← Excess Returns 
Excess Returns
The Chart of Truth Is Turning | Rupert Mitchell on the Regime Change Investors Are Missing
01:01:05
Loading summary
Transcript61 lines
- [00:01]
A
On December 12, Disney invites you to go behind the scenes with Taylor Swift in an exclusive six episode docu series.
- [00:09]
B
I wanted to give something to the fans that they didn't expect. The only thing left is to close.
- [00:14]
A
The book the end of an era and don't miss Taylor Swift. The Eras Tour, the final show featuring for the first time the tortured poets department. Streaming December 12th only on Disney Plus.
- [00:30]
C
This chart has been in a downtrend since 2012 and when these things goes, you know, it's all bets are off. I mean if we have a kind of 2000 to 2002, 2002 to 2007 type cycle, things could get really interesting. The NASDAQ 100 really hasn't made a higher high now for, for three months. And you know, with the exception of, you know, the resurgence of Google, you know, the rest of the rest of the MAG7, which have led the market for the last 15 years are, are putting in a topping formation right now. The Chinese leadership want domestic equities to work as a unit of savings, as a real asset class, not a token of speculation. China has plenty of scope for targeted fiscal stimulus and that's the dirty, dirty secret of bull markets. Fiscal, fiscal drives, equity markets.
- [01:32]
D
You're watching Excess Returns, the channel that makes complex investing ideas simple enough to actually use, where better questions lead to better decisions. My guest today, Mr. Macro for Civilians, the blind squirrel himself, Rupert Mitchell. Welcome back to Excess Returns.
- [01:48]
C
Hi Matt, Good evening. What a day, what a day we.
- [01:52]
D
Are having on this January 20th of 2026, the year of our Lord. Part of the reason we're on this call today is because you were my first message after the whole Trump Venezuela thing and that started a back and forth and not so much for any great opinions on exactly what that means. But if somebody hasn't heard it yet, go back and listen to the intentional investor I did with Rupert and you'll understand why I threw the bat phone away. I exclusively use the squirrel phone in these scenarios. So we were talking about that and I mean, maybe start here. Could you just tell us about your Macro thesis with this because you do have a pretty strong view on oil and what's going on in those markets.
- [02:41]
C
Well, yeah, I mean, so my initial reaction was to not react. Right. I mean, listen, we, it was, it was, it was slightly later in the day on, on Saturday over here in Australia when, when, when the news broke and you know, the knee jerk reaction. I've got a lot of Canadian oil and gas business businesses in the portfolio, perceived losers on the Other hand, I've got a pretty decent exposure to, to refiners and US Refiners, perceived winners. And I've got a very healthy, healthy overweight in Latin America. You know, Venezuela's frankly been unplugged from Latin America really for the, for, for most of the sort of Chavista period. But the refugee crisis, because of what's been going on in Venezuela, you know, it's put a lot of pressure on a lot of economies in that neck of the woods, you know, and it's, and it's been turning quite a lot of political dials. I mean, it seems strange, but, you know, Venezuelan, Venezuelan immigrants, you know, were a key campaign topic for the, the recent Chilean presidential election, which obviously flipped, right. Economies like Colombia, you know, under a huge amount of pressure on their health care, on their prison systems and on all of their social infrastructure because of the migrant crisis. So, you know, if we are looking at a world in which, you know, Venezuela reenters as a customer to Latin American businesses and you know, you start to see a reversal of that migration flow, you know, equity markets in the region, which have been having a very, very good couple of years, actually a pretty decent five years, but accelerated in the last 12 months, which is why everybody's talking about them. Funny that all gets a little bit eerie and crowded feeling. But yeah, it's, it's a, you know, I think the right, the right answer was to sit on your hands and we can talk about Latin America specifically because it's a big overweight for me right now in a second. But I mean, I, I, I guess, I guess because it's you, Matt. We always have to start with the Chart of Truth, don't we? We have to have enough.
- [05:12]
D
We have to start with the Chart of Truth because, and I actually want to say one more thing about the Venezuela and we'll circle all the way back to Latin America in this conversation. It's not like, it's not like you were positioning for this event. It's not like you're predicting this move to happen. But this is the reason the squirrel phone comes out. The contextual awareness of what does this change in the dynamics and does this change the thesis at all is what's so fascinating to me with you. So take me to the Chart of Truth. Take, take me to what's going on here?
- [05:44]
C
The Chart of Truth is. It was, was my tongue in, tongue in cheek name for just the performance, the relative performance of the MSCI developed markets versus developed markets x U S versus the Spoos versus the S&P 500. And you know, let's be, let's be very clear. I mean US equities have been cleaning the clock with foreign, foreign stocks for the best part of 15 years. And you know, towards the, towards the end of 2024, you know, I, I, I, I have always had a more internationally diversified portfolio than, than I, I imagine most of your listeners. But I, I started to push all the chips, or frankly the majority of the chips to one side of the ledger towards the end of, of 2024. And you know, and then we, then we had what we, you know, we, I mean I like many thought that the chart, the Chartered Truth would carry on going straight down, you know, after Liberation Weekends. You know, there's, there's been a lot of fist pumping about the rally off the lows in US equities. But you know, if, I mean this is a daily chart, a daily version of the Chart of Truth, you know. Yep, it's, it recaptured its 200 day simple moving average in late October, but we're starting the year back below. We're firmly in a downtrend. And you know, there's going to be a bit of an emerging market theme to this. This is another ratio chart here and this is, this is the S and P versus the MSCI emerging Markets. Now this is a weekly chart and this, this chart I snipped at the weekend. So we, we saw Friday's close of this ratio chart literally close at the 200 week moving average. Now just for some historical context, pretty much barring a couple of peaks above it in 2018, this chart has been in a downtrend since 2012. Right. And you know, you know, notwithstanding this year we had a, we, we, we, we had a bit of a, a resurgence in the dollar at the F, in the first, in the first part of the year prime, you know, but you know, we've still, we're still seeing this emerging market chart looking like it wants to curl up and when these things goes, you know, it's all bets are off. I mean if we have a kind of 2000 to 2000, 2002 to 2007 type cycle, things could get really interesting and I am very much positioned for that move.
- [08:43]
D
Investment banker hat Rupert on for just a second. Do you see the conditions? It feels like the conditions are there where we could actually have a sustained move in both the economic output and growth that could potentially carry something like this. If the US markets participate, I guess.
- [09:01]
C
Yeah, they don't help themselves. All bets are, listen if we have a complete meltdown in US financial assets, it's really, really hard for, you know, decent positive returns in anyone else's financial assets. So you know, provided, you know, provided we don't have a complete upset of the apple cart, you know, I think, you know, a relative, a relative trade, you know, still works well, you know, we've got, we've got this, this weird dynamic and this is, this is, this is a chart that I like to look at. I, I, I keep a watch list of just under a hundred ETFs which are sector and country ETFs and this is just them plotted by a simple forward price earnings multiple. I've obviously cut off the X axis to get rid of the biotech stocks and the, and the, and the real estate biotech and real estate ETFs. But this is just a year to date performance so not including today. And you know, it's, it's actually this trend has accelerated with today's market. But there is a clear correlation towards performance and shorter duration. Right. And I think you can frame it in, you know, yeah, low P is a simple way to, to, to frame that. But you know, anything, you know, the whole, the whole sort of children of zur, right, the children of the zero interest rate, you know, market who discount far dated cash flows, whether it's in SAS software, whether it's in cloud earnings, whether it's in, you know, sticky moats, you know, and monopolies priced to infinity. You know, we've got a big reversal going, going on here and I think that, you know, the place to hide is, is closer to the cash flows and closer to, you know, it's the classic atoms versus bits, right? You want to be in short duration, you want to be in atoms is where I think for, for this, for this next step in the cycle. You know, I saw an interesting chart the other day that I think the team at KKR had been circulating about the outperformance of low capital intensive businesses versus high capital intensive businesses. I think that outperformance is in the process of topping and starting to mean revert.
- [11:43]
E
AI is incredible. It can teach you how to fry an egg and even write a poem pirate style, but it knows nothing about your work. Slackbot is different. It doesn't just know the facts, it knows your schedule. It can turn a brainstorm into a brief. And it doesn't need to be taught because Slackbot isn't just another AI. It's AI that knows your work. As, as you do visit slack.com meetslackbot to learn more.
- [12:13]
F
This is pro linebacker TJ Watt and I'm back with YPB by Abercrombie for another activewear drop. My second co design collection has new shorts and tanks that keep up with all my in season workouts. And their new Restore collection is a game changer off the field too, because even pro athletes like me need rest days. Shop YPB by Abercrombie in the app, online and in stores because your personal best is greater than anything.
- [12:44]
D
Talk about that insider of or relative to the US Markets, for example, because it feels like that's not the theme. We're seeing that theme if you look at Oracle, their balance sheet. But talk to me about where you see that in the U.S. market.
- [12:58]
C
Well, you know, the, the U.S. market is highly financialized. I think you've had Julian Brigden on the podcast a couple of times, who I'm a huge fan of and his theme about the sort of hyper financialization of US Equities. Yes, markets have financialized all over the world, but the s and P500 and the way in which the leading companies within that index are managed is all about the stock price. It's all about financial engineering. It was all about offshoring, was all about becoming as capital light financializing. You know, you know, you've got management teams whose decisions are driven primarily by the way in which their RSU stock awards are structured. You know, it's all being indexed towards, you know, reducing equity, reducing the share count, redirecting, re redirecting, you know, redirecting cash flow, you know, to, to, to shrinking that, shrinking that equity. And we're setting up, you know, rightly or wrongly, for a world in which you want to be actually an owner of productive assets.
- [14:26]
D
Right.
- [14:26]
C
Right. Rather than a productive share price. And you know, I think there is a bit of a, you know, a, a sort of negative flywheel effect that you need to think about where, you know, if industries are suddenly being required to optimize for, you know, returns on functioning assets as opposed to, you know, indexing on the buyback, you're going to see a significant derating, you're going to see a significant reduction of multiples in the U.S. now, the concern I have is that this feeds back into the real economy. And when people start seeing their 401k plans falling in value as opposed to, you know, tacking on 10 to 12% for a decade per annum, I think that gets that feed, that feedback loop gets felt in consumption pretty quickly. And so you could have this sort of thing things starting to spiral down.
- [15:41]
D
So one other piece on this chart before we move along then. Places of interest. Tell me about the eyeballs. Tell me about the eyeballs on this.
- [15:50]
C
Sorry. Well, the mags is just the Mag 7 ETF and really the triple Qs, the NASDAQ 100 really hasn't made a higher high now for three months. And with the exception of the resurgence of Google, the rest of the MAG7 which have led the market for the last 15 years are, are putting in a topping formation right now.
- [16:18]
D
And under discussed last year and under, under discussed because last year to see basically Google and then more or less the rest meeting.
- [16:28]
C
Well, there was someone picking up the baton for for most of the last three, four years it was Jensen that was sort of was running at the front of the pack, sort of waving his golden baton everywhere. But then you know, really Google put in a kick save for the entire Mag 7 over the course of last year. And you know, a lot of people called that, right? I mean, you know, I, I, I get, I get the sense that people don't read me and listen to me for my views on large cap US tech stocks. So I tend to, tend to be pretty quiet about them. But you know, the Google bulls, you know, won in the end, you know, when you know, so soon after that stock was written off as you know, going woke and going broke. But the bit that, that got the, that got the extra emoticon of the crack that really caught my attention was the software space. Now I have, you know, been watching the Enterprise SaaS business for about two years with a very negative bias. I, you know, you know, people really resent paying their salesforce bill every month and you know, have felt beholden to you know, having being locked into that, into that sort of enterprise cloud expensive universe. And I think the worm is really turning right now. And you know, I mean WCLD is my one stop shop for, for enterprise SaaS. It's like an equal weighted SaaS index that's off 12% year to date. Right? That is, you know, that's as of, as of the close a few minutes ago. I think we're in a world where you know, the whole sort of software's eating the world narrative has really been turned on its head with the introduction of agentic AI. You know, it's seemingly working better and better every single day. And if a smart CTO can sit down on Claude Code with his team and make their own customized wholly owned CRM system in a few weeks, whoa, you know, these big enterprise SaaS businesses should not be trading at 7 times sales. Right. That kind of multiple implies moats into perpetuity. And I think you have to at least call in question the only other eyeball, while I'm an emerging market bull, I am not an India bull. And so the iShares India ETF gets an eyeball there. I've been waiting for that market to roll over. Outside of the US it's the most expensive market out there. I've done a lot of business in India over the years. You know, great place to visit, terrible place to, to do business. And certainly don't think that the stocks should be valued as rich richly as they are. And you know, the irony is, is that, you know, the big, the big narrative, the bull, the bulls narrative around India, it is quote unquote, the next China, right? Well, why not, why not buy China that's really growing and it's trading at a fraction of the price.
- [19:59]
D
What do you think structurally? Just stay on India for just one second, then I'm going to take you back to Latin America. What about India makes it structurally? Why do you think the valuation has grown to this level? And is it internal flows is just.
- [20:12]
C
An outside combination of flow? Both. So there are two things. One, international emerging market investors were told by their boards that they had to be out or structurally underweight China. So that's the next big pool of assets that could be acquired in Asia. So there's a, there's a flows issue. But then you've also seen, you know, you know, the Robin Hood effect has hit Indian equities as well. I mean, the amount of, and also the growth of open interest in short dated derivatives. I mean, the, the explosion of option activity in Indian equities over the last two years has been a big part of it, you know, the, the influence of retail. So it's a combination of the two things. Now, I cannot claim to be an expert on Indian retail. It was a significantly less important part of the market when I was, you know, trafficking in Indian equities sort of, you know, as a, as a major part of my day job as a capital markets banker in Asia. But you know, that, that's been a big part of it. And you know, I, I do think that, you know, as we are almost entering, we're about to enter potentially a third year of a bull market in Chinese equities, you know, there's, there's going to be, there's going to be, there's going to have to be some kind of reversal of that International flow.
- [21:45]
D
So a wise squirrel once told me that Latin America was not just a series of election bets. I like that reductive attitude. How dare you tell me that it should be the other way around. But again, this is what the squirrel phone is for. What's, what's going on here? Break down what's on this slide because I think this is fascinating. And while there's some distraction, quote unquote distraction, there's some people talking about China still. It's still not a lot of people talking about China. Nobody's talking about Latin America aside from political actions. Entirely different. Take.
- [22:16]
C
Listen. One of the, one of the, one of the real bugbears I have is, is listening. I think it's a hiding to nothing is people trading their politics, right? Yeah. You know, a lot of people in our world, you know, lean to the right and they go, look, Latin America is swinging, right? And so it's, it's, you know, buy, buy the, buy the equities. And I think that that is, you know, very dangerous and a little bit reductive. Right. I am massively overweight. Latin America with a significant bias to Brazil and Mexico with two slightly different stories there, but largely because I think that we're in the foothills of a commodity bull market. Right. And Latin American equities, specifically Brazilian equities are the, one of the best ways to play that. So my equity book has just over 12% allocated to LATAM equities right now, with the majority of that in Brazil at the index level in a few single stock stock positions such as new holding, the Neo bank and the exchanges. Everyone's saying this is all hinging on the transition away from Lulanomics and the election of a center right government in Brazil later this year. The only Brazilian equity is going to outperform. It's not going to be because of the politics, it's going to be because of, because we're in a commodity bull market. I mean, if you actually look at the performance of Brazilian equities against various political regimes over time, they've done just fine under, under lula historically, it's really all, it's really all about what the BCom's doing. Right. Been overweight Mexico as well. But I, you know, I'm a little bit more tentative around Mexico. I, you know, we, I, I was, I mean, I, I was, I jumped straight back into Mexico, you know, post Liberation, Post Liberation Day last year I, I bought the closed end fund, the Mexico fund, MXF, because it was trading at that point at almost 20% discount to NAV kind of owns all the same stuff that's in the, in the iShares ETF. But you know, when, when, when the bid disappears in close closed end fundland, you can get some absolute bargains. Couple of weeks ago that had narrowed to 10% which is kind of in line with the long run average. And so I flipped into the ETF and, and, and, and clipped and, and clipped that game. Now I'm a little bit of a fan of La Presidenta Senora Sheinbaum. She is, she's been a pretty effective political operator since she took over the same trade. Their politics crowd were going, oh my God, she's a climate, she's a climate science professor. This is, you know, Mexico's gonna disappear down the toilet. I was really happy to take the other side of that bet. I, you know, there is no doubt that renegotiation of the USMCA is a big deal coming up over the course of the next few months. She's showed her hand pretty aggressively in aligning herself in the, in the U.S. china sort of tension, you know, with those 50% tariffs on, you know, certain Chinese finished and intermediate goods. You know, she's armed her negotiators pretty effectively with a kind of we've done our part stance for when they go into the negotiations. But I, I flipped into the more liquid, less prone to swinging to a wild discount ETF because I think you just need to have your feet a little bit close to the door right elsewhere in the market that, you know, these are much smaller and much less significant markets. But Peruvian equities, if you just overlay epu, the Peruvian ETF against, you know, lme, LME copper futures, right? You have to look at the London ones rather than the Comex one because, because of all the tariff nonsense of last year. But you know, they're basically the same chart, right? You know, you can, you can, I mean, and you know, I have, I have, you know, traded, traded Southern Copper in in the past. I mean that's, that's the, the reference ticker for the entire market down there. I just happen to prefer owning my coffer EXP Copper exposure via Glencore, which has been a fantastic trade this year with the, with the, with the latest being the, the Rio Tinto I, I, the Rio Tinto merger. I mean, I, I, I was, it was, I was, I was in Glencore well before that I actually took them public in, in, in, in, in 2011, I think it was, yeah, 2011.
- [27:35]
D
I, I was going to ask don't you have, you've got personal history with Blencorn?
- [27:39]
C
Absolutely. I, I, I was, I remember driving, drive, driving Ivan Glasenberg and his CFO around, around Hong Kong, taking them to institutional meetings. You know, an absolute gangster of a commodity trader. It was pretty clear that we were pretty close to the end of the commodity bull market if he was, if he was ipoing his business. But what really caught my eye was last year when for the first time in about five years, Glasenberg, who's no longer no longer running the shop chronic.
- [28:13]
B
Migraine is 15 or more headache days a month, each lasting four hours or more. Botox Onobotulinum toxin a prevents headaches in adults with chronic migraine because before they start, it's not for those with 14 or fewer headache days a month. It prevents on average eight to nine headache days a month versus six to seven for placebo.
- [28:30]
G
Prescription Botox is injected by your doctor. Effects of Botox may spread hours to weeks after injection causing serious symptoms. Alert your doctor right away as difficulty swallowing, speaking, breathing, eye problems or muscle weakness can be signs of a life threatening condition. Patients with these conditions before injection are at highest risk. Side effects may include allergic reactions, neck and injection site pain, fatigue and headache. Allergic reactions can include rash, welts, asthma symptoms and dizziness. Don't receive Botox if there's a skin infection. Tell your doctor your medical history, muscle or nerve conditions including als, Lou Gehrig's disease, Myasthenia gravis or Lambert Eaton syndrome and medications including botulinum toxins as these may increase the risk of serious side effects.
- [29:06]
B
Why wait? Ask your doctor, visit botoxchronicmigraine.com or call 1-844botox to learn more. Starting a business can seem like a daunting task unless you have a partner like Shopify. They have the tools you need to start and grow your business. From designing a website to marketing to selling and beyond, Shopify can help with everything you need. There's a reason millions of companies like Mattel, Heinz and Allbirds continue to trust and use them. With Shopify on your side, turn your big business idea into Sign up for your $1 per month trial@shopify.com specialoffer very.
- [29:42]
C
Publicly bought an awful lot of stock and if he's in, I'm in. It was a slow start, but you know, he's traded it like a, like a gangster again in Colombia. I mean, it's, it's, it's, it's, it's up again. It's up Again in the last couple of weeks. But I do tend to feel that Colombian equity suits, the easy money's been made there so far. You know, I'd be interested in a sell off on a dip. I think that if Venezuela starts to normalize, one of the biggest beneficiaries is their neighbor in Colombia. They've got elections this year as well. It looks like the markets are trying to price in a move to the center right candidates. I think that you can probably be smart about single stock exposure in Colombia at that point. And the obvious candidate there would be ecopetrol. They have had their hands tied under the current administration in terms of new exploration. They get the handcuffs taken off under a new administration. A very cheap stock with a very high dividend yield could be due a RE rating. Chile is a similar story in terms of running hard. You know, you know Chile really is a sort of natural resources superpower. But you know there are some, there are some great US listed ADRs banquet Chile, Latin American Airlines and of course SQM which you kind of want to have a look, have a, have a nibble at on dips. But you know they are, they are part of, you know those big large caps are part of the, the ILF which is the Latin American top 40 ETF which is, which is the, the, the, the vehicle, the vehicle that I do my broad use for my broad latam exposure. And then finally Argentina, I was in the sort of the mile trade up until the beginning of last year. I ducked out of it when he did his Libra meme coin rug pull in February. That was a no mas basta for me. And really they've got the hard yards now of maintaining the reform momentum. And I think that the sort of economic and political surprises probably is of a downside there. So that's my sort of, you know, run around the grounds on Latin America. You know, very overweight relative to sort of classic sort of global index benchmarks with a bias towards the sort of commodity champion and you know, if you like a true global champion of the non aligned in this multi political, a multipolar political world and that's, that's Brazil. And you know, sure the election's going to get noisy as we as, as we approach it, but that's not the trade here.
- [32:54]
D
Right, Just a comment on it because I think it's, it's worth saying 12% allocation to the region in the equity book. Yeah, global market cap for Latin America.
- [33:06]
A
What are we at?
- [33:07]
D
A couple percent?
- [33:09]
C
Yeah, if, if that somewhere between one. No, it's maybe it's a little bit higher than that. Maybe you, maybe you get to three and a half maybe. For the whole region?
- [33:18]
D
Yeah, for the whole region. Okay. Probably with Brazil and some of the bigger companies, I guess. Yeah. So just to put this in perspective, this is a multi fold overweight from any market cap weighted indices with Latin America in it.
- [33:33]
C
Yeah. I mean, we'll, we'll talk about how, how I, I benchmark myself, you know, in a second when we, when we go back to bushy. But I mean know, I ultimately. Well, first of all, I, I'm not a, I'm not a U.S. person. You know, I, I, I do think in U.S. dollars, but my functional currency is a lot more volatile. I, you know, I do believe that the outperformance of US assets for all the reasons we've just discussed is, is, is due for a mean reversion in the, you know, and provided that mean reversion is not too violent, you know, you can, you can feel safer in markets that would have been very vulnerable to sort of, you know, any kind of whiff of a sneeze in risk sentiment. Listen, I'm not an allocator of $12 billion of or $100 billion of a pension fund. So liquidity risk is not something that I need to think too hard about. Right. You know, for some allocators, the Brazilian market's not big enough to put a proper put, to put a put a proper overweight exposure. But you know, frankly, that's not my audience. Right. And you know, they have just very different constraints to you or I.
- [35:04]
D
Take me through ABCs. I want to go to Sesame Street. I want to hear why this isn't Jackson 5, why you're putting Big Bird in Asia here.
- [35:16]
C
Well, Sesame street was brought to you by the letters A, B and C. I was sitting at my desk in London in June, July of 2010. I'd been back in London from China for about six or seven years and my old friends and colleagues were making hay and I was working on the IPO of the online grocer in the UK called Ocado. And we had a much more junior role than I'd been hoping for. We've been working, working on that mandate for two years. And then my coverage banker that covered the founders of Ocado went and left us to go and become the CFO of Ocado ahead of the ipo and then felt he couldn't over, over favor his former employer. Employer. Just as we were wading through that, you know, the IPO of Agricultural bank of China. ABC hit the tape. A 19.2 billion IPO versus my 200 million pound IPO in London. You know, they had a, a cornerstone tranche where corporate sovereign wealth funds, Hong Kong tycoons were cutting checks in aggregate for five and a half billion dollars worth of stock which was going to be locked up for one to two years. I mean it was, I thought oh my God, what's going on? This wasn't a one off. And you know there were, there were a whole sort of queue of billion dollar plus IPOs in Hong Kong China lining up for months and well, suffice to say four months later, you know, one of those, One of those IPOs was, you know, the, the IPO of the insurance giant AIA which was being sold down by AIG to pay off the, pay off the, the, the, the GFC loan from the Federal Reserve bank of New York. And anyway that was enough. My FOMO kicked in and I was back in Hong Kong allocating those very same AIA shares. Four months later at the end of October, I pivoted back to China. Anyway, I, I've been getting to, getting to the current day. I've been overweight China for almost two years now since it was a very, very unloved trade. And you know, I got hate mail for a note that I wrote in the summer of 24 where I said, you know, you're all long China anyway just most of you are long it at the wrong price because you know they were constantly beating, beating up their, constantly, constantly beating up their, their, their, their boards so that they could be even more long. Nvidia. You know where, where, where were Jensen's GPUs made? You know, you know they couldn't own China because Chinese equities because China was about to retake Taiwan. Yet they had some pretty concentrated Taiwan risk themselves. Anyway, fast forward. You know, by September you had Dave Tepper giving Joe Kernan a heart attack on Schoolbox by saying you should buy everything China. And then we have one of these classic western fried rice trades. I'll talk about those in a second. But fast forward to today. I do think that the worst of the trade war US China trade war news is behind us. Green light from top. What I mean like that the Chinese leadership want domestic equities to work as a unit of savings, as a real asset class, not a token of speculation. China has plenty of scope for targeted fiscal stimulus and that's the dirty secret of all markets. Fiscal drives, equity markets. There is plenty of cash in terms of household and corporate savings both on and offshore that can be put to work. The companies are cash rich and are being encouraged to buy back their own shares. You know, one of the, one of the big, and we're seeing an inflection in earnings now. One of the big sort of potential killers to Chinese equity bull runs of the past is that, you know, all of this new issuance comes out of the woodworks as soon as the market starts to trend up. I think the danger of that is very low. With anti involution policies, Chinese corporates are not being encouraged to, to, to, to, to, to invest that capital and that cash in, you know, excess manufacturing capacity now and then. Finally, you know, I'm a curly value value investor at heart and these, these assets are really a really cheap, so in terms of, in terms of positioning, you know, when Dave Tepper goes on, goes on, goes on CNBC and saying he's, he's, he's backing up the truck on Chinese assets, you get, you get the hot money flows, right? And every guy in a fleece vest in midtown Manhattan reaches for 30 Delta calls on Alibaba, right? Listen, I've got nothing, nothing wrong against Alibaba again. I worked on Alibaba's ADR IPO back in, back in 2014. It's a fantastic business. But the, you know, the core US listed ADRs are, you know, very dangerous vessels for getting whipsawed by hot money flows. And the way I've been gradually building my overweight position in China is to stick with my lbc, which is my lower beta China. So you know, a dirty little secret that, you know, one of the best performing assets anywhere in the world over the past 24, 24 months has been state owned Chinese banks as their, as their dividend yields have compressed from double digits to down closer to 5 and a half, 6%. Right? Utilities Telcos are another example of that. You know, quite funny. So a core holding for me in Bushy is Dvye, which is the iShares emerging market high dividend ETF. If you look at the attribution of returns which have been great over the past 12 months, almost a quarter of those has come from those Chinese banks. And you know, I know certain, certain sort of vocal owners of this ETF that are also in the China is uninvestable camp, I find that dissonance quite hard to piece together. The other thing I wanted to point out is that chart at the bottom there, that red line there is just the relative chart of the A shares. So the domestically listed A shares in China versus the offshore shares in the MSCI China, the FXI ETF which is the iShares Large Cap China ETF. Now we, in the midpoint of last year the A shares started to catch ground. And this is really consistent with what I'm talking about in terms of the encouragement of domestic investment in in equities. And you know this looks to me like the start of a, a real trend over, over, over, over the coming and provided you know, I mean I, I'm, I'm, I'm long both on and offshore Chinese equities. But I, I have a hunch that the, the onshore, the onshore names are going to be the ones that that outperform and also that will will outperform both on the up and the downside. Remember you know, when what, what's known as the national team get involved Chinese equities at times of dislocation it's the big A share names where, where that, where the buying comes and actually you know, financials are relative. Those big, those big financials are actually a relatively small percentage of the CSI 300 which is the index that the A shares, the the A share ETF tracks. So you know that's, that's, that's, that's kind of kind of where I am on China. Just another illustration of, of this Western fried rice. So this is Tencent versus Alibaba since the, you know, the October 2022 lows which is when you know I jump there was, which was, which was my first jump back into Chinese equities post Covid was to buy my old friend ten Cent. Now one of the reasons that you know, number reasons I like it. But if I, I think both are formidable companies. But if you look at Tencent which has its primary listing venue in Hong Kong, right. You know there's, there's an unsponsored ADR that people can trade in the US but it is, it's essentially it's an overseas stock. If you compare the drawdown profile between Tencent and Alibaba over the last three years, I mean the difference is stark. You know, the thing about, you know, think about trades as being able to stay in them and if you're regularly looking at sort of 30, 40% drawdowns, you know, that's an awful, there's an awful lot of stopping out or an awful lot of you know, round tripping pain. So you know, that's, that you know those drawdowns, you know, cost total returns over time, right? And since that, you know, since that, my entry point in, in October 22, you know, 10 cent 700 Hong Kong has outperformed the Alibaba ADR by about 60%. Actually, I went to see 10 cent in Shenzhen back in late October, a trip organized by our mutual friend Louis Garve. I have to say, you know, there's, it's very easy to, you know, even in my mind's eye, you know, it was, it's my largest single stock position and I go, you know, maybe I should be trimming it, you know, you know, you know, Wei Shin is, is, is, is, is a, is an amazing super app. They've cracked the, they've, they've cracked, crack the super app concept with WeChat. If you look at what they're doing in the cloud business, what they're looking in AI, you look at the Tencent meeting is their equivalent of Zoom and it's just sort of night and day better. They've got unicorns and decacorns sort of lurking in the corner of the broom cupboard everywhere. There's just so much, so much value. Sorry about, sorry about Barney. They're just, they're just feels very strong.
- [47:06]
D
About the 10 cent position.
- [47:09]
C
Yeah, he feels very strong about the 10 cent.
- [47:11]
D
The largest household position. Had to chime in. Wait, I want to keep you there on this because this is what I was going to ask you about. You went over there and visited and. Would you just comment for a section or section. Comment for a second here on the difference between the way Tencent in China is approaching AI versus how we're talking about it in the rest of the world and the CapEx spending.
- [47:33]
C
Well, I mean, you know, ultimately, you know, the capex discipline is there. Right. And the focus of the investment is making other stuff within their portfolio better. Right. It's very, very targeted. I mean, actually, that's, that's the, that's the, that's, that's my impression of the total approach towards AI development in China. You know, the focus is on how can AI improve our already strong position in high, high tech, high tech manufacturing and in complex manufacturing processes. It's not about cat videos and meme creation. Right. Which I, you know, I just think is just a massive misallocation of capital. Yeah, I mean, listen, I mean, the announcement recently in terms of sort of the integration of AI into the WeChat ecosystem, you know, it's all about enhancing what is already leading and investing class and, you know, I just think that's the right way to approach it.
- [48:55]
D
You're trading head on stock picking inside of China. And again for the viewers here, this is why you're not going to find a lot of people talking about this the way that Rupert does. So even if you're not going to try this at home, it's interesting to hear somebody working through this, which I think is so fascinating. Stock picking in China.
- [49:15]
C
Yeah, listen, I, you know, I, I, I have my core positions in at the index level via FXI and via the A share ETF. But you know, like, like the 10 cent position I have been adding, you know, mainly until recently, sort of classic low beta exposures, those, those utilities, those telcos, those, a basket of consumer names that I find interesting. Some are more racy than others. You know, like, you know, Pop Mart, the creator of the Labubu dolls, you know, that, that, that, that's had a wild ride. But I added a couple of new positions at the end of last year which I think are really interesting. You know, the first one is, is a name that I've known for years because they've been around as long as smartphones have been around, which is Sunny Optical. Now they make, you know, they're the dominant supplier of camera modules. And I got interested in this by, you know, I'm terrible at early adoption with consumer tech and you know, I didn't think the iPhone would catch on. I didn't, I was too wedded to my BlackBerry. And you know, when Oculus Rift came out with sort of the concept of wearable tech, I thought, heavens no. But if you look at what's going on in terms of Chinese consumption, the explosion, now that China has figured out how to make really cheap equivalents and better versions of the Meta Ray bans, you know, I think that we're going to spend a lot more time talking about wearables in, in 2026. And a great first derivative play on that would be the maker of, you know, the, the smart cameras that go into every one of those frames. You know, listen, this is, this, this is, this is a, you know, I mean, at the moment, you know, I'm, I'm hovering just above my stop. I'll be very disciplined about it. But I think that, you know, if 26 is the year of wearable eyeglass smart glasses, this stock's going to do very well. The other example is, I mean, I'm a terrible investor in biotech. I got some stories I can bore you with about that, but I mean, essentially I have typically always outsourced my investments in healthcare and biotech. To people that, you know, really know what they're doing or at least when it comes to FDA approvals and things like that, know how to count the cards. But the Foundry sisters are the name I give to the two Wuxi companies, Wushi Aptech and Wuxi Biologics. And the reason I call them the Foundry Systems is these guys are to biotech what TSMC is to the Fabless semiconductor companies, right? So they, you know, China's really good at complex manufacturing and complex processes. And these guys, you know, there, there are names like Charles river in the US that do what these guys do, but you know, these guys are doing it at scale. They were beaten up last year on trade war concerns, but they, you know, and this is specifically the biasecure act, it looks like the worst of the risk related to threats to their business from that have gone or are going away. And you know, I think these will be, you know, and they're not going to have the same kind of monopoly as tsmc, but they're going to be part of a very powerful global oligopoly. If you look at, you know, if you look at FDA applications generally, right, 95% of them get kicked out because of the manufacturing process or the testing process. So it's that, it's that very, you know, you know, it's not because of the concept or toxicity or concerns or things like that. It's, you know, concerns about is the formula going to be made consistently and reliably. Right. And you know, if you have got service providers like the Wuxi Twins that are, that are basically all but removing a lot of that risk from you, you know, they're just going to be your go to people zoom me up.
- [54:11]
D
To a much, much higher level. I want to talk benchmarking, want to talk how you think about your portfolio and rating it against something else.
- [54:20]
C
So I didn't actually start talking about, I, I, I honestly thought that people just wanted to go to the squirrel for his acorns until, you know, towards the back end of 2024, a lot of my readers were saying, well, you know, what, what does the beta book look like? And I said, that's very boring. You know, you don't, you don't want to, you don't want to talk about the, the beat. But eventually I was convinced and, and so I started, I started publishing and sharing and sharing this portfolio every week with, with, with subscribers. And you know, we previewed it on a, on a previous show. So I won't take you through the puns and the Acronyms but Bushy Bushy had a great 2025. I benchmark myself against big retirement US big retirement. So the classic 6040 target tape portfolio from Benchmark from Baggard as my benchmark but under the hood we look very different. I don't know any fixed any US treasuries e.g. unless they happen to be part of long positions within my big bond replacement allocation which is a. Currently it's a 14% allocation to a basket of seven trend following ETFs and mutual funds. You know for most of last year the Trend followers and CTAs had a pretty tough year but you know actually it worked very well as a, as a, as a stabilizer for the overall portfolio. You know we've had plenty of metals, a large core gold position that was which was topped up with silver and platinum palladium you know later on in the year since we added more beta exposure to China. That was the ABC was the alpha and beta of my China China portfolio. The, the we're now, we're now over 30% in emerging markets if you take into account the other fixed income component of Bushy which is the emerging market local currency bonds. And I, I hold that in two via two collective vehicles. One is the closed end Templeton Emerging Market Income fund which has been around since the early 90s. They really are the OGs of OGs of EM local currency investing. You know that that Fund was up 48% last year. I mean it just had an absolute standout year and it's it, it pays you a, a monthly, a monthly dividend which I, I simply just reinvest. And then there's also an ETF that an ETF that's benchmark to the JP Morgan index which is EMLC. So I across those two, across those two I've got just under 11% in an emerging market bonds and then the rest of the equity allocation and there's a big help, there's a big dollop of cash in there. So that cheese is cash and hedges. I'll talk about the OTC hedges in a second. But essentially this is about pure cash. I E T bills is mid single digits. I also have a large allocation to really what is T bills plus a credit hedge which is the ProShares SJB ETF where essentially you're long a basket of bills plus a swap of on the high yield CDS. Right and it's a very, it's a, it's a, it's a very low cost of carry way to have you know Some insurance on an upset in credit markets and then there's an OTC hedge book which currently now given the sort of non dollar bias of my portfolio owns some euro USD puts and some out of the money call options on the SMH semiconductor ETF just in case you know Jensen has another one of his gangbuster years. So and then thematic equities is a very strong energy bias. These are my Canadian energy stocks, my refining stocks, a big slug of European defense companies and then all over the emerging markets. There's a decent position in Indonesian equities in the EM portfolio. I think there's a really interesting year ahead for Indo equities as, as, as Prabowo pivots to fiscal. You know Indonesia is another big winner as a, as a, as a professionally non aligned member and big player in the global south with you know an awful lot of very valuable natural resources. You know, not, not least you know being you know the, the, the, the Saudi Arabia of nickel. Right. Which is having a very decent start to the year. So and then you know the, and, and the, you know there's within, within developed markets, international, a healthy, a healthy dose of Japanese exposure where I, I particularly like the banks.
- [60:12]
D
So we're not going to be able to get deep into the Japanese banks exposure but I think this is a perfect segue to just so a, the benchmarking, the beta exercise. Fascinating. You're not going to get that from most people offering some trading product or whatever else. Let's talk about this because again the reason I pay attention to your work is this is not the normal routines that I see from not just a lot of our guests but a lot.
- [60:37]
C
Of nothing normal about me mate. You know that.
- [60:39]
D
Nothing, nothing. And I adore the fact that there's nothing normal about this because you make sure these ideas are, are front and center when they're not getting coverage. I'm going to send people to Blind Squirrel Macro to find out about the Japanese banks. But let's talk about the content you're putting out. You guys are going live on Twitter and substack I think what twice a week, you and Ben?
- [61:01]
C
Yeah, I've got a new partner. I'm four months into Benny and the Squirrel. We started telling of October, beginning of November. So Ben Bry, in case you've never come across him before, first came across when he was the consumer analyst and PM at Fidelity in Boston. Right. So he's got a, he's got, he's, he's a lot younger than me but he's Got a really superb pedigree in finance. And you know, since just around pre the gfc, he, he's been managing hedge funds, his own family office. He is highly quantitative. He's, you know, he's very much a volume trader. He runs a, you know, a tail risk fund for a couple of large endowments. And we get on, we get on, we get on the, we get on, we get on live on Sunday evenings and Thursday evenings for those not awake at that time of day because we, we, we're doing the early evening slot so usually around 7pm Eastern we go out live on Twitter and substack. But then obviously the recordings are up on, on, on YouTube after that. And you know, our subscribers to our services also get, you know, the slides and the show notes and stuff like that. And then, you know, on, on my own, you know, there's, there's, there's obviously the, the two letters I write a week from under the blind squirrel macro banner and an increasingly active community in discord in, in, in the dray where, you know, actually I, I, I wake up smiling every morning where, you know, the whole world has been chatting to each other, sharing ideas while I was sleeping. And then, you know, I just come in, in the morning and mark the homework.
- [62:57]
D
Nothing like having to step in to mark the homework. If you're looking for an outside perspective. I, I can't recommend this enough when I say that this was the first place that I went to find out what was going on with the Venezuelan news. When I hear something about Latin America, when I hear something ex U S, nobody's better than the blind squirrel himself. Rupert Mitchell, I want to thank you for coming back on Excess Returns.
- [63:18]
C
Oh my. Anytime, you know it.
- [63:21]
D
All right, we're going to be doing more. I'm getting you and Louis Vincent Gov on this at some point this year because I want that international edition too.
- [63:29]
C
Okay, well, that'll be so much fun.
- [63:32]
D
All right, you're watching Excess Returns. Like subscribe all the things below. And we are out.
- [63:37]
H
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@excessreturnspod.com. if you have any feedback or questions, you can contact us@accessreturnspodmail.com no information on.
- [63:57]
B
This podcast should be construed as investment advice. Securities discussed in the podcast may be holdings of the firms of the host.
- [64:04]
H
Well, the holidays have come and gone once again. But if you've forgotten to get that special someone in your life a gift, well, Mint Mobile is extending their holiday offer of half off unlimited wireless. So here's the idea. You get it now, you call it an early present for next year. What do you have to lose? Give it a try@mintmobile.com Switch limited time.
- [64:24]
B
50% off regular price for new customers. Upfront payment required $45 for three months, $90 for six month or $180 for 12 month plan taxes and fees. Extra speeds may slow after 50 gigabytes per month when network is busy. See terms or their clients.