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Yes It’s an AI Bubble. Here’s Why (with Albert Edwards) · Merryn Talks Money

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Speaker 1: Bloomberg Audio Studios, podcasts, radio news. Hello Meren Talks Money.
0:09
Speaker 1: Listeners now, First, a quick reminder, we are recording an
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Speaker 1: episode of Maren Talks Money in front of an audience
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Speaker 1: the morning after Rachel Reeve's UK budget. That'll be a
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Speaker 1: depressing affair. Join us at Bloomberg's European headquarters in the
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Speaker 1: heart of the city of London for customs of smart analysis.
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Speaker 1: I'll be joined by Helen Thomas of Blonde Money, Stephanie Flanders,
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Speaker 1: Bloomberg's head of Government and Economics, and of course John
0:30
Speaker 1: Steppeck will be there. Find the registration link in the
0:33
Speaker 1: show notes. Space is limited as ever, so do sign
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Speaker 1: up soon onwards. Welcome to Meren Talks Money, the podcast
0:52
Speaker 1: in which people who know the markets explain the markets.
0:55
Speaker 1: I am Maren Somerset Web. This week Albert Edwards, Global
0:58
Speaker 1: Strategistic Society in General, joined me in the London studio.
1:02
Speaker 1: The ft has called Albert a provocative and voluble strategist.
1:07
Speaker 1: Other people just call him famous investment guru, and my
1:11
Speaker 1: colleagues at Bloomberg like to call him a perma bear.
1:14
Speaker 1: Sorry about that, Albert, Albert. Welcome to Marin Talked Money.
1:19
Speaker 2: Hi there, and thanks for inviting me on. It's been
1:23
Speaker 2: a long while since I've been promising to come on,
1:25
Speaker 2: but here i am.
1:26
Speaker 1: You have been promising to come on, I would say
1:28
Speaker 1: for many many years, but here you are. This is
1:30
Speaker 1: exciting and I'm going to get as much audio as
1:32
Speaker 1: I possibly can because I suspect you and agree to
1:34
Speaker 1: come on again for another decade. So we're going to
1:36
Speaker 1: have to cover pretty much everything. So why don't we
1:41
Speaker 1: start with equity markets bubble or no bubble in the US.
1:46
Speaker 2: That is, I think there's a bubble, but they were
1:49
Speaker 2: going to always think there's a bubble. But I think
1:52
Speaker 2: looking back, I've been in the markets now since nineteen
1:55
Speaker 2: eighty two. I've been working, and these things come around
1:59
Speaker 2: from time to time, and during each bubble there's always
2:04
Speaker 2: very plausible narrative, very compelling, and hey, I know in
2:09
Speaker 2: previous bubbles like two thousand and seven and even that
2:12
Speaker 2: the Nasdaq bubble in late nineteen nineties, even I start
2:16
Speaker 2: to doubt myself. And this is one of these times,
2:21
Speaker 2: very compelling narrative, strong earnings, and but it will end
2:26
Speaker 2: in tears, that much, I'm sure of.
2:28
Speaker 1: We were both working back in the Dot gum bubble days,
2:32
Speaker 1: and so we remember the run up right those days
2:35
Speaker 1: when we were told that the old valuation methods didn't
2:38
Speaker 1: count anymore, and that we should realign ourselves with the
2:41
Speaker 1: new plateau of the market, etc. And that because the
2:45
Speaker 1: new technology was going to change the world so enormously,
2:49
Speaker 1: valuations didn't matter, current earnings didn't matter. It was all
2:52
Speaker 1: about the future. So we remember all those things, and
2:55
Speaker 1: then of course it all went horribly wrong. Do you
2:58
Speaker 1: feel any of those things now?
3:01
Speaker 2: I do, And the narrative is in some ways very similar,
3:07
Speaker 2: particularly when you see these extremely rich valuations in tech
3:14
Speaker 2: thirty times over thirty times forward earnings in the US
3:18
Speaker 2: being justified because of decent earnings growth. But one of
3:23
Speaker 2: the key comparisons I think is there when you think
3:26
Speaker 2: back to the late nineties the telecom sector, which will
3:30
Speaker 2: get it because it was it was it wasn't just technology,
3:32
Speaker 2: it was technology. MEDIAMTMTVOINT and the telecom sector were getting
3:39
Speaker 2: free money. They were laying cables. The amount of capital
3:43
Speaker 2: investment which was taking place on the back of the
3:46
Speaker 2: free money, a lot of it quite useful, but a
3:50
Speaker 2: lot of it replication, a lot of it not needed,
3:53
Speaker 2: wasted investment and how it strangled the other parts of
3:57
Speaker 2: the economy as money was towards this sector. So one
4:02
Speaker 2: of the key comparisons. You had a bubble in earnings
4:06
Speaker 2: as well as a bubble in valuations, and then something
4:10
Speaker 2: always changes to pull the rug out from under it. Now,
4:15
Speaker 2: during the Nasdaq bubble, it was higher interest rates. The
4:18
Speaker 2: Fed was raising interest rates through the back end of
4:20
Speaker 2: nineteen ninety nine. But one key thing which people often
4:25
Speaker 2: forget is despite these higher interest rates, as you moved
4:30
Speaker 2: right towards the end of nineteen ninety nine, people were
4:33
Speaker 2: so scared of the Y two K time bomb that
4:37
Speaker 2: we'd flip over to the first of January and all
4:39
Speaker 2: the computers will stopped working.
4:40
Speaker 1: Certing younger listeners won't remember this we're talking about. There
4:44
Speaker 1: was this palling fear that all of our technology, all
4:49
Speaker 1: of our computer systems would be unable to deal with
4:52
Speaker 1: this turn of the century and everything around us would collapse.
4:55
Speaker 2: Absolutely, And it was prudent to buy lots of tins
4:58
Speaker 2: of baked beans. If everything went down, then I personally
5:03
Speaker 2: quite likely you can cold baked beans out of a can.
5:06
Speaker 2: But if it didn't go down, it was fine. You
5:08
Speaker 2: had your cash safe. You just put it. It was just preventative.
5:12
Speaker 2: But what you saw, and you can see it in
5:14
Speaker 2: the I was chatting about it with one of my
5:17
Speaker 2: colleagues last week and I showed him a chart of
5:20
Speaker 2: USM not rocketing up towards the end of nineteen ninety
5:24
Speaker 2: nine and then collapsing as you flipped over into the
5:28
Speaker 2: year two thousand and everything didn't shut down. The FED
5:31
Speaker 2: withdrew that liquidity, and that is when the Nasdaq started
5:36
Speaker 2: toppling over. Now, as far as I can see, at
5:39
Speaker 2: the moment, those same conditions aren't there. The Fed is
5:44
Speaker 2: lowering interest rates rather than tightening interest rates, and they're
5:48
Speaker 2: just moving away from quantitative tightening to be neutral. I
5:51
Speaker 2: think they'll go to quantitative easing quite soon. So normally
5:54
Speaker 2: when bubbles burst, it is usually the monetary authorities tight cycle,
6:01
Speaker 2: and that isn't there. And I feel a bit like
6:05
Speaker 2: towards nineteen ninety nine, I just got bored being bearish,
6:09
Speaker 2: basically rattling my chain saying this is all a bubble,
6:12
Speaker 2: It's all going to collapse. I find myself talking about
6:15
Speaker 2: something else a lot a lot of the time, and
6:17
Speaker 2: that's the comparison, which really worries me. I can feel that, yeah,
6:23
Speaker 2: this is going to go on for a lot longer.
6:25
Speaker 2: And actually that's when something just comes out of the
6:27
Speaker 2: woodwork and takes the legs from out from under the bubble.
6:30
Speaker 1: Interesting. So, I mean, you are not the only person
6:33
Speaker 1: talking about a bubble, neither neither ofm I there's almost
6:35
Speaker 1: a bubble and people talking about bubbles, if you see
6:37
Speaker 1: what I mean said. It's not as though it's a
6:40
Speaker 1: contrarian thing to say anymore. It feels very obvious. But
6:45
Speaker 1: it also seems possible that they could be a melt
6:47
Speaker 1: up from here. Absolutely people talk about melt ups, and
6:50
Speaker 1: I'm like, kind of al really had a melt up
6:51
Speaker 1: that looked like a melt up. But maybe there's more
6:53
Speaker 1: melt up to.
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Speaker 2: Come as they sort of start to flip away from
6:56
Speaker 2: quanstant tightening to quantitative easing. And I think it have
7:00
Speaker 2: to be. There's a lot of evidence that there's problems
7:03
Speaker 2: in the repo markets in the US and in the
7:06
Speaker 2: plumbing that the FED users that they're going to be
7:10
Speaker 2: forced to shift to quantitative easing quite quite soon, and
7:15
Speaker 2: that for example, could cause a further melt And so
7:19
Speaker 2: when the bubble burst will be even more damaging than
7:22
Speaker 2: it would be if you've got it over with early.
7:24
Speaker 1: And is this a bubble? Do you think that on
7:27
Speaker 1: bursting is similar in scale for dot com bubble or
7:31
Speaker 1: is it worse in that two To some extent, the
7:35
Speaker 1: TMT bubble was sort of contained, and this seems to
7:40
Speaker 1: have a much deeper set of deeper tentacles throughout the
7:44
Speaker 1: US economy in particular.
7:46
Speaker 2: I think what may make it worse this time around
7:51
Speaker 2: is that the New York Fed, for example, have shown
7:56
Speaker 2: that consumption growth has become more and more concentrated amongst
8:01
Speaker 2: higher earners, rich consumers whose wealth has been inflated by
8:07
Speaker 2: the stock market doing so well. Consumption for the for
8:11
Speaker 2: the bottom fifty percent of income earners has actually been
8:15
Speaker 2: quite quite poor. So to the extent, what has driven
8:19
Speaker 2: the economy forwards is AI investment, this sort of spaghetti
8:24
Speaker 2: of vendor and that's another comparison. There's spaghetti charts of
8:28
Speaker 2: vendor financing that we also saw in nineteen ninety nine.
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Speaker 2: But what is is slightly more concerning is I think
8:37
Speaker 2: the economy may be more reliant on the stock market
8:42
Speaker 2: going up, and if it goes down thirty forty fifty percent,
8:47
Speaker 2: and we've seen these before. A lot of people be
8:50
Speaker 2: stunned that that can even occur, But actually consumption just
8:54
Speaker 2: gets hit very very bad. Indeed, so it's not just
8:57
Speaker 2: an investment cycle, but a consumption cycle too.
9:00
Speaker 1: Yeah, and that might be particularly bad given the huge
9:03
Speaker 1: retail participation in this bubble, particularly in the US right
9:07
Speaker 1: and I keep looking at the number of leveraged ETF launchers,
9:11
Speaker 1: single stock, single stock leverage ETFs.
9:14
Speaker 2: And certainly after Liberation Day when President Trump backed off
9:18
Speaker 2: his initial tariffs and the stock market started going back
9:24
Speaker 2: crazy from that point onward, that was retail which drove that.
9:28
Speaker 2: And the professional investors we could see from the service
9:31
Speaker 2: were very reluctant to participate. They were still quite bearish.
9:34
Speaker 2: They're expecting a recession, and they really drag kicking and
9:38
Speaker 2: screaming into the market by retail. Just yeah, just buy
9:42
Speaker 2: the dips, always just by, because you know, the stop
9:46
Speaker 2: market never goes down very might might pop down ten percent,
9:49
Speaker 2: fifteen percent, but it doesn't go down thirty forty fifty
9:53
Speaker 2: percent anymore until it won to bet until.
9:55
Speaker 1: It does exactly. Let's leave aside what might be a
9:59
Speaker 1: trigger for the end of the bubble for preventing a
10:02
Speaker 1: melt up. But a lot of this idea that it
10:05
Speaker 1: might go on, that might be a continuation in the
10:08
Speaker 1: bubble is about inflation and interest rates, right as you
10:11
Speaker 1: just said, so you're expecting the Fed to keep cutting rates,
10:14
Speaker 1: We're expecting ritcuts in the UK, etc. But you've also
10:18
Speaker 1: written about the deflationary environment in China.
10:21
Speaker 2: I mean, if any other economy G seven major G
10:25
Speaker 2: seven industrialist economy had seen the level of economy wide
10:31
Speaker 2: deflation that China is suffering. So China has seen twelve
10:37
Speaker 2: successive quarters, quarters, not months, quarters of year on year
10:43
Speaker 2: declines and its GDP deflator. That's economy wise, So it's
10:48
Speaker 2: more than just the CPI or RPI. It's economy. Why
10:51
Speaker 2: includes exports, includes investment goods, et cetera. If any other
10:56
Speaker 2: economy had seen that, they would be printing money like
11:00
Speaker 2: confetti and chucking it into the economy. China is in
11:05
Speaker 2: a real hole in terms of its deflation, and as
11:10
Speaker 2: we know having followed Japan over many years, the worst
11:14
Speaker 2: situation to be in is when you're a highly indebted
11:17
Speaker 2: economy as China is, and then to suffer deflation because
11:23
Speaker 2: it crushes you.
11:25
Speaker 1: Well, it increases the real value of people's debt and
11:27
Speaker 1: makes it even harder to pay off. You want infleation
11:30
Speaker 1: if you're in debt nor deflation, right absolutely.
11:32
Speaker 2: And Robin Brooks, who I follows at the Brookings Institute,
11:35
Speaker 2: no relation to the name, but he pointed out that
11:39
Speaker 2: the China's PPI on consumer durable goods is accelerating downwards.
11:44
Speaker 2: It's down four percent year on you own it's getting
11:47
Speaker 2: worse this and this is part of their surplus capacity problem.
11:53
Speaker 2: They've got a lot of deflation to give the world
11:57
Speaker 2: and they want to get rid of it. And the
11:59
Speaker 2: big surprise could be where, especially in the US, where
12:03
Speaker 2: everyone is waiting for inflation to pick up because of
12:07
Speaker 2: the tariffs, is it just doesn't that inflation we add
12:13
Speaker 2: a downside surprise in the UK recently, albeit from quite
12:18
Speaker 2: high rates, downside surprise in Japan. US has broadly been
12:23
Speaker 2: surprising on the downside looking at their underlying driver for inflation,
12:29
Speaker 2: which is unit labor costs. Is what I've been writing
12:32
Speaker 2: is look unit labor costs, and unit costs are only
12:35
Speaker 2: at running at one percent year on year, and that's
12:38
Speaker 2: that's not an erratic number, that's smooth that's what most
12:42
Speaker 2: economists think drives inflation, and that's been coming down quite smartly,
12:48
Speaker 2: as has Court company inflate corporates. The corporate price deflator
12:53
Speaker 2: has come down, and that's running quite a way below
12:57
Speaker 2: course CPI and I think the surprise maybe not the
13:02
Speaker 2: economy suddenly drops into the recession in the next few months,
13:05
Speaker 2: but inflation really carries on under shooting, the bond rally
13:09
Speaker 2: really gets going, which will cheer Rachel Reaves up up
13:12
Speaker 2: no end in the UK, and actually that inflates the
13:16
Speaker 2: stock market bubble even more.
13:18
Speaker 1: Perhaps, but it's not idea for deeply indebted Western economies.
13:22
Speaker 1: If one of the things that we talk about a
13:24
Speaker 1: lot on the podcast is how do you deal with
13:26
Speaker 1: this level of public debt? What on earth can you
13:28
Speaker 1: do about this? And the answer, of course is a
13:30
Speaker 1: type of financial repression, running interest rate slightly lower than
13:34
Speaker 1: inflation for a long time, so that eventually your debt
13:36
Speaker 1: doesn't necessarily go way, but it is massively reduced to
13:39
Speaker 1: that in some ways. The last thing that an economy
13:42
Speaker 1: like ours once right now is another wave of deflation
13:45
Speaker 1: out of China.
13:46
Speaker 2: It's to get out of jail free card for the
13:49
Speaker 2: politicians cyclically, I could think we can get down shift
13:53
Speaker 2: in inflation on a secular or trend basis. I mean,
13:58
Speaker 2: I'd been known for many many years my ice age thesis,
14:01
Speaker 2: which I put together at the end of the nineties
14:03
Speaker 2: the West, following what happened in Japan, that inflation would
14:07
Speaker 2: come low and low and bond yours following that after
14:11
Speaker 2: the pandemic, I have switched camp into a secular rise
14:15
Speaker 2: in inflation. I can remember personally twenty eight percent inflation
14:19
Speaker 2: in the UK and actually in Japan also a twenty
14:21
Speaker 2: eight percent inflation. I think seeing the fiscal on a
14:25
Speaker 2: secular basis, seeing the fiscal incontinence which is there and
14:30
Speaker 2: the fiscal dominance over monetary policy, I can see inflation
14:37
Speaker 2: trending back up to double digits. Might be you might
14:41
Speaker 2: get some short term relief, but actually politicians seemed congenitally
14:46
Speaker 2: unable to get to deal with this, these fiscal deficits,
14:51
Speaker 2: which means the path of these resistance will ultimately be
14:55
Speaker 2: money printing.
14:55
Speaker 1: So we might get some short medium term relief from
14:59
Speaker 1: the Chinese situation, but medium to longer term we have
15:03
Speaker 1: to expect our inflation because there is no other thing
15:06
Speaker 1: that can happen without politicians getting a grip, which are
15:09
Speaker 1: quite clearly not.
15:09
Speaker 2: Going to I mean and popularism. Anyone in the UK suggests,
15:13
Speaker 2: for example, who we get rid of the triple lock
15:15
Speaker 2: on pensions will be voted out of office immediately. Perhaps
15:20
Speaker 2: best not to say it in the run up to
15:22
Speaker 2: the election.
15:22
Speaker 1: We're speaking on the day that Rachel Reeves has been
15:25
Speaker 1: out talking this morning about well about the budget, which
15:29
Speaker 1: is increasingly weird that you come out three weeks before
15:32
Speaker 1: a budget to tell everyone there's going to be bad
15:34
Speaker 1: and using the budget to make them feel really miserable
15:36
Speaker 1: in the advance of the budget and make things even
15:37
Speaker 1: worse than they were already. But here we are. That's
15:39
Speaker 1: what she's done. And she's made it pretty clear that
15:42
Speaker 1: this isn't about spending cards, it's not about getting group
15:45
Speaker 1: on public spending. It is about taxing everybody more. No
15:49
Speaker 1: longer about broad shoulders. It's about kind of everybody's shoulders.
15:52
Speaker 2: Yes, and getting hold of the spending, particularly welfare spending
15:56
Speaker 2: and disablit And we saw even with an I think
16:00
Speaker 2: global bomb, markets took a big lesson from this. The
16:03
Speaker 2: Labor Party, even with one hundred and eighty plus majority
16:06
Speaker 2: couldn't get through the most minor of reforms in terms
16:10
Speaker 2: of in terms of disability spending where alone in the world,
16:14
Speaker 2: particularly for under thirties. It has exploded upwards as people
16:20
Speaker 2: get signed off, get signed off and their TikTokers to
16:24
Speaker 2: actually explain to you how to gain the system to
16:26
Speaker 2: do this, and they're just unable, totally unable to get
16:31
Speaker 2: a grip on it. And it's although the UK isn't
16:34
Speaker 2: the worst offender by any means, I think the US
16:37
Speaker 2: is worse. I think France is worse. Both those countries
16:41
Speaker 2: are more protected than the UK. France because it's wrapped
16:44
Speaker 2: up in the Eurozone, wrapper US because of the dollar
16:47
Speaker 2: and the exorbitant privilege of being able to borrow in
16:51
Speaker 2: the dollar. But the UK is far more vulnerable to
16:57
Speaker 2: blow up. I mean, luckily, we're in a period where
16:59
Speaker 2: bondi are coming down, and this is what blew up
17:02
Speaker 2: Liz Trusts. Her budget came at a time when bond
17:05
Speaker 2: yours were rising sharply globally, and it wasn't a good
17:09
Speaker 2: time to hit the markets with that sort And.
17:12
Speaker 1: Also she hadn't put any effort into getting everyone else
17:14
Speaker 1: on side because it came out of nowhere exactly. But
17:17
Speaker 1: so we have this massive public debt problem and as
17:20
Speaker 1: you say, this sort of fiscal fiscal dominance in the UK,
17:23
Speaker 1: and does where is it concern about that that the
17:27
Speaker 1: gold price has been signaling.
17:29
Speaker 2: I think it is. I think people are joining the
17:32
Speaker 2: dots and I think the debasement trades. And because it's
17:36
Speaker 2: not just gold. Until the recent correct it's had a
17:41
Speaker 2: very deep well is enjoying a very deep enjoying not
17:44
Speaker 2: quite the word right word, if you're holding it, it's
17:47
Speaker 2: seeing a very deep correction at the moment. But it's
17:51
Speaker 2: not just gold, it's the entire precious metal complex which
17:55
Speaker 2: ran up very, very sharply. Incidentally, from the day of
18:00
Speaker 2: August the twenty seconds Jerome Powell, the Fed chairs Jackson
18:05
Speaker 2: Hole's speech, gold ran up thirty percent, but actually the
18:11
Speaker 2: rest of the precire's metal complex rose even more strongly.
18:15
Speaker 2: Now you got to the stage where gold had was
18:19
Speaker 2: so overbought. Technicians look at things like calls relative strength
18:26
Speaker 2: index are RSIs. They're called how far the price has
18:29
Speaker 2: moved from the moving average. Essentially had a monthly RSI
18:34
Speaker 2: of over ninety two, which was the highest in history
18:39
Speaker 2: for the goal market. So you're going to see a
18:41
Speaker 2: very deep correction. But I think it was this is
18:45
Speaker 2: the deed's basement trade. Why aren't bonds he was also
18:48
Speaker 2: rising at the same time sharply at that time. I
18:52
Speaker 2: think it's basically because people say, well, it's not a
18:54
Speaker 2: deed basement trade, because bond If people expected very high inflation,
18:59
Speaker 2: bond bond.
19:00
Speaker 1: Market collapse and yields will be going to the sky.
19:02
Speaker 2: And it's because people figure out because of fiscal dominance,
19:07
Speaker 2: the central banks will be told to intervene to hold
19:12
Speaker 2: down bond yields at some point, whether it's five percent,
19:15
Speaker 2: whether it's five and a half percent or six percent,
19:17
Speaker 2: at some point, the maths just do not add up
19:21
Speaker 2: anymore for fiscal sustainability, so they would have to be
19:25
Speaker 2: yell curve control or as Japan had for many years,
19:29
Speaker 2: yell curve control or quantitive easing, which is effectively yield
19:32
Speaker 2: curve control. So, yeah, the precious metals can rip raw upwards,
19:37
Speaker 2: but the bond yields don't in the same way. They
19:40
Speaker 2: get that they start to stall out as they get
19:43
Speaker 2: to higher levels.
19:44
Speaker 1: So you think gold will come back. I find that
19:47
Speaker 1: just down to four thousand today as we speak where
19:49
Speaker 1: three nine hundred and sixty seven dollars. But it seems
19:53
Speaker 1: likely to me and to John who's on the podcast
19:56
Speaker 1: with me, a lot that gold will go back in
19:59
Speaker 1: four thousand and its still some things on.
20:01
Speaker 2: Silver, gold, silver, platinum, palladium, all of them go gold.
20:07
Speaker 2: Might be goal, might be the.
20:09
Speaker 1: Laggard gold miners.
20:11
Speaker 2: Yeah, gd x gd x J. I don't personally recommend stop.
20:17
Speaker 2: I wouldn't know. I'm a macro person. I wouldn't know
20:20
Speaker 2: stock if it bits me. I just waved my arms
20:24
Speaker 2: around and talk about the macro backdrop. And actually there
20:28
Speaker 2: was quote my former colleague Dylan Grice, you know very well,
20:32
Speaker 2: used to do a lot of research about the what
20:36
Speaker 2: happened to Germany in the nineteen twenties, Yes, and why
20:40
Speaker 2: Rudolph Vona Havistein, who was the Rikbang governor, why he
20:44
Speaker 2: kept on printing money. And the conclusion was, and I
20:50
Speaker 2: think it was a quote in later life, was he
20:53
Speaker 2: basically kept on because he was scared of the economic
20:57
Speaker 2: and social consequences of stopping. And it's similar with the
21:02
Speaker 2: public sector deficits. The politicians are scared of the social
21:08
Speaker 2: consequences of stopping spending money to and throwing money out
21:14
Speaker 2: as they are are doing these huge, huge spending plans
21:20
Speaker 2: they've they've got and so the path of least resistance
21:24
Speaker 2: is money printing.
21:25
Speaker 1: They can just keep it going for a few years
21:27
Speaker 1: another few years.
21:30
Speaker 2: Later the COVID period it didn't if you like, spoiled
21:34
Speaker 2: politicians into thinking they could spend like this, and eventually
21:40
Speaker 2: the markets come forth for them. They look around for
21:43
Speaker 2: the weak as Canada that may well be the UK
21:46
Speaker 2: at some stage, even though other countries are worse. They'll
21:50
Speaker 2: pick off the weak as Canada and basically bludgeon them
21:54
Speaker 2: and make an example of them. But that that's which
21:58
Speaker 2: is why we're going to end up up with QUANSITIV
22:01
Speaker 2: unlimited money printing to hold down and if the central
22:06
Speaker 2: banks won't do it. I was like the Groud char
22:09
Speaker 2: Marks quote, these are my principles. If you don't like,
22:13
Speaker 2: don't like them, I have others. These might be my
22:16
Speaker 2: central bankers today. If they don't do what I say,
22:18
Speaker 2: I'll find others to do it.
22:20
Speaker 1: Yeah. So central bank independence, as ever is something of
22:22
Speaker 1: a myth, is absolutely real. Yeah. Now, on the subject
22:40
Speaker 1: of central bankers, what part do you think that central
22:42
Speaker 1: bank buying of gold is playing in this. So we've seen,
22:45
Speaker 1: you know, various central banks around the world, Channel in particular,
22:48
Speaker 1: constantly adding to their gold holdings.
22:50
Speaker 2: I think this is a natural consequence from the pivot
22:54
Speaker 2: away from US assets, which was people tell me, and
23:01
Speaker 2: I think it's a reasonable hy partly a consequence of
23:05
Speaker 2: the seizure of Russian assets after the invasion of Ukraine.
23:10
Speaker 2: I was reading a narrative of the cabinet meeting in
23:14
Speaker 2: the US where everyone was talking about seizing or freezing
23:18
Speaker 2: their assets, and Janet Yellen did demure about shouldn't we
23:23
Speaker 2: think through the economic and financial consequences of this? But
23:28
Speaker 2: it certainly weakens Yeah, which emerging market central bank, which
23:35
Speaker 2: might fall foul of the US at some stage is
23:40
Speaker 2: going to buy US assets and deposit them in the
23:43
Speaker 2: US to be seized later on. And I think that's
23:46
Speaker 2: partly what is going on here. And you can you
23:49
Speaker 2: can see it from a lot of a lot of
23:51
Speaker 2: the hermegany of the dollar has been weakened somewhat. I
23:55
Speaker 2: don't think people who say that the age of the
23:57
Speaker 2: dollar is over I think a premature, but that I
24:00
Speaker 2: think part of it is that is what is going
24:02
Speaker 2: on and it's perfectly logical.
24:05
Speaker 1: Doesn't make sense under their circumstances to also hold some
24:10
Speaker 1: cryptocurrency us to hold bitcoin in particular, do you think to.
24:14
Speaker 2: The extent that crypto is a bet against central bank competence?
24:22
Speaker 2: Which is what my former colleague Dylan Greis always used
24:24
Speaker 2: to tell me, is I would add it to a portfolio,
24:29
Speaker 2: but with a very skeptical and cynical view about it,
24:34
Speaker 2: that it could collapse to some stage. But what I've
24:37
Speaker 2: noticed more recently in the last few months, it does
24:40
Speaker 2: seem to be a bit of an inverse correlation to gold,
24:44
Speaker 2: So you're putting the two together and it does tend
24:47
Speaker 2: to dampen down the volatility. So I think there certainly
24:50
Speaker 2: is a place for cryptocurrencies if central banks are going
24:56
Speaker 2: to do what I think they're going to do.
25:00
Speaker 1: If that is the case, if we are looking forward
25:02
Speaker 1: to a period of very high inflation, surely there's also
25:04
Speaker 1: a case for holding equities. And we've talked on this
25:07
Speaker 1: podcast about the Gavcast Turkish portfolio. It's fifty percent fifty
25:12
Speaker 1: percent gold as being the way to get through an
25:14
Speaker 1: unpleatant inflationary period.
25:16
Speaker 2: I would agree with that because you're buying a real,
25:18
Speaker 2: real asset, and I think commodities also as part part
25:21
Speaker 2: of that another real asset. The earnings will rise in
25:26
Speaker 2: nominal terms in line probably in line with nominal GDP growth.
25:31
Speaker 2: But the key question is and that offers the protection
25:36
Speaker 2: that the profits growth is in highly inflationary times, what
25:40
Speaker 2: multiple should the market be on? So the US is
25:43
Speaker 2: on the currently a forward P of twenty three times,
25:47
Speaker 2: which is almost back to where it was during the
25:50
Speaker 2: Nasdaq bubble in nineteen eighty two. Normally, when there's high inflation,
25:56
Speaker 2: the P is extremely low. And what you saw or
26:00
Speaker 2: from nineteen sixty five, for example, from nineteen sixty five
26:03
Speaker 2: to nineteen eighty two, as inflation rose and as bondials rose,
26:09
Speaker 2: there's really good earnings growth. The Dow went nowhere for
26:14
Speaker 2: seventeen years in nominal terms because the P which started
26:20
Speaker 2: it around twenty times if my memory says me right,
26:23
Speaker 2: in nineteen sixty five deflated I think eight times earnings
26:30
Speaker 2: by the time inflation peaked out. So yes, what I
26:36
Speaker 2: would say is in an environment of rising inflation arising bondials,
26:41
Speaker 2: what has worked for the last twenty years will stop working.
26:47
Speaker 2: So bond beneficiaries stocks or sectors which benefit from lower bondials,
26:53
Speaker 2: so they tend to be defensive, they tend to be utilities,
26:56
Speaker 2: they tend to be growth sectors like tech, which had
26:59
Speaker 2: done rare very well from decades of falling bond deals.
27:03
Speaker 2: And what hasn't done so well were cyclical stocks value stocks.
27:08
Speaker 2: So what hasn't worked should start to work when things
27:13
Speaker 2: have worked for twenty odd years or longer. It's getting
27:17
Speaker 2: out of that mindset and saying we're in a different paradigm. So, yes,
27:21
Speaker 2: I agree with you. Stocks are a hedge against inflation,
27:27
Speaker 2: but it's working out well. If we go through a
27:29
Speaker 2: secular de rating, actually that can wipe out all those gains.
27:33
Speaker 1: Find stuff that's cheap already.
27:35
Speaker 2: So it's ambiguous. It's ambiguous for.
27:37
Speaker 1: Yeah, now I see that. Now listen, speaking of sectors
27:40
Speaker 1: that have benefited or asset classes, should we say that
27:43
Speaker 1: have benefited from very low interest rates? Private equity. We're
27:46
Speaker 1: going through a period where we are hearing constantly that
27:50
Speaker 1: it's time for retail investors, for ordinary private investors to
27:53
Speaker 1: get their hands on a whole lot of private equity,
27:55
Speaker 1: and that will really temporary turns going forward. You and
28:00
Speaker 1: I'm thinking you don't necessarily agree with that.
28:02
Speaker 2: Well, I'm very cynical generally awful trade I picked up
28:06
Speaker 2: over the years working in finance, and me.
28:08
Speaker 1: Having that as well, we should I shouldn't really have
28:10
Speaker 1: had you prom.
28:14
Speaker 2: As far as I can see, the big advantage of
28:17
Speaker 2: private equity has been carried interest is it's been its
28:21
Speaker 2: tax treatment gives it an advantage, and it doesn't have
28:24
Speaker 2: to market self to market, so it isn't very volatile.
28:27
Speaker 2: People say, well, you know, we haven't got the volatility
28:29
Speaker 2: in private equity. Yeah, but you don't know what it's
28:31
Speaker 2: really worth.
28:32
Speaker 1: Well, you do have the volatility, or you would have
28:34
Speaker 1: the volatility if you if you tried to sell it
28:35
Speaker 1: every day.
28:36
Speaker 2: You know, But you know, there are problems in the
28:39
Speaker 2: private equity space as people call it at the moment.
28:44
Speaker 2: And you've had two high profile bankruptcies in the US
28:50
Speaker 2: with First Brands and tri Color, And I know nothing
28:53
Speaker 2: of what they do and understand, but I know that
28:55
Speaker 2: there've been problems there and that has started to leak
28:59
Speaker 2: into a high yields bond markers. Spreads have started to
29:03
Speaker 2: widen because people are worried and Jamie Diamonds of JP
29:08
Speaker 2: Morgan has has come out and said, you know, well
29:10
Speaker 2: you never have just one cockroach. Well you've got two there.
29:13
Speaker 2: And it's not just the IMF have been warning about
29:16
Speaker 2: private equity. Andrew Bailey at the Bank of England as
29:21
Speaker 2: very worried about it, and people don't really focus on this.
29:26
Speaker 2: And maybe this is the thing which in this cycle.
29:30
Speaker 2: Every cycle is slightly different. Maybe this is the thing
29:32
Speaker 2: in this cycle which which will lay us lower. I
29:36
Speaker 2: don't know. But there's an awful lot of leverage. You know,
29:38
Speaker 2: one of the one of the one of the elixirs
29:40
Speaker 2: for private equity is leverage. Huge amount of.
29:45
Speaker 1: Private equity. People would like you to believe is that
29:49
Speaker 1: it's got nothing to do with that at all, and
29:52
Speaker 1: everything to do with being better at managing.
29:54
Speaker 2: Really, yes, I think I'm just too cynical. I'm sure
29:58
Speaker 2: they're wonderful, man. I'm sure some of them are. I'm
30:01
Speaker 2: sure some of the suppose.
30:03
Speaker 1: One of the problems with the performance record of private
30:05
Speaker 1: equity is that, you know, when you talk to private
30:07
Speaker 1: equity people, they will say to you, will look at
30:09
Speaker 1: the long term performance record, you know, it's really great.
30:11
Speaker 1: But if you go back to the very beginning, so
30:13
Speaker 1: you're looking over a fifteen or a twenty year period.
30:15
Speaker 1: If you go back to fifteen years ago, this market
30:19
Speaker 1: was tiny and you had a very small number of
30:22
Speaker 1: like super intelligent and effective people working in a very
30:25
Speaker 1: small area. So that doesn't tell you anything about performance.
30:29
Speaker 1: When it's huge, vast amounts of money in every single
30:32
Speaker 1: every single mathematic graduate wanting to work in it, etcetera.
30:36
Speaker 1: It's a totally different sector now to the sector that
30:39
Speaker 1: we look at the performance of fifteen years ago.
30:42
Speaker 2: Yeah. No, absolutely, And you can tell that the bubble
30:46
Speaker 2: conditions because certainly they are sucking the best the engineers
30:51
Speaker 2: and sort of people who used to go into finance,
30:53
Speaker 2: investment banking, for example, they're all getting rich in private
30:56
Speaker 2: equity rageo. One of the big problems for private equity,
31:01
Speaker 2: like so much else is they benefited from years and
31:05
Speaker 2: years of falling bond deals and the mood music has
31:10
Speaker 2: now changed. I know bond deals might be coming down
31:12
Speaker 2: just at the moment, but if we're in a secular
31:15
Speaker 2: we're not going in my view, we're not going back
31:18
Speaker 2: to where we were. We're in a secular bear market
31:21
Speaker 2: for bonds, and if you're highly leveraged, it's going to
31:26
Speaker 2: be a major problem. And what you've seen to have
31:29
Speaker 2: is a very few number of companies at the moment
31:32
Speaker 2: related to AI which are doing very very well. But
31:35
Speaker 2: you scratch the surface, and my colleague Andrew Laptform does
31:38
Speaker 2: is for me, you remove the top not even ten
31:41
Speaker 2: percent of companies, quota companies, the top ten companies, and
31:45
Speaker 2: underneath that things are pretty crappy. And as you drill
31:49
Speaker 2: down into smaller and smaller companies, things are really really tough.
31:54
Speaker 2: And people talk about a K shape recovery within the
31:57
Speaker 2: consumer sector, within the corporate sector, it's it's it's very
32:02
Speaker 2: very There are very small amounts of winners which are
32:06
Speaker 2: out there, and so the moon music maybe for private equity,
32:11
Speaker 2: and certainly in the UK where you've got private equity
32:13
Speaker 2: taking over the vets, taking over care home nursing homes,
32:17
Speaker 2: and people just don't realize how their tentacles have spread
32:22
Speaker 2: so deeply into the into the real economy. And the
32:25
Speaker 2: UK is a really good example. If you if your
32:27
Speaker 2: vet isn't owned by private equity, you're you're doing pretty well.
32:32
Speaker 2: But it's to me, it's a real issue. I wouldn't
32:36
Speaker 2: say problem, because that's a bit pejorative. It's an issue.
32:40
Speaker 2: It's an issue we should be watching closely well. And
32:44
Speaker 2: and and as Jamie Diamond says, you never get I
32:47
Speaker 2: don't want to compare private equity to cockroaches. But but
32:51
Speaker 2: but but you never, as he said, you never just
32:54
Speaker 2: get one cockroach as these things start going bust.
32:57
Speaker 1: So we're worried about private equity, worried about inflation. We're
33:01
Speaker 1: also worried about deflation, worried about equity valuations, we're worried about.
33:07
Speaker 2: Got more lines you can see over there. I haven't
33:09
Speaker 2: got many lines here, but I'm amazed I'm not not
33:12
Speaker 2: more wrinkled.
33:14
Speaker 1: And for those of you who can't see Albert, which
33:16
Speaker 1: is all of you, he's not remotely wrinkled. And he's
33:19
Speaker 1: wearing a great seasonal shirt. And we might put a
33:22
Speaker 1: photo of Albert online photo shop.
33:27
Speaker 2: Me a bit no.
33:28
Speaker 1: So here's the question, Albert, what could go right?
33:33
Speaker 2: Well? What could go right? I suppose is the bubble
33:36
Speaker 2: just carries on for another another year. The interest rates
33:38
Speaker 2: come down, bond deals come down on cyclical basis, we
33:42
Speaker 2: go to forty times forward earnings. Some of us have
33:47
Speaker 2: seen this all before. I'll stop talking about equity bubbles
33:50
Speaker 2: and start talking about goals or my personal life as
33:56
Speaker 2: I have done in the past instead.
33:58
Speaker 1: But that's not going right, is it it? That's just
34:00
Speaker 1: going on a bit longer.
34:02
Speaker 2: Yes, I don't think there are any good options here
34:05
Speaker 2: is what's the least bad option? With you down the
34:10
Speaker 2: road for so long?
34:11
Speaker 1: What about that AI does everything everything that I had
34:16
Speaker 1: promise to do. There's a massive productivity wave throughout the
34:20
Speaker 1: Western world which brings down government spending massively, husually reduces
34:24
Speaker 1: our deficits, gradually starts releasing the debt, makes every company
34:28
Speaker 1: more productive, such that valuations are perfectly fine and everything.
34:33
Speaker 1: Everything's okay, everything's okay.
34:35
Speaker 2: Can I sell you a bridge London bridges for sale?
34:41
Speaker 1: Really no chance?
34:43
Speaker 2: Suddenly. Productivity growth in the US has been looking okay recently.
34:51
Speaker 2: What's interesting is no one has a recession on the horizon.
34:55
Speaker 2: The latest Atlanta FED numbers for the next quarter four
35:00
Speaker 2: sent GDP growth driven a.
35:01
Speaker 1: Lot by.
35:03
Speaker 2: AI investments. But when I look at I was looking
35:07
Speaker 2: at the ADP in the absence of official payroll numbers.
35:12
Speaker 2: So the biggest driver for employment is not the megacaps
35:16
Speaker 2: or the AI companies. It's it's mum and pup. It's companies,
35:20
Speaker 2: it's unquoted companies. So I was looking at and the
35:24
Speaker 2: ADP in the US divide it up into company size,
35:28
Speaker 2: and those companies with less than fifty employees comprise forty
35:34
Speaker 2: five percent of employment in the US. And employment is falling,
35:40
Speaker 2: and the latest numbers year on year is very unusual.
35:43
Speaker 2: Employment for smaller companies is falling year on year in
35:47
Speaker 2: the US. And it's not a rapid dumbdown. It has
35:50
Speaker 2: accelerated a bit, and maybe that's something to do with
35:53
Speaker 2: the immigration policies in the US, but actually has been
35:56
Speaker 2: slowing down quite rapidly for the last two three years.
36:00
Speaker 2: Large cap employment still looks okay, that's slowing. But when
36:05
Speaker 2: you have when you have the job generators in the US,
36:11
Speaker 2: small small cap companies in recession, then you think, actually,
36:18
Speaker 2: to the stock market maybe at all time highs, but
36:22
Speaker 2: actually the rug is being pulled out from underneath. So
36:26
Speaker 2: all they say in II investment is going on with
36:30
Speaker 2: this this vendor finance scheme between all of them, but
36:34
Speaker 2: actually could this be the rug? But I tend to
36:37
Speaker 2: look on the dark side, so i'd recommend I recommend
36:40
Speaker 2: all your listeners will ignore should ignore me totally. Okay,
36:44
Speaker 2: let me just background.
36:45
Speaker 1: Let me try something else on the positive side. Okay.
36:49
Speaker 1: So in the UK and particularly, one of our big
36:50
Speaker 1: problems is very expensive energy, massive drag on the economy.
36:55
Speaker 1: If we accept, which we do, that all economic activity,
36:58
Speaker 1: in fact, all activity or another is energy transformed. If
37:03
Speaker 1: we were to find a way in the UK and
37:05
Speaker 1: possibly elsewhere, to massively bring down the cost of energy, say,
37:09
Speaker 1: I don't know, beaming solar power from space to a
37:12
Speaker 1: massive mirror somewhere, something like that with some of our
37:14
Speaker 1: guests we've talked about that could be that could do
37:17
Speaker 1: things even in the UK, abandoning that zero for example,
37:20
Speaker 1: that could be a massive positive. That could be transformative,
37:23
Speaker 1: and the solar to mirror could transform the US and
37:27
Speaker 1: the rest of the world. Imagine energy being practically free.
37:30
Speaker 1: I'm really working as hard as I can here, Albert.
37:33
Speaker 2: I think that would be transformative if it happens. Certainly
37:36
Speaker 2: if the UK is an outlier. The UK has some
37:39
Speaker 2: of the highest energy costs in industrialized countries, but that's
37:43
Speaker 2: because of the ludicrous pricing mechanism we have here, which
37:48
Speaker 2: I'm sure your listeners will be aware of. Where even
37:53
Speaker 2: if ninety nine percent of the energy being generated is
37:59
Speaker 2: from low costs newbles, which is not consume it is
38:02
Speaker 2: and the gas price goes up. The average the pricing
38:08
Speaker 2: in the UK is off that marginal producer, which is
38:12
Speaker 2: usually an expensive gas generator, and so everyone has to
38:18
Speaker 2: pay that marginal price. And it's a ludicrous system. So
38:23
Speaker 2: that's one of the reasons our energy costs are so
38:25
Speaker 2: high here. And you have to break that link because
38:27
Speaker 2: what's happening is that the renewable companies are getting a massive,
38:32
Speaker 2: massive subsidy from the consumers. But there's distance in any
38:39
Speaker 2: will to break that ludicrous link here in the UK.
38:43
Speaker 2: But the UK is totally almost deindustrialized now because it's
38:49
Speaker 2: it's too late for the UK to be honest.
38:51
Speaker 1: Okay, that didn't get me anywhere either. Loving Left. In
38:54
Speaker 1: terms of encourage you to think of something possible, I.
38:57
Speaker 2: Think when you've you've been through many cycles like you
39:00
Speaker 2: and I have, you know the inevitability and the business cycle,
39:05
Speaker 2: that the one thing which which cannot be abolished is
39:10
Speaker 2: the business cycle. And apart from two or three months
39:14
Speaker 2: during the pandemic, the US hasn't seen a proper cyclical
39:20
Speaker 2: downturn since two thousand and eight. Now that is an
39:25
Speaker 2: extraordinary long economic cycle. A recession will come along and
39:32
Speaker 2: all these bubble elements will implode it. It may well
39:35
Speaker 2: be the bubble implodes and then brings the economy down
39:38
Speaker 2: into recession, and that's going to cause a lot of surprise.
39:42
Speaker 2: But we can inflate a lot further from from here.
39:45
Speaker 2: We've been doing this long enough to know anything is possible.
39:48
Speaker 1: Okay, So in the meantime, all we can do is
39:52
Speaker 1: hold precious metals and inexpensive equities to the best of
39:56
Speaker 1: our ability and wait.
39:57
Speaker 2: And if you want to ride the equity bubble, but
40:00
Speaker 2: just be very cynical about it. Don't. Don't believe the story.
40:05
Speaker 2: Momentum investing is one of the most profitable methods of investing.
40:09
Speaker 2: My colleague Andrew Latform has shown me that. But just
40:11
Speaker 2: have clear technical signals to get you out, whether it's
40:16
Speaker 2: whether it's the SMP or cutting below the two hundred
40:20
Speaker 2: day moving average or whatever it is. Don't buy into
40:23
Speaker 2: the rhetoric too much. Ride the bubble if you so wish,
40:26
Speaker 2: As George Soros says when he said, you know, whenever
40:29
Speaker 2: I see a bubble, I run towards it. But don't
40:32
Speaker 2: get consumed by the story. Be very cynical, and just
40:36
Speaker 2: have a have a level to get yourself out so
40:38
Speaker 2: you're not bankrupted when the thing turns down. So, as
40:43
Speaker 2: Chuck Prince said, you've got to keep dancing while the
40:46
Speaker 2: music's playing. But just decide how near the fire eggsit
40:50
Speaker 2: you want to be gyrating around on the dance floor.
40:53
Speaker 1: And don't be tempted to move back in front of
40:54
Speaker 1: the band.
40:57
Speaker 2: Exactly here plugs in so you can't hear the music,
41:02
Speaker 2: but just keep moving over.
41:05
Speaker 1: All right, let me ask you one last question, then,
41:07
Speaker 1: what are you reading? Came here on the train. What
41:09
Speaker 1: are you reading?
41:10
Speaker 2: I don't. I don't read very much. Actually, what I
41:14
Speaker 2: normally would do is get my colleagues to read that.
41:18
Speaker 2: You know that they do that heavily, lifting for me
41:20
Speaker 2: and read all the economics or finance books and then
41:23
Speaker 2: they just tell me what's what what?
41:24
Speaker 1: What's in it? No?
41:28
Speaker 2: I just no, no, I'm not. I generally read current events.
41:33
Speaker 2: I like reading a lot about current events. I have
41:36
Speaker 2: been reading Boris Johnson's biography, and just to balance that,
41:41
Speaker 2: I did read Gordon Brown's one before before that. So
41:44
Speaker 2: I'm very eclectic in my taste, but I'm not. I'm
41:48
Speaker 2: very lazy. I generally in the evenings what I do
41:52
Speaker 2: is basically just watch Telly. I watched rubbish on Telly
41:55
Speaker 2: and and wide. I'm so caught up with attention of
41:59
Speaker 2: financial mark archets during the day.
42:02
Speaker 1: Excited Are you so excited about the bak Off final?
42:05
Speaker 2: I've never watched bof Are you watching on the television?
42:09
Speaker 2: Even off?
42:10
Speaker 1: Even?
42:12
Speaker 2: No, No, I've been watching Ted Ted Lasso.
42:15
Speaker 1: Change in my life has been about the way those
42:18
Speaker 1: sugar dome things or broke last week.
42:20
Speaker 2: I'm not a big cook. There's someone laughing in the
42:25
Speaker 2: background here of it.
42:26
Speaker 1: It's outrageous, right, Albert, thank you, Thank you a pleasure, And.
42:32
Speaker 2: We must do this again. We mustn't wait another ten years.
42:35
Speaker 1: Can we do once a year?
42:36
Speaker 2: Maybe on air? Commitment every every every every couple of years, definitely.
42:43
Speaker 1: I'm interpreting that as too. I've got a better idea.
42:46
Speaker 1: How about we do it again straight off the crash?
42:48
Speaker 2: Absolutely next week.
42:50
Speaker 1: Then it's a deal, could be in ten days. Thank
43:04
Speaker 1: you for listening to this week Maren Talks Money. If
43:06
Speaker 1: you like our show, rate to review and subscribe wherever
43:09
Speaker 1: you listen to podcasts. Keep sending your questions or comments
43:12
Speaker 1: to Merrin Money at Bloomberg dot net. You can also
43:14
Speaker 1: follow me and John on Twitter or x I'm at
43:16
Speaker 1: MARINETSW and John is John Underscore steppek. You are on
43:20
Speaker 1: Twitter right, Albert yep? What is it?
43:22
Speaker 2: Albert Edwards? Nine to nine?
43:24
Speaker 1: There are another ninety eight?
43:27
Speaker 2: No I jumped over all the rest of them?
43:29
Speaker 1: Ah okay. This episode was hosted by Me Maren sumset
43:32
Speaker 1: where but it was produced by Samasadi and Moses and
43:35
Speaker 1: sound designed by Blake Mabels and Aaron Casper and special
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Speaker 1: thanks of course to Albert Edwards