← The Rest Is Money
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- [00:01]
A
This episode is brought to you by indeed. Stop waiting around for the perfect candidate. Instead, use Indeed sponsored Jobs to find the right people with the right skills fast. It's a simple way to make sure your listing is the first candidate. C. According to Indeed data, Sponsored Jobs have four times more applicants than non sponsored jobs. So go build your dream team today with Indeed. Get a $75 sponsored job credit@ Indeed.com podcast. Terms and conditions apply.
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B
The most volatile, unpredictable world any of us can remember. We can sum up the cause of that in one word. Trump.
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C
You're right. There's domestic uncertainty and then there's global uncertainty. Really doesn't want global stock prices falling as he runs into the midterms or anything happening to the US economy.
- [00:45]
B
And there'll be a stimulus, won't they? He's bound to bribe voters in some shape or form, isn't he?
- [00:50]
C
How do you reconcile this sort of politically chaotic world with the fact that markets are at record high practically every day? And I think. I think the way, to me, it's absolutely clear what's going on is almost
- [01:04]
A
we're delighted to say that this year, the Rest Is Money is being powered by Octopus Energy. So Greg is back with us. Greg, I've got another question for you. So, in terms of energy companies, are we just back to the big six?
- [01:16]
B
You know what, we've only got like six or so major supermarket chains. No one worries about that because they invest ferociously in competition. You've got differentiation. You know, we thought the market was stable, then Aldi and Lidl turned up. Competition is not about reinventing the souk with dozens of identikit companies. It's about companies having different approaches to looking after customers and competing ferociously on that. Energy could well be going that direction.
- [01:44]
A
Well, cheers, Greg, and thank you for powering this episode of the Rest Is Money.
- [01:59]
B
Helen. Welcome to the Rest Is Money with me, Robert Peston.
- [02:01]
A
And me, Steph McGovern. And back by popular demand, we have Karen Ward, who's chief market strategist for Europe, Middle east and Africa at JP Morgan Asset Management. Also had various advisory roles over the years.
- [02:13]
B
Robert? Yeah, I worked for Philip Hammond at the treasury as an advisor. And the thing that's obviously gripping us most is, is the British economy finally on the turn.
- [02:24]
A
Here's our interview with Karen Ward.
- [02:26]
B
Great to see you as always. We love your insights in to what's going on, both in British economy, British markets, global economy, global markets. I want to start with the UK because I was struck that you are hopeful that this could be a year in which the British economy turns the corner, that we could actually see something that looks a bit like decent growth. Where is your optimism coming from?
- [02:51]
C
Yes, well, thank you for having me. It's always, always a pleasure. It comes from the fact that the private sector in the uk, so our households and our corporates are actually in brilliant financial health. I mean, for all the doom and gloom you read about the uk, it misses the point that actually private businesses, households have got themselves in really good financial shape. So households have been really busy paying off mortgages and credit cards and all of that debt. They've also in the last few years been saving and have amassed this warp of a trillion pounds. So not a small amount of money.
- [03:30]
B
And by historical standards, in terms of savings, that is a lot of money. Is it?
- [03:33]
C
It's a lot of money. Our savings rate at the moment is running the level of Germany and we've never been a sort of prudent saving nation like that. So our household sector's in good shape and our corporates are in good shape as well. I mean, corporate debt is lower than it's been since 1998. So we've got really good financial health. We're not weighed down by the burden of debt. The problem we've got, I think, is confidence. Yeah, we just don't want to spend. Households, as I say, are really saving, squirreling away and businesses similarly aren't then spending, investing and hiring. So we're kind of stuck in this rut of confidence.
- [04:15]
B
But can I. So I should just make one. It's not exactly a disclaimer, but obviously on this podcast we do talk a lot about how if you're on low incomes, you're definitely not squirreling money away. And we do have a lot of people in this country living in poverty. So what you're highlighting here is that if you are significantly above the poverty line, above the poverty threshold, then you are doing this thing which is very un British. If you look at the last 30, 40 years, which is rather than spending what you're earning, you are saving really rather large sums. What does I say? We shouldn't minimise poverty, the poverty that there is in this country in any way. Why do you think over the last few years people have become so it is really risk averse. Why do you think British people are saving so much?
- [05:04]
C
Well, I think it's partly in the business community. I think Brexit was still a shock, that's still resonating through investment has been relatively weak now for a Decade and it does coincide with that vote. So who are our trading partners? What are the markets we can sell into? That uncertainty, I think creates that caution on behalf of businesses because you don't want to invest in a whole load of new plant if you're not confident about where you're going to sell it to. So I think that's an aspect of it. I think in the household sector we're still really recovering from not so much the pandemic, but I think Russia's invasion of Ukraine and what happened to our energy prices. I mean, you know, I, I accept I'm in the higher income bracket, but watching my energy price quadruple scared the living daylights out of me. And, and I think that sort of shock of the cost of living, seeing your cost just spiral like that has just is still resonating.
- [06:03]
A
Yeah, because there were two, there's kind of two parts to that, I think, aren't there? There's the pandemic where people weren't spending as much because we couldn't and therefore there were certain pockets of society where they had a bit more disposable income and were thinking, well hang on, we can't really spend it, let's save it.
- [06:19]
C
Yeah.
- [06:19]
A
And then on top of that is the fear of what might happen again. And it's that sense of for the first time ever, you know, we always talk, don't you, when you're growing up about Urany day pot. And I think for the first time living through essentially a hell of a storm. It's made people more risk averse. It's made people think we better do this just in case.
- [06:40]
C
Yeah, absolutely. I think that's exactly right. It was forced saving, but now it's choice saving. And I think the other part of the story is that, and this is where perhaps there's a sort of a bit of a. But an if to my positive narrative is certainly if we look to last year, the constant speculation about tax hikes I do think played a role in again, households and companies just waiting, not spending, just waiting because every tax wasn't, it was on the table for what could go up. All of that speculation in the run up to the budget and therefore I think that put the whole economy in the sort of economic paralysis. And so that was my, my positive thesis is that, you know, we've got this cash pile ready to be deployed if we can avoid another year of speculation about fiscal troubles and spending. But then what that means for taxes, that's where I think we could have a great year, but it is a bit of a but.
- [07:43]
B
We had the behavioral economist Richard Taylor, Nobel Prize winner, on this podcast. He talked about, obviously how you nudge people to do things that you think are good for the economy or you try and deter them from doing things that you think are bad. I just wondered, is there any evidence about what kind of stability persuades people to spend more and how long you have to wait? I suppose I say that because it is. I mean, there is a lot of evidence that all that speculation about taxes going up led to a deceleration in spending and investment at the end of last year and much lower growth. But we also live in the most volatile, unpredictable world any of us can remember. We can sum up the cause of that in one word.
- [08:36]
A
Trump.
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B
Are you really confident that this just prevailing sense of anxiety that is everywhere can dissipate enough that we will see significantly more spending and investment?
- [08:52]
C
You're right. There's domestic uncertainty and then there's global uncertainty. I mean, we're seeing in terms of the relative weight of those forces. The latest data we've had for the post budget period have actually showing quite a bounce in activity. So I do think that's been that domestic tax uncertainty was a big part of why things slowed and then people got the budget out of the way and, and the uncertainty result, I think it's for businesses about just knowing which of the taxes and we have had therefore that bounce in the data. Whether global uncertainty improves significantly. Again, I'm a little bit more optimistic on that front, partly because Trump is going to start increasingly to focus on the midterms coming up in November. And therefore anything that rocks the boat ahead of the midterms you would perhaps think is less likely. He really doesn't want global, global stock prices falling as he runs into the midterms or anything happening to the US Economy.
- [09:53]
B
And there'll be a stimulus, won't they? He's bound to bribe voters in some shape or form, isn't he?
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C
Well, I mean, it's a feature across the world of, you know, the question I most frequently asked in my day job as a market strategist is how do you reconcile this sort of politically chaotic world with the fact that markets are at record high practically every day? And I think the way to me it's absolutely clear what's going on is almost the more chaotic the politics gets, the more governments are responding with stimulus and in the US absolutely vote winning stimulus. So President Trump, he created the one big beautiful Bill act and those tax cuts are about to benefit U.S. households. Each individual, when they do their tax return is going to get about $1,000 more than they would normally. When you add up all the US households, that's about $440 billion, so not a small amount.
- [10:51]
A
And that includes for example, that cut on paying tax on tips.
- [10:56]
C
Exactly. And those also are the individuals that are most likely to spend it. And I wouldn't be surprised if we hear he has toted the prospect of a tariff rebate. So of course we know he's raised tariffs on goods coming into the US economy. He wants to pass that revenue onto households. I wouldn't be surprised if we get another stimulus. Some more checks in the post in the summer months as well.
- [11:23]
B
Can I ask you about something that's of massive material interest to British people? We've had 15 years of stagnating living standards because we've had such disappointing productivity growth. A collapse in productivity growth. There is some evidence that productivity output per person, output per hour worked is now rising a bit faster. Do you think that productivity recovery is real? Because it's all very well talking about GDP growth, but what matters to people is their living standards, what they're paid. So do you believe that if we do get this stimulus of people spending more, that will be translated into higher earnings relative to inflation?
- [12:14]
C
People being better off over time, is my answer. Probably not. What we're seeing at the moment is entirely thanks to genuine productivity. Because the way we measure productivity is we know all the output that the economy makes and we know how many people are employed and that's how we work out the productivity of those individuals. Now what we've seen in the very recent year is employment has been much weaker than growth. In fact, there have been job cuts. But if you look at where those job cuts are, they're actually largely in leisure, hospitality, retailing, low productivity sectors. And just it's not that I think the job cuts are because of uncertainty and the costs of those individuals. I mean, Steph, you've made the point a number of times before in the experience in your own business that very well intended increases in the national living wage, particularly in those lowest segments. And again, we all know what the government's trying to achieve. I really reiterate this is incredibly well intended. But we have seen the biggest job cuts in those segments where we've seen the largest national living wage. So I'm not sure I chalk our recent experience up to genuine productivity growth,
- [13:28]
B
not investment led productivity growth.
- [13:31]
C
Not yet.
- [13:32]
A
Interesting. We had Ruth Curtis on from the Resolution foundation and she Was saying that, you know, we need to, in order to boost productivity, we need to get. Let those zombie companies go. Let these businesses go that, you know, and have kind of managed to hold on because of low debt costs for a long time and they're not really productive and we should just let them go in order to thrive. Do you think that will work?
- [13:56]
C
Letting it go is always a very risky strategy for a policymaker. And that's because economies have, and these are the hardest things for people to forecast. They have feedback loops. So let's say you say, well, that business there is definitely a zombie company. Let's let it go. But then that business employs people, those people then stop spending and then that can filter into other businesses which is viable. So it's, it's always a bit of a risky strategy, I think, to say let's just cleanse the system and let these zombie companies go. I think what I would rather see, and this is where I am hopeful this year, that we actually see a recovery in confidence and we see spending increase in businesses and in households. And then there's just new resource and then. And the, and as their new companies are trying to take limited resource, whether that's people or buildings, they sort of suck the resource out of the zombie company. I'd say that's a safer strategy for a policymaker to deploy.
- [14:59]
B
And you are also like us and actually our recent investor guest Sol Klein, you are somebody who also sees great potential from our higher tech younger businesses. I saw that you were bigging up the number of, I hate this phrase, unicorns. We've got these, I don't know, I
- [15:22]
A
just hate these sort of zombies and unicorns and cults and thoroughbreds and all that.
- [15:27]
C
A company that reaches a billion dollars is a unicorn, isn't it? So, and we're producing them.
- [15:32]
B
That's what I'm saying. We don't want to talk ourselves into thinking we are not actually in many ways a very successful, you know, wealth generating, enterprise generating economy. Wealth may not be shared fairly enough, but we're by no means dead as an economy.
- [15:52]
C
Absolutely. I mean we're in a. So, you know, you asked me, Robert, about productivity and I said the current data, you know, I don't feel that we're seeing a huge productivity revival, but there are nascent signs. And where we're all watching and starting to get excited is we know we're at the beginning of a massive technological change because we've built all these artificial intelligence capabilities. Now that has largely that activity been in the US because it's been the Googles and the Amazons that have been creating these massive data centers in order to power artificial intelligence. But we're now moving into the next step where it's going to be all of these little companies, or maybe not so little, who are going to work out how do we bring artificial intelligence into corporate life and into household life. And that's where the UK looks great. So if you take, for example, Stanford are one of the leading researchers on how AI is proliferating through the global economy. And they rank us in the UK as number three on their list. So it's the us, then it's China, and then it's little US in the uk. And that's because Cambridge, Oxford, Imperial, we've got these universities that have really invested, been way ahead of the game in creating these, these centers of excellence, training people. So I'm really excited about how, as we transition into this new stage of AI impacting the world, we could be a real leader in that endeavor.
- [17:27]
A
Yeah, and you talk as well, you know, you talk about these catalysts, don't you? And that being one of them, AI. But there's also other things going on in Europe as well. Like Germany is now on a bit of a spending spree and that could be something we could benefit from.
- [17:40]
C
Yeah, absolutely. I mean, we sort of look in awe at Germany's low level of government debt. And, you know, we talked about our fiscal troubles here. They have been incredibly prudent for the last 20 years and they've got money to spend. They are trying to spend 12% of their GDP over the next few years. That's not a small amount of money. And they are still, you know, one of our biggest trading partners. So as the German economy revives, that will filter across Europe, despite Brexit. You know, we are still trading with Europe. There's still a very important trading partner for us, so I hope we'll be lifted by that. And the other thing that's going on here that's positive in the UK is our Achilles heel, is that inflation has been really stubborn here. It came down really quickly after the pandemic in the us. It then came down very quickly on the continent. It's been really sticky here and uncomfortable. You know, households again, why are they saving? Feeling that, oh, gosh, I'm back in the supermarket, my bill's gone up 5% again. That is finally easing. And that's some of the government policies trying to push down energy costs. You know, we can thank the government for some of that. Stuff in the budget. But inflation could be back closer to two within the next couple of months and that might mean the bank of England, they seem to be moving in that direction that they could give us a couple of rate cuts, take their foot a little bit off the break and that's all going to help as well.
- [19:04]
A
Karen Lorsmore still to ask you, but sit tight for a couple of minutes for a quick break. This episode is brought to you by Vanguard. Now, when it comes to your finances, you want to work with companies you trust, don't you? It can be really complicated when you're investing, you know, trying to work out where your money's going. And it can be confusing, can't it? And that's where Vanguard comes in because they always put investors first and they're delivering on that promise for 50 million investors worldwide with a wide range of funds and a platform that keeps costs low and makes investing simple. You can also open an ISA or a self invested personal pension, choosing investments yourself or letting Vanguard choose them for you. Search Vanguard Investor to find out more. Now, when investing your capital is at risk, tax rules apply.
- [19:58]
B
I mean, one of the things that's quite striking in Keir Starmer's it hasn't been an easy time, shall we say, for the prime Minister. We've been talking about it. We talk about lots of people losing their jobs. He seems somehow to still have to still have his at time of recording. But when he talks about why he's the right person for the job and why he insists he's going to be here for years to come, one of the things he does say is he repeats what you were saying at the beginning of the program is he's very hopeful this is going to be a much better year for economic growth. And he trots out, we've had all these interest rates, rate cuts or more are going to come, cost of living is falling. And what he's trying to do is claim credit for these trends. I mean, you as an economist, do you think if we are in for a better year in terms of inflation and growth, that's despite the government or because of the government, is he right to try and claim some credit here?
- [21:11]
C
I think there are things they can claim credit for. I mean, the last budget of trying to push down inflation, the measures that they enacted are really helpful in probably taking off at least a half a percent of inflation.
- [21:25]
B
So this is the power, the deal on energy prices and rail fares and that kind of thing?
- [21:33]
C
Yes, absolutely. And then I think the front bench have been Trying to put together a very credible fiscal plan. They haven't always had support from the back bench. Obviously the welfare reform didn't get supported. So I think, you know, they have been, this, this particular front bench, I think, have been very mindful of the fact that we have £3 trillion worth of debt. We're spending well over a hundred billions a year servicing that. Let's just try and keep the bond market on our side because then if we can get growth going, I mean, this is what I think just so important for us all to acknowledge in the uk. Coming back to what you said, Robert, we know we've got some lots to do in living standards, improving inequality, but we have to do that via growth. We have to get growth in the economy going that will generate in turn the tax receipts, then we can work on some of that. Whereas I think what we've been trying to do so far of quickly, let's spend but tax to pay for it today, that is not getting growth going and it's not a sustainable plan. So I, you know, I do give them credit for, I think, the fact they have been trying, they haven't always had the parliamentary party behind them.
- [22:47]
A
Can I just. On the point, though, about, for example, inflation, you know, we mentioned earlier about the pressure of the minimum wage going up for retail, leisure, hospitality, who are big employers, you know, employee heavy, that's a lot of their cost. And also they employ lots of young people. Often, you know, it's people's first jobs and things like that. That along with the business rates, along with the increase in national insurance contributions, that inevitably is going to push up prices in, in those sectors. And so isn't that the government increasing inflation there?
- [23:20]
C
Yeah, absolutely. But I mean, again, I think we have to come back to how did the front bench perhaps get to some of those tax decisions for the spending announcements that they wanted to make? It was a journey of the party, not necessarily what Takir Starmer and Chancellor Rachel Reeves began with as the plan. I mean, we saw obviously the plan evolve and that was very much on feedback from the backbench. So I think we'd have to sort of remember that they are the front bench, are delivering what they can. I mean, they have a big majority, but we know huge divisions within the party. So, you know, we have to sort of be mindful of they have already been somewhat limited in what they wanted to achieve and can achieve.
- [24:02]
B
And can I just ask, you know, whenever there is speculation, you know, that Starmer might be thrown out or Rachel Reeves might be sacked. We do see government bond prices, UK government bond prices falling. We see yields. That's effectively the interest rate the government has to pay rising. And as you pointed out, the interest the government pays annually is well over 100 billion. That is money that we weren't paying it out in interest. Could help schools and hospitals. It's a big sum of money. Right. What is the sentiment of those who lend to the government, who buy government bonds? Would they be pretty panicky if there was a period of uncertainty about who the British Prime Minister would be?
- [24:50]
C
Absolutely. We see it in bond markets on a daily basis. I call it the who's next premium in gilt yields. Because, you know, the market has. Global investors have lots of opportunities about where they want to put their money. You know, global stocks are booming, interest rates are higher for across the world. And so, you know, investors have a choice. So when they're deciding, do I want to lend it to the UK government or the German government or the US government, you know, they're making a decision on the likelihood of getting their money back in real terms. And if you hear somebody who says, like, we've. We want to spend lots, straight away, you know, we've got great stuff to do. We're back in a sort of Liz Truss moment of thinking, well, hang on, how safe is my. Is my money if I deploy it in the uk or maybe I'll deploy elsewhere? So we are seeing definitely daily gyrations in bond markets as different candidates are being brought forward and taken off the table. Absolutely. It's affecting my day job.
- [25:59]
B
If they were thinking about just stability of markets, you would say to the Labour Party, can all this talk about
- [26:04]
C
replacing the leader, I would say, be very mindful that you are borrowing almost £100 billion. The idea that the bond market doesn't matter is a bit like me saying my, I. I don't care about my. The bank that provides my mortgage, you know, I. They are absolutely critical to my future. And so make sure you are backing a front bench that can deliver sustainable fiscal policy.
- [26:37]
A
On the point, though, you know, bringing up Liz Truss, you know, her downfall and the whole bond market issue was to do with. She wanted to bring in growth with basically unfund tax cuts. And interesting. If you look at Japan with the new Prime Minister there, we were talking about how she had a kind of Liz Truss vibe in that she had all these big plans for tax cuts and spending, which the bond markets for a while were looking like were unfunded.
- [27:03]
C
I mean, everybody's up to this Every government pretty much around the world, I can't think of any that's springing to mind, particularly at the moment, are not under political pressure. And that's because of some actual big structural stuff, inequality, aging populations. Like how governments are going to get through and please their electorate over the coming years is a tricky old job for any everyone. It's much easier to tell your electorate, of course you can have it all. And what's happening in Japan is, you know, exactly as we're seeing elsewhere is in cost of living pressures have been, I mean Japan's wanted inflation for the last 20 years. Talk about careful what you wish for. Because now it's here they want to ease that inflation pressure. So as you say, Prime Minister Takeaichi who had a minority government has called an election, achieved a much greater majority, but on the promise that she could take down some of those cost of living pressures. Now the bond market has said to her, and this is just what's going to be, I mean it's going to make my day job very, very tricky for the foreseeable of, you know, the bond market said, well you can let them have that bit but not that bit. So you know, at the moment in Japan there's now a discussion about well maybe they'll spend more on defense.
- [28:19]
B
He abolished the consumption tax for two years or something or suspend it for two years, which I mean that would be like suspending vat, wouldn't it? For I mean that's a huge tax giveaway.
- [28:31]
C
Absolutely. And so I think this is going to be the tricky thing for governments are going to be constantly thinking about, right, what's going to please my electorate versus what's going to please the bond market. And how do I thread the needle of trying to keep everyone happy? And that's not going to be easy. It's going to give us lots of bumps in the, in the bond market for sure. And Japan is particularly important in the global story and can feed back to us here in the UK because Japan has been the sort of epicenter, the driver of global low interest rates because Japan is a high saving nation. All of that money in Japan has been going out in the world looking for opportunities. So suddenly if interest rate start to go up, there are opportunities at home. The worry is that some of that Japanese money will head back home. But then where does that leave the rest of us that's been reliant on?
- [29:29]
B
So it means our interest rates are going to go up.
- [29:31]
C
Exactly.
- [29:31]
B
You know, as theirs go up, ours will also go up.
- [29:34]
C
That's exactly right. They have been anchoring global interest rates at a low level for a very long period of time and that is a rising tide that will lift all the interest rate boats.
- [29:45]
B
I mean the other thing which I find really interesting about, about Japan, apart from the fact that actually does look, it has looked for about a year or so that this was an economy that was at last growing a bit faster again after all those years of stagnation, I think it's a really interesting country at the moment from an economic sense. But the other thing that is fascinating is Xi has just won the biggest majority. So Takechi's won the biggest majority I think since the war through this very economic populist policy. And she absolutely highlights the tension that any politician anywhere really in the western world, but particularly in the UK now faces is on the one hand she did take on the bond markets. They did panic during the election campaign and we saw really dramatic falls in bond prices because she's basically saying she's going to have a tax giveaway, but that tax giveaway also gives her this stonking majority. So the politics and the economics are absolutely at logger heads and the bond
- [30:51]
C
market decides who wins and, and that's, you know, the, as I say for governments everywhere, whether it's here in the UK or political parties, you've got to be very careful what you're offering your electorate and whether the bond market is going to give you the money to deliver or not.
- [31:10]
B
But she still wanted 2/3 majority, that's the point. She's got what she wanted.
- [31:14]
A
So like for example here then if you look at, you know, talking about popularism, what reform are doing, you know, they're very much getting the backing of lots of people on the basis they're going to make their lives better. Whether that economically stands up is a question we're all asking. So it. But then they're probably not that bothered. If they get in, they get in. And that's the danger, isn't it? We vote for them on the basis of them telling us they're going to make life better for us. And the economics of our government, current government, haven't stacked up either because no one feels better off. So let them in, they get in, their economics don't stand up and it all falls apart again. So it's like this vicious cycle, isn't it?
- [31:53]
C
It is. But I think the bond market plays a really important. And you know, the bond market's always painted as this. I mean they use the term bond vigilantes this Kind of evil force, all these nasty men in basements kind of creating all of these problems. But actually I think that it's a really useful part of the political process of basically saying don't lie to your electorate about what you can do. So you know, we're way out of general election right now. We will learn as we move towards the general election exactly what all of these parties are truly offering and whether they can fund it. Because when you're way out from a general election it's like opposition party time because you just can offer everything, can't you? So we will learn as we move towards the general election exactly what is the priorities, what is being offered, how it's being funded. And the bond market will have their say and will be a guiding force for the electorate.
- [32:50]
A
The electorate don't care about the bond market. Like they don't wait, you know, people are not people. Loads of people don't even understand the bond market.
- [32:55]
C
Well they do when sterling's falling and suddenly you can't go to Malaga for your summer holiday. There's a way of, of the, of markets impacting day to day life or that's a fair point. And it enters the political, you know, enters the news flow. Robert will do a super job of, and you will do a super job of telling us exactly what the bond market is telling us as a nation. So I do think it, the will be received.
- [33:23]
B
You know, the bond market is also to a large extent us in the sense that if you're saving for a pension, you know, pension funds have these, you know, and if the price of UK government bonds were to collapse, that would have a direct impact on the value of people's savings. I mean one of the great, I'm afraid, vulnerabilities of the UK at the moment in terms of the government's ability to borrow is disproportionately. This is unlike Japan, disproportionately. The British government depends a lot on the goodwill of overseas investors. There's a lot of lending, a lot of buying of British gilts from overseas and these more speculative institutions, hedge funds and the like. And it is something I know that is causing, for example the bank of England and central banks anxiety is that the way that government bonds are now held creates more volatility. And it feeds into your point that any prudent government simply has to take those investors seriously because they have over the last 20 years borrowed so much more than they had been in the previous 20 years. And in the end when you become so indebted as you say, the interest rate you pay is so important to your ability to do all the other things you want to do as a government.
- [34:50]
C
Absolutely. As I say, you know, the idea of the bond market, I shouldn't be dictated to by the bond market. Look, we have to remember we have £3 trillion worth of debt. We're paying in interest per annum, almost £100 billion a year. We are beholden to global investors wanting to lend us that money. You know, again, I use the analogy. It's like me saying, well, I want to go to the Maldives this year. I don't care if my mortgage provider says that I can't afford to go. No, I shan't be going to the Maldives this year because I would like to stay in my house. So that's exactly the situation we're in. We are beholden on the bond market. And you know, Robert, the sort of hedge fund, the shift that actually the hedge funds have just grown in their importance in every single market. You know, we've been, I'm sure you've been talking about gold and precious metals and other prices that are doing lots of things. Again, the hedge funds are of what happened after the financial crisis was we took a lot of regulation, took a lot of the market making the big, you know, who dictates where money is going and how quickly money is going. We took, we asked the banks to stop doing that, but therefore there had to be a replacement. And therefore these hedge funds have grown in enormous size and they're now being very influential in every market. It's not that they've decided to pick on us here in the UK in the gilt market. They just now are the market makers in global, global capital. But that is fast money. And it just means some of the dangers of politicians getting it wrong I think are more acute.
- [36:29]
B
And there was one final point we wanted to talk to you about. And it relates actually back to what you were saying earlier on, particularly with stock markets. We are seeing stock markets at absolutely record levels despite the incredible global uncertainties. And indeed, if you know, we've talked a lot on this podcast about whether there is a significant bubble element, excessive valuation element in all this, AI, artificial intelligence investment. What is your current view? Are stock market levels sustainable certainly for this year?
- [37:16]
C
Yes, I think stock prices are rational because, as I say, governments are responding everywhere in the world to their electorate by throwing more money at them. And that is what the stock market has cottoned onto. It's the fact that, okay, well, if governments are spending money on defense on changing their energy systems and then a few checks in the post that's going to find its way into corporate earnings. That corporate earnings is going to send stock prices higher. Now, we do have to. However, history tells us that printing money to keep things afloat often eventually ends up in tears. Sometimes it takes one year, sometimes it takes five, maybe it takes 10. So the way it often ends up in tears is either bubbles, so we have to be very careful of certain areas, or it ends up in inflation. So my job at the moment is very much about keeping our clients on the risk train because the checks are coming, but at the same time protecting against inflation by risk, protecting against bubble risk. What areas of the market are looking bubbly? You know, I'm asked the question every day, is tech a bubble? And the honest answer is, and this is not because I haven't done any work on it, I've done. All I've done for the past few years is read everything about AI and is the answer is we do not know. No investor can know, because what we know so far is that these tech companies are spending hundreds of billions of dollars, creating billions the capacity to deliver AI. What we don't know is whether there is the demand from consumers and from enterprises to buy the product. And that's the learning stage that we're in. And you know, I often ask when I speak to audiences, you know, how many of you have chatgpt and then I ask them, how many of you Pay for your ChatGPT? And sort of all the hands go down at that stage. So, you know, monetizing our are there's massive capex going on. The market's very excited and optimistic that that monetization of the capex will follow. But it's going to be a bumpy journey because we are going to learn not only the aggregate sense of whether there's demand for AI, but who's AI. And that's the other sense of volatility we're getting in the market of, oh, it looks like everyone at the moment is now using OpenAI's technologies. Hang on, on Google have just launched with Gemini a really new interesting. Oh, they're leapfrogging and then you see Google share price go up. Now the market's waiting this week for the new ChatGPT platform again. So it's going to create us a lot of volatility. My advice, therefore, to clients is just check your exposure because the 40% of the S and P is tech, which I think has questions and is going
- [40:10]
B
to be volatile and as you say, it is a bit like whack a mole in the sense that the biggest market shock recently was when Anthropic launched this new Claude, I mean, absolutely, apparently very powerful Claude service which basically will put out of business all sorts of sort of legal software and has profound implications for financial services, for consultancy. And you know, what was really interesting, you know, when this was launched, was it was other kinds of digital companies whose share prices fell incredibly sharply because they were being effectively, you know, apparently made redundant by this particular Anthropic AI service. So it's not necessarily. The bubble may not necessarily just be in the AI providers, it may be in competitor digital services.
- [41:14]
C
I mean, as I say, fundamentally here we just, we have so much to learn about ultimately how it's going to change our world, but who are going to be the winners and losers? That's going to create us a lot of volatility, a lot of it we should probably look through and ignore. There's going to be lots of babies thrown out with the bathwater. All the software companies, I think, are a very good example of that. They're bouncing back in the last couple of days, Robert, because the market, when they heard that news about Anthropic, said, well, who's going to pay this company to provide you HR and you your compliance services if you can all do it easily in house? And then there's the reminder of, oh, hang on, the data protection and safety of how some of these software companies store it. The service, you know, being able to phone up. It's not just about the code. And so the market had this sort of shock reaction is since digesting and coming back. I mean, we're very excited about the opportunities that provides us as fundamental stock pickers, because you can kind of, on those days where everybody's dumping an entire sector, go, oh, fabulous. I've been waiting to get that company and now I can get it at a much better price. But, boy, it's going to be a ride for sure. It's going to create some big old volatility.
- [42:25]
B
Remember, we had my friend Azeem Azar on the program. He's a great researcher in this area. Anyway, he sent me a little note he put out internally yesterday because he's now got all sorts of AI agents working for the company. And he sent out a note saying, and by the way, these are effectively the equivalent of employees, but you're not to call them when we name them. You're going to have to put an R in front of all of them. So that we know that they're not real people.
- [42:53]
A
God.
- [42:55]
C
Well, in our company, though, actually for us, there's no headcount reduction on the back of a massive AI tech spend. It's all about the incremental productivity. What. Taking what we call the no joy work away from people. But there are no headcount implications of that.
- [43:12]
B
So you're not even growing less fast, as it were.
- [43:15]
A
Were.
- [43:16]
B
I mean, you may not have sacked.
- [43:17]
C
No, not.
- [43:18]
B
But you're sure, you're sure you're not recruiting for your people?
- [43:20]
C
Because we're a people business and at the end of the day, people want to speak to people. Fundamentally, clients want to speak to people. And so, no, I mean, it's, it's fascinating what we've been employing recently. These young graduates and, and, and so many of them, the fear when they were saying to me, how is AI? You know, the graduate market's so awful, how is AI affecting my job that I'm applying for jobs across the business, they're utterly terrified. And I had to say to them, it's going to make your job brilliant
- [43:51]
A
because it's just going to be different
- [43:52]
C
from where three years ago you'd have spent all day formatting presentations for me and pulling data. You're going to be able to do that super quickly. And you and I are going to write really interesting thought pieces because. And I can go on podcasts. It's going to free up all this time for the fun stuff.
- [44:08]
A
And it's also that point that, you know, has been made, which is you're not necessarily going to be replaced by AI. You're going to be replaced by somebody. Someone using it. So if you can start using it now in some way, even to just get your head around it in your personal life, that's going to help you professionally as well.
- [44:22]
C
I think that's exactly right. Yeah. In. In Engage.
- [44:26]
B
That was a public service message from. To all our listeners.
- [44:30]
A
Yeah, yeah. Right. We should probably wrap things up. Karen, as ever, lovely to have you here. So thank you for popping in.
- [44:35]
B
Absolutely gripping and insightful as always. Thank you so much.
- [44:38]
C
Pleasure. Thank you for having me.
- [44:39]
A
That's it from us. Bye. Bye.
- [44:41]
B
Goodbye.