May 23, 2025 • 34 mins
Think it’s all over for US markets? Think they’re finally going to sink under high valuations, inflated expectations and now a nervous bond market? Maybe think again, says Ed Yardeni of the eponymous firm Yardeni Research.
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Speaker 1 (00:00):
Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2 (00:17):
Welcome to Meron Talks Money, the podcast in which people
who know the markets explain the markets.
Speaker 3 (00:22):
I'm Merensumset Web. This week I'm speaking with Edir Danney,
President at Yadanney Research.
Speaker 2 (00:27):
Ed is the economists and investment strategist who coined the
term bond vigilantes in the nineteen eighties. It's made quite
a comeback since Donald Trump's reelection, most recently around the
question of whether an extended bond sell off will make
it difficult for Trump and his allies in Congress to
push through their big, beautiful tax bill. We're going to
get into this talk about how the bond market is
(00:47):
pressuring governments across the board. We're going to talk about
equity markets. We're going to talk about gold, bitcoin, and
what Ed is writing about at the moment. Ed welcome
to Meron Talks Money. Thank you for joining us again,
very kind, Thank you very much. Now we should probably
start with exactly what I said in the introduction. We
should start with what is going on with developed world
(01:07):
bond markets.
Speaker 3 (01:08):
Yields rising all over the place.
Speaker 2 (01:10):
That was particularly in Japan, but quite a lot going
on in the US as well.
Speaker 4 (01:16):
The global bond market, particularly in developed countries, is seeing
some stress clearly. I think there's mounting concerns about fiscal accesses,
unsustainable fiscal policies that need to be addressed politically, and
there's not any confidence that the politicians have the willingness
to tackle these things now. I think we're seeing it
(01:37):
most clearly and immediately in Japan right now, where the
twenty year bond auction went off rather poorly, the thirty
year and the forty year yields rose along with the
twenty years, so that was kind of the beginning of
the alarm bell being sounded in the Japanese credit markets.
The ratio of their debt to GDPs over two hundred percent.
(02:00):
The central Bank has purchase much of the bonds issued
by the treasury in Japan, and now the Bank of
Japan has recognized that they have an inflation problem, so
that policy basically terminated two years ago, and now it's
all coming back to haunt them. Here in the United States,
(02:20):
things are still going relatively well. The ten year yield
has been remarkably stable around four and a half percent,
which seems to be fine. It's just that thirty year
treasury yield. The spread has widened over the tenure, and
we're getting closer to five percent, and so there is
an unease that the bond market. The bond vigilantes in
the United States are watching what's going on with the
(02:43):
budget negotiations very closely, and if they're not happy with
what the results are, there's a potential here for something
similar to what's going on in Japan, kind of a protest,
if you will, by the bond vigilantes, and that raises
the question of whether the politicians will recognize that and
respond appropriately to it.
Speaker 2 (03:04):
Pretty interesting, isn't it. This pops up periodically, doesn't it.
And it's obvious to everybody that levels of Japanese debt,
levels of US debt, of course, they're not sustainable.
Speaker 3 (03:13):
This is not sustainable long time.
Speaker 2 (03:15):
You can't have one hundred percent of your debt GDP ratio,
you can't have two hundred percent. And sure, maybe you
can net out a little bit with what the central
Bank holds, et cetera, but you've still got a major problem.
But it pops up and it goes away. It pops
up and it goes away. It's never actually dealt with,
and we know, there aren't really very many ways to
deal with it.
Speaker 3 (03:35):
So we just put it off, put it off. But
is this time any different?
Speaker 4 (03:39):
It's a good question. I've been doing this for over
forty five years, and for that entire period on a
regular basis, naysayers, pessimists, doom sayers saying this time we're
finally going to have to pay the price for our sins.
You know, borrowing is sinful, and eventually you have to
pay the price for that. And yet here we are
(04:01):
with the stock market almost worldwide at a record high.
Economy is still growing in the United States. It's slowed
down in Europe. It's had a little negative quarter in Japan,
but all in all, the economies have done quite well.
You have some very smart people today like read Dalia,
walking around telling us that a debt crisis is imminent,
(04:21):
and well, it looks like he may be getting it right.
In Japan. It really just hasn't happened yet. In the
United States. We had a glimpse of what it could
look like in twenty twenty three when the bond deal
went from four to five percent. We had a minor,
little glimpse of it. On April eighth of this year
twenty twenty five, when the bond yell rose from four
to four and a half percent on April eighth, and
(04:43):
that was basically in protest of Trump's tariff turmoil, and
the response was very quick by the administration to postpone
the reciprocal tariffs anyway, So the bond vigilantes are still
out there. They're still interested in maintaining law and order.
They prefer that fiscal and monetary policies are disciplined so
that they don't have to take on that role, but
(05:04):
they're ready if they have to assert their concerns. The
only question is if they do, is whether the politicians
will respond. And of course this is a great opportunity
for the bond vigilantes to get the attentions of the
politicians in the United States because we are negotiating a budget.
Speaker 2 (05:22):
Yeah, let's go back to Japan brief. Maybe there is
a genuine crisis brewing there there. I know I've written
that art call myself quite a lot of times over
the last couple of decades, but maybe it's real this time.
You do have this phenomenally high ratio and you have
very long time yield, well over three percent now when
we were used to them long term knocking around one
percent or below.
Speaker 3 (05:43):
It is quite a big deal.
Speaker 4 (05:44):
Huge.
Speaker 3 (05:45):
Yeah, if that does develop into a genuine crisis, what
does that mean?
Speaker 4 (05:51):
I tend to be an optimist at heart. So the
notion that the pessimists have been promoting that one day
they'll be auctions in the United States and now maybe
in Japan where nobody will show up, or the Japan
and the United States will default on their payments, I
think that's nonsense. We saw in twenty twenty three a
(06:12):
mini debt crisis with a yield going for four to
five percent, as I mentioned, and at five percent there
was just a ton of buying. So there's always going
to be some yel at which there'll be investors saying,
you know what, this is pretty good. This will probably
slow the economy down and bring inflation down, and who knows,
maybe they'll even cause the politicians to get the message.
(06:34):
But the bond vigilantes are not the only players in
this game. The central banks are involved, the treasuries are involved.
In the United States, and November first, twenty twenty three,
Treasury Secretary Jenny Yale and basically told the bond vigilantes.
If you don't like my bonds and my notes, you
know what, I won't issue any additional ones. I'll just
issue the usual load, but I'll do what I need
(06:57):
extra in the bill market, and that like a charm.
There's ways that the central banks and the Treasury can
still buy time and to avoid a day of reckoning.
But if there's a day of reckoning, the deficits are
a man and a woman made problem. They can be
easily fixed. All we have to do is slow down
the pace of outlays and increase the pace of receipts.
(07:21):
It's the political challenge of getting that accomplished that has
stymied any progress on deficits. It's just, you know, Americans
and maybe Japanese and Europeans and others don't do pain
very well. And we would just as soon pay for
entitlements by issuing debt rather than raising taxes. At some
(07:41):
point that could come back to haunt you, and it
may very well be at this point, but it doesn't
have to be doomsday, kind of like what happened in
two thousand and eight. There was a financial crisis, all
hands on deck, and we did respond to it. The
politicians responded to it. They came up with a program
called TARP to bail out the banks. The first round,
the stock market hated and took a huge dive on it.
(08:05):
One week later they came up with a new, improved
TARP that fixed things. So this could be a process
that last a few weeks. If we do, in fact
get something that feels very much like a dead crisis,
doesn't have to be the end of the world, would it.
Speaker 3 (08:17):
Maybe it not be such a bad thing. Get it
over with.
Speaker 2 (08:21):
It's that thing we all know is coming right hanging
over us for decades. In a way, it'd be quite
nice to get it out of the way, have a
bit of a reset, force everyone to rethink their fiscal priorities,
and just get moving again in a better way.
Speaker 4 (08:32):
The way I've built with that uncertainty is I've said, look,
I'll worry about it when the bond market worries about it.
And that's been a useful way to watch it because
people have been worrying about it all the time, have
missed the great equity market. There was opportunities in the
bond market. You don't want to get too pessimistic about it,
because there's pretty straightforward solutions. They just require some political will.
Speaker 2 (08:55):
And you're optimistic on the US economy as a whole. Right,
Lots of conversation about coming recession over the last few months,
and you now think it's about a thirty five percent Chanson.
I love the way you describe this recession. You call
it the gotto recession, the one that we're always waiting
for and never ever arrives. And you'll view that hasn't changed,
has it?
Speaker 4 (09:14):
The past three years We've had the most widely anticipated
recession of all times that never happened, as you said,
the goodeaux recession, the no show recession. And I bet
on the resilience of the consumer. I'm a baby boomer.
I'm still working for a living, but a lot of
my friends are retiring. And collectively the baby boomers have
eighty trillion dollars in net worth. That's half the net
(09:36):
worth of the household sector. The savings rate is probably
going to turn negative here because they're not earning money,
but they have a ton of assets and they are
spending that money. In addition, the fears that capital spending
was going to take a dive because of the uncertainty
with tariffs, now, and with monetary policy over the past
(09:57):
three years, I don't think that's playing out well. Some
capital spending is going to be postponed. More than fifty
percent of capital spending is now in technology and technology
capital spending is something that's almost imperative. You have to
spend on technology in order to stay competitive. And to
give Trump some credit, because everybody focuses on the fact
(10:19):
that it's created a lot of turmoil, which you would
think is basically bad for capital spending. At the same time,
you know, he keeps collecting these IOUs from foreign governments
and foreign companies saying that they intend to spend hundreds
of billions in the United States for on shoring. Imshoring
has been going on over the past four years since
(10:41):
Biden created some legislation that stimulated it, and I think
it will continue to go on.
Speaker 2 (10:47):
Okay, So relatively confident about the US economy and as
a result, still confident about the US market. And there's
one thing you said that it's the kind of thing
that makes me a niny bit nevs about the US
market is that you mentioned the savings rate going negative
and the baby boom is moving very firmly from their
accumulation period into their decumulation period, and that changes the flows.
Speaker 4 (11:13):
It does, But I'm also thinking that there's going to
be younger generations that are increasingly investing in the stock market.
As I said, the baby boomers are sitting on a
record eighty trillion dollars of net worth. We've never had
a retiring generation this rich, but it's a nature of
the beast. Young folks don't have much in net worth
(11:37):
and over the years they accumulate it, and so the
younger ones are in that process now. And I don't
think the baby boomers are going to be able to
spend eighty trillion dollars. I think there's going to be
a lot of inheritances, and based on my own experience
and my discussions why a fellow baby boomers, I think
there's a lot of intra generational income and wealth chance
(12:00):
is going on right now. So I think that's what's
been missing in the discussion of the consumer. Everybody's been
talking about as though there's only kind of one kind
of consumer experience. In fact, there's many, And the baby
boomers are doing very well. The younger folks aren't doing
as well. That's where you're seeing delinquency ratios going up.
But the parents are definitely helping out.
Speaker 2 (12:21):
In my next life, Ed, I'm going to be the
child of an American baby boomer. That's what I'm aiming for.
Speaker 4 (12:27):
Yeah, it's a good position.
Speaker 2 (12:28):
Yeah, everyone who believes in reincarnation should definitely be aiming
for exactly that. So you're one of what comes what
backs up. What you say is that the buyers of
the dips all the way through this volatility of the
last few months, the buyers have been retail investors, ordinary
people picking up on the dip, haven't they. I haven't
seen any of those U shaped dips that you might
have got maybe in the old days. Now everything is
(12:49):
very the market goes down, retail buyers come in, market
goes up.
Speaker 4 (12:54):
Absolutely. I mean the fun flows data that is available
showing that retail investor are the ones that are keeping
this market going. They're in a good position because I
think it seeped into their consciousness that stocks really have
to be abled for the long run. Somehow, I think
they appreciate that more than the baby boomers really appreciated it,
And I think that they're viewing sell offs as opportunities
(13:18):
to buy stocks. And I think they have a long
term mentality. Again, I may be generalizing from my kids
and some others that I've talked to, but with my
limited sample that I've talked to, I'm surprised by their
steadfastness and how they didn't freak out with the market
selling off, whereas my baby boom generation I remember lots
of freak out situations. As a matter of fact, I'm
(13:41):
pretty proud of my forecasting record and calling bottoms, And
one of the reasons I'm so good at it is
I've got a relative who always calls me upright at
the bottom and says that he should I get out.
So I've witnessed more of that among my peers.
Speaker 2 (13:55):
Okay, interestingly, I think we will got one of those,
one of those relatives. Maybe the rest of us recognize
it as well as you do. Yeah, so you think
they're right to be buying in now? There is still
I would say, from the other side of the Atlantic,
you look across to the US and certainly we feel
a lot of concerns about the US market and evaluations
is still very high. There's an enormous amount of uncertainty.
Anything could happened from here. The idea that America is
(14:17):
permanently exceptional. That spell seems to have broken a bit,
and so we would wonder if those retail investors pouring
money into the US market might not be wiser to
be looking overseas.
Speaker 4 (14:31):
I've been promoting the idea of stay home rather than
go global since twenty ten. That doesn't mean I'm telling
people not to invest overseas. I've just been recommending over
waiting the United States, and I may overstay my welcome
with that concept, but I'm sticking with it. We do
have seven exceptional companies here, the Magnificent seven, and this
(14:53):
recent correction was basically led by them. They had more
than just a correction, They had a bear market. They
were down like twenty five percent. The overall market was
down eighteen percent for the S and P five hundred,
and there was a lot of concern that they were
spending too much on AI and would never get a
return on that. And they came back and said, We're
(15:15):
still going to spend that kind of money because we'd
still think we're going to get a return on it.
You know, some of these are cloud companies, and the
demand for computing is only going to increase in this
what I call the digital revolution that started in the
mid sixties. If that's the case, these are continue to
be exceptional companies. Not much debt, a lot of cash flow,
(15:37):
tremendous innovations, and they are uniquely Americans. It doesn't mean
that there aren't great companies overseas, but everybody seems to
recognize the exceptionalism of these companies, which does reflect many
aspects of the exceptionalism of the US economy.
Speaker 2 (15:53):
And are you worried about earnings in the near term.
I'm reading a couple of your notes. I see that
you've been writing a bit about earning. Earning his consensus
focused softening slightly.
Speaker 4 (16:04):
Yeah, in the near term, there's certainly concerns. The Trump
tariff turmoil has been moderated somewhat, but there's still plenty
of it out There, still plenty of uncertainties related to
where this is all going to lead. The tariff itself, certainly,
the basic tariff of ten percent is in effect a
tax on corporation, so it's got to hurt. We recently
(16:26):
saw the President respond to a big retailer by saying,
don't dare raise raise your prices, And if they do
raise don't raise their prices. That'll affect their profit margins.
And there's found to be some kind of stagflationary scenario
unfolding here the next few months, with higher inflation and
slower growth. But I think the market's looking past all that.
(16:49):
I think the market has come to conclude that the
president needs to get this behind him as soon as possible.
The midterm elections are coming next year. You can't really
afford to have a sesshould occur now or certainly not
early next year, and so I think the market perceives
that he will continue to blink, and that along the
(17:10):
way he'll declare victory and move on to this big,
beautiful tax bill, which the jury is out on that
whether it's big and beautiful or big and ugly. I'm
waiting to see how the bond market votes on all that.
But it's a volatile time right here, and I think
retail investors are right to see his opportunities to buy,
(17:31):
let's say, buy on the dips. So I think that
will continue to work.
Speaker 3 (17:35):
So a bit of a melt up into the end
of the year.
Speaker 4 (17:37):
Maybe well, you know, I'm struggling with the question of
whether we're going to have a melt up in the
stock market or a melt down in the bond market. Obviously,
if we have a melt down in the bond market,
we're not going to get a melt up in the
stock market. You know, I've told my accounts that I
reserve the right to change my forecast as often as
the President seems to change his mind. But I do
(17:59):
try to maintain some objectivity and stability in my forecasting.
And I think the market's right. This too sholl pass.
And We've got a tremendous amount of technological innovations ahead
of us, whether it be humanoid robotics, more automation, autonomous driving,
artificial intelligence. All these technologies are are not pie in
(18:22):
the sky. They're here and they're being implemented. I think
they're going to have a tremendous impact on productivity. So
I've been talking since twenty nineteen that this decade could
be turned out to be the Roaring twenty twenties. First
half of the decade worked out great so far, you know.
Then it looked like things started to slip up here
for a Roaring twenty twenty scenario, But I think it's
(18:44):
making a comeback here and it's based on the idea
that technological innovations will boost productivity because there are shortages
of skill labor, and productivity means better economic growth, lower inflation,
better profit margins, and higher real wages and makes everything better.
And so I'm still counting on that, and I'm trying
(19:07):
to get positive feedback from the stock market, and I
have been until this correction, but we thought it would
be a correction. We didn't think it would be a
bear market. So far, so good, and within the market's
kind of back to signaling that the Roaring twenty twenty
scenario might still be very much intact.
Speaker 2 (19:29):
Yeah, although I suppose it is possible. In fact, history
shows us is over and over again. I'm a financial
walking tour of Edinburgh yesterday and we walked around the
railway station and all that kind of thing and talked
about the various booms and busts and how often it
is that you have an amazing technological revolution, Yeah, alongside
disastrous investing environment. These two very often go hand in hand.
(19:53):
So the assumption that because you have a decade or
two decades of astonishing technological advancement, it is not a
even that alongside that an awful lot of people make money.
Generally a lot of people lose money. And it's in
the second way when the productivity gains really come through
that the next lot make the money.
Speaker 4 (20:13):
Yeah, I guess it's Schaumpater's notion.
Speaker 3 (20:16):
Of creative destruction.
Speaker 4 (20:18):
Creative destruction for the help the idea that capitalism, by
its very nature is constantly innovating and coming up with solutions.
You know, when I studied economics, it's like a lot
of first year students. I read Samuelson's book on economics,
and he defined economics as the study of how you
(20:39):
optimally allocate scarce resources. It sounds like a very depressing
concept that you, oh, my god, there's only so much
and we have to figure out how to divvate up.
And then you get into these debates of whether the
government should do it through Marxism or state run economies,
or should it be done by the marketplace. I think
economics is all about technology solving the problem of scarce resources.
(21:04):
The way we know scare resources are scarce is because
the prices go up, and then some entrepreneurs says, I
can do this better cheaper with these kind of technologies,
and that's what makes it so exciting. But it's very dynamic,
and while you're creating, you're also destroying, and that's where
a lot of the tensions come in. But I think
we're very much in that kind of environment right now.
Speaker 3 (21:26):
Okay.
Speaker 2 (21:26):
I like the idea that economic should not be about
allocating scares resources. We've been talking about that a bit
on the podcast recently, saying that the whole aim should
be to find, create, offer more and more resource so
that we consume more and more, rather than constantly working
towards trying to consume less. We should be open to
the idea that we should always consume more energy, more resources,
(21:47):
more land, etc.
Speaker 4 (21:49):
Just take autonomous driving. We're not going to have to
own cars anymore. We can own them and rent them out.
But that'll make the whole auto industry much more efficient.
We're all driving to work in the car sitting there
for hours on end. We're all coming back home at
night and the car is sitting there and the driveway
or garage hours on and now, imagine if we actually
use these vehicles, these digital devices more efficiently, then we
(22:13):
will be using a few resources, certainly in that area.
Speaker 2 (22:17):
I don't know, my car is almost an extension of
my house. I currently see myself giving it up. You're
very optimistic.
Speaker 3 (22:26):
We appreciate that.
Speaker 2 (22:26):
We don't get it often on the Marin talks money podcasts,
particularly about the US market, So it's.
Speaker 3 (22:31):
Good to hear. But what would make you change your mind?
What would happen?
Speaker 2 (22:35):
What confluence of events or ideas or changes is it
that would make you say, actually, do you know what?
I've got this wrong? There's going to be a recession.
This market's going to correct. It doesn't look good anymore.
What should we be looking out for?
Speaker 4 (22:49):
I'd watch out for when the pessimists become optimists in
my country, and instincts will come out and say that
something's got to be wrong here. As you said, I
tend to be a loone around these podcasts. There aren't
too many of us optimists out there, so from a
contrarian's perspective, it works. I've been accused of being a permeable,
(23:11):
which I've used as a compliment. I want my tombstone
to say it. Yard Denny was usually bullish and usually right,
and I'm not saying that bragging. I'm saying that stock
market's are permeable. It tends to go up. Technology tends
to solve the problems that people think are going to
bring us down. The debt crisis. I welcome it. I
hope we get a debt crisis in the next few months,
(23:32):
because it will probably be resolved in the next few
months as we scare the living daylights out of the politicians.
I hope that bonvigil Ani showed that they're more powerful
than ever. After all, there's more debt than ever, so
they must be more powerful than ever. I do tend
to see things more optimistically, but that's a contrary instinct
because it's being a pessimist. Is it's just a conventional
(23:54):
It's so easy to say how things are going to
go wrong. So as long as the pessimists keep coming
up with ideas a way could go wrong, I don't
have to work as hard on that side. So I
keep looking at what they're saying could go wrong, and yeah,
I think, right now, you've got people like great Dally,
We're very credible. Is a billionaire. By the way, I
don't know what it is about these billionaires that make
some pessimists. A lot of these billionaires just keep telling
(24:17):
the masses that they can't be even billionaires because we're
going to have a crisis any day.
Speaker 2 (24:22):
So it's interesting because you're right, we get that a
lot that the miserable billionaires, the world's going to end,
everything's awful, et cetera, et cetera, And they must have
been optimistic on the way up, because it's not really
possible to become a billionaire by being a miserable or
good is it.
Speaker 4 (24:36):
That's the way I'm looking at it. But I would
say right now the most credible pessimistic scenario is that crisis.
But you can pretty much count on me and tell
you why this is not going to be the end
of the world as we know it, and why it
might actually be a good thing. It might be might
resolve this issue once and for all.
Speaker 2 (24:54):
Yeah, although it will break various things in the financial
markets that we didn't even know that were to be broken, well,
not always happens. He'll be stuff that breaks Shelby, all
sorts of things that we wouldn't have expected would come
out of a proper day crisis.
Speaker 4 (25:07):
I'll respond to that by saying that was very true
in two thousand and eight, but we've made a lot
of progress in creating all kinds of shock absorbers in
the capital markets. People were certain that the tightening of
monetary policy over the past three years was going to
cause a financial crisis in a recession, and it didn't happen.
And now they're certain that the tariffs are going to
(25:27):
cause some sort of crisis and a recession. We have
a very resilient economy and a very resilient capital market
in America, so it is resilient. Maybe Japan will turn
out to be the mean poster child for what happens
when you borrow too much and at some point it
comes back to haunt you.
Speaker 3 (25:47):
Yeah. Maybe, Okay.
Speaker 2 (25:48):
So in this giant equity market that is the US
market obviously a very keen on big tech. But for
an order investor looking at the market, not wanting to
buy a passive fund, where should they be, Like what
sectors are interesting?
Speaker 4 (26:02):
You know? I've been recommending overweighting information technology, communication services, industrials, financials,
so all the good stuff, all the stuff that does
well during good times, growth kind of companies. Not cheap.
They were cheap on April eighth, not as cheap anymore,
but I would stay with them. Not to say that
(26:23):
the defensive stocks are cheap They're also very expensive because
there are a lot of pessimists out there who still
want to be in the market, but they don't want
to be in the gamey stuff, which is what they
would say my recommendations are focusing on. But yeah, I
would overweight those sectors, and I would continue to overweight
the United States. I don't think the US dollar is
(26:44):
going into a major decline. I don't see how that's
possible when we have the world's largest capital market and
the most liquid capital market. So I think that just
doesn't make sense.
Speaker 2 (26:54):
What about smaller companies in the US. We keep being
told that's where the value is.
Speaker 4 (26:58):
Well, they've been frustrating the smid caps, the small cap
MidCap stocks, particularly small caps, they've been cheap for a
long time and they just can't seem to get a
sustainable rally. Going definitely look more attractive in evaluation basis.
But maybe the problem is in this small cap arena
is all the good stuff doesn't go public very quickly,
(27:19):
and before it does go public, it gets bought out
by the Magnificent seven or some other large cap company.
And then the other frustrating thing is if you happen
to come up with the next Microsoft. Then you're sure
it's going to be the next Microsoft, and you buy it,
and you see this thing going up double triple, and
then all of a sudden somebody comes in and buys
it from you. Well, that's great, you're going to have
(27:41):
a good one day return on your money when the
takeover is announced. But then you've got to go back
to the drawing board and try to find the next Microsoft.
So it's a very frustrating kind of game to be
playing right now because you're competing against the investment banking
department of some pretty big.
Speaker 2 (27:57):
Companies, which is very bad for said markets overall, isn't it. Yeah,
it's possible that another reason why small caps aren't getting
the traction that you might expect small and mid sized
companies because of the shift towards passive and of course
the bulk of passive money goes into index funds that
float around the larger cap level.
Speaker 4 (28:16):
Very good point. Yeah, Active managers are almost always limited
by what percent of their portfolio they can put in
any particular stock. Sometimes it's two percent max, three percent maximum.
You've got to have a certain diversification in the numbers
of stocks you own. The ATFS there's no restraint. You know.
Whatever the magnificence seven are in the S and P
(28:39):
five hundred is what they're going to be in the
atfs attract the S and P.
Speaker 2 (28:43):
Now, I know you've said definitely that you've definitely favored
the US and everyone should really be overweight the US.
And but are there any other markets that you look
at and you think a lead, you know, that looks
kind of interesting. You know, there's lots of talk about
rebalancing towards Europe because of Germany's fiscal splurge, because of
rising spending across the board. There are lots of talk
about how China is no longer an uninvestable market and
(29:05):
one should be there as well.
Speaker 4 (29:08):
I'm in the China's uninvestables camp.
Speaker 3 (29:10):
Oh you still why is that?
Speaker 4 (29:12):
I still am. I don't think that's changed. It's still
authoritarian regime that can change the rule of business very quickly.
More fundamentally, the governments destroyed the demographic profile of China.
It's very geriatric. You know. I've described China as the
world's largest nursing home operated by maoists. Before that, I
(29:33):
used to call Japan the world's largest nursing home. Operated
by the mob. So I don't know that they let
me into China. I don't know that.
Speaker 2 (29:41):
I mean no, But that is the really interesting thing
about China is that the population is actually falling by
a million plus a year.
Speaker 4 (29:49):
And the Japan and now we can see that Japan
has a lot of debt. China has a huge amount
of debt. Their property market is a disaster. No, I've
got no interest in China. And for a while there
was a it's a great vehicle for trading, but I
don't think you can India. I keep looking at with
saying I wish I'd thought about that one earlier, but
(30:10):
we just had to sell off there that now is
followed by a recovery. It seems to trade and tandem
with what happens in the United States. I would say
there's probably opportunities in India, particularly in the banking sector
and the retailing sector. I think there's certainly opportunities. Other
than that, it's catches catch can around the world. Mexico
(30:31):
has some opportunities, but it's a state with questionable political stability.
Brazil has some opportunities, clearly, but a lot of them
it tend to depend on a strong global economy pushing
up commodity prices, and that doesn't seem to be what's
happening right now.
Speaker 3 (30:48):
Okay, what about gold? Do you have a look at gold.
Speaker 4 (30:52):
I've never been a proponent of gold.
Speaker 3 (30:55):
Well, it's not an optimist investment, is it.
Speaker 4 (30:58):
It's not that it's got no income, it's got no dividend.
I can't come up with the present discarded value of gold.
I haven't really studied the market that carefully from a
supplied demand standpoint. But about a year ago I said,
you know what it looks like. We're crossing above two
thousand dollars an ounce. I think it looks like it's
(31:18):
got some upside here. And the explanation from a fundamental
standpoint was real simple. As long as foreign central banks
of countries that don't like us decide that they don't
want to see what happened to Russia happened to them
when Russia invaded Ukraine, the United States froze the foreign
exchange reserves of Russia, and so these central bankers have
(31:40):
decided they want to have more gold than dollars or
even euro or yen as reserve assets. Just go with
the flow. If that's what they're going to do. Then
that means gold's going to continue to move higher, and
to the extent that along the way there's more geopolitical concerns,
there's more debt concerns. That's all positive for gold. Oh yeah,
I would recommend actually holding gold and maybe overweighting gold
(32:04):
relative to whatever. You know, if you thought five percent
was enough, maybe ten percent. So I'm actually a gold enthusiast.
Speaker 3 (32:11):
That is not the answer I expected, but I like it.
I try to be open minded good and bitcoin.
Speaker 4 (32:19):
Oh bitcoin. I came up with an amazing insight a
few years ago that I should have listened to, and
the insight was that bitcoin is kind of like digital tulips,
which sounds very critical, right, because then the implication is
that it's just a bubble in Holland. But I did
point out that the difference is that the tulip bulb
(32:42):
was geographically just in a very tiny little town called
Holland many centuries ago, and that people did go to
sleep at night. It wasn't open twenty four by seven.
Bitcoin is global. The market's open on a global basis
twenty four by seven, so there's a lot more potential
buyer than there ever was in the Holland toolip market,
(33:03):
and at least for bitcoin, there does seem to be
a digital mechanism that's limiting the supply of these things.
So I have no problems owning bitcoin. I don't personally,
but I have no I'm not pounding the table and
telling people that they shouldn't be buying bitcoin.
Speaker 2 (33:19):
But the way you've just described it them makes it
sounds like the reason to own it is because it
can be a bubble significantly bigger than the Chilip bubble
ever was, as opposed to because you think it's a
reasonable asset class.
Speaker 4 (33:29):
Yeah. I have no problems with bubbles. I just have
to remind myself to get out at the top. Yeah.
Speaker 2 (33:36):
We don't like to be able to do that it
at the bottoment out of the top. Thank you so
much for joining us today, Ed, I really appreciate it.
I've enjoyed our chat.
Speaker 4 (33:44):
Very welcome. Thank you.
Speaker 3 (33:50):
Thanks for listening to this week's Meren Talks Money.
Speaker 2 (33:52):
If you like us, show rate, review, and subscribe wherever
you listen to podcasts, and keep sending questions or comments
the merin Money at Bloomberg dot net. You can also
follow me in John on Twitter or x, I'm Marianess
w and John is John Underscores Depic. This episode was
hosted by Meet Marin Zumset Web. It was produced by
Someersadi and Moses and dun Sound designed by Blake Maples
(34:13):
and of course special thanks to Eddie or Jenny
Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2 (00:17):
Welcome to Meron Talks Money, the podcast in which people
who know the markets explain the markets.
Speaker 3 (00:22):
I'm Merensumset Web. This week I'm speaking with Edir Danney,
President at Yadanney Research.
Speaker 2 (00:27):
Ed is the economists and investment strategist who coined the
term bond vigilantes in the nineteen eighties. It's made quite
a comeback since Donald Trump's reelection, most recently around the
question of whether an extended bond sell off will make
it difficult for Trump and his allies in Congress to
push through their big, beautiful tax bill. We're going to
get into this talk about how the bond market is
(00:47):
pressuring governments across the board. We're going to talk about
equity markets. We're going to talk about gold, bitcoin, and
what Ed is writing about at the moment. Ed welcome
to Meron Talks Money. Thank you for joining us again,
very kind, Thank you very much. Now we should probably
start with exactly what I said in the introduction. We
should start with what is going on with developed world
(01:07):
bond markets.
Speaker 3 (01:08):
Yields rising all over the place.
Speaker 2 (01:10):
That was particularly in Japan, but quite a lot going
on in the US as well.
Speaker 4 (01:16):
The global bond market, particularly in developed countries, is seeing
some stress clearly. I think there's mounting concerns about fiscal accesses,
unsustainable fiscal policies that need to be addressed politically, and
there's not any confidence that the politicians have the willingness
to tackle these things now. I think we're seeing it
(01:37):
most clearly and immediately in Japan right now, where the
twenty year bond auction went off rather poorly, the thirty
year and the forty year yields rose along with the
twenty years, so that was kind of the beginning of
the alarm bell being sounded in the Japanese credit markets.
The ratio of their debt to GDPs over two hundred percent.
(02:00):
The central Bank has purchase much of the bonds issued
by the treasury in Japan, and now the Bank of
Japan has recognized that they have an inflation problem, so
that policy basically terminated two years ago, and now it's
all coming back to haunt them. Here in the United States,
(02:20):
things are still going relatively well. The ten year yield
has been remarkably stable around four and a half percent,
which seems to be fine. It's just that thirty year
treasury yield. The spread has widened over the tenure, and
we're getting closer to five percent, and so there is
an unease that the bond market. The bond vigilantes in
the United States are watching what's going on with the
(02:43):
budget negotiations very closely, and if they're not happy with
what the results are, there's a potential here for something
similar to what's going on in Japan, kind of a protest,
if you will, by the bond vigilantes, and that raises
the question of whether the politicians will recognize that and
respond appropriately to it.
Speaker 2 (03:04):
Pretty interesting, isn't it. This pops up periodically, doesn't it.
And it's obvious to everybody that levels of Japanese debt,
levels of US debt, of course, they're not sustainable.
Speaker 3 (03:13):
This is not sustainable long time.
Speaker 2 (03:15):
You can't have one hundred percent of your debt GDP ratio,
you can't have two hundred percent. And sure, maybe you
can net out a little bit with what the central
Bank holds, et cetera, but you've still got a major problem.
But it pops up and it goes away. It pops
up and it goes away. It's never actually dealt with,
and we know, there aren't really very many ways to
deal with it.
Speaker 3 (03:35):
So we just put it off, put it off. But
is this time any different?
Speaker 4 (03:39):
It's a good question. I've been doing this for over
forty five years, and for that entire period on a
regular basis, naysayers, pessimists, doom sayers saying this time we're
finally going to have to pay the price for our sins.
You know, borrowing is sinful, and eventually you have to
pay the price for that. And yet here we are
(04:01):
with the stock market almost worldwide at a record high.
Economy is still growing in the United States. It's slowed
down in Europe. It's had a little negative quarter in Japan,
but all in all, the economies have done quite well.
You have some very smart people today like read Dalia,
walking around telling us that a debt crisis is imminent,
(04:21):
and well, it looks like he may be getting it right.
In Japan. It really just hasn't happened yet. In the
United States. We had a glimpse of what it could
look like in twenty twenty three when the bond deal
went from four to five percent. We had a minor,
little glimpse of it. On April eighth of this year
twenty twenty five, when the bond yell rose from four
to four and a half percent on April eighth, and
(04:43):
that was basically in protest of Trump's tariff turmoil, and
the response was very quick by the administration to postpone
the reciprocal tariffs anyway, So the bond vigilantes are still
out there. They're still interested in maintaining law and order.
They prefer that fiscal and monetary policies are disciplined so
that they don't have to take on that role, but
(05:04):
they're ready if they have to assert their concerns. The
only question is if they do, is whether the politicians
will respond. And of course this is a great opportunity
for the bond vigilantes to get the attentions of the
politicians in the United States because we are negotiating a budget.
Speaker 2 (05:22):
Yeah, let's go back to Japan brief. Maybe there is
a genuine crisis brewing there there. I know I've written
that art call myself quite a lot of times over
the last couple of decades, but maybe it's real this time.
You do have this phenomenally high ratio and you have
very long time yield, well over three percent now when
we were used to them long term knocking around one
percent or below.
Speaker 3 (05:43):
It is quite a big deal.
Speaker 4 (05:44):
Huge.
Speaker 3 (05:45):
Yeah, if that does develop into a genuine crisis, what
does that mean?
Speaker 4 (05:51):
I tend to be an optimist at heart. So the
notion that the pessimists have been promoting that one day
they'll be auctions in the United States and now maybe
in Japan where nobody will show up, or the Japan
and the United States will default on their payments, I
think that's nonsense. We saw in twenty twenty three a
(06:12):
mini debt crisis with a yield going for four to
five percent, as I mentioned, and at five percent there
was just a ton of buying. So there's always going
to be some yel at which there'll be investors saying,
you know what, this is pretty good. This will probably
slow the economy down and bring inflation down, and who knows,
maybe they'll even cause the politicians to get the message.
(06:34):
But the bond vigilantes are not the only players in
this game. The central banks are involved, the treasuries are involved.
In the United States, and November first, twenty twenty three,
Treasury Secretary Jenny Yale and basically told the bond vigilantes.
If you don't like my bonds and my notes, you
know what, I won't issue any additional ones. I'll just
issue the usual load, but I'll do what I need
(06:57):
extra in the bill market, and that like a charm.
There's ways that the central banks and the Treasury can
still buy time and to avoid a day of reckoning.
But if there's a day of reckoning, the deficits are
a man and a woman made problem. They can be
easily fixed. All we have to do is slow down
the pace of outlays and increase the pace of receipts.
(07:21):
It's the political challenge of getting that accomplished that has
stymied any progress on deficits. It's just, you know, Americans
and maybe Japanese and Europeans and others don't do pain
very well. And we would just as soon pay for
entitlements by issuing debt rather than raising taxes. At some
(07:41):
point that could come back to haunt you, and it
may very well be at this point, but it doesn't
have to be doomsday, kind of like what happened in
two thousand and eight. There was a financial crisis, all
hands on deck, and we did respond to it. The
politicians responded to it. They came up with a program
called TARP to bail out the banks. The first round,
the stock market hated and took a huge dive on it.
(08:05):
One week later they came up with a new, improved
TARP that fixed things. So this could be a process
that last a few weeks. If we do, in fact
get something that feels very much like a dead crisis,
doesn't have to be the end of the world, would it.
Speaker 3 (08:17):
Maybe it not be such a bad thing. Get it
over with.
Speaker 2 (08:21):
It's that thing we all know is coming right hanging
over us for decades. In a way, it'd be quite
nice to get it out of the way, have a
bit of a reset, force everyone to rethink their fiscal priorities,
and just get moving again in a better way.
Speaker 4 (08:32):
The way I've built with that uncertainty is I've said, look,
I'll worry about it when the bond market worries about it.
And that's been a useful way to watch it because
people have been worrying about it all the time, have
missed the great equity market. There was opportunities in the
bond market. You don't want to get too pessimistic about it,
because there's pretty straightforward solutions. They just require some political will.
Speaker 2 (08:55):
And you're optimistic on the US economy as a whole. Right,
Lots of conversation about coming recession over the last few months,
and you now think it's about a thirty five percent Chanson.
I love the way you describe this recession. You call
it the gotto recession, the one that we're always waiting
for and never ever arrives. And you'll view that hasn't changed,
has it?
Speaker 4 (09:14):
The past three years We've had the most widely anticipated
recession of all times that never happened, as you said,
the goodeaux recession, the no show recession. And I bet
on the resilience of the consumer. I'm a baby boomer.
I'm still working for a living, but a lot of
my friends are retiring. And collectively the baby boomers have
eighty trillion dollars in net worth. That's half the net
(09:36):
worth of the household sector. The savings rate is probably
going to turn negative here because they're not earning money,
but they have a ton of assets and they are
spending that money. In addition, the fears that capital spending
was going to take a dive because of the uncertainty
with tariffs, now, and with monetary policy over the past
(09:57):
three years, I don't think that's playing out well. Some
capital spending is going to be postponed. More than fifty
percent of capital spending is now in technology and technology
capital spending is something that's almost imperative. You have to
spend on technology in order to stay competitive. And to
give Trump some credit, because everybody focuses on the fact
(10:19):
that it's created a lot of turmoil, which you would
think is basically bad for capital spending. At the same time,
you know, he keeps collecting these IOUs from foreign governments
and foreign companies saying that they intend to spend hundreds
of billions in the United States for on shoring. Imshoring
has been going on over the past four years since
(10:41):
Biden created some legislation that stimulated it, and I think
it will continue to go on.
Speaker 2 (10:47):
Okay, So relatively confident about the US economy and as
a result, still confident about the US market. And there's
one thing you said that it's the kind of thing
that makes me a niny bit nevs about the US
market is that you mentioned the savings rate going negative
and the baby boom is moving very firmly from their
accumulation period into their decumulation period, and that changes the flows.
Speaker 4 (11:13):
It does, But I'm also thinking that there's going to
be younger generations that are increasingly investing in the stock market.
As I said, the baby boomers are sitting on a
record eighty trillion dollars of net worth. We've never had
a retiring generation this rich, but it's a nature of
the beast. Young folks don't have much in net worth
(11:37):
and over the years they accumulate it, and so the
younger ones are in that process now. And I don't
think the baby boomers are going to be able to
spend eighty trillion dollars. I think there's going to be
a lot of inheritances, and based on my own experience
and my discussions why a fellow baby boomers, I think
there's a lot of intra generational income and wealth chance
(12:00):
is going on right now. So I think that's what's
been missing in the discussion of the consumer. Everybody's been
talking about as though there's only kind of one kind
of consumer experience. In fact, there's many, And the baby
boomers are doing very well. The younger folks aren't doing
as well. That's where you're seeing delinquency ratios going up.
But the parents are definitely helping out.
Speaker 2 (12:21):
In my next life, Ed, I'm going to be the
child of an American baby boomer. That's what I'm aiming for.
Speaker 4 (12:27):
Yeah, it's a good position.
Speaker 2 (12:28):
Yeah, everyone who believes in reincarnation should definitely be aiming
for exactly that. So you're one of what comes what
backs up. What you say is that the buyers of
the dips all the way through this volatility of the
last few months, the buyers have been retail investors, ordinary
people picking up on the dip, haven't they. I haven't
seen any of those U shaped dips that you might
have got maybe in the old days. Now everything is
(12:49):
very the market goes down, retail buyers come in, market
goes up.
Speaker 4 (12:54):
Absolutely. I mean the fun flows data that is available
showing that retail investor are the ones that are keeping
this market going. They're in a good position because I
think it seeped into their consciousness that stocks really have
to be abled for the long run. Somehow, I think
they appreciate that more than the baby boomers really appreciated it,
And I think that they're viewing sell offs as opportunities
(13:18):
to buy stocks. And I think they have a long
term mentality. Again, I may be generalizing from my kids
and some others that I've talked to, but with my
limited sample that I've talked to, I'm surprised by their
steadfastness and how they didn't freak out with the market
selling off, whereas my baby boom generation I remember lots
of freak out situations. As a matter of fact, I'm
(13:41):
pretty proud of my forecasting record and calling bottoms, And
one of the reasons I'm so good at it is
I've got a relative who always calls me upright at
the bottom and says that he should I get out.
So I've witnessed more of that among my peers.
Speaker 2 (13:55):
Okay, interestingly, I think we will got one of those,
one of those relatives. Maybe the rest of us recognize
it as well as you do. Yeah, so you think
they're right to be buying in now? There is still
I would say, from the other side of the Atlantic,
you look across to the US and certainly we feel
a lot of concerns about the US market and evaluations
is still very high. There's an enormous amount of uncertainty.
Anything could happened from here. The idea that America is
(14:17):
permanently exceptional. That spell seems to have broken a bit,
and so we would wonder if those retail investors pouring
money into the US market might not be wiser to
be looking overseas.
Speaker 4 (14:31):
I've been promoting the idea of stay home rather than
go global since twenty ten. That doesn't mean I'm telling
people not to invest overseas. I've just been recommending over
waiting the United States, and I may overstay my welcome
with that concept, but I'm sticking with it. We do
have seven exceptional companies here, the Magnificent seven, and this
(14:53):
recent correction was basically led by them. They had more
than just a correction, They had a bear market. They
were down like twenty five percent. The overall market was
down eighteen percent for the S and P five hundred,
and there was a lot of concern that they were
spending too much on AI and would never get a
return on that. And they came back and said, We're
(15:15):
still going to spend that kind of money because we'd
still think we're going to get a return on it.
You know, some of these are cloud companies, and the
demand for computing is only going to increase in this
what I call the digital revolution that started in the
mid sixties. If that's the case, these are continue to
be exceptional companies. Not much debt, a lot of cash flow,
(15:37):
tremendous innovations, and they are uniquely Americans. It doesn't mean
that there aren't great companies overseas, but everybody seems to
recognize the exceptionalism of these companies, which does reflect many
aspects of the exceptionalism of the US economy.
Speaker 2 (15:53):
And are you worried about earnings in the near term.
I'm reading a couple of your notes. I see that
you've been writing a bit about earning. Earning his consensus
focused softening slightly.
Speaker 4 (16:04):
Yeah, in the near term, there's certainly concerns. The Trump
tariff turmoil has been moderated somewhat, but there's still plenty
of it out There, still plenty of uncertainties related to
where this is all going to lead. The tariff itself, certainly,
the basic tariff of ten percent is in effect a
tax on corporation, so it's got to hurt. We recently
(16:26):
saw the President respond to a big retailer by saying,
don't dare raise raise your prices, And if they do
raise don't raise their prices. That'll affect their profit margins.
And there's found to be some kind of stagflationary scenario
unfolding here the next few months, with higher inflation and
slower growth. But I think the market's looking past all that.
(16:49):
I think the market has come to conclude that the
president needs to get this behind him as soon as possible.
The midterm elections are coming next year. You can't really
afford to have a sesshould occur now or certainly not
early next year, and so I think the market perceives
that he will continue to blink, and that along the
(17:10):
way he'll declare victory and move on to this big,
beautiful tax bill, which the jury is out on that
whether it's big and beautiful or big and ugly. I'm
waiting to see how the bond market votes on all that.
But it's a volatile time right here, and I think
retail investors are right to see his opportunities to buy,
(17:31):
let's say, buy on the dips. So I think that
will continue to work.
Speaker 3 (17:35):
So a bit of a melt up into the end
of the year.
Speaker 4 (17:37):
Maybe well, you know, I'm struggling with the question of
whether we're going to have a melt up in the
stock market or a melt down in the bond market. Obviously,
if we have a melt down in the bond market,
we're not going to get a melt up in the
stock market. You know, I've told my accounts that I
reserve the right to change my forecast as often as
the President seems to change his mind. But I do
(17:59):
try to maintain some objectivity and stability in my forecasting.
And I think the market's right. This too sholl pass.
And We've got a tremendous amount of technological innovations ahead
of us, whether it be humanoid robotics, more automation, autonomous driving,
artificial intelligence. All these technologies are are not pie in
(18:22):
the sky. They're here and they're being implemented. I think
they're going to have a tremendous impact on productivity. So
I've been talking since twenty nineteen that this decade could
be turned out to be the Roaring twenty twenties. First
half of the decade worked out great so far, you know.
Then it looked like things started to slip up here
for a Roaring twenty twenty scenario, But I think it's
(18:44):
making a comeback here and it's based on the idea
that technological innovations will boost productivity because there are shortages
of skill labor, and productivity means better economic growth, lower inflation,
better profit margins, and higher real wages and makes everything better.
And so I'm still counting on that, and I'm trying
(19:07):
to get positive feedback from the stock market, and I
have been until this correction, but we thought it would
be a correction. We didn't think it would be a
bear market. So far, so good, and within the market's
kind of back to signaling that the Roaring twenty twenty
scenario might still be very much intact.
Speaker 2 (19:29):
Yeah, although I suppose it is possible. In fact, history
shows us is over and over again. I'm a financial
walking tour of Edinburgh yesterday and we walked around the
railway station and all that kind of thing and talked
about the various booms and busts and how often it
is that you have an amazing technological revolution, Yeah, alongside
disastrous investing environment. These two very often go hand in hand.
(19:53):
So the assumption that because you have a decade or
two decades of astonishing technological advancement, it is not a
even that alongside that an awful lot of people make money.
Generally a lot of people lose money. And it's in
the second way when the productivity gains really come through
that the next lot make the money.
Speaker 4 (20:13):
Yeah, I guess it's Schaumpater's notion.
Speaker 3 (20:16):
Of creative destruction.
Speaker 4 (20:18):
Creative destruction for the help the idea that capitalism, by
its very nature is constantly innovating and coming up with solutions.
You know, when I studied economics, it's like a lot
of first year students. I read Samuelson's book on economics,
and he defined economics as the study of how you
(20:39):
optimally allocate scarce resources. It sounds like a very depressing
concept that you, oh, my god, there's only so much
and we have to figure out how to divvate up.
And then you get into these debates of whether the
government should do it through Marxism or state run economies,
or should it be done by the marketplace. I think
economics is all about technology solving the problem of scarce resources.
(21:04):
The way we know scare resources are scarce is because
the prices go up, and then some entrepreneurs says, I
can do this better cheaper with these kind of technologies,
and that's what makes it so exciting. But it's very dynamic,
and while you're creating, you're also destroying, and that's where
a lot of the tensions come in. But I think
we're very much in that kind of environment right now.
Speaker 3 (21:26):
Okay.
Speaker 2 (21:26):
I like the idea that economic should not be about
allocating scares resources. We've been talking about that a bit
on the podcast recently, saying that the whole aim should
be to find, create, offer more and more resource so
that we consume more and more, rather than constantly working
towards trying to consume less. We should be open to
the idea that we should always consume more energy, more resources,
(21:47):
more land, etc.
Speaker 4 (21:49):
Just take autonomous driving. We're not going to have to
own cars anymore. We can own them and rent them out.
But that'll make the whole auto industry much more efficient.
We're all driving to work in the car sitting there
for hours on end. We're all coming back home at
night and the car is sitting there and the driveway
or garage hours on and now, imagine if we actually
use these vehicles, these digital devices more efficiently, then we
(22:13):
will be using a few resources, certainly in that area.
Speaker 2 (22:17):
I don't know, my car is almost an extension of
my house. I currently see myself giving it up. You're
very optimistic.
Speaker 3 (22:26):
We appreciate that.
Speaker 2 (22:26):
We don't get it often on the Marin talks money podcasts,
particularly about the US market, So it's.
Speaker 3 (22:31):
Good to hear. But what would make you change your mind?
What would happen?
Speaker 2 (22:35):
What confluence of events or ideas or changes is it
that would make you say, actually, do you know what?
I've got this wrong? There's going to be a recession.
This market's going to correct. It doesn't look good anymore.
What should we be looking out for?
Speaker 4 (22:49):
I'd watch out for when the pessimists become optimists in
my country, and instincts will come out and say that
something's got to be wrong here. As you said, I
tend to be a loone around these podcasts. There aren't
too many of us optimists out there, so from a
contrarian's perspective, it works. I've been accused of being a permeable,
(23:11):
which I've used as a compliment. I want my tombstone
to say it. Yard Denny was usually bullish and usually right,
and I'm not saying that bragging. I'm saying that stock
market's are permeable. It tends to go up. Technology tends
to solve the problems that people think are going to
bring us down. The debt crisis. I welcome it. I
hope we get a debt crisis in the next few months,
(23:32):
because it will probably be resolved in the next few
months as we scare the living daylights out of the politicians.
I hope that bonvigil Ani showed that they're more powerful
than ever. After all, there's more debt than ever, so
they must be more powerful than ever. I do tend
to see things more optimistically, but that's a contrary instinct
because it's being a pessimist. Is it's just a conventional
(23:54):
It's so easy to say how things are going to
go wrong. So as long as the pessimists keep coming
up with ideas a way could go wrong, I don't
have to work as hard on that side. So I
keep looking at what they're saying could go wrong, and yeah,
I think, right now, you've got people like great Dally,
We're very credible. Is a billionaire. By the way, I
don't know what it is about these billionaires that make
some pessimists. A lot of these billionaires just keep telling
(24:17):
the masses that they can't be even billionaires because we're
going to have a crisis any day.
Speaker 2 (24:22):
So it's interesting because you're right, we get that a
lot that the miserable billionaires, the world's going to end,
everything's awful, et cetera, et cetera, And they must have
been optimistic on the way up, because it's not really
possible to become a billionaire by being a miserable or
good is it.
Speaker 4 (24:36):
That's the way I'm looking at it. But I would
say right now the most credible pessimistic scenario is that crisis.
But you can pretty much count on me and tell
you why this is not going to be the end
of the world as we know it, and why it
might actually be a good thing. It might be might
resolve this issue once and for all.
Speaker 2 (24:54):
Yeah, although it will break various things in the financial
markets that we didn't even know that were to be broken, well,
not always happens. He'll be stuff that breaks Shelby, all
sorts of things that we wouldn't have expected would come
out of a proper day crisis.
Speaker 4 (25:07):
I'll respond to that by saying that was very true
in two thousand and eight, but we've made a lot
of progress in creating all kinds of shock absorbers in
the capital markets. People were certain that the tightening of
monetary policy over the past three years was going to
cause a financial crisis in a recession, and it didn't happen.
And now they're certain that the tariffs are going to
(25:27):
cause some sort of crisis and a recession. We have
a very resilient economy and a very resilient capital market
in America, so it is resilient. Maybe Japan will turn
out to be the mean poster child for what happens
when you borrow too much and at some point it
comes back to haunt you.
Speaker 3 (25:47):
Yeah. Maybe, Okay.
Speaker 2 (25:48):
So in this giant equity market that is the US
market obviously a very keen on big tech. But for
an order investor looking at the market, not wanting to
buy a passive fund, where should they be, Like what
sectors are interesting?
Speaker 4 (26:02):
You know? I've been recommending overweighting information technology, communication services, industrials, financials,
so all the good stuff, all the stuff that does
well during good times, growth kind of companies. Not cheap.
They were cheap on April eighth, not as cheap anymore,
but I would stay with them. Not to say that
(26:23):
the defensive stocks are cheap They're also very expensive because
there are a lot of pessimists out there who still
want to be in the market, but they don't want
to be in the gamey stuff, which is what they
would say my recommendations are focusing on. But yeah, I
would overweight those sectors, and I would continue to overweight
the United States. I don't think the US dollar is
(26:44):
going into a major decline. I don't see how that's
possible when we have the world's largest capital market and
the most liquid capital market. So I think that just
doesn't make sense.
Speaker 2 (26:54):
What about smaller companies in the US. We keep being
told that's where the value is.
Speaker 4 (26:58):
Well, they've been frustrating the smid caps, the small cap
MidCap stocks, particularly small caps, they've been cheap for a
long time and they just can't seem to get a
sustainable rally. Going definitely look more attractive in evaluation basis.
But maybe the problem is in this small cap arena
is all the good stuff doesn't go public very quickly,
(27:19):
and before it does go public, it gets bought out
by the Magnificent seven or some other large cap company.
And then the other frustrating thing is if you happen
to come up with the next Microsoft. Then you're sure
it's going to be the next Microsoft, and you buy it,
and you see this thing going up double triple, and
then all of a sudden somebody comes in and buys
it from you. Well, that's great, you're going to have
(27:41):
a good one day return on your money when the
takeover is announced. But then you've got to go back
to the drawing board and try to find the next Microsoft.
So it's a very frustrating kind of game to be
playing right now because you're competing against the investment banking
department of some pretty big.
Speaker 2 (27:57):
Companies, which is very bad for said markets overall, isn't it. Yeah,
it's possible that another reason why small caps aren't getting
the traction that you might expect small and mid sized
companies because of the shift towards passive and of course
the bulk of passive money goes into index funds that
float around the larger cap level.
Speaker 4 (28:16):
Very good point. Yeah, Active managers are almost always limited
by what percent of their portfolio they can put in
any particular stock. Sometimes it's two percent max, three percent maximum.
You've got to have a certain diversification in the numbers
of stocks you own. The ATFS there's no restraint. You know.
Whatever the magnificence seven are in the S and P
(28:39):
five hundred is what they're going to be in the
atfs attract the S and P.
Speaker 2 (28:43):
Now, I know you've said definitely that you've definitely favored
the US and everyone should really be overweight the US.
And but are there any other markets that you look
at and you think a lead, you know, that looks
kind of interesting. You know, there's lots of talk about
rebalancing towards Europe because of Germany's fiscal splurge, because of
rising spending across the board. There are lots of talk
about how China is no longer an uninvestable market and
(29:05):
one should be there as well.
Speaker 4 (29:08):
I'm in the China's uninvestables camp.
Speaker 3 (29:10):
Oh you still why is that?
Speaker 4 (29:12):
I still am. I don't think that's changed. It's still
authoritarian regime that can change the rule of business very quickly.
More fundamentally, the governments destroyed the demographic profile of China.
It's very geriatric. You know. I've described China as the
world's largest nursing home operated by maoists. Before that, I
(29:33):
used to call Japan the world's largest nursing home. Operated
by the mob. So I don't know that they let
me into China. I don't know that.
Speaker 2 (29:41):
I mean no, But that is the really interesting thing
about China is that the population is actually falling by
a million plus a year.
Speaker 4 (29:49):
And the Japan and now we can see that Japan
has a lot of debt. China has a huge amount
of debt. Their property market is a disaster. No, I've
got no interest in China. And for a while there
was a it's a great vehicle for trading, but I
don't think you can India. I keep looking at with
saying I wish I'd thought about that one earlier, but
(30:10):
we just had to sell off there that now is
followed by a recovery. It seems to trade and tandem
with what happens in the United States. I would say
there's probably opportunities in India, particularly in the banking sector
and the retailing sector. I think there's certainly opportunities. Other
than that, it's catches catch can around the world. Mexico
(30:31):
has some opportunities, but it's a state with questionable political stability.
Brazil has some opportunities, clearly, but a lot of them
it tend to depend on a strong global economy pushing
up commodity prices, and that doesn't seem to be what's
happening right now.
Speaker 3 (30:48):
Okay, what about gold? Do you have a look at gold.
Speaker 4 (30:52):
I've never been a proponent of gold.
Speaker 3 (30:55):
Well, it's not an optimist investment, is it.
Speaker 4 (30:58):
It's not that it's got no income, it's got no dividend.
I can't come up with the present discarded value of gold.
I haven't really studied the market that carefully from a
supplied demand standpoint. But about a year ago I said,
you know what it looks like. We're crossing above two
thousand dollars an ounce. I think it looks like it's
(31:18):
got some upside here. And the explanation from a fundamental
standpoint was real simple. As long as foreign central banks
of countries that don't like us decide that they don't
want to see what happened to Russia happened to them
when Russia invaded Ukraine, the United States froze the foreign
exchange reserves of Russia, and so these central bankers have
(31:40):
decided they want to have more gold than dollars or
even euro or yen as reserve assets. Just go with
the flow. If that's what they're going to do. Then
that means gold's going to continue to move higher, and
to the extent that along the way there's more geopolitical concerns,
there's more debt concerns. That's all positive for gold. Oh yeah,
I would recommend actually holding gold and maybe overweighting gold
(32:04):
relative to whatever. You know, if you thought five percent
was enough, maybe ten percent. So I'm actually a gold enthusiast.
Speaker 3 (32:11):
That is not the answer I expected, but I like it.
I try to be open minded good and bitcoin.
Speaker 4 (32:19):
Oh bitcoin. I came up with an amazing insight a
few years ago that I should have listened to, and
the insight was that bitcoin is kind of like digital tulips,
which sounds very critical, right, because then the implication is
that it's just a bubble in Holland. But I did
point out that the difference is that the tulip bulb
(32:42):
was geographically just in a very tiny little town called
Holland many centuries ago, and that people did go to
sleep at night. It wasn't open twenty four by seven.
Bitcoin is global. The market's open on a global basis
twenty four by seven, so there's a lot more potential
buyer than there ever was in the Holland toolip market,
(33:03):
and at least for bitcoin, there does seem to be
a digital mechanism that's limiting the supply of these things.
So I have no problems owning bitcoin. I don't personally,
but I have no I'm not pounding the table and
telling people that they shouldn't be buying bitcoin.
Speaker 2 (33:19):
But the way you've just described it them makes it
sounds like the reason to own it is because it
can be a bubble significantly bigger than the Chilip bubble
ever was, as opposed to because you think it's a
reasonable asset class.
Speaker 4 (33:29):
Yeah. I have no problems with bubbles. I just have
to remind myself to get out at the top. Yeah.
Speaker 2 (33:36):
We don't like to be able to do that it
at the bottoment out of the top. Thank you so
much for joining us today, Ed, I really appreciate it.
I've enjoyed our chat.
Speaker 4 (33:44):
Very welcome. Thank you.
Speaker 3 (33:50):
Thanks for listening to this week's Meren Talks Money.
Speaker 2 (33:52):
If you like us, show rate, review, and subscribe wherever
you listen to podcasts, and keep sending questions or comments
the merin Money at Bloomberg dot net. You can also
follow me in John on Twitter or x, I'm Marianess
w and John is John Underscores Depic. This episode was
hosted by Meet Marin Zumset Web. It was produced by
Someersadi and Moses and dun Sound designed by Blake Maples
(34:13):
and of course special thanks to Eddie or Jenny
Host
Merryn Somerset Webb
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