Latest / Merryn Talks Money / Recession Threat Is Back—and Maybe Something Worse

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Recession Threat Is Back—and Maybe Something Worse · Merryn Talks Money

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  Speaker 1: than two thousand, seven hundred journalists worldwide. Right onto this
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  Speaker 1: week's show.
• 0:56
  Speaker 2: Welcome to Meren Talks Money.
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  Speaker 1: The podcast imish people who know the markets explain the markets.
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  Speaker 1: I'm marrensumset where, but this week I'm speaking with Peter Barrison,
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  Speaker 1: Chief Global Investment Strategist at BCA Research. That means he
• 1:07
  Speaker 1: heads up the team at BCA that provides global economic
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  Speaker 1: and financial market analysis to its clients and helps them
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  Speaker 1: shape their investment decisions. Peter has been economists for more
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  Speaker 1: than three decades. Previously worked at the IMF, the International
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  Speaker 1: Monetary Fund, and at Goldman Sachs. So we wanted to
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  Speaker 1: get Peter on partly because we read all his work religiously. Peter,
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  Speaker 1: by the way, religiously. We wanted to get him on
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  Speaker 1: to talk about the global economic outlook. Back in March,
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  Speaker 1: he was very clear that he felt the recession holds
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  Speaker 1: for the US were still high. His year end SMP
• 1:35
  Speaker 1: target is four four hundred and fifty. That is quite
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  Speaker 1: a drop from the current level, which is still knocking
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  Speaker 1: around six twenty five percent drop. Actually, is he still
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  Speaker 1: bearished on the US? What impact does he think Trump's
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  Speaker 1: trade policies will have. Is there a bigger risk than trade?
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  Speaker 1: And what does the endgame for markets in the US
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  Speaker 1: and elsewhere look like right now, Peter, that's going to
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  Speaker 1: take an offul lot longer than thirty five minutes that
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  Speaker 1: we've got, So as you could talk really fast, I'd
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  Speaker 1: appreciate it.
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  Speaker 3: I'll do my best.
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  Speaker 1: Welcome to Marrion, Dogs Money, Thank you very much for
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  Speaker 1: coming on. Why don't we start then with the US
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  Speaker 1: economy and this recession rescue. Latest peace puts the recession
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  Speaker 1: risk for the US at about sixty percent, right, But
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  Speaker 1: we have been waiting for this recession for a long time.
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  Speaker 3: Yeah, that's right. So back in twenty twenty two and
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  Speaker 3: twenty twenty three was one of the few optimistic strategists
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  Speaker 3: making the case that the US was not at any
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  Speaker 3: great danger of recession. And then late last year and
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  Speaker 3: certainly into this year, I moved into the recession camp.
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  Speaker 3: And the reason I did so was because I argued
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  Speaker 3: that a lot of the installation that had protected the
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  Speaker 3: US economy had worn thin. So back in twenty twenty two,
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  Speaker 3: there were millions of excess job openings. Anyone who lost
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  Speaker 3: a job back then could walk across a street and
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  Speaker 3: find new work and not prevented unemployment from going up.
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  Speaker 3: There were over two trillion in excess pandemic savings, and
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  Speaker 3: so when the FED began to raise rates, inflation rows
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  Speaker 3: households just kept on spending. Now things aren't so simple anymore.
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  Speaker 3: Those job openings have receded, the pandemic savings are gone,
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  Speaker 3: consumer delinquency rates are rising, and on top of that,
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  Speaker 3: we've got all these threats from the trade war, from
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  Speaker 3: the bond market, and so I do think that the
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  Speaker 3: risks of a recession this year are higher than they
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  Speaker 3: would normally be.
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  Speaker 1: Yeah, although we do still keep seeing a numbers that
• 3:33
  Speaker 1: suggest things are just fine, and we know that consumer
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  Speaker 1: confidence levels below but consumers are still really spending in
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  Speaker 1: the US and the recent job numbers were fairly encouraging, right,
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  Speaker 1: So we do keep seeing better than expected data just
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  Speaker 1: keeps going, we do.
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  Speaker 3: Although there has been a slowing in consumer spending this year,
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  Speaker 3: there's also been a slowing in the labor market. I
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  Speaker 3: know we got pretty good numbers on payrolls for May,
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  Speaker 3: but those numbers are like to be revised down. What
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  Speaker 3: we've seen since the start of twenty twenty four is
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  Speaker 3: that on average, past payrolls have been revised down by
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  Speaker 3: about fifty thousand. That doesn't even include the benchmark revisions.
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  Speaker 3: We know from the CENSUSUS quarterly data that was just
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  Speaker 3: released last week that payrolls were overstated by round seventy
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  Speaker 3: five thousand per month in the final three quarters of
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  Speaker 3: last year. So fifty thousand plus seventy five thousand in
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  Speaker 3: future revisions basically gets you down to close to zero
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  Speaker 3: potentially on the May payrolls when all the data has
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  Speaker 3: been cleaned up, so I think we are still seeing
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  Speaker 3: It's not a dramatic slowdown, but the crew certainly is
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  Speaker 3: a slowdown that's taking place as we speak.
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  Speaker 1: This idea that fast falling immigration in the US may
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  Speaker 1: turn into something of a supply shocking, that you end
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  Speaker 1: up with a fairly dramatic reduction in the growth rate
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  Speaker 1: of potential workers, which could lead to rising wages, a
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  Speaker 1: tighter job market, etc. Ivan a supply shock really in
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  Speaker 1: the same way as we've seen over the last four
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  Speaker 1: or five years, but in a different category.
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  Speaker 3: A that depends on how quickly the slow down and
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  Speaker 3: immigration unfolds. Of course, we have like millions of people
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  Speaker 3: being deported, that would be a supply shock. If it
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  Speaker 3: happens more gradually, then it's not entirely clear whether demand
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  Speaker 3: or supply will dominate it. And the reason I say
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  Speaker 3: that is because if you reduce immigration, then of course,
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  Speaker 3: arithmetically you're reducing labor supply. But those immigrants spend They
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  Speaker 3: spend money on food, they spend money on clothing, they
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  Speaker 3: spend money on shelter, so they contribute to demand. In
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  Speaker 3: other words, and in the nearer tum it's not really
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  Speaker 3: clear how you balance out those.
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  Speaker 1: Right, Well, let's look at the threats then, and one
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  Speaker 1: of the things that everyone maris about, of course, is
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  Speaker 1: the effective tariff rate we're going to end up with
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  Speaker 1: and exactly how that will impact the US economy. How
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  Speaker 1: are you feeling about that at the moment as a
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  Speaker 1: recessionary risk.
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  Speaker 3: Well, right now, the effective terror frate in the US
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  Speaker 3: stands at about fifteen percent, which is quite high. I mean,
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  Speaker 3: we went into this year with an effective terror freight
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  Speaker 3: of like three percent or so, So fifteen percent is
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  Speaker 3: kind of in the same ballpark as to where tariffs
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  Speaker 3: were in the nineteen thirties.
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  Speaker 1: So at a much lower level of impulses percent of
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  Speaker 1: GDP in the nineteen thirty So the impact lower.
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  Speaker 3: Well, well imports as a share of GDPR about three
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  Speaker 3: times as high now as they were in the nineteen thirties.
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  Speaker 3: So the fact that we have the same terorforrate actually
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  Speaker 3: does more damage to the economy today because trade is
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  Speaker 3: a share of GDP is larger today than it was
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  Speaker 3: back then.
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  Speaker 1: So that that is going to impact on growth.
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  Speaker 3: Well, if you look at the estimates that the Yale
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  Speaker 3: Budget Lab and others have done. If current teriforrates remain
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  Speaker 3: in play, this will reduce household income by about two
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  Speaker 3: percent for the median US household, which is not a
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  Speaker 3: trivial shock. Two percent is a meaningful decline in income.
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  Speaker 3: And of course, the Trump administration is hoping that China
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  Speaker 3: ends up eating the tariffs rather than US importers or
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  Speaker 3: US consumers. We don't really see any evidence for that
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  Speaker 3: hope in the data. We now have a few months
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  Speaker 3: of data on Chinese import prices. This is data calculated
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  Speaker 3: by the US, not by China, by the way, and
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  Speaker 3: what we've seen is that basically Chinese import prices are
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  Speaker 3: down about one percent prior to the imposition of tariffs.
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  Speaker 3: So it's really US importers that have been shouldering the
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  Speaker 3: burden of the tariffs. Consumers not so much so far.
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  Speaker 3: But as we've heard from Walmart and others, if these
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  Speaker 3: tariffs remain in place, then they're going to have to
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  Speaker 3: pass on the cart of the tariffs to the ultimate buyer,
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  Speaker 3: the consumer.
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  Speaker 1: Okay, so they will end up being a feed into inflation.
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  Speaker 3: Yes, yes, In fact, the CPI swop market is saying
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  Speaker 3: that inflation's going to a rise by around a percentage
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  Speaker 3: point over the next twelve months. That's a meaningful increase
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  Speaker 3: in inflation.
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  Speaker 1: But you also think there's an even bigger risk, as
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  Speaker 1: you put it in a headline recently, lurking around the corner,
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  Speaker 1: something much worse than trade war. And I think everyone
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  Speaker 1: knows what that is. It's the dynamics of US government debt,
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  Speaker 1: which are increasingly out of control, and with a big
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  Speaker 1: beautiful Bill on the way, that may get worse. And
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  Speaker 1: that that's your big worry at the moment.
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  Speaker 3: Yeah, I think the market has taken comfort in this
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  Speaker 3: kind of notion that Trump is pivoting away from tariffs
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  Speaker 3: and focusing on tax cuts. Now, of course, that would
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  Speaker 3: be good if the bond market did not react negatively
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  Speaker 3: to the prospect of more unfunded budget deficits. But what
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  Speaker 3: we've seen both in the bond market and from the
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  Speaker 3: US dollar is that investors are getting a little bit
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  Speaker 3: skittish about the current level of deficits. We estimate that
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  Speaker 3: if the Big Beautiful Bill passes, the budget deficit will
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  Speaker 3: rise to close to eight percent of GDP over the
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  Speaker 3: next few years.
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  Speaker 1: From around six and a half percent at the moment.
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  Speaker 3: From around six and a half percent yes, that's right.
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  Speaker 3: Now it's supposed to come back down after a couple
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  Speaker 3: of years because of various cuts to social programs. But
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  Speaker 3: the reason those cuts were inserted later on into the
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  Speaker 3: ten year budgetary horizon is because they're politically unpopular, so
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  Speaker 3: they might never actually end up taking place, which is
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  Speaker 3: often the way things go in Washington. So the problem
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  Speaker 3: is that you've got a budget deficit, let's say seven
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  Speaker 3: and a half to eight percent of GDP, and you
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  Speaker 3: need something closer to three and a half percent just
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  Speaker 3: to stabilize the debt to GDP ratio. And so you've
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  Speaker 3: got this completely unsustainable trajectory in debt to GDP and
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  Speaker 3: on top of that fairly high interest rates. And I
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  Speaker 3: think that's the big difference from where we were a
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  Speaker 3: few years ago. A few years ago, we also had
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  Speaker 3: high debt to GDP, but interest rates were very very
• 10:22
  Speaker 3: low up until twenty twenty two. Now we've got this
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  Speaker 3: toxic combination of high debt and high interest rates, and
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  Speaker 3: as a consequence, the amount of interest that the federal
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  Speaker 3: government is currently paying stands at about three percent of GDP,
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  Speaker 3: up from around one and a half percent of GDP
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  Speaker 3: during Trump's first term. And if you look at where
• 10:52
  Speaker 3: interest expense is going, if bond yields evolve with market
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  Speaker 3: expectations and the big beautiful bill passes, we're talking about
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  Speaker 3: six percent of GDP in interest expense over the next
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  Speaker 3: ten years. That would be completely unprecedented in US history.
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  Speaker 3: Not that point, about one third of government revenue would
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  Speaker 3: be going just to pay the interest on the debts.
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  Speaker 3: So something needs to break. This can't continue in its
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  Speaker 3: current form. And yes, it sounds a lot like that
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  Speaker 3: story about the boy who cried wolf. People have been
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  Speaker 3: talking about a debt crisis for many years. It hasn't happened,
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  Speaker 3: But of course with the story, the boy does get
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  Speaker 3: eaten at the end, and so I think that, unfortunately,
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  Speaker 3: is where we're heading. I don't know if it's this year,
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  Speaker 3: next year, but it's getting increasingly close.
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  Speaker 1: We talk a lot about how the fiscal situation of
• 11:46
  Speaker 1: the US is unsustainable, same with the UK, with other
• 11:49
  Speaker 1: European markets, etc. But let's focus on the US when
• 11:52
  Speaker 1: we say it is unsustainable, completely unsustainable, and something what
• 11:56
  Speaker 1: must change? What do we mean what must change? How
• 12:00
  Speaker 1: can it change?
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  Speaker 3: Well, the deficit needs to come down. It's as simple
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  Speaker 3: as that, and that can happen either because spending is
• 12:09
  Speaker 3: cut or because revenue goes up. Now, in practice, I
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  Speaker 3: think it's very difficult to cut spending because most of
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  Speaker 3: what the government spends on is government programs such as
• 12:21
  Speaker 3: medicare and social security defense. Not a lot of political
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  Speaker 3: support in cutting that, certainly not social programs for Democrats,
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  Speaker 3: and not social programs or defense for the Republicans. Raising
• 12:36
  Speaker 3: taxes is a non starter for many Republicans. Democrats probably
• 12:41
  Speaker 3: a little bit more amenable to that. And so if
• 12:44
  Speaker 3: you can't spending and raise taxes, all you can then
• 12:47
  Speaker 3: really do is hope for growth, and unfortunately that's sort
• 12:50
  Speaker 3: of the direction in which the current administration is going.
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  Speaker 3: They're saying, we're not really going to cut the deficit
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  Speaker 3: in dollar terms, but we're going to grow the economy massively,
• 13:01
  Speaker 3: and that's going to fix all our problems. So you know,
• 13:04
  Speaker 3: of course, if growth does go up to three percent
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  Speaker 3: four percent, that would fix a lot of problems. But
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  Speaker 3: it's not clear where that growth is going to come from.
• 13:12
  Speaker 3: As the administration itself has admitted, much of what is
• 13:15
  Speaker 3: in the tax bill just goes towards extending the expiring
• 13:18
  Speaker 3: tax cuts. So existing policy doesn't change. And the other
• 13:22
  Speaker 3: tax cuts, you know, no taxes on tips, no taxes
• 13:26
  Speaker 3: on on over time, the self deduction, you know, that's
• 13:30
  Speaker 3: generally focused on households. It's not so much focused on businesses.
• 13:34
  Speaker 3: I mean, there are a few things for businesses in
• 13:36
  Speaker 3: the bill, but it's mainly focused on households. So it's
• 13:39
  Speaker 3: not really obvious why trend GDP growth would go up
• 13:43
  Speaker 3: a lot as a result of the big beautiful bill.
• 13:45
  Speaker 3: In fact, it could be quite the opposite, to the
• 13:47
  Speaker 3: extent that these big budget deficits raise interest rates and
• 13:52
  Speaker 3: that crowds out private investments that could reduce trend growth
• 13:57
  Speaker 3: in the United States.
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  Speaker 1: When we say on the sustain what is the endgame question?
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  Speaker 1: Because you know perfectly true that there is no appetite
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  Speaker 1: to cut spending, there is no appetite to put up taxes,
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  Speaker 1: and it is not a given that growth will come through.
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  Speaker 1: So what is it? What level of yield? For example,
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  Speaker 1: what is it that might persuade an administration or force
• 14:17
  Speaker 1: an administration to actually do something about the situation as
• 14:22
  Speaker 1: it currently stands, rather than the wibble away about future growth.
• 14:25
  Speaker 1: There has to be a crisis of some kind, right,
• 14:27
  Speaker 1: what counts as a crisis.
• 14:29
  Speaker 3: I don't know if you need a full blow crisis.
• 14:31
  Speaker 3: You could have something similar to what happened in both
• 14:35
  Speaker 3: the US and Canada in the early nineteen nineties, where
• 14:39
  Speaker 3: yields were very, very high. The budget deficits was lower
• 14:45
  Speaker 3: than it is today, but nevertheless, because yields were seven
• 14:49
  Speaker 3: eight percent, that was pushing up the interest expense on
• 14:53
  Speaker 3: the debt quite a bit. And you had the tax
• 14:56
  Speaker 3: cuts that George Bush famously forced to introduce breaking is
• 15:02
  Speaker 3: no new taxes pledge, and in Canada, will also had
• 15:06
  Speaker 3: the GST, the Government sales tax General Sales Tax, and
• 15:11
  Speaker 3: so revenue was found in the deficit declined and the
• 15:15
  Speaker 3: bond vigilianties right away. That didn't really require a crisis,
• 15:18
  Speaker 3: but it did require market pressure. You could, of course,
• 15:21
  Speaker 3: have a more adverse scenario where there really is a
• 15:25
  Speaker 3: crisis where bond yields start rising, investors panic, that dumped
• 15:29
  Speaker 3: the bonds, and that causes the yields to continue rising.
• 15:33
  Speaker 3: That could happen as well, but either outcome would probably
• 15:37
  Speaker 3: lead to the final result, which is that the budget
• 15:42
  Speaker 3: deficit goes down in one form or another.
• 15:46
  Speaker 1: I then spending house all the tax cuts are things
• 15:49
  Speaker 1: that people have no appetite for until they're forced to
• 15:51
  Speaker 1: have an appetite for it.
• 15:52
  Speaker 3: That's right, that's right.
• 15:53
  Speaker 1: Yes, I'm guessing Peter that you are a little more
• 15:57
  Speaker 1: pessimistic about the US secuity market and perhaps some of
• 16:00
  Speaker 1: those more bullets commentators.
• 16:02
  Speaker 2: Yeah.
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  Speaker 3: I mean, if you look at valuations right now, the
• 16:05
  Speaker 3: S and P five hundred is trading at about twenty
• 16:08
  Speaker 3: one and a half times forward twelve month earnings, and
• 16:13
  Speaker 3: those overd earnings assume record high profit margins. So it's
• 16:18
  Speaker 3: a pretty optimistic set of assumptions that are driving equity
• 16:24
  Speaker 3: prices today. And of course, if earnings do rise from
• 16:26
  Speaker 3: current levels, that would be fine, but that hasn't really
• 16:30
  Speaker 3: happened this year. Earnings estimates have sort of been flat.
• 16:34
  Speaker 3: They went down in April, they recovered in May, but
• 16:36
  Speaker 3: we're close to where we were in say January. I
• 16:41
  Speaker 3: think it's unlikely that we would get meaningful increase in
• 16:45
  Speaker 3: earnings estimates unless growth really ends up being quite strong,
• 16:51
  Speaker 3: and that is unlikely given the slowing in the labor market,
• 16:55
  Speaker 3: given the hangover from the trade war, and the fact
• 17:00
  Speaker 3: the bond yields remain quite elevated. So I think probably
• 17:03
  Speaker 3: in the best case scenario, if we avoid recession, then
• 17:07
  Speaker 3: the SMP goes up maybe five percent or so. But
• 17:10
  Speaker 3: if we don't avoid recession, then you have to ask
• 17:14
  Speaker 3: how low could the stock market go.
• 17:17
  Speaker 1: Well, let's talk then about where other people's optimism lies.
• 17:22
  Speaker 1: And still even now, a lot of it lies in
• 17:25
  Speaker 1: AI on the huge potential for this sector to pull
• 17:28
  Speaker 1: not at the stock market but the economy, along the
• 17:31
  Speaker 1: idea that we really will have the great productivity revolution
• 17:35
  Speaker 1: we've been waiting for for so long, that will drive growth,
• 17:37
  Speaker 1: that will drive company earnings, that will make the evaluations
• 17:40
  Speaker 1: that we're paying today in the US licklick, nothing and
• 17:43
  Speaker 1: everything will be absolutely fine. Where do you come down
• 17:47
  Speaker 1: on the AI story.
• 17:49
  Speaker 3: Well, right now we don't see the gains from AI
• 17:52
  Speaker 3: in the productivity statistics at all, actually been really really weak. Now,
• 17:57
  Speaker 3: maybe AI does boost productive I think that's entirely possible,
• 18:02
  Speaker 3: But even if it does, that's no guarantee that it
• 18:06
  Speaker 3: will boost profits, which is what matters for a stock
• 18:09
  Speaker 3: market and the internet period. It's a good example. US
• 18:12
  Speaker 3: productivity did increase in the mid nineteen nineties and stayed
• 18:16
  Speaker 3: fairly high for about a decade until about two thousand
• 18:20
  Speaker 3: and five, but it was only around two thousand and
• 18:24
  Speaker 3: five that the profits began to finally materialize, So there
• 18:28
  Speaker 3: was a long lag between productivity and profits. That could
• 18:32
  Speaker 3: happen with AI as well.
• 18:34
  Speaker 1: Okay, so not madly optimistic there in this shorter term.
• 18:37
  Speaker 1: The other thing I supposed to talk about is that
• 18:39
  Speaker 1: there's an awful lot of reasons why foreign investors might
• 18:41
  Speaker 1: want to start applying a slightly higher risk premium to
• 18:44
  Speaker 1: the US than they have previously, or risk premium at all,
• 18:47
  Speaker 1: given they haven't really considered there to be must risk.
• 18:49
  Speaker 1: You have the things that we've already talked about, the
• 18:51
  Speaker 1: uncertainty around tariffs, we have the uncertainty around the debt
• 18:55
  Speaker 1: and the fiscal position, and of course the general uncertainty
• 18:58
  Speaker 1: around the current administration. And then you know, we all
• 19:01
  Speaker 1: woke up this week and around the world to the
• 19:03
  Speaker 1: pictures of la burning. Whether which parts of burning or
• 19:07
  Speaker 1: not burning, or exactly how bad it is, it's hard
• 19:09
  Speaker 1: to tell from far away, but nonetheless you see the
• 19:11
  Speaker 1: pictures and you look at that, and you can see
• 19:14
  Speaker 1: people who have an awful lot of money invested in
• 19:16
  Speaker 1: the US market. We were looking at these statistics the
• 19:19
  Speaker 1: other day, by the way, and really interesting because it
• 19:21
  Speaker 1: is only the last four or five years that foreign
• 19:24
  Speaker 1: investors have really poured money into the US and as
• 19:29
  Speaker 1: the risks begin to accumulate, or a pitch to accumulate,
• 19:32
  Speaker 1: it might be quite a fast move out.
• 19:34
  Speaker 2: Yeah.
• 19:34
  Speaker 3: I think that's definitely the risk for the US dollar,
• 19:39
  Speaker 3: and a dollar, despite the fact that it's weakened over
• 19:41
  Speaker 3: the last few months, still remains a fairly expensive currency.
• 19:46
  Speaker 3: And so if this notion of US exceptionalism fades, it
• 19:51
  Speaker 3: does have to go completely go away. But if investors
• 19:55
  Speaker 3: decide that US economy is going to be less exceptional
• 20:00
  Speaker 3: than it was in the past, that will justify a
• 20:03
  Speaker 3: smaller growth premium to US assets, which means capital is
• 20:08
  Speaker 3: going to flow out and the dollar could we confer
• 20:12
  Speaker 3: so structurally, I am fairly bearish on the outlook for
• 20:15
  Speaker 3: the US dollar.
• 20:17
  Speaker 1: Okay, So if money flows out of the dollar, which
• 20:20
  Speaker 1: currency and which market does it flow into?
• 20:23
  Speaker 3: Well, I mean, of course, if the dollar weekends, it
• 20:25
  Speaker 3: has to weaken against something, so most likely it'll be
• 20:29
  Speaker 3: the euro, maybe even the Japanese yen. Here in the
• 20:33
  Speaker 3: Bank of Japan seems to be finally able to raise
• 20:37
  Speaker 3: rates now that inflation increased and these deflationary pressures have abated,
• 20:43
  Speaker 3: might flow into other developed economies such as Canada, Australia.
• 20:50
  Speaker 3: Now it's true that all of these countries have their
• 20:52
  Speaker 3: own problems to contend with, and so that doesn't mean
• 20:56
  Speaker 3: that their currencies are going to skyrocket, but the margin
• 21:00
  Speaker 3: they could strengthen visa VI the US if the underlying
• 21:06
  Speaker 3: drivers that have compelled foreigners to buy US assets become
• 21:13
  Speaker 3: less appealing.
• 21:14
  Speaker 1: And if money flows out of US equities, and when
• 21:18
  Speaker 1: you say your mildly underweight equities, I think what you
• 21:22
  Speaker 1: mean is that outside of holding fewer US equities and
• 21:26
  Speaker 1: would suggest holding fewer US equities and cash and bonds,
• 21:29
  Speaker 1: you're not talking about diversifying into other equity markets. But
• 21:33
  Speaker 1: if you were, which equity markets would you consider to
• 21:37
  Speaker 1: be attractive at the moment or interesting.
• 21:39
  Speaker 3: In terms of where would that money go? You know,
• 21:41
  Speaker 3: in a global recession, it's hard to see other stock
• 21:47
  Speaker 3: markets doing well. If anything, most non US markets tend
• 21:52
  Speaker 3: to be higher beta. When US earnings estimates fall, they
• 21:56
  Speaker 3: tend to fall even more in places like Europe and Japan.
• 21:59
  Speaker 3: So you're not going to find a safe haven in
• 22:03
  Speaker 3: most other major stock markets in a recessionary scenario. Now,
• 22:07
  Speaker 3: once we get out of the recession and the dollar
• 22:10
  Speaker 3: bear market resumes and valuations become more relevant for investors,
• 22:18
  Speaker 3: then I think at that point you're going to see
• 22:21
  Speaker 3: Europe and other non US markets outperform. But I think
• 22:25
  Speaker 3: we have to get through the recession first, Okay.
• 22:28
  Speaker 1: I mean our general feeling I think is that if
• 22:31
  Speaker 1: US markets full by twenty five percent, twenty percent something
• 22:34
  Speaker 1: like that, all of the markets will fall too, of course,
• 22:37
  Speaker 1: possibly even more, but the cheaper markets are likely to
• 22:41
  Speaker 1: wreak up faster.
• 22:42
  Speaker 3: Yeah, so the Europe is cheaper, Japan is cheaper, China
• 22:46
  Speaker 3: is cheaper. They also tend to be a little bit
• 22:48
  Speaker 3: more stycklical, They tend to have more exposure to financials,
• 22:52
  Speaker 3: materials industrials. So sometimes it's a bit of a wash.
• 22:56
  Speaker 1: Okay, what about China.
• 22:58
  Speaker 3: I think China is an interesting stock markets. I mean,
• 23:02
  Speaker 3: clearly China has done a fantastic job in terms of
• 23:07
  Speaker 3: tech progress. Where I think the uncertainty still lies for
• 23:11
  Speaker 3: investors is around corporate governance politics, Like our Chinese company
• 23:19
  Speaker 3: is actually going to be able to make money for
• 23:21
  Speaker 3: their shareholders or will all of this just be about
• 23:25
  Speaker 3: maintaining economic stability and political stability. That's where the uncertainty lies.
• 23:30
  Speaker 3: And I think that question mark over whether shareholders will
• 23:35
  Speaker 3: capture the innovation coming out of China is a big
• 23:38
  Speaker 3: question mark and does justify a discount for Chinese stocks.
• 23:42
  Speaker 1: Okay, so would you say that for you, maybe the
• 23:44
  Speaker 1: Chinese market is always a trade, never a long term hold.
• 23:48
  Speaker 3: Right now, I would say it's more of a trade
• 23:50
  Speaker 3: than anything else. If we have shifts in kind of
• 23:54
  Speaker 3: corporate governance, that I think it'll go from being a
• 23:57
  Speaker 3: trade to an investment. We have to see those shifts.
• 23:59
  Speaker 1: For when you think about markets, do you still think
• 24:03
  Speaker 1: of them in terms of EM and DM or yeah,
• 24:05
  Speaker 1: a different kind of category in your head.
• 24:08
  Speaker 3: Yeah, I think that's becoming a bit of an antiquated label.
• 24:12
  Speaker 3: I sometimes choke with our em strategistic BCA Arthur Burdakian
• 24:17
  Speaker 3: that maybe the US is going to become an emerging
• 24:19
  Speaker 3: market simply if you look at how the dollar has traded,
• 24:22
  Speaker 3: and we've seen US interest rates rise relative to those abroad.
• 24:26
  Speaker 3: Usually that would signify a stronger dollar, but the dollar
• 24:30
  Speaker 3: is weak, and because the US itself is having some
• 24:32
  Speaker 3: of the same EM related issues around debt and political
• 24:37
  Speaker 3: stability that emerging markets have historically faced, whereas actual emerging
• 24:42
  Speaker 3: markets today are much better shape than they were a
• 24:45
  Speaker 3: couple of decades ago when I was first working at
• 24:48
  Speaker 3: the IMF and dealing with some of these issues. So yeah,
• 24:51
  Speaker 3: I think you have to kind of go on a
• 24:53
  Speaker 3: country by country basis now.
• 24:56
  Speaker 1: Yeah, And as you say, the so called developed markets
• 24:59
  Speaker 1: have no moral high ground the political stability business at
• 25:01
  Speaker 1: the moment. That's right, Yes, across Europe, the UK, the US,
• 25:06
  Speaker 1: exact right, none of us, none of us are standing
• 25:08
  Speaker 1: on particularly thick ice at the moment. Yes, gold, silver, platinum, oil.
• 25:15
  Speaker 1: We're great gold bugs on this podcast, and we're excited
• 25:18
  Speaker 1: by the silver price now, and we're excited by platinum.
• 25:21
  Speaker 1: We're wondering what's going to happen in this market and
• 25:23
  Speaker 1: if there is a safe haven out therebuts it's a
• 25:26
  Speaker 1: yellow one.
• 25:27
  Speaker 3: Yeah. I've generally been bullish on gold, and I'm structurally
• 25:31
  Speaker 3: still bullish that the price of gold is high, even
• 25:34
  Speaker 3: in inflation adjust the terms, it's close to its all
• 25:38
  Speaker 3: time peak. But I think when you're trying to value gold,
• 25:43
  Speaker 3: and of course it's difficult to value something like gold
• 25:45
  Speaker 3: because it doesn't pay any income to its holders. I
• 25:49
  Speaker 3: think what you have to do in that case is
• 25:51
  Speaker 3: sort of look at gold holdings in relation to something
• 25:54
  Speaker 3: like global wealth. If you do that, what you see
• 25:58
  Speaker 3: is that gold kind of look cheap because global wealth
• 26:01
  Speaker 3: has grown so much over the last fifty years that
• 26:05
  Speaker 3: gold has not caught up. So it's a share of
• 26:07
  Speaker 3: global wealth. Gold is much much smaller today than it
• 26:10
  Speaker 3: was in the early nineteen eighties.
• 26:13
  Speaker 1: Okay, interesting, I like that way of looking at a
• 26:16
  Speaker 1: share of global wealth. I'm not sure we've done those
• 26:18
  Speaker 1: numbers before. We're going to do them. What about bitcoin?
• 26:21
  Speaker 1: We're talking the week beginning June the night and there's
• 26:24
  Speaker 1: been positive bitcoin years out of the US administration, and
• 26:28
  Speaker 1: the day we're talking bitcoins up two percent today. Are
• 26:31
  Speaker 1: you positive long term or Bitcoin or indeed on any
• 26:33
  Speaker 1: other cryptocurrencies?
• 26:34
  Speaker 3: Well, I mean Bitcoin is interesting because we just talked
• 26:37
  Speaker 3: about global wealth and there's a large fraction of global
• 26:41
  Speaker 3: wealth that people don't necessarily want to disclose. They want
• 26:46
  Speaker 3: to maintain their wealth in as private as setting as possible,
• 26:52
  Speaker 3: and bitcoin does fulfill that demands. I wouldn't necessarily advise
• 26:56
  Speaker 3: investors to own a lot of bitcoin, but I can
• 26:58
  Speaker 3: see the use case for push comes to shove. I
• 27:01
  Speaker 3: would choose gold over bitcoin in the current environment, but
• 27:05
  Speaker 3: certainly bitcoin, I think at this point does deserve to
• 27:10
  Speaker 3: have at least a very small part investors' portfolios. Have
• 27:16
  Speaker 3: you got any I don't hold any. No, I've been
• 27:19
  Speaker 3: sticking to gold.
• 27:22
  Speaker 1: Yeah, well I've got both. I've never been a big
• 27:25
  Speaker 1: fan of bitcoin, but I'm often wrong, so I like
• 27:28
  Speaker 1: to hedge myself. So as we keep telling people, I
• 27:30
  Speaker 1: get end litt hate mail about being mean about bitcoin,
• 27:32
  Speaker 1: but I've actually got some and half the people I
• 27:35
  Speaker 1: talk to who aren't mean about bitcoin at all just don't. Peter,
• 27:38
  Speaker 1: is there anything we haven't talked about that you think
• 27:40
  Speaker 1: we should talk about.
• 27:41
  Speaker 3: I think one question mark is around oil prices and
• 27:46
  Speaker 3: where they go from here. I think if there's sort
• 27:52
  Speaker 3: of a bullish case to be made for the US consumer,
• 27:56
  Speaker 3: that bullish case could at least in part, hinge on
• 27:59
  Speaker 3: the possibility that gasoline prices fall, and it certainly does
• 28:05
  Speaker 3: seem as though OPEC is no longer able to maintain discipline.
• 28:12
  Speaker 3: The Saudis, of course understandably upset that countries that Kazakhstan
• 28:16
  Speaker 3: have been exceeding their quotas. US shale production still remains
• 28:21
  Speaker 3: quite strong now, of course, the prices fall For most
• 28:23
  Speaker 3: shale players, you need oil of around sixty to seventy
• 28:27
  Speaker 3: dollars a barrel to make money by drilling. If oil
• 28:31
  Speaker 3: prices would have fallen into the fifty range, that would
• 28:34
  Speaker 3: shut down quite a lot of US production. But nevertheless,
• 28:37
  Speaker 3: I think it's worth stressing that gasoline prices have declined
• 28:41
  Speaker 3: relative to where they were a year ago, and the
• 28:44
  Speaker 3: margin that is helping the US consumer. If that continues,
• 28:48
  Speaker 3: that tailwind could increase. That just worth monitoring.
• 28:52
  Speaker 1: And how much would that take down your recession risk?
• 28:56
  Speaker 3: Probably not a lot, because I think ultimately tariffs and
• 29:00
  Speaker 3: bond yields matter more for the economy. But it would
• 29:04
  Speaker 3: help certainly help offset some of these headwinds.
• 29:09
  Speaker 1: What could happen, Peter to make you change your mind
• 29:12
  Speaker 1: about coming recession? What could happen to make you positive
• 29:15
  Speaker 1: on the US economy, positive on growth, and crucially positive
• 29:19
  Speaker 1: on the US equity market.
• 29:21
  Speaker 3: We need to see a few things on the economic front.
• 29:24
  Speaker 3: One we would need to see Trump further dial back
• 29:28
  Speaker 3: the tariffs, especially against China, which you know they've come
• 29:31
  Speaker 3: down from one hundred and forty five percent, but they're
• 29:34
  Speaker 3: still close to forty percent. TERRAF rates on China's quite high.
• 29:37
  Speaker 3: If the Big Beautiful Bill passes without the bond market
• 29:41
  Speaker 3: reacting negatively. So, in other words, if we get the
• 29:44
  Speaker 3: fiscal stimulus without the adverse bond market reaction, that would
• 29:50
  Speaker 3: make me more positive. If we start to see AI
• 29:55
  Speaker 3: boost corporate profits in a more broad based way, would
• 30:00
  Speaker 3: make me more optimistic as well. So I'm open minded.
• 30:03
  Speaker 3: And my recesion probability is sixty percent. It's not one
• 30:05
  Speaker 3: hundred percent. There's still forty percent chance where things can
• 30:08
  Speaker 3: go right. And that's why I've been cautioning investors to
• 30:13
  Speaker 3: wait until they see the whites of those recession's eyes
• 30:17
  Speaker 3: before turning fully pessimistic.
• 30:21
  Speaker 1: Okay, and let's hope that we see the whites when
• 30:23
  Speaker 1: they're coming. We're going to miss them. Indeed, Pete, what
• 30:27
  Speaker 1: are you reading at the moment?
• 30:29
  Speaker 3: Oh gosh, I've been mainly listening to podcasts and things like,
• 30:34
  Speaker 3: things like that, and so a lot of great content
• 30:36
  Speaker 3: on Bloomberg. I would certainly start there obviously.
• 30:41
  Speaker 1: Obviously, thank you so much. You for joining us today.
• 30:46
  Speaker 3: My pleasure.
• 30:46
  Speaker 1: Thank you so much, Thanks for listening to this week's
• 30:52
  Speaker 1: Marin Talks Money. If you like us, your rate, review
• 30:55
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• 30:58
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• 31:01
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• 31:03
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• 31:07
  Speaker 1: episode was hosted by me maren' umset Web. It was
• 31:09
  Speaker 1: produced by Sumersadi and Moses and sound designed by Blake
• 31:12
  Speaker 1: Maples and special thanks of course to Peter Barrison