November 10, 2025 • 43 mins
Veteran market strategist Albert Edwards says we’re in a full-blown AI bubble—one powered by a story so seductive even skeptics are getting swept up. On this week’s Merryn Talks Money, the Société Générale global strategist explains why today’s tech optimism echoes the 1990s mania and warns that both earnings and valuations may be more fragile than they seem. His message: enjoy the ride, but stay near the exits—and maybe keep an eye on gold.
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Episode Transcript
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Speaker 1 (00:02):
Bloomberg Audio Studios, podcasts, radio news. Hello Meren Talks Money.
Listeners now, First, a quick reminder, we are recording an
episode of Maren Talks Money in front of an audience
the morning after Rachel Reeve's UK budget. That'll be a
depressing affair. Join us at Bloomberg's European headquarters in the
heart of the city of London for customs of smart analysis.
(00:24):
I'll be joined by Helen Thomas of Blonde Money, Stephanie Flanders,
Bloomberg's head of Government and Economics, and of course John
Steppeck will be there. Find the registration link in the
show notes. Space is limited as ever, so do sign
up soon onwards. Welcome to Meren Talks Money, the podcast
(00:52):
in which people who know the markets explain the markets.
I am Maren Somerset Web. This week Albert Edwards, Global
Strategistic Society in General, joined me in the London studio.
The ft has called Albert a provocative and voluble strategist.
Other people just call him famous investment guru, and my
colleagues at Bloomberg like to call him a perma bear.
(01:14):
Sorry about that, Albert, Albert. Welcome to Marin Talked Money.
Speaker 2 (01:19):
Hi there, and thanks for inviting me on. It's been
a long while since I've been promising to come on,
but here i am.
Speaker 1 (01:26):
You have been promising to come on, I would say
for many many years, but here you are. This is
exciting and I'm going to get as much audio as
I possibly can because I suspect you and agree to
come on again for another decade. So we're going to
have to cover pretty much everything. So why don't we
start with equity markets bubble or no bubble in the US.
Speaker 2 (01:46):
That is, I think there's a bubble, but they were
going to always think there's a bubble. But I think
looking back, I've been in the markets now since nineteen
eighty two. I've been working, and these things come around
from time to time, and during each bubble there's always
very plausible narrative, very compelling, and hey, I know in
(02:09):
previous bubbles like two thousand and seven and even that
the Nasdaq bubble in late nineteen nineties, even I start
to doubt myself. And this is one of these times,
very compelling narrative, strong earnings, and but it will end
in tears, that much, I'm sure of.
Speaker 1 (02:28):
We were both working back in the Dot gum bubble days,
and so we remember the run up right those days
when we were told that the old valuation methods didn't
count anymore, and that we should realign ourselves with the
new plateau of the market, etc. And that because the
new technology was going to change the world so enormously,
(02:49):
valuations didn't matter, current earnings didn't matter. It was all
about the future. So we remember all those things, and
then of course it all went horribly wrong. Do you
feel any of those things now?
Speaker 2 (03:01):
I do, And the narrative is in some ways very similar,
particularly when you see these extremely rich valuations in tech
thirty times over thirty times forward earnings in the US
being justified because of decent earnings growth. But one of
(03:23):
the key comparisons I think is there when you think
back to the late nineties the telecom sector, which will
get it because it was it was it wasn't just technology,
it was technology. MEDIAMTMTVOINT and the telecom sector were getting
free money. They were laying cables. The amount of capital
(03:43):
investment which was taking place on the back of the
free money, a lot of it quite useful, but a
lot of it replication, a lot of it not needed,
wasted investment and how it strangled the other parts of
the economy as money was towards this sector. So one
of the key comparisons. You had a bubble in earnings
(04:06):
as well as a bubble in valuations, and then something
always changes to pull the rug out from under it. Now,
during the Nasdaq bubble, it was higher interest rates. The
Fed was raising interest rates through the back end of
nineteen ninety nine. But one key thing which people often
forget is despite these higher interest rates, as you moved
(04:30):
right towards the end of nineteen ninety nine, people were
so scared of the Y two K time bomb that
we'd flip over to the first of January and all
the computers will stopped working.
Speaker 1 (04:40):
Certing younger listeners won't remember this we're talking about. There
was this palling fear that all of our technology, all
of our computer systems would be unable to deal with
this turn of the century and everything around us would collapse.
Speaker 2 (04:55):
Absolutely, And it was prudent to buy lots of tins
of baked beans. If everything went down, then I personally
quite likely you can cold baked beans out of a can.
But if it didn't go down, it was fine. You
had your cash safe. You just put it. It was just preventative.
But what you saw, and you can see it in
the I was chatting about it with one of my
(05:17):
colleagues last week and I showed him a chart of
USM not rocketing up towards the end of nineteen ninety
nine and then collapsing as you flipped over into the
year two thousand and everything didn't shut down. The FED
withdrew that liquidity, and that is when the Nasdaq started
toppling over. Now, as far as I can see, at
(05:39):
the moment, those same conditions aren't there. The Fed is
lowering interest rates rather than tightening interest rates, and they're
just moving away from quantitative tightening to be neutral. I
think they'll go to quantitative easing quite soon. So normally
when bubbles burst, it is usually the monetary authorities tight cycle,
(06:01):
and that isn't there. And I feel a bit like
towards nineteen ninety nine, I just got bored being bearish,
basically rattling my chain saying this is all a bubble,
It's all going to collapse. I find myself talking about
something else a lot a lot of the time, and
that's the comparison, which really worries me. I can feel that, yeah,
(06:23):
this is going to go on for a lot longer.
And actually that's when something just comes out of the
woodwork and takes the legs from out from under the bubble.
Speaker 1 (06:30):
Interesting. So, I mean, you are not the only person
talking about a bubble, neither neither ofm I there's almost
a bubble and people talking about bubbles, if you see
what I mean said. It's not as though it's a
contrarian thing to say anymore. It feels very obvious. But
it also seems possible that they could be a melt
up from here. Absolutely people talk about melt ups, and
I'm like, kind of al really had a melt up
(06:51):
that looked like a melt up. But maybe there's more
melt up to.
Speaker 2 (06:53):
Come as they sort of start to flip away from
quanstant tightening to quantitative easing. And I think it have
to be. There's a lot of evidence that there's problems
in the repo markets in the US and in the
plumbing that the FED users that they're going to be
forced to shift to quantitative easing quite quite soon, and
(07:15):
that for example, could cause a further melt And so
when the bubble burst will be even more damaging than
it would be if you've got it over with early.
Speaker 1 (07:24):
And is this a bubble? Do you think that on
bursting is similar in scale for dot com bubble or
is it worse in that two To some extent, the
TMT bubble was sort of contained, and this seems to
have a much deeper set of deeper tentacles throughout the
US economy in particular.
Speaker 2 (07:46):
I think what may make it worse this time around
is that the New York Fed, for example, have shown
that consumption growth has become more and more concentrated amongst
higher earners, rich consumers whose wealth has been inflated by
(08:07):
the stock market doing so well. Consumption for the for
the bottom fifty percent of income earners has actually been
quite quite poor. So to the extent, what has driven
the economy forwards is AI investment, this sort of spaghetti
of vendor and that's another comparison. There's spaghetti charts of
(08:28):
vendor financing that we also saw in nineteen ninety nine.
But what is is slightly more concerning is I think
the economy may be more reliant on the stock market
going up, and if it goes down thirty forty fifty percent,
and we've seen these before. A lot of people be
(08:50):
stunned that that can even occur, But actually consumption just
gets hit very very bad. Indeed, so it's not just
an investment cycle, but a consumption cycle too.
Speaker 1 (09:00):
Yeah, and that might be particularly bad given the huge
retail participation in this bubble, particularly in the US right
and I keep looking at the number of leveraged ETF launchers,
single stock, single stock leverage ETFs.
Speaker 2 (09:14):
And certainly after Liberation Day when President Trump backed off
his initial tariffs and the stock market started going back
crazy from that point onward, that was retail which drove that.
And the professional investors we could see from the service
were very reluctant to participate. They were still quite bearish.
(09:34):
They're expecting a recession, and they really drag kicking and
screaming into the market by retail. Just yeah, just buy
the dips, always just by, because you know, the stop
market never goes down very might might pop down ten percent,
fifteen percent, but it doesn't go down thirty forty fifty
percent anymore until it won to bet until.
Speaker 1 (09:55):
It does exactly. Let's leave aside what might be a
trigger for the end of the bubble for preventing a
melt up. But a lot of this idea that it
might go on, that might be a continuation in the
bubble is about inflation and interest rates, right as you
just said, so you're expecting the Fed to keep cutting rates,
We're expecting ritcuts in the UK, etc. But you've also
(10:18):
written about the deflationary environment in China.
Speaker 2 (10:21):
I mean, if any other economy G seven major G
seven industrialist economy had seen the level of economy wide
deflation that China is suffering. So China has seen twelve
successive quarters, quarters, not months, quarters of year on year
(10:43):
declines and its GDP deflator. That's economy wise, So it's
more than just the CPI or RPI. It's economy. Why
includes exports, includes investment goods, et cetera. If any other
economy had seen that, they would be printing money like
confetti and chucking it into the economy. China is in
(11:05):
a real hole in terms of its deflation, and as
we know having followed Japan over many years, the worst
situation to be in is when you're a highly indebted
economy as China is, and then to suffer deflation because
it crushes you.
Speaker 1 (11:25):
Well, it increases the real value of people's debt and
makes it even harder to pay off. You want infleation
if you're in debt nor deflation, right absolutely.
Speaker 2 (11:32):
And Robin Brooks, who I follows at the Brookings Institute,
no relation to the name, but he pointed out that
the China's PPI on consumer durable goods is accelerating downwards.
It's down four percent year on you own it's getting
worse this and this is part of their surplus capacity problem.
(11:53):
They've got a lot of deflation to give the world
and they want to get rid of it. And the
big surprise could be where, especially in the US, where
everyone is waiting for inflation to pick up because of
the tariffs, is it just doesn't that inflation we add
(12:13):
a downside surprise in the UK recently, albeit from quite
high rates, downside surprise in Japan. US has broadly been
surprising on the downside looking at their underlying driver for inflation,
which is unit labor costs. Is what I've been writing
is look unit labor costs, and unit costs are only
(12:35):
at running at one percent year on year, and that's
that's not an erratic number, that's smooth that's what most
economists think drives inflation, and that's been coming down quite smartly,
as has Court company inflate corporates. The corporate price deflator
has come down, and that's running quite a way below
(12:57):
course CPI and I think the surprise maybe not the
economy suddenly drops into the recession in the next few months,
but inflation really carries on under shooting, the bond rally
really gets going, which will cheer Rachel Reaves up up
no end in the UK, and actually that inflates the
stock market bubble even more.
Speaker 1 (13:18):
Perhaps, but it's not idea for deeply indebted Western economies.
If one of the things that we talk about a
lot on the podcast is how do you deal with
this level of public debt? What on earth can you
do about this? And the answer, of course is a
type of financial repression, running interest rate slightly lower than
inflation for a long time, so that eventually your debt
doesn't necessarily go way, but it is massively reduced to
(13:39):
that in some ways. The last thing that an economy
like ours once right now is another wave of deflation
out of China.
Speaker 2 (13:46):
It's to get out of jail free card for the
politicians cyclically, I could think we can get down shift
in inflation on a secular or trend basis. I mean,
I'd been known for many many years my ice age thesis,
which I put together at the end of the nineties
the West, following what happened in Japan, that inflation would
(14:07):
come low and low and bond yours following that after
the pandemic, I have switched camp into a secular rise
in inflation. I can remember personally twenty eight percent inflation
in the UK and actually in Japan also a twenty
eight percent inflation. I think seeing the fiscal on a
secular basis, seeing the fiscal incontinence which is there and
(14:30):
the fiscal dominance over monetary policy, I can see inflation
trending back up to double digits. Might be you might
get some short term relief, but actually politicians seemed congenitally
unable to get to deal with this, these fiscal deficits,
(14:51):
which means the path of these resistance will ultimately be
money printing.
Speaker 1 (14:55):
So we might get some short medium term relief from
the Chinese situation, but medium to longer term we have
to expect our inflation because there is no other thing
that can happen without politicians getting a grip, which are
quite clearly not.
Speaker 2 (15:09):
Going to I mean and popularism. Anyone in the UK suggests,
for example, who we get rid of the triple lock
on pensions will be voted out of office immediately. Perhaps
best not to say it in the run up to
the election.
Speaker 1 (15:22):
We're speaking on the day that Rachel Reeves has been
out talking this morning about well about the budget, which
is increasingly weird that you come out three weeks before
a budget to tell everyone there's going to be bad
and using the budget to make them feel really miserable
in the advance of the budget and make things even
worse than they were already. But here we are. That's
what she's done. And she's made it pretty clear that
this isn't about spending cards, it's not about getting group
(15:45):
on public spending. It is about taxing everybody more. No
longer about broad shoulders. It's about kind of everybody's shoulders.
Speaker 2 (15:52):
Yes, and getting hold of the spending, particularly welfare spending
and disablit And we saw even with an I think
global bomb, markets took a big lesson from this. The
Labor Party, even with one hundred and eighty plus majority
couldn't get through the most minor of reforms in terms
of in terms of disability spending where alone in the world,
(16:14):
particularly for under thirties. It has exploded upwards as people
get signed off, get signed off and their TikTokers to
actually explain to you how to gain the system to
do this, and they're just unable, totally unable to get
a grip on it. And it's although the UK isn't
the worst offender by any means, I think the US
(16:37):
is worse. I think France is worse. Both those countries
are more protected than the UK. France because it's wrapped
up in the Eurozone, wrapper US because of the dollar
and the exorbitant privilege of being able to borrow in
the dollar. But the UK is far more vulnerable to
blow up. I mean, luckily, we're in a period where
(16:59):
bondi are coming down, and this is what blew up
Liz Trusts. Her budget came at a time when bond
yours were rising sharply globally, and it wasn't a good
time to hit the markets with that sort And.
Speaker 1 (17:12):
Also she hadn't put any effort into getting everyone else
on side because it came out of nowhere exactly. But
so we have this massive public debt problem and as
you say, this sort of fiscal fiscal dominance in the UK,
and does where is it concern about that that the
gold price has been signaling.
Speaker 2 (17:29):
I think it is. I think people are joining the
dots and I think the debasement trades. And because it's
not just gold. Until the recent correct it's had a
very deep well is enjoying a very deep enjoying not
quite the word right word, if you're holding it, it's
seeing a very deep correction at the moment. But it's
(17:51):
not just gold, it's the entire precious metal complex which
ran up very, very sharply. Incidentally, from the day of
August the twenty seconds Jerome Powell, the Fed chairs Jackson
Hole's speech, gold ran up thirty percent, but actually the
rest of the precire's metal complex rose even more strongly.
(18:15):
Now you got to the stage where gold had was
so overbought. Technicians look at things like calls relative strength
index are RSIs. They're called how far the price has
moved from the moving average. Essentially had a monthly RSI
of over ninety two, which was the highest in history
(18:39):
for the goal market. So you're going to see a
very deep correction. But I think it was this is
the deed's basement trade. Why aren't bonds he was also
rising at the same time sharply at that time. I
think it's basically because people say, well, it's not a
deed basement trade, because bond If people expected very high inflation,
(18:59):
bond bond.
Speaker 1 (19:00):
Market collapse and yields will be going to the sky.
Speaker 2 (19:02):
And it's because people figure out because of fiscal dominance,
the central banks will be told to intervene to hold
down bond yields at some point, whether it's five percent,
whether it's five and a half percent or six percent,
at some point, the maths just do not add up
anymore for fiscal sustainability, so they would have to be
(19:25):
yell curve control or as Japan had for many years,
yell curve control or quantitive easing, which is effectively yield
curve control. So, yeah, the precious metals can rip raw upwards,
but the bond yields don't in the same way. They
get that they start to stall out as they get
to higher levels.
Speaker 1 (19:44):
So you think gold will come back. I find that
just down to four thousand today as we speak where
three nine hundred and sixty seven dollars. But it seems
likely to me and to John who's on the podcast
with me, a lot that gold will go back in
four thousand and its still some things on.
Speaker 2 (20:01):
Silver, gold, silver, platinum, palladium, all of them go gold.
Might be goal, might be the.
Speaker 1 (20:09):
Laggard gold miners.
Speaker 2 (20:11):
Yeah, gd x gd x J. I don't personally recommend stop.
I wouldn't know. I'm a macro person. I wouldn't know
stock if it bits me. I just waved my arms
around and talk about the macro backdrop. And actually there
was quote my former colleague Dylan Grice, you know very well,
(20:32):
used to do a lot of research about the what
happened to Germany in the nineteen twenties, Yes, and why
Rudolph Vona Havistein, who was the Rikbang governor, why he
kept on printing money. And the conclusion was, and I
think it was a quote in later life, was he
(20:53):
basically kept on because he was scared of the economic
and social consequences of stopping. And it's similar with the
public sector deficits. The politicians are scared of the social
consequences of stopping spending money to and throwing money out
(21:14):
as they are are doing these huge, huge spending plans
they've they've got and so the path of least resistance
is money printing.
Speaker 1 (21:25):
They can just keep it going for a few years
another few years.
Speaker 2 (21:30):
Later the COVID period it didn't if you like, spoiled
politicians into thinking they could spend like this, and eventually
the markets come forth for them. They look around for
the weak as Canada that may well be the UK
at some stage, even though other countries are worse. They'll
pick off the weak as Canada and basically bludgeon them
(21:54):
and make an example of them. But that that's which
is why we're going to end up up with QUANSITIV
unlimited money printing to hold down and if the central
banks won't do it. I was like the Groud char
Marks quote, these are my principles. If you don't like,
don't like them, I have others. These might be my
(22:16):
central bankers today. If they don't do what I say,
I'll find others to do it.
Speaker 1 (22:20):
Yeah. So central bank independence, as ever is something of
a myth, is absolutely real. Yeah. Now, on the subject
of central bankers, what part do you think that central
(22:42):
bank buying of gold is playing in this. So we've seen,
you know, various central banks around the world, Channel in particular,
constantly adding to their gold holdings.
Speaker 2 (22:50):
I think this is a natural consequence from the pivot
away from US assets, which was people tell me, and
I think it's a reasonable hy partly a consequence of
the seizure of Russian assets after the invasion of Ukraine.
(23:10):
I was reading a narrative of the cabinet meeting in
the US where everyone was talking about seizing or freezing
their assets, and Janet Yellen did demure about shouldn't we
think through the economic and financial consequences of this? But
it certainly weakens Yeah, which emerging market central bank, which
(23:35):
might fall foul of the US at some stage is
going to buy US assets and deposit them in the
US to be seized later on. And I think that's
partly what is going on here. And you can you
can see it from a lot of a lot of
the hermegany of the dollar has been weakened somewhat. I
(23:55):
don't think people who say that the age of the
dollar is over I think a premature, but that I
think part of it is that is what is going
on and it's perfectly logical.
Speaker 1 (24:05):
Doesn't make sense under their circumstances to also hold some
cryptocurrency us to hold bitcoin in particular, do you think to.
Speaker 2 (24:14):
The extent that crypto is a bet against central bank competence?
Which is what my former colleague Dylan Greis always used
to tell me, is I would add it to a portfolio,
but with a very skeptical and cynical view about it,
(24:34):
that it could collapse to some stage. But what I've
noticed more recently in the last few months, it does
seem to be a bit of an inverse correlation to gold,
So you're putting the two together and it does tend
to dampen down the volatility. So I think there certainly
is a place for cryptocurrencies if central banks are going
(24:56):
to do what I think they're going to do.
Speaker 1 (25:00):
If that is the case, if we are looking forward
to a period of very high inflation, surely there's also
a case for holding equities. And we've talked on this
podcast about the Gavcast Turkish portfolio. It's fifty percent fifty
percent gold as being the way to get through an
unpleatant inflationary period.
Speaker 2 (25:16):
I would agree with that because you're buying a real,
real asset, and I think commodities also as part part
of that another real asset. The earnings will rise in
nominal terms in line probably in line with nominal GDP growth.
But the key question is and that offers the protection
(25:36):
that the profits growth is in highly inflationary times, what
multiple should the market be on? So the US is
on the currently a forward P of twenty three times,
which is almost back to where it was during the
Nasdaq bubble in nineteen eighty two. Normally, when there's high inflation,
the P is extremely low. And what you saw or
(26:00):
from nineteen sixty five, for example, from nineteen sixty five
to nineteen eighty two, as inflation rose and as bondials rose,
there's really good earnings growth. The Dow went nowhere for
seventeen years in nominal terms because the P which started
(26:20):
it around twenty times if my memory says me right,
in nineteen sixty five deflated I think eight times earnings
by the time inflation peaked out. So yes, what I
would say is in an environment of rising inflation arising bondials,
(26:41):
what has worked for the last twenty years will stop working.
So bond beneficiaries stocks or sectors which benefit from lower bondials,
so they tend to be defensive, they tend to be utilities,
they tend to be growth sectors like tech, which had
done rare very well from decades of falling bond deals.
(27:03):
And what hasn't done so well were cyclical stocks value stocks.
So what hasn't worked should start to work when things
have worked for twenty odd years or longer. It's getting
out of that mindset and saying we're in a different paradigm. So, yes,
I agree with you. Stocks are a hedge against inflation,
(27:27):
but it's working out well. If we go through a
secular de rating, actually that can wipe out all those gains.
Speaker 1 (27:33):
Find stuff that's cheap already.
Speaker 2 (27:35):
So it's ambiguous. It's ambiguous for.
Speaker 1 (27:37):
Yeah, now I see that. Now listen, speaking of sectors
that have benefited or asset classes, should we say that
have benefited from very low interest rates? Private equity. We're
going through a period where we are hearing constantly that
it's time for retail investors, for ordinary private investors to
get their hands on a whole lot of private equity,
and that will really temporary turns going forward. You and
(28:00):
I'm thinking you don't necessarily agree with that.
Speaker 2 (28:02):
Well, I'm very cynical generally awful trade I picked up
over the years working in finance, and me.
Speaker 1 (28:08):
Having that as well, we should I shouldn't really have
had you prom.
Speaker 2 (28:14):
As far as I can see, the big advantage of
private equity has been carried interest is it's been its
tax treatment gives it an advantage, and it doesn't have
to market self to market, so it isn't very volatile.
People say, well, you know, we haven't got the volatility
in private equity. Yeah, but you don't know what it's
really worth.
Speaker 1 (28:32):
Well, you do have the volatility, or you would have
the volatility if you if you tried to sell it
every day.
Speaker 2 (28:36):
You know, But you know, there are problems in the
private equity space as people call it at the moment.
And you've had two high profile bankruptcies in the US
with First Brands and tri Color, And I know nothing
of what they do and understand, but I know that
there've been problems there and that has started to leak
(28:59):
into a high yields bond markers. Spreads have started to
widen because people are worried and Jamie Diamonds of JP
Morgan has has come out and said, you know, well
you never have just one cockroach. Well you've got two there.
And it's not just the IMF have been warning about
private equity. Andrew Bailey at the Bank of England as
(29:21):
very worried about it, and people don't really focus on this.
And maybe this is the thing which in this cycle.
Every cycle is slightly different. Maybe this is the thing
in this cycle which which will lay us lower. I
don't know. But there's an awful lot of leverage. You know,
one of the one of the one of the elixirs
for private equity is leverage. Huge amount of.
Speaker 1 (29:45):
Private equity. People would like you to believe is that
it's got nothing to do with that at all, and
everything to do with being better at managing.
Speaker 2 (29:54):
Really, yes, I think I'm just too cynical. I'm sure
they're wonderful, man. I'm sure some of them are. I'm
sure some of the suppose.
Speaker 1 (30:03):
One of the problems with the performance record of private
equity is that, you know, when you talk to private
equity people, they will say to you, will look at
the long term performance record, you know, it's really great.
But if you go back to the very beginning, so
you're looking over a fifteen or a twenty year period.
If you go back to fifteen years ago, this market
was tiny and you had a very small number of
like super intelligent and effective people working in a very
(30:25):
small area. So that doesn't tell you anything about performance.
When it's huge, vast amounts of money in every single
every single mathematic graduate wanting to work in it, etcetera.
It's a totally different sector now to the sector that
we look at the performance of fifteen years ago.
Speaker 2 (30:42):
Yeah. No, absolutely, And you can tell that the bubble
conditions because certainly they are sucking the best the engineers
and sort of people who used to go into finance,
investment banking, for example, they're all getting rich in private
equity rageo. One of the big problems for private equity,
like so much else is they benefited from years and
(31:05):
years of falling bond deals and the mood music has
now changed. I know bond deals might be coming down
just at the moment, but if we're in a secular
we're not going in my view, we're not going back
to where we were. We're in a secular bear market
for bonds, and if you're highly leveraged, it's going to
(31:26):
be a major problem. And what you've seen to have
is a very few number of companies at the moment
related to AI which are doing very very well. But
you scratch the surface, and my colleague Andrew Laptform does
is for me, you remove the top not even ten
percent of companies, quota companies, the top ten companies, and
underneath that things are pretty crappy. And as you drill
(31:49):
down into smaller and smaller companies, things are really really tough.
And people talk about a K shape recovery within the
consumer sector, within the corporate sector, it's it's it's very
very There are very small amounts of winners which are
out there, and so the moon music maybe for private equity,
(32:11):
and certainly in the UK where you've got private equity
taking over the vets, taking over care home nursing homes,
and people just don't realize how their tentacles have spread
so deeply into the into the real economy. And the
UK is a really good example. If you if your
vet isn't owned by private equity, you're you're doing pretty well.
(32:32):
But it's to me, it's a real issue. I wouldn't
say problem, because that's a bit pejorative. It's an issue.
It's an issue we should be watching closely well. And
and and as Jamie Diamond says, you never get I
don't want to compare private equity to cockroaches. But but
but but you never, as he said, you never just
(32:54):
get one cockroach as these things start going bust.
Speaker 1 (32:57):
So we're worried about private equity, worried about inflation. We're
also worried about deflation, worried about equity valuations, we're worried about.
Speaker 2 (33:07):
Got more lines you can see over there. I haven't
got many lines here, but I'm amazed I'm not not
more wrinkled.
Speaker 1 (33:14):
And for those of you who can't see Albert, which
is all of you, he's not remotely wrinkled. And he's
wearing a great seasonal shirt. And we might put a
photo of Albert online photo shop.
Speaker 2 (33:27):
Me a bit no.
Speaker 1 (33:28):
So here's the question, Albert, what could go right?
Speaker 2 (33:33):
Well? What could go right? I suppose is the bubble
just carries on for another another year. The interest rates
come down, bond deals come down on cyclical basis, we
go to forty times forward earnings. Some of us have
seen this all before. I'll stop talking about equity bubbles
and start talking about goals or my personal life as
(33:56):
I have done in the past instead.
Speaker 1 (33:58):
But that's not going right, is it it? That's just
going on a bit longer.
Speaker 2 (34:02):
Yes, I don't think there are any good options here
is what's the least bad option? With you down the
road for so long?
Speaker 1 (34:11):
What about that AI does everything everything that I had
promise to do. There's a massive productivity wave throughout the
Western world which brings down government spending massively, husually reduces
our deficits, gradually starts releasing the debt, makes every company
more productive, such that valuations are perfectly fine and everything.
(34:33):
Everything's okay, everything's okay.
Speaker 2 (34:35):
Can I sell you a bridge London bridges for sale?
Speaker 1 (34:41):
Really no chance?
Speaker 2 (34:43):
Suddenly. Productivity growth in the US has been looking okay recently.
What's interesting is no one has a recession on the horizon.
The latest Atlanta FED numbers for the next quarter four
sent GDP growth driven a.
Speaker 1 (35:01):
Lot by.
Speaker 2 (35:03):
AI investments. But when I look at I was looking
at the ADP in the absence of official payroll numbers.
So the biggest driver for employment is not the megacaps
or the AI companies. It's it's mum and pup. It's companies,
it's unquoted companies. So I was looking at and the
(35:24):
ADP in the US divide it up into company size,
and those companies with less than fifty employees comprise forty
five percent of employment in the US. And employment is falling,
and the latest numbers year on year is very unusual.
Employment for smaller companies is falling year on year in
(35:47):
the US. And it's not a rapid dumbdown. It has
accelerated a bit, and maybe that's something to do with
the immigration policies in the US, but actually has been
slowing down quite rapidly for the last two three years.
Large cap employment still looks okay, that's slowing. But when
you have when you have the job generators in the US,
(36:11):
small small cap companies in recession, then you think, actually,
to the stock market maybe at all time highs, but
actually the rug is being pulled out from underneath. So
all they say in II investment is going on with
this this vendor finance scheme between all of them, but
(36:34):
actually could this be the rug? But I tend to
look on the dark side, so i'd recommend I recommend
all your listeners will ignore should ignore me totally. Okay,
let me just background.
Speaker 1 (36:45):
Let me try something else on the positive side. Okay.
So in the UK and particularly, one of our big
problems is very expensive energy, massive drag on the economy.
If we accept, which we do, that all economic activity,
in fact, all activity or another is energy transformed. If
we were to find a way in the UK and
possibly elsewhere, to massively bring down the cost of energy, say,
(37:09):
I don't know, beaming solar power from space to a
massive mirror somewhere, something like that with some of our
guests we've talked about that could be that could do
things even in the UK, abandoning that zero for example,
that could be a massive positive. That could be transformative,
and the solar to mirror could transform the US and
the rest of the world. Imagine energy being practically free.
(37:30):
I'm really working as hard as I can here, Albert.
Speaker 2 (37:33):
I think that would be transformative if it happens. Certainly
if the UK is an outlier. The UK has some
of the highest energy costs in industrialized countries, but that's
because of the ludicrous pricing mechanism we have here, which
I'm sure your listeners will be aware of. Where even
(37:53):
if ninety nine percent of the energy being generated is
from low costs newbles, which is not consume it is
and the gas price goes up. The average the pricing
in the UK is off that marginal producer, which is
usually an expensive gas generator, and so everyone has to
(38:18):
pay that marginal price. And it's a ludicrous system. So
that's one of the reasons our energy costs are so
high here. And you have to break that link because
what's happening is that the renewable companies are getting a massive,
massive subsidy from the consumers. But there's distance in any
(38:39):
will to break that ludicrous link here in the UK.
But the UK is totally almost deindustrialized now because it's
it's too late for the UK to be honest.
Speaker 1 (38:51):
Okay, that didn't get me anywhere either. Loving Left. In
terms of encourage you to think of something possible, I.
Speaker 2 (38:57):
Think when you've you've been through many cycles like you
and I have, you know the inevitability and the business cycle,
that the one thing which which cannot be abolished is
the business cycle. And apart from two or three months
during the pandemic, the US hasn't seen a proper cyclical
(39:20):
downturn since two thousand and eight. Now that is an
extraordinary long economic cycle. A recession will come along and
all these bubble elements will implode it. It may well
be the bubble implodes and then brings the economy down
into recession, and that's going to cause a lot of surprise.
(39:42):
But we can inflate a lot further from from here.
We've been doing this long enough to know anything is possible.
Speaker 1 (39:48):
Okay, So in the meantime, all we can do is
hold precious metals and inexpensive equities to the best of
our ability and wait.
Speaker 2 (39:57):
And if you want to ride the equity bubble, but
just be very cynical about it. Don't. Don't believe the story.
Momentum investing is one of the most profitable methods of investing.
My colleague Andrew Latform has shown me that. But just
have clear technical signals to get you out, whether it's
whether it's the SMP or cutting below the two hundred
(40:20):
day moving average or whatever it is. Don't buy into
the rhetoric too much. Ride the bubble if you so wish,
As George Soros says when he said, you know, whenever
I see a bubble, I run towards it. But don't
get consumed by the story. Be very cynical, and just
have a have a level to get yourself out so
you're not bankrupted when the thing turns down. So, as
(40:43):
Chuck Prince said, you've got to keep dancing while the
music's playing. But just decide how near the fire eggsit
you want to be gyrating around on the dance floor.
Speaker 1 (40:53):
And don't be tempted to move back in front of
the band.
Speaker 2 (40:57):
Exactly here plugs in so you can't hear the music,
but just keep moving over.
Speaker 1 (41:05):
All right, let me ask you one last question, then,
what are you reading? Came here on the train. What
are you reading?
Speaker 2 (41:10):
I don't. I don't read very much. Actually, what I
normally would do is get my colleagues to read that.
You know that they do that heavily, lifting for me
and read all the economics or finance books and then
they just tell me what's what what?
Speaker 1 (41:24):
What's in it? No?
Speaker 2 (41:28):
I just no, no, I'm not. I generally read current events.
I like reading a lot about current events. I have
been reading Boris Johnson's biography, and just to balance that,
I did read Gordon Brown's one before before that. So
I'm very eclectic in my taste, but I'm not. I'm
(41:48):
very lazy. I generally in the evenings what I do
is basically just watch Telly. I watched rubbish on Telly
and and wide. I'm so caught up with attention of
financial mark archets during the day.
Speaker 1 (42:02):
Excited Are you so excited about the bak Off final?
Speaker 2 (42:05):
I've never watched bof Are you watching on the television?
Even off?
Speaker 1 (42:10):
Even?
Speaker 2 (42:12):
No, No, I've been watching Ted Ted Lasso.
Speaker 1 (42:15):
Change in my life has been about the way those
sugar dome things or broke last week.
Speaker 2 (42:20):
I'm not a big cook. There's someone laughing in the
background here of it.
Speaker 1 (42:26):
It's outrageous, right, Albert, thank you, Thank you a pleasure, And.
Speaker 2 (42:32):
We must do this again. We mustn't wait another ten years.
Speaker 1 (42:35):
Can we do once a year?
Speaker 2 (42:36):
Maybe on air? Commitment every every every every couple of years, definitely.
Speaker 1 (42:43):
I'm interpreting that as too. I've got a better idea.
How about we do it again straight off the crash?
Speaker 2 (42:48):
Absolutely next week.
Speaker 1 (42:50):
Then it's a deal, could be in ten days. Thank
you for listening to this week Maren Talks Money. If
you like our show, rate to review and subscribe wherever
you listen to podcasts. Keep sending your questions or comments
(43:12):
to Merrin Money at Bloomberg dot net. You can also
follow me and John on Twitter or x I'm at
MARINETSW and John is John Underscore steppek. You are on
Twitter right, Albert yep? What is it?
Speaker 2 (43:22):
Albert Edwards? Nine to nine?
Speaker 1 (43:24):
There are another ninety eight?
Speaker 2 (43:27):
No I jumped over all the rest of them?
Speaker 1 (43:29):
Ah okay. This episode was hosted by Me Maren sumset
where but it was produced by Samasadi and Moses and
sound designed by Blake Mabels and Aaron Casper and special
thanks of course to Albert Edwards
Bloomberg Audio Studios, podcasts, radio news. Hello Meren Talks Money.
Listeners now, First, a quick reminder, we are recording an
episode of Maren Talks Money in front of an audience
the morning after Rachel Reeve's UK budget. That'll be a
depressing affair. Join us at Bloomberg's European headquarters in the
heart of the city of London for customs of smart analysis.
(00:24):
I'll be joined by Helen Thomas of Blonde Money, Stephanie Flanders,
Bloomberg's head of Government and Economics, and of course John
Steppeck will be there. Find the registration link in the
show notes. Space is limited as ever, so do sign
up soon onwards. Welcome to Meren Talks Money, the podcast
(00:52):
in which people who know the markets explain the markets.
I am Maren Somerset Web. This week Albert Edwards, Global
Strategistic Society in General, joined me in the London studio.
The ft has called Albert a provocative and voluble strategist.
Other people just call him famous investment guru, and my
colleagues at Bloomberg like to call him a perma bear.
(01:14):
Sorry about that, Albert, Albert. Welcome to Marin Talked Money.
Speaker 2 (01:19):
Hi there, and thanks for inviting me on. It's been
a long while since I've been promising to come on,
but here i am.
Speaker 1 (01:26):
You have been promising to come on, I would say
for many many years, but here you are. This is
exciting and I'm going to get as much audio as
I possibly can because I suspect you and agree to
come on again for another decade. So we're going to
have to cover pretty much everything. So why don't we
start with equity markets bubble or no bubble in the US.
Speaker 2 (01:46):
That is, I think there's a bubble, but they were
going to always think there's a bubble. But I think
looking back, I've been in the markets now since nineteen
eighty two. I've been working, and these things come around
from time to time, and during each bubble there's always
very plausible narrative, very compelling, and hey, I know in
(02:09):
previous bubbles like two thousand and seven and even that
the Nasdaq bubble in late nineteen nineties, even I start
to doubt myself. And this is one of these times,
very compelling narrative, strong earnings, and but it will end
in tears, that much, I'm sure of.
Speaker 1 (02:28):
We were both working back in the Dot gum bubble days,
and so we remember the run up right those days
when we were told that the old valuation methods didn't
count anymore, and that we should realign ourselves with the
new plateau of the market, etc. And that because the
new technology was going to change the world so enormously,
(02:49):
valuations didn't matter, current earnings didn't matter. It was all
about the future. So we remember all those things, and
then of course it all went horribly wrong. Do you
feel any of those things now?
Speaker 2 (03:01):
I do, And the narrative is in some ways very similar,
particularly when you see these extremely rich valuations in tech
thirty times over thirty times forward earnings in the US
being justified because of decent earnings growth. But one of
(03:23):
the key comparisons I think is there when you think
back to the late nineties the telecom sector, which will
get it because it was it was it wasn't just technology,
it was technology. MEDIAMTMTVOINT and the telecom sector were getting
free money. They were laying cables. The amount of capital
(03:43):
investment which was taking place on the back of the
free money, a lot of it quite useful, but a
lot of it replication, a lot of it not needed,
wasted investment and how it strangled the other parts of
the economy as money was towards this sector. So one
of the key comparisons. You had a bubble in earnings
(04:06):
as well as a bubble in valuations, and then something
always changes to pull the rug out from under it. Now,
during the Nasdaq bubble, it was higher interest rates. The
Fed was raising interest rates through the back end of
nineteen ninety nine. But one key thing which people often
forget is despite these higher interest rates, as you moved
(04:30):
right towards the end of nineteen ninety nine, people were
so scared of the Y two K time bomb that
we'd flip over to the first of January and all
the computers will stopped working.
Speaker 1 (04:40):
Certing younger listeners won't remember this we're talking about. There
was this palling fear that all of our technology, all
of our computer systems would be unable to deal with
this turn of the century and everything around us would collapse.
Speaker 2 (04:55):
Absolutely, And it was prudent to buy lots of tins
of baked beans. If everything went down, then I personally
quite likely you can cold baked beans out of a can.
But if it didn't go down, it was fine. You
had your cash safe. You just put it. It was just preventative.
But what you saw, and you can see it in
the I was chatting about it with one of my
(05:17):
colleagues last week and I showed him a chart of
USM not rocketing up towards the end of nineteen ninety
nine and then collapsing as you flipped over into the
year two thousand and everything didn't shut down. The FED
withdrew that liquidity, and that is when the Nasdaq started
toppling over. Now, as far as I can see, at
(05:39):
the moment, those same conditions aren't there. The Fed is
lowering interest rates rather than tightening interest rates, and they're
just moving away from quantitative tightening to be neutral. I
think they'll go to quantitative easing quite soon. So normally
when bubbles burst, it is usually the monetary authorities tight cycle,
(06:01):
and that isn't there. And I feel a bit like
towards nineteen ninety nine, I just got bored being bearish,
basically rattling my chain saying this is all a bubble,
It's all going to collapse. I find myself talking about
something else a lot a lot of the time, and
that's the comparison, which really worries me. I can feel that, yeah,
(06:23):
this is going to go on for a lot longer.
And actually that's when something just comes out of the
woodwork and takes the legs from out from under the bubble.
Speaker 1 (06:30):
Interesting. So, I mean, you are not the only person
talking about a bubble, neither neither ofm I there's almost
a bubble and people talking about bubbles, if you see
what I mean said. It's not as though it's a
contrarian thing to say anymore. It feels very obvious. But
it also seems possible that they could be a melt
up from here. Absolutely people talk about melt ups, and
I'm like, kind of al really had a melt up
(06:51):
that looked like a melt up. But maybe there's more
melt up to.
Speaker 2 (06:53):
Come as they sort of start to flip away from
quanstant tightening to quantitative easing. And I think it have
to be. There's a lot of evidence that there's problems
in the repo markets in the US and in the
plumbing that the FED users that they're going to be
forced to shift to quantitative easing quite quite soon, and
(07:15):
that for example, could cause a further melt And so
when the bubble burst will be even more damaging than
it would be if you've got it over with early.
Speaker 1 (07:24):
And is this a bubble? Do you think that on
bursting is similar in scale for dot com bubble or
is it worse in that two To some extent, the
TMT bubble was sort of contained, and this seems to
have a much deeper set of deeper tentacles throughout the
US economy in particular.
Speaker 2 (07:46):
I think what may make it worse this time around
is that the New York Fed, for example, have shown
that consumption growth has become more and more concentrated amongst
higher earners, rich consumers whose wealth has been inflated by
(08:07):
the stock market doing so well. Consumption for the for
the bottom fifty percent of income earners has actually been
quite quite poor. So to the extent, what has driven
the economy forwards is AI investment, this sort of spaghetti
of vendor and that's another comparison. There's spaghetti charts of
(08:28):
vendor financing that we also saw in nineteen ninety nine.
But what is is slightly more concerning is I think
the economy may be more reliant on the stock market
going up, and if it goes down thirty forty fifty percent,
and we've seen these before. A lot of people be
(08:50):
stunned that that can even occur, But actually consumption just
gets hit very very bad. Indeed, so it's not just
an investment cycle, but a consumption cycle too.
Speaker 1 (09:00):
Yeah, and that might be particularly bad given the huge
retail participation in this bubble, particularly in the US right
and I keep looking at the number of leveraged ETF launchers,
single stock, single stock leverage ETFs.
Speaker 2 (09:14):
And certainly after Liberation Day when President Trump backed off
his initial tariffs and the stock market started going back
crazy from that point onward, that was retail which drove that.
And the professional investors we could see from the service
were very reluctant to participate. They were still quite bearish.
(09:34):
They're expecting a recession, and they really drag kicking and
screaming into the market by retail. Just yeah, just buy
the dips, always just by, because you know, the stop
market never goes down very might might pop down ten percent,
fifteen percent, but it doesn't go down thirty forty fifty
percent anymore until it won to bet until.
Speaker 1 (09:55):
It does exactly. Let's leave aside what might be a
trigger for the end of the bubble for preventing a
melt up. But a lot of this idea that it
might go on, that might be a continuation in the
bubble is about inflation and interest rates, right as you
just said, so you're expecting the Fed to keep cutting rates,
We're expecting ritcuts in the UK, etc. But you've also
(10:18):
written about the deflationary environment in China.
Speaker 2 (10:21):
I mean, if any other economy G seven major G
seven industrialist economy had seen the level of economy wide
deflation that China is suffering. So China has seen twelve
successive quarters, quarters, not months, quarters of year on year
(10:43):
declines and its GDP deflator. That's economy wise, So it's
more than just the CPI or RPI. It's economy. Why
includes exports, includes investment goods, et cetera. If any other
economy had seen that, they would be printing money like
confetti and chucking it into the economy. China is in
(11:05):
a real hole in terms of its deflation, and as
we know having followed Japan over many years, the worst
situation to be in is when you're a highly indebted
economy as China is, and then to suffer deflation because
it crushes you.
Speaker 1 (11:25):
Well, it increases the real value of people's debt and
makes it even harder to pay off. You want infleation
if you're in debt nor deflation, right absolutely.
Speaker 2 (11:32):
And Robin Brooks, who I follows at the Brookings Institute,
no relation to the name, but he pointed out that
the China's PPI on consumer durable goods is accelerating downwards.
It's down four percent year on you own it's getting
worse this and this is part of their surplus capacity problem.
(11:53):
They've got a lot of deflation to give the world
and they want to get rid of it. And the
big surprise could be where, especially in the US, where
everyone is waiting for inflation to pick up because of
the tariffs, is it just doesn't that inflation we add
(12:13):
a downside surprise in the UK recently, albeit from quite
high rates, downside surprise in Japan. US has broadly been
surprising on the downside looking at their underlying driver for inflation,
which is unit labor costs. Is what I've been writing
is look unit labor costs, and unit costs are only
(12:35):
at running at one percent year on year, and that's
that's not an erratic number, that's smooth that's what most
economists think drives inflation, and that's been coming down quite smartly,
as has Court company inflate corporates. The corporate price deflator
has come down, and that's running quite a way below
(12:57):
course CPI and I think the surprise maybe not the
economy suddenly drops into the recession in the next few months,
but inflation really carries on under shooting, the bond rally
really gets going, which will cheer Rachel Reaves up up
no end in the UK, and actually that inflates the
stock market bubble even more.
Speaker 1 (13:18):
Perhaps, but it's not idea for deeply indebted Western economies.
If one of the things that we talk about a
lot on the podcast is how do you deal with
this level of public debt? What on earth can you
do about this? And the answer, of course is a
type of financial repression, running interest rate slightly lower than
inflation for a long time, so that eventually your debt
doesn't necessarily go way, but it is massively reduced to
(13:39):
that in some ways. The last thing that an economy
like ours once right now is another wave of deflation
out of China.
Speaker 2 (13:46):
It's to get out of jail free card for the
politicians cyclically, I could think we can get down shift
in inflation on a secular or trend basis. I mean,
I'd been known for many many years my ice age thesis,
which I put together at the end of the nineties
the West, following what happened in Japan, that inflation would
(14:07):
come low and low and bond yours following that after
the pandemic, I have switched camp into a secular rise
in inflation. I can remember personally twenty eight percent inflation
in the UK and actually in Japan also a twenty
eight percent inflation. I think seeing the fiscal on a
secular basis, seeing the fiscal incontinence which is there and
(14:30):
the fiscal dominance over monetary policy, I can see inflation
trending back up to double digits. Might be you might
get some short term relief, but actually politicians seemed congenitally
unable to get to deal with this, these fiscal deficits,
(14:51):
which means the path of these resistance will ultimately be
money printing.
Speaker 1 (14:55):
So we might get some short medium term relief from
the Chinese situation, but medium to longer term we have
to expect our inflation because there is no other thing
that can happen without politicians getting a grip, which are
quite clearly not.
Speaker 2 (15:09):
Going to I mean and popularism. Anyone in the UK suggests,
for example, who we get rid of the triple lock
on pensions will be voted out of office immediately. Perhaps
best not to say it in the run up to
the election.
Speaker 1 (15:22):
We're speaking on the day that Rachel Reeves has been
out talking this morning about well about the budget, which
is increasingly weird that you come out three weeks before
a budget to tell everyone there's going to be bad
and using the budget to make them feel really miserable
in the advance of the budget and make things even
worse than they were already. But here we are. That's
what she's done. And she's made it pretty clear that
this isn't about spending cards, it's not about getting group
(15:45):
on public spending. It is about taxing everybody more. No
longer about broad shoulders. It's about kind of everybody's shoulders.
Speaker 2 (15:52):
Yes, and getting hold of the spending, particularly welfare spending
and disablit And we saw even with an I think
global bomb, markets took a big lesson from this. The
Labor Party, even with one hundred and eighty plus majority
couldn't get through the most minor of reforms in terms
of in terms of disability spending where alone in the world,
(16:14):
particularly for under thirties. It has exploded upwards as people
get signed off, get signed off and their TikTokers to
actually explain to you how to gain the system to
do this, and they're just unable, totally unable to get
a grip on it. And it's although the UK isn't
the worst offender by any means, I think the US
(16:37):
is worse. I think France is worse. Both those countries
are more protected than the UK. France because it's wrapped
up in the Eurozone, wrapper US because of the dollar
and the exorbitant privilege of being able to borrow in
the dollar. But the UK is far more vulnerable to
blow up. I mean, luckily, we're in a period where
(16:59):
bondi are coming down, and this is what blew up
Liz Trusts. Her budget came at a time when bond
yours were rising sharply globally, and it wasn't a good
time to hit the markets with that sort And.
Speaker 1 (17:12):
Also she hadn't put any effort into getting everyone else
on side because it came out of nowhere exactly. But
so we have this massive public debt problem and as
you say, this sort of fiscal fiscal dominance in the UK,
and does where is it concern about that that the
gold price has been signaling.
Speaker 2 (17:29):
I think it is. I think people are joining the
dots and I think the debasement trades. And because it's
not just gold. Until the recent correct it's had a
very deep well is enjoying a very deep enjoying not
quite the word right word, if you're holding it, it's
seeing a very deep correction at the moment. But it's
(17:51):
not just gold, it's the entire precious metal complex which
ran up very, very sharply. Incidentally, from the day of
August the twenty seconds Jerome Powell, the Fed chairs Jackson
Hole's speech, gold ran up thirty percent, but actually the
rest of the precire's metal complex rose even more strongly.
(18:15):
Now you got to the stage where gold had was
so overbought. Technicians look at things like calls relative strength
index are RSIs. They're called how far the price has
moved from the moving average. Essentially had a monthly RSI
of over ninety two, which was the highest in history
(18:39):
for the goal market. So you're going to see a
very deep correction. But I think it was this is
the deed's basement trade. Why aren't bonds he was also
rising at the same time sharply at that time. I
think it's basically because people say, well, it's not a
deed basement trade, because bond If people expected very high inflation,
(18:59):
bond bond.
Speaker 1 (19:00):
Market collapse and yields will be going to the sky.
Speaker 2 (19:02):
And it's because people figure out because of fiscal dominance,
the central banks will be told to intervene to hold
down bond yields at some point, whether it's five percent,
whether it's five and a half percent or six percent,
at some point, the maths just do not add up
anymore for fiscal sustainability, so they would have to be
(19:25):
yell curve control or as Japan had for many years,
yell curve control or quantitive easing, which is effectively yield
curve control. So, yeah, the precious metals can rip raw upwards,
but the bond yields don't in the same way. They
get that they start to stall out as they get
to higher levels.
Speaker 1 (19:44):
So you think gold will come back. I find that
just down to four thousand today as we speak where
three nine hundred and sixty seven dollars. But it seems
likely to me and to John who's on the podcast
with me, a lot that gold will go back in
four thousand and its still some things on.
Speaker 2 (20:01):
Silver, gold, silver, platinum, palladium, all of them go gold.
Might be goal, might be the.
Speaker 1 (20:09):
Laggard gold miners.
Speaker 2 (20:11):
Yeah, gd x gd x J. I don't personally recommend stop.
I wouldn't know. I'm a macro person. I wouldn't know
stock if it bits me. I just waved my arms
around and talk about the macro backdrop. And actually there
was quote my former colleague Dylan Grice, you know very well,
(20:32):
used to do a lot of research about the what
happened to Germany in the nineteen twenties, Yes, and why
Rudolph Vona Havistein, who was the Rikbang governor, why he
kept on printing money. And the conclusion was, and I
think it was a quote in later life, was he
(20:53):
basically kept on because he was scared of the economic
and social consequences of stopping. And it's similar with the
public sector deficits. The politicians are scared of the social
consequences of stopping spending money to and throwing money out
(21:14):
as they are are doing these huge, huge spending plans
they've they've got and so the path of least resistance
is money printing.
Speaker 1 (21:25):
They can just keep it going for a few years
another few years.
Speaker 2 (21:30):
Later the COVID period it didn't if you like, spoiled
politicians into thinking they could spend like this, and eventually
the markets come forth for them. They look around for
the weak as Canada that may well be the UK
at some stage, even though other countries are worse. They'll
pick off the weak as Canada and basically bludgeon them
(21:54):
and make an example of them. But that that's which
is why we're going to end up up with QUANSITIV
unlimited money printing to hold down and if the central
banks won't do it. I was like the Groud char
Marks quote, these are my principles. If you don't like,
don't like them, I have others. These might be my
(22:16):
central bankers today. If they don't do what I say,
I'll find others to do it.
Speaker 1 (22:20):
Yeah. So central bank independence, as ever is something of
a myth, is absolutely real. Yeah. Now, on the subject
of central bankers, what part do you think that central
(22:42):
bank buying of gold is playing in this. So we've seen,
you know, various central banks around the world, Channel in particular,
constantly adding to their gold holdings.
Speaker 2 (22:50):
I think this is a natural consequence from the pivot
away from US assets, which was people tell me, and
I think it's a reasonable hy partly a consequence of
the seizure of Russian assets after the invasion of Ukraine.
(23:10):
I was reading a narrative of the cabinet meeting in
the US where everyone was talking about seizing or freezing
their assets, and Janet Yellen did demure about shouldn't we
think through the economic and financial consequences of this? But
it certainly weakens Yeah, which emerging market central bank, which
(23:35):
might fall foul of the US at some stage is
going to buy US assets and deposit them in the
US to be seized later on. And I think that's
partly what is going on here. And you can you
can see it from a lot of a lot of
the hermegany of the dollar has been weakened somewhat. I
(23:55):
don't think people who say that the age of the
dollar is over I think a premature, but that I
think part of it is that is what is going
on and it's perfectly logical.
Speaker 1 (24:05):
Doesn't make sense under their circumstances to also hold some
cryptocurrency us to hold bitcoin in particular, do you think to.
Speaker 2 (24:14):
The extent that crypto is a bet against central bank competence?
Which is what my former colleague Dylan Greis always used
to tell me, is I would add it to a portfolio,
but with a very skeptical and cynical view about it,
(24:34):
that it could collapse to some stage. But what I've
noticed more recently in the last few months, it does
seem to be a bit of an inverse correlation to gold,
So you're putting the two together and it does tend
to dampen down the volatility. So I think there certainly
is a place for cryptocurrencies if central banks are going
(24:56):
to do what I think they're going to do.
Speaker 1 (25:00):
If that is the case, if we are looking forward
to a period of very high inflation, surely there's also
a case for holding equities. And we've talked on this
podcast about the Gavcast Turkish portfolio. It's fifty percent fifty
percent gold as being the way to get through an
unpleatant inflationary period.
Speaker 2 (25:16):
I would agree with that because you're buying a real,
real asset, and I think commodities also as part part
of that another real asset. The earnings will rise in
nominal terms in line probably in line with nominal GDP growth.
But the key question is and that offers the protection
(25:36):
that the profits growth is in highly inflationary times, what
multiple should the market be on? So the US is
on the currently a forward P of twenty three times,
which is almost back to where it was during the
Nasdaq bubble in nineteen eighty two. Normally, when there's high inflation,
the P is extremely low. And what you saw or
(26:00):
from nineteen sixty five, for example, from nineteen sixty five
to nineteen eighty two, as inflation rose and as bondials rose,
there's really good earnings growth. The Dow went nowhere for
seventeen years in nominal terms because the P which started
(26:20):
it around twenty times if my memory says me right,
in nineteen sixty five deflated I think eight times earnings
by the time inflation peaked out. So yes, what I
would say is in an environment of rising inflation arising bondials,
(26:41):
what has worked for the last twenty years will stop working.
So bond beneficiaries stocks or sectors which benefit from lower bondials,
so they tend to be defensive, they tend to be utilities,
they tend to be growth sectors like tech, which had
done rare very well from decades of falling bond deals.
(27:03):
And what hasn't done so well were cyclical stocks value stocks.
So what hasn't worked should start to work when things
have worked for twenty odd years or longer. It's getting
out of that mindset and saying we're in a different paradigm. So, yes,
I agree with you. Stocks are a hedge against inflation,
(27:27):
but it's working out well. If we go through a
secular de rating, actually that can wipe out all those gains.
Speaker 1 (27:33):
Find stuff that's cheap already.
Speaker 2 (27:35):
So it's ambiguous. It's ambiguous for.
Speaker 1 (27:37):
Yeah, now I see that. Now listen, speaking of sectors
that have benefited or asset classes, should we say that
have benefited from very low interest rates? Private equity. We're
going through a period where we are hearing constantly that
it's time for retail investors, for ordinary private investors to
get their hands on a whole lot of private equity,
and that will really temporary turns going forward. You and
(28:00):
I'm thinking you don't necessarily agree with that.
Speaker 2 (28:02):
Well, I'm very cynical generally awful trade I picked up
over the years working in finance, and me.
Speaker 1 (28:08):
Having that as well, we should I shouldn't really have
had you prom.
Speaker 2 (28:14):
As far as I can see, the big advantage of
private equity has been carried interest is it's been its
tax treatment gives it an advantage, and it doesn't have
to market self to market, so it isn't very volatile.
People say, well, you know, we haven't got the volatility
in private equity. Yeah, but you don't know what it's
really worth.
Speaker 1 (28:32):
Well, you do have the volatility, or you would have
the volatility if you if you tried to sell it
every day.
Speaker 2 (28:36):
You know, But you know, there are problems in the
private equity space as people call it at the moment.
And you've had two high profile bankruptcies in the US
with First Brands and tri Color, And I know nothing
of what they do and understand, but I know that
there've been problems there and that has started to leak
(28:59):
into a high yields bond markers. Spreads have started to
widen because people are worried and Jamie Diamonds of JP
Morgan has has come out and said, you know, well
you never have just one cockroach. Well you've got two there.
And it's not just the IMF have been warning about
private equity. Andrew Bailey at the Bank of England as
(29:21):
very worried about it, and people don't really focus on this.
And maybe this is the thing which in this cycle.
Every cycle is slightly different. Maybe this is the thing
in this cycle which which will lay us lower. I
don't know. But there's an awful lot of leverage. You know,
one of the one of the one of the elixirs
for private equity is leverage. Huge amount of.
Speaker 1 (29:45):
Private equity. People would like you to believe is that
it's got nothing to do with that at all, and
everything to do with being better at managing.
Speaker 2 (29:54):
Really, yes, I think I'm just too cynical. I'm sure
they're wonderful, man. I'm sure some of them are. I'm
sure some of the suppose.
Speaker 1 (30:03):
One of the problems with the performance record of private
equity is that, you know, when you talk to private
equity people, they will say to you, will look at
the long term performance record, you know, it's really great.
But if you go back to the very beginning, so
you're looking over a fifteen or a twenty year period.
If you go back to fifteen years ago, this market
was tiny and you had a very small number of
like super intelligent and effective people working in a very
(30:25):
small area. So that doesn't tell you anything about performance.
When it's huge, vast amounts of money in every single
every single mathematic graduate wanting to work in it, etcetera.
It's a totally different sector now to the sector that
we look at the performance of fifteen years ago.
Speaker 2 (30:42):
Yeah. No, absolutely, And you can tell that the bubble
conditions because certainly they are sucking the best the engineers
and sort of people who used to go into finance,
investment banking, for example, they're all getting rich in private
equity rageo. One of the big problems for private equity,
like so much else is they benefited from years and
(31:05):
years of falling bond deals and the mood music has
now changed. I know bond deals might be coming down
just at the moment, but if we're in a secular
we're not going in my view, we're not going back
to where we were. We're in a secular bear market
for bonds, and if you're highly leveraged, it's going to
(31:26):
be a major problem. And what you've seen to have
is a very few number of companies at the moment
related to AI which are doing very very well. But
you scratch the surface, and my colleague Andrew Laptform does
is for me, you remove the top not even ten
percent of companies, quota companies, the top ten companies, and
underneath that things are pretty crappy. And as you drill
(31:49):
down into smaller and smaller companies, things are really really tough.
And people talk about a K shape recovery within the
consumer sector, within the corporate sector, it's it's it's very
very There are very small amounts of winners which are
out there, and so the moon music maybe for private equity,
(32:11):
and certainly in the UK where you've got private equity
taking over the vets, taking over care home nursing homes,
and people just don't realize how their tentacles have spread
so deeply into the into the real economy. And the
UK is a really good example. If you if your
vet isn't owned by private equity, you're you're doing pretty well.
(32:32):
But it's to me, it's a real issue. I wouldn't
say problem, because that's a bit pejorative. It's an issue.
It's an issue we should be watching closely well. And
and and as Jamie Diamond says, you never get I
don't want to compare private equity to cockroaches. But but
but but you never, as he said, you never just
(32:54):
get one cockroach as these things start going bust.
Speaker 1 (32:57):
So we're worried about private equity, worried about inflation. We're
also worried about deflation, worried about equity valuations, we're worried about.
Speaker 2 (33:07):
Got more lines you can see over there. I haven't
got many lines here, but I'm amazed I'm not not
more wrinkled.
Speaker 1 (33:14):
And for those of you who can't see Albert, which
is all of you, he's not remotely wrinkled. And he's
wearing a great seasonal shirt. And we might put a
photo of Albert online photo shop.
Speaker 2 (33:27):
Me a bit no.
Speaker 1 (33:28):
So here's the question, Albert, what could go right?
Speaker 2 (33:33):
Well? What could go right? I suppose is the bubble
just carries on for another another year. The interest rates
come down, bond deals come down on cyclical basis, we
go to forty times forward earnings. Some of us have
seen this all before. I'll stop talking about equity bubbles
and start talking about goals or my personal life as
(33:56):
I have done in the past instead.
Speaker 1 (33:58):
But that's not going right, is it it? That's just
going on a bit longer.
Speaker 2 (34:02):
Yes, I don't think there are any good options here
is what's the least bad option? With you down the
road for so long?
Speaker 1 (34:11):
What about that AI does everything everything that I had
promise to do. There's a massive productivity wave throughout the
Western world which brings down government spending massively, husually reduces
our deficits, gradually starts releasing the debt, makes every company
more productive, such that valuations are perfectly fine and everything.
(34:33):
Everything's okay, everything's okay.
Speaker 2 (34:35):
Can I sell you a bridge London bridges for sale?
Speaker 1 (34:41):
Really no chance?
Speaker 2 (34:43):
Suddenly. Productivity growth in the US has been looking okay recently.
What's interesting is no one has a recession on the horizon.
The latest Atlanta FED numbers for the next quarter four
sent GDP growth driven a.
Speaker 1 (35:01):
Lot by.
Speaker 2 (35:03):
AI investments. But when I look at I was looking
at the ADP in the absence of official payroll numbers.
So the biggest driver for employment is not the megacaps
or the AI companies. It's it's mum and pup. It's companies,
it's unquoted companies. So I was looking at and the
(35:24):
ADP in the US divide it up into company size,
and those companies with less than fifty employees comprise forty
five percent of employment in the US. And employment is falling,
and the latest numbers year on year is very unusual.
Employment for smaller companies is falling year on year in
(35:47):
the US. And it's not a rapid dumbdown. It has
accelerated a bit, and maybe that's something to do with
the immigration policies in the US, but actually has been
slowing down quite rapidly for the last two three years.
Large cap employment still looks okay, that's slowing. But when
you have when you have the job generators in the US,
(36:11):
small small cap companies in recession, then you think, actually,
to the stock market maybe at all time highs, but
actually the rug is being pulled out from underneath. So
all they say in II investment is going on with
this this vendor finance scheme between all of them, but
(36:34):
actually could this be the rug? But I tend to
look on the dark side, so i'd recommend I recommend
all your listeners will ignore should ignore me totally. Okay,
let me just background.
Speaker 1 (36:45):
Let me try something else on the positive side. Okay.
So in the UK and particularly, one of our big
problems is very expensive energy, massive drag on the economy.
If we accept, which we do, that all economic activity,
in fact, all activity or another is energy transformed. If
we were to find a way in the UK and
possibly elsewhere, to massively bring down the cost of energy, say,
(37:09):
I don't know, beaming solar power from space to a
massive mirror somewhere, something like that with some of our
guests we've talked about that could be that could do
things even in the UK, abandoning that zero for example,
that could be a massive positive. That could be transformative,
and the solar to mirror could transform the US and
the rest of the world. Imagine energy being practically free.
(37:30):
I'm really working as hard as I can here, Albert.
Speaker 2 (37:33):
I think that would be transformative if it happens. Certainly
if the UK is an outlier. The UK has some
of the highest energy costs in industrialized countries, but that's
because of the ludicrous pricing mechanism we have here, which
I'm sure your listeners will be aware of. Where even
(37:53):
if ninety nine percent of the energy being generated is
from low costs newbles, which is not consume it is
and the gas price goes up. The average the pricing
in the UK is off that marginal producer, which is
usually an expensive gas generator, and so everyone has to
(38:18):
pay that marginal price. And it's a ludicrous system. So
that's one of the reasons our energy costs are so
high here. And you have to break that link because
what's happening is that the renewable companies are getting a massive,
massive subsidy from the consumers. But there's distance in any
(38:39):
will to break that ludicrous link here in the UK.
But the UK is totally almost deindustrialized now because it's
it's too late for the UK to be honest.
Speaker 1 (38:51):
Okay, that didn't get me anywhere either. Loving Left. In
terms of encourage you to think of something possible, I.
Speaker 2 (38:57):
Think when you've you've been through many cycles like you
and I have, you know the inevitability and the business cycle,
that the one thing which which cannot be abolished is
the business cycle. And apart from two or three months
during the pandemic, the US hasn't seen a proper cyclical
(39:20):
downturn since two thousand and eight. Now that is an
extraordinary long economic cycle. A recession will come along and
all these bubble elements will implode it. It may well
be the bubble implodes and then brings the economy down
into recession, and that's going to cause a lot of surprise.
(39:42):
But we can inflate a lot further from from here.
We've been doing this long enough to know anything is possible.
Speaker 1 (39:48):
Okay, So in the meantime, all we can do is
hold precious metals and inexpensive equities to the best of
our ability and wait.
Speaker 2 (39:57):
And if you want to ride the equity bubble, but
just be very cynical about it. Don't. Don't believe the story.
Momentum investing is one of the most profitable methods of investing.
My colleague Andrew Latform has shown me that. But just
have clear technical signals to get you out, whether it's
whether it's the SMP or cutting below the two hundred
(40:20):
day moving average or whatever it is. Don't buy into
the rhetoric too much. Ride the bubble if you so wish,
As George Soros says when he said, you know, whenever
I see a bubble, I run towards it. But don't
get consumed by the story. Be very cynical, and just
have a have a level to get yourself out so
you're not bankrupted when the thing turns down. So, as
(40:43):
Chuck Prince said, you've got to keep dancing while the
music's playing. But just decide how near the fire eggsit
you want to be gyrating around on the dance floor.
Speaker 1 (40:53):
And don't be tempted to move back in front of
the band.
Speaker 2 (40:57):
Exactly here plugs in so you can't hear the music,
but just keep moving over.
Speaker 1 (41:05):
All right, let me ask you one last question, then,
what are you reading? Came here on the train. What
are you reading?
Speaker 2 (41:10):
I don't. I don't read very much. Actually, what I
normally would do is get my colleagues to read that.
You know that they do that heavily, lifting for me
and read all the economics or finance books and then
they just tell me what's what what?
Speaker 1 (41:24):
What's in it? No?
Speaker 2 (41:28):
I just no, no, I'm not. I generally read current events.
I like reading a lot about current events. I have
been reading Boris Johnson's biography, and just to balance that,
I did read Gordon Brown's one before before that. So
I'm very eclectic in my taste, but I'm not. I'm
(41:48):
very lazy. I generally in the evenings what I do
is basically just watch Telly. I watched rubbish on Telly
and and wide. I'm so caught up with attention of
financial mark archets during the day.
Speaker 1 (42:02):
Excited Are you so excited about the bak Off final?
Speaker 2 (42:05):
I've never watched bof Are you watching on the television?
Even off?
Speaker 1 (42:10):
Even?
Speaker 2 (42:12):
No, No, I've been watching Ted Ted Lasso.
Speaker 1 (42:15):
Change in my life has been about the way those
sugar dome things or broke last week.
Speaker 2 (42:20):
I'm not a big cook. There's someone laughing in the
background here of it.
Speaker 1 (42:26):
It's outrageous, right, Albert, thank you, Thank you a pleasure, And.
Speaker 2 (42:32):
We must do this again. We mustn't wait another ten years.
Speaker 1 (42:35):
Can we do once a year?
Speaker 2 (42:36):
Maybe on air? Commitment every every every every couple of years, definitely.
Speaker 1 (42:43):
I'm interpreting that as too. I've got a better idea.
How about we do it again straight off the crash?
Speaker 2 (42:48):
Absolutely next week.
Speaker 1 (42:50):
Then it's a deal, could be in ten days. Thank
you for listening to this week Maren Talks Money. If
you like our show, rate to review and subscribe wherever
you listen to podcasts. Keep sending your questions or comments
(43:12):
to Merrin Money at Bloomberg dot net. You can also
follow me and John on Twitter or x I'm at
MARINETSW and John is John Underscore steppek. You are on
Twitter right, Albert yep? What is it?
Speaker 2 (43:22):
Albert Edwards? Nine to nine?
Speaker 1 (43:24):
There are another ninety eight?
Speaker 2 (43:27):
No I jumped over all the rest of them?
Speaker 1 (43:29):
Ah okay. This episode was hosted by Me Maren sumset
where but it was produced by Samasadi and Moses and
sound designed by Blake Mabels and Aaron Casper and special
thanks of course to Albert Edwards
Host
Merryn Somerset Webb
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