Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: You're listening to Bloomberg Business Week with Carol Masser and
Speaker 2: Tim Stenoveek on Bloomberg Radio.
Speaker 3: Well, the dollar fell, long dated bond yields rose, and
Speaker 3: stocks wavered as President Trump's push to remove FED Governor
Speaker 3: Lisa Cook fueld, concerns about central make independence and inflation risks.
Speaker 3: It's not just that, though, it's also in Vidia Tomorrow.
Speaker 3: We've been saying there's a lot riding on that report.
Speaker 3: It's the world's biggest stock. It makes up three percent
Speaker 3: of the global market cap of all public companies. Will
Speaker 3: bring those numbers to you as soon as they cross tomorrow.
Speaker 3: This is the backdrop for our conversation with Ben Inker.
Speaker 3: He's the co head of Asset Allocation Portfolio Manager at GMO.
Speaker 3: It's the Boston based asset manager co founded by Jammy Grantham,
Speaker 3: with seventy billion dollars in assets under management. Ben looks
Speaker 3: closely at megacap concentration, so yeah, in Nvidia certainly on
Speaker 3: his radar. He joins us from Boston. Ben, we're going
Speaker 3: to talk about the mag seven in the US and
Speaker 3: the context of the rest of the world. But First,
Speaker 3: the threat of FED independence. What we were just talking
Speaker 3: about with Endo Current who covers the global economy, the
Speaker 3: President saying he will fire FED Governor Lisa Cook if
Speaker 3: he is successful. Does it change your view of US markets?
Speaker 2: It probably doesn't change my view all that much because
Speaker 2: we're pretty skeptical of at least the US stock market
Speaker 2: these days. It would have It would create some more
Speaker 2: concerns for US about US bonds and create more concern
Speaker 2: about the US dollar because I think if the President
Speaker 2: is successful in bullying the Federal Reserve into lowering interest
Speaker 2: rates more than the economy warrants, the two places that
Speaker 2: that comes out are long term bonds and the dollar.
Speaker 2: And the dollar, by virtue of being quite over value today,
Speaker 2: could fall really quite hard.
Speaker 3: Do the president's attacks on the Federal Reserve confirm your skepticism?
Speaker 3: Does it essentially give you evidence that saying, hey, we
Speaker 3: are right in our call to be skeptical of US
Speaker 3: equities right now.
Speaker 2: Well, we do think it is part of one of
Speaker 2: the key problems for US companies right now. The US
Speaker 2: stock market is trading at a big premium to the
Speaker 2: rest of the world. That is an issue. The US
Speaker 2: dollar is very overvalued. That is an issue. But the
Speaker 2: other thing we really worry about for the US is
Speaker 2: the US is facing a series of supply shocks that
Speaker 2: the rest of the world is not. So we've got
Speaker 2: the tariffs, which increase inflation and decrease economic activity. We've
Speaker 2: got the move against immigrants, which tends to do the same,
Speaker 2: and then we've got this uncertainty problem where we have
Speaker 2: an administration that makes its decisions apparently by tweet, and
Speaker 2: where you really don't know week to week what is
Speaker 2: going to happen, and that makes it very difficult for
Speaker 2: USA businesses to make good long term investment decisions. This
Speaker 2: is part and parcel of that problem. So while I
Speaker 2: certainly hope the administration does not succeed in pushing a
Speaker 2: Thud governor off of the board on the basis of
Speaker 2: a criminal referral, because you can have a criminal referral
Speaker 2: on just about anyone for just about no reason at all,
Speaker 2: So I hope it doesn't happen. If it does, it's
Speaker 2: another sign of policy uncertainty in a country that is
Speaker 2: suddenly a wash in it.
Speaker 1: And we know that you are a skeptic of US
Speaker 1: equities because of their high valuations, but the Magnificent Six
Speaker 1: dominate US equity performance. What breaks their momentum and what
Speaker 1: will you replace them with if they falter?
Speaker 2: Yeah, I mean to be clear, we are quite skeptical
Speaker 2: of the fact that the average US company trades at
Speaker 2: a big premium to the average company in the rest
Speaker 2: of the world. The Magnificent Six, which is the Magnificent
Speaker 2: seven x Tesla, because Tesla is not only a very
Speaker 2: different company, it's also a much much more expensive company
Speaker 2: than the rest. The Magnificent Six have been extraordinary in
Speaker 2: their ability to continue to grow at a scale where
Speaker 2: other companies in the past have really hit limits to growth.
Speaker 2: Now they're trading around thirty times earnings on average. That
Speaker 2: Lord knows, that's not cheap. If they can maintain their
Speaker 2: past levels of growth, it's still a perfectly reasonable valuation
Speaker 2: for them. The question is can they maintain it. We're
Speaker 2: not honestly sure. One of the things that is very
Speaker 2: different from the past is they have hugely ramped up
Speaker 2: their aggregate capex. These were always very capital life businesses,
Speaker 2: had wonderful free cash flow, and today they are investing
Speaker 2: in aggregate hundreds of billions of dollars in property, plant,
Speaker 2: and equipment, and it's a huge bet that they are
Speaker 2: going to be able to make a lot of money
Speaker 2: out of AI. Will that come true, I don't know
Speaker 2: If it does not. It is one of the most
Speaker 2: you know, economically meaningful bets we've ever seen from the
Speaker 2: stock market and could be a real problem for them.
Speaker 1: Why do you think US premium has persisted despite stronger
Speaker 1: growth overseas?
Speaker 2: You know, it's it's funny. I think some of it
Speaker 2: is the reflected the reflected glow of the MAG six.
Speaker 2: Because of the MAG six, the aggregate S and P
Speaker 2: has done better fundamentally right now, That fundamental out performance
Speaker 2: is a piece of it. The dollar has been a
Speaker 2: big source of the outperformance because the dollar has appreciated
Speaker 2: by a lot over the last decade versus every other
Speaker 2: currency on the planet. And then the valuation in the
Speaker 2: US over the last decade has really expanded relative to
Speaker 2: the rest of the world. But there is this base
Speaker 2: of sort of fundamental outperformance, all of which is owed
Speaker 2: to the MAG six. So the Magi have been amazing
Speaker 2: over the last decade. They're expensive, but they're amazing. The
Speaker 2: rest of the US has not been amazing, but has
Speaker 2: still captured some of the glow because they've been more
Speaker 2: associated with the MAG six than companies outside the US,
Speaker 2: and that I just don't see how it's sustainable because
Speaker 2: those companies are going to have to do a lot
Speaker 2: better than they have in the past to justify their valuations.
Speaker 3: We're speaking with a Ben Ankor, co head of Acid
Speaker 3: Allocation portfolio manager at GMO. Of course, the co founded
Speaker 3: firm by Jammy Grantham seventy billion dollars in assets under management,
Speaker 3: been on the valuation side when it comes to the
Speaker 3: MAG six. I know you've talked about US stocks being
Speaker 3: more highly valued than international stocks, and if we look
Speaker 3: at stocks in the US, obviously that's based on where
Speaker 3: investors think they're going to go. You said it could
Speaker 3: be justified if they continue their growth rate as the
Speaker 3: way they've been growing in recent years. What would you say, though,
Speaker 3: to someone who says, well, the US is a unique
Speaker 3: environment from a regulatory perspective, from an economic power perspective,
Speaker 3: from an international relations perspective, and there is this premium
Speaker 3: in the US because well, we have a regulatory environment
Speaker 3: that allows for that. That essentially says, okay, well that
Speaker 3: is justified that the rest of the world doesn't have,
Speaker 3: and indeed, we haven't seen outperformance of the rest of
Speaker 3: the world save for the first few months of this year.
Speaker 3: We'll see what the future brings. But isn't the doesn't
Speaker 3: the US deserve to have a premium on it based
Speaker 3: on those factors.
Speaker 2: Look, if the US deserves to have a premium, it
Speaker 2: would be on the basis of having a higher return
Speaker 2: on capital than we have in the rest of the world.
Speaker 2: There are plenty of countries where there are not a
Speaker 2: lot of regulations over what companies do. Most of the
Speaker 2: emerging world doesn't have that much any regulations. The return
Speaker 2: on capital isn't necessarily that brilliant. They aren't wonderful places
Speaker 2: to operate. The US has been a good place for
Speaker 2: businesses to operate. One we are a very big market. Two,
Speaker 2: we have had a regulatory system that is very rules based,
Speaker 2: very kind of slow to change, And it has been
Speaker 2: a good base to try to sell to the rest
Speaker 2: of the world. All of that is under threat right now.
Speaker 2: The US is not such a brilliant place to be
Speaker 2: as a base for the rest of the world because
Speaker 2: things like steel and aluminum costs a lot more in
Speaker 2: the US than they do anywhere else on earth, because
Speaker 2: we have the big the big tariffs on them. From
Speaker 2: a regulatory perspective, while the biggest you know, the biggest
Speaker 2: victims might be companies providing wind power or looking to
Speaker 2: do so. We today operate in a world where the
Speaker 2: regulatory environment is much less predictable, and unfortunately, we also
Speaker 2: now operate in an environment where it is pretty clear
Speaker 2: that the way you want to get ahead, at least
Speaker 2: as a very large cap company, is getting in the
Speaker 2: good graces of the government, which is a very different
Speaker 2: game than we have had for the last eighty years
Speaker 2: in the US, and that you know, that pushes towards
Speaker 2: rent seeking behavior, it pushes towards corrupt behavior. It is
Speaker 2: not a situation where you would say, aha, these are
Speaker 2: the companies that should be training in a premium for
Speaker 2: the rest of the world. That is more like what
Speaker 2: we have seen in countries like Russia or China, where
Speaker 2: in general people have said, oh, well, if you're going
Speaker 2: to invest there, you better have a discount to make
Speaker 2: up for the fact that you don't know what the
Speaker 2: government is going to do. And the incentives for companies
Speaker 2: are not necessarily profit maximizing for shareholders.
Speaker 3: You know, speaking of Washington, and we're going to have
Speaker 3: more questions on this. The President is having a cabinet
Speaker 3: meeting right now. We're monitoring it. If he does start
Speaker 3: to take questions, we will bring you those questions and
Speaker 3: answers as soon as we get them. Check out live
Speaker 3: go on the Bloomberg terminal to see that right now.
Speaker 3: Then on that the idea of the US government taking
Speaker 3: a stake in these companies, as you mentioned, it does
Speaker 3: concern you. We did hear from Howard Lutnik earlier on
Speaker 3: CNBC who said the idea of taking a stake in
Speaker 3: a defense company such as Lockheed Martin for example, could
Speaker 3: be talked about at a certain point in the future.
Speaker 3: What's the warning that you have for US involvement US
Speaker 3: government involvement in private enterprise.
Speaker 2: Well, you know, the basic problem is as the government
Speaker 2: gets more involved in private enterprise, the needs of shareholders
Speaker 2: take a back seat. And that isn't obviously, you know,
Speaker 2: that isn't necessarily the absolute worst thing in the world.
Speaker 2: But we do see, and we have seen time and
Speaker 2: time again, where businesses are more answerable to the government
Speaker 2: than they are to their standard owners. You get less
Speaker 2: good business decisions. Now. On the other hand, if you
Speaker 2: are a defense contractor, it may well be in your
Speaker 2: interest to have the government take a stake, because if
Speaker 2: you are one where the government has not taken a stake,
Speaker 2: maybe you're less likely to win the next competition.
Speaker 3: Ben, speaking of the President, we got to leave it there.
Speaker 3: Ben Inker, co head of Acid Allocation portfolio manager at
Speaker 3: GMO