Pod Insights Odd Lots Why SocGen's Albert Edwards Sees Double-Digit Inflation Coming Back About this episode Making a long career as a bear at a sell-side institution is tough. Generally financial markets have done quite well which means forecasting doom and gloom is, usually, only tenable for so long. Which is why we wanted to talk to one of the most successful bears out there. Société Générale has let Albert Edwards out of the bear cage for today's episode. Edwards knows his reputation as a bear is well deserved: He believes, among other things, double-digit inflation is in the offing. We also talk about the attention span of readers on the buy-side, what success looks like for a bear, and how a bear avoids getting fired. Read more:Boeing Falls After Trump Unveils Smaller China Aircraft OrderBOE’s Pill Says Strong Iran Price Pressures Warrant Rate Rise Only Bloomberg - Business News, Stock Markets, Finance, Breaking & World News subscribers can get the Odd Lots newsletter in their inbox each week, plus unlimited access to the site and app. Subscribe at bloomberg.com/subscriptions/oddlots Subscribe to the Odd Lots NewsletterJoin the conversation: discord.gg/oddlotsSee omnystudio.com/listener for privacy information.
Transcript Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.
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1:13 Tracy Alloway? Hello and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.
1:17 Joe Weisenthal? And I'm Joe Weisenthal.
1:18 Tracy Alloway? Joe, I think, I think a lot of people don't understand the role of bears in finance and markets.
1:25 Joe Weisenthal? It's to create headlines for tweeting, right? And retweets.
1:28 Tracy Alloway? Technically, it's to sell newsletters.
1:31 Joe Weisenthal? I was, I was going to say it's to get emails opened, right?
1:34 Tracy Alloway? That's right. So I think, you know, being a bear who's selling a newsletter, we can all kind of see the business model there. But if you're an analyst at a big sell-side firm and you're known as a bear, that seems incredibly difficult to me because like the tendency on Wall Street and investment and finance is towards optimism, right? You have to place bets on the future. You have to put your money to work. And if you're managing to be a sort of like long-run bear at a big sell-side institution, that's pretty impressive to me.
2:03 Joe Weisenthal? Oh, so you're selling?
2:04 Tracy Alloway? Yes.
2:05 Joe Weisenthal? You're selling. They call it the sell-side. And if you know the There's all these financial instruments that the financial institution has and you're the bear. I was like, well, I'm not going to buy anything.
2:16 Tracy Alloway? You know what else?
2:18 Joe Weisenthal? It's the sell side. You're supposed to have something to sell, not sell to other people to sell.
2:21 Tracy Alloway? The clue is truly in the name, but the other thing that's very impressive is if you're a long run bear at a sell side institution, who also manages to be the top ranked macro analyst in your category for 13 years in a row. That's pretty impressive, right?
2:38 Joe Weisenthal? It is impressive and this gets to another important point, which is people like to read. And I think about this even with podcasts and other forms of any sort of media, whether it's formal media and a PDF that a bank sells or a news organization. People like to consume ideas and it doesn't mean they're going to consume the ideas and say, oh, this was convincing. Buy, sell, but they like to hear a range of ideas. They like to have their thought process influenced. They like to stress test.
3:08 Tracy Alloway? Well, this is what I was going to say. Like to me, the role of a true bear on Wall Street is for big investors and institutional clients to actually test some of their thinking. You know, if you have a bunch of analysts who are trying to pitch you tech stocks at the moment, like you want to hear an opposing viewpoint that says, well, maybe here is the downside scenario.
3:28 Joe Weisenthal? Well, here's the other thing. Right now, we're recording this in early May 2026, which is that equity markets around the world are very high. Some would say bizarrely high, but they're very high for various reasons we could get into. Bonds have been selling off very much and that's sort of the story. We're here in the UK right now and the headlines are all about generally how much gilt yields keep spiking. But we're in this moment in which I would say there is a real mismatch, but between I would say gloom, which you could pick your poison. Why are you gloomy? You're gloomy because the AIs are going to take us or going to destroy the world. You're gloomy because of the war in Iran. You're gloomy because high deficits, et cetera.
4:11 Joe Weisenthal? You're gloomy because of politics in so many countries seems to be deteriorated. There's plenty of reason for gloom out there and yet, you know, you're losing. If you're not in the stock market, et cetera, it is just a very weird time. But um, yes, there is this weird mismatch, depending on how you look at it, between sentiment across any many different attempts to measure sentiment and what at least certain parts of the market are doing.
4:35 Tracy Alloway? Yeah, I think that's exactly right. And also, you know, you mentioned bond yields going up. So we're recording this on May 6th, the 30 year UK gilt, we're in London still, by the way, hit like its highest since 1998 or something yesterday. And you're absolutely right, there does seem to be a tension between all these little glimmers of inflation that are out there and what's going on in the equity market. Because you would expect with rates possibly going up that equities were going to take a hit. But anyway, we do in fact have the perfect guest.
5:06 Joe Weisenthal? That's right.
5:07 Tracy Alloway? Someone who is very well known, not just for being a bear, but also for having very long term sort of paradigm views on the relationship between bonds and equities.
5:16 Joe Weisenthal? Someone we've been reading for a very long time, probably since the beginning of our careers.
5:20 Tracy Alloway? We finally convinced him to come on the podcast. I gave it away earlier when I said the top ranked Excel survey macro analyst 13 times in a row. But we are of course going to be speaking with Albert Edwards, who is the global strategist over at SocGen.
5:34 Speaker 04 Hi there.
5:35 Tracy Alloway? Thank you so much for coming on All Thoughts.
5:36 Speaker 04 It's a pleasure. I don't get out much and this is a real treat.
5:40 Joe Weisenthal? They've let you out of the bear cave.
5:41 Speaker 04 Exactly.
5:42 Tracy Alloway? That's right. That's right. Why don't you go ahead and explain? Well, first of all, I should ask, when people introduce you as a well known bear, does it grate you the way it seems to grate some other people? I remember Nuriel Rubini would always get upset if you called him Dr. Doom. Do you get upset?
5:58 Speaker 04 No one pleased be introduced at all and anyone still speaking to me, quite frankly.
6:03 Tracy Alloway? Okay, is it a deserved reputation?
6:06 Speaker 04 It's deserved in the sense that the media has more latched on to, or had more latched on to my bearish views on equity markets, but not my bullish views on government bonds. Now, I join the sell side. So I've been working in finance since 1982. I joined the Bank of England just over the road here. But I joined after a little stint on the buy side. Which is why, by the way, I write such short notes because I've actually had to read these notes on the buy side over the years. And I know the clients and readers aren't sitting there waiting for them. And if they can't read them in about three, four minutes, they're not going to read, they're not going to read them at all.
6:48 Speaker 04 But I joined the sell side in nineteen eighty eight at Kleinwalt's, became Dresner Kleinwalt's. I was there for almost twenty years, but I saw the back end of the Japanese bubble. And I saw the, what Richard Kewitt Namura used to describe, the balance sheet recession in Japan and how it unraveled. And by the time we got to, and how Western economists were saying, you're doing it all wrong in Japan. You should be just liquidating the capital stock and get to get rid of this deflation. And I was thinking, well, firstly, actually, this, what's happening in Japan is they're just ahead of you, ten years ahead of you in the West. Because their bubble was a lot, their credit bubble was a lot earlier.
7:29 Speaker 04 And when it bursts in the West, you won't be doing what you're recommending that they do. You'll be, you'll be, you'll be slashing rates, you'll be doing everything to stop recessions. But the key thing about Japan, so the back end of nineteen ninety eight, when I thought this is coming to the West. I developed what I call the Ice Age view, which is secular stagnation thesis, which is next, essentially Lawrence Summers. The excess of savings over investment driving down real yields and bond yields and causing a rerating of valuations. But we saw in Japan after a while that actually, your inflation and bond yields and interest rates would carry on coming down.
8:13 Speaker 04 But after a while, it wouldn't cause any more P expansion, actually quite the reverse. That inflation got so low and so close to deflation, it would cause P contraction. So what I was trying to do is bolt on a financial market view onto the secular stagnation thesis. And that ran all the way from nineteen ninety six, I ran with it. I, I thought it was coming immediately after the Asian crisis. You mentioned gilt yields being there higher since nineteen ninety eight. I can remember that, the aftermath of the Asian crisis, the Russian G K O crisis. This is where longevity helps, by the way, you can, I might not be able to remember what happened yesterday. But I can remember twenty years ago quite, quite well.
8:56 Speaker 04 And then from two thousand onwards, you started to see. As bond yields got lower, problems were merging within the equity markets. So that was basically the Ice Age these days. And it worked very... So although I was an equity bear and well known for that, I was very much a bond bull, government bond bull.
9:15 Joe Weisenthal? I'm glad you said, just reflecting, I'm glad you said the point about having come from the buy side and understood the attention spans of readers and how that informed your view of the sell side, because that's something that I've said or thought many times. Having started my career, a lot of what I learned to write was from reading sell side research and it, I figured that, okay, the sell side analysts are writing for people who are just inundated with notes, right? Their inboxes are filled with all kinds of notes. They must know what the type of content that the buy side is willing to read. Chart heavy often, concise, et cetera.
9:58 Joe Weisenthal? And so early on in my journalism career, I figured, okay, if this is how the sell side writes, it's probably a good idea to sort of crib some of these ideas because they understand the realities of shortened attention spans and so forth. And now with social media, everyone has the attention span essentially of a buy side trader. What's your job? You know, Tracy introduced you as strategist. Setting aside your view specifically, what does success look like? Why do you, why do you have a role at the bank? And what is the purpose of your job?
10:30 Speaker 04 What, why am I employed? And actually...
10:32 Joe Weisenthal? And I don't mean that from like, why are you employed? Like if you've gotten the equity call, et cetera. Why is this an important role though to have at a bank?
10:38 Speaker 04 Well, I, I remember in the run up to the Nasdaq bubble bursting, we were having our round table lunches at Kleinwalt's. And Tony Dye then, who was head of Phillips and Drew Asset Management, who had become bearish too early, value, a bit like Jeremy Grant, but value orientated. And his co-conspirator out in Chicago, also known Brinson, both had come under the umbrella of UBS. I remember him saying to the head of equities at Kleinwalt's, well, I totally agree with what Albert's saying. But why haven't you fired him? Because that's what happens to most bears or most analysts who get it wrong.
11:22 Speaker 04 Not on the bullish side, but if you're an economist and call a recession on the sell side and you're wrong, you're usually out pretty quickly. There's such a bias towards optimism and it's not just confected. It's natural. It's like an analyst covering a stock. Inevitably, they're going to be usually enthusiastic about their sector and stock. So there is a natural bias. And part of my role, I mean, I've developed it over the years in that even when I'm getting it wrong, how to avoid getting fired. We had an analyst at Kleinwalt's in the late nineties. He was a tech analyst. He was very bearish on Nokia and Ericsson.
12:06 Speaker 04 He was right. He was pounding the table with analysts, with, sorry, with their clients. And he [bleeped] off the clients so much, he almost got fired. And the secret is to develop strategies. This is my view, for what it's worth. They know my, they can calibrate what I'm thinking. I'm not too much in their face. I'm not annoying them too much. And I'm a bit like, I'm a bit like Caesar always used to have a slave right behind him, whose job it was to say to Caesar, you are mortal, you are mortal.
12:40 Tracy Alloway? I thought you were going to say you're a bit like Caesar. I was like, whoa.
12:43 Speaker 04 No, I'm the slave. I'm the wage slave and the actual slave. Often those slaves themselves were terminated in pretty horrendous fashion themselves.
12:53 Speaker 04 But if the clients, even clients who are bulls, would want to hear what I'm saying, just to know what to be watching out for in the back of my, they've got to be fully invested. They've got to participate. But hey, should we, you know, we've got to keep dancing as the Chuck Prince thing. But should we be dancing near the fire escapes or in the centre of the room, that sort of thing?
13:14 Tracy Alloway? All of that makes a lot of sense. And I want to get into the risks that you're seeing now. But before we do, just going back to the Ice Age thesis. So on the equity side, explain what went wrong. Because this is the thing that you're criticized for and you're sort of known for is you've had a bearish view on equities for a very, very long time. It didn't work out. What happened?
13:37 Speaker 04 What well, what happened from 2000 onwards, if you look at charts of bond yields carrying on falling, equity equity yields did start to rise. So you did have that exactly what you saw in Japan. What derails the derating of equities, in my view, is certainly quantitative easing. So the green and it wasn't just used once in 2008 when you were in your heyday. Well, you're in your heyday now, of course, but you're in another heyday.
14:11 Tracy Alloway? Another heyday, the older heyday.
14:13 Speaker 04 Another heyday. But how it persisted all the way through over the next 10 years. And that basically inflated, and that was the job of QE, to inflate all asset prices. Where the Ice Age continued to work was within the equity market. Because sectors which were benefited from lower bond yields, such as defensives or growth sectors, did extraordinarily well and rerated to huge P premiums versus cyclicality or value stocks. So even though the equity manager might ignore what I'm saying at the macro level, well, the market's not going down.
14:54 Speaker 04 Actually, within the equity market, it was still very, very relevant, this Japanification of the West theme.
15:18 Tracy Alloway? There are some market stories where you want every detail. Joe and I have made quite a few podcasts on that basis. But sometimes you've only got 10 minutes and just want to know what's moving markets fast. That's the Barclays Brief Podcast. Every week, experts from Barclays Markets and Research get you up to speed on what's happening and what to watch next. Concise, focused, and brief. Search Barclays Brief wherever you get your podcasts.
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17:08 Joe Weisenthal? Let's talk about then Japanification and within Japanification, Japan specifically, because this is an important, there's a lot going on right now that's very important. In the 2010s, the JGB market for a long time, it was characterized as the widowmaker, right? Because everyone looked at the size of the Japanese debt stock and they say it's going up and up and up, it's big, Japanese debt to GDP is getting higher and higher, and yet rates were going down. This confused a lot of people. You were correct on the call that that was actually sort of irrelevant, that actually debt stock could go higher and higher, rates could keep going down, Japanese yields famously zero, probably
17:52 Joe Weisenthal? negative in many instances. Post-COVID, however, that's changed. And now Japan, as well as every other developed market economy, the rates are going up. So this relationship, whatever was going on has flipped. What flipped really post-COVID in your view, such that rates are going up all around the world, including in Japan, but also especially in the UK, that ice age of disinflation and lower rates has truly come to an end?
18:22 Speaker 04 I mean, what flipped, in my view, was prior to the COVID recession, by the way, before the COVID recession, I was writing in early 2020, before the pandemic came along, that actually the next recession would see a transition away from the ice age. I was moving, and it had worked for me for quite a long time. But actually, I was thinking we were going to move to a new paradigm, and the falling bond yield story was going to stop. And the reason was... Up until that point, quantitative easing had been injected primarily in virtually entirely
19:06 Speaker 04 into the veins of Wall Street. The idea that QE didn't create inflation is nonsense. It created loads of inflation, but the sort of inflation people like in housing, in financial assets. Asset prices. And no one complains about, no one complains about that unless you don't own the asset prices. What it caused was a lot of intergenerational tension with younger people not being able to afford, which is, we can come on to populism later, but one of the reasons populism has come along in Spain. So it caused lots of inequality, which even the central banks eventually realised. But what I thought would occur was the next recession, when it came along, you were so close to outright
19:47 Speaker 04 deflation and certainly, remember at that time, you were having negative bond, so much of the market was negative bond yields, Europe had quite clearly fallen into the Japanification trap. The US was heading there. I thought and predicted that we would get a flip over into a modern monetary theory type QE, where they started injecting money into the veins of Main Street and a bit into Wall Street. Too fiscal. Fiscal. So basically, classic tax cuts, checks dropping on people's doorsteps, paid for by monetary creation.
20:29 Speaker 04 And I didn't foresee, clearly the pandemic made the situation, the inflationary situation on consumer prices a lot worse because of the restricted supply chains. And having read, yeah, I've got a lot of sympathy with a lot of, I don't tend to have any dogmatic views, monetarist, Keynesian or whatever, I'm quite Catholic, I bring all the themes in. There's quite a lot about M M T I I agree with, but reading Stephanie Kelton's book, one thing was absolutely clear, they were saying, yes, we can do this, it doesn't create inflation, but when you hit capacity constraints, you have to stop doing it.
21:08 Speaker 04 And nothing could have been more capacity constrained than global economy during the Covid. So in my view, it was bat crazy to do what they were doing and it was going to create, the money, you could see it from the broad money growth.
21:25 Joe Weisenthal? So just to be clear, and I know you said we were gonna skip ahead to the populism, which is a very intertwined, I would say, or many people would say with what's going on with economic policy right now, is the failure, the basically the premise that governments could ever stop the fiscal expansion once the capacity constraint is hit? So you have the money drops, you have the helicopter drops, you have the checks, you have the tax cuts, arguably quite justified during the worst of the COVID. Is the core analytical error, the notion that after you hit that capacity constraints, that governments have the internal capacity to say, okay, we've hit that point now where
22:10 Joe Weisenthal? we have to raise taxes to stop the checks?
22:12 Tracy Alloway? Democratically elected.
22:13 Joe Weisenthal? Yeah, the democratically elected officials are capable of saying, you know what? We've hit these capacity constraints and now we have to unwind the checks.
22:22 Speaker 04 I don't think that, I don't think congenitally they are able to do that.
22:26 Joe Weisenthal? That's what I'm saying. Is that where the, is that where the analysis breaks down?
22:30 Speaker 04 Yeah, that, that, that, well, that's where the, that's where the problem comes. That's where the future, if you like, is so scary because, well, actually, in the US, for example, the, the budget deficit detached itself from economic reality before COVID hit in Trump's first term. And that's when you first started seeing budget deficits heading to 6%, 6% of GDP in, absent of a recession or, or a crisis. And we're at 7% of GDP, I was looking at the IMF numbers before I came in. You're at 7% of GDP when unemployment is this low, there's no appetite to, and if politicians
23:14 Speaker 04 try and do it, and I would say part of the problem with the UK at the moment, so yields at 20, 28 year highs.
23:24 Speaker 04 It's not that they haven't tried to do it. They have tried to do it. But if you, it's a very fine tightrods, placating the bond markets and pissing off your electorate so much that you're on your way out.
23:37 Joe Weisenthal? To Dubai.
23:38 Speaker 04 Uh, yeah, yeah. Well, no, you're on your way out of government.
23:41 Joe Weisenthal? Oh, okay. I thought you were saying the elect, that you're on your way out to the electorate and your high taxpayers are out to Dubai.
23:46 Speaker 04 Some of them are on the way out to Dubai and then, and then, and then looping back somewhere else at the moment. But you're, you're, you're out, you're out of government. And, and this is the problem, one of the problems for the, for the UK government is the electoral, electorate won't tolerate. Unless there's a crisis. And you're almost politicians need a eurozone type Greek, Spanish, Italian crisis to be able to implement the measures that everyone knows needs to take place. But, but electorates currently have no appetite for it.
24:22 Tracy Alloway? I saw this amazing chart. You probably saw it too, because it was in Adam Tuza's newsletter recently, but it was from T S Lombard and it showed fiscal support during the 2022 energy crisis in Europe as a percentage of GDP. And I hadn't realized just how substantial it actually was, like energy tax cuts. And so of course, the question now is with oil going back up and people coming under pressure, if we're going to see that same type of fiscal response.
24:51 Speaker 04 I don't think you can. Well, first, first of all, it's even in Europe, the rise in the gas price is nowhere near as bad as it was in 2022. And they will, they will do stuff and they have done stuff in places like Spain, despite the European Commission warning the countries that actually you haven't got the buffers to be able to do this. They are trying to, they have been reducing VAT. But I, I quite like the quote, in the US, it's somewhat different. I was just over there saying, I was just over in Boston recently. I could see the gas price well above $2 a barrel.
25:24 Tracy Alloway? Especially in Massachusetts, yeah.
25:26 Speaker 04 But the natural gas price isn't, hasn't really gone up in the US. And winding back to that famous statement in the early seventies of this is our currency, but your problem to the Europeans. Yeah, this is our war, US war, but it's your problem. Europeans and especially Asia, particularly Asia, which gets so much of its derivative chemical supplies out of the Gulf. And I saw your chart of the urea versus the corn prize showing is absolutely stratospheric. But so much of the, so much derivative chemical products come out of the Gulf, especially to Asia.
26:09 Speaker 04 I saw that eighty percent of India's ammonia comes from the Gulf. Now, Asia is in real, real trouble. And this is coming down, I mean, one thing I think that's really surprised me in the early part of the war was when I looked at five-year versus five-year inflation swaps, they've come down, they hadn't started going up. But recently, the two-year, in two-year shot up and the five-year and five-year have started to go up. People have started to realise, this is dragging on.
26:47 Speaker 04 And why the taco, your former colleague, Rob Armstrong, who invented the taco description, why the taco trade isn't working here? I saw a very nice quip, which is because Iran's involved, it takes two to taco. And Trump can announce these U-turns, but they're not effective unless Iran is also participating or dancing the same dance. So when I hear our oil analysts, our commodity analysts on our call, the equity guys, it's still really bullish, the bond guys, somewhere in between, the commodity guys are basically sobbing into their microphones because they know, they know the inflation coming down
27:30 Speaker 04 the track here in fertilisers and food and everything.
27:33 Joe Weisenthal? This is the funny thing, talk about all the commodity guys, the doom, it's like, it's knocking on our door and everyone's like, we'll see what happens. I want to talk more, since we're here in the UK, I mentioned the Dubai thing, and I'm actually very fascinated by this, not Dubai, people moving to Dubai specifically per se. But the political economy generally of fiscal consolidation, which includes the possibility of leaving. And when the issue that I think people would cite across UK and across Europe is probably twofold. One is declining productive capacity, manufacturing getting eaten by Chinese competition and digital industry that can't keep up with what's happening in the United
28:18 Joe Weisenthal? States, particularly with AI. Okay, you say it's obvious and many people say it's obvious. We all know that the government needs to shrink the deficit, but it's very tough. If people can leave, wealth taxes are very difficult, almost infamously so, and particularly in an era where the big money is being made through equity markets, not through traditional wage or labor income, et cetera. It's great to say, obviously fiscal consolidation is the move, but even setting aside electoral constraints, is there an obvious path towards reducing the deficit, given the means for which the people with money can avoid paying tax?
29:01 Speaker 04 It is very difficult. And you mentioned the UK. The UK is a very specific problem in that so many young people after the pandemic have been signed off as permanently sick. They don't even have to look for work. So the welfare bill has, to a large extent, gone out of control in the UK. And even though the Labour government here has an overwhelming majority, it couldn't get it through Parliament, couldn't get any reform measures through Parliament. And the markets seeing that, and the number of U-turns they've had to do as their own MPs have rebelled, let alone the public rebelling.
29:46 Speaker 04 Mean it's very, very difficult and defense.
29:49 Joe Weisenthal? And it's not just young people, right? Because there's the heating assistance that the old people and the triple lock so that the pension goes up by the maximum.
29:58 Speaker 04 Yeah.
29:58 Joe Weisenthal? Or the whatever the maximum of three different inflation measures are. It's the it's the old it's the old as well, right?
30:05 Speaker 04 Yeah, no, absolutely. And this is one of the things which exacerbates intergenerational hostility tensions. Is that the younger people who can't get on the housing ladder see the older people protected through things like the triple lock pensions going up of wage inflation, price inflation, or the minimum of two and a half percent. So on a real escalator and clearly totally unaffordable. However, when I look at the CBO and the US is just when I look at the CBO projections of US debt to GDP, they go off to infinity. And you know, this is unsustainable because infinity is not a number which is sustainable.
30:49 Speaker 04 The IMF has looked at this quite closely. The only other country to go off to infinity even quicker than the US is strangely China. And the IMF have cited the US and China as the two basket cases. Now, the UK isn't the worst miscreant in terms of its fiscal situation. France, I look at the IMF numbers, France is much worse, but it's under the protection of the eurozone umbrella. The US is much worse, but it's under the protection of the dollar, being of the reserve currency. The bond vigilantes have woken up. They're pretty off looking around at what's going on. They've got a dusty copy of Reinhardt and Rogoff under their desk.
31:33 Speaker 04 They're thinking we're getting, yeah, we're going over a hundred percent of GDP. We're getting near the levels of where it's a problem. And to be fair, on the public sector, what they've done is transfer a lot of the excess debt which was there in the household sector and corporate sector onto their own balance sheets. But you look at these and you think, well, actually, you look, the vigilantes are looking to. Pick someone off and give them a bloody good kicking, basically, to teach everyone else. And the gilt market is the weakest, you know, it hasn't got enough protection. It's it's the weakest kid in the playground. And it's gonna get, it's gonna get beat badly beaten up at some points.
32:13 Speaker 04 And I think Bill Gross, Bill Gross many years ago, said the gilt market was sitting on a better, better kryptonite, kryptonite.
32:20 Tracy Alloway? Nitroglycerin.
32:21 Speaker 04 Nitroglycerin. And when you saw the oil price come down yesterday, but the gilt price, the gilt yield going up. That is a real, that's a real issue, especially as Starmer, Prime Minister Starmer exits the scene at some stage soon.
32:37 Tracy Alloway? That's right. We're recording this also during local elections, just to make sure the maximum amount of stuff possible could happen. That's why we came here now. When we record this and when it actually publishes. But actually, okay, you say the bond vigilantes have woken up. And one could infer from that statement that like we are now in a longer term period where bond yields are going to be higher and inflation is possibly going to be higher. But on the other hand, it feels like the news cycle is so compressed nowadays and new stuff is happening all the time. And there's so much chaos in global politics. It also feels really difficult to have a sort of parad- paradigm, is that a word? Paradigmatic. Paradigmatic.
33:17 Speaker 04 I like that. You're inventing words as we go along.
33:20 Tracy Alloway? You know, it's hard to have a longer term view on the market in the way that one could have an ice age thesis in the early two thousands. Is that possible for you now? Or are you sort of all moving in the short term like everyone else seems to be?
33:33 Speaker 04 I think it is possible. At least I'm trying to make it possible. But as you say, markets are so volatile. I was reading that the recent rally in the equity market, 10% plus rally, this was the fastest ever rebound, 10% rebound after a 10% correction. And it's. Particularly on the equity market, they have become so fixated with the buy on dips mantra, that actually the Fed have got our backs. There will never be recessions again. If there was a recession, it's because of the pandemic. We can't actually remember two thousand and eight, which is a consequence of a very long period of growth, building up excesses.
34:18 Speaker 04 No, I, I think there is a place for a long term theme, and the long term theme is actually it's fiscal incontinence, political weakness. And eventually the monetary authorities having to monetize away these debts. Because in the U S, when you're paying four percent of GDP on as government on your interest payments. That is absolutely crazy. I mean, ten years ago, I was looking at the charts. Ten years ago, it was roughly the same as the eurozone at around two percent. It's absolutely crazy numbers. So the end game for me, I can remember twenty eight percent inflation in the UK in, in, in the seventies, in the seventies.
35:03 Speaker 04 I certainly think we go back everywhere to double digit inflation. Because
35:09 Joe Weisenthal? Really?
35:10 Speaker 04 I know.
35:10 Joe Weisenthal? There's our headline to the episode.
35:12 Tracy Alloway? Yeah.
35:12 Speaker 04 No, I, I, I think fiscal dominance, which is there. The central bankers will have no other option. I mean, you could get some consolidation on the crisis, but I think that's where we're heading. Just monetize away this, this, they'll couch it differently.
35:30 Tracy Alloway? I'm sure they won't say, and now we are monetizing the debt.
35:32 Speaker 04 Yeah, yeah.
35:33 Joe Weisenthal? Do you ever, uh, this happens to us. Do you ever talk to either new colleagues or clients for whom talking about two thousand and eight, you might as well be talking about the nineteen thirties Great Depression because this is like, uh, I feel like this is happening more and more in my life, something that I take for granted. Oh, well, remember when Lehman and I might as well be talking about Credit Antstall or something like that.
35:57 Speaker 04 No, exactly. And with the retail participation in, in, in the market and you get these one day options, which I don't, don't understand. It's, it's so short term, but having I mean, one of the advantages of being in finance since, you know, nineteen eighty two is I can remember the Asian crisis, which is one of the first times I got myself into deep trouble, being banned from Malaysia, Malaysia after writing that.
36:26 Joe Weisenthal? Are you still banned?
36:27 Speaker 04 I don't, I don't.
36:28 Joe Weisenthal? I love K L, so I feel for you.
36:30 Speaker 04 But what you, and this relates to the AI theme, which we could leave, is going, you know, in nineteen ninety six, writing that the Asian miracle was basically a pack of cards waiting to collapse. And I had on my bookshelf this book from the World Bank, Thailand's Economic Miracle, Sustainable Growth and Development. And you just think, I've seen these so many times before going into the, I remember going, you know, in, in, in the late nineties, going around the U S, saying, look, this is a huge bubble which is going to collapse. It's very similar to the Asian crisis. I'm basically, my boss, the chief economist, having to restrain the clients from punching my lights out.
37:13 Speaker 04 But I, when I read what I do now about the AI, et cetera, I just think, yeah, I've, I've, I've heard this so many times. And maybe that's, that's, maybe being young is better because you don't have that baggage.
37:26 Tracy Alloway? Oh, being young, I think you're more of an optimist.
37:29 Speaker 04 I tell you, you've got a lot less gray hair in your beard than I have.
37:32 Joe Weisenthal? Yeah, but more than I had a year ago, so I'm catching up quickly.
37:36 Speaker 04 Do these podcasts pick up color?
37:38 Joe Weisenthal? The cameras here are pretty good.
37:40 Speaker 04 Make it black and white. Make it black and white.
37:42 Joe Weisenthal? All right.
37:42 Tracy Alloway? I can confirm that when we started this podcast, you did not have any gray hair. And it all sort of set in over the course of ten years.
37:50 Joe Weisenthal? I notice more every day.
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39:32 Tracy Alloway? Since you mentioned AI and since we're talking about historic parallels, there seem to be a lot of similarities with the dot-com bubble, just wild enthusiasm for a new technology and this expectation that everyone's going to be making money. On the other hand, the argument against a dot-com redux is this idea that, well, tech companies have very, very heavy valuations at the moment, but they are actually earning money. And if you look at the multiples, they were nowhere near where some of the dot-com companies actually were. What's your thinking there? How much of a parallel or analogy is this?
40:06 Speaker 04 I mean, the main parallel I would draw is with the telecom part of the tier. So the dot-com bubble was more TMT, telecom, media, and technology. People forget it was a bit wider. But the telecom side was was quite similar to what you're seeing now with AI because they actually went out and dug trenches and laid cable. There was a capex boom. And if you were selling cables in the same way you're selling Nvidia selling semiconductor chips, you benefited from producing picks and shovels for the gold rush, essentially. There was real profits there in the on the telecom side at least.
40:51 Speaker 04 But the problem is the euphoria is the narrative is so compelling that you're given these companies are given free money, essentially, although Oracle is not quite so free anymore. But you're you're being given free money and you go off and spend it on you blow it on capex, which isn't necessarily going to be profitable 10 years down the road. And what you've got is basically when you look at the US IT mega caps, they've gone from being hugely free cash flow generative to zero.
41:33 Speaker 04 I saw a chart 2027, zero, it's gone, it's been blown. Now, you might say, well, they're at least they're not borrowing very heavily. They're starting to. But actually, it's transforming their balance sheets. So I just read your quote, I brought a quote along here, I wrote it down, so I didn't forget it. But it's it's about, it could be about the AI transformation. So not so long ago, a leading expert opined that, and I put this in my this sort of thing I write in my notes, he opined that. In retrospect, we will look back and recognize that the US economy was experiencing a once
42:16 Speaker 04 in a century acceleration of innovation, which propelled forward productivity, output, corporate profits and stock prices at a nor at a pace not seen in generations, if ever. Now, that absolutely applies to what is going on now. That's a quote from Alan Greenspan, 13th of January, 2000.
42:43 Speaker 04 At the New York, the Economic Club of New York, just before Nasdaq collapsed. Now, all that was true, and by the way, I was reminded of that quote, reading Jeremy Grantham's book, Making of a Perma Bear, another Perma Bear. I went to his book launch and I, I, I don't read many books. I'm quite lazy. I don't read many books. But I thought, as I was going to his book launch, I better read it. And I, he had some of these great quotes from Ben Anki and Greenspan, which they would probably like to erase from people's memory. But that equally applies to now. It, it is absolutely transformational. It probably will be transformational. Doesn't mean you can't have a stock market collapse.
43:21 Joe Weisenthal? Yeah.
43:22 Tracy Alloway? When bears have a book party, is it a picnic?
43:26 Joe Weisenthal? Oh, that's a good one.
43:26 Tracy Alloway? Thank you. Sorry, I was trying to think of a bear joke. That was the best I could come up with.
43:30 Speaker 04 That's got a lot of that.
43:30 Joe Weisenthal? There's so many different directions we could go in. I want to ask you though, something about the 2010s that I've thought a lot about. You're talking about QE. QE ended in the mid 2010s.
43:41 Speaker 04 Yep.
43:42 Joe Weisenthal? Now, I mean, first they stopped cutting rates, you know, it was a ser-, it was a sequence, right? But then they actually started shrinking the balance sheet. It didn't affect stocks. Stocks just kept going up. And now we look today and again, the stocks, at least in the US, but around the world, stocks are doing all very well. This is despite the fact that rates are, the rate picture is nothing like it was in the beginnings of what you characterized as the Ice Age. Did that make you question anything? Have you revised any past views in light of the fact that it turns out evidently that ultra-low rates and quantitative easing
44:24 Joe Weisenthal? may not have been such a precondition for these incredible equity market gains? How do you reconcile that?
44:31 Speaker 04 I think, well, certainly back in the, uh, prior to the COVID recession, the quantitative easing for quite a lengthy period, if you like, got things going, got that momentum going. And one of the most profitable ways, methods of investing is just momentum trading. I sit near. Our head of quant is Andy Lathorne, who I've worked with for thirty years last month. He's actually trying to move a few desks away from me. But I know, looking at his quant work, momentum investing is absolutely fine. And actually, if I was participating, if I was fund manager fully invested, I'd be quite happily with that investment style.
45:16 Speaker 04 But looking at the technicals for when to get me out, is the macro story changing? Is something changing? I've been writing recently that, yes, profits are booming in the tech sector. But actually, the second derivative is starting to turn over because you can't go parabolic forever. It's the second derivative is starting to turn over. So it's still very healthy profit growth. The momentum of the momentum is slowing. It's starting to slow. I'm going to go sell everything. And when you've got bubble conditions, then this is something the bull should be looking at. Even if you're a bull, think, well, actually, that is a change I should be watching.
46:00 Speaker 04 What I would say at the moment is, I think, as you did earlier, I think the retail in particular, which certainly after the liberation trade bear market came in early before the professional investors, they've been consistently the ones to drive the market back up. And it is a bit like, what causes big bear markets are recessions. Yeah. It's when, and usually when you're at the peak of the cycle, you're on the wrong valuation, wrong forward P E, and prices collapse. If you're a copper stock, normally at the peak of earnings, you're on a P. P is low. Your P on four, and so you're geared up for the collapse in prices. They have some memory there.
46:44 Speaker 04 But what tends to happen in bubbles, you end up on a twenty-three, like the S and P on a twenty-three times forward P at the point of recession. So you have the wrong earning, forward earnings, and the wrong P E. And there's no acknowledgement that there could be a recession out there. Apart from the A I spending on investment, which could collapse at any, we've seen it before. If another deep seat comes along, something happens to blow that narrative up.
47:16 Speaker 04 But outside of that, you look at the US economy and you look at the consumer. Yeah, last year it's seen no employment growth when the economy is toddling along quite happily between two and three percent. And not just because of the public sector, private payrolls year on year slowed to zero. You're thinking, yeah, AI is having an effect here, has a positive effect on some ways on on on union labour costs. But this is really undermining consumption. So US real household incomes are up half a percent year on year, half a percent. Their consumer consumer spending in real terms is still up over two percent. Why is that?
47:57 Speaker 04 The savings ratio in the US in the last year has collapsed from over five percent this time last year to three and a half percent now. That is as low as the only other times it's been lower is as people were spending the Covid checks. So it got down to two and a half percent. Or just before the two thousand and eight global financial crisis, when you had that credit bubble. The consumer is totally tapped out. And if you get a wave of inflation coming through the economy through cost push. Last time companies just whacked up their margins, so they they put up their prices, whacked up their margins as well in unprecedented fashion because margins sort of contracted as costs went up.
48:42 Speaker 04 They didn't, it was absolutely unprecedented inflation. The St Louis Fed named the sectors which did it. Retail, wholesale and construction were the three big contributors to that whole economy level. But people had pandemic checks then, so companies could get away with doing it then. This time around, as this wave of cost push pressure comes through. Are companies going to be able to get away with it when the savings ratio is already so low? Is it going to start squeezing the corporate sector margins, which are ludicrously, obscenely inflated in my view?
49:23 Speaker 04 And when these margins start, if these margins start coming down because they can't pass on these price increases. Will they then react to that by cutting jobs and cutting investment? So could the one surprise we get is actually the economy outside of AI investment is far weaker. Yeah. That we think and actually could tip over. Into recession. Now that could be a real surprise because that could take down the AI sector as well. It's not just an exogenous
49:53 Tracy Alloway? Right.
49:54 Speaker 04 force. So I think that's an interesting, that's, that's an interesting black swan because no one is thinking this oil price could cause a recession.
50:04 Tracy Alloway? One question I wanted to ask, given your long career, when were you most worried about the future? Is there a particular moment looking back where you were really hitting the panic button?
50:17 Speaker 04 I tend to stay very close to the panic button, a bit too close to some people, so.
50:23 Tracy Alloway? That's your job.
50:24 Speaker 04 I, I, I, I tend to see problems around the corner. Actually, instead, I, I was on a conference call with clients yesterday. And I said, well, probably the most bearish thing I can think of from my side is I don't feel as bearish as I have done in the past. I, I struggle to see an immediate catalyst for collapse. And the positive narratives are always very compelling. I, I remember that the time I was most worried globally was two thousand six, two thousand seven, where it was obvious to me, and I don't understand much about crypto and all these complicated things or the details of AI, but I actually got to the bottom of CDOs, and this was before the big short film,
51:09 Speaker 04 where they made it a bit simpler. I actually understood CDOs. I went to a CDO conference in, in two thousand and, two thousand and seven. And I was amazed that they weren't optimistic. They were getting really worried. And I, I just thought as a macro person, when someone like Bananki says, we're asked about the housing bubble, I guess I, I don't accept your premise. There is a bubble and there's never been a nationwide house price recession in, in history. Classic. I just think you're an idiot. You should not be in your job, basically. And yes, he was the right person at the time when the bubble burst. But if you looked at his, because people said, well, he did the thesis on the Great Depression.
51:53 Speaker 04 You looked at his thesis about the Great Depression. There was nothing about the credit bubble that preceded it at all. And similarly, he just did not understand the, and, and, and where the, I'm not a big fan of central bankers. Although the Bank of England improved dramatically after I left it. The quality, the quality of the people there. Because they're just so reluctant to admit, they're just constantly screwing it up and making it worse. For benevolent reasons, they're trying to make it better, but they make it a lot worse. And quantitative easing, I, in my view, made it, they might have been in an argument for doing the first quantitative, quantitative easing.
52:34 Speaker 04 But just to keep on going, Paul Volcker eviscerated, just before he died, eviscerated the Fed. By saying, you know, you can't measure inflation that, that closely. You've got a 2% target for inflation. Anywhere between one to three is okay, essentially, as long as it's not accelerating off. And this is, we're between, broadly between one and three now. But he said, we were getting down to one with measurement errors. It was ludicrous to try and push it back up to 2%. You didn't need to do that. And personally, I just think central bankers need to be reined in quite closely.
53:11 Tracy Alloway? I do think in retrospect, when we look back to the sort of late 2010s era of inflation. It, it felt pretty good, even though we were below target.
53:19 Joe Weisenthal? I agree, and I have a lot of thoughts. And the idea of undershooting inflation has never, and I, I'm on record as saying this, not just in retrospect. I've never understood people whining about too little inflation, so.
53:34 Tracy Alloway? All right.
53:34 Joe Weisenthal? I have receipts.
53:35 Tracy Alloway? Well, Albert, that was fantastic fun. Thank you so much for finally coming on All Thoughts.
53:39 Speaker 04 It's been a real pleasure and I hope I haven't scared your viewers.
53:42 Joe Weisenthal? You're a nice guy for a bear. Bears are fun. You're a pleasant guy.
53:45 Speaker 04 Well, people who read my stuff think I'm really miserable, but I'm actually a very happy, contented person. And I, and I wear, and I wear a nice shirt to try and cheer people, try and cheer people up.
53:56 Joe Weisenthal? Weirdly.
53:57 Speaker 04 But I hope I haven't depressed too many of you viewers.
53:59 Joe Weisenthal? Yeah, no, no, I think I've got.
54:00 Speaker 04 I apologize for that.
54:01 Joe Weisenthal? I feel, I feel great.
54:15 Tracy Alloway? Joe, that was really good fun. I'm glad we could finally have him on.
54:18 Joe Weisenthal? We've been reading Albert really, literally for decades, or at least over a decade now. Really fun to finally.
54:25 Tracy Alloway? His notes really are fantastic. One thing that stood out to me, you know, I was thinking about what he was saying about the US savings rate and the ability of companies to push through price increases. And earlier this week, I was reading the earnings transcript for Colgate. And they were talking about packaging costs going up quite significantly because of higher petrochemicals prices. And also guiding their margin lower for the full year. So basically saying that they're going to absorb the costs. And there was one analyst on the transcript who was like, well, why don't you raise prices? And they basically didn't, you know, classic executive style, they didn't really say anything. They were just like, if I were you, I would incorporate the lower margin guidance into your algorithm and leave it, leave it at that.
55:10 Tracy Alloway? But you know, like, there might be something there.
55:13 Joe Weisenthal? Totally. Can I just say, this is going to be the type of thing that someone says at the very top and so forth. But before we flew to London, I downloaded Ray Kurzweil's The Singularity is Near book about, this is published in 2004. In which he predicts that in the first half of this century, we would have machines that are more intelligent than humans on almost every scale. But one of the things he says in the book, part of his theory is that computers are going to keep getting better and better. And as they get better, more money will flow into computer investments because they can do more things.
55:51 Joe Weisenthal? And the Moore's Law and all that, that actually the rate of acceleration, the derivative of the derivative can actually keep going up and up and up until you do get that vertical. And so now I'm thinking like, we all know the stock market would not be nearly where it was, where it is right now if it weren't for AI, obviously. We might be in a bear market, we might be in a recession.
56:12 Tracy Alloway? Yeah, the economy wouldn't be either.
56:14 Joe Weisenthal? Nothing like it is now. But now I'm like in that mood reading this to like. And Albert said, he's like, I feel a little weird right now because I don't know what the obvious bearish catalyst is. Right now I'm in a little bit of a weird situation. And me, I'm reading this book. It's like, what if like earnings literally just go to infinity? Maybe it could happen. I don't know.
56:33 Tracy Alloway? I don't know. If Albert Edwards feels pretty good about stocks right now.
56:36 Joe Weisenthal? And I'm talking about how earnings could go to affinity.
56:39 Tracy Alloway? Yeah.
56:39 Joe Weisenthal? This is a sign that maybe these are the types of episodes we record near the top.
56:44 Tracy Alloway? Ah, okay. Um, shall we leave it there?
56:46 Joe Weisenthal? Yes.
56:47 Tracy Alloway? Okay. This has been another episode of the Odd Lots Podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway.
56:52 Joe Weisenthal? And I'm Joe Weisenthal. You can follow me at the Stalwart. Follow our producers, Carmen Rodriguez at Carmen Armin Dashel Bennett at Dashbot, Kail Brooks at Kail Brooks, and Kevin Lozano at Kevin Lloyd Lozano. And for more Odd Lots content, go to Bloomberg.com/oddlots. We have a daily newsletter and all of our episodes. And you can chat about all these topics 24/7 in our Discord, discord.gg/oddlots.
57:16 Tracy Alloway? And if you enjoy Odd Lots, if you want us to ask Albert Edwards where he gets his floral shirts, 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.
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