Merryn Talks Money – "Inflation Isn’t Done: Why the Next Shock Could Be Worse"

Podcast Host: Merryn Somerset Webb
Guest: Sebastian Lyon (Troy Asset Management)
Date Recorded: March 20, 2026
Episode Theme: Navigating portfolios through rising inflation, persistent volatility, and a shifting investment landscape.

Episode Overview

This episode was recorded in front of a live audience at a Bloomberg subscriber event in London. Merryn Somerset Webb interviews longstanding friend and Troy Asset Management founder Sebastian Lyon about the major market disruptions of recent months, why inflationary pressures are likely to persist, and how to construct a resilient portfolio for the challenging era ahead. The conversation covers gold, bonds, equities, inflation, and the role of geopolitics and public debt.

Key Discussion Points and Insights

1. The Unsettling Calm in Today's Markets

• Despite a spate of shocks—from geopolitical tensions to rapid oil price rises—markets remain strikingly calm.
• Quote:
  "Listening to that list of Simons, the first thing that I think strikes you is how extraordinarily calm markets are in the wake of that bizarrely unexpected list of things that have happened in the last two and a half, three months."
  – Marion, 03:29

2. The Philosophy of Portfolio Construction in Volatile Times

• Sebastian’s approach is built on preparing for market dislocations and focusing on capital preservation over constant growth.

• Their method aims to enable investors to "sleep at night" by avoiding excessive volatility.

• Past market shocks (Covid, global crises) are seen as inevitable, and readiness—not prediction—is key.

• Quote:
  "Dislocations happen ... We were ready for Covid, although Covid came totally out of the blue."
  – Sebastian Lyon, 04:34

• Crucially, their funds do not target benchmarks but strive to maintain real (inflation-adjusted) value.

• Quote:
  "We are trying to protect the real value of people's capital. Income, helpful though it is, is a residual. We never reach for income."
  – Sebastian Lyon, 07:53

3. The Persistent Threat of Inflation and Its Drivers

• Sebastian believes we are in a secular, multi-year period of higher inflation, with surprises "on the upside" (08:40–11:19).

• Inflation is driven by:

  • Geopolitical tensions
  • Supply chain fragility
  • Tariffs and a retreat from globalization

• The oil price is a major risk factor: recent spikes could feed new rounds of inflationary shocks.

• The belief that central banks can control inflation appears increasingly tenuous.

• Quote:
  "We are in a world ... where the surprise will be on the upside for inflation rather than the downside. 2010 to 2021, the surprise was permanently on the downside. The central banks were struggling ... to get actually inflation up. Now we're in a very different world."
  – Sebastian Lyon, 09:51

4. Why 60/40 Portfolios No Longer Work

• Traditional mixes of equities and bonds do not provide the historic downside protection in an inflationary environment.
• Correlations between equities and bonds have changed—both can fall together.
• The notion of 'flight to quality' (e.g., buying bonds during crisis) is not behaving as it did historically.
• Quote:
  "You do not want to have 60/40, because actually equities and bonds can go down at the same time within an inflationary world."
  – Sebastian Lyon, 11:19

5. Public Debt and Policy Dilemmas

• Skyrocketing public debt and government interest bills add inflationary risk.
• Policymakers are "stuck": raising rates to fight inflation, or lowering them to cushion growth, both have severe trade-offs.
• Risk of recession is understated, especially if geopolitical crises persist.
• Quote:
  "Policymakers are stuck. They're stuck in this period whereby they have to consequently out of the debt ... In the US it's 1.1 trillion [interest bill]."
  – Sebastian Lyon, 12:37

6. Technology: Not the Inflation Cure-All

• While technology and AI provide deflationary impulses, they are currently overwhelmed by reversing globalization and geopolitical pressures.
• Quote:
  "Technological gains have been made over the last five years ... yet we're in a position where inflation is sticky and above target ... there are other factors at play which are frankly more important that are sort of overruling the factors of technology just at the moment."
  – Sebastian Lyon, 16:44

7. Rethinking Fixed Income: Very Short Duration and Index Linkers

• Only short-dated bonds (under 2 years) are attractive, as duration risk in an era of rising yields is seen as dangerous.

• Index-linked bonds, specifically short-dated, provide inflation protection without the risk of long-term duration.

• Quote:
  "We're just not taking any duration risk at all. And we haven't taken any duration risk for a very long time."
  – Sebastian Lyon, 17:52

• Governments may eventually intervene in debt markets via yield curve control or by altering bond coupons (as in the past wartimes).

• Quote:
  "Yield curve control is probably the most likely ... They're not very pleasant and clearly they're a default and clearly they have implications for currencies."
  – Sebastian Lyon, 18:27

8. Gold: Friend, Not Savior

• Gold remains about 10% of the portfolio, down from a peak of 14% after the recent run-up.

• Its portfolio insurance value has diminished in the recent geopolitical shocks—not reacting as expected to "flight to quality."

• Gold is best as a sizable but not overwhelming component—Sebastian prefers 8-12% allocation.

• Quote:
  "You'd expect the gold price to go up [on a crisis] ... It hasn't ... It's just not going to be necessarily that portfolio insurance."
  – Sebastian Lyon, 22:27

• On sizing gold:
  "I've got friends who've got 50% in gold, I've got friends who've got 1%... I've always felt between 8 and 12% is about right ... enough to make a difference, but not so much that the tail wags the dog."
  – Sebastian Lyon, 23:40

• On crypto:
  "Bitcoin definitely goes into the too hard bucket. And I will leave that to far, far cleverer of people."
  – Sebastian Lyon, 25:30

9. Equities: Quality over Hype, Careful Diversification

• Focus remains on quality companies with consistent cash generation, ideally with dividends rather than buybacks.
• Recently trimmed exposure to US equities (selling American Express, Procter & Gamble, Moody’s) and increased European and UK exposure due to valuation.
• Avoids overpaying for 'hot' sectors like miners or speculative tech; risk controls require trimming outsized positions.
• Bought defensive investments (Canadian National railroads; insurance firm Chubb; grid infrastructure via Hubble).
• Quote:
  "Quality is a given. It's a question of the valuation. ... We have pretty strong risk controls whereby if a stock goes above 5%, we trim it naturally anyway, because we don't want to have ... We never know what could go wrong."
  – Sebastian Lyon, 26:25

Notable Quotes and Memorable Moments

• On Market Calm:
  "The noise levels are off the scale at the moment, but consistency is. Your consistency is. Yes, absolutely. What we do try, that's what we are there for."
  – Sebastian Lyon, 03:42

• On Inflation Shocks:
  "So with the oil price up at $100 and it might spike further, I wouldn't be surprised if it spikes further, then obviously we're going to see inflation shock to the RPI."
  – Sebastian Lyon, 08:40

• On Gold Exposure:
  "We've held it uninterrupted all of that time. We haven't been in and out and in and out. We held it a long time ...We allowed gold to run up to 14% at the end of last year within the portfolio. In January ... we sold some ... and we brought it down to 10%."
  – Sebastian Lyon, 22:24

• On Risks Ahead:
  "Sovereign government bonds. It has to be that over the next ... five years. That has got to be the thing that's the major worry because while I've said how it might be solved, it will be messy before then."
  – Sebastian Lyon, 30:18

Key Timestamps

• 02:02 – Episode intro, event setup, guest welcome.
• 04:34 – Philosophy of investing for dislocation and resilience.
• 07:14 – Discussion on benchmarks and targeting real returns.
• 08:24 – Inflation expectations and impact of war/oil prices.
• 11:19 – The end of 60/40; why the model no longer works.
• 12:37 – How public debt and policy dilemmas fuel inflation and recession risk.
• 16:22 – Is AI and technology a deflationary counterweight?
• 17:52 – Bond strategy: short duration, index-linkers, and why.
• 18:27 – Potential for yield curve control and coupon cutting.
• 20:40 – The evolving role of gold.
• 22:24 – Why the portfolio cut back gold holdings.
• 26:25 – Approach to equities: quality, risk control, geographic shift.
• 30:04 – Final rapid-fire: most pressing risk for the next five years.

Closing

Summary Takeaway:
In a world marked by persistent inflation, geopolitical shocks, and public debt dilemmas, Sebastian Lyon advocates for a "sleep at night" approach: portfolios built on resilience, liquid assets, limited duration exposure, gold as a ballast but not a panacea, and a disciplined focus on quality at the right price. The traditional 60/40 model is out. Markets may look calm, but the next shock could be worse—and it's prudent to prepare, rather than predict.

For more:
Follow Merryn on Twitter/X: @MarionSW
Questions: marinmoneyloomburg.net