Speaker 1: But knowledge to work and grow your business with c
Speaker 1: i T from transportation to healthcare to manufacturing. C i
Speaker 1: T offers commercial lending, leasing, and treasury management services for
Speaker 1: small and middle market businesses. Learn more at c i
Speaker 1: T dot com put Knowledge to Work. Welcome to add thoughts.
Speaker 1: I'm Tracy Alloway, executive editor of Bloomberg Markets. My co
Speaker 1: host Joe Wisenthal is away this week, but never fear
Speaker 1: because his absence means we are about to geek out
Speaker 1: on some of the most financing things of all things
Speaker 1: in finance. So today joining me, we have a former
Speaker 1: banker and corporate treasurer. He's also an all round derivatives expert.
Speaker 1: He is the author of one of my all time
Speaker 1: favorite finance books, Traders, Guns and Money. I am talking,
Speaker 1: of course, about Showtujit das Uh. He actually has a
Speaker 1: new book out, but you are going to be talking
Speaker 1: about something much broader than that. The topic of today's
Speaker 1: podcast was inspired by a recent column by my Bloomberg
Speaker 1: colleague Noah Smith. His column was called How Finance took
Speaker 1: Over the Economy. Dass has previously spoken about the financialization
Speaker 1: of the world economy. Many of his books are full
Speaker 1: of specific examples of this. But we are not just
Speaker 1: going to talk about financialization of the economy. We are
Speaker 1: also going to talk about the financialization in markets and
Speaker 1: monetary policy, and that is of course one of the
Speaker 1: big big questions for investors at the moment. So Das,
Speaker 1: thank you so much for joining us today. It's my pleasure.
Speaker 1: All right. Maybe just to begin, we should start by
Speaker 1: defining our terms and talk about what we mean when
Speaker 1: we say financialization. Well, that's a very very difficult question.
Speaker 1: I think it's a bit like trying to define a smile,
Speaker 1: because I think it was us who once said a
Speaker 1: smile is the drawing back and slight lifting of the
Speaker 1: corners of the mouth, which partially uncovered the teeth. So
Speaker 1: I think financialization is a little bit like that, and
Speaker 1: I have seen many people struggle with that. So I
Speaker 1: actually tend to think about its manifestations, and I think
Speaker 1: there's a few of them which are very important. One
Speaker 1: which is obviously very topical, which is the use of
Speaker 1: debt to drive financial and economic activity. The second is
Speaker 1: which actually has become topical again is the size of
Speaker 1: the financial sector and how large that is relative to
Speaker 1: the real economy. And this is the whole idea, which
Speaker 1: is a third point that instead of using traditional ways
Speaker 1: to drive the economy, which is things like innovation, productivity,
Speaker 1: new markets, we now start to use financial techniques or
Speaker 1: financial engineering rather than real engineering to try to create growth,
Speaker 1: wealth and prosperity. And the last one is an excessive
Speaker 1: reliance I suppose on financial techniques and instruments, And maybe
Speaker 1: underlying all of that is the increased emphasis on not
Speaker 1: the real economy but just creating and trading financial claims
Speaker 1: of different types on them. And the best way to
Speaker 1: describe it as you and I are creatures of that
Speaker 1: because at an earlier age we might have been useful
Speaker 1: and worked in real industry instead of which we keep
Speaker 1: talking about financialization. Oh wow, um, you went there. Okay, Well,
Speaker 1: I'm going to turn this back on you. You have
Speaker 1: a long career as a banker and a trader. Was
Speaker 1: there a particular moment in time that you can remember
Speaker 1: thinking that financialization was a thing, or that the finance
Speaker 1: industry had grown too big, or that financial engineering was
Speaker 1: starting to get a little bit weird? Well, I think
Speaker 1: I think there was never one magic moment in all
Speaker 1: of this, but I realized there was something very odd
Speaker 1: when I used to be a corporate treasurer, and in
Speaker 1: those days it was fashionable to run corporate treasuries as
Speaker 1: profit centers. That's something that's fallen into disrepute recently. But
Speaker 1: in a particular year, we made more money than the
Speaker 1: real business, which was to me a sign of considerable
Speaker 1: alarm in the sense that we were a transport company,
Speaker 1: but the financial jiggery, pokery and pettifoggery that we were
Speaker 1: doing was actually creating more wealth then the business of
Speaker 1: shifting parcels around the world, which I didn't think was healthy.
Speaker 1: And the other thing I supposed was earlier in my
Speaker 1: life when I used to work in banking, and I remember,
Speaker 1: with some degree of shame, actually thinking that my bonus
Speaker 1: in one year was more than the earnings that my father,
Speaker 1: who was a mechanical engineer, had earned over probably really
Speaker 1: a decade, or probably more than that. And I thought
Speaker 1: there was something I suppose wrong with the world, which
Speaker 1: actually looks at that type of evaluation relatives. Wow, this
Speaker 1: podcast is turning into a big guilt trip for finance workers.
Speaker 1: But tell me, how do you think we got to
Speaker 1: this point in time where a trader, someone like yourself
Speaker 1: can earn more than a mechanical engineer in a single year.
Speaker 1: I think there's several aspects to it. I don't think
Speaker 1: it's actually any one thing. I think you have to
Speaker 1: go back to the seventies, and in the seventies, you
Speaker 1: remember we had a period of stagflation, which is a
Speaker 1: period of high inflation and high unemployment and low growth.
Speaker 1: And at that point in time, I think the economic
Speaker 1: policymakers and political leaders were experimenting with the different ways
Speaker 1: of breaking out of the traditional Keensian dominated mixed economy,
Speaker 1: and people like Milton Friedman and basically Frederick Hike became
Speaker 1: very popular, mainly because politicians kept quoting them, despite the
Speaker 1: fact that none of them had the slightest idea of
Speaker 1: what their principles or policies or theories were. And what
Speaker 1: that did was deregulate a number of key industries. And
Speaker 1: one of those key industries that had actually deregulated was finance,
Speaker 1: and that set off the whole series of things, including
Speaker 1: the rise of the financial sector, the growth of debt,
Speaker 1: and obviously the entire process of financial engineering that went on.
Speaker 1: And I think that was very successful, and that grew
Speaker 1: the economy. So that created that self reinforcing sort of dialectic,
Speaker 1: which is that this must be good. And I think
Speaker 1: that effectively started a process which has different sort of strands,
Speaker 1: one of which is what Emmanuel Derman called the POWs,
Speaker 1: the physicists on Wall Street. I actually called them actually
Speaker 1: prisoners of Wall Street, because once you get there and
Speaker 1: get paid that you can never lead. But essentially what
Speaker 1: happened was industry was dying, the bell labs were shutting down,
Speaker 1: some major science based projects were shutting down, to talent
Speaker 1: basically moved away from real industry into the financial industry,
Speaker 1: which was getting started. And the other thing which I
Speaker 1: think people underestimate in terms of the importance of one
Speaker 1: element of finance, which is actually drives financialization, is I
Speaker 1: don't know if any industry in which you can actually
Speaker 1: attribute earnings or at least choose to attribute earnings as
Speaker 1: accurately to individual activities and therefore link directly rewards to
Speaker 1: those achievements. And that's a huge element. If you work
Speaker 1: for a large company building a motor car, there are
Speaker 1: so many little bits to it, who actually takes credit
Speaker 1: for it. But if you make a trade which makes
Speaker 1: a lot of money, it's much more easily to attribute
Speaker 1: the success to an individual. So it felt like we
Speaker 1: did get close to a moment in two thousand and
Speaker 1: eight where the world could have woken up and said,
Speaker 1: wait a second, all this financialization, whether it be in
Speaker 1: terms of products like derivatives or in terms of growth
Speaker 1: generated through the accumulation of debt, this is not a
Speaker 1: good thing, and it's bound to end in tears. But
Speaker 1: it feels like we actually kind of moved away from that.
Speaker 1: It feels like, if anything, we've sort of continued with
Speaker 1: our financial engineering. Well, I think fundamentally our problem is
Speaker 1: a different one, which is we are addicted to growth
Speaker 1: and we can't conceive of a world without growth. And
Speaker 1: particularly after two thousand and eight, we had an additional problem.
Speaker 1: We recognized that we had too much debt in the world,
Speaker 1: and the only way you actually reduced debt in a
Speaker 1: meaningful sense is through growth and inflation. So we needed
Speaker 1: things which created that growth and inflation and the elements
Speaker 1: of the real economy, because what lives growth really is
Speaker 1: things like population, new markets, productivity, and innovation. Those things
Speaker 1: are very difficult to engineer on demand, certainly within the
Speaker 1: life of a political leader. And remember political processes have
Speaker 1: quite short lifespans because you have to run for office regularly,
Speaker 1: So everybody was looking around for something to do. And
Speaker 1: essentially the financial leavers, which is budget deficits, let's get
Speaker 1: interest rate, let's do que or move on to something
Speaker 1: more adventurous like helicopter money, was far more I suppose
Speaker 1: attractive to people with those shorter term horizons. And I
Speaker 1: think that's what actually happened, and nobody really sat down
Speaker 1: and looked very, very clearly at what the causes of
Speaker 1: the problems of two thousand and eight are. I'll give
Speaker 1: you one example. You know we talked about de leveraging
Speaker 1: in terms of debt. Debt is increased by over fifty
Speaker 1: seven trillion dollars between two thousand and seven and two
Speaker 1: thousand fourteen. Now we know the world has actually grown
Speaker 1: in terms of GDP as well, but if you take
Speaker 1: it as a percentage of GDP, world debt has grown
Speaker 1: by seventeen percentage points, and most alarmingly, places like China
Speaker 1: have gone from seven trillion dollars in debt in two
Speaker 1: thousand and seven to well over twenty eight trillion dollars
Speaker 1: of debt today, and even despite the fact that their
Speaker 1: economy has grown quite a lot during that period. It's
Speaker 1: almost doubled as a percentage of GDP. So we went
Speaker 1: for the easy solution, and and to some extent, I
Speaker 1: can understand why people chose that, because they didn't want
Speaker 1: a sudden curtailment of activity. But there's a problem with
Speaker 1: debt driven growth, which is what they're trying to do,
Speaker 1: which is that the moment you turn off the debt tabs,
Speaker 1: growth stops as well. So this is the classic heroin addiction,
Speaker 1: where you need to take larger and larger doses to
Speaker 1: get the same effect, and that obviously traps you in
Speaker 1: a number of things. For instance, now were now trapped
Speaker 1: in a position where we can't actually increase interest rates
Speaker 1: or normalize interest rates because that would bring the house
Speaker 1: of cards down. So what we've seen is, I suppose
Speaker 1: the financialization of economic policy with some I suppose problematic outcomes.
Speaker 1: All right, we're going to take a quick break for
Speaker 1: a word from our sponsor. But knowledge to work and
Speaker 1: grow your business with c i T from transportation to
Speaker 1: healthcare to manufacturing. C i T offers commercial lending, leasing,
Speaker 1: and treasury management services for small and middle market businesses
Speaker 1: learn more at c I T dot com put knowledge
Speaker 1: to work. We are back with shot Das. We are
Speaker 1: talking about the financialization of the economy, of markets, of
Speaker 1: monetary policy. So Das, I'm wondering, you know, policymakers were
Speaker 1: in a tough spot after two an eight. I know
Speaker 1: they used quie and we can argue that that increase
Speaker 1: the debt burden and it hasn't been successful at least
Speaker 1: yet in terms of generating inflation. Have there been any
Speaker 1: benefits to those sorts of medicines. Sure it bought time,
Speaker 1: and I think the crucial thing was that politically nobody
Speaker 1: could accept the actual sort of collapse of demand and
Speaker 1: activity that may take place as a result of just
Speaker 1: called turking the cure, I suppose. But the problem with
Speaker 1: buying time is you have to use it properly. And
Speaker 1: there's a very famous line in Shakespeare and Richard the
Speaker 1: third I think it is I wasted time, and now
Speaker 1: time wastes me. And so we wasted that time because
Speaker 1: we did not look at the real issues of re
Speaker 1: engineering our economies away from financialization, away from debt, focusing
Speaker 1: on the things we actually needed to do. And so
Speaker 1: that opportunity has now been wasted, and during problem we've
Speaker 1: multiplied the debt and all sorts of other issues, which
Speaker 1: leads us now down a path which is very difficult
Speaker 1: to reverse. And that's the real issue. So yeah, there
Speaker 1: were benefits, but ultimately I don't think that was the
Speaker 1: right decision. I'll give you an idea of how ridiculous
Speaker 1: the argument gets. We're not talking about negative interest rates,
Speaker 1: which is kind of a strange, surreal world. And let's
Speaker 1: have a look at if you want to have negative
Speaker 1: interest rates, the kind of arguments you put up in
Speaker 1: support of it. Now, first thing, low interest rates haven't works.
Speaker 1: I'm not quite sure why negative interest rates will necessarily
Speaker 1: work much better. But then what happens is if you
Speaker 1: have negative interest rates, look at the sort of side
Speaker 1: effects of that. What is you undermine the profitability of
Speaker 1: the banking system. And what happens is people just take
Speaker 1: their money out, because why would you leave money in
Speaker 1: and lose some of it? You take it out and
Speaker 1: keep it at home. Incidentally, home safes, particularly places like Japan,
Speaker 1: and so it's all and have gone through the roof
Speaker 1: in terms of sales. So you take the money out.
Speaker 1: But that destroys the funding base off the bank. And
Speaker 1: one of the reasons for basically having negative interest rates
Speaker 1: is to encourage lending. But if you don't have a
Speaker 1: funding base, how the hell is that can occur? And
Speaker 1: then you get into an absurd situation. And I've noticed
Speaker 1: that several luminaries have now been enlightening us on the
Speaker 1: pages of different publications saying how bad cash is for crime. Now,
Speaker 1: you know, money has been around for a long period
Speaker 1: of time, and crime has been around for a long
Speaker 1: period of time. But I'm now discovered that these large
Speaker 1: notes are the cause of crime, which has something I've
Speaker 1: never really understood before. But the problem here is the
Speaker 1: truth lies somewhere else. And Andrew Haldane from the Bank
Speaker 1: of England actually outlined there is very very clearly. He said,
Speaker 1: when the next crisis comes, and it will come, we're
Speaker 1: going to have to cut interest rates and they're very low,
Speaker 1: so we're going to have to go into massive negative territory.
Speaker 1: So to make that policy work, we have to ban cash.
Speaker 1: Now it's not only banned cash, he didn't go to
Speaker 1: this extent, but you have to also ban capital flows
Speaker 1: between countries because otherwise people would take money out of
Speaker 1: a country with negative interest rates and get to somewhere
Speaker 1: with positive interest rates, which is a completely dysfunctional reversal
Speaker 1: of the precise objectives that we actually are trying to
Speaker 1: achieve and some of the things we believe in, which
Speaker 1: is free capital flows. And one of the things that
Speaker 1: really troubles me about this spirit of history is that,
Speaker 1: you know, Winston Churchill once book is very elegantly when
Speaker 1: he said, you know, no no matter how beautiful the strategy,
Speaker 1: one should occasionally look at the results. And I don't
Speaker 1: think anybody's looking at the results. Well, what is the solution?
Speaker 1: Then it seems like we're sort of at our wits end.
Speaker 1: In terms of monetary stimulus. It doesn't seem like fiscal
Speaker 1: stimulus is on the way anytime soon, and it's unclear
Speaker 1: whether or not that would even really solve the problem
Speaker 1: that we're talking about. You're right, and I think there's
Speaker 1: basically three scenarios which now stretch out in front of us.
Speaker 1: One of which is is what I call the Lazarus economy,
Speaker 1: which is that things miraculously suddenly get better for all
Speaker 1: sorts of reasons. I'm personally personally looking for the Martians
Speaker 1: or some extraterrestrial intelligent life to visitors and solve our problems.
Speaker 1: And that's some major technological advance, right, Yeah, and it
Speaker 1: could be a technological advance. You never can say never.
Speaker 1: I mean, if somebody was to basically find infinite energy
Speaker 1: solve the problems of cold fusion, you would get certain
Speaker 1: things that would happen. But that's not something you can
Speaker 1: bank on. But the more likely case is a period
Speaker 1: of prolonged stagnation. And this is very much the Japanese
Speaker 1: and what's becoming the European model, which as we can
Speaker 1: solve the problems, so we will use monetary morphine to
Speaker 1: keep the process going for as long as we can do,
Speaker 1: and hope over that period we can gradually deliver the economy.
Speaker 1: And that basically means transferring wealth from the savers to
Speaker 1: the borrowers. And that's what's going to happen to be done,
Speaker 1: and you're trying to stretch out that adjustment over a
Speaker 1: long period of time, and Japan shows that you can
Speaker 1: do it under certain conditions, at least for a long
Speaker 1: period of time. But the problem with all of that
Speaker 1: is that once people realize that the outcome, the last
Speaker 1: option comes into play. Which is everybody panics and starts
Speaker 1: to try to get out of this game, as it were.
Speaker 1: And the crucial thing he remember is this game is
Speaker 1: underpinned by essentially an act of heroic faith in central bankers.
Speaker 1: And remember, in the old times, priests intermediated between rulers
Speaker 1: and their gods. These days we have economic gods, and
Speaker 1: the alchemists or the priests are the central bankers and
Speaker 1: the economic policy mandarins, and they intermediate between the body
Speaker 1: politic and these economic forces. And there's a lot of
Speaker 1: faith in them. And everybody has suspended disbelief and wants
Speaker 1: to believe that this will work. But at some point
Speaker 1: in time, and I'm starting to see signs of that
Speaker 1: or ready that there will be a moment when they say, well, actually,
Speaker 1: you know, they don't know what they're doing, or what
Speaker 1: they're doing can't work, or they don't have the tools
Speaker 1: to do this, and that sets off a horrible process. Now,
Speaker 1: you know, I've worked in financial markets for a very
Speaker 1: very long time, and the one thing I do know
Speaker 1: is when people panic in financial markets, it's never a
Speaker 1: very pretty side, and everybody wants to be first to
Speaker 1: get out. And the reason is very simple. If you're
Speaker 1: the first. It's you don't call it panic, it's very
Speaker 1: sensible trading. And everybody is looking at each other saying,
Speaker 1: how long can we continue this game where we suspend disbelief.
Speaker 1: And that's a very dangerous situation to find yourself in
Speaker 1: because the consequences are not only economic. This is not
Speaker 1: an economic problem ultimately, this is actually a social problem
Speaker 1: and a political problem. All economic problems ultimately more as
Speaker 1: we saw in the nineties and nineteen thirties, into political problems.
Speaker 1: And we're seeing signs of that in terms of extreme
Speaker 1: um movements of the right and left in different parts
Speaker 1: of the world, the rise of some interesting populist politicians,
Speaker 1: and those pressures are going to start to actually play out.
Speaker 1: I mean, the most interesting thing about the Republican potential
Speaker 1: candidate is he's repudiating things like free trade and all
Speaker 1: sorts of things that we believed in. And he's openly
Speaker 1: flagged the idea that perhaps not repaying your debt is
Speaker 1: not such a bad idea, which are things that are very,
Speaker 1: very dangerous in the way we've structured our financial system. Uh,
Speaker 1: let's leave our listeners with some actionable advice in terms
Speaker 1: of the rush for the exits that everyone seems to
Speaker 1: be worrying about and has been worrying about for so long.
Speaker 1: What do you think is going to be the key
Speaker 1: thing to look out for. I think in terms of
Speaker 1: asset classes, the key asset classes which will take the
Speaker 1: pressure of currencies. I know there's no currency war going
Speaker 1: because I listened to central bankers, but I can assure
Speaker 1: you that there is a currency war going on because
Speaker 1: everybody is trying to devalue their way to prosperity. That's
Speaker 1: the first thing. That's one of the asset classes which
Speaker 1: will take enormous train. The other thing is I think
Speaker 1: political and policy developments are going to be crucial in that,
Speaker 1: so you have to monitor what these people do. But
Speaker 1: the other thing is in terms of investment, I think
Speaker 1: you need to understand some very very simple rules, and
Speaker 1: I always look at investments in terms of three criteria.
Speaker 1: One is basically the capital the return of the capital.
Speaker 1: The American comedian Will Rodgers once said very elegantly, it's
Speaker 1: the return of my capital rather than the return on
Speaker 1: my capital that I worry about. The second thing is
Speaker 1: the income, and the last thing is the capital gains. Now,
Speaker 1: historically in the last thirty years, we've reversed the order
Speaker 1: of importance. I think maintaining capital and getting a bit
Speaker 1: of income will actually be crucial. And I think this
Speaker 1: is a world in which you can't actually look at
Speaker 1: the past in any meaningful way. And I'll tell you
Speaker 1: an example all of that, which is one of my
Speaker 1: great mistakes. A friend of mine who used to trade
Speaker 1: JGBS or who's actually a fund manager Japanese government and
Speaker 1: g GBS were around three. He asked me a question.
Speaker 1: He said, to me, is it actually good value? And
Speaker 1: I said, you know, you're looking at twenty years. Three
Speaker 1: percent does not seem to me the right record for
Speaker 1: that period. He ignored my advice entirely, and he loaded
Speaker 1: up on every long day to j g B that
Speaker 1: he could actually find. And history shows that g GBS
Speaker 1: had never flirated with those sorts of levels. Again, so
Speaker 1: what we thought was in the past reasonable and what
Speaker 1: we may need to live with are going to be
Speaker 1: fundamentally different. So being agile and actually going back to
Speaker 1: some very very simple principles will serve people much much
Speaker 1: better than trying to be clever in this sort of environment.
Speaker 1: All right, I think that is some excellent advice for
Speaker 1: all the investors out there. Show us. One of my
Speaker 1: all time favorite finance authors. He has a new book
Speaker 1: out called The Age of Stagnation, Why perpetual growth is
Speaker 1: unattainable and the global economy is in peril. If you're
Speaker 1: looking for some uplifting reading over the weekend. Thank you
Speaker 1: so much for joining us. It's my pleasure. Tracy. All right,
Speaker 1: that was shortage at das UM talking about the financialization
Speaker 1: of everything, pretty much the economy, markets, monetary policy, and
Speaker 1: leaving us with some quite depressing thoughts. To be honest,
Speaker 1: thank you so much for joining this episode of Odd Blots.
Speaker 1: Joe Wisenthal will be back next week. Put Knowledge to
Speaker 1: work and grow your business with c i T from
Speaker 1: transportation to healthcare to manufacturing. C i T offers commercial lending, leasing,
Speaker 1: and treasury management services for small and middle market businesses.
Speaker 1: Learn more at c I T dot com. Put Knowledge
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