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The Asset Class: Philip Saunders · Strictly Business

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  You're listening to Strictly Business Podcast with Lindsay Williams.
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  Recently, the monthly US jobs report surprised to the upside with the country
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  creating 172,000 jobs,
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  beating expectations and stopping a trend that was feared to be an employment
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  recession for the world's largest economy.
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  At the same time, growth in 2026 has been erratic but positive, while inflation, the
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  big fear,
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  is ticking up but as yet not.
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  out of control.
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  Are President Trump's pronouncements about the economy coming to pass as AI starts to
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  exert its influence?
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  With me is Philip Saunders, Director of the Investment Institute at 91 in London.
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  Can it be that Trump's wisdom that he keeps on shouting at us, Philip, is set to
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  come true?
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  He says the economy is doing well, and suddenly there's data to back that up.
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  Well, I think, you know, I mean, obviously, he's a pro-growth president.
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  And so he's inclined to be positive about the economy, you know, whether it's doing
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  well or not.
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  However, I think he may be wrong on a number of issues, but, you know,
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  basically,
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  I think he could be right about this.
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  And the primary engine, of course, is AI CapEx.
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  So it's somewhat lopsided growth, but growth nonetheless, simply because the
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  quantum of investment is rampant.
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  you know, as hyperscalers ramp it up, is very material.
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  The US economy, you know, obviously, was ramped up by the Biden administration to,
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  you know,
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  an attempt to get democratic presidents elected.
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  And so having some kind of hangover after that was unsurprising.
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  So in a way, you know, if you look at the unemployment numbers until the most recent
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  ones, you know, it's been limping along,
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  it's been, you know, teetering on the edge of potentially looking worse.
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  But I think we've seen quite a lot of other anecdotal evidence so far this year,
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  that actually, you know,
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  the supertanker that is the US economy is actually picking up steam,
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  and higher oil prices don't look as if they're going to derail that.
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  Is there a two-tier economy?
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  You talked about AI, and there's an enormous amount of money being spent by
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  these AI companies on capital expenditure,
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  as you said, I think the official figure.
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  It's something like 750 or 800 billion US dollars this year for the major AI
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  companies.
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  But then we've got these three massive listings coming up.
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  We've got SpaceX, OpenAI, and also what's the other one?
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  Anthropic.
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  And that'll also be a big boost.
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  But at some point, the AI spend, I don't know, can it continue at this pace?
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  And can that AI effect not become the bubble that many people are talking about?
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  And then it'll just fall flat in a year's time.
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  Yeah, well, I think that it's got more staying power potentially than that.
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  And, you know, whether that results in a bubble in equity market terms, you know,
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  that, you know,
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  is possible, but I don't think we're there yet.
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  If you think about it, actually, this two-tier economy was really the result of,
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  you know,
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  the significant hike in interest rates that happened a few years ago.
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  You know, you saw that really dramatic move away from zero rates to belatedly to
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  very tight, very...
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  actually relatively high interest rates, certainly by post-GFC comparison.
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  And that has really hit large parts of the US economy, like housing, for example,
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  very hard.
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  So you've got this sort of growth recession going on in the background.
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  And that, I think, it's beginning to sort of come through.
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  You're beginning to see the cyclical parts of the economy beginning to do a bit
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  better.
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  And so...
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  broader underpinnings for growth.
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  But yes, I mean, the AI side of things, you know, is pretty dominant at the
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  moment.
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  And of course, basically, it potentially raises the cost of capital, you know,
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  given the sort of sheer scale of the investment.
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  So and that, of course, obviously, will put pressure on more interest rate
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  sensitive sectors of the economy.
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  But for now, it looks as if we're seeing more breadth.
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  And, you know, over the next few months, I suspect that But...
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  you may well have a lot of people talking about how US growth is less unbalanced, if
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  you see what I mean.
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  Yeah, compelling argument that you put forward.
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  But if you go to someone on Main Street and someone on Wall Street, you'll get
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  different answers as to what's going on.
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  Also, Kevin Walsh, who's the soon-to-be new Fed chair,
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  has expressed some sort of quite, again,
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  compelling argument that AI could support.
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  suppress inflation because of the efficiencies it introduces.
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  Do you believe that?
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  I think it's all a question of, you know, I do believe that, but it's not the
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  question of flicking a switch.
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  You know, this, you know, rollout, you know, even if
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  AI adoption happens more rapidly than innovation cycles in the past, you know,
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  this is a sort of rollout that's going to take years.
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  You know, look at what's happened with the Internet.
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  It's still actually delivering productivity gains.
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  So recent productivity improvements, the numbers have been pretty good for the US.
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  having been lousy in the post-GFC period, aren't really the result of
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  AI yet because it's just too early.
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  It's just not the level of adoption is just not there yet.
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  So it depends on the timescale.
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  So he's right over the longer term.
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  I don't think he actually means that things are going to be wonderful
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  productivity wise as a result of AI adoption in the short term.
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  If you look at the U.S.
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  bond markets, I've got the U.S.
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  10-year in front of me now as we record.
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  at 4.53% and the 10-year is
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  5.04%, so yields ticking up.
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  So someone's saying that inflation is going to be a problem and if you look back
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  in history at the relationship between rising
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  yields because of rising inflation, therefore rising interest rates and the
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  stock market and the economy,
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  there's a fairly well-defined trend.
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  Will that trend be broken this time?
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  Well, I think it's clearly bond yields at the
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  the current levels are getting uncomfortable unless inflation is going to
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  go meaningfully higher.
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  And it's quite actually interesting to contrast what's happening in the States
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  with what's happening in Europe.
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  In Europe, the ECB members are all talking about raising rates.
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  I think the Fed is likely to sit on their hands.
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  I think that Walsh is not simply a Trump puppet, but we'll see about that.
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  But the issue is this, that basically you had a lot of hand about inflation and
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  actually inflation started to undershoot.
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  So the narrative basically was sort of wrong.
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  And now, basically, the inflationistas are seizing on the growth argument.
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  You know, inflation now is definitely going to go up because growth is too
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  strong.
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  And I think that, you know, just like any cycle, I think there will be inflation
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  risks that will come to play, you know,
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  over the medium term.
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  You know, the economy is likely to run hot and that might put upward pressure on
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  inflation.
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  You know, but I think the underlying level.
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  is probably okay at the moment.
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  The headline number looks somewhat high.
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  And the crucial thing is that the labour market actually has been pretty weak.
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  And even the recent job number, by past comparison, isn't exactly indicating a
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  boom.
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  So yes, I think we have got to watch the labour market to see whether labour market
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  tightness is going to actually become an inflation problem.
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  But at the moment, I think the signs don't really suggest that.
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  And I think there's a big risk that the ECB does the wrong thing because
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  European economies are simply not strong enough to withstand the kind of interest
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  rates that are now priced into markets.
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  I don't think the Americans are going to make the same mistake.
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  Does the jobs market matter?
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  A billionaire, a callous, cold capitalist who has become a billionaire or is
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  becoming a billionaire
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  or even a trillionaire will say it doesn't really matter about the jobs market.
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  AI is going to destroy jobs at certain levels of the economy.
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  But it will also boost growth.
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  So we'll have a growth environment.
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  Inflation will be suppressed by AI because of efficiencies.
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  And if there's a high unemployment rate, maybe five, five and a half or even
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  higher, and jobs growth is suppressed,
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  like inflation is suppressed.
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  So what?
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  It doesn't matter.
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  People will have to adapt.
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  That's what some people are saying.
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  Yeah, of course.
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  But I mean, you know, that is, you know, actually a highly questionable statement
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  because there are already problems of
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  social cohesion.
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  I mean.
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  It's led to Trump being elected twice, you know, a maverick, elected president not
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  once but twice.
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  So the idea that the grassroots are going to put up with yet more
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  inequality is crazy, really, because it's politically, I think, impossible.
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  So the oligarch, the billionaire can say what he wants or she wants.
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  But the reality of the situation is that social cohesion is extremely important.
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  And if AI challenges that, then there will be a political response and there will
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  need to be a political response.
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  But we're talking, you know, for AI to be causing wholesale job destruction again,
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  you know, the rollout has to occur and it's going to take many years.
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  So what do you do as an investor?
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  The stock market is a juggernaut.
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  And every time someone says, oh, there's a bubble and there's a little sell off of a
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  couple of percent like we saw on the Nasdaq recently,
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  everyone says that's it.
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  It's all over, but it's not.
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  It always bounces back.
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  It defies logic.
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  So the stock market's going, so you can't stand in the way of that.
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  It has its own logic.
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  Bond markets are under pressure because of the rising yields, obviously.
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  There's a patchy economy that doesn't seem to obey the rules.
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  So what do you do as an investor?
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  What is your strategy?
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  Because it seems as though, back to rules, you throw the rulebook out the window.
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  The idea that you can simply apply historical precedent to solve
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  how markets are going to behave is frankly laughable, because history, it might
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  rhyme, but it doesn't necessarily repeat.
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  And I think particularly when you're in the thick of an innovation and a really
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  big innovation cycle, you know,
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  that's when the historical precedents are even more useless.
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  So I think that we have to keep open minds.
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  I think that...
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  If you look at equity markets, they're clearly overextended at the moment.
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  I think the probability of actually a further correction is quite high, simply
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  because they're overextended and positioning isn't good.
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  But frankly, if the underlying picture is one that supports this continued high
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  level of
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  earnings growth, then that's typically going to be associated with equities doing
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  okay.
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  Philip, thank you very much for your analysis.
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  Philip Saunders is a director of the Investment Institute at 91 in London.
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  The views and opinions expressed in these podcasts are those of Lindsay Williams and
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  various contributors and do not reflect the policy,
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  position or opinion of any other agency, organisation,
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  change,
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  revision and rethinking at any time.
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  Please do not hold us to them in perpetuity.