Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: Welcome to Meron Talks Money, the podcast in which people
Speaker 2: who know the markets explain the markets.
Speaker 3: I'm Merensumset Web. This week I'm speaking with Edir Danney,
Speaker 3: President at Yadanney Research.
Speaker 2: Ed is the economists and investment strategist who coined the
Speaker 2: term bond vigilantes in the nineteen eighties. It's made quite
Speaker 2: a comeback since Donald Trump's reelection, most recently around the
Speaker 2: question of whether an extended bond sell off will make
Speaker 2: it difficult for Trump and his allies in Congress to
Speaker 2: push through their big, beautiful tax bill. We're going to
Speaker 2: get into this talk about how the bond market is
Speaker 2: pressuring governments across the board. We're going to talk about
Speaker 2: equity markets. We're going to talk about gold, bitcoin, and
Speaker 2: what Ed is writing about at the moment. Ed welcome
Speaker 2: to Meron Talks Money. Thank you for joining us again,
Speaker 2: very kind, Thank you very much. Now we should probably
Speaker 2: start with exactly what I said in the introduction. We
Speaker 2: should start with what is going on with developed world
Speaker 2: bond markets.
Speaker 3: Yields rising all over the place.
Speaker 2: That was particularly in Japan, but quite a lot going
Speaker 2: on in the US as well.
Speaker 4: The global bond market, particularly in developed countries, is seeing
Speaker 4: some stress clearly. I think there's mounting concerns about fiscal accesses,
Speaker 4: unsustainable fiscal policies that need to be addressed politically, and
Speaker 4: there's not any confidence that the politicians have the willingness
Speaker 4: to tackle these things now. I think we're seeing it
Speaker 4: most clearly and immediately in Japan right now, where the
Speaker 4: twenty year bond auction went off rather poorly, the thirty
Speaker 4: year and the forty year yields rose along with the
Speaker 4: twenty years, so that was kind of the beginning of
Speaker 4: the alarm bell being sounded in the Japanese credit markets.
Speaker 4: The ratio of their debt to GDPs over two hundred percent.
Speaker 4: The central Bank has purchase much of the bonds issued
Speaker 4: by the treasury in Japan, and now the Bank of
Speaker 4: Japan has recognized that they have an inflation problem, so
Speaker 4: that policy basically terminated two years ago, and now it's
Speaker 4: all coming back to haunt them. Here in the United States,
Speaker 4: things are still going relatively well. The ten year yield
Speaker 4: has been remarkably stable around four and a half percent,
Speaker 4: which seems to be fine. It's just that thirty year
Speaker 4: treasury yield. The spread has widened over the tenure, and
Speaker 4: we're getting closer to five percent, and so there is
Speaker 4: an unease that the bond market. The bond vigilantes in
Speaker 4: the United States are watching what's going on with the
Speaker 4: budget negotiations very closely, and if they're not happy with
Speaker 4: what the results are, there's a potential here for something
Speaker 4: similar to what's going on in Japan, kind of a protest,
Speaker 4: if you will, by the bond vigilantes, and that raises
Speaker 4: the question of whether the politicians will recognize that and
Speaker 4: respond appropriately to it.
Speaker 2: Pretty interesting, isn't it. This pops up periodically, doesn't it.
Speaker 2: And it's obvious to everybody that levels of Japanese debt,
Speaker 2: levels of US debt, of course, they're not sustainable.
Speaker 3: This is not sustainable long time.
Speaker 2: You can't have one hundred percent of your debt GDP ratio,
Speaker 2: you can't have two hundred percent. And sure, maybe you
Speaker 2: can net out a little bit with what the central
Speaker 2: Bank holds, et cetera, but you've still got a major problem.
Speaker 2: But it pops up and it goes away. It pops
Speaker 2: up and it goes away. It's never actually dealt with,
Speaker 2: and we know, there aren't really very many ways to
Speaker 2: deal with it.
Speaker 3: So we just put it off, put it off. But
Speaker 3: is this time any different?
Speaker 4: It's a good question. I've been doing this for over
Speaker 4: forty five years, and for that entire period on a
Speaker 4: regular basis, naysayers, pessimists, doom sayers saying this time we're
Speaker 4: finally going to have to pay the price for our sins.
Speaker 4: You know, borrowing is sinful, and eventually you have to
Speaker 4: pay the price for that. And yet here we are
Speaker 4: with the stock market almost worldwide at a record high.
Speaker 4: Economy is still growing in the United States. It's slowed
Speaker 4: down in Europe. It's had a little negative quarter in Japan,
Speaker 4: but all in all, the economies have done quite well.
Speaker 4: You have some very smart people today like read Dalia,
Speaker 4: walking around telling us that a debt crisis is imminent,
Speaker 4: and well, it looks like he may be getting it right.
Speaker 4: In Japan. It really just hasn't happened yet. In the
Speaker 4: United States. We had a glimpse of what it could
Speaker 4: look like in twenty twenty three when the bond deal
Speaker 4: went from four to five percent. We had a minor,
Speaker 4: little glimpse of it. On April eighth of this year
Speaker 4: twenty twenty five, when the bond yell rose from four
Speaker 4: to four and a half percent on April eighth, and
Speaker 4: that was basically in protest of Trump's tariff turmoil, and
Speaker 4: the response was very quick by the administration to postpone
Speaker 4: the reciprocal tariffs anyway, So the bond vigilantes are still
Speaker 4: out there. They're still interested in maintaining law and order.
Speaker 4: They prefer that fiscal and monetary policies are disciplined so
Speaker 4: that they don't have to take on that role, but
Speaker 4: they're ready if they have to assert their concerns. The
Speaker 4: only question is if they do, is whether the politicians
Speaker 4: will respond. And of course this is a great opportunity
Speaker 4: for the bond vigilantes to get the attentions of the
Speaker 4: politicians in the United States because we are negotiating a budget.
Speaker 2: Yeah, let's go back to Japan brief. Maybe there is
Speaker 2: a genuine crisis brewing there there. I know I've written
Speaker 2: that art call myself quite a lot of times over
Speaker 2: the last couple of decades, but maybe it's real this time.
Speaker 2: You do have this phenomenally high ratio and you have
Speaker 2: very long time yield, well over three percent now when
Speaker 2: we were used to them long term knocking around one
Speaker 2: percent or below.
Speaker 3: It is quite a big deal.
Speaker 4: Huge.
Speaker 3: Yeah, if that does develop into a genuine crisis, what
Speaker 3: does that mean?
Speaker 4: I tend to be an optimist at heart. So the
Speaker 4: notion that the pessimists have been promoting that one day
Speaker 4: they'll be auctions in the United States and now maybe
Speaker 4: in Japan where nobody will show up, or the Japan
Speaker 4: and the United States will default on their payments, I
Speaker 4: think that's nonsense. We saw in twenty twenty three a
Speaker 4: mini debt crisis with a yield going for four to
Speaker 4: five percent, as I mentioned, and at five percent there
Speaker 4: was just a ton of buying. So there's always going
Speaker 4: to be some yel at which there'll be investors saying,
Speaker 4: you know what, this is pretty good. This will probably
Speaker 4: slow the economy down and bring inflation down, and who knows,
Speaker 4: maybe they'll even cause the politicians to get the message.
Speaker 4: But the bond vigilantes are not the only players in
Speaker 4: this game. The central banks are involved, the treasuries are involved.
Speaker 4: In the United States, and November first, twenty twenty three,
Speaker 4: Treasury Secretary Jenny Yale and basically told the bond vigilantes.
Speaker 4: If you don't like my bonds and my notes, you
Speaker 4: know what, I won't issue any additional ones. I'll just
Speaker 4: issue the usual load, but I'll do what I need
Speaker 4: extra in the bill market, and that like a charm.
Speaker 4: There's ways that the central banks and the Treasury can
Speaker 4: still buy time and to avoid a day of reckoning.
Speaker 4: But if there's a day of reckoning, the deficits are
Speaker 4: a man and a woman made problem. They can be
Speaker 4: easily fixed. All we have to do is slow down
Speaker 4: the pace of outlays and increase the pace of receipts.
Speaker 4: It's the political challenge of getting that accomplished that has
Speaker 4: stymied any progress on deficits. It's just, you know, Americans
Speaker 4: and maybe Japanese and Europeans and others don't do pain
Speaker 4: very well. And we would just as soon pay for
Speaker 4: entitlements by issuing debt rather than raising taxes. At some
Speaker 4: point that could come back to haunt you, and it
Speaker 4: may very well be at this point, but it doesn't
Speaker 4: have to be doomsday, kind of like what happened in
Speaker 4: two thousand and eight. There was a financial crisis, all
Speaker 4: hands on deck, and we did respond to it. The
Speaker 4: politicians responded to it. They came up with a program
Speaker 4: called TARP to bail out the banks. The first round,
Speaker 4: the stock market hated and took a huge dive on it.
Speaker 4: One week later they came up with a new, improved
Speaker 4: TARP that fixed things. So this could be a process
Speaker 4: that last a few weeks. If we do, in fact
Speaker 4: get something that feels very much like a dead crisis,
Speaker 4: doesn't have to be the end of the world, would it.
Speaker 3: Maybe it not be such a bad thing. Get it
Speaker 3: over with.
Speaker 2: It's that thing we all know is coming right hanging
Speaker 2: over us for decades. In a way, it'd be quite
Speaker 2: nice to get it out of the way, have a
Speaker 2: bit of a reset, force everyone to rethink their fiscal priorities,
Speaker 2: and just get moving again in a better way.
Speaker 4: The way I've built with that uncertainty is I've said, look,
Speaker 4: I'll worry about it when the bond market worries about it.
Speaker 4: And that's been a useful way to watch it because
Speaker 4: people have been worrying about it all the time, have
Speaker 4: missed the great equity market. There was opportunities in the
Speaker 4: bond market. You don't want to get too pessimistic about it,
Speaker 4: because there's pretty straightforward solutions. They just require some political will.
Speaker 2: And you're optimistic on the US economy as a whole. Right,
Speaker 2: Lots of conversation about coming recession over the last few months,
Speaker 2: and you now think it's about a thirty five percent Chanson.
Speaker 2: I love the way you describe this recession. You call
Speaker 2: it the gotto recession, the one that we're always waiting
Speaker 2: for and never ever arrives. And you'll view that hasn't changed,
Speaker 2: has it?
Speaker 4: The past three years We've had the most widely anticipated
Speaker 4: recession of all times that never happened, as you said,
Speaker 4: the goodeaux recession, the no show recession. And I bet
Speaker 4: on the resilience of the consumer. I'm a baby boomer.
Speaker 4: I'm still working for a living, but a lot of
Speaker 4: my friends are retiring. And collectively the baby boomers have
Speaker 4: eighty trillion dollars in net worth. That's half the net
Speaker 4: worth of the household sector. The savings rate is probably
Speaker 4: going to turn negative here because they're not earning money,
Speaker 4: but they have a ton of assets and they are
Speaker 4: spending that money. In addition, the fears that capital spending
Speaker 4: was going to take a dive because of the uncertainty
Speaker 4: with tariffs, now, and with monetary policy over the past
Speaker 4: three years, I don't think that's playing out well. Some
Speaker 4: capital spending is going to be postponed. More than fifty
Speaker 4: percent of capital spending is now in technology and technology
Speaker 4: capital spending is something that's almost imperative. You have to
Speaker 4: spend on technology in order to stay competitive. And to
Speaker 4: give Trump some credit, because everybody focuses on the fact
Speaker 4: that it's created a lot of turmoil, which you would
Speaker 4: think is basically bad for capital spending. At the same time,
Speaker 4: you know, he keeps collecting these IOUs from foreign governments
Speaker 4: and foreign companies saying that they intend to spend hundreds
Speaker 4: of billions in the United States for on shoring. Imshoring
Speaker 4: has been going on over the past four years since
Speaker 4: Biden created some legislation that stimulated it, and I think
Speaker 4: it will continue to go on.
Speaker 2: Okay, So relatively confident about the US economy and as
Speaker 2: a result, still confident about the US market. And there's
Speaker 2: one thing you said that it's the kind of thing
Speaker 2: that makes me a niny bit nevs about the US
Speaker 2: market is that you mentioned the savings rate going negative
Speaker 2: and the baby boom is moving very firmly from their
Speaker 2: accumulation period into their decumulation period, and that changes the flows.
Speaker 4: It does, But I'm also thinking that there's going to
Speaker 4: be younger generations that are increasingly investing in the stock market.
Speaker 4: As I said, the baby boomers are sitting on a
Speaker 4: record eighty trillion dollars of net worth. We've never had
Speaker 4: a retiring generation this rich, but it's a nature of
Speaker 4: the beast. Young folks don't have much in net worth
Speaker 4: and over the years they accumulate it, and so the
Speaker 4: younger ones are in that process now. And I don't
Speaker 4: think the baby boomers are going to be able to
Speaker 4: spend eighty trillion dollars. I think there's going to be
Speaker 4: a lot of inheritances, and based on my own experience
Speaker 4: and my discussions why a fellow baby boomers, I think
Speaker 4: there's a lot of intra generational income and wealth chance
Speaker 4: is going on right now. So I think that's what's
Speaker 4: been missing in the discussion of the consumer. Everybody's been
Speaker 4: talking about as though there's only kind of one kind
Speaker 4: of consumer experience. In fact, there's many, And the baby
Speaker 4: boomers are doing very well. The younger folks aren't doing
Speaker 4: as well. That's where you're seeing delinquency ratios going up.
Speaker 4: But the parents are definitely helping out.
Speaker 2: In my next life, Ed, I'm going to be the
Speaker 2: child of an American baby boomer. That's what I'm aiming for.
Speaker 4: Yeah, it's a good position.
Speaker 2: Yeah, everyone who believes in reincarnation should definitely be aiming
Speaker 2: for exactly that. So you're one of what comes what
Speaker 2: backs up. What you say is that the buyers of
Speaker 2: the dips all the way through this volatility of the
Speaker 2: last few months, the buyers have been retail investors, ordinary
Speaker 2: people picking up on the dip, haven't they. I haven't
Speaker 2: seen any of those U shaped dips that you might
Speaker 2: have got maybe in the old days. Now everything is
Speaker 2: very the market goes down, retail buyers come in, market
Speaker 2: goes up.
Speaker 4: Absolutely. I mean the fun flows data that is available
Speaker 4: showing that retail investor are the ones that are keeping
Speaker 4: this market going. They're in a good position because I
Speaker 4: think it seeped into their consciousness that stocks really have
Speaker 4: to be abled for the long run. Somehow, I think
Speaker 4: they appreciate that more than the baby boomers really appreciated it,
Speaker 4: And I think that they're viewing sell offs as opportunities
Speaker 4: to buy stocks. And I think they have a long
Speaker 4: term mentality. Again, I may be generalizing from my kids
Speaker 4: and some others that I've talked to, but with my
Speaker 4: limited sample that I've talked to, I'm surprised by their
Speaker 4: steadfastness and how they didn't freak out with the market
Speaker 4: selling off, whereas my baby boom generation I remember lots
Speaker 4: of freak out situations. As a matter of fact, I'm
Speaker 4: pretty proud of my forecasting record and calling bottoms, And
Speaker 4: one of the reasons I'm so good at it is
Speaker 4: I've got a relative who always calls me upright at
Speaker 4: the bottom and says that he should I get out.
Speaker 4: So I've witnessed more of that among my peers.
Speaker 2: Okay, interestingly, I think we will got one of those,
Speaker 2: one of those relatives. Maybe the rest of us recognize
Speaker 2: it as well as you do. Yeah, so you think
Speaker 2: they're right to be buying in now? There is still
Speaker 2: I would say, from the other side of the Atlantic,
Speaker 2: you look across to the US and certainly we feel
Speaker 2: a lot of concerns about the US market and evaluations
Speaker 2: is still very high. There's an enormous amount of uncertainty.
Speaker 2: Anything could happened from here. The idea that America is
Speaker 2: permanently exceptional. That spell seems to have broken a bit,
Speaker 2: and so we would wonder if those retail investors pouring
Speaker 2: money into the US market might not be wiser to
Speaker 2: be looking overseas.
Speaker 4: I've been promoting the idea of stay home rather than
Speaker 4: go global since twenty ten. That doesn't mean I'm telling
Speaker 4: people not to invest overseas. I've just been recommending over
Speaker 4: waiting the United States, and I may overstay my welcome
Speaker 4: with that concept, but I'm sticking with it. We do
Speaker 4: have seven exceptional companies here, the Magnificent seven, and this
Speaker 4: recent correction was basically led by them. They had more
Speaker 4: than just a correction, They had a bear market. They
Speaker 4: were down like twenty five percent. The overall market was
Speaker 4: down eighteen percent for the S and P five hundred,
Speaker 4: and there was a lot of concern that they were
Speaker 4: spending too much on AI and would never get a
Speaker 4: return on that. And they came back and said, We're
Speaker 4: still going to spend that kind of money because we'd
Speaker 4: still think we're going to get a return on it.
Speaker 4: You know, some of these are cloud companies, and the
Speaker 4: demand for computing is only going to increase in this
Speaker 4: what I call the digital revolution that started in the
Speaker 4: mid sixties. If that's the case, these are continue to
Speaker 4: be exceptional companies. Not much debt, a lot of cash flow,
Speaker 4: tremendous innovations, and they are uniquely Americans. It doesn't mean
Speaker 4: that there aren't great companies overseas, but everybody seems to
Speaker 4: recognize the exceptionalism of these companies, which does reflect many
Speaker 4: aspects of the exceptionalism of the US economy.
Speaker 2: And are you worried about earnings in the near term.
Speaker 2: I'm reading a couple of your notes. I see that
Speaker 2: you've been writing a bit about earning. Earning his consensus
Speaker 2: focused softening slightly.
Speaker 4: Yeah, in the near term, there's certainly concerns. The Trump
Speaker 4: tariff turmoil has been moderated somewhat, but there's still plenty
Speaker 4: of it out There, still plenty of uncertainties related to
Speaker 4: where this is all going to lead. The tariff itself, certainly,
Speaker 4: the basic tariff of ten percent is in effect a
Speaker 4: tax on corporation, so it's got to hurt. We recently
Speaker 4: saw the President respond to a big retailer by saying,
Speaker 4: don't dare raise raise your prices, And if they do
Speaker 4: raise don't raise their prices. That'll affect their profit margins.
Speaker 4: And there's found to be some kind of stagflationary scenario
Speaker 4: unfolding here the next few months, with higher inflation and
Speaker 4: slower growth. But I think the market's looking past all that.
Speaker 4: I think the market has come to conclude that the
Speaker 4: president needs to get this behind him as soon as possible.
Speaker 4: The midterm elections are coming next year. You can't really
Speaker 4: afford to have a sesshould occur now or certainly not
Speaker 4: early next year, and so I think the market perceives
Speaker 4: that he will continue to blink, and that along the
Speaker 4: way he'll declare victory and move on to this big,
Speaker 4: beautiful tax bill, which the jury is out on that
Speaker 4: whether it's big and beautiful or big and ugly. I'm
Speaker 4: waiting to see how the bond market votes on all that.
Speaker 4: But it's a volatile time right here, and I think
Speaker 4: retail investors are right to see his opportunities to buy,
Speaker 4: let's say, buy on the dips. So I think that
Speaker 4: will continue to work.
Speaker 3: So a bit of a melt up into the end
Speaker 3: of the year.
Speaker 4: Maybe well, you know, I'm struggling with the question of
Speaker 4: whether we're going to have a melt up in the
Speaker 4: stock market or a melt down in the bond market. Obviously,
Speaker 4: if we have a melt down in the bond market,
Speaker 4: we're not going to get a melt up in the
Speaker 4: stock market. You know, I've told my accounts that I
Speaker 4: reserve the right to change my forecast as often as
Speaker 4: the President seems to change his mind. But I do
Speaker 4: try to maintain some objectivity and stability in my forecasting.
Speaker 4: And I think the market's right. This too sholl pass.
Speaker 4: And We've got a tremendous amount of technological innovations ahead
Speaker 4: of us, whether it be humanoid robotics, more automation, autonomous driving,
Speaker 4: artificial intelligence. All these technologies are are not pie in
Speaker 4: the sky. They're here and they're being implemented. I think
Speaker 4: they're going to have a tremendous impact on productivity. So
Speaker 4: I've been talking since twenty nineteen that this decade could
Speaker 4: be turned out to be the Roaring twenty twenties. First
Speaker 4: half of the decade worked out great so far, you know.
Speaker 4: Then it looked like things started to slip up here
Speaker 4: for a Roaring twenty twenty scenario, But I think it's
Speaker 4: making a comeback here and it's based on the idea
Speaker 4: that technological innovations will boost productivity because there are shortages
Speaker 4: of skill labor, and productivity means better economic growth, lower inflation,
Speaker 4: better profit margins, and higher real wages and makes everything better.
Speaker 4: And so I'm still counting on that, and I'm trying
Speaker 4: to get positive feedback from the stock market, and I
Speaker 4: have been until this correction, but we thought it would
Speaker 4: be a correction. We didn't think it would be a
Speaker 4: bear market. So far, so good, and within the market's
Speaker 4: kind of back to signaling that the Roaring twenty twenty
Speaker 4: scenario might still be very much intact.
Speaker 2: Yeah, although I suppose it is possible. In fact, history
Speaker 2: shows us is over and over again. I'm a financial
Speaker 2: walking tour of Edinburgh yesterday and we walked around the
Speaker 2: railway station and all that kind of thing and talked
Speaker 2: about the various booms and busts and how often it
Speaker 2: is that you have an amazing technological revolution, Yeah, alongside
Speaker 2: disastrous investing environment. These two very often go hand in hand.
Speaker 2: So the assumption that because you have a decade or
Speaker 2: two decades of astonishing technological advancement, it is not a
Speaker 2: even that alongside that an awful lot of people make money.
Speaker 2: Generally a lot of people lose money. And it's in
Speaker 2: the second way when the productivity gains really come through
Speaker 2: that the next lot make the money.
Speaker 4: Yeah, I guess it's Schaumpater's notion.
Speaker 3: Of creative destruction.
Speaker 4: Creative destruction for the help the idea that capitalism, by
Speaker 4: its very nature is constantly innovating and coming up with solutions.
Speaker 4: You know, when I studied economics, it's like a lot
Speaker 4: of first year students. I read Samuelson's book on economics,
Speaker 4: and he defined economics as the study of how you
Speaker 4: optimally allocate scarce resources. It sounds like a very depressing
Speaker 4: concept that you, oh, my god, there's only so much
Speaker 4: and we have to figure out how to divvate up.
Speaker 4: And then you get into these debates of whether the
Speaker 4: government should do it through Marxism or state run economies,
Speaker 4: or should it be done by the marketplace. I think
Speaker 4: economics is all about technology solving the problem of scarce resources.
Speaker 4: The way we know scare resources are scarce is because
Speaker 4: the prices go up, and then some entrepreneurs says, I
Speaker 4: can do this better cheaper with these kind of technologies,
Speaker 4: and that's what makes it so exciting. But it's very dynamic,
Speaker 4: and while you're creating, you're also destroying, and that's where
Speaker 4: a lot of the tensions come in. But I think
Speaker 4: we're very much in that kind of environment right now.
Speaker 3: Okay.
Speaker 2: I like the idea that economic should not be about
Speaker 2: allocating scares resources. We've been talking about that a bit
Speaker 2: on the podcast recently, saying that the whole aim should
Speaker 2: be to find, create, offer more and more resource so
Speaker 2: that we consume more and more, rather than constantly working
Speaker 2: towards trying to consume less. We should be open to
Speaker 2: the idea that we should always consume more energy, more resources,
Speaker 2: more land, etc.
Speaker 4: Just take autonomous driving. We're not going to have to
Speaker 4: own cars anymore. We can own them and rent them out.
Speaker 4: But that'll make the whole auto industry much more efficient.
Speaker 4: We're all driving to work in the car sitting there
Speaker 4: for hours on end. We're all coming back home at
Speaker 4: night and the car is sitting there and the driveway
Speaker 4: or garage hours on and now, imagine if we actually
Speaker 4: use these vehicles, these digital devices more efficiently, then we
Speaker 4: will be using a few resources, certainly in that area.
Speaker 2: I don't know, my car is almost an extension of
Speaker 2: my house. I currently see myself giving it up. You're
Speaker 2: very optimistic.
Speaker 3: We appreciate that.
Speaker 2: We don't get it often on the Marin talks money podcasts,
Speaker 2: particularly about the US market, So it's.
Speaker 3: Good to hear. But what would make you change your mind?
Speaker 3: What would happen?
Speaker 2: What confluence of events or ideas or changes is it
Speaker 2: that would make you say, actually, do you know what?
Speaker 2: I've got this wrong? There's going to be a recession.
Speaker 2: This market's going to correct. It doesn't look good anymore.
Speaker 2: What should we be looking out for?
Speaker 4: I'd watch out for when the pessimists become optimists in
Speaker 4: my country, and instincts will come out and say that
Speaker 4: something's got to be wrong here. As you said, I
Speaker 4: tend to be a loone around these podcasts. There aren't
Speaker 4: too many of us optimists out there, so from a
Speaker 4: contrarian's perspective, it works. I've been accused of being a permeable,
Speaker 4: which I've used as a compliment. I want my tombstone
Speaker 4: to say it. Yard Denny was usually bullish and usually right,
Speaker 4: and I'm not saying that bragging. I'm saying that stock
Speaker 4: market's are permeable. It tends to go up. Technology tends
Speaker 4: to solve the problems that people think are going to
Speaker 4: bring us down. The debt crisis. I welcome it. I
Speaker 4: hope we get a debt crisis in the next few months,
Speaker 4: because it will probably be resolved in the next few
Speaker 4: months as we scare the living daylights out of the politicians.
Speaker 4: I hope that bonvigil Ani showed that they're more powerful
Speaker 4: than ever. After all, there's more debt than ever, so
Speaker 4: they must be more powerful than ever. I do tend
Speaker 4: to see things more optimistically, but that's a contrary instinct
Speaker 4: because it's being a pessimist. Is it's just a conventional
Speaker 4: It's so easy to say how things are going to
Speaker 4: go wrong. So as long as the pessimists keep coming
Speaker 4: up with ideas a way could go wrong, I don't
Speaker 4: have to work as hard on that side. So I
Speaker 4: keep looking at what they're saying could go wrong, and yeah,
Speaker 4: I think, right now, you've got people like great Dally,
Speaker 4: We're very credible. Is a billionaire. By the way, I
Speaker 4: don't know what it is about these billionaires that make
Speaker 4: some pessimists. A lot of these billionaires just keep telling
Speaker 4: the masses that they can't be even billionaires because we're
Speaker 4: going to have a crisis any day.
Speaker 2: So it's interesting because you're right, we get that a
Speaker 2: lot that the miserable billionaires, the world's going to end,
Speaker 2: everything's awful, et cetera, et cetera, And they must have
Speaker 2: been optimistic on the way up, because it's not really
Speaker 2: possible to become a billionaire by being a miserable or
Speaker 2: good is it.
Speaker 4: That's the way I'm looking at it. But I would
Speaker 4: say right now the most credible pessimistic scenario is that crisis.
Speaker 4: But you can pretty much count on me and tell
Speaker 4: you why this is not going to be the end
Speaker 4: of the world as we know it, and why it
Speaker 4: might actually be a good thing. It might be might
Speaker 4: resolve this issue once and for all.
Speaker 2: Yeah, although it will break various things in the financial
Speaker 2: markets that we didn't even know that were to be broken, well,
Speaker 2: not always happens. He'll be stuff that breaks Shelby, all
Speaker 2: sorts of things that we wouldn't have expected would come
Speaker 2: out of a proper day crisis.
Speaker 4: I'll respond to that by saying that was very true
Speaker 4: in two thousand and eight, but we've made a lot
Speaker 4: of progress in creating all kinds of shock absorbers in
Speaker 4: the capital markets. People were certain that the tightening of
Speaker 4: monetary policy over the past three years was going to
Speaker 4: cause a financial crisis in a recession, and it didn't happen.
Speaker 4: And now they're certain that the tariffs are going to
Speaker 4: cause some sort of crisis and a recession. We have
Speaker 4: a very resilient economy and a very resilient capital market
Speaker 4: in America, so it is resilient. Maybe Japan will turn
Speaker 4: out to be the mean poster child for what happens
Speaker 4: when you borrow too much and at some point it
Speaker 4: comes back to haunt you.
Speaker 3: Yeah. Maybe, Okay.
Speaker 2: So in this giant equity market that is the US
Speaker 2: market obviously a very keen on big tech. But for
Speaker 2: an order investor looking at the market, not wanting to
Speaker 2: buy a passive fund, where should they be, Like what
Speaker 2: sectors are interesting?
Speaker 4: You know? I've been recommending overweighting information technology, communication services, industrials, financials,
Speaker 4: so all the good stuff, all the stuff that does
Speaker 4: well during good times, growth kind of companies. Not cheap.
Speaker 4: They were cheap on April eighth, not as cheap anymore,
Speaker 4: but I would stay with them. Not to say that
Speaker 4: the defensive stocks are cheap They're also very expensive because
Speaker 4: there are a lot of pessimists out there who still
Speaker 4: want to be in the market, but they don't want
Speaker 4: to be in the gamey stuff, which is what they
Speaker 4: would say my recommendations are focusing on. But yeah, I
Speaker 4: would overweight those sectors, and I would continue to overweight
Speaker 4: the United States. I don't think the US dollar is
Speaker 4: going into a major decline. I don't see how that's
Speaker 4: possible when we have the world's largest capital market and
Speaker 4: the most liquid capital market. So I think that just
Speaker 4: doesn't make sense.
Speaker 2: What about smaller companies in the US. We keep being
Speaker 2: told that's where the value is.
Speaker 4: Well, they've been frustrating the smid caps, the small cap
Speaker 4: MidCap stocks, particularly small caps, they've been cheap for a
Speaker 4: long time and they just can't seem to get a
Speaker 4: sustainable rally. Going definitely look more attractive in evaluation basis.
Speaker 4: But maybe the problem is in this small cap arena
Speaker 4: is all the good stuff doesn't go public very quickly,
Speaker 4: and before it does go public, it gets bought out
Speaker 4: by the Magnificent seven or some other large cap company.
Speaker 4: And then the other frustrating thing is if you happen
Speaker 4: to come up with the next Microsoft. Then you're sure
Speaker 4: it's going to be the next Microsoft, and you buy it,
Speaker 4: and you see this thing going up double triple, and
Speaker 4: then all of a sudden somebody comes in and buys
Speaker 4: it from you. Well, that's great, you're going to have
Speaker 4: a good one day return on your money when the
Speaker 4: takeover is announced. But then you've got to go back
Speaker 4: to the drawing board and try to find the next Microsoft.
Speaker 4: So it's a very frustrating kind of game to be
Speaker 4: playing right now because you're competing against the investment banking
Speaker 4: department of some pretty big.
Speaker 2: Companies, which is very bad for said markets overall, isn't it. Yeah,
Speaker 2: it's possible that another reason why small caps aren't getting
Speaker 2: the traction that you might expect small and mid sized
Speaker 2: companies because of the shift towards passive and of course
Speaker 2: the bulk of passive money goes into index funds that
Speaker 2: float around the larger cap level.
Speaker 4: Very good point. Yeah, Active managers are almost always limited
Speaker 4: by what percent of their portfolio they can put in
Speaker 4: any particular stock. Sometimes it's two percent max, three percent maximum.
Speaker 4: You've got to have a certain diversification in the numbers
Speaker 4: of stocks you own. The ATFS there's no restraint. You know.
Speaker 4: Whatever the magnificence seven are in the S and P
Speaker 4: five hundred is what they're going to be in the
Speaker 4: atfs attract the S and P.
Speaker 2: Now, I know you've said definitely that you've definitely favored
Speaker 2: the US and everyone should really be overweight the US.
Speaker 2: And but are there any other markets that you look
Speaker 2: at and you think a lead, you know, that looks
Speaker 2: kind of interesting. You know, there's lots of talk about
Speaker 2: rebalancing towards Europe because of Germany's fiscal splurge, because of
Speaker 2: rising spending across the board. There are lots of talk
Speaker 2: about how China is no longer an uninvestable market and
Speaker 2: one should be there as well.
Speaker 4: I'm in the China's uninvestables camp.
Speaker 3: Oh you still why is that?
Speaker 4: I still am. I don't think that's changed. It's still
Speaker 4: authoritarian regime that can change the rule of business very quickly.
Speaker 4: More fundamentally, the governments destroyed the demographic profile of China.
Speaker 4: It's very geriatric. You know. I've described China as the
Speaker 4: world's largest nursing home operated by maoists. Before that, I
Speaker 4: used to call Japan the world's largest nursing home. Operated
Speaker 4: by the mob. So I don't know that they let
Speaker 4: me into China. I don't know that.
Speaker 2: I mean no, But that is the really interesting thing
Speaker 2: about China is that the population is actually falling by
Speaker 2: a million plus a year.
Speaker 4: And the Japan and now we can see that Japan
Speaker 4: has a lot of debt. China has a huge amount
Speaker 4: of debt. Their property market is a disaster. No, I've
Speaker 4: got no interest in China. And for a while there
Speaker 4: was a it's a great vehicle for trading, but I
Speaker 4: don't think you can India. I keep looking at with
Speaker 4: saying I wish I'd thought about that one earlier, but
Speaker 4: we just had to sell off there that now is
Speaker 4: followed by a recovery. It seems to trade and tandem
Speaker 4: with what happens in the United States. I would say
Speaker 4: there's probably opportunities in India, particularly in the banking sector
Speaker 4: and the retailing sector. I think there's certainly opportunities. Other
Speaker 4: than that, it's catches catch can around the world. Mexico
Speaker 4: has some opportunities, but it's a state with questionable political stability.
Speaker 4: Brazil has some opportunities, clearly, but a lot of them
Speaker 4: it tend to depend on a strong global economy pushing
Speaker 4: up commodity prices, and that doesn't seem to be what's
Speaker 4: happening right now.
Speaker 3: Okay, what about gold? Do you have a look at gold.
Speaker 4: I've never been a proponent of gold.
Speaker 3: Well, it's not an optimist investment, is it.
Speaker 4: It's not that it's got no income, it's got no dividend.
Speaker 4: I can't come up with the present discarded value of gold.
Speaker 4: I haven't really studied the market that carefully from a
Speaker 4: supplied demand standpoint. But about a year ago I said,
Speaker 4: you know what it looks like. We're crossing above two
Speaker 4: thousand dollars an ounce. I think it looks like it's
Speaker 4: got some upside here. And the explanation from a fundamental
Speaker 4: standpoint was real simple. As long as foreign central banks
Speaker 4: of countries that don't like us decide that they don't
Speaker 4: want to see what happened to Russia happened to them
Speaker 4: when Russia invaded Ukraine, the United States froze the foreign
Speaker 4: exchange reserves of Russia, and so these central bankers have
Speaker 4: decided they want to have more gold than dollars or
Speaker 4: even euro or yen as reserve assets. Just go with
Speaker 4: the flow. If that's what they're going to do. Then
Speaker 4: that means gold's going to continue to move higher, and
Speaker 4: to the extent that along the way there's more geopolitical concerns,
Speaker 4: there's more debt concerns. That's all positive for gold. Oh yeah,
Speaker 4: I would recommend actually holding gold and maybe overweighting gold
Speaker 4: relative to whatever. You know, if you thought five percent
Speaker 4: was enough, maybe ten percent. So I'm actually a gold enthusiast.
Speaker 3: That is not the answer I expected, but I like it.
Speaker 3: I try to be open minded good and bitcoin.
Speaker 4: Oh bitcoin. I came up with an amazing insight a
Speaker 4: few years ago that I should have listened to, and
Speaker 4: the insight was that bitcoin is kind of like digital tulips,
Speaker 4: which sounds very critical, right, because then the implication is
Speaker 4: that it's just a bubble in Holland. But I did
Speaker 4: point out that the difference is that the tulip bulb
Speaker 4: was geographically just in a very tiny little town called
Speaker 4: Holland many centuries ago, and that people did go to
Speaker 4: sleep at night. It wasn't open twenty four by seven.
Speaker 4: Bitcoin is global. The market's open on a global basis
Speaker 4: twenty four by seven, so there's a lot more potential
Speaker 4: buyer than there ever was in the Holland toolip market,
Speaker 4: and at least for bitcoin, there does seem to be
Speaker 4: a digital mechanism that's limiting the supply of these things.
Speaker 4: So I have no problems owning bitcoin. I don't personally,
Speaker 4: but I have no I'm not pounding the table and
Speaker 4: telling people that they shouldn't be buying bitcoin.
Speaker 2: But the way you've just described it them makes it
Speaker 2: sounds like the reason to own it is because it
Speaker 2: can be a bubble significantly bigger than the Chilip bubble
Speaker 2: ever was, as opposed to because you think it's a
Speaker 2: reasonable asset class.
Speaker 4: Yeah. I have no problems with bubbles. I just have
Speaker 4: to remind myself to get out at the top. Yeah.
Speaker 2: We don't like to be able to do that it
Speaker 2: at the bottoment out of the top. Thank you so
Speaker 2: much for joining us today, Ed, I really appreciate it.
Speaker 2: I've enjoyed our chat.
Speaker 4: Very welcome. Thank you.
Speaker 3: Thanks for listening to this week's Meren Talks Money.
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