Hi everybody and welcome to this conversation with a very special person, Ruchir Sharma, and this looks like a fake background but it is real. They often use it with green screen. Yes, it is very beautiful. Now you are a very deep and wonderful thinker. And we met last year and talked about your book, What Went Wrong With Capitalism.

Yes. Now another year has passed and wow how the world has changed. So what is your take that uh what has happened with capitalism in the last 12 months?

Well I think it's a bit disappointing. Isn't it? Because everywhere it seems the role of government is increasing. We have a new government here in the US as well. Yet I think that old thinking that the government should just do the necessary and get out of the way. That thinking has now fundamentally been shaken everywhere.

Now obviously the current government is doing a lot of work on de-regulation which I think is very positive. But still the thinking is that you should be there when someone is in trouble to help. And the Federal Reserve also wants to cut interest rates as soon as any problem is seen.

In my opinion, this is the inequality which I have written about many times with regret in my book, that when there are profits, you can profit from capitalism. On the other hand, the risks are socialized. I think that asymmetry still exists in the system and that's what worries me.

But before that, what do you think are the other things we should mention about the events of the last 12 months? Look, everyone was after Trump. But I think in the last 12 months, there is one thing that has become bigger than Trump, and that is AI.

It has now become a singular focus of the global economy and especially the US economy. The US economy is now a big bet on AI, because outside of AI, the US economy has a lot of weakness. But AI is constantly pushing everything forward. Therefore, the success of the huge bet that America has placed on AI is crucial. Otherwise, there could be difficulties for the country going forward.

For now, everything revolves around AI. That is the biggest factor that has emerged. When you look at the importance of AI in society and the stock market, what things do you focus on? Here are a few things. Isn't it?

I think one of them is how much AI is already impacting economic growth. So current methods show that about 40% of economic growth in America this year has come from CapEx spending on AI. So that's one way. The second impact, I think, is also something that is important but underestimated. It's the wealth effect, meaning the stock market is doing well.

Financial assets are doing well. This is clearly increasing the spending of the top 10% of people in this country, and the top 10% of people are driving the entire consumer spending in this country. So the stock market's rally of about 80% this year has come from AI plays. So in a way, you can say that about 60% of economic growth in America today is coming from AI.

Now the problem with this is that there are also classic signs of a bubble. As financial historians, we are studying. But let's not talk about the bubble yet. So 60% growth in the US is coming from AI. But do we think its impact will be seen in the share prices of these companies? Isn't it?

Yes. Now what economic benefits are you seeing from the implementation of AI? Well, not yet. Because the adoption of AI is still in its early stages. That's why we have seen some increase in productivity in the American economy over the last two or three years.

What do you think? How much is coming from this? AI? I think it's too early yet. So it's very little right now. By when? By when do you think we will see this? It should happen in the next two to three years. Isn't it?

Because if you look at the internet revolution, which happened in the late 1990s, the big jump in productivity came at that time and continued even after the recession of the early 2000s. That is, these benefits take time to show.

And we don't even know yet what AI is ultimately going to do. So the hope is still very big. We have all started using AI in some form or another. But we are not sure if productivity will increase or not. And there is a very important difference in the adoption of this AI compared to the big tech revolutions that happened before. Frankly, this is the most hated tech revolution.

And what that means is, if you look back, the other big revolutions, even the bubbles that formed, if we talk about the famous parallel, which was in the late 1990s. All surveys show that in the mid-90s and late-90s, people were very optimistic about what the internet could do for them. There was a lot of hope.

Today, surveys show that most people are quite negative about AI. And there are two reasons for this. First, all the techno-optimists are telling them that we will take your jobs because the big benefit of AI will be reduced labor costs. And second, there is a fear of what we will do with this AI.

Everyone is saying that AI has arrived and if you don't use AI, you might lose your job, and people are afraid of it. So in fact, some surveys I've seen indicate that only 35% of people feel good about AI. In fact, most people want it to be regulated in some way because they fear the impact of AI.

So if you look at the past mania bubbles or the past big revolutions, people are generally very optimistic about what it's going to bring. Isn't it? Electricity, cars, or places like Japan, where there was a lot of confidence in the late 80s. China a decade ago, and so on. But the big difference with AI is that people genuinely fear what it will do to them.

Yes. Well, maybe many people are afraid. I like it very much. Yes, and we are embracing it very well in our company.

Yes, but is it also causing job losses? Maybe that's a big deal for you. We ensure that no jobs are lost. But it greatly increases our workload, the difficulty of our work, and the quality of our work.

But I can understand what you're saying. So is this a bubble?

So is this a bubble? But I think if you look at the four types of 'Os' that guide you on whether we have a bubble or not. So what are these four 'Os' for me? One 'O' is over-investment. If you look at the investment happening in AI today, the tech investment as a percentage of GDP is roughly at the same level as we saw in past bubbles, especially in 2000.

Today, tech investment is still around 5%, which is roughly the same as at that time. So, in some ways, we are also seeing over-investment. The second typical sign of a bubble is overvaluation. No matter from which angle you look, US stock markets, especially AI-related stocks, are overvalued.

Some people believe that valuations are not as high as in 2000. Yes, on some metrics, like PE ratio, this is correct. But if you look at price to free cash flow or long-term earnings, these metrics show we are approaching the same level. So this point also holds true.

The third reason is that people over-concentrate on something. That is, all the same trades and ideas. A simple way to measure this in America is that today, about 52% of Americans' financial wealth is in equities, which is higher than in 2000. And people are trading like crazy.

The fourth reason is often related to over-leverage, meaning the leverage level in the entire system becomes too high. In this regard, the evidence is somewhat mixed. Because the companies building AI have had considerable cash until now. You know, these companies were generating high free cash flow.

Yes, I think Sundar Pichai's statement last year was: "For us, the biggest risk is not investing too much, but investing too little." So, I think the prevailing sentiment now is under-investing in AI.

And one interesting difference I've noticed is that the tech investment cycle in the 1990s grew gradually. It started forming from the early 90s and then grew. What is seen this time is the fastest build-up in the investment cycle. Two years ago, AI and tech CapEx contributed almost nothing to GDP growth, and now they contribute about 40%. This is a huge build-up, and it's happening very fast.

Of course, some will say that the adoption of AI this time is also faster than before. But the increase in investment and how much money is being financed through debt, all these are changing rapidly.

But does that really matter? I mean, many people now differentiate between "good bubbles" and "bad bubbles." They say this is a good bubble because it reallocates capital to areas that will enhance society's productivity.

Yes, I think that's correct. Most tech bubbles are good bubbles because what is left in the end is something that everyone can benefit from. And bad bubbles are things like real estate bubbles.

So, is it good or bad? In this case, it's a good bubble. That is, it promises significant advances in productivity and technology. So, I think in that sense, it's a good bubble.

We return to the point you mentioned at the beginning. That is, governments are forming. You know, bureaucracy and the state, etc. Is this true? I mean, are we seeing, if we start from the US, in the US, do you think bureaucracy is forming?

Well, I think there has been some slowdown in de-regulation and other aspects. But what has changed now is that the idea of the US government taking direct stakes in companies has changed. This seems to be a more advanced form of state intervention in the economy. My point has always been that the state's growing intervention has weakened productivity growth, undermined dynamism, and exacerbated inequality, as it always benefits the entrenched groups and the establishment.

And I don't think there are any signs of this process reversing on any major level. So, yes, there are some positive signs, like de-regulation and things that are happening. But on the other hand, I think the idea that the US government wants to maintain good relations with all tech giants and everyone else, because they don't know what will happen in the future, seems to be a strategy.

So, I think this is an area where you can clearly see the increased role of government. I am actually from India. Tell me, one thing I always liked was the difference between India and America. One point was that in India, anyone doing business would not say anything negative about the government, at least not publicly, because they fear that even if it is a democracy, if you speak ill of the government, the government might use its regulatory power against you.

I have seen this in India. I met about 40 business leaders. Not a single one said a negative word about the government. Especially not publicly, there is no way. Even privately, yes. So, I think that's how it is. Now, in America, we always pride ourselves on being able to say whatever we want.

People will openly be Democrats or Republicans. Today, if you pay attention and look at some of these meetings held with the American government, where people are sitting around the table. They have all become one-upmanship shows, where everyone is telling the other person how much they love Trump and how much they love the government.

This is a huge change that has happened in America, and it's almost the same as what I used to see in India. How do you understand this? What does it mean? Well, the fear of the government is that if you say something very negative about the government, they might come after you. Anything can happen.

I think this tells you about it, doesn't it? How this change has happened? The deep involvement of the government. Do you also see tariffs in the same way? Is this also one of its functions? Yes.

This is because tariff policy is very subjective. There is no objectivity or science behind it. It's like you can decide who to give tariffs to, which country or industry to impose tariffs on. And if you feel someone is doing well and you want to help them, you can reduce their tariff rate.

So this is clearly something that is quite arbitrary. Even if you like tariffs as a policy, as a revenue generator, the way it is implemented is very arbitrary. So, these are all signs of rising statism and increasing intervention.

So, I regret to say that in the past year, I don't think we have seen any major shift in the growing role of government. So, the other factors you mentioned in your book, why capitalism doesn't work? What factors do you track?

For me, capitalism still works. The issue is, as mentioned in the book, What Went Wrong With Capitalism? My answer is that capitalism has not failed. The government has ruined it. But the good news is that there are other parts of the world, as mentioned in the book, where capitalism is still working, and by working, I mean it is moving in the right direction.

America is still largely a capitalist society, just not as much as before. Its decline is evident over time. But if I go to countries like Vietnam or Taiwan, I see places where people are still moving in the right direction of providing economic freedom. What is capitalism for me? Capitalism means giving people more economic freedom, increasing competition, encouraging change.

So, I think these are some of the traits I see, and what I don't like are the results. In fact, capitalism should not favor the existing government. It should be a system of change. But increasingly concentrated companies are dominating. For me, these are the shortcomings of capitalism, not good signs.

From America to China, let's pause in Europe for 1 second. How do you see Europe? As we said last year, in many ways, the state of capitalism in Europe is worse. When you look at countries like France, where government spending in GDP reaches 60%, it's hard to classify these countries under any capitalist definition. And this is growing.

The only good thing about Europe is that, as we have seen, usually around the world, governments only undertake major economic reforms when their economic situation is poor. We have seen some signs of this in Europe, at least in Germany at the beginning of the year. Although most of the discussion was about spending, there was still some discussion about labor market reforms and other aspects. So, reforms happen when situations worsen.

The Southern European countries are a classic example. As you know, Southern European countries were dismissed as "pigs" (referring to economically backward or poorly managed countries) a decade ago, but we have seen them perform quite well in the last five years. I think they were forced to correct their mistakes, and the role of government in Greece, Portugal, and Spain has somewhat diminished.

But I will challenge you a bit, because I mean, how many real difficulties do they face? I mean, life in Europe is good now. Yes, but they did it, didn't they? Yes, they did. But look at Germany, France, Italy, and all of Northern Europe, the situation is not that tense.

I mean, they are not facing any immediate crisis. Yes, life is generally good. We saw this at the beginning of the year because there was so much despair, and Trump and others were really putting pressure on Europe.

So, how bad does the situation need to get for them to feel the need to take drastic measures? Well, unless a crisis occurs, no one acts. But how big should the crisis be?

It should be that they run out of money to spend. Right? That's the basic definition. But I think at the beginning of the year, I felt something like an existential crisis. That is, in places like Germany, at places like Davos, everyone was very depressed about Europe, and everyone had overlooked Europe. And this is interesting as an investor.

As you know, what happened this year has been quite interesting. In fact, America, at least on a relative basis, has been the worst-performing region in the world. Europe is very surprising, isn't it?

Because at the beginning of the year, everyone was on the "American exceptionalism" trade. It was believed that this was the only place worth investing in the world. But in reality, what we have seen this year is that Europe, emerging markets, and China have all outperformed the US.

Why? Why is this happening? I think it's because at the beginning of the year, all the money was concentrated in one region, one country. So to speak, as you know, America's weight in the MSCI equity index reached nearly 70% by the beginning of the year. The dollar was also severely overvalued. So, some part of it is just a correction.

And many countries are now indeed taking steps to advance necessary reforms. I mean, again, expectations in Europe are still low. But at least Germany has started to wake up and say, "Okay, we have to make some changes here, whether it's spending more on the right things, focusing on the labor market, or improving de-regulation."

On the other hand, in many countries, like China, I think a very important shift has occurred. China has realized that if we are to compete with America in AI, we must support the private sector. A major shift in China is that previously it had a hostile attitude towards the private sector, which was promoted by Xi Jinping.

But I think an important shift has happened there. Now, Jack Ma has returned to Alibaba, and Alibaba's stock has doubled this year.

What do you think caused this shift? What caused this shift? Well, apart from AI, China's economy is facing immense difficulties.

If you remove AI from China, the economy is not doing well at all. The property market has collapsed. There are reports of how businesses, consumers, and everyone are feeling immense pressure.

I think China's entire idea is also a bit existential. That is, their way of competing with America relies on AI and technology. And it is here that we have seen a huge catch-up. I think, as we saw, the DeepSea moment in January was a very important moment at the beginning of the year. I think something similar has happened in China too. So, these two things are: one, the economy is facing immense difficulties, and two, Xi Jinping has realized that AI is important, technology is important, and they have a very good tech sector.

Are you surprised that we haven't seen more follow-up after the DeepSea event? That was a wake-up call. US AI stocks reacted very dramatically.

Yes. And then they recovered, and we forgot about China's capabilities again.

Absolutely. Because today, it's not that they have stopped working. No, frankly, on some metrics, Chinese LLM models have reached almost the same level as the US.

That is, virtual convergence has been achieved. And interestingly, they are spending only about one-fifth of the cost for this. Because US CapEx spending has reached nearly half a trillion dollars. China's AI CapEx spending is around $100 billion. So this is little.

But I think what has happened in the US is that there is so much confidence in AI that people are willing to invest all kinds of capital. That's why I don't think this question is arising.

Nikola, this question will indeed arise, and that is when interest rates rise. Historically, every bubble or mania has burst for the same reason, and that is when interest rates eventually rise.

Why will interest rates rise? If the economy remains strong on this scale. Firstly, inflation here is already quite high. As you know, the Fed's 2% target is nowhere in sight.

The Fed has failed to meet its 2% target for five consecutive years, and inflation next year is likely to be closer to 3% than 2%. Why the Fed is cutting interest rates in this environment, I completely fail to understand. But they are doing so. Perhaps under pressure from the White House, perhaps it's the Fed's historical reaction function.

That is, they will react at the slightest sign of trouble. But never react when things are going well. And it's interesting because if you look at what has happened in the last few days, the Fed has started questioning whether interest rates should be cut. This is why there has been some volatility in the market. But again, as soon as there was some market fluctuation, the Fed is again signaling that a rate cut might happen in December.

This just illustrates what the reaction function is. But if inflation accelerates from here, because the economy remains very strong on this scale, with increased CapEx spending on AI and other things, and the Fed says, "Okay, we must now raise interest rates," because either we cannot lower interest rates as they wish, because this country has affordability problems.

I think that's when the entire over-investment AI bubble will burst.

What are your thoughts on a less independent Federal Reserve? I think, regarding a less independent Federal Reserve, there are two things here. Does the Fed need reform? I think the Fed does need reform. But I think in the opposite direction. That is, the Fed has had two problems here. One problem is that it is not uniform, as I said, "We are here for your safety."

The good news is, you can do whatever you want. So, you enjoy the profits, and we will socialize your losses. I think this is an asymmetry that needs to be changed. The second point is that the Fed should be held accountable. If we count from 2000, the Fed has actually significantly missed its inflation target.

If we look at it in a straight line, i.e., 2% inflation versus what the Fed has actually achieved. Then it should be held responsible for this. So, this is the reform of the Fed. On the other hand, some people talk about the need to eliminate mission creep.

That is, the Fed cannot do everything. Like intervening in all markets, or intervening in things outside the scope of monetary policy. So, I think, yes, the Fed needs reform. But thinking that reform means a less independent Federal Reserve. I really don't know what that means. As I said, I haven't been a big fan of Fed policy, so I'm open to reforming the Fed. But reform means you want to lower interest rates because it will reduce your debt burden. I think that's a wrong policy. So, independence and reform are different.

You have previously warned about high levels of government debt globally. How do you see it now? Well, this year, except for the US, this has happened everywhere. UK, Japan, even France. In all these places, the heavy debt burden on these countries has become an issue at some point, forcing them to react in all these places.

Why? Why is it not an issue in the US? I think there are two reasons. One is the immense confidence in AI, which is reflected in two ways. One is the confidence in AI, which causes a lot of money to still flow into the US. The second is the bet that because America is at the forefront of AI, America will achieve a huge leap in productivity.

These high productivity leaps will help stabilize the debt-to-GDP ratio. The third point, and perhaps the most surprising to most of us, is that despite the high GDP deficit in the US, it has actually decreased.

This is partly due to tariffs, isn't it? Tariffs, absolutely. So, I think, yes, their tariffs are profitable.

Well, at least in the short term, on the surface, tariff revenue has helped reduce the deficit by 1% of GDP. So, now if you remove tariffs, do you think this will be good news or bad news for the market?

I think if you remove tariffs, the concern about the deficit will come back a bit. Even more than the positive impact on earnings. Yes, but I don't think tariffs will be completely removed.

But I don't think it has had such a significantly negative impact. I mean, what I'm saying is, yes, tariffs have had a negative impact on economic growth. It's just been largely offset by the hope around AI spending and other things.

So, tariffs have a negative impact on economic growth. We just don't think it has had such a significantly negative impact because, from an overall economic perspective, the positive spending from AI is compensating for the losses from tariffs.

Last year, what has changed in the hostility between China and America? I think the realization has dawned that, especially in America, they are more dependent on China than they expected. Because at the beginning of the year, most people's calculation was that China is a big exporter and needs the American market, no matter what.

So, it seemed like America had all the bargaining chips. But I think, in the past few months, we have learned that China also has bargaining chips, whether it's the advantage derived from rare earths. So, I think what has changed is that deep mistrust remains.

But I think people like Trump are transactional, and they also know what dependence is? What is codependence? So, I think what has changed in both countries is the realization that there is immense interdependence, and you cannot easily get rid of it.

Finally, Ruchir, if you were to predict what will happen in the next 12 months, what are the most important factors? I've been thinking about this. Every year I write about my top 10 trends for the year, and I've been thinking about this.

Perhaps how long will AI last? Because right now, everything revolves around AI. The question is, how long can it sustain itself, and will this bubble burst in 2026? That's the biggest question.

After doing this for so many years, one thing is clear: it is impossible to predict when a bubble will burst. But yes, we do have a kind of checklist. So, as soon as there is any sign that interest rates are going to go up, in my opinion, that is the moment when you should understand that "Okay, this cycle is ending."

You can be a wise investor and say, "I will wait for a clear signal. I will wait for the bubble to burst, and then exit." But there is one more thing I have noticed, and I want to teach it a bit. Because if this is true, sometimes you feel that this is the best investment idea currently available, and I have been working on it.

And I think, measured as a big trend, 2026 will be an excellent time to buy quality stocks. In fact, quality stocks have performed very poorly in the last 12 months. Quality as a factor has really underperformed. Yes.

Typically, it is measured by growth and higher returns on investment. With very high ROE and leverage, and you can easily select them based on key metrics like valuation and growth. But I have found the last 12 months to be one of the worst and most difficult periods on record for quality stocks. So, this could be an excellent time.

There is too much concern in our industry, like "Okay, what should we buy?" On one hand, due to the AI bubble and other factors, everything looks very expensive. On the other hand, some insurance, like gold and oil, have also risen sharply. We cannot invest more money in them. What to do? There is always a sense of fear.

Okay. So, a prediction. So, is this prediction that quality stocks will once again be favored? I think quality stocks will be favored again? In my opinion, you just need to buy quality stocks. If this is the only thing I have to do, then I think, as I said, the AI bubble will burst somehow next year, perhaps due to higher interest rates.

I don't know the exact timing, but I feel buying quality stocks is becoming increasingly popular. The third thing is that the trend of international markets outperforming the US, once it starts, tends to last for many years. I don't think 2025 was just a fleeting moment.