Bad News Is Good News — Until It Isn’t

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1:53Merryn Somerset Webb: Welcome to the Merrin Talks Money Market Wrap, where we talk about the biggest moves in the markets this week and what is driving them. I am Merrin Somerset Webb, UK money editor at large. And I'm John Stebbik, senior reporter for Bloomberg and author of the Money Distilled newsletter. Had complaints, John. People think that you should keep saying award-winning Money Distilled newsletter. There are people who just want you to remind me every single week that I haven't won an award in, I don't know, two years, three years I haven't won an award. Award givers. What's up with that? I was trying to be kind, but if they insist, the award-winning Money Distilled newsletter.

2:33Merryn Somerset Webb: Excellent. Good to know. I mean, I haven't won an award for a couple of years either, actually, so maybe. Maybe that's the other reason I stopped saying it. There's got to be someone out there who'd like to give us an award. I mean, after all, we talk about such interesting things. And today we've got quite a lot to talk about, actually. We're going to talk about the Bank of England. We're going to talk about the midterms and the market's response to that. And of course, whenever you talk about something like that, it ends up being a conversation about AI. Because everything is AI now, even elections.

3:00Merryn Somerset Webb: So let's start with the boring bit, John, the Bank of England. Base rate up 4%. Yes, but I can't believe you called it boring because the market had expected seven people to vote for a hike and two people to vote to keep rates at 3.75%. But instead what happened is eight people voted for a hike and one person voted for an even bigger hike. If Catherine Mann had got her way, it would be 4.25%. So there we go. Cats amongst the pigeons. I'm really an outcomes person, to be honest, John. The result, regardless of the conversation, the result was exactly as we expected. Although I suppose what you're really trying to say is that it may be that there is another hike coming.

3:47Yeah, basically. I think people kind of get their knickers in the twist about this, and I think it's interesting. It's absolutely 100 % true to say the Bank of England cannot put out a single barrel of oil extra, and it can't reduce kind of like energy prices or anything like that. But at the end of the day, inflation has been above the 2 % target forever. And the Bank of England has one job and it's to keep inflation at 2%. And the easier choice, the backside covering choice, regardless of whether you think it makes any sense or not, is to put interest rates up. Because you can't turn around and say, in the middle of next year, CPI is going to be 5 % and then simultaneously say, but we're not going to worry about it.

4:30So that's just it. That's why rates are going up. And you can get annoyed about it all you want, but that's the kind of long and short of it. That's the structure we have.

4:41Merryn Somerset Webb: And the government could do something about this to a degree in that a lot of the inflation is driven by, well, obviously our appalling energy policy. And it's driven by public sector wage rises. it's driven by the national insurance hikes etc they're all in there so a lot of this is is self-inflicted yeah it's all stuff that um is fundamentally falls under the remit of there are structural things we need to do about the supply side of the economy and we're not doing them and so all you're left with is an economy that can't really take very much growth without inflation going up and certainly can't take any external shocks because we've got no reserves to kind of deal with external shocks.

5:27So we're just very vulnerable. And that vulnerability is not something that you can fix with monetary policy.

5:33Merryn Somerset Webb: Well, isn't it lucky, John, that we don't get much growth, so we don't have to worry about that too much? Well, this is true. Thank the Lord. I know, silver linings all around. Now look, there are silver linings, right? Something happened this week that you've been waiting for for quite a long time you've got a special hat for it and everything i do i do i was immensely excited because today is the day that the footsie 250 broke the magic 25 000 mark for the first time ever those who follow me on x will notice that i have recently been manufacturing in my small factory uh which i will refuse to acknowledge the presence of any miners working in that factory, but their nimble little fingers have stitched hats with FTSE 11K, 25K, and the government bond at 6%.

6:25And we got the 30-year government bond at 6 % yield, but now we got the good one. We got the FTSE 250 at 25K.

6:33Merryn Somerset Webb: I think your followers are only disappointed that you insist on wearing only one hat at once. I would like to see a picture of you on X with all your hats on. That's a challenge. That's a challenge. Yes. Now, I hope that a lot of our listeners have taken advantage of low prices on the UK stock exchanges and bought small and mid caps and are benefiting from this. But I am concerned, as I know you are, John, by a reporter today from Pamela Iberum, looking at small caps. And we've been saying over and over and over again to our listeners, we've been saying, if you don't buy them, somebody else will, and then you won't get the growth or the returns from them.

7:16Merryn Somerset Webb: So here's the horrible, shocking statistic. Actually, this is the second shocking statistic that I came across today. Do you want to take the other one briefly before we move on to this one? I say, yeah. Yeah, 23 % of Irish electricity, of metered consumption, 23 % goes on, I might let you guess. So it's the 23 % of the Irish electricity bill or the electricity consumption? 23 % of all electricity consumption in Ireland is used by? I have no idea. Data centres. Seriously? Yes. Up from 5 % a decade ago. And in America, that equivalent number is 5%. I don't know what it is for the UK. But that is, I mean, Ireland has put itself out there as a location for data centers, and it's not a very big country.

8:06Merryn Somerset Webb: Sure, I get all that. But nonetheless, 23%, and it's heading towards 30. That's the expectation that it hits 30. How many data centers have they got? This is not something I've been paying any attention to. No, just someone mentioned it to me yesterday. They said, did you know? And I said, don't be ridiculous. And then went away and looked it up. And that's what the government statistics tell you. Anyway, that's another podcast. We'll do a whole podcast on data centers quite soon. But that number, it just really struck me. Okay, so the second shocking number of the day. Year to date, approximately 13%, 1-3 % of the market cap of the FTSE small cap has been taken out through bids.

8:45Merryn Somerset Webb: This is the highest share of market cap to delist since our measurement begins in 2001. The result being that there are now below, below, fewer than 100 stocks in the FTSE small cap X investment trusts index. Yeah. I mean, it's just absolutely extraordinary. UK small caps are basically just, they're disappearing. They're disappearing. For perspective, so 30 years ago, there were 460 stocks in that index. So, you know, it really is absolutely, I mean, obviously 95 is not much, but it is tiny compared to what it was. So on average, 11 a year gone. 11 a year gone. I mean, there are a few IPOs coming on, but we'd need 300 to get us back to where we were.

9:32Merryn Somerset Webb: It's absolutely extraordinary. Well, I mean, there's so many things that are to blame for it. Because there is obviously de-equitization has been a thing everywhere. But the other thing that really hasn't helped here is all the method rules and the rules about unbundling charges and all that. So effectively what you got is you get no brokers covering stocks anymore because it didn't pay to do it. And so the kind of profile of the low companies has been just obliterated. Well, it's a mixture, isn't it, of all that regulation and the government supplied stuff and the rise of private equity on the other side, which means that listing has become significantly less attractive, but it is possible to survive and grow for a very long time out with the listed market.

10:20Merryn Somerset Webb: So it's a combination of the two things. But I do think it's very worrying. And we've talked a lot about how we feel, I certainly feel, that the listed markets are so important to shareholder democracy, you know, democratic capitalism as well. And so seeing them gradually disappear like this in the UK is very distressing. government, reduce regulation. I mean, private equity, they're getting their comeuppance. So one side of it is working itself out. Maybe the public markets will return.

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13:24Merryn Somerset Webb: Now, the other thing that we must really talk about, although I will just say one more time, if you don't buy them, somebody else will. If you're interested in small caps, go look at small caps and buy small caps. Interesting stuff out there. The other thing that we should talk about is, well, the midterms. We should talk about America. And that means, I know we were talking earlier, saying we talk about AI all the time on the podcast. Every podcast ends up being about AI, but everything is AI. Everything is AI. And a lot of the midterms were about AI as well, and that there is an idea that a lot of people voted Democrat rather than Republican because they're concerned about data centers, because they're concerned about AI regulation, because they're concerned about, oh, I don't know, the apocalypse.

14:06I think there's an element of that, and I also think that even if that's not why people voted, the Democrats that get in are more inclined to take a slightly more nimby-ish view on data centers as well, aren't they?

14:20Merryn Somerset Webb: Yes, and quite a few of the big states that are known for data center building are now Democrat run. So you would expect some more localized regulation and change to the ability to put these things up, which has lots of interesting connotations. One of them being that a large part of US GDP growth is currently driven by data center build-outs. And they're huge projects and employ thousands and thousands and thousands of people. So that's one thing. If growth in the buildout slows, then that will have implications for the economy as a whole. But then the other thing that we have been seeing is the effect on the market.

15:03Merryn Somerset Webb: So there's obviously we've been talking about the slide in AI and AI adjacent stocks in general over the last month or so, as people have begun to get worried about whether there are going to be enough revenues to make all this capex worth it, whether the capex boom in itself is worth it. And so the idea that there might be some friction in here, something that slows it down, That's not all bad for the hyperscalers, particularly the ones who already have a lot of compute bank. So we've seen the hyperscalers pop. But at the same time, we've seen the NeoCloud companies, the one whose business is just to build data centers and rent the stuff out.

15:40Merryn Somerset Webb: They've come off a lot. And then, of course, it's not great for the likes of NVIDIA. And also we've seen some fairly big slides in the Korean market because of Samsung and SK Hynix, who are obviously memory chip makers as opposed to hyperscalers. So it does seem to have, of course, some kind of separation in the market, right? I think so. But I think also a lot of this is just the chain has already come off the AI sector, even before, obviously, the kind of midterms had happened. And I think there's also an element of people just, it's almost like with this out of the way, everyone can start looking at, oh, well, okay, what are the next big drivers that are going to drive the market from here?

16:21And I think the fact that we saw oil prices come off for no particularly good reason, or rather, it's just that the market's decided that oil, we're not going to get another attack on Iran anytime soon and that's not going to escalate. There's no potential reason for thinking that. And I think what we actually saw straight after the midterms was a sense that the market is getting actually more worried about the economy slowing down as a result of an AI slowdown than it was before. Before it was kind of focusing on oil-driven inflation and now it's sitting there thinking, oh, wait a minute, this might actually, you know, we might lose growth.

17:04And on the other hand, that means that we might not get more interest rate hikes because you kind of saw the dollar get weaker. You saw gold go up. And gold has had a pretty rough few months, actually. But it seems that's kind of drawn a line under it. And certainly the sense I'm getting from looking at how things have moved around, it's almost like the market is slightly relieved that the US economy might slow down because it means that you won't get as many interest rate hikes. And therefore, you can do all those trades.

17:35Merryn Somerset Webb: Yeah, well, this takes us back, doesn't it, John? Yeah, exactly. Take this back to a 2006 hypothesis. Bad news is good news. Anything bad that happens make it less likely that interest rates will go up further, which makes it more likely that growth stocks will be okay. And we don't know how that ended. Well, exactly. I mean, this is the problem. I mean, actually, just looking at the headlines flashing up today, the Nasdaq's now down about 3 % today alone. That's quite a big drop. I mean, I think I would hazard, I guess, that the bubble has basically burst at this point because the level of enthusiasm for AI really kind of went off the boil maybe about a month ago or so.

18:22And now we're getting the sense from all of the big kind of investors in it that the investment might slow down. And then if you're also getting the sense from the Democrat, and a midterm sweep that the building will slow down and everything about it is going to slow down the problem with bubbles is that the issue is not so much whether there's anything to them or not, they've got to be maintained by a constant pace of acceleration so if you don't get that acceleration, in fact you actually get a slowdown, then it's already dead in the water and it just takes a while for people to catch up because you say oh well no it's okay because things are still getting built or mine's still getting spent but the point is the pace of acceleration has either slowed or it's actually decelerating and that's the thing that keeps the bubble momentum going and I think so I think we're kind of already there and now we're probably at the point where you say everyone kind of then rationalises it and says oh yeah bad news is good news and then we probably do then still have a point to come where actually no bad news is just bad news I need to get out of this so I guess that's kind of gloomy actually

19:31Merryn Somerset Webb: but is that what you would like to end today with bad news is bad news yes why not ok but bad news is bad news but you've got your 25 ,000 hat exactly so bad news is bad news but sometimes there is good news in different places if you look for it exactly maybe yes maybe the US the bad news for the US is perhaps the good news for places that are less exposed to AI, like the UK. In fact, you can buy yourself a FTSE 25K hat. Although one thing I would say, John, one thing I would say is that while the UK is not AI on a stock market, so everyone says, oh, they've got no tech companies, that's why they're so cheap, blah, blah, blah, but we know that that's only part of it.

20:21Merryn Somerset Webb: It is tech that is driving quite a lot of our very limited growth at the moment. We have a lot of AI consultancies, a lot of growth in the tech sector. So it is entirely possible that while we might present ourselves as anti-AI, and I'm good with that. In fact, under the herd, quite a lot of our obviously not particularly exciting growth, such as it is, is AI driven. in that case yeah i guess you're back to square one then aren't you i mean suppose it kind of depends the the lower tech stuff you know isn't but at the same time yeah if the higher paid jobs are all either in ai or in ai consultancy and then everyone says either actually we're spending too much on ai we need to cut back therefore we're not going to need all these kind of like people giving us you know flashy explanations how it works and you don't need you don't need flashy explanations.

21:18Merryn Somerset Webb: You just come to Merintalk's money for simplistic explanations. Exactly, exactly. I suppose that the good news is good news bit of that is that if there is a lot of tech spending in the UK and everyone is hiring an AI consultancy to tell them how to use AI, we have got a productivity boom ahead of us. Yeah, I mean, productivity apparently has improved. I take productivity statistics at the best of times with a very big pinch of salt. All statistics, all statistics. particularly if they're generated by the OBR well they change them a lot and the productivity statistics that got recently revised were the ones that we'd been agonizing about for the past 20 years or something like that so you know if you can if it takes them that long to get them right I just don't actually see the value in them at all so that's one reason why I'm actually very skeptical that anyone can tell you anything particularly definitive about AI helping productivity.

22:17I think whenever you see people genuinely getting fired as en masse, which again, we still haven't seen, you can still have a very, very, very defendable debate on both sides about whether AI is making any difference to the labour market at all. And yeah, until you sort of see big companies actually getting rid of people and explicitly doing it because of AI as opposed to doing it because they've secretly offshored staff again.

22:43Merryn Somerset Webb: Yes. And that'll be, when that does happen, that'll be good news is bad news. We can't win here, John. We really can't. We really can't. Just have a diversified portfolio, folks. I think that's the only answer. Do that. Do that. And make sure that you understand the composition of your index holdings. Exactly. Right. Okay. I think we better leave it there. Thanks, John. Thanks for listening to this week's Merrin Talks Money Markets Wrap. If you like our show, rate, review and subscribe wherever you listen to your podcasts. And be sure to follow me and John on X at MerrinSW and John underscore StepX.

23:18Merryn Somerset Webb: This episode was produced by Sam Isadi and Moses and Em. Questions and comments on this show and all our shows are always welcome. Our show email is merrimoney at bloomberg.net.

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