00:00:06:21 - 00:00:29:22 Unknown Welcome, everybody to the Art of investing Summer edition, brought to you by IG, the global investing platform. That's right. We're on our summer holidays. You can see spice in his superyacht in central P and CJ Donan is shared in Skegness. Yeah, it's quite here. Rich very quiet. So today we're going to bring you Leopold and his leverage. That's right. 00:00:29:22 - 00:00:55:18 Unknown By the end of today's episode you're going to know how to run your own hedge fund and how not to. But before we get into that, we're going to have a look at this week's portfolio performance. It's a good one. 00:00:55:20 - 00:01:19:00 Unknown So we got a week on week performance of up 4.2%. We got year to date up 13%. And now since inception that number growing to up 25.5. This is the last week of the first year of the portfolio. So quite a stellar performance. We'll come back to that later though, because we want to hear why those performances have come about. 00:01:19:01 - 00:01:40:05 Unknown Let's go to the space market update. Thanks, Rich. Quite an interesting week. Very interesting in fact. And we're going to debate about why the big moves have happened later on. But basically you've seen another outbreak of peace or semi peace in the Middle East. So Iran and Oman looked like they'd some sort of deal in the background to semi-open the Straits of Hormuz. 00:01:40:06 - 00:02:09:05 Unknown So the bombs paused, stock markets rallied a huge amount. All fell 10%. Some people might say it might be down to Kevin Walsh. Weak statement as the Federal Reserve chairman last week. But net net. The US dollar had one of its biggest falls in the last year or so, down 1.6%. Commodities all had a great run up, sort of between 5 and 10%, and you saw a huge swing back from the value companies, back into growth companies. 00:02:09:05 - 00:02:33:22 Unknown Remember, we talked in last week's podcast about how value had had a very good sort of run for the last couple of months, or we see quite a big reversal of that this week that was led by the US markets and those that are heavily skewed to technology and growth companies. So we saw all new time highs again in the main US markets the S&P, the Dow, the S&P equal weighted. 00:02:34:03 - 00:02:51:17 Unknown The Russell 2000 Nasdaq had probably the best week of all of them, but still below its all time high because it had been hit, if you remember, by about 1,213% in the last couple of months had gone into correction phase, as we mentioned last week, it's one of the reasons we went in and bought a little bit in our portfolio. 00:02:51:17 - 00:03:12:24 Unknown And obviously that's done this well on a one week view anyway. Let's not get short term in Asia. You saw Korea have its biggest ever one day rise. It was up 17% in one day. And that was led by all the usual stocks like SK Hynix and Samsung. It's only got two stocks. Net space. Yeah but who cares. 00:03:13:02 - 00:03:30:18 Unknown They're two good ones. Is that right? Two stocks make up nearly 50% of the index I think. Yeah that's that's about right. Absolutely I think it's 55 actually. But no I'd say if they're good ones we don't mind if they're bad ones. Then we would we would were and what we'd have. Well we'd give to have some of those in the UK market. 00:03:30:19 - 00:04:03:04 Unknown It was new highs also in the UK market. I'm just saying I'm just getting that in there because you're trying to you're trying to cost over the Footsie. 250 new high and new highs in the FTSE 100. Well I was going to mention that in the, in the, in the market report when we talk about the portfolio because we obviously added to our our Footsie 250 last week which is again like the Nasdaq add has done as long as good and we added to Japan as well if you remember, which didn't make any all time high but had a very big bounce. 00:04:03:04 - 00:04:24:13 Unknown So a lot of it is being driven by some fantastic corporate results that coming out all around the world, particularly in the US. But now we're on track for our seventh quarter in a row of double digit earnings growth around the world and particularly in the US, and we're running in mid 20s percent growth in the US. Even in the UK, we've managed some good results. 00:04:24:13 - 00:04:46:17 Unknown Person in the house builder was up for percent. WPP, which is big marketing company, used to be run by a guy called Martin Sorrel, who is considered one of the gurus of marketing. Their shares are up 25% today, while not so good with air, unfortunately down 4%, but suffering like many companies in that space and tourism or airlines because of the high all price. 00:04:46:20 - 00:05:08:09 Unknown And they're still suffering from that. So their shares are down 4% back into the tech world, which has been the main driver of these big rallies back up. We've seen Western Digital and SanDisk to big sort of memory. Companies in America actually had fantastic results. But the shares, both their shares fell very heavily. Actually, Western Digital were down 14%, SanDisk were down 9%. 00:05:08:09 - 00:05:36:10 Unknown But let's give you some perspective there. Western digital is still up 200% year to date and SanDisk is up 500% year to date. So although we've had a small drawdown, SanDisk is still the best performing S&P 500 stock this year. And I think this gives us a good chance to talk about our main topic of the day, and that is Leopold and his leverage, because everything that spice has mentioned so far all ties into this one story. 00:05:36:11 - 00:06:08:08 Unknown A 24 year old called Leopold Ashen Brenner. Now Leopold came from working for OpenAI, where allegedly he was sacked for giving ideas across to anthropic. But he laterally is known for running a $45 billion hedge fund at the age of 24, with huge positions in SK Heinecke, in Samsung in all the AI names. And that has really been pushing these names around for the past few months. 00:06:08:08 - 00:06:33:22 Unknown But it all came to a head last week where Leopold was effectively stopped out. And we're going to go through all the implications of that for the market today, and we're going to educate everybody on what leverage is and the dangers of it when it goes wrong. So that's coming up soon. In our main topic of the day, other tech companies, Apple, we we talked about had become the biggest company in the world again last week, overtaken Nvidia. 00:06:33:22 - 00:06:57:14 Unknown Well, it lost its crown this week. If the shares fell 9% after their results. And we'd sort of mentioned that arm who make chips that go into mobile phones. And Qualcomm, one of the biggest suppliers and memory chips into phones, had had bad results last week and that actually fed through to Apple. Apple were struggling to get supplies into their phones and that basically saw their shares going down 9%. 00:06:57:15 - 00:07:23:18 Unknown Still had a good year. Amazon on the other hand, and this certainly helped boost the AI trade. And the people who are worried about the big CapEx spend. Amazon shares were up 12% on their results, felt 22% since last week, and they upped their capital expenditure by about 10%. But they management very clear. They said they think they can now get a three year payback on any capital expenditure. 00:07:23:18 - 00:07:53:05 Unknown So if you spend $100 billion building a new data center, they think they can get that 100 billion back in three years. So the proof is going to be in the pudding. And those results were exceptionally good. And that helped LSA some of the tech names around the world. That's interesting. I had a wonderfully entertaining evening listening to the space conference call a couple of nights ago, and Elon said roughly the same thing 3 to 4 year payback on all this CapEx. 00:07:53:05 - 00:08:11:15 Unknown They're spending the market would like that. If that was the truth, wouldn't it? So, as you say, Rich, that, you know, if you can get your return on that capital investment within 3 or 4 years, that's as good as any industrial company that's making widgets will probably look to get as well. You know, you buy a new machine to make the widgets and you want that money back within three years to four years. 00:08:11:16 - 00:08:31:04 Unknown That's a standard accounting return. So that's that's pretty good. And what makes the world think a lot more positively now we need more evidence. Amazon is the first company to say that. As you say, SpaceX had their results this week. Their shares were disappointing. Their shares went down 12% on the back of the results, but they had been rising very heavily on the back of the Amazon results before that. 00:08:31:05 - 00:08:54:21 Unknown Net net at the end of the week, about down 2%. But what happens today is there's another 900 or so million new shares come into the market. And the market's been anticipating that one of the reasons that space shares are trading so far below their IPO price, their training about $112 a share this morning against $135 when they floated on their IPO a few weeks ago. 00:08:54:23 - 00:09:16:20 Unknown It'll be interesting spikes, wouldn't it? Because the market is short 25% of that initial free flow, knowing that all these new shares are coming to market. But these are people that believe in Elon, they believe in space. And what if they don't sell? What if the market is so short, these things waiting for people to sell and it just doesn't happen. 00:09:16:20 - 00:09:37:03 Unknown It's going to be one almighty short squeeze. Dream on, rich dream on. The bulls are back in town. It's now you know we can do all this AI in three years. You know everybody's short. It's all going to go up forever. Let's just watch and see what happens. Well, I think it's to be fair to Rich, one of his old favorites. 00:09:37:03 - 00:09:55:17 Unknown Palantir, out on the bare side as he'd like to short it. That shows were up 30% this week on the day of their results. Again, a company that's very heavily shorted. So we've talked before many times about the the pain that can come if you're short of the stock. They come in better than expected. You get very, very squeezed. 00:09:55:17 - 00:10:14:09 Unknown And you know like say you see these huge moves. To be fair the time to be sure it was at 200. That's when we were speaking about it at 125 as it was got into these revolt. I'm not sure it was so well shorted. Palantir is trading 158 bucks. The high was over 200. So here's a stock where you're saying it's everything's brilliant. 00:10:14:09 - 00:10:36:01 Unknown It's fantastic. It's trading 25% less than where it was trading. And the same is true of things like space and all these things. You know, we've got to be very careful here that these aren't just bounces in trends of in bearish trends because there was so much built into them. So you know I'm I'm comfortable with with things. 00:10:36:01 - 00:10:54:17 Unknown But let's let's have a bit more of a rigorous fact check around what we're talking about rather than just trying to, you know, sort of talk the good news the whole time. Oh, you can tell you're a bond investor. So I'm a bond that can I talk about bond speeds because they were really exciting this week. 00:10:54:19 - 00:11:17:24 Unknown So so so bonds this week did nothing. They were absolutely tedious. In fairness to them. They actually rallied a very small amount. And if you remember we were talking last week about the the fed chairman and his disappointing news conference that really put a foot on the the neck of the equity market. The equity market was very worried with the shot moving bond yields are higher with those bond yields rallying a little bit. 00:11:18:00 - 00:11:37:07 Unknown That was another factor I think, which helped the equity market recover and go, oh well, things aren't as bad as as we were thinking. So there's a bit of a relief around here. So so that I think is is important. And I'm just going to go back to one other thing which I know will upset Mark quite greatly, which is the FTSE 250. 00:11:37:09 - 00:11:54:12 Unknown And the only reason I go out to the Footsie 250 is people like me have been talking about it for years and years and years and basically fallen asleep thinking about it. It actually took out. It's high this week, the high that's been there for five years. It took out. So we should mark that and say, well done. 00:11:54:13 - 00:12:13:04 Unknown The fact it's underperformed every other market by anywhere between 50 and 100% is is our afraid putting that in perspective, in the same way, as I said, we need to talk about perspective around the other things. But well done. Take out the high. We've got a decent position to AMS next. Great things always have to start somewhere. CJ they certainly do. 00:12:13:04 - 00:12:34:00 Unknown And you know, I think to be fair, as I say, part of it is we're seeing and we've talked about this numerous times in previous podcasts is that the economic growth we're seeing and the benefits of AI in terms of better margins, more efficiency, etc., is beginning to spread out from the very biggest companies. And that's one of the reasons we've got a big position in the Russell 2000. 00:12:34:01 - 00:12:53:12 Unknown One of the reasons we've got a big, big position in the Footsie 250, which is the municipal sized companies in the UK. So as I say, we're we're in the seventh quarter in a row, a very, very good earnings growth out of America that is spreading into other regions. At ten of the 11 sectors in America. Those companies increase their margins quite substantially. 00:12:53:12 - 00:13:18:15 Unknown And that's very unusual to have all these sectors improving at the same time. And JP Morgan have done a bit of research that say that they identified that companies who adopted AI early and are using it efficiently are now getting about 1% extra margin in their profits, which is huge, by the way, given that most companies will struggle to maybe make 10% margins net net. 00:13:18:16 - 00:13:46:05 Unknown So that's 10% more than you were getting. If you add another 1% to that and get 11%, and that increases your cash generation profitability and helps the valuation. Yeah, I think the average margin facing P5 run is 14%. So yeah, definitely a big number there. But earnings season as a whole. So we're 66% of the way through at the end of this week, 28.8% growth in earnings versus expected 23%. 00:13:46:05 - 00:14:11:21 Unknown So I've got to say it's very, very hard to fight that now that we've got the leverage problem out of the way, which we're going to come to shortly, the earnings are really printing and S&P 500, it's hard to see it not going upwards towards 8000. So I mean the valuation is slightly less than 20 times forward earnings, which by the way isn't massively out of kilter with history. 00:14:11:21 - 00:14:32:15 Unknown Even Nasdaq stand at 21 times. And that, as you say, is the delivery of all this earnings coming through from the biggest and the best companies. So you know, that bodes well. As you say, we don't want to get ahead of ourselves. But nice to see things like the S&P and some of those broader indices including the Footsie 250 CJ taking out their all time highs this week okay. 00:14:32:15 - 00:15:00:13 Unknown So let's get that beautiful portfolio back up on screen then. As you can see a fantastic week especially in mining world. We had the Blackrock World Mining Trust up 10.4% shortly followed by Japan the Nikkei some intervention there. Which space is going to talk about in a moment up 9.5% MSCI emerging markets as we mentioned Korea helping that up 6.5% in the week and the Nasdaq up 5.9. 00:15:00:14 - 00:15:26:07 Unknown Spice this is your fantasy isn't it? It's your dream week. Absolutely I mean what a week. You know Blackrock World Mining. You say it's basically these commodity prices but also Blackrock World Mining don't just own the underlying commodity. They also own shares in those that make the miners if you like, in that area. And those mining companies tend to go up or down more than or less than the underlying commodity. 00:15:26:07 - 00:15:43:13 Unknown So as I mentioned earlier on, gold and silver at five and sort of eight, 9% and copper up 5%. And yet the companies, the gold mining companies and silver mining companies all done better than that. And Blackrock World Mining owned a lot of those. So they benefited from that. So they've risen by more than the underlying commodity prices. 00:15:43:13 - 00:16:04:21 Unknown This week Japan is rich mentioned. We've seen a really interesting intervention this week. So last on last Friday we had the Bank of Japan very early hours in the morning. Bank of Japan had their their meeting, their interest rate setting meeting, and they didn't change interest rates. Well, that was as expected. So you know, that was a good thing for for equity markets. 00:16:04:21 - 00:16:31:05 Unknown But interestingly, within the next 24 hours or so, it turns out that the Bank of Japan, along with the American authorities, had intervened in their currency market to support the Japanese yen, which was weakening very heavily. And, you know, there was ¥163 against the dollar for a very brief moment, and it's back at 157 now. So that intervention worked absolute classic as well. 00:16:31:05 - 00:17:05:16 Unknown So Scott sent the Treasury secretary in the US was caught on camera, somebody taking a picture of his notepad with a to do list by Japanese yen. How about that? You couldn't write. Brilliant, brilliant. Absolutely brilliant. The other interesting thing was they didn't sell treasuries, this old euro's. And so there's lots of lots of chatter going on in the markets that this actually undermining the US dollar. 00:17:05:16 - 00:17:28:21 Unknown And they're worried about undermining the US dollar then causing people to sell treasuries. So the big worry is that the central banks of the world would be selling dollars to say, by yen or selling dollars to buy something else. And in order to, you know, raise those dollars to sell, they have to sell their treasury holdings. And so they don't want them to sell their Treasury holdings. 00:17:28:23 - 00:17:54:07 Unknown So the US sole euros, not dollars to Japanese, have a law that they've got in Japan where they can borrow against their treasury holdings, they can borrow dollars, they can then sell those dollars, but they don't have to sell the actually the actual underlying bonds. So there's a big worry here that Besson's actually pretty concerned about the US bond market, and that's why he's doing it the way he's doing it now. 00:17:54:09 - 00:18:19:24 Unknown Clearly everyone's making up the story that suits them. Last week the Federal Reserve statement was was worrying to everybody. And so they're a bit worried about what that means for bonds. Are people going to buy those bonds? What's going to happen. But I don't think the game's over here. I think we should watch this quite carefully what's going on in the yen, because it may be identifying a little bit of concern about the US Treasury market. 00:18:19:24 - 00:18:40:24 Unknown So CJ, you're trying to say that Scott so worried about the long end of the yield curve that he phoned up the Bank of Japan and said sorry, Bank of Japan, stop selling treasuries to support your own currency. I'll come and help you and do it for you. Surely that would never happen. It's it's what happens in the new world we're in now. 00:18:40:24 - 00:19:00:11 Unknown It's either that or tariffs. I think they prefer doing that than tariffs. But that's the other way of playing it as we know from from our friends. Voldemort, we need to make sure that, you know, if it's not him, it's somebody else. Try and do something. And that's what I think was going on. So it'll be very interesting to see how things develop. 00:19:00:12 - 00:19:23:17 Unknown Remember, this is quite this is for people who haven't been in markets a lot. August is a quiet month. Don't much happens in August. The and they always say the B team of the people left at desks. Anybody at the desk. So listening to this I'm not really being rude to you, but the B team at the desk is the A team are on holes and therefore markets can move in fairly exaggerated fashion. 00:19:23:18 - 00:19:46:07 Unknown And you can argue that with the AI trades this week, maybe you can argue that in the dollar yen as well, which has moved significantly from where it was trading, we will only see what the truth is when we get to the other end of August. Right? Course, it wasn't just the yen that that benefited from, if you like, that, that dollar intervention, sterling sort of rallied about 1%, as did the euro against the dollar. 00:19:46:07 - 00:20:05:16 Unknown And this weaker dollar, as I mentioned, is the biggest fall for over 12 months. 1.7% in the week it will take has basically helped fuel this commodity rally. Remember, we've talked before that the lower the dollar, the lower the US dollar, because the commodities are all priced in dollars, the higher the commodity prices tend to go. But that also helped emerging markets. 00:20:05:16 - 00:20:26:08 Unknown We've talked before, a lot of emerging markets have to borrow money in US dollars. So if the dollar goes down, their interest charge that they have to pay on that effectively goes down to. That's one of the reasons, perhaps, why the emerging markets was our third best performing asset in our portfolio this week. You know, all those things coming together along with this AI bounce also helped, undoubtedly. 00:20:26:08 - 00:20:57:22 Unknown So we can we can group everything together in the worst performers on the week. And our fourth place best performer, which is the Nasdaq 100, up 5.9%. Know what has been happening now. We know the real story for the past few weeks is that the Nasdaq, and especially those AI names, have been getting absolutely hammered. So Sky next came to market a few weeks ago, and ever since then, the AI trade has been really, really struggling. 00:20:57:22 - 00:21:20:11 Unknown And you've been seeing a rotation that we've mentioned many times on the podcast before. So money has been coming out of the AI names, out of the Nasdaq and into defensive areas, which has helped our Indian position and it's helped FTSE 100 as well. It's also helped a lot of software stocks. So stocks you might have heard of like Adobe and ServiceNow. 00:21:20:14 - 00:21:47:16 Unknown And the overwhelming huge position in the market had been long AI and short or underweight software. And as that reversed and money came out of tech, it had to go somewhere. So it went into the Footsie 100 and went into India. No, because of Leopold Ash and Brenner. That all reversed last week, literally from when we were recording the podcast last week. 00:21:47:17 - 00:22:12:18 Unknown About 11 a.m. on Thursday morning, the story came out that this big hedge fund had had to be bailed out by Citadel. So that meant that the money could flow back into tech. And that's what we saw this week with a big performance from Nasdaq and the underperformance in our least best performance of the week, which is Footsie 100 pretty much flat in the week and India only up 1.3. 00:22:12:21 - 00:22:33:11 Unknown Okay, that was really clear about the underperformers. And the underperformers turned into the over performers this week and what's been going on the market. But you mentioned a new name there, a chap called Leopold Ashen Brenner. And to a lot of people listening to this podcast, they're going to wonder who the hell that is. It's on politician in Bavaria or something. 00:22:33:13 - 00:23:00:11 Unknown But no, it's clearly something very relevant to what happened in the financial markets last week. So it will help us to introduce our topic of the week, which is going to be leverage. Why don't you tell us a bit about Leopold Brenner and his story? So poor old Leopold has come from obscurity to one of the most talked about names globally in the financial world this week, and all on the weekend of his wedding as well. 00:23:00:16 - 00:23:31:18 Unknown And that's part of the story. So Leopold Brenner has just married the assistant to the head of OpenAI, of course, the big AI name behind ChatGPT. Now, Ashton Brenner, used to work there, and he was a very talented programmer in the AI world. And there is a story that he was let go from OpenAI because he's been accused of sending ideas to anthropic, which of course is the big competition. 00:23:31:18 - 00:24:01:16 Unknown So he left OpenAI and he wrote a thesis called Situational Awareness. And this the basically underlying theme was AI is going to take over the world. It's going to be the best investments that you could possibly ever dream of going up ten x 20 x, and that he really believes that he can choose which names are going to benefit, and just as importantly, which companies are really going to suffer from I. 00:24:01:20 - 00:24:30:07 Unknown So there was for investors that thought, well, this kid really sounds like you know what he's talking about. He's only 22 years old. But they were really impressed. And they seeded him with $250 million to start his own hedge fund now, since then, in the 18 months subsequently, his performance has been absolutely incredible. Until the start of July, this 24 year old was up 420%. 00:24:30:08 - 00:24:54:16 Unknown That's right. 420% in six months. Slightly better than our own portfolio. But there was one main reason for that Mr. Failing. And what is it? Well, I'm afraid Rich, it's our old friends when we have seen on many different occasions, in many different guises, but it's always the same and it's leverage. He wasn't just putting that money to work in the market. 00:24:54:17 - 00:25:16:23 Unknown He was borrowing a load of money from the banks to buy more of those things. So he had bigger exposure. Why don't you talk to us about a bit about leverage, Rich? And that means might as well think of some examples for people. So leverage is basically when you borrow money to potentially increase investment returns. You might have heard it before. 00:25:17:00 - 00:25:54:00 Unknown Every now and again it rears its ugly head. But if you you want to think about it in a simple way, it can magnify both your profits and your losses. So when it is accelerating those profits or making those losses even worse, then that's where risk management becomes so important. And the discipline and the people that you surround yourself with, especially if you're running a fund of up to $45 billion like Ashton Brenner was, you have to have the system in place to absorb when markets turn lower. 00:25:54:00 - 00:26:18:04 Unknown So, of course, leverage isn't just for rocket scientists and 24 year old hedge fund geniuses. We also all use it in our our daily life space. What kind of example would you give where people at home might have used leverage as well? The most obvious example obviously riches mortgages. And, you know, it's a well known sort of fact that you can get a mortgage against an asset. 00:26:18:05 - 00:26:38:24 Unknown Most of the time, banks are pretty conservative about how much they lend you against it, but from time to time they increase, they give you extra leverage. So back in 1986, when the housing market was bubbling away very, very strongly, they decided that they were going to give you more than 100% of the value of the house with no deposit. 00:26:39:03 - 00:26:54:04 Unknown So and they would let you borrow maybe 5 or 6 times your salary in order to borrow the money to buy the house. And they gave you the extra money so you could buy a sofa and bed and all the other stuff you need when you move into new house. And they were particularly generous to first time buyers. 00:26:54:07 - 00:27:14:08 Unknown Now, when the credit crunch came along, those lending criteria, instead of lending you 5 or 6 times your salary, they cut it right back down to three times your salary. And I think it's just nudging up again now towards the sort of four times the first time buyers, but that those those multiples have been set in stone for a long time. 00:27:14:08 - 00:27:36:02 Unknown But they flex depending on what the banks think about the risk of the underlying market is now back in 1986, the housing market blew up and eventually having gone up, you know, I bought my I bought my first house in 1986 and basically went up very quickly, right at the top. Absolutely went up literally 50%. I'm sitting there going, happy days. 00:27:36:02 - 00:27:52:09 Unknown I'm a very wealthy man. And I borrowed all this money, all the money I borrowed. I'm going to get back because my house values gone up. No, no, no, the housing market blew up, as you know. And the next thing I had to hand back about 20,000 pounds on an 80,000 pound purchase to get myself out of that property. 00:27:52:09 - 00:28:17:23 Unknown And that was because I borrowed 105% on my mortgage, very naively so, you know, kids out there don't get sucked into these things. Be sensible. Make sure you can afford the payments, even if the interest rates double and double again, because that's what happened back in 1986 87. Okay, spice, good example. But I'm going to talk more about the financial example because that I think is more relevant to our dear hedge fund friend. 00:28:17:23 - 00:28:42:05 Unknown And that is how does leverage work in the financial markets. Let's say I want to buy shares in company A, and the share price is a dollar and I have $100. Now I can just go and buy 100 shares at a dollar each. That's $100. That's fine. But hey, that's not the fun. That's not that's not what leverage is about. 00:28:42:05 - 00:29:04:00 Unknown What I can do is I negotiate with my my broker and I say, look, if I want to borrow some money. How much do I have to put down of that money as collateral? What's my margin? It's called. And he he says, well, Chris, you're a good credit. I'm going to let you have an initial margin. Stop laughing guys of 50%. 00:29:04:00 - 00:29:32:23 Unknown So therefore I don't buy a hundred shares. I can now buy 200 shares and I only have to deposit still my $100 because he has lent me the money to buy the other shares. So I've now got 200 shares. So clearly if my idea is right, I'm going to make twice the money I would otherwise have made and I'll be just as successful and happy as every hedge fund manager in the land. 00:29:33:00 - 00:29:56:06 Unknown The problem you need to understand, though, is if the stock price goes down, the collateral now is not a margin of 50%. I probably only given collateral now of 40%. Let's say I've got to find some more money to put into my account. Or my broker will say to me, I'm sorry guys, but I'm going to foreclose on you. 00:29:56:06 - 00:30:16:10 Unknown It's called a margin call. He says to me, put some more money in or you're going to be bankrupted by me. I go to them, find some money to put in. I've now got a problem. What happens if I haven't got that money? I've got to sell something else. And that's what happens when that leverage cycle moves against you, right? 00:30:16:10 - 00:30:40:24 Unknown So. So let me take this one step further and let me explain how hedge funds work to everybody. Because if you can understand how a hedge fund works, you'll understand why stocks move and can be as volatile as they are. And it might really help you understand what we talk about week after week after week. So going with Chris's example, same kind of idea. 00:30:40:24 - 00:31:06:17 Unknown I'm a new hedge fund and I'll keep the numbers round so everybody can can get a grasp maybe write it down. I've got $10 million of capital. So Chris and Spicer have given me $5 million each because they believe in my cautious approach to investing. Absolutely correct. Absolutely correct. So just like the mortgage, when you put your deposit down, I go to an investment bank, okay. 00:31:06:18 - 00:31:31:00 Unknown I probably wouldn't go to Goldman Sachs. I'll be honest. Maybe I'll go to JP Morgan now. JP Morgan Prime Services. Okay. So that's the part of the investment bank that deals with hedge funds. So Prime broker or Prime Services and I deposit my $10 million there. Now they very kindly offer to give me three times leverage. What does that mean. 00:31:31:02 - 00:32:03:01 Unknown It doesn't mean that I can go and buy $30 million of stocks or commodities or bonds, like in CJ's example. What it means I now have $30 million of a gross book now that remember, is split between longs and shorts. Shorts is when you put on a position and you sell shares before you've even bought them. So in a long position, you buy shares and you want them to go up in a short position. 00:32:03:01 - 00:32:26:00 Unknown You sell shares, you want them to go down and then you buy them back. So with my $30 million, if I was running a flat book, I'd be long 15 and short 15. So if the market crashed, everything would go down together and I might not lose any money. Or if the market rallies, they all go up and I might not make any money. 00:32:26:02 - 00:33:01:08 Unknown What I want to do is choose stocks that I think would go up and bet against stocks I think would go down. And that's exactly what Ash and Brenner was trying to do. He bought all the AI stocks. So everything we talk about each week the in videos, the microns, the SK Heinrich's, Samsung and SanDisk and anything with exposure AMD, all the stocks in in the Nasdaq 100 and some smaller ones as well. 00:33:01:08 - 00:33:40:04 Unknown That would go up with AI and he bet against all the industries that would suffer as AI came in and disturb that market. So you've seen software stocks in particular, information services like relics in the UK, ServiceNow in the US. Even Palantir was one of these software stocks as Oracle as well. So what he perhaps didn't take into account is that when you want AI stocks to go up and you want anti-air stocks to go down, you've only really got one single trade on. 00:33:40:07 - 00:34:21:14 Unknown So instead of having 15 long and 15 short, you've got $30 million of assets. Or in his case, $45 billion of assets. And they actually are all one trade. When it started to go wrong, it started to go really wrong. And his AI stocks were down 40% and his software stocks were up 25% in just two weeks. And you're going to cringe at this because his assets under management have dropped from 45 billion to under 10,000,000,000 in 2 weeks. 00:34:21:18 - 00:34:50:22 Unknown And at what happens at that point, the prime broker comes calling. And that's what closes him down and means that he has to find an exit. And the press was full of the stories at the end of last week, but he sold his positions on to another hedge fund and in doing so had seen his numbers go from, as you say, $44 billion of assets down to $6 billion of assets. 00:34:50:22 - 00:35:18:16 Unknown And this is where it gets really interesting, because there was rumors around ever since the SK Heinicke IPO, because Ashton Brenner was asked to be a cornerstone investor. So a large investor into this IPO and it went wrong in the sky. Necks started to drop. So Ashton Brenner was under pressure. Now a week past Saturday, people started to talk about it at their holiday homes in the Hamptons, talking to the press. 00:35:18:16 - 00:35:43:10 Unknown And they started to hear that he was in trouble. Now, spice, what happens when the market hears that somebody in trouble? Well, it's funny you should say that, Rich, but I was just about to say exactly what happens, because markets are ruthless and market participants are very, very ruthless. Once they know, you know a dog is lame or an animal is hurt, they'll be all over it like a rash. 00:35:43:10 - 00:36:02:06 Unknown So they just accentuate those positions so they know that you are short of something that's going up. They'll buy more of that position to make it go up even more, to make it hurt twice as much. And likewise, all the things you long of that you are hoping to go up. They'll be pushing them down on the other side. 00:36:02:07 - 00:36:22:04 Unknown So you'll have had some other hedge funds doing exactly the opposite positions to him in order to make it so painful that eventually has to close out. And as you say, Citadel came along and, you know, taking him out of those positions. I'm sure that Citadel and some of the other people have followed Citadel doing exactly that and bounced them back the other way. 00:36:22:04 - 00:36:42:19 Unknown And a lot of people have made a lot of money, but he would have lost an absolute shed load, as we know. So to me, there's two things here that's important. One is he's got leverage and he hasn't really managed his risk positions. He hasn't realized he's only got one bet on. But secondly, when he realized he got a problem. 00:36:42:20 - 00:37:03:13 Unknown He then told too many people he got a problem and asked them to help him. And the last thing you want to do is do that. I've got a person. I've actually got a personal experience of exactly this happening. I was the CIO at a business, which I shan't mentioned because it's embarrassing. And Mark was actually working with me at the time. 00:37:03:14 - 00:37:30:23 Unknown We had a fixed income product which had 4 billion under management. It was really successful product grown really strongly. Each was levered ten times, so we had 4 billion of money in and we had 40 billion of assets, which we were managing. The risk of. Are you Leopold in disguise. Well, well, well the the good news was the risk control was excellent. 00:37:31:01 - 00:37:53:20 Unknown Basically I did that. So I've got, I've got to say that haven't I. I've got to say that. But we had a disaster and the disaster was the team had done brilliantly, performed fantastically, decided they would leave another one of our competitor organizations came along and said, look how well this team have done. Let's let's offer them a huge amount of money so they can go and they can do this for us. 00:37:53:20 - 00:38:15:05 Unknown And they they took Judas coin and let us all down. And so suddenly I'm faced one weekend with traveling up to Glasgow, which gives you a hint as to who which organization it was and having to spend the next three weeks up there sorting out the mess of this team leaving. And what we had to do was think, well, hold on. 00:38:15:10 - 00:38:39:15 Unknown We got 40 billion of exposure. If the clients find out this team have left, they will quickly want to redeem their money. But every dollar they redeemed was $10 that we had to get out of the market. So we had to move quickly. So first of all, I got the team to sign a confidentiality course so they couldn't tell anybody for a period. 00:38:39:16 - 00:38:56:23 Unknown And then me, spice and a few others liquidated all the positions. But what we had to do was do it in a way that the market didn't guess what we were up to, because if it had, it would have then run those positions against us. Let's just say that we'd been around for a long time. So and we've got some very good contacts. 00:38:56:23 - 00:39:17:22 Unknown So we managed to get out of all our positions. We lost 1% doing it, which in a bond fund, which is looking to make 6% a year, is a fair amount of outperformance. But at least we got out of it, got our leverage down the market, found out the market, realized what was going on, but fortunately too late to hurt us. 00:39:17:24 - 00:39:44:05 Unknown And we live to fight another day. But a perfect example. Sleepless nights, worry, concern. Trying to tell people. Trying to find out. Trying to keep people in the dark as to what we were doing. Really, really, really tough. If anybody wants to watch a movie on this, the movie Margin Call is exactly what Chris has been through there, except it's the Lehman Brothers situation, so well, well worth a watch. 00:39:44:06 - 00:40:09:11 Unknown I was going to say that actually, it's important to realize that that fund was doing nothing wrong. It was acting within the guidelines it was allowed to. So it was allowed to have that ten times leverage that had been agreed with the regulator. So maybe the regulators that forward sometimes by letting people have too much leverage on these things, but they were within the limits that they were allowed and they'd done nothing wrong. 00:40:09:12 - 00:40:32:19 Unknown And as Chris said, we had to work very hard and very fast without the market realizing what was happening. I think it probably I think on the off the top of my head, Chris probably took 4 or 5 days business days before suddenly they they sussed it out and worked out what was happening. And then suddenly all the things we were left with trying to get us out of, funny enough, went to sell prices. 00:40:32:19 - 00:40:52:13 Unknown You didn't want to do that. And so we just held a nerve and wait until they bounced a bit and then started doing the same thing again. It was a very, very interesting and educational time for for all of us, I think. And it shows you what happens in times of stress as well, because as we said on our example, everybody wants to buy good stocks. 00:40:52:13 - 00:41:17:03 Unknown So hedge funds are generally long good performers and great companies and the shore of bad companies because they believe they're going to go down. So in times of stress when people start to lose money, then it can snowball sometimes. And you get this, you know, you can only sell what you own, and therefore you're selling all the best companies in the world, and you're buying all the worst companies in the world. 00:41:17:03 - 00:41:44:16 Unknown And every hedge funds go on the same positions. And it gets really ugly very quickly. And that's why when we talk about volatility going, if volatility gets to a certain point then you've got a good chance. It goes even further. People might ask listening to this why are we talking about it. And we're talking about it because leverage is always there or thereabouts when accidents happen in the financial markets. 00:41:44:16 - 00:42:22:06 Unknown We need to talk about this with respect to a book. I was reading through the good books, a book that people should should read on their summer holidays called 1929, and it's by Andrew Ross Sorkin, who wrote a number of the books about the financial crash. And what he's done is he's accessed a lot of extra material, which was available from that time fed chairman's private diaries, banks, chairman's diaries, chief executive stories, those sorts of things to try to piece together what happened in 1929. 00:42:22:06 - 00:42:42:12 Unknown And for those people on this podcast who've never heard of the stock market crash in 29 and what happened, essentially the market fell very, very heavily. And then that brought about a depression that lasted for nigh on ten years. So when the stock market went in 29, it was a proper, proper destruction. Who are you working for then? 00:42:42:12 - 00:43:14:02 Unknown CJ thank you very much. I wasn't working for fun enough. Not even I'm that old. But if I was, I'd have been working for one of those firms. I've got no doubt, because it was exactly the same sort of markets as we have or so many. There are many similarities to the markets that we have today, and this is what I found so interesting about this book, that if you look at what it says was the cause of the Wall Street crash, or I mean, what he says, it's clearly an opinion. 00:43:14:07 - 00:43:45:03 Unknown You can look then at what's going on today and try to draw an analysis or analogy of where we are in that situation. Now, this is what he says. Having looked at all this stuff was the main causes of of that terrible crash, extreme leverage and margin buying. Well, that's what we're talking about in terms of the leverage in the market now. 00:43:45:03 - 00:44:10:04 Unknown It was more then I mean, people were putting down 10% deposits and being able to borrow, therefore 90% extra. And so they were really, really, really heavily exposed. So so that's that's one. Now there are similarities today. And I would argue that if you look to things like, SK Hynix, you would you would see some of that behavior. 00:44:10:06 - 00:44:35:11 Unknown What do we have today. We have these new vehicles that have been created over the past 6 to 9 months where you can live, you can buy a fund that's leveraged three times to either the market going up in a particular stock or the market going down in particular stock. And people say, great, isn't this fantastic? Well, it is if you get it right. 00:44:35:13 - 00:45:05:05 Unknown But if you get it wrong, it's a disaster. Let me give you one very quick example. SGI NICs have a there's an exchange traded product, which is a three times long SK Hynix product. If you bought that on the 22nd of June, which was the peak of the stocks in Korea, it was $35. That was now what the instrument gives you is three times the return from the date you bought it. 00:45:05:06 - 00:45:31:09 Unknown So if you bought it, let's say you were you were smoking this the spicy euphoria cigarettes that he is having most of the time. And you said, right, you know what? I've fallen for it. I'm going to buy $35. I'm going to buy that day. It's going out for ever. Would you believe those things trade today at $0.84, you have lost 97.5% of your money. 00:45:31:11 - 00:45:56:00 Unknown If you had bought those. That tells you why our hedge fund friend lost so much money. Because from that top to that bottom, if you leave it yourself up at the wrong time, that's a terrible, absolutely terrible performance. It's interesting that sometimes governments get involved to try and take this sort of euphoria out of markets. We only talked about it last week or the week before that. 00:45:56:00 - 00:46:16:10 Unknown Korea, the Korean government were doing exactly that. The Korean government are introducing sort of controls now to stop this margin by this leverage buying that we've seen didn't stop there. The cost be going up 17% this week or one day. But nevertheless, they realized that how much danger it was was happening. And China have done it before in the past. 00:46:16:11 - 00:46:40:24 Unknown And of course, they encouraged them first. And after encouraging them and getting everybody involved in the casino of what it was. They then try and slow it down. But that's the first one extreme leveraging margin buying second one speculative mania around new technology. Now in those days it was radio, telecommunications, that sort of thing. Nowadays we have AI. 00:46:41:01 - 00:47:08:20 Unknown The bells are ringing, the bells are ringing. That's true for you, right? Third one, retail and democratization of risk. All the investors in those days were courted by bankers, brokers you could buy on margin. Put your money in. You can make a fortune. What do we have these days after 2020? We have all these people. We've all seen the adverts, all saying, copy what I'm doing, make 200% in the next three minutes and people believe it. 00:47:08:20 - 00:47:32:05 Unknown And people give people money on that basis. So you've got a bit of that going on as well. The next observation was weak or absent guardrails. In those days there was no regulation. Now, at least these days we have pretty good regulation from our regulators within each of the individual markets. So I'm going to say that's a that's a plus point. 00:47:32:06 - 00:47:56:15 Unknown Up till now I've been saying this pretty similar. That one's a bit of a plus point. Now this is the one that worries me. Policy errors that turned a crash into a depression. What was the response or what happened around that time? At that time, the Federal Reserve were keeping rates very easy. The banks who were lending money to all these retail investors were saying, you can't possibly tighten rates. 00:47:56:15 - 00:48:13:24 Unknown We can't have rates going up. That isn't something we should do. We need to actually be cut. Is there a Donald Trump in the House? At the end of the day, we now have a fed chairman who is saying we don't want it raised right. We're going to do everything we need to do against inflation. We're going to talk. 00:48:14:00 - 00:48:35:08 Unknown We're going to be really aggressive, but actually is doing nothing. That's one of the things that happened there. But it's not just that similarity. They also brought in tariffs in 1930 which then added to the issues. And we seem to have tariffs as well. Gosh this is getting this is going to be a bit a bit a bit scary. 00:48:35:10 - 00:48:52:19 Unknown The final thing which isn't similar in my view is in those days you had to go down to Wall Street to know what was trading. There was no there was no ticker tape. There was no screen with it all on. So they would actually go down and queue up, which is where you see those big pictures of 1929 where everybody's around Wall Street. 00:48:52:19 - 00:49:19:22 Unknown They want to know where the stocks are trading. Has it crashed? What's going on? And we don't have that problem today. But there are a number of similarities here that make us at least think, are we getting a very mature in this bull run that we're in? And the thing that's worried me most has been the Fed's change of policy and communication. 00:49:19:23 - 00:49:50:02 Unknown We talked about this last week. The fed have come out under the chairman and said we're very we're very keen on keeping inflation down, but we're not actually doing anything about it. And the market's doing the job for us. Now. The problem to me about that is if the market's got to do the job for you and you lose confidence that the fed will be there, if there's a problem, then one of the big anchors of this bull market, which is the fed, will always do what's needed to keep the stock market in the right place disappears. 00:49:50:02 - 00:50:07:09 Unknown So of all the things that I see there from 29 and reading this great book, and I recommend everybody reads it on the summer holidays, it's a great read. Really, really interesting read is do can we rely upon the fed being there to save us? If that's a problem, which is what we have been able to do for the last ten years? 00:50:07:10 - 00:50:28:15 Unknown That's the thing that worries me. Guys. What are you think? Well, isn't it fair to say, Chris, and you've preached this many, many times to me. The Europeans will look after their bond markets because they remember what happened that, you know, started the war, hyperinflation in Germany. And that's why the Germans lead. The European Central Bank will always try and control inflation very aggressively. 00:50:28:15 - 00:50:51:22 Unknown And therefore, you want to be a bond investor in Europe, but they don't really care about what happens to equity prices or other asset prices. The Americans, because of the lessons of 1929 and the Great Depression, will always try and protect their stock market. And so even if interest rates are out of kilter, if that you start to see a crash in stock markets, they would step in and actually probably cut interest rates. 00:50:51:23 - 00:51:11:20 Unknown Even though that may hurt bonds, they don't care so much about the bond markets. They care more about the equity markets. What I was going to say is that I think that one of the reasons we've had a very good week in equities generally is that equity investors such as myself, believe the fed are doing what's called running the economy hot. 00:51:11:22 - 00:51:36:17 Unknown They are prepared to live with higher inflation, even though they don't specifically say it in their statements. But at the end of the day, they want to see this growth that is accelerating now continue. And their argument to the flip side is that this can be growth that doesn't bring huge amounts of inflation. Historically, central bankers are worried that if you get too much growth, companies put prices up too much and therefore you get inflation. 00:51:36:17 - 00:52:04:19 Unknown And then people have asked for higher wages and the whole spiral of prices going up and up and up. This time, I'm not going to say it's different, but there will be there's in the background, there's an implicit belief from people like Kevin Warsh. And he's been quite public about it, that because the adoption of AI actually brings possibly higher unemployment through youth unemployment, that is a dampener down on things like inflation. 00:52:04:21 - 00:52:27:24 Unknown Companies, as I mentioned in the market report, are getting over 1% more margin through pure profitability. If they're adopting AI so they are getting higher efficiency gains. This is not by them putting up prices. This is by them cutting costs, becoming more efficient. The people working for the company is becoming more productive. And that, I think, is the core argument this time that this this industry changed. 00:52:27:24 - 00:52:48:14 Unknown The adoption of AI is actually potentially quite disinflationary. And that's what I've argued for this over the last 12 months. If you believe, like me, that AI is going to be adopted, ultimately it can lead to companies being able to if they want to become more competitive, try and get bigger market shares by cutting prices, not by putting them up. 00:52:48:15 - 00:53:05:13 Unknown And those companies that put prices up are going to suffer because they haven't put the AI in to get the efficiencies to make the difference. And I think that's the big difference this time. So right now the fed in my view, is running the economy hot. Personally, I'm not worried about the inflation side. I think bond markets have moved a long way. 00:53:05:16 - 00:53:47:15 Unknown But you know how much further they go before people say I need to sell equities to buy bonds, because the bond yields are so attractive that it makes it a no brainer bet. And I think that that that is some way off. Still, I think August 27th is going to be so interesting because that is when all the top central bankers meet in Jackson Hall in the US, and that's when we're going to hear from Kevin Warsh, not as he is forced into at the fed press meetings, and he has to answer questions and stick to the statement at Jackson Hall, every year, the chairman of the Federal Reserve gets a chance to look longer 00:53:47:15 - 00:54:16:02 Unknown term and really put down his views and his path towards 2% inflation, as Mark thinks they're that they're running the economy hot and they don't have this 2% inflation target. Well, we'll actually hear the meat on the bones of what Kevin Warsh plans to do. And I think the path until then exit markets get excited. They run on this huge earnings growth without Leopold and the leverage. 00:54:16:03 - 00:54:39:15 Unknown Then we've got what I would call a clean and undisturbed market. At the moment, a lot of hedge fund managers go off to Sancho and to the Hamptons, and this is their holiday period. So their books are down. The leverage is down there, the positioning is lower than normal. And I think we see the S&P run into 8000. 00:54:39:16 - 00:55:04:06 Unknown And I think that will be will be a very good August. However, then at the end that last final few days of August, I personally would like to get risk down a little bit because anything can come out of of hole. I look at the similarities of 29 and I don't think we are there yet as the the, the child says in the back of the car. 00:55:04:08 - 00:55:28:20 Unknown Are we there yet? I don't think we are. But there are a number of things that have raised the risk in the market. And the big one to me, as I say, is warsh. Whilst I accept what Marx says and the view he believes in, that's not really the job of the Federal Reserve chairman. The Federal Reserve chairman is there to give you credibility in what the fed is doing. 00:55:28:24 - 00:55:50:20 Unknown And if you don't know what the fed is doing, and if inflation does not prove to be transient, as they say, remember they said that in 2021, 2022 and it wasn't. Now they're saying they're asking you to believe the same thing. This inflation is not going to evolve into anything else. It's absolutely safe as houses. The job of the Federal Reserve is to make sure they have credibility. 00:55:51:00 - 00:56:13:15 Unknown And if the fed doesn't establish credibility, then there will be a worry. The risk premium must have gone up. It may not go up enormously, but the risk must have gone up that there is an error at some stage. So I'm the same as you guys. I don't see anything in the horizon at the moment to worry about the markets continuing to move higher. 00:56:13:15 - 00:56:29:05 Unknown I think we've got a good position in the markets and if anybody disagrees, please say, you know, we sold some some bonds out last week. We added some more equities. All those have worked for us and done nicely. But I just think we have to be careful running into Jackson Hole at the end of August. We talked about last week. 00:56:29:05 - 00:57:02:01 Unknown Richards talked about it this week just now. That's when we're going to get a better picture. And if we do have a really good August, we should remember the seasonal patterns that we've talked about before, how in September, it's not normally a good time for equity markets, which we said that last year and we kept it. Those people who remember back to the start of our portfolio when we first set up the portfolio, we kept a little bit of cash on the sideline and the markets, you know, rallied a little bit. 00:57:02:01 - 00:57:27:15 Unknown So we were wrong to do that. But there's a seasonal pattern, which means it normally happens. So I suspect it will be right to reduce a little bit of risk in a couple of weeks time. But let's enjoy the ride for the next couple of weeks. So I'm not suggesting any changes to the portfolio this week. I think we stay as we are and wait for the good ride into the end of August before we think about maybe taking a bit of profit. 00:57:27:16 - 00:57:51:00 Unknown Now talking about enjoying the ride. Well, you enjoy your summer holidays as well. No matter where you are. You can find us on Instagram, which is the art of investing pods or on TikTok, underscore the art of investing for some behind the scenes footage and the best clips of today as well. So that's it for today. We hope it's going to be a quiet August no. 00:57:51:00 - 00:58:02:19 Unknown 1929 style crashes here, gents, thank you very much for joining us. Goodbye from Chris. Goodbye and goodbye from space. Goodbye, everyone. And it's a goodbye from me. Have a great week.