Hello and welcome to another episode of the OddLots podcast. I'm Jill Weisenthal

and I'm Tracy Aloway. Tracy, we can't go too long without talking about the role of the dollar in the United States, the pillar of the global financial system, whether there is some threat to it or not. We are recording this July 17th. It has been a fresh week of headlines about say independence of the Federal Reserve and all of the things that we talk about all of the time. So, we sort of need to return to this central question.

Yeah. The interesting thing about the Fed chair drama is when the initial headlines came out about Trump possibly firing Pal, the big reaction wasn't the dollar, right? It wasn't in markets. It wasn't even bonds. It was the currency.

Totally. And I think this is one of those things where

I don't know. We don't know what's going to happen, whether Trump will actually try to find cause to fire Powell. Who knows what will even happen by the time people are listening to this episode. But you know I think people get the sense that with the Fed here with many other thing there is this sort of like erosion of an existing set of norms or expectations etc. And so you know I think arguably some damage for better or worse has already been done to the existing institutional arrangement. Everyone around the world is paying attention not to mention the sort of arbitrariness or volatility of tariff policy ongoing wars and so forth. Much is in change. We live in interesting times.

Here's what I think.

Go on.

So, it's a cliche in financial market commentary to talk about a major turning point, right? Because we've seen people talk about the death of the dollar for decades. Yeah. Exactly. But that said, I think what's different about now is the number of like long-term secular trends that appear to be reversing

on the move.

Yeah. So, you know, there's globalization going from deglobalization. There's population growth going to shrinking populations. There's higher inflation instead of years and years of deflation.

Totally. And I'll just say one thing which makes this very interesting timing wise from the perspective of investors because there is a lot there are a lot of trends that seem to be if not going in reverse at least a new direction etc. One trend that hasn't got really gone in reverse however is you are still getting paid a lot to own US tech and you know US markets they're up solidly on the year they are underperforming which is that is new global equities have outperformed US equities in large part this year but this basic idea that where all the money to be made is as an investor is still in like a handful of US companies like that in a way surprisingly is still kind of intact and The question is, will that be like the last sort of the shoe to drop or the end of US exceptionalism from just the perspective of a globally oriented portfolio manager?

I think that's a good thing to watch. I'm going to pull a page out of Bob Brackett's Commodities Energy Transition book and say that these types of transitions often take longer than people expect. You shouldn't expect everything to happen all at once. It's going to happen in stages. So, there's a lot to look out for, a lot to discuss. Well, I'm really excited to say we have the perfect guest, someone we haven't spoken to in uh several years, but always one of the most interesting guys around. We're going to be speaking with Inigo Frasier Jenkins. He is a market strategist at Alliance Bernstein. He has recently published a new quote book that's public online about the sort of like the big trends of the year including a big focus on the sort of like question about the stability of the dollar or a postdoll universe and what that could look like. So Inigo, thank you so much for uh coming back on OddLots.

Thank you very much. Be good to be back on the show.

Tell me about your books. What are your books and what is the theme of this year's book? Yeah.

So the book is a way of drawing together in one place some of the views we have on some of the biggest questions that investors face. So exactly some of the issues that you've mentioned already in terms of globalization turning into deglobalization of population growth turning into a slowdown in working age population and issues around interest rates and inflation being different from the norms of the last 30 or so years. And all these issues sit in the background. We think there's a strong case to be made that some of the norms of the last 30 or 40 years really are unwinding and either run their course or going into reverse. And then one of the particular issues that has really dominated the client conversations that we've had the last 3 to 6 months has been this question you've been talking about in terms of US exceptionalism. Has it ended? Does the dollar change in terms of its role as a reserve currency? Is the prognosis the dollar the same as prognosis for US equities or are these just different things? And if these kind of questions do we really want to kind of get to grips with and offer some views what investors can do about them?

What kind of time frame are you looking at here? Because I think we often don't talk enough about time frames and reading some of the book some of it I found, you know, a little bit worrying, a little bit depressing because you're talking about all these long-term challenges that the entire world basically faces. And so I'm thinking like what is the time frame here? Is it on a long enough time frame we're all going to be dead anyway or is it the next 20 or 30 years?

I think the interesting thing is there are a bunch of different forces acting at the same time on markets. Now all these are strategic forces but the ones I'm talking about in the book that is and so they can be thought about as acting over a say 5 to 10 year time frame and of course anything that involves a conversation on demographics occasion people just kind of close their ears because they think well it's so slow moving that surely that's not going to matter but actually if it's happening in conjunction with other things then there is an argument that that strategic horizon perhaps isn't quite so far off as people thought and when that view on delization for example is tied with concerns around debt levels is concerned around the shift from globalization and deglobalization. These are things that have suddenly zoomed up the list of concerns that investors have. And so I'd argue that although one might have thought that these are issues that were sort of further off in some sort of notional strategic future that in fact what we've seen in the last 6 months or so is those longerterm issues become things that dominate the near term. And so that's a longerterm future has become issues that few people are facing. out

just on the demographics point you mentioned that a lot of you you hear that word as okay this slowmoving trend it is actually though staggering the numbers when you look at so you know obviously people talk about the population trajectories in China aging in the west but even like I saw these charts of Latin American population growth like fertility is collapsing everywhere I mean it's really extraordinary and it's it's not happening slowly

yes so the changes uh certainly happening very rapidly uh in terms of the context of past changes we've seen and I think that people just need to be aware of just the scale of the support the demographics has given to growth rates over the last 30 or 40 years. We've seen this extraordinary period when there's been globalization that's brought extra workers into the sort of same environment in terms of the economic um arena that they work in. and you've had a large kind of cohort of people who've all been in the workforce and you've had an increase in the female participation ratio at the same time and so you've had a series of things that have meant that there have been many more workers available and I'd argue that even before you're going to get into the issue around deglobalization that demographic shift alone undoes a very large part of this increase in the global worker pool that we've seen through the process of globalization since the 80s. Now people can you know can get very negative about this but you know it isn't an outlook that implies a bearish way of prognosis for the future but it certainly changes the base case of where you think kind of growth lies. So for example, if you look at the sort of prognosis from here onwards, we have an outlook of the next sort of 10 to 15 years where on the UN population data at least that the US working age population is still going to grow but it's going to grow much more slowly than people have been used to in the last kind of 30 years. It'll grow at about 2% peranom but in Europe the working age population is going to shrink at about half% peranom. In China it's really going to shrink quickly at about 1% peranom between now and 2050. So yes, I mean other forces are happening in parallel with this kind of clearly, but you know as a base level effect that does change one's view on what growth rates look like. No, but but in that context that yes, from an absolute perspective that's telling us growth slows down. But back to the other thread that you started this podcast with in terms of the US exception point, although growth is slowing in the US, the base assumption that we have and the most forecasters have is the working age population does still grow ever so slightly. And that is a better prognosis than say in Europe, in Japan, in China where it's shrinking outright.

Can I ask about government debt because this is the other thing that you know people have been talking about for a very very long time. High deficits especially in the developed world. I think the highest level of debt since like World War II, something like that. How do you reconcile I guess the warnings over debtdriven instability or impact on economic growth with the fact that investors keep for the most part buying government bonds? I know after April 2nd we did see a spike in like 10-year Treasury rates, but it came down a bit after that. It's actually pretty close to where it was in early April now, but it does seem like there is broadly continued appetite for debt. So when would that actually become a concern for investors?

I keep being asked this question by investors in recent question and really for the last year or so. So yeah, you're right in saying that the level of net debt to GDP is the same as it was in World War II. I guess the first thing to say about that is not just a US problem. That's actually a G7wide problem. So G7 debt in terms of net debt to GDP is back to where it was at the end of World War II. Now of course it's been getting there for some time. It's been rising really kind of 30 years and that hasn't mattered in an environment of falling interest rates. But if there has been a definitive turn in the interest rate cycle, then that obviously starts to become a problem. People like to fret about these debt levels and certainly you know other things equal. It implies that sovereign issuers including the US are more risky than they were before. And so you could say well maybe there should be a pricing of sovereign risk and a should be a steeper yield curve. The problem is that so far those fears have been utterly swamped by the demands that investors have for liquid assets and safer liquid assets. So you have seen attempts to price sovereign risk. Yes. arguably in April in the US, a couple years ago in the UK around uh the LDI crisis prior to the last French election. You get these sort of episodes where the market tries to price sovereign risk, but it's very hard to know, you know, at what point that becomes a problem because this is a can that obviously can be kicked down the road a long way. There was a fascinating paper published by Nile Ferguson earlier this year where he made the argument that basically it's not net debt to GDP that really matters. It's the relative size of the debt service cost compared to the defense budget. And the reason that seems like a relevant thing to talk about is last year was the first year where the US service cost on debt exceeded the US defense budget. And then he goes back and looked at previous examples of great powers that have seen this kind of crossover take place and bad things happen. And whether that is the example of the UK or the Ottoman Empire or the Hapsburgs, you know, a whole series of historical episodes have led to great powers no longer being able to project hard power if the debt service cost is much larger than the defense budget. Now the interesting example that I guess is vaguely relevant from that is most relevant is the UK. In 1920, the debt service cost became much greater than defense budget. That had a big impact on the ability to project hard power. Now what's interesting is the UK managed to reverse course and actually end up with a defense budget again larger than interest service cost and debt but it did so through inflation depreciation and through the loss of reserve currency status which I guess is the kind of key thing that makes it relevant today. So I guess to conclude in terms of of how one thinks about this, you know, I think the sovereign risk is something that perhaps should be priced given the massive uncertainty about you know how that risk is perceived in the market versus demand for liquidity. I think one's just left with a a kind of directional answer saying well yes at some point the yield curve should steepen but is very very hard to make a tactical kind of call around that. I I think perhaps a more pertinent way for investors to actually think about that in practical terms is that it means that the dollar is less of a safe haven asset but than it was before. And that's the key point really. It's not so much

in terms of coming up with a particular return forecast on the dollar being different from where it was say 6 months ago. I think it's become almost consensus across the street that people are now more negative on the dollar than they were say 6 months ago. But I guess what's interesting is the riskiness of it and the idea that risk the dollar are now more correlated with the risks to other risk assets. And so that implies a different approach the way people should form portfolios.

Okay, let's get into this because I think this is the really important point which is that people talk about some sort of you know risks to the dollar risks to the dollar status and so I want to talk about more like setting aside timing. Maybe it's fast, maybe it's slow, maybe it's medium-term. What are the data points that you would look at to say something is happening? Is it dollar levels against other currencies? Is it dollar share of transactions? Is a dollar share of sovereign savings? Or is it, and it seems like where you're going with this, is it the relationship, whether it's inverse or positive, to risky assets? what are these sort of like fingerprints of what it would look like when it's like oh something has meaningfully changed about the way people view the dollar in their portfolios. So I guess I first of all kind of pick up in terms of the relationship with dollar and other assets. And so you've seen just the last few months episodes when the a dollar has declined at same times that bond yields have gone up. I is a more risky environment and the dollar hasn't behaved in a safe haven asset in that kind of environment. You've also seen a more deeply negative correlation between dollar and gold. Obviously priced in dollars that implies that the dollar is seen as less of a safe haven asset. And you've seen an increased correlation between assets such as gold, silver, platinum, and Bitcoin. All things which are plausibly possible non-fear zero duration assets that you know that through a certain lens share certain characteristics anyway. So you've seen this market behavior where more dollar risk has been priced. At least there have been episodes of that. What I think would really change this though and make it more of an immediate concern for people is if there were large flows out of US bonds from institutional investors. Now there's been a lot of talk about this. There's been a lot of coverage of it. I've been asked about it in many many meetings. But so far as far as we can tell that is much more talk than actual flow. I mean there have been episodes for example where the Japanese pension system or elements of European pensions have been selling dollar bonds but the numbers are very small in the scheme of things. So so far what you're still seeing is a demand for safer liquid assets uh is still the dominant yeah forces but that's the thing that we really look for for a change. I mean I think one thing in the background here is one has to bear in mind there are some very different kinds of risks here that are all being conflated and they point in the same direction but they come from I guess very different basis. So one is the concern around fiscal sustainability as we discussed. So that yes it's certainly a concern but you never know what the timing of that's going to be. Separate from that is a more geopolitical imperative which is the need for countries which are rivals to the US to try and deolarize in some way. Now the problem is there is no viable alternatives. That means that the flow into other alternatives is going to be slow. We obviously seen this in the increased bidding by central banks for gold and I think it's and I think that could spread to other kind of assets as well. But that's a sort of non-marketdriven more geopolitical concern that can carry on. And then you have specific investor concerns, you know, when there have been suggestions from the US administration that perhaps we can apply some kind of taxes or charges on foreign holders of US assets and that has certainly grabbed attention but and people have backed away from that. So it doesn't seem to be an immediate concern right now. But three very different things pointing the same direction which is for there to be somewhat less trust in the dollar as a safe haven. The biggest thing in its favor though is that growth in the US seems likely to be stronger than growth in other regions and the lack of another alternative means the outflows are going to be slow. I think so this is a drip freed story that sits in the background I think we have for many years to come

can I tell a story

please

I swear it's relevant to this conversation but you've probably heard this story before actually Joe one of the best convers conversations I ever listened to was between Howard Marx and Mike Milin at the Milin conference in LA and it was basically about how the investment landscape had kind of changed over their careers. So in the 1950s and 1960s if you put your money in blue chip stocks like the Nifty50 or something like that, everything was fine and you made consistent profit. But then the market crashed in the early 1970s and you had high inflation and that kind of changed everything. So higher volatility along with higher inflation and a deterioration in real purchasing power which meant people lost like 90% of their money at that time which is crazy. And Mike and Howard's argument was that this was what caused the explosion of money managers and also the birth of the high yield bond market because people realized well you can't just buy Polaroid stock anymore and expect a consistent return. you have to be more sophisticated about it and measure risk against that return. So I guess my question is are we talking about something similar here in terms of a C shift in investor behavior? So maybe instead of weighing risk against return, you weigh risk against real returns or something like that.

I think that's a strong narrative that will carry on for a long time because people have been very used to an environment where for decades and decades inflation has been benign. It's been relatively low volatility of inflation and inflation's been going down. At the same time, we've seen strong returns both from equities and from fixed income assets over most of the time. And um equities and fixed income have managed to have a negative correlation there between them. And so the overall return versus risk that you've achieved in real terms has been very strong. Now I'm absolutely not suggesting that we face a bearish outlook, but I think we do face a harder outlook. an outlook where there are multiple structural forces that imply the level of inflation will be somewhat higher and somewhat more volatile. Given the constraints on growth that we spoke about in terms of demographics etc. Given where we are in terms of the valuations across most asset classes being high, the likelihood is that the real return achieved from the portfolios that have done well for many decades is going to be much much lower. And so it raises this really fundamental question which is actually what is the objective of most investors. You know is the objective to maximize return per unit risk or is it to preserve real returns or another way of thinking about it is what is the definition of risk that's ultimately relevant here? I mean is risk the expected volatility of my portfolio over the next 10 years or is risk the risk of a loss of purchasing power over the next 10 years? And I would suggest that for nearly every investor if they think about it ultimately it's the latter of those two that's a much bigger issue.

Wait why not both?

I mean ideally one would care about both. It depends how many degrees of freedom you think you have because you know unfortunately if the expected real return across assets is going to be generally lower. If the correlation amongst them is generally higher then ekking out a certain level of real return becomes much much harder. So I think actually there ends up being a direct tension between the measure risk as um expected volume of the portfolio versus preserving purchasing power because if the thing that really matters to you in the long run is preserving purchasing power I would argue that actually you probably have to take more risk in the sense of expected V

and even though I'm aware that's a horrible thing to have to explain to people and it might sound very cavalier at a point when the ship is 35 times and I'm not spelling uh particularly you become bullish a long-term outlook but I think you'll have no choice you have to think about taking more risk because the other you know option is to underperform inflation and that is more painful for people

I mean the good news at least in that is that people can choose how they want to take that risk how they want to partition it what kind of risks do they believe in what risks are consistent with the liquidity that they need and the time horizons they have and the beliefs they have etc etc but in this tension between the two different kinds of risk I think is that need to preserve we purchasing power that is the real focus and that is a a shift in governance ultimately for many investor types. So you know looking at your big themes this year and thinking about this idea of a sort of a world where the dollar is less important or less dominant or less safe or something like that. One of the things that you mention is geopolitics and of course there are multiple wars going on. There is the weaponization of the dollar. Of course, Russia was on the the other end of after its invasion of Ukraine. But what about politics? I mean, we always talk about geopolitics, but I'm also interested in like actual politics and what's going on in the United States right now, the attacks on Federal Reserve independence. That's not geopolitics. That's politics. But it could shake people's faith in the dollar system. other, you know, shackles like that that the government has put on itself to maintain some sort of stability or even just sort of the volatility in trade policy or the fact that the government, you know, passed another gigantic tax cut. There's no political appetite for meaningful change in the debt trajectory. How does like politics, domestic politics play into global perceptions of dollar stability?

I think there are two avenues here. I guess one avenue again is back to this topic of fiscal sustainability. And if there is no appetite across parties to really meaningfully change that fiscal kind of trajectory, then one is left with this you know kind of question of how sustainable is the debt? Can this can be kicked down the road? But what are the ways out? And I and ultimately I think that inflation is the most likely route out. I think you have to be hugely optimistic about the growth that can come from AI in order to have a view that there's an alternative way out. And the second I guess is this question of trust in the US from the point of overseas investors. There certainly there have been points where that's been shaken. So I was doing a series of marketing tours around global clients at the point where all those discussions was taking place about should there be some kind of Mara Laga accord and potentially changing the status of foreign owners of US debt and okay it looks like that's been backed away from as suggestion and certainly hasn't come up in meetings for a long time so maybe that's not going to happen but just the fact it was raised you know at the same time that there is this concern about fiscal sustainability and there are geopolitical political forces which are very strong to try and find dollar alternatives and that I guess sort of feeds this kind of view that that perhaps the dollar has less of a safe haven status than it did before. I mean the big caveat is it depends what kind of risk we're talking about here. I think if we're talking about general business cycle risks then people you know I think generally do take the view now compared to say a year ago that the dollar is more risky. When things get really bad when there's a geopolitical shock often you know quite short-term in nature thankfully then you still see people flee to the dollar and the dollar rally in the short term over potentially large shocks.

Since we're talking risk premiums and political or geopolitical instability, one thing I wonder is we're basically talking about how the world is changing and norms are shifting. And I'm kind of wondering could the norms or could the response from investors change in a more unexpected way in the sense that instead of seeing risk premiums go up because everyone is nervous about instability or big shocks or whatever maybe everyone just becomes really used to it and you don't see higher risk premiums priced in. I mean that's a consistent theme in market right? something major happens and then something similar happens later and you don't get as big a reaction. Is that a possibility here?

I mean I think it's a possibility. I mean I e I'm not sure that's enough to turn one super bullish uh in terms of long run again I you know but just to stress you know I do think that the US market and global equities are going to produce weird positive real return but valuations today are high. So I would argue that you know that yes one can outline a narrative that there does not need to be a shift back to structurally lower levels of valuation because of where we are in real rates because where we are in terms of the persistence of profitability for some of the most profitable firms. I mean all these things justify valuations where they are but to justify a shift upward in valuations which I think is what you're kind of getting to been your question I think that would just be really tough. So yes, I can get to a positive return outlook, but yes, that's driven by views on where real earnings go, not by multiple expansion. I think that would be a hard call to make.

Joe has a complicated relationship with gold, but when we're talking about real purchasing power, what exactly are you advising people to buy to or hedge to to preserve that purchasing power?

Yeah. So there's a broad range of responses and it's not as simple I guess in future thing as perhaps with hindsight it was over years when both bonds and equities produce positive real returns and had a negative correlation between them. I mean think of real assets for me number one is global equities. I mean as long as inflation's only moderately higher and not much higher then there is strong evidence that equities behave like a real asset and produce real returns and that's a liquid asset class. So that comes number one. Alongside that there are a range you know of other real assets as well be it real physical assets or be it areas of private assets for example kind of private debt that has a floating rate nature attached to it can be in real assets in the form of real estate farmland etc and things like that and then there's gold so gold has a long run real return of the last 200 years of plus 0.2% 2% peranom as far as we can tell. So it's very small number. Although maybe one should, you know, say that if you're buying it because you're frightened of some a really riskoff event, then a zero real return may not be such a bad thing.

There's a value in getting a good night's sleep. That's something that I've kind of learned like investors are willing to pay to have that sort of end of the world hedge.

Yes. Although the risk of course is the lost opportunity that becomes because in the last kind of 30 years obvious that would be an appalling call.

Yeah. I lose sleep because other people are getting richer than I am. So you know there are all kinds of reasons to lose sleep.

Yeah. Although in the last kind of couple years obviously girls actually

Yeah. totally and then I lose sleep over that too. I just don't sleep well. I think the key argument in favor of gold and we've been pro a gold allocation in the advice we give to clients for some years but I think the key argument in favor of it is that look yes you want a big overweight on equity strategically even if it's not that bullish outlook but just because that gives you a positive real return. The question is what do you add around that equity position that helps diversify risk in the portfolio because the problem is that if inflation does remain higher and perhaps more volatile then bonds are not going to diversify equity risk as they have in the past. The key attraction of gold is that the correlation of gold and equities remains at zero at different inflation levels. So it does seem to have an established track record as being a diversifier risk of equity risk that is in higher inflation episodes and that's its kind of key role in portfolios. Then I mean on top of that we can also take the view that for geopolitical reasons and nonprofit driven reasons central banks will carry on buying it and that might give upward support but I'm not going to attempt to give a number or forecast on that because that's simply too hard to do.

One of the bigger structural trends you talk about in this more volatile future world or potentially more inflationary future world is a climate risk. And I have to say that over the last several years I've come to roll my eyes a little bit when I see financial institutions talk about climate. Sometimes it feels prefuncter. We've seen

performative

performative. Sometimes in the last couple of years and again this is not on the research side. This is not on the investing side but on the last couple of years suddenly banks losing their interest in in climate period etc. like suddenly these client all this talk that executives love to talk about on panels in the mid2010s suddenly they don't say it anymore but I so I thought it was actually interesting that here in 2025 and you're still talking about climate net zero being unrealistic in your view from a social perspective temperatures expected to continue to rise talk to us about like why I shouldn't be cynical about when I see financial institutions talk about climate and why it should actually be you know one of the key pillars of risk going forward

Yes. So our view is very kind of specific on this which is we want to think about what are the big structural forces that act on markets over a 5 10 year horizon and what are things that really affect the fundamental risks that investors face. So in conjunction with these other forces happening at the same time in terms of demographic shifts and AI and worries about debt and deglobalization, we also have I think a need to think about whether there are risks associated with climate. And the specific view that we have on that is that it seems highly unlikely that the world will achieve net zero by 2050 for two different kinds of reasons. One is that it's socially and politically really hard to change behaviors fast enough. Secondly is the power demand of AI. So you know so as far as we can tell by the end of next year global data center power demand will be the same power demand as the total power of Japan. So we basically added a G3 economy onto global power demand and that will continue to grow. So that implies that we don't hit net zero. The climate science seems to suggest that means that it's likely we see a warming greater than 2°. And then the question is well do investors need to care about this? Does this matter either from the point of view of inflation, inflation risk, supply chain risk or growth rates? So in our book, we spend a lot of time so pooling academic evidence on what the effect is of a change in temperature on GDP. Now the first thing to say is you plot the 28 studies that we looked at in terms of the link between temperature and growth. They're all over the place. It's a big bunch of points. So the first thing to say about it is there's huge disagreement about what the relationship between temperature and growth is but the trend line through it if you simply put a sort of average line kind of through it is downwards. So yes we can argue about how material it is but there is a link that seems to be the consensus across the academic work that we looked at that you know at the margin a bigger increase in temperature is bad for growth. Again the question is you know how does this matter and how do people kind of think about it and what's the scale of this because the average of all those you know implies a change in the equity outlook 10 years forward that just simply shaves 2% peranom off the global equity outlooks that might not sound like a very big deal you know it's certainly smaller than the impact of demographic change or mean reversion on an equity forecast having said that the more recent forecasts are worse than the older forecast and imply something that looks like a minus.5 or minus.6% 6% peranom impact on equity returns at the 10-year mark. And that starts to get to be the same kind of order of magnitude as demographics has on the average return that one should expect. But I'd argue that we go beyond that because the real thing that struck me is just the scale of the error bars around these forecasts is huge. So yes, of course, we can argue about what globalization and demographics and corpor profitability and labor versus profit share will do to the earnings outlook and we can try our best to have models for those and we have certain error bars around them. But the error bars around climate and also AI I would say are two things that just are very different from everything else that introduces the sense of radical forecast error in what we're doing and really implies that people need to be you know thinking about perhaps diversification in a more radical way because we have path error on 10 years horizons that's much wider than it's been historically.

Going back to AI for a second, obviously this is really important not just for the energy transition and the impact on climate change, but also for the economic outlook, the impact on productivity and also of course for the equity market where we've seen the big tech giants just continue to dominate. Is there a risk or would it be your base case that AI basically just intensifies I ex I guess existing market imbalances where the big just get bigger and only a select group of tech firms is kind of favored and that presumably would undermine productivity gains broad-based productivity gains.

I think the biggest issue around trying to forecast productivity gains is that with any new technology that comes along, it turns out to be really really hard to forecast what the impact that has on aggreate productivity and the ability of the economic expression you know in general and you know everyone across the street to forecast productivity has been really poor for a long long time. So I guess we should firstly approach productivity forecasts with a degree of humility and certainly shouldn't rely on huge productivity gains as a justification for earnings growth. Say that's the first thing I'd say. Secondly is that it has to be put in conjunction with downward forces on growth um from the things we spoke about earlier in terms of deglobization and demographics etc. So yes, it seems likely we do get a productivity improvement from AI and the scale of it is hotly debated. But the question is, you know, is that enough to overcome downward forces on growth from the levels of growth that we've become used to for the last kind of 30 or 40 years. And the third element is to what extent does a large productivity gain from AI require significant uh displacement of jobs? Now that's a very hotly debated topic. We simply don't know the answer to that yet. I mean on the one hand one could point to 200 years of technological advance and automation and yet we have almost full employment. There's no evidence to date that there's been a structural trend increase in unemployment through all the automation we've seen uh since the birth of the industrial revolution. You know, equally at the same time, the jobs that seem most at risk from AIdriven automation are those in non-unionized sectors. And that seems like a different kind of risk than the one perhaps we've seen, you know, through automation shifts the last kind of 30 or 40 years. So I think the heart of the macro aggregate you know kind of question around AI is firstly what's the quantum of the productivity increase that we can expect you know whether that is enough to offset these downward force and growth elsewhere and if you are very bullish on the outlook for AIdriven productivity growth do you necessarily have to bearish in terms of the job outlook and that's a very much an open question at the moment

I have just one more question and it's a personal one if you don't mind, but I know you you kind of publicly declared that you're no longer a quant, which is kind of funny because I kind of imagine the equivalent of the office scene where Michael stands up and shouts out, "I declare bankruptcy." I kind of imagine Indigo at the office of Alliance Bernstein shouting, "I am no longer a quant." But anyway, what does all of this mean? This sort of big shift mean for systematic investing that basically relies on, you know, back testing reams and reams of historic data.

Yeah. So I I think there is a case made that the bigger structural level that we've been in a certain economic environment for 30 or 40 years and the forces that drove that you know have run their course or going into reverse and therefore some of the rules of thumb that have existed in for a long time aren't going to work in the same way. Now that does not mean that systematic investing um suddenly stops working because obviously there are firstly a host of processes that operate over shorter time horizons that don't need to take into account these huge slowmoving structural forces. Secondly, it would be you know almost absurd I think to reject any kind of systematic quantitative input given the advances in AI that are taking place and assume that one can sort of carry on working in the same way. So it's not to kind of reject with that kind of process at all, but it is I think hard to say that the general approaches that have worked are going to carry on in the same way. Specifically when it comes down to the really hard questions around helping clients think about kind of governance and back to this question we spoke about at the beginning which is actually what is the real measure of risk that we care about. you know is that the volatility of the portfolio or is it uh a measure of purchasing power and that's the kind of deep governance question that I think is very you know hard to attack with any kind of systematic process almost necessarily kind of sits outside of that and so it's those kind of discussions that we're spending a lot more of our time on clients because we think those is where some of the bigger shifts are taking place indigo Frasier Jenkins at Alliance Bernstein thank you so much for coming on it had been too long it's always interesting to talk to and read your stuff appreciate you joining us on our

Thank you very much for having me back on the show. It's been huge fun. Thank you.

Thanks, Nico.

Tracy, I always really like talking to Indigo. It'd been too long and I think he's probably one of the best out there. you know, a lot of people try to synthesize big picture ideas and, you know, must be a lot of fun like going around the world and talking to clients and talking about big ideas. I think he's like one of the best at it and I think uh he's very cogent and takes that process very seriously.

He does. I do imagine you must get the same questions from clients over and

that's so valuable, right?

Yeah. I mean, I guess it allows you to weigh what's the biggest concern for people, but I just wonder I mean I guess you give a sort of set response each time you hear it. I don't know. or maybe you refine your arguments as you go along. I got to say, speaking of arguments, you mentioned that this book is from Indigo is publicly available. We should put a link in the show notes um or something to it so everyone can read it alongside this episode.

The amount of data and interesting charts in there, it's certainly well worth anyone approing. So, we will definitely make sure that we find a way to point people to that. So I'm really interested in this question of and on the dollar specifically about the sensitivity of the dollar to risk right because for years the view is something bad happens or something new happens or something people get anxious in the flight to dollars and I still think you see that to some extent but it definitely seems true. I mean, you know, you see this recovery in a lot of assets since early April. We haven't seen the dollar. And I think you have these moments now where you have a sort of quote risk event unquote and there is no flight to the dollar. It's a flight to gold or something else,

right? And the Fed example is well, it's a really good example. The two things I kind of took away from that conversation are even if we're talking about a sea shift in what's happening in the world and how that translates into markets,

it doesn't mean it's all going to happen at once, right? This can be a very very slowm moving thing. And I I guess I'm going to use the old tanker cliche, right? Like if you're in a speedboat, you can turn it very quickly, but if you're talking about these huge huge structural changes, it's more of a tanker and it takes some time. And then the second thing is I think what is actually different about this moment and Indigo talked about it at the beginning is just the confluence of major changes that seem to be happening. It's not just death of the dollar potentially. It's also death of the dollar plus declobalization plus AI plus population growth and all of that. Now, I've been thinking about this and it's a little bit tangential to what we've been talking about specifically, but there's obviously so many changes. But even if you just take one, and one that's been on my mind lately is self-driving cars. Even if there was nothing else happening technologically in the entire world, I think you could make the argument that self-driving cars, for example, will massively restructure urban landscapes. Right? The way that we arrange cities and suburbs and exerbs has the potential to change massively if people don't have to drive anymore. And this is just one thing. It actually doesn't really even get talked about that much. But if you actually follow follow through the implications, it's actually big. But we there are so many things happening right now. That's just one minor one that doesn't even get that much attention. But add in self-driving cars. Add in AI and the effect that that has on disrupting the white collar workforce in some way. Add on the rise of sort of domestic political volatility and the attacks on the Fed and so forth. Add on the fact there are multiple wars going on, etc. uh add on, you know, the fact that birth rates are collapsing.

This is a very long list, Joe.

Well, this is a lot going on. There's a lot going on. And each one of these has the potential to be and they're all real.

I think you need to travel around the world talking to clients about how self-driving cars are going to impact urban planning.

I'd love to. You know what I think we should do? We should go around the world and do live oddlots events, but we don't have to ask any other question. We just get to hear what everyone else is interested in.

They're the clients basically. No, no, we let the client, we let the listeners, you know, like we don't we just What do you guys want to hear about a listen? Let's go on a listening tour.

We should do that. Yeah,

I would love that. That would be a nice

Yeah, let's do a listening tour.

All right, shall we leave it there?

Let's leave it there.

This has been another episode of the Odd Thoughts podcast. I'm Tracy Aloway. You can follow me at Tracy Aloway

and I'm Joe Weisenthal. You can follow me at the stalwart. Check out Indigo Frasier Jenkins's book. You can find it at the Alliance Bernstein website. You can search that. Follow our producers Kerman Rodriguez at Kerman, Dash O Bennett at Dashbot, and Kellbrooks at Kellbrooks. For more OddLots content, go to bloomberg.com/odlots.

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