00:00So we were hearing there about everything that's happening in the Middle East, slow progress,
00:04the oil prices are watching that story, bond markets are watching that story,
00:08equities are arguably watching a completely different drama unfold, and that is around
00:12AI, and it all seems to be upside. U.S. stocks, futures pointing again,
00:16higher, Ven. What do you make of U.S. stocks?
00:18Morning, Anna. It's absolutely spot on. I think that the AI is the overpowering narrative.
00:23Now, if we had sat here in January, early January, thinking, you know, what are the
00:27main drivers for this year, hardly anyone would have pointed to an escalation of Iran conflict
00:33to the point that we got to a war, and yet we got to a war, and what happened?
00:38I mean, equities fell 10% from the top, and that's about it, and they shrugged it off.
00:42It was, the point is, it was an unknown unknown, and the equity markets shrugged it off.
00:47So if an unknown unknown cannot spook the markets, what is going to spook the markets?
00:51And I do worry about that. My point is that, you know, stocks are appearing increasingly
00:57invulnerable, and that in itself is a sign of, you know, caution, right?
01:02Because, you know, equity multiples have been stretched, and you've got, you know,
01:06there is no earnings recession in sight. So, and, but this fraud is, the longer it continues,
01:11the more it sets us up towards a bubble, and that worries me a lot.
01:16But we're not in a bubble yet. What are the chances of getting to a 5% U.S. 10
01:21-year yield?
01:22Well, I think that, you know, if you look at a Fisher equation, Tom, so you've got your yields
01:28have got to be somewhere near nominal growth. You've got, you know, real growth of 2.5%,
01:322.7% above trend, and you've got inflation running well above 2.5%. So what does it mean
01:38for the 10-year yield? It's got to be higher than 450, and I think 450 is not reasonably cheap
01:46or excessive in valuation. But if you look at the front end of the curve, we are doing 4.05,
01:51and that is excessively optimistic, right? I mean, the Fed has got to raise rates.
01:56You've got inflation, which is a big problem, and the Fed has been missing the inflation target for
02:01the better part of five years now. So, you know, you've got to raise rates, and 4.05 just doesn't
02:05cut it.
02:06Ben, is there excessive optimism in the gilt markets? I'm looking at yields that have come in about 40
02:11basis points since around middle of May. Gilt's, the 10-year, the 2-year, they've rallied in the
02:16last 15 days or so.
02:18I think they've rallied in conjunction with German bonds, and I think that, you know, some of it is
02:22justified because the Fed, the Bank of England is not going to raise rates nearly as much as the
02:28markets are thinking. I've been saying for a long time that 4.10 is the level that the Bank of
02:33England will probably get to because that's what the Taylor Rule equation says, and the markets are
02:40pricing in 4.10 at the moment by the end of the year. But even so, I think that the
02:44two-year yield
02:45at 4.20, 4.25 is not doing justice. I think you need to factor in the higher inflation, the
02:51persistence of inflation in the UK, and that persistence component suggests that yields need
02:56to be higher, not lower.
02:58Does that mean that the market is overestimating hikes in Europe and underestimating the need for
03:04hikes in the US, Ben?
03:05Yeah, absolutely. I think that, you know, the markets are thinking, you know what, maybe there's
03:09a 50% chance that the Fed will raise rates, and I don't think, I think the markets are
03:14smoking something they shouldn't because it's not happening. I mean, the Fed needs to raise
03:18rates because of the nominal and the real growth that we talked about.
03:22We will certainly watch the politics.
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