Title: Why Gold Is Money Again: Rethink Traditional Portfolio Show: The Meb Faber Show Guest: Inigo Fraser Jenkins — chief investment strategist and co-head of Institutional Solutions, AllianceBernstein (previously Bernstein, Nomura) Date: 2026-09-04 URL: https://youtu.be/4BTXquUsM30 Length: 50:17 (3017s) Note: Auto-captions, lightly cleaned — fillers (um/uh/"you know" as interjection) removed and stutters/false starts collapsed; wording otherwise verbatim. Every (mm:ss) cue kept in place. Auto-caption manglings of proper nouns and technical terms restored to the intended words: "Indigo" → Inigo, "Lance Burnstein"/"Alliance Bernstein" → AllianceBernstein, "shilipe" → Shiller PE, "4p" → forward P/E, "Ibita" → EBITDA, "BICS" → BRICS, "ddollarize"/"deolarize" → de-dollarize, "non-feared"/"non-far"/"non-fair" allocation → non-fiat allocation, "peranom" → per annum, "MSI world index" → MSCI World index, "Jeff Gonlock" → Jeffrey Gundlach, "damalization" → debt monetization, "delobization"/"deglization" → deglobalization, "twoderee" → two-degree, "El Nino" → El Niño, "Craig Witner" → Craig Wichner. Two dropped leading zeros restored where the arithmetic requires it: the steam-engine / US working-age-population figures read "about8%" (= 0.8% per annum) and gold's 150-year long-run real return reads "about 6%" but is 0.6% (he then adds a BRICS-buying uplift to reach "let's call it 1% real").
00:00 AI presumably does raise productivity, but the central case of that is that it just keeps us running at the growth rate that we've seen in recent decades, not an extra uplift [music] to growth. Gold is actually no longer a commodity. Gold is money in this kind of environment. If you look at the sectors where AI is expected to make the biggest difference, with our sector being number one on the list, and then overlay it with unionization rates in different sectors, then it looks starkly different from attempts at automation in, say, heavy
00:33 industries, auto industries etc. in the last 20 or 30 years. So it implies in the near term at least I think we should expect some level of job dislocation. If you rank markets by market cap in 1899, then obviously US works spectacularly well and the UK worked reasonably well too.
00:50 The next six or seven went to zero, sometimes more than once. Today's guest is Inigo Fraser Jenkins, chief investment strategist at AllianceBernstein. Inigo, welcome to the show. Thank you for having me on. I figure we'll start with US exceptionalism and you talk about that, defend the case, pros, cons, all that. You want to start here? I think we need to split up the topic really into two.
01:12 So there's the question about the US equity exceptionalism and then there's a dollar and these are two slightly separate things and I would like to take the view — I'm not sure whether it's popular or not — but to defend US equity exceptionalism but to decline to defend dollar exceptionalism.
01:29 So I guess we have to unpick those things and why they're not necessarily the same kind of thing. The reasons why we want to defend US exceptionalism even after years of outperformance and potentially high valuations come down to a few things. First obviously we can't go 5 minutes in the industry without talking about AI.
01:47 There are huge uncertainties in terms of what the productivity gain of AI is going to be and maybe we can get into that later, but whatever you think the productivity growth of AI is going to be it's likely that the US benefits more from that and sees a greater productivity growth in the US than elsewhere. For a few reasons really: one is there's a long history of evidence that US firms are better at exploiting IT advantages than rivals elsewhere, and there's a less good or less hopeful sounding reason which is
02:19 US firms are able to fire people faster, and in the initial stages of a productivity growth — it's a big one from AI — it's likely that involves a rationalization of the labor force. So you have that kind of rationalization going on. At the same time you've got a completely different kind of reason that supports the US which is very slow moving, it's just old-fashioned demographics, which is that the projection for the size of the working age population in the US is basically flat over the next 10 to 15 years. Now maybe should be clear that is
02:54 a much lower level of growth than we've been used to for the last 40 years. So it's not great in absolute terms but it's better than everyone else. In Europe we're seeing something like a projection of about a half-percent per annum decline in the working age population over that time. In China it's close to 1% per annum decline.
03:13 So a real difference in base growth rates coming from demographics. Then there's other reasons for US equity exceptionalism which is obviously normally thought of as a good thing from the point of view of equity investors, but part of it is this extraordinary growth in profit share of GDP by US firms through administrations of both colors over many decades.
03:35 If you look at the effective tax rate of US firms, it's almost a monotonic line down over decades. That's been a big part of the earnings story — and there's been real growth elsewhere, but it's a big part of the earnings story of the US. I don't think there's any appetite to reverse that and that's an advantage US firms have over firms in other parts of the world.
03:57 I do think there are some limits to that. I mean presumably the profit share of GDP can't just grow indefinitely because there'd be social consequences and presumably a backlash against that, but so far US voters have declined to engage with that. So that looks a little bit like regulatory capture perhaps, but as an extra reason for US equity exceptionalism.
04:22 So I think all those forces support the case for US equities versus those in other regions. The dollar I think is a bit different though. There are in the case of the dollar more balanced pros and cons. So I guess the most obvious case against the dollar retaining its reserve currency status for example is this question which is now front and center of many people's views, which is this question of fiscal sustainability.
04:49 And this is a can that can be kicked down the road for a long time and you never know when a limit comes. But public debt to GDP is obviously at a very high level. I don't think that by itself represents any kind of limit. I mean, Japan showed us that we can go way through that number and still function.
05:08 I think a perhaps more pressing issue is the share of government expenditure that's spent on debt service as opposed to things like defense, and the fact these two have crossed over is a big deal. I think a second angle would be geopolitics, and the weaponization of the dollar in the wake of the Russian invasion of Ukraine has led to other people who think they may be at risk of that kind of action at some point in the future having to think about other exposures, and so BRICS nations have an incentive to try and de-dollarize. Now I
05:43 think they can't actually de-dollarize. China can't make its currency convertible for all kinds of reasons. But there's an attempt to try and move away. And then we have this question of somewhat capricious policymaking — is that leading more people to fear dollar exposure. Set against that, a lot of people have written many column inches on the decline in the dollar.
06:06 We shouldn't hold our breath. There is absolutely no alternative to the dollar. Other changes in reserve currency status in the past have taken decades, and there are some forces that are pro dollar. I mean the emergence of stablecoins has created a buyer of short maturity US debt that is very material. So with the dollar I think it's less a story of expecting depreciation against other currencies. It's that the dollar is more risky in some way, and I think that the depreciation story is really a depreciation story against gold, that
06:40 maybe we can get on to later if you want to. But I think you need to, a bit in summary, separate these two issues: equity exceptionalism, dollar exceptionalism. I think it pays to be strategically overweight US equities in a global equity portfolio. The consequences for the dollar are more for non-dollar investors at least to hedge more of the dollar exposure.
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07:49 They have an offering open now that pays cash annually. Go to farmlandlp.com/invest to see how it works. All right, so a bunch of stuff wrapped in there. I just heard you use the word overweight. And the interesting thing about US stocks, depending on how you measure some of the floats of some countries, let's call it, I don't know, somewhere 60%, two-thirds of world market cap.
08:15 And it feels less challenging in my mind for an American to say, all right, I'm going to put most of my money in US stocks cuz they live here. Rest of the world, does that feel uncomfortable? And then to say overweight — what does that mean? I used to joke with people, no one thinks it's funny or they don't even get the joke.
08:31 I said the US stock market's not going to stop until it gets to over 100% of world market cap, and thank you for laughing at my very terrible joke, but the point being it's such a huge portion. How do you think about that when you say overweight, and does that feel uncomfortable? Yeah, look, it feels uncomfortable in the sense of it's one of these concentration stories, right? But there's a concentration within the US stock market given the weight of the top 10 stocks.
08:59 There's a concentration of the US compared to the rest of the world. I think that it's part of a much bigger issue which investors face that really runs through the very heart of portfolio construction today, thinking strategically at least, which is it's hard to find diversification in the world today. And one of the challenges is how do you find diversification in future, and I'd argue strongly that it's harder to come by than it has been in the last 20 or 30 years. And the other side of the challenge is where do you
09:29 find sources of real return. But I think there's a good case to be made that you do find sources of real return in the US, now less than people have been used to historically, but this is not some great bull story about the future returns of the stock market. It's that they are better than the other alternatives.
09:49 So yes, it's uncomfortable, but I think that's the reality that we face, which is that trade-off of getting real returns, which matters, I would argue, more than anything else, against the overall risk of your portfolio is a more challenging trade-off. And as part of that attempt to get real returns, you need to accept some things that are slightly less palatable.
10:11 You probably have to have some more illiquid assets. You probably have to be happy with higher overall vol levels, happy to be happy with more concentration, and think about responding to those in some ways in the way you build portfolios overall. >> There was an interesting chart on EBITDA, of US EBITDA margins versus EU.
10:37 Maybe tell us a little bit about that. Well, there has been this increase in margins of US firms over time. It's a mirror of that point made earlier on about the profit share of GDP having grown over time. I guess if you go back a few years and I was asked back then to make long run attempts at return forecasts, I would have assumed there'd be some kind of mean reversion and say, okay, US profit margins are unusually high.
11:12 So let's assume they mean revert downwards back to the US's own history or other global norms. I've given up on making that mean reversion call on profit margins or on profit share of GDP in the US. I have to say, as I mentioned earlier, I do think there are social limits to what is politically and socially acceptable in terms of how high profit margins can get, but we don't seem to have reached those levels yet as far as we can tell.
11:40 So in the near term I think those profit margins stay high, and the setup with AI seems to be if anything in the near term they go higher. A choice has been made — it might not feel like a choice but it is a choice — that private companies get to decide what AI is developed and what AI is released, and almost inevitably a chunk of that will be directed towards automation.
12:04 And that probably drives margins higher in the near term. People say okay hold on, hold on, and they go, aren't you worried about valuations? This has been a romper. I mean, US stocks have creamed foreign stocks, have creamed emerging markets, have creamed everything. These big mega companies, they look like they're getting a little pricey across a bunch of stuff.
12:24 Yeah, I worry about valuation. I certainly would strongly reject the idea that valuation doesn't matter. A few ways to unpeel it. On the one hand if you look at valuation on a forward P/E basis that does not look very extreme at the moment, but then that just shunts the problem on to what the earnings forecasts are and whether they're right or not.
12:43 So that's one issue. If we're making strategic forecasts what I'd care more about is something like the Shiller PE. So price divided by 10-year inflation adjusted average earnings. On that basis the market looks fully valued. A few things about that. One is equities aren't alone in this. I would argue that actually most assets are relatively expensive compared to history, and the takeaway from that is yep, we should expect a lower return world than the one that we've been in for a long time. But I think using valuation alone is dangerous.
13:13 If you use valuation compared to history it would have told you to be out of stocks for a long time and that would have been an absolutely terrible call, and it's evident that earnings growth can keep the market going. Secondly this point about profit share of GDP I think is important in terms of supporting the return of the market.
13:36 I think though that valuation comes in as being something that just limits your view on what returns can be. So when you make a forecast out from here, yes, obviously you want to make a forecast of what GDP is going to be or what profit margins are going to be and you can put some numbers around that.
13:55 And I happen to think that average growth rates are coming down compared to what we've assumed in the past. But what we can't do is assume that multiples expand further. I just can't really think of that being a credible forecast to go and make. So it feeds into this view that returns are going to be lower but still positive in real terms.
14:16 But that's the key thing and that ultimately is why when I'm thinking about strategic asset allocation — and this thing that does keep me awake at night, which is how do investors generate positive real returns — well, an overweight position in the public equity market is going to be part of that even if valuations are relatively high.
14:33 The other aspect of it is the relative performance of the US compared to the rest of the world. There I'm a bit less concerned. I don't think there's really good evidence that relative valuation has been a particularly useful guide to medium-term relative regional performance for a long time.
14:54 And I'm not sure why that should start now. So people who want to make a forecast that Europe is going to strongly strategically outperform the US, they have to assume that earnings growth is going to outperform US earnings growth. And I just don't see a basis for making that kind of forecast. >> So a lot of people listen to this and say, okay, well the good news is we got some bonds now. They used to yield zero.
15:19 Now they yield four or something. Is that the diversifier today that we're relying on if something derails this equity train? No, I have a strong view on this which is that if we're talking about government bonds anyway, and long duration government bonds, I think it's likely they will not perform the diversifying role that they've performed historically.
15:43 I've written a lot about this. Just to pick up a few themes in that: firstly, yes it's true that in the last 20 odd years the return of 10-year government bonds and the return of equities have had a negative correlation between them and it's been a no-brainer diversifier which has helped the performance of things like 60/40 strategies.
16:07 Unfortunately if you extend the chart 200 years prior to the last 20 years that correlation was positive almost all the time. So just as a point of empirical regularity, this post 2022 experience of a positive correlation of stock and bond returns actually looks more normal. One narrative that runs through my research that I really want to stress to investors is this period since really since the mid-80s has been an incredibly special period for markets. ▶ Chart 200
16:35 Inflation's been benign. Bond yields started at an incredibly high level. There was very strong growth in the labor force partly because of demographics and partly because of globalization, that led to very strong positive real returns, plentiful diversification, and that is something that's actually very unusual in the longer scheme of history.
17:04 And some people might say well okay but that's the recent history, but why should it change? Well, because a bunch of the forces that drove that higher growth and lower inflation have either run their course or are even going into reverse right now. When we're thinking about what the prognosis is for strategic equilibrium inflation going forward from here, the combination of things like deglobalization, high starting debt levels, and so this risk that debt monetization looks attractive, and arguably climate
17:37 as well, all point to higher levels of inflation than we've seen before. Now it's not runaway inflation because there are disinflationary forces from automation. But it means that there are these exogenous forces upwards on inflation that don't come with an extra force upward on growth.
18:00 In fact, if anything, a force downward on growth at the same time. And that really flips the relationship to inflation and growth. Flips the relationship between equities and bonds compared to the one we've seen in the last 20 or 30 years or so. So yeah, I think it's less likely the bonds perform their diversifying role. Now they're not correlated one to one with equities.
18:16 They've got a correlation of let's say 0.2 as the 100-year average, which still helps. It's just not the no-brainer it was at a minus 0.4 correlation. But there's some other worries too, which is the global pension system is slowly moving from DB to DC. I'd argue one of the biggest shifts inherent in that is that there is less demand for long duration and nominal assets.
18:44 You need a bigger allocation to real assets. So presumably less appetite for buying these bonds, and then you have this question mark over debt sustainability and do they become more risky. I've long held the view that there is absolutely no such thing as a risk-free asset. People just use that term partly because it makes the maths easier, but maybe it makes people sleep more easily at night, but there is no such thing as a risk-free asset.
19:14 It's contingent on political and economic states of the world, and I don't think we're in those states anymore. So the appetite for bonds is less positive I think in that sense because they don't perform all the roles that they have done. Now there's still obviously a role for them. They are highly liquid assets.
19:32 They are probably useful for drawdown mitigation for institutional investors. They're useful for matching particular cash flows that are coming. But it implies that if you're trying to find your diversifier from equities, from things like the AI trade, if those are going to come off, you've got to work a lot harder.
19:52 And 60/40 is in no way a passive default asset allocation strategy in that kind of environment. You need to go and find other things as diversifiers. You guys have a great chart, speaking of just history in markets, and it's looking at — it's called false sense of security from markets that "worked" — and going back to 1899 showed about a half dozen of pretty big-name countries you would think of: Japan, Austria, Hungary, Russia, France, Germany, that essentially the markets went to zero.
20:25 >> I think it tells us that we need to be careful of survivorship bias when people tend to do long run analysis for equity markets and other markets. Just looking at the US because it's easy, the data is available, but we do have to bear in mind that that looks good partly because it happened to work.
20:43 And so if you rank markets by market cap in 1899, then obviously US works spectacularly well and the UK worked reasonably well too. The next six or seven went to zero, sometimes more than once. I'm not saying that is the prognosis for US or UK returns going forward from here, but it does mean there is this inherent survivorship bias in the way people think about the long run return from a passive cap-weighted index.
21:04 It's not perhaps quite as high as you think it is. >> Should we talk about gold next? I find gold fascinating. Firstly, when I go and tour around investors around the world, the topic of gold comes up in at least 90% if not pretty much close to 100% of client meetings. Has that always been true or is that true right now? >> No, it's been true for a number of years at least anyway.
21:26 And then I flip around and say, so how much gold do you actually own? And the answer almost exactly maps on to where they sit in the financial ecosystem. So if people are in family offices or sovereign wealth funds, then yeah, they probably have some gold. If they're in pension plans, most of them probably don't, but not all. I mean, some do.
21:45 But it's very much linked to targets, governance, etc. But the interest is universal. So we've been overweight gold for some time. Not too worried from a strategic standpoint about the selloff that happened this year, although it's still up this year. But that had happened earlier this year. I think we can explain some of that at least ex post.
22:06 I think there are a few things that point to gold and really comes back to that wish to deny dollar exceptionalism in quite the same way. So one of the assets that benefits from people trying to diversify away from the dollar is gold, along potentially with other non-fiat assets.
22:29 But thinking about it from a portfolio context, for me the thing that grounds a gold view is that I would like to strongly defend the idea that the correlation of gold and equities is zero and remains zero at any level of inflation you care to mention. That is clearly not true of bonds. And I'm not suggesting people can replace the 40 in 60/40 with a gold position. No.
22:54 But it's part of that diversifying portfolio. And so I think that's an important element to it. The thing that's lacking in gold is being able to have a good price target. And often I joke in meetings of investors that here I am as an investment strategist telling people to buy an asset for which I decline to give a price target, which of course is an odd thing to go and do.
23:25 But there used to be an ability to price gold. You could price it off TIPS. That broke down on the day the Russians invaded Ukraine and I don't think that comes back. In the absence of a price target I think what one can do is perhaps come up with a long run return target. It's not quite the same. And I guess the basis of that would be to say, look, the long run 150 year real return on gold has been about 0.6% per annum, albeit very episodic, and then I'd add on to that the observation that BRICS nations particularly China have to buy a lot of gold. I've got no idea how much
23:59 gold and when they buy it, but it is enough to lift that return assumption. Let's call it 1% real. So we've got 1% real, zero correlation to equities. That at least is the starting position for thinking about what a portfolio allocation to gold might look like. This episode is brought to you by Upwork.
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24:56 That's upwork.com. You guys have some cool charts where you were talking about correlation of gold to equities based on the macro environment for inflation. Maybe tell us about that, or tell us about this idea that during different macro setups these correlations can change, and the entire sign can change.
25:20 Yeah, >> I think you're right. Obviously correlations do change between most major asset classes. So we were looking at the correlation of different kinds of commodities with equities and there's a case that say copper and equities have a positive correlation. They've got this procyclicality to them. With oil it's a bit different because high oil prices tend to be associated with equity shocks. But gold's a bit different.
25:47 If you take different inflation buckets and different inflation bands you tend to find this very close to zero correlation over long periods of time between equities and gold. And of course that can change. So if you zoom in on the last few years ending in about January time this year, then we're going to find a positive correlation between gold and equities and there were strong inflows into both assets at the same time, and I think that's part of the clue as to why gold sold off so aggressively in the
26:20 first half of this year, because there had been this extra flow into it from investors in particular to a degree, but that was unusual and that had driven that correlation higher. That's something that's abnormal. I wouldn't expect to normally continue. But again, think about the basis of it from a more normative perspective.
26:40 What should the correlation be? Well, one of these assets has no cash flows attached to it. Hasn't really got a use. Frankly, there's no reason to think there should be a non-zero correlation between gold and equities. If you and I sat down and said, "Hey, we agree on these 10 things in portfolio design."
26:58 And there's not a whole lot of fields like that. I feel like if you get 10 surgeons in the world and you give them, hey, here's the patient, most of them probably come up with the same recommendation. Investing is not like that. You end up with very different end results.
27:13 But I think people have genuinely, firstly, very different time horizons, have very different appetites to drawdowns, people have different definitions of risk and people have different types of returns that they need. Now some of those I think are innate in terms of where people sit in the system, some of them relate to the institutional legacies that are hard to change over time.
27:42 Some of them perhaps can change though. One of those things is this idea that you've mentioned a few times which is real returns versus nominal returns. I am amazed at the number of people I come across who do have nominal return targets. Now, some people are blessed with having nominal return targets by the nature of where they sit in the system.
28:01 But I'd argue most people don't or at least shouldn't. Ultimately for the end investor who is either buying an asset management product or investing in a pension or whatever it is, presumably the only reason they're really investing is to meet some future liabilities in the real world. Retirement costs, healthcare costs, whatever it's going to be.
28:23 So generally that real return is important, and I think it's one of these things about people defaulting to what they've experienced over their investment careers. People haven't had to worry about higher equilibrium inflation for a very long time. So people have tended to drift towards benchmarks which are asset class relevant.
28:43 So they're trying to outperform the MSCI World index or the AGG index in bonds rather than trying to outperform inflation. I think the one change that probably does happen is that more people are probably forced to focus on generating real returns, and that I think is a change that hasn't yet happened really.
29:03 >> I don't know, other than people who are like — gold seems to be a barbell. It's like there's probably a huge percentage that's zero and then you got some crazy people that have like 20, but I don't feel like — if you ask the average financial adviser, do you have 5 to 10% of gold? Like no chance.
29:22 I don't know. Do you think that would be accurate or do you actually hear that? >> Yeah, I think it's a big barbell as you say. So although as I said almost everyone wants to talk about it, a lot of people have zero allocations, particularly in the pension system, and I get it.
29:38 I mean for people to say it's really hard to own an asset that has no income. It's really hard to own an asset where I admit freely I haven't even got a price target for the thing, and it's not obvious which bucket it sits in. Now I guess the latter thing is something I'd attack because I don't think that's a good reason not to own something.
29:52 But these are real reasons that constrain people. The other thing I point to is the returns are very episodic. You can go for decades with no return which is obviously painful. So it requires taking a strategic view. And also for me the gold allocation, despite being positive on the asset for a long time, is by no means a standalone view.
30:17 I'm not positive on gold in isolation. I'm positive on gold because I think people should have a strategic overweight on equities and then I think we are struggling as an industry to articulate what on earth diversifies that equity position in a world where bonds no longer do it. And so gold is one of the things that goes into that bucket.
30:37 So it stands alongside a strategic equity view. But yes, there's been evidence that there was a lot of flow into gold last year both from retail investors and from CTAs, unsurprisingly given the price just went up in like a straight line essentially. And we've seen that unwind pretty aggressively.
30:57 But then you go and ask people how much gold do you have in your portfolio? For many people — one recent survey showed that the modal answer was zero. >> More recently in the last year or so I feel like Bitcoin, which used to get mentioned in the same breath as gold and then gold has kind of taken its place, has kind of faded to the back.
31:18 Funniest thing I heard the other day was Jeffrey Gundlach say that Bitcoin is not cool anymore. It's only for boomers and everyone's moved on to AI and everything else. What are your conversations on Bitcoin? Have people forgotten about it? Have they moved on? >> Pretty much. So I find that the interest in Bitcoin ebbs and flows with the price.
31:40 So not so many client questions on it. I have to admit though that as part of a non-fiat allocation that we suggest to people strategically, I think Bitcoin should be a part of that. Now a small part, because a non-fiat exposure should be dominated by gold. But I think there is some place potentially for Bitcoin in that.
31:57 I very publicly changed my view on Bitcoin over the course of COVID really, having previously thought it had absolutely no role whatsoever in asset allocation, then grudgingly accepted that actually maybe it does have a role in asset allocation. And I think the idea really, for me at least, is on the coattails of gold, which is, there's this gold argument I've articulated already, now I guess the question is whether any things that are potentially gold-like in some way
32:31 perhaps should be part of the allocation. So I throw a small allocation to silver in that, not because I'm fundamentally bullish on silver necessarily, but just it is different because investors play a much smaller role in that market than they do proportionally in the gold market, and similarly with Bitcoin.
32:51 One thing that could happen is there could be more regulatory clarity. There could be more clarity on custody arrangements, etc., etc., and that would bring more investors into it. So yeah, I think it does have a small role to play behind gold as part of a non-fiat allocation. >> We touched on a few of these.
33:10 You talk about the five forces: AI, demographics, climate, debt, deglobalization. All roads when it comes to the investing world lead to inflation, because it can be just an absolute haymaker for expensive equity markets. It's obviously a problem for bonds. So, is inflation going to run away or what? >> So I think it's right to expect long run inflation to be higher than what we've seen for many decades.
33:41 It's really a combination of the forces you mentioned earlier, i.e. deglobalization, risk of debt monetization, etc., etc. The problem is it would be a brave economist who pointed to all these forces and simply put a coefficient on them and added them up, because we've never been here before.
33:56 But it's enough to say that we are plausibly in a different inflation regime than the one we've seen before. I think given there are these disinflationary forces around I wouldn't want to forecast unanchored inflation. Far from it. But simply higher equilibrium inflation. Let's call it high twos, 3%.
34:15 And that's enough to force people's minds on that need for real return. >> In the terms of history pretty mellow though. Talking about what it's looked like in the past, people love pulling their hair out about inflation no matter what level it's at. It could be at 1% and people are going to complain about inflation. But two, 3%, even four — four seems to be the kink where it starts to get >> yeah, beyond four becomes a problem. For all kinds of reasons, not least socially. In portfolios
34:50 it becomes a problem for a very specific reason, which is much higher than four and equities stop behaving like a real asset. Now it depends how fast it's moving and the reasons it's moving. But above four I'd argue that your portfolio that protects against inflation doesn't want to have bonds or equities in it and it's a lot more complicated.
35:11 So that forecast of a number that's simply higher than what we've been used to but not unanchored still leaves us in shooting distance of portfolios that we recognize and can actually talk about how assets behave in that kind of environment. >> You guys have four parts in this great paper.
35:34 You dedicate one to an entire sector. Talk to us about healthcare. What's so interesting for healthcare? >> I think it sits at the nexus of a few of these issues: so the need for diversification, demographics, AI, and then valuation in the market. So again, we're happy to have this pro-equity view but we want to have something that might be defensive around that. And I think a few things point to healthcare from a strategic perspective. So one, given the demographics backdrop, that is supportive of the sector,
36:09 particularly supportive for the ability for pricing power to remain in the sector, because you tend to see care costs in particular be quite sticky in terms of prices. I think it's a very plausible case that it's a beneficiary of AI. Obviously huge argument of who's benefiting from AI, but that's one area where I think it's a very good story to tell about it being a beneficiary.
36:34 And then you can layer on valuation and you say, well okay, the sector's outperformed, but still if you look at the P/E of the sector relative to the market over the last 20, 30 years, it's low compared to its trading range. Now of course there are reasons for that, and I guess the reason is policy uncertainty. But the good news is that uncertainty about health policy is not particularly related to the riskiness of the AI trade in the near term, so it's a different kind of risk. So yeah, in the context of needing to also have cross asset approaches to
37:09 find defenses in portfolios, it can be done in equities as well. And healthcare stands out in that sense. >> Another kind of long-forgotten sector: energy. And you guys talk a lot about this, about the global energy market, the shifts we've seen. How should investors be thinking about that, which is now as part of the US equity portfolio it's like 3%?
37:31 It's like a rounding error. It's almost — it's less than gold I think at this point. How should we think about this once dominant sector? >> Yeah. So I think there's a case to have exposure to it again in the context of wanting to find different kinds of sources of real return in portfolios. I think it's a case to have exposure through commodities directly and through the equities linked to those commodities,
37:58 particularly if one is an investor who happens to have a focus on income and free cash flow in particular — then the sector would stand out on that basis. I think also just, we're in this environment where one needs to have this link to inflation protecting return streams, and so commodities more broadly I think play a role in this. Now I'd draw a slight distinction between gold and everything else. I would argue that because of geopolitics and because of outstanding debt positions of major economies, gold is
38:33 actually no longer a commodity. Gold is money in this kind of environment. Now maybe no one really cares about that distinction, but I think it's kind of important, and so I want to put gold in a slightly separate bucket from commodities. But then the rest of commodities, well they play this role as being part of inflation protection, part of the generation of real returns, and I'd want to mix that between base metals and the energy sector more broadly. That tends to be a small part of
39:05 people's portfolios again — inflation hasn't really been a worry for a long time. But I think it deserves a role now and I do hear more investors asking about this. So this broader commodity question is one of these things that does come up around the world meeting very different investor types.
39:26 >> You briefly glossed over base metals, and something that it would feel like more people might be talking about in the word cloud, which is historically it has its own PhD. It's the only commodity that has a PhD and we're talking about Dr. Copper. Dr. Copper is I think at all-time highs, up around almost seven bucks.
39:50 I don't hear a whole lot of headlines about this. Is this just localized? Is this a growth thing or is this an inflation thing? How do you — when the doctor — people used to go Looney Tunes if this was on fire like this. But I don't hear that much. >> Yeah. No, nor me. I guess historically it had a very clear link to the business cycle, but that kind of business cycle regularity is something that's I guess not talked about much either these days.
40:19 Obviously it has a role to play in the AI physical capex buildout and energy transition buildout. So this structural demand sits there. I think for me though the more interesting takeaway is if I think strategically about portfolios, we talk a lot about the level of inflation and there's a case that it will be higher, but I think we also need to consider the volatility of inflation, and I think there's a case that the volatility of inflation is going to be higher, and base metals form
40:55 at least part of the potential response to managing that in a portfolio. I think some of the reason for higher volatility of inflation comes from deglobalization and the way that crimps the ability to cushion price shocks in the global economy.
41:20 And part of it comes from I guess what we're seeing in geopolitics now, which is the confluence of AI's reawakening of serious demand for physical capex coinciding with what appear to be limits on the US's ability or willingness to play a policeman role, and these two narratives are going to crash against each other and I think imply that we should expect more supply shocks.
41:48 Okay, but this year oil is the topic, but in future years it could be cobalt or lithium or copper or something else. And so we should expect more volatility of inflation. >> What have we not talked about today that is burning on your brain that you're worried about, annoyed about, excited about? We've kind of hit a bunch of stuff, but there's got to be some other things we didn't get into.
42:07 I guess thinking in terms of the papers in the pipeline and things that people are asking about at the moment, one is this idea of the way AI permeates everything and so it's potentially something that's harder to escape from in a cross asset class sense. And the other is this debate which is going to run for years, which is what is the productivity gain from AI, what does it mean for the labor market, what does it mean for growth rates.
42:38 >> Well, let's dig in. You've talked about job loss. You've talked about unionization, which is interesting. You talked about reduced demand for labor versus reduced supply from demographics. Give us a little deeper — what are you noodling on here? >> So I guess I'd pick two different elements that obviously are very much linked, but two slightly different ones.
43:05 One is the overall growth rate to expect in an AI world and second is what does it mean for the labor market. So firstly I'm relatively skeptical of anyone's ability really to make forecasts of long run aggregate productivity growth. The experience of the TMT bubble in 2000 was that people made assumptions of a very long run or permanent increase in productivity and then had to unwind those over time.
43:30 So we seem to be not very good as humans at making a forecast of long run productivity growth. So I'm inherently a little bit skeptical of starting with that as the basis of the view and working from that. So we try to reverse engineer it in our research and say, well, we've got these other forces going on which look likely to depress growth.
43:50 Can we try and have a guess at how much a depression of growth those are going to bring about, and then ask, is it plausible that AI can make up for this and compensate for it. So if you think about what those are, I guess number one is demographics. I mentioned that the US is in a more favorable position at the beginning of the show compared to other regions but still less good than it was before.
44:14 So the central case for growth rate of the working age population over the next 10, 15 years in the US is about 0.8% per annum less than the growth rate we've seen since 1980. That we can forecast. The one that probably also depresses growth but we can't really forecast is climate. So I've got this view that it seems highly unlikely that the world hits net zero by 2050.
44:39 Therefore, it's presumably likely we see a more than two-degree temperature increase. We don't really know what the implication of that is. And the main implication probably comes with complicated things in terms of nonlinearities and path uncertainties. But let's say it depresses growth again by a few tens of bps.
44:58 So if you add this up, you're seeing a central assumption of growth rates that are probably going to be about 1% per annum lower in real terms by the time we get 10 years from now than we've seen in the post 1980 period. So as a starting point AI better create 1% productivity growth per annum more than we saw historically in order to make up for this, to keep us running at the same pace.
45:24 So is that plausible? And we try and answer that in two ways in the paper. One is I like looking at long run history. So looking at what happened in the industrial revolution and the invention of the steam engine raised productivity in the UK by about 0.8% per annum in a sustained way.
45:41 So we've seen this kind of shift before. If AI is as good as the steam engine then it can do that. Although that's an interesting little speed limit as well, and people who want to come and forecast much higher than that, they're saying that AI is much better than the steam engine, which of course is plausible, who am I to say, but people should be mindful about making that kind of forecast I think. And the second is to look at the last couple of years of academic research, and this cottage industry of forecasts has grown
46:08 up of trying to actually make this hard forecast of productivity growth, and the average of those is about 1% per annum. A huge range around it. Massive disagreement, but consumption around 1% per annum. So yes, AI presumably does raise productivity, but the central case of that is that it just keeps us running at the growth rates that we've seen in recent decades, not an extra uplift to growth.
46:34 And then the other element of this is, well, where's the productivity growth come from? AI can raise productivity fundamentally in two ways. It can either enhance a unit of labor, make it more productive, or it can automate a role that was not automated before and get rid of that unit of labor. And I think there's a case to be made that certain people want to put in more optimistic views of where productivity can get to in the near term.
46:58 You probably implicitly have to make some assumptions around a negative impact on the labor market. Now here there's obviously huge fear around job losses, and I guess the obvious initial pushback on that is, hang on, we've been here before for the entire history of automation the last 200 years. There have been countless episodes of scares around automation getting rid of jobs, but we still have close to full employment. More jobs always got created than got destroyed. Now that's not to gloss over — obviously there has in
47:31 times been extreme pain for certain elements of society along the way and that's clear — but in aggregate more jobs have always been created. So if you think that AI is a technology like any other then in a sense we shouldn't be worried about it. The pushback on that is if you look at the sectors where AI is expected to make the biggest difference, with our sector being number one on the list, and then overlay it with unionization rates in different sectors, then it looks starkly different from attempts at
48:04 automation in say heavy industries, auto industries etc. in the last 20 or 30 years. So it implies in the near term at least that I think we should expect some level of job dislocation. >> What are you going to be working on the rest of the year for the next book? Your next thoughts, any predictions, ideas, anything you're stuck on? >> I guess this kind of broader issue around commodities, and one thing we haven't really covered in huge detail is soft commodities.
48:32 And I think the combination of El Niño, fertilizer exports out of [inaudible], point to potentially higher food prices. Tends to be an asset we don't spend a huge amount of time talking about normally but I think that's probably going to get extra airtime over the next 6 months or so.
48:52 >> Inigo, this has been a blast. Where do people find your writing? Where do they go if they want to follow your research, what you're up to, any particular place? Well, we deliver it on the AllianceBernstein website and also tend to post most of the pieces onto LinkedIn as well. So people can find it there.
49:09 Thanks so much for joining us today. Thank you for having me on the show. Podcast listeners will post show notes to today's conversation at mebfaber.com/podcast. If you love the show, if you hate it, shoot us feedback at themebfabershow.com. We love to read the reviews. Please review us on iTunes and subscribe to the show anywhere good [music] podcasts are found.
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