00:00Kyle, I want to get to Hong Kong in a moment. But first, I mentioned how the dollar is very active, especially against the yen.
00:06And I want to get your sense on the drama in Japanese markets as well, because the yen is stronger.
00:11We had a route in Japanese JGB yields in the last couple of weeks that sent yields to the highest since about 2008.
00:19We also had JGB auctions that didn't do that well. And now there's political uncertainty going forward.
00:24What's your take on Japanese markets, the bond and the yen?
00:27Yeah, I think it's important to note that the Japanese rates are still pegged out to 10 years and they've decided the BOJ is elected to let the 30 year, I guess, freely trade, even though it doesn't trade every single day.
00:43Japanese sovereign debt to GDP is north of 260 percent. It's kind of the world's most interesting debt laboratory.
00:51And so when you get a scenario like you had with covid, where you have to remember, the whole world is priced in dollars.
00:58And so when the U.S. Fed and the U.S. administration decides to print and spend as much as we did, remember, we put 40 percent more M2 into the system between 2020 and 2023.
01:10And what did we get? We got about a 40 or 50 percent inflation of almost everything.
01:16And I'll caveat that there are a few things that didn't move 40 or 50 percent higher in expense.
01:21But let's say dwellings and consumer goods and things that people have to buy every day or pay for rent did.
01:27So what happened in Japan is the yen went from roughly 100 to 160 and now it's sitting around, what, 145, 147.
01:36So when you think about the yen, the yen is just moving in the amount of purchasing power it has in dollars.
01:44It's really that simple. And so they're in a really bad situation from a debt perspective.
01:49They've got a population decline.
01:50They are a very important trading partner of the United States and one of the stalwarts of ours in Asia.
01:58So I think we're going to do all we can to trade and help the Japanese going forward.
02:03But I think they're in a precarious position, i.e. they either have to let their currency go or their bond market go.
02:09And they'll never let their bond market go. So I would be aware of the yen into the future.
02:15All right. Well, we'll keep an eye on that one.
02:16I mentioned the Hong Kong dollar. You've bet against the Hong Kong dollar in the past, which, of course, is pegged to the U.S. currency.
02:22And it has experienced some swings because of President Trump's tariffs and the impact there.
02:27The HKMA intervening, spending a lot of money to support that currency peg.
02:31As Romain was saying, every so often people wonder whether it's time for the Hong Kong dollar to be re-pegged to a basket of currencies or re-pegged maybe to the Chinese currency.
02:41Are we at one of those times right now?
02:43Yeah, I think, again, when you think about this peg, it's been around since 1983.
02:49Back then, the reason the peg was put into place is there was a massive run on the Hong Kong dollar.
02:55If you remember, there were rumors back in 1981, 82 about the British handing Hong Kong back to the Chinese.
03:01And when those rumors got out, money started fleeing Hong Kong and Asia kind of writ large.
03:07And so the Hong Kong dollar depreciated 50 percent versus the dollar in a basket of world currencies.
03:13And we, the United States and the United States dollar, provides the stability to Hong Kong and therefore China and their currency regime.
03:21So when you think about that peg, it used to be that as Hong Kong's economy went, so did those of the United States and the West.
03:31Now Hong Kong's economy is more inextricably linked with China's.
03:35And there's a divergence in economic activity.
03:39China has had its worst financial crisis in maybe its modern day history in the last two or three years.
03:45Its 10 year bonds at one and a half percent.
03:48Its overnight rates are roughly one and a half percent.
03:50So China's having a really difficult economic period internally.
03:55And so those economies no longer move with the same synchronicity that was required.
04:00So look at Hong Kong's overnight rates today.
04:03The overnight rate is still close to zero.
04:05U.S. overnight rates are 4.3.
04:07One year rates in Hong Kong are not around one percent.
04:11Ours are still around four percent.
04:12And if you can interchangeably own the HKD or USD, you'd be crazy not to convert it to USDs, right?
04:18You may earn three to four percent more.
04:21That's why you're seeing the weakness in the Hong Kong dollar.
04:23The question is, can Hong Kong afford to move its rates higher?
04:27Because the majority of Hong Kong mortgages are floating rate mortgages tied to short rates.
04:32So Hong Kong's in a really bad position right now.
04:35And also the geopolitical risks are there.
04:38Well, I'm curious about the geopolitical side as it relates to the economics, because, I mean, Hong Kong and China being more wedded or more in sync, I would think that would almost blunt the positive impact that Hong Kong has had on mainland China and really just the region overall.
04:54I mean, we just had a couple of reports last week of executives of Wells Fargo, apparently a patent and trademark employee from the U.S. being detained over there.
05:02And then when you look at the interplay between those two economies, what is the potential upside with continuing to do business there?
05:09Yeah, I mean, again, I think, you know, I remain over the over the last call it five, six years, maybe longer.
05:18I've said that, you know, at some point in time, the hard decoupling is certainly coming.
05:23We don't have we don't share anything in common from a values perspective with the Chinese Communist Party.
05:28And that ends up interlacing itself into trade and our in our relationship, our bilateral relationship.
05:35So when China took over Hong Kong post covid without a shot fired and and call it corrupted the judiciary and and decided to break the the Sino-British joint declaration and the U.S. declaration of our relationships with Hong Kong.
05:52I don't understand why the West continues to do business with Hong Kong and or China.
05:56And I think those that continue to do so will pay a hefty price in the coming years.
06:02Well, what about all the big U.S. companies that, of course, want to do business in China, certainly mainland China, because of the population and obviously the perception of a rising middle class and a rising wealth class?
06:13I mean, just last week, I mean, we spent countless hours on this network talking about the deal that Jensen Wong struck to be able to sell some of his NVIDIA chips over there in China.
06:23Yeah. Yeah. Look, I I think that the NVIDIA deal was basically a hostage exchange.
06:32The U.S. desperately needed rare earth magnets and China desperately needs NVIDIA's H2O chips.
06:41And I think we agreed to do to execute a hostage transfer, i.e., give them the chips.
06:48They give us the magnets. But the interesting thing in that transaction is they're requiring us or U.S.
06:54companies to enter a licensing agreement with the Chinese rare earth magnet suppliers.
07:00And we have to disclose very sensitive data to them, how many units of production we have, what the cost per unit is of each car.
07:08Ford is basically having to sell its soul to get those magnets.
07:12And we're just letting those chips move freely into the Chinese Communist Party's People's Liberation Army.
07:18And they're being used to develop A.I. in the battlefield, A.I. in their weaponry, A.I. to develop things to point back at us.
07:26So I think that was a deal with the devil that I think we'll end up regretting.
07:30Well, I am curious, though, but from an investment standpoint, Kyle, do you find yourself looking for places to put your money that would maybe counter what you just laid out with regards to China?
07:40Yeah, I think that, you know, we we happen to have a partnership with the U.S. Defense Department called Rocheford Management Company, where we are we are looking for advanced defense technology, both on the offensive side and defensive side in the United States to help the U.S.
07:59military and U.S.
08:00Defense Department. And there are a number of managers entering into programs like that where, you know, we spend about two point nine percent of GDP on defense today.
08:09And we all know NATO is trying to catch up to two percent, just gave a five percent target.
08:16When you look historically at periods of war, whether you're talking about the Cold War, the Vietnam War, the Korean War and or World War Two, in World War Two, there was one year, 1945, where we spent more than 40 percent of our GDP on defense.
08:30So I think you're going to see the wind in the sails of defense and defense tech for the next decade or more.
08:36You saw it in the big, beautiful bill. There's there's another two hundred billion dollars going into shoring up, let's say, where our holes are and where we need to advance.
08:46So I think you're going to see defense spending as a percentage of GDP move higher.
08:50And I think the money to be invested is on the front end of defense and defense tech in the United States for the next decade.
08:56And I think that's the next day.
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