“It’s All About Credit” | James Aitken on Widening Credit Spreads & Falling U.S. Stocks, Tariff-Induced Slowdown & Trade Disruption, Chinese & European Stocks, and Private Credit
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Today's episode is brought to you by Fintool, the AI equity research co-pilot tailored for institutional investors. Go to the Fintool.com link in the description to learn how you can add AI to your research process. The ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough. Thank you. Just close the f***ing door. Yes.

Very, very glad to welcome to Monetary Matters, James Aitken of Aitken Advisors. He advises some of the best and biggest and most sophisticated investors in the world. And I'm really glad he is here. James, good to talk to you.

Good to see you, Jack. You finally got me. You've been chasing me for three years. I admire your tenacity and I'm looking forward to a wonderful conversation with you. So thank you for having me. It's my pleasure, James. I'm glad we have you at last. It's a good time, James. Tariffs, they are here. Some of the tariffs have actually been implemented. A lot more has been threatened. Markets don't like them at all. Credit spreads are widening. The stock market is selling off. How has Trump's fiscal policy

tariffs, Department of Government Efficiency or DOGE, how does that impact your views on nominal GDP, on credit and on stocks? Are we living in a different world now? - So you're starting with the easy bit first, Jack. Is that what you're telling me? - Yes.

Look, it's got to the stage where we have intraday tariffs, depending on what the president puts out there. So trying to calibrate the cumulative impact of all of this is quite tricky. But intraday tariffs are apparently a thing. But look, you're asking the right question. It's what we're all wrestling with. Look, let's start with the important point.

The president truly believes in tariffs as a force for good. Well, he thinks they're a force for good and as a very blunt negotiating tool to get the outcomes he desires. Now, we've never seen anything quite like this, at least not in living memory.

But he's deadly serious about using tariffs to get desired trade outcomes and whisper it generates sufficient revenue to help stabilize the U.S. fiscal situation. So there's two broad, I guess you'd call it, ideas that underline his tariff threats or tariff ideas.

But Jack, the thing that concerns me is this notion of reciprocal tariffs. And to be frank with you and all our viewers, I kept hearing Trump talk about reciprocal tariffs and I read about reciprocal tariffs and it occurred to me I didn't actually know what that meant. Is it tit for tat where someone's got a goods and services tax or value added tax on U.S. exports that we're going to match it? What does it actually mean? So I did some reading on that.

And boy, reciprocal tariffs are disruptive. At the most basic level, the impact of reciprocal tariffs on every part of every device that's moving across border is far more impactful and disruptive

than a flat 10% tariff on all imported goods. It's really disruptive, Jack. And implementing that via customs and border protection, which for obvious reasons is somewhat understaffed at the moment, and hasn't made the investment in technology and infrastructure to monitor all of this, if they're serious about pushing ahead with reciprocal tariffs worldwide from April 2nd,

I think it's very disruptive for global trade. It's very disruptive for shipping. It's very disruptive for customs agents and importers and exporters all around the world as they try to comply with these reciprocal tariffs. Now, of course, there'll be many people who say that the threat of reciprocal tariffs is just another negotiating strategy. No, no, no. They're very serious about implementing them and very serious about progressing with them

for the reasons I said at the top, to achieve, for better or worse, fairer trade outcomes and also raise a substantial amount of revenue to help stabilize the US fiscal situation. But that's the first part of your question, is just to say reciprocal tariffs are actually complicated. The second part is, look,

We don't need to remind any viewer or listener that we have been in a great, big, beautiful bull market. And I'm not saying this is the only framework or the framework for thinking about why we've had such a bull market in the US and why credit's been well behaved. But let's try it. And the framework I've been using with my clients for two and a half years is as a result of too much stimulus, if you will.

Nominal GDP coming out of COVID was well higher than what we saw in the 25 years prior to 2020. OK, so nominal GDP was 5% plus for a long period of time in the United States. Now, Jack, it doesn't matter if it's the United States. It could be any country on Earth that is generating 5% plus nominal GDP. Guess what? Their credit market broadly is going to be fine.

Because the economy as a whole is generating more than enough cash flow to service all that debt and guess what any country on earth That's got nominal GDP at 5% plus their stock markets going to be fine as well Because companies can defend and grow their moats their earnings are growing in a predictable way and unsurprisingly some companies do very very well indeed that was then and

And this is where this gets difficult in what I think is a hyper financialized financial market, financial system. We're not tracking 5% nominal GDP in the United States anymore. It must now be a lower number. It must now be a lower number. How much lower? We don't know. Let's say it's not 5%. It might be 3%.

And that's because fiscal policy has been tightened in the US. We know that. You've got the tariff impact on growth. You've got the impact of reduced immigration. I'm not saying it's good or bad. It's a fact. And then you've got the more difficult to calibrate aspect, which you just broadly call confidence. How does all of this in motion impact CapEx, CapEx plans, consumer spending and so forth?

And you're seeing some tentative signs that all of this is slowing down. Now, to be really clear, if we're going from 5% nominal GDP in the United States to, say, three, it is not the end of the world. But obviously, if that is the trajectory for the next couple of quarters, at least, then

then the broad market clearing price for equities is probably not definitely. It's probably has to be lower as earnings forecast gets shaved.

And the market clearing price for credit, Jack, in terms of spreads, probably has to be wider. Now, as you and I record this on a Friday in March, to be very clear, the US economy still generally looks OK. Inflation's a bit sticky, but it's coming down. The labor market still generally looks OK. Wages are OK, but there are clear signs that things are changing.

There's various anecdotes about CapEx plans being readjusted or shelved. If Delta Airlines is a guide, there's some reasons to be concerned about consumer confidence and lower end consumers in particular. So we need to think and ruminate on what the asset market's implications are of a U.S. economy that's slowing down.

Whether it's a recession or not, I don't know. But the delta is definitely down. And we need to adjust the way we think broadly about equities and broadly about credit. You said something, Trump likes tariffs. I don't think anyone on the planet has ever been more clear about something than Trump has been that he likes tariffs.

And I think on Wall Street, there's been a sense that at the moment's notice, if credit, if high yield credit widens by 20 basis points or 30 basis points, Trump is going to throw into the trash his entire economic agenda of tariffs, of rewiring global trade. How much, how likely do you think that is to happen? How much pain has to occur before Trump would reconsider rejiggering some of these policies or at all? Look, the blood answer is, I don't know.

I don't think Mr. Trump knows. But here's where we need to just do a little bit of a detour into some of the broad philosophy, if there is one, of what the president is trying to do. He says, commendably, we're not targeting a stock market, as does Secretary Bassett. They say, sensibly, we're targeting the 10-year Treasury as a measure of our progress to getting the fiscal situation under control. And just on that, to be clear,

The fact that a 10 year Treasury is still where it is today, let's say four and a quarter for simplicity, is actually a pretty good outcome so far. Now, we could argue the reason yields have come down is because people are worried about growth or whatever. But actually, it's not about outcomes so far when the full impact of those cuts and everything else is still to be felt and the economic uncertainty is rising. So you'd probably take four and a quarter today. But of course,

If you tell any financial market over and over again, we are not targeting you. And you've seen so many examples of this over the past 40, 50 years. A policymaker says, oh, no, we're not targeting Sterling or infamously subprimes contained or Chairman Powell in October 2018. He says we're a long way from neutral.

The risk is in a hyper financialized financial system that that market turns around and says, oh, really, pal? Try this on. And there's some hints of that at the moment, although far from panic. So, look, to be blunt, I don't know what the number is in terms of a correction in equities, wider bond spread, wider credit spreads. I really don't know, Jack. I don't think the president knows either.

But if you're implying that there is some kind of wrong number out there that gets Mr. Trump's attention, I think you're right. We just don't know what it is. Although my best guess would be it would be a lot lower yet on the S&P 500. But let's be clear about something. The fact that the president is not apparently as obsessed with the stock market today as he was in his first term is actually a good thing.

But then we've got more leverage deployed today, more day trading, more gambling, more casino like characteristics in the US equity market than we had 10 years ago and potentially we've ever had. I mean, everyone's just punting all the time, right? People have quit their jobs to be day traders and they're living at large and well played to them because it's been a rampaging bull market. But look, what I've seen the past two weeks, it's not a panic.

It's not some kind of epiphany in markets about growth or anything like that, although people, of course, are fitting a narrative to the price action. It's a whole bunch of people that had too many correlated, highly leveraged bets, some of them, unfortunately, working at multi-asset firms or so-called pod shops. They've been taken down. And hence, we've had this

derating of US equities. But it's not a panic. Stocks have come down, but no one's paying up for tail hedges in equities like very low delta put options, like 4,000 strikes on the S&P. No one's panic paying of credit. But you can see the point I'm making here. If I'm roughly right about the lower expected growth in the US, then what we've seen is just the start of

of the potential correction if the US data now clearly starts to wobble. That's the point I'm making.

And so how much of the sell-off is due to positioning? So you said it's a lot of the day traders, the people invested in the two times levered daily ETFs. And then the professional version of those people, I mean, who have better risk limits, but the pod shops, the multi-strategy firms, because many of them are your clients, we should say, is that

I have a sense that they have very, very tight risk limits. So if it's just the multi-strategy firms, the positioning unwind, okay, they were too long, the momentum factor, that's not a cause for concern. But is the unwind of this over, you think? Yeah, let's explain that for our viewers because it's important to think about how is it that these multi-asset firms have become so large and so popular and frankly, so successful for so long?

And they might slightly disagree with this, but to my way of thinking, there was one fundamental insight that underwrote the success of these very large, very active, very high frequency, very levered multi-asset firms. And Jack, the insight was that if I can build a portfolio of

I've got a long short equities pod. I've got a rates trading pod. I've got a commodity pod, whatever the asset class is, index arbitrage, whatever. There's no limit. Right. And if I can put together a portfolio of risk or asset classes and

that has low expected realized correlation. Now, there's no such thing as zero correlation, but you see where I'm going. Let's say stylistically, I can put together five strategies that have a realized correlation of 10. Okay, if I manage the risk in those strategies appropriately, I should lever those to the hilt.

Because collectively those strategies will give me the desired low but predictable single digit rate of return well mid to high single digits and that has worked phenomenally well So the art that whole thing is like low correlation strategies when all added together can generate sustainable predictable high single digit outcomes give or take now theoretically

If you can build, find all sorts of very low correlation strategies, there's no limit to how many you should do, which is kind of where we've ended up. And I know it sounds facetious, but, you know, up there or in New York today or Midtown or Greenwich, there's probably, I don't know, 130 something dudes and they're nearly all dudes.

They've all got their long-short strategy. They've all got $250 to $500 million of capital from their pod mothership, if you will. They're all doing uncorrelated trades. But you can see where the difficulty lies. If your assumed low correlation pods this, that, and the other, some event happens and the correlations go up, what happens?

You get the tap on the shoulder from the risk manager saying you need to cut that, cut that, cut that. And you're dead right, of course, and you know this very well, that whereas theoretically and this is theoretical, it's not a given. But let's say we're running a long, short equity strategy and we've had a good run, but we know we've got a stop loss at 5 percent. Well, in markets that are moving very fast.

You running that long, short equity strategy, don't wait until you're down four and a half percent to chop everything. You get the tap on the shoulder in fast markets when you're down two percent. And I think there's been a lot of that happening. But let's be really clear, whether it be the Millenniums, the Baleasnes, I think Citadel's a very different beast. I don't think any entity on Earth has a greater appetite for structured markets.

for structured, sensible, aggressive risks than Citadel. So they're a bit different. But the original insight was a whole portfolio of low realized correlation returns, which financial theory says you should therefore lever to the limit, which they did, generated stable, predictable returns. But of course, it all falls down if for any reasons correlations go up. That's what's happened. Cue all sorts of degrossing.

Across all sorts of strategies. We've seen it again this week in specific sectors, semiconductors, software, you know, all sorts of things are doing strange things where there's indiscriminate selling all through the day. And in the absence of news, Jack, or should I say in the absence of new news, we should feel reasonably confident.

that a lot of the flows that have been going through markets, the degrossing, if you will, or detonating, unfortunately, in some of these pods, is all about positioning first and foremost, rather than some kind of deep prediction as to where the world is going. But again, no signs of panic. And that's an important thing to factor in. But certainly an interesting evolution in markets. And I'm just surprised, I should say here,

We've had a great run. We've had this great big bull market. It's been extraordinary for all of us across so many assets. I'm just surprised that the market's collective message to me this Friday when I turn on the Bloomberg here is that everything's going to be fine. You buy the dip. It's just a correction. I'm not so sure about that.

So you have these multi-strategy firms, they have all these uncorrelated bets that should be fundamentally not related to each other. So relative value fixed income doesn't have a lot to do with commodity curve trading, doesn't have a lot to do with a long short in mid-cap stocks. But if all these firms have the same trade on at the same time and they unwind them, then they do become correlated. Yeah.

Well, really what they're all trying to solve for all day long, no matter what the strategy is, is the crowding factor. I want to avoid, I mean, it sounds counterintuitive because the success of so many of these strategies is all based on momentum. And momentum, when you think about it, is all about crowding because more and more people plow into some kind of position or strategy. Okay.

So there's this kind of this dichotomy where all these firms are always monitoring positioning and making sure that all their peers are not crowded into the same strategy. And the dichotomy there is obvious, because when you are, and most of these firms are, the biggest counterparty of the entire street, how can you solve for the crowding factor when you are the crowding factor? This is the dichotomy. But generally, they find a way to do it.

It's obviously been a difficult couple of weeks for a lot of them, but they'll survive to fight another day. So, James, it sounds like your broad thesis is nominal GDP was at 5%, very good for equities, very good for credit. There's enough money to service debt. Now, nominal GDP with tariffs and maybe Doge is going to be closer to 3%. I had a guess. Correct.

credit spreads are going to widen and the market clearing price for equities is lower. Now let's get into the philosophy, James. How do you go about that as an investor, as someone who's advising investors of very large firms? Because

The mindset for what your base case over the next few months, maybe it has to be different than in a bull market. And if you say people go outright shorts, buy puts, de-risk because there's hedging, but also the easiest hedge is just to sell, right? Yeah. Well, the frank answer is it depends on the client and whether it be a

high net worth individual or a sovereign wealth fund or a gigantic pool of fixed income and credit or a macro hedge fund. I mean, it really depends on the client and the strategy. And of course, so far, we've had a US centric conversation. There's a lot of other things happening around the world that one might want to allocate towards, whether it be things in China or Japan or obviously Europe. And we'll come to that.

But the challenge for all the clients I'm very lucky to advise, and most of them have advised for two and a half decades, is it's not trying to understand tariffs or economics or Trump or this, that and the other or European military spending, some of which is obvious, some of which isn't, some of which is hard.

Jack, the challenge for all these people I work with, no matter how large their balance sheet and mandate is, is they just have too little time to think. It's really hard when you're sitting atop of a large pool of personal or institutional capital or family balance sheet to step back from the noise and the struggle and the battle and the tweets and all these impulses and your

come to work every day and you turn on your email, oh my gosh, there's 1,200. It's really hard to outperform in any market when you kind of feel you're always on the back foot. And this may sound strange, but people may think of me, well, I hope they do, as a successful or satisfactory investment analyst or strategist, however.

But I'm not an investment strategist these days. I'm actually an investment therapist because a lot of people, understandably, fairly are very wound up by what's going on and very troubled by what's going on. OK, it doesn't look like America first. It looks like America only.

And some days it looks like some kind of shakedown or extortion racket where if you don't do what we tell you to do, you know, we'll send in Lutnik in the middle of the night to, you know, scrape the side of your car or something. I don't know because he seems capable of that. But first and foremost, it's listening to my clients. I'm serious. Before we even get into what we do, my job when clients are a bit on the back foot, a bit on edge, is to keep them calm.

And I do that by listening. And then when they've talked through what they're wrestling with, I remind them of what they know. I try to remind them of what they know about how the world works, how markets work and everything else. And then we reflect on a course of action. Now, ideally, if a client is prepared for chaos, there's actually nothing to do. You have a satisfactory allocation to the right equities.

You have a satisfactory allocation, yes, to the right private equity fund or private debt. You have a satisfactory liquidity profile and you have a sensible expected rate of return across your portfolio to reflect the age we're in. And you're just watching and waiting as opposed to, oh, my gosh, get me out of this, that and the other. But the thing for me if I was to narrow it down is not equities per se, because who doesn't know?

that the US equity market in particular, despite the recent correction, is still richly valued. Now, what we haven't seen yet is people start to revise their earnings forecast down for the S&P broadly, but maybe that's coming. We shall see. So who doesn't know that the US equity market is richly valued and that you need to be careful of any business that has massively decoupled from what you call base rates?

And to put it bluntly, Jack, it's probably not sensible at this moment to be chasing any stock that has gone from 10 to 20 times sales. That is not a sensible thing that just as it's not sensible, probably thinking long term to try to pick a bottom in any stock. And guess what? Most of them are technology stocks these days, of course, AI related and so forth.

Just as it's not sensible to be looking for a bottom in any stock that's derated from 25 times sales to 23 times sales, to pick an example. Again, the market clearing price of so many things, if you look at base rates, which suggests it's a lot, lot lower. So you've got to be careful. But people know that. People know that. They know there's a lot of leverage and gambling and speculation marks. They know that. The thing I'm most focused on is how should we think about U.S. credit? That to me is.

is the thing that gets uncomfortable for people. Now, again, every sensible business in the era of low interest rates termed out their funding at a very low cost, which is good. But progressively, that funding matures and they need to refinance at rates that may be a little bit higher. Now, again, if we are the Bloomberg over here, US credit spreads are a bit wider, just a bit.

but they are still so tight. And that's the thing we've got to be wary of. If we're adding credit protection, and to be clear, I'm not talking about credit ETFs or shorting them, because that is a very imperfect way of trying to hedge credit risk. I mean, I know there are people that use them and so forth, but it's very imperfect. But if we have wider credit spreads for any period of time,

maybe two, three or five turns wider than the gap we've seen recently. You know, it becomes more difficult at the margin for people to refinance in a period of uncertainty. And I think that potentially has a big ripple effect through markets more broadly. It has implications for all the private equity guys. Again, their share prices, you could argue, are a bit elevated.

You have all these listed private credit and debt firms. There's tons of them. And it's interesting to see their share prices have come off the boil a bit. For me, it's all about credit. And I want to be careful of not giving trading advice. But most of the conversations with my largest clients have been, OK, how should we think about U.S. credit? What's the feedback loop between U.S.

An expected, perhaps necessary slowing of the US economy. What do I need to avoid? Do I need to redeem now? Okay, what do I do? So there's lots of conversations around that. It's usually at an index level.

And, you know, the widening in credit in a proper slowdown has a long, long way to go. And I think if I'm roughly right about expected U.S. growth in the two quarters ahead, it should be a difficult transition for credit. And if I'm roughly right about expected U.S. growth in the period ahead, then there's the risk of a feedback loop between widening credit spreads and the stock market in general.

And that's when things obviously get incrementally more challenging. So really, it's all about credit, Jack. Today's episode is brought to you by Fintool, the AI equity research co-pilot tailored specifically for institutional investors. Everyone in finance is racing to figure out how AI can best be integrated into their investment process.

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That's Fintool.com. Now let's get back to today's episode. The high yield spreads have widened from 260 basis points above treasuries, above risk-free rates, the base rate, to 320. So that's 60 basis points in a little under a month. So it seems wide if you look at a one-year chart, which I'm looking at now. But if you zoom out, it really is a tiny, tiny...

amount of widening. And so yeah, I mean, how bad do you think this can get? And also talk to us about that feedback mechanism of wider credit spreads, lower stocks, and then impact on the economy through the wealth effect as wealth as assets go down in value, people who have been spending based on a number in their head of how much money they have, they're going to spend less.

Look, would it be if we get a proper economic slowdown with high yield at 400, 500 over be feasible? Of course. Of course, it would be completely normal, uncomfortable transition. But at 500 over, why not? Investment grade, why? Yeah, you know, things make sense. And of course, in credit, it's the bottom of the capital structure that always rots first.

And we're seeing that, you know, the triple C's and everything else is a wider as as they should be. But you asked me about the feedback loop and the important question. I'm grateful you reminded me about the wealth effect. Now, look, in the first instance, if I'm thinking about what do wider credit spreads mean for the private credit markets?

And gosh, hasn't that been a juggernaut? I mean, the amount of money going into those low vol strategies because apparently they never have to mark the market. Now, win-win, right? Oh, you're going to give me 9% with zero volatility? We'll do it all day long. But of course, none of that has been properly tested, at least not in the recent past, with a proper US growth slowdown. And there's been so much risk transferred, as intended, as intended,

from the regulated banking system to private credit and debt and everything else that, you know, that's what we need to worry about. So first and foremost, what do wider let's call them public credit spreads, credit indices, high yield junk, which we can say, what's the ripple effect of that in terms of a test for the private debt and private credit juggernaut? That's the first instance. Now, to be very clear, I'm not foreseeing calamity

in private credit and debt, I'm foreseeing a test. And of course, the biggest, the best, the Blackstones, the KKRs, the Apollos, look, they might get a bit of a chinning here and there on some of their exposures, but they're big enough, they're robust enough to absorb some of those setbacks, those dints to their portfolios.

And they are financial engineers par excellence. And I'm sure that there's ways of ensuring that an underperforming asset is not a big fat zero. There's ways of extending and pretending down the road. So first and foremost, what might wider credit spreads mean for the momentum of these private credit and private debt juggernauts? OK, that's the first point. Second point is just the more organic one.

What's the signaling effect of wider credit spreads potentially for markets that are highly geared businesses that are perhaps run too far? Yes, some of the listed private equity managers and so forth, or any business that hasn't been able to refinance during this extraordinary liquidity boom of the past several years. If you couldn't refinance during that time or couldn't get your IPO away, well, let's face it, you're probably dead.

So it might lead to an accelerated slowdown and reckoning for certain businesses that are sort of bumbled along. And you know what? That's OK. But you hit upon the important thing, which is the wealth effect. And I think it's

well understood how important that wealth effect has been in terms of sustaining U.S. consumption. And of course, the U.S. economy is very much consumption driven, as we all know. And Jack, the data came out last night, the Fed's Z1 report, and there's many interesting line items in there. But we were reminded last night

in the Fed's Zed one report, which is for the third quarter of last year, that U.S. household net worth is still roughly seven and a half times U.S. household disposable income. Now, that is staggering. Unsurprisingly, as a result of the mega stimulus we deployed after COVID, that multiple went parabolic. In fact, if I remember correctly,

At the end of 21, which was the buy everything mania, there's no inflation rates are zero. Jack, the US household net worth as a multiple of disposable income, I think, got to about 8x. I mean, that's just off the charts. So we've come down, but it's still 7.5x. And if we were to guess what that multiple is at the end of this difficult quarter, maybe the answer is 6.5x, 7x. But here's the so what.

So guess what? If there's an equity correction, U.S. household net worth as a multiple disposable income, it's not going to be driven by lower house prices. It's not going to be driven by the money market funds. It's not going to be driven by the liquid assets.

But there has to be a connection. If U.S. household net worth enabled the U.S. consumer to keep going in aggregate and that's now peaked and it's going to start coming down, then you have to imagine that U.S. consumer spending is going to soften. Now, I don't have the ability to calibrate that precisely, except the delta has to be down.

And you're seeing some early signs of that, some early signs of that, particularly at the lower end consumer, lower income, etc. But, you know, it's we've got to watch that link because it has to have peaked. It has to have peaked. U.S. household net worth is a multiple of personal disposable income, household disposable income, I should say, has to have peaked. And that has implications for consumption.

And it's one of the other reasons I think that the US economy is probably going to slow from here on. But we shall see. And by the way, I should add, I don't I can't give you a precise confidence on my views. It's a view.

And I'm going to be constantly reevaluating that view and updating it as the data comes in. I'm not I'm just I want to make sure I'm not too dogmatic about it. I want to make sure I'm pragmatic and evaluating it in real time. But I'm confident about the direction of the slowing. I'm confident about the direction of credit spreads and equities in general.

But I've got to keep evaluating that day by day, as every investor should.

And so, James, you never know anything for sure and you're always constantly evaluating your views. But I think that you have a level of confidence now that credit spreads are going to go up and equities are going to go down. That is a higher level of confidence that you normally have. Is that true? Yeah. Yeah. I mean, I've been very, very calm. I mean, all this recession talk that we've heard endlessly for three years about the U.S. was just stupid. I mean, it was just stupid.

And yet people went on and on about it. And I was much more like, no, no, no. Here is the US economy. Here's nominal GDP. Despite all these Fed hikes, by the way, US nominal GDP was still comfortably 5% plus. That's a great outcome. And by the way, it also tells you the Fed probably didn't do enough. But that's a whole nother story. Right.

So, yeah, I am fairly confident about it. But again, how it turns out, we shall see. But you're right. I just think we're coming off the boil. What we've seen in markets, I don't think fully reflects how difficult this transition can be. And for the Trump administration, I mean, I admire their bravery in saying we're not targeting the stock market.

I admire their bravery in saying this is not so much about Wall Street anymore. It's about Main Street. Excellent, because let's face it, for too long, it's been all about Wall Street and a rebalancing back to more productive uses of our time rather than day trading to actually building things and doing things and so forth actually be welcome. But that's a painful transition.

But Jack, to be clear, what I'm describing here for the Trump administration is actually a sequencing problem where the difficult things come first. Yeah, the difficult things come first. The benefits eventually are down the road. I mean, you look at this big, beautiful reconciliation bill. Realistically, the earliest it can get through Congress, if it all goes to plan, is August.

August is a long time away when you've got all this tariff stuff going on and other matters and willy won'ty and fistfights everywhere and so forth. August is a long way away if you want to sort of bet on a bottom in all these things. And then the extending the tax cuts, you know, all of that financial deregulation. So we've got this kind of sequencing problem.

And I think therefore, as opposed to most of the past three years, where it's just like sit back, don't be talked out of risk assets, stay invested, play the game. I think given that sequencing problem, rather than just toughen it out, trying to bet on a bottom in X, Y and Z, we actually need to adjust our portfolios. We need to adjust our thinking. And again, to use that metaphor, if we're thinking that business is

that was at 25 times sales is now cheap at 22 times sales. I think we need to be careful of things like that. We need to avoid all the stuff that's a little bit overcooked, a little bit overhyped. We need to be disciplined now. We need to be really disciplined. And what do you think about the pickup in capital markets in initial public offerings, IPOs? The markets have been very buoyant for so long, yet IPOs never really came in there. This was supposed to be the year. Do you think that is? Yeah, it was. Yeah.

Yeah, I think there's a window here. There's no doubt about it. I mean, there's some amazing businesses that are about to come through. I think one of the most amazing, you know these guys, CoreWeave, related to AI chips and everything else. I mean, the story of that company, when the book is written, it is one of the great business stories. A bunch of Morgan Stanley commodity traders have a big idea that they're going to go into Bitcoin farming because...

You know, Morgan Stanley was getting out of commodities and they end up with all these GPUs. And it's like, well, I don't know. What do we do with them? Well, guess what? They've just crushed it. And it's a wonderful story. So they'll get away.

And there'll be a few more. But you're making a good point, of course, is that the window is not wide open, particularly the backstory. And I think my guess would be that anyone who thought they might be doing an IPO in the third or fourth or the second half of 2025 might be wishing to accelerate their plans. So the good ones will get away. They'll get away at a reasonable price. But I think, yeah, it's going to look if I'm roughly right.

about the evolution of the US economy. And then, of course, it's going to be incrementally more difficult for people to get their liquidity events done. And so as viewers can note, you're wearing a very nice Canada jacket. The major tariffs so far, it's so hard to keep track of them, but already a 10% tariff on China. And then there were tariffs on Canada and Mexico that I think

now are also going to be on that April 2nd date of reciprocal tariffs when I think it's with the rest of the world. So apparently India has on some products, a hundred percent tariff. Now we're going to slap a hundred percent tariff on them. What is this going to look like? How disruptive could it be towards trade? And then also explain the economic is disruptive in 2021. This trade was very, very disruptive, but you had a huge momentum boost of,

like nominal GDP because of all the stimulus. What might that look like now if you don't have that stimulus? And then also what's going to be the impact on other markets? I mean, the backdrop for this, of course, is that the US dollar has been weakening, which many people thought the US dollar would strengthen because of tariffs. And foreign stock markets, the Chinese market, the European market have been rallying as the US market has been selling off. Yeah. Let's try and tease it all out and

The Canadian top is, yes, just trying to support our friends in the north. My wife was born and raised in Toronto. I have obviously in-laws there, which is nice. I have the highest regard for Canadian policymakers, full stop. They're some of the most impressive people I've ever come across. Quietly brilliant. Never in the headlines, although that's changed of late.

And they have a new prime minister with whom I'm very, very familiar. It's a mess. Now, let's start at the top. Let's start at the top. What is Trump actually trying to do? Trump is the schoolyard bully who's picking on the little kids and then to set an example for the big kids he's eventually going to go after. So he's bullying little old Canada and Mexico in a very unusual way.

I'm not sure he's been fully advised. I mean, maybe he has. The United States, despite what he messages, actually does rely on Canada for a lot of things, from fresh water to hydropower to potash. Very important for agriculture. Saskatchewan has a lot of potash. And the last time I checked, Jack, I think there was approximately $480 billion

Canadian dollars of trade every year between Ontario and the United States, most of which is, you know, Windsor, Detroit, et cetera. And so many parts, for reasons I don't quite understand, but so many auto parts go back and forth, back and forth across that border in various components. So if Trump is serious on smacking Canada over the head, boy, oh boy, it's going to be disruptive for the automakers. And I would believe, well,

Well, they are spending a lot of time in Washington right now, lobbying for exemptions. But the reason he's bullying the little kids, if you will, Canada and Mexico, is actually to put together a unified North American trade bloc. Now, that's not obvious to see right now, is it? But it's trying to make USMCA, previously known as NAFTA, into a very resilient trade bloc.

And if and when he can sort all that out and it needs to be sorted out, he will then turn his full attention to Europe. And we've seen some hints of that. And then after he's dealt with Europe, with tariffs and everything else, he turns to the big one, which is China. And let's not forget that all of this apparent madness and mess that we're seeing is all a preview for the big one, which is Trump going after unfair trade with China.

So great to own Chinese equities today. We'll see what happens in months to come, but we'll come to that. In terms of what's the actual number and how do we calibrate reciprocal tariffs and how will they be implemented? Look, my blunt answer is I don't know. I don't know. But again, if one spends a little bit of time reading about reciprocal tariffs, boy, oh boy, they're complicated. And you, sorry, to be clear, complicated to implement.

And you remember in January, one of the frankly good things the Trump administration has done is try to crack down on these de minimis rule, where all those packages under 800 bucks of value, you know, they try to crack down on that because, you know, Chinese manufacturers were arbitraging that and the drugs coming in this and the other. But then within 24 hours, they had to rescind that because customers, CBP, Customs and Border Protection said,

Look, I'm sorry. We are already drained of personnel, ironic, and we do not have the systems to implement that. If you give us the budget and tell us exactly what you want, we'll go away and do it. But this is something that takes necessarily months, even if it's a good thing. And it is a good thing. Hang on a second. If you don't have the systems in place to manage a change in the de minimis rule, what kind of systems do you need in place, Jack?

to manage really complicated reciprocal tariffs, not just on individual items, but components to prove proof of origin, where they're manufactured. You know, how do I charge for all the different widgets in an iPad that's coming from China? If I've got silicon from here, I've got the screen from here, I've got the chip from there. This is hard. It's really hard. It's hard for shipping companies.

It's hard for customs agents. It's hard for export agents, importers, everyone. It's hard for ports. Who wears the liability of ensuring that reciprocal tariffs are implemented? And let's go back to first principles. Tariffs full stock, whether it be reciprocal or unilateral, whatever. Raising revenues from tariffs is an essential component of the Trump's administration. Let's call it strategy.

to stabilize the fiscal situation. Now, if you can't raise the amount of money you anticipate from these things, then where does that leave the bond market? But also, of course, this is not going to be a static process. Other parts of the world are not going to be able to completely change their VAT system, value added tax system or tax systems in general.

to comply with whatever Trump wants them to do. It's really, really hard because you basically if people want to deescalate, then Trump seems to be saying, you do it our way or else. Well, that's really hard to do. So it's a dynamic process. Other parts of the world will have to respond.

And I think we understand why they want to do reciprocal tariffs and why they're so keen on them. But as best I can tell from my reading, I never imagined going into the weeds as I have had to do over the past couple of weeks of like, well, what are reciprocal tariffs? How do they work? And I'm reading all this stuff from trade academics and export academics because I'm trying to understand the risks here. But I can say with some confidence, I think,

that if they are determined to go ahead with reciprocal tariffs on or after April 2nd against all major trading partners, I think that is as disruptive for global trade at a basic level as anything we've seen since COVID. That's my feeling, strong feeling that it's really, really disruptive. And that's not good.

And I know what you're thinking and I know what many of you are thinking. Hang on a second. Are you talking about supply chain disruption? Yeah. Hang on. What happened the last time when we had supply chain disruption? Inflation. Bingo. Now, isn't it interesting?

Let's bring in another really key player here. You know, Jack, if we were having this conversation for most of the past 25 years at a moment of some uncertainty and turbulence in markets, guess what we would have started with first? What does the Fed think? Exactly. And isn't it interesting? We're deep into this very generous conversation you're hosting.

And we're about, I don't know, 50 odd minutes into it or something like that. And we're only just now bringing the Fed. And this is Monetary Matters. This is supposed to be a central banking focused show. There you go. Oops. But, you know, it's interesting. It just reminds us how much the world has changed. We've got a Fed meeting coming up in the next couple of weeks. Hang on. That's kind of important, I thought.

Now, in years past, it's, oh, what's that? What are they going to do with a statement of economic objections? What's the leak? No, no, no. All we're talking about, and this is right, tariffs, trade, doge, fiscal. Yeah, we're talking about all those things. And the Fed is kind of like, oh, yeah, I forgot about those guys. You know, Jay Powell gave a speech last Friday. I don't think anyone, and it's like, oh, yeah, he's giving a speech. You know, what's the stock market? It's interesting. But here's the serious dilemma. Look.

I've got to say, I have no time for the vast number of people out there who have worked at the Fed or any central bank and then think it's great fun to dump on the Fed. I think that's not cool. I really don't. And whether it be for reasons of ego or vendetta, I don't know. Look, central bankers...

in my experience, are really bright, intelligent people doing the best they can subject to their mandate and subject to politics. They really are trying to do their best. No central banker goes to work in the morning, Jack, and says, gee, how can I really screw this up today? What's the worst thing I could do? Although sometimes some primaries contain, eh, not so good. Unlike previous market wobbles, this is something we should think about.

Given inflation, it's dribbling down, but given inflation is still above the Fed's target. I'll just make the obvious point. It's more difficult now with inflation lower, but still above the Fed's target for the Fed to be proactive in the event that there's ongoing disturbances in markets and in the event that U.S. consumer confidence crumbles.

Consumer spending slows and all in all, the US economy slows. There's less wiggle room today for them to be proactive. Now, I do think they will be cutting again, but my suspicion would be it might take them a little bit longer to

to be able to respond simply because inflation is above target. OK, it's not it's not fully back to where they need it or want it, although they're getting incremental progress. So it's a tricky one, isn't it? It's a tricky transition where you've got all these moving parts. The Fed will do what the Fed needs to do eventually. But if we then throw in

Some kind of lingering disruption from the attempt to implement reciprocal tariffs. And Jack, we imagine what that could mean for supply chains that have just got through all the disrupt. And then we imagine what that might mean for goods prices and stuff like that.

It feels incrementally more difficult, doesn't it, for markets as a whole? And that's how I tie it all together. Incrementally more difficult, not predicting, oh, my gosh, it's all going to hell, but incrementally more difficult, which requires us, therefore, to be incrementally more disciplined in terms of how we think of the risk assets on our screen.

and how we scrub our equity portfolios in particular. And so your case of nominal GDP going from 5% to 3%, I think it is nominal. That would cause real growth to go down. And that seems among economists, real growth is going to go down, either your case of nominal growth going down or in terms of inflation going up and nominal growth saying the same. So it sounds like you are in the camp of the nominal growth going down.

Yeah, I just think in nominal terms, I mean, it's a bit old fashioned. I mean, we're all trained to think in terms of real GDP, this, that and the other. I just like to think in nominal because, you know, that's where the cash flow comes, etc. But look, let's be clear. I think I feel pretty confident that the US economy is probably going to slow from here on just because it's like to use a fun metaphor, Rodney Dangerfield said,

on that high diving board trying to pull off the triple lindy. It gives me great amusement. I think I must have watched that short video on YouTube, I don't know, several dozen times. It always makes me giggle. The Trump administration is trying to pull off the policy equivalent of the triple lindy. It's a difficult one to do, to hold it all together. It's especially difficult when you have, unfortunately,

a cabinet member such as Commerce Secretary Lutnik out there nearly every day spouting the most outrageous nonsense about what's happening, often getting way out in front of the president's thinking. And I think Mr. Lutnik in particular, unfortunately, we can't avoid the fact that he's Mr. Tariff because that's his job.

But Jack, he out of all of these people is frankly adding to the confusion and it's not good. And I think it's very hard for Scott Besson. Treasury Secretary. Yeah. Yeah. You know, he's a good man. He's been thinking about this job for a long time. He's very bright, as I think most people know. He certainly understands markets.

But he's he's finding it difficult to be heard at the moment because, look, Nick thinks he's both commerce secretary and treasury secretary. But frankly, the sooner there can be one economic spokesman for this administration, the better. I mean, maybe that's naive. I mean, it's President Trump, isn't it?

But the sooner there can be one coherent economic spokesman for this administration, I think the more likely it is we can avoid some more dramatic outcomes in markets. But we shall see. So what do you think the odds are that

President Trump achieves the triple Lindy, it's very difficult because I remember there was a time when Jay Powell had a triple Lindy to achieve of the soft landing and he raised interest rates and inflation fell down and nominal GDP grew at a lower rate, but real GDP grew a lot higher. So Powell achieved the triple Lindy. I mean, generally, I think

In markets, people are too pessimistic, sometimes people are too optimistic. But what are the chances that you think he achieves this as well as reciprocal tariffs are successful in actually lowering tariffs? Because if the US raises the tariffs to the level of the EU's tariffs, then the EU is incentivized to lower tariffs. And there's also an issue of non-tariff tariffs.

trade stuff. China, I don't think has super high tariffs, but they subsidize their industry in ways that make it very, very competitive. You're making a good point, Jack. You are. And as difficult as it is to imagine today, part of the thinking is if we go hard,

against everyone about tariffs, full stop, whether it be reciprocal or unilateral. Actually, where we want to get to is pure free trade, no tariffs, pure free trade. It's like, OK, I think we'd all vote for that. But boy, oh boy, the path from here to there, no tariffs, pure free trade. When you have so many export subsidies,

all around the world will require the most monumental reversal

in things like the common agricultural policy in Europe, which is this massive subsidy, frankly, to French farmers. You know, all of this stuff changed the Chinese manufacturing chain, Japan, South Korea, everything. I mean, well played if that's what you're trying to do. But boy, oh boy, I think it's a difficult path. So let's be clear. There is a Nash equilibrium, if you want to talk in fancy game theory, of a world of zero tariffs, but I'm not sure it's a high probability.

Now, you said, and I'm going to take you to task here, my friend. You said Jay Powell stuck the landing, the triple lindy. Okay. Soft landing. Yeah. Inflation down. Yeah. Unemployment marginally higher. Yeah. Some softening of the labor market and asset prices, not only unchanged, but higher. It's remarkable. But I just take you to task gently because you know this.

I don't think he stuck any landing at all because inflation, they chop rates 100 basis points, as we all recall, late last year, which was arguably political. I don't know. But they chop rates 100 basis points, which turned out with a full benefit of hindsight to be a fairly wise thing to do. Not obvious at the time. But, you know, they chop rates 100.

with inflation by 100 basis points, with inflation still well above this 2% target that they go on and on about. I'm not sure there was much of a landing there. But you've reminded me of another way and another important way of thinking about all of this. You know, if I was to encapsulate a successful way of thinking about the US economy and asset markets over the past three years, it's like you bet on the soft landing,

while being hypervigilant to the risk of a hard one. And that worked. So you bet on soft, hypervigilant to hard. Now I think that might have switched. You think more, maybe bet more on the risk of a harder landing, if you will, while being hypervigilant to the risk that we just muddled through. So it's kind of flipped. But yeah, I wouldn't give Jay full credit perhaps for the landing there.

But let's be very clear and very fair. As of today, the Fed are in a good spot, not a great spot, but they're in a good spot. And inflation is dribbling down the way they measure it, although obviously it's probably stickier than I like, but it's dribbling down. And if the dribbling low of inflation continues...

The Fed will have the option to respond if needed, if the economy, not markets, not markets, but if the economy turns down. So the Fed has arrived in a pretty good spot. But we shall see. And to repeat the message earlier, although the Fed has arrived in a fairly good spot, it doesn't mean we should rely on them to help us in markets.

as the Fed has done repeatedly over so many years. What do you think about the Smoot-Hawley tariff of 1930? Some people say it caused the Great Depression. Because I'm focused on monetary matters, I think that the real cause is the gold standard and monetary stuff that obviously you're very familiar with. So I kind of downplay the Smoot-Hawley tariff. But just how bad are tariffs for economic growth? It depends how you adjust to them.

I mean, one way, if the US whacks tariffs on people, then theoretically the dollar goes up to offset it. That's how the exporters to the United States would offset it. But clearly, interestingly, that's not happening. It's very interesting, actually, when you think about it. I mean, the dollar's softer, but it's interesting how soft the dollar actually is when you step back from the screen in the context of these real live tariffs threats, isn't it? It's very interesting.

If you go back to Smoot-Hawley, I'll just say simplistically, it did not help. But I'll also say, frankly, you're right.

The problem wasn't the tariffs per se. You look at the whole collapse from October 29 and everyone thought of a bottom. And then the bottom really fell out of everything in 31, 32. And you're right. The gold standard and this, that and the other. And the inability of the Fed then, very unfortunately, to understand what was going on. And then that only changed thanks to one man named Mariner Eccles.

which is why one of the two Fed buildings in Washington is named the Eccles building. The other one, Martin, after a great, great Fed governor, Bill Martin. But yeah, you are, of course, correct. It was a monetary problem as much as the tariffs. But of course, it is convenient for people trying to understand the present. I'm not blaming you at all. It is convenient for people to try to understand the present

through the prism of Smoot-Hawley in the early 1930s. I don't think it's quite that. But unsurprisingly, if the Trump administration thinks you can just walk over people and bash everyone to where you want them with tariffs, to a lot of proud countries, not least this one, it looks like some kind of shakedown or extortion racket.

And when you've got an election pending like Canada does and you've got a massive groundswell of popular opinion who, you know, frankly, let's just use Canada as a metaphor. You know, I don't think anyone particularly fond of Trudeau, who was just a catastrophe in so many dimensions. But the more Trump beats up Canada, the more popular, you know, the tide of the opinion polls. And it's very interesting. Believe me, unless I use this gag probably too often, but I'll go with it.

Unless it's me forgetting to take the garbage out again, it takes a lot to get a Canadian upset, believe me. But Canadians are really upset about this. Like, really upset, including people who are no fans of Trudeau.

So the irony here is it actually serves some countries that are approaching elections or newly elected to try to be very tough in into the teeth of the Trump hurricane. And I really very much doubt that Modi in India is going to give Mr. Trump what he wants. I very much doubt that Europe that has now found a backbone on defense spending, which is, let's face it, good, is

is going to give much, you know, try to be, try to give Trump everything he wants. And I very, very much doubt Xi Jinping out there in Beijing is just going to say, yeah, buddy, what do you need? Let's do a deal. I think it's going to be a lot more complicated than that. So do you have a view on relative markets of the European market over the U.S. market, the Chinese market of the U.S. market, the U.S. market?

Stock market has just absolutely crushed all other most other foreign markets, so-called U.S. exceptionalism. Do you think that that is over, that other markets, Chinese market, European market will outperform the U.S. market on a short term basis? What about on a medium or a long term basis? Jack, there's an important point to bring into the conversation.

There's an awful lot of people out there sharing their opinions on this, that and the other. Some of them, to be blunt, are frankly bonkers. But that's life. That's the day and age of social media and everything else. It all gravitates towards the lowest common denominator of, well, dare I say, bullshit. But there we are. But everyone's got opinions and that's fine. But if for any period of time I find that my opinion on any asset or country is not confirmed by price,

I am wrong. There's no escaping it. And I bring that up because there are people that go on and on and on about the same thing, whether it be a US recession or whatever, or the Fed. And it's just rubbish. It's such rubbish. And then eventually the event they've been predicting for five years happens and they say, I told you so. Well, that's not much use to anyone, is it? But hey, great for eyeballs, but not very useful. But the serious point here is that markets always tell you what to do if you listen.

Markets always tell you what to do if you listen. And that's how I answer your question about what's happening in Europe, sorry, European equities and Chinese equities for starters. Now, unsurprisingly, since Russia went after Ukraine, we have already had a tremendous run up in all kinds of European defense stocks.

And then late last year, obviously, Trump wins. People start talking about Ukraine peace deal, this, that and the other. And it was striking to me how bid Ryan Metal and other European defense stocks were made. They barely dipped. Now, that is an important tell. And that was months before what we've seen with Mertz and defense spending and everything else or the Trump. Let's call it the Trump shock.

Markets were already sniffing out that something was going to change, or at least equity markets in particular. And that was notable. So the market didn't in these key defense stocks, and frankly, there's not too many of them. It didn't dip. That's important. The euro sort of flopping around, doing nothing. And generally, the euro was surprised by Merz's big announcement and the bond.

was surprised and we had a bit of a VAR shock in European rates and because people like, oh, my gosh, they're doing it now. But the key point is, once again, the equity market, let's call them our friends at the bottom of the capital structure, figured it out first. And what we've seen is an acceleration in Europe and a rewriting, sorry, an acceleration of something that was already underway. Now, many of my clients

started accumulating European defence stocks early last year. Now, to be very clear, this was not a bet on increased European defence spending or Trump or anything. It was all about a disciplined implementation of their mandate. It's not I'm going to chase Mag7, this, that and the other. I can't justify Nvidia up here. What else is out there? What other great businesses are there trading at a fair price

where I can get a piece of ownership. So they started buying. And then as the year went on, more of my clients were like, look,

We don't have a particularly strong view on Europe per se, but by golly, there are some great European businesses here trading at great prices whose balance sheets look rock solid. They've got great capital discipline. I should have some of that. And again, not a bet on what we've seen, but obviously strongly validated since by what we've seen.

And I still think it's true to say that people there's been obviously a flow of money into European equities. Of course, it has. But I do think it's still correct to say that the world is not equal way European equities. I think that's fair to say. And that this trend that we're seeing could continue.

And it's been a long, long, long time since one might use the phrase mean reversion with regards to European equities as a whole. But the simple point would be, even though we've had this rewriting, a lot of these great, great, not domestic, but global businesses are not expensive. And the point here is.

There's times in finance where you need your brain plugged in all day. You need to think deeply. You need to read. You need to study. And then a lot of the time, you need to leave your brain at home and not overthink it. So people are now saying to me, oh, does Mertz have the numbers in the Bundestag and the Bundesrat? What's he going to do with the Greens? This, that and the other. It's like, guys, guys, you know, that's important. And, you know, as we learned between 2009, 2012, Jack,

You know, the European negotiations are never linear. There's always a few twists and turns and someone will complain and the Greens in Germany might want some more money for something and France will say no. But eventually I get there. And I think of the present moment a bit like TARP in the US in October 2008, where disastrously Congress first said no. And then they've marked and but eventually I got the right outcome. So even if Mertz.

He unfortunately doesn't get this vote through. Unfortunately, I think he probably can, but I don't know. You know, guess what? Euro comes down. There's a dip in European equities, Boone's rally, all of this. But I think the direction and intent of European policymakers collectively and individually is very clear.

And I would think strategically that if unfortunately Merz does have a setback here with getting the votes for his package and there is a correction.

In euro denominated assets, or more accurately, the euro goes back down and fills a bit of a gap or European equities come off five to 10 percent. I think that's where patient capital says, right, where do I get back in or where do I add? So that's how I'm thinking about that. But again, you know, don't want to overthink it. Don't want to get cute. Don't want to say, oh, you know, I think it turns is now too expensive or ride metals gone too far. Well, compared to what?

Oh, you know, this is I mean, there's I was joking with my clients this morning. There's even an Austrian meme stock now. I mean, who thought they'd say Austrian meme stock in the same sentence? But there's this tiny market cap company, an Austrian engine maker who just got a contract with Rheinmetall and their stock price has just done that. I'll send it to you afterwards. But it's like it's just hysterical that there's now an Austrian meme stock.

How about that? But it just shows how fast the world changes. And, you know, you watch all these things with interest. And it seems to me, this is my best guess, that the structural reasons, the buy and hold reasons that one might want to tilt one's portfolio a bit more towards Europe, for example. I mean, that's been the case for a while now. But I think the structural reasons why one might want to do that are robust, but

and likely to be running for some years to come would be my best bet. Did you ask me about China? I'm sorry, I went on and on about Europe. Remind me what you wanted me to say about China. Same question, just that Chinese markets are up so much. Oh, sorry. Yeah, yeah.

So let's take one step back. And to be very clear, one of the things I've been spending most time on for the past seven years, seven and a half, eight years, is trying to get my clients to understand what motivates Xi Jinping, what drives him, what inspires him, what motivates him, because people didn't understand what's going on.

And, you know, there's let's say euphemistically, there's been a fair amount of CPC malfeasance in every direction, unfortunately. And it continues because he just doesn't care. But, Jack, for most of the past seven years, Xi Jinping has been on a campaign.

to make his economy and financial system fit for purpose, because obviously it wasn't. It just wasn't. You had massive excesses in property, property companies, property debt. And unsurprisingly, if you're seeking to deflate that, what many people regarded as the world's biggest bubble, boy, oh boy, you better do that carefully. But after seven or so years of

fighting financial leverage or basically making their financial system and economy fit for purpose, he seems to have achieved it. But in brackets, fit for purpose for what? And unfortunately, fit for purpose for very difficult days with the West and the United States in particular. I'm not predicting war or conflict.

But fit for purpose in the sense, can we insulate our economy and financial system from whatever the United States might do to us? What do we need to do? So that's the backstory. And it's been painful. But there is evidence that what some people describe as the world's most important market bottomed in the fourth quarter of last year, or more accurately, stopped getting worse. And that's the Chinese property market.

Despite everything, it may have finally scratched out a bottom. Now, it's not going to be V-shaped or anything else. That's the first point. Second point is that we're seeing a more proactive regime in Beijing with regards to supporting the economy, a greater willingness to use fiscal policy, which is not bad, is it? Of course, it's not negative for Chinese equities as a concept. It can't be.

But then unplug the brain for a bit. And the symbolism of Jack Ma being rehabilitated is really, really important. It's so important. And I work.

Well, everyone I advise is smarter than I am. And I take my hat off to my clients who started buying Barber, Alibaba in the 80s, give or take. I mean, remarkable wisdom. It was not a punt on Jack Ma being rehabilitated or anything else. It was a pure, again, valuation discipline that was subsequently rewarded.

But the symbolism of Jack Ma being rehabilitated after three years in the wilderness, shaking hands and smiling with Xi Jinping was probably the most powerful stimulus that Xi Jinping has applied to his domestic capital markets in many, many years.

So I know that we don't just invest on vibes, or at least we shouldn't, although a lot of people apparently do. We shouldn't invest on vibes. I'm not trying to oversimplify an immensely complex part of the world. But the message is, it's OK to buy a stock market again. The valuations of a lot of these giant companies, obviously the valuations of the stock price has gone up, but the valuations are still not expensive. And there's a massive but.

So Trump, to go back to what we discussed earlier, is working on some kind of schedule. I'm going to bash the little kids in the playground first, Canada and Mexico. Then I'm going to turn my attention to Europe. I'm going to try and sort out Ukraine on, unfortunately, whatever Putin wants. Yeah, OK, buddy. And then I'm going to turn my attention to China. And I don't know when that is. It may be a quarter away. It may be two quarters where Trump

I think goes after is the wrong term, but where the full fury of trade unfairness in Washington is turned on Beijing. At that point, it might yet get uncomfortable for renminbi assets or the stock market or this, that and the other. I don't know. But my point would be that if people want to have a swing at Chinese equities, go for it. Know what you're dealing with. Know what you're dealing with.

The big dog, Xi Jinping, he doesn't care about you. He doesn't care about me. He doesn't care particularly about Jack Ma, but hey, it suits the purpose. He doesn't care about your fund. He doesn't care about your net. He doesn't care. He holds the golden share in every Chinese business. But right now, he cares about one thing. He wants the stock market up.

Earlier you said that China is preparing for something, that maybe it's not war, and it's preparing to break off from the West. I'm sorry if it came across that way. It's not to break off from the West. It's not that. It's not China going into a hibernation like it went into for 200 years. It's not that. It's China saying, OK, we're on a mission. Xi Jinping, for better or worse, has concluded the West is too weak and disorganized to pay the full price of decoupling from us.

And unfortunately, I think that's probably true. Trump or no Trump. But we shall see. It's not to say we're out, we're out, we're out. It's actually the opposite. It's like to say, hang on, can Trump impose sanctions on our access to dollars or dollar funding or so forth? Could that be disruptive? Dot, dot, dot. Well, yeah, he could.

OK, so we want to make sure we can ring fence that part of our financial system or have a stockpile of dollars domestically. We can lend to our own banks, et cetera, et cetera. You know, so it's like, OK, I don't want to be over reliant on the dollar. Although that might be wishful thinking. Excuse me. It's actually to say you can trust us.

We're not picking any fights. We're not hacking into your social security system or your utility. That's not us. It's someone else. Someone else. Whatever. Oh, no, you trust us. We're steady. We're consistent. But they say that with a strong threat of menace. Strong hint of menace, I should say. It's like, oh, you know, you really want to stop doing your manufacturing in China? No, no, no. Come and do it. You really want to...

Oh, well, hang on. We're not going to allow you to do anything here then, if that's the way you want to play it. Or we're going to remove the funding for all that infrastructure you wanted there in Italy or Greece. No, we're going to, you know, we're your friends up until you decide we're not. To clarify, China's not trying to decouple from the world per se. China is trying to present herself as a trusted counterparty in a world of Trump-induced chaos.

To the rest of the world, not to the US, to the rest of the world. Yeah. Okay. Okay. Yeah. Yeah. I mean, no, no, the US, you want us to build a little bit of X, Y, Z in your country? Okay. We'll do a bit of that. You know, we'll give Trump a cookie and maybe he'll go away as, you know, the great Don Rickles used to say, gave him a cookie and he went away. You know, great man. Great man. But, you know, it's serious point. Oh, yeah.

Putin got everything he wanted from Trump over Ukraine. So why do we offer Trump everything on trade? Well, just okay if he really wants to be the big deal maker Let's do it on our terms, which would be most unfortunate, but we shall see So look China's not trying to decouple from the world far from it There are hawks in Washington who think the United States should decouple from China now how that actually works I don't know. I don't know and the other thing that China has done very well despite everything is

is exports at a record high. It boosted manufacturing, which eventually drove global goods prices down after the inflation shock, which allowed Western nations to get inflation down, at least goods price inflation a lot lower because China was flooding the world. Now, there's a limit to that. There's a limit to how much China can just dump capacity on the West.

Jack, it's very interesting to see how smaller Southeast Asian countries are pushing back on China, saying, hey, listen, you can't come and dump all your cars and stuff here on Vietnam or Thailand. Philippines a bit more complicated. But you can see these smaller states are saying, no, no, no, no, no. You can't do that to us, hoping that the US will eventually agree. But we shall see. So all in all, look, quite complicated. A lot of moving parts.

But like any asset market, Jack, and this includes Chinese equities in particular, any market that goes from dreadful, which describes Chinese equities for most of the past several years, any market that goes from dreadful to less bad or the story goes from dreadful to less bad. You do not try to second guess the re-rating that results. You don't overthink it.

Appreciate that. James, my final question for you, we referenced private credit, and I'll just set the stage for the audience that private credit, so much of the risk has moved outside of the banking system, either from newer regulations or from synthetic risk transfers where banks are basically selling the credit risk to private credit firms.

The limited partners in these private credit deals, they have not seen ascent of any re-rating because it's private. The general partner, the stocks, the management companies have gone down to 20% to 30% to 35% over the past month and a half. How do you think this ends? And also, James, I want to introduce a concept that the assets matter, but the liability structure also matters. You were front and center of the great financial crisis about how

Banks could basically and investors could pull money at a moment's notice. And therefore, there was a run on the global financial system. It's my understanding that for private credit, these deals like private equity and like private real estate, the money is tied up for a long time. So you really it's unlikely to further a bank run in that regard. Your final thoughts? Yeah, it's like most things. It's like is it?

the asset fully funded, not term funded, fully funded. And you recall how private equity works. A private equity firm launches a new private whatever fund and tries to drum up investors and you get commitments. And the commitments are X, Y, Z, sovereign wealth fund commits a billion.

Now, that's not a billion of cash on day one. It's a billion dollar commitment that the private equity manager calls on to invest over a period of time. And obviously, they need to invest it because otherwise they don't earn their fees. But you saw some examples over the years where people had committed to a locked strategy or not gated, but locked. You know what I mean? But they hadn't fully funded it.

And it's very awkward if you've committed a big chunk of money to a private strategy and the manager calls you for it and you need to sell something else to raise the liquidity. Now, I'm hoping that there's not a lot of people in that situation. Happily, I think there's not. But that's one thing that comes to mind. But as best one can tell, an awful lot of the money that's gone into private credit in general,

is from investors who should be comfortable locking up their capital for long periods of time. They should be, whether it be a family office or a private bank and so forth. Where it gets a bit silly is what we've seen recently, where Apollo and State Street have tried to create a private credit ETF. Now,

As we learn in every financial accident, forgive me for being blunt, but price discovery is a bitch. The reason subprime fell apart, people forget this. The reason subprime fell apart is because people started pricing it correctly. And all it takes is one person to say, excuse me, I'd like to sell. And then it's on. And.

In July 2000, it took a long time for subprime to crack because most of the crap was held in CDOs, which were non-mark to market vehicles. And then when the CDOs were downgraded, there's a bit of history, but it's important. CDOs were downgraded in July 07, which meant that people that had invested in subprime via CDOs had to sell. Oh, gosh, there's no bid. It's not par. It's 72.

And that's it. And I bring that up because it's odd to want to have a private credit ETF, which can be a real time voting mechanism on the merits of the underlying asset. Now, of course, there'll be all these clever people out there say, OK.

If this ETF is tracking this Apollo fund and they give us transparency on the assets, we can work out if the discount on the private credit ETF is too low. But to check the serious point, why do we need a private credit ETF? Why? Democratize finance, James. Come on. Oh, sorry, Matt. I forgot. Democratize finance or bring another sucker to the table, which is what democratizing finance is when you think about it.

But it's bad. So private credit per se, there's nothing wrong with it.

But I'm not worried about run risk. I'm worried about the people that have come into this with no great expertise and who just think it's a high yielding zero volatility asset that can only be a par. That assumption has not been tested. And the other thing you've reminded me of, I'm grateful for, is when you falsify the key assumption that's underpinned any asset boom.

Guess what? You're going to get some pretty serious price discovery, which is subprime again, or sovereign debt has no default risk in Europe up until 2009 to 2012. The underlying assumption that supports so much inflow to private credit, at least what I think it is, is that there is zero mark to market risk and next to no default risk. Well, we haven't actually tested that, have we?

I mean, some people say, oh, you know, private credit performed beautifully in 08. Well, the private credit industry back in 08 was like this big. And now it's this juggernaut. You've got all sorts of participants reaching for yield. You know, it'd be most unfortunate. So to be clear, I'm not worried about run risk per se in private credit. I'm worried about the second derivative, which is price discovery.

and how that reverberates across listed asset managers and everyone else. And perhaps we're seeing some sense of that already where people are like, oh, I'm not quite as confident in the blue hours vehicle or these business development vehicles. Maybe we just need to be a little bit more cautious about them. And that's a natural iteration. So look,

I'd like to tell a scary story. A lot of people do, but it's going to be difficult. And of course, to be consistent, if the US economy is now on a somewhat slower growth path, maybe it's 200 basis points lower on GDP, et cetera. You know, you have to have some kind of test of these private asset holdings. But I'll follow up with something really important that our viewers and listeners should reflect on. You know, the metaphor I use for private credit and private equity is,

Some of their assets inevitably are going to end up in casualty. But you need to understand that these private equity guys are running the hospital. They are the world's greatest financial engineers. They are brilliant, brilliant businessmen, generally businessmen. You know, I have the highest regard for the John Grays, the Mark Rowans and so forth. They are just so good.

And I listened to all their presentations because I always learn something about investing. I mean, they're really good. But, you know, it's interesting when they're buying businesses. Well, suddenly they're enriching these families that they might be buying businesses from or releasing capital liquidity events. And what they've all done is so clever. They have built these giant wealth solution businesses on the side.

So they go to some medical supplies company in Chicago, which happened a few years back and say, we'll pay you $39 billion. And the family's like, all right. Oh, by the way, have you thought about investing with us? I didn't know. I knew those two things. I didn't know they were connected. Yeah, it's really clever. The wealth solutions. Now, by the way, everyone listening in finance should know that anything that has solutions in it means a lot of spread.

Lot of money there a lot of spread for providing those solutions. So that's good But the serious point is you build all this expertise Where if you get into a difficult situation with a particular asset at any of your portfolios? You can work with these families or these businesses that you've just enriched by buying something say hey listen We've got this problem

in a related industry. Let's sign an NDA. This is how we think about, we don't want to put this to a zero. We think we can restructure it. All of that's pending. So you're going to see some headlines. You're going to see some businesses that don't make it. You're going to read about rising defaults. All of that is to be expected. But don't overlook the fact that these guys have already thought about all of this. They've thought about all of it. Remember when Blackstone's individual REIT report

credit reader, whatever it was, gated things. And everyone thought that was the end of the world. Didn't matter. It didn't matter. They built this $50 billion juggernaut from nothing. Okay. So yeah, they know it's difficult, but they have the street smarts. So again, to use that metaphor, Jack, you expect that there's a whole bunch of things that have been funded that are going to end up in casualty, getting their heart pumped.

But don't forget that the private equity guys also run the hospital. So we have to look through it. And there'll be a price out there where you and I can say without overthinking it, you know what? Blackstone's derated enough.

KKR is derated enough. Now, that's down the road, but we can't lose sight of that. And whilst I remember it, as much as everyone's running after European defense stocks and everyone's belted the five prime U.S. defense stocks because Doge is going to restructure U.S. defense budget. Yes, yes, yes. At some point.

At some point, those US defense stocks are going to be overdone on the downside. And that's why the world of investing is so interesting. Now, I got so caught up in that about private credit. What was your first question? I forgot. It was about private credit. Oh. Yeah. No, but you said something else about liquidity and liabilities. Oh, just that you answered it, that there won't be a run because the money's been up for a while. Look, there's always, look, Mr. Buffett, I mean, just the most extraordinary man ever.

and just so extraordinary wise and how generous of him and the late Mr. Munger to share their wisdom on so many things. I mean, just wonderful that they were so charitable with their wisdom. And one of the many things he reminds us is that in finance, you get the innovators, you get the imitators, and then finally you end up with the idiots. Now,

I think that applies to way back earlier in our discussion, some of the multi-asset shops. You've got the innovators, rock solid infrastructure, you know, maybe get dinged up a bit at the moment, but they'll be okay. You've got the imitators who try to do what Millennium and Ballyasney and all those guys do. And then you've got, perhaps in generous in saying idiots, these pod shops that have come from nowhere. I mean, who suddenly have five or $10 billion in

And you're like, well, do they have the same kind of infrastructure and market savvy and this, that and the other than the big guys? And unfortunately, the answer nearly always is no way. So there's problems there. Same thing will happen in private credit. We'll get people who are happy to commit their capital for term credit.

to X, Y, Z private credit, knowing that you might get dinged here and there, but that's OK because you've earned your 8% to 10%, maybe a bit more. You're fine. It's in a tax advantage vehicle. You're fine. And then you get people who have piled in and offered two times leverage on this, that and the other. And you make a great point about the democratisation of finance. And I know you agree. And you've been very good about this. It's not the democratisation of finance.

That is the sucker line. It is the democratization of gambling, the democratization of speculation, the democratization of leverage, zero data expiry options, single stock ETFs that are two to three times leveraged, hyper-financialized system, which quite frankly makes any potential transition in asset markets quite difficult. But you know what? We'd be surprised if it wasn't.

We'd be surprised if it wasn't. So we're kind of mentally preparing for a somewhat more difficult environment. But what I like to do, here's something to chew on.

We could talk and we have talked about various difficult, complicated topics and hopefully in an effort to be less wrong. That's what we're trying to do. And we're trying to be patient and sensible. We don't want to be out there doing 10 or 20 tickets a day trading. I don't know why people do that. It seems very counterproductive. But there you go. But really what we're trying to do is to be less wrong and to be patient and to wait and just wait and wait.

I do this challenge whenever I sit down with my very substantial family office clients and high net worth individuals in particular who are very busy. They've got demands on their time. They're traveling, whatever. And they're inundated with pictures, Jack.

And the way to turn it around and to try to peer through the fog, which is what we're doing, what we're all trying to do, turn it around. It's not like, oh, should I buy this? Should I sell that? No, no, no. Here's a blank piece of paper. Write down the five assets you would love to buy if you could name your price.

It could be a building. It could be a stock. It could be a bond. It could be a commodity. It could be whatever you want. What are the five assets you would love to own for the long term if it can name your price? And it's a great exercise when markets are a little bit more unsettled. And I'm not saying, well, I've been clear. I'm not saying the little bounce we're having today is the bottom or anything like that. I'm just saying there's no signs of panic yet.

But who knows how the next couple of quarters or so will unfold, given the nature of markets, the leverage, the hyperfinanciation. You know, Jack, with a bit of luck, there will be some things that are shaken down within our circle of competence that we can say, actually, I know everyone's wound up about that, but I know that asset. And that's actually a reasonable price that gives me a margin of safety.

And it's a good exercise to do in crazy times. And it's not to say, oh, my gosh, I'm going to get all five of those in a row. But it's a great exercise because it gives you clarity when a lot of people are running around with their hair on fire and understandably agitated by the present moment. So it's a good exercise, a useful exercise. And, you know, there's nothing too crazy. You can put whatever you want on that list. But I recommend it to everyone, frankly.

That is a great exercise. I think I'm going to have to do this right after that. James, thank you so much for coming on. As you said at the beginning, I've been trying to get to you on my previous podcast and now the current podcast for a while. I'm really glad I got the chance to do so.

Just sharing your thoughts about what sounds like could be a little bit of a bumpy ride in markets and the economy. James, just tell us about Aitken Advisors. People can find you on Twitter at Aitken Advisors. But tell us about the work that you do as well as your piece, Notes from a Small Island.

Yeah, thank you. And most important, thank you for having me, mate. I really, really appreciate your time and the time of everyone who's been kind enough to listen or watch. I'm very grateful indeed because time is in short supply. Look, I've been running my business now for 16 years, one-man business, working from home here in Wibbledon, just up the road from Centre Court, books everywhere. It looks like I've been love-bombed by Jeff Bezos or something. I mean, it's just complete chaos. But there we go. But look, I...

I got very lucky. I had no idea I'd ever end up doing what I'm doing. I knew I didn't want to be a trader because I worked with some of the world's greatest traders, have done for 25, 30 years, and I see how good they are and what they do to be the best. And I thought that mentality is not quite where I'm at. But, hey, I can help these people think.

And it just grew out of that. I got very lucky with Subprime. I helped a lot of people not lose money. I helped some people make billions, as you know. And on the back of that, my client said, have you thought about setting up your own business? Which I did. That's 16 years ago, almost. I will happily tell everyone I had no idea what I was doing. But I am very lucky that over many, many years, I am able to work with and to advise people

Some of the world's most sophisticated investors, in fact, many of them, some of the world's most successful investors, no matter what their mandate and strategy. Jack, interestingly, nobody's heard of some of the most extraordinary people I work with. They have no public profile, but their returns are just extraordinary. And what a privilege it is to work with all of them.

Look, we joke that people knew me as the plumbing guy because of my insights and understanding of the financial system back in 07 and 08, which was useful. But you can't be the plumbing guy forever.

In fact, the amount of nonsense still written about the financial system today is just insane amount of nonsense that people go on and on with. I won't name names, but I think we all know that. What's the biggest piece of nonsense? Not naming names, but the idea. What's the biggest nonsense idea? Euro dollars, SOFA, repo, how the plumbing is all connected, this, that, and the other. It's apparently all some conspiracy theory, this, that, and the other. Look, it's not. The plumbing works really well.

Some time to time it gets clogged and that's important to understand. But the way some people write about it relentlessly is just silly. And when I have written about the financial system over the past decade now, with the obvious exception of what happened in September 19 and through COVID, most of what I've written is like, I know everyone's wound up about that, but here's why it's not true.

And I could spend all day on Twitter, which happily I don't, correcting some of the errors of judgment. But who cares? The market will figure it out. But no, so the point there is you have to evolve. You can't just be the plumbing guy. You can't be the man with a hammer. You have to evolve. You have to adapt. And that's the number one thing I've learned over the last 16 years. And I think that's critical to my ability to continue to work with these extraordinary people.

And one thing I have been doing, I mean, my business is regulated, which is a bit different to most because of who I work with. That's why, frankly, Jack, I probably let a few listeners down by not giving specific stock advice or anything else. It's incredible to me how many people who aren't regulated say they're not providing investment advice, but do it all day long. I don't understand it. So I have to be careful. I have to be careful. But I've also had to adapt.

I'm constantly trying to learn. I'm constantly trying to solve for being less wrong. I'm trying to be patient. I'm trying to help people think about a range of issues. That's what I do. I sit here and I read on behalf of my clients because most of them don't have time. And I read and I synthesize and I try to explain things in a clear way to help my clients think. And then where necessary, if I can get three or four things right on any given year, I'm doing very well.

And where necessary, I tell them what to do. And that's an art. It's not a science. But I can't convey adequately how lucky I feel to work with and become a trusted, confident, as much as an advisor of these extraordinary people. And not to make it too highbrow, but one experiment I have been conducting over the past five years, I don't do free trials or anything like that. I don't.

Because I think, you know, you find out who's serious or not. But no free trials. But I have been experimenting subject to regulatory approval with high net worth investors who have had liquidity events or are sick of the advice they're getting from their private bank. They're just looking for something a bit different. And pleasingly, I've seen a steady stream of inflow, not just of new institutional clients, as the world's a bit friskier.

but also these high net worth individuals who are looking for something a bit different, who are not looking to be lectured. Like all of us, they're trying to learn. And it's a constant challenge. And I'm trying to learn every day, some days better than others. I make a lot of mistakes. I just try not to replicate those mistakes. So look, I'm just working hard. I'm reading. I'm

I'm trying to educate people. I'm trying to keep my clients out of trouble. And then if we can do that and be sensible and, you know, the thing I'll finish with is that for obvious reasons, people think of macro as what can go wrong. And that's for understandable reasons. You know, it's all about the left tail. And I've always thought that macro, there's two sides, two tails to the distribution.

So the left tail might describe some elements of what's happening in the United States right now, what could go wrong. The right tail, what could go right, is really important. It is important in the United States. Maybe we look through to the other side of Trump deregulation and so forth. But the right tail, what can go right, as applies to America.

Chinese equities, for example, European equities, for example. It's really, really important to keep an eye on both sides of the distribution. And that's what I'm trying to do.

We're also trying to learn here, and I've learned a lot. I know the audience has as well. So thank you very much, James. Thank you, everyone, for watching. A reminder, you can find this not only on YouTube, but also on Apple Podcasts, Spotify, wherever else you find your podcasts. And if you are on YouTube, please like and subscribe. It helps the channel. Thanks for listening. Hope you enjoyed today's episode. Remember to check out FinTool to take your investment research process to the next level. Until next time.

Thank you. Just close this f***ing door.