Latest / Merryn Talks Money / SocGen’s Global Head of Economics Argues a US Downturn Is Inevitable

Transcript

SocGen’s Global Head of Economics Argues a US Downturn Is Inevitable · Merryn Talks Money

• 0:00
  Speaker 1: John Man.
• 0:01
  Speaker 2: I've been on holiday. Whenever I got on holiday, I
• 0:04
  Speaker 2: know it was nice.
• 0:05
  Speaker 3: It was nice. It's Srilanker.
• 0:06
  Speaker 2: I've got a lot to say about Sri Lanka, but
• 0:08
  Speaker 2: maybe now it's not the place. Some quite interesting stuff
• 0:11
  Speaker 2: that now would be the place. But we'll say that
• 0:13
  Speaker 2: for next week. Next week I'll tell you everything I
• 0:14
  Speaker 2: think about the economy a Tri Lanka. But for now,
• 0:18
  Speaker 2: I want to note that every time I go away,
• 0:21
  Speaker 2: something happens that I have previously predicted, and this time
• 0:24
  Speaker 2: it's the gold price.
• 0:25
  Speaker 1: Right, yes, yes, the gold price speaks to new highs
• 0:30
  Speaker 1: before falling back to the same place it was in before,
• 0:34
  Speaker 1: which was anticlimactic.
• 0:36
  Speaker 2: We have to see, all right, well anti climactic, But
• 0:41
  Speaker 2: tell me what happened why?
• 0:43
  Speaker 1: Well, so so gold has been Obviously you have to
• 0:47
  Speaker 1: get a little bit into the technical analysis a lot.
• 0:52
  Speaker 1: I know that a lot of people have resisted into
• 0:54
  Speaker 1: this idea, but basically the gold chart gold has bounced
• 0:58
  Speaker 1: off kind of like the two thousand than seventy dollars
• 1:00
  Speaker 1: announced level like three times since twenty twenty. And because this,
• 1:08
  Speaker 1: whenever you get something like that, then that's called resistance.
• 1:11
  Speaker 1: And the ideas that as soon as it gets above that,
• 1:13
  Speaker 1: it's going to rocket, because you know, that means it's
• 1:16
  Speaker 1: broken out, and then you know, the resistance becomes support.
• 1:20
  Speaker 1: Of course, what apmed is that it was kind of
• 1:22
  Speaker 1: late on Sunday evening early Monday morning, clearly what somebody
• 1:27
  Speaker 1: had hit, you know, the various buttons that made the
• 1:30
  Speaker 1: gold price kind of go up through that particular triple
• 1:33
  Speaker 1: top level, and it spiked up to like twenty one
• 1:37
  Speaker 1: hundred and fifty odds and then immediately came back down
• 1:40
  Speaker 1: because probably it was just you know, there's not a
• 1:42
  Speaker 1: lot of liquidity around at that time in the morning,
• 1:45
  Speaker 1: probably an awful lot of people with automatic things like
• 1:47
  Speaker 1: stop losses and stuff like that. But the point is
• 1:50
  Speaker 1: it's still the most interesting. But goold is more. How
• 1:54
  Speaker 1: has it managed to remain at our near record highs
• 1:58
  Speaker 1: despite the fact that interest rates went on so aggressively
• 2:01
  Speaker 1: this year.
• 2:03
  Speaker 2: That's the kind of thing that should push gold prices
• 2:05
  Speaker 2: down because obviously, if you can get a nice return
• 2:07
  Speaker 2: on your cash and there is no return.
• 2:08
  Speaker 3: Available on gold, that's not Unfortunately theyair dividend.
• 2:12
  Speaker 1: Yeah, exactly, so they can of the bigger messy isn't
• 2:15
  Speaker 1: so much the fact that they didn't quite have a
• 2:20
  Speaker 1: massive breakout in the way that I guess old they
• 2:22
  Speaker 1: kind of you know, serious finds of gold would like
• 2:24
  Speaker 1: to see. But the fact is, actually, you know, it's
• 2:27
  Speaker 1: up so much over the year, and I mean, all right, yes,
• 2:29
  Speaker 1: it's you know, obviously the interest rates cycle seems to
• 2:33
  Speaker 1: have turned now. But the point is that gold still
• 2:36
  Speaker 1: manage to sustain this level despite the fact that you know,
• 2:39
  Speaker 1: rates are gone from zero percent to five percent and
• 2:41
  Speaker 1: pretty short order.
• 2:43
  Speaker 2: And that's the kind of resilience that tells us that
• 2:45
  Speaker 2: the market, whatever it might say, remains pretty anxious about
• 2:48
  Speaker 2: the global economy, remains pretty anxious about volatile inflation going forward.
• 2:52
  Speaker 3: That kind of thing. That's the message from the gold price.
• 2:55
  Speaker 1: Yeah, I think so. And also well, I mean, well,
• 2:58
  Speaker 1: the other interesting is that the kind of ETF holdings,
• 3:03
  Speaker 1: so that the exchange traded funds that own the physical gold,
• 3:07
  Speaker 1: they've actually lost holdings this year or certainly in the
• 3:11
  Speaker 1: last few months. So a lot of this kind of
• 3:13
  Speaker 1: physical demand has actually come from central banks this year.
• 3:18
  Speaker 1: And obviously, this is the thing I always find quite
• 3:20
  Speaker 1: interesting that a lot of people still refair misquoting Maynard
• 3:24
  Speaker 1: Canes to gold as a kind of barbaric relic. But
• 3:28
  Speaker 1: the reality is that, you know, most central banks hold
• 3:31
  Speaker 1: a significant amount of it. So although it doesn't play
• 3:36
  Speaker 1: a legal role in the monetary system anymore, it's not
• 3:40
  Speaker 1: actually money, you know, central banks still act as if
• 3:44
  Speaker 1: it is or certainly a lot more reliable as a
• 3:47
  Speaker 1: store of value than lots of other kind of foreign currencies.
• 3:51
  Speaker 2: So it's always a very very interesting dynamic. The amount
• 3:54
  Speaker 2: of gold that central banks hold. They never discussed, rarely mentioned,
• 3:58
  Speaker 2: not something central bankers like to talk about it in
• 4:00
  Speaker 2: their meetings and their press conferences. They don't talk about
• 4:02
  Speaker 2: their gold holdings where they're up or down, et cetera.
• 4:05
  Speaker 2: And then you hear a lot of people saying that
• 4:06
  Speaker 2: the gold is point, there's nothing to gold, as you say,
• 4:08
  Speaker 2: misquoting the barbarous relic thing that Caine said, and actually
• 4:12
  Speaker 2: he was referring to the gold standard. But yeah, there
• 4:15
  Speaker 2: it is on every central bank balance sheet.
• 4:18
  Speaker 3: It's a great, big pile of gold.
• 4:20
  Speaker 2: And for many central banks an increasingly large pile of gold.
• 4:24
  Speaker 3: Well yeah, exactly good enough for them, is good enough
• 4:26
  Speaker 3: for us, right.
• 4:28
  Speaker 1: Yeah, And I mean that she can I mean you
• 4:31
  Speaker 1: and I have heard all the arguments about you know,
• 4:33
  Speaker 1: the demise of the US dollar and all of that
• 4:36
  Speaker 1: sort of stuff, and you know, I would take all
• 4:38
  Speaker 1: of that sort of thing the pinch of salt. But
• 4:40
  Speaker 1: one thing that I would say is that I do
• 4:42
  Speaker 1: think that you know, as well as gold being you know,
• 4:49
  Speaker 1: sort of an inflation hedge, another thing that it hates
• 4:53
  Speaker 1: and sort of a geopolitical hege, another thing that it
• 4:55
  Speaker 1: hages against is when people are not sure what's going
• 4:59
  Speaker 1: to happen to the gold monetary system. And I think
• 5:02
  Speaker 1: there's lots of good reasons to wonder where we are
• 5:06
  Speaker 1: going with that, because, for example, the you know, digital
• 5:12
  Speaker 1: gold or the non physical bitcoin as it were, also
• 5:17
  Speaker 1: has kind of rocketed over the last.
• 5:19
  Speaker 3: Couple of weeks. Yeah, I mean that's actually rocketed right.
• 5:22
  Speaker 2: Well of gold, yeahlient resilient is good. The price of
• 5:27
  Speaker 2: bitcoin has really really sort And of course, if we
• 5:29
  Speaker 2: look on social media, there's a lot of people pointing
• 5:32
  Speaker 2: out that you and I are complete idiots, but not
• 5:36
  Speaker 2: being positive on bitcoin and being positive on gold and
• 5:40
  Speaker 2: todd and so it may be that we turn out
• 5:42
  Speaker 2: to be complete idiots. And we've said this all along, right,
• 5:45
  Speaker 2: we can't be sure, but the balance and probabilities. It
• 5:48
  Speaker 2: looks to us like gold would be a better long
• 5:50
  Speaker 2: term bet than then. You know they could, but we
• 5:52
  Speaker 2: could be wrong.
• 5:54
  Speaker 1: I mean, yeah, we absolutely could be.
• 5:57
  Speaker 3: In there.
• 5:57
  Speaker 1: Used to be getting called an idiot for all sorts
• 5:59
  Speaker 1: of things, so this is just one, you know, other
• 6:01
  Speaker 1: idiot string to the bowl. But I mean, I think
• 6:06
  Speaker 1: the chiggy things, what are you holding any things for?
• 6:12
  Speaker 1: And I do think that I don't think that bitcoin
• 6:15
  Speaker 1: kind of replaces gold as such.
• 6:20
  Speaker 3: It says just hold both and be done with it.
• 6:23
  Speaker 1: Yeah, I mean, I tend to be fair. He kind
• 6:25
  Speaker 1: of Charlie's point. I mean, his his bold portfolio is
• 6:29
  Speaker 1: I think eighty percent gold and twenty percent baitcoin, and
• 6:32
  Speaker 1: then you rebalance every so often and that's done very well. So,
• 6:38
  Speaker 1: by the way, just to be clear, so that's within
• 6:41
  Speaker 1: your gold bitcoin holdings. He's not saying put eighty percent
• 6:45
  Speaker 1: of your money in gold and twenty percent and baitcoin.
• 6:47
  Speaker 1: It's you know what.
• 6:49
  Speaker 2: I'm really really glad you cleared that. Really glad you
• 6:52
  Speaker 2: cleared that one up, because I don't know what could
• 6:54
  Speaker 2: have happened to our listener's portfolios if you hadn't look.
• 6:58
  Speaker 1: I know, Our listeners are very sensible people. There's always
• 7:01
  Speaker 1: one need you going to go onto it? See here
• 7:03
  Speaker 1: the community portfolio.
• 7:06
  Speaker 2: So there's always give me one of those. But at
• 7:08
  Speaker 2: least we don't get those letters in green ink anymore.
• 7:10
  Speaker 2: Those days have past, right, that's true. Onwards, onwards. Personal
• 7:15
  Speaker 2: finance tip.
• 7:16
  Speaker 3: As you know, listeners, we like to give you a
• 7:17
  Speaker 3: personal finance.
• 7:18
  Speaker 2: Tip every week and we like to make them extremely simple,
• 7:20
  Speaker 2: and this week we have a very very simple one
• 7:22
  Speaker 2: for you. Start your tax return now, get it done
• 7:26
  Speaker 2: before Christmas if you possibly can. Otherwise it drags, you
• 7:29
  Speaker 2: might be late. There are fines, there's interest. John has
• 7:32
  Speaker 2: done his already, haven't you, John?
• 7:35
  Speaker 3: Yes?
• 7:36
  Speaker 1: Yes, have I felt so smug if I don't know
• 7:39
  Speaker 1: what I did it, I did it pretty much at
• 7:41
  Speaker 1: the very end of the actual tax here, as opposed
• 7:44
  Speaker 1: to I normally leave it to.
• 7:47
  Speaker 3: The limit to the man of smugness I will accept
• 7:49
  Speaker 3: on this podcast. Thank you, John.
• 7:53
  Speaker 2: Welcome to Meron Talks Money, the podcast in which people
• 7:56
  Speaker 2: who know the market's.
• 7:57
  Speaker 3: Explain the markets.
• 7:58
  Speaker 2: I'm mere and sumset Web this week bring you a
• 8:00
  Speaker 2: conversation with coco atbut blow up here Society General Global
• 8:03
  Speaker 2: head of Economics, Cross ACCT and Court Research.
• 8:06
  Speaker 3: And the UK Head of Research.
• 8:08
  Speaker 2: We started our conversation on the oddswa recession is there,
• 8:11
  Speaker 2: when coming, When will it be, how bad will it be?
• 8:13
  Speaker 2: And will it happen in the UK and the US,
• 8:15
  Speaker 2: Europe and all Asia or everywhere at once.
• 8:20
  Speaker 4: Well, this is a very hotly debated topic among economists
• 8:24
  Speaker 4: and strategists, and I'm tempted to cut John Galbreth who
• 8:28
  Speaker 4: essentially said you have two types of forecasters, those who
• 8:31
  Speaker 4: don't know and those who don't know. They don't know.
• 8:35
  Speaker 4: But luckily for you, we have a proprietary crystal ball
• 8:38
  Speaker 4: at Associituational actually drok aside. It's a lot of brainstorming
• 8:42
  Speaker 4: and data and analysis. And our view is that we
• 8:45
  Speaker 4: are due for a self lending in the second half
• 8:49
  Speaker 4: of next year, so the US will go into a
• 8:52
  Speaker 4: soft research recession. We don't foresee a recession in the
• 8:55
  Speaker 4: UK or in the EU. And this is pretty much
• 8:58
  Speaker 4: because the US has tightened monetary policy quite aggressively. And
• 9:04
  Speaker 4: if you look at the bottom fifty percent of the population,
• 9:06
  Speaker 4: or if you look at credit card loans, even small
• 9:09
  Speaker 4: cap or high yield corporates, they have been struggling thus far.
• 9:14
  Speaker 4: So we think monetary policy is eschancially delayed for a
• 9:19
  Speaker 4: number of reason we can talk about, but it will
• 9:22
  Speaker 4: eventually lead to a slowdown of the US economy.
• 9:26
  Speaker 3: Let's talk about the delay first.
• 9:28
  Speaker 2: I mean, we talk a lot John and I about
• 9:30
  Speaker 2: the delay and the transmission mechanism for monetary policy in
• 9:34
  Speaker 2: the UK being related to the fact that we have
• 9:36
  Speaker 2: longer fixes on mortgage than we've had in previous difficult environments,
• 9:39
  Speaker 2: and also based on the fact that companies aren't stupid.
• 9:42
  Speaker 2: You know, they spent a lot of this time when
• 9:43
  Speaker 2: interest rates were very low managing their finances such that
• 9:46
  Speaker 2: they either had more cash than they might have ordered,
• 9:48
  Speaker 2: they have fixes on their corporate debt as well going
• 9:51
  Speaker 2: out for a really long time, So you have a
• 9:52
  Speaker 2: much longer transmission period than you might have in the past.
• 9:56
  Speaker 2: We used to say, you know, interest rates take a
• 9:58
  Speaker 2: year eighteen months to come through, and now we it's
• 10:00
  Speaker 2: a bit longer. But on the other hand, we're still
• 10:03
  Speaker 2: looking at a phenomenally high rate of interest increases. You know,
• 10:06
  Speaker 2: I can't think of another point in history possibly you can,
• 10:09
  Speaker 2: where rates have gone up by quite so many multiples
• 10:12
  Speaker 2: so quickly. It's not just about the fourteen rises. It's
• 10:14
  Speaker 2: about the absoluteness of the shift from zero point two
• 10:18
  Speaker 2: five percent up into the five percent. It's an extraordinary shift,
• 10:22
  Speaker 2: not just in the US but here. So even if
• 10:26
  Speaker 2: you think the transmission mechanism is longer, it's still hard
• 10:29
  Speaker 2: to imagine that you can be certain that the landing
• 10:32
  Speaker 2: will be soft after that kind of change.
• 10:36
  Speaker 4: Yeah, I mean, this is definitely a great summary. So
• 10:39
  Speaker 4: the way I look at it is that corporates have
• 10:41
  Speaker 4: essentially developed a sort of transitory natural immunity against interest rates.
• 10:48
  Speaker 4: And this is the point you mentioned a balance sheet
• 10:50
  Speaker 4: to prepare having long term refinancing, which brings some sort
• 10:56
  Speaker 4: of humunity against short term interest rates. And the other
• 11:00
  Speaker 4: important point is sort of adding insult to injury, is
• 11:03
  Speaker 4: that the excess cash on balance sheet is today earning
• 11:07
  Speaker 4: five percent over five percent, which is higher than the
• 11:09
  Speaker 4: average cost of financing. So net interesting expense for investment
• 11:14
  Speaker 4: great companies is actually going down despite this phenomenal increase
• 11:19
  Speaker 4: in interest rates. But I think we also need to
• 11:23
  Speaker 4: take into perspective the sheer size of the fiscal stimulus
• 11:29
  Speaker 4: that got injected in the economy. So it's a sort
• 11:32
  Speaker 4: of fiscal whatever it takes response by government when lives
• 11:39
  Speaker 4: and livelihood of the population is put at risk. So
• 11:41
  Speaker 4: if you look at fiscal and monetary combined spending or
• 11:45
  Speaker 4: investments is close to twenty five to trillion dollars of dollars,
• 11:48
  Speaker 4: So that's roughly over fifteen to twenty percent of global GDP.
• 11:52
  Speaker 4: So that was pretty massive, and it's injected a huge
• 11:55
  Speaker 4: amount of let's say, kinetic velocity or energy in the system.
• 12:00
  Speaker 4: And if you talk about the immunity of corporate you
• 12:03
  Speaker 4: obviously have access savings at the consumer level which sort
• 12:07
  Speaker 4: of shielded or react acted as a shock observer against
• 12:11
  Speaker 4: the higher cost of financing. But we estimate that the
• 12:15
  Speaker 4: peak in terms of access saving was around ten percent
• 12:18
  Speaker 4: of GDP for the US, so twe and a half
• 12:19
  Speaker 4: trillion dollars and it's roughly sixty seven percent down from
• 12:22
  Speaker 4: its peak, so a lot of that shield if you will,
• 12:26
  Speaker 4: is sort of becoming less and less effective. So we
• 12:30
  Speaker 4: do think that you could have a strong economy being
• 12:35
  Speaker 4: offset to some extent we higher interest rate and still
• 12:39
  Speaker 4: find a new equilvalum doesn't have to completely crash because
• 12:42
  Speaker 4: the online strength of the labor market is offsetting a
• 12:47
  Speaker 4: lot of that slowdown or restrictive monetary policy, if you will.
• 12:52
  Speaker 3: Okay, but back to not knowing what we don't know.
• 12:55
  Speaker 2: One thing that we do know is that the level
• 12:58
  Speaker 2: of interest rates, this extraordinary low level of interest rates
• 13:01
  Speaker 2: that we lived for some decades until the pandemic was
• 13:04
  Speaker 2: historically incredibly unusual. Not just unusual in terms of decades
• 13:07
  Speaker 2: or even centuries, but unusually in terms of millenniums right
• 13:10
  Speaker 2: lowest intros for thousands of years. I used to hawk
• 13:13
  Speaker 2: around a chart, as I know many strategist and economists did,
• 13:15
  Speaker 2: of global interest rates over a three thousand year period, going, look,
• 13:19
  Speaker 2: this is the most dangerous chart in the world. Look
• 13:21
  Speaker 2: at this, look at how low interest rates have got.
• 13:24
  Speaker 2: And now I don't take that chart. I take the
• 13:26
  Speaker 2: most updated chart. Thing I was wrong. That was not
• 13:28
  Speaker 2: the most dangerous chart in the world. This is the
• 13:30
  Speaker 2: most dangerous chart in the world. Not incredibly low level
• 13:33
  Speaker 2: then popping up, because that may have all sorts of
• 13:36
  Speaker 2: unintended consequences that are very difficult for us to think about,
• 13:40
  Speaker 2: because we've never been in a situation where rates have
• 13:43
  Speaker 2: been so unbelievably low and then popped up so quickly.
• 13:47
  Speaker 2: So whenever I hear talk about the soft landing, which
• 13:49
  Speaker 2: I'm very keen to believe, look at that and I think,
• 13:53
  Speaker 2: might there not be stuff going on under here that
• 13:55
  Speaker 2: we simply can't fathom because of this extraordinary confluence of events.
• 14:00
  Speaker 2: I suppose I'm really asking you about your confidence.
• 14:04
  Speaker 4: Yeah, I mean, there's always light at the end of
• 14:06
  Speaker 4: the tunnel. Weich just need to make sure it's not
• 14:08
  Speaker 4: an oncoming train because it can be quite brutal and painful.
• 14:13
  Speaker 4: So yeah, we definitely are aware of the sort of
• 14:17
  Speaker 4: black swans that are floating around or flying around. But
• 14:21
  Speaker 4: I think it is also important to recognize the reaction
• 14:25
  Speaker 4: function of central banks. So if you remember twenty eighteen,
• 14:29
  Speaker 4: when the FED was tightening and we saw a pretty
• 14:32
  Speaker 4: big on the performance of the S and P, they
• 14:35
  Speaker 4: were able to change course and cut interest rate quite aggressively.
• 14:39
  Speaker 4: So today we are pretty well above our star, which
• 14:42
  Speaker 4: is the natural rate of interest rates, so that's sort
• 14:45
  Speaker 4: of the neutral rate, let's say. So it's extremely restrictive.
• 14:48
  Speaker 4: But the point is also to think about how they
• 14:52
  Speaker 4: will react if unemployment were to pick up and you
• 14:55
  Speaker 4: start to see profit margin rolling over and risk assets
• 14:58
  Speaker 4: starting to underperform, they will have the option of exercising
• 15:03
  Speaker 4: the FED put per se because it's sort of reloaded.
• 15:06
  Speaker 4: Because in the past we were struggling with zero industry policy,
• 15:11
  Speaker 4: you could cut further down obviously someone in negative territory.
• 15:16
  Speaker 4: But today you could argue that you have close to
• 15:19
  Speaker 4: five hundred basis points of cutting power to offset any
• 15:23
  Speaker 4: sort of major blacks one that could occur, and we
• 15:26
  Speaker 4: have plenty of them from geopolitical crisis. We had SVB
• 15:31
  Speaker 4: or credit to this earlier this year. They and the
• 15:33
  Speaker 4: system is still very residient because the reaction function of
• 15:37
  Speaker 4: governments and center bank has been doing better than what
• 15:42
  Speaker 4: it was in the past, where if you remember in
• 15:44
  Speaker 4: two thousand and eight with a great financial crisis, we
• 15:46
  Speaker 4: had to wait for Hank Paulson convincing Congress to do
• 15:49
  Speaker 4: the tarp and that created that delay, so to speak,
• 15:53
  Speaker 4: led to pretty deep bankruptcies and painful to make adjustments.
• 16:02
  Speaker 2: But does that reloading really exist in the same way
• 16:05
  Speaker 2: it has in the past. Now that we've rediscovered inflation,
• 16:08
  Speaker 2: it was very easy to say you can cut and
• 16:11
  Speaker 2: cut and cut down to the bottom. When we of
• 16:13
  Speaker 2: people appeared to believe that inflation was gone forever, and
• 16:16
  Speaker 2: we would always knock around.
• 16:17
  Speaker 3: At two percent or below. And we now know that's
• 16:19
  Speaker 3: not the case.
• 16:20
  Speaker 2: That perfectly easy for inflation to explode inside the system
• 16:24
  Speaker 2: in ways that not everyone expects, including global central banks
• 16:27
  Speaker 2: certainly didn't see this coming.
• 16:28
  Speaker 3: So we know there's a problem with central bank models.
• 16:30
  Speaker 3: We know that, right.
• 16:31
  Speaker 2: We know that they can't necessarily predict when and where
• 16:34
  Speaker 2: inflation is going to come. We know that central banks
• 16:36
  Speaker 2: have lost an awful lot of their reputation over the
• 16:38
  Speaker 2: last couple of years. I mean, who believes a central
• 16:40
  Speaker 2: banker when they speak anymore? Right, nobody? So that those
• 16:43
  Speaker 2: five hundred basis points, do they really exist as ammunition
• 16:48
  Speaker 2: in the way that they used to be, or do
• 16:50
  Speaker 2: we now move into an environment where central bankers know
• 16:52
  Speaker 2: how important it is to look a little matcho along
• 16:55
  Speaker 2: with everything else, and one in which we know that
• 16:58
  Speaker 2: inflation isn't in there expectations for chance, and if you
• 17:02
  Speaker 2: cut rags too fast you can get another information explosion
• 17:06
  Speaker 2: in the hell in nineteen seventies.
• 17:08
  Speaker 4: This is a great point, and I'm tempted to quote
• 17:10
  Speaker 4: the great philosopher Mike Tyson who once said everybody has
• 17:14
  Speaker 4: a plan until they get punched in the face, and
• 17:17
  Speaker 4: I think central banks have clearly been punched a number
• 17:20
  Speaker 4: of time in the face. But they also learn from
• 17:22
  Speaker 4: their mistakes. And it is true that we have this
• 17:24
  Speaker 4: big debate. It's essentially called our star versus our double star.
• 17:28
  Speaker 4: So in other words, our star is the level of
• 17:30
  Speaker 4: interest rate that is neutral for the economy, and our
• 17:35
  Speaker 4: double star is the same concept for but for financial markets.
• 17:39
  Speaker 4: So in other words, are central bank going to raise
• 17:42
  Speaker 4: interest rate to level that will break the financial system
• 17:46
  Speaker 4: or create major bankruptcies before it had time to reach
• 17:50
  Speaker 4: the r star which is the level required to break
• 17:53
  Speaker 4: the inflation outbreak? And this is where you know a
• 17:57
  Speaker 4: lot of the monetary power see sort of framework is
• 18:03
  Speaker 4: data dependent. But you also have governments and regulators proactively
• 18:08
  Speaker 4: stepping in to make sure finances stability is not compromise.
• 18:12
  Speaker 4: And you had Christine Laguard who made this point around
• 18:16
  Speaker 4: the central monk needing to focus on price stability, which
• 18:21
  Speaker 4: ought to be different to the tools needed to guarantee
• 18:25
  Speaker 4: financial stability, and the two sometimes might maybe in conflict.
• 18:30
  Speaker 4: But going back to your point about inflation not going
• 18:33
  Speaker 4: back to the low levels we used to have, I
• 18:37
  Speaker 4: do agree that we are heading towards a sort of
• 18:40
  Speaker 4: higher lows, not just because of the current environment of
• 18:44
  Speaker 4: inflation linked to the war and Subbli Jain disruptions, but
• 18:48
  Speaker 4: also around climate change and green inflation in particular. And
• 18:52
  Speaker 4: we have isah Bel Schnabel, a member of the ECB
• 18:56
  Speaker 4: Governing Council, who actually talked about how the lack of
• 19:01
  Speaker 4: supply or the constraint supply of the very metals and
• 19:04
  Speaker 4: minerals and energy sources needed to build the energy transition
• 19:09
  Speaker 4: are constrained and these could potentially lead to an environment
• 19:14
  Speaker 4: of higher inflation for longer, and that could force the
• 19:18
  Speaker 4: CB and other center banks to keep interest rate at
• 19:21
  Speaker 4: higher level than they would otherwise, particularly if you think
• 19:25
  Speaker 4: about the Inflation Reduction Act or the European Green Deal,
• 19:28
  Speaker 4: all of which are major and sizeable investment into the future.
• 19:33
  Speaker 4: So yes, we could potentially be stuck with having to
• 19:37
  Speaker 4: think about other unconventional policy to deal with inflation, or
• 19:42
  Speaker 4: I think the most likely path of least resistance could
• 19:45
  Speaker 4: simply be that we need to accept a level of
• 19:47
  Speaker 4: higher interest rate for longer with an inflation that is
• 19:52
  Speaker 4: going to be higher than what we've been used to.
• 19:55
  Speaker 4: So in summary, we are just going back to normal,
• 19:59
  Speaker 4: having lived a decade of abnormal economic and market environment.
• 20:05
  Speaker 2: And that may come with we've quite a lot of
• 20:07
  Speaker 2: good things, and that we've seen massive metalocation of capital
• 20:09
  Speaker 2: over the last couple of decades, money going to places
• 20:11
  Speaker 2: where money shouldn't go, and interest rates normalizing might come
• 20:15
  Speaker 2: with difficulties for some of those companies in some of
• 20:17
  Speaker 2: those areas, but nonetheless it might give us back a
• 20:20
  Speaker 2: little productivity and a little long term growth. I just
• 20:24
  Speaker 2: go back to the drivers of this higher for longer inflation.
• 20:27
  Speaker 3: I mean, I think we.
• 20:27
  Speaker 2: Probably agree that a little bit of deglobalization, geopolitical instability
• 20:31
  Speaker 2: and all this kind of thing obviously drives long term
• 20:34
  Speaker 2: inflation because it affects supplier lines, etc. And also it
• 20:37
  Speaker 2: has fiscal implications if you have to bump up your
• 20:39
  Speaker 2: spending on the defense. Of course, that has fiscal implications
• 20:42
  Speaker 2: for governments, which again is mildly inflationary. I'm interested in
• 20:45
  Speaker 2: the green inflation discussion because definitely, over the last few years,
• 20:50
  Speaker 2: we've been told over and over again the energy transition
• 20:54
  Speaker 2: is not a cost, it's an opportunity, and that it
• 20:57
  Speaker 2: will drive the prices of energy down long term and
• 21:00
  Speaker 2: that there is only good to come of it. And
• 21:02
  Speaker 2: I think it's an important turn in the conversation that
• 21:06
  Speaker 2: we have become more realistic about saying this is compulsory.
• 21:11
  Speaker 2: We are going to do this, but there is a
• 21:13
  Speaker 2: cost to it. It's expensive, and it's going to change
• 21:16
  Speaker 2: your energy bills, and it's going to change the inflation
• 21:19
  Speaker 2: dynamic going forward.
• 21:20
  Speaker 3: That seems to me to be quite an important shift.
• 21:23
  Speaker 4: Absolutely. I think it's almost reminiscent of the transitory versus
• 21:27
  Speaker 4: persistent inflation discussion we had right after COVID in twenty twenty.
• 21:32
  Speaker 4: And I think we also need to understand the sheer
• 21:36
  Speaker 4: size of the problem around climate change. I mean, the
• 21:39
  Speaker 4: world emits fifty four gigatons of CO two equivalent in
• 21:43
  Speaker 4: terms of greenhouse gas emissions every single year, and when
• 21:46
  Speaker 4: you look at the one point five degree target of
• 21:49
  Speaker 4: the Parish Agreement, it essentially says that we need to
• 21:53
  Speaker 4: limit the cumulative amount of greenhouse gases in the atmosphere
• 21:57
  Speaker 4: to three thousand gigar tons of CO two equivalent, and
• 22:01
  Speaker 4: that's cumulative from eighteen fifty that's the starting point. We
• 22:05
  Speaker 4: are today at roughly two five hundred gikitons so the
• 22:08
  Speaker 4: carbon budget is five hundred giga tons of CO two
• 22:11
  Speaker 4: equivalent before hitting that one point five threshold, above which
• 22:15
  Speaker 4: a lot of bad things in terms of disasters and
• 22:18
  Speaker 4: flowers and heat waves will occur. So, if we have a.
• 22:20
  Speaker 2: Carbon budget solely, there's a lot of we don't know
• 22:22
  Speaker 2: what we don't know in there.
• 22:23
  Speaker 4: Isn't there Well, there's clearly a lot of range of uncertainty,
• 22:28
  Speaker 4: et cetera. But the fact from the IPCC clearly shows
• 22:31
  Speaker 4: you that higher concentration of CO two in the atmosphere
• 22:36
  Speaker 4: does raise average temperature. So if you have roughly five
• 22:39
  Speaker 4: hundred gig toons of carbon budget and you emit fifty
• 22:42
  Speaker 4: four gigitons every single year, then you are just going
• 22:45
  Speaker 4: to heat. You will be above one point five before
• 22:48
  Speaker 4: the end of the century. And this means that we
• 22:51
  Speaker 4: clearly need to accelerate the transition, and this requires costs
• 22:56
  Speaker 4: and investments, and it is something that is very difficult
• 22:59
  Speaker 4: because the world does not want or it's less comfortable
• 23:05
  Speaker 4: with sacrificing GDP for investments in transition or reducing consumption. So,
• 23:10
  Speaker 4: just to put things into perspective, in twenty twenty, where
• 23:13
  Speaker 4: the world was in hibernation. Global greenhouse gas mission only
• 23:16
  Speaker 4: fell by four point seven four point eight percent, when
• 23:20
  Speaker 4: what's required is between five five and a half percent
• 23:23
  Speaker 4: every single year between nine to twenty thirty. We need
• 23:27
  Speaker 4: to reduce emissions by fifty percent just to have a
• 23:29
  Speaker 4: chance of need zero by twenty fifty, and global mission
• 23:32
  Speaker 4: just are making new highs. So it is going to
• 23:36
  Speaker 4: be quite a challenge. But the amount of investments could
• 23:40
  Speaker 4: force more inflation for commodities in particular metals, copper, letium,
• 23:45
  Speaker 4: et cetera. But what's interesting is that with China slowing
• 23:48
  Speaker 4: down today and having a real estate crisis, you have
• 23:53
  Speaker 4: these very minerals and metals are on the performing because
• 23:56
  Speaker 4: demand is on the pressure. So there's a window of
• 23:59
  Speaker 4: opportunity to make some of these investments. But they will
• 24:02
  Speaker 4: obviously have an impact on growth. So to summarize, I
• 24:05
  Speaker 4: think my view on this is that it will lead
• 24:08
  Speaker 4: to inflation volatility, not simply a sort of a steady
• 24:13
  Speaker 4: upward trajectory for inflation, because a lot of these price
• 24:16
  Speaker 4: hikes will lead to demand destruction, and then it will
• 24:20
  Speaker 4: also depend on how strong and aggressive government will implement
• 24:26
  Speaker 4: these transitions. You can think about the carbon border adjustment
• 24:30
  Speaker 4: mechanism where you try to tax the carbon intensity or
• 24:33
  Speaker 4: products you're importing, you could have backlashes, et cetera. So
• 24:37
  Speaker 4: it will be incredibly a volatile path.
• 24:40
  Speaker 3: I think. Yeah.
• 24:41
  Speaker 2: One of the things that we always used to say
• 24:43
  Speaker 2: in the all those was that the solution to high
• 24:45
  Speaker 2: prices and the quodity markets is high prices because of ceron.
• 24:49
  Speaker 2: As prices go up, obviously get an expansion of supply.
• 24:52
  Speaker 2: And one of the things that we keep hearing at
• 24:54
  Speaker 2: the moment is so that solution again has a massive
• 24:57
  Speaker 2: time lag on it in some legislati Chaine is Europe
• 25:00
  Speaker 2: about this over the last few days. But it's increasingly
• 25:03
  Speaker 2: difficult to open a new mine, and particularly in the West,
• 25:07
  Speaker 2: if there's no shortage of lithium under the ground across
• 25:09
  Speaker 2: the world, right, no shortage at all, but no one
• 25:11
  Speaker 2: wants to dig up any parts of the UK to
• 25:13
  Speaker 2: get that lithium out, And in Chili, no alm wants
• 25:15
  Speaker 2: to dig up Chili to get the lithium out, et cetera.
• 25:17
  Speaker 2: So it becomes increasingly difficult to rely on the old
• 25:21
  Speaker 2: equations of demand loose to supply, because today it doesn't
• 25:25
  Speaker 2: necessarily and that's a long term inflationary dynamic as well.
• 25:30
  Speaker 4: Yeah. Absolutely. But the also important thing to bear in
• 25:33
  Speaker 4: mind is that Chile and Peru are roughly forty percent
• 25:35
  Speaker 4: of the world supper of copper and there have been
• 25:38
  Speaker 4: putting restriction to limit the impact of these mines on
• 25:41
  Speaker 4: biodiversity and the environment. So you are as if we're
• 25:45
  Speaker 4: shooting ourselves in the food in a way, there is
• 25:49
  Speaker 4: that fear, isn't that that to get where you need
• 25:51
  Speaker 4: to go, you actually need more emissions in the short
• 25:54
  Speaker 4: term because actually putting out a transition infrastructure in a
• 25:57
  Speaker 4: particular in the UK we talk a lot about the
• 25:59
  Speaker 4: national Grip, which needs to be double tripled, quadrupled in
• 26:02
  Speaker 4: size at massive cost and massive use of metal to
• 26:05
  Speaker 4: minerals and massive use of people views to put up
• 26:07
  Speaker 4: the pylons, et cetera.
• 26:09
  Speaker 3: There's an enormous amount of emission in the building of
• 26:11
  Speaker 3: a transition infrastructure.
• 26:14
  Speaker 4: Yeah, exactly, And we are forcing everybody to be cutting
• 26:17
  Speaker 4: emission and being at zero ord of having at zero
• 26:20
  Speaker 4: transition plan. So that's by definition restriction the supply it
• 26:24
  Speaker 4: is very mineral, and then we also have to protect
• 26:25
  Speaker 4: biodiversity and you have to do and you also have
• 26:28
  Speaker 4: to be profitable to meet the demand of your shareholders.
• 26:31
  Speaker 4: So the whole thing is a bit in conflict and
• 26:33
  Speaker 4: paradoxical and.
• 26:34
  Speaker 3: More complicated than people think.
• 26:36
  Speaker 4: I mean, this whole exercise reminds me of Albert Ashtein,
• 26:39
  Speaker 4: who said there are two things that are infinite, the
• 26:42
  Speaker 4: size of the universe and human stupidity. And he was
• 26:45
  Speaker 4: not sure about the size of the universe. So we
• 26:48
  Speaker 4: are essentially the frog in boiling water, and.
• 26:53
  Speaker 3: There is something else dropping out of the water. Yeah,
• 26:56
  Speaker 3: there is something else that is absolutely limitless, right, and
• 26:58
  Speaker 3: that is human creativity ingenuity, and we must have a
• 27:01
  Speaker 3: discount that.
• 27:03
  Speaker 4: Yeah, absolutely, that's a good point. I had a chat
• 27:07
  Speaker 4: with a colleague of mine who said that was in finance,
• 27:11
  Speaker 4: we typically say history is a very bad indicator of
• 27:16
  Speaker 4: future performance. And the issue with climate change that we're
• 27:19
  Speaker 4: dealing with the laws of physics because there are in
• 27:22
  Speaker 4: terms of energy conservation, the different laws of thermodynamics in
• 27:26
  Speaker 4: terms of what you can create, how much energy you
• 27:30
  Speaker 4: can store, or for example, I mean, it's you know,
• 27:33
  Speaker 4: fossil fuel is essentially some light stored for millions of years,
• 27:37
  Speaker 4: and it's been an incredibly dense source of energy and
• 27:40
  Speaker 4: today it's very difficult to replace. Even energy storage is
• 27:44
  Speaker 4: a challenge to meet the same intensity and density as
• 27:48
  Speaker 4: fossil fuel. But the laws of physics are some are
• 27:51
  Speaker 4: something that are where history is is typically a good
• 27:54
  Speaker 4: predictor of future performance or behavior. So I think we
• 27:59
  Speaker 4: innovation and creativity is definitely part of the solution, but
• 28:02
  Speaker 4: I think changing our supply chain, circular economy, thinking about
• 28:07
  Speaker 4: excess consumerism, and even a simple concept like not the
• 28:11
  Speaker 4: world population by twenty fifty, we're likely to go from
• 28:15
  Speaker 4: eight billion today to ten billion people. So that's literally
• 28:19
  Speaker 4: having a new China on Earth. And you know that
• 28:23
  Speaker 4: will require energy consumption, food, etxea, et cetera.
• 28:27
  Speaker 2: So there's a lot of very very wary cook of
• 28:30
  Speaker 2: that population number. It's consistently downgraded how high we're going
• 28:33
  Speaker 2: to get to. And we know how fast fertility is
• 28:36
  Speaker 2: falling across the world. We know we're already globally down
• 28:38
  Speaker 2: to two point four two point five percent. We know
• 28:40
  Speaker 2: that in the UK we're well well under two. We
• 28:43
  Speaker 2: know that even in India, which was we always thought
• 28:45
  Speaker 2: it was going to be the fastest growing population ever,
• 28:48
  Speaker 2: is already down below replacement rate. And we know that
• 28:51
  Speaker 2: always happens faster than we think. And obviously the global
• 28:54
  Speaker 2: population is still growing. We're going to have a problem
• 28:56
  Speaker 2: with an aging population and the shape of the shape
• 28:58
  Speaker 2: of our population chain. But there is an argument which
• 29:02
  Speaker 2: I'm quite taken by, that we may seem not be
• 29:04
  Speaker 2: worrying about there being too many people, but worrying about
• 29:06
  Speaker 2: there being too few people, particularly across the West.
• 29:10
  Speaker 4: I think the best way to think of this is
• 29:13
  Speaker 4: to remember the Joichi Kaya equation, which is used in
• 29:17
  Speaker 4: the IPCC report. So it simply says greenhouse gas missions
• 29:21
  Speaker 4: is equal to population times GDP per capita. That is,
• 29:25
  Speaker 4: consumption times the energy intensity of GDP, So GDP so
• 29:30
  Speaker 4: how much energy your economy requires, and finally times emissions
• 29:34
  Speaker 4: intensity of your energy system. So you know, even if
• 29:38
  Speaker 4: population were to stay flat or go up a little
• 29:42
  Speaker 4: or less than what we thought, you still need to
• 29:45
  Speaker 4: look at consumption a GDP per capita. And this is
• 29:48
  Speaker 4: almost an exponential line of since the nineteen fifties, because everybody,
• 29:54
  Speaker 4: you know, our standard of living increases, and as you
• 29:58
  Speaker 4: aspire for a higher standard of of us, the high
• 30:00
  Speaker 4: standard of life, your consumption increase. And then obviously all
• 30:05
  Speaker 4: of that requires energy and your energy intensity or your
• 30:08
  Speaker 4: kind of increase as well, etcetera, etcetera. So unfortunateity is
• 30:12
  Speaker 4: not just the population problem. It is consumption. It is
• 30:15
  Speaker 4: energy intensity and then emission intensity of your energy system,
• 30:18
  Speaker 4: which is limited by the laws of physics. So I
• 30:21
  Speaker 4: think there's clearly room for a lot of innovation and
• 30:23
  Speaker 4: creativity for us and the next generation, for sure.
• 30:27
  Speaker 2: There was a lengthy conversation in late twenty twenty and
• 30:30
  Speaker 2: John and I used to have and a lot of
• 30:32
  Speaker 2: other economists joined into about the Great Roaring twenties and
• 30:35
  Speaker 2: how exciting it was going to be once we've gone
• 30:37
  Speaker 2: through the difficulties of the pandemic, the technology advancements of
• 30:42
  Speaker 2: the last decade would suddenly stop just being used to
• 30:44
  Speaker 2: watch people dancing on TikTok and suddenly being used to
• 30:47
  Speaker 2: drive full digitalization across Western economies and non Western economies,
• 30:51
  Speaker 2: and that would bring us huge productivity growth GDP.
• 30:54
  Speaker 3: Growth, and it would all be absolutely wonderful.
• 30:56
  Speaker 2: Now, no one really talks about the Roaring twenties anymore,
• 30:59
  Speaker 2: but there hints coming through in rising productivity in the
• 31:03
  Speaker 2: US in particular right not here yet, i'm afraid, but
• 31:05
  Speaker 2: certainly in the US and we're beginning to see real
• 31:07
  Speaker 2: wages rising around the place, which is often a hint
• 31:10
  Speaker 2: that productivity is improving. I just wonder if you think
• 31:14
  Speaker 2: that there is any sense, once we get through your
• 31:16
  Speaker 2: predicted mild recession, that we might come out the other
• 31:19
  Speaker 2: end and see the Roaring twenties that we were so
• 31:21
  Speaker 2: excited about only twelve months ago.
• 31:23
  Speaker 4: Yeah, this is a good point. I mean, there was
• 31:25
  Speaker 4: a lot of comparison between the Roaring twenties and the
• 31:29
  Speaker 4: Roaring twenty twenties after the reopening of the economy, the
• 31:33
  Speaker 4: sort of revent spending, etc. When you look at total
• 31:37
  Speaker 4: factor productivity, it has actually sort of been flat two
• 31:42
  Speaker 4: falling independent on countries. Obviously, the US security has a
• 31:46
  Speaker 4: lot more investment in innovation and productivity, so for that
• 31:52
  Speaker 4: you need investments in technology, robots, etc. Even artificial intelligent
• 31:59
  Speaker 4: intelligence is expected to increase the productivity in the service industry,
• 32:04
  Speaker 4: not just replace jobs, but make us a lot more
• 32:07
  Speaker 4: efficient at what we do. So I think there is
• 32:10
  Speaker 4: a yeah, there is a probability for productivity to increase
• 32:14
  Speaker 4: because we won't have much alternative. As businesses will are
• 32:18
  Speaker 4: facing as you said, real wage growth, they'll have to
• 32:21
  Speaker 4: find ways to protect our margin by investing in more
• 32:25
  Speaker 4: productive assets. Otherwise they'll just have to they'll struggle and
• 32:28
  Speaker 4: on the perform. So I think it is definitely a
• 32:32
  Speaker 4: strategy that China, for example, is looking at through a
• 32:35
  Speaker 4: huge investment in the AI and technology, and that could
• 32:39
  Speaker 4: potentially be what Japan has done with it, although in
• 32:43
  Speaker 4: the car industry after the Second World War by being
• 32:47
  Speaker 4: incredibly through the five zero concept of zero waste, zero delay,
• 32:52
  Speaker 4: et cetera. So yeah, maybe productivity might help improve the
• 32:57
  Speaker 4: path of high inflation. But I'll be more I'll be
• 33:00
  Speaker 4: cautiously optimistic.
• 33:02
  Speaker 2: Okay, we'll take cautious optimism. Can we add AI into
• 33:05
  Speaker 2: your concious optimism? Can that change our world in a
• 33:07
  Speaker 2: positive way rather than a negative way?
• 33:11
  Speaker 4: Yes, for sure, But as we know humans, I'm not
• 33:13
  Speaker 4: going to quote Unstein again, but I think the problem
• 33:15
  Speaker 4: is just is the abuse.
• 33:17
  Speaker 2: Of I'm going with creativity with stupidity.
• 33:23
  Speaker 4: Well, I mean, I was about to say that a
• 33:26
  Speaker 4: pessimist is an optimist with experience, but stay on the bus.
• 33:31
  Speaker 4: On the positive side, Yeah, I think we see that
• 33:34
  Speaker 4: in our industry. Even in my current job, we are
• 33:36
  Speaker 4: looking at use cases for using AI in the way
• 33:40
  Speaker 4: we produce contact analyzed documents, and this is kutia a
• 33:44
  Speaker 4: no brainer. And the question is simply whether this will
• 33:48
  Speaker 4: increase the monopoly or legally of some businesses that will
• 33:54
  Speaker 4: use AI very well at the expense of the others.
• 33:58
  Speaker 4: It's a bit like the Magnificence seven versus the four
• 34:01
  Speaker 4: hundred and ninety three companies of the s and P
• 34:03
  Speaker 4: five hundred, where you could curry see the significant outperformance
• 34:07
  Speaker 4: because they almost have a geminic position with predentless profit
• 34:13
  Speaker 4: profit growth. And that's really the concern because the more
• 34:16
  Speaker 4: you have inequality, you have the lower long term growth
• 34:20
  Speaker 4: because the rich have a lower marginal propensity to spend.
• 34:23
  Speaker 4: So I think the decide effect is what worries me.
• 34:26
  Speaker 4: But I do think there will be a transitory pairoed
• 34:29
  Speaker 4: ware productivity will increase, We'll be able to do a
• 34:32
  Speaker 4: lot more, and the challenges are we going to be
• 34:36
  Speaker 4: able to share that excess growth and access productivity with
• 34:40
  Speaker 4: everybody or is it just something that will benefit the
• 34:44
  Speaker 4: happy view.
• 34:46
  Speaker 2: Something definitely think about in that is there a case
• 34:48
  Speaker 2: for investing in Chinese equities at the moment you know
• 34:51
  Speaker 2: they're supposed to have a wonderful year hasn't had a
• 34:53
  Speaker 2: wonderful year, and there are lots of concerns around the
• 34:55
  Speaker 2: Chinese economy, and also lots of concerns for foreign investors
• 34:58
  Speaker 2: about the logistics of holding Chinese equities and the extent
• 35:01
  Speaker 2: that represents real ownership, et cetera. I wonder if you
• 35:04
  Speaker 2: think there is a case for investing in Chinese equities
• 35:07
  Speaker 2: at the moment.
• 35:07
  Speaker 3: Yeah.
• 35:08
  Speaker 4: I think in the short term it will be pretty
• 35:10
  Speaker 4: difficult to see return in Chinese equities. We're a lot
• 35:13
  Speaker 4: more cautious because we think China is going through not
• 35:16
  Speaker 4: exactly it's last decade or I don't think it's training
• 35:19
  Speaker 4: Japanese either, but it is. I don't think we're going
• 35:22
  Speaker 4: to see the same eight nine percent GDP growth we've
• 35:24
  Speaker 4: been used to. I think China is in a deleveraging
• 35:27
  Speaker 4: mode and fighting disinflation or even deflation forces, and it's
• 35:32
  Speaker 4: sort of environments equities don't do well. Is typically, Yeah, bonds.
• 35:36
  Speaker 4: Chinese bonds are better in my opinion than Chinese equities.
• 35:40
  Speaker 2: Right, let's move on to what we've talked about. A
• 35:43
  Speaker 2: lot of interesting things, a lot of big picture things,
• 35:46
  Speaker 2: But what.
• 35:46
  Speaker 3: Does our ordinary investor do?
• 35:48
  Speaker 2: What does a listener to this podcast do with their
• 35:51
  Speaker 2: money right now, Where are the markets that are interesting,
• 35:53
  Speaker 2: the markets that are cheap, the areas that you should
• 35:56
  Speaker 2: definitely not be invested in, and more crucially, the areas
• 35:59
  Speaker 2: they really should be invested in.
• 36:00
  Speaker 3: Can you give us any point as that.
• 36:03
  Speaker 4: I think it is very important to have a diversified portfolio.
• 36:06
  Speaker 4: I mean, that's the classic.
• 36:10
  Speaker 3: That that's a list of acceptable answers.
• 36:15
  Speaker 4: But personally I do like sort of indices, so like
• 36:19
  Speaker 4: the S and P five founded or the eurostocks, simply
• 36:22
  Speaker 4: because I think companies are can be thought of as
• 36:26
  Speaker 4: biological organism that go through a Darwinian process of evolution
• 36:30
  Speaker 4: by natural selection of their returnal equity or their profitability.
• 36:33
  Speaker 4: So to put it simply, the DNA of companies evolve
• 36:38
  Speaker 4: and adapt with their environment, and equity indices have this
• 36:44
  Speaker 4: great benefit of rebalancing themselves, so an underperforming company will
• 36:49
  Speaker 4: be taken out of the index, whereas the next one will,
• 36:53
  Speaker 4: you know, has an opportunity to drive the air performance
• 36:55
  Speaker 4: of an index. So a lot of the top companies
• 36:58
  Speaker 4: the S and P FI founded did not exist twenty
• 37:01
  Speaker 4: years ago, for example, So it has the great benefit
• 37:04
  Speaker 4: of being a rebalancing portfolio through performance because it's market
• 37:09
  Speaker 4: up with it. So I'll definitely have a sort of
• 37:13
  Speaker 4: a selection of diversified global indices because, as we just
• 37:17
  Speaker 4: discussed over the next ten twenty years, if you're a
• 37:20
  Speaker 4: return investor, or even an instition investor for that matter,
• 37:24
  Speaker 4: you look, you're trying to invest for the long term,
• 37:27
  Speaker 4: so you know that so Asia, US, European equity in
• 37:34
  Speaker 4: this is then I also like bonds in this environment
• 37:38
  Speaker 4: we talked about slow down and recessions. There's been a
• 37:41
  Speaker 4: lot of pain with people trying to time a recession
• 37:45
  Speaker 4: and suffered in their bond portfolio. But I think central
• 37:48
  Speaker 4: banks have reached their peak in terms of tightening, although
• 37:51
  Speaker 4: there's a risk I could do more if inflation doesn't normalize.
• 37:54
  Speaker 4: But from a research just the basis, having a combination
• 37:58
  Speaker 4: of sovereign bonds makes sense. And now'll probably trying some
• 38:02
  Speaker 4: gold as well, because I think we'll have you know,
• 38:06
  Speaker 4: inflation is effective, the that of money and gold is
• 38:10
  Speaker 4: some sort of insurance against the basement of currency. And
• 38:14
  Speaker 4: last but not least, any sort of metals and mining
• 38:18
  Speaker 4: or sectors that are needed for the transition. We talked
• 38:21
  Speaker 4: about Cobal copper, et cetera. And I think there are
• 38:25
  Speaker 4: at attractive levels given the on the performance link to
• 38:28
  Speaker 4: the slowdown in China. But I think over the extend
• 38:31
  Speaker 4: fifteen years, these are commodity These are commodities that areten
• 38:35
  Speaker 4: to perform because the demand is pretty significant. So to
• 38:38
  Speaker 4: recap equities a bit of bonds, gold and transition metals.
• 38:43
  Speaker 2: I'd go back briefly too in decease and that if
• 38:46
  Speaker 2: you buy a US and the CY at the moment
• 38:48
  Speaker 2: SMP five hundred to get a very strong concentration from
• 38:51
  Speaker 2: the seven biggest companies, would it make sense for an
• 38:56
  Speaker 2: investor at the moment to perhaps go for something that
• 38:59
  Speaker 2: is less money and tim driven and go for a
• 39:01
  Speaker 2: weighted index as opposed to a market cap weighted index.
• 39:06
  Speaker 4: Yeah, equal weight is yeah, that's It's a good point
• 39:09
  Speaker 4: because a lot of these stocks tend to trade at
• 39:12
  Speaker 4: high valuation and could suffer from a risk stock specific risk.
• 39:17
  Speaker 4: But the caveat to that argument is that if you
• 39:19
  Speaker 4: look at these Magnificent seven, they're almost like industries on
• 39:23
  Speaker 4: their own because they have market caps that are equivalent
• 39:26
  Speaker 4: to the GDP of a number of countries. So I
• 39:31
  Speaker 4: think the reason why they are performed. Is not simply
• 39:34
  Speaker 4: a valuation argument, because interest rate is obviously very high,
• 39:37
  Speaker 4: but it is also because of this sort of almost
• 39:40
  Speaker 4: darwinistic ability to generate profitability and acquire any sort of
• 39:44
  Speaker 4: competitors and invest aggressively in return, generating opportunities and capex.
• 39:50
  Speaker 4: I think, yeah, you could reduce that if you want
• 39:54
  Speaker 4: to reduce the vlatility through an equal weight, but I
• 39:56
  Speaker 4: wouldn't be too concerned about it personally.
• 40:00
  Speaker 3: You slightly ruined the last question. I always ask everybody.
• 40:03
  Speaker 3: We have a question at the end.
• 40:05
  Speaker 2: We ask every single participant, and we keep a note
• 40:08
  Speaker 2: of the results and we start rows on Twitter about it.
• 40:11
  Speaker 3: We have a lot of fun with this.
• 40:12
  Speaker 2: And I was about to ask you the question, and
• 40:14
  Speaker 2: you gave me the answer. This is a bit awkward,
• 40:17
  Speaker 2: but I have to ask the question anyway, because you know,
• 40:20
  Speaker 2: we keep lists, right, So if I were to tell
• 40:26
  Speaker 2: you force you tell you only are allowed one asset
• 40:30
  Speaker 2: for the next ten years, and you get a choice
• 40:32
  Speaker 2: of three, the first one of which we usually discount,
• 40:34
  Speaker 2: but we offer it anyway, a deposit account in the UK, gold,
• 40:39
  Speaker 2: physical or bitcoin.
• 40:43
  Speaker 3: Which one do you take?
• 40:45
  Speaker 4: Yeah? Gold?
• 40:47
  Speaker 3: Do what? I make me ruin? Gold excellent.
• 40:50
  Speaker 2: I mostly agree, but tell me just briefly why you
• 40:55
  Speaker 2: wouldn't take it.
• 40:57
  Speaker 4: Yeah, I think it's just the volatile of it and
• 41:00
  Speaker 4: the you know, the creative destruction of sort of the
• 41:05
  Speaker 4: next innovation or technology. There's also the risk around security
• 41:10
  Speaker 4: and hacks, although a lot of this is being I mean,
• 41:14
  Speaker 4: I'm sure there will be a lot of arguments against
• 41:16
  Speaker 4: these points, but I think you still have skepticism when
• 41:20
  Speaker 4: you look at the average investor or average household investor
• 41:25
  Speaker 4: who is looking at safety. There's a point a code
• 41:29
  Speaker 4: that says people care it's about the return on the
• 41:33
  Speaker 4: money versus people have two things they have in mind.
• 41:39
  Speaker 4: The first one is the return on your money and
• 41:43
  Speaker 4: the second one is the return of your money. So
• 41:46
  Speaker 4: when you are in a sort of a bullish and
• 41:49
  Speaker 4: careless and risk on market, people are really much about
• 41:53
  Speaker 4: the risk return on your money, and my concern is
• 41:56
  Speaker 4: the return of your money when in bad times. And
• 41:59
  Speaker 4: that's where I'm a bit more skeptical on the bitcoin,
• 42:03
  Speaker 4: given it's full of tile, it's vulatility, But in terms
• 42:06
  Speaker 4: of the technology, I think it has a great feature.
• 42:09
  Speaker 2: Obviously, that's a very diplomatic way of answering the question wonderful.
• 42:14
  Speaker 3: Well, thank you so much.
• 42:16
  Speaker 2: I was absolutely fascinating and I please that we agree
• 42:19
  Speaker 2: on something and disagree on other things, because that makes
• 42:22
  Speaker 2: things work properly. You've been really kind to spend so
• 42:25
  Speaker 2: much time with us.
• 42:25
  Speaker 4: Thank you, Thank you.
• 42:30
  Speaker 3: Thanks for listening to this week's Marin Talks Money. We
• 42:32
  Speaker 3: will be back next week.
• 42:34
  Speaker 2: Catch our debrief on this week's conversation on Merrin Talks
• 42:36
  Speaker 2: Money after show and our normal feed that is free
• 42:38
  Speaker 2: to everyone. All our previous after shows are now also free.
• 42:42
  Speaker 3: You asked, we delivered.
• 42:43
  Speaker 2: Don't forget to leave us a review. It helps people
• 42:45
  Speaker 2: find the show. And if you're talking about money, you're
• 42:47
  Speaker 2: talking about economics, you're talking about investing. To your friends,
• 42:50
  Speaker 2: talk about us too. This episode was hosted by me
• 42:53
  Speaker 2: Marin Sumoset Web. It was produced by Sumasadi additional editing
• 42:56
  Speaker 2: by Blake Naples. A special thanks to Coco Agri, Bluer
• 42:59
  Speaker 2: and John. Be sure to sign up for John's daily newsletter,
• 43:02
  Speaker 2: Money Distilled. The link for that is in the show
• 43:04
  Speaker 2: notes