Episode 102
US Debt Warning, Yen Carry Trade Risk & Is AI Really a Bubble?
Brian Dunhill has stepped out for this episode, so Richard Taylor is joined by Dunhill analyst Kamaljit Somal for an unscripted breakdown of the forces moving global markets.
First up, the US bond market. Kam explains why rising long-term yields are making policymakers nervous, how higher borrowing costs feed through to mortgages, car loans and government finances, and why the bond market may finally be sounding the alarm over US debt. With federal debt approaching $40 trillion, Richard and Kam dig into the bigger issue: the growing cost of servicing it, which Kam says is now a larger expense for the US government than military spending.
Then, Japan. The yen has strengthened sharply, raising questions around one of the most important sources of cheap funding in global markets: the carry trade. Kam breaks down how leverage has built up around the yen, why a disorderly unwind could put pressure on the Magnificent Seven and other high-growth stocks, and what a stronger Japanese currency could mean for investors around the world.
They also look at what this means for cross-border portfolios. Kam explains why Dunhill has been reducing some US dollar exposure, particularly in fixed income, and why matching the safer part of a portfolio to the currency you actually spend can help remove an unnecessary layer of risk.
Finally, Richard and Kam turn to the US stock market and the constant talk of an AI bubble. Despite investor anxiety, they argue that today’s market looks very different from the dot-com era: the companies driving growth are generating enormous amounts of cash, earnings are broadening beyond the Magnificent Seven, and even some of the software names written off during the so-called “SaaS apocalypse” are beginning to benefit from AI.
As always: real talk, zero scripts, and a cross-border look at what actually matters beneath another chaotic month in markets.
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Expat Wealth is supported by Plan First Wealth. Plan First Wealth is a Registered Investment Advisor serving fellow expatriates and immigrants living across the US on matters such as retirement planning, investment management, tax planning and non-US asset management.
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Expat Wealth is affiliated with Plan First Wealth LLC, an SEC registered investment advisor. The views and opinions expressed in this program are those of the speakers and do not necessarily reflect the views or positions of Plan First Wealth.
Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Plan First Wealth does not provide any tax and/or legal advice and strongly recommends that listeners seek their own advice in these areas.
ABOUT RICHARD:
Richard Taylor is a British expat, dual citizen (UK & US). Originally from Bolton, he now lives in Greenwich, CT, where Plan First Wealth has its head office.
As the firm’s leader, Richard launched Taylor & Taylor, now Plan First Wealth, and continues to fuel the firm’s growth. Richard is a Chartered Financial Planner (UK – CII) in addition to holding the IMC (CFA UK) and Series 65 (US – FINRA).
Connect with Richard on LinkedIn
TRANSCRIPT:
Kam Singh Somal:
[00:00:00 – 00:00:11]
It’s like a slow motion car crash, right? It’s just you get like a front seat view into it and you know what needs to be done to avoid it. But neither party is willing to, you know, come out on the other side.
Richard Taylor:
[00:00:11 – 00:00:22]
When you look at sentiment, when you look at all these things, when you look at how much money these companies are actually making to justify their valuations, I don’t see it. It’s going to be bumpy, but I’m not seeing a bubble.
Kam Singh Somal:
[00:00:22 – 00:00:28]
And what I mean by that is Google gets 66% of their revenues from outside the US in non US dollars.
Richard Taylor:
[00:00:28 – 00:00:31]
66%. I didn’t realize it was that high. Wow.
Kam Singh Somal:
[00:00:31 – 00:00:33]
AI is going to be the savior, Richard. That’s what I heard.
Richard Taylor:
[00:00:37 – 00:02:08]
Welcome to Expat Wealth, a Plan first wealth podcast dedicated to helping ambitious British expatriates living in America to thrive here. I’m your host Richard Taylor, and Plan first wealth is the business I founded and run today. And we work with successful British expats living across America to make the most of their opportunity while avoiding the expat landmines. And boy, are there a lot of landmines in America. But first, a quick disclaimer. While Plan First Wealth LLC is an SEC registered investment advisor, the views and opinions expressed in this program are those of the speakers and do not necessarily reflect the views and positions of Plan First Wealth. Information presented is for educational purposes only. Okay, so today on Macro Aggressions, myself and my industry friend Brian Dunhill of Dunhil will take a look at what’s going on in the world from an economic and investment perspective, but always through a cross border lens. I’m a Brit in the US working with Brits in America. He’s an American in the UK working with Americans in the uk, Europe and beyond. And we think this gives us a unique perspective relevant to our expat clients and followers. If you have questions for me or Brian, we will try and answer them on the show. So email us your questions at Expat Wealth Plan first world dot com. Okay, let’s get into it. Okay. Welcome back to macroaggressions. This week I’m joined by Cam Somal, an analyst at Dunhill because Brian is. Where is Brian? Cam.
Kam Singh Somal:
[00:02:08 – 00:02:16]
Brian. Brian is awol. Where he is, he hasn’t exactly told us, but you know, in my head I hope someplace exotic.
Richard Taylor:
[00:02:16 – 00:02:32]
Yeah, I’m sure he’s swanning around Europe like the. The princeling that he is. Okay, so we don’t have Brian, but we’re very lucky to be joined By Cam. Cam is an analyst at Dunhill. I’ve known Cam. I think I’ve known you, Cam. I’ve known you for longer than I’ve known Brian. Did I meet. I have a feeling I met you first.
Kam Singh Somal:
[00:02:32 – 00:02:41]
That is actually quite funny. I think we did have some brief conversations before Brian and then, you know, Brian jumped into the picture some way.
Richard Taylor:
[00:02:41 – 00:02:42]
Elbowed his way somewhere between.
Kam Singh Somal:
[00:02:42 – 00:02:42]
Exactly.
Richard Taylor:
[00:02:43 – 00:02:52]
Okay, well, we’ve come full circle. So I’m delighted to be back on. I’m delighted to be, to be doing this show with you for the first time. So. So let’s see. Can supersede Brian.
Kam Singh Somal:
[00:02:52 – 00:02:54]
Oh, some big, big boots to fill there.
Richard Taylor:
[00:02:55 – 00:03:10]
So we are. This show is all about unpacking what’s gone in the last month from an economic, from an investment perspective and always through a cross border lens. So let’s dive straight in. What, what. Since I last met with Brian, what’s gone on? Nothing. Right. It’s all been. All been very quiet as per usual.
Kam Singh Somal:
[00:03:10 – 00:03:36]
Well, I wish there was nothing going on because it means then we can, you know, focus on the fundamentals. But unfortunately there’s been a lot going on in the last couple of weeks and months which. Well, for me it’s meant a bit of job security, but it’s meant a lot of late nights trying to pass through some of the data and the headlines because it’s difficult to figure out the forest from the trees and what we actually need to be paying attention to.
Richard Taylor:
[00:03:36 – 00:03:56]
Hey Ray, just before we get into this, actually I’m interested. So you’re an analyst, which is different to what Brian and I do really. But how do you pass this information? Is it just. Are you reading it all? Are you listening to it all? I met with someone yesterday who said they have an app where they put articles into this app and it speeds to them at the gym. Like how do you take on this mountain of information? It’s never ending as well.
Kam Singh Somal:
[00:03:57 – 00:04:52]
That is true. So sometimes it can just feel like a complete deluge where you just have information overload. But I think there’s a difference actually because like there’s what went on with analysis, pre chat, GPT and AI and then you know, post chat, GPT and the renaissance with AI. But you know, it’s a mixture of all those things that you just described there, Richard. It’s, you know, really trying to keep on top of the headlines and such and looking at some of the incoming data. I mean we’ve got some pretty interesting stats coming out this week. I mean this week is probably jam Packed with a lot of interesting data sets coming in. We’ve got us CPI on Friday, the bank of Japan meeting towards the tail end of this week as well, with a potential, you know, rate decision at some point next week. So there’s a lot to pass through there, but for the most part, you know, I just have my head buried in spreadsheets and Bloomberg and yeah, that’s, that’s sort of what, what I do for the most part.
Richard Taylor:
[00:04:52 – 00:05:44]
Must be like you’re drinking through a fire hose, Honestly, especially now. There’s always a lot going on, right? There’s net. It’s never quiet, but there are periods where it is particularly manic. And this administration and the last one, but, well, I mean, not the last one, but the one, the one prior, the, the one with the. This, the big guy at the head that is particularly cha. And yeah, it must just feel like you’re drinking from a fire hose. Does it also feel like you’re on a hamster wheel? Because one of the things I actually really enjoy about being a financial planner is we get to zoom out and take the big picture and kind of say to people and mean it. Don’t focus on the, on the here and now, like we’re taking 20, 30, 40 year view here. You can’t do that. You are glued to the jobs report, CPI data, what the MPC is doing and it just, it just must be relentless.
Kam Singh Somal:
[00:05:44 – 00:06:17]
It is relentless. But I think that’s where, you know, as an analyst, I quite enjoy some of those aspects there. So it’s trying to figure out past the noise and try to get to the end and resolution of what’s actually driving the markets. Right. So you have the first order of forex, second order effects and trying to link all the different pieces together. I think some people find that quite chaotic and others like myself, I quite enjoy that challenge. It’s finding meaning in the chaos which, given the current headlines and geopolitics, there’s been no shortage of that.
Richard Taylor:
[00:06:23 – 00:06:30]
Great answer, Cam. All right, let’s use that as a segue to get into what we’re going to talk about today. So where should we start? What’s the big news?
Kam Singh Somal:
[00:06:30 – 00:07:40]
Well, I think the biggest news really is what the Treasury Secretary Scott Bessant has been up to in the last couple of weeks. I mean, since the last podcast session here with Brian, a lot has really gone on. I mean, we had the intervention in the actual bond market, in the US bond market, so to speak. And just to back up a little bit for our audience of what this intervention is and what they’re trying to achieve with it. So in the last couple of months, really yields across the developed markets, whether it’s the uk, Europe, the US Long term yields have been trending higher and that’s making a lot of people nervous, especially officials. Why? Because when you have higher yields, it has a ripple effect on growth because it passes through a lot of things that consumers and everyday voters see first and foremost. Right? Your mortgage rates, your car loans, et cetera. So all of those things have a knock on impact there, depending on what the long term yields are doing. And through some clever machinations or some clever.
Richard Taylor:
[00:07:40 – 00:07:59]
Not just isn’t it, it also raises the cost of the government borrowing. So then just the interest pay on the $40 trillion government debt, that also starts to crowd out everything else. It’s just, don’t they say like the bond market is the adult in the room and when the bond market starts to get twitchy, that’s when you really should start paying attention.
Kam Singh Somal:
[00:07:59 – 00:08:41]
Exactly. And I think the bond market has been sounding the alarm for a while now and it’s only just reached a crescendo in the last couple of weeks, particularly as we get to some of these key levels here. And you’re right, Richard, bond markets are typically viewed as the adult in the room, where it’s essentially meant to be the break when get a little bit too out of hand. Right. Take the 40 trillion budget deficit that you just mentioned there. At some point early next year, we’re going to cross 41 trillion and then 42 trillion by year end next year. I think at this point it’s one of those systemic items out there that you can only kick the can down for so long until somebody somewhere has to make a decision.
Richard Taylor:
[00:08:42 – 00:08:56]
Do you know, the thing is Trump does listen to the bond market, doesn’t he? I mean, there’s not much Trump listens to, but he has. The bond market has caused him to blink before, but is that happening right now? Are we seeing.
Kam Singh Somal:
[00:08:56 – 00:10:12]
Well, we haven’t seen headlines come out yet of the bond market getting a little bit yippee according to Trump, and that’s quoting him adverbatum there. But I think his team, including Scott Bessant and Kevin Walsh at the Fed chair there, they’re all watching the same sort of data sets that we’re watching here on the wider investment landscape. It’s just that they get a front row seat in some of those items and some of those reaction functions there. So typically the bond market is meant to cause the administration to rethink some of those policies. But when the policies are basically a geopolitical war in the Middle east, it’s a lot less palatable for either side to sort of back down, given the current quagmire they found themselves in without saving face. Right. So, you know, we’ll have to wait and see how that shakes out. But, you know. Absolutely. Scott Besson, Trump and Kevin Walsh, they’re watching the same, same data points that we are now, despite what Trump would say, that we should have lower interest rates. I think, you know, the CPI coming out this Friday will probably indicate otherwise. So we might actually just end up with a rate hike there. And that puts Scott Bessant in an even bigger bind because he’s caught, you know, in a rock and a hard place.
Richard Taylor:
[00:10:12 – 00:10:27]
Yeah. So they’ve got, they’re running this to get, you know, Trump Bessant wash, but they’ve kind of got competing mandates. Right. Wash and Bessant. So where do you see, how do you see this playing out? Get your crystal ball out. Come tell us. Tell us the future.
Kam Singh Somal:
[00:10:28 – 00:11:37]
Get my crystal ball out. Yeah. So, so, so here’s my two cents. And again, this is not, you know, the, the House view of the firm or anything, but just my two cents. If I did have a crystal ball that worked, I think it’s going to be a delicate balancing act because the very premise of Kevin Walsh being put in place there as the new Fed chair by Trump was, despite what people would tell you otherwise, was on the implicit assumption that he would at least bring rates slower. Because that’s what Trump wants. Right. He’s under the assumption that if you get lower rates, you get higher growth, the economy runs hot and therefore that’ll juice his outlook for the midterms, etc. I think everything that’s going on in the last couple of months, we have to view it in the lens of how is this going to affect the midterms. Once we’ve passed that Rubicon of the midterms no longer being the front page item there, I think things change very drastically at that point. You might see a much more desperate administration trying to do a Hail Mary play, whether it’s on the geopolitical front or elsewhere. But everything right now is being focused on the lens of how this shapes the midterms.
Richard Taylor:
[00:11:37 – 00:11:58]
When you say, when you say on the other side of this, on the other side of the midterms, you mean they’re just going to want to, they’re going to have such a short term outlook, they’re going to, he’s going to push for, you know, loosening and lower rates and just, just to try and go out on a high and leave the problem for the next, for his successor who he doesn’t care about at all?
Kam Singh Somal:
[00:11:58 – 00:12:31]
That’s, that’s spot on there, Richard, because if you think about it, right, if he’s, he’s lost his raison d’ etre of, you know, trying to, to get a good outcome in the mid, then it’s kind of like what have you got left to lose? Right? At that point you’ll, you’ll probably start to see the administration start taking a much more harder line stance on the conflict in the Middle east and some of the, you know, the other conflict as well on the European continent with Ukraine and Russia. Now what that means from a game theory perspective, I think that’s going to be very interesting.
Richard Taylor:
[00:12:31 – 00:12:51]
Cam, do you not think that White, Walsh in particular, he’s must have his eye on, you know, the next administration and beyond and once we’re through these midterms, you not think he might, the shack, he might care less about what Trump is demanding of him and more about his own performance and legacy? Is that just wishful thinking?
Kam Singh Somal:
[00:12:51 – 00:14:25]
You would hope so. Right. Because at the end of the day, the Federal Reserve, the reason it’s such a well respected institution globally is that, you know, it has that independence from the presidency there and the administration, at least on paper. Right. And I think you’re right there, after the midterm sort of lapse, it’s going to be more difficult to put on the pressure to Kevin Walsh to bring rates lower. And at the end of the day, Kevin Walsh is one of nine Fed chairs out there in the Federal Reserve that have a voting power. He doesn’t have any veto, he doesn’t have any special voting privileges, etc. So it’s really a matter of him trying to convince the rest of the other nine to vote alongside him. And I think given it’s such a diverse mix there in the Federal Reserve, it’s going to take a lot of real data coming in to support cutting rates. And if that data doesn’t come in, I think the best case this administration can hope for is just dragging their feet and no hike. But until inflation starts coming back down meaningfully, a hike is probably going to be the default status quo. I mean, we heard it in Jackson Hole by Kevin Walsh where he said, you know, inflation has ran above target for way too long and that fault lies squarely with the Federal Reserve. So I think he’s made an implicit acknowledgment of what needs to be done, how that runs counter to Trump and what he wants. I think there’s going to be that fine balancing act.
Richard Taylor:
[00:14:25 – 00:14:33]
It’s so interesting to watch it all play out. I wish it wasn’t also high stakes and so haphazard and it’s like a.
Kam Singh Somal:
[00:14:33 – 00:14:44]
Slow motion car crash, right? It’s just, you get like a front seat view into it and, and you know what needs to be done to avoid it. But neither party is willing to, you know, come out on, on the other side.
Richard Taylor:
[00:14:44 – 00:15:06]
So 40 trillion in debt, 41, 42. Like these are wild numbers and it just never seems to matter. But one day it’s going to matter. It’s going to be like what did Ermes Hemingway say about going bankrupt very slowly? And then all at once, I guess it’s kind of like this is not going to matter for years, decades, and then suddenly, surely one day it’s going to matter a great deal.
Kam Singh Somal:
[00:15:06 – 00:16:43]
It’s a huge number, right? It’s almost hard to fathom and I think what a lot of listeners and our audience members and even when we look at the headlines, we get stuck on that notional figure of 40 trillion or 41 trillion, etc. But it’s not the amount of debt that’s actually quite worrying. It’s the pace and the cost to service that debt. Two weeks ago, the cost to service that 40 trillion debt is now a bigger expense item for Uncle Sam than what they spend on the military. So that’s, that’s a huge number. So we’re spending close to, you know, over a trillion just to service that debt. And if interest rates stay higher for longer, that’s only going to compound the problem that regardless of what sort of shenanigans Scott Bessant tries to, to do, to assist, it’s only kicking the can down the road. Now, now in the past, how previous administrations have really dealt with this is just kick the can down the road. But actually coming out of World War II, we also had very high deficit levels. And you know, and that was at the time when a lot of social reform and, you know, Social Security and all of these welfare programs were actually being rolled out. So it’s not that we have to actually, you know, get back into austerity to start cutting and bringing that number down. We could just grow the economy faster than the debt. And that sort of solves the problem itself. Right. And potentially with AI, that might be the next thing that helps. But you know, it’s going to be a tough call for some of these politicians.
Richard Taylor:
[00:16:44 – 00:16:47]
That’s our only play, though, isn’t it, right now is AI.
Kam Singh Somal:
[00:16:48 – 00:16:51]
AI is going to be the savior, Richard. That’s what I got.
Richard Taylor:
[00:16:51 – 00:17:10]
Fingers crossed. And you know, Brian is very much on the side of the US Is weak, trying to weaken its economy. Right. To help. Help with this. So. Well, okay, so let’s move on from, from treasury intervention. It’s still ongoing. Right. Investment was in the news today, talking about, actually talking what we’re going to talk about next, which is their intervention in Japan. So tell us what’s going on there.
Kam Singh Somal:
[00:17:10 – 00:18:20]
Yeah, yeah, yeah. I, I think in the last couple of podcasts, Japan has been a recurring theme and, and for the right reasons. I think we all tend to get very fixated on what’s going on with the Mag 7 or earnings reports in the US et cetera. But actually, a large part of the global market should really be paying attention to what’s going on in Japan and more specifically, what’s going on with the yen. In the last two months, the yen has appreciated by about 6% against the dollar. Right. Doesn’t sound like a lot. 6% Over two months, Cam. Not a big deal. But in the land of currencies, that’s a huge deal. And especially for a currency like the Japanese yen because it’s a very large source of cheap funding for. Across the globe, whether it’s hedge funds and sovereigns or large corporations, everybody’s tapping the Japanese yen there. So what you mean by that, essentially, the carry trade. The carry trade has been in the headline for a number of moments in the past. And essentially you borrow in a cheap currency, you convert it into a currency that’s paying you more, and you pocket the difference.
Richard Taylor:
[00:18:20 – 00:18:22]
Simple as that. Okay, so that’s been going on for years.
Kam Singh Somal:
[00:18:23 – 00:19:25]
That’s been going on for years. And it’s built up because the Japanese yen has only gone in one direction in the last, you know, since the pandemic, really, it’s only depreciated against the dollar. So that meant anybody that has been in this carry trade has benefited extremely, you know, to the, to the upside there. And because it’s only been going in one direction, what tends to happen is when, you know, you get a trend in one direction is leverage starts to build up in the system. So it’s not only just people, you know, just converting that, you know, borrowing in yen and then selling, selling out to dollars and parking in Treasuries and collecting the spread that they’re actually Putting on leverage on top of this. Right. So all of a sudden, when you get a 6% move in two months, that can start having a ripple effect across the board. When some of these hedge funds or larger sovereigns have to unwind that position, as we know, correlation trends to one in a black swan event. And the door to get out is always much narrower than it is to get in.
Richard Taylor:
[00:19:25 – 00:19:26]
And what does this mean for us?
Kam Singh Somal:
[00:19:27 – 00:21:01]
Well, what this really means is that it’s a source of risk on the horizon there. And if the bank of Japan and the treasury coordinate to an extent where they can manage that decline, where it’s not disorderly, I don’t think it’s something that we need to pay too much attention to. However, in past instances, whether it’s 2018 or 2022, every time the Japanese yen has strengthened by about more than 10% in a very short period of time, it’s hit a lot of the high growth names like your AI growth darlings, the tech sector, a lot of those high beta, high momentum names because a lot of the funding for that is in Japanese yen, but more importantly, a lot of large Japanese pension funds and even everyday Japanese investors, because their government bonds have historically yielded so little, they’ve been incentivized to take their capital out of Japan and park it in US dollars. Now what happens when the yen starts strengthening and interest rates actually start to go up and in Japan? Well, all of a sudden they’re in a bit of a bind. So they’re trying to, they’re trying to unwind that as quickly as possible and repatriate that capital back to Japan. So what that, what, what that really means is selling your winners like your Mag 7 names, the, the AI growth story names, et cetera, and bringing it back in, back to Japan. And you know, sometimes those unwinds can be very disorderly.
Richard Taylor:
[00:21:01 – 00:21:10]
So what does this mean for our clients? So at Dunhill, what do you do about this? You know, you’re aware of it, you see it going on. What do you do about it?
Kam Singh Somal:
[00:21:10 – 00:22:21]
So that’s an excellent point. I think there’s a couple of ways to look at it, right? You can view this as it’s just something on the horizon. It’s happening. We can’t really do anything about it. Or you can, like you said, try to take a little bit of proactive steps to mitigate some of that risk there. So essentially what we’ve been doing here at Dyno Financial for a lot of our clients is, is lightening up on some of our US dollar exposure, both on the equity front, but particularly on the fixed income front. Right. Because as the interest rates start to creep up higher across the globe, all of a sudden we’re seeing interest rates both in Europe, the UK and Japan that we haven’t seen since 2007. So all of a sudden the incentive to stay in US dollars for your fixed income doesn’t make as much sense as it once did probably. So what we’ve been doing for a lot of our clients is transitioning a lot of that U.S. bond exposure into international bond exposure, particularly in euros and sterling, because a lot of our clients tend to be here in Europe and the UK and they’ll probably need pounds or euros for their day to day needs and it’s one less risk to worry about.
Richard Taylor:
[00:22:21 – 00:22:50]
As a, as a rough rule of thumb, do you try and match someone’s fixed income currency exposure to their current, the currency they’re living in? So if you have someone in pounds, are you trying to maintain most of fixed income in pounds? If you have someone who lives in dollars, are you trying to maintain their fixed income exposure in dollars? Because the problem, currency fluctuations can wipe out current, you know, can magnify or wipe out fixed income gains because you know, they’re, they’re so much smaller than equity gains. So how do you manage that?
Kam Singh Somal:
[00:22:51 – 00:23:17]
Absolutely. So it’s one of those, take the S&P 500 for example. Right. Or one particular company and they will pick on Google just because they were in the headlines the last couple of weeks. It’s a US company, trades on the New York Stock Exchange. We think of it as a US company, but is it really a US company? Right, and what I mean by that is Google gets 66% of their revenues from outside the US in non US dollars. So that’s Euro high.
Richard Taylor:
[00:23:18 – 00:23:20]
66%. I didn’t realize it was that high. Wow.
Kam Singh Somal:
[00:23:20 – 00:24:25]
It’s, it’s 66% as of Q1’s earnings might be a little bit more, a little bit less, give or take a few percentages, but it’s that high. So two thirds of their revenue is outside of the US and that revenue is coming in in euros and pounds and Japanese yen and various sorts of currencies. So, so all of a sudden when you get a weaker dollar and a company or equities like Google actually do quite well off the back of a declining dollar because all of a sudden when you translate their earnings back into dollars because that’s what they report on their earnings call, it looks amazing. The problem with bonds A US treasury is only going to pay you in US dollars and it’s only going to pay you a fixed amount. Last year that was about 4% is what U.S. treasuries on average yielded. Now if you were an American living in Europe or an investor living in Europe and you bought that U.S. treasury bond last year, great, you made 4% in U.S. dollars last year, the dollar was down 10% against the euro. So really in euro terms you lost 6%.
Richard Taylor:
[00:24:25 – 00:24:26]
Exactly.
Kam Singh Somal:
[00:24:26 – 00:25:02]
Not a good place to be. Right. And so what we tried to do here is the safe part of the portfolio for a lot of clients is that bond portion. It should be matched with the currency that they’ll actually be needing or spending it. Right? Because it takes one less element of risk out of it. Before the pandemic, the conversation was slightly different because interest rates were at rock bottom levels across the world. In Europe, you were almost getting paid basically nothing or even losing money on bonds. So therefore having US Bonds made some sense. But in today’s environment, it’s a completely different conversation.
Richard Taylor:
[00:25:02 – 00:26:10]
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Kam Singh Somal:
[00:26:10 – 00:26:30]
So despite all the previous goings about that we’ve just discussed, it’s not all doom and gloom. There are some. It’s really not. I mean, you know us people in the financial landscape, we tend to get very hung up on some of the small teething items on the periphery. But actually when we look at the health of the US economy, it’s not that bad.
Richard Taylor:
[00:26:30 – 00:26:52]
I Don’t think it’s just us. I, the, the. We speak to clients all day, every day. People are super nervous. People are seeing bubbles everywhere. I mean there’s. Well, not bubbles, a bubble. People are seeing a bubble everywhere. It’s like a bubble. Watch out there. And when I zoom out, you know, at a high level, I can see where they’re coming from. But once you zoom in and get into details, it’s much harder to see it.
Kam Singh Somal:
[00:26:53 – 00:28:39]
Exactly. And I mean it’s, it’s fair to draw those comparisons to history, right? Us human beings, we love a good story and we love to look to history for precedence. But as Mark Twain famously says, history doesn’t repeat itself, but it does rhyme, right? So we’re seeing a little bit of some of those echoes, which is what’s making a lot of people nervous that this is another bubble like the dot com or, you know, the railroads before that, etc, but again, not to be a doomsayer here, there are a lot of fundamental things that are just plainly different in today’s market than in 2008 or the2000.com, right. A lot of these companies that are driving the earnings growth, right? Take for example, your AI hyperscalers, right? Your Googles, your Microsoft’s, Amazon and Nvidia. These are companies that are earning huge amounts of cash. These are companies that are cash cows that we haven’t seen in the history of capital markets ever, Ever, ever. Right? Yeah, you’d probably have to go back to like, you know, the Dutch East India company to, to really draw a fair comparison of how much cash flow a lot of these companies have been bringing in, minus this short little, you know, debt binge and capital expenditure that they’ve been forced to spend because of not being one, not not wanting to be left behind in, in, in. So with that said, the earnings growth is actually broadening out. It’s no longer Just a Mag 7 story, it’s no longer just a tech story or an AI story. We’re seeing some of the earnings growth expand. And what I mean by that is early on in this AI story, a lot of the software name so SaaS software as a service got heavily punished, right? So Salesforce, what’s it called?
Richard Taylor:
[00:28:39 – 00:28:42]
The saaspocalypse.
Kam Singh Somal:
[00:28:42 – 00:28:42]
Saaspocalypse.
Richard Taylor:
[00:28:43 – 00:28:56]
Everyone thought AI was going to. Who would have a salesforce when you could just use AI to build your own? Which, you know, in theory I get, but it was kind of naive really, but there was a SaaS apocalypse. Everyone thought SaaS was over.
Kam Singh Somal:
[00:28:56 – 00:30:10]
Exactly. And I think it was one of those situations where the market was under the impression shoot first, ask questions later. Right. Or throwing the baby out with the bathwater for a more adept analogy there. And I think we’ve seen a bit of a resurgence in some of those SaaS names. So, you know, we can clearly say it wasn’t a SaaS apocalypse. But actually a lot of those software names are starting to leverage some of this AI productivity and AI efficiency in their product suites and then they’re seeing an uptick in their margins. Right? So, so that’s quite healthy in a broadening market. But more importantly, it’s not just tech or software. We’re seeing earnings growth in the banks, we’re seeing earnings growth in some of the utilities and staples there. So a broadening out in the overall market, or breadth as we like to call it, is really a healthy sign because it means it’s not just 10 names that are dragging the market high and therefore if they run out of steam, everything sort of falls apart. Right? It’s like that cartoon scene where Willie Coyote is going off a cliff and then there’s a few seconds before he’s looking down and then, you know, before he realizes he’s on thin air. That’s what you don’t want. And I think seeing this breadth in the wider market is, is definitely a healthy rotation.
Richard Taylor:
[00:30:11 – 00:31:22]
Really healthy sign. Really healthy sign. And, and though, you know, don’t get me wrong, like, yes, when it was the Fang or Mag 7 at times it looked unhealthy, but we all benefited from it. You know, we are. If you were invested in the, in, in the market, you did extremely well as a result. And now you’re seeing a, a, the market broadening, which is super healthy. And American companies are printing money. They are doing really, really well. This, this whole thing is not based on nothing. It. Look, I know short term market movements are based on all sorts, but like long term really comes down to how much money a company’s making. And American companies are making an awful lot of money. They are well run, they are ambitious, they are doing exceptionally well. And that’s why the stock market is doing so well. But even beyond that. So I heard a couple of things today listening to podcasts, I heard, and I haven’t, haven’t verified these, so I’m just, I’m just repeating them. But the average PE ratio, price, price earnings ratio on the S P 500 right now is 1919. That is not crazy high. That is, that’s, that’s just very, very normal.
Kam Singh Somal:
[00:31:22 – 00:32:07]
Exactly. I think it’s one of those, you know, earlier on, late last year or early this year, I think people were getting a little bit concerned about the price to earnings ratio. But actually everybody fixates on the price and doesn’t really focus on the earnings part of the exact equation. There’s, and earnings has been doing phenomenal. So a lot of these names like take Nvidia, right, Nvidia trades at a much lower price to earnings valuation now than it ever did in its history. So it’s, it’s, it’s. And again, it’s a poster child of the AI grocery and a poster child for a company that’s executed very well on all fronts and has had everything go right for them. But again, as long as earnings continue to come through quite decently, you know, the valuations sort of, you know, grow into themselves.
Richard Taylor:
[00:32:08 – 00:34:10]
And another thing I saw this morning in the paper is population sentiment on the economy. So, and this chart went back to before the dot com bubble. So before the dot com bubble the sentiment on the economy was super high, like way, way like 20, 25, 30%. Then it crashed to below zero in the dot com bubble. Then it rose again and on the eve of, on the eve of the global financial crisis it was well above zero. And then it crashed again and then over the next, what, 15 years it rose and rose and rose and pre Covid it was well above zero again. So people were feeling generally quite bullish about the economy. And then in Covid it crashed and it’s never come back. So for the last five years now, while we’ve had 2022 aside, we’ve had a roaring stock market, the customer sentiment, population sentiment on the economy is low and has stayed low. And I again, I think that, well, I wish people felt more confident and happy in the economy. It doesn’t scream bubble to me. People aren’t running around taking out loans to invest in the stock market because it’s so bullish. People are anxious and scared and worried and negative. And as much as I wish that wasn’t the case, I do think it plays into my position, which is I’m not worried about a bubble. Everyone I speak to is and like I said at the beginning, I can see why. But when you drill down, when you look at, at how the, the price, earnings, when you look at sentiment, when you look at all these things, when you look at how much money these companies are actually making to justify their valuations, I don’t see it. I don’t. It’s going to be bumpy there’s going to be corrections and who knows what’s around the corner, but I’m not seeing a bubble. And if one happens before this episode comes out, we’ll obviously edit out this last part, if it open. But I, I’m. People are nervous, but yeah, I, I think we’re still in quite. I think things are, things are going well. They’re not perfect. There are absolutely headwinds, but things are going well and we should make hay while the sun shines.
Kam Singh Somal:
[00:34:11 – 00:34:12]
Absolutely.
Richard Taylor:
[00:34:16 – 00:34:22]
Perfect. Right? Well, should we just, should we just. Let’s, let’s, let’s leave it there. Make hay while the sun shines. Okay.
Kam Singh Somal:
[00:34:22 – 00:34:23]
Love it.
Richard Taylor:
[00:34:24 – 00:34:39]
Okay, good. All right, well, listen, Cam, thank you so much for joining me. I’ve, I’ve enjoyed our conversation and yeah, well, if Brian is back from his jollies, wherever he is, tbd, we’ll get Brian in the seat. But please, when he’s, when he’s not around, come back and talk to us again.
Kam Singh Somal:
[00:34:39 – 00:34:45]
Absolutely. Thanks so much for having me, Richard. It’s a pleasure and look forward to seeing you the guys on the next one.
Richard Taylor:
[00:34:45 – 00:35:55]
All right, good man. Cheers, Cam. See you soon. All right, folks, that’s another episode of Expat wealth under our belts. Thank you for listening. I appreciate it and I appreciate you. If you’re enjoying the show and would like to support the mission, which is to help ambitious expats thrive in America, I’d ask you to subscribe to the podcast wherever you listen and also consider leaving a rating and review. This stuff really does matter. Please help us get this information to the people who need it, that is your fellow expats. Also, if you have any questions you would like answered on the show, you can get in touch with us at Expat wealth@plan planfirstwealth.com Just a quick reminder that this show is brought to you by Plan First Wealth. We are a US based financial planner and wealth manager and we help ambitious, successful international families living across the US to make the most of their opportunity and ultimately to retire happier. If you’d like to know more about how we might be able to help you retire, you can find us at our website, www.planfirstwealth.com or you can look me up on LinkedIn. Do get in touch. We’d love to hear from you. As always, thank you to the podcast guys for their help producing this episode and the entire show. See you next week.
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