We continued the tradition of The Most Interesting Dinner in the World in Toronto to start the new year. 

As is customary at our events, each attendee was requested to bring a chart to discuss with the group. Please find a summary of the charts and discussion below.

Chart 1: Long Dominatrix The belief that the Magnificent Seven are the most crowded trade on the planet is overwhelming, but the typical investor is underweight those names compared to the index. The pain trade is an acceleration of MAG7 outperformance.

Chart 2: Short Gloom “What if the Roaring Twenties are behind us?”

Chart 3: Short Scrooge There is no viable solution to address unsustainable budgets without encountering a crisis.

Chart 4: Long Conundrum “Real return bonds are essentially free money.”

Chart 5: Long Unknowing Who thought the October 7 attacks would disrupt maritime trade in the Red Sea and result in the US and UK striking Houthi forces in Yemen? What comes next? 

Chart 6: Short Gremlins When did you start believing in yourself? 

Long Dominatrix 


Source: Goldman Sachs

“While the strong runup in the Magnificent Seven (MAG7) stocks left many investors filled with fear and regret, I don’t think these companies are overvalued,” says the speaker. 

Since 2020, collectively, Amazon, Alphabet, Microsoft, Meta, Nvidia, and Tesla, have tripled their earnings. The 493 biggest US stocks that aren’t among this cohort have grown their earnings per share by only about 25 percent. 

MAG7’s margins expanded by nearly 750 basis points to 23 percent in the fourth quarter and analysts expect another 250 basis points increase during the next three years. In contrast, margins for the 493 S&P 500 companies contracted 110 basis points in the fourth quarter and are expected to rise only 44 basis points by 2026.  

In aggregate, the MAG7 currently trade at a forward P/E multiple of 30x compared with 20x for the overall index and 18x for the remaining 493 stocks. While elevated versus the last ten years, the 50 percent P/E premium ranks below the peak 103 percent premium reached in 2021 and 73 percent premium at the height of the dot-com bubble. 

“Many are cautious looking at the lofty valuations, however, MAG7’s strong earnings prospects must be taken into consideration,” the speaker adds. The price/earnings-to-growth (PEG) ratio for the S&P500 is 1.88 while the MAG7 is trading at an attractive PEG ratio of 1.11. 

“While the belief that the MAG7 have become the most crowded trade on the planet has grown overwhelming, the reality is the typical mutual fund and hedge fund is underweight those names compared to the index weight,” a participant states. “The pain trade entails an acceleration of MAG7 outperformance rather than the catchup trade that most anticipate.”

Short Gloom

Source: Mark Mills, The Cloud Revolution

The speaker presented a compelling case for optimism, referencing Mark Mills’ 2021 book titled “The Cloud Revolution: How the Convergence of New Technologies Will Unleash the Next Economic Boom and A Roaring 2020s.” The book forecasts an economic boom driven by the convergence of radical advances in three primary technology domains: information, materials, and machines. 

Microprocessors are increasingly embedded in everything. Materials, from which everything is built, are showcasing new, almost magical capabilities. And machines responsible for producing and transporting various goods are undergoing a parallel transformation. The author contends that driving and expediting all of these advancements is the cloud, which is itself based on the building blocks of next-generation microprocessors and artificial intelligence.

“We’ve seen this pattern before,” says the speaker. “The technological revolution that fueled the significant economic growth of the twentieth century can be attributed to a comparable convergence, which initially became apparent in the 1920s: a new information infrastructure (telephony), new machines (cars and power plants), and new materials (plastics and pharmaceuticals).”

Consider other technological leaps. As brilliant as Henry Ford was, he could not have built his great enterprise but for the confluence of the internal combustion engine, petroleum refining, and the idea of an assembly line. And Steve Jobs could not have built the iPhone were it not for the availability and maturity of three technologies that had come of age, none of which Apple had anything to do with: the silicon microprocessor, a pocket-sized TV screen, and the lithium battery. 

According to Mills, the cloud will now facilitate the creation of new information, materials, and machines that will drive the productivity boom of the 2020s. 

“There’s only one problem,” a participant jumps in. “We have far exceeded the 1920s bull market on a total return basis.” The S&P 500 gained 385 percent between 1921 and 1929. We are up 640 percent since 2009. “What if the Roaring Twenties are behind us?”

Short Scrooge

Source: CBO

The Congressional Budget Office has issued a warning about the unsustainable trajectory of US government finances. The independent watchdog predicts that US government borrowing will remain relatively stable over the next decade, hovering around 6 percent of GDP. However, this level significantly surpasses the 3.7 percent average observed over the previous 50 years, a period encompassing the global financial crisis and the pandemic.

These projections hinge on the assumption that most of Donald Trump’s 2017 tax cuts will expire by the end of 2025, and that the public spending constraints outlined in the 2023 Fiscal Responsibility Act will persist beyond that point. This implies a decline in discretionary US government spending, including defense, from 6.4 percent of GDP last year to 5.1 percent in 2034. Such projections starkly contrast with the 8 percent average observed over the past 50 years and raise doubts about their credibility.

Moreover, the slightly optimistic expectation that the US government will be able to consistently borrow short-term funds at rates below 3 percent further underscores the fantastical nature of these forecasts. Concerns about fiscal dominance have gained ground—and they carry inherent risks.

“Since 2020, fiscal spending has allowed the economy to grow faster than forecast, providing a tailwind for stocks versus bonds,” says the speaker, who expects a favorable risk backdrop. “So far, we have not seen any signs of the market being unwilling to finance these government debts.” In contrast to the UK, for example, where in 2022 the Truss government’s aggressive fiscal plan spurred a spike in yields and a decline in the pound. 

The US government is on track to pay $1 trillion in net interest costs starting in 2026—and they are forecast to rise from there, pinching other national priorities. The government already spends more money servicing the national debt than it does on Medicaid, and the number is on track to surpass defense spending soon. Two-thirds of the increase in net interest payments is resulting from higher rates, and one-third as a result of the amount of debt. 

Debt service costs were 1.2 percent of GDP in the mid-2010s and 1.8 percent in 2019 just before the pandemic. But the combination of higher interest rates and the swell of debt for pandemic relief spending has pushed that much higher. Debt service amounted to 2.4 percent of the economy last year, and is poised to rise to 3.1 percent this year and 3.9 percent in 2034.

“The last time the government’s interest costs were anything near this level as a share of the economy, in the late 1980s and early 1990s, deficit reduction became a central political issue and bipartisan cause,” shares a participant.  

In the 1990s, President George H.W. Bush signed a bipartisan deficit reduction deal that, among other things, increased the top income tax rate to 31 percent from 28 percent. President Bill Clinton’s first budget act in 1993 raised taxes further, pushing the top rate to 39.6 percent. Deficits fell sharply through the 1990s and flipped into a surplus in 1998.

“Politics now are very different. A legacy of the pandemic is that the government is prioritizing human outcomes over budget comes,” he continues. “If fiscal policy is showing such little constraint in good times, what happens to the deficit when the next recession arrives?” 

It was acknowledged that there is no viable solution to address unsustainable budgets without encountering a crisis. The more probable scenario is that we will persist in muddling along, feigning that everything is acceptable until a critical point is reached. The timing of such an event remained uncertain to all.

Long Conundrum


Source: FRED

The speaker’s chart show the estimate of the neutral rate, which supports the economy at full employment while keeping inflation constant, the 10-year real yield, which he calls “the building block of financial asset pricing,” and equity returns by decade.  

“It’s hard to know what the equilibrium real rate will be going forward, but what’s interesting is that there’s no discernable relationship with equity returns,” the speaker notes. “We have to treat our equity allocation decision independently of the fixed income outlook.”

As the CIO of a pension fund, he loves real return bonds to neutralize the plan’s liabilities. “Even if real yields jump 100 basis points, it wouldn’t matter,” he says. “While the asset side of our balance sheet may suffer, our future obligations will be lowered by an even greater amount, thus improving the plan’s overall funding position.”

Real return bonds have the potential to weather multiple macroeconomic scenarios. If inflation resurges, high starting yields provide a cushion. And if inflation moderates, bonds and equities may resume their more typical inverse relationship (i.e., negative correlation) – meaning bonds tend to do well when equities struggle. In a hard landing, where growth and inflation fall quickly, real return bonds can provide equity-like returns.  

“With yields near fifteen-year highs, we’ll keep buying,” another pension fund CIO adds, advocating that real return bonds are essentially free money. “You can repo them, receiving 98 percent of the capital which you can deploy anyway you like.” 

Long Unknowing


Source: Encyclopedia

“Who could have thought the October 7 Hamas attack against Israel would disrupt maritime trade in the Red Sea and result in the US and UK striking Houthi forces in Yemen?” the speaker inquires. “The price of sending goods around the world is spiking while stoking fears of a wider conflict.” 

About 15 percent of global seaborne trade goes through the Red Sea. This includes 8 percent of global grain trade, 12 percent of traded oil by sea, and 8 percent of the world’s liquefied natural gas trade. The disruption, coupled with drought-induced congestion at the Panama Canal, raises concerns about goods shortages that, if sustained, could reignite inflation.

The speaker is worried that Israel will eventually attack Iran. In response, what if Iran shuts down oil tanker traffic through the Strait of Hormuz, through which about one-fifth of the world’s oil passes each day? Even though the majority of those shipments are bound for Asia, the interconnectedness of the global oil market means a supply disruption anywhere is a disruption to prices everywhere. 

“Ongoing geopolitical risks from the Middle East conflict may cause a surge in energy prices, even as prices remain stable for the moment,” the speaker warns. He’s seeking ways to hedge this tail risk. “It is not easy,” he admits. The only consideration at the moment is speculating on the widening premium between the internationally traded Brent and the West Texas Intermediate (WTI) crude benchmarks.

Short Gremlins


Source: Anderson

“In February 2016, amidst the turmoil of global markets, my mentor, Steve Drobny, found himself in a dilemma. Eager to host a bull versus bear debate at his prestigious macro event, he struggled to find someone willing to challenge the profoundly bearish John Burbank, then-founder and CIO of Passport Capital. “Do you want to do it?” he asked me. “Yes!” I eagerly responded, optimistic about the world and eager to challenge the bearish thesis.

“At the time, I was in my third year in the business, barely scraping by financially, and feeling like an impostor among the esteemed hedge fund luminaries at the gathering. Despite my insecurities, I diligently prepared for the debate. To my satisfaction, the event went exceptionally well. I found myself more persuasive than expected, and many guests approached me afterward to commend my courage and appreciate the alternative perspective I offered. 

“It was a pivotal moment that ignited my self-belief. For years, I had perceived my unconventional background as a shortcoming, but standing on that stage, I realized it was a unique strength. It allowed me to perceive the world through a different lens, distinct from the majority of Western-trained analysts. Over time, my bullish outlook was vindicated, bolstering my confidence.”

I posed a question to the guests: when did you start believing in yourself?

“Only in the last couple of years,” one attendee shares, a portfolio manager at a multi-family office. “It took establishing a robust process and delivering consistent performance.” They transitioned from solely allocating to external managers to actively managing capital themselves. He admits it is still “tough in moments” but he is focused on strengthening his skills and abilities.

Another participant recounted winning a stock-picking competition. At Citadel, each portfolio manager keeps a paper book. In 2018, he had the top stock picks in three out of the four quarters and won the contest. “That was when I realized I can do this.”

Reflecting on his career shift from the Bank of Canada to the buyside during a bond market downturn in 1994, another guest recalls feeling overwhelmed but persevering through the challenge, emerging as a seasoned portfolio manager.

“I was given the reigns to manage a $1 billion bond portfolio in mid-1994. It can’t get any worse I thought and started buying duration,” he recounts. Yields kept rising and he got berated by his boss day in and day out. “She was hard,” he says, remembering the anguish. “But I realized that if I can survive working with Carmen, and the worst bond selloff in more than sixty years, I can survive anything.” 

Yet another attendee, contemplating the long-term prospects of winning, emphasized the importance of teamwork and collaboration. 

He reflects on how many people he has worked with since 1987, and how it was always a group of five people that worked closely and delivered exceptional results. He shares his epiphany: “I realized that I don’t need to know everything, and more importantly, that I don’t have to do it alone.” 

Now, by placing his belief in the team and collective effort, his mindset has shifted from “how do I win?” to “I can’t see how I don’t win.” 

The final guest recounts how it took him a year to secure a job in Toronto after immigrating from Iraq. Upon starting at the pension fund in 2002, his boss immediately tasked him with suggesting a currency trade. Fueled by nerves, he hastily researched and proposed buying the euro against the US dollar. To his astonishment, his boss approved a $100 million position.

“I panicked,” the participant confesses. “The sum felt daunting, and I feared losing my job.” He walked over the trading desk and asked them to put on the trade. They sent him away, requesting the instructions to be sent in an email. “I’ve never spell checked an email that carefully, ever.” 

Fortunately, the trade proved successful, with the euro climbing nearly 50 percent over three years. “I got lucky,” the participant admits. “But I was touched by how much my boss trusted and believed in me. That instilled confidence in myself.”

Sixteen years later, following a remarkable track record that dispelled any notions of mere luck, the attendee was appointed as the CIO of the pension fund.

In each narrative, there’s a common thread of self-discovery, resilience, and the realization that belief in oneself is cultivated through experience, challenges, and the support of others.