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Hello and welcome to another episode of the Ad Thoughts Podcast. I'm Tracy Alloway.
And I'm Joe Wisenthal.
Joe, I think I think a lot of people don't understand the role of bears in finance and markets.
It's to create headlines for tweeting, right.
Well, technically it's just sell newsletter.
I was going to say it's to get emails opened, right, that's right.
So I think you know, being a bear who's selling a newsletter, we can all kind of see the business model there. But if you're an analyst at a big sell side firm and you're known as a bear, that seems incredibly difficult to me, because, like the tendency on Wall Street and investment in finance is towards optimism, right, you have to place bets on the future, you have
to put your money to work. And if you're managing to be a sort of like long run bear and a big cell side institution, that's pretty impressive to me.
Oh so you're selling, Yes, it is, you're selling. They call it the cell side. And if you know there's all these financial instruments that the financial institution has and you're the bear. It's like, well, I'm not going to buy anything, you know, it's the cell side. You're supposed to have something to sell, and that's other people to sell.
The clue is truly in the name. But the other thing that's very impressive is if you're a long run bear at a cell side institution who also manages to be the top ranked macro analyst in your category for thirteen years in a row. That's pretty impressive, right, It is impressive.
And this gets to another important point, which is people like to read. And I think about this even with podcasts and other forms of any sort of media, whether it's formal media and a PDF that a bank cent sells or a news organization. People like to consume ideas. And it doesn't mean they're going to consume the ideas and say, oh, this was convincing by sell. But they like to hear a range of ideas. They like to have their thought process influenced, they like to stress test.
Well, this is what I was going to say. Like to me, the role of a true bear on Wall Street is for big investors and institutional clients to actually test some of their thinking. You know, if you have a bunch of analysts who are trying to pitch you tech stocks at the moment, like you want to hear an opposing viewpoint that says, well, maybe here is the downside scenario.
Well, here's the other thing right now we're recording this in early May twenty twenty six, which is that equity markets around the world are very high. Some would say bizarrely high, but they're very high for various reasons. We could get into. Bonds have been selling off very much, and that's sort of the story. We're here in the UK right now, and the headlines are all about generally
how much guilt yields keep spiking. But we're in this moment which I would say there is a real mismatch, but between I would say gloom which you could pick your poison. Why are you gloomy? You're gloomy because the Ais are going to take us, are going to destroy the world. You're gloomy because the war and around. You're gloomy because high deficits, et cetera. You're gloomy because politics
in so many countries seems to be deteriorated. There's plenty of reason for gloom out there, and yet you know you're losing if you're not in the stock market, et cetera. It is just a very weird time. But yes, there is this weird mismatch depending on how you look at it, between sentiment across any many different attempts to measure a sentiment and what least certain parts of the market are doing.
Yeah, I think that's exactly right. And also, you know you mentioned bond yields going up, So we're recording this
on May sixth, the thirty year UK gilt. We're in London still, by the way, hit like its highest since nineteen ninety eight or something yesterday, And you're absolutely right, there does seem to be a tension between all these little glimmers of an inflation that are out there and what's going on in the equity market, because you would expect with rates possibly going up that equities were going
to take a hit. But anyway, we do in fact have the perfect guest, right, someone who is very well known not just for being a bear, but also for having very long term, sort of paradigm views on the relationship between bonds and equities.
Someone we've been reading for a very long time. Prices.
We finally convinced him to come on the podcast. I gave it away earlier when I said the top ranked Extel Survey macro analyst thirteen times in a row. But we are, of course going to be speaking with Albert Edwards, who is the global strategist over at SoC GEN. Thank you so much for coming on off.
It's a pleasure. I don't get that much. They've let you out of the bear exactly.
Right, that's right.
Why don't you go ahead and explain? Well, first of all, I should ask when people introduce you as a well known bear, does it great you the way it seems to great some other people I remember Nurial Rubini would always go upset if you call them doctor Doom. Do you get upset?
No, I'm please be introduced at all, and anyone's speaking to me quite frankly, okay.
Is it a deserved reputation.
It's deserved in the sense that the media has more latched onto, or had more latched onto, my bearish views on equity markets, but not my bullish views on government bonds. Now I joined the cell side, so I've been working in finance since nineteen eighty two. I joined the Bank
of England just over the road here. But I join after his little stint on the buy side, which is why, by the way, I write such short notes, because I've actually had to read these notes on the byside over the years, and I know the clients and readers aren't sitting there waiting for them, and if they can't read them in about three four minutes, they're not going to read them. They're not going to read them at all. But I joined the cell side in nineteen eighty eight,
at time Waltz became dressner time Walts. I was there for almost twenty years, but I saw the back end of the Japanese bubble, and I saw the what Richard kouat Namura used to describe the balance sheet recession in Japan and how it unraveled and by the time it got to and how Western economists were saying, you're doing it all wrong in Japan. You should be just liquidating the capital stock and get to get rid of this deflation.
And I was thinking, well, firstly, actually, this what's happening in Japan, is there just ahead of you, ten years ahead of you in the West, because their bubble was a lot, their credit bubble was a lot earlier, and when it bursts in the West, you won't be doing what you're recommending that they do. You'll you'll be you'll be slashing raids, you'll be doing everything to stop recessions.
But the key thing about Japan, so the back end of nineteen ninety eight, when I thought this is coming to the West, I developed what I call the ice Age view, which is secular stagnation thesis, which is next essentially Lauren Summer's the excess of savings over investment, driving down real yels and bond deals and causing a rerating
of valuations. But we saw in Japan after a while that actually your inflation and bond deals and interstrates would carry on coming down, but after what it wouldn't cause any more PA expansion. Actually quite the reverse, that inflation got so low and so close to deflation it would cause PA contraction. So what I was trying to do is bolt on a financial market view onto the secular stagnation thesis, and that ran all the way from nineteen ninety six. I ran with it. I thought it was
coming immediately after the Asian crisis. You mentioned guilt hell as being there higher since nineteen ninety eight. I can remember that the aftermath of the Asian crisis, the Russian GKO crisis, and this where longevity helps. By the way you can I might not be able to remember what happened yesterday, but I can remember twenty years ago quite quite well. And then from two thousand onwards you started to see as bond Yell's got lower problems with merging
within the equity markets. So that was basically the ice age thesis, and it were so. Although I was an equity bear and well known for that, I was very much a bond bow government bond.
Bo I'm glad you said, just reflecting. I'm glad you said the point about having come from the buyside and understood the attention spans of readers and how that informed your view of the cell side because that's something that
I've said or thought many times. Having started my career, a lot of what I learned to write was from reading cell side research, and it I figured that, Okay, the cell side analysts are writing for people who are just inundated with notes, right their inboxes are filled with
all kinds of notes. They must know what the type of content that the buyside is willing to read chart heavy off in concise, et cetera, and so early on in my journalism care I figured, Okay, if this is how the cell side writes, it's probably a good idea to sort of crib some of these ideas because they understand the realities of shortened attention spans and so forth. And now with social media, everyone has the attention span essentially of a byside trader. What's your job?
You know?
Tracy introduced you as strategists, setting aside your views specifically, what does success look like? Why do you have a role at the bank, and what is the purpose of your journey?
Why am I employed on action?
And I don't mean that from like why you employed like if you've gotten the equity call, et cetera. Why is this an important role though to have a bank?
Well, I remember in the run up to the Nunstack bubble bursting, we were having our round table lunches at climb Waltz and Tony die Then who was head of Phillips and Jewassen Management, who had become bearished too early value a bit like Jeremy grant them value orientating and his co conspiratorality in Chicago what's his name, Brinson, who
both had come under the umbrella of UBS. I remember him saying to the head of equities at climb Waltz, well, I totally agree with what Albert's saying, but why haven't you fired him? Because that's what happens to most bears or most analysts who get it wrong. Not on the bullish side, but if you if you're an economist and call a recession on the cell side and you're wrong, you're usually out pretty quickly. There's such a bias towards optimism,
and it's not just confected, it's natural. It's like an analyst covering a stock. Inevitably they're going to be usually enthusiastic about their sector and stock, so that there is a natural bias, and part of my role, I mean, I've developed it over the years in that, even when I'm getting it wrong, how to avoid getting fired. We had an analyst of Climb Waltz in the late nineties. It was a tech analyst. He was very bearish on
nochio and ericson he was right. He was pounding the table with analysts with sorry with their clients, and he off the clients so much he almost got fired, and the secret is to develop strategies. This is my view for what it's worth. They know my they can calibrate what I'm thinking. I'm not too much in their face. I'm not annoying them too much. And I'm a bit like I'm a bit like Caesar always used to have a slave right behind him whose job it was to
say to Caesar, you are mortal. You are mortal.
I'm the slave.
I'm the wage slave and the actual slave. Often those slaves themselves were terminated in pretty horrendous fashion themselves. But if the clients, even times for bulls, would want to hear what I'm saying just to know what to be watching out for in the back and end, they've got
to be fully invested. They've got to participate. But hey, should we you know, we've got to keep dancing as the Chuck Prince thing, But should we be dancing near the fire escapes or in the center of the room, that sort of thing.
All of that makes a lot of sense, and I want to get into the risks that you're seeing now. But before we do it, just going back to the ice age thesis. So on the equity side, explain what went wrong, because this is the thing that you're criticized for and you're sort of known for, is you've had a bearish view on equities for a very very long time. It didn't work out.
What happened, well, what happened from two thousand onwards. If you look at charts of bond eels carrying on falling, equity equity yields did start to rise, so you did have that exactly what you saw in Japan. What derails the de rating of equities, in my view, was certainly quanstity of easy. So the degree and the it wasn't just used once in two thousand and an eight when
you were in your heyday. Well you're in your heyday now of course, but you in another, had another, another, But how it persisted all the way through over the next ten years, and that basically inflated and that was
the job of QI to inflate all asset prices. Where the ice age continued to work was within the equity market because sectors which were benefited from lower bondie on, such as defensives or growth sectors, did extraordinarily well and rerated to huge p premiums versus cyclicality or value stop. So even though the equity manager might ignore what I'm saying at the macro level where the market's not going down, actually within the equity market it was still very very relevant.
This Japanification of the West.
Feet let's talk about then Japanification and within Japanification, Japan specifically, because this is an important there's a lot going on right now that's very important. In the twenty tens, the JGB market. For a long time, it was characterized as the widow maker, right because everyone looked at the size of the Japanese debt stock and they say, it's going up and up and up. It's big. Japanese debt to GDP is getting higher and higher, and yet rates were
going down. This confused a lot of people. You were correct on the call that that was actually sort of irrelevant, that actually that stuck could go higher and hire rates could keep going down. Japanese yields famously zero, probably negative in many instances post COVID. However, that's changed and now Japan, as well as every other developed market economy, the rates are going up. So this relationship, whatever was going on,
has flipped. What flipped really post COVID, In your view, such that rates are going up all around the world, including in Japan, but also especially in the UK. That ice age of disinflation and lower rates has truly come to an end.
I mean what flipped in my view was prior to the COVID recession. By the way, before the COVID recession, I was writing in early twenty twenty, before the pandemic came along, that actually the next recession would see a transition away from the ISA I was moving and it worked for me for quite a long time. But actually I was thinking we were going to move to a new paradigm and that falling bond of your story was
going to stop. And the reason was, up until that point, quantitative easing had been injected primarily in virtually entirely into the veins of wall streets. The idea that the Q didn't create inflation was nonsense. He created loads of inflation, but the sort of inflation people like in housing, in financial assets asset prices, and no one complains about No one complains about that unless you don't own the asset
price is. What it caused was a lot of generational tension, with younger people not being able to afford which is we can come on too populism later. But one of the reasons populism has come along in space, so it caused lots of inequality, which even the central banks eventually realized. But what I thought would occur was the next one. When it came along, you were so close to outright deflation. And certainly remember at that time you were having negative bonds,
so much of the market was negative bond deals. Europe had quite clearly fallen into the Japanification trap. The US was heading there, I thoughts and predicted that we would get a flip over into a modern monetary theory type QE where they started injecting money into the veins of main streets and a bits fiscal so basically classic tax cuts, checks dropping on people's doorsteps, paid for by monetary creation.
And I didn't foresee clearly the pandemic made the situation, the inflationary situation on consumer prices a lot worse because of the restricted supply chains. And having read I've got a lot of sympathy with the lot of I don't tend to have any dogmatic views monetarists, ken zin or whatever. I'm quite catholic. I bring all the themes in there's quite a lot about MMTR I agree with, but reading
Stephanie Kelton's book, one thing was absolutely clear. They were saying, yes, we can do this, it doesn't create inflation, but when you hit capacity constraints, you have to stop doing it. And nothing could have been more capacity constrained than global economy during the COVID. So in my view, it was that crazy to do what they were doing, and it was going to create the money. You could see it from the broad money growth.
So just to be clear, and I know you said we were going to skip ahead to the populism, which is very intertwined. I would say, or many people would say, with what's going on with economic policy right now, is the failure the basically the premise the government could ever stop the fiscal expansion once the capacity constraint is hit. So you have the money drops, you have the helicopter drops, you have the checks, you have the tax cuts, arguably
quite justified during the worst of the COVID. Is the core analytical error the notion that after you hit that capacity constraints, that governments have the internal capacity to say, Okay, we've hit that point now where we have to raise taxes to stop.
The check Democratically.
Democratically elected officials are capable of saying, you know what, we've hit these capacity constraints and now we have to unwind the checks.
I don't think that. I don't think congenitoually they are able to do that.
That's what I'm saying, is that where that where the analysis breaks.
Well, that's where the that's where the proscription breaks do That's where the future, if you like, is so scary because well, actually, in the US, for example, the budget deficit attached itself from economic reality before COVID hit in chance first term, and that's when you first started seeing such a deficits heading to six percent of GDP in an absence of a recession or a crisis, and we're at seven percent of GDP. I was looking to be IMF numbers. Before I came in, you were seven percent
of GDP. When unemployment is this slow, there's no appetite. And if politicians try and do it, and I would say part of the problem with the UK at the moment, so that yields at twenty twenty eight year highs. It's not that they haven't tried to do it. They have tried to do it. But if you it's a very fine type wrote clackating the bond markets and taking off your electorate so much that you're on your way out to do Bai. Well, you know you're on your way out of government.
You're saying you're on your way out of the election.
Taxpayers are some of them are on the way out to Dubai and then then then looping back somewhere else at the moment, but you're you're out a government, and this is the problem. One of the problems for the UK government is the electoral electorate won't tolerate unless there's a crisis, so almost politicians need a Eurozone type Greek, Spanish Italian crisis to be able to implement the measures that everyone knows needs to take place, but electorates currently have no appetite for I.
Saw this amazing chart. You probably saw it too because it was an Adam Tuosa's newsletter recently, but it was from TS Lombard and it showed fiscal support during the twenty twenty two energy crisis in Europe as a percentage of GDP, and I hadn't realized just how substantial it actually was. Like energy tax cuts, and so of course the question now is with oil going back up and people coming under pressure, if we're going to see that same type of fiscal response, I.
Don't think you can. Well, first of all, it's even in Europe. The rise in the gas price is nowhere near as bad as it was in twenty twenty two. And they will do stuff, and they have done stuff in places like Spain, despite the European Commission warning the countries that actually you haven't got the buffers to be able to do this. They are trying to. They have been reducing vat but I quite like quite in the US it's somewhat different, just over the saying. I've just
over in Boston recently. I can see the gas price well above two dollars.
Especially in Massachusetts.
H yeah, but the natural gas price isn't it hasn't really gone up in the US. And winding back to that famous statement in the early seventies of this is our currency, but your problems to the Europeans, this is our war, US war, but it's your problem Europeans and especially Asia, particularly Asia which gets so much of its derivative chemical supplies out of the Gulf. And I saw your chart of the Urea versus the Corn Prize showing
as absolutely stratospheric. But so much of the so much derivative chemical products come out of the Gulf, especially to age Asia. I saw that eighty percent of India's ammonia comes from the Gulf. Now the Asia is in real, real trouble, and this is coming down. I mean, one thing I think that's really surprised me in the early part of the war was when I looked at five year versus five year inflation swaps, They've come down. They
hadn't started going up. So recently the two year into year a shot up, and the five year and five years started to go up. The people have started to realize this is dragging on. And why the taco your your former colleague Rob Armstrong, who invented the taco description, why the taco trade isn't working? Here, I saw a very nice quip, which is because in RAN's involved, it takes two to taco uh and Trump can announce these U turns, but they're not effective unless Iran is also
participating or dancing the same dance. So when I hear are ail analysts are commodity analysts on our call the equity guys that it's still really bullished. The bond guys somewhere between. The commodity guys are basically sobbing into their microphones because if they know, they know the inflation coming down the track here in fertilizers and food and everything.
This is the funny thing talking about all the commodity guys the doom. It's like it's knocking on our door and everyone, we'll see what happens. I want to talk more since working in the UK, I mentioned the Dubai thing, and I'm actually very fascinated by this. Not Dubai people moving to Dubai specifically per se, but the political economy generally of fiscal consolidation, which includes the possibility of leaving and when the issue that I think people would cite
across UK and across Europe is probably twofold. One is declining productive capacity, manufacturing getting eaten by Chinese competition, and digital industry that can't keep up with what's happening in the United States, particularly with Ai. Okay, you say it's obvious, and many people say it's obvious. We all know that the government needs to shrink the deficit, but it's very
tough if people can leave wealth. Taxes are very difficult, almost infamously so, and particularly in an era where the big money is being made through equity markets, not through traditional wage or labor income, et cetera. It'st I read to say. Obviously fiscal consolidation is the move, but even sitting aside electoral constraint, is there an obvious path towards reducing the deficit given the means through which the people with money can avoid paying tax.
It is very difficult. And you mentioned the UK. The UK is a very specific problem in that so many young people after the pandemic have been signed off as permanently sick. They don't even have to look for work. So the welfare Bill has to a large extent gone
out of control in the UK. And even though the labor governments here has an overwhelming majority, it couldn't get it through Parliament, couldn't get any reform measures through Parliament, and the markets, seeing that and the number of U turns they've had to do as their own MP's have rebelled, rebelling. I mean, it's very very difficult, and defense.
Especially young people right because there's the heating assistance that the old people and the triple locks, so that the pension goes up by the maximum or the whatever the maximum of three different inflation measures are it's it's the old. It's the old as well.
Right, yeah, no, absolutely, And this is one of the things which exacerbates into generational hostility tensions is that the younger people who can't get on the housing ladder see the older people protected through things like the triple lot pensions going up of wage inflation, price inflation or the minimum of two and a half percent, so on a
real escalator and clearly totally unaffordable. However, when I look at the CBO and the US is just when I look at the CBO projections of US debt to GDP, they go off to infinity, and you know this is un sustainable because infinity is not a number which is sustainable. The IMF has looked at this quite close. The only other country to go off to infinity even quicker than the US is Strangely, China and the IMF have cited
the US and China as the two basket cases. Now, the UK isn't the worst miscreant in terms of a stistical situation. France, I look at the IMF numbers. France is much worse, but it's under the protection of the euro Zone umbrella. The US is much worse, but it's under the protection of the dollar, being of the reserve currency. The bond vigilantes are woken up. They're pretty off looking around at what's going on. You know, they've got a dusty copy of rhine Art and Rogoff under their desks.
They're thinking, you were getting here, We're going over one hundred percent of GDP. We're getting near the levels of where it's a problem. And to be fair on the public sector, what they've done is transfer a lot of the excess debt which was there in the household sector and corporate sector onto their own balance sheets. But you look at these and you think, well, well, actually, you look at the vigilantes are looking to pick someone off and give them a bloody good kicking, basically to teach
everyone else. And the guild market is the weakest. Yeah, it hasn't got enough protection. It's the weakest kid in the playground and it's gonna get It's going to get beat badly beaten up at some points. And I think Bill grows. Bill grows many years ago, So the guilt market was sitting on a better, better kryptonite crypt nitro. And when you saw the oil price come down yesterday,
but the guilt price, the guilt you're going up. That is a real that's a real issue, especially as Starmer Prime Minister Starmer exits the scene at some stage soon.
That's right, we're recording this also during local elections, just to make sure the maximum amount of stuff possible could happen between when we record this and what it actually publishes. But actually, okay, you say the bond vigilantes have woken up, and one could infer from that statement that, like, we are now in a longer term period where bond yields are going to be higher and inflation is possibly going
to be higher. But on the other hand, it feels like the news cycle is so compressed nowadays, and new stuff is happening all the time, and there's so much
chaos in global politics. It also feels really difficult to have a sort of parademic is that a word pard You know, it's hard to have a longer term view on the market in the way that one could have an ice Age thesis in the early two thousands, is that possible for you now or are you sort of all moving in the short term like everyone else seems to be.
I think it is possible, at least I'm trying to make it possible. But as you say, markets so volatile. I was reading that the recent rally in the equity mark ten percent plus rally, this was the fastest ever rebound ten percent rebound after a ten percent correction. And it's particularly on the equity market. They have become so fixated with the byThe on dips mantra that actually the freed of God are backs. There will never be recessions again.
If there was a recession is because of the pandemic we can't actually remember two thousand and eight, which is a consequence of a very long period of growth building up excesses. No, I think there is a place for a long term theme, and the long term theme is actually it's fiscal continents, political weakness, and eventually the monetary
authorities having to monetize away these debts. Because in the US, when you're paying four percent of GDP as government on your interest payments, that is absolutely I mean ten years ago, I was looking at the chart ten years ago, it was roughly the same as the Eurozone at around two percent. It's absolutely crazy numbers. So the endgame for me, I can remember twenty eight percent inflation in the UK and
in the in the seventies. In the seventies, I certainly think we go back everywhere to double digit inflation.
Because really the headlines to the episode.
Yeah, no, I think fiscal dominance, which is there. The central bank beers will have no other option. I mean, you could get some consolidation on the crisis, but I think that's where we're heady. Just monetize away this. They'll cautured different lead.
Sure, they won't say and now we are monetizing that.
Yeah. Yeah.
Do you ever do you ever talk to either new colleagues or clients for whom talking about two thousand and eight, Well, we talk about the nineteen thirties great depression, because this is like I feel like this is happening more and more in my life, something that I take for granted. Oh well, remember when Lehman and I might as well be talking about credit anstall or something like that.
No, exactly, And with the retail participation in the mark and you get these one day options which I don't understand it's so short term, but having I mean, one of the advantages of being in finance since nineteen eighty two is I can remember the Asian crisis, which is one of the first times I got myself into deep trouble, being banned from Malaysia after writing that, are you still banned? I don't, I don't know. I don't feel for you.
But what you and this relates to the AI theme, which we could do, is going in nineteen ninety six writing that the Asian miracle was basically a pack of cards waiting to collapse. And I had my bookshelf, this book from the World Bank, Thailand's Economic Miracle, Sustainable Growth and Development, And you just think I've seen me so many times before and going into the I remember going in the late nineties going around the US saying, look, this is a huge bubble which is going to collapse.
It's very similar to the Asian crisis. I'm basically my boss, the chief economists, having to restrain the clients from punching my lights out. But when I read what I do now about the AI, et cetera, I just think, yeah, I've heard this so many times, and maybe that's maybe being young is better because you don't have that baggage.
Well, being young, I think you're more of an optimism.
So you've got a lot less gray hair and your beard than I have.
Yeah, but more than I had a year ago. So I'm catching up these podcasts.
Pick up color the cameras here a pretty good black, make a black white, make it black and wise.
I can confirm though when we started this podcast, you did not have any gray hair, and it all sort of set in over the course of ten years.
I noticed more.
Since you mentioned AI and since we were talking about historic parallels, there seem to be a lot of similarities with the dot com bubble, just wild enthusiasm for a new technology and this expectation that everyone's going to be
making money. On the other hand, the argument against dot com reducs is this idea that well tech companies have very very heavy valuations at the moment, but they are actually earning money, and if you look at the multiples, they are nowhere near where some of the dot com companies actually were. What's your thinking there? How much of a parallel or analogy is this?
I mean, the main parallel I would draw is with the telecoms. Part of the ti SO dot com bubble was more TMT telecom media and technology. People forget it was a bit it was a bit wider. But the telecom side was quite similar to what you're seeing now with AI because they actually went out and dug trenches and laid cable. There was a Capex boom, and if you were selling cables in the same way you were selling in the video selling semiconductor chips, you benefited from
producing picks and shovels for the goal rush. Essentially, there was real profits there on the telecom side at least. But the problem is the euphoria is the narrative is so compelling that you're given these companies are given free money essentially, although Oracle it's not quite so free anymore. But you're being given free money and you go off and spend it on it. You blow it on Capex, which isn't necessarily going to be profitable ten years down
the road. And what you've got is basically when you look at the US I T megacaps, they've gone from being hugely free cash flow generative to zero I saw Chat twenty twenty seven. Zero. It's gone. It's being blown. Now. You might say well, they're at least they're not borrowing very heavily. But actually it's transforming their balance sheet. So I just read your quote. I brought a quote along here. I wrote it down so I didn't forget it. But it's it's about it could be about the AI transformation.
So not so long ago, a leading experts O pine that, and I put this in mind, this sort of thing I write in my notes the opine that in retrospect, we will look back and recognize that the US economy was experiencing a once in a century acceleration of innovation which propelled forward productivity, output, corporate profits, and stock prices at a pace not seen in generations. If ever, now
that absolutely applies to what is going on now. That's quote from Alan Green Span thirteenth of January two thousand at the New York Economic Club of New York just before now is that collapse? Now all that was true. And by the way, I was reminded of that quote reading Jeremy Grantham's book Making of a Perma Bear, Another Perma Bear. I went to his book launch. And I don't read many books. I'm quite lazy. I don't read many books. I thought as I was going to his
book launch, I better read it. And he had some of these great quotes from Bananky and green Span, which they probably like to erase from people's memory, but that equally applies to now. It is absolutely transformational. It probably will be transformational. Doesn't mean you can't have a stock market collapse.
Yeah, when bears have a book party, is it a picnic?
Be it's a good one.
Thank you.
Sorry, I was trying to think of a Bear that was the best record.
So many different directions we could go in. I want to ask you, there's something about the twenty tens that I've thought a lot about. You're talking about qi Qui ended in the mid twenty tens. Yeah, Now, I mean, first they stopped cutting rates. You know, it was a series, it was a sequence, right, But then they actually started shrinking the balanceyt it didn't affect stocks. Stocks just kept going up. And now we look today and again the stocks have at least in the US, but stocks are
doing all very well. This is despite the fact that rates are the rate picture is nothing like it was in the beginnings of what you characterized as the ice age. Did that make your question anything? Have you revised any past views in light of the fact that it turns out evidently that ultra low rates and quantitative easing may not have been such a precondition for these incredible equity market games. How do you reconcile that?
I think, well, certainly, back in the prior to the COVID recession, the quantity of easing for quite lengthy period. If you like got things going, got that momentum going, and one of the most profitable ways methods of investing is just momentum trasure. I sit near head of Quantity Andy Lapthorn, who I've worked with for thirty years. Last month he's actually trying to move a few desks away from me. But I know, looking at his quant work,
momentum investing is absolutely fine. And actually, if I was participating, if I was fund manager fully invested, I'd be quite happily with that investment style. But looking at the technicals for when to get me out is the macro story changing? Is something changing. I've been writing recently that yes, profits are booming in the tech sector, but actually the second derivative is starting to turn over because you can't go parabolic forever. It's the second derivative is starting to turn over,
so still very healthy profit zone. It started to slow and when you've got bubble conditions, then is this something the bulls should be looking at? Even if you're a bull, think well, actually that that is a change I should be watching. What I would say at the moment is I think when did earlier? I think the retail in particular, which certainly after the liberation trade bearmark came in early before the professional investors. They've been consistently the ones to
drive the market back up. And it is a bit like what causes big bear markets are recessions. It's when and usually when you're at the peak of the cycle, you're on the wrong valuation, wrong forward pe, and prices collapse go. If you're a copper stock, normally at the peak of earnings, you're on you're p on four and
so you're geared up for the collapse in prices. They have some memory there, but what tends to happen in bubbles you end up on a twenty three like the SMP on a twenty three times forward p at the point of recession. So you're the wrong earning forward earnings and the wrong pe, and there's no acknowledgment that there could be a recession out there, apart from the AIS spending on investment, which could collapse at any We've seen it before. Another deep seat comes along, something happens to
blow that narrative up. But I had side of that. You look at the US economy and you look at the conception. Yeah, last year it's seen no employment growth when the economy is toddling along quite happily between two and three percent, and not just because of the public sector. Private payrolls ye're on year slowed to zero. You're thinking, yeah, yeah, it is having an effect here, has a positive effect on some ways on UNI labor costs, but this is
really undermining consumption. So US real household incomes are up half a percent year on year, half a percent. The consumer spending in real terms is still up over two percent. Why is that the savings ratio in the US and the last year has collapsed from over five percent this time last year to three and a half percent. Now,
that is as low as it. The only other times it's been lower is as people were spending the COVID checks, So it got down to two and a half percent or just before the two thousand and eight global financial crisis, when you had that credit bubble, the consumer is totally tapped out. And if you get a wave of inflation
coming through the economy through cost push. Last time, companies just whacked up their margins that they put up their prices whacked up their margins as well, an unprecedented fashion because margins sort of contracted as costs went up, they didn't. It was absolutely unprecedented greedflation. And the saluis Fed named the sectors which did it, Retail, wholesale, and construction with
the three big contributors to that whole economy level. But people had pandemic checks there, so companies could get away with doing it. Then this time around, this wave of cost push pressure comes through, our company's going to be able to get away with it When the savings ratio is already solo. Is it going to start squeezing the corporate sector margins which are ludicrously, obscenely inflated in my view.
And when these margins start, if these margins start coming down because they can't pass on these price increases, will they then react to that by cutting jobs and cutting investments. So could the one surprise we get is actually the economy outside of AI investment is far weaker than we think and actually could tip over into recession. Now that could be a real surprise because that could take down the AI sector as well. It's not just an exogynous force.
So I think that's an interesting that's an interesting black swan because no one is thinking this or price could cause a recession.
One question I want to ask, given your long career, when were you most worried about the future. Is there a particular moment looking back where you were really hitting the panic button.
I tend to stay very close to the panic button a bit two to close. Some people sir, that's your job. I tend to see problems around the corner. Actually instead. I was on a conference call with clients yesterday and I said, well, probably the most bearish thing I can think of from my side is I don't feel as bearish as I have done in the past. I struggled to see an immediate catalyst for collapse, and the positive
narratives are always very compelling. I remember the time I was most worried globally was two and six, two thousand and seven, where it was obvious to me and I don't understand much about crypto and all these complicated things, or the details of air. But I actually got to the bottom of CDOs. And this was before the Big Show film where they made it a bit simpler. I actually understood CDOs. I went to a CDO conference in two thousand and two thousand and seven, and I was
amazed that they weren't optimistic. They were getting really worried. And I just thought, as a macro person, when someone like Bananke says were asked about the housing bubble, I guess, I don't accept your premise there is a bubble, and there's never been a nationwide house price recession in history. I just say, you're an idiot. You should not be in your job. Basically, And yes, he was the right
person at the time when the bubble burns. But if you looked at his because people said, well he did the thesis on the Great Depression, you looked at his thesis about the Great Depression, there was nothing about the
credit bubble that preceded it at all. And similarly, he just did not understand the and where I'm not a big fan of central bankers or the banking improved dramatically after I left it the quality of the quality of the people there, because they just so reluctant to admit they're just constantly screwing it up and making it worse. For benevolent reasons. They're trying to make it better, but they make it a lot worse. And quantitive easing, i
am my view, made it. They might have been an argument for doing the first quantitive easing, but just to keep on going poor Volka viscerated just before he died, a viscerated the fact by saying, you know you can't measure inflation that that closely it. You've got a two percent target for inflation. Anywhere between one to three is okay essentially as long as it's not accelerating off, and this is we're between one, broadly between one and three now. But he said we were getting down to one with
measurement errors. It was ludicrous to try and push it back up to two percent. You didn't need to do that. And personally I just think central bad because needs to be rained quite closely.
I do think in retrospect, when we look back to the sort of late twenty tens era of inflation, it felt pretty good, even though we were target and I have.
A lot of thoughts the idea of undershooting and is never and I, I'm on record, is saying this not just in retrospect. I've never understood people whining about it too little inflation. So all right, seeds.
Well, Albert, that was fantastic fun. Thank you so much for finally coming on, as.
It's been a real pleasure. And I hope I.
Have bears are fun. You're a pleasant guy.
Well, people who read my stuff think I'm really miserable, but I'm actually a very happy And I went and I wear a nice shirt trying to cheer people up weirdly, but I haven't depressed too many of reviews.
Yeah, I apologized, but I've got.
Joe.
That was really good fun. I'm glad we could finally have them on.
We've been reading Albert really literally for decades or at least over a decade now really fun to finally.
Really are fantastic.
YEA.
One thing that stood out to me, you know, I was thinking about what he was saying about the US savings rate and the ability of companies to push through price increases, and earlier this week I was reading the earnings transcript for Colgate and they were talking about packaging costs going up quite significantly because of higher petrochemicals prices, and also guiding their margin lower for the full year, so basically saying that they're going to absorb the costs.
And there was one analyst on the transcript who was like, well, why don't you raise prices? And they basically didn't, you know, classic executive style. They didn't really say anything. They were just like, if I were you, I would incorporate the lower margin guidance into your algorithm. Leave it at that, but you know, like there might be something there totally.
Can I just say this is going to be the type of thing that someone says at the very top and so forth. But before we flew to London, I downloaded Ray Curse Wilds The Singularity Is Near, a book about this is published in two thousand and four, in which he predicts that in the first half of this century we would have machines that are more intelligent than
humans on almost every scale. But one of the things he says in the book part of his theory is that computers are going to keep getting better and better, and as they get better, more money will flow into computer investments because they can do more things, and they're War's law and all that. That actually the rate of acceleration, the derivative of the derivative can actually keep going up and up and up until you do get that vertical.
And so now I'm thinking, like, we all know, the stock market would not be nearly where it was where it is right now if it weren't for AI obviously right might be in a bear market, might be in a recession.
Yeah, the economy wouldn't be nothing.
Like it is now. But now I'm like in that mood reading this so like, and Albert said, he's like, I feel a little weird right now because I don't know what the obvious bearish catalyst is. I'm in a little bit of a weird situation. And me I'm reading this book. It's like, what if, like earning is literally just go to infinity. Maybe it could happen, I don't know, but no.
If Albert Edwards feels pretty good about stocks right now that.
I'm talking about how earning should go to affinity, yeah, this is the side that maybe these are the types of episodes we record nearer the top.
Okay, shall we leave it there? Yes, Okay, this has been another episode of the All Thoughts podcast. I'm Tracy Alloway. You can follow me at Tracy all the Way.
And I'm Joe Wisnanhal you can follow me at The Stalwart. Follow our producers Carmen Rodriguez at Carman Arman, Dash, O Bennett at Dashbod Killbrooks at Killbrooks and Kevin Lozano at Kevin Lloyd Losano. And from our odd Loot's content. Go to Bloomberg dot com slash odd Lots. We have the daily news love learn all of our episodes, and you can chat about all of these topics twenty four to seven in our discord Discord dot gg slash onlines.
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