WEBVTT - Inflation Will Fall, Just Not the Way You Think 0:00:00.400 --> 0:00:04.040 John, Hello, morning, Melton. There's so much to talk about. 0:00:04.080 --> 0:00:06.400 I don't know where to start, and really importantly, so 0:00:06.519 --> 0:00:09.440 much to talk about in areas where you and I 0:00:09.480 --> 0:00:11.039 have just been right. 0:00:13.960 --> 0:00:16.200 That's always the best idious to talk about. I feel. 0:00:16.680 --> 0:00:20.160 I know, I know now you've written and we're not 0:00:20.200 --> 0:00:21.600 going to talk about this. I just want to write 0:00:21.640 --> 0:00:24.160 down a market so everyone knows that we were right. 0:00:24.239 --> 0:00:27.159 You've written about the Japanese equity market today, and you 0:00:27.200 --> 0:00:30.400 and I have been talking for a while about her. 0:00:30.520 --> 0:00:33.800 Japanese equity is farty, cheap, everything's changing. When I say well, 0:00:33.800 --> 0:00:36.680 I mean it really a very long while. And finally 0:00:36.680 --> 0:00:40.120 they've broken through what our old friend Jonathan Allen mused 0:00:40.120 --> 0:00:42.839 to call the iron coffin lid, which means that the 0:00:42.880 --> 0:00:45.000 only way is up right, just say yes, because we're 0:00:45.000 --> 0:00:46.239 all going to talk about this. They can go and 0:00:46.280 --> 0:00:48.519 read Money Distilled and read all about it there. Your 0:00:48.560 --> 0:00:52.120 job is just to say yes, yes, excellent. The thing 0:00:52.200 --> 0:00:53.800 I really want to talk about today is the other 0:00:53.840 --> 0:00:55.840 thing that you and I have been writing about for 0:00:55.920 --> 0:00:58.800 a long time. We've been writing about her. Nobody understands 0:00:58.840 --> 0:01:02.760 how widely spread read the tax burden is in the UK, 0:01:03.160 --> 0:01:06.160 so we read you and I how many years ago 0:01:06.200 --> 0:01:07.560 now we read an article I think in the New 0:01:07.640 --> 0:01:12.160 York Times about fourteen twenty fourteen, because we also have 0:01:12.280 --> 0:01:14.760 good memories, which is important to rather. You have a 0:01:14.760 --> 0:01:17.400 good memory, and sometimes you remind me about stuff we've 0:01:17.400 --> 0:01:20.000 talked about in the past, and we've read this article 0:01:20.040 --> 0:01:24.119 which we thought was absolutely amazing because it explained the 0:01:24.120 --> 0:01:28.280 fluidity of income earning in the US and how over 0:01:28.319 --> 0:01:31.840 a lifetime people are sometimes in the bottom quintile of earning, 0:01:31.880 --> 0:01:34.360 sometimes in the top quintile of earning, often in the 0:01:34.400 --> 0:01:38.320 middle quintiles, et cetera. But seventy six percent of people, 0:01:38.360 --> 0:01:43.080 according to the study, passed through the top quintile of 0:01:43.280 --> 0:01:47.960 income generation in the US at least once during a career. 0:01:48.160 --> 0:01:50.680 And you know what the top quintile income in the 0:01:50.760 --> 0:01:51.280 US is. 0:01:52.440 --> 0:01:53.760 As you know, it's on my head. 0:01:53.800 --> 0:01:57.440 No, luckily I do. Back when back when the article 0:01:57.480 --> 0:01:59.720 was written, it was was slightly lower, but it's now 0:01:59.720 --> 0:02:02.040 about to two hundred and sixty nine thousand dollars, or 0:02:02.080 --> 0:02:04.040 that was the number last year. So that mean seventy 0:02:04.080 --> 0:02:06.919 six percent of income tax paying workers in the US, 0:02:07.120 --> 0:02:11.480 at some point during a year earn around two hundred 0:02:11.480 --> 0:02:14.720 and seventy thousand dollars. Absolutely amazing and a great testament 0:02:14.760 --> 0:02:19.000 to the meritocracy and fluidity of the US economy. Now, 0:02:19.080 --> 0:02:23.080 everybody thinks that that is not the case in the UK, 0:02:23.280 --> 0:02:25.200 right So when we had all this stuff up from 0:02:25.200 --> 0:02:28.119 the IFS this week explaining that in a couple of years, 0:02:28.200 --> 0:02:31.600 twenty percent of income tax paying workers in the UK 0:02:32.120 --> 0:02:35.280 would end up in the forty percent bracket, everyone went, oh, 0:02:35.280 --> 0:02:38.200 my god, that's awful twenty percent of people. And you 0:02:38.280 --> 0:02:40.680 and I thought back, and we remembered that article that 0:02:40.720 --> 0:02:44.160 we'd read, and we thought, twenty percent people is the 0:02:44.200 --> 0:02:48.000 bottom band there, because in fact there'll be fluidity in 0:02:48.040 --> 0:02:51.800 the UK economy as well. Incomes are not static, particularly 0:02:51.800 --> 0:02:54.359 in the private sector. They move around the place all 0:02:54.400 --> 0:02:56.680 the time. You can sometimes be in a lower bracket, 0:02:56.720 --> 0:02:58.840 you can sometimes be in a higher bracket. Let's go 0:02:58.880 --> 0:03:01.400 back to the quintiles move around the place inside these 0:03:01.400 --> 0:03:04.440 going to us. And what we didn't know though, is 0:03:04.520 --> 0:03:07.840 exactly what those numbers might look like in the UK. 0:03:08.120 --> 0:03:09.960 And now I'm handing out to you because one of 0:03:09.960 --> 0:03:13.000 our brilliant colleagues at Bloomberg pointed us to some ons 0:03:13.080 --> 0:03:14.320 data which gave us some clues. 0:03:14.400 --> 0:03:20.560 Right, Yeah, So Conrad in the office very kindly dugout 0:03:20.840 --> 0:03:24.960 this particular port called income dynamics. I think is that 0:03:25.000 --> 0:03:27.480 the name of the report, and it's often I mean, 0:03:27.480 --> 0:03:29.600 it's nowhere on there is granular. I think that was 0:03:29.639 --> 0:03:33.160 an academic study that the US was referencing, and so 0:03:33.240 --> 0:03:36.280 that I had actually gone through an entire lifetime. But 0:03:36.400 --> 0:03:42.240 even looking at just ten years, what this study found 0:03:42.720 --> 0:03:45.880 was that while people in the top quin title in 0:03:45.920 --> 0:03:51.000 twenty ten were more likely to stay there for the 0:03:51.040 --> 0:03:54.920 whole time, between twenty ten and twenty twenty, you still 0:03:54.960 --> 0:03:59.000 found just basically half of them weren't there by the 0:03:59.080 --> 0:04:04.240 time that the decade ended. You also found that more 0:04:04.280 --> 0:04:06.400 than half the people who started in the bottom quint 0:04:06.440 --> 0:04:09.320 title had then moved out of it by the time 0:04:09.600 --> 0:04:12.200 that kind of decade ended. And in the middle there's 0:04:12.280 --> 0:04:15.480 virtually there was just a lot of moving about, so 0:04:15.560 --> 0:04:17.400 people were in the second and then the third, and 0:04:17.400 --> 0:04:20.080 then the fourth and vice versa. So the point isn't 0:04:20.120 --> 0:04:23.200 so much that, and I mean there are specific kind 0:04:23.200 --> 0:04:27.400 of statistics and money distilled from earlier this week, but 0:04:27.440 --> 0:04:29.000 the point is that, yes, there is a lot of 0:04:29.000 --> 0:04:31.640 income fluidity here too, and there might not be as 0:04:31.680 --> 0:04:34.080 much as the US. In fact, I'd be astonished if 0:04:34.080 --> 0:04:36.000 there is as much as in the US, because obviously 0:04:36.000 --> 0:04:38.640 the US is the kind of kreme de la creme 0:04:38.720 --> 0:04:42.320 of meritocracy and kind of capitalist dynamic and all that 0:04:42.360 --> 0:04:46.719 sort of stuff. But it's very clear that, as you said, 0:04:46.839 --> 0:04:50.280 the idea that twenty percent of income tax payers will 0:04:50.320 --> 0:04:55.159 be paying forty percent tax is a very low bar estimate. 0:04:55.279 --> 0:05:00.240 And I would wager that the majority of work use 0:05:00.279 --> 0:05:03.400 as in more than half will pay forty percent income 0:05:03.440 --> 0:05:06.640 tax at some point during their careers. And I think 0:05:06.720 --> 0:05:08.880 that the important thing about that is that it should 0:05:08.880 --> 0:05:12.600 make us think about this differently. I mean the one 0:05:12.600 --> 0:05:16.520 actually that I pick up on and I think we 0:05:16.520 --> 0:05:19.920 should discuss this another time, But we're always talking about 0:05:19.920 --> 0:05:22.839 who you know, maybe tax relief on pensions is skewed, 0:05:22.880 --> 0:05:26.880 and two it should be done differently. But the thing is, 0:05:26.920 --> 0:05:30.720 if there are points in most people's careers where they 0:05:30.760 --> 0:05:33.400 are forty percent tax payers, those are also the times 0:05:33.480 --> 0:05:35.640 in their lives where they're going to be wanting to 0:05:35.640 --> 0:05:38.200 put away as much as possible for their pensions. So 0:05:38.240 --> 0:05:41.680 perhaps this idea kind of flattening the tax releaf and pensions, 0:05:41.760 --> 0:05:44.200 isn't such a good idea and not is it actually 0:05:44.200 --> 0:05:48.400 particularly fair, particularly in anyone who has yet to be benefit 0:05:48.400 --> 0:05:51.279 from that tax relief. That's slightly separate issue. 0:05:51.360 --> 0:05:53.040 Well, I think I just pick up that one quickly. 0:05:53.240 --> 0:05:56.080 Oh yeah, I obviously I agree with you on everything, 0:05:56.120 --> 0:05:57.760 and I particularly agree with you on this, and it's 0:05:57.800 --> 0:05:59.600 one of the main reasons why I feel that the 0:06:00.040 --> 0:06:03.800 annual allowance is the problem, that the lifetime allowance was 0:06:03.839 --> 0:06:06.600 never the problem. The problem is the annual allowance because 0:06:06.600 --> 0:06:09.200 as soon as people get to a point, which as 0:06:09.240 --> 0:06:11.560 it turns out, more people than you think do, get 0:06:11.600 --> 0:06:14.840 to their few high earning years, those are the years 0:06:14.920 --> 0:06:16.400 when they're then told they're not allowed to contry be 0:06:16.480 --> 0:06:19.320 very much into a pension. And that's where the problem comes, 0:06:19.360 --> 0:06:23.080 you know. So it's the whole system is set up 0:06:23.120 --> 0:06:26.599 with the belief that politicians have because most politicians cannot 0:06:26.600 --> 0:06:28.520 see be on the end of their own noses, they 0:06:28.560 --> 0:06:33.200 believe that everybody's income is like there's the same every year. 0:06:33.320 --> 0:06:36.720 Because anyone who works in the public sector will, particularly 0:06:37.200 --> 0:06:39.640 as an MP, because you don't get promoted or demoted 0:06:39.720 --> 0:06:42.320 outside going in and out of the cabinet, right, their income, 0:06:42.560 --> 0:06:46.680 bar a little inflation adjustment, remains static year after year 0:06:46.880 --> 0:06:50.880 after year, and they make policies for that situation, not 0:06:51.040 --> 0:06:54.320 for the situation which these these numbers that we're looking 0:06:54.360 --> 0:06:56.640 at show most people on or in. 0:06:58.080 --> 0:06:58.320 See. 0:06:59.120 --> 0:06:59.640 I'll give you wyes. 0:06:59.880 --> 0:07:02.520 Think that's an interesting point. The one thing I would 0:07:03.000 --> 0:07:07.640 say is I just query slightly whether they have that excuse, 0:07:07.760 --> 0:07:09.279 because I mean. 0:07:10.720 --> 0:07:13.040 You're too nice to have I been too nice. 0:07:14.520 --> 0:07:19.000 I mean, career politicians may have a sort of static income, 0:07:19.040 --> 0:07:21.040 but I mean, you know, every four years they run 0:07:21.080 --> 0:07:23.240 the risky getting thrown out in their backsides and then 0:07:23.280 --> 0:07:25.480 they don't have anything. And then also there's all the 0:07:25.480 --> 0:07:28.600 ones who you know, quite rightly in my view, kind 0:07:28.600 --> 0:07:31.800 of make money on the side. So in a funny 0:07:31.880 --> 0:07:33.920 kind of I think they should be more used to, 0:07:35.520 --> 0:07:38.000 you know, ups and downs in their their annual income 0:07:38.120 --> 0:07:40.640 than so I'm not sure that they have the excuse 0:07:40.760 --> 0:07:43.720 that I could see if they want normal public sector workers, 0:07:43.880 --> 0:07:46.280 you know, because there's like pay grades and bands and 0:07:46.320 --> 0:07:49.200 all that sort of stuff, and it generally is kind 0:07:49.200 --> 0:07:51.480 of matter, you know, as long as you stay in work, 0:07:51.720 --> 0:07:54.040 you go up the way. But with politicians, they have 0:07:54.040 --> 0:07:57.600 a much more volatile career path if they're at all 0:07:57.760 --> 0:08:00.560 I mean, if they're at all ambitious. So it just 0:08:00.600 --> 0:08:03.040 strikes me that actually, I'm not sure they have that excuse. 0:08:04.000 --> 0:08:08.320 Well, they're just making crap then anyway, that was that 0:08:08.480 --> 0:08:12.000 was a sign. Where were you actually going with this conversation? 0:08:12.680 --> 0:08:15.840 I have totally forgotten already, But no, I think it's 0:08:15.960 --> 0:08:18.520 it's this thing of well, actually, the other interesting about 0:08:18.520 --> 0:08:21.160 this politically is that I do think that people will 0:08:21.200 --> 0:08:29.600 start to notice because it's been popular to talk about taxing, 0:08:29.720 --> 0:08:33.800 you know, the rich and then throwing income at a 0:08:33.800 --> 0:08:38.520 certain level in as being the rich, and the more 0:08:38.559 --> 0:08:42.160 people who get hit by higher rate tax not to 0:08:42.200 --> 0:08:44.679 mention kind of horrendous kind of marginal tax rates as 0:08:44.760 --> 0:08:48.520 child benefits, withdrawing, etc. The less likely that charge is 0:08:48.559 --> 0:08:49.000 to stick. 0:08:49.120 --> 0:08:49.400 I mean. 0:08:49.440 --> 0:08:51.200 One of the things that I thought was interested and 0:08:51.280 --> 0:08:55.360 quite clever about the way the IFS publicized this is 0:08:55.360 --> 0:08:57.800 they made the point that in the early nineteen nineties, 0:08:57.960 --> 0:09:03.920 virtually no nurse toll was paying forty percent tax, and 0:09:04.160 --> 0:09:07.960 by twenty twenty seven, some poate one in eight of 0:09:08.000 --> 0:09:13.840 them will be paying twenty percent. One in four teachers 0:09:15.360 --> 0:09:18.040 almost like I mean like well over our third to 0:09:18.080 --> 0:09:19.080 police officers. 0:09:19.360 --> 0:09:24.319 Yeah, but that's at one static point. Yeah, exactly, Many 0:09:24.400 --> 0:09:27.400 many more of them will move through this rate over 0:09:27.480 --> 0:09:29.760 their careers. And that's the key thing. The point that 0:09:29.760 --> 0:09:33.280 we're desperately trying to get across to everybody is that 0:09:33.360 --> 0:09:36.560 it might be one in four policemen in two years 0:09:36.600 --> 0:09:39.000 if you if you take a static point, but it'll 0:09:39.040 --> 0:09:41.760 be many, many, many more of a career. So this 0:09:41.920 --> 0:09:46.359 explains why, and this is really important listen our politicians. 0:09:46.600 --> 0:09:51.960 This explains why electorates are generally against the top rate 0:09:52.000 --> 0:09:55.440 of taxes going up, because they know that there's a 0:09:55.600 --> 0:09:58.400 very strong chance that they're going to pay that rate 0:09:58.440 --> 0:10:00.760 of tax at some point, and it's going to be 0:10:00.800 --> 0:10:02.760 in the one or two years when they suddenly go, 0:10:02.920 --> 0:10:07.240 oh wow, I'm really earning now. Someone else took everything. 0:10:07.880 --> 0:10:10.680 Yeah, it's yeah. They should learn that and they're going. 0:10:10.800 --> 0:10:12.719 I mean the point thing that worries means they'll learn 0:10:12.760 --> 0:10:15.240 the wrong lesson and they'll decide to just shunt a 0:10:15.280 --> 0:10:18.120 load of tacks when it's something else and make our 0:10:18.160 --> 0:10:24.079 lives miserable that way. But yes, I think the focus 0:10:24.160 --> 0:10:27.040 needs to fall on how do we make more money? Overall, 0:10:27.080 --> 0:10:30.760 how do we grow the pie again rather than sitting 0:10:31.040 --> 0:10:36.839 kind of you don't threaten about saving bets here and 0:10:36.920 --> 0:10:40.120 there and cutting this and cutting that, and all of 0:10:40.160 --> 0:10:41.640 that kind of goes back to we should have a 0:10:41.679 --> 0:10:46.040 smaller state, et cetera, et cetera, regulation, you. 0:10:46.000 --> 0:10:48.760 Know, and that we had horrible productivity numbers. Again today, 0:10:48.840 --> 0:10:51.520 focus on growing, focus on productivity read money to stilled 0:10:51.520 --> 0:10:53.240 by the way, because there's also some bits and bobs 0:10:53.240 --> 0:10:56.240 in there. There's a growing body of anecdotal evidence at 0:10:56.320 --> 0:10:59.040 least that people are virting with their feet and wealth 0:10:59.080 --> 0:11:02.400 creators are beginning to leave the UK for warmer climbs 0:11:02.440 --> 0:11:04.839 in every possible way. So that's very important. I just 0:11:04.920 --> 0:11:07.840 want to leave you with these numbers again. We've told 0:11:07.880 --> 0:11:11.040 you them before, but in this podcast, but listen again. 0:11:11.320 --> 0:11:13.240 You think that in the UK the rich of the 0:11:13.360 --> 0:11:15.880 rich and the poorer the poor, But in this quintear 0:11:16.000 --> 0:11:18.640 data we've been looking at over the ten year period, 0:11:19.000 --> 0:11:21.600 nearly fifty percent of those in the top quartile at 0:11:21.600 --> 0:11:25.800 the beginning were not there at the end, and over 0:11:26.000 --> 0:11:28.600 sixty percent of those who are in the bottom quartile 0:11:28.640 --> 0:11:32.080 at the beginning were not there at the end. The 0:11:32.200 --> 0:11:34.160 rich are not the rich and the poor are not 0:11:34.240 --> 0:11:36.800 the poor. There's a lot of fluidity in the UK, 0:11:37.040 --> 0:11:37.800 right John. 0:11:38.200 --> 0:11:42.040 Yep, it's not all lost, and you know. 0:11:41.960 --> 0:11:44.280 Maybe the US is better, but I wonder I'd really 0:11:44.400 --> 0:11:46.760 like to have proper data on this right. 0:11:46.800 --> 0:11:51.280 Hopefully somebody out there listening right now is the start 0:11:51.520 --> 0:11:54.520 offices or a university somewhere. You might have this data. 0:11:54.559 --> 0:11:55.600 You might be looking at it. 0:11:56.240 --> 0:11:58.320 Send it to us, Send it to us. Put your 0:11:58.360 --> 0:12:02.960 political prejudices aside one at universities, send us the data. 0:12:05.200 --> 0:12:07.800 Welcome to Merendalk's Money, the podcast in which people who 0:12:07.840 --> 0:12:10.640 know the markets explain the markets. I'm Meren sum Set 0:12:10.679 --> 0:12:13.840 where this week a conversation with Sharon Bell, Managing director 0:12:13.880 --> 0:12:17.560 and senior European equity strategist at Goldman Sachs. Yes, our 0:12:17.600 --> 0:12:22.000 first guest from Goldman Sachs. Sharon, thank you so much 0:12:22.040 --> 0:12:24.439 for joining us today. We hugely appreciate it. 0:12:24.720 --> 0:12:27.160 Thank you, Thanks for in fighting me kind. 0:12:26.920 --> 0:12:29.000 Of come now listen. I want I know, I know 0:12:29.080 --> 0:12:31.800 that you're basically one of those rare guests we have 0:12:31.880 --> 0:12:34.719 who knows absolutely everything. And you know, I could ask 0:12:34.760 --> 0:12:36.600 you about any market around the world and you'd know 0:12:36.679 --> 0:12:38.920 the answer. So what I'd like to do, if you 0:12:38.920 --> 0:12:41.160 don't mind, and I think that their listeners will love this, 0:12:41.360 --> 0:12:43.760 is just start by saying, could you give us an 0:12:43.880 --> 0:12:48.280 overview the huge question right an overview of global markets 0:12:48.280 --> 0:12:50.760 at the moment? What is going on out there, what 0:12:50.800 --> 0:12:53.959 are the main dynamics bind market moves, and what should 0:12:54.000 --> 0:12:54.720 we be looking at. 0:12:55.280 --> 0:12:59.000 I will tell you everything, But in some ways I 0:12:59.000 --> 0:13:01.320 think global markets is surprised people this year. 0:13:01.400 --> 0:13:05.480 On the positive side, a lot of investors expected weaker 0:13:05.520 --> 0:13:10.120 returns this year. We've had pretty strong returns actually, especially 0:13:10.120 --> 0:13:13.000 in Europe, double digit returns for a lot of indices 0:13:13.240 --> 0:13:16.200 already and we're not even halfway through the year. And 0:13:17.040 --> 0:13:19.880 the US market as well, especially the NASDAK, but the 0:13:19.960 --> 0:13:23.080 S and P five hundred as well up to year 0:13:23.080 --> 0:13:27.120 to date, so reasonably good returns on equities, and particularly 0:13:27.480 --> 0:13:30.600 given all the things that actually face interest rates have 0:13:30.640 --> 0:13:36.280 been rising, commodity prices have come down, growth has definitely slowed, 0:13:36.360 --> 0:13:39.079 orbit not in recession yet, so in some ways I 0:13:39.120 --> 0:13:41.880 would say the market's been quite resilient so far this year. 0:13:42.320 --> 0:13:43.960 And then on top of all of that, we've had 0:13:44.640 --> 0:13:48.760 all the stress in the US banks with some bank failures, etc. 0:13:49.320 --> 0:13:52.920 And concerns about slowing a loan growth as well. But 0:13:53.000 --> 0:13:55.600 I guess the things that have really boosted the market 0:13:55.640 --> 0:13:57.880 and helped the market, especially in Europe, which is my 0:13:58.000 --> 0:14:02.199 focus is energy, is gas prices weren't as high as 0:14:02.200 --> 0:14:04.480 people feed worried about coming into this year. 0:14:04.760 --> 0:14:05.520 They came down. 0:14:05.600 --> 0:14:08.560 That's how the consumer, it's how governments as well, hell, 0:14:09.520 --> 0:14:14.400 because they promised to cushion the consumer from higher prices. Also, 0:14:14.640 --> 0:14:18.400 the contagion, the feared contagion from the bank stress in 0:14:18.440 --> 0:14:21.200 the US hasn't been as bad yet as feared. 0:14:21.240 --> 0:14:22.240 Of course that could come. 0:14:22.320 --> 0:14:25.480 But at the moment we've only seen a small tightening 0:14:25.520 --> 0:14:28.400 and credit conditions and a small fall in loan growth. 0:14:28.760 --> 0:14:32.040 So I'd say that markets have digested things relatively well. 0:14:32.200 --> 0:14:35.160 But our main concern for the equity market at the moment, 0:14:35.680 --> 0:14:38.640 particularly in the US, is that it's not cheap. It 0:14:38.720 --> 0:14:41.280 trades on a pe ratio of sort of eighteen to 0:14:41.360 --> 0:14:44.880 nineteen times, that's about its twenty year average. And of 0:14:44.920 --> 0:14:47.360 course there is now another asset class out there which 0:14:47.400 --> 0:14:50.360 is quite attractive, offering you four or five percent yield, 0:14:50.440 --> 0:14:52.480 and that's short term rates. 0:14:53.120 --> 0:14:54.680 Given where interest rates are now. 0:14:54.600 --> 0:14:58.840 So I would say resilient, but a little bit mixed, 0:14:58.880 --> 0:15:01.240 and we do have and that returns will be low 0:15:01.240 --> 0:15:01.640 from here. 0:15:02.160 --> 0:15:04.360 Yeah. So basically when you say resilient, what you mean 0:15:04.480 --> 0:15:08.040 is it's too resilient, it's scarily resilient. Something doesn't feel 0:15:08.400 --> 0:15:10.760 quite right. I mean, last year, we had this sense 0:15:10.840 --> 0:15:13.040 that we were going to revert to some kind of 0:15:13.120 --> 0:15:16.320 valuation norm and possibly you know, profit margins were going 0:15:16.320 --> 0:15:18.720 to revert to some beginning to revert some kind of 0:15:18.760 --> 0:15:21.280 historical norm as well, and that that was something that 0:15:21.320 --> 0:15:24.720 we'd see going through into this year. And some of 0:15:24.760 --> 0:15:27.640 that didn't happen this year. Instead, we've seen a reversion 0:15:27.720 --> 0:15:31.520 back to the dynamic of the last few years, the 0:15:31.560 --> 0:15:34.400 prove twenty twenty two years, as opposed to a continuation 0:15:34.480 --> 0:15:37.280 of the dynamic of twenty twenty two. Very unexpected. 0:15:37.680 --> 0:15:40.400 Yes, I'd say that's probably fair in a number of senses. 0:15:41.040 --> 0:15:43.400 One in the sense that great expectations have started to 0:15:43.400 --> 0:15:46.320 come down, so that twenty twenty two was very characterized 0:15:46.360 --> 0:15:51.400 by high inflation, inflation constantly surprising on the upside, economists 0:15:51.440 --> 0:15:53.360 had to let go of this idea that it was transient. 0:15:53.880 --> 0:15:56.360 It turned out that inflation was very sticky. Last year, 0:15:56.360 --> 0:15:58.360 our interest rates had to go up and were constantly 0:15:58.800 --> 0:16:02.640 rising above people's expertsations. So while this year, I think 0:16:02.880 --> 0:16:05.280 a big boost equities in many ways has been the 0:16:05.320 --> 0:16:07.320 expectation that interest rates will be peaking. 0:16:07.760 --> 0:16:09.880 We in fact, do you think that interest rates have 0:16:10.000 --> 0:16:11.840 peaked now in the US at the short end. 0:16:12.280 --> 0:16:15.000 Where we differ, I think from the consensus is that 0:16:15.720 --> 0:16:18.120 we don't expect them to come down very rapidly, so 0:16:18.200 --> 0:16:20.280 we think rates will plateau for a period of time. 0:16:20.480 --> 0:16:23.040 But yes, you're right, it's been very resilient, and maybe 0:16:23.280 --> 0:16:26.800 overly resilient, not reflecting some of the risks out there, 0:16:26.880 --> 0:16:29.080 which is that the remainder of this year you'll like 0:16:29.120 --> 0:16:31.160 to see very slow grows. There's a risk of recession. 0:16:31.160 --> 0:16:33.200 It's not in our forecast, but there's certainly a risk 0:16:33.360 --> 0:16:36.840 of that. And there's also not much risk premium priced 0:16:36.880 --> 0:16:40.280 into equities. I guess you would say, because the yould 0:16:40.320 --> 0:16:42.840 you can get another other assets is quite attractive relative 0:16:42.840 --> 0:16:43.360 to equity. 0:16:44.360 --> 0:16:48.200 Okay, so let's just stick briefly with the interest rate 0:16:48.240 --> 0:16:52.880 inflation dynamics. So you're expecting that rates have pretty much 0:16:52.880 --> 0:16:55.280 plattered what peaked, shall we say, But are going to 0:16:55.320 --> 0:16:58.320 stay at this kind of level for a longer period 0:16:58.480 --> 0:17:01.840 than some others might think. Does that also suggests that 0:17:01.880 --> 0:17:05.440 you expect inflation to remain reasonably high in the short 0:17:05.480 --> 0:17:06.240 to medium term. 0:17:06.840 --> 0:17:10.119 We do expect inflation to come down. Inflation has already 0:17:10.119 --> 0:17:13.200 come down from its peaks in most places to remain 0:17:13.280 --> 0:17:16.119 quite sticky and high in the UK, but in most 0:17:16.320 --> 0:17:20.399 places and the US inflation recently printed below five percent 0:17:20.680 --> 0:17:24.719 headline inflation. Core inflation has been coming down to so 0:17:25.280 --> 0:17:28.880 that is helpful for global economies because you won't need 0:17:28.920 --> 0:17:32.159 such heart interest rate rises if inflation is already starting 0:17:32.160 --> 0:17:35.240 to normalize. The fact that energy prices and commodity prices 0:17:35.280 --> 0:17:37.200 have come down from their peaks as well, it's also 0:17:37.280 --> 0:17:38.200 helpful in. 0:17:38.119 --> 0:17:41.359 Bringing down inflation. But there are some elements of inflation 0:17:41.400 --> 0:17:42.240 that are like to be sticky. 0:17:42.400 --> 0:17:45.320 The service sector still looks very strong, and that's services 0:17:45.320 --> 0:17:48.159 consumption is a big part of economies in pretty much 0:17:48.200 --> 0:17:52.480 all Western economies. Also, wage growths, although it's come down 0:17:52.480 --> 0:17:54.840 off its peaks in the US, are still very high 0:17:54.920 --> 0:17:58.760 and in Europe there is often two year wage deals, 0:17:59.200 --> 0:18:02.360 so it took a wa Wages to pick up in Europe, 0:18:02.800 --> 0:18:05.639 member sort of a year org. Also, people were constantly 0:18:05.680 --> 0:18:08.359 asking why aren't German wages picking up more? But I 0:18:08.359 --> 0:18:10.840 think that's largely because the two year deals. You're starting 0:18:10.840 --> 0:18:13.920 to see those come through now. Also, labor markets are 0:18:14.080 --> 0:18:16.840 very tight still. We keep hearing about this, and pretty 0:18:16.920 --> 0:18:19.000 much every country labor markets are tight, and again that's 0:18:19.000 --> 0:18:20.120 going to be higher wages. 0:18:20.280 --> 0:18:21.800 Higher wages feeds into core inflation. 0:18:22.240 --> 0:18:25.880 So for those reasons, we think inflation will come down, 0:18:26.280 --> 0:18:29.000 but it's not going to come down rapidly in the 0:18:29.000 --> 0:18:30.560 way that it would have done before because of this 0:18:30.640 --> 0:18:31.520 tight labor market. 0:18:32.200 --> 0:18:35.639 It's interesting, I mean, wages, fast rising wages seem to 0:18:35.640 --> 0:18:38.320 be the major worry. I mean, in some sense, of course, 0:18:38.320 --> 0:18:40.320 there's not a worry. If wonderful, If people can keep 0:18:40.359 --> 0:18:43.000 their real incomes constant, right, or even if real wages 0:18:43.040 --> 0:18:45.879 don't go up a little, possibly even significantly, that's a 0:18:45.920 --> 0:18:48.360 good thing in general. But of course it's very bad 0:18:48.359 --> 0:18:50.960 for inflation. And one of the things that people keep 0:18:50.960 --> 0:18:54.200 telling me is that again this rising wages is transient, 0:18:54.280 --> 0:18:57.800 that it's a one off that will get high rises 0:18:57.840 --> 0:19:00.879 that this year, but then that'll be that. But I 0:19:00.960 --> 0:19:03.000 keep looking even thinking, well, hang on, a take you know, 0:19:03.200 --> 0:19:06.560 after many, many years of people not demanding high wage 0:19:06.640 --> 0:19:09.600 rises because they haven't seen high levels of inflation, they 0:19:09.640 --> 0:19:14.680 now understand the inflation dynamic and see what happens when 0:19:14.720 --> 0:19:17.879 inflation is high and erodes their real learnings, etc. So 0:19:18.040 --> 0:19:19.680 it seems to me that there's been a bit of 0:19:19.720 --> 0:19:22.720 a sea change in the way that labor and the 0:19:22.880 --> 0:19:27.600 unions approach wage increases, and that this could easily carry 0:19:27.640 --> 0:19:31.200 on for many years from here. Them say inflation settles 0:19:31.200 --> 0:19:33.520 that four percent as opposed to two percent, which seems 0:19:33.560 --> 0:19:36.240 quite likely, right, or that it's volatile around four percent, 0:19:36.880 --> 0:19:40.760 why would the unions and workers in general not demand 0:19:40.840 --> 0:19:44.240 with rises next year of another five six seven percent. 0:19:44.280 --> 0:19:46.160 I mean, private sector wages are running at what about 0:19:46.160 --> 0:19:48.040 seven percent at the moment. It's hard for me to 0:19:48.080 --> 0:19:49.760 see why that wouldn't continue next year. 0:19:50.280 --> 0:19:54.199 Yeah, I understand. I have a lot of sympathy with 0:19:54.240 --> 0:19:54.680 that view. 0:19:54.880 --> 0:19:58.919 I think that real wages have deteriorated over time. Even 0:19:59.040 --> 0:20:01.240 nominal wages have been reading and good in the last 0:20:01.280 --> 0:20:03.800 couple of years, and then for a long time, medium 0:20:03.920 --> 0:20:08.640 wages in real terms haven't really increased. So I think 0:20:08.640 --> 0:20:11.040 this is a bit of a fight back by workers 0:20:11.080 --> 0:20:14.640 and unions in particular to regain some of that income 0:20:15.080 --> 0:20:17.920 over time. Company margins are quite high, so they could 0:20:17.960 --> 0:20:20.879 try and push for higher wages workers take a little 0:20:20.880 --> 0:20:22.960 bit more of the share of the overall pie of 0:20:23.000 --> 0:20:26.080 the economy. And I think that the other thing which 0:20:26.119 --> 0:20:28.840 is the cause allowing allowing this is the tightness of 0:20:28.880 --> 0:20:33.919 the labor market. And I think there's a few potential 0:20:33.960 --> 0:20:36.320