Transcription complète de Turbulence in the AI trade and a shift in US politics with Economist Andrew Hunt

time. I mean, I think the fall in 70 00:04:00.620 --> 00:04:03.870 NVIDIA's market cap last night was about the same as 71 00:04:03.909 --> 00:04:07.169 a 60% fall in the FTSE, something like that, in 72 00:04:07.270 --> 00:04:10.169 terms of money destroyed. I mean, these are huge numbers 73 00:04:10.210 --> 00:04:13.090 we're throwing around. And so there would have been some 74 00:04:13.189 --> 00:04:17.769 flight towards bonds. But also, I think there's another dynamic 75 00:04:17.829 --> 00:04:22.379 here in that initial ratcheting up in yields a few 76 00:04:22.420 --> 00:04:26.449 months ago I think has put the whole AI capital 77 00:04:26.490 --> 00:04:31.810 spending or the funding for that in doubt. So although 78 00:04:31.850 --> 00:04:34.180 savings rates are falling, I think we might now be 79 00:04:34.189 --> 00:04:38.339 in a world where capital spending, particularly in the AI complex, 80 00:04:38.399 --> 00:04:42.120 is falling away, reducing the demand for credit. And perhaps 81 00:04:42.160 --> 00:04:45.899 the equity market is reflecting the fact that these earnings 82 00:04:45.939 --> 00:04:47.589 are not going to come through. And there's a particularly 83 00:04:47.649 --> 00:04:51.980 nasty dynamic here. So much of reported profit growth in 84 00:04:52.000 --> 00:04:55.360 the US has been actually what economists call the capital 85 00:04:56.519 --> 00:05:00.889 consumption allowance. Other people might just call it depreciation, the 86 00:05:00.910 --> 00:05:04.269 kind of implied cash flow from that. That's great on 87 00:05:04.310 --> 00:05:06.129 the way up. When you've got a capital spending boom 88 00:05:06.189 --> 00:05:09.490 and you're depreciating things over seven years, that's great for 89 00:05:09.529 --> 00:05:13.300 reported profits. But if capital spending starts to fall away 90 00:05:13.399 --> 00:05:16.120 relative to that depreciation that's coming through from the capital 91 00:05:16.139 --> 00:05:21.370 spending you've done previously, then reported profits get absolutely hammered. 92 00:05:21.750 --> 00:05:24.199 And I think the equity markets perhaps beginning to sense 93 00:05:24.250 --> 00:05:27.009 that if this capital spending boom is indeed going to 94 00:05:27.029 --> 00:05:30.810 wind down, then there's going to be a disproportionate impact 95 00:05:30.870 --> 00:05:36.829 on reported profits because of this depreciation profit dynamic. And so, yeah, 96 00:05:36.949 --> 00:05:40.329 it's been a tough week for equities on the back 97 00:05:40.370 --> 00:05:42.649 of that. And there may well be more of that, 98 00:05:42.689 --> 00:05:45.269 because I think we are going to see evidence that 99 00:05:45.290 --> 00:05:48.180 the capital spending boom is slowing. Now, I've covered a 100 00:05:48.560 --> 00:05:50.399 lot of credit booms in my career. I'm going to 101 00:05:50.420 --> 00:05:53.300 feel quite old in this. And some of the biggest 102 00:05:53.339 --> 00:05:57.279 credit booms, thinking of the UK in the late 80s, Japan, 103 00:05:57.319 --> 00:06:01.899 of course, in the late 80s, early 90s, the Asian crisis, NASDAQ, and, 104 00:06:01.939 --> 00:06:05.980 of course, the global financial crisis. And something you see 105 00:06:06.339 --> 00:06:08.860 in the tail end of a credit boom is a 106 00:06:09.000 --> 00:06:12.740 lot of the credit that finances the capital spending in, say, 107 00:06:12.759 --> 00:06:16.860 Japan or in Asia starts to go off balance sheet. 108 00:06:17.189 --> 00:06:22.009 there's an awful lot of trade credit involved. There's non-bank lenders, 109 00:06:22.230 --> 00:06:25.310 read private credit in this particular iteration, start to become 110 00:06:25.329 --> 00:06:30.110 a big part of the mobilization of credit that feeds 111 00:06:30.149 --> 00:06:34.470 the capital spending, feeds the whole economic boom. But right 112 00:06:34.509 --> 00:06:37.310 at the end of that cycle, those channels tend to 113 00:06:37.329 --> 00:06:41.870 get compromised. And the rise in bond yields we saw 114 00:06:41.889 --> 00:06:44.839 a month or so ago On top of some of 115 00:06:44.860 --> 00:06:47.019 the other things that were happening, I think the Fed's 116 00:06:47.060 --> 00:06:50.379 guidance here suggesting the banks didn't get involved in wholesale 117 00:06:50.420 --> 00:06:53.680 funding is quite a big story here that Walsh didn't 118 00:06:53.800 --> 00:06:57.209 only tie in by raising the Fed funds. His guidance 119 00:06:57.290 --> 00:07:01.009 to the commercial banks was probably more important. But what 120 00:07:01.050 --> 00:07:05.910 we've seen is those non-bank credit channels really starting to struggle. 121 00:07:06.329 --> 00:07:08.740 And you see that in the markets, the rise in 122 00:07:08.750 --> 00:07:14.949 CCC spreads, CDS prices, CDSs aren't a particularly efficient market. 123 00:07:15.290 --> 00:07:17.410 It's a very thin market, so you don't read too 124 00:07:17.449 --> 00:07:19.870 much into the price moves. But a lot has been 125 00:07:19.910 --> 00:07:24.069 happening in CDS prices. And what I started to see 126 00:07:24.110 --> 00:07:27.050 in the weekly money and credit data in the US 127 00:07:28.529 --> 00:07:33.670 is sort of almost discontinuities. There'll be big jumps in 128 00:07:33.750 --> 00:07:37.829 credit to commercial industrial companies or big jumps in lending 129 00:07:37.980 --> 00:07:42.430 to non-bank financials. And that, I think, was very symptomatic 130 00:07:42.569 --> 00:07:46.370 that those non-bank credit channels that had fed the AI 131 00:07:46.410 --> 00:07:49.269 boom started to get stressed a couple of months ago. 132 00:07:49.980 --> 00:07:53.540 And for the first six weeks of that process, it 133 00:07:53.620 --> 00:07:56.480 did seem that the US commercial banks were prepared to 134 00:07:56.800 --> 00:07:58.920 take this stuff on balance sheet. They were prepared to 135 00:07:59.000 --> 00:08:03.310 step into the void and keep the system just

about funded. 136 00:08:04.089 --> 00:08:06.149 But in the last couple of weeks, we've seen a 137 00:08:06.290 --> 00:08:09.209 fall in the total assets of the US banking system. 138 00:08:09.610 --> 00:08:13.480 They've lent less to non-bank financials. The commercial and industrial 139 00:08:13.509 --> 00:08:16.379 lending data are stored. Now, this is weekly data, and 140 00:08:16.399 --> 00:08:18.360 you don't want to get too excited with two weeks' 141 00:08:18.420 --> 00:08:22.660 worth of weekly data that's been seasonally adjusted. But then 142 00:08:23.399 --> 00:08:25.220 looking at some of the other things we've seen going 143 00:08:25.300 --> 00:08:28.990 on in markets, U.S. banks pulling back from lending to 144 00:08:29.069 --> 00:08:34.110 non-residents at the same time, what we've seen, say, in 145 00:08:34.870 --> 00:08:37.789 the far reaches of the credit system, it does all 146 00:08:37.870 --> 00:08:45.529 look to me like That situation we saw mid-2008, first 147 00:08:45.610 --> 00:08:51.320 quarter 1990 in Japan, around about 1990-91 in the UK, 148 00:08:52.100 --> 00:08:59.639 where you have the non-bank channels start to struggle. The 149 00:08:59.679 --> 00:09:02.340 lending comes on balance sheet. You get a late cycle 150 00:09:02.379 --> 00:09:05.919 surge in credit growth from the conventional banking system. And 151 00:09:05.960 --> 00:09:09.570 then that stops. And then that's typically where you start 152 00:09:09.590 --> 00:09:11.970 to see the economy slow down and the equity market 153 00:09:11.990 --> 00:09:15.049 to struggle. And that feels like the narrative of the 154 00:09:15.110 --> 00:09:17.330 last 10 days or so. So it's going to be 155 00:09:17.389 --> 00:09:22.289 very interesting. I think, you know, arguably crucial that tonight 156 00:09:22.409 --> 00:09:24.730 when we get our next lot of U.S. monetary data 157 00:09:24.769 --> 00:09:26.950 and then in a week's time as well, if we 158 00:09:26.970 --> 00:09:30.429 start to get the consistent story that the conventional, the 159 00:09:30.549 --> 00:09:34.899 old school banks are not prepared to keep filling that void, 160 00:09:35.379 --> 00:09:38.039 as the non-bank credit channels start to dry up, and 161 00:09:38.059 --> 00:09:40.059 we're certainly seeing evidence of that all around us at 162 00:09:40.100 --> 00:09:43.120 the moment, then I think we probably need to get 163 00:09:43.259 --> 00:09:47.159 really quite cautious about the outlook for capital spending, certainly 164 00:09:47.179 --> 00:09:52.990 the outlook for corporate profits because of that depreciation versus 165 00:09:53.029 --> 00:09:56.690 capital spending dynamic and the impact that has on profitability. 166 00:09:57.149 --> 00:10:00.250 And of course, the equity markets, even today, are not 167 00:10:00.330 --> 00:10:03.509 particularly cheap. So we're in quite a vulnerable moment here. 168 00:10:04.080 --> 00:10:06.200 I think we do need to look very closely at 169 00:10:06.220 --> 00:10:10.639 the credit data. If we don't see those big US 170 00:10:10.820 --> 00:10:14.740 commercial banks stepping up to provide more credit to keep 171 00:10:14.779 --> 00:10:18.559 the system funding, then I think we will see higher yields, 172 00:10:18.620 --> 00:10:22.700 particularly in the equity market Now at some point that 173 00:10:22.779 --> 00:10:26.730 pain will become apparent to the Federal Reserve. I think 174 00:10:26.759 --> 00:10:29.350 they are aware of it. We've seen just a little 175 00:10:29.389 --> 00:10:31.889 bit of liquidity injection in the last week or so 176 00:10:31.929 --> 00:10:34.309 from the Federal Reserve that does suggest they're conscious of 177 00:10:34.950 --> 00:10:38.269 what's going on. Now ultimately you would expect if the 178 00:10:38.289 --> 00:10:41.580 commercial banks don't step into the void, the Federal Reserve 179 00:10:41.620 --> 00:10:43.820 will find a way of encouraging them or even do 180 00:10:43.879 --> 00:10:48.200 it itself. Perhaps the Fed doesn't actually get to quantitative 181 00:10:48.240 --> 00:10:51.299 tightening despite everything Mr Walsh has talked about and setting 182 00:10:51.340 --> 00:10:54.100 up task force and everything. Perhaps actually his next move 183 00:10:54.139 --> 00:10:57.009 is back towards expanding the balance sheet if this thing 184 00:10:57.190 --> 00:11:02.070 gathers momentum. But it's certainly an interesting dynamic. And I 185 00:11:02.110 --> 00:11:05.190 do think the tech boom had gone too far. And 186 00:11:05.230 --> 00:11:08.860 here really are parallels with Japan. If I think back 187 00:11:08.899 --> 00:11:12.419 to that Japanese economic boom and credit boom in the 188 00:11:12.460 --> 00:11:16.830 late 80s, so much of the capital spending occurred in 189 00:11:16.970 --> 00:11:23.559 one sector, basically manufacturing, cars, consumer electronics, and of course, property. 190 00:11:24.460 --> 00:11:26.620 But it was a very narrow capital spending boom, and 191 00:11:26.639 --> 00:11:29.360 it was probably too narrow in as much as it 192 00:11:29.399 --> 00:11:33.159 was producing more of these things than the Japanese households 193 00:11:33.580 --> 00:11:37.580 actually wanted. There were shortages of some things in Japan 194 00:11:37.600 --> 00:11:39.879 during the boom, and the famous orange juice that would 195 00:11:39.899 --> 00:11:43.389 cost you $ 20. for a glass of orange juice because 196 00:11:43.409 --> 00:11:47.029 the service sector was supply constrained. But you could go 197 00:11:47.070 --> 00:11:51.759 to Akihabara and buy a VCR, shows my age, for 198 00:11:51.799 --> 00:11:54.200 less than the price of the orange juice. You had 199 00:11:54.240 --> 00:11:58.320 that disequilibrium. And I do wonder whether the tech bros 200 00:11:58.340 --> 00:12:01.340 have perhaps produced rather too much of the new tech, 201 00:12:01.379 --> 00:12:04.470 of the AI theme, certainly more than the consumer wants. 202

00:12:05.409 --> 00:12:07.690 If we now take the credit boom away, I think 203 00:12:07.710 --> 00:12:10.769 the economy will find an equilibrium a bit like Japan's. 204 00:12:11.720 --> 00:12:18.179 where you can only consume as many of the supply-constrained 205 00:12:18.200 --> 00:12:20.019 things as are actually meant. So in Japan, you could 206 00:12:20.070 --> 00:12:22.490 only consume so many glasses of orange juice because that's 207 00:12:22.519 --> 00:12:25.950 all they were. That's all that there was. In the 208 00:12:25.990 --> 00:12:30.350 case of the US, if we go to this suboptimal equilibrium, 209 00:12:30.370 --> 00:12:35.090 there'll only be so much capacity in the old economy. 210 00:12:35.649 --> 00:12:38.769 So you get lingering inflation, stagflation, if you like, in 211 00:12:38.789 --> 00:12:41.279 the old economy. But in the new economy, where they 212 00:12:41.320 --> 00:12:45.740 produce too much, you get some deflation and low capacity utilization. 213 00:12:46.279 --> 00:12:49.029 It's bad for their profits. And it brings the whole 214 00:12:49.090 --> 00:12:52.889 economy inside what the economists call the production possibility frontier, 215 00:12:53.289 --> 00:12:58.470 which is really quite a sluggish deflation in some sectors, 216 00:12:58.590 --> 00:13:02.120 inflation in others. The headline consumer price index just becomes 217 00:13:02.179 --> 00:13:04.740 mathematical at that point. It'll be a number determined by 218 00:13:04.779 --> 00:13:07.840 the weightings in the CPI. You know, probably I get 219 00:13:07.960 --> 00:13:11.330 too concerned whether inflation is one, two, or three in 220 00:13:11.370 --> 00:13:15.149 that because it's mathematical. It's what's going on in the 221 00:13:15.250 --> 00:13:19.620 sectors that matters. And if you move into that sort 222 00:13:19.649 --> 00:13:24.220 of suboptimal equilibrium, then the companies that have pricing power 223 00:13:24.250 --> 00:13:26.500 will be in the old economy. They'll be the ones 224 00:13:26.539 --> 00:13:29.159 that are more likely to be cash flow positive. They'll 225 00:13:29.200 --> 00:13:30.899 be the ones that are profitable, perhaps because they're not 226 00:13:30.940 --> 00:13:34.620 carrying a lot of depreciation from former capital spending. And 227 00:13:34.659 --> 00:13:37.080 it's the AI sector that you start to wonder whether 228 00:13:37.100 --> 00:13:39.360 there's actually going to be any profits. So it's quite 229 00:13:39.399 --> 00:13:45.320 a big And also it has ramifications around the world. 230 00:13:45.360 --> 00:13:47.940 If the AI boom slows down, then the Asian current 231 00:13:47.980 --> 00:13:50.600 account surpluses start to come down. That changes a lot 232 00:13:50.639 --> 00:13:53.299 of the international dynamics we've talked about in some of 233 00:13:53.320 --> 00:13:56.200 the previous calls. So this really is, I think, a 234 00:13:56.799 --> 00:14:01.580 fascinating moment in history. If the US commercial banks in 235 00:14:01.600 --> 00:14:06.139 the next few weeks step up and fund the AI sector, 236 00:14:06.179 --> 00:14:11.139 fund the corporate sector in general, prepared to do on-balance 237 00:14:11.159 --> 00:14:15.779 sheet lending, then the status quo is maintained and this 238 00:14:15.840 --> 00:14:18.970 is just a mid-cycle correction. If we see the banks 239 00:14:19.330 --> 00:14:21.850 pulling back or continuing to pull back over the next 240 00:14:21.899 --> 00:14:25.350 few weeks, you're probably a lot more cautious with regard 241 00:14:25.370 --> 00:14:27.970 to your outlook for profits, for asset prices in general, 242 00:14:28.450 --> 00:14:30.730 and you start to consider there's going to be quite 243 00:14:30.750 --> 00:14:33.210 a big rejig in many of the things we've taken 244 00:14:33.230 --> 00:14:38.649 for granted over the last year really the last three 245 00:14:38.669 --> 00:14:41.169 or four years and perhaps arguably the last 20 years. 246 00:14:42.950 --> 00:14:45.720 So the synthesis of what's happened in the bond markets 247 00:14:45.759 --> 00:14:49.419 and the equity markets since, which I think is you're 248 00:14:49.460 --> 00:14:52.379 smoking gun a little bit, is that there's a suspicion 249 00:14:52.399 --> 00:14:55.940 there's probably going to be less demand for credit at 250 00:14:55.980 --> 00:14:58.419 these prices. So there's kind of reverse crowding out. 251 00:14:59.740 --> 00:15:00.220 But from an. 252 00:15:00.179 --> 00:15:03.250 Equity market point of view, if there was that sort of, 253 00:15:03.330 --> 00:15:05.429 I think they're calling it the valley of death between 254 00:15:05.470 --> 00:15:08.750 the build out and the monetization it just got pushed 255 00:15:08.850 --> 00:15:10.169 out a little bit further. 256 00:15:10.629 --> 00:15:12.070 So that's kind of bad for profits. 257 00:15:12.450 --> 00:15:15.250 And that's why the equity markets reacted differently to the 258 00:15:15.269 --> 00:15:16.129 bond market. 259 00:15:16.309 --> 00:15:18.830 Is that kind of it? I think there's a bit 260 00:15:18.889 --> 00:15:20.919 of that. I mean, I think some of it is mechanical. 261 00:15:20.940 --> 00:15:24.200 I mean, if we think, I'm not giving investment advice 262 00:15:24.259 --> 00:15:27.039 on stocks here, obviously, but if you think of a 263 00:15:27.059 --> 00:15:31.450 big AI chip manufacturer who would make a lot of 264 00:15:31.490 --> 00:15:36.190 chips and then lend the money to somebody building a 265 00:15:36.210 --> 00:15:39.480 data center, or a neocloud, who would buy their chips. 266 00:15:39.759 --> 00:15:42.500 So it was a form of vendor financing. Now, in 267 00:15:42.519 --> 00:15:45.980 the way the accounting works, the chip manufacturer would book 268 00:15:46.120 --> 00:15:50.259 all the sales as revenues and show a profit, whereas 269 00:15:50.299 --> 00:15:54.710 the data center would depreciate over effectively about seven years. 270 00:15:55.649

--> 00:15:59.210 So the costs were being accounted for completely differently than 271 00:15:59.809 --> 00:16:03.029 the revenues. But if the capital spending now slows down, 272 00:16:03.090 --> 00:16:06.509 the revenues collapse, and then all that depreciation happens despite 273 00:16:06.529 --> 00:16:09.000 the fact You're no longer actually doing the capital spending. 274 00:16:09.580 --> 00:16:14.259 So the whipsaw in profits is really quite scary. And 275 00:16:14.519 --> 00:16:17.509 a few of the high-profile strategists have been drawing the 276 00:16:17.549 --> 00:16:21.850 market's attention to this. There's potential for disruptions in the 277 00:16:21.889 --> 00:16:26.289 credit markets being reflected, and then, of course, any regulatory changes, 278 00:16:26.490 --> 00:16:28.529 which I think will take time to come through as 279 00:16:28.549 --> 00:16:31.049 a result of the midterms. I'm not focused too much 280 00:16:31.129 --> 00:16:36.610 on that. We get a degree of credit rationing. then 281 00:16:36.629 --> 00:16:42.149 it does seem to me that the profit data will deteriorate. 282 00:16:42.169 --> 00:16:45.019 And I think that's what's upsetting equities. And for the 283 00:16:45.059 --> 00:16:48.779 bond markets, you could have sold off in the midterms. 284 00:16:49.480 --> 00:16:52.080 You haven't because I think they're sensing that there will 285 00:16:52.100 --> 00:16:55.860 be this slowdown in corporate credit growth and there will 286 00:16:55.899 --> 00:16:59.899 be some flight to safety because of what's happening in 287 00:16:59.919 --> 00:17:02.360 the equity market as well. But I think the fact 288 00:17:02.379 --> 00:17:06.769 the bond market hasn't reacted is really quite significant at 289 00:17:06.789 --> 00:17:10.650 this point. This should have been a bit of kryptonite. 290 00:17:10.670 --> 00:17:13.529 The midterm should have been almost kryptonite for the bond markets. 291 00:17:14.009 --> 00:17:16.400 That hasn't happened. And I think that's because there are 292 00:17:16.480 --> 00:17:19.319 bigger changes actually occurring within the private sector now. 293 00:17:21.180 --> 00:17:25.220 So looking, I guess we're in a kind of uneasy 294 00:17:25.299 --> 00:17:26.900 period where you just have to keep a bit of 295 00:17:26.940 --> 00:17:30.970 a watch out. You sound kind of cautious on risk assets, 296 00:17:31.049 --> 00:17:32.670 but don't run for the hills quite yet. 297 00:17:32.809 --> 00:17:33.549 So you're watching. 298 00:17:34.390 --> 00:17:36.980 Bank lending, I think you're going to be going to 299 00:17:37.000 --> 00:17:39.140 the U.S., talking to some of those banks in the 300 00:17:39.180 --> 00:17:39.819 near future. 301 00:17:39.839 --> 00:17:41.519 The U.S. 302 00:17:41.579 --> 00:17:43.220 Dollar, is that another kind of tell? 303 00:17:45.339 --> 00:17:47.960 At the moment, I think the dollar is gaining support 304 00:17:48.000 --> 00:17:51.660 because U.S. banks are reducing their offshore exposure. So there's 305 00:17:51.680 --> 00:17:55.430 a repatriation and you'd expect that to continue for a 306 00:17:55.490 --> 00:17:59.609 while longer. But if we do get a risk-off moment, 307 00:17:59.829 --> 00:18:02.910 I would expect the yen to appreciate quite dramatically as 308 00:18:02.950 --> 00:18:05.880 the yen carry trade unwinds. I haven't thought the yen 309 00:18:05.920 --> 00:18:08.500 carry trade would unwind because Japan would raise yields, because 310 00:18:08.519 --> 00:18:10.720 I don't think Japan has an inflation problem. I'm quite 311 00:18:10.819 --> 00:18:16.009 non-consensus on that. But if Japanese investors start to sense 312 00:18:16.049 --> 00:18:19.549 the world outside isn't very friendly and then repatriate a 313 00:18:19.569 --> 00:18:21.970 lot of the proceeds of their current account surpluses that 314 00:18:22.009 --> 00:18:24.890 hitherto they haven't repatriated, we could see quite a sharp 315 00:18:24.930 --> 00:18:30.059 appreciation of the yen. Euro, less clear. Obviously, we have 316 00:18:30.130 --> 00:18:35.220 our own problems within the European region at the moment. Ultimately, 317 00:18:35.279 --> 00:18:37.940 in this world, I do think we see a revaluation 318 00:18:38.160 --> 00:18:43.049 of Asian currencies. And that does have an impact on everybody. 319 00:18:43.390 --> 00:18:46.029 I'm starting to think it could be sort of Bretton 320 00:18:46.049 --> 00:18:50.900 Woods 3. If we do have a correction and a slowdown, 321 00:18:50.940 --> 00:18:53.980 there will be immense pressure on Asia to revalue its currencies. 322 00:18:54.039 --> 00:18:56.559 So we might see a currency accord within the next 323 00:18:56.579 --> 00:19:01.369 few years that sees the Asian currencies, particularly CNY, appreciate. 324 00:19:02.460 --> 00:19:05.910 And that changes the world. That means that countries like 325 00:19:05.930 --> 00:19:08.569 the UK, like Australia, that import a lot of their 326 00:19:08.609 --> 00:19:11.529 consumer goods from Asia will have to pay more. So 327 00:19:11.569 --> 00:19:17.609 there's some traded goods price inflation comes there. That undermines 328 00:19:17.809 --> 00:19:22.390 household real incomes. It keeps interest rates a little elevated, 329 00:19:22.430 --> 00:19:24.089 as we've just seen with the Bank of England raising 330 00:19:24.130 --> 00:19:27.670 their rates in response to higher import prices. It's not 331 00:19:27.839 --> 00:19:30.079 entirely clear they should do that, but that's what central 332 00:19:30.119 --> 00:19:33.519 banks do. And that's not great for property. It's not 333 00:19:33.619 --> 00:19:36.619 great for services. It's not great for traded goods. So 334 00:19:36.640 --> 00:19:38.299 I think we could see a big, and we're starting 335 00:19:38.319 --> 00:19:40.640 to see it in the market already, a big rotation 336 00:19:40.660 --> 00:19:48.299 away from tech, non-traded goods, property, financials, towards those OECD 337

00:19:48.339 --> 00:19:52.650 manufacturers that start to get priced back into global markets 338 00:19:52.880 --> 00:19:56.720 by that Asian currency revaluation. So this is quite a 339 00:19:57.079 --> 00:20:00.259 big rejig for the global economy. It's not just simply 340 00:20:00.299 --> 00:20:07.099 a case of credit slows down, equities fall, That's your 341 00:20:07.140 --> 00:20:10.289 only portfolio decision. I think this is much more complicated 342 00:20:10.329 --> 00:20:13.849 than this. And just in that talk a while back, 343 00:20:13.890 --> 00:20:17.710 I mentioned, what will your forecast for headline inflation be? 344 00:20:17.730 --> 00:20:20.950 In a sense, that's something you perhaps don't really care 345 00:20:20.990 --> 00:20:24.900 too much as an investor. It's a weighted average of 346 00:20:24.920 --> 00:20:27.789 a bunch of different prices. I think much more interesting 347 00:20:27.829 --> 00:20:31.769 is we could see this rise in traded goods prices, 348 00:20:31.869 --> 00:20:35.670 goods prices in effect, relative to service prices, reversing what 349 00:20:35.690 --> 00:20:38.940 we've seen in the last 25 years. And I think 350 00:20:38.960 --> 00:20:41.619 there's real mileage in portfolios to try and exploit that. 351 00:20:43.160 --> 00:20:46.000 So that's people that make things, basically, with price and power. 352 00:20:46.500 --> 00:20:50.240 Make things, have some control over their costs, price back in. 353 00:20:52.089 --> 00:20:54.930 And the good thing for all of us embedded in 354 00:20:54.970 --> 00:21:00.859 that is they're the guys that produce productivity. Focus on 355 00:21:01.119 --> 00:21:04.500 real estate agents and building houses is not great for 356 00:21:04.579 --> 00:21:07.599 average productivity. We've been doing that a few hundred years. 357 00:21:07.640 --> 00:21:11.180 It hasn't really changed how it works. Manufacturing is where 358 00:21:11.200 --> 00:21:14.089 you get your productivity growth. And if you've got productivity growth, 359 00:21:14.750 --> 00:21:19.609 you get real wage growth for society. Consumer finance, consumer 360 00:21:19.650 --> 00:21:22.970 balance sheets will ultimately become less dependent on asset prices 361 00:21:23.089 --> 00:21:26.099 and more, you know, have stronger balance sheets because of 362 00:21:26.160 --> 00:21:29.619 income growth. And it affects society in so many ways. 363 00:21:32.259 --> 00:21:37.900 I know the subject of migration is incredibly contentious, but 364 00:21:37.960 --> 00:21:41.900 if you look back through history, and I've taken this 365 00:21:41.920 --> 00:21:43.799 all the way back to the Romans, believe it or not, 366 00:21:44.559 --> 00:21:47.839 if you have migration into an economy with no productivity growth, 367 00:21:48.099 --> 00:21:51.420 it tends to create quite a difficult political environment. I'm 368 00:21:51.440 --> 00:21:57.519 thinking of 500 AD Britain being a very obvious example 369 00:21:57.539 --> 00:21:59.799 a million Saxons turned up and there wasn't enough food 370 00:21:59.839 --> 00:22:04.630 for everybody and it all got pretty ugly however look 371 00:22:04.650 --> 00:22:09.630 at the 19th century UK population doubles a lot of 372 00:22:09.670 --> 00:22:13.710 it was migration but productivity growth was so rapid that 373 00:22:13.750 --> 00:22:16.410 the economy was growing in a way that absorbed that 374 00:22:16.710 --> 00:22:19.930 and the pressures that could have happened didn't and I 375 00:22:19.990 --> 00:22:22.569 think This has got to be the holy grail, not 376 00:22:22.609 --> 00:22:26.450 just for economics, but for politics, for societies. It's something 377 00:22:26.490 --> 00:22:30.450 that gives us productivity growth back. And if we do 378 00:22:30.539 --> 00:22:36.319 see this rejig in the economies, back towards fewer global 379 00:22:36.380 --> 00:22:44.680 trade imbalances, bigger traded goods sectors within OECD economies, then 380 00:22:44.700 --> 00:22:47.539 the world gets better on so many different levels and 381 00:22:47.559 --> 00:22:49.759 there's certainly I think a number of ways to exploit 382 00:22:49.799 --> 00:22:53.720 that in portfolios and the starting point for that as 383 00:22:53.799 --> 00:22:56.329 I've mentioned could be this notion I'm sure we won't 384 00:22:56.369 --> 00:22:58.609 call it Bretton Woods 3 I don't suppose they'll be 385 00:22:59.089 --> 00:23:00.829 rushing off to New Hampshire to go back to that 386 00:23:00.890 --> 00:23:04.250 hotel it's not that good a hotel I've stayed in 387 00:23:04.269 --> 00:23:09.210 it but something some sort of currency move whereby we 388 00:23:09.230 --> 00:23:13.299 do finally address some of the imbalances that have been 389 00:23:13.339 --> 00:23:16.440 created in the global economy so yes this is a 390 00:23:17.069 --> 00:23:20.890 are very important for the global economy, potentially a lot 391 00:23:20.910 --> 00:23:23.829 of instability in the short term. But I think we've 392 00:23:23.869 --> 00:23:27.170 got to the point, as we've seen politically and in societies, 393 00:23:28.190 --> 00:23:32.730 that we need this change. So I think there's more 394 00:23:32.769 --> 00:23:35.099 than a silver lining in this possible cloud. I think 395 00:23:35.130 --> 00:23:38.599 it's actually something that could address an awful lot of 396 00:23:38.640 --> 00:23:41.440 problems that have dogged us for years, that have been 397 00:23:41.960 --> 00:23:45.240 hidden by that credit boom. Yes, taking the curtain of 398 00:23:45.279 --> 00:23:49.549 the credit boom away reveals some of the problems and 399 00:23:49.569 --> 00:23:53.109 that that's something for markets to struggle with but then 400 00:23:53.130 --> 00:23:56.019 you know there is a potential i think for i 401 00:23:56.059 --> 00:23:58.539 don't know should we call it economic healing almost. 402 00:23:59.859 --> 00:24:01.640 So it sounds like in the near term or the 403

00:24:01.680 --> 00:24:04.559 medium term there's two scenarios there's a bit more can 404 00:24:04.579 --> 00:24:07.299 kicking the credit boom so it continues and it feels 405 00:24:07.400 --> 00:24:11.849 like a mid-cycle reset um but in it almost sounds 406 00:24:11.890 --> 00:24:13.569 like what we should hope for is that you do 407 00:24:13.609 --> 00:24:18.079 get that reset sooner rather than later. And then it 408 00:24:18.119 --> 00:24:20.500 becomes an adjustment. And it can be uncomfortable in certain 409 00:24:20.559 --> 00:24:23.480 areas of the economy, certain things that you invest in. 410 00:24:24.660 --> 00:24:29.240 But a readjustment means that those resources are going elsewhere 411 00:24:29.259 --> 00:24:33.359 and you end up with something a bit more healthy. 412 00:24:33.859 --> 00:24:37.160 It's just the pace at which that happens. Yeah, I 413 00:24:37.200 --> 00:24:40.880 think so. And it's something that needs to happen. I 414 00:24:40.940 --> 00:24:44.859 was living out in in Asia during the Asian boom 415 00:24:44.880 --> 00:24:49.869 that preceded the Asian financial crisis. And by late 1993, 416 00:24:49.859 --> 00:24:54.559 when the Hang Seng was doubling seemingly every quarter, you 417 00:24:54.779 --> 00:24:58.240 couldn't get a taxi in Hong Kong because every taxi 418 00:24:58.289 --> 00:25:01.990 driver was in the little retail brokerage punting the stock market. 419 00:25:02.869 --> 00:25:05.829 These systems in our company failed because the entire IT 420 00:25:05.849 --> 00:25:11.670 department was day trading. And it feels like we've sort 421 00:25:11.710 --> 00:25:16.029 of reached that we'd reached that same point in the West. 422 00:25:16.069 --> 00:25:20.539 I was talking to my oldest son who was sort 423 00:25:20.559 --> 00:25:23.880 of amused and bemused by the fact most lectures, half 424 00:25:23.900 --> 00:25:28.279 the people aren't listening to the lecturer doing architecture because 425 00:25:28.299 --> 00:25:33.039 they're all day trading on their phones. And rather amusingly, 426 00:25:33.460 --> 00:25:37.950 the economics teacher for my youngest son is now letting 427 00:25:37.970 --> 00:25:40.650 them day trade for 10 minutes because at least it's 428 00:25:40.670 --> 00:25:43.730 something to do with economics. It does seem that we've 429 00:25:43.769 --> 00:25:49.470 become over-financialized. And as we know, productivity growth in the 430 00:25:49.509 --> 00:25:52.279 world has collapsed, despite all of the hype about what 431 00:25:52.319 --> 00:25:56.720 tech was supposed to do. Real wages have stagnated because 432 00:25:56.759 --> 00:25:59.900 of the lack of productivity growth, and that's generated all 433 00:25:59.960 --> 00:26:04.319 sorts of problems. So, yes, we do need to change this. 434 00:26:04.359 --> 00:26:08.589 And I think really the conversation is how rapidly this changes. 435 00:26:09.849 --> 00:26:13.440 Do we keep kicking the can? So that it occurs 436 00:26:13.519

--> 00:26:18.549 gradually and perhaps takes too long to occur? Or do 437 00:26:18.589 --> 00:26:21.509 we have that shock to the system? And I think ultimately, 438 00:26:21.630 --> 00:26:27.269 is it the shock or is it the slow partial can-kicking, 439 00:26:27.650 --> 00:26:29.710 get their event, get to the end of the road eventually? 440 00:26:29.730 --> 00:26:34.230 I think the arbiter of that is actually going to 441 00:26:34.250 --> 00:26:41.660 be described or going to be determined by relatively few people. Essentially, 442 00:26:42.019 --> 00:26:46.880 the the risk committees, the boards of those mega U.S. 443 00:26:47.039 --> 00:26:51.420 financial institutions, are they prepared to step in and rescue 444 00:26:51.440 --> 00:26:53.700 the AI boom? Or are they going to say, no, 445 00:26:54.180 --> 00:26:57.339 looking at what's happening at credit spreads, looking at the 446 00:26:57.500 --> 00:27:00.460 doubts on this credit quality, we're not going to do 447 00:27:00.509 --> 00:27:06.450 it at this price. If you as a private credit 448 00:27:06.470 --> 00:27:08.869 fund want to sell us some of your exposure to 449 00:27:08.930 --> 00:27:11.759 a NEO cloud, we're going to give you 30 cents 450 00:27:11.819 --> 00:27:14.859 on the dollar, not 80 cents on the dollar. I 451 00:27:14.880 --> 00:27:16.759 think those are the questions that are going to matter 452 00:27:16.799 --> 00:27:17.640 in the next few weeks. 453 00:27:19.079 --> 00:27:23.039 Well, I have to say, when we started talking about Japan, 454 00:27:23.059 --> 00:27:26.480 I didn't think we'd end that positively. But I think 455 00:27:26.500 --> 00:27:28.339 maybe that's something we remember. If things do get a 456 00:27:28.359 --> 00:27:31.940 bit rocky, maybe it's the medicine. Maybe it's the sort 457 00:27:31.960 --> 00:27:35.049 of credit reset that we have to have. But also, 458 00:27:35.069 --> 00:27:38.730 you know, going back to the midterms, maybe democracy does work. 459 00:27:38.829 --> 00:27:40.109 Maybe this is the pause. 460 00:27:41.049 --> 00:27:46.210 That you need to allow that. 461 00:27:44.609 --> 00:27:45.670 Adjustment to happen. 462 00:27:45.910 --> 00:27:49.259 And some of the sentiments that you're expressing there kind 463 00:27:49.319 --> 00:27:51.980 of sound like what the US voters are after as well. 464 00:27:52.880 --> 00:27:53.539 I want this to. 465 00:27:53.460 --> 00:27:56.740 Slow down a little bit. And I want a less 466 00:27:56.779 --> 00:27:57.619 polarized economy. 467 00:27:58.339 --> 00:28:01.670 I think so. And there's been a couple of surveys out. 468 00:28:01.750 --> 00:28:05.509 The OECD did a trust in government survey recently. And 469 00:28:05.529 --> 00:28:08.160 then we just had the publication of It's called the 470 00:28:08.220 --> 00:28:13.579 Edelman Survey, which looks at public trust in public institutions 471 00:28:13.640 --> 00:28:17.779 and corporations. And the message from both of them was 472 00:28:17.859 -->

00:28:21.789 that trust in governments is at lows. People are becoming 473 00:28:21.849 --> 00:28:24.529 very insular. And I found it very depressing in one 474 00:28:24.549 --> 00:28:28.289 of the surveys that 70% of people won't trust somebody 475 00:28:28.329 --> 00:28:30.769 who has a different opinion or a different analytical approach 476 00:28:30.809 --> 00:28:37.220 to them. And I think we probably need to address 477 00:28:37.259 --> 00:28:43.809 these ills in society and possibly life, you know, becoming 478 00:28:43.869 --> 00:28:48.450 less financialized, asset markets not seemingly providing a rather slightly 479 00:28:48.509 --> 00:28:51.730 polarizing free ride for some and a barrier to entry 480 00:28:51.769 --> 00:28:55.779 for others, goes a long way to healing some of 481 00:28:55.799 --> 00:29:01.299 this stuff. And perhaps there's a good, certainly an interesting 482 00:29:01.400 --> 00:29:05.309 play that's playing in the West End of London at 483 00:29:05.329 --> 00:29:07.940 the moment about the life of John Maynard Keynes, the economist. 484 00:29:08.460 --> 00:29:13.759 Some of it's quite scandalous, but just emphasising that economics, politics, society, 485 00:29:13.819 --> 00:29:16.359 and the play's called The Standard of Living. You know, 486 00:29:16.400 --> 00:29:19.369 all of these things are intertwined, and I think this 487 00:29:19.420 --> 00:29:21.930 is one of the moments it's probably a good time 488 00:29:21.950 --> 00:29:24.869 to remember that. The world we've created for the last 489 00:29:24.869 --> 00:29:29.710 20 years has not really been that popular. So we 490 00:29:29.809 --> 00:29:33.160 need to rethink. This is a catalyst. And we need 491 00:29:33.200 --> 00:29:36.039 more of a dialogue. And it is interesting, isn't it, 492 00:29:36.079 --> 00:29:39.470 in those US midterms that we could have had the 493 00:29:39.509 --> 00:29:42.160 toys out of the pram moment but people seem to 494 00:29:42.200 --> 00:29:46.519 be trying to be a little conciliatory promising work together 495 00:29:48.079 --> 00:29:56.240 maybe they realize that when trust in major OECD high-income 496 00:29:56.299 --> 00:30:03.529 economies trust in those governments is lower than low-income, less 497 00:30:03.549 --> 00:30:07.549 developed countries with a history of coups, that the world 498 00:30:07.589 --> 00:30:08.309 needs to change. 499 00:30:10.150 --> 00:30:12.619 Well, look, on that note, not just a silver lining, 500 00:30:12.670 --> 00:30:15.180 but maybe a silver cloud. It sounds like there might 501 00:30:15.220 --> 00:30:16.880 be a little bit of a twixt and between, and 502 00:30:17.500 --> 00:30:19.279 maybe we'll sort of catch up in a few weeks 503 00:30:19.319 --> 00:30:22.779 to see how the monetary plumbing is performing, whether it's 504 00:30:22.799 --> 00:30:24.000 confirming that thesis. 505 00:30:24.539 --> 00:30:24.700 And. 506 00:30:25.779 --> 00:30:27.059 But I think it's a good thought to sort of 507 00:30:27.380 --> 00:30:30.180 leave it on that maybe, you know, some turbulence in 508 00:30:30.220 --> 00:30:33.339 markets might be for a good cause is a good 509 00:30:33.359 --> 00:30:34.759 message for advisors as well. 510 00:30:35.160 --> 00:30:37.700 No, I think that's it. And we wait to see 511 00:30:37.720 --> 00:30:39.880 what the monetary data does. I think that will determine 512 00:30:39.920 --> 00:30:42.589 the speed that these changes happen. And I used to 513 00:30:42.630 --> 00:30:46.369 do my US credit review on a Monday morning, and 514 00:30:46.390 --> 00:30:49.430 then it started to move to Sunday evening so people 515 00:30:49.450 --> 00:30:51.569 could have it before the markets opened. And last week, 516 00:30:51.589 --> 00:30:54.720 I ended up doing it on Saturday morning. So... I 517 00:30:54.740 --> 00:30:57.420 think I know what I'm doing tomorrow morning. OK, well, 518 00:30:57.440 --> 00:30:58.160 good luck with that. 519 00:30:58.240 --> 00:31:01.990 And we will watch that with interest. Look forward to 520 00:31:02.029 --> 00:31:02.750 talking to you soon, Andrew. 521 00:31:02.869 --> 00:31:03.930 Thanks again. Bye.