1 00:00:02,480 --> 00:00:17,720 Speaker 1: Bloomberg Audio Studios, Podcasts, radio News. 2 00:00:18,160 --> 00:00:21,200 Speaker 2: Hello and welcome to another episode of the Odd Lass podcast. 3 00:00:21,239 --> 00:00:23,640 Speaker 3: I'm Jill Wisenthal and I'm Tracy Alloway. 4 00:00:24,000 --> 00:00:27,639 Speaker 2: Tracy, we can't go too long without talking about the 5 00:00:27,720 --> 00:00:30,680 Speaker 2: role of the dollar in the United States, the pillar 6 00:00:30,760 --> 00:00:34,240 Speaker 2: of the global financial system, whether there is some threat 7 00:00:34,280 --> 00:00:37,559 Speaker 2: to it or not. We are recording this July seventeenth. 8 00:00:37,680 --> 00:00:41,000 Speaker 2: It has been a fresh week of headlines about say, 9 00:00:41,120 --> 00:00:43,480 Speaker 2: independence of the Federal Reserve and all of the things 10 00:00:43,520 --> 00:00:45,760 Speaker 2: that we talk about all of the time, so we 11 00:00:45,800 --> 00:00:48,120 Speaker 2: sort of need to return to this central question. 12 00:00:48,320 --> 00:00:52,239 Speaker 3: Yeah, the interesting thing about the Fed chair drama is 13 00:00:52,280 --> 00:00:56,880 Speaker 3: when the initial headlines came out about Trump possibly firing Powell, 14 00:00:57,240 --> 00:00:59,920 Speaker 3: the big reaction wasn't the dollar, right, There wasn't a market, 15 00:01:00,080 --> 00:01:02,840 Speaker 3: it wasn't even bonds, It was the currency totally. 16 00:01:02,880 --> 00:01:05,399 Speaker 2: And I think this is one of those things where 17 00:01:06,360 --> 00:01:08,399 Speaker 2: I don't know, we don't know what's going to happen, 18 00:01:08,480 --> 00:01:12,520 Speaker 2: whether Trump will actually try to find cause to fire Powell. 19 00:01:12,560 --> 00:01:15,240 Speaker 2: Who knows what will even happen by the time people 20 00:01:15,360 --> 00:01:19,039 Speaker 2: are listening to this episode. But you know, I think 21 00:01:19,080 --> 00:01:21,959 Speaker 2: people get the sense that with the Fed here, with 22 00:01:22,040 --> 00:01:24,920 Speaker 2: many other things, there is this sort of like erosion 23 00:01:25,200 --> 00:01:29,600 Speaker 2: of an existing set of norms or expectations, et cetera. 24 00:01:29,720 --> 00:01:33,240 Speaker 2: And so you know, I think arguably some damage, for 25 00:01:33,319 --> 00:01:35,840 Speaker 2: better or worse, has already been done to the existing 26 00:01:35,920 --> 00:01:39,480 Speaker 2: institutional arrangement. Everyone around the world is paying attention now 27 00:01:39,520 --> 00:01:44,280 Speaker 2: to mention the sort of arbitrariness or volatility of tariff policy, 28 00:01:44,840 --> 00:01:48,440 Speaker 2: ongoing wars, and so forth. Much is in change. We 29 00:01:48,520 --> 00:01:49,720 Speaker 2: live in interesting times. 30 00:01:50,560 --> 00:01:53,600 Speaker 3: Here's what I think go on. So it's a cliche 31 00:01:53,800 --> 00:01:58,000 Speaker 3: in financial market commentary to talk about a major turning point, yes, 32 00:01:58,040 --> 00:02:03,040 Speaker 3: because we've seen people talk about the dollar for decades. Yeah, exactly. 33 00:02:03,360 --> 00:02:06,800 Speaker 3: But that said, I think what's different about now is 34 00:02:06,840 --> 00:02:11,400 Speaker 3: the number of like long term secular trends that appear 35 00:02:11,520 --> 00:02:13,320 Speaker 3: to be reversed on the move. 36 00:02:13,560 --> 00:02:13,920 Speaker 4: Yeah. 37 00:02:13,960 --> 00:02:18,120 Speaker 3: So you know, there's globalization going from deglobalization. There's population 38 00:02:18,280 --> 00:02:22,800 Speaker 3: growth going to shrinking populations. There's higher inflation instead of 39 00:02:22,880 --> 00:02:27,320 Speaker 3: years and years of deflation. And the interesting thing about 40 00:02:27,360 --> 00:02:29,760 Speaker 3: that is, of course, how are people going to react 41 00:02:29,800 --> 00:02:32,080 Speaker 3: to that? How are markets going to react to that, 42 00:02:32,480 --> 00:02:36,959 Speaker 3: especially when they've grown very, very used to the previous 43 00:02:37,160 --> 00:02:40,960 Speaker 3: situation through you know, back testing and all of that stuff. 44 00:02:41,120 --> 00:02:43,639 Speaker 2: Totally. And I'll just say one thing which makes this 45 00:02:43,800 --> 00:02:47,200 Speaker 2: very interesting timing wise from the perspective of investors, because 46 00:02:47,240 --> 00:02:49,840 Speaker 2: there are a lot of trends that seem to be, 47 00:02:50,240 --> 00:02:52,760 Speaker 2: if not going in reverse, at least a new direction, 48 00:02:53,320 --> 00:02:57,920 Speaker 2: et cetera. One trend that hasn't really gone in reverse, however, 49 00:02:58,600 --> 00:03:00,959 Speaker 2: is you're still getting paid a lot to own US 50 00:03:01,000 --> 00:03:04,480 Speaker 2: tech and you know US markets, they're up solidly on 51 00:03:04,520 --> 00:03:07,720 Speaker 2: the year, they are underperforming, which that is new Global 52 00:03:07,720 --> 00:03:11,360 Speaker 2: equities have outperformed US equities in large part this year. 53 00:03:11,960 --> 00:03:14,800 Speaker 2: But this basic idea that for all the money to 54 00:03:14,880 --> 00:03:17,280 Speaker 2: be made is as an investor is still in like 55 00:03:17,320 --> 00:03:20,560 Speaker 2: a handful of US companies like that in a way 56 00:03:20,720 --> 00:03:24,400 Speaker 2: surprisingly is still kind of intact. And the question is 57 00:03:24,520 --> 00:03:27,320 Speaker 2: will that be like the last sort of the shoe 58 00:03:27,360 --> 00:03:30,880 Speaker 2: to drop, We're the end of US exceptionalism. From just 59 00:03:30,960 --> 00:03:35,600 Speaker 2: the perspective of a globally oriented portfolio manager, I think that's. 60 00:03:35,400 --> 00:03:37,640 Speaker 3: A good thing to watch. I'm gonna pull a page 61 00:03:37,680 --> 00:03:41,760 Speaker 3: out of Bob Bracket's Commodities Energy Transition book and say 62 00:03:41,800 --> 00:03:45,840 Speaker 3: that these types of transitions often take longer than people expect, 63 00:03:45,880 --> 00:03:48,160 Speaker 3: and you shouldn't expect everything to happen all at once. 64 00:03:48,200 --> 00:03:50,440 Speaker 3: It's going to happen in stages, so there's a lot 65 00:03:50,440 --> 00:03:52,280 Speaker 3: to look out for, a lot to discuss. 66 00:03:52,720 --> 00:03:55,040 Speaker 2: Well, I'm really excited to say we have the perfect guest, 67 00:03:55,200 --> 00:03:58,920 Speaker 2: someone we haven't spoken to in several years, but always 68 00:03:58,960 --> 00:04:02,120 Speaker 2: one of the most intro guys around. We're gonna be 69 00:04:02,160 --> 00:04:05,440 Speaker 2: speaking with Inego Fraser Jenkins. He has a market strategist 70 00:04:05,520 --> 00:04:09,120 Speaker 2: at Alliance Bernstein. He has recently published a new quote 71 00:04:09,160 --> 00:04:12,520 Speaker 2: book that's public online about the sort of like the 72 00:04:12,560 --> 00:04:16,280 Speaker 2: big trends of the year, including a big focus on 73 00:04:16,320 --> 00:04:18,960 Speaker 2: the sort of like question about the stability of the 74 00:04:19,080 --> 00:04:22,160 Speaker 2: dollar or a post dollar universe and what that could 75 00:04:22,160 --> 00:04:24,919 Speaker 2: look like. So, Inego, thank you so much for coming 76 00:04:24,920 --> 00:04:25,719 Speaker 2: back on odline. 77 00:04:26,040 --> 00:04:27,320 Speaker 4: Thank you very much. Be good to be back on 78 00:04:27,320 --> 00:04:28,200 Speaker 4: the show. 79 00:04:28,240 --> 00:04:30,839 Speaker 2: Tell me about your books. What are your books and 80 00:04:30,920 --> 00:04:32,920 Speaker 2: what is the theme of this year's book. 81 00:04:33,320 --> 00:04:35,919 Speaker 5: Yeah, so the book is a way of drawing together 82 00:04:35,920 --> 00:04:39,040 Speaker 5: in one place some of the views we have on 83 00:04:39,080 --> 00:04:42,000 Speaker 5: some of the biggest questions that investors face. So is 84 00:04:42,040 --> 00:04:43,839 Speaker 5: actually some of the issues that you've mentioned already in 85 00:04:43,960 --> 00:04:48,880 Speaker 5: terms of globalization turning into deglobalization, of population growth turning 86 00:04:48,920 --> 00:04:53,680 Speaker 5: into a slowdown in working age population, and issues around 87 00:04:54,240 --> 00:04:57,120 Speaker 5: interest rates and inflation being different than the norms of 88 00:04:57,160 --> 00:04:59,400 Speaker 5: the last thirty or so years, and all these issues 89 00:04:59,600 --> 00:05:02,239 Speaker 5: sitting background, we think there's a strong case you made 90 00:05:02,600 --> 00:05:05,320 Speaker 5: that some of the norms of the last thirty or 91 00:05:05,360 --> 00:05:08,480 Speaker 5: forty years really are unwinding and either run their course 92 00:05:08,560 --> 00:05:11,279 Speaker 5: or going into reverse. And then one of the particular 93 00:05:11,320 --> 00:05:15,520 Speaker 5: issues that has really dominated the client conversations that we've 94 00:05:15,560 --> 00:05:18,920 Speaker 5: had in the last three to six months has been 95 00:05:19,000 --> 00:05:21,680 Speaker 5: this question you've been talking about in terms of US exceptionalism, 96 00:05:22,080 --> 00:05:25,080 Speaker 5: Has it ended? Does the dollar change in terms of 97 00:05:25,120 --> 00:05:29,359 Speaker 5: its role as a reserve currency. Is the prognosis the 98 00:05:29,400 --> 00:05:32,479 Speaker 5: dollar the same as prognosis for US equities or are 99 00:05:32,520 --> 00:05:34,960 Speaker 5: these just different things? And these kind of questions we 100 00:05:35,000 --> 00:05:37,680 Speaker 5: really want to get to grips with and offer some 101 00:05:37,760 --> 00:05:39,839 Speaker 5: views what investors can do about them. 102 00:05:40,320 --> 00:05:42,720 Speaker 3: What kind of timeframe are you looking at here, because 103 00:05:42,760 --> 00:05:45,080 Speaker 3: I think we often don't talk enough about time frames, 104 00:05:45,160 --> 00:05:48,599 Speaker 3: and reading some of the book, some of it I found, 105 00:05:48,680 --> 00:05:50,640 Speaker 3: you know, a little bit worrying, a little bit depressing, 106 00:05:50,640 --> 00:05:53,840 Speaker 3: because you're talking about all these long term challenges that 107 00:05:53,880 --> 00:05:57,760 Speaker 3: the entire world basically faces. And so I'm thinking like, 108 00:05:57,920 --> 00:05:59,760 Speaker 3: what is the time frame here? Is on a long 109 00:05:59,800 --> 00:06:02,640 Speaker 3: and timeframe we're all going to be dead anyway, or 110 00:06:02,680 --> 00:06:05,080 Speaker 3: is it in the next twenty or thirty years. 111 00:06:05,640 --> 00:06:07,200 Speaker 5: I think the interesting thing is there are a bunch 112 00:06:07,240 --> 00:06:10,839 Speaker 5: of different forces acting at the same time of markets. Now, 113 00:06:10,839 --> 00:06:13,560 Speaker 5: all these are strategic forces, but the one's talking about 114 00:06:13,560 --> 00:06:15,400 Speaker 5: in the book that is, and so they can be 115 00:06:15,440 --> 00:06:17,600 Speaker 5: thought about as acting over a say, five to ten 116 00:06:17,640 --> 00:06:20,160 Speaker 5: year timeframe. And of course anything that involves a conversation 117 00:06:20,200 --> 00:06:23,200 Speaker 5: on demographics occasion build just kind of close their ears 118 00:06:23,240 --> 00:06:25,640 Speaker 5: because they think, well, it's so slow moving, that's surely 119 00:06:25,680 --> 00:06:28,000 Speaker 5: that's not going to matter. But actually, if it's happening 120 00:06:28,200 --> 00:06:31,240 Speaker 5: in conjunction with other things, then there is an argument 121 00:06:31,320 --> 00:06:34,520 Speaker 5: that that strategic arison perhaps isn't quite so far off 122 00:06:34,520 --> 00:06:38,680 Speaker 5: as people thought. And when that view on deglobalization, of example, 123 00:06:38,839 --> 00:06:42,360 Speaker 5: is tied with concerns around debt levels, it's concerned around 124 00:06:42,360 --> 00:06:46,320 Speaker 5: the shift from globalization deglobalization. These are things that have 125 00:06:46,560 --> 00:06:50,280 Speaker 5: suddenly zoomed up the list of concerns and investors have 126 00:06:50,640 --> 00:06:53,440 Speaker 5: and so I'd argue that although one might have thought 127 00:06:53,480 --> 00:06:55,560 Speaker 5: that these issues that were sort of further off in 128 00:06:55,600 --> 00:06:58,320 Speaker 5: some sort of notional strategic future. Then in fact, what 129 00:06:58,320 --> 00:07:01,400 Speaker 5: we've seen in the last six months or so is 130 00:07:01,440 --> 00:07:04,400 Speaker 5: those longer term issues become things that dominate the near term. 131 00:07:04,480 --> 00:07:06,560 Speaker 5: So that's a longer term future has become issue a 132 00:07:06,600 --> 00:07:07,200 Speaker 5: few people to face. 133 00:07:07,279 --> 00:07:11,000 Speaker 2: Now, just on the demographics point, you mentioned that a 134 00:07:11,000 --> 00:07:13,320 Speaker 2: lot of you hear that word it's okay, the slow 135 00:07:13,360 --> 00:07:16,680 Speaker 2: moving trend. It is actually those staggering the numbers when 136 00:07:16,720 --> 00:07:19,600 Speaker 2: you look at so you know, obviously people talk about 137 00:07:19,680 --> 00:07:23,600 Speaker 2: the population trajectories in China, aging in the waste, but 138 00:07:23,680 --> 00:07:28,000 Speaker 2: even like I saw these charts of Latin American population growth, 139 00:07:28,040 --> 00:07:31,840 Speaker 2: like fertility is collapsing everywhere. I mean, it's really extraordinary, 140 00:07:31,880 --> 00:07:33,640 Speaker 2: and it's it's not happening slowly. 141 00:07:34,880 --> 00:07:40,040 Speaker 5: Yes to the changes there, a'bsolutely having very rapidly in 142 00:07:40,120 --> 00:07:43,200 Speaker 5: terms of the context of past changes have seen, and 143 00:07:43,280 --> 00:07:44,960 Speaker 5: I think that people just need to be aware of 144 00:07:45,000 --> 00:07:49,440 Speaker 5: just the scale of the support the demographics as given 145 00:07:49,800 --> 00:07:52,320 Speaker 5: to growth rates of Alaska thirty or forty years. I've 146 00:07:52,320 --> 00:07:56,120 Speaker 5: seen this extraordinary period when there's been globalization that's brought 147 00:07:56,360 --> 00:08:01,600 Speaker 5: extra workers into the sort of same environment in terms 148 00:08:01,640 --> 00:08:05,320 Speaker 5: of the economic arena that they work in, and you've 149 00:08:05,360 --> 00:08:07,440 Speaker 5: had a large kind of cohort of people who've all 150 00:08:07,480 --> 00:08:10,280 Speaker 5: been in the workforce, and you've had an increase in 151 00:08:10,280 --> 00:08:12,640 Speaker 5: the female come participation ratio at the same time, and 152 00:08:12,680 --> 00:08:14,600 Speaker 5: so you have a series of things that have meant 153 00:08:14,640 --> 00:08:18,600 Speaker 5: that there have been many more workers available. And I'd 154 00:08:18,680 --> 00:08:20,480 Speaker 5: argue that even before you're going to get into the 155 00:08:20,520 --> 00:08:25,960 Speaker 5: issue around deglobalization, that demographic shift alone undoes a very 156 00:08:26,040 --> 00:08:29,520 Speaker 5: large part of this increase in the global worklupool. But 157 00:08:29,560 --> 00:08:33,000 Speaker 5: that we've seen through the process of globalization since the eighties. 158 00:08:33,440 --> 00:08:38,040 Speaker 5: Now people can you get very negative about this, but 159 00:08:38,520 --> 00:08:41,760 Speaker 5: you know, it isn't an outlook that implies a bearish 160 00:08:41,960 --> 00:08:45,160 Speaker 5: where a prognosis for the future, but it certainly changes 161 00:08:45,320 --> 00:08:48,640 Speaker 5: the base case where you think kind of growth lies. So, 162 00:08:48,640 --> 00:08:51,440 Speaker 5: for example, if you look at the sort of prognosis 163 00:08:51,520 --> 00:08:54,000 Speaker 5: from here onwards, we have an outlook of an extra 164 00:08:54,080 --> 00:08:57,360 Speaker 5: of ten to fifteen years, where on the UN population 165 00:08:57,480 --> 00:08:59,760 Speaker 5: data at least that the US working age population is 166 00:08:59,800 --> 00:09:01,920 Speaker 5: still going to grow, but it's going to grow much 167 00:09:01,960 --> 00:09:03,319 Speaker 5: more slowly than people have been used in the last 168 00:09:03,480 --> 00:09:06,640 Speaker 5: of thirty years or grown about zero point two percent perannum. 169 00:09:06,960 --> 00:09:09,160 Speaker 5: But in Europe the working age population is going to 170 00:09:09,160 --> 00:09:12,000 Speaker 5: shrink at about half percent pranum. In China, it's really 171 00:09:12,040 --> 00:09:14,480 Speaker 5: going to shrink quickly at about one percent paranom between 172 00:09:14,480 --> 00:09:17,760 Speaker 5: now and twenty fifty. So yes, I mean other forces 173 00:09:17,800 --> 00:09:19,960 Speaker 5: are happening in parallel with this kind of clearly, but 174 00:09:20,240 --> 00:09:23,480 Speaker 5: you know, as a base level effect, that does change 175 00:09:23,520 --> 00:09:26,559 Speaker 5: one's view on what growth rates look like. No, beginally 176 00:09:26,559 --> 00:09:29,319 Speaker 5: in that context. That yes, from an absolute perspective, that's 177 00:09:29,320 --> 00:09:31,120 Speaker 5: setting US growth slows down. But back to the other 178 00:09:31,240 --> 00:09:34,040 Speaker 5: thread that you started this podcast with in terms of 179 00:09:34,080 --> 00:09:37,280 Speaker 5: the US exceptionism point, although growth is slowing in the US, 180 00:09:37,960 --> 00:09:41,480 Speaker 5: the base assumption that we have and the most forecasters 181 00:09:41,520 --> 00:09:45,320 Speaker 5: have is working age population does still grow ever so slightly, 182 00:09:45,679 --> 00:09:48,480 Speaker 5: and that is a better prognosis than say in Europe, 183 00:09:48,480 --> 00:09:51,080 Speaker 5: in Japan, in China where it's shrinking out right. 184 00:09:51,640 --> 00:09:53,680 Speaker 3: Can I ask about government duck because this is the 185 00:09:53,760 --> 00:09:57,040 Speaker 3: other thing that you know, people have been talking about 186 00:09:57,120 --> 00:10:00,440 Speaker 3: for a very very long time. High deficits actually in 187 00:10:00,480 --> 00:10:03,200 Speaker 3: the developed world, I think, the highest level of debt 188 00:10:03,240 --> 00:10:06,520 Speaker 3: since like World War two something like that. How do 189 00:10:06,600 --> 00:10:12,760 Speaker 3: you reconcile I guess the warnings over debt driven instability 190 00:10:13,120 --> 00:10:17,720 Speaker 3: or impact on economic growth with the fact that investors 191 00:10:17,840 --> 00:10:21,280 Speaker 3: keep for the most part buying government bonds. I know, 192 00:10:21,400 --> 00:10:23,960 Speaker 3: after April second, we did see a spike in like 193 00:10:24,040 --> 00:10:26,839 Speaker 3: ten year treasury rates, but it came down a bit 194 00:10:26,880 --> 00:10:29,160 Speaker 3: after that. It's actually pretty close to where it was 195 00:10:29,200 --> 00:10:31,840 Speaker 3: in early April now. But it does seem like there 196 00:10:31,880 --> 00:10:35,920 Speaker 3: is a broadly continued appetite for debt. So when would 197 00:10:35,960 --> 00:10:38,720 Speaker 3: that actually become a concern for investors? 198 00:10:39,000 --> 00:10:41,600 Speaker 5: Like keep being asked this question by investors in I 199 00:10:41,679 --> 00:10:44,800 Speaker 5: bet been a common question and really for the last 200 00:10:44,880 --> 00:10:47,920 Speaker 5: a year or so. So, yeah, you're right in saying 201 00:10:48,000 --> 00:10:49,880 Speaker 5: that the level of net debt to GDP is the 202 00:10:49,920 --> 00:10:51,680 Speaker 5: same as it was in World War Two. I guess 203 00:10:51,679 --> 00:10:52,880 Speaker 5: the first thing to say about that is not just 204 00:10:52,880 --> 00:10:55,520 Speaker 5: a US problem, that's actually a G seven wide problem. 205 00:10:55,600 --> 00:10:58,400 Speaker 5: So G seven debt in terms of net debt to 206 00:10:58,520 --> 00:10:59,960 Speaker 5: GDPs back to where it was at the end of 207 00:11:00,000 --> 00:11:02,360 Speaker 5: World War Two. Now, of course, it's been getting there 208 00:11:02,440 --> 00:11:05,800 Speaker 5: for some time. It's been rising really kind of thirty years, 209 00:11:05,840 --> 00:11:10,440 Speaker 5: and that hasn't mattered in an environment of falling interest rates. 210 00:11:10,440 --> 00:11:13,200 Speaker 5: But if there has been a definitive turn in the 211 00:11:13,240 --> 00:11:16,240 Speaker 5: interest rate cycle, then that obviously starts to become a problem. 212 00:11:16,679 --> 00:11:20,760 Speaker 5: People like to fret about these debt levels, and certainly 213 00:11:21,160 --> 00:11:25,760 Speaker 5: other things equal, it implies that sovereign issuers, including the US, 214 00:11:25,920 --> 00:11:28,400 Speaker 5: are more risky than they were before. And so you 215 00:11:28,400 --> 00:11:31,679 Speaker 5: could say, well, maybe there should be a pricing a 216 00:11:31,720 --> 00:11:35,120 Speaker 5: sovereign risk and a should be a steeper yield curve. 217 00:11:35,520 --> 00:11:38,559 Speaker 5: The problem is that so far those fears have been 218 00:11:38,640 --> 00:11:43,400 Speaker 5: utterly swamped by the demands that investors have for liquid assets, 219 00:11:43,640 --> 00:11:46,959 Speaker 5: and say for liquid assets. So you have seen attempts 220 00:11:46,960 --> 00:11:50,640 Speaker 5: to price sovereign risk, yes, arguably in April in the US, 221 00:11:51,080 --> 00:11:54,160 Speaker 5: a couple of years ago in the UK around the 222 00:11:54,480 --> 00:11:58,040 Speaker 5: LDI crisis, prior to the last French election. If you 223 00:11:58,080 --> 00:12:01,000 Speaker 5: get these episodes where the market tries to price sovereign risk, 224 00:12:01,400 --> 00:12:04,000 Speaker 5: but it's very hard to know at what point that 225 00:12:04,040 --> 00:12:06,319 Speaker 5: becomes a problem, because this is a can that obviously 226 00:12:06,600 --> 00:12:09,240 Speaker 5: can be kicked down the road a long way. There 227 00:12:09,280 --> 00:12:12,160 Speaker 5: was a fascinating paper published by Nil Ferguson earlier this 228 00:12:12,240 --> 00:12:14,560 Speaker 5: year where he made the argument that basically is not 229 00:12:14,640 --> 00:12:17,880 Speaker 5: net debt to GDP that really matters. It's the relative 230 00:12:17,920 --> 00:12:20,840 Speaker 5: size of the debt service costs compared to defense budget, 231 00:12:21,160 --> 00:12:23,560 Speaker 5: and the reason that seems like a relevant thing to 232 00:12:23,600 --> 00:12:26,440 Speaker 5: talk about is last year was the first year where 233 00:12:26,480 --> 00:12:29,640 Speaker 5: the US service costs on debt exceeded the US defense budget. 234 00:12:29,880 --> 00:12:33,040 Speaker 5: And then he goes back and looked at previous examples 235 00:12:33,080 --> 00:12:35,920 Speaker 5: of great powers that have seen this kind of crossover 236 00:12:36,040 --> 00:12:37,880 Speaker 5: take place and bad things happen. 237 00:12:38,040 --> 00:12:39,880 Speaker 4: And whether that is the example of. 238 00:12:39,800 --> 00:12:43,400 Speaker 5: The UK, or the Ottoman Empire or the Habsburgs, a 239 00:12:43,440 --> 00:12:47,559 Speaker 5: whole series of historical episodes have led to great powers 240 00:12:47,559 --> 00:12:51,240 Speaker 5: no longer being able to project hard power if the 241 00:12:51,280 --> 00:12:53,839 Speaker 5: debt service cost is much larger than the defense budget. Now, 242 00:12:53,960 --> 00:12:56,760 Speaker 5: the interesting example that I guess is vaguely relevant from 243 00:12:56,800 --> 00:12:59,840 Speaker 5: that is most relevant is the UK. In nineteen twenty, 244 00:13:00,280 --> 00:13:03,920 Speaker 5: the debt service cost became much greater than defense budget. 245 00:13:04,000 --> 00:13:05,920 Speaker 5: That had a big impact on the ability to project 246 00:13:05,920 --> 00:13:08,800 Speaker 5: hard power. Now what's interesting is UK managed to reverse 247 00:13:08,880 --> 00:13:11,959 Speaker 5: course and actually end up with a defense budget again 248 00:13:12,040 --> 00:13:14,360 Speaker 5: larger than interest service costs and debt. But it did 249 00:13:14,400 --> 00:13:19,240 Speaker 5: so through inflation depreciation and through the loss of reserve 250 00:13:19,280 --> 00:13:21,160 Speaker 5: currency status, which I guess is the kind of key 251 00:13:21,440 --> 00:13:24,440 Speaker 5: thing that makes irrelevant today. So I guess conclude in 252 00:13:24,520 --> 00:13:26,960 Speaker 5: terms of how one thinks about this, you know, I 253 00:13:26,960 --> 00:13:29,760 Speaker 5: think the sovereign risk is something that perhaps should be 254 00:13:29,840 --> 00:13:34,400 Speaker 5: priced given the massive uncertainty about you know, how that 255 00:13:34,520 --> 00:13:37,119 Speaker 5: risk is perceived in the market versus demand for liquidity. 256 00:13:37,440 --> 00:13:40,360 Speaker 5: I think one's just left with a kind of directional 257 00:13:40,360 --> 00:13:42,440 Speaker 5: answer saying, well, yes, at some point the yield cuve 258 00:13:42,480 --> 00:13:45,160 Speaker 5: should steepen, but it's very, very hard to make a 259 00:13:45,200 --> 00:13:48,640 Speaker 5: tactical kind of call around that. I think perhaps a 260 00:13:48,679 --> 00:13:50,920 Speaker 5: more pertinent way for investors to actually think about their 261 00:13:50,960 --> 00:13:54,160 Speaker 5: in practical terms is it it means that the dollar 262 00:13:54,280 --> 00:13:56,800 Speaker 5: is less of a safe haven asset but than it 263 00:13:56,880 --> 00:13:58,559 Speaker 5: was before. And that's the key point of Really it's 264 00:13:58,600 --> 00:14:01,080 Speaker 5: not so much in terms of up with a particular 265 00:14:01,520 --> 00:14:04,240 Speaker 5: return forecast on a dollar being different from where it was, 266 00:14:04,280 --> 00:14:06,960 Speaker 5: say six months ago. I think has become almost consensus 267 00:14:07,000 --> 00:14:09,520 Speaker 5: across the street that people are now more naked than 268 00:14:09,559 --> 00:14:12,079 Speaker 5: dollar than they were, say six months ago. But I 269 00:14:12,080 --> 00:14:14,440 Speaker 5: guess what's interesting is the riskiness of it and the 270 00:14:14,520 --> 00:14:18,320 Speaker 5: idea that risk the dollar are now more correlated with 271 00:14:18,920 --> 00:14:22,400 Speaker 5: risks to other risk assets. So that implies a different 272 00:14:22,440 --> 00:14:24,440 Speaker 5: approach the way people should form portfolios. 273 00:14:24,520 --> 00:14:26,320 Speaker 2: Okay, let's get into this because I think this is 274 00:14:26,360 --> 00:14:29,160 Speaker 2: the really important point, which is that people talk about 275 00:14:29,240 --> 00:14:32,360 Speaker 2: some sort of you know, risks to the dollar, risks 276 00:14:32,400 --> 00:14:34,800 Speaker 2: to the dollar's status, And so I want to talk 277 00:14:34,840 --> 00:14:38,120 Speaker 2: about more like setting aside timing. Maybe it's fast, maybe 278 00:14:38,160 --> 00:14:40,800 Speaker 2: it's slow, maybe it's a medium term. What are the 279 00:14:40,920 --> 00:14:44,040 Speaker 2: data points that you would look at to say something 280 00:14:44,120 --> 00:14:48,360 Speaker 2: is happening. Is it dollar levels against other currencies? Is 281 00:14:48,400 --> 00:14:52,880 Speaker 2: it dollar share of transactions, is a dollar share of 282 00:14:53,120 --> 00:14:56,320 Speaker 2: sovereign savings? Or is it And it seems like where 283 00:14:56,320 --> 00:14:59,120 Speaker 2: you're going with this, is it the relationship whether it's 284 00:14:59,160 --> 00:15:03,440 Speaker 2: inverse or po two risky assets. What are these sort 285 00:15:03,480 --> 00:15:05,720 Speaker 2: of like fingerprints of what it would look like when 286 00:15:05,760 --> 00:15:08,520 Speaker 2: it's like, oh, something has meaningfully changed about the way 287 00:15:08,640 --> 00:15:11,200 Speaker 2: people view the dollar in their portfolios. 288 00:15:11,640 --> 00:15:13,720 Speaker 5: So first we'll got of pick up in terms of 289 00:15:13,760 --> 00:15:15,920 Speaker 5: relationship with dollar and other assets. And so you've seen 290 00:15:16,200 --> 00:15:20,480 Speaker 5: just the lasting a few months episodes when the a 291 00:15:20,560 --> 00:15:22,640 Speaker 5: dollar has declined at the same time as that bond 292 00:15:22,680 --> 00:15:25,760 Speaker 5: deals have gone up. Is a more risky environment and 293 00:15:25,760 --> 00:15:27,680 Speaker 5: a dollar hasn't behaved in a safe haven asset in 294 00:15:27,720 --> 00:15:31,400 Speaker 5: that kind of environment. You've also seen a more deeply 295 00:15:31,560 --> 00:15:36,720 Speaker 5: negative correlation between dollar and gold obviously priced in dollars. 296 00:15:36,920 --> 00:15:39,120 Speaker 5: That implies that the dollar's seen it as less of 297 00:15:39,120 --> 00:15:42,360 Speaker 5: a safe haven asset, and you've seen an increased correlation 298 00:15:42,480 --> 00:15:46,880 Speaker 5: between assets such as gold, silver, platinum, and bitcoin, all 299 00:15:46,920 --> 00:15:52,160 Speaker 5: things which are plausibly possible, non fear, zero duration assets 300 00:15:52,200 --> 00:15:55,800 Speaker 5: that you know that through a certain lens, share certain characteristics. Anyway, 301 00:15:55,880 --> 00:15:59,720 Speaker 5: so you've seen this market behavior where more dollar risk 302 00:15:59,800 --> 00:16:02,120 Speaker 5: has been priced. At least there have been episodes of that. 303 00:16:03,120 --> 00:16:06,600 Speaker 5: What I think would really change this though, and make 304 00:16:06,680 --> 00:16:08,800 Speaker 5: it more of an immediate concern for people, is if 305 00:16:08,800 --> 00:16:13,880 Speaker 5: there are large flows out of US bonds from institution investors. 306 00:16:13,880 --> 00:16:15,880 Speaker 5: Now there's been a lot of talk about this, There's 307 00:16:15,880 --> 00:16:17,520 Speaker 5: been a lot of coverage of it. I've been asked 308 00:16:17,520 --> 00:16:21,520 Speaker 5: about it in many many meetings, but so far, as 309 00:16:21,560 --> 00:16:23,920 Speaker 5: far as we can tell, that is much more talk 310 00:16:24,040 --> 00:16:26,760 Speaker 5: than actual flow. I mean, there have been episodes, for example, 311 00:16:26,800 --> 00:16:30,640 Speaker 5: where the Japanese pension system or elements of European pensions 312 00:16:30,640 --> 00:16:33,920 Speaker 5: have been selling dollar bonds, but the numbers are very 313 00:16:33,960 --> 00:16:36,800 Speaker 5: small in the scheme of things. So so far, what 314 00:16:36,800 --> 00:16:40,520 Speaker 5: you're still seeing is a demand for safer, liquid assets. 315 00:16:40,880 --> 00:16:43,400 Speaker 5: It's still a dominant we have forces, but that's the 316 00:16:43,400 --> 00:16:46,480 Speaker 5: thing that we really look for for a change. I mean, 317 00:16:46,520 --> 00:16:48,040 Speaker 5: I think one thing the background is one has to 318 00:16:48,080 --> 00:16:50,160 Speaker 5: bear in mind there are some very different kinds of 319 00:16:50,240 --> 00:16:53,200 Speaker 5: risks here that are all being conflated, and the point 320 00:16:53,200 --> 00:16:55,920 Speaker 5: of the same direction where they come from, I guess 321 00:16:56,760 --> 00:16:59,920 Speaker 5: a different basis. So one is the concern around fiscal 322 00:17:00,120 --> 00:17:02,320 Speaker 5: and ability, as we discussed, so that, yes, it's certainly 323 00:17:02,320 --> 00:17:04,600 Speaker 5: a concern, but you never know what the timing that's 324 00:17:04,600 --> 00:17:08,720 Speaker 5: going to be. Separate from that is a more geopolitical imperative, 325 00:17:09,160 --> 00:17:12,639 Speaker 5: which is the need for countries which are arrivals to 326 00:17:12,640 --> 00:17:15,040 Speaker 5: the US to try and dedollarize in some way. Now 327 00:17:15,040 --> 00:17:18,399 Speaker 5: the problem is there is no viable alternatives. That means 328 00:17:18,680 --> 00:17:21,840 Speaker 5: that the flow into other alternatives is going to be slow. 329 00:17:22,160 --> 00:17:25,359 Speaker 5: We've obviously seen this in the increase bidding by central 330 00:17:25,400 --> 00:17:28,040 Speaker 5: banks for gold. I think it's and I think that 331 00:17:28,080 --> 00:17:30,240 Speaker 5: could spread to other kind of assets as well. But 332 00:17:30,280 --> 00:17:34,120 Speaker 5: that's a sort of non market driven, more geopolitical concern that. 333 00:17:34,080 --> 00:17:34,800 Speaker 4: Can carry on. 334 00:17:35,200 --> 00:17:37,880 Speaker 5: And then you have specific investor concerns, you know, when 335 00:17:37,880 --> 00:17:41,879 Speaker 5: there've been suggestions from the US administration that perhaps we 336 00:17:41,920 --> 00:17:45,560 Speaker 5: can apply some kind of taxes or charges on foreign 337 00:17:45,600 --> 00:17:48,040 Speaker 5: holders and US assets, and that has certainly grabbed attention 338 00:17:48,480 --> 00:17:50,400 Speaker 5: but people are backed away from that. So it doesn't 339 00:17:50,400 --> 00:17:52,159 Speaker 5: seem to be in a media concern right now. But 340 00:17:52,160 --> 00:17:55,160 Speaker 5: it's three very different things pointing the same direction, which 341 00:17:55,200 --> 00:17:59,000 Speaker 5: is for there to be somewhat less trust in the 342 00:17:59,040 --> 00:18:02,120 Speaker 5: dollar as a safe hay. The biggest thing in its favor, though, 343 00:18:02,680 --> 00:18:05,960 Speaker 5: is that growth in the US seems likely to be 344 00:18:06,040 --> 00:18:08,240 Speaker 5: stronger than growth in other regions, and the lack of 345 00:18:08,280 --> 00:18:12,240 Speaker 5: another alternative means the outflows are going to be slow. 346 00:18:12,280 --> 00:18:12,520 Speaker 4: I think. 347 00:18:12,560 --> 00:18:15,359 Speaker 5: So this is a drip Freed story that sits in 348 00:18:15,359 --> 00:18:16,000 Speaker 5: the background. 349 00:18:16,359 --> 00:18:18,320 Speaker 4: I think we have for many years to come. 350 00:18:34,640 --> 00:18:37,360 Speaker 3: Can I tell a story please? I swear it's relevant 351 00:18:37,359 --> 00:18:40,960 Speaker 3: to this conversation, But you've probably heard this story before. Actually, Joe, 352 00:18:41,000 --> 00:18:43,800 Speaker 3: one of the best conversations I ever listened to was 353 00:18:43,840 --> 00:18:46,960 Speaker 3: between Howard Marx and Mike Milkin and the Milkan Conference 354 00:18:46,960 --> 00:18:50,320 Speaker 3: in LA and it was basically about how the investment 355 00:18:50,480 --> 00:18:53,679 Speaker 3: landscape had kind of changed over their careers. So in 356 00:18:53,720 --> 00:18:56,719 Speaker 3: the nineteen fifties and nineteen sixties, if you put your 357 00:18:56,760 --> 00:18:59,639 Speaker 3: money in blue chip stocks like the nifty to fifty 358 00:18:59,720 --> 00:19:02,080 Speaker 3: or something like that, everything was fine and you made 359 00:19:02,320 --> 00:19:05,120 Speaker 3: consistent profit. But then the market crashed in the early 360 00:19:05,160 --> 00:19:08,320 Speaker 3: nineteen seventies and you had high inflation and that kind 361 00:19:08,320 --> 00:19:13,159 Speaker 3: of changed everything. So higher volatility along with higher inflation 362 00:19:14,080 --> 00:19:18,280 Speaker 3: ended deterioration in real purchasing power, which meant people lost 363 00:19:18,320 --> 00:19:20,880 Speaker 3: like ninety percent of their money at that time, which 364 00:19:20,920 --> 00:19:24,600 Speaker 3: is crazy. And Mike and Howard's argument was that this 365 00:19:25,000 --> 00:19:29,200 Speaker 3: was what caused the explosion of money managers and also 366 00:19:29,280 --> 00:19:33,520 Speaker 3: the birth of the high yield bond market because people realized, well, 367 00:19:33,600 --> 00:19:37,600 Speaker 3: you can't just buy polaroid stock and more and expect 368 00:19:37,680 --> 00:19:41,080 Speaker 3: a consistent return. You have to be more sophisticated about 369 00:19:41,080 --> 00:19:45,320 Speaker 3: it and measure risk against that return. So I guess 370 00:19:45,320 --> 00:19:48,560 Speaker 3: my question is, are we talking about something similar here 371 00:19:48,600 --> 00:19:51,840 Speaker 3: in terms of a see shift in investor behavior. So 372 00:19:52,000 --> 00:19:55,320 Speaker 3: maybe instead of weighing risk against return, you weigh risk 373 00:19:55,440 --> 00:19:57,880 Speaker 3: against real returns or something like that. 374 00:19:58,400 --> 00:20:02,720 Speaker 5: I think that's a strong narrative that will carry on 375 00:20:02,760 --> 00:20:06,040 Speaker 5: for a long time because people have been very used 376 00:20:06,080 --> 00:20:09,639 Speaker 5: to an environment where for decades and decades inflation has 377 00:20:09,680 --> 00:20:12,679 Speaker 5: been benign. It's been readily low volatility of inflation, inflation 378 00:20:12,800 --> 00:20:14,880 Speaker 5: has been going down, and at the same time we've 379 00:20:14,960 --> 00:20:19,280 Speaker 5: seen strong returns both from equities and from fixed income assets, 380 00:20:19,480 --> 00:20:22,639 Speaker 5: and most of the time and equities in fixing can 381 00:20:22,760 --> 00:20:25,919 Speaker 5: manage to have a negative correlation at between them, and 382 00:20:26,000 --> 00:20:29,000 Speaker 5: so the overall return versus risk that you've achieved in 383 00:20:29,080 --> 00:20:33,080 Speaker 5: real terms has been very strong. Now, I'm absolutely not 384 00:20:33,240 --> 00:20:35,920 Speaker 5: suggesting that we face a bearish outlook, but I think 385 00:20:35,960 --> 00:20:39,360 Speaker 5: we do face a harder outlook, an outlook where there 386 00:20:39,400 --> 00:20:43,800 Speaker 5: are multiple structural forces that imply the level of inflation 387 00:20:43,840 --> 00:20:47,000 Speaker 5: will be somewhat higher and some more volatile given the 388 00:20:47,000 --> 00:20:49,200 Speaker 5: constraints on growth. But that we spoke about in terms 389 00:20:49,240 --> 00:20:51,760 Speaker 5: of demographics, etc. We're given where we are in terms 390 00:20:51,800 --> 00:20:54,760 Speaker 5: of the valuations across most asset classes being high. The 391 00:20:55,000 --> 00:20:59,280 Speaker 5: likelihodea is that the real return achieved from the portfolios 392 00:20:59,320 --> 00:21:01,200 Speaker 5: that have done well for many decades is going to 393 00:21:01,240 --> 00:21:03,720 Speaker 5: be much much lower. And so it raises this really 394 00:21:03,720 --> 00:21:07,199 Speaker 5: fundamental question, which is actually what is the objective of 395 00:21:07,240 --> 00:21:11,399 Speaker 5: most investors? You know, is the objective to maximize return 396 00:21:11,560 --> 00:21:14,600 Speaker 5: per unit risk? Or is it to preserve real returns? 397 00:21:14,680 --> 00:21:16,399 Speaker 5: Or another way of thinking about it is what is 398 00:21:16,440 --> 00:21:18,679 Speaker 5: the definition of risk that'sulting relevant here? I mean, is 399 00:21:18,800 --> 00:21:22,399 Speaker 5: risk the expected volatility of my portfolio the next ten years, 400 00:21:23,000 --> 00:21:25,760 Speaker 5: or is risk the risk of a loss of purchasing 401 00:21:25,840 --> 00:21:27,480 Speaker 5: per of the next ten years, and I would suggest 402 00:21:27,520 --> 00:21:29,640 Speaker 5: that for nearly every investor, if they think about it, it 403 00:21:29,680 --> 00:21:31,880 Speaker 5: ultimately it's the latter of those two that's a. 404 00:21:31,880 --> 00:21:32,800 Speaker 4: Much bigger issue. 405 00:21:32,840 --> 00:21:33,800 Speaker 3: Wait, why not both? 406 00:21:34,680 --> 00:21:37,200 Speaker 5: I mean, ideally one would care about both. It depends 407 00:21:37,760 --> 00:21:40,920 Speaker 5: how many degrees of freedom we think you have, because 408 00:21:41,880 --> 00:21:45,120 Speaker 5: you know, unfortunately, if the expected real return across assets 409 00:21:45,200 --> 00:21:48,840 Speaker 5: is going to be generally lower, if the correlation amongst 410 00:21:48,840 --> 00:21:52,720 Speaker 5: them is generally higher, then eking out a certain level 411 00:21:52,760 --> 00:21:55,360 Speaker 5: of real return becomes much much harder. So I think 412 00:21:55,359 --> 00:21:59,240 Speaker 5: actually there ends up being a direct tension between the 413 00:21:59,400 --> 00:22:03,400 Speaker 5: measure risk as expected of all of the portfolio versus 414 00:22:03,560 --> 00:22:06,879 Speaker 5: preserving purchasing power, because if the thing that really matters 415 00:22:06,880 --> 00:22:09,240 Speaker 5: to you in the long run is preserving purchasing power, 416 00:22:09,600 --> 00:22:11,600 Speaker 5: I would argue that actually you probably have to take 417 00:22:11,760 --> 00:22:15,560 Speaker 5: more risk in the sense of expected vole And even 418 00:22:15,640 --> 00:22:17,280 Speaker 5: though I'm aware that's a horrible thing to have to 419 00:22:17,280 --> 00:22:20,159 Speaker 5: explain to people and it might sound very cavalier at 420 00:22:20,160 --> 00:22:22,320 Speaker 5: a point when the shita pee is thirty five times 421 00:22:22,880 --> 00:22:25,639 Speaker 5: and I'm not spelling out particularly be con't bullish a 422 00:22:25,680 --> 00:22:28,080 Speaker 5: long term outlook, but I think you'll have no choice. 423 00:22:28,280 --> 00:22:31,399 Speaker 5: You have to think about taking more risk, because the 424 00:22:31,440 --> 00:22:35,320 Speaker 5: other option is to underperform inflation, and that is more 425 00:22:35,320 --> 00:22:36,160 Speaker 5: painless to people. 426 00:22:36,800 --> 00:22:38,440 Speaker 4: I mean, the good news. 427 00:22:39,160 --> 00:22:41,520 Speaker 5: At least in that is that people can choose how 428 00:22:41,600 --> 00:22:43,800 Speaker 5: they want to take that risk, how they want to 429 00:22:44,080 --> 00:22:46,840 Speaker 5: partition it, what kind of risks do they believe in, 430 00:22:47,000 --> 00:22:49,680 Speaker 5: what risks are consistent with the liquidity that they need 431 00:22:49,720 --> 00:22:51,760 Speaker 5: and the time horizons they have, and the beliefs they have, 432 00:22:51,880 --> 00:22:54,680 Speaker 5: et cetera, et cetera. But in this tension between the 433 00:22:54,720 --> 00:22:56,880 Speaker 5: two different kinds of risk, I think is that need 434 00:22:56,920 --> 00:23:02,000 Speaker 5: to preserve we are purchasing power. That is the real focus, 435 00:23:02,040 --> 00:23:05,720 Speaker 5: and that is a shifting governance ultimately for many vestetypes. 436 00:23:06,280 --> 00:23:09,720 Speaker 2: So, you know, looking at your big themes this year 437 00:23:09,960 --> 00:23:12,600 Speaker 2: and thinking about this idea of a sort of a 438 00:23:12,600 --> 00:23:15,400 Speaker 2: world where the dollar is less important or less dominant, 439 00:23:15,480 --> 00:23:17,679 Speaker 2: or less safe or something like that. One of the 440 00:23:17,680 --> 00:23:20,080 Speaker 2: things that you mentioned is geopolitics, and of course there 441 00:23:20,080 --> 00:23:23,600 Speaker 2: are multiple wars going on. There is the weaponization of 442 00:23:23,680 --> 00:23:27,400 Speaker 2: the dollar. Of course Russia was on the other end 443 00:23:27,440 --> 00:23:31,400 Speaker 2: of after its invasion of Ukraine. But what about politics. 444 00:23:31,400 --> 00:23:33,840 Speaker 2: I mean, we always talk about geopolitics, but I mean 445 00:23:33,920 --> 00:23:37,639 Speaker 2: also interested in like actual politics and what's going on 446 00:23:37,720 --> 00:23:40,920 Speaker 2: in the United States right now. The attacks on federal 447 00:23:40,960 --> 00:23:44,399 Speaker 2: reserve independence. That's not geopolitics, that's politics. But it could 448 00:23:44,640 --> 00:23:47,600 Speaker 2: shake people's faith in the dollar system. Other you know, 449 00:23:47,760 --> 00:23:50,320 Speaker 2: shackles like that that the government has put on itself 450 00:23:50,520 --> 00:23:53,760 Speaker 2: to maintain some sort of stability, or even just sort 451 00:23:53,800 --> 00:23:57,200 Speaker 2: of the volatility and trade policy, or the fact that 452 00:23:57,440 --> 00:24:01,040 Speaker 2: the government, you know, passed another gigantic tax cut. There's 453 00:24:01,040 --> 00:24:04,600 Speaker 2: no political appetite for meaningful change in the debt trajectory. 454 00:24:04,920 --> 00:24:10,240 Speaker 2: How does politics, domestic politics play into global perceptions of 455 00:24:10,640 --> 00:24:11,520 Speaker 2: dollar stability. 456 00:24:12,560 --> 00:24:13,680 Speaker 4: I think there's two avenues here. 457 00:24:13,680 --> 00:24:16,160 Speaker 5: I guess one avenue again is back to this topic 458 00:24:16,200 --> 00:24:20,200 Speaker 5: of physical sustainability. And if there is no appetite across 459 00:24:20,240 --> 00:24:25,640 Speaker 5: parties to really meaningfully change that fiscal contrajectory, then one 460 00:24:25,720 --> 00:24:29,240 Speaker 5: is left with this question of how sustainable is the debt? 461 00:24:29,400 --> 00:24:32,159 Speaker 5: Can this can be kicked down the road by what 462 00:24:32,160 --> 00:24:35,280 Speaker 5: are the ways out? And I and ultimately I think 463 00:24:35,400 --> 00:24:37,679 Speaker 5: that inflation is the most likely route out. I think 464 00:24:37,720 --> 00:24:41,960 Speaker 5: you have to be hugely optimistic about the growth that 465 00:24:42,040 --> 00:24:44,960 Speaker 5: can come from AI in order to have a view. 466 00:24:44,960 --> 00:24:47,920 Speaker 5: There's an alternative way out. And the second I guess 467 00:24:48,160 --> 00:24:51,040 Speaker 5: is this question of trust in the US from the 468 00:24:51,080 --> 00:24:53,600 Speaker 5: point of overseas investors, and there certainly there have been 469 00:24:53,720 --> 00:24:56,720 Speaker 5: points where that's been shaken. So I was doing a 470 00:24:56,800 --> 00:24:59,800 Speaker 5: series of marketing tours around global clients at the point 471 00:25:00,040 --> 00:25:02,359 Speaker 5: where all the discussions taking place about should there be 472 00:25:02,359 --> 00:25:06,920 Speaker 5: some kind of Mara Laga accord and potentially changing the 473 00:25:06,960 --> 00:25:10,040 Speaker 5: status of foreign owners of US debt And Okay, it 474 00:25:10,080 --> 00:25:12,919 Speaker 5: looks like that's been backed away from my suggestion and 475 00:25:13,000 --> 00:25:14,680 Speaker 5: suddenly hasn't come up in meetings for a long time. 476 00:25:14,760 --> 00:25:16,159 Speaker 5: So maybe that's not going to happen, but just the 477 00:25:16,160 --> 00:25:19,280 Speaker 5: fact it was raised, you know, at the same time 478 00:25:19,960 --> 00:25:23,720 Speaker 5: that there is this concern about physical sustainability and there 479 00:25:23,760 --> 00:25:27,359 Speaker 5: are geopolitical forces which are very strong to try and 480 00:25:27,400 --> 00:25:31,199 Speaker 5: find dollar alternatives, that I guess sort of feeds this 481 00:25:31,280 --> 00:25:34,680 Speaker 5: kind of view that perhaps the dollar has less of 482 00:25:34,680 --> 00:25:36,840 Speaker 5: a safe having status than did before. I mean, the 483 00:25:36,840 --> 00:25:39,480 Speaker 5: big caveat is it depends what can I risk we're 484 00:25:39,480 --> 00:25:41,359 Speaker 5: talking about here. I think if we're talking about general 485 00:25:41,400 --> 00:25:46,200 Speaker 5: business cycle risks, then people, you know, I think, generally 486 00:25:46,640 --> 00:25:48,800 Speaker 5: do take the view now compared to say a year ago, 487 00:25:48,880 --> 00:25:51,520 Speaker 5: that the dollar is more risky when things get really bad, 488 00:25:51,520 --> 00:25:54,400 Speaker 5: and when there's a geopolitical shock, often in a quite 489 00:25:54,400 --> 00:25:56,960 Speaker 5: short term and nature thankfully, then you still see people 490 00:25:57,040 --> 00:25:59,159 Speaker 5: flee to the dollar, and the dollar rally in the 491 00:25:59,160 --> 00:26:02,040 Speaker 5: short term over potentially large shocks. 492 00:26:02,960 --> 00:26:07,439 Speaker 3: Since we're talking risk premiums and political or geopolitical instability, 493 00:26:07,800 --> 00:26:10,840 Speaker 3: one thing I wonder is we're basically talking about how 494 00:26:10,840 --> 00:26:14,440 Speaker 3: the world is changing and norms are shifting, and I'm 495 00:26:14,560 --> 00:26:18,320 Speaker 3: kind of wondering, could the norms or could the response 496 00:26:18,359 --> 00:26:23,000 Speaker 3: from investors change in a more unexpected way, in the 497 00:26:23,080 --> 00:26:27,040 Speaker 3: sense that instead of seeing risk premiums go up because 498 00:26:27,119 --> 00:26:30,960 Speaker 3: everyone is nervous about instability or big shocks or whatever, 499 00:26:31,280 --> 00:26:34,040 Speaker 3: maybe everyone just becomes really used to it and you 500 00:26:34,160 --> 00:26:37,360 Speaker 3: don't see higher risk premiums priced in. I mean, that's 501 00:26:37,400 --> 00:26:40,560 Speaker 3: a consistent theme in market, right, Something major happens and 502 00:26:40,600 --> 00:26:43,560 Speaker 3: then something similar happens later and you don't get as 503 00:26:43,600 --> 00:26:45,960 Speaker 3: big a reaction. Is that a possibility here? 504 00:26:47,400 --> 00:26:48,640 Speaker 4: I mean I think it's possibility. 505 00:26:48,920 --> 00:26:51,960 Speaker 5: I mean, I'm not sure that's enough to tell one 506 00:26:52,200 --> 00:26:55,760 Speaker 5: super bullish in the long wor wace that's fair again, 507 00:26:55,880 --> 00:26:57,720 Speaker 5: I you know, it gets just to stress, you know, 508 00:26:57,800 --> 00:27:00,640 Speaker 5: I do think that the US market and ob equities 509 00:27:00,680 --> 00:27:04,040 Speaker 5: are going to produce we have positive real return, but 510 00:27:04,640 --> 00:27:09,399 Speaker 5: valuations today are high. So I would argue that you 511 00:27:09,440 --> 00:27:13,400 Speaker 5: know that, yes, one can outline a narrative that there 512 00:27:13,400 --> 00:27:16,160 Speaker 5: does not need to be a shift back to structure 513 00:27:16,200 --> 00:27:19,480 Speaker 5: lower levels of valuation because of where we are in 514 00:27:19,560 --> 00:27:22,320 Speaker 5: real rates, because where we are in terms of the 515 00:27:22,359 --> 00:27:25,560 Speaker 5: persistence of profitability for some of the most profitable firms. 516 00:27:25,640 --> 00:27:29,040 Speaker 5: I mean, all these things that justify valuations where they are. 517 00:27:29,480 --> 00:27:33,040 Speaker 5: But to justify a shift upward in valuations, which I 518 00:27:33,040 --> 00:27:35,160 Speaker 5: think is what you're kind of getting to, been a question. 519 00:27:35,200 --> 00:27:37,880 Speaker 5: I think that would just be really tough. So, yes, 520 00:27:37,920 --> 00:27:40,280 Speaker 5: I can get to a positive return outlook, but yes, 521 00:27:40,320 --> 00:27:43,399 Speaker 5: that's driven by views on where real earnings go, not 522 00:27:43,560 --> 00:27:46,800 Speaker 5: by multiple expansion. I think that would be a hard 523 00:27:46,880 --> 00:27:47,480 Speaker 5: core to make. 524 00:27:48,240 --> 00:27:51,360 Speaker 3: Joe has a complicated relationship with gold. But when we're 525 00:27:51,359 --> 00:27:55,320 Speaker 3: talking about real purchasing power, what exactly are you advising 526 00:27:55,400 --> 00:27:59,720 Speaker 3: people to buy to or hedge to preserve that purchasing power. 527 00:28:01,040 --> 00:28:04,080 Speaker 5: Yeah, so there's a broad range responses and it's not 528 00:28:04,480 --> 00:28:06,840 Speaker 5: as simple. But I guess in the future thing has 529 00:28:06,840 --> 00:28:09,600 Speaker 5: perhaps with hindsight it was over years when both bonds 530 00:28:09,640 --> 00:28:12,119 Speaker 5: and equities to pduced positive returns and had negative correlation 531 00:28:12,240 --> 00:28:14,440 Speaker 5: between them. I mean, I think there's a real assets 532 00:28:14,920 --> 00:28:17,199 Speaker 5: for me. Number one is global equities. I mean, as 533 00:28:17,200 --> 00:28:20,560 Speaker 5: long as inflation is only moderately higher and not much higher, 534 00:28:21,119 --> 00:28:23,639 Speaker 5: then there is strong evidence of equities behave like a 535 00:28:23,680 --> 00:28:27,399 Speaker 5: real asset and produce real returns. And that's a liquid 536 00:28:27,400 --> 00:28:30,440 Speaker 5: asset class. So that comes number one. Alongside that, there 537 00:28:30,440 --> 00:28:33,080 Speaker 5: are a range you know, of other real assets as well, 538 00:28:33,119 --> 00:28:36,840 Speaker 5: be it real physical assets, or be it areas of 539 00:28:36,880 --> 00:28:39,680 Speaker 5: private assets for example of private debt that has a 540 00:28:39,720 --> 00:28:42,560 Speaker 5: floating rate nature attached to it. It can be in 541 00:28:42,640 --> 00:28:46,160 Speaker 5: real assets in the form of real estate, farmland, et cetera, 542 00:28:46,360 --> 00:28:47,040 Speaker 5: and things like that. 543 00:28:47,240 --> 00:28:50,880 Speaker 4: And then there's gold. So gold has a long one real. 544 00:28:50,760 --> 00:28:52,880 Speaker 5: Return of the last two hundred years of plus zero 545 00:28:52,960 --> 00:28:54,720 Speaker 5: point two percent per anum as far as we can tell. 546 00:28:54,760 --> 00:28:58,360 Speaker 5: So it's very small number, although maybe one should you 547 00:28:58,600 --> 00:29:01,280 Speaker 5: say that if you're buying it because you're frightening some 548 00:29:01,840 --> 00:29:04,560 Speaker 5: really risk off event, then a zero real return may 549 00:29:04,600 --> 00:29:05,640 Speaker 5: not be such a bad thing. 550 00:29:05,800 --> 00:29:08,400 Speaker 3: There's a value in getting a good night's sleep. That's 551 00:29:08,600 --> 00:29:11,920 Speaker 3: something that I've kind of learned like investors are willing 552 00:29:11,960 --> 00:29:14,600 Speaker 3: to pay to have that sort of end of the 553 00:29:14,600 --> 00:29:15,200 Speaker 3: world hedge. 554 00:29:16,040 --> 00:29:18,640 Speaker 5: Yes, although the risk, of course is the lost opportunity 555 00:29:18,920 --> 00:29:21,120 Speaker 5: that becomes because in the last time, thirty years of 556 00:29:21,200 --> 00:29:22,280 Speaker 5: that would be an appalling call. 557 00:29:22,720 --> 00:29:25,719 Speaker 2: I lose sleep because other people are getting richer. So 558 00:29:26,040 --> 00:29:28,440 Speaker 2: you know, there are all kinds of reasons to lose. 559 00:29:28,280 --> 00:29:30,920 Speaker 4: Sleep, although in the last a couple of years obviously 560 00:29:30,920 --> 00:29:31,560 Speaker 4: girls actually. 561 00:29:31,600 --> 00:29:34,360 Speaker 2: Yeah, and then I lose sleep over there too, I 562 00:29:34,440 --> 00:29:35,320 Speaker 2: just don't sleep well. 563 00:29:35,400 --> 00:29:38,080 Speaker 5: I think the key argument favorite gold, and we've been 564 00:29:38,440 --> 00:29:41,040 Speaker 5: pro a gold allocation in the advice for give to 565 00:29:41,040 --> 00:29:43,320 Speaker 5: clients for some years. But the key argument in favor 566 00:29:43,360 --> 00:29:47,320 Speaker 5: of it is that, look, yes, you want a big 567 00:29:47,400 --> 00:29:50,760 Speaker 5: overweight on equity strategically, even if it's not that bullsh 568 00:29:50,800 --> 00:29:52,920 Speaker 5: no outlook, but just because that gives you a positive 569 00:29:52,960 --> 00:29:56,600 Speaker 5: real return. The question is what you add around that 570 00:29:56,720 --> 00:30:01,200 Speaker 5: equity position that helps diversify risk portfolio, because the problem 571 00:30:01,280 --> 00:30:05,760 Speaker 5: is that if inflation does remain higher and perhaps more volatile, 572 00:30:06,080 --> 00:30:08,440 Speaker 5: then bonds are not going to diversify equity risk as 573 00:30:08,440 --> 00:30:10,560 Speaker 5: they have in the past. The key attraction of gold 574 00:30:10,920 --> 00:30:15,040 Speaker 5: is that the correlation of gold and equities remains at 575 00:30:15,160 --> 00:30:18,040 Speaker 5: zero at different inflation levels. So it does seem to 576 00:30:18,080 --> 00:30:21,600 Speaker 5: have an established track record as being a diversifier risk 577 00:30:22,080 --> 00:30:25,160 Speaker 5: of equity risk that is in higher inflation episodes, and 578 00:30:25,160 --> 00:30:27,720 Speaker 5: that's its kind of key roid in portfolios. Then I mean, 579 00:30:27,760 --> 00:30:29,440 Speaker 5: on top of that, my goals will take the view 580 00:30:29,840 --> 00:30:33,560 Speaker 5: that for geopolitical reasons and nonprofit different reasons, central banks 581 00:30:33,600 --> 00:30:36,400 Speaker 5: will carry on buying it, and that might give upward support. 582 00:30:36,480 --> 00:30:38,400 Speaker 4: But I'm not going to attempt to give a number 583 00:30:38,440 --> 00:30:40,040 Speaker 4: of forecasts on that because that's going to be too 584 00:30:40,080 --> 00:30:40,440 Speaker 4: hard to do. 585 00:30:56,960 --> 00:30:59,800 Speaker 2: One of the biggest structural trends you talk about in 586 00:31:00,240 --> 00:31:04,600 Speaker 2: more volatile future world or potentially more inflationary future world, 587 00:31:04,760 --> 00:31:08,400 Speaker 2: is a climate risk. And I have to say that 588 00:31:09,120 --> 00:31:12,400 Speaker 2: over the last several years, I've come to roll my 589 00:31:12,560 --> 00:31:15,880 Speaker 2: eyes a little bit when I see financial institutions talk 590 00:31:15,880 --> 00:31:20,600 Speaker 2: about climate. Sometimes it feels perfunctory. We've seen performative, performative 591 00:31:20,800 --> 00:31:23,640 Speaker 2: sometimes in the last couple of years. And again this 592 00:31:23,760 --> 00:31:26,000 Speaker 2: is not on the research side, this is not on 593 00:31:26,040 --> 00:31:28,760 Speaker 2: the investing side. But in the last couple of years, 594 00:31:28,800 --> 00:31:33,040 Speaker 2: suddenly banks losing their interest in climate period et cetera. 595 00:31:33,440 --> 00:31:36,320 Speaker 2: Like suddenly these client all this talk that executives love 596 00:31:36,320 --> 00:31:38,560 Speaker 2: to talk about on panels in the mid twenty tens, 597 00:31:38,640 --> 00:31:40,960 Speaker 2: suddenly they don't see it anymore. So I thought it 598 00:31:41,000 --> 00:31:43,360 Speaker 2: was actually interesting they'd here in twenty twenty five and 599 00:31:43,400 --> 00:31:46,400 Speaker 2: you're still talking about climate net zero being unrealistic in 600 00:31:46,440 --> 00:31:50,560 Speaker 2: your view. From his social perspective, temperatures expected to continue 601 00:31:50,600 --> 00:31:53,640 Speaker 2: to rise. Talk to us about like why I shouldn't 602 00:31:53,640 --> 00:31:57,200 Speaker 2: be cynical about when I see financial institution to talk 603 00:31:57,240 --> 00:31:59,680 Speaker 2: about climate and why it should actually be you know, 604 00:31:59,720 --> 00:32:02,440 Speaker 2: one one of the key pillars of risk going forward. 605 00:32:02,960 --> 00:32:04,640 Speaker 5: Yeah, So our viue is very kind specific on this, 606 00:32:04,680 --> 00:32:08,240 Speaker 5: which is we want to think about what are the 607 00:32:08,280 --> 00:32:11,800 Speaker 5: big structural forces that act on markets over a five 608 00:32:11,840 --> 00:32:13,920 Speaker 5: to ten ure horizon, and what are the things that 609 00:32:13,960 --> 00:32:18,400 Speaker 5: really affect the fundamental risks that investors face. So, in 610 00:32:18,440 --> 00:32:20,960 Speaker 5: conjunction with these other forces are happening at the same 611 00:32:21,000 --> 00:32:24,280 Speaker 5: time in terms of demographic shifts and AI and worries 612 00:32:24,280 --> 00:32:28,160 Speaker 5: about death and deglobalization, we also have, I think a 613 00:32:28,280 --> 00:32:31,200 Speaker 5: need to think about whether there are risks associated with 614 00:32:31,280 --> 00:32:33,360 Speaker 5: climate and the specific view that we have on that 615 00:32:33,880 --> 00:32:37,080 Speaker 5: is that it seems highly unlikely that the world will 616 00:32:37,120 --> 00:32:40,080 Speaker 5: achieve net zero by twenty fifty for two different kinds 617 00:32:40,120 --> 00:32:43,120 Speaker 5: of reasons. One is that it's social and politically really 618 00:32:43,200 --> 00:32:47,200 Speaker 5: hard to change behaviors fast enough. Secondly, is the power 619 00:32:47,240 --> 00:32:50,560 Speaker 5: demand of AI. So you know, so as far as 620 00:32:50,640 --> 00:32:52,600 Speaker 5: we can tell, by the end of the next year, 621 00:32:53,120 --> 00:32:55,600 Speaker 5: global data center power demand will be the same part 622 00:32:55,680 --> 00:32:58,840 Speaker 5: demand as the total power of Japan. So we've basically 623 00:32:58,840 --> 00:33:01,720 Speaker 5: added a G three economy onto global power demand and 624 00:33:01,760 --> 00:33:04,960 Speaker 5: that will continue to grow. So that implies that we 625 00:33:05,000 --> 00:33:08,720 Speaker 5: don't hit net zero. The climate science seems suggest that 626 00:33:08,880 --> 00:33:11,160 Speaker 5: means that it is likely we see a warming greater 627 00:33:11,200 --> 00:33:13,920 Speaker 5: than two degrees. And then the question is, well, do 628 00:33:14,040 --> 00:33:16,920 Speaker 5: investors need to care about this? Does this matter either 629 00:33:16,920 --> 00:33:19,800 Speaker 5: from the point of view of inflation, inflation risks, supply 630 00:33:19,920 --> 00:33:23,720 Speaker 5: chain risk, or growth rates. So in our book we 631 00:33:23,760 --> 00:33:26,680 Speaker 5: spend a lot of time so pulling academic evidence on 632 00:33:26,880 --> 00:33:30,440 Speaker 5: what the effect is of a change in temperature on GDP. Now, 633 00:33:30,480 --> 00:33:32,840 Speaker 5: the first thing say is you plot the twenty eight 634 00:33:32,880 --> 00:33:35,000 Speaker 5: studies that we looked at in terms of the link 635 00:33:35,040 --> 00:33:37,440 Speaker 5: between a temperature and growth. They're all over the place. 636 00:33:37,480 --> 00:33:39,920 Speaker 5: It's a big bunch of points. So the first thing 637 00:33:39,960 --> 00:33:43,280 Speaker 5: I say about it is there's huge disagreement about what 638 00:33:43,360 --> 00:33:48,320 Speaker 5: the relationship between temperature and growth is. But the trend 639 00:33:48,360 --> 00:33:49,960 Speaker 5: line through it, if you seemed to put a sort 640 00:33:49,960 --> 00:33:53,040 Speaker 5: of average line and through it is downwards. So yes, 641 00:33:53,080 --> 00:33:56,120 Speaker 5: we can argue about how material it is, but there 642 00:33:56,200 --> 00:33:59,480 Speaker 5: is a link that seems to be the consensus of 643 00:33:59,560 --> 00:34:03,160 Speaker 5: crossed the academic works that we looked at that you know, 644 00:34:03,200 --> 00:34:06,160 Speaker 5: at the margin, a bigger increase in temperature is bad 645 00:34:06,440 --> 00:34:09,440 Speaker 5: for growth. Again, the question is, you know, how does 646 00:34:09,560 --> 00:34:11,160 Speaker 5: matter and how do people kind of think about it? 647 00:34:11,280 --> 00:34:15,000 Speaker 5: And what's the scale of this, Because the average of 648 00:34:15,280 --> 00:34:18,960 Speaker 5: all those, you know, implies a change in the equity 649 00:34:18,960 --> 00:34:21,640 Speaker 5: outlook ten years forward that just simply shaves zero point 650 00:34:21,680 --> 00:34:24,879 Speaker 5: two percent parannum of the global equity outlooks. That might 651 00:34:24,920 --> 00:34:26,960 Speaker 5: not sound like a very big deal. You know, it's 652 00:34:26,960 --> 00:34:30,480 Speaker 5: certainly smaller than the impact of demographic change or mean 653 00:34:30,560 --> 00:34:34,600 Speaker 5: reversion on an equity forecast. Having said that, the more 654 00:34:34,719 --> 00:34:38,200 Speaker 5: recent forecasts are worse than the older forecasts and imply 655 00:34:38,360 --> 00:34:40,800 Speaker 5: something that looks like a minus point five and minus 656 00:34:40,840 --> 00:34:44,440 Speaker 5: point six percent paranum impact on equitturns at the ten 657 00:34:44,560 --> 00:34:46,759 Speaker 5: year mark, and that starts to get to be the 658 00:34:46,800 --> 00:34:51,400 Speaker 5: same kind of order of magnitude as demographics have on 659 00:34:51,440 --> 00:34:53,919 Speaker 5: the average return the one should expect. But I'd argue 660 00:34:53,920 --> 00:34:56,279 Speaker 5: that we go beyond that because the real thing that 661 00:34:56,320 --> 00:34:58,920 Speaker 5: struck me it's just the scale of the error bars 662 00:34:58,920 --> 00:35:02,880 Speaker 5: around these forecasts huge. So yes, of course we can 663 00:35:02,960 --> 00:35:08,239 Speaker 5: argue about what globalization and demographics and core profitability and 664 00:35:08,360 --> 00:35:11,160 Speaker 5: labor versus profit share will do to the earnings outlook, 665 00:35:11,360 --> 00:35:13,960 Speaker 5: and we can try our best to have models. 666 00:35:13,560 --> 00:35:15,680 Speaker 4: For those, and we have certain error bars around them. 667 00:35:15,920 --> 00:35:19,279 Speaker 5: But the error bars around climate and also AI, I 668 00:35:19,320 --> 00:35:23,399 Speaker 5: would say two things are just very different from everything else. 669 00:35:23,480 --> 00:35:28,000 Speaker 5: That introduced the sense of radical forecast error in what 670 00:35:28,040 --> 00:35:31,120 Speaker 5: we're doing, and really implies that people need to be 671 00:35:31,800 --> 00:35:36,240 Speaker 5: thinking about perhaps diversification in a more radical way, because 672 00:35:36,280 --> 00:35:39,920 Speaker 5: we have path error on ten years horizons that's much 673 00:35:39,960 --> 00:35:41,160 Speaker 5: wider than it's been historically. 674 00:35:42,320 --> 00:35:44,799 Speaker 3: Going back to AI for a second, obviously this is 675 00:35:44,840 --> 00:35:48,040 Speaker 3: really important not just for the energy transition and the 676 00:35:48,120 --> 00:35:51,360 Speaker 3: impact on climate change, but also for the economic outlook, 677 00:35:51,560 --> 00:35:55,000 Speaker 3: the impact on productivity, and also of course for the 678 00:35:55,040 --> 00:35:58,360 Speaker 3: equity market where we've seen the big tech giants just 679 00:35:58,680 --> 00:36:03,160 Speaker 3: continue to dominate. Is there a risk or would it 680 00:36:03,200 --> 00:36:07,239 Speaker 3: be your base case that AI basically just intensifies. I 681 00:36:08,280 --> 00:36:13,440 Speaker 3: guess existing market imbalances where the big just get bigger 682 00:36:13,520 --> 00:36:17,560 Speaker 3: and only a select group of tech firms is kind 683 00:36:17,600 --> 00:36:22,400 Speaker 3: of favored, and that presumably would undermine productivity gains broad 684 00:36:22,440 --> 00:36:24,279 Speaker 3: based productivity gains. 685 00:36:25,480 --> 00:36:29,640 Speaker 5: I think the biggest issue around trying to forecast productivity 686 00:36:29,680 --> 00:36:32,320 Speaker 5: gains is that with any new technology that comes along, 687 00:36:32,760 --> 00:36:35,440 Speaker 5: it turns out to be really really hard to forecast 688 00:36:35,520 --> 00:36:39,160 Speaker 5: what the impact that has on accurate productivity and the 689 00:36:39,239 --> 00:36:43,200 Speaker 5: ability of the economics pression you know, in general and 690 00:36:43,480 --> 00:36:46,000 Speaker 5: everyone across the street to forecast productivity has been really 691 00:36:46,000 --> 00:36:48,279 Speaker 5: poor for a long long time. So I guess we 692 00:36:48,280 --> 00:36:53,200 Speaker 5: should firstly approach productivity forecasts with a degree of humility 693 00:36:53,239 --> 00:36:57,279 Speaker 5: and certainly shouldn't rely on huge productivity gains as a 694 00:36:57,400 --> 00:36:59,840 Speaker 5: justification for earnings growth. 695 00:37:00,080 --> 00:37:01,919 Speaker 4: Say that's the first thing I'd say. 696 00:37:02,400 --> 00:37:04,759 Speaker 5: Secondly is that it has to put in conjunction with 697 00:37:04,920 --> 00:37:09,120 Speaker 5: downward forces on growth from the things we spoke earlier 698 00:37:09,120 --> 00:37:12,840 Speaker 5: in terms of degloverzation and demographics, etc. So yes, it 699 00:37:12,880 --> 00:37:15,760 Speaker 5: seems likely we do get a productivity improvement from AI, 700 00:37:16,239 --> 00:37:18,400 Speaker 5: and the scale of it is hotly debated, But the 701 00:37:18,480 --> 00:37:22,080 Speaker 5: question is is that enough to overcome downward force on 702 00:37:22,120 --> 00:37:24,399 Speaker 5: growth from the levels of growth that we've become used 703 00:37:24,400 --> 00:37:26,520 Speaker 5: to for the last thirty or forty years. And the 704 00:37:26,600 --> 00:37:31,279 Speaker 5: third element is to what extent does a large productivity 705 00:37:31,320 --> 00:37:36,680 Speaker 5: gain from AI require significant displacement of jobs. Now that's 706 00:37:37,120 --> 00:37:39,880 Speaker 5: a very hotly debated topic. We see, we don't know 707 00:37:40,000 --> 00:37:42,240 Speaker 5: the answer to that yet. I mean, on the one hand, 708 00:37:42,640 --> 00:37:46,440 Speaker 5: one per point to two hundred years of technological advance 709 00:37:46,480 --> 00:37:49,759 Speaker 5: and automation, and yet we have almost full employment. There's 710 00:37:49,840 --> 00:37:53,160 Speaker 5: no evidence to date that there's been a structural trend 711 00:37:53,200 --> 00:37:56,360 Speaker 5: increase unemployment through all the automation we've seen since the 712 00:37:56,360 --> 00:38:00,240 Speaker 5: birth of the Industrial Revolution. Equally, at the same time, 713 00:38:00,560 --> 00:38:04,040 Speaker 5: the jobs that seem most at risk from AI driven 714 00:38:04,239 --> 00:38:07,240 Speaker 5: automation are those in non unionized sectors, and that seems 715 00:38:07,280 --> 00:38:10,200 Speaker 5: like a different kind of risk than the one perhaps 716 00:38:10,200 --> 00:38:13,719 Speaker 5: we've seen, you know, through automation ships in the last 717 00:38:13,760 --> 00:38:16,400 Speaker 5: now thirty or forty years. So I think the heart 718 00:38:16,480 --> 00:38:20,120 Speaker 5: of the macro aggregate, you know, going to question around 719 00:38:20,200 --> 00:38:23,440 Speaker 5: AI is firstly, what's the quantum of the productivity increase 720 00:38:23,480 --> 00:38:26,560 Speaker 5: that we can expect, you know, whether that is enough 721 00:38:26,600 --> 00:38:30,239 Speaker 5: to offset these downwindforce and growth elsewhere? And if you 722 00:38:30,520 --> 00:38:34,280 Speaker 5: are very bullish on the outlook for AI driven productivity growth. 723 00:38:34,520 --> 00:38:38,000 Speaker 5: Do you necessarily have to be a bearish in terms 724 00:38:38,040 --> 00:38:40,080 Speaker 5: of the job side look? And that's very much an 725 00:38:40,080 --> 00:38:41,600 Speaker 5: open question at the moment. 726 00:38:42,560 --> 00:38:45,040 Speaker 3: I have just one more question, and it's a personal 727 00:38:45,080 --> 00:38:47,400 Speaker 3: one if you don't mind, but I know you. You 728 00:38:47,520 --> 00:38:50,520 Speaker 3: kind of publicly declared that you're no longer a quant 729 00:38:50,680 --> 00:38:53,040 Speaker 3: which is kind of funny because I kind of imagine 730 00:38:53,080 --> 00:38:56,799 Speaker 3: the equivalent of the office scene where Michael stands up 731 00:38:56,920 --> 00:38:59,840 Speaker 3: and shouts out, I declare bankruptcy. I kind of imagine 732 00:39:00,160 --> 00:39:03,360 Speaker 3: to go at the office of a Lions Bernstein shouting 733 00:39:03,440 --> 00:39:05,799 Speaker 3: I am no longer a quant. But anyway, what does 734 00:39:05,840 --> 00:39:08,319 Speaker 3: all of this mean, the sort of big shift mean 735 00:39:08,480 --> 00:39:13,400 Speaker 3: for systematic investing that basically relies on, you know, back 736 00:39:13,520 --> 00:39:15,759 Speaker 3: testing realms and reams of historic data. 737 00:39:16,560 --> 00:39:19,200 Speaker 5: Yeah, so, I think there is a case made that 738 00:39:19,360 --> 00:39:22,680 Speaker 5: the bigger structural level that we've been in a certain 739 00:39:22,880 --> 00:39:26,360 Speaker 5: economic environment for thirty or forty years, and the forces 740 00:39:26,360 --> 00:39:30,200 Speaker 5: that drove that you have run their course or going intraverse, 741 00:39:30,239 --> 00:39:32,040 Speaker 5: and therefore some of the rules of some that have 742 00:39:32,080 --> 00:39:35,360 Speaker 5: existed for a long time aren't going to work in 743 00:39:35,400 --> 00:39:38,120 Speaker 5: the same way now that does not mean the systematic 744 00:39:38,160 --> 00:39:41,719 Speaker 5: investings suddenly stops working, because obviously there are firstly host 745 00:39:41,760 --> 00:39:45,680 Speaker 5: of processes that operate over shorter time horizons that don't 746 00:39:45,719 --> 00:39:50,360 Speaker 5: need to take into account these huge, slow moving structural forces. Secondly, 747 00:39:51,040 --> 00:39:53,520 Speaker 5: it would be you know, almost absurd, I think, to 748 00:39:53,640 --> 00:39:58,839 Speaker 5: reject any kind of systematic quantitative input given the advances 749 00:39:58,920 --> 00:40:01,279 Speaker 5: in AI that it takes in place, and assuming the 750 00:40:01,280 --> 00:40:03,680 Speaker 5: one thing cary on working in the same way. So 751 00:40:03,920 --> 00:40:06,440 Speaker 5: it's not to kind of reject with that kind of 752 00:40:06,480 --> 00:40:10,080 Speaker 5: process at all, but it is I think hard to 753 00:40:10,120 --> 00:40:13,040 Speaker 5: say that the general approaches that have worked are going 754 00:40:13,080 --> 00:40:15,560 Speaker 5: to carry on in the same way. Specifically when it 755 00:40:15,560 --> 00:40:19,920 Speaker 5: comes down to the really hard questions around helping clients 756 00:40:19,960 --> 00:40:22,080 Speaker 5: think about kind of governance, and back to this question 757 00:40:22,120 --> 00:40:24,080 Speaker 5: we spoke about the beginning, which is actually what is 758 00:40:24,680 --> 00:40:26,680 Speaker 5: the real measure risk that we care about it? You know, 759 00:40:26,920 --> 00:40:30,239 Speaker 5: is that the volatility the portfolio or is it a 760 00:40:30,280 --> 00:40:33,000 Speaker 5: measure of purchasing power? And that's the kind of deep 761 00:40:33,040 --> 00:40:35,640 Speaker 5: governance question that I think it's very hard to attack 762 00:40:35,680 --> 00:40:37,920 Speaker 5: with any kind of systematic process almost necessarily kind of 763 00:40:37,960 --> 00:40:40,000 Speaker 5: sits outside of that. And so as those kind of 764 00:40:40,040 --> 00:40:42,520 Speaker 5: discussions that we're spending a lot more of our time 765 00:40:42,560 --> 00:40:44,680 Speaker 5: on the clients spouse we think for those is where 766 00:40:44,719 --> 00:40:47,240 Speaker 5: some of the biggest shifts are taking place in Ago. 767 00:40:47,320 --> 00:40:50,640 Speaker 2: Fraser Jenkins at Alliance Burnstein, thank you so much for 768 00:40:50,760 --> 00:40:53,400 Speaker 2: coming on. It had been too long. It's always interesting 769 00:40:53,560 --> 00:40:55,719 Speaker 2: to talk to you and read your stuff. Appreciate you 770 00:40:55,800 --> 00:40:56,760 Speaker 2: joining us on the outline. 771 00:40:57,440 --> 00:40:59,000 Speaker 4: Thank you very much for hanging back on my shirt. 772 00:40:59,000 --> 00:40:59,879 Speaker 4: It's for being a huge fun. 773 00:41:13,760 --> 00:41:16,239 Speaker 2: Tracy. I always really like talking to Inego. It's been 774 00:41:16,239 --> 00:41:18,719 Speaker 2: too long, and I think he's probably one of the 775 00:41:18,800 --> 00:41:20,680 Speaker 2: best out there. You know, a lot of people try 776 00:41:20,680 --> 00:41:24,200 Speaker 2: to synthesize big picture ideas, and you know, it must 777 00:41:24,280 --> 00:41:26,200 Speaker 2: be a lot of fun going around the world and 778 00:41:26,200 --> 00:41:28,680 Speaker 2: talking to clients and talk about big idea. I think 779 00:41:28,719 --> 00:41:30,480 Speaker 2: he's one of the best at it, and I think 780 00:41:31,040 --> 00:41:33,480 Speaker 2: he's very cogent and takes that process very seriously. 781 00:41:33,640 --> 00:41:34,040 Speaker 4: He does. 782 00:41:34,200 --> 00:41:36,480 Speaker 3: I do imagine you must get the same questions. 783 00:41:36,280 --> 00:41:36,560 Speaker 5: All right. 784 00:41:37,360 --> 00:41:39,200 Speaker 2: That's so valuable, right, yeah. 785 00:41:39,280 --> 00:41:41,520 Speaker 3: I mean, I guess it allows you to weigh what's 786 00:41:41,600 --> 00:41:45,040 Speaker 3: the biggest concern for people. But I just wonder. I mean, 787 00:41:45,080 --> 00:41:47,080 Speaker 3: I guess you give a sort of set response each 788 00:41:47,120 --> 00:41:48,759 Speaker 3: time you hear it. I don't know, or maybe you 789 00:41:48,840 --> 00:41:51,439 Speaker 3: refine your arguments as you go along. I got to say, 790 00:41:51,440 --> 00:41:55,200 Speaker 3: speaking of arguments, you mentioned that this book is from Inego, 791 00:41:55,320 --> 00:41:58,160 Speaker 3: is publicly available. We should put a link in the 792 00:41:58,200 --> 00:42:01,160 Speaker 3: show notes or something to it so everyone can read 793 00:42:01,200 --> 00:42:02,839 Speaker 3: it alongside this episode. 794 00:42:03,000 --> 00:42:05,839 Speaker 2: The amount of data and interesting charts in there, it's 795 00:42:05,840 --> 00:42:10,480 Speaker 2: certainly well worth anyone approusing. So we will definitely make 796 00:42:10,560 --> 00:42:12,960 Speaker 2: sure that we find a way to point people to that. 797 00:42:13,320 --> 00:42:17,360 Speaker 2: So I'm really interested in this question of and on 798 00:42:17,480 --> 00:42:21,520 Speaker 2: the dollars, specifically about the sensitivity of the dollar to risk, right, 799 00:42:21,600 --> 00:42:25,360 Speaker 2: because for years the view is something bad happens, or 800 00:42:25,360 --> 00:42:27,880 Speaker 2: something new happens, or something people get anxious in the 801 00:42:27,880 --> 00:42:30,200 Speaker 2: flight to dollars. And I still think you see that 802 00:42:30,280 --> 00:42:33,520 Speaker 2: to some extent, but it definitely seems true. I mean, 803 00:42:33,560 --> 00:42:35,480 Speaker 2: you know, you see this recovery and a lot of 804 00:42:35,480 --> 00:42:38,680 Speaker 2: assets since early April, we haven't seen the dollar. And 805 00:42:38,760 --> 00:42:41,560 Speaker 2: I think you have these moments now where you have 806 00:42:41,600 --> 00:42:44,560 Speaker 2: a sort of quote risk event unquote and there is 807 00:42:44,600 --> 00:42:46,800 Speaker 2: no flight to the dollar, it's a flight to gold 808 00:42:46,880 --> 00:42:47,480 Speaker 2: or something else. 809 00:42:47,680 --> 00:42:47,839 Speaker 5: Right. 810 00:42:47,840 --> 00:42:51,120 Speaker 3: And the FED example, yeah, well it's a really good example. 811 00:42:51,200 --> 00:42:51,759 Speaker 1: Yeah. 812 00:42:51,840 --> 00:42:54,000 Speaker 3: The two things I kind of took away from that 813 00:42:54,120 --> 00:42:58,440 Speaker 3: conversation are even if we're talking about a see shift 814 00:42:58,719 --> 00:43:01,960 Speaker 3: in what's happening in the world, how that translates into markets. 815 00:43:02,320 --> 00:43:04,480 Speaker 3: It doesn't mean it's all going to happen at once, right, 816 00:43:04,520 --> 00:43:07,200 Speaker 3: This can be a very very slow moving thing. And 817 00:43:07,520 --> 00:43:10,319 Speaker 3: I guess I'm going to use the old tanker cliche, right, like, 818 00:43:10,360 --> 00:43:12,200 Speaker 3: if you're in a speak boat, you can turn it 819 00:43:12,280 --> 00:43:14,600 Speaker 3: very quickly. But if you're talking about these huge, huge 820 00:43:14,680 --> 00:43:17,480 Speaker 3: structural changes, it's more of a tanker and it takes 821 00:43:17,480 --> 00:43:20,120 Speaker 3: some time. And then the second thing is, I think, 822 00:43:20,239 --> 00:43:23,719 Speaker 3: what is actually different about this moment, and Inego talked 823 00:43:23,719 --> 00:43:27,200 Speaker 3: about it at the beginning, is just the confluence of 824 00:43:27,360 --> 00:43:30,680 Speaker 3: major changes. Yes, yeah, that seem to be happening. It's 825 00:43:30,760 --> 00:43:34,319 Speaker 3: not just death of the dollar, potentially, it's also death 826 00:43:34,320 --> 00:43:38,520 Speaker 3: of the dollar plus deglobalization plus AI plus AI plus 827 00:43:38,680 --> 00:43:40,600 Speaker 3: population growth and all of that. 828 00:43:41,040 --> 00:43:43,279 Speaker 2: Now, I've been thinking about this and it's a little 829 00:43:43,320 --> 00:43:46,440 Speaker 2: bit tangential to what we've been talking about specifically, But 830 00:43:46,520 --> 00:43:48,880 Speaker 2: there's obviously so many changes. But even if you just 831 00:43:48,920 --> 00:43:51,400 Speaker 2: take one, and one that's been on my mind lately 832 00:43:51,520 --> 00:43:54,200 Speaker 2: is self driving cars. Even if it was nothing else, 833 00:43:54,239 --> 00:43:57,839 Speaker 2: happening technologically in the entire world. I think you could 834 00:43:57,840 --> 00:44:00,839 Speaker 2: make the argument that self driving cars, for example, will 835 00:44:00,880 --> 00:44:04,000 Speaker 2: massively restructure urban landscapes. Right the way that we arrange 836 00:44:04,000 --> 00:44:07,640 Speaker 2: cities and suburbs and excerbs has the potential to change 837 00:44:07,960 --> 00:44:09,160 Speaker 2: massively if people don't. 838 00:44:09,040 --> 00:44:09,840 Speaker 4: Have to drive anymore. 839 00:44:10,200 --> 00:44:11,879 Speaker 2: And this is just one thing, and it actually doesn't 840 00:44:11,920 --> 00:44:13,760 Speaker 2: really get talked about that much, but if you actually 841 00:44:13,880 --> 00:44:16,719 Speaker 2: follow through, the implication is actually big. But there are 842 00:44:16,760 --> 00:44:19,240 Speaker 2: so many things happening right now. That's just one minor 843 00:44:19,280 --> 00:44:21,359 Speaker 2: one that doesn't even get that much attention. But add 844 00:44:21,400 --> 00:44:24,640 Speaker 2: in self driving cars, add in AI and the effect 845 00:44:24,680 --> 00:44:28,200 Speaker 2: that that has on disrupting the white color workforce in 846 00:44:28,239 --> 00:44:31,480 Speaker 2: some way. Add on the rise of a sort of 847 00:44:31,520 --> 00:44:35,200 Speaker 2: domestic political volatility and the attacks on the FED and 848 00:44:35,239 --> 00:44:38,160 Speaker 2: so forth. Add on the fact there are multiple wars 849 00:44:38,239 --> 00:44:41,279 Speaker 2: going on, etc. Add on you know, the fact that 850 00:44:41,360 --> 00:44:42,360 Speaker 2: birth rates are collapsing. 851 00:44:42,400 --> 00:44:44,560 Speaker 3: This is a very long list here, Well, this is 852 00:44:44,600 --> 00:44:45,239 Speaker 3: a lot going on. 853 00:44:45,280 --> 00:44:47,319 Speaker 2: There's a lot going on, and each one of these 854 00:44:47,360 --> 00:44:49,080 Speaker 2: has the potential to be and they're all real. 855 00:44:49,560 --> 00:44:51,640 Speaker 3: I think you need to travel around the world talking 856 00:44:51,640 --> 00:44:54,279 Speaker 3: to clients about how self driving cars are going to 857 00:44:54,320 --> 00:44:55,320 Speaker 3: impact urban planning. 858 00:44:55,440 --> 00:44:56,880 Speaker 2: I'd love to, you know, I think we should do 859 00:44:56,920 --> 00:44:58,719 Speaker 2: We should go around the world and do live odd 860 00:44:58,760 --> 00:45:01,279 Speaker 2: lots events. But we don't have to ask question. We 861 00:45:01,320 --> 00:45:03,200 Speaker 2: just get to hear what everyone else is interested in 862 00:45:03,719 --> 00:45:04,400 Speaker 2: the audio. 863 00:45:04,120 --> 00:45:05,000 Speaker 3: All the clients. 864 00:45:05,080 --> 00:45:06,160 Speaker 4: Yeah, I don't know. 865 00:45:06,280 --> 00:45:08,719 Speaker 2: We let the client, We let the listeners, you know, like, 866 00:45:08,760 --> 00:45:11,560 Speaker 2: we don't what do you guys want to hear about? Listen? 867 00:45:11,640 --> 00:45:12,759 Speaker 2: Let's go on a listening tour. 868 00:45:13,000 --> 00:45:14,759 Speaker 3: We should do that. Yeah, I would love that. 869 00:45:15,239 --> 00:45:17,239 Speaker 2: That would be a nice Let's do a listening tour. 870 00:45:17,280 --> 00:45:18,360 Speaker 3: All right, shall we leave it there? 871 00:45:18,440 --> 00:45:19,120 Speaker 2: Let's leave it there. 872 00:45:19,239 --> 00:45:21,799 Speaker 3: This has been another episode of the Authoughts podcast. I'm 873 00:45:21,800 --> 00:45:24,759 Speaker 3: Tracy Alloway. You can follow me at Tracy Alloway and 874 00:45:24,800 --> 00:45:25,800 Speaker 3: I'm Jolly Wasenthal. 875 00:45:25,840 --> 00:45:28,280 Speaker 2: You can follow me at the Stalwart check out inego 876 00:45:28,320 --> 00:45:31,280 Speaker 2: Fraser Jenkins' book. You can find it at the Alliance 877 00:45:31,320 --> 00:45:34,560 Speaker 2: Bernstein website. You can search that. Follow our producers Kerman 878 00:45:34,640 --> 00:45:37,840 Speaker 2: Rodriguez at Carman Arman, dash O, Bennett at Dashbot and 879 00:45:37,920 --> 00:45:40,600 Speaker 2: kel Brooks at Keil Brooks. More odd Laws content. Go 880 00:45:40,640 --> 00:45:43,000 Speaker 2: to bloomberg dot com slash od Laws with the daily 881 00:45:43,080 --> 00:45:45,480 Speaker 2: newsletter and all of our episodes, and you can chat 882 00:45:45,520 --> 00:45:47,520 Speaker 2: about all of these topics twenty four seven in our 883 00:45:47,680 --> 00:45:50,359 Speaker 2: discord discord gg slash. 884 00:45:50,000 --> 00:45:52,879 Speaker 3: Odlines and if you enjoy add thoughts. If you want 885 00:45:52,960 --> 00:45:55,200 Speaker 3: us to go on a listening tour of the world, 886 00:45:55,239 --> 00:45:57,640 Speaker 3: then please leave us a positive review on your favorite 887 00:45:57,640 --> 00:46:01,400 Speaker 3: podcast platform. And remember, if you are Bloomberg subscriber, you 888 00:46:01,440 --> 00:46:04,560 Speaker 3: can listen to all of our episodes absolutely ad free. 889 00:46:04,680 --> 00:46:06,920 Speaker 3: All you need to do is find the Bloomberg channel 890 00:46:06,960 --> 00:46:10,800 Speaker 3: on Apple Podcasts and follow the instructions there. Thanks for listening.