Odd Lots - How to Prepare for a Post-Dollar World with Inigo Fraser Jenkins

Episode Date: July 24, 2025

People talk all the time about the potential for huge turning points in history. And they've been talking about the possibility of the US losing its dominant position in the international financial order for some time. So far it hasn't really happened, but there are plenty of people who think that the Trump's focus on tariffs and higher deficits could mark a sea change in the appetite for dollar assets. In this episode we speak with Inigo Fraser Jenkins, strategist at Alliance Bernstein, about some of the big changes that are altering the investment landscape including: higher debt loads across the world, the rise of AI, de-globalization, demographics, and more. As he points out, the difference right now is that we're not just talking about one possible regime change for investors, but a long list of them. Inigo talks about how these shifts might play out and what investors can do to prepare for them.Read "The End of US Exceptionalism?" by Inigo Fraser JenkinsOnly Bloomberg.com subscribers can get the Odd Lots newsletter in their inbox — now delivered every weekday — plus unlimited access to the site and app. Subscribe at bloomberg.com/subscriptions/oddlotsSee omnystudio.com/listener for privacy information.

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Health, support by Sante Canada. Bloomberg Audio Studios. Podcasts, Radio News. Hello, and welcome to another episode

of the Odd Lod's podcast. I'm Jill Wisenthall. And I'm Tracy Allaway. 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 Powell. 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 share, with many other things, there is this sort of like erosion of an existing set of norms or expectations, et cetera.

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 isn't changed. 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.

Yes, yes. 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 de-globalization.

There's population growth going to shrinking populations. There's higher inflation instead of years and years of deflation. And the interesting thing about that is, of course, how are people going to react to that? How are markets going to react to that, especially when they've grown very, very used to the previous situation through, you know, back testing and all of that stuff. Totally. And I'll just say one thing which makes this very interesting timing-wise from the perspective of investors because there are a lot of trends that seem to be, if not going in reverse, at least a new direction, et cetera. One trend that hasn't really gone in reverse,

however, is you are still getting paid a lot to own U.S. tech. And, you know, U.S. markets, they're up solidly on the year. They are under. performing, which that is new. Global equities have outperformed U.S. 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 U.S. 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 U.S. 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 several years, but always one of the most interesting guys around. We're going to be speaking with Inigo Fraser Jenkins. He has 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 post dollar universe and what that could look like. So Inigo,

thank you so much for coming back on Oddlod. Thank you very much. It'd 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 de-globalization, 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 you made that some of the problem.

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 three to six 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 all these just different things. And if these kind of questions, we really want to 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 timeframes 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 in the next 20 or 30 years? I think the interesting thing is there are a bunch of different forces acting at the same time of markets. Now, all these are strategic forces, but the one's talking about in the book, that is. And so they can be thought about as acting over a, say, five to 10 year timeframe. And of course, anything that involves a conversation on demographics, occasionally 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 de-globisation, of example, is tied with concerns around debt levels, it's concerned around the shift from globalisation, de-globalisation. 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 were issues that were sort of further off in some sort of notional strategic future, then in fact what we've seen in the last

six months or so is those longer term issues become things that dominate the near term. So that's a longer term future has become an issue that few people have faced now. Just on the demographics point, you mentioned that a lot of, you hear that word is, okay, the slow-moving 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 not happening slowly.

Yes, to the changes there are certainly happening very rapidly in terms of the context of past changes have 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

the 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. environment in terms of the economic 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 have 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 de-globalization, that demographic shift alone undoes a very large part of this increase in the global work club pool, but that we've seen through the process of globalization since the 80s. Now, people can get very negative about this, but 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 growth lies. So, for example, if you look at the sort of prognosis from here onwards, we have an outlook of the next 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 0.2% per annum. But in Europe, the working age population is in a shrink at about half percent per annum. In China, it's really going to shrink quickly at about 1% per annum between now and 2050. So, yes, I mean, other forces are happening in parallel with this kind of clearly, but as a base level of effect, that does change one's view on what growth rates look like.

But it's 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 U.S. exceptionalism point, although growth is slowing in the U.S., the base assumptions 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 debt-driven 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 a broadly continued appetite for debt. So when would that actually become a concern for investors? I keep being asked this question by investors in business. I bet. It's been a common question. I'm really for the last a 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 U.S. problem. That's actually a G7-wide 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 of 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, 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 of years ago in the UK, around the LDI crisis, prior to last French election. If you get these episodes where the market tries to price sovereign risk, but it's very hard to 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 costs compared to the defence budget. And the reason that 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 defence 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 Habsburgs, 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, which 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 costs 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 irrelevant today. So I guess to conclude in terms of how one thinks about this, I think the sovereign risk is something that perhaps should be priced. Given the massive uncertainty about how that risk is perceived in the market versus demand for liquidity, I think

one's just left with a kind of directional answer saying, well, yes, at some point the yield curve should steepen, but it is very, very hard to make a tactical kind of call around that. I think perhaps a more pertinent way for investors to actually think about them in practical terms is that it means that the dollar is less of a safe haven asset 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 a dollar being different from where it was, say, six months ago. I think it's become almost consensus across the street that people are now more naked

than the dollar than they were, say, six 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 it 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 this. dollar in their portfolios? So I guess I first of all got to 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 dollar has declined at same times that bond deals have gone up, 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't. an asset. And you've seen an increased correlation between assets such as gold, silver, platinum, and Bitcoin, all things which are plausibly possible non-feat zero duration assets that, you know, that through a certain lens share certain characteristics anyway. So you've seen this in a market behavior where more dollar risk has been priced, at least there been episodes of that.

What I think would really change this, though, and make it more of an immediate concern for people, as 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 is still the dominant. We have forces. But that's the thing that we really look for for a change. I think one of the background is, when it 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, a 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 de-dollarize 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.

I think that could spread to other kind of assets as well. But that's a sort of non-market-driven, more geopolitical concern that can carry on. And then you have specific investor concerns, you know, when they've 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, and people have backed away from that, so it doesn't seem to be an immediate concern right now. But there's 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

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-free story that sits in the background. I think we have many years to come. Today's show is brought to you by Vanguard. To all the financial advisors listening, let's talk bonds for a minute. Capturing value and fixed income is not easy. Bond markets are massive, murky, and let's be real.

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Sante Canada. 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 conversations I ever listened to was between Howard Marks and Mike Milken at the Milken conference in L.A. 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 nifty 50

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-eat-eastern. 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, inflation has been going down. And the same time, we've seen strong returns, both from equities and from fixed income

assets over most of that time, and equities and fixed income are 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. We're 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 the next 10 years? or is the risk of a loss of purchasing power 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 eking out a certain. certain level of real return becomes much, much harder. So I think actually there ends up being a direct tension between the measure of risk as expected of all 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 vol. 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 shillopi is 35 times, and I'm not spelling out, particularly you can't bullish a long-term outlook. But I think people have no choice. You have to think about taking more risk, because the other 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 a way of purchasing power that is the real focus. And that is a shifting 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 One of the things that you mentioned is geopolitics, and of course there are multiple wars going on. There is the weaponization of the dollar. Of course, Russia was on 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 shackles like that that the government has put on itself to maintain some sort of stability or even just sort of the volatility and trade policy or the fact that the government 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 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 ultimately, I think that inflation is the most likely route. I think you have to be hugely optimistic about the growth that can come from AI in order to have a view 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. And 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 the discussions taking place about should there be some kind of mar-a-laga record and potentially changing the status of foreign orders of US debt.

And, okay, it looks like that's been backed away from my suggestion and certainly hasn't come up in meetings for 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 forces which are very strong to try and find dollar alternatives. 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 dollar is more risky.

When things get really bad, when there's a geopolitical shock, often in a 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'm not sure that's enough to term one super bullish in terms of long work. That's fair. Again, I, you know, but it's just to stress, you know, I do think that the U.S. market and global equities are going to produce, we have 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 that justify valuations where they are. But to justify a shift upward in valuations, which I think is what you're kind of getting to have been a 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 preserve that purchasing power? Yeah, so there's a broad range response.

And it's not as simple, I guess in future. it, I think as perhaps with hindsight it was over years when both bonds and equities produce positive returns and had a negative correlation between them. I mean, thinking it was a real assets, for me, number one is global equities. I mean, as long as inflation is 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 of other real assets as well, be it real physical assets or be it areas of private assets,

you have some kind of private debt that has a floating rate nature attached to it. 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% per annum as far as we can tell. So it's a very small number.

Although maybe one should say that if you're buying it because you're frightened of some really risk off 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 it comes because in the last

10 years, obviously, 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. Although in the last kind of couple years, obviously, girls actually outperformed. Yeah, yeah, totally. And then I lose sleep over that, too. I just don't sleep well. I think the key argument in favour 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 favour of it is that, look, yes, you want a big overweight on equity strategically, even if it's not that bullish an outlook, but just because that gives you a positive real return, the question is, what 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'll also take the view that for geo, political reasons and non-profit-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 of forecasts on that, because that's simply too hard to do. Eating well shouldn't be complicated, but somehow it turns into recipes, prep, clean up, and half your Sunday gone. Factors solves all that. These are fresh, ready-to-eat meals designed by dieticians, delivered to your door and ready in just minutes. No prep,

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years. Fast internet, long ad. But it's so worth it. Visit bell.ca for more details and to check availability. Bell, connection is everything. This is Tom Keen, inviting you to join us for the Bloomberg Surveillance Podcast. It's about making you smarter every business day. I'm Paul Sweeney. We bring you complete coverage of the U.S. market open. We cover stocks, bonds, commodities, even crypto, all the information you need to excel. And I'm Alexis Christophers. Bloomberg surveillance also brings you the analysis behind the headlines. We do that through conversations with the smartest names in economics, finance, investment, and international relations. We do all this live each and every weekday, then bring you the best analysis in our daily podcast. Search for Bloomberg surveillance

on Apple, Spotify, YouTube, or anywhere else you listen. On the East Coast, listen at lunch. And on the West Coast, listen as soon as you wake up. That's the Bloomberg Surveillance Podcast with Tom Keene, Paul Sweeney and me, Alexis Christophorus. Subscribe today, wherever you get your podcasts. Bloomberg Surveillance, Essential Listening, each and every business day. 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. We've seen performative. Sometimes it feels perfunctory. 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 in the last couple of years, suddenly banks losing their interest in climate period, et cetera.

Like suddenly these clients, all this talk that executives love to talk about on panels in the mid-2010s, 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 the social perspective, temperatures expected to continue to rise. Talk to us about why I shouldn't be cynical about when I see financial institutions to talk about climate and why it should actually be 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 five, 10 year horizon. and what are things that really affect the fundamental risks that investors face?

So in conjunction with these other forces that are happening at the same time in terms of demographic shifts and AI and worries about death and de-globalization, 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 of the amount of AI. 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've 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 two degrees. 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 spent a lot of time 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 lying through it, if you simply put a sort of average line 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 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 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 0.2% per annum of 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 implies something that looks like a minus 0.5 and minus 0.6% per annum impact on equiturns at the 10-year mark. And that starts to get to be the same kind of order of magnitude as demographics have on the average return the one should expect. But I'd argue that we go beyond that because the real thing that struck me, it's just the scale of the error bars around these forecasts.

It's huge. So, yes, of course, we can argue about what globalization and demographics and corporate 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 are just 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 thinking about perhaps diversification in a more radical way because we have path error on 10 years' horizons as 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 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 accurate 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 put in conjunction with downward forces on growth from the things we spoke about earlier in terms of de-gloversation 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 last 30 or 40 years? And the third element is, to what extent does a large productivity gain from AI require significant 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 since the birth of the Industrial Revolution. Equally, at the same time, the jobs that seem most at risk

from AI-driven 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 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 on growth elsewhere. And if you are very bullish on the outlook for AI-driven productivity growth, do you necessarily have to be a bearish in terms of the job side look? 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 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 Inigo at the office of Lyons 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 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 to traverse. And therefore, some of the rules of thumb

that have existed for a long time aren't going to work in the same way. Now, that does not mean the systematic investing 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 slow-moving 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 the one can 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 governance. And back to this question, we spoke about at the beginning, which is actually what is the real measure of risk that we carry about it? You know, is that the volatility of the portfolio, or is it a measure of purchasing power? And that's the kind of deep governance question that I think it's 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 the clients, because we think that those is where some of the biggest ships are taking place.

Inigo, Fraser Jenkins and 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 Adlau. Thank you very much for hanging back on the show. It's been huge fun. Thank you.

Thanks, Inigo. Tracy, I always really like talking to Inigo. It's 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, it 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 he's very cogent and takes that process very seriously.

He does. I do imagine you must get the same questions from the lines over and over and over over. 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 Inigo is publicly available. We should put a link in the show notes 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 uproozing. 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 and 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 slow moving thing. And 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 Inigo 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 it. 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 ex-erbs 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 through the implication, it's actually big. But 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 color

workforce in some way. Add on the rise of a sort of domestic political volatility and the attacks on the Fed and so forth. Add on the fact there are multiple wars going on, et cetera. add-on, the fact that birth rates are collapsing. This is a very long list, Joe. There's 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 odd lots events, but we don't have to ask it any questions. We just get to hear what everyone else is interested in. Then we're the clients, basically. No, no, we let the client, we let the listeners, you know, like we don't. We don't. We just. What do you guys want to hear about? Let's go on a listening tour. We should do that.

Yeah. I would love that. Yeah. That would be a nice change. 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 All Thoughts podcast. I'm Tracy Allowway. You can follow me at Tracy Alloway. And I'm Joe Wisenthal. You can follow me at the stalwart. Check out Inigo Fraser Jenkins's book. You can find it at the Alliance Bernstein website.

You can search that. Follow our producers, Carmen Rodriguez at Carmen Armin. Dashel Bennett at Dashbot and Kel Brooks at Kel Brooks. For more oddlots content, go to Bloomberg.com slash oddlots with the daily newsletter and all of our episodes. And you can chat about all of these topics 24-7 in our Discord. Discord.g.g. slash oddlots. And if you enjoy oddlots, if you want us to go on a listening tour of the world, then please leave us a positive review on your favorite podcast platform.

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