GM95: When Consensus Gets the Cycle Wrong ft. Dario Perkins

Summary

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Podcast Summary: Top Traders Unplugged – GM95: When Consensus Gets the Cycle Wrong ft. Dario Perkins

Host: Alan Dunn (with Niels Kaastrup-Larsen)
Guest: Dario Perkins, MD of Global Macro at TS Lombard
Date: January 28, 2026

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Main Theme

This episode critically explores prevailing economic consensus for 2026, emphasizing the risks of groupthink among analysts and forecasters. Dario Perkins challenges the so-called “K-shaped” narrative for the U.S. and global economies, digs into the drivers (and misconceptions) of AI-driven productivity booms, and scrutinizes monetary and fiscal policy settings across the U.S., Europe, and China. Perkins forecasts a period of near-term optimism for risk assets, but warns of looming late-cycle risks, particularly around inflation and policy mistakes.

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Key Discussion Points & Insights

1. Critique of Economic Consensus

• Dario Perkins describes consensus outlooks as "incredibly boring" and largely premised on a rerun of the previous year: slightly weaker inflation, steady growth, rates returning to mythical ‘neutral’ levels, and ongoing K-shaped divergence in the U.S. economy (03:34-04:35).

  “Everybody was expecting an exact rerun of what happened last year ... similar levels of growth pretty much everywhere.”
  — Dario Perkins (03:42)

• Perkins rejects the idea that the upper and lower segments of the U.S. economy will indefinitely offset each other, leading to a “Goldilocks” scenario.

  “I just don’t really buy it ... I think either things are going to deteriorate more ... or much more likely in my view, ... we’ll actually see the bottom of the K start to recover.”
  — Dario Perkins (04:34-04:58)

2. Policy Stimulus: The Main Driver for 2026

• Perkins argues ongoing fiscal and monetary stimulus in the U.S., Europe, and China is larger and more significant than most analysts expect (05:00-05:15, 09:00-12:00).

  “We’re going from a 1% of GDP tightening to 1% of GDP easing ... that’s big.”
  — Dario Perkins (09:09)

• He highlights a critical late-cycle dynamic: governments are stimulating demand while simultaneously constraining supply (e.g., immigration restrictions), sowing seeds for inflation later (05:21-06:18).

3. Historical Parallels: 1990s Soft Landing or 1960s Re-acceleration?

• Perkins draws a nuanced distinction between mid-1990s “soft landing” optimism (Greenspan era) versus the late-1960s policy-driven re-acceleration that led to renewed inflation problems (06:18-07:26).

  “I have this period in mind: 1967 to 1969 in the U.S. ... The Fed cut interest rates quite aggressively ... the inflation problem starts to come back.”
  — Dario Perkins (06:24-07:04)

• He is bullish for now but expects policy tightening (higher rates) to eventually end the cycle, potentially as AI and tech bubbles become more central (07:22-07:36).

4. Fed Leadership and Independence Debate

• Extensive discussion about potential Fed appointees (Kevin Warsh, Kevin Hassett, Christopher Waller):
  • Warsh is viewed as likely because of his TV appeal and ability to “carry the rest of the [FOMC] committee,” despite doubts about credibility (17:09-20:19, 20:59-22:28).
  • Central concern: Will the Fed under new leadership remain credible and independent, or become politically compromised? Perkins is skeptical about narratives justifying rate cuts based on speculative “AI productivity miracles.”

  “The big thing about Warsh is that Trump thinks he looks good on TV … that seems to be playing into the arithmetic as well.”
  — Dario Perkins (20:47)

5. AI and Productivity: Hype or Hope?

• Perkins is a “massive AI skeptic.” Recent U.S. productivity gains are interpreted as cyclical, not structural or driven by AI (26:39-28:07).

  "I think this is just an entirely cyclical story... companies went on this huge hiring spree... now they are squeezing efficiency gains."
  — Dario Perkins (26:43-27:22)

• He rebuts the meme that AI-led capital expenditure is propping up the U.S. economy or driving job losses (32:53-34:40).

  “There is this massively overinflated story about what macroeconomic impact AI is actually having ... if you're a policymaker, this sort of AI question is sort of interesting for the next sort of five years ... but it isn't the thing that's driving your interest rate decisions right now.”
  — Dario Perkins (34:49)

• Also questions the “productivity boom” analogies with the 1990s, noting that wage gains followed productivity then, undermining the narrative of endless Goldilocks conditions (29:00-31:10).

6. Labor Market, Recession Risks, and Stall Speed

• The apparent “stall” in U.S. jobs growth is noted as historically rare outside recessions (36:00-36:23).
• Perkins attributes weakness to policy uncertainty, not underlying imbalances, and expects hiring to rebound with renewed stimulus and fading uncertainty (37:21-39:07).

7. Global Yields and the End of the Bond Bull Market

• Perkins posits that COVID marked the end of the secular bull market for bonds; now expects “higher highs and higher lows” in yields driven by persistent fiscal deficits and diminishing bond ‘insurance’ properties (40:00-43:02).

  “I can definitely see another hundred basis points on the term premium, which would push up the whole curve. I think that's the risk here.”
  — Dario Perkins (44:02)

• He notes that the term premium is now equivalent to late-1990s levels—concerning given today's fiscal backdrop is far less benign (41:31-42:03).

8. Japan and Europe: Normalization and Recovery

• Japan’s move away from deflation, normalizing yields—a healthy development, debunking demographic-deflation link (46:04-47:24).

• Europe looks set for positive surprises:

  • Policy easing, much improved labor market, and positive spillovers from Germany’s fiscal expansion (49:10-53:16).

  “You could see a pretty good boost coming to Europe. With or without the fiscal spending.”
  — Dario Perkins (52:23)

  “If Germany does reaccelerate, that is really positive news for France, Italy, all of these European countries.”
  — Dario Perkins (53:06)

• Defense spending framed as a catalyst for innovation and industrial renewal, especially in France and the UK (54:03-54:29).

  “If you can get a vibrant defense industry ... you get high quality manufacturing jobs, science, engineering, technology. A lot of the big technological breakthroughs of the last 50 years in the US have come from the defense sector.”
  — Dario Perkins (54:05)

9. Eurozone Fiscal Dynamics—Old Crisis Unlikely to Repeat

• The acute Eurozone crisis dynamic (2011-12) was about lack of ECB backstop. Now, the ECB has assumed the role of "market backstop," making repeats of those crisis episodes unlikely except in cases of outright anti-euro governments (55:19-57:27).

10. China’s Path—Stimulus and Rebalancing

• Recognizes that China can no longer rely on export surpluses, but pressures are building for re-stimulation, possibly surprising to the upside versus very low expectations (58:17-60:23).

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Notable Quotes & Memorable Moments

• On the market narrative:
  “There is this massively overinflated story about what macroeconomic impact AI is actually having.”
  — Dario Perkins (34:49)

• On the cycle’s endgame:
  “All I'm saying is that I think you can also see for the first time how this cycle is actually going to end... this overheating dynamic cuts the cycle short. So, you know, bullish, but not bullish in the sense that this is just like 1995 where this can continue for the next five years.”
  — Dario Perkins (61:50-62:11)

• On policy independence:
  "The fact that they've sort of threatened Jay Powell with jail time doesn't scream that the next Fed chair is going to be completely independent."
  — Dario Perkins (44:18)

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Timestamps for Important Segments

• Consensus critique and policy stimulus: 03:34 – 12:00
• Historical analogies (mid-90s vs. late-60s): 06:18 – 07:26
• Fed leadership and independence: 17:09 – 22:28
• AI and productivity skepticism: 26:39 – 34:49
• Labor market risks and recession discussion: 35:52 – 39:07
• Bond yields and the end of the bull market: 40:00 – 44:02
• Japan, Europe, and normalization: 46:04 – 54:29
• Eurozone fiscal crisis redux?: 55:07 – 57:27
• China’s stimulus and trade dilemma: 58:17 – 60:23
• Wrap-up on growth and cycle risks: 61:05 – 62:11

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Tone & Style

The conversation is candid, intellectually skeptical, and often counter-consensus, with Perkins consistently challenging prevailing narratives. Humor and mild sarcasm (“productivity fairies”, “meme anomics”) lighten the tone while underscoring substantive critiques.

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Summary Table: Core Outlooks

| Region | Perkins' Near-Term View | Key Risks / Considerations | |-------------|-----------------------------|--------------------------------------| | US | Growth rebounds, inflation risk later | Overheating, policy independence, AI bubble | | Europe | Underestimated upside, fiscal & policy tailwinds | Old euro crisis dynamics unlikely short-term | | Japan | Normalization, positive for yields | Demographics not deflationary | | China | Upside surprise possible, stimulus likely | Can't repeat “China shock”, export model dead |

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Conclusion

Dario Perkins provides a refreshing, critical examination of consensus macro thinking for 2026, highlighting complacency around AI/productivity, underappreciated policy stimulus, and the fragile balance facing policymakers. He anticipates upside economic surprises in the short run, especially outside the U.S., but is wary of inflationary and policy risks later in the cycle.

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For more insights, follow Dario Perkins on X and read his contributions at TS Lombard.

Transcript

[Dario Perkins]

They're basically trying to recreate what the US has had over the last 50.

[Alan Dunn]

Years, which is that if you can.

[Dario Perkins]

Get a vibrant defense industry, you can.

[Alan Dunn]

Get these are high quality manufacturing jobs, science, engineering, technology. A lot of the sort of big.

[Dario Perkins]

Technological breakthroughs of the last 50 years in the US have come from the defense sector.

[Alan Dunn]

I think Europe can see this as.

[Dario Perkins]

A catalyst for growth and the countries that benefit most at the moment are places like France and the UK which don't have a particularly good growth story or good sort of growth consensus.

[Alan Dunn]

So I think this is a really positive development.

[Podcast Host (Niels Kostrup Larson)]

Imagine spending an hour with the world's greatest traders. Imagine learning from their experiences, their successes and their failures. Imagine no more. Welcome to Top Traders Unplugged, the place where you can learn from the best hedge funds managers in the world so you can take your manager due diligence or investment career to the next level. Before we begin today's conversation, remember to keep two things in mind. All the discussion we'll have about investment performance is about the past and past performance does not guarantee or even infer anything about future performance. Also understand that there's a significant risk of financial loss with all investment strategies and you need to request and understand the specific risks from the investment manager about their product before you make investment decisions. Here's your host, veteran hedge fund manager Niels Kostrup Larson.

[Alan Dunn]

Welcome or welcome back to another conversation in our series of episodes that focuses on markets and investing from a global macro perspective. This is a series that I not only find incredibly interesting as well as intellectually challenging, but also very important given where we are in the global economy and the geopolitical cycle. We want to dig deep into the minds of some of the most prominent experts to help us better understand what this new global macro driven world may look like. We want to explore their perspectives on a host of game changing issues and hopefully dig out nuances in their work through meaningful conversations. Please enjoy today's episode hosted by Alan Dunn.

[Interviewer (possibly Niels Kostrup Larson or a co-host)]

Thanks for the introduction, Niels. Today I'm delighted to be joined by Dario Perkins. Dario is MD of Global Macro at TS Lombard. He was previously a senior European Economist at ABN and Amro. Previously in his career he was a Senior Economic Advisor at the UK treasury where he was advising Gordon Brown, Ontario. Great to have you back. You've been on with us before but great to have you back. How are you doing?

[Alan Dunn]

Yeah, it's good to be back. There's certainly plenty to talk about. Started the year with a sort of storm.

[Interviewer (possibly Niels Kostrup Larson or a co-host)]

Absolutely. I guess we'll get into it, but uncertainty is back as a topic and geopolitics, politics and tariffs obviously. But I guess coming into the year everybody published their outlook and growth. I mean I had a quick look at yours yesterday and you seem to be on the more upbeat side in terms of the growth outlook before I guess the most recent news came out.

[Alan Dunn]

Yeah, I mean I'm still quite bullish about how the global economy is going to evolve this year as you said. I wrote this note at the end.

[Dario Perkins]

Of December looking at the sell side consensus for this year and it was just incredibly boring.

[Alan Dunn]

I mean basically everybody was expecting an.

[Dario Perkins]

Exact rerun of what happened last year. The know similar levels of growth pretty much everywhere.

[Alan Dunn]

Inflation coming down a little bit further.

[Dario Perkins]

But not quite getting to central banks.

[Alan Dunn]

Targets, interest rates going to neutral, these.

[Dario Perkins]

Magical neutral estimates that central banks have sort of imagined.

[Alan Dunn]

And yet the bond market's completely bought into because it sees interest rates staying.

[Dario Perkins]

At those levels forever.

[Alan Dunn]

And then you know, when you read those outlooks they will say the same thing.

[Dario Perkins]

You know, there are these pockets of.

[Alan Dunn]

Vulnerability, but it's all about the K shaped economy. I mean if there's one sort of.

[Dario Perkins]

Big consensus idea in the world right now is this K shaped economy.

[Alan Dunn]

The idea that some bits of the.

[Dario Perkins]

US economy are quite hot and doing well, the top of the case are sort of high income consumers, mega tech.

[Alan Dunn]

Some bits of the K are doing quite badly. But those two things balance out and.

[Dario Perkins]

They give you this sort of beautiful.

[Alan Dunn]

Goldilocks environment where all you need to do is think about AI and buy big tech companies. And I just don't really buy it. I think either things are going to deteriorate more and that bottom of the.

[Dario Perkins]

Cave will get worse and we'll sort of slide into a recession or much more likely in my view with all the policy stimulus that's coming in the.

[Alan Dunn]

World, we'll actually see the bottom of.

[Dario Perkins]

The case start to recover.

[Alan Dunn]

And I think global growth will bounce.

[Dario Perkins]

Quite strongly this year.

[Alan Dunn]

A lot of this is about policy.

[Dario Perkins]

Stimulus that's coming in the US but also there's a lot of policy stimulus in Europe and in China. And I think that people are underestimating that stimulus.

[Alan Dunn]

My worry, which is really for later in the year, is that with all.

[Dario Perkins]

This policy stimulus these governments are always also doing things that are damaging the supply potential of their economies. The immigration controls in the US are the obvious example of this. But there are other countries pursuing similar policies because of the sort of lurch towards populism.

[Alan Dunn]

And so you sort of Have a rerun of what happened after the pandemic, which is that we're putting all this.

[Dario Perkins]

Stimulus into the economy, but we're also, also doing things that are damaging the supply side of the economy. So where do you end up?

[Alan Dunn]

You end up with an inflation problem. And 12 months ago, I think if.

[Dario Perkins]

People had asked me for a sort of historical parallel, I would have said.

[Alan Dunn]

It looks sort of like the mid-90s.

[Dario Perkins]

The economy is sort of landing, the inflation problem is going away, labor markets are rebalancing.

[Alan Dunn]

It looks a bit like Alan Greenspan's.

[Dario Perkins]

Economy in the mid-90s.

[Alan Dunn]

That was before we had this sort.

[Dario Perkins]

Of lurch again into populism and all of these supply side problems.

[Alan Dunn]

And now I think this is looking.

[Dario Perkins]

A bit more like the late 60s.

[Alan Dunn]

And if you think about. So I have this period in mind.

[Dario Perkins]

1967 to 1969 in the U.S. which was 1966, you had this sort of recession scare in the U.S. the Fed cut interest rates, but it looked like they delivered this perfect soft landing in the economy. But under sort of enormous political pressure to get interest rates down.

[Alan Dunn]

And because they overestimated how much supply.

[Dario Perkins]

Potential they had in the labor market, the Fed cut interest rates quite aggressively.

[Alan Dunn]

The economy started to re.

[Dario Perkins]

Accelerate for a while, for about 12 months. This was a really good narrative. Reflation, bullishness. Stock markets loved it. Yields went down because the Fed was cutting interest rates.

[Alan Dunn]

But within 12 months, the inflation problem.

[Dario Perkins]

Starts to come back, then the Fed has to deal with it and then the environment turns quite toxic.

[Alan Dunn]

So coming into this year, I do.

[Dario Perkins]

Feel quite bullish about the economy. I think we're going to have an immediate inflation problem. But towards the end of this year and certainly into next year, I think.

[Alan Dunn]

You can see probably what's going to bring an end to this cycle and.

[Dario Perkins]

It will be policy tightening.

[Alan Dunn]

And if we get that policy tightening, then I think things like, you know, worries about AI bubbles and all of.

[Dario Perkins]

That stuff then start to matter much more.

[Interviewer (possibly Niels Kostrup Larson or a co-host)]

Yeah, it's interesting, as you say, that parallel between the 90s or the late 60s and, and there are other parallels as well, I guess, you know, with, you know, Nixon had price controls and now Trump is tinkering with interest rates and all manner of things, I guess. I mean, you talk about stimulus and you draw a parallel with the pandemic. Now, clearly the amount of stimulus coming isn't of that magnitude. But do you see, is the stimulus in the big beautiful bill? Is that what you're talking about? Or where do you see the. And how big do you see that stimulus as being?

[Alan Dunn]

Yeah, so there's a few parts to it. So, in terms of fiscal policy, what.

[Dario Perkins]

The Trump administration has done is it introduced these tariffs. The tariffs, and we know from the revenue that's been raised, were a fiscal tightening of about 1% of GDP.

[Alan Dunn]

And they passed this budget bill in.

[Dario Perkins]

August, which was a 1% easing of GDP.

[Alan Dunn]

And so a lot of people looked at that and said, well, they're taking away with one hand and giving with.

[Dario Perkins]

The other, and those two things balance out, and there's no net effect.

[Alan Dunn]

But what they forgot is that the fiscal tightening happened immediately, and we've already gone through that.

[Dario Perkins]

There's been that squeeze on the corporate sector in the US that came from these tariffs because they didn't pass the 1 to consumers.

[Alan Dunn]

And the boost from the tax cuts.

[Dario Perkins]

Is actually starting now at the beginning of this year. So what we're doing is we're going from a 1% of fiscal, 1% of GDP tightening to 1% of GDP easing.

[Alan Dunn]

And remember, if you tighten policy and.

[Dario Perkins]

Then leave it alone, that alone, you know, the effect on growth starts to fade.

[Alan Dunn]

So even if they hadn't had the tax cuts, you'd have this sort of.

[Dario Perkins]

You know, the fiscal impulse would already be turning more positive. But now you have these tax cuts on top of that.

[Alan Dunn]

And in addition to that, there's this.

[Dario Perkins]

Talk about actually giving these tariff rebates.

[Alan Dunn]

And these tariff rebates, which they were.

[Dario Perkins]

Talking about $2,000 per taxpayer.

[Alan Dunn]

They're not even tied to what happens.

[Dario Perkins]

With the Supreme Court anymore. This is just a sort of promise to help the bottom of the cane. It's part of this sort of affordability agenda in the U.S. so if we.

[Alan Dunn]

Get that, that's another one and a.

[Dario Perkins]

Half percentage points of GDP. So suddenly going from minus 1% of GDP last year and still recording 2%.

[Alan Dunn]

GDP growth to potentially one to two.

[Dario Perkins]

And a half percentage points easing this year.

[Alan Dunn]

That's big. And on top of that, we've had.

[Dario Perkins]

The Fed cutting interest rates. It's cut interest rates 150 basis points so far. Probably cut interest rates a little bit more this year. There's going to be enormous pressure on the new Fed chair, whoever that is, to keep cutting interest rates.

[Alan Dunn]

And if that wasn't enough, you have.

[Dario Perkins]

An administration, as you said, that has.

[Alan Dunn]

Sort of moved into the MMT book of, well, let's think about things that.

[Dario Perkins]

We can do to sort of bypass monetary policy and get credit going again. So you've got regulatory changes trying to get the banks to lend. You've got this promise to cap the charge on credit cards at 10%. You've got the whole sort of energy agenda.

[Alan Dunn]

Let's try and stimulate the economy while getting energy. I'm not so convinced that bit's going.

[Dario Perkins]

To work, but it's part of this.

[Alan Dunn]

And then you've got various attempts at.

[Dario Perkins]

Sort of stealth QE with sort of issuing debt only at the very short term, buying mortgages.

[Alan Dunn]

This is everything about this policy is.

[Dario Perkins]

All about let's try and run the economy hot. Let's try and get things going.

[Alan Dunn]

And if you listen to the Treasury.

[Dario Perkins]

Secretary, Scott Bessen, who gave this 25 minute interview on Friday, he was talking.

[Alan Dunn]

About what do we want in our new Fed chair? What we want somebody that's going to.

[Dario Perkins]

Do exactly what Greenspan did in the 90s and cut interest rates in order.

[Alan Dunn]

To allow this big productivity boom. And we want somebody that can get the rest of the committee to go along with that.

[Dario Perkins]

They have to have gravitas and be convincing.

[Alan Dunn]

So clearly this is all pushing in one direction. This is about running the economy as hot as they possibly can and not.

[Dario Perkins]

Worrying about the potential inflation consequences of.

[Alan Dunn]

That because they believe in this sort of AI productivity fairy tales going to.

[Dario Perkins]

Rescue them from any of the inflation consequences.

[Alan Dunn]

So you're right that it's not in terms of magnitude, this isn't as big.

[Dario Perkins]

As what happened after Covid.

[Alan Dunn]

But then I'm not talking about inflation going to 10%, I'm talking about inflation going the opposite direction to which the.

[Dario Perkins]

Universal consensus of the sell side and.

[Alan Dunn]

The buy side think inflation is going to be lower. You know, if you look at the.

[Dario Perkins]

Sort of distribution of CPI forecast for the end of this year, there is nobody that can't see inflation not falling. There is nobody that doesn't think central banks will be cutting interest rates.

[Alan Dunn]

So, you know, we're very sort of.

[Dario Perkins]

Skewed in one direction on all of this stuff.

[Interviewer (possibly Niels Kostrup Larson or a co-host)]

Lots of interesting points to pick up on there. The Supreme Court, productivity, the Fed, the inflation outlook, maybe just to close off on the Supreme Court, just because that's kind of front and center at the moment. I mean, what's the market reaction likely to be? How would that play out if they do vote down the tariffs? I mean, obviously there are potential other routes for Trump to go down, but how do you see it playing out and what's the likely market reaction?

[Alan Dunn]

I don't think there'll be a huge reaction.

[Dario Perkins]

I suspect that if they did vote.

[Alan Dunn]

It down, there'd be a Positive reaction in equities.

[Dario Perkins]

Anyway. I'm not sure that bonds would like it because there has been this fiscal tightening, the in that's come from the tariffs.

[Alan Dunn]

I think they will try to go past it.

[Dario Perkins]

You know, if you listen to what various members of the administration have said.

[Alan Dunn]

They already have a plan B.

[Dario Perkins]

You know, they've already thought through what's going to happen, so they'd probably move to that quite quickly, I guess.

[Alan Dunn]

You know, my one concern about all.

[Dario Perkins]

Of this and it, and it sort of plays into the, you know, the.

[Alan Dunn]

Sort of storm that we're having at.

[Dario Perkins]

The moment in the US which is with these threats of tariffs on Europe.

[Alan Dunn]

Is that, you know, we do need some, at some point this uncertainty to.

[Dario Perkins]

Begin to fade a little bit because.

[Alan Dunn]

You know, as I said, I think.

[Dario Perkins]

This reacceleration in the economy is coming. But what we don't want is a sort of another range, another round of sort of stinging tariffs that sort of make businesses reluctant to invest and hire again.

[Interviewer (possibly Niels Kostrup Larson or a co-host)]

Yeah, and on Greenland on that. I mean, it could end up dominating for the next six months or it could go away in a week. It's that kind of thing, I guess. I mean, what do you think you what's likely to come out of Davos or how's it likely, do you think, in the next trial?

[Alan Dunn]

I think that we'll get the taco trade once again.

[Dario Perkins]

The Trump chickens out again.

[Alan Dunn]

I think that probably come quite quickly.

[Dario Perkins]

They'll look for the sort of flimsiest.

[Alan Dunn]

Of excuses to walk some of this stuff back. They'll talk about having negotiations and because.

[Dario Perkins]

Europe is going into these negotiations, they'll take the tariffs off for a while.

[Alan Dunn]

That sort of thing. So I don't think this is going.

[Dario Perkins]

To be a serious problem.

[Alan Dunn]

I guess one element that does concern.

[Dario Perkins]

Me is the sort of global investor response, which is, I think after Liberation Day, global investors looked at the US and they said, what the hell is happening? There were these big question marks about the sort of basic competency of US policymakers.

[Alan Dunn]

And even though Trump chickened out again and again and you saw that taco.

[Dario Perkins]

Trade was this sort of very bullish cry in the US and retail investors loved it in the US Global investors were still quite nervous about what was happening. These policies were still happening even after the various chickening outs.

[Alan Dunn]

And you've seen that in the dollar.

[Dario Perkins]

There'S been a nervousness to have dollar exposure.

[Alan Dunn]

I think we're seeing that again over.

[Dario Perkins]

The last 48 hours.

[Alan Dunn]

And it's not that all these global.

[Dario Perkins]

Investors are just suddenly dumping their dollar assets.

[Alan Dunn]

But they've got these exposures and they're.

[Dario Perkins]

Starting to hedge them and that's quite negative.

[Alan Dunn]

And this constant succession of examples of incompetence in the U.S. i just don't.

[Dario Perkins]

Think that's helpful if you're a global investor and you do have alternatives.

[Alan Dunn]

Now, if we've gone back 12 months.

[Dario Perkins]

Ago, I was quite bullish on European stocks, global stocks. I thought the US Exceptionalism theme was massively overdone. People got very upset about that. They were shouting at me. They couldn't see past constant US outperformance.

[Alan Dunn]

And actually the US Underperformed last year.

[Dario Perkins]

So in the context where your domestic markets are actually doing quite well, I don't think you really need all that dollar exposure. So I think that plays to this narrative as well.

[Interviewer (possibly Niels Kostrup Larson or a co-host)]

Yeah. Now, you touched on Besant's remarks about the Fed and we also had Trump saying he was leaning towards keeping Kevin Hassett in his current position because he's such a good defender of the administration. And he does that most days on cnbc, it seems. I mean, the prediction markets have been all over the place. Hassett was favorite. Warshaw's favorite was, Waller was favorite at one point. But I guess Warsh is now the favorite. Is he or Waller is kind of maybe what the markets might hope for in terms of a credible selection. I mean, how do you see it? Are any others or people like Rick Ryder, even Jamie diamond was mentioned at one point or are there others out there that, that are possibles?

[Alan Dunn]

I mean, right now it looks very.

[Dario Perkins]

Much like Kevin Warsh.

[Alan Dunn]

I, I think if you sort of, I sort of did some sort of.

[Dario Perkins]

Game theory on this a few weeks.

[Alan Dunn]

Ago, thinking, well, what happens if Hasset comes in? You know, he's, he's going to do, he's going to do what the President.

[Dario Perkins]

Wants him to do and push for lower interest rates.

[Alan Dunn]

But you know, the FOMC is a committee.

[Dario Perkins]

I think there'd be serious question marks about his credibility.

[Alan Dunn]

I'm not sure that the other members.

[Dario Perkins]

Of the FMC would go along with that.

[Alan Dunn]

So I thought if we got Hassit, we just end up with what I.

[Dario Perkins]

Was calling the sort of boe fication of the Fed, which is that we'd have these constant sort of disputes, we'd have huge amounts of disagreement and dissent.

[Alan Dunn]

And probably a Fed that just couldn't move.

[Dario Perkins]

It would just be stuck there.

[Alan Dunn]

And that wouldn't be great because markets.

[Dario Perkins]

Don'T like that sort of volatility and noise and they don't like a sense that the central bank is powerless to respond to whatever is happening.

[Alan Dunn]

I think Bessant is quite smart. I think he's thought about that and he said, well, Hassett is not a.

[Dario Perkins]

Great fit for the Fed now because he's not going to be able to carry the rest of the committee and deliver those interest rate cuts.

[Alan Dunn]

Whereas personally I have massive doubts about the credibility of Kevin Walsh as well. But I think he has these credentials.

[Dario Perkins]

He's been at the Fed, he was once a monetary hawk. He's very skeptical about qe. He talks about shrinking the Fed's balance sheet, crowding in the private sector. A lot of conservative economists love these sorts of ideas.

[Alan Dunn]

And I think he's probably got a.

[Dario Perkins]

Better chance of actually getting the rest of the committee to do what the President wants them to do and cut interest rates.

[Alan Dunn]

So I should think that's the reason.

[Dario Perkins]

That they're now moving towards him.

[Alan Dunn]

In terms of other candidates, I don't.

[Dario Perkins]

Think it will be Waller.

[Alan Dunn]

I think investors would love the idea.

[Dario Perkins]

Of Waller doing it because, you know, he wants to cut interest rates, but he wants to do it for the right reasons. You know, he hasn't been talking about productivity fairies and all this other stuff.

[Alan Dunn]

That those other Fed Fed wannabes are talking about. And he's quite credible.

[Dario Perkins]

But I just don't think he's gonna. He's gonna.

[Alan Dunn]

I think, you know, the big thing.

[Dario Perkins]

For Trump is that he appointed Powell.

[Alan Dunn]

And if you go back, you know.

[Dario Perkins]

He regretted it within weeks. You know, within weeks he was saying, maybe I've appointed the wrong person.

[Alan Dunn]

And obviously that's just got worse and worse over time.

[Dario Perkins]

And now we've got to the point where, you know, he's calling him a moron and a numb skull and all these other words he's used to describe pow.

[Alan Dunn]

So I don't think he's going to want to take any chance of doing that again. And I think he worries that maybe Waller would, you know, if the economy.

[Dario Perkins]

Did rebound, Waller would probably change his views on interest rates. Whereas from Wash and Hasser, you've got got this narrative of there's this massive productivity boom coming.

[Alan Dunn]

I'm going to be just like Alan Greenspan. It's a great argument if you want.

[Dario Perkins]

To be on the Fed because it.

[Alan Dunn]

Allows you to say, well, I need.

[Dario Perkins]

To cut interest rates, but I'm doing.

[Alan Dunn]

It because the economy is so strong, which is. Waller wants to cut interest rates because.

[Dario Perkins]

He thinks the economy is really weak. That doesn't play to the narrative that Everything Trump is doing is fantastic, so it's difficult to see him coming in.

[Alan Dunn]

Rick Ryder, I don't know him particularly well. You know, I've spent some time sort.

[Dario Perkins]

Of researching his ideas. He seems quite consensus in terms of.

[Alan Dunn]

You know, quite vanilla. He expects pretty much what I said.

[Dario Perkins]

The consensus expected this year, you know, growth to be 2%, inflation to come down towards 2%. He's sort of optimistic on AI, but.

[Alan Dunn]

You know, I'm not sure that he. I'm not sure he's going to capture.

[Dario Perkins]

The President's imagination in the way that horse has managed to do.

[Alan Dunn]

And the big thing about Walsh is that Trump thinks he looks good on tv. He's sort of in love with his boyish good looks. So that seems to be playing into the arithmetic as well.

[Interviewer (possibly Niels Kostrup Larson or a co-host)]

Yeah, I mean, you do talk about credibility. And obviously Walsh was a Fed governor before, so it's not like he's without credibility. But at the same time, he's not a hardcore economist like Kevin Hassett has the economic academic credentials. And we, I mean, Warsh. He was at. As he was the M and A and Morgan Stanley or something like that before the Fed. It wasn't. He is, I think he is well connected in, in Republican circles, I think. Isn't that.

[Alan Dunn]

I think he's well connected to the Trump family as well, as far as.

[Interviewer (possibly Niels Kostrup Larson or a co-host)]

Okay, yeah.

[Alan Dunn]

In terms of his wife and background. But I think that the issue of Hassert is that Hassett has done various things. You know, there was once a time.

[Dario Perkins]

That Hassan was sort of a vanilla conservative economist like other guys. I think that's gone in recent years.

[Alan Dunn]

Because, you know, number one, he. He apparently came up with a plan.

[Dario Perkins]

To fire Pal, which is not something you do if you value the independence of your central bank.

[Alan Dunn]

And he's constantly talked about how the.

[Dario Perkins]

Statistics are being made up and, you know, they're political.

[Alan Dunn]

And I don't think you do that.

[Dario Perkins]

If you value the independence of the.

[Alan Dunn]

Fed either, or makes me worried about Wash is, you know, I'm a bit.

[Dario Perkins]

Of a skeptical about this productivity story. I think that's a little bit too convenient.

[Alan Dunn]

And, you know, when you hear him.

[Dario Perkins]

Talk on tv, it's very much, you know, sort of Team Trump. It's as if he's talking for the administration. And I just don't think that's something that you would do if you were truly independent. So.

[Alan Dunn]

But I get it. You know, I think he can convince.

[Dario Perkins]

The rest of his colleagues to cut interest rates, which is what the job is going to be.

[Alan Dunn]

Yes, I just, I'm not sure that's coming from an entirely honest place.

[Interviewer (possibly Niels Kostrup Larson or a co-host)]

If you take what Warsh says at face value, it could be problematic for the administration down the line. As you say balance sheet reduction, how does that play out? We're talking about an administration that needs to see its deficit finance. And Warsh has these views, which it's not clear exactly how it would be enacted. I mean, is it. I mean, in this excess reserve world, is balance sheet reduction even feasible or plausible? I mean, is it just hot air or do you think he has a. Is there a potential sea change here at the Fed in terms of how they operate?

[Alan Dunn]

No. I mean, it's sort of playing to the narrative of the Fed has become.

[Dario Perkins]

Too woke, it's too involved, we need.

[Alan Dunn]

To trim it back.

[Dario Perkins]

I think Bessant and Trump love that idea. The issue is that if you look.

[Alan Dunn]

At what Walsh is actually saying, it.

[Dario Perkins]

Doesn'T make a lot of sense. The idea is that the balance sheet has got so big that it's crowding out private investment. And if you could cut the balance sheet, you could reduce interest rates.

[Alan Dunn]

Now that sort of runs against the narrative that most people have believed over.

[Dario Perkins]

The last few years that if the balance sheet gets big, it suppresses interest rates and causes investment to get too strong.

[Alan Dunn]

I think the only way you can.

[Dario Perkins]

Sort of reconcile what Walsh is saying is if there's an implicit demand for fiscal tightening, because then the argument is.

[Alan Dunn]

You tighten up the government's fiscal position.

[Dario Perkins]

That allows the Fed to reduce its balance sheet. At the same time, interest rates will go down, you then crowd in the private sector.

[Alan Dunn]

And that's been a popular story with.

[Dario Perkins]

Scott Bessant as well, who keeps channeling Rubenomics of the 90s, because that's exactly what happened in the 90s. It wasn't about the balance sheet, but.

[Alan Dunn]

It was about years of fiscal tightening.

[Dario Perkins]

During the 90s under Clinton and Robert Rubin and Greenspan basically accommodating that by cutting interest rates. So you delevered the public sector and re leveraged the private sector. And every opportunity Bessant talks about this.

[Alan Dunn]

So there's this sort of narrative out.

[Dario Perkins]

There which is you get Kevin Walsh at the Fed, you get Scott Bessant at the treasury, you get this supply side Clinton, like economics.

[Alan Dunn]

The difficulty is that the revealed preference.

[Dario Perkins]

In all of this is the opposite. There is no sense in which this administration is tightening fiscal policy.

[Alan Dunn]

Everything is going the opposite direction. And so if Walsh isn't going to.

[Dario Perkins]

Get the fiscal tightening that this seems to be based on, there's no chance that he's going to be able to.

[Alan Dunn]

Rein in the Fed's balance sheet. So it's all a sort of fantasy. I can't see any of this happening. I think this is just a fantasy and I think that all we're going to do is we're just going to.

[Dario Perkins]

End up having lower interest rates, running the economy hot, and eventually having some consequences from that.

[Interviewer (possibly Niels Kostrup Larson or a co-host)]

Yeah, I mean, he has, as you say, been suggested a belief in the productivity boom similar to the 90s, the Greenspan era, obviously at a high level, you could draw the parallel, but things are quite different. Like in the 1990s, you had the kind of capex on the Internet spend, but it was the prior kind of, I suppose, investment in PCs and the greater adoption of PCs that was driving the productivity boom. And obviously the boom was very apparent. Growth was over 4%, I think, towards the end of the 90s. We're not quite there yet, but I mean, AI and productivity, the last couple of quarters, the productivity numbers have picked up a bit, so has raised hopes that maybe it's starting to kick in. To date it's been more anecdotal, I think it's fair to say. You know, what do you think is driving the most recent pickup in productivity? And is it reasonable to expect AI to be having a meaningful effect at this stage?

[Alan Dunn]

So I'm a massive AI skeptic, but.

[Dario Perkins]

We can get into that. In terms of the recent productivity data.

[Alan Dunn]

I think this is just an entirely cyclical story. I think what's happened is that we.

[Dario Perkins]

Had the pandemic for a while. We had these massive labor shortages, and.

[Alan Dunn]

Then companies went on this huge hiring.

[Dario Perkins]

Spree where they were just desperate to get workers in and they didn't care about the efficiency of those workers. It was just about getting people in the door.

[Alan Dunn]

And then you come into this year.

[Dario Perkins]

Those labor shortages have gone. You get all of these tariffs, you get all of this uncertainty, you get this margin squeeze that comes from the tariffs and the fact that companies are reluctant to pass these on because they're worried about the shape of the economy.

[Alan Dunn]

And so what happens is that they just stop hiring and they start to.

[Dario Perkins]

Force efficiency gains on their workers.

[Alan Dunn]

And they can do that because of.

[Dario Perkins]

The fat in the system that's grown up now.

[Alan Dunn]

I think there has been an acceleration.

[Dario Perkins]

In productivity that started before the pandemic.

[Alan Dunn]

Which is about this sort of tighter.

[Dario Perkins]

Labor market and a hotter economy.

[Alan Dunn]

So I do think you are getting.

[Dario Perkins]

Some productivity from that.

[Alan Dunn]

But I think that is mainly a.

[Dario Perkins]

Sort of cyclical story about where the labor market is.

[Alan Dunn]

And I would be very cautious about.

[Dario Perkins]

Expecting the productivity numbers of the last two quarters to just continue indefinitely.

[Alan Dunn]

I think if activity does accelerate in.

[Dario Perkins]

The way that I'm expecting, I think companies are going to have to start to hire again, rather than just, you know, keep trying to squeeze these efficiency gains out of their staff.

[Alan Dunn]

In terms of the AI story, you know, firstly, I think there's massive question.

[Dario Perkins]

Marks about how much AI is going to boost whole economy productivity.

[Alan Dunn]

You know, you did get this sort.

[Dario Perkins]

Of productivity boom in the late 90s. I think it's going to be quite hard to replicate that.

[Alan Dunn]

I think that people that work in.

[Dario Perkins]

This industry or in the tech sector have a slightly distorted view about what the rest of the economy does. Most people do not work in industries where AI can just replace what they're doing. They work in the NHS or in the supermarket.

[Alan Dunn]

So I think there are question marks about this sort of massive labor shedding.

[Dario Perkins]

That people talk about.

[Alan Dunn]

But my big problem with this whole.

[Dario Perkins]

AI productivity story, let's do another Greenspan story, which you're getting from all of these world to be Fed chairs right.

[Alan Dunn]

Now, is that it's just not an.

[Dario Perkins]

Honest description of what actually happened under Alan Greenspan.

[Alan Dunn]

Because what happened under Alan Greenspan is.

[Dario Perkins]

That you got to sort of 1995, 1996, and Greenspan starts to think that productivity is improved, but this isn't being recorded in the official statistics. So he says to the rest of the staff, let's hold off raising interest rates, let's see how this is playing out. You know, I think there's this productivity.

[Alan Dunn]

Boom happening and I don't think we.

[Dario Perkins]

Should be raising interest rates.

[Alan Dunn]

And a big part of that story.

[Dario Perkins]

Was that you had this traumatized worker.

[Alan Dunn]

This idea that workers were getting replaced.

[Dario Perkins]

So they weren't demanding big increases in wages, so all of this productivity was going into profit margins and lower prices.

[Alan Dunn]

I think that basic story turned out.

[Dario Perkins]

To be wrong, because even though it was true that productivity was accelerating, what really happened is that wages actually followed. So from 1995 to 1996, you get this acceleration in productivity in the US, but you also get this acceleration in wages and profit margins actually go down.

[Alan Dunn]

So the idea that you had a.

[Dario Perkins]

Traumatized worker that couldn't demand wage increases turned out to be wrong.

[Alan Dunn]

And even the way that Alan Greenspan.

[Dario Perkins]

Reacted to this story changed.

[Alan Dunn]

So in 1995, 1996, this was a.

[Dario Perkins]

Reason to be dovish. We don't need to raise interest rates. Maybe we can cut interest rates by.

[Alan Dunn]

1999, 2000, he started to think that.

[Dario Perkins]

All of this investment was actually pushing up the neutral interest rate, the sort of R squared number that central banks are again enamored with.

[Alan Dunn]

And he argued that this was a.

[Dario Perkins]

Reason for actually raising interest rates, that you had too much investment, the economy was starting to overheat. He believed in all of these wealth effects as well.

[Alan Dunn]

And so he pivoted quite hard and.

[Dario Perkins]

Became a hawk on all of this stuff.

[Alan Dunn]

And these Fed officials today, or wannabe.

[Dario Perkins]

Fed officials, for their own sort of convenience, are saying, well, let's do what Alan Greenspan did in 1995.

[Alan Dunn]

But they're forgetting the 1999 version of.

[Dario Perkins]

Alan Greenspan, which was very different.

[Alan Dunn]

And I think what this shows you is there are big question marks about.

[Dario Perkins]

How this all plays out.

[Alan Dunn]

Because in the first instance, there's a.

[Dario Perkins]

Question about how much productivity will actually improve as a result of AI.

[Alan Dunn]

There's then a question of will this.

[Dario Perkins]

Go into wages or will this go into profit margins?

[Alan Dunn]

And if it goes into profit margins.

[Dario Perkins]

Is that going to allow companies to cut their prices or are they just going to keep raising their prices and allow their profit margins to go up, in which case there's no deflationary effects?

[Alan Dunn]

And then you have this question of, we feel all this investment is happening.

[Dario Perkins]

All this AI data centers are massively energy intensive. Shouldn't that cause equilibrium interest rates to go up? This is a really complicated story.

[Alan Dunn]

It's something that we're going to have.

[Dario Perkins]

To monitor over time.

[Alan Dunn]

But this very simple narrative of, oh, look, the AI fairy is here, let's just cut interest rates, it's just not true.

[Interviewer (possibly Niels Kostrup Larson or a co-host)]

But you're right, I mean, that is the. The theory is, H, productivity is a higher trend growth than a higher neutral rate, as you say. But there is a timing dimension to it. But, yeah, I mean, sorry, one of the things that struck me is I went back to the last minutes just because I hadn't been following them so closely, to see. What's the Fed saying about this? Nothing. I mean, productivity, I think the word productivity, I think, appeared twice in the last minute. So clearly it is something that's preoccupying the minds of the markets and these Fed candidates, but not hugely the Fed, I think the last press conference, Powell said, he referenced it, he says, yeah, I can see how it might have an impact. I use Chuck GBT a bit myself or something like that. But it doesn't appear like the Fed is really grappling with this as a kind of an ideological issue at the moment, is that fair to say?

[Alan Dunn]

I think so. And I think that part of the.

[Dario Perkins]

Reason for that is that the Fed doesn't really engage in the sort of meme anomics that we seem to be subject to these days, which is that there are these narratives out there which.

[Alan Dunn]

Are just not true, which appear all.

[Dario Perkins]

Over Twitter and on social media.

[Alan Dunn]

And one of the big narratives of.

[Dario Perkins]

Last year was that the only reason the US economy was growing or avoiding recession was because of all this AI investment. And AI was the only thing that was propping up the economy.

[Alan Dunn]

And that story just wasn't true.

[Dario Perkins]

It wasn't true at all.

[Alan Dunn]

And if you look at the contribution.

[Dario Perkins]

Of AI Capex to gdp, there was one quarter where it was sort of outsized contribution, mainly because everything else was.

[Alan Dunn]

So weak, because it was, you know.

[Dario Perkins]

It was just around Liberation Day where the economy just froze for three months. But as a story, as a whole, the impact of, of AI was trivial. You know, really not a big economic driver.

[Alan Dunn]

And so the idea that this was.

[Dario Perkins]

Driving productivity is just not true.

[Alan Dunn]

But also the idea that we're seeing.

[Dario Perkins]

Massive job losses, which is another story that's all over social media. AI is already generating job losses. Look at what's happening with new entrants. The unemployment rate for 17 to 24 year olds is rising rapidly.

[Alan Dunn]

And the narrative is that's all because of AI. And again, it's nothing to do with AI.

[Dario Perkins]

What's really happening is you have an.

[Alan Dunn]

Economy where companies are reluctant to hire, but they're not firing anybody either. And for most age groups, those two things balance out.

[Dario Perkins]

You don't get fired, but you don't get hired either. So you're just sort of stable.

[Alan Dunn]

But if you're coming out of school.

[Dario Perkins]

Or university and going into the jobs market and there's no hiring, naturally the unemployment rate of those groups will go up.

[Alan Dunn]

But it's not because of AI, it's just maths that is just mathematics. It's nothing to do with AI. And so I think that there is.

[Dario Perkins]

This massively overinflated story about work, what macroeconomic impact AI is actually having on the economy. And if you're a policymaker, this sort of AI question is sort of interesting for the next sort of five years. How is this going to play out? How should we respond? But it isn't the thing that's driving your interest rate decisions right now.

[Alan Dunn]

Unless you want to join the Fed and come up with a good reason.

[Dario Perkins]

For cutting interest rates. There isn't.

[Alan Dunn]

I'm really worried about the economy because.

[Dario Perkins]

Trump's tariffs are causing all this destruction.

[Interviewer (possibly Niels Kostrup Larson or a co-host)]

You presented your kind of more upbeat case and we did touch on Chris Waller. I mean, Waller has been at the forefront in calling for, for lower rates on, kind of on the weak labor market, at least going back over the last six months. Not, not as much as Steve Moran, but, but he's kind of been in that direction. I mean, where would you, where would you disagree in terms of the economic outlook than to say, Chris Waller, who seems to have got it pretty right in the last one to two years?

[Dario Perkins]

I think it's on the labor market.

[Alan Dunn]

So I think that Chris Waller is.

[Dario Perkins]

Quite concerned about the state of the labor market.

[Alan Dunn]

I think we haven't seen any job.

[Dario Perkins]

Growth in the US for six months. That is incredibly rare outside of recessions. And by incredibly rare, I mean it's literally never happened happened before.

[Alan Dunn]

Typically once the US economy stops adding.

[Dario Perkins]

Jobs, it sort of breaks below this stall speed and then chips over into a recession.

[Alan Dunn]

And that's the sort of whole basis of the idea.

[Dario Perkins]

There is this stall speed in the economy. Once you get growth below a certain level, things just sort of deteriorate non linearly.

[Alan Dunn]

And there's definitely historically been this reflexivity.

[Dario Perkins]

You know, when companies start to lose jobs, that hits confidence, hits spending, feeds back into profits, leads to more rounds of redundancies.

[Alan Dunn]

I mean, that I think is the.

[Dario Perkins]

Definition of a recession, that exact dynamic in the labor market.

[Alan Dunn]

And so I think, you know, some.

[Dario Perkins]

Fed officials have looked at the state of the labor market and said, you know, we are really dangerously close to stall speed here. If this was a normal economic cycle, we'd probably be headed for a recession. This is something that we need to guard against and cut interest rates.

[Alan Dunn]

And I think they look at their mandate and say, well, which part of.

[Dario Perkins]

The mandate is likely to spiral against us? Is it inflation or is it jobs?

[Alan Dunn]

And I think their view is it's all about jobs.

[Dario Perkins]

But I think they're just misreading what's happening in the labor market.

[Alan Dunn]

I think the weakness in the labor.

[Dario Perkins]

Market is all about this policy uncertainty. I think companies have been reluctant to hire.

[Alan Dunn]

I don't think they needed to hire.

[Dario Perkins]

Because of this fat in the system that's allowed them to push these efficiency gains.

[Alan Dunn]

And so I think as the sort of demand comes back and confidence comes.

[Dario Perkins]

Back, I think companies will start hiring again. I think we'll bounce away from this store speed.

[Alan Dunn]

And I also think a big part.

[Dario Perkins]

Of this weakness is the labor force.

[Alan Dunn]

Because if you've got these Very stringent.

[Dario Perkins]

Immigration policies and your net immigration is probably, probably negative, including sort of illegal immigration. I think the labor force isn't growing.

[Alan Dunn]

And so I think it makes it.

[Dario Perkins]

That much harder to sort of trigger stall speed.

[Alan Dunn]

The other reason I don't worry about.

[Dario Perkins]

The labor market too much is I.

[Alan Dunn]

Don'T think there's anything fundamentally wrong with the economy. Typically that stall dynamic happens because there.

[Dario Perkins]

Is something quite profoundly wrong.

[Alan Dunn]

You've got some big misallocation of resources or you've got some big credit bubble in the system and then the labor.

[Dario Perkins]

Market stalls because that bubble is bursting.

[Alan Dunn]

And then as it bursts, you get.

[Dario Perkins]

This sort of big deterioration. I don't see that right now.

[Alan Dunn]

There's no over investment. Maybe big tech is spending too much on AI but as I said, that's.

[Dario Perkins]

Not a massive macro story.

[Alan Dunn]

I think if you look at the.

[Dario Perkins]

Corporate financial position is basically balanced.

[Alan Dunn]

Typically that's in deficit and the deficit.

[Dario Perkins]

Is getting bigger ahead of a recession. There's no obvious credit bubble. Credit hasn't really cycled for the last 15 years. Since the global financial crisis, we've deleveraged a long way.

[Alan Dunn]

So I just don't see anything fundamentally wrong. I think we've had a sort of.

[Dario Perkins]

Reckless administration that's been doing all of this stuff that is producing a degree of chaos and uncertainty and that's been the thing that has prevented hiring.

[Alan Dunn]

But I don't think it's enough to tip the economy over.

[Interviewer (possibly Niels Kostrup Larson or a co-host)]

Good stuff. I mean. Curious to get your thoughts on bond markets. I mean, US markets have been very stable. I guess you've had different forces. On the one hand, deficits have been high and rising. At the same time the Fed's been easing and the curve steepened. Outside of us, we have seen this trend of higher yields continuing, very notably in Japan even and Germany at the long end. What's your read on the US markets? And I guess if your scenario plays out this year of a resumption of growth, presumably risks to the upside for yields.

[Alan Dunn]

Yes. So my view on bonds for a.

[Dario Perkins]

While has been that Covid would mark this sort of secular turning point in yield.

[Alan Dunn]

So we've been on this secular bull.

[Dario Perkins]

Market with yields coming down.

[Alan Dunn]

It was 20 years of, of lower.

[Dario Perkins]

Lows and lower highs in yields.

[Alan Dunn]

And I felt that Covid would mark.

[Dario Perkins]

That turning point and we'd now be in a world of higher highs and higher lows over time.

[Alan Dunn]

And I think that's basically playing out.

[Dario Perkins]

I think part of it is a resilience story.

[Alan Dunn]

So the fact that all of these.

[Dario Perkins]

Central banks raised interest rates. They did it much more than people expected.

[Alan Dunn]

Nothing really went wrong, nothing broke.

[Dario Perkins]

The economy has proven to be quite resilient.

[Alan Dunn]

I think we've had a bull market.

[Dario Perkins]

That sort of three, four years has played with this idea that maybe there's going to be a recession. So you've had these drops in yields, but then the recession hasn't materialized and yields have rebounded.

[Alan Dunn]

I think that's very much where we are. I think about yields in sort of three components.

[Dario Perkins]

So you think about real yields, inflation expectations and the term premium.

[Alan Dunn]

And I think real yields are, you know, about right.

[Dario Perkins]

I don't worry too much about that. Inflation expectations.

[Alan Dunn]

The market expects an era where inflation.

[Dario Perkins]

Is slightly above target as opposed to being slightly below target. Again, that's something I agree with. That's something I've been saying for a number of years now. That sort of basic tendency of inflation has changed, but not in a particularly alarming way.

[Alan Dunn]

It's all about the term premium. And I think you look at the term premium now.

[Dario Perkins]

We have the same term premium that we had at the end of the 1990s. Now, the 1990s, we did get the Rubenomics. We did get.

[Alan Dunn]

We were running budget surpluses by the.

[Dario Perkins]

End of the 1990s. We had a decade of supply improvements. We had rapid globalization, tariff barriers coming down everywhere, collapse of the Soviet Union.

[Alan Dunn]

All of those were the sorts of.

[Dario Perkins]

Environments that would push the term premium down. So it's slightly concerning to me that we have that same term premium now.

[Alan Dunn]

Even though all of that is going.

[Dario Perkins]

In the opposite direction. The fiscal deficits are staying bigger. Governments are playing a much more activist role in the economy. We've got a series of negative supply shocks, whether that's immigration or trade barriers or whatever. You've got the potential for continued disruption to supply chains from geopolitics and all of that stuff.

[Alan Dunn]

To me, that's all upside for the TAM premium.

[Dario Perkins]

I struggle to see how the term premium could come down. I think it's much more likely to rise over time.

[Alan Dunn]

And I think that's the thing that's.

[Dario Perkins]

Going to drive yields higher over time.

[Alan Dunn]

And to me, the term premium is.

[Dario Perkins]

All about the basic insurance properties of bonds. For a long time, we're in this really nice dynamic where inflation and growth just move together. They went up together, they went down together. It gave you this beautiful negative correlation between bonds and equities.

[Alan Dunn]

And that meant that bonds had this.

[Dario Perkins]

Really strong insurance property, particularly if you could trust into the Fed and the independents and all of that. Stuff.

[Alan Dunn]

I think if you're in a world.

[Dario Perkins]

Where you start to think more about supply shocks and you've got these doubts about the credibility of the Fed for the reasons that we've explained, I think that sort of bottom deck equity correlation starts to change.

[Alan Dunn]

And it's not that it's going to.

[Dario Perkins]

Be positive all the time like it was in the 1970s, but it's just.

[Alan Dunn]

Not going to be as negative as it was on average. And there's going to be periods like.

[Dario Perkins]

The last couple of years where that correlation will be positive.

[Alan Dunn]

And if that's the case, you know.

[Dario Perkins]

Bonds aren't such a good equity hedge anymore and the term premium has to widen because the term premium is like the insurance fee on holding bonds.

[Interviewer (possibly Niels Kostrup Larson or a co-host)]

So what, I mean, practically, what could that mean? I mean, obviously 10 year yields have been stuck around 4.14 and a quarter percent. I think we've touched above maybe touch at 5%. Could you see them going above there at some point?

[Alan Dunn]

I mean, I can definitely see another.

[Dario Perkins]

Hundred basis points on the term premium, which would push up the whole curve. I think that's the risk here.

[Alan Dunn]

I just think everything is pushing in.

[Dario Perkins]

That direction at the moment.

[Alan Dunn]

We've talked a lot about Fed independent independence and, you know, whoever gets the.

[Dario Perkins]

Job, I don't really trust them at this point.

[Alan Dunn]

You know, the fact that, you know, they've sort of threatened Jay Powell with jail time doesn't scream that the next Fed chair is going to be completely independent because that surely will be on their mind. You know, if I don't do, if I didn't do what Trump wants me to do, where am I going to end up? In jail? You know, do I want to go to jail or do I want to cut rates? So, you know, there are these questions. I don't think that's really playing into.

[Dario Perkins]

Market dynamics right now. I think that for most people this is a sort of theoretical discussion.

[Alan Dunn]

They don't know who the next Fed.

[Dario Perkins]

Chair is going to be.

[Alan Dunn]

They don't know what the economic outlook will be.

[Dario Perkins]

If we've got a recession, it will be easy for the Fed to cut interest rates and wouldn't have anything to do with independence.

[Alan Dunn]

I think if I'm right, the economy starts to re.

[Dario Perkins]

Accelerate. That's when this stuff starts to matter again. Because then you get into questions. Well, is the labor market tightening up? And if the labor market market is tightening up, shouldn't the Fed be raising interest rates?

[Alan Dunn]

And if the Fed is still talking about cutting interest rates, why, why are they doing that that's when these independence.

[Dario Perkins]

Questions start to matter a lot more.

[Interviewer (possibly Niels Kostrup Larson or a co-host)]

And we've obviously seen this kind of strong bond market reactions in Japan of late. Just looking at it here, Japan 10 year yields were up to just under 2.4%. And obviously for a long time Japanese, These yields were 0 or negative and then started to move up 20, 23 or so. I mean, for a long time people thought, okay, big sell off in the JGB market, rising yields that would unwind the yen carry trade, we'd get a big surge in the yen. That hasn't happened. It seems to be more Japanese bond market weakness being associated with a weak yen. Is that the new dynamic or are we waiting for something to break with respect to Japan or how do you read it?

[Alan Dunn]

Yeah, I mean, I've never really bought into the argument that sort of Japanese.

[Dario Perkins]

Buying is distorting the term premium in the US or keeping yields artificially low. So I think that link between US yields and Japanese yields was always a bit overstated. I never really bought into that story. I think you can explain the term premium as I have done with sort of macro fundamentals rather than flows or, or sort of, what do they call it, sort of savings gluts and those sorts of arguments.

[Alan Dunn]

I regard what's happening in Japan as.

[Dario Perkins]

Sort of bullish in the sense that for the last 30 years Japan has struggled with this deflationary trap and they finally seem to be out of it. They've got this mild wage price dynamic which is not anything alarming. This is a sort of normalization, that deflationary psychology is gone.

[Alan Dunn]

One of the big takeaways I think.

[Dario Perkins]

You do have from this is that demographics is not deflationary. That was the consensus before the pandemic that aging populations would give you ever lower bond yields. I always thought that story was wrong. And I think this demographic inflection point in Japan is actually pushing yields higher.

[Alan Dunn]

And at the moment I regard this as normalization.

[Dario Perkins]

You know, the Japanese economy is gradually normalizing. The bank of Japan is pushing up interest rates.

[Alan Dunn]

I think, you know, they were, they.

[Dario Perkins]

Will be quite cautious in doing that because they don't want to get a sudden appreciation of the end, which is the thing that's always killed them in the past, you know, when they've tried to raise interest rates.

[Alan Dunn]

But I think this is a welcome dynamic.

[Dario Perkins]

And the same story for Europe. You know, you asked about Europe as well.

[Alan Dunn]

You know, I think for a long.

[Dario Perkins]

Time Europe was obsessed with this idea that it was turning into Japan. You're going to get this deflationary dynamic, we had, you know, years of ecbqe, we had years of negative interest rates.

[Alan Dunn]

You know, if negative interest rates aren't.

[Dario Perkins]

A sign that something's gone profoundly wrong, I don't know what is.

[Alan Dunn]

And you know, we've sort of emerged.

[Dario Perkins]

From the pandemic with a much more healthy labor market. You know, it's a higher pressure labor market is generating wage growth that's allowing all of these central banks to move interest rates higher.

[Alan Dunn]

I think that's a pretty good dynamic.

[Dario Perkins]

And I don't get the sense that it's going too far.

[Alan Dunn]

And I think even the fiscal concerns.

[Dario Perkins]

About those countries are a bit overdone. You take Germany. Germany is going to do what, 2% of GDP and fiscal easing this year.

[Alan Dunn]

But it's happening against a backdrop where.

[Dario Perkins]

Only 12 months ago everyone was obsessed with the prospect of de industrialization and some sort of German depression. So there's plenty of spare capacity in Germany.

[Alan Dunn]

I don't think that fiscal stimulus is.

[Dario Perkins]

Going to go into inflation. I think it will go into growth. And that's probably good news from the perspective of the ECB given what it thought it was facing a decade ago.

[Interviewer (possibly Niels Kostrup Larson or a co-host)]

Certainly Germany has obviously taken dramatic steps in terms of the debt break and their announcements around infrastructure spending and defense spending. You mentioned kind of the stimulus at the start of the, of the conversation in, in Europe as well. So presumably that's what you're talking about. I mean, from a European perspective, do you think that's going to see a, like a notable change in the growth outlook this year? Like listen to the ECB at the back end of last year it seemed to be. I saw Isabel Schnabel speaking. She was saying risks were now tilting more to the upside for inflation and rates. Is that your read as well?

[Alan Dunn]

Yeah, I think so. I think that people are much too.

[Dario Perkins]

Bearish still in Europe.

[Alan Dunn]

I think there's a sort of, you know, I talked about meme and omics. There's definitely a meme anomics about Europe which is, it's that sort of image of, you know, rockets landing in the.

[Dario Perkins]

US versus the bottle top in Europe.

[Alan Dunn]

Being attached to the bottle. You know, this is European technology, this is US technology. I think that, you know, Europe has.

[Dario Perkins]

Emerged from COVID in a pretty good position.

[Alan Dunn]

I think, you know, they've got, you.

[Dario Perkins]

Know, much better labor market, a higher pressure labor market is creating wage, wage growth.

[Alan Dunn]

I think it will create productivity.

[Dario Perkins]

I think there's plenty of pent up demand. You look at savings rates, they've been quite high in recent years.

[Alan Dunn]

I think that people looked at the.

[Dario Perkins]

European economy post Covid and they were just too bearish because they were forgetting that Europe faced a series of really nasty shocks.

[Alan Dunn]

We had that period where inflation was.

[Dario Perkins]

Running at 15% and wage growth was running at 2%. So this enormous squeeze on real incomes, which was never nearly as bad. In the US you had a global manufacturing recession for three years because coming out of the pandemic everyone was buying goods. They then rotated into services. So you got a manufacturing recession on.

[Alan Dunn]

The back of that. If you were a company in Germany.

[Dario Perkins]

Or France or even Asia, this was effectively a global recession that you were facing and you had this massive monetary squeeze. You know, the ECB and the bank of England, they chased the Fed in raising interest rates, they tried to sort of outhawk the Fed, but the issue was that most of US debt is.

[Alan Dunn]

Tied to long term and Europe has.

[Dario Perkins]

Huge amounts of variable rate debt, particularly on the corporate sector. So if you looked at the squeeze that was engineered by interest rates going up, it was much greater in Europe than it was in, you know, in the US or some of these other countries.

[Alan Dunn]

And all of these factors have now unwound.

[Dario Perkins]

You know, wages are outpacing prices. So the cost of living crisis is gone.

[Alan Dunn]

You've got, you know, the ECB has.

[Dario Perkins]

Cut interest rates much more quickly than Fed and has got back to what they think is neutral. It's probably fair. I mean, I don't put a lot of weight on neutral rate estimates, but it seems like credit is flowing again. It seems like the construction sector is.

[Alan Dunn]

Starting turn and that sort of manufacturing.

[Dario Perkins]

Recession, the inventory overhang is gone. The uncertainty from the tariffs is clearly weighing, but eventually that dissipates too.

[Alan Dunn]

So I think that you could see.

[Dario Perkins]

A pretty good boost coming to Europe.

[Alan Dunn]

With or without the fiscal spending. And now you've got the fiscal spending on top. Now that fiscal spending is pretty significant. The fact that it's coming in Germany.

[Dario Perkins]

Is also significant because it means that Germany can't lecture the rest of Europe about the need for austerity, which is how it spent most of the 2000 and tens.

[Alan Dunn]

And one of the things people missed.

[Dario Perkins]

And I looked at consensus forecast for Europe for this year and they were basically assuming that you'd get this acceleration in German GDP which was just a sort of fiscal story.

[Alan Dunn]

But they were missing the fact that.

[Dario Perkins]

Everybody in Europe, their biggest export partner is Germany.

[Alan Dunn]

So if Germany does re accelerate, that.

[Dario Perkins]

Is really positive news for France, Italy, know all of these European countries The uk.

[Alan Dunn]

And so I think they're missing potential.

[Dario Perkins]

Spillovers from this to the rest of Europe.

[Alan Dunn]

So, you know, I think particularly compared.

[Dario Perkins]

To the consensus 12 months ago, which was all about de industrialization and this, you know, really sort of quite bleak outlook for Europe, I think there's a.

[Alan Dunn]

Really positive story here and I even.

[Dario Perkins]

Think if, if you look at this.

[Alan Dunn]

Longer term, you know, one of the.

[Dario Perkins]

Pushbacks I get from investors is, well, what's the point of defense spending? You're just buying bombs and recruiting soldiers.

[Alan Dunn]

And even here I think they're sort of missing the point because if you're.

[Dario Perkins]

As sad as me and you read these sort of European policy documents on what they're trying to do here, they're basically trying to recreate what the US has had over the last 50 years, which is that if you can get a vibrant defense industry, and the emphasis is on industry rather than just the.

[Alan Dunn]

Army, you can get these are high.

[Dario Perkins]

Quality manufacturing jobs, science, engineering, technology. A lot of the big technological breakthroughs of the last 50 years in the US have come from the defense sector. I think Europe can see this as a catalyst for growth and the countries that benefit most at the moment are places like France and the UK which don't have a particularly good growth story or good sort of growth consensus.

[Alan Dunn]

So I think this is a really positive development.

[Interviewer (possibly Niels Kostrup Larson or a co-host)]

So I mean, does that, will that be enough to address the budgetary issues in the likes of France? Obviously they've been struggling to pass a budget for a while. Obviously deficit levels are high. The old Mastrich criteria have been brushed aside because they've been too hard to adhere to. Is that, was that a story for last year? Unlikely to be a story for this year, do you think, or how do you read that?

[Alan Dunn]

I don't even think it was a.

[Dario Perkins]

Story for last year. I think it was a story in sort of punditry for last year. I don't think it was a big story in terms of markets.

[Alan Dunn]

I think it's quite hard to get.

[Dario Perkins]

Excited about European fiscal anymore because firstly, I think stronger growth helps, but it's.

[Alan Dunn]

More about the sort of dynamic. I know there's this sort of PTSD.

[Dario Perkins]

From the euro crisis, but it's just really hard to get that dynamic again. Because at the heart of the euro crisis there was this question about a backstop for the system. And I remember 2011, 2012, 2013, every conversation with global investors was, where's the backstop? Is it going to be Germany? Is it going to be the ecb? The Germans didn't want to do it, the ECB didn't want to do it. Trichet was reluctantly buying bonds and at.

[Alan Dunn]

That time it was basically a one.

[Dario Perkins]

Way bet against these countries because if.

[Alan Dunn]

You dumped Italian bonds the spreads would.

[Dario Perkins]

Rise.

[Alan Dunn]

It would demand more austerity or.

[Dario Perkins]

The Germans would demand more austerity as a solution to that. It was completely un sustainable. So the odds of one of these countries quitting the euro intensified. So it become this sort of self fulfilling one way bet.

[Alan Dunn]

And there were a lot of hedge.

[Dario Perkins]

Funds from the US and the UK that were playing that one way bet.

[Alan Dunn]

And then when Draghi came in and.

[Dario Perkins]

Said he'd do whatever it takes to stop this, it stopped. The one way bet became symmetrical. If you were shorting these bonds, there was a good chance the ECB would come in and blow you up with their unlimited balance sheet. So nobody was interested anymore.

[Alan Dunn]

Personally, I think since then I've just not found European politics interesting at all.

[Dario Perkins]

Because I don't think it's a market story.

[Alan Dunn]

And so I can't see those sorts of dynamics coming back because I think.

[Dario Perkins]

The ECB has understood that it is.

[Alan Dunn]

Part of its role as a sort.

[Dario Perkins]

Of modern central bank to be this backstop that it has to protect monetary transmission.

[Alan Dunn]

So I just don't think this is.

[Dario Perkins]

Going to be a big story again this sort of Euro crisis dynamics.

[Alan Dunn]

The only way in which this becomes.

[Dario Perkins]

Relevant to markets again is, is if.

[Alan Dunn]

You end up with some anti eu, you know, government that actively wants to.

[Dario Perkins]

Pursue the end of the year or leaving the euro and then you've got a serious political crisis and at that point it doesn't matter what the ECB does because they can't backstop a government that wants to leave the currency.

[Alan Dunn]

But right now that doesn't seem likely.

[Interviewer (possibly Niels Kostrup Larson or a co-host)]

Fair enough. Just conscious of time, I mean we haven't talked about China at all and obviously, I mean China's been recovering gradually from its own adjustment, kind of the property downturn and we've had various stimulus measures. But I suppose the big debate around China has been its orientation of trying to export its fiscal trade surplus, its excess capacity to the rest of the world. And that being a pushed back by obviously in some places like the US and also with some tariffs in Europe. I mean how do you see that getting resolved over time? Is that a sustainable simply it's not a sustainable model for China, but is that going to be a pressure point in the system?

[Alan Dunn]

I think they realize now quite seriously.

[Dario Perkins]

That they have to rebalance their economy away from exports. I think They've realized that there can't be a sort of China Shop 2.0 because the rest of the world doesn't want to absorb that spare capacity in the way that they did after the original China shock.

[Alan Dunn]

I think if you go back to the early 2000s, economists were quite naive about this stuff. They thought that trade was unambiguously good and cheap stuff was good. And I think that consensus has changed. And I think certainly as soon as.

[Dario Perkins]

We started to see these EVs and stuff coming out of China, I think you've seen this reaction from the rest of the world.

[Alan Dunn]

The tolerance for that isn't there. I was bearish on China for a long time.

[Dario Perkins]

Back in the mid 2010s, you could see that this was basically the biggest credit bubble in history.

[Alan Dunn]

And although there was this stop go.

[Dario Perkins]

Policy, they were just adding huge amounts of leverage to the system. And you could see that in the end that was going to affect growth in a really big way. I never thought that China would have a Lehman moment, but I thought that you couldn't completely cheat the rules of economics and eventually you get this sustained slowdown. That's definitely what we've seen over the last few years.

[Alan Dunn]

I just think now the pressure is growing for China to restimulate the economy again. I think the consensus has given up on this idea.

[Dario Perkins]

So the consensus forecast is just that this year will be weaker than last year for China. If you look at sort of credit or, you know, infrastructure spending or any of that stuff, nobody's expecting anything. They've completely given up on the idea of Chinese stimulus. So compared to expectations, I think there's.

[Alan Dunn]

You know, reasonable chance of a positive surprise here. And, you know, I do think they're.

[Dario Perkins]

Going to be willing to spend more.

[Alan Dunn]

You know, we're not going to get.

[Dario Perkins]

The enormous fiscal splurges that we had in the 2010s, because they've seen that that can be quite dangerous.

[Alan Dunn]

But they've also realized that they've got to get the economy growing again. So we're sort of we're re accelerating.

[Dario Perkins]

Not just 10% growth rates, but compared to consensus expectations, plenty of room for positive developments.

[Interviewer (possibly Niels Kostrup Larson or a co-host)]

Good stuff. So it sounds like overall, some reasons for optimism growth, maybe not as boring as the consensus is suggesting. And I mean, that's all assuming, I guess, that this Greenland stuff blows over reasonably soon. Is that fair summation?

[Alan Dunn]

I think so. If we're going to get some massive.

[Dario Perkins]

Escalation in the trade war, then that changes things.

[Alan Dunn]

But so far, everything we know about.

[Dario Perkins]

Trump is that taco usually kicks in quite quickly and the tolerance for pain isn't there.

[Alan Dunn]

And ahead of the midterms in particular.

[Dario Perkins]

This is all about getting the economy growing again.

[Alan Dunn]

And it goes back to this K shaped economy.

[Dario Perkins]

There's this sort of naive investor belief that the K shaped economy is just going to persist indefinitely. But politically it doesn't work.

[Alan Dunn]

You can't have, particularly when you come.

[Dario Perkins]

In a populist agenda.

[Alan Dunn]

And so they need to get the.

[Dario Perkins]

Bottom of the K to recover.

[Alan Dunn]

And my concern is that once you've.

[Dario Perkins]

Got a recovery in the bottom of the K, the top and the bottom no longer cancel each other out and you've no longer got this Goldilocks environment.

[Alan Dunn]

So, you know, I, I think this.

[Dario Perkins]

Is a bullish environment.

[Alan Dunn]

You know, I'm quite optimistic on stock.

[Dario Perkins]

Markets, global stock markets.

[Alan Dunn]

I think that's going to be the.

[Dario Perkins]

Dominant story for the next six months.

[Alan Dunn]

All I'm saying is that I think.

[Dario Perkins]

You can also see for the first time how this cycle is actually going to end.

[Alan Dunn]

Maybe that's a story towards the end.

[Dario Perkins]

Of this year, maybe that's a story for next year.

[Alan Dunn]

But I think this overheating dynamic is.

[Dario Perkins]

You know, probably cuts the cycle short.

[Alan Dunn]

So, you know, bullish, but not bullish.

[Dario Perkins]

In the sense that this is just like 1995 where this can continue for.

[Alan Dunn]

The next five years.

[Dario Perkins]

Thanks to the productivity fairies.

[Interviewer (possibly Niels Kostrup Larson or a co-host)]

Yeah, good stuff. Well, appreciate you coming on and people can follow you and your comments on X. I think they're fairly active there still and competitive I think at times as well with some, some participants. But always great to get your thoughts.

[Alan Dunn]

The thing is, I'm not, I don't really get into arguments with people on X really. I tend to be quite critical of policymakers and it's not about politics.

[Dario Perkins]

I'm critical of all policymakers. I've been just as critical of the Europeans as I have about the Trump administration.

[Alan Dunn]

I just think these are the masters.

[Dario Perkins]

Of the universe and we should be free to criticize them when we think they're going in the wrong direction.

[Interviewer (possibly Niels Kostrup Larson or a co-host)]

Absolutely. But always appreciate your frankness and on that side. So thanks for coming on from all of us here on Top Traders Unplugged. Stay tuned. We'll be back soon with more content.

[Podcast Host (Niels Kostrup Larson)]

Thanks for listening to Top Traders Unplugged. If you feel you learned something of value from today's episode, the best way to stay updated is to go on over to itunes and subscribe to the show so that you'll be sure to get all the new episodes as they're released. We have some amazing guests lined up for you. And to ensure our show continues to grow, please leave us an honest rating and review in itunes. It only takes a minute, and it's the best way to show us you love the podcast. We'll see you next time on Top Traders Unplugged.