Stress Testing Your Portfolio: Will we add Gold, Treasuries or Nasdaq?

0:00In today's episode of The Art of Investing, it is the end of quarter portfolio review. So big questions asked around our allocations. My equity expert wants to buy the NASDAQ at new highs. My bond guru, we ask, is it time yet? CJ puts three scenarios to us for the future of the economy in the rest of the year. So find out, is it Goldilocks and the two bears or is it Goldilocks and the big grizzly?

0:35Yes, it's that time of week again. Welcome to The Art of Investing, brought to you by IG, the global investment platform, your favourite UK finance podcast. Now, with me, my expertise expert, Mark Spiceholden. Hi, Rich. And somebody who's given us homework to do this week. It's Chris CJ Fellingham. Hello, Richard. What is coming up on today's show? It's the end of the quarter. So we need to do a comprehensive portfolio review. But I think we need to give also a bit of time to review what our themes are for the next three months. Have we changed what we are thinking is going to happen? So I'm going to spell out three scenarios a bit later on in the podcast.

1:15And then I'm going to ask you guys to tell me what you think is going to happen in each of them and the probability of them happening. So when we get to what should we do with our portfolio, as people will remember, this is one of the unique points about this podcast is that we run our own portfolio online. When we get to the bit where we think about what we're going to do in our portfolio, we actually have got something backing it rather than Spice is selling these bullish. And I'm assuming these three scenarios, they're different economic conditions. Yes, there will be different economic conditions.

1:47But they're what we think the market will start to think about as the dominant themes for the next three months. It's not any longer than that, because we can write many different themes for that. They're my ideas of what those three themes could be, you guys are doing all the work once again. So that's what we're going to be doing, Rich. Back to you. Well, just one request before we move on. We've been nominated for the Finfluencer Awards. And we could really do with your help once again. Apologies for asking. But if you could just take a couple of minutes to go online, you'll find the link below in the notes.

2:21If you can click on that, we have been nominated in the best economist influencer category. Yeah, that's an interesting in category. Not sure you get a lot of economics. It must be because Stewie Thompson comes on here. Thanks, Stu. He shows us the light. So if you could vote in that for us, that would be fantastic. Sorry, if you could vote for whoever you think is the right winner of the category. Yeah, yeah. Weak, weak. The more votes, the better. And then I think, Spice, you've got something for us as well. Yeah, just a little bit of admin. Obviously, on Tuesday, the 13th of October, we have our live podcast event at Lords.

2:59You will shortly be receiving an email if you've already applied by email. We'll ask you just to send us a confirm back because we're very, very oversubscribed, I'm pleased to say. So the more the merrier, but please just let us know you're definitely coming and that will make our lives a lot easier to judge food and drink, more importantly. That's it. Yeah, send us a confirm so we know how many to cater for. Now, after all that admin, you'll be very happy to hear we're going into the Spice Market Review. Thanks, Rich. Well, as CJ alluded to earlier on, it's the end of the third quarter of the year.

3:33Can't believe how time has flown. And we're into, what, seventh or eighth month of the Gulf War. Oil remains extremely volatile, particularly in the last week or so. It's been very intraday volatile. Even today, overnight, we've seen a near 4 % to 5 % move from a low point when the oil price was down about$2 to up to$2,$3. So, big move, 4 % to 5 % today. We've had some very mixed economic data today. And just coming up, to throw in for good measure, we've got the French budget next week and the UK budget coming up shortly. So, lots to talk about. But let's get into the sort of detail. The major asset moves, like I say, oil has been the big sort of driver.

4:15And every time the oil price has gone up, markets have typically gone down. So, there's a very big close link at that at the moment. And that's despite the fact that supposedly the US and Iran are in tour. about solutions. JP Morgan and Goldman are now saying that the oil flows through the Middle East and through the Straits of Hormones are back to pre-war levels. Wow. And yet the oil price is still fairly heavily elevated. Interestingly... How can that be the case, Prices? Do you believe that, that they are back to those levels? Because it doesn't really strike truth with the way the oil price is performing.

4:51Come on, you are the expert. Tell us how you square that circle. Well, I think there's been a big drawdown of reserves by the big countries, particularly in China and the US. And China, having said, we'll just use our reserves at the beginning of the crisis, are now starting to rebuild not just what they want for their economy, but also to put some back into their strategic reserves. And this week, actually, to try and take some pressure off, the US released another 40 million barrels of oil into the system. That is to help the refiners. Remember, the diesel price in America has hit an all-time high, despite the oil price being some way off the all-time high.

5:26And that's because the refiners haven't got the product, the raw oil, to refine into diesel and unleaded petrol and airline fuels and so on, etc. So, they've done that. And it's put a cap so far on the diesel price. It hasn't gone any higher, but it's still very high. I think more interestingly, the Iranian situation still bubble was away in investors' minds. And there are a lot of people still speculating on that oil price. So there's a lot of speculation in that price rather than pure fundamentals of supply and demand. And the US Strateger Reserve has come down from a billion barrels down to near 200 million.

5:59Exactly. Wow, that's huge. It is huge. I mean, even when flows are back fully, as if they are now, they're going to have to start building those up. And that will take, as I say, that will skew more positively for the demand side rather than the supply side. Not forgetting all that money has been going into the budget deficit, remember. Yeah. So it's kind of helped at the same time. Well, and midterms are coming up, so things have got to happen pretty quickly to get those diesel prices down. And interestingly, one of the Iranian officials sort of quietly said yesterday, we're not going to do a deal until after the midterms.

6:32I think they basically want to knife Voldemort ahead of those midterms at the beginning of November. We'll see. The only all-time high I can report on was NASDAQ overnight. NASDAQ futures hit an all-time high after some very strong results from Micron, which I'll talk about in a bit. Yeah, that's the only real all-time high in sort of equity markets this week. Across the board, the chip sector's been pretty flat. Magnificent 7, pretty flat, and even Bitcoin pretty flat. So, it's been a pretty dull week behind that oil price, where there's been a lot of sort of volatility. In commodities, again, it's been pretty stable.

7:06Hurt a little bit by the dollar being strong. Now, for the last three weeks, I've had to report the dollar has been very strong. And again, this week, it's up nearly 1%. And that has weighed on gold and silver and copper, as you'll see when we come to talk about the portfolio. And it's also, again, in my opinion, and we'll have a debate about this later, also weighing perhaps on bond yields, that is the oil price there. It's a real debate going on whether the risk markets can resist the way the bond markets are moving. And the bond markets are just moving higher in yield almost every day. And people are looking over at the equity market and saying, you know, is it holding today?

7:42And it is holding. And so they move a bit higher. And it's a real issue here, the way these bonds are moving. But as we've talked about on many, many different occasions, it's when the bonds get to a certain level, that level is uncertain, that it will have a really big effect. And at the moment, it's stopping equities. It's not actually bringing them down. Until today, when, as you say, there's been a lot of volatility in oil price. Here we are talking on Thursday. day, we've seen some dramatic falls in European equity markets at the start as their bonds have broken through key levels. And today, we've got the 30-year UK Treasury gone through 6%.

8:25Crypto, just very briefly, we've been bullish on crypto for some time. We thought that the market has stabilized. It continues to do very well. And I think that will continue. Yeah. Yeah, it's really interesting to watch the relationship between gold and crypto moves because cryptos are moving with growth and gold's moving with real yields. And the disparity between the two is incredible. Anyway, Micron results. Yeah, exactly. Micron results. Back to the AI theme, which we can't get far away. Very good results from Micron. Obviously, one of the biggest makers of memory chip. They had a fantastic gross margin.

9:04So that's the sort of profit before they start taking things like tax and interest off. And that was 87%, expected to be 85%. But they've warned that it might be a bit lower next year. And that's because, guess what? They're going to pay their staff more, which is quite interesting and laudable, I suppose. So they've just warned that slightly higher wage costs are going to mean that that margin doesn't keep pushing up. But it's still 86%. Oh, it's amazing. It's an amazing gross margin. And they basically said they're sold out for the next two years as far as they can see. So that's very powerful.

9:33Also, this week, we've seen OpenAI who have delayed their IPO or their time to come to the market into next year. So they say in the background, they're going to raise another$30 billion, as you do. What's$30 billion between mates? Watch those bond yields go up a little bit more. How much is it going to cost? That's the interesting thing. Exactly. It's not just AI companies out there raising lots of money. Paramount Skydance, who are taking over, you remember, Warner Discovery, are raising$52 billion worth of credit and loans in the next week or so. And they're basically raising$30 billion in investment grade.

10:12Those are the highest quality corporate bonds. And they're raising$30 billion and they're paying or offering interest that's 300 basis points or 3 % above the treasury yields for the equivalent period. So if the 10-year yield is 5%, they're offering loans at 8%. What if it's 5.5 %? Well, that'll be enough. And they're also issuing a load of high yield or junk. So let's just say what you said there, 300 over. So today, the 30-year yield in the US is 5.64. So they're borrowing at 8.64 % for 30 years, if they were borrowing 30 years. 8.64%. Wow. to buy a communications and media company. But it's all about the streaming, isn't it?

10:59And I think that's the way. And it is. I mean, who watches real-time television anymore? It's pretty rare, unless you're watching sporting events. And with that, that's the end of the Spice Market Review. Your capital is at risk. The value of your shares, ETFs and ETCs can fall as well as rise, which could mean getting back less than you originally put in. This content is for information purposes only and is not investment advice. Past performance is not an indication of future results. It takes us perfectly on to the portfolio review. So let's look at the overall performance. It is down negative 0.5 % week on week.

11:32That leaves us up 12.5 % year to date. Now, what has happened in the last week then? Well, the Nikkei has been our best performer up 3 % on the week. FTSE 250 up 0.6 % and the NASDAQ 100 up 0.3%. Nikkei really stands out there, doesn't it, Spice? What's going on in Japan. Yeah, it does, Rich. There's a survey that companies do called the Tancan survey, and that's come out in the last 48 hours. And it actually showed that companies are much more positive about the growth outlook in Japan than they have been for some time. At the same time, interestingly, they're also more dovish, or in other words, they're not worried about the inflation outlook.

12:09And that's really interesting because the oil price, as we talked about earlier on in the market review, has remained very high. A combination of lower inflation expectations, higher growth expectations, has meant that actually the odds on another interest rate rise from the Bank of Japan in the next month or two has fallen quite dramatically. And that's helped the equity markets. Not at all-time highs, but they have made some very good ground in the last few weeks. That's going to cause a problem, isn't it? In the end. I love equity people. They can always find something to be British about, right?

12:36But now we've got the yen now pushing much weaker again. And we had Scott the house person. I'll keep going until people are really sick of that. You know, he said, well, I turn this thing because I know what's going to happen. I know what's going to happen and you shouldn't bet against it. The Ministry of Finance said the same thing today in Japan, said, you know, we're warning about the yen being too weak. So I think the market's completely wrong. I think they will tighten more aggressively. But in the short term, they took solace from that figure. I think bigger macro picture is not looking great.

13:11I would say that because I sold 2.5 % last week. So I have to say that. I mean, not sort of my own book in any way, shape, or form, so I've never been accused of that. Well, what do we wish we had sold 2.5 % of? That is India, because the performance this week, dreadful, down 3.8 % on the MSCI India. We've got BlackRock World mining down 3.1%, also poor performance, and that comes partly from copper, down 2.3%. Also gold, which we don't have in the portfolio, was down 3-4%. 3-4 % just on Monday alone as those real yields march ever higher. And then worth noting, emerging markets also down 1.7%.

13:53So you can see that gave us a week on week total of negative 0.5 % with year to date up 12.5%. And since inception, up 25%. But we're also starting to measure are our second year, right? So the first 12 months, we were up 26%. But going into that second year now, we are down 1 % since that anniversary. And that is why today's portfolio review is going to be comprehensive, Mr. Chairman, isn't it? Well, it's always comprehensive, Rich. But, you know, it depends how many hours people have got to listen. Let's start just very quickly on the third quarter to give an idea of the variety of returns. Bitcoin was up 44%.

14:40Now, for those of us who remember that we had the VanEck, we would say, God, you know, we haven't got any of that. And the Bitcoin went up 44%. VanEck was down 1%. So it just shows how it's got nothing to do with Bitcoin, that VanEck. Wow, it's all data centers. It's all about data centers. So Bitcoin up 44%. Well done, Bitcoin. Oil strong up 40%. And notable also, you know, prizes for appearing on the list but not getting the winner's prize, copper up eight, and the world mining up 6.6, and FTSE 250 up 6.1. So well done, the FTSE 250. UK economy a little bit stronger than people felt. Andy Burnham doing Buy British and all that sort of stuff.

15:23Maybe that's coming through a little bit. On the negative side of the ledger, we have Russell down six and a half. Russell's been really good for us over the period we've held it. Had a tricky last quarter, and I think that's going to come when we start talking about our scenarios. We'll see why that's there. India, oh, God, down five and a half. And I think, you know, we might have to rip the plaster. But, you know, everything else is pretty flattish, plus ones to minus ones. So generally a pretty quiet quarter with some standouts at both ends. But I want to just mention the bond stuff because bonds are boring.

15:59We all know that. They hardly move. Spices of sleep. 30-year US are 67 basis points in yield. Now, to most people, that means nothing. So let's turn that into a price performance down 8%. The worst of the lot. So the worst of everything here has been bonds. 30-year UK down 6.5 % in price. Thank God we don't own any bonds. That's all I can say. Thank God we haven't got a 60-40. I was just going to say, for the average wealth manager, they like to run what's called a 60-40 portfolio, 60 % in equities, 40 % in bonds, that 40 % would have lost your money hand over fist. No matter where you were, in the US and Japan, in the UK and Europe, it would have hurt you everywhere you were pretty much.

16:45So I would say when we look at that, we've done well with our asset allocation to be out of bonds. And generally, we've had a few things on the real winners list, not too much on the losers list, which, as you say, gives us a 1.6 % performance on the third quarter. So up 1.6. That was our portfolio. That was our portfolio. So if people look on the show notes, they'll see that we are up 1.6 % in the third quarter. Okay, so our target is 10. So those people are good at mental arithmetic. Two and a half per quarter, if we were going to look at it that way. We're not shooting the lights out for what we need to do.

17:28We need to up the game a little bit. As I said, maybe the chairman needs to be fired, but we'll talk about that later. So let's just think what is going on in these markets, because I think we're moving into a different stage, or that's what I'm putting out there. And I think we need to conclude on this and decide whether we think that's the case. So I'm going to spell out three scenarios. Now, when I spell out these three scenarios, it's a concept people got to get into their mind that what I'm talking about is what is the dominant theme which these scenarios are going to suggest for the next three months.

18:03It doesn't mean what is going to happen on a year's or two years view because any one of them might be true on that timescale. That's not what the markets are moving on. The markets are moving on. What do you think over the next three months? So three scenarios. And what I'm going to say is I'm going to describe the scenarios and then I'm going to say what I think is the likelihood of those scenarios. And then I'm going to hand over to you guys and get your likelihoods. And then we're going to go through each one and see what the implication we think for the investment portfolio mix should be.

18:34And then we will conclude with, do we need to do anything? Okay, all right. So scenario A, number one, real yields and bond yields rise and keep rising and keep rising until we get recession, world of recession. So much more of the last week. What's happened in the last day or two carries on, right? Big questions about that will be how high do they have to rise? Are we close? Are we there yet, as we said earlier? But also, the pain is concentrated in the old economy, in retail areas, mortgages, spending. And it's quite interesting, isn't it, what Mark was saying in the Spicy Market Review about how some of the data in the States is weaker and at the weakest levels it's been for some time.

19:21I was listening to something the other day where they said they reckon that the US retail sector was in recession now. And when Mark talks about a K-shaped economy, you can see the K-shaped economy in a different light. The bottom bit of the K is anything to do with the retail sector or anything to do with the old economy. The top bit is if you've got anything to do with AI. So if you work for Micron, as you say, and you've got your share options coming out, you don't care. You know, this is fantastic news. But if you work for an old economy company, you're suffering. And you can see that in the performance of the sectors in September as well.

19:55So you've had utilities down, financials down, REITs down. So the market is behaving logically in the rate-sensitive areas, even though the overall indices aren't coming lower, the Nasdaq and S &P 500. You're seeing it in the Russell 2000, which is a lot more rate-sensitive. So the market is moving a lot underneath the surface, even though you're looking at that headlight number. Absolutely. And that's a critical thought process is, if this continues, would it just fold everything over? Or will you still see this differentiation? So that's one of the big things there. I mean, the only thing you really want to buy in this scenario is bonds, but you want to be buying them at the right time, clearly.

20:45You know, when yields to get to a sufficient level, because the next step is recession. And then people start pricing in lower earnings. And those things that are on mega multiples start to get derated. So that's scenario A. And just sorry, to square the circle, what happens to bonds in that situation when the market starts to price in recession? Well, what happens then is the front end of the market, so the shorter dated bonds, start to sniff out interest rate cuts. And after the equity market has corrected and realized that earnings are coming back, then, of course, my friend, the equity bull, who's never far from the surface, returns and says, Lower interest rates, that's really good news for the stock market, which is why stock markets tend to go up.

21:31But there will need to be some sort of corrective phase, depth unknown, while you go from one view to the next view. Your safest place is in bonds. That's scenario A. And at the long end? Long ends will rally as well and quite sharply because you'll get more optimistic that inflation will fall, disinflationary forces will come through. But of course, as you know, it's not just about inflation. It's about demand for capital. So if the demand for capital is still enormous out there, it will take time for those long-end yields to fall. And in a recession situation, you're expecting tax receipts to drop and government spending stimulus is going to have to come in.

22:15So the amount of money coming at the long end from the government alone is most likely going to be higher. And that's why the long end might be much more sticky to come down than it might have been in the past. But save those comments for when we do it. But I'm just saying that's scenario A. Scenario B or two is AI leads to a much bigger deflationary pressure than we've seen so far. There's stories out there at the moment about that. Spice, we know, is a proponent of this. But remember, I'm talking about over the next three months, do you think this will come through? You might think that's the three-year view, but I don't care about the three-year view.

22:54We could all be dead in three years. What I want to know about is what's happening in the next three months. Well, you know what AI is like at the moment. It should be done. So to me, AI leads to much bigger deflation pressure, leading to disinflation in the world, is the old Goldilocks of 2013, 14, 15, 16, where rates move lower. All assets do very well. Clearly, growth stocks, commodities do a lot better. But you're going to make on anything you've got. It's going to be fine. Bonds do well, but everything else does really well. So that's my second scenario. And my third scenario is what we've got now, more of the same.

23:36Oil price fluctuates on what's going on in the Straits of Hormuz. The market assumes there'll be a settlement at some stage in the next short term, one month, two months, whatever. And so it never gets ridiculously stupid in oil. It gradually drifts back. AI optimism's there. Bond yields gently climb up still because of all the demand for capital. They have periodic panics, which you could argue we're getting, we might be in one at the moment. Then they stabilize, they trade around, and then they go back up, they go higher again until we get some resolution. So C is a sort of stalling scenario, is sort of where we are or were up till yesterday, shall we say.

24:20B is a second scenario is an optimistic one that we're just going to think it's all deflationary. So that's the important thing. And scenario A is the Armageddon's coming scenario. I'm going scenario A, 50%. Oh, cheery. I'm going scenario B, 15%. And scenario C, 35%. So I think we've got one in two chance, 50 % chance that we have started that rise in bond yields, which only ends when we have a problem. Okay? And then the other two scenarios are there with equal weighting of 50 % between them. And I think if you'd asked me before today where we were, I'd have said we were definitely in scenario C.

25:07I just think I'm worried we're moving into scenario A. Anyway, that's enough chat from me. You're all bored now. So over to you, Rich. What are you thinking of those three scenarios? where's your head thinking? What do you think implications are of any of them? I think we're going to be in scenario C and that is because I'll give you a stat to begin with. Bond yields have moved higher in the US in 18 of the last 25 days. Right? That is huge. It's only happened 11 times since you started in the market in the 60s. 11 times. Is that the 1860s? But now - Where's K-R1 when you need him? Whenever we go 12 months forward, in 80 % of those scenarios, those 11 scenarios, in the past 70 years, yields have been lower 80 % of the time, right?

26:04And the average move lower is by 90 basis points. So whether that comes because of recessionary fears or the Fed talks it down or inflationary pressure disappears, years, the fact is, I think we're at some kind of peak. Now, we might have a couple of days more panic, but I think we're at a peak in treasury yields around about where we are now. And the second reason and why I'm so confident about that is because our good friend Scott's going to ride to the rescue. Oh, what's he going to do? He is going to come out with a bond bazooka. you heard it here first Besant's bond bazooka is coming and he's already told you I am the house and in days gone by we've always had a Fed put right and the Fed put was if things get bad you either get QE or you get lower rates no this is now the treasury put and I think Besant is going to come right to rescue so I would actually put 60 % probability on scenario C.

27:1515%, I agree with you there, on D, and then 25 % chance on A. So let me just come back at you for two things there. First of all, you talk about the data. What might have been just as useful maybe for homework for next week, Richard, is how did those situations evolve to get to lower 90 base points? Because if you've gone into recession those times, then that will be scenario A. Leading, we just led to it. So I would like to know how you get there. Yeah, I'll come back to you on that. Because I think, and it might not be tomorrow, right? It might not be the non-farms, but I think in the next few months, you start to see some serious job losses, right?

27:59Because this is happening. I've used AI now comprehensively every hour of every day for the last couple of weeks trying to build my business. and it is absolutely incredible. It is going to do away with 20 % of the workforce as they stand at the moment. Now that's fine, 10 % are going to manage to get a job elsewhere, but it's starting and it's going to come through quicker than people realize. And it's absolute fantasy to believe that the unemployment rate is not going to go up. And I think that starts to come soon. So yes, we'll see deflationary measures come through in AI, but I don't think we get those yet.

28:37I think we get the job losses soon. So if I'm going to complicate things slightly, because you know me, I never like things to be easy. You think the end result is scenario B, right? On a three-month view, no. But on a one-year view, you want to be investing for scenario B. 18 months. 18 months. Let's not argue about six months. Yeah. We could all be dead again. But on a longer-term view, your confidence is scenario B. but you think we're still a C to B rather than a C scenario A to B. Yeah. Okay. So that's great. And so scenario C for you, just before we go to spice, is you said what percentage you thought?

29:2160. 60. 60 there, 15, and 25 for A, spice. Well, the first thing is I'm impressed. You both managed to put in numbers that have added up to 100. So well done. You notice how slowly I did that as I was adding up in my head. He's got a calculator. I was just checking there. I used to have a calculator on my desk. So it won't surprise you that I'm in scenario B or two. Immediately. Now. Yeah. Well, look, equities, I've always said, look, three to six months forward. Oh, so you're changing the rules again. No. No, you said three months. Three to six months is an equity time horizon. And the more confident you are, the shorter that time horizon becomes.

30:03If you're uncertain, that time horizon gets pushed out. and get more volatility in the market. So I am confident that actually within the next three to six months, not necessarily in this quarter, maybe in this quarter, we've got reporting. Remember, companies start reporting in the next few weeks again from the third quarter, and then we'll see the really big numbers, if you like, at the beginning of 2027, in January, when those companies report. So at some point in the next two reporting seasons, that's sort of four months or so from where we are now, I think we will see pretty clear evidence that as Rich says, that AI is being adopted more rapidly than people think.

30:44And it is bringing material benefits quicker than people think. And that's one of the reasons I think that we saw a 30 % increase in earnings growth in the S &P 500 last quarter. Now, I'd be staggered if we get 30 % again. Then most people are looking for sort of low to mid-20s this quarter. And quite often they'll hold a bit back in the third quarter because they want to beat in the full year. So that's just a game of sort of analysts sort of jiggery-pokery to make sure that they can beat the numbers at the end of the year. Analyst arbitrage. Exactly. So I think that we will see evidence of that now start to come through in the next two reporting seasons, which I think will take, as Rich says, if that's going to lead to certainly job pressures.

31:28I'm not so you know. And remember, there was some early research when we started talking about AI a year ago. I think Goldman Sachs thought that they would lead to an extra 6 % to 9 % unemployment, potentially, particularly in the youth area, which is very sad for the younger people. But ultimately, there will be jobs recreated and new areas and new industries built up because of it. Long story short, I think that that will take quite a lot of pressure off these bond yields that we're seeing. The offset to that is that I think growth will continue to accelerate. And if you, you know, when we'll have a debate about what the real yields are telling you, are they telling you that there's an inflation problem?

32:06CJ would argue he doesn't think there's an inflation problem. It's all about the growth. And if you're like me and you think growth can be 5%, 6 % next year, then that is very, very powerful and very supportive of equity growth, in my opinion. I don't believe that inflation will get out of control. I think that there's been enough central banks ex the Bank of England saying that they're willing to do something if inflation does start to get more out of control. They've laid down the market and the challenge, if you like, and bond markets are now testing them, which they have a habit of doing. How far that goes, I don't know.

32:40But for me, scenario two or B is a 50 % probability. So that's one of the reasons I remain very positive on equities. And I think at the same time, we will see oil back at around 70 % to 80%. $80. Below$80, basically, I'd go and buy everything I could pretty much, including bonds. The next scenario that I think is likely is more of the same that we're getting now. So, I think there's a 30 % probability that we have more of the same, which is, you know, we get this volatility in the oil price. People trade against that in risk assets. If the oil price goes up, they want to sell equities. If they want to sell bonds, if the oil price comes down, they want to buy a little bit of bonds, but more importantly, they want to buy equities.

33:21And that's the interesting thing at the moment, as Chris mentioned earlier on, Every time we've seen the oil price actually go down, it's not been the bond yields that have fallen or bond prices that have gone up. It's equity prices have bounced pretty strongly in the back of it, and particularly ones like the NASDAQ, which are exposed to this growth area of the market. And so I think there's a 30 % probability. The key here is that any moves we get, even if bond yields keep ticking higher and higher and higher, as long as it's slow, markets have a chance to absorb that. The problem comes if you get scenario one.

33:53And I think there's a 20 % probability of that. And that is where you get these bond yields really spike. And whenever you get a big sharp move very quickly in one sort of asset or the other, up or down, but in this case, if bond prices go down, yields go up a lot, then other assets will struggle to grapple with those moves that are very quick. So I'm key here saying, I think there'll be a slow trudge higher in bond yields. That's a 30 % probability of me. if they rocket up, then there's a 20 % probability that that will then damage economic growth, the earnings outlook, and that real economy, particularly the small and mid-sized companies, in which case I'll be very wrong on the Russell 2000.

34:34I'll put my hands up on that. But that's not what my core view is. My core view is ultimately someone like the Russell 2000 will benefit from a stronger underlying economy with disinflationary impacts, lower employment, which means greater profitability, greater margins, and therefore higher share prices. So, I mean, I've just taken note of what you've said and forgotten most of the numbers. So, I've made some numbers up here. And we all want A. No, sorry. We've all come out and I've averaged it out. And it's about, I've somehow got something wrong here, but I've got A at 32%. I've got portfolio B at about 28%, 29%.

35:14And I've got C at about 37%, 38%. So a third, a third, a third. So that was a really useful exercise. That's what happens when you get two bears and a bull. Yeah, but to be honest, you say that, but Rich is quite bullish. Mine is the bear scenario. I'm the bear here. And Rich is actually described a bullish scenario. Yeah, mine's a washing line when you put all your washing in the middle. Yeah, but to me, what you would be saying, I think, you tell them if I'm wrong, But I think you'd be a better buyer on a dip, right, at the moment, because you think that you would get either more of the same, right, with a bit of scenario B.

36:00Scenario B, I think you said was something like 15, and A was about 25, right? So C, the 50%, is quite a big weighting as it is at the moment, which is basically, let's be honest, equities continue to sit and look and do fine. Yeah, but we're starting to get a growth problem in my scenario because unemployment. And unemployment being so high, the Fed is going to have to move and shift its focus from inflation to unemployment. And then I can see something like quantitative easing coming back. And that's why my favor moves towards gold and not necessarily with US equities. I would much prefer to be in the rest of the world, in the FTSE, in gold.

36:44But I think, you see, to me, that's more like scenario C. It's like, you know, it's like Besant will find your big bad bazooka, whatever you called it, from Besant. That's a lot of B's for today. But, you know, my scenario A is something, the shit hits the fan in some way, shape, or form, and something has to pick that up, right? B and C are not that. B is things are absolutely fine, don't worry about it. C is we'll manage as we are now. we'll soldier on through. And if we need to do QE or if the big bad bazooka needs to come out, then that's there. But it's not the crisis of age. I hate to break it to you.

37:22Your three scenarios that you've made up aren't the only three possibilities here. No, of course. But then if we're going to recognize that, then there's no point having this sort of... We're trying to get an influence where people are. And I would say, from what we're saying, I think there's going to be a crisis that's going to cause a reaction. I don't think either of you think a crisis is going to cause the reaction. And that, to me, is a good, useful way of penciling in. One thing I do want to go back to is the big bomb bazooka, which you talked about. But what does that mean? Does that mean that he comes out and he says, right, I'm going to print money and buy long bombs?

38:00He's got, it was already released. He's got a fund, a rainy day fund, as they call it, which has up to a trillion dollars in it. And he'll use that to buy the long end. Now, he doesn't buy new issues at the long end. He buys all the off the run where long-end bonds have been issued in previous years and they're hardly traded. And that is where his bazooka is going to come in. And he will stop that. There's no way that Besson's going to sit back and let that long-end continue to get to breaking point, as you are saying in scenario. To me, that's really worrying. He's the house. But we all know that never works.

38:38Because we're going to find no examples of that ever working at the long end of the market. Never. Short end, you can do it. What you're talking about is he's got a reserve fund and at the moment, he's got other assets in it, right? So, you're going to have to sell all those assets, all of them, trillion, to buy something over here, okay? So, what's in it at the moment? And I suspect what's in it at the moment is cash and short-term bills, whatever. So, suddenly, all this funding that's going to the short end, all this money that needs to be raised to the short end, there's another trillion need raising at the short end.

39:07Now, hang on. He started with 6 billion. Oh, right. Right? Not in this fund. It's got a trillion in the fund. Yeah, he's got the trillion in the fund, but he started using$6 billion. That's nothing. And it's had no impact. So maybe he needs another 50. That's it. If he comes in and he says, I'm just going to buy all the off the runs in the marketplace, the swap yields will explode upwards. You need to explain that, CJ. So in the market, you've got government bonds, and then you have a spread up to where banks trade, effectively, and that's the swap spread, okay, essentially. When governments don't issue much, that swap spread gets very wide.

39:48When banks don't issue very much at all, governments are issuing a lot, that narrows up, and equally it goes the other way when the government may be buying all their paper back and the banks are borrowing at their normal amounts. Everybody else then borrows above the swap rate, either above or maybe if you're in video, you borrow slightly below it because you're better credit than the bank. But effectively, credit trades off that swap spread. It does not trade off the government market. So if all you do is you say, I'm going to artificially move the long end of the bond market down, all the credit will not move down with it.

40:29Swap spreads will widen and they will have to borrow money at just the same high level deals. And we've seen this happen many times where governments have stopped issuing. You've led to swap spreads widening. And credit is still available at the same price it was before and same years before. So do you call BS on his theory that it's just illiquidity? Yeah, complete BS. Right. It's complete BS. It's the reason why the market has moved up at the long end is the borrowing from what's coming through. and Spice talked today already about the Paramount wanting to do 50 billion. I mean, what the hell is that all about?

41:06Eight and three quarter percent borrowing on the quality stuff, maybe 11 % or 12 % on the junk. About the 10 on the junk, yeah. Right, and they're saying the only reason they can do it is because they say we're going to make money, in our opinion. How bullish are people if they think they can get return on investment of over 15%, 20 % to pay for the 9 % to 11 % that they're going to expend on the bond market. Has high yield started to move yet? I would imagine it has, given what's happening to equities. Well, I think to be fair, when I last looked, credit spreads, which is the amount corporates, as you say, have to pay over and above government bonds to borrow, have actually remained pretty tight all year.

41:50So even though government bond yields have risen, Yes, so to have corporate bond yields, they've risen, but they haven't gapped higher. That's telling you that there's not, if anything, there is not a problem in the real economy. And those companies are profitable and able to weather any potential slowdown in there at the moment without risk of default. So those credit spreads have stayed very stable for certainly the last six months, which is really impressive given the sort of things that have been going on. All that's telling you is scenario B and scenario C. What I'm saying is scenario A, they're going to start widening.

42:24So what I'm saying is watch out because those should now start widening if scenario A is what's getting priced. And that's when equities start rattling off. Correct. And that's why I take these three scenarios because there is one which is a nasty scenario, which I have to say nobody has really believed in. But now we're starting to wonder with the way bonds are moving, whether we're getting close to that scenario. And that's going to be, once again, the very big test of where we are. So we put this all together. I'm probably more bearish, therefore, than the two of you guys, which is interesting.

43:04We may not have started off the conversation thinking that, but I think that is where we are. So the question then is, what do we do with the portfolio? I mean, the portfolio so far is down 1 % for our second year. We've only had about six weeks of that, six to eight weeks of that, but it's down 1%. We only did 1.6 in Q3, which I actually think was pretty good, given if we'd had bonds, we wouldn't have done 1.3. We'd have lost money. So that's pretty good going relative to what other people have done. I imagine that's extremely good. But what do we want to do with our portfolio now? So we've got 20 % in cash and bonds.

43:44Equity is 67.5, commodities 12.5. If you go down scenario A, we've got too much in equity commodities. Just generally, you're going to get to a save where the recession is going to be priced in. But if we're going down scenario B, which is the longer term view, which you two are talking about, I'm reserving judgment because I'm trying to do three months rather than six months, 12 months, 18 months. You'd want to be fully invested, 100 % in. and under scenario C, you'd probably say, I've got a bit of cash which I could put in to things like NASDAQ and things where the AI side of things is going to stay pretty optimistic.

44:24We talked about this last week, remember? We all said how much we still think AI is okay and there's not a problem there, but I don't mean the NASDAQ. That's what I'm saying. My scenario C is a lot more defensive. So I move into bonds, into gold, and I'm much more likely to have FTSE and emerging markets rather than Nasdaq supplies. Well, I'm not as bearish as that, obviously. I can see scenarios where you're right. But I say my view is that in the next two reporting seasons, I said, I'm not going to repeat myself, but we're going to see some evidence that AI is bringing all the benefits that bulls like me expect to come.

45:06and I therefore want to be in the places that are most heavily invested in AI, which equals America, at the expense probably of Europe, the UK and places like India. I mean, I don't know how's the right time to talk about India. No, talk about India. It's been a terrible investment. It's been awful, right? And I've been a long-term fan of India. The simple reason is demographics, right? It's got the biggest populace in the world and it's still growing at a decent pace. And there's a middle class of people who work very hard, who become increasingly wealthy, who like investing in shares, and they invest in their own stock market first.

45:40However, it's always been quite an expensive market compared to others. And what's happening at the moment is a big chunk of that market, sort of 25, 30 % of the Indian market, is basically IT, what was software. So, call centers. Now, call centers are going out of business left, right, and center because of AI chatbots. And they are being made redundant the left, right and centre. I think the IT sector in India is down 27 % this year. I was looking at the numbers before we came in. And that is pretty painful. And at the same time, that's hurting a lot of those businesses and the banks are the next biggest sector in India.

46:14And they're also suffering very badly. So I can't get positive on India. Putting aside the data, if I was taking a 20-year view, it would be different because I think the demographics will play out. But at the moment, they're going through a very tough time adjusting to the influences of AI on some of their core industries and businesses that are quoted in the stock market. That's different to the real economy, but it's actually what's quoted in the stock market. And that's what's weighing on that stock market, as is a high oil price. Now, India will get a bounce if the oil price comes down to$70,$80.

46:46No doubt about it, because they're one of the big importers of oil. But so will Europe, so will the UK, so will the Midcap, so will the Russell 2000. There are lots of other areas that will also do well. So I'm not buying India just for that fall in the oil price. it's been a thorn in our side. Every time I look at it, I go, God, we should have sold it. We should have sold it. We should have sold it. Personally, I just say, to start a new quarter, start with a blank piece of paper. Where would you be with a blank piece of paper? I wouldn't have India on it. Right. So I don't think there's any supporters of India around here.

47:14I mean, don't get me wrong. I think, you know, it's a good stock market over the long term. But the fact is, we've had bad experience of it. And, you know, we've held it for a year. We've proved we can hodl as the crypto people would say. Or we can be rabbits, as various other people would say. So let's get rid of it. The question is, what do you do with the cash? We've got 5 % in India? Yes, 5%. 5%. So I'm going to suggest we buy 2.5 % NASDAQ and put 2.5 % into cash. Because we did say last week we were quite happy with NASDAQ, generally because of all the AI companies in there. And I think that it's traced extremely well still.

47:55I don't think we're at the crisis stage in bonds yet. so I can see why we could hold out for a bit longer. But no allocation. So what do you think? No allocation at all to treasuries. I wouldn't allocate anything to treasuries, no. Spice has just said, right, his view is 5 % growth. He said that on this. 5 % growth, right, 3 % inflation, bonds are 8%. Well, you don't want to be anywhere near the bond market. It's absolutely rubbish. I would love to sit here and say, let's buy some long gilts. Fantastic. Let's just think about what we've said before. What's our inflation estimate? Well, Bank of England say two.

48:39But these monkeys don't put rates up when they should put rates up. They don't give me any confidence. They're going to keep inflation at two. So I'm going to put in three. Right? So I say three. Real yields, four is seven. So at least six and a half, seven, let's say. They've only just gone through six today. So I don't see, and let me open up on one other thing because it just makes me laugh. Here comes a rant. It probably means that I'm going to be completely wrong here. I was in an investment committee meeting this week, can't say who, can't say when, and the whole questions were, well, when do we buy, oh, we just bought some, oh, we bought some bonds, we bought some bonds, oh, we bought some bonds sometimes, oh, bonds are cheap, aren't they?

49:17Let's buy them. That's not how you see bull markets. Bull markets happen when people are panicking and stopping out of things. and I don't think they've gone far enough yet. I've had a text while I've been sitting here telling me, isn't this an Elliott Wave 5 move on the chart now to time to find bonds? I don't think it is. But you also had one of the top investment banks come out this week saying, if you have been 100 % equities, as a lot of our viewers will have been, that's the popular thing to be now, is no bond allocation. If you've been 100 % equities, this is one of the best buying opportunities ever to change that allocation and even bring in 10 % bonds, 20 % bonds.

49:59Well, why not just hold some cash? We've got cash. I mean, we're holding cash because we think that cash or short bond, very short-dated bonds, is that good surrogate until we get to the right level. For listeners out there, the attraction of bonds is that if you buy something on a 6 % yield today, essentially your interest on that will be around about 6%. and therefore if interest rates themselves are four, you could see a 2 % capital fall in order before you would lose money or hold cash. So there's a big bias when the curve is what's known in the trade as steep, i.e. short bonds are at low yield levels, long bonds are at high yield levels, so you get a steep yield curve.

50:45There's big protection in buying those. And I have other people who listen to this show saying to me exactly what the yields need to move to on a one-year basis for you to lose money buying here today. We're not meant to be people who just buy and then will hold it on a year's view. If we don't think, we're not going to get a better buying opportunity. I think you're going to get a better buying opportunity on bonds. I do not think bonds are in any way expensive. It's are they cheap enough yet? And I would still argue that there are too many people trying to buy it. I want to see it when it moves like this and no one's got any ammunition left to buy it.

51:22That's when I buy my bonds. Okay. Do you have a level in mind? Is it 7 %? No, I'm going to buy six and a halves in long gilts. I've been patiently waiting for some time. I will buy six and a half long gilts. And we're at six now. And we're at six today. We've got a budget coming up. We've got Andy Burnham. We've got all these other things. You know, there'll be people sitting out there saying, why on earth would you buy six and a half in the UK? So then you turn to the US. And when I turn to the US, I say, well, hold on a minute. 5 % growth. Well, I don't think it's going to be five. Spice is one of his growth.

51:56And Sturie Thompson didn't think it was going to be five. Yeah, yeah. Two and a half, he said. But we said two and a half, three. So let's say we're at the top end of that. Let's say we're three. Real yields on 30-year tips. Today, you can buy your 30-year tip, as I said earlier, 3.3%. So you can guarantee 3.3 % above inflation if you buy a tip today, right? A treasury in debt security, 3.3. 3.3 onto three makes 6.3. Where are long treasuries at the moment? They are not 6.3%. But it is a big decision to have zero allocation. You're not saying let's buy two and a half, let's buy five. You're saying zero.

52:34That's a big decision. Yeah, but when it gets to six and a half and I buy two and a half and it goes to seven next, I'll be glad I'd only bought two and a half. Yeah, but at six and a half, we might want to have 20 % in bonds. We can buy 20 then, can't we? Well, after today, we will have 20 % in cash, won't we? And 2.5 % in short gills, right? And nothing in gold. And nothing in gold. Well, we have. We've got the BlackRock World Miner. And it's still gold miners. I mean, the interesting thing, talking of gold miners, obviously we had South Africa's biggest gold mining company take over Australia's biggest gold mining company in the$27 billion deal this week.

53:09I didn't mention it in the market report. Maybe that's the industry saying we are getting to an interesting point in the gold price. Maybe that's something to consider. As I said last week, I think we're maybe just a little bit further to go. I think we're not quite there yet, but maybe I'm just being greedy. But we said we'd raise 5 % out of India, right? Now, I'm saying I would put two and a half into NASDAQ because I think it's pretty bulletproof. Now, always a famous last word. But do you want to, I mean, I've not heard anybody suggest. I mean, I don't like, I don't really want to buy much at all because I think scenario A.

53:44But that isn't the majority view around here. So if you two want to push and say, I should buy some gold here, two and a half gold, well, we could do that. Yeah, we both said we were interested in it. We said we were interested in it last week and it's 4 % lower. So I would definitely feel the trigger. Thank you, Christopher, for stopping that. Thank you. We did say we're not quite there. I'm not going for that. We did. I'm not going for that, Spice. Okay, I mean, what I would therefore suggest is I like the idea of buying more NASDAQ. I think we are woefully low in NASDAQ. We've only got 2.5 % in it.

54:15If we put 2.5 % more in, we're in 5%. Compared to global weightings, all the rest of it, that's low. I'm not sure. I don't care about global weightings. I'm trying to do 10 % a year. Exactly. And I'm with you. I'm with you on that, Chris. And for the first year, we made very good money by not being as heavily weighted as other people in that area. But I don't have a problem whether I put it in cash or whether I put it in gold. I don't have a problem with that. I'd put something maybe 2.5 % in gold. I'd go with Rich on that one. I'd put 5 % in gold. I'd take 2.5%. In fact, I would put the whole of the Indian money into gold.

54:48I know the Indian people like gold. If you think that there's a 50 % chance that we are going to get ugly in bond yields, then at some point the Nasdaq breaks. Yeah, but gold will go a lot lower on that. Yeah, because it's a real yield. Gold's going to get Cain through 4 ,000. Yeah, I would argue that Nasdaq would be down more than gold on that. I don't think it would be. I don't think it would. But hey, that's why we have a debate on these things. Is Nasdaq still duration? If we want to explain... The Nasdaq still duration is very lowly rated, as we know, by a number of the companies, we've proved that ourselves, by Micron producing magnificent numbers and on being on a PE going forward of about six times.

55:33Completely dependent. Yeah, but you've also got CrowdStrike on 200 times earnings. So what? There's one or two, isn't there? There's always one or two. But yeah, I mean, you know, at the overall level, the S &P 500, not NASDAQ, has got the lowest forward P ratio that it's had since 2023. And that's because we're getting this massive growth coming through, 30 % growth. No, because you've had a bubble in earnings. Because people are skeptical, right? People are skeptical. So this is not going to continue. It can't last, it can't last. So the market is being derated and the earnings are coming through.

56:02Now, if that happens for another quarter, another quarter, people won't be able to ignore that And the market will kick up and you'll get a big sort of pickup in market performance. You seem to have forgotten the whole of AI is built upon debt. And you're talking about the cost of funding for debt blowing out. Yes, but to me, the return that people are looking for from AI is far as superior to where the cost of the debt is at the moment. If the debt goes to those levels, we'd be better off in nothing apart from cash. Because if it goes to where it stops the AI investment, bond yields are going to 15%.

56:36You do that, nothing survives. Yeah, but I mean, that's not in one of your three scenarios. No, well, it is. It's in my first scenario. Remember, I said, Bob, you'll rise. And you think there's a 50 % chance? I didn't say where to. I know, but this is the job of the... The chairman's role, unfortunately, is to try to herd cats, as I've said before. And I've got some very meowy cats here. It was sheep last week. Well, yeah, sorry, it was sheep last week, actually. But he's Welsh. I think it's better sheep, because I am a Welshman, as he says. So anyway, decisions time. Yes. Decisions. We're selling five India.

57:06We're buying 2.5 % NASDAQ. We're buying 2.5 % gold. That keeps everybody happy. That's the job of the chairman. Okay. Fantastic. Right. Okay. So there was all this. I need a drink. Again. That's two weeks of heavy discussions. The market must be getting very interesting. Very, very interesting. These are markets I love. Because I'm not an equity guy, it's too boring when they just keep going up all the time easily I like it when it gets like this because you've really got to think about what's going on and it's a challenge it's a real challenge Right, thank you very much for joining us this week then so reminder please vote in the Finfluencer Awards that link's below in the show notes and then also if you could please reply to the email that you're going to receive in the next few days about live at Lords much appreciated Give us a thumbs up.

58:03Give us a subscribe. If you're going to drop us an email, drop it to theartofinvestingatig.com. Have a great weekend. See you next week.