Obviously, geopolitics is in the news a lot, but I want to first hear from you how you actually operationalise it. I have a polling question, just to give me a sense, how do you actually integrate what you see on the news, on your social media feeds and so forth, to give a sense of whether there's an approach here? I want more than four responses before I get started. I hope everybody can log in in time. Okay, it looks like tech is failing us. I may actually do a show of hands if that's going to happen. We're going to do an old-school show of hands. Who here just uses geopolitics, you monitor episodically and then you make adjustments tactically in portfolios? That looks like a plurality. How many here largely ignore it just because there's no system, no process around actually integrating it? Anybody? One hand should be going up at least. Finally, who has a systemic approach to this, either quant or process-wise? Okay, great. Well, if I can, we can go back to the presentation. Before I even get started, I think the important thing is it's conceptual, so when the pandemic hit, we tried to think about what has really changed in the pandemic, and then once the war in Ukraine and Russia happened, all the things that we were speculating about had clearly happened. About a year ago, a year and a half ago, when I was presenting basically the same message I'm going to present now, most heads were shaking, not convinced that the world had really changed profoundly, but I'll make this easy. Think about what the world was like before 2020, and when I say the world, I'm talking roughly from 1980 to 2020. That's what we call regime shift. What did the global macro regime look like from the 1980s until about 2020? It was very simple, it was a nice carousel spinning, the carousel of globalisation. China joined the world economy. A lot of authoritarian countries and other emerging markets opened up. Then you obviously had the collapse of the wall. Basically, ever-growing markets. Ever-growing supply side resources that joined the global economy, whether that was labour pools. All of that made the supply chains longer, more efficient, more optimal. Therefore you got on the production side, this nice swinging positive reinforcement that was disinflationary, partially even deflationary as a force. On the flip side, what did all these workers and countries do with their hard-won earnings? They deposited them as excess reserves. A lot of these excess reserves were geared towards stemming currency appreciation, and a lot of these excess reserves flowed back into Western financial assets, so therefore you got also a little bit of yield compression on the capital side. Both on the real economy, disinflationary pressures, and on the capital side, yields compression. That was a carousel because what did that do in turn? It meant you had more purchasing power for consumers. You had lower rates, therefore higher leverage or ability to take out credit, and that fuelled growth and that fuelled more globalisation, FDI flows, and more optimisation of supply chain, a nice carousel. If there's anything you take away from these 30 minutes, that's basically the message; we had a nice carousel spinning. That carousel stopped during the pandemic and then with the war in Ukraine and Russia has now turned. It's not turning as fast as it was spinning for 30 or 40 years, but it has turned. The sign has gone from a plus to a minus. Here, I've flagged conceptually how to think about it. What the carousel looks like right now. At the centre, we have an unstable world. That's not news to you. Nothing on this slide is news to you, but how they interact. Clearly, you have instability at the core. That means you basically have fragmentation; the global economy starts to fragment. McDonald's no longer operates in Russia. Huawei no longer sells in the West and so forth. The markets are getting smaller as a result. Also, supply chains are getting shorter. That has an obvious impact on inflation on the production side. Now the magnitude is not huge, so the deglobalisation force is not as strong as the globalisation force that we had, but the direction of travel is the same. Deglobalisation, on one hand, is not just a process that stands on its own, and we'll go through some metrics in a second. It obviously comes along, what was a side effect of the Ukraine-Russia war? What's the side effect of the US-China tech war? What was the worry about the Gaza-Israel war right now? Well, obviously, it's about supply, that you have supply shocks and we are having supply shocks and but the frequency is higher, the intensity is higher. Again, supply shocks are classic stagflationary impulses, not all the time, but higher frequency and higher average, again slightly more inflationary. At the same time, all of this is happening while we're changing our energy mix and changing our energy mix is, unfortunately, a battle over the same exact resources that run parallel to the geopolitical competition. They reinforce deglobalisation and they reinforce the supply shocks because everybody is running into the same areas at the same time, battles for the same natural resources, battles for the same capital goods, battles for the same know-how and expertise, and that obviously triggers a lot of reactions. At the bottom is the response, particularly in DMs around, you have an energy shock or you have a pandemic, what do you do? We'll write checks to households. You have an energy shock. Well, what do you do? We'll write checks to households; bail them out for energy. Europe is going to have an auto shock. Well, got to respond to that as well. You have a security risk. We're going to respond. Whatever it is, it means a stronger fiscal impulse that's going to stay with us and that fiscal impulse is not geopolitically agnostic. It's biased. Well, what do you think the signal sends if you're rearming, if you're trying to build out competitiveness in your auto sector, or you're going to do industrial policy like the CHIPS Act and so forth. Well, that's a geopolitical signal and that's going to boomerang where the other side says, well, wait a minute. They're trying to carve out some advantages here. We need to respond to that, and so you're back to deglobalization and the fragmentation. So you have this carousel, not spinning as fast but it is spinning in the other direction. That's basically the message I want to leave with you with is, where does it leave you? It leaves you with a world that's slightly more inflationary. It's certainly more volatile across all asset classes. You can have episodes of lull like we had in the summer of 2023. Remember that a few months ago? These episodes of lull should not last, and of course, for rates, it means that nominal and real rates need to be higher as a result of the different policy mix that you have in the country, as well as the uncertainty about the long-term future. Finally, on equities, and I'll finish there, it does mean that the relative performance of different equity baskets should look different than it did during the 30 or 40 years that we've seen. I'm just going to now, having said that, run through a lot of various metrics because we can argue deglobalisation, yes, no. What matters really is that there's certainly no globalisation anymore. The reason why we don't see declines is that obviously within blocks, you still have cross-border activity. Globalisation is cross-border data, capital flow of goods and services and people. That's still happening. It's just not happening, a Germany-China transaction is not the same as Germany-Poland, even though it may show up on the data as the same. The interesting thing is less on the trade side. I think the investment and the portfolio flow side is much more interesting. FDI flows obviously here on the left you can see that they have come off of highs, but FDI inflows are a tricky measurement. A lot of it is about how do you reinvest earnings abroad, and so I find the chart on the right is the more insightful one. If you really pay attention here, the red line is net FDI. Greenfield. Greenfield. This is new money going into a country to actually build something, so not some accounting of where the earnings are allocated. You can see structurally that China has been in secular decline for a decade. The US is now in a secular uptick. What happened in China around 2011, 2012, where you basically get the start of the decline? What happened in China in 2011, 2012? Well, we had a new chairman take over, Chairman Xi, and so I do not think it's a coincidence that the policy priorities shifted and greenfield FDI started to really drop as foreign companies realised the potential for entering and benefiting from the Chinese market is not the same. I'm going to skip through a lot of these things, but one of the inflationary by-products is that the labour market dynamics in the West were, and that's one of the reasons you had wage suppression for so many decades, globalisation worked through two ways. One is you had some attrition of manufacturing jobs, and remember manufacturing jobs are mid-skill wage jobs, so you had a loss of mid-skill. So the average of the workers that are left earn less because some of the higher paying jobs wandered off. The second effect is that as the higher paying jobs went wandered off, these higher paid workers had to flood into the service sector, which is lower paying on average, and so suddenly you had an excess labour overhang in the service sector in developed markets and that added to further wage compression. You can see it here nicely that until the pandemic, the inverse correlation between US wages and Chinese exports is surprisingly robust. Another way to look at it would be the Beveridge curve. You can see over the last 25 years, measuring a skills mismatch in the economy. Describing this process, you had a variety of shocks. Globalisation was only one. Technology is another driver. Basically, you had a mismatch between the workers the economy needed, the curve shifting outward each decade, and now gradually the bots here at the top left starting to drop back down as you get reinvestment in home-grown manufacturing and mid-skilled work. Obviously, that means, by implication, a higher share of income goes to labour. So that's deglobalisation. You can see we're going around on the carousel. Here's supply-side shocks that I'm talking about. This slide is almost a year old when I created it, and why do I tell you that I created a slide that's so long ago? Look on the right side. We talked about supply shocks, not only energy. Oil and gas is not even on here. A year ago, you just look at, who has real dominance in certain areas? You're probably going to get outages of those. On the left, certain high-value technology outputs such as semiconductors, you have the US-led sanctions block against China and its allies. On the right side, you see the raw materials here where we've already had three supply shocks this year. The first one was germanium and gallium effective August 1st, China rationed its exports, and effective December 1st, graphite is coming. So that is already supply shocks. Again, episodic, very distortionary, and obviously highly inflationary. What do you need graphite for? What do you need germanium and gallium for? You need it for the technologies of the future. That's renewable energy, electric vehicles and so forth. Here, you have a brief explanation of why decarbonisation is so problematic and where geopolitical risk sits. In fossil fuels, who earns, derives the most benefit from the resource? It's the resource owner, the natural resource owner, the Texas oil baron, the oil-rich countries of the Gulf. They capture the most value. In renewables, who captures the most value? Those that put it all together. They take the raw resources, natural resources, lithium, graphite, whatever it may be. They have the expertise and know-how with semiconductors and they put it together, build a wind turbine or the solar cells and then export them on and deploy them. That's where the value sits, and if that's where the value sits, the competition and the geopolitics sit elsewhere. They don't sit at the source fighting over who has access to oil or who has access to cobalt and lithium, but who has access to the infrastructure and the framework to develop the industries of the future and basically be economically dominant. Example, who can produce electric vehicles en masse at a cheap cost, and therefore disrupt or sweep out the competition? That's why Chinese electric autos are one of the frontiers of geopolitical battles today. On the other side of decarbonisation, we still have a fossil fuel world. In there too, the geopolitics here on the right, if you look at the Saudi production curve, which historically the central banker of oil always kept it around 10 million barrels a day before 2020, you can take it back 20, 25 years. Very narrow band of production trying to stabilise the market. You can see since 2020, a very erratic, very policy-driven determination to affect the outcome of that. This is a corollary of that geopolitical instability, because the Saudis, as an example, are just doing what's best for them, which is trying to take advantage of the extracting concessions from the respective consumers that they deal with and stabilise the oil price. On the left, you have a dented supply issue in the US, in shale, given the risks of carbon taxation and the punitive regulation in the future, and so that's discounted, and so the supply response is weak. Long story short, you basically have a problematic supply side on this end too. Finally, what's the new policy mix that we are expecting? We talked about the check-writing in crises. Well, some of that stays with us. The demands on fiscal impulse remain high, and the question is where does the public spend money? I know I'm running fast here, but bear with me with the speed. Look here on the left. That blue line on the left bottom, this is the US, R&D, basically investments, CapEx. That's where the jump is happening. Look at that. That's a crazy three standard deviations jump in the level of US public CapEx, and the fiscal multiplier on CapEx is very, very high for public CapEx. That's obviously going to have to deliver. The one good news here is it should deliver a productivity impulse to the rest of the economy, it should let the economies run a little bit hotter than they have in the past, and I have defence spending on the side because defence spending, in particular, the type of defence spending that is needed, is highly correlated with a very high multiplier. The US was producing 105-millimetre shells around 15,000 a year. Those are the shells that are most used in artillery. Unfortunately, in the war in the Middle East as well as in Ukraine, it aims to produce 100,000 a year in 2025, so a huge scale-up in production. That's part of the expense and that's basically core manufacturing. Now, finally, to the multiplier. Look on the left. That's the Cold War. I lagged labour productivity by two years to the defence R&D budget, and look at that, I didn't expect the curve to correlate as much as it did, but it's not a surprise because you do get a real genuine productivity bump and that's the one good news here. It speaks for higher real rates as well, a higher pressured economy to be with us. I'm going to close and then allow for some questions. Four very clear investment takeaways from this. Some of them have become obvious over time. One is the era of low volatility is over. Cross-asset volatility has to be higher. Conversations with clients earlier this year, when the VIX was at 13, was like, well, we live in a crazy world. If insurance is cheap, you might as well buy it, therefore that's obvious. You can have periods of episodic calm, but structurally even my children understand, my teenagers understand that this world is unstable and therefore instability should be reflected in volatility as well. The second one is inflation may be higher but it's inflation volatility that's going to be higher more than anything else. We were worried about demand weakness for 25 years. We're now going to alternate between worries about demand weakness and think about today, what's the data in the US telling us. Is there some underlying weak cracks? At the same time being worried about supply shocks at the same time. You basically get inflation not consistently in one area or the other, but flipping back and forth, and that volatility means correlations do not work the same way they have in the past. The third big one is obviously, as I mentioned, rates. They have to be higher. We've now had a big adjustment in the term premium. Why? Well, inflation is going to be volatile. We don't know what inflation will be a few years out. Well, that has to be factored. Simplistically, the term premium should reflect that uncertainty, especially when you have a bias towards higher rather than lower, and the real rates should be higher because we do expect to get some type of growth boost coming out of all that public money flowing into manufacturing infrastructure and defence. Finally, just because I know time's ticking away. Who are the winners and losers? Well, clearly the big winners of the last era, of those 30, 40 years cannot be the same type of winners going forward. If you think about who really benefited from ever-growing markets, evermore optimised supply chains, a disproportionate share of income going to capital, low rates, being able to leverage. Well, it's been particularly large cap, DM large cap, particularly US large cap that have had that outperformance for very long, and structurally, I'm not saying they will underperform, but that outperformance gap has to narrow. The winners have to give back. That's how I'm going to close, and I know we still have a few times for questions, but those are the key points I wanted to make.

Well, I can vouch for the fact that… I'll just hop up here. Slido is working. I did check because I submitted a question. Please feel free to keep your questions coming in and we're also very happy to take questions from the room now as well because obviously our European friends have gone, so we have it all to ourselves. Thank you for that presentation. The first question I'm going to ask you is of the known political events coming in the next year or so, which do you think has the biggest potential to impact political risk and or markets if they're not the same thing?

If you apply this framework, what you're looking for is where do you get disturbances in the equilibrium? Now we have a lot of disturbances, but where do you get further disturbances. Some are visible. That's the peace process in Ukraine. I know it may not seem like that, given the devastating nature of what's happening there still, but there actually is already the beginnings of some type of diplomatic process, the very, very beginnings. That bears a lot of risks because these processes, like wars, have room for errors and missteps. Particularly if you think about EU and China relations, that's a big one. The other one is the electoral calendar. We know that elections are milestones, they provide opportunities for popular discontent, for regime change, for policy shifts, and there we have plenty on the horizon. We have Egypt in a month. Egypt usually would not matter, but given the circumstances, I'm not concerned about the outcome of the election, I'm concerned about the process of the election, that under certain possibilities, you could basically have a very unstable regime or some turbulence. You have the election in Taiwan, where, again, that's really critical to the global economy. Everybody in the room understands why that's so. The election itself can deliver again an upset to the status quo, and right now, any upset to the status quo bears downside risk. Then, of course, you have the US elections and others, which have very monumental policy implications. Those are the obvious ones. Then the less obvious ones are the crises that you cannot foresee. Sometimes they emerge from what we've seen in the Middle East recently, but clearly, the potential for more of that to happen is higher today than a month ago, and certainly much higher today than two years ago.

Thank you. Okay, so I've got a couple a couple of different questions coming here. The first one actually relates to your point on stocks; your very last point in fact. If the winners have to give back, how do you feel about the outperformance of the seven stocks, or The Magnificent Seven I believe they're known as, driving US equities continuing? Slightly sector-specific. It's an interesting question.

I'll answer it this way. Historically, there are few precedents for justifying that sustained outperformance of the Magnificent Seven. It's rare basically, to have those valuation justifications based on a shift in the technological frontier. We are at an all-time high in terms of concentration of the equity index. These levels of concentration never last very long historically, so you really have to imagine that the technology is so profoundly different, that you basically have a revolution taking place, and there's arguments to say that that's the case. Otherwise, historically, I would say the relative favourables that have spoken for growth have weakened. All the arguments that were in place for that growth value outperformance for at least 15 years, if not more, they have weakened. That does not mean the outperformance flips, but it must mean that the gap at a minimum narrows quite considerably.

One quick follow-up question along similar lines is, where do you think the competition around AI plays into the geopolitical landscape that you described?

Well, it's the heart. What do you need for AI? You need enormous computing power. You need a policy framework that allows for clustering of the industry, and you need the human capital base to be able to operate, so it speaks to exactly the points that are similar to decarbonisation. Decarbonisation, by the way, aligns very closely with digitisation and even AI because the highest value of the energy transition is extracted by optimising the analytics around the analytics and the deployment of energy storage, dispersion, replenishment, and so forth. It's the same processes of basically how do I gain economic primacy in this area? I gain it by having policy settings that draws a lot of investment, gives me the people and the R&D that I need at the expense of the other. That's what's different from the last 30, 40 years, which is that, well, we have one global R&D network, one globalised economy where the diffusion of technology benefits everybody. That's not the case anymore. Now it's a zero sum where it's at the expense of the other, and by the way, the one thing that happens is you build up excess capacity. We have too many semiconductor producers in the world now. Who's going to pay for that? Now, on the one hand, some shareholders will get some excess returns because this is subsidised. Who's subsidising it? Well, the taxpayer and the consumer. That consumer surplus, so to speak, shifts into a producer surplus. That's great for some shareholders. Ultimately, somebody still has to pay the bill, and that's where AI plays in and exacerbates all of that.

Interesting. Okay, slightly narrower question now on the current conflict. I'm trying to think when it was, I want to say two or three weeks ago, you kindly joined Tim Graf on our Street Signals podcast, which for those of you that are not subscribed, small advertising break, you might have seen the cards up in the lobby there. In that, you talked a little bit about escalation risk. The question basically relates to that. What do you think the chances are of the conflict becoming much broader, and in particular, involving Iran?

The Middle East War broke out. The simplistic view of markets was, oh my God, what happens to oil? I think that's a very narrow view of how conflicts have the potential to spill out and transmit. Right now, obviously, the conflict is contained. The US stepped in, basically said if it escalates, this will be a broad regional war with a superpower involvement, and that has done the trick of containing it. I'm fairly sanguine on that front that, yes, this will remain a localised conflict. I'm not certain, but I'm sanguine. That's just one track of how this can escalate. The other tracks seem to be very much ignored by the rest of the market, which means you could have regime turmoil in key states. I mentioned Egypt earlier. Imagine Jordan's regime collapses tomorrow. There's an Islamist takeover, hostilities on the Eastern Front. There's another pathway to domino to escalation, and that's just one. The third one is really, if the war in the Middle East is now a proxy war, which means that proxy wars pop up, have domino effects everywhere else in the world, and so you should actually have risk premium widening in other parts of the world where you are on the edge or precipice of geopolitical risk, and we see none of that by the way. If you look at the past month, only one asset has really responded to geopolitics, and that's gold. Real rates are high; that's not usually a good environment for gold. Gold was declining for the last six months by roughly ten per cent and then it shot up the past month. So clearly markets are worried, but if you have inflows into gold in a synchronous cycle, you should have risk premium widening in specific areas that are exposed and we see none of that. Nowhere. I've been hunting for risk premium. You don't see it on certainly MFX. You don't see it in emerging market debt. You don't see it in developed market debt either. Think about eurozone cohesion. I don't see any spread widening. There's been spread compression. Again, the FX side is very similar. That does not add up to me because, clearly, if it's a proxy war and China's broadcasting this as a weakening of the US, hoping that this drains diplomatic, military physical capital, you're clearly creating different incentives and other theatres of conflict to engage in a higher risk activity, and that should be priced somehow, and it's not.

Curiously, and actually, we put this chart up earlier in the day, GeoQuant, who are trying to measure political risk directly, it actually captures the same thing that markets are reflecting for the moment that actually, while some geopolitical risk in the Middle East obviously has gone up a lot, there are many countries actually where it's still falling. Maybe it just hasn't impacted or maybe we haven't had the news yet of the contagion that you're warning of, I guess.

Yes. Well, look, I think it's like with the Hamas attack, a lot of things are not visible until they are, but clearly, the incentive structure has shifted across the world. Particularly, I'm worried about Europe, I think Europe is facing a very difficult 2024. It's all basically downside risks across the board geopolitically and then there's pockets of EM, selective pockets that suffer. There's also pockets of EM that are benefiting from a positive in terms of trade shock, from a positive risk premium, compression, so to speak.

Perfect. Well, unfortunately, we're now out of time, but I think to Elliot's very first question, if you want to try and think about geopolitical risk in a systematic way, I think he's given you a nice framework for thinking about it. Thanks very much.