WEBVTT - How to Prepare for a Post-Dollar World with Inigo Fraser Jenkins 0:00:02.480 --> 0:00:17.720 Bloomberg Audio Studios, Podcasts, radio News. 0:00:18.160 --> 0:00:21.200 Hello and welcome to another episode of the Odd Lass podcast. 0:00:21.239 --> 0:00:23.640 I'm Jill Wisenthal and I'm Tracy Alloway. 0:00:24.000 --> 0:00:27.639 Tracy, we can't go too long without talking about the 0:00:27.720 --> 0:00:30.680 role of the dollar in the United States, the pillar 0:00:30.760 --> 0:00:34.240 of the global financial system, whether there is some threat 0:00:34.280 --> 0:00:37.559 to it or not. We are recording this July seventeenth. 0:00:37.680 --> 0:00:41.000 It has been a fresh week of headlines about say, 0:00:41.120 --> 0:00:43.480 independence of the Federal Reserve and all of the things 0:00:43.520 --> 0:00:45.760 that we talk about all of the time, so we 0:00:45.800 --> 0:00:48.120 sort of need to return to this central question. 0:00:48.320 --> 0:00:52.239 Yeah, the interesting thing about the Fed chair drama is 0:00:52.280 --> 0:00:56.880 when the initial headlines came out about Trump possibly firing Powell, 0:00:57.240 --> 0:00:59.920 the big reaction wasn't the dollar, right, There wasn't a market, 0:01:00.080 --> 0:01:02.840 it wasn't even bonds, It was the currency totally. 0:01:02.880 --> 0:01:05.399 And I think this is one of those things where 0:01:06.360 --> 0:01:08.399 I don't know, we don't know what's going to happen, 0:01:08.480 --> 0:01:12.520 whether Trump will actually try to find cause to fire Powell. 0:01:12.560 --> 0:01:15.240 Who knows what will even happen by the time people 0:01:15.360 --> 0:01:19.039 are listening to this episode. But you know, I think 0:01:19.080 --> 0:01:21.959 people get the sense that with the Fed here, with 0:01:22.040 --> 0:01:24.920 many other things, there is this sort of like erosion 0:01:25.200 --> 0:01:29.600 of an existing set of norms or expectations, et cetera. 0:01:29.720 --> 0:01:33.240 And so you know, I think arguably some damage, for 0:01:33.319 --> 0:01:35.840 better or worse, has already been done to the existing 0:01:35.920 --> 0:01:39.480 institutional arrangement. Everyone around the world is paying attention now 0:01:39.520 --> 0:01:44.280 to mention the sort of arbitrariness or volatility of tariff policy, 0:01:44.840 --> 0:01:48.440 ongoing wars, and so forth. Much is in change. We 0:01:48.520 --> 0:01:49.720 live in interesting times. 0:01:50.560 --> 0:01:53.600 Here's what I think go on. So it's a cliche 0:01:53.800 --> 0:01:58.000 in financial market commentary to talk about a major turning point, yes, 0:01:58.040 --> 0:02:03.040 because we've seen people talk about the dollar for decades. Yeah, exactly. 0:02:03.360 --> 0:02:06.800 But that said, I think what's different about now is 0:02:06.840 --> 0:02:11.400 the number of like long term secular trends that appear 0:02:11.520 --> 0:02:13.320 to be reversed on the move. 0:02:13.560 --> 0:02:13.920 Yeah. 0:02:13.960 --> 0:02:18.120 So you know, there's globalization going from deglobalization. There's population 0:02:18.280 --> 0:02:22.800 growth going to shrinking populations. There's higher inflation instead of 0:02:22.880 --> 0:02:27.320 years and years of deflation. And the interesting thing about 0:02:27.360 --> 0:02:29.760 that is, of course, how are people going to react 0:02:29.800 --> 0:02:32.080 to that? How are markets going to react to that, 0:02:32.480 --> 0:02:36.959 especially when they've grown very, very used to the previous 0:02:37.160 --> 0:02:40.960 situation through you know, back testing and all of that stuff. 0:02:41.120 --> 0:02:43.639 Totally. And I'll just say one thing which makes this 0:02:43.800 --> 0:02:47.200 very interesting timing wise from the perspective of investors, because 0:02:47.240 --> 0:02:49.840 there are a lot of trends that seem to be, 0:02:50.240 --> 0:02:52.760 if not going in reverse, at least a new direction, 0:02:53.320 --> 0:02:57.920 et cetera. One trend that hasn't really gone in reverse, however, 0:02:58.600 --> 0:03:00.959 is you're still getting paid a lot to own US 0:03:01.000 --> 0:03:04.480 tech and you know US markets, they're up solidly on 0:03:04.520 --> 0:03:07.720 the year, they are underperforming, which that is new Global 0:03:07.720 --> 0:03:11.360 equities have outperformed US equities in large part this year. 0:03:11.960 --> 0:03:14.800 But this basic idea that for all the money to 0:03:14.880 --> 0:03:17.280 be made is as an investor is still in like 0:03:17.320 --> 0:03:20.560 a handful of US companies like that in a way 0:03:20.720 --> 0:03:24.400 surprisingly is still kind of intact. And the question is 0:03:24.520 --> 0:03:27.320 will that be like the last sort of the shoe 0:03:27.360 --> 0:03:30.880 to drop, We're the end of US exceptionalism. From just 0:03:30.960 --> 0:03:35.600 the perspective of a globally oriented portfolio manager, I think that's. 0:03:35.400 --> 0:03:37.640 A good thing to watch. I'm gonna pull a page 0:03:37.680 --> 0:03:41.760 out of Bob Bracket's Commodities Energy Transition book and say 0:03:41.800 --> 0:03:45.840 that these types of transitions often take longer than people expect, 0:03:45.880 --> 0:03:48.160 and you shouldn't expect everything to happen all at once. 0:03:48.200 --> 0:03:50.440 It's going to happen in stages, so there's a lot 0:03:50.440 --> 0:03:52.280 to look out for, a lot to discuss. 0:03:52.720 --> 0:03:55.040 Well, I'm really excited to say we have the perfect guest, 0:03:55.200 --> 0:03:58.920 someone we haven't spoken to in several years, but always 0:03:58.960 --> 0:04:02.120 one of the most intro guys around. We're gonna be 0:04:02.160 --> 0:04:05.440 speaking with Inego Fraser Jenkins. He has a market strategist 0:04:05.520 --> 0:04:09.120 at Alliance Bernstein. He has recently published a new quote 0:04:09.160 --> 0:04:12.520 book that's public online about the sort of like the 0:04:12.560 --> 0:04:16.280 big trends of the year, including a big focus on 0:04:16.320 --> 0:04:18.960 the sort of like question about the stability of the 0:04:19.080 --> 0:04:22.160 dollar or a post dollar universe and what that could 0:04:22.160 --> 0:04:24.919 look like. So, Inego, thank you so much for coming 0:04:24.920 --> 0:04:25.719 back on odline. 0:04:26.040 --> 0:04:27.320 Thank you very much. Be good to be back on 0:04:27.320 --> 0:04:28.200 the show. 0:04:28.240 --> 0:04:30.839 Tell me about your books. What are your books and 0:04:30.920 --> 0:04:32.920 what is the theme of this year's book. 0:04:33.320 --> 0:04:35.919 Yeah, so the book is a way of drawing together 0:04:35.920 --> 0:04:39.040 in one place some of the views we have on 0:04:39.080 --> 0:04:42.000 some of the biggest questions that investors face. So is 0:04:42.040 --> 0:04:43.839 actually some of the issues that you've mentioned already in 0:04:43.960 --> 0:04:48.880 terms of globalization turning into deglobalization, of population growth turning 0:04:48.920 --> 0:04:53.680 into a slowdown in working age population, and issues around 0:04:54.240 --> 0:04:57.120 interest rates and inflation being different than the norms of 0:04:57.160 --> 0:04:59.400 the last thirty or so years, and all these issues 0:04:59.600 --> 0:05:02.239 sitting background, we think there's a strong case you made 0:05:02.600 --> 0:05:05.320 that some of the norms of the last thirty or 0:05:05.360 --> 0:05:08.480 forty years really are unwinding and either run their course 0:05:08.560 --> 0:05:11.279 or going into reverse. And then one of the particular 0:05:11.320 --> 0:05:15.520 issues that has really dominated the client conversations that we've 0:05:15.560 --> 0:05:18.920 had in the last three to six months has been 0:05:19.000 --> 0:05:21.680 this question you've been talking about in terms of US exceptionalism, 0:05:22.080 --> 0:05:25.080 Has it ended? Does the dollar change in terms of 0:05:25.120 --> 0:05:29.359 its role as a reserve currency. Is the prognosis the 0:05:29.400 --> 0:05:32.479 dollar the same as prognosis for US equities or are 0:05:32.520 --> 0:05:34.960 these just different things? And these kind of questions we 0:05:35.000 --> 0:05:37.680 really want to get to grips with and offer some 0:05:37.760 --> 0:05:39.839 views what investors can do about them. 0:05:40.320 --> 0:05:42.720 What kind of timeframe are you looking at here, because 0:05:42.760 --> 0:05:45.080 I think we often don't talk enough about time frames, 0:05:45.160 --> 0:05:48.599 and reading some of the book, some of it I found, 0:05:48.680 --> 0:05:50.640 you know, a little bit worrying, a little bit depressing, 0:05:50.640 --> 0:05:53.840 because you're talking about all these long term challenges that 0:05:53.880 --> 0:05:57.760 the entire world basically faces. And so I'm thinking like, 0:05:57.920 --> 0:05:59.760 what is the time frame here? Is on a long 0:05:59.800 --> 0:06:02.640 and timeframe we're all going to be dead anyway, or 0:06:02.680 --> 0:06:05.080 is it in the next twenty or thirty years. 0:06:05.640 --> 0:06:07.200 I think the interesting thing is there are a bunch 0:06:07.240 --> 0:06:10.839 of different forces acting at the same time of markets. Now, 0:06:10.839 --> 0:06:13.560 all these are strategic forces, but the one's talking about 0:06:13.560 --> 0:06:15.400 in the book that is, and so they can be 0:06:15.440 --> 0:06:17.600 thought about as acting over a say, five to ten 0:06:17.640 --> 0:06:20.160 year timeframe. And of course anything that involves a conversation 0:06:20.200 --> 0:06:23.200 on demographics occasion build just kind of close their ears 0:06:23.240 --> 0:06:25.640 because they think, well, it's so slow moving, that's surely 0:06:25.680 --> 0:06:28.000 that's not going to matter. But actually, if it's happening 0:06:28.200 --> 0:06:31.240 in conjunction with other things, then there is an argument 0:06:31.320 --> 0:06:34.520 that that strategic arison perhaps isn't quite so far off 0:06:34.520 --> 0:06:38.680 as people thought. And when that view on deglobalization, of example, 0:06:38.839 --> 0:06:42.360 is tied with concerns around debt levels, it's concerned around 0:06:42.360 --> 0:06:46.320 the shift from globalization deglobalization. These are things that have 0:06:46.560 --> 0:06:50.280 suddenly zoomed up the list of concerns and investors have 0:06:50.640 --> 0:06:53.440 and so I'd argue that although one might have thought 0:06:53.480 --> 0:06:55.560 that these issues that were sort of further off in 0:06:55.600 --> 0:06:58.320 some sort of notional strategic future. Then in fact, what 0:06:58.320 --> 0:07:01.400 we've seen in the last six months or so is 0:07:01.440 --> 0:07:04.400 those longer term issues become things that dominate the near term. 0:07:04.480 --> 0:07:06.560 So that's a longer term future has become issue a 0:07:06.600 --> 0:07:07.200 few people to face. 0:07:07.279 --> 0:07:11.000 Now, just on the demographics point, you mentioned that a 0:07:11.000 --> 0:07:13.320 lot of you hear that word it's okay, the slow 0:07:13.360 --> 0:07:16.680 moving trend. It is actually those staggering the numbers when 0:07:16.720 --> 0:07:19.600 you look at so you know, obviously people talk about 0:07:19.680 --> 0:07:23.600 the population trajectories in China, aging in the waste, but 0:07:23.680 --> 0:07:28.000 even like I saw these charts of Latin American population growth, 0:07:28.040 --> 0:07:31.840 like fertility is collapsing everywhere. I mean, it's really extraordinary, 0:07:31.880 --> 0:07:33.640 and it's it's not happening slowly. 0:07:34.880 --> 0:07:40.040 Yes to the changes there, a'bsolutely having very rapidly in 0:07:40.120 --> 0:07:43.200 terms of the context of past changes have seen, and 0:07:43.280 --> 0:07:44.960 I think that people just need to be aware of 0:07:45.000 --> 0:07:49.440 just the scale of the support the demographics as given 0:07:49.800 --> 0:07:52.320 to growth rates of Alaska thirty or forty years. I've 0:07:52.320 --> 0:07:56.120 seen this extraordinary period when there's been globalization that's brought 0:07:56.360 --> 0:08:01.600 extra workers into the sort of same environment in terms 0:08:01.640 --> 0:08:05.320 of the economic arena that they work in, and you've 0:08:05.360 --> 0:08:07.440 had a large kind of cohort of people who've all 0:08:07.480 --> 0:08:10.280 been in the workforce, and you've had an increase in 0:08:10.280 --> 0:08:12.640 the female come participation ratio at the same time, and 0:08:12.680 --> 0:08:14.600 so you have a series of things that have meant 0:08:14.640 --> 0:08:18.600 that there have been many more workers available. And I'd 0:08:18.680 --> 0:08:20.480 argue that even before you're going to get into the 0:08:20.520 --> 0:08:25.960 issue around deglobalization, that demographic shift alone undoes a very 0:08:26.040 --> 0:08:29.520 large part of this increase in the global worklupool. But 0:08:29.560 --> 0:08:33.000 that we've seen through the process of globalization since the eighties. 0:08:33.440 --> 0:08:38.040 Now people can you get very negative about this, but 0:08:38.520 --> 0:08:41.760 you know, it isn't an outlook that implies a bearish 0:08:41.960 --> 0:08:45.160 where a prognosis for the future, but it certainly changes 0:08:45.320 --> 0:08:48.640 the base case where you think kind of growth lies. So, 0:08:48.640 --> 0:08:51.440 for example, if you look at the sort of prognosis 0:08:51.520 --> 0:08:54.000 from here onwards, we have an outlook of an extra 0:08:54.080 --> 0:08:57.360 of ten to fifteen years, where on the UN population 0:08:57.480 --> 0:08:59.760 data at least that the US working age population is 0:08:59.800 --> 0:09:01.920 still going to grow, but it's going to grow much 0:09:01.960 --> 0:09:03.319 more slowly than people have been used in the last 0:09:03.480 --> 0:09:06.640 of thirty years or grown about zero point two percent perannum. 0:09:06.960 --> 0:09:09.160 But in Europe the working age population is going to 0:09:09.160 --> 0:09:12.000 shrink at about half percent pranum. In China, it's really 0:09:12.040 --> 0:09:14.480 going to shrink quickly at about one percent paranom between 0:09:14.480 --> 0:09:17.760 now and twenty fifty. So yes, I mean other forces 0:09:17.800 --> 0:09:19.960 are happening in parallel with this kind of clearly, but 0:09:20.240 --> 0:09:23.480 you know, as a base level effect, that does change 0:09:23.520 --> 0:09:26.559 one's view on what growth rates look like. No, beginally 0:09:26.559 --> 0:09:29.319 in that context. That yes, from an absolute perspective, that's 0:09:29.320 --> 0:09:31.120 setting US growth slows down. But back to the other 0:09:31.240 --> 0:09:34.040 thread that you started this podcast with in terms of 0:09:34.080 --> 0:09:37.280 the US exceptionism point, although growth is slowing in the US, 0:09:37.960 --> 0:09:41.480 the base assumption that we have and the most forecasters 0:09:41.520 --> 0:09:45.320 have is working age population does still grow ever so slightly, 0:09:45.679 --> 0:09:48.480 and that is a better prognosis than say in Europe, 0:09:48.480 --> 0:09:51.080 in Japan, in China where it's shrinking out right. 0:09:51.640 --> 0:09:53.680 Can I ask about government duck because this is the 0:09:53.760 --> 0:09:57.040 other thing that you know, people have been talking about 0:09:57.120 --> 0:10:00.440 for a very very long time. High deficits actually in 0:10:00.480 --> 0:10:03.200 the developed world, I think, the highest level of debt 0:10:03.240 --> 0:10:06.520 since like World War two something like that. How do 0:10:06.600 --> 0:10:12.760 you reconcile I guess the warnings over debt driven instability 0:10:13.120 --> 0:10:17.720 or impact on economic growth with the fact that investors 0:10:17.840 --> 0:10:21.280 keep for the most part buying government bonds. I know, 0:10:21.400 --> 0:10:23.960 after April second, we did see a spike in like 0:10:24.040 --> 0:10:26.839 ten year treasury rates, but it came down a bit 0:10:26.880 --> 0:10:29.160 after that. It's actually pretty close to where it was 0:10:29.200 --> 0:10:31.840 in early April now. But it does seem like there 0:10:31.880 --> 0:10:35.920 is a broadly continued appetite for debt. So when would 0:10:35.960 --> 0:10:38.720 that actually become a concern for investors? 0:10:39.000 --> 0:10:41.600 Like keep being asked this question by investors in I 0:10:41.679 --> 0:10:44.800 bet been a common question and really for the last 0:10:44.880 --> 0:10:47.920 a year or so. So, yeah, you're right in saying 0:10:48.000 --> 0:10:49.880 that the level of net debt to GDP is the 0:10:49.920 --> 0:10:51.680 same as it was in World War Two. I guess 0:10:51.679 --> 0:10:52.880 the first thing to say about that is not just 0:10:52.880 --> 0:10:55.520 a US problem, that's actually a G seven wide problem. 0:10:55.600 --> 0:10:58.400 So G seven debt in terms of net debt to 0:10:58.520 --> 0:10:59.960 GDPs back to where it was at the end of 0:11:00.000 --> 0:11:02.360 World War Two. Now, of course, it's been getting there 0:11:02.440 --> 0:11:05.800 for some time. It's been rising really kind of thirty years, 0:11:05.840 --> 0:11:10.440 and that hasn't mattered in an environment of falling interest rates. 0:11:10.440 --> 0:11:13.200 But if there has been a definitive turn in the 0:11:13.240 --> 0:11:16.240 interest rate cycle, then that obviously starts to become a problem. 0:11:16.679 --> 0:11:20.760 People like to fret about these debt levels, and certainly 0:11:21.160 --> 0:11:25.760 other things equal, it implies that sovereign issuers, including the US, 0:11:25.920 --> 0:11:28.400 are more risky than they were before. And so you 0:11:28.400 --> 0:11:31.679 could say, well, maybe there should be a pricing a 0:11:31.720 --> 0:11:35.120 sovereign risk and a should be a steeper yield curve. 0:11:35.520 --> 0:11:38.559 The problem is that so far those fears have been 0:11:38.640 --> 0:11:43.400 utterly swamped by the demands that investors have for liquid assets, 0:11:43.640 --> 0:11:46.959 and say for liquid assets. So you have seen attempts 0:11:46.960 --> 0:11:50.640 to price sovereign risk, yes, arguably in April in the US, 0:11:51.080 --> 0:11:54.160 a couple of years ago in the UK around the 0:11:54.480 --> 0:11:58.040 LDI crisis, prior to the last French election. If you 0:11:58.080 --> 0:12:01.000 get these episodes where the market tries to price sovereign risk, 0:12:01.400 --> 0:12:04.000 but it's very hard to know at what point that 0:12:04.040 --> 0:12:06.319 becomes a problem, because this is a can that obviously 0:12:06.600 --> 0:12:09.240 can be kicked down the road a long way. There 0:12:09.280 --> 0:12:12.160 was a fascinating paper published by Nil Ferguson earlier this 0:12:12.240 --> 0:12:14.560 year where he made the argument that basically is not 0:12:14.640 --> 0:12:17.880 net debt to GDP that really matters. It's the relative 0:12:17.920 --> 0:12:20.840 size of the debt service costs compared to defense budget, 0:12:21.160 --> 0:12:23.560 and the reason that seems like a relevant thing to 0:12:23.600 --> 0:12:26.440 talk about is last year was the first year where 0:12:26.480 --> 0:12:29.640 the US service costs on debt exceeded the US defense budget. 0:12:29.880 --> 0:12:33.040 And then he goes back and looked at previous examples 0:12:33.080 --> 0:12:35.920 of great powers that have seen this kind of crossover 0:12:36.040 --> 0:12:37.880 take place and bad things happen. 0:12:38.040 --> 0:12:39.880 And whether that is the example of. 0:12:39.800 --> 0:12:43.400 The UK, or the Ottoman Empire or the Habsburgs, a 0:12:43.440 --> 0:12:47.559 whole series of historical episodes have led to great powers 0:12:47.559 --> 0:12:51.240 no longer being able to project hard power if the 0:12:51.280 --> 0:12:53.839 debt service cost is much larger than the defense budget. Now, 0:12:53.960 --> 0:12:56.760 the interesting example that I guess is vaguely relevant from 0:12:56.800 --> 0:12:59.840 that is most relevant is the UK. In nineteen twenty, 0:13:00.280 --> 0:13:03.920 the debt service cost became much greater than defense budget. 0:13:04.000 --> 0:13:05.920 That had a big impact on the ability to project 0:13:05.920 --> 0:13:08.800 hard power. Now what's interesting is UK managed to reverse 0:13:08.880 --> 0:13:11.959 course and actually end up with a defense budget again 0:13:12.040 --> 0:13:14.360 larger than interest service costs and debt. But it did 0:13:14.400 --> 0:13:19.240 so through inflation depreciation and through the loss of reserve 0:13:19.280 --> 0:13:21.160 currency status, which I guess is the kind of key 0:13:21.440 --> 0:13:24.440 thing that makes irrelevant today. So I guess conclude in 0:13:24.520 --> 0:13:26.960 terms of how one thinks about this, you know, I 0:13:26.960 --> 0:13:29.760 think the sovereign risk is something that perhaps should be 0:13:29.840 --> 0:13:34.400 priced given the massive uncertainty about you know, how that 0:13:34.520 --> 0:13:37.119 risk is perceived in the market versus demand for liquidity. 0:13:37.440 --> 0:13:40.360 I think one's just left with a kind of directional 0:13:40.360 --> 0:13:42.440 answer saying, well, yes, at some point the yield cuve 0:13:42.480 --> 0:13:45.160 should steepen, but it's very, very hard to make a 0:13:45.200 --> 0:13:48.640 tactical kind of call around that. I think perhaps a 0:13:48.679 --> 0:13:50.920 more pertinent way for investors to actually think about their 0:13:50.960 --> 0:13:54.160 in practical terms is it it means that the dollar 0:13:54.280 --> 0:13:56.800 is less of a safe haven asset but than it 0:13:56.880 --> 0:13:58.559 was before. And that's the key point of Really it's 0:13:58.600 --> 0:14:01.080 not so much in terms of up with a particular 0:14:01.520 --> 0:14:04.240 return forecast on a dollar being different from where it was, 0:14:04.280 --> 0:14:06.960 say six months ago. I think has become almost consensus 0:14:07.000 --> 0:14:09.520 across the street that people are now more naked than 0:14:09.559 --> 0:14:12.079 dollar than they were, say six months ago. But I 0:14:12.080 --> 0:14:14.440 guess what's interesting is the riskiness of it and the 0:14:14.520 --> 0:14:18.320 idea that risk the dollar are now more correlated with 0:14:18.920 --> 0:14:22.400 risks to other risk assets. So that implies a different 0:14:22.440 --> 0:14:24.440 approach the way people should form portfolios. 0:14:24.520 --> 0:14:26.320 Okay, let's get into this because I think this is 0:14:26.360 --> 0:14:29.160 the really important point, which is that people talk about 0:14:29.240 --> 0:14:32.360 some sort of you know, risks to the dollar, risks 0:14:32.400 --> 0:14:34.800 to the dollar's status, And so I want to talk 0:14:34.840 --> 0:14:38.120 about more like setting aside timing. Maybe it's fast, maybe 0:14:38.160 --> 0:14:40.800 it's slow, maybe it's a medium term. What are the 0:14:40.920 --> 0:14:44.040 data points that you would look at to say something 0:14:44.120 --> 0:14:48.360 is happening. Is it dollar levels against other currencies? Is 0:14:48.400 --> 0:14:52.880 it dollar share of transactions, is a dollar share of 0:14:53.120 --> 0:14:56.320 sovereign savings? Or is it And it seems like where 0:14:56.320 --> 0:14:59.120 you're going with this, is it the relationship whether it's 0:14:59.160 --> 0:15:03.440 inverse or po two risky assets. What are these sort 0:15:03.480 --> 0:15:05.720 of like fingerprints of what it would look like when 0:15:05.760 --> 0:15:08.520 it's like, oh, something has meaningfully changed about the way 0:15:08.640 --> 0:15:11.200 people view the dollar in their portfolios. 0:15:11.640 --> 0:15:13.720 So first we'll got of pick up in terms of 0:15:13.760 --> 0:15:15.920 relationship with dollar and other assets. And so you've seen 0:15:16.200 --> 0:15:20.480 just the lasting a few months episodes when the a 0:15:20.560 --> 0:15:22.640 dollar has declined at the same time as that bond 0:15:22.680 --> 0:15:25.760 deals have gone up. Is a more risky environment and 0:15:25.760 --> 0:15:27.680 a dollar hasn't behaved in a safe haven asset in 0:15:27.720 --> 0:15:31.400 that kind of environment. You've also seen a more deeply 0:15:31.560 --> 0:15:36.720 negative correlation between dollar and gold obviously priced in dollars. 0:15:36.920 --> 0:15:39.120 That implies that the dollar's seen it as less of 0:15:39.120 --> 0:15:42.360 a safe haven asset, and you've seen an increased correlation 0:15:42.480 --> 0:15:46.880 between assets such as gold, silver, platinum, and bitcoin, all 0:15:46.920 --> 0:15:52.160 things which are plausibly possible, non fear, zero duration assets 0:15:52.200 --> 0:15:55.800 that you know that through a certain lens, share certain characteristics. Anyway, 0:15:55.880 --> 0:15:59.720 so you've seen this market behavior where more dollar risk 0:15:59.800 --> 0:16:02.120 has been priced. At least there have been episodes of that. 0:16:03.120 --> 0:16:06.600 What I think would really change this though, and make 0:16:06.680 --> 0:16:08.800 it more of an immediate concern for people, is if 0:16:08.800 --> 0:16:13.880 there are large flows out of US bonds from institution investors. 0:16:13.880 --> 0:16:15.880 Now there's been a lot of talk about this, There's 0:16:15.880 --> 0:16:17.520 been a lot of coverage of it. I've been asked 0:16:17.520 --> 0:16:21.520 about it in many many meetings, but so far, as 0:16:21.560 --> 0:16:23.920 far as we can tell, that is much more talk 0:16:24.040 --> 0:16:26.760 than actual flow. I mean, there have been episodes, for example, 0:16:26.800 --> 0:16:30.640 where the Japanese pension system or elements of European pensions 0:16:30.640 --> 0:16:33.920 have been selling dollar bonds, but the numbers are very 0:16:33.960 --> 0:16:36.800 small in the scheme of things. So so far, what 0:16:36.800 --> 0:16:40.520 you're still seeing is a demand for safer, liquid assets. 0:16:40.880 --> 0:16:43.400 It's still a dominant we have forces, but that's the 0:16:43.400 --> 0:16:46.480 thing that we really look for for a change. I mean, 0:16:46.520 --> 0:16:48.040 I think one thing the background is one has to 0:16:48.080 --> 0:16:50.160 bear in mind there are some very different kinds of 0:16:50.240 --> 0:16:53.200 risks here that are all being conflated, and the point 0:16:53.200 --> 0:16:55.920 of the same direction where they come from, I guess 0:16:56.760 --> 0:16:59.920 a different basis. So one is the concern around fiscal 0:17:00.120 --> 0:17:02.320 and ability, as we discussed, so that, yes, it's certainly 0:17:02.320 --> 0:17:04.600 a concern, but you never know what the timing that's 0:17:04.600 --> 0:17:08.720 going to be. Separate from that is a more geopolitical imperative, 0:17:09.160 --> 0:17:12.639 which is the need for countries which are arrivals to 0:17:12.640 --> 0:17:15.040 the US to try and dedollarize in some way. Now 0:17:15.040 --> 0:17:18.399 the problem is there is no viable alternatives. That means 0:17:18.680 --> 0:17:21.840 that the flow into other alternatives is going to be slow. 0:17:22.160 --> 0:17:25.359 We've obviously seen this in the increase bidding by central 0:17:25.400 --> 0:17:28.040 banks for gold. I think it's and I think that 0:17:28.080 --> 0:17:30.240 could spread to other kind of assets as well. But 0:17:30.280 --> 0:17:34.120 that's a sort of non market driven, more geopolitical concern that. 0:17:34.080 --> 0:17:34.800 Can carry on. 0:17:35.200 --> 0:17:37.880 And then you have specific investor concerns, you know, when 0:17:37.880 --> 0:17:41.879 there've been suggestions from the US administration that perhaps we 0:17:41.920 --> 0:17:45.560 can apply some kind of taxes or charges on foreign 0:17:45.600 --> 0:17:48.040 holders and US assets, and that has certainly grabbed attention 0:17:48.480 --> 0:17:50.400 but people are backed away from that. So it doesn't 0:17:50.400 --> 0:17:52.159 seem to be in a media concern right now. But 0:17:52.160 --> 0:17:55.160 it's three very different things pointing the same direction, which 0:17:55.200 --> 0:17:59.000 is for there to be somewhat less trust in the 0:17:59.040 --> 0:18:02.120 dollar as a safe hay. The biggest thing in its favor, though, 0:18:02.680 --> 0:18:05.960 is that growth in the US seems likely to be 0:18:06.040 --> 0:18:08.240 stronger than growth in other regions, and the lack of 0:18:08.280 --> 0:18:12.240 another alternative means the outflows are going to be slow. 0:18:12.280 --> 0:18:12.520 I think. 0:18:12.560 --> 0:18:15.359 So this is a drip Freed story that sits in 0:18:15.359 --> 0:18:16.000 the background. 0:18:16.359 --> 0:18:18.320 I think we have for many years to come. 0:18:34.640 --> 0:18:37.360 Can I tell a story please? I swear it's relevant 0:18:37.359 --> 0:18:40.960 to this conversation, But you've probably heard this story before. Actually, Joe, 0:18:41.000 --> 0:18:43.800 one of the best conversations I ever listened to was 0:18:43.840 --> 0:18:46.960 between Howard Marx and Mike Milkin and the Milkan Conference 0:18:46.960 --> 0:18:50.320 in LA and it was basically about how the investment 0:18:50.480 --> 0:18:53.679 landscape had kind of changed over their careers. So in 0:18:53.720 --> 0:18:56.719 the nineteen fifties and nineteen sixties, if you put your 0:18:56.760 --> 0:18:59.639 money in blue chip stocks like the nifty to fifty 0:18:59.720 --> 0:19:02.080 or something like that, everything was fine and you made 0:19:02.320 --> 0:19:05.120 consistent profit. But then the market crashed in the early 0:19:05.160 --> 0:19:08.320 nineteen seventies and you had high inflation and that kind 0:19:08.320 --> 0:19:13.159 of changed everything. So higher volatility along with higher inflation 0:19:14.080 --> 0:19:18.280 ended deterioration in real purchasing power, which meant people lost 0:19:18.320 --> 0:19:20.880 like ninety percent of their money at that time, which 0:19:20.920 --> 0:19:24.600 is crazy. And Mike and Howard's argument was that this 0:19:25.000 --> 0:19:29.200 was what caused the explosion of money managers and also 0:19:29.280 --> 0:19:33.520 the birth of the high yield bond market because people realized, well, 0:19:33.600 --> 0:19:37.600 you can't just buy polaroid stock and more and expect 0:19:37.680 --> 0:19:41.080 a consistent return. You have to be more sophisticated about 0:19:41.080 --> 0:19:45.320 it and measure risk against that return. So I guess 0:19:45.320 --> 0:19:48.560 my question is, are we talking about something similar here 0:19:48.600 --> 0:19:51.840 in terms of a see shift in investor behavior. So 0:19:52.000 --> 0:19:55.320 maybe instead of weighing risk against return, you weigh risk 0:19:55.440 --> 0:19:57.880 against real returns or something like that. 0:19:58.400 --> 0:20:02.720 I think that's a strong narrative that will carry on 0:20:02.760 --> 0:20:06.040 for a long time because people have been very used 0:20:06.080 --> 0:20:09.639 to an environment where for decades and decades inflation has 0:20:09.680 --> 0:20:12.679 been benign. It's been readily low volatility of inflation, inflation 0:20:12.800 --> 0:20:14.880 has been going down, and at the same time we've 0:20:14.960 --> 0:20:19.280 seen strong returns both from equities and from fixed income assets, 0:20:19.480 --> 0:20:22.639 and most of the time and equities in fixing can 0:20:22.760 --> 0:20:25.919 manage to have a negative correlation at between them, and 0:20:26.000 --> 0:20:29.000 so the overall return versus risk that you've achieved in 0:20:29.080 --> 0:20:33.080 real terms has been very strong. Now, I'm absolutely not 0:20:33.240 --> 0:20:35.920 suggesting that we face a bearish outlook, but I think 0:20:35.960 --> 0:20:39.360 we do face a harder outlook, an outlook where there 0:20:39.400 --> 0:20:43.800 are multiple structural forces that imply the level of inflation 0:20:43.840 --> 0:20:47.000 will be somewhat higher and some more volatile given the 0:20:47.000 --> 0:20:49.200 constraints on growth. But that we spoke about in terms 0:20:49.240 --> 0:20:51.760 of demographics, etc. We're given where we are in terms 0:20:51.800 --> 0:20:54.760 of the valuations across most asset classes being high. The 0:20:55.000 --> 0:20:59.280 likelihodea is that the real return achieved from the portfolios 0:20:59.320 --> 0:21:01.200 that have done well for many decades is going to 0:21:01.240 --> 0:21:03.720 be much much lower. And so it raises this really 0:21:03.720 --> 0:21:07.199 fundamental question, which is actually what is the objective of 0:21:07.240 --> 0:21:11.399 most investors? You know, is the objective to maximize return 0:21:11.560 --> 0:21:14.600 per unit risk? Or is it to preserve real returns? 0:21:14.680 --> 0:21:16.399 Or another way of thinking about it is what is 0:21:16.440 --> 0:21:18.679 the definition of risk that'sulting relevant here? I mean, is 0:21:18.800 --> 0:21:22.399 risk the expected volatility of my portfolio the next ten years, 0:21:23.000 --> 0:21:25.760 or is risk the risk of a loss of purchasing 0:21:25.840 --> 0:21:27.480