Marian Somerset Webb (2:37)

We talked about AI, we talked about investing in the uk, we talked about software, stocks, everything. Oh, the yen as well. We talked a lot about the yen. You need to listen, hope you enjoy it and make sure you are getting alerts for our new episodes on Monday. We have a really good conversation coming out with Temple Bar's Ian Lance about the strategy behind the Fund's amazing performance over the last five years.

Marian Somerset Webb (3:02)

We're going to start just by setting the scene a little. Obviously, things don't look great. Things don't look great in the UK in all sorts of ways. And there's lots of parts about the US and the rest of the global economy that don't look great. On the way here, I was looking at a survey that showed that over 50% of Gen X wished they lived in the 90s. I quite wish I lived in the 90s. Who wishes they lived in the 90s?

John Stepek (3:25)

I'll go with that.

Marian Somerset Webb (3:26)

Yeah. You know what? So let's start by just talking about what's going on here. John, you wrote a piece the other day in which you said that Rachel Reeves had a bit of bad luck because the UK economy was kind of picking up before the war, which I personally think is nonsense. But why don't you tell us a little about what's going on in the UK economy and what our main problems are?

John Stepek (3:46)

Yeah, I mean, I think the main thing is we came into 2026 with a sense that interest rates were going to fall faster than expected, and that's because inflation was falling faster than expected, which was partly because Rachel Reeves kind of basically ranked the numbers in our last budget, which was at least better than the 2024 budget, which was inflationary. Now, it's really bad that we should be so dependent on the direction of interest rates, because that just highlights how the lack of resilience and the overall economy. But the point is, things were going from not very good to a tiny bit less bad. And then, of course, the war is broken out, and that's just turned everything upside down because we already have a massive debt to GDP problem. So at 95% at the moment, there's no appetite for cutting public spending. But there's also no acknowledgment that we're on the far side of the Laffer curve on very many areas of the tax take. Rising kind of higher inflation also means we're not going to get the rate cuts that we were hoping for. That means mortgage rates have already shot up by about a percentage point, which means that the housing market, I mean, which has been wobbly for a long time now. It seems to be a bit of a tipping point. Seen a lot of talk about the fact that house prices haven't actually gone anywhere for about A decade faces in London are actually down in normal massive real terms collapse.

Marian Somerset Webb (5:11)

They finally, the forecast that John and I have been making about the great house price crash has coming true in real terms rather than nominal.

John Stepek (5:18)

Well, definitely in real terms, but yeah, also I mean as you pointed out, in nominal terms, you know, being flat or actually having fallen over 10 years is wild. And then, you know, on top of that, you know, we've got the. We are extremely vulnerable to energy problems because we have a kind of somewhat irrational energy policy and have done for a long time. So yeah, so we started off, things looked as if they might get a bit better, but now we've run into a better.

Marian Somerset Webb (5:50)

I mean there are so many problems. There's a whole sort of breadth of problems here from political instability to everything else. But when it comes right down to it, the thing that causes political instability, the thing that causes all the other problems from which everything else stems, is this massive level of debt. So there is no way out. You can't increase welfare, you can't change anything, you can't introduce new policies that might be expensive, you can't invest in any infrastructure. Infrastructure, you have nothing. So the real problem is the debt. And the only way out of that at this point is to grow your

John Stepek (6:19)

way out, grow away or inflate our

Marian Somerset Webb (6:22)

way out or inflate your way out. So those are our choices. So we're going to come back to this. So Jim, I know that when you look at the global economy one of your main worries is exactly that. In the U.S. you know, we sit here worrying about our level of debt, but in the US it's a, it's almost a different level. Certainly in absolute terms.

Jim Mellon (6:39)

Yeah, it is. I'm actually much more optimistic about the UK I think than John. In terms of US debt. The situation is really out of control. Okay, so U.S. government, federal government debt is $39 trillion. Some of that's intergovernmental, a few trillion rather. So you can sort of knock that off. But it's at an all time high obviously. But it's also at an all time percentage high. It's higher now than it was at the end of the Second World War.

Marian Somerset Webb (7:10)

What is the percentage in the U.S. we're 95%.

Jim Mellon (7:12)

It depends on how you look at it. I'm going to explain. There's more debt than just central government debt. It's about 130% at the moment of GDP and it compares to about 90% in the UK. However, on top of that you've got state debt which is pretty substantial. It's about 15 to 20% of US states on top of that. And then you've got consumer debt in the US which again is at an all time high of, and that's around $18 trillion at the moment. And then you have relatively small savings in the us You've got the average, the median as they call it, savings in the US is between 5 and $8,000. And a lot of people don't have any money in the United States and they have a lot of debt. So the average American has $105,000 of debt, of which $21,000 is non mortgage debt. And that's much, much more than we have here. The savings rate in the US is half the level of the uk and despite the government here, and despite the level of government debt, the consumer in the UK is in remarkably robust shape and corporations are generally in robust shape as well. So the situation in the US is really bad. The fiscal deficit, if you want me to, I'll just quickly round this off. The fiscal deficit is running at about 6% of GDP and it's getting bigger. And what's more, there's no way in which they can cut government expenditures. They're basically non discretionary and with the war in Iran adding about a billion dollars a day in extra expenses, they're just racking up debt like a drunken sailor. So my view is that the main pinch point in the world economy and where we're going to see the potential crash emerging is not private credit, which is tiny and is largely institutionally owned. It's the US government debt, which will lead to some serious, I think, consequences for the world economy and obviously will result in a major devaluation of the US dollar, which is already falling. In 2008, the US represented about 70% of reserves around the world. Today, the US dollar is about 57% of reserves and it's going down fast. And one of the factors against that is that of course gold reserves at central banks have been going up a lot in the last five years as predicted by the three of us here.

Marian Somerset Webb (9:43)

As predicted by all of us. Absolutely. Jim. We weren't going to talk about this for that long, but I just want to pick this up. How does this move from something that we have been worrying about? You, me, John, I don't know, Stephen, if you've been worrying about American debt for decades, but the three of us have, how does this move from something we've been worrying about for ages that gets gradually worse and worse and worse and worse and worse into an actual crisis?

Jim Mellon (10:06)

Well, no one knows and if I knew that then I mean I'm sure someone in the administration is already putting bets on that. But the fact of the matter is that we don't really know when it's is going to happen. But the scale at which the US dollar is the world economy is being de dollarized for lots of good reasons is very rapid and I think that's one factor. The second is that you've got the US stock market at really very stretched valuations. The Cape Shiller is about just under 40 and every time it's ever got to 40 there's been a subsequent major correction. You've got record levels of margin debt and you've got the gamification of stock market investing in the United States which is very dangerous. I mean young people in the US are on their phones all the time on Robinhood or one of those predictor sites and that has become a sort of national, national obsession and akin to the speculation and possibly in 1929 it's not looking good. And half of all US growth is basically the growth is being generated by monetary expansion largely and debt is the building of data centers. And I'll have a few words to say about data centers both now and later on.

Marian Somerset Webb (11:16)

You'll definitely have few words to say about data centers. So just be clear. Are you talking about the UK economy and your thing later?

Jim Mellon (11:22)

I am.

Marian Somerset Webb (11:23)

Okay, so, but I do just want to stress the one thing that Jim said is that the UK household has deleveraged amazingly since the financial crisis has been extraordinary. So the UK household is actually in excellent shape. And if we were to by some outbreak of miracles get a series of good political policies in the UK we'd be in quite good shape. It's just that hopes are relatively low for that bit. For that bit. Steven, you, you, I know you think about macro bit but you don't think about all the time. You're a genuine old fashioned stock picker. But when you think about what Jim has said, does that worry you?

Steven Yu (11:58)

I think they're all interconnected and, but of course the way that we pick our investment is we take a bottom up approach. So even though in today's context we still have about maybe 70% invested into American businesses, but then when you look at the balance sheet strength or the business model and everything pricing or even the margin, I mean they are highly profitable and most of our holdings are net cash on the balance sheet. So. So I think it's always is that ironic that the American government is probably in not a very good state, but under companies that we invested into are actually in a very good state.

Marian Somerset Webb (12:33)

This would be just go up and up and up. Can I. But let's just pick up on what Jim said about Datacenter Capex first because I think we need, we need to talk about that a bit. I mean it's extraordinary that about half of American GDP growth at the moment comes from this one thing. Is this going to end in tears or is this justified build out of infrastructure?

Steven Yu (12:51)

So I think if people have follow Jim and myself, I think we take a very different view on this subject matter. I think our view today still we are probably at the early innings of this AI super cycle and at some point it's going to end. At some point it's going to end and we are probably going to have more capacity that we have built on top. But I think one of the things that we have followed so far is the new applications that have been coming out every other week. And recently we have seen Anthropic has come up with a Mythos which is a cybersecurity tool. I think that's going to be quite game changing in a way that is suddenly a lot of governments across the world at the same time enterprises will be embracing this and then, then when you think about, okay, how do they embrace that, they would probably need to utilize some of the AI data center capacity in order to, to put this in place. So we are still being very encouraged by the things that are coming out today. Hence we do not think that we are at the end of this journey. At some point it's going to end.

Marian Somerset Webb (13:54)

Of course, some point it's going to end. But there isn't a sense that, I mean we've done a couple of podcasts recently on AI and on LMS in particular talking about how maybe this is a false start. And the idea that you need these data centers and you need this constant laying up of compute is a little old fashioned. And in fact the new direction that AI is going in requires a different kind of infrastructure.

Steven Yu (14:16)

That's right. Yep.

Marian Somerset Webb (14:18)

Okay. That's right. So we don't need that, we don't need all the capex. That we don't need all the capex. We don't need all the data centers.

Steven Yu (14:25)

No, I think, I think the way that you see you think about this is obviously I think over the last year or so we have to, to to big scenario one was a deep seq that came out from China last year and then recently we have the Alphabet coming up with a way of optimizing data storage that then you were thinking about, okay, then we don't need as much data center or compute or even memory. But of course our view which has been very consistent is that all these developments or advancement is going to lower the cost of trainings, lower the energy intensity and it's going to increase the penetration and adoption and also expansion of the AI tools that we can embrace with. So, so hence we actually think this is all very positive. I mean, unless you take the view that everything that we've seen in AI today is the end of what we think about AI, then we probably have too much, then we don't need more. But that is not the point. I think that's not the reality. The reality is every time we say we're going to quite a stop, we see more things coming out. Yeah, so that is, that's why we

Marian Somerset Webb (15:31)

think that you, but you, you've moved away from investing in the big infrastructure spenders. Right. That's not where your money is.

Steven Yu (15:38)

Yeah.

Marian Somerset Webb (15:38)

So away from that into AI adjacent businesses.

Steven Yu (15:42)

Yeah. So the way that we have done it over the last two years or so is we have been avoiding the AI spenders or company that investing into AI and we very much prefer to position ourselves into the AI infrastructure companies which are the company that are receiving the investment. So we have a number of companies within the AI data center space like Vertif, which they do the liquid cooling systems for. AI data center is very energy intensive. We have a South Korean memory company called Hynex. We think we're going to see more machine generated data than the entire human population has got on record. Just think about the interaction that we would have with AI. AI is generating a lot of images, videos, a lot of things that are coming out from AI. Everything needs to be archived. And then last but not least, we recently added a company called Lumentum, which is about $80 billion market cap company American. And what they do is they do fiber optics. So if you think about fiber optics is something we're familiar with at home, like broadband, etc. But what we're going to see within the AI's data center is they are going to replace copper wires with fiber optics to transmit data because it's more energy efficient, it's going to be better for data transmission in terms of efficiency as well. So I think in that sort of setting that the money that we are actually going to receive as a shareholders rather than you take a speculative view about oh, we're investing the AI, which I agree with Jim, that a lot of money is going to be wasted. Yeah, but I want the money to be wasted with my companies as a shareholder.

Marian Somerset Webb (17:23)

Quite right, quite right.

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Marian Somerset Webb (19:47)

Jim, how are you invested in this space?

Jim Mellon (19:50)

Well, what I would say is that I'm going to put money into Stephen's fund. He's a great fund manager. It's great, really. The performance has been spectacular, but he is fantastic. But let me just say this. What we've not talked about is the competition from China and Deepsea, as Stephen well knows, can produce a million tokens for about a tenth the price of anthropic. And although they might not be right at the cutting edge, they're good enough to be highly competitive with the US models and ultimately they'll overtake the US models and One of the key reasons is because the energy cost in China and the availability of energy has got three times the amount of electricity as the United States, as an example, is much lower. So I think we should watch the Chinese competition very, very carefully. And the China models are going to be a very big factor, I think, in this whole AI thing. But let's look at AI generally. There are seven major spending companies and they're all effectively like the railroads in the 1860s and 1870s. They're laying rail tracks in exactly the same direction, adjacent to each other, competing, one's ahead of one and the other one's not ahead of the other, et cetera, et cetera. And they're absorbing massive amounts of money. As Stephen just said, there is no way there is sufficient money to keep all those seven going. And all the Mag 7 companies, with the exception of one, have moved to a position of cash flow, either neutrality when they were hugely cash flow positive or negative. And they're in debt. And that's a real, that could be the trigger point for a problem with the market. Let's just look at OpenAI. All right. OpenAI needs $600 billion to fund its supposed growth between now and 2030. That's only three years. There's no way they're going to get $600 billion. And a lot of the deals that are being done at the moment is I invest in Steven's company by basically buying products from him and he invests in me. The circularity is really huge in this industry and ultimately that all collapses on itself. So I completely understand why Steven's in the stocks he's in and I think he's an outstanding fund manager. But I think if you look at the bigger picture, OpenAI is going to go bust or it's going to have to be absorbed by Microsoft or one of these things. And a face saving exercise, it's not going to be competitive. And then you'll get one or two that will survive and be competitive for the Chinese. But China is the point at which no one makes any margin because the involution of competition in China means that everyone will be going to the lowest level, which is why you're not investing in the user, the ones who want to provide the AI, but you're investing in the sort of bricks and mortar companies and also in some uses of AI, which I think will be exceptionally good. Speaking my own book, Robotics the best use of AI, the one that is we're all going to be with a robot in the next 15 years. Some in some form or another in our lives.

Marian Somerset Webb (22:50)

And this is going to solve China.

Jim Mellon (22:52)

That's China's business.

Marian Somerset Webb (22:53)

And it's going to solve our demographics problem as well, isn't it?

Jim Mellon (22:57)

It will. And also it will relieve us all of. I mean, I won't have to do the hoovering around the house, I won't have to do the dishes, I won't have to stack the dishwashing machine that I'm forced to do at the moment and empty it. You know, it's about time I was freed of all these.

Marian Somerset Webb (23:12)

Free from your domestic duties, Jim. I know, definitely time. But listen, Tim, I mean, I agree with you on robotics and you know, you know, I've discussed this quite a lot, right, and we've discussed the demographic problem there, et cetera, falling fertility rates, etc. And we're happy to think that the huge rise of robotics and the use of AI and robotics will solve that problem for us. But then there are gonna be an awful lot of people with nothing to do. And this is the question we get asked most on the podcast. And if any of you came on the podcast, the thing you would ask is, what will my children do once Jim's Utopia has arrived? Stephen and Jim's Utopia combined. A world full of robots doing absolutely everything. A world of extraordinary abundance. I'm really looking forward to it. It's going to be marvelous. What will our children do? What will ordinary people do in that world?

Jim Mellon (23:58)

Are you asking me or.

Marian Somerset Webb (23:59)

Yes, I'm asking. Well, I'm asking Stephen, actually, because it looks like he knows the answer.

Steven Yu (24:04)

I think it's early days to come to a conclusion on this, but there are many different scenarios. I think my personal view in today's context is I probably think it's quite dark scenario that we are taking ourselves into and at some point we are going to see some regulations from the government to put a stop in terms of how quickly the technological advancement through AI is going to. We choose a lot of jobs, opportunities and things that people could actually do. So. So I think that would become like a friction. So that is where we are going to see a plateauing of where AI is going to take us. So I. But without that, I think we could go into a very dark places. When you see even some of the big tech companies recently, they have been making quite a lot of redundancy that they are the company who are the most advanced in terms of developing AI, then you think about any other companies who are yet to adopt AI, we could see the same things and and obviously, within the developed economies that we have seen a lot of unemployment rate with a younger generation, it's very difficult to pinpoint whether it's economic uncertainties, economic economy uncertainty, or is that because of AI?

Marian Somerset Webb (25:14)

Yeah. So, yeah, it feels to me like so far it's economic uncertainty, that the UK in particular is definitely in an employment recession, and that's to do with actual recession as opposed to do with AI, but that will probably change. Listen, I want you to go back to investing. Sorry, Jim, I was just going to

Jim Mellon (25:29)

say, I think that if you've got a. If you're a young person, that the best thing, Robo Bob, my colleague, as he's known is, puts it quite well. He says that you train for the Olympics. You're. You're healthy, you're agile, you're thinking about, you know, your opponent and all that sort of stuff. But you don't choose a sport yet because no one knows what the sport will be.

Marian Somerset Webb (25:51)

Just be ready.

Jim Mellon (25:51)

I think that's quite a good way of putting it. So personally, I think that the industries that will be best for people will be those that require human empathy and human interaction. So social care is undervalued at the moment. Maybe it'll be more highly valued in this world of robotics. You know, what you're doing, you two are doing, I think will be, you know, robots can't do that and they will never be able to. They'll never be able to replicate what you're doing.

Marian Somerset Webb (26:20)

I asked AI a couple of weeks ago to produce a podcast in the style of Merrin, and John was absolutely excellent. I guess I didn't tell you. I don't. Unmanly confidence.

Jim Mellon (26:32)

Yeah. So empathetic sessions, you know, very good. Being in the Trump administration, getting insider tips. That's probably a good job to have as well. So there are jobs out there.

Marian Somerset Webb (26:43)

Listen, let's talk. Let's talk about something a little bit more basic. One of the things that John and I talk about a lot on the podcast and that our guests talk about a lot is the ethereal world and the material world and how. And we've done it again here. We've talked about the ethereal world, we've talked about robotics, talk about AI, we talked about data centers, and we haven't mentioned the energy constraints and the resource constraints that come. Come with that. So, John, we've talked a lot about whether everyone should have a slightly higher percent of their portfolio in commodities than maybe they had even five years ago.

John Stepek (27:13)

Yeah, definitely. And I think, I mean, the Iran War and all of this stuff also shows that the world that we moved into is one where we're fracturing. So the process of deglobalization, if you like, is still continuing. And we're going to move into a world of kind of distinct, kind of blocks of interest. And that means more redundancy, which basically means that everyone needs to stockpile more stuff and that means the prices of stuff is going to go up. So I think that resources is going to be a sector that you're looking at during this period because you know, we've been through a very disinflationary world and they were moving into a consistently more inflationary world. And it's just going to be like that for certainly a prolonged period of time, regardless of what happens with, with AI. And obviously AI is incredibly energy intensive on energy.

Marian Somerset Webb (28:04)

You used to be a very enthusiastic investor in uranium, Jim.

Jim Mellon (28:08)

Yes, it's a no brainer. And we have with us today nick Lawson, who's Mr. Uranium and his colleague Ben Feingold, who's an absolute expert on uranium. Seek them out, talk to them about uranium stocks. Because there is a world shortage of uranium, although I understand that 400 kilos is going to be liberated from Iran quite soon. But it's the key component of nuclear power. And lots of nuclear power projects are being developed at the moment. But particularly In China, there's 200 in planning or under construction. And guess how many there are in the United States under construction at the moment? Zero. At least there are three in this country and we're going to have the same as well. So by uranium I think it's an absolute no brainer. Yeah.

Marian Somerset Webb (28:53)

Okay, that's like no brainer investments. Stephen, how do you approach the energy problem in the portfolio?

Steven Yu (28:59)

Yeah, so we, we do share the view that I think at some point when, if you follow the narrative within the AI domain is ultimately we are going down to path of the course of AI is going to be very much related to the energy cost in terms of per token being generated. And one stock that we, one stock that we have in the fund is called Siemen Energy. So what they do is they do gas turbines. And obviously if you follow the domain between Siemens Energy and Nova in the US that they have been seeing a lot of demand in terms of how gas turbine is going to be using, being used to power the data center. So that is where we get into. But obviously we would like to invest more, but it's just in the public domain. There's not too many companies that we could look into.

Marian Somerset Webb (29:44)

You started off by saying, by telling us how miserable things are in the uk and we pick that up a little bit by saying, well, actually there are quite a few good things lurking around in the UK economy that could come out with good policy. And we also keep saying, we say on the board over and over again, just by the uk, it's cheap, everything will be fine. Do we stand by that even now?

John Stepek (30:04)

I think we basically stand by it. I mean, I don't think the fact that the UK economy has kind of managed to struggle along through the last few years without any obvious kind of consumer collapse, you know, I mean, like, you know, all of the kind of company reports that are coming out, it's always surprising how resilient the consumer is. And basically it's just a good country in a decent state with crap governance. And it really is bad governance. You and across the board. I don't just mean labor, I'm not picking on them. I mean, the Tories were in charge for 15 years, 14 years. And, you know, they laid waste by kind of, you know, you've got restrictions on Simon French over at Panmure. Laborum has got a good take on this and he calls it ration pact Britain. And basically energy is rationed, land use is rationed and the cost of capital is too high. And it's all because of.

Marian Somerset Webb (30:57)

People are rationed.

John Stepek (30:58)

Yeah, People. Yep. Employment, minimum wage, et cetera. So what we need is a government that will unwind some of that stuff and that would really, I guess, put a rocket boost under the economy.

Marian Somerset Webb (31:09)

It might be worth buying UK small caps and just waiting.

John Stepek (31:11)

Yeah, I mean, companies find a way, you know, like, you know, in the early 1990s when interest rates shot up to 15%, I remember my dad. Tell me about it. Companies still found a way to survive, so they'll keep getting by. But yeah, we could do with some recognition that government needs to not get out of the way so much as just unwind some of the kind of knots that they've created over the years. I don't know if that will happen.

Marian Somerset Webb (31:38)

Okay, brilliant. Just before we finish, if you could only invest in one thing, it can't be bitcoin, it can't be gold. What would it be, Steven? What would it be? One thing. What's your favorite? I know you're not allowed to have favorites in your portfolio, but I also know you do. What's your favorite?

Steven Yu (31:54)

So one of the interesting stock, which is, I wouldn't make this a stop tip. So stock tip. Just because it's going to be quite nice is a South Korean memory company called Hynix. And one of the question I got asked before was, I mean, it's gone up a lot and is that expensive? I mean, the valuation at the moment is trading at 4 times PE ratio one year forward, but it's probably gone up over 100% in the last six months and they're going to do a due listing in the US in the next few months. So it could be quite interesting.

Marian Somerset Webb (32:21)

Brilliant. Thank you, Jim.

Jim Mellon (32:23)

So banging the gong for years along with you and John on gold and suddenly it's done what we expected it to and more. I've been banging the gong for a couple of years on the Japanese yen as being the most undervalued major financial asset in the world. Interest rates are going up in Japan, they will go up further. So that makes it more attractive. Japanese have a lot of assets overseas. They're going to start repatriating that if there's a problem in the United States, which I think there will be. So the yen, which can take 10 years to depreciate by 50% but can double in the space of six weeks, is my best bet for you to put your money in for the next year or so.

Marian Somerset Webb (33:03)

Okay, John, I'm guessing that you'd say that you could get a double whammy by buying Japanese equities.

John Stepek (33:07)

Well, irritatingly, yes. I was going to say, yeah, I think the Japanese yen is remarkable. Japan's in better condition than people think and actually Japanese equities could do well even if the yen kind of strengthens. So yeah, brilliant.

Marian Somerset Webb (33:20)

We've gone over. Thank you so much for being such a good audience and thank you to my wonderful panel. John, Jim, Stephen, thank you, thank you.

Marian Somerset Webb (33:31)

Thanks for listening to this week's Marin Talks Money. If you like our show, rate, review and subscribe wherever you listen to podcasts and keep sending questions or comments to marinmoneyloomburg.net you can follow me and John on Twitter OR X. I'm MarionSW. John is JohnStepec. This episode was hosted by me, Marian Somerset Webb. It was produced by Sama Saadi and Moses Andam Sound designed by Blake Maples and Aaron Casper. A special thanks, of course, to our guests at the show, Jim Mellon and Steven Yu, and to the organizers of the Master Investor Show.

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Chase Business Representative (35:22)

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