Your Friendly February 2025 Reader Mailbag

Hello, dear readers, and welcome to February 2025’s reader mailbag! Your questions interested us, as always, and we hope our replies interest you!

China is so big! Why is it considered an Emerging Market?

Surprising to many, the size of an economy doesn’t factor when MSCI considers whether to reclassify countries from its Emerging Markets to its developed markets indexes (or vice versa). And despite its size and status as the world’s second-largest economy (using nominal GDP in US dollars), China doesn’t meet many of MSCI’s criteria. Though its total GDP is large, population plays a large role in that. MSCI uses per-capita income, rather than national GDP, as its marker of development. To be included in developed indexes, a country’s per-capita Gross National Income must exceed the World Bank’s high-income threshold three years running. China’s remains under the threshold as of 2023, the latest data available.

MSCI also has several market access requirements, including very high openness to foreign investment, free capital flows and institutional stability. China has made progress on this front over the past couple of decades, but it still has many restrictions, and the government’s various interventions raise questions about operational efficiency and institutional stability.

With all this said, China’s exclusion isn’t a glaring blind spot for people who orient their portfolio toward global developed markets. It is just 3.0% of MSCI All Country World Index market cap (that is the index spanning all developed and Emerging Markets).^[i] That makes it smaller than Japan, the UK and of course the ginormous US. GDP doesn’t necessarily correlate with market cap weightings. 

I get bombarded with materials telling me the dollar is being devalued and I should own silver or gold. Thoughts? How solid is the US dollar?

We see this a lot, too—usually from outfits that have some sort of relationship with a company that wants to sell you physical gold or silver at a hefty markup. Not that we are dismissing these concerns ad hominem, but it is important to understand the motivation behind this stuff and the various interests at work. In a lot of cases, the idea is to scare you into buying something expensive and illiquid, where returns deviate from gold itself because of said costs and illiquidity.

At any rate, this all comes down to what people mean by “the dollar.” Hear us out. It is basically a statement about inflation. As in, a dollar bought three ice cream cones in 1965 and today it buys only one-sixth of an ice cream cone, hence, the dollar has lost value. Gold, silver and other commodities being more expensive now than decades ago is also allegedly evidence of a devalued dollar. Seems to us it would be more transparent to simply say gold and silver appreciated. But then we guess they would have to explore difficult truths, including their inferior long-term returns, higher volatility and frequent failure to hedge against inflation or falling stock markets. It could then raise uncomfortable questions for purveyors like, “Did it appreciate as much as stocks over time?”

Interestingly, when gold and silver fall—which they do, a lot—you never hear people couch it as the dollar regaining value. And somehow, when stocks rise, everyone rightly sees this as wealth creation, not a dollar buying less stock than it used to and therefore losing value. It all strikes us as a verbal shell game.

In our view, the best way to look at the dollar is relative to other currencies. Currencies trade in pairs, after all. So how is the dollar doing relative to the pound, euro, yen, Swiss franc, Canadian loony, Swedish krona, Saudi riyal, and, and, and—or better yet, relative to a trade-weighted global currency basket. As it happens, the dollar is trading near all-time highs relative to these peers. It is super-strong right now.

What are your thoughts on small scale nuclear power, especially with wind and solar having so many problems?

As a technology, just from a pure cool factor, we dig it! For those who don’t follow these things as closely, we are referring to a next-generation nuclear reactor called a small modular reactor. These are factory-built mini power plants, for lack of a better term, that get loaded on trucks and assembled on-site. The use case is for them to be on the same property as a factory, data center, whatever, and power it directly. They are much cheaper, with a much smaller environmental footprint, than traditional reactors. And because they take up less space than wind and solar farms—without the attendant risks to wildlife—they theoretically have a lot of potential to play a big role in the world’s efforts to reduce emissions while delivering reliable electricity.

But as an investment, there are some things to consider. One, we are only now at the point where the first few reactors are in development—we don’t yet know how this will scale and whether market forces will adopt it. Two, there are reports of cost overruns and projects getting canceled accordingly, raising questions about near-term viability. Three, a lot of the pureplay companies are private startups, which create obvious investing roadblocks for everyday folks (and come with a host of risks). Publicly traded companies amount to a handful of very small companies that aren’t generating earnings yet. There are larger Industrials with some exposure to this space, but they have already boomed and busted on this trend a couple of times, which brings us to …

Four, always remember success in investing requires knowing something others don’t. The investment thesis for this industry is well-known, and with expectations so high, we have questions about whether reality can meet exceedingly high hopes within the 3 – 30 month timeframe markets weigh most heavily. Anything beyond that is just a wild guess about long-term winners and losers.