Inflation, BoA and Gold's Time to Shine
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Bloomberg Audio Studios. Podcasts. Radio. News. Welcome to the Merrin Talks Money Markets Wrap, where we talk about the biggest moves in markets this week and what is driving them. I'm Merrin Thumbset-Webb, Editor-at-Large at Bloomberg UK Wealth. And I'm John Stevick, Senior Reporter at Bloomberg and the author of the Money Distilled newsletter. John, inflation. I'm slightly bored by talking about inflation. We've now been talking about inflation relentlessly, you and me, for decades.

Wow, 25 years. Yeah. Actually, I mean, more intensely for the last few, admittedly, but nonetheless, the conversation hasn't gone away. We've had the UK inflation numbers. What did they say? There really isn't much to tell. It came in at 3.4% today, which was the same as last month. Last month it was meant to be 3.5%, but they got the wrong vehicle excise duty numbers, so it was actually 3.4%. Actually, the most semi-interesting thing is

is that in about a year's time, if inflation is still above 3%, and it probably will be looking at the arithmetic, then we'll have been above target for almost five years. Well, almost five years nonstop nearly. And so you're kind of at the point where people are starting to think, wait a minute, inflation's always 3% or more. And that starts to influence their behavior, or at least in

In economic theory it does, and so possibly that will be at the back of the Bank of England's mind in terms of when it sets interest rates. Although I suppose what also should be at the back of the Bank of England's mind is the catastrophic failure of their policies.

I think that is always somewhere miles away at the back of the Bank of England's mind. In fact, possibly in a filing cabinet, Mark, do not open. Less cognitive dissonance afflict you too heavily. And a long, long way away from the filing cabinet that says, how about we change that inflation target, eh? Wouldn't 3% be a little better? Because then we might not mess it up so badly. If it's going to be 3%, change the target to 3%. Follow reality.

I think, well, part of the point of financial repression, if you can even get it going, is to pretend that the inflation target is 2%, but it's actually 3%. I think the rest of us should maybe think of it as being a high. Do you think that the actual target is 3%? Conspiracy theory alert. No, it's not a conspiracy. It's more just it would be helpful if it was 3%. We'd like it to be 2%.

We weren't trying too hard. I mean, the fact that it was 3.5% nearly, and they're still saying we want to cut rates.

Yeah. I mean, if they were that serious, or rather, if they believed that their tools would push it down, then you would think they'd be talking about putting it up rather than putting it down. I don't want to dwell on this. No, we shouldn't go on this too much. I just want to say one more thing about it all, but put out one more thought, which is that, you know, we've talked about financial repression, you and I, so much over the years, and our wonderful regular guest, Russell Napier, comes on, he talks about financial repression. And when we talk about financial repression, i.e. keeping interest rates below the level of inflation, obviously we haven't got that.

But we talk about this idea that inflation would be higher than target for maybe a decade or something as a way to try and sort out the UK debt situation.

that predicated on controlling spending in the first place. If you keep spending constantly going up beyond what you can do with this type of mild financial repression, it's kind of pointless anyway. Yeah, and I mean, that's a problem. And I think that's why actually with politics, you always need to hit a wall at some point. There's got to be a pain point.

that did get hit in the 70s and so things changed and I think probably something similar will have to happen this time round whether we like it or not. It feels like it can't be that far off debt to GDP 100% ridiculous do you remember the days not to keep harping on about how long you and I have been talking John but do you remember

remember the days when we used to consider a country to be all but bankrupt when its GDP debt to GDP ratio was 80% do you remember that yeah I remember the deficit rule as well for the EU was like 3% deficit is getting on for bankruptcy dare to dream UK politicians yeah yeah

Right. Anyway, on to more interesting stuff than this sort of, you know, slow motion crisis that one day won't be slow motion anymore. And then we really will want to talk about it. I wanted to talk about the latest Bank of America Global Fund Manager survey just out for this month. And this is kind of interesting because they ask the same questions every time. One of them being...

What do you expect the best performing asset to be over the next five years? And suddenly, instead of everyone going, oh, yeah, American equity is definitely always forever. Fifty four percent of them have said international stocks. Only 23 percent have said have said U.S. stocks. And that's kind of a turnaround. And this is not to say, for example, by the way, that they're in.

Their portfolios will reflect what they have said. If they did, markets would be performing very, very differently because the flows out of US equities would be so huge. But nonetheless, it reflects a sense of change.

Yeah, I love the Global Fund Manager Survey. It comes out every month and it's a really useful sense of market sentiment. And some of the elements of it, you know, you can trade against, you can say, oh, I'm going to take the contrarian view on this. But other bits, probably like this one, are more indicative of trend changes. It's kind of gratifying to see because we've been talking about how

you know, basically we need flows to come out of the US or at least not go into the US as much and start going everywhere else. And that would help the UK as well as all the other kind of neglected global markets. So it's nice to see that in theory, at least fund managers do believe this now. They think it is time to go back into diversification. They clearly think the US exceptionalism theme has kind of run its course. They're very bearish on the dollar, which is probably the one area where I think

The level of bearishness implies that we could get a short term bounce back. But even then it's probably only like a short term thing rather than a longer term big shift. Yeah and then I'm looking at the biggest tail risks that they think there are out there. Trade war triggers global recession. Is that a tail risk if everyone expects it? Everybody thinks it's kind of

unlikely or wants to think is unlikely. I think we've been so long without a proper recession that people can't quite wrap their heads around the idea that there might be one. If you ask me which of the two outcomes, no recession or a recession, I had to bet on, I wouldn't have high conviction, but it'd be more no recession because I think it's going to be more like inflation, nominal GDP growth type of thing. What if I gave you mild recession?

Yeah, but then I think a mild recession is kind of like no recession in an inflationary environment because your economy is still growing. It's just not growing properly. It's not growing in real terms. Fair enough. If anyone's interested in whether there's going to be a recession or not, please listen to this week's interview podcast on Friday. There's a lot in there about whether recessions have been cancelled completely. We will never see the like of the recessions of the previous century again. Oh, is this the one with Vincent? Absolutely. Oh, he's very interesting, Gary. So good.

Yeah, and we talked about, you know, one of the main things behind this idea that there won't be another recession is the idea that the capital cycle is different in an intangible economy. But then I would still worry slightly about AI because the capex there has been massive. There's definitely a capital cycle there. But we'll come back to this another time. We'll come back to this another time. The other bit I wanted to point out in the survey is what do you think is currently the most crowded trade industry?

And the answer, this is not what is the most crowded trade, it's what people think the most crowded trade is. And the answer there at the moment is long gold, which is the third month running that people have thought that other people are in a crowded trade, right? Yeah, I mean, the crowded trade question is a really interesting one on the B of A thing, because when you look at it, it doesn't tell you much that's actionable, I wouldn't have said.

Oh, I don't know. I think it doesn't, doesn't it tell you something? It tells you 41% of people think that long gold is the most crowded trade, but only 13% of people think that gold will be the best performing investment over the next five years. See, I look at that and I think that means that they think that more money is in gold than really is, which suggests that gold might have further to go. Ah,

Ah, okay, yeah, that's fair enough. Or maybe you could argue it the other way around. I don't know. Anyway, I just think it's interesting. It's tricky, though, because if you look at it, like Long Mag 7 was the main thing that they thought was a crowded trade, but they thought that for about...

like five years give or take there was a couple of moments where they said oh everybody's too long Chinese equities in October 2022 that was I guess that was when interest rates were coming down but so I don't I don't actually know how much kind of value that particular discussion has but it is the first time that long gold has been cited as you

you know the most crazy trade yeah well third third month in a row we've got a chart that goes back to october the 14th here which tells us what people have thought the most crowded trade is for a long time when you run through it it's basically all america long dollar long nasdaq long us tech long dollar long week number seven and then their brief little bits in there where for about five minutes people went long time equities long crypto um etc etc but in the end this is basically for the last um

It's been all about America and now suddenly it's about gold. I don't know what the signal is there, but it's definitely a signal. Oh yeah. And well, maybe it is. Maybe it's people, the accepted wisdom becomes that, oh, well, gold's too expensive, but you can't not own it. The same as it was with the US. The US is too expensive, but you can't not own it. That would be fun for those of us who hold gold. Yeah.

One more thing to mention briefly was that if it is true, if it is true that investors are beginning to believe that the US will not be the best performing place for the next five years, and they really believe that the best place to be is either European equities, and I'm going to include, you know, don't be upset listeners, I'm going to include UK equities inside European for the purposes of this conversation, because I suspect that for a lot of big American investors are kind of the same thing.

And we were talking last week about flows, or I was writing about flows last week anyway, and about how there are two things. When you look at equity markets, you have to think about two things. You have to think about the fundamentals and valuations long term, what that means. But you also, more important than that, in the short and medium term, you have to think about the flows. So this massive outperformance in the US has all been about piles of money pouring in. Stock prices are about supply and demand in the end. And in the UK...

You know, we have shrinking supply. We've talked about this a lot, right? We have endless companies being taken out, private equity, or just giving up the ghost altogether, mergers, etc. A lot of companies leaving the market has really, really shrunk. So we have a shrinking supply. If we get even the slightest real tick up in demand, we might see something really quite interesting happen. Yeah, I mean, I think it'd be great.

The US has benefited so much. And as you pointed out, so much of the growth in the US market was down to valuations expanding rather than fundamentals getting better. Even though fundamentals were good,

The fundamentals work, the last decade they have been good, but not unusually good, not uniquely good. Much the same as most other decades in the last hundred or years of US history. Yeah, and it's just probably relative to everyone else, average was better than what we all got. So it'd be really interesting. The other thing I'd be really interested to see is given the concerns over private equity, if the trend of de-equitization actually starts to turn around again,

Or if that's just not going to happen. I mean, there was one thing I wondered about private equity, and I don't know what your take is on this, but what if the volume of money going into private markets is basically a function of passive, making it no longer profitable to essentially be involved in public markets and the scrutiny putting people off. And what actually happens is that private markets start to move back towards being semi-liquid, semi-public, and we kind of get a weird...

where it comes back that way rather than private equity blowing up or something and then everyone just going back to the old way of IPOing.

Yeah, that's really interesting. And we should refer listeners back to the podcast earlier this week where we were talking about private equity and we were talking about this idea of semi-liquid private equity products where you could get your money out twice a year, etc., which I think slightly defeats the whole object of what we were always told was the most brilliant thing about private equity was its illiquidity. And that's where you get your excess return from. And if you don't get excess return from that, where do you get excess return? But it is an interesting point that it could be that it comes back

back around that way and we've seen this uh the new exchange in in that we will be having in the uk as well which is again an exchange for private companies so it may come back that way but i still hope that we will see a return to public markets in that when the average investor um

looks at the fact that the returns from private equity and the returns from public equity are remarkably similar, surprised with them both being equity. But they can get their returns from the public markets at a lower cost and with significantly more transparency and with significantly more certainty around the governance and compliance of the management. So I would have thought that might bring people back to the public markets. But again, you know, we'll see.

There's nothing about that in the Bank of America survey, I'm afraid. Perhaps you're going to have to add some questions in on that kind of thing. You call them, John. I shall. I shall.

Thanks for listening to this week's Merrin Talks Money Debrief. If you like our show, rate, review and subscribe wherever you listen to our podcasts. Also be sure to follow me on X at MerrinSW and John at John underscore StepEgg. This episode was produced by Moses Andam and Sam Asadi. Questions and comments on this show and all our shows are always welcome. Our show email is merrinmoney at bloomberg.net.

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