Talking Markets with First Eagle's Matt McLennan
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This is parents live. Each week, we bring you live conversations from our newsrooms about what's moving the market right now. On this podcast, we take you inside those conversations, the stories, the ideas and the stocks to watch so you can invest smarter. Now let's dial in.

Hello, everyone, and welcome to barr's live, our weekly web chat, and todd cast. I'm learn rumblin n senior managing editor at baLance. Thanks for joining us for a look at the markets and stocks in the news. My guess are Brent deputy, the editor ben levenson, and that mcclinton coherence of the global value team and a portfolio manager at first eagle investment. Matt manages the first eagle global value fund and the ticker is S G E N.

I am sure I don't have to remind our listeners not to mention map and bin, but a few things of happening this week, election days tomorrow, november fifth, and the federal open market committee will meet on the six and seventh and likely cut interest rates again by a quarter of a percentage point. Map is truly a long term investor, however, and I am glad that, that will allow us to cut through some of the near term noise. So mad and bin IT is great to have your embarrassed life today. Let's get started.

Great to be her learn.

Thank you.

right? Mad is, you like to say, you take an artistical approach to investing, and I know what artisan coffee is, I know what artistical design is, but artists al investing, I think, needs some explanation. What does that mean to you? What are you really referring to?

So the first thing is that we spend a lot of time looking for businesses that are relatively elective and that have some benefit of income ency. And I think, uh, you know at the core of our approaches, buying businesses that have survived the test of time and that we think can survive the test time. And that's A A unique part of our D N.

A. At first eagle. And the fund itself that you reference, the global fund, has been around since one thousand nine hundred and seventy nine.

I think the second thing that is that you know in any of article, a practice as a degree of specialization is important. And one of the things that we've done a poetical over the last fifteen years is invest very heavily in industry specialization. And I think that's important as the capital stock of the world is increasingly moving from tangible to intangible in nature.

You know we have A A very mental rich culture at festivals. So we really believe in instead of installing a unique approaches to investing. But also um a temperament that's more like a gardner than a gladiator at first eagle. And um that's that's an important part of what we would to think of as an artisan approach. I this is an industry .

where the yeah yeah yeah .

we do we have about a ten year average holding period. And and I think one other thing I would put out there is that we spend a lot of time um not so much on forecasting, but on what we referred to as hand casting and recasting hand casting, meaning you looking at how the business has evolved through time, have a cash flows, have mirrored the report numbers or not um and recasting the financials proportional consolidations looking for economic free cash void setter. And so these are all the kinds of things that we mean when we talk about an artisan approach.

So your stack election must to some degree be informed by macro o considerations, though i'm wondering how you would size up the current macro backdrop for equity investors and for bond investors.

I I would say that where are going through a very important macro o transition um and and you see IT in the bond market, uh, interest rates even though they had specifically been to the trending now here the last several months, have structurally broken out on the upside after a forty year downtrend. And this is A A very meaningful development because it's happened up at a moment um where we've seen fiscal deficits in the U. S.

Even before interest expense move from where they were in the postwar period on average and baLance before interesting expense to large structural primary deficits. And if you take those two facts together, a large primary fiscal deficit and um an increasing rate of interest expense on that debt, what you're seeing is very large physical deficits um in what is arguably a pretty uh peak cycle environment with racial valuations and low levels on employment. And the reason this is important is that if you're running larger than usual, fiscal deficits is producing more profits in the private sector than what otherwise be the case and is also creating more nominal drift in the economy.

What do I mean by that? The stock of government debt is going up at an accelerating pace. Um people's expectations about the future Price level attended to retire. And so we feel that where in A A A window here where the key risk may be fit a soft in nature, and this is very different from the loss of economic cycles.

In the late one hundred and nineties, we have corporate credit cycle and on world comment um in the next two thousands, we saw our household credit cycles with the global financial crisis in the all of the more good related issues. And I think what markets are starting to sense here is the emergence of sober n risk, not just in the U S. But in other parts of the world.

And I think this is gonna the defining feature of the macro o backdrop for some time to come. And it's going to present policymakers with very difficult choices. You know, you trying to correct the fiscal imbaLance, you get recession.

If you don't, you get a more inflation revise in the economy. And so these are the kind of chAllenging puzzles that we we face ahead of us. So I think IT may explain to a certain extent why warm buffer t has been selling equities, why standing ly drug and mill has been short treasures. And I just like those two investors as investors with wonderful track records going against the grain here.

I doesn't leave you much to buy them, although you are a big buyer of gold. So does that tie into your macropore?

So for us, um the rubber always always meets the road at one security at the time, bottom up. So even though the macro backdrop may not be as prepared ous as we would like, there's always something to do bottom up. And sometimes even in the worst macro o environments, you see great companies emerge.

What is the old problem? Takes friction to polish the gym. And and so um I think it's bad to say that despite the fact that um the macro backdrop can be chAllenging prospectively, I think there's always can be um idiosyncratic uh ideas when you've got a global focus.

On the second part of your question, gold, and you we've we've always viewed gold as a potential hedge up portant folio. We are primarily business by as if you look at portfolio, just seventy five percent is invested in businesses around the world. Be given our concerns about fiscal trends, um some questions about financial architecture in different parts of the world, we have wanted some goal as a potential hedge.

Um you know right now, if I look at the sum of brilliant and gold minor explosion of football is it's a mite's percent in in the portfolio. And we will know trimmer here in there of gold is very strong so that IT doesn't become outsize. We don't want apple follow to be a cure directional Better of gold um but we like gold because it's the embodiment of scarce dy value.

And if if the basic concern you have is the supply of sovereign bt is growing out of accelerating rate, then owning something where the supply is far more constrained is a way to preserve value in real terms. And that's why we've held a substantial investment. And gold.

this potential edge have you been trimmed or adding lately at the margin.

you know as the Prices has moved up with trim a little here and there, the waiting of gold and up all IT has remained volta consistent. Um uh but you know obviously if if you don't take any action that becomes a big pot of your polo when it's most moving so well. And there have been other environments where we have lent into gold and we've attitude when it's been out of favor.

Um but when you look at output, follow you um in terms of about aggregate percentages, the allocation of gold has been relatively stable over time. Uh and and so you know we sort of manage that by counter secretly leaning into the wind. But we've been comfortable holding at least what is an above average allocation to goal for us given that the fiscal grip that I mention before have actually been positive for markets in the real vision neuro uh, because of the positive impact on corporate profitability.

Um but present prospective risks. And you know one buffer talks about the difference between um experience and exposure and the goal is there the head against potential exposure. And I and I I think it's also pretty clear to uh, folks nowadays that there's a an array of geopolitical risks that are on the horizon. And so when when we think about our gold investment is really about uh, potential headaches inst, both financial and geopolitical rist, which can evolve .

into financial .

is sorry.

I just one last question on the on the deficit and gold. No, we've been hearing about uh you know the deficit being an issue. I think I think i've been hearing IT for no close to four years. Um what makes IT right now more worrisome than you know these past episode you know you hear all these people coming out talking about deficits uh being problematic and maybe gonna blow the economy.

It's a great question. I mean, if I just look at the long term data from one hundred and forty five to the year two thousand on average, we pretty much had a primary fiscal baLance. There was six local volatility bit before interesting expense. The budget was roughly baLanced.

Um and so the stock of government dead was really a creating um by the level of interest right on that government debt is the single to your clip and so you had an equal liberum system where the fed was targeting a certain amount of Normal growth, IT was targeting interest rates at that level and a system was inflating at that level. What we've seen you in the wake of covered is the emergence of primary deficits, as I mentioned before. And this is different from the postwar period where we have um three to four percent deficits, even be more interest expense.

And as I mentioned, we've seen interest rates to break out on the upside um after a forty year downtrend. And so the government has to roll its that now at these higher interest rates. And so um you know ochrida balls all best when not predicting any imminent crisis per say, other than to say that the problem is one that is accelerating in nature and given large primary deficits and the government having to roll the stock of government debt to higher interest.

Strates onions. I would also um point out that much of the debate that you see in congress, uh you know when they are negotiated in budget is about the um discretion reliance of the budget, which are are only about a quarter of total expenditure. And so with aging demographics, the non discretionary piece um in social security health care entitlements is expanding a fairly rapid pace.

Defense expenditure is that a generational lowest of percentage of GDP and may need to expect increase given what we see geopolitically in the world. And we we're seeing all of these new industrial subsidies come in a trying to promote reassuring, trying to promote independence and send conductor technology is set at set. And so I think it's the confluents of factors that getting us focused on this right now. And it's also the fact that need a candidate um in this election has a potentially credible fiscal strategy. So you put all of that together and that's why it's kind of risen to the top of the heat for us as as a focal point right now.

IT makes .

a sense.

absolutely. So you mention the election. Therefore, I must ask an election question, since everybody has been following this as a money manager, how do you think about the possible election outcomes and the impact on your portfolio? We had a question from a listener, mark, who wants to know if you have any thoughts about a Harris trade or trumpet trade and whether such a thing even exists. What do you .

think that it's an interesting question, whether IT even exists. I I like that kind of um twist at the end of the question. Um yes, the reality is like when we invest, we invested a long time.

As I mentioned before, for our equities, we have you know an average close to a decade whole period. And so free give an investment, we're likely go through a range of different electoral cycles and and the fact is where global investors and so while the attention of people has been on the U. S.

Election right now, um we've seen many impact of elections this year and globally. Uh no, we had one in taiwan um um with a more profound dependence candidate, which is a stoking question out in that part of the world. We had an election in france where the center essentially collapsed and you saw the the two right um populous part, the bright and the network popular lous parties take a lot more sharing.

And since then we've seen french sovereign spreads blow out relative to germany. We've have elections in japan. And last week or so, uh that i've seen A L D P.

Lose its majority. We've seen a populist left government have a Lance. The election in mexico was shine down. And so what we're sing globally um is a lot a of political uncertainty when we aggregated. Uh and uh I think the um the election here is um just one of the piece in the puzzle. I'll be at a very important one in terms of the trump of the Harris trade itself.

I think you can get a sense for what the market has been thinking about that because when the prediction markets have been favoring ing uh trump you you've seen certain um assets do well and and when those uh prediction markets have gone the other way, some of those trades have reversed. We don't try to um invest um based upon a um a single any single election outcome because it's just too difficult to call this election of particular is very close as as we know from the betting markets. And and and so it's it's not really how we're construction up or fully.

What we do try to do is create a portfolio can be resilient to a range of different scenarios. And so we talked about the role having embarassed and gold um but we also have a quite a degree of um diversification with that up all as we look nothing like an index bd, but we have a range of different industry exposures and a range of different country exposures. S and I think this is an important point to get across that now is a point of time where you are actually getting paid to diversify.

Um the earning yield on international equities is higher than U S. Security by some measure. Um the markets have got to quite a degree of stretch, you know favor a small number of growth stocks but if this perception what to go up um the the more value are into universe can be more resilient uh to that uh and um given that we've seen the emergence of two very different regimes in china, in the united states, we start to see a breakdown in in correlation patterns around the world. And and so I think the best response to this kind of electoral uncertainty is, Frankly, to diversify an own businesses bottom up that have a strength of market position.

I like what you said that companies your portfolio have to endure through many different administrations. And I thought that was a good way to think about IT. I wanted to ask you quickly about china.

We've been following the governments stimulus efforts here. The wall street journal had a headline this morning that caught my eye that china's coming stimulus is necessary, but likely insufficient. What is your assessment of the economic situation there?

So we we have an an incredibly interesting moment now because in the us, we have this um up with shift in the Normal draft of the economy driven by those fiscal considerations we discuss. On the other hand, in china, we've seen a breakdown in the Normal over um the chinese stock market was essentially cut in half the last few years. It's gone away for the last the last decade.

The currencies had the lost decade um and you know here you have an economy um that had achieved a lot uh over the loss fifteen to twenty years, but with break in baLances, there was a lot of uh excess investment in the real estate space and um that is now a sort of posted flush, if you will, and you can see the um the chAllenges in the real state industry in china. And then the government pivoted to a lot of strategic manufacturing investments to try and drive back growth, yet is getting to the point where um china is getting push back from a lot of economies around the world, not just the U S. Uh by virtue of the flood of manufactured products that are coming from china and and putting deflationary pressure on on various industries.

And so the chinese are in a difficult situation because they have a broken real state market. They have access manufacturing capacity in in some ways. You know we've seen this business cycle ends like dog woods in the united states because of the the tech titans. But the chinese have done the opposite. They put the tech titans back in the sandbox with some of their regulatory moves.

And so you don't you you know the animal spirits have been killed and um the banks are are in in a bit of a parallel situation because um you have a large number of flowers at an on performing uh and um and so the chinese, I think you're at the point where their economy is is not above trend with access inflation like house is below trend with this inflationary or deflationary pressures in certain sectors. And so they're feeling the need to stimulate um and I think they've been somewhat reluctant to um open the figures because um they they felt that the pattern in the west of very easy monetary and fiscal policy is only LED to unsustainable dynamics. And so they have been so holding back and this deflationary mindsets been taking root.

Um but in in recent weeks um they're change their um their tones somewhat. We've seen the government h announce various monitoring disco measures to stimulate the economy um our senses that they've been meaningful and up to put a floor under the locks there for a time um but not so meaningful um to fundamentally change um the trajectory to a strong positive trajectory. Um we do see some investors getting quite constructive on china.

I said I know David tepper um um making comments. He was he was all on china um but I I will say that um IT really is the mirror image of what we seen in the U S. O.

In the U S. Equity market trades at um a low twenties multiple that names were the chinese markets around ten times zones ings. So the chinese market is Price for a file less than perfect outlook. Um and there are a lot of trouble businesses and trouble capital structures. But um there are some interesting a potential opportunities either in china or in companies that could benefit from A A more stable situation in china.

Are we may come back to some of those companies at later in the call. I want to turn to ban speaking a Price for perfection and talk about something that happened late friday. That is an announcement that in video would be joining the douzen es industrial average, replacing intel.

What does this mean? If anything, then a cnc might say IT Marks the top for NVIDIA and the index. But what does history tell us?

I mean, history tells us that getting added to the doubt is usually not a great thing. Often times it's the companies that were removed that go on to have a very nice rally while the companies that were added, I get stuck or or or drop um and and and I do think you have to worry about that to some extent um with NVIDIA anything. The other one that was added, which was sure when Williams, which was a good choice, uh he feels like a good choice to be added to the doll, replaced the chemical and I said, I do think you have to worry you after um you know such a kind of massive rally in a and video and also um with the stock. You know it's not cheap but it's trading at thirty six times and is so dependent on a few large customers that I do think you have to worry some about the just what this the signaling that comes with this of the timing of being added to the down.

And I would just to add up to your comment event that you know rise perception is below average in the united states and not just in in the fact that owners multiples are above average, but higher credit spreads are back down to three percent. And and so you when when risk perception is low, the market tends to reward the longest duration growth stories that out there. Um and so to bends point, some of these securities may be added to the index just at the time where the role evaluation is at a fairly large premium and given the low aggregate level of this perception of the economy.

So may not just be a cynical concerned, but i'm i'm glad that you both mention that. Um speaking of risk perception, I want to talk for a moment band about super. The company reports earnings on tuesday, although earnings may be the least a bit.

This was a one time A I darlink th last week, the company's ordinary walked away saying something about not wanting to be associated with super micro or its results. You don't often hear that on wall street. So bring us up today on the super mico situation.

Yeah that was a is a pretty uh um awful week for IT last week is bounce a bit today. Uh now the stock had an incredible start to the year um and then I had an learnings report that wasn't so great. And then h what really got to all started with a hindon burgers short to selling firm came out with the report um saying that you know there were issues with the the accounting and the company push back against, but then they actually delayed the ten k um which is uh um usually not a good thing, unusual ah I mean that is not what a heavy company does um especially after a short seller has come out with the reporting accounting of problem so that really the moment that uh everyone should have been selling super micro o um and and really the stocks been going straight down ever since there have been reports of the department of justice investigating, those have not been confirmed.

Um but then you had last week the the the account step away basically saying that they couldn't trust the numbers and or or management that's not a good thing um and and so you have a stock that was up a ton as now down a point four percent of the last twelve months um and um andy and spent hit hard in the last three month, down fifty eight percent um and I think the real question is, is not so much what the earnings looks like so that, that is an issue. There's actually some signs that the earnings might not be great, that they could be perhaps losing some customers to deal, but also that maybe demand wasn't as strong that you know they make the the servers where you put the the in video chips into um that, that may be the demand wasn't just strong for them as previously thought, um that could be issued. But really everyone is focusing on the the financial um no this has happened to super microbes for um IT IT happened nothing back in twenty eighteen um if if I have my note right um and that actually results in the company getting briefly listed um and came back but that could be an issue again now they have cording to rural sixty days to submit to as that trades in a working plan to restore its compliance by filing that twenty but I found that ten k that IT hasn't filed yet um and without an account and that's going to be tough um so they'll be very interesting to see. And IT also means that earnings are going to be the least of the issues when IT reports on tuesday.

Well, IT is hard to overstate how popular this stock was, which makes IT all the more dramatic.

See what happened. And going back to your question of a cycle top, I mean, you don't never wanted to draw too much for many one and of data point. But what um seems I I guess concern to music.

This is also the kind of thing that you see when you do get a market that is just uh, overly excited about a certain trades. Um you do see these accounting kind of things pop up and that has to be worrisome. It's the only one we've seen so far that like there's you know three and we can call the trend, but it's just something to keep in in on.

And this is then makes a good point here. I mean um at the other day, it's A A symptom of a market that gets fixated on forecasting a great future for an individual name a without doing the sort of hind casting and that we talked about before, a sort of checking what what have been the cash for as of this this business and have the cash flows head well with the reported financial statements? Or you know have have they mirrored the kinds of projections that are being made. And I think sometimes when there's a gap between cash flow experience and um hoped for prospects, risk emerges.

I love the idea of hind casting IT works in all in all sorts of fears in life. So it's a good one. Math and spend two more stocks I want to talk about and will talk briefly about some of math favorite names and go to some listening questions.

MaDonna and guilin are both reporting this week. They both have something in common. They both came out with fantastic products that did extremely well and help many people, and they've struggled to kind of fulfilled the promise of those initial products. So let's talk about modern reports on thursday.

Yeah I really expect uh majora mean IT really is incredible. Um when you look at things that you know, the stock has been hit hard at a down thirty seven percent over the past three months um and it's not actually that hard to see why you know the earnings are going to turn to a loss of dollar ninety four that was down from nine dollars and fifty three cents a year ago um as sales continue continue decline as well, sales are got to one point two five billion, that being down from one point eight three.

Um it's already cut its uh revenue guidance uh twice this year um uh the guidance for twenty twenty four and then for twenty five um and I think the worry um is coming from a leering analysts is that there gona have to cut a third time. Um what's really happened as they benefited enormously um from the uh upsurge in vaccines for covered the instance. Fewer people are getting those vaccines um and uh that's really hurt uh um their sales and their profits.

And they are continuing to do a lot of research h into other um vaccines and treatments. But he has to come through yet in the sales um and that's a IT has been a huge problem for them. That's why the stock is down so much, leary said.

They are worried that the the rist cutting into this print is actually lower for the stock, which is pretty redial when you think how the much the stock is already dropped this year. Um and so it's just uh, there's even actually concerns now that I could drop out of the S M P five hundred and and that would he uh just one more thing for for people to to worry about that where to happen. So I think they just a lot of issues that way. And IT reminded me a lot of guilty at sciences. So the stock when I was still just a little the stock market blocker that bearance .

that was .

very part you are never thank .

you um .

that know they they care red hair tie to see um and had an amazing run up this is back in twenty sixteen, amazing run up um over a few years as this um became clear what they what the company had done. But then you got all this push back at how much the drug cost, even though the drug um was a cure and IT IT would actually that the cost of the cure was far lower than having to treat someone with appetite to see over a long period of time.

But there is mense push back IT was a cure which also meant that there isn't this uh uh revenue that keeps coming and consistently, it's just you get cured and that's IT. Um and then you also had competitors come in and um the stock had hit hard and it's really been trading sideways um different last eight years. Um what's been my tension though is that the stock is this year traded up to the top of uh, what husband is eight year range um and there there seems to be a little bit of um I don't want to call the excitement because you never want to get excitement excited about guilt.

yad. Every time you get excited, IT IT comes back and punches you in the face. But I do you want to say there seems to be um arguments emerging that there are opportunity is force that aren't being Priced in.

That is each I V business may have a longer tail than people are considering that he has other drugs and the pipeline, including some um cancer therapies and what not that may turn out OK and or Better than okay. Um and so is something that you know i'm keeping an eye just because IT, it's been waiting for the second act. And if I can actually develop that second act here, there is really a lot of upside room for the stock.

And my senses the stock is pretty unloved IT.

really. I think just people got yeah people got burned by IT so much over the last eight years that I just think that there's. A lot of scepticism about its ability to sustain what has been a very strong rally this year. I think it's up about thirty five percent in the last three months um and but the stock .

is in horribly um well know that thing .

is like who's really buying IT here? I mean, if I think that investor place really owned and loved IT is long gone and now you're starting to see something turn so the stack can get a lift but is still trades at thirteen times earnings. And so to be interesting to to see whether you can keep this going, whether the the treatment that IT has coming are gonna able to lift further.

I'm indraught by the pipeline. We will look into that further. But I wanted to just spend a minute before we get to listening to questions, asking you about some of the stocks you really like. And um I wonder if you could talk about some that you particularly resilient and somewhere where hide casting has work worked well for you.

So so you know I think in the context of uh, american markets and we we invest globally, um you you're right. We've been trying to identify a range of um investments the last couple of years that um perhaps have less economic sensitivity and they have a grade degree of marketers entrenchment.

And ah those companies in in many cases have have not really been in in in favor persue because the marketing fixated on certain growth narratives and to give you specific examples. So um some of the names that would fit that bill um in the U S, the health care spaces is a fairly result. Cash for general uh arena to to fish on and and two of our larger investments in the U.

S. Have been in a companies like beck and dickinson and metro ic. And these are companies that kind of gone nowhere for some period of time. And i've gradually derated rail ship to the growing cash for streams, but they have very strong and blind businesses. You know beckon has plus mind a sixty percent market share in critical consumers are particularly catheters and syringes, uh, and that's a very strong global market fit print that they have very cash fully general business.

Where is medtronic? Um is is very strong in uh kai ac rythm management, specifically pacemakers, also in implants for brain and the spine um that sends stimulation signals and surgical instruments and both these company in fact in the metronet um examples of highly cashle general businesses with strong market share, sound management and and and and conservative valuations given their resilience and what we've seen. Other markets where fiscal problems have become more manifest in india is a good example of this is that market participants ultimately ly look for uh low data substitutes to treasury securities um and uh I I think these kinds of businesses uh offer the prospect of sound real returns, some growth um and uh you know they they they have a below average degree of economic quality.

On the other hand, I mentioned that the chinese market had been very out of favor and we don't have a lot of direct investments in china to say uh and I think for reasons they're obvious, but um there are specific opportunities to identify businesses are advantage and our logic um investment that would really have capsized on this would be, ironically, our investment in a dutch holding company called process and process in turn on twenty five percent of ten cent um ten cent is the leading social media um pin tech um and and uh you know online messaging platform and china gaming platform. Uh it's a very strong business ah ten said uh and the stock of ten sent has really degraded dramatically over the last five ideas given all of the concerns in china. But its businesses turned to favorable concerning here um there are starting to buy backstop and process trades, a very large holding company discount um to its ownership stake in in um intensity and process is buying back stock in itself.

They also have some other interesting businesses are leading online food company in brazil LED I food leading online classified company in eastern europe called x and so here you have essentially um uh a new economy business um that is available that they double discount because of the holding company structure. And and so what we've looked for is either resident in the U S. Or um ways to participate in depressed segments of the global economy um where the um holding company structure can provide us with an advantage.

Entry point often happens with holding companies that they traded to discount to their assets. That's an interesting one with a question from Kevin math. This is for you.

How are you thinking about global banks in the U. S. In the u.

So global what sorry.

global banks.

global banks. So you know we we um have a feeling modest waiting to banks. Uh ultimately, if you have question Marks around other disco or uh architecture of the world or uh where credit markets are in terms of risk perception and um it's not to show the most fertile environment to go shopping for banks having to set that um where we have been willing to invest in the banking sector, we tend to have a very defined mental model. Uh, we'd like to invest in banks that have a very strong local market deposit share.

So if you look at the banks where in the U S or U K or in parts of uh scand navia or in in in asia for example, um the the the pattern tends to be one where we reporting the banks that have plus of minus twenty five percent local market deposition um and that strengthening local market deposit year gives them um the ability to scale their fixed costs and he gives them more credit loss absorption capacity is a fundamental driver precision. And many these banks um also have um important fee income engines independent of their baLance sheet lending Operations. And so um where we have made investments, typically we've look to in invest that sort of high single digit multiples of earnings in in companies that have strong uh local market deposit share.

Um you can see in our public list of holdings and a collective series of investments in in global banks in the us. You've on U S. Bank al as an example of that outside there.

You know in the U K. We've had a position and loyd um in in scandinavia had a position and spenser handle banken. Um even in brazil we have an investment and IT also a uh holding company, which the main ask of which is that taken IT.

We've had an investment in bank kok bank. So we have been willing um to selectively invest in banks globally. But they they have that common element of strong local market deposit share and um free incommoding assets independent the value should they give them the ability to survive projections cle.

Then again, silicon valley bank had a strong local market. So how do you how do you deal with something when I get so this .

comes back to behind costing discussion we had before. Um if you look at the banks that that we've invested in traditionally, um we've had measured growth in their assets and action growth in their deposit liabilities. And you it's it's funny in in some industries, if you're investing in tech or media, um you want companies are innovating and growing quickly. Um but in other industries, an excess innovation and and rapid growth and can um can lead to death and banking as one of those industries because if you're growing your baLance sheet too quickly, you you you potentially have adverse selection risk.

If you're growing um your deposits very quickly, um your risk of that you know those depositors, uh I not habitual deposit or have come to you up for one reason or another that's a federal and nature and and you know silicon valley k found itself having made some four investments on the asset cide of its baLanced extending duration um and h by voto of its online post gathering um uh um activities having a raised deposits very quickly that were more flighty than an average. And so you created quite a vulnerable banking structure. If you look at the areas where we've invested, um the banks tend to have have much more measured baLanced growth uh, and much greater stability and duration in that positive franchise.

good. I just wanted to point out what the differences were there. We had a question from john on what catalist could bring the deficit to the forefront.

Well, you know in many in many cases and I think ben raised this question before, like you know nothing seems to have happened for a long years of time. Uh why would anything happen uh, anytime soon um and I think an economic systems, one of the things that we've noticed that sometimes nothing does seem to happen for a long time and then a lot of change gets telescope into a short period of time.

And I I think one of the things that's been interesting to me is um we saw a fundamental shift um in the treasury market when russia or invaded the ukraine uh in in so far as when we sanctioned the ability of the russians to access the treasury assets um I think that LED to a structural shift in the um demand for treasury's uh from other reserve accumulating a economy said that you can see that notably in in china's uh lack of appetite for treasury's now roles have to history and the increased appetite for golf um and so we really had a constituent effect um start to play out. I I mentioned before that you know we have an election with two candidates, neither of whom have a particularly credible fiscal strategy. And we've seen um in the wake of other elections around the world, notably when list trust came to part of the U K.

That um when the market tends to have questions around fiscal credibility, um you can see the bond market vivida anties emerged pretty quickly and and some form of a fiscal adjustment. So um in election can sometimes be a catalist for focus on these issues are when there's not a credible plan. And um and you know I I would just also um make the point that we've been an interesting period where the um the old economy has slow, slow downtown here.

Um you know you've seen manufacturing I S M um go from fairly high levels back in twenty twenty one down to below of fifty um and um historically ally the tension of bundle track that pretty easily yet bonde's after the fed cut rates have gone up, not down. And so I think the bomber had assigned to grab with this fiscal issue, assigned to grab with what the time printing should be. And um the thing that um could act as a sort of accelerant here is that the government itself needs to roll its death to these high levels of interest rates, which only exacerbates the chAllenges.

And so we as I I mentioned, all they are acknowledge the Crystal ball is foggy best when that comes to forecasting. Um and so we're not forecasting anything in in and particularly other than that, we are highlighting a vulnerability uh, on the fiscal side. And and may I add, that is not just the united states.

I mentioned the situation in france with spreads by up, italian finances are quite compromise. The chinese, if they are to turn their economy around, are going to need quite a large amount of fiscal stimulus to bail out banks and to provide um demand in in a below trend economy. And so the fiscal picture doesn't look back right in many parts of the world. And it's the kind of um you know what worries us is that we're seeing in the world what looked like postwar baLance sheet for governments in a potentially pre war environment.

That's a frightening thought. All right. I'm afraid we have yeah yes, the whole the whole discussion really, but I think we're be coming back to this topic a lot more as time goes on a map. I think we're going to be coming back to you then. And I I speak for you ban, but but I know I learned a lot from today's call.