WEBVTT - The Edward Chancellor Aftershow 0:00:04.720 --> 0:00:07.840 Welcome to Maren Talks Money, the after Show. This is 0:00:07.840 --> 0:00:09.840 where we unpack all the commentary you hear in our 0:00:09.880 --> 0:00:11.800 regular podcast for free. 0:00:12.000 --> 0:00:13.720 I'm merin some set web This week. 0:00:13.760 --> 0:00:16.079 John Steppick, senior reporter at Bloomberg and author of the 0:00:16.160 --> 0:00:18.720 Daily Money to Skilled, a newsletter, joins me to discuss 0:00:18.760 --> 0:00:23.080 my conversation with Edward Chance, left finite historian, journalist, investment strategists, 0:00:23.280 --> 0:00:27.479 and expert on everything to do with interest rates. John, 0:00:27.560 --> 0:00:30.240 you know, I really enjoyed talking to Edward. I and 0:00:30.360 --> 0:00:33.080 Edward a long time. I've had lots of public conversations 0:00:33.080 --> 0:00:36.400 with him. And the worrying thing, and this is the 0:00:36.440 --> 0:00:38.599 worrying thing, is that I kind of agree with him 0:00:38.600 --> 0:00:39.480 on everything. 0:00:39.520 --> 0:00:40.319 I try not to. 0:00:40.360 --> 0:00:43.640 Because he's such a misery guts, but it's quite hard 0:00:43.720 --> 0:00:46.919 not to. He's so intelligent, he's so compelling. He has 0:00:47.000 --> 0:00:50.920 such a sweep of history behind everything that he says. 0:00:50.960 --> 0:00:53.320 You know, he's not just plucking random, random. 0:00:53.000 --> 0:00:54.639 Fact from the air like some authors. 0:00:55.200 --> 0:00:57.520 He really knows what he's talking about, and he's got 0:00:57.560 --> 0:01:00.680 thousands of years worth of history and data to back 0:01:00.720 --> 0:01:03.040 it up. And I listened to him speaking and all 0:01:03.080 --> 0:01:07.560 I can think is I can cletely agree with you difficult, right. 0:01:08.040 --> 0:01:11.200 It's difficult, and I agree with them as. 0:01:11.000 --> 0:01:13.880 Well, And damn I was hoping you wouldn't. 0:01:14.360 --> 0:01:18.520 Well, I know, we all sort of swing Austrian in 0:01:18.600 --> 0:01:21.440 terms of the economics. You know, you hear terms like 0:01:21.520 --> 0:01:24.240 capital misallocation and you know, okay with this, this is 0:01:24.360 --> 0:01:27.640 you know, the kind of Austrian view. The only the 0:01:27.680 --> 0:01:29.240 only thing to do then is to sort of try 0:01:29.240 --> 0:01:32.880 and push back against their own views and think about 0:01:33.240 --> 0:01:37.240 what the what's what's the kind of upside case or 0:01:37.280 --> 0:01:41.480 what is the potentially benign outcome here? And I do 0:01:41.560 --> 0:01:44.960 think that's important because you know, we have a lot 0:01:45.000 --> 0:01:49.920 of these end of the world moments in financial history, 0:01:50.520 --> 0:01:54.240 and most of the time it's not actually the end 0:01:54.280 --> 0:01:56.840 of the world. And even two thousand and eight, which 0:01:57.000 --> 0:01:58.920 was kind of the closest thing that I guess, we've 0:01:58.960 --> 0:02:02.240 got to the end of the financial world in a 0:02:02.280 --> 0:02:06.240 long time since the kind of great depression. Maybe that 0:02:06.960 --> 0:02:13.280 didn't end up with the sort of like cathartic moment. 0:02:14.919 --> 0:02:16.800 I know, lots of people still sort of feel as 0:02:16.800 --> 0:02:20.880 if there's some unfinished business there or whatever. And I 0:02:20.919 --> 0:02:25.160 suppose it's just worth thinking about, well, how could this 0:02:25.720 --> 0:02:30.160 interest rate cycle have a pretty benign ending, or at 0:02:30.240 --> 0:02:33.240 least a you know, one where things go on as 0:02:33.320 --> 0:02:38.400 usual and actually nothing in particular blows up. And I suppose, well, 0:02:38.880 --> 0:02:43.760 if you think about that, there's maybe two ways in 0:02:43.840 --> 0:02:48.720 which it could be okay. And maybe the reality is 0:02:49.360 --> 0:02:53.760 that since two thousand and eight, consumers and businesses have 0:02:53.880 --> 0:02:57.360 actually deleveraged to a certain extent in most countries, they 0:02:57.400 --> 0:03:01.280 weren't they're not as indebted as they were at the 0:03:01.280 --> 0:03:05.679 peak in two thousand and eight. If you then except 0:03:05.720 --> 0:03:07.679 that alo the people who do have debts and the 0:03:07.720 --> 0:03:09.960 companies they do have debts have it on fixed rates 0:03:10.400 --> 0:03:15.480 for prolonged dish periods, and then that means they've got 0:03:15.480 --> 0:03:19.960 time to think before they take the hit, the financial hit, 0:03:20.200 --> 0:03:22.000 and they also have time for inflation to play a 0:03:22.120 --> 0:03:25.560 role in driving up wages and you know, corporate incomes. 0:03:25.919 --> 0:03:28.120 So let's say that that happens, and so you get 0:03:28.120 --> 0:03:31.840 a gradual sort of like the pain keeps coming, but 0:03:32.000 --> 0:03:36.880 not in a way that actually blows anything up. And 0:03:36.920 --> 0:03:40.320 then you've got the sovereign side. But the reality is 0:03:40.360 --> 0:03:45.320 that government balance sheets actually can take a lot of stress, 0:03:46.040 --> 0:03:48.560 particularly if they're all in it at the same time, 0:03:49.080 --> 0:03:51.040 It's like it would be one thing if the UK 0:03:51.200 --> 0:03:54.760 had roughly one hundred percent debt to GDP and everyone 0:03:54.840 --> 0:03:57.320 else was, you know, Hunky Dorrian, they were all in 0:03:57.440 --> 0:04:00.839 twenty percent, but well not we're all checking that ound 0:04:00.880 --> 0:04:03.000 that area. And actually I think if you look at 0:04:03.000 --> 0:04:05.800 the G seven, I think the UK is actually below average, 0:04:05.880 --> 0:04:08.720 was slightly better off in terms of date to GDP. 0:04:09.480 --> 0:04:15.640 So maybe it just maybe inflation washes it over time, 0:04:16.160 --> 0:04:18.320 which I guess. I mean that does sort of still 0:04:18.360 --> 0:04:22.360 come down on it would say, because that's financial repression, 0:04:22.680 --> 0:04:27.400 but you don't get that kind of end of day's moment. 0:04:28.640 --> 0:04:31.800 And maybe just maybe at the same time, we get 0:04:31.800 --> 0:04:35.159 the beginning of the productivity revolution we've been waiting for 0:04:35.160 --> 0:04:40.359 for so long, and that helps move things forward by 0:04:40.400 --> 0:04:43.600 pushing out GDP growth more than one might have expected, 0:04:44.080 --> 0:04:46.960 and pushing up corporate growth of the better companies at 0:04:47.040 --> 0:04:49.599 least more than one might have expected, and that might 0:04:49.720 --> 0:04:53.360 act as something of a cover for the companies operating 0:04:53.400 --> 0:04:55.760 in areas where capital have been misallocated. 0:04:56.680 --> 0:04:59.080 Yeah, I mean, I'm really really trying here. 0:05:00.120 --> 0:05:06.760 Maybe artificial intelligence will do more than my imagination currently 0:05:06.920 --> 0:05:08.320 kind of runs too really. 0:05:09.240 --> 0:05:12.839 On the other hand, maybe it is true that the 0:05:12.880 --> 0:05:16.920 state of this this equilibrium or I mean, I don't 0:05:16.920 --> 0:05:19.120 know if you've read Bernard Connolly's latest book. We've got 0:05:19.160 --> 0:05:22.039 to get him on the podcast. I am working my 0:05:22.120 --> 0:05:24.320 way through it to the moment and more in there 0:05:24.360 --> 0:05:27.320 about the what he calls a temporal disequilibrium. 0:05:27.640 --> 0:05:29.920 We've pulled, pulled future growth forward. 0:05:29.600 --> 0:05:32.080 With very low interest rates, and you know that can 0:05:32.160 --> 0:05:36.320 only end end badly and only end with financial crisis. 0:05:35.880 --> 0:05:40.279 And you know it's a it's a depressing read. But 0:05:40.560 --> 0:05:43.200 Connolly has a good. 0:05:43.160 --> 0:05:47.000 Record, and here's someone who Edward reads as well, and 0:05:47.560 --> 0:05:49.600 you know they've they've looked at each other's work a lot, 0:05:49.640 --> 0:05:52.440 and they end up in the same place that another 0:05:52.480 --> 0:05:56.120 financial crisis is really not very far away, that markets 0:05:56.120 --> 0:05:59.120 will collapse, central bankers will give in and cut interest 0:05:59.200 --> 0:06:01.280 rates as a price, this well go up again, and 0:06:01.640 --> 0:06:04.200 you know we're back where we were. There's no easy 0:06:04.200 --> 0:06:05.920 way out of this, which is going to lurch from 0:06:05.960 --> 0:06:07.719 crisis to crisis to crisis. 0:06:07.839 --> 0:06:09.840 Capital continues to be misallocated. 0:06:09.880 --> 0:06:13.720 In that capital misallocation leads to financial crisis, which central 0:06:13.720 --> 0:06:17.840 banks react to in their usual rubbish way by creating 0:06:18.000 --> 0:06:20.640 nu acid bubbles and in the end, I don't know, 0:06:20.680 --> 0:06:22.360 maybe the world does end in the end. 0:06:23.320 --> 0:06:27.480 I mean that does feel. The issue I have with 0:06:27.640 --> 0:06:31.080 that is a public facts monumentally the present. 0:06:30.880 --> 0:06:32.840 Is very really depressing. 0:06:33.080 --> 0:06:36.480 I don't think that's politically sustainable. I think you get 0:06:36.480 --> 0:06:40.479 to a point where people get sufficiently fed up that 0:06:41.040 --> 0:06:45.080 I mean either something like you know, nasty happens in politics, 0:06:45.080 --> 0:06:47.160 which is obviously what people are all panicking about just 0:06:48.240 --> 0:06:50.200 but also you know, if you think back to kind 0:06:50.200 --> 0:06:54.640 of poll vocal the nineteen seventies, eventually they kind of 0:06:54.920 --> 0:06:58.760 the cure of high inflation got much more painful down 0:06:58.839 --> 0:07:02.719 the cure of of a stating recession. And that kind 0:07:02.720 --> 0:07:05.919 of put us stop to to that because like it 0:07:06.000 --> 0:07:09.559 kind of this is the political side sort of became 0:07:10.000 --> 0:07:15.160 too difficult to indulge the easy answer that cutting interest 0:07:15.240 --> 0:07:19.800 rates all the time. So I can see possibly that 0:07:20.120 --> 0:07:22.600 would happen at some point in the future to you know, 0:07:22.720 --> 0:07:26.040 stop this. And but equally, you know, the geopolitical picture 0:07:26.160 --> 0:07:28.400 is messier than it has been for a long time, 0:07:29.600 --> 0:07:34.160 and that I find very uncomfortable. I have to say, 0:07:35.960 --> 0:07:38.360 you know, I mean me and you are kind of 0:07:39.200 --> 0:07:41.960 grew up in the nineties, late eighties, when other things 0:07:42.160 --> 0:07:45.520 were actually genuinely getting better on that front to a 0:07:45.600 --> 0:07:48.680 quite spectacular extent, you know, the Cold War end and 0:07:48.720 --> 0:07:52.560 completely unexpectedly, regardless of what anyone says. Now, nobody saw 0:07:52.760 --> 0:07:57.640 the Berlin Wall falling, you know, six months before it happened. 0:07:58.080 --> 0:08:01.320 But now, you know, it feels like we're really going 0:08:01.800 --> 0:08:04.280 back the way badly on that front. 0:08:04.880 --> 0:08:05.120 And too. 0:08:05.280 --> 0:08:07.960 You know, this might be just middle aged, but to 0:08:08.040 --> 0:08:10.280 the extent, it feels as if we squandered you know, 0:08:10.360 --> 0:08:11.960 the kind of benefits of that era. 0:08:12.960 --> 0:08:14.000 We totally did. 0:08:15.640 --> 0:08:18.880 So spend all the money we said that we didn't 0:08:18.880 --> 0:08:21.120 have to spend on defence, didn't. 0:08:21.680 --> 0:08:23.480 Yeah, let's not get started on that. 0:08:23.560 --> 0:08:26.560 But that's so I think that's that's that's actually the 0:08:26.560 --> 0:08:28.920 thing that worries mean more because I think that the 0:08:29.000 --> 0:08:35.520 financial side, oddly enough, companies still have enough freedom and 0:08:35.640 --> 0:08:40.560 individuals still enough freedom to get by despite all of 0:08:40.600 --> 0:08:44.120 the mess mistakes that are made, you know, at the 0:08:44.160 --> 0:08:46.439 higher levels. But as soon as we're starting to get 0:08:46.440 --> 0:08:50.360 any actual kind of like shooting wars were you know, 0:08:52.280 --> 0:08:55.080 dangerous kind of enemies, then that that's not a that's 0:08:55.080 --> 0:08:57.719 a bad situation. I think that's probably what I'm more 0:08:57.760 --> 0:09:00.880 worried about. If it was the else is in decity 0:09:00.960 --> 0:09:04.920 that it's the thing that cannot ends up causing all 0:09:04.960 --> 0:09:05.400 the trouble. 0:09:06.440 --> 0:09:09.000 Yeah, the one part of this comes back to that. 0:09:09.000 --> 0:09:11.320 The one part of the interview Chancellor that I found 0:09:11.440 --> 0:09:14.240 very interesting is that about halfway through we're talking about 0:09:14.240 --> 0:09:15.760 when I'm saying to him, you know what's going to 0:09:15.800 --> 0:09:17.360 happen next, that we're just going to it's just going 0:09:17.440 --> 0:09:19.440 to be slower and misery for a decade or so 0:09:19.480 --> 0:09:20.680 as we try and work away out of this. 0:09:20.840 --> 0:09:22.360 Is there going to be a big crisis? 0:09:22.440 --> 0:09:24.840 And I know that his core case is that there 0:09:24.960 --> 0:09:27.679 is likely to be a financial crisis of some kind. 0:09:27.720 --> 0:09:28.800 But one thing that he. 0:09:28.800 --> 0:09:32.920 Says is that this is becoming analytically his words, more complicated. 0:09:33.720 --> 0:09:37.920 But one thing I would say is that the crisis 0:09:37.960 --> 0:09:41.760 that we have been experiencing over the last twenty five 0:09:41.840 --> 0:09:46.559 years are becoming analytically more complex. For instance, go back 0:09:46.600 --> 0:09:51.440 to the dot com bust was pretty simple. You really 0:09:51.480 --> 0:09:54.240 had to be done not to understand how that was 0:09:54.280 --> 0:09:57.599 coming and how to analyze it. I think the credit crisis, 0:09:57.760 --> 0:10:04.319 global financial crisis was much more complicated. With the structured 0:10:04.920 --> 0:10:09.200 credit and problems in subprime and collectialized debt applications. I 0:10:09.200 --> 0:10:13.400 think the problem that we have today is not so 0:10:13.559 --> 0:10:20.160 much complex financial structures, but the fact that the low 0:10:20.240 --> 0:10:26.720 interest rates that prevailed for so long had such wide effects. 0:10:27.720 --> 0:10:30.440 Any points out that we go back to dot com bust, 0:10:30.480 --> 0:10:31.280 that was really simple. 0:10:32.040 --> 0:10:33.000 Everyone could see it coming. 0:10:33.000 --> 0:10:35.840 It had been an absolute idiot not to see that 0:10:35.920 --> 0:10:38.840 there was a massive bubble based on this allocation of 0:10:38.880 --> 0:10:42.480 capital and piles of cash being given to unbelievably stupid companies, etc. 0:10:43.240 --> 0:10:45.040 Really really stupid not to know that that was going 0:10:45.080 --> 0:10:47.720 to crash and crash big time. Of course, you couldn't 0:10:47.880 --> 0:10:49.600 quite get the timing right, and lots of people got 0:10:49.640 --> 0:10:51.880 the timing wrong. In short, all those companies were far 0:10:51.880 --> 0:10:53.959 too long before they actual crashed. But the fact that 0:10:54.000 --> 0:10:58.600 they were going to crash it's an absolute given. But 0:10:59.000 --> 0:11:02.080 later crisis, the crisis, the Gooble financial crisis, all these. 0:11:01.960 --> 0:11:03.520 Things much more complicated. 0:11:03.559 --> 0:11:06.600 The cdios, the subprime, the structure credit stuff, all these 0:11:06.800 --> 0:11:12.199 really complicated financial structures made it really complicated to analyze, 0:11:12.320 --> 0:11:14.400 complicated to see what was going to happen next. 0:11:14.679 --> 0:11:17.040 And so the core point I'm trying to make is 0:11:17.080 --> 0:11:17.640 that right now? 0:11:17.880 --> 0:11:20.720 Anyone who tells you that they can see exactly what's 0:11:20.720 --> 0:11:24.160 going to happen, even us, John, even us, anyone they 0:11:24.160 --> 0:11:26.120 can see exactly what is going to happen, it's very 0:11:26.520 --> 0:11:31.959 probably wrong because I mean, everybody'ses this wonderful phrase. Interest 0:11:32.000 --> 0:11:34.520 rates get into all the cracks, and you know, you 0:11:34.559 --> 0:11:37.120 can't even see some of the cracks. Central interest rates 0:11:37.160 --> 0:11:40.160 go up and then the pushout starts. So you just 0:11:40.440 --> 0:11:44.800 don't know in this incredibly complicated financial environment where the 0:11:44.920 --> 0:11:47.199 nightmare is going to be what's gonna what's going to 0:11:47.240 --> 0:11:50.120 start something? Or if maybe nothing will start And as 0:11:50.160 --> 0:11:52.360 you say, we just sort of slow burn through the 0:11:52.360 --> 0:11:54.600 misery for a decade and maybe we have a huge 0:11:54.600 --> 0:11:58.640 productivity boost and maybe company company managers are really as 0:11:58.640 --> 0:12:00.720 brilliant as they often can be. Things send out to 0:12:00.720 --> 0:12:04.040 be kind of fine. But we literally don't know. And 0:12:04.160 --> 0:12:08.520 that's the key thing for investors understanding that no one 0:12:08.600 --> 0:12:11.880 really quite understands, and so you have to be really 0:12:12.120 --> 0:12:15.400 careful how you invest with a constant eye to the 0:12:15.960 --> 0:12:18.319 endless unknown unknown unnn unknowns. 0:12:19.720 --> 0:12:23.560 Yeah, and I suppose the editating thing about all this 0:12:23.720 --> 0:12:26.040 is that when then comes down, well, what does this 0:12:26.160 --> 0:12:30.320 actually mean for your money? All it really means is, well, 0:12:30.320 --> 0:12:32.480 this is why you need to have a diversified portfolio. 0:12:32.760 --> 0:12:35.920 But also, you know, you need to have something that 0:12:36.400 --> 0:12:38.400 takes to your political risk in your account. So I 0:12:38.400 --> 0:12:41.119 guess the main difference is it's like when we say diversified, 0:12:41.160 --> 0:12:45.160 you don't actually mean sixty forty Boin's equities. We mean 0:12:45.320 --> 0:12:50.600 Boin's equities and some gold, and probably you know, think 0:12:50.679 --> 0:12:53.320 of cash as being a quarter the cash I know. 0:12:53.480 --> 0:12:53.640 I mean. 0:12:53.640 --> 0:12:56.720 The thing is, these conversations are so interesting, aren't there 0:12:56.800 --> 0:12:59.880 particularly one with Edward's so interesting, absolutely love talking to. 0:13:00.080 --> 0:13:04.319 But in the end the solution is really quite pooring. 0:13:06.000 --> 0:13:06.920 For an investor. 0:13:07.080 --> 0:13:09.160 You can't come out of this going, god, this is 0:13:09.200 --> 0:13:11.840 so exciting. I'm going out to buy Singapore and small caps, 0:13:11.840 --> 0:13:13.640 although by the I think they're quite cheap too, someone's 0:13:13.640 --> 0:13:15.439 telling me the other day. But you know, you can't 0:13:15.440 --> 0:13:17.600 go out with an exciting investment strategy. 0:13:17.640 --> 0:13:19.679 You're just like, oh my god, to be a bit diversified. 0:13:19.760 --> 0:13:22.240 And you know, Japan because every by the way, it's 0:13:22.240 --> 0:13:24.160 also a Japan bull and I enjoyed that about them 0:13:24.200 --> 0:13:27.760 as well, because you know, just agrees on everything. 0:13:29.600 --> 0:13:31.960 So I think you know that some of the headwinds 0:13:32.000 --> 0:13:35.160 for Japan were high valuations and then this period of 0:13:35.960 --> 0:13:42.800 deflation and deleveraging that hurt Japanese margins and return on equity. 0:13:42.920 --> 0:13:44.640 And I think that was over ten years ago. So 0:13:44.920 --> 0:13:48.800 that was our reason for being bullish ten twelve years ago, 0:13:49.080 --> 0:13:51.199 and that's been more than vindicated. 0:13:51.480 --> 0:13:56.880 Let's say, I guess right by Chief stuff and gold, 0:13:57.080 --> 0:13:59.000 by Japan, by gold, and many of the things you 0:13:59.000 --> 0:14:02.360 and I have been saying for. He wasn't having any 0:14:02.440 --> 0:14:04.480 truck at all with bitcoin. I think he thought it 0:14:04.520 --> 0:14:06.319 was a true question. It was not a truck question. 0:14:08.520 --> 0:14:12.200 Well ideah, let's well, let's not have the bitcoin chat again. 0:14:12.320 --> 0:14:17.800 We could do. I still feel I think it's interesting 0:14:17.800 --> 0:14:22.880 that a historian of money and it's you know, because 0:14:22.880 --> 0:14:24.960 it is. I think it is fair to take money 0:14:25.000 --> 0:14:29.560 as a social technology and the idea that. 0:14:29.920 --> 0:14:31.480 I love the way you proved for us that you 0:14:31.560 --> 0:14:32.560 read books. 0:14:34.040 --> 0:14:39.240 Yes, yes, occasionally read one creeps in there and yeah 0:14:39.400 --> 0:14:42.080 it's that the thing you think, Well, you know, maybe 0:14:42.080 --> 0:14:46.400 maybe I don't think. I don't think bitcoin is a scam. 0:14:46.640 --> 0:14:49.760 I think it's it's maybe niche, but it's definitely there's 0:14:49.960 --> 0:14:53.880 there's a technology there that that is for real, unless 0:14:54.040 --> 0:14:58.360 you know, the world's greatest tackers have mice to keep going. 0:14:59.160 --> 0:15:01.320 This is what we've learned back John Today, John reads 0:15:01.320 --> 0:15:05.840 books and John's a money launderer. Thanks for listening to 0:15:05.880 --> 0:15:08.720 this week's Marin JUG's Money the After Show. This episode 0:15:08.760 --> 0:15:11.560 was hosted by me Maren zumset Web alongside John step Back. 0:15:11.640 --> 0:15:12.360 Thank you John. 0:15:12.680 --> 0:15:16.200 It was produced by some Aersadi additional editing by Blake Mabels. 0:15:16.200 --> 0:15:18.520 Please review us, Please tell your friends thank you.