← The Master Investor Podcast with Wilfred Frost
The Master Investor Podcast with Wilfred Frost
Jim Mellon: Bearish US, big opportunities UK, China & Robotics
00:36:11
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- [00:00]
A
Growing its way out of this debt crisis I just don't think is a serious option. And I'm quite surprised that there hasn't been some shaking of confidence in the US itself among investors. But the fact it hasn't happened doesn't mean it's going to happen. This has been a great year for making money, notwithstanding the fact I'm not invested in Nvidia for obvious reasons, I'm not invested in the Mag 7. But there have been much, much better performers in other parts of the world. And I think that outperformance will carry on. We will have more robots on the planet by 2050 than there are human beings, many more, and they will be doing everything. This is a revolution that's at the cusp of its huge expansion. So I would prefer to invest in that, to invest in the obvious stuff, the Mag 7, for instance. And I think there's a great opportunity.
- [00:56]
B
Welcome to the Master Investor Podcast with me, Wilfred Fr, where we celebrate and learn from the success of the greatest investors, business leaders and politicians in the world, giving you, our listeners, the edge. I am delighted to welcome back to the podcast the co founder of the podcast, no less, Jim Mellon. Jim, it is great to see you again.
- [01:20]
A
It's great to see you, Wolf. And yeah, I've been listening to a lot of your podcasts. Really great. And I think you've got 14 in the can now. Right. So it's becoming quite a series. Fantastic. Many congratulations.
- [01:33]
B
Well, it's very kind of you to say and it's so great to have you back, as is going to be the case regularly for our listeners. So we can learn from your extraordinary expertise when it comes to investing and we can go straight back in to what we talked about last time back in May. And I think it was fair to say your big concern then was the US debt pile. Of course, since then it's worsened with the passage of the one big beautiful bill. And yet markets are higher pretty much right at all time highs since then. How do you balance those two events out?
- [02:11]
A
Well, a bit like on the podcast, there's occasionally a delay in the sound. I think it's exactly the same in the market. There's a delay between the recognition of the problems, particularly in the United States, and the analysis that we've made that basically this is all priced to perfection and there's going to be a downturn. Now I have to say that when we first spoke at Master Investor in, I guess it was in late March of this year, we were talking about a coming downturn in the market. And there was one, there was a 15% drawdown pretty quickly. And then in the most recent podcast that I did with you, which was a few months ago, I kept the same view. And you're right, the markets have gone up since then. But I also have to say that the US market has trailed European and Japanese, Chinese and particularly the British market since then. Very considerably, very considerably. So if you look at since the end of March, the performance of the US market is up about 9% including dividends. The UK is up nearly 20% including dividends. Hong Kong is up 30 something percent, China is up 20%. And the European markets are a spread. But if you take Germany as an example, it's up about 19%. So there's been a very clear lagging by the US market. And also there's been a depreciation of.
- [03:43]
B
The US dollar and commodities, certain commodities have done even better. And I know you've recommended them in the past, so we'll come to that in a second. Just to pause a little bit though, on the US Debt picture, because Scott Besant, Treasury Secretary, announced in July what seemed like a little bit of clever short term finessing, but a couple of months on for now seems to be working when he said we're going to reduce the issuance at the long end of the yield curve, 10, 20, 30 year bonds, and instead issue a lot more treasury bills, the very short term one and two year bills. What do you make of that? I mean, is that something that will buy them a little bit of breathing room or a lot of breathing room or not at all? And could it work to give the US Economy time to grow out of its problem?
- [04:33]
A
All the indications that I have is that the US Economy is pretty fragile at the moment. The labor market is definitely softening. The housing market is softening quite considerably. And therefore, you know, growth is not something that we can expect in the US in a strong way for the remainder of this year and certainly not for next year. So growing its way out of this debt crisis I just don't think is a serious option. And we've talked before about the fact that notwithstanding Doge and the idea of cutting government expenditures and all this sort of stuff, the discretionary part of the US budget is not very big. And unless they take a big axe to Medicare, Medicaid, Social Security and all those things that would cause literary riots in the street were they to really chop them, then the trajectory of US Debt is only one way, and that's upwards, because as we've spoken before. You can't have an economy that's being taxed at 30%, but is spending 37 or 38% through the government just unsustainable? And there's been no you rightly point out that the most recent big budget bill has the opposite effect. It increases the deficit rather than now. I'm quite surprised, to be quite honest, that there hasn't been more of a crisis at this point. I'm quite surprised to see that, for instance, the Japanese haven't started to repatriate money in large quantities and they're a very big creditor nation, as you know. And I'm quite surprised that there hasn't been some shaking of confidence in the US Itself among investors. But the fact it hasn't happened doesn't mean it's going to happen. But I was very intrigued by listening to some of your previous speakers who all have very, very good things to say, some of which I disagree with, but that you have this range of people who are either uber optimistic or uber pessimistic and a few somewhere in between. But generally speaking, I would say that this is absolutely not a time to invest in the United States. The problems are just going to get worse and I don't think the economy is going to be able to grow its way out of the problem. I just don't see anything that's supporting the US Economy other than an increase in certain government expenditures, notably defense.
- [07:00]
B
Well, let's jump. I mean you mentioned some of the episodes, so why don't we just jump into this to frame the bull bear debate and two, two segments we've pulled from from past episodes. One Jeremy Grantham for the, for the bearish outlook. And and one from Tom Lee recorded last week for the for the bullish outlook. Let's have a listen to them back to back and then we can discuss it. What is your reflection then, Jeremy, when we see Nvidia today hit $4 trillion in market cap, could it be similar to, to as you just mentioned, Amazon slipping peak to trough 90% in the dot com bubble? Is that possible with Nvidia?
- [07:39]
C
It's not just possible. I don't think it's even merely probable. I think at the very least it's highly probable. It is the guy selling the shovels at the peak of the gold rush, isn't it? This is one hell of a gold rush. It's a much, much bigger chunk of GDP being spent on this than was ever spent on digging gold.
- [08:07]
B
I note, Jeremy, that in 2000 you predicted that the S&P 500 would be down by 2010 and obviously you had some short term pain in that moment for the broad market. Do you say the same today? In the next decade the S&P 500 will be lower than it is today.
- [08:29]
C
Let's put it this way, I think it's quite likely. It's not of course certain weird and wonderful things happen, but in terms of a historian, I put a lot of weight on 1929. I think it's a wonderful example. It would be highly unlikely for this one to not be similar. And at or around several years in the future, 5, 10, even 15. It's highly likely from a historical point of view that you'll reach a point where you would rather have been in cash.
- [09:08]
B
So that was Jeremy Grantham with the bearish view. And now for the bullish view, here's Tom Lee. Are we very early in a new bull market but we've obviously had an extended bull market already?
- [09:21]
D
Yeah, I think that's what confuses folks because I would say generally we've been up since 2020, but we've had two 20% declines since. So in fact this has been a really disrupted recovery since the 2020 lows. So I think we are in a new bull market because we just had another essentially wipeout that happened February to April this year. I do think that the bigger story arc is that there is a big surge in US prime age workforce. That's the millennials and Gen Z plus they're inheriting a lot of wealth over the next 20 years which is going to be transformed into more equity exposure, less credit. The third is that the US is at the center of a lot of the major structural changes taking place. AI and now blockchain. But those are going to really boost financial sector which could re rate to like 40% of the S and P. And then of course health care could benefit. So I think there's a lot to be excited about. And 2035 sounds about right. That would be a 10 year bull run from here.
- [10:29]
B
So Jim, I have to say I can listen to either episode and I recommend people go back to the feed and find both episodes. And I listen to Grantham and I'm incredibly bearish. I listen to Tom Lee and I'm incredibly bullish. And I think the added interesting thing is it's very hard to argue with Tom Lee's track record over the last decade and with Grantham's over the last five decades. So they both have credibility in what they're saying. But I, I can't pick between them. When I listen in full what I imagine which way you're going to go. But what, what's your conclusion between the two?
- [11:02]
A
Well, okay, it's a great question. Wolf and I thought they were both, they were riveting episodes. I completely agree. Go back and listen to them. In terms of Grantham, he has predicted a few busts as well as and some of them been right and some of them have just not materialized. And I imagine there has been pain points for him on some of those, but I've experienced that myself as well.
- [11:28]
B
He acknowledges that in the episode that he was far too early in a.
- [11:32]
A
Couple of them actually. He's a very, very compelling individual. And Tom Lee, I take exception to some of the stuff he said, which I'll mention in a second, but the most struck me about Tom Lee was he said if you're, you know, of a vintage era, which I definitely am, maybe not as vintage as Jeremy or Ray, but you need to slap, put some specs on and imagine that you're 20 years old because the whole world has changed. And I think the same thing could have been said when I was closer to that sort of 20 year old thing at the beginning of the Internet, you know, that you had to put on your 20 year old specs to understand the implications of what was happening. You would however, have lost a great deal of money, as Jeremy Grantham pointed out, if you'd been buying at the top of the Internet bubble, almost without regard for the fact that valuations were crazy, as in many cases they are today. So although I understand what Tom's saying about the fact that you've we're in a new kind of era, perhaps a new epoch, I think we have to pay attention to the very, very high prices of the stocks that are being highly recommended, including Nvidia. But my view generally is that do we need to make a decision as to whether we're in a bull market or a bear market, or do we just have to look for alternative investments that don't put us at risk by investing heavily in the United States? And I think that, as you know, I'm very bullish on the UK for a whole variety of reasons. I've been bullish on the emerging markets, bullish on China. And I think there's great value to be had in some of those areas. I think there's great value to be had in some commodities, not necessarily all of them. And there's great value to be had in some of the industries that will benefit from AI but may not be part of the great bust that will inevitably come in AI in the relatively near future. We don't know when, but sure enough there will be a bust. So I don't think we need to actually be completely US centric and say it's either going up or it's going down. We can look because we're international investors, we can look anywhere we want. And there are, if you are nimble, almost gladiatorial, you can and indeed will make money. And this has been a great year for making money. Notwithstanding the fact I'm not invested in Nvidia for obvious reasons I'm not invested in the Mag 7. But there have been much, much better performers in other parts of the world and I think that that outperformance will carry on.
- [14:21]
B
I want to touch on those opportunities obviously in a moment and many of which you've recommended have done well. But let's just dwell on the mag 7 because there are some names out there which for example, even Tom Lee was bullish on. Palantir is trading at about a hundred times price to sales and you get 50% revenue growth for that. But Nvidia, 50% revenue growth going forward in the latest numbers is on a 34 times 12 month Ford P. So obviously not as stretch. And then I would say you said the Mag 7 there, Jim. I mean the likes of Google and Microsoft are rough numbers here, but 30 times PE for Microsoft and close to 20% revenue growth for Google, slightly cheaper, 25 times PE for 15% revenue growth. It's not unheard of, those valuations.
- [15:18]
A
No, I think you're right. However, one of the problems with investing in Microsoft or Alphabet or Nvidia for that matter, is that every single institution in the United States and a lot of retail investors as well, has a position in them. And so you have to ask who are the marginal extra buyers basically when everyone's got them and they represent a formidable part of the S and P as an example, because of the growth of passive investment, there has been continual shoveling of money into those particular names. And I don't disagree with Jeremy. I think that they could particularly Nvidia could go down quite a long way. When that's going to happen, God help me, because I don't know what the answer is basically.
- [16:08]
B
So when you said earlier that there'll be huge losses in AI, you're talking about some of those mega cap names, not some of the private market AI companies that are getting 10 to $50 billion valuations out of, out of nowhere.
- [16:22]
A
Well, I think they will lose lots of money for people as well. Some of them will at least, but I don't know if you, I'm sure you have. You used AI, but a lot of it is the same, a lot of it's quite clunky and most of the providers are providing ultimately the same sort of product. And it, as we've talked about it before, this is a bit like, and I know Jeremy talked about this and Ray Dalio talked about it, it's a bit like the railways in the 1850s and 18 6. Ultimately, no one made any money. There were lots of railroads built and that was great for society, but no one made any money out of the railroads ultimately. And I think this will be the same. However, some of the uses of AI are incredibly attractive and you know, those people who use, or the companies that use AI as a sort of utility could do extremely well as a result. And the valuations are much more attractive. But I would say the anthropics, the OpenAI's, the, the vast amounts of money that's going into them, a lot of that will be squandered.
- [17:26]
B
So let's talk about the opportunities then. And as you mentioned already, it's not like you're bearish. All equities, not even all equities in the United States, essentially, does that stem from the fact that valuations are cheaper in some places and we're looking at an inflationary decade ahead. So you do need real assets.
- [17:48]
A
Yeah, I mean, we're not looking at inflation everywhere because China is still in a deflationary situation and China is the second biggest economy and it still remains one of the most exciting economies in the world. And from a stock market point of view, I think it's much more attractive than the United States, generally speaking, at the moment. But in the Western developed nations, we are facing sticky inflation and ultimately rising yields, which are negative. I mean, Tom Lee was saying that he thinks that PE ratios will carry on going up until interest rates get to 6%. I didn't understand that logic. I have to say I think that every minor percentage, percentage of a percentage point that interest rates go up is a negative for PE ratios and for the stock market. And I don't think there's an optimal level of interest rates that's out there, but we're just going to get higher interest rates. We have to, because just everything points to crowding out by the government or the private sector and that will carry on. We're also seeing some cash flow issues, even for the Mag 7 because all the cash that they're generating basically goes into this. Either stop buyback, employee compensation or into building out their AI capability. And they're all building essentially the same thing. So the differentiation between these companies and one of your interviewees was making this point is not that great. They're no longer competing in separate segments, they're competing in the same segment. And that ultimately is not good. It's what the Chinese call involution. It's the over competition which erodes margins and causes an era of zero prosperity in a prosperous world. It's going to be negative. I don't think you have to go into these stocks. I don't think you need to be following the herd into these things and just look for other stuff. There's plenty out there and nimbleness and lots of reading are going to be the keys to succeeding and listening to your podcasts are going to be the keys to succeeding in the next couple of years or so. But I think there will be very good money made.
- [20:13]
B
Well, in terms of reading lots, I don't think I've ever met anyone, Jim, who reads as much investment research as you. Based on how many you send me, I have to try and keep up every day. Do you read every single one of those things you send?
- [20:25]
A
I read quite a lot of them, but I skim all of them.
- [20:28]
B
Amazing.
- [20:29]
A
I did a course at school when I was young. The only good thing that happened at my school called dynamic reading, which allows you, I mean, it means that you don't actually get the nuances of a great novel, but you basically can skim it. You can read about three times faster than if you were just reading it conventionally.
- [20:45]
B
Well, like my, my, my late dad always swore by a speed reading course he did as a child and he could completely consume a book in, in hours. Let's touch on some of those other opportunities then. I know earlier in the year at Master Investor we were talking about gold and silver. Are you still constructive on those or. Obviously they've had a good run. What's your latest thoughts?
- [21:11]
A
Well, I, I'm less keen on gold because it's a pretty crowded trade and everyone knows the story of gold and I am on silver and so I, I basically made a bit of a switch towards silver and I also sold a, a gold mine in Nicaragua to a UK listed company. I've been selling a lot of the shares that I got in return for that because there isn't anyone who doesn't know about gold. And by the way, I do agree with Dalio that gold is preferable to Bitcoin and indeed I think this year it has outperformed Bitcoin quite considerably. But I sense that there's a sort of a waning of the forward momentum for gold, but a more positive impulse for silver. And so I would be longer of silver. And then you might also want to look at something is beaten up like lithium, because there will be a huge demand for batteries for a reason that we'll get to in a second, which is robotics. And lithium is a key component of that. And so I'm picking up some lithium at the moment because it's very beaten up. I don't know what the outlook for things like iron ore or more conventional base metals are. I think copper looks pretty good. But you have to remember that China is still not growing as fast as, especially in the construction sector as it once did. And I don't see very much upside for growth in either Europe or in the United States. So it could be that commodities will only go up because of the continuing inflation rather than because of very high demand for those commodities industrially.
- [22:50]
B
Let's talk about some of those big long term calls that you wanted to touch on. So robotics is one of them and quantum computing is the other. I think most people will know what robotics is. What's quantum computing exactly?
- [23:03]
A
Well, quantum computing is a form of computing that basically is non binary. So it's not using ones and zeros, it's basically taking rogue elements and trying to herd them. It's like herding cats basically and harnessing that power to produce even more powerful and by the way, more energy efficient computers. And in areas such as cryptography, Quantum is beginning to come to the fore. And I think I can't really explain Quantum extremely well, but I am an investor in a quantum company called Continium, which is actually fundamentally UK based and has just recently raised $650 million at a $10 billion pre money valuation, which considering it's only been gained for 14 years, is quite a testament to the management of that company. I think it's probably the world's leading quantum company. And so everything that Bitcoin's built on, everything, all the passwords that we use on the Internet, all the blockchain, is potentially upended by Quantum, which is able to do calculations thousands of times faster than conventional computing. And so there's going to be a lot of change as a result of Quantum. And I think that is an area that's definitely worth looking at. There aren't very many investable assets in that area at the moment. But a company like Google, for instance, is quite far advanced in quantum. And so, you know, Google might be something to look at from a quantum point of view. So I'm very, very positive about quantum, but I'm even more positive about robotics.
- [24:47]
B
Well, and I just mentioned with quantum computing, broadly, as you already declared, you obviously have an interest in Quantinium, not that you could be pushing it because it's not publicly listed yet, but there are a few publicly listed names in the US that people could look at. But Quantinium remains private at the moment, the uk. So, yeah, robotics explain the moment that sort of shifted for you. You've traveled to various countries like China and Japan, where this is starting to take off and seen it in action.
- [25:14]
A
Yeah, so we've all seen the sort of fighting dogs and the walking humanoids and the one that, you know, the Japanese one that sort of bows at you when you walk into a hotel and all that sort of stuff. But, you know, robotics. When I was 15, first starting out as an analyst, robotics existed and I went to visit a company called, what was then called Fujitsu Fanuc in Japan with my boss, and robots were making robots, but those robots were going to factories and were caged and they would do lots of repetitive tasks, very basic tasks that like spray painting cars or welding, but they were very specific to one on, at most, two tasks. Today what's happened is that AI has enabled robots to do multiple tasks and to do them in a learning way so that a robot can learn to do what a human does. So for instance, picking fruit requires great gentleness so you don't bruise the fruit. And now robots can do that. But equally, battery technology has allowed robots to become mobile. So the robots, instead of being caged and just plugged into the grid, can now move around. And in fact, a lot of robots can change their own batteries or go to a charging station and recharge themselves so that these robots, which are able to work 24 hours a day, don't pay national insurance. Not yet anyway, although they may do in the future. Don't complain. Non unionized can do more and more tasks as a result of AI and mobility that they were unable to do in the relatively recent past. Morgan said there are a variety of forecasts for robotics, but they're somewhere between 5 and $8.5 trillion of sales by 2050, which would represent somewhere between the size of the food industry and the energy industry. As the size of the robotics industry, just under 10% of current world GDP will be based on robotics. Within a relatively short space of time, there will be billions of them. There will be billions of them. And the AI the United States is the leader in still, it's clinging to a. You know, it's still a lead, but in terms of the manufacturing of these things, it's China all the way. And so my idea was to try and find a vehicle, which we now have, which is listed in the uk, and to bridge the gap between the inability of Americans to invest in Chinese technology, particularly private technology, because of the various geopolitical considerations and the fact that the Chinese are the world leaders in so many aspects of robotics and will continue to be so because of their manufacturing capabilities and because of their lower costs. And so we're trying to find a way in which we can allow investors in the uk, a bit like we did for agronomics, to invest in the novel proteins, to invest in this new robotics revolution, which is going to be better, in my opinion, in terms of returns, than investing in just AI or data centers or, you know, the conventional stuff that we associate AI with now. So we will have more robots on the planet by 2050 than there are human beings, many more. And they will be doing everything they can, basically, not only look after the elderly, but also move elderly patients, avoid falls for elderly patients. They are increasingly being used in medical applications. So if you have a prostate cancer operation in the uk, increasingly it's going to be done by a robot rather than by a surgeon. And it's much, much better, much quicker. You're less exposure to the air and all that sort of stuff, and less infection risk. You're going to have robots doing the jobs of security guards. Currently, there'll just be robots doing it. There won't be any security guards. In a relatively short space of time, robots are going to be allowing us to produce stuff in situ next to the consumer, because they can be rented, they're cheaper than human beings, and as I said, they're uncomplaining. So almost everything, including, you know, your cleaning lady, will be substituted by a robot. And not so long hotels will be cleaned by robots. I mean, robotic cars, we're all going to be driving around in Uber's version of those. We won't even be driving, and we're just sitting in them in the relatively short space of time. This is a revolution that's at the cusp of its huge expansion. Morgan Stanley are forecasting a 39% compound growth between now and 2040, which is phenomenal. So I would prefer to invest in that, to invest in the obvious stuff, the Mag 7 for instance. And I think there's a great opportunity.
- [30:26]
B
And so I didn't know about this, but you're saying you're about to launch an investment trust or something in London that would capture this theme.
- [30:34]
A
So we've taken control of a company called Seed and we're going to rename that company. I mean it's in the early stages and we've announced that we want to change the investing policy of that company. So it's not non public information, but the exact detail of that we haven't worked out ourselves, but we've hired someone to help us do that. And yeah, so this will become the world's first humanoid. They call them humanoid as a shorthand for basically mobile robots that can do multiple tasks and that would be by far the biggest element of this. So they don't need to look like humans, but currently they make them look like humans. So you're not freaked out by when you see one of them?
- [31:16]
B
Well, I think when they look like humans it makes it more freaky, but there we go.
- [31:19]
A
Well, that's true. It depends how close they look to us. You don't want them to be identical.
- [31:24]
B
Well, we look forward to learning more, Jim, about, about the new investment vehicle to come. By the way, I thought when you said they don't pay national insurance yet, I was thinking to myself it'll become a very attractive cohort to tax, unless of course they get given the vote, in which case we'll be in all sorts of trouble. Jim, as you know, we kind of end the episodes with the same set of questions. But I've already put those to you in our first episode back in, in June which people can, can go back and look at. So I've tweaked the question this time as we wrap up this episode. As opposed to the best investment or the worst investment you made, what's been the investment which taught you the clearest lesson in your investment career?
- [32:08]
A
Oh, I think that the investments where you are so certain of your righteousness and all the facts seem to support your argument for making the investment, then it goes wrong. Are those that teach you the most. I mean, I don't think anyone really wants to learn by losing a lot of money, but I certainly did. I was a early investor in Russia in 1994 and we were riding, I mean I was young and we were riding a huge wave of inward investment into Russia because of the privatization process that was going on then when all the Oligarchs were accumulating their assets and the Russian state was selling off everything via a system of vouchers. And it was amazing. And we were making as a company, we were making US$100 million a year, which was a lot of money in those days until it stopped. And it stopped because there was a devaluation of the ruble and a devaluation of the or a default on the government bonds in Russia and crisis of confidence. And I remember getting a margin call from an ex university colleague of mine who was then the second or the sort of chief accountant at Morgan Stanley, and the margin call was for $40 million. It was touch and go. We managed to pay the margin. But I'll never ever forget that riding very high is often the time when you should be selling and not adding to the opportunity for major risk. And so that's why I frame everything now in the context of both diversifying my assets and also of the risk of my positions so I never end up in that situation again, which was a very, very difficult position for us to be in. We got through it, obviously. But I do think there's a lot of people out there who take excessive amounts of risk with insufficient diversification. And that's not something that I'm going to do. And so my best investment ever, funny enough, has been in something really boring and unrisky, which is in German property and we still have it. And you can sleep fairly well at night in German property, particularly if it's deleveraged. But you can't sleep well at night if you have all your money in the Mag 7 or all your money in some wacky new AI project. So diversify, read a lot and just be constantly aware of risk because risk is out there and it comes at you in the middle of the night and you don't see it coming.
- [34:50]
B
Jim, as always, such a pleasure to see you. I think our next appointment, I hope, is in the pub, by the way, wherever it is.
- [34:58]
A
I look forward to raising a jar with you, Wilf. And again, many, many congratulations on this outstanding series and I'm very happy to be part of it.
- [35:05]
B
Jim. Well, likewise. It's great to have you as my partner in crime and co founder. And we'll be back again for another episode with Jim in a month or two. And it's an action packe week here on the podcast because on Wednesday we've got an interview with the former Prime Minister, Liz Truss. Do stay tuned in for that one. Do remember that nothing on the Master Investor podcast should be considered direct investment advice. There's more in the show. Notes on that. The Master Investor Podcast is produced by Paradine Productions and Master Investor Podcast Ltd. In association with Birdline Media. If you've enjoyed the podcast, please do subscribe on YouTube or click follow on your podcast platform and then you'll be automatically notified each time a new episode drops. And please do leave us a review as well and a five star rating if you're so inclined. We'll be back on Wednesday with Liz Truss.