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The Asset Class: Philip Saunders · Strictly Business

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  You're listening to Strictly Business Podcast with Lindsay Williams.
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  He's recently chaired his first meeting of the US Federal Reserve.
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  He's also testified to Congress.
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  His name is Kevin Walsh and perhaps very significantly to many people.
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  He's a Trump appointee, but is he a Trump puppet?
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  With me is Philip Saunders, Director, Investment Institute at 91 in London.
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  Not a puppet, I think.
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  No, I don't think he's a puppet.
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  You know, he's...
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  Obviously, he's worked at the Fed before, so he's been part of that institution.
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  He's been very successful in the hedge fund world, working with others such as
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  Besant, the US Treasury Secretary, and Stanley Druckenmiller, who, of course,
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  basically has been one of the most successful
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  hedge fund managers that we've seen.
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  So I think he's a very high caliber individual.
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  He is...
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  independently wealthy as a result of his efforts and also his marriage, I think.
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  So therefore, you know, he's doing this public service role because he wants to
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  achieve something.
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  And I think what he wants to achieve is to reform the Fed and to help Besant
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  and others, you know, bring to reality this idea of America first and this
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  significant shift in the
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  direction of the US.
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  He said when he was testifying to Congress, he said, in six weeks, we have
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  caused, I think, a sea change in
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  new thinking.
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  How can you sort of reinvent the way that the Fed looks at the market?
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  And when I say the market, I mean inflation and interest rates and growth
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  and jobs and all that sort of thing.
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  I mean, surely that's cemented in Economics 101.
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  How can you effect a sea change?
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  Well, I think that in a number of ways.
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  I mean, obviously, he's set up five working groups and to look into areas that
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  he believes can be
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  improved or changed.
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  And one of these, which I think is pretty significant at the moment, is the debate
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  over productivity.
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  And, you know, we are in the midst of, obviously, the AI infrastructure boom.
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  So it's a sort of supply side.
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  development that potentially is underpinning growth at the moment, likely
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  to increase the rate of growth.
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  So in one of those sort of cycles.
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  And it's quite possible that this will result in the US economy continue to grow
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  quite
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  significantly above the conventional estimate that the Fed staffers have signed
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  up to
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  conventional estimates of the sustainable growth rate in the US, which is about one
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  and a half to one and three quarter
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  percent.
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  in real terms.
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  That's 1% of, you know, effectively productivity per annum, which is a pretty
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  low level, and
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  half to three quarters of a percent of labor force growth, i.e.
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  pretty weak because the demographics are sort of relatively negative, not quite as
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  negative, obviously, as the likes of Japan,
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  China, or Europe.
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  So, you know, this is the Fed generally, you know, they collectively make these
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  fundamental
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  assumptions.
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  And he's challenging some of those, which I think is a good thing, because I think
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  the Fed definitely suffers from groupthink.
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  You know, most of the people around the table, federal, at the FOMC are, you know,
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  economists.
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  As one former Fed member described them, you know, they've all been educated on one
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  or other side of the Charles River.
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  So they tend to actually think in a conventional way and they think alike.
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  And we're entering a period of very significant change.
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  On the one hand, obviously, you've got to.
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  innovation cycle, AI, which is clearly very significant.
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  It's going to be a completely new platform that the world will operate off in time.
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  And also the US has decided that it can no longer sort of live in this sort of
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  Washington consensus type rules-based order world.
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  So some very major things are going on and there needs to be this openness to debate
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  and discussion.
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  in order to actually set policy sensibly, rather than just simply setting it in the
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  way you've simply said it in the past.
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  Walsh gets this, Besant gets this.
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  But there's obviously a lot of resistance, conventional or more orthodox thinking
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  basically, you know, believes that this is potentially dangerous, and
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  it's going to lead to inflation getting out of control, and so forth.
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  Speaking of inflation, he hasn't abandoned the 2% inflation target.
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  The recent inflation data from the United States was CPI at 3.5%, coming down, I
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  think, from
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  4.2%.
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  But anyway, it's come down in the last month because of lower oil prices, lower
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  gasoline prices, etc.
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  in the United States.
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  But is he going to try and massage the way that they collect data in order to get it
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  down to 2% but without raising interest rates?
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  Because that's the fear I've heard from some commentators.
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  Yes, and that's an understandable critique.
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  It comes from a particular school of thought.
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  But maybe he's simply trying to be more objective.
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  And I think that there's a lot of useful high-frequency data that the Fed doesn't
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  use in terms of
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  understanding inflationary forces.
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  And the other point he did make in his statement is the impact.
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  of higher inflation rates on the poorest people in society.
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  And I think that this is important because inflation tends to affect the weakest
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  people in society the worst.
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  You know, this is why having a independent central bank that has a focus on inflation
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  is
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  important.
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  But they haven't done a very good job on that front in recent years.
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  Really, you know, inflation basically has been running well above trend, you know,
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  prices have been going up.
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  well above 2% since 2020.
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  So in a way, the Fed has sort of failed in its duty to actually keep inflation under
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  control over that particular period under Jerome Powell's
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  watch.
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  Do you think that he has to look at two different economies, the economy that is
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  driven by AI, the economy that is beholden to
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  Wall Street, and the other one that is Joe Soak walking down to his local Walmart?
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  Has he got a problem there in balancing those two perceived economies?
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  Well, I think that what we're seeing is, you know, potentially policymakers in
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  charge now who
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  believe that Main Street, you know, deserves a better deal and that Wall
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  Street,
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  you know, has been the primary beneficiary, obviously, of this sort of
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  form of financial capitalism on
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  steroids that we've actually...
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  had over the last 20 years or so, and particularly in the post-GFC period.
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  But I think, you know, clearly Besant has said that he doesn't think that this is
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  healthy and sustainable.
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  And both of them want to go back to a more classical form of capitalism.
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  Yep, not the sort of financial version, and one that basically is underpinned by,
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  you know, healthy supply side as well.
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  So better deal for the less well off.
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  more sustainable model in order to actually compete effectively with China.
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  What have the markets said about it?
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  Because if you look at the yields, it doesn't matter what duration you're
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  looking at, they have been ticking up recently.
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  And it hasn't been a spectacular rise, but going up they are.
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  So the market says, well, he's not going to cut rates, certainly.
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  And maybe he's even going to raise rates if inflation after this recent blip down
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  to 3.5%, as I said earlier, starts to
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  be a blip to the upside again?
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  What's he going to do?
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  Is he going to raise rates?
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  So I think that he's keeping his options open.
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  And I think that if you continue to see inflation numbers like the one we've just
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  seen, and there's more evidence of that,
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  then it's highly unlikely that short term interest rates are going up in the States.
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  Whether they actually go down is debatable.
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  But I think that what was discounted, you know, as a result, obviously, of the
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  impact on oil prices of the whole Hormuz
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  conflict.
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  That caused a major reassessment of interest rate expectations in the US and
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  elsewhere.
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  And I think that got very overdone.
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  And now oil prices basically have relaxed, even though the conflict has sort of
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  reignited.
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  Oil prices seem to be pretty well behaved for now at any rate.
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  And so that pressure potentially is sort of coming off.
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  And I think that in a way, basically, it's been a mistake to simply expect that if
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  oil prices go up
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  to...
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  say, $90 or $100 a barrel, that central banks have necessarily got to raise
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  interest rates.
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  That's the traditional reaction function.
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  And I think that if there's no pass-through, then reacting like that
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  actually
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  damages the economy more than higher oil prices, which obviously reduces demand.
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  So I think that we're now in a somewhat better position in the sense that oil
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  prices seem to be more or less under control.
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  If you look at inflation expectations in the market, actually, they're pretty calm.
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  And so therefore, I think that this is a reasonably smooth transition in terms of
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  leadership of the Fed.
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  Final question.
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  Like it or not, Kevin Walsh is the custodian of the US dollar.
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  The US dollar index is currently trading above 100.
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  The dollar is supposed to be going into a long term bear market from many
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  commentators that I've read.
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  But it's clearly not.
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  It's quite firm.
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  What do you think might happen to the dollar because of Walsh?
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  I mean, the dollar is pretty highly valued at the moment.
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  But actually, the US is in a pretty strong position, you know, because there are only
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  two real powers in AI, and
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  that's the US and China.
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  You've got a growth-oriented administration in place.
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  And, you know, if you've got a debt problem, you know, without growth, you've
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  got an even worse debt problem.
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  In the case of, you know, they believe that you have to grow your way out of this
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  problem.
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  And I think that's the sort of correct thing to do.
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  But you don't just do that by slashing interest rates to juice up consumer
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  demand.
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  I mean, that just leads to inflationary pressures and it's not necessarily
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  sustainable.
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  But if you support CapEx and a supply-led growth cycle, then you can
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  actually run the economy quite a lot hotter without necessarily...
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  causing inflation to come back and bite you.
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  The final word, I suppose, is I've already said it would be the final word, but I'm
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  going to say it anyway.
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  Growth is no longer the enemy.
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  Is that the message that Walsh is trying to get across?
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  I think that's absolutely the message he's trying to get across.
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  Philip, thank you very much for your time.
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  Philip Saunders is Director, Investment Institute at 91 in London.
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  The views and opinions expressed in these podcasts are those of Lindsay Williams and
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  various contributors.
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  change, revision, and
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  rethinking at any time.
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  Please do not hold us to them in perpetuity.