Stress Testing Your Portfolio: Will we add Gold, Treasuries or Nasdaq?

In today's episode of The Art of Investing, it is the end of quarter portfolio reviews. A big question asked around our allocations. My equity expert wants to buy the NASDAQ at new highs. My bond guru, we ask, is it time yet? CJ puts three scenarios to us for the future of the economy in the rest of the year. So find out, is it Goldilocks and the two bears, or is it Goldilocks and the Big Grizzly? Yes, it's that time of week again. Welcome to The Art of Investing brought to you by IG, the Global Investment Platform. You're a favourite UK Finance Podcast. Now, with me, my equity expert, Mark Spice Holden. I reach. And somebody who's given us homework to do this week, it's Chris C.J. Fellingham. Hello, Richard. What is coming up on today's show? It's the end of the quarter, so we need to do a comprehensive portfolio review. But I think we need to give also a bit of time to review what our themes are for the next three months. Have we changed what we are thinking is going to happen? So I'm going to spell out three scenarios, a bit later on in the podcast. And then I'm going to ask you guys to tell me what you think is going to happen in each of them. And the probability of them happening. So when we get to what should we do with our portfolio? As people will remember, this is one of the unique points about this podcast. Is that we run our own portfolio online. When we get to the bit where we think about what we're going to do in our portfolio, we actually have got something backing it, rather than Spice, just telling these people. And I'm assuming these three scenarios, they are, they're different economic conditions. Yes, there will be different economic conditions. But what we think, the market will, will start to think about as the dominant scene for the next three months. It's not any longer than that, because we can write many differences to that. They're my ideas of what those three themes could be. You guys are doing all the work once again. So that's what we're going to be doing, Rich, back to you. Well, just one request before we move on. We've been nominated for the Fin Fluencer Awards. And we could really do with your help once again. Apologies for asking, but if you could just take a couple of minutes to go online, you'll find the link below in the notes if you can click on that. We have been nominated in the best economist influencer category. Yeah, that's an interesting category. Not sure you get a lot of equal. It must be because Stewie Thompson comes out and shows us the life. So if you could vote in that for us, that would be fantastic. Sorry, if you could vote for whoever you think is the right winner of the category. Yes, yeah, way quick. The more votes, the better. And then I think Spice, you've got something for us as well. Yeah, just a little bit of admin. Obviously, on Tuesday, the 13th of October, we have our live podcast event at Lords. You will shortly be receiving an email if you've already applied by email. We've asked you just to send us a confirm back because we're very, very oversubscribed. I'm pleased to say. So the more the merrier, but please just let us know you're definitely coming. And that will make our lives a lot easier to judge food and drink more importantly. Yes, send us a confirm so we know how many to cater for. No, after all that admin, you'll be very happy to hear we're going into the Spice Market review. Thanks, Rich. Well, as CJ alluded to earlier on, it's the end of the third quarter of the year. Can't believe how time is flown. And we're into what seventh or eighth month of the Gulf Gulf War. Oil remains extremely volatile, particularly in the last week or so. It's been very intraday volatile. But even today, overnight, we've seen a near four to five percent move from a low point when the oil price was down about two dollars to up to two, three dollars. So big move, four to five percent today. We've had some very mixed economic data today. I'm just just coming up to throw in for good measure. We've got the French budget next week and the UK budget coming up shortly. So lots to talk about. But let's get into the sort of detail. The major asset moves, let's say oil has been the big sort of driver. And every time the oil price has gone up, markets have typically gone down. So there's a very big, closer link at that at the moment. And that's despite the fact that supposedly the US and Iran are in talks about solutions. JP Morgan and Goldman are now saying that their oil flows through the Middle East and through the Straits almost are back to pre-war levels. And yet the oil price is still fairly heavily elevated. Interesting. How can that be the case? I see. Do you believe that that they are back to those levels? Because it doesn't really strike truth with the way the oil price is performing. Come on, you are the expert. Tell us how you square that circle. Well, I think there's been a big drawdown of reserves by the big countries, particularly in China and the US. And China, having said, would just use our reserves at the beginning of the crisis and now start to rebuild not just what they want for their economy, but also to put some back into their strategic reserves. And this week, actually, to try and take some pressure off the US released another 40 million barrels of oil into the system. That is to help the refiners. You remember the diesel price in America is at an all-time high, despite the oil price being some way off the all-time high. That's because the refiners haven't got the product, the raw oil, to refine into diesel and unletter petrol and airline fuels and so on, etc. So they've been, they've done that and it's put a cap so far on the diesel price, hasn't gone any higher, but it's still very high. I think more interestingly, the Iranian situation still bubble was away in investors' minds, and there are a lot of people still speculating on that oil price. So there's a lot of speculation in that price, rather than pure fundamentals of supply and demand. And the US strategic reserve has come down from a billion barrels down to near 200 million. Exactly, that was huge. I mean, even when flows are back fully as if they are now, they're going to have to start building those up. And that will take, as I say, that will skew more positively for the demand side rather than the supply side. Not forgetting all that money's been going into the budget deficit, remember? Yep. So it's kind of helped at the same time. Well, in mid-terms of coming up, so things have got to happen pretty quickly to get those diesel prices down. And interestingly, one of the Iranian officials sort of quietly said, "Yes, we're not going to do a deal until after the mid-terms." I think they basically want to knife folder more ahead of those mid-terms at the beginning of November. But what we'll see, the only auto-mahaya I can report on was NASDAQ overnight. NASDAQ futures are now a time high after some very strong results from Macron, which I'll talk about in a bit. Yeah, that's the only real auto-mahaya in sort of equity markets this week. Across the board, the sector's been pretty flat, Magnus in 7, pretty flat, and even Bitcoin, pretty flat. So it's been a pretty dull week behind that oil price, whether it's been the loss of sort of volatility. In commodities, again, it's been pretty stable. It had hurt a little bit by the dollar being strong. Now, for the last three weeks, I've had to report the dollar has been very strong. And again, this week, it's nearly 1%. And that has weighed on gold and silver and copper, as you'll see when we come to talk about the portfolio. And it's also, again, I, in my opinion, and we'll have a debate about this later. Also weighing perhaps on bond yields, that is the oil price there. It's a real debate going on whether the risk markets can resist the way the bond markets are moving. And the bond markets are just moving higher in the yield almost every day. And people are looking over at the equity market and saying, you know, is it holding today and it is holding? And so they move a bit higher. And it's a real issue here, the way these bonds are moving. But as we've talked about on many, many different occasions, it's when the bonds get to a certain level, that level is uncertain, that it will have a really big effect. And at the moment, it's stopping equities. It's not actually bringing them down. Until today, when, as you say, there's been a lot of volatility in the yield price. Here we are talking on Thursday. We've seen some dramatic falls in European equity markets at the start. As their bonds have broken through key levels. And today, we've got the 30-year UK Treasury gone through 6%. Crypto, just very briefly. We've been bullish on crypto for some time. We thought that the market has stabilized. It continues to do very well. And I think that will continue. Yeah. Yeah, it's really interesting to watch the relationship between gold and crypto moves. Because crypto is moving with growth. And gold is moving with real yields. And it completely, the disparity between the two is incredible. Anyway, micron results. Yeah, exactly. Micron results. Back to the AI thing, which we can't get far away. Very good results from micron, obviously. One of the biggest makers of memory chip. They had a fantastic growth margin. So that's the sort of profit before they start taking things like tax and interest off. And that was 87% expected to be 85%. But they've warned that it might be a bit lower next year. And that's because, guess what? They're going to pay their staff more. Which is quite interesting and bloodable, I suppose. So they've just warned that slightly higher wage costs are going to mean that that margin doesn't keep pushing up. But it's still 86%. Oh, it's amazing. It's an amazing, gross margin. And they basically said they're sold out for the next two years as far as they can see. So that's very powerful. Also, this week, we've seen open AI who have delayed their IPO or their time to come to the market into next year. So they say in the background, they're going to raise another 30 billion dollars as you do. What's 30 billion dollars between mates? Watch those bond yields go up a little bit more. How much is it going to cost? That's the interest. Exactly. It's not just AI companies out there raising lots of money. Paramount Skydance, who are taking over your member Warner dissolution. discovery, raising $52 billion worth of credit and loans in the next week or so. And they're basically raising $30 billion in investment grade. Those are the highest quality corporate bonds. And they're raising $30 billion and they're paying or offering interest that $300 basis points or 3% above the Treasury yields for the equivalent period. So if the 10-year yield is 5%, they're offering loans at 8%, so that's just what you said there. $300 over. So today, the 30-year yield in the US is $564. So they're borrowing at 8.64% for 30 years if they were borrowing 30 years. $8.64% to buy communications and media company. But it's all about the streaming, isn't it? And I think that's, you know, that's the way. And it is. It's how it watches real-time television anymore. It's pretty rare, unless you're watching sporting events. And with that, that's the end of the spice market, really? Your capital is at risk. The value of your shares, ETFs and ETCs can fall as well as rise, which could mean getting back less than you originally put in. This content is for information purposes only and is not investment advice. Pass performance is not an indication of future results. It takes us perfectly on to the portfolio reviews. So let's look at the overall performance. It is down negative 0.5% week on week. That leaves us up 12.5% year to date. Now, what has happened in the last week then? Well, the NICI has been our best performer up 3% on the week. 52, 50, up 0.6% and then as that 100, up 0.3. NICI really stands out there. Doesn't it spice what's going on in Japan? Yeah, it does rich. There's a survey that companies do called the tank hand survey. And that's come out in the last 48 hours. And it actually showed that companies are much more positive about the growth outlook in Japan than they have been for some time. At the same time, interesting. They're also more dovish. Or in other words, they're not worried about the inflation outlook. And that's really interesting because the oil price, as we talked about earlier on in the market review, is remained very high. The combination of lower inflation expectations, higher growth expectations has meant that actually the odds on another interest rate rise from the bank of Japan in the next month or two has fallen quite dramatically. And that's helped the equity markets. Not at all time highs, but they have made some very good ground in the last few weeks. That's going to cause a problem is in the N. I love equity people. They can always find something to be bullish about, right? But now we've got the N now pushing much weaker again. And we had Scott the house person. I'll keep going until people have really said that. He said, well, I turn this things I know what's going to happen. I know what's going to happen. And you shouldn't bet against it. The Ministry of Finance said the same thing today in Japan said, you know, we're warning about the yen being too weak. So I think the market's completely wrong. Yeah. I think they will tighten more aggressively. But in the short term, they took so less from that figure. I think bigger macro picture is not looking great. I would say that. So I have to say that I mean, not someone book in any way shape or forms. I've never been accused of that. Well, what do we wish we had sold two and a half percent of that is India because the performance this week dreadful down 3.8 percent on the MSCI India. We got BlackRock world mining down 3.1 percent also poor performance. And that comes partly from copper down 2.3 also gold, which we don't have in the portfolio was down 34 percent. Yeah, 34 percent just on Monday alone as those real yields march ever higher. And then worth noting emerging markets also down 1.7 percent. So you can see that gave us a week on week total of negative 0.5 percent with year to date up 12.5 percent. And since inception up 25 percent, but we're also starting to measure our second year, right? So the first 12 months, we were up 26 percent, but going into that second year. Now we are down 1 percent. So that's the challenge anniversary. And that is why today's portfolio review is going to be comprehensive, Mr. Chairman, isn't it? Well, it's always comprehensive, Rich, but you know, it depends how many hours people have got to listen. Let's start just very quickly on the third quarter to give an idea of the variety of returns. Bitcoin was up 44 percent. Now, for those of us who remember that we were going with that we had the vanneck, we would say, "Oh God, you know, we haven't got any of that." And the Bitcoin went up 44 percent. Vanneck was down 1 percent. So it just shows how it's got nothing to do with Bitcoin. It's all about data centers. So Bitcoin up 44 percent, well done. Bitcoin, oil strong up 40 percent. Notable also, you know, prizes for appearing on the list, but not getting the winners prize, copper up 8 and the world mining up 6.6. And FTSE 250 up 6.1. So well done the FTSE 250. UK economy a little bit stronger than people felt. And he burned them doing by British and all that sort of stuff. Maybe it's that's coming through a little bit. On the negative side of the ledger, we have Russell down 6.5. Russell's been really good for us over the period we've held it. Had his tricky last quarter. And I think that's going to come when we talk talking about our scenarios. We'll see why that's there. India got down 5.5. And I think, you know, we might have to rip the plaster. But, you know, everything else is pretty flatish plus ones to minus ones. So generally, a pretty quiet quarter with some some standouts of both ends. But I want to just mention the bond stuff because bonds are boring. We all know that. They move twice as easily. 30 US up 67 basis points in yield. Now to most people, that means nothing. So let's turn it into a price performance down 8%. So the worst of everything here has been bonds. 30 UK down 6.5% in price. Thank God, we don't own any bonds. That's all I can say. I mean, I feel we haven't got a 6040. I was just going to say for the average wealth manager, they like to run a 60, what's called a 6040 portfolio, 60% inequities, 40% in bonds, that 40% would have lost your money hand over this. No matter where you were in the US and Japan and the UK and Europe, it would have hurt you everywhere. You were pretty much. So I would say when we look at that, we've done well with our application to be out of bonds. And generally, we've had a few things on on the real winners list, not too much on the losers list, which as you say gives us a 1.6% performance on the third quarter. So up 1.6. That was our report for you. That's our portfolio. So if people look on the show notes, they'll see that we are up 1.6% in the third quarter. Okay. So our target is 10. So so those people have good mental arithmetic to an hour per quarter if we were going to look at it that way. We're not shooting the lights out for for what we need to do. We need to up the game a little bit. As I said, maybe the German needs to be fired, but we'll talk about that later. So let's just think what is going on in these markets because I think we're moving into a different stage or that's what I'm putting out there and I think we need to conclude on this and decide whether we think that's the case. So I'm going to I'm going to spell out three scenarios. Now when I spell out these three scenarios, it's a concept people got to get into their mind that what I'm talking about is what is the dominant theme which these scenarios are going to suggest for the next three months. Okay. It doesn't mean what is going to happen on a year's or two years for you because any one of them might be true on that on that time scale. That's not what the market's moving on. The market's moving on what do you think over the next three months? So three scenarios. And what I'm going to say is I'm going to describe the scenarios and then I'm going to say what I think is the light clue to those scenarios and then I'm going to hand over to you guys and get your light glutes and then we're going to go through each one and see what the implication we think for the investment portfolio mix should be and then we'll conclude with do we need to do anything. Okay. All right. So scenario A, number one, real yields and bond yields rise and keep rising and keep rising until we get recession, world recession. So much more of the last week. What's happened in the last day or two? Yeah, carries on, right? Big questions about that will be how high do they have to rise? Are we close? Are we there yet, as we said earlier? But also the pain is concentrated in the old economy, in retail areas, mortgages, spending. And it's quite interesting, isn't it? What Mark was saying in the spicy marker of you, about how some of the data in the states is weaker and that the weakest levels it's been for some time. I was listening to something the other day where they said the reckon that the US retail sector was in recession now. And when Mark talks about a K-shaped economy, you can see the K-shaped economy, they're different light. The bottom bit of the K is anything to do with the retail sector or anything to do with the old economy. The top bit is if you've got anything to do with their eyes. So if you work for Mike Corners, you say and you've got your share options coming out, you don't care. You know, this is fantastic news. But if you work for an old economy company, you're suffering. And you can see that in the performance of the sectors in September as well. So you've had utilities down, financials down, reach down. So the market is behaving logically in the rate-sensitive areas, even though the overall indices aren't coming lower, the NASDAQ and S&P 500, you're seeing it in the Russell 2000, which is a lot more rate-sensitive. So the market is moving a lot underneath the surface, even though you're looking at that, that every market level. Absolutely, and that's a critical thought processes. If this continues, would it just fold everything over, or will you still see this differentiation? So that's one of the big things there. I mean, the only thing you really want to buy in this scenario is bonds, but you want to be buying them at the right time. Clearly, when yields to get to a sufficient level, because the next step is recession, and then people start pricing in lower earnings, and those things that run mega multiples start to get de-rated. So that's scenario A. And just to square the circle, what happens to bonds in that situation when the market starts to price in recession? Well, what happens then is the front end of the market, so the shorter-dated bonds start to sniff out interest rate cuts. And after the XC market has corrected and realized the earnings are coming back, then, of course, my friend, the XC bull, who's never far from the surface, returns and says, low interest rates, that's really good news for the stock market, which is why stock markets tend to go up. But there will need to be some sort of corrective phase, depth unknown, while you go from one view to the next view. Your safest places in bonds, that's scenario A. And at the long end? Long ends will rally as well, and quite sharply, because you'll get more optimistic inflation, will fall, disinflation, and forces will come through. But of course, as you know, it's not just about inflation, it's about demand for capital. So if the demand for capital is still enormous out there, it will take time for those long and yields to fall. And in a recession situation, you're expecting tax receipts to drop and government spending stimulus is going to have to come in. So the amount of money coming at the long end from the government alone is most likely going to be higher. And that's why the long end might be much more sticky to come down than it might have been in the past. But say those comments for when you're, when we do, but I'm just saying that scenario A, scenario B or two is AI leads to a much bigger deflationary pressure than we've seen so far. This store is out there at the moment about that. Spice, we know is a, is a proponent of this. But remember, I'm talking about over the next three months, do you think this will come through? You might think that's the three of you, but I don't care about three of you. You know, we could all be dead in three years. What I want to know about is what's happening in the next three months. Right. Well, you know what AI is like at the moment. So to me, AI leads to much bigger deflation pressure, leads to disinflation in world is the old Goldilocks of 2013, 14, 15, 16, where rates move lower. All assets do very well. Clearly growth stocks commodities do a lot better, but you know, you're going to make on anything you've got. It's going to be fine. bonds do well, but everything else does really well. So that's my second scenario. And my third scenario is what we've got now, more of the same oil price fluctuates on what's going on in the straightforward moves. The market assumes they'll be a settlement at some stage in the next short term, one month, two months, whatever. And so it never gets ridiculously stupid in oil. It gradually drifts back. AI optimisms there, bond yields gently climb up still because of all the demand for capital. They have periodic panics, which you could argue we're getting, we might be in one at the moment, then they stabilize, they trade around, and then they go back up, they go higher again until we get some resolution. So C is a sort of stalling scenario is sort of where we are or were up to yesterday, shall we say. B is a second scenario is an optimistic one that we're just going to think it's all deflationary. So that's the important thing. And scenario A is the Armageddon's coming scenario. I'm going scenario A, 50%. I'm going scenario B, 15%, and scenario C, 35%. So I think we are, we've got one in two chance, 5% chance that we have started that rise in bond yields, which only ends when we have a problem. Okay. And then the other two scenarios are there with equal weighting of 50% between them. And I think if you'd asked me before today where we were, I just said we were definitely in scenario C. I just think we're, I'm worried we're moving into scenario A. Anyway, that's enough chat from me. You're all bored now. So over to you, Rich, what are you thinking of those three scenarios? Where do you, where's your head thinking? What do you think implications are of anything? I think we're going to be in scenario C. And that is because I'll give you a start to begin with, bond yields have moved higher in the US in 18 of the last 25 days, right? That is huge. It's only happened 11 times since you started in the market in the 60s, 11 times, it's at 1860s. Now, wherever we go 12 months forward, in 80% of those scenarios, those 11 scenarios in the past 70 years yields have been lower 80% of the time, right? And the average move lower is by 90 basis points. So whether that comes because of recessionary fears or the Fed talks it down or inflationary pressure disappears, the fact is I think we're at some kind of peak where now we might have a couple of days more panic, but I think we're at a peak in treasury yields around about where we are now. And the second reason and why I'm so confident about that is because our good friend Scott's going to write to the rescue. What's he going to do? He is going to come out with a bond bazooka. You heard it here for us. Besson's bond bazooka is coming. And he's already told you, I am the house. And in days gone by, we've always had a fed put, right? And the fed put was if things get bad, you either get chewy or you get lower rates. No, this is now the treasury put. And I think Besson is going to come right to rescue. So I would actually put 60% probability on scenario C. Interesting. 15%. I agree with you there on D and then 25% chance on E. So let me just come back at you for two things there. First of all, you talk about the data. What might have been just as useful, maybe for homework for next week, Richard, is how did those situations evolve to get to lower 90 base points? Because if it being, you've gone into recession those times, then that will be scenario A. Leedy was just led to it. So I'd like to know how you get there. Yeah. I'll come back to you on that because I think and it might not be tomorrow, right? It might not be the non-forms, but I think in the next few months you start to see some serious job losses, right? Because this is happening. I've used AI now comprehensively every hour of every day for the last couple of weeks trying to build my business. And it is absolutely incredible. It is going to do away with 20% of the workforce as they stand at the moment. Now, that's fine. 10% are going to manage to get a job elsewhere, but it's starting and it's going to come through quicker than people realize. And it's absolute fantasy to believe that the unemployment rate is not going to go up. And I think that starts to come soon. So yes, we'll see deflationary measures come through an AI, but I don't think we get those yet. I think we get the job losses soon. So if I'm going to complicate things slightly because you know me, I never like things to be easy. You think the end result is scenario B, right? On a three-month view, no, but on a one-year view, you want to be investing for scenario B. 18 months. Let's not argue about six months. Yeah, we could all be dead again. But on a longer term view, your confidence is scenario B. But you think we're still a C to B, rather than a C scenario A, B. Yeah. Okay. So that's great. So scenario C for you, just before we go to spice, is you said what percentage is 60? 60 there. 15. And 25 for a spice. Well, the first thing is I'm impressed. You both managed to put in numbers that have added up to 100. So slowly I did that as I was adding up in my head. I'm just checking there. I used to have a calculator on my desk. So it won't surprise you that I'm in scenario B or two immediately. Yeah. Well, look, equities, I've always said, look three to six months forward. Oh, you said three months, three to six months is an equity time horizon. And the more confident you are, the shorter that time horizon becomes. If you're uncertain that time horizon gets pushed out and get more volatility to the market. So I am confident that actually within the next three to six months, not necessarily in this quarter, maybe in this quarter. We've got a reporting, might be companies start reporting in the next few weeks again from the third quarter, and then we'll see the really big numbers, if you like, at the beginning of 2027 in January when those companies report. So at some point in the next two reporting seasons, that's sort of four months or so from where we are now, I think we will see pretty clear evidence that as Rich says that AI has been adopted more rapidly than people think, and it is bringing material benefits quicker than people think. And that's one of the reasons I think that we saw a 30% increase in earnings growth in the December 500 last quarter. Now I'd be staggered, if we get 30% again, most people are looking for sort of low to mid 20s this quarter, and quite often they'll hold a bit back in the third quarter because they want to be in the four years. So that's, you know, that's just a game of sort of analysts sort of jiggery pokery to make sure that they can beat the numbers at the end of the year. Analysts arbitrage. Exactly. So I think that we will see evidence of that now start to come through in the next two reporting seasons, which I think will take as Rich says, if that's going to lead to certainly job pressures, not so you know, and remember there was some early research when we started talking about AI a year ago. I think Goldman Sachs thought that there would lead to an extra six to nine percent unemployment potentially, particularly in the youth area, which is very sad for the younger people. But ultimately there will be jobs recreated in new areas and new industries built up because of it. Long story short, I think that that will take quite a lot of pressure off these bond jobs that we're seeing. The offset to that is that I think growth will continue to accelerate. And if you're, you know, when we're having debate about what the real yields are telling you, are they telling you that there's an inflation problem? CJ would argue he doesn't think there's an inflation problem. It's all about the growth. And if you're like me and you think growth can be five, six percent in next year, then that is very, very powerful and very supportive of equity growth in my opinion. I don't believe that inflation will get out of control. I think that, you know, there's been enough central banks ex the Bank of England saying that they're willing to do something if inflation does start to get a more out of control. They've laid down a market and they're challenging, if you like, and bond markets are now testing them, which they have a habit of doing. How far that goes? I don't know. But for me, scenario two or B is a 50 percent probability. So that's one of the reasons I remain very positive on equity. And I think at the same time, we will see oil back at around 80 to $70 to $80 below 80. Basically, I've gone by everything. I could pretty much, including bonds. The next scenario that I think is likely is more of the same than we're getting now. So I think there's a 30 percent probability that we have more of the same, which is, you know, we get this volatility in the oil price. People trade against that in the risk assets. If the oil price goes up, they want to sell equities. If they want to sell bonds, if the oil price comes down, they want to buy a little bit of bonds, but more importantly, they want to buy equities. And that's the interesting thing at the moment that Chris mentioned earlier on. Every time we've seen the oil price actually go down, it's not been the bond yields that have fallen or bond prices that have gone up. It's equity prices have bounced pretty strongly in the back of it. And particularly ones like the NASDAQ, which are exposed to this growth area of the market. And so I think there's a 30 percent probability at the key here is that any moves we get, even if bond yields keep ticking higher and higher and higher, as long as it's slow, markets have a chance to absorb that. The problem comes if you get Sonora 1. And I think there's a 20 percent probability there. And that is where you get these bond yields really spike. And whenever you get a big shot moved very quickly in one sort of asset or the other up or down, but in this case, if bond bond prices go down, yields go up a lot, then other assets will struggle to grapple with those moves that are very quick. So I'm key here saying, I think there'll be a slow trudge higher in bond yields. That's a 30 percent probability of me. If they rock it up another then there's a 20 percent probability that that will then damage economic growth, the earnings outlook. And that real economy, particularly the smaller mid-size companies, in which case I'll be very wrong on the Russell 2000, to put my hands up on that. But that's not what my core view is. My core view is ultimately someone like the Russell 2000 will benefit from a stronger underlying economy with disinflationary impacts, low employment, which means greater profitability, greater margins, and therefore higher share prices. So I mean, I've just taken note of what you've said and forgotten most of the numbers. So I've made some numbers up here. We've all come out, and I've averaged it out, and it's about, I've somehow got something wrong here, but I've got A at 32 percent, I've got portfolio B at about 28 percent, 29 percent, and I've got C at about 37, 38 percent. So that was a really useful exercise. That's what happens with the get-two bears in the bull. Yeah, but to be honest, you say that, but Rich is quite bullish. My mind is the bear scenario. I'm the bear here, and Rich has actually described a bullish scenario. Yeah, mine's a washing line when you put all your washing in the middle. Yeah, but to me, what you would be saying, I think, you turn from wrong, but I think you'd be a better buyer on a dip, right, at the moment, because you think that you would get either more of the same, right, with a bit of scenario B. scenario B, I think you said was on like 15, and A was about 25, right? So C, the 50 percent is quite a big waiting of, as it is at the moment, which is basically, let's be honest, ecosystem continues to sit and look and do fine. Yeah, but we've started to get a growth problem in my scenario because unemployment, and unemployment being so high, the Fed is going to have to move and shift its focus from inflation to unemployment, and then I can see something like quantitative easing coming back. And that's why my favor moves towards gold, and not necessarily with US equities, I would much prefer to be in the rest of the world in the FTSE in gold. But I think you said to me, that's more like scenario C. It's like, you know, it's like Besson will find that you're your big bad bazooka, whatever you called it, from Besson, thought that's a lot of these for today. But you know, my scenario A is something the shit is the fan in some way, shape, will form, and something has to pick that up, right? B and C are not that, B is things are absolutely fine, don't worry about it, C is, will manage as we are now, we'll we'll we'll we'll soldier on through if we need to QE or if the big bad bazooka needs to come out, then then that's there, but it's not the crisis of A. I hate to break it to you. You're three scenarios that you've made up aren't the only three possibilities here? Well, no, of course, but then if we're going to recognise that, then there's no point having this sort of, we're trying to get an influence where people are, and I would say from what we're saying, I think there's going to be a crisis that's going to cause a reaction. I don't think either of you think a crisis is going to cause a reaction. And that to me is a good useful way of pitching it in. One thing I do want to go back to is the big bad bazooka, which you talked about, but what does that mean? Does that mean that he comes out and he says, right, I'm going to print money and buy a long box. He's got, it was already released, he's got a fund, a rainy day fund, as they call it, which has up to a trillion dollars in it, and he'll use that to buy the long it. Now, he doesn't buy new issues at the long end. He buys all the off the run, where long end bonds have been issued in previous years, and they're hardly traded. And that is where his bazooka is going to come in. And he will stop that. There's no way that Besson's going to sit back and let that long end continue to get to breaking point as you are seeing it. So you say sorry. To me, that's really, that's really worrying. He's the house, but we all know that never works. And we have to find no examples of that ever working at the long end of the market. Never. Short ends you can do it. What you're talking about is he's got reserve funds at the moment. He's got other assets in it. Right. So you can have sell all those assets, all of them, trillion, to buy, something over here. Okay. So what's seen at the moment? And I suspect what's seen at the moment is cash and short term bills, wherever. So suddenly, all this funding that's going to the the short end. All this money that needs to go to the short end. There's another trillion knee-draising at the short end. No, hang on, he started with $6 billion. All right. Right. Not in this fund. It's got trillion in the fund. Yeah. He's got the trillion in the fund, but he started using $6 billion. That's nothing. Yeah, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, 50. That's it. If he comes in and he says I'm just going to buy all the off the runs in the marketplace, the swap yields will explode upwards. You need to explain that, so you do. So in the market, you've got gum bonds, and then you have a spread up to where banks trade effectively, and that's the swap spread, essentially. When governments don't issue much, that swap spread gets very wide. When banks don't issue very much at all, governments are issuing them up, that narrows up, and equal it goes the other way, when the government may be buying all their paper bank and the banks are boring at their normal amounts. Everybody else then borrows above the swap rate, either above or maybe if you're in video you borrow slightly below it because you're a better credit than a bank. But effectively credit trades off that swap spread, it does not trade off the government market, okay? So if all you do is you say I'm going to artificially move the long end of the bond market down, all the credit will not move down with it. Swats spreads will widen and they will have to borrow money at just the same high level wheels. And we've seen this happen many times where governments have stopped issuing, you've led to Swats spreads widening and credit is still available at the same price it was before and same years before. So do you call BS on his theory that it's just illiquidity? Yeah, complete BS. Right. It's complete BS. It's the reason why the market is as moved up at the long end is the borrowing from this coming through. And spice talk to today already about the paramount wanting to do 50 billion. I mean, what the hell's that all about? 83 quarter percent borrowing on the quality stuff, maybe 11 percent or 12 percent on the junk. The ten on the junk. Right. And they're saying the only reason they can do it is because they say we're going to make money in our opinion, how bullish are people if they think they can get return on investment of over 15, 20 percent to pay for the 9 to 11 that they're going to expend on the bond market as high yields throw to move you. I would imagine it has given what's happening to equity. Well, I think to be fair, when I last looked credit spreads, which is the the amount corporates, as you say, have to pay over and above government bonds to borrow have actually remain pretty tight. Oh, yeah. So even though government bond yields have risen, yes, so to have corporate bond yields, they've risen, but they haven't gapped higher. That's telling you that there's not, if anything, there is not a problem in the real economy. And those companies are profitable and able to weather any potential slowdown in their at the moment, without risk of default. So those credits spreads have stayed very stable for certainly the last six months, which is really impressive given the sort of the things that we do. Well, that's telling you, scenario B and scenario C. Well, I'm saying it's scenario A, they're going to start widening. So what I'm saying is watch out because those should now start widening if scenario A is what's getting priced. And that's when it goes to start rattling off. Correct. And that's why I, you know, I take these three scenarios because there is one which is a nasty scenario, which I have to say nobody has really believed in. But now we're starting to wonder with the way bonds are moving, whether we're getting close to that scenario. And that's going to be once again the very big test of where we are. So we put this all together. I'm probably more bearish, therefore, than the two of you guys, which is interesting. We may not have started off the conversation thinking that, but I think that's where that is where we are. So the question then is what do we do with the portfolio? I mean, the portfolio so far is down 1% for our second year. We've only had about six weeks of that, six to eight weeks of that, but it's down 1%. We only did 1.6 in Q3, which I actually think was pretty good given we haven't, if we'd had bonds, we wouldn't have done 1.3. We'd have lost money. So that's pretty good going, relative to what other people have done. I imagine that's extremely good. But what do we want to do with our portfolio now? So we've got 20% in cash and bonds, actually 67.5, commodities 12.5. If you go down scenario A, we've got too much inequity in commodities. Just generally you're going to get to a say where the recession is going to be priced in. But if we're going down scenario B, which is the longer term view which you two are talking about, I'm reserving judgment because I'm not on 23 months rather than six months, 11 months, 18 months. You'd want to be fully invested, 100% in. And under scenario C, you'd probably say I've got a bit of cash deal for which I could put in to things like NASDAQ and things where the AI side of things is going to stay pretty optimistic. We talked about this last week, remember? We all said how much we still think AI is okay, and it's not a problem there, but that I mean the NASDAQ. That's what I'm saying. My scenario C is a lot more defensive. So I move into bonds, into gold, and I'm much more likely to have FTSE and emerging markets rather than NASDAQ. Well, I'm not as bearish as that, obviously. I can see scenarios where you're right. But I say my view is that in the next two reporting season, I said I'm not going to repeat myself, but we're going to see some evidence that AI is bringing all the benefits that bulls like me expect to come. And I therefore want to be in the places that are most heavily invested in AI, which equals America. At the expense probably of Europe, the UK, and places like India, I mean, we know I don't know how's the right time to talk about India. Talk about India. It's terribly bustling. It's been awful, it's been awful, right? And I've been a long-term fan of India, the simple reason there's demographics, right? This got the biggest populace in the world, and it's still growing at a decent pace. So that, and there's a middle class of people who work very hard, who become increasingly wealthy, who like investing in shares and they invest in their own stock market first. However, it's always been quite an expensive market compared to others. And what's happening at the moment is a big chunk of that market, sort of 25, 30% of the Indian market is basically IT, what was software. So call centres. Now, call centres are going out of business, left-right centre, because of AI chat box. And they are being made redundant, left-right centre. That's, I think the IT sector in India is down 27% this year. I was looking at the numbers before we came in, and that is pretty painful. And at the same time, that's hurting a lot of those businesses, and the banks are the next biggest sector in India. And they're also suffering very badly. So I can't get positive on India, putting aside the day. If I was taking a 20 year view, it would be different, because I think the demographics will play out. But at the moment, they're going through a very tough time adjusting to the influences of AI on some of their core industries and businesses that are quoted in the stock market. That's different to the real economy, but it's actually what's quoted in the stock market. And that's what's weighing on that stock market. And as is a high oil price. Now, India will get a bounce if the oil price comes down to $78,000. No doubt about it, because they're one of the big importers of oil. But so will Europe, so will the UK, so will the mid cap, so will the Russell 2000. There are lots of other areas that will also do well. So I'm not buying India just for that fall in the oil price. It's been a thought on our side. Every time we're looking at God, we should have sold it. We should have sold it. Personally, I just say that it's a start of new quarter, start with a blank piece of paper. Where would you be with a blank piece of paper? I wouldn't have India on it. Right. So I don't think there's any supporters of India around here. I mean, don't get me wrong. I think it's a good stock market over the long term. But the fact is, we've had a bad experience of it. And we've held it for a year. We've proved we can hoddle as the crypto people were saying, or we can be rapists as various other people were saying. So let's get rid of it. The question is, what do you do with cash? We've got 5% in India? Yes, 5%. 5%. So I'm going to suggest we buy 2.5% now stock and put 2.5% in the cash. Because we did say last week, we were quite happy with that stock generally because of all the AI companies in there. And I think that it's crazy extremely well still. I don't think we're at the crisis stage in bonds yet. So I can see why we could be, we could hold out for a bit longer. But that's what allocation. So what do you think? What do you think? No allocation at all to industries? I wouldn't allocate any industries now. Spice has just said, right? His view is 5% growth. He said that on this on this 5% growth, right? 3% inflation. Bonds are 8. Well, you know, we're going to be anywhere near the bond market. It's absolutely rubbish. I would love to sit here and say, let's buy some long gilts. Fantastic. Let's just think about what we've said before. What's our inflation estimate? Well, Bank of England say 2. But these monkeys don't put rates up when they should put rates up. They don't give me any confidence. They're going to keep inflation at 2. So I'm going to put in 3. Right? So I say 3. Real yields 4 is 7. So at least 6.5, 7. I don't just go on through 6 today. So I don't see and let me open up on one other thing because it just makes me laugh. It comes around. It's probably means that I'm going to be completely wrong here. I was in an investment committee meeting this way. Can't say who. Can't say who. And the whole questions were, well, when do we buy? But oh, we've just bought some bonds. We've bought some bonds. We've bought some bonds sometimes. Oh, bonds cheap, aren't they? Let's buy them. That's not how you see ball markets. Ball markets happen when people are panicking and stopping out of things. And I don't think they've gone far enough. Yeah, I've had a, I've had a text. I want to be sitting here telling me, isn't this an Elliott Wave five move on, you know, on the chart now to end what bonds? I don't think it is. But you also had one of the top investment banks come out this week saying, if you have been 100% equities as a lot of our viewers will have been, right? That's the popular thing to be now is no bond allocation. Yep. If you've been 100% equities, this is one of the best buying opportunities ever to change that allocation and even bring in 10% bonds, 20% bonds. [BLANK_AUDIO] one or just hold some cash. We've got cash. I mean, we're holding cash because we think that cash or short bond, very short dated bonds is that good surrogate until we get to the right level. For listeners out there, the attraction of bonds is that if you buy something on a 6% yield today, essentially your interest on that will be around about 6%. And therefore if interest rates themselves are for, you could see a 2% capital fall in order before you would lose money or hold cash. So there's a big bias when the curve is what's known in the trade as steep by short bonds or at low yield levels, long bonds are high yield levels. So you get a steep yield curve. There's a big there's big protection in buying those. And I have other people who listen to the show saying to me exactly what the yields need to move to on a one year basis for you to lose money buying here today. When we're not meant to be some people who just buy and then will hold it on a year's view, if we don't think we're not going to get a bad buy opportunity. I think you're going to get a better buy opportunity on bonds. I do not think bonds are in any way expensive. It's are they cheap enough yet. And I would still argue that we are, there are too many people trying to buy it. I want to see it when it moves like this and no one's got the ammunition left to buy it. That's when I buy my bonds. Do you, okay. Do you have a level in mind? Is it seven percent? No, I'm going to buy six and a half in long yields. I've been patiently waiting for some time. I will buy six and a half long yields. And we're at six now. And we're at six today. We've got a budget coming up. We've got Andy Burnham. We've got all these other things. You know, people, there'll be people sitting out there saying, while earth would you buy six and a half in the UK? So then you turn to the US. I'm going to turn to the US. I say, well, hold on a minute. Five percent growth. Well, I don't use to be five from the spices one and one of his growth. That's three times a third. We said two and a half three. So let's say we're at the top end of that. Let's say with three real yields on 30 tips. Two days, you can buy your 30 tip. I said earlier, three point three percent. So you can guarantee three point three percent above inflation if you buy a tip today, right? A treasury index security three point three three point three onto three makes six point three. Where are long treasures at the moment? They are not six point three percent. So but it is a big decision to have zero allocation. You're not seeing let's buy two and a half, let's buy five. You're seeing zero. That's a big decision. Yeah, but when it gets to six and a half and I buy two and a half and it goes to seven next. I'll be glad I had only bought two and a half. But it's six and a half. We might want to have 20% in bonds. Well, after today, we will have 20% in cash. Why are we? And two and a half percent in short gilts, right? And nothing in gold. And nothing in gold. Well, we have gold. We've got the black rock world money. And it's still gold minus. I mean, the interest they took of gold miners. Obviously, we had South Africa's biggest gold mining company take over Australia's biggest gold mining company in the $27 billion deal this week. I didn't mention it in the market. Maybe that's the industry saying we are getting to an interesting point in the gold price. Maybe that's something to consider. As I said last week, I think we're maybe just a little bit further to go. I think we're not quite there yet, but we're, you know, maybe I'm just being greedy. But we said we've raised five percent out of India. Right. Now, I'm saying I would put two and a half into Nasdaq's. I think it's pretty bullet proof. Now, always. But do you want to, I mean, I've not heard anybody say, yes, I mean, I don't like, I don't really want to buy much at all because I think scenario A. But that isn't the majority gear around here. So if you two want to push and say, I should buy some gold here to a half gold, well, we could do that. Yeah, we both said we were interested in it last week. And it's four percent lower. So I thank you for stopping that. Thank you. We're not doing further. We did not go for that. Okay. I mean, what I would therefore suggest is I like the idea of buying more Nasdaq. I think we are woefully low in Nasdaq. We only got two and a half percent in it. If we, if we put two and a half more in we're in five, you know, compared to global bad, you know, weightings, all the rest of it, that's low. I'm sure I don't care about global voices. I don't do tempsons. Exactly. And I'm with you. I'm with you on that Chris. And, you know, for the past the first year, we made very good money by not being a heavily weighted as other people in the area. But I don't have a problem whether I put it in cash or whether I put in gold. I don't have a problem with that. I'd put something maybe two and a half percent in gold. I go with rich on that one. I'd put five percent in gold. I'd take two and a half percent. In fact, I would put the whole of the Indian money into gold. I know the Indian because if you like gold, if you think yeah, exactly. If you think that there's a 50% chance that we are going to get ugly in bond yields, then at some point the Nasdaq breaks. Yeah, but gold will get a lot lower in that. Yeah, because we're going to get ten to four thousand. Yeah, I would argue that Nasdaq would be doing more than gold on that. I don't think it would be. I don't think it would. And there is hate. Hey, that's why we have a debate on these things. There's still duration. If we want to explain, the interest rate is very lowly rated as we know by a number of the product of the of the companies we've proved ourselves by micron producing magnificent numbers and on being on a PE going forward of about six times. Completely dependent. Yeah, but you've also got credit strike on two hundred times earnings. So what, that's one or two and then there's all. Yeah, I mean, you know, at the overall level, the S&P 500, not Nasdaq, has got the lowest Ford PE ratio that it's had since 2023. And that's because we're getting this massive growth coming through 30% growth. No, because you've had a bubble in earnings. Because people are skeptical, right? People are skeptical. So this is not going to continue. It can't last. It can't last. So the market is being de-rated. And the earnings are coming through. Now, if that happens to another quarter, another quarter, people won't be able to ignore that. And the market will kick up. And you'll get a big, big sort of pick up in market performance. You seem to have forgotten the whole of the AI is built up on debt. And you're talking about the cost of funding for debt blowing out. Yes, but to me, the return that people are looking for from AI is far as superior to where the cost of the debt is at the moment. If the debt goes to those levels, we'd be better off in nothing apart from cash. Because if it goes to where it stops the AI investment, bond yields are going to 15%. You do that. Nothing survives. Yeah, but I mean, that's not in one of your three scenarios. No, well, it is. It's in my first scenario. I remember I said, "Boggles rise." I think there's something I'm saying weird too. I know, but I'm, I'm, this is the job of the, the chairman's role, unfortunately, is to try to herd cats, as I've said before. And I've got, I've got some very mean how he cats here. Every sheep class, every, what sheep last week actually I think as well. I think it's better sheep because I have a Welshman as he says. So anyway, decisions time. Yes. Decisions. We're selling five India. We're buying two and a half percent, now it's that we're buying two and a half percent gold. It keeps everybody happy. That's what job of the chairman. Okay. Fantastic right. Okay. So there was yours. Did I need a drink again? That's two, two weeks of heavy discussions. It must, the market must be getting very interesting. It's very, very interesting. These, these, these are markets I love because I'm not an equity guy. I, it's too boring when they just keep going up all the time easily. I like it when it gets like this because you've really got to think about what's going on and it is, it's a challenge. It's a real challenge. Right. Thank you very much for joining us this weekend. So remind our please vote in the influencer award. That links below in the show notes. And then also, if you could please reply to the email that you're going to receive in the next few days about live app lords. Much appreciated. Give us a thumbs up. Give us a subscribe. If you're going to drop some email, drop it too. The author of [email protected]. Have a great weekend. See you next week.