Markets Wrap: Inflation Means Bad News for Burnham

Summary

Markets Wrap: Inflation Means Bad News for Burnham

Podcast: Merryn Talks Money
Host: John Stepek (standing in for Merryn Somerset Webb)
Guest: Simon White, Bloomberg Macro Strategist
Date: July 24, 2026

---

Episode Overview

This special “Markets Wrap” episode dives into the turbulent landscape of UK politics and the markets, focusing especially on how entrenched inflation is constricting fiscal options for the new Labour government led by Andy Burnham. John Stepek is joined by Simon White to examine the interplay between government spending, taxation limits, welfare reform, global inflationary pressures (including oil and food prices), implications for investors, and the speculative nature of big tech’s AI bets. The episode delivers both detailed macroeconomic analysis and practical perspectives for investors navigating a period of uncertainty and rising volatility.

---

Key Discussion Points & Insights

1. UK Political Theatre: Burnham’s Fiscal Bind

[02:51 - 09:33]

• A Familiar Crisis:
  Simon White draws parallels between Burnham’s current predicament and Starmer’s tenure, highlighting persistent difficulties in balancing spending with fiscal rules.

  • “Burnham, is he gonna fail in a more charismatic fashion? Or maybe he's gonna, you know, get through what he wants to get through, but it's hard to...see with all these promises now, but what he's going to spend and nothing to do with what he's going to cut...”
    — Simon White [03:27]

• Levers Left: Taxation and Its Limits:
  Both speakers emphasize that UK tax as a % of GDP is at record highs outside of wartime, leaving close to no scope for further increases.

  • “We're already got the highest tax rates in a generation—or actually maybe two generations in terms of GDP...”
    — John Stepek [04:00]

  • “Outside of war or the aftermath of war, it's never been higher.”
    — Simon White [04:08]

• The Welfare Bill Dilemma:
  Simon points to pandemic-related welfare increases (“a roughly 50 billion increase”) that have not reverted, uniquely leaving the UK with a high baseline for government outlays even after other countries have reduced theirs.

• Can Burnham Sell Tough Reforms?
  They discuss whether Burnham can perform a ‘Tony Blair’-style balancing act: “tickling the left” while driving through needed, but tough, welfare reforms.

  • “If he has that charisma and ability to persuade in the way that Blair did, maybe possible that he’s able...to do the big decisions that they need to do.”
    — Simon White [06:30]

  • “If you framed it correctly as a kind of working class waste-of-people's-ability issue...then actually somebody could make the case for it.”
    — John Stepek [07:13]

---

2. Market Realities: Inflation’s Resilience and Volatility

[09:33 - 13:29]

• Global Drivers: Oil & Geopolitics:
  The ongoing Iran war and recent Houthi attacks are pushing oil prices ever higher, causing renewed inflationary strains.

  • “He [Burnham] doesn't have control over the biggest variable effect in gilt rates, which is the Iran war and oil prices.”
    — John Stepek [09:33]

• Inflation Volatility is As Damaging as High Inflation:
  Simon elaborates on how inflation is not just high, but increasingly volatile (“heteroskedastic”), which adds uncertainty across all risk assets.

  • “When inflation rises, it tends to use a polysyllabic term—that’s heteroskedastic...the higher it gets, the more volatile it gets.”
    — Simon White [10:31]

  • “All that sort of stuff becomes much more uncertain. So it's really bad for consumption, bad for investment, bad for everything.”
    — Simon White [11:30]

• Food Inflation Looms:
  The hosts note that, due to the geopolitical constraints and supply chain vulnerabilities (e.g., fertilizer ingredients from/through the Gulf), the UK may not be as lucky as before in avoiding a food price spike.

---

3. Investing Amid Stagflation and Uncertainty

[15:19 - 19:29]

• Stagflationary Backdrop:
  With energy and food prices climbing, all “needs” become more expensive; disposable income shrinks, creating tough problems for central banks and policymakers.

• Asset Class Implications:
  They quickly rule out fixed income (“inflation is just bad for fixed income”), note that cash may only hold value if rates keep pace with inflation, and then zero in on gold.

• Gold as Insurance, Not a Quick Trade:
  A deep dive into recent gold price action and its role as both an inflation and deflation hedge for portfolios. Simon distinguishes between the speculative gold run-up (likely fueled by “Johnny-come-lately” momentum chasers) and gold’s enduring purpose as “monetary system insurance.”

  • “It ran up unsustainably… it was going to have to unravel to some extent and which it did… But the fundamental reason for owning gold had never actually changed. All that changed is the price.”
    — Simon White [16:15]

  • “If you were owning gold for the right reasons before, it’s not just like a quick trade, you should still be in it today.”
    — Simon White [18:16]

---

4. AI Hyperscalers and Market Risk

[19:29 - 24:57]

• Alphabet’s Shock Negative Free Cash Flow:
  John highlights Alphabet’s first negative free cash flow quarter since its IPO—due to huge outlays on AI infrastructure—and raises concerns about tech sector resilience.

• Are the ‘Hyperscalers’ the Next Bubble Epicenter?

  • “They're all betting on the fact that this is an epoch-changing time for computing... It requires different chips... vast data centers... that's their bet. Whether they're right or not, nobody knows.”
    — Simon White [20:50]

  • On leverage: “The actual debt they've got on balance sheet of five hyperscalers, I'm not including Apple here, is about $800 billion... Off balance sheet, there's all these other things...data center leases, other liabilities... could be in the order of 1.6 trillion.”
    — Simon White [22:56]

• Risk of Correction:
  Simon foresees a plausible 10-15% correction in U.S. stocks, with deeper drawdowns possible if a recession emerges. Cites historic patterns—biggest equity drawdowns coincide with recessions.

---

Notable Quotes & Memorable Moments

• On Tax and Fiscal Constraints:

  • “We're really kind of maxed out as far as the tax take goes.”
    — John Stepek [04:16]

• On Welfare Spending:

  • “In that 50 billion...would solve all your problems... defense problem solved, nhs... you could fix on the back of that.”
    — Simon White [06:30]

• On Inflation’s Broader Risks:

  • “If the purchasing power of your money... becomes more uncertain, it feeds into all sorts of goods. Prices uncertainty, Fed policy uncertainty, borrowing rates, uncertainty, cash flows, all that... is bad for everything.” — Simon White [11:30]

• On Gold as True Insurance:

  • “Gold is the monetary system kind of insurance trade rather than anything else.”
    — John Stepek [19:29]

• On Tech’s AI Bet:

  • “It's one big bet... Whether they're right or not, nobody knows... even if these guys [Musk/Zuckerberg] can't agree, then we'll agree that we don't know.”
    — Simon White [20:50]

---

Timestamps for Key Segments

• 02:51: Intro to British politics and Burnham difficulties
• 04:00: Discussion of tax constraints and the ‘maxed out’ fiscal space
• 05:03: The ‘accelerationist’ arguments in the FT and the need for ‘system reset’
• 06:25: Welfare state spending and the challenge of reform
• 09:33: Markets’ focus shifts to oil, Middle East, and inflation volatility
• 10:31–13:29: Detailed explanation of inflation volatility and food price risks
• 15:19: Stagflation, asset class impacts, shift to gold
• 16:15–19:29: Gold’s recent price action, role in portfolios
• 19:29: Alphabet’s negative free cash flow, AI infrastructures costs
• 20:50–24:57: Debate on AI hyperscaler risk and bubble dynamics
• 24:57: Equities outlook—correction risk and recession scenarios

---

Tone & Style

The conversation is punchy, informal, and candid, with understated British humor (“If you require subtitles...you are fired as a listener”), direct skepticism of political promises, and a focus on sobering market realities. Simon White’s technical precision is balanced by John Stepek’s pragmatic investor lens, creating an accessible, yet richly detailed, dissection of market and political risks.

---

TL;DR – Essential Takeaways

• UK fiscal space is critically tight—tax and spend levers are largely exhausted, making unpopular reforms inevitable.
• Inflation is not just high, but now very volatile, compounding risk across markets—especially with renewed energy and food price pressures.
• Stagflation is the prevailing threat; most asset classes exposed except for gold, which retains value as systemic insurance.
• AI tech giants are piling on both visible and hidden leverage to fund next-gen infrastructure—risk of a market correction is significant, especially if recession hits.
• Investors should brace for volatility, question narratives, and treat “insurance” assets (like gold) for the right reasons, not just momentum.

Listen for:

• Clear-sighted, unsentimental discussion of both the UK political outlook and the dangers facing markets from all sides—tied together with practical investing implications.

Transcript

[IBM Representative]

So there's a lot of noise about AI, but time's too tight for more promises. So let's talk about results. At IBM, we work with our employees to integrate technology right into the systems they need. Now a global workforce of 300,000 can use AI to fill their HR questions, resolving 94% of common questions, not noise. Proof of how we can help companies get smarter by putting AI where it actually pays off, deep in the work that moves the business. Let's create smarter business.

[Public.com Advertiser]

IBM support for this show comes from public.com if you're actively involved in your portfolio, you probably catch yourself repeating the same actions. Buying the dip, manually sweeping idle cash, putting on a hedge on public you can now create AI agents that handle all these tasks on your behalf. Just describe what you want to do in plain English, like if the Vix hits 25, buy a put option on the S&P 500 or if my cash balance goes above $20,000, move the excess into my direct index. You approve the workflow and your agent handles the risk, monitoring the market, watching for your conditions and executing your strategies exactly as defined. An investing platform driven by your intent, not just your clicks. You can also get full read and write access to your account via the public API. Go to public.com market and fund your account in five minutes or less. That's public.com market paid for by Public

[John Stebik]

Investing Brokerage Services by Open to the Public Investing Inc. Member FINRA and SIPC Advisory Services by Public Advisors, LLC SEC registered advisor complete

[Okta Advertiser]

disclosures [e-mail] disclosures these days it seems like AI agents are just about everywhere you turn every field and every function. But without identity, you can't trust they'll serve your business instead of jeopardizing it. Fortunately, Okta helps you get identity right by securing your AI agents identity, giving you a single layer of control, a single standard of trust. So whether an AI agent supports a single user or your entire enterprise, with Okta you'll turn risk into opportunity. Secure every agent. Secure any agent. Okta secures AI

[Optum Advertiser]

Bloomberg Audio Studios Podcasts Radio News.

[John Stebik]

Welcome to the Mern Talks Money Market Wrap, where we talk about the biggest moves in markets this week and what's driving them. I'm John Stebik, senior reporter and author of the Money Distilled newsletter. And joining me in the studio while Merlin's away on holiday is Simon White. Simon's a microstrategist at Bloomberg and author of the Microscope column. Simon, thanks very much for joining us today.

[Simon White]

Thanks for having me on, John.

[John Stebik]

As you'll have noticed Simon is also from my neck of the woods. So if you require subtitles for this podcast, then I regret to inform you that you are fired as a listener. Don't be so cheeky. Right, so after that warning, Simon, British politics. It's been interesting this week, hasn't it?

[Simon White]

It's kicking off again. By the way, I will say the Glaswegian accent is a lot stronger than my Edinburgh softer tones. So the subtitles might be needed for you. Yes, it's been very interesting.

[John Stebik]

Shots filed. Sorry, carry on.

[Simon White]

Yeah, it's been interesting. I mean, when hasn't it been in British politics for some time? Probably like a lot of people, like the same way I was with Kiera Starmer, like hopeful that it was all gonna work out, but it didn't. And we're kind of here again. Burnham, is he gonna fail in a more, you know, charismatic fashion? Or maybe he's gonna, you know, get through what he wants to get through, but it's hard to sort of reason, you know, with these, all these promises now, but what he's going to spend and nothing to do with what he's going to cut and he's sticking to the fiscal rules. So what's your only lever left?

[John Stebik]

Well, the only lever left is tax. I'm wondering what your take is on this. I mean, we're already got the highest tax rates in a generation, or actually

[Simon White]

maybe two generations in terms of gdp. I just looked at this. It's basically outside of war or the aftermath of war, it's never been higher.

[John Stebik]

Yeah, so we are really kind of maxed out as far as the tax date goes as well. And I think that's one thing it's easy to see with the borrowing that we're, you know, we're very high borrowing and it's easy to see with the spending because obviously the borrowing so tight that it's self evident we're spending too much, but we're also taxing too much. So I do wonder how much more can he squeeze the pips, as it were. I mean, even if he wants to

[Simon White]

pluck the goose, I mean, he's got, as I say, limited room for maneuver. I mean, I don't know, I mean, look, there's been a couple of articles in the papers recently like the Jenna and Ganesh and ft and it was Matthew Syed and Sunday Times making the same point that they kind of want him to fail. Yeah, we need another 1970s winter of discontent to kind of reset the system.

[John Stebik]

Yeah, this was very much because I read the Ganesh one. He was basically saying this has to go pear shaped and preferably go pear shaped in quite a catastrophic way so that everyone accepts or the voters accept that actually we need to do something different. I didn't expect the FT to come out with the accelerationist argument, I have to say. So that was quite interesting to see.

[Simon White]

Yeah, yeah, it is. I mean, as I say, interesting and as I say, the same thought process elsewhere. I mean, as I say, he's saying all the right things right now and I think the sort of cosmetic, if you like, announcement he's made so far. I mean, the bus cap and the VAT and fuel and the business rates thing, in the grand scheme of things don't cost a lot, but they sound good. So my sort of sliver of hope is that he sort of says the right things to keep the left to his party, tickle their belly a little bit, keep them happy, and he's able some point down the line to persuade them for the need to say, cut the welfare bill, by the way. That alone would solve everything. I mean, It's a roughly 50 billion increase since the pandemic. And a lot of that happened in a lot of countries because of the pandemic, of course, But a lot of other countries, their welfare bills went back down. I was stuck. So I can't imagine we were uniquely sick in some way.

[John Stebik]

Yeah.

[Simon White]

So it feels like in that 50 billion, roughly what it is would solve all your problems.

[John Stebik]

Yeah, right.

[Simon White]

Your defense problem solved nhs. I'm sure you could throw money at that. Again, you've got a lot of things you could fix on the back of that. So that seems to me you need to get that one right. And if he's able to do a kind of Tony Blair, persuade them, it's in their interest. It's like part of the labor movement. And that Alan Milburn review about that really framed it in the right way that this is actually a negative for people. So if he has that charisma and ability to persuade in the way that Blair did, maybe possible that he's able to keep them happy in some ways and then persuade them to do the big decisions that they need to do. But I don't know what you think about that, whether you think that's likely.

[John Stebik]

I do think that one thing that people possibly underrate and especially people in their position, I mean, people who sort of see the numbers and think, well, the numbers are the same, just swapping out the guys isn't going to do something. But I do think that slightly lets Keir Starmer off the hook for how bad he actually was. And I do feel that Starmer specifically, without being cruel or biased, I just think he was clearly not a great leader. And at every step of the way you could see there were actually mistakes made. And the welfare reform. On the one hand, I agree that the left of the Labour Party is knee jerk against anything that touches benefits. At the same time, you had people in that rebellion that weren't really in that wing of the party and they were actually just rebelling against other elements of the leadership. But also the fact that it was not particularly well thought through. And I do get the impression, as you say, if you framed it correctly, as a kind of working class waste of people's ability issue as it is, and if you actually kind of put it through a proper kind of review, for example, that comes back with what are considered recommendations for ditching this stuff, then actually somebody could make the case for it. I guess I do wonder if the idea of, you know, kind of cutting benefits is just going to go back to, oh, this is austerity 3.0 or whatever that it often seems to run in. But I know what you mean. I do think there's, there's a sliver

[Simon White]

of a chance there that's, that's come out my optimistic thing. I mean, obviously we'll see the near future. I mean, his picks so far I think have been pretty good for his cabinet, certainly surprising and very surprising, but I think, you know, it's kind of ticked a lot of boxes, I would say. Like, it's definitely, you know, it's not scared to horses, I would say any of these picks really, you know, like, obviously Healey is the Chancellor keeping my mood in the home office streeting in defense. You know, they all seem to me like pretty reasonable picks. He's kind of like, it feels like he's off to a good start, but the mathematics, you can't get away from the fact that you need, he's going to need to cut spending one way or the other. And we don't think he can probably tax that much more. I mean, he might try, but this is where obviously it could all start

[John Stebik]

to unravel and just kind of fall apart. But I think this is, and this is moving on to the kind of wider markets this is. The other big issue about spending is that he doesn't have control over the biggest variable effect in gilt rates, which is the Iran war and oil prices. And we kind of thought this was, or sorry, not we Markets kind of seem to think that this was pretty much a done deal up until, obviously, the ceasefire started to fall apart. And now this morning, we've got the Houthis attacking Saudi tankers in the Red Sea, which means the actual wars actually getting worse rather than getting closer to some kind of truce. So, I mean, what does that mean for asset prices? Because you tackle the macro stuff and you wrote something quite interesting about inflation, but not just about inflation being high, about it also being kind of volatile and how that makes it all even worse.

[Simon White]

Yeah, exactly that. I mean, oil prices, you say back in the rise, we're almost at 100 again on Brent oil prices, and you've got all the ingredients. I mean, really, inflation never went away in the first place, that's one thing. And this getting this reignition, if you like, from this renewed rise in oil prices is a problem. And what happens with inflation is that's bad enough, of course, prices go up, everything gets more costly, of course. But when inflation rises, it tends to use a polysyllabic term that's heterosketastic. Now, we do need subtitles, but basically is that the higher it gets, the more volatile it gets. And you see that with inflation, it's already beginning to happen, certainly in US inflation. So you're seeing that kind of. So you've got this added uncertainty, uncertainty with prices, given that essentially the purchasing power of your money is pretty much the most important signal out there. And if that becomes more uncertain, it feeds into all sorts of goods. Prices uncertainty, Fed policy uncertainty, borrowing rates, uncertainty, cash flows, all that sort of stuff becomes much more uncertain. So it's really bad for consumption, it's bad for investment, it's pretty much bad for everything. And therefore it feeds into credit markets, bond markets, stock markets, basically, they all have to have a higher risk premium to take account of this extra uncertainty because of the extra volatility. So it's not a good environment at all for asset prices. And as I say, I don't really think inflation looked like it was coming off. It was still elevated, remember? And I think it was going to come back anyway. But this, of course, has just accelerated it. What's happening again in the Middle east, which never really went away, and I was looking at this earlier as well, when it comes to food prices. So we kind of dodged a bullet when it came to food prices, because people thought there's a lot of fertilizer ingredients, if you like, come through the Gulf. They either come from the Gulf or they travel through the Strait of Hormuz. And you did see a sharp rally in some of the stuffs like urea and ammonia. But it came back down really sharply. And that was partly good fortune really. You had high inventories already. China, I think, released a lot of urea supply into the market. So kind of everything went in the right direction. But we might not be so lucky this time around. Right, because inventories aren't as high anymore. I don't know if China has as much urea it can offer back into the market. So this nitrogen and phosphate fertilizer, actually phosphate fertilizer is already elevated. It remained elevated because sulfuric acid, 50% I think, of sulfur comes through the straight. So you've already got a bit of a bottleneck there and that could spread to this nitrogen fertiliser. And then, yeah, then you've got a food, a food problem on your hands as well.

[Optum Advertiser]

Let's talk about healthcare for a second. It doesn't always work the way people expect it to. If you've ever waited on a prescription refill or had a hard time getting the care you needed, you know the feeling the system should just work better for everyone. That's exactly what the people at Optum are trying to do every day. They're a healthcare company linking patient care and pharmacy services and using data and technology to drive the whole system. So care is connected, not complicated for patients and providers. Things like making it easier to get care that looks at the whole person, from primary care doctors to mental health support and even in home care. And then using technology to make sure they all work together. Technology designed to help doctors spend less time on busywork and more time with their patients and those prescriptions. Optum is working to bring costs down, save patients money and make it easier to get refills. Little by little, Optum is helping make healthcare work as one for everyone. Head to business.optum.com to see how the

[IBM Representative]

thing about AI for business, it may not automatically fit the way your business works. At IBM we've seen this firsthand. But by embedding AI across hr, it's and procurement processes, we've reduced costs by millions, slash repetitive tasks and freed thousands of hours for strategic work. Now we're helping companies get smarter by putting AI where it actually pays off, deep in the work that moves the business. Let's create smarter business IBM.

[Optum Advertiser]

This message is brought to you by Apple Card. Apple Card lets you earn daily cash back on every purchase, every day. Applying the Wallet app on iPhone today, subject to credit approval. Apple Card is issued by Goldman Sachs Bank USA Salt Lake City Branch terms and more on applecard.com.

[John Stebik]

And basically all of these things are stagflationary, aren't they? Fundamentally because you've got oil and food costs so the cost of your needs is going up. That means you'll have less money to spend on wants and that just makes life harder for everyone, including I guess central bankers. I mean we don't talk share tips directly on here but in terms of the kinds of things that investors can do because obviously bonds inflation is just bad for fixed income. It's not ideal for cash or low. If interest rates keep up, cash can sort of keep its head above water a lot of the time. Gold, what's been going on with gold because I noticed that kind of was doing this thing where it was going down when oil was going up for a while and vice versa, but now it seems to have been ticking back higher, even low. Oil is up pretty much since well basically just the last few days. What are your thoughts on that?

[Simon White]

I think gold's an interesting one. I mean obviously it ran up unsustainably which is really unfortunate. If you're kind of like gold to have it as a portfolio hedge, that's kind of the worst thing you want to see because you know the inevitable was going to happen. It was going to have to unravel to some extent and which it did. And it's always it being gold as well, it's probably going to do so more than anyone expected. So you kind of had to sit through all the kind of expected in my mind enemy noise of oh, that's the end of the gold trade. Real rates are going up, so that's over. You're like no, this is just unwinding the speculative froth that we saw in the run up. And this is a good thing because I think a lot of kind of Johnny come lately if you like people that were maybe they were in Bitcoin, the sort of investors that are just looking for a quick kind of what's going up momentum followers. And I think a lot of that people went into the gold trade and that obviously really threw it higher. And then as you say, what happened subsequently is that then it started going opposite to oil prices basically because of tension in the Middle east, right. So anytime that you know, central banks like Turkey were having to basically sell reserves because they couldn't afford oil prices, right, Oil was gone up. They don't really have much of their own oil supply. So that. And imagine Middle Eastern central banks were doing that. They don't have the same revenue income because they weren't able to export their product. So that really exacerbated that. So maybe that's sort of coming to an end right now and you'll get central banks or maybe starting to peter back in, start buying again. But the fundamental rules, like a reason, sorry for owning gold had never actually changed. All that changed is the price. Price went up a lot and then it went kind of back down to where it was where October, you know, not that long ago. And so kind of really, it's one of these classic things especially you know, when it comes to things like you own for the long term. You pay attention to the. If you pay attention to the price every day, you're going to get thrown around.

[John Stebik]

Yeah.

[Simon White]

Like, you know, typical value investor doesn't really tries not to pay too much attention to what the voting machine is saying, you know. And I think we're at that point now where it's kind of the decks have been cleared with gold. So I think it's got a much more solid base, if you like, for it to start going higher. We're not going to see what we saw before because of that. That was kind of an unusual set of circumstances. But I do think it's setting up for a longer term, more durable kind of rally. I will say though, it's not really just about inflation. I would say it's both edges of the distribution. You're hedging with gold. So inflation and deflation, okay, so in serious deflation, which we could get, if you have a credit bust, like private credit maybe or something like that, you get a deflationary bust and that's the tail risk for sure. Gold actually should benefit in that situation because it's the very integrity of the financial system itself comes under question. And once again gold starts to look, because it's orthogonal if you like, to the whole thing, it starts to look attractive again. So I think there's again all the fundamental reasons. I think that if you were owning gold for the right reasons before, it's not just like a quick trade, you should still be in it today.

[John Stebik]

Yeah, no, that makes a lot of sense. I say, yeah, gold is the monetary system kind of insurance trade rather than anything else. It's interesting you brought up the insurance trade because just very quickly I thought one thing we should talk about is the hyperscalers because yesterday Alphabet, which is obviously Google's parent, they've been spending loads of money on AI infrastructure and yesterday they came out and said we may spend even more than we said we were going to spend. And they also reported their very first. I mean this really struck me as the very first negative free cash flow quarter since they've been listed in 2004. Everybody knew this was common. But one of the arguments for why, at least I constantly are like why this isn't like the dot com bubble for example, is because these are really resilient companies with tons of money and they're going to be able to spend forever and it doesn't really matter. Yes, the valuations may be high or something, but this is not.com 2.0. So with all this debt spreading out gradually through the system and various share issuances and things like that coming out, what do you see happening next? Because this surely does look like the epicenter of whatever bad thing happens next.

[Simon White]

It's a very good question. Obviously it's the question is it a bubble, all that sort of stuff. Without getting into definitions of bubbles or not, it's one big bet, right? They're all betting on the fact that this is an epoch changing time for computing. And we're going from the old paradigm of CPU driven computing, which is kind of deterministic, to non deterministic, I.e. large language models, GPU driven computing. So it's a very different type of computer computing and it requires different chips, obviously GPUs that are much more expensive and depreciate much faster and requires these vast data centers because these models are extremely hungry for computing power. So it really all comes down to that. That's their bet. Whether they're right or not, nobody knows. And you've got, in the one extreme you've got Elon Musk thinks we need to build them in space because we'll run out of literally won't have enough space, suitable space on Earth. And then you've got Zuckerberg at Meta actually saying he's maybe got too much because he's going to start renting out some cloud. So even if these guys can't agree, then we'll agree that we don't know. So it's one big bet. And so I suspect that whether the bet is ultimately proven right, which was kind of was with the tech thing, but it's path dependency, right? If there was, you know, the prices got built up too much in the interim and then there's a bust, even if you know you built whatever you built was actually the right amount or wasn't too much, if to get there there's a kind of sinking, there's a bust or whatever, then it is what it is, right? If you see a 50% decline in your portfolio, that's a problem. Even if over the longer term you're right. I obviously don't know. But I think that the way that they're going about it is extreme. And obviously the leverage that they're building up in their balance sheets is also extreme. That's undeniable. I mean the actual debt they've got on balance sheet of five hyperscalers, I'm not including Apple here, is about $800 billion, which is obviously a lot because they used to have pretty much impregnable balance sheets and now they have less impregnable balance sheets. But off balance sheet there's all these other things that they're getting up to,

[John Stebik]

sort of special purpose vehicles. It's all a little bit 2018, isn't it?

[Simon White]

It's all the usual off balance sheet SPV type thing. So there's SP structures, there's data center leases, there's other liabilities essentially don't sit on your balance sheet. And there was a report out yesterday, I think it was Nikkei and Mike Burry retweeted it that could be in the order of 1.6 trillion, right? So that's obviously double what knows. So I suspect that even if it's all right, done for the right reasons, they actually are right about this. Demand for compute will be there. When you get finance involved, it can always go too far and you end up with more risks than maybe people are completely priced properly pricing in and at some point prices have to retract back to reality. I could easily see that. And given the earnings expectations for a lot of these companies, certainly the memory companies and the other hardware companies are so high there's no wriggle room. And all the stuff I've been talking about with inflation and all the rest of it and this inflation volatility, earnings are unlikely to survive that unscathed. So there seems to be so many potential pitfalls ahead for to get smooth sailing in the equity market. My view right now is roughly I could easily see a 10 to 15% correction in U.S. stocks. I don't see much, much bigger than that right now because recession risk is still low. Now if that suddenly changed, recession just suddenly became a lot more likely, then you have to factor in a potentially much deeper drawdown because you often get the deepest drawdowns in equities when there's a recession. In fact all of them. I think the only example was in 1987 where you had a massive drawdown 25% but there was no recession. But otherwise all the big drawdowns happen

[John Stebik]

in recessions, so that's what we need to look out for. So it's a nasty correction unless we get a recession as well, which might happen because if oil prices keep squeezing everybody okay, that's good. We always like to leave it on a cheery note here in the market. Wrap Merntox Mining so I think that's the ideal one to do it. Thanks very much for coming in and joining us today.

[Simon White]

Not at all. Thanks for having me.

[John Stebik]

Thanks for listening to this week's Mern Talks Money Markets Wrap. If you like our show, rate, review and subscribe wherever you listen to podcasts and be sure to follow me on X or Twitter at johnstepec. This episode was produced by Summer Saadi and Moses Ande. Questions and comments on this show and all our shows are always welcome. Our short email is merrinmoneyloombird.net and special thanks to Simon White.

[Optum Advertiser]

Healthcare doesn't always work great. If you've ever waited on a refill or couldn't schedule an appointment, you get it. That's the kind of stuff Optum is changing. They're using data and technology to integrate patient care, pharmacy and everything else. So healthcare is connected, not complicated. What's that look like? Cheaper prescriptions that are easier to get, and care that looks at the whole person how you need it. Optum is helping make healthcare work as one for everyone. Learn [e-mail] these days it seems like

[Okta Advertiser]

AI agents are just about everywhere you turn, every field and every function. But without identity, you can't trust they'll serve your business instead of jeopardizing it. Fortunately, Okta helps you get identity right by securing your AI agents identities, giving you a single layer of control, a single standard of trust. So whether an AI agent supports a single user or your entire enterprise, with Okta you'll turn risk into opportunity. Secure every agent, Secure any agent. Okta secures AI Wise is the smart way to manage the currencies you need around the globe. When you send money abroad using your bank, you could get hit with hidden fees and exchange rate markups. There's a better way. Try wise. Wise uses the exchange rate you'd usually find on Google, with no unwelcome surprises. Plus, most transfers happen in under 20 seconds, which means your money arrives in less time than you've been listening to me. It's simple and free to sign up when you download the Wise app. Be smart. Get Wise T's and C's apply.