Recession like it's 1990?

With 3.5 weeks into another global economic shock, once again triggered by a war of choice. How many more of these shocks can markets withstand? Well, considering the S&P 500 is only 5.5% of late fair pies, seemingly quite a lot, at least for now anyway. While stocks are kinda holding up, safe havens, confusingly, are not. With the US 10-year yield close to 4.4% and gold nearly 14.5% down since hostilities broke out. What is going on? Can we perhaps learn from history, so we're not doomed to repeat it? Today, we ask #1. Have your views on Iran change from 2 weeks ago? #2. What is the best historical parallel? Passing energy shock, stiflation, recession even? #3. Are the Europeans seriously going to high grades? And #4. Is gold no longer a safe haven? Please excuse the fore instead of the usual three questions, exceptional times and all that. Peace, or at least cease foreign negotiations, are in full swing. According to Trump anyway, and markets believe, so we have to too. Until we get another dramatic update. And fair disclaimer, that may happen between recording and you listening to this, invalidating some of this discussion. I think so, frankly. Yeah. So, Freya, let's first sketch out how our views have changed since the last podcast on the 11th of March. So, there's a few sort of anchors that we're holding on to. On the macro side, primarily, that this is more of a threat to growth than a fresh inflation spiral. Obviously, it's a sort of a short-term inflation boost in the worst case scenario. And in certain senses, markets are sort of complicit in that as well, in the sense that the only real move that we're seeing is in the two year. So, it's more about what markets think that central banks are going to do than any sort of sustained shift in break-even or even sort of term premium that we're seeing in the way that markets are behaving at the moment. So, in a sense, markets agree with us there, but they're still worried about what central banks are going to do, which we're going to get to in the third question, I think. So in terms of what's changed between now and the previous podcast, which feels like an eternity ago. Yeah, three months ago. We've, the balance is gradually incrementally, if I can use that word, shifting towards a few tenths of a percentage point off of growth and a few extra tenths of a percentage point onto inflation. And as I said, markets are sort of complicit in that, in the sense that it hasn't gone on for long enough, the shock hasn't gone on for long enough for us to have really conclusively hit those tipping points where you start to get reflexivity kicking in and recession sort of kicking in and you start to get those non-linearities. We also know from the sort of the series of 180s, dizzying 360s that we seem to be doing on a daily basis, that the energy prices do seem to want to come back down again. And so that helps market complicity, even though we know that there are these, you know, hysteresis a little bit, if you like, in the supply shock, that if you get a supply shock for a period of time, then that sort of gets further supply shocks. We know that there is going to be actual physical disruption for a period of months now. We know that markets seem to want to look through that whenever there's any kind of de-escalation and that allows markets to be complicit in sort of looking through the recession forecast or any kind of recessionary forecast at this moment in time. And we're sort of partly because of where we're positioned in our model portfolio and our allocation going into this. We were in a risk on phase, we'd sort of forecast this re-acceleration going into the year, that had all kind of come in our direction. And that's where we were sort of positioned going into that. So we're not sort of chasing any recession call in terms of how we're playing this in our own model portfolio at this moment in time. If you'd gone in differently, you might be playing this differently as well. But we're mainly just looking for those kind of, what salient points can we pull out from the geopolitical scene to help us to understand sort of which scenario we're in. Recognising that if we go towards the escalation, then we're moving more towards a recessionary call than an inflation spiral call and the beginning of a hiking cycle. And if we manage to avoid that recessionary call, then another sort of anchor that we're holding on to is that inflation call in the US, inflation 3% inflation for the US, is reinforced in either sort of event of the world. So either we get that short term inflation boost or we don't get the short term inflation boost and demand starts to re-accelerate. And then towards next year we start to see the US inflation story picking up again as well. So there's a few sort of anchors there that we've got on the macro side. And then we're just looking for those kind of salient points that we can pull out from the geopolitical side. For me, kind of any sort of attack on infrastructure on Carg Island or sort of infrastructure more broadly is something that obviously can't be ignored. It changes the chess game between Iran and the US and points towards a more sort of intractable prolonged problem. And then sort of looking on the bull case side, we know that Trump wants to tackle. We've seen that from very early on that he wants to sort of get out of this. And as we said, I think on the last podcast it takes to TACO. Yeah, that was the title of the last podcast wasn't it? Not quite, that was a title of a fantastic night. A fantastic night. But we thought we first. That's the stage that it takes to TACO. But we do also know at least the official line from Iran seems to be a reasonably low bar for talks to the extent that there can be any sort of consensus on what the Iran position is. The official line coming out of the foreign minister is that removal of sanctions would be enough to move forward with some kind of a deal. That was a bullish signal to us and allows us to still be in that sort of. If you like, complicity with markets that this could boil over. Now when we get to the discussion of safe havens and when we get to discussions on interest rates, we can sort of piece that apart. But I think it's worth thinking about just the. What is the scarring from this? So we've gone into this with the belief that we're going to see a re-acceleration in the global economy. If we now get a de-escalation in geopolitics, do we just go back to that re-acceleration? But with the whole story sort of pushed forward in time a little bit, yes, but probably there is still scarring. There will be a premium in oil prices because we know that there is the risk that this all kind of flares up again and that there is the Iranian deterrent on the straight of hormones now. Yeah, oil is not going back to 70 in the next two to two seasons. So there is going to be that scarring and that adds to the previous scarring that we've seen in. From Liberation Day, there has been a rise in term premium that we saw built into bond markets around Liberation Day. So every time we get these shocks, it does. We sort of. Even if you get the de-escalation and it's more difficult to de-escalate from this than previous shocks, even if we get the de-escalation, there will be some scarring left over. In markets. Yeah, I mean, it's been a wild two weeks. It's been a wild few days. I mean, I think when we arranged this podcast on Friday to record today, on Friday we were talking about special forces, Marines capturing car, Ireland and holding at ransom. And then over the weekend we had Trump's 48-hour deadline before he was going to bomb oil infrastructure. And then Monday, early U.S. time, negotiations deadline suddenly had gone and things were all happy again. Tuesday, Iran, seemingly not really negotiating. We thought, and then last night Trump comes out and says negotiations going really well and risk assets are a bit happier. So it's been a wild few days, Daria, how have things changed? Yeah, but you don't really know who's telling the truth, first issue. I mean, yesterday, the negotiations were clearly being leaked, but they were coming from the U.S. and Iran's line was still quite tough. So I don't know. I mean, it's hard to understand really what's happening. I mean, you know, first I saw a lot of it in terms of how the view has changed. I think if you go back to the previous podcast, there was still a chance of this very quick Venezuela type outcome. That's clearly gone. And we're two more weeks into this every day, sort of problems in the supply chains of [BLANK_AUDIO] energy just compound. And so even if this ends in the next week or so, potentially you're looking at more months of disruption to energy supply, sort of one month to rev up production of oil, two months to get, so Cotari, LNG, back online. And then you've got all these problems in shipping, all of these ships are in the wrong place, tankers that were supposed to carry energy to Asia, heading to the US instead. So that's going to take a while. I guess as Freya said, the sort of encouraging thing is that markets just want to look through that. I think that is now very, very consensus, this idea that these supply chains are going to be messed up for a period of months. That's now in the market, everybody knows that, everybody's aware of that. You know, all these energy experts have been telling us all these podcasts for weeks that this is the biggest energy shock in history. And yet the slightest sort of taco news delivers immediate declines in energy prices that are quite big. So it does look like the market wants to look through this. I just don't know, you know, can that continue? If you are seeing genuine stresses in supply over such a long period, is that going to mean energy sort of energy prices sort of growing back higher again? I'm not sure. But I think that's the main point in that. At the moment, we're still in that. That's why I keep using this word complicity because we're still in that world where you can it hasn't gone on for long enough that we really tipped into the reflexivity of recession. In terms of the recession, we're not there, but just in terms of energy supply. I do think this is a sort of consensus of you now that this is going to be messed up. And yet, all the prices still come back down. So I find that sort of encouraging. I just don't know if that's how this is going to play out. As things stand, as Freya said, we're looking at a short inflation, potentially between 0.5 percentage points and 1%. That's going to squeeze real incomes. If this is a sort of a few question of a few months, then it's going to be a temporary thing. Growth is going to be weaker for one to two quarters, not massively. Freya was sort of hinting at 0.3 percentage points. I love it. She called it a few. She didn't quite. She didn't for the know what she thought she'd get away who's saying a few, but a few means three. I mean, that seems reasonable. I guess the only thing that worries me in all of this is that, you know, I've just spent the week reading through Fed transcripts from the from the 1990 recession when we talk about this in the sort of historical parallels. But, you know, this is the way economists behave. We sort of change our forecast incrementally as they need to get worse. And we keep changing it incrementally. And then suddenly things do change quite dramatically. And we find that we've made these systematic mistakes. I guess that's just the thing that, you know, I think our forecast is a pretty sensible one. The sort of re-acceleration postponed a sort of soft patch for the global economy for, you know, three to potentially six months. I just think you have to be aware that we're on a slightly more fragile situation than we're in in 2022. Great. Thanks, Arya. Okay. Moving on to question two. Because you mentioned that they're already Dario in terms of your historical parallel of 1990 and your reading of the Fed papers, some excellent historical tracking as a as a history graduate. I'm on pride of you for that. But what are you seeing then? What are you seeing? I'm passing energy shocks, inflation, recession. What's going to happen? I don't know if I like the 1990 just because I was sort of 12 years old. And I was collecting the sticker book. There was a goal for a sticker book and you believe that sticker book, a sticker book going alongside a war. So I think, you know, it times like this, everyone always goes back to 1970s. We talked a bit about this in the last forecast that that was a situation where workers were just incredibly powerful. You had these trade unions, you had wage indexation. So you got those wage-price spirals and persistence sort of stagnationary pressures. You just can't get that in today's economy. You had a slight echo of it in 2022 just because of the distortions of the pandemic had created this sort of temporary worker power. So workers did have some power back then. You had a lot of extra savings. You had very tight labor markets. This now just looks very different. And so my sort of sort of historical template, which is not something I think is going to happen, but I think this is the plausible downsides scenario to our forecast, which is what happened in 1990, which is Iraq invades Q8 on the 2nd of August. And at that point, the US economy is already looking a little bit fragile. So payrolls are just printed a negative number. It was a pretty small negative number. Fed officials were taking some comfort from the fact that initial claims hadn't picked up. And there was no big increase in layoffs, which is sort of the same message we're getting from them now. Nobody was expecting a recession. And then you had this huge energy pressure, which is a little bit bigger than the one that we've got now, but it's sort of similar. And it squeezed real consumer income. Spending went down. Savings went up because consumers were worried. And then that tipped the economy into recession because it played on these underlying vulnerabilities. So there's one obvious vulnerability in the labor market. The fact that employment had stopped growing and it started to contract again, similar to what we're seeing now. And the credit system, you know, they'd have this big credit boom in the late 80s, roughly eight percentage points of GDP. It was sort of financial engineering. A lot of it was sort of leveraged buyouts. But I mean, there are obvious parallels with private credit and the worries that people have about private credit today. And in terms of scale, it's roughly the same size. If you look at private credit as a share of GDP, it's gone up by about eight percentage points. And that was beginning to deflate. And yet because you'd had this energy price shock, which made it the economy, obviously worse, it also tied the Fed's hands, which is, you know, it's very similar to what's happening right now. I mean, suddenly, Fed of Israel is not entirely comfortable looking through this. They came into this year planning to cut interest rates. They're now saying they can't cut interest rates anymore until the situation has resolved. So it's just about, you know, the shock sort of coming at a point where the economy is potentially quite vulnerable. And there are these issues in the labor market and in the credit system. And it just makes the Fed's life much more difficult. And of course, the other thing, as I said, is the humility of it. Because when you read through those transcripts, you see how the thinking of the official sort of evolves. So at first, it's, you know, don't worry too much about the labor market. It's pretty resilient, claims a low, there's no big layoffs. And then it becomes, well, maybe we're going to get a soft patch in the economy. And then the Fed staff come up with a forecast, which is GDP is going to be lower for one to two quarters. But then it blows over quickly and GDP rebounds because real incomes rebound. And then, you know, that's sort of fine up until December. And then suddenly, you get this very discrete deterioration in the economy. Suddenly Alan Greenspan, who for five months has been saying, we're not going to get a recession. The economy's not rolling over in that way. Suddenly sees, you know, severe recessionary pressures all over the place. So it's just how quickly that line of thinking can change. And as I said, you know, I don't think this is where we're headed. I just think this is a plausible downside scenario. This seems more likely to me than a sort of 1970s wage-price file. But the big thing about the 1990 recession is that it ended up being the most sort of plain, vanilla recession you can imagine. You know, the credit problems were there, but they were not systemic. I don't think private credit is systemic. You know, I don't think we're going to end up in some sort of 2008 type scenario. If you look at how much GDP and employment went down, it is basically the sort of minimum that you get in a recession. It's like two percentage points on employment, which is a sort of really sort of plain vanilla recession. And I think that's the sort of downside scenario, a really vanilla recession. But none of this sort of, you know, 2008, everything's going to blow up. I can't see that environment. So if that's the worst case scenario of vanilla plain recession or a soft punch leading to recession. But I think I remember you saying US equities sold off around the energy crisis, around the war just before the war, but then rallied and they were fine. And during the recession, they were basically fine. So could we see that? Even if we get the worst case scenario of a mild recession, do you equities, global equities hold up pretty fine? Yeah, I mean, the interesting thing is the equities reacted quite differently to the outbreak of war. So as soon as you got the energy price increase, the equity market dropped 20%. And then it just reacted to the oil price. And so once yet operation desert storm and the US actually got involved because for five months, the US wasn't involved. It was just threatening and it was moving its troops there. Once the US actually got involved, the oil price collapsed. And that's when the Fed could cut interest rates. That's actually when the economy started to deteriorate much more quickly. But that's when the equity market rallied. So it almost looked through it. And even as, you know, 1991 was pretty bad in terms of unemployment was rising. The recession was sort of really gaining traction. The equity market just sort of looked through it. So it's quite difficult to get the exact look through that we had in 1990, just because we're already looking through it. You know, we're down what 5%. I mean, it's barely budged in reaction. But aren't you trying to make the comparison that maybe Iraq invading Q8 is comparable to the US and Israel bombing Iran? and then the US invading Iraq is comparable to, say, peace negotiations, concluding in the state of more news opening in whenever it happens. Yeah, but we haven't sold off in the same way. True. So, we're going to bounce as quickly, given that we didn't sell off in the same way. I mean, the equity market was down 20% in 1990. What was we said? It's fine. Everyone knew that the oil price was the sort of big problem for the economy that compounded and triggered the recession. And then once you knew that you had a resolution to the crisis, the sort of fundamental problem went away. And even as the data continued to deteriorate, the market just looked through it. I think it's going to be more difficult to look through this just because we've already looked through it for three weeks, three weeks. Right. In a sense, we haven't really had the trigger for the downside yet. So you could still get a swift recovery after you get that trigger. But you still need to see the downside before that happens. So we haven't had that trigger yet. That would be like, you know, there's troops on the ground or there's a attack on Car Guyland that destroys infrastructure or there's some other sort of infrastructure destruction. And then you would get the downside in equity markets. But potentially it's vanilla V shaped vanilla type of a recession. I think the thing that I'm struggling with is the best predictor. That point where reflexivity starts to kick in tends to be where profit margins are with respect to trend. And if you have like a simple trend in profits, in profit margins, then it's quite simple to say, okay, well, we need to see further deterioration in profit margins until you get to, you know, X below that trend. The problem that we have at the moment is that profits are structurally higher now than they were in 2019. And I'd say that's because the US fiscal deficit is structurally higher than it was in 2019. And businesses are the ones that have captured that benefit of the flip side of that. So now the question is in a behavioral sense from businesses, do they start to fire and not invest, which is essentially what a recession is when businesses stop investing and they fire, that's the cycle. Do they start to do that in reference to a 2019 type of a trend in profit margins or do they start to do that in reference to their current much bigger margins? And that's a behavioral question that we don't, we can't really, there's no sort of simple answer to that. So we're left with, you know, we're just that behavioral question. There's lots of tricky behavioral questions. Like how will US consumers respond? I mean, in theory, they could reduce their savings, but the savings were really quite low, but you could absorb some of the short by reducing savings. You could have companies just looking through this or you could have them, you know, starting to fire people. And there's those are really tricky behavioral questions. And I think that's why I said you need to stay sort of humble, you know, given that you can see those dynamics play out in 1990 and how the psychology suddenly changed. I mean, it's literally, you know, there's like three weeks between Greenspan saying there's no evidence the economy's falling off a cliff to, oh my god, the economy's falling off a cliff. And that was one really bad payroll report. And then everything went. Yeah. But it probably is different this time around again, because the labour market is very, very different from how it was in 1990. So there's parallels to 1990. There's the difference is we don't know what the sort of structural trend in profits up is. So we don't know when businesses are going to start to try to repair their profit margins. And the other, the other difference is that the labour market is very, very, there's not a lot of labour supply businesses have just been through the COVID experience of having labour shortages. And we know that there are really severe shortages already, so especially in those certain sectors that are exposed to new immigration policy. So it might not be a typical US response to profit margins being squeezed that were, that people have been used to. It might play out more through wages. It might play out through, you know, other, not actually firing this time around or not to the same extent as previously. So it's, it is, it is different in those senses. And we've already got a fiscal impulse, which we, you know, we came into this year expecting a re-exceleration. That's still coming. At the moment, this energy pressure basically cancels the fiscal boost, but it doesn't, you know, it shouldn't be large enough to trigger those non-linearity's given that you've got that fiscal support coming. So in a sense, really, like the, the, the sort of, lausable worst case that we're getting to, unless it's like a complete blowout in energy markets, is, is that where it's a sort of a slow grinding period of, of, of kind of weakness, but not the same degree of, of firing as you'd expect from a, from a historical US position. And, and in a sense, there is, to some degree, that buffer in, in, in fiscal policy as well. We're going to move on to question three. So I saw on Monday that the Bank of England were still planning on hiking four times this year. That line of that's changed. Markets, it's effective. Markets, it's affecting four hikes this year. And failing very, very quickly, tried to wipe that out after the meeting last week. Exactly. And, and, and ECB, we're expecting hikes as well. I mean, is this, Darios, is this, are we really going to get hikes from the ECB and the BOE this year? Well, I mean, the ECB obviously has the history of hiking into energy price crisis. You know, they did it in 2008, in, you know, global credit crunch. They did it in 2011, into a European suffering debt crisis. You know, what typically happened was energy prices went up. That boosted yields and long-term inflation expectations. And the ECB thought, oh my god, we're losing control. And the philosophy of that does go back to 1970s, because the Bundesbank, I mean, this was its finest moment in history. The moment it opted out of the great inflation by raising interest rates aggressively during the energy price shock and avoiding all of those second round effects. And, you know, there are literally dozens of Bundesbank papers about how fantastic the Bundesbank did in the 1970s and how it avoided all the mistakes that the Fed and the Bank of England had made. And, you know, if we were about to 1990 again, that's exactly what they did in 1990. They were the only central bank that was raising interest rates into the energy price shock. And they could do that because Germany at that time was experiencing a pretty big boom. It was the reunification boom, which was partly massive fiscal spending, which obviously has parallels with today with the government spending like drunk and salons. But also it was just their decision to sort of set the eastern west German marks one to one, which suddenly increased the purchasing power of eastern Germans and gave them this massive consumer boom. You know, they might say, well, if we're going to use the 1970s as a template, we need to repeat the trick that we did. We're going to use the 1990s as a template. Maybe we should do that again. I think so far the ECB sounded reasonably sensible about its approach to this. I mean, there's a big speech from Lagarde this morning setting out a sort of framework saying, you know, it's all going to depend. It's going to depend on how long this lasts, how big this shock is, you know, in a very different position to 2022. But, you know, we could raise rates at any point. So I think they sound reasonably sensible. I'm not sure they're going to make the same mistake. I'd like to point out in 2008, I won a bet of one of my colleagues. This was an AB&M row because the ECB had said it was going to raise interest rates. Nobody thought they would because it just seemed completely bonkers. And I think we bet 50 pounds that I bet 50 pounds that it would. That was a lot of money about that. Exactly. Wow. And obviously they did hike. Yeah. Well, I'm going to lay it down. Completely mad. And there's a sort of lesson there, which is always, you know, forecast what they will do, not what you think they should do because everybody knew they shouldn't raise interest rates because it was ridiculous. But they did it anyway. I think they seem more sensible. I think the Bank of England, I think the Bank of England has tried to sound hawkish because if you think about this from a central bank perspective, you look through it as long as you don't see inflation expectations starting to rise. How do you stop inflation expectations from rising from being really, really hawkish? And I just think the Bank of England overdid it. I mean, if you go back to the policy decision last week and you read it up to a point, it sounds quite sensible. And then suddenly it just goes on this sort of hawkish tangent. And I think that's the bit that freaked people out. And, you know, I think they just over did the sort of rhetoric on hawkishness. I'd be surprised if the central banks actually hike interest rates. At all. This year. I think maybe we could get a token ECB hike or a token bank in England, but the idea they're going to hike interest rates multiple times, particularly in the UK. Just looks so vulnerable right now in the labour market. I think that's what that's essentially what markets are saying as well. And that should feed back into the policy decision. Like if the reason why central bankers in this environment, the only reason why on any kind of textbook sense central bankers should be thinking about hiking rates is if you think that this is going to feed into inflation expectations, which you could argue the hawkish case that we've had a lot of shocks inflation has been elevated for a long time. So if you have another shock and inflation stays elevated, then people are just going to think that's what inflation is and it'll start to get priced into wages and you get this wage-price spiral. So that's like the hawkish argument. But at this stage, the only thing market seems to be pricing in is the central bank response. So you're not seeing a big increase in break evens. You're not seeing inflation expectations in a market sense pickup. Now, it could be that we get evidence of inflation expectations in a survey sense in terms of real economy. And that could start to make central bankers worry that this is sort of another wage or wage price spiral. I think in terms of like the hedged story here is where we started, which is that we do think the risks are more on the damage to growth. If there is an escalation and if the energy prices remain elevated for longer, then maybe you get a token hike out of the more hawkish central bank CtB in the Bank of England. But the likelihood that they're going to be able to actually go on a hiking cycle, they're going to want to go on a hiking cycle is just going to get invalidated by what's happening with growth and sort of probably inflation expectations sort of staying lower. So that beyond one hike is a reasonably well sort of hedged outlook, regardless of what happens on the geopolitics. Because either the energy price is going to come back down and they won't need to do that hiking cycle. The only one that's left in the beginning of a hiking cycle is potentially the ECB, but they get pushed back out again. Or if energy prices are elevated, then they only do one hike anyway. So these big sort of intraday moves where we're pricing in four hikes for the Bank of England just seem in no matter what happens on the geopolitical outlook seem to be misplaced. Only worry with the Bank of England is chief economist Hugh Peele is a sort of acolyte of what Marissing, he says, what Marissing is his hero now what Marissing was obviously from the Bundesbank. He was the guy that was writing all these papers about how fantastic the Bundesbank did in the 70s by hiking interest rates during an energy crisis. So that makes me slightly concerned about some of their sort of regiments is there. One of the I just want to go back to 1991 more times because there's a really interesting bit in the Trans-Retro, Don Cone. Don Cone argues that what central banks should do is actually target normal GDP. And if you think about it, it sort of makes sense because you've got this energy pressure off. Inflation goes up, real GDP goes down. If those two things balance out, you just keep you just look through it and you keep interest rates steady. If you start to see these sort of wage price spirals, then normal GDP is going to go up and so you hike. And if you start to see those non-linearities in growth, you know, the decline in real GDP will be bigger than the rise in inflation in the end. And normal GDP will go down so you should cut interest rates. I thought that was quite a neat framework for thinking about it. Yeah. And that's why people are so worried about the UK because nominal GDP has been so high. So two reasons. One, because nominal GDP has been so high, inflation has been so high. So people just perceive the UK as having this horrible deteriorated supply side, which is true, but it's not as imbalanced as it was previously. And then also the UK has been more volatile at the moment, yields a more volatile moment of short end because the UK was the only central bank that has a had a live cut in the period that we sort of, the foreseeable future, so now or in April, the Bank of England was going to be cutting. But I think, sort of, thinking about where the UK is now compared to where it was through this whole period where guilt has been underperforming, it's in a much less acute position with regards to the likelihood that we stay in this kind of high wage inflation, high inflation scenario. And it wasn't even really a wage price spiral that the UK has been experiencing through this period really since Brexit, when inflation has been, has been higher in inflate and guilt has been underperforming. It's just that there was literally a very big mismatch in the, in between Labour demand and Labour supply. You had two, you had two major shocks that sort of compounded. You had the Brexit shock and that took out Labour supply and then you had Covid and that took out Labour supply and then you'd had under investment also in, in, in, in the health system. And so a lot of people ended up being sidelined and long-term sick over over the course of, of, of Covid. So as a result of that demand, Labour demand and supply had a lot longer to, to go to, to come back into balance. But the, the, the starting position for this shock, this energy shock is, is, is a situation of slack in the labour market. So if, if you get that shock now, the UK is not going to have as much underperformance in terms of the stickiness of its, of its inflation as it did through the previous experience in the past few, few years because the starting position is different and that, the guilt's market doesn't seem to be, at least in terms of how the guilt's market perceives the central bank responding, it doesn't, it doesn't seem to be pricing that. The market seems to agree actually that, that, that, that, that, that, the inflation situation is less sticky than it was previously, but they still, is this lingering worry that the central bank is going to respond as though this is not transitory, possibly because the, the central bank has got it wrong and, and in the UK got it more wrong over how long inflation was going to last and how long wage growth was going to stay elevated for. So they're sort of worried market, the market seems to be worried that the central bank is going to be fighting the last battle, but the market doesn't actually seem to be worried that inflation is, is going to be as sticky as it was in the last battle. So it's purely over what the central bank is going to do. So to wrap up then our, our view is if oil drops to say 90 brand, I mean, drops to say 90 late April and then drops down to 80 in June, we probably don't see any hikes from the ECB or the Bank of England this year, except for maybe, maybe a token hike later in the year. Yeah, I mean, that, that, that there's been quite rigorous on, on making sure that we're, we're forecasting what the, the central banks are going to do rather than what we think they should do, which is what Dario is saying as well. And so you could see that sort of token, token hike. I think in the UK, another thing that's being underestimated is, is there is a price cap in the UK and there's other parts of Europe where there are price caps. So if, if, if oil, if energy prices revert within that timeframe and the next price cap is in July, then, then you don't actually see that much first hand effect. You could see it feeding through food prices, which are, which do react to, to energy prices in, in the UK, you could see various other sort of like indirect effects. But the actual sort of feed through, if this, if the, if the situation stabilizes before the price cap is, is reset, you, you would, you wouldn't expect it to actually even feed through that much to inflation in the UK. Right. The only thing that could cause stickiness is if government start spending, if we start getting energy bailouts and there's already a bit of talk of that in the UK. Yeah. Although it's probably going to be more targeted than last time around. Yeah, exactly. They've figured out ways to target it to more need. And the school policies already in traction in the UK. So it certainly compared with expectations. Of course, that has to get price, has to get priced in. But there's a contraction in the fiscal policy. There's a slack labor market. So the idea that the Bank of England is going to have to start hiking full time, going on a new hiking cycle seems, seems a bit rough. Right. Final question, guys, safe havens, or gold is certainly no longer a safe haven. But what is a safe haven? I, I, I have a problem with the whole term safe haven, actually, because people seem to think that it's like, oh, this sort of the place that you go to when you feel a bit scared as though it's sort of like a warm fuzzy feeling. Most of the time it's just about flows. Like, yes, you need, you need, you need certain sort of necessary conditions. So if it's, if it's a, to do with any fiat currency, then the current country that is, is issuing that, there has to be certain conditions that are met. There has to be rule of law. There has to be, all of those things are being eroded, which is why I would look through this seeming safe haven behavior of the dollar in this, in this particular environment. But same with, with gold, the extent to which it was actually a safe haven, even kind of leaving up, leading up into this when gold prices were rising, it wasn't exactly like a safe haven state of bubble. It was a bubble. Well, central, I don't know, central banks. The central banks were buying and that pushed up the goal. And then the whole debatement trade, that was the bubble part. Once people started talking about the debatement trade, I think that was the bubbly part. But it was the underlying factor. Would you mean by debatement? Well, it didn't, none of it, we talked about it on the podcast a few times. It didn't even make sense in real time in terms of how gold was trading against other things, like bonds. Very few, even so. Yeah. It didn't make sense. It was just an excuse that people were using for buying gold when it was going up. It became like a mean coin. It was driven by genuine demand for central banks that want something other than the dollar. Yeah. Way back, though, that was the initial. So the initial story, you could see that happening and that was driving up. You had like a gradual and then it became this debatement story and it just went through the roof. That's when it became quite bubbly, I think. And also central banks can now sell at a great profit. So the goal they bought a year ago or two years ago, and selling at a great profit, that is still. Yeah. still room for the PBOC to be cycling into gold on a on a secular basis looking at how how much gold is as a percentage of their of their balance sheet. I think certainly gold had gotten bubbly going into this and overboard and that is a theme so the the sort of markets that were overboard going into this are the ones that seem to have sold off the hardest. So if we're looking for anything sort of safe haveny within within fixed income, nothing has performed that well because of the response on central banks but JDBs were sort of over oversold going into going into this crisis there was this kind of either belief in in fiscal crisis potential in Japan or or belief in in Renaissance in Japan and both of those things seem to mean that the yield should be should be higher and we were saying at the time I think it's probably gone a little bit far either on the fiscal crisis side or the Renaissance side which means that the yield should have been a bit lower. So in terms of the sell-off in fixed income markets, Japan is one of the places that's done best. Obviously that is somewhat marked by the the performance of the yen which hasn't been trading as a safe haven. Again none of this is about safe haven it's just about the flows and the terms of trade shock that are all trading off of energy. So I think in this environment again like gold doesn't actually historically do that well in an energy shock which is seen as a transitory inflation shock. There's sort of not very much evidence that gold is a good buy in that in these types of shocks. So it's really only the dollar that has performed and hasn't really done that much. Was the dollar was the dollar oversold going into this crisis? No I think the dollar is a as a secular bear story. I think this is the only type of shock or one of the only types of shock that would actually get you a positive response in the dollar because of the US being in that energy exporter. I think fair is right it's about positionally and there isn't a sense of panic. Despite the headlines, despite all the things that could go wrong, nobody is talking about your recession risk. You look at the fund manager survey even post this conflict nobody is expecting it's like 5% people talking about as hard landing in the US. So nobody's too worried about this situation. So it's positioning and it's the terms of trade. It's the idea that the US is less exposed to the rest of the world to what's going on. And so because the terms of trade of the US are improving and the current account improves because you export more energy that strengthens the currency. I'm not sure we were seeing real sort of safe haven moves anyway. So I don't think there's that sense of panic about what's happening. Yeah. Yeah. And anyway, the point about gold being in a bubble going into this makes a lot of sense as well. So people need to sell something that's made a lot of money, made a profit. So why not sell gold when the crisis hits? Fantastic. I was just going to ask about our view then going forward. Obviously going into this, we had our re-acceleration theme. We also had a bullish European equities, bullish EM, EM equities, bullish Japan. If we get a quick resolution and by quick resolution, I guess we have to say May June. Does our view do we revert to our January February view or has our view now evolved regardless? Well, May June is quite, is not that quick in my opinion. I think that that would really sort of push push back any kind of re-acceleration by a good bit. If there's if there's a faster two dual-sided taco, then I think a lot of the calls that we made in December that had sort of almost played out already by the end of January going into February calls are provided a new entry point. So all of the EM multi-year theme, your area multi-year theme same for Japan, you just get a new entry point for that. With potentially more upside on the yen, I think the thing that we were waiting for with the yen, various different pieces had already fallen into place. We thought that there was a greater understanding on where inflation was going to settle down in Japan. It said 1.5 to 2% rather than any higher than that. So the natural rate of interest, not being at the top of of Bank of Japan estimates being kind of closer to the bottom of that. That was all starting to sort of come into place. Similarly, rotation out of AI tech stocks would have helped with the portfolio flows back into Japan. And we were really just waiting for that Bank of Japan piece of the puzzle for markets to sort of catch up with Rory's call on that being the normalization being pushed back to July, so the next rate height being in July. So if you do get a resolution, a quick resolution of the situation in the Middle East from the respective of energy prices at least, then that Japan story should have some amplification from even greater application from the end. And the same for the euro, we'd sort of gone on to this year with a target of 120. And that happened very, very quickly. And now because of the sort of terms of trade shock, there's a new entry point for that if energy prices settle back down again. Yeah, I'm sorry, but I made June, I meant the straight of one news fully open with the oil flowing as it was in February. And I meant it like a ceasefire, a ceasefire in April, a full ceasefire in April. So when you asked about how equities performed in 1990 compared to today, we talked about the US, but the rest of the world has performed more like the US market did in 1990. So you have had a much larger sell off. And so it could be that XUS equities are much more able to look through this. So once you do get the resolution in the actual underlying crisis, you could see quite a powerful recovery in non-US equities as they catch back up to the US. That's interesting. But the big difference with 1990s, obviously, the World Cup because Italy 1990, my favorite World Cup, Italy, we're one of the favorites this time, doesn't it? They're going to qualify. And also it's in the US this year as well. That was 94. And that was, oh yeah, that was 94. Yeah, yeah. No, you're right. It's Italian 90, of course. Right. Well, I mean, we are doing these podcasts every two weeks and we'll continue to do that. But if you obviously want real time updates from Dario and Freya via their publications or indeed one of one meetings with them, do reach out to me as always. Look in the description, give me an email [email protected]. I'll happily set you up with the trial. But that's all we have time for. Freya, thank you very much Dario. Thank you very much. And thank you all for listening. Bye bye. (gentle music)