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- [00:01]
Karen Ward
That's going to be what really drives his decision making. The November midterm elections where his colleagues will be up for re election and he will find out whether he maintains control of the House of Representatives and the Senate, the two arms of Congress. And if he loses control of those, then it's very hard for him to do anything to legislate. And so his mind will be, as we move through the next weeks and months, increasingly focused on making sure the outcome of those midterms is good. The big concern when you look at the US electorate is affordability, cost of living, pressures, very much like here, people fed up of the rising cost of living. And so the longer this goes on and the longer oil prices remain elevated, it's a tax on our growth.
- [01:02]
Steph McGovern
Hello, and welcome to the Rest Is Money. With me, Steph McGovern. Back with us is Karen Ward, managing director and chief market strategist for Europe, Middle east and Africa at JP Morgan Asset Management. I wanted to get Karen back on to find out what she thinks is happening in the markets. It seems to be all anyone's talking about at the moment is the volatility in oil prices in, you know, what's happening with stocks and shares. And she's got some really interesting thoughts on it. For example, why you do not need to panic if you do have money in stocks and shares, whether that's through your pension or ISIS or whatever it is. And also why she doesn't think we're heading for another financial crisis. So here is my interview with Karen Ward. Karen, it's lovely to have you back. I feel like you're part of our podcast furniture now. Obviously the nicest, more sophisticated, like chaise launch or something. Not like, you know, a lamp. I was really keen to get you back on just because of everything that's going on. It just feels really chaotic and I think there's a lot of people out there just hoping someone sensible, you can, you know, just put some light on it all in terms of, do we need to worry? What is going on? What are investors thinking? That type of thing. So I guess, like, my first question is very, very big and broad in that, what's going on? What's your take on it all?
- [02:24]
Karen Ward
Well, pleasure to be back. I'd be happy to be a lamp. I could be enlightening, couldn't I? Yes, yes.
- [02:29]
Steph McGovern
Actually putting a. You're shining a light on what's going on.
- [02:32]
Karen Ward
Clearly, the latest events, this attack on Iran from the US and Israel. The problem is, of course, as we all know, it's caused spiraling commodity prices. And I think this is where markets have sort of swung between optimism and pessimism is how the news flow has progressed in terms of when we might reach that resolution. So we've been trying to work out, well, what is the US administration's ambition here in this conflict? Is it full regime change in Iran or, you know, is it purely reducing their nuclear capabilities, at which the scenes, they've already achieved a lot of that. So what is the US's game plan? And when are they going to almost call time on, on the conflict? But then I think as the weeks have gone on, Steph, the, the concern I think has become, well, even if the US is wanting to call time and walk away from the conflict, almost, has Pandora's box been opened? And are there other actors here, whether that is Israel or whether that is Iran itself, that actually have incentives to make this a much longer conflict and to keep the strait closed? And this is where I think, particularly over the last couple of weeks, where oil has then moved above $100 a barrel. It's, I think, really been about that concern. Well, is it, is Iran actually going to prevent this conflict ending? Because Iran is really demonstrating, I think, its power not only in the region, but of course, the impact on the global economy because of the power it has over the strait. So it's all about this straight up or moves the vessels that are stuck there. And it's about 20% of global energy. So that just gives you a figure for how important it is.
- [04:33]
Steph McGovern
Karen Lords, more still to talk to you about. We'll find out after the break. 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?
- [04:53]
Greg
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 identical companies. It's about companies having different approaches to looking after customers and competing ferociously on that energy could well be going that direction.
- [05:20]
Steph McGovern
Well, cheers, Greg, and thank you for powering this episode of the Rest Is Money.
- [05:28]
Karen Ward
So good, so good, so good.
- [05:30]
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- [05:34]
Karen Ward
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- [05:41]
Karen Ward
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- [05:43]
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- [05:57]
Steph McGovern
It's interesting your point on Iran as well, because one of the things the Iranians have come out and said is we've got enough reserves, we've got enough stuff in the country to last us for a year. So it feels like they are, they're not what Trump was expecting. Not, they're not what Israel and us, the US Were expecting in terms of. They haven't just given in. You know, I think we saw that, didn't we, with China? And when Liberation Day happened and Trump went hard on China and then China very much reacted like, bring it on and you know, put up their reciprocal tariffs. And so it does feel a bit like who's going to blink first in this, which must be really difficult as an investor, as the markets or, you know, if you're working out whether to buy or sell or whatever else, it must be really hard to, to, to work it out. And because it doesn't feel predictable or
- [06:54]
Karen Ward
rational, I think rational is the key word. You know, my job is to sit there and not necessarily tell people exactly what's going to happen, but to say, right, well, let's work out what are the key actors in this, in this conflict, what are their incentives to prolong or de escalate. And I'm doing a very rational piece of analysis to get to a conclusion. But then of course, you have to overlay that with, well, you know, is, is one party focused particularly on the economic outcome, or are there other factors that are much more important to them? I think the one thing that keeps me still quite optimistic coming back to this point about whether actually Iran want to prolong the conflict. And you mentioned China with regards to trade tariffs. But China are really other important player in this because of all of that energy that leaves the strait. 80% of it heads to Asia and half of it goes to China and India. Now, China has oil reserves that it's been working through, so it hasn't been particularly affected as yet. But we are, we're getting to the point now where the delivery is due in the next couple of weeks. They won't arrive in these big countries and the impact on them economically will be really significant because, you know, India can't afford. It's a big net oil importer. It can't afford to be spending hundred and twenty dollars a barrel on the oil it needs for its transportation assets. And so I, I suspect that actually it will be the influence of China and India in discussions with Iran which actually see the strait reopen. To me, that's the more likely way this story plays out, rather than actually where we're all spending our attention at the moment, which is what is happening in the dialogue between the US And Iran.
- [08:58]
Steph McGovern
It feels like every time Trump speaks as well, like we', seen, haven't we, you know, we're recording this on Wednesday and it was last night that Trump has suggested this conflict with Iran's going to end in two to three weeks. And off the back of that, we've seen the markets rally a bit and oil's fallen a bit again to just over $100 a barrel, hasn't it, where it's been much higher than that in the last few weeks. So it does feel really, it's so volatile, isn't it? It feels like it can be just Trump saying something on a whim that can completely change people's investment portfolios, people's pensions and how they're doing. And obviously we're all told as investors, don't look at it day to day. That's the worst thing you can do apart from in your job obviously, but for people who are, have got their pensions or whatever in, in funds. But it, but it is, it feels so volatile. What's it like working in that? You know, obviously I want to get all your big global thoughts and stuff and, and what you think the long term is, but just day to day. Karen, what's it? You're trying to work all this out?
- [10:07]
Karen Ward
Yeah, I mean, spend all of my energy thinking, watching the news and the latest headlines. You have to filter all of that and just sit back and say, okay, well, what's important to the President, what is important to the President is the November midterm elections where his colleagues will be up for reelection and he will find out whether he maintains control of the House of Representatives and the Senate, the two arms of Congress. And if he loses control of those, then it's very hard for him to do anything to legislate. And so his mind will be, as we move through the next weeks and months, increasingly focused on making sure the outcome of those midterms is good. And that to me is my sort of anchor of knowing that's going to be the priority. And therefore four dollar gasoline prices is not helping. You know, the big concern when you look at the US Electorate is affordability, cost of living, press very much like here, people fed up of the rising cost of living. And so that's going to be what really drives his decision making. I think the US Administration will, as we move through the timeline I think is short because of that midterm election. So I don't need to focus on what the latest statement was because I'm very anchored by that. And, and then, you know, the day to day, I think, you know, in some ways, Steph, my life becomes really hard because demand to speak to me goes up. But at the same time it's when actually, you know, I have a real purpose in saying to people, well okay, let's go through the, let's go through the facts. So, you know, 20% of energy comes out of the strait, but 80% of it goes to Asia. Let's, let's think about China in this, let's think about India and this and the pressure they're going to be exerting and sometimes just helping people with data and facts so that they can filter that news flow and, and make better decisions. I mean, a really good example, I'm sure you saw a couple of weeks, Steph, when there was an energy field hit in Qatar.
- [12:17]
Steph McGovern
Yes.
- [12:17]
Karen Ward
And it was sort of presented as there's going to be no global gas. And, and, and, and you know, then again, my job is to say, well, hang on. Okay. It was 2 of 14 of the, of the, they call them trains, these. I don't really know why. I think it's because of how the gas gets filtered and moved through this column to become liquefied. N2 of the 14 in Qatar got hit. Qatar produces 20% of the world's liquefied natural gas, but that's only then 20% of total gas. So sometimes my job is to just almost hold hands and say, let's take a deep breath and just go through the numbers and let's then work out. We might still ultimately, once we've done that, be really nervous or we might go, okay, maybe it's not as bad as some of their, some of the headlines would suggest. And it's that process I think of just helping people filter the noise, go back to what the facts of the situation are, which allows them, I think, to work out whether or not to change their investment position.
- [13:19]
Steph McGovern
Yeah, yeah. I wanted to ask you, the last time you were on was kind of mid Feb, towards the end of Feb, and I remember you saying at the time about how Americans are feeling because of, you know, the big beautiful bill and you talked about got, you know, people who particularly, you know, if you're on low income and you get tips, for example, and the tax change on that is going to mean you have a bit more money and that's, that's coming in. And now as you, as you know, you're talking about the, the price of fuel is going up in America which is going to have that counter effect. So what, what's your like feeling of how, of that situation now in terms of, I know you can't predict what's going to happen in the midterms, but do you think that's going to change sentiment and what happened, you know, how, how Trump must be conscious of that as you say, he must be thinking, hang on a minute, that, that this, the money they're going to make from the big beautiful bill is now going to be totally eaten by, you know, diesel costs or whatever.
- [14:21]
Karen Ward
Yeah, I mean we've crunched through the numbers, Stefan. Exactly as you say, the lower income part of the US Population were getting this tax rebate. So that should have been, you know, a lovely boost for their incomes, make them feel better about life, go and spend. But actually the, with rising gasoline prices because so much more of their income is spent on, on non, non discretionary, non fun I like to call it items they, it's gone. It's, it's, it's sort of wiped out. So that the boost that we were supposed to get from that fiscal package that Trump announced for the lower income households, they're not going to feel the effects of that now. I think it's entirely possible that if gasoline prices stay elevated, if I'm wrong on my political calculus and actually this does end up being a more prolonged conflict, I wouldn't be surprised if we get more stimulus in the US because of that focus on the midterms. But that worries me in the bond market because I'm not sure we know the US Government is already borrowing an awful lot from the global bond market this year. If he tries to go for more, then I think that could be problematic for global markets. I think his options maybe are a little bit more limited.
- [15:47]
Steph McGovern
Yeah. And on your point as well about filtering through the noise, I know you've written a blog on this. In terms of what are the things that do deserve attention in all of this, what is standing out to you as things we do need to think about in the longer term?
- [16:04]
Karen Ward
We have to acknowledge the world is definitely changing. For 20 years prior to the pandemic, maybe you could say 40 years incrementally prior to the pandemic, we were just becoming much more integrated. The world economy was globalizing, as they call it, this big trend of globalization where it was easier to buy goods from far reaching parts of the world. But there were quite a lot of migration flows. But there was also a lot of capital, movement, money moving around the world as well. So we were just becoming a lot more integrated. But you can definitely feel the electorate questioning whether that's worked for them. And I think the difficult thing for politicians is there are certain parts of their electorate who it's worked really well for. Myself, Stevie, I haven't felt my job prospects be hindered worrying about migrants taking my job and therefore my day to day standard of living hasn't felt much more precarious. And at the same time I've had all these cheap goods available to me. So I, I'm fully aware that I'm that in that little economic bubble that probably feels that life has been, the globalization has been lovely for me.
- [17:25]
Steph McGovern
Yeah.
- [17:25]
Karen Ward
But there's definitely a segment of society where it's made their life really hard. They've become much more insecure about their job prospects and whether they, you know, they and are going to have good real wages and their kids are going to have good real wages. And so I think that part of, that part of the, of society that's discontent about the way the world has changed. They just seem to be growing and they're voting. And that's where I think, you know, we all sort of get obsessed about what President Trump's doing. But actually if you look at the political shift happening across the west, maybe even started here with Brexit, it's, you're seeing that groundswell from the electorate. So as an investor, I have to recognize the world is changing now. Politicians can't often sort of disrupt our way of life that quickly. I mean, everything that's going on at the moment shows how hard it is. You know, we, as you said just before this, we were all grappling with the tariffs and that was the last thing that the administration was up to. And that was their, that was their attempt to respond to the electorate and say we're going to bring all those manufacturing jobs home and we're going to cut off Chinese imports. And the second you try and do that, you realize it's quite hard and you upset the part of the electorate that was doing quite well from globalization. So it's not easy to do quickly. But I think as an investor it's really acknowledging how the long Term changes are going to shape the way the world moves, but also money and investment opportunities. And it's not all bad for us here in Europe. You know, I think actually a lot of the capital that used to go and work in the US or go and get put to use elsewhere in the world, actually a lot of that money will increasingly come and find opportunities at home. So it's not all bad news, but you just have to sort of as an investor, you have to really check your biases about. Right. How did, how was the world set up? What did that mean for what returns used to look like? And how might the world over the next 20 years just be really different to that?
- [19:44]
Steph McGovern
Yeah, that's such a, a good point about the, the globalization and how actually now what you're seeing with, particularly with populism, is that playing to the unease of globalization and why actually global fragmentation, I suppose, is, is something we should go back to. You know, that then it will bring jobs back and then it stop problems with migration. And that is that, that's fundamentally where we're at at the minute, isn't it? It's people who feel like they've done badly out of globalization and the few have done well out of it have just got richer and everyone else has got poorer. And so how do you. Because you're totally right as well about. You can't just change that overnight. You can't turn up. It's the same with energy, isn't it? You, we do need as a country to have, you know, to be less dependent on the rest of the world for energy and. But you can't just turn a tap off and expect another one to start because it's a lot more about infrastructure, it's about skills, it's, you know, a ton of things which are so finely woven into society and it's really hard to unpick that. So, and on that, then, just like using the UK as an example, because the last time we spoke you were feeling quite optimistic about how we were looking as a country. You know, you said we could be set for a strong, strong year of growth because the, the, the right variables, the right mix of variables were there has that. Are you changing your mind on that now, given what's happening geopolitically, or are you still of the mind that. No, actually we just need to. We'll get through this and it'll still be, you know, this, the growth is ahead. Because I would love to hear that. Yeah.
- [21:24]
Karen Ward
I mean, it's taking the shine off the story. There's no doubt about it. So the foundations for my optimism when we last spoke was basically making the point that actually our private sector here in the uk, private sector, households and companies are actually in really good shape. We've been focused on paying down debt. So household debt is lower than it's been since 2002 and corporate debt is lower than it's been since 1998. So we're not weighed down with this massive burden of debt that we're carrying. Our real problem is one of confidence and we just don't feel optimistic about the future. So we're unwilling to go and spend the savings that have been accumulated because actually we've also accumulated a trillion pounds worth of savings since the pandemic. It's not spread equally amongst society, for sure, but it's there. So we just, our households and our companies just need that confidence in the future to just go and spend a little bit more and then that gets you into a nice virtuous cycle where households spend a little bit more and then companies feel a bit more optimistic about life and then they invest a bit more and then they employ a bit more and then households feel even better about their job prospects and their real income. And we. I just felt like we might, for the first time in quite a long time, get into that virtuous cycle. So this isn't helpful, for sure, because, of course, a, those savings are going to increasingly get eaten up as we fill our cars and, you know, heat our homes next winter if energy prices don't come back down. And it's just not good for business confidence, for the businesses thinking, like, right, this is a nice, stable environment that I can go and invest in. So it takes the shine off the story for sure. I don't think this is us, us going to now stumble into a recession because our starting point was really good. That makes us, I think, quite resilient. But it definitely, the longer this goes on and the longer oil prices remain elevated, it's a tax on our growth. We just are increasingly using more of that fun money to fill up the car and that's not good.
- [23:45]
Steph McGovern
Karen, I want to ask you a bit more about how this all impacts us here, but let's go to a question quick Brick. This episode is brought to you by Hargreaves Lansdowne. Now, if the last four decades have shown us anything, it's that change keeps coming. There have been so many huge economic events that have shaped our thinking today. Back in the 80s, we had Margaret Thatcher's deregulation of the stock market. Then there was the dot com bubble of the 90s, followed by the credit crunch of the noughties and the pandemic in the decade after that. Plus lots of other significant developments too. For over 40 years, though, Hargreaves Lansdowne has helped Britain invest through it all confidently. Whatever is going on in the world, join over 2 million Brits using the UK's number one investment and savings platform. Learn more at ho.co.uk investment returns vary. For claim verification, visit hl.co.uk platform. And just on the point about prices as well, because obviously there's lots of talk here now about what's going to happen with inflation. The bank of England, by everyone's predictions, was going to cut rates a bit. That now that looks like it's not going to happen. And potentially if inflation does become a problem, more of a problem, then rates are going to go up. What, what's your take on that? Have you, you know, do you think inflation is going to be a problem?
- [25:21]
Karen Ward
So there's no doubt inflation is going to rise from here and, you know, I feel sorry for the bank of England in this scenario. Central banks all around the world, the worst thing that can happen to them is cost shocks or in energy shocks, because they just have. There's no good outcome. They're damned if they do and damned if they don't. So life becomes really hard for them, the central bank. And the way they'll be thinking about this is to think, okay, well, headline inflation is definitely going to go up. And so that you might think, therefore, well, their job, their mandate is to keep inflation low. If headline inflation is going to go up, that just means they will have to raise interest rates. It's not quite necessarily that obvious because as I've just said, rising energy prices is a tax on us. And what will happen, therefore, is I spent so much money filling my car up that, you know, I won't buy something else or I won't go out to dinner. And so I cut back in other places. So you get this drag on the economy. And, and if that drag is quite significant, if they raise interest rates as well, they can actually make that drag even bigger than it needs to be. Now, the reason they would maybe think
- [26:37]
Steph McGovern
about
- [26:40]
Karen Ward
that drag not being so big and them actually having to hike is two scenarios. One is if the government provides a really big bailout and obviously everybody wants this, everybody's calling on the Chancellor again, this is a tax on me. This is not fun. Help us out with our energy costs. And she's going to be under tremendous pressure there. But the problem is if she then, you know, as I've filled my car up, if she's, if she's, if she's recouped my losses, if she's compensated me, I don't go and do that process of cutting back elsewhere and then inflation can get embedded. So I think the difficult thing for policymaking right now, and I think the chunk of Chancellor, some of her recent statements acknowledged this, is that if she did anything big and broad that looks like it will help, but actually it will mean the bank of England has to raise interest rates. So anything she gives, the bank of England will have to take away. And that was the problem back in 22, Steph, is, you know, the Liz Truss government announced a massive energy package after the, after Russia invaded Ukraine and we were coping with rising gas prices then. So the, the, the package then was enormous, like £50 billion. And it looked like it was going to shield households from these rising energy costs, but instead they just got higher mortgage costs. So I think the lessons have been learned. So that makes me think, you know, we're hearing the Chancellor talk about, you know, targeting those that are really desperately going to need the support as, as she should. But I think anything broad, unfortunately, the reality is that the bank of England would have to just take away with the other hand. The other reason the bank might think about raising rates is if they started to see what they call second round effects. Now what that means is basically workers going to ask their boss for more pay to compensate them for rising energy prices. And you know, again, that sounds like a really sensible thing to do, doesn't it? Like your cost of living's gone up. Go and ask your boss for more money to help you out. But in economic terms, the problem that then happens is for the employer, their energy costs have gone up, then their wage bill goes up, if they help their staff out and then they raise their prices again. So you get into this sort of spiraling effect and actually workers don't get an improvement in their real wages after all. Yeah, but I don't think any of that's going to happen. So actually, sorry, that was a very long, weirded answer, but I, I don't think necessarily the bank will raise rates, actually. I think they could just be on hold for the remainder of the year. I can't rule out a shot across the bow. You know, don't everyone out there have a go at raising prices? I mean business, they might want to send a little bit of A signal given our starting point is already 3% inflation. But, but I, I don't, I don't think your listeners out there should be panicking that this is 2022 again and they know we had 300 basis.4 or 5, wasn't it back then guys were all becoming a blur. Yeah, we're not in that world. If we see, if we do see rates going up, I think we're looking at something pretty modest.
- [30:00]
Steph McGovern
Yeah. What, what do you think then out of. Because you, you know you paint that picture so clearly of, of what could happen and the, the different instances. What do investors care more about in this? Do they care more about inflation being under control growth or sticking to like the fiscal rules? Because you can't really have all in the short term, can you?
- [30:25]
Karen Ward
What they want is long term growth and sometimes for long term growth you have to make a short term sacrifice. So I think what investors really want to see right now is governments keep keeping their fiscal credibility, you know, make not providing massive handouts because they will then know that the central banks will have to jack rates up and cause an even bigger downturn than is necessary. So they, they sort of, I think want to see a little markets don't want to see short term pain. That sounds horrible but you know what they want is a sustainable long term growth pict. Sometimes that can mean a bit of a downturn that's short and shallow in order to just right the ship and sail on.
- [31:14]
Steph McGovern
And so in that instance do you kind of just accept a downturn in the markets, the borrowing costs of the government going up a bit. And you've just got to accept that because in the longer term it'll work out. Because that's the thing that Rachel Reeves seems to like live or die by is what happens with, with the bond markets. What happens with, you know, how much it costs the government to borrow money. Because essentially, you know, when you look at what happened in that Liz Truss area you mentioned, it was that, that saw her off, wasn't it? It was the fact that the borrowing costs went up ridiculously for the government. So does Rachel Reeves and need to, you know, accept a bit of borrowing costs going up in order to then get the longer term growth? Because then she will have, have you know, shown a plan.
- [31:58]
Karen Ward
If the chances sticks to a plan, you know, then that should keep borrowing costs down actually and almost improve her degrees of freedom to actually do something. So they don't like to see rising inflation. Obviously these are bond markets. You know, bond investors lend to governments at Fixed income, fixed interest. So you know, the inflation erodes those payments and that's why the bond investors ask governments for more money when they see an inflation shock. So really, you know, and unfortunately we are beholden to global bond investors because we're borrowing a heck of a lot of money from them every year. So, you know, as much as it would be lovely to say, oh well, you know, let's, let's not worry about them, you know, why should we be beholden to these global bond markets? But the reality is, you know, it's a bit like me saying, well, I'm not going to be beholden to my mortgage provider, I want to go on holiday this year. That's not the reality. They'll take my house away. And that's just when you're borrowing so much money and your debt levels are so high. That's, that's the world we're in. We are beholden on who is willing to invest to, to lend us money and what interest rate they're going to charge us.
- [33:14]
Steph McGovern
That's where it feels like it's impossible. Though, you know, very rarely do I defend the government, but that's where it feels like her job's impossible. Because if she comes out with a plan that's costly now but leads to long term growth, the it's, it will push up the cost of borrowing because people will say, well, she hasn't got the money yet to pay for it. Where's she the money going to come from? And if she says it's going to come from GDP growing this much and tax revenues going this much, it won't be believed to begin with, will it? It'll be like, well that's in the long term, but, but anything can change in that time. It does feel like an impossible job to try and keep everyone happy in all of this.
- [33:53]
Karen Ward
Oh for sure. I mean, you know, I, I sort of gave my sympathy to the bank of England, but my sympathy to her as well. Because ultimately Stefan, energy shock is a tax on us as a nation. We're a net importer. So money is being sucked away from us and there's no, there's no policy that any policymaker can deliver to take away the pain of that. So none of them have got good scenarios. The one thing I would just say though is, you know, if it's got really ugly, let's say everything I said at the beginning about how, you know, the US want to de escalate, but actually so will Iran. And so energy prices are going to ease if all of that turns out to be wrong and this escalates and get gets much worse. The bond market might see it as the right policy for the government to help out. Yeah, exactly. For the reasons you said. If the bond market is, you know, this is the downturning growth is going to be deeper than it needs to be, then actually providing stimulus, the yields would go down and providing stimulus becomes an option. So, you know, I think I said when I was with you last time, you know, bond investors are quite, they do look at the detail. They're quite savvy about not just what is the government's fiscal definite deficit, what's the absolute number? It's what's the nature of government policy, is it good for long term growth? And they do think about that, which is where there are these nuances in should she stimulate, how much should she stimulate, under what conditions? So it's not to say that if energy prices go to $200, she's completely hamstrung. I think at that point then actually the bond market would be desperately worried about a global recession.
- [35:43]
Steph McGovern
Yeah.
- [35:44]
Karen Ward
And yields would come down and actually she'd be able to help.
- [35:47]
Steph McGovern
Yeah. Because it's interesting, last time you were on, you talked about Germany as well and their spending and the fact that, you know, they are and we could benefit from that is what you were talking about at the time.
- [35:56]
Karen Ward
Yeah.
- [35:56]
Steph McGovern
Because they, their approach is interesting in this, isn't it? In that they have, have kind of gone, right, we are going to invest for long term growth. Growth and you know, hopefully that'll pay off for them and hopefully we'll benefit from it as well. But that take seems to have gone down all right.
- [36:11]
Karen Ward
Their starting point was a very low level of debt and it's a massive spending package. It's 12% of GDP. It's, you know, all different types of infrastructure. We're seeing it hit the economy, just starting to see it hit the German economy now. And the signs are really good. I mean, you know, I've sort of said us is the last thing we needed here. But I suspect they're thinking this is really annoying because we were going to have this growth bonanza. We've been so prudent for 20 years and now we were really going to kick start and get growth going. I suspect they're annoyed as the rest of us about how this impacts the growth trajectory, but yeah, they're starting better.
- [36:48]
Steph McGovern
It comes back to your point about globalization though, again, doesn't it? About being so reliant on other countries that inevitably when Things go wrong. You might think. Who'd have thought we'd be talking so, so much about the straight of Hormuz in terms of our bills going up. The other thing I wanted to ask you about before I let you go is we had Lloyd Blankfein on the show recently and he was obviously, he was, you know, boss of Goldman Sachs during the credit crunch and he was talking about the, the, you know, the cyclical nature of the economy and, and particularly saying we're due another financial crisis. Was his. One of his takes on things you say, you know, it's been a while since the credit crunch now and actually we're probably in that time have probably been doing things that might lead to another financial crisis and we're probably due one. What do you think on that? When you hear something like that, when you hear the boss of former boss of Goldman Sachs sitting there?
- [37:43]
Karen Ward
I don't agree, Steph. I mean, I was actually just thinking about this this morning. I think one of the things that we can be really comforted by is quite how resilient growth has been and the financial system has been to some pretty crazy stuff happening. And I do think, you know, that's owed to some of the regulation that's been put in place post the financial crisis to ensure the financial system was sound. I almost think the way they've been running regulation, financial regulation, is sort of spacing out the dominoes in a domino run. You know, whether when you're setting up a domino run, if they're too far apart and one goes, the next one doesn't go. That's actually what they've been doing and it's proved, I would say, incredibly successful. We've had so many things that have happened, whether it was the Liz Truss moment and spiking bond yields or tariff wars or worry about regional banks, the pandemic, you know, all of this stuff that's gone on and we haven't had a. Any kind of financial contagion. And I think that really speaks to the fact that, you know, you don't often give the regulators a, a hat tip. But actually the financial regulation, I think has got the financial system in a really solid place. I mean, this could be my famous last words and let's hope that I'm right and not Lloyd. But I think actually it's owed to the fact we've really improved how risk is managed in the financial system and that makes us much more resilient. So I think I'd take the other side of that argument. It's A huge part of why we can actually be optimistic about the long term. And I think it's one of the reasons financial markets ultimately, through all of this, still proving quite resilient. I mean, Steph, the amount of times people say to me, how can it be that the world seems to be becoming increasingly chaotic and yet equity markets just keep on going up and up. You know, what, are you not all drinking? And, and I think it is that actually the, the, the fabric of the global economy is changing. But is the financial system's pretty sound? Debt levels in the private sector are very low. Like actually our foundations here, I think are pretty strong. And that's why, you know, yes, we could. We'll get these little. We're going to get bumps in the road, we're going to get downturns, but it's when things get ugly, when the vicious cycles kick in, when demand falls, but then banks pull in all the loans and, you know, my domino run. Everything's close together and everything goes. And I just don't think we're in that world. And that is a good, great resilience.
- [40:33]
Steph McGovern
Yeah, so. So, for example, there's obviously the, the various headlines about private credit, which is obviously this type of direct lending, not issued by banks, it's not publicly traded, and it's seen as a higher risk compared to, like your traditional bank loans. And that has increased significantly in terms of being an option for lending since the crisis. And there's, you know, lots of questions being asked now about how stable it is and how much the bank banks are exposed to this. And we've seen like, the European Central bank asking, you know, their banks for details of any dealings with this direct lending. So, so something like that, that's not worrying you then? Because that's, you know, that was one of the things Lloyd alluded to is, is that, that's, is that looking precarious or not?
- [41:19]
Karen Ward
So it's definitely been a massive growth in private credit. So, you know, for your listeners, after the financial crisis, when banks were less willing to lend, we sort of had this new system develop where companies who wanted loans sort of sought access more directly. That's why it's called direct lending. It might be a pension fund, it might be a big insurance company who've got money, they want to invest, and then they got joined up directly with borrowers. I don't think necessarily the growth of that market is something we should be concerned about. I think some people are worried about it purely because it grew quickly. And I don't think that actually is an issue. Private credit, but also private equity grew really rapidly over the last 10 years largely because there was a demand for that type of lending, but also big institutional investors who wanted to act directly. And big institutional investors, they don't move money quickly. So this was sort of locking in, locking in that investment, providing that loan over the very long term. But you know, this is riskier kind of lending. And so you're always going to get some companies who fall into difficulty and can't pay it back. And that's what the headlines are really focusing on at the moment. Some of these names that are popping up, but I'm not. Where things have gone wrong I think is they tried. There was a bit of a push maybe from some institutions to try and get retail investors involved in private, in, in this private lending. But retail investors often want what we call liquidity. They want an option to take the money out. And what sort of happened over the last few months, Steph, is you've had a couple of names that have gone bust. So everybody said, oh, what's this private credit thing going on, on? And it's almost created a little bit of a run on the retail component of the private markets that have said, oh, maybe I'll take my money out. But this isn't that type of lending. You know, you're lending to a firm for the next 20, 10, 20 years. So you can't just do that. So I'm not worried about this as a systemic problem. I don't think it's going to generate us the next financial crisis. I think a lot of the headlines actually are, are making a bit more of this than it, it really is actually.
- [43:48]
Steph McGovern
Do you know what, Karen? I always appreciate your optimism when you come on. I mean, I mean it's probably part of your job to be happy and optimistic but as well. But it helps it just like a closing thought then, just in terms of what we need to be thinking about over the next few weeks to keep us calm. You know what, what do you want people to take away from everything you've said today?
- [44:10]
Karen Ward
So think about hot Crossbow over the next week or so. I think turn off the news. We are just in a world where the politics is going to be more chaotic and that's international politics, it's domestic politics and therefore we're going to have to filter that in our day to day decision making in order to get stuff done. And I think the underlying economy here in the UK is, is good. It's fine. It's not going to be as bad as, as some of the news headlines would suggest. So, you know, take a deep breath and, and try and pay as little attention to some of that short term news flow as possible, honestly, is what I would say.
- [44:56]
Steph McGovern
But do still listen to us on our podcast. Obviously don't completely turn away from, from news. It's actually a really good time to talk to lots of people about this, you know, because there as you to your point, you've got to just get on, haven't you? In business you've got to just try and control what you can control and just get on and try and just filter some of that noise out and that's where, that's where growth and jobs and everything else comes from.
- [45:19]
Karen Ward
Yeah, absolutely. Just don't. And you know, coming back to your point about the whole purpose of my job at the moment is when people try and move money based on headlines and volatility is the fastest way to destroy your wealth.
- [45:33]
Steph McGovern
Yeah.
- [45:33]
Karen Ward
So just really resist that urge to check your apps. Oh gosh, it's down 10. That's the, you know, these things come and go. So that's, that's critical.
- [45:44]
Steph McGovern
Really good advice. Thank you, Karen as ever. Lovely to see you. I'm sure we'll have you back soon if you can bear it.
- [45:50]
Karen Ward
Love to. Thanks Steph. Great to see you.
- [45:52]
Steph McGovern
Thank you very much. That's it from us. Bye Bye. Bad day.
- [46:01]
Greg
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- [46:06]
Karen Ward
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- [46:11]
Steph McGovern
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