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Speaker 1: Hello, and welcome to another episode of the All Thoughts Podcast.

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Speaker 1: I'm Tracy Alloway.

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Speaker 2: And I'm Joe Wisenthal.

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Speaker 1: Joe, you know, it's a hot topic at the moment. Uh,

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Speaker 1: don't say AI.

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Speaker 3: I mean it is, right, but I guess it is.

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Speaker 1: Yeah, Okay, Hey, we're not talking about AI. We're talking

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Speaker 1: about another hot button topic, which is corporate profits.

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Speaker 3: Yes, but it might kind of be related valuations, stocked, booming,

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Speaker 3: profits booming, et cetera.

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Speaker 2: Like there might be some.

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Speaker 1: Connection, right, Okay, that is fair. But one of the

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Speaker 1: reasons everyone's talking about corporate profits at the moment is

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Speaker 1: because obviously there is this new idea that maybe there

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Speaker 1: is profit led inflation, companies raising their prices a little

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Speaker 1: more than they have to given, you know, input costs

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Speaker 1: and things like supplying to and that's boosting profits. So

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Speaker 1: you see it everywhere now. And one of the things

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Speaker 1: that you see is corporate profits have been very, very

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Speaker 1: high in recent years. Although it's true they are starting

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Speaker 1: to come down.

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Speaker 3: Right, And the interesting thing about high corporate profits is

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Speaker 3: that there has been this expect it's been for years.

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Speaker 3: I mean, they've been very high in recent years. But

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Speaker 3: I mean, I remember you know, years ago people talk

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Speaker 3: about corporate profits being high and they had to mean revert, right, Yeah,

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Speaker 3: there was this assumption that they were at unsustainable levels,

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Speaker 3: and people talked about this in the wake of the

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Speaker 3: Great Financial Crisis, that corporate profits were very high and

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Speaker 3: it was only a matter of time before labor would

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Speaker 3: take a greater share out of profits, et cetera. Anyway,

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Speaker 3: the point is, though they've been high and they've stayed high.

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Speaker 1: I'm glad you mentioned mean reversion because today we have

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Speaker 1: really the perfect guest. We have someone who forecast that

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Speaker 1: profits were going to mean revert, they were going to fall.

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Speaker 1: This was a prognostication that was made back in the

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Speaker 1: very early days of twenty twelve, so right after the

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Speaker 1: two thousand and eight financial crisis, when everyone was sort

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Speaker 1: of scratching their heads about why they recovery. The economic

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Speaker 1: recovery was slow and painful, but the recovery in corporate

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Speaker 1: profit margins was quite quick, yes, and dramatic. So this

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Speaker 1: particular guest made the forecast that eventually profits would mean revert. However,

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Speaker 1: it is now more than ten years later they didn't

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Speaker 1: mean revert, and our guest has just published a giant

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Speaker 1: mea culpa, which is something that you don't see that

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Speaker 1: often in the world of financial research. So kudos to

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Speaker 1: the guest for doing that. And we are going to

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Speaker 1: dig in about why corporate profits remain so high.

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Speaker 3: I can't wait. This is a really important topic. And

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Speaker 3: again with this sort of new boom in the stock

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Speaker 3: market really over the last couple of months again kind

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Speaker 3: of you know, we're a bull market again with stocks

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Speaker 3: last October, last fall really negative, just absolutely on a

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Speaker 3: tear lately recording this June fifteenth. What's driving at how

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Speaker 3: sustainable is? These are great questions to dive into now.

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Speaker 1: Yeah, and we're going to talk about valuations too, because

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Speaker 1: of course profits valuations sort of naturally go together. But

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Speaker 1: without further ado, I think I already gave it away,

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Speaker 1: but we are speaking with James Montier. He is, of

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Speaker 1: course a strategist over at GMO, someone we've wanted to

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Speaker 1: talk to for a very long time. So I'm glad

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Speaker 1: we could finally have a mom James, thanks so much

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Speaker 1: for joining odd Lots.

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Speaker 4: Thank you very much for having me. Guys really appreciate it.

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Speaker 1: So I want to sound genuine here. I really applaud

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Speaker 1: someone revisiting their previous work and thinking about it again

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Speaker 1: and saying having the honesty to say I was wrong.

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Speaker 1: So talk us through just to begin with, how did

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Speaker 1: this sort of maya kulpa come about?

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Speaker 4: So? I guess it really stems from just a longevity

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Speaker 4: in the business. When you've been in it as long

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Speaker 4: as I have, you cannot possibly claim to have anything

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Speaker 4: approximating a kind of group track record for forecasting. And

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Speaker 4: I've written before, many many years ago, when I was

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Speaker 4: back a Dresna on the folly of forecasting and how

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Speaker 4: stupid it is to actually attempt to forecast things. And

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Speaker 4: yet I still do it. And I think if one's

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Speaker 4: going to do that, there's a whole.

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Speaker 1: Industry dedicated to doing it, So you're not the only one.

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Speaker 4: Absolutely, Yeah, the entire financial industry seems to think it

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Speaker 4: can tell the future. We make Gypsies with their crystal

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Speaker 4: balls look positively reasonable with our accuracy, and so I've

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Speaker 4: long long taken to the view that we really have

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Speaker 4: to go back and examine our mistakes. Right. There's this

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Speaker 4: concept of the growth mindset that Carol Dweck wrote about

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Speaker 4: years ago, and it really is that the only way

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Speaker 4: of learning is to embrace your mistakes right. If you

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Speaker 4: get it right, fine, you got it right, but you

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Speaker 4: don't learn anything. If you get something wrong. There's the

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Speaker 4: opportunity to learn something. You know, why did you get

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Speaker 4: it wrong? And so for me, as I've gone over

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Speaker 4: the years and I guess I've aged and an ego

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Speaker 4: has died. You know that kind of enthusiasm of exuberance

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Speaker 4: of youth where you're like, yeah, I mean vincible, I'm

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Speaker 4: always right, and you're like, no, the market's just wagh,

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Speaker 4: you're down. Over time, you've been wrong. And I think

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Speaker 4: what's particularly fascinating to me is when you have a

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Speaker 4: long term forecast. You know, the short term ones are

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Speaker 4: just noised right, any goody would be right tomorrow, who knows.

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Speaker 4: But the long term views, where you're talked about mean

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Speaker 4: reversion in your intro and mean reversion doesn't happen, that

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Speaker 4: really gets interesting to me. And I've always kind of

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Speaker 4: piken those examples of where I've been wrong now ten

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Speaker 4: years after the fact and so, okay, what on earth

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Speaker 4: did I miss? Because for me, it's all about learning.

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Speaker 4: How do I improve? I'm fifty two years old this year,

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Speaker 4: and I'm still stupid enough to think that I can

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Speaker 4: learn and maybe get better. I probably won't get better,

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Speaker 4: but at least I can learn.

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Speaker 3: So why do we go back to start? Why don't

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Speaker 3: we go back ten years or a little more? I

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Speaker 3: guess to your call in twenty twelve, and at the

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Speaker 3: time there's a chart in your newest white paper that's useful.

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Speaker 3: It shows that at the time when you sort of

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Speaker 3: sort of rain the alarm about corporate profits US NEPA

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Speaker 3: profit margins is a share of GNP. They're about ten percent,

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Speaker 3: which was well higher than anything we had seen. And

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Speaker 3: say the fifty years or I guess seven years prior,

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Speaker 3: they've sort of gotten as high as nine percent, but

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Speaker 3: they had gotten really high at that point. So what

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Speaker 3: do we start there, like talk about the conditions that

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Speaker 3: had gotten us in twenty twelve to an extraordinary high

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Speaker 3: level of corporate profit margins.

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Speaker 4: Sure, So the framework I tend to use to understand

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Speaker 4: these things is something called the Kalechi equation.

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Speaker 3: Which many of our many odd Logs listeners. We did

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Speaker 3: a full episode on Koleetchki and.

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Speaker 1: Well Collecki Tribua.

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Speaker 3: Yeah, so this is home term for odd logs listeners.

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Speaker 3: But yes, keep going exactly.

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Speaker 4: Yeah, good old yeah, and it did all the hard

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Speaker 4: work for me. And I was fortunate enough when I

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Speaker 4: was at university all those years ago to have someone

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Speaker 4: who actually taught this stuff and arrogant enough at the

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Speaker 4: time to ignore it. Back then, I was a full

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Speaker 4: believer in rational ex expectations and I was a mathematical

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Speaker 4: and columnist, and the beauty of rational expectations was really

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Speaker 4: awesome to me. And then I realized as I began

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Speaker 4: my career in finance that actually that was just a terrible,

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Speaker 4: terrible framework for thinking. And I fell back on these

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Speaker 4: tools that i'd been taught that i'd kind of thrown

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Speaker 4: out when I was being taught them. In fact, I

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Speaker 4: saw my old lecturer a good few years ago sadly

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Speaker 4: at the funeral and had to apologize to him for

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Speaker 4: my extreme arrogance when I was a student and tell

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Speaker 4: him that the stuff he'd actually taught me was the

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Speaker 4: only stuff I actually used these days. And I used

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Speaker 4: this equation to kind of frame the world and try

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Speaker 4: and understand profits. And it comes down to this view

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Speaker 4: that profits can really be decomposed from a macro point

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Speaker 4: of view. The beauty of a macro framework is it

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Speaker 4: imposes conditions that tend to get missed when you're dealing

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Speaker 4: with kind of micro topics. So often you'll hear people say, oh,

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Speaker 4: now profit margins are high because they crushed their suppliers. Well,

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Speaker 4: the problem is from an aggregate point of view, that

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Speaker 4: doesn't make any sense lens. Right, it might be true

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Speaker 4: for that one individual company, but it can't be true

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Speaker 4: in aggregate because those suppliers profits are also companies, right, yeah, exactly,

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Speaker 4: they get their inputs, So everybody's output is somebody else's

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Speaker 4: input kind of thing. Right, So you can't get higher

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Speaker 4: profits by squshing in aggregate, by squashing your your suppliers,

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Speaker 4: because they just end up with a lot of profits.

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Speaker 4: So when you take a macro lens, it gives you

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Speaker 4: a kind of framework that is coherent and consistent, and

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Speaker 4: that's a really powerful style. So the collect equation says, hey, look,

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Speaker 4: there's a few drivers of profits. There's net investment. If

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Speaker 4: you go out and you buy stuff that's going to

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Speaker 4: add to productive capacity, that's going to be good for profits.

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Speaker 4: It makes sense as a corporate you're investing in your future,

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Speaker 4: but you are providing profits to somebody else. Again, we

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Speaker 4: get that kind of no firm can bootstrap itself out

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Speaker 4: of that situation, but it does in aggregate create profits.

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Speaker 4: Dividends are another source of profits. Now it sounds weird

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Speaker 4: because we always think about dividends being paid out of profits,

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Speaker 4: but dividends, of course are an income flow to a

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Speaker 4: household somewhere, and ultimately they are therefore a form of

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Speaker 4: spending or potential spending. Then you get the kind of

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Speaker 4: negatives that drag on profits. So if households choose to save,

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Speaker 4: that's obviously a drag. You know, I'm not spending all

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Speaker 4: of their income they're saving. That's going to drag profits

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Speaker 4: down if governments are saving it, And that turns out

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Speaker 4: to be kind of the opposite of what governments do.

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Speaker 4: But if governments were saving, that too would be a drag.

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Speaker 4: And if the foreign sector is saving, that too drags

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Speaker 4: down profits. And so when I was looking back in

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Speaker 4: twenty twelve, we had pretty big fiscal deficits. Investment had

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Speaker 4: fallen dramatically and effectively the government deficits had expanded to

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Speaker 4: fill some of that gap, and I foolishly made the

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Speaker 4: forecast that it was really the government deficits that were

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Speaker 4: going to have to come down, and that was going

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Speaker 4: to be the macro driver of the profit margin mean

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Speaker 4: reversion that we kind of all expected.

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Speaker 1: So, just on that note, why did you think that

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Speaker 1: government spending would come down? Because nowadays, I mean, we've had,

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Speaker 1: you know, successive years of the US deficit getting bigger

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Speaker 1: and bigger and bigger, and it's almost taken for granted

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Speaker 1: at this point that it's just going to keep growing.

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Speaker 1: But why did you think that spending would actually reduce

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Speaker 1: back in twenty twelve.

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Speaker 4: So I think it was it was a product of

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Speaker 4: two things. So I was standing there on twenty twelve

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Speaker 4: looking at the fiscal deficit and we're, you know, POSTGFC,

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Speaker 4: and during the GFC, of course, the fiscal deficit exploded

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Speaker 4: to levels that frankly, we hadn't ever seen before, which

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Speaker 4: are now dwarfed by what we experienced in COVID, but

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Speaker 4: back then were really exceptional. And it was that kind

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Speaker 4: of extremely high level of fiscal deficit over the post

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Speaker 4: GFC or the GFC, and it's kind of hangover if

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Speaker 4: you like. That really had me thinking, right, it's got

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Speaker 4: to come down, right, governments can't continue spending at this rate.

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Speaker 4: And that's that was undoubtedly the thing I got wrong.

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Speaker 4: Because it's simply never seen, at least in the US

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Speaker 4: fiscal deficits of such magnitude for such a period of time.

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Speaker 4: I should, of course have learned from my experiences with

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Speaker 4: regard to Japan, where they'd already been running very large

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Speaker 4: fiscal deficits. But at that time I hadn't really figured

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Speaker 4: out that kind of secular stagnation and the kind of

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Speaker 4: is the US turning Japanese was going to be the

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Speaker 4: road path? It took me a little bit longer. I

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Speaker 4: began to write about that towards the end of twenty twelve.

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Speaker 4: Actually I began to figure out that actually that was

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Speaker 4: probably a more likely template. I should have actually listened

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Speaker 4: my old colleague out Albert Edwards from and he'd been

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Speaker 4: telling me this for years, the US was turning Japanese,

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Speaker 4: and I was like, yeah, whatever, its a great line,

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Speaker 4: and it's the sun by the vapors. It's all cool.

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Speaker 4: But I kind of just ignored him, and I really

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Speaker 4: shouldn't have done, because it turns out he was spot off.

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Speaker 3: We start to move over the course of that next decade,

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Speaker 3: we didn't see the big contraction in the deficit as

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Speaker 3: many people expected, and then, of course with COVID deficits

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Speaker 3: blew out again and are significantly wider than you know.

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Speaker 3: Twenty twelve was obviously a great time in retrospect to

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Speaker 3: buy stocks. And if you just bought the sort of

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Speaker 3: broad stock market in the US and twenty twelve and

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Speaker 3: held to it today, you would have done quite well.

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Speaker 3: If we decompose the returns over that last ten or

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Speaker 3: eleven years, how much can we attribute to corporate profitability

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Speaker 3: from the from those years to those stock returns.

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Speaker 4: So yeah, I said, this is a really good way

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Speaker 4: of framing it, and I think the way I tend

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Speaker 4: to look at it don't have the decon right to hand.

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Speaker 4: I have done it before, actually looking at the kind

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Speaker 4: of drivers. But what I found is, by far and

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Speaker 4: away the most important factor turned out to be valuation

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Speaker 4: rather than profits. Profits were good, you know, they stayed high,

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Speaker 4: but they did come down compared to the kind of

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Speaker 4: absolute peak that we reached in twenty twelve. So profit

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Speaker 4: margins and that kind of new levels of corporate profitability,

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Speaker 4: although they didn't mean revert, they didn't continue to go up.

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Speaker 4: And therefore the key driver of the performance that we've

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Speaker 4: witnessed is actually been valuation and that I think is

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Speaker 4: as Ever, here's the progostfication for you, of course, for

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Speaker 4: concern right as a value based investor, when I see

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Speaker 4: a market that is essentially being driven by multiple expansion,

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Speaker 4: that makes me kind of nervous. And so yeah, the

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Speaker 4: fact that margins didn't come down, but they didn't go

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Speaker 4: up from twenty twelve actually kind of they came down

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Speaker 4: a little bit, and they've stayed over that decade higher

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Speaker 4: than they were historically, but they didn't rise from twenty twelve.

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Speaker 4: They average. That I think tells you that the evaluations

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Speaker 4: have been a massive part of this problem.

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Speaker 1: Just setting aside valuations for a second, I mean, if

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Speaker 1: we look at some of the fundamentals in the macro

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Speaker 1: economy that might have boosted profits, one of the things

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Speaker 1: in your equation is dividends, as you've laid out previously,

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Speaker 1: And I think there are people out there who would

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Speaker 1: argue that companies have gotten bigger, they've gotten more pricing power,

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Speaker 1: maybe with monopolistic tendencies. Could that be genuinely boosting profitability.

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Speaker 4: It's really fascinating. I think that the increasing dividends is

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Speaker 4: certainly a noteworthy feature, right, Dividends in the last decade

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Speaker 4: have indeed been significantly higher than they were over most

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Speaker 4: of history. The causes of that, I think are also

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Speaker 4: interesting to me. The fact that dividends have increased is

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Speaker 4: really has to be combined with what happened to investment,

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Speaker 4: because I think investment and dividends, as com buying, is

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Speaker 4: a corporate payout decision. Right, you can either invest or

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Speaker 4: you can pay dividends. Those are at a very crude level,

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Speaker 4: those are your two options. And what we've seen over

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Speaker 4: the last decade, compared to let's say the nineteen fifties onwards,

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Speaker 4: investment roughly halved and dividends roughly doubled. And so you

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Speaker 4: saw this switch in payout from a world in which

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Speaker 4: corporates wanted to invest to a world in which corporates

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Speaker 4: chose to distribute. Now to what extent that is driven

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Speaker 4: by increasing concentration and monopolistic power, I think is a

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Speaker 4: open question, and it's certainly one that I intend to

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Speaker 4: return to. I did some work internally which I haven't

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Speaker 4: published yet, but it's the next one in the or

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Speaker 4: maybe sneak pre y later. Yeah, exactly. Yeah. Three, I've

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Speaker 4: written like three papers that are now in the works.

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Speaker 4: There's one more after that, which is going to be

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Speaker 4: the one on monopoly, I think, and what I showed

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Speaker 4: was monopoly can redistribute profits between corporates, but doesn't actually

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Speaker 4: raise the absolute level of profits terribly much because what

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Speaker 4: tends to happen is there are other offsetting factors. So

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Speaker 4: I think these shift in the corporate payout policy is

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Speaker 4: probably a function of monopoly. But it's not hugely surprising

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Speaker 4: to me that when I combine investment and dividends and

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Speaker 4: compare them over history, they haven't really as a pair

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Speaker 4: driven this expansion of margins that we've seen, And so

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Speaker 4: that fits very nicely with the work I've done, which

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Speaker 4: again actually follows from Kleetski. It is such an amazing

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Speaker 4: man and so important, and yet so few people know

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Speaker 4: of him, Thank goodness. The odd lots listeners are a

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Speaker 4: different breed. But you know, you walk around and there,

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Speaker 4: why are you quoting some long dead Polish economists? And yeah,

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Speaker 4: even worse from an American point of view, Yeah, he

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Speaker 4: was associated with Marx. It's oh no, the end of

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Speaker 4: the world is nigh. He talked to Rosa Luxembourg, this

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Speaker 4: kind of thing. But he did a whole load of

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Speaker 4: work on what he called the monopoly power and it's

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Speaker 4: using some of his insights that I can now demonstrate

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Speaker 4: in a very simple little model that actually monopolies do

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Speaker 4: not rise the aggregate level of profits.

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Speaker 3: Well, let me ask you another question, and it's sort

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Speaker 3: of it's another thing that I remember we and by me,

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Speaker 3: we I mean like sort of like you know, people

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Speaker 3: who are like blogging ten years ago and trying to

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Speaker 3: figure this stuff out. But another story that people told

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Speaker 3: and maybe tell is that, Okay, you see these profit

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Speaker 3: margins at extremely high levels, and that it represents some

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Speaker 3: tilting of the balance between capital and labor. The labor's

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Speaker 3: share of GDP has declined, or unionization or labor bargaining

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Speaker 3: power has weakened steadily over the years. And you could

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Speaker 3: put two lines on a chart, and unions are going

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Speaker 3: down and profit margins are going up. Is there a

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Speaker 3: zero sumness in this in terms of like how much

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Speaker 3: is how much on your cruise to corporate province versus say,

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Speaker 3: how much workers can get?

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Speaker 4: Yeah, absolutely there is. And this was really what let's

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Speaker 4: get again was talking about with his monopoly power theory, right,

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Speaker 4: He was talking about exactly this issue, the distribution of

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Speaker 4: the economic pie, if you like. He wrote a wonderful

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Speaker 4: paper on the political aspects of full employment, all about

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Speaker 4: why corporates don't actually want full employment, despite the fact

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Speaker 4: that it would seem like a good idea because obviously

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Speaker 4: the economy would be booming, everybody be spending, that would

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Speaker 4: be trendous. But actually his argument was that corporates would

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Speaker 4: really not like that because it would give exactly the

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Speaker 4: point you raise their labor too much bargaining power. And

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Speaker 4: I think one of the things that people have got

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Speaker 4: wrong in the whole kind of inflation story that we've

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Speaker 4: heard over the last few years is the kind of

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Speaker 4: permanence and that whole team transitory versus team permanent and

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Speaker 4: all this kind of thing. Yeah, to me, the big

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Speaker 4: thing that really drives all of this is exactly the

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Speaker 4: dynamic you're talking about, which is, do you have the

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Speaker 4: conditions for a wage price spiral? And I have been

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Speaker 4: unable to see any evidence of really significant, prolonged recapturing

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Speaker 4: of labour's bargaining power. I think that that's absolutely true.

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Speaker 4: This whole dynamic is really fascinating and massively integral to

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Speaker 4: understanding what we are going through, what we've been through,

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Speaker 4: and potentially the danger of forecasting in where we will

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Speaker 4: be going. But it's to me that that distribution between

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Speaker 4: labor and capital is really important, and it's tied in

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Speaker 4: with monopoly, it's tied in with these kinds of issues

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Speaker 4: we're talking about the profit margins. But the really nice

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Speaker 4: thing about the Kalechi equation is that it sits above

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Speaker 4: all of that and it frames it all. So I've

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Speaker 4: described it as like Lord of the Rings. I'm a nerd.

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Speaker 4: I love the Lord of the rings, and the Kaleki

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Speaker 4: equation is kind of the one ring, right. It can

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Speaker 4: bring all the others and bind them in the darkness.

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Speaker 4: And so having that overarching framework is really useful. It

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Speaker 4: allows us to understand what's been going on with profits

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Speaker 4: and therefore think about what may happen with him in

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Speaker 4: the future. And what you have really is if you'd

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Speaker 4: seen a huge amount of corporate power relative to labor normally,

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Speaker 4: that would lead to wage suppression, which indeed we have seen.

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Speaker 4: You know, wages have certainly not kept up with productivity.

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Speaker 4: And here I go being wrong again. In twenty eighteen

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Speaker 4: I wrote a note called late cycle Lament, and here

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Speaker 4: we are still in a late cycle and I use

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Speaker 4: some work by another very very insightful economist, Launce Taylor,

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Speaker 4: who sadly died a couple of years ago.

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Speaker 2: Now.

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Speaker 4: He showed how we could look at wage repression and

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Speaker 4: the corporates had effectively been holding wages down relative to productivity,

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Speaker 4: which I thought was a very interesting take on the

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Speaker 4: kind of monopoly theme because it was to me less

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Speaker 4: about monopoly power and the way we normally think about it,

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Speaker 4: and that perhaps is more associated with the degreed flation

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Speaker 4: story that we've heard more recently, which is corporates using

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Speaker 4: their pricing power, but much more about what one would

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Speaker 4: call monopsony, where it was more like you had a

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Speaker 4: single buyer rather than a single seller of a product.

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Speaker 4: In this case was the corporates were acting like a

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Speaker 4: single buyer of labor and had squashed labor down. Now,

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Speaker 4: it doesn't actually explain why over the last decade we've

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Speaker 4: had high profit margins, because had they been squishing labor down,

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Speaker 4: I would have expected household savings to have to decline,

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Speaker 4: But by freak of accident, in the sample that I

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Speaker 4: looked at, it turned out that household savings had been

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Speaker 4: exactly the same. Now, some of that is driven by COVID,

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Speaker 4: because obviously it was a huge spike in household savings

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Speaker 4: during COVID, but some of it is not quite adequately

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Speaker 4: represented by the average of the floor of averages, if

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Speaker 4: you like. But in between these two samples, at least

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Speaker 4: the nineteen fifties to twenty twelve and then twenty twelve

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Speaker 4: and afterwards, we know that household savings haven't been the

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Speaker 4: big engine or be by by happenstance. I don't think

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Speaker 4: I wouldn't draw any conclusion by their equality in those

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Speaker 4: two samples. I think they've been driven by some pretty

404
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Speaker 4: unusual things, but we know they're not the cause of

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Speaker 4: the big surge in margins that we saw.

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Speaker 1: Yeah, I remember monopsonly was like a big yeah topic.

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Speaker 1: I think it was the twenty eighteen Jackson Hall and

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Speaker 1: Kolleki to some extent as well. Okay, so it makes

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Speaker 1: me kind of wonder whether they're going to talk about

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Speaker 1: profit led inflation this year. But anyway, setting aside Kaleki

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Speaker 1: and monopolies, which we've been talking a lot about, can

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Speaker 1: we talk a little bit more about just big government spending.

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Speaker 1: Because of course, there was another very famous economist who

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Speaker 1: talked about the potential for this sort of big government moment.

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Speaker 1: Are we there?

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Speaker 4: Absolutely? I think we are there, And you quite rightly

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Speaker 4: allude to Minsky, who interestingly was a follower of Koletski,

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Speaker 4: and so there is a lovely intellectual heritage fowing through

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Speaker 4: these guys. And Minsky was yet absolutely a proponent of

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Speaker 4: the financial instability hypothesis, which we all know and love,

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Speaker 4: but also he was a big proponent of the need

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Speaker 4: for big government, and he framed big government as really

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Speaker 4: a more like a job guarantee scheme, which is not

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Speaker 4: what we've seen, but we have as far as at

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Speaker 4: least the data suggests, had an era where government spending

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Speaker 4: has been considerably higher than anything we've seen before. And

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Speaker 4: so yeah, I think Huiott Minsky wrote a book called

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Speaker 4: Can It Happen Again? And he was referring to the

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Speaker 4: Great Depression, and that book is really all about making

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Speaker 4: sure it doesn't happen again. And one of his takeaways was,

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Speaker 4: in the event of a private sector shutdown, as there

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Speaker 4: was in the Great Depression, the only thing that can

433
00:23:52,680 --> 00:23:56,200
Speaker 4: happen to offset that has to be government spending. And

434
00:23:56,480 --> 00:24:00,320
Speaker 4: I think with the GFC, with COVID, we have seenments

435
00:24:00,359 --> 00:24:03,280
Speaker 4: do exactly that. They really added Japan's base. For a

436
00:24:03,400 --> 00:24:06,040
Speaker 4: very long time, we've seen governments do that, and so

437
00:24:06,119 --> 00:24:10,400
Speaker 4: we've seen this era of big government actually and big

438
00:24:10,440 --> 00:24:14,920
Speaker 4: government spending actually arrive. How long it lasts, as I

439
00:24:15,119 --> 00:24:17,480
Speaker 4: confessed to the paper, I have no idea, but it's

440
00:24:17,480 --> 00:24:18,920
Speaker 4: certainly there right now.

441
00:24:19,480 --> 00:24:22,760
Speaker 3: Well, you know, so much government spending in the US

442
00:24:23,160 --> 00:24:27,000
Speaker 3: is entitlement spending. And it seems like there's no imminent

443
00:24:27,119 --> 00:24:32,800
Speaker 3: prospect of some meaningful change in social security payouts or

444
00:24:32,800 --> 00:24:35,399
Speaker 3: in the change of trajectory, no iminent prospects of the

445
00:24:35,480 --> 00:24:38,520
Speaker 3: change of trajectory of healthcare spending. We have a society

446
00:24:38,680 --> 00:24:42,000
Speaker 3: that's getting older. It's doubtful that there's going to be

447
00:24:42,040 --> 00:24:45,240
Speaker 3: any change in defense spending. There's not even that much

448
00:24:45,280 --> 00:24:48,800
Speaker 3: appetite on the discretionary side, nor does it seem that big.

449
00:24:49,200 --> 00:24:52,520
Speaker 3: Something I've wondered about is like, does this provide a

450
00:24:52,600 --> 00:24:56,720
Speaker 3: sort of cushion of stability, as sort of like cushion

451
00:24:56,920 --> 00:25:00,440
Speaker 3: of sort of macro stability and perhaps profits to ability

452
00:25:00,760 --> 00:25:03,320
Speaker 3: That there is this huge chunk of spending, it's every

453
00:25:03,359 --> 00:25:06,840
Speaker 3: year and guaranteed, and there's almost no political appetite to

454
00:25:07,240 --> 00:25:07,960
Speaker 3: make it go down.

455
00:25:08,840 --> 00:25:12,880
Speaker 4: Yeah, absolutely right. You'll get some conservatives to tear their

456
00:25:12,880 --> 00:25:17,960
Speaker 4: hair out that prospect of government intervention. And any number

457
00:25:18,000 --> 00:25:22,160
Speaker 4: of them are interestingly fellow value investors, and I obviously

458
00:25:22,200 --> 00:25:24,800
Speaker 4: missed the kool aid on that one, but they all

459
00:25:25,359 --> 00:25:27,800
Speaker 4: get really hot into the collar about government spending. As

460
00:25:27,800 --> 00:25:30,359
Speaker 4: an old lefty, I tend not to, but yeah, I

461
00:25:30,359 --> 00:25:33,640
Speaker 4: think you're right. The big government is inherently a kind

462
00:25:33,640 --> 00:25:39,119
Speaker 4: of prerequisite for stabilizing an inherently unstable system. And that's

463
00:25:39,200 --> 00:25:42,159
Speaker 4: exactly what Minsky was alluding to, right. He said that

464
00:25:42,480 --> 00:25:45,280
Speaker 4: big government must be big enough to ensure that swings

465
00:25:45,320 --> 00:25:48,800
Speaker 4: in private investment lead to sufficient offsetting swings in government

466
00:25:48,840 --> 00:25:52,840
Speaker 4: deficits so that profits are stabilized, and that was his

467
00:25:54,160 --> 00:25:56,879
Speaker 4: guiding concept right now. He thought you could best do

468
00:25:56,960 --> 00:26:00,240
Speaker 4: that with a job guarantee. Well, yeah, that's been talked

469
00:26:00,240 --> 00:26:02,840
Speaker 4: about in universal basic income and all these other concepts

470
00:26:02,880 --> 00:26:06,000
Speaker 4: get talked about, but the reality is it's been implemented

471
00:26:06,080 --> 00:26:08,880
Speaker 4: in a very different way. But it's there. And as

472
00:26:08,920 --> 00:26:12,040
Speaker 4: you say, it's kind of hard to imagine given the

473
00:26:12,640 --> 00:26:15,760
Speaker 4: state of politics, it's kind of hard to imagine that's

474
00:26:15,760 --> 00:26:27,960
Speaker 4: going to change anytimes too.

475
00:26:33,600 --> 00:26:36,560
Speaker 1: You mentioned value investing just there, And of course we

476
00:26:36,600 --> 00:26:39,960
Speaker 1: would be very remiss if we didn't ask you about

477
00:26:40,000 --> 00:26:43,560
Speaker 1: what's going on there, because we've seen these headlines for

478
00:26:43,600 --> 00:26:46,520
Speaker 1: a while now, the death of value investing, the idea

479
00:26:46,800 --> 00:26:50,840
Speaker 1: that everything nowadays seems to be fueled by momentum. I

480
00:26:50,880 --> 00:26:53,920
Speaker 1: wrote a story just recently about how all the most

481
00:26:54,080 --> 00:26:57,400
Speaker 1: terrible stocks and assets, all the things that people were

482
00:26:57,440 --> 00:27:01,600
Speaker 1: saying were overvalued for a long time, stuff like Tesla, Netflix,

483
00:27:01,680 --> 00:27:05,520
Speaker 1: some long duration bonds, those are all surging once again.

484
00:27:06,280 --> 00:27:10,840
Speaker 1: Is there any value to be found in value investing nowadays?

485
00:27:12,480 --> 00:27:16,000
Speaker 4: I really hope. So if there isn't, then I better

486
00:27:16,080 --> 00:27:19,560
Speaker 4: retire and GMO along with me. I think there is,

487
00:27:19,600 --> 00:27:23,440
Speaker 4: because we know that the market's Howard Marx always puts

488
00:27:23,440 --> 00:27:26,119
Speaker 4: it really well right, that the markets swing on pendulums,

489
00:27:26,240 --> 00:27:30,040
Speaker 4: from the euphoria to despair and back again. And you know,

490
00:27:30,400 --> 00:27:33,000
Speaker 4: go back a year and we had what my colleague

491
00:27:33,000 --> 00:27:37,359
Speaker 4: Beninca delightfully called jomo. So rather than the fomo, the

492
00:27:37,359 --> 00:27:40,480
Speaker 4: fear of missing out, we had the joy of missing out. Finally.

493
00:27:40,520 --> 00:27:42,600
Speaker 4: You know, all the crap that had gone up didn't

494
00:27:42,760 --> 00:27:45,280
Speaker 4: and some of the stuff we owned actually went up.

495
00:27:45,280 --> 00:27:47,560
Speaker 4: But it was like yes, and now we're back to

496
00:27:47,840 --> 00:27:51,560
Speaker 4: the other world. And so our JOYMO was very short lived.

497
00:27:51,880 --> 00:27:56,879
Speaker 4: And GMO we have experienced any number of these horrific

498
00:27:57,000 --> 00:28:01,200
Speaker 4: experiences where in the long term you can be right

499
00:28:01,280 --> 00:28:05,920
Speaker 4: and in the short term utterly wrong. And that's an

500
00:28:05,920 --> 00:28:09,760
Speaker 4: incredibly painful thing. And it's why value investing is so hard,

501
00:28:10,400 --> 00:28:13,080
Speaker 4: because you can sit there, you can do your work,

502
00:28:13,119 --> 00:28:16,600
Speaker 4: you can kind of gather your intrinsic value, you know

503
00:28:16,680 --> 00:28:19,680
Speaker 4: what fair value, if you like, should be, and then

504
00:28:19,960 --> 00:28:23,320
Speaker 4: mister market turns up and decides, yeah, he's in a

505
00:28:23,400 --> 00:28:27,040
Speaker 4: manic phase today and so ignores any kind of anchor

506
00:28:27,040 --> 00:28:31,600
Speaker 4: of valuation right up until he doesn't, and suddenly he

507
00:28:31,640 --> 00:28:34,000
Speaker 4: wakes up one day and decides he does. And the

508
00:28:34,040 --> 00:28:37,200
Speaker 4: problem is you never know when that is, and that

509
00:28:37,280 --> 00:28:43,280
Speaker 4: kind of that's the classic uncertainty of It's what makes

510
00:28:43,320 --> 00:28:46,920
Speaker 4: being a value investor so hard. Right, If that wasn't there,

511
00:28:47,280 --> 00:28:49,640
Speaker 4: I guess everyone will be a value investor and value

512
00:28:49,720 --> 00:28:54,560
Speaker 4: presumably wouldn't work. But because there is this collective madness

513
00:28:54,560 --> 00:28:58,160
Speaker 4: of crowds experience. Joe, you mentioned AI right at the start.

514
00:28:58,600 --> 00:29:01,680
Speaker 4: Will that be the next bubble? Yeah? Yeah, God only knows, right,

515
00:29:01,720 --> 00:29:03,920
Speaker 4: it's got all the hallmarks of it. It's a technical,

516
00:29:04,200 --> 00:29:08,360
Speaker 4: technological innovation that gets everybody excited historically that that's kind

517
00:29:08,400 --> 00:29:14,360
Speaker 4: of classic bubble breeding territory it could be. And sorry, go.

518
00:29:14,360 --> 00:29:17,479
Speaker 3: Ahead, well no, just to play Devil's advocate for a second.

519
00:29:17,520 --> 00:29:21,640
Speaker 3: I mean, obviously, the twenty tens were this extraordinary decade

520
00:29:21,800 --> 00:29:23,640
Speaker 3: for big tech, and maybe we're good, you know, big

521
00:29:23,680 --> 00:29:26,080
Speaker 3: tech is raillyant again lately, but this handful of big tech.

522
00:29:26,120 --> 00:29:28,960
Speaker 3: But the other thing about that decade is it's not

523
00:29:29,040 --> 00:29:32,440
Speaker 3: just that those stocks did well. Those companies did really well.

524
00:29:32,520 --> 00:29:36,400
Speaker 3: And Amazon and Google and all these names were far

525
00:29:36,480 --> 00:29:40,040
Speaker 3: more profitable in twenty nineteen than I think people in

526
00:29:40,120 --> 00:29:42,120
Speaker 3: twenty twelve would have guessed about where they'd be in

527
00:29:42,160 --> 00:29:45,400
Speaker 3: twenty nineteen. I mean, they really did do extraordinary well

528
00:29:45,440 --> 00:29:49,000
Speaker 3: from like a business and profit standpoint, So I mean,

529
00:29:49,120 --> 00:29:52,880
Speaker 3: setting aside you know, valuations and multiples, the companies did

530
00:29:52,920 --> 00:29:56,560
Speaker 3: do really well and captured a huge share of that

531
00:29:57,160 --> 00:30:01,920
Speaker 3: overall corporate profits. And so right, I mean, and so

532
00:30:02,040 --> 00:30:03,720
Speaker 3: like there's other so like I don't know when you

533
00:30:04,120 --> 00:30:08,560
Speaker 3: look now at once again people piling back into these names,

534
00:30:08,600 --> 00:30:12,680
Speaker 3: and QQQ not really that far off from its high,

535
00:30:12,840 --> 00:30:15,480
Speaker 3: Like what is the is there some reason why that

536
00:30:15,800 --> 00:30:18,719
Speaker 3: can't be sustainable? And and I guess to you know,

537
00:30:18,760 --> 00:30:21,959
Speaker 3: it's like if we already sort of stipulate too that

538
00:30:22,240 --> 00:30:25,680
Speaker 3: there's sort of one source of profits, which is government deficits,

539
00:30:26,040 --> 00:30:28,640
Speaker 3: does not seem to be going away, Like what changes

540
00:30:28,720 --> 00:30:29,760
Speaker 3: this current environment?

541
00:30:30,960 --> 00:30:33,360
Speaker 4: Yeah, I think the thing with those kind of companies

542
00:30:33,720 --> 00:30:35,680
Speaker 4: is we go back to that that kind of beauty

543
00:30:35,680 --> 00:30:36,560
Speaker 4: of the Macroft framework.

544
00:30:36,680 --> 00:30:36,920
Speaker 2: Yeah.

545
00:30:37,000 --> 00:30:40,960
Speaker 4: They succeeded by eating everybody else's lunch. Yeah, right, They

546
00:30:41,000 --> 00:30:44,240
Speaker 4: turned from I guess, you know, the weedy little kid

547
00:30:44,360 --> 00:30:47,560
Speaker 4: to the huge jock who is wondering around thumping the

548
00:30:47,560 --> 00:30:49,200
Speaker 4: weedy kid, and say I'm going to have your lunch

549
00:30:49,240 --> 00:30:52,120
Speaker 4: money and your dinner money and your breakfast money as well.

550
00:30:52,160 --> 00:30:55,320
Speaker 4: And that's how they won. Right, They did exceptionally well

551
00:30:55,520 --> 00:30:57,640
Speaker 4: and far better than I think, You're right pretty much

552
00:30:57,640 --> 00:31:00,520
Speaker 4: anyone would have said. The problem is I think that

553
00:31:00,600 --> 00:31:03,360
Speaker 4: you at some point you run out of people to bully,

554
00:31:04,240 --> 00:31:07,240
Speaker 4: and you run out of the playground. Images everybody graduates,

555
00:31:07,320 --> 00:31:10,160
Speaker 4: and what happens then, well, your job is your jock

556
00:31:10,200 --> 00:31:14,480
Speaker 4: bully is suddenly not quite so comfortable anymore. And when

557
00:31:14,480 --> 00:31:18,240
Speaker 4: you then put a kind of continued growth multiple on

558
00:31:18,440 --> 00:31:21,520
Speaker 4: those kinds of guys. That gets hard. You know, it's

559
00:31:21,560 --> 00:31:24,720
Speaker 4: not hard to grow fast when you're really small, it's

560
00:31:24,800 --> 00:31:27,760
Speaker 4: really hard to grow fast when you're really big. And

561
00:31:27,800 --> 00:31:30,840
Speaker 4: that's I think always the challenge. It's that kind of

562
00:31:31,600 --> 00:31:38,480
Speaker 4: growth callding growth torpedos right where people's expectations are so extreme,

563
00:31:39,120 --> 00:31:40,800
Speaker 4: and the pricing of some of those stocks, not all

564
00:31:40,840 --> 00:31:42,320
Speaker 4: of them by any means, but some of them is

565
00:31:42,400 --> 00:31:46,040
Speaker 4: really extreme in terms of their implied growth for the future.

566
00:31:46,400 --> 00:31:47,880
Speaker 4: You kind of have to scratch your head and go,

567
00:31:48,720 --> 00:31:50,880
Speaker 4: where the hell is that coming from? You know, how

568
00:31:50,960 --> 00:31:55,000
Speaker 4: much more advertising can alphabet really take over? How many

569
00:31:55,080 --> 00:31:59,280
Speaker 4: more businesses can Amazon completely disrupt? And maybe they will, right,

570
00:31:59,720 --> 00:32:03,800
Speaker 4: there will be winners, and maybe those guys are the

571
00:32:03,840 --> 00:32:06,200
Speaker 4: ones that will win. But the market is pricing it

572
00:32:06,240 --> 00:32:10,200
Speaker 4: as if that is an absolute certainty, and that always

573
00:32:10,280 --> 00:32:13,120
Speaker 4: kind of an anytime anyone said it for sure about anything,

574
00:32:13,400 --> 00:32:16,120
Speaker 4: I tend to kind of get a little nervous because

575
00:32:16,480 --> 00:32:19,080
Speaker 4: I'm not even sure I exist, let loan anything else.

576
00:32:19,760 --> 00:32:21,400
Speaker 4: All I know, I could be a brain in the jar,

577
00:32:21,760 --> 00:32:23,760
Speaker 4: in which case I clearly lack inventinations.

578
00:32:23,800 --> 00:32:26,600
Speaker 1: This is getting very existential.

579
00:32:26,640 --> 00:32:30,480
Speaker 4: Yeah, right, but it's it is possible, right, and that

580
00:32:30,480 --> 00:32:33,960
Speaker 4: that to me is that absolute certainty is concerned. I

581
00:32:33,960 --> 00:32:35,920
Speaker 4: think it was Voltaire who said to live in doubt

582
00:32:35,960 --> 00:32:39,920
Speaker 4: is unpleasant, to live in certainty is absurd, and that

583
00:32:39,920 --> 00:32:41,920
Speaker 4: that that's always been my byline. Right.

584
00:32:42,520 --> 00:32:45,760
Speaker 1: So we've been very focused on the US market and

585
00:32:45,800 --> 00:32:49,040
Speaker 1: the idea of American stocks being priced to perfection. But

586
00:32:49,120 --> 00:32:51,760
Speaker 1: of course America is not the only market out there.

587
00:32:51,800 --> 00:32:55,560
Speaker 1: And I was reading just before we came on. Actually, actually, Joe,

588
00:32:55,560 --> 00:32:58,360
Speaker 1: did you know there's more than half of Japanese companies

589
00:32:58,440 --> 00:32:59,880
Speaker 1: trade below book value?

590
00:33:00,320 --> 00:33:00,960
Speaker 2: You didn't know.

591
00:33:01,120 --> 00:33:01,480
Speaker 4: I knew that.

592
00:33:01,600 --> 00:33:03,360
Speaker 3: Like Japanese stocks, I think they've been doing well.

593
00:33:03,400 --> 00:33:03,800
Speaker 2: I didn't know.

594
00:33:03,960 --> 00:33:06,080
Speaker 1: Yeah, so they were undervalued for a long time and

595
00:33:06,120 --> 00:33:09,080
Speaker 1: then this year there suddenly seems to be renewed interest.

596
00:33:09,200 --> 00:33:13,160
Speaker 1: But James, to your point about value investing, is the

597
00:33:13,200 --> 00:33:18,080
Speaker 1: implication here that maybe investors should be looking to non

598
00:33:18,280 --> 00:33:19,120
Speaker 1: US markets?

599
00:33:20,120 --> 00:33:21,920
Speaker 4: Yeah, absolutely, I think there's a couple of things people

600
00:33:21,920 --> 00:33:23,680
Speaker 4: can do within the US. If you've got to be

601
00:33:23,720 --> 00:33:26,320
Speaker 4: in the US. There is some stuff that's cheap, right,

602
00:33:26,520 --> 00:33:29,040
Speaker 4: The really deep value, the stuff that the nobody wants

603
00:33:29,080 --> 00:33:32,320
Speaker 4: to own, does actually look really compellingly achieved to US

604
00:33:32,480 --> 00:33:34,840
Speaker 4: but outside of the US, I think you can do

605
00:33:35,040 --> 00:33:37,280
Speaker 4: so much better. I mean, if you look at Funny

606
00:33:37,280 --> 00:33:39,680
Speaker 4: you mentioned Japan, you're absolutely right about half the stocks

607
00:33:39,680 --> 00:33:43,520
Speaker 4: below book. But so here's another plug. Not the next note,

608
00:33:43,520 --> 00:33:46,200
Speaker 4: but the note after that is on Japan, and it's profitability.

609
00:33:46,320 --> 00:33:50,360
Speaker 4: Oh yeah, one day I'll get around to punt. Then

610
00:33:50,360 --> 00:33:53,240
Speaker 4: they're all just waiting to be published now. And in

611
00:33:53,280 --> 00:33:55,520
Speaker 4: there I looked I did a similar analysis to the

612
00:33:55,520 --> 00:33:58,400
Speaker 4: one that we've talked about today the Japan. I won't

613
00:33:58,520 --> 00:34:01,120
Speaker 4: drive on that now, but chart to me was when

614
00:34:01,160 --> 00:34:03,360
Speaker 4: I looked at EV to ebit DA in the US

615
00:34:03,440 --> 00:34:06,240
Speaker 4: versus Japan. So in the US, you've got the US

616
00:34:06,280 --> 00:34:09,799
Speaker 4: market trading on nearly fourteen times to ebit DAR. In

617
00:34:09,880 --> 00:34:13,040
Speaker 4: Japan the market is trading on like five times EV

618
00:34:13,200 --> 00:34:17,360
Speaker 4: to ebit. So Japan is certainly with any kind of

619
00:34:17,600 --> 00:34:21,320
Speaker 4: measure that looks at anything that concerns balance sheet based analysis,

620
00:34:21,400 --> 00:34:25,840
Speaker 4: Japan looks compelling. It too has had a profitability surge,

621
00:34:26,239 --> 00:34:29,480
Speaker 4: now not to do the same levels as the US,

622
00:34:29,920 --> 00:34:33,120
Speaker 4: but it has had this ongoing profitability surge. But I

623
00:34:33,160 --> 00:34:36,440
Speaker 4: think interestingly, in Japan's case, it actually looks kind of

624
00:34:37,040 --> 00:34:39,680
Speaker 4: very sustainable because it has a lot to do with

625
00:34:39,800 --> 00:34:44,400
Speaker 4: de leveraging and therefore kind of more cash flow flowing

626
00:34:44,480 --> 00:34:47,480
Speaker 4: through to the bottom line. You've basically had this long

627
00:34:47,640 --> 00:34:50,240
Speaker 4: battle between the holders of debt and the holders of equity,

628
00:34:50,560 --> 00:34:52,799
Speaker 4: and the holders of debt have been taking a lot

629
00:34:52,840 --> 00:34:55,960
Speaker 4: of Japan's cash flow. Now that Japan hass de levered,

630
00:34:56,200 --> 00:34:59,280
Speaker 4: which has been going on since the early nineteen nineties,

631
00:34:59,640 --> 00:35:01,680
Speaker 4: you've I've got a situation where that cash flow is

632
00:35:01,719 --> 00:35:04,440
Speaker 4: flowing through to the bottom line, and Japan therefore looks

633
00:35:04,480 --> 00:35:07,319
Speaker 4: like it is a market where we have kind of

634
00:35:07,320 --> 00:35:10,520
Speaker 4: increased profitability and low valuations. You know what's not to

635
00:35:10,680 --> 00:35:12,719
Speaker 4: like there? And if you're if you're a really brave

636
00:35:12,800 --> 00:35:16,000
Speaker 4: value investor, go play an EM. I mean, nobody, nobody

637
00:35:16,000 --> 00:35:18,920
Speaker 4: in their right mind wants to talk about EM. And

638
00:35:18,960 --> 00:35:22,080
Speaker 4: we know that social pain, the pain of being excluded,

639
00:35:22,360 --> 00:35:25,600
Speaker 4: being ostracized and ridiculed, is felt in the brain in

640
00:35:25,960 --> 00:35:29,279
Speaker 4: the same parts as real physical So being a value

641
00:35:29,280 --> 00:35:31,800
Speaker 4: investors like having your arm broken on a regular basis,

642
00:35:33,000 --> 00:35:35,279
Speaker 4: which ain't fun, right, That's why most people don't do it.

643
00:35:35,320 --> 00:35:39,000
Speaker 4: But EM looks amazingly cheap, like the bad news is

644
00:35:39,080 --> 00:35:41,400
Speaker 4: so in the price, and so I think there really

645
00:35:41,400 --> 00:35:44,919
Speaker 4: are some some amazing opportunities around the world.

646
00:35:45,360 --> 00:35:47,520
Speaker 3: When you publish the other day, when you publish your

647
00:35:47,560 --> 00:35:50,720
Speaker 3: notes on these, can you put the Can you provide

648
00:35:50,760 --> 00:35:53,200
Speaker 3: the colletch Levy equations for these? Because I always see

649
00:35:53,200 --> 00:35:55,120
Speaker 3: it for the US, and I never see people make

650
00:35:55,160 --> 00:36:01,360
Speaker 3: them for Japan, just as a p no request for

651
00:36:01,560 --> 00:36:03,200
Speaker 3: If I can put in a like a request, like

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00:36:03,200 --> 00:36:06,080
Speaker 3: a request for the dj please make a series of

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00:36:06,239 --> 00:36:08,880
Speaker 3: charts showing these same things for other countries, because I

654
00:36:08,960 --> 00:36:10,560
Speaker 3: only ever see people make it for the US.

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00:36:10,640 --> 00:36:14,520
Speaker 4: Really done, I promise you when when the Japan note

656
00:36:14,600 --> 00:36:17,160
Speaker 4: comes out there, it'll be there right right up front

657
00:36:17,200 --> 00:36:17,520
Speaker 4: for you.

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00:36:17,560 --> 00:36:17,799
Speaker 2: Great.

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00:36:17,880 --> 00:36:21,160
Speaker 1: We'll have to collate them all and publish them on

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00:36:21,239 --> 00:36:23,920
Speaker 1: the odd Lots website. I just saw a headline go

661
00:36:23,960 --> 00:36:27,400
Speaker 1: by It says Pakistan gets no bids for fifteen, twenty

662
00:36:27,400 --> 00:36:30,600
Speaker 1: and thirty year bonds. So you know, to James's point,

663
00:36:30,760 --> 00:36:32,920
Speaker 1: if you want to run away from the herd, it

664
00:36:32,960 --> 00:36:35,680
Speaker 1: does seem like parts of em are the place to go.

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00:36:36,040 --> 00:36:38,120
Speaker 1: At the moment, James, we're going to have to leave

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00:36:38,160 --> 00:36:40,800
Speaker 1: it there. But really appreciate you coming on. That was

667
00:36:40,880 --> 00:36:41,600
Speaker 1: so much fun.

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00:36:42,560 --> 00:36:45,120
Speaker 4: Oh my pleasure. Thank you so much for having me guys, Yeah,

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00:36:45,280 --> 00:36:45,880
Speaker 4: get a bluff.

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00:36:46,000 --> 00:36:47,600
Speaker 2: That was a blast, James. We'll have to have you back.

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00:36:47,640 --> 00:37:01,960
Speaker 2: Thank you so much, Joe.

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00:37:02,000 --> 00:37:05,839
Speaker 1: I love having a self described old lefties employed at

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00:37:05,920 --> 00:37:08,640
Speaker 1: large asset managers on the show. It's so much fun.

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00:37:09,360 --> 00:37:11,440
Speaker 2: There are some of my favorite people to talk to

675
00:37:11,440 --> 00:37:13,359
Speaker 2: you about. That was really good. I mean, I really

676
00:37:13,440 --> 00:37:13,719
Speaker 2: enjoy it.

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00:37:14,280 --> 00:37:16,960
Speaker 3: Like I think we've both been reading James's stuff for

678
00:37:17,120 --> 00:37:19,960
Speaker 3: several years and hearing him sort of like put together

679
00:37:20,040 --> 00:37:22,879
Speaker 3: his way of thinking some of the mistakes. He's got

680
00:37:22,880 --> 00:37:24,560
Speaker 3: the opportunities right now to look really good.

681
00:37:24,760 --> 00:37:28,120
Speaker 1: The introspection, I think is really important because you do

682
00:37:28,160 --> 00:37:30,880
Speaker 1: see people make these big calls and kind of gloss

683
00:37:30,880 --> 00:37:34,520
Speaker 1: over mistakes they've made in the past. And really it's

684
00:37:34,560 --> 00:37:38,439
Speaker 1: not about you know, schadenfreude or pointing fingers at people

685
00:37:38,440 --> 00:37:40,680
Speaker 1: who got stuff wrong. It's about trying to understand the

686
00:37:40,719 --> 00:37:44,719
Speaker 1: way we were thinking of things in twenty twelve and

687
00:37:44,800 --> 00:37:49,800
Speaker 1: what happened differently to make those thesis, to make those

688
00:37:49,960 --> 00:37:51,960
Speaker 1: theses not applicable.

689
00:37:52,280 --> 00:37:56,800
Speaker 3: I do think that almost everyone in every dimension assumes

690
00:37:56,840 --> 00:38:00,640
Speaker 3: some level of mean reversion right from everything right, tech

691
00:38:00,760 --> 00:38:04,680
Speaker 3: versus value, deficits, labor versus capital, et cetera. So you

692
00:38:04,719 --> 00:38:07,960
Speaker 3: see something at the high end of some range of

693
00:38:08,000 --> 00:38:10,520
Speaker 3: a chart, you make some chart on Bloomberger, you make

694
00:38:10,600 --> 00:38:12,600
Speaker 3: some chart on Fred and the numbers at the top

695
00:38:12,960 --> 00:38:15,239
Speaker 3: and you say, Okay, it's going to go down. And

696
00:38:15,320 --> 00:38:17,680
Speaker 3: so like, looking back, it's like, well, why didn't it

697
00:38:17,680 --> 00:38:20,319
Speaker 3: go down? Why did it go up even further? Is

698
00:38:20,360 --> 00:38:22,919
Speaker 3: really interesting and it sort of you know, as he puts,

699
00:38:22,960 --> 00:38:25,239
Speaker 3: it makes you humble about your guests for the next

700
00:38:25,280 --> 00:38:25,680
Speaker 3: ten years.

701
00:38:25,719 --> 00:38:26,239
Speaker 4: Early. Yeah.

702
00:38:26,360 --> 00:38:29,600
Speaker 1: Well, also James's point about maybe we are in the

703
00:38:29,680 --> 00:38:34,160
Speaker 1: era of big government spending. I mean, that's a big

704
00:38:34,200 --> 00:38:36,799
Speaker 1: point to make. But beyond that, the idea that that

705
00:38:36,920 --> 00:38:41,760
Speaker 1: might not necessarily be good for shareholder returns is really

706
00:38:41,800 --> 00:38:44,200
Speaker 1: counterintuitive to the way a lot of people think about it,

707
00:38:44,239 --> 00:38:47,279
Speaker 1: because one of the big criticisms of government spending is like, oh,

708
00:38:47,440 --> 00:38:50,600
Speaker 1: you're just you know, inflating corporate profit margins. And this

709
00:38:50,680 --> 00:38:53,319
Speaker 1: is why there are some investors out there who like

710
00:38:53,400 --> 00:38:56,439
Speaker 1: to talk about, you know, big infrastructure programs and things

711
00:38:56,480 --> 00:39:00,719
Speaker 1: like that. But James made the point that that might

712
00:39:00,800 --> 00:39:04,160
Speaker 1: not actually lead to a good return.

713
00:39:04,200 --> 00:39:07,000
Speaker 2: Right, I'd like the knock on other value investors.

714
00:39:07,280 --> 00:39:09,160
Speaker 3: This is like, don't you know where our profits are

715
00:39:09,160 --> 00:39:12,280
Speaker 3: coming from dog you know what drives corporate profitability?

716
00:39:12,280 --> 00:39:14,280
Speaker 2: And yeah, that's great stuff.

717
00:39:14,400 --> 00:39:15,480
Speaker 1: All right, shall we leave it there.

718
00:39:15,560 --> 00:39:16,319
Speaker 2: Let's leave it there.

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00:39:16,440 --> 00:39:19,200
Speaker 1: This has been another episode of the Odd Thoughts podcast.

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00:39:19,280 --> 00:39:21,680
Speaker 1: I'm Tracy Alloway. You can follow me on Twitter at

721
00:39:21,760 --> 00:39:23,000
Speaker 1: Tracy Alloway.

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00:39:22,680 --> 00:39:25,600
Speaker 3: And I'm Joe Wisenthal. You can follow me on Twitter

723
00:39:25,719 --> 00:39:30,120
Speaker 3: at the Stalwart. Follow our producers Carman Rodriguez at Carman

724
00:39:30,320 --> 00:39:33,879
Speaker 3: Arman and Dashel Bennett at Dashbot. And check out all

725
00:39:33,880 --> 00:39:37,239
Speaker 3: of our podcasts at Bloomberg under the handle at podcasts.

726
00:39:37,320 --> 00:39:40,120
Speaker 3: And for more odd Lots content, go to Bloomberg dot

727
00:39:40,120 --> 00:39:43,680
Speaker 3: com slash odd Lots, where we have transcripts, a blog,

728
00:39:43,719 --> 00:39:47,680
Speaker 3: and weekly newsletter, and for more check out our discord.

729
00:39:47,760 --> 00:39:50,680
Speaker 3: It's really fun people in there chatting about all these topics.

730
00:39:50,760 --> 00:39:53,360
Speaker 3: Twenty four to seven. It's a really fun place to

731
00:39:53,400 --> 00:39:57,520
Speaker 3: hang out. Discord dot gg, slash odd Lots. Thanks for

732
00:39:57,560 --> 00:40:07,800
Speaker 3: listening it

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00:40:14,719 --> 00:40:14,759
Speaker 1: In