Defensive Investing for an AI Bubble | Ruchir Sharma's Hedge Rules

Bankless Nation, I'm very excited to introduce you to Rashear Sharma. He's the CIO of Breakout Capital. He's the bestselling author of a number of books, Breakout Nations, The Rise and Fall of Nations, What Went Wrong with Capitalism? Appreciate it. Welcome to Bankless. Thanks, Ryan. Looking forward to doing this.

Okay, so I feel like it's an absolute pleasure to pick your brain today. You're an investor I followed for a while, I admire. Actually, because of you, I listened to an episode with you not too long ago and I dabbled in my first emerging markets assets. So I made some buy.

in the emerging markets landscape. I had not previously done that. I think you've got a lot of ideas that can help break us out of our bubbles. So maybe I'll start with this question, Rashir. What are your most contrarian ideas as an investor right now? Well, having studied market cycles for the last few decades, the one thing we know is that cycles don't last forever, that there is a certain duration to them.

And what I've typically found is that every decade is defined by some new investment theme. So if you look back at the... Last decade, it was all about American exceptionalism, which is that the only place in the world it seemed like to invest and to make money was America. The decade before that, it was all about emerging markets, the BRICS.

as they came to be known, Brazil, Russia, India, China. The decade before that was, again, all about tech, NASDAQ, the 1990s. The 80s was about Japan. The 70s was about the commodities.

those countries benefiting from the commodity boom. So, you know, the 1960s was all over the nifty 50. And so my big take, which I spoke about at the beginning of this year, was this... incredible period of American exceptionalism was going to come to an end, which is that the American stock market and American financial assets in general had outperformed the rest of the world by a very significant margin.

for possibly longer than anyone would have imagined, at least for longer than I had expected. Even though I was very bullish on America for much of the last decade, I thought that this had gone too far. And I think so, therefore, what we are seeing this year is that even though the American stock market has again defied the odds and done reasonably well this year, producing a return in excess of 15% for the S&P 500.

The real big story here is that the international markets have done far better than the U.S. this year. So the international markets on average are up close to 30% in dollar terms. So that gap of outperformance between America and the rest of the world, which we had right up until last year, that gap has now begun to close. And I suspect that this is going to be...

multi-year trend. This is not the first year of American underperformance. It's going to be many years of American assets in general underperforming the rest of the world. And I feel that capital hasn't... moved much because people are still very fascinated by the AI story. America obviously has the edge as far as AI is concerned. But in that maniacal focus on AI...

I think that a lot of investors are ignoring the green shoots that we're seeing in these international markets. So I still feel that even though we have seen the price trend turn this year and the international markets are outperforming the U.S. market. I still feel that this is a contrarian idea because the opposite has been going on for many years and it'll take many years for people to adjust to this reality where international markets offer better opportunities.

than the US. So do you see an analog in terms of a decade that the 2020s is like, or is there something new in your mind? So if it's not so much American equities, then what replaces it? Is this some sort of emerging market type of...

activity like, you know, the BRICS in the 2000s. I mean, some would say, given that the recent AI moves, particularly in the last two years, this looks something like the 1990s again, which might actually favor America in this case. What's the theme for the 2020s? Yeah. So as I said, then, you know, like for the 2020s so far, American exceptionalism has already done relatively well. But I think that it's about...

some of these international markets doing well, including China making a comeback. For many years, I was very bearish on China because I just thought that the debt and demographic problem that China had was intractable and something that they would not be able to fight. But I think that the advances that China has made on the AI front itself are very impressive. And there is a legitimate case to be made that China is catching up to the US very quickly on AI.

by spending a whole lot less than the U.S. is. So I think that that's something which could also emerge as a team out there. And the dollar, I think that is the other thing which is playing out, which is that for... A long time, it seemed as if there was nothing to replace the dollar, that this was king dollar. And the term that got very popular in financial markets, as you know, was PINA, that there is no alternative to the US dollar. And instead, what we're seeing now is that...

No, nature abhors a vacuum that nothing can be taken for granted. And so instead of the dollar, now we have seen gold, Bitcoin, the so-called dollar debasement trades. do relatively well. Now, of course, some of this is also being powered by so much liquidity out there. But, you know, this trend has been in place now for many years as well. So I think that the theme really is the fact that

is one of diversification, which is that you've had the last 15 years, it made no sense to diversify outside the U.S. because the U.S. was really the only game in town. Everything else was too small a marginal. Now I think that the international markets of some size from China to Germany, I think that these markets are staging a comeback because the economies are also doing a bit better, albeit from...

very low expectations. Let's dig into all of this for the rest of the episode this year because you've opened up a number of interesting paths I think we can go down. The first is maybe talking about America and AI. You wrote this post in the Financial Times recently that I enjoyed. which is basically entitled, America is Now One Big Bet on AI. I think a lot of investors sort of feel this. I'm wondering if you can give that more...

quantification and talk about that. So America has one big bet on AI. What are you seeing that justifies this analysis? Well, one is just a pure economic impact, which is that if you look at the amount of spend... that American companies are doing on AI, and you calculate how much is that contributing to GDP, the number works out to close to 40%, right? So 40% of economic growth in America this year.

is coming because of all the spend that's happening on AI. But that's just the so-called first-order effect. There are, I think, two or three other secondary effects because of what's happening on AI. Around 80% of the American stock market's gains have been driven by the so-called AI plays, whether it's got to do with...

these hyperscalers, as they're known, or got to do with some of these profitless tech companies and other thematics related to AI. So about 80% of the gains of the stock market have come from there. And as you can see there that the... A big reason that the American consumer is holding up is because of the incredible gains in the stock market, the wealth effect that that is generating. Of course, it's being led by the top.

10% or so because they own a bulk of the stocks as has always been the case. But I think so that's the second order effect, right? So you're getting 40% of American growth this year is happening because of the spend. that's taking place on building out the AI infrastructure. So that's the very direct contribution that you can see. The other contribution is that whatever consumer spending that we're seeing in this economy, and it's been weakening a bit, but still whatever.

positive consumer spending we're seeing, that is being driven, I think, a lot by the wealth effect coming from the stock market's gains, which can directly be tied to AI. Those are the two channels through which I think that the American economy is being powered by AI. Then there are a couple of other repercussions of this as well.

One is the fact that, you know, that despite America running reasonably high deficits, the government's fiscal deficit and the fact that the debt to GDP ratio is breaching 100 percent. The reason why the American bond market seems relatively calm in the face of all of that is because there is this expectation that AI is going to lead to a big productivity boom.

Because AI will lead to a productivity boom, that will also take care of America's very high debt to GDP problem. Because for every half a percentage point increase in productivity. That really helps lift economic growth rate and stabilize the debt to GDP ratio. So there is a implicit bet that the AI boom is going to lead to a big surge in productivity.

And that big surge in productivity will help stabilize America's debt-to-GDP ratio. Therefore, America is getting a bit of a free pass, even though its fiscal deficit as a share of GDP is still running at close to 6%. Also, an extraordinary high number for an economy at this stage of the business cycle, which is one where the recovery is relatively mature. In fact, America has never run such a large fiscal deficit at this stage of the economic.

cycle. And the third aspect here has to do with the dollar as well. Even though the dollar has weakened this year, I think that the dollar weakness would have been much more pronounced in the face of all the actions that President Trump

and the administration are taking, you know, which has been at times, seem to be a bit hostile for foreign capital. But in the face of all those actions, I would have expected the dollar to have weakened much further. But then once again, A lot of foreign investors in turn are brushing aside whatever negative impact they think is coming from tariffs and other Trump administration's policies because they're all fixated on AI and how much...

America has a great comparative advantage when it comes to technology. And so we're seeing a lot of foreign capital rush into the American markets, chasing the AI dream.

So that's really why I made that point that America has become one big bet on AI, because in terms of contribution to economic growth, what explains the relative calm of the bond market in the face of all the... deficits that America is running, and also why the dollar hasn't weakened even more, despite the policies of the administration and the secular sort of trend that the dollar now seems to be in.

And so the conclusion here is that this big bet on AI better work out because if it weren't for all this massive AI hype, I think the American economy would today... be close to stall speed because the tariffs would be biting, or at least the effect of the tariffs biting would show up a lot more. And I don't think America would get such a free pass for the other.

policies. But all of that is being papered over by the fact that there's so much hype about AI and so much capital is still rushing into America, chasing the AI dream. So that is an interesting counterfactual overshare. Maybe flesh that out a little bit more. So if AI hadn't come about in the last two to three years, this sort of miracle that seems to have extended America's runway from the perspective of...

how much fiscal debt to GDP, how much it can spend, dollar dominance, equity dominance, all of these things, even kind of capex and growth in the economy. If AI hadn't have come about in the last two to three years, what kind of shape do you think America would be in right now? I mean, do you think it would be recession? Do you think it would be giving up some of those, the gains in the stock market to

kind of emerging markets and, you know, the international, like, what would it have looked like? Yes, this is a very dynamic situation. For one, I think that, you know, because it's hard to calculate these things for President Trump. Should it possibly looks at the economy and says, hey, despite all that the experts told me and all the critics told me, my high tariffs and also the other policies are clamping down on.

immigration, you know, there's been a massive fall off in immigration this year. Now, all these would have ordinarily had a big negative impact on economic growth and possibly even led to higher inflation. But that's not happened. At least it's not happened to the extent that people expect it. And the point I make here is the fact that it's not because tariffs and the clampdown on immigration are not having a negative impact, but they're being more than offset.

by the AI boom. So now let's say that this AI boom didn't happen. Well, I think that there are two things. One, yes, the American economy would definitely be a lot weaker, but then also you have the... counter balancing here that then President Trump may not have been this aggressive in pursuing the tariff agenda or even the immigration agenda because then he would have seen the pushback that's coming from financial markets because

Because of the AI boom, as I've just outlined, there is no real pushback coming from the financial markets. But we saw that in April this year, that when you get a very strong pushback from financial markets. the president is quite sensitive to that, particularly the bond market. So yes, if the AI boom was not happening, the economy would be weaker, but maybe there would not be a recession because on things like tariffs and immigration.

the president would be a lot softer than he is today. But today he thinks that he can take a pretty hard line on those things because there is no visible negative impact at an overall. level in the economy because the AI boom is offsetting the negative drag from tariffs or the big clampdown on immigration and in general feeling of not being that welcoming of foreigners in foreign capital.

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slashing the price of creating or accessing liquidity. Want to stay in the loop on Unichain? Visit unichain.org or follow at Unichain on X for all the updates. There's this investor line that concentration produces wealth, diversification preserves it. And I'm wondering about the idea of the AI bet. So I think you make a compelling case that America is one big bet on AI. Maybe that's a genius wealth creation tactic.

Maybe that is the right bet to make. Certainly as you look at things in 2025 and you see the innovation happening and you see there's really only two global competitors when it comes to the frontier of AI. And if you start to get into the Silicon Valley... circles and hear the hype of AI leading to massive productivity increases. I've heard some of the CEOs talk about numbers in the range of 6% to 8% GDP growth per year.

And you say, wow, this is the right technology to invest in. What if America is making the right play here? I think you're making a compelling case that it's a concentrated play, but maybe it's concentrated and right.

In which case, doesn't that actually solve all of America's problems? Oh, yeah. I mean, if AI delivers to the promise that the techno-optimist thinks it will, sure. So you're right that... The point that I'm making is that this is a very concentrated bit. And I really like the line that you have come up with. And I'm going to sort of remember that. But as I said, that we just have to be then aware of the situation we are in. And then, you know, the other and.

I don't know as yet as to how big AI is going to be. Obviously, we know it's going to be transformative. On that, there is unanimity. But I'm also slightly concerned by the narrative that, you know, this can... AI, you know, can just keep running at this pace because let's just take the, you know, like the really bullish case that Gen AI is here and it's going to, you know, sort of do so many jobs that human beings.

would have otherwise been able to do. So the whole promise of that is that in the past, you had technological breakthroughs which helped humans get better. Here, the real promise of AI is that it's going to... replace human beings not that it's going to help them get better but it's going to replace human beings and I just don't know if you know we're all going to or at least the large populace is going to just sit back and you know at the altar of

profit margins of companies increasing that people are just going to accept it passively that, okay, AI is going to take everyone's job and that's what it's going to do. So I'm a bit skeptical of that, that, okay. How much of demand do you really kill by doing that? You know, like, so, you know, so I guess there are two arguments here. One that I think that you're making a very legitimate point that yes.

The stronger case to make is that this is a very concentrated bet on AI, and it's entirely possible that the concentrated bet pays off. I'm not sure that I, as an investor, would want to do that, especially at this stage of the cycle where so many unprofitable companies have done so well in the last few months that I just want to pile on to the AI trade at this stage.

And the second point I'm making is that even if AI plays out in its full potential and full promise, is it really going to be that way that it takes away all these jobs? increases profit margins and shareholders are going to be really happy and we're going to have people who are just going to be sort of unemployed and take those or whatever the government has to give them. You know, it just...

I find it very hard to get my head around that argument. Yeah, I think that second point is a really good point, which is even if the techno-optimists are right and the bull case for AI succeeds, then certainly the wealth creation happens on the capital side and much less so on the labor side, which we've seen how that has played out in the past couple of decades. You've wrote an entire book about it.

about what went wrong with capitalism. So that could be a problem in the future that fractures society. I want to go back to the first point too. So you've seen many of these market cycles for share. I am an avid reader of any memo that Howard Marks publishes. And he wrote a memo earlier this year and then another in August, one called The Calculus of Value. And he basically...

It's kind of the question, you know, Howard Marks called the original dot-com bubble. And so he has that history. He sort of sees risks when others don't. And he's not concretely saying it looks like there's an AI bubble, but he is saying... hey, I'm seeing some warning signs, PE ratios at historic highs, some signs of euphoria. He goes through it in his memo. And so...

What I would advocate, I'm not really an equities investor too much, but what I would advocate is a more defensive position where you stop buying and you reduce aggressive holdings and increase your defensive holdings. I'm wondering about this concept of... are we in an AI bubble? Do you have any market indicators for that? Is there like a bubble watch from an investor psychology perspective that you have on your radar?

And do you have an answer to that question? Well, sure. You know, I think that in terms of the fact that I've studied bubbles a lot. And I think that, you know, when there's two, that for me, the basic definition of a bubble. is a good story that's gone too far, right? So that every bubble is a good, I mean, like a very good story, but like, you know, that it's gone too far and that there's too much capital flowing into just one area, one sector.

I think that there are signs of that. So I do feel that we are in some sort of an AI bubble currently. The only problem with this is the fact that generally bubbles don't burst on their own. It takes some catalyst to do that. And the catalyst historically has been tighter money because, you know, like that typically like what happens is that inflation shows up as the economy overheats because there's so much.

hype and spending and investment. And then whatever inflation shows up, the central bank finally comes out to fight that. And currently the issue is that it's very hard to see that happening because this Fed... is very dovish. It's still very keen to cut interest rates at the slightest excuse. And so I think that to answer your question that, yes, if I look at my standard bubble parameters and there are, you know, like...

As I said, it's a good idea gone too far. But even if just objectively looking at the kind of froth we see in terms of the investment, the trading that we see like in the... markets, the popularity of leveraged ETFs. I think that all those signs to me suggest that we are in some sort of a bubble, but it's very hard to know as to what stage. of that bubble we are in. But to me, that's almost not that important even because I think that the bubble can keep inflating as long as there is

no force from the other side to counter it. And as I said, the only force historically that has consistently deflated a bubble is when you end up getting monetary tightening. So I'd say that...

possibly next year, because so far the consensus is that the Fed is going to keep cutting interest rates and that the Trump administration is going to keep egging them to do so. But as we saw... even in the recent polling numbers for Trump or even what happened in the election earlier this month, which is the fact that rising prices and inflation

is a big concern for the average American. And so I think that, you know, like it's some, and if the economy keeps growing this way, I think that inflation could well surface more quickly than people imagine. And that could get the Fed to also pivot. And like even for the Trump administration to get more sensitive that rising prices is really a big fault line and is something which could hurt them.

politically a lot, including in the midterms next year. So I'd say that to answer your question, I do feel that we are in a bubble when I look at all the standard metrics of over trading, over investment, over valuation, which typically characterize bubbles. But having said that, I don't know in terms of when that comes to an end because any bubble doesn't.

deflate on its own. It needs a catalyst. And the only catalyst which I know of is when you get tighter monetary conditions. And the tighter monetary conditions only happen when you get... consumer price inflation because that's the one metric the Fed focuses on. The Fed doesn't focus on asset price inflation, which I think it should as well, but the Fed focuses on consumer price inflation. So I suspect that in the next...

12 months at some point, the Fed's going to have to pivot. And then if you end up getting higher interest rates, that's what ends this AI bubble. Yeah, you're right that the Fed does not focus on asset price inflation, but... The public does and the politics certainly do. And so I think you make a good point there. Let's maybe widen the lens a little bit and the aperture a little bit on America, but also outside of America.

If America is now one big bet on AI, which it is, and the world is over allocated to America, which it certainly is, roughly 65% of all equity ownership across the world. is U.S. equities, and that is up by a substantial amount over the last 10 to 15 years. So then that by proxy means the world is also one big bet on AI, at least at some level. Can you talk about how we got here? So how did it come to pass that the theme of the 2010s was basically American equities?

dominance and exceptionalism. How did that happen? Yeah. So I think that this goes back to the previous decade, right? That in the 2000s, the S&P 500 had done nothing. Emerging markets were the glorified. asset class of that decade. And then you got the global financial crisis that pricked a lot of hype around the world. And then also the fact that America was able to

recover from that crisis relatively quickly, whereas it took Europe a long time to recover from that. And also because that you saw a big increase in the importance of Silicon Valley and technology in the 2010s. And whenever you end up getting a big tech cycle, that's the time when America always does well because...

The reason why America is the most successful large nation in the world today is because it's been like always at the cutting edge and the leading edge of technology. So I think that the... tech boom, which took place in the 2010s, led by, you know, some of these companies that have become mega cap tech companies now.

And the fact that America was able to recover relatively quickly after the global financial crisis with its banking system appearing and its financial system appearing in much better shape than Europe. And on the other side, you had... like all these emerging markets that had partied like crazy in the 2000s, had too much money flowing to them, which corrupted them in a way of running fiscal excesses, current account.

deficit excesses. So they were in the penalty box trying to clean up their entire balance sheet over the last 10 to 15 years after the global financial crisis pricked that brick bubble out there. So I think that there's this combination, which is that you have this big tech boom, which lifts America because America is seen to have a big competitive advantage on technology.

Europe is the big laggard when it comes to adopting new technology, or as someone said to me once, that it's like the Silicon Valley of regulation rather than innovation. So therefore... Europe's like the big laggard. Emerging markets were, you know, like in the doghouse recovering or trying to clean up their balance sheet after the excesses of the 2000s. So all this led to...

really America being the only game in town. And so you had this incredible concentration of capital coming to America. And then in the pandemic, I think, you know, was something which turbocharged that because... America ended up throwing a lot of money at the problem, both monetary, fiscal, massive amounts of stimulus that it put to work.

The technology cycle further extended itself with AI coming on stream so quickly. We had barely gotten over the cloud innovation technologies and before that, the consumer internet economy. And then you've got the AI stuff, which came on stream. So I'd say that all of that has powered the American stock markets to this extent. And of course, it's been turbocharged by liquidity with both monetary and fiscal.

policy being so easy. And then there is another aspect which is far more troubling for me, which is that there is this sort of implicit assumption that the government has given people to believe. that we're always here to protect you on the downside when it comes to your investments. And I think that that is a really problematic thing for me because we saw that of late even with the Silicon Valley.

Valley Bank crisis back in the spring of 2023, that every time there is even the slightest flutter in the financial system, the American government, the Treasury, the Fed... they all seem to be very keen to rush to the rescue. Fearful that if they don't do that, it'll lead to wider contagion and, you know, like...

undermine the economy. But that's the asymmetry. And that's one of the big themes you spoke about in my book, What Went Wrong With Capitalism. That's been one of my dominant themes that I speak about in that book, which is the fact that this asymmetry, which...

which is to socialize all the losses. Whereas on the upside, you know, it's a free ride on the upside. And I think that that's another issue which is there, which is really... powering so much money into the American stock market that the American, like I saw this stunning data the other day that the households, their allocation to equities is now above 50%.

which is incredible. That's surpassed the peak we saw even back in 2000 at the height of that boom. And the reason I think so many people feel emboldened to put this amount of...

money to work in the equity market is partly because they feel that on the downside, the government's always there to protect us. And on the upside, you know, it's free optionality. So I think that that's what's also driving a lot of... speculative activity and a lot of flows into the stock market so some good so mostly good but some of it bad as to what has got us here to this position where you know like america

has seen this incredible amount of financialization and the stock market doing so well. But the point that I'm trying to make here is that a lot of these trends are now very well understood. They're quite mature. And the rest of the world is beginning to get its act together. At the beginning of this year, we saw that Europe, you know, that they were able to snap out of their funk and said, okay, led by Germany, that we're going to stimulate, we're going to do what it takes to...

recover out here. A lot of the emerging markets, you know, are learning to trade without the US. They're increasing their own intra-regional or, you know, signing much more bilateral. trade agreements and increasing trade and sort of leaving America out, thinking that America is a very difficult partner when it comes to trade. So these changes are taking place.

And so therefore, I think that there's a lot more opportunity now in the rest of the world. And so definitely own a lot more of the rest of the world that some of these European banks have done so well over the last. few years, you know, and like almost until this year, they were doing so in a very below the radar way. But now, you know, they seem to be breaking out on the upside. And then also the politics.

is turning for the better in many emerging markets, in particularly places like Latin America, where you're seeing a lot more market-friendly, right-wing, orthodox governments come to par and who treat capital. with much greater respect than their left-wing predecessors in Latin America. So these changes are taking place. So for me, the rest of the world is looking more exciting. And as far as America is concerned,

You know, it's, as I said, apart from being one big bet on AI, there's a fair amount of complacency. And the complacency is only being further reinforced this year because, as a detail, because of AI, it seemed as if, oh, okay, America can get away with. whatever it wants. We can run whatever deficit we want, whatever debt to GDP we want, because at the end of the day, AI is going to come and it's going to boost productivity and save us all. So I suspect that the budget deficit, I mean...

you know, like sort of stabilized this year with the Trump administration also making some effort to rein in oven spending. But I suspect that next year, the deficit is going to start to widen again, you know. And especially if the consumer outside of the stock market's gains, the consumer is feeling a bit weak. I think that the government will be more emboldened to give just more stimulus, you know, give some of the...

tariff windfall back to the consumer. And so I think that that's really what's going to happen over the coming year. And that's why I feel that the risk from here is that...

You get some overheating of the economy and bond yields go up a bit and the Fed is forced to act. And that finally pricks the AI bubble. I feel like part of the argument here, Rochere, is just a reversion to the mean, basically, where you have... U.S. capital markets, U.S. equities, 65-70% plus of the total world equities right now.

And you're just saying... Of the World Equity Benchmark, yes. Yeah, World Equity Benchmark. Maybe you know the stats more. So you're talking about a rebalancing to something that is kind of like more formal or more... with kind of the average or more with demographics or more with, I guess, the world economy and mapping closer to that. Maybe we could get tactical for a minute. So on bank lists, I think you're talking to...

A lot of investors, some of which are retail investors, right? They're definitely heavy in cryptocurrency. We could talk about that later. But also when it comes to equities, to the extent they own equities, it's probably going to be S&P or it's probably going to be QQQ, something like this. And when they look at the emerging market and everything outside of the U.S., they're not really sure where to start because there's a lot of capital markets out there and it's kind of scary.

And it's very easy to just go to Robinhood and press the buy button for QQQ and then it's kind of done. When it gets into emerging markets, it's like, where do we even start? So I think the average retail investor, their impression is like, well... there's nothing really happening in Europe. It's kind of sleepy right now. And then you made some comments about Germany. And then here are good things about India. It has underperformed S&P. So if you look at the charts, you're like, ah.

I don't know here, but maybe India is a place. There's the rest of Asia. There's also China, which is out there, which seems incredibly interesting because they have some of the... the AI narrative as well and some of the AI tech that you mentioned. But like, I don't know, can we invest in Chinese equities markets? That seems risky from a property rights perspective. And then also, for whatever reason, China is booming.

But Chinese equities have underperformed. Like I wish I had some land in China or real estate in China in 2010, but I'm not sure that the equities markets are doing so well. So it's kind of like a, it's complex out there. Can you help?

The average investor makes sense of that whole landscape and gives some advice on like where we should start. Yeah, so I think that the issue is this, that if you focus too much on recent performance or past performance, You know, like that's like often a poor guide to the future. So you're right that the Chinese stock market has produced very underwhelming returns, particularly in relation to the GDP growth.

the nominal GDP growth we have seen for the last few decades in China. But I think that what's happened as a consequence of the property market having gone bust and also with bond yields being so low in China. is that we are seeing now a greater equity flow go into the stock market. And as you know, in China, what the government also wants matters. And I think that there the Chinese government is quite keen.

to see more capital flow to the stock market and out of the bond market. So I'd say that you have that one tailwind behind you. And I think that, you know, the other very important signal is that... President Xi Jinping, he was seen to be not very friendly to the private sector and to capitalism as such.

And his crackdown on Alibaba at the beginning of this decade possibly brought an end to the Chinese stock market boom, or at least the Chinese tech stock market boom that was taking place right up until then. But I think that he too has... changed his stance. You know, that he also realizes that if China has to catch up with the U.S. and compete on the AI front, it needs these private sector behemoths, you know, its own.

Max 7 or whatever you want to call it to help build out the AI infrastructure. And it's being led by companies such as Alibaba. So I think that that's the point, which is that China is turning more capital friendly. encouraging its own population to put more money into equities and away from very low bond yields. And as I said, just looking at past performance is never a good guide to the future because...

I know that there was so much pessimism about the American market in the 2000s. The S&P 500 produced a zero return, you know, between 2000 and 2009, those 10 years. Now, somebody in, and our memories are short, but remember that in 2011 and stuff, there was so much pessimism about America, you know, that the SNP had just downgraded America's.

America's debt, with a much lower debt to GDP ratio than compared to what we have today, they still downgraded it. And it seemed as if America was going to have a terrible decade and that it was... They're about to go into recession. That's what the thinking was in 2011. And look what that set us, you know, set ourselves up for that, you know, it's set up for a great bull market that took place. And similarly, I'd say that.

You know, like in Europe, there's so much pessimism about Europe today. And, you know, but that pessimism to me is reflected in the prices. There's a reason why Europe trades at such a wide discount to the US today. It's because there is so much pessimism built into the prices and it takes only small changes in these very low expectations, you know, for things to turn around. And I think that that's what we are seeing.

in Europe as well. We're seeing in some of these emerging markets as well. So I'd say that, you know, for the retail investor we refer to on this show, the fact is that like always be wary of too much hype that where there's far too much hype, everyone is chasing the same idea because the odds that you're going to be able to make too much money on the back of that is a bit limited. On the other hand,

Going out to places where people are not that crowded or not paying that much attention to has always been a winning strategy. As one of my favorite lines borrowed from psychology goes. that the opposite of love is not hate, but indifference, right? So, and you have so many sort of markets out there where people are just indifferent, you know, like whatever. But having gone through cycles again, I can tell you that the feeling about America.

at the beginning of the 2010s, was exactly similar. That America was seen as the weak link in the global economy. Its strengths on shale and technology after that were just not properly. recognized. And I think that that's what shifted. Today, instead, I feel there's a lot of complacency about the fact that, oh, where else will the money go? It has to come to America. And because people look at recent performance.

They feel further emboldened to put more capital to work at America. But we need to acknowledge that that's the reason why the American stock market today is so expensive compared to its history and why it already trades. at such a big premium to the rest of the world. And just one other idea that I'll throw out there that there's, you know, like this is a research project that I'm currently working on, that there is not, there's not been a better time.

to invest in quality stocks. You know, there's so much hand-wringing out there that, oh, what are we going to do? The market's already so expensive. If this is already an AI bubble, what do we do? But then we did some work and we found that...

If you look at quality stocks, these are companies which deliver a relatively high return on equity, consistently reward shareholders and produce lots of cash flow. These companies have... underperformed the market by one of its widest margins ever, because that's a lot of unprofitable tech companies have done very well over the last few months.

And so therefore, you have this dichotomy that the market has moved up, but it's really being driven by a lot of the unprofitable so-called junk companies, whereas the very high-quality companies have been big laggards. in this latest bull run. So this could be the best time to just say that, hey, I'm going to buy some very high quality companies out there and I'm just going to sit on them and see what happens rather than...

join the herd and chase the same AI names that everyone is already invested in. So for me, I'd say that those are fine. If you're bullish on AI, by all means, own some of the main AI stocks. in the US, because that's the best place still to own AI stocks. But I'm like in the mood currently of just continuing to diversify, of investing more overseas.

And even within the US trying to identify, okay, which are these quality companies which deliver a steady return on equity of above 15% have some good earnings potential? Let me, you know. Come up with a basket of these and buy these companies because in any environment, these companies should do well. Now, they may underperform the market if you get a rip-roaring AI bull market for the next couple of years.

I'd say that generally when you get such a massive period of underperformance, as we have seen for quality companies over the past year, that typically sets the stage up for a big phase of quality. outperforming. So I would own a lot of quality stocks out there in this environment. Okay. So some of your ideas are quality stocks in the US if you're going to do the US.

What about the emerging markets and international markets? Again, we're probably talking to an audience that largely is US-based, right? In particular, their equity holding, I should say, right? It's going to be QQQ. It's going to be S&P. Is there a way to just buy a world indice of some sort? Is that like a product you'd recommend? Or would you actually say...

No, you should go country by country, market by market, look at India, see if you like that, look at China, see if you like that, and then buy index funds for each of them. As I mentioned to you earlier, I was inspired to diversify some of my equity holdings based on some of your takes because I largely agree with them. And I was looking at indices in India, for example, and have done some diversification there.

Am I playing that right? I think people just need a primer in how to get started outside of US investing, really. Yeah, but I think that to go country by country is a bit difficult. Yeah, it is. But I think that...

As a starter, as you said, just buying some international exposure by buying, you know, like an MSCI World X US Index, I think is a good way to start because... I think that you have to also understand that the currency is going to play a big role out here, you know, which is that, like, one reason why the American stock market outperformed so much, you know, like, and there was no incentive for...

the average American retail investor to go overseas over the last 10 to 15 years is because if you went overseas, the currency was going against you, which is that, you know, you're being set back a few percentage points every year because the dollar just kept strengthening. international diversification just in work. But I think the opposite has begun to happen now, which is that this year, the euro is up 10%. The dollar index broadly is up about eight odd percent. So just sort of diversifying.

And buying these international markets, you know, helps you play that currency effect as well. Which, you know, like, and historically, the currency accounts for about 30% of the total gain in any, you know, average year. So I'd say that there's a double benefit here, which is that because I expect the dollar to weaken, I'd say that investing overseas is something which could really be helpful because it gives you both a currency boost.

and you're buying markets that are cheaper. But I think to clarify your question, that I would just buy some of these international broad indices on an unhedged basis. as an easy way to start. Now, after that, if you want to do some work and identify countries for whatever it's worth, I wrote a book about the 10 rules of successful nations as well.

Okay, what are these 10 factors you should look at to know which countries are likely to outperform or underperform for the foreseeable future, which I define as three to five years. I find any forecast beyond that, particularly all these. you know, like forecast on how the world will be in 2050 and 2060 to be utterly useless because, you know, like neither you nor I am going to be possibly around to know at least I'm going to be like, you know, that actively.

invested or be even around to know whether I was right or wrong by what I said today. So I'm not a big fan of that. But I do feel the fact that if you want to start with buy an international index on an unedged basis. And country-wise, yeah, I mean, you spoke about India. I mean, I feel that India is a great long-term opportunity because its economy is poised to grow in nominal terms by close to 10%.

And generally, it's equity market there, unlike China, let's say, at least historically, that the equity market in India, whatever earnings growth comes through generally gets reflected, you know. in terms of the stock market performance. And the earnings also are very closely tied to nominal GDP. So it all sort of lines up. And nominal GDP growth in India is expected to be about 10%. And you could...

From here onwards, the dollar investor gets some positive carry on the currency as well with the rupee. So I'd say that India is a market also for people to consider on an individual basis. But beyond that, it gets very difficult because unless you're willing to read these 10 rules of a successful nation, and then there's an ETF for everything today. But I'd say that if you were to buy a country, then India at this stage does make sense. But I like India.

you know, for the fact that it's got nearly 600 stocks now with a market cap of more than a billion dollars. And so you can build a portfolio of 25 odd stocks in India, which are very, you know, like... high quality and likely to deliver decent returns over the foreseeable future. But you can't do that with too many other countries because they're not that deep, that wide as yet. So yeah, I'd say in summary that...

Definitely diversify. Buying an international index covering the MSCI World X US on an unedged basis is a good starting point. The next point is that to allocate some money to India and possibly China, because these are two large markets, you know, which have potential India for the reasons I just outlined about that it's still got relatively quick nominal GDP growth.

which tends to get reflected in earnings growth. China is a bit of a comeback story, powered by the fact that it seems to be able to do AI at a cheaper, more efficient way. Beyond that, if you want to go... to some of these other emerging markets or even specifically any European markets, then I recommend you reading the 10 rules of successful nations because, you know, that will help you identify that. But currently some of the countries that I like.

you know, have been Greece, Poland. And this is very instructive here because exactly a decade ago, Greece was considered to be the biggest basket case in the world. In fact, it was seen as a single biggest factor that could tick. Europe into recession and have a contagion effect from around the world. Instead, the last 10 years, and particularly in the last three to four of those 10 years, the Greek stock market has gone gangbusters. It's been performing really well.

It's partly because when Greece was in crisis a decade ago, it carried out the necessary economic reform as countries do when they have their back to the wall. And this is one of my first rules, in fact. of the 10 rules of successful nations that the best time to invest in a country is typically when, you know, that country has its back to the wall and some new leader comes and is forced to take radical steps to correct course. That's what Greece did.

That's what, in fact, a lot of these so-called nations in the Mediterranean nations refer to as club med in a nice way and pigs in a negative way. Portugal, Ireland, Greece, Spain. Some of these countries have all carried out major economic reforms led by Greece. And so therefore, like a very good state today. But for me, the tale here is the fact that a decade ago.

All the countries that people were really pessimistic on, the pigs, even the US, have done relatively well. And a decade ago, the countries people were really optimistic on. We forget that in 2015, the Chinese equity market had one hell of a bubble. exactly like a decade ago. And people were still quite optimistic about some of these other emerging markets as well. And that's not played itself out in the way people thought. So it always...

Now you have to, you know, I mean, you can't be a contrarian every year because dancing around and, you know, like often ending up being a cute contrarian, you know, but every few years you'll find the cycle gets too extended. People are... too over-invested in one part of the cycle. They're missing out on other things. And so therefore, I feel that, you know, always keep an eye out for where the cycle is about to turn and lead us to. And I think that...

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By the way, for those of you who weren't around that decade, that was a very good decade for gold, okay? And stocks are parting like it's 1999. It's sort of weird that gold and stocks are going up together. There's a question of why now? Is this the debasement trade? But if so, why are these things paired together? And then what happens in a risk-off scenario? Say there's the prick of the bubble, AI bubble bursts.

Where does gold go? That should do well, one would think, but it seems to be much more correlated to stocks. What do you think is going on with gold? Exactly. So again, I've been a... bull on gold, particularly after 2022, because in the way the US imposed sanctions on Russia, you know, I thought it was a very negative development, given the fact that the US has the responsibility of being the world's.

reserve currency and, you know, but the way Russia was like thrown off the grid. Now, like I'm not trying to, you know, condone Russia's military actions. But the fact is that because of the way that the U.S. sanctioned Russia. It made a lot of countries around the world nervous, including, you know, policymakers in India and Brazil and other countries. This got very nervous that if the US can do this to Russia.

What if they do it to us one day? You know, which sort of, you know, that about the confiscation of assets, reserves or whatever held overseas. So I think that that's when you ended up getting this move taking place into gold that central banks. You know, their contribution to gold demand nearly doubled after 2022 because they started to sort of diversify their FX reserves much more in favor of gold and out of the US.

or so. So that's what really started the big gold move. But as I said, there's no good story that too much money cannot spoil. And I think that that's what's been happening this year, which is that gold has also got caught up in this. liquidity-fueled trade out there. There's so much liquidity. We argued both legacy liquidity coming from the stimulus, which is still circulating in the economy, and two, as I said, from this asymmetry which exists out there.

where the average person thinks that on the downside, my risks are protected by the government. On the upside, I can make whatever money I want to. So I think that that's one thing which has also led to... a lot of liquidity finding its way into the system and something which is also powered gold higher. So as you know, the long term, the correlation between gold and equities tends to be...

In fact, gold is often done well when equities have been in trouble. But because this current latest up move in gold, particularly the very furious up move that we saw after...

gold, you know, cross 3000 or so. I'd say that that up move has been fueled a lot by liquidity. So my fear is that if the central scenario that I was outlining to you... at the top of the show that we end up in the next 12 months or so getting a cycle where the Fed is forced to tighten because the economy is overheating or, you know, some such or, you know.

Something breaks the big momentum trade in the equity market. My sort of fear is that gold too gets dragged down in that scenario. That gold is no longer the hedge that people think it should be because a hedge doesn't behave this way. The whole idea of a hedge is something that sort of counters the move, you know, in your other assets. And a safe haven, as gold is often perceived, tends to be one which is steady but boring.

But because gold has gotten so exciting, now I suspect that whenever the next, you know, sort of monetary tightening cycle comes, gold and stocks may go down together. And so that's the... fear I have that gold may no longer be the hedge that people think it is because of late it's got caught up in this liquidity-fueled rally that we are seeing across asset classes.

Well, you're making me worried that we've run out of hedges. I'm actually not sure what to do in this scenario of like, what is my hedge? Is it like back to fiat bonds of some country or something like that? Treasuries, US treasuries? No, but I mean, as I said that, I mean, like... There are hedges by investing in some of the international equity markets, you know, which are no longer that correlated to the US, including like in Europe, some emerging markets that I outline.

This is a very good time to be buying quality stocks because I think that, you know, like in both relative and absolute terms, the prospective returns look quite good based on what we've seen historically. And yeah, I mean, I'd say that... You know, like, just be wary that you can chase gold here. But the fact that, you know, this is very much a liquidity fuel rally. And if you do end up getting a downturn, then gold is unlikely to provide you that protection.

And we saw shades of that back in 2008 as well, which is that at least in the first leg down then, like in the equity market, gold too, you know, got whacked. It's only later on that, you know, gold had a decent year in 2010 or so. So I think that, you know, it's very important to keep in mind that these liquidity rallies can fuel asset classes simultaneously. And that's what's happening currently with both stocks and gold getting positively correlated.

after not really having been so for a long time. I know this is somewhat weird and haven't heard this theory anywhere, but I was almost thinking about gold as a little bit of an emerging markets trade too, right? Just because like you think of something like China post-2022. It has massive trade surplus with the U.S. Instead of buying treasuries, what does it want to buy? The U.S. is going to sanction all the treasuries. Well, gold. And so by proxy, are you getting...

a portion of the Chinese economy and maybe the rest of the emerging markets economy as a result of that. Maybe it's weird to think of gold as an emerging markets asset, but that's how I've been thinking about it. No, but what you're saying is completely correct. I mean, it shows up in the data as well that the Chinese central bank have been big buyers of gold, as have been central banks and many other emerging markets as well. So that's correct. But I'd say at this stage...

Given how much gold is run up, I would rather buy the equity markets of these emerging markets more directly. You know, again, there are also very good quality stocks in emerging markets which have gone ignored. There are about 4,000 stocks in emerging markets now with a market cap of more than a billion dollars. That's a pretty big number. You know, so there's a lot of stuff that you can pick out there if you do your due diligence.

So it's all about the effort, which is my point is that the opportunity is international. Emerging markets do look very good, particularly if the dollar keeps weakening. But how deep you want to get... is really a function of what your appetite is for reading the research about some of these countries, following a framework, and also in terms of the fact is that...

you know, what sort of time horizon that you have. But yeah, you know, like I would definitely not put all my money in the U.S. just now or stuff.

And again, I'm cognizant of the fact that the US is always going to be the world's premier financial market, the world's premier economy. I have no debate on that. But I just feel that at this stage, you know, as you said. that for one country to be 65% of the global equity benchmark is just unhealthy almost. There's far too much concentration of capital taking place out there.

You got to zig one other zag. Rashir, as we wrap this up, because this is a crypto podcast as well, I got to ask you the question about cryptocurrency. And maybe I'll fit a few things in this for color on your answer. As I recall from what I've heard from you, you're generally bullish disposition on Bitcoin, particularly as a kind of a debasement hedge, so a form of digital gold.

So I want to ask you again about maybe Bitcoin, what you think, and cryptocurrency in general. And then do you have any thoughts on... crypto adoption in emerging markets or crypto adoption in India? Are you seeing anything out there? You know, like it goes back to, I mean, as you're right, that I've been relatively bullish on

Bitcoin and, you know, like the crypto universe, starting from the first time I wrote about this back in 2020. But I'd make, you know, and then, but the follower piece I wrote last year was, I said, two chairs for the Bitcoin bulls. And what I meant by that was that I think that Bitcoin has defied so many skeptics and done relatively well in terms of its performance. Its volatility is still quite high, but it's coming off.

you know, compared to what it used to be at its peak or even like a couple of years ago. So in that regard, the Bitcoin's behavior, so to speak, has been... pretty good. And to that, I think that now it's being widely accepted as an asset class, as something that you can, you know, have as an investment. But there's any area where...

Bitcoin has disappointed, and that's why I gave it only two shares and not three shares for the Bitcoin bulls, is the fact that its adoption in transaction use is very, very limited so far. That most of the crypto, Bitcoins are still... lying dormant, and that when it comes to exchange and its adoption, it's still very, very limited around the world currently. And if there's any potential for it to be used, it's in the so-called underground economy.

you know, where it can be used, particularly given the fact that if the US is seen, you know, like to be this country which can sanction, you know, like any country at any point in time, I think people will want to hold and trade more directly with each other and possibly even use. So two shares for the Bitcoin bulls is how I put it. One that it's staying par and it's reducing volatility, albeit from a very high base, is what...

Gives it one share. Two, the fact that you have so many mainstream investment houses now who are recommending Bitcoin to be part of their portfolio. So the fact that Bitcoin is an investment you... need to have a bid off in your portfolio. I think that's been widely understood. But the disappointment for me has been on the adoption front for transaction use. There it really hasn't done that much as yet. And it's very interesting that...

You know, like despite all the talk about Bitcoin disintermediating gold, that in fact this year gold, as you know, has done far better than Bitcoin's done, you know, like this year. So I'd say that, you know, that... The next leg, I mean, I hope that Bitcoin, you know, like in terms of that, it also shows its utility as a transactional vehicle rather than only as an investment vehicle, as is the case currently. Rashir.

Thank you so much for joining us today. We've certainly learned a lot and I appreciate your time. It's a fantastic perspective. Yeah, I mean, like a nice to have such a wide range of questions. And, you know, from some of those questions, even I get to learn a thing or two.

including the point you made about concentration versus diversification. And that's one way of thinking about the central question we addressed today that America is one big bet on AI. But yeah, it's always, you know, good to go. you know, get a thoughtful reaction from people like you who study this quite deeply.

Well, sure. You got a ton of books out, a ton of resources. The Rise and Fall of Nations, fantastic. What Went Wrong with Capitalism, Breakout Nations as well. If people want to go to the rabbit hole, what's another way to get in touch with you? Website, newsletter, you got social media.

Well, I mean, I've typically kept off social media just because I find that it distracts me from a lot of my writing. Yep. But the Financial Times is where, you know, like I can be found, as you know, that I write a column for the Financial Times. I'm a columnist with them. Every alternate Monday on the opinion page, I write for them. And of course, you know, my website's there under my name. And so, you know, like you always contact me.

But I'd say that, you know, like I'm writing quite frequently in the public domain and with the Financial Times in particular. And so that's, you know, my most current expression of my views. I don't miss those columns. So we'll include a link in the show notes to the Financial Times. Bankless Nation, of course, you guys know none of this has been financial advice. Investing is risky all around the world. So is crypto. You could lose what you put in. But we are headed west. This is the frontier.

It's not for everyone, but we're glad you're with us on the bankless journey. Thanks a lot.