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Bloomberg.
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Maren Somerset Webb
Audio Studios Podcasts Radio News hello Marin Talks Money listeners. Now, before we get started, a quick reminder. We are recording an episode of Marin Talks Money in front of a live audience. You could be in that audience. We are doing this the morning after Rachel Reeves UK Budget so please join us at Bloomberg's European headquarters in the heart of the City of London for quite some smart analysis and probably a cup of coffee. I will be joined by Helen Thomas of Blonde Money, Stephanie Flanders, Bloomberg's Head of Government and Economics, and of course John Stepek will be there. Find the registration link to this in the show. Notes space is limited. Sign up soon. We would love to see you.
- [02:22]
Welcome to Marin Talks Money, the podcast in which people who know the markets explain the markets. I'm Maren Somerset Webb. This week I have with me Jim Reed, Head of Macro and Thematic Research at Deutsche Bank. We have brought Jim back on the show. You'll remember his last appearance to talk to us about the latest long term asset return study from the Deutsche Bank Research Institute. It's a super interesting report. John has already looked in one of his newsletters, so some of you may already know a little bit about this year's. The idea is that it looks at real after inflation returns for a range of asset classes across a full 200 years and 356 different global markets. So a lot to look at there and some very interesting takeaways that we will get into now. Jim, welcome to Marin Talks Money.
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Jim Reed
Lovely to be here. Thank you for the invite again.
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Maren Somerset Webb
Again. Well, exactly. Not many people get two appearances.
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Jim Reed
I'm flattered.
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Maren Somerset Webb
Mainly an admin fail. But not many people get to get on twice. So we're very pleased to have you. Now listen, before we start, I want to tell listeners that this is a long and interesting report. We're gonna go through some of the main things, but if you want to hear more, you can read it. We will put the link in the show notes, you can get to it from there. But also, Jim, it's on the website, right. How do they find it? Direct like that?
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Jim Reed
Yeah. If you just Google, Deutsche Bank Research Institute. We've made it publicly available to everybody. So you can look at it on that.
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Maren Somerset Webb
Good. Now where I want to start, Jim, if you don't mind, is with cash holding cash instead of investing. This has been a subject under much discussion in the UK over the last couple of years because various reports have come out across the board showing how many hundreds of billions we hold in cash that we it really shouldn't. The most recent number being 610 billion held in cash that really could be invested. And the UK saver is actually much worse at this than the saver in many other countries. We tend to hold a lot more cash than other people. And the amount of cash that we're holding in that way is up quite a lot even since 2022, because rising interest rates, of course, have encouraged people to hold even more of their money in cash. There is some conversation about there being some pushes in the budget to try and get people to more of their money into stock markets in general, perhaps by changing the way that you can invest inside your ISO wrapper, less allowance for cash, more allowance for stocks and shares, et cetera. But let's just talk about what a terrible idea it is to have too much of your cash. Well, too much of your cash in cash over the long term.
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Jim Reed
Yeah, it is. Right. And I must admit, when I speak to kind of family and friends and they say, well, you know, it's risky to invest in markets. I kind of almost flip it around in the long term, it's risky to have money in cash over the long run because it will always be inflated away. And I think especially in the last 55 years when we've lived in a fiat money System where nothing is back in paper money, there is always going to be a crisis and there is always going to be a reason why the money supply is expanded. And while nominal activity goes up because the authorities need it to. Really. So I think you always have to be predisposed to try to invest in riskier assets, however uncomfortable it feels. And it does feel uncomfortable. As an analyst, I look at things sometimes and think this is a terrible moment to invest. But for the long term, you just have to look at the historical data and realize that cash is an incredibly risky asset. I mean over the 200 years of our report, it gives you a minus 2% real return per annum. And I think that that's probably accelerated rather than decelerated. That is got worse over time.
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Maren Somerset Webb
And if you look at that nominal equities, I'm looking at your data now. Nominal equities have only a 0.8% probability of underperforming cash under the mattress, that is earning no return at all over a 25 year period. Now that probability rises slightly over 10 years and over 5 years, 6.3% over 10 years, 13.6% over 5 years. So obviously the shorter your time period, the more likely it is that maybe you'd be better off in cash. But it's still pretty low odds.
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Jim Reed
Yeah, no, it is. And when we drill down into those probabilities you just discussed, the times that cash have outperformed have often been around just massive events like world wars, massive massive dislocations. And look, these events will happen over a 200 year period, but it's very difficult to set your portfolio up solely to wait for them, if that makes sense.
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Maren Somerset Webb
Yeah, and one thing that we do always say, John and I, is that when equities are very expensive, perhaps it makes sense to hold little bit more cash than usual. In that it does give you optionality. Cash means that when something bad happens, you have the cash available to dive into the market. So there are times where it makes sense to have more cash than other times, but really not for very long.
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Jim Reed
Yeah, and it's a good point. The title of this report is the ultimate guide to Long Term Investing. And it's a little bit of a grandiose title, I apologize for that. But one of the things we're trying to do is how can you get the probabilities on your side over the long run? And obviously we know that riskier assets perform better the long, longer horizon you have. But one of the way you can get probabilities on your side is to look at valuations now, it's not rocket science, just simple valuations. And obviously if markets that are cheap, you probably wait a little bit more too. Markets are expensive, you wait a little bit less to. I think valuations are more important for long term investment than they are obviously for short term investment, which clearly in my day job I have to tell fund managers, et cetera, how to invest their money in three months. And that is a difficult job. That is the really difficult job. Long term investment is a lot easier.
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Maren Somerset Webb
Well, it is, isn't it? Because you can tell people, you know, everything reverts to the mean in the end. And we have all this very, very long term data that tells us that works, tells us what works and value investing works. I mean, you have a very clear line when you've got this section in the report. Which variables predict long term performance best? And the answer is starting valuations matter enormously. A low, low PE portfolio has returned 20.2% a year over the last 70 years and the high PE portfolio, 11. So your starting point really matters. Same with dividends. The high dividend portfolio returns 12.8% a year over 200 years. The low dividend portfolio, 9.3%.
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Jim Reed
The one thing I'll pick you up on, I think you said the low PE portfolio instead of the high PE portfolio there.
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Maren Somerset Webb
Oh, did I? Sorry. Low PE portfolio is the good one, high PE portfolio is the bad one.
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Jim Reed
Just to be absolutely clear, you had me worried there.
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Maren Somerset Webb
Sorry about that. Now, some people would say that PEs don't matter as long as you get growth. Yeah.
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Jim Reed
And look, I think what we came up with in the report is that you can have expensive markets that perform well and obviously the US is an example of that. But I think the problem with the US market, because it's so important, because it's so big, it's easy to get biased by thinking that the US way to outperform is the global way to outperform, if that makes sense. And it's also easy to think that it will continue to go down that route. So I suppose the report looks at enough countries, so it looks at 56 countries, to realize that the US is the exception, massive exception, rather than the norm. And if you look at over aggregated wider collection of countries, valuations matter more than anything else.
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Maren Somerset Webb
And it isn't necessarily the case that the US has always been more expensive than other markets. I mean, you say here that it's obviously an incredibly interesting case study because despite having these very high valuations, both the PE and The Cape ratios and pretty much anything else you look at, dividends, et cetera. It is extraordinarily expensive. And we look at that and we go, oh, yeah, well, that's the, that's the premium for being exceptional. But it hasn't always been there, has it? And it was relatively recent, this idea that the US market should be valued at a much higher level than other markets.
- [10:20]
Jim Reed
Yeah. And look, it has kind of emerged over the last two or three decades. Obviously, within that two or three decades, there's been times where the US has plummeted down to more normal valuations. But I suppose for the last 20, 30 years, you've kind of had this rolling higher valuation than the rest of the world. But yeah, if you go back before that, that was not really a massive premium on valuations in the us. It has been really something that's developed over the last two or three decades, and obviously in particular in the last seven or eight years with the Mag 7 and the Mega cap. So the current kind of difference between valuations in the US and the rest of the world are probably as wide as they ever have been, because obviously, as you and I remember from 2000, everything was pretty expensive. In 2000, most markets were pretty expensive, whereas this is a slightly different market in the US is quite considerably more expensive than. Than most of the other global markets.
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Maren Somerset Webb
I mean, this is interesting then, isn't it, because this is one of those occasions when other options are available. And we could have said back in the period when the Japanese market was insanely expensive, and everyone thought that that would continue forever because Japan was so special. I remember when I went to work in the Japanese market not long after the crash in the early 1990s, the clear expectation was that Japanese exceptionalism was so clear that the market would soon return to its previous valuations, which of course it never did and probably never would. But that was another example of a. When other options were available because it was an exceptionally expensive market, but surrounded by markets which weren't particularly expensive.
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Jim Reed
Yeah, and that's. It's an interesting one because as part of the portfolio returns you mentioned earlier, what we do, we took our 56 countries and every year we ranked them high to low, and we basically bought the 28 cheapest markets and we sold the 28 most expensive markets, and then every year we rebalanced it. And when we do that, the returns from the lower PE portfolio are so much better than the higher PE portfolio over time. And Japan would have been a classic example of where that would have ranked Right at the top and we would have completely left it and other markets would have been cheap. It won't work on a year to year basis. There will be periods where clearly momentum and high valuations just keep on going. But I don't think it takes particularly long. We show a couple of graphs in the piece where we look at the 25 year returns and then we look at the 5 year returns and actually the correlation between valuation and 25 year returns are very linear. That is high valuations, low returns, low valuations, high returns. It's a fairly linear relationship even though with five years it isn't quite as linear, but it's still very good. So Even over a five year period, valuations matter from the 200 years of data we've looked at.
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Maren Somerset Webb
So do you think that when we talk about long term investing, short term investing, holding cash, et cetera, that somebody new to the market, one of these people the FCA gets so cross with because they've got more than £10,000 in savings and they hold 100% of it in cash. And this is considered to be a very bad thing if they are going to invest is the bare minimum five years.
- [13:34]
Jim Reed
I mean obviously luck plays a part of it. So one, you know, you can't rule out being unlucky. I think five years is probably where you start to see the probabilities get much more in your favor. No guarantees, but you get much more in favor. If listeners want to have a look at the report, they'll see a nice graph where we show 5, 10 and 25 year probabilities of outperforming from different asset classes. Well, stocks, bonds, 60, 40 portfolio and stocks versus bonds, et cetera. So you can kind of do your own kind of judgment about where your risk tolerance is, but I think probably five years is what you need to give yourself to give yourself the best chance anyway.
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Maren Somerset Webb
Yeah, but when you talk about that probability, I mean it's interesting because if, let's say, let's still keep a hypothetical person who has only cash in mind and is thinking, okay, well that sounds good, I will now go and invest knowing that if I put the money in the market for five years, I've got an excellent chance of at the very least not losing it. Right. But if they now go and do that, the odds are that they will go and buy a global tracker and that will mean that they are not buying what you are talking about, they are in fact buying because all of these indices are market cap based. They are in fact buying the most expensive Markets in great volume and the cheapest ones really not at all. Whereas what you're talking about is I think an equal weighted portfolio. Right. We're talking about something very different.
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Jim Reed
I suppose it's difficult to pitch this obviously because, you know, there are people who are experts in their own field, but they're not particularly experts in the finance field. And it's easy, as you say, to buy a tracker and there's also people that are more sophisticated and I think, yeah, you probably need to find a way of removing that expensiveness bias into a portfolio. So some kind of equal weight global portfolio or a global portfolio X. You can buy ETFs or trackers that are global portfolio X a certain market. You know, I'd rather not give individual kind of advice.
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Maren Somerset Webb
I'm not expecting you to give individual advice. What I'm just trying to point out is that the automatic and easy way for a novice to invest over a five year period based on your research, is probably the wrong way.
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Jim Reed
I think the easy entry option, yes, is typically a kind of a global tracker. So I think it still would be a decent long term investment, but it probably wouldn't be getting at the key of this report and that is that valuations matter.
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Maren Somerset Webb
Okay, we're going to come back to that in a minute, but before we do that, I just want to pick up on gold, which you also wrote about, which has been the standout investment of the century so far, right? To everyone's massive surprise. Not to ours by the way, not to this podcast surprise, but to everyone else's surprise. And it is true, isn't it, that a portfolio of just gold would pretty much have you evens with inflation over the long. But that's about it.
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Jim Reed
Gold is a fascinating one because Obviously we've got 200 plus years of data here and if you look at that full 200 year period, gold has only given you 0.4% per annum over inflation. But I suppose what you have to take into account is that for the best part of 150, 170 years, the price of gold was fixed to the dollar and the dollar was fixed to most other currencies. So you had a gold based.
- [17:04]
However, I mean that broke down a few times in the last couple of centuries when there was a war, depression, bad economic times, and maybe the gold price got reset of your currency to gold. But it wasn't until 1971 where Nixon effectively pulled the US out of the Bretton woods system, which was a system that the dollar was tied to gold and Every other currency was tied to the dollar. It wasn't until that point that we completely broke free of gold based money. And since then we've been in a more inflationary environment because there's nothing back in paper money. And gold has been a good performer. Now in that full 55 year period. Gold hasn't beaten equities. It's been competitive but it hasn't beaten equities. But actually in the 21st century it has beaten equities quite convincingly. But at the start of the 21st century it was quite low. It had gone low because a lot of central banks have sold their holdings. Gold had gone out of fashion in the kind of 1990s. So look, I think gold is a good inflation hedge and I think it should be part of a portfolio. The two things that make me a bit nervous about gold is the fact that it doesn't pay a coupon or a dividend whereas other assets do. And also just how far it's run in the last year or two. I mean, I think I was on your podcast 18 months ago and you asked me if I'd prefer gold or bitcoin and I said I prefer gold. I think it's a great inflation hedge. I probably should have held bitcoin. I haven't done the math to see which is outperformed since that point. But.
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I wouldn't say I was as optimistic on gold today as I was 18 months ago purely because valuations have changed.
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Maren Somerset Webb
But also it should be distressing when you see gold outperform equities. It's not right for something that is merely an inflation hedge to outperform an asset class that is supposed to reflect their productivity and the growth of, well, humanity.
- [19:04]
Jim Reed
Yeah, to me most commodities because they go into production of various things that we consume around the world, they probably should be an inflation hedge because if their price goes up too much, people should look at alternatives. Now I pretty say gold is slightly.
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Maren Somerset Webb
Different because it doesn't really have an alternative.
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Jim Reed
Yeah, yeah, it's a store of value. But I mean you could, you know, you could own other precious metals if you, if you really wanted to. But look, I'm not anti gold at all because I've been a bit of a gold bug for a long period of time. It's just when I see such violent upward move in price it makes me a little bit nervous on the valuation side.
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Maren Somerset Webb
Interesting though, isn't it? I mean I rather expected when it came back down through 4,000, I mean not a chartist obviously, but having it come down below 4,000. I slightly expected it to keep going down, that is, but it absolutely didn't. It really come hanging on.
- [19:55]
Jim Reed
Yeah. And I suppose if you wanted to create the bull story for gold, it's the central banks are buying again and I think their holdings are still a fraction of where they were in, let's say, 1980. Now it doesn't mean to say they get anywhere close to that, but if you were looking for the bull story, it is that central banks are still buying.
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Maren Somerset Webb
Don't fight the central banks, eh?
- [20:15]
Jim Reed
That's not been a bad bit of advice through one Screw.
- [20:20]
Foreign.
- [20:29]
Podcast Advertiser
Exchanges the Goldman Sachs podcast featuring exchanges on navigating macro uncertainty exchanges on the forces shaping global markets. For the sharpest analysis on finance, business and the economy, count on exchanges between leading mines at Goldman Sachs. New episodes every week. Listen now.
- [20:56]
Maren Somerset Webb
Support for the show comes from public.com.
- [20:58]
Jim Reed
You'Re thoughtful about where your money goes. You've got your core holdings, some recurring.
- [21:02]
Maren Somerset Webb
Crypto buys, maybe even a few strategic option plays on the side.
- [21:06]
Jim Reed
The point is you're engaged with your.
- [21:08]
Maren Somerset Webb
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- [21:38]
Jim Reed
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- [21:54]
Podcast Advertiser
Disclosures introducing the all new Adobe Acrobat Studio now with AI powered PDF spaces. Do more with PDFs than you ever thought possible. Need AI to turn 100 pages of market research into 5 insights with a click. Do that with Acrobat. Need templates for a sales proposal that'll close that deal. Do that with Acrobat. Need an AI specialist to tailor the tone of your market report to sound real smart in real time. Do that with the all new Adobe Acrobat Studio. Learn more@adobe.com do that with Acrobat.
- [22:33]
Maren Somerset Webb
Let's look at wider portfolio construction. So we tell people that over a five year period the probability of them losing money in Real terms in the equity market is relatively low, but obviously a 100% equity portfolio portfolio is pushing it a little. You've looked again at a 60:40 portfolio. 40% in the bond market has historically given the lowest probability of making nominal losses. At least chance of a negative nominal returns over 25 years to 0.1%. That doesn't sound so bad.
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Jim Reed
Yeah, I think if you're very loss averse, you really don't like losing money, then I think a 6040 portfolio is a reasonably good way of minimizing that risk. And the stats in this document, you can look at it, I'm going to tell you, it's on page 34. You can look at it at your leisure.
- [23:24]
The stats basically tell you that bonds do have a nice hedge in property. So in the times where equities are the most vulnerable, bonds tend to rally. And although over time you're not going to outperform equities, you are going to probably minimize your drawdown risk. So again, everything depends on your risk tolerance and how much you hate losses.
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Maren Somerset Webb
So we talked there about it being a very, very low possibility of a nominal loss. But what about a real terms loss?
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Jim Reed
For a 6040 portfolio over 25 years it's around about 8%. For equities it's around about 7 and a half. So it's similar in real terms because over 25 years the fact that equ equities gives a superior return starts to make it more attractive to own an outright equity portfolio.
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Maren Somerset Webb
Okay, so at what point, at what time frame should we say to our listeners perhaps get the bond bit and go all in on equities? Cheap equities.
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Jim Reed
Going back to the 6040 question, I suppose 25 years is probably the point where you don't need a 6040 portfolio, if that makes sense because equities are probably better. If you had 20 years, you might actually say that 6040 give you a slightly better chance of not having a loss, if that makes sense. So I think the kind of break even for where your loss probability starts to favor equities is probably in the 20 to 25 year bucket. But don't forget this is just a loss avoiding strategy. This is not a maximizing your return strategy.
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Maren Somerset Webb
Okay, how do we maximize our returns? 100% equities always.
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Jim Reed
And as I said earlier, buy the lowest PE ones.
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Maren Somerset Webb
Okay, so if I want to make the most possible Money over a 25 year period, I buy the cheapest possible markets and only hold equities for 25 years.
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Jim Reed
That's what the data would say, yeah, okay, I hide behind the data.
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Maren Somerset Webb
Hide behind the data, definitely. And what are those very cheap PE markets right now? What page are the charts for that on?
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Jim Reed
The charts that you'll see that. And I'm going to flick through my document here and the reason I don't want to kind of say is because I'm not a microanalyst. I actually heard your podcast with Albert Edwards and he, he, he, he kind of took fright when, when, when he was asked to comment on micro names and stuff. And I, I agree with him. It gives us macro people a bit of cause for concern when we're asked to talk about individual countries or companies. But if you look at page 23 in the report, we basically show the cheapest.
- [26:07]
Markets of our 56 countries in our study by the P ratio, by the CAPE ratio. And for those that don't know, the CAPE ratio just looks at earnings over a 10 year horizon rather than just a single year, just to give you a bit of cyclicality smoothing to it. And we've also done it by dividend yields. Now you've got to be slightly careful on dividend yields because countries like the US have used buybacks to replace dividends. So the dividend yield on, on the US is quite low. Doesn't mean to say that investors aren't getting distribution from other means. So you've got to be slightly careful. But on page 23 of the report, listeners can look at what markets are cheap and what markets are expensive.
- [26:49]
Maren Somerset Webb
Okay, so for those who really want to know right now, I can tell you that up at the expensive end, you've got the us, India, New Zealand, Taiwan, Portugal, Greece, up there expensive all of a sudden, Canada, Netherlands, etc. And if you want the cheap end, you've got Israel, Turkey, Austria, Colombia, Brazil, Argentina, Hungary. And you get to the UK about a third in sandwiched between China and Malaysia. And then if you look at dividend yield again, I would have thought the UK would be much more towards the cheaper end, but it's not actually. If you look at dividend yields in particular, down at the cheap end, you've got.
- [27:27]
Oh no, hang on, I'm reading this one the wrong way around. If you look at high dividends, we're up at Colombia, Nigeria, Brazil, Kenya, Pakistan, and the UK is only halfway through, sandwiched there again, right next to Singapore. Sandwiched between Singapore and Australia.
- [27:41]
Jim Reed
Yeah, but look, there is an emerging market bias to the cheaper end of the spectrum and I think people can take a kind of, again, an overlay if they do only want to have developed markets. They, they could probably look at this and see which are the cheapest developed markets, which are the most expensive, et cetera.
- [27:58]
Maren Somerset Webb
Yeah, and then you have some markets that don't have long enough data to give you the CAPE data.
- [28:02]
Jim Reed
Right, yeah, and we just do the P for that. But the one thing I would say is that again in the report we look at demographics and the interesting thing about the next 25 years is that we've never really had a period before where so many countries are going to have, have lower working age population. And you know, if you look at how that split between DM and EM World, you know, it's more biased towards the DM world is going to see less workers in the next 25 years. So although it may look a little bit scary sometimes to see some of the emerging market countries being the cheapest, in some ways they've got, you know, the best demographics. And you know, we showed up on page 12 ranking the same countries by demographic for the next 25 years.
- [28:47]
Maren Somerset Webb
And what difference do we think those demographics are going to make? I mean, there's a perfectly good argument to be made that it doesn't matter if you have fewer workers now because you have AI. So developed economies will be able to shift all the work that maybe middle ranking workers might have done off onto robots of one sort or another and generative AI. And so it's not necessarily the case that demographics will affect economies and maybe markets in the same way they would have if we were in this situation 30 years ago.
- [29:14]
Jim Reed
Yeah, I mean it's a very valid point and one that is gathering a bit of steam. I would probably say even as a minimum, I would say the rankings of the countries matter. So if and when AI becomes successful, it's probably a price point that a lot of countries will be able to use it. And therefore the relative ranking of demographics probably still matter. It just might lift all the boats higher, if that makes sense. One maybe more controversial thing to say is that if you look at history, ever since the Industrial Revolution, we have constantly been worried about new technologies destroying jobs or replacing jobs. I know your question was slightly framed, slightly different, but what economic history tells us is that innovation probably creates jobs if it improves productivity, if it improves growth, and therefore the labor market in aggregate might not look, look too different in the longer term. But it just might be a compositional change where, you know, instead of having lots of people doing data entry stuff, they're doing more lifestyle things. I don't know. I wish I knew the industries of tomorrow, but as an economic historian, I'm less concerned about AI destroying jobs.
- [30:28]
Maren Somerset Webb
Yeah, well, as we always say, if you looked back 20 years, you wouldn't have believed that half the jobs that exist today could possibly have existed. I'm going to give mine as a classic example. Who could possibly have known? Who could possibly have known? Podcasting influences, online yoga teachers, et cetera, et cetera. Who could have guessed?
- [30:45]
Jim Reed
Absolutely. I'm not sure I'm ready to be an online yoga teacher yet though, so hopefully there's still a market for me.
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Maren Somerset Webb
I think you'd be extremely good at it, Jim. Well, for macro economists, I think that microstrategists, what do we call you? A macro strategist, don't we really?
- [31:00]
Jim Reed
As long as there's a market for it, I'm happy to be called it.
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Maren Somerset Webb
Now, listen, I mean, I know that we're obsessed with page 23 at the moment, but I'm personally obsessed with page 36, which is the maximum drawdown page. So how much you've actually lost in markets, particular markets, and how long it's taken for them to get back to the nominal level. And it's mainly Italy seems to suffer a lot from this. Down 91% in 1906, again in 1912, again in 1913. France has suffered from it. Italy again in the 60s. Sweden seems to have some troubles in this area. Kenya just pops up all the time. And then of course there was Japan, which is interesting because, you know, very recent, very developed market, one of the greatest bubbles of all time. And your drawdown there was 70% and you didn't make your money back in nominal terms. Well, until about a week ago, actually.
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Jim Reed
Very recently. Yeah, I think it was a bit longer than that.
- [32:02]
Maren Somerset Webb
Three weeks, but relatively. Yeah, yeah. So, you know, when we talk about cheap markets and looking at them sometimes, sometimes cheap for a reason, and your money won't come back for a long time. 33 years, you say, of negative real returns from Japan's equity slump.
- [32:17]
Jim Reed
Yep. And obviously, as you pointed out earlier, that was a very expensive market at the time, which is why it took so long. I suppose this list of drawdown here in some way is a bit of a comfort though, because a lot of these have occurred in countries that.
- [32:37]
Have had a, you know, a once in a century or once in a maybe a two century event like a, like a world war. And actually the list is relatively small relative to the amount of data we have. But the point we're trying to make is that, you know, that you can have these long drawdowns and you know, trying to identify what, what causes. I mean, some, you know, something like Italy has probably been the least stable country politically in our database in terms of the amount of governments it's had in, in the period of our study. Two of the countries with the highest returns, almost stealth, you don't really notice them, are kind of Denmark and Sweden. And these are two countries that have actually had a, a long, long period of political stability. They've, they've managed to kind of sidestep major conflicts and they've been fairly stable country. So it's an interesting contrast between Italy which has until recently, I mean, actually the last few years have been one of the most stable for Italy in terms of politics for.
- [33:39]
Centuries. Maybe a little bit overstating it, but decades at least. And the political instability we've had in the past has actually weighed on Italy longer term, whereas the political stability we've had in places like Denmark and in Sweden have actually meant that their returns have been reasonably good.
- [33:58]
Maren Somerset Webb
Yeah, I should be clear and say the drawdowns we were talking about, or I was mentioning in Sweden earlier, were all in the 1910s. Can we talk about more recent stuff? You said earlier that one of the most stressful parts of your day job was telling people what they should invest in in the short term, whether they should go over a three month period. What are you telling them now?
- [34:17]
Jim Reed
It is challenging because I think the biggest topic in the market at the moment is is AI in a bubble? And that unfortunately dictates a lot of different asset classes because these companies now are so big that they are countries in terms of their influence on the global financial market. So I was having a chat with our rate strategist this morning and he's got a very, very well defined framework of predicting where rates will go, interest rates go. And he said, look, the biggest risk is the AI story. It's not is inflation going to be higher or lower, Is it not that supply of government bonds is going to be higher or lower. The biggest risk to him is the AI story. So I think the AI story dominates everything. And within Deutsche bank we have different views on this. So I don't really want to kind of be too aggressive on my view because I can find you other views.
- [35:13]
Maren Somerset Webb
Okay, what is your view? You.
- [35:16]
Jim Reed
Well, coming back to this long term study and trying to be a politician here, give you a politician's answer as.
- [35:21]
Maren Somerset Webb
I, I won't accept a politician answer, Jim, and I can't do that. I can't do that. It's, that's not that kind of show that you have the BBC for that.
- [35:31]
Jim Reed
No comment. I would say I prefer cheap markets would be my, my comment. But look over the short term that that can, can iron out. I do think that if this is a bubble in AI, if the Fed is cutting rates that could be blown up further, if that makes sense.
- [35:50]
Maren Somerset Webb
So there could be a melt up in the AI story as rates are cut further.
- [35:55]
Jim Reed
Yeah, I mean if you look at the history of rate cutting cycles, equities in the US do phenomenally well. So I think in every rate cutting cycle in the last 70 years, from the first cut in the cycle, equities on average do about 50% up and they're probably already 30, let's say 30% up since. So if this rate cutting cycle is a kind of a template for, well, history is a template for this one, then there could still be a bit of a melt up. I suppose the interesting thing would be with the government shutdown now coming to a close and you get all the data, we're going to have a lot of macro information to, to work out whether the Fed should be cutting and maybe the risk scenario for the AI story is that the data is stronger and suddenly you get a load of cuts that just get priced out of the market.
- [36:46]
Maren Somerset Webb
Okay, so those expected cuts once we see the data may look less likely and that would have an impact on the US market.
- [36:55]
Jim Reed
Yeah, I think the presumption at the moment is that the Fed will continue to ease a reasonable amount into next year and that supports probably the risk environment. I think that's the default market assumption.
- [37:06]
Maren Somerset Webb
Okay. And let's go back to the UK market briefly, which we've been talking about as being cheap for ages. And I think last time you were on we Talked about the UK market and the FTSE 100 really looks like it would like to go through 10,000 now, doesn't it?
- [37:19]
Jim Reed
It seems to be fairly immune to kind of negative domestic news which to be fair is as we know is fair because it's not a domestic focused constituency constituents within the index. So there does seem to be momentum. I suppose in my travels I just see an incremental increase from overseas of people at least looking at the market, whereas maybe 12, 18 months ago they weren't.
- [37:46]
Maren Somerset Webb
Should we be nervous about the UK sovereign bond market? And also the sovereign bond markets are very highly indebted countries. It does slightly feel like we're nearing a public debt tipping point in some developed economies.
- [38:04]
Jim Reed
I think we all know that the debt profile of a lot of developed market countries is totally unsustainable. The problem the UK has is that it has a higher proportion of overseas investors than many other developed markets. So it's more difficult to control, if that makes sense. If the overall global bond market is having a bad period, the UK often joins it because it's owned by a lot of, well, a high proportion of it is owned by overseas investors. There are some European countries that obviously also got unsustainable debt profiles, but they're probably a slightly more domestic owned. So A, you've got a bit more control over your domestic owners and also you've got the ECB that may be there to backstop it. So the UK is vulnerable, but I don't think it's an imminent thing. I think it's something that if you left the debt rising year after year, at some point there would be a real, real issue feels like it is.
- [39:07]
Maren Somerset Webb
Going to rise year after year.
- [39:08]
Jim Reed
I mean, look, everything points in that direction in most developed market countries. So I think the day of reckoning will come, but it's just, it's not clear when that is really.
- [39:19]
Maren Somerset Webb
Do you think there's anything that Rachel Reeves could do in her upcoming budget to prevent that day of reckoning coming.
- [39:24]
Jim Reed
Without going into specific policies? I think we desperately need growth everywhere. And I think whatever country you're looking at, I do think there should be more priority on how can you maximize economic growth. And I think that would be for the betterment of everybody, what end of the kind of income spectrum they are, because at the end of the day, growth is what funds most of our lifestyle. So I think, you know, if to be glib, I think any country at the moment I would look to try to get as high economic growth as possible.
- [39:57]
Maren Somerset Webb
Easier said than done, I guess. Jim, sorry, you went off topic a bit there. Is there anything in the, the report we haven't talked about that you'd like to talk about?
- [40:06]
Jim Reed
No, I think the main thing is that valuations matter. Clearly valuations are the most important thing and I, without wanting to give away my secret message for free, the kind of secret thing in financial markets is buy low, sell high. That is the kind of secret source of financial markets. The one thing I would say is that nominal GDP is the speed limit for global equity. So if you told me for the next 5, 10, 15, 20 years nominal GDP would be 2%, I would tell you that equity returns are going to be very low, very low.
- [40:43]
Maren Somerset Webb
Because the valuation starting point combined with.
- [40:45]
Jim Reed
The low growth yeah, look, I think global equities are probably neutral valuations if I had to aggregate them in total, so I don't have a big problem with the median country in the world. But if your next 10, 20 years is 2% nominal GDP growth, you're not going to get much more than 2% from nominal from equities. But I do think we're in a financial system where because of how much debt we have, have the authorities are almost incentivized to keep nominal GDP high, if not high a level which can at least alleviate the debt. Yeah, so I don't think there's any danger of nominal GDP collapsing when you've got fiat money and authorities able to manipulate money supply.
- [41:28]
Maren Somerset Webb
But it's real GDP per head we care about, isn't it? In the end, the end game of everything is supposed to be improved living standards for each and every person and not some random nominal number.
- [41:42]
Jim Reed
Yeah, it is for the economy. But I suppose if you're making a decision, do I hold my money in cash or do I invest in the equity market, then nominal GDP matters. Matters. Yeah.
- [41:55]
Maren Somerset Webb
I wanted to end on a more upbeat note than that, but we failed.
- [42:01]
Jim Reed
On a scale of 0 to 10, this is near 10 of my upbeatness, so I'm sorry.
- [42:06]
Maren Somerset Webb
Okay, so we can take it no further than this.
- [42:09]
Jim Reed
I've out upbeat myself, so I don't think I can go any further.
- [42:13]
Maren Somerset Webb
Okay, all right, brilliant. I'll accept that if that's as good as it gets. It was pretty good. Let me ask you another question then. Are you reading anything uplifting at the moment? What's besides your bed?
- [42:22]
Jim Reed
The problem is because I like to think I work long hours when I read. I tend to read non financial books these days.
- [42:29]
Maren Somerset Webb
That's okay, I'll take that. Recommend a nice crime novel to us. We like that.
- [42:34]
Jim Reed
Well, I'm always a big fan of the strike books.
- [42:37]
Maren Somerset Webb
Oh yeah, I've just finished the latest one.
- [42:40]
Jim Reed
Yep, I finished that too, so I won't give any spoilers.
- [42:44]
Maren Somerset Webb
Well, I'm hanging on a thread. I mean, how long is it going to take her to write the next one?
- [42:48]
Jim Reed
I hope not too long, but yeah, that's been my favorite book in recent times.
- [42:52]
Maren Somerset Webb
Yeah, see, I made the mistake if I haven't read them all and now the way that the plot develops, I can't go back and read the earlier ones. It won't work. So I'm now stark hanging off the next one. I feel like I've wasted a lot of my reading time.
- [43:04]
Jim Reed
Yeah, I can't help you with that, but sorry.
- [43:08]
Maren Somerset Webb
Thank you very much. Jim thank you so much for coming on today. It's been super interesting.
- [43:12]
Jim Reed
Pleasure. Thank you very much. And obviously remember people can go on the Deutsche Bank Research Institute and look at this study for themselves. So thank you very much for having me on.
- [43:31]
Maren Somerset Webb
Thanks for listening to this week's Maryn Talks Money. If you like our show, show, rate, review and subscribe. Wherever you listen to podcasts and keep sending questions or comments to marianmoneyloomburg.net you can also follow me and John on Twitter OR X. I'm Erinsw and John is JohnStepek. This episode was hosted by me, Marion Somerset Web. It was produced by Sam Asadi and Moses andam Sound designed by Blake Maples and Aaron Casper. Special thanks of course to Jim Reed.
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