Speaker 1: Hi, John, Now listen, we are talking just after the
Speaker 1: Bank of England has raised interest rates brainnother half a
Speaker 1: percent to take them to four percent, which seems kind
Speaker 1: of okay, right, four percent feels like a normal kind
Speaker 1: of range for interest rates, all other things being equal, that,
Speaker 1: of course, all other things that are not equal. But nonetheless,
Speaker 1: if safe, for example, inflation was somewhere around the Bank
Speaker 1: of England target of two percent, then you would expect
Speaker 1: interest rates to be about four percent. The fact that
Speaker 1: inflation is around tempercent, we'll put that one side at
Speaker 1: the moment. This first my progress, right, Yeah, it's nice
Speaker 1: to get away from zero's. It feels somewhere approaching something,
Speaker 1: getting towards normality. And if inflation actually does come down,
Speaker 1: obviously it's going to come down next year and next year,
Speaker 1: but if it does kind of stay around maybe four
Speaker 1: or five percent in the long run, then the Bank
Speaker 1: England doesn't have that much although it should. I mean,
Speaker 1: obviously it's not planning to reads them much further at
Speaker 1: all effort all actually, but we'll see, and certainly not
Speaker 1: planning to raise them above inflation, because you know that
Speaker 1: would be crazy and old fashioned. But it does mean
Speaker 1: it does mean that if we have an even vaguely
Speaker 1: consumer phacing bank, we should be able over the next
Speaker 1: few months, just like getting proper interest on our deposits,
Speaker 1: not more than inflation. Obviously isn't a real return on cash,
Speaker 1: but a return on cash the less. Yeah, and I
Speaker 1: mean there's quite a few fix Street boinds know that
Speaker 1: you don't alsus have to lock up for that long.
Speaker 1: You get over four per cent, may even be high
Speaker 1: on the um. And then there's a few accounts you
Speaker 1: can get stuff. I mean, obviously with the Continent account
Speaker 1: you can't see really white money in it, but I'm
Speaker 1: sure I saw one that was picking up above sex
Speaker 1: or seven percent actually recently, I don't believe you. Now listen,
Speaker 1: you can get above four percent on UK equities as well, right,
Speaker 1: And one of the great things about UK equities is
Speaker 1: that they are usually dividend paying and not particularly expensive.
Speaker 1: And I put up a chance the other day on
Speaker 1: twitship that everyone got right across about pointing out that
Speaker 1: in capital terms, real the UK market hasn't actually moved
Speaker 1: since the nineteen sixty seven, which meant everyone go, oh,
Speaker 1: you can't like this, You've forgotten about dividends, and I
Speaker 1: haven't got about dividends. I was just putting up an
Speaker 1: interesting chart and people didn't find it interesting. I found
Speaker 1: it quite interesting. But nonetheless, you've had a perfectly reasonable
Speaker 1: return from the UK market thanks to dividends, right, Yeah.
Speaker 1: And I think this is actually really important because and
Speaker 1: that's it's really important in the context of a very
Speaker 1: specific thing today, which is a Shell obviously just reported
Speaker 1: its results as well, and it's made draka profits blah
Speaker 1: blah blah, and of course everyone is kind of disgusted, appalled,
Speaker 1: blah blah, et cetera. But this and one of the
Speaker 1: things they always highlight is it pays out there's something
Speaker 1: of dividends to share holders. But if I called up
Speaker 1: a chart the Royal Dutch Shall over the past ten years,
Speaker 1: if you include dividends re invested, it has made exactly
Speaker 1: as much as if you put your money and a
Speaker 1: foot who shared tracker. If you don't rest the dividends,
Speaker 1: the capital gain is less than six percent, So I
Speaker 1: think that's a good measure of Look, the dividends are
Speaker 1: part of the reward to shareholders for owning the stock.
Speaker 1: They are not actually egregious and they are not, you know,
Speaker 1: flying ahead of every other company in the country. Um.
Speaker 1: So that that's kind of like I think one could
Speaker 1: measure that helps to separate the can effect from the
Speaker 1: fiction side. This argument about whether kind of energy companies, etcetera.
Speaker 1: Are making profits that are kind of over the top. Um,
Speaker 1: and you know, the discussion about wind fall taxes, etcetera.
Speaker 1: Greedy shareholders. I mean that's the story, isn't it. You
Speaker 1: greedy shareholders. You shouldn't want those dividends. Everyone forgets that
Speaker 1: those dividends are paying their pensions. Yeah. And also those
Speaker 1: greedy shareholders would have been like far, far, far better
Speaker 1: off by being invested in the SMP five hundred for
Speaker 1: those ten years. So we should be we should be grateful,
Speaker 1: grateful to those greedy shareholders exactly, these sacrificed returns and
Speaker 1: wait for this. I'm gonna wait for the thank you
Speaker 1: letters now. In terms of anything but the US, which
Speaker 1: is kind of where most investors are beginning to get
Speaker 1: to these days. One of the things that I'm talking
Speaker 1: about in the podcast that you're about to hear fantastic
Speaker 1: conversation with with Russell Napier or other. He's fantastic. I
Speaker 1: just sit there as usual, but you know, he does
Speaker 1: say some really interesting things. One of the things he
Speaker 1: points out is that in pretty much every environment similar
Speaker 1: to the one we have today i inflationary or one
Speaker 1: jammed with the financial oppression measures, the best way to
Speaker 1: invest is to invest in stuff that is cheap. And
Speaker 1: outside of the US almost everything is reasonably prized. You know,
Speaker 1: look at the the MSCI World Index if you take
Speaker 1: out the US, and again it's barely budged for a decade. Yeah,
Speaker 1: I mean, I think this is really good. It's it's
Speaker 1: actually I mean, this is the nice thing that interest
Speaker 1: is going up. We've get something closer to normal environment.
Speaker 1: We are you can also put your money, are we
Speaker 1: we haven't a or in sort of like really weird
Speaker 1: conditions lasting forever, which is what you had to do,
Speaker 1: you know, maybe five years ago. Um. And I think,
Speaker 1: I mean, one of the things I've been writing about
Speaker 1: this morning the zou Ki equity income investment trusts, and
Speaker 1: one of the brokers was out talking about basically how
Speaker 1: cheap they look, and it wasn't exactly I kind of
Speaker 1: is it. The UK might quite possibly be quite a
Speaker 1: good place to be this year. So it's not like
Speaker 1: a ringing endorsement. God, it's hard for people to It's
Speaker 1: hard for people to say this isn't it after all
Speaker 1: these years are saying the UK is rubbish, rubbish, rubbish.
Speaker 1: The fact that it looks like a perfectly really bras
Speaker 1: market with good dimit impayment, it's really hard for some
Speaker 1: of these professionals to force themselves to say, but you
Speaker 1: know what, the more it goes up, the easier they're
Speaker 1: going to find it. Well, yeah, I mean, interesting thing
Speaker 1: is the Investment Association came out it's annual figures on
Speaker 1: where we've been putting our money basically, and last year
Speaker 1: was the first year ever, including two thousand and eight,
Speaker 1: the UK retail investors have actually had a net outflow.
Speaker 1: In other words, we took money out of funds and
Speaker 1: of course the hardest sector again was UK equity funds
Speaker 1: generally something like twelve billion outfloor is the only thing
Speaker 1: going up? Yeah, and then well this is you know,
Speaker 1: it's good news for anyone who's got a kind of
Speaker 1: contrarian bent because it's still really widely detested. It's not
Speaker 1: quite as heated as it was in September, but that's
Speaker 1: really not seeing very much relative hatred. Wonderful thing, right, John,
Speaker 1: Thank you very much. Thanks. Welcome to Mary Talks Money,
Speaker 1: the podcast in which people who know the markets explain
Speaker 1: the markets. I'm there in sum Stweb this week. Our
Speaker 1: guest is Russell Napier. He's author of The Solid Ground Investment.
Speaker 1: Well it's a newsletter, really report anyway, it's brilliant. If
Speaker 1: you can't get your hands on it, do He's also
Speaker 1: the author of two excellent books, Anatomy of the Bear,
Speaker 1: which I think we might be eating over the next
Speaker 1: few years, and The Asian Financial Crisis, both absolute must
Speaker 1: reads now rather than I started by discussing one of
Speaker 1: the things that is absolutely crucial to Russell's analysis, which
Speaker 1: is understanding where the global economy is heading. And to
Speaker 1: look at that, we need to look at government debt
Speaker 1: and private debt relative to g d P. Has it, pete,
Speaker 1: Is it at a point where something has to change? Now?
Speaker 1: If we can understand where we are with that, then
Speaker 1: we can start to understand how governments will react. And
Speaker 1: if we know what governments are going to do, then
Speaker 1: we can get a sense of how markets are going
Speaker 1: to react. So my first question to Russell was where
Speaker 1: are we right now? Globally in terms of public and
Speaker 1: private debt levels. I mean, one of the biggest questions
Speaker 1: and finances when it's too much debt, too much debt.
Speaker 1: Throughout my entire career, debt to GDP ratios have been
Speaker 1: going on. Either's more debt, but yet it always seems
Speaker 1: to be sustainable. So we have to focus on why
Speaker 1: suddenly that isn't the case. Let's talk about three metrics.
Speaker 1: So one is debt to GDP ratio, and that would
Speaker 1: be the debt of the government, the dead of the
Speaker 1: household sector, and the debt of the non financial corporate
Speaker 1: sector as a percentage GDP. Well, it's at the highest
Speaker 1: level ever recorded. Often when people look at this data,
Speaker 1: they look just at government data, and you could show
Speaker 1: for the Hunted Kingdom, for instance, that it's below where
Speaker 1: it was at the end of World War two. But
Speaker 1: if one looks at the whole lot, which includes the
Speaker 1: households and the corporates, were at a higher level. America,
Speaker 1: for instance, would have got to the end of World
Speaker 1: War two with its debt burden on those three sectors
Speaker 1: at about a hundred and GDP. It's now two hundred
Speaker 1: and sixty to GDP. So it's not marginally higher, it
Speaker 1: is significantly higher. So you'd come to the conclusion it's
Speaker 1: the highest level of debt to GDP and human history.
Speaker 1: That still doesn't mean it's too much, but it doesn't
Speaker 1: raise the vibraes as to why it might be too much. Now,
Speaker 1: let's look at the other metrics, because the problem with
Speaker 1: that the GDP is it's measuring a stock, which is
Speaker 1: the debt to a flow which is GDP that's the
Speaker 1: annual amount of the production of the economy. A second
Speaker 1: one people can look at is the Bank of International
Speaker 1: Settlements Early Warning Indicators, and they have back tested this
Speaker 1: and look at the growth rate off debt to GDP
Speaker 1: relative to trend, and a deviation from trend on the
Speaker 1: upside as produced as a very high prospect of a
Speaker 1: private sector debt crisis. In other words, there's too much
Speaker 1: debt because the private sector can't possibly service it. So
Speaker 1: that's another indicator. And the one that I like to
Speaker 1: look at is private sector debt service ratios. So that's
Speaker 1: just the private sector and not the government, and it's
Speaker 1: the total amount of income private sector income needed to
Speaker 1: service the debts. And there are many many countries where
Speaker 1: that's above. That's always been a warning signal, particularly if
Speaker 1: interest rates are going up and you're already at And
Speaker 1: the problem we have today is they're going up from
Speaker 1: five thousand year loans. And when interest expense goes up,
Speaker 1: interest rates go up from five thousand year loans, interest
Speaker 1: expense goes up particularly quickly. Anybody with the UK mortgage
Speaker 1: it's maturing this year will be all too familiar with
Speaker 1: that dynamic. So you put all that together, I think
Speaker 1: it's too high. It's dangerously high. It risks a prior
Speaker 1: that sector debt crisis if interest rates properly reflect the
Speaker 1: inflation outlook. So that's the final little bit of the
Speaker 1: ingredient that is now in the in the pudding. If
Speaker 1: you like, inflation is high, interest rates are supposed to
Speaker 1: go high to correct that bring it down. But can
Speaker 1: the system, this geared system, live with the level of
Speaker 1: indust rates that will do that. My answer is no one.
Speaker 1: So finally, too much debt is too much debt. Okay, Well,
Speaker 1: that sounds like there's a really simple solution here. We
Speaker 1: just keep interest rates low forever everything I'll be fine.
Speaker 1: I think that is the solution. There's a problem with
Speaker 1: that because short term rates are controlled by the central bank,
Speaker 1: and long term rich are supposed to be controlled by
Speaker 1: you and me the saver. They're not supposed to be
Speaker 1: within the control of the government. Remember one of the
Speaker 1: reasons that we took it out of the control of
Speaker 1: the government as they did such a bad job of it.
Speaker 1: And that is why we made the Bank of independent
Speaker 1: in the nineties. That is why we give our central
Speaker 1: banks targets. That is why we left this up to them. Uh.
Speaker 1: And if the market you and I demand the correct
Speaker 1: level of interest strates to compensate us for future inflation
Speaker 1: one if that's just simply too high and forces everybody
Speaker 1: to default or forces mass default in the private sector.
Speaker 1: And if you look at the British government profit and
Speaker 1: loss account of the minute, and look at how much
Speaker 1: money we're paying on interest expense and the inflation compensation
Speaker 1: we pay on indexlling guilts, and the transfers were making
Speaker 1: to the Bank of England to compensate them for their losses,
Speaker 1: and the transfers will soon be making to the commercial
Speaker 1: banking system to compensate them for the losses on the
Speaker 1: COVID loans that the government guaranteed. You know this number
Speaker 1: is rapidly getting to about a hundred and thirty hundred
Speaker 1: forty billion sterling, quite close to the budget for the
Speaker 1: National Health Service. So I focused on the private sector
Speaker 1: and say, you know, the private sector couldn't cope with
Speaker 1: higher rates. But if we stick with the status quo
Speaker 1: where a central bank independent sets short term rates and
Speaker 1: bond investors right even the set long term rates, we
Speaker 1: may not have a feasible economic system. What should interest
Speaker 1: rates be at the moment to compensate us for inflation?
Speaker 1: You know, CPI is branning knocking around ten the center,
Speaker 1: so that we should be getting twelve on our deposit
Speaker 1: accounts in a way. Well, in short term rates, yeah,
Speaker 1: and in long term rates it's a bit more problematical.
Speaker 1: There are lots of distortions already in the long term
Speaker 1: bond market, Lots of force buyers already, and those buyers
Speaker 1: will be life funds and pension funds when they're doing
Speaker 1: their liability management and matching. Those were their aspects, So
Speaker 1: they're already distorting the rates. The central bank ownership is
Speaker 1: distorting the rates. And there's a unique function post Great
Speaker 1: Financial Crisis, of which many organizations used government debt as
Speaker 1: a form of collateral for borrowing, and that also distorts rates.
Speaker 1: So yeah, we're showing much much higher, but they are
Speaker 1: not going higher. And part of that is a government
Speaker 1: action through forcing savings some savings institutions to buy this
Speaker 1: part of it is a central bank distortion. But I
Speaker 1: think it's very difficult to argue that these rates are
Speaker 1: properly set by a market and fully compensates for future inflation.
Speaker 1: So there's some distortion already there. But let's go back
Speaker 1: a little bit to the last time that that debt
Speaker 1: was extremely high, although as you set year is different
Speaker 1: because we're talking about the post war period when it
Speaker 1: was public debt alone that was the major problem, and
Speaker 1: then didn't see massive distortion of the relationship between interest
Speaker 1: rates and inflation or how how did that work? Well,
Speaker 1: it worked by forcing the savings institutions to buy government bonds.
Speaker 1: So I want to quote from Isaac Newton here, and Newton,
Speaker 1: as you probably know, quite a lot to do with finance,
Speaker 1: and his time was Master of the Mint, and that
Speaker 1: was particularly go to executing people for forgery. But we'll
Speaker 1: leave that as a as a separate issue. So UT's
Speaker 1: third laws dates that for every action there is an
Speaker 1: opposite and equal reaction. And what I will now arrogantly
Speaker 1: called Napier's laws is that for the modern investor, for
Speaker 1: every market action, there is an opposite, never equal, and
Speaker 1: always distortionary government reaction. So let's talk about the reaction,
Speaker 1: but more importantly, let's talk about some of the distortions
Speaker 1: that it causes to the entire systems. So during warfare,
Speaker 1: it's quite easy to get people to buy government bonds.
Speaker 1: I mean, the sacrifices people make during war are much
Speaker 1: bigger than finances, so they there are war born drives. Also,
Speaker 1: your institution Usians are forced by government bonds through ferties
Speaker 1: Freeconian measures. In World War Two, the savings institutions of
Speaker 1: the United Kingdom had the hand over all of their
Speaker 1: offshore assets, particular dollar assets, to the government and they
Speaker 1: got government bonds in return. So there's a pretty blunt
Speaker 1: sledgehammer approach to this. Obviously, there was a dollar assets
Speaker 1: where liquidated and used to purchase war materials, but the
Speaker 1: investors suddenly find themselves for herself or in government bonds.
Speaker 1: After World War Two, it's more tricky to make the
Speaker 1: case that we should continue financial repression. But the case
Speaker 1: is made, and then that we have to switch and
Speaker 1: say this was not about preserving the state and preserving
Speaker 1: the welfare and the liberty of the people. This is
Speaker 1: about their safety. And this is because we have to
Speaker 1: get them into really safe assets, because we all know
Speaker 1: how dangerous assets. Other assets are not that difficult after
Speaker 1: World War Two, given the prolonged her performance from equities
Speaker 1: which began famously in October nine and had lasted really
Speaker 1: throughout that entire period. But we now have to say
Speaker 1: that it's government bonds that are saying if the yield
Speaker 1: has capped, in particular, if you don't let the price
Speaker 1: of bonds fall, there won't be a capital loss. The
Speaker 1: yield is reasonable, it can be argued there is no
Speaker 1: risk of principle not being paid, There is no risk
Speaker 1: of interest not being paid. Why wouldn't you want this
Speaker 1: coercy of our set right in the middle of your portfolio.
Speaker 1: And then we go to the institutions under the guise
Speaker 1: of macropotential regulation and say you need to have x
Speaker 1: percentage in government bonds. And a nice little example of
Speaker 1: the legacy of this, which has only just disappeared, is
Speaker 1: the need to force retiring pensioners to put all the
Speaker 1: money into ennuities, and the nuities are backed by government bonds.
Speaker 1: So there's lots of little works of the system you
Speaker 1: can put in place to force the compulsory ownership of
Speaker 1: government bonds. Okay, so I can see how it works
Speaker 1: that time around. How might this work this time around?
Speaker 1: I mean, obviously, what we're trying to do here is
Speaker 1: to get investors to hold onto government bonds at lower
Speaker 1: yield than our appropriate given the inflation environment, that gradually
Speaker 1: eats away at government debt in real terms. And the
Speaker 1: problem is that stop, friend, So it works, I mean,
Speaker 1: it works, so there is an upside here, right, Yeah.
Speaker 1: I think a nice little example of that is I
Speaker 1: think it's nineteen fifty seven where Harold McMillan said to
Speaker 1: the people of the United Kingdom, you've never had it
Speaker 1: so good. By that stage, I think you've already lost
Speaker 1: thirty percent of your money in real terms investing in
Speaker 1: British government bottoms. So you've never had it so good.
Speaker 1: It was clearly in that one section of the population,
Speaker 1: but not necessarily in another section of the population. So
Speaker 1: if you're a portfolio investor and you can see how
Speaker 1: wealth maybe realigned during this period. You can do something
Speaker 1: about that as long as you're free to do so,
Speaker 1: and you can look at it to invest in equities
Speaker 1: and shares of companies that might benefit from such realignments
Speaker 1: of wealth. So it's being alive to the opportunities to
Speaker 1: do something rather than believing that this is temporary. And
Speaker 1: I think that's the other thing worth stressing. Could last
Speaker 1: a long time. It doesn't last a year or two years.
Speaker 1: This to get our to GDP and say, oh, I
Speaker 1: mean the advanced economy, it's not just the United Kingdom.
Speaker 1: To get it back into line, I think it's a
Speaker 1: decade's work. Don't own government bonds unless they force you
Speaker 1: own them. Well, let's come back to how financial repression,
Speaker 1: because that's what this is. How finance repression might work
Speaker 1: this time around. We talked about how it worked last
Speaker 1: time around and has some of the remnants of it.
Speaker 1: For example, annuities being as something we're forced about exceptionaly,
Speaker 1: they're relatively recently fallen away, right, But nonetheless, if we're
Speaker 1: going to start again, how how might it happen or
Speaker 1: is it happening already? I think the other that might
Speaker 1: be Yes, yeah, I think it's happening already, depending on
Speaker 1: My main job is to advise financial institutions, and the
Speaker 1: more I'm talking to longer term pension funds and life funds,
Speaker 1: the more they'll tell me this is already happening to them.
Speaker 1: If I'm talking to mutual funds, they'll say, what's financial repression?
Speaker 1: So in the obviously easy answer that is just hang
Speaker 1: around and you'll find find out. So it has to
Speaker 1: spread down through the system. It's like low hanging fruit.
Speaker 1: The low hanging fruit to be repressed. It has to
Speaker 1: be regulated, but it has to be natural owners of
Speaker 1: government bonds. If you like multi asset funds, so multi
Speaker 1: asset I shouldn't call them funds. Multi asset pools have
Speaker 1: been the easy place to repress because it's not revolutionary
Speaker 1: to tell them that forced them to buy more government bonds.
Speaker 1: As if we ever get beyond that two funds that
Speaker 1: are dedicated to equities, or if we get to your
Speaker 1: SIP or your ISA, that's when it becomes more revolutionary.
Speaker 1: So the minute they've just been plucking off the low
Speaker 1: hanging fruit, and I think it's about to become much more,
Speaker 1: much more dramatic than somewhere sometime we're going to see
Speaker 1: an institution or a form of savings compelled to buy,
Speaker 1: say to buy bonds that we just didn't think was
Speaker 1: ever going to be owning bonds, and that may be
Speaker 1: coming to Japan before it comes here. Well, it's interesting,
Speaker 1: I mean, we've heard a little bits involves that suggest
Speaker 1: to us that various things might be coming that we
Speaker 1: will find uncomfortable. I mean, but until up until now,
Speaker 1: we've seen, for example, defined benefit pension funds providing people
Speaker 1: with their defined benefit pensiants having to hold larger amounts
Speaker 1: of bonds than possibly some people might think is sensible
Speaker 1: under the circumstances for regular reasons. But we've heard mutterings
Speaker 1: recently about the suggestions, for example, that perhaps all penci
Speaker 1: of funds may be the ones that people hold under
Speaker 1: order enrollment, might be persuaded to invest in various government
Speaker 1: initiatives via green bomb system, that kind of thing. So
Speaker 1: what you're talking about having to having to assist the
Speaker 1: government bio iss that already kind of feels like it's
Speaker 1: out there to a degree, doesn't it. Well, the Bike
Speaker 1: of England, and this is before COVID formed a committee
Speaker 1: I think it's called the Bank of England Working Group
Speaker 1: on Productive Investment. Now I'm I'm not sure that the
Speaker 1: Bank of England knows a lot about productive investment, but anyway,
Speaker 1: it has a working Group on Productive Investment which includes
Speaker 1: h m r C, includes the regulator and includes Last
Speaker 1: time I looked about seventeen financial institutions people are listening to.
Speaker 1: This will be interesting to know that they're not banks,
Speaker 1: that the people who look after your money. So they're
Speaker 1: sitting in a room and what are they discussing. Well,
Speaker 1: that's all over the newspapers you can read about it.
Speaker 1: But it's effectively about getting those institutions to buy more
Speaker 1: long term securities, and those long term securities are ultimately
Speaker 1: aimed at achieving some sort of political goals. Now those
Speaker 1: political goals can be in renewables, but can they be
Speaker 1: all the political goals? And the high biling is what
Speaker 1: coupon really should people get for this returned? And there's
Speaker 1: a lot of argument from those institutions and other institutions,
Speaker 1: but the fact is that the working group is there.
Speaker 1: It's trying to find a way to get the people
Speaker 1: who look after your money to buy more long term
Speaker 1: fixed coupon securities and in my opinion, that is not
Speaker 1: good for the own customer. So there's lots of ways
Speaker 1: you can dress it up to say it is good
Speaker 1: for the own customer, but I think it isn't, and
Speaker 1: I think it is tinged more than tinged with a
Speaker 1: needed by the politicians to have your savings where they
Speaker 1: need the savings to be. So basically the point is
Speaker 1: that the concepts are out there now we're just bickering
Speaker 1: about the price. That's a very good way of putting it. Okay,
Speaker 1: So if that is the case here we are in
Speaker 1: a situation where as you say, if saving institutions and
Speaker 1: fund managers, in particular the fund managers so we think
Speaker 1: of as being mainly equity only investors, long the only investors,
Speaker 1: if they are now forced to put even five teen
Speaker 1: percent of their portfolios into what we might call it
Speaker 1: the bank giving they would call long term productive investments,
Speaker 1: and we might call long term not particularly productive political investments.
Speaker 1: If they're forced to that, then as you say, they
Speaker 1: are then forced to sell equities, and so what we
Speaker 1: have Obviously we know that inflation has a long term
Speaker 1: nemic negative effect on equity valuations, but there's selling of
Speaker 1: equities would have a secondary negative effect on equity valuations.
Speaker 1: One of the consequences of that for us. Well, so
Speaker 1: we all go back to the seventies now and we
Speaker 1: think about what happened in the seventies, and it wasn't
Speaker 1: a good time to be in order of equities. I
Speaker 1: think there's an interesting dynamic though, because one of the
Speaker 1: key reasons why it wasn't a good time to be
Speaker 1: an honor of equities is because indust rates went so high.
Speaker 1: Nominal rates went so high. Now we've already discussed why
Speaker 1: that's unlikely, just because the levels of debt are so
Speaker 1: much higher, So it's not to be rising rates. What
Speaker 1: is it that would bring down valuations? And as you said,
Speaker 1: it's going to be this shift that forced the savings
Speaker 1: institutions to sell equities. And then we reach an interesting
Speaker 1: dichotomy here because some equities are already cheap and some aren't.
Speaker 1: So if I do that in broad terms, I would
Speaker 1: say to categorically the SMP five hundred is grossly overvalued,
Speaker 1: and data that we have stretching back as far as
Speaker 1: eighteen seventy one, it looks like it's very expensive. If
Speaker 1: I look at UK equities, looks like they're really at
Speaker 1: best fair value and potentially really quite cheap. So I
Speaker 1: think there are still opportunities and equities. It may be
Speaker 1: that UK st in institutions have to sell the UK equities,
Speaker 1: but frankly they don't own a lot of them anyway.
Speaker 1: And secondly, there's always this other buying power below that,
Speaker 1: and that is in the form of solid wealth funds,
Speaker 1: private equity management biots. So I would not be so
Speaker 1: negative in a word of financial repression in the markets
Speaker 1: where we start with low valuations. So last time we
Speaker 1: didn't and it didn't do well. But if you want
Speaker 1: to look at the period in the in the fifties
Speaker 1: and sixties when UK was clearly running a financial repression,
Speaker 1: equities didn't do too badly because they started at a
Speaker 1: very cheap price. Now they're not as cheap as they were.
Speaker 1: In we're looking at the world x US equity markets
Speaker 1: in dollar terms, there really haven't gone very far in
Speaker 1: twenty two years. The MSc I, this is an index
Speaker 1: of world equities, doesn't include the US in dollar terms,
Speaker 1: it's not much above it's March two thousand level. But
Speaker 1: if you have an asset class in the capital returns
Speaker 1: of being close to zero for twenty two years? High
Speaker 1: risky is it to invest in? They asked a class.
Speaker 1: So I don't rule out some forms of equities as
Speaker 1: a way to defend yourself from this financial repression, but
Speaker 1: I think one should be very very cautious about US equities,
Speaker 1: which are sixty four of global market capitalization. Yeah, and
Speaker 1: any fund you might hold, literally, any fund that is
Speaker 1: not country specific is going to have very high exposure
Speaker 1: to the U s sense. So it's pretty much any
Speaker 1: passive fund that you might buy in any sector or
Speaker 1: any kind that anything global or world and the title
Speaker 1: is effectively can be tracking the US. Right. Yeah, Passive
Speaker 1: I think is particularly dangerous. And I suppose you have
Speaker 1: people involved with active management on here every week saying
Speaker 1: how dangerous passive is, and they've been saying that probably
Speaker 1: twenty five years. But it is dangerous in this world.
Speaker 1: This is a sea change in how the system works
Speaker 1: and the market. This is the nature of equity markets.
Speaker 1: They fill up with winners, and they fill up with
Speaker 1: winners of a certain type of system. And the system,
Speaker 1: particularly US market, is filled up with is those that
Speaker 1: benefit from falling infest rates, more debt, lower inflation, off shoring,
Speaker 1: productive capacity just running with brands financial engineering, if you like,
Speaker 1: in its broadest terms, and those are not the winners
Speaker 1: of a financial repression. In fact, they may be forced
Speaker 1: to re equitize. So when you're buying passive, you're buying
Speaker 1: the winners of the old regime. I would say, even
Speaker 1: in America, there are lots of stocks to buy that
Speaker 1: are winners in the new regimes. So if you've got
Speaker 1: a good map fund manager who's not compelled to be
Speaker 1: orientated towards the benchmark, I would be pretty convinced that
Speaker 1: they could buy a good portfolio of reasonably priced equities.
Speaker 1: As you know, the thing that biases us towards that
Speaker 1: would be the word value in the title. So value
Speaker 1: managers would be looking for lower valuation stocks, and if
Speaker 1: the risk from equities in an inflation is really the
Speaker 1: valuation and not the earnings, which is what history tells
Speaker 1: us that I think even in America, with the right
Speaker 1: sort of mandy, a good fund manager could potentially produce
Speaker 1: with terms have been inflation. But it's difficult to see
Speaker 1: that happening in the SSP, which is full of the
Speaker 1: winners of the old regime. They are actually saying that
Speaker 1: this could be a stockpickers market. People have been saying
Speaker 1: that to me for ages, and I've written several columns
Speaker 1: about it, saying, you know, now it's a stock pickers market.
Speaker 1: And it turns out that the momentum of the index
Speaker 1: JAZZ keeps going. But the last year or so, we
Speaker 1: have begun to see a change, haven't we. So you know,
Speaker 1: value stocks about performed, and you're beginning to see I think,
Speaker 1: as you say, the shift towards people who can really
Speaker 1: step away from the index and really look for value,
Speaker 1: really by stuff that is cheap to begin with out performing,
Speaker 1: which is is reassuring for the likes of us. Yeah, well,
Speaker 1: you know, I can't say you heard it here first
Speaker 1: obviously because you've been hearing it for twenty odd years.
Speaker 1: But it is coming, and I think there's an interesting
Speaker 1: quirk in it, which is the gorhythms fascinating. The algorithms
Speaker 1: obviously use lots of historical data to work out relationships
Speaker 1: that they see in the market, or relationships they see
Speaker 1: related between the market and macro variables. And if I'm
Speaker 1: right that there's a whole new system coming, and one
Speaker 1: of a lot less market and a lot more government.
Speaker 1: One wonders what the algorithms do because at some stage
Speaker 1: the data dropping into the equation against the sense that
Speaker 1: actually some of these old relationships don't exist anymore. And
Speaker 1: then there has to come a tipping point where they
Speaker 1: begin to pick up new relationships. And at that stage
Speaker 1: do they all go at the same time, that they
Speaker 1: all move at the same time. So strangely, one of
Speaker 1: the reasons that we've been so wrong about stop picking
Speaker 1: for so long is the automized automization of the whole
Speaker 1: system through algorithms and index funs. And it may be
Speaker 1: the algorithms lead us or don't lead us. Hopefully human
Speaker 1: beings are ahead of them, but sort of exacerbate these strands.
Speaker 1: But as when they get that important piece of data
Speaker 1: that tells them that we're not in Kansas anymore, I
Speaker 1: don't know. But when they do, it might all happen
Speaker 1: quite quickly, okay. And when they do, what do you
Speaker 1: what what do you want to be in? I mean,
Speaker 1: when when we look back to history, what are the
Speaker 1: kind of stocks that should perform well in this environment
Speaker 1: outside value? I've heard you speak before about it being
Speaker 1: a matter of size and the midcaps and small caps.
Speaker 1: Ever history of that performing in this environment. But again,
Speaker 1: is that because historically when these things have happened, they've
Speaker 1: been cheap at the beginning, or is it because there's
Speaker 1: smaller mid caps. Yeah, I think it's because they've been
Speaker 1: cheaper againing. Primarily, what we're talking about is the politicization
Speaker 1: of the flow of credit and capital. So when would
Speaker 1: want to look to see which companies benefit from it? Okay,
Speaker 1: that's just the whole point. We said, this is a
Speaker 1: transfer of wealth, but there are people and companies and
Speaker 1: sectors that benefit from it. I don't think it's that
Speaker 1: difficult to work out what the political goals are. And
Speaker 1: the political goals are clearly energy and renewables, shorter supply chains,
Speaker 1: and the big one which we don't really talk enough
Speaker 1: about but it's really important, is that we're becoming less
Speaker 1: reliant upon China. From a geopolitical perspective, We've got to
Speaker 1: become less reliant up on China. Now, those companies are
Speaker 1: going to be getting cheap credit. It's worth pointing out
Speaker 1: that if you can access credit at all and a
Speaker 1: financial repression, it is pretty cheap. I mean, the government
Speaker 1: fleeting away Zone debts isn't fleeting away everybody's debts. If
Speaker 1: you're on the political nice step and not the political
Speaker 1: naughty step to get some of that cheap debt capital,
Speaker 1: and you and I invest in the equity, then those
Speaker 1: companies that get that cheap capital to solve the political
Speaker 1: problems that we've just discussed, well, their equity should do
Speaker 1: quite well, even better if it was cheap. Now that's
Speaker 1: the sort of place I think you should be investing in.
Speaker 1: But you can see the problem here which the managers
Speaker 1: acclimatized to that which for manager has been thinking in
Speaker 1: that sort of world. I have an answer to that, actually,
Speaker 1: and that is if you if you've been operating in
Speaker 1: emerging markets for the last thirty years, you've got a
Speaker 1: reasonable idea how that system works. Emerging markets are not
Speaker 1: percent like that, there's a huge variety in them. But
Speaker 1: I think emerging market managers in a better sense of
Speaker 1: working out the political economy, because that's what we're talking
Speaker 1: about here. It's profiting from a political economy, uh, and
Speaker 1: being very careful of the old financial engineering economy, which
Speaker 1: is the legacy which will now be allowed to wither
Speaker 1: on the vine. One of the things that you're expecting
Speaker 1: as we attempt to make our supply chains more secure
Speaker 1: and shift away from China. Is a capex boom in
Speaker 1: the West, the capox boom in in developed markets. So
Speaker 1: we need to be looking to invest in the kind
Speaker 1: of companies that will benefit from that. So the industrial sector,
Speaker 1: for example, which had been much ignored over the last
Speaker 1: couple of decades. Absolutely. I mean, if I look, I
Speaker 1: have a nice chart somewhere. It's in the Andrew Smith's
Speaker 1: book Productivity of the bonus culture of the US corporates
Speaker 1: investment in tangible assets as a percentage of US GDP,
Speaker 1: and from two thousand onwards it just goes down and
Speaker 1: down and down. And I don't think it's at an
Speaker 1: old time Lobo. I think it's close to a post
Speaker 1: war blow. They didn't have to invest in these tangible
Speaker 1: assets because that productive capacity was being added in China.
Speaker 1: And they may have invested in the intangible assets and
Speaker 1: the brands and the goodwill acquisition, but not in the
Speaker 1: tangible assets. There has been a massive under investment. Lots
Speaker 1: of reasons for that. Andrews for this in his book,
Speaker 1: argues it's the bonus culture. But anyway, whatever the cause
Speaker 1: and reason was, it now has to end an interesting
Speaker 1: prohibit from Christians suing who's the man who runs Deutsche Bank?
Speaker 1: He was asked why his loom books, expanding why are
Speaker 1: German corporations boring from him? And what looks like it
Speaker 1: could be a recession law for Germany, and he replied, well,
Speaker 1: the rebuilding their supply lets. That is a huge form
Speaker 1: of reinvestment, and it relates not to Russia, but it
Speaker 1: relates primarily to China. So yes, absolutely, this, this reinvestment
Speaker 1: in our productive assets is going to do well. And
Speaker 1: there are people who make the picks and shovels once again,
Speaker 1: of any such form of physical capital investment, and there
Speaker 1: are bits of the country that do much better from it,
Speaker 1: and bits of the world that do much better from it.
Speaker 1: And worthwhile then saying that the other bit that whether's
Speaker 1: on the vine, which is financial engineering, we are going
Speaker 1: to focus on directing capital to something that builds new
Speaker 1: cash floats and not financing old cash flow, because, as
Speaker 1: everybody listening to this knows, the quickest way to get
Speaker 1: rich in the last thirty years was to borrow as
Speaker 1: much money as you could and buy an existing income
Speaker 1: strain and were or a house. Many houses that's that's
Speaker 1: exactly that. You know, whether it was commercial properly a house,
Speaker 1: private equity, gear up, buy an income strained. Watch your
Speaker 1: industry has come down, watch your asset price go up.
Speaker 1: That is a form of financial engineering, or any different
Speaker 1: derivations of it. It's over and therefore that's the opportunity,
Speaker 1: because the opportunity is to be in the other bit,
Speaker 1: which benefits not from the flow of cheap, cheap credit.
Speaker 1: So there are two parts for this. As I said,
Speaker 1: there's the naughty step and there's a nice step, and
Speaker 1: then a politicization of credit. But a lot of things
Speaker 1: will be on the naughty step. Does this mean do
Speaker 1: you think that the northeast and northwest of the UK
Speaker 1: might level themselves up? Yes, I hit to to talk
Speaker 1: about British vaults, but I do suspect it's coming back.
Speaker 1: I do suspect there will be a battery pack factory,
Speaker 1: and I do think it will be at Blithe, northumber
Speaker 1: and whoms. It will be a very different question. These
Speaker 1: will be some of the highest quality jobs to being Blinth,
Speaker 1: Northumberland ever and certainly for many decades, but perhaps perhaps
Speaker 1: even ever. And that sort of thing does begin to
Speaker 1: regenerate not just the United Kingdom, but lots of parts
Speaker 1: of Europe and lots of parts of America that haven't
Speaker 1: seen it before. So the leveling up agenda, maybe you know,
Speaker 1: not coming from the government, may just be coming from
Speaker 1: geo politics and the need now that we are self
Speaker 1: sufficient or partially sufficient in key strategic goods such as chips,
Speaker 1: such as electric batteries, and there'll be plenty more. And
Speaker 1: I think it's interesting that those two things hit all
Speaker 1: the headlines. But when you ask got to bank what's
Speaker 1: happening with their long book, companies are boring to invest
Speaker 1: in everything to make them less reliant on China and Russia.
Speaker 1: And that's a that's an investment boom which goes on
Speaker 1: for many many years to come. So yeah, it should
Speaker 1: really focus on bits of the country that need the
Speaker 1: investment and have been starved off it. And it should
Speaker 1: happen without the intervention of government. It should be fairly
Speaker 1: natural to go where the labor is over some short suppliers,
Speaker 1: you know, so goodworth on the ammer rigs, but with
Speaker 1: the land is cheap, and it could happen with its
Speaker 1: old court. Yeah, you know what's going to happen now.
Speaker 1: All our listeners, because they're obsessed with houses, are rushing
Speaker 1: out to buy house prices on the Northumberland coast. I
Speaker 1: have looked at the price of houses in Blair, Northumberland.
Speaker 1: I'm sure everybody will night be googling, but they are.
Speaker 1: Let's put it this way, there are a lot cheaper
Speaker 1: than a garage in Kensington, isn't everything? Russell? Listen to
Speaker 1: you talking about emerging markets and about China and about
Speaker 1: how emerging markets are the place to be at the moment,
Speaker 1: I would say it's any obvious from what you said
Speaker 1: that you are not talking about China, You're talking about
Speaker 1: the other emerging markets. Do you have a favorite? So
Speaker 1: my long term sort of macrobublitioners has been on India,
Speaker 1: but I would find it very difficult now to commit
Speaker 1: capital to India just because of the valuations. How may
Speaker 1: I may be a macro guy if you like, but
Speaker 1: value matters. It's too expensive and I think it's time
Speaker 1: to be a bit more cautious on India. There are, however,
Speaker 1: lots and I'm more familiar with Asia because I used
Speaker 1: to of there. So Indonesia, Malaysia, Thailand, even Singaport, which
Speaker 1: is not an emerging market, but sits at the middle
Speaker 1: of those emerging markets and benefits from their growth and
Speaker 1: benefits from financing that growth. So I think Southeast Asia
Speaker 1: looks particularly attractive. Vietnam has been, uh something that people
Speaker 1: have been promoting that fit into your structure. Yeah, no
Speaker 1: reason not to include Vietnam. The other markets are more
Speaker 1: familiar with and I can e's much easier check the valuations,
Speaker 1: and there's more liquidity in the markets as well, and
Speaker 1: they just look cheap. Last thing I want to talk about,
Speaker 1: because they you've been brilliant. Thank you. Gold got la
Speaker 1: force everyone about gold. Would you hold gold in this environment? Yeah?
Speaker 1: Gold is they go to asset of a financial repression.
Speaker 1: Two reasons. One, we're kind of locking in negative real reads.
Speaker 1: But that's what we're doing, so that's important. It's not
Speaker 1: that there are negative real rates, is that we're locking
Speaker 1: them in, that we're institutionalizing, and that institutionalization means that
Speaker 1: you can forecast them but hire degree of certainty. So
Speaker 1: if I'm right, we will now be forecast a negative
Speaker 1: real rates. That takes a certain amount of risk out
Speaker 1: of running gold. There is risk, and gold at the minute.
Speaker 1: If rates should suddenly spike above inflation, infltation should collapse
Speaker 1: the low interest rates. But if you think we're institutionalizing
Speaker 1: the gap between the two, then that's positive for gold.
Speaker 1: There are bigger things for gold. A financial repression is
Speaker 1: interfering in people's property rights and forcing their savings to
Speaker 1: be where the government wants them to be. In gold
Speaker 1: is much more difficult to do. That not impossible, as
Speaker 1: we know from the Roosevelt legislation of Thanking thirty three,
Speaker 1: but it is very difficult and not really necessary. So
Speaker 1: much wealth is held in regulative financial institution. So I
Speaker 1: think as we realize that more people will come to
Speaker 1: whole gold, central bankers already doing it. I'm sure everyone
Speaker 1: seem the data central bankers were particularly big buyers of
Speaker 1: gold last year, And which two central bankers were They
Speaker 1: were the People's Bank of China and the Central Bank
Speaker 1: of Turkey, two governments that may find themselves in dispute
Speaker 1: with other governments who are being pretty clear that they
Speaker 1: think it's safer to own gold than those other government's
Speaker 1: government bond markets. And something else. For gold, we're talking
Speaker 1: about the naughty step and who's not going to get
Speaker 1: credit and capital going forward. I wonder if gold miners
Speaker 1: are high up the list to get capital to create
Speaker 1: more gold, because you know it's not that good for
Speaker 1: the environment. You create this thing, you smelled it, put
Speaker 1: it at the bar, and then you could have back
Speaker 1: in the ground to get so I think there could
Speaker 1: be an interference with their ability to have a cheap
Speaker 1: cost of capital, which if it makes it more difficult
Speaker 1: to produce it, then it's going to be The existing
Speaker 1: gold is worth even more. It is one third of
Speaker 1: the height of the Washington Monument. All the gold in
Speaker 1: the world, I've just flown past the Washington Monument. It's
Speaker 1: a lot, but it's not the hell of a lot.
Speaker 1: So I think it's the It is the asset for
Speaker 1: a financial repression. Yeah, there was say there's only enough
Speaker 1: gold at the ground globally to fill one basketball court.
Speaker 1: These things are under amazing if true. Now we have
Speaker 1: a joke to jump step back and alas you think
Speaker 1: is absolutely hysterical, and I'm not sure everyone else last
Speaker 1: in the same way where we call god physical bitcoin.
Speaker 1: I think you enjoynce you get into the marketing business.
Speaker 1: I think you've got a whole thing going there. But
Speaker 1: of course we call it physical bitcoin because they used
Speaker 1: to call bitcoin digital gold, and I just want to
Speaker 1: double check that there's none of that digital gold in
Speaker 1: your portfolio. It's not something you're looking at for the future,
Speaker 1: because it is, i'd be interesting. So in a financial repression,
Speaker 1: what we're saying is the government is taking the part
Speaker 1: of control money away from the central point. So the
Speaker 1: idea that it would do that slowly at first, and
Speaker 1: then quickly, but yet somehow I allow this private sector
Speaker 1: money to exist out there, which will become a means
Speaker 1: of transaction. It's highly unlikely, but that loophole is allowed
Speaker 1: to work. So I think there will be crypto. I
Speaker 1: think it will be stable cooin. I think the government's
Speaker 1: gonna love stable coin. Stable cooin properly regularly. It was
Speaker 1: entirely backed by short term government debt. Who's not going
Speaker 1: to like that. So you get all that functionality that
Speaker 1: you know people who are in the crypto talk about.
Speaker 1: You know, there is great functionality in it, but that
Speaker 1: was a particular form of crypto which government's like. That
Speaker 1: then leaves to what we might call private sector crypto,
Speaker 1: which is bitcoin. I just see that as being a
Speaker 1: kind of curiosity in which one can make money, and
Speaker 1: it one understands that one can trade it and make money.
Speaker 1: There are lots of assets I don't understand, don't trade
Speaker 1: and would never make any money, and it's about crypto
Speaker 1: will be one of them. Baseball cards is one I've
Speaker 1: never really managed to get the grips with. Fine, why
Speaker 1: I knew there's lots of things that one can play
Speaker 1: around in and occasionally make money in, but it's never
Speaker 1: gonna be a currency, and it's never going to be
Speaker 1: a store of value. It's going to be a spectative
Speaker 1: asset of beast. So that's my view on crypto, which is,
Speaker 1: you know, if you really really understand crypto, well, you know,
Speaker 1: people really really understand baseball cards. Nothing wrong with that,
Speaker 1: but it doesn't become this thing that it's been marketed as.
Speaker 1: I was walking in Edinburgh just before Christmas doin George
Speaker 1: Street and was a bitcoin conference on and the headline
Speaker 1: and they had the assembly rooms, which you know, well
Speaker 1: a great big poster for a bitcoin and said fix
Speaker 1: the money, fix the world. No it isn't money, but
Speaker 1: it's one of the greatest mark getting efforts of all
Speaker 1: time to call something money and to say not only
Speaker 1: that that it fixes the world. What about I mean who,
Speaker 1: I don't know who thought of it, but it's an
Speaker 1: active genius create a new form of money that fixes
Speaker 1: the world. Well, No, in its purest form, it would
Speaker 1: destroy the world because it would strip the power of
Speaker 1: away from government. Many people think that would be a
Speaker 1: good thing, but it would strip all the power away
Speaker 1: from government, So governments will not consionate. I think that's
Speaker 1: always been as biggest flaw by the understand it or not,
Speaker 1: it is not going to be allowed. And that's the
Speaker 1: kind of that. Um Russell, thank you so much for
Speaker 1: joining us. I found that unexpectedly optimistic because we're away
Speaker 1: now where that we know that we should be buying
Speaker 1: physical bitcoin, we know that we should be buying emerging markets,
Speaker 1: and we know that if we carefully inside all stock markets,
Speaker 1: we can find stuff that is reasonable value and that
Speaker 1: may benefit from cheap credit or from the Catholics zoom
Speaker 1: having to zoom Catholics boom industrials, et cetera. So Russell,
Speaker 1: thank you so much for joining us today. She hugely appreciated.
Speaker 1: And that, Russell, what would you like to promote while
Speaker 1: you were here? The library mistakes of course, well, there
Speaker 1: are two charitable ventures, so I don't feel about promoting
Speaker 1: charitable ventures. So one of them is the Library Mistakes,
Speaker 1: which is in Edinburgh. We hope to bring one to
Speaker 1: London this year. Watch the space free public Library for
Speaker 1: anybody who walks to register of God the Library Mistakes
Speaker 1: dot com and the same charity runs a course in
Speaker 1: finance which will find out the DASCO education dot or work.
Speaker 1: So if you think you need education in how the
Speaker 1: markets have worked as a guide to how they will work,
Speaker 1: which is, you know, a lot order than the last
Speaker 1: thirty years, so hopefully covering some of the things that
Speaker 1: we've already discussed. If you'd like to get into that,
Speaker 1: we have that as an online version. You can do
Speaker 1: it online, So go to dadasco education dot org have
Speaker 1: look see if you are ready for several hours of
Speaker 1: high quality education on the history of financial markets and
Speaker 1: hopefully that will prepare you somewhat are somewhat better for
Speaker 1: what is to come. I have been on that course,
Speaker 1: by the way, everybody, and it's absolutely brilliant. Um, so
Speaker 1: do go on if you have the time. Russell, thank
Speaker 1: you very much, so true thanks for listening to this
Speaker 1: week's Marion Talks Money. We will be back next week
Speaker 1: in the meantime. If you like our show, rate review
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Speaker 1: remember that we prefer good reviews to bad reviews. This
Speaker 1: episode was hosted by me Marin's Somerset Web. It was
Speaker 1: produced by Summer Sadi. Additional editing by Blake Maple's and
Speaker 1: special thanks to Russell Napier and of course as ever
Speaker 1: to John's Steppeck. Thank you John, and of course don't
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