WEBVTT - Man Group's Ed Cole: How to Adapt Your Portfolio to a Changing World

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news.

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<v Speaker 2>It's sort of easier to recognize that the regime is

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<v Speaker 2>changing than to understand what it will change into. But

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<v Speaker 2>if you think about all those things I mentioned there,

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<v Speaker 2>which is you know, globalization, the sort of frictionless movement

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<v Speaker 2>of capital and labor and supply chains, I think those

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<v Speaker 2>things are going into reverse. And as they go into reverse,

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<v Speaker 2>it introduces more friction into the system. It requires, you know,

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<v Speaker 2>national interest to be put at the sort of top

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<v Speaker 2>of the priority list for governments. I think we're all

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<v Speaker 2>going to get used to the idea of America first

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<v Speaker 2>by British, by Canadian. The Italians have got their own

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<v Speaker 2>version of it. And these things are going to require

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<v Speaker 2>more capital to be deployed at home. There's more sort

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<v Speaker 2>of you know, more demand on the physical constraints of

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<v Speaker 2>the world, which gives rise to produce supplicce inflation. All

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<v Speaker 2>of these things are sort of more friction probably stick

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<v Speaker 2>here inflation.

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<v Speaker 1>Welcome to Marrin Talks Money, the podcast in which people

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<v Speaker 1>who know the markets explain the markets. I am Maren

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<v Speaker 1>Sumset Web and this week I'm speaking with Ed Cole.

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<v Speaker 1>Ed is head of Multi Strategy equities within solutions at

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<v Speaker 1>Man Group and was lost on the show back in

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<v Speaker 1>April twenty twenty five, then we spoke about the great

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<v Speaker 1>rotation and why at the time Chinese stocks looked like

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<v Speaker 1>pretty good investments. Well Ed is back, and on today's

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<v Speaker 1>show we talk about what we talk about everything. We

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<v Speaker 1>talk about AI bubble or not bubble? Is it evaluation bubble?

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<v Speaker 1>Is it an earnings bubble? Or is it really absolutely fine?

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<v Speaker 1>We talk about Japan, we talk about small gaps, We

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<v Speaker 1>talk about the end of the sixty forty portfolio and

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<v Speaker 1>how you should diversify from here, and we finish up

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<v Speaker 1>with a really good sounding book for you to take

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<v Speaker 1>to the beach. Ed welcome back to Marion Talks Money.

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<v Speaker 1>Thank you very much for coming on again.

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<v Speaker 2>Thanks for having me, Maren, great pleasure to be here.

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<v Speaker 1>Last time we spoke, we talked at length about the

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<v Speaker 1>end of American exceptionalism. We talked about how we expected

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<v Speaker 1>other markets to outperform, or at least to perform better

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<v Speaker 1>than the US.

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<v Speaker 3>Let me talk abou something link about.

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<v Speaker 1>Chinese equities and you know how they looked attractive and

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<v Speaker 1>where investors should look at the moment.

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<v Speaker 3>A lot has happened since then.

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<v Speaker 1>We last spoke before, before the war in the Middle East,

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<v Speaker 1>before the Great Ai Bubble really got going, and a

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<v Speaker 1>few other little bits and bobs have happened since then.

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<v Speaker 1>So when do it' we saut with an update, We're

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<v Speaker 1>how are you feeling now about our previous conversation about

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<v Speaker 1>American acceptionalism, about the great rotation out of the US.

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<v Speaker 2>Well, I'm marked my own homework actually in advance of this.

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<v Speaker 2>So it was a thank you little more than a

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<v Speaker 2>year ago that we spoke, and it was it's always

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<v Speaker 2>a little gall lings after go back and listen to

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<v Speaker 2>yourself as a starting point, and then listen to yourself

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<v Speaker 2>and recognize the extent to which you've probably got things wrong.

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<v Speaker 2>I was a bit surprised that some of what I

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<v Speaker 2>said has actually played out reasonably well. I think you

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<v Speaker 2>and I were probably both on the same page that

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<v Speaker 2>nothing's particularly exceptional other than hype cycles, and we're certainly

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<v Speaker 2>in a hype cycle now. But just looking back over

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<v Speaker 2>sort of fifty two weeks of returns, and I've put

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<v Speaker 2>all this in constant currency, so the S and P

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<v Speaker 2>and the mag seven, which is I guess what people

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<v Speaker 2>think of as exceptional are both up about twenty percent

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<v Speaker 2>in the last twelve months. European dollars is up about

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<v Speaker 2>eighteen so that bit didn't really work out particularly well. Amazingly,

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<v Speaker 2>inside the US, the Russell two thousand, which is the

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<v Speaker 2>small cap index or small and MidCap has a bit

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<v Speaker 2>more of a value tilt, is up thirty eight percent.

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<v Speaker 2>For all that exceptionalism and all of that apparent leadership

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<v Speaker 2>by the tech tech giants, it's actually been more cyclical,

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<v Speaker 2>more value UI smaller cap companies that have not just outperformed,

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<v Speaker 2>but outperformed materially.

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<v Speaker 3>I think we did. We did talk about that, didn't we.

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<v Speaker 1>We did think that part of the rotation would be

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<v Speaker 1>in TV smaller cap value names, not just in the

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<v Speaker 1>US but everywhere.

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<v Speaker 2>Yes, but everywhere exactly. And then the other extraordinary one,

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<v Speaker 2>a couple of other extraordinary ones, is that the emerging

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<v Speaker 2>markets have had a phenomenal year in many ways, driven

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<v Speaker 2>by the same thing that occupies the headlines everywhere in

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<v Speaker 2>the world. So emerging market's up nearly fifty percent over

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<v Speaker 2>the last twelve months.

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<v Speaker 1>Yeah, but I think we have to stop and talk

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<v Speaker 1>about that briefly before we move on and say that

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<v Speaker 1>that is not emerging markets that have got absolutely nothing

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<v Speaker 1>whatsoever to do with emerging markets. That is three giant

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<v Speaker 1>companies in Taiwan and Korea, and we've talked about that

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<v Speaker 1>on this pod quite a lot to say, you know,

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<v Speaker 1>if you want emerging markets exposure, do not buy an

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<v Speaker 1>emerging markets index because you're going to get an AI momentum.

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<v Speaker 2>Trade absolutely fair. And of course, you know, EM has

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<v Speaker 2>always been in many ways the factory for what the

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<v Speaker 2>developed world is con huming. And you know, the monetizing

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<v Speaker 2>AI is still really a developed world story. And of

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<v Speaker 2>course those three companies are the picks and shovels that

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<v Speaker 2>are manufacturing what it is that the Western world needs

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<v Speaker 2>to consume for this particular growth cycle. The other surprising

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<v Speaker 2>bit in it, though, is that on shore Chinese equities

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<v Speaker 2>there's been a massive bifurcation between offshore Chinese equities and

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<v Speaker 2>on shore Chinese equities. On Shore Chinese equities are really

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<v Speaker 2>interesting market because they're super super deep and super broad

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<v Speaker 2>and quite lots of inefficiency, lots of opportunity to route

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<v Speaker 2>out on shore China. Chinese equities are up nearly thirty

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<v Speaker 2>percent in dollars over the last year, so You're absolutely

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<v Speaker 2>right in index terms, in em there's something very much

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<v Speaker 2>going on amongst those big semiconductor names in both memory

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<v Speaker 2>and logic. But below the hood there are many other

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<v Speaker 2>stories going on as well. So I think we could

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<v Speaker 2>probably take a step. I'm going to sort of probably

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<v Speaker 2>mark my scorecard as could do better altogether. Not terrible,

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<v Speaker 2>not terrible at all, But I think that and I

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<v Speaker 2>think probably we also talked about golden Bitcoin, we might

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<v Speaker 2>come from.

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<v Speaker 3>Yes, it would definitely come back to that.

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<v Speaker 2>But I look, I think I suppose, on the one hand,

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<v Speaker 2>in sort of scores, it looks as though there has

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<v Speaker 2>been some rotation. On the other hand, in terms of narrative,

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<v Speaker 2>America probably would be patting itself on the back for

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<v Speaker 2>looking more exceptional than ever in terms of having the

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<v Speaker 2>companies that are absolutely at the tip of the spear

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<v Speaker 2>in what's going on in AI and AI monetization and

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<v Speaker 2>you know, and there's a question mark in all of that,

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<v Speaker 2>which I'm sure going to get onto about how sustainability

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<v Speaker 2>all is.

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<v Speaker 1>Well, why don't we start with that, Well, actually we've

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<v Speaker 1>started already. Why don't we move on to the AI

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<v Speaker 1>hype cycle and how that is going? I mean, we're

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<v Speaker 1>talking in a very volatile week twenty fourth of guine

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<v Speaker 1>by the way, and so there's been quite quite a

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<v Speaker 1>lot going on. Tuesday this week was a lightly mad

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<v Speaker 1>day with all sorts of movements in tech and the

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<v Speaker 1>cost of the Korean index down nearly ten percent in

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<v Speaker 1>one day because of the again, because of these big

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<v Speaker 1>AI and ms. Do you think we are reaching the

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<v Speaker 1>top of the hype cycle? We're getting to the bit

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<v Speaker 1>where everyone saying, okay AI is great. We get that

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<v Speaker 1>there's a marvelous technology. It can do fabulous things for us,

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<v Speaker 1>but nonetheless it needs to be monetized, and that path

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<v Speaker 1>is slightly less certain in particularly in terms of the

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<v Speaker 1>volumes required. It's slightly less certain than we thought. We've

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<v Speaker 1>seen quite a lot of companies begin to talk about

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<v Speaker 1>something we've discussed on this podcast quite a lot, which

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<v Speaker 1>is saying, well, is there a cheaper way to do

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<v Speaker 1>this and looking at some of the open source models

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<v Speaker 1>that they can run on their own computers and owned

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<v Speaker 1>networks without recourse to the big expensive companies, et cetera.

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<v Speaker 2>But I suppose I hesitate to say yes, we're at

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<v Speaker 2>the top. It's incredibly hard to know it will be

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<v Speaker 2>hard to know in some ways until we're quite a

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<v Speaker 2>long way away from the top, because tops are typically

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<v Speaker 2>quite noisy. If I stack a step back, i'm I'm

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<v Speaker 2>my glass is half empty as a person, which is

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<v Speaker 2>both good and bad in this business. But I think

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<v Speaker 2>that if I just sort of forced myself a little

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<v Speaker 2>bit to listen to the other side, I would tend

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<v Speaker 2>to agree with you in sorts of hype cycle or

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<v Speaker 2>bubble if I take a step back and listen to

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<v Speaker 2>the other side. And we have quite lively debates in

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<v Speaker 2>my company about this, the bulls will say right now

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<v Speaker 2>that actually the market's derated this year. You know, the

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<v Speaker 2>earnings revisions have been so extreme, and I've been extreme everywhere.

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<v Speaker 2>It hasn't just been an AI story. You've seen it

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<v Speaker 2>even in the Russell two thousand that I talked about

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<v Speaker 2>enormous earnings revisions. On the positive side, that there is

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<v Speaker 2>something going on in terms of a strong economy, and

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<v Speaker 2>clearly the hype that we see in AI is this

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<v Speaker 2>is the ball argument justified by what's happened in terms

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<v Speaker 2>of earnings revisions. So unlike other bubbles, you can look

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<v Speaker 2>at this right now today and say the market is

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<v Speaker 2>not that expensive if the earnings estimates come through. That's

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<v Speaker 2>something we talked about a year ago, you and I.

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<v Speaker 2>If the owning estimates come through, then the market doesn't

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<v Speaker 2>look expensive. Now I would take a step back and say,

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<v Speaker 2>and I think this gets exactly to your point about monetization.

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<v Speaker 2>I would take a step back and say that those

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<v Speaker 2>earnings revisions today are predicated on an earnings estimates rather

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<v Speaker 2>today are predicated on an assumption that compute is scarce,

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<v Speaker 2>and that if you are an Asian semiconductive manufacturing company,

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<v Speaker 2>your capacity to keep your price moving in a world

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<v Speaker 2>where it previously was very deflationary is high, and therefore

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<v Speaker 2>both volume and price are in your favor. And that's

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<v Speaker 2>a phenomenal environment to be selling the hardware that people need.

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<v Speaker 2>If we discover that compute is not scarce, then I

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<v Speaker 2>think the picture will change pretty materially. Now, why would

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<v Speaker 2>compute not be scarce? So I think the first thing

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<v Speaker 2>is even alluded to. It is actually an understanding that

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<v Speaker 2>perhaps you just don't need these leading edge llms to

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<v Speaker 2>perform the kind of tasks that we're performing. You know,

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<v Speaker 2>we use AI to an enormous extent at work. We

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<v Speaker 2>have you know, kind of coding co pilots all of

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<v Speaker 2>us can use and it's incredibly powerful. But actually, as

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<v Speaker 2>a portfolio manager rather than a courant developer, I don't

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<v Speaker 2>need to use the leading edge models. It's absolutely clear,

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<v Speaker 2>and so you can do a very simple tweak which

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<v Speaker 2>is just say, well, let's start moving away from the

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<v Speaker 2>leading edge so we don't have to use take up

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<v Speaker 2>all of that capacity in the most expensive part of

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<v Speaker 2>the stack. So that's one which is just not using

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<v Speaker 2>the leading edge. The other is perhaps not using the

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<v Speaker 2>llms at all, so small language models ways of actually

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<v Speaker 2>dealing with discrete tasks. The other angle is you know,

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<v Speaker 2>not using the US models that are you know, the

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<v Speaker 2>premium price. So of course we all know that the

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<v Speaker 2>you know, the cost of a Chinese model is much

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<v Speaker 2>much closer to the cost of production of that model.

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<v Speaker 2>And I think it's entirely conceivable that certain businesses and

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<v Speaker 2>enterprises are going to carry on using you know, the

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<v Speaker 2>premium models all the time, but there will be other

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<v Speaker 2>applications that don't. And then I think the other thing

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<v Speaker 2>is actually fascinating news that came out overnight, which was

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<v Speaker 2>the sort of world world ranking of supercomputers. I don't

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<v Speaker 2>know if you saw this, but there's a Chinese supercomputer

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<v Speaker 2>called Lineshine in Shenzen that's just won the crown of

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<v Speaker 2>most powerful supercomputer, and it's entirely powered by CPUs, not GPUs,

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<v Speaker 2>again demonstrating that actually it isn't all about how much

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<v Speaker 2>compute you throw at something. It's often, you know, about

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<v Speaker 2>the way that the things engineered and implemented. So there

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<v Speaker 2>are enough reasons to think it's possible that we could

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<v Speaker 2>end up with a serious headwind for this if the

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<v Speaker 2>market continues to be driven by the idea that actually

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<v Speaker 2>computers scarce and therefore you know, those names in a

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<v Speaker 2>that we've talked about continue to be the leaders. I

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<v Speaker 2>don't know when please please.

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<v Speaker 1>Ask you to explain to our non AI literate listeners

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<v Speaker 1>a difference between CPUs and GPUs.

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<v Speaker 2>Yeah, so gpuser called graphics processing units, and those are

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<v Speaker 2>the kind of just much much more advanced, much powerful,

0:12:18.520 --> 0:12:22.160
<v Speaker 2>much much more energy energy, energy intensive, Yeah, much more

0:12:22.200 --> 0:12:25.360
<v Speaker 2>powerful logic semiconductor, So they do the thinking. That's the

0:12:25.360 --> 0:12:28.319
<v Speaker 2>semiconductor that does the thinking, and a CPU is a

0:12:28.400 --> 0:12:30.240
<v Speaker 2>much more basic version of it. It's what we all

0:12:30.360 --> 0:12:35.040
<v Speaker 2>used to have in our home PCs before, you know,

0:12:35.120 --> 0:12:37.720
<v Speaker 2>before there was a sort of step change in technology.

0:12:37.840 --> 0:12:40.760
<v Speaker 2>In other words, it's a more basic function, more basic,

0:12:41.200 --> 0:12:45.719
<v Speaker 2>less less powered, and requires less energy intensity to make

0:12:45.760 --> 0:12:48.319
<v Speaker 2>it work. And I think it's you know, there's been

0:12:48.360 --> 0:12:50.720
<v Speaker 2>a story you and I spoke last year, not a

0:12:50.840 --> 0:12:53.679
<v Speaker 2>million miles after the deep seat news, and in many

0:12:53.679 --> 0:12:55.400
<v Speaker 2>ways it's the sort of continuation of the same thing.

0:12:55.440 --> 0:12:59.040
<v Speaker 2>That you don't have to keep throwing the most leading

0:12:59.120 --> 0:13:01.720
<v Speaker 2>edge chip at every thing in order to push things further.

0:13:01.800 --> 0:13:04.920
<v Speaker 2>There's an awful lot about the way you engineer these processes, and.

0:13:04.840 --> 0:13:10.240
<v Speaker 1>That that leads on to two possibilities. One that this

0:13:10.360 --> 0:13:15.040
<v Speaker 1>is an earnings bubble more than a valuation bubble. Obviously

0:13:15.040 --> 0:13:18.360
<v Speaker 1>they're connected, but it's an earnings bubble first, and that's

0:13:18.400 --> 0:13:20.720
<v Speaker 1>the first thing. And the second thing is that it

0:13:20.840 --> 0:13:24.319
<v Speaker 1>is possible that the huge amount of capex being thrown

0:13:24.360 --> 0:13:28.599
<v Speaker 1>at data centers might turn out to be too much.

0:13:28.800 --> 0:13:34.000
<v Speaker 2>To absolutely agree. I think the the the argument I said,

0:13:34.000 --> 0:13:36.120
<v Speaker 2>the sort of bulls argument that it's not a bubble

0:13:36.160 --> 0:13:40.400
<v Speaker 2>because because earnings revisions have been so powerful, if earnings

0:13:40.800 --> 0:13:45.480
<v Speaker 2>collapse because monetization doesn't work, the market's going to look

0:13:45.480 --> 0:13:47.920
<v Speaker 2>a hell of a lot more expensive. And I think

0:13:48.000 --> 0:13:51.440
<v Speaker 2>I think a fascinating you know, prison to look at

0:13:51.440 --> 0:13:55.880
<v Speaker 2>this through is actually that those Korean semiconductor memory companies,

0:13:57.400 --> 0:14:00.880
<v Speaker 2>you know, those have historically been cyclical. And the way

0:14:00.920 --> 0:14:03.240
<v Speaker 2>we treat a cyclical company, the sort of orthodox way

0:14:03.280 --> 0:14:05.800
<v Speaker 2>to treat a cyclical company, is you sell it when

0:14:05.800 --> 0:14:08.760
<v Speaker 2>it's cheap, because it's earnings and revisions are sort of

0:14:08.760 --> 0:14:10.319
<v Speaker 2>you know, they're not going to stay up there. Right.

0:14:10.360 --> 0:14:12.640
<v Speaker 2>You grow up in this business learning to sell those

0:14:12.679 --> 0:14:14.680
<v Speaker 2>things when they're cheap and buy them them avery expensive.

0:14:15.360 --> 0:14:18.280
<v Speaker 2>If in fact, this is not a secular trend in

0:14:19.760 --> 0:14:24.480
<v Speaker 2>in earnings but a cyclical or a blowoff moment or

0:14:24.520 --> 0:14:26.560
<v Speaker 2>a bubble or as you call it, then actually what

0:14:26.600 --> 0:14:28.000
<v Speaker 2>we're going to find is that the market's a hell

0:14:28.000 --> 0:14:29.480
<v Speaker 2>of a lot more expensive than it looks.

0:14:29.520 --> 0:14:33.120
<v Speaker 3>Yeah, and this is just a normal cyclical Yeah. And

0:14:33.200 --> 0:14:36.080
<v Speaker 3>I think I think the other thing extreme but normal extreme. Yeah.

0:14:36.120 --> 0:14:37.680
<v Speaker 2>The other thing in all of that, which I think,

0:14:37.800 --> 0:14:39.560
<v Speaker 2>you know, when it all happened a year ago, a

0:14:39.600 --> 0:14:42.200
<v Speaker 2>bit sort of ten months ago, everyone was perplexed and

0:14:42.680 --> 0:14:45.160
<v Speaker 2>we've all moved on. Because we have short attention spans.

0:14:45.480 --> 0:14:47.840
<v Speaker 2>We also have to go back to the to the

0:14:47.880 --> 0:14:50.760
<v Speaker 2>realization that a lot of these earnings revisions are part

0:14:50.760 --> 0:14:55.680
<v Speaker 2>of that incredible circularity of you know of vendor financing,

0:14:55.800 --> 0:14:58.880
<v Speaker 2>where you know, where the customer invests in the invests

0:14:58.880 --> 0:15:02.520
<v Speaker 2>stock in the company to place orders for the chips.

0:15:02.920 --> 0:15:05.760
<v Speaker 2>And there was all those extraordinary diagrams that went round

0:15:05.800 --> 0:15:08.920
<v Speaker 2>that showed this ecosystem where everyone was both customer and

0:15:09.520 --> 0:15:12.440
<v Speaker 2>off take for the same same ecosystem. And there's this

0:15:12.520 --> 0:15:16.040
<v Speaker 2>sort of multiplication of earnings revisions that's going through the system.

0:15:16.080 --> 0:15:18.520
<v Speaker 2>So it isn't just the case that one company's order

0:15:18.520 --> 0:15:20.680
<v Speaker 2>book suddenly looks different. It's that that has a ripple

0:15:20.680 --> 0:15:24.560
<v Speaker 2>through effect from the company that's building the model, through

0:15:24.560 --> 0:15:26.840
<v Speaker 2>to the hyperscala, through to the company that's making the

0:15:26.920 --> 0:15:29.160
<v Speaker 2>memory chip, through to the company that's making the logic chip.

0:15:29.480 --> 0:15:32.560
<v Speaker 2>So all of them are enormously interrelated. We all scratched

0:15:32.560 --> 0:15:34.840
<v Speaker 2>our heads in September October last year when all of

0:15:34.880 --> 0:15:38.160
<v Speaker 2>those deals were announced and sort of laughed a bit

0:15:38.200 --> 0:15:39.920
<v Speaker 2>and moved on, And now here we are with that

0:15:40.120 --> 0:15:43.000
<v Speaker 2>being at least one factor that's contributed enormously to the

0:15:43.000 --> 0:15:47.520
<v Speaker 2>growth in earnings expectations. All quite fragile sounding, Yeah, it

0:15:47.560 --> 0:15:50.240
<v Speaker 2>could be or we could find that actually the productivity

0:15:50.280 --> 0:15:56.120
<v Speaker 2>gains are so extraordinary, and that businesses learn quite quickly

0:15:56.160 --> 0:15:59.080
<v Speaker 2>that they can't do without it, that their competitors are

0:15:59.120 --> 0:16:03.720
<v Speaker 2>starting to make advances because they are being prepared to

0:16:03.800 --> 0:16:06.920
<v Speaker 2>take on the cost of tokens, and you know, and

0:16:06.960 --> 0:16:09.320
<v Speaker 2>they make that part of their ongoing budget. So I,

0:16:09.920 --> 0:16:13.320
<v Speaker 2>you know, I look at this after twenty five years

0:16:13.320 --> 0:16:15.040
<v Speaker 2>in markets and think it looks in many ways like

0:16:15.080 --> 0:16:16.680
<v Speaker 2>a bubble, and it talks like a bubble, and it

0:16:16.720 --> 0:16:19.440
<v Speaker 2>walks like a bubble. But I also have to be

0:16:19.440 --> 0:16:21.200
<v Speaker 2>open minded in a way that I probably wasn't when

0:16:21.240 --> 0:16:25.040
<v Speaker 2>I was twenty five, that there are paths in, there

0:16:25.040 --> 0:16:27.840
<v Speaker 2>are path dependencies, there are ways through this where actually

0:16:28.640 --> 0:16:30.440
<v Speaker 2>perhaps it doesn't go pop.

0:16:31.240 --> 0:16:34.480
<v Speaker 1>And either way, this is not Emperor's New clothes. The

0:16:34.520 --> 0:16:38.480
<v Speaker 1>technology is exciting and valid, and either way leads to

0:16:38.720 --> 0:16:41.880
<v Speaker 1>astonishing productivity gains. That's simply a matter of whether the

0:16:42.680 --> 0:16:43.840
<v Speaker 1>valuations are right or wrong.

0:16:43.880 --> 0:16:47.320
<v Speaker 2>So just yeah, yeah, definitely. I think there's one one

0:16:47.440 --> 0:16:51.400
<v Speaker 2>really fascinating way to think about all bubbles is that

0:16:51.520 --> 0:16:54.840
<v Speaker 2>actually the majority of them are productive in a sense

0:16:54.880 --> 0:16:58.240
<v Speaker 2>that what they do is they suck capital into something

0:16:58.320 --> 0:17:03.960
<v Speaker 2>that is ultimately almostly changing for society or changing for

0:17:04.000 --> 0:17:07.119
<v Speaker 2>a political economy. You know, you can look at the

0:17:07.400 --> 0:17:09.639
<v Speaker 2>you know, the sort of nation building in the US,

0:17:09.680 --> 0:17:13.280
<v Speaker 2>the railway bubble in the US, you know, even parts

0:17:13.320 --> 0:17:15.639
<v Speaker 2>of the Roaring twenties actually, which was sort of beginning

0:17:15.680 --> 0:17:20.240
<v Speaker 2>of like domestic consumption taking off, the dot com you know.

0:17:20.520 --> 0:17:25.479
<v Speaker 2>The norm is that that these bubbles bring capital into something.

0:17:25.480 --> 0:17:28.440
<v Speaker 2>There's some malinvestment along the way, but the technology remains.

0:17:28.880 --> 0:17:33.840
<v Speaker 2>What's not normal is something closer to the GFC or

0:17:34.000 --> 0:17:37.800
<v Speaker 2>the kind of very tail end of the Roaring twenties,

0:17:37.840 --> 0:17:43.120
<v Speaker 2>when it's pure speculation. South Sea, you know, tulips, where

0:17:43.160 --> 0:17:46.280
<v Speaker 2>there's where there is nothing, nothing sort of transformational about.

0:17:46.320 --> 0:17:49.280
<v Speaker 1>I'm want to pick you up on tulips actually interesting

0:17:49.400 --> 0:17:52.960
<v Speaker 1>sps I mean yes, always cited as an extraordinary bubble

0:17:52.960 --> 0:17:56.600
<v Speaker 1>that left nothing behind it, you know, exponential rises in

0:17:56.640 --> 0:17:58.879
<v Speaker 1>the prices of tulip bulb and then a collapse that

0:17:58.960 --> 0:17:59.840
<v Speaker 1>leaves everyone.

0:17:59.520 --> 0:18:00.680
<v Speaker 3>Destroyed, et cetera, et cetera.

0:18:00.800 --> 0:18:03.320
<v Speaker 1>But you know, here we are and the Netherlands are

0:18:03.320 --> 0:18:06.800
<v Speaker 1>still one of the greatest flower exporters in the world, right,

0:18:07.240 --> 0:18:08.639
<v Speaker 1>and where do you go when you want to buy

0:18:08.680 --> 0:18:11.200
<v Speaker 1>amazing tulip bulbs. What do you buy when you go

0:18:11.960 --> 0:18:13.240
<v Speaker 1>when you go to Holland and you want to bring

0:18:13.280 --> 0:18:14.800
<v Speaker 1>back a souvenir chilip bulbs?

0:18:15.080 --> 0:18:18.480
<v Speaker 3>Right, it left an amazing like the.

0:18:18.600 --> 0:18:22.439
<v Speaker 1>Long term chulip bubble was ages ago, and there it is.

0:18:22.480 --> 0:18:25.440
<v Speaker 1>The legacy of the tulips is still there in the

0:18:25.760 --> 0:18:28.879
<v Speaker 1>in a huge industrial infrastructure the production of these flowers,

0:18:28.880 --> 0:18:30.560
<v Speaker 1>and in a massive tourist infrastructure.

0:18:30.640 --> 0:18:32.879
<v Speaker 3>So now I won't hear a word against the tulip bubble.

0:18:33.160 --> 0:18:35.240
<v Speaker 2>No, okay, I stand corrected, and they are, of course

0:18:35.480 --> 0:18:36.480
<v Speaker 2>wonderfully beautiful.

0:18:36.800 --> 0:18:47.680
<v Speaker 3>Yes, exactly right.

0:18:47.840 --> 0:18:50.879
<v Speaker 1>Let's move on from bubbles to a paper that you

0:18:50.920 --> 0:18:53.679
<v Speaker 1>wrote recently that I'm interested in. I know our listeners

0:18:53.680 --> 0:18:56.760
<v Speaker 1>will be interested in about diversification in an age of

0:18:56.960 --> 0:18:59.919
<v Speaker 1>inflation and the change that has come there. I know.

0:19:00.040 --> 0:19:02.880
<v Speaker 1>But you think that we're moving into what we're in

0:19:03.040 --> 0:19:06.800
<v Speaker 1>and staying in a more inflation environment that we've been.

0:19:06.760 --> 0:19:09.000
<v Speaker 3>Used to over the last forty years pre COVID.

0:19:09.040 --> 0:19:12.280
<v Speaker 2>Of course, yeah, I mean we do, we think I

0:19:12.320 --> 0:19:15.000
<v Speaker 2>think you know. Actually this is in some way informed

0:19:15.000 --> 0:19:17.159
<v Speaker 2>by the kind of conversations we have with many of

0:19:17.200 --> 0:19:20.960
<v Speaker 2>our largest clients, and it's really interesting to us how

0:19:21.359 --> 0:19:26.000
<v Speaker 2>there are many, many different conversations coming from asset allocation

0:19:26.160 --> 0:19:30.280
<v Speaker 2>teams in these big institutional businesses, which are all touching

0:19:30.280 --> 0:19:32.800
<v Speaker 2>on the fact on the sort of realization that the

0:19:32.840 --> 0:19:36.920
<v Speaker 2>world is changing, that the pre sets that we lived

0:19:36.960 --> 0:19:41.280
<v Speaker 2>through from you know, the sort of mid nineties onwards,

0:19:42.600 --> 0:19:47.359
<v Speaker 2>probably until the Brexit referendum ten years ago this week,

0:19:50.080 --> 0:19:54.560
<v Speaker 2>there was a set of characteristics that were pretty stable.

0:19:54.720 --> 0:19:58.720
<v Speaker 2>And those characteristics were, you know, the kind of primacy

0:19:58.720 --> 0:20:03.159
<v Speaker 2>of globalization, stimization of supply chain, stability in Western politics,

0:20:03.640 --> 0:20:08.640
<v Speaker 2>low inflation, financialization of everything because low inflation allowed for that,

0:20:09.119 --> 0:20:14.600
<v Speaker 2>and this wonderful kind of basis for multi asset investing,

0:20:14.760 --> 0:20:18.240
<v Speaker 2>which was that stocks and bonds were negatively correlated, meaning

0:20:18.320 --> 0:20:22.920
<v Speaker 2>that when your bomb, when your stock portfolio hit the skids,

0:20:24.160 --> 0:20:27.640
<v Speaker 2>your bomb portfolio would typically partially bail you out.

0:20:27.680 --> 0:20:29.720
<v Speaker 1>Which happened earlier this week. By the way, I mean

0:20:29.760 --> 0:20:31.800
<v Speaker 1>that that happened on Tuesday.

0:20:32.040 --> 0:20:33.720
<v Speaker 3>Old fashioned stuff. But it did happen.

0:20:34.080 --> 0:20:36.080
<v Speaker 2>Yeah, it did happen. I mean, I think what we're

0:20:36.119 --> 0:20:39.480
<v Speaker 2>really thinking about here is what happens on more than

0:20:39.480 --> 0:20:44.960
<v Speaker 2>a day, and it certainly didn't happen in March, where

0:20:45.000 --> 0:20:47.480
<v Speaker 2>stocks got hit very hard and so did bonds, and

0:20:47.520 --> 0:20:50.520
<v Speaker 2>so did gold. So I think, you know, the way

0:20:50.600 --> 0:20:54.320
<v Speaker 2>we recognize it's sort of easier to recognize that the

0:20:54.400 --> 0:20:57.879
<v Speaker 2>regime is changing than to understand what it will change into.

0:20:58.359 --> 0:21:01.160
<v Speaker 2>But if you think about all those things I mentioned there,

0:21:01.200 --> 0:21:05.359
<v Speaker 2>which is you know, globalization, the sort of frictionless movement

0:21:05.400 --> 0:21:08.440
<v Speaker 2>of capital and labor and supply chains, I think those

0:21:08.440 --> 0:21:12.479
<v Speaker 2>things are going into reverse. And as they go into reverse,

0:21:12.560 --> 0:21:16.399
<v Speaker 2>it introduces more friction into the system. It requires you know,

0:21:16.480 --> 0:21:18.720
<v Speaker 2>national interest to be put at the sort of top

0:21:18.760 --> 0:21:22.560
<v Speaker 2>of the priority list for governments. You know, I think

0:21:22.560 --> 0:21:24.240
<v Speaker 2>we're all going to get used to the idea of

0:21:24.280 --> 0:21:27.440
<v Speaker 2>America first by British, by Canadian. The Italians have got

0:21:27.440 --> 0:21:30.040
<v Speaker 2>their own version of it. And these things are going

0:21:30.080 --> 0:21:33.200
<v Speaker 2>to require more capital to be de deployed at home.

0:21:34.160 --> 0:21:37.200
<v Speaker 2>There's more sort of you know, more demand on the

0:21:37.200 --> 0:21:42.840
<v Speaker 2>physical constraints of the world, which gives rise to produce supplies. Inflation.

0:21:43.200 --> 0:21:45.680
<v Speaker 2>All of these things are sort of more friction, probably

0:21:45.760 --> 0:21:46.640
<v Speaker 2>stickier inflation.

0:21:46.880 --> 0:21:48.479
<v Speaker 3>There's us conversations about that.

0:21:48.560 --> 0:21:50.040
<v Speaker 1>You know, we've talked, I think we might have talked

0:21:50.040 --> 0:21:54.119
<v Speaker 1>previously about capital controls and the odd defining that your

0:21:54.200 --> 0:21:58.919
<v Speaker 1>money is confined within a country, or appropriated for the pension,

0:21:59.080 --> 0:22:03.320
<v Speaker 1>pension in particular, appropriated for domestic domestic infrastructure needs, etc.

0:22:03.680 --> 0:22:05.639
<v Speaker 1>One of the conversations in the UK at the moment

0:22:06.600 --> 0:22:09.119
<v Speaker 1>endless leaking of possible tax things, right, but one of

0:22:09.160 --> 0:22:11.560
<v Speaker 1>them is that the introduction of an exit tax. So

0:22:11.600 --> 0:22:14.000
<v Speaker 1>if you do want to leave the UK to escape

0:22:14.040 --> 0:22:16.160
<v Speaker 1>an oppressive tax regime, you get to pay a partner

0:22:16.240 --> 0:22:19.080
<v Speaker 1>taxes on the way out. So you know, that's another

0:22:19.920 --> 0:22:22.240
<v Speaker 1>bizarre thing in this new world of ours, isn't.

0:22:22.080 --> 0:22:22.960
<v Speaker 2>It absolutely right?

0:22:23.000 --> 0:22:23.800
<v Speaker 3>It's exactly so.

0:22:23.880 --> 0:22:26.960
<v Speaker 2>I mean, you know, a hallmark of neoliberalism and globalization

0:22:27.359 --> 0:22:30.480
<v Speaker 2>was the liberalization of capital accounts, and this is sort

0:22:30.520 --> 0:22:32.840
<v Speaker 2>of the opposite of that, which is that you know,

0:22:33.000 --> 0:22:36.000
<v Speaker 2>the capital resources sort of economy are required at home.

0:22:36.400 --> 0:22:39.320
<v Speaker 2>Japan will be really interesting to watch in that respect.

0:22:39.440 --> 0:22:41.679
<v Speaker 2>I mean, you know, they've now got interest rates at

0:22:41.720 --> 0:22:46.639
<v Speaker 2>one percent, Inflation is certainly high in their own context,

0:22:47.160 --> 0:22:50.720
<v Speaker 2>the yen is extraordinarily weak. They're finding it difficult to

0:22:51.080 --> 0:22:53.560
<v Speaker 2>work out how to cap that. My take on it,

0:22:53.640 --> 0:22:56.879
<v Speaker 2>purely personal view, is that at some point, you know,

0:22:56.880 --> 0:23:00.360
<v Speaker 2>if you go back, gosh, is it twelve thirteen is

0:23:00.400 --> 0:23:04.560
<v Speaker 2>to our bay part of our Bay's plan in Japan

0:23:04.920 --> 0:23:08.440
<v Speaker 2>was to depreciate the yen to get to sort of

0:23:08.520 --> 0:23:11.480
<v Speaker 2>try and move away from disinflation deflation. And one of

0:23:11.560 --> 0:23:14.360
<v Speaker 2>the things they did in that respect was they change

0:23:14.440 --> 0:23:19.280
<v Speaker 2>the ratios of onshore and offshore investment for the pension

0:23:19.320 --> 0:23:21.280
<v Speaker 2>funds in Japan. The pension fund system in Japan is

0:23:21.320 --> 0:23:25.760
<v Speaker 2>absolutely enormous, and you know, I think it's entirely possible

0:23:25.880 --> 0:23:28.119
<v Speaker 2>that some point that what they'll do is reverse that,

0:23:28.320 --> 0:23:31.520
<v Speaker 2>as they'll start requiring Japanese pension funds to start buying

0:23:31.840 --> 0:23:34.960
<v Speaker 2>more Japanese assets. But I think the critical thing when

0:23:35.000 --> 0:23:38.920
<v Speaker 2>you think about investing, whether you're investing your ISA or

0:23:39.080 --> 0:23:43.640
<v Speaker 2>investing the assets of a sovereign wealth fund, is that

0:23:44.280 --> 0:23:48.919
<v Speaker 2>the approach that we've all typically used as is changing enormously.

0:23:49.800 --> 0:23:53.119
<v Speaker 2>You know, the sixty forty is the sort of mainstay

0:23:53.200 --> 0:23:56.920
<v Speaker 2>of wealth investing and has been for all of our lifetimes,

0:23:57.200 --> 0:23:59.320
<v Speaker 2>and it rests on the assumption, as I said already,

0:23:59.359 --> 0:24:03.240
<v Speaker 2>that bonds andequities negatively correlated. You know, we've done some

0:24:03.400 --> 0:24:07.080
<v Speaker 2>work at looking at what happens in similar drawdowns in

0:24:07.200 --> 0:24:12.479
<v Speaker 2>environments where bonds are negatively correlated versus positively correlated. Nineteen

0:24:12.480 --> 0:24:15.639
<v Speaker 2>seventy four, the equity draw down was the same size

0:24:15.640 --> 0:24:18.240
<v Speaker 2>as it was in two thousand and eight, So you

0:24:18.320 --> 0:24:21.720
<v Speaker 2>lost about forty percent in world equities in both nineteen

0:24:21.760 --> 0:24:24.400
<v Speaker 2>seventy four and two thousand and eight. In nineteen seventy four,

0:24:24.400 --> 0:24:27.320
<v Speaker 2>which was obviously an inflationary environment, stocks and bonds were

0:24:27.359 --> 0:24:30.879
<v Speaker 2>positively correlated, and you lost I think something close to

0:24:30.920 --> 0:24:34.280
<v Speaker 2>thirty percent in the sixty forty portfolio. In two thousand

0:24:34.320 --> 0:24:37.080
<v Speaker 2>and eight, it was a much much smaller loss because

0:24:37.119 --> 0:24:40.000
<v Speaker 2>bonds really really kicked in. And I think the point

0:24:40.160 --> 0:24:42.800
<v Speaker 2>is that, you know, what we worry about is not

0:24:43.320 --> 0:24:48.080
<v Speaker 2>runaway inflation, but rather once you once the genie is

0:24:48.119 --> 0:24:51.440
<v Speaker 2>out of the bottle with respect to inflation targets, it's

0:24:51.560 --> 0:24:54.280
<v Speaker 2>very hard to get it back in again. And I

0:24:54.280 --> 0:24:56.320
<v Speaker 2>think you can see that. You can see that kind

0:24:56.320 --> 0:24:57.560
<v Speaker 2>of I mean, you can see that in the UK,

0:24:57.760 --> 0:25:00.560
<v Speaker 2>where we don't have very strong real growth. But you know,

0:25:00.560 --> 0:25:04.320
<v Speaker 2>in the UK CPI is running it close to three percent.

0:25:05.920 --> 0:25:09.480
<v Speaker 2>Services CPI is at three point eight percent and is

0:25:09.520 --> 0:25:12.800
<v Speaker 2>moving higher. And that's an economy where real GDP growth

0:25:12.840 --> 0:25:14.919
<v Speaker 2>is about one percent. So this isn't a function of

0:25:14.960 --> 0:25:18.359
<v Speaker 2>a runaway demand the US, which is obviously growing at

0:25:18.359 --> 0:25:23.240
<v Speaker 2>a much more rapid clip. There's a terrific inflation series

0:25:23.920 --> 0:25:28.960
<v Speaker 2>run by the San Francisco FED, and they break down PCE,

0:25:29.280 --> 0:25:31.680
<v Speaker 2>which is one of the which is the Fed's preferred

0:25:31.680 --> 0:25:35.000
<v Speaker 2>measure of inflation, at least before wash. We'll see if

0:25:35.040 --> 0:25:38.520
<v Speaker 2>it changes. But they break down PCE into what they

0:25:38.520 --> 0:25:41.159
<v Speaker 2>call cyclical components, so those that are sensitive to the

0:25:41.200 --> 0:25:45.520
<v Speaker 2>economy and acyclical components. Core PCE is running about three

0:25:45.520 --> 0:25:48.480
<v Speaker 2>point three percent as of the last data for April.

0:25:50.119 --> 0:25:53.359
<v Speaker 2>About sixty percent of that comes from the acyclical components,

0:25:53.480 --> 0:25:56.040
<v Speaker 2>and that's been accelerating over the last two or three years.

0:25:56.080 --> 0:25:58.240
<v Speaker 2>So you're in an environment in the US where this

0:25:58.320 --> 0:26:00.600
<v Speaker 2>is this thing about sticky inflation. Once genies out of

0:26:00.600 --> 0:26:04.080
<v Speaker 2>the bottle, it becomes sticky, it starts to feed inflation expectations,

0:26:04.080 --> 0:26:05.840
<v Speaker 2>and it's very, very hard to get it down again.

0:26:06.000 --> 0:26:08.439
<v Speaker 2>That doesn't mean, you know that what we saw in

0:26:08.560 --> 0:26:11.720
<v Speaker 2>twenty twenty two inflation was high single digit It doesn't

0:26:11.720 --> 0:26:12.919
<v Speaker 2>mean that's what we're going to have. But what it

0:26:12.960 --> 0:26:15.440
<v Speaker 2>does mean is that what we used to do, which

0:26:15.480 --> 0:26:19.080
<v Speaker 2>is inflation being at or around the targets of all

0:26:19.119 --> 0:26:22.159
<v Speaker 2>central banks at about two percent, that looks increasingly unlikely.

0:26:22.720 --> 0:26:25.159
<v Speaker 2>And the reason we would then worry about that is

0:26:25.160 --> 0:26:30.840
<v Speaker 2>it means that you can have environments where the hands

0:26:30.840 --> 0:26:33.560
<v Speaker 2>of central banks can be more tied in terms of

0:26:33.600 --> 0:26:36.919
<v Speaker 2>their response to a crisis. If they're faced with a

0:26:37.440 --> 0:26:39.920
<v Speaker 2>if they're faced with the crisis that's driven by inflation,

0:26:40.200 --> 0:26:42.240
<v Speaker 2>they may well be raising rates into that, which is

0:26:42.240 --> 0:26:44.360
<v Speaker 2>what we saw in twenty twenty two. And if they're

0:26:44.359 --> 0:26:47.600
<v Speaker 2>faced with a crisis where inflation is very sticky and

0:26:47.640 --> 0:26:50.960
<v Speaker 2>they don't have enough conviction that it's going to roll over,

0:26:51.359 --> 0:26:54.640
<v Speaker 2>they may not be able to provide what in markets

0:26:54.640 --> 0:26:58.080
<v Speaker 2>we call the central bank put the protection that we're

0:26:58.160 --> 0:27:00.359
<v Speaker 2>used to. And so that can mean that, you know,

0:27:00.440 --> 0:27:03.960
<v Speaker 2>all of the reaction functions and interactions that we've seen

0:27:03.960 --> 0:27:06.000
<v Speaker 2>over the last thirty years can start to change.

0:27:06.119 --> 0:27:09.080
<v Speaker 1>So we've been used constantly to every time something goes wrong,

0:27:09.200 --> 0:27:13.200
<v Speaker 1>central bankstep in, slash rates and everything's just fine again somehow.

0:27:13.320 --> 0:27:16.760
<v Speaker 2>Yeah, and again have to be humble. That could be

0:27:16.800 --> 0:27:19.720
<v Speaker 2>the case, but I think becomes more difficult when inflation

0:27:19.800 --> 0:27:20.439
<v Speaker 2>remains sticky.

0:27:20.760 --> 0:27:24.159
<v Speaker 1>But the core difference then being that previously most of

0:27:24.200 --> 0:27:27.080
<v Speaker 1>these crises could be put down put at the door

0:27:27.119 --> 0:27:30.119
<v Speaker 1>of demand, these demand related crisis and so you slash

0:27:30.119 --> 0:27:32.040
<v Speaker 1>interest rate gen you're off to the races again. But

0:27:32.440 --> 0:27:36.640
<v Speaker 1>if they are supply created crisis, you can't do the same.

0:27:36.680 --> 0:27:37.800
<v Speaker 3>It doesn't work in the same way.

0:27:37.880 --> 0:27:40.840
<v Speaker 2>Yeah, and then you have to ask how robust is

0:27:40.880 --> 0:27:44.240
<v Speaker 2>the portfolio that you're sitting with. How much is it

0:27:44.280 --> 0:27:47.520
<v Speaker 2>an artifact of the old regime, and how much is

0:27:47.560 --> 0:27:51.360
<v Speaker 2>it something that's actually robust to a changing world where

0:27:51.359 --> 0:27:54.399
<v Speaker 2>we don't entirely understand where all the risks are coming from.

0:27:54.560 --> 0:27:57.040
<v Speaker 3>But how do you shift your portfolio?

0:27:57.119 --> 0:27:57.399
<v Speaker 2>What do you do?

0:27:57.440 --> 0:27:59.960
<v Speaker 1>Where is your diversifier? And now we're not going to

0:28:00.000 --> 0:28:01.840
<v Speaker 1>we're not going to get listeners out of equities. That's

0:28:01.880 --> 0:28:04.120
<v Speaker 1>never going to happen. But yet anyway.

0:28:04.680 --> 0:28:06.800
<v Speaker 2>Well, well we could we can go a bit back

0:28:06.840 --> 0:28:08.560
<v Speaker 2>to the conversation we had a year ago, which is

0:28:08.560 --> 0:28:12.000
<v Speaker 2>you diversify the you diversify where our equities are.

0:28:12.560 --> 0:28:14.159
<v Speaker 1>I mean, last time is it? At the beginning we

0:28:14.240 --> 0:28:15.960
<v Speaker 1>talked quite a lot about China. Where where would you

0:28:16.000 --> 0:28:16.440
<v Speaker 1>look now?

0:28:16.880 --> 0:28:19.320
<v Speaker 2>I think if we if I sort of think about

0:28:19.359 --> 0:28:23.920
<v Speaker 2>it in terms of styles, I think higher inflation plus

0:28:24.040 --> 0:28:28.720
<v Speaker 2>greater fixed capital investment in economies, and the fixed capital

0:28:28.720 --> 0:28:31.399
<v Speaker 2>investment is you know capex, that's a function of all

0:28:31.440 --> 0:28:34.800
<v Speaker 2>of the reshoring or energy expansion, all of these sorts

0:28:34.840 --> 0:28:38.200
<v Speaker 2>of things. The combination of inflation plus that tendency suggests

0:28:38.200 --> 0:28:40.440
<v Speaker 2>to me that you want to be in what we

0:28:40.600 --> 0:28:43.800
<v Speaker 2>call shorter duration cash flows, so things with things that

0:28:43.880 --> 0:28:47.960
<v Speaker 2>have a real fixed capital base rather than the sort

0:28:47.960 --> 0:28:50.200
<v Speaker 2>of intangible assets of the last cycle.

0:28:50.520 --> 0:28:54.320
<v Speaker 3>Okay, so it's the halo trade, hard assets, low ups lescens.

0:28:53.960 --> 0:28:56.720
<v Speaker 2>Yes, exactly. Yes, I think there's an awful lot of

0:28:56.760 --> 0:29:01.320
<v Speaker 2>value in that. I think that you know that you

0:29:01.400 --> 0:29:04.320
<v Speaker 2>will find a lot of those companies outside of large caps.

0:29:04.320 --> 0:29:06.440
<v Speaker 2>I'm sort of repeating what I said again last year,

0:29:06.440 --> 0:29:07.120
<v Speaker 2>but I think these.

0:29:06.960 --> 0:29:08.840
<v Speaker 3>Are probably still value on the small caps.

0:29:09.000 --> 0:29:12.880
<v Speaker 2>Yeah, smaller caps for sure. I have to say I

0:29:12.960 --> 0:29:15.600
<v Speaker 2>and this is a personal Everything I'm saying is a

0:29:15.600 --> 0:29:17.800
<v Speaker 2>personal view, but I think that you know, I think

0:29:18.160 --> 0:29:20.640
<v Speaker 2>we had a very weak dollar, which helped a lot

0:29:20.640 --> 0:29:22.760
<v Speaker 2>of the rest of the world. The dollar then got

0:29:22.800 --> 0:29:27.280
<v Speaker 2>a bit bid again around Iran, most recently in the

0:29:27.320 --> 0:29:29.720
<v Speaker 2>last week. It's been bid again because the markets read

0:29:29.760 --> 0:29:34.680
<v Speaker 2>on Wash was that he's hawkish. My take is really

0:29:34.680 --> 0:29:39.560
<v Speaker 2>what Wash is doing personal view is that he's he's

0:29:39.960 --> 0:29:43.440
<v Speaker 2>really he's guiding us towards a different type of guidance.

0:29:43.560 --> 0:29:46.200
<v Speaker 2>He's essentially saying this, you know, forward guidance is finished

0:29:46.840 --> 0:29:48.480
<v Speaker 2>and we're going to be a bit less data dependent.

0:29:48.720 --> 0:29:51.320
<v Speaker 2>I don't think that means he's extremely hawkish. I tend

0:29:51.360 --> 0:29:52.920
<v Speaker 2>to think it probably means the dollar is going to

0:29:52.920 --> 0:29:55.040
<v Speaker 2>be a bit weaker and there are dollar beneficiaries out

0:29:55.080 --> 0:29:57.120
<v Speaker 2>there to be had in equity. So equities, you know,

0:29:57.440 --> 0:29:59.520
<v Speaker 2>I think you can continue to divers if I continue

0:29:59.560 --> 0:30:01.440
<v Speaker 2>to look for that. As you say, halo is a

0:30:01.440 --> 0:30:05.440
<v Speaker 2>good way to think about it. I think then, you know,

0:30:05.440 --> 0:30:07.240
<v Speaker 2>then you have to question, well, what role the bonds

0:30:07.240 --> 0:30:10.000
<v Speaker 2>have in your portfolio. Bonds still have a fantastic role

0:30:10.000 --> 0:30:13.040
<v Speaker 2>in the portfolio, I think, you know, particularly for us

0:30:13.080 --> 0:30:16.120
<v Speaker 2>in the UK, you get this opportunity from time to

0:30:16.160 --> 0:30:20.000
<v Speaker 2>time to buy a low coupon bond with a discounter

0:30:20.160 --> 0:30:22.440
<v Speaker 2>part and you don't pay capital gainst tax on that

0:30:22.480 --> 0:30:24.400
<v Speaker 2>if you can hold it to maturity. So you know,

0:30:24.440 --> 0:30:27.920
<v Speaker 2>these are still really excellent ways to get a kind

0:30:27.920 --> 0:30:32.120
<v Speaker 2>of guaranteed return with a tax efficient approach. But I

0:30:32.120 --> 0:30:34.640
<v Speaker 2>would what I think, what we the way we think

0:30:34.640 --> 0:30:36.880
<v Speaker 2>about that is bonds have many uses, but it may

0:30:36.880 --> 0:30:42.800
<v Speaker 2>not be that they are reliably diversifiers. You know, we

0:30:42.880 --> 0:30:46.080
<v Speaker 2>think that this is actually a golden age for alternative investing.

0:30:46.480 --> 0:30:51.960
<v Speaker 2>To be frank that that alternative assets alternative investments have

0:30:52.120 --> 0:30:54.479
<v Speaker 2>been quite out of fashion for a long time. They

0:30:54.520 --> 0:30:58.680
<v Speaker 2>haven't been required because it's been an environment where the

0:30:58.720 --> 0:31:01.440
<v Speaker 2>returns you got from equities were so fantastic that you

0:31:01.560 --> 0:31:05.200
<v Speaker 2>just didn't need to bother thinking about diversifying any a

0:31:05.280 --> 0:31:08.120
<v Speaker 2>way to things that are lower return and lower volatility.

0:31:08.520 --> 0:31:12.000
<v Speaker 2>But liquid alternatives that have little or no beta to

0:31:12.080 --> 0:31:16.400
<v Speaker 2>the market, that are genuinely diversifying, and a liquid what.

0:31:16.360 --> 0:31:18.320
<v Speaker 3>Is a what is a liquid alternative asset?

0:31:18.680 --> 0:31:22.240
<v Speaker 2>Liquid alternatives are you know, funds that are not directional,

0:31:22.360 --> 0:31:26.080
<v Speaker 2>so hedge funds in nomenculture, but they are, you know,

0:31:26.160 --> 0:31:30.080
<v Speaker 2>in our world, extremely diversified. They combine many different approaches

0:31:30.160 --> 0:31:34.080
<v Speaker 2>to capturing different risk premium in markets. They're not directional,

0:31:34.320 --> 0:31:38.360
<v Speaker 2>they may be market neutral, and their ways to essentially

0:31:38.520 --> 0:31:41.760
<v Speaker 2>extract returns out of the market that don't rely on

0:31:41.800 --> 0:31:44.520
<v Speaker 2>what's happening in beta, They don't rely on market direction.

0:31:46.000 --> 0:31:48.840
<v Speaker 2>It's interesting that you know that these have been very

0:31:48.840 --> 0:31:50.120
<v Speaker 2>out of fashion for a long time.

0:31:50.200 --> 0:31:52.360
<v Speaker 1>Both while you don't need you don't need them. You

0:31:52.400 --> 0:31:54.520
<v Speaker 1>can be long only at ten to fifteen percent a year.

0:31:54.640 --> 0:31:56.720
<v Speaker 1>You don't need somebody that's going to go market neutral

0:31:56.760 --> 0:31:57.200
<v Speaker 1>for you.

0:31:57.240 --> 0:31:59.640
<v Speaker 2>Exactly right. And actually, but in the institutional case, so

0:31:59.680 --> 0:32:02.920
<v Speaker 2>with our biggest investors, it was it wasn't so much

0:32:03.600 --> 0:32:06.880
<v Speaker 2>we'll just have more public equities, it's we'll have more privates,

0:32:07.280 --> 0:32:11.400
<v Speaker 2>and that that decision is starting to be reframed again.

0:32:11.760 --> 0:32:14.960
<v Speaker 2>And the interesting thing about actually a lot of liquid

0:32:15.000 --> 0:32:18.120
<v Speaker 2>alternatives hedge funds is that many of them in fact

0:32:18.160 --> 0:32:20.960
<v Speaker 2>benefit from higher inflation. I mean, we've done quite a

0:32:20.960 --> 0:32:23.640
<v Speaker 2>lot of work at looking at equity long short in

0:32:23.720 --> 0:32:28.040
<v Speaker 2>different different inflationary regimes. Equity on short tends to do

0:32:28.080 --> 0:32:31.120
<v Speaker 2>better when inflation's high. I think the reason for that

0:32:31.360 --> 0:32:35.880
<v Speaker 2>is because as interest rates move higher, as the refinancing

0:32:35.920 --> 0:32:40.040
<v Speaker 2>of debt becomes more expensive, companies are required to do

0:32:40.120 --> 0:32:44.760
<v Speaker 2>more idiosyncratic remedial work to keep their head above water.

0:32:44.920 --> 0:32:47.080
<v Speaker 2>But yeah, we think that as inflation moves high, and

0:32:47.080 --> 0:32:49.040
<v Speaker 2>as interest rates through hire and the cost of debt

0:32:49.080 --> 0:32:52.160
<v Speaker 2>moves higher, it forces companies to do more and that

0:32:52.240 --> 0:32:54.400
<v Speaker 2>means you get more dispersion, and that makes a greater

0:32:54.440 --> 0:32:58.160
<v Speaker 2>opportunity for stop picking, selecting good from bad, and so

0:32:58.280 --> 0:33:01.400
<v Speaker 2>returns to equity market neutral equity laun short strategies get

0:33:01.440 --> 0:33:04.920
<v Speaker 2>better as inflation goes up, so that's quite an interesting diversifier.

0:33:05.680 --> 0:33:08.640
<v Speaker 2>I think the trick in all this is diversify your diversifiers.

0:33:09.080 --> 0:33:11.320
<v Speaker 2>In the past, we didn't need to. You just bought bonds.

0:33:11.920 --> 0:33:14.280
<v Speaker 2>Today you need to have a much much broader toolkit.

0:33:14.600 --> 0:33:15.280
<v Speaker 3>Explain to me.

0:33:15.640 --> 0:33:21.560
<v Speaker 1>I really enjoyed your euphemism about decisions about privates being reframed.

0:33:21.960 --> 0:33:24.840
<v Speaker 2>I think that that you go back to the nineteen

0:33:24.880 --> 0:33:28.560
<v Speaker 2>eighties when the endowment model emerged, which was the sort

0:33:28.560 --> 0:33:32.640
<v Speaker 2>of bible of investing in you know, investing across a

0:33:32.760 --> 0:33:34.959
<v Speaker 2>much broader pool of assets and including privates in it.

0:33:35.280 --> 0:33:39.040
<v Speaker 2>There was an illiquidity premium right if you were able,

0:33:39.160 --> 0:33:41.600
<v Speaker 2>if you were an endowment or an asset owner that

0:33:41.680 --> 0:33:45.880
<v Speaker 2>had a very very long time frame for your liabilities,

0:33:45.920 --> 0:33:48.080
<v Speaker 2>if you you know, required your money over very long

0:33:48.120 --> 0:33:52.080
<v Speaker 2>periods of time, there was an inquidity premium that you

0:33:52.120 --> 0:33:54.240
<v Speaker 2>could harvest, which was, if I'm prepared to lock my

0:33:54.320 --> 0:33:57.440
<v Speaker 2>money up, I will be rewarded for that. And there

0:33:57.520 --> 0:34:00.920
<v Speaker 2>was you know, the cohort of managers provide those services

0:34:01.040 --> 0:34:05.080
<v Speaker 2>was much smaller. Today, the universe has grown enormously. Many

0:34:05.080 --> 0:34:07.520
<v Speaker 2>people with much shorter liabilities have been pushed into it,

0:34:08.400 --> 0:34:10.440
<v Speaker 2>and we can see that, you know, the exits for

0:34:10.520 --> 0:34:13.160
<v Speaker 2>many private companies in the equity space are much more

0:34:13.239 --> 0:34:16.360
<v Speaker 2>challenged and the returns that are diminishing over time. And

0:34:16.440 --> 0:34:19.040
<v Speaker 2>I think what we certainly see among not all of

0:34:19.080 --> 0:34:22.160
<v Speaker 2>our institutional clients, but certainly some of them, is that

0:34:23.200 --> 0:34:25.040
<v Speaker 2>you know that the returns are starting to become a

0:34:25.080 --> 0:34:30.560
<v Speaker 2>bit underwhelming. There is probably more risk that they have

0:34:30.680 --> 0:34:33.440
<v Speaker 2>in their private equity portfolio that looks comparable to their

0:34:33.440 --> 0:34:36.600
<v Speaker 2>public equity portfolio that you know that it may be

0:34:36.640 --> 0:34:40.480
<v Speaker 2>in both VC and P and private credit. There's more

0:34:40.520 --> 0:34:43.839
<v Speaker 2>of the AI ecosystem in there, you know, than they

0:34:44.000 --> 0:34:46.920
<v Speaker 2>previously was the case. So it's less diversifying and in

0:34:46.960 --> 0:34:50.719
<v Speaker 2>many ways, you know, in the next cycle, if there's

0:34:50.760 --> 0:34:55.040
<v Speaker 2>a down leg, there will be the same downward vulnerability

0:34:55.080 --> 0:34:57.520
<v Speaker 2>in these assets that there is in their public portfolio.

0:34:57.840 --> 0:35:01.160
<v Speaker 2>So I think, you know, certainly the com among some

0:35:01.239 --> 0:35:04.040
<v Speaker 2>of our institutional investors is moving onto thinking well, these

0:35:04.040 --> 0:35:06.359
<v Speaker 2>are probably not going to be diversifying for us now.

0:35:06.880 --> 0:35:10.320
<v Speaker 1>Yeah, So moving to the bit where lack of liquidity

0:35:10.400 --> 0:35:12.480
<v Speaker 1>will come with a discount rather than a premium.

0:35:12.160 --> 0:35:14.920
<v Speaker 2>Which makes more logical sense. It may well be that

0:35:15.000 --> 0:35:18.880
<v Speaker 2>case exactly right. Yeah, yeah, so yeah. I think everyone

0:35:19.160 --> 0:35:22.560
<v Speaker 2>in essence, whether you're a CIO of a sovereign wealth

0:35:22.560 --> 0:35:25.640
<v Speaker 2>found managing half a trillion dollars or someone making decisions

0:35:25.680 --> 0:35:28.880
<v Speaker 2>about you know, their ISA, we're all faced with the

0:35:28.920 --> 0:35:32.440
<v Speaker 2>same question today about how you achieve diversification from this great,

0:35:32.520 --> 0:35:36.240
<v Speaker 2>big common factor, which is, you know, concentration in markets

0:35:36.280 --> 0:35:38.280
<v Speaker 2>and beta and expensive valuation.

0:35:39.000 --> 0:35:41.480
<v Speaker 1>Might we do some of that diversification with gold? It's

0:35:41.600 --> 0:35:43.120
<v Speaker 1>pretty horrible a few months.

0:35:43.320 --> 0:35:45.680
<v Speaker 2>Yeah, I mean, look, I think I think gold still

0:35:45.800 --> 0:35:48.640
<v Speaker 2>is a very interesting asset. I have to say right now,

0:35:48.719 --> 0:35:50.440
<v Speaker 2>based on what I've just said about the dollar, I

0:35:50.480 --> 0:35:53.960
<v Speaker 2>quite like it personally. I think that actually, you know,

0:35:53.960 --> 0:35:57.240
<v Speaker 2>if we start to work out overcoming weeks and months,

0:35:57.239 --> 0:36:00.680
<v Speaker 2>that what Warsh has said is not explicitly hawkish, but

0:36:00.920 --> 0:36:06.360
<v Speaker 2>more giving himself the flexibility to respond to a changing

0:36:06.400 --> 0:36:08.040
<v Speaker 2>outlook as he sees it, and I think he will

0:36:08.080 --> 0:36:11.920
<v Speaker 2>be less data dependent and more dependent on his expectation

0:36:12.080 --> 0:36:13.960
<v Speaker 2>for what's happening in the economy. So it's a bit

0:36:13.960 --> 0:36:15.920
<v Speaker 2>more opaque. I think if that's the case, and that

0:36:16.160 --> 0:36:18.480
<v Speaker 2>a lot of people who know Arsh say that's how

0:36:18.480 --> 0:36:20.759
<v Speaker 2>he thinks, then it's a week dollar, and I think

0:36:20.800 --> 0:36:22.520
<v Speaker 2>it was a week dollar. We're probably going to see

0:36:22.640 --> 0:36:25.520
<v Speaker 2>some support coming back under gold. I don't think that

0:36:25.640 --> 0:36:29.960
<v Speaker 2>the the demand from the rest of the world central

0:36:30.000 --> 0:36:33.160
<v Speaker 2>banks for gold has changed. You know, part of fragmentation

0:36:33.280 --> 0:36:36.280
<v Speaker 2>deglobalization is that people are looking for other reserve assets

0:36:36.320 --> 0:36:38.720
<v Speaker 2>other than the dollar. So I don't think that's changed.

0:36:38.760 --> 0:36:40.880
<v Speaker 2>So yeah, I think there's some back.

0:36:40.719 --> 0:36:43.959
<v Speaker 1>Toup of demand from the certain bank remains a week

0:36:44.000 --> 0:36:44.680
<v Speaker 1>dollar gives.

0:36:44.520 --> 0:36:48.480
<v Speaker 2>It some some sre and some impetus to move higher.

0:36:48.680 --> 0:36:51.160
<v Speaker 2>Maybe the way to question the role of gold is,

0:36:51.640 --> 0:36:54.720
<v Speaker 2>as we saw in March, is that that at various

0:36:54.719 --> 0:36:57.120
<v Speaker 2>points in time, can become a risk on asset rather

0:36:57.120 --> 0:37:00.040
<v Speaker 2>than a diversifying asset. So I think it's an interesting

0:37:00.080 --> 0:37:03.160
<v Speaker 2>asset to have in your portfolio, but it isn't necessarily

0:37:03.200 --> 0:37:05.560
<v Speaker 2>something reliably that you want to bank on to bail

0:37:05.600 --> 0:37:07.120
<v Speaker 2>you out when equities are doing badly.

0:37:07.719 --> 0:37:09.719
<v Speaker 3>We talked last time when we were talking about gold,

0:37:09.719 --> 0:37:11.160
<v Speaker 3>well we always do this. We talked about God.

0:37:11.160 --> 0:37:13.480
<v Speaker 1>We also talked about cryptocurrencies, and in particular we talked

0:37:13.480 --> 0:37:16.800
<v Speaker 1>about bitcoin slightly separate asset to other crypto.

0:37:17.520 --> 0:37:19.080
<v Speaker 3>Any change in your views there.

0:37:20.480 --> 0:37:26.320
<v Speaker 2>I mean, no other than other than I'm really, really

0:37:26.360 --> 0:37:32.439
<v Speaker 2>amazed that the amount of policy support crypto has had

0:37:32.480 --> 0:37:37.239
<v Speaker 2>in the last sixteen months. Never in my imagination would

0:37:37.280 --> 0:37:41.040
<v Speaker 2>I have I conceived of the possibility that it could

0:37:41.080 --> 0:37:45.640
<v Speaker 2>have that much policy support in terms of sort of

0:37:45.680 --> 0:37:49.200
<v Speaker 2>you know, legitimization and regulation and do as badly as

0:37:49.239 --> 0:37:51.640
<v Speaker 2>it has. So I think we're sitting here today scratching

0:37:51.680 --> 0:37:54.319
<v Speaker 2>our head and wondering what the utility of crypto is.

0:37:54.400 --> 0:37:56.319
<v Speaker 2>I mean, maybe that just makes it the very best

0:37:56.360 --> 0:38:00.360
<v Speaker 2>time to buy it because everyone hates it. But you know,

0:38:00.400 --> 0:38:02.200
<v Speaker 2>I think you asked me the question last time, gold

0:38:02.320 --> 0:38:04.560
<v Speaker 2>or crypto, and I think, or I hope I said gold.

0:38:04.719 --> 0:38:08.280
<v Speaker 2>You did, and I would still say the same today.

0:38:08.520 --> 0:38:09.840
<v Speaker 3>Yeah, it's difficult, isn't it.

0:38:09.880 --> 0:38:12.319
<v Speaker 1>And we on and on and on we go about

0:38:12.320 --> 0:38:14.680
<v Speaker 1>the use case, the use case, the use case, and

0:38:14.840 --> 0:38:19.120
<v Speaker 1>we never really quite get a compelling enough answer.

0:38:19.719 --> 0:38:21.120
<v Speaker 2>No, I think that's right.

0:38:21.160 --> 0:38:24.880
<v Speaker 3>Okay, last question, last question, onto the fun. But what

0:38:24.920 --> 0:38:26.120
<v Speaker 3>are you going to take to the beach with you?

0:38:27.360 --> 0:38:27.879
<v Speaker 3>Book Wise?

0:38:27.960 --> 0:38:29.439
<v Speaker 1>Book Wise, I don't want to hear about your towel

0:38:29.480 --> 0:38:32.479
<v Speaker 1>and your sontime. What book are you going to take

0:38:32.560 --> 0:38:33.280
<v Speaker 1>on a holiday?

0:38:33.600 --> 0:38:35.520
<v Speaker 2>I would recommend if people are going to the beach

0:38:35.560 --> 0:38:40.440
<v Speaker 2>and they want a really inspiring book. I don't normally

0:38:40.440 --> 0:38:42.799
<v Speaker 2>read non fiction, and I've just read a book called

0:38:42.840 --> 0:38:46.080
<v Speaker 2>The Wide Wide c which came out a couple of

0:38:46.160 --> 0:38:49.640
<v Speaker 2>years ago and is an account of Captain Cook's last

0:38:49.640 --> 0:38:55.680
<v Speaker 2>circumnavigation of the world. And it's a really extraordinary story,

0:38:55.760 --> 0:39:00.360
<v Speaker 2>both how meticulously it's been put together from historical record

0:39:00.400 --> 0:39:03.400
<v Speaker 2>of the time, but actually the thing that I found

0:39:04.120 --> 0:39:07.720
<v Speaker 2>overwhelming at times was that it is only two hundred

0:39:07.760 --> 0:39:12.040
<v Speaker 2>and fifty years ago, and it's extraordinary to remind ourselves

0:39:12.080 --> 0:39:15.120
<v Speaker 2>at this pace of sort of you know, you know,

0:39:15.200 --> 0:39:20.440
<v Speaker 2>acceleration in progress all the time, how young modernity is

0:39:21.520 --> 0:39:24.120
<v Speaker 2>that only two hundred and fifty years ago Cook was

0:39:24.160 --> 0:39:27.759
<v Speaker 2>meeting people that had never encountered outsiders before and was

0:39:27.800 --> 0:39:30.719
<v Speaker 2>exploring parts of the world that weren't charted. And I

0:39:30.760 --> 0:39:33.279
<v Speaker 2>think it's so easy to sort of sit in the

0:39:33.400 --> 0:39:36.440
<v Speaker 2>moment we're in and assume that you know that things

0:39:36.480 --> 0:39:40.439
<v Speaker 2>will progress sort of forever along a path. But it's

0:39:40.480 --> 0:39:42.239
<v Speaker 2>only two hundred and fifty years ago that we didn't

0:39:42.280 --> 0:39:43.640
<v Speaker 2>even know what our own world looked like.

0:39:44.360 --> 0:39:47.160
<v Speaker 3>Excellent. I'm sold. I'm ordering it right now.

0:39:48.120 --> 0:39:49.960
<v Speaker 1>Thank you, Ed, and thank you so much for joining

0:39:50.040 --> 0:39:51.239
<v Speaker 1>us today.

0:39:51.440 --> 0:39:51.920
<v Speaker 2>Thank you.

0:40:00.480 --> 0:40:02.359
<v Speaker 3>Thanks for listening to this week's Marin Talks Money.

0:40:02.400 --> 0:40:04.480
<v Speaker 1>If you like us, show, rate to review, and subscribe

0:40:04.520 --> 0:40:06.560
<v Speaker 1>wherever you listen to podcasts. Thank you for sending your

0:40:06.600 --> 0:40:10.279
<v Speaker 1>questions or comments to Merrin Money at Bloomberg dot net.

0:40:10.600 --> 0:40:13.160
<v Speaker 1>You can also follow me and John on Twitter or x.

0:40:13.239 --> 0:40:17.360
<v Speaker 1>I'm at Mariners W and John is John Underscore Stuffy.

0:40:17.840 --> 0:40:20.560
<v Speaker 1>This episode was hosted by Me marenthumsep Web. It was

0:40:20.560 --> 0:40:23.799
<v Speaker 1>produced by Samasadi and Moses and sound designed by Blake

0:40:23.840 --> 0:40:25.800
<v Speaker 1>Maples and Aaron Caspers Russell.

0:40:25.880 --> 0:40:27.080
<v Speaker 3>Thanks to Ed Cole.