WEBVTT - Bitcoin or Gold? Oaktree’s Howard Marks Sees Little Difference 0:00:00.320 --> 0:00:02.840 John Well got a question for you. 0:00:02.880 --> 0:00:04.720 Where's the house price crash? 0:00:05.040 --> 0:00:08.119 It's the question we're all asking this question. We all 0:00:08.119 --> 0:00:09.520 want to know the answer promised us. 0:00:09.760 --> 0:00:11.600 You promised us the house price crash. 0:00:11.960 --> 0:00:13.800 I think you find that didn't. I think you're find 0:00:13.800 --> 0:00:16.840 that promised a healthy correction in real terms. 0:00:17.120 --> 0:00:17.599 Same thing. 0:00:17.800 --> 0:00:22.759 Yeah, interesting, Well certainly that's what people take it as. Yeah, 0:00:22.840 --> 0:00:26.040 well they what can't say the UK housing market is 0:00:26.079 --> 0:00:31.000 made of teflon. I mean it's it's down about fifteen 0:00:31.000 --> 0:00:34.240 percent in real terms over the last and that is 0:00:34.280 --> 0:00:34.600 a lot. 0:00:34.720 --> 0:00:35.720 Actually, which is a lot? 0:00:35.880 --> 0:00:38.280 That is that it's a lot, And to be fair, 0:00:38.360 --> 0:00:41.159 that probably is one reason why it hasn't fallen harder 0:00:41.400 --> 0:00:45.040 in kind of nominal terms, because at the end of 0:00:45.080 --> 0:00:50.080 the day, real wages are going up, you know, big 0:00:50.120 --> 0:00:55.200 spiking inflation and wages means that affordability improves ever so 0:00:55.280 --> 0:00:58.319 slightly but more if only nobody's lost their job, and 0:00:58.360 --> 0:01:00.440 nobody wants to sell the house if they don't think 0:01:00.440 --> 0:01:03.720 they can get peak price for it, And so people 0:01:03.720 --> 0:01:06.080 are sitting in their houses for longer, and the people 0:01:06.120 --> 0:01:08.039 who wanted to buy them can't borrow quite as much 0:01:08.080 --> 0:01:09.959 money to get hold of them. Then you get a 0:01:10.000 --> 0:01:13.920 crash in transactions, which is what happened. But the deals 0:01:13.920 --> 0:01:17.000 that do actually go through go through for a bit 0:01:17.120 --> 0:01:22.039 less money, but not a massive amount less. And I 0:01:22.040 --> 0:01:24.640 guess the tricky thing or sorthing, not the tricky thing, 0:01:24.680 --> 0:01:27.360 but the frustrating thing now for any first time buyers 0:01:27.360 --> 0:01:30.920 out there, is that you know, as we're coming into 0:01:30.920 --> 0:01:34.240 this year, mortgage rates are still they're a lot higher 0:01:34.280 --> 0:01:36.360 than they were kind of like eighteen months ago, but 0:01:36.400 --> 0:01:38.640 they're not as high as they were maybe six months ago. 0:01:40.800 --> 0:01:42.640 And at the same time, you no kind of wage 0:01:42.640 --> 0:01:47.039 growth has improved, so affordability has improved, is still you know, 0:01:47.280 --> 0:01:50.920 unbearable in lots of parts of the country, but there's 0:01:50.960 --> 0:01:55.280 no real trigger to kind of drive any force selling. 0:01:56.480 --> 0:01:57.600 Or to. 0:01:59.560 --> 0:02:02.480 The pressure we've seen kind of like the maximum pressure 0:02:02.560 --> 0:02:05.120 on the housing market in twenty twenty three, and it's 0:02:05.120 --> 0:02:08.000 not as bad now, and chances are the interest rates along. 0:02:08.040 --> 0:02:09.720 I don't think they're going to go much lower than 0:02:09.760 --> 0:02:12.240 they are. No mortgage rates, but the same thing, you. 0:02:12.240 --> 0:02:14.120 Know, they've gone down a lot, and they've gone down 0:02:14.160 --> 0:02:17.400 a lot more in some other countries. Germany has had 0:02:17.400 --> 0:02:19.800 the worst of it, haven't they German. We talked about 0:02:19.800 --> 0:02:21.880 German house prices a while ago, and they're down ten 0:02:21.880 --> 0:02:23.399 percent there, and if you look at some of the others, 0:02:23.440 --> 0:02:25.480 I've just pulled up the numbers well while he's been talking, 0:02:25.480 --> 0:02:27.240 because I got bored in the but of you explaining 0:02:27.240 --> 0:02:29.760 where we haven't had a proper crist Canada, Denmark's weed 0:02:29.800 --> 0:02:34.320 in Luxembourg career, they're down seven percent to nine percent, Australia, 0:02:34.360 --> 0:02:37.680 the Netherlands, Slovakia three percent, five percent, But everywhere else 0:02:37.720 --> 0:02:39.560 price has only felt a little bit and a lot 0:02:39.560 --> 0:02:43.200 of it seems to be about prices being propped up 0:02:43.200 --> 0:02:45.680 by rental growth, which I suspect is the case here, 0:02:46.160 --> 0:02:48.079 but then being pushed down again on the other side 0:02:48.080 --> 0:02:50.560 by regulatary change, which may again be the case here 0:02:50.600 --> 0:02:52.679 because we've got various rental forms on the way. 0:02:53.800 --> 0:02:55.639 Yeah, But I mean the other thing we all of 0:02:55.680 --> 0:02:59.240 those market says the interest rates sensitivity was higher than 0:02:59.280 --> 0:03:03.800 the UK for basically for two reasons. It's like we're Sweden. Effectively, 0:03:03.840 --> 0:03:08.079 as soon as the interest rate changes there, the rate 0:03:08.120 --> 0:03:11.040 on your mortgage changes almost immediately. But the other thing 0:03:11.120 --> 0:03:13.080 is that anywhere that didn't have a house price crash 0:03:13.120 --> 0:03:17.160 in two thousand and eight, like Australia or Canada, the consumers, 0:03:17.520 --> 0:03:23.400 the households were massively over leveraged. They are where we 0:03:23.400 --> 0:03:25.880 were in two thousand and eight. Whres one thing I 0:03:25.919 --> 0:03:27.880 think people don't appreciate, and we go on about it 0:03:27.880 --> 0:03:30.440 a lot on the podcast, is that after two thousand 0:03:30.440 --> 0:03:34.080 and eight, UK households their balance sheets have improved and 0:03:34.160 --> 0:03:37.480 we aren't as kind of, you know, over leveraged as 0:03:37.480 --> 0:03:39.560 we were back then, which is the other reason that 0:03:39.560 --> 0:03:41.880 we're not as rate sensitive as we were. But I 0:03:41.880 --> 0:03:44.120 think that's why, you know, the likes of Sweden, et cetera. 0:03:44.200 --> 0:03:50.200 I had proper crashes, and I mean, you know, I'll 0:03:50.240 --> 0:03:52.800 be interested to see what happens to the Canadian banking system, 0:03:52.880 --> 0:03:56.080 for example. That's just off the top of my head. 0:03:56.080 --> 0:03:58.000 I don't if any haven't looked at it in any 0:03:58.040 --> 0:04:00.480 great detail. But you'd think we all those more geez 0:04:00.840 --> 0:04:04.720 that was going to reset scandalously high rates, et cetera, 0:04:04.840 --> 0:04:08.000 that there'll be a problem there. But overall, I can 0:04:08.040 --> 0:04:10.720 see there's a good reason why the UK hasn't quite 0:04:10.960 --> 0:04:13.000 going the same way as those other countries I think. 0:04:14.360 --> 0:04:16.000 But we still got the lag, there's still a lot 0:04:16.040 --> 0:04:19.920 of people to remortgage. It's still not coming. There's regulation change, 0:04:20.279 --> 0:04:21.960 probably a new government at the end of the year. 0:04:21.960 --> 0:04:25.560 I'm telling everyone not get complacent yet. John's crash may 0:04:25.680 --> 0:04:26.600 still yet come. 0:04:27.360 --> 0:04:29.400 We need to know what we need to see. 0:04:29.440 --> 0:04:31.640 How I'm distincing myself from your. 0:04:31.560 --> 0:04:35.040 Crash, Yeah, the one, the one you tricked me into predicting. 0:04:36.040 --> 0:04:39.240 Yeah, Now, I'm basically I'm putting myself out there as 0:04:39.240 --> 0:04:42.200 a housing bubble, a housing a boomer and you're going 0:04:42.200 --> 0:04:44.360 to take all the flag for the next how many years? 0:04:45.920 --> 0:04:47.760 John, I'm I was going to see someone we should 0:04:47.760 --> 0:04:50.719 get back going the podcast at some point, or we 0:04:50.720 --> 0:04:52.400 should get one of the people that kind of talks 0:04:52.400 --> 0:04:55.600 about the eighteen year housing cycle, because if they are right, 0:04:55.960 --> 0:04:59.839 then this is the the Bier's remorse moment and like 0:04:59.839 --> 0:05:03.719 to is going to be when it all comes tumbling down. 0:05:04.040 --> 0:05:06.919 So I would be genuinely curious to all what that 0:05:07.400 --> 0:05:10.880 kind of group of people think is actually going on, 0:05:10.920 --> 0:05:14.240 and just know maybe I should talk to a while. 0:05:14.960 --> 0:05:17.320 Yeah, and now you've mentioned them, I'm almost certain they'll 0:05:17.320 --> 0:05:17.839 be in touch. 0:05:19.200 --> 0:05:22.159 All right, It's like kindy mine, it. 0:05:22.000 --> 0:05:27.600 Is welcome to Maren talks money the podcast in which 0:05:27.640 --> 0:05:30.080 people who know the markets explain the markets. I'm meren 0:05:30.080 --> 0:05:32.599 Sunset Web this week' bringing you a conversation with oak 0:05:32.600 --> 0:05:36.040 Tree Capital Management co founder Howard Marks. Oak Tree, founded 0:05:36.040 --> 0:05:38.360 in nineteen ninety five, is a distressed debt specialist now 0:05:38.400 --> 0:05:41.799 manages roughly one hundred and eighty billion dollars in assets, 0:05:41.839 --> 0:05:43.719 and Howard, as what many of you will know, is 0:05:43.720 --> 0:05:46.719 famous for the notes that he writes on his thoughts 0:05:46.800 --> 0:05:51.880 about investment. Howard, thank you so much for joining us today. 0:05:51.880 --> 0:05:54.000 We really appreciate it. It's good to have you with us. 0:05:54.000 --> 0:05:55.400 Good to be here. Thank you, Maren. 0:05:56.040 --> 0:05:59.039 I wonder if we can start by talking about your 0:05:59.160 --> 0:06:01.880 sea change things and the ideas behind that. I think 0:06:02.240 --> 0:06:04.920 a lot of listeners will read your notes very enthusiastically, 0:06:05.000 --> 0:06:06.800 and I know a bit about the way that you're thinking, 0:06:07.000 --> 0:06:08.719 but some won't. So it would be great if we 0:06:08.760 --> 0:06:12.640 can set the scene by talking about this big pendulum 0:06:12.720 --> 0:06:14.680 swing that you've seen in markets. 0:06:15.600 --> 0:06:20.159 Paul Samuelson, the great American economists who wrote the textbook 0:06:20.240 --> 0:06:24.680 that almost all of us read in college, said, when 0:06:24.720 --> 0:06:27.400 events change, I changed my mind, what do you do? 0:06:28.360 --> 0:06:31.599 That's a good question. You know, most people kind of 0:06:31.640 --> 0:06:34.719 assume that the way things are is the way they've 0:06:34.760 --> 0:06:38.159 always been and the way they'll always be, and so 0:06:38.560 --> 0:06:43.279 the tactics and strategies that have worked will continue working. 0:06:43.600 --> 0:06:47.600 As simple as that, I think for most people. The 0:06:48.240 --> 0:06:52.640 idea of the sea change arose for me fifteen months ago. 0:06:53.080 --> 0:06:57.279 I wrote about it thirteen months ago, and also eight 0:06:57.320 --> 0:07:00.480 months ago, and also a little bit last month for 0:07:00.680 --> 0:07:03.800 this month, and I still believe it. And basically what 0:07:03.880 --> 0:07:08.560 it says is that at the end of eight the 0:07:08.600 --> 0:07:16.040 FED took what we call a dubbsh stimulative monetary policy 0:07:16.520 --> 0:07:19.400 to get us out of the global financial crisis, and 0:07:19.440 --> 0:07:22.840 in particular, they took the FED funds rate, which is 0:07:22.880 --> 0:07:26.600 the benchmark rate of short term interest rates in the US, 0:07:27.600 --> 0:07:32.000 to zero for the first time. Surprisingly, they kept it 0:07:32.040 --> 0:07:37.560 there for almost seven years, and for the total of 0:07:37.640 --> 0:07:42.320 the thirteen years from nine through twenty twenty one. 0:07:42.960 --> 0:07:44.320 It averaged a half a percent. 0:07:45.200 --> 0:07:48.120 And the reason we watch the FED, and the reason 0:07:48.160 --> 0:07:52.280 the FED manipulates interest rates is that interest rates matter 0:07:52.320 --> 0:07:58.760 a great deal in determining the vibrance of business and 0:07:59.040 --> 0:08:03.440 the cultural Low interest rates had a very strong impact 0:08:04.320 --> 0:08:07.680 on those thirteen years. But I believe they're over, and 0:08:07.840 --> 0:08:10.400 that means that the climate ahead will be different from 0:08:10.400 --> 0:08:13.560 the last thirteen years. Now, what prevailed over the last 0:08:13.560 --> 0:08:16.520 thirteen years not the way it's always been. At the 0:08:16.560 --> 0:08:21.120 beginning of my career, in the late sixties and seventies, 0:08:22.040 --> 0:08:26.240 we had a different interest rates. They closer to I 0:08:26.240 --> 0:08:28.800 would say, five to six on average, and we had 0:08:28.800 --> 0:08:31.360 a different climate. But then the US had about of 0:08:31.360 --> 0:08:34.040 inflation in the seventies. The Fed Fund rate was taken 0:08:34.080 --> 0:08:36.600 to twenty by Paul Wolker, the Chairman of the FED, 0:08:36.960 --> 0:08:40.600 and that killed the inflation. Good news, killed the economy, 0:08:40.640 --> 0:08:43.840 bad news, and it set the tone for the next 0:08:43.880 --> 0:08:46.560 forty years. And I say in the memo which I 0:08:46.600 --> 0:08:49.640 published in December, and by the way, everything I'm going 0:08:49.679 --> 0:08:52.319 to say about the memos is available by a podcast 0:08:52.360 --> 0:08:55.840 if people would rather listen than read. In nineteen eighty 0:08:55.840 --> 0:08:57.719 I had a long outstanding from a bank and I 0:08:57.800 --> 0:08:59.480 got a piece of paper which said the rate on 0:08:59.480 --> 0:09:02.280 your loan now twenty two and a half percent. And 0:09:02.360 --> 0:09:05.080 forty years later, in twenty twenty, I was able to 0:09:05.120 --> 0:09:08.320 borrow at two and a half percent. And that decline 0:09:08.320 --> 0:09:11.760 and interest rates really set the tone for that forty 0:09:11.840 --> 0:09:17.160 year period and again, I think that the decline is over. 0:09:17.760 --> 0:09:21.560 In the latest note, you talk about reading Edward Chancellor's book. 0:09:21.559 --> 0:09:23.640 We're great fans of Edward Chancellor, and we've had him 0:09:23.640 --> 0:09:25.200 on the podcast in the past to talk about his 0:09:25.200 --> 0:09:27.400 books and his idea, but that he had in his 0:09:27.440 --> 0:09:29.480 most recent book, The Price of Time, and we've talked 0:09:29.480 --> 0:09:31.880 about that with him a lot. And you say in 0:09:31.920 --> 0:09:34.920 your latest note that reading his book clarified your thoughts 0:09:34.960 --> 0:09:38.000 again about how it is that very low interest rates 0:09:38.080 --> 0:09:41.120 affect the investment markets. And again you say in your note, 0:09:41.160 --> 0:09:43.560 and we've discussed here before, that there are all sorts 0:09:43.600 --> 0:09:46.599 of things that people attribute their investment's success over the 0:09:46.679 --> 0:09:50.120 last twenty thirty forty years to, in particular their personal brilliance, 0:09:50.440 --> 0:09:53.040 but you also say that you think, in fact, it 0:09:53.120 --> 0:09:55.000 is very low interest rates that have been the main 0:09:55.160 --> 0:09:58.480 driver of investment performance of asset markets over the last 0:09:58.520 --> 0:10:01.040 forty years. So it it's very much the case that 0:10:01.120 --> 0:10:04.960 if that changes, everything changes. So I wonder if you 0:10:05.040 --> 0:10:07.680 could just explain what it is that what it was 0:10:07.720 --> 0:10:11.120 in Edward's book that clarified your thinking, the key points 0:10:11.120 --> 0:10:11.800 that came out. 0:10:11.679 --> 0:10:15.920 That the reason I like Edward's books so much Edward, 0:10:15.920 --> 0:10:19.000 as far as I'm concerned, is not an economist. I 0:10:19.040 --> 0:10:22.640 would say, thank god, I don't. I'm not very sympathetic 0:10:22.679 --> 0:10:30.000 to economists. Edward is a financial historian. And you know, 0:10:30.679 --> 0:10:34.440 the philosopher Santayana said those who are ignorant of history 0:10:34.520 --> 0:10:38.199 are doomed to repeat it. And Mark Twain, the American 0:10:38.240 --> 0:10:42.560 humorist of the nineteenth century, said history does not repeat itself, 0:10:43.559 --> 0:10:46.200 but it does rhyme. What does that mean, to not 0:10:46.360 --> 0:10:49.880 repeat but to rhyme? And the answer is that the 0:10:49.960 --> 0:10:53.760 details of history are always different in every iteration, but 0:10:53.880 --> 0:10:59.240 there are themes that do rhyme from one iteration to 0:10:59.280 --> 0:11:03.240 the next. Edward does a great job of studying those 0:11:03.280 --> 0:11:06.400 and poising them out. The first of his books that 0:11:06.440 --> 0:11:08.640 I read was Devil Take the Highmost in the Fall 0:11:08.679 --> 0:11:14.240 of nineteen ninety nine, and he described the behavior in 0:11:14.440 --> 0:11:18.200 speculative bubbles, things like the South Sea bubble of the 0:11:18.240 --> 0:11:22.160 seventeen twenties, the Tulip bubble. You know, people engage in 0:11:22.760 --> 0:11:26.240 crazy behavior in speculative bubbles, and as a consequence, they 0:11:26.920 --> 0:11:29.640 buy things with no value for high prices, which is 0:11:29.640 --> 0:11:30.880 a good formula for losing a. 0:11:30.880 --> 0:11:31.440 Lot of money. 0:11:32.840 --> 0:11:35.600 And I was reading Devil Take the Highmost in the 0:11:35.600 --> 0:11:38.520 fall of ninety nine, and I said, wait a minute, 0:11:39.360 --> 0:11:42.760 this is the same behavior we're seeing today. In what 0:11:42.800 --> 0:11:46.000 we call the tech bubble of ninety eight, ninety nine, 0:11:46.000 --> 0:11:51.360 two thousand and again people acted like anything with Internet 0:11:51.400 --> 0:11:54.000 in the name, or any thing having to do with 0:11:54.080 --> 0:11:57.120 the e commerce would make them rich, which of course 0:11:57.440 --> 0:12:01.280 is a very dangerous expectation. I wrote a memo called 0:12:01.440 --> 0:12:05.240 Bubble dot Com about the bubble that was taking place 0:12:05.280 --> 0:12:09.720 in dot com stocks. It was well, I don't like 0:12:09.760 --> 0:12:11.520 to be self congraguatory, but it was right. 0:12:12.000 --> 0:12:14.360 It was right. You could be self congrassive. That's okay. 0:12:14.720 --> 0:12:17.640 Taking on this podcast we celebrate success well. 0:12:17.679 --> 0:12:20.880 And the great thing theren is that, you know, it 0:12:21.000 --> 0:12:23.199 attracted a lot of attention to the memos. I had 0:12:23.240 --> 0:12:26.240 started writing the memos ten years earlier, in nineteen ninety 0:12:26.440 --> 0:12:29.439 and for ten years I wrote without having one response, 0:12:30.440 --> 0:12:32.760 and as somebody who writes for a living, you would 0:12:32.760 --> 0:12:34.880 know that that's not very rewarding. 0:12:35.000 --> 0:12:35.760 No, we don't like that. 0:12:36.160 --> 0:12:39.160 But then thanks to Bubble dot com, I was recognized, 0:12:39.200 --> 0:12:44.560 and now nowadays the memos are popular. In twenty twenty three, 0:12:45.320 --> 0:12:49.360 I again spent the Fall. Reading another Chancellor book at 0:12:49.400 --> 0:12:52.160 this time, the price of time. What is the price 0:12:52.200 --> 0:12:54.679 of time? The price of time is interesting. It's the 0:12:54.720 --> 0:12:58.120 amount that we pay to have the use of somebody 0:12:58.200 --> 0:13:02.200 else's money for a period of time. Threat we rent 0:13:02.240 --> 0:13:05.880 the money, and the person who rents the money out 0:13:06.360 --> 0:13:08.880 gets the interest rate, and the person who pays the 0:13:08.920 --> 0:13:11.760 interest rate and gets the use of the money gets 0:13:11.800 --> 0:13:15.800 the benefits of putting that money over that time, whether 0:13:15.880 --> 0:13:20.760 it be losses or gains. It talks a lot in 0:13:20.800 --> 0:13:25.680 the book about the negative impact of rates being too low, 0:13:27.000 --> 0:13:29.120 and I said, wait a minute, this is the same 0:13:29.120 --> 0:13:31.240 thing we're seeing now, and ihaps seen for the last 0:13:31.280 --> 0:13:35.880 thirteen years. And so I wrote my memo called easy Money, 0:13:36.559 --> 0:13:39.520 which came out a couple of weeks ago, and again 0:13:39.760 --> 0:13:44.280 the same theme rhyming four hundred years later. And it's 0:13:44.320 --> 0:13:48.160 important to understand the themes of financial history. Is more 0:13:48.200 --> 0:13:52.160 important to understand the way they rhyme and have a 0:13:52.200 --> 0:13:56.800 recurring impact on generations over I think the impact of 0:13:57.520 --> 0:14:00.920 easy money ultra low interest rates is profiled. 0:14:01.640 --> 0:14:04.120 Yeah, so when you look at the list of things 0:14:04.160 --> 0:14:06.719 that you wrote in this memo, the things that low 0:14:06.800 --> 0:14:09.880 interest rates allow you make it easy to run a business. 0:14:10.080 --> 0:14:12.880 They make it easy for investors to see acid appreciation, 0:14:12.960 --> 0:14:15.520 They make it easy and cheap to levy your investments up, 0:14:15.840 --> 0:14:19.000 easy and cheap for business to businesses to obtain financing, 0:14:19.160 --> 0:14:22.640 and easy to avoid default and bankruptcy. And one of 0:14:22.680 --> 0:14:27.280 the effects of that is malinvestment. Is is capital being 0:14:27.280 --> 0:14:31.120 allocated to the wrong places, to businesses that shouldn't survive 0:14:31.200 --> 0:14:34.320 in a normal environment. So if we're now seeing this 0:14:34.360 --> 0:14:36.640 sea change and we flipping bank the other way, does 0:14:36.640 --> 0:14:39.320 this suddenly become hard to run a business, hard to 0:14:39.360 --> 0:14:41.840 make any money out of the markets, hard to levy 0:14:41.880 --> 0:14:45.600 your investments, hard to get financing, and really not easy 0:14:45.680 --> 0:14:48.200 at all to avoid DeVault and bankruptcy. 0:14:48.200 --> 0:14:50.160 The flip sounds really nasty. 0:14:50.320 --> 0:14:53.400 We had ultra low interest rates. I don't think we're 0:14:53.440 --> 0:14:56.600 going to ultra high interest rates. I think we're just 0:14:56.640 --> 0:15:00.920 going back to normal interest rates. I don't think it's 0:15:00.960 --> 0:15:05.040 going to be terribly hard to make money or avoid 0:15:05.080 --> 0:15:07.520 bankruptcy or get financing. I think it's going to be 0:15:07.600 --> 0:15:11.400 normally hard. You know, the people. The thing that people 0:15:11.440 --> 0:15:18.400 should bear in mind, both your listeners and normal economic participants, 0:15:18.960 --> 0:15:20.920 it's not supposed to be easy. 0:15:21.280 --> 0:15:22.520 So much nicer when it is. 0:15:22.880 --> 0:15:25.120 Well, it's nicer for a minute, but the point of 0:15:25.160 --> 0:15:31.000 the memo is that it being easy subsequently has bad effects. 0:15:31.560 --> 0:15:36.120 And you know, let's think of an example. Investors like 0:15:36.240 --> 0:15:40.640 myself or you are supposed to be risk averse. We're 0:15:40.640 --> 0:15:49.520 supposed to dislike riskiness and be attracted to safety, and 0:15:49.640 --> 0:15:55.480 as a consequence, we demand the opportunity to make higher 0:15:55.520 --> 0:15:59.040 returns from risky investments. If we have two investments and 0:15:59.080 --> 0:16:02.520 one is safe and one of risky, we'll demand that 0:16:02.600 --> 0:16:07.160 the risky one appear to offer a higher return, or 0:16:07.200 --> 0:16:09.120 we don't make the risky one, we'll make the safe one. 0:16:09.800 --> 0:16:12.320 If I said, mare, and I have two you know 0:16:12.360 --> 0:16:15.840 oak Tree funds to offer to you. One is one 0:16:16.040 --> 0:16:18.400 invest in treasuries and it will give you seven percent, 0:16:18.440 --> 0:16:21.120 and the other is adventure capital fund that will invest 0:16:21.160 --> 0:16:24.240 in high tech solutions and if things go right, will 0:16:24.240 --> 0:16:26.800 make seven percent. You'll say, I'll take the shore seven 0:16:27.040 --> 0:16:29.520 over the risky seven. Because you're a normal person, you're 0:16:29.520 --> 0:16:33.400 a risk averse. You have to be induced make risky investments. Now, 0:16:33.720 --> 0:16:37.040 what happens when people forget to be risk averse, And 0:16:37.080 --> 0:16:43.160 the answer is that they make risky investments without suitable incentives. Well, 0:16:43.640 --> 0:16:47.480 if the central Bank reduces the interest rate to zero, 0:16:47.840 --> 0:16:52.160 and the return on savings, for example, is zero, as 0:16:52.160 --> 0:16:54.120 it has most been most of the time for the 0:16:54.200 --> 0:16:57.520 last fifteen years in this country, then if you see 0:16:57.560 --> 0:17:02.080 a crazy high tech start up investment that offers five 0:17:02.440 --> 0:17:04.920 maybe you say, oh my god, that's near vine. I'll 0:17:04.920 --> 0:17:07.720 take that all day long. I love five percent when 0:17:07.720 --> 0:17:11.800 cash is zero. And so you can see that ultra 0:17:11.920 --> 0:17:16.840 low interest rates on short instruments like cash or treasuries 0:17:17.040 --> 0:17:22.000 drives people to make investments in risky things that still 0:17:22.040 --> 0:17:27.240 offer low absolute rates of return, just higher than the 0:17:27.520 --> 0:17:29.920 Measley what I think it was Edward Chanceller who said 0:17:29.920 --> 0:17:34.119 the Measley rates unsafety investors. So you can see that 0:17:34.280 --> 0:17:38.920 ultra low interest rates encourage risk taking and that's not good. 0:17:39.200 --> 0:17:42.439 It gets people into things they shouldn't do. And you know, 0:17:42.520 --> 0:17:48.040 the ultra low interest rate has effects on let's say people. 0:17:48.240 --> 0:17:50.800 It may not be people, maybe institutions or companies or 0:17:50.840 --> 0:17:53.359 what have you, but it has effects. And in particular, 0:17:53.960 --> 0:18:00.359 ultra low interest rates penalize lenders and safers and upside 0:18:00.400 --> 0:18:02.560 eyes risk takers and borrowers. 0:18:03.320 --> 0:18:04.639 And you know, is that. 0:18:04.520 --> 0:18:07.120 What we really want to do in our society. Let's 0:18:07.119 --> 0:18:09.520 say you have a worker who's been fortunate enough to 0:18:10.000 --> 0:18:13.280 save up half a million over the course of her career, 0:18:13.520 --> 0:18:17.359 and she's now retiring. If the bank offers five percent interest, 0:18:17.400 --> 0:18:21.080 which is pretty normal in the US, she makes twenty 0:18:21.080 --> 0:18:24.040 five thousand a year of retirement income. But if the 0:18:24.160 --> 0:18:26.399 interest rate is zero, as it has been most of 0:18:26.440 --> 0:18:29.399 the last fifteen years, she makes zero. And she says, 0:18:29.400 --> 0:18:32.760 I can live on zero. Most people can't. And so 0:18:32.800 --> 0:18:36.600 she says, well, I better invest in you know, high 0:18:36.600 --> 0:18:40.960 tech thocts or something like that. And it's probably inappropriate 0:18:41.359 --> 0:18:45.359 for her to be investing in something that risky given 0:18:45.440 --> 0:18:50.880 her limited resources in station in life, but she does 0:18:50.920 --> 0:18:55.199 it because the low interest rates drive her out of 0:18:55.640 --> 0:18:59.080 safe instruments. And you know, I in the memo, I 0:18:59.119 --> 0:19:01.879 caught my late other in law who used to refer 0:19:01.920 --> 0:19:06.520 to people like her as handcuff volunteers. They do not 0:19:06.680 --> 0:19:09.200 what they want to do. They do what they feel 0:19:09.240 --> 0:19:09.880 they have to do. 0:19:10.200 --> 0:19:12.240 What they're forced to do by the central banks, which 0:19:12.320 --> 0:19:14.560 gives them. A central bank is a level of responsibility. 0:19:14.600 --> 0:19:16.119 I'm not sure they always step up to. 0:19:16.960 --> 0:19:20.040 They may not sit down and say let's penalize the 0:19:20.119 --> 0:19:25.360 retiree and reward the speculator. But that is the impact 0:19:25.359 --> 0:19:28.800 of what they do. Maybe it's a byproduct of having 0:19:29.440 --> 0:19:32.680 a stimuli of monetary policy which with low interest rates 0:19:32.960 --> 0:19:37.480 and i availability of liquidity. But whether whether whether it's 0:19:37.520 --> 0:19:40.880 their intention or not, it is the effect. 0:19:41.359 --> 0:19:43.760 Well they don't do it unknowingly, that's for sure. So 0:19:43.880 --> 0:19:46.440 there are in that sense, there are many positives too, 0:19:46.520 --> 0:19:49.080 or return to a normal level of interest rates. And 0:19:49.080 --> 0:19:50.320 I know there is a view that we will see 0:19:50.359 --> 0:19:52.520 interest rates go back down to what younger people consider 0:19:52.600 --> 0:19:54.960 to be normal, back down to in a very low levels, 0:19:54.960 --> 0:19:57.280 as inflation falls back to two percent. That my view, 0:19:57.359 --> 0:20:00.440 nice suspect yours as well, is it they will stay 0:20:00.440 --> 0:20:03.719 at much more normal rates in the medium to long term. 0:20:04.520 --> 0:20:04.760 Yes. 0:20:04.920 --> 0:20:07.359 In the memo and in the podcast, I take the 0:20:07.400 --> 0:20:12.160 position that the rate for the next decades, shall we say, 0:20:12.560 --> 0:20:15.119 is on the FED funds rate, which is always the 0:20:15.119 --> 0:20:17.560 lowest rate there is because it is the rate that 0:20:17.640 --> 0:20:20.960 banks pay each other or paid on bank deposits at 0:20:21.000 --> 0:20:24.760 the FED, that the rate will be between two and four, 0:20:25.359 --> 0:20:26.720 not between zero and two. 0:20:28.200 --> 0:20:29.440 I don't believe in forecasts. 0:20:29.440 --> 0:20:32.119 I especially don't believe in my own forecast, but you 0:20:32.240 --> 0:20:35.480 have to believe something, and you know, I don't think 0:20:35.480 --> 0:20:40.880 it's heroic to cite such broad ranges, but I think 0:20:41.320 --> 0:20:45.000 I think that's true, and I think it's indicative it's 0:20:45.040 --> 0:20:46.720 going to be a different climate. 0:20:46.960 --> 0:20:49.560 It recalls for different actions. 0:20:49.400 --> 0:20:52.080 And it's fair to say, without making forecasts that historically 0:20:52.080 --> 0:20:54.560 it's incredibly unusual for inflation to get to the level 0:20:54.600 --> 0:20:56.440 it did and for then to fall back to two 0:20:56.440 --> 0:20:58.440 per cent and remain there. That would be if we're 0:20:58.440 --> 0:21:00.840 talking about history rhyming, that would be history, not rhyming. 0:21:00.880 --> 0:21:05.120 Asshle right, right, yeah, I mean, look, we haven't had 0:21:05.160 --> 0:21:08.760 high interest at high inflation much of the time since 0:21:09.359 --> 0:21:12.200 nineteen eighty and we got up to nine and a 0:21:12.240 --> 0:21:15.320 half in the US, and now as you say, it's 0:21:15.760 --> 0:21:19.240 around three or three and a half, and most people 0:21:19.280 --> 0:21:20.280 are confident it's going. 0:21:20.200 --> 0:21:20.680 To be two. 0:21:21.240 --> 0:21:24.879 You know, the FED has adopted restrictive monetary policy to 0:21:24.960 --> 0:21:28.720 cool off the inflation. Doesn't want the economy to overheat 0:21:28.760 --> 0:21:32.600 and be inflationary, so they rose in They raised interest 0:21:32.680 --> 0:21:37.480 rates and embarked on quantitative tightening, taking liquidity out of 0:21:37.520 --> 0:21:43.119 the system by selling bonds into the economy or merely 0:21:43.200 --> 0:21:47.040 letting them mature, both of which use up liquidity like 0:21:47.080 --> 0:21:50.680 a sponge. And so all the optimists who've been raising 0:21:50.960 --> 0:21:54.080 the stock market for the last fourteen months say, oh, 0:21:54.240 --> 0:21:57.840 you know what, inflation will soften. That means the Fed 0:21:57.920 --> 0:22:00.399 will not have to raise rates anymore, be able to 0:22:00.400 --> 0:22:03.840 start loving them. That means that it's not going to 0:22:03.880 --> 0:22:07.920 cause a recession. And I think you would say, they're 0:22:07.960 --> 0:22:11.480 and Bobs your uncle or Robert's your mother's brother. 0:22:11.800 --> 0:22:17.120