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- [00:01]
A
Today's markets move fast. Get the insights you need in 10 minutes with the Barclays Brief, a new podcast from Barclays Investment Bank. Through sharp dialogue and scenario based analysis, our leading experts analyze key market themes each week. So whether you're managing a portfolio or leading a business, the Barclays Brief podcast can help you make smarter decisions today. Stay sharp, stay briefed. Find Barclays Brief wherever you get your podcasts.
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B
Pushkin the On Hedge podcast is on the road and we have a live audience. Live audience, say hello. Hooray. We have been allowed out of our sad gray audio studios and come here instead to a fancy kind of loft space in New York City for the FT Weekend festival. Behind us is a huge window with a skyline of New York and patches of sky as blue as the Lincoln Memorial pool was before the antifa algae turned up. I am Katie Martin. I'm a markets columnist at the FT in London. I'm joined by Mr. Robert Armstrong. Rob, say hello.
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A
Hello. I want to say a special thank you to everyone in the audience for not going to the wine tasting.
- [01:24]
B
Yeah, I don't know what it says about us that our colleagues, who I previously thought were friends, put us for this session alongside the wine tasting session. Anyway, we'll quiz them about that later. Luckily, we've got some brains on board. FT readers will be familiar with him. It's Rasheer Sharma, who is chair of Rockefeller International and author of what Went Wrong with Capitalism. It's a long book. Rasheer, it's so great for you to come and do this. Thanks so much for joining us.
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C
Well, thanks, Katie. I mean, Rob's been obsessed with how many people we'll have in the room.
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A
So we've done okay.
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C
Pretty good turnout.
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A
Yeah, this is good.
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C
So far, so good.
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B
This is the hardcore. So look, this is an opportunity, I think this session to kind of step back and take the temperature of what is going on in markets. Right. It's a mistake to think of markets as people. They don't want to do anything, they just do what they do. But they really want to go up right at the moment. Stock markets really want to go up. There's a kind of feeding frenzy vibe in stocks at the moment. There's also almost a kind of last days of Rome sort of feeling about stocks, you know, like that kind of crypto mindset. It just seems to have settled in across sort of traditional markets. So like Russia, you've been bobbing around markets for a long time. How weird is this current environment to you?
- [02:45]
C
Well, I'd say it's not that weird because of the fact that we have seen bubbles in the past and this has all the trademarks of one. And if you look at the long history of markets, which I love studying, is that the bigger the technological breakthrough, the bigger tends to be the financial bubble, which is that because there's so much excitement around that. So the whole idea that bubbles are based on nothing is obviously not true. They're based on something very real. So the real thing is that this is a huge technological breakthrough that we have seen. So the technology is for real. But every time we see something like this happen for the last 300 years, you end up seeing a very big financial bubble which accompanies that. And the thing about problem for us in markets is that there is no science behind these things, which is that how do you define a bubble? What is a bubble? And I think that what you can do, I mean, I've tried to come up with a framework that how do you define a bubble? Using four O's, which is you typically get overvaluation, you get over investment, you get over ownership, and you get over leverage. Those are four defining claims.
- [03:53]
A
Too much debt in the market on that last one.
- [03:54]
C
Yeah, that's right.
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A
But can I just interrupt you for a second? One thing that is strange, or maybe it's not strange about this particular bubble for me, is that everybody has been worried about it being a bubble from the very beginning. I think so many people in financial markets are like myself in that the 2007, 2008 crash was like a formative experience in my life. It was one of the major things. It's like, get married, have kids, 2008 bubble. You know, those are the big things in my life. Right. So can you have a bubble in the classic sense when everybody's like, is this a bubble? Is this a bubble? Is this a bubble? Right. Because usually a bubble is something that's supposed to sneak up on you, but this will be the most predicted one in the history of bubbles. Maybe, but maybe I'm wrong.
- [04:44]
C
Exactly. I mean, if I can say so, because I looked at all the literature going back to 1999, and what were people saying in 1999, as an example, And I'll find you enough evidence there where people were worried sick that this was a bubble. In fact, there's a letter that a whole bunch of economists wrote to the Fed. I think this was in March of 1999, telling the Fed that we are in the midst of a bubble and something needs to be done about this. So the whole idea that this, you know, that a bubble will only be formed when no one talks about it, I think is not entirely true because. And even the other bubbles I've seen, you know, the Chinese equity market bubble, Japan in 1989. Now what's true is that the timing is so uncertain and there's only one factor, so I tell people, which is that, you know this old line on Wall street, which is that the fools may be dancing but the bigger fools are watching, right? So that's exactly like how you feel about where we are currently. So I'd say.
- [05:40]
B
So you've got your four O's. Yes, but, but the reality is there isn't a dictionary definition of a bubble. But it's a bit like pornography, right? I know it when I see it. And when you've got this situation where Elon Musk has listed this boondoggle company that does a bit of AI and a bit of rockets and a bit of satellites for the, for the thick end of $2 trillion. And the financial industry has managed to engineer itself so that, that gets hooked directly into the central NER of passive investment, right. Of really easy investment flows. And then within a couple of weeks of listing, he's already doing acquisitions and Talking about issuing $20 billion worth of debt, which looks like it's going to get an investment grade rating, right? Which is basically shorthand in markets. But this stuff is safe. What are we,
- [06:35]
C
this movie we've seen before, this happens in every single bubble, including 99 is the most studied one. But Japan in 89 and you know, like the housing bubble in 2008, all these things happen and these things can keep inflating. And my point is that in 300 year history of looking at bubbles, there's only one factor which deflates a bubble. Only one, which is when.
- [06:57]
A
Moment of silence.
- [06:58]
C
Yeah. Which is when interest rates go up. Until interest rates go up, the bubble will keep on inflating. So that's what I mean. So you've got to make up your mind as to what you want to do, which is that. And the smart hedge funds, they're all, they're all saying that, listen, you know, we have to play this.
- [07:16]
A
Doesn't this make it too easy though?
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B
Right?
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A
I just sit there until rates start to rise and then when they do, I sell and I've top tip top ticked it and now I'm rich.
- [07:27]
C
Yeah, but you don't know what extent of the rate increase may be because back in 99 it took 150 to 200 basis points. Like one and a half. Yeah, like one and a half to two percentage point increase in interest rates for that bubble to burst in like Japan also it took something like that in 1989 this time I think is that because of the amount of. The real weakness in this system currently has to do with the finances of the American government. And this is what makes it so difficult because if you look at the past bubbles, all the excesses were built on either the household balance sheet or the corporate balance sheet. This time all the excesses are on the government's balance sheet. That the government of America is running a deficit of 6% of GDP in the midst of a massive economic expansion that is unprecedented. That's not happened before. But let me in a way, as you, we have discussed in the past, it's a transfer of income going on away from the government. They're almost giving money to the households and the, and the pushing money into the corporate system. And that's what happened even in the, in the first half of this year. That. Why were, why was American consumer able to once again withstand the oil shock? Partly it was because they were getting massive tax refunds and also the corporate sector was benefiting from the bill. The.
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A
Yeah, tax cuts.
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C
Tax cuts.
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A
Yeah. Yeah.
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C
You know, so they. The American government's ability to keep on financing the deficit is incredible. That for me is really what I'd say that if something which really surprised me over the years, it's that that America's ability to finance its deficit and the consequences of that and how it is inflating asset prices and everything. I think that is where it comes down to.
- [09:10]
B
But let me ask you about something. So obviously like the, the lion's share of what we've seen in stock markets and the predominant reason why they've done so well recently is the trade. Any. It's got a whiff of AI about it is doing incredibly well and that's pulling the rest of the markets up with it. But so there was a story in the FT the other day which was about how companies are reining in their use of AI tools and their staff's use of AI tools because once they get the bill for these things, they're saying how much? So explain to me the economics of that. How is this monetizable because surely if, if markets are sort of balancing on this very narrow pinhead that is AI but actually it's very difficult to make any money out of that AI then surely the rest of what we see in stock markets doesn't make any sense.
- [10:00]
C
No, but I think what's happening with like in all fairness is that the adoption rates and even the monetization have been much quicker compared to past technological adoptions, including what happened in 99, 2000. So it took many years to monetize anything on the net. That way the charges that companies are being able to take and the adoption rates have been much quicker than past technological revolutions. So that credit we got to give to the AI phenomenon that it's been much quicker than anything we've seen in the past.
- [10:33]
A
Let's take a little step back then. How much should it worry us? And this is something I've written about and have not come to any very satisfactory conclusion. The market being what they call so narrow that most stocks are doing are having like a flat year. So everything AI contributing all the gains in our stock markets and by the way, not just the stock market in America, but across the world, everywhere, it's global and everything else is kind of flat to down for the year. Is that, is that necessarily unhealthy?
- [11:06]
C
Well, I think that once again this happens, right? So if you look at the world today, what we have today is what I call a new AI driven world order, which is that if you look at the world today and all the countries, you can bucket them into three categories. You have the, the winners, the followers and the losers. So who are the winners? It's clearly America, tops of China, parts of Japan, you know, where the leading companies now are, all AI based companies. Korea, Taiwan and possibly Israel. So these are the, and you know what's common in all these countries? Their tech spending as a share of GDP is very high, about, you know, anywhere between 3 to 6%. So they're all being rewarded for having created a tech stack. Then you have what I call the followers. These are countries which don't have too much of great technology of their own, but they're building data centers and other things to feed the ecosystem. Malaysia, even Mexico, Thailand, Singapore, these are countries. And then you have AI losers. Every time there's a technological revolution, Europe is always in the AI losers basket, right? So that's what happens. With the only notable exception being the Dutch because of one company, asml. Yeah, asml. And then there is the real losers. And this is how quickly narratives can flip. And this is something we have to all keep in mind. India, for example, right, like this was the big celebrated country till even a couple of years ago on a high,
- [12:38]
A
was the hottest stock market in the world.
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C
For the market in the world, the only market keeping pace With America all of a sudden, last two years, in terms, about the worst performing stock market among the major markets in the world. Because not only don't they have any of the AI hardware, which is what, like, is driving markets today, but they also have industries like IT services, which are seen to be the wrong end of the wrecking ball. So, so Philippines, Indonesia, India, all these markets, nobody wants to touch them.
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A
They're tech outsourcing markets.
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C
Tech outsourcing markets.
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A
Yeah. Yeah.
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C
So I think that what we have is this AI world order, you know, like in the world. But once again, look at this point about narrowness, dispersion. 99, it was even worse. Right. In terms of what happened in the last six months, last nine months, the dispersion, the narrowness of the markets, what was driving it was, was even more extreme in some cases. So that's where you have it. And yet bubbles, you know, like, feel best, like at the end. Because the Nasdaq, like, as you know, In October of 1999 till March of
- [13:44]
B
2000, I was only four years old. Yeah.
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C
But I'm going to ask, I can tell you the history that I live there, that it doubled in value in that time period. Doubled in value. So that's what happens with these things.
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A
And it feels like we're in one of those spikes.
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C
It feels like that. Until interest rates go up. I just don't see this party ending.
- [14:04]
B
Yeah, regrettably, I was not four years old, but you're still not allowed to. Whoever laughed over there is in trouble with me. So, Rob, the other day we did a thing called Ask the experts on FT.com, which makes me feel quite awkward because if we're the experts, but we really are in a lot of trouble. Yeah, but people were like asking, okay, I get all that. I get everything you're saying about AI being narrow and about the world being kind of predicated on one trade and how it doesn't matter if you go to South Korea or Japan or where you go, you're still betting on AI. I get that this is all a problem, and I get that SpaceX is kind of symptomatic of a broader problem, but what am I supposed to do? What am I supposed to buy? And my reply to one of those queries, it's kind of an ask, ask me anything thing. This, this ask the quote, unquote experts. And I said, look, I'm not here to give financial advice and if I did, it would be terrible, but it's still very difficult to come to any Conclusion, other than ride this thing for as long as you can buy a diversified bucket of stocks, do it passively, do it cheaply, and just sit on it until it goes wrong. I mean, it's hard to come to any other.
- [15:13]
A
I think you're right, you know, with the proviso, the old cliche, which is not an old cliche in my case, it's reality in my case is that more money is lost getting out before the bubble than is lost in the popping of the bubble. And so the worst thing that happened to me in my life as an investor is that I got the 2008 crash just about right. And so I had all my money out of the market and down the market goes. And I had the fatal thought that I understood markets as a result. And over the ensuing decade, I set more money on fire thinking that I understood how markets worked than I had saved in the first place by a factor of two or three. Right? So you can't, like. It's just not a strategy to not participate because then, as Jeremy Grantham likes to point out, you have to make the decision about when to get back in and you're going to screw that decision up too. So I agree with you, you have to be in. We have a genuine expert here. But you do need kind of sleep at night capital, right? You need enough cash in your account where you're not reading the Financial Times in a state of emotional hysteria.
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B
But if you had all of your money in US stocks and you'd gone into a coma in March 2025, and you'd missed Liberation Day and you'd missed the war in Iran, and you woke up today, you're up about 30%.
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A
Yeah.
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B
Happy days.
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A
Warship.
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B
What are we doing here? Worrying about all this, all this stuff. But. So, Rasheer, you spend a good portion of your life advising the rich and powerful on what to do with their money. We are obviously all in this room, very rich and very powerful.
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A
I can tell just looking at you.
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B
Look at them, look at these people. So what's your advice? Is it the same as mine, which just buy a diversified bucket of stocks and forget about it?
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C
Well, I think we have to be a bit more specific, if I can say so that. So, in fact, I remember writing this.
- [17:17]
B
He does what he does, I do
- [17:19]
C
what I do, you know. So let me just break it down, because this is a question I get like all the time, which is that if you look at the world today, There are about 8,000 stocks which are listed in the public equity markets, which are What I call investable. I define investable as companies with a market cap of more than $1 billion, a market value and. And somewhat reasonable trading volume. There are about 8,000 such stocks out there. There is something which is defined as quality. And quality is a factor which is that's, you know, like There are about 1200 such stocks in the world today which are defined as quality. What is quality exactly? These are definitions which are used by all these indices. These are companies which consistently produce very high returns on equity capital, have very low leverage, steady earnings, relatively low volatility.
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A
Boring stocks.
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B
Boring.
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A
Can we call them boring stocks?
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C
But we call them boring. But in terms of steady eddies over time.
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A
Yeah, yeah.
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C
And you. So of the 8,000, you narrow it down, the quality and you get about 1200 such stocks in the world today. Then, you know, what I ended up doing was that let's look at the cheapest of these stocks, of these, of these, you know, sort of stocks. Because you're paying the least for their profit for them. Because if you look at what's happened historically is that in the last 12 months, because of this market we have been in, these quality stocks in general have underperformed or done much worse in the market than possibly ever. Right. Because so many unprofitable, the space X, etc. Are doing so well. So these companies have all been ignored and they have done very well, poorly.
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A
Give us a couple of names, right? What's a typical.
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C
Anything. So for example, let's look at Europe. It could be a Volvo, it can be a Shell. You look at emerging markets, it can be a bank in Brazil like Itau, it can be a company like Bharti Airtel in India.
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A
Yes.
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C
You look at, you know, like the U.S. you know, like out here, bunch of energy, materials, other companies, including some industrial companies. So my point is that if you back tested this, what I found was that if you bought quality stocks after they've had such a run of underperformance from like they've had, they typically give you a return of about 15% annualized dollar for the next three to five years. So my sort of advice to people is figure out how much equity risk you want to play the AI bubble. And I have no idea as to how early or late in this. It seems we're in the advanced stages of it, but it may still have some to go. Figure out how much. And if you want to take any more risk, equity risk in your portfolio, stock risk in your portfolio, buy this basket of stocks. Because I would do this I'm putting my money behind this and saying for the next five years, if I'm going to get 15% annualized returns in dollar terms, I'm going to be very happy with it.
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B
The problem with that is that sure, at some point they will start making 15% annualized returns, but in the meantime they're making near percent annualized returns. And ultimately we're all human, humans. And so while we're sitting there wreaking an old percent and thinking, Ah, but it's going to be 15% soon, we've all got some like 18 year old nephew somewhere who's like, I just put all of my birthday money in SpaceX and I'm the winner and you're the loser. Take the L. So that's why that doesn't happen. Right. Is that we're just, we're people.
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A
And for people like you, professional investors, there's career risk in taking the contrarian trade and saying I want neglected high quality companies, you know, not, you know, you're in a position where you're established in your career and maybe you don't have to worry as much. But for a lot of the professional investors it's a very risky thing to do professionally.
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C
Like as I said that first figure out how much you want to put in the AI trade and this is what you put as the hedge.
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A
Yeah.
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C
So, you know, so to speak. That's what I'm trying to say. So I totally agree with you that to be completely out of it if you're, if you're a professional investor is very dangerous.
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A
Yes.
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C
But if you have a three to five year time horizon and you're like, listen, I don't understand why SpaceX trading at 2 trillion and all this other stuff. But I still want to, like, I still have to make money. Right. Because in fixed income you're getting close to zero in terms of real return.
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B
Bond markets.
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C
Yeah, like in the bond market.
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A
Because I don't think it's zero.
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C
Well, the inflation rate is 4%.
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A
Right, right.
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C
I mean here in America.
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A
Yeah.
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C
And you have the, you know, depending what you buy, but anything up to five years is also 4%.
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A
Yeah.
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C
So it's close to zero. Like I still want to make some money, but I don't want to do it in a way where, because what do bubbles do? Because bubbles can go up and then like you can be down 80, 90%.
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A
Yeah.
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C
You know, so I won't be surprised if three years from now SpaceX is down 80%. That's entirely feasible. It's happened across the world.
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A
Loads of time.
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C
Yeah, loads of time.
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B
So America's a giant bet on AI and to a large extent that has been fed by the fact that the current President is who he is and the sort of the AI, you know, the sort of Silicon Valley types have cozied up to the President and there's been this massive deregulatory agenda and so on and so forth. To what extent is the stock market vulnerable to a political change? Like if we have a Democratic president next time around, does a lot of this kind of deflate?
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C
You know, if I can say so, which is that I know we are all obsessed with Trump and, and rightly so, you know, given what he does, but I just feel that we overestimate Trump because even like on the stock market, the nature of the stock market and the way it's behaving has been pretty much this has been a cycle which has been on since 2009 and even under Biden, including, you know, like the years like 2023, 2024, it was very similar.
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A
Okay.
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C
So I just feel that the, that we overestimate politics in general, its impact every time.
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A
Agree.
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C
And, and the impact of these economic forces like AI and stuff are underestimated. So therefore, as a rule that I have for investing is that. Let's not talk about Trump because he, because I think that, that this may be the ultimate insult for him, but he just doesn't matter as much compared
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A
to AI oh, he would be, he would be very unhappy to say that.
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B
Yeah.
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A
But so you keep optimistically batting away Katie's habitual pessimism here, but you are worried about one thing.
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C
Yeah.
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A
Which is at some point the price of money increases enough to crack. Crack the bubble and we have a big problem.
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C
Yeah.
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A
That sounds like what you're really worried about is inflation getting out of control.
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C
Inflation or the deficit.
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A
Yeah, but those are. Yeah, I would say those are two sides of the same coin, like in a way.
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C
But I'm saying that, you know, there is a point that if inflation goes up, the Fed doesn't increase rates. The long end gets unanchored.
- [24:04]
A
Yeah, yeah.
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C
You know, so like I keep saying that. Yeah. And we have done some analysis, you know, as you all know, that there is no science behind these things. This is art. But if the 10 year, for example, the 10 year yield on government bonds in the US were to go up above 5%, that's what, as loud a bell as you're going to hear. Yeah, that, that this is coming to an end.
- [24:24]
A
Yeah, it's a terrifying number. But it's about, in your view of bubbles, it's about inflation getting out of control or inflation starting to get out of control. The Fed doesn't respond and the bond market does the work of inflation, interest rates.
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C
I mean, 300 years of bubble history for whatever. I can come down to one factor. People come to me today. What do you think about these massive IPOs which are happening? Isn't this sign of fraud? What do you think of hedge fund leverage? What do you think of this? What do you think of that? I said we have tested all this.
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B
Yeah.
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C
And none of this really works in explaining, but you get me, like an interest rate increase of even 50 basis points, about half a percent given the amount of debt you have in the system today. And that will bring this down.
- [25:05]
A
Okay. Counterexample, we had a massive increase in interest rates in 2021. 2022.
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C
Yeah.
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A
We had the market come down a little bit and then it bounced merrily right back.
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C
Yeah.
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A
Is that. Isn't that a counter example to your.
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C
No. So firstly, the market did go down 20%. Yeah.
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A
Yeah.
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C
You got a bear market. But here's the big thing, which is what I think two things happened which helped this. One, the amount of fiscal stimulus which came on.
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A
Came the other way.
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C
Yeah. Came the other way. So it's like, you know, your two levers in opposite direction. On one hand, like interest rates, you would jack them up. On the other hand, you keep on spending. And under Biden as well. Right. Which is that they kept on spending, spending, spending. I mean, just to put it like in perspective, that America used to run a budget deficit of 3% of GDP last decade. Now it is 6% is the new normal. And that came to be after the pandemic. So that offset it. So that's my point, Robert, that it sort of offset it in terms of it. But at this stage, you don't have that room. And in fact, the feedback mechanism can easily go the other way. That. Let's say that America has a downturn. Every time America is a downturn, the deficit goes up by 4 percentage points. So we're looking at a 9 to 10% deficit of GDP this time. If America has a downturn, the US
- [26:18]
B
already spends more on servicing its debts than on defense.
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C
On defense. Yeah. That's one statistic which is out there. You can cut this in many ways, but I'm saying. So that is the real risk. Something happens to interest rates, then the feedback mechanism, the feedback loop goes the other way twice as fast.
- [26:50]
A
Bull or bear trade or tariff future or fad. There's more than one side to every story. With the Flip side podcast from Barclays Investment bank, you'll hear two research analysts having a provocative debate on hot topics in business and markets. Listen to the Flip side on your favorite platform.
- [27:11]
B
We do a thing on the Unhedged podcast where at the end we go long. Short. We go long a thing we love or short a thing we hate. So in the time that we have remaining, what are we saying?
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A
Rob, you know, I've been giving a lot to the thought to the financial world as we find it. The numbers are what they are, which is why today I'm going short sharks. I am an ocean swimmer and there was a terrifying article in the Wall Street Journal this week about the incursion of sharks onto the East Coast. So however strapped our government is, it needs to do something about the sharks. Katie. And I'm short sharks.
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B
Short sharks. Good. Rasheer.
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A
I'm selling sharks.
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B
What are you saying?
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C
Well, I'm just going to stick to the theme that I've said today because I, I get it all the time, which is that buy this basket of quality stocks and just don't worry about when this AI bubble will burst. Will it? Is it a bubble or not? It's agnostic to that. So, you know, just do that and you know, just go and you know, for the next three to five years, you know, just be content with that. But of course, deal with fomo. If you're, you know, your mother in law or your daughter in law, they're coming and saying, we are like up this much on, on Space X. Yeah.
- [28:27]
B
Yeah, I'm going to be long. June, normally whenever I come to New York, it's either far too hot or far too cold. This is delightful.
- [28:37]
A
This is not bad.
- [28:38]
B
I'm going to. This is okay. Maybe you're right about this city. Maybe it's all right. So I'm going to, I'm going to be long of this. Rasheer, thank you for sharing your brain. Rob thank you for sharing what's left of your brain. Audience, thank you so much for being here.
- [28:51]
C
It.