Marin Sumset Webb (2:48)

Oh, is that silver?

John Stevik (2:49)

It was silver, aye. And the thing is, I bought her something silver for the anniversary and it was back in the first half of the year.

Marin Sumset Webb (2:57)

Oh, nice.

John Stevik (2:58)

And they've realized that silver has basically doubled since I bought that anniversary present. So now I'm wondering how I can ask her if we can pawn it.

Marin Sumset Webb (3:03)

She's probably done it already, John.

John Stevik (3:05)

It's probably true. I was like, oh, your hair's looking nice. Ah, that'll be why. There we go.

Marin Sumset Webb (3:13)

Trust me, if you bought her something nice, you got a lot more for it than I knew how to.

John Stevik (3:18)

Maybe not, but yeah. So it's been quite the search for silver and obviously gold to the great year as well. But, yeah, silver's just the one that keeps blowing my mind slightly because it's never been above $50 an ounce for a sustained period of time. And now it seems to be.

Marin Sumset Webb (3:33)

Although to be fair, gold's never been above $4,000 for a sustained period of time. So we're all in the zone here.

John Stevik (3:38)

Well, this is true, but someone's got that thing where it actually did hit 50 or nearly hit 50 in 19, as far back as 1980. And you always think, oh, okay, now we're going to come to the point where it all Coll. But it seems we're in a new paradigm. And basically, I think that's because we are back to inflationary environment. And it keeps gradually dribbling into the market's consciousness that this isn't just going to go away. This is the new normal for the foreseeable future. Really, the backdrop is more of an inflation risk than a deflation risk.

Marin Sumset Webb (4:13)

Okay, there's controversy over that, isn't there? I mean, there's some people out there who think we're moving into a new deflationary environment. But you and I, we're natural inflation deflationists, aren't we? Because we can't see any way out of the global debt problem.

John Stevik (4:25)

I think there are individual things that could happen to trigger bouts of deflation. Obviously, a recession is sort of deflationary, but I think the overall where we are dictates that politics is going to be inflationary. And I think that is fundamentally why I would expect more inflation going forward rather than less. And I do think that one issue or one problem at the moment is that governments are simultaneously. So governments are very indebted. They're aware at some level that the best way to get rid of the debt is to have nominal GDP growth, which is high. So that you. Even if real GDP growth is low, it doesn't matter. The main thing is that you're growing fast enough to pay back the debt faster than it's building up.

Marin Sumset Webb (5:12)

Yeah, well just to be clear, real GDP matters to real people.

John Stevik (5:15)

Oh, it matters to real people. Yeah. We're talking about just how not to governments. Yeah. How the government can soft default on its debt basically. So encouraging a higher level inflation is, is a good thing for them, their point of view. At the same time they know the cost of living annoys voters. And I think the trade off there is, and we're already starting to see it is going to be something basically price controls. Not over price controls necessarily but more and more things slipping in. Like I mean like for example Rachel Reeves freezing the kind of the train tickets and the budget and various other kind of minor moves that are short term moves to make inflation look lower than as for the next year, say like the bank of England thinks it will cut about half a percentage point of headline inflation, but that's only for next year.

Marin Sumset Webb (6:02)

But it's interesting, isn't it? Because one thing we do know about price controls is that they don't work.

John Stevik (6:07)

Yeah. They don't work in the longer run.

Marin Sumset Webb (6:08)

They don't. You can't make prices stay down. And there was that very interesting article by old friend of the podcast Simon French a little while ago, I don't know if you read it, where he explained that the problem with the UK is that one of the many problems with the UK is it effectively runs a system of price controls across the economy. Everything is controlled one way or another.

John Stevik (6:28)

Yeah. And it's extremely striking now I think it's been going on for a while but so many things are indexed and I think in the wages market, particularly the kind of just relentless rise in the minimum wage specifically. And you do also have the benefits system kind of playing a big part in this, but a less clear one. But you've almost, you've, we've almost kind of simultaneously put a floor under wages, but it's so high that it's putting a cap on wages at the other end of the spectrum. So really the relationship between reward and effort is being very disrupted and that's extremely bad for productivity because people's incentives are not designed properly.

Marin Sumset Webb (7:12)

Yeah. So effectively our wage and price controls bake inflation in rather than the other way around.

John Stevik (7:17)

Yeah. Which is really bad. There's so many things that need to be unwound and dismantled if we want to get the UK back into a good place. But I don't see that happening anytime soon.

Marin Sumset Webb (7:31)

And you wrote this week, John, you were writing about central banks and interest rates and political pressure to keep rates down and obviously we feel that in the US and are seeing that in the us, and there's a lot of political pressure in the UK as well to keep rates low, even though we feel there is this inflationary backdrop.

John Stevik (7:47)

Yeah, I mean, it was interesting because Rachel Reeves was in front of the Treasury Select Committee yesterday or the day before. The whole point was about the budget and the run up to the budget. But one of the Conservative MPs in the select Committee asked her a question that she wasn't particularly keen on, and then she kind of laughingly pointed to the fact that they'd managed to have five interest rate cuts under the Labour government, as if that was an achievement of the government. And it's this thing where you've got the government realizing that it wants interest rates to go down and have impinned its kind of reputation on creating an environment in which the bank of England can cut rates. And even if it's doing nothing else, there's an element of pressure there on the management of the central bank to meet the government's expectations, regardless which government is. It's all part of the state apparatus, ultimately. And independence is really just a fig leaf.

Marin Sumset Webb (8:48)

It's a mirage, isn't it?

John Stevik (8:50)

Yeah, exactly. So you're always, whenever you've got even good politicians talking about like that. I mean, obviously Trump is very overt about it. I think the Fed cut interest rates by a quarter point yesterday, and he just puts a tweet immediately, or the equivalent tweet saying that this is a waste of time, Powell's useless, and I can't wait till we get somebody proper running this thing. And so that's very overt. But the same sort of pressure is there from kind of across the board.

Marin Sumset Webb (9:18)

And you also mentioned in the same piece you wrote about that, you talked about energy and oil prices. We both think. We both read the same article, didn't we? The Gavcal Daily on what are today's contrarian trades. And one of the contrarian trades that you could take at the moment is oil, in that it's been sort of remarkable how cheap oil has stayed all the way through this year.

John Stevik (9:52)

Oil started the year around about 80 and it's down to almost 60 now. And, I mean, I think you got to think about how much that's also played into the fairly calm inflationary environment this year, because one thing you can usually say for sure is oil going up is inflationary. In the longer run, it's deflationary because it acts as a tax. But in terms of your headline prices, they're Going to go up if the oil price is going up, because that feeds through everything else. I think that, yes, I think one of the surprises for next year might be oil coming back more sharply than anyone expects at the moment because everyone's talking about how there's a supply glut. Also. I was looking at that piece and I thought it was an interesting piece. But of the four contrarian trades he suggested, I definitely thought the energy was the most kind of compelling one because you can see how it could happen more readily than the other ones he suggested.

Marin Sumset Webb (10:52)

We need to get somebody on to talk at length about the possibility of a new commodity super cycle. We're going to do that and then we'll talk about the commodities spectrum as a whole. We haven't done that phrases so standby. We'll be doing that in January or February. But the last thing I want to talk about today was Howard Marks, who we have had on the podcast before and he writes these great letters and another one out this week. And this is about the AI bubble or not. Is there a bubble? Isn't there a bubble? Did you read the note? I read it briefly. Well, you know, I did read it. I read everything Howard Marks writes.

John Stevik (11:24)

Yeah, I did read it. Yeah. I thought it was. It was good. It was very sensible, which is always slightly galling because you want something, you know, really punchy that you can write about. Yeah. But I don't know, I think if Marx is kind of coming out and saying. Because he does know his bubbles at the dot com bubble and at the, you know, the financial crisis bubble, he wasn't backwards at coming forward. He wasn't particularly equivocal. You could read it and say the stuff he wrote then and say, no, he's saying this is a bubble and it's probably going to burst quite soon. Whereas with this one he's very much more equivocal. And that's one reason I kind of thought, well, AI is a weird one because simultaneously it doesn't feel as if we've got quite enough frenzy. Everyone's a bit too skeptical still about it.

Marin Sumset Webb (12:15)

Not in California.

John Stevik (12:16)

Oh yeah.

Marin Sumset Webb (12:17)

And we hear a lot of skeptical stuff, but people who are in the bubble are really in the bubble.

John Stevik (12:22)

Yeah, yeah.

Marin Sumset Webb (12:24)

Hugely optimistic, incredibly excited, vaguely worried about, you know, existential threats at the end of the world and the possible sentience of AI and that kind of thing. But generally very, very excited.

John Stevik (12:35)

Well, yeah, I mean, yeah, they are and that's true.

Marin Sumset Webb (12:37)

And maybe how has been having lunch in California. One of the things he says one of the things he says that is worth mentioning is that he says, you know, in every bubble people say this time it's different. And then the rest of us say it's never different, it's never different. But a small percentage of the time it is different. Maybe 20% of the time it really is different. And you can look at AI and say, do you know what this kind of is? The products exist, people buy them, revenues are going up, maybe not quite enough, but you know, it exists, it can make money, there's a path to profitability. For real.

John Stevik (13:15)

Yeah, I mean, I think that's so true. I'm not sure that even means it's different this time though. I mean the Internet was different and it did make money, but it was still a bubble, I think, I mean, I do, I think it's maybe trickier at this point to turn around and look at the bits of it that are definitively bubbles. Because I mean, obviously Nvidia is the kind of the picks and shovels stock and everyone's actually, it's only gone up 20% this year, having gone up about 200% last year. But you don't have the same sort of stocks that were around in the dot com boom, at least not, they don't have the profile. There's not a lot of companies kind of suddenly coming out with flaky sounding AI products that are then going to the moon. But then again a lot of that's maybe in the private credit area where we are not looking so much. They're not looking so actually, yeah, well.

Marin Sumset Webb (14:16)

I suppose the thing that he does say that, the thing that worries me and we've talked about before is that until very recently all of the investment in AI, it came from cash. You know, it was, it was equity cash flow, but not anymore. Now there's a lot of debt in here and that changes the whole dynamic I think, you know, back to private credit. There's a lot of debt knocking around in the big AI companies now. And we've seen that compression of credit spreads as well, which suggests that people are very much aware of the level of debt that the big AI companies are coming on now. I mean, as Mark says, debt doesn't have to be a problem. It's not a thing or a bad thing in itself. It just comes down to how much debt you have, the quality of the assets, the cash flows you're lending again, all that kind of thing. But nonetheless it's a shift from look, we got a pile of cash, we made a Pile of cash because we're a great tech company. So we're going to spend on this new thing to. This new thing is so competitive and requires so much money that we no longer have enough cash and we're going to go borrow a big pile of money. It's a big change and it's relatively.

John Stevik (15:19)

Recent and it is also very opaque and I am noticing more articles even on the Bloomberg site actually and generally just talking about the role of the banks and funding things that sound very much like the sorts of products that ended up getting them into trouble in 2008. So, you know, lots of off balance sheet stuff that looks as if the risk is all on one group of people. But fundamentally if it does blow up, you're the one that's going to own it. And I don't know how long it takes before, you know, significant risk transfers or SRTs are kind of, you know, featuring the equivalent of a kind of whoever Robert Peston is these days, sort of like report on the BBC. But it does feel as if we are nudging towards something like that. You know, whether it'll ever get to that point is a slightly separate issue. But I do, yeah, I think there is a problem with visibility in this particular bubble that we certainly. Well, that you certainly didn't have in the dot com bubble because all of that funding was done through IPOs.

Marin Sumset Webb (16:35)

Yeah, that was much more transparent.

John Stevik (16:38)

What about his bit on jobs? Did you read the ps? Because I almost felt as if.

Marin Sumset Webb (16:45)

No, I didn't read that bit.

John Stevik (16:46)

What did it say? Well, no, I almost felt as if, because I'd say one thing I found a little bit disappointing about the memo is that obviously he's a credit guy and I was kind of hoping he would say more about the credit side beyond, you know. Okay, well that's not always a bad thing and it's all getting a bit speculative, but I don't know where we are in the cycle. But the thing he was talking about, and maybe, and actually to be fair this probably does lean into, perhaps he's seeing it as being too different, was kind of stressing about basically the number of job losses that it's going to cause. It's going to kind of wipe out whole tiers of industry and then what will happen. And he was sort of making, I mean it's an argument you've heard before from other people. But the idea is that we'll live in a kind of almost tech feudalism where you've got Silicon Valley millionaires and then everyone else is on Universal Basic Income or something like that.

Marin Sumset Webb (17:38)

Yeah. Well, I do accept that this is the kind of thing that happens slowly and then incredibly fast. So, you know, we're in the foothills of the whole. How many jobs can AI do? Will it take your job? How many jobs will it take? And everyone's going, oh, well, it hasn't really happened yet. You know, bit of an increase in and the productivity of customer services representatives, bit of this, bit of that. But it's not a flood yet. But there will come a point when it's much quicker.

John Stevik (18:04)

Yeah.

Marin Sumset Webb (18:05)

And it's maybe not that far off, but we're not going to talk about that because it's nearly Christmas.

John Stevik (18:11)

Yeah, let's not, let's not put a downer in the readers before Christmas. We don't, we don't normally do that.

Marin Sumset Webb (18:16)

Definitely not. No, we don't do that.

John Stevik (18:18)

I keep calling you readers. Sorry, your listeners.

Marin Sumset Webb (18:21)

Yeah, listeners. So, John, end us on something positive. You wrote earlier this week about how everything was just fine in the gilts market.

John Stevik (18:28)

Actually. Yeah, let's wait till the local elections, but between now and then there's probably not going to be many kind of fireworks in the gilt market. And actually this year there actually weren't. It felt like there were, but the gilts are kind of like 10 years are ending roughly. In fact, a little bit below with your 10 year yield is roughly a bit below where it started here at. So overall for all, it's been a fairly grim and chaotic year politically. All the hype about the gilts market has come to nothing. And I think given that the UK still has one of the highest base rates, in fact, it is the highest base rate in the developed world at this point. There's still room for the bank of England to come down and if it turns out that the economy is even worse than expected next year, then maybe the bank of England comes down a little bit more than everyone's expecting. So that would probably mean the kind of gilt yields go down a bit and therefore gilts perform okay next year.

Marin Sumset Webb (19:30)

Excellent. So here we are straight into the dynamic that you and I have worked with for so many years. Bad news is good news.

John Stevik (19:36)

Excellent. That's a.

Marin Sumset Webb (19:38)

The economy suffers and your gilts do fine. So let's end on that cheery note, shall we?

John Stevik (19:47)

Yeah, I'd say Merry Christmas, but there's more. At least one more of these, isn't there, before we wrap up for the year.

Marin Sumset Webb (19:53)

No one's getting off that lightly. It's only the 11th. Thanks for listening. To this week's Marin Talks Money. Marcus Debrief if you like our show, rate, review and subscribe wherever you listen to podcasts. Also, be sure to follow me and John on X or Twitter. I'm ErinSW and John is John. Underscore Stepek. This episode was produced by Sama Saadi and Moses Andam.