00:00Matt, first I have to ask you a broad question about these markets.
00:02I mean, you go in every day and you watch all of these narratives unfold.
00:07I mean, SpaceX yesterday, you're a value investor.
00:10What's going through your mind all day?
00:11Well, I think even as a value investor, you have to take a close look at where value creation is
00:17happening in markets
00:18and what the narrative is that's driving markets.
00:21And I think this is one of those moments where the narrative behind markets is unusually concentrated.
00:27Everyone's talking about AI.
00:28It's affecting chip stocks, the cloud compute companies, and all of the companies that markets expect will be disrupted.
00:35But when you stand back from the moment and just look at the pricing overall,
00:40I think it's fair to say that this degree of focus on AI has led markets to a place that's
00:46arguably a little complacent.
00:48We have credit spreads that are very low relative to history.
00:52Earnings multiples are very high relative to history.
00:54If you just look at how households have their money invested, they have more in equities now than real estate.
00:59That's highly unusual since World War II.
01:01And the big companies in the S&P 500 are now net issuers of stock.
01:05They're not repurchasing stock.
01:07So we have a number of signs that would suggest that markets are fully rich in this environment of AI
01:14narrative.
01:14Yeah, you say it is not necessarily the time to become bearish, but it is a time to become broader.
01:19Yes.
01:20Do you, though, find any value anywhere in the AI sphere?
01:23I mean, you must have been tempted to look.
01:25And there are patches.
01:27I mean, before a year ago, some of the chip stocks were up 200% since then.
01:32You would have had to say back then, although it might have been obvious at the time, that there was
01:36value there.
01:36Or that's correct.
01:37In fact, if you looked at our portfolio 18 months ago, one of the biggest capital deployments we made at
01:42the time was into Samsung.
01:44And that's an investment that has performed soundly for us since that period of time.
01:50Understatement, yeah.
01:51But today, you have to look more broadly.
01:53I think you can find value.
01:56If you're looking in the AI space, sometimes the value might be in companies that are perceived to be subject
02:03to disruption risk.
02:04And so one of our larger investments is actually in the software space, which is where everyone's concerned that software
02:10is going to get disintermediated by AI.
02:13And so we have an investment, for example, in Workday, which is essentially a system of record for HR, payroll,
02:21business processes.
02:22And I think the thing that's interesting when you have companies that are systems of record is that they own
02:27proprietary data.
02:28Now, an LLM is going to scrape what's publicly available to figure out a narrative for you to read.
02:37But they can't scrape private data unless it's done by the company that has that private data.
02:41And so I think for a company like Workday, AI will provide incremental business opportunities, but it's price for disruption.
02:47Yeah, down 23% year over year.
02:50The software space, though, has been coming back ever so slightly.
02:54I mean, we saw Microsoft and some of these other companies really just go gangbusters over the last few sessions.
02:59Is it a general idea that software will come back, or is it very specific software companies?
03:06I think it's very specific to companies that really control a system of record.
03:11Whether you own the sort of Salesforce database or whether you own something like payroll and employment database, system of
03:20record software is important.
03:22CAD CAM, companies like Dasso Systems, for example, very hard to replicate those businesses.
03:28But if it's just a plain vanilla company that has an app that applies to publicly available data, that could
03:35be at risk of being disintermediated.
03:37So I think you have to be selective within software.
03:39I think the other reason that you've seen these companies come back a little bit is that the CapEx story
03:46that's fueled the semiconductors,
03:47because let's not forget the CapEx of the hyperscalers is the profit of the semiconductor companies.
03:52That's reaching natural limits at this point in time because they went from spending a fraction of their cash flow
03:58on CapEx for data centers
04:00to spending all of their cash flow for CapEx on data centers.
04:05And so that CapEx can only grow so quickly going forward.
04:08You're already seeing them having to tap debt markets to grow.
04:11And we see copper prices going up, DRAM prices going up.
04:15In the media, you see Kathy Hochul.
04:17You see the Texas governor talking about slowing entitlements for data centers.
04:21So we're at a window where the pace of this AI investment may be naturally moderating.
04:28How do you think about changes at the Fed and how that's going to impact the market and your investments
04:33going forward?
04:34I mean, we have obviously a new Fed chair.
04:35We have perhaps a lot less transparency on how the individual members are thinking.
04:40So initially when Kevin Walsh came into the market narrative and at his confirmation, I think the initial market response
04:50was a credibility trade.
04:52Perhaps these early comments were a little more hawkish than the market expected.
04:55And we saw that the dollar went up, gold went down, and two-year bond yields went up.
05:02And so the markets in the early part of Kevin Walsh assuming the role were surprised by what they perceived
05:09to be his hawkish tone.
05:10So there was a kind of credibility trade there.
05:12I think after the last release, that came into question a little bit.
05:17Some of those things reversed because there wasn't a rate hike and there wasn't a lot of guidance on what
05:22to expect going forward.
05:23And I think what market participants may be missing here is that the Fed has less degrees of freedom than
05:30usual right now because of the fiscal situation in the United States.
05:34If you're running 6% deficits at a time of full employment, it's very hard to raise rates because then
05:41the government has to roll its debt to those higher rates.
05:44And it produces a faster growth in the level of government debt outstanding.
05:47Do you think that's actually causing them to pause even though inflation continues to run hard?
05:51I don't think they would say it for obvious reasons.
05:54But I think it is a gating constraint.
05:57You can't run substantial primary deficits.
05:59That is the budget deficit before interest expense and then just keep raising interest rates.
06:04It brings forward the prospect of a fiscal crisis.
06:08And so it is a constraining factor on the Fed.
06:10And I think to have a truly independent Fed, you need a fiscal situation that's balanced.
06:18One quick final question, Matt.
06:20International markets, how will the situation in Iran affect their valuations?
06:26I mean, we've seen some huge run-ups and some huge sell-offs thanks to the Iran war.
06:30Might it change how you invest internationally?
06:33So we're talking before about the fact that at a time of market concentration, it makes sense to broaden your
06:40horizons.
06:41And we talked about different sectors in the United States.
06:43But that same statement can be made about international markets.
06:46By and large, if you look at the valuation of international markets, they're more modest than U.S. valuations.
06:52And there are many incredible companies internationally that trade at reasonable multiples.
06:56International markets, in many cases, have been more adversely impacted by high energy prices.
07:02So if we get a resolution of the situation in Iran, I think international markets could be more positively elastic
07:08to that resolution.
07:10And if we get this continued pattern of to and fro, they're already discounting a worse outcome than the U
07:16.S. markets, which are at record highs.
07:17Thanks, guys.
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