How to Prepare for a Post-Dollar World with Inigo Fraser Jenkins

People talk all the time about the potential for huge turning points in history. And they've been talking about the possibility of the US losing its dominant position in the international financial order for some time. So far it hasn't really happened, but there are plenty of people who think that the Trump's focus on tariffs and higher deficits could mark a sea change in the appetite for dollar assets. In this episode we speak with Inigo Fraser Jenkins, strategist at Alliance Bernstein, about some of the big changes that are altering the investment landscape including: higher debt loads across the world, the rise of AI, de-globalization, demographics, and more. As he points out, the difference right now is that we're not just talking about one possible regime change for investors, but a long list of them. Inigo talks about how these shifts might play out and what investors can do to prepare for them. Read "The End of US Exceptionalism?" by Inigo Fraser JenkinsOnly Bloomberg.com subscribers can get the Odd Lots newsletter in their inbox — now delivered every weekday — plus unlimited access to the site and app. Subscribe at bloomberg.com/subscriptions/oddlotsSee omnystudio.com/listener for privacy information.

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• 0:00Speaker 00

  Finance is increasingly being built on digital rails. But as the adoption of virtual assets, tokenization and stable coins grows, can regulation not only keep pace but help accelerate it? Find out more later in the podcast.

• 0:16Speaker 01

  This is the Bloomberg Tech Minute brought to you by ChatGPT. I'm Carol Muster. Getting hired at SpaceX requires exceptional ability and may include having Elon Musk review a candidate's resume. So writes Bloomberg Business Week's Lauren Grush. She reports that the company culture is defined by Musk and job candidates must understand that a commitment to SpaceX means adhering to this culture and exhibiting loyalty to Elon Musk. To get hired, candidates must demonstrate their achievements from past jobs and hands-on experience matters more to recruiters than advanced degrees, with the company looking for people with raw innate intelligence. A spokesperson for SpaceX didn't respond to a request for comment on its recruiting and hiring practices.

• 0:59Speaker 01

  But according to recruiters, advisors and those who've interviewed for jobs there, it's the space exploration dream that draws people to the company. And Musk invokes that dream regularly to remind workers why they're there. Prospective hires are told that the job will require stamina, including in job ads that candidates quote "must be willing to work extended hours and weekends as needed." One major perk for all that hard work? Employees' access to equity, either the right to buy shares or payment in the form of restricted stock units that vest over time. That's the Bloomberg Tech Minute brought to you by ChatGPT. Get started at chatgpt.com.

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• 2:29Joe Weisenthal?

  Hello and welcome to another episode of the Odd Loss Podcast. I'm Jill Weisenthal.

• 2:34Tracy Alloway?

  And I'm Tracy Alloway.

• 2:35Joe Weisenthal?

  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 17th. 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.

• 2:59Tracy Alloway?

  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? It wasn't in markets. It wasn't even bonds. It was the currency.

• 3:13Joe Weisenthal?

  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 Chair, 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, not to mention the sort of arbitrariness or volatility of tariff policy, ongoing wars

• 3:57Joe Weisenthal?

  and so forth. Much is in change. We live in interesting times.

• 4:02Tracy Alloway?

  Here's what I think.

• 4:02Joe Weisenthal?

  Go on.

• 4:03Tracy Alloway?

  So it's a cliche in financial market commentary to talk about a major turning point, right? Because we've seen people talk about the death of 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 reversing.

• 4:24Joe Weisenthal?

  On the move.

• 4:24Tracy Alloway?

  Yeah. So, you know, there's globalization going from de-globalization. There's population growth going to shrinking populations. There's higher inflation instead of years and years of deflation.

• 4:37Tracy Alloway?

  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?

• 4:52Joe Weisenthal?

  Totally. And I'll just say one thing which makes this very interesting, timing-wise, from the perspective of investors, because there is a lot, 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 where 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,

• 5:32Joe Weisenthal?

  is still kind of intact. And the question is, will that be like the last sort of, the shoe to drop, or the end of US exceptionalism from just the perspective of a globally oriented portfolio manager?

• 5:46Tracy Alloway?

  I think that's a good thing to watch. I'm gonna pull a page out of Bob Brackett'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 gonna happen in stages. So there's a lot to look out for, a lot to discuss.

• 6:04Joe Weisenthal?

  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 interesting guys around. We're gonna be speaking with Inigo Fraser Jenkins. He is 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, Inigo, thank you so much for coming back on Odd Lots. Thank you very much. It'd 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?

• 6:44Speaker 06

  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 exactly 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 from the norms of the last 30 or so years. And all these issues sit in the background. We think there's a strong case to be made that some of the norms of the last 30 or 40 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

• 7:26Speaker 06

  that we've had 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.

• 7:51Tracy Alloway?

  What kind of timeframe are you looking at here? Because I think we often don't talk enough about timeframes. 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 timeframe here? Is it on a long enough timeframe, we're all going to be dead anyway? Or is it the next 20 or 30 years?

• 8:17Speaker 06

  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 ones talking about in the book, that is. And so they can be thought about as acting over a, say, five to 10-year timeframe. And of course, anything that involves a conversation on demographics, occasionally people just kind of close their ears because they think, well, it's so slow-moving that 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 horizon 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 investors have.

• 9:02Speaker 06

  And so I'd argue that although one might have thought that these are 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. And so that's a longer term future has become an issue that a few people are faced now.

• 9:19Joe Weisenthal?

  Just on the demographics point, you mentioned that a lot of you hear that word as okay, the slow moving trend. It is actually though staggering, the numbers when you look at. So, you know, obviously people talk about the population trajectories in China, aging in the West. 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.

• 9:46Speaker 06

  Yes, to the changes that have started happening very rapidly.

• 9:50Joe Weisenthal?

  Yeah.

• 9:51Speaker 06

  In terms of the context of past changes we've seen. And I think that people just need to be aware of just the scale of the support. The demographics has given to growth rates over the last thirty or forty years. We'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 cohort of people who've all been in the workforce. And you've had an increase in the female comp 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.

• 10:34Speaker 06

  That demographic shift alone undoes a very large part of this increase in the global worker pool. But that we've seen through the process of globalization since the eighties. Now, people can get very negative about this. But, you know, it isn't an outlook that implies a bearish way of 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 the next 10 to 15 years where on the UN population data at least, the US working age population is still going to grow, but it's going to grow much more slowly than people have been used to in the last 30 years. It'll grow at about

• 11:16Speaker 06

  0.2% per annum. But in Europe, the working age population is going to shrink at about half percent per annum. In China, it's really going to shrink quickly at about 1% per annum between now and 2050. 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, but initially in that context that yes, from an absolute perspective, that's telling 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 assumptions that we have and the most forecasters have is the working age population does still grow ever so slightly. And that is a better

• 11:58Speaker 06

  prognosis than say in Europe, in Japan, in China, where it's shrinking outright.

• 12:03Tracy Alloway?

  Can I ask about government debt? Because this is the other thing that, you know, people have been talking about for a very, very long time, high deficits, especially in the developed world. I think the highest level of debt since like World War II, 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 2nd, we did see a spike in like 10 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 broadly continued appetite for debt.

• 12:46Tracy Alloway?

  So when would that actually become a concern for investors?

• 12:50Speaker 06

  I keep being asked this question by investors in recent I bet. A common question, really for the last 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 II. I guess the first thing to say about that is not just a US problem, that's actually a G7 wide problem. So G7 debt in terms of net debt to GDP is back to where it was at the end of World War II. Now, of course, it's been getting there for some time. It's been rising for really kind of 30 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, you know, other things equal.

• 13:34Speaker 06

  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 of 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 safer 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 last French election. You get these episodes where the market tries to price sovereign risk.

• 14:12Speaker 06

  But it's very hard to know, you 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 Niall Ferguson earlier this year where he made the argument that basically it's not net debt to GDP that really matters. It's the relative size of the debt service costs compared to the defence budget. And the reason that seems like a relevant thing to talk about is last year was the first year where the US service cost on debt exceeded the US defence 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, you know,

• 14:54Speaker 06

  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 defence budget. Now, the interesting example that I guess is vaguely relevant from that is most relevant is the UK. In 1920, the debt service cost became much greater for that defence budget. That had a big impact on the ability to project hard power. Now, what's interesting is the UK managed to reverse course and actually end up with a defence budget, again, larger than interest service cost 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 it relevant today. So I guess the conclude in terms of how one thinks about this, you know, I think the sovereign

• 15:39Speaker 06

  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 directional answer, saying, well, yes, at some point the yield curve 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 that in practical terms is that it means that the dollar is less of a safe haven asset than it was before. And that's the key point, really. It's not so much in terms of coming up with a particular return forecast on the dollar being different from where it was, say, six months ago. I think it's become almost consensus across the street that people are now more naked to the dollar than they were, say, six months ago.

• 16:23Speaker 06

  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. And so that implies a different approach, the way people should form portfolios.

• 16:35Joe Weisenthal?

  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 status. And so I want to talk about more like, setting aside timing, maybe it's fast, maybe it's slow, maybe it's 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 it 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 positive, to risky assets? What are the sort of like fingerprints of what it would look like when it's like, oh,

• 17:17Joe Weisenthal?

  something has meaningfully changed about the way people view the dollar in their portfolios?

• 17:23Speaker 06

  So I guess I first of all kind of pick up in terms of the relationship with dollar and other assets. And so you've seen just in the last few months, episodes when the dollar has declined at the same times that bond deals have gone up, i.e. it's a more risky environment and the dollar hasn't behaved as 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 is seen 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.

• 18:07Speaker 06

  So you've seen this sort of market behaviour 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 were large flows out of US bonds from institutional 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.

• 18:46Speaker 06

  So so far, what you're still seeing is a demand for safer liquid assets is still a dominant force here. But that's the thing that we really look for, for a change. I mean, I think one thing in the background here is we have to bear in mind, there are some very different kinds of risks here that are all being conflated and they point in the same direction, but they come from, I guess, a different basis. So one is the concern around fiscal sustainability, as we discussed. So that, yes, it's certainly a concern, but you never know what the timing of that's going to be. Separate from that is a more geopolitical imperative, which is the need for countries which are rivals to the US to try and de-dollarise in some way. Now, the problem is there is no viable alternatives.

• 19:29Speaker 06

  That means that the flow into other alternatives is going to be slow. We've obviously seen this in the increased bidding by central banks for gold. 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 when there have been suggestions from the US administration that perhaps we can apply some kind of taxes or charges on foreign holders of US assets. And that has certainly grabbed attention, but people have backed away from that. So it doesn't seem to be an immediate concern right now. But it's three very different things pointing in the same direction, which is for there to be somewhat less trust in the dollar as a safe haven.

• 20:12Speaker 06

  The biggest thing in its favour, 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 many years to come.

• 20:45Speaker 00

  What's next for virtual assets? I'm Jacob Greece, host of Economy Scale, a series exploring growth in key global sectors. And in this episode, we're diving into the digital forces shaping finance. Sean McHugh from Dubai-based Virtual Assets Regulatory Authority has this to say.

• 21:01Speaker 07

  We're seeing a lot of institutional players come in, digital asset dedicated hedge funds, high frequency traders and that sort of thing, and folks who service institutional clients.

• 21:10Speaker 00

  As more capital enters the market, adaptive regulation is likely to become increasingly key. Reece Merrick of Ripple says.

• 21:18Speaker 08

  A lot of regulators globally would like to keep the industry at arm's length. That's the opposite here. I think also what you'll find is that regulation and frameworks can come out, but some of them are maybe a slight iteration on some 80-year-old policy and not actually in line with what the technology can do and offer. And again, that's very different in Dubai.

• 21:37Speaker 00

  Listen to the full episode wherever you get your podcasts. This series is brought to you by Bloomberg Media Studios and the Dubai Department of Economy and Tourism.

• 21:47Speaker 01

  This is the Bloomberg Tech Minute brought to you by ChatGPT. I'm Carol Muster. Getting hired at SpaceX requires exceptional ability and may include having Elon Musk review a candidate's resume. So writes Bloomberg Business Week's Lauren Grush. She reports that the company culture is defined by Musk and job candidates must understand that a commitment to SpaceX means adhering to this culture and exhibiting loyalty to Elon Musk. To get hired, candidates must demonstrate their achievements from past jobs and hands-on experience matters more to recruiters than advanced degrees, with the company looking for people with raw innate intelligence. A spokesperson for SpaceX didn't respond to a request for comment on its recruiting

• 22:29Speaker 01

  and hiring practices, but according to recruiters, advisors, and those who've interviewed for jobs there, it's the space exploration dream that draws people to the company and Musk invokes that dream regularly to remind workers why they're there. Prospective hires are told that the job will require stamina, including in job ads that candidates quote "must be willing to work extended hours and weekends as needed." One major perk for all that hard work? Employees' access to equity, either the right to buy shares or payment in the form of restricted stock units that vest over time. That's the Bloomberg Tech Minute brought to you by ChatGPT. Get started at ChatGPT.com.

• 23:10Tracy Alloway?

  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 Marks and Mike Milken at the Milken Conference in LA. And it was basically about how the investment landscape had kind of changed over their careers. So in the 1950s and 1960s, if you put your money in blue-chip stocks, like the Nifty 50 or something like that, everything was fine and you made consistent profit. But then the market crashed in the early 1970s and you had high inflation and that kind of changed everything. So higher volatility along with higher inflation and a deterioration in real purchasing power,

• 23:53Tracy Alloway?

  which meant people lost like 90% of their money at that time, which is crazy. And Mike at 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 anymore and expect a consistent return.

• 24:15Tracy Alloway?

  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 sea shift in investor behavior? So maybe instead of weighing risk against return, you weigh risk against real returns or something like that.

• 24:34Speaker 06

  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 relatively low volatility of inflation, inflation's been going down. And at the same time, we've seen strong returns, both from equities and from fixed income assets over most of the time. And equities and fixed income have managed to have a negative correlation there 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

• 25:19Speaker 06

  the level of inflation will be somewhat higher and somewhat more volatile. Given the constraints on growth that we spoke about in terms of demographics, et cetera, given where we are in terms of the valuations across most asset classes being high, the likelihood 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? 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's ultimately relevant here? I mean, is risk the expected volatility of my portfolio over the next 10 years? Or is risk the risk of a loss of purchasing power for the next 10 years?

• 26:03Speaker 06

  And I would suggest that for nearly every investor, if they think about it, ultimately it's the latter of those two that's a much bigger issue.

• 26:08Tracy Alloway?

  Wait, why not both?

• 26:10Speaker 06

  I mean, ideally, one would care about both. It depends how many degrees of freedom you think you have. Because 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 vol 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 vol. And even though I'm aware that's a horrible thing to have to explain to people, and it

• 26:54Speaker 06

  might sound very cavalier at a point when the shill a p is 35 times, and I'm not spelling out particularly 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 painful for 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 a purchasing power that is the real focus.

• 27:38Speaker 06

  And that is a shift in governance ultimately for many investor types.

• 27:42Joe Weisenthal?

  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'm 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. Shake people's faith in the dollar system. Other shackles like that that the government has put on itself to maintain some sort of

• 28:27Joe Weisenthal?

  stability, or even just sort of the volatility in trade policy, or the fact that the government passed another gigantic tax cut. There's no political appetite for meaningful change in the debt trajectory. How does like politics, domestic politics, play into global perceptions of dollar stability?

• 28:47Speaker 06

  I think there are two avenues here. I guess one avenue, again, is back to this topic of fiscal sustainability. And if there is no appetite across parties to really meaningfully change that fiscal trajectory, then one is left with this question of how sustainable is the debt? Can this can be kicked down the road? But what are the ways out? And ultimately, I think that inflation is the most likely route. 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 certainly there have been points where that's been shaken.

• 29:31Speaker 06

  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 Mar-a-Lago Accord and potentially changing the status of foreign orders of US debt. And, okay, it looks like that's been backed away from my suggestion and certainly 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 at the same time that there is this concern about fiscal sustainability, and there are geopolitical forces which are very strong to try and find dollar alternatives. And that, I guess, feeds this kind of view that perhaps the dollar has less of a safe haven status than it did before. And the big caveat is it depends what kind of risk we're talking about here.

• 30:16Speaker 06

  I think if we're talking about general business cycle risks, then people, 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, when there's a geopolitical shock, often in a quite short term in nature, thankfully, then you still see people flee to the dollar and the dollar rally in the short term over potentially large shocks.

• 30:39Tracy Alloway?

  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?

• 31:23Speaker 06

  I mean, I think it's a possibility. I mean, I'm not sure that's enough to term one super bullish in terms of long run returns.

• 31:30Tracy Alloway?

  That's fair.

• 31:31Speaker 06

  But again, I, you know, but just to stress, you know, I do think that the US market and global equities are going to produce a 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 structurally 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.

• 32:13Speaker 06

  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 call to make.

• 32:24Tracy Alloway?

  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?

• 32:37Speaker 06

  Yeah, so there's a broad range of responses and it's not as simple, I guess, in future. Think as perhaps with hindsight it was over years when both bonds and equities produced positive returns and had a negative correlation between them. I mean, thinking of the 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 that 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 of other real assets as well, be it real physical assets or be it areas of private assets. For example, kind 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, things like

• 33:22Speaker 06

  that. And then there's gold. So gold has a long run real return over the last 200 years of plus 0.2% per annum as far as we can tell. So it's a very small number, although maybe one should say that if you're buying it because you're frightened of some really risk-off event, then a zero real return may not be such a bad thing.

• 33:41Tracy Alloway?

  There's a value in getting a good night's sleep. That's something that I've kind of learned. Investors are willing to pay to have that sort of end-of-the-world hedge.

• 33:52Speaker 06

  Yes, although the risk, of course, is the lost opportunity that comes because in the last 30 years, that would be an appalling call.

• 33:58Joe Weisenthal?

  Yeah, I lose sleep because other people are getting richer than I am. So, you know, there are all kinds of reasons to lose sleep.

• 34:05Speaker 06

  Although in the last couple of years, obviously, gold's actually outperformed.

• 34:07Joe Weisenthal?

  Yeah, totally. And then I lose sleep over that, too. I just don't sleep well.

• 34:11Speaker 06

  I think the key argument in favor of gold, and we've been pro a gold allocation in the advice we give to clients for some years, but I think the key argument in favor of it is that, look, yes, you want a big overweight on equity strategically, even if it's not a bullish outlook, but just because that gives you a positive real return. The question is, what do you add around that equity position that helps diversify risk in the 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.

• 34:53Speaker 06

  So it does seem to have an established track record as being a diversifier of risk, of equity risk, that is, in higher inflation episodes. And that's its kind of key role in portfolios. Then, I mean, on top of that, I'll also take the view that for geopolitical reasons and nonprofit driven 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 simply too hard to do.

• 35:34Speaker 01

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• 36:16Speaker 01

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• 36:57Joe Weisenthal?

  One of the bigger structural trends you talk about in this 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 in climate, period, et cetera. Like suddenly these clients, all this talk that executives love to talk about on panels in the mid 2010s, suddenly they don't say it anymore.

• 37:40Joe Weisenthal?

  But I, so I thought it was actually interesting that here in 2025, and you're still talking about climate, net zero being unrealistic in your view from a social perspective, temperatures expected to continue to rise. Talk to us about like, why I shouldn't be cynical about when I see financial institutions talk about climate and why it should actually be, you know, one of the key pillars of risk going forward.

• 38:03Speaker 06

  Yes, so our view is very specific on this, which is we want to think about what are the big structural forces that act on markets over a five, 10 year horizon? And what are things that really affect the fundamental risks that investors face? So in conjunction with these other forces that are happening at the same time in terms of demographic shifts and AI and worries about debt and de-globalization. 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 2050 for two different kinds of reasons. One is that it's socially and politically really hard to change behaviors fast enough. Secondly, is the power demand of AI.

• 38:48Speaker 06

  So, you know, so as far as we can tell, by the end of next year, global data center power demand will be the same power demand as the total power of Japan. So you've basically added a G3 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 to suggest that means that it's 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 risk, supply chain risk, or growth rates? So in our book, we spent a lot of time pooling academic evidence on what the effect is of a change in temperature on GDP.

• 39:30Speaker 06

  Now, the first thing to say is you plot the 28 studies that we looked at in terms of the link between a temperature and growth, they're all over the place, there's a big bunch of points. So the first thing to 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 simply put a sort of average line kind of 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 across the academic work that we looked at, that at the margin, a bigger increase in temperature is bad for growth. Again, the question is, how does this matter? And how do people kind of think about it? And what's the scale of this?

• 40:12Speaker 06

  Because the average of all those implies a change in the equity outlook 10 years forward that just simply shaves 0.2% per annum off the global equity outlooks. That might not sound like a very big deal. 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 0.5, a minus 0.6% per annum impact on equity returns at the 10-year mark. And that starts to get to be the same kind of order of magnitude as demographics has on the average return the ones should expect. But I'd argue that we go beyond that because the real thing that struck me, it's just

• 40:57Speaker 06

  the scale of the error bars around these forecasts is huge. So yes, of course, we can argue about what globalization and demographics and corporate profitability and labor versus profit share will do to the earnings outlook. And we can try our best to have models for those and have certain error bars around them. But the error bars around climate and also AI, I would say, are two things that are just very different from everything else. That introduces the sense of radical forecast error in what we're doing and really implies that. People need to be, you know, thinking about perhaps diversification in a more radical way because we have path error on 10 years' horizons that's much wider than it's been historically.

• 41:42Tracy Alloway?

  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.

• 42:25Speaker 06

  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 aggregate productivity. And the ability of the economic expression, you know, in general, and, you know, 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 be put in conjunction with downward forces on growth from the things

• 43:08Speaker 06

  we sort of spoke about earlier in terms of deglobalization and demographics, et cetera. 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 forces on growth from the levels of growth that we've become used to for the last kind of 30 or 40 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 simply don't know the answer to that yet. I mean, on the one hand, one could point to 200 years of technological advance and automation, and yet we have almost full employment.

• 43:49Speaker 06

  There's no evidence to date that there's been a structural trend increase in employment through all the automation we've seen since the birth of the Industrial Revolution. You know, 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 shifts the last 30 or 40 years. So I think the heart of the macro aggregate, you know, kind of 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 downward forces and growth elsewhere. And if you are very bullish

• 44:32Speaker 06

  on the outlook for AI-driven productivity growth, do you necessarily have to be bearish in terms of the job side look? And that's very much an open question at the moment.

• 44:42Tracy Alloway?

  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 imagined the equivalent of the office scene where Michael stands up and shouts out, I declare bankruptcy. I kind of imagine Inigo at the office of Alliance Bernstein shouting, I am no longer a quant. But anyway, what does all of this mean, this sort of big shift, mean for systematic investing that basically relies on, you know, backtesting reams and reams of historic data?

• 45:16Speaker 06

  Yeah, so I, I think there is a case to make that at a bigger structural level, that we've been in a certain economic environment for 30 or 40 years, and the forces that drove that, you know, have run their course or going into reverse. And therefore, some of the rules of thumb that have existed for a long time aren't going to work in the same way. Now, that does not mean the systematic investing suddenly stops working, because obviously, there are firstly, a 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

• 45:57Speaker 06

  input, given the advances in AI that are taking place, and assume the one thing to carry on working in the same way. So it's not to 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 governance. And back to this question we spoke about at the beginning, which is what is the real measure of risk that we care about? Is that the volatility of the portfolio? Or is it a measure of purchasing power? And that's the kind of deep governance question that I think is very hard to attack. Any kind of systematic process almost necessarily sits outside of that.

• 46:39Speaker 06

  And so it's those kinds of discussions that we're spending a lot more of our time on with clients because we think those are where some of the biggest shifts are taking place.

• 46:47Joe Weisenthal?

  Inigo Fraser Jenkins at Alliance Bernstein. Thank you so much for coming on. It had been too long. It's always interesting to talk to and read your stuff. Appreciate you joining us on the Oddline.

• 46:57Speaker 06

  Thank you very much for hanging back on the show. It's been huge fun. Thank you.

• 47:00Tracy Alloway?

  Thanks, Inigo.

• 47:14Joe Weisenthal?

  Tracy, I always really like talking to Inigo. It'd 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, must be a lot of fun going around the world and talking to clients and talking about big ideas. I think he's one of the best at it, and I think he's very cogent and takes that process very seriously.

• 47:34Tracy Alloway?

  He does. I do imagine you must get the same questions from clients over and over and over.

• 47:38Joe Weisenthal?

  That's still valuable, right?

• 47:39Tracy Alloway?

  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 from Inigo is publicly available. We should put a link in the show notes or something to it so everyone can read it alongside this episode.

• 48:03Joe Weisenthal?

  The amount of data and interesting charts in there, it's certainly well worth anyone up perusing. 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 dollar specifically about the sensitivity of the dollar to risk, right? Because for years, the view is something bad happens, or something new happens, or some 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 in 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.

• 48:47Tracy Alloway?

  Right. And the Fed example is, well, it's a really good example.

• 48:51Joe Weisenthal?

  Yeah.

• 48:52Tracy Alloway?

  The two things I kind of took away from that conversation are even if we're talking about a sea shift in what's happening in the world and 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 speedboat, 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 Inigo talked about it at the beginning, is just the confluence of major changes that seem to be happening. It's not just death of the dollar, potentially. It's also death of the dollar plus decolonization.

• 49:36Joe Weisenthal?

  Plus AI.

• 49:37Tracy Alloway?

  Plus AI, plus population growth and all of that.

• 49:41Joe Weisenthal?

  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 there 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 exurbs 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 even get talked about. But if you actually follow through the implication, it's 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

• 50:26Joe Weisenthal?

  the white collar 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, et cetera. Add on, you know, the fact that birth rates are collapsing.

• 50:42Tracy Alloway?

  This is a very long list, Joe.

• 50:44Joe Weisenthal?

  Well, this is the point.

• 50:45Tracy Alloway?

  There's a lot going on.

• 50:46Joe Weisenthal?

  There's a lot going on and each one of these has the potential to be, and they're all real.

• 50:49Tracy Alloway?

  I think you need to travel around the world, talking to clients about how self-driving cars are going to impact urban planning.

• 50:55Joe Weisenthal?

  I'd love to. You know what I think we should do? We should go around the world and do live Odd Lots events, but we don't have to ask any questions. We just get to hear what everyone else is interested in.

• 51:03Tracy Alloway?

  Then we're the clients, basically.

• 51:06Joe Weisenthal?

  Yeah, yeah. No, no, we let the client, we let the listeners, you know, like, we don't, we just, what do you guys want to hear about? Let's go on a listening tour.

• 51:13Tracy Alloway?

  We should do that.

• 51:14Joe Weisenthal?

  Yeah.

• 51:14Tracy Alloway?

  I would love that. That would be a nice change.

• 51:16Joe Weisenthal?

  Yeah, let's do a listening tour.

• 51:17Tracy Alloway?

  All right. Shall we leave it there?

• 51:18Joe Weisenthal?

  Let's leave it there.

• 51:19Tracy Alloway?

  This has been another episode of the Odd Lots Podcast. I'm Tracy Alockway. You can follow me at Tracy Alockway.

• 51:25Joe Weisenthal?

  And I'm Joe Weisenthal. You can follow me at the Stalwart. Check out Inigo Fraser Jenkins's book. You can find it at the Alliance Bernstein website and search that. Follow our producers, Carmen Rodriguez at Carmen Armin, Dash O'Bennett at Dashbot, and Kel Brooks at Kel Brooks. For more Odd Lots content, go to Bloomberg.com/oddlots, where we have a daily newsletter and all of our episodes. And you can chat about all of these topics 24/7 in our Discord, discord.gg/oddlots.

• 51:51Tracy Alloway?

  And if you enjoy Odd Lots, if you want us to go on a listening tour of the world, then please leave us a positive review on your favorite podcast platform. And remember, if you are a Bloomberg subscriber, you can listen to all of our episodes absolutely ad-free. All you need to do is find the Bloomberg channel on Apple Podcasts and follow the instructions there. Thanks for listening.

• 52:42Speaker 09

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• 53:18Speaker 10

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