EP15| Market Bubbles, Crypto Crashes. Why we aren’t cashing out just yet?
Summary
Market Outlook: The podcast discusses the current state of the market, emphasizing the presence of a potential bubble, with experts debating when it might burst and the implications for investors.
Cryptocurrency Volatility: Recent events in the cryptocurrency market, including a flash crash and subsequent recovery, highlight the risks and unregulated nature of crypto trading, which can lead to significant losses and market instability.
Corporate Earnings: The corporate reporting season has shown strong results from major banks and companies like Nestle and LVMH, with surprises in lower-than-expected bad debt provisions, indicating resilience in the face of economic challenges.
AI and Workforce Changes: Companies like Amazon and Goldman Sachs are cutting significant portions of their workforce, attributed to the efficiencies gained from AI, which may have long-term implications for employment and economic productivity.
Investment Strategy: The podcast emphasizes the importance of maintaining a diversified portfolio with defensive positions, such as government bonds, to protect against potential market corrections.
Behavioral Economics Insight: The guest expert highlights the role of behavioral economics in understanding market movements and the importance of observing human behavior and market psychology in investment decisions.
Economic Predictions: The discussion includes predictions about future interest rate cuts and the potential impact of AI on productivity and economic growth, with a focus on long-term positive outcomes despite current market turbulence.
Portfolio Performance: The podcast reviews the performance of their investment portfolio, noting gains in certain sectors like crypto and mining, while also discussing underperformers like the DAX and FTSE 100.
Transcript
God, this we're in the middle of a bubble. This is a nightmare. We should be getting out. In terms of a bubble, if it walks like a duck and quacks like a duck, it is a duck. To me, we are in a bubble. Bubbles inflate further and last longer than anybody expects. But at some stage, we're going to have to say time to jump out and find the exit. And yet, here they are pretty much fully invested with the lowest level of cash they've had since 2024. Look at the contradictions. There's lots of things to worry about. If there were nothing to worry about, I'd be worried. >> One of the most respected economists in the world. We consider him to be entertainment. >> I think you've just given the chairman a great excuse when that portfolio goes red. >> I was just following Stu. >> Your capital is at risk. The value of your shares, ETFs, and ETCs can fall as well as rise, which could mean getting back less than you originally put in. This content is for information purposes only and is not investment advice. Past performance is not an indication of future results. [Music] Welcome to episode 15 of The Art of Investing brought to you by IG, the global investing platform. Now, as always, I'm joined by my co-conspirators, Mr. CJ Felingham. and Mark Spice Holden. But you may notice we have a fourth member of the crew. Today I am joined by a specialist in behavioral economics, Mr. Stewie Thompson. Welcome to the pods. It's ideal timing because there has been some funny behavior in the markets this week. So before we get to the Robbie Cold Train of financial markets, let's go to the spice market update. >> Thanks Rich. Um, wow, what a week. Friday saw a flash crash in cryptocurrencies which caused the biggest one day drop in equities since April this year. Then Monday we saw the biggest daily bounce since May. Tuesday markets were marked down about 2% first thing in the morning and then they had a huge bounce off of that. Ended the day virtually unchanged. a 2% rally off the lows and by yesterday, by the close of yesterday, major equity markets are back pretty much to their all-time highs or very close to them. So, what a week. Wow. The flash crash or the crypto flash crash uh was caused on Friday by Trump launching what many more of his what are now being known as T-bombs, tariff bombs. This time he was having a go at China um and Rarus. Let's say he started a battle with them again on rare earth. A couple of days later he talked about having to go at cargo shipping that Chinese control and then yesterday they were talking about soybeans versus cooking oil. So he's throwing bombs around all over the place. But actually the equity markets have been shrugging these off actually as the week's gone on. As I say, we're back up towards alltime highs. One of the stories of the last week has been the fall in the um crypto markets. And um before I say anything about them, let's just remember two things. Firstly, they're a 24/7 market, which means they are open all the time on their exchanges, and therefore there are periods of significant illiquidity, especially over the weekends where uh bad actors can have their fun and games. Secondly, and this is a bit of a wealth warning, um this is really the wild west. So all cryptos really is for those who are prepared to lose a significant portion of their capital over time. So with that wealth warning in place, let me just talk about what happened in the crypto market. The first thing was the macro thing that Mark just talked about where the tariffs were announced by um Trump in the um evening because he didn't get his Nobel Peace Prize >> because maybe he didn't get his Nobel Peace Peace Prize for whatever reason. He does like tend to do these things on Fridays. Thank god he did it after the market closed in the UK. So at least we had a little bit of a break, but not for the people in the States. Now, I've got to use the word allegedly around here. But um there was a very big seller of what's called a whale who sold a lot of Bitcoin half an hour before the announcement. You know, some people get all the luck. Um and then after the announcement they closed it up and they made $192 million. Now the reason why those sorts of trades are done or or allegedly done in the crypto market uh is because it is a deregulated market. So there is no insider trading. There is nothing like that. Now I'm not suggesting anybody knew anything but it remarkably good trader. If that traders listening, could you come on and explain to us how you managed to do that? Number one. Secondly, and more and more relevantly, um that destabilized the crypto market. Then somebody uh came along and exploited a weakness in Binance, which is the biggest crypto exchange. So, if you think about the London Stock Exchange, you got the S&P 500 on the New York Stock Exchange, you got all these stock exchanges. Well, in crypto, there are lots and lots of different exchanges. Uh some are centralized, some are decentralized, all all are pretty much unregulated. And with if you hold a token uh you can swap that token for something else with these exchanges which you can then use to earn interest to uh lend against to borrow and to act as collateral. So for example with Binance there's a thing called BN soul BN that is a liquid staking token it's called that is equal to one token from the Salana chain. So if you are um an owner of Salana, you have a token, you can then deposit that at at at Binance, get a liquid staking token called BN Soul and then use that to generate more return. So lots of people have these holdings, they deposit them, they then go off and they do lots of this staking in in the background. Now the problem lies if the two values disagree between the soul token and the BN soul token. They should be the same because you're swapping one for the other. But of course, being a market, everybody trades everything. So, they trade the value of both. Someone came in and exploited a weakness in the Binance system and moved this BN soul price down by 80% relative >> 80% >> 80% relative to the Salana price. So suddenly you think you're holding X, you've suddenly been reduced by 80% and you can't swap it back into what you originally owned because of that valuation drop. Most importantly, they're using these things as collateral. So suddenly there's a huge collateral call. It's Friday evening. Nobody's awake. Nobody's looking at what's going on. Massive collateral call. All positions are closed out. And suddenly you come finding people who Friday afternoon thought they had, I don't know, $5 million in their account. Suddenly have got nothing because it's been collateral. All their collateral has been taken and ripped out. >> Can we just touch on what collateral is? Sorry, Chris. >> Yes. So collateral is a um asset that you use to to deposit with somebody to allow you to borrow more things or to trade more things. It's there basically saying, I guarantee you're good for your money. It's a bit like in their margin account. If you have collateral in there, they will let you do leverage trades. But if you don't or you run through your collateral levels, they will close you down and stop you out. The interesting thing is when those margin calls, as they're as they're termed, when people are asked to put up extra collateral because their value of the asset they've been investing in falls, they have to sell other assets. And that's what led to the sell off in some of the equity markets. So we saw Nasdaq fall 3 and a half% on Friday just before the close and into the close and the S&P 500 fell 2% as well. Um and that was probably people trying to gather as much money as they could as quickly as they could to try and offset some of this collateral call they were seeing undoubtedly have played an effect but also you'd have seen at 9:00 suddenly distressing one market. So you get people saying oh well maybe they'll be distressing other markets. So you it and at a time when you're just closing everything for the weekend in the regulated markets in the normal stock markets it causes a bit of panic but in the crypto markets it just keeps trading until somebody comes in and buys them. So people were buying things at levels that were completely um unheard of in terms of where they had trading day. So take Bitcoin for example. Bitcoin had hit $125,000 just a day before. It traded down to $102,000 on that Friday. If you look at all the charts, it never traded down there, but it did trade there because that's where people were transacting business. So, as I said, I go back to what I said before. This is the wild west. This is only for people who are prepared to lose most of their money. But that is what went on on Friday. Once again, a black mark for the crypto industry. once again showing that the fact it's not regulated um hurts it badly and somebody made a lot of money and a lot of people lost a lot of money >> and the contagion effect can ripple through markets 24/7 not like the stock market where traditionally we've been 5 days a week and at 1000 p.m. on a Friday night, you can go to the pub and relax. >> And and you're still seeing that effect now because if you look at what Mark said earlier, most assets have recovered back towards their highs, you know, slightly back from them, but they're still they're still up there. Bitcoin now still trades um 10% below. Ethereum, another one of the major um tokens is the same. Um and um once again, it's not a great advert for the crypto industry. Carrying on with the market review, we've we've emphasized in the last couple of weeks that without um data coming from the major US agencies because of the government shutdown and we're now into the third week of US government shutdown, the corporate reporting season which has just kicked off this week has become really important for particularly equity investors to get an idea of what's happening in the underlying economy. So we've started this week most of the major banks in America have kicked off the reporting and so far so good. they've been really really good uh and particularly because there's been quite a lot of volatility in asset markets where they make quite a lot of money. They have these investment banks unlike the British banks they have big exposures there. That's been really good. But what surprised a few people was underlying analysts were expecting to have to increase the amount of bad debts they they were providing for. So people struggling a bit with this rising unemployment we've been seeing in the US. Everyone's expecting credit card debts to start sort of rising, but actually they went down. >> Provisioning for that went down across all the major banks in the US. That was a real surprise and that's one of the reasons pretty much all of them beat expectations because they weren't having to put as many provisions away to offset these potential bad debts. Now that may change if this unemployment keeps rising in the US and or the economy slows down, but it's very worthy of of sort of note. I think the other thing that's worthy of note is we've seen both Goldman Sachs and Amazon this week announce that they're going to be cutting quite a significant amount of their workforce and that's because they are already beginning to reap the benefits of AI in their businesses. So Amazon are rumored to be looking to cut about 15% of their workforce which is huge if you think about that. They're one of the biggest employers around the world and that's you know that shows you perhaps some of the the potential long-term impacts of AI. Now, we said that that might be part of the reason we're also seeing unemployment rise in the US and Stewie no doubt will talk about that sort of side of it potentially later, but worthy of note, I think, in the reporting season. Outside of the outside of the major banks, we've had great results from other businesses. Uh Nestle in Europe today shares are up seven or eight% last time I looked. LVMH for those of you like Louis Vuitton. There they go, Rich. You got a lot of bit of Louis Vuitton Moa Hennessy for our chairman over there. Mo Hennessy, their shares are up 12% yesterday because they've had great results. And Europe's biggest company, ASML, who make the machines that make the chips that go into the AI boom that we're seeing, uh they had they had great great results and pointed out that their demand was increasing very very strongly. Uh in the UK, we haven't had many results yet. Uh but Kroger Specialty Chemicals Company um that's been hit by tariffs had a bit of a profit warning. But interestingly, and this is where an equity investor observes these sort of things, their shares went up rather than down. They're up about 3%. When even though they did warn that things were tough now, that is a good sign that some of these expectations about the tariff impact etc. are well and truly baked into numbers and that's positive. >> But we're completely ignoring the fact that Whitbread have a profit war this morning. Stocks down 10% on UK hotels. >> I haven't been to Cost forget the bad news. So, so I I just want to say one thing just just to point just to point to some of these in inherent contexts. I'm sure not being an equity guy, I I I don't get it. But the banks are going up on the fact they're writing back in the monies they said they were assuming were going to be lost in credit cards. So, they're saying things are better than they were. Amazon and Goldman are saying they're cutting staff. So, the market says we're going to get more rate cuts because things are worse than they are. Can someone explain to me how that circle squares? But except it's a bull market. >> Goldman and Amazon are cutting because of the benefits of AI, the all the investment they've been putting in. >> And there have been many contradictions this week. So, it'll be really interesting to see where our portfolio sits. Because on a Friday evening, I started to think, "Oh my goodness, we've we've hit our all-time peak. That's it. We're never going to see the same again this year." >> As you put on our chat, Sorry, I said I said I wasn't going to talk about that. Sorry. >> So, how is it looking? Well, of course, the VANC crypto and blockchain innovators ETF is our best performer, up 4.4% on the week. As you see, we dropped the waiting down to 2 and a half% last week. Then we've got gold now 5% holding all-time highs. Now, that might not be the case by the time you're actually listening or watching to this podcast. It might be 5% higher. It might be 5% lower because the safe haven is uh acting very much like a volatile asset. But for now, we can clock in a 4% gain there. And then our good old world mining trust gent a fantastic decision to go up to 10% last week as that is up another 3 12%. Now its performance isn't quite as good as that, but of course we make our changes at the close after the podcast comes out. So, we've benefited from buying 5% at lower prices and therefore our profit on the week is three and a half%. What about the underperformers? Well, it is that DAX again, our worst performer in the portfolio that we've had since inception. DAX down 1.2% and relatively flat since we bought it 9 weeks ago. And then the Footsie 100 was also down 1.2% on the week. and then the S&P and NASDAQ as well. So you, as you can see, equity markets as a whole underperformers on the week, but a little bit of alpha coming through in the portfolio choices. So that leaves us up half a percent for this week, which gives a total return since inception of 8.8%. Chairman, what do you think? Well, I'm I mean I'm remarkably um remarkably impressed with our timing on Friday to have uh to have managed to buy these things after a big sell-off caused by the crypto which of course we knew was coming. Um, no, >> the whale. You know, in in in all honesty, I think we need to probably have a slightly longer conversation here, uh, with regard to our portfolio. Um, and thinking about some of those sharp moves on Friday, >> especially because we've got an actual expert in >> Well, we have, and we'll be able to ask him in, you know, for for for his thoughts, but also because there's an enormous noise in Ferrari emanating through the press about this being a bubble. everywhere I read now this is a bubble and uh whether you believe it or not everybody wants to talk about it. So let's just have a consideration some of the people who have been saying things. So this week we've had Jamie Diamond the head of JP Morgan and Cityroup's Jane Fraser who runs Croup both warning about the frothiness in valuations. A lady called Cristina Georgie Ava who I must say I've never heard of before. Um, and but but not talk about her being my usual opinion of economists, not not what we've got Stuart here to talk about, but she's a manager manager director at the IMF, the International Monetary Fund, who says stock valuations resemble those prior to the internet bubble. We had Mark Rowan, a more impressive guy at Apollo Global Management. We talked about Apollo last week with private debt. You know, when I had my little rant about private debt, there'll be more of those to come. He's talking about an erosion in lending standards in private debt markets. Now what that means is that when um there's lots of uh money and not many people want to borrow it um you uh are able to um move around the covenants which you lend to. So there might be you can't borrow more than X, you can't borrow more than Y, you must do 5 years or 10 years or 50 years. What's happening is people are are softening up all these covenants because there's so much money trying to buy private debt that the the people who want to issue it can issue it at the terms they want extremely attractive terms which is why the banks aren't really doing it. It's these private debt funds. So that's Mark Rowan. Then you know remember last week we talked about first brands going bust that's cost Jeffrey $700 million UBS $500 million and um one called which um Jamie Diamond talked about this week where um they lost $170 million and as he said not our finest hour but there's more. Ray Dallio, one of the most successful investors of all time um founder of Bridgewwater Associates is warning about the bubblelike valuations. You've got Howard Marx from Oak Tree Capital Market, a very famous US investor, warding as well. Perhaps most famous of all, Michael Bur. Now, people ask who Michael Bur was. Uh he was the star of the film The Big Short. He was the guy who called the housing collapse. Called the fact that the mortgage back securities were worthless. Spent a year and a half trying to keep his job because he was too early. And that's an important point to think about here. In the end, he was right and made billions. Um, so all these people are saying the market is toppy >> and Bur has also been christristened. Cassandra like you two have christened me. >> Oh, right. Okay. Yes, of course. Thank you. Who are we to disagree with with these experts? I mean, after all, we're we're just a a group of fund managers who've been working the markets for 40 years. So, the point that I want to make is that the key point is not are we in a bubble or not. I think there's plenty of evidence in many things that there are bubble-like tendencies going on. As always, the question is when is it going to burst? And that's what I think we would just want to spend a few minutes just talking about now. Um, there are so many people talking about a bubble that makes me think we're probably not quite there yet. It's a bit like being in the car. Are we there yet? No. Are we there yet? Well, it there's so many people shouting about it. I think we're probably not quite there, but I suspect it means we're in the seventh innings of a baseball match. Now, for those who don't understand baseball, there are nine innings in a baseball match. And so, you go all the way through. So, we're getting close to the end. >> We're in the 80th minute of >> But we're But we in the football match, we're in the 80th minute. The last vestigages of a bubble are when the gains get exponential. Now, we're starting to see that in some places, but not broadly across the piece. Now, two expressions I want or two two things I want people to remember. First of all, we need to remember that if we hold on for too long, it's going to be messy. So, we've got to get out at some stage. We've got to, if we think we're in a bubble, suddenly raise our cash levels more. And we understand that, but we've got to think about that. But there are two expressions in the city which I wanted to mention here. One is don't be a dick for a tick. And what that basically means is it, you know, don't try and be too cute about this stuff because you might miss it by trying to get that last one or 2%. So we got to remember that in our mind. We are dealing on a weekly basis in this podcast. So we need to think about that. And the other one of my favorites which is the city knows the price of everything and the value of nothing. I.e. people who trade all the day looking at prices all the time don't step back enough and say God is we're in the middle of a bubble. This is a nightmare. We should be getting out. So yes, we need to be timing ourselves. Yes, we need to understand it's going to go exponential. But at some stage we're going to have to say time to jump out and find the exit. Now when I look at things I see us having some defensive positions already. We got our 15% in the naugh to 5year guilts. We still have interest rate cuts likely to this week. Jerome Powell talked about more interest rate cuts coming in the states which Mark's been talking about for some time and these interest rate cuts that are are priced into the market. We've still got another four or five priced in to go and therefore the surroundings to me still look as though there is more room to the upside. The one sign that I'm going to be looking for are bond markets. Bond markets remaining very well controlled. The front ends, the bit that responds to interest rates, we've talked about this before. They are performing very nicely. Interest rates are going to be cut. What does that do to bond prices? They go up. Thank you very much. For those who weren't watching, they were pointing upwards. Thank you very much. So, until I see the bond market start to sell off more than longer dated bonds, I'm going to say, "Well, hold on a minute. The bond market's telling you there's lots of liquidity. There's going to be more liquidity with with with with rate cuts. Where does that liquidity go? It goes into markets. So, there's more um so so there's more pressure on the upside. So, I think there's more pressure on the upside. We're in the late stages, but I think we're still safe to with the positions we've got. And we can see from our performance this week that that has worked. Last thing I want to say, old poker expression, if you're playing poker, look around wondering who the idiot is. It's probably you. I hope I'm not the dick for the tick. Well, I would like to introduce another couple of terms. One we've already spoken about. It was Alan Greenspan's description of the market in 1997, long before the dotcom bubble burst and that was irrational exuberance. Now, we've covered that already and we decided, no, we're in rational exuberance at the moment. So, today I'm going to take you back to 1929 and the UK chancellor of the time was a gentleman called Philip Snowden. Philip Snowden looked at Wall Street and he said we are in an orgy of speculation here and that was forecasting the subsequent 1929 crash that the markets didn't recover until 1956 where they were in that orgy. So I'm concerned that the term bubble gets thrown around and it's a very overused term and we used it here but it doesn't necessarily mean that the markets are are going to crash that there's four areas that I'm particularly worried about and they are not AI itself but AI capex spend capex being capital expenditure building the factories building the chips and that is regarding this open AI ventures and circles that we've seen with all investing >> data centers things like that >> very much data centers so we've got 2 and a half% exposure to that then we've got um quantum computing which is absurd hopefully we have no exposure to that we've got um robots robotics I don't think we've really got much exposure there and then the fourth one is nuclear power now of course that's another offshoot of AI because we're looking to use nuclear to then energize the the data centers. So, I'm mostly relaxed because of the diversification that we've got and we've started moving into more things like mining into emerging markets um Russell 2000 and we have only got 15% in those S&P NASDAQ and then the 2 and a half% in uh VANIC crypto. Is gold part of the orgy of speculation? It certainly feels that way for now, but um again with the way things are going in the politics circles, then I'm not sure it's the worst place to be. So that's where I would be. So I'm summing up you saying that you've got some nervousness around the edges, but you looking at the portfolio and our spread between equities and then mining and you know between the fragile assets and the non frag fragile assets we've talked about before gives you comfort with that position for the moment. >> Exactly. comfort. And if anything, I would be taking the S&P 500 down to half the position and getting rid of an that would be I'd be absolutely sleeping like a baby. Look like your own pension then. >> I' I've got many years to to look after my P more than you have. So, >> so Rich, you'll be glad to know you're in good company because not me, but Meil Lynch, the Bank of America do a survey each month of the professional fund managers out there. and we had one of those out this week. Really interesting because there's quite a lot of contradictions in there. So, equity valuations within a portfolio uh have basically hit an eightmonth high and that's not too surprising, I suppose, given that equity markets are towards their all-time highs and that includes people allocating to it like we did. You know, we put some money into the Russell 2000, put some money in emerging markets, took it out of cash. That's the same sort of thing as other asset managers have been doing. So cash levels for the average farmer is just down to 3.8%. That's the lowest since the end of 2024. So that's it's well over, you know, nearly a year now. Uh that's the lowest level it's been for two year. Uh bond exposure. So some of the protection that people normally buy when they're worried about markets being too high is at its lowest level since 2022. >> That's interesting. >> So you know, very low level. And we're not positive on bonds. You know, we've obviously talked about this before. Now growth optimism is where it seems to have changed. People have become more optimistic on the outlook for the US economy in particular over the next 12 to 18 months. Whereas if you went back a month or three people worried about the prospect of potentially a recession. So that that that fear has eased and obviously Stu will be able to talk about that perhaps in a minute. And inflation worries uh has also sort of diminished a bit although there are people worried that there is some tail risk coming in in that side. But the big concerns lie around, as you say, the valuation in AI stocks. 54% of the people believe AI stocks are already in a bubble. That's what they believe. And a record number of 60% of them are saying that global equities are overvalued. And yet here they are pretty much fully invested with the lowest level of cash they've had since 2024. Look at the contradictions. Now, you know, you remember this, Cydia, you will say this all the time. There's lots of things to worry about. If there were nothing to worry about, I'd be worried. But there's always something to worry about. And yes, this is just one of them. >> Our listeners know we're taking a fairly high risk approach in our portfolio. We've got some good stocks. We've performed well up till now. And they're probably sitting at home thinking, well, when should I be selling things? When I when should I be getting worried that every time they look at a newspaper, it's saying or or well, people sorry, people don't look at newspapers anymore, do they? So every time they look at their screen, it says terrible budget coming, terrible this coming, everything's in a bubble, the world's in a terrible place, Trump is awful, blah blah blah. And they're they're looking and they're going, "How the hell are markets doing what they're doing here?" So the thing I'm trying to reach for is what's going to be the trigger for you, Mark, as the as the real rampant bull amongst us. What's going to be your trigger for saying, do you know what? Even I'm now thinking we should be raising more cash quite rapidly. I think there are two things that can happen. One is you see an absolutely stupid deal of some sort. Now we are seeing some of these circular deals that are worrying and I said that last week. I was I am concerned. That's my biggest concern these circular deals. But I explained that I thought part of the reason for that is that maybe companies think their equity is too expensive which is why they're using this cash or they think that they have to get a move on get involved in this AI revolution otherwise they're going to be left behind. you know, I've considered it and I think that is more the reason that they are doing all these deals as quickly as they can and the Americans are leading the way and that they want to be the world leaders in AI and its application and I'm sure that's there. Uh the other thing is if a central bank makes a mistake and by mistake I mean that they rather than cut interest rates or keep them the same they start putting them up. The minute you see that, I think that would be a policy mistake. Um, and therefore that could well be the point where markets turn heavily and that can include not cutting when you expect cutting. >> So we got five priced in at the moment. So if suddenly Pal came out, sorry, Jerome Pal, the head of the the Federal Reserve in the States, came out and said, you know, I'm going to cut once more, which is what he's just said or maybe I'm going to a couple of times, but then I think that we would then be at a neutral rate and we don't need to cut anymore until we see a lot more evidence. Would that be enough for you to go, "Oh my gosh, everyone's expecting five cuts. That's only two on top of these valuations. Watch out." >> I I don't think so. I think if they put it rates up >> is actually so this actually happened in 1999. Remember the Fed actually put rates up to try and control the exuberance that was going on in the internet market >> in 2008 as well with the budness bank remember not the bank the ECB. >> So there you go. You got two perfect examples where central banks have moved against the tide or tried to control the enthusiasm. It may not have happened on that date one day but it certainly eventually happened. And so in 1999, if end of 1999, the Fed put rates up and by March 2000, the internet bubble was over. Grow your portfolio with IG. Invest £50 with IG and get a free shared bundle worth between4 and £200. Make your first investment into an ISA general investment account or sit by the 31st of October and benefit from commissionfree investing as well as 4% variable interest on your cash. Other fees may apply. Terms and conditions found in the show notes or on ig.com/uk. Kickstart your investing journey with IG today. Well, this almost sounds like an economics debate to me. So, if only we had a specialist uh expert. >> Let me see if I ring anybody. >> Economics. >> Stewie. I introduced you at the start as a behavioral economist. Take us through exactly how the behavioral part differentiates you from your associates. >> It means I'm not excited by models. It means I'm more excited by what people do um rather than how the spreadsheet works. So for me a behavioral economist asks the question why why is the consumer going to increase his expenditure? Why are businesses going to increase investment? And that is that leads to what is the consensus doing? Because once the consensus is formed, it doesn't remain stable. It has to change. And in terms of economic strategy, what you want to determine is where that consensus is going to go in order to make money in the portfolio. So it brings a lot of human behavioral psychology into it as well. >> Absolutely. Economics is the base for all life. Um but it's it is run by humans >> and that's why I went with the financial markets own Robbie Col Train. Of course, back to a little nod to that great program Cracker back in the day. you you like to look at all the clues around you and rather than just build the model, actually look at what um what consumers are may well do in the future. >> Yeah. You got to see the wood for the trees. >> You've been listening very patiently to us, wittering on. What's come up in the conversation so far? And and what do you think? >> Well, my first question is, has Spice ever seen a rate hike that he actually likes? In terms of a bubble, look, if it walks like a duck and quacks like a duck, it is a duck. To me, we are in a bubble. But I would also uh give the recommendation of the one of the greatest economists of all time, John Maynard Gaines, who said that uh bubbles inflate further and last longer than anybody expects. And I agree with Chris, it's always the bond market that uh is the canary in the coal mine because government bonds, they're at the base of the investment tree. And when government bond yields start to rise, when there is competition for capital, that's draws money away from the other markets. Stu, it's probably worth explaining what competition for capital is because we've worked together before and you know this is something that is ingrained in myself and and Chris now because you've talked about it a lot. >> He never took any notes from you then. >> No, no, but I think for the for our listeners, it's a really interesting concept actually. what we mean by competition for capital that is um where you've got rising bond yields investors say oh look you know I can get 5% um you know for my pension from a government bond that'll do me uh that is enough for my portfolio now clearly where rates are at the moment where they see the liquidity where markets uh risk markets are rising rapidly we're we're not seeing that competition per. But there comes a point in the markets when rising bond yields triggers and very often what happens is that the central bank having eased policy recognizes it's made a mistake and reverses that. We're talking about uh potential Fed, Bank of England uh rate cuts in the next few months, but the markets are doing well. Liquidity is plentiful. um you know they're taking insurance against slower economic activity. They're taking insurance against uh volatility. But that can be a mistake. And what happens when they you know they they add more um alcohol to the punch bowl then >> what's wrong with that? >> Well, the role of the central bank is to take it away just when the party gets going. Now clearly they haven't done that. The party is in full swing. So at some point in the future the central banks are going to take fright about the liquidity that they've created about the froth in the markets. And it's that reversal and the increase in bond yields that it creates that triggers what we call the competition for capital um and triggers the market correction. What's going to happen in 12 months time when when we see many more of these stories of Amazon and Goldman's cutting labor force? So unemployment is going to be 5% and above, but inflation's going to be 4% and above. So, so they've got that two-way pool because they've got two targets. Which one do they decide to go with? Stagflation is central bank's ultimate nightmare. Um, and very often uh central banks will be tempted to uh support the economy. But his theory tells us if we let inflation rip, it's much worse. So ultimately the central bank has to focus on inflation and that's when it has to start tightening policy. And and if I was to come in there Stu and I I totally agree with what you say there. I think it's the bond market that that that's going to tell you when this is over. Remember the central bank's last um experience of inflation was not comfortable. They were saying this is going to be temporary inflation in 21. They said that, you know, inflation's up a little bit, which isn't going to come down. Of course, inflation then went roaring. This helps me in my view, which is, as you know, that we are going to get some rate cuts, but we're not going to get five of them because when I look around markets, I totally agree with you. There's clearly loads of liquidity around, otherwise they wouldn't be trading all-time highs in everything. There's masses of of liquidity around. And you know, it that doesn't strike me then as a reason why you are cutting rates. In fact, I would go further. I would say the only reason to cut rates is if the central bankers believe the AI story is going to make a lot of people unemployed. If they're wrong, they're going to have a real problem here. So once but once again, the bond market will tell you. The bond market will you will see the bond market start moving first. We've we've discussed the bond market a lot in these um pods and and one of the things that we we know throughout our life is the bond market sees it first. That's where you will see if upward pressure starts on yields at the long end of maturity spectrum and you start seeing that come through that's when the equity market I think will have a a glance. >> Do you not think that we've seen a lot of people worry about the impact of tariffs on inflation? That's where Rich gets to his 4% inflation. He thinks the tariffs but every central banker that I've been listening to or talked to think this is a transient sort of period and that will drop out. So by this time next year, the tariff effect will have gone. Now on the on the flip side, you've got benefits potentially of AI improving productivity, improving efficiency, and that should help inflation come down. But more importantly, in the background in for the world as a whole on inflation fried, you've got China who have deflation and they're basically trying to export that deflation or they they they can't sell as much to the Americas they want to. So they cut their prices and they sell them to the Europeans or the UK or Japan or wherever they do. So, China busy exporting all of their deflation, all their goods at a cheaper price than they really should do. And that is helping dampen inflation elsewhere in the world. And I I read somewhere this week that one of the ECB members is even talking about worrying that they're going to go below their 2% inflation target, which means that they may they may have to cut rates again. And they're already saying they're on pause. And they're beginning to in the back of their minds worry about deflation. that and that's really interesting for me because this is such an early stage of things like the China export of deflation and potentially the impact of AI. >> Yeah, I think that's really important. Uh China's exporter of deflation and I agree with um the speculation that China's uh playing hard ball with um rare earths is because its exporters are really struggling with margins are getting squeezed um and that's causing the global deflation. Um, central bankers can be a bit nerdy about tariffs because to them inflation is the continual rise in prices whereas tariffs theoretically uh ex Trump are oneoff but it's the feed through of those tariffs. We're not seeing the tariffs feed through all at once as a central bank would say a one-off. It's been fed through gradually and that's having an impact. We're not going to see um from the tariffs a big spike in US inflation, but what we're going to see is a gradual ticking up. And for me, it's not that uh you know, we're going to 5 6% in inflation in the states, but we're going to rem remain above 3% of that 3 to 4%. We're going to remain in a very uncomfortable state for the Fed. And at some point in, you know, the next 12 to 24 months, the Fed is going to have to respond to that level of discomfort. And it may well be that they'll wait to see how the economy progresses because we've got obviously the big beautiful um budget. But at the same time in the states I would argue for another factor which is I think what the Fed is taking into account and this is CO as a spectre at the feast because everywhere else in the world has followed the pattern post pandemic of rising savings. So in the UK, a country which is not known for its thrift these days for in Scotland of course. >> No it's two against one now. So just watch yourself Mr. Felum. Right. I think we've just given you a wonderful introduction to why economics is relevant because we've just been speaking about it for the past 15 minutes. So that almost covers our first question. But CJ, do you want to introduce properly your uh your good friend for the last 15 years, the both of you have have known with him and and worked with him and then get stuck into these questions on what's the point in economists? >> Stuart Thompson here um has been a colleague of mine for the last 20 years and Marks as well. Um and Stuart is a particular type of economist. Um he's a useful one. >> Yeah. And so um a rare bridge I'm just I'm just warming up now. But before I say anymore, Stu, just give us a flavor for your background. Where did you start and why did you want to be an economist? Well, before I worked with these two geniuses, uh I worked uh in both investment banking and in investment management. So within investment banking, I worked for US, French and Japanese investment banks. When I came over to the buy side, I worked for Ignis uh where I met these two. I worked for Standard Life and I worked for Manu Life. Getting into economics itself uh was really a Eureka moment for me. I wasn't always the best studier. So, my exams didn't go according to plan. I didn't get into the university I wanted to go to. I study what? >> Uh to study uh production engineering and accounts. Actually, I've always been an interesting person. Yes. Well, I kind of rose above that, but I was in a deep funk when I was sitting in the armchair reading the university course guide and uh I came across economics and it was truly um life-changing that moment. Um I found my career soulmate and I went off to Edma University. I did economics um with a quirk. So I sat in the marketing um courses and did consumer behavior uh from the people who have to make money out of it rather than economists who make graphs out of it. And that consumer behavior analysis informed investor analysis. informed why economies move and what economics does uh for the city is you know to analyze inflation to analyze growth as an input into forecasting what the government's going to do in the budget and what the central bank is going to do with monetary policy. So why Stu does everybody need an economist? Why do you we find that every investment bank, every fund management group, every business group, most parts of government, you know, the treasury, the bank of England, etc., etc. Why do they all need economist? I mean, surely you're all studying the same stuff. I mean, how how how many views can there be? Uh, well, if you listen to the great George Barard Shaw, he will tell you that if you lay all economists end to end, you'll never reach a conclusion. Um but let me tell you a story about Wayne Angel wonderfully named economist. So after the.com bust an investor in the states sued uh one of the major investment banks there company called Bear Sterns and he sued because he'd followed Wayne Angel's forecasts and lost money. The head of Bear Sterns stood up in court and said, "Wayne Angel, former governor of the Federal Reserve, professor of economics and one of the most respected economists in the world. We consider him to be entertainment." In other words, we expect him to write weekly reports to send out to clients to generate business. >> I think you've just given the chairman a great excuse when that portfolio goes red. >> Yeah. Yeah. Yeah, probably. I was I was I was just following Stu >> Entertainment only, >> you know. So, you've got um economists, you know, at the central bank um which are obviously influenced by the politicians. You've got economists at um the IMF you mentioned earlier, uh the International Monetary Fund, um their forecasts have to be in agreement with governments. So, there's politics there. So there's a lot of politics in how economists work. >> You know, that's that's great to hear, but isn't that just an excuse? You know, when people get it wrong, they say, "It wasn't me, Governor. You know, I I was being lent on by somebody to have you the chair." Sorry. And and and and to me, the problem with economists is they fit into my normal view of um of economic commentators. I I used to have a boss at Mercury. He was brilliant. He was a bond market legend. and he had an expression that if you don't have a position, we shouldn't listen to your view. And what he was basically saying was if you're not experiencing the, you know, the gut-wrenching disappointment when things go wrong or the over the joy when things are working, you can't really judge what your view is on anything because you've got to face the conclusions of what you're saying as as the as that investor. Whereas an economist can just say, I think this and he's wrong and who cares and he says that. Who's wrong? It doesn't matter. >> My forecast said this. >> Yeah, my forecast was this. I thought that was going to happen. I was completely wrong. But hey, never mind. Now, it's a perfect example of that. Perfect example. And I've got many, but I'm only going to do one because otherwise the yellow and the red guard's going to come out. And we talked about it earlier, the um non-existent recession in 2022 and reaction after CO. So after COVID, everybody cuts rates. We do lots of QE and all that sort of stuff. Money supply picks up, inflation picks up. Every economist, well, not not perhaps not used, Ste you, but most economists say it's temporary. This is not a problem. We carry on feeding the animal. That's the bull market. Mark's getting happier and happier. Inflation's picking up, but nobody's doing anything about it. Suddenly, inflation's 10, 12%. >> And the Feds say, "Oh, oh, we got that one wrong. We better raise rates." So, they got it wrong, first of all, saying it was temporary. Then the US, the UK, Europe, we all raise rates. And every economist then says it's going to be a recession. 22 is going to be awful. It's going to be a recession. Everything's going to collapse. They were completely wrong with that as well. Now, if I if I back those judgments as a fund manager, I lost my job. Most of those economists are still walking around telling me what's going to happen this year and next year. So, tell me tell me what I'm missing. Why why is it that they have been so successful in generating salaries and and reputations when in fact most of them have got it wrong? Well, look, economists are a special breed. >> Say what you really mean. >> Yeah, we we are a special breed, but we're not born with perfect foresight. Um we don't have crystal balls, that's for sure. I think one of the problems in economics if you're thinking about the central banks uh making their uh forecasts is that if it's not in their model then they can't see it. Um and what happened after the pandemic with that inflation with the supply chain disruption wasn't in their model. >> Well, Russia invaded Ukraine and the oil price doubled and that that gave the inflation boost that you're talking about really. So to be fair to the economist that was a that was that wasn't something you could forecast is it? It's not something you could forecast. >> And as I say you know um economists um aren't always say what they mean. Let me give you an example. When I worked for um Japanese investment bank, I was working for Nickel uh one of the major uh investment securities houses in Japan during the 1990s. The Japanese government u lent upon those securities houses in Japan. They weren't allowed to say uh negative things about the economy. The economy was in a balance sheet recession. And by what I mean by that is the assets had fallen in value below the level of debts and companies balance sheets were paralyzed. Now I was working out of London analyzing the Japanese economy for our clients. And I was able to say, "Look, the economy is in trouble. Bank of Japan will have to keep cutting interest rates." My colleagues in Tokyo weren't allowed to say that, but they were pleased that I was able to say that because that was what economists really felt about it. But people who believed uh from the Japanese government and from um those Japanese securities houses, you know, got it wrong. That was actually the fatal mistake of Nick Leon. >> So, do we really have to think about an economist in terms of where they're working and the biases they're going to come up with before we listen to what they have to say? >> Absolutely. Now, where I think you've done brilliantly um and um I would say this having offered you jobs in many different places and enjoy working with you the whole time is that you've turned into a investment strategist economist. So you've very much thought about I want to give advice that people can take actions on and I want to be therefore um held responsible if so for my forecasts rather than um the um a forementioned body of economists in the rest of the world. So you've done very very very well at that and and we've got a a perfect opportunity for you to show us and tell us what you think because we have a portfolio. But you you were sitting here hearing what we were saying about where we think we are with our portfolio construction. Is there anything that you look at with our portfolio and you say given my understanding what I think's going on in the world, I might do something a bit differently or change anything. >> Well, with my Scottish economists um general misery, I would uh >> there's two of them now. I I would I would worry I'm Welsh. >> I'm staying out of it. >> Uh I would worry about the future. I would worry about that point at which um the central banks realize they've gone too far. Um they've spiked the punk bowl too much. And so it's not for now, but I would look for some soft protection. you know, I would be looking at uh, you know, buying some out of the money puts as a means of protecting your downside. >> For everybody at home that that doesn't know what a put is or the the options market, it's a bit like buying your car insurance. >> Yes. >> In case one day in the future, you have a bit of a prang like I once did in the Aston Martin on the way to work at 6:00 in the morning just approaching Tower Bridge. had to stand there for uh 25 minutes as all my colleagues from work drove past giving me what I think was a little bit of a wave. So, the options market, it's like buying car insurance. And what you're suggesting is it would be really nice just to to give up a little bit of our performance, our gains so far to protect oursel maybe 3% lower if the market was to sell off. >> Yeah. Yeah, I mean the aim of this portfolio uh is to make uh a target return. It's uh you don't you know it's not to become billionaires. So it's you're not pushing the risk. You don't want to push the risk too far and by taking some soft protection uh you help protect the downside. >> So in this portfolio we can't really buy puts or because a lot of we want people to be able to put this in their pension fund or their their ISIS and their sips. So there are other assets that give you that sort of protection potentially. There are obviously government bonds. So first of all that that would be a traditionalist thought of how you would buy protection for when equity markets sell off, bond markets should rally and prices go up and yields go down. That would be a traditional way of doing it. And we we have to be you know we have got quite a lot of what we call antifragile assets in our portfolio which is gold and copper and uh we've we put the crypto blockchain in there because we thought that would act as it and it's acting for different ways but it's been more like the best equity you've ever bought. Um and we've got some cash and short dated bonds. How would you do it given our the constraints on what we could probably buy >> given the available assets that you're able to invest in? I would look to increase the guilt share. Um, wait until after the budget because we want to see what Rachel Reeves says. Um, but after that, we'd expect to see the Bank of England uh lower interest rates. So, increasing the share of guilts in the not to 5year area benefits from these lower interest rates, but also acts as soft protection against any market correction. Where do you take that money from? I would tend to slice down the NASDAQ and the S&P because these are the markets that have done the best. >> Now, that sounds surprisingly like another Scotsman on the panel that is uh >> two grizzlies wondering. But if we go back, we mentioned Michael Bur earlier on. I'm fascinated having heard your thoughts here. I wonder tell me how did how did you get on around 2008? Were you working with these gents then? Did they put you under pressure to make decisions as well like they just have? >> Fortunately, not. Back in 2007, uh I read a report about uh new uh innovations in the credit market. They were coming up with new products which didn't make sense and it felt like a a massive bubble. So, we looked into where base rates could go in a collapse in a bubble. And in February uh 2008, we forecast that base rates would reach half a percent by the end of the year. >> What were they at at that point? >> They were around five and a quarter, I think. So, we went bullish, which means when you say you went bullish bonds, just for our listeners, you bought exposure to the bond market because when yields fall, what do prices do? >> They go up. >> Thank you. So we increased our exposure to government bonds. That proved to be a slight disappointment because a couple of months later the Federal Reserve organized a bailout of the aforementioned bare sterns by JP Morgan. The market believed that the problems were over and so equity markets rallied. Uh bond markets fell but we held our nerve. Fortunately, we didn't have the chairman uh to oversee our portfolio and we held our nerves. We had many likeminded uh we looked into like-minded people. There was a great economist at unmentionable US investment bank uh who was also predicting this. Indeed, by the end of the year, he was told if he ever got it so right again, he'd be sacked. Uh we also uh I remember going to a conference organized by the infamous Lehman Brothers and they gave their analysis and uh as we walked out of it I turned to my friend and head of rates Russ Oxley and said if they're right and I believe they are we have just heard the most elegant suicide note in history. >> Was it Dick Foo or was it their chief economist? It was their economists. It was their strategists. Uh we had all the senior people there and they were this is going to be a problem but we are going to survive and >> which they didn't. >> Clearly history proved them wrong. But uh yes we uh made a lot of money that year for our clients. Sounds a great story. I mean to go from five and a quarter to to to half a percent rate and predict that unprecedent situation and I have to say we weren't working together at the time because if we had have done then I might have made a lot more money that year >> but that's another story for another day. Obviously we've covered most areas now Stu. Um obviously talking point for everyone and week in week out we talk about it on this podcast is the AI revolution. So do you believe it's real? uh um do you believe some of the impacts that are being talked about at the edges like this rise in youth unemployment but potentially the offset of big productivity etc and a and a sec second industrial revolution if you like do you believe that's real and how would an economist view it yes I believe it's real um and I'm also a great believer in long economic cycles so I think for this decade unfortunately we are living in turbulent times or as the Chinese might say, may you live in interesting times. These are very interesting times, but they lead to much better times. And I think uh it's important to see beyond this turbulence to see what happens to the global economy when all these technologies feed through. Now, that's more likely to be the 2030s than the 2020s, but it will be very good for the global economy. And when you say it's good, is that in productivity, profitability, employment? How how how does an economist think what do you think is good? >> So it's about productivity because productivity is uh what matters to people because that's what drives real incomes and with real incomes uh growing in the next decade um that disperses into new forms of employment. And so that absorbs the workers who are displaced by this new technology and we have a much better uh standard of living um way of living and yes I'm very optimistic but we still have to get through the rest of this decade. Um and when we have new technology when you have revolutions in communication uh technology you do find turbulence. That's the history um of the world part 570. Stu, that's been fantastic. Thank you so much for coming along today uh sharing your wisdoms with us. I hope it hasn't been too much of a traumatic experience to bring back the old asset allocation meetings. I hope you're not going to have to go and have a lie down somewhere. Um but it's been really great and thank you very much. So, I think you'll agree that's been a wonderful week deep diving into economics and the background of what we discuss every single week. If you have some questions on this episode in particular, gentlemen, where should the viewers write into >> the art of investing.com? >> Thank you very much for viewing and if you've enjoyed it, please give us a like, a subscribe, and tell your friends about it. We'll be back next week. We look forward to seeing you then on Friday. [Music]
EP15| Market Bubbles, Crypto Crashes. Why we aren’t cashing out just yet?
Summary
Transcript
God, this we're in the middle of a bubble. This is a nightmare. We should be getting out. In terms of a bubble, if it walks like a duck and quacks like a duck, it is a duck. To me, we are in a bubble. Bubbles inflate further and last longer than anybody expects. But at some stage, we're going to have to say time to jump out and find the exit. And yet, here they are pretty much fully invested with the lowest level of cash they've had since 2024. Look at the contradictions. There's lots of things to worry about. If there were nothing to worry about, I'd be worried. >> One of the most respected economists in the world. We consider him to be entertainment. >> I think you've just given the chairman a great excuse when that portfolio goes red. >> I was just following Stu. >> Your capital is at risk. The value of your shares, ETFs, and ETCs can fall as well as rise, which could mean getting back less than you originally put in. This content is for information purposes only and is not investment advice. Past performance is not an indication of future results. [Music] Welcome to episode 15 of The Art of Investing brought to you by IG, the global investing platform. Now, as always, I'm joined by my co-conspirators, Mr. CJ Felingham. and Mark Spice Holden. But you may notice we have a fourth member of the crew. Today I am joined by a specialist in behavioral economics, Mr. Stewie Thompson. Welcome to the pods. It's ideal timing because there has been some funny behavior in the markets this week. So before we get to the Robbie Cold Train of financial markets, let's go to the spice market update. >> Thanks Rich. Um, wow, what a week. Friday saw a flash crash in cryptocurrencies which caused the biggest one day drop in equities since April this year. Then Monday we saw the biggest daily bounce since May. Tuesday markets were marked down about 2% first thing in the morning and then they had a huge bounce off of that. Ended the day virtually unchanged. a 2% rally off the lows and by yesterday, by the close of yesterday, major equity markets are back pretty much to their all-time highs or very close to them. So, what a week. Wow. The flash crash or the crypto flash crash uh was caused on Friday by Trump launching what many more of his what are now being known as T-bombs, tariff bombs. This time he was having a go at China um and Rarus. Let's say he started a battle with them again on rare earth. A couple of days later he talked about having to go at cargo shipping that Chinese control and then yesterday they were talking about soybeans versus cooking oil. So he's throwing bombs around all over the place. But actually the equity markets have been shrugging these off actually as the week's gone on. As I say, we're back up towards alltime highs. One of the stories of the last week has been the fall in the um crypto markets. And um before I say anything about them, let's just remember two things. Firstly, they're a 24/7 market, which means they are open all the time on their exchanges, and therefore there are periods of significant illiquidity, especially over the weekends where uh bad actors can have their fun and games. Secondly, and this is a bit of a wealth warning, um this is really the wild west. So all cryptos really is for those who are prepared to lose a significant portion of their capital over time. So with that wealth warning in place, let me just talk about what happened in the crypto market. The first thing was the macro thing that Mark just talked about where the tariffs were announced by um Trump in the um evening because he didn't get his Nobel Peace Prize >> because maybe he didn't get his Nobel Peace Peace Prize for whatever reason. He does like tend to do these things on Fridays. Thank god he did it after the market closed in the UK. So at least we had a little bit of a break, but not for the people in the States. Now, I've got to use the word allegedly around here. But um there was a very big seller of what's called a whale who sold a lot of Bitcoin half an hour before the announcement. You know, some people get all the luck. Um and then after the announcement they closed it up and they made $192 million. Now the reason why those sorts of trades are done or or allegedly done in the crypto market uh is because it is a deregulated market. So there is no insider trading. There is nothing like that. Now I'm not suggesting anybody knew anything but it remarkably good trader. If that traders listening, could you come on and explain to us how you managed to do that? Number one. Secondly, and more and more relevantly, um that destabilized the crypto market. Then somebody uh came along and exploited a weakness in Binance, which is the biggest crypto exchange. So, if you think about the London Stock Exchange, you got the S&P 500 on the New York Stock Exchange, you got all these stock exchanges. Well, in crypto, there are lots and lots of different exchanges. Uh some are centralized, some are decentralized, all all are pretty much unregulated. And with if you hold a token uh you can swap that token for something else with these exchanges which you can then use to earn interest to uh lend against to borrow and to act as collateral. So for example with Binance there's a thing called BN soul BN that is a liquid staking token it's called that is equal to one token from the Salana chain. So if you are um an owner of Salana, you have a token, you can then deposit that at at at Binance, get a liquid staking token called BN Soul and then use that to generate more return. So lots of people have these holdings, they deposit them, they then go off and they do lots of this staking in in the background. Now the problem lies if the two values disagree between the soul token and the BN soul token. They should be the same because you're swapping one for the other. But of course, being a market, everybody trades everything. So, they trade the value of both. Someone came in and exploited a weakness in the Binance system and moved this BN soul price down by 80% relative >> 80% >> 80% relative to the Salana price. So suddenly you think you're holding X, you've suddenly been reduced by 80% and you can't swap it back into what you originally owned because of that valuation drop. Most importantly, they're using these things as collateral. So suddenly there's a huge collateral call. It's Friday evening. Nobody's awake. Nobody's looking at what's going on. Massive collateral call. All positions are closed out. And suddenly you come finding people who Friday afternoon thought they had, I don't know, $5 million in their account. Suddenly have got nothing because it's been collateral. All their collateral has been taken and ripped out. >> Can we just touch on what collateral is? Sorry, Chris. >> Yes. So collateral is a um asset that you use to to deposit with somebody to allow you to borrow more things or to trade more things. It's there basically saying, I guarantee you're good for your money. It's a bit like in their margin account. If you have collateral in there, they will let you do leverage trades. But if you don't or you run through your collateral levels, they will close you down and stop you out. The interesting thing is when those margin calls, as they're as they're termed, when people are asked to put up extra collateral because their value of the asset they've been investing in falls, they have to sell other assets. And that's what led to the sell off in some of the equity markets. So we saw Nasdaq fall 3 and a half% on Friday just before the close and into the close and the S&P 500 fell 2% as well. Um and that was probably people trying to gather as much money as they could as quickly as they could to try and offset some of this collateral call they were seeing undoubtedly have played an effect but also you'd have seen at 9:00 suddenly distressing one market. So you get people saying oh well maybe they'll be distressing other markets. So you it and at a time when you're just closing everything for the weekend in the regulated markets in the normal stock markets it causes a bit of panic but in the crypto markets it just keeps trading until somebody comes in and buys them. So people were buying things at levels that were completely um unheard of in terms of where they had trading day. So take Bitcoin for example. Bitcoin had hit $125,000 just a day before. It traded down to $102,000 on that Friday. If you look at all the charts, it never traded down there, but it did trade there because that's where people were transacting business. So, as I said, I go back to what I said before. This is the wild west. This is only for people who are prepared to lose most of their money. But that is what went on on Friday. Once again, a black mark for the crypto industry. once again showing that the fact it's not regulated um hurts it badly and somebody made a lot of money and a lot of people lost a lot of money >> and the contagion effect can ripple through markets 24/7 not like the stock market where traditionally we've been 5 days a week and at 1000 p.m. on a Friday night, you can go to the pub and relax. >> And and you're still seeing that effect now because if you look at what Mark said earlier, most assets have recovered back towards their highs, you know, slightly back from them, but they're still they're still up there. Bitcoin now still trades um 10% below. Ethereum, another one of the major um tokens is the same. Um and um once again, it's not a great advert for the crypto industry. Carrying on with the market review, we've we've emphasized in the last couple of weeks that without um data coming from the major US agencies because of the government shutdown and we're now into the third week of US government shutdown, the corporate reporting season which has just kicked off this week has become really important for particularly equity investors to get an idea of what's happening in the underlying economy. So we've started this week most of the major banks in America have kicked off the reporting and so far so good. they've been really really good uh and particularly because there's been quite a lot of volatility in asset markets where they make quite a lot of money. They have these investment banks unlike the British banks they have big exposures there. That's been really good. But what surprised a few people was underlying analysts were expecting to have to increase the amount of bad debts they they were providing for. So people struggling a bit with this rising unemployment we've been seeing in the US. Everyone's expecting credit card debts to start sort of rising, but actually they went down. >> Provisioning for that went down across all the major banks in the US. That was a real surprise and that's one of the reasons pretty much all of them beat expectations because they weren't having to put as many provisions away to offset these potential bad debts. Now that may change if this unemployment keeps rising in the US and or the economy slows down, but it's very worthy of of sort of note. I think the other thing that's worthy of note is we've seen both Goldman Sachs and Amazon this week announce that they're going to be cutting quite a significant amount of their workforce and that's because they are already beginning to reap the benefits of AI in their businesses. So Amazon are rumored to be looking to cut about 15% of their workforce which is huge if you think about that. They're one of the biggest employers around the world and that's you know that shows you perhaps some of the the potential long-term impacts of AI. Now, we said that that might be part of the reason we're also seeing unemployment rise in the US and Stewie no doubt will talk about that sort of side of it potentially later, but worthy of note, I think, in the reporting season. Outside of the outside of the major banks, we've had great results from other businesses. Uh Nestle in Europe today shares are up seven or eight% last time I looked. LVMH for those of you like Louis Vuitton. There they go, Rich. You got a lot of bit of Louis Vuitton Moa Hennessy for our chairman over there. Mo Hennessy, their shares are up 12% yesterday because they've had great results. And Europe's biggest company, ASML, who make the machines that make the chips that go into the AI boom that we're seeing, uh they had they had great great results and pointed out that their demand was increasing very very strongly. Uh in the UK, we haven't had many results yet. Uh but Kroger Specialty Chemicals Company um that's been hit by tariffs had a bit of a profit warning. But interestingly, and this is where an equity investor observes these sort of things, their shares went up rather than down. They're up about 3%. When even though they did warn that things were tough now, that is a good sign that some of these expectations about the tariff impact etc. are well and truly baked into numbers and that's positive. >> But we're completely ignoring the fact that Whitbread have a profit war this morning. Stocks down 10% on UK hotels. >> I haven't been to Cost forget the bad news. So, so I I just want to say one thing just just to point just to point to some of these in inherent contexts. I'm sure not being an equity guy, I I I don't get it. But the banks are going up on the fact they're writing back in the monies they said they were assuming were going to be lost in credit cards. So, they're saying things are better than they were. Amazon and Goldman are saying they're cutting staff. So, the market says we're going to get more rate cuts because things are worse than they are. Can someone explain to me how that circle squares? But except it's a bull market. >> Goldman and Amazon are cutting because of the benefits of AI, the all the investment they've been putting in. >> And there have been many contradictions this week. So, it'll be really interesting to see where our portfolio sits. Because on a Friday evening, I started to think, "Oh my goodness, we've we've hit our all-time peak. That's it. We're never going to see the same again this year." >> As you put on our chat, Sorry, I said I said I wasn't going to talk about that. Sorry. >> So, how is it looking? Well, of course, the VANC crypto and blockchain innovators ETF is our best performer, up 4.4% on the week. As you see, we dropped the waiting down to 2 and a half% last week. Then we've got gold now 5% holding all-time highs. Now, that might not be the case by the time you're actually listening or watching to this podcast. It might be 5% higher. It might be 5% lower because the safe haven is uh acting very much like a volatile asset. But for now, we can clock in a 4% gain there. And then our good old world mining trust gent a fantastic decision to go up to 10% last week as that is up another 3 12%. Now its performance isn't quite as good as that, but of course we make our changes at the close after the podcast comes out. So, we've benefited from buying 5% at lower prices and therefore our profit on the week is three and a half%. What about the underperformers? Well, it is that DAX again, our worst performer in the portfolio that we've had since inception. DAX down 1.2% and relatively flat since we bought it 9 weeks ago. And then the Footsie 100 was also down 1.2% on the week. and then the S&P and NASDAQ as well. So you, as you can see, equity markets as a whole underperformers on the week, but a little bit of alpha coming through in the portfolio choices. So that leaves us up half a percent for this week, which gives a total return since inception of 8.8%. Chairman, what do you think? Well, I'm I mean I'm remarkably um remarkably impressed with our timing on Friday to have uh to have managed to buy these things after a big sell-off caused by the crypto which of course we knew was coming. Um, no, >> the whale. You know, in in in all honesty, I think we need to probably have a slightly longer conversation here, uh, with regard to our portfolio. Um, and thinking about some of those sharp moves on Friday, >> especially because we've got an actual expert in >> Well, we have, and we'll be able to ask him in, you know, for for for his thoughts, but also because there's an enormous noise in Ferrari emanating through the press about this being a bubble. everywhere I read now this is a bubble and uh whether you believe it or not everybody wants to talk about it. So let's just have a consideration some of the people who have been saying things. So this week we've had Jamie Diamond the head of JP Morgan and Cityroup's Jane Fraser who runs Croup both warning about the frothiness in valuations. A lady called Cristina Georgie Ava who I must say I've never heard of before. Um, and but but not talk about her being my usual opinion of economists, not not what we've got Stuart here to talk about, but she's a manager manager director at the IMF, the International Monetary Fund, who says stock valuations resemble those prior to the internet bubble. We had Mark Rowan, a more impressive guy at Apollo Global Management. We talked about Apollo last week with private debt. You know, when I had my little rant about private debt, there'll be more of those to come. He's talking about an erosion in lending standards in private debt markets. Now what that means is that when um there's lots of uh money and not many people want to borrow it um you uh are able to um move around the covenants which you lend to. So there might be you can't borrow more than X, you can't borrow more than Y, you must do 5 years or 10 years or 50 years. What's happening is people are are softening up all these covenants because there's so much money trying to buy private debt that the the people who want to issue it can issue it at the terms they want extremely attractive terms which is why the banks aren't really doing it. It's these private debt funds. So that's Mark Rowan. Then you know remember last week we talked about first brands going bust that's cost Jeffrey $700 million UBS $500 million and um one called which um Jamie Diamond talked about this week where um they lost $170 million and as he said not our finest hour but there's more. Ray Dallio, one of the most successful investors of all time um founder of Bridgewwater Associates is warning about the bubblelike valuations. You've got Howard Marx from Oak Tree Capital Market, a very famous US investor, warding as well. Perhaps most famous of all, Michael Bur. Now, people ask who Michael Bur was. Uh he was the star of the film The Big Short. He was the guy who called the housing collapse. Called the fact that the mortgage back securities were worthless. Spent a year and a half trying to keep his job because he was too early. And that's an important point to think about here. In the end, he was right and made billions. Um, so all these people are saying the market is toppy >> and Bur has also been christristened. Cassandra like you two have christened me. >> Oh, right. Okay. Yes, of course. Thank you. Who are we to disagree with with these experts? I mean, after all, we're we're just a a group of fund managers who've been working the markets for 40 years. So, the point that I want to make is that the key point is not are we in a bubble or not. I think there's plenty of evidence in many things that there are bubble-like tendencies going on. As always, the question is when is it going to burst? And that's what I think we would just want to spend a few minutes just talking about now. Um, there are so many people talking about a bubble that makes me think we're probably not quite there yet. It's a bit like being in the car. Are we there yet? No. Are we there yet? Well, it there's so many people shouting about it. I think we're probably not quite there, but I suspect it means we're in the seventh innings of a baseball match. Now, for those who don't understand baseball, there are nine innings in a baseball match. And so, you go all the way through. So, we're getting close to the end. >> We're in the 80th minute of >> But we're But we in the football match, we're in the 80th minute. The last vestigages of a bubble are when the gains get exponential. Now, we're starting to see that in some places, but not broadly across the piece. Now, two expressions I want or two two things I want people to remember. First of all, we need to remember that if we hold on for too long, it's going to be messy. So, we've got to get out at some stage. We've got to, if we think we're in a bubble, suddenly raise our cash levels more. And we understand that, but we've got to think about that. But there are two expressions in the city which I wanted to mention here. One is don't be a dick for a tick. And what that basically means is it, you know, don't try and be too cute about this stuff because you might miss it by trying to get that last one or 2%. So we got to remember that in our mind. We are dealing on a weekly basis in this podcast. So we need to think about that. And the other one of my favorites which is the city knows the price of everything and the value of nothing. I.e. people who trade all the day looking at prices all the time don't step back enough and say God is we're in the middle of a bubble. This is a nightmare. We should be getting out. So yes, we need to be timing ourselves. Yes, we need to understand it's going to go exponential. But at some stage we're going to have to say time to jump out and find the exit. Now when I look at things I see us having some defensive positions already. We got our 15% in the naugh to 5year guilts. We still have interest rate cuts likely to this week. Jerome Powell talked about more interest rate cuts coming in the states which Mark's been talking about for some time and these interest rate cuts that are are priced into the market. We've still got another four or five priced in to go and therefore the surroundings to me still look as though there is more room to the upside. The one sign that I'm going to be looking for are bond markets. Bond markets remaining very well controlled. The front ends, the bit that responds to interest rates, we've talked about this before. They are performing very nicely. Interest rates are going to be cut. What does that do to bond prices? They go up. Thank you very much. For those who weren't watching, they were pointing upwards. Thank you very much. So, until I see the bond market start to sell off more than longer dated bonds, I'm going to say, "Well, hold on a minute. The bond market's telling you there's lots of liquidity. There's going to be more liquidity with with with with rate cuts. Where does that liquidity go? It goes into markets. So, there's more um so so there's more pressure on the upside. So, I think there's more pressure on the upside. We're in the late stages, but I think we're still safe to with the positions we've got. And we can see from our performance this week that that has worked. Last thing I want to say, old poker expression, if you're playing poker, look around wondering who the idiot is. It's probably you. I hope I'm not the dick for the tick. Well, I would like to introduce another couple of terms. One we've already spoken about. It was Alan Greenspan's description of the market in 1997, long before the dotcom bubble burst and that was irrational exuberance. Now, we've covered that already and we decided, no, we're in rational exuberance at the moment. So, today I'm going to take you back to 1929 and the UK chancellor of the time was a gentleman called Philip Snowden. Philip Snowden looked at Wall Street and he said we are in an orgy of speculation here and that was forecasting the subsequent 1929 crash that the markets didn't recover until 1956 where they were in that orgy. So I'm concerned that the term bubble gets thrown around and it's a very overused term and we used it here but it doesn't necessarily mean that the markets are are going to crash that there's four areas that I'm particularly worried about and they are not AI itself but AI capex spend capex being capital expenditure building the factories building the chips and that is regarding this open AI ventures and circles that we've seen with all investing >> data centers things like that >> very much data centers so we've got 2 and a half% exposure to that then we've got um quantum computing which is absurd hopefully we have no exposure to that we've got um robots robotics I don't think we've really got much exposure there and then the fourth one is nuclear power now of course that's another offshoot of AI because we're looking to use nuclear to then energize the the data centers. So, I'm mostly relaxed because of the diversification that we've got and we've started moving into more things like mining into emerging markets um Russell 2000 and we have only got 15% in those S&P NASDAQ and then the 2 and a half% in uh VANIC crypto. Is gold part of the orgy of speculation? It certainly feels that way for now, but um again with the way things are going in the politics circles, then I'm not sure it's the worst place to be. So that's where I would be. So I'm summing up you saying that you've got some nervousness around the edges, but you looking at the portfolio and our spread between equities and then mining and you know between the fragile assets and the non frag fragile assets we've talked about before gives you comfort with that position for the moment. >> Exactly. comfort. And if anything, I would be taking the S&P 500 down to half the position and getting rid of an that would be I'd be absolutely sleeping like a baby. Look like your own pension then. >> I' I've got many years to to look after my P more than you have. So, >> so Rich, you'll be glad to know you're in good company because not me, but Meil Lynch, the Bank of America do a survey each month of the professional fund managers out there. and we had one of those out this week. Really interesting because there's quite a lot of contradictions in there. So, equity valuations within a portfolio uh have basically hit an eightmonth high and that's not too surprising, I suppose, given that equity markets are towards their all-time highs and that includes people allocating to it like we did. You know, we put some money into the Russell 2000, put some money in emerging markets, took it out of cash. That's the same sort of thing as other asset managers have been doing. So cash levels for the average farmer is just down to 3.8%. That's the lowest since the end of 2024. So that's it's well over, you know, nearly a year now. Uh that's the lowest level it's been for two year. Uh bond exposure. So some of the protection that people normally buy when they're worried about markets being too high is at its lowest level since 2022. >> That's interesting. >> So you know, very low level. And we're not positive on bonds. You know, we've obviously talked about this before. Now growth optimism is where it seems to have changed. People have become more optimistic on the outlook for the US economy in particular over the next 12 to 18 months. Whereas if you went back a month or three people worried about the prospect of potentially a recession. So that that that fear has eased and obviously Stu will be able to talk about that perhaps in a minute. And inflation worries uh has also sort of diminished a bit although there are people worried that there is some tail risk coming in in that side. But the big concerns lie around, as you say, the valuation in AI stocks. 54% of the people believe AI stocks are already in a bubble. That's what they believe. And a record number of 60% of them are saying that global equities are overvalued. And yet here they are pretty much fully invested with the lowest level of cash they've had since 2024. Look at the contradictions. Now, you know, you remember this, Cydia, you will say this all the time. There's lots of things to worry about. If there were nothing to worry about, I'd be worried. But there's always something to worry about. And yes, this is just one of them. >> Our listeners know we're taking a fairly high risk approach in our portfolio. We've got some good stocks. We've performed well up till now. And they're probably sitting at home thinking, well, when should I be selling things? When I when should I be getting worried that every time they look at a newspaper, it's saying or or well, people sorry, people don't look at newspapers anymore, do they? So every time they look at their screen, it says terrible budget coming, terrible this coming, everything's in a bubble, the world's in a terrible place, Trump is awful, blah blah blah. And they're they're looking and they're going, "How the hell are markets doing what they're doing here?" So the thing I'm trying to reach for is what's going to be the trigger for you, Mark, as the as the real rampant bull amongst us. What's going to be your trigger for saying, do you know what? Even I'm now thinking we should be raising more cash quite rapidly. I think there are two things that can happen. One is you see an absolutely stupid deal of some sort. Now we are seeing some of these circular deals that are worrying and I said that last week. I was I am concerned. That's my biggest concern these circular deals. But I explained that I thought part of the reason for that is that maybe companies think their equity is too expensive which is why they're using this cash or they think that they have to get a move on get involved in this AI revolution otherwise they're going to be left behind. you know, I've considered it and I think that is more the reason that they are doing all these deals as quickly as they can and the Americans are leading the way and that they want to be the world leaders in AI and its application and I'm sure that's there. Uh the other thing is if a central bank makes a mistake and by mistake I mean that they rather than cut interest rates or keep them the same they start putting them up. The minute you see that, I think that would be a policy mistake. Um, and therefore that could well be the point where markets turn heavily and that can include not cutting when you expect cutting. >> So we got five priced in at the moment. So if suddenly Pal came out, sorry, Jerome Pal, the head of the the Federal Reserve in the States, came out and said, you know, I'm going to cut once more, which is what he's just said or maybe I'm going to a couple of times, but then I think that we would then be at a neutral rate and we don't need to cut anymore until we see a lot more evidence. Would that be enough for you to go, "Oh my gosh, everyone's expecting five cuts. That's only two on top of these valuations. Watch out." >> I I don't think so. I think if they put it rates up >> is actually so this actually happened in 1999. Remember the Fed actually put rates up to try and control the exuberance that was going on in the internet market >> in 2008 as well with the budness bank remember not the bank the ECB. >> So there you go. You got two perfect examples where central banks have moved against the tide or tried to control the enthusiasm. It may not have happened on that date one day but it certainly eventually happened. And so in 1999, if end of 1999, the Fed put rates up and by March 2000, the internet bubble was over. Grow your portfolio with IG. Invest £50 with IG and get a free shared bundle worth between4 and £200. Make your first investment into an ISA general investment account or sit by the 31st of October and benefit from commissionfree investing as well as 4% variable interest on your cash. Other fees may apply. Terms and conditions found in the show notes or on ig.com/uk. Kickstart your investing journey with IG today. Well, this almost sounds like an economics debate to me. So, if only we had a specialist uh expert. >> Let me see if I ring anybody. >> Economics. >> Stewie. I introduced you at the start as a behavioral economist. Take us through exactly how the behavioral part differentiates you from your associates. >> It means I'm not excited by models. It means I'm more excited by what people do um rather than how the spreadsheet works. So for me a behavioral economist asks the question why why is the consumer going to increase his expenditure? Why are businesses going to increase investment? And that is that leads to what is the consensus doing? Because once the consensus is formed, it doesn't remain stable. It has to change. And in terms of economic strategy, what you want to determine is where that consensus is going to go in order to make money in the portfolio. So it brings a lot of human behavioral psychology into it as well. >> Absolutely. Economics is the base for all life. Um but it's it is run by humans >> and that's why I went with the financial markets own Robbie Col Train. Of course, back to a little nod to that great program Cracker back in the day. you you like to look at all the clues around you and rather than just build the model, actually look at what um what consumers are may well do in the future. >> Yeah. You got to see the wood for the trees. >> You've been listening very patiently to us, wittering on. What's come up in the conversation so far? And and what do you think? >> Well, my first question is, has Spice ever seen a rate hike that he actually likes? In terms of a bubble, look, if it walks like a duck and quacks like a duck, it is a duck. To me, we are in a bubble. But I would also uh give the recommendation of the one of the greatest economists of all time, John Maynard Gaines, who said that uh bubbles inflate further and last longer than anybody expects. And I agree with Chris, it's always the bond market that uh is the canary in the coal mine because government bonds, they're at the base of the investment tree. And when government bond yields start to rise, when there is competition for capital, that's draws money away from the other markets. Stu, it's probably worth explaining what competition for capital is because we've worked together before and you know this is something that is ingrained in myself and and Chris now because you've talked about it a lot. >> He never took any notes from you then. >> No, no, but I think for the for our listeners, it's a really interesting concept actually. what we mean by competition for capital that is um where you've got rising bond yields investors say oh look you know I can get 5% um you know for my pension from a government bond that'll do me uh that is enough for my portfolio now clearly where rates are at the moment where they see the liquidity where markets uh risk markets are rising rapidly we're we're not seeing that competition per. But there comes a point in the markets when rising bond yields triggers and very often what happens is that the central bank having eased policy recognizes it's made a mistake and reverses that. We're talking about uh potential Fed, Bank of England uh rate cuts in the next few months, but the markets are doing well. Liquidity is plentiful. um you know they're taking insurance against slower economic activity. They're taking insurance against uh volatility. But that can be a mistake. And what happens when they you know they they add more um alcohol to the punch bowl then >> what's wrong with that? >> Well, the role of the central bank is to take it away just when the party gets going. Now clearly they haven't done that. The party is in full swing. So at some point in the future the central banks are going to take fright about the liquidity that they've created about the froth in the markets. And it's that reversal and the increase in bond yields that it creates that triggers what we call the competition for capital um and triggers the market correction. What's going to happen in 12 months time when when we see many more of these stories of Amazon and Goldman's cutting labor force? So unemployment is going to be 5% and above, but inflation's going to be 4% and above. So, so they've got that two-way pool because they've got two targets. Which one do they decide to go with? Stagflation is central bank's ultimate nightmare. Um, and very often uh central banks will be tempted to uh support the economy. But his theory tells us if we let inflation rip, it's much worse. So ultimately the central bank has to focus on inflation and that's when it has to start tightening policy. And and if I was to come in there Stu and I I totally agree with what you say there. I think it's the bond market that that that's going to tell you when this is over. Remember the central bank's last um experience of inflation was not comfortable. They were saying this is going to be temporary inflation in 21. They said that, you know, inflation's up a little bit, which isn't going to come down. Of course, inflation then went roaring. This helps me in my view, which is, as you know, that we are going to get some rate cuts, but we're not going to get five of them because when I look around markets, I totally agree with you. There's clearly loads of liquidity around, otherwise they wouldn't be trading all-time highs in everything. There's masses of of liquidity around. And you know, it that doesn't strike me then as a reason why you are cutting rates. In fact, I would go further. I would say the only reason to cut rates is if the central bankers believe the AI story is going to make a lot of people unemployed. If they're wrong, they're going to have a real problem here. So once but once again, the bond market will tell you. The bond market will you will see the bond market start moving first. We've we've discussed the bond market a lot in these um pods and and one of the things that we we know throughout our life is the bond market sees it first. That's where you will see if upward pressure starts on yields at the long end of maturity spectrum and you start seeing that come through that's when the equity market I think will have a a glance. >> Do you not think that we've seen a lot of people worry about the impact of tariffs on inflation? That's where Rich gets to his 4% inflation. He thinks the tariffs but every central banker that I've been listening to or talked to think this is a transient sort of period and that will drop out. So by this time next year, the tariff effect will have gone. Now on the on the flip side, you've got benefits potentially of AI improving productivity, improving efficiency, and that should help inflation come down. But more importantly, in the background in for the world as a whole on inflation fried, you've got China who have deflation and they're basically trying to export that deflation or they they they can't sell as much to the Americas they want to. So they cut their prices and they sell them to the Europeans or the UK or Japan or wherever they do. So, China busy exporting all of their deflation, all their goods at a cheaper price than they really should do. And that is helping dampen inflation elsewhere in the world. And I I read somewhere this week that one of the ECB members is even talking about worrying that they're going to go below their 2% inflation target, which means that they may they may have to cut rates again. And they're already saying they're on pause. And they're beginning to in the back of their minds worry about deflation. that and that's really interesting for me because this is such an early stage of things like the China export of deflation and potentially the impact of AI. >> Yeah, I think that's really important. Uh China's exporter of deflation and I agree with um the speculation that China's uh playing hard ball with um rare earths is because its exporters are really struggling with margins are getting squeezed um and that's causing the global deflation. Um, central bankers can be a bit nerdy about tariffs because to them inflation is the continual rise in prices whereas tariffs theoretically uh ex Trump are oneoff but it's the feed through of those tariffs. We're not seeing the tariffs feed through all at once as a central bank would say a one-off. It's been fed through gradually and that's having an impact. We're not going to see um from the tariffs a big spike in US inflation, but what we're going to see is a gradual ticking up. And for me, it's not that uh you know, we're going to 5 6% in inflation in the states, but we're going to rem remain above 3% of that 3 to 4%. We're going to remain in a very uncomfortable state for the Fed. And at some point in, you know, the next 12 to 24 months, the Fed is going to have to respond to that level of discomfort. And it may well be that they'll wait to see how the economy progresses because we've got obviously the big beautiful um budget. But at the same time in the states I would argue for another factor which is I think what the Fed is taking into account and this is CO as a spectre at the feast because everywhere else in the world has followed the pattern post pandemic of rising savings. So in the UK, a country which is not known for its thrift these days for in Scotland of course. >> No it's two against one now. So just watch yourself Mr. Felum. Right. I think we've just given you a wonderful introduction to why economics is relevant because we've just been speaking about it for the past 15 minutes. So that almost covers our first question. But CJ, do you want to introduce properly your uh your good friend for the last 15 years, the both of you have have known with him and and worked with him and then get stuck into these questions on what's the point in economists? >> Stuart Thompson here um has been a colleague of mine for the last 20 years and Marks as well. Um and Stuart is a particular type of economist. Um he's a useful one. >> Yeah. And so um a rare bridge I'm just I'm just warming up now. But before I say anymore, Stu, just give us a flavor for your background. Where did you start and why did you want to be an economist? Well, before I worked with these two geniuses, uh I worked uh in both investment banking and in investment management. So within investment banking, I worked for US, French and Japanese investment banks. When I came over to the buy side, I worked for Ignis uh where I met these two. I worked for Standard Life and I worked for Manu Life. Getting into economics itself uh was really a Eureka moment for me. I wasn't always the best studier. So, my exams didn't go according to plan. I didn't get into the university I wanted to go to. I study what? >> Uh to study uh production engineering and accounts. Actually, I've always been an interesting person. Yes. Well, I kind of rose above that, but I was in a deep funk when I was sitting in the armchair reading the university course guide and uh I came across economics and it was truly um life-changing that moment. Um I found my career soulmate and I went off to Edma University. I did economics um with a quirk. So I sat in the marketing um courses and did consumer behavior uh from the people who have to make money out of it rather than economists who make graphs out of it. And that consumer behavior analysis informed investor analysis. informed why economies move and what economics does uh for the city is you know to analyze inflation to analyze growth as an input into forecasting what the government's going to do in the budget and what the central bank is going to do with monetary policy. So why Stu does everybody need an economist? Why do you we find that every investment bank, every fund management group, every business group, most parts of government, you know, the treasury, the bank of England, etc., etc. Why do they all need economist? I mean, surely you're all studying the same stuff. I mean, how how how many views can there be? Uh, well, if you listen to the great George Barard Shaw, he will tell you that if you lay all economists end to end, you'll never reach a conclusion. Um but let me tell you a story about Wayne Angel wonderfully named economist. So after the.com bust an investor in the states sued uh one of the major investment banks there company called Bear Sterns and he sued because he'd followed Wayne Angel's forecasts and lost money. The head of Bear Sterns stood up in court and said, "Wayne Angel, former governor of the Federal Reserve, professor of economics and one of the most respected economists in the world. We consider him to be entertainment." In other words, we expect him to write weekly reports to send out to clients to generate business. >> I think you've just given the chairman a great excuse when that portfolio goes red. >> Yeah. Yeah. Yeah, probably. I was I was I was just following Stu >> Entertainment only, >> you know. So, you've got um economists, you know, at the central bank um which are obviously influenced by the politicians. You've got economists at um the IMF you mentioned earlier, uh the International Monetary Fund, um their forecasts have to be in agreement with governments. So, there's politics there. So there's a lot of politics in how economists work. >> You know, that's that's great to hear, but isn't that just an excuse? You know, when people get it wrong, they say, "It wasn't me, Governor. You know, I I was being lent on by somebody to have you the chair." Sorry. And and and and to me, the problem with economists is they fit into my normal view of um of economic commentators. I I used to have a boss at Mercury. He was brilliant. He was a bond market legend. and he had an expression that if you don't have a position, we shouldn't listen to your view. And what he was basically saying was if you're not experiencing the, you know, the gut-wrenching disappointment when things go wrong or the over the joy when things are working, you can't really judge what your view is on anything because you've got to face the conclusions of what you're saying as as the as that investor. Whereas an economist can just say, I think this and he's wrong and who cares and he says that. Who's wrong? It doesn't matter. >> My forecast said this. >> Yeah, my forecast was this. I thought that was going to happen. I was completely wrong. But hey, never mind. Now, it's a perfect example of that. Perfect example. And I've got many, but I'm only going to do one because otherwise the yellow and the red guard's going to come out. And we talked about it earlier, the um non-existent recession in 2022 and reaction after CO. So after COVID, everybody cuts rates. We do lots of QE and all that sort of stuff. Money supply picks up, inflation picks up. Every economist, well, not not perhaps not used, Ste you, but most economists say it's temporary. This is not a problem. We carry on feeding the animal. That's the bull market. Mark's getting happier and happier. Inflation's picking up, but nobody's doing anything about it. Suddenly, inflation's 10, 12%. >> And the Feds say, "Oh, oh, we got that one wrong. We better raise rates." So, they got it wrong, first of all, saying it was temporary. Then the US, the UK, Europe, we all raise rates. And every economist then says it's going to be a recession. 22 is going to be awful. It's going to be a recession. Everything's going to collapse. They were completely wrong with that as well. Now, if I if I back those judgments as a fund manager, I lost my job. Most of those economists are still walking around telling me what's going to happen this year and next year. So, tell me tell me what I'm missing. Why why is it that they have been so successful in generating salaries and and reputations when in fact most of them have got it wrong? Well, look, economists are a special breed. >> Say what you really mean. >> Yeah, we we are a special breed, but we're not born with perfect foresight. Um we don't have crystal balls, that's for sure. I think one of the problems in economics if you're thinking about the central banks uh making their uh forecasts is that if it's not in their model then they can't see it. Um and what happened after the pandemic with that inflation with the supply chain disruption wasn't in their model. >> Well, Russia invaded Ukraine and the oil price doubled and that that gave the inflation boost that you're talking about really. So to be fair to the economist that was a that was that wasn't something you could forecast is it? It's not something you could forecast. >> And as I say you know um economists um aren't always say what they mean. Let me give you an example. When I worked for um Japanese investment bank, I was working for Nickel uh one of the major uh investment securities houses in Japan during the 1990s. The Japanese government u lent upon those securities houses in Japan. They weren't allowed to say uh negative things about the economy. The economy was in a balance sheet recession. And by what I mean by that is the assets had fallen in value below the level of debts and companies balance sheets were paralyzed. Now I was working out of London analyzing the Japanese economy for our clients. And I was able to say, "Look, the economy is in trouble. Bank of Japan will have to keep cutting interest rates." My colleagues in Tokyo weren't allowed to say that, but they were pleased that I was able to say that because that was what economists really felt about it. But people who believed uh from the Japanese government and from um those Japanese securities houses, you know, got it wrong. That was actually the fatal mistake of Nick Leon. >> So, do we really have to think about an economist in terms of where they're working and the biases they're going to come up with before we listen to what they have to say? >> Absolutely. Now, where I think you've done brilliantly um and um I would say this having offered you jobs in many different places and enjoy working with you the whole time is that you've turned into a investment strategist economist. So you've very much thought about I want to give advice that people can take actions on and I want to be therefore um held responsible if so for my forecasts rather than um the um a forementioned body of economists in the rest of the world. So you've done very very very well at that and and we've got a a perfect opportunity for you to show us and tell us what you think because we have a portfolio. But you you were sitting here hearing what we were saying about where we think we are with our portfolio construction. Is there anything that you look at with our portfolio and you say given my understanding what I think's going on in the world, I might do something a bit differently or change anything. >> Well, with my Scottish economists um general misery, I would uh >> there's two of them now. I I would I would worry I'm Welsh. >> I'm staying out of it. >> Uh I would worry about the future. I would worry about that point at which um the central banks realize they've gone too far. Um they've spiked the punk bowl too much. And so it's not for now, but I would look for some soft protection. you know, I would be looking at uh, you know, buying some out of the money puts as a means of protecting your downside. >> For everybody at home that that doesn't know what a put is or the the options market, it's a bit like buying your car insurance. >> Yes. >> In case one day in the future, you have a bit of a prang like I once did in the Aston Martin on the way to work at 6:00 in the morning just approaching Tower Bridge. had to stand there for uh 25 minutes as all my colleagues from work drove past giving me what I think was a little bit of a wave. So, the options market, it's like buying car insurance. And what you're suggesting is it would be really nice just to to give up a little bit of our performance, our gains so far to protect oursel maybe 3% lower if the market was to sell off. >> Yeah. Yeah, I mean the aim of this portfolio uh is to make uh a target return. It's uh you don't you know it's not to become billionaires. So it's you're not pushing the risk. You don't want to push the risk too far and by taking some soft protection uh you help protect the downside. >> So in this portfolio we can't really buy puts or because a lot of we want people to be able to put this in their pension fund or their their ISIS and their sips. So there are other assets that give you that sort of protection potentially. There are obviously government bonds. So first of all that that would be a traditionalist thought of how you would buy protection for when equity markets sell off, bond markets should rally and prices go up and yields go down. That would be a traditional way of doing it. And we we have to be you know we have got quite a lot of what we call antifragile assets in our portfolio which is gold and copper and uh we've we put the crypto blockchain in there because we thought that would act as it and it's acting for different ways but it's been more like the best equity you've ever bought. Um and we've got some cash and short dated bonds. How would you do it given our the constraints on what we could probably buy >> given the available assets that you're able to invest in? I would look to increase the guilt share. Um, wait until after the budget because we want to see what Rachel Reeves says. Um, but after that, we'd expect to see the Bank of England uh lower interest rates. So, increasing the share of guilts in the not to 5year area benefits from these lower interest rates, but also acts as soft protection against any market correction. Where do you take that money from? I would tend to slice down the NASDAQ and the S&P because these are the markets that have done the best. >> Now, that sounds surprisingly like another Scotsman on the panel that is uh >> two grizzlies wondering. But if we go back, we mentioned Michael Bur earlier on. I'm fascinated having heard your thoughts here. I wonder tell me how did how did you get on around 2008? Were you working with these gents then? Did they put you under pressure to make decisions as well like they just have? >> Fortunately, not. Back in 2007, uh I read a report about uh new uh innovations in the credit market. They were coming up with new products which didn't make sense and it felt like a a massive bubble. So, we looked into where base rates could go in a collapse in a bubble. And in February uh 2008, we forecast that base rates would reach half a percent by the end of the year. >> What were they at at that point? >> They were around five and a quarter, I think. So, we went bullish, which means when you say you went bullish bonds, just for our listeners, you bought exposure to the bond market because when yields fall, what do prices do? >> They go up. >> Thank you. So we increased our exposure to government bonds. That proved to be a slight disappointment because a couple of months later the Federal Reserve organized a bailout of the aforementioned bare sterns by JP Morgan. The market believed that the problems were over and so equity markets rallied. Uh bond markets fell but we held our nerve. Fortunately, we didn't have the chairman uh to oversee our portfolio and we held our nerves. We had many likeminded uh we looked into like-minded people. There was a great economist at unmentionable US investment bank uh who was also predicting this. Indeed, by the end of the year, he was told if he ever got it so right again, he'd be sacked. Uh we also uh I remember going to a conference organized by the infamous Lehman Brothers and they gave their analysis and uh as we walked out of it I turned to my friend and head of rates Russ Oxley and said if they're right and I believe they are we have just heard the most elegant suicide note in history. >> Was it Dick Foo or was it their chief economist? It was their economists. It was their strategists. Uh we had all the senior people there and they were this is going to be a problem but we are going to survive and >> which they didn't. >> Clearly history proved them wrong. But uh yes we uh made a lot of money that year for our clients. Sounds a great story. I mean to go from five and a quarter to to to half a percent rate and predict that unprecedent situation and I have to say we weren't working together at the time because if we had have done then I might have made a lot more money that year >> but that's another story for another day. Obviously we've covered most areas now Stu. Um obviously talking point for everyone and week in week out we talk about it on this podcast is the AI revolution. So do you believe it's real? uh um do you believe some of the impacts that are being talked about at the edges like this rise in youth unemployment but potentially the offset of big productivity etc and a and a sec second industrial revolution if you like do you believe that's real and how would an economist view it yes I believe it's real um and I'm also a great believer in long economic cycles so I think for this decade unfortunately we are living in turbulent times or as the Chinese might say, may you live in interesting times. These are very interesting times, but they lead to much better times. And I think uh it's important to see beyond this turbulence to see what happens to the global economy when all these technologies feed through. Now, that's more likely to be the 2030s than the 2020s, but it will be very good for the global economy. And when you say it's good, is that in productivity, profitability, employment? How how how does an economist think what do you think is good? >> So it's about productivity because productivity is uh what matters to people because that's what drives real incomes and with real incomes uh growing in the next decade um that disperses into new forms of employment. And so that absorbs the workers who are displaced by this new technology and we have a much better uh standard of living um way of living and yes I'm very optimistic but we still have to get through the rest of this decade. Um and when we have new technology when you have revolutions in communication uh technology you do find turbulence. That's the history um of the world part 570. Stu, that's been fantastic. Thank you so much for coming along today uh sharing your wisdoms with us. I hope it hasn't been too much of a traumatic experience to bring back the old asset allocation meetings. I hope you're not going to have to go and have a lie down somewhere. Um but it's been really great and thank you very much. So, I think you'll agree that's been a wonderful week deep diving into economics and the background of what we discuss every single week. If you have some questions on this episode in particular, gentlemen, where should the viewers write into >> the art of investing.com? >> Thank you very much for viewing and if you've enjoyed it, please give us a like, a subscribe, and tell your friends about it. We'll be back next week. We look forward to seeing you then on Friday. [Music]