Something Has Broken In The U.S. — ft. Katie Martin

28:33Your thoughts on the notion that, one, we either see a destruction in the market valuation of these companies or pretty much chaos in the labor markets. Your thoughts on that thesis? Yeah, I think that thesis is correct. I think there is, you know, investors spend a lot of time noodling over this point of, you know, is there a bubble in AI? Do valuations make sense? Do you know, does the stock market make sense? Is it really tracking, you know, realized earnings or is there a lot of kind of a wing and a prayer going on here? What strikes me is that, you know, I think it was the chair at OpenAI in Davos saying, no, no, sure, there's definitely a bubble going on here.

29:17You know, Sam Altman is saying, no, sure, there's a bubble going on here. There's some money that's getting misallocated. Jeff Bezos is saying, oh, yeah, there's a bubble going on here, but it's a good type of bubble. You know, the people inside the room are saying there is a heap of stupid stuff going on here. There's a lot of hopium. There's a lot of imagining that some sort of computer god is being created and it's all-powerful and crucially that it's monetizable. For me, that argument is not one. But what I think probably happens here is, look, Nvidia is a proper company. It makes shed loads of money.

29:55This isn't like the dot-com boom and bust in that regard. But there's a really thick layer of just like bubbly nonsense that sits on top of this space. And I think a lot of that froth does need to get blown off over the course of this year. The other sort of flip side extreme scenario that you allude to is exactly that, is not that AI is a load of old rubbish. It's that it's much better than we currently envisage. and that all of a sudden, as you suggest, we don't need humans. Now, what are those humans going to do? And what are the socioeconomic ramifications of those humans having nothing to do?

30:37I don't know. And I don't know which scenario I would kind of rather see. But I think it's, you know, in terms of how markets respond to all this, I do think it's important to remember that it's, you know, the US dominates this whole debate. Of course, you know, these big tech companies account for something like, 25 % or a third of the entire S &P 500. They're absolute monsters. But Korean stocks last year had a fantastic year. Why? Because they've got three gigantic AI contingent companies that account for almost the entire market. Japanese stocks had a great year last year. Same kind of story.

31:15So there's no escaping it. And increasingly, there's no escaping it, not just in the stock market but in the corporate bond market and in private markets there's an awful lot of private credit private equity venture capital capital that again is all contingent on this one thing of ai hitting that sweet spot where it enhances efficiency and it's monetizable but it doesn't work so well that it puts us all out of a job you know if it wasn't for the fact that trump was threatening to invade greenland we would probably still obsessively be talking about this all of the time. It does remain a very pressing danger for global markets.

31:54And investors that I speak to are very conscious that they are kind of accidentally very overexposed to this. I just saw a survey recently, which I think was quite telling about what is happening in AI. And it basically asked a series of C-suite executives what AI is doing to their week, basically how much time is it saving you. And they asked that same question to a series of employees and workers who work for those C-suite executives. And basically what it found is that there is a gigantic divergence between workers and CEOs on the extent to which AI is actually helping the business and saving them time.

32:36So 40 % of workers say that AI actually saves them no time during the week. For C-suite executives, that number is only 2%. Those same C-suite executives say that 45 % of them say that it's saving them more than eight hours per week. The number among workers is tiny compared to that. So this brings up kind of an interesting point to me that I think is crucial in terms of our understanding of how to value AI is there seems to be a huge misunderstanding between different types of workers on how valuable it actually is. And I think that it's quite good evidence of there potentially being a bubble because what it tells me is that workers, the people on the ground, the people who are supposed to be using the AI products themselves, they're telling us, actually, this stuff isn't that useful.

33:29But the guys who run the companies, who probably aren't using the AI that much themselves, but are telling their workers to use the AI, they think that they're getting a lot of value out of this. And that might be true between the workers and also the investment community. It could be that investors really think that AI is working, it's juicing the economy, saving people time, and yet on the ground, that isn't the case. I thought that was quite interesting. I just wanted to get your reactions to the results of that survey. So what you're saying is we can put all the chief execs out of work and all of the workers share the profits is that where we're going with this is the great socialist revolution in ai form that is another implication yes survey data around who uses ai and what kind of you know utility they get out of it are kind of all over the place you know that that rings true to me but so one little anecdote here we we do this thing at the ft called weekend festival and uh last september one of the speakers there was nikolai tangen who runs the norwegian oil fund a gigantic pot of money in norway like two trillion dollars and he loves his ai and he was talking about you know he was asked on a on a session about you know how do you get people within the oil fund to to use ai and he said oh it's very simple you have to be and i quote a maniac about it.

34:55You need someone at the top of the organization who effectively forces it down people's throats day and night, mandatory training, drop-in sessions, champions on every team, constantly getting everybody in the building and they employ hundreds of people to use AI to make themselves more efficient. And I thought, huh, if this stuff is so useful, why do you need a maniac to tell you to do it at the cost of otherwise losing your job right and and at the end of this process where people are kind of forced to use this technology which you know Nikolai thinks is a great benefit to the organization but at the end of this process they send a survey to everyone in the building and say how much more efficient are you as a result of AI and and I think the result was something like 12 percent of course you're going to say that if your boss is forcing you to use the technology right but I don't have anyone breathing down my neck telling me to use telephones or telling me to use whatsapp or telling me to use email because it's just an obvious efficiency to my day so it's this constant question around technology isn't it it creates it creates productivity but you just can't see it anywhere So there is a valid question around how useful this stuff really is.

36:16And I think also, you know, what I gather is that, you know, companies are asking much tougher questions now. It's like, hang on, before we commit this money and this time and this resource to this technology, show me the proof points. And actually, that's something that investors are becoming somewhat more rigorous about as well. It's kind of, you know, like, show me. You can't just sort of wave your hands and say, oh, something, something, generative AI. I was like, no, no, no, I need practical evidence that this stuff is any good. So that sort of rigor is probably helpful. But, you know, there have been famous surveys.

36:53There was a study last year, was it from MIT, that said something like 95 % of companies that have adopted AI think it's a total waste of time. Yeah. That was a big one. I personally don't use it. You don't use it to prove, fact check, your drafts, your articles, nothing? No, nothing like that. um my 17 year old son can i mean he can barely get out of bed in the morning at all but he can barely tie his own shoelaces without asking chat gpt how to do it you know there's a whole generation of kids that are absolutely that use it for everything for revision for school work for all sorts of things um but you know maybe it's just me but it doesn't really touch my life wow i think your point that it's it's almost like in 2020 or at least in 2025 the name of the game was just wave your hands as much as possible, say AGI, AGI, AGI, and then you get half a trillion dollar valuation.

37:46It seems that in 2026, the vibe has shifted and there is more of an emphasis on show me the money. Show me that you are actually generating a return from these investments, which is why I think a lot of these companies are doing quite well. I think Anthropic has got it right. I think the emphasis on enterprise business is working out well. And I do think it is actually a bright spot for OpenAI that they have now rolled out ads. Because to me, that tells me, okay, you guys are taking seriously that the job is to make money. So let's see how much money you can go out and make. And I would be very interested to see how much people are willing to pay, how much advertisers are willing to pay.

38:27Apparently they want$60 CPMs, about three times higher than what Facebook charges. So we'll see if that actually works. But I do agree with you. It seems like we're entering the phase where, okay, we've waved our hands, we've sort of made these large projections about what the world's going to look like now, let's see what it actually looks like, which to me is almost less concerning. And I'd be very interested to see what OpenAI stock price were to be if it were actually publicly traded. I'm sure it would have gotten hammered in the past six months or so. I'd like to just return to the global rotation point.

39:03I think it's very helpful to have you on this interview right now because you are speaking with those fund managers in Europe. And I'm realizing as we talk, we haven't really gotten that perspective yet. So you said that, you know, fund managers, pension managers in Europe, last year they were beginning to sort of diversify out of the US. What did Davos do to that rotation? and what are your expectations for 2026? Is that rotation going to continue? Will it slow down? Will it accelerate? What do you think? Yeah, my expectation is that rotation will absolutely continue. And look, there are push and pull factors here, right?

39:46You know, Trump is pushing people out of the US for a whole host of incredibly obvious reasons. But, you know, for a lot of investors, whether they're in Europe or elsewhere, the case for investing in Europe has rarely been stronger than it is today. You know, you look at the situation in Germany. Yes, OK, it has taken a long time for it to start deploying this extra money that it's been talking about for the past year or so. But this money is really going to start hitting in terms of infrastructure projects and defence spending and all of that lovely stuff. So you look at the sort of fiscal expansion that you see in the states and a lot of it is about sending checks to people who don't necessarily need it the fiscal expansion that you're getting in in europe is about real stuff it's about roads and bridges and and infrastructure and energy and defense the multipliers on that are likely to be much higher right so this really should be supportive to european growth which i know is disappointed for a long time but it's better than nothing you look at the european financial sector I don't know if you've looked at a chart of European bank stocks recently, but they had an absolute storming 2025.

40:58They've kept on going into 2026. Financial sector, in sharp contrast to where it was a decade and a half ago, is in seriously good health. Now, I know that European financial markets are more kind of creaky and sludgy and less sort of fast moving than they are in the States. But you can't argue with the performance that you had in Europe last year. UK even France didn't do too badly even despite multiple government failures you know Germany all sorts of different markets across Europe had a fantastic run last year people are definitely taking a fresh look at those markets and even some US asset managers are saying huh think we missed a trick on Europe last year especially when you add in the currency effect you could we could have had some really big winnings there this is happening across Asia too there is just a sense that it's important to be more self-reliant.

41:52And, you know, one thing as well that sort of hangs over people with regards to Europe is that people say, look, okay, we don't have it today, we won't have it tomorrow, but at some point we will have a ceasefire in Ukraine. And at some point we will have something that resembles peace in Ukraine. And at some point after that, there is a massive reconstruction trade of that country. And, you know, if I were running a cement company in eastern Poland somewhere, Poland, by the way, standout 2025, I would be feeling pretty good about the next five to 10 years. You know, the infrastructure spend and the rebuild spend that's going to happen at some point, hopefully sooner rather than later in Ukraine is going to be really significant.

42:40So people can see a lot of positives about investing in Europe. It's not just about avoiding the states. I think there's another question here, which is something Scott often says is market dynamics trump individual performance. And if the dynamic among the markets here is that Europeans are kind of collectively deciding to reinvest in themselves, then that is going to be a big deal, regardless of what happens in the world, regardless of which companies are performing well in America. I guess the question then is, what level of investment power does Europe really have? Does Europe have the fiscal power?

43:20Do they have the investment prowess to really move markets in a significant way? And that seems to be kind of a theme coming out of Davos, which is there's a threat that maybe Europe stands up to America. They decide we're going to sell our U.S. holdings. We're going to sell U.S. treasuries. We're going to decide we're going to defend ourselves on our own. But then the follow-up is, do you really have enough to do that? Are you really powerful enough to take on America in the way that these conversations seem to suggest? It's a very broad topic and question. I'm sure there's no single answer, but what would you make of that question?

43:58I think the evidence for the fact that Europe does have some clout and does have some leverage here is that Scott Besant was extremely pissed off at this notion that European pensions could start selling down their treasuries. You'll recall there was a note from Deutsche Bank not saying that Europe is going to sell all of its treasuries, but saying, huh, Europe owns an awful lot of treasuries. Maybe it's not going to carry on accumulating treasuries at the pace that we've been used to for the past few decades in future. You know, Scott Besson had a word with the chief executive of Deutsche Bank.

44:36All of a sudden, they're distancing themselves from this analysis. And it's very clear that the US administration is very sensitive to the idea that it could lose a pocket of very reliable buyers for the US treasuries market. You know, stocks do what stocks do. They're typically very flighty. But Scott Besson is very focused on keeping that 10-year US Treasury yield at or about 4%. He does not want it to spiral higher. He doesn't want higher borrowing costs either for the government or for anybody else. It's not in the US's rational self-interest to scare off buyers of US Treasuries. Now, So, you know, again, so we've had a couple of like quite small Nordic pension funds that have said we've got out of our treasuries, not necessarily because of Greenland, but because of a bunch of other issues, you know, debt sustainability, fiscal dynamics, the Fed, you know, all of that stuff.

45:31But it clearly leaves a mark. You know, I don't think Europe is going to just one day, you know, press a button and sell all of its treasuries. That would do us just as much harm as it would do the states. It's not plausible. But it is plausible that, so you're running a pension fund somewhere, your very old, you know, 10, 20-year treasury, you know, comes up for redemption and you think, well, do I churn this into another 10, 20-year treasury or do I say, hmm, maybe actually this time I'm going to stick half of it in Germany, I'm going to stick half of it in the UK, maybe I'm going to put some of it in Japan, it's got nice high yields now.

46:08I think that this whole moment at Davos has proven to be a little bit of a reminder that, you know, Europe is not without its tools at retaliation. You know, that's much more obvious with China, which says, look, we've got a whole heap of your treasuries and we can do what we like with them by the way we've got the rare earths. But it doesn't mean that Europe has no tools. And I do think that even that suggestion that maybe it won't be mechanically plowing money into the US has rankled some nerves. We'll be right back. And for even more markets content, sign up for our newsletter at profgmarkets.com slash subscribe.

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47:41We're back with Profit Markets. I can make a case for the markets at some point getting fed up with the sclerotic behavior. The Japanese yields skyrocket. People just lose faith in our treasuries. There's just a bunch of scenarios, AI being overvalued, where you can see a string gets pulled, any number of strings, and the market takes a real drawdown. At the same time, we're going into an election year. A lot of that big, beautiful bill stimulus is about to take real effect in 2026. Typically, in an election year, the current administration does whatever it can to kind of juice the market. And also, our friend Josh Brown constantly, you know, I'm a catastrophist and a glass half empty kind of guy.

48:24And he says, look, Scott, the optimists have beaten the shit out of the pessimists. And he's right. and he taught me something that was really interesting. Always ask yourself what could go right. So coming into 26, recognizing nobody has a crystal ball, when you look at all the dynamics, all the risks, all the upside, stimulus spending, threats of AI, geopolitical uncertainty, where do you in the editorial board, or no, don't speak for the editorial board, where do you, Katie Martin, if you're advising clients or institutional investors, Do you think the U.S. market will underperform or outperform its peers abroad?

49:01I would never presume to advise anyone. But what I can say is that, look, and it's silly to talk about markets as if they're people, but markets do kind of want to go up. U.S. stock markets want to go up. They grind higher. They grind higher. It's a function of U.S. growth. It's a function of the US tech miracle, but it's also a function of the fact that you do still have fiscal expansion and you do still have interest rates that are heading lower. Not heading lower as quickly as Trump would like them to, but they are nonetheless heading lower. That's a recipe for US stock markets to pull higher.

49:38but what i think is you know again we go back to that diversification point that sort of sell america point is that if you're not based in the states and you're not based in u.s dollars then you still have an enormous vulnerability around institutional credibility and around the resilience of the fed and if they get chipped away out further and we get another big pull lower in in the dollar then we're going to end up with another washout year for overseas investors being being parked in in the u.s and i think you know one year you can kind of write off as a bit of an anomaly but if this happens again then we've got a really serious problem i do think that the sort of the most likely outcome is that u.s markets do pretty well especially if it can if if we can have some credibility restored to the federal reserve um but but the risks are substantial and i do think there's a reasonable chance that u.s gets its you know gets its ass kicked by the rest of the world again in 2026 and beyond.

50:38So really, the extent to which you care about that matters what currency you're in, what hedging policies you've put in place, and just where you're domiciled. But people do just want a little bit more compensation and certainty around putting their stakeholders' money to work in the US with all of the policy uncertainty that's hanging over it. Is there anything you're watching in the markets right now that you think people are not talking about enough, something that deserves more attention, that you find interesting, that isn't getting enough clicks? The thing that I think people are probably not worried enough about is the Fed.

51:20We are all sitting around like diligent little soldiers and podcasters and journalists saying, oh, I wonder which Kevin will be the new chair of the Federal Reserve. Will it be this Kevin? Will it be that Kevin. Maybe it'll be a Rick. Maybe it'll be somebody else. And we're not seeing the big picture here, which is that Trump and Besson and Stephen Moran, who's now at the Fed and other people have made it very clear that they want the Fed to look very different to how it does now. And I just, you know, there's a part of me that thinks, are we sort of playing this game the old way and thinking, okay, which Kevin is it going to be, when actually what they're planning is a much bigger reconfiguration of the entire organization.

52:04It's a tail risk, but I think it's one that's worth taking seriously. If I were to upload the transcript of this into, you know, my favorite AI model, which I keep a secret, hoping that one of them will show up with a big fat fucking check for me to say who my favorite. Just welcome to capitalism. But good Good news, Katie. I'm a whore, but I'm an expensive whore. Anyways, where was I headed with that? If I were to upload everything that your dialogue and your articles and said summarize Katie's viewpoint and recommendation in one word, it would be diversification. You think that's accurate? I think that's accurate.

52:43And I think that's a very reasonable representation of everything that money managers are saying to me at the moment. And again, it sort of doesn't matter what type of money manager you are. It can be wealth managers advising risky individuals, you know, wealthy individuals. It can be managers of enormous pots of pensions. It can be hedge funds. It can be anybody. They're all saying the same thing, which is something has broken with the U.S. And, you know, the phrase that I always like to use here is that you can't put the shit back in the donkey, right? You can't unsay that you're thinking of invading Greenland.

53:16You can't. We've got to have you again. That just earned you a second, a third and a fourth appearance.

53:25You can't unsay that the chair of the Federal Reserve is a numbskull. The stuff that you, it's out there. You've said it now. The trust is gone. Even, you know, this is one thing that I think is lost on a lot of people, particularly in the States, is that this is going to hang over U.S. assets much longer than Trump is around. You know, the next administration is going to have to spend a fearsomely long time rebuilding that trust with global investors and trying to explain away a kind of moment of madness and trying to put extra guardrails around the institutions that investors hold dear. This is going to hang over for a really, a really long time.

54:08I'm afraid there's kind of no way back. Katie Martin is a markets columnist and member of the Financial Times editorial board. She writes the weekly Longview column on market trends and appears weekly on the Unhedged podcast. Previously, she spent four years as the FT's markets editor and also several years on the FT's live news service prior to joining the FT in 2015. She spent 11 years at the Dow Jones Wall Street Journal group. Katie, this was excellent. Really appreciate it. Thank you. Thank you, Katie. Pleasure.

54:45Ed, thank God we found someone other than Robert Armstrong from the FT. Jesus. They've been hiding Katie. I know. She was excellent. What did you make of it? Super smart, super measured. I like that people like that are in financial journalism. It just drives home the point of diversification. She validated a lot of the points you've made or that we've made around people, you know, this great rotation. That was our big prediction for 25. It's happened and it's accelerating. The point that she made that people miss is that, okay, the U.S. markets, the S &P is up 70%. But if I'm in the UK and I've invested and had to transfer pounds to dollars, I'm up 7 % versus if I'd stuck in a European market, it's up 30%, 40%, and 50%.

55:37The U.S. trade has not been a winner. The 17 % headline on a currency-adjusted basis, this has not been a winner for people, this market. But the other thing, the only thing I would push back on that you said was that there's going to be an incredible post-war trade in Ukraine. And I would say it's very dependent upon the following. If we do what Trump wants and what Putin wants and enter into a shitty deal for Ukraine and follow – I interviewed Neil Ferguson at Davos. And the whole interview, I love Neil, but it just pissed me off so much because I think he was basically parroting Sergei Lavrov's talking points that the war in Ukraine is totally unsustainable for Ukraine.

56:16I would argue it's totally unsustainable for Russia. But if we end up with a piece there that is basically not, you know, that basically is not preventing the next war but scheduling it. and that is if we give Russia anything resembling what the peace plan that Rubio and Trump and probably Putin endorsed, we're just scheduling the next war and no one is going to invest in Ukraine, especially in the civilian infrastructure. The bunch of their drone makers will all move to Silicon Valley and become really rich, but no one's going to invest in Ukraine just waiting for Russia to rearm and then take the rest of Ukraine and possibly Poland.

56:56Anyways, I think that the Ukraine trade is totally dependent upon the kind of peace that is negotiated there. Little in the weeds, little in the weeds. Any thoughts, Ed? I thought it was a really interesting point. I have to be honest, I haven't given the reconstruction, the Ukraine reconstruction trade much thought. So I'm not sure I have much insight there. I think your points are also totally reasonable as well. I think the thing that was most interesting to me was the fact that she has this direct line of communication to all of these fund managers in Europe. And it makes me think that we should be spending more of our time hearing their perspectives and maybe having one of those guys on the podcast.

57:41Because, you know, you were making the point last year that there would be a global rotation. Other people started to call it the sell America trade. And then when the S &P went up, A lot of people were quick to say, hey, you were wrong. It wasn't a sell America trade. That was never our point. The point was a rotation trade. The idea being that fund managers are going to increase their exposure to foreign markets. And that is exactly what happened. And that's why we saw the outperformance of all of those foreign markets, not just in dollar terms, but on a currency-adjusted basis. The U.S. outperformed practically every other market, especially the European markets.

58:23My assumption going into 2026 was that we would see something of a reversal, or at least a reversion to the mean. And that is, I thought that all of these European markets had ripped. and then maybe there would be some level of taco taking effect where people go, oh, you know what? That was a little scary, but things in America are probably okay. Let's not worry too much about getting out of America. Given what we've seen over the past month, given what we saw in Davos, given everything she just told us about what European fund managers are thinking, I'm not sure that's true, actually, or that that will happen.

58:58It seems to me that actually this rotation will, as she said, continue and maybe even accelerate. And while I have said that I think the S &P will end up in the green this year, though I think it's going to be kind of mere returns, it's going to be almost and pretty much flat, like, you know, low to mid single digit returns. I do think that European markets, given what you said, have a real, real potential to significantly outperform US markets again. And if that happens, I think that will only add more fuel to this momentum trade, more fuel to the fire, that the U.S. long term isn't going to have the kind of returns that we have historically expected.

59:41And that could be a big deal for markets. Let's turn to the tape. The S &P was up 17. Europe, Europe stocks 50 or the stock 600 was up 19. The UK FTSE was up 22. Japan was up 26. I think the KOSPI in South Korea was up 70 something. thing. I think the Hang Seng was up, what was it, up 19? I mean, Canada was up 28%. In sum, wasn't the S &P the worst performing market amongst the developed economies? Exactly. And then that's not even taking into account if you were investing, if you were transferring your currency into dollars, of which you likely lost another 5 % or 10 % on top of that because of the weakening of the dollar.

1:00:22So anyways, very much enjoyed her perspective.

1:00:31This episode was produced by Claire Miller and Alison Weiss and engineered by Benjamin Spencer. Our research team is Dan Chalon, Isabella Kinsel, Kristen O'Donoghue and Mia Silverio. Drew Burrows is our technical director and Catherine Dillon is our executive producer. Thank you for listening to Prof G Markets from Prof G Media. If you liked what you heard, give us a follow and join us for a fresh take on markets on Monday.

1:01:02You help me In kind reunion As the world turns And the dark flies In love

1:01:30Thank you.