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Jeremy Grantham Says No One Should Invest in the US · Merryn Talks Money

• 0:00
  Speaker 1: John Man.
• 0:01
  Speaker 2: Isn't it nice when something we've been predicting for ages
• 0:05
  Speaker 2: finally happens. When I say nice, I mean kind of
• 0:07
  Speaker 2: intellectually satisfying. I supposed to actually nice when it comes
• 0:11
  Speaker 2: to this week.
• 0:12
  Speaker 1: Yeah, yeah, I was saying intellectually satisfying watching the kind
• 0:16
  Speaker 1: of great bonding and busting of the Boind bubble, which
• 0:21
  Speaker 1: could have actually, I suppose very massy. Consequences are low.
• 0:26
  Speaker 1: Thankfully so far it doesn't seem to be having that
• 0:30
  Speaker 1: many because.
• 0:33
  Speaker 2: What you means so far, it's been a couple of days.
• 0:37
  Speaker 1: Yes, I know that it's happening, and I'm kind of worried.
• 0:39
  Speaker 1: That's the problem.
• 0:41
  Speaker 2: You know, for context, You've written about this in your
• 0:43
  Speaker 2: news letter and everyone should read your money distilled on this.
• 0:45
  Speaker 2: What's it called? What one?
• 0:46
  Speaker 1: It's the Boind market was in a bubble nose Boston?
• 0:51
  Speaker 1: Or was it the Boind bubble?
• 0:52
  Speaker 2: Okay?
• 0:53
  Speaker 1: There, Basically there's a Boind bubble.
• 0:56
  Speaker 2: There's a bond bubble. It's ending. It's so you know,
• 0:59
  Speaker 2: yield yields gone to high as we haven't seen for
• 1:02
  Speaker 2: ages across the board. Everything. You can't blame less trust
• 1:06
  Speaker 2: because she's got nothing to do with Germany or the
• 1:08
  Speaker 2: US as far as we know. So we're seeing bond
• 1:11
  Speaker 2: jail's going up everywhere. That's got consequences for so many things.
• 1:14
  Speaker 2: Is almost ridiculous. But of course one of the one
• 1:16
  Speaker 2: of the consequences, of course is for governments, because this
• 1:18
  Speaker 2: means that their debt payments go up and up and up.
• 1:21
  Speaker 2: We already know that across the developed world debt to
• 1:24
  Speaker 2: the GDPs is one hundred percent plus, you know, up
• 1:26
  Speaker 2: from seventy to eighty percent and eight. So you know,
• 1:29
  Speaker 2: this is this is massive. When your interest costs go
• 1:32
  Speaker 2: up on that, you're in a lot of trouble.
• 1:33
  Speaker 3: What do you cut? Well, this is it.
• 1:35
  Speaker 1: And the problem is so the same time, I mean,
• 1:38
  Speaker 1: I suppose we're seeing it here at the moment, like
• 1:40
  Speaker 1: everyone's there talking about growth, growth, growth, But at the
• 1:43
  Speaker 1: same time, it's kind of like, well, yeah, but we
• 1:45
  Speaker 1: have to cut everything at the same time. And I
• 1:49
  Speaker 1: mean with her I kind of serious kind of overhaul
• 1:51
  Speaker 1: of the actual structure of this date, which is probably
• 1:53
  Speaker 1: something we're talking a bit to do. But you know,
• 1:57
  Speaker 1: all of this the hopes that by say canceling HS two,
• 2:03
  Speaker 1: we can spend that money there. It's all kind of
• 2:05
  Speaker 1: dancing in the edge of the volcano. Because everything every
• 2:09
  Speaker 1: kind of country has got this massive can addate to
• 2:11
  Speaker 1: GDP problem. It's kind of a matter of, well, how
• 2:16
  Speaker 1: is that going to end up resolving itself? And I
• 2:19
  Speaker 1: think that's why we're going to have to have a
• 2:20
  Speaker 1: lot of inflation in the future, because that kind of
• 2:23
  Speaker 1: is the only way to resolve it.
• 2:25
  Speaker 2: We have a lot of inflation. Rates stay high, and
• 2:28
  Speaker 2: if rate stay high, that's got consequences for every single
• 2:31
  Speaker 2: asset class that has sowed on the back a very
• 2:34
  Speaker 2: low rates. And we might have seen we might have
• 2:36
  Speaker 2: seen markets fall from their highs, but they're still way
• 2:39
  Speaker 2: too high relative to this level of bondy alderm. That
• 2:42
  Speaker 2: goes for property markets across the board, equity markets across
• 2:45
  Speaker 2: the board, all that private equity or that venture capital
• 2:48
  Speaker 2: anything I haven't mentioned yet that's in trouble.
• 2:51
  Speaker 1: No, but I guess I mean this is there's kind
• 2:53
  Speaker 1: of two problems. I think when is the kind immediate
• 2:57
  Speaker 1: problem of those government dat basically setting every word based
• 3:02
  Speaker 1: on various assumptions, the assumption that it's safe, the assumption
• 3:05
  Speaker 1: that only goes up, the assumption that is constantly highly liquid,
• 3:11
  Speaker 1: and it's kind of embedded in an awful lot of
• 3:13
  Speaker 1: financial models and in an awful lot of financial structures.
• 3:17
  Speaker 1: So that's the the immediate body. And that's when people
• 3:21
  Speaker 1: are talking about something breaking, that's what they mean.
• 3:23
  Speaker 2: Well, remember that this is our you know, our defined
• 3:25
  Speaker 2: benefit pension systems are shot through with the government debt
• 3:29
  Speaker 2: and with bonds in general. And I wrote this week
• 3:32
  Speaker 2: about the cautious portfolio that every wealth man offer you
• 3:36
  Speaker 2: and the Adriginal sixty forty again, you know, very heavily
• 3:40
  Speaker 2: fixed income, and everyone believes that that's safe. This is
• 3:44
  Speaker 2: not safe. And the idea that a bond bear market
• 3:47
  Speaker 2: can last for a long time, it's something that everyone
• 3:49
  Speaker 2: is completely forgotten, despite the fact there was a thirty
• 3:51
  Speaker 2: five year bond bear market after the war. In fact,
• 3:55
  Speaker 2: if you look at the decades in which bonds have
• 3:57
  Speaker 2: not been in a bear market, depending on how you count,
• 3:59
  Speaker 2: it's like if you're than the ones when they've being
• 4:01
  Speaker 2: in a bull market.
• 4:02
  Speaker 1: Yeah, I mean, you know what I mean.
• 4:04
  Speaker 3: Yeah, No, you're right.
• 4:05
  Speaker 1: The Deutsche Bank study came out the other day and
• 4:07
  Speaker 1: it was something like six or not something like eight
• 4:10
  Speaker 1: in ten of the decades in the twentieth century Gilts
• 4:14
  Speaker 1: actually lost your money in real terms, and you know,
• 4:17
  Speaker 1: giving it we think it's a safe facet. You kind
• 4:19
  Speaker 1: of like, well where did where did it get that reputation? Yeah,
• 4:23
  Speaker 1: I mean that is and also I mean I suppose
• 4:25
  Speaker 1: we've also seen a bit of a massive failure of
• 4:27
  Speaker 1: the collective imagination over the past couple of years, because
• 4:31
  Speaker 1: no one thought that bond yields could get to where
• 4:35
  Speaker 1: they are now like six months ago. I mean, yeah,
• 4:41
  Speaker 1: let's not brag, but yeah, so it's kind of you
• 4:46
  Speaker 1: can see why everyone's scared. But that goes back to
• 4:48
  Speaker 1: the second point, which is the longer term problem. So
• 4:52
  Speaker 1: it's not just about stuff blowing up. It's about the
• 4:54
  Speaker 1: fact that we're now moving into a kind of environment
• 4:57
  Speaker 1: for the long run where inflation is going to continue
• 5:00
  Speaker 1: to be an issue. And so that means that all
• 5:02
  Speaker 1: the assumptions we're making for the past forty odd years
• 5:05
  Speaker 1: have kind of flipped on the head, which is something
• 5:09
  Speaker 1: everything's going to have to get used to it, which
• 5:10
  Speaker 1: means probably the markets will be a lot warbliered as
• 5:13
  Speaker 1: well a.
• 5:14
  Speaker 2: Lot of volatility. Yeah, oh so so exciting. Now listen, John,
• 5:18
  Speaker 2: on a more helpful note. We've decided, haven't we to
• 5:23
  Speaker 2: always have a personal finance tip of the week. Yes, yeah,
• 5:26
  Speaker 2: we've got one.
• 5:27
  Speaker 1: Still only the jungle law.
• 5:29
  Speaker 2: Yeah, I'm hoping you're going to come up with that.
• 5:31
  Speaker 1: I'm working on it. I'm working on it.
• 5:33
  Speaker 2: John's going to either sing or play an instrument next
• 5:36
  Speaker 2: week to introduce the personal finance Tip of the week. Now,
• 5:39
  Speaker 2: as an I'm torn on personal finance tip of the week.
• 5:41
  Speaker 2: There are two things that are quite important at the moment. Well,
• 5:43
  Speaker 2: it's one thing that's very important, and that's our property market,
• 5:46
  Speaker 2: falling property prices, paralysis in exchanges. You know that there
• 5:50
  Speaker 2: just isn't that much going through Chaine, the back change,
• 5:53
  Speaker 2: the back. There's a house on my strap that has
• 5:55
  Speaker 2: just sold or come close to. Somebody's depended on a chain.
• 5:58
  Speaker 2: There as so many links that can fall through. Things
• 6:00
  Speaker 2: can go wrong. And I didn't even know that this existed.
• 6:03
  Speaker 2: But I've recently been reading about insurance that you can
• 6:06
  Speaker 2: buy to protect yourself from a collapsing house purchase, and
• 6:10
  Speaker 2: that seems to me like not a bad idea. I'm
• 6:12
  Speaker 2: not a great one for buying pointless insurances, but you
• 6:14
  Speaker 2: can spend a lot of money on getting into the
• 6:18
  Speaker 2: zone of buying a house, and if it then falls through,
• 6:20
  Speaker 2: you can be seriously out of pocket. You do that
• 6:22
  Speaker 2: three or four times, even twice, your deposit is seriously impacted.
• 6:25
  Speaker 2: So is it worth spending? And these insurances seem to
• 6:28
  Speaker 2: cost KD of sixty eighty quid? Is that something worth
• 6:30
  Speaker 2: looking at? I wonder if it might be.
• 6:32
  Speaker 1: Definitely what's looking any because if you can easily share
• 6:36
  Speaker 1: it a look like a couple of grind whenever you're
• 6:38
  Speaker 1: looking to buy a host and things like selves and
• 6:40
  Speaker 1: or so if it's all in league and a sexty
• 6:43
  Speaker 1: or something you quite, that probably sayings worth it.
• 6:45
  Speaker 2: The other thing I want people to look at at
• 6:47
  Speaker 2: the moment is the offset mortgage. You and I remember
• 6:49
  Speaker 2: the offset mortgage because we're getting old. There was we
• 6:52
  Speaker 2: remember it that we remember another day, long long ago
• 6:55
  Speaker 2: when interest rates were not zero, when if you had
• 6:58
  Speaker 2: savings you could offset them against the day on your
• 7:00
  Speaker 2: mortgage and that would bring down your mortgage payments every month,
• 7:03
  Speaker 2: and it was kind of useful. It's time to look
• 7:05
  Speaker 2: at those again. If you've got a mortgage and you've
• 7:07
  Speaker 2: got savings, go have a look at some of the offsets.
• 7:08
  Speaker 2: They're pretty useful, excellent tips. Welcome to Meren Talks Money,
• 7:17
  Speaker 2: the podcast in which people who know the markets explain
• 7:19
  Speaker 2: the markets. I'm merin Sumset Web. This week our guest
• 7:21
  Speaker 2: is Jeremy Grantsam, co founder of investment firm GMO. Grantham
• 7:25
  Speaker 2: is well known for his analysis of bubbles and for
• 7:27
  Speaker 2: his parish forecasts that have come at pretty useful times,
• 7:30
  Speaker 2: such as in two thousand and two thousand and eight.
• 7:33
  Speaker 2: In our conversation, we talk about where valuations are, where
• 7:36
  Speaker 2: we expect the market to go, and why this has
• 7:38
  Speaker 2: been one of the greatest bubbles of all time. Jeremy,
• 7:42
  Speaker 2: thank you so much for joining us today.
• 7:44
  Speaker 3: That's a pleasure.
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  Speaker 2: Now, last time we talked, which was just over two
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  Speaker 2: years ago, it was the end of twenty twenty one.
• 7:52
  Speaker 2: Later middle of aug was twenty twenty one. I think
• 7:54
  Speaker 2: you and I had a conversation where we talked about
• 7:56
  Speaker 2: how we were in one of the greatest bubbles in
• 7:58
  Speaker 2: financial history, which seemed pretty obvious to you and actually
• 8:01
  Speaker 2: pretty obvious to me at the time, not so obvious
• 8:03
  Speaker 2: to everybody else. Out with some other people, and we
• 8:06
  Speaker 2: talked about where investors could hide from the craziness of
• 8:09
  Speaker 2: that bubble, although we couldn't find very many places. And
• 8:12
  Speaker 2: the best advice you gave my listeners at the time,
• 8:15
  Speaker 2: which was purely, absolutely brilliant, and I hope that they
• 8:18
  Speaker 2: all took it, was to rush out and get the
• 8:20
  Speaker 2: longest fixed rate mortgage on their house that they possibly could.
• 8:24
  Speaker 2: So fingers crossed, lots of them did that and sitting
• 8:29
  Speaker 2: there with a ten year mortgage of one to one
• 8:31
  Speaker 2: and a half percent instead of six to six and
• 8:33
  Speaker 2: a half percent.
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  Speaker 4: Yeah, well, if a handful of people did it, we
• 8:37
  Speaker 4: could feel justified.
• 8:38
  Speaker 2: I think so if we saved anybody. So let's talk
• 8:42
  Speaker 2: about that great bubble. It was excellent timing. And hopefully
• 8:45
  Speaker 2: the listeners also rushed out and solved their overpriced equities,
• 8:48
  Speaker 2: because twenty twenty two so the beginning of the popping
• 8:52
  Speaker 2: of that bubble. And I'm saying the beginning because I'm
• 8:56
  Speaker 2: guessing that what you're going to tell me is that
• 8:58
  Speaker 2: we are only part way through that bubble collapsing. So
• 9:03
  Speaker 2: where are we with the whole thing now?
• 9:05
  Speaker 4: Well, everything was proceeding perfectly well, and the great bubbles
• 9:09
  Speaker 4: take their time quite a few years, going up quite
• 9:12
  Speaker 4: a few years coming down, and the market suffers from
• 9:16
  Speaker 4: attention deficit disorder, so it always stinks every rally at
• 9:20
  Speaker 4: the beginning of the next great ball market and so on.
• 9:23
  Speaker 4: But there were some definitely original interferences.
• 9:28
  Speaker 3: With this deflating period.
• 9:30
  Speaker 4: The first of them was what I call the presidential cycle,
• 9:33
  Speaker 4: which I wrote about suggesting we would have a time
• 9:37
  Speaker 4: out because there's never been a serious market decline between
• 9:44
  Speaker 4: October the first of the second presidential year and the
• 9:48
  Speaker 4: end of April in the third year, because the administration
• 9:52
  Speaker 4: would like to have a strong labor market running up
• 9:55
  Speaker 4: to the election, and they realized, of course that economics
• 9:58
  Speaker 4: moves rather slowly, lot of inertia, and so they had
• 10:02
  Speaker 4: to stimulate it a year and a quarter before, and
• 10:04
  Speaker 4: so that's the period of stimulus. And since FDR there
• 10:07
  Speaker 4: has never been a big decline. And the average gain
• 10:10
  Speaker 4: in that seven month window equals the remaining.
• 10:14
  Speaker 3: Forty one months. It's amazing.
• 10:16
  Speaker 4: Of the four year presidential cycle, it seems impossible, but
• 10:19
  Speaker 4: it's true. Check it, and the average gain is about
• 10:22
  Speaker 4: fifteen percent in that window, and this time we had
• 10:25
  Speaker 4: thirteen or fourteen.
• 10:26
  Speaker 3: It was right on the nose.
• 10:28
  Speaker 4: So we had a typical presidential cycle rally, and we
• 10:31
  Speaker 4: had a strong January bounds. If you've wiped out the
• 10:34
  Speaker 4: growth stocks the following January, you always have a great bounce,
• 10:38
  Speaker 4: even if the bear market is not over. The perfect
• 10:42
  Speaker 4: example would be two thousand and one. The tech bubble
• 10:46
  Speaker 4: was huge.
• 10:46
  Speaker 3: It got the.
• 10:47
  Speaker 4: Growth stocks got hammered. In two thousand they were down
• 10:51
  Speaker 4: fifty percent, and then rallied a bit at the end
• 10:53
  Speaker 4: of the year, and then in January they had a
• 10:57
  Speaker 4: huge rally eight or nine percent, And so we should
• 11:01
  Speaker 4: have expected the same, and basically we got it a
• 11:04
  Speaker 4: little bit less, but a strong January rallied. Why not
• 11:10
  Speaker 4: because there were lots of tax losses that had been
• 11:12
  Speaker 4: taken and people replacing their position, investing their Christmas bonuses
• 11:19
  Speaker 4: and so on. So that was fairly normal, and so
• 11:24
  Speaker 4: was the presidential cycle effect. What was abnormal is that
• 11:29
  Speaker 4: they occurred in the middle of a great.
• 11:34
  Speaker 3: Bubble that was on the way down.
• 11:37
  Speaker 4: This had not happened in nineteen twenty nine, seventy two,
• 11:40
  Speaker 4: or two thousand or two thousand and seven. All of
• 11:43
  Speaker 4: them had neatly sidestepped that seven month window. But this one,
• 11:49
  Speaker 4: it fell right in the middle of the deflating phase.
• 11:52
  Speaker 2: So we got a bit of a reprieve as a
• 11:54
  Speaker 2: result of that.
• 11:55
  Speaker 4: Yeah, we got a bit of a temporary reprieve. And
• 11:57
  Speaker 4: then I argue back to the meat grinder, but both
• 12:02
  Speaker 4: the meat grinder had time to really get going. We
• 12:07
  Speaker 4: ran into the artificial intelligence mini rally, and yes it
• 12:14
  Speaker 4: was only a dozen or two stocks, but it included
• 12:18
  Speaker 4: some very big ones and they had huge rallies, and
• 12:23
  Speaker 4: even though the average stock didn't move, it sent the
• 12:27
  Speaker 4: smpl oh I don't know, fifteen sixteen, seventeen percent this
• 12:33
  Speaker 4: year year today and on the backs of these handful
• 12:38
  Speaker 4: of huge names.
• 12:40
  Speaker 2: Okay, so another little reprieve for the index.
• 12:43
  Speaker 4: Yeah, his artificial intelligence for real. And my answer is yes, absolutely,
• 12:47
  Speaker 4: it is for real. It will have huge effect. Is
• 12:50
  Speaker 4: it big enough soon enough to stop the deflating No,
• 12:55
  Speaker 4: I don't think it is. It's a ten to twenty
• 12:58
  Speaker 4: multi the catal effect going off into the distant future,
• 13:02
  Speaker 4: and it will be huge, and in what way I
• 13:06
  Speaker 4: don't know. It's over my pay grade, but it will
• 13:08
  Speaker 4: be potentially in vast in its effects.
• 13:12
  Speaker 3: In the meantime, it leng the the interruption.
• 13:17
  Speaker 4: In this deflating period, but under the surface, the economics deteriorate,
• 13:24
  Speaker 4: debt increases, consumers spent their stimulus program. It's all gone,
• 13:30
  Speaker 4: except that maybe the richest ten or fifteen percent that
• 13:33
  Speaker 4: don't really count because they don't spend it as desperately
• 13:36
  Speaker 4: as everybody else does. So, and we've taken off the
• 13:41
  Speaker 4: moratorium on paybacks of college loans, which is a huge
• 13:46
  Speaker 4: thing in the US, and the leting indicators, which have
• 13:49
  Speaker 4: a terrific record, continue down.
• 13:52
  Speaker 3: The availability of debt.
• 13:54
  Speaker 4: For small companies becomes increasingly difficult to get. The debt
• 13:59
  Speaker 4: level themselves at the government level are huge, and the
• 14:03
  Speaker 4: interest rates increase, putting a real burden on the budget.
• 14:08
  Speaker 4: And many things continue to deteriorate. And my guess is
• 14:16
  Speaker 4: we will have a recession. I don't know whether it
• 14:20
  Speaker 4: will be fairly mild or fairly serious, but it will
• 14:24
  Speaker 4: probably go deep into next year, as I have been
• 14:27
  Speaker 4: saying for three year.
• 14:29
  Speaker 2: Okay, but there's still a general view that this is
• 14:32
  Speaker 2: going to be a soft landing. And I think you
• 14:35
  Speaker 2: said before that all landings are soft landings until they
• 14:38
  Speaker 2: become hard landings.
• 14:40
  Speaker 3: Well, every bubble has been.
• 14:44
  Speaker 4: Greeted with a chorus of soft landing, and there's never
• 14:48
  Speaker 4: been one Japan. The greatest bubbles, both in real estate
• 14:54
  Speaker 4: and the stock market was followed by a last decade,
• 14:58
  Speaker 4: arguably a last two decades, but nineteen twenty nine, of
• 15:02
  Speaker 4: course was mishandled followed by depression. The nineteen seventy two
• 15:07
  Speaker 4: fifty to fifty was followed by a very serious recession,
• 15:11
  Speaker 4: and two thousand was followed by a mild recession still
• 15:14
  Speaker 4: allowed the NASDAK to decline seventy two percent and fifty percent,
• 15:20
  Speaker 4: and the housing bust of those seven was of course
• 15:24
  Speaker 4: followed by a potentially disastrous recession, which was counted by
• 15:29
  Speaker 4: biggest stimulus by far in American history up till that point,
• 15:34
  Speaker 4: finally exceeded amazingly by the stimulus program around COVID and
• 15:39
  Speaker 4: the after effects of which we we are now dealing with.
• 15:44
  Speaker 2: So we have a lot of people saying at the
• 15:46
  Speaker 2: moment that it is extraordinary and impressive how interest rates
• 15:50
  Speaker 2: have gone up so fast.
• 15:52
  Speaker 3: This is the.
• 15:53
  Speaker 2: Speed of the movers has not been seen for many,
• 15:56
  Speaker 2: well many hundreds of years. So seventeen eighty eight, someone
• 15:58
  Speaker 2: told me the other day, so an incredibly fast move.
• 16:02
  Speaker 2: And the extraordinary thing is that nothing very big has
• 16:05
  Speaker 2: broken yet, but everybody expects something to break, they're just
• 16:09
  Speaker 2: not quite sure what it will be.
• 16:12
  Speaker 4: Well, if they think that they're being historic historically rather literate,
• 16:19
  Speaker 4: because that is the pattern, something breaks and nobody seems
• 16:25
  Speaker 4: to know what it is. You increase the pressure on
• 16:28
  Speaker 4: a very complicated system until a few things snap, and
• 16:33
  Speaker 4: each cycle is different, so each cycle something else happens.
• 16:38
  Speaker 4: It's always a surprise, but you always have a surprise,
• 16:42
  Speaker 4: so the idea of a surprise is totally unsurprising.
• 16:45
  Speaker 2: Can you make any guesses as to what the surprise
• 16:48
  Speaker 2: might be this time?
• 16:50
  Speaker 4: Well, of course we did have an interesting kind of
• 16:53
  Speaker 4: sneak preview. Didn't weigh with the large regional banks in
• 16:58
  Speaker 4: America where a couple just up and went out of
• 17:02
  Speaker 4: business in a flash.
• 17:03
  Speaker 2: Yeah, but unlike most things, that turned out to actually
• 17:05
  Speaker 2: be contained and containable. You know, we sat there looking
• 17:08
  Speaker 2: at it thinking is this it is something big breaking
• 17:11
  Speaker 2: and it turned out that that could be cleared up.
• 17:14
  Speaker 4: It did indicate that the authorities are very kind of
• 17:18
  Speaker 4: well aware of this something breaking effect because they moved
• 17:23
  Speaker 4: very quickly, and one could argue open zealously gave a
• 17:27
  Speaker 4: blanket safety net to everybody. Maybe You could argue that
• 17:32
  Speaker 4: people should have been able to analyze the vulnerability of
• 17:36
  Speaker 4: Silicon Valley Bank and so on to the VC industry
• 17:41
  Speaker 4: and to the level of high years, the pain that
• 17:45
  Speaker 4: high yels would inflict on their large portfolio of rock
• 17:49
  Speaker 4: bottom investments. They had made a huge number, unprecedented actually
• 17:56
  Speaker 4: in the banking industry, the percentage of their portfolio that
• 17:59
  Speaker 4: was invested in very low yielding paper, just in time
• 18:04
  Speaker 4: to be hit hard by an increase in rates. The
• 18:07
  Speaker 4: combination of that very large component and the fact that
• 18:13
  Speaker 4: they were uniquely dependent on BC and VC is itself,
• 18:17
  Speaker 4: along with real estate, kind of guaranteed to take a
• 18:21
  Speaker 4: lot of pain in these kinds of cycles. The VC
• 18:25
  Speaker 4: industry has been the only part so far that has
• 18:28
  Speaker 4: moved along at a much quicker pace and is fairly
• 18:33
  Speaker 4: deep into a trouble. The IPOs completely ceased and the
• 18:39
  Speaker 4: money flowing into new PC's dropped way down, fell to
• 18:45
  Speaker 4: about a third.
• 18:47
  Speaker 3: In a real hurry.
• 18:49
  Speaker 4: So the VC industry acted as if there was a
• 18:51
  Speaker 4: major bubble breaking, and the rest of the market, particularly
• 18:56
  Speaker 4: the growth end and the artificial intelligence and had a
• 19:01
  Speaker 4: much easier time.
• 19:03
  Speaker 2: Yeah, does it feel like maybe it is the private
• 19:07
  Speaker 2: equity lest VC part of the market that is most
• 19:09
  Speaker 2: vulnerable at the moment, and you've got a lot of
• 19:12
  Speaker 2: debt piled up in there. You've got a lot of
• 19:13
  Speaker 2: companies that are burning cash fast and require more cash
• 19:17
  Speaker 2: put in. We're hearing quite a lot about private equity
• 19:19
  Speaker 2: businesses having to borrow at at unexpectedly high rates, and
• 19:23
  Speaker 2: we're wondering what happens over the next couple of years
• 19:27
  Speaker 2: in that industry.
• 19:28
  Speaker 4: It's plausible that they would feel the pain quickest. Everything
• 19:32
  Speaker 4: to do with real estate, of course, is pretty much certain,
• 19:35
  Speaker 4: although the delays and special cases there are much more impressive.
• 19:40
  Speaker 3: But eventually it grinds through.
• 19:43
  Speaker 4: When you lower the mortgage, people can afford to pay more,
• 19:46
  Speaker 4: and eventually they pay more and push out the prices.
• 19:49
  Speaker 4: So at three percent, you're paying four hundred thousand for
• 19:52
  Speaker 4: your house, and when the mortgage goes to six percent,
• 19:55
  Speaker 4: you suddenly realize you can't afford to buy the house.
• 19:57
  Speaker 4: You pull your bid, market backs off, and eventually the
• 20:01
  Speaker 4: prices come down.
• 20:02
  Speaker 3: So mortgages move.
• 20:05
  Speaker 4: To fill the available affordability, and house prices do exactly that.
• 20:11
  Speaker 4: They're not reliable in the short term, they're incredibly reliable
• 20:14
  Speaker 4: in the long term. An over forty year period of
• 20:18
  Speaker 4: driving down mortgage rates, of course, you drove up house
• 20:21
  Speaker 4: prices all over the world pretty much. And now the
• 20:26
  Speaker 4: rates have gone up, of course it will drive down.
• 20:29
  Speaker 4: And the ones that flow through quickly, some of the
• 20:32
  Speaker 4: Scandinavian countries side Sweden have a fairly severe housing pullback.
• 20:37
  Speaker 4: The ones that have more convoluted system, more locked in mortgages,
• 20:40
  Speaker 4: like the US, they take their time, but eventually people
• 20:45
  Speaker 4: can't afford to buy a house at a high mortgage
• 20:49
  Speaker 4: and the prices come down.
• 20:50
  Speaker 3: So that's pretty reliable.
• 20:52
  Speaker 2: Yeah, And you can see that happening across the world,
• 20:54
  Speaker 2: can't you. You can see house prices coming down all
• 20:56
  Speaker 2: over Europe, at Canada, beginning in the US, particularly in Scandina, Navier,
• 21:00
  Speaker 2: and in the UK is increasingly obvious as well, because
• 21:03
  Speaker 2: we're at that we're at that point where no one's
• 21:05
  Speaker 2: buying and no one's selling. We're at the paralysis stage
• 21:08
  Speaker 2: before you would exect prices to fall quite dramatically.
• 21:11
  Speaker 4: And that's exactly the same in the US. Paralysis and
• 21:14
  Speaker 4: house prices are worse for the ordinary household, they're worse
• 21:19
  Speaker 4: for the economy than stocks because they're substantially more broadly owned.
• 21:25
  Speaker 4: It's really an important part of the median families income
• 21:29
  Speaker 4: picture and capital picture, and it is not stock sunning.
• 21:33
  Speaker 4: And so the the motto should be don't mess with housing.
• 21:38
  Speaker 4: The supermato should be never have a housing bubble at
• 21:43
  Speaker 4: the same time as you have a stock market bubble,
• 21:45
  Speaker 4: which is the great mistake the Japanese made with the
• 21:49
  Speaker 4: biggest bubble in history on both frants at the same time.
• 21:52
  Speaker 4: But although although we didn't get carried away with ridiculous
• 21:58
  Speaker 4: subprime this time, the multiple of family income actually went
• 22:03
  Speaker 4: higher than it did in two thousand and seven, So
• 22:08
  Speaker 4: in terms of actual long term vulnerability posed by overpricing,
• 22:13
  Speaker 4: this housing market was more overpriced, and it was accompanied
• 22:18
  Speaker 4: by a much more overpriced and plastically bubbly stock market
• 22:24
  Speaker 4: than two thousand and seven OKA.
• 22:26
  Speaker 2: So we can see it working its way through the
• 22:28
  Speaker 2: housing market across the world. But obviously all the stock
• 22:32
  Speaker 2: markets are different because they've come out of this bubble
• 22:35
  Speaker 2: at different valuation levels, with the US, foribly being the
• 22:37
  Speaker 2: most expensive. So what can we expect to see happened
• 22:40
  Speaker 2: to the US stock market in particular?
• 22:42
  Speaker 4: Now the most vulnerable area in my opinion is the
• 22:48
  Speaker 4: Russell two thousand is a good measure of where the
• 22:51
  Speaker 4: vulnerabilities will be. The Russell two thousand often has no
• 22:56
  Speaker 4: collective earnings at all. It has a very high density
• 23:00
  Speaker 4: of zombies, companies that really can only pay their interest
• 23:05
  Speaker 4: payments by issuing more debt.
• 23:08
  Speaker 3: It has never been.
• 23:08
  Speaker 4: Higher than it is today, and they have a very
• 23:12
  Speaker 4: high ratio, something like forty percent, don't have positive earnings,
• 23:15
  Speaker 4: and they have record debt.
• 23:17
  Speaker 3: They have never had this kind of debt.
• 23:19
  Speaker 4: So they're vulnerable on the debt front, vulnerable on the
• 23:22
  Speaker 4: financial front, and vulnerable on a broad economic front.
• 23:26
  Speaker 3: And this is the interesting thing.
• 23:29
  Speaker 4: The Russell two thousand is not up in real terms.
• 23:33
  Speaker 3: For the last year.
• 23:35
  Speaker 4: It's not up over two years, and really surprising, it's
• 23:39
  Speaker 4: not up over five years. It's actually down quite a
• 23:42
  Speaker 4: bit over five years. So it is showing its vulnerability,
• 23:46
  Speaker 4: and it brings up a kind of sidebar. Why don't
• 23:51
  Speaker 4: people state everything inflation adjusted? We always did in the
• 23:54
  Speaker 4: nineteen seventies, eighties and nineties, and we have now forgotten
• 23:58
  Speaker 4: because we had a twenty five your window where inflation
• 24:02
  Speaker 4: was dribbling down towards nothing, and we've lost the habit
• 24:06
  Speaker 4: because people think, oh, well, the S and P five
• 24:09
  Speaker 4: hundred's almost that it's high.
• 24:11
  Speaker 3: The s and P five.
• 24:12
  Speaker 4: Hundred is about eighteen percent below it's high. It's high
• 24:16
  Speaker 4: a year and nine months ago, and there's been decent
• 24:21
  Speaker 4: inflation in that window at least seven maybe eight percent plus.
• 24:26
  Speaker 4: The market is down in any case about ten per cent.
• 24:30
  Speaker 4: The markets are not doing as well as people think
• 24:33
  Speaker 4: because they they have lost the knack of taking off inflation.
• 24:37
  Speaker 4: Inflation is every bit as painful as any other percentage
• 24:40
  Speaker 4: point loss.
• 24:42
  Speaker 2: But it isn't though, is it. I mean, it isn't
• 24:44
  Speaker 2: in people's minds. I mean, in some senses, this is
• 24:47
  Speaker 2: a great way for things to be brought back to
• 24:50
  Speaker 2: ground by a couple of years of relatively high inflation.
• 24:53
  Speaker 2: So people don't feel like they're losing all their hard
• 24:56
  Speaker 2: earned money, they don't feel as though their house prices collapse, etc.
• 25:00
  Speaker 2: If it only happens in real terms as opposed to
• 25:03
  Speaker 2: in nominal terms, generally, people seeming people feel happier about it.
• 25:08
  Speaker 4: You're right, they're more easily misguided in thinking they're doing fine,
• 25:12
  Speaker 4: except when they go to the supermarket where the reverse end.
• 25:16
  Speaker 4: If anything, they over respond to so they come out
• 25:19
  Speaker 4: of the supermarket thinking that inflation will crush them, and
• 25:23
  Speaker 4: they are accept a ten pounds loss on their house
• 25:27
  Speaker 4: from inflation without even noticing it. The other thing, though,
• 25:30
  Speaker 4: is it it does take down their depths inflation, so
• 25:35
  Speaker 4: there is an offset. If you have a very big
• 25:38
  Speaker 4: mortgage and you have ten percent inflation, you owe ten
• 25:42
  Speaker 4: percent less and that sadly has always slipped through unnoticed.
• 25:45
  Speaker 2: Also, yeah, and then if your salary goes up at
• 25:48
  Speaker 2: the same time, if your salary matches inflation, then in
• 25:51
  Speaker 2: some senses, for a lot of people, an inflationary environment,
• 25:54
  Speaker 2: as long as it doesn't get out of control in
• 25:57
  Speaker 2: a situation like this, isn't too bad. Adver get hit.
• 26:00
  Speaker 2: I'm just saying it's not too bad.
• 26:03
  Speaker 4: You might say that, but if you actually ask them
• 26:05
  Speaker 4: how they feel, the results are quite conclusively opposite. People's
• 26:11
  Speaker 4: confidence in the economy is very low in the UK
• 26:17
  Speaker 4: and the US. If you ask them do you feel
• 26:19
  Speaker 4: better off than last year? Almost nobody since they feel
• 26:25
  Speaker 4: better off, even though obviously quite a large fraction are
• 26:29
  Speaker 4: better off in real life. The results are the rich
• 26:32
  Speaker 4: and the poor are feeling a little squeezed in today's environment,
• 26:36
  Speaker 4: so I think you're wrong in that sense. It does
• 26:41
  Speaker 4: reach right through into consumer confidence. Now, if you have
• 26:46
  Speaker 4: a lot of money in the piggybang from the government's
• 26:48
  Speaker 4: program stimulus program, that's a huge offset, and that that
• 26:53
  Speaker 4: has been very successful in keeping keeping spending going. And
• 26:57
  Speaker 4: there were some other psychological factors that people were so
• 27:01
  Speaker 4: wildly enthusiastic to come out of COVID and get on
• 27:04
  Speaker 4: a plane and go to Spain again and so on
• 27:07
  Speaker 4: and spread their wings and have a mail out that
• 27:11
  Speaker 4: they have done that so enthusiastically that they've run through
• 27:14
  Speaker 4: all their COVID savings and now they are racking up
• 27:18
  Speaker 4: credit card debt like there's note tomorrow and building out
• 27:21
  Speaker 4: their aggregate debt level. They've never saved less in America.
• 27:25
  Speaker 4: You may be aware than their saving now heaven. I mean,
• 27:29
  Speaker 4: the savings phrase has just about disappeared.
• 27:32
  Speaker 2: But nonetheless, nonetheless, this inflation plus the folds in the
• 27:36
  Speaker 2: market do mean that. And you wrote about this in
• 27:40
  Speaker 2: your latest note that the meat grinder that quite a
• 27:44
  Speaker 2: lot of the stocks that we look at have already
• 27:47
  Speaker 2: come off very significantly in real terms. You say, for example,
• 27:50
  Speaker 2: the lakes of Amazon, Alphabet and Meta would have to
• 27:53
  Speaker 2: rise between seventeen one hundred and fifty percent to go
• 27:56
  Speaker 2: back to their twenty twenty one peaks in real terms.
• 27:59
  Speaker 2: So we've seen it awful lot of froth come up
• 28:01
  Speaker 2: the market in real terms, and I suspect there are
• 28:06
  Speaker 2: some groups of more enthusiastic growth infestors than perhaps you
• 28:09
  Speaker 2: or I are looking at those prices and saying, well,
• 28:11
  Speaker 2: this is a pactly good place to get back in.
• 28:13
  Speaker 4: Well, they typically do that, and in a multi legged
• 28:18
  Speaker 4: bear market, they always have plenty of people buying into
• 28:23
  Speaker 4: each leg, and I have no reason to think this
• 28:25
  Speaker 4: would be any exception. Once you've seen a stock sell
• 28:29
  Speaker 4: at three hundred, even if it's intrinsically worth one hundred,
• 28:34
  Speaker 4: you feel somehow it has a divine right to go back.
• 28:37
  Speaker 3: To three hundred.
• 28:38
  Speaker 4: So when it comes down to two hundred, you think
• 28:40
  Speaker 4: it's a massive bargain even though it's intrinsic value maybe
• 28:44
  Speaker 4: one hundred. So you go whooping in there and you
• 28:46
  Speaker 4: buy it, and then it comes second leg down to
• 28:48
  Speaker 4: one hundred and fifty still looks pretty good, and then
• 28:51
  Speaker 4: eventually it comes down to one hundred and you're heartbroken
• 28:54
  Speaker 4: and you sell it anyway, and it goes down to
• 28:56
  Speaker 4: eighty and it's actually cheap.
• 29:00
  Speaker 2: Can't buy it again because you've been too hurt.
• 29:02
  Speaker 3: Yes, now you're paralyzed and hurt.
• 29:07
  Speaker 4: And that's when I get to write to reinvesting when terrified. Yes,
• 29:12
  Speaker 4: two thousand and nine, and when people are so paralyzed
• 29:16
  Speaker 4: they don't care that it's the cheapest prices for twenty
• 29:18
  Speaker 4: two years. And GMO's famously allegedly bear If Forecast had
• 29:25
  Speaker 4: double digit real returns for seven years in everything, including
• 29:31
  Speaker 4: the S and P five hundred.
• 29:32
  Speaker 2: Yeah, but you had to be brave in two thousand
• 29:34
  Speaker 2: and nine, didn't you. I mean there were several starts
• 29:37
  Speaker 2: you were. You possibly one of the loudest voices saying
• 29:40
  Speaker 2: you know, if you buy now, you've got an excellent
• 29:42
  Speaker 2: chance of making extraordinary returns over the next decade.
• 29:45
  Speaker 3: It was hard to Why do you have to be brave?
• 29:48
  Speaker 4: I would argue you have to be brave buying when
• 29:50
  Speaker 4: prices are extended and high, because you're much more likely
• 29:54
  Speaker 4: to lose money.
• 29:55
  Speaker 3: It's just the perception, But the.
• 29:58
  Speaker 4: Real bravery requires is to buy when the market is
• 30:03
  Speaker 4: smashed down to a bargain.
• 30:05
  Speaker 3: Seems to me very.
• 30:06
  Speaker 2: Little, but does not now is it.
• 30:08
  Speaker 3: No, that is not now.
• 30:09
  Speaker 4: If you look at if you look at the most
• 30:11
  Speaker 4: predictive measures, and mister Hussman does the best of those,
• 30:19
  Speaker 4: very detailed history, historical record of which ones actually do
• 30:24
  Speaker 4: the best predictive measure. It isn't Warren Buffett's price to
• 30:28
  Speaker 4: book compared to GDP. It's an interesting, more sophisticated measure
• 30:36
  Speaker 4: of the earnings taking out financial companies and so on.
• 30:40
  Speaker 4: And those measures are about as high as they have
• 30:44
  Speaker 4: ever been today. They're in the top two or three
• 30:47
  Speaker 4: percent of all time. There's a spike. There's a spike
• 30:52
  Speaker 4: in two thousand, and there's a spike in twenty twenty one.
• 30:57
  Speaker 4: And this is above two thousand, but below the spike
• 31:01
  Speaker 4: in twenty twenty one. But we are right up there.
• 31:04
  Speaker 4: In order to get the market down to a level
• 31:07
  Speaker 4: where it would typically out yield the long bond by
• 31:12
  Speaker 4: five percent, which it should, which you could argue it should,
• 31:17
  Speaker 4: the market would just sheare arithmetic, the market would have
• 31:21
  Speaker 4: to drop by more than fifty percent. This is not
• 31:24
  Speaker 4: my forecast. I have a very genteel forecast. Anything below
• 31:28
  Speaker 4: three thousand would make me think that it was reasonable.
• 31:33
  Speaker 4: And if everything works out, badly, which it sometimes does.
• 31:36
  Speaker 4: I would not be amazed if it went to two
• 31:38
  Speaker 4: thousand on the SP, but that would that would require
• 31:44
  Speaker 4: a couple of wheels to fall off, and wheels tend
• 31:47
  Speaker 4: to fall off in the grate in the Great bubbles unraveling,
• 31:50
  Speaker 4: but it doesn't mean they have to so, but it
• 31:54
  Speaker 4: would be unlikely not to get to something close to
• 31:58
  Speaker 4: three three on the S and P.
• 32:01
  Speaker 2: Now what could turn that around, of course, is inflation
• 32:04
  Speaker 2: falling right back, right back to two percent or below,
• 32:06
  Speaker 2: which it was not impossible, and interest rates then falling
• 32:10
  Speaker 2: back as well, because we know, don't we let markets
• 32:13
  Speaker 2: really like low steady inflation. We know they really like
• 32:16
  Speaker 2: low steady interest rates. We know that they hate high
• 32:19
  Speaker 2: and volatile inflation. So and there is an expectation in
• 32:23
  Speaker 2: large parts of the market, although I think that's been
• 32:25
  Speaker 2: tested over the last couple of weeks. There has been
• 32:27
  Speaker 2: an expectation that eventually inflation would end up back at
• 32:31
  Speaker 2: target and that we would see rates begin to come off.
• 32:34
  Speaker 2: Now that the higher for longer story is beginning to
• 32:36
  Speaker 2: get a bit more traction, but that's relative the reason.
• 32:39
  Speaker 2: So shift in the inflation or interest rate environment would
• 32:42
  Speaker 2: change things.
• 32:44
  Speaker 4: The model that Ben Incur and I did twenty years ago.
• 32:48
  Speaker 4: It's got a very very high correlation explaining PE. It
• 32:51
  Speaker 4: doesn't predict it, It just says, how do we get here?
• 32:54
  Speaker 4: It turns out the market is really a coincident indicator
• 32:58
  Speaker 4: of comfort. What is it to make a portfolio manager
• 33:02
  Speaker 4: comfortable in an institution? And the answer is, as you suggest,
• 33:07
  Speaker 4: steady inflation around two percent. It hates inflationary spines and
• 33:13
  Speaker 4: very high profit margins, and profit margins have been drifting
• 33:18
  Speaker 4: down and more than people realize, and inflation has been
• 33:23
  Speaker 4: bouncing around.
• 33:24
  Speaker 3: But it's part of the scenery now.
• 33:27
  Speaker 4: And the model says a shillerpee should be about sixteen
• 33:30
  Speaker 4: point eight, which is decently above average and doesn't sound
• 33:35
  Speaker 4: ridiculously low, and that's because the profit margins are still decent.
• 33:40
  Speaker 3: Well, what is it?
• 33:41
  Speaker 4: Well, a few weeks ago it was twenty nine thirty,
• 33:46
  Speaker 4: so it was not responding in the normal way.
• 33:49
  Speaker 3: This is only the second time it had a bit
• 33:52
  Speaker 3: of a holiday.
• 33:53
  Speaker 4: In two thousand, our model said we should have the
• 33:58
  Speaker 4: highest pe and history everything is perfect, and the market
• 34:01
  Speaker 4: said you're done right and went much higher than that
• 34:04
  Speaker 4: even for eighteen months. That's you could argue the fire
• 34:10
  Speaker 4: and away out the outlier in speculative craziness. And the
• 34:16
  Speaker 4: second time was when inflation spiked in twenty twenty two,
• 34:23
  Speaker 4: or was it twenty twenty one, twenty twenty one, twenty
• 34:27
  Speaker 4: one not in the summer of twenty twenty one, you
• 34:31
  Speaker 4: had a rapidly rising, unexpected inflationary jag and the market
• 34:36
  Speaker 4: continued to rise for the whole half year, and so
• 34:40
  Speaker 4: you had a huge divergence in our model and the
• 34:44
  Speaker 4: first half to wipe out in the first half of
• 34:47
  Speaker 4: twenty twenty two was the biggest decline in the first
• 34:51
  Speaker 4: half of the year since nineteen thirty nine, incidentally in
• 34:54
  Speaker 4: real times. But it didn't close the gap because inflation.
• 35:00
  Speaker 4: The longer it stayed there, the worse the model god,
• 35:03
  Speaker 4: and the profit margins began to decline a bit.
• 35:07
  Speaker 2: Well, that was interesting, profit margins beginning to decline, wasn't it?
• 35:09
  Speaker 2: Because one of the things that we've talked about before
• 35:11
  Speaker 2: is how extraordinary it is that something that always mean
• 35:14
  Speaker 2: reverts profit margins did not mean revert, and a lot
• 35:19
  Speaker 2: of us have been waiting to see profit margins that
• 35:22
  Speaker 2: come down. They didn't, and they didn't, and they didn't
• 35:24
  Speaker 2: and even now. It's a pretty gradual erosion.
• 35:27
  Speaker 3: Yes it is.
• 35:29
  Speaker 4: And if you want to further narrow that story to
• 35:34
  Speaker 4: what they now call the Magnificence seven, there had never
• 35:39
  Speaker 4: been ever, ever such a divergence in favor of the
• 35:44
  Speaker 4: US in total corporate earnings since twenty ten, so this
• 35:49
  Speaker 4: is a recent event. The US has outperformed the rest
• 35:53
  Speaker 4: of the developed world by about.
• 35:55
  Speaker 3: Seventy percentage points.
• 35:57
  Speaker 4: So you could say, well, in that case, they should
• 35:59
  Speaker 4: have done seventy percentage points better, and they did more
• 36:04
  Speaker 4: than that because they in the market always goes in
• 36:07
  Speaker 4: for double counting, So if you have unexpectedly good profit margins,
• 36:11
  Speaker 4: you'd get an unexpected increase in price earnings ratio, which
• 36:15
  Speaker 4: also happened.
• 36:17
  Speaker 3: Any case, if you go.
• 36:18
  Speaker 4: Back to the seventy percent hour performance and you take
• 36:21
  Speaker 4: out them so called fans.
• 36:25
  Speaker 3: You find that.
• 36:29
  Speaker 4: The ninety you know, the ninety five percent or more,
• 36:32
  Speaker 4: the ordinary American stocks looked very much like the rest
• 36:38
  Speaker 4: of the world. Their performance was a little bit better,
• 36:41
  Speaker 4: their earnings were a little bit better, but in the
• 36:44
  Speaker 4: normal range. And then you have the Magnificence seven, whose
• 36:49
  Speaker 4: performance in earnings was unprecedented by a wide margin, and
• 36:54
  Speaker 4: whose performance in the stock market was even more unprecedented
• 36:57
  Speaker 4: because they not only had the earning, but they had
• 37:01
  Speaker 4: a steady rise in pe. So you've had the sudden
• 37:04
  Speaker 4: emergence of multi trillion dollar market caps. Quite an amazing
• 37:11
  Speaker 4: world and culminating in this year where if you took
• 37:17
  Speaker 4: out the Magnificent seven today, the S and P would
• 37:21
  Speaker 4: not be out for the year. It may be up
• 37:24
  Speaker 4: a point, but little or nothing, and all of the
• 37:31
  Speaker 4: ten or at twelve point rally is carried by carried
• 37:35
  Speaker 4: by the Magnificence seven. There has never been such a
• 37:38
  Speaker 4: narrow market. Now, what will happen to them is a
• 37:43
  Speaker 4: very interesting question, is it not? Will they continue to
• 37:49
  Speaker 4: grow and become seventy percent of the entire world's market cap.
• 37:56
  Speaker 4: Will they be attacked by governments? Will they attack each other,
• 38:01
  Speaker 4: grow into each other's markets and beat down their profit margins.
• 38:06
  Speaker 4: Will new technologies arise and n run the iPhone or whatever?
• 38:13
  Speaker 3: Who knows?
• 38:14
  Speaker 4: I noticed back in the nifty to fifty of nineteen
• 38:18
  Speaker 4: seventy two, that's when fifty high quality companies like Coca
• 38:23
  Speaker 4: Cola and IBM went to a fifty percent premium in
• 38:28
  Speaker 4: fair value against the market. It's the one time when
• 38:31
  Speaker 4: quality stocks had a huge bubble, and one of the
• 38:33
  Speaker 4: reasons was that none of them had failed. There were
• 38:37
  Speaker 4: no failures in the nifty to fifty group for fifteen
• 38:40
  Speaker 4: years prior to nineteen seventy two, and after nineteen seventy
• 38:44
  Speaker 4: two they actually started to die off like flies. We
• 38:47
  Speaker 4: had Avon, we had Polaroid, we had Exxon, we had
• 38:51
  Speaker 4: Eastman Kodak, we had IBM half wounded, seriously wounded, i
• 38:56
  Speaker 4: should say.
• 38:57
  Speaker 3: And on it went. They lost their match, and they.
• 39:00
  Speaker 4: Lost their huge premium uh and and they and they
• 39:04
  Speaker 4: did not and they underperformed badly.
• 39:06
  Speaker 3: For a decade.
• 39:08
  Speaker 4: Will that happen to these new nifty seven That's the
• 39:15
  Speaker 4: question that is unanswerable, I think, because each one of
• 39:20
  Speaker 4: them depends on a completely different slice of the economy.
• 39:25
  Speaker 4: Tesla has relatively little in common with Apple. Both of
• 39:30
  Speaker 4: them are you know, Tesla's a metal basher. Apple is
• 39:34
  Speaker 4: a metal basher with lots of software.
• 39:37
  Speaker 3: And then you move into the into the.
• 39:43
  Speaker 4: Software enterprises, the Googles and Amazons and facebooks. It's a
• 39:51
  Speaker 4: very complicated set of issues and to which I don't
• 39:55
  Speaker 4: have the answer, but I have pretty much faith that
• 39:58
  Speaker 4: in aggregate when you add them to the market and
• 40:02
  Speaker 4: you look at the price. You can't get blood out
• 40:05
  Speaker 4: of a stone if you've sent, if you've sent the
• 40:10
  Speaker 4: Shiller pe up towards thirty, you are unlikely to get
• 40:17
  Speaker 4: more than a three percent real return out of that
• 40:22
  Speaker 4: is the reciprocal of thirty. And the market really expect
• 40:26
  Speaker 4: twice there, doesn't it? So sooner or later? The simple
• 40:31
  Speaker 4: arithmetics suggests you'll either have a dismal return forever, or
• 40:35
  Speaker 4: you'll have a nice bear market and then a normal return.
• 40:39
  Speaker 4: And the nice bear market will be hopefully less than
• 40:44
  Speaker 4: a fifty percent declimb, but it won't be a huge
• 40:46
  Speaker 4: amount less from the peak than fifty percent in real
• 40:50
  Speaker 4: turn in real terms.
• 40:51
  Speaker 2: Okay, Well, I think we've established where the bubbles still are,
• 40:55
  Speaker 2: but hopefully we can discuss some opportunities. I mean, obviously
• 40:59
  Speaker 2: every does everyone does. Don't want to be entirely in cash,
• 41:01
  Speaker 2: and they wouldn't be particularly healthy either. Where should people
• 41:04
  Speaker 2: be putting their money at the moment? I suspect you're
• 41:07
  Speaker 2: going to say value.
• 41:09
  Speaker 4: Well, if you've spent forty years running down interest rates
• 41:14
  Speaker 4: until recently, you've basically spent forty years pushing up assets
• 41:21
  Speaker 4: led by real estate, as we've said, but everything eventually
• 41:24
  Speaker 4: follows for the same for the same logic. If I'm
• 41:27
  Speaker 4: paid a negative return in the piggy bank, I'd better
• 41:30
  Speaker 4: reach for yield and so on, and that game has
• 41:34
  Speaker 4: gone on. So global real estate is universally overpriced. Farms
• 41:40
  Speaker 4: and forests, you know.
• 41:42
  Speaker 3: Fine art universally overpriced. The aberration is the stock markets
• 41:47
  Speaker 3: outside the US. Why were they so ordinary? Is slightly
• 41:54
  Speaker 3: bewildering to me.
• 41:58
  Speaker 4: I suppose two thousand the tag bubble was a bit similar,
• 42:02
  Speaker 4: but it seems a little implausible that your typical assets
• 42:06
  Speaker 4: like real estate would become overpriced everywhere from Canada to Australia.
• 42:11
  Speaker 4: And yet in the stock market most of the most
• 42:14
  Speaker 4: of the markets were kind of overpriced, but ordinary, ordinarily
• 42:21
  Speaker 4: ordinarily overpriced, and a few were underprised then and they
• 42:25
  Speaker 4: were investible, and not just emerging markets. But the developed
• 42:31
  Speaker 4: world outside the US was investible and is investible, so.
• 42:35
  Speaker 2: Japan, most of Europe, the UK there is. I mean,
• 42:39
  Speaker 2: we always look at the UK and Japan, John, and
• 42:42
  Speaker 2: I think they are the cheapest markets.
• 42:44
  Speaker 4: Yeah, they look two amongst the cheaper ones for sure.
• 42:49
  Speaker 4: And emerging is of course very complicated with China, but
• 42:53
  Speaker 4: in general the rest of the world seems investible. Do
• 42:57
  Speaker 4: your analysis, you know, make your mistake, but it's reasonable.
• 43:04
  Speaker 4: So don't invest in real estate, don't invest in the US.
• 43:07
  Speaker 4: And if you have to invest in the US, and
• 43:09
  Speaker 4: most institutions do, I would urge you to take a
• 43:14
  Speaker 4: good look at quality. Quality has been the mispriced asset
• 43:19
  Speaker 4: for one hundred years. The triple A bond everyone understands,
• 43:24
  Speaker 4: will pay you one percent less. The triple A stock
• 43:28
  Speaker 4: has paid you half a percent more. Now, what the
• 43:31
  Speaker 4: heck is that? Actually, I can explain it. They are
• 43:34
  Speaker 4: performing band markets. They underperform in ball markets. Why do
• 43:37
  Speaker 4: they underperform in bullmarkes because they're boring. In a ballmarket,
• 43:41
  Speaker 4: you want to earn Tesla, You want to own Meme stocks,
• 43:44
  Speaker 4: you want to earn what's flying. You don't want to
• 43:48
  Speaker 4: own Coca Cola. It's just too boring. In the long run,
• 43:52
  Speaker 4: Coca Cola does very well in the bear markets. They
• 43:54
  Speaker 4: do particularly on air. But that's a free lunch. It's
• 43:58
  Speaker 4: the only free lunch of totally missed by the pressure
• 44:01
  Speaker 4: and farmers of the world. Back in the day, they
• 44:05
  Speaker 4: were quite correctly saying price the book wins because it's
• 44:08
  Speaker 4: a risk factor.
• 44:08
  Speaker 3: Of course, it's a risk factor.
• 44:10
  Speaker 4: Price the book is the marker's description of who's got
• 44:14
  Speaker 4: the junkiest, ugliest assets. Pe is the market's judgment on
• 44:20
  Speaker 4: who's got the flakeyst dourneys, et c. But when it
• 44:24
  Speaker 4: comes to quality, they have less risk of every kind.
• 44:27
  Speaker 4: They have less debt, they go bankrupt less, they have
• 44:30
  Speaker 4: less volatility, they have a lower beta.
• 44:33
  Speaker 3: Yet they outperform. That is a free lunch.
• 44:35
  Speaker 2: And they're not hideously overpriced at the moment.
• 44:39
  Speaker 3: Absolutely not.
• 44:40
  Speaker 4: No, they've moderately outperformed for the last year, the last
• 44:44
  Speaker 4: ten years, the last fifty years, and the last one
• 44:46
  Speaker 4: hundred years. And I'm happy to say that my firm, GMO,
• 44:52
  Speaker 4: has made a big fuss about them from the very beginning.
• 44:55
  Speaker 4: They play a big role in our value models, and
• 44:58
  Speaker 4: we have a fund a very good job of thinking
• 45:01
  Speaker 4: about how to treat them, which wants to buy and
• 45:04
  Speaker 4: what really constitutes quality.
• 45:07
  Speaker 3: Quality.
• 45:07
  Speaker 4: By the way, in a nutshell is your element of monopoly.
• 45:11
  Speaker 4: High returns, low debt. Low debt of course goes along
• 45:16
  Speaker 4: with the high stable returns. High stable returns is another
• 45:19
  Speaker 4: way of saying you're a price setter, and a price
• 45:22
  Speaker 4: setter is another way of saying you have a monopoly element.
• 45:27
  Speaker 4: And the amazing thing about the Magnificent Seven is they're
• 45:31
  Speaker 4: all global monopolies and they sprang out of the ground
• 45:34
  Speaker 4: pretty down quickly. And of course the Justice Department, the
• 45:41
  Speaker 4: anti monopoly element in the US and the UK, has
• 45:45
  Speaker 4: been largely sound asleep for the last twenty years. So
• 45:49
  Speaker 4: they've had a wonderful environment in which to operate, and
• 45:52
  Speaker 4: they had done a wonderful job of capitalizing on that
• 45:56
  Speaker 4: and moving very fast.
• 45:58
  Speaker 2: Okay, I wanted to ask you about the investing in
• 46:02
  Speaker 2: the energy transition. We've been looking at the renewable stocks,
• 46:04
  Speaker 2: and obviously you have as well, and they've been having
• 46:06
  Speaker 2: a fairly torrid time recently, the wind and solar companies,
• 46:09
  Speaker 2: and you might have expected something rather different given the
• 46:13
  Speaker 2: rush to zero across the world. I wondered if you
• 46:16
  Speaker 2: had any thoughts on how to invest or not to
• 46:18
  Speaker 2: invest in the transition.
• 46:21
  Speaker 4: The thing about transitions is they're very tricky, characterized by
• 46:27
  Speaker 4: even more booms and busts than anywhere else, and so
• 46:32
  Speaker 4: oil and alternative energy will will be a trickier area
• 46:37
  Speaker 4: than most climate resources. The same the thing about climate investing, however,
• 46:44
  Speaker 4: is that they will have an enormous top line revenue advantage.
• 46:48
  Speaker 4: Other things being even the countries of the world finally
• 46:53
  Speaker 4: have woken up.
• 46:55
  Speaker 3: And maybe a few of are in the process of still.
• 46:58
  Speaker 4: Waking up, to get the idea that climate is a
• 47:03
  Speaker 4: big problem and needs to be addressed, and they are
• 47:05
  Speaker 4: beginning to address it and throw money at it subsidies
• 47:08
  Speaker 4: mainly instead of a carbon tax.
• 47:10
  Speaker 3: But you can't expect perfection, and so going back to.
• 47:15
  Speaker 2: Now, I have to interrupt you there. Your preferred way
• 47:18
  Speaker 2: of dealing with this would be a blanket carbon tax
• 47:21
  Speaker 2: on everything, and that would let the market sort this
• 47:24
  Speaker 2: out for itself, whereas the subseas are a much more
• 47:26
  Speaker 2: inefficient way of doing it.
• 47:28
  Speaker 4: Absolutely, I'm not a great believer in economists as general.
• 47:32
  Speaker 4: I think they've lost the plot for the last seventy years.
• 47:34
  Speaker 4: They've forgotten their job description, which is to be useful.
• 47:38
  Speaker 4: That they drown in assumptions and closed systems, which are
• 47:43
  Speaker 4: largely speaking irrelevant for everything except their reputation inside their industry.
• 47:48
  Speaker 3: But they have gotten one thing right.
• 47:51
  Speaker 4: They all agree that a carbon tax is the vastly
• 47:56
  Speaker 4: more efficient way to address climate change produce a source
• 48:00
  Speaker 4: of very useful government revenue, but it's supposed by a
• 48:04
  Speaker 4: very powerful industry which has, particularly in America, enormous political influence,
• 48:10
  Speaker 4: and therefore it's very hard to do it. And each
• 48:14
  Speaker 4: of the oily countries have a lot of political influence,
• 48:20
  Speaker 4: so Australia, Canada, the UK, and of course in spades
• 48:28
  Speaker 4: in the US.
• 48:28
  Speaker 3: But I just wanted to finish that.
• 48:30
  Speaker 4: You asked a question what to invest in, and I said,
• 48:33
  Speaker 4: if you have to invest in the US, look at quality.
• 48:36
  Speaker 4: But also climate change is going to outgrow the rest
• 48:41
  Speaker 4: of the economy by a lot. It's going to dominate
• 48:45
  Speaker 4: investing and the need for money for the next many decades.
• 48:49
  Speaker 4: It doesn't mean though it won't have an element of commodities.
• 48:54
  Speaker 4: Commodities break your heart because just as they're doing well,
• 48:58
  Speaker 4: they have a wipeout for eighteen months and then they
• 49:01
  Speaker 4: go roaring back to a new high. It's intrinsically a difficult,
• 49:04
  Speaker 4: dangerous area, but it will have enormous growth potential. And
• 49:10
  Speaker 4: so if you can find a competent source of investors,
• 49:15
  Speaker 4: I would of course recommend climate change over the rest
• 49:18
  Speaker 4: of the US market.
• 49:20
  Speaker 2: Okay, And is there anything to be said for investing
• 49:23
  Speaker 2: in the oil companies on the basis that we're going
• 49:25
  Speaker 2: to need oil for many, many years to come, but
• 49:28
  Speaker 2: supply is constrained, and so you might get a fairly
• 49:32
  Speaker 2: long term supply of cash pouring off the oil companies,
• 49:35
  Speaker 2: possibly in the same way that you have of the
• 49:37
  Speaker 2: tobacco companies in the last couple of decades. That might
• 49:40
  Speaker 2: make a reasonable medium term investments people looking for income.
• 49:44
  Speaker 4: Yeah, no, it's quite possible. The trouble with commodities tobacco
• 49:50
  Speaker 4: was never a commodity for oil is is that everything
• 49:55
  Speaker 4: hinges on the marginal barrel. A couple of barrels too
• 49:58
  Speaker 4: many and the price goes down to thirty. Couple of
• 50:00
  Speaker 4: barrels too few and it goes to one hundred, and.
• 50:03
  Speaker 3: That will always be the case.
• 50:04
  Speaker 4: Now, the takeoff of evs, which represents a lot of oil,
• 50:10
  Speaker 4: is moving much faster than people are twiggering onto. The
• 50:14
  Speaker 4: US is lagging badly, but it's just left. From three
• 50:17
  Speaker 4: to eight this week will be eight percent of all
• 50:20
  Speaker 4: cart sold will be evs. But in the world at
• 50:23
  Speaker 4: general it's sixteen, in Europe over twenty, and in China
• 50:28
  Speaker 4: thirty five. It's the biggest market in the world. It's
• 50:31
  Speaker 4: thirty five and growing rapidly, which means within five years
• 50:37
  Speaker 4: oil demand will take a very big hit. And since
• 50:40
  Speaker 4: oil is determined on the margin, that would suggest that's
• 50:45
  Speaker 4: too many oil companies, too much oil capability in a
• 50:49
  Speaker 4: suddenly reduced demand world, which.
• 50:53
  Speaker 3: Typically would be absolute rack and ruin.
• 50:57
  Speaker 4: In the meantime, however, you have the following power paradox
• 51:00
  Speaker 4: that the faster you ramp up EV's wind solar, battery storage,
• 51:08
  Speaker 4: the faster you ramp up your demand for energy. Because
• 51:12
  Speaker 4: wind solar and storage are all resources upfront, energy up front,
• 51:19
  Speaker 4: labor upfront, capital upfront. Once you've put them in the ground,
• 51:23
  Speaker 4: it's practically free for the life span of the asset twenty.
• 51:27
  Speaker 3: Thirty forty years.
• 51:29
  Speaker 4: And EV's of course have the element built into their batteries,
• 51:33
  Speaker 4: which is a very big chunk of the total.
• 51:36
  Speaker 3: So they are much more money up front.
• 51:38
  Speaker 4: They're incidentally more affected by the rise of interest rates,
• 51:42
  Speaker 4: which is the.
• 51:44
  Speaker 3: Short term problem.
• 51:45
  Speaker 4: But what it means is we have an enormous demand
• 51:49
  Speaker 4: for resources, really outside our ability to meet it consistently.
• 51:54
  Speaker 4: In the next few years. We have to invent our
• 51:56
  Speaker 4: way around. We have to substitute for these resources. We
• 52:00
  Speaker 4: have to find cheaper ways of extracting them, and so
• 52:03
  Speaker 4: on and so forth. And even so, the prices will
• 52:07
  Speaker 4: be in their usual volatile way going higher, lithium, propper, cobalt,
• 52:12
  Speaker 4: nickel being critical four. But energy is more important even
• 52:16
  Speaker 4: than that, and there will be a terrible push on
• 52:21
  Speaker 4: the demand for energy. And a lot of that is oil,
• 52:25
  Speaker 4: a lot of it is gas, a lot of it
• 52:26
  Speaker 4: is cold, but it will be fairly remsseless pressure. And
• 52:31
  Speaker 4: the question is where do you go ramping up from
• 52:36
  Speaker 4: sixteen percent evs to the global fleet being sixties, say,
• 52:42
  Speaker 4: somewhere in that range. The tipping point comes where the
• 52:47
  Speaker 4: squeeze on oil upwards becomes a consistent squeeze.
• 52:52
  Speaker 3: On oil downwards.
• 52:54
  Speaker 4: And I don't know, it's a sensitive business. I don't
• 52:57
  Speaker 4: know exactly where that inflection point will come. But you
• 53:01
  Speaker 4: should not be surprised if the price of oil doesn't
• 53:03
  Speaker 4: go over one hundred maybe once or twice in the
• 53:06
  Speaker 4: next five years. And you should not be surprised, No,
• 53:10
  Speaker 4: you should be amazed if the price of oil does
• 53:13
  Speaker 4: not then have a long term crutch, and it will
• 53:16
  Speaker 4: run down to a level where the Saudi's or somebody
• 53:20
  Speaker 4: will be able to grind out forty five dollars oil
• 53:24
  Speaker 4: into the setting.
• 53:24
  Speaker 3: Sup. That's how I think the game will end.
• 53:28
  Speaker 2: It's interesting as mat you talk about this, that she
• 53:31
  Speaker 2: demand for resources up front, I think is something that
• 53:33
  Speaker 2: people are only just beginning to grasp that in order
• 53:36
  Speaker 2: to get to the clean side, we have to do
• 53:38
  Speaker 2: a lot of really really grubby stuff first.
• 53:41
  Speaker 4: Really really grubby stuff. And even in the long run,
• 53:45
  Speaker 4: you need a lot of metals which are grubby in
• 53:49
  Speaker 4: order to get to a green world. Sorry guys, sorry,
• 53:52
  Speaker 4: you purists.
• 53:54
  Speaker 3: There is no way around that one.
• 53:55
  Speaker 2: Yeah, there's no clean root to clean.
• 53:58
  Speaker 3: No interesting.
• 54:00
  Speaker 2: I let you go in to check out. I've catch
• 54:01
  Speaker 2: you longer than I promised, but I wanted to ask
• 54:03
  Speaker 2: you one last thing, which is when we last spoke,
• 54:05
  Speaker 2: you said the Foundation was putting an awful lot of
• 54:07
  Speaker 2: money into venture capital, and that was the place where
• 54:10
  Speaker 2: you still thought that American exceptionalism was absolutely on. Do
• 54:15
  Speaker 2: you still feel like that about the bench capital and industry?
• 54:17
  Speaker 2: And we talked about it a little earlier in our conversation,
• 54:19
  Speaker 2: but I wanted to come back to you and how
• 54:21
  Speaker 2: you've been investing.
• 54:23
  Speaker 4: Yeah, no, obviously, venture capital participated in the bubble, had
• 54:29
  Speaker 4: a huge run up in prices twenty twenty twenty twenty one,
• 54:34
  Speaker 4: and we'll have a fairly high price to pay over.
• 54:38
  Speaker 3: The next year or so.
• 54:40
  Speaker 4: But in the long run, it is amazing the quality
• 54:43
  Speaker 4: of the people the American BC industry attracts. It's getting
• 54:48
  Speaker 4: the best and the brightest who used to go into
• 54:50
  Speaker 4: consulting or Goldman SAG and now they go into VC
• 54:54
  Speaker 4: and startups, and they come from all over the world.
• 54:57
  Speaker 4: At least a quarter of the bosses of all the
• 55:00
  Speaker 4: VC companies we talk to were not born in America.
• 55:05
  Speaker 4: And what an achievement for the US. We have the
• 55:09
  Speaker 4: great research universities fifteen of the twenty and most of
• 55:13
  Speaker 4: the rest are in the UK, but the fifteen great
• 55:17
  Speaker 4: research universities are the bedrock for so many of these vcs.
• 55:21
  Speaker 4: And you add that to a societal attitude taking risk
• 55:25
  Speaker 4: in the US is simply much better than Europe. We
• 55:29
  Speaker 4: will forgive people a failure. If they go into a
• 55:32
  Speaker 4: startup and they fail, and they come back four years
• 55:35
  Speaker 4: later with another bright idea, they'll get funded and it
• 55:39
  Speaker 4: will hang over their heads. In most parts of the world,
• 55:42
  Speaker 4: if you fail but not in the US now we
• 55:44
  Speaker 4: have a wonderful aggressive attitude to risk taking, and we
• 55:47
  Speaker 4: need to because the whole future of transferring to green
• 55:52
  Speaker 4: is a thousand problems.
• 55:55
  Speaker 3: Need to solve it.
• 55:56
  Speaker 4: We need entrepreneurs, we need research, we need break throughs,
• 56:01
  Speaker 4: and we need to keep moving fast. And in the end,
• 56:05
  Speaker 4: the theory should be that VC, because it's riskier, has
• 56:10
  Speaker 4: more failures. Because it has more failures and more risk,
• 56:13
  Speaker 4: it should have a higher return and the practices that
• 56:16
  Speaker 4: it has.
• 56:18
  Speaker 3: If you look at the database for.
• 56:19
  Speaker 4: The last twenty years, VC has the highest return, as
• 56:24
  Speaker 4: it should of any sector in the marketplace. So to
• 56:28
  Speaker 4: be into GREENBC is to go into the highest return
• 56:32
  Speaker 4: sector with the biggest support from global governments and the US.
• 56:38
  Speaker 2: That's a yes, then, I think, Jered. I ask every
• 56:42
  Speaker 2: one of our guests.
• 56:44
  Speaker 3: I ask every one of my guests recommended a warm recommendation.
• 56:47
  Speaker 2: I ask every one of my guests before I let
• 56:49
  Speaker 2: them go, the same question. I'm embarrassed to ask you this,
• 56:52
  Speaker 2: but as I ask everybody, I have to ask you
• 56:54
  Speaker 2: as well. I hope you don't mind. If if I
• 56:58
  Speaker 2: was only going to give you one thing to keep
• 57:01
  Speaker 2: for ten years, and I gave you a choice of
• 57:04
  Speaker 2: only three things, gold, bitcoin, or cash on deposit, what
• 57:12
  Speaker 2: would it be?
• 57:14
  Speaker 3: I take gold.
• 57:15
  Speaker 4: I'm not happy with gold, but in a world where
• 57:18
  Speaker 4: inflation could come back, I think I'll take gold. Bitcoins
• 57:23
  Speaker 4: of course an elaborate scam. Really, but gold is the
• 57:29
  Speaker 4: least bad of the three.
• 57:30
  Speaker 2: Brilliant least bad is good enough for me. Jeremy, thank
• 57:33
  Speaker 2: you so much.
• 57:35
  Speaker 3: No, you're very welcome.
• 57:40
  Speaker 2: Thanks for listening to this week's Marin Talks Money. We'll
• 57:42
  Speaker 2: be back next week. Catch our debrief on this week's
• 57:45
  Speaker 2: conversation on the Merin Talks Money after show under the
• 57:48
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• 57:51
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• 57:53
  Speaker 2: This episode was hosted by me Maren Sunset Web. It
• 57:56
  Speaker 2: was produced by some Siety. Additional editing by Blake Maple's.
• 58:00
  Speaker 2: Thanks of course to Jeremy grants them and to John Steppeck. Finally,
• 58:03
  Speaker 2: be sure to sign up to John's daily newsletter, Money Distilled.
• 58:07
  Speaker 2: I know I always say that you won't regret it,
• 58:08
  Speaker 2: but trust me, you really really won't. The link is
• 58:11
  Speaker 2: in this show notes