Speaker 1: Bloomberg Audio Studios, podcasts, radio news. Hello Meren Talks Money.
Speaker 1: Listeners now, First, a quick reminder, we are recording an
Speaker 1: episode of Maren Talks Money in front of an audience
Speaker 1: the morning after Rachel Reeve's UK budget. That'll be a
Speaker 1: depressing affair. Join us at Bloomberg's European headquarters in the
Speaker 1: heart of the city of London for customs of smart analysis.
Speaker 1: I'll be joined by Helen Thomas of Blonde Money, Stephanie Flanders,
Speaker 1: Bloomberg's head of Government and Economics, and of course John
Speaker 1: Steppeck will be there. Find the registration link in the
Speaker 1: show notes. Space is limited as ever, so do sign
Speaker 1: up soon onwards. Welcome to Meren Talks Money, the podcast
Speaker 1: in which people who know the markets explain the markets.
Speaker 1: I am Maren Somerset Web. This week Albert Edwards, Global
Speaker 1: Strategistic Society in General, joined me in the London studio.
Speaker 1: The ft has called Albert a provocative and voluble strategist.
Speaker 1: Other people just call him famous investment guru, and my
Speaker 1: colleagues at Bloomberg like to call him a perma bear.
Speaker 1: Sorry about that, Albert, Albert. Welcome to Marin Talked Money.
Speaker 2: Hi there, and thanks for inviting me on. It's been
Speaker 2: a long while since I've been promising to come on,
Speaker 2: but here i am.
Speaker 1: You have been promising to come on, I would say
Speaker 1: for many many years, but here you are. This is
Speaker 1: exciting and I'm going to get as much audio as
Speaker 1: I possibly can because I suspect you and agree to
Speaker 1: come on again for another decade. So we're going to
Speaker 1: have to cover pretty much everything. So why don't we
Speaker 1: start with equity markets bubble or no bubble in the US.
Speaker 2: That is, I think there's a bubble, but they were
Speaker 2: going to always think there's a bubble. But I think
Speaker 2: looking back, I've been in the markets now since nineteen
Speaker 2: eighty two. I've been working, and these things come around
Speaker 2: from time to time, and during each bubble there's always
Speaker 2: very plausible narrative, very compelling, and hey, I know in
Speaker 2: previous bubbles like two thousand and seven and even that
Speaker 2: the Nasdaq bubble in late nineteen nineties, even I start
Speaker 2: to doubt myself. And this is one of these times,
Speaker 2: very compelling narrative, strong earnings, and but it will end
Speaker 2: in tears, that much, I'm sure of.
Speaker 1: We were both working back in the Dot gum bubble days,
Speaker 1: and so we remember the run up right those days
Speaker 1: when we were told that the old valuation methods didn't
Speaker 1: count anymore, and that we should realign ourselves with the
Speaker 1: new plateau of the market, etc. And that because the
Speaker 1: new technology was going to change the world so enormously,
Speaker 1: valuations didn't matter, current earnings didn't matter. It was all
Speaker 1: about the future. So we remember all those things, and
Speaker 1: then of course it all went horribly wrong. Do you
Speaker 1: feel any of those things now?
Speaker 2: I do, And the narrative is in some ways very similar,
Speaker 2: particularly when you see these extremely rich valuations in tech
Speaker 2: thirty times over thirty times forward earnings in the US
Speaker 2: being justified because of decent earnings growth. But one of
Speaker 2: the key comparisons I think is there when you think
Speaker 2: back to the late nineties the telecom sector, which will
Speaker 2: get it because it was it was it wasn't just technology,
Speaker 2: it was technology. MEDIAMTMTVOINT and the telecom sector were getting
Speaker 2: free money. They were laying cables. The amount of capital
Speaker 2: investment which was taking place on the back of the
Speaker 2: free money, a lot of it quite useful, but a
Speaker 2: lot of it replication, a lot of it not needed,
Speaker 2: wasted investment and how it strangled the other parts of
Speaker 2: the economy as money was towards this sector. So one
Speaker 2: of the key comparisons. You had a bubble in earnings
Speaker 2: as well as a bubble in valuations, and then something
Speaker 2: always changes to pull the rug out from under it. Now,
Speaker 2: during the Nasdaq bubble, it was higher interest rates. The
Speaker 2: Fed was raising interest rates through the back end of
Speaker 2: nineteen ninety nine. But one key thing which people often
Speaker 2: forget is despite these higher interest rates, as you moved
Speaker 2: right towards the end of nineteen ninety nine, people were
Speaker 2: so scared of the Y two K time bomb that
Speaker 2: we'd flip over to the first of January and all
Speaker 2: the computers will stopped working.
Speaker 1: Certing younger listeners won't remember this we're talking about. There
Speaker 1: was this palling fear that all of our technology, all
Speaker 1: of our computer systems would be unable to deal with
Speaker 1: this turn of the century and everything around us would collapse.
Speaker 2: Absolutely, And it was prudent to buy lots of tins
Speaker 2: of baked beans. If everything went down, then I personally
Speaker 2: quite likely you can cold baked beans out of a can.
Speaker 2: But if it didn't go down, it was fine. You
Speaker 2: had your cash safe. You just put it. It was just preventative.
Speaker 2: But what you saw, and you can see it in
Speaker 2: the I was chatting about it with one of my
Speaker 2: colleagues last week and I showed him a chart of
Speaker 2: USM not rocketing up towards the end of nineteen ninety
Speaker 2: nine and then collapsing as you flipped over into the
Speaker 2: year two thousand and everything didn't shut down. The FED
Speaker 2: withdrew that liquidity, and that is when the Nasdaq started
Speaker 2: toppling over. Now, as far as I can see, at
Speaker 2: the moment, those same conditions aren't there. The Fed is
Speaker 2: lowering interest rates rather than tightening interest rates, and they're
Speaker 2: just moving away from quantitative tightening to be neutral. I
Speaker 2: think they'll go to quantitative easing quite soon. So normally
Speaker 2: when bubbles burst, it is usually the monetary authorities tight cycle,
Speaker 2: and that isn't there. And I feel a bit like
Speaker 2: towards nineteen ninety nine, I just got bored being bearish,
Speaker 2: basically rattling my chain saying this is all a bubble,
Speaker 2: It's all going to collapse. I find myself talking about
Speaker 2: something else a lot a lot of the time, and
Speaker 2: that's the comparison, which really worries me. I can feel that, yeah,
Speaker 2: this is going to go on for a lot longer.
Speaker 2: And actually that's when something just comes out of the
Speaker 2: woodwork and takes the legs from out from under the bubble.
Speaker 1: Interesting. So, I mean, you are not the only person
Speaker 1: talking about a bubble, neither neither ofm I there's almost
Speaker 1: a bubble and people talking about bubbles, if you see
Speaker 1: what I mean said. It's not as though it's a
Speaker 1: contrarian thing to say anymore. It feels very obvious. But
Speaker 1: it also seems possible that they could be a melt
Speaker 1: up from here. Absolutely people talk about melt ups, and
Speaker 1: I'm like, kind of al really had a melt up
Speaker 1: that looked like a melt up. But maybe there's more
Speaker 1: melt up to.
Speaker 2: Come as they sort of start to flip away from
Speaker 2: quanstant tightening to quantitative easing. And I think it have
Speaker 2: to be. There's a lot of evidence that there's problems
Speaker 2: in the repo markets in the US and in the
Speaker 2: plumbing that the FED users that they're going to be
Speaker 2: forced to shift to quantitative easing quite quite soon, and
Speaker 2: that for example, could cause a further melt And so
Speaker 2: when the bubble burst will be even more damaging than
Speaker 2: it would be if you've got it over with early.
Speaker 1: And is this a bubble? Do you think that on
Speaker 1: bursting is similar in scale for dot com bubble or
Speaker 1: is it worse in that two To some extent, the
Speaker 1: TMT bubble was sort of contained, and this seems to
Speaker 1: have a much deeper set of deeper tentacles throughout the
Speaker 1: US economy in particular.
Speaker 2: I think what may make it worse this time around
Speaker 2: is that the New York Fed, for example, have shown
Speaker 2: that consumption growth has become more and more concentrated amongst
Speaker 2: higher earners, rich consumers whose wealth has been inflated by
Speaker 2: the stock market doing so well. Consumption for the for
Speaker 2: the bottom fifty percent of income earners has actually been
Speaker 2: quite quite poor. So to the extent, what has driven
Speaker 2: the economy forwards is AI investment, this sort of spaghetti
Speaker 2: of vendor and that's another comparison. There's spaghetti charts of
Speaker 2: vendor financing that we also saw in nineteen ninety nine.
Speaker 2: But what is is slightly more concerning is I think
Speaker 2: the economy may be more reliant on the stock market
Speaker 2: going up, and if it goes down thirty forty fifty percent,
Speaker 2: and we've seen these before. A lot of people be
Speaker 2: stunned that that can even occur, But actually consumption just
Speaker 2: gets hit very very bad. Indeed, so it's not just
Speaker 2: an investment cycle, but a consumption cycle too.
Speaker 1: Yeah, and that might be particularly bad given the huge
Speaker 1: retail participation in this bubble, particularly in the US right
Speaker 1: and I keep looking at the number of leveraged ETF launchers,
Speaker 1: single stock, single stock leverage ETFs.
Speaker 2: And certainly after Liberation Day when President Trump backed off
Speaker 2: his initial tariffs and the stock market started going back
Speaker 2: crazy from that point onward, that was retail which drove that.
Speaker 2: And the professional investors we could see from the service
Speaker 2: were very reluctant to participate. They were still quite bearish.
Speaker 2: They're expecting a recession, and they really drag kicking and
Speaker 2: screaming into the market by retail. Just yeah, just buy
Speaker 2: the dips, always just by, because you know, the stop
Speaker 2: market never goes down very might might pop down ten percent,
Speaker 2: fifteen percent, but it doesn't go down thirty forty fifty
Speaker 2: percent anymore until it won to bet until.
Speaker 1: It does exactly. Let's leave aside what might be a
Speaker 1: trigger for the end of the bubble for preventing a
Speaker 1: melt up. But a lot of this idea that it
Speaker 1: might go on, that might be a continuation in the
Speaker 1: bubble is about inflation and interest rates, right as you
Speaker 1: just said, so you're expecting the Fed to keep cutting rates,
Speaker 1: We're expecting ritcuts in the UK, etc. But you've also
Speaker 1: written about the deflationary environment in China.
Speaker 2: I mean, if any other economy G seven major G
Speaker 2: seven industrialist economy had seen the level of economy wide
Speaker 2: deflation that China is suffering. So China has seen twelve
Speaker 2: successive quarters, quarters, not months, quarters of year on year
Speaker 2: declines and its GDP deflator. That's economy wise, So it's
Speaker 2: more than just the CPI or RPI. It's economy. Why
Speaker 2: includes exports, includes investment goods, et cetera. If any other
Speaker 2: economy had seen that, they would be printing money like
Speaker 2: confetti and chucking it into the economy. China is in
Speaker 2: a real hole in terms of its deflation, and as
Speaker 2: we know having followed Japan over many years, the worst
Speaker 2: situation to be in is when you're a highly indebted
Speaker 2: economy as China is, and then to suffer deflation because
Speaker 2: it crushes you.
Speaker 1: Well, it increases the real value of people's debt and
Speaker 1: makes it even harder to pay off. You want infleation
Speaker 1: if you're in debt nor deflation, right absolutely.
Speaker 2: And Robin Brooks, who I follows at the Brookings Institute,
Speaker 2: no relation to the name, but he pointed out that
Speaker 2: the China's PPI on consumer durable goods is accelerating downwards.
Speaker 2: It's down four percent year on you own it's getting
Speaker 2: worse this and this is part of their surplus capacity problem.
Speaker 2: They've got a lot of deflation to give the world
Speaker 2: and they want to get rid of it. And the
Speaker 2: big surprise could be where, especially in the US, where
Speaker 2: everyone is waiting for inflation to pick up because of
Speaker 2: the tariffs, is it just doesn't that inflation we add
Speaker 2: a downside surprise in the UK recently, albeit from quite
Speaker 2: high rates, downside surprise in Japan. US has broadly been
Speaker 2: surprising on the downside looking at their underlying driver for inflation,
Speaker 2: which is unit labor costs. Is what I've been writing
Speaker 2: is look unit labor costs, and unit costs are only
Speaker 2: at running at one percent year on year, and that's
Speaker 2: that's not an erratic number, that's smooth that's what most
Speaker 2: economists think drives inflation, and that's been coming down quite smartly,
Speaker 2: as has Court company inflate corporates. The corporate price deflator
Speaker 2: has come down, and that's running quite a way below
Speaker 2: course CPI and I think the surprise maybe not the
Speaker 2: economy suddenly drops into the recession in the next few months,
Speaker 2: but inflation really carries on under shooting, the bond rally
Speaker 2: really gets going, which will cheer Rachel Reaves up up
Speaker 2: no end in the UK, and actually that inflates the
Speaker 2: stock market bubble even more.
Speaker 1: Perhaps, but it's not idea for deeply indebted Western economies.
Speaker 1: If one of the things that we talk about a
Speaker 1: lot on the podcast is how do you deal with
Speaker 1: this level of public debt? What on earth can you
Speaker 1: do about this? And the answer, of course is a
Speaker 1: type of financial repression, running interest rate slightly lower than
Speaker 1: inflation for a long time, so that eventually your debt
Speaker 1: doesn't necessarily go way, but it is massively reduced to
Speaker 1: that in some ways. The last thing that an economy
Speaker 1: like ours once right now is another wave of deflation
Speaker 1: out of China.
Speaker 2: It's to get out of jail free card for the
Speaker 2: politicians cyclically, I could think we can get down shift
Speaker 2: in inflation on a secular or trend basis. I mean,
Speaker 2: I'd been known for many many years my ice age thesis,
Speaker 2: which I put together at the end of the nineties
Speaker 2: the West, following what happened in Japan, that inflation would
Speaker 2: come low and low and bond yours following that after
Speaker 2: the pandemic, I have switched camp into a secular rise
Speaker 2: in inflation. I can remember personally twenty eight percent inflation
Speaker 2: in the UK and actually in Japan also a twenty
Speaker 2: eight percent inflation. I think seeing the fiscal on a
Speaker 2: secular basis, seeing the fiscal incontinence which is there and
Speaker 2: the fiscal dominance over monetary policy, I can see inflation
Speaker 2: trending back up to double digits. Might be you might
Speaker 2: get some short term relief, but actually politicians seemed congenitally
Speaker 2: unable to get to deal with this, these fiscal deficits,
Speaker 2: which means the path of these resistance will ultimately be
Speaker 2: money printing.
Speaker 1: So we might get some short medium term relief from
Speaker 1: the Chinese situation, but medium to longer term we have
Speaker 1: to expect our inflation because there is no other thing
Speaker 1: that can happen without politicians getting a grip, which are
Speaker 1: quite clearly not.
Speaker 2: Going to I mean and popularism. Anyone in the UK suggests,
Speaker 2: for example, who we get rid of the triple lock
Speaker 2: on pensions will be voted out of office immediately. Perhaps
Speaker 2: best not to say it in the run up to
Speaker 2: the election.
Speaker 1: We're speaking on the day that Rachel Reeves has been
Speaker 1: out talking this morning about well about the budget, which
Speaker 1: is increasingly weird that you come out three weeks before
Speaker 1: a budget to tell everyone there's going to be bad
Speaker 1: and using the budget to make them feel really miserable
Speaker 1: in the advance of the budget and make things even
Speaker 1: worse than they were already. But here we are. That's
Speaker 1: what she's done. And she's made it pretty clear that
Speaker 1: this isn't about spending cards, it's not about getting group
Speaker 1: on public spending. It is about taxing everybody more. No
Speaker 1: longer about broad shoulders. It's about kind of everybody's shoulders.
Speaker 2: Yes, and getting hold of the spending, particularly welfare spending
Speaker 2: and disablit And we saw even with an I think
Speaker 2: global bomb, markets took a big lesson from this. The
Speaker 2: Labor Party, even with one hundred and eighty plus majority
Speaker 2: couldn't get through the most minor of reforms in terms
Speaker 2: of in terms of disability spending where alone in the world,
Speaker 2: particularly for under thirties. It has exploded upwards as people
Speaker 2: get signed off, get signed off and their TikTokers to
Speaker 2: actually explain to you how to gain the system to
Speaker 2: do this, and they're just unable, totally unable to get
Speaker 2: a grip on it. And it's although the UK isn't
Speaker 2: the worst offender by any means, I think the US
Speaker 2: is worse. I think France is worse. Both those countries
Speaker 2: are more protected than the UK. France because it's wrapped
Speaker 2: up in the Eurozone, wrapper US because of the dollar
Speaker 2: and the exorbitant privilege of being able to borrow in
Speaker 2: the dollar. But the UK is far more vulnerable to
Speaker 2: blow up. I mean, luckily, we're in a period where
Speaker 2: bondi are coming down, and this is what blew up
Speaker 2: Liz Trusts. Her budget came at a time when bond
Speaker 2: yours were rising sharply globally, and it wasn't a good
Speaker 2: time to hit the markets with that sort And.
Speaker 1: Also she hadn't put any effort into getting everyone else
Speaker 1: on side because it came out of nowhere exactly. But
Speaker 1: so we have this massive public debt problem and as
Speaker 1: you say, this sort of fiscal fiscal dominance in the UK,
Speaker 1: and does where is it concern about that that the
Speaker 1: gold price has been signaling.
Speaker 2: I think it is. I think people are joining the
Speaker 2: dots and I think the debasement trades. And because it's
Speaker 2: not just gold. Until the recent correct it's had a
Speaker 2: very deep well is enjoying a very deep enjoying not
Speaker 2: quite the word right word, if you're holding it, it's
Speaker 2: seeing a very deep correction at the moment. But it's
Speaker 2: not just gold, it's the entire precious metal complex which
Speaker 2: ran up very, very sharply. Incidentally, from the day of
Speaker 2: August the twenty seconds Jerome Powell, the Fed chairs Jackson
Speaker 2: Hole's speech, gold ran up thirty percent, but actually the
Speaker 2: rest of the precire's metal complex rose even more strongly.
Speaker 2: Now you got to the stage where gold had was
Speaker 2: so overbought. Technicians look at things like calls relative strength
Speaker 2: index are RSIs. They're called how far the price has
Speaker 2: moved from the moving average. Essentially had a monthly RSI
Speaker 2: of over ninety two, which was the highest in history
Speaker 2: for the goal market. So you're going to see a
Speaker 2: very deep correction. But I think it was this is
Speaker 2: the deed's basement trade. Why aren't bonds he was also
Speaker 2: rising at the same time sharply at that time. I
Speaker 2: think it's basically because people say, well, it's not a
Speaker 2: deed basement trade, because bond If people expected very high inflation,
Speaker 2: bond bond.
Speaker 1: Market collapse and yields will be going to the sky.
Speaker 2: And it's because people figure out because of fiscal dominance,
Speaker 2: the central banks will be told to intervene to hold
Speaker 2: down bond yields at some point, whether it's five percent,
Speaker 2: whether it's five and a half percent or six percent,
Speaker 2: at some point, the maths just do not add up
Speaker 2: anymore for fiscal sustainability, so they would have to be
Speaker 2: yell curve control or as Japan had for many years,
Speaker 2: yell curve control or quantitive easing, which is effectively yield
Speaker 2: curve control. So, yeah, the precious metals can rip raw upwards,
Speaker 2: but the bond yields don't in the same way. They
Speaker 2: get that they start to stall out as they get
Speaker 2: to higher levels.
Speaker 1: So you think gold will come back. I find that
Speaker 1: just down to four thousand today as we speak where
Speaker 1: three nine hundred and sixty seven dollars. But it seems
Speaker 1: likely to me and to John who's on the podcast
Speaker 1: with me, a lot that gold will go back in
Speaker 1: four thousand and its still some things on.
Speaker 2: Silver, gold, silver, platinum, palladium, all of them go gold.
Speaker 2: Might be goal, might be the.
Speaker 1: Laggard gold miners.
Speaker 2: Yeah, gd x gd x J. I don't personally recommend stop.
Speaker 2: I wouldn't know. I'm a macro person. I wouldn't know
Speaker 2: stock if it bits me. I just waved my arms
Speaker 2: around and talk about the macro backdrop. And actually there
Speaker 2: was quote my former colleague Dylan Grice, you know very well,
Speaker 2: used to do a lot of research about the what
Speaker 2: happened to Germany in the nineteen twenties, Yes, and why
Speaker 2: Rudolph Vona Havistein, who was the Rikbang governor, why he
Speaker 2: kept on printing money. And the conclusion was, and I
Speaker 2: think it was a quote in later life, was he
Speaker 2: basically kept on because he was scared of the economic
Speaker 2: and social consequences of stopping. And it's similar with the
Speaker 2: public sector deficits. The politicians are scared of the social
Speaker 2: consequences of stopping spending money to and throwing money out
Speaker 2: as they are are doing these huge, huge spending plans
Speaker 2: they've they've got and so the path of least resistance
Speaker 2: is money printing.
Speaker 1: They can just keep it going for a few years
Speaker 1: another few years.
Speaker 2: Later the COVID period it didn't if you like, spoiled
Speaker 2: politicians into thinking they could spend like this, and eventually
Speaker 2: the markets come forth for them. They look around for
Speaker 2: the weak as Canada that may well be the UK
Speaker 2: at some stage, even though other countries are worse. They'll
Speaker 2: pick off the weak as Canada and basically bludgeon them
Speaker 2: and make an example of them. But that that's which
Speaker 2: is why we're going to end up up with QUANSITIV
Speaker 2: unlimited money printing to hold down and if the central
Speaker 2: banks won't do it. I was like the Groud char
Speaker 2: Marks quote, these are my principles. If you don't like,
Speaker 2: don't like them, I have others. These might be my
Speaker 2: central bankers today. If they don't do what I say,
Speaker 2: I'll find others to do it.
Speaker 1: Yeah. So central bank independence, as ever is something of
Speaker 1: a myth, is absolutely real. Yeah. Now, on the subject
Speaker 1: of central bankers, what part do you think that central
Speaker 1: bank buying of gold is playing in this. So we've seen,
Speaker 1: you know, various central banks around the world, Channel in particular,
Speaker 1: constantly adding to their gold holdings.
Speaker 2: I think this is a natural consequence from the pivot
Speaker 2: away from US assets, which was people tell me, and
Speaker 2: I think it's a reasonable hy partly a consequence of
Speaker 2: the seizure of Russian assets after the invasion of Ukraine.
Speaker 2: I was reading a narrative of the cabinet meeting in
Speaker 2: the US where everyone was talking about seizing or freezing
Speaker 2: their assets, and Janet Yellen did demure about shouldn't we
Speaker 2: think through the economic and financial consequences of this? But
Speaker 2: it certainly weakens Yeah, which emerging market central bank, which
Speaker 2: might fall foul of the US at some stage is
Speaker 2: going to buy US assets and deposit them in the
Speaker 2: US to be seized later on. And I think that's
Speaker 2: partly what is going on here. And you can you
Speaker 2: can see it from a lot of a lot of
Speaker 2: the hermegany of the dollar has been weakened somewhat. I
Speaker 2: don't think people who say that the age of the
Speaker 2: dollar is over I think a premature, but that I
Speaker 2: think part of it is that is what is going
Speaker 2: on and it's perfectly logical.
Speaker 1: Doesn't make sense under their circumstances to also hold some
Speaker 1: cryptocurrency us to hold bitcoin in particular, do you think to.
Speaker 2: The extent that crypto is a bet against central bank competence?
Speaker 2: Which is what my former colleague Dylan Greis always used
Speaker 2: to tell me, is I would add it to a portfolio,
Speaker 2: but with a very skeptical and cynical view about it,
Speaker 2: that it could collapse to some stage. But what I've
Speaker 2: noticed more recently in the last few months, it does
Speaker 2: seem to be a bit of an inverse correlation to gold,
Speaker 2: So you're putting the two together and it does tend
Speaker 2: to dampen down the volatility. So I think there certainly
Speaker 2: is a place for cryptocurrencies if central banks are going
Speaker 2: to do what I think they're going to do.
Speaker 1: If that is the case, if we are looking forward
Speaker 1: to a period of very high inflation, surely there's also
Speaker 1: a case for holding equities. And we've talked on this
Speaker 1: podcast about the Gavcast Turkish portfolio. It's fifty percent fifty
Speaker 1: percent gold as being the way to get through an
Speaker 1: unpleatant inflationary period.
Speaker 2: I would agree with that because you're buying a real,
Speaker 2: real asset, and I think commodities also as part part
Speaker 2: of that another real asset. The earnings will rise in
Speaker 2: nominal terms in line probably in line with nominal GDP growth.
Speaker 2: But the key question is and that offers the protection
Speaker 2: that the profits growth is in highly inflationary times, what
Speaker 2: multiple should the market be on? So the US is
Speaker 2: on the currently a forward P of twenty three times,
Speaker 2: which is almost back to where it was during the
Speaker 2: Nasdaq bubble in nineteen eighty two. Normally, when there's high inflation,
Speaker 2: the P is extremely low. And what you saw or
Speaker 2: from nineteen sixty five, for example, from nineteen sixty five
Speaker 2: to nineteen eighty two, as inflation rose and as bondials rose,
Speaker 2: there's really good earnings growth. The Dow went nowhere for
Speaker 2: seventeen years in nominal terms because the P which started
Speaker 2: it around twenty times if my memory says me right,
Speaker 2: in nineteen sixty five deflated I think eight times earnings
Speaker 2: by the time inflation peaked out. So yes, what I
Speaker 2: would say is in an environment of rising inflation arising bondials,
Speaker 2: what has worked for the last twenty years will stop working.
Speaker 2: So bond beneficiaries stocks or sectors which benefit from lower bondials,
Speaker 2: so they tend to be defensive, they tend to be utilities,
Speaker 2: they tend to be growth sectors like tech, which had
Speaker 2: done rare very well from decades of falling bond deals.
Speaker 2: And what hasn't done so well were cyclical stocks value stocks.
Speaker 2: So what hasn't worked should start to work when things
Speaker 2: have worked for twenty odd years or longer. It's getting
Speaker 2: out of that mindset and saying we're in a different paradigm. So, yes,
Speaker 2: I agree with you. Stocks are a hedge against inflation,
Speaker 2: but it's working out well. If we go through a
Speaker 2: secular de rating, actually that can wipe out all those gains.
Speaker 1: Find stuff that's cheap already.
Speaker 2: So it's ambiguous. It's ambiguous for.
Speaker 1: Yeah, now I see that. Now listen, speaking of sectors
Speaker 1: that have benefited or asset classes, should we say that
Speaker 1: have benefited from very low interest rates? Private equity. We're
Speaker 1: going through a period where we are hearing constantly that
Speaker 1: it's time for retail investors, for ordinary private investors to
Speaker 1: get their hands on a whole lot of private equity,
Speaker 1: and that will really temporary turns going forward. You and
Speaker 1: I'm thinking you don't necessarily agree with that.
Speaker 2: Well, I'm very cynical generally awful trade I picked up
Speaker 2: over the years working in finance, and me.
Speaker 1: Having that as well, we should I shouldn't really have
Speaker 1: had you prom.
Speaker 2: As far as I can see, the big advantage of
Speaker 2: private equity has been carried interest is it's been its
Speaker 2: tax treatment gives it an advantage, and it doesn't have
Speaker 2: to market self to market, so it isn't very volatile.
Speaker 2: People say, well, you know, we haven't got the volatility
Speaker 2: in private equity. Yeah, but you don't know what it's
Speaker 2: really worth.
Speaker 1: Well, you do have the volatility, or you would have
Speaker 1: the volatility if you if you tried to sell it
Speaker 1: every day.
Speaker 2: You know, But you know, there are problems in the
Speaker 2: private equity space as people call it at the moment.
Speaker 2: And you've had two high profile bankruptcies in the US
Speaker 2: with First Brands and tri Color, And I know nothing
Speaker 2: of what they do and understand, but I know that
Speaker 2: there've been problems there and that has started to leak
Speaker 2: into a high yields bond markers. Spreads have started to
Speaker 2: widen because people are worried and Jamie Diamonds of JP
Speaker 2: Morgan has has come out and said, you know, well
Speaker 2: you never have just one cockroach. Well you've got two there.
Speaker 2: And it's not just the IMF have been warning about
Speaker 2: private equity. Andrew Bailey at the Bank of England as
Speaker 2: very worried about it, and people don't really focus on this.
Speaker 2: And maybe this is the thing which in this cycle.
Speaker 2: Every cycle is slightly different. Maybe this is the thing
Speaker 2: in this cycle which which will lay us lower. I
Speaker 2: don't know. But there's an awful lot of leverage. You know,
Speaker 2: one of the one of the one of the elixirs
Speaker 2: for private equity is leverage. Huge amount of.
Speaker 1: Private equity. People would like you to believe is that
Speaker 1: it's got nothing to do with that at all, and
Speaker 1: everything to do with being better at managing.
Speaker 2: Really, yes, I think I'm just too cynical. I'm sure
Speaker 2: they're wonderful, man. I'm sure some of them are. I'm
Speaker 2: sure some of the suppose.
Speaker 1: One of the problems with the performance record of private
Speaker 1: equity is that, you know, when you talk to private
Speaker 1: equity people, they will say to you, will look at
Speaker 1: the long term performance record, you know, it's really great.
Speaker 1: But if you go back to the very beginning, so
Speaker 1: you're looking over a fifteen or a twenty year period.
Speaker 1: If you go back to fifteen years ago, this market
Speaker 1: was tiny and you had a very small number of
Speaker 1: like super intelligent and effective people working in a very
Speaker 1: small area. So that doesn't tell you anything about performance.
Speaker 1: When it's huge, vast amounts of money in every single
Speaker 1: every single mathematic graduate wanting to work in it, etcetera.
Speaker 1: It's a totally different sector now to the sector that
Speaker 1: we look at the performance of fifteen years ago.
Speaker 2: Yeah. No, absolutely, And you can tell that the bubble
Speaker 2: conditions because certainly they are sucking the best the engineers
Speaker 2: and sort of people who used to go into finance,
Speaker 2: investment banking, for example, they're all getting rich in private
Speaker 2: equity rageo. One of the big problems for private equity,
Speaker 2: like so much else is they benefited from years and
Speaker 2: years of falling bond deals and the mood music has
Speaker 2: now changed. I know bond deals might be coming down
Speaker 2: just at the moment, but if we're in a secular
Speaker 2: we're not going in my view, we're not going back
Speaker 2: to where we were. We're in a secular bear market
Speaker 2: for bonds, and if you're highly leveraged, it's going to
Speaker 2: be a major problem. And what you've seen to have
Speaker 2: is a very few number of companies at the moment
Speaker 2: related to AI which are doing very very well. But
Speaker 2: you scratch the surface, and my colleague Andrew Laptform does
Speaker 2: is for me, you remove the top not even ten
Speaker 2: percent of companies, quota companies, the top ten companies, and
Speaker 2: underneath that things are pretty crappy. And as you drill
Speaker 2: down into smaller and smaller companies, things are really really tough.
Speaker 2: And people talk about a K shape recovery within the
Speaker 2: consumer sector, within the corporate sector, it's it's it's very
Speaker 2: very There are very small amounts of winners which are
Speaker 2: out there, and so the moon music maybe for private equity,
Speaker 2: and certainly in the UK where you've got private equity
Speaker 2: taking over the vets, taking over care home nursing homes,
Speaker 2: and people just don't realize how their tentacles have spread
Speaker 2: so deeply into the into the real economy. And the
Speaker 2: UK is a really good example. If you if your
Speaker 2: vet isn't owned by private equity, you're you're doing pretty well.
Speaker 2: But it's to me, it's a real issue. I wouldn't
Speaker 2: say problem, because that's a bit pejorative. It's an issue.
Speaker 2: It's an issue we should be watching closely well. And
Speaker 2: and and as Jamie Diamond says, you never get I
Speaker 2: don't want to compare private equity to cockroaches. But but
Speaker 2: but but you never, as he said, you never just
Speaker 2: get one cockroach as these things start going bust.
Speaker 1: So we're worried about private equity, worried about inflation. We're
Speaker 1: also worried about deflation, worried about equity valuations, we're worried about.
Speaker 2: Got more lines you can see over there. I haven't
Speaker 2: got many lines here, but I'm amazed I'm not not
Speaker 2: more wrinkled.
Speaker 1: And for those of you who can't see Albert, which
Speaker 1: is all of you, he's not remotely wrinkled. And he's
Speaker 1: wearing a great seasonal shirt. And we might put a
Speaker 1: photo of Albert online photo shop.
Speaker 2: Me a bit no.
Speaker 1: So here's the question, Albert, what could go right?
Speaker 2: Well? What could go right? I suppose is the bubble
Speaker 2: just carries on for another another year. The interest rates
Speaker 2: come down, bond deals come down on cyclical basis, we
Speaker 2: go to forty times forward earnings. Some of us have
Speaker 2: seen this all before. I'll stop talking about equity bubbles
Speaker 2: and start talking about goals or my personal life as
Speaker 2: I have done in the past instead.
Speaker 1: But that's not going right, is it it? That's just
Speaker 1: going on a bit longer.
Speaker 2: Yes, I don't think there are any good options here
Speaker 2: is what's the least bad option? With you down the
Speaker 2: road for so long?
Speaker 1: What about that AI does everything everything that I had
Speaker 1: promise to do. There's a massive productivity wave throughout the
Speaker 1: Western world which brings down government spending massively, husually reduces
Speaker 1: our deficits, gradually starts releasing the debt, makes every company
Speaker 1: more productive, such that valuations are perfectly fine and everything.
Speaker 1: Everything's okay, everything's okay.
Speaker 2: Can I sell you a bridge London bridges for sale?
Speaker 1: Really no chance?
Speaker 2: Suddenly. Productivity growth in the US has been looking okay recently.
Speaker 2: What's interesting is no one has a recession on the horizon.
Speaker 2: The latest Atlanta FED numbers for the next quarter four
Speaker 2: sent GDP growth driven a.
Speaker 1: Lot by.
Speaker 2: AI investments. But when I look at I was looking
Speaker 2: at the ADP in the absence of official payroll numbers.
Speaker 2: So the biggest driver for employment is not the megacaps
Speaker 2: or the AI companies. It's it's mum and pup. It's companies,
Speaker 2: it's unquoted companies. So I was looking at and the
Speaker 2: ADP in the US divide it up into company size,
Speaker 2: and those companies with less than fifty employees comprise forty
Speaker 2: five percent of employment in the US. And employment is falling,
Speaker 2: and the latest numbers year on year is very unusual.
Speaker 2: Employment for smaller companies is falling year on year in
Speaker 2: the US. And it's not a rapid dumbdown. It has
Speaker 2: accelerated a bit, and maybe that's something to do with
Speaker 2: the immigration policies in the US, but actually has been
Speaker 2: slowing down quite rapidly for the last two three years.
Speaker 2: Large cap employment still looks okay, that's slowing. But when
Speaker 2: you have when you have the job generators in the US,
Speaker 2: small small cap companies in recession, then you think, actually,
Speaker 2: to the stock market maybe at all time highs, but
Speaker 2: actually the rug is being pulled out from underneath. So
Speaker 2: all they say in II investment is going on with
Speaker 2: this this vendor finance scheme between all of them, but
Speaker 2: actually could this be the rug? But I tend to
Speaker 2: look on the dark side, so i'd recommend I recommend
Speaker 2: all your listeners will ignore should ignore me totally. Okay,
Speaker 2: let me just background.
Speaker 1: Let me try something else on the positive side. Okay.
Speaker 1: So in the UK and particularly, one of our big
Speaker 1: problems is very expensive energy, massive drag on the economy.
Speaker 1: If we accept, which we do, that all economic activity,
Speaker 1: in fact, all activity or another is energy transformed. If
Speaker 1: we were to find a way in the UK and
Speaker 1: possibly elsewhere, to massively bring down the cost of energy, say,
Speaker 1: I don't know, beaming solar power from space to a
Speaker 1: massive mirror somewhere, something like that with some of our
Speaker 1: guests we've talked about that could be that could do
Speaker 1: things even in the UK, abandoning that zero for example,
Speaker 1: that could be a massive positive. That could be transformative,
Speaker 1: and the solar to mirror could transform the US and
Speaker 1: the rest of the world. Imagine energy being practically free.
Speaker 1: I'm really working as hard as I can here, Albert.
Speaker 2: I think that would be transformative if it happens. Certainly
Speaker 2: if the UK is an outlier. The UK has some
Speaker 2: of the highest energy costs in industrialized countries, but that's
Speaker 2: because of the ludicrous pricing mechanism we have here, which
Speaker 2: I'm sure your listeners will be aware of. Where even
Speaker 2: if ninety nine percent of the energy being generated is
Speaker 2: from low costs newbles, which is not consume it is
Speaker 2: and the gas price goes up. The average the pricing
Speaker 2: in the UK is off that marginal producer, which is
Speaker 2: usually an expensive gas generator, and so everyone has to
Speaker 2: pay that marginal price. And it's a ludicrous system. So
Speaker 2: that's one of the reasons our energy costs are so
Speaker 2: high here. And you have to break that link because
Speaker 2: what's happening is that the renewable companies are getting a massive,
Speaker 2: massive subsidy from the consumers. But there's distance in any
Speaker 2: will to break that ludicrous link here in the UK.
Speaker 2: But the UK is totally almost deindustrialized now because it's
Speaker 2: it's too late for the UK to be honest.
Speaker 1: Okay, that didn't get me anywhere either. Loving Left. In
Speaker 1: terms of encourage you to think of something possible, I.
Speaker 2: Think when you've you've been through many cycles like you
Speaker 2: and I have, you know the inevitability and the business cycle,
Speaker 2: that the one thing which which cannot be abolished is
Speaker 2: the business cycle. And apart from two or three months
Speaker 2: during the pandemic, the US hasn't seen a proper cyclical
Speaker 2: downturn since two thousand and eight. Now that is an
Speaker 2: extraordinary long economic cycle. A recession will come along and
Speaker 2: all these bubble elements will implode it. It may well
Speaker 2: be the bubble implodes and then brings the economy down
Speaker 2: into recession, and that's going to cause a lot of surprise.
Speaker 2: But we can inflate a lot further from from here.
Speaker 2: We've been doing this long enough to know anything is possible.
Speaker 1: Okay, So in the meantime, all we can do is
Speaker 1: hold precious metals and inexpensive equities to the best of
Speaker 1: our ability and wait.
Speaker 2: And if you want to ride the equity bubble, but
Speaker 2: just be very cynical about it. Don't. Don't believe the story.
Speaker 2: Momentum investing is one of the most profitable methods of investing.
Speaker 2: My colleague Andrew Latform has shown me that. But just
Speaker 2: have clear technical signals to get you out, whether it's
Speaker 2: whether it's the SMP or cutting below the two hundred
Speaker 2: day moving average or whatever it is. Don't buy into
Speaker 2: the rhetoric too much. Ride the bubble if you so wish,
Speaker 2: As George Soros says when he said, you know, whenever
Speaker 2: I see a bubble, I run towards it. But don't
Speaker 2: get consumed by the story. Be very cynical, and just
Speaker 2: have a have a level to get yourself out so
Speaker 2: you're not bankrupted when the thing turns down. So, as
Speaker 2: Chuck Prince said, you've got to keep dancing while the
Speaker 2: music's playing. But just decide how near the fire eggsit
Speaker 2: you want to be gyrating around on the dance floor.
Speaker 1: And don't be tempted to move back in front of
Speaker 1: the band.
Speaker 2: Exactly here plugs in so you can't hear the music,
Speaker 2: but just keep moving over.
Speaker 1: All right, let me ask you one last question, then,
Speaker 1: what are you reading? Came here on the train. What
Speaker 1: are you reading?
Speaker 2: I don't. I don't read very much. Actually, what I
Speaker 2: normally would do is get my colleagues to read that.
Speaker 2: You know that they do that heavily, lifting for me
Speaker 2: and read all the economics or finance books and then
Speaker 2: they just tell me what's what what?
Speaker 1: What's in it? No?
Speaker 2: I just no, no, I'm not. I generally read current events.
Speaker 2: I like reading a lot about current events. I have
Speaker 2: been reading Boris Johnson's biography, and just to balance that,
Speaker 2: I did read Gordon Brown's one before before that. So
Speaker 2: I'm very eclectic in my taste, but I'm not. I'm
Speaker 2: very lazy. I generally in the evenings what I do
Speaker 2: is basically just watch Telly. I watched rubbish on Telly
Speaker 2: and and wide. I'm so caught up with attention of
Speaker 2: financial mark archets during the day.
Speaker 1: Excited Are you so excited about the bak Off final?
Speaker 2: I've never watched bof Are you watching on the television?
Speaker 2: Even off?
Speaker 1: Even?
Speaker 2: No, No, I've been watching Ted Ted Lasso.
Speaker 1: Change in my life has been about the way those
Speaker 1: sugar dome things or broke last week.
Speaker 2: I'm not a big cook. There's someone laughing in the
Speaker 2: background here of it.
Speaker 1: It's outrageous, right, Albert, thank you, Thank you a pleasure, And.
Speaker 2: We must do this again. We mustn't wait another ten years.
Speaker 1: Can we do once a year?
Speaker 2: Maybe on air? Commitment every every every every couple of years, definitely.
Speaker 1: I'm interpreting that as too. I've got a better idea.
Speaker 1: How about we do it again straight off the crash?
Speaker 2: Absolutely next week.
Speaker 1: Then it's a deal, could be in ten days. Thank
Speaker 1: you for listening to this week Maren Talks Money. If
Speaker 1: you like our show, rate to review and subscribe wherever
Speaker 1: you listen to podcasts. Keep sending your questions or comments
Speaker 1: to Merrin Money at Bloomberg dot net. You can also
Speaker 1: follow me and John on Twitter or x I'm at
Speaker 1: MARINETSW and John is John Underscore steppek. You are on
Speaker 1: Twitter right, Albert yep? What is it?
Speaker 2: Albert Edwards? Nine to nine?
Speaker 1: There are another ninety eight?
Speaker 2: No I jumped over all the rest of them?
Speaker 1: Ah okay. This episode was hosted by Me Maren sumset
Speaker 1: where but it was produced by Samasadi and Moses and
Speaker 1: sound designed by Blake Mabels and Aaron Casper and special
Speaker 1: thanks of course to Albert Edwards