June 29, 2026 • 40 mins
Despite agreeing that AI is likely as transformative as its proponents argue, Ed Cole, head of multi-strategy equities at Man Group, believes it’s too early to understand whether there’s a bubble. Meanwhile, the growing backlash against globalization and an effort to reshore means traditional 60/40 portfolios are at risk of becoming outdated. He says a reallocation of assets across gold, small caps and liquid alternatives could be essential to keep up with a changing macro environment.
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Speaker 1 (00:02):
Bloomberg Audio Studios, podcasts, radio news.
Speaker 2 (00:08):
It's sort of easier to recognize that the regime is
changing than to understand what it will change into. But
if you think about all those things I mentioned there,
which is you know, globalization, the sort of frictionless movement
of capital and labor and supply chains, I think those
things are going into reverse. And as they go into reverse,
it introduces more friction into the system. It requires, you know,
(00:32):
national interest to be put at the sort of top
of the priority list for governments. I think we're all
going to get used to the idea of America first
by British, by Canadian. The Italians have got their own
version of it. And these things are going to require
more capital to be deployed at home. There's more sort
of you know, more demand on the physical constraints of
(00:52):
the world, which gives rise to produce supplicce inflation. All
of these things are sort of more friction probably stick
here inflation.
Speaker 1 (01:11):
Welcome to Marrin Talks Money, the podcast in which people
who know the markets explain the markets. I am Maren
Sumset Web and this week I'm speaking with Ed Cole.
Ed is head of Multi Strategy equities within solutions at
Man Group and was lost on the show back in
April twenty twenty five, then we spoke about the great
rotation and why at the time Chinese stocks looked like
(01:33):
pretty good investments. Well Ed is back, and on today's
show we talk about what we talk about everything. We
talk about AI bubble or not bubble? Is it evaluation bubble?
Is it an earnings bubble? Or is it really absolutely fine?
We talk about Japan, we talk about small gaps, We
talk about the end of the sixty forty portfolio and
how you should diversify from here, and we finish up
(01:56):
with a really good sounding book for you to take
to the beach. Ed welcome back to Marion Talks Money.
Thank you very much for coming on again.
Speaker 2 (02:02):
Thanks for having me, Maren, great pleasure to be here.
Speaker 1 (02:05):
Last time we spoke, we talked at length about the
end of American exceptionalism. We talked about how we expected
other markets to outperform, or at least to perform better
than the US.
Speaker 3 (02:16):
Let me talk abou something link about.
Speaker 1 (02:17):
Chinese equities and you know how they looked attractive and
where investors should look at the moment.
Speaker 3 (02:23):
A lot has happened since then.
Speaker 1 (02:26):
We last spoke before, before the war in the Middle East,
before the Great Ai Bubble really got going, and a
few other little bits and bobs have happened since then.
So when do it' we saut with an update, We're
how are you feeling now about our previous conversation about
American acceptionalism, about the great rotation out of the US.
Speaker 2 (02:46):
Well, I'm marked my own homework actually in advance of this.
So it was a thank you little more than a
year ago that we spoke, and it was it's always
a little gall lings after go back and listen to
yourself as a starting point, and then listen to yourself
and recognize the extent to which you've probably got things wrong.
(03:07):
I was a bit surprised that some of what I
said has actually played out reasonably well. I think you
and I were probably both on the same page that
nothing's particularly exceptional other than hype cycles, and we're certainly
in a hype cycle now. But just looking back over
sort of fifty two weeks of returns, and I've put
all this in constant currency, so the S and P
(03:28):
and the mag seven, which is I guess what people
think of as exceptional are both up about twenty percent
in the last twelve months. European dollars is up about
eighteen so that bit didn't really work out particularly well. Amazingly,
inside the US, the Russell two thousand, which is the
small cap index or small and MidCap has a bit
(03:48):
more of a value tilt, is up thirty eight percent.
For all that exceptionalism and all of that apparent leadership
by the tech tech giants, it's actually been more cyclical,
more value UI smaller cap companies that have not just outperformed,
but outperformed materially.
Speaker 3 (04:05):
I think we did. We did talk about that, didn't we.
Speaker 1 (04:07):
We did think that part of the rotation would be
in TV smaller cap value names, not just in the
US but everywhere.
Speaker 2 (04:13):
Yes, but everywhere exactly. And then the other extraordinary one,
a couple of other extraordinary ones, is that the emerging
markets have had a phenomenal year in many ways, driven
by the same thing that occupies the headlines everywhere in
the world. So emerging market's up nearly fifty percent over
the last twelve months.
Speaker 1 (04:29):
Yeah, but I think we have to stop and talk
about that briefly before we move on and say that
that is not emerging markets that have got absolutely nothing
whatsoever to do with emerging markets. That is three giant
companies in Taiwan and Korea, and we've talked about that
on this pod quite a lot to say, you know,
if you want emerging markets exposure, do not buy an
emerging markets index because you're going to get an AI momentum.
Speaker 2 (04:51):
Trade absolutely fair. And of course, you know, EM has
always been in many ways the factory for what the
developed world is con huming. And you know, the monetizing
AI is still really a developed world story. And of
course those three companies are the picks and shovels that
are manufacturing what it is that the Western world needs
(05:13):
to consume for this particular growth cycle. The other surprising
bit in it, though, is that on shore Chinese equities
there's been a massive bifurcation between offshore Chinese equities and
on shore Chinese equities. On Shore Chinese equities are really
interesting market because they're super super deep and super broad
and quite lots of inefficiency, lots of opportunity to route
(05:35):
out on shore China. Chinese equities are up nearly thirty
percent in dollars over the last year, so You're absolutely
right in index terms, in em there's something very much
going on amongst those big semiconductor names in both memory
and logic. But below the hood there are many other
stories going on as well. So I think we could
probably take a step. I'm going to sort of probably
(05:57):
mark my scorecard as could do better altogether. Not terrible,
not terrible at all, But I think that and I
think probably we also talked about golden Bitcoin, we might
come from.
Speaker 3 (06:07):
Yes, it would definitely come back to that.
Speaker 2 (06:09):
But I look, I think I suppose, on the one hand,
in sort of scores, it looks as though there has
been some rotation. On the other hand, in terms of narrative,
America probably would be patting itself on the back for
looking more exceptional than ever in terms of having the
companies that are absolutely at the tip of the spear
(06:30):
in what's going on in AI and AI monetization and
you know, and there's a question mark in all of that,
which I'm sure going to get onto about how sustainability
all is.
Speaker 1 (06:39):
Well, why don't we start with that, Well, actually we've
started already. Why don't we move on to the AI
hype cycle and how that is going? I mean, we're
talking in a very volatile week twenty fourth of guine
by the way, and so there's been quite quite a
lot going on. Tuesday this week was a lightly mad
day with all sorts of movements in tech and the
cost of the Korean index down nearly ten percent in
(07:01):
one day because of the again, because of these big
AI and ms. Do you think we are reaching the
top of the hype cycle? We're getting to the bit
where everyone saying, okay AI is great. We get that
there's a marvelous technology. It can do fabulous things for us,
but nonetheless it needs to be monetized, and that path
is slightly less certain in particularly in terms of the
(07:21):
volumes required. It's slightly less certain than we thought. We've
seen quite a lot of companies begin to talk about
something we've discussed on this podcast quite a lot, which
is saying, well, is there a cheaper way to do
this and looking at some of the open source models
that they can run on their own computers and owned
networks without recourse to the big expensive companies, et cetera.
Speaker 2 (07:40):
But I suppose I hesitate to say yes, we're at
the top. It's incredibly hard to know it will be
hard to know in some ways until we're quite a
long way away from the top, because tops are typically
quite noisy. If I stack a step back, i'm I'm
my glass is half empty as a person, which is
both good and bad in this business. But I think
(08:02):
that if I just sort of forced myself a little
bit to listen to the other side, I would tend
to agree with you in sorts of hype cycle or
bubble if I take a step back and listen to
the other side. And we have quite lively debates in
my company about this, the bulls will say right now
that actually the market's derated this year. You know, the
(08:22):
earnings revisions have been so extreme, and I've been extreme everywhere.
It hasn't just been an AI story. You've seen it
even in the Russell two thousand that I talked about
enormous earnings revisions. On the positive side, that there is
something going on in terms of a strong economy, and
clearly the hype that we see in AI is this
is the ball argument justified by what's happened in terms
(08:45):
of earnings revisions. So unlike other bubbles, you can look
at this right now today and say the market is
not that expensive if the earnings estimates come through. That's
something we talked about a year ago, you and I.
If the owning estimates come through, then the market doesn't
look expensive. Now I would take a step back and say,
and I think this gets exactly to your point about monetization.
(09:06):
I would take a step back and say that those
earnings revisions today are predicated on an earnings estimates rather
today are predicated on an assumption that compute is scarce,
and that if you are an Asian semiconductive manufacturing company,
your capacity to keep your price moving in a world
(09:29):
where it previously was very deflationary is high, and therefore
both volume and price are in your favor. And that's
a phenomenal environment to be selling the hardware that people need.
If we discover that compute is not scarce, then I
think the picture will change pretty materially. Now, why would
(09:51):
compute not be scarce? So I think the first thing
is even alluded to. It is actually an understanding that
perhaps you just don't need these leading edge llms to
perform the kind of tasks that we're performing. You know,
we use AI to an enormous extent at work. We
have you know, kind of coding co pilots all of
(10:13):
us can use and it's incredibly powerful. But actually, as
a portfolio manager rather than a courant developer, I don't
need to use the leading edge models. It's absolutely clear,
and so you can do a very simple tweak which
is just say, well, let's start moving away from the
leading edge so we don't have to use take up
all of that capacity in the most expensive part of
the stack. So that's one which is just not using
(10:37):
the leading edge. The other is perhaps not using the
llms at all, so small language models ways of actually
dealing with discrete tasks. The other angle is you know,
not using the US models that are you know, the
premium price. So of course we all know that the
you know, the cost of a Chinese model is much
(10:59):
much closer to the cost of production of that model.
And I think it's entirely conceivable that certain businesses and
enterprises are going to carry on using you know, the
premium models all the time, but there will be other
applications that don't. And then I think the other thing
is actually fascinating news that came out overnight, which was
(11:19):
the sort of world world ranking of supercomputers. I don't
know if you saw this, but there's a Chinese supercomputer
called Lineshine in Shenzen that's just won the crown of
most powerful supercomputer, and it's entirely powered by CPUs, not GPUs,
again demonstrating that actually it isn't all about how much
compute you throw at something. It's often, you know, about
(11:41):
the way that the things engineered and implemented. So there
are enough reasons to think it's possible that we could
end up with a serious headwind for this if the
market continues to be driven by the idea that actually
computers scarce and therefore you know, those names in a
that we've talked about continue to be the leaders. I
(12:03):
don't know when please please.
Speaker 1 (12:05):
Ask you to explain to our non AI literate listeners
a difference between CPUs and GPUs.
Speaker 2 (12:11):
Yeah, so gpuser called graphics processing units, and those are
the kind of just much much more advanced, much powerful,
much much more energy energy, energy intensive, Yeah, much more
powerful logic semiconductor, So they do the thinking. That's the
semiconductor that does the thinking, and a CPU is a
much more basic version of it. It's what we all
used to have in our home PCs before, you know,
(12:35):
before there was a sort of step change in technology.
In other words, it's a more basic function, more basic,
less less powered, and requires less energy intensity to make
it work. And I think it's you know, there's been
a story you and I spoke last year, not a
million miles after the deep seat news, and in many
ways it's the sort of continuation of the same thing.
(12:55):
That you don't have to keep throwing the most leading
edge chip at every thing in order to push things further.
There's an awful lot about the way you engineer these processes, and.
Speaker 1 (13:04):
That that leads on to two possibilities. One that this
is an earnings bubble more than a valuation bubble. Obviously
they're connected, but it's an earnings bubble first, and that's
the first thing. And the second thing is that it
is possible that the huge amount of capex being thrown
at data centers might turn out to be too much.
Speaker 2 (13:28):
To absolutely agree. I think the the the argument I said,
the sort of bulls argument that it's not a bubble
because because earnings revisions have been so powerful, if earnings
collapse because monetization doesn't work, the market's going to look
a hell of a lot more expensive. And I think
I think a fascinating you know, prison to look at
(13:51):
this through is actually that those Korean semiconductor memory companies,
you know, those have historically been cyclical. And the way
we treat a cyclical company, the sort of orthodox way
to treat a cyclical company, is you sell it when
it's cheap, because it's earnings and revisions are sort of
you know, they're not going to stay up there. Right.
You grow up in this business learning to sell those
(14:12):
things when they're cheap and buy them them avery expensive.
If in fact, this is not a secular trend in
in earnings but a cyclical or a blowoff moment or
a bubble or as you call it, then actually what
we're going to find is that the market's a hell
of a lot more expensive than it looks.
Speaker 3 (14:29):
Yeah, and this is just a normal cyclical Yeah. And
I think I think the other thing extreme but normal extreme. Yeah.
Speaker 2 (14:36):
The other thing in all of that, which I think,
you know, when it all happened a year ago, a
bit sort of ten months ago, everyone was perplexed and
we've all moved on. Because we have short attention spans.
We also have to go back to the to the
realization that a lot of these earnings revisions are part
of that incredible circularity of you know of vendor financing,
where you know, where the customer invests in the invests
(14:58):
stock in the company to place orders for the chips.
And there was all those extraordinary diagrams that went round
that showed this ecosystem where everyone was both customer and
off take for the same same ecosystem. And there's this
sort of multiplication of earnings revisions that's going through the system.
So it isn't just the case that one company's order
book suddenly looks different. It's that that has a ripple
(15:20):
through effect from the company that's building the model, through
to the hyperscala, through to the company that's making the
memory chip, through to the company that's making the logic chip.
So all of them are enormously interrelated. We all scratched
our heads in September October last year when all of
those deals were announced and sort of laughed a bit
and moved on, And now here we are with that
being at least one factor that's contributed enormously to the
(15:43):
growth in earnings expectations. All quite fragile sounding, Yeah, it
could be or we could find that actually the productivity
gains are so extraordinary, and that businesses learn quite quickly
that they can't do without it, that their competitors are
starting to make advances because they are being prepared to
(16:03):
take on the cost of tokens, and you know, and
they make that part of their ongoing budget. So I,
you know, I look at this after twenty five years
in markets and think it looks in many ways like
a bubble, and it talks like a bubble, and it
walks like a bubble. But I also have to be
open minded in a way that I probably wasn't when
I was twenty five, that there are paths in, there
(16:25):
are path dependencies, there are ways through this where actually
perhaps it doesn't go pop.
Speaker 1 (16:31):
And either way, this is not Emperor's New clothes. The
technology is exciting and valid, and either way leads to
astonishing productivity gains. That's simply a matter of whether the
valuations are right or wrong.
Speaker 2 (16:43):
So just yeah, yeah, definitely. I think there's one one
really fascinating way to think about all bubbles is that
actually the majority of them are productive in a sense
that what they do is they suck capital into something
that is ultimately almostly changing for society or changing for
(17:04):
a political economy. You know, you can look at the
you know, the sort of nation building in the US,
the railway bubble in the US, you know, even parts
of the Roaring twenties actually, which was sort of beginning
of like domestic consumption taking off, the dot com you know.
The norm is that that these bubbles bring capital into something.
(17:25):
There's some malinvestment along the way, but the technology remains.
What's not normal is something closer to the GFC or
the kind of very tail end of the Roaring twenties,
when it's pure speculation. South Sea, you know, tulips, where
there's where there is nothing, nothing sort of transformational about.
Speaker 1 (17:46):
I'm want to pick you up on tulips actually interesting
sps I mean yes, always cited as an extraordinary bubble
that left nothing behind it, you know, exponential rises in
the prices of tulip bulb and then a collapse that
leaves everyone.
Speaker 3 (17:59):
Destroyed, et cetera, et cetera.
Speaker 1 (18:00):
But you know, here we are and the Netherlands are
still one of the greatest flower exporters in the world, right,
and where do you go when you want to buy
amazing tulip bulbs. What do you buy when you go
when you go to Holland and you want to bring
back a souvenir chilip bulbs?
Speaker 3 (18:15):
Right, it left an amazing like the.
Speaker 1 (18:18):
Long term chulip bubble was ages ago, and there it is.
The legacy of the tulips is still there in the
in a huge industrial infrastructure the production of these flowers,
and in a massive tourist infrastructure.
Speaker 3 (18:30):
So now I won't hear a word against the tulip bubble.
Speaker 2 (18:33):
No, okay, I stand corrected, and they are, of course
wonderfully beautiful.
Speaker 3 (18:36):
Yes, exactly right.
Speaker 1 (18:47):
Let's move on from bubbles to a paper that you
wrote recently that I'm interested in. I know our listeners
will be interested in about diversification in an age of
inflation and the change that has come there. I know.
But you think that we're moving into what we're in
and staying in a more inflation environment that we've been.
Speaker 3 (19:06):
Used to over the last forty years pre COVID.
Speaker 2 (19:09):
Of course, yeah, I mean we do, we think I
think you know. Actually this is in some way informed
by the kind of conversations we have with many of
our largest clients, and it's really interesting to us how
there are many, many different conversations coming from asset allocation
teams in these big institutional businesses, which are all touching
(19:30):
on the fact on the sort of realization that the
world is changing, that the pre sets that we lived
through from you know, the sort of mid nineties onwards,
probably until the Brexit referendum ten years ago this week,
there was a set of characteristics that were pretty stable.
(19:54):
And those characteristics were, you know, the kind of primacy
of globalization, stimization of supply chain, stability in Western politics,
low inflation, financialization of everything because low inflation allowed for that,
and this wonderful kind of basis for multi asset investing,
(20:14):
which was that stocks and bonds were negatively correlated, meaning
that when your bomb, when your stock portfolio hit the skids,
your bomb portfolio would typically partially bail you out.
Speaker 1 (20:27):
Which happened earlier this week. By the way, I mean
that that happened on Tuesday.
Speaker 3 (20:32):
Old fashioned stuff. But it did happen.
Speaker 2 (20:34):
Yeah, it did happen. I mean, I think what we're
really thinking about here is what happens on more than
a day, and it certainly didn't happen in March, where
stocks got hit very hard and so did bonds, and
so did gold. So I think, you know, the way
we recognize it's sort of easier to recognize that the
(20:54):
regime is changing than to understand what it will change into.
But if you think about all those things I mentioned there,
which is you know, globalization, the sort of frictionless movement
of capital and labor and supply chains, I think those
things are going into reverse. And as they go into reverse,
it introduces more friction into the system. It requires you know,
(21:16):
national interest to be put at the sort of top
of the priority list for governments. You know, I think
we're all going to get used to the idea of
America first by British, by Canadian. The Italians have got
their own version of it. And these things are going
to require more capital to be de deployed at home.
There's more sort of you know, more demand on the
(21:37):
physical constraints of the world, which gives rise to produce supplies. Inflation.
All of these things are sort of more friction, probably
stickier inflation.
Speaker 3 (21:46):
There's us conversations about that.
Speaker 1 (21:48):
You know, we've talked, I think we might have talked
previously about capital controls and the odd defining that your
money is confined within a country, or appropriated for the pension,
pension in particular, appropriated for domestic domestic infrastructure needs, etc.
One of the conversations in the UK at the moment
endless leaking of possible tax things, right, but one of
(22:09):
them is that the introduction of an exit tax. So
if you do want to leave the UK to escape
an oppressive tax regime, you get to pay a partner
taxes on the way out. So you know, that's another
bizarre thing in this new world of ours, isn't.
Speaker 2 (22:22):
It absolutely right?
Speaker 3 (22:23):
It's exactly so.
Speaker 2 (22:23):
I mean, you know, a hallmark of neoliberalism and globalization
was the liberalization of capital accounts, and this is sort
of the opposite of that, which is that you know,
the capital resources sort of economy are required at home.
Japan will be really interesting to watch in that respect.
I mean, you know, they've now got interest rates at
one percent, Inflation is certainly high in their own context,
(22:47):
the yen is extraordinarily weak. They're finding it difficult to
work out how to cap that. My take on it,
purely personal view, is that at some point, you know,
if you go back, gosh, is it twelve thirteen is
to our bay part of our Bay's plan in Japan
was to depreciate the yen to get to sort of
(23:08):
try and move away from disinflation deflation. And one of
the things they did in that respect was they change
the ratios of onshore and offshore investment for the pension
funds in Japan. The pension fund system in Japan is
absolutely enormous, and you know, I think it's entirely possible
that some point that what they'll do is reverse that,
as they'll start requiring Japanese pension funds to start buying
(23:31):
more Japanese assets. But I think the critical thing when
you think about investing, whether you're investing your ISA or
investing the assets of a sovereign wealth fund, is that
the approach that we've all typically used as is changing enormously.
You know, the sixty forty is the sort of mainstay
(23:53):
of wealth investing and has been for all of our lifetimes,
and it rests on the assumption, as I said already,
that bonds andequities negatively correlated. You know, we've done some
work at looking at what happens in similar drawdowns in
environments where bonds are negatively correlated versus positively correlated. Nineteen
seventy four, the equity draw down was the same size
(24:15):
as it was in two thousand and eight, So you
lost about forty percent in world equities in both nineteen
seventy four and two thousand and eight. In nineteen seventy four,
which was obviously an inflationary environment, stocks and bonds were
positively correlated, and you lost I think something close to
thirty percent in the sixty forty portfolio. In two thousand
and eight, it was a much much smaller loss because
(24:37):
bonds really really kicked in. And I think the point
is that, you know, what we worry about is not
runaway inflation, but rather once you once the genie is
out of the bottle with respect to inflation targets, it's
very hard to get it back in again. And I
think you can see that. You can see that kind
of I mean, you can see that in the UK,
(24:57):
where we don't have very strong real growth. But you know,
in the UK CPI is running it close to three percent.
Services CPI is at three point eight percent and is
moving higher. And that's an economy where real GDP growth
is about one percent. So this isn't a function of
a runaway demand the US, which is obviously growing at
(25:18):
a much more rapid clip. There's a terrific inflation series
run by the San Francisco FED, and they break down PCE,
which is one of the which is the Fed's preferred
measure of inflation, at least before wash. We'll see if
it changes. But they break down PCE into what they
(25:38):
call cyclical components, so those that are sensitive to the
economy and acyclical components. Core PCE is running about three
point three percent as of the last data for April.
About sixty percent of that comes from the acyclical components,
and that's been accelerating over the last two or three years.
So you're in an environment in the US where this
is this thing about sticky inflation. Once genies out of
(26:00):
the bottle, it becomes sticky, it starts to feed inflation expectations,
and it's very, very hard to get it down again.
That doesn't mean, you know that what we saw in
twenty twenty two inflation was high single digit It doesn't
mean that's what we're going to have. But what it
does mean is that what we used to do, which
is inflation being at or around the targets of all
central banks at about two percent, that looks increasingly unlikely.
(26:22):
And the reason we would then worry about that is
it means that you can have environments where the hands
of central banks can be more tied in terms of
their response to a crisis. If they're faced with a
if they're faced with the crisis that's driven by inflation,
they may well be raising rates into that, which is
what we saw in twenty twenty two. And if they're
(26:44):
faced with a crisis where inflation is very sticky and
they don't have enough conviction that it's going to roll over,
they may not be able to provide what in markets
we call the central bank put the protection that we're
used to. And so that can mean that, you know,
all of the reaction functions and interactions that we've seen
over the last thirty years can start to change.
Speaker 1 (27:06):
So we've been used constantly to every time something goes wrong,
central bankstep in, slash rates and everything's just fine again somehow.
Speaker 2 (27:13):
Yeah, and again have to be humble. That could be
the case, but I think becomes more difficult when inflation
remains sticky.
Speaker 1 (27:20):
But the core difference then being that previously most of
these crises could be put down put at the door
of demand, these demand related crisis and so you slash
interest rate gen you're off to the races again. But
if they are supply created crisis, you can't do the same.
Speaker 3 (27:36):
It doesn't work in the same way.
Speaker 2 (27:37):
Yeah, and then you have to ask how robust is
the portfolio that you're sitting with. How much is it
an artifact of the old regime, and how much is
it something that's actually robust to a changing world where
we don't entirely understand where all the risks are coming from.
Speaker 3 (27:54):
But how do you shift your portfolio?
Speaker 2 (27:57):
What do you do?
Speaker 1 (27:57):
Where is your diversifier? And now we're not going to
we're not going to get listeners out of equities. That's
never going to happen. But yet anyway.
Speaker 2 (28:04):
Well, well we could we can go a bit back
to the conversation we had a year ago, which is
you diversify the you diversify where our equities are.
Speaker 1 (28:12):
I mean, last time is it? At the beginning we
talked quite a lot about China. Where where would you
look now?
Speaker 2 (28:16):
I think if we if I sort of think about
it in terms of styles, I think higher inflation plus
greater fixed capital investment in economies, and the fixed capital
investment is you know capex, that's a function of all
of the reshoring or energy expansion, all of these sorts
of things. The combination of inflation plus that tendency suggests
(28:38):
to me that you want to be in what we
call shorter duration cash flows, so things with things that
have a real fixed capital base rather than the sort
of intangible assets of the last cycle.
Speaker 3 (28:50):
Okay, so it's the halo trade, hard assets, low ups lescens.
Speaker 2 (28:53):
Yes, exactly. Yes, I think there's an awful lot of
value in that. I think that you know that you
will find a lot of those companies outside of large caps.
I'm sort of repeating what I said again last year,
but I think these.
Speaker 3 (29:06):
Are probably still value on the small caps.
Speaker 2 (29:09):
Yeah, smaller caps for sure. I have to say I
and this is a personal Everything I'm saying is a
personal view, but I think that you know, I think
we had a very weak dollar, which helped a lot
of the rest of the world. The dollar then got
a bit bid again around Iran, most recently in the
last week. It's been bid again because the markets read
(29:29):
on Wash was that he's hawkish. My take is really
what Wash is doing personal view is that he's he's
really he's guiding us towards a different type of guidance.
He's essentially saying this, you know, forward guidance is finished
and we're going to be a bit less data dependent.
I don't think that means he's extremely hawkish. I tend
(29:51):
to think it probably means the dollar is going to
be a bit weaker and there are dollar beneficiaries out
there to be had in equity. So equities, you know,
I think you can continue to divers if I continue
to look for that. As you say, halo is a
good way to think about it. I think then, you know,
then you have to question, well, what role the bonds
have in your portfolio. Bonds still have a fantastic role
in the portfolio, I think, you know, particularly for us
(30:13):
in the UK, you get this opportunity from time to
time to buy a low coupon bond with a discounter
part and you don't pay capital gainst tax on that
if you can hold it to maturity. So you know,
these are still really excellent ways to get a kind
of guaranteed return with a tax efficient approach. But I
would what I think, what we the way we think
(30:34):
about that is bonds have many uses, but it may
not be that they are reliably diversifiers. You know, we
think that this is actually a golden age for alternative investing.
To be frank that that alternative assets alternative investments have
been quite out of fashion for a long time. They
haven't been required because it's been an environment where the
(30:58):
returns you got from equities were so fantastic that you
just didn't need to bother thinking about diversifying any a
way to things that are lower return and lower volatility.
But liquid alternatives that have little or no beta to
the market, that are genuinely diversifying, and a liquid what.
Speaker 3 (31:16):
Is a what is a liquid alternative asset?
Speaker 2 (31:18):
Liquid alternatives are you know, funds that are not directional,
so hedge funds in nomenculture, but they are, you know,
in our world, extremely diversified. They combine many different approaches
to capturing different risk premium in markets. They're not directional,
they may be market neutral, and their ways to essentially
extract returns out of the market that don't rely on
(31:41):
what's happening in beta, They don't rely on market direction.
It's interesting that you know that these have been very
out of fashion for a long time.
Speaker 1 (31:50):
Both while you don't need you don't need them. You
can be long only at ten to fifteen percent a year.
You don't need somebody that's going to go market neutral
for you.
Speaker 2 (31:57):
Exactly right. And actually, but in the institutional case, so
with our biggest investors, it was it wasn't so much
we'll just have more public equities, it's we'll have more privates,
and that that decision is starting to be reframed again.
And the interesting thing about actually a lot of liquid
alternatives hedge funds is that many of them in fact
(32:18):
benefit from higher inflation. I mean, we've done quite a
lot of work at looking at equity long short in
different different inflationary regimes. Equity on short tends to do
better when inflation's high. I think the reason for that
is because as interest rates move higher, as the refinancing
of debt becomes more expensive, companies are required to do
(32:40):
more idiosyncratic remedial work to keep their head above water.
But yeah, we think that as inflation moves high, and
as interest rates through hire and the cost of debt
moves higher, it forces companies to do more and that
means you get more dispersion, and that makes a greater
opportunity for stop picking, selecting good from bad, and so
returns to equity market neutral equity laun short strategies get
(33:01):
better as inflation goes up, so that's quite an interesting diversifier.
I think the trick in all this is diversify your diversifiers.
In the past, we didn't need to. You just bought bonds.
Today you need to have a much much broader toolkit.
Speaker 3 (33:14):
Explain to me.
Speaker 1 (33:15):
I really enjoyed your euphemism about decisions about privates being reframed.
Speaker 2 (33:21):
I think that that you go back to the nineteen
eighties when the endowment model emerged, which was the sort
of bible of investing in you know, investing across a
much broader pool of assets and including privates in it.
There was an illiquidity premium right if you were able,
if you were an endowment or an asset owner that
had a very very long time frame for your liabilities,
(33:45):
if you you know, required your money over very long
periods of time, there was an inquidity premium that you
could harvest, which was, if I'm prepared to lock my
money up, I will be rewarded for that. And there
was you know, the cohort of managers provide those services
was much smaller. Today, the universe has grown enormously. Many
people with much shorter liabilities have been pushed into it,
(34:08):
and we can see that, you know, the exits for
many private companies in the equity space are much more
challenged and the returns that are diminishing over time. And
I think what we certainly see among not all of
our institutional clients, but certainly some of them, is that
you know that the returns are starting to become a
bit underwhelming. There is probably more risk that they have
(34:30):
in their private equity portfolio that looks comparable to their
public equity portfolio that you know that it may be
in both VC and P and private credit. There's more
of the AI ecosystem in there, you know, than they
previously was the case. So it's less diversifying and in
many ways, you know, in the next cycle, if there's
(34:50):
a down leg, there will be the same downward vulnerability
in these assets that there is in their public portfolio.
So I think, you know, certainly the com among some
of our institutional investors is moving onto thinking well, these
are probably not going to be diversifying for us now.
Speaker 1 (35:06):
Yeah, So moving to the bit where lack of liquidity
will come with a discount rather than a premium.
Speaker 2 (35:12):
Which makes more logical sense. It may well be that
case exactly right. Yeah, yeah, so yeah. I think everyone
in essence, whether you're a CIO of a sovereign wealth
found managing half a trillion dollars or someone making decisions
about you know, their ISA, we're all faced with the
same question today about how you achieve diversification from this great,
(35:32):
big common factor, which is, you know, concentration in markets
and beta and expensive valuation.
Speaker 1 (35:39):
Might we do some of that diversification with gold? It's
pretty horrible a few months.
Speaker 2 (35:43):
Yeah, I mean, look, I think I think gold still
is a very interesting asset. I have to say right now,
based on what I've just said about the dollar, I
quite like it personally. I think that actually, you know,
if we start to work out overcoming weeks and months,
that what Warsh has said is not explicitly hawkish, but
more giving himself the flexibility to respond to a changing
(36:06):
outlook as he sees it, and I think he will
be less data dependent and more dependent on his expectation
for what's happening in the economy. So it's a bit
more opaque. I think if that's the case, and that
a lot of people who know Arsh say that's how
he thinks, then it's a week dollar, and I think
it was a week dollar. We're probably going to see
some support coming back under gold. I don't think that
the the demand from the rest of the world central
(36:30):
banks for gold has changed. You know, part of fragmentation
deglobalization is that people are looking for other reserve assets
other than the dollar. So I don't think that's changed.
So yeah, I think there's some back.
Speaker 1 (36:40):
Toup of demand from the certain bank remains a week
dollar gives.
Speaker 2 (36:44):
It some some sre and some impetus to move higher.
Maybe the way to question the role of gold is,
as we saw in March, is that that at various
points in time, can become a risk on asset rather
than a diversifying asset. So I think it's an interesting
asset to have in your portfolio, but it isn't necessarily
something reliably that you want to bank on to bail
(37:05):
you out when equities are doing badly.
Speaker 3 (37:07):
We talked last time when we were talking about gold,
well we always do this. We talked about God.
Speaker 1 (37:11):
We also talked about cryptocurrencies, and in particular we talked
about bitcoin slightly separate asset to other crypto.
Speaker 3 (37:17):
Any change in your views there.
Speaker 2 (37:20):
I mean, no other than other than I'm really, really
amazed that the amount of policy support crypto has had
in the last sixteen months. Never in my imagination would
I have I conceived of the possibility that it could
(37:41):
have that much policy support in terms of sort of
you know, legitimization and regulation and do as badly as
it has. So I think we're sitting here today scratching
our head and wondering what the utility of crypto is.
I mean, maybe that just makes it the very best
time to buy it because everyone hates it. But you know,
I think you asked me the question last time, gold
(38:02):
or crypto, and I think, or I hope I said gold.
You did, and I would still say the same today.
Speaker 3 (38:08):
Yeah, it's difficult, isn't it.
Speaker 1 (38:09):
And we on and on and on we go about
the use case, the use case, the use case, and
we never really quite get a compelling enough answer.
Speaker 2 (38:19):
No, I think that's right.
Speaker 3 (38:21):
Okay, last question, last question, onto the fun. But what
are you going to take to the beach with you?
Book Wise?
Speaker 1 (38:27):
Book Wise, I don't want to hear about your towel
and your sontime. What book are you going to take
on a holiday?
Speaker 2 (38:33):
I would recommend if people are going to the beach
and they want a really inspiring book. I don't normally
read non fiction, and I've just read a book called
The Wide Wide c which came out a couple of
years ago and is an account of Captain Cook's last
circumnavigation of the world. And it's a really extraordinary story,
(38:55):
both how meticulously it's been put together from historical record
of the time, but actually the thing that I found
overwhelming at times was that it is only two hundred
and fifty years ago, and it's extraordinary to remind ourselves
at this pace of sort of you know, you know,
acceleration in progress all the time, how young modernity is
(39:21):
that only two hundred and fifty years ago Cook was
meeting people that had never encountered outsiders before and was
exploring parts of the world that weren't charted. And I
think it's so easy to sort of sit in the
moment we're in and assume that you know that things
will progress sort of forever along a path. But it's
only two hundred and fifty years ago that we didn't
(39:42):
even know what our own world looked like.
Speaker 3 (39:44):
Excellent. I'm sold. I'm ordering it right now.
Speaker 1 (39:48):
Thank you, Ed, and thank you so much for joining
us today.
Speaker 2 (39:51):
Thank you.
Speaker 3 (40:00):
Thanks for listening to this week's Marin Talks Money.
Speaker 1 (40:02):
If you like us, show, rate to review, and subscribe
wherever you listen to podcasts. Thank you for sending your
questions or comments to Merrin Money at Bloomberg dot net.
You can also follow me and John on Twitter or x.
I'm at Mariners W and John is John Underscore Stuffy.
This episode was hosted by Me marenthumsep Web. It was
produced by Samasadi and Moses and sound designed by Blake
(40:23):
Maples and Aaron Caspers Russell.
Speaker 3 (40:25):
Thanks to Ed Cole.
Bloomberg Audio Studios, podcasts, radio news.
Speaker 2 (00:08):
It's sort of easier to recognize that the regime is
changing than to understand what it will change into. But
if you think about all those things I mentioned there,
which is you know, globalization, the sort of frictionless movement
of capital and labor and supply chains, I think those
things are going into reverse. And as they go into reverse,
it introduces more friction into the system. It requires, you know,
(00:32):
national interest to be put at the sort of top
of the priority list for governments. I think we're all
going to get used to the idea of America first
by British, by Canadian. The Italians have got their own
version of it. And these things are going to require
more capital to be deployed at home. There's more sort
of you know, more demand on the physical constraints of
(00:52):
the world, which gives rise to produce supplicce inflation. All
of these things are sort of more friction probably stick
here inflation.
Speaker 1 (01:11):
Welcome to Marrin Talks Money, the podcast in which people
who know the markets explain the markets. I am Maren
Sumset Web and this week I'm speaking with Ed Cole.
Ed is head of Multi Strategy equities within solutions at
Man Group and was lost on the show back in
April twenty twenty five, then we spoke about the great
rotation and why at the time Chinese stocks looked like
(01:33):
pretty good investments. Well Ed is back, and on today's
show we talk about what we talk about everything. We
talk about AI bubble or not bubble? Is it evaluation bubble?
Is it an earnings bubble? Or is it really absolutely fine?
We talk about Japan, we talk about small gaps, We
talk about the end of the sixty forty portfolio and
how you should diversify from here, and we finish up
(01:56):
with a really good sounding book for you to take
to the beach. Ed welcome back to Marion Talks Money.
Thank you very much for coming on again.
Speaker 2 (02:02):
Thanks for having me, Maren, great pleasure to be here.
Speaker 1 (02:05):
Last time we spoke, we talked at length about the
end of American exceptionalism. We talked about how we expected
other markets to outperform, or at least to perform better
than the US.
Speaker 3 (02:16):
Let me talk abou something link about.
Speaker 1 (02:17):
Chinese equities and you know how they looked attractive and
where investors should look at the moment.
Speaker 3 (02:23):
A lot has happened since then.
Speaker 1 (02:26):
We last spoke before, before the war in the Middle East,
before the Great Ai Bubble really got going, and a
few other little bits and bobs have happened since then.
So when do it' we saut with an update, We're
how are you feeling now about our previous conversation about
American acceptionalism, about the great rotation out of the US.
Speaker 2 (02:46):
Well, I'm marked my own homework actually in advance of this.
So it was a thank you little more than a
year ago that we spoke, and it was it's always
a little gall lings after go back and listen to
yourself as a starting point, and then listen to yourself
and recognize the extent to which you've probably got things wrong.
(03:07):
I was a bit surprised that some of what I
said has actually played out reasonably well. I think you
and I were probably both on the same page that
nothing's particularly exceptional other than hype cycles, and we're certainly
in a hype cycle now. But just looking back over
sort of fifty two weeks of returns, and I've put
all this in constant currency, so the S and P
(03:28):
and the mag seven, which is I guess what people
think of as exceptional are both up about twenty percent
in the last twelve months. European dollars is up about
eighteen so that bit didn't really work out particularly well. Amazingly,
inside the US, the Russell two thousand, which is the
small cap index or small and MidCap has a bit
(03:48):
more of a value tilt, is up thirty eight percent.
For all that exceptionalism and all of that apparent leadership
by the tech tech giants, it's actually been more cyclical,
more value UI smaller cap companies that have not just outperformed,
but outperformed materially.
Speaker 3 (04:05):
I think we did. We did talk about that, didn't we.
Speaker 1 (04:07):
We did think that part of the rotation would be
in TV smaller cap value names, not just in the
US but everywhere.
Speaker 2 (04:13):
Yes, but everywhere exactly. And then the other extraordinary one,
a couple of other extraordinary ones, is that the emerging
markets have had a phenomenal year in many ways, driven
by the same thing that occupies the headlines everywhere in
the world. So emerging market's up nearly fifty percent over
the last twelve months.
Speaker 1 (04:29):
Yeah, but I think we have to stop and talk
about that briefly before we move on and say that
that is not emerging markets that have got absolutely nothing
whatsoever to do with emerging markets. That is three giant
companies in Taiwan and Korea, and we've talked about that
on this pod quite a lot to say, you know,
if you want emerging markets exposure, do not buy an
emerging markets index because you're going to get an AI momentum.
Speaker 2 (04:51):
Trade absolutely fair. And of course, you know, EM has
always been in many ways the factory for what the
developed world is con huming. And you know, the monetizing
AI is still really a developed world story. And of
course those three companies are the picks and shovels that
are manufacturing what it is that the Western world needs
(05:13):
to consume for this particular growth cycle. The other surprising
bit in it, though, is that on shore Chinese equities
there's been a massive bifurcation between offshore Chinese equities and
on shore Chinese equities. On Shore Chinese equities are really
interesting market because they're super super deep and super broad
and quite lots of inefficiency, lots of opportunity to route
(05:35):
out on shore China. Chinese equities are up nearly thirty
percent in dollars over the last year, so You're absolutely
right in index terms, in em there's something very much
going on amongst those big semiconductor names in both memory
and logic. But below the hood there are many other
stories going on as well. So I think we could
probably take a step. I'm going to sort of probably
(05:57):
mark my scorecard as could do better altogether. Not terrible,
not terrible at all, But I think that and I
think probably we also talked about golden Bitcoin, we might
come from.
Speaker 3 (06:07):
Yes, it would definitely come back to that.
Speaker 2 (06:09):
But I look, I think I suppose, on the one hand,
in sort of scores, it looks as though there has
been some rotation. On the other hand, in terms of narrative,
America probably would be patting itself on the back for
looking more exceptional than ever in terms of having the
companies that are absolutely at the tip of the spear
(06:30):
in what's going on in AI and AI monetization and
you know, and there's a question mark in all of that,
which I'm sure going to get onto about how sustainability
all is.
Speaker 1 (06:39):
Well, why don't we start with that, Well, actually we've
started already. Why don't we move on to the AI
hype cycle and how that is going? I mean, we're
talking in a very volatile week twenty fourth of guine
by the way, and so there's been quite quite a
lot going on. Tuesday this week was a lightly mad
day with all sorts of movements in tech and the
cost of the Korean index down nearly ten percent in
(07:01):
one day because of the again, because of these big
AI and ms. Do you think we are reaching the
top of the hype cycle? We're getting to the bit
where everyone saying, okay AI is great. We get that
there's a marvelous technology. It can do fabulous things for us,
but nonetheless it needs to be monetized, and that path
is slightly less certain in particularly in terms of the
(07:21):
volumes required. It's slightly less certain than we thought. We've
seen quite a lot of companies begin to talk about
something we've discussed on this podcast quite a lot, which
is saying, well, is there a cheaper way to do
this and looking at some of the open source models
that they can run on their own computers and owned
networks without recourse to the big expensive companies, et cetera.
Speaker 2 (07:40):
But I suppose I hesitate to say yes, we're at
the top. It's incredibly hard to know it will be
hard to know in some ways until we're quite a
long way away from the top, because tops are typically
quite noisy. If I stack a step back, i'm I'm
my glass is half empty as a person, which is
both good and bad in this business. But I think
(08:02):
that if I just sort of forced myself a little
bit to listen to the other side, I would tend
to agree with you in sorts of hype cycle or
bubble if I take a step back and listen to
the other side. And we have quite lively debates in
my company about this, the bulls will say right now
that actually the market's derated this year. You know, the
(08:22):
earnings revisions have been so extreme, and I've been extreme everywhere.
It hasn't just been an AI story. You've seen it
even in the Russell two thousand that I talked about
enormous earnings revisions. On the positive side, that there is
something going on in terms of a strong economy, and
clearly the hype that we see in AI is this
is the ball argument justified by what's happened in terms
(08:45):
of earnings revisions. So unlike other bubbles, you can look
at this right now today and say the market is
not that expensive if the earnings estimates come through. That's
something we talked about a year ago, you and I.
If the owning estimates come through, then the market doesn't
look expensive. Now I would take a step back and say,
and I think this gets exactly to your point about monetization.
(09:06):
I would take a step back and say that those
earnings revisions today are predicated on an earnings estimates rather
today are predicated on an assumption that compute is scarce,
and that if you are an Asian semiconductive manufacturing company,
your capacity to keep your price moving in a world
(09:29):
where it previously was very deflationary is high, and therefore
both volume and price are in your favor. And that's
a phenomenal environment to be selling the hardware that people need.
If we discover that compute is not scarce, then I
think the picture will change pretty materially. Now, why would
(09:51):
compute not be scarce? So I think the first thing
is even alluded to. It is actually an understanding that
perhaps you just don't need these leading edge llms to
perform the kind of tasks that we're performing. You know,
we use AI to an enormous extent at work. We
have you know, kind of coding co pilots all of
(10:13):
us can use and it's incredibly powerful. But actually, as
a portfolio manager rather than a courant developer, I don't
need to use the leading edge models. It's absolutely clear,
and so you can do a very simple tweak which
is just say, well, let's start moving away from the
leading edge so we don't have to use take up
all of that capacity in the most expensive part of
the stack. So that's one which is just not using
(10:37):
the leading edge. The other is perhaps not using the
llms at all, so small language models ways of actually
dealing with discrete tasks. The other angle is you know,
not using the US models that are you know, the
premium price. So of course we all know that the
you know, the cost of a Chinese model is much
(10:59):
much closer to the cost of production of that model.
And I think it's entirely conceivable that certain businesses and
enterprises are going to carry on using you know, the
premium models all the time, but there will be other
applications that don't. And then I think the other thing
is actually fascinating news that came out overnight, which was
(11:19):
the sort of world world ranking of supercomputers. I don't
know if you saw this, but there's a Chinese supercomputer
called Lineshine in Shenzen that's just won the crown of
most powerful supercomputer, and it's entirely powered by CPUs, not GPUs,
again demonstrating that actually it isn't all about how much
compute you throw at something. It's often, you know, about
(11:41):
the way that the things engineered and implemented. So there
are enough reasons to think it's possible that we could
end up with a serious headwind for this if the
market continues to be driven by the idea that actually
computers scarce and therefore you know, those names in a
that we've talked about continue to be the leaders. I
(12:03):
don't know when please please.
Speaker 1 (12:05):
Ask you to explain to our non AI literate listeners
a difference between CPUs and GPUs.
Speaker 2 (12:11):
Yeah, so gpuser called graphics processing units, and those are
the kind of just much much more advanced, much powerful,
much much more energy energy, energy intensive, Yeah, much more
powerful logic semiconductor, So they do the thinking. That's the
semiconductor that does the thinking, and a CPU is a
much more basic version of it. It's what we all
used to have in our home PCs before, you know,
(12:35):
before there was a sort of step change in technology.
In other words, it's a more basic function, more basic,
less less powered, and requires less energy intensity to make
it work. And I think it's you know, there's been
a story you and I spoke last year, not a
million miles after the deep seat news, and in many
ways it's the sort of continuation of the same thing.
(12:55):
That you don't have to keep throwing the most leading
edge chip at every thing in order to push things further.
There's an awful lot about the way you engineer these processes, and.
Speaker 1 (13:04):
That that leads on to two possibilities. One that this
is an earnings bubble more than a valuation bubble. Obviously
they're connected, but it's an earnings bubble first, and that's
the first thing. And the second thing is that it
is possible that the huge amount of capex being thrown
at data centers might turn out to be too much.
Speaker 2 (13:28):
To absolutely agree. I think the the the argument I said,
the sort of bulls argument that it's not a bubble
because because earnings revisions have been so powerful, if earnings
collapse because monetization doesn't work, the market's going to look
a hell of a lot more expensive. And I think
I think a fascinating you know, prison to look at
(13:51):
this through is actually that those Korean semiconductor memory companies,
you know, those have historically been cyclical. And the way
we treat a cyclical company, the sort of orthodox way
to treat a cyclical company, is you sell it when
it's cheap, because it's earnings and revisions are sort of
you know, they're not going to stay up there. Right.
You grow up in this business learning to sell those
(14:12):
things when they're cheap and buy them them avery expensive.
If in fact, this is not a secular trend in
in earnings but a cyclical or a blowoff moment or
a bubble or as you call it, then actually what
we're going to find is that the market's a hell
of a lot more expensive than it looks.
Speaker 3 (14:29):
Yeah, and this is just a normal cyclical Yeah. And
I think I think the other thing extreme but normal extreme. Yeah.
Speaker 2 (14:36):
The other thing in all of that, which I think,
you know, when it all happened a year ago, a
bit sort of ten months ago, everyone was perplexed and
we've all moved on. Because we have short attention spans.
We also have to go back to the to the
realization that a lot of these earnings revisions are part
of that incredible circularity of you know of vendor financing,
where you know, where the customer invests in the invests
(14:58):
stock in the company to place orders for the chips.
And there was all those extraordinary diagrams that went round
that showed this ecosystem where everyone was both customer and
off take for the same same ecosystem. And there's this
sort of multiplication of earnings revisions that's going through the system.
So it isn't just the case that one company's order
book suddenly looks different. It's that that has a ripple
(15:20):
through effect from the company that's building the model, through
to the hyperscala, through to the company that's making the
memory chip, through to the company that's making the logic chip.
So all of them are enormously interrelated. We all scratched
our heads in September October last year when all of
those deals were announced and sort of laughed a bit
and moved on, And now here we are with that
being at least one factor that's contributed enormously to the
(15:43):
growth in earnings expectations. All quite fragile sounding, Yeah, it
could be or we could find that actually the productivity
gains are so extraordinary, and that businesses learn quite quickly
that they can't do without it, that their competitors are
starting to make advances because they are being prepared to
(16:03):
take on the cost of tokens, and you know, and
they make that part of their ongoing budget. So I,
you know, I look at this after twenty five years
in markets and think it looks in many ways like
a bubble, and it talks like a bubble, and it
walks like a bubble. But I also have to be
open minded in a way that I probably wasn't when
I was twenty five, that there are paths in, there
(16:25):
are path dependencies, there are ways through this where actually
perhaps it doesn't go pop.
Speaker 1 (16:31):
And either way, this is not Emperor's New clothes. The
technology is exciting and valid, and either way leads to
astonishing productivity gains. That's simply a matter of whether the
valuations are right or wrong.
Speaker 2 (16:43):
So just yeah, yeah, definitely. I think there's one one
really fascinating way to think about all bubbles is that
actually the majority of them are productive in a sense
that what they do is they suck capital into something
that is ultimately almostly changing for society or changing for
(17:04):
a political economy. You know, you can look at the
you know, the sort of nation building in the US,
the railway bubble in the US, you know, even parts
of the Roaring twenties actually, which was sort of beginning
of like domestic consumption taking off, the dot com you know.
The norm is that that these bubbles bring capital into something.
(17:25):
There's some malinvestment along the way, but the technology remains.
What's not normal is something closer to the GFC or
the kind of very tail end of the Roaring twenties,
when it's pure speculation. South Sea, you know, tulips, where
there's where there is nothing, nothing sort of transformational about.
Speaker 1 (17:46):
I'm want to pick you up on tulips actually interesting
sps I mean yes, always cited as an extraordinary bubble
that left nothing behind it, you know, exponential rises in
the prices of tulip bulb and then a collapse that
leaves everyone.
Speaker 3 (17:59):
Destroyed, et cetera, et cetera.
Speaker 1 (18:00):
But you know, here we are and the Netherlands are
still one of the greatest flower exporters in the world, right,
and where do you go when you want to buy
amazing tulip bulbs. What do you buy when you go
when you go to Holland and you want to bring
back a souvenir chilip bulbs?
Speaker 3 (18:15):
Right, it left an amazing like the.
Speaker 1 (18:18):
Long term chulip bubble was ages ago, and there it is.
The legacy of the tulips is still there in the
in a huge industrial infrastructure the production of these flowers,
and in a massive tourist infrastructure.
Speaker 3 (18:30):
So now I won't hear a word against the tulip bubble.
Speaker 2 (18:33):
No, okay, I stand corrected, and they are, of course
wonderfully beautiful.
Speaker 3 (18:36):
Yes, exactly right.
Speaker 1 (18:47):
Let's move on from bubbles to a paper that you
wrote recently that I'm interested in. I know our listeners
will be interested in about diversification in an age of
inflation and the change that has come there. I know.
But you think that we're moving into what we're in
and staying in a more inflation environment that we've been.
Speaker 3 (19:06):
Used to over the last forty years pre COVID.
Speaker 2 (19:09):
Of course, yeah, I mean we do, we think I
think you know. Actually this is in some way informed
by the kind of conversations we have with many of
our largest clients, and it's really interesting to us how
there are many, many different conversations coming from asset allocation
teams in these big institutional businesses, which are all touching
(19:30):
on the fact on the sort of realization that the
world is changing, that the pre sets that we lived
through from you know, the sort of mid nineties onwards,
probably until the Brexit referendum ten years ago this week,
there was a set of characteristics that were pretty stable.
(19:54):
And those characteristics were, you know, the kind of primacy
of globalization, stimization of supply chain, stability in Western politics,
low inflation, financialization of everything because low inflation allowed for that,
and this wonderful kind of basis for multi asset investing,
(20:14):
which was that stocks and bonds were negatively correlated, meaning
that when your bomb, when your stock portfolio hit the skids,
your bomb portfolio would typically partially bail you out.
Speaker 1 (20:27):
Which happened earlier this week. By the way, I mean
that that happened on Tuesday.
Speaker 3 (20:32):
Old fashioned stuff. But it did happen.
Speaker 2 (20:34):
Yeah, it did happen. I mean, I think what we're
really thinking about here is what happens on more than
a day, and it certainly didn't happen in March, where
stocks got hit very hard and so did bonds, and
so did gold. So I think, you know, the way
we recognize it's sort of easier to recognize that the
(20:54):
regime is changing than to understand what it will change into.
But if you think about all those things I mentioned there,
which is you know, globalization, the sort of frictionless movement
of capital and labor and supply chains, I think those
things are going into reverse. And as they go into reverse,
it introduces more friction into the system. It requires you know,
(21:16):
national interest to be put at the sort of top
of the priority list for governments. You know, I think
we're all going to get used to the idea of
America first by British, by Canadian. The Italians have got
their own version of it. And these things are going
to require more capital to be de deployed at home.
There's more sort of you know, more demand on the
(21:37):
physical constraints of the world, which gives rise to produce supplies. Inflation.
All of these things are sort of more friction, probably
stickier inflation.
Speaker 3 (21:46):
There's us conversations about that.
Speaker 1 (21:48):
You know, we've talked, I think we might have talked
previously about capital controls and the odd defining that your
money is confined within a country, or appropriated for the pension,
pension in particular, appropriated for domestic domestic infrastructure needs, etc.
One of the conversations in the UK at the moment
endless leaking of possible tax things, right, but one of
(22:09):
them is that the introduction of an exit tax. So
if you do want to leave the UK to escape
an oppressive tax regime, you get to pay a partner
taxes on the way out. So you know, that's another
bizarre thing in this new world of ours, isn't.
Speaker 2 (22:22):
It absolutely right?
Speaker 3 (22:23):
It's exactly so.
Speaker 2 (22:23):
I mean, you know, a hallmark of neoliberalism and globalization
was the liberalization of capital accounts, and this is sort
of the opposite of that, which is that you know,
the capital resources sort of economy are required at home.
Japan will be really interesting to watch in that respect.
I mean, you know, they've now got interest rates at
one percent, Inflation is certainly high in their own context,
(22:47):
the yen is extraordinarily weak. They're finding it difficult to
work out how to cap that. My take on it,
purely personal view, is that at some point, you know,
if you go back, gosh, is it twelve thirteen is
to our bay part of our Bay's plan in Japan
was to depreciate the yen to get to sort of
(23:08):
try and move away from disinflation deflation. And one of
the things they did in that respect was they change
the ratios of onshore and offshore investment for the pension
funds in Japan. The pension fund system in Japan is
absolutely enormous, and you know, I think it's entirely possible
that some point that what they'll do is reverse that,
as they'll start requiring Japanese pension funds to start buying
(23:31):
more Japanese assets. But I think the critical thing when
you think about investing, whether you're investing your ISA or
investing the assets of a sovereign wealth fund, is that
the approach that we've all typically used as is changing enormously.
You know, the sixty forty is the sort of mainstay
(23:53):
of wealth investing and has been for all of our lifetimes,
and it rests on the assumption, as I said already,
that bonds andequities negatively correlated. You know, we've done some
work at looking at what happens in similar drawdowns in
environments where bonds are negatively correlated versus positively correlated. Nineteen
seventy four, the equity draw down was the same size
(24:15):
as it was in two thousand and eight, So you
lost about forty percent in world equities in both nineteen
seventy four and two thousand and eight. In nineteen seventy four,
which was obviously an inflationary environment, stocks and bonds were
positively correlated, and you lost I think something close to
thirty percent in the sixty forty portfolio. In two thousand
and eight, it was a much much smaller loss because
(24:37):
bonds really really kicked in. And I think the point
is that, you know, what we worry about is not
runaway inflation, but rather once you once the genie is
out of the bottle with respect to inflation targets, it's
very hard to get it back in again. And I
think you can see that. You can see that kind
of I mean, you can see that in the UK,
(24:57):
where we don't have very strong real growth. But you know,
in the UK CPI is running it close to three percent.
Services CPI is at three point eight percent and is
moving higher. And that's an economy where real GDP growth
is about one percent. So this isn't a function of
a runaway demand the US, which is obviously growing at
(25:18):
a much more rapid clip. There's a terrific inflation series
run by the San Francisco FED, and they break down PCE,
which is one of the which is the Fed's preferred
measure of inflation, at least before wash. We'll see if
it changes. But they break down PCE into what they
(25:38):
call cyclical components, so those that are sensitive to the
economy and acyclical components. Core PCE is running about three
point three percent as of the last data for April.
About sixty percent of that comes from the acyclical components,
and that's been accelerating over the last two or three years.
So you're in an environment in the US where this
is this thing about sticky inflation. Once genies out of
(26:00):
the bottle, it becomes sticky, it starts to feed inflation expectations,
and it's very, very hard to get it down again.
That doesn't mean, you know that what we saw in
twenty twenty two inflation was high single digit It doesn't
mean that's what we're going to have. But what it
does mean is that what we used to do, which
is inflation being at or around the targets of all
central banks at about two percent, that looks increasingly unlikely.
(26:22):
And the reason we would then worry about that is
it means that you can have environments where the hands
of central banks can be more tied in terms of
their response to a crisis. If they're faced with a
if they're faced with the crisis that's driven by inflation,
they may well be raising rates into that, which is
what we saw in twenty twenty two. And if they're
(26:44):
faced with a crisis where inflation is very sticky and
they don't have enough conviction that it's going to roll over,
they may not be able to provide what in markets
we call the central bank put the protection that we're
used to. And so that can mean that, you know,
all of the reaction functions and interactions that we've seen
over the last thirty years can start to change.
Speaker 1 (27:06):
So we've been used constantly to every time something goes wrong,
central bankstep in, slash rates and everything's just fine again somehow.
Speaker 2 (27:13):
Yeah, and again have to be humble. That could be
the case, but I think becomes more difficult when inflation
remains sticky.
Speaker 1 (27:20):
But the core difference then being that previously most of
these crises could be put down put at the door
of demand, these demand related crisis and so you slash
interest rate gen you're off to the races again. But
if they are supply created crisis, you can't do the same.
Speaker 3 (27:36):
It doesn't work in the same way.
Speaker 2 (27:37):
Yeah, and then you have to ask how robust is
the portfolio that you're sitting with. How much is it
an artifact of the old regime, and how much is
it something that's actually robust to a changing world where
we don't entirely understand where all the risks are coming from.
Speaker 3 (27:54):
But how do you shift your portfolio?
Speaker 2 (27:57):
What do you do?
Speaker 1 (27:57):
Where is your diversifier? And now we're not going to
we're not going to get listeners out of equities. That's
never going to happen. But yet anyway.
Speaker 2 (28:04):
Well, well we could we can go a bit back
to the conversation we had a year ago, which is
you diversify the you diversify where our equities are.
Speaker 1 (28:12):
I mean, last time is it? At the beginning we
talked quite a lot about China. Where where would you
look now?
Speaker 2 (28:16):
I think if we if I sort of think about
it in terms of styles, I think higher inflation plus
greater fixed capital investment in economies, and the fixed capital
investment is you know capex, that's a function of all
of the reshoring or energy expansion, all of these sorts
of things. The combination of inflation plus that tendency suggests
(28:38):
to me that you want to be in what we
call shorter duration cash flows, so things with things that
have a real fixed capital base rather than the sort
of intangible assets of the last cycle.
Speaker 3 (28:50):
Okay, so it's the halo trade, hard assets, low ups lescens.
Speaker 2 (28:53):
Yes, exactly. Yes, I think there's an awful lot of
value in that. I think that you know that you
will find a lot of those companies outside of large caps.
I'm sort of repeating what I said again last year,
but I think these.
Speaker 3 (29:06):
Are probably still value on the small caps.
Speaker 2 (29:09):
Yeah, smaller caps for sure. I have to say I
and this is a personal Everything I'm saying is a
personal view, but I think that you know, I think
we had a very weak dollar, which helped a lot
of the rest of the world. The dollar then got
a bit bid again around Iran, most recently in the
last week. It's been bid again because the markets read
(29:29):
on Wash was that he's hawkish. My take is really
what Wash is doing personal view is that he's he's
really he's guiding us towards a different type of guidance.
He's essentially saying this, you know, forward guidance is finished
and we're going to be a bit less data dependent.
I don't think that means he's extremely hawkish. I tend
(29:51):
to think it probably means the dollar is going to
be a bit weaker and there are dollar beneficiaries out
there to be had in equity. So equities, you know,
I think you can continue to divers if I continue
to look for that. As you say, halo is a
good way to think about it. I think then, you know,
then you have to question, well, what role the bonds
have in your portfolio. Bonds still have a fantastic role
in the portfolio, I think, you know, particularly for us
(30:13):
in the UK, you get this opportunity from time to
time to buy a low coupon bond with a discounter
part and you don't pay capital gainst tax on that
if you can hold it to maturity. So you know,
these are still really excellent ways to get a kind
of guaranteed return with a tax efficient approach. But I
would what I think, what we the way we think
(30:34):
about that is bonds have many uses, but it may
not be that they are reliably diversifiers. You know, we
think that this is actually a golden age for alternative investing.
To be frank that that alternative assets alternative investments have
been quite out of fashion for a long time. They
haven't been required because it's been an environment where the
(30:58):
returns you got from equities were so fantastic that you
just didn't need to bother thinking about diversifying any a
way to things that are lower return and lower volatility.
But liquid alternatives that have little or no beta to
the market, that are genuinely diversifying, and a liquid what.
Speaker 3 (31:16):
Is a what is a liquid alternative asset?
Speaker 2 (31:18):
Liquid alternatives are you know, funds that are not directional,
so hedge funds in nomenculture, but they are, you know,
in our world, extremely diversified. They combine many different approaches
to capturing different risk premium in markets. They're not directional,
they may be market neutral, and their ways to essentially
extract returns out of the market that don't rely on
(31:41):
what's happening in beta, They don't rely on market direction.
It's interesting that you know that these have been very
out of fashion for a long time.
Speaker 1 (31:50):
Both while you don't need you don't need them. You
can be long only at ten to fifteen percent a year.
You don't need somebody that's going to go market neutral
for you.
Speaker 2 (31:57):
Exactly right. And actually, but in the institutional case, so
with our biggest investors, it was it wasn't so much
we'll just have more public equities, it's we'll have more privates,
and that that decision is starting to be reframed again.
And the interesting thing about actually a lot of liquid
alternatives hedge funds is that many of them in fact
(32:18):
benefit from higher inflation. I mean, we've done quite a
lot of work at looking at equity long short in
different different inflationary regimes. Equity on short tends to do
better when inflation's high. I think the reason for that
is because as interest rates move higher, as the refinancing
of debt becomes more expensive, companies are required to do
(32:40):
more idiosyncratic remedial work to keep their head above water.
But yeah, we think that as inflation moves high, and
as interest rates through hire and the cost of debt
moves higher, it forces companies to do more and that
means you get more dispersion, and that makes a greater
opportunity for stop picking, selecting good from bad, and so
returns to equity market neutral equity laun short strategies get
(33:01):
better as inflation goes up, so that's quite an interesting diversifier.
I think the trick in all this is diversify your diversifiers.
In the past, we didn't need to. You just bought bonds.
Today you need to have a much much broader toolkit.
Speaker 3 (33:14):
Explain to me.
Speaker 1 (33:15):
I really enjoyed your euphemism about decisions about privates being reframed.
Speaker 2 (33:21):
I think that that you go back to the nineteen
eighties when the endowment model emerged, which was the sort
of bible of investing in you know, investing across a
much broader pool of assets and including privates in it.
There was an illiquidity premium right if you were able,
if you were an endowment or an asset owner that
had a very very long time frame for your liabilities,
(33:45):
if you you know, required your money over very long
periods of time, there was an inquidity premium that you
could harvest, which was, if I'm prepared to lock my
money up, I will be rewarded for that. And there
was you know, the cohort of managers provide those services
was much smaller. Today, the universe has grown enormously. Many
people with much shorter liabilities have been pushed into it,
(34:08):
and we can see that, you know, the exits for
many private companies in the equity space are much more
challenged and the returns that are diminishing over time. And
I think what we certainly see among not all of
our institutional clients, but certainly some of them, is that
you know that the returns are starting to become a
bit underwhelming. There is probably more risk that they have
(34:30):
in their private equity portfolio that looks comparable to their
public equity portfolio that you know that it may be
in both VC and P and private credit. There's more
of the AI ecosystem in there, you know, than they
previously was the case. So it's less diversifying and in
many ways, you know, in the next cycle, if there's
(34:50):
a down leg, there will be the same downward vulnerability
in these assets that there is in their public portfolio.
So I think, you know, certainly the com among some
of our institutional investors is moving onto thinking well, these
are probably not going to be diversifying for us now.
Speaker 1 (35:06):
Yeah, So moving to the bit where lack of liquidity
will come with a discount rather than a premium.
Speaker 2 (35:12):
Which makes more logical sense. It may well be that
case exactly right. Yeah, yeah, so yeah. I think everyone
in essence, whether you're a CIO of a sovereign wealth
found managing half a trillion dollars or someone making decisions
about you know, their ISA, we're all faced with the
same question today about how you achieve diversification from this great,
(35:32):
big common factor, which is, you know, concentration in markets
and beta and expensive valuation.
Speaker 1 (35:39):
Might we do some of that diversification with gold? It's
pretty horrible a few months.
Speaker 2 (35:43):
Yeah, I mean, look, I think I think gold still
is a very interesting asset. I have to say right now,
based on what I've just said about the dollar, I
quite like it personally. I think that actually, you know,
if we start to work out overcoming weeks and months,
that what Warsh has said is not explicitly hawkish, but
more giving himself the flexibility to respond to a changing
(36:06):
outlook as he sees it, and I think he will
be less data dependent and more dependent on his expectation
for what's happening in the economy. So it's a bit
more opaque. I think if that's the case, and that
a lot of people who know Arsh say that's how
he thinks, then it's a week dollar, and I think
it was a week dollar. We're probably going to see
some support coming back under gold. I don't think that
the the demand from the rest of the world central
(36:30):
banks for gold has changed. You know, part of fragmentation
deglobalization is that people are looking for other reserve assets
other than the dollar. So I don't think that's changed.
So yeah, I think there's some back.
Speaker 1 (36:40):
Toup of demand from the certain bank remains a week
dollar gives.
Speaker 2 (36:44):
It some some sre and some impetus to move higher.
Maybe the way to question the role of gold is,
as we saw in March, is that that at various
points in time, can become a risk on asset rather
than a diversifying asset. So I think it's an interesting
asset to have in your portfolio, but it isn't necessarily
something reliably that you want to bank on to bail
(37:05):
you out when equities are doing badly.
Speaker 3 (37:07):
We talked last time when we were talking about gold,
well we always do this. We talked about God.
Speaker 1 (37:11):
We also talked about cryptocurrencies, and in particular we talked
about bitcoin slightly separate asset to other crypto.
Speaker 3 (37:17):
Any change in your views there.
Speaker 2 (37:20):
I mean, no other than other than I'm really, really
amazed that the amount of policy support crypto has had
in the last sixteen months. Never in my imagination would
I have I conceived of the possibility that it could
(37:41):
have that much policy support in terms of sort of
you know, legitimization and regulation and do as badly as
it has. So I think we're sitting here today scratching
our head and wondering what the utility of crypto is.
I mean, maybe that just makes it the very best
time to buy it because everyone hates it. But you know,
I think you asked me the question last time, gold
(38:02):
or crypto, and I think, or I hope I said gold.
You did, and I would still say the same today.
Speaker 3 (38:08):
Yeah, it's difficult, isn't it.
Speaker 1 (38:09):
And we on and on and on we go about
the use case, the use case, the use case, and
we never really quite get a compelling enough answer.
Speaker 2 (38:19):
No, I think that's right.
Speaker 3 (38:21):
Okay, last question, last question, onto the fun. But what
are you going to take to the beach with you?
Book Wise?
Speaker 1 (38:27):
Book Wise, I don't want to hear about your towel
and your sontime. What book are you going to take
on a holiday?
Speaker 2 (38:33):
I would recommend if people are going to the beach
and they want a really inspiring book. I don't normally
read non fiction, and I've just read a book called
The Wide Wide c which came out a couple of
years ago and is an account of Captain Cook's last
circumnavigation of the world. And it's a really extraordinary story,
(38:55):
both how meticulously it's been put together from historical record
of the time, but actually the thing that I found
overwhelming at times was that it is only two hundred
and fifty years ago, and it's extraordinary to remind ourselves
at this pace of sort of you know, you know,
acceleration in progress all the time, how young modernity is
(39:21):
that only two hundred and fifty years ago Cook was
meeting people that had never encountered outsiders before and was
exploring parts of the world that weren't charted. And I
think it's so easy to sort of sit in the
moment we're in and assume that you know that things
will progress sort of forever along a path. But it's
only two hundred and fifty years ago that we didn't
(39:42):
even know what our own world looked like.
Speaker 3 (39:44):
Excellent. I'm sold. I'm ordering it right now.
Speaker 1 (39:48):
Thank you, Ed, and thank you so much for joining
us today.
Speaker 2 (39:51):
Thank you.
Speaker 3 (40:00):
Thanks for listening to this week's Marin Talks Money.
Speaker 1 (40:02):
If you like us, show, rate to review, and subscribe
wherever you listen to podcasts. Thank you for sending your
questions or comments to Merrin Money at Bloomberg dot net.
You can also follow me and John on Twitter or x.
I'm at Mariners W and John is John Underscore Stuffy.
This episode was hosted by Me marenthumsep Web. It was
produced by Samasadi and Moses and sound designed by Blake
(40:23):
Maples and Aaron Caspers Russell.
Speaker 3 (40:25):
Thanks to Ed Cole.
Host
Merryn Somerset Webb
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