Latest / Merryn Talks Money / Markets Wrap: Bessent's Big Bet, Bond Yields and the AI Bubble

Transcript

Markets Wrap: Bessent's Big Bet, Bond Yields and the AI Bubble · Merryn Talks Money

0:02
Speaker 1: Bloomberg Audio Studios. Podcasts. Radio.
0:06
Speaker 2: News.
0:18
Speaker 3: Welcome to the Merlin Talks Money Market Wrap, where we
0:20
Speaker 3: talk about the biggest moves in the markets this week
0:22
Speaker 3: and what's driving them. I'm John Stebic, senior reporter and
0:26
Speaker 3: author of the Money Distilled newsletter. And joining me this week,
0:29
Speaker 3: a man who's becoming something of a regular. Bloomberg macro strategist,
0:33
Speaker 3: Simon White. Welcome back, Simon.
0:35
Speaker 1: Good to see you again. Thanks for having me again, John.
0:38
Speaker 3: And I hope I didn't jump the gun there by
0:40
Speaker 3: saying you're becoming a regular. I'm going to twist your
0:43
Speaker 3: arm in the future as well. Anyway, so Simon, this
0:47
Speaker 3: week's chat, I wanted us to get into a few
0:49
Speaker 3: of the big topics this week. First thing, we'll have
0:52
Speaker 3: a wee chat about Scott Besson, the US Treasury Secretary,
0:56
Speaker 3: and what he's been doing And then I think really
1:00
Speaker 3: the biggest story of the week is bond yields and
1:02
Speaker 3: what's been happening with them globally, but particularly in the UK.
1:06
Speaker 3: And if we get two minutes, we can maybe touch
1:08
Speaker 3: on AI at the end, because a load of people
1:11
Speaker 3: at Anthropic and OpenAI have been saying that it's going
1:14
Speaker 3: to murder us all in our sleep or something along
1:17
Speaker 3: those lines. But let's start with Scott Besson. So, This week,
1:23
Speaker 3: he kind of came out and said, he said, I
1:26
Speaker 3: am the house.
1:27
Speaker 1: I am the house now. I have pretty good insight
1:30
Speaker 1: into what the Bank of Japan is going to do.
1:32
Speaker 1: You can bet against me if you want.
1:34
Speaker 3: And kind of challenged the market to bet against him
1:38
Speaker 3: in the various things he's trying to do. So do
1:40
Speaker 3: you want to talk us through what he's actually doing
1:42
Speaker 3: and whether he's actually having any success at it?
1:45
Speaker 1: Well, thanks for the intro. And I'm glad we're keeping
1:47
Speaker 1: the human extinction thing to the second part. The least
1:51
Speaker 1: important bit. Yeah, yeah, yeah. Well, we've still got time, right?
1:54
Speaker 3: Exactly.
1:55
Speaker 1: Yeah, Scott Besant is, yeah, that was quite a comment.
1:58
Speaker 1: You know, I'm the house now, which is kind of
2:01
Speaker 1: remarkable in a way for someone like him to say,
2:03
Speaker 1: because he's got personal experience of betting against the house
2:06
Speaker 1: and succeeding, right? Everyone knows now that he bet against
2:09
Speaker 1: Sterling in the early 90s and that worked. They broke
2:12
Speaker 1: the peg at the ERM. So I'm kind of, yeah,
2:14
Speaker 1: a bit surprised he's saying that, but he keeps talking
2:17
Speaker 1: about his asymmetric, information so you know hope we'll find
2:20
Speaker 1: out what that is at some point.
2:23
Speaker 3: He's basically he's basically saying that i've got insider knowledge
2:26
Speaker 3: and you guys are going to lose um it does
2:30
Speaker 3: seem quite uh a gutsy thing to set himself up
2:34
Speaker 3: as a target in that way but presumably he.
2:38
Speaker 1: Well you think you think as a you know sort
2:40
Speaker 1: of a case of don't watch what i say but
2:42
Speaker 1: watch what i do and he's not really done much
2:44
Speaker 1: i mean he's done the buybacks of course And the
2:46
Speaker 1: purpose of that really is, well, look, they've got a
2:49
Speaker 1: yield issue.
2:50
Speaker 3: So what they're doing is they're buying back US treasury
2:55
Speaker 3: bonds out at what's called the long end. So like
2:58
Speaker 3: 30 years basically, isn't it?
2:59
Speaker 1: Yeah. So basically they've got all this debt outstanding and
3:02
Speaker 1: they're like, let's buy back some of them. Issue some
3:05
Speaker 1: shorter term debt. So in theory it's neutral. And that
3:09
Speaker 1: should hopefully help improve liquidity. They actually have not really
3:12
Speaker 1: specifically said it's to lower yields, but to improve liquidity.
3:15
Speaker 1: But obviously they want lower yields because they've got a
3:17
Speaker 1: trillion dollar a year interest rate bill, which if you
3:21
Speaker 1: think is nuts, like whether the entire UK economy is what,
3:23
Speaker 1: four trillion or five or something like that. They've got
3:26
Speaker 1: a fifth of that and just an interest, which is
3:29
Speaker 1: just as wild. Anyway, so the hope is that, and
3:31
Speaker 1: actually to be fair, So I was looking at this.
3:34
Speaker 1: On its own terms, it's actually worked so far. So
3:36
Speaker 1: you did that announcement a few weeks ago. If you
3:39
Speaker 1: look at the term premium based on the yield curve
3:42
Speaker 1: of longer terms, the term premium, by the way, is
3:44
Speaker 1: kind of like the risk embedded in a bond. So
3:47
Speaker 1: you've basically got two parts of the risk. You've got
3:50
Speaker 1: what you think the central bank's going to do, so
3:52
Speaker 1: the Fed, in terms of rate hikes. And then anything
3:54
Speaker 1: that's left over is really like the extra risk involved.
3:58
Speaker 1: for owning that bond. So really, he wants to get
4:00
Speaker 1: that down because that shows that UK, sorry, US debt
4:03
Speaker 1: has become less risky. And on those terms, it's actually working.
4:06
Speaker 1: Problem is, though, the yield hasn't moved.
4:09
Speaker 3: Yes.
4:10
Speaker 1: And that's ultimately what they have to pay, the Treasury
4:13
Speaker 1: has to pay. And the reason why the yield's not
4:15
Speaker 1: moved is because basically expectations, Fed expectations are going up.
4:19
Speaker 1: So people are expecting the Fed to hike more.
4:22
Speaker 3: So basically, the backdrop has changed and that's pushed up
4:27
Speaker 3: the yields. But the bit that Besant technically wants to target,
4:31
Speaker 3: which is the perceived riskiness of the US Treasury, that's
4:35
Speaker 3: actually worked. But he's still in trouble because... The yields
4:39
Speaker 3: are not moving. He still owes as much. But it's classic.
4:42
Speaker 3: It's the Fed against the Treasury, right? And we know
4:45
Speaker 3: who ultimately is going to win that battle. But that's
4:47
Speaker 3: partly the problem now. It's Warsh, it's got oil going
4:50
Speaker 3: up past $ 100 again as the Middle Eastern conflict re-escalates.
4:55
Speaker 3: You had some pretty good job numbers last week in
4:58
Speaker 3: the US.
4:59
Speaker 1: So you put all that together and the Fed's kind
5:00
Speaker 1: of like in a very invidious position, right? And really
5:04
Speaker 1: whether the buybacks work in that yield sense really comes
5:07
Speaker 1: down to the Fed right now. So I wouldn't want
5:09
Speaker 1: to be Kevin Warsh because he's either going to upset
5:13
Speaker 1: the White House or he's going to upset the Besant
5:15
Speaker 1: House as in the casino world. One of them he's
5:18
Speaker 1: going to upset, right? If not both of them. I mean,
5:20
Speaker 1: that really is.
5:22
Speaker 3: Yeah, he is kind of between a rock and a
5:24
Speaker 3: hard place from that point of view, which I guess
5:26
Speaker 3: means the easy, obvious thing for him to do would
5:29
Speaker 3: just be to do what he thinks you should do.
5:31
Speaker 1: But I guess we'll see.
5:33
Speaker 3: It's easier said than done. But in terms of what
5:37
Speaker 3: happened with the yen this week, because also that's another
5:41
Speaker 3: thing where Besant set himself up essentially is... I mean,
5:44
Speaker 3: I do... On another point, I find it quite interesting
5:47
Speaker 3: that effectively he really is kind of interfering in another
5:50
Speaker 3: country's monetary policy in quite a dramatic way. And I've
5:55
Speaker 3: got to say, the Japanese authorities don't really seem to
5:57
Speaker 3: care because they seem to want it to go that way.
5:59
Speaker 3: It'll be interesting to see what happens if they ever
6:02
Speaker 3: start to disagree. But tell us what's happening there.
6:05
Speaker 1: Well, I guess it's a global casino, right? So he's
6:07
Speaker 1: not just betting on US treasuries, it's the yen. It's
6:11
Speaker 1: kind of joined up. I mean, Japan is the largest
6:14
Speaker 1: owner of u.s treasuries so i think the worry is
6:17
Speaker 1: that they are forced to start selling these treasuries to
6:21
Speaker 1: to essentially to support their currency yeah and and you
6:25
Speaker 1: know scott betson and the treasury don't want that yeah
6:28
Speaker 1: so i think that was part of the thinking behind
6:29
Speaker 1: this let's help the japanese support the yen but in
6:33
Speaker 1: that sense they're actually probably pushing an open door now
6:36
Speaker 1: and they've probably got more chance of success with that
6:39
Speaker 1: than the buybacks because you're at the stage now where
6:42
Speaker 1: japanese basically have all these they've got like $ 5 trillion
6:46
Speaker 1: in assets that they own abroad. So it's massive. I
6:49
Speaker 1: don't think any other country owns as many foreign assets.
6:52
Speaker 1: And a lot of it's unhedged, which basically means that
6:56
Speaker 1: if the yen sort of goes up a lot, they
6:58
Speaker 1: lose a lot of money. And so you've got this
7:01
Speaker 1: stage where the yen started to rally a bit because
7:03
Speaker 1: you've had some of these interventions. So it is moving
7:05
Speaker 1: in that direction. But the more it does, the more
7:08
Speaker 1: it draws in these unhedged investors because they're suddenly like, oh,
7:12
Speaker 1: I'm losing money now. a better hedge or take off
7:16
Speaker 1: the position or whatever. But that then feeds in itself
7:19
Speaker 1: and becomes self-fulfilling. And if you look at like, the
7:21
Speaker 1: hedge ratios are very low right now, so there's a
7:23
Speaker 1: lot of potential there. And second of all, you can
7:26
Speaker 1: look at various measures that show that they're getting more
7:28
Speaker 1: sensitive to the currency rising. So there's more chance that
7:32
Speaker 1: they're likely to hedge. So I think Besson's actually pushing
7:35
Speaker 1: an open door on that one.
7:37
Speaker 3: And this is basically the kind of dreaded yen carry trade, Unwind. Yes,
7:42
Speaker 3: so basically the Japanese bring all their money home, at
7:46
Speaker 3: least in theory, and everything else.
7:50
Speaker 1: They don't even need to bring it home, they just
7:51
Speaker 1: need to put the hedges on. So they can actually
7:53
Speaker 1: leave the assets. So that's kind of what I'm thinking.
7:56
Speaker 1: Do you know what, they're like, do you know what,
7:57
Speaker 1: better hedge now. Because we've let ourselves, we keep the assets,
8:00
Speaker 1: we don't need to sell treasuries and annoy Scott Besson, right?
8:04
Speaker 1: I really like getting his way. Just get the hedge
8:07
Speaker 1: ratios back. And that in itself, because at 2015-2016, that
8:11
Speaker 1: was a big part of the yen rally then. The
8:14
Speaker 1: yen rallied about 20-25% over that period. A big part
8:18
Speaker 1: of it was suddenly the Japanese going, right, we need
8:21
Speaker 1: to hedge again.
8:21
Speaker 3: Yeah, and that was pretty disruptive in markets as far
8:24
Speaker 3: as I can remember. And obviously August 2024 was when
8:28
Speaker 3: we saw that was more a kind of flash crash
8:31
Speaker 3: type situation, wasn't it?
8:33
Speaker 1: That was a flurry, yeah.
8:34
Speaker 3: So this is, so in terms of what you should
8:36
Speaker 3: watch out for, certainly as a private retail investor, this
8:41
Speaker 3: is the kind of thing that could create volatility from
8:44
Speaker 3: time to time. Well, if you are, because usually I
8:49
Speaker 3: base that on safety readers. If you own, say you're
8:53
Speaker 3: a British person and you own a Japanese fund, and
8:58
Speaker 3: you own it in sterling you haven't thought because obviously
9:01
Speaker 3: you can buy hedged versions of these things my take
9:04
Speaker 3: tends to be don't worry about it you've got enough
9:07
Speaker 3: to worry about choosing equities and equity funds without bothering
9:11
Speaker 3: your head what's going to happen to the currency you
9:14
Speaker 3: might as well kind of like take the swings with
9:15
Speaker 3: the roundabouts because hedging is essentially just taking that risk
9:19
Speaker 3: in a different way i'm just curious what's your take
9:22
Speaker 3: on that as someone who's more kind of you know,
9:25
Speaker 3: accustomed to the institutional side and thinking about currency hedging.
9:29
Speaker 1: I'd take the other side with that. Ah, interesting. I
9:33
Speaker 1: think Japanese is a great trade. It's a stock trade.
9:37
Speaker 1: But I think the real, it's a big, big trade.
9:38
Speaker 1: And that really would come down to the big move
9:41
Speaker 1: is an inflationary move. So Japan has always had a
9:44
Speaker 1: potential inflation problem, but now it's really beginning to take flight.
9:48
Speaker 1: So not only is measures of inflation rising, but measures
9:51
Speaker 1: of inflation expectation rising. They were already high, by the way,
9:54
Speaker 1: because they rose after the pandemic. They kind of leveled
9:56
Speaker 1: up and now they're rising again so so there's a
9:59
Speaker 1: real i think we've got a real inflation problem you
10:01
Speaker 1: know be careful what you wish for yeah in japan
10:03
Speaker 1: they're over invested in bonds and under invest in equities
10:06
Speaker 1: they start to see there's an inflation problem equities could
10:08
Speaker 1: massively benefit yeah right so you suddenly see the surge
10:11
Speaker 1: of domestic money into the equity market problem with that
10:15
Speaker 1: of course is there's an inflation problem and if the
10:18
Speaker 1: yen will be the pressure valve there so that's why
10:21
Speaker 1: owning japanese equities is a great thing i think you
10:25
Speaker 1: want to have that currency hedged interesting okay.
10:28
Speaker 3: So i so basically you're saying that if they do
10:31
Speaker 3: jump into japanese equities and i am uh i i
10:36
Speaker 3: own the sterling uh version of these assets so i
10:41
Speaker 3: guess what i'm saying is so If the yen goes
10:44
Speaker 3: up against sterling, then you're laughing, assuming the equities don't
10:48
Speaker 3: fall off a cliff. But what you're saying is that
10:51
Speaker 3: it might actually go the other way.
10:53
Speaker 1: I think that's exactly what I'm saying. If the big
10:56
Speaker 1: trade here, if I'm right, and it's a big inflation
10:58
Speaker 1: thing in Japan, and Japan will do everything to try
11:02
Speaker 1: and prevent that, the release valve, if you like, the
11:06
Speaker 1: adjustment mechanism will be the yen. The yen will go.
11:08
Speaker 1: If you've got a big inflation problem in Japan.
11:11
Speaker 3: the yen will go so over the longer run you're
11:13
Speaker 3: expecting the yen to weaken further rather than bounce you
11:18
Speaker 3: could see in the shorter term money coming in and
11:20
Speaker 3: all that stuff but once that hedging is done it's
11:23
Speaker 3: kind of done Ah, that's quite interesting. So you reckon
11:27
Speaker 3: it's probably worth actually hedging your Japanese.
11:29
Speaker 1: I'd 100% of all the kind of... Sorry to... No,
11:30
Speaker 1: I think that's really interesting. John's just run out the
11:33
Speaker 1: door to hedge his Japanese equities. I'm just getting on
11:35
Speaker 1: the phone to my broker.
11:59
Speaker 3: Now we're on that bombshell. Shall we move on to
12:02
Speaker 3: bond yields generally? Because obviously this is partly where Besant's
12:08
Speaker 3: headache is, but it's even more of a massive headache
12:11
Speaker 3: for us here in the UK because we've got the
12:15
Speaker 3: highest bond yields in the G7. And the reason for
12:18
Speaker 3: that is because we seem to have the most inflation-prone
12:20
Speaker 3: economy in the G7. And it doesn't really look as
12:24
Speaker 3: if Andy Burnham and John Healey are especially inclined to
12:30
Speaker 3: tackle that issue, as far as I could see from
12:33
Speaker 3: Prime Minister's question time this week. I mean, I know
12:38
Speaker 3: you saw it as well, but Kemi Badenoch was saying
12:41
Speaker 3: to Andy Burnham, well, you know, how are you going
12:43
Speaker 3: to increase spending on defence?
12:46
Speaker 1: So we don't want national security at the expense of
12:50
Speaker 1: social security, which is pretty clear, right?
12:53
Speaker 2: Yes, we do everything to support our national security, but
12:57
Speaker 2: it can't come at the expense of social security. Having
13:02
Speaker 2: strong national security also.
13:05
Speaker 1: Yeah, I mean, they said, I think he clarified, said
13:08
Speaker 1: we're against crude cuts. But the stage is set and
13:11
Speaker 1: you kind of know, I think, where people's kind of
13:13
Speaker 1: sympathies lie. And, you know, I don't think many Labour
13:17
Speaker 1: MPs got into power or into government or into becoming
13:21
Speaker 1: an MP to save money.
13:23
Speaker 2: Yeah.
13:23
Speaker 1: You know, it's not really, you know, the thing that
13:25
Speaker 1: I guess that they're kind of driven by. So it's
13:27
Speaker 1: kind of like you can sort of see which way
13:28
Speaker 1: the wind's blowing. But Burnham is, you know, they've got
13:31
Speaker 1: this commitment to 3%, I think, or they're going to
13:33
Speaker 1: lay it out. Yeah. 3% by 2030. And then what,
13:37
Speaker 1: three and a half by 2035. And that's kind of
13:40
Speaker 1: like quite a long time, right?
13:42
Speaker 2: Yeah.
13:42
Speaker 1: It doesn't feel there's enough urgency. Like, if they're saying
13:45
Speaker 1: all these things, but if they really believe that it
13:47
Speaker 1: was an urgent problem, they'd be saying different things.
13:50
Speaker 2: Yeah.
13:50
Speaker 1: I think.
13:51
Speaker 2: Yeah. Right.
13:51
Speaker 1: And it would be, there'd be a different conversation happening
13:54
Speaker 1: right now and you wouldn't even be putting, and by
13:56
Speaker 1: the way, that it's not to pick on, I know
13:58
Speaker 1: the right is sort of saying, um, or, or, or sorry,
14:01
Speaker 1: left Burnham is saying, this is like an easy left wing,
14:03
Speaker 1: right wing thing. It's like, if you look at like,
14:06
Speaker 1: I had to look at this chat GPT number. So take, take,
14:09
Speaker 1: take with caution. I said which departments, what's the increase
14:13
Speaker 1: in spending since 2019? Top of the bill is the DWP.
14:17
Speaker 1: It's £ 100 billion, which is 40% of the entire increase
14:22
Speaker 1: of the increase in expenditure overall. So like any, you'd
14:26
Speaker 1: have to look at the thing. And a Treasury insider,
14:29
Speaker 1: this is too political, said that the low-hanging fruit is done.
14:34
Speaker 1: Only welfare cuts are really left. I don't think it
14:36
Speaker 1: really is a right versus left thing anymore. It's just
14:38
Speaker 1: a practical accounting thing.
14:40
Speaker 3: Well, this is it. I mean, to be fair, to
14:44
Speaker 3: Burnham and even to the Starmer administration, I mean, this
14:48
Speaker 3: is coming at the end of a long period of, again,
14:52
Speaker 3: conservative government and before that, even the new Labour government.
14:57
Speaker 3: whereby we've been getting rid of the guns in favour
15:00
Speaker 3: of the butter for a long time. I mean, it
15:02
Speaker 3: was the mid 80s, wasn't it? I think something like
15:05
Speaker 3: defence spending was something like 8% of GDP and the
15:09
Speaker 3: welfare budget was at the opposite end. And now they've
15:12
Speaker 3: basically switched sides. And I think clearly one of the
15:19
Speaker 3: big issues, the only real issue with the right-left divide
15:21
Speaker 3: is that there's a presentation thing. And it was never
15:25
Speaker 3: quite as overt that, well, we're just getting rid of
15:28
Speaker 3: the defence budget so we can basically fund the state pension.
15:31
Speaker 1: I think we've got the American taxpayers to thank for that, really.
15:37
Speaker 1: They've essentially indirectly funded this. this welfare that otherwise probably
15:41
Speaker 1: should have been spent or some of it on defence.
15:43
Speaker 3: Yeah, and the Americans have been saying, as we've said
15:46
Speaker 3: here before, they've been saying politely for years, guys, you
15:50
Speaker 3: need to stop relying on our taxpayers to defend your country.
15:54
Speaker 3: And now that Donald Trump's in, obviously, they've started saying
15:57
Speaker 3: it a lot less politely. But even then, you kind
16:00
Speaker 3: of look at even what's happening in Germany now. And
16:03
Speaker 3: so obviously one of the big things that happened was
16:05
Speaker 3: that last year they had the German Cedric Burgundy re-armed
16:09
Speaker 3: basically because Donald Trump and J.D. Vance, J.D. Vance made
16:14
Speaker 3: a big speech and it kind of made everyone kind
16:17
Speaker 3: of panic because it really kind of drew a line under, look, seriously,
16:20
Speaker 3: we need you guys to spend more. But even that's
16:23
Speaker 3: kind of running into issues and whenever you look at
16:26
Speaker 3: what they end up spending the money on, it's essentially
16:30
Speaker 3: at best infrastructure and sometimes Effectively, just welfare-adjacent stuff is
16:35
Speaker 3: not actually going on.
16:37
Speaker 1: Like frontline defence.
16:38
Speaker 3: Yeah, exactly.
16:39
Speaker 1: Yeah, I mean, I think that happened here as well.
16:41
Speaker 1: They talk about, like, they included in the budget what
16:44
Speaker 1: they pay, essentially, for payments for veterans.
16:47
Speaker 2: Yeah.
16:47
Speaker 1: And you're like, OK, this is maybe not the sort
16:49
Speaker 1: of thing where you should be trying to equivocate and
16:52
Speaker 1: obfuscate with the language. It feels like there's an urgency.
16:56
Speaker 3: And to be fair, you know, we... by the standards
17:00
Speaker 3: of Europe, we do still spend a reasonable chunk of
17:02
Speaker 3: our GDP and the 2% has been high for the
17:06
Speaker 3: Eurozone particularly, but clearly it's not sufficient anymore. And I
17:12
Speaker 3: do think that you're right, there's this problem with our
17:15
Speaker 3: muscle memory, where our politicians are stuck in this world
17:18
Speaker 3: where you could basically rely on the defence budget to
17:23
Speaker 3: fund everything else, but that's no longer the case. But
17:26
Speaker 3: we're also up against it because we've spent so much.
17:29
Speaker 3: It is that thing, as your Treasury chap said, there's
17:35
Speaker 3: nothing left but hard choices. But who's going to be
17:38
Speaker 3: the one that says we're going to scrap the triple
17:40
Speaker 3: lock and therefore loses the next election?
17:46
Speaker 1: It's a hard sell. It's a hard sell. Well, it
17:48
Speaker 1: is and it isn't. But I think, yeah, I mean,
17:50
Speaker 1: I think if you're obviously a recipient of that, it's
17:52
Speaker 1: a hard sell. to you, and I think, well, you've
17:56
Speaker 1: ended up with a kind of quote-unquote client state, because
17:59
Speaker 1: the more people you've got on benefits, the more you've
18:02
Speaker 1: got a franchise, right? And they're all aware of that, right?
18:05
Speaker 1: I mean, even Reform, surprisingly, actually, they've talked about they're
18:08
Speaker 1: going to cut, what, 50 billion, but a lot of
18:11
Speaker 1: Reform voters are against it. So I'm surprised they kind
18:14
Speaker 1: of went down that route, but no matter who, which
18:17
Speaker 1: party it is, they're going to face that problem.
18:19
Speaker 3: Yeah, and I mean, Reform have also made some really
18:23
Speaker 3: frankly ridiculous promises about raising the personal allowance, the income
18:26
Speaker 3: tax personal allowance to £ 15, 000 it's not, that kind of
18:31
Speaker 3: talk is not serious either and so while I can
18:36
Speaker 3: see why there's an appetite for policy change in the
18:40
Speaker 3: country like hardly anyone is seriously talking about the actual
18:46
Speaker 3: changes that we need which is to broaden the tax
18:48
Speaker 3: base and kind of cut the spending um and that
18:52
Speaker 3: is going to involve some kind of uncomfortable choices but
18:57
Speaker 3: is it the bond market that's going to have to
18:59
Speaker 3: force us to do it i think that's the the
19:02
Speaker 3: big question.
19:03
Speaker 1: Well i mean it has to be something i guess
19:06
Speaker 1: it almost feels like there has to be something dramatic
19:08
Speaker 1: yeah happens i mean the problem is of course is
19:09
Speaker 1: that the you mentioned like uk yields they are high
19:12
Speaker 1: but they're kind of rising everywhere and again it's funnily
19:15
Speaker 1: enough it's the term premium again so actually the extra
19:18
Speaker 1: risk So since Burnham became prime minister, like last month
19:22
Speaker 1: or two months before July, term premium in the UK
19:25
Speaker 1: has gone nowhere. It's actually not moved. So actually, if
19:28
Speaker 1: you look at the risk, the yields have gone up,
19:29
Speaker 1: but the actual underlying risk hasn't actually altered. But almost
19:33
Speaker 1: like I wouldn't want him to know that because it
19:36
Speaker 1: reclates his reflexivity. And Trump's a bit doing it in
19:39
Speaker 1: the US with the stock market so he can escalate
19:42
Speaker 1: the war. If he knows the stock market's kind of
19:44
Speaker 1: close to highs, it's certainly not down a lot. but
19:47
Speaker 1: then of course that creates fertile ground for exactly what
19:49
Speaker 1: you don't want to happen to happen yeah and in
19:52
Speaker 1: this in our case yields go sky high maybe in
19:54
Speaker 1: the us it's yields and and stocks all the rest
19:57
Speaker 1: of it so yeah i think to force the hard
19:59
Speaker 1: choices you need to see something dramatic happening but well
20:02
Speaker 1: it doesn't happen it allows the easy the easy route right.
20:06
Speaker 3: Yeah um And I mean, I guess this is the
20:09
Speaker 3: other problem because it now feels as if we're settling
20:11
Speaker 3: in for a longer war than people had anticipated between
20:16
Speaker 3: the US and Iran. And so all of this pressure
20:18
Speaker 3: on energy prices is just going to get worse. So
20:23
Speaker 3: even if the country-specific risk doesn't change, if the term
20:26
Speaker 3: premium doesn't change, the underlying chunk that's pushing up kind
20:30
Speaker 3: of yields is going to keep going up. But I
20:34
Speaker 3: guess that's something we'll just have to keep an eye on.
20:38
Speaker 3: Shall we quickly talk about AI very briefly?
20:41
Speaker 1: The human extinction part. Yeah, why not?
20:44
Speaker 3: I'm just curious about... Because honestly, a lot of that
20:48
Speaker 3: stuff's philosophical. And you've written some good pieces this week
20:51
Speaker 3: about the practicalities of the AI bubble and whether it's
20:56
Speaker 3: going to pop or not. But on the extinction side
20:58
Speaker 3: of this stuff... So a cynic would say, to my
21:04
Speaker 3: mind at least, that, OK, these... guys are coming out
21:08
Speaker 3: and saying because basically what's happened is one guy resigned
21:11
Speaker 3: from anthropic was it and said that i don't want
21:14
Speaker 3: to do this job anymore because i think there's a
21:17
Speaker 3: 10 chance that ai is going to destroy maybe you.
21:20
Speaker 1: Should put a bet on with the besant casino for
21:22
Speaker 1: that right exactly yeah yeah what great bet i don't
21:26
Speaker 1: know who's going to claim it off human extinction go
21:28
Speaker 1: long um well.
21:30
Speaker 3: Yeah so the 10 thing and then his boss basically
21:32
Speaker 3: came out or you know former boss presumably and said
21:36
Speaker 3: um Well, no, no, he's right. We do believe this
21:39
Speaker 3: and this is what we think. So this is what
21:42
Speaker 3: we're trying to do about it. And I think a
21:44
Speaker 3: cynic obviously would say, well, the whole Doomer element of
21:49
Speaker 3: AI is to basically drum up their share prices before
21:51
Speaker 3: the IPO because they're running out. There's so many other
21:56
Speaker 3: things you can question AI on in terms of its economics.
22:01
Speaker 3: But what's the other side of that? What kind of
22:05
Speaker 3: arguments have you seen or do you think? What are
22:08
Speaker 3: the chances that it would, should we take this.
22:10
Speaker 1: At all seriously? I mean, I think, I mean, nobody,
22:13
Speaker 1: obviously nobody knows. I mean, all I know is that
22:15
Speaker 1: the more I follow and read these guys, women and
22:19
Speaker 1: all the rest of it that are... are in this
22:21
Speaker 1: area and they they they're all experts but they all
22:24
Speaker 1: just a lot and disagree which tells you that obviously
22:27
Speaker 1: nobody really knows so i'd say that say that's one
22:30
Speaker 1: thing um and i think yeah you know yan lacoon
22:33
Speaker 1: who is the former head of ai at meta i
22:35
Speaker 1: know he has his own um company but he was
22:38
Speaker 1: always of the point of view that you know you
22:41
Speaker 1: have to have bad motives like the ai would have
22:43
Speaker 1: to have bad motives to destroy mankind and that certainly
22:47
Speaker 1: might be true and i agree with that what we
22:49
Speaker 1: don't can't just assume that an AI, it might be intelligent,
22:52
Speaker 1: but it might not have the same motivations as humans.
22:55
Speaker 1: But also it could just be a mistake, what they
22:58
Speaker 1: call misalignment. So it's not necessarily evil in any sense.
23:02
Speaker 1: It's just a misalignment and it misinterprets what we think
23:05
Speaker 1: is an innocent instruction. The classic example is making paper clips,
23:10
Speaker 1: you know, and the AI just goes ahead and turns
23:12
Speaker 1: every energy resource in the universe, including us, into paper clips.
23:17
Speaker 1: You know, it's like the It's seen in, I think
23:19
Speaker 1: it's Fantasia, where he wants the magic broom to fill
23:24
Speaker 1: up the cauldron with water.
23:24
Speaker 3: Oh, yeah, the Sorcerer's Apprentice.
23:26
Speaker 1: But because it doesn't actually know when it's exactly full,
23:30
Speaker 1: so it just keeps on just in case, and then
23:33
Speaker 1: ends up flooding everything. I mean, that's a misalignment problem,
23:36
Speaker 1: because it didn't understand the instruction the way we would
23:40
Speaker 1: instruct it. So I think there is a risk, but
23:42
Speaker 1: I mean, trying to put numbers on it, I really
23:44
Speaker 1: don't know. It's difficult.
23:47
Speaker 2: I think.
23:48
Speaker 1: I mean, I'm personally not overly worried about it because
23:50
Speaker 1: I think we're in a bit of a hype cycle.
23:53
Speaker 1: And obviously these words might come back to bite me.
23:55
Speaker 1: But there'll be nobody around. There'll be nobody around, exactly.
23:58
Speaker 1: So I'm all right. I'll get my bet off Scott Besson.
24:01
Speaker 1: And yeah, so I think I'm sort of inclined to
24:04
Speaker 1: sort of there's a lot of hype and people are
24:07
Speaker 1: seeing exponentials everywhere, which is what happens in the middle
24:09
Speaker 1: of a hype cycle. So I'm kind of just resting
24:12
Speaker 1: a little bit on that. But undoubtedly there are risks.
24:16
Speaker 1: But I just, I think it's very hard to put
24:17
Speaker 1: like a number on it. And even then, I think
24:19
Speaker 1: that number is going to be super high.
24:21
Speaker 3: And on a slightly more practical investment level, how close
24:25
Speaker 3: do you think we are to the top on this bubble?
24:27
Speaker 3: Because I've seen, well, A, Jensen Wang was on the
24:31
Speaker 3: cover of The Economist, actually doing that Sorcerer's Apprentice type.
24:36
Speaker 2: Image.
24:37
Speaker 1: Sorcerer of Silicon.
24:39
Speaker 3: Yeah, that was it. It was very Wizard of Oz-y
24:41
Speaker 3: as well, the kind of colours. But also Sam Altman
24:45
Speaker 3: and one of his sidekicks at Open AI are on
24:47
Speaker 3: the cover of Time. And okay, I mean, the headlines
24:50
Speaker 3: trust us, but again, we all know the magazine cover indicator,
24:55
Speaker 3: if you're on the cover of Time and you're a
24:57
Speaker 3: CEO or a politician, probably means that your time in
25:01
Speaker 3: the spotlight is about to kind of turn a little
25:05
Speaker 3: bit less favourable. I mean, if we have seen a peak,
25:10
Speaker 3: are we are going to see a peak jank a year,
25:13
Speaker 3: six months? I mean, maybe already.
25:16
Speaker 1: But yeah, I mean, I think it feels like, I mean,
25:19
Speaker 1: prices right now are obviously kind of chopping sideways. Yeah.
25:23
Speaker 1: And so I could see like a correction in the market,
25:26
Speaker 1: 10 or 15%, just to let some of the air out.
25:28
Speaker 1: And that's kind of happening a little bit now with
25:30
Speaker 1: the consolidation. In terms of like, when does the message
25:33
Speaker 1: come across that the overall trade, like they've overbuilt capacity.
25:38
Speaker 1: I mean, that could be a bit longer because they're
25:39
Speaker 1: spending hand over fist right now. And nobody really knows
25:43
Speaker 1: for sure exactly what the demand for computing power is
25:46
Speaker 1: going to be. I mean, I suspect they'll overbuild and
25:49
Speaker 1: they'll find out because it's all based on essentially infinite demand.
25:52
Speaker 1: So all the assumptions assume that just demand's essentially unbounded.
25:56
Speaker 1: And I think that's stretched too far. So they'll probably
25:59
Speaker 1: find at some point, but that could be a little
26:01
Speaker 1: bit further out. But in the interim, yeah, you could
26:03
Speaker 1: easily have enough of a correction that actually might be
26:06
Speaker 1: an interim buying opportunity, right? Because if you sort of think, well,
26:10
Speaker 1: maybe the actual peak in the Buggles is not going
26:13
Speaker 1: to be another 12 to 18 months, then you've got
26:15
Speaker 1: a window to get in at a reasonable value or
26:18
Speaker 1: better valuation. But yeah, I think we'll find out.
26:23
Speaker 3: No, well, thanks, Simon. I think that was a really
26:26
Speaker 3: good chat. And I think we'll have to leave it
26:29
Speaker 3: there because we've overshot our allotted time period. The AI
26:33
Speaker 3: will come and switch us off if we're not careful.
26:35
Speaker 1: If we're still around, yeah.
26:41
Speaker 3: Thanks for listening to this week's Merrin Talks Money Market Wrap.
26:43
Speaker 3: If you like our show, rate, review and subscribe wherever
26:46
Speaker 3: you listen to podcasts. Be sure to follow me and
26:48
Speaker 3: Merrin on Exxon Twitter. Merrin is at Merrin SW and
26:53
Speaker 3: I'm John underscore StepX. This episode was produced by Summer Saturday,
26:58
Speaker 3: sound designed by Blake Maples. Questions and comments on this
27:00
Speaker 3: show and all our shows are always welcome. The show
27:03
Speaker 3: email is merrinmoney at bloomberg.net.