JAMES HELLIWELL: So that's a lot of macro stuff there. Jimmy, you were long short, were you? Long short equities?
JAMIE MACDONALD: Mm-hmm.
JAMES HELLIWELL: Insurance companies you were focusing on?
JAMIE MACDONALD: Many short. No, just a joke. So basically I-- see, yeah, exactly. So I ran a long short equity book. So I was only looking at one asset class. And my job-- and this is why I actually find it amazing that Roger can do what he did. Because I just find that way too much information to be able to compute.
So my job, which was the general setup of most long short equity hedge funds, to be honest, over the past 20 years is you're divided into sectors. So you're always looking at your peers. And as we've spoken about, what I'm really trying to do is find pockets of relative valuation mismatch.
So let's say my universe was 300 companies. Let's say 300 global insurance companies have a decent sized market cap. I'd pick about 50 of them that I really thought had interesting stories. And I'd make sure that I met with management every year. I listen to every earnings call. I'm watching every earnings conference. I'm meeting them as much as I can.
And because I know or aim to these companies inside out, I can predict or aim to predict with some certainty which ones are going to start missing earnings and which ones are going to start beating earnings. So my job is, in the UK, I could be long Prudential and short Aviva. And the reason I do that is, I think the market's got it wrong about what Prudential's future earnings are relative to what Aviva's are.
Now, the idea with that is I've taken out macro risk. So I don't know, something happens and there's a war-- war outbreak. Well, the whole market's down 10%. Well, I'm hoping that Aviva is going to gain more than 10% and Prudential goes down less than 10%. And that's what I'm trying to make.
So for me, I'm basically studying about 40 to 50 companies every single day and making sure I'm on top of the news flow. But what I think--
JAMES HELLIWELL: That being you're a specialist though.
JAMIE MACDONALD: --what Roger's doing is taking us off of like 210 countries. [laughs]
[interposing voices]
ROGER HIRST: Well, I mean, so to me that is even more-- it gives me even more fear than look and try and look at the world as a whole.
JAMIE MACDONALD: Yeah.
ROGER HIRST: Because you're having to go into the proper weeds on a whole bunch of companies. You've got to look at their accounts. You've got to get to know these things intimately. And that's a level of detail which I generally can't comprehend. So on the macro world, what you can do is you can jump in and out. It's always said that you can be a master of-- Jack of all trades and a master of none. You don't actually have to be a really, really hard core bond specialist or an equity specialist.
But what you're trying to do is see how these relationships shift. And they're obviously, sometimes at the very highest level, inflation is doing this, then the bonds are doing that, and then bond-sensitive stocks like insurance companies are doing something. And all I need to know is that there's those rough relationships.
And actually, what I've seen historically and when I used to cover a lot of accounts, people used to get so focused on the specialist area that they actually completely missed the big picture. And the classic example of that was in 2014 when oil sold off. And almost everyone I spoke to, the oil specialists, were always, no, oil can't sell off. No, this is a new paradigm. This time is different.
And I was going, but the dollar's going to go up, isn't it? And if the dollar goes up, don't commodities sell off? And they go, no, no, you don't understand. And so my very simplistic thing, which sounded like a really crap argument to all these specialists who could tell me about rig counts and the exact flow through all the pipelines in the world.
[laughter]
And I was just saying, but-- but the dollar. And it was the dollar. So it's actually a very, very simple thing. Again, the child could have looked at the map-- or the not the map, but the chart of the dollar versus oil and gone, oh, if the dollar is going up, then yeah, oil's probably going to go down.
JAMIE MACDONALD: So this is something that I struggled to get my head around, is that we basically made money based on, dare I say the C word, conviction. I mean, that's how we did it. But then again, I haven't been in the game for several years. But back when I was doing it, fundamentals did matter.
ROGER HIRST: Yeah.
JAMIE MACDONALD: So I knew that I could buy more of a stock down 5% when the reason it was down 5% was something that wasn't relatively to do with that company. And that's basically how I would try and make money, which was keep buying down, because I had the conviction it was worth more. But I mean, tell me, how do you get that level of commitment-- I don't understand how you can buy more when oil goes down, because there's so many exogenous factors?
ROGER HIRST: Well, I suppose, maybe some people are mixing the two together.
JAMIE MACDONALD: Yeah.
ROGER HIRST: I mean, can you mix together the macro and the micro. And in fact, some of the best--
JAMIE MACDONALD: That's what James did.
[laughter]
[interposing voices]
ROGER HIRST: --say, some the best--
[interposing voices]
JAMES HELLIWELL: --in the middle.
ROGER HIRST: Some of the best guys did this.
[laughter]
[interposing voices]
JAMES HELLIWELL: --everyone in the room is always saying.
ROGER HIRST: Yeah. But this is particularly going into 2008 financial crisis. You saw these guys who were looking at balance sheets for some of the UK banks and mortgage banks. And they're looking at this in depth at how they're funding themselves. And then looking at this bigger picture of the macro world and going, these companies with what they're doing to their balance sheets will not be able to withstand the shock that could come through from this overleveraged scenario. So there was a big macro call on a micro level.
And we all focus on the big short. But actually, there's other guys doing this out there. And they focused on not those derivatives but just on stocks, particularly in the financial sector, which just got themselves leveraged. So I think you can mix the two.
JAMES HELLIWELL: So the other C word, I guess, is a catalyst, right?
ROGER HIRST: Yeah, that's true.
JAMES HELLIWELL: And that macro catalyst really can change the fundamental setup of the stocks or whatever it is that you've been researching.
ROGER HIRST: But and it goes, I think, goes down to how long can you wait for a catalyst? Because that was a great thing about 2006 to 2008. When we're all looking at this. What was it? What was the fundamental thing that was happening? And--
JAMIE MACDONALD: Because you must have had clients who said to you, I think we could be heading for a banking crisis. It'd be short--
[interposing voices]
ROGER HIRST: Oh, loads.
JAMES HELLIWELL: But in a couple of years, right?
ROGER HIRST: Yeah.
[interposing voices]
ROGER HIRST: --where our rates guys would come in as mixed macro meeting, and they'd be the rates guys would come in, and the credit guys would go, oh, we've just done another billion of some three letter acronym. And me and the other equity are going, oh my God. But you could see this 2006 and 2007, and people go, the big short, they were the ones who nailed it. Well, actually, they were the ones who managed to hang on for the longest.
JAMIE MACDONALD: Yeah.
ROGER HIRST: Because most people put these trades on early and it failed and it failed. And I think the UK banks, they blew up at the end of 2007. So it was a year before Lehman, Bear Stearns blew up in March of 2008.
Some people had these trades on. And they made out really, really well. But they used a macro and a micro framework. They took a macro framework for the catalysts, and then they picked on a micro basis which stocks there should be long and short.
And I think your way of doing it, which is within a sector is really complex. But what you can do is rather than picking the idiosyncratic stories on the single stocks, you can go for sets, and you go, OK, my long short is I'm long miners, what is going up.
JAMIE MACDONALD: Yeah.
ROGER HIRST: I'm short mortgage banks in the UK, because they're the ones that are going to get screwed by the system. So you don't have to quite go into the weeds doing that.
JAMIE MACDONALD: And even easier, I guess, now because ETFs are so readily available that you can literally be long emerging market banks. I'm sure that--
[interposing voices]
JAMES HELLIWELL: Definitely. For sure. Definitely, just going to an ETF.
JAMIE MACDONALD: Yeah.
ROGER HIRST: Yeah. So what then, turning away from stocks, if we think about commodities, for example. You mentioned oil a couple of times.
JAMIE MACDONALD: Yeah.
JAMES HELLIWELL: If we're focusing in on commodities, what ultimately we're looking at is as fundamental factors?
ROGER HIRST: Got to go back to China, haven't you, for the first one. Over the last 20 years, China 2001, and that was the beginning of that big commodity boom, combined with leverage and relatively cheap dollar-- falling dollar-- and China. So that was the key one there. And then, for the next 20 years it was trying to spot when China was coming back with a little bit more aggression in terms of its credit.
And I think people who've watched this series will have seen, we've talked about this before, which is in 2016, the thing that I missed completely because I was focused on Brexit in the middle of the year and the US election was that China came rattling back in at the beginning of 2016 with yet more credit. Which saw commodities and commodity stocks starting to outperform on a relative basis and in absolute terms were going up.
And I didn't spot that because I was looking elsewhere. I was looking at this bigger picture with currencies. And I was waiting for the next mini devaluation from China. When China had just gone, OK, we're going to stop this now. We're going to build that growth back in. So commodities, I think, had that China element still.
JAMIE MACDONALD: So I'm not an oil expert in any way, shape or form. But more recently, is there not talk of changing the currency of oil from the dollar to the Chinese Rand, or they're going to start to buy it in a different currency?
ROGER HIRST: Wow.
JAMIE MACDONALD: Is that something that could be--
JAMES HELLIWELL: There's been a temporary experiment, hasn't there, with shifting the currency around that. How we purchase oil but that's a different matter, I think.
ROGER HIRST: I mean, that comes into this whole concept of is it the importance of the dollar versus the level of the dollar. And the dollar can go up and down in importance. And the value of the dollar can go up and down in importance-- related or non-related. So I think when you're looking at oil, is the demand story, what really matters with the demand.
JAMIE MACDONALD: Right.
ROGER HIRST: So for instance, are we seeing on limitations of, for instance, renewables, which means that actually we've got to go wholeheartedly back into fossil fuels in the short-term to give us a five-year buffer. And talking about a long-term trend, that's probably one where you know that there's been this massive underinvestment because of that commodity bust of 2015.
Now we've got to fix that. And at the same time, there is going to be a demand for renewables or at least commodities behind renewables. So there's a whole bunch of things there which become the big drivers and the big fundamental stories in them.
JAMIE MACDONALD: Yeah.
JAMES HELLIWELL: So moving on from the dollar and relating that more broadly to other currencies, when I think of commodities, I think of them as probably the more speculative assets compared to being an equity-focused bread guy like yourself.
JAMIE MACDONALD: Yeah.
JAMES HELLIWELL: I'm thinking in terms of positioning, sentiment, obviously the fundamental drivers as well, the other factors that you've just discussed. But the next thing I'm thinking of, I'm always relating that back in my mind to currencies and potentially emerging markets as well.
JAMIE MACDONALD: What are the main currencies that get traded?
[interposing voices]
ROGER HIRST: So commodity currencies--
JAMIE MACDONALD: Yeah.
ROGER HIRST: --or in general? It would be the Brazilian rail, the Aussie dollar, the Norwegian krona.
JAMIE MACDONALD: Right, I see.
ROGER HIRST: Those are the most famous ones that people will look at. I mean, South African rand as well. So basically, pick a nation that's largely an exporter of commodities and those are the ones. And then on the other side, you've got those who import commodities. So for instance, yen is, or Japan is a big importer of commodities.
JAMIE MACDONALD: Yeah.
ROGER HIRST: And if you have a scenario which has been seen at the beginning of 2022 where Kuroda goes, I'm going to lock yields at 25 basis points whilst every yield around the world is screaming to 3%, what are you going to do as a Japanese investor? Invest 25 basis points domestically or go, I'll have 2 and 3/4 in the US.
JAMIE MACDONALD: Yeah. So is this a carry trade, effectively?
ROGER HIRST: It's effectively, it's all carry-- yeah it is a carry trade. But this is basically Kuroda saying, go and fill your boots with overseas assets which will drive the yen down. But at the same time, they're trying to import commodities which are higher and higher in price, which will also drive the yen down. So again, these are those fundamental drivers which in currencies are always changing.
JAMIE MACDONALD: Yeah.
ROGER HIRST: You probably heard that people will say, well, there's the framework of its bear, rear, fear, these valuation models.
JAMIE MACDONALD: Yeah.
ROGER HIRST: They're nice.
JAMIE MACDONALD: But wait, what do they mean again?
ROGER HIRST: I've got no idea.
[laughter]
Just chuck them out there. I always-- what was that one? And people will use it as a framework. But invariably, something else, such as the currents counts surplus or deficit, or relative interest rates, or relative real interest rates, or just do I want any money in Europe if there's a war going on? And those are really the drivers of currencies. But it changes. It always changes. To have one static model particularly in currencies is a very bad idea.
JAMES HELLIWELL: And to your point on the yen as well. If we're in an environment where maybe we're bullish on commodities, if there's rising inflation, then that's another great overlay. Not only as to the carry, but you can very much express rather than being long in a particular commodity and probably paying a carry cost through storage or what have you and the role, you could actually be long, for example, Aussie yen or something like that. So if we're saying sell a yen. Whatever it may be.
ROGER HIRST: Yeah. So you can actually try and get--
JAMES HELLIWELL: Also, you have the high-yielding currencies.
ROGER HIRST: You can try and move it from something which is the sort of a lower beta currency to something which has a little bit more nitroglycerine in it. So Aussie dollar yen is a little bit more fun than Aussie dollar versus the US dollar.
JAMES HELLIWELL: And you're receiving the rate differential rather than having to pay the roll.
ROGER HIRST: Yeah. I mean, some people would look at it as receiving a rate differential. Most people just go, that country's buggered. That one's the one that's exporting all the commodities. Then that one's going to go up, that one's going to go down.
And I always think that for me, looking-- there's this thing in finance where everybody likes to create the complexity of, oh, there's all these big differentials. But if you just take some logical steps in macro and just go, they're probably screwed because they're importing commodities. And they're exporting them. Then let's just put that relative trade on, since a currency trades are always relative trades between effectively two countries.
JAMES HELLIWELL: And you know what? That's the macro mind talking there. Because that's the difference between being super focused in a sector--
JAMIE MACDONALD: Yeah.
JAMES HELLIWELL: --and going through balance sheets, and management calls, and all the rest. And actually macro perhaps not being as complicated as it sounds.
ROGER HIRST: It's simple. It's simple. Anyone can get their head around macro. People--
[interposing voices]
JAMIE MACDONALD: Well, how about--
ROGER HIRST: --because it's so many different facets.
JAMIE MACDONALD: Yeah.
ROGER HIRST: But it's very simple at its base level.
JAMIE MACDONALD: And how about correlations between the asset classes? Are there times when correlations are very predictable and times when they all kind of-- because in equities, pretty simple, hopefully there aren't strong correlations. But there are times where a correlation goes to one, 2008, 2020.
ROGER HIRST: Yeah.
JAMIE MACDONALD: The same as same in other asset classes?
ROGER HIRST: Yeah. I mean, again, the complex guys will be always looking for these changes in correlation. So mathematical modeling, if you're into that sort of thing, you can see how these ebb and flow. But for most people, it's when you get what you just mentioned, which is correlation to one where everything is going up or down.
JAMIE MACDONALD: Yeah.
ROGER HIRST: And invariably, when it's all going down that it hurts everybody, obviously.
JAMIE MACDONALD: So I mean, we've talked about currencies. We've talked about commodities. What are the big drivers of bonds?
JAMES HELLIWELL: There's a third C-- oh, bonds. Ah, sorry. I thought you were going to go on to the other big C, the crypto.
JAMIE MACDONALD: Ah, we'll get there.
[laughter]
ROGER HIRST: Yeah, bonds. Bonds is really a combination of growth and inflation expectations. But even that, the inflation expectations can be impacted by central banks destroying the concept of inflation expectations. And there's this great thing, it's called term premium or Adrian Crump and Munch, as they call it in the US, it's the--
[interposing voices]
[laughter]
JAMES HELLIWELL: --this place.
ROGER HIRST: Adrian Crump and Munch, and a term premium, which is basically, OK, what is our expectation of inflation? It's a sort of differential between short dated yields and long dated yields.
JAMIE MACDONALD: Yeah.
ROGER HIRST: And that's been coming down, and down, and down, and down because central banks were effectively suppressed in the concept of future growth. So this is one of the reasons why, or one of the arguments behind why yields got pushed down towards the zero bound, and why in some ways they're still there. Because we still haven't seen term premium get back up, which is why you've got inflation here and yields here at the beginning of 2022.
Now, hopefully that term premium will come back. But there has been a suppression of that. So it's a combination of fundamental factors, growth, inflation expectations, but right now inflation expectations suggests that bond yields-- or when I say right now, beginning of 2022, should be 4% or 5%. But they're 2, 2.5% in the US and lower in a lot of other regions like Japan and Europe.
So the fundamental drivers are there. But then, you have these other influences which are who are the buyers themselves? It's positioning of which we have to include central banks as a key part of positioning.
JAMIE MACDONALD: Oh right, that's true actually.
JAMES HELLIWELL: Definitely. Yeah. We need tight turns.
JAMIE MACDONALD: Yeah.
JAMES HELLIWELL: It's going to be--
JAMIE MACDONALD: Because central banks, prior to the last decade-- I'm guessing here-- but their involvement wasn't as so incredibly influential as it has been over the past 10 years. So this is why I actually-- [laughs] not necessarily why I left the industry. But it must have been much more difficult over the past 10 years to pick long short equity. Because I just don't think fundamentals would have been as important.
I mean, Roger, you probably got a stronger view. But there's got to a stage where there's so much liquidity in the market that those poorer companies who were undercapitalized have outperformed. So you could have been long the crappier companies and short the better companies, which is not the way around we were really taught to do it and make money.
ROGER HIRST: It's why in the US you've seen active money has been migrating to passive for exactly that reason. And that's, again, added more to that very trend. Because it meant that active managers would tend to sell their portfolios down and see the money going to the passives.
So the fundamental story, which is there, which is, oh my God. Tesla looks really, really expensive here. Oh, it's just gone and doubled again. Oh, it's now really expensive. It's gone and doubled. Whether that's a quality stock or not. What we have seen is low quality has been outperforming high quality. And that's the opposite way for most hedge fund managers--
JAMIE MACDONALD: Yeah, sure.
ROGER HIRST: --who've underperformed the S&P.
JAMES HELLIWELL: And that's coming back again to correlation, point you raised a minute ago, particularly in equity markets it's the nightmare. You need to be aware of at least what is going on with bond yields. Because the whole value growth rotation just as a starting point. And there's so many other factors which ultimately come back to what US 10-years are doing.
JAMIE MACDONALD: Yeah. Well, I mean, I do remember when I was looking at insurance companies and being like, why aren't these non-life insurance companies rerating and they should be doing better. And what I really overlooked is the fact is just nobody was looking at financials in equities at the time. They were just out of favor.
And you need-- everyone was looking at tech companies and much more growth stocks. And so, just if I'd had that view, it would have become-- I would have had a better understanding that these were going to be laggards for a while until macro traders and funds where money was flowing into funds that actually cared about those sort of stocks.
ROGER HIRST: And another example of this whole sort of macro versus fundamental is right in that moment where you see commodities taking off. Now, when they took off in the early 2000s, commodities took off and commodity stocks took off because you had both price going up and volume going up. So you were able to print loads of money. You were basically chucking out loads of copper and it was at a good price.
JAMIE MACDONALD: You've got to have both.
ROGER HIRST: What we've seen-- you've got to have both. And what we've seen in more recently has been commodity prices are going up. But volume has not been following because these have been supply chain bottlenecks. So you're not able to get as much volume into the market at those higher prices. Now, that probably will come about because some of these are big long-term trends.
But again, it goes back to should I be long in commodity stocks or should I be in commodities? And in an environment of low volume, you probably want to be long commodities first until you start to see those supply chains coming back. And you might see a little bit of a drop or a plateauing in commodity prices. But then, if you start to see the commodity stocks churning out those commodities--
JAMIE MACDONALD: Yeah.
ROGER HIRST: --then those will start to outperform. They are outperforming. But if you look at energy versus the broad market in the early 2020s, it's still not anywhere near where it was 15 years earlier.
JAMIE MACDONALD: Yeah.
JAMES HELLIWELL: That reminds me as well of gold miners. There's always that debate whether or not should go long gold, the stock commodity, or whether you should look to the gold miners. And there are some people who are really ardent fans of gold mining stocks. Because typically they'll spin out a dividend.
So rather than, again, paying for storage, or ETF fees, or commodity roll and so on, owning the spot price on futures, you benefit from a dividend. But there's so much complexity there or potential pitfalls when it comes to management and so on, it's--
JAMIE MACDONALD: Well, yeah. What I was going to say, getting involved with gold stocks over gold itself, I can understand why that would be a gear play on the rising gold price. Except for the fact that you've got to make sure the management are running a good company.
JAMES HELLIWELL: Yeah.
JAMIE MACDONALD: And that's where you've got to do some bottom-up investigation. Because truth is, there's a lot of managements out there that are frauds.
JAMES HELLIWELL: Yeah. And I guess, every company is going to have a different break-even point depending on its gearing, or what have you, and its cost base, and debt levels, and all the rest. It's just far more complicated.
ROGER HIRST: And that's the beauty of macros, you don't have to worry about the idiosyncratic risk of the single company. You just--
[interposing voices]
JAMES HELLIWELL: Keep it simple, do gold.
ROGER HIRST: I'm going to-- well, keep it simple, do gold. Or buy the whole gold mining sector.
JAMES HELLIWELL: Yeah.
ROGER HIRST: And if there's a couple of duds in there, they should be offset by a bigger majority that aren't duds.
JAMIE MACDONALD: Yeah.
ROGER HIRST: So you can always do that way. Again, for the person who wants to just get involved at the sector level, you don't have to go into accounts. You just have to know--
JAMIE MACDONALD: Yeah.
JAMES HELLIWELL: Yeah.
ROGER HIRST: --is that stock related to the oil price? Is it a good or bad correlation or not?
JAMIE MACDONALD: Because frankly, there is a big risk in playing single stocks. Because your downside is zero.
JAMES HELLIWELL: You can still pick up a dividend as well with an ETF--
ROGER HIRST: Yeah.
JAMES HELLIWELL: --on average. And you're going to give away what, 20 basis points for not having that risk?
JAMIE MACDONALD: Yeah.
JAMES HELLIWELL: [inaudible]
JAMIE MACDONALD: No, I get it. I get it. I mean, the rise of ETFs have made that so much better.
ROGER HIRST: And when we're looking at these relationships, because we sort of talked about the relationships of within largely. But I mean, I think at the very beginning, we talked about being able to pick things based on the actual relationships.
Because at the macro level, it is-- I think you mentioned earlier, there was the emerging markets and commodities, or was it commodities in certain currencies as well as commodity currencies? But if you know, again, that there's a long relationship between currency x and commodities, but you can also see some other relationships.
So for instance, emerging market equities in general are the same chart as copper and the Aussie dollar. Now, Aussie dollar and copper is kind of obvious, emerging markets slightly less so. And maybe that relationship's breaking down a bit today because emerging markets 20 years ago were largely commodity exporters.
Today, it's a bit of more of a mixed bag. But if you know that that's a relationship, and you're expecting that, let's say, you said to me, I'm convinced the dollar is now going to go down. I'd go, OK, you're probably long copper already. Be long in emerging markets. Because emerging markets tend to outperform when the dollar is going down.
JAMIE MACDONALD: Right.
ROGER HIRST: So it's those relationships, which can really help the picking the positions and picking the stocks per sectors.
JAMES HELLIWELL: It makes me think as well of those charts, Jimmy. So I just see-- when you can see the relationship so clearly, I think you can sometimes forget that very often it's the rate of change or the momentum in that correlated fundamental or pair, whatever it may be, that's perhaps more important than the level. So the charts can look great. But I think what people really need to focus in on is what's changing here. Is it accelerating? Is it bending, whatever it may be.
JAMIE MACDONALD: Yeah.
ROGER HIRST: I mean, very much on that point is that if you see, let's say, the chart of truth. Raoul always talks about the chart of truth. And you see that band--
JAMES HELLIWELL: Is this the 30-year?
ROGER HIRST: 30-year. It's the 30-year trend on the US 10-year yield. And it's downward. It looks like it's breaking out. But what's really interesting is it's not so much that it's breaking out. And some people will say, looking at that in the mortgage equivalent and say, mortgages have gone up a lot. But they're still nowhere near where they were.
But what really matters is where were when you got levered up? So a move from 3% to 4.5% on a mortgage is far, far worse than a move from 10 to 11.5%. Still 1.5%, but one's a 50% move, the others a 15% move.
Which is kind of going to the rate of changes. It's you get to an era. And if you've had two years post-pandemic where you've been used to zero interest rates. And you've levered yourself up thinking that's the world that's never going to change. Suddenly a move to 2% interest rates could be absolutely devastating.
And so, we have to think of these things in relative moves. And this is something Raoul always says. It's the relative move not the absolute move that matters when thinking about how all these parts of the jigsaw are going to fit together.
JAMES HELLIWELL: That makes me think of gold again, not to keep going back to it. But when I was first trying to understand what drives gold, if there was anything more to it than simply real interest rates, which kind of comes back to other than if there's a sudden flight to safety or safe haven demand. It seems to be more the change in the momentum, exactly as you were talking about, the necessarily the level of real interest rates that determines it.
JAMIE MACDONALD: The second derivative.
JAMES HELLIWELL: Exactly. Exactly.
JAMIE MACDONALD: But I had a question, so a more general one, which is, can you plug in some macro expectations that you have? You're like, I'm expecting inflation to stay high. I'm expecting the economy to hit a sort of mild recession. Therefore I should be long bonds. Is there things you can plug in, and it will spit out exactly how you should be investing?
JAMES HELLIWELL: It's mostly framework, isn't it?
ROGER HIRST: Yeah.
JAMES HELLIWELL: It's kind of how your thought process and how you begin to fit things together. But if you were just starting out, how would you structure that?
ROGER HIRST: Well, I think, if you thought you were still on a very long-term secular trend and this was a cyclical story around that, then you can probably do that. The danger of that comes at the point where the secular part changes.
And there's a lot of discussion around higher inflation today, is that a change to that secular trend, which was lower and lower inflation, globalization, now we've got deglobalization, higher inflation, and central banks which seems to be happy to raise rates when asset prices are falling. Whereas before, asset prices fall, they're always like, oh, we're going to do more QE.
JAMES HELLIWELL: That's the key.
ROGER HIRST: So now you kind of go, OK, normally what would happen is that you have a wobble in the market and bond yields would roll back over and then go down.
JAMIE MACDONALD: Yeah.
ROGER HIRST: Should they go down? I mean, no one really knows. There's a great argument to say that actually bond yields now have to go up to 5% in the 10-year space. Or is it that if they go up to 3% it kills equity, equity sells off, and that brings bonds back. Because it used to always be a case that bond yields were a bit-- bonds with protection against equities. Equities sold off, bonds rallied.
But as you got close to zero, the rally in the bonds became smaller and smaller. So you got less and less protection. To the point where now actually those portfolios that have been doing bond and equity together on the upside are now unwinding together on the downside. Equities sell off and bonds sell off.
Is that the change? We don't yet. And unfortunately, you probably need to see the trend broken. And maybe the best part's already happened by that point. Based on the cycles as well. So all these things will be changing over time.
JAMIE MACDONALD: Hold that thought. Same again?
JAMES HELLIWELL: Yeah, please.
ROGER HIRST: Yeah. Yep.