Tim Graf (TG): This is Street Signals, a weekly conversation about markets and macro brought to you by State Street Global Markets. I'm your host Tim Graf, European Head of Macro Strategy.

Each week we bring you the latest insights and thought leadership from our award-winning suite of research, as well as the current thinking from our strategists, our traders, our business leaders, and a wide array of external experts in the markets. If you listen to us and like what you're hearing, please do subscribe, leave us a good review, get in touch with us, it all helps us improve what we hope to bring to you.

And with that, here's what's on our minds this week.

TG: The last few episodes, we've spent a lot of time talking about recent market history, a lot about US politics, US markets, AI. That all makes sense, of course. They have been the prime movers of global markets this year. And we're still going to cover them a little bit more this week.

But I'm really thrilled to speak to this week's guest, not just because it's given me a chance to get back in touch with a market contact from many years ago, but because he helps to put so much of what we obsess about in the short run into the context of longer term cycles of economic and financial market history. And being local here in London, he also has a lot of thoughts on the economies of the UK and Europe, which we often overlook in favor of some of the other areas and themes I noted before.

My guest this week is Ben Ashby, CIO of Henderson Rowe, an investment manager and advisor based in London as the UK arm of Rayliant Global Advisors. I first met Ben probably 10 years ago or so when he was a client of ours in a previous role at JP Morgan's Chief Investment Office, where he was managing investments for the bank's treasury function. The conversations with him then were not nearly frequent enough, but I always remember them being thought-provoking, as is the conversation with him that follows.

Hello, Ben, how are you?

Ben Ashby (BA): I'm very well, very well. Sorry about the delay. It was one of those where you suddenly open it up and it says, you need to do an update. Oh, no. And it's like my fault, I should have checked. So I apologize for being slightly late, sir.

TG: Well, actually, this is a good chance to start. What are you doing these days? It's been a few years since we caught up, so I'm curious to hear what you're up to.

BA: So one of the things I started to do towards the end of Morgan was, they started to initiate a lot of big data projects. Because the Chief Investment Office is joined at the hip with the Treasury, effectively, rates is probably the biggest single decision that will drive the bank on that side of things.

And so the thought was, if we could pull in all the data that JP Morgan had from credit card purchases, from various other kinds of loans, various other things, perhaps we could build a model that would give us a better idea of where the economy was going, how rates might behave, how the economy might behave, even therefore, any hedging activities that we did would be much more precise.

So all that applied data science was of great interest to me. The other thing you've had as well is ever since the GFC, there's been a slow crushing of the ability to perhaps be more active in terms of portfolio management within a bank. So some of those functions that the bank does, you have to have an active decision making about what do you think the rate curve is going to do, or potentially what do you think this foreign exchange is going to do. And some of the credit investments as well.

But being sat in London with negative yields in Europe and ever more compliance, it was not perhaps what I'd signed up for initially. So therefore, I left the bank.

I'm running the London arm effectively of a US fund manager called Rayliant Global Advisors. And I also deal with the fixed income side of things for Rayliant Global Advisors. This goes back to the data science, but Rayliant is very heavily involved in quantitative investment. We wouldn't necessarily call it AI, as you know, the latest buzzword for everything, but we would certainly call it Applied Data Science. And we continue to do a lot more of that.

TG: Okay, so it is traditional portfolio management, or is it mostly kind of research and analytics?

BA: Oh, it's traditional portfolio management, but working for a smaller firm, instead of having a cast of very, very talented colleagues that could do a lot of this stuff for you, there's a lot more emphasis on me doing it now. But one of the things that has made me very good at is actually using quote AI to fill in the gaps. And again, it just gets better and better. And stuff that I would have expected perhaps a team of analysts to do, now you can build your own model, you can refine it and you get it to run it for you. And it just pulls up stuff that you think you need to look at.

So it is the future. Some people are going to make a lot of success of this. I don't know which firms they were, hopefully ours will be one of them. But so far it's been going very well. I occasionally argue with the algorithms, but more often than not, they're right and I'm wrong.

TG: It feels like it's a losing battle increasingly, yes. You can actually put in a paper, an academic paper, I think it's Google's Monaco service, that's what it's called. They can generate a 15 to 20 minute podcast on a paper, people talking about a paper and doing back and forth and making jokes and follow up questions.
It's insane.

BA: Have you ever read the Suleiman book, The Coming Wave?

TG: Yes, I did.

BA: Yeah. I know we're kind of detracting away from sort of macro, but he talks pretty much about how DeepSeek gets to its model. And he talks about, look, the future is you cannot put this stuff into cars and its current model, let alone Hoovers or anything else. So they are going to have to have much more limited parameter models.

And that's why I was kind of surprised when the market was surprised. Well, actually, these things are exactly what they were predicted. I mean, Suleiman must have written that book two years ago, at least.

TG: I think so, yes.

BA: Probably a few years ago. And here he is telling you, this is what's going to happen. It happens and market seems to get a bit of a shock, which kind of gets to the next point, just on a sort of longer term macro trend.

But somebody I would recommend having a read of is Carlotta Perez. She's an economist that specializes in the economics of innovation and technology. And if you have a look at how she looks at things, she kind of puts it into two sections. So there's the breakthrough and then you get this wild investment phase where we go, oh, this is brilliant, it's going to change the world. Too much capital piles in. Normally, there's some kind of financial accident because there's too many people chasing a good idea.

But actually then you've had the installation phase. So if you think of the dot-com boom, people put in the fiber optics and everything else. We obviously had the crash afterwards, but actually the technology was there. And actually then you got the second wave of companies and people that were implementing it. And it, as we know, wasn't actually to have come to companies that benefited from it. It was a lot of new firms like Facebook that nobody had ever heard of in the late 1990s.

And I suspect that's probably where we are around some of the AI stuff at the moment. There's a lot of money that's gone into it. I suspect we're just getting to the point where thanks very much, investors, for putting all that cash into the market, but you're probably not going to get the returns you expect. And after the crash, we are at, or, shall we say the repricing, there's going to be a lot more opportunities.

TG: Actually, that's perfect as a means of getting to markets because whether it's been DeepSeek or we had, I can't even remember which week it was now, tariffs on and then tariffs off, that was actually this week, I think. And it's Friday and that happened a couple of days ago. And, we were surprised, I don't know why, that these stories about tariffs emerged, but then they were quickly reversed.

But we're left here with this market environment. Now, the last couple of days, where it's gotten remarkably calm and people have digested this news very quickly.

But you've brought up something really interesting, which is around the investment cycle for particularly tech. But I'm just curious to get your thoughts more broadly, what you think about the kind of consensus outlook, which was for another upbeat year this year. Our own risk appetite metrics actually over the last week have gotten very, very positive, which kind of surprised me given some of the volatility we've seen in markets.

Where are you on this right now with a broad outlook for risky assets, and where are we in the cycle?

BA: Given my background in sort of background, particularly because of my life and work at this Chief Investment Office, I tend to view the global financial system as plumbing. That might be the best way to describe it. We've had a wave of liquidity ever since COVID that hasn't been extinguished properly out of the market. And I still think we've got more liquidity looking for a home.

So if you think you print a load of money. So one of the things that they didn't get after the GFC is you basically had a wrecked financial system. So that's great, you can print a chunk of money. But in essence, because the banks were rebuilding their balance sheets, and even when they started to rebuild the balance sheets, they had a whole load of new regulation to deal with. Effectively, they just needed more and more capital. So the monetary transmission wasn't there.

COVID was very different, because not only did you have a financial system that was actually in great state at that point, and was able to do monetary transmission, but you also had the government piling in as well. So you had a huge amount of money going straight through into the financial sector, and then pouring over into the real economy.

There's a very old economic theory called the Cantillon Effect. It's about 200 years old. It comes from France, and effectively, that was he observed that. The people closest to money do the best. So you can say that would be things like private equity, hedge funds and financial institutions. People that can access that cheap credit do very well, but then it hits the real economy. Inflation has gone up and people get really unhappy at that point, tends to start triggering political populism and change. So if you take that Cantillon model, that's where I think we are.

Where do I think we are at the moment in the cycle? Well, I think we are probably in the last six to nine months. So just very crudely, I would be interested to see where things get to over the summer, because it looks to me that some of those liquidity sources will have been exhausted by that point.

I think this year could well be a year of two halves. I think there's a lot of skepticism, even though there seems to be enthusiasm in the market, but there's skepticism about valuations, which is fair. I just don't think that much liquidity has been taken out of the market just yet. And I think as part of that process, we're going to see capital going back to the US for various reasons. Tariffs should promote that.

And I think we could see real weakness in those kind of subsidiary markets, because whenever you look at a big market downturn, it's rarely ever the most bullish market that rolls over first. What tends to go first would be the weaker, the most speculative ones. Again, what would I expect to see? Weakness in crypto, if we're talking about highly speculative assets. And again, capital being sucked back to the US, so probably some of the emerging markets will struggle. But to the plus side, I think that money needs a home, and it will probably end up. So I could see one last push in US equities upwards.

TG: I know I read some of your writing on LinkedIn, and you're thinking for the quarter ahead, the year ahead, and some caution around tech names in particular. And that, of course, you mentioned the valuation concerns, and well, just looking at US equity market cap, global equity market cap, that is where your returns have come from. So another few good months for them. These are healthy companies at the end of the day.

What is it that rolls over to create the weakness in those sectors?

BA: I just think if you get financial tightening, that may well be enough. Look, the markets, as we both know, don't always go up on fundamentals. You know, there might be a good story, but have you ever seen a company roll over because somebody said, oh, it's 200 times earnings, I'm going to short that. I've seen lots of people shorting things at 200 times earnings and then watch it go even higher. So I'm not sure you get it on a pure valuation argument.

So first of all, if you get difficult financial conditions, if you start to get the US yield curve steepening, which I think we can talk about separately, I think that's perhaps a distinct possibility. Then I think when you kind of start to net present value, all these future earnings on tech companies, this sort of profile looks a lot more different.

It could well also be the fact that we start to get retaliatory tariffs at some points. And the obvious ones to go after are the US tech companies. I think it's no secret that Trump is not particularly fond of Ireland's business model. And let's face it, there's a lot of what should be really US taxpayer revenue going through Ireland. I wouldn't be surprised if he comes after that.

TG: Where does that leave, as a bond person, where does that leave fixed income in your broad asset allocation thinking? If you think, yeah, maybe the next few months, while liquidity is still abundant, you get decent enough capital flowing into the US.

Where does that leave bonds, particularly with supply pressures, very much a concern?

BA: Yeah, for me, it would be relatively short duration. And I think you want to probably stick closer to stuff like the US dollar, for obvious reasons, because it will be a reciprocal for that. And you've got the chance of an FX uplift.

I'm based in London, so a lot of my clients tend to look in the world and sterling or euro, where I might differ. I still think certain parts of the credit market are relatively attractive.

TG: Okay.

BA: The bit that seems to be particularly unloved to me is emerging market corporates that have issued in hard currency. So instead of chasing after single B credits and getting paid perhaps 200 basis points for something that's got a lot of financial engineering on it, and some really quite funky documents about what I get back if there's a problem, rather than chasing that, you can kind of look at things like Braskem, Cenex, a range of other things in there.

And why are they struggling at the moment? Well, the sovereigns that are back in them are struggling. They're not really in anybody's index. Emerging markets are generally seeing outflows.

So even if it is in your index, you're an EM fund manager for the most part, and you're having to sell things. And most emerging market fund managers tend to be sovereign biased, not corporate biased.

And again, these things tend to have quite heavy asset backing. So there's real businesses behind and real things that they do that. So look, it's not without risk, but I just think you're potentially getting paid more for the risk in that. So for me, it would be a relatively short duration portfolio with those type of securities and perhaps a few others.

TG: And again, in your writing, you talked about a tactical opportunity in fixed income in the second half of this year. Is that where it's focused?

Or would you also throw on the notion that we sort of financial conditions tighten, maybe central banks then have to respond with easing? Would that also include sovereigns? Or do you just steer clear of that?

BA: It depends on where the spreads are at the time. By my bias, I'm always going to prefer a good company than a sovereign if I think I'm being paid for it.

TG: Yeah.

BA: Potentially, I get paid for it on the credit spread, and I can deal with a bit of volatility around what's happening on the actual underlying rate component. For me, I think probably the biggest thing, A, the market just panics, so you, just get a risk off and bonds cop a bid, even though actually they don't look particularly attractive.

Or the second thing is that the bond market gets exactly what it wants, which is a lot of fiscal tightening, which will be extremely deflationary. Then you may well get more of a generalized panic of, oh my God, the world's going into deflation. We've brought forward all this demand, and we're out the government's running massive fiscal deficits. It's all going to be horrific.

In which case, they start to get the green light about perhaps doing quantitative easing the game or some other kind of maybe fiscal expenditure. But at some point, I can absolutely see that scenario. We have to have the deflationary scare, a real deflationary scare, probably because the bond market got what it wanted, that gives them the green light for the next phase. And then I think we probably move into something that's fairly stagflationary for a while. But the base case for the world is it all looks kind of a bit like the 1970s.

TG: Well, speaking of economies that didn't do great in the 1970s, we never talk about the UK on the podcast. And I wanted to do that. I wanted to start with your assessment of the UK economy as it stands right now. It's no secret the economy has been pretty poorly managed for a long time, but the recent labor policies and budget also don't seem to be helping. The government is focused on growth now.

How likely do you think their chances of success are?

BA: Pretty low. I wouldn't say zero, because there's always a statistical possibility of things. But I think it's pretty low. One of the great things about being British is when you talk to the Americans is anything that's going to happen to you, we've done it. Right? It's gone wrong for us. And hopefully we've got to, some of us maybe have learned the lesson, but unfortunately, you're going to kind of have to go through some of our mistakes.

I think there's a great quote by JK. Galbraith. I think it's Everybody's Guide to Economics. This is kind of all the questions he's been asked over the decades when he was teaching at, I think it was Harvard Economics School. And it was like, why are so many economists, famous economists British?

And he's also roughly along the lines of, well, some economies are really easy to run relatively. You know, the United States, France, balance, they've got all these resources and everything. Others are much more complicated to run. And I think he says that the UK economy is one of the most complicated to run because it's not particularly resource endowed and it's generally highly levered and driven by trade.

So it kind of comes to the sort of whole line of, if you had an economy that was very open, very driven by trade and very much prone to booms and slumps, you too would generate a lot of economists looking at the economy going, well, why did it just go wrong again?

TG: Yeah.

BA: So from a Brit to an American, can I kind of say, end of empire is a hell of a thing, guys. So, we've got a lot of similar problems to the United States. We've got enormous trade deficit. That is going to have to close one way or the other. I actually think Trump's right to put some of those tariffs in place. The US trade deficit is unsustainable and people have actively traded against the US and that is effectively exportation of industry and jobs in many ways.

And as a Brit, we can tell you that because when we had the world's reserve currency, when we were running that, we had similar problems with that around productivity all around the early 19th century. So there is merit to some of the stuff he's talking about. How they get executed might be another policy. But yeah, look, we've shifted to services. That is not a good idea. It's one of those things that sounds clever, but services generally are far less productive than more industrial kind of endeavors.

We've again became much more dependent on foreign capital to finance our lifestyle. That's going to have to change. I think there's going to be a general painful closing of both fiscal and trade deficits. So the UK will get relatively poorer and sterling will take part of the strain for that as it has done pretty much since 1945. So that's kind of where I think the UK is.

At some point, it's definitely a buying opportunity because it's got a lot of the core features that you want. Actually, the companies are pretty well managed or a lot of them are well managed. It's actually got a very good tech base. Not like the US, but obviously, it's countries in the world that can do a lot of things like nuclear engineering or AI or genetic engineering and stuff like that. So there are definitely opportunities in there. And you have got some world class businesses. It's just they are going to have to change a few things. And then I think ultimately the sentiment has to change internationally.

But the biggest problem we got in the short term is finding buyers for our debt. And that's the same issue that actually France has, the issue that the US has. But fortunately, our numbers are relatively smaller compared to say the US. So we've both got 30 percent requirement for foreign investors. It's just that's a very large number for the United States.

TG: Yeah.

Do you think the worst news on the fiscal dynamics is in the price for guilds?

BA: No. No, I think I think it'll just get carried out by I think they had a window under the government where they could have gone out and said, look, we're going to borrow some money, but we're going to spend it on long-term infrastructure projects, sensible infrastructure, I don't know, small modular reactors, a few other things.

Unfortunately, for various reasons, we tend to make our infrastructure very expensive because there's a lot of legal processes you have to go through. There's where, and then there's just been lots and lots of legislation layered over the top.

Look, ultimately, it's a political decision for people. You know, you might decide to prioritize this or the environment or whatever. Other people might decide to prioritize economic growth. And this election pretty much shows that they pretty much wanted more growth than protecting perhaps the wildlife and the environment.

TG: What is the lowest hanging fruit then? They talked a lot in the last election about planning reform. And is the low hanging fruit just that reform kind of on the supply side of the economy? Or is there any, with the fiscal constraints that we have here, is there any demand side management that can be pursued by the laborer?

BA: I think there's a lot they can do on the supply side. And again, this is going to sound sort of very Brexiteer-y, but again, they can do it now. You could never do it when you're in the European Union. And the problem you have with the European Union is talk you through whenever the European Union has changed some legislation or gone back on itself and said, well, actually, we're going to scrap all of this stuff. So they talk about it, but this takes a very long time. You have a lot of agreement.

So for whatever flaws you've got, I think there's a lot of stuff that you can do in the UK by restructuring it. I personally would lay off on the demand side of things, because they've been using that for a very long time, and it's requiring government debt. And the government, our government, is very good at raising money and perhaps funding things, but very poor at actually managing them. So I think there is an opportunity to release the animal spirit.

So you could see it last summer when they were talking about doing all these things. And then suddenly September starts to come out, and it's a big clunky 1970s looking left-wing kind of budget, and the market just dies. And then the taxes come through, and if it wasn't already dying in terms of animal spirits, they make sure they shut it at the back of the head like a good vet.

In a former life, we often managed the guilt position, which was sizable, on a beta to US treasuries. And as much as you want to sit around as a Brit and say, look, no, we should be doing more analysis, and actually, that's how it trades.

TG: Yeah, and that, I think, was the real wakeup call earlier this year was, you know, for all the talk about the response to the fiscal side of things here, it was really a beta of US rates. And now it's improved as US rates have fallen, but it will be a slave to that.

Actually thinking about, as a final point in the UK, what arose during that period was kind of these EM-like or doom loop dynamics, where you had sterling trading off with higher rates. You mentioned before the need to correct imbalances and a weaker pound perhaps being part of that.

Do you therefore think that that doom loop dynamic returns as it was the case maybe about a month ago, where you were getting spreads widening relative to the US?

BA: What do you think's changed in the last month that would stop it next time it happens? No, it's nothing, is it? So the other problem as well, just without going to the UK politics, but you've got quite significantly left wing government at the moment, probably the most left wing since the 1970s. And they are slowly being forced into doing quite 1980s Thatcher right wing policies. They are not going to be very happy as a political party over the next 18 months, 24 months. They are going to have a bust up because what they are going to have to do to get things moving is not ideologically where they generally are. So it will be interesting to see the party discipline. But my kind of view would be it's going to basically start fragmenting.

TG: And then there's Europe. You talk about as well in some of the things I've read from you about the Draghi report as sort of this acknowledgement of some of the things we've talked about with respect to the UK. You know, this need for reform and a recognition that as you put it, the political project that didn't bother focusing on its economic underpinnings, now really needing to pursue some of these reforms.

I mean, is it kind of the same answer as far as which reforms are most critical for the EU as the UK?

BA: I think it's going to be very, very hard for, when I say the European Union, perhaps the Eurozone might be the best place to start. Because I think some of the prospects with places like Poland are actually really quite optimistic.

I think it's going to be very hard for the Eurozone to turn things around. And I think the need to co-ordinate activities is going to make it very hard. If history is any guide, and as you know, I love my financial history and economic history, both the UK and Europe are putting together a perfect recipe for right-wing populism. And I think you'll begin to see that. And I can't see what turns that around.

If the debt loadings of the economy were lower, if the regulation was lower, I could say, well, maybe we might see more left-wing populism. I mean, don't get me wrong. I think we're going to see more left-wing populism, but I just think right-wing is the one that's going to dominate and grow quicker. So I am not surprised by the rise of those parties in Europe. People want to change, and they are going to blame the European Union for it. And some of its national government, some of it's the European Union, but I think that's broadly where it is.

But I honestly do not see how they can turn it around in the short run. I mean, in many ways they've got a lot of what you want. You've got a lot of advanced industry in Europe. You have got a lot of good universities in Europe. Apart from the UK, there isn't much of a venture capital sector across the rest of Europe. Certainly nowhere near the depth that you find in the US. Some of the stuff the European Union's done with what they funded, or just if you look at the recent AI Act, kind of get the principle they were trying to do, but in many ways it starts to make it much, much harder to actually develop some of the AI companies of the future in Europe.

So, I just think it's going to be very difficult.

TG: Do you allocate anything to Europe at this point, beyond maybe what you have to, sort of your benchmark?

BA: No. No, look, there's occasionally European companies that the computers will throw up and say, look, this looks really attractive. We think that's fine, that's great, but they tend to be much more global. Either very relatively small companies with interesting stories, or they're very large global businesses that are going to benefit from some other kind of trend. That would be the two kind of themes that would generally come up when you seem to get them found. But I just don't think we've hit the price.

The other thing we haven't had yet is, I don't think, this is me going back to my Treasury hat on, a lot of horrible things were done in the financial system to keep the lights on over the last 15 years, and not all of them have surfaced yet. So ultra-low rates promoted some really bad capital allocation while Europe is obviously cutting yields again. That might buy some more time, but there's a lot of stuff that was written by a lot of financial institutions that I don't think is going to work out well for them.

And I'll give you an example of that. Swiss National Bank came out recently and just said, well, we might not like negative yields, but they work. Well, define what you mean by ‘work’. Your second biggest bank basically collapsed because of all the risk taking it had to take on, and your third biggest bank had a massive blow up and lost its CEO because of a single position. So I'm not entirely certain they were ringing endorsements of zero rates for a country that bases itself around a banking system.

TG: Actually, this applies I think for the US as well, but I'll ask it in the context of the UK and the Eurozone. You spoke specifically about the effectiveness of zero rates in an economy like Switzerland, and I don't think any central bank probably wants to get to that territory when it comes to the European Central Bank (ECB) or the Bank of England (BOE).

I mean, how much policy flexibility at this stage do central banks have, do you think?

BA: That's an excellent question. I think it all depends on inflation. And as the Fed famously said, it has no model of inflation or functional model of inflation. So I think you can kind of get away with negative yields as long as nothing else is surfacing.

Let's wind back to the 90s, which to my mind was where a lot of original sins were started. So we can talk about whether North American Free Trade Agreement (NAFTA) was a good idea or World Trade Organization (WTO) was a not good idea. I think it's one of those classic things that seems good on paper, but bears no resemblance to what actually happens in reality. And again, I'd say the US trade deficit is a good example of that. That shouldn't exist and perpetuate in that size for that long under traditional economics. It just shouldn't simply be there.

And we know why it's there, because countries are running their economic models on fundamentally different bases. A number of them want to have export driven economies, employ people and they're not necessarily looking for a return on capital that a Western, certainly American company would be looking for.

Claudio Borio has just retired from the Bank of International Settlements. And if you have a look at his last paper, he's just basically talking about inflation targeting. And look, we just break inflation targeting into two halves. There's stuff we can control, which is the domestic economy. And there's all this stuff where you've got China basically flooding the world with goods, which is what they want to do. But is that really appropriate to put the two into the same number and say, well, fine, we're going to manage for this aggregate, even though we can only control crudely half of the stuff that's going in there.

And again, it goes back to the 1990s. As you outsourced a lot of that production, we had this deflationary effect. So okay, if you're going to start unwinding international trade agreements, if you start going to put tariffs back in place, you are likely to start seeing a lot more inflation. If you are going to start to restrict the flow of labor again, that is likely to start pushing up labor costs again. And I think we are kind of shifting into a longer term negative market fall rate.

And it goes back to my 1970s paradigm, but they are going to need a certain level of inflation to get out of these problems. Yeah, it's just trying to manage that going forward. So yeah, I think, I'm with Borio, I don't think inflation targeting was a good idea. And I think even if you're trying to do it, it's going to have to be a bigger number going forward, or they're going to have to look at it in a slightly different way. And the bond market needs to reprice for it.

TG: Thinking about the imbalance question, this is obviously a topic of interest given the politics in the US, given what will be about three weeks into the Trump administration by the time this goes out. And tariffs have already reared their heads, or the threat of them has certainly reared its head.

The long term question is, how successful do you ultimately think tariff policy by the US would be in closing some of these imbalances?

BA: I'd phrase it a different way. I mean, they can be spectacularly successful at closing these imbalances. It's just how quickly you want it done, and how ugly is it going to be. So I think if they're smart tariffs, or what Keynes would describe as putting sands in the wheels of global capitalism, you could achieve a much better rebalancing of the US economy and reduce some of those deficits one way or the other.

I think you would need something that was more considered, and it would have to be kind of targeted, explained over time, and rolled in over the next three to four years. And I know Trump has a reputation of being very right-wing, but if you look at one of the first people that talked about the sort of need to have balanced trade is Keynes, who most certainly was not a right-wing populist. And he talks about that's one of the factors that really destabilized the world economy in the 20s into the 30s. And the original purpose, obviously, of the IMF was to try and balance these things out. And there was various other concepts that he came up with that have gone by the wayside.

Large trading balances will lead to financial instability. And I think that's kind of what we're seeing at the moment.

TG: Do you have any thoughts about retaliation and whether there will be efforts, particularly on the part of China, I guess also on the part of EU.

What's your thinking on how they might respond to this and perhaps try and defer that rebalancing or bringing things back into balance, I guess is the more accurate way of putting it.

BA: Yeah, I think they will. But at the end of the day, the US imports more. In many ways, I would say those countries have got the bigger problem because they're dependent on a customer that one way or the other isn't going to be buying their goods anymore or it's going to be harder for them to sell to that. The rebalancing may well be not that the US is exporting more.

Famously, we buy no US cars or very few US cars as Trump keeps pointing out. Well, there's a lot of reasons for that because they're designed for the US highways and that's not really the most appropriate. European cars tend to be smaller, more fuel efficient, various other features around them. If you look at what the US could export, I'm not entirely certain how they could close the gap on that side. I think it's probably going to be a bit more painful along the lines of the Europeans are just simply going to be selling less.

TG: Yeah.

BA: The Chinese are going to be selling less. And some of the production is going to shift elsewhere and some of it will shift back on shore. But some of the stuff that you hear that comes out like, well, we don't make microchips, we don't have this know-how. I mean, you practically created the industry, you have the know-how how to do it. It's just getting that production back on shore from Taiwan. They've decided to specialize in all this stuff, great, but there's no reason why it can't be done in the States.

And one of the big drivers for productivity over time is trying to get costs down. Productivity gains come from automation, and we are going to see a lot more of that. So do I think the factory of 25 years of time in the US is going to look like the one today? No, not really. And look, this brings us back to the whole AI point. With robotics and more AI, they are going to be able to do that. There is just going to be less humans involved in the process, in my opinion.

TG: So long term, then, that leaves you dollar bearish, dollar bullish. How does that sit?

BA: I think the dollar swings around a lot. So we discussed earlier on, I think it kind of goes up because capital flows flowing back in. But I think once the US starts printing money again, it's going to get a lot weaker again. So I think we're going to have a lot of volatility one way or the other. I don't know where their monetary policy will be three to five years relative to other ones, because obviously all currency bets are two bets.

But in the case of you'd have to go against what currency and what are they doing at the time? What is their rate? What is their monetary policy?

Just think of COVID. You had an enormous sucking effect, first of all, as lots of stuff got liquidated, dollar appreciation, and then they absolutely print tons of money and it spills into the economy and all sorts of weird and wonderful currencies that you would have thought would have done much weaker than the US, obviously, rally. But it's just to me, going back to my plumbing analogy, well, you're flooding the system with this compared to that.

TG: You talk in your writing as one final question that your near-term outlook, and we talked about it all today, US equity is probably doing okay, dollar still doing pretty well, rates biased a little bit higher. These were all kind of the Trump trades that we talked about at the start of the year, end of last year, and somewhat slightly consensus as you acknowledged in your broad outlook.

But what would you say is your most unpopular view?

BA: I'll tell you what I like most of all at the moment, it's gold equities. Because gold's gone up, the actual mining companies have lagged significantly. They're way outside of their normal historic ranges. Again, you're not really making a bet on gold at this point. All you need it to do is do nothing from here, and ultimately the earnings should come through.

But perhaps my most unpopular one, I'm not sure if I'm popular, but the one that seems to be most out of consensus, but I actually think this will be the US century again. Our rag-tag empire with a small number of people held together for 200 years. So when you look at the US with all its resources and everything else, I can't really see it just being sort of like 80, 90 years of dominance. It's going to be a lot longer.

And you look at everybody else, they compare it against. We've talked about Europe, we haven't talked about China, but I just think it's going to be a period of adjustment for the US. The US had the 1930s before it went on to kind of dominate the 20th century, and I think that's kind of where we are.

TG: Middle age isn't so bad.

BA: You're just, you're signing up to the gym, you've decided you've let things go for a while, and that's where it's going to be a few years. But yeah, I think it will be another US century.

Some of the US smaller cap stuff is very attractively priced still when you can see the wider economy and what they do and the size of the home market. And we all talk about the mega cap stocks, but there's a lot of stuff in there where I think the valuations are attractive and they're in attractive industries with an economy that is still very dynamic.

TG: And anything specific that you're looking at?

BA: Some of the smaller manufacturing companies, some of the people with automation, where I'd stay away from would be all the hope stocks around quantum computing, all the AI ventures that suddenly appeared. I think it's too early to tell that. I think some of the medical companies are relatively attractive as well, some of the smaller biotechs.

TG: This has been great, Ben. Thank you so much. Really appreciate all of the time. You've given so many good ideas here. Yeah.

BA: No, thank you very much. It's really good to see you again.

TG: Thanks for listening to this week's edition of Street Signals from the research team at State Street Global Markets. This podcast and all of our research can be found at our web portal Insights. There, you'll be able to find all of our latest thinking on macroeconomics and markets where we leverage our deep experience in research on investor behavior, inflation, risk, and media sentiment, all of which goes into building an award-winning strategy product.

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