Unhedged Live: How Katie was “right all along”

0:00This episode is brought to you by BigData.com. Your AI is only as smart as its data. BigData.com connects Claude, ChatGPT, and Copilot to the sources hedge funds and asset managers use. SEC filings, financial times, earnings calls, and over 2.5 million transcripts from 50-plus countries. Verified, institutional-grade intelligence right where you work. Try it free. Pay-as-you-go plans start today at BigData.com. Hello and welcome to the Unhedged podcast live from the FT Weekend Festival in London with me, Katie Martin, and him, Rob Armstrong.

0:45We've been let out for good behaviour again. Normally we record this podcast in something that looks a little bit like a grey padded cell. Mine in London, yours in New York. But now, if you're listening to this podcast, just imagine we're in a white marquee in the grounds of Kenwood House. It's a beautiful day in London, and there's loads of people here and dogs. So a few weeks ago, the organizers were like on my case saying, what's the title of the event? What are you going to talk about? And you were like on holiday or couldn't be bothered replying or something. Something like that, yeah. Yeah.

1:19And I was like, well, I don't know. It's like three or four weeks away. Like, how am I supposed to know what's going to be happening in three or four weeks? But then a glorious thing came out of the sky, which was a column written by Rob Armstrong that effectively said, Katie was right and I was wrong all along.

1:41Katie Martin: That's one interpretation of what the column said. So I've been banging on, ever since Trump came back into power, I've been banging on about this idea that investors are thinking differently about US markets. it's not the kind of safe place to be that it's always been treated by investors and you've always said, pipe down young lady not going to happen and now you're warming to the idea that I'm on to something I am, but I would like to clarify there's two parts to that thesis that it's all going to be fine from an investment point of view in America point number one is that America has the strongest corporate economy in the world by a mile and matched to the deepest capital market in the world.

2:25Katie Martin: And politics doesn't change that. The companies are bigger. They have a large domestic market. You can list their virtues. There's a deep stock market. There's plenty of financing. There's loads of entrepreneurs. There's good universities. It's everything you want. So that's the positive part of the thesis, is money will always come to that corporate-slash-financial monster that is the United States. Part number two is the thesis, is no matter how bad it gets in the United States, it'll be worse in the rest of the world. And those two points are kind of causally connected. You know, it is a U.S.

3:00Katie Martin: sneezes, rest of the world gets a cold kind of problem because the dependencies flow that way. I think all of that remains broadly true. Where, and saying this makes me feel like I'm putting hot coals in my eyes, you turn out to be right, Katie, is that you can put this at risk if you borrow like a total crazy person, both on the corporate and the government side. And I think that can destabilize the American system enough that all this good stuff that isn't changing can be kind of knocked away. And so we have a runaway government deficit and debt that for reasons no one quite understands, the market is just noticing now.

3:44Katie Martin: It's like, hello, we've been watching this show for 30 years, but they're paying attention. Plus, we have the explosion in debt from our most important companies, AI companies. And between the two of those, they're kind of connected. It's this huge blob that could ruin everything. That's the short version of me conceding that you are right about something just this one time as the exception that proves the rule. So you're sort of awakening to this idea that there may be some sense in putting money to work in places other than the United States of America. By the way, I do have money at work in other places myself.

4:15Katie Martin: I'm not totally against diversification. But still. So you're thinking about it from a kind of numbersy point of view. You're thinking about debt levels. I'm thinking about institutional credibility, which I think is a much more important part of that equation. So let's talk about a thing that happened last week, which is that the Dutch Central Bank, so you have the European Central Bank, but you still have national central banks across all of the euro system countries. The Dutch Central Bank said that it had brought back its gold from New York. And it said, you know, it didn't just say, this is just a thing we've done on a whim.

4:52They said it was all about the kind of tradability of the gold. But they said, we're doing this due to geopolitical concerns. And effectively, they think their gold is safer in London than it is in New York. So they brought over 78 tons of the stuff. they've switched from New York to London. Now that I think in a very kind of like dry Dutch finance-y kind of way is saying we don't trust you guys. Like the whole point of having all this gold is that in some sort of nightmare situation the shit hits the fan we need the gold and now we're starting to wonder whether in that situation with the brown stuff hitting the fan you would give it back to us.

5:37It is ours.

5:38Katie Martin: Yes. And that, I think, is a red flag. Yeah, I think that's true. And looking into the minds of the people who made that decision, what percent chance that the U.S. will repossess your gold from the vaults beneath New York City do you have to arrive at before you decide to move it? Because it's expensive to move. Gold's heavy stuff. It's a big deal. It sends a message to the U.S. government that they probably hesitated to send in a lot of ways. So is 1 % chance of repossession of global assets enough to make you that decision? 2 % chance? So we're still, my point being, we're still at the tail end of the risk distribution here.

6:16Katie Martin: Even if you think there's a low chance something are really going to get awful in New York, that's a move you might make. But it's important, and I agree with you. It's a moment. It'll be interesting to see if others follow. Yeah, but it is just that way that very serious people have of saying, I think you've got an institutional credibility problem, And I think it's a problem potentially in a horrendous situation. It's a problem for me to have my national money in U.S. assets and physically present in the States. And I'm so scared that I'm going to move the gold to a country that might be run by Nigel Farage.

6:50Yeah. Yeah.

6:52Katie Martin: Yeah. Yeah. Exactly that. So, yeah, it's a bit of a kind of marker of where we've got to on this. The thing that I will definitely concede to you, Rob Armstrong, however, is that the US economic machine, this damn thing, you cannot knock it down. So just the other day, we had US non-farm payrolls data, the big kind of employment report. It's the number one most important data release in the global data calendar. And in the previous month, it had said, shockingly, that the US economy had lost jobs. It had lost about 20-something thousand jobs in July. Now they put their numbers out for August, and they said, first of all, oopsie, we made a bit of a mistake in July.

7:37It didn't actually lose 20 ,000 jobs. It gained 20 ,000 jobs. Now, that's not that unusual because data revisions are a thing, and it's boring and hard.

7:44Katie Martin: 20 ,000, and it's a tiny number anyway. But they also said that in August, the U.S. economy added 162 ,000 jobs. Yeah, new jobs. And you have to remember the context for that number. Again, in a country of 300 million, 160 ,000, not very much. But remember, you're talking about a country where the working age population is growing by zero or shrinking. And the participation rate is already very high. So you're adding jobs to a market that was already tight. And furthermore, it was incredible to see where those jobs appeared. It was in places like construction, restaurants, transport. So areas where it's cyclical, you know, it's not the government, it's not schools, it's like economic activity sensitive sectors added those jobs.

8:36Katie Martin: So again, in a country that's not growing its working age population, it was a very impressive number. I'd love to say one month is just one month, or as I abbreviate it, Amijam. Amijam. But it was a good month. And if you look at the long trend of that data, job creation since the pandemic has been going like this. It's a podcast. People listen to it. You can't do visual. This is charts on the podcast. Line going down, line going down. And we get to about the middle of last year. And this starts to happen in the US economy. What does? You have to say it out loud. This is job creation. It comes back up again.

9:12If you're listening at home, I'm sorry. Charts on the radio, ladies and gentlemen. Charts on the radio, everybody. Yeah, yeah. So the US economy is firing on all cylinders.

9:22Katie Martin: And I've heard this canard repeated by colleagues I won't mention here at the festival, that without AI, America would not be growing at all. And that is, I mean, it would be growing a lot more slowly, but it would still be growing. There's more to American growth. So that sort of equity side of the story, the American companies are very strong and reporting high profits. That part of the story remains in place. The devil's on the debt side. Yeah, okay, yeah. Right? And we'll talk a little bit about that in just a second. But, so you've got this situation where you've still got inflation that's somewhat above target in the States.

9:59I think it's been above target in the States for about 20 months. Am I right? Something like that. It just never comes back down to target.

10:04Katie Martin: And it's not working its way down either. It's not working its way down. You've got a jobs market that is on fire. Tight. It's doing great. So there's 162 ,000 numbers well above what economists have been expecting. So all things being equal, that says that later this month, September, the Federal Reserve, under the new chair, Kevin Walsh, should be raising interest rates. Yes. Now then, do you think Kevin Walsh has got the balls to raise interest rates two months before the midterm elections? Yeah, it's a terrific question. How many people are regular listeners to the show, just to get a sense?

10:43Katie Martin: Okay, so I will still bore you with things you've already heard. Welcome to my world. I mean, there was this, the first two public appearances of Warsh, and he was ambiguous. Yeah. And, you know, it's okay to say nothing, it's okay to say something, it's okay to say a whole range of things, but don't leave people wondering what you just said. And that's what he managed to do in his first two meetings as Fed. Then he comes out the other week in Jackson Hole, and he's very clear, and he makes a hawkish noise. I don't know what this noise hawks make, some kind of screeching noise. Ah! Ah! He makes a hawkish noise.

11:16Katie Martin: He says, inflation is too high and it's not getting better. I don't see any improvement in the data. And, you know, it was like big hawkish noise. Yeah. Right? So question number one, did he already paint his way into a corner? Yeah. Right? He came out his third meeting. He's still learning how to talk to all of us. Did he come out in his third meeting and make a mistake and destroy all his optionality? You know, when you're the chair of the Fed, you always want to leave a little back door open to whatever you said before that you can slip through at the last moment and change your mind, which is a point he's actually harped on.

11:45Katie Martin: The reason he doesn't want to talk very much is because he doesn't want to pre-commit to any course of action. He's rattled on at great length about this. I want to maintain optionality. I don't want to give forecasts of the future because forecasts trap us. Well, did he give a forecast by mistake, talking in Jackson Hole and making a screeching, hawking noise? So is he trapped? That's question number one. Is he trapped by his own words. Because now, if he doesn't raise, he just like tattoos Wimp on his forehead in big letters, right? And that's a bad look. That's consequential. Because as we know, he's a handsome man and it would be a shame.

12:19Katie Martin: Oh, he is a handsome man. I will say, putting my fashion, he's got very good suits as well. We're not here to talk about your fashion column. So you've got all these kind of investment banks that had been saying, look, I don't think the US is going to raise interest rates it's this year, 2026, and probably not into 2027 either. Now, all of a sudden, they're saying, yeah, I think they go in September, and I think they go in December, and I think they go in March, with like quarter point raises all the way through. But Donald Trump, for it is he, he said on Truth Social, after the jobs numbers, he said something like, the Federal Reserve, with its new chair, has got to get smart.

13:00And he said, lower the rate, or I'll stop trading with countries with which we have a deficit. Now, Rob, one thing that I love doing on this show and that you hate me doing on this show is when I ask you to account for stupid stuff that Donald Trump says. Nonetheless, please make it make sense that he's threatening trade tariffs if they don't.

13:24Katie Martin: I mean, he just pressed the button on the Donald Trump word generator. Yeah. And it's like, tariffs, lower the rate. Natalie, send this. Be a patriarch. So, yeah, I will not try to explain that. But I will go on my usual tirade. Others in this audience may feel differently. You may feel differently. I think the chair of the Fed has very little to fear from the president. He tried to intimidate the last guy, and it really failed. Trump is a wasting asset with two years to go. I don't say that anything about Trump in particular. That's just last two years of his second-term president. You know, Worsh can look into the future and see Trump's power sliding down, right?

14:02Katie Martin: So nothing to fear there. One of the main tests of his chairmanship is going to be, am I the kind of guy who stands up to the president? So I think he has everything to gain by not doing what the president wants him to do. And if I had to assess that tweet from the president, I would say it made it materially more likely that the Fed will tighten. Because now they have to prove that they're not listening to the president. Well, yeah. So do they have to do, what is it that T.S. Lombard is calling it? Like a credibility hike? A credibility hike. Like they have to hike now just to show that they can.

14:37Right?

14:38Katie Martin: And this sounds childish. It is childish. It's people playing chicken. But the crucial thing to understand about central banking is that perception is reality. The reality of what central banks do is way less important than what central banks do. Right? And so it's important when the president tries to humiliate you that you push back because that creates that powerful facade. Right? And so I think he really has no choice. Although we have the strange case of Governor Waller. The strange case of Chris Waller. Chris Waller. Who, when he was trying to get the job as the Fed chair, was like, yeah, we should cut rates really, really fast.

15:16And then when he was out of the running, he's saying, actually, I'm not sure we need to cut them now.

15:20Katie Martin: And then he changed his mind again last week and said we need to hike. He's a very influential governor. And I don't know, is he trying to give Warsh cover so he can cut? But he came out and said, I don't think we need a cut right now. So it is hard to remember when you are talking about the godlike chair of the Federal Reserve that he's just the head of a committee. And he has to have the persuasive power to bring people along with him, which is again a test for the institution. If the world perceives him as a Fed chair who cannot gather in the sheep and lead them wherever he needs to go, that weakens the power of the institution to control inflation, and affect the economy and so forth.

16:04Katie Martin: So it's a weird, you know, he used the phrase, I used the phrase first, by the way. But he used, Warsh, in his speech in Jackson Hole, used the phrase Hall of Mirrors to describe the game that the Fed plays with markets. Are you claiming credit for Hall of Mirrors? No, but I had a column with the title, the Fed's Hall of Mirrors, and then the Fed chair says Hall of Mirrors. How am I supposed to understand that? Well, so Rob Armstrong is directing Fed policy, boys and girls. Yeah, that's basically, that's the point. That's how this works. Okay, fine. Terrifying. So this whole will they, won't they on the rates ahead of the midterms, which I take your point that...

16:40Katie Martin: By the way, I should challenge you before you say that. Let's have a bet. I think they're going to hike. What do you think? I think they're going to... So do I. So it's not much of a bet. Yeah, yeah. Buy each other with a swap beers. I think they'll do, like, yeah, a quarter of a percentage point. But I do think that the fury that will come from the White House as we get closer to the midterms, if he feels like people are blaming higher rates for any kind of little bump in the road economically. I just wouldn't like to be in Walsh's shoes, basically. Okay, speaking of shoes, let's talk about Besant's shoes.

17:12Okay.

17:13Katie Martin: I have never looked at his shoes, but I'm talking metaphorically still. So Scott Besant... Scott Besant, the Secretary of the Treasury. Yeah, his shoes, you say, yes? So to speak schematically, the chair of the Fed, their problem is the short end of the interest rate curve. The problem of the Treasury Secretary is the long end of the interest rate curve. So you're setting short-term monetary policy here. The Treasury wants the long-term rate to go down. You can summarize the job of the head of the U.S. Treasury as funding the U.S. government. And he wants to do it as cheaply as he can. That's his assignment.

17:47Katie Martin: So he wants that rate, the 10 years and out, to go down. That's his job. He wants bond yields to come down. He wants lower borrowing costs. In his heart of hearts, does he want the Fed to... Is that Barkley? It's a different dog. Barkley is somewhere and will bark. For the long end to come down, does Bessent want Warsh to hike or to cut? And I think in the dark heart of Scott Bessent, he's not rooting for Trump, he's rooting for Warsh. Raise rates at the short end, establish the credibility of the United States, long-end financing will come down. Scott Besson was on some podcast with Steve Bannon the other day being mean about the FT and saying we're anti-American and awful.

18:32And so that's us told. OK. Again. Yeah. But actually, let's just pause on that point about the bond market because it has been getting absolutely hammered recently. And the world can't settle on an agreed explanation for what is going on here. Like, either it's the market saying growth is going great, which, in fairness, the payrolls data does suggest that might be right. Yeah, yeah. In America, the growth is great. Or it's saying the U.S. is borrowing too much damn money. The national debt is already over$40 trillion. Yeah. Or it's saying...

19:08Katie Martin: The Fed is not credible. The Fed has lost credibility. Or it's saying some sort of combination of those things. Inflation is coming. Yeah, yeah, yeah. It's like, yeah, there's all these sort of explanations that cancel each other out, and I just don't know where we get to on it. I think the minions of the Trump administration, Moran, for example, says it's growth. Growth in America is very strong. Of course, that's what longer term rates are telling you. You said something different a month ago, whatever. I will agree with the Trump administration. Growth does have something to do with it. You have whatever, 3 % to 4 % GDP growth maybe last quarter.

19:39Katie Martin: You had 3 % of inflation on that. You have 6 % or 7 % nominal growth. You're going to have a higher rate when you have that. So that's part of it. But the long-term story, of course it's the debt story. That's where we started. Of course, the world has woken up to the fact that not only the US, but all the developed countries have too much debt. They have no political machinery to solve the problem. And you're going to loan these people money for 30 years or 10 years or 20 years? And what do you want to get paid? You want to get paid more. And fair enough. So when we think about risks to global markets, which we do because we're sad people like that, Like one potential way that this could all go wrong is that debt markets really do properly blow up.

20:22Yes. Another is that, you know, something goes wrong with like the AI trade, for example, or with corporate America. But I wonder what your thoughts are on. Also, last week, we had a speech from Andrew Bailey, who's the governor at the Bank of England, who was saying, I really think people who run banks and investment firms need to think carefully about what they would do if some AI widget managed to get inside their system and hack them and that we're not potentially too far away from the point where that is a genuine possibility, that AIs could turn hostile on financial institutions. I mean, what can you do about that?

21:06Nothing.

21:06Katie Martin: I mean, I thought the quote of the year was actually so... I don't know how many of you followed the hugging face story. Yeah. So they have some toy over there at OpenAI working in what they think is a locked room of computers, obviously. I'm speaking metaphorically. And it's the new experimental model. And it breaks out into the computers of another company and starts having a screw around in there. I mean, this is a big deal. This is something they didn't... The company didn't know they were connected to the Internet. The AI figured out how to find an internet connection, falsify its credentials to another corporate server, get in there and have it poke around for laughs.

21:43Yeah.

21:44Katie Martin: Right? And so this is a moment, right? This is the first scene of a science fiction movie, right? And once they get on top of this, which takes a week, Yes. they have a press release and a statement from OpenAI, and Sam Altman, the head of OpenAI, his big comment is, Oh, we're going to see a lot more of this. Yeah. And it's like, what are you talking about? You know, like... So there is a sense that the people running the AI companies, which are the most valuable companies in the corporate economy of America that I just mentioned, do not take a very responsible attitude towards their own product.

22:25Katie Martin: The kind of response we got from open AI was like, that scene in Jurassic Park, you remember? Clever girl. Yeah. You know? Yeah. Yeah, it's like when the velociraptors learn to open the door and get out. So I think he was quite right to warn. And the thing is, there can be a secondary kind of event where something like that happens and the value of the AI trade goes down. And so now a lot of money in the US equity market, which is the cornerstone of all markets in the world, air starts to come out of that because people realize the AI future we're going to have is extremely different from the one we'd been imagining a few months ago.

23:08Katie Martin: And so then you can just have a good old-fashioned market crash. Wall Street is kind of one trade now, and that's dangerous, you know? And a really scary event could change that, no question about it in my mind. And Andrew Bailey is not the sort of guy to shout fire in a crowded cinema. He's like Captain Sensible, and if he's saying this is something that the global financial system needs to take seriously, then I guess we need to take it seriously. So there's at least four different ways that AI can take down global markets. Even people can wake up to the idea that a lot of this stuff is not as monetizable as we all previously...

23:42That's a standard story. No one's going to pay... Not as many people are going to pay for AI as the companies appear to currently think. And the companies that use AI are saying, well, actually, this is too expensive. We want to go onto a cheaper model. they could infiltrate the Bank of England or the Federal Reserve or whatever it is, or your bank account or mine. And somebody just shuts it down. And someone just shuts it down.

24:03Katie Martin: The grown-ups show up. And they're borrowing so much money. Yeah. You know, borrowing quickly can often go wrong. I mean, I think of debt as a kind of financing that is very attractive, but makes risks riskier, right? Because when you have equity financing, nobody's knocking on the door to be paid immediately. And whatever risks you have in the company when it's not indebted, they're bigger when you carry a lot of debt. And now the companies that used to be the great equity machines of all time are becoming debt machines, and so that's a risk. But I just kind of worry that they've borrowed all this money so that they can build data centers, and now little old ladies are sitting in front of the bulldozers and saying, well, you can't build them here.

24:42We're not doing it, yeah. So where does the money go?

24:45Katie Martin: I mean, I think Francis Fukuyama, I don't know if anybody saw Frank, my friend Frank, in the next... But he made a good point about the data center thing. It's not that the data centers are so horrendous, but they're a physical symbol of something much larger and more complex that we all feel, right? And so the data center is the concrete physical manifestation of something we have much larger, vaguer worries about. We don't want the box. Even if the box isn't the problem, they're sending a message. And these companies, I think, by the way, one outcome we haven't discussed is everybody makes a shitload of money.

25:21Katie Martin: Yeah. And that's great. Yeah. That's the outcome we're looking for here. Everyone happy. But these companies are assuming they can pull a Travis Kalanick, the guy who founded Uber. And Travis Kalanick was like, damn the torpedoes, damn the regulators. I don't care what the taxi drivers say. I don't care what the towns say. I don't care if London makes me illegal. We're just putting Ubers. And what's going to happen is eventually everybody is going to like Ubers enough that it's not going to matter. We're going to win the political war by giving everybody a product they like so much that the nervous Nellies who don't like it and the taxi drivers and the city council, they're not going to matter.

25:57They just have to suck it up. Worked perfectly. Yeah.

26:00Katie Martin: Home run for Uber. People like taking Ubers. The other stuff doesn't matter. Is that going to happen with AI? If you're an investor, you better hope so. Yeah. You haven't got any better ideas at the moment.

26:18Your AI tools are only as good as the data behind them. Bigdata.com plugs into Claude, ChatGPT, and Copilot via MCP, bringing in the sources serious investors trust, SEC filings, Financial Times, earnings calls, and 2.5 million plus transcripts across 50 plus countries. Institutional grade data, right inside the tools you use every day. Start your free trial at Bigdata.com. I think we are pretty much bang out of time so we have to do the thing that we always do long, short, that part of the show we go long, a thing we love or short, a thing we hate normally I've got one ready and Rob has forgotten but on this occasion Rob's got one ready and I have forgotten so you go first

27:06Katie Martin: I have a pear trade, I'm short the whiskey business there was a great article in the FT about how there's too much scotch and people are healthy now. They drink less of this stuff. Meanwhile, it had been a major source of capital. People like it invested in building more distilleries. So there's like a lock full of scotch in Scotland they don't know what to do with. And this happened in Kentucky, in America, a few years ago. It's a serious problem. It takes a long time to fix. So I'm short the business. I am long drinking whiskey. Yes. Because I really look forward to helping empty lock whiskey in Scotland, which I feel is my patriotic duty as someone descended from the Scots.

27:49Yeah, absolutely.

27:53I think we're going to start doing that in about an hour. Yeah, yeah. I'm going to be ploying and sentimental and say it's just so nice to see our listeners in real life because we sort of chat to each other in a dark cell and we kind of forget sometimes that there are real people who listen to us. And it's lovely to see you in real life. thank you for listening please tell all your friends about the podcast listen to it wherever you get your podcasts and thank you so much for coming on to listen to us today