Motley Fool Hidden Gems Investing - Bill Mann “On The Market”

Episode Date: October 14, 2023

The Motley Fool’s Bill Mann recently appeared on the BiggerPockets podcast “On The Market”. Today’s episode is a feed drop of that show. Host Dave Meyer caught up with Bill to chat about what���s going on around the world. They discuss: - Why the US dollar is a “bit of a wrecking ball.” - Semiconductor supply chains. - Apple’s political risks. - China’s real estate market. Companies discussed: AAPL, TSM, ASML, FANUY BiggerPockets credits: Host: Dave Meyer Producers: Kailyn Bennett, Hager Eldaas Engineer: Exodus Media Motley Fool credits: Guest: Bill Mann Producer: Ricky Mulvey Engineer: Dan Boyd Learn more about your ad choices. Visit megaphone.fm/adchoices

We always think of things as being the snap test. Like if a company disappeared, instantly things would get much, much worse if Taiwan Semiconductor disappeared, but things would get gradually much, much, much worse if ASML disappeared because ASML is absolutely crucial to manufacturing for Taiwan Semiconductor, amongst many others. I'm Mary Long, and that's Bill Mann. He recently appeared on the BiggerPockets podcast, On the Market. Today, we're sharing that episode with you. Host Dave Meyer caught up with Bill to talk about the global economy, the reaction to the return of normal interest rates, China's real estate situation, and the two most important companies in the world that aren't often discussed.

Bill Mann, welcome to On The Market. Thanks for being here. Hey, Dave. How are you doing? I'm doing great, and I'm very excited to be talking to you. for everyone who doesn't know you from your work at The Motley Fool. Can you tell us just a little bit about yourself and your work? I am the Director of Small Cap Research here. I also have our international brief at the company. The Motley Fool is almost entirely equity-based. We look for companies all around the world. We have a very specific style. We're long-term buy-and-hold investors. We believe that people are best suited doing the work and making decisions

for themselves. From my own standpoint, I view every day for me as being like a treasure hunt. I come in and I look at parts of the market where a lot of people don't really spend a whole lot of time. Are you finding a lot of treasures right now? The answer is yes, but they've been laying around for a long time. I would describe the current market environment as being one in which in the U.S. we have an S&P 7 and then an S&P 493 and then everything else below that. It's almost like they're unrelated from each other at the moment. There are a lot of treasures. Dave, as you know, the difficulty in the market is that just because you found a treasure, it's not like somebody is going to come by instantly and say, oh, that's a treasure.

I mean, it could look like junk to everybody else for a long period of time. So, you have to be a patient treasure hunter and hold on to your treasure as long as you can. Well, I think that our audience is mostly real estate investors. I think that is a very apt analogy also for our industry, too. Being patient is investing the name of the game. It's a great way to proceed. So, glad we sort of agree there on general philosophy. Yeah, I still kick myself.

In 1993, I looked at a place to buy in an area of Washington, D.C. called Logan Circle, which I don't know. A lot of your real estate investors now, when I say the words Logan Circle, will go, because it's literally the nicest part of Washington, D.C. now. And at that time, it wasn't. But you needed to be willing to bend your headlights around corners and see what was coming. So, yes, I'm glad to be talking to people who understand this principle internally. Yeah, people did not know Logan Circle was a treasure for a few years.

Not in 1993, and maybe not for a little while, but they got there eventually. All right. So, you know, most of our audience is real estate investors, and we might delve into sort of equities a little bit here, but you are also a student of the global economy. And so I was curious to just get your high-level view of the global economy right now and where do you think we are in this very unique moment? You know, economies are systems, and maybe that's not a really brilliant insight, but we have just gone through a period of time in which in 2020, we had $19 trillion of sovereign

debt that the debt holders were paying for the right to hold. They were negative yielding interest rates, which is a kind of thing that for the entire history of the financial markets, people thought of that as being like the Yeti. There's no such thing as negative yielding interest rates. So, obviously, one of the reasons why that sort of thing would exist is that inflation was the thing that the central banks were trying to bring about. Inflation is something that comes along with economic activity. It comes along with growth. Anything that they could do to keep us from entering a deflationary environment, they did. We've gone in a very short period of time,

as short as we can ever remember, of going from a low interest rate environment to, I guess, That's what you would maybe feel like a high interest rate environment, but it's somewhere in the middle. All of these systems really, really struggle when you go through that period of change. You get to Stasys on the other side and it's fine, but it's hard to guess. It really is. Where are interest rates going to end up? We don't really know. But globally, What we're seeing right now is that the U.S. has been raising faster than everybody else, and commodity prices have been going up. You can see it in a dollar basis, but you can imagine in a market in which the dollar has increased against your local currency and oil prices have

gone up, just how destabilizing that can be. This doesn't maybe count for the countries that produce oil, but for everybody else. I mean, it's a really big deal. So, I would describe the global markets right now as being unsettled and looking for a new equilibrium, which they will find, but it's tough to predict when. And I think interest rates and currencies have a lot to do with that. Yeah. Uncertainty is the only honest way to assess the situation right now. It also seems that different countries and different regions are experiencing really different environments. Like in the U.S., obviously, as you said, inflation was the thing. It's, you know, same thing in Europe, a lot of, you know, South America, same thing. But then you look at an

economy like China that's now experiencing deflation. So how do you sort of square this on a global sense where there's sort of different areas of the world that seem so different when And just a few years ago, it seemed like the global economy obviously has its own little sectors and caveats, but was sort of moving in the same general direction. Yeah, we've really gone through a period of time in which, and it started in the middle of last decade, and it really started with China's Belt and Road Initiative, where you began to see some of the larger countries using economics as a form of warfare. You've seen it with Russia in regards to both our isolation of Russia, but then also Russia using gas prices as a weapon in Europe.

So, I think one of the things that is really happening is that we have gone from being a system that has favored globalization to one where you start to see that fracture a little bit. I think the U.S. economy and the Chinese economy still are very deeply linked, but they're much less so than they were even just prior to the pandemic. And so, when you see, again, to get back to what I was saying before, a dislocation or a change, then you're going to see each individual part of that system move in its own way. In the case of China, it has essentially grown over the last decade, doing a bunch of capital projects, a huge amount of construction. They build roads to nowhere. They build airports. These types of things are a form of growth. But if they don't end up being used, then they can

become deflationary, because you don't need it, and you don't need to build another one. Right. That is an interesting thing about infrastructure investments, is that once the infrastructure is in place, there's no need to repeat it. Yeah, if it works. Like, hey, let's put in a third airport, right? You don't need that sort of thing. So, what you're seeing in China now is an echo of what has probably been fairly poorly conceived capital projects that have brought about growth. But not all growth is the same because the consumption hasn't been there. And how concerned are you about this, both from an equity standpoint and just from a global economy standpoint? It seems that,

at least in my lifetime or adult lifetime, all we hear out of China is outsized growth. And we've never really seen a period where China is a, you know, it's now a period where the China's standing as the second largest economy in the world goes into a recession or goes into a deflationary environment. We've never seen it. So what do you think might come of this? I think one of the most important things for people to realize is that there is a bit of a decoupling from China.

But to your point, we talk about, for example, the China geopolitical risks, but we don't talk about the things like, for example, that 94% of Apple's production is in China and 25% of its revenues come from China. What happens to Apple, which is a huge component of the U.S. stock market, if China continues to stumble? And I think it is absolutely the case that China is stumbling and will continue to do so. So, Apple can't simply snap their fingers and move everything to India. I mean, they can't. They absolutely, positively can't do it. First of all, the Chinese would notice. They're like, what are you doing? Oh, no, nothing, nothing, we're fine. It doesn't really work that way.

So, we are still deeply, deeply linked to China. the Goldilocks scenario is actually fairly negative, but it's not terrible. We kind of bumble on along, and China continues to be a manufacturing growth engine. There is some decoupling from China, and the poor capital investments that have been made over the last decade start to get absorbed. The really bad ones would be if China's unemployment rate continues to skyrocket. And amongst people below 25, it's believed that it's as high as 45 percent. But we won't know, right? Because they stopped releasing that data. Exactly. Exactly. Well, and even before they stopped releasing it, those numbers were,

I don't know how to say it, unpejoratively, they were not necessarily the ones that you would put your full faith into their being correct. Fair enough. So, ultimately, if China does go into a deflationary spiral, because our countries are so highly linked, I think that there is the potential for some real pain in the U.S., but even worse in places like Japan and Australia. Yeah, absolutely. That does seem to be the case. And in the real estate industry, I'm just looking at it sort of as the financial sector that, you know, we see that China's central government is pushing their banks to sort of support the real estate industry, which might be by taking, you know, issuing riskier loans. And maybe that's just kicking the can down the line. And, you know, of course, like you said, there is some decoupling, but the global financial system is strongly linked.

And I, you know, I worry a little bit. I'm not like, you know, staying up at night thinking about this, but, you know, you read about this stuff and you do think, OK, if the if the Chinese market continues to collapse, it could lead to some tighter credit conditions here in the United States. And that's just one small example. Dave, I think that's exactly right. And the thing that I always the faith that I always put into the system is that it is that it is somewhat self-healing.

But it is not a new thing that the central government of China, the Communist Party of China is is using the banking system to further political its political interests. Like that's yeah, that's something that has existed forever. That's a good point, because it's not like if there is this big downturn in China that it's not foreseen. You know, I think a lot of banks and companies that are operating in China know that this is going on. And, you know, the property crisis has been going on for a year or two already. You know, like this is not a quick moving thing. So at least as an economy and individual companies do have some time to adapt to it. Yeah. And this is where you get into the topics of the phantom cities, the ghost developments all around China. A lot of people don't really

realize. They think of China as having a huge amount of U.S. treasuries, that that is a weapon that they have over us. But that's only one part of the balance sheet. They also have an incredible amount of debt. It may be the most indebted large economy in the world, which seems amazing in a world in which the United States and Japan exist. But it certainly may be the case. The way that China's provinces have raised money to operate themselves is through land sales. They go to their own land banks, and they sell into these property developers who then develop. And the loans come from the banks. It's all mandated by the central authority. And again, this gets back to something I was talking about earlier when we were talking about infrastructure. I guess you

would consider housing to be infrastructure also. But even in a totalitarian society, it's hard to sell the same land twice. Once you have sold it, I guess you could take it back. But at some point, the buyers are going to figure out what the game is. So, they are selling ever more adversely selected land in a period of time in which the land that has been sold before has not generated a great capital return. And so, the rot that's in China right now on every level is substantial. When you say the central government is getting involved in mandating the banks to do these sorts of things, to support these property developers, they're literally just trying to plug holes in the bottom of the barrel of the whole Chinese economy.

Yeah, that's not what you want. That doesn't spell confidence to me. What a way to break it down. Yes, that's not what you want. just listener if you were curious not ideal situation uh well you know so i want to switch gears a little bit from real estate to something that i think is a little more bit more i mean obviously real estate there are equities and REITs and stuff but i want to talk a little bit about uh chip manufacturing and semiconductors because this is something that is related to

china the whole global economy and is closely connected to one of the uh one of the what do call it, the S&P 7 before. Yeah, that's right. I assume NVIDIA is one of those seven that you were citing. It is. They did it. Yeah. Okay. They made it to the seven. Well, maybe you could just start by giving us sort of a background on the situation with chip manufacturing and sort of how it is distributed across the globe and why it's so important. Yeah. So obviously, the majority of the advanced microchips in the world are produced in Taiwan, and they're almost all produced by a company called Taiwan Semiconductor. And so, whenever you talk about the geopolitical situation in Taiwan, and obviously, it predates the existence of Taiwan Semiconductor, but Taiwan

Semiconductor is absolutely now the prize of Taiwan. The company has such a linchpin on the global economy that, if you even ask experts, there really isn't a good answer where the second option were to be. If you snapped your fingers and Taiwan Semiconductor disappeared, there's nobody to step in. They are so far ahead of any other comparable producer. And why? They would say that it has to do with the process and the type of talent that they have in Taiwan. I think that this is probably somewhat true, that they have 3,000 of some of the best developers in the world all in one space. They have been incredibly paranoid about technology transfer, making sure that their trade secrets don't get out.

You can be fired in Taiwan Semiconductor for doing something like changing the heading on an email that you've been forwarded. right? Like the level, it seems nuts. I mean, I've done worse things than that. I don't know about you and I haven't been fired. I've done worse things today for sure. Exactly. Exactly. We had, we had lunch here and I had seconds. If that is a fireable offense, I wouldn't have made it past my first week. Exactly. So it is a, it is a potentially catastrophic situation. And so, I mean, The U.S. has recognized this, and a couple of years ago, the U.S. government passed a bill called the Chips and Science Act, which has helped, essentially, fund Taiwan Semiconductor's development of additional facilities, like in Arizona.

That's the huge one. That's being done not necessarily at the total choice of Taiwan Semi. It's also being done, funded, almost 70% of it is being funded by the U.S. government. So that is something I was curious about, because Taiwan Semiconductor Company has this monopoly, essentially, on the most advanced types of chips. Why would they expand to the U.S.? Is it because the U.S. government and the Taiwanese government are also sort of intertwined in the U.S. provides a lot of aid to Taiwan and is sort of seen as this military backstop against

sort of any sort of Chinese incursion. Is that is all of that playing into like these little I mean, not little, but these seemingly innocuous semiconductor plants that are going into the U.S.? Well, you've heard of money, right? I a few times. Yeah. I even have I don't have a lot of it, but I would like to have more of it. You don't have Taiwan Semiconductor money, but a lot of it has to do with the fact that the U.S. government almost, because when the U.S. went in and said, OK, we don't want these companies to sell into China anymore, Taiwan Semi cut off sales to Huawei, which was its second largest customer. Huawei is one of the largest Chinese companies. Yeah, just shut it off. They didn't really have any choice.

Right. Because the U.S. government insisted, basically? Yeah. Yes, exactly. So, what's the giveback there? Like, okay, look, we understand that this is a painful thing for you, one of the most important companies in the world. So, how about we find ways to help you de-risk a little bit? And, oh, hey, by the way, we've got this land in Arizona. If you would like to build there, we will provide all of the infrastructure. We will provide a lot of the funding. And we're just talking about manufacturing. You can retain all of your development. You can retain everything that you want in Taiwan. By the way, Taiwan Semiconductor, like a lot of chip companies

and memory companies, a lot of their manufacturing was in China. It's not in Taiwan now. Some of the choices that they were forced to make at the behest of the U.S. government and other Western powers, there is a little bit of a giveback there. And so, I think that that has a whole lot to do with it, that and the money thing. The money, that small money thing. So, when you look at the stock market, and obviously, TSM is a, what is it, TSCM? Sorry, I can never get the acronym right. TSMC, yeah. TSMC, yeah, there we go. Thank you. They are obviously a publicly traded company. But you look at other chip companies that have been going crazy in terms of valuation over this year,

is this largely due to the same thing? There's still just a chip shortage. Demand is out of control. Or is something else going on here? At least partially. So, one of the largest chip companies in the world is Micron Technologies. And they just reported earnings. And they've actually seen a real softening in terms of pricing. I mean, in a lot of ways, you have to separate Taiwan Semi from most of the other chip companies because they are commodities, right? Ultimately, chip production is, in some ways, no different from oil production, right? You basically don't get to name your own price. The price is set for you. And the distinction is that Taiwan Semiconductor has the more advanced chips, right? Is that the

difference okay exactly they have they they have chips that are generally speaking the rule of thumb is that they are two years ahead of their next competitor wow i know which especially in technology seems like i mean that's literally forever right like you know we were we were still it feels like we were still using digital watches two years ago so god i mean that now that really just underscores the importance can you imagine having to go back to like an iphone 11 it would be unbearable. It would be absolutely horrible. The horror. Yeah, so you get it. That's ultimately it. Yeah, OK. This is what's at stake here. Yeah, exactly. Exactly. If we were just being released, excited about the iPhone 11. So,

that's really what it comes down to. I mean, it is potentially a massive, massive deal. So one company that I am particularly interested in, because I live in the Netherlands, I don't know if you know that, Bill, and there is a company here called ASML, which is, they're like, they make the machines that make the chips, right? Right. Is that correct? Yes. So how do they sort of, how do they fit into this whole global competition for chips?

So we have now touched upon maybe the two most important companies in the world that nobody's ever heard of. I mean, ASML is another one of those technology companies that the technology that they build is so sensitive that the U.S. government, the Dutch government, the British government, they have no interest in having that technology and that know-how end up in China or in Russia to some degree. But really, China is the country that knows what to do with that type of technology. ASML is the manufacturer of the equipment that makes the highest-end chips. So, we always think of things as being the snap test. Like, if a company disappeared, instantly, things would get much, much worse if Taiwan Semiconductor disappeared. But things would

get gradually much, much, much worse if ASML disappeared, because ASML is absolutely crucial to manufacturing for Taiwan Semiconductor, amongst many others. So do you see, you know, I get that, you know, I think ASML is like one of those like backlogs of product orders that, you know, they could stop taking orders now and they'd be busy for the next 30 years, like Boeing, you know, they have these like orders for decades. Do you see more manufacturing coming into the United States? Like this obviously matters for just the economy in general, but as real estate investors, the places where these plants go tend to be economic hotspots after they go in. So, just curious your outlook.

I think ASML, it's a really good question. It seems to me, and this is somewhat theorizing, so if this turns out to be 1,000% wrong, we can blame it on just a bad theory. Well, ASML, like years later, just years later, ASML is one of those companies that is it's so sensitive that I think it's pretty much comfortable for all of the you know, all of the actors for it to be in a centralized place. I don't I don't really foresee too much of ASML's manufacturing capacity moving away from the Netherlands, moving away from its central place. And there are other companies that are like that, Finuc in Japan, which is a robot maker, is one where they make basically everything in a single facility.

And it is for those industrial espionage and technology transfer limitation reasons that they do it. So, I'm not sure that ASML is going to be of a great benefit for real estate investors anywhere other than in the netherlands now for sure yeah yeah i i guess my question is more like because asml is so backlogged like is there is there realistic that producers who need the asml machines are going to be able to build new plants in the u.s whether it's taiwan semiconductor or any other chip maker i mean that is uh yes so i never really thought about it that way if i you Maybe just be a stupid question. No, it's not a stupid question. It's

actually a fantastic one. Ultimately, when you think about a company like ASML, what you're talking about is not so much a backlog. It's a backlog at the very, very top end. It doesn't really slow down a Taiwan semiconductor for ASML to have a backlog. What it does is it limits their capacity to bring out the next and the next technologies. So, yes, that backlog is not ideal. It's possible that they will solve it through an addition of ASML capacity. Most likely, the way that that plays out is that it simply changes the curve on new technology adoption. Okay, great.

Well, we started in China. We went to microchips. We talked a little bit about my home here in the Netherlands. I'd love to just hear your thoughts on Europe in general, because we have Germany, which is the biggest driver of economic growth traditionally in the EU, technically in a recession right now. And we're seeing the continent, you know, some economies doing well, some doing poorly. And as obviously a big integrated part of the global economy, where do you give us an

assessment of the Eurozone? So, I would describe the U.S. dollar right now as being a bit of a wrecking ball. So, when we were talking earlier about oil prices and then U.S. dollar inflation, because 60% of the world's commodities are priced in dollars, a strong U.S. dollar is a problem very specifically for Europe. Europe has a number of economies, and maybe Netherlands is at the top of the list, but Germany as well, that are both export-oriented, and they are very good capital reinvestment countries. The one that I would put at maybe the top of the list, though, is Sweden, as a country

that has done an incredibly good job at looking outside of the country in terms of reinvesting their profits. So I think the Swedish economy is probably the one to me that is most interesting as an investor. Oh, cool. Interesting. Wouldn't have thought of that. All right. Well, Bill, this has been very fascinating, very helpful conversation and getting a better understanding of the global economy. If you had, you know, crystal ball time here, if you had to take a guess on how the global economy evolves over the next year. What's your view? I think it really is going to be based on a couple of things that are hard to predict. The first of which is, India is really driving hard to become a manufacturing center in a very high-tech way.

India, I would describe as the economy of the future, and it maybe always will be. But, you can see now, they're trying to open up a very high-tech manufacturing area in Gujarat at any point, particularly when you see a break in the things that have been the drivers of the past. I'm thinking specifically here of AI, of artificial intelligence. I think you have a real opportunity for advancements in parts of the economy that we haven't really expected. I expect that probably we have come close to the end of the U.S. Federal Reserve raising interest rates. So, I think you're going to see a little bit of a return to stability that will give companies a little bit of a longer, their binoculars will look out

a little bit farther so they can make some additional plans. You're going to see some real redeployment. But I see the global economy moving back to a reasonable rate of inflation and GDP growth across the globe of 3.5% to 4%. Well, Bill, let's hope you're right. I like your vision of the future. That sounds like a vision of the future we can all get behind. I'd vote for me. Yeah, if you can do it, I'd vote for you, too. Well, Bill, obviously, you are doing a lot of research, you make a lot of content.

Where can people follow you if they want to learn more? I run a few services at The Motley Fool. I run one called Global Partners, which is an international equities service. and I run another called Value Hunters, which is scouring the globe and looking for companies that have been left behind. Treasures. Treasures, exactly. You're finding the treasures. Should have just called it Treasures. Those are the best places to find me. I'm on Motley Fool Money a couple of days a week. That is our free podcast and radio show.

Awesome. Well, Bill Mann, thank you so much for joining us. We really appreciate it. Thanks, Dave. I really appreciate the invitation. As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Mary Long. Thanks for listening. We'll see you tomorrow.