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Welcome to Many Happy Returns, where we aim to make you a better investor. I'm Roman. And I'm Michael. Markets are unruly beasts swayed by shifting narratives, sudden rumors, and ever-changing expectations. But a handful of all important stories will shape investor returns throughout 2025.
From interest rates to trade policy to big tech, we explore what's capturing the market's attention and why it matters. And in today's dumb question of the week, we ask, can bad news be good news? All right, let's get into it. So when British Prime Minister Harold McMillan was asked, what's the greatest challenge of being a statesman? He replied, events, dear boy, events. And I think something like that is true of being an investor too. Sometimes random things pop up and you just can't really prepare for them.
But other times, there's stories that we know are going to come up again and again and really affect what happens to our investments. Where should we start, Roman? The Fed, we always need to start with the Fed, don't we? Yeah, look, I mean, that's such an important factor for investors. And it's something which people who aren't used to investing aren't aware of. Professional investors are well aware of how important the Fed is, whereas retail investors don't tend to be.
And the key question here, really, is will the Fed be able to deliver further rate cuts this year? But why does that matter so much, do you think? I think at the moment, the problem is that US stocks are priced to perfection, they're highly concentrated, and it's all about this AI narrative. And remember that these are growth stocks, so they're very interest rate sensitive.
Whether that's right or wrong, a lot of them don't depend heavily on debt capital. So do they really care if interest rates increase? Maybe not so much. But that's how the market perceives growth stocks. So higher interest rates, bad for stocks, higher cost of capital, and potentially this is bad for the US market and global indices, which depends so heavily on US stocks.
And you remember a year ago, the market expected interest rates today to be far lower than they are. It kept having to adjust its expectations. Have they now got used to the fact that rates are higher for longer?
Yeah, previously, it was almost one meeting, one cut, and some of the cuts were 50 basis points. That was the expectation. That was the expectation based on futures markets. But at the moment, after we got the election result from Trump, whose policies are very inflationary, it became pretty clear that we'd be talking about a higher inflation environment, at least in the short term.
and then suddenly everything turned around 180 degrees. And if you look at what's priced in now, we're talking about rate increases being priced in. That wasn't even on the map previously.
I mean, they're still an outside bet, right? These Ray increases. The market is still expecting, I think, two 25 basis point cuts from the Fed over the next 12 months. But then if you look out to 2026, there's now a 3% chance that they're going to raise interest rates by 25 basis points. That's around September of 2026, maybe June of 2026. So, yeah, completely different story from the one we had before Trump was elected.
To be fair, even before the Trump election happened, I remember you saying the market is just way off here. Listen to what the Fed is saying. They are not going to be coming down a whole percentage point or two percentage points over the next year.
Yeah, I think that's a risk when people misread what the Fed's saying. They should just listen. I mean, they talk all the time. And all you have to do is listen. But the funny thing is, the market was completely wrong. But yeah, it didn't hurt risk assets that they were wrong.
Yeah, for a long time, it really didn't matter what the Fed said. And sometimes markets are really sensitive to Fed pronouncements. But at the moment, at least recently, they just shrugged everything off. Everything was absolutely fine. We were in this kind of utopia where growth would continue, AI would transform the world, and what could go wrong?
But I think if we did get a surprise, if the Fed did hike rates at some point this year, that would surely have a big effect on stock prices, wouldn't it? Because it would signal a turning point, right? We couldn't expect rates to go back down to a neutral position of 3% or something.
Yeah, the big deal happens when the Fed changes its path. It's not just about whether this is the third cut out of a series of 10. This is when you go from cut to hikes. So that's a big deal and it marks the end of a cycle, potentially. Now I've become a little bit obsessed by prediction markets. This is another legacy, I think, of the Trump election, right where the prediction markets and the betting markets were arguably more accurate than the polls, right? Yeah.
And, you know, when we talk about expectations for what the Fed's going to do, we always talk about futures markets, which is where people are buying options and kind of betting real money in markets about where interest rates are going to be. But you can also look at these betting markets where, again, people are betting real money on things, but it's not so much around derivatives and futures. And here on Polymarket, there is the option to bet on, will the Fed height rates in 2025?
And currently, the market has a 22% chance of that happening.
Would you make of this? Do you pay any mind to these things? It's funny because I used this as an example of arbitrage because I'm tutoring Laura's grandson in maths. And so we were looking at how to arbitrage markets. And at one point, you could bet both ways on Kamala Harris winning the election and make a risk-free profit. But in this case, I think the markets will weigh off. I think it's unlikely we're going to get a Fed rate hike in 2025.
But they're saying it's unlikely. They're saying 22% chance. Well, given that the futures market is only pricing in a 3% chance, and that's for 2026, I think this is unlikely. I mean, let's listen to what the Fed says at the coming meeting, because they will signal it before it actually happens.
And then we'll see this probability fluctuate a lot, I suspect, after the next meeting. Because if they are going to think about hiking, it's all a matter of whether they can look through these inflationary policies. And looking back to tariffs in 2016, they had a whole set of research which was done for them. And at that time, there was a real question as to whether they could look through these inflation spikes, whether it was just transitory to use the language.
If Jerome Powell did want to make President Trump's head explode, then a rate hike would be a key way to do that. I just have this image of him just sniggering as he pushes the button on a rate hike. It would just be priceless to see him. If he could be a fly on the wall, I'd love to see that.
I'd love to see what he says about Trump in private. Because it's weird, like in the press conferences, he never mentions Trump by name, does he? He always just talks about the uncertainty of policy and we're not going to get into the business of guessing what the White House is going to do. And it's weird, actually, in these prediction markets, you can bet on the most obscure things, like what he's going to even just utter in his press conferences.
And there's a whole market around, is he gonna say good afternoon? Now, there's a 97% chance that he will say good afternoon, Ramen, so. Because he always does, he always does. Well, I imagine though, if you put like a million pounds down and I'm saying it, and then he comes out and just goes, hi, folks, I keep like a million pounds. I'm not sure how much alpha there is in these markets. Yeah, I'm not sure I bet a lot of them. So that's interest rates covered. One of the biggest things that's gonna affect markets over the next year, as it often is.
But to just zoom out slightly on that, at the longer end of the yield curve, that's going to be hugely influential too. We've seen long-term yields increasing over the past several months in the US and in the UK and in most of the developed world. I guess one big question here for Marcus is, will that trend continue? Are yields going to keep rising? And if so, how high are they going to get?
Yeah, so if we have a quick look at the yield curve in the US right now, what you're seeing is it's kind of flat out to two years and then it's gradually ramping up to 30 years. So what we're seeing is term premium, which is a welcome return, I'd say. Because previously, we were in a weird situation where you were actually compensated more for taking less risk.
in the US yield curve and the UK yield curve, because the term premium was negative, which was really weird. But now I'd say this is market's healing. It's just going back to normal. And you are being compensated for taking more risk premium. And it's worth saying what the drivers are at the long end of the curve, its inflation and growth expectations, rather than fed policy, which drives yield.
So what we're seeing here is higher growth and or inflation being priced into the long end, which is quite reasonable given the policies that we're seeing. But if this is nature healing, can it go too far? Like if long term rates got up like six, seven percent, that would be a problem, right? For risk assets.
It's always a question of what the actual drivers are. I mean, it's credit risk starting to factor in here because this administration doesn't seem to be that bothered about issuing lots of debt or debt sustainability. Whereas if you look at the UK, they're obsessed with debt sustainability and not issuing too much debt.
Well, they might be obsessed with it, but Ray Dalio came out, didn't he? Last week and said the UK government is risking a death spiral. Yeah, what a muppet. I think that's just nonsense. This is a guy who said cash is trash just before we had the most incredible time for investing in money market funds. Yeah. So I wouldn't pay too much attention to Ray. But you don't want those kind of soundbites from prominent investors, do you? When you're trying to sell a load of gills?
Well, the UK government might not, but the thing to remember is what UK customers are actually doing, which is piling into guilds. So I think that'll probably keep yields down. In terms of the question of how high will yields go in the near term, again, I'm going to return to the betting market on polymarket. Will US tenure treasury yield rise above 5% by June the 30th? 49% chance.
Wow, okay. But look, 5% is not crazy. I mean, that's the kind of, you know, how you have certain expectations about markets based on your life experience. So I used to think that dollar yen would be, you know, a certain level. And I was surprised when it was different or sterling versus the dollar.
So my anchored belief is that long under the curves about 5%, the short end is around 2% or 3%, that's the kind of normal. And if you look at median yields over the long term, that's kind of borne out, unless you go back to the crazy period in the 70s. So yeah, I think 5% of the long end, that prices in roughly long term inflation and growth expectations for developed markets. That's why we anchor back at that level,
And what could cause it to blow out then? All sorts of things. I mean, it may be a crisis to do with Trump. Trump is very likely to completely not care about defaulting on your estate. He said it before. He said, just go ahead and default.
And if he says that again, well, yeah, that's going to put markets into a huge tail spin. But he has said he wants the debt ceiling to just be abolished, for example. I think he does care. He just plays this game in the media. He wouldn't want to be the president that blows up the bond market.
But this is a president who doesn't care about precedent, right? He doesn't think about consequences before he opens his mouth for tweets. So I think that's the risk. This is a president who potentially could talk about defaulting on debt, and markets are not going to like it. And I think he'll see that. I think he'll see their reaction. And maybe that'll make him step back from the brink.
Yeah, I guess I'm a bit less worried about that. My worry would be if he really goes after the Fed and forces them to push rates down and we get another pick up in inflation, I could see that blowing up the curve. Oh, yeah, I mean, that's the other problem. The other kind of thing which you do is erode Fed independence, which you'd be absolutely fine with, but which market certainly wouldn't be.
This would essentially be shifting the US into third world territory, which is that the president has really strong views about where rates should be and he forces it on to the central bank. I mean, this is what you'd expect from Turkey, not the US. And I think that's fairly likely. If his economic plan doesn't work out, then he'll probably start railing against the fair, not lowering rates. And if inflation's high because of his policies, which is looking pretty likely, I think that's an outcome, which is also pretty likely.
I mean, this is what he said last week. I think I know interest rates much better than they do. That's the Fed. And I think I certainly know them much better than the one who's primarily in charge of making that decision. That's Jerome Powell. If I disagree, I will let it be known. And then he went on to say, I will speak to Powell at the right time. Now, if any other president in history probably had said that, markets, bond markets would have freaked out. Now you'd have seen yields soaring, but they just shrugged. They don't believe what he's saying, I think.
Yeah, at this point, I think Marcus had kind of punched drunk on all of the nonsense because they remember what happened last time. He said lots of stuff and didn't do it. But what seems to be the pattern this time is he says things and then he follows through. I think he's got the mandate to do it. And I think that has the potential to wreck a lot of faith in the US.
It'll be interesting to see if he does follow through on things, because Tariff says the other big one where he said a lot of stuff in the campaign. He talked about 60% tariffs on China, for example. And now we've got to the point where he's taken office and there's talk of maybe a 10% tariff on China.
Yeah, I think that one's not a big deal. And, you know, he has stepped back and started to use it tactically. So, for example, when we were looking at Columbia refusing to let the airplane land returning some of their refugees, he used tariffs effectively to make them change our decision. He's trying to use it against Denmark so he can buy Greenland. As if Denmark's going to care about US tariffs. I mean, it's crazy.
Well, they have had emergency meetings with nobody with Nordisk because how important it is to their economy and their biggest market is by far the US buying the answer to your visa e-drugs. Yeah, this is the world we've come to where essentially we've got one native country threatening the territory of another.
And that worries me. You know, I think that's a really worrying precedent. He keeps coming back to Greenland, doesn't he? I mean, it was almost a joke in the first term, but I think he kind of means it this time. He does want some kind of resolution here. I can't see the US invading Greenland, you know, and blowing up NATO. But I'm guessing some kind of deal will be struck, probably not on sovereignty of Greenland, but on them having more access rights and control or something. I don't know.
The thing is they had so much access anyway. You know, they've got military bases there, they've got mineral rights. So, you know, why would you need to take over Greenland or Canada for that matter? He said Canada should become the 51st day, didn't he? Of course, it wouldn't work for Trump if he did. Maybe he just hates all the countries that make the good bacon.
So you kind of sanguine about the tariff threats now. Do you think they're just going to be threatened every now and again as a transactional thing when Trump doesn't get his way? Or is he going to bring in these big tariffs? Because he's talking about Canada and Mexico in the first instance, I think from next week, he's talked about bringing in 25% tariffs.
Yeah, I think using it as a way of negotiating, using it as a bargaining chip, that's pretty clear that he's going to use that. He's already started doing it. But is he going to use it to control China? And will China actually cave in, given that US trade isn't that important to them? Because remember that China's exports make up about a third of its GDP.
US exports make up 15% of that. So that's four percentage points of their total GDP. So even if exports the US went to zero tomorrow, well, that's just a rounding error. And by stimulus, they could top up their economy. So really, I think this four-year term for Trump, if he's going to increase tariffs such that all exports of the US went to zero, would it be catastrophic for the Chinese economy? No.
I'm going to disagree with you there. I think it would be catastrophic. Because it would crash the Chinese economy. How? It's the crucial source of foreign currency for China. And it's a lot of their high value at industries as the exports to the US. They've got a little bit less than a trillion parked in US dollars anyway in the treasury market. So, you know, what's the problem there?
The thing is, if you bring in big tariffs, currency markets will move to a large extent to offset their impact, right? The dollar would strengthen, usually, and the renminbi would weaken. So it wouldn't have as big a effect on traders you'd think based on the scale of tariffs.
You know, I just don't think it would be catastrophic. So, you know, I think it's a bit of a weak bargaining tool for the US when it comes to China. For countries like Mexico and Japan, much more of a big deal. And of course, Canada, which is hugely dependent on the US. But of course, they've got much more trade with the US.
And the other thing Trump has sort of roped into this trade war narrative is international tax law now, where he's talking about coming out of the OECD deal, which was agreed. I was like setting a minimum floor on corporation taxes of 15%, and letting countries do top up taxes if there was any sort of skirting of those laws. Because he sees it as punishing US multinationals.
And he's also railing against the fines that have been levied by, for example, the EU against American big tech firms. So I think this is coming into play as where the big dispute could be with his allies. And it's no surprise, really. If you look at his inauguration, all the tech CEOs were sat at the front row. This is the thing they really care about.
Yeah, it was interesting to hear what Biden said about an oligarchy, which I think was actually spot on. It's unusual to see the vested interests in the US so overtly displayed at something like an inauguration. But I think the real question here is what happens after Trump, because that's what's going to affect markets longer term. Will the US's policy be set by what Trump's done? Or will we see some kind of normalization to what went before?
Because what was interesting with Biden was that he just carried on with the tariffs that we'd got already from Trump, and in fact he doubled down on them. When he came to China, yeah. So that was a worry, and certainly from China's point of view. But really what could happen is that the US would become just less important in global trade, and people would simply sidestep the US, which is difficult given its importance, given its wealth, and then given its economic heft.
So in a sense, it might be an own goal for the US. But really, I guess as an investment podcast, what we care about is, is this going to disrupt markets? And I think based on my reading, at least, I don't think it will, not the way it's being used right now. And there are actually some positives. In fact, I made a whole video about the five positives I saw about tariffs, one of them being potentially getting China to behave better when it comes to trade.
I guess the market will care in so much as it hurts profits. Yeah, and it's not looking like it's hurting profits at the moment because the counter tariffs don't hurt the US currently. So really, that's the big deal. What's going to happen with the counter tariffs? And I think that'll be the big decider.
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It wouldn't take much, I think, to upset the stock market in the US, because we know it's expensive. So the S&P 500, just to reiterate, is trading a forward-priced earnings ratio of over 22 times, which is above the five-year average of 19.7 and above the 10-year average of 18.2. It also looks expensive on a 12-month trailing PE ratio. And when stocks are expensive, if earnings disappoint, then things can move quickly.
And it's not like analysts are pricing in just a little bit of earnings growth. They're pricing in almost 15% higher earnings for 2025 than last year. The thing to remember about broker forecasts is they don't have any kind of prescience. They don't have any kind of special insight. They tend to be quite susceptible to cognitive biases. If something's trending upwards, they won't forecast something which is going to buck that trend.
So they simply extrapolate the trends that we're already seeing. So it's not surprising that they're expecting many of these tech companies to continue growing their profits at an incredible rate. Because what they assume I think is that the US pretty much has a stranglehold on AI and its transformative properties on the global economy.
But this morning, Roman, have you seen markets have taken a little bit of a wobble? We're recording this on Monday morning. Because I think that there's this Chinese company DeepSeek, which has launched an AI model. And it's very competitive. It seems to be as good as the open AI models, the chat GBT stuff.
And yet it's been trained with a fraction of the capital and a relatively small number of GPUs and not even the cutting edge GPUs apparently. So I guess markets are looking at it and going, huh, US big tech companies are spending a fortune. They're betting the farm on buying GPUs and training these AI models. And now a Chinese company spun out of a hedge fund, has come along and gone, maybe you don't need all that capex spending.
Maybe there's no moat here, which is what Google said originally. If you remember, there was a leaked memo that said there is no moat. Anyone can do this because a lot of the models were open source. And really, it's not that advanced, the technology that you can't reproduce it.
And there was a lovely tweet from Mark Andreasen, who's actually one of Trump's advisors and a famous VC investor. He described this model Deepseek R1 as AI's Sputnik moment. Oh, good. Which harks back to the shock the Americans got when Russia launched Sputnik and basically beat them into space.
Yeah, it is kind of reminiscent of the space race in a way. Everyone seems to believe that AI is going to be crucially important in the future, both to economic productivity, but also military capability. And huge amounts of resources are being spent there. The US had a bit of a lead, but maybe it's not a sustainable lead. We'll see.
Because remember, the US believes this narrative so much that it has banned Nvidia selling high-end chips into China. Now, I'm sure some are getting through that ban, but not a lot. And China doesn't have the capability as yet to make high-end chips itself. So what it seems to have doubled down on is making the absolute best use of the last generation of chips that it can.
So indirectly, I think it's actually backfired because it's forced China to produce more efficient models, which require less energy, less computing power, less chips, and that's been to their advantage.
What might be interesting, though, for the long term is something similar to the dot-com bubble, right? So in the dot-com bubble, everyone thought, internet's going to be the future. Turned out, people was going to be the future. But they got ahead of themselves, spent a huge amount of money building out infrastructure, like Cisco built out all this infrastructure, all the routers, all the cabling, everything.
and then, you know, lost 90% of its value or whatever. But the infrastructure was still there, and it was really good for the US to have built that infrastructure, even if it was inefficiently done at the start. Maybe something similar is happening here.
So Google and open AI, Microsoft, anthropic are all spending huge amounts of money on server farms and GPUs and R&D around how to build AI models. Maybe it will go pop and they'll lose a load of value, but they will still have that compute capacity for when they can best exploit it in the future, maybe.
I think that's an optimistic take on it. I think the problem is that they've spent so much on infrastructure, which now may not have an ROI because there's something which undercuts what they provide. And I think the problem is that AI is now in everything. Gemini keeps popping up whenever I open Gmail and saying, look, would you like to use Gemini? And I just think, no, no, I'm sick of AI. I've used it for so many things.
You're already sick of it. We're in the foothills and it is useful. You know, I think it is incredibly useful for doing research, for, you know, certain applications like editing some of these scripts, you know, it's incredible or for transcribing speech. I want to be clear here. We are not working from a script from him. We don't have a script for this podcast. Give me your videos.
Well, no, I kind of just do the research using AI. And when I do explain it to the members, there's something called the script, which turns it into text. And you edit the text and that edits the video, which is really cool. And a lot of that depends on AI. So that's incredible. You know, I use that for transcribing phone conversations, which is really useful to remember what was said.
But more importantly, how much extra am I willing to pay for AI? Because people are just going to take it for granted that their email is going to be AI enabled. And they may not be willing to pay that much extra for it. Well, in that case, it's really good news that someone in China has cracked this seemingly and is able to produce an equivalent model for a tenth of the cost.
Good news for consumers, but not so good for all of the companies which have piled all of their cash and their treasure into developing this AI to plumb into the rest of their services. Is it not possible that they look at this Chinese model and go, wow, they've got this little trick that they're using for self-learning, apparently, which makes it go much faster. If we do that with our much faster GPUs, we'll have another leap forward.
Sure, sure, but I think what it shows is that they don't have an edge and it is possible for them to be undercut. Also, that it's not just a US phenomenon, which is the assumption, I think, which we kind of had up to that point. So I certainly think there'll be a re-pricing of markets, potentially a very sharp re-pricing, as the bubble, which I think was based on a US AI dominance narrative, implodes.
I think your point about consumers is really interesting whether they're willing to pay for this, because remember Google built its business on ad sales, right? As did Facebook, which is no matter. I think it's harder to do that with AI. And our people are actually willing to reach into their wallets and pay real money to use AI. Businesses will be if it improves productivity, but will consumers
And if you think about Google's business model, essentially it's dead. You know, what they offered was the ability to find lots of things on the internet. Whereas now you can find just the answer you're looking for rather than lots of really annoying links, which you then have to click on research. So obviously they've seen this and they've got AI search built into Google now and they've got Gemini wasting everyone's time.
Yeah, I've seen you can actually put minus AI in your searches.
Oh, let's go Google, please. Yeah, I'm just reading the book, Supremacy by Pami Olson. And it's just an incredible description of the race between DeepMind, which is the Brit version of AI and the Brit vision of AI compared with chat GPT, which was the American cheerleader for AI. But it actually turns out that the real competition was coming from somewhere outside the US, which nobody really expected. Yeah, it's really interesting how quickly it's flipped.
I mean, maybe too quickly, right? I wouldn't rush headlong into believing that China's cracked AI. Let's see, right? It's very early days. And even if it has, I'm not sure how useful these models will necessarily be to us in the West. Like, for example, if you go in and ask about Tiananmen Square, it starts typing out a nice answer until it hits the dreaded T word and it just goes, you can't answer the question. So will people ever really trust AI algorithms out of China?
not sure. But there's lots of questions around China, isn't it? We know that it's in a bit of a slump at the moment. We did a whole podcast on it a few weeks ago. I guess one of the big questions facing markets over the next year is will China really pull out the big bazooka when it comes to stimulus?
I think it's looking more likely given the troubles they've got right now. I think things are getting worse. The housing market's not improving and local governments have pretty much starved of income. And at a certain point, that's going to reach ahead. So I'd expect that they will do something larger. Maybe they'll do it incrementally rather than a big bazooka.
as it's required simply to cut down on the cost of it because, remember, they haven't got that much capacity for stimulus as they had, say, five years ago or 10 years ago. No, there's a lot of debt, isn't there? And more and more has been taken on to the public balance sheet, a lot of it's been hidden up to now.
So I think they're limited in what they can do, but will they have to do something? Yeah, I think so. And I'm hoping they will, because my copper portfolio is languishing at the moment. So I've certainly got my fingers crossed for a bigger stimulus. What other questions do you think markets are unsure about for 2025?
But we've seen complacency in the equity market, and we're seeing it in the credit market too. Remember the credit markets often see crises coming before equity markets. And at the moment, they're not seeing any crisis at all. There's really tight credit spreads across the EU credit market, across the US credit market. So I think, again, we've got a market price to perfection.
And for people that aren't familiar with credit markets, what do you mean by that? It's a tight spread. So the extra compensation you receive for the possibility of defaults or bankruptcies is what's called the credit spread. And that's added to the risk-free rate. And hopefully it's big enough to absorb any losses you take from defaults from bankruptcies.
So in very simple terms, if US government debt treasuries are paying 5% say, and investment grade credit is paying 6%, then you say there's a 1% credit spread.
Yeah, that's right. So you just subtract one from the other and that's the spread. And the bigger the spread, the bigger the compensation you're receiving for the risk. Well, at the moment, you're receiving very little. So the default risk as markets expect it is very, very, very low. Now, in an economic boom, that makes sense. But if things are starting to become a little bit wobbly and the wheels are coming off the wagon when it comes to economic growth, then you'd expect credit spreads to widen.
It's interesting because I read in the FT, just a couple of weeks ago, the corporate bankruptcies in the US are actually increasing. In fact, last year was the worst year, I think, since the financial crisis. So almost 700 US companies filed for bankruptcy last year, which was an 8% increase on 2023 and the highest since 2010.
And 30 of those bankruptcies had at least $1 billion in liability. So not all small companies. You've got companies like Tupperware, Spirit Airlines, Red Lobster, which is a restaurant chain. Tupperware always has a place in our house.
But apparently they've seen falling sales and have fallen into bankruptcy. But these aren't necessarily small companies, are they? It is surprising. And that is a sign that things are starting to weaken. You know, doesn't have to be catastrophic. It can happen gradually. But what's worrying is that it often happens gradually then suddenly. What was interesting in the article was that usually every US bankruptcy is accompanied by around one out of court debt restructuring.
So half the companies are on the verge going to bankruptcy and half don't. Last year, it looked like that every company going into bankruptcy, there were two that were doing this kind of debt restructuring, not quite bankruptcy thing. So there are a lot that are wobbling, even if they're not quite falling off the edge yet.
But you know, unemployment's low, growth is still strong. So that's probably going to keep the default rate low. And interest rates potentially are falling, although we have to see what happens. So I'm not too worried about that yet, but I certainly wouldn't be piling into the credit market right now. Certainly not for high yield.
Someone is, though. That's what's keeping spreads tight, right? There's got to be flows from somewhere. I looked at this PIMCO short-term high yield ETF because it was offering about 6% return compared to 4.7% for a money market fund. But then I thought, well, for the additional return you get, is it worth the risk? And I thought, no.
But is that why some people are thinking, yes, it's just like they don't believe there's going to be a widespread space of bankruptcy. So we may as well take the little bit of extra yield we can get. Yeah, I think so. And the fact that I was tempted tells you that some people would have said, yes, depends on how cautious you are. But your expectation would be if things do get a little bit worse, credit markets will show it a little bit before the stock markets do.
They often do, not always, but often, because credit investors are just more miserable than equity investors, and they're very sensitive to crises, and they always see the glasses half empty rather than half full. So I think credit spreads are certainly worth keeping an eye on. The credit spread canary. Yeah.
I mean, just to wrap this up then, there are a lot of things markets are watching. The Fed clearly, trade wars, what's China going to do, what's happening with big tech and AI. But the elephant in the room really is Trump and geopolitics in general.
Now, I guess Trump is so unpredictable. Deliberately so, I think, he sees it as a positive to be unpredictable and keep people on their toes. But that does make it very difficult to predict anything related to geopolitics. And it's always difficult to predict this stuff, right? Yeah, the worry is that someone's going to call his bluff because people sense that Trump doesn't want to be involved in a war. And frankly, can you impose many more sanctions on Russia right now? It's going to be tricky.
And would tariffs stop someone from starting a war? That's the worry. I mean, he would love to get that war ended. As with everyone, I hope, as long as it's on reasonable terms. And he does really care about the oil price. You saw him the other day putting pressure on OPEC in his speech at Davos saying, they need to bring down the oil price, ramp up supply, and that's what will cause interest rates to fall because it will contain inflation.
which is a logical argument, at least goes through the right steps. Because he has to counteract the inflationary policies he's also got, which are to deport lots of illegal workers from the US, which will be inflationary, tariffs are inflationary. And if he has to counteract those, the best way to do that is by lowering the oil price. Plus, it goes down really well with American voters, because that's the component of inflation, which they're really sensitive to. What's the price of a gallon of gas?
And I think Putin knows that. So there was quotes from him saying we could work together on energy policy here. Now, if the war did stop, I'm not sure it would have a huge impact because I can't imagine that Europe would rush back to becoming very dependent on Russian energy. Certainly now they see that risk for what it is. And it may happen again, you know, who knows what the next territory will be that Russia tries to invade.
But maybe some of the real risk premium, the fear premium around European equities would go away.
Yeah, I think that's true to a limited extent, although I think people have kind of forgotten about Ukraine. I know it's awful to say it, but in terms of market reaction, I don't think there's a lot of risk premium priced in other than escalation of the war, which I think people have discounted. Interesting. Which I think is a mistake. I think it clearly shows that Putin is probably willing to take the next step and invade other countries, which were previously part of the USSR.
All right, just to finish off quickly, then, Roman, is there anything we haven't talked about? Do you think investors should be watching like a wild card for 2025? Yeah, I think for me, it would be the UK. I think the UK is in a pretty good position to take the lead in things like AI. And that could revitalize the UK equity markets. It could bring a little bit of joy back to the UK economically. So I think that's what's not really priced in a UK economic renaissance.
Well, let's hope. Do you know what's on my wildcard watch list? Go on. Trump falling out with Elon Musk in a big way. You know, I can really see happening. They're both so volatile and unpredictable. And then, you know, who knows what would that mean for Tesla or whatever, right? Something to watch.
there are always worrying things about markets which could go wrong. And if you want to discuss that with other people in our community to put your mind at ease, or perhaps to flesh out the risks, you can do that by going to our website, pensioncraft.com slash membership to learn more.
OK, today's dumb question of the week is, can bad news be good news? This is something we heard again and again really throughout the inflationary spike. And I don't think it's fully gone away that people talk about this phenomenon.
Usually it's about the Fed puts. If things get really bad, the Fed cuts interest rates and markets rally again. Now, you could say that that's kind of true in China as well. If markets get really bad, either the property market or the equity market, then the government steps in. So there's a kind of President Xi put as well. We saw a lot around the non-farm payrolls, didn't we, the jobs numbers in the US, where sometimes when they were weak, markets rallied because they thought, oh, this means the Fed's going to cut rates.
The economy's doing badly. That's a good thing. Whereas now I think it'll be a market shock unless the Fed telegraphs are changing the cycle well ahead of time, which I think they will. I think if they are thinking about it, which they probably are, then they will signal that, oh yeah, well actually, we think the balance of risks is now moving to the upside for inflation. That's the way they'll phrase it. So that's what to listen out for when you're listening to Jerome Powell talking.
But we did see that when the jobs numbers came in much hotter than expected week or two ago, stock markets fell a couple of percent. Had a bad week. Yeah, that's right. So the dynamic is continuing for now, but I think the big one is going to be the end of this cycle and the start of a new one if it happens.
And I guess the other put we've got right now is President Trump because he is obsessed with the stock market. So if he does see the S&P wobble, then he probably will start to do whatever he can in order to get it pumped up again. Because he sees that as his metric of success. It goes into US 401K pension plans and directly affects the feel good factor in the US. So that's why it's important to him.
I guess there's a whole other way in which good news isn't always treated as good news by the market, which is something we touched on earlier with AI. We get this new model which says, you can have the same results at a tenth of the cost and markets go, whoa, whoa, whoa, whoa. We thought we were going to make bank here. We were going to make big, big profits.
Yeah, what's good for consumers isn't always good for the stock market. And I think that's what's going to cause a re-pricing right now. But I would say that if AI is transformative for productivity, which would be great news to the economy, and I think great news for stocks in the long term, we should welcome this, even if it hurts profits of those magnificent seven companies in the short term.
Oh, I agree. And I think people always say that stock markets are forward looking, but in fact, they only look forward by about two or three months. So I think that's a good point, which is economically, it will be better in the long run in terms of energy consumption and the effect on the environment, but also cost to consumers. But it's inevitable that these models will become more efficient and improve over time.
But then they're not forward looking in the long sense in the, obviously we're all going to be killed by a Skynet. The thing is this runs away. And yet we're still buying stocks. Thank you for joining us for many happy returns. Keep sending us your questions, no matter how dumb, at mhr at pensioncraft.com. And do remember to check out pensioncraft.com for all the information about our membership courses and investment coaching options.
Many happy returns is a pension craft production, co-hosted and executive produced by Romaine Nikiza and Michael Pugh. This podcast is for informational and entertainment purposes and is not financial advice. We do not provide recommendations or endorse any decision to buy, sell or hold any security. We cannot be held responsible for any actions listeners may take and investors are encouraged to see independent financial advice.