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

25:27And 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 shillip is 35 times. and I'm not spelling out particularly 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.

26:04et cetera. 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 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 mentioned is geopolitics. And of 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.

26:42But what about politics? I mean, we always talk about geopolitics, but I'm also interested in 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 in 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 politics, domestic politics, play into global perceptions of dollar stability?

27:25I 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 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 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.

28:05And there certainly 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-lago accord and potentially changing the status of foreign owners of US debt. And OK, it looks like that's been backed away from, I'd suggest, 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 forces which are very strong to try and find dollar alternatives.

28:41And that, I guess, sort of feeds this kind of view 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 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.

29:14Since 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.

29:57Is that a possibility here? I mean, I think it's a possibility. I mean, I'm not sure that's enough to turn one super bullish in terms of long run returns. That's fair. Again, I, you know, but just to stress, you know, I do think that the U.S. market and global equities are going to produce a 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.

30:41But to justify a shift upward in valuations, which I think is what you're kind of getting to being 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 or hedge to preserve that purchasing power? Yeah, so there's a broad range of responses, and it's not as simple, I guess, in the future.

31:19I think it's perhaps with hindsight it was over years when both bonds and equities produced positive returns and had a negative correlation between them. I mean, thinking of those are 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. Do you have some kind of private debt that has a floating rate nature attached to it?

31:54It can be in real assets in the form of real estate, farmland, etc. 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 becomes because in the last 30 years, that would have been an appalling call.

32:35Yeah, 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 couple of years, obviously, gold has 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 favor of gold, and we've been pro 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 an outlook. but just because that gives you a positive real return.

33:06The 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 of risk, of equity risk that is, in higher inflation episodes. And that's its kind of key role in portfolios. Then on top of that, we could also take the view that for geopolitical reasons and non-profit driven reasons, central banks will carry on buying it and that might give upward support.

33:49But I'm not going to attempt to give a number of forecasts on that because that's going to be too hard to do.

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35:58That's public.com. Paid for by public investing. All investing involves the risk of loss, including loss of principle. Brokerage services for U.S.-listed registered securities, options and bonds, and a self-directed account are offered by Public Investing, Inc., member FINRA and SIPC. Crypto trading provided by Backed Crypto Solutions, LLC. Complete disclosures available at public.com slash disclosures. One of the bigger structural trends you talk about in this more volatile future world or potentially more inflationary future world is 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.

36:35Sometimes 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 on 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 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.

37:09Talk 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 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 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.

37:50And 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 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.

38:30And 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 pooling academic evidence on what the effect is of a change in temperature on GDP. Now, the first thing I 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 I say about it is there's huge disagreement about what the relationship between temperature and growth is.

39:04but 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 implies a change in the equity outlook 10 years forward that just simply shaves 0.2 % per annum off the global equity outlook.

39:42That might not sound like a very big deal. 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 forecasts and imply something that looks like a minus 0.5 % or minus 0.6 % per annum 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 have 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.

40:19So, 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 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 introduced 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 that's much wider than it's been historically.

41:00Going 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.

41:43I 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 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.

42:20Secondly, is that it has to be put in conjunction with downward forces on growth from the things we spoke about earlier in terms of deglobalization 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, is that enough to overcome downward forces on growth from the levels of growth that we've become used to for the 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.

42:59I 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 through automation shifts in 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?

43:43You 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 bearish in terms of the job site look? And that's 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.

44:22But anyway, what does all of this mean, this sort of big shift mean for systematic investing that basically relies on, you know, backtesting reams and reams of historic data? Yeah, so I think there is a case in May that the biggest structural level that we've been in a certain economic environment for 30, 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 for a long time aren't going to work in the same way. Now, that does not mean that 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.

45:08Secondly, it would be almost absurd, I think, to reject any kind of systematic quantitative input given the advances in AI that are taking place and assuming that one can sort of carry on working in the same way. So it's not to kind of reject 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 care about?

45:44You 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 is very hard to attack with any kind of systematic process. It 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 those is where some of the biggest shifts are taking place. Inigo Frazier-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 the odd lock thank you very much for coming back on the show it's been huge fun thank you thanks indigo

46:32tracy i always really like talking to indigo 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 going around the world and talking to clients and talking about big ideas. I think he's 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 clients over and over and over. 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.

47:06I 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 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 perusing. 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.

47:45People 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.

48:22Right. 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 deglobalization. Plus AI. Plus AI, plus population growth and all of that.

48:59Now, 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. The way that we arrange cities and suburbs and exurbs has the potential to change massively if people don't have to drive anymore. And this is just one thing.

49:29It actually doesn't really even get talked about that much. But if you actually follow through, the implications is 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-collar 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.

50:02Well, 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 odd lots events, but we don't have to ask any questions. We just get to hear what everyone else is interested in. Then we're the clients, basically. I would like that. We let the listeners, you know, like we don't, what do you guys want to hear about? Let's go on a listening tour.

50:31We 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 Odd Lots podcast. I'm Tracy Allaway. You can follow me at Tracy Allaway. And I'm Joe Wiesenthal. you can follow me at The Stalwart. Check out Inigo Fraser Jenkins' book. You can find it at the Alliance Bernstein website. You can search that. Follow our producers, Carmen Rodriguez at Carmen Armin, Dash O 'Bennett at Dashbot, and Kale Brooks at Kale Brooks. For more OddLots content, go to Bloomberg.com slash OddLots where we have a daily newsletter and all of our episodes.

51:03And you can chat about all of these topics 24-7 in our Discord, discord.gg 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. And remember, if you are a Bloomberg subscriber, you can listen to all of our episodes absolutely ad-free. All you need to do is find the Bloomberg channel on Apple Podcasts and follow the instructions there. Thanks for listening.

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