Like, I do the interview

... dramatic.

Okay, okay.

So on, uh, Monday, we, um, we put out a note, uh, essentially upgrading treasuries front end and back end, and downgrading US equities to manage risk, and just thinking about the potential focus on AI policy and AI build-out.

And subsequently, we have seen what's happened in markets, pretty, uh, pretty, uh, dramatic really.

But ultimately, the big picture is that after years of yield repricing, uh, in the US Treasury market, we think, uh, bonds are back.

We first went underweight long duration treasuries, it was more than six years ago, when US 10-year was below 90 basis points.

So what, what are your thoughts there at, at BlackRock concerning the Fed? Where will we be going? And y- you know, are you worried about any of these major changes in communications policy and the like?

This week, we're making some tactical view changes, in particular, changing our views on U.S. treasuries and U.S. equities.

Starting with U.S. treasuries.

We first went underweight U.S. long-duration treasuries back in 2020, October, when U.S. 10-year was still below 0.9%.

Since then, we have had brief periods of neutral, but stayed mostly underweight.

U.S. 10-year is now at 5.25%, and we are upgrading to neutral to lock in income.

On US equities, we are bringing overweight to neutral, partly funding the Treasury's upgrade.

And we're also monitoring

growing population focus on AI policy and AI build-out.

So here's what she had to say.

The environment is very complex right now because global saving blood is moving in reverse, which is very different from the environment that we experienced back in the 2000s and the 2010s.

And this is creating a very different environment in terms of the competition for capital.

Capital used to be cheap, and now it is expensive because not only the public sector is is needing to fund itself.

The private sector is needing to fund itself.

And that intensifying of this competition for capital is creating fragility and stress points.

in parts of the economy, in parts of the market that can complain a bit sometimes.

And if they're taking a blended approach, the actual connection point between manager and investor could get quite complicated.

Do you think the AI boom is a productivity revolution or do you think it could be a bubble?

You can be both, you know, you can be both.

You give it time, it gives you both.

I think right now, at this very moment, AI and tech names are actually not as stretched in valuation.

So when you say bubble, it infers that it is bubbly, multiple levels, but you look at US tech right now.

It's trading at the same multiple as US ex-tech.

Isn't that crazy? Isn't that crazy? Everyone is increasing CapEx commitment and re-underwriting and doubling down on their conviction in the AI transformation.

So is the balance of power shifting from public markets to private markets?

have him pee on the pole, got it,

okay.

then we walked to the fire hydrant on on the concrete uh sidewalk next to the curb he decided to pee on the fire hydrant okay that's when i was standing there watching him pee okay okay and a shadow comes out of nowhere and grabs my dog okay is your dog on a leash dog was on the leash okay i tried to pull him but In that split second, I didn't know what it was.

Then I realized when he was crying, it was a big dog.

I jumped on him.

Did you let go of the leash? I let go of the leash.

I jumped on the big dog, tried to pull him back.

What else did he

If this is not Nixon to China, what is this visit?

Well, uh, the summit points to a push to preserve near-term stability.

There are incentives on both sides to, uh, manage tension given the deep supply disruption in, uh, the Middle East, and also the interconnectedness in global trade.

Right? And of course, technology remains at the center of the strategic com- uh, competition, you know, with what's happening in the China AI models.

They are catching up in terms of performance, uh, of those in the US, and they are also competing on cost and efficiency.

The energy system, power system in China is large and less constrained, so lots, uh, going on, and I think some of that is, uh, reflected in markets as well.

Uh, what do you make of this market, this ear- earnings cycle we're seeing, um, and these valuations?

Well, uh, valuations look more attractive compared to this time last year because of the very strong earnings that have been coming through.

Is that suggesting, Wei, that maybe these markets are maybe too sanguine about, uh, the risk opposed by, uh, perhaps higher energy prices for longer?

I would say two things.

First is that, yes, there is a disconnect between energy, uh, market that is pricing in doable disruption and broader risk assets.

You look at US equities, that's just down, I think 4% from the beginning of the conflict, so there is definitely a disconnect.

And the second thing I would say is that I've spoken to a lot of investors the last three weeks and lots of, uh, clients globally as well.

There are really just two ways to invest in and navigate this, uh, this market.

The first one is directionally, and the second one is thematically.

... who can generate a return on all this investment.

Are you expecting the same caliber of returns to continue into next year? Do you expect tech to be the leader as we look into 2026?

I do expect concentration first before broader diffusion when we think about the AI, uh, trades.

Uh, we're talking about an environment, uh, where there is gonna be more leverage, there is gonna be more, uh, scrutiny over the individual company fundamentals.

So if you think about the latest, uh, correction in tech and more broadly in risk assets, actually you see greater differentiation, right? You see Alphabet doing better because of the, uh, model, uh, Gemini 3 and TPU, and you see Oracle doing a bit worse because of negative free cash flow as well as greater indebtedness.

So greater differentiation, concentration, before broadening out.

And I'm paying very close attention to if there are new revenues being created on top of existing business lines to really understand if the runway of AI is as big as people are hoping for.

So when we think about geopolitics, what have you make of potential opportunities when we think about energy or defense for that matter? I mean, we've been seeing a large bid in European defense.

Mm.

Weili of BlackRock, uh, here talking about the Fed and markets.

We do think that in the very near term, uh, markets can go with this narrative that, uh, because of weak labor markets, actually the, the, the Fed needs to, to cut.

And because there is macro justification for that, uh, maybe the long end of the curve is not going to be penalized, uh, uh, in that 10 premium may not go higher, uh, as markets challenge the, the, the, the Fed independence topic.

So there is a bit of a sweet spot for, for treasuries.

Th- Can I say, it's never been like this?

I think we're seeing some extraordinary K-shaped developments.

The, um, chart that I put out, the Broom- Bloomberg screenshot that I put out on LinkedIn is the profit margin of the S&P 500 large-cap and S&P 600 small-cap, and they're really starting to diverge, but that's just one manifestation of this K-shaped development, right? We see K-shaped recovery of the consumers.

We see K-shaped kind of default type of pattern in credit, and also including in private credit.

I think in a environment where w- we don't have rising tide of, uh, very easy policy lifting or bode of very easy fiscal stimulus kind of supporting everything.

Being very selective in terms of how we deploy risk is going to be the name, uh, of the game.

We see credit markets, you look at the- the- the- the- the cycle, there is almost a missing credit cycle, but digging under the hood, fundamentals supports the very strong, uh, uh, large-caps, uh, awash with cash, whereas the very small, uh, uh, players are currently under, uh, uh, pressure.

Really?

I asked her just the mathematics and dynamics of the massive capex in artificial intelligence.

I would say that actually it's remarkably hard to get precise numbers-

Thank you, I- (laughs)

... of recent investment for this capex because it's quite well hidden and they are not, uh, obligated to report them in a very precise form.

Um, but I would make the general observation that markets are letting them off the hook right now because it's really an existential build-out race.

You are either, uh, spending and overspending to stay in the game and stay on the table, or you, uh, will be viewed as, well, you won't be part of the, the future mix, right? So I think markets are giving these tech companies, uh, uh some leeway to, to spend and overspend.

We pay attention to free cash flow.

As a percentage of free cash flow, it's gone up quite a bit in terms of the capex spent, but not to a level that they can't afford.

That's normal in a bull market, isn't it?

I think so.

I think so.

Uh, and I think it's worth remembering that, uh, bull markets do not die from valuation and even if there's more focus around valuations right now, our study shows that it's not really as stretched as you would have expected.

Looking at price appreciation, you look at Magnificent Seven right now, at, uh, 32 times P/E is actually lower than the level at the beginning of the year because of the very strong earnings delivery and earnings upgrade.

So, we think that there is more to go.

Our study shows that, uh, for US tech more broadly, if they deliver earning in the region from 15% to 20%, their current multiples may be even higher than that, can be very well supported.

Thank you, I agree.

Here is Wei Li on the political rallies of a bond sell-off.

Well, UK seems specific, but the challenge that they face is not specific to the UK.

UK is perhaps more emblematic and, and, and more, uh, pronounced, but the bigger picture is this is a tougher trade-off environment facing the government and facing central banks.

The government is facing a tougher trade-off between fiscal discipline and also the need to spend more to boost growth.

And the central bank is facing a tougher trade-off between supporting growth and managing price stability and inflation.

So, in this world shaped by supply constraint because of mega-forses, we've talked a lot about them, a tougher trade-off-

Right.

... is really characterizing the UK in particular, but across the, the, the major economies.

Wei Li, what does it mean when, out past 10 years, we reprice? What does it mean for the shorter term paper that most of our listeners and viewers are in?

So, um, Tom, as you know, we have had the view of, uh, uh, the curve needing to steepen.

So in part, uh, there is a, uh, underweight to the long end of the curve, but there is also a preference, a, a implicit overweight to the front end, uh, of the curve.

And so far this year, we have seen significant steepening, but more, uh, relative to the very long end, so I'm talking about 30-year rather than 10-year.

But what has also happened is that the front end of the curve actually priced in more rate cuts, uh, especially kind of going out to the end of next year.

So that is, uh, further supporting this steepening view, meaning that it actually played out better than we expected.

We were expecting-

How, how do you see that these days? How do you think about geographic allocation of capital?

For Weili of BlackRock, it's an analog back to 2007.

If we think about the periods after global financial crises with the injection of immense pool of liquidity, companies that didn't have good fundamentals were rallying alongside companies with very good fundamentals, and this is what I meant by rising tides lifting all boats.

But we're now in an environment of greater dispersion.

We're in an environment of, um, secular transformations like AI, uh, that is likely going to imply winners take all.

So this is an environment where being active and selective pays off more, and this is not a hypothesis.

Our study actually shows that in the period coming out of the pandemic, actually the, um, additional alpha generated by good active managers-

Right.

... is greater compared to the period, uh, when rising tide was lifting all boats.

On the income statement, those successful companies that are rising, what does their gross margin or other margins down the income statement look like?

Honestly, it's incredible that margins in the US have held up so well.

They are testing a recent year high and it's notably higher than the equivalent in Europe.

in Japan, for example.

So there really are something exceptional about US companies.

But again, to the point of greater dispersion and differentiation, one would note, digging under the hood, that actually a lot of the margin staying elevated and pushing higher has been driven by tech names, Magnificent Seven, that are growing their revenues without actually hiring a lot more people.

On the other hand, you have companies, smaller apps, for example, they are more vulnerable to rates settling at a higher level compared to before.

Wait, if we define exuberance, is something to do with Alan Greenspan or something to do with Robert Schiller at Yale? How does Wei Li measure the exuberance of the equity market this summer of 2025? I

On the income statement, those successful companies that are rising, what does their gross margin or other margins down the income statement look like?

Honestly, it's incredible that margins in the US have held up so well.

They're testing a recent year high, uh, and it's, uh, notably higher than the equivalent in Europe, in, uh, Japan, for example.

So there really are something exceptional about US, uh, companies.

Uh, but again, to the point of greater dispersion, uh, and differentiation, uh, one would, uh, note digging under the hood that actually a lot of the margin, um, staying elevated and pushing higher has been driven by, uh, tech names, Magnificent Seven, that are, uh, uh, growing, uh, their revenues without actually hiring, uh, a lot (laughs) more people.

Uh, on the other hand, you have companies, smaller caps for example, that are more vulnerable, uh, to rates, uh, settling at a higher level compared to before.

They are more vulnerable to having to refinance, uh, their debt.

Wei, if we define exuberance as something to do with Alan Greenspan or something to do with Robert Shiller at Yale, how does Wei Lii measure the exuberance (laughs) of the equity market this summer of 2025?

So what's the tactical approach currently for you and the team?

Right now, we are investing for the here and now, which is to recognize that so far this year, we have focused a lot on tariffs and we're still focusing on tariffs, which is very different from Trump term one, where we had tax cuts first and then we had tariffs.

But now focus is going to shift also towards tax cuts, also towards deregulation, potentially unleashing tariffs.

animal spirit.

And yes, tariffs headlines are still flying around, but we do think that because of the constraints and immutable laws that I just talked about, we're going to get to some sort of landing spot, not likely derailing the tactical kind of risk-con view that we still have.

So right now we still like U.S. equities, and I would observe that at this juncture is no longer consensus as future investors across the world, Europe, the APEC, I would think that it's more divisive right now, but we still like it.

The condition for sustained rest of the world Europe outperformance over U.S. haven't been met, which is why we haven't chased the European equity outperformance beyond closing the underweight to neutral

How much does this just mean fade the extremes, fade the tail risks, because they always will come back to the center based on math?

So what's the tactical approach currently for you and the team?

Right now, we are investing for the here and now, which is to recognize that so far this year, we have focused a lot on tariffs, and we're still focusing on tariffs, which is very different from Trump term one, where we had tax cuts first and then we had tariffs.

But now focus is going to shift also towards tax cuts, also towards deregulation, potentially unleashing animal, uh, spirit.

And yes, tariffs headlines are still flying around, but we do think that because of the constraints and immutable laws that I just talked about, we're going to get to, uh, some sort of landing spot, not, uh, likely derailing the tactical kind of, uh, risk on view that we still have.

So right now, we still like, uh, US equities, and I would observe that at this juncture is no longer consensus.

I speak to investors across the world, Europe, APAC, I would think that it's more divisive right now, but we still like it.

The condition for sustained rest of the world, Europe outperformance over US haven't been met, which is why we're not, we haven't chased the European, uh, equity, uh, outperformance beyond closing beyond the weights to neutral earlier in the year.

You did write, "We think immutable economic laws will prevent a return to a maximal stance." How much does this just mean fade the extremes, fade the tail risks? Because they always will come back to the center based on math.

Just on a tactical level, has the rally already taken back all of the bullishness that you feel? And for now, it feels like maybe it's going to take a breather, even with some of these deals going on in the Middle East?

Well, tech has taken the brunt of market corrections since beginning of the year.

We think that there is more to go.

If you look at their guidance, they have all committed to their previous CapEx spend, if not increasing.

Broadly, companies are guiding down their CapEx spending.

expectations but for hyperscalers they continue to be all in on AI transformation and multiples now look a bit more attractive compared to before the sell-off.

So we do think that there is more to go.

What happened to the European trade? Where is it now?

Just on a tactical level, has the rally already taken back all of the bullishness that you feel? And for now, it feels like maybe it's gonna take a breather even with some of these deals going on in the Middle East.

While tech has taken the brunt of market correction since beginning of the year, we think that there is more to go if you look at their guidance.

They have all committed to their previous CapEx spend, if not increasing.

Um, broadly, companies are guiding down their CapEx, uh, uh, expectations for hyperscalers.

They continue to be all in on AI transformation, and multiples now look a bit more attractive compared to beginning, uh, uh... well, compared to before the selloff, right? So, so we do think that there is more to go.

Now, the bigger picture, we talked about the walk back and, and, and, and, and how markets are kind of jumping on incremental positive development.

But the bigger picture is that we're still talking about a landing zone or, uh, for US effective tariffs, somewhere between 10 to 15%.

What's holding you back still?

Um, A, did you see that in your business and B, do you expect it to come back now that we have the US markets kind of r- recovering a little bit?

Um, the answer is yes on both, uh, fronts.

I would say though, you know, people look at the fact that, uh, dollar was selling off as evidence of investors losing confidence in US exceptionalism, but I would say, you know, one thing that we heard from, um, our investors and clients is that for a long time international investors holding US assets have been somewhat, uh, quote-unquote "lazy" with their currency hedging strategy basically leaving a lot of their, uh, US exposures unhedged because of hedging cost, but also because hedging for currency oftentimes comes as an afterthought, but, uh, the volatility in the dollar so far this year has taught them to be more rigorous around their hedging strategy, which is in part why dollar has been selling off because investors are hedging their dollar, uh, US, uh, uh, dollar-denominated US exposure a bit more rigorously.

So it's not a sign...

Well, it cannot be interpreted just as a sign of international investment community losing confidence in the, in the US.

I think there is still quite a lot to go for US exceptionalism, especially for US corporates.

But is there stability on the Pacific Rim around this just crazy news flow? Is there a bet you can make there on Singapore, a bet on Taiwan?

Um, I think the Taiwan dollar episode is another example of the debt dynamics at play, right? Like if you want to shut off the, the trade deficit, foreign funding, uh, all of a sudden needs to also decrease, uh, in a commensory way.

markets kind of recovering a little bit?

The answer is yes on both fronts.

I would say, though, people look at the fact that the dollar was selling off as evidence of investors losing confidence in U.S. exceptionalism, but I would say one thing that we heard from our investors and clients is that for a long time international investors holding U.S. assets have been somewhat quote-unquote lazy with their currency hedging strategy, basically leaving a lot of their U.S. exposures unhedged because of hedging costs, but also because hedging for currency oftentimes comes as an afterthought.

But the volatility in the dollar so far this year has taught them to be more rigorous around their hedging strategy, which is in part why dollar has been selling off, because investors are hedging their dollar U.S., dollar-denominated U.S. exposure a bit more rigorously.

So it's not a sign, well it cannot be interpreted just as a sign of international investment community losing confidence in the US.

I think there is still quite a lot to go for US exceptionalism, especially for US corporates.

To bring it forward this time around with the numbers I'm seeing and with the legislation, are we finally at a point where America must confront its debt and its deficit?

Yeah, that is the other immutable law that I didn't talk about in detail that ultimately governs where we are now in the negotiation, right? So if you think about the dynamics of trade and debt, if we want to close the trade deficit very, very quickly, very, very suddenly, we're also shutting out the foreign funding market by the same magnitude.

Is there a huge separation in short-term and long-term between the two cultures?

Well, maybe there is some time pressure because we are heading into midterm, for example, in the U.S. next year.

So things need to happen a bit more quickly.

But what I meant by kind of rules that cannot be broken is more on the economic basis.

Specifically, we have the U.S. looking to reduce trade deficits, but trade deficit cannot be reduced without reducing foreign lending by the same magnitude.

So if you push that in that direction too quickly, it's going to raise interest rate and it's going to raise future debt servicing costs, which is why we saw the bond market rout last week.

And specifically, we did this kind of bag of envelope calculation, 25 basis point of long-term yields translate into roughly $50 to $75 billion per annum of additional debt servicing costs.

How are you guys approaching it?

Is there a huge separation in short-term and long-term between the two cultures?

Well, maybe there is some time pressure because we are heading into midterm, for example, in the US next year.

So things need to happen a bit more quickly.

But what I meant by kind of rules that cannot be broken is more on the economic basis.

Specifically, you know, we have the US looking to reduce trade deficit, but trade deficit cannot be reduced without reducing foreign lending by the same magnitude, right? So if you push that in that direction too quickly, it's going to raise interest rate and it's going to raise future debt servicing cost, which is why we saw the bond market rout last week.

And specifically we did this kind of back of envelope calculation, 25 basis point of long-term yields translate into roughly 50 to $75 billion per annum of additional debt servicing costs.

And we're already at a point where we're spending more in the US, right? Like $150 billion more than last year this time.

Right.