WEBVTT - Deflation May Be Coming Sooner Than You Think 0:00:00.440 --> 0:00:03.199 John. You know how lots of people say they're passionate 0:00:03.200 --> 0:00:06.040 about stuff, and we really disapprove of that. And I'm 0:00:06.080 --> 0:00:09.319 always saying to people, you know, stop being passionate about stuff. 0:00:09.400 --> 0:00:11.039 Just be good at stuff. You know, no one cares 0:00:11.039 --> 0:00:15.480 about your passion, They care about the result. Am I wrong? No? No, 0:00:15.600 --> 0:00:18.160 I'm not wrong anyway. So yesterday we did a Twitter 0:00:18.239 --> 0:00:20.520 spaces you know me because we're kind of young and 0:00:20.960 --> 0:00:24.639 modern and down with the kids, right, and I suddenly 0:00:24.680 --> 0:00:28.320 realized that I am passionate about pensions. I mean, who hasn't. 0:00:28.880 --> 0:00:31.400 Let's be feeling who among us has not been passionate 0:00:31.440 --> 0:00:35.040 about pensions at one point? And I'll wait, everyone, everyone, 0:00:35.280 --> 0:00:39.400 But that's because they don't know how fascinating they can 0:00:39.479 --> 0:00:42.760 be and how exciting it is to have actually done 0:00:42.800 --> 0:00:45.199 some proper work on this, because you know, you know research, 0:00:45.280 --> 0:00:47.559 sometimes we do it, sometimes we don't. Having done some 0:00:47.640 --> 0:00:50.440 actual research into how that the UK pension system works 0:00:50.479 --> 0:00:53.320 and how it works relative to other pension systems around 0:00:53.360 --> 0:00:57.200 the world, and we find that niceally, relatively speaking, it's 0:00:57.280 --> 0:01:00.480 pretty good. And we talked about this rating system, the 0:01:00.520 --> 0:01:03.720 most of pensions rating system that the looks at pension 0:01:03.760 --> 0:01:06.479 systems around the world in terms of all their different 0:01:06.480 --> 0:01:08.400 parts as opposed to just the state pension. And we 0:01:08.520 --> 0:01:11.920 found that in terms of global ratings, the UK is 0:01:12.040 --> 0:01:14.960 really high up there, better by the way than Switzerland 0:01:15.120 --> 0:01:18.680 or Germany. That makes me feel kind of excited, as 0:01:18.800 --> 0:01:21.120 it should. I mean, I think I said it was 0:01:21.160 --> 0:01:23.839 a really good chart. Actually it was. It was very interesting, 0:01:24.360 --> 0:01:26.120 and I think everyone should go out and listen to. 0:01:26.280 --> 0:01:29.840 Someone's going to put the link in the show notes. Um, 0:01:29.880 --> 0:01:32.640 but just as a little added incentive, we talked about 0:01:32.680 --> 0:01:34.320 house prices the last thing we did one of these 0:01:34.360 --> 0:01:36.840 Twitter spaces and it ended up being one of the 0:01:37.040 --> 0:01:40.360 most listened to Twitter spaces that Bloomberg's haven't done. So 0:01:40.400 --> 0:01:42.319 what we'd really love is if you look could go 0:01:42.319 --> 0:01:44.680 out right now and listen to the pensions one and 0:01:44.760 --> 0:01:47.960 help us to beat a personal record. John and I 0:01:47.960 --> 0:01:50.640 are target driven. We talk about our pbs all the time, 0:01:50.720 --> 0:01:56.080 don't we. John KPI is coming out earliers absolutely, but listen, 0:01:56.200 --> 0:01:59.120 let's let's give them an incentive here. What was the 0:01:59.160 --> 0:02:01.920 most interesting thing for you that came out of that 0:02:02.040 --> 0:02:04.680 chat yesterday about pensions? What made you think, God, my 0:02:04.760 --> 0:02:07.160 retimement is going to be great. Apart from me pointing 0:02:07.160 --> 0:02:09.799 out that you haven't got a defined pension, defined benefit 0:02:09.880 --> 0:02:11.679 pension and you don't work in the public sector, which 0:02:11.680 --> 0:02:13.440 is a bit of a downer. But what was the 0:02:13.480 --> 0:02:15.760 thing that really made you feel that, actually this is 0:02:15.800 --> 0:02:18.600 not so bad. Well, I think the these thing is 0:02:18.639 --> 0:02:24.240 that it is that idea that we've finally again. It's 0:02:24.240 --> 0:02:26.640 not so much more own pension. It's the sense that 0:02:26.800 --> 0:02:31.520 Britain was actually doing something right and right and and 0:02:32.120 --> 0:02:35.120 in quite a significant way. It's actually the system is 0:02:35.160 --> 0:02:37.919 a lot better, and it's also kind of backed by 0:02:37.960 --> 0:02:41.600 actual money as opposed to a promise to pay at 0:02:41.600 --> 0:02:44.000 some point in the future. But the other thing actually 0:02:44.000 --> 0:02:47.360 that I thought was was interesting but also agent was 0:02:48.080 --> 0:02:51.360 we were on with Stuart True who's Blue Miss Pension columnists, 0:02:51.400 --> 0:02:53.679 and he pointed out that there was actually a really 0:02:53.680 --> 0:02:59.280 good deal on buying then missing national insurance years. At 0:02:59.320 --> 0:03:01.800 the moment you made thirty five of those, right in 0:03:01.960 --> 0:03:03.880 thirty five of those to get a full state pension. 0:03:03.880 --> 0:03:06.120 And if you haven't got those, which you might not have, 0:03:06.200 --> 0:03:09.480 you taken time off, you know, for parenting, caring or 0:03:09.639 --> 0:03:11.760 just you know, hanging around, going to yoga, retreats whatever. 0:03:12.080 --> 0:03:14.239 You may not have those full thirty five years, and 0:03:14.280 --> 0:03:16.760 there's a deal on a sale on at the pension's 0:03:16.800 --> 0:03:20.040 department right where you can you can buy them back. Yeah. 0:03:20.040 --> 0:03:22.560 It's really good value. You get the money back in 0:03:22.720 --> 0:03:26.079 three years. Yeah. No, it was really impressive. So so yeah, 0:03:26.200 --> 0:03:28.919 actually you really should license you this, you know, even 0:03:28.960 --> 0:03:31.040 if it is just for that, but the rest of 0:03:31.040 --> 0:03:33.880 it is also excellent. Um. But you know, you can 0:03:33.960 --> 0:03:36.040 really make a defency your personal finances in the long 0:03:36.120 --> 0:03:39.920 term if you haven't got those contributions and you make 0:03:40.000 --> 0:03:42.160 them before April. Yeah. And you know what I was 0:03:42.200 --> 0:03:46.320 thinking afterwards, well five minutes ago, actually that the auto 0:03:46.480 --> 0:03:49.840 enrollment system, the way that the auto enrollment system that 0:03:49.880 --> 0:03:51.120 we have in the UK is by the way you 0:03:51.200 --> 0:03:53.920 getting money at fifty five. You don't get that anywhere else. Um. 0:03:54.040 --> 0:03:57.040 The way that interplace with the state pension system, which 0:03:57.080 --> 0:04:00.680 is there is back up, etcetera. This interming angling of 0:04:01.200 --> 0:04:05.440 private and state financing that has worked so brilliantly to 0:04:05.680 --> 0:04:08.960 fully rescue the UK's pension system and make it one 0:04:09.000 --> 0:04:12.400 of the best and most resilient in the world. I'm 0:04:12.440 --> 0:04:18.360 thinking NHS, Yeah, I think that's a good idea controversial, 0:04:19.480 --> 0:04:24.560 absolutely hate mail to the usual address. Please right, everyone, 0:04:24.640 --> 0:04:27.440 listen to that Twitter spaces. It's really interesting. There's a 0:04:27.480 --> 0:04:29.200 lot to say about pensions, and I know you think 0:04:29.200 --> 0:04:30.880 it's boring, and I know it's one of those things 0:04:30.960 --> 0:04:32.640 you just want to put out of your head, you know. 0:04:32.720 --> 0:04:34.560 Please God, let you never have to be old enough 0:04:34.600 --> 0:04:36.760 to to retire and take a pension. But this is 0:04:36.800 --> 0:04:38.839 going to happen. You need to know about it. And 0:04:38.920 --> 0:04:42.520 John and I are passionate about pensions and that comes 0:04:42.520 --> 0:04:45.120 through in the Twitter spaces. Go listen, help us reach 0:04:45.160 --> 0:04:48.599 our targets because that matters to us as well. Thank 0:04:48.600 --> 0:04:50.919 you very much, Sean Love reach out to you as usual. 0:04:52.400 --> 0:04:55.840 Passionate pensions about pensions. Let's make that on a news 0:04:55.839 --> 0:05:03.359 strap line. Welcome to Marion Talks Money, the podcast in 0:05:03.400 --> 0:05:06.240 which people who know the markets explain the markets. I'm 0:05:06.240 --> 0:05:08.640 there in Sumset Web this week. Our guest is my 0:05:08.720 --> 0:05:11.359 old friend and ex colleague, James Ferguson, founder of the 0:05:11.440 --> 0:05:14.719 Macro Strategy Partnership. He's got over twenty five years of 0:05:14.720 --> 0:05:18.120 experience as a stockbroker, sector analyst and as a Matt 0:05:18.160 --> 0:05:21.080 Grows strategist. James and I well, we kind of started 0:05:21.080 --> 0:05:25.360 our careers together as the stockbrokers over in Japan, so 0:05:25.400 --> 0:05:27.039 we've known each other a long time. We've had a 0:05:27.040 --> 0:05:30.240 lot of conversations in those years. James, Hello, thank you 0:05:30.279 --> 0:05:33.320 for joining us. Now listen, James. One of the reasons 0:05:33.360 --> 0:05:35.160 I always want to have you on my podcast because 0:05:35.160 --> 0:05:37.480 you tend to look at things a slightly different way 0:05:37.520 --> 0:05:39.480 to other people. They'll be a little bit contrarian, well, 0:05:39.560 --> 0:05:41.840 quite a lot of contrarian, and very often you turn 0:05:41.880 --> 0:05:45.000 out to be absolutely right, and we like that. So 0:05:45.520 --> 0:05:48.600 this year, I'm looking at a PC. Recently, you are 0:05:48.640 --> 0:05:51.440 expecting this to be the year not of high inflation, 0:05:51.560 --> 0:05:54.880 not even maybe of inflation, but possibly the beginnings of deflation. 0:05:55.560 --> 0:05:59.680 Don't hear that? Often in the old days, deflation was 0:05:59.760 --> 0:06:04.159 to find as a contraction in the nominal money supply. Now, 0:06:04.600 --> 0:06:06.800 on that basis, the U S money supply has been 0:06:07.560 --> 0:06:11.680 falling nominally, so not a justif inflation just the headline 0:06:11.680 --> 0:06:14.640 big has been falling since February of last year. So actually, 0:06:15.080 --> 0:06:16.960 from that point of view, we've we've actually been in 0:06:17.040 --> 0:06:19.760 deflation since February. That The trouble is that we have 0:06:19.960 --> 0:06:23.640 what Milton Freatment called long and variable lacks, and so 0:06:23.839 --> 0:06:26.960 I think it's going to be this year where the 0:06:27.080 --> 0:06:32.440 lags um play out and we end up with something 0:06:32.440 --> 0:06:36.480 that looks, at least on the surface quite deflation route. Yeah, okay, well, 0:06:36.560 --> 0:06:39.760 let's let's just define deflation for the purposes of this 0:06:39.880 --> 0:06:42.760 podcast and this audience is being a general fall in 0:06:42.839 --> 0:06:45.440 the price level as measured by a CPI. Can we 0:06:45.480 --> 0:06:48.880 do that rather than a contraction in nominal money supply. 0:06:49.279 --> 0:06:51.720 That's why we didn't have deflation last year, or even 0:06:51.760 --> 0:06:53.919 though that's the textbook definition, but we will have it 0:06:54.000 --> 0:06:57.560 this year, I think. Okay, So what's driving it purely 0:06:57.560 --> 0:07:00.200 this contraction and money supply? The sort of absolutely sort 0:07:00.200 --> 0:07:03.200 of first mover is the base effects. And now you 0:07:03.240 --> 0:07:05.560 may remember people talking about base effects when we had 0:07:05.600 --> 0:07:08.960 the inflation. The the authorities when the inflation started to 0:07:09.040 --> 0:07:13.520 crop up in sort of early one, talked about how 0:07:13.560 --> 0:07:16.400 it was still transitory and all that we were seeing 0:07:16.400 --> 0:07:19.360 were base effects. I because inflation had dip lower than 0:07:19.400 --> 0:07:22.680 trend in the sort of March April May period of 0:07:22.680 --> 0:07:25.720 twenty Then in the same March April May period of 0:07:25.720 --> 0:07:28.640 twenty one, you were comparing the year on your change 0:07:28.680 --> 0:07:32.000 has been compared with something artificially depressed. So the base 0:07:32.040 --> 0:07:35.640 effect was making the inflation look was their argument. And 0:07:35.680 --> 0:07:37.920 those of us who said no, you've you've got to 0:07:37.920 --> 0:07:40.119 watch money supply was saying, no, it's not just base effect. 0:07:40.160 --> 0:07:43.200 It's going to carry on going, And sure enough it did. 0:07:43.640 --> 0:07:45.640 This time we have exactly the same thing in reverse. 0:07:45.760 --> 0:07:51.120 So we had much stronger than trend prints basically May, 0:07:51.560 --> 0:07:55.040 certainly April May. The peak was June, and then there 0:07:55.120 --> 0:07:57.360 was still above trend but starting to fall back again 0:07:57.640 --> 0:08:00.760 in July and August. So therefore we're likely to see 0:08:00.920 --> 0:08:03.160 base effects. This ti'm working in reverse, so this time 0:08:03.200 --> 0:08:05.840 the base is too high or higher than trend. So 0:08:05.880 --> 0:08:08.600 therefore it's going to make the prints for each of 0:08:08.600 --> 0:08:12.040 those months look on a year on year basis lower 0:08:12.080 --> 0:08:15.000 than the underlying rate of inflation really is. And that 0:08:15.120 --> 0:08:18.560 effect will peek out in June and give us potentially 0:08:19.000 --> 0:08:21.119 as much as a sort of two and a half 0:08:21.160 --> 0:08:25.280 percent lower than the underlying trend figure. So let's assume 0:08:25.320 --> 0:08:28.440 that there are roughly three pre sized components of CPI. 0:08:29.000 --> 0:08:31.440 Um there's goods, which actually a bit smaller than an 0:08:31.440 --> 0:08:35.360 equal size, but goods if you include energy prices, then 0:08:35.400 --> 0:08:37.719 you've got services, which is about the same pretty much 0:08:37.720 --> 0:08:40.360 as wages, and then you've got shelter as the third component, 0:08:40.400 --> 0:08:43.880 which is basically house prices and a little bit of rent. 0:08:44.040 --> 0:08:48.000 If we assume that two thirds eye services slash wages 0:08:48.120 --> 0:08:51.720 and shelter are both running at six percent. But because 0:08:51.840 --> 0:08:56.839 we've finally unwound the supply blockages, then goods inflation can 0:08:56.880 --> 0:08:58.520 come back down to normal, and that, of course, in 0:08:58.559 --> 0:09:01.760 the near term, means an overshoot to below possibly blow zero. 0:09:02.080 --> 0:09:04.880 But let's just say for the lilitrative purposes, if goods 0:09:04.880 --> 0:09:06.839 are one third and their zero and the other two 0:09:06.880 --> 0:09:10.320 components are six percent, then the underlying trend will be 0:09:10.360 --> 0:09:15.280 about four actually four So if the underlying trend is 0:09:15.280 --> 0:09:18.160 four percent, but because these base effects, by June, we 0:09:18.160 --> 0:09:20.600 can have a figure that's two point five percent lower 0:09:20.600 --> 0:09:23.079 than whatever the trend is. You can see that even 0:09:23.080 --> 0:09:26.160 on that assumption, we're basically looking at maybe a figure 0:09:26.160 --> 0:09:28.840 at one point five for June, which will probably lead 0:09:28.880 --> 0:09:32.320 to much dancing in the streets outside the fed um 0:09:32.360 --> 0:09:36.480 and everyone telling us that inflation has been conquered because 0:09:36.480 --> 0:09:39.439 they're missing the base effects. So the number one thing 0:09:39.520 --> 0:09:42.880 is the base effect But what makes that really interesting 0:09:43.000 --> 0:09:45.280 is that also if you look at the huge amount 0:09:45.280 --> 0:09:48.760 of excess money that was printed in the COVID period um, 0:09:48.800 --> 0:09:50.880 that led to a sort of bubble of what even 0:09:50.920 --> 0:09:54.840 the Fed now acknowledges is excess savings, and that was 0:09:54.880 --> 0:09:59.520 what has been driving the nominal bit of nominal GDP inflation. 0:10:00.280 --> 0:10:03.320 But those two things cross over because the money supplies 0:10:03.400 --> 0:10:06.719 being on a sort of very gentle downward trend, and 0:10:06.920 --> 0:10:08.959 not a normal GDP has been on a very sharp 0:10:09.040 --> 0:10:12.720 upward trend. Those two crossover around about April and May. 0:10:13.240 --> 0:10:15.280 So suddenly in June you're gonna have two things. You're 0:10:15.280 --> 0:10:17.200 gonna have a base effect that makes the print of 0:10:17.320 --> 0:10:21.400 artificially low, but you're also gonna lose assuming we don't 0:10:21.640 --> 0:10:24.080 find a sort of sudden surgeon money's like, you're always 0:10:24.080 --> 0:10:26.880 going to lose that that bubble of excess savings. So 0:10:27.200 --> 0:10:29.840 we could suddenly be looking at something that really does 0:10:29.920 --> 0:10:33.760 look quite deflation. Arry By say May June July of 0:10:33.880 --> 0:10:36.880 this year. Okay, but that sounds like good news. It 0:10:36.920 --> 0:10:39.439 sounds like great news. So suddenly we've gone from environment 0:10:39.440 --> 0:10:42.199 when we're definitely worried about inflation, and most figures I 0:10:42.280 --> 0:10:44.520 have one at the moment say that they expect inflation 0:10:44.559 --> 0:10:47.000 to full very sharply, and again I'm talking cp I here. 0:10:47.160 --> 0:10:49.679 Expect inflation to full very sharply. But after that they 0:10:49.760 --> 0:10:52.600 expected to not fall to stay tube center and stay there, 0:10:52.600 --> 0:10:55.240 but to be very volatile. So that's what most people 0:10:55.280 --> 0:11:00.000 are expecting, relatively high, relatively volatile inflation. And if it's 0:10:59.760 --> 0:11:02.400 actually going to fall down to you know, one percent 0:11:02.480 --> 0:11:05.880 to percent and stay there for a bit, this seems 0:11:05.920 --> 0:11:10.520 like great news. Um. Yes and no. So the first 0:11:10.520 --> 0:11:12.640 thing is that, yes, that's great news because it's what 0:11:12.679 --> 0:11:15.560 the FED was trying to do. I they they are 0:11:15.640 --> 0:11:17.840 the cause of the error. Same with the Bank of 0:11:17.840 --> 0:11:20.640 England in this country. They printed the money because according 0:11:20.720 --> 0:11:23.719 to their theory, lots of excess money can't possibly lead 0:11:23.720 --> 0:11:26.480 to inflation. I know. I mean, there isn't anyone else 0:11:26.520 --> 0:11:29.400 on the planet virtually believes that that they believe they're 0:11:29.440 --> 0:11:32.120 in judge Um, and so that's what caused the problem. 0:11:32.520 --> 0:11:34.920 But they don't believe it anymore, do they, James. They 0:11:34.920 --> 0:11:37.880 don't believe it anymore. They should have learned something, but 0:11:37.920 --> 0:11:40.720 don't forget. Cognitive dissonance is likely to be that the 0:11:40.800 --> 0:11:45.319 overriding condition because in order to learn that, they will 0:11:45.360 --> 0:11:47.440 have had to have learned that everything they've learned at 0:11:47.520 --> 0:11:51.800 university was wrong. And that's so there's does they're more 0:11:51.880 --> 0:11:55.720 likely to go there. I told you it's transitory rather 0:11:55.840 --> 0:11:59.400 than throw out every textbook they have and tear up 0:11:59.400 --> 0:12:02.600 there their PhD s and and go back to school 0:12:02.600 --> 0:12:06.240 as it, or demand that someone starts, you know, digging 0:12:06.280 --> 0:12:12.440 out the old monetary or monetarist traps. So, yes, that 0:12:12.520 --> 0:12:14.880 we have a preside problem. We don't know how much 0:12:14.960 --> 0:12:17.840 they believe that they got it wrong and and how 0:12:17.920 --> 0:12:20.520 what they ascribe that too, But but it does we 0:12:20.559 --> 0:12:22.520 all become very pertinent because say we get to the 0:12:22.559 --> 0:12:25.760 summer and say we now have a sort of deflationary 0:12:25.800 --> 0:12:28.840 environment with a bit of a wages overhang, as wages 0:12:28.840 --> 0:12:32.120 always lack at that point, what does the FED do? Now? Historically, 0:12:32.760 --> 0:12:35.600 as soon as you start getting a recession, which you 0:12:35.760 --> 0:12:39.080 usually get because unemployment, which has just been bubbling around 0:12:39.120 --> 0:12:42.880 the bottom, suddenly goes quite sharply upwards, and the FED 0:12:43.040 --> 0:12:46.480 usually cuts rates quite quickly, I mean, you know, within 0:12:47.280 --> 0:12:49.800 a couple of months quickly. So what they've said they're 0:12:49.800 --> 0:12:52.360 going to do, But I don't believe. I think, you know, 0:12:52.520 --> 0:12:55.079 events will overtake this, but their plan at the moment 0:12:55.160 --> 0:12:58.080 is to hike rates to a certain point and then 0:12:58.160 --> 0:13:01.520 hold them. Based on the fact of these spase effects, 0:13:01.640 --> 0:13:04.959 they wouldn't be hiking rates any further, but they seem 0:13:05.040 --> 0:13:08.400 to be still intent on that, and they certainly wouldn't 0:13:08.440 --> 0:13:11.760 be holding them at that high level if the drop 0:13:11.760 --> 0:13:16.440 in inflation comes with a recession, which is actually what 0:13:16.440 --> 0:13:19.319 we're talking about. Okay, tell us more about the recession, 0:13:19.559 --> 0:13:21.760 because I was saying someone the other day, possibly even 0:13:21.800 --> 0:13:24.640 on this podcast, that when people talk about the recession now, 0:13:24.679 --> 0:13:28.200 they refer to the mild recession, and I said, maybe 0:13:28.240 --> 0:13:31.640 mild is this year's transitory. In the US, we've had 0:13:31.679 --> 0:13:36.280 seven recessions post for recessions that you know, we have 0:13:36.360 --> 0:13:38.880 the data force. So there were actually someone who immediately 0:13:38.880 --> 0:13:41.120 after the World War that it's quite hard to get 0:13:41.160 --> 0:13:45.000 the data for. So I'm talking about since like nine fifties, 0:13:45.040 --> 0:13:49.600 since ninety fifty had seven recessions. But the average decline 0:13:49.679 --> 0:13:53.120 in real earnings in the US. This is corporate earnings, 0:13:53.160 --> 0:13:57.959 not not people. The average decline was in real terms. 0:13:58.760 --> 0:14:01.520 So the idea that you can have a can you know, 0:14:01.360 --> 0:14:04.800 you could theoretically have a mild procession, but how would 0:14:04.800 --> 0:14:07.880 you have a mild procession? The point about inflation is 0:14:07.880 --> 0:14:09.560 that the feeders let the cat out of the bag. 0:14:09.600 --> 0:14:13.439 The point about raising rates or type tighter monetary policy 0:14:13.679 --> 0:14:15.680 is in order to destroy demand, to get rid of 0:14:15.679 --> 0:14:18.200 some of that inflation. What is the destruction of the mound? Well, 0:14:18.200 --> 0:14:21.160 it's a recession. It's it's you know, it's just being 0:14:21.160 --> 0:14:24.320 disingenuous to pretend otherwise. When the Fed is tightening policy, 0:14:24.360 --> 0:14:27.360 it is tightening policy to create a recession, because if 0:14:27.360 --> 0:14:29.600 it doesn't create a recession, it will be doing nothing 0:14:30.000 --> 0:14:33.960 to reign back inflation. And how do you create a recession, Well, 0:14:34.160 --> 0:14:37.720 basically you stop money supply growth in the sense that 0:14:37.760 --> 0:14:41.320 you you you know, you constrain bank lending. Now, bank 0:14:41.360 --> 0:14:43.480 lending is still running quite strongly at the moment, but 0:14:43.520 --> 0:14:46.480 obviously money supply growth is already negative. That The thing 0:14:46.560 --> 0:14:49.880 about the recession is we have almost record high corporate 0:14:49.920 --> 0:14:54.520 profit margins. And corporate profit margins obviously rely on two things. 0:14:54.520 --> 0:14:57.320 They're allowing firms being able to sell their goods to 0:14:57.360 --> 0:15:01.560 the household sector, and the household sector is increasingly less 0:15:01.600 --> 0:15:03.400 able to buy their good They were able to buy 0:15:03.440 --> 0:15:06.360 them because they're this big chunk of excess savings from 0:15:06.360 --> 0:15:09.080 the money printing during COVID. But as as I said, 0:15:09.120 --> 0:15:13.520 this is going to evaporate come April May, whereupon households 0:15:13.560 --> 0:15:15.240 are going to need to get the extra money they 0:15:15.280 --> 0:15:18.600 need to buy all these corporate products from their earnings. 0:15:18.640 --> 0:15:21.320 But we know that real earnings are shrinking because although 0:15:21.400 --> 0:15:25.320 wages are rising at record higher rates, they're rising less 0:15:25.600 --> 0:15:27.720 than prices are. So therefore we have a cost of 0:15:27.760 --> 0:15:30.120 living crisis. It's not quite as severe in the US, 0:15:30.200 --> 0:15:33.240 but it's it's driven on by very similar things to 0:15:33.240 --> 0:15:36.720 to our situation. So that by the time the excess 0:15:36.760 --> 0:15:39.320 savings are used up, which as I said, best guesses 0:15:39.440 --> 0:15:44.840 maybe April, then households in general don't have enough financial 0:15:44.840 --> 0:15:48.920 resources to keep buying ever more expensive goods, so they 0:15:48.960 --> 0:15:52.400 start buying less unless it gets discounted, which is squeezing 0:15:52.400 --> 0:15:55.000 corporate profit margins. And then they go back to their 0:15:55.040 --> 0:15:56.920 boss and they say, I need a bigger way of 0:15:57.280 --> 0:16:00.360 pay rise this year. So when the corporates are looking 0:16:00.360 --> 0:16:02.480 at this, they see, oh, so now our costs with 0:16:02.520 --> 0:16:05.640 a leg Our biggest cost is wages and those those 0:16:05.640 --> 0:16:08.040 costs are going up at the same time we're having 0:16:08.040 --> 0:16:11.280 trouble pushing through the higher prices of our goods. So 0:16:12.080 --> 0:16:14.680 it is often observed in the past that the first 0:16:14.800 --> 0:16:17.720 year of inflation is loved. Everyone likes the first year 0:16:17.760 --> 0:16:20.680 of inflation. It's years two, three, and four that get 0:16:20.720 --> 0:16:24.320 really much more difficult. And if you basically have that situation, 0:16:24.360 --> 0:16:29.800 that margin squeeze situation, and that declining corporate revenue situation 0:16:30.080 --> 0:16:34.360 occurring at the same time that you prevent people borrowing. Um, 0:16:34.520 --> 0:16:37.320 I think you've got type mountry policy. That is the 0:16:37.440 --> 0:16:40.240 usual preamble to tour researtion. And this is gonna be 0:16:40.240 --> 0:16:44.840 a horrible shot, which usually not off cent offending, okay, 0:16:45.080 --> 0:16:47.000 real in real time, it's gonna be a horrible shots. 0:16:47.360 --> 0:16:49.440 But if the inflation evaporates, then it will not get 0:16:49.480 --> 0:16:51.040 off in normal terms as well. Where's the bit where 0:16:51.040 --> 0:16:53.360 I get to interrupt you? For God's sake, I saw 0:16:53.400 --> 0:16:57.680 the body language and I just rolled straight over. We 0:16:57.760 --> 0:16:59.720 can see each other, listeners you see in it. It's 0:16:59.760 --> 0:17:03.640 not necessarily a good thing. Now. Corporate margins in the 0:17:03.720 --> 0:17:05.760 US have been expanding for a really long time. Everyone's 0:17:05.760 --> 0:17:08.000 gotten used to the idea that they expand expand expanding, 0:17:08.080 --> 0:17:10.840 record highs, etcetera. And there is a general assumption which 0:17:10.880 --> 0:17:13.520 you can feel that they're sort of stable that this 0:17:13.680 --> 0:17:17.320 contraction I think will be a horrible shock to people. Historically, 0:17:17.320 --> 0:17:20.880 one of the most difficult things for corporates was pricing. 0:17:21.720 --> 0:17:23.440 You know, it's not like you're running a petrol fore 0:17:23.440 --> 0:17:25.760 court where you can you can flick a switch and 0:17:25.840 --> 0:17:29.640 change the price every day. Each delivery you know as 0:17:29.680 --> 0:17:31.760 a different cost to you, and you just change the 0:17:31.800 --> 0:17:34.159 price up on the big board for what people are 0:17:34.160 --> 0:17:36.840 going to have to pay to fill up their cars. 0:17:36.840 --> 0:17:39.840 But most companies can't do that. Seventy percent able products 0:17:39.880 --> 0:17:43.080 are calling at lander fed are what we call sticky prices. 0:17:43.240 --> 0:17:45.919 And sticky prices on average don't change more often than 0:17:45.920 --> 0:17:47.720 about once every twelve months. So if you can have 0:17:47.720 --> 0:17:52.639 a sticky then obviously pricing becomes very difficult. Now, in 0:17:52.680 --> 0:17:57.280 a low, stable, low inflation environment, pricing isn't really a 0:17:57.320 --> 0:18:01.639 big deal. But once you get into more volatile inflationary 0:18:01.680 --> 0:18:04.760 environment pricing, if you get your price too high, you're 0:18:04.800 --> 0:18:06.920 going to pay the price in terms of lower sales. 0:18:06.960 --> 0:18:08.479 If you get your price too lower, you're gonna get 0:18:08.520 --> 0:18:12.400 lower margins very very hard for everybody to get pricing 0:18:12.480 --> 0:18:15.240 right once we have inflation. If margins are going to 0:18:15.280 --> 0:18:19.080 fall by then that tells us presumably that the U 0:18:19.119 --> 0:18:21.959 s ecuary market is still massively of the valued. The 0:18:22.080 --> 0:18:25.440 US equity market at this level probably doesn't have a 0:18:25.520 --> 0:18:29.280 valuation problem, but it does have an earnings problem, and 0:18:29.320 --> 0:18:31.600 that that means that you get the slightly different You 0:18:31.640 --> 0:18:34.560 get certainly different impacts on which bit of the market 0:18:34.600 --> 0:18:37.240 that might do well. For example, if you have a 0:18:37.240 --> 0:18:40.080 bit of an earnings problem, then the sorts of companies 0:18:40.080 --> 0:18:44.560 that might do well might be more value and stables 0:18:45.119 --> 0:18:49.800 than growth and discretion, Whereas if you have a valuation problem, 0:18:49.880 --> 0:18:52.600 then you might actually find that the stuff that does 0:18:52.640 --> 0:18:55.600 well is the opposite. So it's really more about where 0:18:55.640 --> 0:18:58.720 you might expect to see the pain or feel the pain. Yes, 0:18:58.880 --> 0:19:02.119 if the equity market is no longer bad value, that 0:19:02.240 --> 0:19:04.560 assumption is predicated entirely in the fact that it doesn't 0:19:04.600 --> 0:19:08.359 lose any money. If earnings go down, then obviously that 0:19:08.440 --> 0:19:11.520 immediately the extent which they go down makes the market 0:19:11.560 --> 0:19:15.000 look worse value. Again, what can we buy in a 0:19:15.040 --> 0:19:18.760 situation like this, Well, it's a very unfashionable thing to say. 0:19:18.800 --> 0:19:21.639 But the first thing that this makes me think about, 0:19:21.680 --> 0:19:25.080 at least for now, is the fact that the available 0:19:25.160 --> 0:19:30.600 quantity of dollars has been shrinking since February of last year, 0:19:31.119 --> 0:19:35.720 whereas the available quantity of euros or sterling or almost 0:19:35.760 --> 0:19:38.960 all other currencies has been going up. If you think 0:19:39.000 --> 0:19:41.040 that the value of things should go up if the 0:19:41.200 --> 0:19:44.560 supply relatively shrinks, then the first thing to bear in 0:19:44.600 --> 0:19:47.000 mind is that after recent weakness, the dollar might be 0:19:47.040 --> 0:19:49.920 worth the look. And the second thing to think about 0:19:50.040 --> 0:19:54.679 is is um that most of the valuation problems and 0:19:54.880 --> 0:20:00.600 the profile of growth stocks compared to value stocks favors 0:20:00.640 --> 0:20:02.920 the US. So if we're now going to start favoring 0:20:03.000 --> 0:20:05.920 value over growth, and the reason we'd be favoring value 0:20:05.920 --> 0:20:09.040 over growth, by the way, is because of two things. One, 0:20:09.520 --> 0:20:11.840 value stocks tend to be cheaper, which means they tend 0:20:11.840 --> 0:20:14.879 to have a higher earning sield. And the higher earning 0:20:14.880 --> 0:20:18.440 seald is what you require to protect you against inflation. 0:20:18.480 --> 0:20:22.240 We know from the eighties that seventies and eighties that 0:20:22.960 --> 0:20:26.080 the US stock market went into the period with a 0:20:26.160 --> 0:20:28.600 sort of twenty five times be multiple and it came 0:20:28.600 --> 0:20:31.879 out with a six or seven times be multiple. In 0:20:31.920 --> 0:20:36.199 other words, the destruction of value really occurred with the 0:20:36.200 --> 0:20:39.879 destruction of p s. And and so what you we 0:20:40.000 --> 0:20:43.840 we're guessing you need to protect yourself is start with 0:20:44.280 --> 0:20:46.639 a nice, decently low pe and you only find that 0:20:46.720 --> 0:20:48.880 in the value sector. The other thing about the value 0:20:48.920 --> 0:20:50.920 sector is it tends to be boring, which is good 0:20:50.960 --> 0:20:53.359 because you can protect your margins better. And it also 0:20:53.400 --> 0:20:57.240 tends to pay a dividend deal, and dividends are basically 0:20:57.280 --> 0:21:01.440 that that the the thing that that again you enables 0:21:01.440 --> 0:21:04.680 you to hold your head above water during inflation reperiod. 0:21:05.040 --> 0:21:08.720 I know I'm talking about inflation evaporating in the near term, 0:21:08.760 --> 0:21:11.840 but if we get onto it later, I think it 0:21:11.880 --> 0:21:15.280