So, you know, it's made monetary policy a little bit less restrictive than it seemed before.

Come in on just like where, what's the guiding principle for this year? I mean, at the end of last year, it was basically us and Goldman that were bullish on the economy and activity.

And the difference was this question about productivity, which again, is not to say that we're, well, I'm not bearish on productivity.

the ability of AI to drive productivity.

But I think the way that it's manifesting right now is clearly much more about creating demand ahead of creating those supply effects.

So you had this sort of temporary boost to productivity growth last year.

which was effectively just because ai wasn't tariffed and everything was so there was a lot of uncertainty in the whole economy um and so there wasn't a lot of hiring and then tariff effects were less sharp on inflation than people were expecting and so demand more broadly was, hold on, mic issue.

You can't print dollars.

the

second question here about the sell off in bonds, we've had Besson pushing back against that through the rhetoric and through sort of so-called liquidity interventions at the long end of the curve, but in the wider context of Trump bizarrely saying that he's going to use the army to bring down long-end yields and the sort of the pressure that is being put on the Fed at the short end of the curve.

That it sounds, you know, Besson's words just sound a lot more like a sort of a threat to the long end and look like targeting a certain level of yields, which if your whole impression of the economy is derived from growth, being in real estate and being a businessman, then maybe lower yields mean that you're a stronger business.

But the government is not a business.

It's not just a sign of credit, although there are some fiscal indicators that are starting to be determinants here, I think, at the long end of the curve.

it's partly about, and in the US case, most of the time is about what's happening in the private sector.

And so the credibility hike is necessary, I think, but our call has always been that it's not just about one hike here.

So I remain quite optimistic about those parts of the world still.

And his reluctance to share that, is that something that investors will just need to get used to even with, uh, the Treasury market perhaps not sending clear signals because of intervention from Bessent?

Right.

So it's, it- we need to know what the reaction function is.

Ex- exactly as, as you say, we need to know what the, what the reaction function is.

Um, I, I think w- what I'm worried about is, you know, if, if Bessent is trying to send a signal to, to, to bond markets and then we don't get this clarity from, from the Fed, you know, not necessarily today, but over a period of time, and particularly as the labor market re-accelerates on the back of, of this kind of broadening out of, of profits, um, it may be that there's a soft patch in the short term.

But e- uh, eventually, this is an economy that is gonna see a, a re-acceleration in the labor market.

That will provide clear evidence that, um, rates are in fact not restrictive.

What are you looking for, um, next week that could really move things along and give us some more direction on the state of the economy? Is it just all gonna be about the jobs report?

That we're so glib about it now compared to then, when yet we had a global financial crisis, which I remember also included a global sovereign debt crisis, on the basis of much smaller numbers.

Yeah, I mean, the sovereign debt crisis to me was more about that kind of structure of, of, like, more to do with the Eurozone and, um, you know, the whatever-it-takes moment was, was really important in, in saying, "Okay, well, we know we don't have exactly the right structures here and a, and a sort of a, a, a central bank backing each of these," um, but then the ECB sort of stepped in.

So that was a specific example of where it does, um, it does matter, uh, and policymakers sort of did the right thing to sort of calm things down.

Um, I think- The inflation regime is everything.

Um, you know that we know that, uh, that you can have very, very high levels of government debt to GDP and, uh, sustain that for a really long period of time.

All you need to do is look at Japan.

But only in a deflationary environment where, um, the, the deficit is the result of the fact that the private sector is continuously trying to save, whether that's to deleverage, as we had in the 2010s, and that's when you get the really big rise in, in government debt to GDP, and nobody cared.

So Freya, and, and, and given the tensions we've seen over the dollar yen, uh, in the last couple of weeks, a- are, are things not just creaking, but beginning to have kind of, you know, we're having to put more fingers in more holes to stop the water coming through?

If you look beyond the oil price issue, then interest rates are too high in the UK and the bank is squeezing the life out of the economy.

Yeah.

The short end of the curve everywhere, apart from, I would say, ironically, the ECB, is inflation.

very far from what is justified from the perspective of domestic economies.

And partly it's because there are all of these global shocks and central banks don't really know whether to react to them.

But on the spectrum from sort of the Fed and sort of the Bank of Japan that really should be raising rates, and the long end is telling us that, to the bank of England, the really should be cutting rates.

We have almost literally 200 basis points of divergence in where the short end should be.

Okay, Freya, do you agree?

I agree.

I do think productivity growth will be stronger than it was historically, but I think wage growth will be stronger even more, um, by...

And that leaves you with a place where unit labor cost growth is probably a little bit stronger.

So let's say for the US it's gonna be, um, above 1.5%, where the average for the last cycle was 1.5%.

That gives you a little bit more inflation, but I think where the big shift is coming from is in the markup from that unit labor cost growth to domestic inflation.

And there's a, you know, range of different ways in which you can sort of validate that or the, the sort of the drivers of that.

There's a demand side effect, which is that we are in a, a re-leveraging cycle, which is, is a source of, of demand.

It's not a real thing

But to argue that this is going to be some deep financial crisis, I just can't see that.

You almost have a sort of a bubbling, natural bubbling tendency that comes with this type of a new technology, new general purpose technology, because there's a perception among investors that there's potentially infinite demand that they want to chase.

And in the case of this particular technology, There's the idea of needing to be at the frontier of this development.

Now, whether that turns out to be a good place to be in terms of being able to capture rents in future, particularly as Dario was talking about with regards to Chinese models being, you know, a few months behind that.

that it may not turn out to be a good place to be in terms of capturing rents, in which case at the very frontier, we're going to have kind of questions on the sustainability of earnings growth and the ability to sort of monetize and transition to out of... our extra tech revenues.

In terms of the relationship with the macro economy, it's almost like you're always going to have a tech sector and a non-tech sector.

And the pursuit of this perception of infinite demand is going to create an increase in leverage.

Freya, why is the market ignoring this?

Yeah, a real dilemma

there.

I don't know how you're going to figure that one out.

I mean, I think personally, I've never been bearish on it.

I think the tech's fantastic.

Like the first time I saw it coding, it was just like such a moment in life.

In history, frankly.

first round effects are turning out to be quite similar because the inflation increase is basically 1% everywhere.

The tinkerers

tinkerersYeah, the tinkerers.

Um, but, but also not just because they, they are tinkerers and the Fed is not, but, but, but because it won't actually turn out to be necessary for, for the Bank of England and the, the ECB to really tighten rates.

I think just as markets have gotten used to the fact that, um, the, the, the, the, the UK cannot pass inflation through the system because there have been so many shocks, um, it's, it's, uh, it's... and term premium is, is rising and, and the Bank of England is now perceived as not being able to cut rates ever again, despite the fact that before this seemingly transitory shock they, they were going to be able to cut rates according to the market.

Um, just as markets have gotten used to that idea, we're now in a, a slack labor market.

And so the pass through from this shock is gonna be less than people are expecting.

So there's a little bit of a sort of reversal here in terms of the, the first-round effects are bigger for the UK and the euro area than for the US, but it's more likely that you get sticky inflation in the US than in, in Europe.

And so, you know, I worry about that longer term, but that's not really what's playing out right now as far as I can see.

(laughs)

Um, I, I think what's happening here is, is, uh, in, in the, the, the currencies outside of, of the renminbi within China, like I just don't know why, um, the administration wouldn't consider, uh, the, the, the currency as part of trade deals.

When you, when you're considering China it's a slightly more, um, I, I guess aggressive proposition.

But, you know, w- the...

Taiwan has had this current account surplus for, um, years and years and years.

It's a massive, uh, percentage of, of GDP.

Why would that not be a part, why would the currency not be a part of the, of the deal? Um, and I think sort of what's changing here, here I go to the bond equity correlation, um, is that we're, we're shifting away from the hyper-globalization that has sustained those current account surpluses and into a world where the policy reaction to the hollowing out of Detroit and the rise of inequality, the policy reaction is negative supply shocks.

Where does that end up? Does it come back down near two, three?