Stephen Burke discussed the economic and geopolitical risks and opportunities in the US and globally, highlighting the impact of the Trump administration's policies, inflation, interest rates, and climate change. He noted a $4 trillion infrastructure gap in the US and the benefits of re-shoring due to tariffs. The US saw a rise in new greenfield projects post-pandemic, with $1.5 trillion in investments since 2002. He emphasized the importance of productivity gains, defense spending, and the potential for broader economic participation beyond the "Magnificent Seven." The discussion also touched on the implications of AI and national security and the need for strategic investments in infrastructure and defense. Highlights: 📈 U.S. equities projected to see 8-12% growth in 2025, driven by increased corporate CapEx. 💰 Ramp-up in CapEx spending seen as positive for future earnings potential. 🌍 Global demographic trends, like declining birth rates, pose challenges for economic expansion. 🔄 Heightened M&A activity expected, leading to industry reshuffling. 🏦 Fed's monetary policy decisions will be critical in shaping market dynamics.
Key Insights:
📊 Equity Growth Potential: Analysts forecast a modest growth of 8-12% for U.S. equities in 2025, signaling a return to historical norms after previous strong performances. This reflects a cautious optimism amidst economic fluctuations.
💼 Corporate CapEx Surge: Major companies are significantly increasing their capital expenditures, which is seen as a positive indicator for future earnings and economic growth.
🌐 Demographic Headwinds: Declining birth rates and aging populations globally pose challenges for sustained economic expansion, requiring policymakers to address these demographic shifts.
🔀 M&A Reshuffling: Expectations of heightened merger and acquisition activity across industries could lead to significant restructuring and reshuffling, creating both opportunities and risks for investors.
🏦 Fed's Balancing Act: The Federal Reserve's monetary policy decisions will be crucial in navigating the balance between supporting economic growth and managing inflationary pressures, with significant implications for market dynamics.
It was the Monday morning, and I told him, I wish I had not done the slides just yet, because the market was starting to go into its full meltdown from the deep sync news. But I think we're starting to see today that we're maybe moving back to a little i Yeah, maybe back to reflecting on the news and figuring out where we go from here. So the taking a breath was probably a good idea. So let's jump into today's presentation. This was a US exception. Was part of the topic at the event, and there are a lot of views on it. I'll go through that and talk about the s, p, where we are today and where I see opportunities. So it is a whole new world, and there are a lot of risks and opportunities on the risk side, you definitely have the Trump factor and the her key jerking nature of policy under the administration, the threats and the unusual nature of that is something we're going to be dealing with for another four years. We did see this four years ago, although this may be ramped up a level or two because the experience that he had from the first go around. I think the other risks are real economic ones around inflation and interest rates and the debts and the deficits that are out there. I think the other risk is that the market expectations prior to to yesterday were, I think, pretty, pretty aggressive. I think it's not unusual after the run we've had for the last couple of years to have a pullback on news, particularly when there was so much money flowing into the AI area. But I think one of the big risks is the climate impact, and how do we pay for it? And I mentioned on the last call I was out in LA when the fires were starting, and were going on two weeks ago, and I don't think the news did justice to the damage that's being done there, and I think the challenges will be felt there for economically, for quite some time. But you also have the rebuild that's going on in the Carolinas and the storms there, and then going around the world. This is not a US problem. It's a global problem. And add to that, the rebuild that's going to go on from the conflicts, and when do they end, and how do we deal with that, and what is the damage longer term from all those things or issues we're going to have to deal with. But I think the other risk is, do we get the productivity gains that we need in this environment? So there are plenty of risks out there that we are going to have to deal with, and they'll be with us for some time. But I do think there is a case for continued US exceptionalism, even with the nature of this administration's threats to the rest of the world. And I think it's because of the underlying strength of the US and that we are poised for continued growth. I think it's the innovation that we have, the productivity opportunities, that are right in front of us right now. I think the massive investments we're going to continue to make in infrastructure on all levels of government, and even if Doge works and we slow down government on the federal level, spending on the federal level of government, the state local government, is going to have to pick it up, because we have needs that are real. We are in infrastructure two years, three years ago, the American Society of Civil Engineers, who does report every four years on the gap of needs versus the financing gap. So we had a $4 trillion gap. Then that's expected to grow, because we are under investing in those areas. But we have massive demands on the grid. We have massive demands from infrastructure needs. I think the RE shoring we touch on a little bit in this presentation is continuing, and a lot of the tariff threats are driving capital to the US so that people can avoid the tariffs, and that keeps business going here. Obviously AI is top of mind for everyone, but the rebuild I talked about, the climate national security, is an issue that's going to be with us for some time. I think the issues there are growing, and AI is making that more of a problem. You have the sub sea cable issues that are going on that are creating other issues with national security as well. And then what AI and what we're learning from wars in Ukraine is the old way of defending your country is not going to be what you're going to be using in the future. And we're going to have to revamp our spending, not just the US, but all countries, to deal with the new wave of technologies for fighting and protecting your your system. And then today, the US announced that they're going to look at a US Iron Dome. So there's more in that area that's going to more dollars are going to flow there. It may flow to different places than it has in the past. I think that's really the change that's going on that we're going to have to step back and deal. With is they're going to be new winners and losers. There always are. But this is at an accelerated pace. It feels like I think spending is going to continue. The spending that we just talked about is increasing corporate earnings. The distribution of those increases has not been even, and should not, not likely continue to be even, but you are going to see earnings continue to grow in aggregate, cash flow, continuing to grow, dividends, continuing to rise. Buy backs were a trillion dollars last year, and their announcements are continuing, and now there is a need for a more aggressive M and A. And one of the challenges that was delaying, that was people are hoping for rates to come back down so they can get better valuations, but I think they're starting to become a realization that rates are going to be a little bit more persistent at these levels, if not range bound plus or minus 50 or basis points or so from where we are as our RBM. But the US does have a lot of strengths, and we are driving capital to it, some of its policy. You could agree it's good or bad, but in the near term, it is having an impact. And you can see here from new green field projects announced since 2002 but look at the upward trend in the US, really, starting from, you know, the pandemic, and moving forward. But look at the UK and China, for example, go in a different direction. But these are the number of projects. These are the dollars. And you can see from the chart, the dollars are really on the rise in the US and India as well. The UK seeing a little bit of an uptick. China is still in out flows, and that is a problem that they're going to have to reverse to to deal with the economic challenges they have and get to the rebalancing that they need. Where's the dollars going? This chart gives you a pretty good sense of where foreign dollars are coming in for new green field projects in the US. I believe a lot of the real estate is around the data centers primarily, and I think you can see the other areas interesting in the market moves. Yesterday, CRM was up several percent. Apple was flat. So when you think about big movers and some of the shifts software and the ability to deliver technologies, AI was not viewed as having big spend in that area. So they're not viewed as that, but they are the delivering mechanisms for a lot of the artificial intelligence out to the to the world. So interesting where the spend is going industrial equipment. A lot of this is around the rebuild that we're seeing around the data centers and that move. So I think you'll see that continue. But you also are seeing areas that were highlighted the conference, like the autos, where you see auto components. People are getting ahead of the tariffs and shipping production facilities to the US in anticipation of tariffs. So while the the approach of the US government and the current administration and threatening tariffs is actually having the effect of driving capital to the US in advance of that, I also think that there's been a lot of pre buying of stuff in advance of tariffs too, which could see some softening in some of those areas to follow.
But one of the So, one of the big questions is, does this continue or not in terms of capital flows? And I think in the current situation that we're in the interest rate differential between the US and many parts of the developed world seek people seeking yield will come to the US in times of great uncertainty, we are safe haven and continue to be that. There was a lot of discussion around the reserve currency status. I don't see that as a threat in the near term or in the long term right now, in the next five years or so. The reason for that is several fold. One is it's very difficult for an autocratic nation to be a reserve currency. How do you trust a one person to tell you what everything's going to be? So that's one issue. But I do think there is a degradation going on with our policies that are creating swaps and other things that will slowly move reduce the dollar's impact if we're not careful. And I think that's one of the issues that was raised in the earlier discussion we're having. And I think Trump has to be careful that he doesn't snatch the feet out of the Jos of victory with some of his policies are actually fundamentally not bad and actually good for the economy. It's the going about it that's really off putting to a lot of people. But if you do that too much, you actually lose your trust. And when you lose the trust, people find other alternatives. I do think that's a risk that we go too far, and that's always the risk when you have aggressive foreign policies. On the other hand, people forget how liberal our foreign policies have been and how supportive we've been to the rest of the world as Europe, they haven't spent on defense because they were riding on the coat tails in the US for a long time. So some of this is a rebalancing, more than a complete change and an adjustment to maybe a better, more realistic. This approach to foreign policy. I think the approach, the tone and the rhetoric, is off putting. But if you strict past that and look at some of the fundamentals, it is, in many cases, good policy. It's just mask and bad delivery. But switching gears to the one of the big questions on people's minds is, what happens now with the Magnificent Seven, after day like yesterday and the broadening out of the economy. And do we see the other 493, start to participate? I think one of the comments that a lot of commentators are having, and Ed York, Denney, who's a close friend of ARS, was on CNBC this morning, and he sees this as very positive. The deep see opportunity as giving the other 493 the ability to improve their productivity without the big spend with the big like The Magnificent Seven are doing. And now I still don't think all the 493 will be able to take advantage of it, but it does give you the opportunity to see it broadening out beyond those seven, and it does give smaller companies the ability to get involved without the big cost, and that does help the economy and help jobs. So I think that is one of the things that will say moving forward. But I also believe the degree of broadening will be directly related to the level of the 10 year. And as you can see from the rate moves, we're right around 450 now. This is a moderate hit to be this is for our friends at Piper Sandler macro, Michael kanowitz, and he does a really good job of kind of framing this. But if you think about where we were coming into the year, there was high expectations for four rate cuts after the Fed made their rate cut. And what you're seeing is not that I saw from NBC today. They're looking at most two rate cuts this year. Even on the Fed's numbers going out 26 and beyond, they're looking at 3.9% on the 10 year. And I think that's going to be a struggle for two reasons. One is our debts and deficits are too high, and two is there's a fundamental strength in the US economy that's real, and if we continue to see that those things will tend to keep rates higher for longer, and that's one of the issues, and that will strengthen the dollar if the other economies are continuing to see some of the economic challenges that they're having. So while there's a lot of focus on the dollar strength in the US, relative strength, I think there's too much emphasis on what's going on the US, and not enough emphasis on the problems of the rest of the world, that it's not that we're doing so great. We've written this before, and I think it was the title of one of our Zooms, a couple on the last month was The us the best house in a bad neighborhood. That's not a good global neighborhood. So we look good, but it's like jumping over a very small hurdle right now. So I think this is one of the issues that is going to really weigh on the broadening out of the economy. The other big issue is the capital spend plans of the Magnificent Seven, and will they continue? And this is really interesting, because in the last week, two of them announced increases to their spending plans, and the question is, will they continue to do that or not, and what changes with that? And right now, I'm not sure that these guys are going to pull back and in the last quarter, in the last quarterly earnings, not the one starting today, many of the big companies, Microsoft in particular, was very aggressive in talking about their spending meta as well. And they see this as a need to continue for a long time, because if you don't start early and invest heavy early, you can catch up, and that's their view. I think that was up ended a little bit by the deep sea move yesterday, but I believe these guys will spend until it starts to hurt their stock performance, and then they'll make adjustments, similar to what meta did two years ago with their period of efficiency. But keep in mind, the big tech companies have been laying off people as well this year, and continue and for a while. So they are focused on their capital spending pretty aggressively, and their head counts, because they can find ways to do more with fewer people as well. So I think that's one of the, one of the issues that will be really important to keep an eye on. So how do we see the world today? I think we're benefiting from near term and secular trends and the problems of other nations, as much as our strength is what we do. I think it is the problems the other nations that's pushing us forward. I think China and Europe have had some struggles. We are starting to see some more positive returns out of their stock markets, because they've been down for a while, and it doesn't take much to move markets that have been under the weather for a while. So I think the German market is having a pretty good year this year, so there is attractive opportunities in those areas. But like the US, it's a subset. It's not going to be. S, p5, 100 that works. It's going to be, you know, probably something in the 7550 to 100 that it broadens out to not 400 I think you'll see a similar broadening out of opportunities in Europe and China and the rest of the world. But you really have to, have to play it very specifically. I think investors are now trying to figure out the implications of deep see that'll go on for months, not weeks and and even longer than that. But it is a real announcement, whether you
whether they did it at 5 million, or used other chips or not. It did give you a sense that you can use old technologies to get better outputs and to lower the cost, and that does give people the ability to compete without having the big spend that The Magnificent Seven we're putting out. But I think that's a really interesting dynamic that we're going to have to see play out over the next year or two. The broadening will depend on rates. I think we'll hear from the Fed today, tomorrow, that they're on pause. I think the our expectations are, and have been, rates are going to be higher for longer. That's been a theme I've been on for well over a year. We don't think, and that was really the strength the US economy and and the spend that we've put out over the last several years, you know, the amount of stimulus that we put into the system. Keep in mind, from the pandemic through the start of the war, was 50% of GDP between monetary and fiscal policy for a problem that may have been six or 7% GDP loss. So we still have a lot of stimulus that's working through the system. It's starting to slow down, but if we start cutting rates again, you could actually really see an acceleration of inflation, which is stubborn, which will be a challenge to get down from the 2627, levels down to the 2% that the Fed is targeting. I think there's a lot of optimism from a lot of people. When you hear the Fed guys talking about they see a path to getting rates down. Some of that is keeping the pressure off Powell and the fed from the Trump administration, who wants lower rates, but I think Trump will be disappointed on his desire for rates to go down, because I don't see the need or the opportunity to lower them. And if we do get too aggressive, you will actually trigger inflationary pressures that, I think will be, will be problems. I think the other issue that you're having a meeting in Palm Beach from the GOP right now, try to figure out how they're going to bring the Trump policies to light and to work. And there is a complicating factor, and it's the deficit levels that are really uncomfortable for a lot of the more conservative elements of the party, and how do they bring them in line? Is going to be a challenge, because we do have real issues here, and some of the policies, the idea of we'll make them up in tariffs, is not tested and most people believe that's not a reality. You'd have to get it on growth from that. And there is a time issue. I think part of the reason for delaying or talking about phasing in tariffs that's talking about is he is worried about triggering some shorter term inflationary pressures. But we're in a spot now where this is going to be very complicated, and Congress is going to have to come up with a way to figure out the trade offs. And I think the Republicans might keep boxing themselves in if they're not careful, because they could trigger exactly what they don't want. And in two years, we're going to have another midterm election for Congress, and you can see a pretty big flip at that time of the house. So there is a window here that people who are up for election are going to say, can I get can this help me get re elected or not, and how comfortable I am the debt and deficits don't come down, and we don't get the growth we're looking for. So we're kind of positive on the US markets right now, I think this pullback that we saw yesterday, we could have another one, another leg down, and still be only at a 10% correction level, which is actually not unhealthy, given that we've had a 40% plus move in the last two years in the markets. But I think rates and the spend are going to be the big issues and the limiting factors of what can go on. And I think we'll continue to spend here. I think other countries are going to up their spending as the US pulls back, which is going to help Europe and help some of these other areas get back on track better. I think the European problem continues to be, how do they take all the great resources from these individual countries and leverage it into a powerful economic force that they can take advantage of and scale up and win? And I think that's a real challenge because of the lack of leadership around the world that exists today. Because when you have such big problems, they require. Really clear, good decisions that are collaborative, because we have a world problem right now, global debt is at a level that should be really uncomfortable for people, and I'm a little surprised people are not more uncomfortable with that, and I think it's because there's been a lot of hope that rates will come down again, as they did with the oh eight period. But I think the economy can't afford that, and I think that's the difference between where we were before and where we were now. And I would say the governments wasted a massive opportunity over the last 15 years that actually the Big 10 tech companies took advantage of. So while governments should have been putting out 50 year debt at zero interest rate, so 1% they were not doing that. They're doing it now at four and 5% interest rates or even higher. But if you look what Apple did, they did 50 year debt couple years ago, one and a half percent, and that's what they were doing. So they use the capital markets the right way. Governments have wasted a massive opportunity of zero interest rates, and are now faced with really uncomfortable trade offs that they could have been much more put money into much more productive use at the time. And I think when we look back, that's one of the big mistakes that people will miss on when they focus on the Fed went too long and we put too much stimulus into the system, which I think we did at the wrong time. You can't over stimulate a good growth economy and not have bad outcomes. So I think that's something that I'm fascinated doesn't get word talk. And I think when they look back, they'll say that we lost a massive opportunity to do a lot of good along the way. So Mark, I'll stop there and open it up for discussion and opposing views always welcome.
So thoughts, questions, I see Bill and Adam bill, go for it.
There you go. Okay, almost. So do you be? Yeah, I definitely want to emphasize your point on market broadening. It was very interesting yesterday, the Dow was was up, actually 610 and the S and P equal weighted was flat. And so far, on a month to date basis, the s and p cap weight is up 2.2% which is this is going to be a great month regardless. Um, but the the S and P equal weight is up 3.9 so that's like more than 100 basis points difference between half weight and equal weight, which is admitted, ly, like it's unprecedented in in this market that's been led by the mag seven and the large cap components of the
that was all yesterday. Bill, yeah, that out performance prior to yesterday, the value was tagging pretty considerably, and 4% will do that for you. But I agree that. Is it that is something to keep an eye
on? Adam, yes, Stephen, in your last slide, you talk about attractive subset investment opportunities, particularly in Europe. You have Europe in China. But what are those sub sets in Europe,
they have the same problems we have. They're going to be spending, increase their spending on defense. They have an energy problem that they have to put more money the energy that I also think there is massive infrastructure needs everywhere around the world. McKinsey had a report several years ago saying that we had a $77 trillion problem globally. I'm not that was the spend required. I think the spending gap was not insignificant. So the US, I think we have like, a $7 trillion problem with a two and a half $2.6 trillion gap that continues to grow because we don't make the investments in a timely fashion. So I think those are areas. I also think we there will be big opportunities around rebuilds from Ukraine and other issues, but you do have climate damage that's going on that has to be taken care of. So it's all those things that are going on. I also think the whole industrial and military complex is, as you've talked about here forever, is going to be an area that's going to attract capital. I think one of the issues that Europe still facing is their legacy. Industries are not the areas that are attracting capital right now, and how did they deal with that? So when there's a lot of talk about the undervaluation of Europe, I look at it and say they're undervalued because they have old economy industries that are losing share. They are not big in tech as a on the aggregate, and they're one. Once they're leading areas for a long time was their financial institutions, and since the great financial crisis and the problems in Europe, they didn't recapitalize in the way the US did. So I think they have that weakening of their financial services sector has been one of the anchors. So they have to figure out that as well. And when you're down so long you can fix those things or find opportunities if you find the right companies making the turn around. I did see that HSBC is actually eliminating out of Europe, a lot of their investment banking, M and A and other industries, not only out of there, but out of the US as well. And I think they're focusing on Asia. I think that you'll see some of the industries making pivots like that, or companies making pivots like that. That'll give you opportunities to say they're doing something different. And is that going to work? If you think that's an area, go after it. So I think you'll see those same things. But I think the themes are the ones we talk about its energies, industrials, its defense, national security, is going to be much broader than that. And so I think those are the issues. But keep in mind that the tech sector, while there are great tech companies in Europe, the tech sector is much. Is tiny the US, it's it's huge. So I think that you have to look at these markets. I mean, say one's undervalued, one's over valued. I think the US is overval, and I said that in the last couple of weeks, but that doesn't mean that overvaluation can continue for longer than people shorting it can go broke. But I also think that there are shifts that start to happen, and you have to be looking for them. And while I've been very negative on Europe. I do think there are a number of opportunities that are starting, but you're also saying for us, opportunities where companies are looking to move their listings from Europe to the US, because the multiple different differential. And I'll give an example one, and I don't know the number where it is right now, even though we own it our portfolio. Okay? Ken Goldman underscore that as well. But we have a company in our portfolio called CRH. They're an aggregates company that was selling in in the UK at like a 12 multiple MLM. They're one of their rivals in the US, was selling at about a 24 they re listed to the US immediate multiple re rating, and the stock went up. Good business before that, better business now with a better multiple. So I think you'll see things like that going on Adam that will give you those
opportunities. Questions,
don't So Steve, I had a question, which is the RE listing of the companies that you mentioned, right from Europe to the states? Clearly, there's some arbitrage to be had, right? Or some valuation to be growth to be had. However, the question there is, did they have to, you know, was it the case that most of their business was in Europe, as opposed to the US, and did, and as a result, did they have to, let's say, shift their priority of business development or business growth in the US in order to support the US re listing? Yeah,
I think they I think they were benefiting from the opportunities in the US. I don't have their mix up top my head to check the guy did the actual work on it. I don't get into our stock research as well. This is the full time thing for me, but I do think that that's part of what you have to look for in each of those because just a re listing doesn't help but a re listing in it, and this was in a theme that we're big on. And when you look at the valuation difference too, of the US competitors versus them, it just was so that one was a no brainer for us. So I do think they had a significant portion of their business here already. There are others that are looking at actively re listing, though now, so something, just something to keep an eye on.
Any last questions.
Yes, Stephen, it's Anthony Gordon. Hi. I just had a question on Hi. How is it that when a foreign AI vehicle becomes main populace, and it's trending on Apple. Why is the US government not concerned as they are, such as with a tick tock purely it's the most obvious thing is that the AI is learning on itself, and every question and interaction that it's asked on anyone becomes a permanent piece of information. And so surely that gathering more information call it on US persons than the likes of a tick tock. So why has there been no response, reaction and so on, so on and so forth? To that,
I don't know the answer that. And. Today, I think if I had to, if I had to get one, I think Trump is trying to work with China to have a better relation, because if he is, Trump doesn't like more conflicts. He doesn't mind inter personal conflicts and threats. But I think he views his opportunity to negotiate with xi as something that he's going to be careful about he has right now Tiktok, where he's trying to work something with them. And I'm not a technologist, but I think the open source nature of this might have a different element, and Apple does have some protections, as I understand it, that helps preserve your data over there, where I think if you use the Google app, right now, I understood from CNBC this morning that there's a belief that if you go through the Google using deep seek, it can read through your emails and Gmail with if you go put it on Apple. Apple has a restriction that doesn't let you get through your whole system. Yeah, yeah. So I'm not sure how that I think, but I think that's what it is. I also think it's too new for the government to have a policy administration changes. Agree.
But clearly, if we're talking about it, they've already thought about this way back, and they've trying to figure out what to do. And this is a global concern. How do you amplify, you know, this rising tide yet keep security? So it's sort of a, you know, none of us know the answer. We don't understand it. So that that, yeah, I mean, that's the conundrum. How do you, how do you amplify intelligence and productivity, but keep, keep security for sovereign and for the for their people? If that's a concern, which clearly it is,
I think it is. I think you're on the topic of its national security is being redefined. It used to be protect your borders. Now it's protect your people, personal information and hacking and all that. I think that's a better question for Nick and Hamlet on another call mark, because maybe that's a deep dive we're doing a couple weeks because we have a little more information on what you secret means next
week is Bill D clear talk about tech AI and privacy. So,
yeah, I'll jump in and kind of answer your question. Anthony, the big difference is, is that deep seek is open source, and as I had mentioned earlier, before the town hall, I have friends who are actually reviewing the code. And so you can, anybody can look at the code. You can modify the code up to you with tick tock. It's essentially a black box, and that's one of the big differences. So if I download deep seek and I'm running it on my own hardware, I can control where the data goes. If I'm using Tiktok, I have no idea where the data goes.
Fair enough. Let's dive into it. Any last questions? Otherwise, we're going to adjourn. It's been Thursday. Oh night, Friday, Saturday, Sunday, Monday. And here we are, Tuesday. I fly home today. Recharge our batteries in the next one, which just to remind everybody, will be February 25 will be and then New York. There it is, right there. We have a private credit summit as well coming merging managers. There'll be an allocated session, Riyadh, April, in on april 24 a lot of more. Thanks filling in. We'll do a breakfast during milk six in May or San Francisco. Will be San Francisco, Barclay, Palo, alto Stanford, Seattle. It'll be June 16 to 18, Newport, July 20, Singapore and Mumbai. We're combining those for back to back in October, oh, London and on in September. Just keep on your radars. Um, and we're going to Texas. I. Um, we're trying to fit in a three city tour again. We haven't done that since 2019 actually 20, January, 20. So thank you, everybody. We appreciate your time.
Have a good day. Thank you for.