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Speaker 1: week's show.
Speaker 2: Welcome to Meren Talks Money.
Speaker 1: The podcast imish people who know the markets explain the markets.
Speaker 1: I'm marrensumset where, but this week I'm speaking with Peter Barrison,
Speaker 1: Chief Global Investment Strategist at BCA Research. That means he
Speaker 1: heads up the team at BCA that provides global economic
Speaker 1: and financial market analysis to its clients and helps them
Speaker 1: shape their investment decisions. Peter has been economists for more
Speaker 1: than three decades. Previously worked at the IMF, the International
Speaker 1: Monetary Fund, and at Goldman Sachs. So we wanted to
Speaker 1: get Peter on partly because we read all his work religiously. Peter,
Speaker 1: by the way, religiously. We wanted to get him on
Speaker 1: to talk about the global economic outlook. Back in March,
Speaker 1: he was very clear that he felt the recession holds
Speaker 1: for the US were still high. His year end SMP
Speaker 1: target is four four hundred and fifty. That is quite
Speaker 1: a drop from the current level, which is still knocking
Speaker 1: around six twenty five percent drop. Actually, is he still
Speaker 1: bearished on the US? What impact does he think Trump's
Speaker 1: trade policies will have. Is there a bigger risk than trade?
Speaker 1: And what does the endgame for markets in the US
Speaker 1: and elsewhere look like right now, Peter, that's going to
Speaker 1: take an offul lot longer than thirty five minutes that
Speaker 1: we've got, So as you could talk really fast, I'd
Speaker 1: appreciate it.
Speaker 3: I'll do my best.
Speaker 1: Welcome to Marrion, Dogs Money, Thank you very much for
Speaker 1: coming on. Why don't we start then with the US
Speaker 1: economy and this recession rescue. Latest peace puts the recession
Speaker 1: risk for the US at about sixty percent, right, But
Speaker 1: we have been waiting for this recession for a long time.
Speaker 3: Yeah, that's right. So back in twenty twenty two and
Speaker 3: twenty twenty three was one of the few optimistic strategists
Speaker 3: making the case that the US was not at any
Speaker 3: great danger of recession. And then late last year and
Speaker 3: certainly into this year, I moved into the recession camp.
Speaker 3: And the reason I did so was because I argued
Speaker 3: that a lot of the installation that had protected the
Speaker 3: US economy had worn thin. So back in twenty twenty two,
Speaker 3: there were millions of excess job openings. Anyone who lost
Speaker 3: a job back then could walk across a street and
Speaker 3: find new work and not prevented unemployment from going up.
Speaker 3: There were over two trillion in excess pandemic savings, and
Speaker 3: so when the FED began to raise rates, inflation rows
Speaker 3: households just kept on spending. Now things aren't so simple anymore.
Speaker 3: Those job openings have receded, the pandemic savings are gone,
Speaker 3: consumer delinquency rates are rising, and on top of that,
Speaker 3: we've got all these threats from the trade war, from
Speaker 3: the bond market, and so I do think that the
Speaker 3: risks of a recession this year are higher than they
Speaker 3: would normally be.
Speaker 1: Yeah, although we do still keep seeing a numbers that
Speaker 1: suggest things are just fine, and we know that consumer
Speaker 1: confidence levels below but consumers are still really spending in
Speaker 1: the US and the recent job numbers were fairly encouraging, right,
Speaker 1: So we do keep seeing better than expected data just
Speaker 1: keeps going, we do.
Speaker 3: Although there has been a slowing in consumer spending this year,
Speaker 3: there's also been a slowing in the labor market. I
Speaker 3: know we got pretty good numbers on payrolls for May,
Speaker 3: but those numbers are like to be revised down. What
Speaker 3: we've seen since the start of twenty twenty four is
Speaker 3: that on average, past payrolls have been revised down by
Speaker 3: about fifty thousand. That doesn't even include the benchmark revisions.
Speaker 3: We know from the CENSUSUS quarterly data that was just
Speaker 3: released last week that payrolls were overstated by round seventy
Speaker 3: five thousand per month in the final three quarters of
Speaker 3: last year. So fifty thousand plus seventy five thousand in
Speaker 3: future revisions basically gets you down to close to zero
Speaker 3: potentially on the May payrolls when all the data has
Speaker 3: been cleaned up, so I think we are still seeing
Speaker 3: It's not a dramatic slowdown, but the crew certainly is
Speaker 3: a slowdown that's taking place as we speak.
Speaker 1: This idea that fast falling immigration in the US may
Speaker 1: turn into something of a supply shocking, that you end
Speaker 1: up with a fairly dramatic reduction in the growth rate
Speaker 1: of potential workers, which could lead to rising wages, a
Speaker 1: tighter job market, etc. Ivan a supply shock really in
Speaker 1: the same way as we've seen over the last four
Speaker 1: or five years, but in a different category.
Speaker 3: A that depends on how quickly the slow down and
Speaker 3: immigration unfolds. Of course, we have like millions of people
Speaker 3: being deported, that would be a supply shock. If it
Speaker 3: happens more gradually, then it's not entirely clear whether demand
Speaker 3: or supply will dominate it. And the reason I say
Speaker 3: that is because if you reduce immigration, then of course,
Speaker 3: arithmetically you're reducing labor supply. But those immigrants spend They
Speaker 3: spend money on food, they spend money on clothing, they
Speaker 3: spend money on shelter, so they contribute to demand. In
Speaker 3: other words, and in the nearer tum it's not really
Speaker 3: clear how you balance out those.
Speaker 1: Right, Well, let's look at the threats then, and one
Speaker 1: of the things that everyone maris about, of course, is
Speaker 1: the effective tariff rate we're going to end up with
Speaker 1: and exactly how that will impact the US economy. How
Speaker 1: are you feeling about that at the moment as a
Speaker 1: recessionary risk.
Speaker 3: Well, right now, the effective terror frate in the US
Speaker 3: stands at about fifteen percent, which is quite high. I mean,
Speaker 3: we went into this year with an effective terror freight
Speaker 3: of like three percent or so, So fifteen percent is
Speaker 3: kind of in the same ballpark as to where tariffs
Speaker 3: were in the nineteen thirties.
Speaker 1: So at a much lower level of impulses percent of
Speaker 1: GDP in the nineteen thirty So the impact lower.
Speaker 3: Well, well imports as a share of GDPR about three
Speaker 3: times as high now as they were in the nineteen thirties.
Speaker 3: So the fact that we have the same terorforrate actually
Speaker 3: does more damage to the economy today because trade is
Speaker 3: a share of GDP is larger today than it was
Speaker 3: back then.
Speaker 1: So that that is going to impact on growth.
Speaker 3: Well, if you look at the estimates that the Yale
Speaker 3: Budget Lab and others have done. If current teriforrates remain
Speaker 3: in play, this will reduce household income by about two
Speaker 3: percent for the median US household, which is not a
Speaker 3: trivial shock. Two percent is a meaningful decline in income.
Speaker 3: And of course, the Trump administration is hoping that China
Speaker 3: ends up eating the tariffs rather than US importers or
Speaker 3: US consumers. We don't really see any evidence for that
Speaker 3: hope in the data. We now have a few months
Speaker 3: of data on Chinese import prices. This is data calculated
Speaker 3: by the US, not by China, by the way, and
Speaker 3: what we've seen is that basically Chinese import prices are
Speaker 3: down about one percent prior to the imposition of tariffs.
Speaker 3: So it's really US importers that have been shouldering the
Speaker 3: burden of the tariffs. Consumers not so much so far.
Speaker 3: But as we've heard from Walmart and others, if these
Speaker 3: tariffs remain in place, then they're going to have to
Speaker 3: pass on the cart of the tariffs to the ultimate buyer,
Speaker 3: the consumer.
Speaker 1: Okay, so they will end up being a feed into inflation.
Speaker 3: Yes, yes, In fact, the CPI swop market is saying
Speaker 3: that inflation's going to a rise by around a percentage
Speaker 3: point over the next twelve months. That's a meaningful increase
Speaker 3: in inflation.
Speaker 1: But you also think there's an even bigger risk, as
Speaker 1: you put it in a headline recently, lurking around the corner,
Speaker 1: something much worse than trade war. And I think everyone
Speaker 1: knows what that is. It's the dynamics of US government debt,
Speaker 1: which are increasingly out of control, and with a big
Speaker 1: beautiful Bill on the way, that may get worse. And
Speaker 1: that that's your big worry at the moment.
Speaker 3: Yeah, I think the market has taken comfort in this
Speaker 3: kind of notion that Trump is pivoting away from tariffs
Speaker 3: and focusing on tax cuts. Now, of course, that would
Speaker 3: be good if the bond market did not react negatively
Speaker 3: to the prospect of more unfunded budget deficits. But what
Speaker 3: we've seen both in the bond market and from the
Speaker 3: US dollar is that investors are getting a little bit
Speaker 3: skittish about the current level of deficits. We estimate that
Speaker 3: if the Big Beautiful Bill passes, the budget deficit will
Speaker 3: rise to close to eight percent of GDP over the
Speaker 3: next few years.
Speaker 1: From around six and a half percent at the moment.
Speaker 3: From around six and a half percent yes, that's right.
Speaker 3: Now it's supposed to come back down after a couple
Speaker 3: of years because of various cuts to social programs. But
Speaker 3: the reason those cuts were inserted later on into the
Speaker 3: ten year budgetary horizon is because they're politically unpopular, so
Speaker 3: they might never actually end up taking place, which is
Speaker 3: often the way things go in Washington. So the problem
Speaker 3: is that you've got a budget deficit, let's say seven
Speaker 3: and a half to eight percent of GDP, and you
Speaker 3: need something closer to three and a half percent just
Speaker 3: to stabilize the debt to GDP ratio. And so you've
Speaker 3: got this completely unsustainable trajectory in debt to GDP and
Speaker 3: on top of that fairly high interest rates. And I
Speaker 3: think that's the big difference from where we were a
Speaker 3: few years ago. A few years ago, we also had
Speaker 3: high debt to GDP, but interest rates were very very
Speaker 3: low up until twenty twenty two. Now we've got this
Speaker 3: toxic combination of high debt and high interest rates, and
Speaker 3: as a consequence, the amount of interest that the federal
Speaker 3: government is currently paying stands at about three percent of GDP,
Speaker 3: up from around one and a half percent of GDP
Speaker 3: during Trump's first term. And if you look at where
Speaker 3: interest expense is going, if bond yields evolve with market
Speaker 3: expectations and the big beautiful bill passes, we're talking about
Speaker 3: six percent of GDP in interest expense over the next
Speaker 3: ten years. That would be completely unprecedented in US history.
Speaker 3: Not that point, about one third of government revenue would
Speaker 3: be going just to pay the interest on the debts.
Speaker 3: So something needs to break. This can't continue in its
Speaker 3: current form. And yes, it sounds a lot like that
Speaker 3: story about the boy who cried wolf. People have been
Speaker 3: talking about a debt crisis for many years. It hasn't happened,
Speaker 3: But of course with the story, the boy does get
Speaker 3: eaten at the end, and so I think that, unfortunately,
Speaker 3: is where we're heading. I don't know if it's this year,
Speaker 3: next year, but it's getting increasingly close.
Speaker 1: We talk a lot about how the fiscal situation of
Speaker 1: the US is unsustainable, same with the UK, with other
Speaker 1: European markets, etc. But let's focus on the US when
Speaker 1: we say it is unsustainable, completely unsustainable, and something what
Speaker 1: must change? What do we mean what must change? How
Speaker 1: can it change?
Speaker 3: Well, the deficit needs to come down. It's as simple
Speaker 3: as that, and that can happen either because spending is
Speaker 3: cut or because revenue goes up. Now, in practice, I
Speaker 3: think it's very difficult to cut spending because most of
Speaker 3: what the government spends on is government programs such as
Speaker 3: medicare and social security defense. Not a lot of political
Speaker 3: support in cutting that, certainly not social programs for Democrats,
Speaker 3: and not social programs or defense for the Republicans. Raising
Speaker 3: taxes is a non starter for many Republicans. Democrats probably
Speaker 3: a little bit more amenable to that. And so if
Speaker 3: you can't spending and raise taxes, all you can then
Speaker 3: really do is hope for growth, and unfortunately that's sort
Speaker 3: of the direction in which the current administration is going.
Speaker 3: They're saying, we're not really going to cut the deficit
Speaker 3: in dollar terms, but we're going to grow the economy massively,
Speaker 3: and that's going to fix all our problems. So you know,
Speaker 3: of course, if growth does go up to three percent
Speaker 3: four percent, that would fix a lot of problems. But
Speaker 3: it's not clear where that growth is going to come from.
Speaker 3: As the administration itself has admitted, much of what is
Speaker 3: in the tax bill just goes towards extending the expiring
Speaker 3: tax cuts. So existing policy doesn't change. And the other
Speaker 3: tax cuts, you know, no taxes on tips, no taxes
Speaker 3: on on over time, the self deduction, you know, that's
Speaker 3: generally focused on households. It's not so much focused on businesses.
Speaker 3: I mean, there are a few things for businesses in
Speaker 3: the bill, but it's mainly focused on households. So it's
Speaker 3: not really obvious why trend GDP growth would go up
Speaker 3: a lot as a result of the big beautiful bill.
Speaker 3: In fact, it could be quite the opposite, to the
Speaker 3: extent that these big budget deficits raise interest rates and
Speaker 3: that crowds out private investments that could reduce trend growth
Speaker 3: in the United States.
Speaker 1: When we say on the sustain what is the endgame question?
Speaker 1: Because you know perfectly true that there is no appetite
Speaker 1: to cut spending, there is no appetite to put up taxes,
Speaker 1: and it is not a given that growth will come through.
Speaker 1: So what is it? What level of yield? For example,
Speaker 1: what is it that might persuade an administration or force
Speaker 1: an administration to actually do something about the situation as
Speaker 1: it currently stands, rather than the wibble away about future growth.
Speaker 1: There has to be a crisis of some kind, right,
Speaker 1: what counts as a crisis.
Speaker 3: I don't know if you need a full blow crisis.
Speaker 3: You could have something similar to what happened in both
Speaker 3: the US and Canada in the early nineteen nineties, where
Speaker 3: yields were very, very high. The budget deficits was lower
Speaker 3: than it is today, but nevertheless, because yields were seven
Speaker 3: eight percent, that was pushing up the interest expense on
Speaker 3: the debt quite a bit. And you had the tax
Speaker 3: cuts that George Bush famously forced to introduce breaking is
Speaker 3: no new taxes pledge, and in Canada, will also had
Speaker 3: the GST, the Government sales tax General Sales Tax, and
Speaker 3: so revenue was found in the deficit declined and the
Speaker 3: bond vigilianties right away. That didn't really require a crisis,
Speaker 3: but it did require market pressure. You could, of course,
Speaker 3: have a more adverse scenario where there really is a
Speaker 3: crisis where bond yields start rising, investors panic, that dumped
Speaker 3: the bonds, and that causes the yields to continue rising.
Speaker 3: That could happen as well, but either outcome would probably
Speaker 3: lead to the final result, which is that the budget
Speaker 3: deficit goes down in one form or another.
Speaker 1: I then spending house all the tax cuts are things
Speaker 1: that people have no appetite for until they're forced to
Speaker 1: have an appetite for it.
Speaker 3: That's right, that's right.
Speaker 1: Yes, I'm guessing Peter that you are a little more
Speaker 1: pessimistic about the US secuity market and perhaps some of
Speaker 1: those more bullets commentators.
Speaker 2: Yeah.
Speaker 3: I mean, if you look at valuations right now, the
Speaker 3: S and P five hundred is trading at about twenty
Speaker 3: one and a half times forward twelve month earnings, and
Speaker 3: those overd earnings assume record high profit margins. So it's
Speaker 3: a pretty optimistic set of assumptions that are driving equity
Speaker 3: prices today. And of course, if earnings do rise from
Speaker 3: current levels, that would be fine, but that hasn't really
Speaker 3: happened this year. Earnings estimates have sort of been flat.
Speaker 3: They went down in April, they recovered in May, but
Speaker 3: we're close to where we were in say January. I
Speaker 3: think it's unlikely that we would get meaningful increase in
Speaker 3: earnings estimates unless growth really ends up being quite strong,
Speaker 3: and that is unlikely given the slowing in the labor market,
Speaker 3: given the hangover from the trade war, and the fact
Speaker 3: the bond yields remain quite elevated. So I think probably
Speaker 3: in the best case scenario, if we avoid recession, then
Speaker 3: the SMP goes up maybe five percent or so. But
Speaker 3: if we don't avoid recession, then you have to ask
Speaker 3: how low could the stock market go.
Speaker 1: Well, let's talk then about where other people's optimism lies.
Speaker 1: And still even now, a lot of it lies in
Speaker 1: AI on the huge potential for this sector to pull
Speaker 1: not at the stock market but the economy, along the
Speaker 1: idea that we really will have the great productivity revolution
Speaker 1: we've been waiting for for so long, that will drive growth,
Speaker 1: that will drive company earnings, that will make the evaluations
Speaker 1: that we're paying today in the US licklick, nothing and
Speaker 1: everything will be absolutely fine. Where do you come down
Speaker 1: on the AI story.
Speaker 3: Well, right now we don't see the gains from AI
Speaker 3: in the productivity statistics at all, actually been really really weak. Now,
Speaker 3: maybe AI does boost productive I think that's entirely possible,
Speaker 3: But even if it does, that's no guarantee that it
Speaker 3: will boost profits, which is what matters for a stock
Speaker 3: market and the internet period. It's a good example. US
Speaker 3: productivity did increase in the mid nineteen nineties and stayed
Speaker 3: fairly high for about a decade until about two thousand
Speaker 3: and five, but it was only around two thousand and
Speaker 3: five that the profits began to finally materialize, So there
Speaker 3: was a long lag between productivity and profits. That could
Speaker 3: happen with AI as well.
Speaker 1: Okay, so not madly optimistic there in this shorter term.
Speaker 1: The other thing I supposed to talk about is that
Speaker 1: there's an awful lot of reasons why foreign investors might
Speaker 1: want to start applying a slightly higher risk premium to
Speaker 1: the US than they have previously, or risk premium at all,
Speaker 1: given they haven't really considered there to be must risk.
Speaker 1: You have the things that we've already talked about, the
Speaker 1: uncertainty around tariffs, we have the uncertainty around the debt
Speaker 1: and the fiscal position, and of course the general uncertainty
Speaker 1: around the current administration. And then you know, we all
Speaker 1: woke up this week and around the world to the
Speaker 1: pictures of la burning. Whether which parts of burning or
Speaker 1: not burning, or exactly how bad it is, it's hard
Speaker 1: to tell from far away, but nonetheless you see the
Speaker 1: pictures and you look at that, and you can see
Speaker 1: people who have an awful lot of money invested in
Speaker 1: the US market. We were looking at these statistics the
Speaker 1: other day, by the way, and really interesting because it
Speaker 1: is only the last four or five years that foreign
Speaker 1: investors have really poured money into the US and as
Speaker 1: the risks begin to accumulate, or a pitch to accumulate,
Speaker 1: it might be quite a fast move out.
Speaker 2: Yeah.
Speaker 3: I think that's definitely the risk for the US dollar,
Speaker 3: and a dollar, despite the fact that it's weakened over
Speaker 3: the last few months, still remains a fairly expensive currency.
Speaker 3: And so if this notion of US exceptionalism fades, it
Speaker 3: does have to go completely go away. But if investors
Speaker 3: decide that US economy is going to be less exceptional
Speaker 3: than it was in the past, that will justify a
Speaker 3: smaller growth premium to US assets, which means capital is
Speaker 3: going to flow out and the dollar could we confer
Speaker 3: so structurally, I am fairly bearish on the outlook for
Speaker 3: the US dollar.
Speaker 1: Okay, So if money flows out of the dollar, which
Speaker 1: currency and which market does it flow into?
Speaker 3: Well, I mean, of course, if the dollar weekends, it
Speaker 3: has to weaken against something, so most likely it'll be
Speaker 3: the euro, maybe even the Japanese yen. Here in the
Speaker 3: Bank of Japan seems to be finally able to raise
Speaker 3: rates now that inflation increased and these deflationary pressures have abated,
Speaker 3: might flow into other developed economies such as Canada, Australia.
Speaker 3: Now it's true that all of these countries have their
Speaker 3: own problems to contend with, and so that doesn't mean
Speaker 3: that their currencies are going to skyrocket, but the margin
Speaker 3: they could strengthen visa VI the US if the underlying
Speaker 3: drivers that have compelled foreigners to buy US assets become
Speaker 3: less appealing.
Speaker 1: And if money flows out of US equities, and when
Speaker 1: you say your mildly underweight equities, I think what you
Speaker 1: mean is that outside of holding fewer US equities and
Speaker 1: would suggest holding fewer US equities and cash and bonds,
Speaker 1: you're not talking about diversifying into other equity markets. But
Speaker 1: if you were, which equity markets would you consider to
Speaker 1: be attractive at the moment or interesting.
Speaker 3: In terms of where would that money go? You know,
Speaker 3: in a global recession, it's hard to see other stock
Speaker 3: markets doing well. If anything, most non US markets tend
Speaker 3: to be higher beta. When US earnings estimates fall, they
Speaker 3: tend to fall even more in places like Europe and Japan.
Speaker 3: So you're not going to find a safe haven in
Speaker 3: most other major stock markets in a recessionary scenario. Now,
Speaker 3: once we get out of the recession and the dollar
Speaker 3: bear market resumes and valuations become more relevant for investors,
Speaker 3: then I think at that point you're going to see
Speaker 3: Europe and other non US markets outperform. But I think
Speaker 3: we have to get through the recession first, Okay.
Speaker 1: I mean our general feeling I think is that if
Speaker 1: US markets full by twenty five percent, twenty percent something
Speaker 1: like that, all of the markets will fall too, of course,
Speaker 1: possibly even more, but the cheaper markets are likely to
Speaker 1: wreak up faster.
Speaker 3: Yeah, so the Europe is cheaper, Japan is cheaper, China
Speaker 3: is cheaper. They also tend to be a little bit
Speaker 3: more stycklical, They tend to have more exposure to financials,
Speaker 3: materials industrials. So sometimes it's a bit of a wash.
Speaker 1: Okay, what about China.
Speaker 3: I think China is an interesting stock markets. I mean,
Speaker 3: clearly China has done a fantastic job in terms of
Speaker 3: tech progress. Where I think the uncertainty still lies for
Speaker 3: investors is around corporate governance politics, Like our Chinese company
Speaker 3: is actually going to be able to make money for
Speaker 3: their shareholders or will all of this just be about
Speaker 3: maintaining economic stability and political stability. That's where the uncertainty lies.
Speaker 3: And I think that question mark over whether shareholders will
Speaker 3: capture the innovation coming out of China is a big
Speaker 3: question mark and does justify a discount for Chinese stocks.
Speaker 1: Okay, so would you say that for you, maybe the
Speaker 1: Chinese market is always a trade, never a long term hold.
Speaker 3: Right now, I would say it's more of a trade
Speaker 3: than anything else. If we have shifts in kind of
Speaker 3: corporate governance, that I think it'll go from being a
Speaker 3: trade to an investment. We have to see those shifts.
Speaker 1: For when you think about markets, do you still think
Speaker 1: of them in terms of EM and DM or yeah,
Speaker 1: a different kind of category in your head.
Speaker 3: Yeah, I think that's becoming a bit of an antiquated label.
Speaker 3: I sometimes choke with our em strategistic BCA Arthur Burdakian
Speaker 3: that maybe the US is going to become an emerging
Speaker 3: market simply if you look at how the dollar has traded,
Speaker 3: and we've seen US interest rates rise relative to those abroad.
Speaker 3: Usually that would signify a stronger dollar, but the dollar
Speaker 3: is weak, and because the US itself is having some
Speaker 3: of the same EM related issues around debt and political
Speaker 3: stability that emerging markets have historically faced, whereas actual emerging
Speaker 3: markets today are much better shape than they were a
Speaker 3: couple of decades ago when I was first working at
Speaker 3: the IMF and dealing with some of these issues. So yeah,
Speaker 3: I think you have to kind of go on a
Speaker 3: country by country basis now.
Speaker 1: Yeah, And as you say, the so called developed markets
Speaker 1: have no moral high ground the political stability business at
Speaker 1: the moment. That's right, Yes, across Europe, the UK, the US,
Speaker 1: exact right, none of us, none of us are standing
Speaker 1: on particularly thick ice at the moment. Yes, gold, silver, platinum, oil.
Speaker 1: We're great gold bugs on this podcast, and we're excited
Speaker 1: by the silver price now, and we're excited by platinum.
Speaker 1: We're wondering what's going to happen in this market and
Speaker 1: if there is a safe haven out therebuts it's a
Speaker 1: yellow one.
Speaker 3: Yeah. I've generally been bullish on gold, and I'm structurally
Speaker 3: still bullish that the price of gold is high, even
Speaker 3: in inflation adjust the terms, it's close to its all
Speaker 3: time peak. But I think when you're trying to value gold,
Speaker 3: and of course it's difficult to value something like gold
Speaker 3: because it doesn't pay any income to its holders. I
Speaker 3: think what you have to do in that case is
Speaker 3: sort of look at gold holdings in relation to something
Speaker 3: like global wealth. If you do that, what you see
Speaker 3: is that gold kind of look cheap because global wealth
Speaker 3: has grown so much over the last fifty years that
Speaker 3: gold has not caught up. So it's a share of
Speaker 3: global wealth. Gold is much much smaller today than it
Speaker 3: was in the early nineteen eighties.
Speaker 1: Okay, interesting, I like that way of looking at a
Speaker 1: share of global wealth. I'm not sure we've done those
Speaker 1: numbers before. We're going to do them. What about bitcoin?
Speaker 1: We're talking the week beginning June the night and there's
Speaker 1: been positive bitcoin years out of the US administration, and
Speaker 1: the day we're talking bitcoins up two percent today. Are
Speaker 1: you positive long term or Bitcoin or indeed on any
Speaker 1: other cryptocurrencies?
Speaker 3: Well, I mean Bitcoin is interesting because we just talked
Speaker 3: about global wealth and there's a large fraction of global
Speaker 3: wealth that people don't necessarily want to disclose. They want
Speaker 3: to maintain their wealth in as private as setting as possible,
Speaker 3: and bitcoin does fulfill that demands. I wouldn't necessarily advise
Speaker 3: investors to own a lot of bitcoin, but I can
Speaker 3: see the use case for push comes to shove. I
Speaker 3: would choose gold over bitcoin in the current environment, but
Speaker 3: certainly bitcoin, I think at this point does deserve to
Speaker 3: have at least a very small part investors' portfolios. Have
Speaker 3: you got any I don't hold any. No, I've been
Speaker 3: sticking to gold.
Speaker 1: Yeah, well I've got both. I've never been a big
Speaker 1: fan of bitcoin, but I'm often wrong, so I like
Speaker 1: to hedge myself. So as we keep telling people, I
Speaker 1: get end litt hate mail about being mean about bitcoin,
Speaker 1: but I've actually got some and half the people I
Speaker 1: talk to who aren't mean about bitcoin at all just don't. Peter,
Speaker 1: is there anything we haven't talked about that you think
Speaker 1: we should talk about.
Speaker 3: I think one question mark is around oil prices and
Speaker 3: where they go from here. I think if there's sort
Speaker 3: of a bullish case to be made for the US consumer,
Speaker 3: that bullish case could at least in part, hinge on
Speaker 3: the possibility that gasoline prices fall, and it certainly does
Speaker 3: seem as though OPEC is no longer able to maintain discipline.
Speaker 3: The Saudis, of course understandably upset that countries that Kazakhstan
Speaker 3: have been exceeding their quotas. US shale production still remains
Speaker 3: quite strong now, of course, the prices fall For most
Speaker 3: shale players, you need oil of around sixty to seventy
Speaker 3: dollars a barrel to make money by drilling. If oil
Speaker 3: prices would have fallen into the fifty range, that would
Speaker 3: shut down quite a lot of US production. But nevertheless,
Speaker 3: I think it's worth stressing that gasoline prices have declined
Speaker 3: relative to where they were a year ago, and the
Speaker 3: margin that is helping the US consumer. If that continues,
Speaker 3: that tailwind could increase. That just worth monitoring.
Speaker 1: And how much would that take down your recession risk?
Speaker 3: Probably not a lot, because I think ultimately tariffs and
Speaker 3: bond yields matter more for the economy. But it would
Speaker 3: help certainly help offset some of these headwinds.
Speaker 1: What could happen, Peter to make you change your mind
Speaker 1: about coming recession? What could happen to make you positive
Speaker 1: on the US economy, positive on growth, and crucially positive
Speaker 1: on the US equity market.
Speaker 3: We need to see a few things on the economic front.
Speaker 3: One we would need to see Trump further dial back
Speaker 3: the tariffs, especially against China, which you know they've come
Speaker 3: down from one hundred and forty five percent, but they're
Speaker 3: still close to forty percent. TERRAF rates on China's quite high.
Speaker 3: If the Big Beautiful Bill passes without the bond market
Speaker 3: reacting negatively. So, in other words, if we get the
Speaker 3: fiscal stimulus without the adverse bond market reaction, that would
Speaker 3: make me more positive. If we start to see AI
Speaker 3: boost corporate profits in a more broad based way, would
Speaker 3: make me more optimistic as well. So I'm open minded.
Speaker 3: And my recesion probability is sixty percent. It's not one
Speaker 3: hundred percent. There's still forty percent chance where things can
Speaker 3: go right. And that's why I've been cautioning investors to
Speaker 3: wait until they see the whites of those recession's eyes
Speaker 3: before turning fully pessimistic.
Speaker 1: Okay, and let's hope that we see the whites when
Speaker 1: they're coming. We're going to miss them. Indeed, Pete, what
Speaker 1: are you reading at the moment?
Speaker 3: Oh gosh, I've been mainly listening to podcasts and things like,
Speaker 3: things like that, and so a lot of great content
Speaker 3: on Bloomberg. I would certainly start there obviously.
Speaker 1: Obviously, thank you so much. You for joining us today.
Speaker 3: My pleasure.
Speaker 1: Thank you so much, Thanks for listening to this week's
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Speaker 1: episode was hosted by me maren' umset Web. It was
Speaker 1: produced by Sumersadi and Moses and sound designed by Blake
Speaker 1: Maples and special thanks of course to Peter Barrison