find me on the interwebs on, on Twitter, at squirrel macro, on LinkedIn. As Rupert Mitchell, I'm not as good on that one as you are, and, and then come and join us in, in the dray. I mean. So my subscribers, I've got a Discord server, which is called the Dre. And you know what I love about this is that it's the first place I go when I wake up in the morning and they've all been at each other all night and people posting charts and riffing on ideas that I've come up with and coming up with better expressions of my ideas. So I love that and it's a big part of the offering. But I write two and a half times a week and, you know, can find me at blindsquirrelmacro.com.
- [54:01]
B
Go to blindsquirrelmacro.com follow Rupert on the socials. Check out the work he's doing. It's a really great complimentary take to whatever your process is because he's bringing a whole host of ideas to the table. Really remarkable work. Love what you're doing. Rupert. Thanks for hanging out with me early in your morning.
- [54:18]
A
Oh, hang out with you anytime, any place.
- [54:20]
B
Matt Fantastic. That's Rupert Mitchell. I'm Matt Ziegler. You're watching Excess Returns. See you all real soon. Thank you for tuning in to this episode. If you found this discussion interesting and valuable, please subscribe on your favorite audio platform or on YouTube. You can also follow all the podcasts in the Excess returns network@xcessreturnspod.com if you have any feedback or questions, you can contact us@xsreturnspodmail.com no information on this podcast should be constructed construed as investment advice. Securities discussed in the podcast may be holdings of the firms of the hosts or their clients.