WEBVTT -  Markets Wrap: War, Energy and the Return of Inflation Risk

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<v Speaker 1>Bloomberg Audio Studios, Podcasts, Radio News.

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<v Speaker 2>Welcome to the Maren Dogs Money Market Rap.

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<v Speaker 1>What'll we talk about the biggest moves in muggets this

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<v Speaker 1>week and what is draving them. I'm Maren Sum's, a

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<v Speaker 1>web editor at large for the Bloomberg UK Wealth.

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<v Speaker 3>And I'm joined stepping Seniors Report and author of the

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<v Speaker 3>money This Old News Later.

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<v Speaker 1>Don't I John Marcus Belly moved this week. We should

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<v Speaker 1>bother what's going on?

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<v Speaker 3>See you next week.

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<v Speaker 1>The thing is that actually, Marcus happened moved quite a lot.

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<v Speaker 1>It's just that there's not that much that we can

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<v Speaker 1>add to the fact that they have moved quite a lot,

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<v Speaker 1>right up, down, all over the place.

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<v Speaker 2>And the only way you could really.

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<v Speaker 1>Say something sensible about this is if you had the

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<v Speaker 1>faintest idea how long this new war in the Middle

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<v Speaker 1>East would go on for and we just don't.

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<v Speaker 3>Yeah, And that is specifically the point, because the length

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<v Speaker 3>of the war means the length that oil prices are elevated,

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<v Speaker 3>and that then has the knock cooin effect of is

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<v Speaker 3>inflation going to be actually significantly higher than everyone had

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<v Speaker 3>thought up until a bit two weeks ago, and therefore

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<v Speaker 3>the interest rate is higher. So it's a big deal.

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<v Speaker 3>It's got a lot of big potential coinsequences. Unless you've

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<v Speaker 3>litterally got across the wall, then there's no what you say,

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<v Speaker 3>what those consequences are going.

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<v Speaker 1>So we can have relentless conversations about how many days

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<v Speaker 1>worth of oil reserves every economy has, about who is

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<v Speaker 1>the most reliant on oil from the Middle East, career

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<v Speaker 1>in Japan by the way, and which markets therefore we

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<v Speaker 1>should suffer the most over the long term as a

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<v Speaker 1>result of the war dragging out or not dragging out.

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<v Speaker 1>But in the end, it comes down to what we

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<v Speaker 1>have absolutely no idea, and we will find out in

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<v Speaker 1>the fullness of time. But I suppose what we can

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<v Speaker 1>talk about is the way in which this war and

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<v Speaker 1>the immediate energy crunch that it has resulted in shows

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<v Speaker 1>us the vulnerability in developed economies in general. I know

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<v Speaker 1>you've written this week about the vulnerability and inheritance the

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<v Speaker 1>UK economy, and it just reminds us that we're in

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<v Speaker 1>a global economy that is fractured and that makes every

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<v Speaker 1>problem about supply.

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<v Speaker 3>Yeah, I think that's a really good way to put it.

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<v Speaker 3>I mean, we've seen this. I mean, I guess this

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<v Speaker 3>has been coming for quite a while and people have

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<v Speaker 3>been worried about the fracture on the supply chains. Obviously,

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<v Speaker 3>COVID made it very obvious how vulnerable we are and

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<v Speaker 3>how reliant we are, but unfortunately the UK we haven't

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<v Speaker 3>really done it and about that and the energy specifically

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<v Speaker 3>obviously is a big issue. But as Simon French podcast

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<v Speaker 3>regular from Paner Laborom, please go back.

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<v Speaker 2>And listen to the podcast leader with him recently on MMT.

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<v Speaker 3>Yes, very interesting in particular now very timely at the moment.

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<v Speaker 3>But the thing Simon put a piece this morning called

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<v Speaker 3>rash Pack Britain. It kind of inspired title really, and

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<v Speaker 3>what you're saying is that the big thing behind the

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<v Speaker 3>UK's productivity puzzle, as in the fact that we don't

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<v Speaker 3>seem to be getting more out of what we're doing,

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<v Speaker 3>is that it's not actually a puzzle at all. It's

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<v Speaker 3>very clear what the problem is and it's because we've

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<v Speaker 3>been rationing the supply of three big important inputs and

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<v Speaker 3>that's energy, land and capital, so everything's more expensive than

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<v Speaker 3>it should be. Most of this arises from yeah, you

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<v Speaker 3>could call it well meaning I think stupid is a

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<v Speaker 3>better word meaning yeah, yeah, exactly. It is not a

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<v Speaker 3>good excuse for being stupid and mean.

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<v Speaker 2>Disappears after it's been explained to you a certain number of.

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<v Speaker 3>Times, exactly. So the fact that we've kind of cut

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<v Speaker 3>off various sources of energy to ourselves, the fact that

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<v Speaker 3>you can't you know, build a house or anything else

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<v Speaker 3>in the country without you know, jumping through millions of hoops,

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<v Speaker 3>and the fact that we've kind of sabitized our own

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<v Speaker 3>capital market bike getting ready tax breaks for investing locally

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<v Speaker 3>and keeping them for investing wherever the hell you want

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<v Speaker 3>hasn't helped any of this. And so Simon's point is, well,

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<v Speaker 3>most of these things are actually reversible. You know, if

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<v Speaker 3>you had a sensible government and power, then you could

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<v Speaker 3>change all these things. And it's not the current government's fault.

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<v Speaker 3>The current government has compounded it with even dafter policies

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<v Speaker 3>and later or the rest of it. But you know

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<v Speaker 3>this this all happened under you know, the previous kind

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<v Speaker 3>of like the Tory government and even going back before that.

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<v Speaker 3>So I guess the only way that it does change

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<v Speaker 3>is that voters start to wake up to and demand change.

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<v Speaker 3>I mean, the North Sea oil is a good example.

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<v Speaker 3>Rachel Reeves seems to be kind of thinking about maybe

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<v Speaker 3>reducing the ridiculous tax rate on not soil exploration, but

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<v Speaker 3>we're still not there yet. Just do it, Yeah, that's straightforward.

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<v Speaker 2>Well it's interesting.

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<v Speaker 1>I mean they said, didn't it today earlier this week

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<v Speaker 1>that they're working on looking.

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<v Speaker 2>At way you how can it be?

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<v Speaker 1>How can it be? Don't need to look at ways too,

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<v Speaker 1>You can just cut that tax, so take that tax away.

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<v Speaker 1>Sometimes they forget they're actually in power.

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<v Speaker 3>I think yeah, I think they do incasingly. They all

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<v Speaker 3>seem to not realize that this is actually their job now.

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<v Speaker 2>I mean, there was there was something on the radio

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<v Speaker 2>this morning.

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<v Speaker 1>I can't even remember it was about, but I was

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<v Speaker 1>listening to some ministro or the other and the interviewer

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<v Speaker 1>said to him, well, are you going to do this

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<v Speaker 1>particular thing?

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<v Speaker 2>And yes, no in parliamentary time allowing.

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<v Speaker 1>And I'm like, you're the government may give a parliamentary

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<v Speaker 1>time and this is.

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<v Speaker 2>Another one of those things you want to do it?

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<v Speaker 2>Want to just do that?

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<v Speaker 3>Yeah, And you can see why people get frustrated. I

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<v Speaker 3>mean that was a good I mean it's a daft example,

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<v Speaker 3>and they wouldn't draw attention in different times if it

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<v Speaker 3>wasn't for the fact it's such a big metaphor for

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<v Speaker 3>what's going on with our governance right now, which is

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<v Speaker 3>that a looad. The MP's was picture taking part in

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<v Speaker 3>some strictly come dancing things was just kind of meant

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<v Speaker 3>to emphasis to be focused on exercise is good for you?

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<v Speaker 2>Good at dancing?

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<v Speaker 3>I'm sure, really bad, but there's an element of fedal

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<v Speaker 3>in whale room bonds that's very oh well, And it's

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<v Speaker 3>just regardless of whether it was actually a perfectly reasonable

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<v Speaker 3>and sensible use of parliamentary time, there's.

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<v Speaker 2>Really important stuff going on and we'd like you to

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<v Speaker 2>do that, not dancing exactly. There's a time for dancing.

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<v Speaker 2>There's a time for doing Yeah, listen, this will come back.

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<v Speaker 3>That's good, that's catchy. Do you know it?

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<v Speaker 2>Well, yeah, we'll put it in a marketing.

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<v Speaker 1>This brings us back to a podcast that we did

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<v Speaker 1>with Callum Pickering while do you remember this about a

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<v Speaker 1>year ago, and he had a paper calder does the

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<v Speaker 1>UK like the energy for productivity quote? And the chart

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<v Speaker 1>was just so startling because at the time and even now,

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<v Speaker 1>lots of people believe that the UK's productivity problem started

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<v Speaker 1>in two thousand and seven, two thousand and eight. So

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<v Speaker 1>after the GFC and his work and his charts are

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<v Speaker 1>so clearly, their productivity started to fall at the same

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<v Speaker 1>time as the UK's electricity supplies started to decline, and

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<v Speaker 1>that was in two thousand and five, two thousand and six,

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<v Speaker 1>early two thousand and six. So with the fall and

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<v Speaker 1>supply of energy came the general flatlining of our productivity.

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<v Speaker 3>I meant that might be the most important chart as

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<v Speaker 3>this millennium. Yeah, because I remember your most important chart

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<v Speaker 3>in the world just to be the Bank of England

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<v Speaker 3>forecast of what would happen in the interestreets went by

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<v Speaker 3>a competent Well you always that.

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<v Speaker 1>Three thousand years chart of just showing them, you know,

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<v Speaker 1>being more ridiculously their relative to three thousand years worth

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<v Speaker 1>of history. And then I went through a phase of saying, well,

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<v Speaker 1>the most important charts in the world is now the

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<v Speaker 1>one where it begins to tick up. Because we've got

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<v Speaker 1>used to the idea of what happens when interest rates

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<v Speaker 1>are below zero or zero. We now understand the consequences

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<v Speaker 1>that we don't understand is a constant answers of rates

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<v Speaker 1>ticking up very sharply and moving into a new forty

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<v Speaker 1>year interest rate cycle where they will be consistently higher

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<v Speaker 1>than they've been in the past. And interestingly, you know,

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<v Speaker 1>I thought that would happen really quickly. I thought the

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<v Speaker 1>consequences of that shift in the interest rate environment would

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<v Speaker 1>be seen in a year eighteen months or so, But

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<v Speaker 1>actually it's taken a lot longer. But we're seeing it

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<v Speaker 1>now right And we're seeing it, for example, the private

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<v Speaker 1>credit market. Lots of our colleagues will have written about that,

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<v Speaker 1>but you're saying fund after fund after fund, saying saying

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<v Speaker 1>pretty quite a lot of nostris in there as the

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<v Speaker 1>private credit environment begins to see default write down, many collapses, etc.

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<v Speaker 2>So that's in there.

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<v Speaker 1>And as Edward Chancellor, another regular on the podcast, as

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<v Speaker 1>You Ways, says, you know, super their interest rates, they

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<v Speaker 1>get into all the cracks, and you don't know what

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<v Speaker 1>the consequences are going to be until quite a lot later.

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<v Speaker 1>And I think we are beginning to see some of

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<v Speaker 1>those consequences. And going back to neither of us knowing

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<v Speaker 1>what an earth is going to happen with this war,

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<v Speaker 1>One thing we do know is that even if it

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<v Speaker 1>stops very quickly, it will still show up a little

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<v Speaker 1>bit in CPI still make a difference to the easing cycles.

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<v Speaker 2>And the assumption that.

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<v Speaker 1>The next raatee move in the UK will be down

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<v Speaker 1>is pretty much already done for, isn't it.

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<v Speaker 3>So I think the assumption that was going to be

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<v Speaker 3>two cuts. I think that there's still assumption in the

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<v Speaker 3>market that will one this year. But I mean that

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<v Speaker 3>could change, that.

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<v Speaker 2>Could change, and there is not the real riskure staflation.

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<v Speaker 3>Yeah, I mean stag flesh and that would be an

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<v Speaker 3>eight me govern that would already bottline stag fleition in

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<v Speaker 3>the UK.

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<v Speaker 2>Well, we're stagnating.

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<v Speaker 1>It's pretty clear if you get to the point where

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<v Speaker 1>we're muttering about, isn't it moreveless that GDP growth is

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<v Speaker 1>going to be one point one percent? I mean this

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<v Speaker 1>is not exciting to me. One point one percent is

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<v Speaker 1>very very bad. And in terms of GDP ahead, well

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<v Speaker 1>we all know where that goes.

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<v Speaker 2>So you know this is not good.

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<v Speaker 1>The UK is stagnating and it doesn't take much to

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<v Speaker 1>shift is stagnating economy with an energy crisis into taculation,

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<v Speaker 1>and that is what we are, stagnating, stagnating economy with

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<v Speaker 1>an energy crisis.

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<v Speaker 2>Oh this is fun.

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<v Speaker 3>Yeah, I think one of the leaders was saying recently

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<v Speaker 3>that were to glue me. I'm not sure what else you.

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<v Speaker 2>Can be a challenge and this podcast optimistically.

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<v Speaker 3>Hope you Christmas.

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<v Speaker 2>All right, that's it.

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<v Speaker 3>I'm going a whold of this podcast.

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<v Speaker 1>That's really all we can say for now, because, as

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<v Speaker 1>I say, there's much volatility in markets, there's a lot

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<v Speaker 1>of emotion and markets. There's a lot going on with

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<v Speaker 1>both energy and with the whole AI conversation. We've had

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<v Speaker 1>over and over, lots to think about, lots to talk about.

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<v Speaker 1>Don't forget that we both write newsletters trying to analyze

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<v Speaker 1>some of these issues, and hopefully things have become clearer

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<v Speaker 1>over the next week.

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<v Speaker 3>So thank you, John, Thanks.

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<v Speaker 2>Mal thanks for listening to this week's Merin Dogs Money.

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<v Speaker 1>If you like us show, rate, review, and subscribe wherever

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<v Speaker 1>you listen to your podcast, and keep sending your questions

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<v Speaker 1>or comments to Merrin Money at Bloomberg dot net. You

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<v Speaker 1>can also follow me and John on Twitter or x

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<v Speaker 1>John is really going for it on Twitter at the moment,

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<v Speaker 1>by the way, well worth following if you don't already,

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<v Speaker 1>I'm at Marinas w and John is John underscore stepic

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<v Speaker 1>This episode was hosed by me.

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<v Speaker 2>Maris said where is produced by some Asadi and Moses

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<v Speaker 2>and