The 60/40 Is Breaking — Bonds Won’t Save You Anymore feat. Ian Harnett | Global Macro | Ep.96
Summary
Regime Shift: Structural inflation pressures, deglobalization, and weaponization of trade/capital imply a move toward positive stock-bond correlations and a new macro playbook.
US Outlook: The guest remains overweight US equities amid rare coexistence of strong earnings and expected cuts, but warns QT under a new Fed chair could tighten liquidity.
Value Rotation: A gradual multi-year shift from growth/mega-cap tech toward value, dividends, commodities, and emerging markets is favored, with non-US value already outperforming.
High Yield Credit: Prefers public high yield over private credit for clearer risk/yield, emphasizing nominal GDP above 4% to protect cash flows and avoid credit stress.
Gold & Metals: Bullish on gold driven by BRICS+ central bank buying and dedollarization; structural demand suggests strength beyond traditional real-yield models.
Currencies & Japan: Dollar downside depends on political cohesion; yen is the key outlier with potential carry unwind while Japanese equities benefit from competitiveness and improving ROE.
AI & Tech Risks: Sees an AI-driven growth bubble nearing its endgame (M&A, vendor financing, capex surge), posing correlation-one risk if US tech margins crack.
Europe & Geopolitics: Europe risks underperformance due to weak capital markets and heavy regulation, while non-aligned EM blocs and potential Latin American rerating may benefit from shifting global alliances.
Transcript
that four-way coalition that they outlined [music] starts to fracture very dramatically. And at that point, I really would be selling the dollar. [music] That's going to be the point at which you'll say, "Well, hang on a minute. This is just there's there's a lot of rogue rogue [music] elements here." And so unless there was something that materialized to stabilize the ship very dramatically. So that to me seems to be the one of the biggest [music] gray swans out there. [music] Imagine spending an hour with the world's greatest traders. Imagine learning from their experiences, [music] their successes, and their failures. Imagine no more. Welcome to Top Traders Unplugged, the place where you can learn from the best hedge fund managers in the [music] world, so you can take your manager due diligence or investment career to the next level. [music] Before we begin today's conversation, remember to keep two things in mind. All the discussion we will have about investment [music] performance is about the past and past performance does not guarantee or even infer anything about future performance. Also understand that there's a significant risk of financial loss with [music] all investment strategies and you need to request and understand the specific risks from the investment manager about [music] their product before you make investment decisions. Here's your host, veteran hedge fund manager Neils Krup Len. [music] Welcome or welcome back to another conversation in our series of episodes that focuses on markets and investing from a global macro perspective. This is a series that I not only find incredibly interesting as [music] well as intellectually challenging, but also very important given where we are in [music] the global economy and the geopolitical cycle. We want to dig [music] deep into the minds of some of the most prominent experts to help us better understand [music] what this new global macrodriven world may look like. We want to explore their perspectives [music] on a host of game-changing issues and hopefully dig out nuances in their work through meaningful [music] conversations. Please enjoy today's episode hosted by Alan Dunn. Thanks for that introduction, Neils. Today I'm delighted to be joined by Ian Harnet. Ian is co-founder and chief investment strategist at Absolute Strategy Research. Uh the firm has been in existence uh just coming up to 20 years now. So celebrating their 20 year anniversary this year. Ian's a veteran of the markets. He's been around uh for about four decades in markets now. Started off as an economist at the Bank of England and then worked with sock gen west and UBS uh where at UBS he was chief investment uh chief European investment strategist. So Ian, great to have you on. Um how are you? >> Thanks very much for the invitation Alan. >> Not at all. No, I've I've followed your work um through your career at at various times. So great to have the chance to to chat and u as uh we always do to start off we like to get a sense on how you got interested uh in markets and I suppose before that even economics what was that >> well you know I I have to say I'm afraid it goes back a long way that I think I wrote my first economics article on on the the shape of inflation when I was probably at primary school. >> Okay. Uh and but that was of course back in the 197 in 1970s and um you know that uh that was when inflation was quite rampant. that my father was a an accountant um and was we obviously talked about finance but it was also very much at school um you know where first of all I found out that I actually quite enjoyed economics when I did at a level but also in history um learning about the impact of of great economists like um canes um you know in the pre-war post-war period so you know it's and thinking well actually maybe this is something that can make a difference to the world rather than just you know, being an interesting academic study. >> Very good. Well, these days you're trying to make a difference to people's portfolios, I guess, and it's we're at an interesting juncture. I know you've written a lot lately about the I suppose you might call it the regime shift in the world and you know, we had Davos recently and uh uh Carney speaking about a rupture and and I know that's a theme you've picked up on. Um, I mean to put that all in context, I mean, how would you kind of characterize that regime change, the most salient features of the new regime? >> I think the the the key thing that um we're talking about at Absolute Strategy is the is the way that um the relationship between stocks and bonds that all of us have known for that 40-year period, it's really changing. um that after four years where central banks have consistently missed their inflation targets, we're starting to see people saying, "Hang on a minute, maybe the way out of this debt problem is a little bit more inflation um and you know um less reliance on um you know, keeping the the the nominal side of the economy under control." and that that encourages a shift away from having bonds as the safe asset or the natural hedge in your portfolio if you're if like you know most funds are going to be probably more than 50% invested in equities. >> Yeah. And I mean obviously we had the experience in 2021. Inflation spiked. You know as you say it was the first it was for most of us it was the first real experience of inflation. You know obviously you would have had it back in the 70s and maybe we you know some of us might remember that some. Yeah. Yeah. But but it was really you know prior to that people talked about the possibility of a resurgence of inflation but it people didn't really believe it but to see it inflation rates get back up to whatever it was 7 8% maybe even a little bit higher >> was was something and and obviously then in 2022 we saw equities and bonds >> sell off together proving the points that the spawn equity correlation is is not um always going to be negative >> since then obviously inflation's come down and and there's mixed views obviously it's still running well above target in the uh so you know close to 3% but there are still those who believe well take out the impact of tariffs that it would probably be closer to 2%. So yes there are plenty of people that that kind of would agree with your I suppose synopsis of maybe inflation being more of a challenge but then it's not it's not a universally held view. I mean what do you think is the going to be are the key factors that will keep inflation more elevated here? Well, I think I think you know when you think about some of the um changes that we're seeing in society and you know the investment that will need to be made that shift in the economic structure tends to create um increased costs. The second thing I think is to to recognize you know that a world that becomes more fractured um you know where we get this weaponization of trade, economic growth, you know potentially um less uh globalized that those long thin supply chains that allowed companies to access the lowest cost possible price of labor, lowest possible price of goods um and the lowest price of capital, you those those are changing and and that is likely to push inflation pressures uh up um as well. So you know those are the kind of things I think Alan that make us feel that structurally inflation is going to come down. Tactically the thing we've been talking to clients about is that every central banker in the world should be entirely grateful to the Communist Party of China. >> Okay. um because actually the the exported deflation in goods prices is actually doing a lot of the work um of holding inflation down. >> If you look at service sector inflation in the US, even in the Euro zone, it's 3 4% still. Um so, you know, I think that that central bankers need to be a bit careful about patting themselves on the backs. >> Yes, for for sure. And I mean, we'll probably get into China in a bit more detail later, but just on that point, is that something you see, I mean, hitting a limit? Obviously, there's a lot of people saying that this the rest of the world isn't going to absorb China surplus on an ongoing basis. How do you see that playing out? >> Well, I think that, you know, that's one of the big problems for China, which is that they do have to generate more of a domestic um growth narrative. and our China economist Adam Wolf who's excellent you know is um is still very concerned that with the housing market and uh which is a key source of wealth and confidence for for Chinese consumers still under pressure that that's very difficult to achieve unless you have a a big fiscal expansion and that's what the you know Chinese authorities don't really want to do and yes but clearly in a world a more fractured this more fractured world America's not going to want Chinese dumped goods. Europe is not going to want those dumped goods either. Um and so that's going to make it a much more complex trading environment for everybody. >> Yeah. Um I mean you've touched on you know the weaponization of of credits of capital. Um obviously it was very much to the four at at Davos when you know when when Trump floated the idea of more tariffs in Europe and then the debate was around well what can Europe do? Could Europe, you know, try and impose some measures uh to to dissuade investors in investing in treasury? So, I mean, how we've already had the weaponization or conflict in trade, so obviously capital could be the next frontier. How do you see that evolving? >> I think we're seeing it I think we're seeing it occur relatively softly at the current time. um you know but it could shift to being a much more aggressive method you know which is that if President Trump takes against Canada uh for example then you know if why you know if we've got tariffs on goods why shouldn't American fund managers that are overinvested in Canada for example um you know have to pay a sir charge on that you know eventually you do get to the case where you could potentially get capital controls um reemerging and you clearly something back to the 1970s, but let's hope that we don't get to that stage. But I think what we're seeing is that particularly say for somewhere like Europe, Europe has a problem because you know if you um if you we still have a number of you know separate economies rather than you know capital markets union in a world where you're relying on your domestic capital much more because you know you you know you see investors saying right I'm going to stay at home or or governments even directing you to stay at home. Um, you know, a bit like Rachel Reeves in the UK trying to encourage the, you know, the the retail investors here to invest in the UK, >> then Europe actually just doesn't really have very effective capital markets. And so, you know, even Germany, you know, where with the type of fiscal expansion they're talking about for both infrastructure and for defense, well, there's a lot of debt issuance coming through >> and if it has to all be absorbed by Germans. >> Yeah. >> You know, then that's German institutions and that that's problematic and again could push by some of these bond attire. >> Okay. And I mean obviously there's been a lot of talking suggestions in Europe. we had draggies report out and um you know there's been a a recognition of of the need to to do something in productivity and and equally the likes of Mcron has talked about this the you know the potential >> European surplus of capital and trying to redirect that back. Um sounds like you're not very optimistic on anything dramatic changing in Europe in terms of kind of mutualized debt issuance or anything like that. No, you know, I I think the um you know, one of the things again we've said to our clients is that actually the best thing that could happen to the Euro zone is a French finan uh debt crisis. Um because to get a capital markets union emerging in anything less than 5 years and the the fi it'll be here in five years is something that we've heard for at least the last five years. Um and you know I suspect we'll hear it for the next five years if we don't. Europe has lacked that Munich moment for capital that it had for defense and it really took a very unsuttle comment by JD or set of comments by JD Vance 15 minutes turned on it on its you know of European policy on its head. Um we need something like that to galvanize European um politicians. Um, and you know, uh, the Draghi report, Draghi's comments recently, they're not enough. You're going to have to have something that's large enough that it doesn't completely destroy the European Union. Um, but important enough that, you know, the rest of the Europe has to say, right, we're going to stand with this and create, you know, um, bonds. And actually, that would be the strongest way to challenge America. But if Europe created a large safe asset, yeah, you know, to offset as an alternative to treasuries, there's $9.6 trillion of EU money currently invested across US treasuries, US equities, and US credit. Um, you know, that might well not be um retaliatory repatriation. Yeah. uh which obviously would be very much the weaponization but but more economically driven repatriation >> and I mean from the US side obviously we've had um you know a number of conflicting uh crosscurrens in terms of the weaponization of capital on one hand you know you've had um I suppose a tacid approval of a weaker dollar is one thing but at the same time a desire for the dollar to be be the reserve currency you've got um you know this these deals that they've cut to attract capital in as well. Uh but at the same time concerns about funding the deficits and and obviously going back to Moran's paper some kind of extreme kind of policy proposals around trying to maintain um capital inflow. So I mean in this world of more fragmentation potential capital wars do you see the US been more of a winner or a loser or or at more or less at risk? Well, at the moment I think they've been a very strong winner. Um, if you look at the White House uh website, you know, President Trump is talking about having secured um a 9.6 trillion. So quite interestingly, that's the same amount as the as Europe could shift offshore that bringing capital into the into the US and as you say quite often um in exchange for a reduction in tariffs. Um so you know looking in more detail at that that national um allocation there's a commitment of about $6.7 trillion dollar you know that's a big amount of money from national governments and the net effect is that that's actually um seen tariff levels come down the median tariff levels come down for those countries that are playing that game with America um from 25% to 15%. Um so you know the point we've been making is that this is um it's almost like paying tributes to the monarch um you know and there's some academic um work around neo royalism for those people that want to have a look um that that you know the the the policy wonks are going down this route you know that that actually getting access to the monarch you have to pay upfront for it. This is very so America I think is is doing a very good job from their perspective at trying to offset the risks of that capital flight. Um and you know with Europe saying that they you know they would do a $600 billion deal. Um Europe's actually at the moment saying we'll play by your rules. So that sounds to me like America winning. >> Yes. Now I mean there is a bit of skepticism around some of these numbers. I mean, every time >> Trump loves to to to quote a 500 billion, it seems like for every a baseline for every deal and then there's always a question, is this stuff that was going to happen anyway or not? But it sounds like you think there will be genuine flows. >> I think the point that we've made to people is let's imagine that this was all funneled and this is, you know, this is not the case at the moment. Yes, it's being funneled at the discretion of uh President Trump or um being funneled through individual areas. But let's say this was funneled through a new um sovereign wealth fund and there was that discussion about a US sovereign fund being created and only a third of that number materialized. you would still be talking about a fund that is as large as the noes bank and the noes bank you know is one of the nine is one of the 10 largest holders of nine of the 10 largest US companies just think what that you know that impact um you would have in terms of capital market allocation and we're actually already seeing seeing it with some of these direct investment deals that America the American government's doing in terms of of aiming to secure mineral rights and and resources generally around the world. >> Yeah. Um I mean taking a step back and looking at at what what's been achieved to date. Obviously we're we're probably over just over a year into Trump uh 2.0 and I mean for a lot of the first year there was kind of discussion like what what's the what's the ultimate objective here? Is it, you know, re-industrialization of the US or is it just uh to fund the deficit with the tariffs? I mean, you mentioned this kind of neo- royalist era, which does sum it up very well. Um, I mean, what's your take? What's the uh economic ideology if if there is one driving this? I think we believe that we that that the Trump administration and remember this is a broad alliance of three or four different groupings. The Republican right um you know the tech bros, the unilateralists and then the multilateralists. But what they're coming together to do is to roll back the economic and social structures to back towards the Reaganite era. They're trying to create a new Republican era that will survive for 20 years in much the same way that you know that that Reagan Thatcher axis um did in the in the 1980s. And you know I think that is where they are trying to get to. Um and I think both of the things that you mentioned Alan are on the agenda in terms of the re-industrialization of the United States. But but I also think that let's go back to Scott Bessant's three arrows. Um and you know he loves uh Shinsza arm but but it he came up with the 3% GDP growth 3% deficit and 3 million barrels per day more energy. And you know, I think what lies at the heart there of this is the Republicans aiming to get the deficits under control through higher nominal growth. So this is another reason why we're much more comfortable with the idea that the economy will be run hot to get those debt ratios under control. Um but to offset the inflation risk to some extent, you need that energy. You need cheap energy. Um, and that's I so I think this is at the heart of of of what we've also some of the other policy measures. But here's a it seems to me to be a very broad brush and a very ambitious project that the Republicans are working towards and the midterms are going to be a big test of that. >> Yeah. Before we get on to midterms, I mean, do you think that's realistic? I mean, it it had a great ring to it 33. Uh but you know obviously we've had the the big beautiful bill which made zero progress in towards heading towards a 3% deficit. Um now obviously the great hope is as you say that economic growth is strong. Um and there was talk about deregulation. Obviously we've seen that with respect to maybe uh AI and crypto stuff like that. Um and obviously productivity has picked up although it's debatable what's driving that. Yes. Um so I mean do you do you buy into that narrative of a >> supply that we can I think we can still see that the momentum behind those ideas. So the deregulation of finance will be a you know and banks we've clearly seen the deregulation around the crypto areas. Um I think what um Scott Besson understands probably better than most and I think I think he's a very accomplished economist and and investor is that the counterpart to the public sector deficit is the private sector surplus. So the only way to get that 3% debt ratio that that they want need effectively to keep the the rate, you know, the interest payments under control is that they have to get investment coming through. They have to get consumer spending. And historically, the only way that really you've got the deficits down for governments in terms of debt to GDP >> is you've always had to get the rest of the economy to take on debt. >> Okay. Yeah, >> debt to GDP ratios actually have never come down apart from 19 since the 1950s since 1952 briefly and then in the post pandemic period, but they stabilized where they started pre- pandemic. You look at total debt ratios. So, you know, I I think, you know, I think that's at the heart of this. They're going to run try and relever the housing market, relever consumers, you know, let them borrow against their crypto assets. >> What could possibly go wrong? >> Exactly. Well, you mentioned running the economy hot and obviously we've had the announcement now of War as the uh nominee to be Fed chair. And again, lots of uh different views on War and he has at times sounded hawkish and at times sounded doubbish. um how do you think he'll play it in the in in the early days? >> I I I think you know the the thing that strikes me about um chair elect uh Walsh and I had the pleasure of listening to him at the Atlanta Fed conference a couple of years ago where you know he was actually he you know in front of a number of Fed presidents regional presidents it did seem as though he was chairing waiting even at that stage. So he is taken very seriously. Um his ideas I think are taken very seriously within the Federal Reserve system. Uh would be my perception. And so I think that he is likely to want to deliver those lower interest rates that President Trump will suggest. But you know what I would like to point to is that the the speech that he gave that day, you know, um in 2024, and I think a couple of other people have picked up on it, was actually about bringing the level of the central bank balance sheet down. >> And and it also fits with an an article that Scott Besson wrote about the scope, you know, curtailing the scope um of the the Federal Reserve and the the range of activities of the Federal Reserve. So, you know, the way that I could see this playing out is that actually the the negative surprise for markets could be that that chair Walsh says, okay, no more bond purchases, no more MBS purchases. We are going to reduce the size of the of the balance sheet, but you know what that reduces global liquidity. Um and so you could get those bond yields coming down or or you know interest rates coming down because you know we actually start to see you know some of those some of the froth coming out of markets and in the past rates have responded when the froth has come out of market. So it it may not be quite as um market friendly as I think a lot of people would like. Um but I can see how he could reconcile getting um you know rates down but you know it's it's probably around that um you know QT accelerating QT. >> Yeah. I mean is that I mean obviously the the Fed has totally shifted how it conducts monetary policy into this excess reserve system. So >> there is some debate as to what he says is is really plausible because obviously when they tried to before it's led to problems in the repo market etc. And I and I think you know one of the things that's been a feature of the discussions I've listened to over the last couple of years is the discussion about the ample reserve system. And so I think there could be some quite interesting technical changes and it wouldn't surprise me that you know we see some of at the same time that there's there's deregulation for banks that there might be some you know changed views around how the reserve um programs work and you know maybe the US moving something closer towards you know what we see in Europe and the UK. >> Okay. So taking all of that together, it sounds like you're quite upbeat or modestly so on on the US economic outlook. Is that fair to say? >> Yeah, for the moment, Alan. Um, you know, it it seems uh you know, maybe it's the uh I don't know whether it's contraonential or not, but but actually we're sticking with that overweight US view. Um, you know, it is a very unusual environment to have doubledigit earnings expectations >> and expectations of rate cuts. >> The closest that we came to it were 1996 and 1998. On both occasions, equities gained 20 to 30%. >> And the point we've made to clients is that it's so unusual that it's unlikely that it'll persist to the end of the year. you know, uh it may do and you know, this is the game that that you know, the administration are trying to play. Strong growth, lower rates. Um but if it doesn't, well, which way would you like it to converge? >> Historically, if you get lower rates because earnings growth is tanking, then that's never been good for equities. Normally, you know, the over the last 12 interest rate cycles when you've had a pivot, you know, I think um you know, 10 out of the 12 were negative and the median decline was about 20% or 24% I think was the figure that we that we calculated. Yeah. >> So, you know, the markets will actually be much healthier, ironically, if we manage to keep nominal growth healthy and rate expectations start to get revised out. >> Yeah. Um so I think that that's a more stable environment for markets. >> And what I mean I think the general sense my understanding is uh of investors is of fairly bullish sentiment at the moment kind of reflecting what you're saying growth out looks looks good but then the Fed's still expected maybe to ease at some point if not sooner rather than later. I mean I know you do your own asset allocation survey in absent strategy research. >> What are you seeing in that survey? So, so you know the the asset allocation survey is still you know giving us that same kind of outcome around um both the global economy uh and also the um the outlook for equities versus bonds. I think the the the interesting thing is that people have become more ambivalent about the direction of bonds. >> They've also become a bit more ambivalent about the the direction of inflation as well. So you know it's there's there's question marks that are opening up here. Um but what we're we are seeing is that that a bit of a move towards what one might class value trades things like commodities um emerging markets. So there's a recognition that the core investments that you've perhaps had over the last um you know 10 years uh you know are starting to to lose some of their shine. >> Okay. I mean obviously you not only are you doing the survey you're speaking to a lot of investors. I mean when you talk to them about this regime change in in the global economy and also as you mentioned at the outset that change potentially in the bond equity correlation. Are you seeing many tangible changes in portfolios on the back of that? So, so not really. And one of the points that we make is that that historically when you get to get the rotation out of the US, you need three things. >> Okay? >> First of all, the dollar needs to come down. Well, we've seen a bit of that, but it's stabilized. Um, secondly, you need the global economy to grow rapidly and you know, can can that happen without China being a bit more dynamic? The but the third and most challenging element is that the US roe have to disappoint relative to the rest of the world you know and and you know at the moment given how how much that those margins those roses are being driven by the US tech companies effectively you're saying you've got to have a tech blow up. >> Yeah. Um and if that happens, the risk is that you would then move to what we call a correlation one event. >> Yes, >> the markets come off, everything, you know, loses and then you want to be in low beta. >> The trouble is that some of the things you might want to rotate into emerging markets, commodities, historically, you know, they can be quite quite high beta. So, so you know what we're seeing from clients is that one or two people are making that rotation a bit more towards commodities, a bit more towards um the emerging markets, but they tend to be larger funds who say, "Look, you know, I'm I'm so large, you know, I recognize that Ian um but I'm so large if I don't start now, I'm never going to get there." So, you know, it's >> Well, it is something we've seen. We're recording on the the 5th of February, but in the last week or so, maybe a couple of weeks, this, you know, outperformance of value versus growth, you know, we've had days where the the the uh the NASDAQ is down, but the Dow is holding up or even up, you know, and and if you look at the sectors, industrials and materials doing well >> and we've had this uh >> yeah, I've just heard this expression, this SAS coalyp, I only heard of heard of that one today, but obviously the software the SAS sector is getting hit badly. I mean, as you say, normally if you get a big sell-off, everything gets dragged down. Is this I mean, if you were sort of advising on strategy, sectoral allocations, are you >> at the moment? We would we're sticking with that um more positive cyclical view. Okay. >> Um you know, because you know, you you're and and you know, the com the interesting thing about value is that non US value has been outperforming for about 18 months. Okay. >> If you think the banks, you know, European banks have been on a roar, um, you know, global basic resource stocks have been up, you know, since the start of 2025, you know, I think up 50 60% almost relative, you know. So, so we've seen we've seen non US value outperforming growth already. I think that the challenge for people and I think this is one of the the big you know something that my colleague Will Moss wrote about for our clients um you know very recently ahead of the SAS SAS apocalypse um which which is the irony is that people are using thinking that by rotating into private equity and private credit they're diversifying away from tech. What the last week has shown them is that actually the largest holdings of private equity and private credit are in tech and actually you know listed um uh high yield has got less tech exposure than private credit. >> Okay. Yeah. Interesting. Yes. >> So you know how you diversify in this environment >> Yeah. >> is is really challenging I think. >> Yeah. That's interesting. I mean it just shows you what the labels are put on things. Don't doesn't matter a whole lot. >> Absolutely. I can't say anything. Having worked for investment banks for 20 years, I couldn't possibly comment about that. >> Yeah. Yeah. But it's true. I mean, high yield would traditionally have higher exposure to things like energy, wouldn't it? >> Yeah. >> Yeah. >> And, you know, one of the things that we've been talking to clients about thinking about where you can get, you know, superior returns and and if you there's a very high correlation between equities and high and and and credit. >> Yeah. um high yield credit I think is actually a really interesting asset class now because it's it's one of the few things that does have what it what it says on the on the tin >> right >> um you know so investment grade >> post GFC we saw a big rise in the lowest grade investment grade tripleB from about 30% pre GFC to over 50% now you know a lot of the um a lot of high yield stuff got revamped into to to investment grade or the if it wasn't it wasn't capable of being you know got away in the public markets it's gone to the private markets yeah >> so actually high yield I think really is you know what you're dealing with you know the scale of risk so you know I I think that you know this is this is you know if you want that enhanced yield I would actually go into to that space rather than to sorry a bit of a digression No, no, it's I mean definitely private credit is uh is topical at the moment and what you say is definitely >> I mean >> and as long as and as you know the key point for about about that we say for for for credit and credit really is important because you never have a bare market in equities without having a bare market in credit. >> Exactly. Yeah. >> Um but you you're not going to get a bare market in credit until you have cash flow crisis. So this is where that nominal growth so so the phrase we've used to clients is nominal nominal nominal nominal GDP growth if it's over 4% then your nominal earnings are going to be fine and that means your nominal cash flow will not be challenged and that's the mistake we made in 2023. So, you know, put our hands up. We don't always get it right. You know, we thought the slowdown that was likely to come and did materialize in real terms, but because inflation was still high, the nominal earnings, the nominal cash flows weren't stressed. And so, we didn't have a big market, you know, as large a market, you know, sell off as we might have had. So, you know, that for us is really what we're focusing on with clients. We're saying watch those nominal numbers, watch those nominal cash flows. Um, and even in the in things like the tech sector as well. [music] We touched a bit on you know the the dollar and um weakened last year somewhat but [music] not you know um not dramatically and you know sentiment certainly got quite negative towards the dollar as last year progressed with at times it was the sell US mentality um and then it's probably dipped down a little bit at the start of this year but but has recovered and then was it last week or the week before you know there was talk of the Fed were checking rates in dollar yen which is kind of a highly unusual event. um what's your sense on you know say from a fundamental perspective the fundamental drivers and then what's the US administration are they changing tac with respect to the dollar with you know that checking on rates um I I think that the the the point we've made about the dollar is that our chief economist Dominic White has um done some great work um around you know what kind of dollar um rates you would need to reequilibrate the current account and the trade account and the capital account. Um, and that points to a decline of something like 15%. >> Okay. >> But the question is when >> and against whom? >> Um, and I think that's one of the and that's one of the challenges that you have, you know, if you want the dollar come to come down, something has to appreciate. >> Yeah. >> Uh, and clearly, >> you know, it doesn't seem as though the Chinese authority is going to be very keen on that. Um Europe, you know, is is probably also, you know, wary about seeing the euro go very much higher than this. Again, you know, this is one reason why the euro the European inflation rates have been under control. Um you know, but but you know, it's going to depress growth to some extent uh at some stage. Um and historically, you know, that might see, you know, the euro rates or people think twice about, you know, whether euro rates would go up and effectively the euro is doing the kind of monetary tightening that rates might have done potentially. Um so you really you're left against the yen. Um and you know that is the problem there is how much of unwinding that yen carry trade >> will then disrupt um you know other financial flows globally. So you know that's the the big risk but you know the big decline in real effective exchange rate terms has definitely been the yen. >> Yeah. So you would say that that's the one that's the outlier then that that's the one that should be material. >> Absolutely. We've got a lovely chart of BIS real effective exchange rates back to you know 40 odd years. We love our charts. We love our history. Yes. >> Um and you know if you renormalize it around 2012 and you can see that you know Japan's been allowed to devalue >> against the rest of the world. You know this has been you know they are you know under the Biden administration they were very definitely seen as the floating you know the the unsinkable aircraft carrier. And you know that you know is one reason why we still like Japanese equities. You know we think that you know they're seeing their roe going up. You know they're getting big competitiveness gains from this. >> Yes. And obviously they're running monetary policy with negative real yields. So that's I guess positive for the equity market. >> Yeah. And and you know our view would be that some normalization of that over the next couple of years seems very likely. the trend towards higher higher interest rates in Japan will probably continue but it'll be at a at a at a slow pace I suspect. >> I mean there has been this fear that we would get a blow up in the JGB market and higher yields. It could have big second order impacts but we have had a huge run up in yields but no major impact on currencies or elsewhere. I mean has that been a surprise? Yeah, I think the fact that the you know the the currency moves haven't been that large. >> Okay. >> Personally, I you know looking at the the US dollar yen chart, it seems to me that to really unwind, I know people will say, oh well the technicals suggest that the carry trade is being unwound and you know look at the you know the the um >> the longs versus shorts. But if you look at actually how the currencies behaved, it really needs to get back to about 120 I think to unwind and appreciation from there would really start to cause problems. But the idea that we could see some repatriation to Japan um away from international assets as yields go higher seems to be perfectly sensible. But I was looking at some numbers earlier this week. You know, the Caribbean has higher exposure to US US assets than um than Japan does now, but of course that's hedge funds. >> Hedge funds. Yeah. >> So, >> yeah. >> Yeah. There's there's other sources of risk that could come through and and bumpers on the market. >> Yeah. Well, I mean, the one asset that you could say we're seeing the fears about the dollar or fiat currencies in general is obviously gold and >> and then obviously silver as a corery. I mean people's pointed to the the debasement trade but but I mean it is striking the magnitude of the move we've seen in gold. I mean you've been >> a student of economics and and markets going back to the 70s. I I think like it's fair to say the moves we've seen now have been as great if not greater which seems surprising. I mean how do you why do you think we're seeing such big moves in in metals markets at the moment? So I think we're seeing a a a range of factors coming together, Alan. Um first of all, you know, we've been talking about of gold and and alternatives to the dollar for a number of years. So David Ba, my co-founder and myself very strongly believe that the bricks plus group, you know, have come together because they want to get away from being beholden to the US authorities and their control of the financial system through the dollar and swift. >> Yeah. Um, and you know, even back in the aftermath of the pandemic, uh, sorry, the the GFC, Bob Zurlic, who was the, uh, the the the head of the World Bank at the time, proposed that there should be a, um, a new global currency built around, you know, effectively a a commoditybacked SDR. >> And I think that that group are taking that to heart. And we've seen those bricks pass purchases of gold, central bank purchases of gold, you know, rising almost monotonically for the last two to three years >> in the aftermath of the of the Ukraine invasion and the the sanctions on Russia. So I think that that process is coming into playing into it. But then on top of that, you know, as you know, if you do think that central banks have missed their targets for multiple years, then you might start to to look for other asset classes. um but but also this willingness to to move towards um a range of alternative assets as a as your inflation hedge. Um so I don't think it's necessarily just a debasement trade and you know sadly all our models have broken down um in terms of real yields and the dollar and you know so that that to me says that it's this structural story that is also playing a role here. And do you think it's it's literally I mean do you think these central banks are possibly accumulating enough gold to create a new system anchored on gold? >> Well, I I I you know I think it's it's going to be more than gold because it's going to have to but then we you know for those of us that have been around long enough there were lots of stories about China over accumulating copper. >> Okay. Yes. >> And other other type of base metals. So I something bas some some some kind of of shift where you did see something supported and you know a some kind of nominal anchor you know of backing currencies I don't think is an impossibility to see within the next 10 years but the point we've made to clients is that the shift away from the dollar has been taking place for almost 20 years. Yeah, >> it's lost, you know, it's its share of of global reserves, currency reserves has come down, you know, 10% over that over that 20 year period. It's been a trend decline. So, um, but the shift up in the gold side is very definitely, you know, accelerating. But again, the point we make is that all that's happened in terms of people's reserves is that they've gone back to where they were in 1998 just before just as we were introducing independent central banking. So um you know maybe we're just people are recognizing that the experiment with independent central banking inflation targeting you know is probably coming to an end. >> Interesting. I mean that that was another feature of the old regime. Obviously we had globalization, falling inflation and um and obviously central bank independent central banks and inflation targeting. I mean you were probably well obviously you started at the Bank of England in in the old era when it was between the bank and the treasury. I mean what will that look like do you think? I mean the reason they went to independent central banks is because politicians meddle on interest rates and eventually you get higher inflation. Is that ultimately where this plays out? It was to try and gain credibility for the politicians. Yeah. Um which was actually, you know, again, probably a way of just trying to let them spend more uh ironically. Um but but the the mechanisms in a non-independent framework work well because you actually see monetary policy and fiscal policy working together to get the best outcome for the economy. I you know I I'm probably at the extreme and I'm not sure that independent central banking has worked well for society. >> There's an asymmetry in terms of um you know willingness uh not to raise rates because they don't want to be blamed for a recession. >> So anytime unemployment goes up they'll cut rates but they don't want to raise rates when you know as we saw in the inflation shock inflation goes up. So it's actually it's been tremendously beneficial for financial markets >> for profits >> for for for the rontier class as it's referred to >> but that was arguably asset purchases and you know a particular byproduct of the financial crisis and the influence of Bernani I guess and people like that >> but but you know for if you look at capital if you look at labor's share of national income Yeah the rise in inequality >> you know and then we wonder why we have greater um >> you know populism high levels of populism. So I actually think I think I personally think that a shift towards a more balanced um central bank treasury relationship is probably quite healthy um >> for society as a whole you know the alternative becomes much less palatable. Yeah, and we I mean we can obviously see that that taking shape to an extent in the US already, you know, with you know Wars and Bessant both talking about you know a Fed Treasury Accord again or and I think that that you know the the markets might be nervous about that and they might well be right to be nervous about it because again what it would argue for is probably a bit higher inflation, >> wages being allowed to get, you know, a bit more um purchase relative to profits >> um and bond yields being modestly higher um but again you know they will the administration will try and stop that rise in bond yields because they want to rele the housing market so you know and that's why low low energy prices are so critical to them. >> Sure. Um >> and if we were to get that type of dynamic obviously we can see it possibly playing out in the US and I mean you know I guess in the UK uh even during co there was nearly direct financing of of the of the deficit obviously in Europe it's different we've got a treaty uh very hard to unwind all of that but could you have this kind of two-speed scenarios more independent in some places and do those places have stronger currencies then or or not or how would you say that You know, well, and maybe that is the the answer. They would have the strong currency, but remember that Christine Lagar came from the the dark side. >> Sure. Yes. >> So, you could argue even there we've seen some politicization of the central bank and certainly a voice that's more attuned to the political um environment. >> Yeah. Interesting. Um we mentioned the midterms very briefly earlier on and and and I think uh we were talking earlier you know you were saying um there is this sentiment out there that maybe we'll just have this administration and eventually things will return to normal and if that was the case maybe the first step towards that would be a Democrat resurgence in the midterms. What how are you seeing it? Currently, you know, the predicted markets are only suggesting a 20% uh clean sweep for the Republicans, 37% for for the Democrats. Um I think the administration will do everything that they can to try and win those, you know, to to certainly limit the losses on the midterms and preferably win them, you know, and certainly keep control um of the uh of the house if they can. My big fear for markets is that if it becomes certain that the Republican administration are going to lose in a big way, >> then I think the risk of interign warfare at the heart of the US administration becomes great. >> Um, and that that four-way coalition that I outlined starts to fracture very dramatically. And at that point, I really would be selling the dollar. That's going to be the point at which you'll say, "Well, hang on a minute. This is just there's there's a lot of rogue rogue elements here." And so unless there was something that materialized to stabilize the ship very dramatically. So that to me seems to be the one of the biggest gray swans out there. >> So presumably for the moment their playbook is to get the economy running hot this year if possible and and that to boost >> prospects for the Republicans. >> Yeah. and you know keep keep unemployment low, keep households happy um or as happy as they can be if you believe the uh some of the the survey numbers. Um there's I think there's quite a lot of doubt around those. Um but but you know the the risk is that if that doesn't happen um you know then you're uh you're in for a for a a much bigger um period of volatility and particularly if you know President Trump just says well he did say prior to the election you know the the 2024 election that that do we need do we need midterms and so you know I'm sure the rubbishing of the electoral process you know will start soon if if it looks So it's going that way. >> Yeah. Um I mean we've talked about this uh regime shift changed international order talked about impact on the US uh Europe to an extent. Um I mean where where are the others other winners and losers in this new environment internationally? >> Well I think that you know we we see um you know the world probably fracturing into four elements. Um there's actually some international relations theories that suggest that five is the optimal number, but at the moment we can't work out where the where the fifth would be. But the four groups would be fortress America um with Canada despite Mark Carney's desires um actually having to link up with America and and Mexico. You know, the US MCA negotiations this year will be critical. um you have the Asian um block you know coalesing around China. I call it slerotic Europe um because I really don't see much of a of a of a driver there without capital marketing. But then there's a non-aligned block of uh the Middle East, India, Turkey, South Africa, you know the bricks without the R and the C really. um that that you know would be an interesting group that where I think investment opportunities will be be strong and if we see a rotation towards either commodities or emerging markets they all stand to to to gain. The other area that we've um emphasized is um uh and David Bow, my co-founder, you know, is is particularly keen on is this idea that if we do see a Trumpian, you know, Monroe Donro policy emerge and the Western hemisphere is viewed as America, then a a rightward shift for a lot of Latin American economies as the as the counterpart to gaining access to a US security umbrella would actually see the potential for a lot of rerating in in um Latin America. >> Yeah. And um it sounds like um Europe is a loser in this uh environment. And you know, one of the things we heard a lot of last week is the end of the rules-based system, international system, which it's kind of a term nearly synonymous with with with Europe. >> Yeah. Europe Europe is built around a a rules-based system and and the you know the the framework that Europe has is a very rules-based framework you know but um regulation is is is its core competency >> um and I might say overregulation at times so yeah you know I think Europe the risk for Europe is that it does get left behind with the demographics and you know it is regulating um growth areas like AI very aggressively. Now that again that may be the right thing for the very long run for society but you know for the next 5 to 10 years it could see capital and labor uh and intellect you know if go elsewhere where it where it can experiment more freely and and develop more freely. >> Yeah. Um I'm just conscious of kind of bringing it together in terms of like asset allocation. I'm sure a lot of your plants you're working with are thinking about asset allocation not just for the next kind of >> 3 to 6 months but kind of 6 months to 3 years or 5 years even. I mean >> there's a lot a lot of uncertainty there as you we don't know how the midterms are going to play out. We don't know how that would impact dollar but I mean if you were thinking about ass allocation on that time frame what are the obvious or the high conviction shifts. I think that the thing that we've been talking to people about is to identify um the pri the entry points that they would want to make for some of the assets that are likely to be long-term winners in a world of stronger nominal growth and higher inflation and positive uh stock bond correlations. So that does take you towards a more valuedriven um framework rather than growth. It takes you towards uh dividends and income and it takes you towards commodities uh and emerging markets. >> Yeah. Uh, as I say, the risk is that if you have a hiatus moment, >> yes, >> um, you know, making those moves early, you know, probably won't damage you too badly relative to other areas. And I think we are starting to see signs that the growth bubble, and we do believe the AI bubble is a bubble, um, that that is coming to a close. But you know the that rotation I think is one if it if we're right it's going to be a five to 10 year rotation. >> Yeah. >> That means you don't have to be in in it for the first six months. >> And I mean one of the parallels people have been drawing recently is kind of with the 90s the mid are we kind of are we closer to 95 or 99 and um but equally I mean you could equally draw parallels with the kind of late 60s and nifty50 and you know the the the higher inflation environment there. I mean, you've been in the markets for four decades. Do you see obvious parallels between now and period in the past? >> Parallel I worry about is 1929, I'm afraid. >> Okay. Right. Yeah. [laughter] >> I think if we're in that 1990s parallel, I think we're definitely past I think we're we're into the 1999, you know, we're we've talked about this being the endgame for the AI bubble. We've got everything that you need, you know, exponential returns on a log scale, buying each other's companies, you know, in M&A activity, buying each other's goods, doing that via vendor financing. But the last bit of this is always excessive capex. >> And the problem is that you run out of people to sell to. >> Yeah. >> They have the cash flow crisis and then you just get your your margins absolutely whacked, you know. Uh but but remember that most bubbles when they burst they do give back over the next five years everything that all the outperformance that they ran at relative to >> Yes. Yeah. Well interesting. Yeah. Um conscious of time and we do like to uh as we wrap up just get you some reflections. I mean you've been in the markets long time for people who are now starting off in your career maybe want to get better at macro at economics. I mean, what do you think? Any things you've read or done that have been very helpful for you in your career? >> So, I think that there's there's lots there's just I've I I you know, >> a lot of books behind you. A lot of books behind me. Um there are tremendous number of helpful books. Reading, you know, is is is really important. But but I think the other thing is to recognize is that in the last five years a lot of people feel that macro hasn't been important and isn't going to be important anymore. Um and I think that's a very dangerous assumption. So understanding where we are in the economic cycle and thinking about those macro relationships um I think are is is very crucial and you know reading you know excellent commentators you know who are strong in their macro like John or um and Rob Armstrong not wanting to to limiting to that but but those are people that I've enjoyed listening to working with over the is um you know and and just getting yourself more up to speed. Hard to identify any any particular books and that's one of the lovely things about the being a strategist rather than economist. There's loads of textbooks about economics. There are very few about investment strategy. >> Right. Interesting. Yeah. Well, maybe you'll >> address that someday now that you've hit your two decade anniversary. >> Yeah. But thanks very much for coming on. Um obviously our listeners can follow your work at absolute strate strategy research um and things like that. >> Yeah, exactly. Um well great thanks a lot and from all of us here at Top Traders Unplugged, thanks for dialing in and we'll be back soon with more content. >> Thanks for listening to Top [music] Traders Unplugged. If you feel you learned something of value from today's episode, the best way to stay updated is to go on over to iTunes and subscribe [music] to the show so that you'll be sure to get all the new episodes as they're released. We have some amazing guests lined up for you. And to ensure our show continues [music] to grow, please leave us an honest rating and review in iTunes. It only takes a minute and it's the best way [music] to show us you love the podcast. We'll see you next time on Top Traders Unplugged.
The 60/40 Is Breaking — Bonds Won’t Save You Anymore feat. Ian Harnett | Global Macro | Ep.96
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that four-way coalition that they outlined [music] starts to fracture very dramatically. And at that point, I really would be selling the dollar. [music] That's going to be the point at which you'll say, "Well, hang on a minute. This is just there's there's a lot of rogue rogue [music] elements here." And so unless there was something that materialized to stabilize the ship very dramatically. So that to me seems to be the one of the biggest [music] gray swans out there. [music] Imagine spending an hour with the world's greatest traders. Imagine learning from their experiences, [music] their successes, and their failures. Imagine no more. Welcome to Top Traders Unplugged, the place where you can learn from the best hedge fund managers in the [music] world, so you can take your manager due diligence or investment career to the next level. [music] Before we begin today's conversation, remember to keep two things in mind. All the discussion we will have about investment [music] performance is about the past and past performance does not guarantee or even infer anything about future performance. Also understand that there's a significant risk of financial loss with [music] all investment strategies and you need to request and understand the specific risks from the investment manager about [music] their product before you make investment decisions. Here's your host, veteran hedge fund manager Neils Krup Len. [music] Welcome or welcome back to another conversation in our series of episodes that focuses on markets and investing from a global macro perspective. This is a series that I not only find incredibly interesting as [music] well as intellectually challenging, but also very important given where we are in [music] the global economy and the geopolitical cycle. We want to dig [music] deep into the minds of some of the most prominent experts to help us better understand [music] what this new global macrodriven world may look like. We want to explore their perspectives [music] on a host of game-changing issues and hopefully dig out nuances in their work through meaningful [music] conversations. Please enjoy today's episode hosted by Alan Dunn. Thanks for that introduction, Neils. Today I'm delighted to be joined by Ian Harnet. Ian is co-founder and chief investment strategist at Absolute Strategy Research. Uh the firm has been in existence uh just coming up to 20 years now. So celebrating their 20 year anniversary this year. Ian's a veteran of the markets. He's been around uh for about four decades in markets now. Started off as an economist at the Bank of England and then worked with sock gen west and UBS uh where at UBS he was chief investment uh chief European investment strategist. So Ian, great to have you on. Um how are you? >> Thanks very much for the invitation Alan. >> Not at all. No, I've I've followed your work um through your career at at various times. So great to have the chance to to chat and u as uh we always do to start off we like to get a sense on how you got interested uh in markets and I suppose before that even economics what was that >> well you know I I have to say I'm afraid it goes back a long way that I think I wrote my first economics article on on the the shape of inflation when I was probably at primary school. >> Okay. Uh and but that was of course back in the 197 in 1970s and um you know that uh that was when inflation was quite rampant. that my father was a an accountant um and was we obviously talked about finance but it was also very much at school um you know where first of all I found out that I actually quite enjoyed economics when I did at a level but also in history um learning about the impact of of great economists like um canes um you know in the pre-war post-war period so you know it's and thinking well actually maybe this is something that can make a difference to the world rather than just you know, being an interesting academic study. >> Very good. Well, these days you're trying to make a difference to people's portfolios, I guess, and it's we're at an interesting juncture. I know you've written a lot lately about the I suppose you might call it the regime shift in the world and you know, we had Davos recently and uh uh Carney speaking about a rupture and and I know that's a theme you've picked up on. Um, I mean to put that all in context, I mean, how would you kind of characterize that regime change, the most salient features of the new regime? >> I think the the the key thing that um we're talking about at Absolute Strategy is the is the way that um the relationship between stocks and bonds that all of us have known for that 40-year period, it's really changing. um that after four years where central banks have consistently missed their inflation targets, we're starting to see people saying, "Hang on a minute, maybe the way out of this debt problem is a little bit more inflation um and you know um less reliance on um you know, keeping the the the nominal side of the economy under control." and that that encourages a shift away from having bonds as the safe asset or the natural hedge in your portfolio if you're if like you know most funds are going to be probably more than 50% invested in equities. >> Yeah. And I mean obviously we had the experience in 2021. Inflation spiked. You know as you say it was the first it was for most of us it was the first real experience of inflation. You know obviously you would have had it back in the 70s and maybe we you know some of us might remember that some. Yeah. Yeah. But but it was really you know prior to that people talked about the possibility of a resurgence of inflation but it people didn't really believe it but to see it inflation rates get back up to whatever it was 7 8% maybe even a little bit higher >> was was something and and obviously then in 2022 we saw equities and bonds >> sell off together proving the points that the spawn equity correlation is is not um always going to be negative >> since then obviously inflation's come down and and there's mixed views obviously it's still running well above target in the uh so you know close to 3% but there are still those who believe well take out the impact of tariffs that it would probably be closer to 2%. So yes there are plenty of people that that kind of would agree with your I suppose synopsis of maybe inflation being more of a challenge but then it's not it's not a universally held view. I mean what do you think is the going to be are the key factors that will keep inflation more elevated here? Well, I think I think you know when you think about some of the um changes that we're seeing in society and you know the investment that will need to be made that shift in the economic structure tends to create um increased costs. The second thing I think is to to recognize you know that a world that becomes more fractured um you know where we get this weaponization of trade, economic growth, you know potentially um less uh globalized that those long thin supply chains that allowed companies to access the lowest cost possible price of labor, lowest possible price of goods um and the lowest price of capital, you those those are changing and and that is likely to push inflation pressures uh up um as well. So you know those are the kind of things I think Alan that make us feel that structurally inflation is going to come down. Tactically the thing we've been talking to clients about is that every central banker in the world should be entirely grateful to the Communist Party of China. >> Okay. um because actually the the exported deflation in goods prices is actually doing a lot of the work um of holding inflation down. >> If you look at service sector inflation in the US, even in the Euro zone, it's 3 4% still. Um so, you know, I think that that central bankers need to be a bit careful about patting themselves on the backs. >> Yes, for for sure. And I mean, we'll probably get into China in a bit more detail later, but just on that point, is that something you see, I mean, hitting a limit? Obviously, there's a lot of people saying that this the rest of the world isn't going to absorb China surplus on an ongoing basis. How do you see that playing out? >> Well, I think that, you know, that's one of the big problems for China, which is that they do have to generate more of a domestic um growth narrative. and our China economist Adam Wolf who's excellent you know is um is still very concerned that with the housing market and uh which is a key source of wealth and confidence for for Chinese consumers still under pressure that that's very difficult to achieve unless you have a a big fiscal expansion and that's what the you know Chinese authorities don't really want to do and yes but clearly in a world a more fractured this more fractured world America's not going to want Chinese dumped goods. Europe is not going to want those dumped goods either. Um and so that's going to make it a much more complex trading environment for everybody. >> Yeah. Um I mean you've touched on you know the weaponization of of credits of capital. Um obviously it was very much to the four at at Davos when you know when when Trump floated the idea of more tariffs in Europe and then the debate was around well what can Europe do? Could Europe, you know, try and impose some measures uh to to dissuade investors in investing in treasury? So, I mean, how we've already had the weaponization or conflict in trade, so obviously capital could be the next frontier. How do you see that evolving? >> I think we're seeing it I think we're seeing it occur relatively softly at the current time. um you know but it could shift to being a much more aggressive method you know which is that if President Trump takes against Canada uh for example then you know if why you know if we've got tariffs on goods why shouldn't American fund managers that are overinvested in Canada for example um you know have to pay a sir charge on that you know eventually you do get to the case where you could potentially get capital controls um reemerging and you clearly something back to the 1970s, but let's hope that we don't get to that stage. But I think what we're seeing is that particularly say for somewhere like Europe, Europe has a problem because you know if you um if you we still have a number of you know separate economies rather than you know capital markets union in a world where you're relying on your domestic capital much more because you know you you know you see investors saying right I'm going to stay at home or or governments even directing you to stay at home. Um, you know, a bit like Rachel Reeves in the UK trying to encourage the, you know, the the retail investors here to invest in the UK, >> then Europe actually just doesn't really have very effective capital markets. And so, you know, even Germany, you know, where with the type of fiscal expansion they're talking about for both infrastructure and for defense, well, there's a lot of debt issuance coming through >> and if it has to all be absorbed by Germans. >> Yeah. >> You know, then that's German institutions and that that's problematic and again could push by some of these bond attire. >> Okay. And I mean obviously there's been a lot of talking suggestions in Europe. we had draggies report out and um you know there's been a a recognition of of the need to to do something in productivity and and equally the likes of Mcron has talked about this the you know the potential >> European surplus of capital and trying to redirect that back. Um sounds like you're not very optimistic on anything dramatic changing in Europe in terms of kind of mutualized debt issuance or anything like that. No, you know, I I think the um you know, one of the things again we've said to our clients is that actually the best thing that could happen to the Euro zone is a French finan uh debt crisis. Um because to get a capital markets union emerging in anything less than 5 years and the the fi it'll be here in five years is something that we've heard for at least the last five years. Um and you know I suspect we'll hear it for the next five years if we don't. Europe has lacked that Munich moment for capital that it had for defense and it really took a very unsuttle comment by JD or set of comments by JD Vance 15 minutes turned on it on its you know of European policy on its head. Um we need something like that to galvanize European um politicians. Um, and you know, uh, the Draghi report, Draghi's comments recently, they're not enough. You're going to have to have something that's large enough that it doesn't completely destroy the European Union. Um, but important enough that, you know, the rest of the Europe has to say, right, we're going to stand with this and create, you know, um, bonds. And actually, that would be the strongest way to challenge America. But if Europe created a large safe asset, yeah, you know, to offset as an alternative to treasuries, there's $9.6 trillion of EU money currently invested across US treasuries, US equities, and US credit. Um, you know, that might well not be um retaliatory repatriation. Yeah. uh which obviously would be very much the weaponization but but more economically driven repatriation >> and I mean from the US side obviously we've had um you know a number of conflicting uh crosscurrens in terms of the weaponization of capital on one hand you know you've had um I suppose a tacid approval of a weaker dollar is one thing but at the same time a desire for the dollar to be be the reserve currency you've got um you know this these deals that they've cut to attract capital in as well. Uh but at the same time concerns about funding the deficits and and obviously going back to Moran's paper some kind of extreme kind of policy proposals around trying to maintain um capital inflow. So I mean in this world of more fragmentation potential capital wars do you see the US been more of a winner or a loser or or at more or less at risk? Well, at the moment I think they've been a very strong winner. Um, if you look at the White House uh website, you know, President Trump is talking about having secured um a 9.6 trillion. So quite interestingly, that's the same amount as the as Europe could shift offshore that bringing capital into the into the US and as you say quite often um in exchange for a reduction in tariffs. Um so you know looking in more detail at that that national um allocation there's a commitment of about $6.7 trillion dollar you know that's a big amount of money from national governments and the net effect is that that's actually um seen tariff levels come down the median tariff levels come down for those countries that are playing that game with America um from 25% to 15%. Um so you know the point we've been making is that this is um it's almost like paying tributes to the monarch um you know and there's some academic um work around neo royalism for those people that want to have a look um that that you know the the the policy wonks are going down this route you know that that actually getting access to the monarch you have to pay upfront for it. This is very so America I think is is doing a very good job from their perspective at trying to offset the risks of that capital flight. Um and you know with Europe saying that they you know they would do a $600 billion deal. Um Europe's actually at the moment saying we'll play by your rules. So that sounds to me like America winning. >> Yes. Now I mean there is a bit of skepticism around some of these numbers. I mean, every time >> Trump loves to to to quote a 500 billion, it seems like for every a baseline for every deal and then there's always a question, is this stuff that was going to happen anyway or not? But it sounds like you think there will be genuine flows. >> I think the point that we've made to people is let's imagine that this was all funneled and this is, you know, this is not the case at the moment. Yes, it's being funneled at the discretion of uh President Trump or um being funneled through individual areas. But let's say this was funneled through a new um sovereign wealth fund and there was that discussion about a US sovereign fund being created and only a third of that number materialized. you would still be talking about a fund that is as large as the noes bank and the noes bank you know is one of the nine is one of the 10 largest holders of nine of the 10 largest US companies just think what that you know that impact um you would have in terms of capital market allocation and we're actually already seeing seeing it with some of these direct investment deals that America the American government's doing in terms of of aiming to secure mineral rights and and resources generally around the world. >> Yeah. Um I mean taking a step back and looking at at what what's been achieved to date. Obviously we're we're probably over just over a year into Trump uh 2.0 and I mean for a lot of the first year there was kind of discussion like what what's the what's the ultimate objective here? Is it, you know, re-industrialization of the US or is it just uh to fund the deficit with the tariffs? I mean, you mentioned this kind of neo- royalist era, which does sum it up very well. Um, I mean, what's your take? What's the uh economic ideology if if there is one driving this? I think we believe that we that that the Trump administration and remember this is a broad alliance of three or four different groupings. The Republican right um you know the tech bros, the unilateralists and then the multilateralists. But what they're coming together to do is to roll back the economic and social structures to back towards the Reaganite era. They're trying to create a new Republican era that will survive for 20 years in much the same way that you know that that Reagan Thatcher axis um did in the in the 1980s. And you know I think that is where they are trying to get to. Um and I think both of the things that you mentioned Alan are on the agenda in terms of the re-industrialization of the United States. But but I also think that let's go back to Scott Bessant's three arrows. Um and you know he loves uh Shinsza arm but but it he came up with the 3% GDP growth 3% deficit and 3 million barrels per day more energy. And you know, I think what lies at the heart there of this is the Republicans aiming to get the deficits under control through higher nominal growth. So this is another reason why we're much more comfortable with the idea that the economy will be run hot to get those debt ratios under control. Um but to offset the inflation risk to some extent, you need that energy. You need cheap energy. Um, and that's I so I think this is at the heart of of of what we've also some of the other policy measures. But here's a it seems to me to be a very broad brush and a very ambitious project that the Republicans are working towards and the midterms are going to be a big test of that. >> Yeah. Before we get on to midterms, I mean, do you think that's realistic? I mean, it it had a great ring to it 33. Uh but you know obviously we've had the the big beautiful bill which made zero progress in towards heading towards a 3% deficit. Um now obviously the great hope is as you say that economic growth is strong. Um and there was talk about deregulation. Obviously we've seen that with respect to maybe uh AI and crypto stuff like that. Um and obviously productivity has picked up although it's debatable what's driving that. Yes. Um so I mean do you do you buy into that narrative of a >> supply that we can I think we can still see that the momentum behind those ideas. So the deregulation of finance will be a you know and banks we've clearly seen the deregulation around the crypto areas. Um I think what um Scott Besson understands probably better than most and I think I think he's a very accomplished economist and and investor is that the counterpart to the public sector deficit is the private sector surplus. So the only way to get that 3% debt ratio that that they want need effectively to keep the the rate, you know, the interest payments under control is that they have to get investment coming through. They have to get consumer spending. And historically, the only way that really you've got the deficits down for governments in terms of debt to GDP >> is you've always had to get the rest of the economy to take on debt. >> Okay. Yeah, >> debt to GDP ratios actually have never come down apart from 19 since the 1950s since 1952 briefly and then in the post pandemic period, but they stabilized where they started pre- pandemic. You look at total debt ratios. So, you know, I I think, you know, I think that's at the heart of this. They're going to run try and relever the housing market, relever consumers, you know, let them borrow against their crypto assets. >> What could possibly go wrong? >> Exactly. Well, you mentioned running the economy hot and obviously we've had the announcement now of War as the uh nominee to be Fed chair. And again, lots of uh different views on War and he has at times sounded hawkish and at times sounded doubbish. um how do you think he'll play it in the in in the early days? >> I I I think you know the the thing that strikes me about um chair elect uh Walsh and I had the pleasure of listening to him at the Atlanta Fed conference a couple of years ago where you know he was actually he you know in front of a number of Fed presidents regional presidents it did seem as though he was chairing waiting even at that stage. So he is taken very seriously. Um his ideas I think are taken very seriously within the Federal Reserve system. Uh would be my perception. And so I think that he is likely to want to deliver those lower interest rates that President Trump will suggest. But you know what I would like to point to is that the the speech that he gave that day, you know, um in 2024, and I think a couple of other people have picked up on it, was actually about bringing the level of the central bank balance sheet down. >> And and it also fits with an an article that Scott Besson wrote about the scope, you know, curtailing the scope um of the the Federal Reserve and the the range of activities of the Federal Reserve. So, you know, the way that I could see this playing out is that actually the the negative surprise for markets could be that that chair Walsh says, okay, no more bond purchases, no more MBS purchases. We are going to reduce the size of the of the balance sheet, but you know what that reduces global liquidity. Um and so you could get those bond yields coming down or or you know interest rates coming down because you know we actually start to see you know some of those some of the froth coming out of markets and in the past rates have responded when the froth has come out of market. So it it may not be quite as um market friendly as I think a lot of people would like. Um but I can see how he could reconcile getting um you know rates down but you know it's it's probably around that um you know QT accelerating QT. >> Yeah. I mean is that I mean obviously the the Fed has totally shifted how it conducts monetary policy into this excess reserve system. So >> there is some debate as to what he says is is really plausible because obviously when they tried to before it's led to problems in the repo market etc. And I and I think you know one of the things that's been a feature of the discussions I've listened to over the last couple of years is the discussion about the ample reserve system. And so I think there could be some quite interesting technical changes and it wouldn't surprise me that you know we see some of at the same time that there's there's deregulation for banks that there might be some you know changed views around how the reserve um programs work and you know maybe the US moving something closer towards you know what we see in Europe and the UK. >> Okay. So taking all of that together, it sounds like you're quite upbeat or modestly so on on the US economic outlook. Is that fair to say? >> Yeah, for the moment, Alan. Um, you know, it it seems uh you know, maybe it's the uh I don't know whether it's contraonential or not, but but actually we're sticking with that overweight US view. Um, you know, it is a very unusual environment to have doubledigit earnings expectations >> and expectations of rate cuts. >> The closest that we came to it were 1996 and 1998. On both occasions, equities gained 20 to 30%. >> And the point we've made to clients is that it's so unusual that it's unlikely that it'll persist to the end of the year. you know, uh it may do and you know, this is the game that that you know, the administration are trying to play. Strong growth, lower rates. Um but if it doesn't, well, which way would you like it to converge? >> Historically, if you get lower rates because earnings growth is tanking, then that's never been good for equities. Normally, you know, the over the last 12 interest rate cycles when you've had a pivot, you know, I think um you know, 10 out of the 12 were negative and the median decline was about 20% or 24% I think was the figure that we that we calculated. Yeah. >> So, you know, the markets will actually be much healthier, ironically, if we manage to keep nominal growth healthy and rate expectations start to get revised out. >> Yeah. Um so I think that that's a more stable environment for markets. >> And what I mean I think the general sense my understanding is uh of investors is of fairly bullish sentiment at the moment kind of reflecting what you're saying growth out looks looks good but then the Fed's still expected maybe to ease at some point if not sooner rather than later. I mean I know you do your own asset allocation survey in absent strategy research. >> What are you seeing in that survey? So, so you know the the asset allocation survey is still you know giving us that same kind of outcome around um both the global economy uh and also the um the outlook for equities versus bonds. I think the the the interesting thing is that people have become more ambivalent about the direction of bonds. >> They've also become a bit more ambivalent about the the direction of inflation as well. So you know it's there's there's question marks that are opening up here. Um but what we're we are seeing is that that a bit of a move towards what one might class value trades things like commodities um emerging markets. So there's a recognition that the core investments that you've perhaps had over the last um you know 10 years uh you know are starting to to lose some of their shine. >> Okay. I mean obviously you not only are you doing the survey you're speaking to a lot of investors. I mean when you talk to them about this regime change in in the global economy and also as you mentioned at the outset that change potentially in the bond equity correlation. Are you seeing many tangible changes in portfolios on the back of that? So, so not really. And one of the points that we make is that that historically when you get to get the rotation out of the US, you need three things. >> Okay? >> First of all, the dollar needs to come down. Well, we've seen a bit of that, but it's stabilized. Um, secondly, you need the global economy to grow rapidly and you know, can can that happen without China being a bit more dynamic? The but the third and most challenging element is that the US roe have to disappoint relative to the rest of the world you know and and you know at the moment given how how much that those margins those roses are being driven by the US tech companies effectively you're saying you've got to have a tech blow up. >> Yeah. Um and if that happens, the risk is that you would then move to what we call a correlation one event. >> Yes, >> the markets come off, everything, you know, loses and then you want to be in low beta. >> The trouble is that some of the things you might want to rotate into emerging markets, commodities, historically, you know, they can be quite quite high beta. So, so you know what we're seeing from clients is that one or two people are making that rotation a bit more towards commodities, a bit more towards um the emerging markets, but they tend to be larger funds who say, "Look, you know, I'm I'm so large, you know, I recognize that Ian um but I'm so large if I don't start now, I'm never going to get there." So, you know, it's >> Well, it is something we've seen. We're recording on the the 5th of February, but in the last week or so, maybe a couple of weeks, this, you know, outperformance of value versus growth, you know, we've had days where the the the uh the NASDAQ is down, but the Dow is holding up or even up, you know, and and if you look at the sectors, industrials and materials doing well >> and we've had this uh >> yeah, I've just heard this expression, this SAS coalyp, I only heard of heard of that one today, but obviously the software the SAS sector is getting hit badly. I mean, as you say, normally if you get a big sell-off, everything gets dragged down. Is this I mean, if you were sort of advising on strategy, sectoral allocations, are you >> at the moment? We would we're sticking with that um more positive cyclical view. Okay. >> Um you know, because you know, you you're and and you know, the com the interesting thing about value is that non US value has been outperforming for about 18 months. Okay. >> If you think the banks, you know, European banks have been on a roar, um, you know, global basic resource stocks have been up, you know, since the start of 2025, you know, I think up 50 60% almost relative, you know. So, so we've seen we've seen non US value outperforming growth already. I think that the challenge for people and I think this is one of the the big you know something that my colleague Will Moss wrote about for our clients um you know very recently ahead of the SAS SAS apocalypse um which which is the irony is that people are using thinking that by rotating into private equity and private credit they're diversifying away from tech. What the last week has shown them is that actually the largest holdings of private equity and private credit are in tech and actually you know listed um uh high yield has got less tech exposure than private credit. >> Okay. Yeah. Interesting. Yes. >> So you know how you diversify in this environment >> Yeah. >> is is really challenging I think. >> Yeah. That's interesting. I mean it just shows you what the labels are put on things. Don't doesn't matter a whole lot. >> Absolutely. I can't say anything. Having worked for investment banks for 20 years, I couldn't possibly comment about that. >> Yeah. Yeah. But it's true. I mean, high yield would traditionally have higher exposure to things like energy, wouldn't it? >> Yeah. >> Yeah. >> And, you know, one of the things that we've been talking to clients about thinking about where you can get, you know, superior returns and and if you there's a very high correlation between equities and high and and and credit. >> Yeah. um high yield credit I think is actually a really interesting asset class now because it's it's one of the few things that does have what it what it says on the on the tin >> right >> um you know so investment grade >> post GFC we saw a big rise in the lowest grade investment grade tripleB from about 30% pre GFC to over 50% now you know a lot of the um a lot of high yield stuff got revamped into to to investment grade or the if it wasn't it wasn't capable of being you know got away in the public markets it's gone to the private markets yeah >> so actually high yield I think really is you know what you're dealing with you know the scale of risk so you know I I think that you know this is this is you know if you want that enhanced yield I would actually go into to that space rather than to sorry a bit of a digression No, no, it's I mean definitely private credit is uh is topical at the moment and what you say is definitely >> I mean >> and as long as and as you know the key point for about about that we say for for for credit and credit really is important because you never have a bare market in equities without having a bare market in credit. >> Exactly. Yeah. >> Um but you you're not going to get a bare market in credit until you have cash flow crisis. So this is where that nominal growth so so the phrase we've used to clients is nominal nominal nominal nominal GDP growth if it's over 4% then your nominal earnings are going to be fine and that means your nominal cash flow will not be challenged and that's the mistake we made in 2023. So, you know, put our hands up. We don't always get it right. You know, we thought the slowdown that was likely to come and did materialize in real terms, but because inflation was still high, the nominal earnings, the nominal cash flows weren't stressed. And so, we didn't have a big market, you know, as large a market, you know, sell off as we might have had. So, you know, that for us is really what we're focusing on with clients. We're saying watch those nominal numbers, watch those nominal cash flows. Um, and even in the in things like the tech sector as well. [music] We touched a bit on you know the the dollar and um weakened last year somewhat but [music] not you know um not dramatically and you know sentiment certainly got quite negative towards the dollar as last year progressed with at times it was the sell US mentality um and then it's probably dipped down a little bit at the start of this year but but has recovered and then was it last week or the week before you know there was talk of the Fed were checking rates in dollar yen which is kind of a highly unusual event. um what's your sense on you know say from a fundamental perspective the fundamental drivers and then what's the US administration are they changing tac with respect to the dollar with you know that checking on rates um I I think that the the the point we've made about the dollar is that our chief economist Dominic White has um done some great work um around you know what kind of dollar um rates you would need to reequilibrate the current account and the trade account and the capital account. Um, and that points to a decline of something like 15%. >> Okay. >> But the question is when >> and against whom? >> Um, and I think that's one of the and that's one of the challenges that you have, you know, if you want the dollar come to come down, something has to appreciate. >> Yeah. >> Uh, and clearly, >> you know, it doesn't seem as though the Chinese authority is going to be very keen on that. Um Europe, you know, is is probably also, you know, wary about seeing the euro go very much higher than this. Again, you know, this is one reason why the euro the European inflation rates have been under control. Um you know, but but you know, it's going to depress growth to some extent uh at some stage. Um and historically, you know, that might see, you know, the euro rates or people think twice about, you know, whether euro rates would go up and effectively the euro is doing the kind of monetary tightening that rates might have done potentially. Um so you really you're left against the yen. Um and you know that is the problem there is how much of unwinding that yen carry trade >> will then disrupt um you know other financial flows globally. So you know that's the the big risk but you know the big decline in real effective exchange rate terms has definitely been the yen. >> Yeah. So you would say that that's the one that's the outlier then that that's the one that should be material. >> Absolutely. We've got a lovely chart of BIS real effective exchange rates back to you know 40 odd years. We love our charts. We love our history. Yes. >> Um and you know if you renormalize it around 2012 and you can see that you know Japan's been allowed to devalue >> against the rest of the world. You know this has been you know they are you know under the Biden administration they were very definitely seen as the floating you know the the unsinkable aircraft carrier. And you know that you know is one reason why we still like Japanese equities. You know we think that you know they're seeing their roe going up. You know they're getting big competitiveness gains from this. >> Yes. And obviously they're running monetary policy with negative real yields. So that's I guess positive for the equity market. >> Yeah. And and you know our view would be that some normalization of that over the next couple of years seems very likely. the trend towards higher higher interest rates in Japan will probably continue but it'll be at a at a at a slow pace I suspect. >> I mean there has been this fear that we would get a blow up in the JGB market and higher yields. It could have big second order impacts but we have had a huge run up in yields but no major impact on currencies or elsewhere. I mean has that been a surprise? Yeah, I think the fact that the you know the the currency moves haven't been that large. >> Okay. >> Personally, I you know looking at the the US dollar yen chart, it seems to me that to really unwind, I know people will say, oh well the technicals suggest that the carry trade is being unwound and you know look at the you know the the um >> the longs versus shorts. But if you look at actually how the currencies behaved, it really needs to get back to about 120 I think to unwind and appreciation from there would really start to cause problems. But the idea that we could see some repatriation to Japan um away from international assets as yields go higher seems to be perfectly sensible. But I was looking at some numbers earlier this week. You know, the Caribbean has higher exposure to US US assets than um than Japan does now, but of course that's hedge funds. >> Hedge funds. Yeah. >> So, >> yeah. >> Yeah. There's there's other sources of risk that could come through and and bumpers on the market. >> Yeah. Well, I mean, the one asset that you could say we're seeing the fears about the dollar or fiat currencies in general is obviously gold and >> and then obviously silver as a corery. I mean people's pointed to the the debasement trade but but I mean it is striking the magnitude of the move we've seen in gold. I mean you've been >> a student of economics and and markets going back to the 70s. I I think like it's fair to say the moves we've seen now have been as great if not greater which seems surprising. I mean how do you why do you think we're seeing such big moves in in metals markets at the moment? So I think we're seeing a a a range of factors coming together, Alan. Um first of all, you know, we've been talking about of gold and and alternatives to the dollar for a number of years. So David Ba, my co-founder and myself very strongly believe that the bricks plus group, you know, have come together because they want to get away from being beholden to the US authorities and their control of the financial system through the dollar and swift. >> Yeah. Um, and you know, even back in the aftermath of the pandemic, uh, sorry, the the GFC, Bob Zurlic, who was the, uh, the the the head of the World Bank at the time, proposed that there should be a, um, a new global currency built around, you know, effectively a a commoditybacked SDR. >> And I think that that group are taking that to heart. And we've seen those bricks pass purchases of gold, central bank purchases of gold, you know, rising almost monotonically for the last two to three years >> in the aftermath of the of the Ukraine invasion and the the sanctions on Russia. So I think that that process is coming into playing into it. But then on top of that, you know, as you know, if you do think that central banks have missed their targets for multiple years, then you might start to to look for other asset classes. um but but also this willingness to to move towards um a range of alternative assets as a as your inflation hedge. Um so I don't think it's necessarily just a debasement trade and you know sadly all our models have broken down um in terms of real yields and the dollar and you know so that that to me says that it's this structural story that is also playing a role here. And do you think it's it's literally I mean do you think these central banks are possibly accumulating enough gold to create a new system anchored on gold? >> Well, I I I you know I think it's it's going to be more than gold because it's going to have to but then we you know for those of us that have been around long enough there were lots of stories about China over accumulating copper. >> Okay. Yes. >> And other other type of base metals. So I something bas some some some kind of of shift where you did see something supported and you know a some kind of nominal anchor you know of backing currencies I don't think is an impossibility to see within the next 10 years but the point we've made to clients is that the shift away from the dollar has been taking place for almost 20 years. Yeah, >> it's lost, you know, it's its share of of global reserves, currency reserves has come down, you know, 10% over that over that 20 year period. It's been a trend decline. So, um, but the shift up in the gold side is very definitely, you know, accelerating. But again, the point we make is that all that's happened in terms of people's reserves is that they've gone back to where they were in 1998 just before just as we were introducing independent central banking. So um you know maybe we're just people are recognizing that the experiment with independent central banking inflation targeting you know is probably coming to an end. >> Interesting. I mean that that was another feature of the old regime. Obviously we had globalization, falling inflation and um and obviously central bank independent central banks and inflation targeting. I mean you were probably well obviously you started at the Bank of England in in the old era when it was between the bank and the treasury. I mean what will that look like do you think? I mean the reason they went to independent central banks is because politicians meddle on interest rates and eventually you get higher inflation. Is that ultimately where this plays out? It was to try and gain credibility for the politicians. Yeah. Um which was actually, you know, again, probably a way of just trying to let them spend more uh ironically. Um but but the the mechanisms in a non-independent framework work well because you actually see monetary policy and fiscal policy working together to get the best outcome for the economy. I you know I I'm probably at the extreme and I'm not sure that independent central banking has worked well for society. >> There's an asymmetry in terms of um you know willingness uh not to raise rates because they don't want to be blamed for a recession. >> So anytime unemployment goes up they'll cut rates but they don't want to raise rates when you know as we saw in the inflation shock inflation goes up. So it's actually it's been tremendously beneficial for financial markets >> for profits >> for for for the rontier class as it's referred to >> but that was arguably asset purchases and you know a particular byproduct of the financial crisis and the influence of Bernani I guess and people like that >> but but you know for if you look at capital if you look at labor's share of national income Yeah the rise in inequality >> you know and then we wonder why we have greater um >> you know populism high levels of populism. So I actually think I think I personally think that a shift towards a more balanced um central bank treasury relationship is probably quite healthy um >> for society as a whole you know the alternative becomes much less palatable. Yeah, and we I mean we can obviously see that that taking shape to an extent in the US already, you know, with you know Wars and Bessant both talking about you know a Fed Treasury Accord again or and I think that that you know the the markets might be nervous about that and they might well be right to be nervous about it because again what it would argue for is probably a bit higher inflation, >> wages being allowed to get, you know, a bit more um purchase relative to profits >> um and bond yields being modestly higher um but again you know they will the administration will try and stop that rise in bond yields because they want to rele the housing market so you know and that's why low low energy prices are so critical to them. >> Sure. Um >> and if we were to get that type of dynamic obviously we can see it possibly playing out in the US and I mean you know I guess in the UK uh even during co there was nearly direct financing of of the of the deficit obviously in Europe it's different we've got a treaty uh very hard to unwind all of that but could you have this kind of two-speed scenarios more independent in some places and do those places have stronger currencies then or or not or how would you say that You know, well, and maybe that is the the answer. They would have the strong currency, but remember that Christine Lagar came from the the dark side. >> Sure. Yes. >> So, you could argue even there we've seen some politicization of the central bank and certainly a voice that's more attuned to the political um environment. >> Yeah. Interesting. Um we mentioned the midterms very briefly earlier on and and and I think uh we were talking earlier you know you were saying um there is this sentiment out there that maybe we'll just have this administration and eventually things will return to normal and if that was the case maybe the first step towards that would be a Democrat resurgence in the midterms. What how are you seeing it? Currently, you know, the predicted markets are only suggesting a 20% uh clean sweep for the Republicans, 37% for for the Democrats. Um I think the administration will do everything that they can to try and win those, you know, to to certainly limit the losses on the midterms and preferably win them, you know, and certainly keep control um of the uh of the house if they can. My big fear for markets is that if it becomes certain that the Republican administration are going to lose in a big way, >> then I think the risk of interign warfare at the heart of the US administration becomes great. >> Um, and that that four-way coalition that I outlined starts to fracture very dramatically. And at that point, I really would be selling the dollar. That's going to be the point at which you'll say, "Well, hang on a minute. This is just there's there's a lot of rogue rogue elements here." And so unless there was something that materialized to stabilize the ship very dramatically. So that to me seems to be the one of the biggest gray swans out there. >> So presumably for the moment their playbook is to get the economy running hot this year if possible and and that to boost >> prospects for the Republicans. >> Yeah. and you know keep keep unemployment low, keep households happy um or as happy as they can be if you believe the uh some of the the survey numbers. Um there's I think there's quite a lot of doubt around those. Um but but you know the the risk is that if that doesn't happen um you know then you're uh you're in for a for a a much bigger um period of volatility and particularly if you know President Trump just says well he did say prior to the election you know the the 2024 election that that do we need do we need midterms and so you know I'm sure the rubbishing of the electoral process you know will start soon if if it looks So it's going that way. >> Yeah. Um I mean we've talked about this uh regime shift changed international order talked about impact on the US uh Europe to an extent. Um I mean where where are the others other winners and losers in this new environment internationally? >> Well I think that you know we we see um you know the world probably fracturing into four elements. Um there's actually some international relations theories that suggest that five is the optimal number, but at the moment we can't work out where the where the fifth would be. But the four groups would be fortress America um with Canada despite Mark Carney's desires um actually having to link up with America and and Mexico. You know, the US MCA negotiations this year will be critical. um you have the Asian um block you know coalesing around China. I call it slerotic Europe um because I really don't see much of a of a of a driver there without capital marketing. But then there's a non-aligned block of uh the Middle East, India, Turkey, South Africa, you know the bricks without the R and the C really. um that that you know would be an interesting group that where I think investment opportunities will be be strong and if we see a rotation towards either commodities or emerging markets they all stand to to to gain. The other area that we've um emphasized is um uh and David Bow, my co-founder, you know, is is particularly keen on is this idea that if we do see a Trumpian, you know, Monroe Donro policy emerge and the Western hemisphere is viewed as America, then a a rightward shift for a lot of Latin American economies as the as the counterpart to gaining access to a US security umbrella would actually see the potential for a lot of rerating in in um Latin America. >> Yeah. And um it sounds like um Europe is a loser in this uh environment. And you know, one of the things we heard a lot of last week is the end of the rules-based system, international system, which it's kind of a term nearly synonymous with with with Europe. >> Yeah. Europe Europe is built around a a rules-based system and and the you know the the framework that Europe has is a very rules-based framework you know but um regulation is is is its core competency >> um and I might say overregulation at times so yeah you know I think Europe the risk for Europe is that it does get left behind with the demographics and you know it is regulating um growth areas like AI very aggressively. Now that again that may be the right thing for the very long run for society but you know for the next 5 to 10 years it could see capital and labor uh and intellect you know if go elsewhere where it where it can experiment more freely and and develop more freely. >> Yeah. Um I'm just conscious of kind of bringing it together in terms of like asset allocation. I'm sure a lot of your plants you're working with are thinking about asset allocation not just for the next kind of >> 3 to 6 months but kind of 6 months to 3 years or 5 years even. I mean >> there's a lot a lot of uncertainty there as you we don't know how the midterms are going to play out. We don't know how that would impact dollar but I mean if you were thinking about ass allocation on that time frame what are the obvious or the high conviction shifts. I think that the thing that we've been talking to people about is to identify um the pri the entry points that they would want to make for some of the assets that are likely to be long-term winners in a world of stronger nominal growth and higher inflation and positive uh stock bond correlations. So that does take you towards a more valuedriven um framework rather than growth. It takes you towards uh dividends and income and it takes you towards commodities uh and emerging markets. >> Yeah. Uh, as I say, the risk is that if you have a hiatus moment, >> yes, >> um, you know, making those moves early, you know, probably won't damage you too badly relative to other areas. And I think we are starting to see signs that the growth bubble, and we do believe the AI bubble is a bubble, um, that that is coming to a close. But you know the that rotation I think is one if it if we're right it's going to be a five to 10 year rotation. >> Yeah. >> That means you don't have to be in in it for the first six months. >> And I mean one of the parallels people have been drawing recently is kind of with the 90s the mid are we kind of are we closer to 95 or 99 and um but equally I mean you could equally draw parallels with the kind of late 60s and nifty50 and you know the the the higher inflation environment there. I mean, you've been in the markets for four decades. Do you see obvious parallels between now and period in the past? >> Parallel I worry about is 1929, I'm afraid. >> Okay. Right. Yeah. [laughter] >> I think if we're in that 1990s parallel, I think we're definitely past I think we're we're into the 1999, you know, we're we've talked about this being the endgame for the AI bubble. We've got everything that you need, you know, exponential returns on a log scale, buying each other's companies, you know, in M&A activity, buying each other's goods, doing that via vendor financing. But the last bit of this is always excessive capex. >> And the problem is that you run out of people to sell to. >> Yeah. >> They have the cash flow crisis and then you just get your your margins absolutely whacked, you know. Uh but but remember that most bubbles when they burst they do give back over the next five years everything that all the outperformance that they ran at relative to >> Yes. Yeah. Well interesting. Yeah. Um conscious of time and we do like to uh as we wrap up just get you some reflections. I mean you've been in the markets long time for people who are now starting off in your career maybe want to get better at macro at economics. I mean, what do you think? Any things you've read or done that have been very helpful for you in your career? >> So, I think that there's there's lots there's just I've I I you know, >> a lot of books behind you. A lot of books behind me. Um there are tremendous number of helpful books. Reading, you know, is is is really important. But but I think the other thing is to recognize is that in the last five years a lot of people feel that macro hasn't been important and isn't going to be important anymore. Um and I think that's a very dangerous assumption. So understanding where we are in the economic cycle and thinking about those macro relationships um I think are is is very crucial and you know reading you know excellent commentators you know who are strong in their macro like John or um and Rob Armstrong not wanting to to limiting to that but but those are people that I've enjoyed listening to working with over the is um you know and and just getting yourself more up to speed. Hard to identify any any particular books and that's one of the lovely things about the being a strategist rather than economist. There's loads of textbooks about economics. There are very few about investment strategy. >> Right. Interesting. Yeah. Well, maybe you'll >> address that someday now that you've hit your two decade anniversary. >> Yeah. But thanks very much for coming on. Um obviously our listeners can follow your work at absolute strate strategy research um and things like that. >> Yeah, exactly. Um well great thanks a lot and from all of us here at Top Traders Unplugged, thanks for dialing in and we'll be back soon with more content. >> Thanks for listening to Top [music] Traders Unplugged. If you feel you learned something of value from today's episode, the best way to stay updated is to go on over to iTunes and subscribe [music] to the show so that you'll be sure to get all the new episodes as they're released. We have some amazing guests lined up for you. And to ensure our show continues [music] to grow, please leave us an honest rating and review in iTunes. It only takes a minute and it's the best way [music] to show us you love the podcast. We'll see you next time on Top Traders Unplugged.