WEBVTT - There’s More to the US Market Downturn Than Tariffs 

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<v Speaker 1>Bloomberg Audio Studios, Podcasts, Radio News. Welcome to the Merrin

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<v Speaker 1>Drugs Money Market Wrap, where we talk about the biggest

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<v Speaker 1>moves in the markets this weekend what's driving them. I'm

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<v Speaker 1>Marrin Zumsat, Web editor at Large for Bloomberg UK Wealth.

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<v Speaker 2>I'm joined Stepic, senior reporter at Bloomberg and author of

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<v Speaker 2>the Money Distilled newsletter.

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<v Speaker 1>Okay, John, We're going to start with the I Told

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<v Speaker 1>you So section, And on Friday you wrote in your

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<v Speaker 1>Money to Tell the newsletter about a number that you

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<v Speaker 1>told everyone at the end of last year that you're watching,

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<v Speaker 1>Fray Kefley, and the reason to watch it Fray Kefley

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<v Speaker 1>has become very clear of the last few months. Right.

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<v Speaker 2>Yes, it was in the video share price. And the

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<v Speaker 2>reason I was looking at the video share praise is

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<v Speaker 2>because back then, before Tarloffs were even a twinkle in

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<v Speaker 2>Donald Trump's I Will, I guess deploy Will, the most

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<v Speaker 2>obvious thing that was driving us exceptionalism was the EA Bobble,

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<v Speaker 2>And obviously the big pixe and shovel story of the

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<v Speaker 2>EA Bobble was Nevidia. And I thought, well, if Nevidia

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<v Speaker 2>goes down the Wii, that means the whole market's going down,

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<v Speaker 2>and if it goes keeps going up the weed then

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<v Speaker 2>US exceptionalism is intact. And of course is down about

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<v Speaker 2>thirty percent, maybe a bit less today, but thoughtyd percent.

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<v Speaker 1>Okay, exceptionalism not intact. And I just want to interrupt

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<v Speaker 1>here briefly, and we're not going to talk about this

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<v Speaker 1>because we are absolutely only talk about markets today, So

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<v Speaker 1>obviously we cannot talk about a blackout in Spain and

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<v Speaker 1>in Portugal and in a little bit of France and

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<v Speaker 1>what caused it. But I do want to draw your

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<v Speaker 1>attention to the fact that in that same publication, when

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<v Speaker 1>we were asked at the end of twenty twenty four

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<v Speaker 1>what we thought might happen in twenty twenty five, my

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<v Speaker 1>answer was that there'd be a lot more focused on

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<v Speaker 1>national grids because they were designed for a few big,

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<v Speaker 1>centrally located powerstations, not for thousands of dispritin distance renewable producers.

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<v Speaker 1>They require upgrades or there is trouble ahead. So all

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<v Speaker 1>I will say is, well, here we are.

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<v Speaker 2>I mean that is our proper told you, So I

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<v Speaker 2>think that's that is a good one. And actually know

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<v Speaker 2>what irony is Helen who asked us to answer those questions,

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<v Speaker 2>was actually in Spain in Madrid yesterday in the depths

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<v Speaker 2>of the blackout.

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<v Speaker 1>Well, she should have known. She should have known that

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<v Speaker 1>that's what was going to happen. Anyway, almost there was

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<v Speaker 1>when the bit on one number of index that you

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<v Speaker 1>think is important for understanding the world in twenty twenty five,

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<v Speaker 1>when you answered video share price, I answered, actually GDP

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<v Speaker 1>per capita in Argentina. So we're still watching that very closely,

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<v Speaker 1>saying if what is happening there is working, Obviously the

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<v Speaker 1>currency is tanking, so maybe it's not going perfectly, but

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<v Speaker 1>well worth watching onwards, John, what is happening in markets?

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<v Speaker 2>One of the interesting things is the S and P

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<v Speaker 2>five hundred is bouncing back. And one point that people

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<v Speaker 2>have been making is that if you look back to

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<v Speaker 2>before all the tide of stuff happened at the start

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<v Speaker 2>of April, it's like the US stock market is down

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<v Speaker 2>something like one or two percent in US dollar terms.

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<v Speaker 1>John, I think I just want to interrupt and say

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<v Speaker 1>we've been making that point.

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<v Speaker 2>Yeah, we actually have made that point almost every week

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<v Speaker 2>for a while.

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<v Speaker 1>We have been making the point that all this stuff

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<v Speaker 1>has happened, all this craziness, all this talking, all this angst,

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<v Speaker 1>all those is the end of America is also and

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<v Speaker 1>in decease have literally barely budged volatile volatile. But if

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<v Speaker 1>you didn't look at them for six months, a year, whatever,

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<v Speaker 1>you would think nothing had happened, or even yeah, even

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<v Speaker 1>a month. And that is the big question, because all

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<v Speaker 1>this stuff is real, it's real. American exceptionalism has been

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<v Speaker 1>severely challenged. American valuations are still absurdly high. Gross stock

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<v Speaker 1>valuations are still absurdly high. The American market is still

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<v Speaker 1>absurdly concentrated. This makes no sense. And I interrupted you,

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<v Speaker 1>and that's probably what you were going to say, right.

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<v Speaker 2>Oh yeah, And I think that's again. Well, I think

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<v Speaker 2>the other thing is the yes, exceptions trade isn't just

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<v Speaker 2>about equities low. It's also about the dollar. And whenever

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<v Speaker 2>you look at what would have happened to somebody in

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<v Speaker 2>the UK, if they've kept all their money in US equities,

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<v Speaker 2>then the story is a bit different. They're down something

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<v Speaker 2>like fifteen percent since the actually not the start of

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<v Speaker 2>the year, since they peaked in February, and so that

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<v Speaker 2>is quite a lot chunkier than just the five percent

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<v Speaker 2>off that you would be now if you were a

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<v Speaker 2>US dollar investor. And the other point is that it

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<v Speaker 2>contrasts where the foots one hundred, which is for example,

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<v Speaker 2>only down about two percent over the same period, the

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<v Speaker 2>docks is actually up a little bit for pound investors

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<v Speaker 2>because the pound a lot it's gone up against the

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<v Speaker 2>dollar is going down against the Euro a bit. So

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<v Speaker 2>the point is basically, if you owned anything but US equities,

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<v Speaker 2>then so far this year has been at worst mediocre

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<v Speaker 2>and some whereas if you had had all your money

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<v Speaker 2>in U S equities, it's been pretty catastrophic actually, because

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<v Speaker 2>you know, fifteen percent down over the best part of

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<v Speaker 2>three months is a bad return.

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<v Speaker 1>I suppose it's worth mentioning that that week dollar is

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<v Speaker 1>a bit of a double whammy for anyone who is

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<v Speaker 1>exporting to the US, because they've already got this tariff

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<v Speaker 1>burden and now they've got this week dollar burden too,

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<v Speaker 1>So early doesn't help.

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<v Speaker 2>Yeah, And I do think that it's gonna be interesting

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<v Speaker 2>to see what happens over the next few months, because

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<v Speaker 2>on the one hand, that is the whole point about

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<v Speaker 2>the great rotation being more about other markets catching up

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<v Speaker 2>with the US in that gap closing, but on the

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<v Speaker 2>other hand, I mean is expensive, and it's kind of

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<v Speaker 2>like if the tariff stuff, even if this stuff doesn't

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<v Speaker 2>stay intact, I mean, you've already got ship mints between

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<v Speaker 2>China and the US have dropped off, and inventories which

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<v Speaker 2>they stock up on stuff before the tariff's kicked in,

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<v Speaker 2>but they're only going to last for so long. So

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<v Speaker 2>at some point along the line, some kind of COVID style,

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<v Speaker 2>oh my god, the shelves are empty in point is

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<v Speaker 2>likely to happen, and it just so it depends on

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<v Speaker 2>how everyone fudges around that and whether Trump backs down.

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<v Speaker 2>But then you're kind of like, what was the point

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<v Speaker 2>They're trying to rebalance everything in the first place. So

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<v Speaker 2>I don't know. I think there's a certain bit of

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<v Speaker 2>everyone kidding themselves that this is going to be okay,

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<v Speaker 2>because I think there's got to be more turbulence to

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<v Speaker 2>come further down the road.

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<v Speaker 1>Yeah, and there's been an awful lot of buying on

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<v Speaker 1>the dip because buying on the dip has always always

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<v Speaker 1>worked historically, and even right now it looks like it's worked, right,

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<v Speaker 1>looks like it's worked, but the market can trick you

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<v Speaker 1>quite a lot with that sort of thing. And if

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<v Speaker 1>we look at the straightforward fundamentals, if there's recession coming

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<v Speaker 1>in the US and the whole Tarraf Balaba makes them

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<v Speaker 1>increasingly likely, and inflation coming in the US. By the way,

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<v Speaker 1>it seems ridiculous to think that that valuation gap between

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<v Speaker 1>the US and Europe should continue.

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<v Speaker 2>Yeah, and I mean I think it's also you can

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<v Speaker 2>see there's an element that complacency in other areas as

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<v Speaker 2>well help because another sort of thing that was rumbling

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<v Speaker 2>in the background the last week or so I noticed

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<v Speaker 2>was this sort of dispute between Pakistan and India. And

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<v Speaker 2>on the one hand, that's this kind of thing that's

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<v Speaker 2>happened between Indian and Pakistan a lot over time. It's

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<v Speaker 2>not unusual, and so you can be forgiven for saying

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<v Speaker 2>it will just be the same as it's always been,

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<v Speaker 2>and you effectively it's a buying opportunity. On the other hand, again,

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<v Speaker 2>the sort of there like the willingness to go straight

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<v Speaker 2>to that conclusion. So it gives you a sense that well,

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<v Speaker 2>like no one is really taking on board the global

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<v Speaker 2>geo politics has become rather more fractious and rather more splintered,

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<v Speaker 2>and it's probably risky to think that it's just gonna

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<v Speaker 2>be business as usual, and I don't. It's tricky because

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<v Speaker 2>we all these geopolitical things are a little bit binary.

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<v Speaker 2>But it doesn't feel as if it almost feels as

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<v Speaker 2>if there's an elementary i know, limbo in the markets

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<v Speaker 2>at the moment where people are just well, let's just

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<v Speaker 2>do what has always walked and for the time being

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<v Speaker 2>that has been the sort of by the debt Truthe.

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<v Speaker 1>Yeah, well, I suppose the thing that we should probably

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<v Speaker 1>say about this, and everyone's bored of us saying it

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<v Speaker 1>so far? Is it when you go into an environment

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<v Speaker 1>like this, when you go into a difficult environment, you

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<v Speaker 1>might as well go into it holding inexpensive equities, equities

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<v Speaker 1>that are not already priced for perfection. And that is

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<v Speaker 1>going to be value stocks or value orientated investments, probably

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<v Speaker 1>more in Europe than in the US. And value investing

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<v Speaker 1>has had so long out of favor it's beginning to

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<v Speaker 1>get ridiculous. And we had value investing was all the

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<v Speaker 1>thing right up for the g GFC, right, and then

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<v Speaker 1>we turned into we all turned into growth investors with

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<v Speaker 1>a little bit of value pop here and that, and

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<v Speaker 1>that's been so long now everyone's forgotten that over the

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<v Speaker 1>very long time. But at term it is value investing

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<v Speaker 1>that tends to work best. And if you do accept that,

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<v Speaker 1>then there are quite a lot of things out there

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<v Speaker 1>that you can buy to sit out this difficult environment.

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<v Speaker 2>Yeah, I mean, I don't know if you've got this one,

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<v Speaker 2>but we've got a note from Verdad Advisors the other day.

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<v Speaker 1>Oh, nice Dan, who we had on the podcast.

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<v Speaker 2>Yeah, his colleague Brian, Brian Tinoro. He was writing about

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<v Speaker 2>European including the UK, European small caps and value small

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<v Speaker 2>caps in particular, and his point was, I mean, because

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<v Speaker 2>he's been watching the ETFs as well, and he noted

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<v Speaker 2>it in the first quarter of this year, one of

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<v Speaker 2>the big vanguard dtfs that covers Europe has so its

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<v Speaker 2>biggest quarterly in flows in at least five years. So

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<v Speaker 2>that's the sort of idea that money is definitely moving

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<v Speaker 2>out of the US and in Europe. But then he

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<v Speaker 2>was also in the point that whenever the money first rotates,

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<v Speaker 2>especially if it's quite a large amount of once, the

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<v Speaker 2>fund managers tend to stick it all in the large

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<v Speaker 2>caps first, and he's pointing that there's still massive kind

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<v Speaker 2>of value in the small cap area and particularly again

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<v Speaker 2>then inentially microcap area as well. So his point is

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<v Speaker 2>that if you are i'll sort of you know, value oriented,

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<v Speaker 2>and you've got the time way to then that's the

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<v Speaker 2>police to go all because that's been the money's going

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<v Speaker 2>to tackle two. Next.

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<v Speaker 1>Yeah, well that does make complete sense. You know, an

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<v Speaker 1>American investor pultubot of money out of America, hands it

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<v Speaker 1>to a European fund manager. The first thing they're going

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<v Speaker 1>to do is put it in a big liquid stuff

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<v Speaker 1>and then gradually you'll get trickled down into the smaller companies.

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<v Speaker 1>There's the allocation to large cab equities, which is a

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<v Speaker 1>perfectly reasonable level, and then you start to trickle down.

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<v Speaker 1>And of course where are the cheapest small caps pretty

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<v Speaker 1>much in the world.

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<v Speaker 2>Well, I selected in the UK.

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<v Speaker 1>I think we've talked about this before. Some of the

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<v Speaker 1>cheapest small caps in the world are yes, absolutely here

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<v Speaker 1>and we've talked as well before, having we about the

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<v Speaker 1>investment trust where you get a kind of you know,

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<v Speaker 1>an endless double discount. You get a UK discount, trible discount,

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<v Speaker 1>you got a UK discount, you get an investment trust discount,

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<v Speaker 1>you get a small cap discount, and there is extraordinary

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<v Speaker 1>value knocking around in that sector. Yeah.

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<v Speaker 2>And the other thing is, again, despite the fact that

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<v Speaker 2>you know, the UK government need leaves a lot to

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<v Speaker 2>be desired, and you know, the Chancellor's probably kind of

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<v Speaker 2>screw lots of things up, hunting for taxes to plug

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<v Speaker 2>various imaginary and or rather looking for taxes to plug

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<v Speaker 2>lots of black holes and all that.

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<v Speaker 1>But I don't think they're imaginary. They're real.

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<v Speaker 2>Well they're real, yeah, but they.

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<v Speaker 1>Argue about who created them, but they're definitely very real.

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<v Speaker 2>The black holes are there, but they're not it's more that,

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<v Speaker 2>I mean, they are unfillable. The way that they talk

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<v Speaker 2>about them, and it's more about the fractions of a

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<v Speaker 2>decimal point either way that they're sort of finagling over

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<v Speaker 2>that is infury. And but the point is it's like

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<v Speaker 2>I noticed this morn than UK mortgage rates are down

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<v Speaker 2>the lowest they've been in quite some time. And also

0:11:53.880 --> 0:11:58.720
<v Speaker 2>the UK build well yeah, I don't even don't even.

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<v Speaker 3>Listen to our podcast from earlier this week on how

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<v Speaker 3>to buy the best house if you're going to buy

0:12:05.840 --> 0:12:09.080
<v Speaker 3>a house. It's really really excellent set myself, very important

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<v Speaker 3>if you're looking at those low Morges rates and going

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<v Speaker 3>do you know what I'm going to.

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<v Speaker 1>Buy a house? Listen to our housing series before you

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<v Speaker 1>go anywhere near the housing market. Definitely, Sorry, John, I

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<v Speaker 1>interrupted you again. What were you going to say?

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<v Speaker 2>No, so Martket rates falled out FA, then consumers are

0:12:24.679 --> 0:12:26.679
<v Speaker 2>going to have more money despite all the other stuff

0:12:26.679 --> 0:12:29.360
<v Speaker 2>they've got to put up with this year. And also

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<v Speaker 2>the UK is probable is well it is it's one

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<v Speaker 2>of the countries that least is least exposed to whatever

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<v Speaker 2>ends up happening with tariffs. So from a big picture,

0:12:38.600 --> 0:12:43.040
<v Speaker 2>global investors don't pay that much attention to the politics

0:12:43.040 --> 0:12:46.040
<v Speaker 2>a country. They just want a good excuse to tell

0:12:46.040 --> 0:12:48.760
<v Speaker 2>their clients why they're investing there. And actually the UK

0:12:48.920 --> 0:12:51.920
<v Speaker 2>has the excuses lining up, you know, lower interest rates

0:12:51.960 --> 0:12:56.160
<v Speaker 2>converting to you know, consumer kind of coming back, and

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<v Speaker 2>then the big picture being immune to the tariffs basically,

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<v Speaker 2>so you can see why inflous make head are we

0:13:03.320 --> 0:13:06.280
<v Speaker 2>because the guy that's telling these clients that has got

0:13:06.320 --> 0:13:09.319
<v Speaker 2>a story, know to evangelizer boot which they didn't have

0:13:09.400 --> 0:13:11.560
<v Speaker 2>for the past you know it years.

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<v Speaker 1>Yeah, reminder that all market action is about stories. And

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<v Speaker 1>I did actually on that very note, John get a

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<v Speaker 1>note this morning from someone suggesting that we've been waiting

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<v Speaker 1>for a catalyst forever for UK smaller mid caps to

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<v Speaker 1>start moving, and it may be that the progress between

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<v Speaker 1>the UK and the US on the making of a

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<v Speaker 1>trade deal could be that catalyst. Whose You know, UK

0:13:34.280 --> 0:13:38.480
<v Speaker 1>smaller companies are straight but much more often than big companies, straightforward,

0:13:38.559 --> 0:13:41.400
<v Speaker 1>simple businesses, and if they know where they are tariff wise,

0:13:41.480 --> 0:13:43.480
<v Speaker 1>that maybe something that makes everyone go Okay, now we

0:13:43.520 --> 0:13:45.240
<v Speaker 1>know where we are, we can buy these, excepting the

0:13:45.320 --> 0:13:47.480
<v Speaker 1>cheap small caps. We live in a world of hope,

0:13:47.520 --> 0:13:48.840
<v Speaker 1>don't we, John, I mean, we really do.

0:13:49.520 --> 0:13:51.439
<v Speaker 2>We do. Maybe this is the catalyst.

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<v Speaker 1>We are optimists.

0:13:52.880 --> 0:13:54.080
<v Speaker 2>We are such optimists.

0:13:54.080 --> 0:13:56.640
<v Speaker 1>People sometimes say that, you know when perma bears were pessimists,

0:13:56.720 --> 0:14:02.920
<v Speaker 1>not so not so optimistic, fullish fansiastic about the future.

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<v Speaker 1>Thanks for listening to this week's Marin Talks to Your

0:14:12.040 --> 0:14:14.400
<v Speaker 1>Money Debrief. If you like our show, rate review, and

0:14:14.440 --> 0:14:16.719
<v Speaker 1>subscribe wherever you listen to podcasts. Also be sure to

0:14:16.720 --> 0:14:18.920
<v Speaker 1>follow me in John on x or Twitter at Marinus

0:14:19.080 --> 0:14:22.240
<v Speaker 1>w and John Undersourced Epic. We are also both on LinkedIn,

0:14:22.280 --> 0:14:24.760
<v Speaker 1>where John is slightly more active than I am. This

0:14:24.800 --> 0:14:27.920
<v Speaker 1>episode was produced by some Sadi production support and sound

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<v Speaker 1>designed by Moses and Questions and comments on the show

0:14:30.600 --> 0:14:33.280
<v Speaker 1>and all our shows are always welcome. Our show email

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<v Speaker 1>is Marimoney at bloomberg dot net