Speaker 1: John. You know how lots of people say they're passionate
Speaker 1: about stuff, and we really disapprove of that. And I'm
Speaker 1: always saying to people, you know, stop being passionate about stuff.
Speaker 1: Just be good at stuff. You know, no one cares
Speaker 1: about your passion, They care about the result. Am I wrong? No? No,
Speaker 1: I'm not wrong anyway. So yesterday we did a Twitter
Speaker 1: spaces you know me because we're kind of young and
Speaker 1: modern and down with the kids, right, and I suddenly
Speaker 1: realized that I am passionate about pensions. I mean, who hasn't.
Speaker 1: Let's be feeling who among us has not been passionate
Speaker 1: about pensions at one point? And I'll wait, everyone, everyone,
Speaker 1: But that's because they don't know how fascinating they can
Speaker 1: be and how exciting it is to have actually done
Speaker 1: some proper work on this, because you know, you know research,
Speaker 1: sometimes we do it, sometimes we don't. Having done some
Speaker 1: actual research into how that the UK pension system works
Speaker 1: and how it works relative to other pension systems around
Speaker 1: the world, and we find that niceally, relatively speaking, it's
Speaker 1: pretty good. And we talked about this rating system, the
Speaker 1: most of pensions rating system that the looks at pension
Speaker 1: systems around the world in terms of all their different
Speaker 1: parts as opposed to just the state pension. And we
Speaker 1: found that in terms of global ratings, the UK is
Speaker 1: really high up there, better by the way than Switzerland
Speaker 1: or Germany. That makes me feel kind of excited, as
Speaker 1: it should. I mean, I think I said it was
Speaker 1: a really good chart. Actually it was. It was very interesting,
Speaker 1: and I think everyone should go out and listen to.
Speaker 1: Someone's going to put the link in the show notes. Um,
Speaker 1: but just as a little added incentive, we talked about
Speaker 1: house prices the last thing we did one of these
Speaker 1: Twitter spaces and it ended up being one of the
Speaker 1: most listened to Twitter spaces that Bloomberg's haven't done. So
Speaker 1: what we'd really love is if you look could go
Speaker 1: out right now and listen to the pensions one and
Speaker 1: help us to beat a personal record. John and I
Speaker 1: are target driven. We talk about our pbs all the time,
Speaker 1: don't we. John KPI is coming out earliers absolutely, but listen,
Speaker 1: let's let's give them an incentive here. What was the
Speaker 1: most interesting thing for you that came out of that
Speaker 1: chat yesterday about pensions? What made you think, God, my
Speaker 1: retimement is going to be great. Apart from me pointing
Speaker 1: out that you haven't got a defined pension, defined benefit
Speaker 1: pension and you don't work in the public sector, which
Speaker 1: is a bit of a downer. But what was the
Speaker 1: thing that really made you feel that, actually this is
Speaker 1: not so bad. Well, I think the these thing is
Speaker 1: that it is that idea that we've finally again. It's
Speaker 1: not so much more own pension. It's the sense that
Speaker 1: Britain was actually doing something right and right and and
Speaker 1: in quite a significant way. It's actually the system is
Speaker 1: a lot better, and it's also kind of backed by
Speaker 1: actual money as opposed to a promise to pay at
Speaker 1: some point in the future. But the other thing actually
Speaker 1: that I thought was was interesting but also agent was
Speaker 1: we were on with Stuart True who's Blue Miss Pension columnists,
Speaker 1: and he pointed out that there was actually a really
Speaker 1: good deal on buying then missing national insurance years. At
Speaker 1: the moment you made thirty five of those, right in
Speaker 1: thirty five of those to get a full state pension.
Speaker 1: And if you haven't got those, which you might not have,
Speaker 1: you taken time off, you know, for parenting, caring or
Speaker 1: just you know, hanging around, going to yoga, retreats whatever.
Speaker 1: You may not have those full thirty five years, and
Speaker 1: there's a deal on a sale on at the pension's
Speaker 1: department right where you can you can buy them back. Yeah.
Speaker 1: It's really good value. You get the money back in
Speaker 1: three years. Yeah. No, it was really impressive. So so yeah,
Speaker 1: actually you really should license you this, you know, even
Speaker 1: if it is just for that, but the rest of
Speaker 1: it is also excellent. Um. But you know, you can
Speaker 1: really make a defency your personal finances in the long
Speaker 1: term if you haven't got those contributions and you make
Speaker 1: them before April. Yeah. And you know what I was
Speaker 1: thinking afterwards, well five minutes ago, actually that the auto
Speaker 1: enrollment system, the way that the auto enrollment system that
Speaker 1: we have in the UK is by the way you
Speaker 1: getting money at fifty five. You don't get that anywhere else. Um.
Speaker 1: The way that interplace with the state pension system, which
Speaker 1: is there is back up, etcetera. This interming angling of
Speaker 1: private and state financing that has worked so brilliantly to
Speaker 1: fully rescue the UK's pension system and make it one
Speaker 1: of the best and most resilient in the world. I'm
Speaker 1: thinking NHS, Yeah, I think that's a good idea controversial,
Speaker 1: absolutely hate mail to the usual address. Please right, everyone,
Speaker 1: listen to that Twitter spaces. It's really interesting. There's a
Speaker 1: lot to say about pensions, and I know you think
Speaker 1: it's boring, and I know it's one of those things
Speaker 1: you just want to put out of your head, you know.
Speaker 1: Please God, let you never have to be old enough
Speaker 1: to to retire and take a pension. But this is
Speaker 1: going to happen. You need to know about it. And
Speaker 1: John and I are passionate about pensions and that comes
Speaker 1: through in the Twitter spaces. Go listen, help us reach
Speaker 1: our targets because that matters to us as well. Thank
Speaker 1: you very much, Sean Love reach out to you as usual.
Speaker 1: Passionate pensions about pensions. Let's make that on a news
Speaker 1: strap line. Welcome to Marion Talks Money, the podcast in
Speaker 1: which people who know the markets explain the markets. I'm
Speaker 1: there in Sumset Web this week. Our guest is my
Speaker 1: old friend and ex colleague, James Ferguson, founder of the
Speaker 1: Macro Strategy Partnership. He's got over twenty five years of
Speaker 1: experience as a stockbroker, sector analyst and as a Matt
Speaker 1: Grows strategist. James and I well, we kind of started
Speaker 1: our careers together as the stockbrokers over in Japan, so
Speaker 1: we've known each other a long time. We've had a
Speaker 1: lot of conversations in those years. James, Hello, thank you
Speaker 1: for joining us. Now listen, James. One of the reasons
Speaker 1: I always want to have you on my podcast because
Speaker 1: you tend to look at things a slightly different way
Speaker 1: to other people. They'll be a little bit contrarian, well,
Speaker 1: quite a lot of contrarian, and very often you turn
Speaker 1: out to be absolutely right, and we like that. So
Speaker 1: this year, I'm looking at a PC. Recently, you are
Speaker 1: expecting this to be the year not of high inflation,
Speaker 1: not even maybe of inflation, but possibly the beginnings of deflation.
Speaker 1: Don't hear that? Often in the old days, deflation was
Speaker 1: to find as a contraction in the nominal money supply. Now,
Speaker 1: on that basis, the U S money supply has been
Speaker 1: falling nominally, so not a justif inflation just the headline
Speaker 1: big has been falling since February of last year. So actually,
Speaker 1: from that point of view, we've we've actually been in
Speaker 1: deflation since February. That The trouble is that we have
Speaker 1: what Milton Freatment called long and variable lacks, and so
Speaker 1: I think it's going to be this year where the
Speaker 1: lags um play out and we end up with something
Speaker 1: that looks, at least on the surface quite deflation route. Yeah, okay, well,
Speaker 1: let's let's just define deflation for the purposes of this
Speaker 1: podcast and this audience is being a general fall in
Speaker 1: the price level as measured by a CPI. Can we
Speaker 1: do that rather than a contraction in nominal money supply.
Speaker 1: That's why we didn't have deflation last year, or even
Speaker 1: though that's the textbook definition, but we will have it
Speaker 1: this year, I think. Okay, So what's driving it purely
Speaker 1: this contraction and money supply? The sort of absolutely sort
Speaker 1: of first mover is the base effects. And now you
Speaker 1: may remember people talking about base effects when we had
Speaker 1: the inflation. The the authorities when the inflation started to
Speaker 1: crop up in sort of early one, talked about how
Speaker 1: it was still transitory and all that we were seeing
Speaker 1: were base effects. I because inflation had dip lower than
Speaker 1: trend in the sort of March April May period of
Speaker 1: twenty Then in the same March April May period of
Speaker 1: twenty one, you were comparing the year on your change
Speaker 1: has been compared with something artificially depressed. So the base
Speaker 1: effect was making the inflation look was their argument. And
Speaker 1: those of us who said no, you've you've got to
Speaker 1: watch money supply was saying, no, it's not just base effect.
Speaker 1: It's going to carry on going, And sure enough it did.
Speaker 1: This time we have exactly the same thing in reverse.
Speaker 1: So we had much stronger than trend prints basically May,
Speaker 1: certainly April May. The peak was June, and then there
Speaker 1: was still above trend but starting to fall back again
Speaker 1: in July and August. So therefore we're likely to see
Speaker 1: base effects. This ti'm working in reverse, so this time
Speaker 1: the base is too high or higher than trend. So
Speaker 1: therefore it's going to make the prints for each of
Speaker 1: those months look on a year on year basis lower
Speaker 1: than the underlying rate of inflation really is. And that
Speaker 1: effect will peek out in June and give us potentially
Speaker 1: as much as a sort of two and a half
Speaker 1: percent lower than the underlying trend figure. So let's assume
Speaker 1: that there are roughly three pre sized components of CPI.
Speaker 1: Um there's goods, which actually a bit smaller than an
Speaker 1: equal size, but goods if you include energy prices, then
Speaker 1: you've got services, which is about the same pretty much
Speaker 1: as wages, and then you've got shelter as the third component,
Speaker 1: which is basically house prices and a little bit of rent.
Speaker 1: If we assume that two thirds eye services slash wages
Speaker 1: and shelter are both running at six percent. But because
Speaker 1: we've finally unwound the supply blockages, then goods inflation can
Speaker 1: come back down to normal, and that, of course, in
Speaker 1: the near term, means an overshoot to below possibly blow zero.
Speaker 1: But let's just say for the lilitrative purposes, if goods
Speaker 1: are one third and their zero and the other two
Speaker 1: components are six percent, then the underlying trend will be
Speaker 1: about four actually four So if the underlying trend is
Speaker 1: four percent, but because these base effects, by June, we
Speaker 1: can have a figure that's two point five percent lower
Speaker 1: than whatever the trend is. You can see that even
Speaker 1: on that assumption, we're basically looking at maybe a figure
Speaker 1: at one point five for June, which will probably lead
Speaker 1: to much dancing in the streets outside the fed um
Speaker 1: and everyone telling us that inflation has been conquered because
Speaker 1: they're missing the base effects. So the number one thing
Speaker 1: is the base effect But what makes that really interesting
Speaker 1: is that also if you look at the huge amount
Speaker 1: of excess money that was printed in the COVID period um,
Speaker 1: that led to a sort of bubble of what even
Speaker 1: the Fed now acknowledges is excess savings, and that was
Speaker 1: what has been driving the nominal bit of nominal GDP inflation.
Speaker 1: But those two things cross over because the money supplies
Speaker 1: being on a sort of very gentle downward trend, and
Speaker 1: not a normal GDP has been on a very sharp
Speaker 1: upward trend. Those two crossover around about April and May.
Speaker 1: So suddenly in June you're gonna have two things. You're
Speaker 1: gonna have a base effect that makes the print of
Speaker 1: artificially low, but you're also gonna lose assuming we don't
Speaker 1: find a sort of sudden surgeon money's like, you're always
Speaker 1: going to lose that that bubble of excess savings. So
Speaker 1: we could suddenly be looking at something that really does
Speaker 1: look quite deflation. Arry By say May June July of
Speaker 1: this year. Okay, but that sounds like good news. It
Speaker 1: sounds like great news. So suddenly we've gone from environment
Speaker 1: when we're definitely worried about inflation, and most figures I
Speaker 1: have one at the moment say that they expect inflation
Speaker 1: to full very sharply, and again I'm talking cp I here.
Speaker 1: Expect inflation to full very sharply. But after that they
Speaker 1: expected to not fall to stay tube center and stay there,
Speaker 1: but to be very volatile. So that's what most people
Speaker 1: are expecting, relatively high, relatively volatile inflation. And if it's
Speaker 1: actually going to fall down to you know, one percent
Speaker 1: to percent and stay there for a bit, this seems
Speaker 1: like great news. Um. Yes and no. So the first
Speaker 1: thing is that, yes, that's great news because it's what
Speaker 1: the FED was trying to do. I they they are
Speaker 1: the cause of the error. Same with the Bank of
Speaker 1: England in this country. They printed the money because according
Speaker 1: to their theory, lots of excess money can't possibly lead
Speaker 1: to inflation. I know. I mean, there isn't anyone else
Speaker 1: on the planet virtually believes that that they believe they're
Speaker 1: in judge Um, and so that's what caused the problem.
Speaker 1: But they don't believe it anymore, do they, James. They
Speaker 1: don't believe it anymore. They should have learned something, but
Speaker 1: don't forget. Cognitive dissonance is likely to be that the
Speaker 1: overriding condition because in order to learn that, they will
Speaker 1: have had to have learned that everything they've learned at
Speaker 1: university was wrong. And that's so there's does they're more
Speaker 1: likely to go there. I told you it's transitory rather
Speaker 1: than throw out every textbook they have and tear up
Speaker 1: there their PhD s and and go back to school
Speaker 1: as it, or demand that someone starts, you know, digging
Speaker 1: out the old monetary or monetarist traps. So, yes, that
Speaker 1: we have a preside problem. We don't know how much
Speaker 1: they believe that they got it wrong and and how
Speaker 1: what they ascribe that too, But but it does we
Speaker 1: all become very pertinent because say we get to the
Speaker 1: summer and say we now have a sort of deflationary
Speaker 1: environment with a bit of a wages overhang, as wages
Speaker 1: always lack at that point, what does the FED do? Now? Historically,
Speaker 1: as soon as you start getting a recession, which you
Speaker 1: usually get because unemployment, which has just been bubbling around
Speaker 1: the bottom, suddenly goes quite sharply upwards, and the FED
Speaker 1: usually cuts rates quite quickly, I mean, you know, within
Speaker 1: a couple of months quickly. So what they've said they're
Speaker 1: going to do, But I don't believe. I think, you know,
Speaker 1: events will overtake this, but their plan at the moment
Speaker 1: is to hike rates to a certain point and then
Speaker 1: hold them. Based on the fact of these spase effects,
Speaker 1: they wouldn't be hiking rates any further, but they seem
Speaker 1: to be still intent on that, and they certainly wouldn't
Speaker 1: be holding them at that high level if the drop
Speaker 1: in inflation comes with a recession, which is actually what
Speaker 1: we're talking about. Okay, tell us more about the recession,
Speaker 1: because I was saying someone the other day, possibly even
Speaker 1: on this podcast, that when people talk about the recession now,
Speaker 1: they refer to the mild recession, and I said, maybe
Speaker 1: mild is this year's transitory. In the US, we've had
Speaker 1: seven recessions post for recessions that you know, we have
Speaker 1: the data force. So there were actually someone who immediately
Speaker 1: after the World War that it's quite hard to get
Speaker 1: the data for. So I'm talking about since like nine fifties,
Speaker 1: since ninety fifty had seven recessions. But the average decline
Speaker 1: in real earnings in the US. This is corporate earnings,
Speaker 1: not not people. The average decline was in real terms.
Speaker 1: So the idea that you can have a can you know,
Speaker 1: you could theoretically have a mild procession, but how would
Speaker 1: you have a mild procession? The point about inflation is
Speaker 1: that the feeders let the cat out of the bag.
Speaker 1: The point about raising rates or type tighter monetary policy
Speaker 1: is in order to destroy demand, to get rid of
Speaker 1: some of that inflation. What is the destruction of the mound? Well,
Speaker 1: it's a recession. It's it's you know, it's just being
Speaker 1: disingenuous to pretend otherwise. When the Fed is tightening policy,
Speaker 1: it is tightening policy to create a recession, because if
Speaker 1: it doesn't create a recession, it will be doing nothing
Speaker 1: to reign back inflation. And how do you create a recession, Well,
Speaker 1: basically you stop money supply growth in the sense that
Speaker 1: you you you know, you constrain bank lending. Now, bank
Speaker 1: lending is still running quite strongly at the moment, but
Speaker 1: obviously money supply growth is already negative. That The thing
Speaker 1: about the recession is we have almost record high corporate
Speaker 1: profit margins. And corporate profit margins obviously rely on two things.
Speaker 1: They're allowing firms being able to sell their goods to
Speaker 1: the household sector, and the household sector is increasingly less
Speaker 1: able to buy their good They were able to buy
Speaker 1: them because they're this big chunk of excess savings from
Speaker 1: the money printing during COVID. But as as I said,
Speaker 1: this is going to evaporate come April May, whereupon households
Speaker 1: are going to need to get the extra money they
Speaker 1: need to buy all these corporate products from their earnings.
Speaker 1: But we know that real earnings are shrinking because although
Speaker 1: wages are rising at record higher rates, they're rising less
Speaker 1: than prices are. So therefore we have a cost of
Speaker 1: living crisis. It's not quite as severe in the US,
Speaker 1: but it's it's driven on by very similar things to
Speaker 1: to our situation. So that by the time the excess
Speaker 1: savings are used up, which as I said, best guesses
Speaker 1: maybe April, then households in general don't have enough financial
Speaker 1: resources to keep buying ever more expensive goods, so they
Speaker 1: start buying less unless it gets discounted, which is squeezing
Speaker 1: corporate profit margins. And then they go back to their
Speaker 1: boss and they say, I need a bigger way of
Speaker 1: pay rise this year. So when the corporates are looking
Speaker 1: at this, they see, oh, so now our costs with
Speaker 1: a leg Our biggest cost is wages and those those
Speaker 1: costs are going up at the same time we're having
Speaker 1: trouble pushing through the higher prices of our goods. So
Speaker 1: it is often observed in the past that the first
Speaker 1: year of inflation is loved. Everyone likes the first year
Speaker 1: of inflation. It's years two, three, and four that get
Speaker 1: really much more difficult. And if you basically have that situation,
Speaker 1: that margin squeeze situation, and that declining corporate revenue situation
Speaker 1: occurring at the same time that you prevent people borrowing. Um,
Speaker 1: I think you've got type mountry policy. That is the
Speaker 1: usual preamble to tour researtion. And this is gonna be
Speaker 1: a horrible shot, which usually not off cent offending, okay,
Speaker 1: real in real time, it's gonna be a horrible shots.
Speaker 1: But if the inflation evaporates, then it will not get
Speaker 1: off in normal terms as well. Where's the bit where
Speaker 1: I get to interrupt you? For God's sake, I saw
Speaker 1: the body language and I just rolled straight over. We
Speaker 1: can see each other, listeners you see in it. It's
Speaker 1: not necessarily a good thing. Now. Corporate margins in the
Speaker 1: US have been expanding for a really long time. Everyone's
Speaker 1: gotten used to the idea that they expand expand expanding,
Speaker 1: record highs, etcetera. And there is a general assumption which
Speaker 1: you can feel that they're sort of stable that this
Speaker 1: contraction I think will be a horrible shock to people. Historically,
Speaker 1: one of the most difficult things for corporates was pricing.
Speaker 1: You know, it's not like you're running a petrol fore
Speaker 1: court where you can you can flick a switch and
Speaker 1: change the price every day. Each delivery you know as
Speaker 1: a different cost to you, and you just change the
Speaker 1: price up on the big board for what people are
Speaker 1: going to have to pay to fill up their cars.
Speaker 1: But most companies can't do that. Seventy percent able products
Speaker 1: are calling at lander fed are what we call sticky prices.
Speaker 1: And sticky prices on average don't change more often than
Speaker 1: about once every twelve months. So if you can have
Speaker 1: a sticky then obviously pricing becomes very difficult. Now, in
Speaker 1: a low, stable, low inflation environment, pricing isn't really a
Speaker 1: big deal. But once you get into more volatile inflationary
Speaker 1: environment pricing, if you get your price too high, you're
Speaker 1: going to pay the price in terms of lower sales.
Speaker 1: If you get your price too lower, you're gonna get
Speaker 1: lower margins very very hard for everybody to get pricing
Speaker 1: right once we have inflation. If margins are going to
Speaker 1: fall by then that tells us presumably that the U
Speaker 1: s ecuary market is still massively of the valued. The
Speaker 1: US equity market at this level probably doesn't have a
Speaker 1: valuation problem, but it does have an earnings problem, and
Speaker 1: that that means that you get the slightly different You
Speaker 1: get certainly different impacts on which bit of the market
Speaker 1: that might do well. For example, if you have a
Speaker 1: bit of an earnings problem, then the sorts of companies
Speaker 1: that might do well might be more value and stables
Speaker 1: than growth and discretion, Whereas if you have a valuation problem,
Speaker 1: then you might actually find that the stuff that does
Speaker 1: well is the opposite. So it's really more about where
Speaker 1: you might expect to see the pain or feel the pain. Yes,
Speaker 1: if the equity market is no longer bad value, that
Speaker 1: assumption is predicated entirely in the fact that it doesn't
Speaker 1: lose any money. If earnings go down, then obviously that
Speaker 1: immediately the extent which they go down makes the market
Speaker 1: look worse value. Again, what can we buy in a
Speaker 1: situation like this, Well, it's a very unfashionable thing to say.
Speaker 1: But the first thing that this makes me think about,
Speaker 1: at least for now, is the fact that the available
Speaker 1: quantity of dollars has been shrinking since February of last year,
Speaker 1: whereas the available quantity of euros or sterling or almost
Speaker 1: all other currencies has been going up. If you think
Speaker 1: that the value of things should go up if the
Speaker 1: supply relatively shrinks, then the first thing to bear in
Speaker 1: mind is that after recent weakness, the dollar might be
Speaker 1: worth the look. And the second thing to think about
Speaker 1: is is um that most of the valuation problems and
Speaker 1: the profile of growth stocks compared to value stocks favors
Speaker 1: the US. So if we're now going to start favoring
Speaker 1: value over growth, and the reason we'd be favoring value
Speaker 1: over growth, by the way, is because of two things. One,
Speaker 1: value stocks tend to be cheaper, which means they tend
Speaker 1: to have a higher earning sield. And the higher earning
Speaker 1: seald is what you require to protect you against inflation.
Speaker 1: We know from the eighties that seventies and eighties that
Speaker 1: the US stock market went into the period with a
Speaker 1: sort of twenty five times be multiple and it came
Speaker 1: out with a six or seven times be multiple. In
Speaker 1: other words, the destruction of value really occurred with the
Speaker 1: destruction of p s. And and so what you we
Speaker 1: we're guessing you need to protect yourself is start with
Speaker 1: a nice, decently low pe and you only find that
Speaker 1: in the value sector. The other thing about the value
Speaker 1: sector is it tends to be boring, which is good
Speaker 1: because you can protect your margins better. And it also
Speaker 1: tends to pay a dividend deal, and dividends are basically
Speaker 1: that that the the thing that that again you enables
Speaker 1: you to hold your head above water during inflation reperiod.
Speaker 1: I know I'm talking about inflation evaporating in the near term,
Speaker 1: but if we get onto it later, I think it
Speaker 1: will probably come roaring back in. Let's hear about that
Speaker 1: right now, because that's the interesting bit. So you are
Speaker 1: fitting fitting into the inflation will be volatile camp really yes,
Speaker 1: And so so the reason why I think it'll be
Speaker 1: volatile is, firstly, we'll we'll get out of the basing
Speaker 1: effects as we go into the second half of this year.
Speaker 1: If we still have a declining broad most supply in
Speaker 1: the US, it won't really make much difference. We'll have
Speaker 1: four percent the underlying four percent inflation rate will be revealed,
Speaker 1: will come back to be revealed because the base effects
Speaker 1: will have dissipated. Um. But if we if we've got
Speaker 1: to sort of four percent inflation rate into the end
Speaker 1: of this year and at the same time money supply
Speaker 1: is still shrinking, most people will fairly reasonably and accurately
Speaker 1: predict that this is sort of a lagged effect and
Speaker 1: that flation within another twelve months, if we haven't got
Speaker 1: any money supply growth will be kind of back at zero.
Speaker 1: And that is absolutely true. I mean, you know, if
Speaker 1: you want to destroy inflation, m then all you're gonna
Speaker 1: do is hold money supply growth as close as you
Speaker 1: can to zero and wait twelve to twenty four months.
Speaker 1: We know this because it was done in the after
Speaker 1: the post Second World War inflation. The problem is that
Speaker 1: the way the reason why this works and the way
Speaker 1: it works is recession. And so what the FED tends
Speaker 1: to do when it realizes it's been successful and it's
Speaker 1: created a recession is it then tends to panic and think, well,
Speaker 1: I've gone too far. Let's let's take my foot off
Speaker 1: the off the throat of the economy. And so the
Speaker 1: normal response once we have a recession, and particularly the
Speaker 1: bit of the recession that the FED will be concentrating
Speaker 1: on is unemployment. But that is almost kind of how
Speaker 1: you would define what a recession is. Um If unemployment
Speaker 1: suddenly starts a surge, and it usually doesn't search until
Speaker 1: the recession starts, and once the recession starts and then
Speaker 1: tends to search quite vertically um that then leads to
Speaker 1: the FED to panic in the opposite direction and start
Speaker 1: slashing rates and presumably in our case, canceling QT at
Speaker 1: the same time. And before you know it, we've got
Speaker 1: money supply growth coming back up again. And it is
Speaker 1: worth bearing in mind that although we tend not to
Speaker 1: be we tend to be very simplistic about inflation, but
Speaker 1: technically inflation is more complicated than people think. And if
Speaker 1: your inflation is coming from overseas. China's reopened this year,
Speaker 1: they're going to start demanding more loyal more copper, more lithium, more,
Speaker 1: more of everything to get their hands on an aal
Speaker 1: tend to push the prices up, but that's not the
Speaker 1: same as inflation. You know, if the US has falling
Speaker 1: money supply, but everything it wants to important gets more expensive,
Speaker 1: that's not inflation. That's what economists called a detrimental shift
Speaker 1: in the terms of trade. This is what happened during
Speaker 1: the Aile crisis, and the correct, well at least the
Speaker 1: textbook correct policy response to hire our costs from overseas
Speaker 1: is not to raise interest rates. That's the correct response
Speaker 1: to getting rid of inflation in your own economy caused
Speaker 1: by you growing the money supply. If the inflation has
Speaker 1: been caused by much more expensive imports of commodities and
Speaker 1: raw materials than in order to prevent that having such
Speaker 1: a comprehensively negative impact in the economy, the correct policy
Speaker 1: response is to ease montro policy cuprates and try and
Speaker 1: encourage money supply growth. So we could be looking at
Speaker 1: a FED that is trying to do the exact opposite
Speaker 1: within as little as twelve months, and that could pushed
Speaker 1: inflation back up next year the exact what it's doing now.
Speaker 1: All right, well, this is miserable, James, thank you for
Speaker 1: coming on. I'm really going well, I think it's not miserable.
Speaker 1: It's dismal. This is economics, and the correct description economics
Speaker 1: is the dismal science. All right, let's let's move over
Speaker 1: to the UK UM and I think similarly dismal here. Um, well,
Speaker 1: we've you know, there there are sort of our inflation
Speaker 1: rate is now higher than the US, partly because everyone
Speaker 1: in Europe has paid the price of reliance on well,
Speaker 1: not so much of the reliance on Putin's gas pipelines,
Speaker 1: but the complacency of not restocking liquid natural gas in
Speaker 1: the summer ahead of the winter, which has amazingly not
Speaker 1: really been picked up much by the press. But here's
Speaker 1: the main root cause of of of this enormous cock
Speaker 1: up that we've had. But anyway, that's now there are
Speaker 1: being bailed out on that via a fairly mild winter
Speaker 1: and uh and having paid exorbitant prices to redirect l
Speaker 1: n G from around the world towards Europe's storage tex.
Speaker 1: So we we currently have sort of a much higher
Speaker 1: level of headline inflation, and that's partly been supported by
Speaker 1: the fact that we're also growing money supply, whereas the
Speaker 1: US is actually shrinking money supply. M not that we're
Speaker 1: growing money supply particularly aggressively. So both Europe and the
Speaker 1: UK are kind of heading into a more gentle recession
Speaker 1: scenario because frankly, the central banks aren't raising rates as
Speaker 1: fast as they are in the States, or as high
Speaker 1: as they've raised rates in the States, and they aren't
Speaker 1: slowing money supply growth as much. So therefore they've got
Speaker 1: kind of more of an inflationary overhang to work through.
Speaker 1: But I'm quite sure that if you give it enough time,
Speaker 1: we'll see a similar story playing out in Europe as
Speaker 1: the one we're going to see first in the US
Speaker 1: is alwayst always first, you know, it's it's first into
Speaker 1: the dawn turn, it's first out of the dam turn.
Speaker 1: They tend to have much more have a history of
Speaker 1: much more aggressive policy responses, too much harder in Europe,
Speaker 1: as you've got always people who are different nations require
Speaker 1: different degrees of policy response, whereas in the US they
Speaker 1: tend to add act at a federal level and so
Speaker 1: they can make things move. Okay, let me then ask
Speaker 1: you about a subject that I know you you suddenly
Speaker 1: used to think about an awful lot and our listeners
Speaker 1: think about all the time, which is house prices. Um.
Speaker 1: You know, John and I have been talking a lot
Speaker 1: about house prices, and here's now announced that he believes
Speaker 1: that they'll fall at least before all this is over.
Speaker 1: And used to be a terrible old bear on the
Speaker 1: house prices. Would you agree with John on that? In
Speaker 1: the UK? So you know, we've we've always known that
Speaker 1: ours prices are pulled by to completely opposite forces. One
Speaker 1: is the multiple of incomes. Obviously, you can never expect
Speaker 1: to pay off your mortgage in the future if the
Speaker 1: price you pay for a house starts to become too
Speaker 1: higher multiple of your income. On the other hand, the
Speaker 1: amount you're paying every month depends to extraordinary extent on
Speaker 1: the interest rate. So therefore, if interest rates are super low,
Speaker 1: the income multiple of houses goes up because the monthly
Speaker 1: outgoings are are relatively low. And we've obviously just come
Speaker 1: up a period where monthly outgoings have been lower than
Speaker 1: they've been for if you believe that bankal England five
Speaker 1: thou years, and that obviously therefore means that house prices
Speaker 1: as a multiple of incomes, while still remaining affordable, have
Speaker 1: gone up to the highest multiple we've probably ever seen.
Speaker 1: So it seems quite reasonable if unless you think introstructor
Speaker 1: going back down to to that five thousand year lobe,
Speaker 1: and if they do, I would argue that they won't
Speaker 1: stay there very long. Then um, you know the chances
Speaker 1: are that the house prices have to reset in terms
Speaker 1: of multiples of incomes, and unless incomes are going to
Speaker 1: come down in nominal terms, which I think is unlikely
Speaker 1: even if they don't do so brilliantly in real terms,
Speaker 1: that it's kind of a no brainer to say that
Speaker 1: house prices in that mix have to come down relative
Speaker 1: to incomes. And if incomes aren't rising hugely, that means
Speaker 1: house prices have to come down full stop. You sound
Speaker 1: to me like you're in John Camp. Well, I uh,
Speaker 1: you know. The thing about economics is every time something
Speaker 1: starts moving towards a target, itself has an effect, and
Speaker 1: that effects causes people to check. So, you know, yes,
Speaker 1: if we if we let's say we had a you know,
Speaker 1: we had interest rates at three and a mortgage rate
Speaker 1: across the economy of five, and that was having enough
Speaker 1: damage on house prices that alone could lead to the
Speaker 1: Bank of England cutting interest rates in order to take
Speaker 1: the pressure of house prices potentially. So therefore, every single
Speaker 1: bit of the economy, you know, that's the economy's saying
Speaker 1: ceterris parables. We hold everything equal, then something might do that,
Speaker 1: but of course nothing is equal in economies. Every single
Speaker 1: thing that moves has an impact on every other thing,
Speaker 1: and they all reset after. It's more like sort of, um,
Speaker 1: that parlor game where you go around musical chairs. We've
Speaker 1: reset every time the music stops. Yeah, yeah, okay, listen
Speaker 1: just before we go. Um. It sounded to me like
Speaker 1: you were bizarrely positive on the UK stock market, which
Speaker 1: people keep telling me is now investor bill again. Having
Speaker 1: been uninvestable last year, suddenly it is in vestable for
Speaker 1: reasons that you know those words who aren't private to
Speaker 1: their precision of thought inside the institutional fund management market
Speaker 1: can't quite understand. But if it's now investable again, are
Speaker 1: you considering that as something reasonable for the retail investor
Speaker 1: to buy the UK market as a whole. Well, two things. One,
Speaker 1: it's quite interesting that the retail investor is supposed to
Speaker 1: be the thickest guy in the room and the institutional
Speaker 1: investors are the smart money. But the reason why the
Speaker 1: institution investors now think the UK is investable again is
Speaker 1: not because it was about to go up twenty compared
Speaker 1: to the US um induseas. It's because it has gone
Speaker 1: up relative to the U s induseries UM so it
Speaker 1: turns out there aren't any smart guys in the room
Speaker 1: where it comes to Finland. But the second point to
Speaker 1: make is because it's quite relevant to the time when
Speaker 1: the US equity market really outperformed the U S which
Speaker 1: is basically from four through until around about the mid eighties.
Speaker 1: Um that it outperformed for the same read them that
Speaker 1: it's kind of out performing right now, which is it
Speaker 1: started from a low enough base, having previously been brutalized
Speaker 1: the nineteen seventy four Those in the UK are just
Speaker 1: you know, just unbelievable really when looked at on a
Speaker 1: historical perspective, but of course coming from a really low
Speaker 1: level and having in this instance got the jump on
Speaker 1: the US, the US was still trying to find a floor,
Speaker 1: which you didn't find until two whereas the UK never
Speaker 1: went lower than the n So the UK was basically
Speaker 1: it wasn't going up that much, but it was going
Speaker 1: it was going sideways when all around them we're going there.
Speaker 1: So the best way to outperform is to be cheap.
Speaker 1: You know, this is why we the emphasis on buying
Speaker 1: things with low p s, which kind of lost all
Speaker 1: currency during the low interest rate growth period. You know,
Speaker 1: when that comes back, that comes back into fashion when
Speaker 1: people will start looking for ways to protect themselves. And
Speaker 1: the reason why low ps protect you is that that
Speaker 1: provides the floor that you know, it isn't necessary for
Speaker 1: other things, but it is worth bearing in mind. You know,
Speaker 1: you may not be necessarily making a lot of money.
Speaker 1: If you look at the US stock market over there
Speaker 1: the seventies and eighties, and there were two oil shops
Speaker 1: exorginous oil shops. So this is a worse very much
Speaker 1: a worse case scenario. It is worth bearing in mind.
Speaker 1: In the index nominally, when absolutely flat sideways didn't do
Speaker 1: a dawn thing and adjusted inflation, it fell sevent So
Speaker 1: you know, sometimes if you want to invest for the
Speaker 1: long run, you want to invest an interest rates are high,
Speaker 1: and I'll go about to embark on a on a
Speaker 1: twenty or thirty year down trend. It's very hard to
Speaker 1: not not to look at our scenario after that forty
Speaker 1: years interest rate DWN trend and say that we're now
Speaker 1: going to have to redress the balance, which might mean
Speaker 1: at least ten years of generally rising interest rate trends,
Speaker 1: which might mean that we've got to kind of, you know,
Speaker 1: payback that idea that what you're gonna do with the
Speaker 1: equity investments is by them and then you know, check
Speaker 1: them every year see how much they've got up. That
Speaker 1: may not work so well in an environment where and
Speaker 1: hasn't historically worked well in an environment where interest rates
Speaker 1: go up and interest rates up, in an environment where
Speaker 1: inflation keeps coming back. And it's worth bearing in mind
Speaker 1: that inflation kept getting kept appearing to be defeated in
Speaker 1: the late sixties and early seventies or through until the
Speaker 1: early eighties. But what happened was each time it came
Speaker 1: back stronger than other. So what made it be defeated, well,
Speaker 1: central banks hiking interest rates, triggering recessions down it would
Speaker 1: come again. What made it then take off and go
Speaker 1: back higher than ever. Well, I think the fact that,
Speaker 1: you know, psychologically speaking, people no longer believed that inflation
Speaker 1: was dead, so wage hikes, wage demands were always just
Speaker 1: a little you know, built in a buffer. You know,
Speaker 1: treasury investors does my under a higher yield built in
Speaker 1: an inflation protection buffer? And I don't see that yet
Speaker 1: in inflation in treasury yields. I think the modern investor
Speaker 1: hasn't yet been brutalized enough by this experience to building
Speaker 1: these buffers. But as people do building these buffers, you know,
Speaker 1: everything just grinds to a to a slower halt. So
Speaker 1: I you know, I think one has to be thinking,
Speaker 1: probably quite carefully about how to find value, how to
Speaker 1: not be greedy, how to protect principle, and possibly to
Speaker 1: diversify into things like you know that for a long
Speaker 1: long time, I wasn't having any of it when you
Speaker 1: want to talk about gold, but actually I think this
Speaker 1: is the sort of environment where gold, you know, which
Speaker 1: has done nothing for ten years, um, But this is
Speaker 1: the sort of environment we're going into. Imagine if you
Speaker 1: if the FED can'ts rates hard because we have a
Speaker 1: recession and starts to reignite money supply growth into say
Speaker 1: which is you know not that are after and everybody
Speaker 1: still remembers twenty twenty two very well, and then they
Speaker 1: start seeing interest rates being cut the fair this money
Speaker 1: supply picking up again. What are all those people going
Speaker 1: to think will happen to inflation? And if they all
Speaker 1: think it's gonna come back, then you know they're all
Speaker 1: going to go and buy gold. Yeah, Okay, I'm want
Speaker 1: to stop you there, James, because I've worked really really
Speaker 1: hard over the last half herd to get you to
Speaker 1: say something positive about any asset class and I've got there, right,
Speaker 1: you see something positive about about gold. I'm going to
Speaker 1: quit while I'm ahead. Thank you so much for joining
Speaker 1: us today, and thank you for finally, after all these years,
Speaker 1: coming around to my way of thinking on gold. I
Speaker 1: appreciate its taking me what twenty five years, but we
Speaker 1: always go there in the end. Thank you. Thank you
Speaker 1: for listening to this week's Marin Talks Money. We will
Speaker 1: be back next week. In the meantime, If you like
Speaker 1: our show, which I really hope you do, rate it,
Speaker 1: review it, and subscribe wherever you isn't to your podcast.
Speaker 1: This episode was hosted by me Marion sumset Well. It
Speaker 1: was produced by Sammersadi. Additional editing by Blake Maples and
Speaker 1: special thanks of course to James Ferguson, Stuart Trout, and
Speaker 1: to John Stepec as usual, and of course our weekly
Speaker 1: reminder to sign up for John's daily newsletter Money Distilled.
Speaker 1: The link is in this show notes. It's very good
Speaker 1: and you won't regret it. James, if you signed up
Speaker 1: yet the John's newsletter, Yeah, absolutely, first thing I did
Speaker 1: this morning and isn't it good? Yes, well I knew
Speaker 1: you'd asked me about it, so I thought i'd better
Speaker 1: get in. Excellent, And you agree it's very good, and
Speaker 1: everyone else should sign up. Yeah. John Sepec is a
Speaker 1: very very bright guy. There we go, Thank you very much,