WEBVTT - Markets Round Up: Private Equity, ISA's, Rachel Reeves

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<v Speaker 1>Bloomberg Audio Studios, Podcasts, Radio News. Welcome to the Marrin

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<v Speaker 1>Talks Money Market Rap, where we talk about the biggest

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<v Speaker 1>moves in the market this week and what's driving them.

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<v Speaker 1>I'm marrying Something's that, web editor at large for Bloomberg

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<v Speaker 1>UK Wealth.

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<v Speaker 2>And I'm joined Stebic, senior reporter at Bloomberg and author

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<v Speaker 2>of the Money Distilled newsletter.

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<v Speaker 1>Do you know what, John? Today, we're not going to

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<v Speaker 1>talk about the biggest moves in the market this week,

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<v Speaker 1>although we could up a lot, right, up a lot.

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<v Speaker 2>Up a lot, up a lot, and also also gold

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<v Speaker 2>down a bit.

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<v Speaker 1>Yeah, okay, Tech up a lot, gold down a bit.

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<v Speaker 1>Top tap for now. But you know, all this will

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<v Speaker 1>turn around in a heartbeat because it happens all the time.

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<v Speaker 1>So keep an eye on gold, keep an eye on tech.

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<v Speaker 1>There have been some interesting moves in the UK market.

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<v Speaker 1>Everyone go back and listen to the podcasts where are

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<v Speaker 1>I think for two sets, fund managers talk about how

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<v Speaker 1>marvelous berbarreas and how you should invest in Berberatus today alone.

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<v Speaker 1>But we're talking on Wednesday, by the way, up fifteen

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<v Speaker 1>percent to nearly fifteen percent when I last looked. So

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<v Speaker 1>if only people listen to all the podcasts. Everything will

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<v Speaker 1>be fine, right except for the bit when we keep

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<v Speaker 1>telling them not to invest in our US equities and

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<v Speaker 1>diversified by.

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<v Speaker 2>The depth dice hard as you meet the point in

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<v Speaker 2>your newsletter the other day.

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<v Speaker 1>I did, and you'd still have been way better off

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<v Speaker 1>in Europe a year to date. Anyway, I don't want

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<v Speaker 1>to dwell on that, because we talk about all this

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<v Speaker 1>stuff a lot. I want to actually today talk about

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<v Speaker 1>the UK and these two things that are floating around.

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<v Speaker 1>The first thing floating around being this this new deal

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<v Speaker 1>Mansion House that the seventeen of our biggest pench of

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<v Speaker 1>funds have agreed by the end of the decade to

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<v Speaker 1>have ten percent of their assets in private assets and

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<v Speaker 1>half of that so five percent of their assets in

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<v Speaker 1>UK private assets. So we're talking about unlisted companies, so

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<v Speaker 1>private equity of various sourts and infrastructure. So that's the

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<v Speaker 1>first thing that's going on. Second is this ongoing rumbling

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<v Speaker 1>conversation about cash ices and how they should be limited

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<v Speaker 1>and people shouldn't be allowed to keep very much catching

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<v Speaker 1>them and that cash should be redirected into public markets,

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<v Speaker 1>or that's the idea at the moment, not that this

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<v Speaker 1>two should be forced into private markets, but public markets.

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<v Speaker 1>So a shift to try and make pension funds get

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<v Speaker 1>out of listed equities and into unlisted stuff, and a

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<v Speaker 1>shift to try and make individual investors in their iss

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<v Speaker 1>get out of cash and into listeds. So two separate

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<v Speaker 1>things going on here, both actually really interesting. Do you

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<v Speaker 1>John approve of the Reeves plan to have five percent

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<v Speaker 1>of your pension money in UK private assets and ten

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<v Speaker 1>percent of your pension money in private assets all around?

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<v Speaker 1>I repeat your money because her ideas your money, yeah.

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<v Speaker 2>Exactly, her ideas earn money.

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<v Speaker 1>Yeah.

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<v Speaker 2>No, I don't particularly like the idea of being forced,

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<v Speaker 2>And if I'm honest, I'm not that keen on the

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<v Speaker 2>default being that either. I just don't think it's the

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<v Speaker 2>best time for pension funds to be mandated to go

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<v Speaker 2>into private assets, given that the private area in general

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<v Speaker 2>is generally regarded as not having quite caught up with

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<v Speaker 2>reality in terms of the value of the assets that

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<v Speaker 2>they hold firsts where interest rates currently are. So that

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<v Speaker 2>is one reason. The other reason is I want a

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<v Speaker 2>bit more detail on this mandation, like, so what.

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<v Speaker 1>There isn't mandation yet? This is not mandation, This is

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<v Speaker 1>just voluntary about Rachel Reason When asked if she would

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<v Speaker 1>make it managaries one of our colleagues, a Bloomberg by

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<v Speaker 1>the way, she said never say never, which is kind

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<v Speaker 1>of irritated all the pension funds because they agreed to

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<v Speaker 1>do this on the basis that it wouldn't be mandatory

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<v Speaker 1>but a voluntary target. And now she's saying, oh, well,

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<v Speaker 1>they don't do it like it will be mandatory, so

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<v Speaker 1>you know, and she's managed to irritate everybody, not just

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<v Speaker 1>you and me for change, but everybody.

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<v Speaker 2>Yeah, I mean, to be fair, I can see that's

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<v Speaker 2>just kind of average politicians caution, which she's sort of

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<v Speaker 2>being caught not ruling something out.

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<v Speaker 1>You having a be kind day? You aren't you.

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<v Speaker 2>Having a wee kind.

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<v Speaker 1>Thing. It's hard.

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<v Speaker 2>They can't win from that point of view, But I mean,

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<v Speaker 2>not that they necessarily should. Look, I think it's not

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<v Speaker 2>necessarily a great time to be buying into this sector,

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<v Speaker 2>this area, and also the idea that pension funds are

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<v Speaker 2>all agreeing to this off the back of what exactly

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<v Speaker 2>I mean. I think this is interesting because we often

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<v Speaker 2>talk here about whether it would be reasonable to say

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<v Speaker 2>that we're only going to give you a tax break

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<v Speaker 2>on certain parts of your eyes at if you invest

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<v Speaker 2>those in UK listed equities. And the reason that we

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<v Speaker 2>talk about that is because we think that capital markets

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<v Speaker 2>are important and that functioning capital markets are important. And also,

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<v Speaker 2>at the end of the day, one of the reasons

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<v Speaker 2>that UK equities have been so heavily sold out of

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<v Speaker 2>is because of regulatory intervention in other areas. So the

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<v Speaker 2>fact that define benefit pension schemes have become promises rather

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<v Speaker 2>than hopes over the course of the last forty fifty years,

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<v Speaker 2>which is forced that may sell out equities and buy

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<v Speaker 2>more points. So we talk about it in terms of

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<v Speaker 2>leaning against that, but this is more, this is something

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<v Speaker 2>completely different. Actually, it's kind of ten percent of the money.

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<v Speaker 2>Why should they go into private assis in the first place?

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<v Speaker 1>The story you're going to be told is you go

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<v Speaker 1>into private equity because private equity has outperformed listed equities

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<v Speaker 1>over the long term. And so if pension funds do

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<v Speaker 1>not have a significant amount of money in private equity,

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<v Speaker 1>they will be, you know, not not doing their produciary

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<v Speaker 1>duty properly because they won't be making the best possible returns.

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<v Speaker 1>So therefore they have to go into private equity. Now

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<v Speaker 1>they're probably with that so many problems, but the main

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<v Speaker 1>problem is that that record of long term returns has

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<v Speaker 1>been made. And of course it's very difficult, by the way,

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<v Speaker 1>to know exactly what the returns from private equity are

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<v Speaker 1>because not everyone's telling you, you know, you can't listed equities,

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<v Speaker 1>you can see the performance is out there. Yeah, there's

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<v Speaker 1>a lot of kind of shoveling together of all the

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<v Speaker 1>different types of private equity, venture capital, etc. Not everyone

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<v Speaker 1>is declaring not everyone knows what the results does You can't.

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<v Speaker 1>You can't really be sure, but in general consensus that

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<v Speaker 1>private equity may have outperformed over the last fifteen twenty years,

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<v Speaker 1>but it's done that in a period when a debt

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<v Speaker 1>has been remarkably cheap. And a lot of the private

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<v Speaker 1>equity model is about leveraging up, getting companies, jamming them

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<v Speaker 1>full of debt, et cetera. That's a big part of

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<v Speaker 1>the model. And when debt is cheap, obviously that works really,

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<v Speaker 1>really well. And it's also we have to go back

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<v Speaker 1>to the beginning of the period when they weren't that

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<v Speaker 1>many people working in private equity, so it's quite easy

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<v Speaker 1>to come across cheap companies and you know, restructure them

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<v Speaker 1>in such a way that you could make them worth more.

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<v Speaker 1>But of course those is a long gun. Now the

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<v Speaker 1>private equity market is absolutely huge, this huge competition for

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<v Speaker 1>every single asset anymore by the way they used to be,

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<v Speaker 1>and of course the low interest rate environment has gone completely.

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<v Speaker 1>So you look at this environment and you say, well, okay,

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<v Speaker 1>there's a massive amount of money sitting around in private

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<v Speaker 1>equity investments, in the assets that it's very difficult to

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<v Speaker 1>flog on. At the moment, there isn't that much appetite

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<v Speaker 1>for IPOs. There's no way for no way for investors

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<v Speaker 1>to exit. So what do you need if you have

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<v Speaker 1>a business that is almost entirely institutional and those institutions

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<v Speaker 1>are going, oh, do you know what kind of had

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<v Speaker 1>enough of this? I'm not putting any more money in.

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<v Speaker 1>I'd really like to get some more money out. What

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<v Speaker 1>do you need? A big pile of new buyers. And

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<v Speaker 1>if that was you, what would you do? You'd go?

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<v Speaker 1>Do you know what? Seems to me that pension funds

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<v Speaker 1>would not be doing their for duciary duty if they

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<v Speaker 1>didn't hold a whole loado I don't know, maybe ten

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<v Speaker 1>percent in private equity. Would you like some private equity

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<v Speaker 1>rates because you're we've got some around the back. I

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<v Speaker 1>can bring it right out, am I being to cecle? No?

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<v Speaker 2>I mean I think the backholder of last resort is

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<v Speaker 2>you know, one element of this for definitely, and I

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<v Speaker 2>guess the UK angle, Well, the problem there is you

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<v Speaker 2>think is this just all going to get piled into

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<v Speaker 2>you know, things like wind farms or anything that Ed

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<v Speaker 2>millerband kind of like puts his stamp on and that. Again,

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<v Speaker 2>this is completely separate from other conversations about should we

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<v Speaker 2>be supporting the UK public markets, where yes, you know,

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<v Speaker 2>by saying you won't get tax relief unless you invest

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<v Speaker 2>at least some of it in the public markets was

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<v Speaker 2>a whole different conversation.

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<v Speaker 1>It's the one thing, private markets are a totally different

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<v Speaker 1>thing and infrastructure is a totally different thing.

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<v Speaker 2>Well, the other thing I'm curious about in this havn't

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<v Speaker 2>got the figures on this. Unfortunately, perhaps I should have

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<v Speaker 2>done my homework before I came on.

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<v Speaker 1>One job jump.

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<v Speaker 2>Yeah exactly. But so we've got these seventeen pension points

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<v Speaker 2>talking about this. I mean presumably they already hold a

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<v Speaker 2>chunk and private assets.

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<v Speaker 1>O I can't get I have looked it up actually,

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<v Speaker 1>and it's well under two percent for most of them.

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<v Speaker 2>Oh that's centrist as.

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<v Speaker 1>Far as I can see. Happy to be corrected on

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<v Speaker 1>that if anyone knows more precise numbers. But the middle

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<v Speaker 1>of research I was doing early suggested we really are

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<v Speaker 1>in the very very low single leship percentages. So so

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<v Speaker 1>the answer kind of know that they haven't gone there.

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<v Speaker 2>So basically we are the Johnny come latelies as well

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<v Speaker 2>on top of the else. Oh yeah, that's good to know.

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<v Speaker 2>So having sold everything to Australian Canadian pension finds them

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<v Speaker 2>having wrong the best of tons out of them. Well,

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<v Speaker 2>and it's what's coming down. We are now going to

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<v Speaker 2>buy them back.

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<v Speaker 1>Worse, we're gonna we're going to force our pensioners to

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<v Speaker 1>invest in new projects government government decided government run at

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<v Speaker 1>very high interest rates. So we see how that pans

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<v Speaker 1>out because the pension funds will have to insist on some

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<v Speaker 1>kind of guaranteed return or some sort with infratuxture projects.

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<v Speaker 1>So this is gonna be very interesting. But we haven't

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<v Speaker 1>got there yet. I will say, by the way, I

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<v Speaker 1>don't know if you've noticed that there has been a

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<v Speaker 1>lot of talk in US private equity as well about

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<v Speaker 1>how this is a fabulous opportunity and it is time

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<v Speaker 1>for everyone to take a pile of private equity into

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<v Speaker 1>their four O one case. So you know, this is

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<v Speaker 1>not just a UK private equity thing, it's a US

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<v Speaker 1>private equity thing as well. How can we how can

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<v Speaker 1>we get somebody else to back up the truck and

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<v Speaker 1>take the stuff off our hands? And you know, the

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<v Speaker 1>retail infestors are out there for their very purpose.

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<v Speaker 2>If I was these guys, then I would be drumming

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<v Speaker 2>up the APU R market again at least try and

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<v Speaker 2>get some excitement about reequitization. You know, at the end

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<v Speaker 2>of the daily what's better than a passive fund coming

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<v Speaker 2>along with this kind of relentless bed and just buying

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<v Speaker 2>up the stuff that you're offloording.

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<v Speaker 1>But what John, what John will really? What will do

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<v Speaker 1>that for us? There is something that will make the

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<v Speaker 1>UK market go berserk, for example, and everyone want to

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<v Speaker 1>ipo here And that's something that's something is everyone's eyes

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<v Speaker 1>of money being channeled out of their cash ices and

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<v Speaker 1>into the market. Yes, can we disapprove.

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<v Speaker 2>Of that channeled? Yeah? Look, I mean I've said this

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<v Speaker 2>before the sort of like the tying vestiges of my

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<v Speaker 2>kind of like libertarian twenties, sort of like twitch against

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<v Speaker 2>the idea of you know, oh no, the government shouldn't

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<v Speaker 2>be interfered with this or interfered with that. But it's

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<v Speaker 2>not as if the government isn't already interfering in every

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<v Speaker 2>other kind of like layer of the kind of savings market.

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<v Speaker 2>So I don't think there's anything wrong we suggest and

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<v Speaker 2>that a they kind of cash allowance should be lower

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<v Speaker 2>than it is, or be that some it would be

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<v Speaker 2>fine to say some of your money has to go

0:11:56.040 --> 0:12:01.079
<v Speaker 2>into UK markets if you point to get that actually

0:12:01.160 --> 0:12:03.640
<v Speaker 2>for an aser for example.

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<v Speaker 1>I agree. And we've talked about this before. Remember how

0:12:05.920 --> 0:12:08.400
<v Speaker 1>much we approved of the Britte Icer. And let's be honest,

0:12:08.440 --> 0:12:10.559
<v Speaker 1>this is really just a new iteration of the Brittan Icer,

0:12:10.640 --> 0:12:11.680
<v Speaker 1>isn't it. Yeah?

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<v Speaker 2>And I mean stupidly with the flag taken off it,

0:12:14.360 --> 0:12:17.480
<v Speaker 2>because you know, just if you want, if you want

0:12:17.520 --> 0:12:20.320
<v Speaker 2>to give it a bit of publicity, then you know,

0:12:20.600 --> 0:12:23.160
<v Speaker 2>I realize there's a low, kind of high maintained people

0:12:23.160 --> 0:12:25.360
<v Speaker 2>who object to anything that's got the flag going it.

0:12:25.400 --> 0:12:29.320
<v Speaker 2>But most normal people don't bring out the bunting all

0:12:29.360 --> 0:12:33.600
<v Speaker 2>around on this podcast. Yeah, exactly, exactly right.

0:12:35.040 --> 0:12:37.720
<v Speaker 1>We have we actually have a report on that feeds

0:12:37.720 --> 0:12:39.400
<v Speaker 1>into this which we both found very interesting in this

0:12:39.520 --> 0:12:42.319
<v Speaker 1>by my old friend doun La Mondasrodis, and he has

0:12:42.400 --> 0:12:45.360
<v Speaker 1>taken a look at what your returns would be if

0:12:45.360 --> 0:12:48.160
<v Speaker 1>you simply stayed in cash for the twenty years running

0:12:48.240 --> 0:12:51.920
<v Speaker 1>up to twenty twenty three, or if you had invested

0:12:52.040 --> 0:12:58.080
<v Speaker 1>in global equities, and he really makes it extremely clear

0:12:58.160 --> 0:13:00.360
<v Speaker 1>that if you keep your money in cash, you are

0:13:00.360 --> 0:13:03.640
<v Speaker 1>missing out on an awful lot of money. You've been

0:13:03.640 --> 0:13:06.360
<v Speaker 1>what they call recklessly cautious. You know, you've tried so

0:13:06.559 --> 0:13:09.040
<v Speaker 1>hard to be cautious that you've actually ended up being

0:13:09.120 --> 0:13:12.960
<v Speaker 1>rather reckless because you've made a significant negative difference to

0:13:13.640 --> 0:13:14.680
<v Speaker 1>your future.

0:13:15.480 --> 0:13:18.200
<v Speaker 2>Yeah, I mean it's the ten tax years up to

0:13:18.320 --> 0:13:19.600
<v Speaker 2>April twenty twenty three.

0:13:19.800 --> 0:13:22.080
<v Speaker 1>Sorry, not the twenty to ten apologies.

0:13:21.679 --> 0:13:25.120
<v Speaker 2>Yeah, well even worse because so in the ten tax years,

0:13:25.960 --> 0:13:29.760
<v Speaker 2>essentially if you stuck on the money in global stocks

0:13:30.120 --> 0:13:34.000
<v Speaker 2>instead of a cash hezer, you'd now be more than

0:13:34.080 --> 0:13:36.880
<v Speaker 2>also collective way, we would be more than five hundred

0:13:36.960 --> 0:13:39.800
<v Speaker 2>billion better off, and as dunkin points, so that's about

0:13:39.800 --> 0:13:43.120
<v Speaker 2>twenty percent the UK GDP, So that is a huge

0:13:43.120 --> 0:13:48.640
<v Speaker 2>amount of wealth creation missed out on by individuals, which

0:13:48.679 --> 0:13:54.200
<v Speaker 2>strikes me, as you know, that's a real issue. And

0:13:54.320 --> 0:13:56.840
<v Speaker 2>all right, you can't say that all of that money

0:13:56.880 --> 0:13:59.920
<v Speaker 2>should have been invested in stockstyle and cash, because, as

0:14:00.040 --> 0:14:03.280
<v Speaker 2>Dunkin points out, everyone needs an emergency fund, and as

0:14:03.320 --> 0:14:06.720
<v Speaker 2>we've discussed here before, if you're retiring, then you probably

0:14:06.720 --> 0:14:09.559
<v Speaker 2>need but you do need significantly more cash than you

0:14:09.640 --> 0:14:12.360
<v Speaker 2>normally would to smooth your time in case something bad

0:14:12.400 --> 0:14:15.560
<v Speaker 2>hams in the stock market. But even putting those aside,

0:14:15.559 --> 0:14:18.480
<v Speaker 2>there's clearly a lot of excess cash saving going on

0:14:19.000 --> 0:14:21.800
<v Speaker 2>that could be in the stock market. And the point

0:14:21.880 --> 0:14:25.680
<v Speaker 2>is that it would almost certainly then make more money,

0:14:25.720 --> 0:14:28.120
<v Speaker 2>because that's the only reason. You know, we wouldn't be

0:14:28.160 --> 0:14:31.120
<v Speaker 2>sitting here talking about this every week if it wasn't

0:14:31.120 --> 0:14:33.400
<v Speaker 2>for the fact that over the long term, the stock

0:14:33.480 --> 0:14:37.440
<v Speaker 2>market does beat inflation and it does beat cash. You know,

0:14:37.480 --> 0:14:40.760
<v Speaker 2>if this was something that genuinely was up for debate,

0:14:40.880 --> 0:14:45.040
<v Speaker 2>then we wouldn't we wouldn't be constantly repeating it. It's like,

0:14:45.120 --> 0:14:47.760
<v Speaker 2>over the long term, it beats it. And yeah, you know,

0:14:47.800 --> 0:14:49.800
<v Speaker 2>you can say that if you'd stuck out your money

0:14:49.800 --> 0:14:52.560
<v Speaker 2>in Japan in nineteen ninety. Well then what would have happened,

0:14:52.600 --> 0:14:54.800
<v Speaker 2>But you wouldn't have done that, you know, you you

0:14:54.840 --> 0:14:58.600
<v Speaker 2>put it in diversified global markets blah blah blah, and

0:14:58.640 --> 0:15:00.800
<v Speaker 2>you do it a month at a time. Nobody puts

0:15:01.000 --> 0:15:05.240
<v Speaker 2>their lifetime earnings in the stock market on one day

0:15:05.760 --> 0:15:08.600
<v Speaker 2>that happens to be the peak. So you know, this

0:15:08.720 --> 0:15:12.680
<v Speaker 2>is the point. And it's just as Duncan's sort of

0:15:12.720 --> 0:15:17.000
<v Speaker 2>really getting that we need a culture shift whereby we

0:15:17.280 --> 0:15:20.640
<v Speaker 2>acknowledge that cash actually over the long run is risky

0:15:20.760 --> 0:15:23.160
<v Speaker 2>because it's probably going to get eroaded away by inflation.

0:15:23.720 --> 0:15:26.360
<v Speaker 2>And Duncan doesn't talk about property, but we should have

0:15:26.400 --> 0:15:29.920
<v Speaker 2>a serious conversation about how it sees because people still

0:15:30.320 --> 0:15:33.360
<v Speaker 2>see that as being you know, bricks and water. You

0:15:33.400 --> 0:15:35.280
<v Speaker 2>can't go wrong with bricks and waters, when in fact,

0:15:35.280 --> 0:15:39.160
<v Speaker 2>actually it's a leveraged asset. You and if you're only

0:15:39.160 --> 0:15:41.800
<v Speaker 2>buying one of them, then anything could happen to that

0:15:41.880 --> 0:15:43.240
<v Speaker 2>bricks and water, well.

0:15:43.120 --> 0:15:46.320
<v Speaker 1>And leverage asset with quite a high carrying cost. Yes,

0:15:47.880 --> 0:15:49.920
<v Speaker 1>And as I'm going to read read you this one

0:15:50.000 --> 0:15:53.480
<v Speaker 1>sentence from Duncan, which is very compelling. The real risk

0:15:53.520 --> 0:15:55.760
<v Speaker 1>for most people. Is not the risk of losing money

0:15:55.800 --> 0:15:58.160
<v Speaker 1>in the show term, but the risk of not achieving

0:15:58.160 --> 0:16:00.320
<v Speaker 1>your long run goal to be there a comfortable time

0:16:00.320 --> 0:16:03.080
<v Speaker 1>and house purchase, providing financial suport to your children, or

0:16:03.120 --> 0:16:06.520
<v Speaker 1>simply making sure your savings keep pace with inflation. This

0:16:06.760 --> 0:16:10.240
<v Speaker 1>is the risk of not taking enough risk. So I

0:16:10.280 --> 0:16:12.920
<v Speaker 1>think it's fair to say that Duncan in this arena

0:16:12.960 --> 0:16:15.360
<v Speaker 1>at least is on Rachel Reeves side.

0:16:15.440 --> 0:16:18.280
<v Speaker 2>Right, Yeah, I think that would be fair to say.

0:16:19.160 --> 0:16:20.920
<v Speaker 1>And we are too, or you are too. I think

0:16:20.920 --> 0:16:21.440
<v Speaker 1>I am too.

0:16:22.800 --> 0:16:26.240
<v Speaker 2>Yeah, I mean, I'm sure they'll find a way mess

0:16:26.280 --> 0:16:28.080
<v Speaker 2>it up and make it something that we don't like,

0:16:28.280 --> 0:16:33.320
<v Speaker 2>but the principletensible. I think it's a it's a good idea.

0:16:33.520 --> 0:16:35.120
<v Speaker 1>All right. Well, we'll come back to why we don't

0:16:35.240 --> 0:16:40.680
<v Speaker 1>like it when when it actually happens. Thanks John, Thanks

0:16:45.720 --> 0:16:48.080
<v Speaker 1>thanks for listening to this week's maryn Talks Money de Briefly.

0:16:48.120 --> 0:16:50.280
<v Speaker 1>If you like USh are rate, review, and subscribe wherever

0:16:50.280 --> 0:16:52.240
<v Speaker 1>you listen to podcasts. Also be sure to follow me

0:16:52.240 --> 0:16:54.720
<v Speaker 1>and John on exor Twitter. I'm at marinas w and

0:16:54.800 --> 0:16:58.200
<v Speaker 1>John is John Underscore Stepic. This episode was produced by

0:16:58.200 --> 0:17:01.080
<v Speaker 1>Summersadia Moses and The Question Comments on this show and

0:17:01.280 --> 0:17:04.360
<v Speaker 1>all our shows are always welcome. Our show email Ismerimany

0:17:04.359 --> 0:17:06.080
<v Speaker 1>at bloomberg dot net.