Silver Breaks Out. Oil Breaks Down. Markets Hold Their Breath.

On this week's markets roundup, hosts Merryn Somerset Webb and John Stepek unpack silver's climb to a record high, oil’s weakness and why it raises the prospect of an energy rebound, and the latest memo on AI from Oaktree Capital Management co-founder Howard Marks. 

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Episode Transcript

Speaker 1 (00:02):
Bloomberg Audio Studios, Podcasts, Radio News. Welcome to Marrin Drugs
Money Market's Wrap, where we talk about the biggest moves
in the markets this week and what is driving them.

(00:23):
I'm Marin Zum's, a Web editor at Large for Bloomberg.

Speaker 2 (00:25):
UK Wealth, and I'm joined Stevic, Senior report at Bloomberg
and the author of the multi award winning Money Distilled newsletter.

Speaker 1 (00:32):
And the audience rolls their eyes as one.

Speaker 2 (00:36):
That's what I like to hear.

Speaker 1 (00:38):
Ah Now, John listen, I was supposed to be talking about
the biggest moves in the markets, and this week there
really is one. I know you watched Silver very closely.
You love silver, and it's sixty dollars. Sixty dollars is
what's happening.

Speaker 2 (00:53):
It was funny because earlier today I was looking at
it and I was like, oh, my goodness, silver's above
sixty dollars announce And it was also it was actually
me and my wife's twenty fifth went anniversary this year.

Speaker 1 (01:04):
Oh is that silver?

Speaker 2 (01:06):
It was silver eye. And the thing is I bought
or something silver for the anniversary and it was back
in the first half of the year and I realized
that silver has basically doubled since I bought that anniversary presence,
and then I wonder how I can ask her if
we can pull it.

Speaker 1 (01:20):
She's probably done it already.

Speaker 2 (01:21):
Jump that's roightly. I was like, oh, your here's looking nice. Ah,
that'll be wow.

Speaker 1 (01:29):
Trust me, if you bought something nice, you got a
lot more for it than you had.

Speaker 2 (01:34):
Maybe not, but yees. So it's been quite the suge
for silver, and obviously gold to the Great Year as well.
But yeah, Silver's just the one that keeps blowing my
mind slightly because it's never been above fifty dollars announced
for a sustained period of time, and now it seems
to be.

Speaker 1 (01:49):
Oh, that'd be fat. Gold never been about four thousand
dollars for a sustame period of time, So we're all
in the zone here.

Speaker 2 (01:54):
Well this is true. But silver's get that thing where
it actually did hit fifty or nearly hit fifty and
ninety far back is innineteen eighty and you always think, okay,
now we're going to come to the point where it
all collapses. But it seems we're in a new paradigm,
and basically I think that's because we are back to
inflationary environment, and it keeps gradually driveling into the market's

(02:18):
consciousness that this isn't just going to go away, this
is the new normal for the foreseeable future. Really that
the backdrop is more of an inflation risk than a
deflation risk.

Speaker 1 (02:30):
Okay, this controversy that isn't there, and there's some people
at that who think we're moving into a new deflationary environment.
But you and I were natural inflation is somewhere because
we can't see any way out of the global DT problem.

Speaker 2 (02:41):
I think there are individual things that could happen to
trigger bouts of deflation, and obviously every session is sort
of deflationary. But I think the overall where we are
it dictates that politics is going to be inflationary, and
I think that is fundamentally why I would expect more
inflation going forward rather than less. And I do think

(03:04):
that one issue or one problem at the moment is
that governments are simultaneously so governments are very indebted. They're
aware at some level that the best way to get
rid of the debt is to have nominal GDP growth
which is high, so that you you know, even if
real GDP growth is low, it doesn't matter. The main
thing is that you're growing fast enough to pay back

(03:27):
the debt faster than it's building up.

Speaker 1 (03:28):
Yeah, well they just speA clear real GDP matters to
real people people.

Speaker 2 (03:32):
Yeah, we'll talk just government. Yeah, how the government can
soft default on its debt basically, so encouraging a higher
level inflation is a good thing for them, put their
point of view. At the same time, they know the
cost of living a noise voters, and I think the
trade off there is, and we're already starting to see
it is going to be something basically price controls. Not

(03:54):
over price controls necessarily, but more and more things slipping
in Like I mean, like for example, Rachel Reeves freezing
the kind of the train tickets and the budget and
various other kind of minor moves that are short tail
moves to make inflation look lower than as for the
next year, say like the Bank of England thinks it
will cut about half a percentage point off headline inflation.

(04:17):
But that's only for next year.

Speaker 1 (04:19):
But it's interesting, isn't it. Because one thing we do
know about price controls is that they don't work.

Speaker 2 (04:23):
Yeah, they don't work.

Speaker 1 (04:24):
Longirl, you can't make prices stay down. And there was
a very interesting article by old friend of the podcast,
Simon French a little while ago, I don't know if
you read it, where he explained that the problem with
the UK is it one of the many problems with
the u K is it effectively runs a system of
price controls across the economy. Everything is controlled one way
or another.

Speaker 2 (04:45):
Yeah, and it's extremely striking. Now, I think you know,
it's been going on for a while, but like so
many things at Index, and I think in the wages
market particularly, they kind of just rolentless rise in the
minimum wage specifically. And you do also have the benefits
system kind of playing a big part in this, but
a less clear one. But you've almost we've almost kind

(05:09):
of simultaneously put a floor under wages, but it's so
high that it's putting a cap or on wages at
the other end of the spectrum. So really the relationship
between reward and effort is being being very disrupted, and
that's extremely bad for productivity because people's incentives are not
designed properly.

Speaker 1 (05:28):
Yeah, so are effectively our wage and price controls baking
fleshing in rather than the other way around.

Speaker 2 (05:33):
Yeah, which is really bad. So there's so many things
that need to be unwound and dismantled if we want
to get the UK back into a good place. But
I don't say that happening any time soon.

Speaker 1 (05:47):
And you wrote this week when you were writing about
central banks and interest rates and political pressure to keep
right down and obviously we feel that in the US,
not seeing that in the US, and there's a lot
of political pressure in the UK as well to keep
right slow even though we feel there is this inflationary backdrop. Yeah.

Speaker 2 (06:03):
I mean it was interesting because Rachel Reeves was in
front of the Treasury Select Committee yesterday of the day before.
The whole point was about the budget, and they run
up to the budget, but one of the Conservative MPs
in the Select Committee asked her a question that you know,
she wasn't particularly keen on, and then she kind of
laughingly pointed to the fact that they'd managed to have
five interest rate cuts under the Labor government, as if

(06:27):
that was an achievement of the government. And it is
this thing where you've got the government realizing that it
wants interest rates to go down and having pinned its
kind of reputation on creating an environment in which the
bank of anyone can cut rates, and even if it's
doing nothing else, that's there's an element of pressure there

(06:50):
on the management of the central bank to meet the
government's expectations regardlessly you know which government is that it's
all part of the state apparatus. Ultimately, an independence is
really just you know, it's just a fig leaf.

Speaker 1 (07:05):
It's a mirage.

Speaker 2 (07:06):
Yeah, exactly, So you're always whenever you've got even get
politicians don't built like that. I mean, obviously Trump is
very overt about it. You know, it's like, I think
the FED cut into streets by a quarter point yesterday,
and he just puts it a tweet immediately the equivalent
in a tweet saying that this is a waste of time,
you know how it was useless and you know, I
can't wait to get somebody proper running this thing. And

(07:27):
so that's very overt. But the same sort of pressure
is there from kind of across the board.

Speaker 1 (07:33):
Mm hmm. And you also mentioned in the same piece
or but that you talk fair energy and oil press.
We both we both read the same article, didn't we
have the gab cal daily on one are Today's contrarian
trades and one of the contrarian trades that you could
take at the moment is oil, and that it's been
sort of remarkable how cheap oil is stayed all the

(07:53):
way through this year.

Speaker 2 (08:08):
Oil started the year around about eighty and it's down
to almost sixty now, And I mean, I think you've
got to think about how much that's also played into
the fairly calm inflationary environment this year, because one thing
you can usually say for sure is oil going up
is inflationary. In the longer run, it's deflation because it

(08:32):
acts as a tax. But in terms of your headline prices,
you know they're going to go up with the oil
prices going up, because that feeds through everything else. So
I think that that, Yes, I think one of the
surprises for next year might be oil coming back more
sharply than anyone expects in the moment, because everyone's talking
about who there's a supply glut. And also I was
looking at that piece and I thought it was an

(08:53):
interesting piece. But of the four contrarian trades he suggested,
I definitely thought the energy was the most kind of
paling one because you can see how it could happen
more dreadily than the other ones.

Speaker 1 (09:06):
He suggested, we need to get somebody on to talk
at length about the possibility of a new commodity Supersnycher.
We're going to do that, and then I'll talk about
the commodities, but spectrum as a whole. We haven't done
that phrases, so stand by we'll be doing that in
January or February. But the last thing I want to
talk about today was Howard Marx. We have had on
the podcast before and he writes these great letters and

(09:30):
another one out this week, and this is about the
AI bubble or not? Is there a bubble? Isn't there
a bubble? Did you read the note? I read it briefly,
but you know I did read.

Speaker 2 (09:40):
Yeah. I thought it was It was good. It was
very sensible, which is always slightly galling because you want
something it'll be yeah. But I don't know. I think
if if Marx is kind of coming out and seeing
because he does noise bubbles at the dot com bubble
and at the you know, the financial crisis bubble, he

(10:03):
wasn't like, what's it coming forward? It wasn't particularly equivocal.
You could read it and say the stuff he wrote
then and say, no, he's saying this is a bubble
and it's probably in the bus quite soon. Where there's
this one. He's very much more equivocal, And that's one
reason I kind of thought, well, he's a weird one,
because simultaneously it doesn't feel as if we've got quite

(10:25):
enough frenzy. Everyone's a bit too skeptical still about it.

Speaker 1 (10:31):
Not in California. Oh yeah, and we heard a lot
of skeptical stuff. But people who are people who are
in the bubble are really in the bubble. Yeah. Yeah,
she's the optimistic, incredibly excited, vaguely worried about the you know,
existential threats at the end of the world and the
possible sentience of AI and that kind of thing, but
generally very very excited.

Speaker 2 (10:51):
Well yeah, I mean, yeah they are, and that's true, and.

Speaker 1 (10:54):
Yeah, maybe maybe how it's been having lunch in California.
One of the things he says things, he says it
is worth mentioning, is it? He says, you know, in
every bubble, people say this time, it's different, and then
the rest of us say, it's never different. It's never different.
But a small percentage of the time it is different,

(11:14):
maybe twenty percent of the time it really is different,
and you're gonna look at AI and say to you
know what, this kind of is different. Products exist, people
buy them, Revenues are going up, maybe not quite enough,
but you know it exists, it can make money. There's
a path to profitability for real.

Speaker 2 (11:32):
Yeah, I mean, I think that's so true. I'm not
sure that even means it's different. There's time more. I mean,
the Internet was different and it didn't money, but it
was still a bubble. I think, I mean, I do.
I think it's maybe checkular at this point to tan
and look at the bits of it that are definitively bubbles,

(11:56):
because I mean, obviously in the vedeas that kind of
the pexx and shovels stop and everyone's actually it's only
going up twenty percent this year, having gone up about
two hundred percent last year. But you don't have the
same sort of stocks that were around in the dot
com boom, at least not they don't have the profile.

(12:16):
There's not a lot of companies kind of suddenly coming
that we fleeky sounding EI products that are then going
to the moon. But then again, a lot of that's
maybe in the private credit area where we are not
looking so much you're not looking, so I sally, Yeah.

Speaker 1 (12:32):
Well, I suppose the thing that he does say that
the thing that worries me, and we've talked about before,
is that, you know, until very recently, all of the
investment in AI came from cash. Yeah it was, it
was it was equity cash flow, but not anymore. Now
there's a lot of debt in here, and that changes

(12:55):
the whole dynamic. I think in the back to private credit,
there's a lot of debt knocking around in the big
AI companies. Now we've seen that compression of credit spreads
as well, which suggests that people are very much aware
at the level of debt that the big AI companies
are coming on now. I mean, as Mark says, that
doesn't have to be a problem. It's not a good
thing or a bad thing in itself. It just comes

(13:15):
down to how much day you have, the quality of
the answers, the cash flaws you're lending again, and all
that kind of thing. But nonetheless, it's a shift from look,
we've got a part of cash. We made a part
of cash because we're a great tach companies, so we're
going to spend on this new thing to this new
thing is so competitive and requires so much money that
we no longer have enough catch and we're going to
go borrow a big part of money. It's a big change. Yeah,
and it's relatively recent.

Speaker 2 (13:36):
And it is also really your peaque Yeah. And I
am noticing more articles even when the Bloomberg say actually
and generally just talking about the role of the banks
in funding things that sound very much like the sorts
of products that ended up getting them any trouble in
two thousand and eight. So, you know, lots off balance

(14:00):
sheet stuff that looks as if the risk is all
on one group of people, but fundamentally, if it does
blow up, you're the one that's going to own it.
And I don't know how long it takes before, you know,
Significant risk transfers or SRTs are kind of you know,
featuring the equivalent of a kind of whoever Robert Peston

(14:21):
is these days, sort of like report on the BBC.
But it does it does feel as if we are
are nudging towards something like that. You know, whether it'll
ever get to that point is a slightly separate issue,
but I do, Yeah, there is I think there is
a problem with visibility in this particular bubble that we

(14:45):
certainly bugged that you certainly didn't have in the dot
com bubble because all of that funding was done through
I p os.

Speaker 1 (14:52):
Yeah, that was much more transparent.

Speaker 2 (14:54):
What about his bit on jobs, Did you read the
PS because almost felt.

Speaker 1 (15:00):
As if, no, I didn't read that bit.

Speaker 2 (15:02):
Well, No, I almost felt as if because I'd say
one thing I found a little bit disappointing. But the
memo is that obviously he's a credit guy, and I
was kind of hoping he would say more about the
credit side up beyond you know, okay, well that's not
always a bad thing, and that it's all getting a
bit speculative. But I don't know, you know, where we
are on the cycle. But the thing he was talking
about and maybe and actually, to be fair, this probably

(15:23):
does lean into perhaps he's seeing it as being too different,
was kind of stressing about basically the number of job
losses that it's going to cause, you know, it's going
to kind of wipe out whole tiers of industry and
the end what will happen, And he was sort of
making I mean, it's an argument you've heard before from
other people, But the idea is that we'll live in

(15:44):
I can almost tech feudalism where you can get Silicon
Valley millionaires and then everyone else is on universal basic
income or you know something like that.

Speaker 1 (15:54):
Yeah, well, I do accept that this is the kind
of thing that happens slowly and then incredibly fast. So
you know, we're in the foothills of the whole. How
many jobs can AI do? Whill it take your job?
How many jobs will it take? And everyone's going, oh,
that haven't really happened yet. You know, a bit of
an increase in the productivity of customer services representatives, bit
of this, bit of that, but it's not a flood yet,

(16:17):
but there will come a point when it's much quicker. Yeah,
and it's maybe not that far off. But we're not
going to talk about that because it's only Christmas.

Speaker 2 (16:27):
Yea, let's not put it down on the readers before Christmas.
We don't. We don't normally do that.

Speaker 1 (16:33):
Not, No, we don't do that.

Speaker 2 (16:34):
Keep calling your readers, sorry, your listeners.

Speaker 1 (16:37):
Yeah, listeners. And it's so John anders On something positive
you read earlier this week about how everything was just
fine in the guilts market.

Speaker 2 (16:44):
Say, yeah, let's wait to the local elections. But between
now and then, there's probably not going to be many
kind of firewoks in the coat market. And I say
this year that actually were on it felt like that
way out. But the goats goats had can like ten
years that end in rough in fact a little bit
below with your ten year yield is roughly a bit
below where it started you're at. So overall, for all that,

(17:09):
it's been a kind of fairly grim and chaotic year politically.
You know, all the hype about the guilts market has
company nothing. And I think given that the UK still
has one of the highest base rates, in fact it
is the high space rate and the developed world at
this point, they're still room for the Bank England to

(17:29):
come down. And if it turns out that the economy
is even worse than expected next year, then maybe the
Bank England comes down a little bit more than everyone's expecting.
So that would probably mean that kind of guilty would
to go down a bit, and therefore gilts perform okay
next year.

Speaker 1 (17:46):
So here we are straight into the dynamic that you
and I've worked with for so many years. Bad news
is good news, excellent economy suffers, and your guilt too fine.
So let's end on that. That's a cheery note.

Speaker 2 (18:01):
Shall we Yeah, I'd say marry Christmas. But there's more,
at least one more of these, isn't it before we raie?

Speaker 1 (18:09):
No one's getting No one's getting off that lightly. It's
only the eleventh. Thanks for listening to this week's Maren
Talks Money, Marcus Dee Brief. If you like a show,
rate review, and subscribe where ever you listen to podcasts,
Also be shure follow me and John on ex or Twitter.
I'm at marins w and John is John Underscore Stepic.

(18:31):
This episode was produced by Summersidi and Moses and