Today's number 65. That is the

percentage of baby boomers who say other

generations quote don't understand them.

Put another way, most boomers still have

teenage brains, which would explain well

everything.

Welcome to Profy Markets. I'm Edson. It

is October 8th. Let's check in on

yesterday's market vitals. All three

major indices declined with the S&P

snapping a 7-day winning streak. Tech

dragged the index down with Oracle

falling 2 and a half% on reports that

its cloud margins may be weaker than

analysts thought. Tesla also sank more

than 4% after unveiling cheaper car

models that disappointed investors.

Meanwhile, Treasury yields declined as

traders took in the minutes from the

latest Federal Reserve meeting. And

finally, gold breached $4,000 for the

first time ever. Okay, what else is

happening?

Japan is on the brink of electing its

first female prime minister. Over the

weekend, Sai Takayichi was elected

leader of the Liberal Democratic Party

or the LDP, positioning her as the front

runner in parliament's vote later this

month. Since the Liberal Democratic

Party is by far the largest party in the

lower house, her victory looks all but

certain. What has been quite notable,

however, is the market's response. Since

her election, the Japanese stock market

or the Nikay has risen 5% and it has hit

two record highs. So clearly investors

are very optimistic. The new prime

minister will be stepping in at a

challenging moment both politically and

economically. Takayichi succeeds Shigaru

Ishiba who resigned last month amid

growing frustrations over rising

immigration and the cost of living.

Nearly 60% of households in Japan say

they are struggling to make ends meet.

Meanwhile, government debt is at 236%

of Japan's GDP. So, what does this

election mean for Japan? What does it

mean for their economy, for markets, and

also their relationship with the US? To

help answer these questions, let's hear

from William Chu. He is the senior

fellow and deputy director of the Japan

chair at the Hudson Institute. William

Chu, thank you for joining us on Profy

Markets.

Thank you so much.

Sai Takiichi's just been elected. Uh, it

appears she will be the new prime

minister of Japan. I don't know much

about her. I don't think most people

know that much about her. Tell us about

who she is. What is her background? What

is her platform? What can we expect for

Japan? Yeah. So, I think uh broadly

she's seen as a conservative lawmaker uh

within the LDP, which is the ruling

party that's led Japan basically since

1955. Um she's seen as a conservative

lawmaker who is conservative on social

issues as well as foreign policy issues.

Um she previously served as economic

security minister in past

administrations. And more importantly, I

think she's broadly seen as uh

essentially like a protege or a mentee

of uh former prime minister um Shinszo

AB who was who led Japan for almost 10

years uh the last goound. And so she's

seen as her election has is seen as a

victory for the conservative wing of the

LDP in terms of uh going forward in

terms of the policies that they want to

enact. there's popular disaection with

the LDP and maybe uh emerging of new

parties like the SATO uh that have

captured some of their uh more

conservative voters uh within the LDP.

So she's seen as a as a reconfiguration

of the LDP.

We saw that Trump was praising her

election. He said she is a quote highly

respected person of great wisdom and

strength. He said this was quote

tremendous news for Japan. Is that

because she is conservative or does she

align with Trump's world views beyond

just being a conservative? Uh what is

the what is the story between Trump and

Takichi?

Sure. Um so I think it's operating on

multiple levels. All right. Part of it

is the fact that they are both

conservative. Certainly I think they

share a lot of views in terms of uh

taking on progrowth strategies that

involve a lot of industrial investment

towards uh long sort of long-term views

towards you know like strategic sectors

right like semiconductors

pharmaceuticals um you know like uh AI

um you know high-tech stuff so I think

they share a lot of that they certainly

um I think they both believe in strong

defense uh I think they both um are very

wary of foreign sort of aggression so I

think on that regards right where

President Trump I think has been very

adamant that allies has to take more on

more of their own responsibility in

defense. Takichi has talked about

increasing Japan's defense spending

which already has been doubled in the

past 5 years to um new levels and I

think this is part partly in reaction to

this acknowledgement of Japan's own need

to do more on defense. So I think those

two issues uh align the two of them um

quite well. Right. Also, there's the

obvious uh connection with Abbe whom,

you know, I think Trump probably

probably understood and worked well with

Trump better than any other leader at

the time in his first term. And so, the

fact that she is sort of his AB's

protege, I think certainly puts her off

to a good start. But, you know, to be

very practical about it, you know,

President Trump also said similar things

of former prime minister Ishiba, who

famously was not an Abby protege. And so

I think part of it is also the fact that

the Trump administration uh obviously

sees Japan as a key partner in a lot of

its uh broader economic and diplomatic

and security uh priorities. And I think

the administration really values having

someone with whom they can work uh in

Japan.

Just looking at the market's reaction.

So we saw Japanese stocks rise after the

election. Uh the Nikay hit record highs

this week. You also saw this decline in

the yen. uh a decline in in long-term

bonds. So, we saw saw yields rising on

on long-term

uh maturity bonds. What do you make of

the market's reaction here? What do you

think the the market is telling us about

this new prime minister?

Sure. Well, I think the markets are kind

of telling us essentially what uh what

you know Takichi is sort of a longer

term reputation, right? So, she has a

reputation of being uh someone who is

interested in sort of a fiscal based

growth, right? She's not she's not a

fiscal restrainer. she is willing to

pressuring the Bank of Japan to cut

rates to uh sort of uh pursue fiscal

expansionism. Part of it is to address

uh Japan's short-term needs, right? So,

I think that the loss that the LDP

experienced in the recent upper house

election back in July, I think showed a

lot of popular discontent with uh with

ongoing economic policies, the feeling

that the governing parties were out of

touch on cost of living issues, quality

of life issues, and so essentially that

was a protest vote. So I think there is

near-term pressure on the Japanese

government and especially Takahichi to

support uh essentially you know um

fiscal expansionism right um via uh

cutting the consumption tax on food or

increasing um income um tax thresholds

but it's also mark about her long-term

plans in terms of pushing Japanese

companies and investing more in R&D that

will allow for long-term Japanese

economic growth in key strategic

sectors. So I think that is the what the

markets are doing in terms of uh are are

essentially reacting to these

expectations of Takiichi. Uh certainly I

think the expectation that you know

Japanese exports will increase that

there will be more spending. I think

that's driving the NIK. Uh it's also

driving sort of the weakening yen. Um

and it's also driving uh essentially the

expectation that Japan will add to its

debt burden long term which is why the

20 and 30year bond yields are

increasing. From my understanding, Japan

has one of the highest debt burdens,

highest debt to GDP ratios in the world.

I think the highest, correct me if I'm

wrong. Um, give us a sense of the debt

situation in Japan. I believe it is much

higher than the US. The US already has

an extremely high debt to GDP ratio.

I've never fully understood how it is

that Japan hasn't

uh hasn't suffered as a result of this.

it seems to be sort of the the anomaly

uh when it comes to the national debt.

But if we're going to if Japan's going

to increase the debt burden, is that not

going in the wrong direction for a

country that is already dealing with

extremely high debt?

Sure. So I think Japan's debt burden

right now is two times its uh uh total

GDP, right, which is the highest in the

world um among developed countries. But

I think what she sees is that

essentially Japan has a problem with

economic growth, right? It's been the

past few years it's been at 0.5%.

It is not you know and economic growth

and economic power is the basis of

Japan's strength. Takichi knows this.

Her mentor Shinszo AB knew this. They

both were trying to search for ways to

sort of incite Japanese uh growth. And

so the idea is that if we can keep you

know interest rates low, we can induce

Japanese companies to invest more in R&D

to produce uh to commercialize new

technologies that make Japan the

strategically indispensable country in

the world in in terms of global supply

chains, then maybe we can finally have a

pathway towards uh insured stable, you

know, relatively high long-term growth,

certainly better than 0.5%. And so in

her mind, uh maybe the argument of yes,

okay, maybe I'm risking um increasing

debt, but this is for a play for our the

long-term viability of our entire

economy. And so it's worth it. It's it's

a roll of the dice that has to be done.

What do you think is the the reason

behind this low growth in Japan? I mean,

is it because there is this riskoff

sentiment where uh investors in Japan

are more interested in bonds? They think

it's safer, so they're not interested in

the stock market. Is it a problem of

actual innovation? Are we perhaps not

seeing enough actual technological

innovation in Japan? And that's why

we've seen this kind of depressed

economic growth. Why are we seeing such

low growth compared to say America?

Yeah, I mean I think it's a it's it's

definitely a multic-causal uh answer. Um

but just to sort of uh you know uh throw

a few up, I mean I think one of it is

the fact that you know there is a I mean

I think the fundamental is the

demographic challenge, right? Japan is a

shrinking population. It is a aging

population. And so when you look at

different Japanese companies, right,

they so I'll give you an example. My

understanding is that Japan's like capac

industrial capacity is basically at

limits, right? Essentially, they have

cut capacity to a point where they

really don't have any extra capacity. Uh

they would have to invest in new

capacity if they want to produce more.

And a lot of that's due to because

Japanese companies feel that like this

is a this is an aging market. This is a

shrinking market. we are not really

going to really prioritize this. All

right, this is why Japanese companies

like Nepon Steel are investing in the

United States, in India, in Southeast

Asia, right? It's because they are

trying to find growth abroad. Uh the

other issue is that yeah, I mean I think

there are some challenges on sort of

like cultural sentiments in terms of

innovation. I think the Japanese

government is trying to change that. I

think you know frankly a lot of

ordinary Japanese or working Japanese

are increasingly also feeling like you

know what you know I don't necessarily

want to take the safe job at a big firm

for the next 40 years of my life let me

try something else right let me go work

at a startup and the Japanese government

itself is trying to encourage more

startups especially in emerging tech um

they have a you know they have a large

contingent of folks in Silicon Valley

essentially trying to start up uh trying

to understand startup culture

um in the United States, how the VC's

ecosystem works and they're trying to

replicate that when you know economic

growth is so low um you know you know

near zero for for decades why really

invest why not just invest in bonds

which are nice and stable instead of

taking a risk on you know like equities

and that kind of thing. So I think it's

it's a combination of both existing

economic standard uh factors um

demographic factors certainly and I

think there there is some cultural role

although I don't want to overplay the

culture card too much.

Takichi's been uh promoting a Japan

first campaign. At least that's what

I've read about. Just as we wrap up

here, how do the Japanese people feel

about Takichi at this point? Are they

excited?

Um, what is the sentiment among Japan

perhaps? Is it as polarized as America

or are the Japanese people pretty united

around this?

Um, I think the Japanese people are,

if I can be honest, I think they're a

little tired, right? I mean, if you

think about it, they've gone through

several um elections in the past year,

right? Uh they've they've had two LDP

presidential elections. They've had, you

know, one general election and also one

upper house election. So, frankly, I

mean, I think someone pointed out,

right, one of the key, you know, sort of

a center left, leftwing newspapers on

Japan, instead of covering the LDP

election had a front page story about

cats, right? And so, you know, I think

the Japanese public are also just kind

of tired of um elections, right? Uh and

as I said earlier, the upper house

election, the defeat that the LDP and

its uh coalition partner uh come

suffered uh is a reflection of uh

essentially it was a protest vote,

right? And so I think you know the last

three LDP leaders were relatively

moderate or uh a moderate leaning and I

think they're saying well you know let's

give her a chance. Uh certainly I think

she's uh well respected for her policy

uh her knowledge of policy and her

ability to uh implement things. She's

definitely a doer. And so I think with

the Japanese public, it's kind of like,

well, the last guy didn't quite work

out. Let's see if she can be more

effective. Uh, so I think the Japanese

people are hopeful, but they're also a

little tired and they kind of just want

to see something work.

William Chu is senior fellow and deputy

director of the Japan chair at the

Hudson Institute. William, we really

appreciate your time. Thank you.

Great. Thank you so much.

We'll be right back. And if you're

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We're back with Profy Markets.

Emerging markets are in the midst of

their biggest bull run in 15 years. The

MCI emerging markets index which tracks

24 markets including China, Taiwan,

India, South Korea, and Brazil, that is

up 28% so far this year. That far

outpaces an index of developed markets

which is up less than 17% this year.

also beats the S&P which is up 14% and

this is a sharp reversal from the

index's own historical performance.

Between 2010 and 2024 emerging markets

gained less than 9% over that entire

period. This year they're up 28%. So

what is driving all of this? Well, a few

things. For one, the dollar is

weakening. It's down roughly 10% this

year. And a weaker dollar means a

stronger return on international

investments. Why? Well, when you as an

American make an investment in say a

Brazilian stock, your return on that

investment comes both from the

performance of the stock, but also the

relationship between the Brazilian

Royale and the dollar. So, if the stock

is flat, but the Royale is up against

the dollar, then if you're investing

with dollars, you are up just due to

currency effects. This could also have

something to do with interest rates.

This is relevant because companies in

emerging markets overwhelmingly borrow

in dollars to finance their operations.

So when interest rates start to come

down as we are about to see well the

cost to service those loans goes down

which makes those businesses more

profitable which thus makes them more

attractive to investors. But perhaps the

most powerful force here is something

we've talked about for a while and that

is mean reversion.

What we mean by that is the stock market

in the US is trading at nearly 27 times

earnings. Historically, it's traded at

an average of 17 times earnings. And you

would think that maybe at some point

things will sort of rebalance. You

compare this to say China where Chinese

stocks are currently trading at 11 times

earnings compared to Brazil at 10 times.

Compare it to South Africa trading at

four times. So perhaps we are simply

seeing a return to the mean here, a

return to quote unquote normal. One

thing is for sure though, and that is

that Scott Galloway predicted this. He

was long emerging markets uh in his

annual predictions deck back in January.

So, let's give Scott a call and let's

see what he makes of this.

[Music]

Scott, good to see you.

Good to be seen, Ed. I'm here at home

sitting by the fire

about to

about to take an edible and listen to

the new Taylor Swift album. All of that

is true except for the last part, Ed.

Except for the last part.

I I cannot say I've listened myself. We

want to uh get your take on this

emerging markets rally. the emerging

markets up 28% so far this year way

outperforming the world and way

outperforming the US and you predicted

this uh back in January during your

annual predictions deck uh your

reactions and also give us a little bit

more color on the prediction you made at

the beginning of the year. Essentially

if you look at if you look at the US

versus the rest of the world it usually

goes in 7 to 10 year cycles and that is

from 2001 to 2007 the rest of the world

outperformed the US and then since 2007

uh the US has vastly outperformed uh

emer let's just call it emerging markets

and at some point the delta between the

two kind of conotes a reversion of the

mean and that is usually US markets

trade at a 25% premium him for a lot of

reasons, rule of law, uh, IP, inflow of

immigrants, capital, etc. A lot of those

things started reversing as far as I

could tell. And the 70% premium just

wasn't justified, and it just felt like

we were sort of overdue. In addition,

the thing that sort of triggered my

reallocation of capital out of the US

and to uh, non- US markets was I read a

survey that institutional investor

interests in US markets

outside of the US had hit a 15-year low.

And just as the consumer confidence

index sometimes preages or uh is a

forward-looking indicator of the

markets, I thought this is essentially

uh coulde what I described as a reversal

in the flow of the rivers specifically a

flow of the rivers of capital and

traditionally about 5% of global assets

are invested in emerging market equities

or excuse me about 8% and it had gone

down to five and if it

reverted back to eight and it never it

always overshoots. So the average is

eight, meaning it'll probably go back to

10 or 12. Even if it just goes back to

its average though, eight, that's about

that's almost a trillion dollars in

additional capital into these markets.

And

uh it kind of justifies or sort of

identifies

um or epitomizes the term market

dynamics trump individual performance.

So if you're any stock in Latin America

the last 10 or 12 years, it almost

didn't matter how good you were unless

you're Marcato Libre, you know, vastly

outperforming everyone because if

capital is being sucked out and the you

can't outrun multiple contraction.

Yeah. One of the big themes that we

discussed at the beginning of the year

was this idea or really after liberation

day was the idea of rotating out of the

US and into uh other other nations

essentially. We kind of have seen that

but not really. What we've really seen

is the US rallying. So yes, there was

the big dip after liberation day but

then the markets ripped back up and

they've been climbing ever since. We're

at around 14% growth in the S&P year to

date. So people didn't sell America like

there were, you know, rumors at the

beginning of the year, but what did

happen is they held America. They

perhaps bought some more America, but

they bought a lot more of everything

else. So I I I just pose this to you. Do

you think this is going to continue? Do

you think we're going to see a

continuation of the outperformance of

international markets, the

outperformance of emerging markets

compared to the US? Is this going to be

the trend going forward?

If I had to predict, I mean, it's so

hard to talk about the US reductively

because as we've said before, it's no

longer the S&P 500. It's the S&P 10

responsible for 70% of the markets uh

gains and then there's the S&P 490, the

rest of it. Uh I still think that on an

kind of riskadjusted basis, emerging

markets still look relatively cheap.

Having said that, you know, I don't

think it would be a bad idea to invest

in non-magnificent 10 stocks right now.

I mean, the key is diversification

because reality is nobody knows. I think

if we could wake up tomorrow and see

those stocks down 60% and they still

wouldn't look cheap, I find that is much

more likely than them, you know,

doubling, if you will, right now. So but

the problem is that these things come

unwound.

Everything is somewhat connected. You

can't you can diversify only to a

certain extent. In the 80s everyone

discovered that there was there was risk

adjusted or return greater return

through diversification. So everyone

listened and diversified. So if a if an

iron ore stock in Australia goes way

down, it impacts Japanese bonds and

impacts the S&P because everything is

somewhat connected. But I still think

that the emerging markets are just a

better value right now even with their

runup. Because as you said certain

stocks of the S&P have run up so much

it's dragged the rest of the S&P up. But

my biggest investment outside of real

estate is in a fund called Elena

Partners that looks for special sits in

Europe and Latin America. And they're

able to find they show me the stuff they

invest in. you know, airports in Chile

trading at, you know, five to seven

times cash flow. It just feels like

those companies right now, I find it I

find it very hard to find value, if you

will, in the US market, and I think you

can find a lot of value in emerging

markets. Um, so look, the lesson is the

the short answer is I don't know. What

I'm more certain of is that

diversification, I think, has never been

more important. And also to think about

diversifying

out of the magnificent 10 that now

represent 40% of the S&P 500 because if

you're just in an S&P index, keep in

mind 40% of that is in 10 stocks.

Yeah. All right, Scott Galloway, thank

you. Enjoy your night.

Thanks, Ed.

Well, for decades, the greatest trade in

the world was quite simple. It was buy

America. If you did that, you were

rewarded. Between 2010 and 2024, the S&P

returned nearly 415%.

Compare that to emerging markets, which

as we said returned only 9%. It was

pretty much flat. Then came Liberation

Day and investors started to wonder if

the new trade was sell America and that

is the trade we saw for a couple of

weeks. Then suddenly taco took hold.

Tariffs were pulled or they were cut and

then US markets ripped back up. The S&P

is up more than 14% so far this year.

But it appears that a new trade is

emerging and that is yes by America but

also buy everything else because it's

been a good run for the S&P this year

but it's been an even better run for

emerging markets and for that matter for

the rest of the world. You look at Japan

up 20% this year. You look at Germany's

stock market up 22% this year. You look

at South Korea's stock market up 48%

this year. In fact, the MSCI World

Index, the average of global stocks,

that has yielded a better return this

year than the S&P. So, the good news for

everyone is that we're all up this year.

You know, if you buy America, you're

rewarded. If you buy Europe, you're

rewarded. If you buy Latin America, if

you buy Asia, you are rewarded. In other

words, the best investors are buying

everything. There are pretty much no bad

investors in 2025. That is the great

thing about a bull market which we are

in. But the real test will come when we

see a correction when we enter a bare

market because at that point investors

will be forced to make a choice. It

won't be a question of both and like it

has been in 2025. It will be a question

of either or. Do I invest in America or

do I go elsewhere? And that is a

question we have not yet seen tested in

the AI era. And it is at that point that

investors will have to make some very

difficult decisions.

Thanks for listening to Property Markets

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