Looking at 2025

0:00Special note to listeners, we're very keen to hear your questions and answer them on the air. If you have burning questions about markets, finance, or the economy, send them to robert.armstrong at ft.com.

0:25It's the most wonderful time of the year, 2025 look-ahead season. This annual exercise by investment houses and big banks seems to get earlier and earlier every year. Still, here it is, and it's a good way to test the market mood and try and figure out what everyone thinks will happen next. Today on the show, we're asking, what are they asking? What are the big questions, the big puzzles to crack if you want to get 2025 right? I mean, there's still plenty of 2024 to get wrong. You guys shush. Okay. This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I'm Katie Martin, a markets columnist at the FT in London, back in the studio after recording a few episodes in the pub in Ireland, good times.

1:10Joining me down the line from New York to figure this all out is a couple of sad weirdos like me who read loads of year-ahead outlooks from banks. Rob Armstrong, who one listener referred to me in an email the other day as my boss amusingly that person can see the future and or has extremely good character judgment we should read their outlook shush shush and aiden writer for whom rob really is his boss poor aiden on the unhedged newsletter uh listeners as a reminder if you get confused aiden is the one who's young and clever rob and i are just trying to keep up with him uh guys how's it going How's outlook season treating you?

1:51It's going well. There is one thing that everyone seems to agree on. And I'll be interested to hear, Katie, if you've heard any dissent from this. The absolute consensus thing is America rules and will continue to rule in markets. So everybody thinks it's been awesome to own America. Keep owning it. I think that's the consensus. I wish I could disagree with you because this is going to be highly annoying for the rest of the world. But yeah, I mean, that is, you know, America first is definitely playing out. What I'm picking up from asset managers and from investment banks at the moment is that, you know, America has like kicked the rest of the world's ass for however long it is in stock markets.

2:42And it's going to keep on doing that. Yes. At least through the course of 2025, because if Donald Trump's agenda ends up, you know, happening and there's no reason to think that it won't, this simply has to like suck growth away from the rest of the world, suck exports away from the rest of the world. And it's just very difficult to make a big investment case to be overweight Europe or overweight, you know, Asia in that kind of environment. That is unless his policies make everybody really, really mad, make the dollar weaker and drive everybody to something else. But that's the great thing about 2025.

3:19None of the policies will have been implemented yet. So 2025 is the year where we just get to keep imagining what Trump's policies might do when they are implemented. 2026 is when we actually open the box and see what is inside. Maybe late 2025 something will happen. But, you know, I think that's that's an issue. I, for one, cannot wait. Now, I mean, as we've previously discussed on this podcast, there's a number of things that investors are actually worried about in relation to Trump's agenda. You look at the tariffs, you look at the deportation policy, you look at the possibility that, you know, that he's going to like cut taxes and deregulate and all that sort of stuff might be inflationary.

4:02That might hit the bond market, which might have a second round effect on pulling down the stock market. But what I find interesting is what people are saying to me is that normally the thing that's considered to be a break on excess by governments, any government anywhere, is these so-called bond vigilantes, right? The point at which the bond market says, stop it, knock it off, or we're going to sell your bonds. This time, what is important is the stock vigilantes. Never heard of a stock vigilante. This is a 100 % new term to me. Well, I heard it the other day, and then the person who mentioned it to me who said he thought he'd just made it up said that actually he'd read it somewhere else first.

4:36So I'm not claiming to be first with this phrase. But what I am saying is that I think we can all agree that Donald Trump loves it when stock markets are going up, and he likes to get validation from the stock market. And so the thing that might kind of restrain him around some of the more extreme elements of what he wants to do on economic policy is the possibility that he might hurt stocks. So stock vigilantes, boys and girls. Okay. Can I take the other side of that argument? You may. Here it is. An important fact for Trump skeptics to remember is that the worse America screws things up, the better American risk assets will do.

5:16Because even in a world, America is screwing up terribly. And I'm not sitting here saying that Trump is going to screw up the world. I'm addressing myself to people who think he will. Big American companies will still be the safest equity bet out there. Bad policy will push U.S. stocks up. That is my prediction. It's the dollar smile in the equity market. Yeah. So that's what I predict. If we are worried about government excesses under a unified government led by someone who is a bit unpredictable, I think we're still counting on the bond market. That's who's going to save our bacon if there is a problem.

5:56I'm not predicting a problem. I'm saying if there's. So there's been coverage that, you know, there's not going to be the same March on Washington resistance this time from people who oppose Trump. Are they just all going to pile into the bond market? Should we go to, you know, local cafes and coffee shops and open everybody an equity and bond account? If you want. Yeah. Keep you busy. Where do the hipsters hang out? Yeah. But yeah, this is definitely something that I've been hearing from like chief investment officer types. you know, particularly the Europeans is like, we're really nervous about this agenda, actually, there's lots and lots of bits of it we don't like, but we feel like we don't have any option but to buy US.

6:33So, you know, it's not just, you know, what we call risk assets, like stocks, right? You know, in the event that something horrible happens to the independence of the Federal Reserve, for example, or to any other bits of US institutional resilience, guess what people are going to buy, they're going to buy US government bonds, and they're going to buy the dollar because that's what they've always done. And because currently there is no real alternative to those super liquid markets. However, Katie, the 10-year treasury yield is at 4.5%. And it is getting towards a level now where it has bothered stocks before.

7:10If you look at, Let me just look at these dates. Late 2022, late 2023, and April of this year, we had spikes in the treasury yield and the stock market puked a little bit. Not big pukes, but notable pukes. you know you get up towards five again and i think people are jumpy about what happens to stocks for a couple of reasons one if you get five percent yield on a 10-year treasury owning a stock is less appealing two five percent yield shows you that financial conditions are getting a little tight you know maybe that's going to show up in weaker profits bad stuff maybe it's indicative of more inflation which stocks don't love so we're flying into the danger zone what is that song highway to the danger zone we are on the highway to the danger zone clearly not a big top gun fan didn't know that that was the title of a note from uh hsbc the other day actually but like so you know as you say like bomb prices have been falling right which has pushed the yield up to about 4.5 on the 10 year but i was listening into the goldman sachs Outlook just the other day and they were saying, look, it's not just the level here that's important in the yields, it's the speed at which we've got to 4.5, right?

8:32So we've gone from about, I'm going to say 3.8 to 4.5 since just before the election. That's a whatever two standard deviation move. You know, I can try and sound clever about it. But the point is, that's a lot in a short space of time for this sort of instrument. And normally a move of that magnitude is associated with something like a 5 % drop in stocks. And that is absolutely not what we've seen this time around. Stocks jamming. So what that's telling you is, you know, first of all, America, heck yeah. And secondly, that, you know, the election has just introduced animal spirits into the markets.

9:10So one debate I've definitely heard among strategists and equity people, investors, is, is this rise in the 10-year boomy or inflation-y? And what the stock market is saying is it's a boomy rather than inflationary. Now, inflation expectations have crept up a bit. People are talking about inflation a lot. Tariffs are inflationary. Immigration controls are inflationary. But what the combination of stocks and bonds, the moves in stocks and bonds are telling you is people think this is a growth move more than they think it's an inflation move. That could turn out to be wrong. Yeah. I think the market's also kind of of a split mind, or at least talking out of both sides of its mouth when it comes to inflation and rates.

9:52Right now, if you look at WORP, which sees what the market is thinking about the next Fed meeting, whether they'll cut, it's still like half of people. Tell our friends who are listening what WORP is. Work is the world interest rate probability, I believe. And essentially, it just looks at futures markets and determines whether or not people think there's going to be a cut at the next Fed meeting and how big that cut would be. And right now, it's about even between people expecting no cut and people expecting a cut. And that's even after Jay Powell said, hey, I don't think there's going to be a cut.

10:22No rush. Yeah, we're in no rush. So the market seems to be thinking, oh, inflation is going to kick up in the future. But they're still somewhat expecting a cut in December. That might be because of how bad the jobs report was in the U.S. in November, which was the October jobs report. But still, it's kind of of two minds. And I think it's going to be interesting to see what direction they go in December in the Fed meeting. And that will really have an impact on these valuations, these equities, and to what extent there actually could be a correction, as you were mentioning. I'll bet either of you guys.

10:54I will right now bet either of you guys a pint that they're going to cut 25 basis points. Any takers? I'll take it. You'll take it? Looking at the most recent jobs report, that was really weak. If the next job report we get before the December meeting is stronger, then he's really going to have no reason to cut. I just think you cut 50 basis points, then you cut 25 basis points, then Trump gets elected and you decide not to cut. I think the Fed governors can be like, we don't want to listen to these guys moan at us for the next six months. We can just kick it down the road. We'll cut and then make them all shut up and then we'll move on.

11:30Theoretically, they are more independent and will do their jobs and not think about politics, period. I do agree that there's going to be something around the edges. But also, as we said, after the election, they did cut. I mean, they cut two days after the election. Two days after the election, correct. So, you know, they've given Trump something. Fair enough. Anyway, we have a pint bet on it. I think they're going to cut. You're saying they don't cut. I'm with Rob on this, much as I hate to agree with him. I can't wait for you guys to get me drunk. You'll get drunk on one pint. Two pints. You guys probably get a second bet.

11:58Oh, I see. I thought we could share it. So one of the questions that you're asking in your newsletter today was, is there a level for the 10-year Treasury yield that will crack the equity market, crack stock markets? And are we going to get there soon? You say yes and yes. I say yes and no. I think the level at which the stock market starts to really get spooked by the bond market is a little bit of a way off. Just a hunch, but I just think that's a little bit further off. If we get to five, we're going to have a serious conversation. That's a long way away. But yeah, if we get to five, then it'll start getting, as we Brits like to say, a bit squeaky bum.

12:36In September, I will remind you, Katie Martin, we were at 365. Here we are in November and we're at 4.42. The train is moving, baby. The Wraith's train is flying down the track. Yeah. Well, I'm sticking with it. Five is squeaky bum territory. The rest of it we can handle. All right. On a sort of related note, you were asking in your newsletter about the credit cycle. Where are we like with like corporate bonds, right? Bonds that are issued by companies, because the thing that is getting a little bit alarming now is, OK, default rates are kind of they're picking up. They're pretty low or they're sort of normal by historical standards.

13:21Yeah. But the spreads on these things. So the little extra that you get for buying these things rather than buying government bonds is super, super, super skinny. It's so skinny. It's getting too skinny. Yeah. I mean, it's the equivalent of the valuation on stocks. Yeah. Big valuation on stocks equals small spread on corporate bonds. Yes. And, you know, I subsume this question under a larger question that should, in theory, be kind of easy to answer, which is what part of the economic cycle are we in? So in a normal economic cycle, you have a recession, you have a recovery, you have mid cycle where things are start just going well.

14:04Then you usually have some kind of late cycle euphoria where everything is going too well. And then you have another recession and that can take any number of years, but that's the general pattern. And I have I know we're not in a recession, but other than that, I don't know where the hell we are or even if we are anywhere in that pattern. You know what I mean? And so what the spreads are telling you is things are a bit euphoric. It's late cycle. You know, these look like the spreads that we had in like 2005, 2006. And we know how that ended. Badly. Yes. Similarly, they look like the spreads of 1997, 1998.

14:42So that says late cycle. But maybe we're in a recovery. We're still recovering in some sense from, I don't know. Or are we always going to be in these weird half semicycles because COVID was not a true recession? Yes. That's the thing. You need a recession. That's my argument is you need a recession to kind of that's the control alt delete of the economic cycle. And we never pressed we never really pressed control alt delete on the economy. So now we're in this weird space where we won't know where we are until we have another recession. And God knows when that'll happen. So until then, we're just feeling around in the dark.

15:17I just I'm just sort of increasingly feeling like all the things that like boring old people like me and you Rob do to tell us where we are in a cycle aren't really working at the moment because normally you would say ah but look at these stock valuations everything's very expensive. Look at the default rates. We're going to come back to something more normal. Look at default rates. They're going to go to something more normal. Look at corporate bond spreads. They're going to go to something more normal, which all says correction. And then what the market actually does is say, nah, I'm not correcting anywhere.

15:50I'm still going. And so something weird has changed in the way that you read markets. This is my grand theory that I have not yet properly flushed out. You didn't mention there, which is also sending very confusing signals. I know Aiden has views on this, is the job market. It's like the unemployment rate is going up and the hirings and firings numbers are weird. So part of your cyclical understanding would be the reading you're getting from the job market. And that signal is very confusing and difficult to read. Yeah, it's confusing, difficult to read. And it's arguably gotten more confusing and difficult to read because of population change, at least in the United States.

16:28Yes. You know, when people decry immigration, we've talked about this before, part of what it did is change the break even number. So the Fed seems to now be attuned to that. They've started talking about it in the last couple of meetings, but it's still bizarre to read this. And again, there's labor hoarding potentially going on. And it's just hard to say what actually was the reset because the recession caused people to hold on to their labor as opposed to let go of their labor, at least for some firms, especially on the smaller end of the spectrum. But nobody's quitting their job. This is a number that's kicking around Wall Street a lot this week It's the quits number and usually that's a bad sign people quit when they're feeling good I mean would you quit which this will be my last?

17:07Would you quit your job ahead of like possibly the most uncertain policy environment in American? Yeah, yeah Maybe that's part of it. Yeah, that's a good good point Anyway, so I but my answer to that question is I have no idea where we are in the cycle I don't know if we're in a cycle. Ask someone else. That is my answer. Thank you for coming to my TED Talk. So the last question on your list from your newsletter today was, is AI a bubble? To which I think you were saying yes, right? Yeah, I think it is. Or it will be. It will be. Well, that doesn't count. Does a bubble have to pop? Yes. Yes. It does.

17:43That is part of the definition. Aidan and I had lunch with the famously bearish, but often write Jeremy Grantham the other day. Oh, did you? Yeah, and he's the guy who founded this asset manager called GMO, considers himself a bubble historian. I think that's true. And he said basically the mistake, the conceptual mistake people are making is they're saying AI is an incredible technology that is going to change everything. Therefore, it can't be a bubble. But his point is au contraire. It is precisely the technologies that are going to change everything that cause bubbles to happen. The railroads or the internet, you have a technology.

18:22Everybody can look at it and say, holy crow, this is an amazing thing that's going to change everything. But you don't really know how it's going to change everything. So you bid up the price of everything in sight. You have a massive bubble. There's great, you know, excitement. And then railroads, internet crash. And it's out of the ashes of that crash that the real businesses grow. And it's interesting. We're even starting to see this in this earning season, right? So Wall Street is starting to actually punish people who have spent a lot on AI CapEx or say they're going to spend a lot, but don't have anything to show for it or don't have a clear story for how they're using the AI.

18:55Google and Amazon, which actually have use cases, did really well. And then Meta, Apple, and Microsoft, they beat earnings too, which they always do. But they fell partially because their AI CapEx just didn't seem like it was going to be playing out in the near term. Productive in the medium term. Yeah, and then Tesla is its own weird, you know, personality stock for Musk and Nvidia is like an enabler. So they're not really held to the same standards. Well, but Nvidia, I mean, that is my counterpoint, right? It's put out results this week. It like doubled its revenues from a year ago. Yeah, it's amazing.

19:29$35 billion in the quarter that ended in October. Making a lot of money. It's not obvious to me that this is out of whack with its share price. I know the share price has gone gaga, but the company has gone gaga. No, no. The question about NVIDIA is whether it's in a revenue bubble. In other words, right now, it is the monopoly maker of AI-grade GPUs. And how much are we pricing them being that forever when eventually some clever person is going to make a competitive product that really works? And we know that, for example, Amazon is working extremely hard at making its cheaper in-house alternative.

20:09Or the CapEx spending slows down, right? All these big numbers, they have to build these units and then they have them. How much more chips do they need after that? NVIDIA's P ratio, which is I think in the 40s now, given its revenue growth, it makes perfect sense. The question is whether the revenue growth is going to continue and how long, right? Yeah, but the funny thing is they benefit from the markets punishing Microsoft and Meta for overspending on CapEx. But NVIDIA is the direct recipient of all that overspending. They're basically punishing them for giving too much money to NVIDIA. Let me wrap up on one kind of quick question for the two of you.

20:43It really strikes me. This was the very start of our conversation today. It was like you read through all the look-ahead pieces for 2025. They're all saying more or less the same thing. Is it just me who finds that a little bit unnerving? There seems to be a lot of consensus here, and that isn't always healthy. No, it's rarely healthy. In fact, you need a rock-solid consensus for something really bad to happen. It's one of the boxes you have to check before something awful can happen. Like, when people don't know what's going on, it's probably a reasonably safe market and will probably go up. When everybody thinks they know what's going on, then you are on the highway to the danger zone.

21:23Got to write the sign. Aidan, are we on the highway to the danger zone? I apologize to all the listeners for the earworm that we've given you for the rest of the day. It's hard to say. While there's consensus about AI, I think, as we said before, there's so much uncertainty about what will come down the pike in 2025 and specifically in 2026, at least from a policy direction in the US. And then, you know, a broader geopolitical war situation in the Middle East and in Eastern Europe. So I think there is consensus maybe a little around the AI thing, but the rest of the market might be balancing it out with how unclear things are going to be.

21:57So you're saying no danger zone. Rob and I are saying danger zone. No, I'm bullish for 2025. I want to be totally unambiguous. But on the balance of risks, the uniformity of consensus is on the liability side. Yeah. You know what I'm saying? It's a bad thing. I think we agree. I'll also say we're danger zone. Yeah, you've got to watch out for the wisdom of crowds, folks. On which note, we're going to be back in a sec with Longshore.

22:32Alrighty, it's time for long, short, that part of the show where we go long, a thing we love, or short, a thing we hate. Aidan, what you got? I am long hair products. My hair is longer than it normally has been, just because I'm lazy or I just can't decide what I want to do with it. And yesterday I forgot to put in hair product and I just felt like a poof ball all day. And so, you know, the lack of something really, really changes your appreciation. I'm very grateful for it. I find all discussion of hair products to be a personal attack. Yeah, I was about to say, Chrome Dome enters the chat. Katie, I am short turkey.

23:10And this time of year, you get a wave after wave of newspaper articles about how to prepare turkey. None of these techniques work because turkey stinks. It is lowest of the protein. I'm against it. We will be eating a capon at my house this thing. Oh, la-di-da with your capons. Yes, la-di-da. What's a capon? Well, that's the thing. It's a secret. You can look it up after the show is over. It's just like a turkey. I am a limit-long Josh Kushner, brother of Jared Kushner, venture capital guy. We have got a great read in the FT today if you want to catch up on it. But his venture capital firm, His whole deal is that it goes big on a really small number of investments, which is quite a weird thing for a venture capital firm to do.

23:57But one of the execs at Thrive Capital gave a comment to us saying, diversification is for people that don't know what they're doing. I just want to put a little pin in that so that we all remember it just in case that all goes wrong. I mean, with their connections to the policy world, it will probably go well. Yeah. I mean, that's quite a thing to say. So remember that one, listeners. Work for Ray Dalio. Do I say that out loud? All right, we're going to have to wrap it up there. Quit your laughing and your banter. We've got to wrap it up. Listeners, we do love to hear from you. So drop us a line at unhedgedatft.com.

24:35And we will be back in your feed on Tuesday. So listen up then. Unhedged is produced by Jake Harper and edited by Brian Erstad. Our executive producer is Jacob Goldstein. We had additional help from Topher Forges. Cheryl Brumley is the FT's Global Head of Audio. Special thanks to Laura Clark, Alastair Mackey, Greta Cohn and Natalie Sadler. FT Premium subscribers can get the Unhedged newsletter for free. A 30-day free trial is available to everyone else. Just go to ft.com slash unhedged offer. I'm Katie Martin. Thanks for listening.

25:21We'll be right back.