Heading for a crash?

[00:00:00] The Why Curve, with Phil Dobbie and Roger Hearing. Call it a correction or call it a crash? Much of the financial world is expecting one of those very soon. Wall Street's been surging recently despite the stormy economic weather. The unresolved global energy crisis from the confrontation in the Gulf is only one of those threats keeping central bankers awake at night. And the ever-rising artificial intelligence stocks are seen by many as a bubble. So when will the bubble burst?

[00:00:30] Will there be a market crash? And how will already teetering economies in Europe and Asia deal with that? The Why Curve So it's interesting we talk about how bad it is for us, but actually it is a lot worse for developing economies when you think about it. Because we can all afford to pay a bit more for oil, but there's not enough oil to go around. So the people who are going to lose out, ultimately those people who can't afford to pay and their economies are going to really crumble as a result of this.

[00:00:57] And of course, because we're all very selfish in the West, we don't talk about that sort of stuff. Well, no. And also, I mean, what we're fixed on, most people are fixed on, is Wall Street and stock markets generally in the sense that there is, you know, that they are far too high at the moment, far too buoyant for the reality of what's out there. And if there is a crash, if there is a major correction, this term they generally use, that's going to have ripples right around the globe, including for those economies you're talking about.

[00:01:23] It is bizarre, isn't it, that we've got the S&P and the Nasdaq in the States both, well, last week, last Friday, hitting new record highs. And possibly we'll do the same again this week, although it has gone down a little bit, a little bit this week, despite the fact really, you know, it feels like we're on the verge of World War III. But hey, let's still buy shares as though nothing's going on.

[00:01:45] Well, isn't it mostly to do with the AI thing, the whole, you know, everyone piling in there and just saying, you know, this is the most wonderful thing out, which, you know, maybe it is, but it's never going to be what they think it's going to be. So to that extent, there's always going to be disappointment, and that potentially could lead to a crash. And we had the warning from the Bank of England last week. Yeah, and it uses power as well. And we're getting less energy because we're losing 20% of it through the Gulf. So there's another factor that plays into the whole mix as well.

[00:02:13] So yeah, it feels like a deck of cards, doesn't it? There's about to, a house of cards that's about to topple over. Yeah, something along those lines. Anyway, let's find some... Decks of cards, they just stay as a deck of cards. They do, they do. House of cards, they can fall over. That's why I'm using it. Yes, indeed. It's all the cards you're dealt, isn't it? So let's bring in David McMillan. He's Professor of Finance at the University of Stirling. He looks at the probability of these kind of things happening. So let's find out what his take is on this one. He joins us now.

[00:02:42] So David, let's go back a little bit before the fuel crisis and where we were. Because things weren't actually that bad. I mean, they weren't great. But, I mean, we moan about it. But inflation was coming down. Real wages were slowly moving up. Unemployment was low. Government debt was high. But it was starting to stabilise. We saw business investment starting to pick up. It was all moving very slowly. But it was heading in the right direction. I feel like if there was a bit more patience, maybe we would have got through the worst of it.

[00:03:12] Is that how you see it? Yeah, I mean, certainly in terms of both the UK economy and the global economy, yes. I mean, I think everything was on track. Some economies were growing faster and performing better than others. I mean, the US economy obviously was doing a lot better than the UK economy. But things were getting there.

[00:03:38] I mean, I think there's a, which we may talk about later, there's a big issue underlying especially the UK economy, which is probably the one thing that is holding everything back really, which is still the issue around productivity.

[00:03:55] And that kind of relationship between productivity and growth and inflation and investment and so on, which kind of got broken around the financial crisis 2008 and so on, that's never really been repaired. And I guess the issue with productivity is it's more of a long term goal that governments have to tackle. And we know that governments prefer short term targets. So things, yeah, I agree.

[00:04:24] Things are moving in the right direction. Unemployment was low interest rates coming down. Inflation was coming down. Growth, okay, it was there, but not in great depths. But longer term, I still think there were issues that needed to be confronted. But that productivity one is difficult to fix without investment, isn't it? I mean, you can't just tell people to work harder. It's got to be more machinery and it's actually got to be smarter. It's got to be more innovation, hasn't it?

[00:04:50] It's actually the secret of getting your productivity up is using the same number of people and the same amount of energy inputs and getting greater outputs at the end of it. You can't get more out of energy if you're not actually being innovative and using machinery or technology in a way that is more efficient than before. But the point, I guess, in all this, you know, the dials may have been pointing slightly better than they had been before.

[00:05:17] But the expectation now, even in the teeth of everything we've seen in the last two or three months, suggests that the markets aren't appreciating the seriousness of the situation. That's how it seems to me. You know, you've got two things, major things going on. You've got the fuel crisis and obviously the geopolitics and also this ever increasing AI bubble. And, you know, are we moving to the point where the reality has to kick in and there's going to be a massive correctional crash?

[00:05:45] OK, I think I would answer that no. But it depends on what happens. I mean, obviously, the conflict yesterday escalated a bit and markets took a step backwards. The thing when you look at stock markets and you say, oh, the prices are very high, therefore they're overvalued. There's always an important need to put that into some kind of context.

[00:06:12] And I think the problem is that the context is pointing in different directions at the same time. So you look at the stock market, including in the US, and you compare that to, say, the gold market. And there's a complete dichotomy there because normally you when the stock market is riding high, that means people are willing to take risks because they think tomorrow will be better. And therefore, they're investing in stocks. But at the same time, the gold market is also pretty much at its record high.

[00:06:42] And the gold market is high when people don't want to take risks and they want to buy something that's physical that they can then use as an asset. So the fact that those two things are happening at the same time is that kind of dichotomy that shows that markets don't really know what they're doing. They're buying both of these things and normally they move in opposite directions. When the gold market is up, the stock market should be down. But doesn't that sound dangerous?

[00:07:11] You've got people investing in shares perhaps because of AI. I mean, it is predominantly the US, obviously. I mean, the NASDAQ is at all-time highs. The S&P is not far behind and it is driven by AI. So doesn't that say that people are going, well, we've got this fear of missing out. So we've got to play in this game. But we are as worried as hell about it. So we're buying gold as well. I think there are two things to that. One is, yes. So some of the signals about the stock market would suggest an overvaluation. And I wouldn't deny that.

[00:07:38] Things like price to earnings ratios are not all-time record highs but pretty high and are in overvaluation territory. The kind of buffer indicator of market cap versus GDP is also above overvaluation territory. So I think that's correct. So the market is too high, I would say that. I think in terms of just looking at the gold thing, the nature of gold has changed over the years.

[00:08:07] So it's still used as a safe haven asset. Obviously, central banks have been buying lots of gold because there's an element of de-dollarization going on. So that's boosted the price of gold. The other thing is that gold is now also used as a speculative asset. There are lots of ETFs for gold and investors are buying them for the same reason they're buying other stocks. Oh, gold price is high. I'll jump on the bandwagon. So that's an interesting point. Do you think that is actually – sorry to interrupt you midway through the point. I'm sure you can get back to it.

[00:08:37] But does that – is ETFs, is that sort of pushing up? We should just say exchange-traded funds for those who don't know, so it doesn't get too close up. Yeah, an easy way for you to buy a packet of things, whether it's a packet of shares or resources, stuff that was traditionally quite difficult to buy. You can now buy as simply as buying a share. And people are increasingly using their own retail platforms to do this sort of stuff.

[00:09:06] Do you think that's pushing up assets because it's become easier for people to do that? Is the retail market – because it's going now where institutional investors might have been, but now retail buyers are in there as well. Is that pushing up? Is that adding to this picture that we're seeing of inflated asset prices? I would say so, yeah. Yeah, I mean, ETFs, exchange-traded funds, make it easy to buy something that was hard to buy for an individual retail investor. So now you can add that into your portfolio of whatever.

[00:09:35] It's easier to buy. It's no more difficult than buying stocks and bonds and so on. So, yes, it's adding to the mix. And if you look at what's happening to ETF volumes and how much ETF – the kind of issuers are buying physical gold, it's adding to the price and pushing it up. So in that circumstance, you were struck very much when you said earlier on, no, you don't think there is going to be a massive correctional crash.

[00:10:05] But everything we're saying at the moment about the inflated nature, the unrealistic nature of this, kind of suggests there would be. And we had the deputy head of the Bank of England warning about this just a week or so again. I think what I would say is that markets are overvalued and I would expect them to come down. I think the talk of a crash, if you think about – well, certainly what I would call a crash of a 20%, 20% fall in stocks.

[00:10:31] It's – okay, the thing holding over all of this is the situation in the Middle East. But if that situation didn't exist, I would say that there would be a gentle-ish 10% decline over the next year or so. That would be where I would think the correction would go. So that's what I would see rather than a crash of the dot-com magnitude or even the financial crisis magnitude.

[00:10:55] The second thing, if I can just very quickly say, is that a lot of the market froth, if you want to call it that, is these AI companies and the AI bubble was referred to earlier. And I think it's always important to remember that a lot of these companies or most of these companies that dominate the AI sector are highly profitable companies. And that's the distinction between where we are now and, say, the 2000s with the dot-com bubble and then crash.

[00:11:25] So these companies are making lots of money and they have lots of investment plans for the future. So I wouldn't say that there's a danger with the Iran situation, but I wouldn't say that they're completely out of line with where the market should be. So if they're over-investing or they've got unrealistic expectations, then it's not going to matter too much because as a percentage of their total turnover, we're not going to feel it to the same extent.

[00:11:53] And I'm with you on the dot-com bomb. There's so many companies that were little more than PowerPoint presentations that were attracting vast investments with nothing to show for it. So it is a different picture, isn't it? But they are going to use a lot of energy and energy is going to be a lot more expensive. And so you've got to wonder about the business model.

[00:12:14] If we're all feeling a lot worse off, it's going to be harder for them to monetize AI and it's going to cost a lot more to operate if we're seeing energy prices rising. Yeah. And I think that's the thing that's holding over all of this is what happens to the Middle East situation. If it's over in a couple of weeks, then this has just been a blip and there's no concerns. If it carries on six months a year, then everything that I've kind of said is out the window really.

[00:12:42] So what does happen in that situation? Because we are looking at an energy crisis. Even, as you say, if it comes to an end in the next couple of weeks, there's an awful lot that isn't where it should be. There'll be a lot of delays, a lot of repairs needed. I mean, the damage is there. But are you saying that that can be just the amount of reserves, for example, that China has can absorb all that? OK. Well, we know that whenever oil prices shoot up, that always causes economic damage. It leads to potentially recessions happening.

[00:13:12] What I guess I'm saying is if this is over in a couple of weeks, that the nature of any fall will be temporary and slight. So the market will come down. Economies will shrink. We know inflation will be slightly higher, but that will work its way through the system. The two dangers to that is, one, as I said, if it carries on for longer, then we could be talking a bigger correction, bigger falls in GDP.

[00:13:40] What hovers over this is the second point is what do governments do and what the central banks do? And to go back to the companies, they're looking to borrow, you know, one, two trillion dollars over the next couple of years. If interest rates shoot up again, that throws all those calculations out the window that they've got. So that would be a major problem.

[00:13:59] How do governments react in terms of price support mechanisms, energy price caps and all those kind of things that are starting to happen, particularly in continental Europe? And there's lots of pressure in the UK. That could lead to further embedding of inflationary problems and interest rates. And that's where the bigger dangers also lie. So, yeah, let's look at that in a second. Just on the, you know, is this all going to be over in a couple of weeks?

[00:14:28] So Polymarket, which, as you know, people will gamble on anything. And Polymarket is the place to do it, except I think it's blocked, isn't it, in lots of countries now. But they've got a 20% chance on the Strait of Hormuz being opened by the end of May and 60% by July. So 60% is better than, you know, better than even, but it's still 40% chance that by the end of July, which is still a long way off, it's still going to be closed.

[00:14:54] I mean, by those odds, I mean, we are looking at something quite substantial, aren't we? Yes. And then that would be where the problem lies in. I think it's the unpredictability of geopolitics anyway. And obviously, I think they're particularly unpredictable at the moment. And foreign policymaking in the US does tend to swing back and forward quite a bit.

[00:15:17] It's interesting you mentioned about de-dollarization in the context of all this as well, that that's what's going on perhaps in the background, this move towards gold and things like that. Is that going to underline or perhaps amplify this change or there is a correction? Are we seeing a kind of more general trend underneath all this that actually could make a massive difference? And perhaps a very big difference as far as the US economy is concerned? Yeah.

[00:15:42] I mean, the US has, although they don't like to admit it, they have a lot of benefits by the fact that the dollar is the world's reserve currency. That allows US government to borrow at a cheaper rate. It supports the dollar and so on. So it's a difficult one because on the one hand, that's unwinding a little bit, as I said, with central banks investing more into gold as part of their reserves, holding a wider range of currencies.

[00:16:08] But at the same time, they're also buying lots of US government debt still. So that hasn't fallen. So, again, it's a bit like the very beginning when we talk about stock markets and gold are doing the same thing. It seems that countries are kind of looking to, in a sense, hedge their own bets and that they're getting out of or that they're potentially offering themselves ways of getting out of holding dollars while still also holding lots of dollars.

[00:16:33] But if the dollarization happened on a bigger scale, and we know the BRICS countries have often talked about having some kind of trading currency that they would use, then that would impact the US economy. The US government find borrowing costs would rise. Therefore, borrowing costs for US companies would rise, including all these AI companies that we've been talking about. And that would start to unwind in terms of how that impacts the US economy.

[00:17:02] So it's another underlying issue that could come to a head very soon. Yeah, yeah. Throwing into the mix. And then we're seeing bond yields getting higher over the last week as though the expectation is to deal with inflation, central banks are going to lift rates. So the RBA in Australia has just lifted rates again, for example. The Bank of England hasn't since August 2023, but will they?

[00:17:31] And is that the smart thing to do? I understand why they're doing it, because they're saying, well, we want to stop inflation from getting out of control. We want to dampen expectations that it's going to get higher. But I don't know if that dampens expectations if interest rates go up when the issue is not people buying too much. The issue is fuel costing too much. And if you've got struggling households, because, you know, as we said, you know, people weren't, you know, things were improving, but really slowly.

[00:18:00] If you then raise interest rates on top of all of that and on top of people paying more to fill up their car, it feels a bit like the nail in the coffin, doesn't it? I mean, it's just going to destroy demand and therefore that could destroy jobs. And then you're racing towards that word. I mean, that is the definition of rising prices, falling out, but fewer jobs. That's the definition of stagflation. Is that where we're heading? Well, I think that's an issue. So, yes, the Bank of England has not done anything yet, but they've talked about raising interest rates.

[00:18:29] I can see an interest rate rise coming. I wouldn't necessarily myself be in favour of that because I think although the UK economy, as we talked about, was slowly improving, there are still some weaknesses there. And lower interest rates would benefit, particularly on the supply side, business investment. And again, that feeds into the productivity argument. We know that, yeah, interest rates are a demand side tool and this is a supply side problem.

[00:18:57] So, interest rates would only impact, as it were, the second round effect. It also depends on how the government responds in terms of things like price caps and so on that we've started to see appearing in Europe. I can see the Bank of England raising rates also because they'll deem it part of their own credibility. We'll see inflation's rising.

[00:19:21] Therefore, for us to maintain credibility in the eyes of politicians, the general public, but also international markets, there will need to follow suit. That kind of accountability argument doesn't work very well when people are losing their jobs and everyone's struggling to pay their mortgage, though, does it? I agree. But there's an argument out there that central banks have kind of been following markets for quite a few years now. And in a sense, markets expect banks to raise rates, not just the Bank of England, but across the range.

[00:19:51] And then they follow suit to keep the market happy. I mean, I think it's going back a few years now when the market expected the Bank of England to raise rates. This is probably about three or four years ago. And they didn't. It was 1 December. I'm trying to remember the exact day. And the market reacted really badly. It got really upset. The pound fell. And there was a lot of questions about what the bank... But then it corrects itself. It corrects itself, doesn't it?

[00:20:18] I mean, wouldn't it be the time because the ECB is also there saying, you know, we're going to lift rates as well. Wouldn't be... And so, you know, we're seeing, yeah, bond yields rising as a result of this. Wouldn't it be the time for central banks to actually say, no, this is not the time to do this at all? Because we're all struggling. We think that government should be providing fuel subsidies for lower income households and for businesses to try and keep inflation in check in terms of energy prices that people are paying.

[00:20:48] But we don't want to make things worse. We're going to hold back. And then that would... And then, you know, you'd see bond yields would respond to... But the market would respond to that because they listen to every word that comes out of the central banks. Yeah. I think there's a... Again, there's an issue there. So if the government on the one hand was putting in fuel supports, et cetera, then that in itself could be inflationary down the line. I mean, that's kind of what we saw post-2022 with the price supports that came in then.

[00:21:16] And so you then have a situation where the Bank of England is saying, we don't think interest rates should rise because there's structural weaknesses in the economy still. Despite the improvements, this may hopefully be a temporary issue. However, if fiscal policy, as it were, is doing the opposite, then it's likely that inflation will rise in the future. And so that then becomes an issue around how reasonable is that an argument to take?

[00:21:42] But I would probably support the idea that, at least for now, the Bank of England saying, we don't think interest rates should rise purely because of an oil price shock. Because it will most likely tip an economy... Certainly has the potential to tip an economy into recession. Yeah. Dave, let me move away from the whole issue of interest rates rise and move to a wider thing, which I think is what underlines what potential. We said some analogy with the dot-com bubble, and it isn't that.

[00:22:11] But what about 2008? A lot of people remember what happened there, which is essentially a crisis of confidence. You had subprime mortgages that led to a whole unravelling of things. We're in a situation now where we've said there are AI, which is energy-hungry. That's what's fueling a lot of the Wall Street rise. We've got a major energy crisis. We've got banks clearly not really, central banks clearly not really knowing what they want to do or what they can do.

[00:22:34] Is there not a risk of going into a situation where, again, the confidence just completely ebbs away, which could lead to something like 2008, the feeling that the whole system is grounded on something that isn't really there, and the energy crisis completely exposing that? Yes. Yes. Yeah.

[00:22:53] I mean, I think economies are in a kind of strange position that things were getting better, but there are inherent weaknesses in their economies. So it's kind of on a precipice to some extent without realising that we're on that precipice. So could this lead to an unravelling? We know that levels of government debt are very high. We know that, you know, in a sense that's never going to be paid off.

[00:23:22] We know that economies, particularly like the US and to a lesser extent, but still there, the UK rely on international bond markets, et cetera, to keep buying all of this debt. If there's an issue there, if there's a crisis of confidence, someone turns around and says, can the US actually ever pay off its government debt? We don't believe it's can. We're going to price in higher default rates and so on. Then, yeah, that could lead to a complete unravelling.

[00:23:48] That would lead to, OK, government borrowing rates going up, investment rates going up for household, sorry, for firms, mortgage rates going up for households and so on. There being another credit crunch, banks lend less to each other, although the interbank market is less important now than it used to be. There's a potential there.

[00:24:09] But I think the other side of that is what central banks have given themselves in terms of power, which is essentially through the quantitative easing programmes, is they would look to expand those again. Yeah. As a way of getting out of that kind of difficulty. Yeah. And are there any consequences if they do that? At the moment, you would have to say no. It seems to be a kind of a free ride on that one. Yeah. It's free money, essentially.

[00:24:39] It's a bit like minting a trillion dollar coin, isn't it? In theory, you can do it. So there's another element in all of this as well. In the United States, the banks have been lending and then they have been selling off, packaging up their debts because they don't want to carry the risk. And this includes investment in AI projects and the like and putting that out to non-bank lenders. And so you've got this big rise in non-bank lending. And banks have always done this, of course, because they do that.

[00:25:09] So they free up the ability for them to lend more. But they're doing it more and more. And so we do have this big rise in non-bank lending happening in the United States now. Isn't that a bit of a concern? Yeah. The kind of non-bank sector is still a bit under-regulated and under-seen. And I think that is a big issue. It's one of those situations.

[00:25:34] It's a bit like the 2008 crisis that when everything is kind of working okay, nobody wants to look into these things. And it's only when there's a crisis that happens, people say, actually, that was a really bad idea. We shouldn't have done that. Well, that was what the subprime crisis was, wasn't it? I mean, it was packaging up debt and selling it on to people without knowing what they were buying. Yeah. When the tide went out, you saw who didn't have anything underneath them, essentially. Yeah. And I mean, in a way, couldn't that be what the energy thing does? Because, you know, we talked about, well, it might end in a couple of weeks, might end in a few months.

[00:26:04] It might, in some form, go on for a lot longer than that. And what I suppose is my point is that with energy underlying all this, including the AI, if that is the problem, couldn't this be the thing that really pulls the whole edifice down? Yes. If this is a war that carries on for a number of years, then we're essentially going to have to, to a large extent, rewire what we're doing.

[00:26:27] So, you know, there'll be less transport for everybody, nevermind, nevermind just thinking about AI borrowing because it needs, it needs the, the energy provision. It changes everything in the way we operate. Now, on the one hand, that's also good for the techs. If everyone gets told to stay at home again, that will help, that will help those techs out. But yeah, I mean, that, that changes the way in which our economy is going. So you can think of that as path dependence. We're on one path that we believe will happen.

[00:26:56] But if this is a permanent increase in the price of energy, then we have to find a different path. Yeah. Could help the planet as well, I suppose. Yeah, exactly. Yeah. No traffic jams and we'll all be back on our bikes like we were in those COVID years, which actually, I mean, apart from obviously, you know, a lot of people were very ill. It was quite nice getting out on your bike during COVID, I have to say. But which brings us actually onto one of the reasons why productivity, part of the reason why productivity is slipping or isn't growing in the UK.

[00:27:26] I mean, productivity is an issue all around the world, of course, in the Western world. But the UK seems to have a lower participation rate than many other places, particularly if you look at the 25 to 54 year olds. So our participation rate is 82% compared to 83% in the US, 84% in Australia, 86% in Germany. And if you dig down on that, large chunk of that is because we're not that healthy. And that is dragging the UK economy down.

[00:27:52] I'm just wondering how, you know, you look at places like Germany, which are doing much better and they've got more childcare for free. They've got more apprenticeships. They've got later retirement ages. They've got higher female participation, more flexible work options, more healthy people and more flexibility. I mean, we've got to start tackling that, haven't we, if we want to get productivity up in the UK? I think there's, yeah, I think there's lots of things we've got to tackle.

[00:28:16] So, I mean, one issue is that the UK doesn't have much in the way of a tech sector compared to the US. So that's one aspect of the whole productivity issue. The way in which the stock market and things like UK pension funds, et cetera, who don't really invest in the UK stock market, that's another aspect of it.

[00:28:34] And, yeah, so the issue of how healthy, how educated is the UK, welcoming in things like economic migration into the UK, all of these things are good and beneficial. And I think a lot of the messages that are being sent out by UK governments of various colours have not been great in a lot of those respects.

[00:28:58] Things around education, you know, tertiary education, things around investing in business parks to help tech companies set up. I mean, I know there's bits of things, but the strategies aren't really joined up. Things like, you know, city centre, mobility, infrastructure, getting even things like 5G around the country and so on. All those things are missing. You know, health is patchy across the UK. There's a lot that needs to be done.

[00:29:26] The problem is, you know, the one thing you could say that was a potential benefit after the financial crisis is that government borrowing for reinvestment was very cheap and now it's not. And so we've missed the boat on that and now it's going to be a longer slog to get all of these things. Yeah, and to be honest, Germany's economy is nothing to write home about. I mean, they have all these advantages, but I mean, and when it comes to some kind of shock, which may or may not be around the corner, which is what we've been talking about.

[00:29:53] I mean, the euro economies are not in a great position to withstand that either, are they? No, I mean, it's an interesting one, isn't it? That you look at somewhere like Poland, which is doing comparatively better to the eurozone economies. So, you know, you could argue it has that flexibility around its exchange rate and so on to make those adjustments that a lot of European or eurozone countries are not able to make. So it's got a younger population as well. Yeah. And there's other factors in that.

[00:30:22] I'm not saying, I think, you know, is the amount of euro regulation holding back European economies as well, particularly. And I don't want to get into the politics of environmental regulations and so on. But, you know, there's an argument to be had there about how helpful all of that is. It's another aspect. I mean, particularly in relation to AI, the fact that money is plowing into America to go into AI companies that, as you say, don't exist in this part of the world.

[00:30:52] So we're not getting that investment. So more money is finding its way into the United States for companies that can give the return. So there's less opportunity for people to ask for investment dollars because it's all being sucked up by AI. And then that just aggravates this, what Giannis Varoufakis has called this techno-feudalism. So it's not the wealthy landowners now, is it?

[00:31:16] It's the owners of the platforms that are taking control of the economy, increasingly holding more power, not just their wealth, but their political power and influence is all falling into the hands of a few. And so the wealth divide is getting wider and, you know, poor again, poorer. And these techno-feudalists are seeing untold wealth. So if you look at the law of averages, which economists love to do, things can look okay.

[00:31:46] But actually underneath the surface, there's a lot of people really struggling. Yeah. I mean, I think these, I mean, the big tech companies in the US, as they call them, the magnificent seven. I mean, yeah, they are sucking in a huge amount of money. You can argue that certainly most of them are too big. And, you know, by previous generations, those companies would have been broken up because they hold too much market power.

[00:32:12] And I know kind of the European Commission talks about that occasionally, but, you know, nothing's happening. So there's an issue about whether those companies are too big. Should they be broken up? Because they are sucking in all the money. I mean, they are pretty much one third of the S&P 500 or even slightly more than that. So, you know, even people who invest in trackers are suddenly heavily concentrated when they perhaps thought their risks were spread wider.

[00:32:39] Does it need a policy solution in the UK and Europe that we need to provide some support in terms of investment and startup capital and so on to try and have some rival companies to those? Because as much as Europe and the UK try, we can't break those companies up. We can't tell Apple to sell off different parts of its division as much as we might want them to. And therefore, any kind of startups quickly get swallowed up by them.

[00:33:07] Either they get pushed out or they get taken over. Yeah. And then the current White House isn't going to want to change that in any way, it appears. No, that's the problem. Exactly. If you try and break them up or charge them taxes, then you get the whole country or the whole region with tariffs added to it. Yeah. So, but from an economic point of view, if you've got dominant companies like this, I mean, obviously it's a risk for investors because, as you say, the risk is not dispersed.

[00:33:36] But from economic efficiency, I mean, it's efficient for those companies to grow in size. But on a global economy or even on the economy for the United States, is it the most efficient way to operate? Or would you see better returns and more productivity if those companies were smaller? Because I'm wondering whether that is part of the risk as well. We've touched on many reasons so far about why we're not seeing the growth and is there a danger that things could, you know, the house of cards could come tumbling down.

[00:34:03] Is the size of companies part and parcel of the problem? Too much, you know, it's almost monopolistic, isn't it? Well, that's what I was going to say. It's the issue of competition and whether you should break up those companies. You know, you think back to the US antitrust rules. I'm trying to remember when they were. Early 1900s. Yeah, at the end of the Gilded Age, that was the whole thing. When they broke up a lot of those big companies then. And you would argue that that benefited the US economy.

[00:34:33] It allowed innovation, competition and younger companies to come in and thrive. I think that's what I would, you know, if I ever had any influence, that's what I would say. They need to break those companies up. They need to create space to have innovation and competition. So Dave, as we kind of wind this discussion to an end, what you're saying is you think a correction may well be around the corner, but not a huge one.

[00:34:57] And that actually you kind of think it's going to be more gentle unless, if I'm getting it right, the energy crisis continues. Is that a fair summary? That's what I would say. You know, with no energy crisis, I think markets are overvalued and I would see the stock market, I should say, overvalued. And it kind of coming down, tapering down. What would probably happen is NVIDIA's earnings wouldn't quite be as big as people expected. And there'd be a gentle fallback.

[00:35:24] But yeah, if this persists, if oil prices keep rising, then that's a different story. Well, it's not just oil prices rising, is it? The fact that they're rising because there's less energy. Yeah. And you can't grow GDP if you haven't got energy. I mean, the two are quite closely linked, aren't they? So on a global level, some people are going to be doing without that energy. And so that's going to have profound effects.

[00:35:50] Yeah, I mean, if you think of the kind of stock price idea that it depends on future earnings and future risk, then with the Iran situation continuing, future earnings will fall and future risk will rise. And therefore, prices will fall. And if that flips quickly and suddenly people think risk is a much greater thing, this war will continue for six plus months. Therefore, earnings will also be lower. Then, yeah, then that's a different story.

[00:36:18] There could be some kind of rather more major correction coming down the line. But it's not, I mean, I know there's lots of people coming out in various websites and press and so on saying that, you know, next month it will be terrible and we'll all see a 25% reduction. I think markets are still in that kind of we're not there yet stage. So if it just rumbles on as it is now, markets will decline, but not hugely.

[00:36:45] But yeah, if there's a sudden escalation, missiles start flying regularly every day again, then we could see something bigger. But you're talking about the markets specifically. Yeah. But I mean, what about the broader economy? I slung that word stagflation around. Yeah. I mean, is that, let's maybe finish on that point. Is that where we could find ourselves, that we're in an economy where we are starting to see jobs losing? We're not seeing growth and prices are going up. Because that's what, you know, real people, not those people with big share portfolios.

[00:37:14] That's what they care about. Their standard of living is going to get worse. Yeah, I think there's two things. One, just to come back to the stock market, is that the valuation of stocks does also impact the real economy. More so in the US where individuals have bigger portfolios, but also through companies' ability to invest. So if the stock market was to crash, companies have less access to capital and the cost of that capital rises.

[00:37:40] So there is a real aspect of the stock market impacting into the economy as well. But yeah, if the war continues, how do governments respond? If they spend a lot of money on price caps and so on, that's going to impact inflation longer term. What happens in the immediate factor is, of course, there's less trade. There's less economic activity happening because obviously ships can't go anywhere.

[00:38:05] The price of oil or price of energy in total goes up and therefore firms pull back on production. And that leads to unemployment. How does the government deal with that unemployment again and so on? So yeah, there's real effects in the economy that would be longer lasting because this would be a negative shock to the real economy. And they take a lot longer to overcome than to stop markets and so on.

[00:38:32] They can have 10, 20 year impacts. Gosh. So I wonder whether Keir Starmer wants to lose his job. Do you think he's actually thinking this is all too hard from now on if I can just appear as though I don't want this job anymore? Then maybe that's the best way forward for him. It might be it. Dave, thank you so much for talking to us. I really appreciate your time and we shall see what does happen. We'll come back to you in six months and ask you about the enormous crash there has been. That's right. It's always a bad idea to predict markets.

[00:39:02] Thanks a lot. So next week by this time we will of course beam through, well it'll be well over by then, the local government elections and we'll know how much the Labour Party has lost by. Which is what everyone seems to be interested in. I mean it seems to be a given that they will have a disaster. And well, certainly the vultures are circling around number 10 at the moment in terms of replacing him. And will Angel Arena be the new Prime Minister? Well exactly. Or will this all be completely nonsense and nothing will have happened?

[00:39:30] But at least we'll have an idea, I suppose in real electoral terms, of what the political landscape is. You know, how, I mean, reforms leading in the polls. But when it actually comes to votes, solid votes, they still only have five or six MPs. So this will be an indicator of whether it actually does translate into people ticking the boxes. Well you can guarantee between now and next Thursday there will have been a lot of people chewing over all of the results of the elections.

[00:39:59] So we'll be one of the last to do that. But we will do it, but we'll do it the best. Of course. Well let the dust settle. You know, we don't, you know, we want things to calm down. We want to be able to take a long view. And also just get a sense really of the wider implications of it all. Not necessarily just the infighting in the Labour Party. But, you know, what does it mean for the future landscape of Britain in political terms? I mean, quite a little part of anything else. How Plaid Cymru do in Wales and how the SNP do in Scotland.

[00:40:25] And whether this means almost inevitably a breakup of the UK, which is another thing people are talking about. But anyway, we will chew over all that. Or getting back into Europe. Well, feasibly. In the meantime, because you know I like to bring that up. I know, I know. In the meantime, we fare back to, what was it, four or five weeks ago when we raised that question, is Britain ungovernable? Yes. And you brought up Brexit then too, I seem to remember. I think there are listeners, I could be wrong on this, it would be interesting to find out who set their watches by the moment at which you mention Brexit in any given podcast. I don't know.

[00:40:55] It's an urban myth. Right, all right. All of that next week on The Why Curve. Join us for that. See you then. The Why Curve.