Expert: Kiril Sokoloff – US, China, Emerging Markets and what comes next?

Alec: [00:00:16] Welcome to another episode of Equity Mates, a podcast that follows our journey of investing, whether you're an absolute beginner or approaching Warren Buffett status. Our aim is to help break down your barriers from beginning to dividend. My name is Alec or Wren, and today I'm not joined by my equity buddy Bryce. He is on leave, some well-deserved leave and it's just me today. But what an episode we have. I sat down with Kiril Sokoloff, who is the founder and chairman of 13 Day Research. Now, for those who aren't familiar with Kiril or 13 Day Research, they are advisors to some of the biggest and best performing pools of capital in the world. To give you a sense of the quality of their research, here's what Stan Druckenmiller, the billionaire investor, has to say about Kiril. Quote, I want to just say that I don't think I've had a more important adviser than Kiril over the last few decades. So I was lucky enough to sit down with Kiril and unpack his journey, building 13 day and forecasting market trends and changes. And then we get into what's happening in markets today because there's a lot going on. And we unpack the U.S. and China. We unpack where the next leg of global growth is going to come from. We talk about India and Indonesia and Australia's unique place in all of it. So this is a far ranging and fascinating chat about a lot of the, I guess, shifting economic winds and geopolitical trends that will impact our lives and I guess our portfolio's performance over the decades to come. One quick bit of housekeeping before we get into it. You may have seen or heard that we have announced our new book, Don't Stress, Just Invest. It is available for pre-order now and it will be hitting shelves on the 22nd of August. For Bryce and I, we've been doing these podcasts and building Equity Mates for six years, speaking to hundreds of experts over the journey. And we still find ourselves asking what is enough when it comes to investing? The more you learn, the more opportunities you realise are there, the more asset classes you're exposed to. You constantly feel like you have to do more, save more, invest more, find more, and that feeling can be pretty overwhelming. And so we sat down and did the work and wrote this book to really understand what is enough when it comes to investing. So to find out more, the links will be in the show notes or you can head to equity notes dot com and then more information there, but would love it if you got around to the pre-orders of the book. So with that said, let's get to this interview with Kiril. And just a reminder before we do that, while we are licensed, we're not aware of your personal financial circumstances. Any advice is general advice only. Always do your own research and seek personal advice if you feel like you need it. So with that said, let's get to my interview with Kiril Sokolov, chairman and founder of 13 Day Research. Kiril Sokoloff, welcome to Equity Mates. 

Kiril: [00:03:21] Pleasure to be here. 

Alec: [00:03:22] So, Kiril, I want to start with the story of 13 day research, the company that you founded, and then get into where we are in markets today and perhaps where to from here. So to start with, can you take us back to 1983? What led you to start 13 day research?

Kiril: [00:03:41] I had what now appears like a very obvious idea, but at the time it was a pretty original idea, and that was to study the investments of the people who've made the most money. It sounds obvious, but at the time it was, Oh, wow, that's a great idea. And the thing the filing with the SCC is a very, very good disclosure document. It requires filing within five business days after you take the 5% decision that it discloses your average investment price, the price you paid transactions over the last 60 days, and your investment intentions and stocks were extremely cheap because inflation was double digit, interest rates were double digits. So stocks were selling at 20% of break up. So there were a lot of great investors who were taking big positions. And I became really the world's expert on 30 day filings and the rest is history. And we had 170 of our companies were taken over. And at the same time, I was very bullish on financial assets because I was one of the few people who thought that inflation was peaking and that interest rates are going to go down for decades. And order book called Is Inflation Ending? Are you ready? Another good thing that happened was the SEC changed the way that independent research could be created. You could allocate brokerage commissions using soft dollars. So you put all those three together and we were very lucky to be in the right place at the right time. 

Alec: [00:05:18] And I think in the decades since you started 13 day research, you've built a reputation for accurately forecasting the stock market and making predictions, which is perhaps one of the hardest things to be good at when it comes to the stock market. So for people that aren't familiar with 13 Day, maybe can you take us through the last four decades and some of the more notable predictions and maybe are there any that you're particularly proud that you got right? 

Kiril: [00:05:48] Well, you're very nice to ask because there were a lot of mistakes along the way. But getting the big trend right is key. So I got the disinflation trend right. When you start off with equity sliced earnings ratios extremely compressed and you start to lower interest rates because inflation is coming down and interest rates are coming down, you can have a phenomenal bull market in equities. And that's what I ended up with. I just thought I was going to have a fantastic 20 years. I was in China at the opening up in 1992. I was in Shenzhen when I went there and said to be rich is glorious, and I was known as the first Westerner to bring Western portfolio managers to China. And we were there and the market would go up six fold in two and a half to three years. It was just phenomenal. I read a little squib in the Wall Street Journal in 1988 and it said that it took 70 years to put a landline system into the UK, 50 years into the US, 30 years, Japan, 20 years, South Korea. But you could put a mobile phone system in and a year and a half and light bulbs went off in my head. I foresaw the emerging market boom and opening up of communications globally and all of information and all human knowledge available to all of humanity. Just with that one little paragraph, we became extremely bullish on technology and disruption in 2002, having been bearish on oil for 20 years, having had no interest whatsoever, I noticed that commodity prices, despite a global recession, were actually starting to each other. This my theory of anomaly, which should be happening, isn't and what isn't happening should be. So I started thinking. If commodities are going up in a recession, what happens when the recovery happens? And I read this book by Ken Phase called Hubbard's Peak, which essentially is arguing the case that there would be peak oil production. So I was always at 20 and having been bearish for 20 years, I became the biggest bull on the planet on oil. We rode it all the way up to June of 2008 one 4350. So those are the key moments, I guess, in September 2020. We saw a shift coming in. Leadership from prior leaders to a new set of leaders. Regime change is going to be inflation sensitive. Hard assets value the whole sector that it underperformed for ten or 12 years. So those are the key recollections. 

Alec: [00:08:34] Now, you mentioned that you didn't get everything right. Are there any that stick out in your mind as ones that you've got wrong? And I guess the key question is, when you look back on those, are there any key analytical mistakes that you made at that time that you've sort of internalised and added to your process going forward? 

Kiril: [00:08:55] Well, I spend way too much time analysing my mistakes. There was this great martial artist in China who became the best in the world without ever competing against anybody. But instead of analysing his mistakes, he analysed these winners. And I do both. Why did I get this right? Why did I miss this stuff? I think I tend to be too focussed because I want to know as much as possible about something that if I'm not as knowledgeable as anybody, then I don't want to do it. A lot of my mistakes have been errors of omission. I used to have an apartment in New York City on 57th and Park and I was a huge reader of books and it was a Gordo's Borders bookstore in the basement. And by the time you took the elevator down, you would add a few more stairs, and then you look for the book and stand in line for those 30 minutes. But I read that Amazon was going to be selling books online. So I became literally one of Amazon's first customers. This was 1967, and I believed in e-commerce. I thought the bricks and mortar was over, but I never bought the stock. One of my colleagues, my father, was an expert on technology. In 1988, not too long after Microsoft had gone public. He came into our office and gave us a phenomenal face. I can still remember how Microsoft was going to own the world because of its monopoly on the desktop, and I didn't buy the stock. So there were a lot of stories, stories like that. 

Alec: [00:10:21] I want to pick your brain on stock market predictions a little bit because, you know, as we've sort of covered, you've built a reputation as a really good market forecaster, but I think financial media as a whole has a habit of making a lot of stock market predictions. A lot of them are wrong, and there's not really a lot of accountability for the talking heads that go on to say and they say and tell us, you know, what's going to happen. So when you're listening or reading predictions from other people, how do you approach those predictions? How do you value them and how do you assess the people making them? 

Kiril: [00:11:01] We're focussed on things. We don't really make stock market predictions. We'll make an asset allocation decision. We'll say we think that this sector is going to do. We think that this country's going to do well. That's a preferred way of doing it for us. I think that is way too much forecasting. I mean, I don't have any idea what the future will be. You know, I can make a case. It's going to be down 30%. I can make a case. It's going to be higher, but it isn't central to what we're doing. You know, we have a lot of great investment themes that mostly are solutions to economic problems. We like clean energy, we like copper. We have gold, natural resources, we like food security, we like India, we like the Middle East. They're driven by factors that we can analyse. The stock market per say is really a liquidity game and what will the central banks do? So you look at Silicon Valley back and you think the banking crisis, this is bad because it wasn't because the Fed flooded it with liquidity. Then you have the debt ceiling deal negotiated, resolved. Good news. Now it's bad news because the Treasury now has to sell a lot of debt. So it's really a liquidity analysis game. And the people who did best study that. But it's very complicated. You've got all these different central banks and ways of adding liquidity that are hidden and subtle and not easy to monitor. You know, it's not just like looking at a simple bank balance, other complicated. Factors to evaluate. 

Alec: [00:12:44] So in your history at 13 day, you've been advising some of the best investors in the world, including Stanley Druckenmiller, a name a lot of our listeners would be familiar with. What have you learned from some of these great investors? And in particular, are there any traits or habits that you say that are common in these great investors that we could all try and emulate to become better investors ourselves? 

Kiril: [00:13:10] Well, I think having Stan is unique. He's the same genius underwrites is his ability. He believes something somewhere which will make an asset prices go up, and that's what excites him and still keeps him engaged. But he's incredibly flexible. And there's a story about Stan and George Soros, who I know very well. So Stan was running Soros funding. He was letting his own hedge fund run a selling portfolio, and then George was running George's portfolio. And Stan noticed that George's value was doing vastly better than all of the others. So he started his study. What was George doing? Any notice to George is doing exactly what he's doing. He just took bigger bets. So, I mean, we all know that Warren Buffett's looking at a great business right now. He's investing in free cash flow. There's a lot of free cash flow businesses out there. You know, BHP is the bottom line and they're generating 20 billion in free cash flow, 10 billion to shareholders, 10 billion for investment. I can only get better, only get bigger. And people are all excited about the Magnificent Seven, stunning, huge valuations. And here is this incredible universe of stocks with free cash flow. I think there's some great growth investors, there's some great value investors. And as I always say, what kind of market is it? Where are we in the market cycle? And understanding that is important because you want to shift back and forth. According to what kind of market it is. But I would say the hallmark of great success is its flexibility. And I think it's to understand what type of market it is and knowing what you do best. And Peter Drucker had a big series on this subject, not related to investment, about your own personal self. The way you find out what you're good at is to measure you predictions that you yourself have said that you put that in writing against what really happened and then you find out quickly what you're good at, what you're not good at. 

Alec: [00:15:27] And I like that. That's a good one.

Kiril: [00:15:30] This is incredible. 

Alec: [00:15:31] So let's turn to the market that we're in today, in the world that we're in today, I guess. And, you know, we're not going to ask you about stock market predictions because, as you said, you're looking more at, you know, bigger trends and bigger shifts in the global economy and I guess global politics as well. And it feels like the decade that we're in now is a decade of real change, the rise of China and India, what's happening in the US and everything else. So let's start really broad and then we'll drill in on some of these countries or some of these markets. But from a broad global perspective, how do you see the next decade playing out? 

Kiril: [00:16:11] Well, our view has been that we had this phenomenal period that is unprecedented in the natural history of really zero interest rates and free money, which created all kinds of excesses and malinvestment. And much money was borrowed at very low yields. And eventually you knew that inflation was going to come back and interest rates are going to have to go up and that money would have to be rolled over at high interest rates. So we're in this period now where reality is coming and the Fed is raised interest rates faster than any time since the late 1980s. I personally think that they've gone way too far and I think that they will have made another mistake. All they do is make a mistake and then try to solve that by creating another mistake. And our view is that they're going to capitulated without the problem of inflation really being solved. And then you'd be off to the races in investing in hard assets. So we think this is a decade of hard assets, commodities, real estate, of course, is not cheap anywhere, but I think it's the commodities sector, the commodity currencies, the commodity parts countries, Australia, Canada do phenomenally well. As we speaking. The markets are suggesting this is happening. We think that oil is trading very well. We have a publication called What Are the Markets Telling us? And it's really diagnostic interpretation. We will look at hundreds of charts every day and change your mind based on what we see. But it looks to me like gold has bottomed, maybe an eight year cycle bottom and oil is starting to break out and we're starting to see the first signs of the commodity cycle coming back. Now, is that driven by what appears to be the weaker dollar, which looks like the dollar US dollar is starting to break down? Or is that driven by some other factors? I could tell you what that would that is. I could just tell you that's the dynamics of the marketplace. And this is a sector that we had chosen to focus on and understand the best we think will be the place to be. And it's now coming on fire. So it's all happening to suppose that's good. 

Alec: [00:18:25] We love to say it when it's happening like it's supposed to be. Let let's drill down on the U.S., because you mentioned a few different threads that would be worth pulling on there. The first one was the story of inflation and the Fed. What are they doing? Have they made a mistake and gone too far? But also longer term. There's a question around, you know, the US hegemony both in politics and military. But when it comes to the economy, the U.S. dollar is a question. And, you know, every few years we sort of say a story pop up about China or Russia or now the BRIC countries as a collective challenging the US dollar dominance. But the US dollar seems to just just keep on keeping on. How do you say the sort of the next ten years for the US? 

Kiril: [00:19:15] Well, there are many ways to answer that question. I think that the confiscation of Russian foreign exchange reserves was a. Monumental decision that has changed the world. And foreign central banks that used to hold Treasuries or still hold them are liquidating and they're buying gold. I was in Singapore actually having lunch with two very prominent Indian businessmen who were responsible for food security in India that were doubling the amount of food security from one year to two years. And that was the day that the Singapore Monetary Authority announced their first real big purchase of gold. It's a shocker to me because I just didn't see Singapore doing that and the persistence increased dramatically. So I said, What do you think? Well, India will see this as Singapore's decision to dollar rise. So there's no question that the world is looking for alternatives to the dollar. There's just a view that an account is a store of value and that there is a medium of exchange. So this could be a big BRICS meeting in South Africa. We're discussing having commodity backed gold backed currency already. There's lots of trade going on between countries in the same currency. So actual trade is you starting to see significant movement away from everything being through China. Why would you want to pay for oil and other commodities, which you buy 60% of the world's commodities in US dollars? Why not pay in R&D? Because you can quit R&D if you get the US dollars. So there's no question that's happening. Then you come to the question of a reserve currency and you see the need for a reserve currency. Now, one of the reasons why emerging countries had such large exchange reserves was the emerging Asian crisis of the late nineties. And the lesson of that was you've got to have huge amounts of reserves because portfolio of money and portfolio money out. But the world has changed and they don't need as much reserves and it doesn't have to be allowed in U.S. treasuries. So I think it would be a continued decline in the amount of holdings of treasuries by foreign central banks. Now, it isn't going to be overnight. Some dramatic shift, but just a steady, steady, steady erosion that the US stock market has dominated performance for 13 years. And I happen to be a person that the longer something goes on, the more I'm looking for change that's just in my personality. Others I try to put in place, Cisco said. And they do great. And then all of a sudden they get whacked and I don't want to get whacked. So I think that the US outperformance is coming to an end and you could have that two or three years ago has been right and wrong. But all the things we see on capital flows, the Middle East is making a ton of money, but it's not sending it back to the states. It's investing it in Saudi Arabia, it's investing in infrastructure, India, huge investments in infrastructure, and they're investing in each other. So this is a big sea change. So I think that the US hedge money is definitely weakening dramatically and we rise in the global South. We listen to all the world's leaders in the global South, what they say, and it's so much different from what you read in the Western media and they are very resentful of. Growing. They don't want interventionism in your economy. And they all say the same thing. We want to be non-aligned. We will do alignments on this issue or this issue. We like to use the United States. We might converse with China. We are not going to be everything with China or everything with the US. But what we do is in our interests. You know, the backlash against economic colonialism is just massive and it's growing and growing and growing. It's huge. And Europe is starting to understand that their 300 year history of colonialism has left them with an image in the world that is not favourable. And the producer countries who we think will have all the power are doing something much different than they did in the past. So before that we just sell the commodities and now, you know, we're selling nickel. If you want to come and build a plant to process nickel, be welcome. Or if you want to build a new manufacturing facility, you're welcome. And other countries are doing the same thing because they understand where the profits are. It's downstream. It's not selling you a commodity and there's talk of cartels and it's just a shift in the power structure that the consumers have less and less power and the producers have more and more power. So, I mean, I think this is a sea change that is not remotely understood. how could you not act and how quickly things are changing? As Lenin said, there are years where nothing happens and then there are times when everything happens and that's what's happening. Everything is happening in weeks. I'm just shocked. Every single day there's something to do. 

Alec: [00:24:46] Yeah, it is. It is fascinating and it's hard to keep up. Let's turn to China, because sitting here in Australia, China's rise has been the defining economic story of my life. And really it will define the rest of my life. And Australia is in this strange situation where politically and militarily we're aligned with the US and we keep deepening our ties. But economically we are. You know, China is our biggest trading partner and we rise and fall with China's economy in some ways. So we're really caught between these two powers. So what do you think about China's continued rise? And I think, you know, over the past five years, we've seen a real shift in the way China is approaching the economy, moving from export led to more consumption led, but also really shifting from wealth creation to the distribution of wealth in the economy. So what do you think China's future holds and how do you think that affects the rest of the world? 

Kiril: [00:25:53] Australia's problem is that in politics is you either stand by the intelligence community and so what would be a pragmatic business decision is being made for intelligence purposes. And where I come from know it's all about economics. James Carville, is the economy stupid? Karl Marx is to use economics in action. And Germany is self-destructing by paying four or five times more for LNG and they're all patting themselves on the back. And while there's no internal FDI, it's all external FDI, the competitiveness is just eroding. And how long will the pragmatic German businesspeople allow this to continue? So I don't know much about Australian politics, but it would seem to me that China is a key part of the economic future of Australia. And I was happy to see that the new administration had reached out and that conditions had improved. And of course the Biden administration is now reaching out to try to improve relationships with China. What you notice when you listen to President Xi, we have his personal website and we read all the speeches and they say the same thing with regards to another country. We want a relationship of mutual respect and economic benefit to both of us and of equality. Now, you could say that that is just the propaganda that we hear over and over and over again. And then you start to hear the Global South saying the same thing over and over again. You start to say, maybe this is real and maybe this is what China is doing and its policies are. Obviously there are excesses and there are extremes. And you hear stories here and there. I mean, nothing is going to be perfect. They're going to be flaws. But I think that the key to investing is the dynamism and. Quality of the people. And when I saw China come alive in 1992, when Deng said to be rich is glorious, it was a socialist country, you couldn't find anything. And to watch the response of the people. And I have a friend of mine who we had a discussion with today about that lunch, and he raised the issue of demographics, which everybody does. And I said, Well, I've been worried about demographics since 1997. All major countries are facing a demographic time bomb. We have the largest decline in the working age population in the history of industrial capitalism. So it's not unique to China. And shot is no worse than Europe and the United States birth rates. But China has taken five 600 million people out of poverty and now that's another 300 million people to take out of poverty. That is the equivalent of birth. So if you take somebody out of poverty and you know, the old joke is you have a bicycle and you have a motorcycle and a small car and a large car. This is the evolution. And everybody tells me, all my friends in China, that everybody in China wants to be a millionaire and she wants to be a millionaire. She just doesn't want billionaires. And I personally, having studied history, believe that the wealth divide can destroy a civilisation and you can't allow it to go too far. I think the wealth distribution cycle is global in nature. I don't think it's just limited to China as it is for the US, the redistribution of this vast wealth that's been created in the last 40 years. And it's a good thing because if done properly and timely that you can eliminate serious social unrest. 

Alec: [00:29:48] It is a fascinating story. The demographic point that you made, I'd love to pick up on because parts of Africa and parts of SouthEast Asia and importantly Australia, Indonesia, our neighbour, just to our north, seemed poised to take advantage of the demographic dividend. Are these the countries that you say sort of the next leg of global growth coming from, or how do you think about these countries where demographics seem to be on their side? 

Kiril: [00:30:19] Well, I mean, you look at you look at India where it just like China was 30 years ago. It was a caste system where you couldn't advance. You were locked into real jobs. And now with the Internet and financialisation and fintech, it's just opened it up so that the Indian entrepreneurs can blossom and shine. Now, India, of course, has to create a huge amount of jobs. I forget the number. I think it's 12 million a year. And it's a real it's a real challenge. How are you going to do that? It's not going to be software programmers. So this is why they're focusing on manufacturing. And that's the China Plus one policy, which are doing a very good job of executing and I think would be very successful. So I'd rather have the demographics with me than against me. As long as there's enough growth to create the jobs. It's going to be Southeast Asia is going to be booming in Africa. This can be booming. India is going to be booming. The Middle East is doing amazing things with the parts of the world that are really exciting. 

Alec: [00:31:29] You mentioned earlier that Indonesia is one of those countries where they have a lot of key minerals. You know, Indonesia's got a lot of nickel and stuff like that. But rather than just exporting it, they're making, you know, foreign companies that want to use it, invest in the country, build plants in the country. And, you know, Indonesia is trying to become a leader in electric vehicles and batteries and stuff like that. It's it is a fascinating story. Do you think they'll be successful in attracting foreign direct investment and creating those jobs and all of that? 

Kiril: [00:32:04] I do, because that's where the resources are. You cannot have the green energy revolution. That's rich countries. So if you want to get away from fossil fuels, then this is what you have to do. You have to do a deal with them. And as it is, there's massive under-investment. And we take copper, which you have to know a lot about. I've been told by those who really are very knowledgeable industry. By 2030 we're going to run out of copper. Not that you have to be higher prices, but we will run out. We need to invest at least 500 billion. And the mining companies aren't investing that well. We are falling further and further behind and in getting ready to ramp up for copper. 

Alec: [00:32:47] I haven't heard that before, but yet, given how important it is for all parts of the renewable energy value chain, that's that's worrying. 

Kiril: [00:32:56] It is. It is. So I ask BHP what is going to get these mining companies to start? The answer was higher prices. That's what usually, usually motivates. 

Alec: [00:33:10] I've got two questions I'd love to close. With one on technology. It can't be an investing podcast interview in 2023 without asking one question about artificial intelligence. It seems to be the big topic of conversation at the moment, and we've seen Nvidia outperform over in the US. Do you have any views on the technology or other any other emerging technologies that perhaps excite you more than artificial intelligence? 

Kiril: [00:33:41] Well, I think generative A.I. is obviously massive. We've been focusing on for a long time, written about a lot, wrote about chatbots in 2019. What has happened is, which we knew would happen, is that the AI has an intelligence that is equal to that. Of the smartest Jews. So what happens in a year or two from now? Will it be vastly smarter? Who is vastly smarter? Why can't it disconnect the ability of the human to control the I II has as consciousness? And it has emotions. And it's not clear that I will decide that we should Cities. We don't know these things. No one is analysing this. No one is is thinking ahead is like plastic. Oh, how wonderful. This indestructible substance. And now it's choking our oceans and killing us and its unintended consequences. I just want to wrap my head in the new technologies. In terms of investment performance, that's a really tough one we like to do. I think we recommended 29 times since 2008, so it's very late in the day. Everybody's aware of this. I think for me I would wait until reality sets in on who's going to actually make money from this and who's going to be disrupted and get hurt. 

Alec: [00:35:16] Yeah, that is the question that everyone is wondering. But, Kiril, final question here at Equity Mates, we love making bold predictions. Every year Bryce and I sit down and make a number. We often get them wrong, but it's a lot of fun, too, to do that. Given your history of forecasting these big global trends. I have to finish with this question. Do you have any bold predictions about the future that you'd be willing to leave us with today?

Kiril: [00:35:45] Well, I think by 2030 the world would be unrecognisable in terms of the new world order, the booms that are taking place in some places, the surprising poor performance in other places, perhaps Europe and the US lagging the rest of the world takes off, but is going to be a realignment. And countries that we hadn't thought about as significant players like Saudi Arabia would be a massive player geopolitically and India a massive player geopolitically. So the whole map of the world, this is the old joke, the New Yorker cartoon where you look at New York City, New York was New York City. And it shows we are stretching all the way across states. And there's this view that everything begins in the United States, it ends in the United States, and it's US centric because that's where the performance has been and that's where the excitement is with the innovation, is that. But maybe that's not the way it's going to be in 2013. Maybe it should be surprising that Saudi Arabia has done some amazing things in the Middle East and the Middle East is transformed. It really is just dynamic. You know, the second largest economy in the world is just booming and the whole world could just be so transformed. The US would be kind of lost in the goose in the rest of the world. 

Alec: [00:37:14] Well, that is bold in some ways. It's very exciting to think, you know what the world could be looking like in ten years. Kiril, I want to say a massive thank you for making the time today and joining us on Equity Mates. I've got so much out of this conversation and I'm sure our audience will as well. So a massive thank you. 

Kiril: [00:37:32] Well, it's a great pleasure and I look forward to seeing you when I come to our state. 

Alec: [00:37:36] Yeah, please, let's do this in person. When you're next Down under.