Latest / Merryn Talks Money / Markets Wrap: Bond Market Turmoil, Inheritance Tax and AI risks

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Markets Wrap: Bond Market Turmoil, Inheritance Tax and AI risks · Merryn Talks Money

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Speaker 1: Bloomberg Audio Studios. Podcasts. Radio. News.
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Speaker 2: Welcome to the Merrin Talks Money Market Wrap, where we
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Speaker 2: talk about the biggest moves in markets this week and
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Speaker 2: what's driving them. I'm John Stevick, senior reporter and author
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Speaker 2: of the Money Distilled newsletter. Merrin's out today, but joining
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Speaker 2: me in the studio is Bloomberg's team leader for MarketsLive,
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Speaker 2: David Goodman. David covers UK markets today and squawk in London.
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Speaker 2: And today's show, we thought we'd probably chat about, well,
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Speaker 2: basically what's been going on in markets this week. We've
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Speaker 2: got the kind of, I hate using the word carnage,
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Speaker 2: so I'll just say sort of like the messiness in
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Speaker 2: the bond markets. We'll have a wee chat about AI
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Speaker 2: as well and maybe a wee chat about what happened
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Speaker 2: at the Tory conference and specifically what they mentioned about
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Speaker 2: inheritance taxes. I think that was probably the most eye-catching
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Speaker 2: thing to come out of that. David, thanks very much
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Speaker 2: for joining us. It's good that you take time out
1:02
Speaker 2: of your a rather hectic markets week to talk to us.
1:07
Speaker 2: So yeah, what's been the big driver in markets this week?
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Speaker 1: I think that's a really good question because you said
1:13
Speaker 1: bond markets are messy. That feels like a bit of
1:15
Speaker 1: an understatement. I mean, I was kind of preparing for this,
1:18
Speaker 1: looking at where markets were and then, you know, leave
1:20
Speaker 1: your desk at half now and then there's been a
1:22
Speaker 1: massive bond rally. So trying to get a handle on
1:24
Speaker 1: this is quite tricky. And I think one of the
1:27
Speaker 1: concerning things about this, I think particularly, you know, in
1:30
Speaker 1: Europe is that I haven't really seen a big trigger
1:33
Speaker 1: for anything. I mean, obviously we have concerns about France
1:37
Speaker 1: and French risks, but if you look at France now
1:40
Speaker 1: versus France, say a month ago when the spread was
1:44
Speaker 1: below 100, the French-German spread.
1:46
Speaker 2: Actually, this is the gap between French government bond yields
1:50
Speaker 2: and German government bond yields.
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Speaker 1: Yeah, so the kind of bond premium is a kind
1:54
Speaker 1: of measure of how much riskier France is. And France
1:56
Speaker 1: and Germany used to be seen as similarish credit i
1:58
Speaker 1: mean you know germany was always the the kind of
2:00
Speaker 1: benchmark but france was kind of there we call it
2:02
Speaker 1: kind of semi-core and like it wasn't a big risk
2:06
Speaker 1: but it wasn't like the safest credit but so that
2:08
Speaker 1: that spread was below 100 basis points even in mid
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Speaker 1: feb mid-september it's now kind of blown out to 150
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Speaker 1: no i do i mean take any guess where it
2:17
Speaker 1: is now and you'll be wrong in five minutes time
2:19
Speaker 1: but it's it's been massive but.
2:21
Speaker 2: And that's something just to be clear we haven't seen
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Speaker 2: since the Eurozone crisis. Cause the thing that struck me
2:28
Speaker 2: was that I remember saying, oh, that's the highest it's
2:31
Speaker 2: been since June, 2012. And then realizing that July, 2012
2:34
Speaker 2: was when Mario Draghi made his, whatever it takes speech.
2:38
Speaker 2: So you really, you really are talking about this. This
2:41
Speaker 2: was the crisis period here.
2:43
Speaker 1: Yeah. I mean, interestingly, back then, France wasn't the problem.
2:46
Speaker 1: I think it was Spain and it was Italy. It
2:48
Speaker 1: was obviously Greece. There were all these other countries who
2:50
Speaker 1: are a bigger problem and France looked relatively okay, but.
2:53
Speaker 1: obviously what the ECB did in response to that after
2:56
Speaker 1: that whatever it takes speech closed these spreads down massively
2:59
Speaker 1: and I remember I was getting kind of geekily excited
3:01
Speaker 1: this time last year there's you know the spread between
3:04
Speaker 1: Germany and any of the eurozone bond is I can't
3:07
Speaker 1: remember where it was but it was like there was
3:09
Speaker 1: a 70 basis point spread across the whole market it's
3:11
Speaker 1: like that just is mad when you I mean I
3:13
Speaker 1: started my career in 2011 2012 when we had spreads
3:17
Speaker 1: that completely huge blown out massively and were really causing
3:21
Speaker 1: causing problems so And obviously, we're seeing some of that
3:23
Speaker 1: come through today at the moment. But I think if
3:27
Speaker 1: you're France, nothing has really changed fundamentally in the last
3:31
Speaker 1: two weeks. There's been some political noise. And obviously, we've
3:35
Speaker 1: kind of got the unrest, which is a big social problem.
3:37
Speaker 1: But I think it's interesting that in the past, we've
3:42
Speaker 1: had these episodes in French debt. It's been a clear
3:45
Speaker 1: kind of political trigger, either the fall of the government
3:47
Speaker 1: and no confidence budgets getting through. We haven't really had
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Speaker 1: this time. It's almost just that there was this big
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Speaker 1: vibes shift where suddenly it was like, oh, France is
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Speaker 1: a problem. And as soon as that thought entered people's minds,
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Speaker 1: selling was the kind of default mode. And then we've
4:00
Speaker 1: just seen this move, this kind of gathered pace. And
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Speaker 1: the worrying thing about it is that it's spread out
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Speaker 1: into other European countries. I mean, Italy's been moving pretty
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Speaker 1: much bang in line with France, despite, you know, we
4:14
Speaker 1: were talking earlier in this year about Italy being, you know,
4:16
Speaker 1: people are positive in Italy, like they like what's going
4:18
Speaker 1: on there. That hasn't really helped them. I mean, this
4:22
Speaker 1: might mark me as a complete bunkie, but I was
4:24
Speaker 1: looking at the Belgium-Germany spread last week. I don't think
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Speaker 1: anyone's looked at that in the terminal for quite some time.
4:31
Speaker 1: But the point is it's spreading beyond France. And I
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Speaker 1: think that's when it becomes a real problem that we
4:37
Speaker 1: can deal with idiosyncratic risk. And I mean, the UK
4:40
Speaker 1: has had its fair share of that over the years.
4:43
Speaker 1: But once it kind of becomes... something that spreads beyond
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Speaker 1: one country, then it becomes more of a problem for
4:48
Speaker 1: the ECB and other people.
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Speaker 2: And how much do you think this is to do
4:55
Speaker 2: with basically the oil price? Because obviously that has been,
4:59
Speaker 2: it feels as if this week we had another, sorry,
5:04
Speaker 2: we've been swinging from, oh, this is nearly over to,
5:07
Speaker 2: oh no, it's getting worse. And this week it's felt like,
5:10
Speaker 2: oh no, it's getting worse weeks. And obviously oil went
5:13
Speaker 2: back above $ 100 a barrel. And today, again, it kind
5:17
Speaker 2: of spiked to about $ 105 for a bit. And I'm
5:20
Speaker 2: just wondering if we're slightly, because obviously France is blown
5:25
Speaker 2: out and obviously France does have its problems. And, you know,
5:30
Speaker 2: I guess the fact that we're trying to get another
5:32
Speaker 2: budget through perhaps started to make people think about it.
5:35
Speaker 2: But at the same time, we do also have this
5:37
Speaker 2: kind of oil prices just automatically push up inflation rate.
5:41
Speaker 2: push up interest rate expectations and maybe it's just it's
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Speaker 2: a kind of global move but france is just the
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Speaker 2: very obvious tip of the spear.
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Speaker 1: Yeah i think so because i mean the oil price
5:52
Speaker 1: is an interesting one because it has kind of just
5:56
Speaker 1: been around a hundred dollars a barrel in either direction
5:59
Speaker 1: for quite a while and you know we've got three
6:02
Speaker 1: percent we had about three five percent move today That
6:04
Speaker 1: would have been huge a few years ago. And now
6:07
Speaker 1: it's just kind of par for the course. We haven't
6:10
Speaker 1: seen that kind of step change from, say, like 80
6:13
Speaker 1: to 100, which I think is what sparked another leg
6:16
Speaker 1: of bond selling later in the summer. But also it
6:19
Speaker 1: hasn't gone up again and it ratcheted higher. But I
6:22
Speaker 1: think if you're thinking about how central banks respond to this,
6:26
Speaker 1: we have entrenched high energy prices now. And I think
6:29
Speaker 1: there was still some hopes that there was going to
6:31
Speaker 1: be an off ramp in, in, in the conflict in Iran.
6:33
Speaker 1: And that was no allow inflation to kind of mechanically
6:36
Speaker 1: come down. And it is that threat of those second
6:39
Speaker 1: round effects now that I think perhaps people are worried
6:41
Speaker 1: about where, you know, inflation feeds into wages feeds into
6:44
Speaker 1: inflation and that kind of develops that, that cycle. I
6:47
Speaker 1: think that is actually one of the key differences between
6:50
Speaker 1: now and the debt crisis in Europe in 2011, 12,
6:53
Speaker 1: that you mentioned, there's been a lot of kind of
6:55
Speaker 1: talk about that, but I think back then. central banks
6:59
Speaker 1: had room to react and they had the mandate to
7:01
Speaker 1: react because of just the situation. And they had all
7:04
Speaker 1: the tools at their disposal. Now we've come off a
7:06
Speaker 1: decade where central banks have cut rates to zero, done QE,
7:10
Speaker 1: done so much. And now we're seeing a big inflation spike.
7:14
Speaker 1: And where inflation is now, it's just a lot harder
7:18
Speaker 1: for any bank to come out and say, we're going
7:20
Speaker 1: to cut rates because they just lose their credibility. And
7:22
Speaker 1: then you kind of reinforce this spike in yields because
7:24
Speaker 1: people just think that hundred banks aren't serious about inflation
7:27
Speaker 1: mandates so therefore they they sell bombs so the the
7:31
Speaker 1: kind of tools to solve this crisis perhaps aren't as
7:33
Speaker 1: obvious as they were back then and that's kind of
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Speaker 1: this slightly worrying thing and also when i know we
7:39
Speaker 1: get technical and we talk about spreads but just in
7:40
Speaker 1: terms of absolute yields as well yeah france is whether
7:43
Speaker 1: or not you know the spread over germany is 150
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Speaker 1: if germany was at zero that would be fine but
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Speaker 1: germany's germany's at three and a half france is nearly
7:51
Speaker 1: at five now so that is a real problem for
7:53
Speaker 1: governments that are having to pay these high interest rates.
7:56
Speaker 1: And I think that's perhaps what makes this worse, particularly
8:01
Speaker 1: for budgetary concerns. And again, coming back to the UK,
8:03
Speaker 1: we see this in the interest bill that the government's facing.
8:06
Speaker 1: It's just ballooned beyond anything we've seen before. And when
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Speaker 1: interest rates get entrenched like this, it becomes very difficult
8:12
Speaker 1: to get your way out of that.
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Speaker 2: Yeah, and I suppose the other problem here, and I've
8:18
Speaker 2: kind of mentioned this before, and it sounds... I think, well, obviously, historically,
8:25
Speaker 2: this is a normal interest rate. And the post-2010 rates
8:30
Speaker 2: of kind of near zero were incredibly abnormal. And so
8:35
Speaker 2: on the one hand, this is, in a funny way,
8:38
Speaker 2: it's almost healthy. But the flip side of that is
8:41
Speaker 2: that it's easy saying that, but now you need to
8:44
Speaker 2: adjust to it having been at zero for 10 years
8:47
Speaker 2: and everyone's finances have shifted to accommodate zero. So, you know,
8:53
Speaker 2: that's why people's mortgages are getting more expensive. And it's
8:56
Speaker 2: all very well saying, well, when I took out my
8:58
Speaker 2: first mortgage in 2001, that was like, you know, 7%.
9:01
Speaker 2: But also, you know, your house price was about like,
9:04
Speaker 2: you know, a third of the cost that it is now.
9:07
Speaker 2: So I think that on the one hand, yes, this
9:10
Speaker 2: is normal. On the other hand, getting from where we
9:12
Speaker 2: were to the new normal, causing an awful lot of
9:16
Speaker 2: pain and it's as you say it's the same thing
9:19
Speaker 2: on the government balance sheets because the last time interest
9:21
Speaker 2: rates were this high debt to GDP wasn't sitting at 100%.
9:26
Speaker 2: It's quite an obvious point but it's also one I
9:29
Speaker 2: think that needs to be kind of made repeatedly. It's
9:32
Speaker 2: after the period of the pandemic where government spent huge
9:35
Speaker 2: amounts of money and GDP went so much higher and
9:38
Speaker 2: all that was funded at near zero. I mean negative
9:43
Speaker 2: rates used to have in the Eurozone and That was
9:45
Speaker 2: kind of a big thing. But I think just as
9:49
Speaker 2: homeowners need to refinance, government needs to refinance. Government, we're
10:10
Speaker 2: going to switch to shorter-term debt to kind of help
10:12
Speaker 2: ride out this storm, which, again, sounds like a good idea,
10:16
Speaker 2: but then you're just... the rollover risk becomes real and
10:19
Speaker 2: you know who's to say interest rates are going to
10:21
Speaker 2: be any lower in two years time i mean the
10:22
Speaker 2: signs are they may not so it's a kind of
10:25
Speaker 2: it's a pretty big risk to take and i think
10:29
Speaker 2: you're right that i think we got used to having
10:32
Speaker 2: these rock bottom rates and even talking about normalization of
10:36
Speaker 2: interest rates the amount of time people spent about talking
10:40
Speaker 2: about is the boe going to height rates from 0.5
10:42
Speaker 2: to 0.75 percent in I mean, I was one of
10:45
Speaker 2: the people writing these things, but the amount of words
10:46
Speaker 2: that we spent on that, and it felt like this
10:49
Speaker 2: really big deal at the time. And also, I think
10:52
Speaker 2: there was this concern that it was going to break
10:56
Speaker 2: the economy if you hike rates by a tiny amount.
10:58
Speaker 2: And I suppose looking at this in a slightly positive way,
11:02
Speaker 2: we had interest rates go above 5% and the economy
11:05
Speaker 2: didn't break. The housing market didn't break. It slowed and
11:08
Speaker 2: transactions slowed down. Do you remember we were talking, we
11:11
Speaker 2: had this conversation probably four or five years ago about
11:14
Speaker 2: Some of the more lurid house price forecasts, they're going
11:16
Speaker 2: to crash 10%.
11:17
Speaker 1: Yeah. And obviously there has been a real terms hit.
11:20
Speaker 1: But in terms of absolute levels, I think basically we
11:23
Speaker 1: just saw transactions fall off a cliff. We didn't see prices.
11:26
Speaker 2: The prices, the only, there's prices have fallen in specific sectors.
11:31
Speaker 2: Like the whole prime central London is quite an eye-catching one.
11:36
Speaker 2: But you're right. I mean, it's the prime central London's
11:38
Speaker 2: down like 27% since 2014.
11:39
Speaker 1: Yeah.
11:41
Speaker 2: But you absolutely wouldn't say that for the average UK-wide house.
11:47
Speaker 2: Flats are a bit trickier there.
11:49
Speaker 1: Well, there's a whole bunch of other things going on there.
11:51
Speaker 1: There's a lot of other reasons for that.
11:53
Speaker 2: And quite right too, actually. But I mean, that is
11:56
Speaker 2: a really good point, because I suppose one thing that
12:00
Speaker 2: Britain and other countries that really suffered a hit in
12:04
Speaker 2: 2008 have on their side is that consumers did deleverage.
12:09
Speaker 2: So by the time we got to, the big bouncing
12:11
Speaker 2: rates in 2021, 2022, the housing market just wasn't as big.
12:17
Speaker 2: It wasn't as big in bank balance sheets. It wasn't
12:19
Speaker 2: as big in consumer household balance sheets. And everyone had
12:22
Speaker 2: a fixed rate mortgage as well. Whereas in 2008, everyone
12:26
Speaker 2: was like, you know, there's like two and a half
12:28
Speaker 2: percent equity in an interest only loan. And their payments
12:33
Speaker 2: were just massively overstretched. But I think it's, yeah, so
12:39
Speaker 2: I think that it's important that we don't get, I guess,
12:44
Speaker 2: overly apocalyptic about it. But there's definitely the pain and
12:49
Speaker 2: the kind of public sector balance sheets does not look good.
12:53
Speaker 1: No, and I think obviously that's, for the UK and
12:56
Speaker 1: the budget that's coming up, there isn't the drama that
12:59
Speaker 1: you've got around France, like, will they get through the
13:00
Speaker 1: House of Commons? Because obviously we've got a different political system,
13:03
Speaker 1: but the trade-offs are super clear and you can see
13:06
Speaker 1: that when you have this interest rate bill hanging over
13:10
Speaker 1: your head and also you're so the bond market is
13:14
Speaker 1: in this mood where it can move very quickly very
13:16
Speaker 1: don't move very fast on not very much i mean
13:19
Speaker 1: that's come back to the front front that's obviously what
13:21
Speaker 1: we've seen there so there's quite a narrow landing zone
13:25
Speaker 1: for yeah for the government to get this right because
13:28
Speaker 1: you know we've we've obviously had some budgets in the
13:30
Speaker 1: past that have caused massive reactions but then we've had
13:34
Speaker 1: relatively small things over the last two years that have
13:36
Speaker 1: done the same thing yeah and so i think And
13:40
Speaker 1: some of it is just to do with the mood
13:41
Speaker 1: in the markets at the time. And I think if,
13:45
Speaker 1: you know, if Healy comes out and, say, cuts Headroom
13:48
Speaker 1: a lot or doesn't show that he's kind of serious
13:51
Speaker 1: about both sides of the ledger, then that could be
13:53
Speaker 1: a moment that the UK, which is, I think, hasn't
13:57
Speaker 1: been as vulnerable during this latest bond time as it
14:01
Speaker 1: has in the past. Yeah, definitely not. You go back to...
14:04
Speaker 1: started this year or even last year when when we
14:06
Speaker 1: had these episodes of bond stress the uk we used
14:08
Speaker 1: to have a joke that like the market's basic basic
14:11
Speaker 1: reaction was you know you worry about bonds and then
14:14
Speaker 1: you sell the uk 30 years yeah that was the
14:17
Speaker 1: pain point and for various reasons this time around i
14:20
Speaker 1: think partly that investors are given burnham a bit of
14:23
Speaker 1: a yeah a kind of window of opportunity to to
14:27
Speaker 1: kind of at least the benefit of the doubt and
14:28
Speaker 1: partly some of the stuff the boe have done around
14:30
Speaker 1: um their bond holdings that they've kind of cancelled some
14:34
Speaker 1: of their longer dated sales and the uk is selling
14:37
Speaker 1: less of this stuff anyway so that's kind of helped
14:39
Speaker 1: bring some solidity to the um to the long end
14:42
Speaker 1: but you can see that ending and the uk could
14:46
Speaker 1: very quickly like become the focus of the bond market
14:49
Speaker 1: again and if you're the focus of the bond market
14:50
Speaker 1: that's very rarely a good thing yeah.
14:52
Speaker 2: It's no fine i mean that's interesting because one thing
14:55
Speaker 2: i thought um telling the tory party conference was that
15:00
Speaker 2: and their own reporters mentioned this, it's almost like there's
15:03
Speaker 2: now getting a more traditional split again between Labour and
15:06
Speaker 2: Tory in that you have the Tories talking about tax
15:10
Speaker 2: cuts and you've got Labour basically talking about tax rises
15:15
Speaker 2: to pay for extra public sector spending. And that's something
15:18
Speaker 2: that we're kind of used to is what you expect
15:20
Speaker 2: from the left versus right party. But the one thing
15:23
Speaker 2: I kind of always thought, it's probably of interest to
15:27
Speaker 2: our listeners, but this idea that If the Conservatives get in,
15:30
Speaker 2: they're going to raise the inheritance tax threshold to a
15:35
Speaker 2: million pounds for a couple. So 500,000 pounds each from
15:39
Speaker 2: the current 325,000 pounds. And instead of having this kind
15:44
Speaker 2: of resident, your family home allowance, where you get a
15:48
Speaker 2: certain amount of extra IHT threshold, as long as you
15:53
Speaker 2: pass your home on to your direct descendants, it's going
15:56
Speaker 2: to be basically any value of house. that can be
15:59
Speaker 2: passed on to your direct descendants. And much as I
16:04
Speaker 2: am not a fan of IHT, this strikes me as
16:08
Speaker 2: being rife with potential problems for the housing market. I
16:12
Speaker 2: don't know about you, but the whole, I thought part
16:17
Speaker 2: of the point was we want to hold people in downsize.
16:21
Speaker 2: This doesn't feel.
16:22
Speaker 1: Like it encourages that. As opposed to buy the biggest
16:23
Speaker 1: house you can as a kind of tax-efficient vehicle. Do
16:26
Speaker 1: you know that? I mean, I think, from a purely
16:32
Speaker 1: market perspective right now i don't i didn't see any
16:36
Speaker 1: kind of conversation around this come through i think it's
16:39
Speaker 1: you know it's one of those things where people often
16:42
Speaker 1: talk about the leader of the opposition is one of
16:44
Speaker 1: the hardest jobs in politics i think when you're making
16:46
Speaker 1: a speech and spending money that you know you're not
16:49
Speaker 1: in control at that moment it's probably one of the
16:50
Speaker 1: easiest because you can have these kind of eye-catching policies
16:53
Speaker 1: without necessarily having to I know the Tories have laid
16:57
Speaker 1: out a plan of how they're going to play for them,
16:58
Speaker 1: but it's kind of untested one that they've been, you know, it's,
17:01
Speaker 1: everyone can talk about these cuts if they're not making
17:03
Speaker 1: them and it's making them when you come into office.
17:05
Speaker 1: I think it felt like Inheritance Act was one of
17:09
Speaker 1: those levers that the Tories have pulled in opposition before.
17:14
Speaker 1: I mean, classically, back when Brown was about to call
17:17
Speaker 1: the election in 2008, 2009, it was a lever they
17:21
Speaker 1: went from and that kind of scared Brown off and Yeah,
17:26
Speaker 1: I think, you know, it felt like something from them
17:30
Speaker 1: was coming, but the way that this is, as you say,
17:32
Speaker 1: the way this has worked out does feel like an
17:34
Speaker 1: interesting way of approaching it. It's not necessarily one that
17:37
Speaker 1: is going to like, you know, the kind of tax
17:39
Speaker 1: wonks on Twitter who come out and give you a
17:41
Speaker 1: kind of rating. It's not really, it's going to appeal
17:43
Speaker 1: to them. Whereas, you know, I think that some of
17:46
Speaker 1: the labour policies you saw from Birmingham around social care
17:49
Speaker 1: and the triple lock were more perhaps designed to appeal
17:53
Speaker 1: to them than this one. This is a very immature
17:55
Speaker 1: kind of, you know, that kind of heart thing, isn't it?
17:59
Speaker 1: It's a heart rather than head approach.
18:01
Speaker 2: Yeah, I mean, that's interesting you mentioned the Gordon Brown
18:05
Speaker 2: kind of wobble because obviously one of the things that
18:08
Speaker 2: people think might happen is that Andy Burnham might call
18:11
Speaker 2: a snap election for early next year or possibly even earlier.
18:15
Speaker 2: How much do you think, it's just now that you've
18:19
Speaker 2: raised that, I mean, how much do you think the
18:20
Speaker 2: IHC thing might have been aimed at stopping them from
18:23
Speaker 2: putting them off doing that?
18:25
Speaker 1: I don't know. I mean, it, yeah, I think, especially
18:33
Speaker 1: coming out to Burnham Street where he's given very long-term views.
18:36
Speaker 2: Yeah, yeah, yeah.
18:37
Speaker 1: Obviously there's always been, he's been quite explicit about not
18:40
Speaker 1: having an election and there's various reasons why he may
18:44
Speaker 1: or may not. And I think this to me just
18:47
Speaker 1: felt like more of a, a kind of statement of
18:50
Speaker 1: the offer that the Tories were given to the, obviously
18:54
Speaker 1: they're in the situation now where they've got the left
18:56
Speaker 1: and the right and they need to they're kind of
18:58
Speaker 1: trying to differentiate themselves because there's a risk they do
19:03
Speaker 1: get squeezed on on either side i suppose so yeah
19:06
Speaker 1: i think that's that may maybe more but again i
19:09
Speaker 1: have no idea like.
19:11
Speaker 2: Oh no it's always interesting to think about these things
19:14
Speaker 2: because that's part of the problem isn't it because i
19:17
Speaker 2: think your point about the head versus the heart thing
19:20
Speaker 2: is a really good one because a lot of if
19:23
Speaker 2: not all of the policies that are aimed at the
19:25
Speaker 2: heart are actually not that great headwise a lot of
19:28
Speaker 2: the time um which is why we're in the situation
19:32
Speaker 2: we're in with the triple lock for example um but
19:35
Speaker 2: yeah i think that's a really good point but anyways
19:38
Speaker 2: getting back to markets um obviously the other big trend
19:42
Speaker 2: that is still ongoing is ai and one thing i
19:46
Speaker 2: kind of noticed this week um was well A there's
19:52
Speaker 2: a fairly well known locally strategist called Joaquin Clement he's
19:59
Speaker 2: over at Panmure Liberum and he reckons the AI bubble
20:02
Speaker 2: is going to burst in the next two years and
20:04
Speaker 2: he's got a kind of tentative S & P 500
20:07
Speaker 2: target for the end of next year of 5000 which
20:10
Speaker 2: is a lot, it's a big drop from where we
20:12
Speaker 2: are now. And I also noticed that Ray Dalio and
20:15
Speaker 2: Michael Burry have the big shot fame, and I realise
20:18
Speaker 2: he's kind of a perma-bear, but at the same time
20:21
Speaker 2: still someone interesting to listen to. We're both coming out
20:25
Speaker 2: and talking about how it feels more imminent than it did.
20:31
Speaker 2: And also this morning we had Samsung reporting record-breaking profits,
20:34
Speaker 2: and actually it still ended the day down 2.4%. I
20:38
Speaker 2: was just wondering, have you got any sense of how
20:42
Speaker 2: AI is rippling through the kind of wider market this week?
20:46
Speaker 2: Because it does feel as if the.
20:51
Speaker 2: I guess maybe it's because the anthropic IPO is coming up.
20:54
Speaker 2: There's a sort of sense of nerves ahead, but it
20:58
Speaker 2: feels as if we must be getting to some kind
21:00
Speaker 2: of point where all of this stuff comes to a
21:03
Speaker 2: head in some way.
21:04
Speaker 1: I think the Samsung... earnings are interesting ones to look
21:07
Speaker 1: at because he said they weren't, they weren't bad by
21:10
Speaker 1: any means. And it just shows you how sky high
21:13
Speaker 1: the expectations are in this X. And I have so
21:16
Speaker 1: like the, the bar to, to be in, to keep
21:18
Speaker 1: this going is getting higher all the, all the time.
21:20
Speaker 1: I think one thing is that my colleagues on markets
21:23
Speaker 1: live in the U S have been writing about allies,
21:26
Speaker 1: how concentrated the rally in the S and P has been,
21:29
Speaker 1: and that all this risk is piled into very kind
21:32
Speaker 1: of particular things. And the breadth of breadth of this is,
21:34
Speaker 1: is really quite concerned and they, you know, produce all
21:36
Speaker 1: these charts that show this is looking like the top
21:40
Speaker 1: boom and then burst or all sorts of things but
21:42
Speaker 1: i think there are you know i think that would
21:44
Speaker 1: be the risk that so much of the rally is
21:48
Speaker 1: kind of predicated on this idea that this can carry
21:50
Speaker 1: on kind of building and building and building both like
21:55
Speaker 1: metaphorically and also literally in terms of data centers and
21:57
Speaker 1: compute and maybe it can but there's also obviously the
22:03
Speaker 1: further down this road you get the more those kind
22:04
Speaker 1: of risks are and we haven't really had the kind
22:08
Speaker 1: of liberation day sell off that.
22:13
Speaker 2: Yeah.
22:13
Speaker 1: You look at that now, that was like kind of
22:15
Speaker 1: barely a bump in the road. We took us a
22:18
Speaker 1: while to get back to the highs in the SMP,
22:19
Speaker 1: but we're there again now. Yeah. I think there is,
22:22
Speaker 1: I suppose it's, you know, coming from a kind of
22:25
Speaker 1: journalistic background, there's always a sense of when things are
22:27
Speaker 1: going up, everyone's immediately looking at the reason why it might,
22:31
Speaker 1: why it might come down. And, you know, you've, if
22:34
Speaker 1: you've kind of, believed in this rally from the start
22:36
Speaker 1: and I imagine you've done pretty well for that because
22:39
Speaker 1: people have been, I think similar warnings have been coming
22:42
Speaker 1: for quite a long time in the past as well. Yeah, absolutely.
22:44
Speaker 2: People have been talking about a bubble for years.
22:47
Speaker 1: One thing that I thought was quite interesting was that
22:49
Speaker 1: we did see that wobble kind of early September when
22:52
Speaker 1: the kind of AI safety concerns kicked off and we
22:55
Speaker 1: saw more talk from the AI companies themselves about pausing
22:59
Speaker 1: or pacing or however they wanted to cause it. But again,
23:03
Speaker 1: that feels like that's that was a kind of one-off
23:07
Speaker 1: thing that that took place over a weekend and yeah.
23:09
Speaker 2: We kind of shrugged off well 10 extinction risk i
23:12
Speaker 2: guess we'll just have to put up with.
23:14
Speaker 1: It and the company said we're going to slow down
23:16
Speaker 1: and now you know we've since then i'm sure we've
23:18
Speaker 1: had new models from both of them that are doing
23:21
Speaker 1: all these kind of yeah talking earlier about the the
23:23
Speaker 1: maths uh the math stump that happened earlier where hundreds
23:27
Speaker 1: and hundreds of puzzles came out and I think puzzles
23:30
Speaker 1: might be understated. Secrets of the universe. Yeah, I think
23:33
Speaker 1: it's probably a better way of putting it. But there
23:36
Speaker 1: is obviously that undeniable progress and that, you know, I
23:39
Speaker 1: suppose when it's due and stuff like that, that kind
23:41
Speaker 1: of explains why people still do believe in it. And,
23:44
Speaker 1: you know, we have got the Anthropic IPO probably coming
23:47
Speaker 1: this year. There's the OpenAI one. I think the last
23:50
Speaker 1: that we heard, that would be, that's kind of pushed
23:52
Speaker 1: back to next year. But there is, you know, those
23:54
Speaker 1: two feel like very big events that, and also, you know,
24:00
Speaker 1: incredibly clean ai plays yeah yeah after that so yeah
24:05
Speaker 1: i wondered.
24:05
Speaker 2: Yeah i guess yeah it's the question of whether they
24:07
Speaker 2: suck all the oxygen out of the market or if
24:10
Speaker 2: they just end up being like spacex because obviously spacex
24:13
Speaker 2: was a big deal but it doesn't seem to have
24:18
Speaker 2: had a lasting impact.
24:20
Speaker 1: On the market back pretty much it's like the price
24:23
Speaker 1: as well everyone was tracking that on the way down
24:25
Speaker 1: and yeah that's kind of back to basically where it
24:28
Speaker 1: was when they got issued.
24:30
Speaker 2: I suppose this is the problem we don't have a
24:32
Speaker 2: crystal ball so I guess the only thing you can
24:35
Speaker 2: do is stay diversified and just be aware that there
24:39
Speaker 2: is a lot of concentration in the markets and you
24:43
Speaker 2: know your S & P 500 tracker used to be
24:45
Speaker 2: whatever 20% in tech and now it's nearly 50% but
24:51
Speaker 2: beyond that trying to kind of call these things is
24:54
Speaker 2: a bit of a mugs game.
24:55
Speaker 1: But then it's also linking back to what we were
24:57
Speaker 1: talking about at the start in terms of the bond
24:58
Speaker 1: yields and that like because all these companies are wishing
25:01
Speaker 1: death at a kind of scary rate as well then
25:04
Speaker 1: that is part of the reason i think we're feeding
25:05
Speaker 1: into these high high yields and if you know traditionally
25:10
Speaker 1: bonds are this kind of safe dull investment that you
25:12
Speaker 1: just buy you forget about and they they kind of
25:15
Speaker 1: form part i guess like you know if you're happy
25:17
Speaker 1: to buy us 30 to 6 that isn't that isn't
25:21
Speaker 1: a terrible deal but only if you can.
25:23
Speaker 2: Hold to maturity exactly that's now you can probably do
25:27
Speaker 2: that i'm pushing it now Well, look, thanks very much
25:31
Speaker 2: for your time, David. I really appreciate you taking the
25:34
Speaker 2: time to come on. Hopefully see you again in the future.
25:36
Speaker 2: Thanks for listening to this week's Merrin Talks Money at Marketswap.
25:43
Speaker 2: If you like our show, rate, review and subscribe wherever
25:46
Speaker 2: you listen to podcasts. And also be sure to follow
25:48
Speaker 2: me on X at John underscore Stepak. This episode was
25:52
Speaker 2: produced by Summer Sadie, Moses Andem and Jennifer Seeley. Questions
25:56
Speaker 2: and comments on this show and all our shows are
25:57
Speaker 2: always welcome. Our show email is medinmoney at bloomberg.net. Special
26:02
Speaker 2: thanks to David Goodman.