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Hello and welcome to another episode of the Odd Lass podcast.
I'm Jill Wisenthal and I'm Tracy Alloway.
Tracy, we can't go too long without talking about the role of the dollar in the United States, the pillar of the global financial system, whether there is some threat to it or not. We are recording this July seventeenth. It has been a fresh week of headlines about say, independence of the Federal Reserve and all of the things that we talk about all of the time, so we sort of need to return to this central question.
Yeah, the interesting thing about the Fed chair drama is when the initial headlines came out about Trump possibly firing Powell, the big reaction wasn't the dollar, right, There wasn't a market, it wasn't even bonds, It was the currency totally.
And I think this is one of those things where I don't know, we don't know what's going to happen, whether Trump will actually try to find cause to fire Powell. Who knows what will even happen by the time people are listening to this episode. But you know, I think people get the sense that with the Fed here, with many other things, there is this sort of like erosion of an existing set of norms or expectations, et cetera.
And so you know, I think arguably some damage, for better or worse, has already been done to the existing institutional arrangement. Everyone around the world is paying attention now to mention the sort of arbitrariness or volatility of tariff policy, ongoing wars, and so forth. Much is in change. We live in interesting times.
Here's what I think go on. So it's a cliche in financial market commentary to talk about a major turning point, yes, because we've seen people talk about the dollar for decades. Yeah, exactly. But that said, I think what's different about now is the number of like long term secular trends that appear to be reversed on the move.
Yeah.
So you know, there's globalization going from deglobalization. There's population growth going to shrinking populations. There's higher inflation instead of years and years of deflation. And the interesting thing about that is, of course, how are people going to react to that? How are markets going to react to that, especially when they've grown very, very used to the previous situation through you know, back testing and all of that stuff.
Totally. And I'll just say one thing which makes this very interesting timing wise from the perspective of investors, because there are a lot of trends that seem to be, if not going in reverse, at least a new direction,
et cetera. One trend that hasn't really gone in reverse, however, is you're still getting paid a lot to own US tech and you know US markets, they're up solidly on the year, they are underperforming, which that is new Global equities have outperformed US equities in large part this year. But this basic idea that for all the money to be made is as an investor is still in like a handful of US companies like that in a way
surprisingly is still kind of intact. And the question is will that be like the last sort of the shoe to drop, We're the end of US exceptionalism. From just the perspective of a globally oriented portfolio manager, I think that's.
A good thing to watch. I'm gonna pull a page out of Bob Bracket's Commodities Energy Transition book and say that these types of transitions often take longer than people expect, and you shouldn't expect everything to happen all at once. It's going to happen in stages, so there's a lot to look out for, a lot to discuss.
Well, I'm really excited to say we have the perfect guest, someone we haven't spoken to in several years, but always one of the most intro guys around. We're gonna be speaking with Inego Fraser Jenkins. He has a market strategist at Alliance Bernstein. He has recently published a new quote book that's public online about the sort of like the big trends of the year, including a big focus on the sort of like question about the stability of the dollar or a post dollar universe and what that could
look like. So, Inego, thank you so much for coming back on odline.
Thank you very much. Be good to be back on the show.
Tell me about your books. What are your books and what is the theme of this year's book.
Yeah, so the book is a way of drawing together in one place some of the views we have on
some of the biggest questions that investors face. So is actually some of the issues that you've mentioned already in terms of globalization turning into deglobalization, of population growth turning into a slowdown in working age population, and issues around interest rates and inflation being different than the norms of the last thirty or so years, and all these issues sitting background, we think there's a strong case you made that some of the norms of the last thirty or
forty years really are unwinding and either run their course or going into reverse. And then one of the particular issues that has really dominated the client conversations that we've had in the last three to six months has been this question you've been talking about in terms of US exceptionalism, Has it ended? Does the dollar change in terms of its role as a reserve currency. Is the prognosis the dollar the same as prognosis for US equities or are
these just different things? And these kind of questions we really want to get to grips with and offer some views what investors can do about them.
What kind of timeframe are you looking at here, because I think we often don't talk enough about time frames, and reading some of the book, some of it I found, you know, a little bit worrying, a little bit depressing, because you're talking about all these long term challenges that the entire world basically faces. And so I'm thinking like, what is the time frame here? Is on a long and timeframe we're all going to be dead anyway, or is it in the next twenty or thirty years.
I think the interesting thing is there are a bunch of different forces acting at the same time of markets. Now, all these are strategic forces, but the one's talking about in the book that is, and so they can be thought about as acting over a say, five to ten year timeframe. And of course anything that involves a conversation on demographics occasion build just kind of close their ears because they think, well, it's so slow moving, that's surely
that's not going to matter. But actually, if it's happening in conjunction with other things, then there is an argument that that strategic arison perhaps isn't quite so far off as people thought. And when that view on deglobalization, of example, is tied with concerns around debt levels, it's concerned around
the shift from globalization deglobalization. These are things that have suddenly zoomed up the list of concerns and investors have and so I'd argue that although one might have thought that these issues that were sort of further off in some sort of notional strategic future. Then in fact, what we've seen in the last six months or so is those longer term issues become things that dominate the near term. So that's a longer term future has become issue a few people to face.
Now, just on the demographics point, you mentioned that a lot of you hear that word it's okay, the slow moving trend. It is actually those staggering the numbers when you look at so you know, obviously people talk about the population trajectories in China, aging in the waste, but even like I saw these charts of Latin American population growth, like fertility is collapsing everywhere. I mean, it's really extraordinary, and it's it's not happening slowly.
Yes to the changes there, a'bsolutely having very rapidly in terms of the context of past changes have seen, and I think that people just need to be aware of just the scale of the support the demographics as given
to growth rates of Alaska thirty or forty years. I've seen this extraordinary period when there's been globalization that's brought extra workers into the sort of same environment in terms of the economic arena that they work in, and you've had a large kind of cohort of people who've all been in the workforce, and you've had an increase in the female come participation ratio at the same time, and so you have a series of things that have meant
that there have been many more workers available. And I'd argue that even before you're going to get into the issue around deglobalization, that demographic shift alone undoes a very large part of this increase in the global worklupool. But that we've seen through the process of globalization since the eighties. Now people can you get very negative about this, but you know, it isn't an outlook that implies a bearish where a prognosis for the future, but it certainly changes
the base case where you think kind of growth lies. So, for example, if you look at the sort of prognosis from here onwards, we have an outlook of an extra of ten to fifteen years, where on the UN population data at least that the US working age population is still going to grow, but it's going to grow much more slowly than people have been used in the last of thirty years or grown about zero point two percent perannum. But in Europe the working age population is going to
shrink at about half percent pranum. In China, it's really going to shrink quickly at about one percent paranom between now and twenty fifty. So yes, I mean other forces are happening in parallel with this kind of clearly, but you know, as a base level effect, that does change one's view on what growth rates look like. No, beginally in that context. That yes, from an absolute perspective, that's
setting US growth slows down. But back to the other thread that you started this podcast with in terms of the US exceptionism point, although growth is slowing in the US, the base assumption that we have and the most forecasters have is working age population does still grow ever so slightly, and that is a better prognosis than say in Europe, in Japan, in China where it's shrinking out right.
Can I ask about government duck because this is the other thing that you know, people have been talking about for a very very long time. High deficits actually in the developed world, I think, the highest level of debt since like World War two something like that. How do you reconcile I guess the warnings over debt driven instability or impact on economic growth with the fact that investors
keep for the most part buying government bonds. I know, after April second, we did see a spike in like ten year treasury rates, but it came down a bit after that. It's actually pretty close to where it was in early April now. But it does seem like there is a broadly continued appetite for debt. So when would that actually become a concern for investors?
Like keep being asked this question by investors in I bet been a common question and really for the last a year or so. So, yeah, you're right in saying that the level of net debt to GDP is the same as it was in World War Two. I guess the first thing to say about that is not just a US problem, that's actually a G seven wide problem. So G seven debt in terms of net debt to GDPs back to where it was at the end of World War Two. Now, of course, it's been getting there
for some time. It's been rising really kind of thirty years, and that hasn't mattered in an environment of falling interest rates. But if there has been a definitive turn in the interest rate cycle, then that obviously starts to become a problem. People like to fret about these debt levels, and certainly other things equal, it implies that sovereign issuers, including the US,
are more risky than they were before. And so you could say, well, maybe there should be a pricing a sovereign risk and a should be a steeper yield curve. The problem is that so far those fears have been utterly swamped by the demands that investors have for liquid assets, and say for liquid assets. So you have seen attempts to price sovereign risk, yes, arguably in April in the US, a couple of years ago in the UK around the
LDI crisis, prior to the last French election. If you get these episodes where the market tries to price sovereign risk, but it's very hard to know at what point that becomes a problem, because this is a can that obviously can be kicked down the road a long way. There was a fascinating paper published by Nil Ferguson earlier this year where he made the argument that basically is not
net debt to GDP that really matters. It's the relative size of the debt service costs compared to defense budget, and the reason that seems like a relevant thing to talk about is last year was the first year where the US service costs on debt exceeded the US defense budget. And then he goes back and looked at previous examples of great powers that have seen this kind of crossover take place and bad things happen.
And whether that is the example of.
The UK, or the Ottoman Empire or the Habsburgs, a whole series of historical episodes have led to great powers no longer being able to project hard power if the debt service cost is much larger than the defense budget. Now, the interesting example that I guess is vaguely relevant from that is most relevant is the UK. In nineteen twenty, the debt service cost became much greater than defense budget. That had a big impact on the ability to project
hard power. Now what's interesting is UK managed to reverse course and actually end up with a defense budget again larger than interest service costs and debt. But it did so through inflation depreciation and through the loss of reserve currency status, which I guess is the kind of key
thing that makes irrelevant today. So I guess conclude in terms of how one thinks about this, you know, I think the sovereign risk is something that perhaps should be priced given the massive uncertainty about you know, how that risk is perceived in the market versus demand for liquidity. I think one's just left with a kind of directional answer saying, well, yes, at some point the yield cuve should steepen, but it's very, very hard to make a
tactical kind of call around that. I think perhaps a more pertinent way for investors to actually think about their in practical terms is it it means that the dollar is less of a safe haven asset but than it was before. And that's the key point of Really it's not so much in terms of up with a particular return forecast on a dollar being different from where it was, say six months ago. I think has become almost consensus across the street that people are now more naked than
dollar than they were, say six months ago. But I guess what's interesting is the riskiness of it and the idea that risk the dollar are now more correlated with risks to other risk assets. So that implies a different approach the way people should form portfolios.
Okay, let's get into this because I think this is the really important point, which is that people talk about some sort of you know, risks to the dollar, risks to the dollar's status, And so I want to talk about more like setting aside timing. Maybe it's fast, maybe it's slow, maybe it's a medium term. What are the data points that you would look at to say something is happening. Is it dollar levels against other currencies? Is it dollar share of transactions, is a dollar share of
sovereign savings? Or is it And it seems like where you're going with this, is it the relationship whether it's inverse or po two risky assets. What are these sort of like fingerprints of what it would look like when it's like, oh, something has meaningfully changed about the way people view the dollar in their portfolios.
So first we'll got of pick up in terms of relationship with dollar and other assets. And so you've seen just the lasting a few months episodes when the a dollar has declined at the same time as that bond deals have gone up. Is a more risky environment and a dollar hasn't behaved in a safe haven asset in that kind of environment. You've also seen a more deeply negative correlation between dollar and gold obviously priced in dollars.
That implies that the dollar's seen it as less of a safe haven asset, and you've seen an increased correlation between assets such as gold, silver, platinum, and bitcoin, all things which are plausibly possible, non fear, zero duration assets that you know that through a certain lens, share certain characteristics. Anyway, so you've seen this market behavior where more dollar risk has been priced. At least there have been episodes of that.
What I think would really change this though, and make it more of an immediate concern for people, is if there are large flows out of US bonds from institution investors. Now there's been a lot of talk about this, There's been a lot of coverage of it. I've been asked about it in many many meetings, but so far, as far as we can tell, that is much more talk
than actual flow. I mean, there have been episodes, for example, where the Japanese pension system or elements of European pensions have been selling dollar bonds, but the numbers are very small in the scheme of things. So so far, what you're still seeing is a demand for safer, liquid assets. It's still a dominant we have forces, but that's the
thing that we really look for for a change. I mean, I think one thing the background is one has to bear in mind there are some very different kinds of risks here that are all being conflated, and the point of the same direction where they come from, I guess a different basis. So one is the concern around fiscal and ability, as we discussed, so that, yes, it's certainly a concern, but you never know what the timing that's
going to be. Separate from that is a more geopolitical imperative, which is the need for countries which are arrivals to the US to try and dedollarize in some way. Now the problem is there is no viable alternatives. That means that the flow into other alternatives is going to be slow. We've obviously seen this in the increase bidding by central banks for gold. I think it's and I think that
could spread to other kind of assets as well. But that's a sort of non market driven, more geopolitical concern that.
Can carry on.
And then you have specific investor concerns, you know, when there've been suggestions from the US administration that perhaps we can apply some kind of taxes or charges on foreign holders and US assets, and that has certainly grabbed attention but people are backed away from that. So it doesn't seem to be in a media concern right now. But it's three very different things pointing the same direction, which is for there to be somewhat less trust in the
dollar as a safe hay. The biggest thing in its favor, though, is that growth in the US seems likely to be stronger than growth in other regions, and the lack of another alternative means the outflows are going to be slow.
I think.
So this is a drip Freed story that sits in the background.
I think we have for many years to come.
Can I tell a story please? I swear it's relevant to this conversation, But you've probably heard this story before. Actually, Joe, one of the best conversations I ever listened to was between Howard Marx and Mike Milkin and the Milkan Conference in LA and it was basically about how the investment
landscape had kind of changed over their careers. So in the nineteen fifties and nineteen sixties, if you put your money in blue chip stocks like the nifty to fifty or something like that, everything was fine and you made consistent profit. But then the market crashed in the early nineteen seventies and you had high inflation and that kind
of changed everything. So higher volatility along with higher inflation ended deterioration in real purchasing power, which meant people lost like ninety percent of their money at that time, which is crazy. And Mike and Howard's argument was that this was what caused the explosion of money managers and also the birth of the high yield bond market because people realized, well, you can't just buy polaroid stock and more and expect a consistent return. You have to be more sophisticated about
it and measure risk against that return. So I guess my question is, are we talking about something similar here in terms of a see shift in investor behavior. So maybe instead of weighing risk against return, you weigh risk against real returns or something like that.
I think that's a strong narrative that will carry on for a long time because people have been very used to an environment where for decades and decades inflation has
been benign. It's been readily low volatility of inflation, inflation has been going down, and at the same time we've seen strong returns both from equities and from fixed income assets, and most of the time and equities in fixing can manage to have a negative correlation at between them, and so the overall return versus risk that you've achieved in
real terms has been very strong. Now, I'm absolutely not suggesting that we face a bearish outlook, but I think we do face a harder outlook, an outlook where there are multiple structural forces that imply the level of inflation will be somewhat higher and some more volatile given the constraints on growth. But that we spoke about in terms of demographics, etc. We're given where we are in terms
of the valuations across most asset classes being high. The likelihodea is that the real return achieved from the portfolios that have done well for many decades is going to be much much lower. And so it raises this really fundamental question, which is actually what is the objective of most investors? You know, is the objective to maximize return per unit risk? Or is it to preserve real returns? Or another way of thinking about it is what is
the definition of risk that'sulting relevant here? I mean, is risk the expected volatility of my portfolio the next ten years, or is risk the risk of a loss of purchasing per of the next ten years, and I would suggest that for nearly every investor, if they think about it, it ultimately it's the latter of those two that's a.
Much bigger issue.
Wait, why not both?
I mean, ideally one would care about both. It depends how many degrees of freedom we think you have, because you know, unfortunately, if the expected real return across assets is going to be generally lower, if the correlation amongst them is generally higher, then eking out a certain level
of real return becomes much much harder. So I think actually there ends up being a direct tension between the measure risk as expected of all of the portfolio versus preserving purchasing power, because if the thing that really matters to you in the long run is preserving purchasing power, I would argue that actually you probably have to take more risk in the sense of expected vole And even though I'm aware that's a horrible thing to have to explain to people and it might sound very cavalier at
a point when the shita pee is thirty five times and I'm not spelling out particularly be con't bullish a long term outlook, but I think you'll have no choice. You have to think about taking more risk, because the other option is to underperform inflation, and that is more painless to people.
I mean, the good news.
At least in that is that people can choose how they want to take that risk, how they want to partition it, what kind of risks do they believe in, what risks are consistent with the liquidity that they need and the time horizons they have, and the beliefs they have, et cetera, et cetera. But in this tension between the two different kinds of risk, I think is that need to preserve we are purchasing power. That is the real focus, and that is a shifting governance ultimately for many vestetypes.
So, you know, looking at your big themes this year and thinking about this idea of a sort of a world where the dollar is less important or less dominant, or less safe or something like that. One of the things that you mentioned is geopolitics, and of course there are multiple wars going on. There is the weaponization of the dollar. Of course Russia was on the other end of after its invasion of Ukraine. But what about politics.
I mean, we always talk about geopolitics, but I mean also interested in like actual politics and what's going on in the United States right now. The attacks on federal reserve independence. That's not geopolitics, that's politics. But it could shake people's faith in the dollar system. Other you know, shackles like that that the government has put on itself to maintain some sort of stability, or even just sort of the volatility and trade policy, or the fact that
the government, you know, passed another gigantic tax cut. There's no political appetite for meaningful change in the debt trajectory. How does politics, domestic politics play into global perceptions of dollar stability.
I think there's two avenues here.
I guess one avenue again is back to this topic of physical sustainability. And if there is no appetite across parties to really meaningfully change that fiscal contrajectory, then one is left with this question of how sustainable is the debt? Can this can be kicked down the road by what are the ways out? And I and ultimately I think that inflation is the most likely route out. I think you have to be hugely optimistic about the growth that can come from AI in order to have a view.
There's an alternative way out. And the second I guess is this question of trust in the US from the point of overseas investors, and there certainly there have been
points where that's been shaken. So I was doing a series of marketing tours around global clients at the point where all the discussions taking place about should there be some kind of Mara Laga accord and potentially changing the status of foreign owners of US debt And Okay, it looks like that's been backed away from my suggestion and suddenly hasn't come up in meetings for a long time.
So maybe that's not going to happen, but just the fact it was raised, you know, at the same time that there is this concern about physical sustainability and there are geopolitical forces which are very strong to try and find dollar alternatives, that I guess sort of feeds this kind of view that perhaps the dollar has less of a safe having status than did before. I mean, the big caveat is it depends what can I risk we're
talking about here. I think if we're talking about general business cycle risks, then people, you know, I think, generally do take the view now compared to say a year ago, that the dollar is more risky when things get really bad, and when there's a geopolitical shock, often in a quite short term and nature thankfully, then you still see people flee to the dollar, and the dollar rally in the short term over potentially large shocks.
Since we're talking risk premiums and political or geopolitical instability, one thing I wonder is we're basically talking about how the world is changing and norms are shifting, and I'm kind of wondering, could the norms or could the response from investors change in a more unexpected way, in the sense that instead of seeing risk premiums go up because everyone is nervous about instability or big shocks or whatever, maybe everyone just becomes really used to it and you
don't see higher risk premiums priced in. I mean, that's a consistent theme in market, right, Something major happens and then something similar happens later and you don't get as big a reaction. Is that a possibility here?
I mean I think it's possibility.
I mean, I'm not sure that's enough to tell one super bullish in the long wor wace that's fair again, I you know, it gets just to stress, you know, I do think that the US market and ob equities are going to produce we have positive real return, but
valuations today are high. So I would argue that you know that, yes, one can outline a narrative that there does not need to be a shift back to structure lower levels of valuation because of where we are in real rates, because where we are in terms of the persistence of profitability for some of the most profitable firms. I mean, all these things that justify valuations where they are. But to justify a shift upward in valuations, which I think is what you're kind of getting to, been a question.
I think that would just be really tough. So, yes, I can get to a positive return outlook, but yes, that's driven by views on where real earnings go, not by multiple expansion. I think that would be a hard core to make.
Joe has a complicated relationship with gold. But when we're talking about real purchasing power, what exactly are you advising people to buy to or hedge to preserve that purchasing power.
Yeah, so there's a broad range responses and it's not as simple. But I guess in the future thing has perhaps with hindsight it was over years when both bonds and equities to pduced positive returns and had negative correlation between them. I mean, I think there's a real assets for me. Number one is global equities. I mean, as long as inflation is only moderately higher and not much higher, then there is strong evidence of equities behave like a
real asset and produce real returns. And that's a liquid asset class. So that comes number one. Alongside that, there are a range you know, of other real assets as well, be it real physical assets, or be it areas of private assets for example of private debt that has a floating rate nature attached to it. It can be in real assets in the form of real estate, farmland, et cetera, and things like that.
And then there's gold. So gold has a long one real.
Return of the last two hundred years of plus zero point two percent per anum as far as we can tell. So it's very small number, although maybe one should you say that if you're buying it because you're frightening some really risk off event, then a zero real return may not be such a bad thing.
There's a value in getting a good night's sleep. That's something that I've kind of learned like investors are willing to pay to have that sort of end of the world hedge.
Yes, although the risk, of course is the lost opportunity that becomes because in the last time, thirty years of that would be an appalling call.
I lose sleep because other people are getting richer. So you know, there are all kinds of reasons to lose.
Sleep, although in the last a couple of years obviously girls actually.
Yeah, and then I lose sleep over there too, I just don't sleep well.
I think the key argument favorite gold, and we've been pro a gold allocation in the advice for give to clients for some years. But the key argument in favor of it is that, look, yes, you want a big overweight on equity strategically, even if it's not that bullsh no outlook, but just because that gives you a positive
real return. The question is what you add around that equity position that helps diversify risk portfolio, because the problem is that if inflation does remain higher and perhaps more volatile, then bonds are not going to diversify equity risk as they have in the past. The key attraction of gold is that the correlation of gold and equities remains at
zero at different inflation levels. So it does seem to have an established track record as being a diversifier risk of equity risk that is in higher inflation episodes, and that's its kind of key roid in portfolios. Then I mean, on top of that, my goals will take the view that for geopolitical reasons and nonprofit different reasons, central banks will carry on buying it, and that might give upward support.
But I'm not going to attempt to give a number of forecasts on that because that's going to be too hard to do.
One of the biggest structural trends you talk about in more volatile future world or potentially more inflationary future world, is a climate risk. And I have to say that over the last several years, I've come to roll my eyes a little bit when I see financial institutions talk about climate. Sometimes it feels perfunctory. We've seen performative, performative sometimes in the last couple of years. And again this is not on the research side, this is not on
the investing side. But in the last couple of years, suddenly banks losing their interest in climate period et cetera. Like suddenly these client all this talk that executives love to talk about on panels in the mid twenty tens, suddenly they don't see it anymore. So I thought it was actually interesting they'd here in twenty twenty five and you're still talking about climate net zero being unrealistic in your view. From his social perspective, temperatures expected to continue
to rise. Talk to us about like why I shouldn't be cynical about when I see financial institution to talk about climate and why it should actually be you know, one one of the key pillars of risk going forward.
Yeah, So our viue is very kind specific on this, which is we want to think about what are the big structural forces that act on markets over a five to ten ure horizon, and what are the things that
really affect the fundamental risks that investors face. So, in conjunction with these other forces are happening at the same time in terms of demographic shifts and AI and worries about death and deglobalization, we also have, I think a need to think about whether there are risks associated with climate and the specific view that we have on that is that it seems highly unlikely that the world will achieve net zero by twenty fifty for two different kinds
of reasons. One is that it's social and politically really hard to change behaviors fast enough. Secondly, is the power demand of AI. So you know, so as far as we can tell, by the end of the next year, global data center power demand will be the same part demand as the total power of Japan. So we've basically added a G three economy onto global power demand and that will continue to grow. So that implies that we
don't hit net zero. The climate science seems suggest that means that it is likely we see a warming greater than two degrees. And then the question is, well, do investors need to care about this? Does this matter either from the point of view of inflation, inflation risks, supply chain risk, or growth rates. So in our book we spend a lot of time so pulling academic evidence on
what the effect is of a change in temperature on GDP. Now, the first thing say is you plot the twenty eight studies that we looked at in terms of the link between a temperature and growth. They're all over the place. It's a big bunch of points. So the first thing I say about it is there's huge disagreement about what the relationship between temperature and growth is. But the trend line through it, if you seemed to put a sort
of average line and through it is downwards. So yes, we can argue about how material it is, but there is a link that seems to be the consensus of crossed the academic works that we looked at that you know, at the margin, a bigger increase in temperature is bad for growth. Again, the question is, you know, how does matter and how do people kind of think about it?
And what's the scale of this, Because the average of all those, you know, implies a change in the equity outlook ten years forward that just simply shaves zero point two percent parannum of the global equity outlooks. That might not sound like a very big deal. You know, it's certainly smaller than the impact of demographic change or mean
reversion on an equity forecast. Having said that, the more recent forecasts are worse than the older forecasts and imply something that looks like a minus point five and minus point six percent paranum impact on equitturns at the ten year mark, and that starts to get to be the same kind of order of magnitude as demographics have on the average return the one should expect. But I'd argue that we go beyond that because the real thing that struck me it's just the scale of the error bars
around these forecasts huge. So yes, of course we can argue about what globalization and demographics and core profitability and labor versus profit share will do to the earnings outlook, and we can try our best to have models.
For those, and we have certain error bars around them.
But the error bars around climate and also AI, I would say two things are just very different from everything else. That introduced the sense of radical forecast error in what we're doing, and really implies that people need to be thinking about perhaps diversification in a more radical way, because we have path error on ten years horizons that's much wider than it's been historically.
Going back to AI for a second, obviously this is really important not just for the energy transition and the impact on climate change, but also for the economic outlook, the impact on productivity, and also of course for the equity market where we've seen the big tech giants just continue to dominate. Is there a risk or would it
be your base case that AI basically just intensifies. I guess existing market imbalances where the big just get bigger and only a select group of tech firms is kind of favored, and that presumably would undermine productivity gains broad based productivity gains.
I think the biggest issue around trying to forecast productivity gains is that with any new technology that comes along, it turns out to be really really hard to forecast what the impact that has on accurate productivity and the ability of the economics pression you know, in general and everyone across the street to forecast productivity has been really
poor for a long long time. So I guess we should firstly approach productivity forecasts with a degree of humility and certainly shouldn't rely on huge productivity gains as a justification for earnings growth.
Say that's the first thing I'd say.
Secondly is that it has to put in conjunction with downward forces on growth from the things we spoke earlier in terms of degloverzation and demographics, etc. So yes, it seems likely we do get a productivity improvement from AI, and the scale of it is hotly debated, But the question is is that enough to overcome downward force on growth from the levels of growth that we've become used to for the last thirty or forty years. And the third element is to what extent does a large productivity
gain from AI require significant displacement of jobs. Now that's a very hotly debated topic. We see, we don't know the answer to that yet. I mean, on the one hand, one per point to two hundred years of technological advance and automation, and yet we have almost full employment. There's no evidence to date that there's been a structural trend increase unemployment through all the automation we've seen since the
birth of the Industrial Revolution. Equally, at the same time, the jobs that seem most at risk from AI driven automation are those in non unionized sectors, and that seems like a different kind of risk than the one perhaps we've seen, you know, through automation ships in the last
now thirty or forty years. So I think the heart of the macro aggregate, you know, going to question around AI is firstly, what's the quantum of the productivity increase that we can expect, you know, whether that is enough to offset these downwindforce and growth elsewhere? And if you are very bullish on the outlook for AI driven productivity growth. Do you necessarily have to be a bearish in terms of the job side look? And that's very much an open question at the moment.
I have just one more question, and it's a personal one if you don't mind, but I know you. You kind of publicly declared that you're no longer a quant which is kind of funny because I kind of imagine the equivalent of the office scene where Michael stands up and shouts out, I declare bankruptcy. I kind of imagine to go at the office of a Lions Bernstein shouting
I am no longer a quant. But anyway, what does all of this mean, the sort of big shift mean for systematic investing that basically relies on, you know, back testing realms and reams of historic data.
Yeah, so, I think there is a case made that the bigger structural level that we've been in a certain economic environment for thirty or forty years, and the forces that drove that you have run their course or going intraverse, and therefore some of the rules of some that have existed for a long time aren't going to work in the same way now that does not mean the systematic investings suddenly stops working, because obviously there are firstly host
of processes that operate over shorter time horizons that don't need to take into account these huge, slow moving structural forces. Secondly, it would be you know, almost absurd, I think, to reject any kind of systematic quantitative input given the advances in AI that it takes in place, and assuming the one thing cary on working in the same way. So it's not to kind of reject with that kind of process at all, but it is I think hard to say that the general approaches that have worked are going
to carry on in the same way. Specifically when it comes down to the really hard questions around helping clients think about kind of governance, and back to this question we spoke about the beginning, which is actually what is the real measure risk that we care about it? You know, is that the volatility the portfolio or is it a
measure of purchasing power? And that's the kind of deep governance question that I think it's very hard to attack with any kind of systematic process almost necessarily kind of sits outside of that. And so as those kind of discussions that we're spending a lot more of our time on the clients spouse we think for those is where some of the biggest shifts are taking place in Ago.
Fraser Jenkins at Alliance Burnstein, thank you so much for coming on. It had been too long. It's always interesting to talk to you and read your stuff. Appreciate you joining us on the outline.
Thank you very much for hanging back on my shirt. It's for being a huge fun.
Tracy. I always really like talking to Inego. It's been too long, and I think he's probably one of the best out there. You know, a lot of people try to synthesize big picture ideas, and you know, it must be a lot of fun going around the world and talking to clients and talk about big idea. I think he's one of the best at it, and I think he's very cogent and takes that process very seriously.
He does.
I do imagine you must get the same questions.
All right.
That's so valuable, right, yeah.
I mean, I guess it allows you to weigh what's the biggest concern for people. But I just wonder. I mean, I guess you give a sort of set response each time you hear it. I don't know, or maybe you refine your arguments as you go along. I got to say, speaking of arguments, you mentioned that this book is from Inego, is publicly available. We should put a link in the show notes or something to it so everyone can read it alongside this episode.
The amount of data and interesting charts in there, it's certainly well worth anyone approusing. So we will definitely make sure that we find a way to point people to that. So I'm really interested in this question of and on the dollars, specifically about the sensitivity of the dollar to risk, right, because for years the view is something bad happens, or something new happens, or something people get anxious in the flight to dollars. And I still think you see that
to some extent, but it definitely seems true. I mean, you know, you see this recovery and a lot of assets since early April, we haven't seen the dollar. And I think you have these moments now where you have a sort of quote risk event unquote and there is no flight to the dollar, it's a flight to gold or something else.
Right.
And the FED example, yeah, well it's a really good example.
Yeah.
The two things I kind of took away from that conversation are even if we're talking about a see shift in what's happening in the world, how that translates into markets. It doesn't mean it's all going to happen at once, right, This can be a very very slow moving thing. And I guess I'm going to use the old tanker cliche, right, like, if you're in a speak boat, you can turn it very quickly. But if you're talking about these huge, huge structural changes, it's more of a tanker and it takes
some time. And then the second thing is, I think, what is actually different about this moment, and Inego talked about it at the beginning, is just the confluence of major changes. Yes, yeah, that seem to be happening. It's not just death of the dollar, potentially, it's also death of the dollar plus deglobalization plus AI plus AI plus population growth and all of that.
Now, I've been thinking about this and it's a little bit tangential to what we've been talking about specifically, But there's obviously so many changes. But even if you just take one, and one that's been on my mind lately is self driving cars. Even if it was nothing else, happening technologically in the entire world. I think you could make the argument that self driving cars, for example, will
massively restructure urban landscapes. Right the way that we arrange cities and suburbs and excerbs has the potential to change massively if people don't.
Have to drive anymore.
And this is just one thing, and it actually doesn't really get talked about that much, but if you actually follow through, the implication is actually big. But there are so many things happening right now. That's just one minor one that doesn't even get that much attention. But add in self driving cars, add in AI and the effect that that has on disrupting the white color workforce in some way. Add on the rise of a sort of domestic political volatility and the attacks on the FED and
so forth. Add on the fact there are multiple wars going on, etc. Add on you know, the fact that birth rates are collapsing.
This is a very long list here, Well, this is a lot going on.
There's a lot going on, and each one of these has the potential to be and they're all real.
I think you need to travel around the world talking to clients about how self driving cars are going to impact urban planning.
I'd love to, you know, I think we should do We should go around the world and do live odd lots events. But we don't have to ask question. We just get to hear what everyone else is interested in the audio.
All the clients.
Yeah, I don't know.
We let the client, We let the listeners, you know, like, we don't what do you guys want to hear about? Listen? Let's go on a listening tour.
We should do that. Yeah, I would love that.
That would be a nice Let's do a listening tour.
All right, shall we leave it there?
Let's leave it there.
This has been another episode of the Authoughts podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway and I'm Jolly Wasenthal.
You can follow me at the Stalwart check out inego Fraser Jenkins' book. You can find it at the Alliance Bernstein website. You can search that. Follow our producers Kerman Rodriguez at Carman Arman, dash O, Bennett at Dashbot and kel Brooks at Keil Brooks. More odd Laws content. Go to bloomberg dot com slash od Laws with the daily newsletter and all of our episodes, and you can chat about all of these topics twenty four seven in our discord discord gg slash.
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