Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News. Welcome to the Maren
Speaker 1: Talks Money Market Wrap, where we talk about the biggest
Speaker 1: moves in the markets this week and what is driving them.
Speaker 2: I'm Maren Zum SAP Web. You gave Money editor at Large.
Speaker 3: And I'm joined step pick Ed.
Speaker 2: Who are you? John? Who are you? Everybody?
Speaker 1: Let's cut the man some slack. He was only you've
Speaker 1: been at work for two days or something. That's the
Speaker 1: longer stretch. He's done for months. For God's sake, You've
Speaker 1: got to cut on some flags.
Speaker 2: Who are you, John? Do me to help you.
Speaker 1: I'm going to do this for John right, so he
Speaker 1: can he can gather himself for the next bet. Okay,
Speaker 1: I'm John steppeck Holduly. I'm not his senior reporter. And
Speaker 1: over the Money Distilled newsletter.
Speaker 3: Award winning You'll never forget that bit.
Speaker 2: Forget your own name, forget your job.
Speaker 1: You don't get your awards, right, John, I think we
Speaker 1: have to start by talking about the bond market. Right,
Speaker 1: there's a lot going on. Let's have a quick look
Speaker 1: at yields today. We are talking on Thursday the twentieth
Speaker 1: about thirty year yields in the US and the UK
Speaker 1: are at a multi decade decade highs at this point
Speaker 1: tenure yields. The US is up near four point seven
Speaker 1: four point six eight, Japan is not far off three.
Speaker 1: Everywhere in the EU is knocking around three and four percent,
Speaker 1: and of course here in the UK we are firmly
Speaker 1: over five percent.
Speaker 2: Poorless Truss is.
Speaker 1: All I have to say to that, poor poor list
Speaker 1: crush lost a job for a bond dealed much lower
Speaker 1: than that.
Speaker 3: It's true, it's a double standard. It's almost like there's
Speaker 3: more than one tier involved, more than one tier, two tiers.
Speaker 1: All right, no more what's it called? No more dog whistling, John,
Speaker 1: That's right. What's going on in the bond market?
Speaker 3: We'll basically mean bond yields have gone up a lot,
Speaker 3: and they are, yes, a multi decade ties, particularly what
Speaker 3: it's known as the long end of the bond market,
Speaker 3: so you know, way out above ten years, thirty years.
Speaker 3: And I mean this is because I mean this is
Speaker 3: actually for pretty logical reasons. Governments have spent a lot
Speaker 3: of money, so there's a lot of points out there.
Speaker 3: EI companies are spending a lot of money, so there's
Speaker 3: even more points out there. So there's an awful lot
Speaker 3: of supply, and then on the other side, we've also
Speaker 3: got the warn Iran continues that keeps on pushing the
Speaker 3: oil price kind of up and down, but that also
Speaker 3: keeps feeding through the kind of diesel prices, petrol prices,
Speaker 3: et cetera, et cetera, And so markets are also still
Speaker 3: concerned about inflation, which also kind of pushes up bond yield.
Speaker 3: So what happened this week is that yesterday Wednesday, US
Speaker 3: Treasury Secretary Being clearly has been feeling edgy about this
Speaker 3: because earlier in the year he basically said to Japan, look,
Speaker 3: if you want to strengthen the yen, I'm okay with that,
Speaker 3: but I don't want you selling US treasuries. Instead, you
Speaker 3: can borrow the money from us, and that's how you
Speaker 3: can raise the dollars to you know, we can strengthen
Speaker 3: the yen against the dollar. And now be the latest thing,
Speaker 3: what he's said is we're going to buy back double
Speaker 3: the number of long end US treasuries that we were
Speaker 3: planning to this quarter. And basically what that involves is
Speaker 3: issuing more short term debt to buy back in some
Speaker 3: of the thirty year points that have been, you know,
Speaker 3: going that are in the market, and they're where the
Speaker 3: kind of most strain has been felt in terms of
Speaker 3: bond yields going up, so that briefly sent bond yields
Speaker 3: back down. But of course, and I mean Scott Wessont
Speaker 3: used to be a hedge one manager, I'm sure he's
Speaker 3: aware of this. As soon as you draw a line
Speaker 3: in the sad and for the markets saying this is
Speaker 3: the thing that the government doesn't like and if you
Speaker 3: get to this number, we will intervene, they tend to
Speaker 3: push it. So today the youth has already bounced back
Speaker 3: to where it was before they said, right, we're going
Speaker 3: to do this intervention. So it's basically just gonna be
Speaker 3: interested to see what happens next.
Speaker 1: Yeah, I suppose, I think says that this doesn't fail
Speaker 1: like a Treasury sacruit job.
Speaker 2: This feels like a fed job. So this is the
Speaker 2: beginnings of what they call physical.
Speaker 3: Dominant right, Oh oh, yeah, the idea. I mean, no,
Speaker 3: you're absolutely right. I mean I don't think it's particularly new.
Speaker 3: I think obviously kind of the fiscal side of things
Speaker 3: has been intervening more and more and nudging central banks
Speaker 3: and the monetary policy element more and more, but it
Speaker 3: is getting more avert, and I do think it would
Speaker 3: be fair to describe this, and I mean George Saravelos
Speaker 3: over at Deutsche Bank did this is a soft form
Speaker 3: of financial repression because the desire is to cap yields
Speaker 3: in some way, and assuming that he does, my is
Speaker 3: to cap yields. The place where the strain will be
Speaker 3: felt is the foreign exchange market. So it's it's all
Speaker 3: else being equal. If he actually manages to put some
Speaker 3: sort of cap on long term yields, the dollar is
Speaker 3: probably where we would feel it. The dollar would go down,
Speaker 3: but I don't really see. I don't think he particularly
Speaker 3: would care about that at this point because if you
Speaker 3: look at where the dollar is, it's not ice particalarly weak,
Speaker 3: it's not mega strong, but you know it was basically
Speaker 3: the kind of dollar index, which is the dollar against
Speaker 3: all its partner currencies, is still a lot higher than
Speaker 3: it was for basically the whole of the two thousands.
Speaker 3: So I would think that if the trade off was
Speaker 3: a weeker dollar for interest rates looking better, I think
Speaker 3: it's being better because this will all feed into the
Speaker 3: US usage market as well. Then that's a trade off
Speaker 3: he would take, but I think he's going to have
Speaker 3: to do more, because otherwise the market is just going
Speaker 3: to say, well, you know, they'll push them to the
Speaker 3: yield that it feels uncomfortable with and then say, okay,
Speaker 3: what are you going to do now? You know, we
Speaker 3: need to see you pull out some big guns here
Speaker 3: is going to take more than just saying oh, we'll
Speaker 3: buy a few extra long entreasure needs to get rid
Speaker 3: of it, I think, hmm.
Speaker 1: And of course the line problem here is the thing
Speaker 1: that you and I now have been talking about for
Speaker 1: going on twenty years, which is the ongoing rises in
Speaker 1: government debt around the world that just keep going and
Speaker 1: going and going and going, and everyone feels like we're
Speaker 1: in a bit of an inflation re environment, and you
Speaker 1: keep seeing debt rising more than GDP over an avernomenal
Speaker 1: GDP in different countries, and't it just got to come
Speaker 1: a point when something breaks somewhere.
Speaker 3: I mean, that's what you would think. I only presumably
Speaker 3: that's what Scott basin as well, and that's why he's
Speaker 3: hoping to hold this down. And I mean I do
Speaker 3: think the.
Speaker 1: I mean US government debt, the number this week is
Speaker 1: going through forty trillion dollars, right, yeah, so much money.
Speaker 3: Yeah, And I mean it's also interesting that there's no
Speaker 3: there's not really like one difference between now and most
Speaker 3: of the time that we've ever been talking about this
Speaker 3: is there's usually at least one group of slightly obsessive
Speaker 3: people who are in politics and really want to see
Speaker 3: the debt and the deficit come down. When that was
Speaker 3: the case prior to the Great Financial Crisis, certainly the
Speaker 3: case after it. But now there is no political constituency
Speaker 3: for cutting spending really, certainly not in America, you know,
Speaker 3: and even here in the UK it's very hard to find.
Speaker 3: It doesn't matter, you know, where you sit on the spectrum,
Speaker 3: from you know, the furthest left to the father a
Speaker 3: straight everybody wants to spend more money.
Speaker 1: So I think absolutely nobody out there saying to get
Speaker 1: off this road to future missure, we have to reduce
Speaker 1: the size of government relative to GDP and we have
Speaker 1: to see some massive rise in GDP. And I saw
Speaker 1: from macro Strategy Partnership of Noteubt this morning saying the
Speaker 1: US is getting thirty four percent of nominal GDP growth
Speaker 1: per dollar of additional debt China is getting eighteen point
Speaker 1: eight cents. Yeah, I mean, you're just borrowing from the
Speaker 1: future in a completely absurd and unsustainable way. So if
Speaker 1: I with the bond marketsily pushing it yelled to regardless
Speaker 1: of all the short term stuff.
Speaker 3: And I mean, this may be what we need to see,
Speaker 3: but I think again the resk here is that well,
Speaker 3: the US, for example, is able to get away with
Speaker 3: us for death and that and other countries can get
Speaker 3: away with it to an extent. The issue will be
Speaker 3: the presumably if they MCEE take cap boind yields in
Speaker 3: some way, then inflation will make itself felt more strongly
Speaker 3: because obviously if you get a weaker currency, that will
Speaker 3: translate into imported inflation or you know, more kind of
Speaker 3: costly goods coming in. But yeah, I mean, I guess
Speaker 3: the fight can go on for quite a bit longer,
Speaker 3: assuming that that this is that they take the steps
Speaker 3: that we think they would take to suppress bond yields.
Speaker 1: Charlie Morris, our old podcast friend Charlie Morris, broke today
Speaker 1: that gold smells Q.
Speaker 2: And we see we did.
Speaker 1: See a big jump in the gold briad yesterday four
Speaker 1: per centers, and obviously in an environment like this, the
Speaker 1: gold price probably is going to rise.
Speaker 3: Yeah, I mean I I see no reason to be
Speaker 3: perish on gold right now. And you know the other
Speaker 3: thing that caught my eye, which I mean and also
Speaker 3: caught Charlie's eye because he likes his crypto as well.
Speaker 3: Bitcoin really took off in a way that it hasn't
Speaker 3: for a while. And actually bitcoin gold have not been
Speaker 3: doing the same thing for some time. But I definitely
Speaker 3: think this is because people suddenly thought, oh, look, this
Speaker 3: is it. The debasement trade is absolutely back. This is
Speaker 3: all about the weaker US dollar. Buy all the things
Speaker 3: that you buy if you think the dollar is going
Speaker 3: to slide. And I think that's again, I don't think
Speaker 3: that's an unreasonable conclusion.
Speaker 1: I asked a tech guy yesterday on one of the
Speaker 1: podcasts coming out next week, actually Topless and do listen
Speaker 1: on quantum computing and all sorts of fabulous things like that.
Speaker 2: I asked him.
Speaker 1: I haven't asked at the end of our podcast for
Speaker 1: a while, bitcoin or gold, but given that we talk
Speaker 1: so much about about quantum computing in this podcast, I.
Speaker 2: Thought I would ask him bitcoin or gold.
Speaker 1: You know, Dick tech guy, right, And I wasn't entirely
Speaker 1: sure which way he would go, but he was very
Speaker 1: very clear.
Speaker 3: Gold gold a quantum guy M destroying.
Speaker 1: Yeah, QD coming up, and then you know, can anyone
Speaker 1: be bothered to go around the place where you know,
Speaker 1: once you've got a quantum computer, you can probably use
Speaker 1: it for more exciting things than going around the place
Speaker 1: breaking into people's wallets and stealing their bitcoin. You know,
Speaker 1: probably not going to get it's not going to happen.
Speaker 1: It's not going to happen in ourria. It's way down
Speaker 1: the list of what happens when people gets their hands
Speaker 1: on a nice quantum computer. To the extent that they
Speaker 1: will in the short to medium term, but nonetheless the
Speaker 1: fact that they could is surely enough to make it
Speaker 1: to make it worthless.
Speaker 3: Yeah, I mean to be for Chris, it's Chris Woods
Speaker 3: all at the c l S that excess c l S.
Speaker 3: I think he was a bitcoin but quite recently sold
Speaker 3: out entirely, didn't it because.
Speaker 2: On that basis, Yeah.
Speaker 3: I mean that is interesting and I sually, I mean
Speaker 3: you're really I mean, at the end of the day,
Speaker 3: you don't need to wrap your head round that if
Speaker 3: even if bitcoin is digital gold, you may as well
Speaker 3: stick with the physical one that can't be disrupted by
Speaker 3: quantum ill Presumably gold could be screwed up if we
Speaker 3: get fusion energy. Yes, because you probably make gold in
Speaker 3: a fusion reactor.
Speaker 1: Yes, I mean alchemy is currently possible, just it takes
Speaker 1: so much energy that's not worth thinking about. Yeah, but
Speaker 1: one day anyway, moving on bonds gold help it, you know,
Speaker 1: the age of abundance the fusion power combined with the
Speaker 1: AI and quantum will bring. The mean is that we
Speaker 1: we won't need to worry about the boll gold buried
Speaker 1: under our house or not anymore. Everything's can be so
Speaker 1: mawfless nothing.
Speaker 2: To worry about.
Speaker 1: But on the matter of disruption, I wanted to talk
Speaker 1: briefly again about an academic report from Stanford University which
Speaker 1: someone at PAMA Liberian pointed us to. And we've talked
Speaker 1: about this before. We've talked about whether the buildout of
Speaker 1: data centers is the right way to go, whether the
Speaker 1: future of a future of AI really is all about
Speaker 1: large language models. Go back and listen to our podcast
Speaker 1: with doctor Jenny's Mareki anyone who wants them. Was the
Speaker 1: granular detail on this, but one of the things that
Speaker 1: he said was, Look, you don't have to use LMS
Speaker 1: anymore to get the same efficacy.
Speaker 2: From your AI.
Speaker 1: You can use an SLM, a small language model which
Speaker 1: you can run on your laptop or on your phone,
Speaker 1: and you get pretty much the same performance. And not
Speaker 1: only that, but you hang on to your own data.
Speaker 1: You maintain your privacy by using an SLM over an LLLM. Cheaper,
Speaker 1: uses pulerless energy and is contained. So the paper on
Speaker 1: this looks at how effective and how accurate SLMs are
Speaker 1: against lms, and I'll put the link to it in
Speaker 1: the show notes, and I'm going to write about it
Speaker 1: in the Merintalks Money and Use letter this this.
Speaker 2: Week as well.
Speaker 1: But the basic point here is that if you look
Speaker 1: at all the tasks on reasoning tasks, SLMs are nearly
Speaker 1: as good as llms. They provide a better or at
Speaker 1: least as good an answer as LMS.
Speaker 2: And while it was.
Speaker 1: Sixty percent of the cases, look at other task, real
Speaker 1: life tasks, this mixture of chat and reasoning performance, and
Speaker 1: on average SLMs are as good, if not better than
Speaker 1: lllms in eighty one point two percent of the cases,
Speaker 1: with lllms having significant advantae. I'm bringing aloud here a
Speaker 1: significant advance only an area like I think you mean,
Speaker 1: such as, let's stick with a grammar correctly, guys, that's
Speaker 1: what AI is for for your grammar. Significant run only
Speaker 1: in areas such as engineering, life science, as transport or transportation,
Speaker 1: and computer science. It's not just accuracy. SLMs achieved this
Speaker 1: performance and energy and compute costs that are between fifty
Speaker 1: and eighty five percent lower than an LLM.
Speaker 3: So at slm's like the SA engine versions. Basically like
Speaker 3: if you're just googling or whatever, use that if you're
Speaker 3: trying to cure kinds of us and ALLM.
Speaker 2: Well, I mean maybe maybe not.
Speaker 1: By October twenty five, the SLMs achieved ninety nine percent
Speaker 1: success for the easiest reasoning task in level one and
Speaker 1: two eighty five to ninety two percent in harder tasks,
Speaker 1: and only lagged in the hardest tasks of all that
Speaker 1: b aqre concept where there's a fifty one point five
Speaker 1: percent success right, So.
Speaker 2: They're exactly right.
Speaker 1: There's are only a very small number of very complex
Speaker 1: and vital tasks that you might want to use in
Speaker 1: LLLM for and the rest perhaps if what you're just
Speaker 1: to do is hang onto your data and hang onto
Speaker 1: your privacy and do things at a low cost, you
Speaker 1: would use an slum.
Speaker 2: And if that is the case.
Speaker 1: If that is the case, and again neither you or
Speaker 1: I are experts on this stuff.
Speaker 2: If that is the case, and.
Speaker 1: The the head that the title of this a little
Speaker 1: bit of research is if this is true, the hyperscalers
Speaker 1: are toast.
Speaker 2: I mean link in the show notes two.
Speaker 3: The thing is, I agree, I mean, I guess My
Speaker 3: problem is I'm trying to work why I'm wrong, if
Speaker 3: you see what I mean, or why this is wrong,
Speaker 3: because on the one hand, you know, we'll alvisos get
Speaker 3: a natural skepticism lean against it in these cases because
Speaker 3: clearly EI is a big deal.
Speaker 2: It's not a big deal.
Speaker 1: It's just to say it doesn't have to be done
Speaker 1: in this expensive way.
Speaker 3: Well, this is it. And also the even if you
Speaker 3: discount the s l A M L l M thing,
Speaker 3: I mean, the Chinese models are just as good, or
Speaker 3: certainly seem to be nearly just as good as the
Speaker 3: most divined ones in the US, but they are not
Speaker 3: spending the same amount of money or in the infrastructure.
Speaker 3: And I do yeah, I would need some I would
Speaker 3: like somebody to kind of make the kind of steal
Speaker 3: mind case for why it's a good idea to be
Speaker 3: building all of these data centers and what they're going
Speaker 3: to be used for if this all turns out to
Speaker 3: be essentially unnecessary.
Speaker 1: Or unnecessary in this volume, it's a little bit. It's
Speaker 1: a little bit like it's like wind power. Yeah, and
Speaker 1: then on a really windy day in the UK, for
Speaker 1: short periods, we can support the entire electricity network from wind.
Speaker 2: So why are we building more?
Speaker 3: Yeah, yeah, it's I mean, I guess I suppose. The
Speaker 3: other thing with this is that all points to the
Speaker 3: data centers being in a funny kind of way that
Speaker 3: kind of like peacock tails. It's like, you know, I mean,
Speaker 3: you get these whatever kind of like for hyperscalers kind
Speaker 3: of like building these massive ornaments because they can and
Speaker 3: it's almost like the last one standing is the winner
Speaker 3: because they kind of out spent each other. I don't know, it's.
Speaker 1: Your animal metaphors are getting kind of kind of interesting.
Speaker 2: I don't know if you.
Speaker 1: Remember that squirrel squirrels standards, And here we are with
Speaker 1: data centers as peacocks, data center data center infrastructure builders
Speaker 1: as peacocks.
Speaker 3: Look at my mighty edifice is of no value, but
Speaker 3: can be some.
Speaker 2: Exactly.
Speaker 1: So let's hold that in your head, this whole SLM
Speaker 1: LLM Chinese LLM dynamic.
Speaker 2: And then let's go.
Speaker 1: Back to what we were talking about at the beginning,
Speaker 1: when we were talking about the bond market. I mean,
Speaker 1: almost always you think, you know, yields up, equity market down.
Speaker 2: Yeah, but that isn't really happening at the moment.
Speaker 1: And if you read all the endless broker reports that
Speaker 1: you and I both look at all the time, what
Speaker 1: they do is they tell us that that dynamic isn't
Speaker 1: working at the moment, or isn't working as it normally
Speaker 1: does because AI because it's simply not sensitive to yield
Speaker 1: in the same way as historically major parts of the
Speaker 1: market has been. Because the demand is so great, the
Speaker 1: need is so strong, the revenues are so high, and
Speaker 1: the future profits are so ginormous that a couple of
Speaker 1: percentage points here or there on the ten and third
Speaker 1: to you yield Yeah, who.
Speaker 3: Case, Yeah, that's not very convincing.
Speaker 1: Well, it's not, and it's particularly not if it's if
Speaker 1: if there is any truth at all in the idea
Speaker 1: that data centers are I would beat toast in the
Speaker 1: in the face of.
Speaker 3: S l MS. Yeah, I mean it's going to be
Speaker 3: it's gonna be fascinating to watch how it falls out.
Speaker 3: And I suppose the wine the wine sort of like
Speaker 3: it's a potential positive in a kind of negative way
Speaker 3: for the sovereign there, or at least for US sovereign.
Speaker 3: There is that if everyone is in a rush to
Speaker 3: go Ei boinds at some point, then that you would
Speaker 3: sort of expect lump me dash for the safety of
Speaker 3: US treasuries if it got that bad. I don't know,
Speaker 3: is this is one of those words. I just think
Speaker 3: it's gonna be fascinating to watch because there's all this
Speaker 3: both balance sheet stuff that they've got as well stuff.
Speaker 2: Yeah.
Speaker 1: Yeah, I think John that we should probably end it
Speaker 1: there because we don't know the answers, but we can
Speaker 1: just say to our listeners, watch out for peacocks.
Speaker 3: I'd say, one tiny thing. This is another reason why
Speaker 3: you should watch what's in your pension Again. If you
Speaker 3: don't know what's in your auto enrollment pension, go and
Speaker 3: find out. Because there is more and more pressure to
Speaker 3: stick more and more money into private credit, private assets,
Speaker 3: all of the sort of stuff that will end up
Speaker 3: being exposed to the worst of the excesses of this
Speaker 3: particular build out, I suspect, and the pressure to do
Speaker 3: that is going to keep mounting the more of this
Speaker 3: stuff that ends up spreading into the wider financial system.
Speaker 3: So yeah, just know where your money is and make
Speaker 3: sure it's not anywhere you don't want it to be.
Speaker 1: Another little personal finance heads up on that one, by
Speaker 1: the way, I was listing earlier today.
Speaker 2: Let's talk about it. This is a UK specific.
Speaker 1: Point, but uh, you know, you get these whopping great
Speaker 1: inheritance tax bills and you can, occasionally, for very very
Speaker 1: non liquid acids, spread those bills out over a long
Speaker 1: time if you have you know, maybe if the the
Speaker 1: acid in question is land or whatever, you can arrange
Speaker 1: to pay the bill in bits. But I don't think
Speaker 1: that applies, and it was under discussion at the moment anyway,
Speaker 1: but I'm pretty sure it doesn't apply to say, private
Speaker 1: equity holdings in your pension. Yeah, So imagine if you
Speaker 1: die with an awful lot of very very liquid private
Speaker 1: credit and private equity assets which it might take five
Speaker 1: years or so to sell, and your airs are stuck
Speaker 1: with the IHT bill on that in the immediate then
Speaker 1: has to be sold at a discount. Just something to
Speaker 1: think about, something that was wandering through my head. Did
Speaker 1: I is it peacocks who are so aggressive that they're
Speaker 1: constantly attacking themselves in their reflections from other people's cars, But.
Speaker 2: They're both vain and aggressive.
Speaker 1: I think that in future maybe we should have a
Speaker 1: biology graduate or a wildlife expert sit in on these podcasts.
Speaker 3: This is a great idea.
Speaker 1: Contact us if you'd like to be on a wildlife
Speaker 1: In turn, thanks for listening to this week's Maren Talks Money,
Speaker 1: Markets Rap. If you like us show, rate, review, and
Speaker 1: subscribe wherever you listen to podcasts. Also be short follow
Speaker 1: me and John on ex or Twitter at marens w
Speaker 1: and John Underscore Stepic.
Speaker 2: This episode was produced by Somersiety.
Speaker 1: And Moses and Questions and comments on this show and
Speaker 1: all our shows up always welcome.
Speaker 2: Our show email is Mere Money at Bloomberg dot net.