Sam Watkins

And I'm going to give you one other one that he has famously put out there, which is that markets can remain irrational for longer than you can remain solvent.

But I think the point still holds.

And really, what we are seeing is a different message from the bond market and the equity market.

That's certainly the case.

What Warren Buffett was really getting at there is that the fundamental value of assets is priced from a risk-free rate concept.

And a risk-free rate concept, in theory what that is, is where the government sort of short-term rates or longer-term rate curve is.

And so the higher that interest rate where a person could, with little to no risk, get a return, the more that other assets that are further out that risk spectrum are

need to work or the higher the return that they need to deliver in order to compete with that higher base rate.

Putting all of that in the context of stocks, when you look at a fundamental value of a stock, what it is is simply expectation of forward earnings discounted to today's price.

And those forward earnings, when you discount them back at a higher interest rate, are simply worth less today.

And so when you see interest rates move higher, it does put a gravitational pull on equity prices.

And at some stage, we would expect to see that play out.

I think the biggest thing that's driving markets at the moment is really the euphoria around AI.

But there's no doubt that one of the biggest drivers of the US market in particular and many other markets like the Korean market, for example, which has gone on an absolute tear the last two years is

has been these unbelievable growth expectations that have been priced in for a number of the AI-exposed stocks.

And not only that, there's also been a view that's been priced into other stocks that might not be directly exposed to the AI theme, that what they'll see is an improvement in margins driven by...

productivity gains from the adoption of AI.

So AI is at the center of what that disconnect question is right now.

So there is a potential argument that, in fact, future earnings have increased at the same time as the discount rate may have gone up.

Therefore, the story may be not quite as disconnected as what people would be thinking today.