WEBVTT - How to Get a 7% Return Without Buying Risky Equities 0:00:00.440 --> 0:00:04.760 So, John, sometimes you're right. Occasionally it does help. Yeah, 0:00:05.000 --> 0:00:08.879 and house press numbers just out from nation wide prices 0:00:08.960 --> 0:00:11.840 down over three percent in March. That's a proper drop. 0:00:11.920 --> 0:00:14.239 Add that to inflation, and you can pretty much call 0:00:14.280 --> 0:00:17.360 it a house price crash. Yeah. I mean I think 0:00:17.440 --> 0:00:20.880 I always. I don't think the bod crash is actually 0:00:21.040 --> 0:00:24.680 all that helpful. Accept the scale people, I fair to 0:00:24.720 --> 0:00:28.000 think of it as a healthy and necessary connection. John, 0:00:28.080 --> 0:00:30.760 This is how we sell the podcast. This is how 0:00:30.800 --> 0:00:33.600 we sell the podcast. We talk about house price crash. 0:00:33.680 --> 0:00:36.760 It brings the listeners in, it's true, and then we 0:00:36.840 --> 0:00:39.800 surprise them with brilliant busy of information and fun conversation 0:00:39.880 --> 0:00:43.640 and great guess But it's hashtag house price crash that 0:00:43.800 --> 0:00:46.320 gets them in. So that's why we call it that 0:00:46.600 --> 0:00:54.280 you've changed. There's so many more models. No, I still 0:00:54.280 --> 0:00:55.800 have the morals. We'll call it whatever you want. What 0:00:55.840 --> 0:00:58.360 do you want to call it? I think I just 0:00:58.400 --> 0:01:01.320 think it's interest because what you tricked me in is 0:01:01.400 --> 0:01:06.000 saying that pieces would follow thirty percent. About three months, 0:01:06.040 --> 0:01:11.320 we're already now like fourteen percent if you look inflation 0:01:11.360 --> 0:01:15.360 as well, So halfway there, what's the next fifteen percent? 0:01:16.560 --> 0:01:19.240 Where does that come from. Is that nominal or is 0:01:19.240 --> 0:01:21.959 it inflation or is it a bit of both? And 0:01:22.080 --> 0:01:24.800 even if prices fell away fifteen percent and nominal terms 0:01:24.880 --> 0:01:27.200 from here, you'd still only be looking at where the 0:01:27.280 --> 0:01:30.560 well at the start of twenty twenty, so before the 0:01:30.600 --> 0:01:33.919 whole COVID freeze and then you know the Bank England 0:01:34.120 --> 0:01:37.319 cutting interest race and throwing loads of money at the market. Again, yeah, 0:01:37.360 --> 0:01:40.040 I think that that's more just for perspective low, because 0:01:40.160 --> 0:01:42.160 I think the other key point why this isn't like 0:01:42.200 --> 0:01:46.160 the nineties, for example, is because even if prices felt 0:01:46.200 --> 0:01:49.480 that much, you're then only talking about that there's still 0:01:49.520 --> 0:01:51.560 only be a tiny proportion of people and things like 0:01:51.640 --> 0:01:56.000 negative equity. The number of homeowners with a mortgage in 0:01:56.040 --> 0:01:59.160 the country als right in England and Wales is now 0:01:59.240 --> 0:02:03.480 but low third, So again it doesn't have the same 0:02:03.600 --> 0:02:06.560 wider impact on the economy as it did perhaps in 0:02:06.600 --> 0:02:10.720 two thousand and eight. Um. The very fact that there's 0:02:10.760 --> 0:02:14.160 that few mortgage womenos is partly the result of the 0:02:14.200 --> 0:02:16.720 house places being too down high in the fast place, 0:02:17.360 --> 0:02:19.200 but in a weird kind of way that's also providing 0:02:19.240 --> 0:02:22.760 a very ventilation for the wider economy and the banking 0:02:22.840 --> 0:02:25.920 sector because there are just fewer people with mortgages, and 0:02:25.960 --> 0:02:28.680 the people who have been able to get mortgages are 0:02:28.760 --> 0:02:33.040 buying large and a better financial position than the average person. 0:02:33.320 --> 0:02:35.560 Still comes with a wealth effect, though, doesn't it. I 0:02:35.600 --> 0:02:38.120 mean this is part of the transmission mechanism of of 0:02:39.040 --> 0:02:42.320 monetary policy anyway, the idea that you can make people 0:02:42.480 --> 0:02:45.680 feel poorer and therefore they spend less, and therefore you 0:02:45.720 --> 0:02:48.760 have some control over inflation, although I would we have 0:02:48.760 --> 0:02:51.000 a conversation another day about the extent with spank England 0:02:51.040 --> 0:02:53.480 have any control over inflation at all Eyes who did 0:02:53.560 --> 0:02:56.000 a podcast earlier with that with Little King with Moving 0:02:56.080 --> 0:02:59.200 King on this matter, and I'll put the link to 0:02:59.240 --> 0:03:00.680 that when it comes up, because we have quite an 0:03:00.680 --> 0:03:04.280 interesting conversation about the extent to which central banks actually 0:03:04.320 --> 0:03:07.480 control inflation, and I suggested it you and I have 0:03:07.960 --> 0:03:10.519 talked about over the last couple of months that they 0:03:10.520 --> 0:03:13.040 have rather less power to do so than they believe, 0:03:13.080 --> 0:03:14.680 and I think he kind of agreed with me, So 0:03:14.720 --> 0:03:17.800 that was kind of I agreed with were certain times fans, 0:03:18.520 --> 0:03:20.880 and we also some interesting conversations about what it is 0:03:20.880 --> 0:03:23.320 that central banks should and shouldn't do in the extent 0:03:23.360 --> 0:03:26.360 to which possibly their briefs has been overexpanded, to the 0:03:26.400 --> 0:03:28.640 extent that it's not very hard for them to focus 0:03:28.680 --> 0:03:32.359 on their their core task of two percent? Two percent? 0:03:32.400 --> 0:03:36.440 Why two percent? Who percent? Were doing? All? I know, 0:03:36.600 --> 0:03:40.160 I know we've talked about it before. I did actually 0:03:40.160 --> 0:03:41.480 look it up. You know, we talked about this the 0:03:41.480 --> 0:03:45.200 other day. Where was that article that I wrote, I 0:03:45.200 --> 0:03:47.880 don't know, two three years ago or something about about it, 0:03:47.920 --> 0:03:50.400 And I looked it up again just to make absolutely 0:03:50.440 --> 0:03:52.480 sure that I wasn't imagining the whole thing. But yes, 0:03:52.560 --> 0:03:55.320 the whole thing came from an article written in a 0:03:56.960 --> 0:04:00.920 version of the IMF staff papers, not even public um, 0:04:01.240 --> 0:04:04.760 by a pleasant sounding academic who suggested that two percent 0:04:05.120 --> 0:04:07.960 kind of intuitively made sense for most of other economies. 0:04:08.000 --> 0:04:10.240 And that's it. And then there we go New Zealand 0:04:10.360 --> 0:04:12.560 full of bay. Every other central bank in the world, 0:04:12.600 --> 0:04:14.600 the FED, not until twenty twelve. I don't think that 0:04:14.600 --> 0:04:18.400 they formerly adoptive percent. Anyway, I've gone off on an aside. 0:04:18.560 --> 0:04:23.560 I'm sorry, house prices, Yes, we told yeah, well nice 0:04:23.839 --> 0:04:26.440 And I think maybe the thing that central banks should 0:04:26.480 --> 0:04:31.520 be focusing on, rather than something like inflation, is more 0:04:31.720 --> 0:04:36.000 localized credit conditions such that you try and avoid bubbles, 0:04:36.000 --> 0:04:39.080 because that that is the thing I've always found irritating 0:04:39.120 --> 0:04:41.960 about central banks. And Alan Greenspan probably was the main 0:04:42.040 --> 0:04:45.440 proponent of this, but everyone else did to this idea 0:04:45.480 --> 0:04:47.919 that you can't spot bubbles, but it's okay because you 0:04:47.960 --> 0:04:54.760 can more pop afterwards, and it's just not that complicated 0:04:55.400 --> 0:04:58.480 spot or bubble. It's very hard spot when it's going 0:04:58.520 --> 0:05:04.640 to bost a tree days. I mean, you just do 0:05:04.880 --> 0:05:07.080 I mean, do you even gorby Jeremy and Einsom's thing 0:05:07.279 --> 0:05:11.000 of x two standard deviations for the long run halverage? 0:05:11.440 --> 0:05:14.640 You can you know? Or the fact that no one 0:05:14.760 --> 0:05:17.160 under the age you're like thought five can flucted by 0:05:17.160 --> 0:05:19.880 a host away claims at things I think should be 0:05:20.240 --> 0:05:22.440 if there were some who may be a bit I 0:05:22.440 --> 0:05:25.920 think the folks are, Yeah, I kind of. I agree 0:05:25.920 --> 0:05:28.239 with you in theory. I agree with you in theory. 0:05:28.240 --> 0:05:31.880 But nonetheless, the subjective targets. When do you decide when 0:05:31.920 --> 0:05:34.840 something has gone over from bullmarket into bubble? When do 0:05:34.880 --> 0:05:37.680 you decide when that bubble is dangerous? You know? These 0:05:37.800 --> 0:05:40.920 is so subjective? And central banks, I mean, are they 0:05:40.960 --> 0:05:42.720 not good at well? They do anyway? I mean, how 0:05:42.720 --> 0:05:44.840 are we doing here? So do we want to give 0:05:44.880 --> 0:05:49.120 them complicated subjective targets or are we good with just 0:05:49.400 --> 0:05:52.680 one clear, straightforward target. Even if that target is it 0:05:52.800 --> 0:05:55.320 is not the correct target, you know, a clear target 0:05:55.360 --> 0:05:58.800 that everybody understands, everyone sees what they're aiming at. This 0:05:58.920 --> 0:06:01.520 is maybe better than than the wooly stuff. I mean, 0:06:01.560 --> 0:06:05.599 that's true. He's playing with fire train. Yeah, I mean 0:06:05.640 --> 0:06:07.640 you are late from that point I view. Can't trust 0:06:07.640 --> 0:06:11.360 them do it that we are wanting them to it. Basically, 0:06:13.880 --> 0:06:16.360 vacancy has come up regularly at the Bank of England, John, 0:06:16.400 --> 0:06:24.720 you should apply. I could be the talking contradian and 0:06:24.839 --> 0:06:27.640 one of our old friends does keep applying every time 0:06:27.680 --> 0:06:30.760 a vacancy comes up to the MPC, but he's never 0:06:30.800 --> 0:06:33.039 been accepted, and he says that he believes that's because 0:06:33.080 --> 0:06:36.359 he understands the effect of money on inflation and nobody 0:06:36.400 --> 0:06:38.640 else does. I want to go back briefly, John, to 0:06:38.680 --> 0:06:40.920 what you were saying about mopping up after bubbles, because 0:06:40.960 --> 0:06:44.040 I was thinking this morning about MMT in modern monetary policy, 0:06:44.040 --> 0:06:46.200 and you know we both read all those books about MMT, 0:06:46.360 --> 0:06:48.560 didn't we a couple of years back about how if 0:06:48.600 --> 0:06:51.400 you had a currency such as the pound or the dollar, 0:06:51.480 --> 0:06:53.200 you could just print all the money you liked and 0:06:53.240 --> 0:06:56.400 it didn't make any difference, and budget deficits don't really exist. 0:06:56.560 --> 0:07:00.000 This is just a technicality. You can print, print, print, print, print, 0:07:00.120 --> 0:07:02.760 do whatever you want, and if inflation starts to get 0:07:02.760 --> 0:07:05.320 out of control, you to just mop it up, mop 0:07:05.400 --> 0:07:08.919 it up, mop it up, and here we are, here 0:07:09.040 --> 0:07:12.320 we are. We effectively had MMT way sooner than any 0:07:12.720 --> 0:07:14.440 any of us would possibly have thought. We had that 0:07:14.560 --> 0:07:18.480 in twenty twenty early twenty twenty. You print a powl 0:07:18.520 --> 0:07:21.240 of money, you stick it in people's pockets, Inflation goes berserk, 0:07:21.320 --> 0:07:25.640 has that mopping up saying going, yeah, it's not terribly well. 0:07:25.400 --> 0:07:28.440 We can so people own lane tilness that we do 0:07:28.480 --> 0:07:32.320 wan't understand MMT. You do realize that I know, and 0:07:32.400 --> 0:07:34.920 people are telling me I don't understand cryptocurrency, so I 0:07:34.960 --> 0:07:39.200 haven't used I understand cryptocurrency, I understand boitcoin, and I 0:07:39.240 --> 0:07:42.000 also understand it M empty, and I think they're all 0:07:42.520 --> 0:07:49.080 absolute nonsense. Hate mail to the usually address thank you. 0:07:49.120 --> 0:07:51.200 In fact, no later in the podcast that I've done 0:07:52.280 --> 0:07:54.720 with Duncan, I think I suggested all the hate mail 0:07:54.760 --> 0:07:57.400 goes to his address because his views on crypto are 0:07:57.440 --> 0:08:00.360 similar to us. So I think that on this occasion, 0:08:00.440 --> 0:08:04.280 please contact Duncan McGinnis on Twitter. All your crypto hatemail 0:08:04.320 --> 0:08:05.640 to him, just for a week and then I'll take 0:08:05.640 --> 0:08:08.440 it back. Thanks very much. John, should get some hate 0:08:08.440 --> 0:08:10.120 mail to you two. Oh yeah, I always like a 0:08:10.120 --> 0:08:14.520 better hate mail. Keeps me humble, excellent, and you are humble, John, 0:08:14.400 --> 0:08:23.040 And so welcome to Merrin Talks Money, the podcast in 0:08:23.080 --> 0:08:26.120 which people who know the markets explain the markets. I'm 0:08:26.160 --> 0:08:29.040 merin Somerset Web and today the person who knows the 0:08:29.080 --> 0:08:33.000 markets inside out right Duncan is Duncan McGinnis, who is 0:08:33.040 --> 0:08:35.480 the manager of one of Rougherst fact flightship funds and 0:08:35.600 --> 0:08:38.320 co manager of another. And I think an awful lot 0:08:38.360 --> 0:08:40.520 of listeners will be invested one way or another in 0:08:40.640 --> 0:08:42.920 Rolph Rown. If they aren't at this point this year, 0:08:42.960 --> 0:08:46.840 they're probably slightly wishing that they were. Duncan. Thank you 0:08:46.880 --> 0:08:49.920 for joining us today. Thank you, thanks for having me. Now. 0:08:49.960 --> 0:08:52.040 We've got a lot to talk about, but I think 0:08:52.080 --> 0:08:56.480 that we might start with banking crisis. We've seen a 0:08:56.520 --> 0:08:58.680 lot of term on in the financial sector over the 0:08:58.720 --> 0:09:02.960 last couple of weeks. Is this going to develop into 0:09:03.000 --> 0:09:06.360 a genuine financial crisis of the like that we've seen before. 0:09:06.480 --> 0:09:10.360 Is everyone's slightly over reacting? Well, I think it would 0:09:10.400 --> 0:09:12.560 not be a conversation with someone from Rougher if we 0:09:12.559 --> 0:09:17.560 weren't concerned about something we have. I'd say, we have 0:09:17.600 --> 0:09:20.280 structural concerns which we can maybe come back to, and 0:09:20.320 --> 0:09:26.439 we have tactical concerns around this potential banking crisis. So 0:09:27.280 --> 0:09:29.280 I think, first of all, that's sort of recap where 0:09:29.320 --> 0:09:31.800 we are. If you went back to the thirty first 0:09:31.800 --> 0:09:34.560 of December, three months ago, recording on the last day 0:09:34.600 --> 0:09:37.520 of the quarter, and someone had said to you in 0:09:37.559 --> 0:09:41.119 the coming three months, credit Suite is going to disappear, 0:09:41.559 --> 0:09:44.160 and three of the top thirty banks, So three of 0:09:44.200 --> 0:09:46.040 the top thirty banks in the US are also going 0:09:46.080 --> 0:09:48.440 to disappear. Do you think the stock market is going 0:09:48.480 --> 0:09:52.480 to be up? Your answer would probably be no, And 0:09:52.640 --> 0:09:57.840 yet and yet they are. I think it's not a 0:09:57.880 --> 0:10:00.800 full blown financial crisis. It's not like two thousand and eight. 0:10:01.160 --> 0:10:04.120 It's not even a run on the banks. Someone wittterally 0:10:04.200 --> 0:10:08.520 described it as a jog on the banks. But it's 0:10:08.559 --> 0:10:11.320 a really difficult situation. So I think it is both 0:10:11.640 --> 0:10:16.240 from a sort of listener's perspective, it's a simultaneously totally 0:10:16.280 --> 0:10:21.640 irrational but also fully irrational to worry about moving your 0:10:21.640 --> 0:10:24.319 money and consider moving your money right now. So it's 0:10:24.440 --> 0:10:28.200 rational to worry about moving your money because we have 0:10:28.240 --> 0:10:31.400 the odd situation where you can earn more money by 0:10:31.440 --> 0:10:33.400 giving it to the government in a money market fund 0:10:33.480 --> 0:10:36.440 or shortly to t bills and you can get less risk. 0:10:36.559 --> 0:10:40.400 So more yield, less risk sounds pretty good. But the 0:10:40.440 --> 0:10:45.160 irrationality is that I think it's highly likely that governments 0:10:45.160 --> 0:10:49.120 will stand behind deposits. Your unsecured retail depositors are not 0:10:49.240 --> 0:10:52.560 going to lose money in this crisis. I would be amazed. 0:10:52.720 --> 0:10:54.520 It would be a huge mistake. I think if they 0:10:54.640 --> 0:10:57.640 let that happen. Yeah, can I interrupt you then to say, 0:10:58.360 --> 0:11:00.200 you know, this is one of the interesting things that 0:11:00.240 --> 0:11:02.480 I would say, it's changed over the last couple of decades, 0:11:02.480 --> 0:11:05.560 and that you know, I'd say even twenty thirty years ago, 0:11:05.600 --> 0:11:07.760 there would have been an assumption that if a bank 0:11:07.840 --> 0:11:10.240 went bust, then you know, you're only protected up to 0:11:10.240 --> 0:11:13.200 the extent that your local regulary system protected you up to. 0:11:13.559 --> 0:11:16.439 But that ship has definitely sailed, hasn't it. There is 0:11:16.559 --> 0:11:20.760 absolutely no appetite from any government anywhere in the developed 0:11:20.760 --> 0:11:24.679 world which to let a depositor lose money on a 0:11:24.720 --> 0:11:26.640 bank failure. So we might as well say that all 0:11:26.640 --> 0:11:31.080 depositors are now protected to infinity and that's that. Yeah, 0:11:31.520 --> 0:11:34.600 legally they are still vulnerable, but I think you're absolutely right. 0:11:34.640 --> 0:11:38.760 The political reality is that it is not acceptable for 0:11:39.400 --> 0:11:44.800 retail depositors to lose money in mainstream banks. So however, 0:11:45.320 --> 0:11:47.520 that doesn't mean they're not There's not lots of problems. 0:11:47.559 --> 0:11:50.920 So there was a well publicized clip of Janet Yellen 0:11:51.040 --> 0:11:55.400 testifying where I think she effectively signed the death warrants 0:11:55.720 --> 0:12:00.599 for smaller regional banks, where where she did not guarantee. 0:12:00.600 --> 0:12:05.080 They're very reluctant to make that explicit guarantee for depositors, 0:12:05.480 --> 0:12:08.280 and she said that they wouldn't guarantee deposits unless it 0:12:08.320 --> 0:12:12.840 was a systemic issue. So the incentive very clearly is 0:12:12.880 --> 0:12:17.040 for is for money to move to the globally important 0:12:17.040 --> 0:12:19.920 systemic banks. You're the very the very largest institutions. So 0:12:19.960 --> 0:12:22.520 how does how does this all play out? I sort 0:12:22.559 --> 0:12:26.000 of imagine the financial system and moving out from a 0:12:26.240 --> 0:12:29.760 core in concentric circles, and at the very center of 0:12:29.840 --> 0:12:35.079 the system you have the RRP, the FED te T 0:12:35.280 --> 0:12:38.160 bills at lending money to the government, and the largest 0:12:38.200 --> 0:12:41.560 financial institutions for your city, groups, your JP, Morgan's, etc. 0:12:42.800 --> 0:12:46.040 And the money is sucking towards the center, from the 0:12:46.080 --> 0:12:50.600 smaller peripheral banks to the center. And as the money 0:12:50.640 --> 0:12:54.240 moves to the center, without getting too technical about things, 0:12:54.240 --> 0:12:59.319 the sort of monetary energy or the monetary velocity DP decreases, 0:13:00.000 --> 0:13:04.200 so the risk taking capacity of the overall financial system decreases. 0:13:04.280 --> 0:13:06.480 And the scene that I have in mind when I 0:13:06.520 --> 0:13:11.120 think about the incentives of corporate treasurers and individuals with 0:13:11.160 --> 0:13:14.760 cash savings at banks is from the film Casino. So 0:13:14.800 --> 0:13:16.760 if you remember the film Casino with Robert de Niro, 0:13:17.760 --> 0:13:20.800 the old mobsters eventually get sort of caught by the 0:13:20.880 --> 0:13:24.600 law and they're sitting around a table deciding whether or 0:13:24.640 --> 0:13:26.720 not they're going to turn on each other or whether 0:13:26.760 --> 0:13:29.480 their foot soldiers are going to turn informants on them, 0:13:29.720 --> 0:13:33.160 and one of the old guys, who's clearly been around 0:13:33.200 --> 0:13:37.640 a while, just says, why take a chance, and everyone 0:13:37.720 --> 0:13:40.480 ends up dead. So everyone that knows anything ends up 0:13:40.520 --> 0:13:43.320 shots and I think that's what depositors are doing currently. 0:13:43.360 --> 0:13:46.680 They are They're shooting first and asking questions later. And 0:13:46.679 --> 0:13:49.120 we're saying we're seeing it in the data, hundreds of 0:13:49.160 --> 0:13:52.240 billions of dollars moving to money market funds and to 0:13:52.600 --> 0:13:55.760 JP Morgan and the like, and this is catastrophic for 0:13:56.400 --> 0:14:02.200 the smaller financial institutions the other Can I interrupt again? Sorry? 0:14:02.480 --> 0:14:06.040 Follow up a question? What does that mean for the 0:14:06.320 --> 0:14:09.440 smaller banks in the UK, for the startup deposit takers, 0:14:09.480 --> 0:14:12.319 for our you know, disrupted banks. I think I think 0:14:12.320 --> 0:14:15.840 it's existential. I think I think they will they will die. 0:14:16.080 --> 0:14:20.080 They will, they will bleed to death unless something arrests 0:14:20.120 --> 0:14:23.920 this situation. And the only two things that can arrest 0:14:24.000 --> 0:14:30.640 it are at the government backstop guaranteeing those deposits, or 0:14:31.440 --> 0:14:33.360 the banks. The banks have the option to raise the 0:14:33.400 --> 0:14:35.400 interest rate that they pay on deposits. I mean, I'm 0:14:35.400 --> 0:14:37.680 sure you'd be as much of a supporter of that 0:14:37.760 --> 0:14:40.960 as I am. But because at the moment, of course, 0:14:41.000 --> 0:14:43.760 they don't pay you base rate, but if they do, 0:14:43.960 --> 0:14:47.360 it will evisceerate their profitability or whatever profitability they have. 0:14:47.920 --> 0:14:50.200 So if they have to pay more to retain the deposits. 0:14:50.240 --> 0:14:52.680 Then then they're they're going to they're going to kill 0:14:52.720 --> 0:14:57.440 their net interest margin, and that too must die the 0:14:57.480 --> 0:14:59.640 way bust if they don't raise their deposit rate, bust 0:14:59.680 --> 0:15:03.520 if they maybe not maybe not bust, but certainly in 0:15:03.560 --> 0:15:07.680 a vastly reduced circumstance. Now, now the other the more important. 0:15:07.720 --> 0:15:10.440 Now this is not as awful as it sounds, because 0:15:11.240 --> 0:15:13.240 it's not great for the sort of health of the 0:15:13.240 --> 0:15:16.920 banking industry, but it's people will still have banking facilities 0:15:16.960 --> 0:15:19.680 to the big banks. I'm more worried about the second 0:15:19.760 --> 0:15:24.320 order consequences. So that's this is becoming pretty pretty well 0:15:24.360 --> 0:15:29.400 known and widely discussed. But it's smaller banks that specialize 0:15:29.440 --> 0:15:33.440 in commercial property lending and small and medium enterprise lending. 0:15:33.600 --> 0:15:35.760 If you've got a small family business, you tend to 0:15:35.800 --> 0:15:38.320 go to a smaller bank to get that loan. So 0:15:38.400 --> 0:15:42.600 it's actually going to be the knock on consequences that 0:15:42.600 --> 0:15:45.520 this will choke off credit to the to the real economy. 0:15:45.800 --> 0:15:50.200 And that's that that's how how you get to bigger 0:15:50.200 --> 0:15:55.080 problems like like a tightening lending standards and an enforced recession. 0:15:55.280 --> 0:15:57.280 But at another angle of this, which is which is 0:15:57.400 --> 0:16:00.640 new A new feature of this bank run is the 0:16:00.760 --> 0:16:04.080 speed at which it's happened. So this is not your 0:16:04.080 --> 0:16:08.000 grandfather's bank run. It's not even an eight because there's 0:16:08.040 --> 0:16:10.480 no cues. There's no standing outside a brank of bank 0:16:10.760 --> 0:16:13.360 or a branch of Northern Rock. There's an app you 0:16:13.400 --> 0:16:17.760 can move your money almost instantly and frictionless. There's a 0:16:17.760 --> 0:16:21.720 great story of how GP Morgan, the man not the institution, 0:16:22.440 --> 0:16:26.280 slowed down the bank runs in nineteen oh seven. He 0:16:26.480 --> 0:16:31.760 asked the bank tellers to double count the money, and 0:16:31.920 --> 0:16:36.400 that really slowed the pace. There's just none of that now, people. 0:16:36.640 --> 0:16:39.680 I mean that the modern equivalent is the closing our 0:16:39.720 --> 0:16:44.760 website for service updates. Yeah, yeah, yeah, indeed there might be. 0:16:44.920 --> 0:16:46.400 I think crypto does a bit of that as well, 0:16:46.440 --> 0:16:51.880 doesn't it. Yeah. So there's there's a bunch of new 0:16:51.960 --> 0:16:53.840 things going on here, and there's a bunch of things 0:16:53.840 --> 0:16:57.240 that are sort of as old as as old as time. Okay, 0:16:57.280 --> 0:17:01.440 so what are the consequences for investors from that? Now? 0:17:01.440 --> 0:17:03.280 Obviously I suppose one of the things you could say 0:17:03.320 --> 0:17:08.000 is that that that dynamic is fairly disinflation ry. Yeah. 0:17:08.040 --> 0:17:14.040 So I think there's two elements. There is the sucking 0:17:14.080 --> 0:17:16.280 of liquidity out the system, something that you know that 0:17:16.320 --> 0:17:18.880 we've been worried about for a while. So there were 0:17:19.000 --> 0:17:21.160 interest rates going up through all of twenty twenty two, 0:17:21.600 --> 0:17:25.680 quantitative easing being reversed into quantitative tightening also through all 0:17:25.720 --> 0:17:30.119 of twenty twenty two and potentially ongoing, and now the 0:17:30.200 --> 0:17:33.879 slow motion run on the banks. So liquidity has been 0:17:33.920 --> 0:17:36.560 drained from the system. That monetary energy that I mentioned 0:17:36.560 --> 0:17:40.680 earlier is disappearing. So that's the first problem. The second 0:17:40.800 --> 0:17:46.600 problem is how investors are positioned. I mean they're on 0:17:46.600 --> 0:17:50.080 a sort of longer term basis. So everyone spent the 0:17:50.160 --> 0:17:55.200 last decade or so iterating towards risk ear and risk 0:17:55.240 --> 0:17:58.800 ear portfolios in a zero interest rate world in pursuit 0:17:58.920 --> 0:18:02.040 of their return target. It's whether that's a retiree wanting 0:18:02.400 --> 0:18:05.520 five to seven percent on their pension pot, or whether 0:18:05.560 --> 0:18:08.360 that's an institution or endowment chasing a seven or eight 0:18:08.359 --> 0:18:12.320 percent long term return target. And one American investor phrased 0:18:12.320 --> 0:18:17.600 it so beautifully I thought when he said, my public 0:18:17.640 --> 0:18:21.640 market investors are doing privates, my private market investors are 0:18:21.680 --> 0:18:25.360 doing venture, and my venture investors are doing crypto. Everyone 0:18:25.680 --> 0:18:29.159 everyone moved to the riskiest end of their mandate to 0:18:29.200 --> 0:18:33.119 try and change returns in zerp world and now because 0:18:33.160 --> 0:18:36.399 we've jumped from zero rates to five percent rates or 0:18:36.520 --> 0:18:38.800 four and a half percent rates in a year or so, 0:18:39.359 --> 0:18:41.600 every investment committee in the land is looking at the 0:18:41.640 --> 0:18:46.000 same challenging picture, all of these cross currents from war 0:18:46.119 --> 0:18:51.200 to inflation, to deglobalization to recession risks to a banking crisis, 0:18:51.240 --> 0:18:54.000 as covered by my Colleaguallex Charters in a podcast of 0:18:54.080 --> 0:18:57.480 you a few months ago, or in our Rougher Review 0:18:57.560 --> 0:19:00.040 recently published. And by the way, everyone I have a 0:19:00.119 --> 0:19:02.760 copy of that Rougher Review. It's excellent. If you're not 0:19:02.800 --> 0:19:04.800 a Rougher client, I think you can still read all 0:19:04.800 --> 0:19:06.960 the stuff on the website right and there is and 0:19:07.040 --> 0:19:09.560 we did do that great podcast with Alex Charter's as 0:19:09.560 --> 0:19:11.399 all the US is going to be even better Duncan, 0:19:11.520 --> 0:19:14.919 so please don't feel for a second prefer him over. 0:19:15.320 --> 0:19:17.600 But it has written a brilliant article in the beginning 0:19:17.720 --> 0:19:20.680 of the Rougher Review twenty twenty three that everyone should 0:19:20.680 --> 0:19:23.440 read to give them a sense of how the land lies. Yes, so, 0:19:23.440 --> 0:19:26.760 so these investment committees are all sitting facing this incredibly opaque, 0:19:26.800 --> 0:19:30.760 uncertain outlook, and all of a sudden they're realizing, wait 0:19:30.760 --> 0:19:35.639 a minute, I can build a portfolio achieving my say, 0:19:35.680 --> 0:19:38.840 seven percent return target, where a big, big chunk of 0:19:38.840 --> 0:19:41.040 that is in cash and T bills earning four or five. 0:19:41.400 --> 0:19:43.879 And to quote the president of black Rock from a 0:19:43.960 --> 0:19:46.119 quarter or so ago, he thinks you can build a 0:19:46.200 --> 0:19:49.760 seven percent expected return portfolio that only has twenty percent 0:19:49.840 --> 0:19:54.600 in equities. So all these investment committees are sitting thinking, 0:19:54.680 --> 0:19:57.080 I don't need to take anywhere near as much risk 0:19:57.119 --> 0:19:59.800 as I used to to achieve my expected return. Yea, 0:20:00.080 --> 0:20:02.760 because that's easier given they've all lost fortunes on those 0:20:02.840 --> 0:20:06.479 higher risk portfolios. Well, yes, yeah, it would have been 0:20:06.520 --> 0:20:08.400 better to start this process a year or so. Yeah, 0:20:08.400 --> 0:20:09.600 a year and a half ago, I would have been 0:20:09.640 --> 0:20:11.240 a better time to look at it. You know what 0:20:11.359 --> 0:20:13.439 seven percent a year next to the thirty percent you're 0:20:13.400 --> 0:20:15.760 already lost. Yeah, And that this the slide that I 0:20:15.840 --> 0:20:17.800 sort of talked to in our pack on this I 0:20:17.840 --> 0:20:20.320 have been using for two years. I would like to emphasize. 0:20:21.200 --> 0:20:26.240 But the risk here is I think a globally synchronized 0:20:26.359 --> 0:20:31.000 de risking of portfolios. So everyone moves from seventy percent equity, 0:20:31.080 --> 0:20:35.600 sixty percent equity, whatever, down the curve de risking by 0:20:35.640 --> 0:20:39.040 twenty or thirty percent towards lower risk assets. And if 0:20:39.080 --> 0:20:42.479 everyone is doing that simultaneously, it is not obvious to 0:20:42.480 --> 0:20:46.680 me who the buyer is, because who's the person that's 0:20:46.520 --> 0:20:49.840 that's up wanting to up their risk in this world. 0:20:50.600 --> 0:20:53.640 If someone said to me the other day, what about 0:20:53.800 --> 0:20:57.160 China and the Middle East, these sovereign wealth funds, They've 0:20:57.160 --> 0:20:59.360 got trillions of dollars that they might like to take 0:20:59.400 --> 0:21:02.200 on that risk from the forced sellers. And I think 0:21:02.240 --> 0:21:06.719 that it was a very interesting point. But because of 0:21:06.760 --> 0:21:11.080 many of the sort of global techtonic things going on, 0:21:11.280 --> 0:21:14.720 I think it's highly unlikely that the West will now 0:21:14.760 --> 0:21:18.800 tolerate trillions of dollars of Chinese money, for example, coming 0:21:18.840 --> 0:21:22.440 in and buying buying up stakes in US businesses. So 0:21:22.560 --> 0:21:24.359 when China puts his hand up and says we're happy 0:21:24.400 --> 0:21:26.480 to take twenty percent of Boeing or twenty percent of 0:21:26.520 --> 0:21:29.520 Lockheed Martin, I think Congress at the Senate might have 0:21:29.520 --> 0:21:33.080 a problem with that. So it's just not at all 0:21:33.119 --> 0:21:38.280 obvious to me who the buyer is for this forced 0:21:38.359 --> 0:21:41.479 not not forced selling, but rational selling that we think 0:21:41.520 --> 0:21:43.360 will happen. Yeah, okay, well, let's go back a bit 0:21:43.400 --> 0:21:45.639 and talk about this portfolio that can make you U 0:21:45.760 --> 0:21:48.480 six or seven percent, well, only being twenty percent in equities, 0:21:48.800 --> 0:21:50.760 what else is in it? We'll come back to equities 0:21:50.760 --> 0:21:52.480 and the type of equities that might make up that 0:21:52.600 --> 0:21:55.119 small apart. But what else is in a portfolio? I 0:21:55.160 --> 0:21:56.960 mean most of us that used to thinking, well, you know, 0:21:57.000 --> 0:21:59.639 the vast majority of our portfolio is an equity is seventy. 0:22:00.240 --> 0:22:02.120 Maybe we have a little cash and a small world exposure, 0:22:02.320 --> 0:22:04.960 but most people moved away, while individuals anyway moved away 0:22:04.960 --> 0:22:08.080 from sixty forty a long time ago and aren't massively 0:22:08.119 --> 0:22:10.879 overexposed in the upream market. So if we would genuinely 0:22:11.000 --> 0:22:13.440 go down to twenty thirty percent in equities, what would 0:22:13.440 --> 0:22:16.920 make up the rest? Yeah? So finally we're getting paid 0:22:16.920 --> 0:22:20.360 a decent return on cash. So I think cash has 0:22:20.400 --> 0:22:25.360 become a useful asset because because it pays a return 0:22:26.040 --> 0:22:28.399 and because it gives you optionality to take advantage of 0:22:28.440 --> 0:22:31.639