It is and others have said this, but it is really good to be doing this on stage. It is a much, much nicer environment than my living room where I've had to do the last couple of research conferences. Actually, I want to rewind a couple of years to one of those conferences that I did in my living room where I took part in a panel discussion, just following the worst volatility we saw during COVID. The discussion was around whether that volatility would persist, what it meant for asset allocators, particularly would strategies like the old reliable 60/40 equity bond portfolio construction stand the test of time in this new environment. Underpinning that, would the correlations of assets which for about two decades, you'd had a fairly persistent negative equity bond correlation persist really since the early 2000s, would that change and was there a new regime on the horizon given what we were seeing in markets. Well, that's where I'll begin because this is a long-term rolling correlation of equity and bond returns and if that is not a regime change, or at least the start of one, I'm not certain what is. You see for the previous 20, 25 years, US equities, US treasuries on a rolling two-year basis had persistently negative correlation of returns. This year, that of course has completely changed and we now see correlations at a 25-year high. The last time they were this high, my career was just getting started and I had a full head of hair. Now though, things are very, very different and then we want to think about the future. Will this persist? Actually to try and answer that question that was posed a couple of years ago. I love history. If you know me, you know I read a lot, I mostly read history, and so I wanted to use history to help frame my thinking, but I had a little bit of help. Actually one of our presenters earlier today who was sitting in the front row, Mark Kritzman, had written a paper and he talked a lot about the concept of statistical relevance to make better predictions about the history. Particularly, Mark with Megan Czasonis and Dave Turkington wrote a paper that was referenced earlier today called, handily enough, The Stock Bond Correlation. In that, they used these statistical methods, particularly the Mahalanobis distance, to pinpoint the most relevant examples that you can compare to current markets in making predictions about, in this case, where the stock bond correlation would go. Those variables that were cited in the paper are all pretty intuitive, things like economic growth, inflation, the relative yields of equities and bonds, the relative volatility of yields in equities and bonds. So I took that paper and I did a lot of thinking about it. It took about a year to actually put all my thoughts together on this. But the next table shows you using economic data up until very recently, the ten most relevant years in the 20th century going back to 1928 using annual data, that compared to the current environment. I want to start with the historic descriptors on the right. I think they're really interesting. Every single one of the relevant years is associated with a commodity supply shock or a war which is usually a commodity supply shock or a period of extreme fiscal expansion. Things like the new deal or financing the Vietnam War. All of these things are products of the post-COVID environment and era. But the rate environments are different. Mark mentioned in his talk earlier today that positive correlations of equities and bonds tends to persist when rates are high and actually, of these ten years, only three or four of them were high-rate environments. I've boxed three of them that you can see here, the late 1970s oil shock and the Fed's response to it. That alone with 1969 were really the only years where rates in this more targeted sample of observations were high. I've particularly focused on the late '70s, early '80s because then as now, you had a Federal Reserve that was actively fighting inflation and becoming ever more hawkish in doing so, and in those years, for the trailing five years and using again a statistical technique that Mark, Meg and Dave introduced in that paper of single period correlations, in the following years, the equity bond correlation remained positive and persisted in positive territory. I think we're here for a while. To finish on a more negative and if you're a little bit squeamish, don't look at the column labelled Shiller PE, but to finish on a more negative note, in those years, cyclically adjusted PE ratios were significantly lower than what we currently see in US equity markets. So I'm afraid this is going against my nature as an American with my inherent optimism, but I'm afraid there's a little bit more pain to come. The reason I think that is because this fight against inflation that I think has brought us here, the inflation itself and then the fight against it, doesn't really look as though it's going to be abating any time soon. We heard, of course, from Alberto Cavello earlier today who talked about how headline inflation probably was going to roll over thanks to base effects, thanks to the impact of energy prices as well. But as you see on the left, when you strip away the effects of transport fuel prices, annual inflation remains very, very high. Month-on-month inflation is still in somewhat of a higher regime and one that I don't think the Fed can respond to in any way differently than they have so far. Then when you look at more core good sectors, and again, Alberto highlighted these, but I'll just reiterate. You don't really see that much inflation in clothing. Okay, that's one sector. But then sectors such as household equipment and furnishings, the sort of inflation related to the housing market. This shows no real signs of slowing down despite already tighter policy and a housing market in the US that is already showing signs of weakening. You don't really see these inflation rates coming lower. In fact, health and beauty products, as was again highlighted this morning, inflation there is accelerating. We know as well from the official data that the core service sectors within US CPI, inflation is broadening out and it is also very, very high. We may well roll over at some point, but for the next six-to-12 months, it doesn't strike me that the long hoped for pivot from the Fed that we especially were hoping for over the summer and markets started to hope for will be coming any time soon, and so therefore, I don't think too many of the market drivers as a consequence will change. The worry now, of course, is that recession risks are rising. This chart shows a GDP weighted measure of manufacturing PMI indices for the 25 largest economies in the world as well as a breadth measure, to give you a sense of whether more economies are seeing their industrial sector expand versus contract. We are right on the knife edge in both metrics and in fact actually, using the Eurozone flash estimates from last week I can tell you these are now in contraction territory. We are really precipitously falling at rates that tend to coincide with significant global slowdowns in activity and the breadth measure, as I say, you're seeing now more and more economies where the industrial sector is in contraction territory relative to expansion. So you have these risks to take on board. The kind of stagflationary dynamic we've been worrying about. Then past market environments, it's okay, China will bail us out, Chinese growth, Chinese investment, spending, it's always there to be had, to boost global growth, to support commodity prices and to keep global growth figures looking healthy. This is a chart I've stolen from my colleague, Ben Luk in Hong Kong, who came up with a very clever way of looking at economic momentum in China, looking at the momentum of nine different indicators of Chinese activity and overlaying it on to a measure of monetary conditions in China. Which to be fair, conditions are starting to ease. The government is taking some steps to, well, ease interest rates to a small degree, the currency is a little bit weaker. They're supporting the property market. Again, to a small degree. But economic momentum remains quite sluggish and of course, we know why, zero COVID is having a continued dampening effect on domestic demand and the policy prescriptions offered so far are not the massive easing that we saw in the years following the global financial crisis. They've been very, very modest and as a consequence, momentum in the Chinese economy which as I say has long been the saviour in a lot of ways, is not there. We're starting to notice this. Our MKT media stats indicators that look at the intensity of coverage of various topics show that the incidence of recession in articles scraped from financial market media has gone up to, it mentioning recession in about, I think it's about 20 per cent of articles now, maybe a little bit higher than that in fact, about 30 per cent. So these risks are being more and more acknowledged in the financial market media, but actually one topic still dominates and still really I think will influence policymaker thinking and that is inflation, where if you think recession coverage has risen, well, inflation coverage has never gone away. In the financial market media, about 50 per cent of the articles that we scan using our media stats indicators deal with inflation. So this is still a focus for policymakers. Again, using our media stats indicators, we can look at the, not the tone of what the central banks themselves are saying, but the tone of the coverage, the narrative. We had Robert Shiller speak at a conference either last year or the year before, talking about how narratives drive markets, and this is the logic behind looking at indicators such as these measures, the tone of coverage of a central bank, whether it's becoming more hawkish or more dovish. In fact, Travis Whitmore and I introduced these indicators at a Fed governor level, but here what I'm showing is the aggregate for the Federal Reserve relative to an average or an aggregate for all the other developed market central banks that we track. Again, no surprise, the tone of coverage has been extremely hawkish. What's different this time relative to the last time the Fed was hiking rates is the Fed was clearly an outlier back in 2015, 2016. The tone of coverage was far more hawkish for the Fed than other central banks, because they were again, an outlier. Other central banks were hiking rates, but the Fed was the most high profile and other high profile central banks, like the ECB, the BOJ were almost moving in the other direction. Well, now they're all doing the same thing or at least the tone of coverage is the same. This persistent fight against inflation, this persistent hawkish coverage has not really abated at any point the last six months. Where are we then in this fight? Have conditions tightened enough? Well, in a way, we're only maybe halfway there. I constructed a monetary conditions index for the US in particular, but I think other countries look very similar just looking at an aggregated index of changes in real short-term interest rates and the real effective dollar exchange rate. Look, conditions aren't loose anymore. There's no question. But we're not close to the tight peaks that we were at the turn of the century or during the GFC. We're not even back to the levels that we got to in terms of aggregate policy tightening at the end of 2018. So there's probably further work that this index can make and I've purposefully overlaid investor cash holdings on to this, because on a lagged basis, cash holdings tend to move with monetary conditions, and that makes sense, right? Interest rates become tighter, markets become more disrupted, investors move to cash. Well, they've moved to cash a little bit and I'll come back to this point in a moment, but the movement thus far has been pretty modest and can potentially go higher if conditions continue to tighten. In the meantime, we've also not really seen a spike in tail risk and here again, I'm going to refer back to work that Mark and his team have done in collaboration with us over the years looking at pricing tail risk by using again, quantitative methods to capture the turbulence in markets or the unusualness of price behaviour and the unusualness of correlations, and the systemic risk within global equity markets. What we've combined here into a percentile global tail risk score, to give you a sense of what is the probability of left-tail events or big drawdowns in asset markets. What we've seen so far this year is of course, weakness in financial markets, but it's not really been accompanied by big spikes in tail risk yet. In fact, systemic risk, that component of this two-factor index is really only now just beginning to rise, so we've already had drawdowns and we've had that without a commensurate rise in our pricing or in our measure of global tail risk in equity markets. Similarly, we've had it without mass capitulation and here again, I'm referring to another presentation today. Marija Veitmane on my team had this chart and we've used it regularly in our presentations of the aggregate allocations to stocks, to bonds, to cash across the investor portfolios we track on our behavioural metrics. Here again, on the cash side of things, investors have moved a little bit into cash, but it's really just gone back to the long run average. They've moved away from equities to a small degree, but really only just back to average. Does this look fearful to you? No, it kind of looks normal. They've just, for lack of a better description, gone back to benchmark. I fear with all of these other factors I've mentioned, the persistence of inflation, the willingness and the need for central banks and the desire for them to fight that and to maybe not repeat the mistakes that were made in the late '70s, early '80s. It doesn't strike me that these allocations will be getting more risk seeking any time soon. That's not to say investors don't have defensive positions, they do. So the big chart here on the left looks at global equity markets cut at a sector level. The orange bar is what I really want you to focus on here. These are holdings relative to benchmark, if benchmark is the Y axis on this chart. There are defensive positions. Investors are underweight industrials, they're underweight consumer discretionary, there's an underweight to materials. There's an overweight in utilities. At a sector level, there are some defensive views out there, but there's one big growth/risk over weight that worries me, particularly in a rising rate environment, particularly where the multiple assigned to that sector is still pretty elevated and that's tech. Especially US tech. There's one big over weight looking at the smaller regional allocations to global equities. There's a big underweight in EM, so again, somewhat defensive, but the big over weight is in the US and the big over weight at a sector level is in tech. That to me strikes me as quite vulnerable. Marija joked about not wanting to own any equities or only wanting to own them on a relative basis. This to me speaks to that. That's the vulnerability in investor positions still. In currencies, it is a little different. You can see here, these are again holdings of the major currencies and major blocks of currencies. Again, relative to a benchmark that in this case, I've flipped the axis, it's the X axis that you want to look at for the benchmark in this market. There is a big overweight in dollars out there, to the expense of pretty much everything else. So there's a defensiveness already expressed in currency markets, but I would just point out when you look at past crises, say the global financial crisis, the Eurozone fiscal crisis, the dollar overweight was actually quite a bit larger than what we currently see. This year, if nothing else, has taught us it's a momentum market and positioning risk, maybe it pays to go with positioning risk as opposed to fight it. That's certainly, that contrarian way we often look at positioning has not really worked out for the dollar so far as it continues to make new highs. I don't think it's going to change again, any time soon. Now the dollar is expensive. The chart on the left shows our PriceStats derived PPP based valuation framework for currencies against the dollar and it's expensive against all of them, against the renminbi, it's about ten per cent rich, against euro and sterling, maybe 20, 25 per cent, maybe a little bit more against sterling now. Certainly against the yen. But this is based on bilateral baskets of identical goods where actually terms of trade I think can maybe narrow some of these gaps and actually it was interesting to see Alberto's presentation earlier today looking at our new measure of dollar valuation, because the valuation gap is not quite as large when you look at it just on a basket basis. I think that circle is kind of squared by how much terms of trade have really just improved for the US relative to almost everywhere else over the last 18 months or so. You can see on the right chart, just looking at a simple ratio of export prices relative to import prices, the US terms of trade situation has improved by about ten per cent. Japan, it's deteriorated by about 30 per cent. So right there, without even considering currency effects, you have some sense of just why these valuation gaps are allowed to persist. The US simply has had a much larger terms of trade boost than other economies, and so I'm not prepared to fight that flow. Particularly given foreign capital seems to keep flowing into the US. The chart on the left I think speaks actually, and I didn't know this until today, but it speaks quite nicely to a point Pippa Malmgren made about foreign capital coming into the US, fuelling innovation. We certainly see that on our cross-border flows for equities and US fixed income, where on a rolling six-month basis, I think you have to go back a couple of years to see net outflows out of the US back to foreign markets. So inflows are still very strong and the cost of hedging those inflows into the US is going up. Looking at the chart on the right, this is the yield spread between the US and Japan in ten years and US and Germany in ten years adjusted for hedging costs. That hedging cost was a benefit, you got paid to hedge dollar risk in previous years but of course, that's no longer the case. It's a negative carry proposition and yet again, I'll talk about another presentation, one you just heard on hedge ratios. Dollar hedge ratios are actually quite high interestingly enough now relative to history and as Alex and Robin Greenwood explained, some of that is structural. Hedged mandates are more prevalent now than they were say 20 years ago, but the last time the dollar, the DXY in this case, was this high, equity hedge ratios were basically zero looking at the dark blue line. Fixed income hedge ratios were 50 per cent. Equity hedge ratios now are about 25 per cent and fixed income hedge ratios from foreigners in US assets are pretty close to 100 per cent. I think it's about 90 per cent. So we're in a very different environment where the hedging cost for US assets has gone up and despite the dollar being a little bit expensive, it's actually quite expensive to hedge dollar risk the way that investors have. So that's a potential source of future flow support or at least maybe less dollar selling and it keeps me pretty constructive on the dollar for the rest of this year. But there is some good news. I said I have to be optimistic to some degree and I think you probably have to wait for this good news a little bit, but going back to our comparative of the 1970s, the dollar is also very negatively correlated with volatility and has been for years. The good news is the current levels of realised volatility in equity markets in particular are very extended relative to the extremes we saw during that most turbulent of decades, when we had a series of oil shocks, we had expansionary fiscal policy, and then finally towards the end of the decade, the early '80s, we had a central bank jacking up rates to actually combat that. Equity volatility then actually was very rarely higher than what we see now and volatility can persist for long periods of time, but it's not a trending series, it's a mean reverting series. There will come a point where we either get used to all of these known unknowns or unknown unknowns and markets become a little less volatile or we start to enter more positive territory. When that happens, then I can see the dollar's time coming to an end. We may have to wait a little bit for that, but I think there is a note of optimism in that currency volatility as well is relatively extended compared to that period. It's a little bit of an apples, oranges comparison given currencies were a bit more managed then, but nevertheless I think the point stands about risk volatility. It is very elevated right now and as day follows night, as dawn follows the darkness, you do tend to see volatility trend lower and then I think you can start to see the dollar weakening, but not until then. I think that's going to require probably a Fed pivot on rates. But let's assume at some point, at some point, that does happen, where do you want to look? Well, I would want to look at economies outside of the US where I feel they could best sustain the tightness of policy, where growth expectations have not deteriorated so much in response to the policy tightening that everyone other than maybe China has offered the world. Particularly, looking at where projected policy rates are already in real territory and I've circled those economies on the right. Those economies that are further towards the top of the chart are where growth expectations have not deteriorated so much. I mean, everyone is expected to see slower than trend growth over the coming couple of years, but those currencies or those countries that I've circled still stand out as expected to perform relatively well but despite much tighter conditions. The US is in there but as I've explained, ad nauseam probably at this point. The dollar is expensive, it's crowded. But those commodity countries like Canada, Norway, New Zealand, they might offer some interest, particularly if global demand starts to come back after we get through what looks like will be a pretty protracted slowdown. Maybe a note of positivity that we can finish on in developed markets and in emerging markets, actually again unintentionally, Carlin Doyle did a lot of my work for me earlier today in talking about the appeal of EM carry strategies. Investors hate EM currencies at the moment and you can see on the left, the aggregate positioning in EM effects is on an inverted scale, so it's very, very low and that makes sense. Forward pricing of US rates is very high. When we get that Fed pivot, when you start to see US forward rates maybe start to roll over, that's the time I think you start to think about these riskier currencies and there's a whole basket of them that offer value. Looking at the left-hand side of the right-hand scatter plot, just looking at current real effective rates relative to long run moving averages, you have in particular in the top left, those currencies in Latin America, Hungary that are very cheap right. All of them, particularly as Carlin highlighted earlier, all of that basket also offers you carry. Carry relative to the underlying volatility and I'm not just talking about current volatility, actually I've scaled this ratio for 75th percentile all time volatility for these currencies, so a very elevated level of volatility. As Carlin pointed out, volatility in EM is actually quite low right now when you look at it on a realised basis, but over history, I've used a very high scaling factor to give you perhaps the most attractive way of looking at these currencies and they are out there. These are currencies of countries that have already taken their monetary tightening pain in most cases. Brazil most notably. You're already seeing inflation turn lower. You're seeing the central bank likely towards the end of its hiking cycle and when the Fed is ready to finish its hiking cycle, this is where I think you want to look. So just to conclude, for the rest of this year, I don't think it's going to be too different from what we've seen previously. I suspect the positive bond equity correlation environment where there has been really no place to hide this year other than perhaps cash is likely to persist. I have the weight of history and good historic examples to guide me to that conclusion. Worryingly, those historic examples were periods where equity markets were much cheaper, so if there's positive correlation and I think rates are to be going higher than they are currently, I suspect that means equities are to turn lower and I think that supports the dollar certainly through the end of this year. There's no reason to expect any differently I don't think based upon what we're hearing from the Fed, based upon what we see in the captured tone of media sentiment around the Fed and other central banks. I don't think there's a change coming any time soon and that's troubling because there, as I mentioned before, there's very little capitulation in equity market and cash market positions and at the same time, pricing of tail risk remains around average. I think there is still pressure to come and the dollar is still supported as a consequence of that, but I think we have to wait for those opportunities I highlighted at the end. I don't think it's a 2022 proposition. Maybe a mid-2023 proposition. We have to wait for those opportunities. What I don't want you to have to wait for any longer is your post conference drink, so I shall leave it there. Any time for questions, I'm happy to take them, but otherwise we can talk afterwards as well.

Great talk, Tim, thank you. We do have some time for questions. The drinks will still be there afterwards, don't worry! We have a closing talk after this as well. One of the things I should have mentioned, I got carried away with my Jason Statham. Tim, some of you will know, was head of options strategy at a European bank before he came to State Street many, many years ago. What do you think of vol right now? Are you surprised that maybe both equity and FX vol is not high given everything else that's going on?

FX vol I'm surprised is actually as high as it is because actually realised vol has come off quite a bit, and I think we are starting to understand a little bit the trajectory of policy now and we're getting closer, I don't think we're there yet as I've taken great pains I hope to show, we're not there to terminal rates yet. But I think markets are understanding there are terminal rates and we're not going to keep adjusting them higher and higher. I think we're getting to that point and that's where vol starts to turn and realised vol I think already shows that to a degree. Maybe yen cross is accepted. Equity vol I am surprised at how high it's been. I think that's the optimistic case for the future. It is priced very, very aggressively and measures like volatility and volatility have already calmed down quite a lot and that typically leads vol cycles. As I say, mean reversion in those metrics can take time, but I am surprised equity vol has persisted at the high level it has.

Tim and I sit next to each other so we could literally natter on all day. Can I see if there's any questions from the audience? Mr Kirby.

Tim, you reminded us of your Americanness, that because you're an American, I can ask you about the UK.

I'm also British!

The pound made historic lows, it's never been lower in history, in recorded history or any kind of history. Can I ask you, what do you think is driving the UK? What do you think of the policy, mixed, fiscal, monetary? What do you think of the outlook for the UK over the next six-to-nine months?

I didn't mention it. It was on there though, but even with the pricing we've had of high or short rates, you still have the UK in negative real rate territory, say one year out, which indicates to me, and growth expectations by the way are the lowest of any G10 economy, I think I'm correct in saying that, even relative to Japan. So I think it's very difficult and the policy mix that was introduced over the last week is taking an inflationary fire and pouring gasoline on it I think, or at least it makes it all the more difficult to justify the valuation of sterling where it is because all you're doing is just increasing an already desperate and dire external balance situation and potentially making it a lot worse. It's one we're not that optimistic on. We've had views, as Michael mentioned earlier today, we've been negative sterling all year and it's coming good and in fact, I think we're resetting those views as a consequence because it doesn't strike me that the Bank of England will potentially do enough because there's so much concern about the housing market and raising rates too quickly, we're all, well, personally speaking, on mortgages that are going to reset in the next year or two to much, much higher rates and that's going to put a huge squeeze on incomes. In addition to the squeeze we already have from energy prices. The demand environment looks pretty terrible, the currency as a consequence I think is the release valve for that, it's the liquid market. You've seen how disruptive and illiquid short rate markets have become in the last week, at least sterling gives you some degree of expressing that negativity and I think that's the release valve sadly.

I think one thing to throw in as well that we haven't seen yet which means it might be to come is that according to our indicators, investors are still buying gilts. Now that data is as of, when will that be? Last Thursday?

Yes.

We haven't seen, if that's going to be a move where, as you say, investors think that the policy mix is not credible, that's money that's still to leave. Any other questions? We've got time for one more. Okay, last one. One more, we can do. Yen.

Yen.

Is intervention effective without the BOJ moving?

It's less effective I would say, but I think at the very least what they've done and we like yen I think for the medium term even, it's cheap, that valuation gap is closed somewhat by the deterioration in terms of trade, but it's still cheap. Now you have the BOJ/MOF, I think removing the right-hand side of the distribution a little bit, if not drawing a line in the sand, at least smoothing the path higher and making it less likely for disorderly moves for yen weakness. So no, given investors are underweight the yen, there's the value appeal and you now have policy action I think now credibly potentially moving against it. No, I quite like the yen, especially if this risk environment holds given its traditional repatriation status if you do get markets deteriorating from here.

Brilliant. Well, Tim, thank you very much.

Thank you.