GM109: Why Buffett Finally Went All In on Japan ft. Andrew McDermott

Tesla

Across the shows: 20 speakers in other episodes, 15 bullish and 18 bearish calls, past 30 days

• Andrew McDermott · Mission Value PartnersBearish

  Tesla's roughly $2 trillion valuation is unjustified given its losses, and index investors are forced to own it.

  Andrew uses Tesla as an example of why US investors are questionable. He says S&P index investors are forced to own Tesla, and it has a valuation near $2 trillion while still losing billions of dollars. He questions why he would need to finance that, arguing the returns on US assets are more questionable than they appear. He frames this as a reason foreign savers are reconsidering their US equity exposure.

  “$2,000,000,000,000 valuation, and it's losing whatever it lost, of billions of dollars. Why do I need to finance that?”at 55:03

Japan's economy

• Andrew McDermott · Mission Value Partners

  Japan's decades weren't lost; its economy and social outcomes lead the world, unlike the US.

  He argues the 'lost decades' narrative is a financial-industry artifact: outside finance, Japan's last decades were good, with food, travel and quality of life drawing people to it. He cites Japan leading on all measures of social well-being, while US political dysfunction, crumbling infrastructure and health outcomes show America's decades were the ones lost. He also says higher interest rates are not hurting Japan because it has become a growth market, driven by robots, rare earths, nuclear plants and semiconductor capacity.

  “Japan's last decades have not been lost unless you're in the financial markets... Japan is far and away on all metrics of social well-being a leader.”at 17:55

• Andrew McDermott · Mission Value Partners

  Japan's corporate governance shift came from companies adapting to survive, not from Abe's policy.

  Andrew argues that Japan's corporate changes were not top-down. Abe was a politician reacting to what was already happening. Japanese companies that wanted to survive had to change: they moved away from managers who only focused on resilience and toward capital-markets-driven returns. He compares this to the US model of 1950-1980 and notes that cross-holdings unwound as ownership changed. He also says the low-ROE framing used by Western investors misses the context.

  “It's not because of Shinzo Abe. It's because these Japanese companies, in order to survive, had to make a bunch of changes”at 37:01

• Andrew McDermott · Mission Value Partners

  Japan's public balance sheet is not an outlier and is structurally more favourable than the US.

  Andrew says that when public and private pensions are consolidated, Japan is not an outlier. Japan is a large net owner of foreign assets, and it has repeatedly restructured its liabilities. Its pension benefits are nominal while its assets are real, and it has held equities through the recent growth period. He also cites the country's historic ability to adjust, PISA results and infrastructure as evidence of strong underlying assets. He concedes Japan has a debt problem but says the US is in a worse position.

  “Japan is not an outlier, and second, that the structure of Japan's balance sheet is very favorable as is the historic ability to make adjustments.”at 46:27

• Andrew McDermott · Mission Value Partners

  Rising JGB yields make Japanese pension assets stay home, reducing overseas bond buying.

  GPIF has a real return objective of about 1% over real wage growth. Andrew says JGB yields have risen to a level that is now attractive against hedged US Treasuries for that objective, which was not the case when yields were near 25 basis points. A fixed-return mandate has no reason to take overseas currency risk when domestic bonds meet the target. He adds that Japanese lenders could pull money from foreign fixed income, and that even small changes in Japanese allocations could have a large effect on other markets. He flags France as the largest outflow area.

  “When you've got a fixed objective like that, why take that overseas currency risk?”at 53:31

• Andrew McDermott · Mission Value Partners

  MIT's partnership with Tokyo's science consortium is a sign Japan is regaining tech and talent momentum.

  Andrew cites MIT's comprehensive partnership with the Tokyo Science Consortium as a sign Japan is gaining ground. The deal covers venture investing, technology commercialisation, research, and student and faculty exchange. He contrasts this with MIT training Chinese engineers at a far higher ratio than Japanese engineers, which he sees as a worry. He argues Japan can lead in an AI age and that democracies partnering with Japan could counter China's tech progress.

  “About three weeks ago, MIT announced a comprehensive partnership with the Tokyo Science Consortium... Now that to me is a great sign.”at 57:56

International equities

• Andrew McDermott · Mission Value Partners

  Global investors overlooked Japan because of China-centric thinking; Buffett's all-in move signals the opportunity.

  He blames the financial industry's 'cognitive prison' for Japan's neglect. He cites Russell Napier's argument that China's deal of fixed currency, massive debt and cheap exports suppressed prices and rates, and says financiers who prospered under that system bought into it. He notes Buffett ignored Japan for fifty years and went all in just when the industry gave up. Japan is about 6% of the MSCI World, which he treats as a sign of under-allocation.

  “We're in a cognitive prison created by the Communist Party of China.”at 15:10

• Andrew McDermott · Mission Value Partners

  Japanese equity and bond returns look very attractive prospectively, with a stronger yen a tailwind.

  Andrew says Japan's fixed income and equity returns both look very attractive prospectively. He notes GPIF has about 25% of its portfolio in Japanese equities and has moved to increase that exposure, invested through public markets with low fees. He says that even stability in the yen, let alone an increase in its value, would be a big tailwind for Japanese assets.

  “Japan's fixed income returns and equity returns are all very attractive, prospectively.”at 54:26

Private equity

• Andrew McDermott · Mission Value Partners

  PE's leverage-and-strip model hollowed out US industry, and its deal flow is now struggling.

  He traces the shift from making things to financial engineering to KKR's 1980s HUDI buyout, which he says bankrupted the US machine tool industry. He says the latest jobs report showed manufacturing jobs rising strongly and finance jobs falling. He observes that PE and private credit are struggling to generate the deal flow they had in the past. He calls the model a misallocation of capital and says the industry should rethink its work.

  “the private equity and private credit markets are struggling to generate the sort of deal flow that they've had in the past.”at 20:15

• Andrew McDermott · Mission Value Partners

  Japan risks becoming a KKR-style private equity portfolio, a major risk to Japanese companies.

  Andrew argues that investors are betting Japan will change through activist and private equity investors. He thinks foreign shareholders own about 35% of the Japanese market but mostly focus on China, not Japan. In this context, he sees a real risk that Japan's companies end up owned and run as private-equity-style portfolios, rather than through the company-led reform he argues is actually working.

  “Not that China becomes more like Japan, but that Japan becomes more like KKR's portfolio, and it's a huge risk.”at 44:28

Wealth, inequality & billionaires

• Andrew McDermott · Mission Value Partners

  US and China have identical wealth distribution; Japan is the most equitable in the developed world.

  He cites research by Jesper Kahl showing the US and China have identical wealth distribution, with the rewards of free enterprise concentrated among financiers who take little personal risk. He says Japan is by far the most equitable developed economy. On his definition of a working economic system, he argues the US and China fall short while Japan leads.

  “They're identical in terms of their wealth distribution. Japan is by far the most equitable in the developed world.”at 6:43

Europe's economy

• Andrew McDermott · Mission Value Partners

  Europe lacks any competitive advantage and is dismantling its grid, so its industry is in decline.

  He says he struggles to find any area where a European country or company has a competitive advantage. He argues Europe is taking its grid apart, which blocks any serious conversation about power and manufacturing. He says the financialised leadership model, which Britain adopted and which spread across Europe outside Germany, stopped making things and is catching up with the continent.

  “I struggle to think of any area where any European country or company has any sort of competitive advantage, and it's a tragedy.”at 8:44

Manufacturing & industrial policy

• Andrew McDermott · Mission Value Partners

  Over $20B of Japanese investment in US Southeast is reshoring capacity once made in China.

  He has tracked Japanese investment in Southeast US over the last couple of years, totalling over $20B in his state alone. It spans steel, rare earths, generation machines, nuclear plants, automated manufacturing, nuclear power and quantum computing. He says much of it was made in China three years ago and is now coming back, partly state-supported and partly driven by tariffs. Japan's record machine tool orders to the US and China support this. He says it is logical, but the distribution of gains and the dislocations it causes are the real question.

  “I've been keeping track for the last couple of years of the size of those investments, and it's over $20,000,000,000 just in my state...”at 12:07

Power demand & the grid

• Andrew McDermott · Mission Value Partners

  US power generation was flat for twenty years and must now be rebuilt to compete with China.

  He says the US had flat power generation for twenty years while adding no new capacity. China is scaling its power supply up eightfold, so the US now needs to rebuild to compete. He contrasts this with Europe, which is taking its grid apart and so cannot have a serious conversation about these issues.

  “America wasn't, and we did... We had flat power generation for twenty years.”at 13:04

AI chips & semiconductors

• Andrew McDermott · Mission Value Partners

  Japan is close to a 1.5nm chip leap with IBM, potentially beyond TSMC, and TSMC is investing there.

  He says Japan is very close to partnering with IBM on a 1.5-nanometre process, which he claims would be ahead of TSMC. He notes that TSMC is aggressively investing in Japan. He presents this as evidence that Japan's industrial capacity is being bid for as the world rebuilds manufacturing.

  “Japan is very close to partnering with IBM to make a leap to one and a half nanometer technology higher than TSMC.”at 21:14

China's economy

• Andrew McDermott · Mission Value Partners

  China's suppressed rates and prices produced false price signals that distorted Western costs and investment.

  He argues China suppressed rates and prices for its own purposes, so low Western prices for rare earths and GM cars reflected a false signal. He cites GM's $6B write-off in China and says the entire investment there is now effectively zero. He links this to the West's lower living standards and the current scramble for rare-earth and industrial capacity.

  “China was suppressing rates and suppressing prices for their own purposes... That entire price signal that we use... That was all false.”at 21:53

Critical minerals & rare earths

• Andrew McDermott · Mission Value Partners

  US lost rare-earth magnet capacity; Japan, which kept making them, is now the supplier of choice.

  He says cheap rare earths were a false price signal, built by China suppressing prices. GM sold its magnet business to a firm linked to Deng Xiaoping's relatives, then wrote off $6B in China. The US can no longer make magnets, but Japan invented them and kept producing them for forty years. That gives Japan a bid for capacity that was always there.

  “And all of a sudden, we don't have enough rare earth magnets. We can't make them in The US anymore. Well, guess who can? The Japanese...”at 23:04

AI bubble & tech valuations

• Andrew McDermott · Mission Value Partners

  Big Tech's AI spending is a gigantic negative return on invested capital, visible in balance sheets.

  He argues that AI is not adding to human flourishing or creating economic value, and that its return on invested capital is deeply negative. He says this shows up mathematically on the balance sheets of the companies spending the money. He calls it a misallocation of human capital, competing with finance, and says a handful of tech leaders' spending that generates no revenue is a vanity project that won't produce real leadership.

  “It's not creating economic value. It is a gigantic negative return on invested capital. You can see it mathematically on the balance sheets of these companies.”at 27:19

Enterprise AI adoption & AI software

• Andrew McDermott · Mission Value Partners

  Japan's machine learning in manufacturing process improvement is world-leading and economically useful.

  He says Japan's real AI is machine learning applied to continuous improvement in manufacturing, an area where the Japanese are uncontested. He checked his two largest holdings and found they started discussing AI in 2015 and 2016, when this applied work began. He cites Anduril's drone project, which could only source fully non-Chinese parts from Japan. He contrasts this productive use with the speculative AI spending in the US.

  “So I'm incredibly bullish on Japan's participation in the guts of this machine learning for the same reason that I was bullish on it fifteen years ago.”at 29:56

US entitlements

• Andrew McDermott · Mission Value Partners

  US Social Security and Medicare face a forced benefit reduction within about two years.

  Andrew says the US Social Security and Medicare system is about two years from being forced into a benefit reduction. He contrasts this with Japan, which restructured its pension liabilities in the past, and with Japan's pension assets, which are invested in equities that have performed well. He notes the US Social Security fund is invested in T-bills, which he says are getting hurt. He presents this as the reason the US is in a weaker position than Japan.

  “The US Social Security and Medicare system is two years from moving to a forced reduction [, being bankrupt].”at 46:49

US dollar

• Andrew McDermott · Mission Value Partners

  A non-US trading system is emerging, with China–Iran trade settled in gold, challenging the dollar.

  Andrew cites his friend Luke Gromen's argument that the financial system will have to be rebased on a gold standard. As evidence, he points to a non-US trading system already forming between China and US adversaries. He gives the example of commodity trade with Iran that is net-settled in gold. He presents this as a sign the dollar-based system is being bypassed.

  “We're already seeing a non US system... Trading system between China and our adversaries. You know, they're trading with Iran for commodities with net settlement in gold.”at 48:56

US deficit & government debt

• Andrew McDermott · Mission Value Partners

  US government debt problem is much worse than officially acknowledged, relative to Japan.

  Andrew says everyone has a debt problem, but he thinks the US is much worse than acknowledged. He points to the Federal Reserve paper that consolidated US and Japanese government balance sheets, showing that US pensions and other obligations sit off balance sheet in a way that Japan's do not. He argues the US pension structure is the reverse of Japan's, with liabilities in real terms and assets in nominal ones.

  “Everybody has a debt problem. I just think The US is much worse than acknowledged.”at 49:30