WEBVTT - Recession Threat Is Back—and Maybe Something Worse 0:00:02.720 --> 0:00:09.280 Bloomberg Audio Studios, podcasts, radio news. Hello listeners, Meren thumbs 0:00:09.360 --> 0:00:11.280 up web Here. Just wanted to remind you that if 0:00:11.280 --> 0:00:13.640 you are enjoying our weekly podcast, and I do hope 0:00:13.640 --> 0:00:17.160 you are, you'll also probably really enjoy my weekly newsletter 0:00:17.200 --> 0:00:20.799 for Bloomberg subscribers. It it's in boxes every Saturday. This 0:00:20.880 --> 0:00:22.960 past week I wrote about Latin amer markets and why 0:00:23.040 --> 0:00:27.120 they're undervalued, under owned, and very very poorly labeled. So 0:00:27.240 --> 0:00:28.600 check out the link in the show notes for how 0:00:28.640 --> 0:00:31.280 to subscribe to the newsletter. It does mean signing up 0:00:31.280 --> 0:00:33.239 for a dot com subscription, but I promise you it 0:00:33.520 --> 0:00:36.960 is worth it. You will also get access to John's 0:00:36.960 --> 0:00:40.760 Money Distilled newsletter and informative and actionable stories from more 0:00:40.800 --> 0:00:45.440 than two thousand, seven hundred journalists worldwide. Right onto this 0:00:45.479 --> 0:00:46.279 week's show. 0:00:56.320 --> 0:00:57.560 Welcome to Meren Talks Money. 0:00:57.560 --> 0:01:00.560 The podcast imish people who know the markets explain the markets. 0:01:00.560 --> 0:01:03.440 I'm marrensumset where, but this week I'm speaking with Peter Barrison, 0:01:03.520 --> 0:01:07.280 Chief Global Investment Strategist at BCA Research. That means he 0:01:07.280 --> 0:01:10.000 heads up the team at BCA that provides global economic 0:01:10.040 --> 0:01:12.600 and financial market analysis to its clients and helps them 0:01:12.680 --> 0:01:15.840 shape their investment decisions. Peter has been economists for more 0:01:15.840 --> 0:01:18.800 than three decades. Previously worked at the IMF, the International 0:01:18.880 --> 0:01:21.960 Monetary Fund, and at Goldman Sachs. So we wanted to 0:01:21.959 --> 0:01:25.039 get Peter on partly because we read all his work religiously. Peter, 0:01:25.120 --> 0:01:27.319 by the way, religiously. We wanted to get him on 0:01:27.360 --> 0:01:30.000 to talk about the global economic outlook. Back in March, 0:01:30.000 --> 0:01:32.160 he was very clear that he felt the recession holds 0:01:32.200 --> 0:01:34.880 for the US were still high. His year end SMP 0:01:35.040 --> 0:01:38.680 target is four four hundred and fifty. That is quite 0:01:38.720 --> 0:01:40.840 a drop from the current level, which is still knocking 0:01:40.840 --> 0:01:44.000 around six twenty five percent drop. Actually, is he still 0:01:44.000 --> 0:01:46.360 bearished on the US? What impact does he think Trump's 0:01:46.360 --> 0:01:49.240 trade policies will have. Is there a bigger risk than trade? 0:01:49.360 --> 0:01:51.480 And what does the endgame for markets in the US 0:01:51.520 --> 0:01:54.360 and elsewhere look like right now, Peter, that's going to 0:01:54.400 --> 0:01:56.320 take an offul lot longer than thirty five minutes that 0:01:56.320 --> 0:01:58.320 we've got, So as you could talk really fast, I'd 0:01:58.320 --> 0:01:58.920 appreciate it. 0:01:59.280 --> 0:02:00.000 I'll do my best. 0:02:01.520 --> 0:02:03.720 Welcome to Marrion, Dogs Money, Thank you very much for 0:02:03.760 --> 0:02:08.280 coming on. Why don't we start then with the US 0:02:08.360 --> 0:02:12.080 economy and this recession rescue. Latest peace puts the recession 0:02:12.120 --> 0:02:15.120 risk for the US at about sixty percent, right, But 0:02:15.160 --> 0:02:18.360 we have been waiting for this recession for a long time. 0:02:18.800 --> 0:02:21.400 Yeah, that's right. So back in twenty twenty two and 0:02:21.480 --> 0:02:26.840 twenty twenty three was one of the few optimistic strategists 0:02:26.880 --> 0:02:30.120 making the case that the US was not at any 0:02:30.160 --> 0:02:34.440 great danger of recession. And then late last year and 0:02:34.480 --> 0:02:37.280 certainly into this year, I moved into the recession camp. 0:02:37.280 --> 0:02:41.440 And the reason I did so was because I argued 0:02:41.480 --> 0:02:44.360 that a lot of the installation that had protected the 0:02:44.480 --> 0:02:48.280 US economy had worn thin. So back in twenty twenty two, 0:02:48.760 --> 0:02:51.720 there were millions of excess job openings. Anyone who lost 0:02:51.720 --> 0:02:54.240 a job back then could walk across a street and 0:02:54.280 --> 0:02:57.520 find new work and not prevented unemployment from going up. 0:02:57.919 --> 0:03:02.520 There were over two trillion in excess pandemic savings, and 0:03:02.560 --> 0:03:05.880 so when the FED began to raise rates, inflation rows 0:03:06.160 --> 0:03:12.320 households just kept on spending. Now things aren't so simple anymore. 0:03:12.720 --> 0:03:16.720 Those job openings have receded, the pandemic savings are gone, 0:03:16.960 --> 0:03:20.360 consumer delinquency rates are rising, and on top of that, 0:03:20.400 --> 0:03:23.760 we've got all these threats from the trade war, from 0:03:23.800 --> 0:03:25.799 the bond market, and so I do think that the 0:03:25.919 --> 0:03:29.760 risks of a recession this year are higher than they 0:03:29.760 --> 0:03:30.600 would normally be. 0:03:30.919 --> 0:03:33.640 Yeah, although we do still keep seeing a numbers that 0:03:33.720 --> 0:03:35.840 suggest things are just fine, and we know that consumer 0:03:35.920 --> 0:03:39.440 confidence levels below but consumers are still really spending in 0:03:39.480 --> 0:03:42.440 the US and the recent job numbers were fairly encouraging, right, 0:03:42.480 --> 0:03:44.960 So we do keep seeing better than expected data just 0:03:45.040 --> 0:03:46.240 keeps going, we do. 0:03:46.280 --> 0:03:50.240 Although there has been a slowing in consumer spending this year, 0:03:50.640 --> 0:03:54.000 there's also been a slowing in the labor market. I 0:03:54.040 --> 0:03:58.360 know we got pretty good numbers on payrolls for May, 0:03:58.800 --> 0:04:03.240 but those numbers are like to be revised down. What 0:04:03.360 --> 0:04:06.600 we've seen since the start of twenty twenty four is 0:04:06.640 --> 0:04:10.680 that on average, past payrolls have been revised down by 0:04:10.720 --> 0:04:15.880 about fifty thousand. That doesn't even include the benchmark revisions. 0:04:16.160 --> 0:04:20.520 We know from the CENSUSUS quarterly data that was just 0:04:20.640 --> 0:04:25.400 released last week that payrolls were overstated by round seventy 0:04:25.400 --> 0:04:29.240 five thousand per month in the final three quarters of 0:04:29.360 --> 0:04:32.640 last year. So fifty thousand plus seventy five thousand in 0:04:32.760 --> 0:04:36.640 future revisions basically gets you down to close to zero 0:04:37.040 --> 0:04:40.479 potentially on the May payrolls when all the data has 0:04:40.560 --> 0:04:43.279 been cleaned up, so I think we are still seeing 0:04:43.320 --> 0:04:46.360 It's not a dramatic slowdown, but the crew certainly is 0:04:46.360 --> 0:04:49.040 a slowdown that's taking place as we speak. 0:04:50.200 --> 0:04:54.279 This idea that fast falling immigration in the US may 0:04:54.360 --> 0:04:57.400 turn into something of a supply shocking, that you end 0:04:57.480 --> 0:05:00.599 up with a fairly dramatic reduction in the growth rate 0:05:00.680 --> 0:05:04.320 of potential workers, which could lead to rising wages, a 0:05:04.440 --> 0:05:07.080 tighter job market, etc. Ivan a supply shock really in 0:05:08.120 --> 0:05:09.800 the same way as we've seen over the last four 0:05:09.880 --> 0:05:11.800 or five years, but in a different category. 0:05:12.800 --> 0:05:16.560 A that depends on how quickly the slow down and 0:05:16.640 --> 0:05:21.160 immigration unfolds. Of course, we have like millions of people 0:05:21.400 --> 0:05:24.560 being deported, that would be a supply shock. If it 0:05:24.600 --> 0:05:30.040 happens more gradually, then it's not entirely clear whether demand 0:05:30.160 --> 0:05:32.120 or supply will dominate it. And the reason I say 0:05:32.120 --> 0:05:34.640 that is because if you reduce immigration, then of course, 0:05:34.680 --> 0:05:38.920 arithmetically you're reducing labor supply. But those immigrants spend They 0:05:38.920 --> 0:05:42.320 spend money on food, they spend money on clothing, they 0:05:42.400 --> 0:05:45.880 spend money on shelter, so they contribute to demand. In 0:05:45.960 --> 0:05:49.280 other words, and in the nearer tum it's not really 0:05:49.320 --> 0:05:51.159 clear how you balance out those. 0:05:51.360 --> 0:05:53.720 Right, Well, let's look at the threats then, and one 0:05:53.720 --> 0:05:56.400 of the things that everyone maris about, of course, is 0:05:56.440 --> 0:05:58.560 the effective tariff rate we're going to end up with 0:05:58.800 --> 0:06:02.360 and exactly how that will impact the US economy. How 0:06:02.360 --> 0:06:04.120 are you feeling about that at the moment as a 0:06:04.160 --> 0:06:05.040 recessionary risk. 0:06:05.960 --> 0:06:09.239 Well, right now, the effective terror frate in the US 0:06:09.320 --> 0:06:14.360 stands at about fifteen percent, which is quite high. I mean, 0:06:14.400 --> 0:06:17.039 we went into this year with an effective terror freight 0:06:17.120 --> 0:06:21.960 of like three percent or so, So fifteen percent is 0:06:22.040 --> 0:06:25.280 kind of in the same ballpark as to where tariffs 0:06:25.279 --> 0:06:27.560 were in the nineteen thirties. 0:06:27.279 --> 0:06:29.599 So at a much lower level of impulses percent of 0:06:29.680 --> 0:06:32.440 GDP in the nineteen thirty So the impact lower. 0:06:32.400 --> 0:06:35.479 Well, well imports as a share of GDPR about three 0:06:35.520 --> 0:06:38.960 times as high now as they were in the nineteen thirties. 0:06:39.120 --> 0:06:42.000 So the fact that we have the same terorforrate actually 0:06:42.160 --> 0:06:45.560 does more damage to the economy today because trade is 0:06:45.600 --> 0:06:47.839 a share of GDP is larger today than it was 0:06:47.880 --> 0:06:48.520 back then. 0:06:48.640 --> 0:06:50.880 So that that is going to impact on growth. 0:06:51.920 --> 0:06:54.520 Well, if you look at the estimates that the Yale 0:06:54.560 --> 0:06:59.200 Budget Lab and others have done. If current teriforrates remain 0:06:59.480 --> 0:07:05.240 in play, this will reduce household income by about two 0:07:05.320 --> 0:07:08.920 percent for the median US household, which is not a 0:07:09.440 --> 0:07:13.560 trivial shock. Two percent is a meaningful decline in income. 0:07:13.560 --> 0:07:19.040 And of course, the Trump administration is hoping that China 0:07:19.200 --> 0:07:23.560 ends up eating the tariffs rather than US importers or 0:07:23.760 --> 0:07:28.200 US consumers. We don't really see any evidence for that 0:07:29.120 --> 0:07:32.200 hope in the data. We now have a few months 0:07:32.200 --> 0:07:35.480 of data on Chinese import prices. This is data calculated 0:07:35.680 --> 0:07:37.960 by the US, not by China, by the way, and 0:07:38.000 --> 0:07:41.280 what we've seen is that basically Chinese import prices are 0:07:41.320 --> 0:07:45.360 down about one percent prior to the imposition of tariffs. 0:07:45.560 --> 0:07:49.800 So it's really US importers that have been shouldering the 0:07:49.800 --> 0:07:53.360 burden of the tariffs. Consumers not so much so far. 0:07:53.680 --> 0:07:56.680 But as we've heard from Walmart and others, if these 0:07:56.720 --> 0:07:59.160 tariffs remain in place, then they're going to have to 0:07:59.240 --> 0:08:03.880 pass on the cart of the tariffs to the ultimate buyer, 0:08:04.000 --> 0:08:04.640 the consumer. 0:08:05.000 --> 0:08:07.480 Okay, so they will end up being a feed into inflation. 0:08:07.760 --> 0:08:10.600 Yes, yes, In fact, the CPI swop market is saying 0:08:11.120 --> 0:08:13.800 that inflation's going to a rise by around a percentage 0:08:13.840 --> 0:08:17.120 point over the next twelve months. That's a meaningful increase 0:08:17.280 --> 0:08:17.920 in inflation. 0:08:18.360 --> 0:08:22.320 But you also think there's an even bigger risk, as 0:08:22.320 --> 0:08:25.960 you put it in a headline recently, lurking around the corner, 0:08:26.160 --> 0:08:28.800 something much worse than trade war. And I think everyone 0:08:28.840 --> 0:08:33.040 knows what that is. It's the dynamics of US government debt, 0:08:33.160 --> 0:08:36.120 which are increasingly out of control, and with a big 0:08:36.240 --> 0:08:39.800 beautiful Bill on the way, that may get worse. And 0:08:39.840 --> 0:08:41.480 that that's your big worry at the moment. 0:08:42.120 --> 0:08:46.480 Yeah, I think the market has taken comfort in this 0:08:46.559 --> 0:08:51.040 kind of notion that Trump is pivoting away from tariffs 0:08:51.440 --> 0:08:54.720 and focusing on tax cuts. Now, of course, that would 0:08:54.760 --> 0:08:59.359 be good if the bond market did not react negatively 0:08:59.559 --> 0:09:04.160 to the prospect of more unfunded budget deficits. But what 0:09:04.200 --> 0:09:07.040 we've seen both in the bond market and from the 0:09:07.160 --> 0:09:11.319 US dollar is that investors are getting a little bit 0:09:11.360 --> 0:09:16.440 skittish about the current level of deficits. We estimate that 0:09:16.760 --> 0:09:20.880 if the Big Beautiful Bill passes, the budget deficit will 0:09:21.000 --> 0:09:25.200 rise to close to eight percent of GDP over the 0:09:25.240 --> 0:09:26.920 next few years. 0:09:26.640 --> 0:09:28.760 From around six and a half percent at the moment. 0:09:28.880 --> 0:09:32.559 From around six and a half percent yes, that's right. 0:09:32.640 --> 0:09:35.520 Now it's supposed to come back down after a couple 0:09:35.559 --> 0:09:39.560 of years because of various cuts to social programs. But 0:09:40.080 --> 0:09:44.200 the reason those cuts were inserted later on into the 0:09:44.280 --> 0:09:48.200 ten year budgetary horizon is because they're politically unpopular, so 0:09:48.240 --> 0:09:53.480 they might never actually end up taking place, which is 0:09:53.520 --> 0:09:56.240 often the way things go in Washington. So the problem 0:09:56.320 --> 0:09:58.160 is that you've got a budget deficit, let's say seven 0:09:58.160 --> 0:10:00.880 and a half to eight percent of GDP, and you 0:10:01.000 --> 0:10:03.840 need something closer to three and a half percent just 0:10:03.880 --> 0:10:06.800 to stabilize the debt to GDP ratio. And so you've 0:10:06.840 --> 0:10:12.040 got this completely unsustainable trajectory in debt to GDP and 0:10:12.320 --> 0:10:14.880 on top of that fairly high interest rates. And I 0:10:14.920 --> 0:10:17.079 think that's the big difference from where we were a 0:10:17.160 --> 0:10:19.200 few years ago. A few years ago, we also had 0:10:19.240 --> 0:10:21.960 high debt to GDP, but interest rates were very very 0:10:22.000 --> 0:10:26.480 low up until twenty twenty two. Now we've got this 0:10:27.160 --> 0:10:33.360 toxic combination of high debt and high interest rates, and 0:10:33.440 --> 0:10:38.120 as a consequence, the amount of interest that the federal 0:10:38.200 --> 0:10:45.000 government is currently paying stands at about three percent of GDP, 0:10:45.640 --> 0:10:48.079 up from around one and a half percent of GDP 0:10:49.080 --> 0:10:52.280 during Trump's first term. And if you look at where 0:10:52.840 --> 0:10:56.560 interest expense is going, if bond yields evolve with market 0:10:56.600 --> 0:11:00.800 expectations and the big beautiful bill passes, we're talking about 0:11:00.840 --> 0:11:05.160 six percent of GDP in interest expense over the next 0:11:05.600 --> 0:11:10.600 ten years. That would be completely unprecedented in US history. 0:11:10.840 --> 0:11:14.200 Not that point, about one third of government revenue would 0:11:14.240 --> 0:11:16.920 be going just to pay the interest on the debts. 0:11:17.040 --> 0:11:20.720 So something needs to break. This can't continue in its 0:11:20.920 --> 0:11:24.400 current form. And yes, it sounds a lot like that 0:11:24.520 --> 0:11:27.320 story about the boy who cried wolf. People have been 0:11:27.320 --> 0:11:30.560 talking about a debt crisis for many years. It hasn't happened, 0:11:30.559 --> 0:11:32.880 But of course with the story, the boy does get 0:11:32.880 --> 0:11:35.800 eaten at the end, and so I think that, unfortunately, 0:11:36.120 --> 0:11:38.199 is where we're heading. I don't know if it's this year, 0:11:38.320 --> 0:11:41.360 next year, but it's getting increasingly close. 0:11:41.960 --> 0:11:45.920 We talk a lot about how the fiscal situation of 0:11:46.080 --> 0:11:49.480 the US is unsustainable, same with the UK, with other 0:11:49.600 --> 0:11:52.280 European markets, etc. But let's focus on the US when 0:11:52.320 --> 0:11:56.400 we say it is unsustainable, completely unsustainable, and something what 0:11:56.559 --> 0:12:00.200 must change? What do we mean what must change? How 0:12:00.240 --> 0:12:01.160 can it change? 0:12:01.760 --> 0:12:04.600 Well, the deficit needs to come down. It's as simple 0:12:04.679 --> 0:12:09.320 as that, and that can happen either because spending is 0:12:09.400 --> 0:12:14.040 cut or because revenue goes up. Now, in practice, I 0:12:14.040 --> 0:12:17.680 think it's very difficult to cut spending because most of 0:12:17.720 --> 0:12:21.640 what the government spends on is government programs such as 0:12:21.840 --> 0:12:26.360 medicare and social security defense. Not a lot of political 0:12:26.520 --> 0:12:30.560 support in cutting that, certainly not social programs for Democrats, 0:12:30.600 --> 0:12:35.760 and not social programs or defense for the Republicans. Raising 0:12:36.120 --> 0:12:41.160 taxes is a non starter for many Republicans. Democrats probably 0:12:41.200 --> 0:12:44.560 a little bit more amenable to that. And so if 0:12:44.559 --> 0:12:47.520 you can't spending and raise taxes, all you can then 0:12:47.600 --> 0:12:50.640 really do is hope for growth, and unfortunately that's sort 0:12:50.679 --> 0:12:53.920 of the direction in which the current administration is going. 0:12:54.080 --> 0:12:56.160 They're saying, we're not really going to cut the deficit 0:12:56.480 --> 0:12:59.760 in dollar terms, but we're going to grow the economy massively, 0:13:01.440 --> 0:13:04.280 and that's going to fix all our problems. So you know, 0:13:04.320 --> 0:13:07.000 of course, if growth does go up to three percent 0:13:07.120 --> 0:13:10.080 four percent, that would fix a lot of problems. But 0:13:10.120 --> 0:13:12.320 it's not clear where that growth is going to come from. 0:13:12.480 --> 0:13:15.480 As the administration itself has admitted, much of what is 0:13:15.520 --> 0:13:18.840 in the tax bill just goes towards extending the expiring 0:13:18.880 --> 0:13:22.200 tax cuts. So existing policy doesn't change. And the other 0:13:22.760 --> 0:13:26.080 tax cuts, you know, no taxes on tips, no taxes 0:13:26.200 --> 0:13:30.400 on on over time, the self deduction, you know, that's 0:13:30.480 --> 0:13:34.920 generally focused on households. It's not so much focused on businesses. 0:13:34.960 --> 0:13:36.600 I mean, there are a few things for businesses in 0:13:36.640 --> 0:13:39.800 the bill, but it's mainly focused on households. So it's 0:13:39.840 --> 0:13:43.200 not really obvious why trend GDP growth would go up 0:13:43.240 --> 0:13:45.800 a lot as a result of the big beautiful bill. 0:13:45.840 --> 0:13:47.840 In fact, it could be quite the opposite, to the 0:13:47.880 --> 0:13:52.520 extent that these big budget deficits raise interest rates and 0:13:52.559 --> 0:13:57.520 that crowds out private investments that could reduce trend growth 0:13:57.520 --> 0:13:58.480 in the United States. 0:13:58.960 --> 0:14:01.720 When we say on the sustain what is the endgame question? 0:14:01.840 --> 0:14:04.680 Because you know perfectly true that there is no appetite 0:14:04.720 --> 0:14:08.120 to cut spending, there is no appetite to put up taxes, 0:14:08.320 --> 0:14:10.440 and it is not a given that growth will come through. 0:14:10.559 --> 0:14:13.880 So what is it? What level of yield? For example, 0:14:13.920 --> 0:14:17.800 what is it that might persuade an administration or force 0:14:17.840 --> 0:14:22.120 an administration to actually do something about the situation as 0:14:22.160 --> 0:14:25.680 it currently stands, rather than the wibble away about future growth. 0:14:25.760 --> 0:14:27.600 There has to be a crisis of some kind, right, 0:14:27.640 --> 0:14:28.760 what counts as a crisis. 0:14:29.160 --> 0:14:31.680 I don't know if you need a full blow crisis. 0:14:31.720 --> 0:14:35.440 You could have something similar to what happened in both 0:14:35.480 --> 0:14:39.680 the US and Canada in the early nineteen nineties, where 0:14:39.800 --> 0:14:45.160 yields were very, very high. The budget deficits was lower 0:14:45.280 --> 0:14:49.520 than it is today, but nevertheless, because yields were seven 0:14:49.600 --> 0:14:53.680 eight percent, that was pushing up the interest expense on 0:14:53.720 --> 0:14:56.640 the debt quite a bit. And you had the tax 0:14:56.720 --> 0:15:02.520 cuts that George Bush famously forced to introduce breaking is 0:15:02.560 --> 0:15:05.840 no new taxes pledge, and in Canada, will also had 0:15:06.240 --> 0:15:11.040 the GST, the Government sales tax General Sales Tax, and 0:15:11.080 --> 0:15:14.800 so revenue was found in the deficit declined and the 0:15:15.040 --> 0:15:18.400 bond vigilianties right away. That didn't really require a crisis, 0:15:18.600 --> 0:15:21.400 but it did require market pressure. You could, of course, 0:15:21.440 --> 0:15:25.240 have a more adverse scenario where there really is a 0:15:25.320 --> 0:15:29.800 crisis where bond yields start rising, investors panic, that dumped 0:15:29.840 --> 0:15:33.040 the bonds, and that causes the yields to continue rising. 0:15:33.800 --> 0:15:37.400 That could happen as well, but either outcome would probably 0:15:37.560 --> 0:15:42.600 lead to the final result, which is that the budget 0:15:42.640 --> 0:15:45.560 deficit goes down in one form or another. 0:15:46.960 --> 0:15:49.320 I then spending house all the tax cuts are things 0:15:49.320 --> 0:15:51.400 that people have no appetite for until they're forced to 0:15:51.400 --> 0:15:52.360 have an appetite for it. 0:15:52.600 --> 0:15:53.520 That's right, that's right. 0:15:53.600 --> 0:15:57.680 Yes, I'm guessing Peter that you are a little more 0:15:57.720 --> 0:16:00.840 pessimistic about the US secuity market and perhaps some of 0:16:00.880 --> 0:16:02.400 those more bullets commentators. 0:16:02.800 --> 0:16:03.080 Yeah. 0:16:03.120 --> 0:16:05.720 I mean, if you look at valuations right now, the 0:16:05.760 --> 0:16:08.400 S and P five hundred is trading at about twenty 0:16:08.440 --> 0:16:13.280 one and a half times forward twelve month earnings, and 0:16:13.400 --> 0:16:18.680 those overd earnings assume record high profit margins. So it's 0:16:18.680 --> 0:16:24.120 a pretty optimistic set of assumptions that are driving equity 0:16:24.160 --> 0:16:26.680 prices today. And of course, if earnings do rise from 0:16:26.760 --> 0:16:30.680 current levels, that would be fine, but that hasn't really 0:16:30.720 --> 0:16:34.400 happened this year. Earnings estimates have sort of been flat. 0:16:34.440 --> 0:16:36.880 They went down in April, they recovered in May, but 0:16:36.920 --> 0:16:41.160 we're close to where we were in say January. I 0:16:41.200 --> 0:16:45.240 think it's unlikely that we would get meaningful increase in 0:16:45.680 --> 0:16:51.400 earnings estimates unless growth really ends up being quite strong, 0:16:51.640 --> 0:16:55.480 and that is unlikely given the slowing in the labor market, 0:16:55.600 --> 0:16:59.880 given the hangover from the trade war, and the fact 0:17:00.040 --> 0:17:03.520 the bond yields remain quite elevated. So I think probably 0:17:03.520 --> 0:17:07.000 in the best case scenario, if we avoid recession, then 0:17:07.520 --> 0:17:10.919 the SMP goes up maybe five percent or so. But 0:17:10.960 --> 0:17:14.080 if we don't avoid recession, then you have to ask 0:17:14.400 --> 0:17:17.199 how low could the stock market go. 0:17:17.640 --> 0:17:22.160 Well, let's talk then about where other people's optimism lies. 0:17:22.240 --> 0:17:24.960 And still even now, a lot of it lies in 0:17:25.200 --> 0:17:28.680 AI on the huge potential for this sector to pull 0:17:28.800 --> 0:17:31.480 not at the stock market but the economy, along the 0:17:31.560 --> 0:17:34.880 idea that we really will have the great productivity revolution 0:17:35.040 --> 0:17:37.560 we've been waiting for for so long, that will drive growth, 0:17:37.560 --> 0:17:40.840 that will drive company earnings, that will make the evaluations 0:17:40.840 --> 0:17:43.000 that we're paying today in the US licklick, nothing and 0:17:43.040 --> 0:17:47.240 everything will be absolutely fine. Where do you come down 0:17:47.359 --> 0:17:48.560 on the AI story. 0:17:49.240 --> 0:17:52.399 Well, right now we don't see the gains from AI 0:17:52.480 --> 0:17:57.600 in the productivity statistics at all, actually been really really weak. Now, 0:17:57.640 --> 0:18:02.639 maybe AI does boost productive I think that's entirely possible, 0:18:02.680 --> 0:18:06.040 But even if it does, that's no guarantee that it 0:18:06.080 --> 0:18:09.520 will boost profits, which is what matters for a stock 0:18:09.600 --> 0:18:12.680 market and the internet period. It's a good example. US 0:18:12.760 --> 0:18:16.800 productivity did increase in the mid nineteen nineties and stayed 0:18:16.800 --> 0:18:20.840 fairly high for about a decade until about two thousand 0:18:20.840 --> 0:18:24.119 and five, but it was only around two thousand and 0:18:24.119 --> 0:18:28.600 five that the profits began to finally materialize, So there 0:18:28.640 --> 0:18:32.040 was a long lag between productivity and profits. That could 0:18:32.080 --> 0:18:33.639 happen with AI as well. 0:18:34.400 --> 0:18:37.200 Okay, so not madly optimistic there in this shorter term. 0:18:37.400 --> 0:18:39.119 The other thing I supposed to talk about is that 0:18:39.119 --> 0:18:41.560 there's an awful lot of reasons why foreign investors might 0:18:41.600 --> 0:18:44.280 want to start applying a slightly higher risk premium to 0:18:44.359 --> 0:18:47.360 the US than they have previously, or risk premium at all, 0:18:47.400 --> 0:18:49.320 given they haven't really considered there to be must risk. 0:18:49.600 --> 0:18:51.560 You have the things that we've already talked about, the 0:18:51.880 --> 0:18:55.480 uncertainty around tariffs, we have the uncertainty around the debt 0:18:55.520 --> 0:18:58.480 and the fiscal position, and of course the general uncertainty 0:18:58.480 --> 0:19:01.080 around the current administration. And then you know, we all 0:19:01.119 --> 0:19:03.760 woke up this week and around the world to the 0:19:03.760 --> 0:19:07.480 pictures of la burning. Whether which parts of burning or 0:19:07.520 --> 0:19:09.280 not burning, or exactly how bad it is, it's hard 0:19:09.280 --> 0:19:11.639 to tell from far away, but nonetheless you see the 0:19:11.680 --> 0:19:14.480 pictures and you look at that, and you can see 0:19:14.480 --> 0:19:16.560 people who have an awful lot of money invested in 0:19:16.640 --> 0:19:18.920 the US market. We were looking at these statistics the 0:19:19.000 --> 0:19:21.520 other day, by the way, and really interesting because it 0:19:21.600 --> 0:19:24.480 is only the last four or five years that foreign 0:19:24.480 --> 0:19:28.760 investors have really poured money into the US and as 0:19:29.080 --> 0:19:31.879 the risks begin to accumulate, or a pitch to accumulate, 0:19:32.080 --> 0:19:33.600 it might be quite a fast move out. 0:19:34.600 --> 0:19:34.760 Yeah. 0:19:34.800 --> 0:19:38.720 I think that's definitely the risk for the US dollar, 0:19:39.040 --> 0:19:41.840 and a dollar, despite the fact that it's weakened over 0:19:41.880 --> 0:19:46.119 the last few months, still remains a fairly expensive currency. 0:19:46.640 --> 0:19:51.679 And so if this notion of US exceptionalism fades, it 0:19:51.680 --> 0:19:55.200 does have to go completely go away. But if investors 0:19:55.200 --> 0:19:59.560 decide that US economy is going to be less exceptional 0:20:00.119 --> 0:20:03.480 than it was in the past, that will justify a 0:20:03.640 --> 0:20:08.439 smaller growth premium to US assets, which means capital is 0:20:08.480 --> 0:20:11.879 going to flow out and the dollar could we confer 0:20:12.160 --> 0:20:15.439 so structurally, I am fairly bearish on the outlook for 0:20:15.480 --> 0:20:16.280 the US dollar. 0:20:17.000 --> 0:20:20.680 Okay, So if money flows out of the dollar, which 0:20:20.760 --> 0:20:23.600 currency and which market does it flow into? 0:20:23.960 --> 0:20:25.760 Well, I mean, of course, if the dollar weekends, it 0:20:25.760 --> 0:20:29.199 has to weaken against something, so most likely it'll be 0:20:29.440 --> 0:20:33.399 the euro, maybe even the Japanese yen. Here in the 0:20:33.400 --> 0:20:37.240 Bank of Japan seems to be finally able to raise 0:20:37.359 --> 0:20:43.119 rates now that inflation increased and these deflationary pressures have abated, 0:20:43.800 --> 0:20:49.959 might flow into other developed economies such as Canada, Australia. 0:20:50.560 --> 0:20:52.840 Now it's true that all of these countries have their 0:20:52.880 --> 0:20:56.840 own problems to contend with, and so that doesn't mean 0:20:56.920 --> 0:21:00.000 that their currencies are going to skyrocket, but the margin 0:21:00.119 --> 0:21:06.560 they could strengthen visa VI the US if the underlying 0:21:06.640 --> 0:21:12.479 drivers that have compelled foreigners to buy US assets become 0:21:13.040 --> 0:21:14.600 less appealing. 0:21:14.880 --> 0:21:18.720 And if money flows out of US equities, and when 0:21:18.760 --> 0:21:22.159 you say your mildly underweight equities, I think what you 0:21:22.240 --> 0:21:26.000 mean is that outside of holding fewer US equities and 0:21:26.480 --> 0:21:29.600 would suggest holding fewer US equities and cash and bonds, 0:21:29.720 --> 0:21:33.600 you're not talking about diversifying into other equity markets. But 0:21:33.680 --> 0:21:36.960 if you were, which equity markets would you consider to 0:21:37.000 --> 0:21:39.560 be attractive at the moment or interesting. 0:21:39.480 --> 0:21:41.840 In terms of where would that money go? You know, 0:21:41.880 --> 0:21:47.359 in a global recession, it's hard to see other stock 0:21:47.440 --> 0:21:52.720 markets doing well. If anything, most non US markets tend 0:21:52.720 --> 0:21:56.080 to be higher beta. When US earnings estimates fall, they 0:21:56.119 --> 0:21:59.520 tend to fall even more in places like Europe and Japan. 0:21:59.720 --> 0:22:03.680 So you're not going to find a safe haven in 0:22:03.800 --> 0:22:07.639 most other major stock markets in a recessionary scenario. Now, 0:22:07.680 --> 0:22:10.639 once we get out of the recession and the dollar 0:22:10.760 --> 0:22:18.520 bear market resumes and valuations become more relevant for investors, 0:22:18.880 --> 0:22:21.200 then I think at that point you're going to see 0:22:21.280 --> 0:22:25.240 Europe and other non US markets outperform. But I think 0:22:25.240 --> 0:22:27.920 we have to get through the recession first, Okay. 0:22:28.160 --> 0:22:31.120 I mean our general feeling I think is that if 0:22:31.280 --> 0:22:34.320 US markets full by twenty five percent, twenty percent something 0:22:34.359 --> 0:22:36.920 like that, all of the markets will fall too, of course, 0:22:37.400 --> 0:22:40.960 possibly even more, but the cheaper markets are likely to 0:22:41.000 --> 0:22:41.840 wreak up faster. 0:22:42.400 --> 0:22:46.280 Yeah, so the Europe is cheaper, Japan is cheaper, China 0:22:46.359 --> 0:22:48.119 is cheaper. They also tend to be a little bit 0:22:48.160 --> 0:22:52.119 more stycklical, They tend to have more exposure to financials, 0:22:52.280 --> 0:22:55.840 materials industrials. So sometimes it's a bit of a wash. 0:22:56.240 --> 0:22:57.439 Okay, what about China. 0:22:58.320 --> 0:23:02.240 I think China is an interesting stock markets. I mean, 0:23:02.400 --> 0:23:06.480 clearly China has done a fantastic job in terms of 0:23:07.119 --> 0:23:11.600