Taking Stock 22 October 2026

SOME investors believe that the world’s fund managers and pension fund managers have access to superior information and analysis, leading to them being omniscient and prescient.

Believers point to the recovery and growth of great stocks like Microsoft, which was around $20 in the 1990s internet era, and today it is $529. Most fund managers never sold. Rewards have been rich.

Those investors favour active or passive fund managers, believing that financial markets see through short-term change, to the advantage of investors.

Other investors have no such faith, reciting Warren Buffett’s wisecrack that asks why wealthy people would drive into Wall Street in their Cadillac to ask the opinion of youngsters who catch the train to the city. Where is the evidence of wisdom?

Those investors do not cite Microsoft’s success. They recall Cisco, the provider of routers for the internet. In the early 1990s Cisco was priced at less than $1.00. When the internet became the breakthrough event that would change the world, Cisco was seen to be the obvious beneficiary. Its routers would be essential.

Its share price soared in double figures reaching $80.00 on March 27, 2000, about the time the internet fever subsided. Some pension funds quit, some bought. Twenty years later, in 2020, Cisco recovered to $38 and today are $107.

In 20 long years between 2000 and 2020, investors in many pension funds learned to whistle.

The question is over omniscience or prescience. No fund manager or pension fund manager is able to do more than observe fashions and choose which to ignore. Short-term results are key to their success, and their bonuses.

Right now, most pension fund managers and fund managers believe that the world is entering a new era of perpetual growth in wealth, thanks to the wonders of Artificial Intelligence. Nothing else seems to matter.

Witness the response to such events as war in Europe, war in the Middle East, destruction of lives, infrastructure and relationships, and maybe democracy, and angst evident in many countries.

One can almost see the headlines: Russia invades Poland, oil fields set on fire, looting in Paris, White House attacked again - and stock prices soar. The pension fund managers, now with a strong grip on other people's money, can see the havoc, see the potential of AI, and make their judgment.

Are the two camps - the believers in omniscience, and the disbelievers - permanently incompatible?

It is hard not to dwell on Cisco, A great idea was well executed, the share price soared, slumped and 20 years later recovered to its previous high. Twenty years. Time is money. Time runs out for some of us!

If we believe in the most successful fund managers/forecasters, we might focus on Ray Dalio, the founder of giant Bridgewater, or John Mauldin, whose weekly economic commentary and forecasts are read by millions, including most of the literate fund managers, though they all will have many sources from which they form their convictions.

Mauldin and Dalio observe artificial intelligence fever with dispassion.

Dalio notes the circularity of private credit funding private equity to invest in the AI-focused shares, while private credit also lends tens of billions to companies wanting to build AI infrastructure.

He uses the word "bubble". He will surely be relieved that the Australian Firmus idea, absurdly valued, was scotched, and may have noticed that this week one of Australia’s largest data centre builders signalled distress, its share price falling 40% in one day.

Mauldin records that AI will undo the logic of index funding, noting that a mainstream index today will be exposed to at least one third, to the various fortunes of a few AI aspirants.

He notes how non-balance sheet liabilities are lurking behind balance sheets of the AI principal players. He warns of the "triangle" - the circularity of Open AI, SoftBank and Oracle incestuous funding making each of them dependent on the others' ability to convert potential into nett profit.

Oracle, as an example, has $288 billion of off balance sheet liabilities, linked to commitments to rent unbuilt data centres. Accounting rules do not require this be shown as a balance sheet liability.

The world knows that another huge player, CoreWeave, has issued $6 billion of bonds at 9% plus this year. They are now priced by the market around 80c in the dollar. It has given notice to its clients that it plans to sell another giant bond issue. CoreWeave is talking to pension funds. Will they buy again?

Insuring CoreWeave bonds is now costly. The price is signalling default risk.

Mauldin's point, that the pension fund managers seem to ignore, is that there are cracks under the bonnet that imply the AI hype is well short of reality, success certain to be patchy. We may deduce that AI may not be hydraulicking the global markets forever.

Mauldin talks about the extreme level of AI enthusiasm as being an existential threat to the concept of index investing. His logic is that when an index is dominated by one concept (AI) the index is not spreading risk across a range of sectors, is not mitigating risk, but is instead dragging non-risk investors into concentrated risk.

Our chairman James Lee made this very point at our seminars months ago.

Mauldin, very much an active fund manager, sees this concentration as dangerous.

During our recent seminars James presented his thoughts. His role as CEO of a Canadian-listed global company brings him into contact with a wide range of American capital market players. He noted that recent research was published highlighting that the gains made by a minority of the great Russell 3000 index offset the losses of a very large percentage of others in the Russell 3000, presenting a false picture of US sharemarket health.

The theory of a shop owner stocking sixpence worth of every lolly will not be much use to those who know that only Jaffas and Spearmints are selling well. Does the owner require prescience to work that out?

The potential and the risks of AI euphoria are driving investment. The immediate visibility of the effect of the excitement can be seen by the impact of foreign investment pouring into US stocks.

The gap between surplus saving nations (China, Japan) and deficit economies (the US the prime example) is at its highest level since the pre-Global Financial Crisis (circa 2007), and near the highest for 150 years. Imbalances often lead to wild policy (Trump’s tariffs?)

In simple terms, China creates trade surpluses that one way or another link to America's debt of US$40 trillion.

Chip makers Taiwan and South Korea provide examples. South Korea recorded a current account surplus in 2023 of $33 billion. Today the surplus is $450 billion, thanks to chip makers, sales driven by AI. Observe its sharemarket volatility, best described as “wild”.

South Korea in 2023 spent $17 billion on US equities. In the year to July 2026 it bought US$69 billion of US stocks.

Governments have been buying fewer US treasuries while corporate and personal savings prefer corporate bonds and US stocks, feeding the AI boom.

The money for US treasuries also diminished in 2007–08. Bloomberg calculates that foreign-held US AI investment has risen in very recent years by US$5 trillion. Small wonder AI stocks have seen their share prices rise.

Research centres in Europe forecast that by 2032 investment in AI infrastructure will be US$9 trillion, far far exceeding, as a percentage of GDP, the railroad expenditure boom which transformed the world in the 19th century.

In summary, Asian trade surpluses and savings are feeding into the share prices of those in the AI circle. The giant bank HSBC notes that a stumble in AI investment - bond failures, share price reversals - would be "extremely painful" for the US (pension funds), the US dollar, for Asia and the world.

Bloomberg notes the Magnificent Seven Index (the AI hyperscalers) has risen in three years by 380%. This surge in pension fund paper value has excited Americans, tending to irrational short-term spending.

Consumer research has identified that Americans are spending far more than their income increases (by about 10%) because of the unrealised gains of their pension displayed in their pension fund valuations. This consumer spending splurge is driving US growth. It is also driving bank lending. If you spend money you do not have, you do it by borrowing, credit cards, bank loans, etc.

Credit card debt grows and is securitised. Pension funds buy the securitised debt; leverage on leverage.

What conclusions may one draw from the above?

If fund managers are indeed omniscient, better still prescient, AI will produce lasting new wealth that greatly enhances pension funds and will feed into a new surge of wealth, especially in Asia (New Zealand’s largest market).

If AI leads to a level of euphoria not matched by successfully monetising the technology, or not spread widely amongst the aspirational companies borrowing trillions to gain a seat at the AI table, then a wide range of forecasters and researchers expect trouble, at a level at the very least of the global financial crisis in 2008.

Currently the global shortage of data centres implies that AI will run into a significant obstacle.

How much faith should we have in those who control our savings?

(I note that our best fund manager, Milford, has made sensible long-term decisions. It is an exception.)

Are the destruction of Middle Eastern and East European infrastructure, the devastation of trading co-operation, and the dramatic changes in weather patterns, coupled with the gigantic increase of household, corporate and sovereign debt, a portent of progress, justifying all-time record-high equity market values? Is France an example of a country that has lived on debt for decades, and is reaping rewards or facing civil war?

May I just repeat the summary our chairman (James Lee) provided at our seminar:

If investors could achieve six to seven per cent returns over the next year or two, then they (and I suggest, most investors) should be comfortable with the return for the risk involved.

Pension fund savers should be vocal in getting their views to their managers, especially as the savers close in on the date when the funds (like KiwiSaver) are to be withdrawn to be used in retirement.

The AI frenzy scares many sages. Return and risk are linked.

_ _ _ _ _ _ _ _ _ _

IF the blind faith in fund managers mystifies me, so too does the attitude towards lending risk.

In an era when investors can buy NZ, Australian, UK and US sovereign-guaranteed debt at rates greater than 5%, New Zealand seems to be reducing credit margins, to enable corporates and banks to raise money at similar levels to sovereign debt.

Here are some facts:

1) Banks and private credit fund managers globally are observing rising debt default levels.

2) Buying insurance against credit default is getting costlier.

3) The dozens of US credit raters (some demonstrably "flexible") are variable, in value to investors. Some seem to be replicas of those who in 2008 were rating liar loans as a AAA investment.

4) Sovereign debt levels are rising, as is the differential being paid by poor performing countries (witness French bonds vs German bonds). France’s 10-year bond rate hit 5% yesterday, higher than Greece’s rate by some margin.

5) Private credit, opaque and lightly regulated, now has lent $2 trillion to aspirational American companies, much of that lending subordinated behind secured, sober bank lending.

6) Many countries (US, UK, Japan, China, France, Italy) have allowed sovereign debt, measured against GDP, to reach highest-ever levels, or close to it.

Those of my age group, highly focused on achieving sustainable passive income, may feel comforted that in NZ 5-6% rates seem likely to be available from organisations with relatively low levels of indebtedness.

I expect a wide range of bond issues to emerge in NZ. For those who have no fear of double-digit inflation (which would be horribly destructive) they can observe the yields available on Auckland City Council 24-year bonds. Six per cent plus - somewhat higher returns than build-to-rent apartments, and with somewhat less capital risk!

Footnote: Falling global equity prices are not a harbinger of planet extinction, and not a hint to open the windows in Wall Street. They are a reminder of the need to measure personal objectives against returns for risk, so that decisions are fit for purpose for the owner of the money. Personal objectives should take account of age and needs.

Chris Lee

_ _ _ _ _ _ _ _ _ _

New Issues

Kiwi Property Group is offering a 7-year, fixed rate, senior, secured green bond, with a minimum interest rate of 5.55%. Firm bids are due by 11am tomorrow, Friday 23 October. 

Contact Energy is expected to issue a new subordinated capital bond on 2 November. The bonds have an initial term of around 5.5 years, with a possible interest rate of close to 6.00% per annum.

Investors who are interested in either of these potential bonds are welcome to contact us with their CSN and an indication of the amount they may wish to invest.

Travel

Our advisors will be in the following cities next month:

17 November – Christchurch - Chris Lee

18 November (am) – Christchurch – Chris Lee

18 November (pm) – Ashburton – Chris Lee

19 November – Timaru – Chris Lee

Investors who would like an appointment to see us are welcome to contact us.