Hi everybody and welcome to this conversation with Richia Shama.

We are here and it looks like it's a fake background but it's actually a real background.

[laughter]

I this is what they use often with the green screen.

Yeah know it's absolutely beautiful.

Right.

Um now you are one of the really deep and great thinkers and uh we met last year and talked about your book what went wrong with capitalism.

Right

Now uh there's been another year and my has the world changed. So what is your what is your take uh when it comes to what has happened with capitalism over the last 12 months?

Well, I think that it's um a bit dispiriting right because of the fact that everywhere I think what we see is that the role of the government keeps expanding.

We have a new government as well here in in the US but I still feel the fact that uh the faith the old faith that you need to sort of have the government do the minimum stuff and get out of the way after that. I think that's been fundamentally shaken everywhere.

Um, now of course the current government is doing a lot of stuff on deregulation which is something which I think is a very big positive but still I think this sort of uh thought process exists that you got to be there to bail out you know when someone gets into trouble and the Federal Reserve also that you know like at the slightest hint of trouble they want to cut interest rates.

And the Federal Reserve also that you know like at the slightest hint of trouble they want to cut interest rates.

I think like to me that asymmetry which is what I lamented a lot in the book that on the upside you have capitalism that you can capitalize with the gains on the downside the risks are socialized I think that asymmetry still remains in the system and that's what continues to concern me

Uh but just before we we go there what are the other things you think we should unpack with the events of the last 12 months

Well I think that the uh you know like everybody was obsessed with Trump

But here's I think what's happened in the last 12 months months that uh one big factor has out trumped Trump that's AI which is that uh that's now I think become the singular focus of the global economy and particularly the US economy

That's now I think become the singular focus of the global economy and particularly the US economy

The US economy has now become one big bet on AI because outside of AI there's a lot of weakness in the US economy but AI has continued to drive everything so this big bet on AI better work out for America because if it doesn't work out then I think think that there's a lot of trouble for this uh country ahead but for now it's all about AI.

But AI has continued to drive everything so this big bet on AI better work out for America because if it doesn't work out then I think think that there's a lot of trouble for this uh country ahead but for now it's all about AI.

I think that's really emerged as the big factor.

When you look at the importance of AI in this society and in the stock market just what are the kind of things that you look at?

Well, there are a couple of things right which is that I think that one is that how big an impact is AI already having on economic growth.

So uh the measures you know currently show that about 40% of economic growth in America this year has come from capex spending towards AI.

M

So that's one way. The second effect I think is also something which is important but underappreciated which is the wealth effect which is that the stock market doing well the financial assets doing well that is clearly powering the spending of the top 10% in this country and the top 10% is what's driving the entire consumer spending in a way in the like in this country.

The stock market doing well the financial assets doing well that is clearly powering the spending of the top 10% in this country and the top 10% is what's driving the entire consumer spending in a way in the like in this country.

So the stock market about 80% of the gains in the stock market this year have been powered by AI plays and that in turn I think is powering the spending of the really rich people.

So by some measures you can argue that about 60% of economic growth in America today is being driven by AI.

Now the problem with that is the fact that uh there are also the classic signs of a bubble.

I mean as financial historians we

But let's not do the bubble yet. So 60% of the growth in the US is coming from AI.

Yes. But from um what we think will come as reflected in share prices of these companies, right?

Yes.

Now what are you [clears throat] seeing in terms of real economic benefit of the implementation of AI?

Well, so far it's too early because you know because the AI adoption is still in its nent stage.

So we have seen some increase in productivity in the American economy in the last 2 or 3 years.

How much do you think

Is coming from this uh from AI as yet?

I think it's too early. So I think very little is yet

When you when you think we'll see it in

Well, it should happen in the next two or three years, right?

Because even if you look back at the internet revolution which took place back in the late 1990s, the big bump in productivity really happened towards the late 1990s and then continued after the recession of 2000 into the early 2000s.

So it takes a while for this for these benefits to come through.

Now we don't even know as yet Nicol that what exactly is AI going to end up doing.

So far the promise is huge.

All of us have started to use AI in some form or the other but uh we're not quite sure whether the productivity increases are coming.

And there's one very important distinction with this AI adoption compared to the past uh big tech revolutions which are happened if I can say so that this is the most hated tech revolution.

And what do I mean by that?

That if you look back at the uh other big revolution which have happened even the bubbles which have taken place going back again to the famous parallel which is the late 1990s that um all the surveys show that back in the mid '90s and late '90s people were very optimistic about what the internet could do for them there was huge optimism about it today the surveys are showing that most people are quite pessimistic about what AI can do and that's because of two reasons.

Today the surveys are showing that most people are quite pessimistic about what AI can do and that's because of two reasons.

One, all the techno optimists are telling them that we're coming for your job, which is that the big benefit of AI is going to be that we're going to take out labor costs.

And second is just the fear, which is that what are we going to do with this AI?

How do we use these AI tools?

Everyone's telling us that AI is here and if you don't use AI, your job can be gone.

And people are fearful of it.

So in fact some of the surveys that I've seen show that only about 35% of the people are uh feeling good about AI and most of it in fact want this to be regulated in some way because they're fearful about the impact that AI is going to have.

So if I look at the past manas, bubbles or even if you look at the past uh big revolutions, people are typically are very optimistic about what it's going to bring, right?

Electricity, cars or even in places like Japan when you like in the late 80s so much confidence.

China, you know, like a decade ago and stuff.

But with AI, the big difference I feel is people are like really scared that what is this going to do for me?

Yeah. Well, it may be that many people are scared. I totally love it.

Right.

Yeah. And we are embracing it big time in in uh you know in our company.

Yes. But are you but is it sort of costing jobs as well? I think that is the big thing.

We we make sure it won't cost any jobs.

Uh but it does increase the amount of work we can do and the complexity of what we do and the quality of what we do in a very very big way and we can do all that with the same number of people.

But I I can see where you come from.

Now bubble is it a bubble?

Well, I think that if you look at the uh uh you know the four sort of O's is how I call it of uh guiding you whether we have a bubble or not like what are these four O's for me um one O is overinvestment now if you look at the amount of investment going into AI today as a share of GDP the tech investment it is comparable to what we saw in past bubbles including in 2000 which is that the tech investment as a share of GDP is about 5% or so today That's roughly what we saw back in 2000.

For me, um one O is overinvestment now if you look at the amount of investment going into AI today as a share of GDP the tech investment it is comparable to what we saw in past bubbles including in 2000 which is that the tech investment as a share of GDP is about 5% or so today That's roughly what we saw back in 2000.

If you look at the amount of investment going into AI today as a share of GDP the tech investment it is comparable to what we saw in past bubbles including in 2000 which is that the tech investment as a share of GDP is about 5% or so today That's roughly what we saw back in 2000.

Some in some ways we are seeing overinvestment.

The other sign of a bubble typically tends to be that you get overvaluation.

Now by any stretch the US stock market in particular and of course the AI plays are overvalued.

Some argue that the valuation is not yet as expensive as it was in 2000 or so.

Yeah, by some measures it's not such as the PE ratios and stuff, but if you look at things like price to free cash flow or you look at very long-term earnings, by those measures we are getting there.

So that also checks out.

The third tends to be one of uh over ownership that everyone just sort of uh crowds into the same trades and stuff.

And one sort of simple measure of looking at this in America is that today uh about uh if you look at the financial wealth here uh Americans have about 52% of their financial wealth today in equities that is higher than what it was even in 2000.

So and people are like trading this like uh crazy out there.

The fourth often has to do with over leverage that you end up getting too much leverage in the system.

On there the evidence is a bit more mixed because these companies which have been building out the AI have broadly been flush with cash you know they've generated very high free cash flow but that's changing very quickly that in the last few months if you look at it the biggest issuers of debt have been companies like Meta and Amazon and even Microsoft so they're beginning to really issue debt very rapidly because it's arms race for AI has really taken off everyone wants to be ahead and they're all thinking that the big risk will be that what if we don't end up uh ahead on AI.

But that's changing very quickly that in the last few months if you look at it the biggest issuers of debt have been companies like Meta and Amazon and even Microsoft so they're beginning to really issue debt very rapidly because it's arms race for AI has really taken off everyone wants to be ahead and they're all thinking that the big risk will be that what if we don't end up uh ahead on AI.

So they're beginning to really issue debt very rapidly because it's arms race for AI has really taken off everyone wants to be ahead and they're all thinking that the big risk will be that what if we don't end up uh ahead on AI.

So I think that so by the most checkpoints

So so the thing so tell me through just talk me through how you think that they are thinking now in terms of the fear of being left behind.

Yeah. So I think what's happening is I think that like this was a statement made last year by Sundar Pachai where he said that the big risk for us is not that we uh invest uh too much but we invest too little.

So I think that's become the mindset just now in terms of investing too little in like uh AI.

So um and and there's a big distinction which I saw which is quite fascinating that in the 1990s there was a gradual buildup in the tech investment cycle right that it it started building in in the early to mid '90s and then it kept ramping up.

This time what we have seen is that this has been the fastest buildup we have seen in the investment cycle that we've gone from uh AI and tech capex virtually contributing nothing to GDP growth 2 years ago to now contributing as I said 40% or so.

So this is a huge buildup which is happening and it's happening very rapidly.

Now, of course, some people argue that the flip side is that even the adoption this time is very quick of like AI compared to the past.

But the buildup in investment and how much now is being financed by debt that's changing very quickly even as we speak.

But does it matter whether it's um I mean some people differentiate now between a good bubble and a bad bubble.

I mean some people differentiate now between a good bubble and a bad bubble.

It's a good bubble because it uh reallocates capital to something which is going to drive productivity in society.

Yes. So I think that it's correct that most technology bubbles tend to be good bubbles because in the wake what's left behind tends to be something which everybody can benefit

And the bad bubbles tend to be things like real estate bubbles.

So is this a good or a bad one?

Well this is a good bubble in that regard which is the fact that this has the promise as you have said of improving productivity improving technology uh considerably.

So I think that way this is a good bubble.

M I just want to go back to what's one of the things you said in the beginning the fact that uh the governments are building up you know u the bureaucracy and the state uh and so on is that really true I mean are we seeing and if we look at it if we start with America with the US is the US uh kind of bureaucracy continuing to build you feel

I mean are we seeing and if we look at it if we start with America with the US is the US uh kind of bureaucracy continuing to build you feel

Well I think that there is uh some slowdown in like in terms of the deregulation and stuff but what's changed now is that this whole idea a of the American government directly taking stakes in in companies that's like a further evolution in the state's involvement in the economy.

I mean the my sort of point has been that the uh state's increased involvement in the economy is something which has caused productivity growth undermined the dynamism and also led to increased inequality by favoring the entrenched and the establishment and I think that there's no sign that that process is broadly reversing itself.

And I think that there's no sign that that process is broadly reversing itself.

So yes, there are some good signs like deregulation and stuff which is happening but on the other hand I think that this you know the idea that the American government today like all the tech moguls and everybody everybody wants to be on the right side of the government because they don't know as to what can happen at any point in time as far as they are concerned.

So I think that that is something which is clearly sort of you know like you can see the increased role of government.

Now I come originally from India and you know like one thing which I used to always sort of fascinate me was that uh the difference between India and America one thing used to be that in India for example no business person at least of any consequence will say something negative about the government because they are fearful that even though it's a democracy they'd be fearful that if you say something against the government the government can unleash the regulatory might of the state against you.

In India for example no business person at least of any consequence will say something negative about the government because they are fearful that even though it's a democracy they'd be fearful that if you say something against the government the government can unleash the regulatory might of the state against you.

Yeah, I noticed that when I was in India, nobody I met like 40 business leaders, nobody said a native word about the you know about the government

Especially in public.

Yeah, even private even private.

So I think that that's there.

Now in America we always pride ourselves that listen in America you can say what you want.

People would openly be Democrats, Republicans and stuff.

Today if you notice and you see some of these uh you know meetings which happened with the American government where people are sitting around the table they've all become you know these oneupman shows where everyone is now telling the other person about how much they love the Trump and how much they love government.

That's a big change I've seen in America and it's almost converged with what I used to see in India.

Well how do you read this?

What are the implications?

Well, implications are that the fear of the government

Which is that the fear of the government is such that that if you say something too negative against the government they could come after you that you know something could be done.

I think that uh tells you about it right that how that change has taken place here

The deeper involvement of uh the government do you read the tariffs in the same way is that also a function of that

Is that also a function of that

Yeah it's also because the tariff policy is you know so subjective right there's no the there's no objectivity and science behind it it's like you can sort of decide in terms of who you want to tariff which country you want to tariff which industry you want to tariff and if you think someone's doing a decent job you can cut their tariff rate down if you need their help so this is obviously like something which is very arbitrary even if you like tariffs as a policy as a revenue earner but the way the implementation is done is very arbitrary so these are all signs of increased stat state statism and increased interventionism so uh I hate to say it in the last year or so I don't think we've seen any big shift take place in the increased role of government uh in our lives

There's no the there's no objectivity and science behind it it's like you can sort of decide in terms of who you want to tariff which country you want to tariff which industry you want to tariff and if you think someone's doing a decent job you can cut their tariff rate down if you need their help so this is obviously like something which is very arbitrary even if you like tariffs as a policy as a revenue earner but the way the implementation is done is very arbitrary so these are all signs of increased stat state statism and increased interventionism so uh I hate to say it in the last year or so I don't think we've seen any big shift take place in the increased role of government uh in our lives

So this is obviously like something which is very arbitrary even if you like tariffs as a policy as a revenue earner but the way the implementation is done is very arbitrary so these are all signs of increased stat state statism and increased interventionism so uh I hate to say it in the last year or so I don't think we've seen any big shift take place in the increased role of government uh in our lives

So these are all signs of increased stat state statism and increased interventionism so uh I hate to say it in the last year or so I don't think we've seen any big shift take place in the increased role of government uh in our lives

So uh I hate to say it in the last year or so I don't think we've seen any big shift take place in the increased role of government uh in our lives

So the other factors that you mentioned in your book um why capitalism you know doesn't work. What are the other factors that you track?

Well, as I said that for me capitalism is still something which works.

It just is the fact that the as the book said that what went wrong with capitalism and my answer that capitalism did not fail. The government ruined it.

But the good news is that there are other parts of the world which I also covered in the book where capitalism is sort of you know still working and like what I mean by working is that it's moving in the right direction.

Even America is still broadly a capitalist society just not the way it used to be.

We've seen a degradation of that over time.

But if I go to countries like a Vietnam or even a uh Taiwan etc. I see places where people are still moving in the right direction of giving people economic freedom.

What is capitalism for me?

Capitalism is about giving people more economic freedom about promoting more competition about there being churn about you know so I think that those [clears throat] are uh characteristics I see and what I don't like is when I see outcomes where in fact capitalism is not supposed to be uh pro-incumbent it's supposed to sort of you know cause churn but this increased concentration where the same companies dominate those to me are perversions of capitalism not healthy signs of capitalism

So I think that those [clears throat] are uh characteristics I see and what I don't like is when I see outcomes where in fact capitalism is not supposed to be uh pro-incumbent it's supposed to sort of you know cause churn but this increased concentration where the same companies dominate those to me are perversions of capitalism not healthy signs of capitalism

On the way from uh the US to China. Let's uh touch down in Europe for a second.

So how does Europe fit into your thinking here?

Well, I think that as we discussed last year that in many ways capitalism is in worse shape in Europe, right?

Because when you get countries like France where government spending as a share of GDP is kissing 60%. How do you call those capitalist countries by any uh definition and stuff?

And that's been moving.

The only good thing about Europe is this which is like what we've seen is that typically uh what we've seen around the world is that the only time governments carry out major economic reform is when they have their back to the wall.

So we saw some signs of that in Europe at least at the beginning of the year.

We saw in Germany where you know like I know a lot of it was about fiscal spending but still about doing some labor market reform and doing other things.

So I think that there are some signs that when you have your back to the wall you end up sort of carrying out reforms and in that regard the classic case has been the entire southern countries.

I mean as you know that the southern European countries that these countries were dismissed as the pigs a decade ago but there we have seen these countries do pretty well in the last 5 years or so because I think that they were forced to sort of clean up their excesses and the government's role sort of did come down a bit in the Greece Portugal Spain of the world

But I I will challenge you a bit there because um I mean how much do they actually have the the back against the wall?

I mean life is good no in Europe.

Yeah, but these countries did, right?

I mean,

Yeah, they did.

But I mean, let's say in Germany and France and you know, um, Italy, uh, you know, Northern Europe, there is no wall again, there is no back against the wall there, right?

Yes, it's broadly correct, but good life.

I think we saw like a bit of that at the beginning of the year because there was so much pessimism and Trump and all were sort of really going after Europe.

So, how much So, how much worse does the situation need to be before they take tougher measures?

Well, unless you unless you get a crisis, no one does anything.

But and how big a crisis does it need to

Well, it needs to be that you just run out of money to spend, right?

That's the basic definition that it's only there.

But I think that there was a bit of an existential crisis feel I got at the beginning of the year which is that in places like Germany and all that there was a bit of a feel as you know you know in places like Davos and stuff and everybody was just so depressed about Europe and everybody had written Europe off and it's sort of interesting as an investor as you know what's happened this year has been you know quite fascinating right which is the fact that in fact America is you know being the at least in relative basis the worst performing region in the world uh Europe

And it's sort of interesting as an investor as you know what's happened this year has been you know quite fascinating right which is the fact that in fact America is you know being the at least in relative basis the worst performing region in the world uh Europe

Which is the fact that in fact America is you know being the at least in relative basis the worst performing region in the world uh Europe

Very very surprising right

Yeah, because everybody was onto the American exceptionalism trade at the beginning of the year that that was supposed to be that you know this is like the only place in the world worth investing and instead in fact what we have found this year is that Europe emerging markets, China, everyone has outperformed America.

Instead in fact what we have found this year is that Europe emerging markets, China, everyone has outperformed America.

Why has this happened?

I think that one was the starting point which that things that you know the entire money was piled into one region and uh one country in a way in a way it never was as you know that America their weight in the uh MCI equity indices uh was hitting nearly 70% by the beginning of the year the dollar also got very overvalued so I think that some of this is just corrective but two I think is also because some of these countries are doing stuff to finally carry out some reforms I mean Again in Europe expectations are very low but at least the Germanies of the world began to wake up and said okay we need to do something here to shift whether it's you know more sort of uh spending on the right things or some sort of you know like uh focus on labor markets reforms and deregulation on the other hand many like China I think there was a very important pivot in China realized that listen if we have to compete with America on AI we need to back the private sector again because the big shift in China which had happened was that the it was a hostile attitude towards the private sector which Gi Jinping had taken but I think that there was a very important pivot there you know so now Jackmar is back at Alibaba in terms of driving stuff and Alibaba's stock has doubled this year

As you know that America their weight in the uh MCI equity indices uh was hitting nearly 70% by the beginning of the year the dollar also got very overvalued so I think that some of this is just corrective but two I think is also because some of these countries are doing stuff to finally carry out some reforms I mean Again in Europe expectations are very low but at least the Germanies of the world began to wake up and said okay we need to do something here to shift whether it's you know more sort of uh spending on the right things or some sort of you know like uh focus on labor markets reforms and deregulation on the other hand many like China I think there was a very important pivot in China realized that listen if we have to compete with America on AI we need to back the private sector again because the big shift in China which had happened was that the it was a hostile attitude towards the private sector which Gi Jinping had taken but I think that there was a very important pivot there you know so now Jackmar is back at Alibaba in terms of driving stuff and Alibaba's stock has doubled this year

So I think that some of this is just corrective but two I think is also because some of these countries are doing stuff to finally carry out some reforms I mean Again in Europe expectations are very low but at least the Germanies of the world began to wake up and said okay we need to do something here to shift whether it's you know more sort of uh spending on the right things or some sort of you know like uh focus on labor markets reforms and deregulation on the other hand many like China I think there was a very important pivot in China realized that listen if we have to compete with America on AI we need to back the private sector again because the big shift in China which had happened was that the it was a hostile attitude towards the private sector which Gi Jinping had taken but I think that there was a very important pivot there you know so now Jackmar is back at Alibaba in terms of driving stuff and Alibaba's stock has doubled this year

I mean Again in Europe expectations are very low but at least the Germanies of the world began to wake up and said okay we need to do something here to shift whether it's you know more sort of uh spending on the right things or some sort of you know like uh focus on labor markets reforms and deregulation on the other hand many like China I think there was a very important pivot in China realized that listen if we have to compete with America on AI we need to back the private sector again because the big shift in China which had happened was that the it was a hostile attitude towards the private sector which Gi Jinping had taken but I think that there was a very important pivot there you know so now Jackmar is back at Alibaba in terms of driving stuff and Alibaba's stock has doubled this year

On the other hand many like China I think there was a very important pivot in China realized that listen if we have to compete with America on AI we need to back the private sector again because the big shift in China which had happened was that the it was a hostile attitude towards the private sector which Gi Jinping had taken but I think that there was a very important pivot there you know so now Jackmar is back at Alibaba in terms of driving stuff and Alibaba's stock has doubled this year

But I think that there was a very important pivot there you know so now Jackmar is back at Alibaba in terms of driving stuff and Alibaba's stock has doubled this year

What do you think made the change what made the change happen

Well the economy in China is in big trouble outside of AI that if you take AI out in China like the economy is not doing well at all the property market is bust uh you know there are like reports about uh how businesses consumers or you know like all are feeling very stressed and I think that the whole idea what China also was a bit existential which is that their path to compete with America was on AI uh and and on tech and that's where we've seen this massive catchup take place out there.

If you take AI out in China like the economy is not doing well at all the property market is bust uh you know there are like reports about uh how businesses consumers or you know like all are feeling very stressed and I think that the whole idea what China also was a bit existential which is that their path to compete with America was on AI uh and and on tech and that's where we've seen this massive catchup take place out there.

And I think that the whole idea what China also was a bit existential which is that their path to compete with America was on AI uh and and on tech and that's where we've seen this massive catchup take place out there.

I think that you know like we saw that the deepseek moment in January was a you know like uh you know was a very important moment at the beginning of this year and I think that's what's like happened in China too which is that this uh so it was two things right one that the economy was in big trouble and two that Xi Jinping realized that listen AI is the big thing and tech is the big thing and and they have a very good tech sector are you surprised we haven't seen more follow-up after deepseek because that was like a total wakeup call uh the AI stocks in the US you know uh reacted quite dramatically.

And I think that's what's like happened in China too which is that this uh so it was two things right one that the economy was in big trouble and two that Xi Jinping realized that listen AI is the big thing and tech is the big thing and and they have a very good tech sector are you surprised we haven't seen more follow-up after deepseek because that was like a total wakeup call uh the AI stocks in the US you know uh reacted quite dramatically.

One that the economy was in big trouble and two that Xi Jinping realized that listen AI is the big thing and tech is the big thing and and they have a very good tech sector are you surprised we haven't seen more follow-up after deepseek because that was like a total wakeup call uh the AI stocks in the US you know uh reacted quite dramatically.

Are you surprised we haven't seen more follow-up after deepseek because that was like a total wakeup call uh the AI stocks in the US you know uh reacted quite dramatically.

Yes.

And then recovered and we kind of forgotten about the Chinese abilities again.

Absolutely.

Because today if you

It's not like they stopped working on it.

No, but in fact today by some metrics the Chinese uh LLM models like have reached virtual convergence by with the US and they've spent they're spending about 1/5 the amount right because the capex spend in America is touching about half a trillion.

Because the capex spend in America is touching about half a trillion.

In China, the capic spend on AI is close to 100 billion.

So, you know, like there is a bit of that.

But I think in America, what's happened is the fact that, you know, like there's so much faith in like AI and that this is going to work and people are willing to put all sorts of capital behind it that I think that that questioning is not happening.

That questioning really, Nicola, will happen whenever interest rates go up.

Every single bubble or mania in history has been pricricked by just one factor, which is when interest rates finally go up.

Why should I go up now?

Well, if inflation comes back,

Why should inflation come back?

Well, if the economy remains, you know, so strong in terms of that, then there is uh firstly inflation is already quite sticky out here as you know that the Fed's 2% target is nowhere in sight.

The Fed has missed it 2% target for 5 years in a row and even next year inflation seems to be uh closer to 3% rather than 2%.

The Fed is why the Fed is cutting interest rates in this environment is completely bewildering to me, but they're doing it.

Maybe it's under pressure from the White House.

Maybe this is the Fed's historical reaction function, which is that they will react to uh the slightest hint of trouble, but never sort of, you know, react when things are going really well and stuff like that.

And we've seen it even now, which is that it's very interesting last few days, if you if you see what's happened that the Fed has begun to question whether they should be cutting interest rates.

And that's the main reason why the markets had a bit of a wobble.

But again, just as the market had a bit of a wobble, the Fed is now again sending signals that yes, a December rate cut may be on.

It just tells you what the reaction function is.

But if inflation, you know, were to accelerate from here because the economy remains relatively strong driven by this massive uh capex spend on AI and stuff and the Fed says, "Okay, we need to raise interest rates now because or we can't cut interest rates the way that they want us to because we ha because we have an affordability problem in this country."

I think that that's when this entire overinvestment AI bubble will burst.

What are your thoughts on a less independent Fed?

Well, I think that the less independent Fed Okay, so the two things here um should the Fed be reformed?

Should the Fed be reformed?

I think there is a case to reforming the Fed, but I'm in the opposite direction which is that the there were two issues with the Fed here.

Uh one issue was the fact of this asymmetry which I've spoken about which is that like on the downside we're here to protect you. on the upside you know you can do whatever you feel like so you capitalize the gains and we we'll socialize your losses I think that's an asymmetry which I think needs to shift the second thing is the Fed needs to be held responsible that if you look at it since 2000 in fact the Fed has missed its inflation target on a cumulative basis now by a you know pretty significant margin if you just do a straight line of of uh 2% inflation versus what the Fed has actually achieved so it should be held accountable for that so that's reform of the Fed and the other aspect which I think some of the people have spoken to is that the mission creep needs to end that the Fed can't be doing everything and anything uh you know like intervening in all markets or even getting into things uh outside the scope of monetary policy uh you as defined here.

I think that's an asymmetry which I think needs to shift the second thing is the Fed needs to be held responsible that if you look at it since 2000 in fact the Fed has missed its inflation target on a cumulative basis now by a you know pretty significant margin if you just do a straight line of of uh 2% inflation versus what the Fed has actually achieved so it should be held accountable for that so that's reform of the Fed and the other aspect which I think some of the people have spoken to is that the mission creep needs to end that the Fed can't be doing everything and anything uh you know like intervening in all markets or even getting into things uh outside the scope of monetary policy uh you as defined here.

The second thing is the Fed needs to be held responsible that if you look at it since 2000 in fact the Fed has missed its inflation target on a cumulative basis now by a you know pretty significant margin if you just do a straight line of of uh 2% inflation versus what the Fed has actually achieved so it should be held accountable for that so that's reform of the Fed and the other aspect which I think some of the people have spoken to is that the mission creep needs to end that the Fed can't be doing everything and anything uh you know like intervening in all markets or even getting into things uh outside the scope of monetary policy uh you as defined here.

So it should be held accountable for that so that's reform of the Fed and the other aspect which I think some of the people have spoken to is that the mission creep needs to end that the Fed can't be doing everything and anything uh you know like intervening in all markets or even getting into things uh outside the scope of monetary policy uh you as defined here.

And the other aspect which I think some of the people have spoken to is that the mission creep needs to end that the Fed can't be doing everything and anything uh you know like intervening in all markets or even getting into things uh outside the scope of monetary policy uh you as defined here.

So, one, I think that it is true that the Fed needs to be reformed, but this idea that the reform means a less independent Fed, and I'm not sure what that means.

As I said, like I haven't been a big fan of Fed policy.

So, I'm all for reforming the Fed, but if reforming the Fed just means that you just want to cut interest rates because that's going to lower your debt burden, I think that that is the wrong policy.

So, there's a big uh difference between independence and reform.

You previously have warned about uh you know the high levels of uh government debts around the world.

How do you see that now?

Well, it's played out this year everywhere except America that we've had sort of in UK, Japan, uh e France, in all these places the incredible debt burden that these countries have at some point in time has come to be an issue and they've been forced to react to it in all these places in some way particularly.

Why why has it not become an issue in the US?

Well, I think for two reasons.

One that there is incredible faith I think in AI and it's playing out in two ways.

One that because of the faith in AI there's so much money which is still flowing into America uh like is happening.

Two there is an implicit bet that the that because America is at the leading edge of AI that there'll be big productivity improvements in America and those high productivity improvements will help stabilize the debt to GDP burden.

And the third thing I think which has been the big surprise to most of us is that actually this year in America the deficit as a share of GDP while very high still has actually come down

Partly because of tariffs.

Tariffs.

Exactly.

So I think that's

Tariffs they they are profitable.

Yeah.

Well in the short term at least

At the surface.

So tariff revenues have helped bring the deficit down by 1% of GDP.

So no now if you took away the tariffs do you think it would be good news or bad news for markets?

I think that if you took away the tariffs, the concern on the deficit would come back a bit just like

More more than the uh positive effect of

Yeah, but I don't think the tariffs are going to come out, you know, completely.

But I think that in terms of the fact that as I said that it's not as if tariffs have not had a negative effect this year.

The point I've made is yes, tariffs have had a negative effect on economic growth. it's just been offset in a huge way by the optimism at least uh among businesses on spending and stuff on AI.

So tariffs are having a negative effect on economic growth just that we don't think it's having a negative effect so much because at an overall economic perspective the positive spend from AI is offsetting the damage being caused by tariffs.

What has changed when it comes to the rivalry between China and the US over the last year?

I think that the uh realization that there is especially in America that there's much more dependence on China than they had expected right because at the beginning of the year the calculation among most people was that uh China is the big uh exporter and they need the American market come what may.

Because at the beginning of the year the calculation among most people was that uh China is the big uh exporter and they need the American market come what may.

So it almost seemed as if all the bargaining chips were with America.

But I think that what we have learned in the last few months is that China too has its bargaining chips whether it's the rare earths uh you know uh uh advantage that it has.

So I think what's changed is the fact that there remains deep distrust but I think that people like Trump are you know uh quite transactional and and they also realize what the independence is.

So I think what's changed in the two countries is a realization that there's much more dependence uh and and you just can't wish that away.

Richard, lastly uh if you were to predict what's going to happen over the next uh 12 months.

So uh what are the most important things?

I'm thinking about that as you know every year I write about my top 10 trends of the year and I was just putting some thought to that.

So I think

So you can share it with us.

Well, I think that the big thing is going to be that how much this a like it's all about AI, right?

As to how much it's going to sort of uh wobble and is this bubble going to burst in 26.

That's the really big question. my my get you know like as you know these things uh having done this for so long which is that to predict exactly when a bubble will burst is impossible but you know there's a checklist that you can keep that you know we're having so at the slightest sign that interest rates are going to go up I think is your sign that okay this is done now now you can be a very smart investor which some people are and say I'm going to wait for that sign and I'm going to wait for that bubble to burst before I actually exit this or there's something else which I found and let me tease this because I think that if there's you know there are times when you have a moment of epiphany that this is the single best investment idea and I and I was doing some work on this and uh just to tease it out as one of the big trends I think of 26 you know that there has never been a better time to buy quality stocks in fact uh that quality stocks have done so poorly in the last 12 months quality as you know as a factor has really underperformed

Now you can be a very smart investor which some people are and say I'm going to wait for that sign and I'm going to wait for that bubble to burst before I actually exit this or there's something else which I found and let me tease this because I think that if there's you know there are times when you have a moment of epiphany that this is the single best investment idea and I and I was doing some work on this and uh just to tease it out as one of the big trends I think of 26 you know that there has never been a better time to buy quality stocks in fact uh that quality stocks have done so poorly in the last 12 months quality as you know as a factor has really underperformed

Or there's something else which I found and let me tease this because I think that if there's you know there are times when you have a moment of epiphany that this is the single best investment idea and I and I was doing some work on this and uh just to tease it out as one of the big trends I think of 26 you know that there has never been a better time to buy quality stocks in fact uh that quality stocks have done so poorly in the last 12 months quality as you know as a factor has really underperformed

And I and I was doing some work on this and uh just to tease it out as one of the big trends I think of 26 you know that there has never been a better time to buy quality stocks in fact uh that quality stocks have done so poorly in the last 12 months quality as you know as a factor has really underperformed

In fact uh that quality stocks have done so poorly in the last 12 months quality as you know as a factor has really underperformed

Yeah and typically characterized by by growth, high return on investments.

Exactly.

You know, very high ROE, low leverage, and also like uh you can screen for some valuation and growth criteria.

So, what I found is that the last 12 months have been one of the worst runs that quality stocks have had uh in recorded history.

So, this could be a great time.

You know, there's so much hand ringing like in our industry, which is that okay, okay, what should we buy?

You know like on one hand like everything looks so expensive because of uh the AI bubble and stuff on the other hand even some of the insurance like gold and all have run up so much so you know we can't put more money there like what should we do you know there's always this

You know there's always this

Okay so one prediction so uh is is that a prediction that quality stocks will come back in favor

Yeah I think quality stocks will come back in favor

I think that you should just buy quality and uh and like you know like sit if that was the one big thing if if I had to do

So that's going to be so I think that as I said I do feel at some point in time next year the AI uh bubble ends in some way possibly because of higher interest rates exact timing I don't know but and buying quality stocks in general coming back in favor I think is the other big thing that I can think about and the third thing I do feel is that you know this uh trend of international markets outperforming the US I think that this these tend to be multi-year trends once they begin and uh I don't think that 2025 was just a flash in the pan.

And buying quality stocks in general coming back in favor I think is the other big thing that I can think about and the third thing I do feel is that you know this uh trend of international markets outperforming the US I think that this these tend to be multi-year trends once they begin and uh I don't think that 2025 was just a flash in the pan.

And the third thing I do feel is that you know this uh trend of international markets outperforming the US I think that this these tend to be multi-year trends once they begin and uh I don't think that 2025 was just a flash in the pan.

So, I think that this trend of international doing better than the US, I think is a trend that will continue in uh 2026.

Very good, Richard.

I look forward to coming back in November next year and we will uh go through these predictions and see how it went.

Great.

Thanks.

Fantastic. Thank you.