Bloomberg Audio Studios, podcasts, radio news.
Welcome to the Melton Talks Mony news round up, where we talked about the biggest moves and markets this week and was driving them. I'm join Stepbeck, senior reporter of Bloomberg and author of the award winning Money Distilled newsletter, and joining me in the studio while Merton is away again, it's Marcus Ashworth. Marcus is a regular here. He's a
Bloombergy opinion columnist with deep expertise in European markets. He's also the guy phone whenever I want to ask anything about bonds and all round useful contributors to the show. So hello Marcus. Great to be with us again. I
was thinking about what we should talk about this week. Well, like I wasn't thinking what we should talk about this week, because what we should talk about this because pretty obvious because gold is up through fave those and five hundred dollars and owns as we speak this morning, which is not necessarily coming. I thought we would be earlier in the year.
Yeah, if you think about everyone's target for the end of this year was basically five thousand, and we're ten percent above that. We're not even the end of January that we are generally give that. But one here is
that you know, where is where does this stop? We just had the World Council of Gold Council's stats out uh and within that also there was an interesting view on central banks in particular which it doesn't seem to me Barb poland we can come back on that that there has actually been that much central bank buying driving gold up. This is all catch up. For the last two or three years you've seen eachtf whole basically being net sellers and retail have not really not been that involved.
This is private and switch for central bank clearly, you know from onwards Russia and now it's seemed proponent buying lots of gold is shifted away from them in the biggest buyers very much. You catch up and it's speculation and look, at some point this is all going to go horribly wrong. Calling the top is a fool's game, fool's gold even And you know, really I can't explain it other than the fact that lots of people seem
to think it's about dollar debasement, which it isn't. But you know, we can get onto that in a minute.
But Yeah, silver.
Has got a slight shortage and definite squeeze going on. But you know, mining production is up quite a lot, Recycling is up a little bit as well, finding enough jewelry usage is down for gold, as you would expect people doing stick a shock on that. And that's the point. When do investors get stick a shock at five and a half six thousand, where is it they actually go? Do you know what do I want to be in at the top asset management? I don't think I really
want to be buying it many more here? See what for the moment I was loving it?
Yeah, And I mean one I suppose one thing I would ask about and dollar debasement because obviously if you look at the dollar, I mean, it's going down a bit this year.
But it's still you don't think it's dollar debasement, it's not.
Yeah, it's historically still relatively expensive. The dollar has been much much lower than less in the last twenty.
Is you've got to separate usage of dollar, yeah, which is the strong currency policy actually of what the US administration talking about, and then the actual value of it. And there's no about it. If you look at the S and P winning seven thousand. This is not about selling of US assets or selling of the US dollar per se. It's hedging of exposure to your dollar. It's been a lovely trade for the rest of the world the last two or three years by US text dogs
whatever it is. And also be long dollar. Don't hedge your dollar exposure. Now the trade still works, except you really do want to hedge your dollar exposure. And that's not dollar debasement, that's just overvalue dollar. And I think that's common sense.
See, I think that's a key point more because obviously you I mean, this is what was called US exceptionalism, and that has ended, and that it's no longer kind of comforting. As you see you have seventy percent of your equity exposure in the S and P five hundred and you know all of this as you see onhedged. Basically everyone has just been owning the US because there has been no other alternative.
And know they longer currency as well. You've got to separate it from only the asset, which I still think exists. I do think, you know, the S and P has got more to go. Look at the FED. The FED are actually fairly confident on inflation. Okay, they're not rushing to cut interest rates because the economy is so strong, the stock market is still so strong, it's still got the best companies in the world. It's still going to
do very well. Will other countries do better, possibly, But that's you know, you know, the emerger markets certainly listened to some my aspects there, but that is a conscious risk choice. The question is do you want to own US assets absolutely great yields and treasuries, great liquidity, great stock markets, blah blah blah. Do you want to own the double bet which is own list And if you're a foreign investor being naked long dollar out right, probably
not anymore. That is how I think you have to separate the two things.
Yeah, and I mean that makes a lot of sense. I mean, if you're a steling investor, I mean you may not have noticed, you but obviously the pound against the dollar has gone from one thirty five to one thirty eight this week. You don't, let's say, you're not
going to instantly notice that in your portfolio. Of the pound does keep going up against the dollar and you haven't hedged that exposure in some way, then it's actually going to act as quite a big drag on your returns, so can see you could definitely see that as an issue. I mean, I suppose I would also say that they're probably I would argue that the play is an element of wanting to hedge against US political uncertainty, which I
don't see is being the same as fleeing it. It's more just, Okay, I've been comfortable having all of my eggs in this one basket, and suddenly they're starting to think. I said, does it make sense to have all it's going on?
And since twenty Since twenty twenty, I mean it's been a sleep trade. If you've been a long here's me, all of a sudden you've got to wake up and think, hang on second one, is there better alternatives elsewhere? And to do I want quite so much exposure? Or in that way, kaiso exposed to the currency if you're still confident holding the underlying assets bit bonds or or stocks. I think US bonds are great value. I think US stocks are probably still the place large larger to be
the dollar itself. I think you have to be slightly careful getting too bearish on it because it's underlying got a lot of so much economic strength that I think it's a difficult short Do you want to head some of your exposure a foreign investor, Absolutely, and you know there are alternatives, particularly in emerging markets, I think, which are make for the sensible investment if you're a US investor. But reality is, I don't think the dollar's going up
and I don't think it's going down too much. But you know, for choice, I think this is a trend which will we will see more dollar weakness at the coast of the next three months.
I suppose the other thing I would ask about precious metals particularly, but it is sort of all part of this reconfigure portfolios because obviously, if you look back over the last year and actually he's getting on for close to two years now, the rest of the world has been catching up with the US. And so I was reading something interesting from Steen Jackibson, who's an analyst over Guys. I can't remember, think it's Rubble Bank, but he was talking about who the it's on this topic, the euro
US dollar exchange rate, and it's a chating thing. And I know the charts are a little bit you know, people don't always think people think charts are just like astrology. But he was pointing out bunch of lines, a bunch of lines. So he was pointing out the euros now it is two hundred month moving average against the dollar, and if it breaks up above that, so this is the end of the month stuff. It mass a long
term trend. And he's saying that the tipping point looks like it might be there if the uro managers to stay stronger against the dollar, and you're kind of you're turning the trend around. And that's a point at which aid allocation teams start to say, okay, well, hang on, this is this is well, it's basically saying what you're saying, we're taking a risk here by being overly exposed, nakedly
long to the dollar. And this is something they can use almost to justify the decision to pull back on that a bit, because also, if you haven't been holding gold at all, you're probably starting to feel like a bit of a numpty. And also the well bombs, and also they can the arguments for for having a sixty thirty five five portfolios start to become more mathematically convincing, because not here, not at the top, well not at all.
But this is the problem absolutely exactly with golds down so well, you plug that into the historic calculations and it looks as if the benefit has outweighed the volatility was before the dead and it suddenly looks as if, well, so that would be sensible portfolio construction. And I just wind that please.
Why now when dollar euros at one twenty, all of a sudden you think, oh, it's about time I should shift out the dollar. Why are the top I mean really, it's like the goal. Why would you shoot your portfolios ten percent of gold? Now? It's brain dead? You know, really, people have got to do the risk reward on this
stuff and think for themselves common sense. You know, where do I really think in a year in two years time, these things will be and the chances of gold and silver having a horrible blow off top and all going very badly wrong, I think are getting exponentially. Nonetheless, with regards to and I wrotised written an article about the dollar euro in particular, the Europeans start to hurt above one twenty. They already started talking about in the European
Central Bank. And if you look at a longer term chart, you will see every time it pokes its head above one twenty and certainly gets close to one twenty five, they come and hit it on the head with a hammer, and I expect that's exactly what's going to happen. And we have the eased to be a meeting next Thursday, February the fifth, where I expect there will be a few more noises and we all back away from this all. Maybe the next move in interest rates in Europe should
be a hike. No, it should not. It should be either dead silence, which would have been preferable, but now they can have to say we actual fact, we still probably have a bias to ease, and maybe that a week in the euro a bit the brutal reality. We know the dollar wants to go down, the euro has only one way to go, and they could very little if they can do about it, apart from actually cut
into straights. Now you would argue you were French with inflation world below one percent, they should be, but you know a lot of the Germans, for some reason in their economy is completely on the floor, don't seem to want to do this. But I suspect by the end of the year if the Fed and i'd lane the Bank of the have cut again and probably one or two, maybe even three more times you will see a further rate cuts in Europe and I think that will be fine.
But until then there's a chance that the EU gets a little bit too strong and it starts killing They're already very weak export growth and indeed economy sadly.
Same point here because I haven't looked at here properly and then don't maybe you haven't, adel but why is for Ancian flution as law as it is, it kind of stands as being.
Yeah, there's that again. Look, most these things are energy driven and there is some basis stuff in it, but you know, there is a very bad economy there at the moment, and it's it's quite extraordinary how how long it's been under one percent, and you know the risks
of it going lower. Italian inflation isn't very strong either. Again, there are there are some basis effects from through as things going going through, but I mean, you know, it is starting to come more of a worry in France that they're realizing this is this isn't just one off effects from things like energy and whatever they are. There is some actual residual problems, perhaps with lack of economic growth and stimulus and momentum in the economy.
Yeah, and that is kind of a problem given we are they are dated to GDPs, because at least we can talk about tax receipts going up faster than anyone expects purely in inflation driven basis.
But I mean, if you look at the overall gross you know, dat GP of the UK, we're actually in one of the best best spaces. I mean, I mean a particularly corporate and household letting setting aside where the government is. But we're relatively under one hundred present a GDP. It does compare more favorably to most of Europe bar Germany, but Germany is rapidly catching the rest of us up. So yeah, I think France has has issues, particularly with
household debt and to extend corporate debt as well. But the good thing, the only thing that I'm going for at the moment, and clearly you can see that reflecting the spread above German yields, is that the European Commission are turning a blind eye. They are getting their budget through somehow by hooker by crook, and you know, they're not creating the flack within and Brussels that they otherwise
may have done it this situation. So at the end of the day, everyone's got a turn a bit of a blind eyes of France and let it a bit like they have done in the past and continue to do with Italy, and let it get try and get itself out of its own mess because you know, domestic politics are a mess.
Yeah, what's going on with the yen, because that's the other thing that everyone sort of was broadly a little bit jetterly about early.
Right, First things first, again, if you look at the Japanese economy overall, excluding it is very large government debt, which is bigger than anyone's really is. The domestic economy is doing perfectly fine. Inflation actually is relatively okay. They are they'll be wanting inflation to come in as the rest of the world, and that's why they've been nudging
up their interest rates very calmly. Everyone gets scared about the single the yen and carry trade, as in, you know, people borrowing yen and buy us tech stocks, and it funds the world's growth to a large degree. I think people misunderstand how that trade works. That works very much in short term tenors one month, three month, three month type stuff. It doesn't exist in thirty and forty year
JGB yields, which is a very domestic market. However, recently a lot of hedge funds have got involved in trying to get busy, and I think quite a few of them have been stopped out. So we're seeing a lack of buyers domestically the pension funds, but like the UK, do not want to own extra duration. In Japan, EI yels are getting better and high. We are not seeing the Japanese fund managers thinking, oh I can now get the same yield or better even in yen, I will
move my money out of dollars. They're quite reversed. They are keener to stay out of Japan and they believe that the US will be cutting interest rates. Why not own that bomb market? And that's why I think you have to look at it. Where is the prospect of lower rates and lower yields more likely an actual fact? You know, especially with the weekning yen is up pill recently, so they haven't been bringing money back on shore. They're
not that excited by higher yields. So that what weather the yen, Well, the yen got towards one sixty and clearly You've had the US Treasury encouraging the back of Japan to call up very aus fxtealers and saying, where would you possibly be offering me to buy some yen please? The rate check which happened the last Friday, and it look it had an immediate effect because it was done again in US time by the US Treasury. You know,
notice been served. And I would say that the end will continue to weaken, but very very carefully this time because getting caught the wrong way on it is going to be extremely papers when and if, and probably more likely when the US Treasury comes in and they do a concerted intervention, you know that will move it ten big figures rather than fostest time. So in that sense, it had got two week the end. And I think it's only so much that the Japanese economy, Japanese government
want this to allow this to happen. And I think we've been served a line of the sound has been drawn. Is that going to hold? Probably not, but at some point, yeah, crashing waves will come in.
It's just for clarity. Why does the US not want the end to get weaker against the dollar?
Because he doesn't want the dollar to get strongercase it wants the US export market to have a better chance against the rest of the world. It's a little bit dumb the way they look at this, but broadly, what they're trying to say is that nice try. Guys, were seeing the Chinese do exactly the same thing, was seeing
the Koreans do, and the Japanese the same game. Let's keep our currencies very weak against principally the dollar, but everything else and against each other more importantly, probably, actually, you can't all play the same game. Get away with it. We see you, and that's why, you know, the Japanese are more observant of the lack of tolerance and how it affects them with the US.
This means like kind of cold see Wars tape thing.
Yeah, they've literally the Japanese have got away with this for a little bit too long. So the Chinese and the US Treasury has them in their sites.
Excellent. Oyah. I think that's a pretty convincing roundp of all the importance up from this week. I was just pretty impressed it. Did you miss anything?
Lots?
I sure, but anything we feel qualified to discuss. Thanks for listening to this week's Merton Talks Money Debrief. If you like our show, rate review, and subscribe Wherever you listen to podcasts, it keeps saying. Your questions are comments to Mern Money at bloomberd dot net. You can also follow me and Marcus so on Twitter or x I'm joined Underscore Stepeck, and Marcus is at Marcus Ashworth. This episode was supported by me Joint step Peck, and it was produced by Moses and Am and Summer Sadie