Latest / Merryn Talks Money / Central Banks at Risk of Breaking Economies, Dario Perkins Warns

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Central Banks at Risk of Breaking Economies, Dario Perkins Warns · Merryn Talks Money

• 0:00
  Speaker 1: John. You know, we've been doing this such a long
• 0:02
  Speaker 1: time that we see stuff come round and round and
• 0:05
  Speaker 1: round again. And we've just seen one of those things
• 0:09
  Speaker 1: that we've seen before. And last time we thought that's
• 0:12
  Speaker 1: a really bad idea. It turned out to be a
• 0:15
  Speaker 1: really bad idea. We thought we'd never see it again,
• 0:19
  Speaker 1: and here it is, the one hundred percent mortgage.
• 0:22
  Speaker 2: Yeah, finance is the worst merry go round reid in
• 0:25
  Speaker 2: the world, I think. But yeah, I mean the one
• 0:29
  Speaker 2: that is a slight difference between this one hundred percent
• 0:31
  Speaker 2: mortgage and the ones that were getting launched the last
• 0:35
  Speaker 2: time the housing market crashed.
• 0:37
  Speaker 1: Small mercies is a.
• 0:39
  Speaker 2: Small mercy because I think the problem is that you
• 0:42
  Speaker 2: you see this happening, and it's a great bit of
• 0:45
  Speaker 2: publicity for the people who come out with it first.
• 0:49
  Speaker 2: And also this particular mortgage has got quite a lot
• 0:52
  Speaker 2: of restrictions on it, and that you can only have
• 0:54
  Speaker 2: it if you've been renting for a certain amount of time,
• 0:58
  Speaker 2: and you can only have it up to the monthly
• 0:59
  Speaker 2: pain on your rent. So the thesis is, obviously, if
• 1:03
  Speaker 2: you can afford to keep paying your rent, then you
• 1:05
  Speaker 2: may as well pay rent to the bank instead. But
• 1:08
  Speaker 2: it's just it's just a saying that whenever there is
• 1:13
  Speaker 2: basically basically just credit kind of finds a way, and
• 1:17
  Speaker 2: you know the bank that.
• 1:18
  Speaker 1: It finds a way. It's like a song title, Yeah,
• 1:21
  Speaker 1: we're in the wrong business.
• 1:23
  Speaker 2: Should that's chat gpt to put together a song based
• 1:27
  Speaker 2: on that. See what it comes up with.
• 1:29
  Speaker 1: But listen, I this one hundred percent mortgage that sounds
• 1:33
  Speaker 1: perfectly reasonable. If you can afford to pay rent, then
• 1:36
  Speaker 1: you can afford to pay the mortgage. And it is
• 1:38
  Speaker 1: the building up of deposits that's so impossibly hard for
• 1:41
  Speaker 1: people you haven't got well of parents who can give
• 1:44
  Speaker 1: you a deposit. Why shouldn't you have this mortgage? Why
• 1:46
  Speaker 1: shouldn't you what's the problem here?
• 1:48
  Speaker 2: The problem is that the fact that you need products
• 1:52
  Speaker 2: like this to be launched points to a deeper problem
• 1:55
  Speaker 2: with the housing market, which is that it is over valued.
• 1:58
  Speaker 2: And generally speaking, eventually over valued things come down. So
• 2:03
  Speaker 2: if you get one hundred percent mortgage, you buy a
• 2:04
  Speaker 2: house and then it loses money, then you're immediately in
• 2:07
  Speaker 2: negative equity. And also these things are the maximum and
• 2:14
  Speaker 2: in fact that sort of the implied standards matured. So
• 2:20
  Speaker 2: duration should take this out over, so it's like a
• 2:22
  Speaker 2: thirty five year mortgage rather than twenty five year one.
• 2:25
  Speaker 2: And this has been sort of quietly creeping up over
• 2:28
  Speaker 2: the last kind of two or three years, particularly the
• 2:33
  Speaker 2: length of time that people are having to take home
• 2:36
  Speaker 2: loans over, and I just don't think that's healthy. You know,
• 2:39
  Speaker 2: we keep on carping on about how we get a
• 2:43
  Speaker 2: pending pension crisis because young people don't say enough ink
• 2:47
  Speaker 2: of their pensions, But now we're sort of encouraging them
• 2:50
  Speaker 2: to take thirty five year mortgages as well. And I mean,
• 2:53
  Speaker 2: I know there's there's the theory that whenever as you
• 2:56
  Speaker 2: get older, you'll earn more and therefore you'll cut the
• 3:00
  Speaker 2: say is down, but that is almost certainly not going
• 3:03
  Speaker 2: to harmen given that people who are trading up but
• 3:05
  Speaker 2: also needn't extend the mortgage term as well to be
• 3:09
  Speaker 2: able to afford to the payments.
• 3:10
  Speaker 1: So sure, John, but you know, at the moment we
• 3:12
  Speaker 1: have the gift of inflation, and so gradually these debts
• 3:16
  Speaker 1: will be eroded away, and if we have inflation running
• 3:19
  Speaker 1: at five percent for a decade, that mortgage will look
• 3:21
  Speaker 1: like small change by the time that people who bought
• 3:24
  Speaker 1: this stuff hit in their mid thirties.
• 3:27
  Speaker 2: That's a very good argument. I hope you'll be encouraging
• 3:32
  Speaker 2: your youngins to take it mortgage when they come of age.
• 3:36
  Speaker 1: Hmm, that'll be a while. I'll tell you that the
• 3:39
  Speaker 1: thing that worries me. I mean, I do see the
• 3:41
  Speaker 1: positives of this, I really do.
• 3:42
  Speaker 3: But the thing that.
• 3:43
  Speaker 1: Worries me is this idea of people being in negative equity.
• 3:46
  Speaker 1: I mean, what we remember from the early nineteen nineties
• 3:49
  Speaker 1: is that negative equity and from twenty seven eight nine
• 3:52
  Speaker 1: is that negative equity is the most awful feeling for people.
• 3:55
  Speaker 1: And it was resolved very quickly, as we know in
• 3:57
  Speaker 1: the two thousands, but in the early nineties it was
• 3:59
  Speaker 1: really hard and it's it's very debilitating. It imprisons you,
• 4:04
  Speaker 1: it can it can lead to really nasty, unpleasant life
• 4:07
  Speaker 1: outcomes of being in a position of negative with your house,
• 4:11
  Speaker 1: and that is something I would really really hate to
• 4:14
  Speaker 1: happen to another generation of house buyers. So that's my
• 4:17
  Speaker 1: big worry about it. I can totally see it in
• 4:19
  Speaker 1: cash flow terms, but in terms of the potential for
• 4:22
  Speaker 1: negative equity, I mean, anyone thinking of taking some of
• 4:24
  Speaker 1: the one of these up might go and talk to
• 4:26
  Speaker 1: some of the people stuck in help to buy homes
• 4:29
  Speaker 1: because that's nasty too.
• 4:30
  Speaker 2: Yeah, that is a good point. They help to buy.
• 4:35
  Speaker 3: Earth.
• 4:36
  Speaker 2: It's gonna be interesting to see how that all pines
• 4:38
  Speaker 2: out over the next few years.
• 4:40
  Speaker 1: No, I mean, I suppose one thing we can say, John,
• 4:42
  Speaker 1: one thing we can say is that so far property
• 4:45
  Speaker 1: prices are defying your gloomy outlook.
• 4:50
  Speaker 2: Yeah, exactly, I think the mill I think that this
• 4:55
  Speaker 2: is where I guess one hundred percent mortgage thing comes
• 4:57
  Speaker 2: back in. Is that point about that? There are Whenever
• 5:02
  Speaker 2: I've been writing about this, I've been saying there's a
• 5:04
  Speaker 2: few ways that this could be wrong, and one is
• 5:07
  Speaker 2: that basically people either take out loans over a longer
• 5:11
  Speaker 2: period of time and that means that low it's the
• 5:14
  Speaker 2: interest rates are higher, you can still you get the
• 5:18
  Speaker 2: same the same monthly payment will buy you a larger
• 5:20
  Speaker 2: amount of capital, or the kind of lending conditions can loosen.
• 5:28
  Speaker 2: And although this isn't much of a loosening at the moment,
• 5:31
  Speaker 2: I think it's reasonable to expect that if it takes off,
• 5:35
  Speaker 2: then given that there's competition between the banks and at
• 5:39
  Speaker 2: the end of the day, they do want to write business,
• 5:43
  Speaker 2: and they would rather write business against property, get you know,
• 5:46
  Speaker 2: business that's asset backed, rather than non asset back business
• 5:50
  Speaker 2: to you know, small firms or something like that. So
• 5:55
  Speaker 2: I can certainly see a race to the bottom kicking
• 5:58
  Speaker 2: off again. And then you know, all that means is
• 6:02
  Speaker 2: that again you get the overall consumer will get overstretched.
• 6:08
  Speaker 2: House prices won't, affordability won't correct, and then you'll just
• 6:12
  Speaker 2: get a bigger correction further down the line, maybe in
• 6:15
  Speaker 2: line with the eighteen year property cycle that we've discussed
• 6:18
  Speaker 2: occasionally before here.
• 6:20
  Speaker 1: Yeah, that sounds about. It sounds increasingly likely as the
• 6:24
  Speaker 1: week scout passed, doesn't it. One of the puzzant thing
• 6:27
  Speaker 1: that could happen is that wages in the UK catch
• 6:29
  Speaker 1: up with inflation. So we have inflation eroding depth wages
• 6:32
  Speaker 1: catching up with inflation, and we're all good, this is possible, right.
• 6:35
  Speaker 2: I mean, I think that is possible, and that would
• 6:37
  Speaker 2: be good. But for that you need prices. You still
• 6:41
  Speaker 2: need prices to go up at a slower rate than
• 6:45
  Speaker 2: wage inflation, and to be fair, at the moment that
• 6:47
  Speaker 2: is happening, I think the risk is that if you
• 6:52
  Speaker 2: simultaneously get kind of credit being loosened, then you know,
• 7:00
  Speaker 2: you may end up losing the benefit because people will
• 7:03
  Speaker 2: still be chasing whose places a lot higher. And I
• 7:05
  Speaker 2: suppose this is partly where I start to have sympathy
• 7:07
  Speaker 2: with the people that say, so, we just do need
• 7:10
  Speaker 2: to build more and build better. I don't think that
• 7:13
  Speaker 2: that's the main driving force behind prices, but I do
• 7:17
  Speaker 2: think that, you know, I'll move towards can building more
• 7:24
  Speaker 2: and making planning restrictions less.
• 7:27
  Speaker 1: Look at that, everybody. A bit of backtracking there from
• 7:29
  Speaker 1: John maybe heaving those compromise with the people, always says
• 7:32
  Speaker 1: he doesn't agree with We're getting there, but listen, before
• 7:34
  Speaker 1: we get started on building more and building better. As
• 7:38
  Speaker 1: a vague possibility we might build more, but Earth Kelly,
• 7:40
  Speaker 1: what I see absolutely no possibility that our house builders
• 7:43
  Speaker 1: will build better, and that is ever going to happen.
• 7:46
  Speaker 2: I need more competition, They.
• 7:48
  Speaker 1: Need more competition. Everybody needs more competition. Welcome to Maren
• 7:57
  Speaker 1: Brook's Money, the podcast in which people who know them
• 8:00
  Speaker 1: explain the markets. I'm mare zumzet Web this week of
• 8:03
  Speaker 1: conversation with Daria Perkins, managing director on the Global macro
• 8:06
  Speaker 1: team at TS Lombard. Daria thank you so much for
• 8:11
  Speaker 1: joining us today. I hugely appreciate it.
• 8:14
  Speaker 3: Oh worry, it's always good to see you.
• 8:15
  Speaker 1: Are now an expert on recessions, and we are going
• 8:19
  Speaker 1: to talk today about something you've recently written on the
• 8:23
  Speaker 1: extent to which the next recession is going to hurt
• 8:27
  Speaker 1: and what it might mean for markets. So I wondered
• 8:29
  Speaker 1: if we could start just by talking about what a
• 8:33
  Speaker 1: recession actually is, because it's a super scary word, but
• 8:37
  Speaker 1: it actually covers some vast range of things from A
• 8:42
  Speaker 1: recession can be almost nothing and it can be absolutely hideous.
• 8:45
  Speaker 1: So when you say a recession, what is it? You mean?
• 8:48
  Speaker 3: Well, I mean that's the sort of debate right now,
• 8:50
  Speaker 3: isn't it. I mean we've been having this debate for
• 8:53
  Speaker 3: almost twelve months now, I mean twelve months ago we
• 8:56
  Speaker 3: had two quarters of negative GDP growth in the US
• 8:59
  Speaker 3: and was saying, oh my god, it's a technical recession
• 9:02
  Speaker 3: and arguing about that word technical, and I think you know,
• 9:05
  Speaker 3: what we're really talking about is a sort of broad
• 9:08
  Speaker 3: based and persistent decline in activity, and by persistent I
• 9:12
  Speaker 3: mean more than a few months, and a technical recession
• 9:15
  Speaker 3: that two quarters of negative GDP GRAF doesn't really capture
• 9:19
  Speaker 3: what a recession is about, because I think ultimately recession
• 9:23
  Speaker 3: is a process rather than an event, and so what's
• 9:28
  Speaker 3: really the key to it, I think is the labor market,
• 9:30
  Speaker 3: because the sort of classic recessionary process is that companies
• 9:35
  Speaker 3: start to fire workers and so then confidence goes down,
• 9:39
  Speaker 3: spending goes down, that leads back into lower corporate revenues,
• 9:43
  Speaker 3: and then you get more rounds of job cuts, and
• 9:46
  Speaker 3: that I think is the sort of classic reflexivity of
• 9:50
  Speaker 3: a recession, and that's why when this process starts to happen,
• 9:53
  Speaker 3: it becomes very nonlinear. And so if you look at
• 9:55
  Speaker 3: the history of recessions, you get this huge variation in
• 10:00
  Speaker 3: severity of recessions, both over time and across countries, because
• 10:04
  Speaker 3: you know how quickly that sort of dynamic of job
• 10:07
  Speaker 3: losses kicks in really varies in different countries. So if
• 10:10
  Speaker 3: you're you know, German or Japanese company, it's so expensive
• 10:14
  Speaker 3: to fire people and then higher them back that you
• 10:17
  Speaker 3: sort of delay that decision as long as you can,
• 10:19
  Speaker 3: whereas in the US you tend to get much quicker
• 10:22
  Speaker 3: decisions to fire people, so you get much more of
• 10:24
  Speaker 3: a sort of v shaped you know, a quick downturn,
• 10:27
  Speaker 3: and then you tend to get quicker recoveries too.
• 10:30
  Speaker 1: And in the UK it's pretty easy to find people here,
• 10:33
  Speaker 1: isn't it if their job as redundant.
• 10:36
  Speaker 3: Yeah, well it's harder than it is in the US. So,
• 10:42
  Speaker 3: as always, the UK sort of in between Europe and
• 10:46
  Speaker 3: the US. But if you think about someone like Italy,
• 10:49
  Speaker 3: you know you can end up paying people two years severance.
• 10:52
  Speaker 3: Now you don't get that in the UK, but you
• 10:54
  Speaker 3: do normally need a sort of good decision for firing,
• 10:58
  Speaker 3: a good reason for firing people. That's why you tend
• 11:00
  Speaker 3: to have these sort of complicated redundancy processes and all
• 11:04
  Speaker 3: of that stuff. So it's sort of in between.
• 11:06
  Speaker 1: Got two years. You might think it was better just
• 11:09
  Speaker 1: not to hire people in the first place.
• 11:11
  Speaker 3: Well, I mean that's exactly what happens, isn't That's why
• 11:13
  Speaker 3: you tend to get these sort of very slow recoveries,
• 11:16
  Speaker 3: because as the economy starts to improve, companies want to
• 11:20
  Speaker 3: be really sure that it's genuinely improving, and you know,
• 11:24
  Speaker 3: you just get this very different dynamic between Europe and
• 11:27
  Speaker 3: the US.
• 11:28
  Speaker 1: I like the way you describe it as a process,
• 11:30
  Speaker 1: not an event. I think, don't we describe Brexit like
• 11:32
  Speaker 1: that as well, do we?
• 11:34
  Speaker 3: Yeah. I mean it's sort of like it's that sort
• 11:36
  Speaker 3: of old joke about pornography. You know, you can't define it,
• 11:39
  Speaker 3: but you know it when you see it. And I
• 11:41
  Speaker 3: think with a recession, you know a recessionary process when
• 11:45
  Speaker 3: you're in one. And that was why that argument last
• 11:48
  Speaker 3: year about two quarters of technical GDP contraction in the
• 11:52
  Speaker 3: US was so silly because every month US companies were
• 11:56
  Speaker 3: hiring huge numbers of workers and that's not a recessionary dynamic.
• 12:00
  Speaker 3: And you know that's not what we're seeing now. You know,
• 12:03
  Speaker 3: every payroll report in the US is quite positive. Even
• 12:08
  Speaker 3: in Europe. You know, you're still seeing sort of positive
• 12:10
  Speaker 3: employment dynamics that is not a recession. So we're not
• 12:13
  Speaker 3: in a recession. That's possible that that process starts to
• 12:17
  Speaker 3: kick in, but I think it will be quite clear
• 12:19
  Speaker 3: when it is kicking in.
• 12:21
  Speaker 1: Okay, so let's talk about the next recession. Then the
• 12:24
  Speaker 1: next recession is something that has been forecast for a
• 12:26
  Speaker 1: very very long time. And also Commis would have said
• 12:29
  Speaker 1: that we should be in a recession by now in
• 12:31
  Speaker 1: the US, in the UK, globally, this idea that there
• 12:34
  Speaker 1: will be a probably quite mild global recession at some
• 12:38
  Speaker 1: point in twenty twenty three. Is almost universal. We don't
• 12:41
  Speaker 1: give very many consensus on this type of thing, but
• 12:43
  Speaker 1: everybody thinks there'll be a recession this year. And of
• 12:46
  Speaker 1: course that doesn't really mean anything because economists are famously
• 12:49
  Speaker 1: bad at forecasting recession, right, But nonetheless, everyone expected something
• 12:54
  Speaker 1: and it hasn't yet happened. Is it going to happen
• 12:56
  Speaker 1: this year? And when it does, if it does, is
• 12:59
  Speaker 1: it to be the mild recession everybody thinks? Or are
• 13:02
  Speaker 1: they getting it completely wrong?
• 13:04
  Speaker 3: Well, you're right that economists are hopeless of forecasting recessions.
• 13:07
  Speaker 3: I mean, there's an IMF paper on this from a
• 13:09
  Speaker 3: few years ago saying that economists had failed to predict
• 13:13
  Speaker 3: one hundred and forty eight of the last one hundred
• 13:15
  Speaker 3: and fifty three recessions. So that sort of tells you
• 13:19
  Speaker 3: when you look at sort of consensus forecast for recessions,
• 13:23
  Speaker 3: you know, we missed all of the sort of the
• 13:24
  Speaker 3: big ones of the eighties and nineties, the two thousand's
• 13:28
  Speaker 3: the one. The last time economists actually forecast a recession
• 13:32
  Speaker 3: correctly was back in the early eighties, and that was
• 13:35
  Speaker 3: because Volka raised interest rates to twenty percent, so even
• 13:39
  Speaker 3: economists could figure out that that level of interest rates
• 13:41
  Speaker 3: was going to kill the economy, and so that's exactly
• 13:44
  Speaker 3: what happened. So ultimately, I think the recession call for
• 13:47
  Speaker 3: this year is about are we getting to the point
• 13:50
  Speaker 3: where central banks are genuinely starting to break the economy?
• 13:54
  Speaker 3: And you know, I think what worries me more in
• 13:58
  Speaker 3: the sort of last couple of months than beforehand is
• 14:01
  Speaker 3: that central banks seem to be losing control of this process.
• 14:05
  Speaker 3: You know, they were they are these control freaks. You know,
• 14:07
  Speaker 3: they were raising interest rates quite quickly, but they were
• 14:10
  Speaker 3: doing it in a sort of measured and methodical way.
• 14:13
  Speaker 3: You know, they were trying to squeeze the economy and
• 14:15
  Speaker 3: reduce demand. But we've got to the point now, well
• 14:19
  Speaker 3: I don't think they're really in control of that process anymore.
• 14:21
  Speaker 3: And the reason for that is, you know, what's been
• 14:24
  Speaker 3: happening in the banking system. So suddenly, you know, we've
• 14:27
  Speaker 3: got this very severe tightening in bank lending standards, and
• 14:31
  Speaker 3: that is, you know, central bank's really losing control because
• 14:35
  Speaker 3: once you've got you know, banks making the decisions about lending,
• 14:39
  Speaker 3: that's happening in a way that you know, central banks
• 14:42
  Speaker 3: can't really measure. You know, they have no idea what
• 14:44
  Speaker 3: the sort of true effective and how effectively tight monetary
• 14:48
  Speaker 3: policy is anymore, and they have no way of sort
• 14:51
  Speaker 3: of calibrating it. So, you know, is this bank lending tightening,
• 14:55
  Speaker 3: Is that worth twenty five basis points on interest rates?
• 14:57
  Speaker 3: Is it worth one hundred and fifty basis points? They
• 15:00
  Speaker 3: don't know, They have no clue. So what worries me
• 15:03
  Speaker 3: is that I think there's been a lot of fake
• 15:05
  Speaker 3: recession signals over the past twelve months. You know, we've
• 15:08
  Speaker 3: had this big contraction in global manufacturing, this big deterioration
• 15:13
  Speaker 3: in leading indicators. I think that was always going to
• 15:16
  Speaker 3: happen on the other side of COVID. You know, I've
• 15:18
  Speaker 3: been saying for the last three years that we've been
• 15:20
  Speaker 3: in this sort of fake business cycle. You know, we
• 15:22
  Speaker 3: shut down the economy, we reopened the economy. There was
• 15:26
  Speaker 3: nothing organic about that, There was nothing you know that
• 15:28
  Speaker 3: that wasn't a normal business cycle. That was a policy
• 15:31
  Speaker 3: induced business cycle. We sent huge amounts of stimulus into
• 15:36
  Speaker 3: the economy, which was temporary, and we withdraw that. We
• 15:39
  Speaker 3: withdrew that stimulus, and so we were always going to
• 15:42
  Speaker 3: get a manufacturing recession. You know, we had sort of
• 15:45
  Speaker 3: eighteen months where we're all at home buying stuff off
• 15:48
  Speaker 3: the internet. How could you not have a manufacturing recession
• 15:51
  Speaker 3: on the other side of that. So I think that
• 15:53
  Speaker 3: misled people and made people think that this sort of
• 15:56
  Speaker 3: recession was inevitable. But to me, the genuine demand destruction
• 16:01
  Speaker 3: is coming from central banks, and I think we've just
• 16:02
  Speaker 3: got to the point now where that's becoming sort of intractable.
• 16:07
  Speaker 3: And so there is a worry here that I have that,
• 16:09
  Speaker 3: you know, central banks are just going too far and
• 16:12
  Speaker 3: they will drive this economy into recession. Is it inevitable?
• 16:15
  Speaker 3: I don't think so. You know, I don't think any
• 16:18
  Speaker 3: of this is inevitable. I don't think a genuine recession
• 16:21
  Speaker 3: was inevitable, but I think that we may just end
• 16:24
  Speaker 3: up with one anyway because of the way that central
• 16:26
  Speaker 3: banks have behaved. And the basic problem here is that
• 16:28
  Speaker 3: they've been sort of freaking out about this nineteen seventies dynamic.
• 16:32
  Speaker 3: You know, they were deeply concerned that the inflation was
• 16:35
  Speaker 3: turning into the nineteen seventies that was never happening. You know,
• 16:38
  Speaker 3: there was never really any genuine evidence that this was
• 16:41
  Speaker 3: the nineteen seventies repeated. But you know, central banks had
• 16:45
  Speaker 3: this sort of personal fear of repeating the mistakes of
• 16:48
  Speaker 3: the past, and so you know, if there is a recession,
• 16:51
  Speaker 3: I think it's going to look quite different to the
• 16:52
  Speaker 3: recessions that we've been in before, because what really happened
• 16:56
  Speaker 3: is central banks freaked out about inflation. They raised interest
• 16:59
  Speaker 3: rates too aggressively. They cause the sort of nonlinear problems
• 17:03
  Speaker 3: in the banking sector. They then, you know, they could
• 17:06
  Speaker 3: then get whip sword into the reverse and you know,
• 17:08
  Speaker 3: having caused the economy to deteriorate too far, they would
• 17:12
  Speaker 3: then ease policy quite quickly.
• 17:14
  Speaker 1: I think I just want to ask about the extraordinaries
• 17:17
  Speaker 1: of unusualness of the situation that we're in. You know,
• 17:20
  Speaker 1: so if you look at interest rates in absolute terms,
• 17:22
  Speaker 1: you know, four five percent around the place, that doesn't
• 17:25
  Speaker 1: seem particularly high. In historical terms, you know, you'd think
• 17:28
  Speaker 1: that four percent is kind of perfectly normal interest rate
• 17:31
  Speaker 1: for the UK, right, But the extraordinary thing about what
• 17:34
  Speaker 1: we've seen recently is that, you know, eighteen months ago,
• 17:38
  Speaker 1: interest rates were more or less zero nothing, and that
• 17:41
  Speaker 1: had distortionary effects on the market. And now even though
• 17:44
  Speaker 1: we've come up to what is a perfectly normal interest rate,
• 17:47
  Speaker 1: we've done it at phenomenal speed. Eleven we're talking on
• 17:51
  Speaker 1: the day of the Embassy meetings, so presumably by the
• 17:53
  Speaker 1: time people listen to this, twelve interest rate rises in
• 17:56
  Speaker 1: a row. That's fairly unusual. And so the incentives inside
• 18:02
  Speaker 1: the world of interest rates have changed so absolutely and
• 18:05
  Speaker 1: so dramatically that it's hard for us to see exactly
• 18:08
  Speaker 1: what will happen. And one of the things that I've
• 18:09
  Speaker 1: been looking at this week and writing about is the
• 18:13
  Speaker 1: shift of money market funds and how you know, even
• 18:15
  Speaker 1: a year ago, most UK investors had never even heard
• 18:18
  Speaker 1: of a money market fund. There's been a need for
• 18:20
  Speaker 1: them for so long because rates have been so low,
• 18:22
  Speaker 1: people have been perfectly happy to take that you know,
• 18:24
  Speaker 1: twenty five basis of points or whatever. It is difference
• 18:26
  Speaker 1: between having money on deposit in a bank and having
• 18:28
  Speaker 1: money in a say money market vunder a guild or whatever.
• 18:31
  Speaker 1: But now that you're talking about a difference between deposit
• 18:34
  Speaker 1: rates at one percent tops and instant access and money
• 18:37
  Speaker 1: market funds at four percent, there's a huge shift of
• 18:39
  Speaker 1: money that as investor mindset changes you know, the point
• 18:44
  Speaker 1: being that it's also unusual and so quick that the
• 18:49
  Speaker 1: incentives inside it and the things that might or not
• 18:52
  Speaker 1: break might or might not break are very uncertain. So
• 18:55
  Speaker 1: it's hard to align what's happening now with any previous
• 18:59
  Speaker 1: historical time.
• 19:00
  Speaker 3: Is that fair? I think so, But I think that
• 19:04
  Speaker 3: you know, basically, what we've had is that central banks
• 19:08
  Speaker 3: sort of lied to us. You know, they told us
• 19:10
  Speaker 3: that interest rates were going to be at zero forever,
• 19:12
  Speaker 3: and they did that on purpose because that was part
• 19:15
  Speaker 3: of the stimulus. And then in COVID that sort of
• 19:19
  Speaker 3: reached an extreme because central bank said, oh my god,
• 19:21
  Speaker 3: the economy may never recover from this. You know, we're
• 19:24
  Speaker 3: going to be at interest rates at zero forever. And
• 19:27
  Speaker 3: then we had the IMF writing about how the world
• 19:29
  Speaker 3: was in a global liquidity trap, which was an obvious
• 19:31
  Speaker 3: sort of red flag for anyone who was worrying about inflation.
• 19:35
  Speaker 3: And then you know, a lot of investors have been
• 19:38
  Speaker 3: totally caught out about this, and so in areas of
• 19:41
  Speaker 3: the market, like you know, the technology sector, particularly in
• 19:45
  Speaker 3: the US, but you know elsewhere, you had this sort
• 19:49
  Speaker 3: of long duration bet, this idea that interest rates would
• 19:52
  Speaker 3: be zero forever. And banks were part of this too.
• 19:55
  Speaker 3: You know, banks who had written mortgages, particularly fixed rate
• 19:59
  Speaker 3: mortgages over the past sort of five ten years, you know,
• 20:04
  Speaker 3: are now on the hook because you know, they assume
• 20:07
  Speaker 3: that interest rates would never go up. And weirdly, you know,
• 20:10
  Speaker 3: policymakers have been looking at mortgage markets and they've been
• 20:14
  Speaker 3: taking a lot of reassurance from the fact that, you know,
• 20:17
  Speaker 3: there's much more fixed rate mortgages than they were in
• 20:20
  Speaker 3: the past, because interest rates going up don't hurt you know,
• 20:25
  Speaker 3: mortgage holders as quickly as before. But they forgot about
• 20:28
  Speaker 3: the banks because the banks on the other side of this.
• 20:30
  Speaker 3: So suddenly, you know, all of these banks are making
• 20:33
  Speaker 3: losses and suddenly they're facing this multi year squeeze of
• 20:38
  Speaker 3: their profits. Now, I think, you know, the good thing
• 20:41
  Speaker 3: about this, the encouraging thing is that none of this
• 20:45
  Speaker 3: has really been leveraged in the same way. So you know,
• 20:48
  Speaker 3: if you look at the sort of really nasty recessions
• 20:50
  Speaker 3: of the past, you know, very simple story. You had
• 20:54
  Speaker 3: long periods where asset prices went up a lot and
• 20:58
  Speaker 3: debt went up a lot, and then the asset price
• 21:00
  Speaker 3: went down, but the debt was fixed and so you
• 21:03
  Speaker 3: had these massive strains on balance sheets that led to
• 21:07
  Speaker 3: these sort of very deep balance sheet recessions. You know,
• 21:10
  Speaker 3: Japan in the early nineties, Sweden in the early nineties,
• 21:14
  Speaker 3: bits of dot com. You know, there were certain companies
• 21:17
  Speaker 3: in the US that struggled with the same dynamic and
• 21:20
  Speaker 3: then subprime you know, periphery debt in Europe, it was
• 21:23
  Speaker 3: all that same story, you know, overinflated asset prices and
• 21:27
  Speaker 3: massive debt binges. And this time we haven't had the debt.
• 21:31
  Speaker 3: So you know, there's a lot of investors that have
• 21:33
  Speaker 3: been caught out by this, and banks have been caught
• 21:36
  Speaker 3: out by this, and profitability and returns are going to
• 21:39
  Speaker 3: be lower than people expected. But I don't think we
• 21:42
  Speaker 3: have that sort of deep underlying financial imbalance, particularly in
• 21:46
  Speaker 3: terms of debt that leads to the really nasty outcomes
• 21:49
  Speaker 3: that we had in the past. And so, you know,
• 21:51
  Speaker 3: to go back to your question about historical precedent, the
• 21:54
  Speaker 3: only one I can really find is US banks in
• 21:57
  Speaker 3: the sort of late eighties and nineties, which was the
• 22:01
  Speaker 3: savings and lowing crisis in the US. So you had
• 22:04
  Speaker 3: this period where you know, similar dynamic. You know, these
• 22:07
  Speaker 3: banks had written all of these mortgagees. Interest rates went
• 22:10
  Speaker 3: up a lot because central banks had to squeeze inflation,
• 22:13
  Speaker 3: and then suddenly the profitability of these banks massively deteriorated,
• 22:18
  Speaker 3: and then you had these sort of rolling bank failures
• 22:20
  Speaker 3: that went on for years, and it didn't cause the
• 22:24
  Speaker 3: sort of disruption destruction to the economy that subprime did
• 22:29
  Speaker 3: because it didn't have the same levels of leverage or
• 22:31
  Speaker 3: the same underlying problem.
• 22:35
  Speaker 1: You said earlier that the central banks lied to us.
• 22:39
  Speaker 1: Do you think they lied or do you think they
• 22:41
  Speaker 1: just got it wrong? Because they're so used to very
• 22:43
  Speaker 1: low inflation as a result of the global dynamics of
• 22:46
  Speaker 1: saying things like China joining the global economy, low labor costs, etc.
• 22:50
  Speaker 1: They got so used to the idea that inflation was
• 22:52
  Speaker 1: going to stay low, and their models simply extrapolate that.
• 22:55
  Speaker 1: It was less lying than believing an inaccurate model.
• 23:00
  Speaker 3: I mean, I was exaggerating a little bit. Well, it's
• 23:03
  Speaker 3: an element of that. You know, the central banks when
• 23:05
  Speaker 3: they say that interest rates are going to be zero
• 23:08
  Speaker 3: for a long time, they do that because they want
• 23:11
  Speaker 3: to sort of drive you know, faster growth that they
• 23:16
  Speaker 3: want it. They wanted to sort of almost be self defeating.
• 23:19
  Speaker 3: You know, you promise people interustrates are going to stay low,
• 23:22
  Speaker 3: and you try and create the conditions where they won't
• 23:25
  Speaker 3: stay low. And I don't think it's just central banks
• 23:27
  Speaker 3: that did that, you know, I think the whole sort
• 23:31
  Speaker 3: of period after the global financial crisis created this psychology
• 23:37
  Speaker 3: where you know, we thought inflation would never come back,
• 23:40
  Speaker 3: and and you see it on the fiscal side. You know,
• 23:43
  Speaker 3: we got to the point where people believe there was
• 23:46
  Speaker 3: absolutely no limit to what fiscal you know, what we
• 23:49
  Speaker 3: could do on the fiscal side, and so and then
• 23:52
  Speaker 3: COVID happens and we put all those lessons into effect.
• 23:57
  Speaker 3: You know, central banks do massive q E. They take
• 24:00
  Speaker 3: interest rates to zero, they promise that interest rates will
• 24:03
  Speaker 3: stay at zero, and then we have this massive fiscal
• 24:06
  Speaker 3: stimulus on the idea that you know, fiscal stimulus wasn't
• 24:09
  Speaker 3: inflationary because we just never get inflation anymore. So you
• 24:12
  Speaker 3: could argue that the whole of the economics profession and
• 24:15
  Speaker 3: the whole of policymaking made this sort of error that
• 24:20
  Speaker 3: sort of it's almost so the seeds of its own destruction.
• 24:24
  Speaker 3: You know, the idea that inflation would never return was
• 24:27
  Speaker 3: ironically the thing that made inflation return. It's this sort
• 24:31
  Speaker 3: of inherent, sort of Minsky moment in the way that
• 24:35
  Speaker 3: economics works. And you see this through history. You know,
• 24:38
  Speaker 3: we have these periods where when everybody believes something and
• 24:42
  Speaker 3: it turns out that thing is wrong, it totally transforms
• 24:45
  Speaker 3: the outlook.
• 24:47
  Speaker 1: Interesting. But you think, or I think, you think that
• 24:52
  Speaker 1: this inflation is going away. You don't believe the nineteen
• 24:55
  Speaker 1: seventieth story, which by way, a lot of the guests
• 24:57
  Speaker 1: on this podcast do believe. I hear a lot from
• 25:00
  Speaker 1: people about how we're already in a nineteen seventies dynamic
• 25:04
  Speaker 1: and we're going to see, if not, you know, steadily
• 25:06
  Speaker 1: high inflation, extremely volatile inflation, which will hit high rates
• 25:11
  Speaker 1: along the way. So you know, there's a lot of
• 25:13
  Speaker 1: people who don't believe for a second that this is
• 25:15
  Speaker 1: over and that well, we may go back down towards
• 25:18
  Speaker 1: the end of the year, we'll almost definitely go back
• 25:20
  Speaker 1: up again after that. But I get the feeling that
• 25:22
  Speaker 1: that's not what you believe.
• 25:24
  Speaker 3: I think that I have a more softle view on inflation.
• 25:27
  Speaker 3: So subtle is good.
• 25:29
  Speaker 1: I like a sudden view, not so easy the headline,
• 25:31
  Speaker 1: but good.
• 25:32
  Speaker 3: I think that a lot of the inflation we've had
• 25:36
  Speaker 3: over the last two years was transitory, a word that
• 25:39
  Speaker 3: is now massively out of fashion. I think that it
• 25:43
  Speaker 3: was very similar to what happened after the Second World War,
• 25:46
  Speaker 3: where you had this sort of one off increase in
• 25:48
  Speaker 3: the price level rather than this sort of spiraling of inflation.
• 25:53
  Speaker 3: But I think that when you look at the world
• 25:56
  Speaker 3: now compared to twenty nineteen, I think some things have
• 26:00
  Speaker 3: changed and they're not going back. So the obvious one
• 26:04
  Speaker 3: is supply chains, you know. I think that companies are
• 26:09
  Speaker 3: rethinking their supply chains, and that deglobalization, which was you know,
• 26:14
  Speaker 3: started way before this is now accelerating. I think geopolitics
• 26:19
  Speaker 3: has changed, you know. I think we have a cold
• 26:22
  Speaker 3: war between the US and China, which is just getting worse.
• 26:25
  Speaker 3: We have a hot war in Europe. We have these
• 26:28
  Speaker 3: big geopolitical shifts around that, you know, that change. We
• 26:33
  Speaker 3: have a different type of economy, a sort of wartime
• 26:35
  Speaker 3: economy where governments feel that they have to be more
• 26:38
  Speaker 3: interventionist and more involved. So things like industrial policy are
• 26:42
  Speaker 3: coming back and so and I think you have labor shortages.
• 26:46
  Speaker 3: You know, we didn't have these massive labor shortages back
• 26:49
  Speaker 3: in twenty nineteen, and part of that is lots of
• 26:52
  Speaker 3: people have dropped out of the labor market. But when
• 26:54
  Speaker 3: you put all that together, I think that you're looking
• 26:56
  Speaker 3: at a subtly different world. You know, over the next
• 26:59
  Speaker 3: sort of ten years is which is not that inflation
• 27:02
  Speaker 3: is going to be sort of spiraling like it did
• 27:04
  Speaker 3: the nineteen seventies, but for sure inflation is going to
• 27:08
  Speaker 3: be a lot more volatile than we've been used to.
• 27:10
  Speaker 3: You know, we're not going back to the Great Moderation.
• 27:14
  Speaker 3: You know, we can argue about whether inflation is going
• 27:16
  Speaker 3: to be four percent or two percent, but I'm not
• 27:18
  Speaker 3: sure that's really the story here. I think we're in
• 27:21
  Speaker 3: a world where we're going to have to live with
• 27:24
  Speaker 3: supply problems much more than we did in the past.
• 27:27
  Speaker 3: And so, you know, even though that's a subtly different
• 27:30
  Speaker 3: view on inflation, it's really important for financial markets because
• 27:35
  Speaker 3: I think, firstly, there's going to be more periods like
• 27:39
  Speaker 3: twenty twenty two where you have stagflation. You know, you
• 27:42
  Speaker 3: have sort of counter cyclical inflation. And what that means
• 27:46
  Speaker 3: is that you know, bonds and equities that correlation flips
• 27:49
  Speaker 3: from negative to positive, and that's profoundly important for you know,
• 27:53
  Speaker 3: where bonds should trade and how you construct a portfolio.
• 27:57
  Speaker 3: You know, sixty forty isn't going to work if you've
• 28:00
  Speaker 3: got sort of reoccurring supply problems, not sort of nineteen
• 28:04
  Speaker 3: seventies permanent inflation, not wage priced spirals, but periods of
• 28:08
  Speaker 3: very high inflation are going to kill returns in bonds,
• 28:13
  Speaker 3: and so you know, and I think the prevailing tendency
• 28:16
  Speaker 3: of inflation has changed. So instead of inflation always being
• 28:21
  Speaker 3: too low and central banks always trying to get inflation
• 28:24
  Speaker 3: back up to two percent, I think two percent becomes
• 28:27
  Speaker 3: a sort of flaw on inflation rather than a ceiling,
• 28:31
  Speaker 3: and so the whole basic task of monetary policy changes.
• 28:34
  Speaker 3: So instead of central banks always looking to QI, always
• 28:38
  Speaker 3: looking to zero interest rates, always trying to get inflation back,
• 28:41
  Speaker 3: this is going to be a world where central bank's
• 28:43
  Speaker 3: always trying to stop inflation going too high. And that's
• 28:48
  Speaker 3: just a totally different investment world. So, you know, it's
• 28:50
  Speaker 3: a secular bear market in bonds, not as extreme as
• 28:54
  Speaker 3: the nineteen seventies, but I think it's a secular bear market.
• 28:58
  Speaker 3: I think the term premium in bonds wildly too low
• 29:01
  Speaker 3: because that term premium reflects the great moderation and the
• 29:06
  Speaker 3: fact that you know, bonds had this perfect insurance property
• 29:09
  Speaker 3: for equity, so you almost paid a premium to own
• 29:12
  Speaker 3: bonds and put them in your portfolio. That world has gone,
• 29:16
  Speaker 3: and I think it changes the equity market because you know,
• 29:20
  Speaker 3: in the old world, you just put money into long
• 29:22
  Speaker 3: duration tech or US stocks. You didn't put it into
• 29:27
  Speaker 3: you know, Europe or the UK, and you got you know,
• 29:30
  Speaker 3: those those returns just you know, went through the roof.
• 29:33
  Speaker 3: You just it just got constantly re rated on the
• 29:36
  Speaker 3: basis that interest rates would be lower and lower and lower.
• 29:39
  Speaker 3: And that world has gone. So you need to be
• 29:42
  Speaker 3: as an investor. You need to think, well, how is
• 29:43
  Speaker 3: this world changing, What are the big themes for the
• 29:46
  Speaker 3: next five ten years. How do I get exposure to
• 29:49
  Speaker 3: those themes. It's not just about you know, a big
• 29:52
  Speaker 3: long duration punt, which is what the last decade was
• 29:55
  Speaker 3: all about.
• 29:55
  Speaker 1: We're going to go back to the market in a minute,
• 29:58
  Speaker 1: but before we do that, I just want to ask
• 29:59
  Speaker 1: you about inflation in general. You know, there is a
• 30:02
  Speaker 1: view that consistently higher inflation than we've been used to
• 30:07
  Speaker 1: for a decade is not necessarily a bad thing because
• 30:10
  Speaker 1: it will help us deal with some of the public
• 30:12
  Speaker 1: debt problems we have, and also will it will help
• 30:15
  Speaker 1: with the housing market. You know, it'll help bring down
• 30:17
  Speaker 1: some of those real debt levels and the housing market,
• 30:19
  Speaker 1: and it'll it'll help well debt across the board, because
• 30:22
  Speaker 1: I know we were talking earlier about this not being
• 30:24
  Speaker 1: necessarily a problem of leverage as it has been in
• 30:26
  Speaker 1: the past, but nonetheless there is a big public debt
• 30:30
  Speaker 1: problem and private debt shot through the system. So you know,
• 30:33
  Speaker 1: a decade of reasonably high inflation will help get us
• 30:35
  Speaker 1: out of that. Mind it's not necessarily a bad thing.
• 30:40
  Speaker 3: I sort of agree. It depends where you are with inflation.
• 30:44
  Speaker 3: You know, if you have inflation in the sort of
• 30:47
  Speaker 3: three to five percent range and it's consistently there, then
• 30:51
  Speaker 3: you know, that's going to make a huge difference to
• 30:54
  Speaker 3: the things that you said, you know, debt, deleavergime. You know,
• 30:58
  Speaker 3: I think history teaches us we basically have two ways
• 31:00
  Speaker 3: to deal with debt problems. One of them is what
• 31:03
  Speaker 3: economists called the conventional approach, which is probably wrongly named,
• 31:06
  Speaker 3: but that's austerity structural reform. That's what we tried after
• 31:11
  Speaker 3: the Global financial crisis. And the other way is what
• 31:14
  Speaker 3: economists called the unconventional approach, which is you inflate away
• 31:18
  Speaker 3: the debt. You use some form of financial repression, or
• 31:21
  Speaker 3: you write it off, or you send your currency down
• 31:24
  Speaker 3: so you don't put it back at sort of international terms.
• 31:27
  Speaker 1: And that is much more the normal way, isn't it.
• 31:29
  Speaker 1: That's much more how we've got rid of debt over
• 31:31
  Speaker 1: the years. In fact, kind of the only way. Austerity
• 31:33
  Speaker 1: is a tricky way to try and do this.
• 31:36
  Speaker 3: Every time we've tried austerity, it's been a disaster. So,
• 31:39
  Speaker 3: you know, UK in the sort of nineteen twenties, you know,
• 31:43
  Speaker 3: while the rest of the world was having the Roaring twenties,
• 31:45
  Speaker 3: we had a sort of depression, you know, with mass
• 31:47
  Speaker 3: unemployment and deflation because we were so desperate to get
• 31:50
  Speaker 3: back onto the gold standard. And after twenty ten, you know,
• 31:55
  Speaker 3: I would say that austerity was a disaster too. And
• 31:57
  Speaker 3: actually many of the problems that we face in the
• 32:00
  Speaker 3: UK right now are because people are just you know,
• 32:03
  Speaker 3: fundamentally pissed off after a decade of austerity. You know
• 32:06
  Speaker 3: the fact that public sector workers have seen their incomes
• 32:10
  Speaker 3: consistently squeezed for a decade they're now saying, right, that's enough.
• 32:15
  Speaker 3: We can't go back to that. And so, you know,
• 32:18
  Speaker 3: I think austerity was a disaster. I think that actually
• 32:21
  Speaker 3: this new world promises to be slightly better. You know,
• 32:25
  Speaker 3: I don't think it's the nineteen seventy So I don't
• 32:27
  Speaker 3: think we're going to be stuck with inflation that sort
• 32:29
  Speaker 3: of five, you know, ten percent. But I think if
• 32:33
  Speaker 3: it's in that slightly higher range, and it's about the
• 32:36
  Speaker 3: tendency of inflation that is changing. As I said, I
• 32:39
  Speaker 3: don't think that's a bad outcome, and I think central
• 32:41
  Speaker 3: banks would readily accept that, even though they will deny
• 32:44
  Speaker 3: it at every opportunity. So if you ask any of
• 32:47
  Speaker 3: these central bankers right now, you know, is three percent
• 32:50
  Speaker 3: inflation all right? They will say no, absolutely not. In reality,
• 32:54
  Speaker 3: if you offer them three percent inflation for the next
• 32:57
  Speaker 3: five years, they will bite your hand off at that.
• 32:59
  Speaker 3: They just can't say it, because you know, they should
• 33:02
  Speaker 3: have changed their inflation targets back in twenty nineteen. They didn't.
• 33:07
  Speaker 3: They can't do it now. You know, if you can't
• 33:09
  Speaker 3: hit your inflation target, you can't raise that inflation target
• 33:12
  Speaker 3: because it's an admission of defeat if you had changed
• 33:16
  Speaker 3: your target in twenty nineteen when inflation was below two percent,
• 33:20
  Speaker 3: it would have been sort of aspirational. You know, you
• 33:22
  Speaker 3: would had to try really hard to get inflation up. Now,
• 33:26
  Speaker 3: you know, you're basically saying, well, we don't have a
• 33:28
  Speaker 3: target anymore if you admit that. So I think, you know,
• 33:31
  Speaker 3: we're back to central banks telling lies again. And you know,
• 33:35
  Speaker 3: I think that they can't be honest about this. But
• 33:39
  Speaker 3: you know, the environment that they're scared of is not
• 33:43
  Speaker 3: persistent three percent inflation. You know, they're scared of that
• 33:46
  Speaker 3: nineteen seventies dynamic because none of these central bankers want
• 33:50
  Speaker 3: to go down in history as the idiots who let
• 33:52
  Speaker 3: it happen again. You know, we spent the last thirty
• 33:56
  Speaker 3: years talking about, you know, the policy mistakes of the
• 33:59
  Speaker 3: nineteen seventy and Arthur Burns and these guys that went
• 34:02
  Speaker 3: down history as complete clowns. So you can understand why
• 34:06
  Speaker 3: these central bags don't want to be talked about as
• 34:09
  Speaker 3: a sort of case study in monetary failure in forty
• 34:12
  Speaker 3: years time.
• 34:13
  Speaker 1: Yeah, poor Arthur Burns, Poor Arthur Burns. Actually we should
• 34:16
  Speaker 1: do a whole podcast on the miseries of Arthur Burns.
• 34:18
  Speaker 1: I think he's being slightly misjudged by history. But we'll
• 34:21
  Speaker 1: come back to that. So let's go back to equity
• 34:24
  Speaker 1: markets then, So we can't do what we were doing before,
• 34:27
  Speaker 1: which is a great shame because it was super easy.
• 34:29
  Speaker 1: If it felt a little bit too easy, and it
• 34:31
  Speaker 1: clearly was a little bit too easy, what do we
• 34:33
  Speaker 1: do now? How do we approach investing?
• 34:35
  Speaker 3: Well, I mean, it wasn't It was easy, but it
• 34:37
  Speaker 3: was something that you could replace with automation. I'm not
• 34:41
  Speaker 3: sure that long term it was really that great. You know,
• 34:44
  Speaker 3: it didn't take a great deal of thought to buy
• 34:47
  Speaker 3: us fangs, did it. I mean, no, it really didn't.
• 34:50
  Speaker 1: Though of course it took an off a lot of
• 34:51
  Speaker 1: thought to not buy them, which was a mistake that
• 34:54
  Speaker 1: a lot of us made.
• 34:55
  Speaker 3: That's true. So I think that, you know, I think
• 34:59
  Speaker 3: basically you need to think about themes. So what are
• 35:02
  Speaker 3: the themes for the next decade? De globalization, climate change,
• 35:08
  Speaker 3: carbonomics AI to some extent, although I think there's a
• 35:13
  Speaker 3: massive amount of hype around that right now. You know,
• 35:17
  Speaker 3: I think you're thinking about themes, you're thinking about an
• 35:21
  Speaker 3: economy that behaves differently, so you know, inflation that's slightly
• 35:24
  Speaker 3: higher periods where you know bonds won't help you, and
• 35:30
  Speaker 3: so you're almost you know, you're you're looking for different
• 35:33
  Speaker 3: sectors within the equity market. And so one of the
• 35:36
  Speaker 3: things I've talked about, you know, over the last eighteen months,
• 35:38
  Speaker 3: what I called the tangible twenties, which is this idea
• 35:42
  Speaker 3: that you know, the twenty ten is all about intangibles,
• 35:44
  Speaker 3: you know, about tech, about long duration. I think now
• 35:48
  Speaker 3: you want exposure to tangible things, and you know those
• 35:52
  Speaker 3: are typically the sorts of things that do better in
• 35:54
  Speaker 3: a higher inflation of regime. So I think you're looking
• 35:58
  Speaker 3: at things like commodities, materials, semiconductors, anything explode, exposed to decarbonomics,
• 36:08
  Speaker 3: anything exposed to friends sawing and reshwing and all of
• 36:11
  Speaker 3: that sort of stuff. You know, So you know, I
• 36:14
  Speaker 3: think you want a different I mean, you asked me
• 36:16
  Speaker 3: about equities, but in bonds, I think you just want
• 36:18
  Speaker 3: a smaller allocation to bonds, and you want to find
• 36:21
  Speaker 3: bits of the equity market that almost replace bonds in
• 36:25
  Speaker 3: those periods of stagflation. So you know, commodities is a
• 36:31
  Speaker 3: sort of obvious replacement if you're talking about not persistently
• 36:35
  Speaker 3: high inflation, but those periods where inflation is a problem
• 36:38
  Speaker 3: and bonds sell off because of the inflation. Okay, so in.
• 36:44
  Speaker 1: Equities in particular, we want to be heading towards tangible things, industrials, etc. Now,
• 36:49
  Speaker 1: as I know my listeners quite well, I can tell
• 36:51
  Speaker 1: you exactly what they're thinking right now. And what they're
• 36:55
  Speaker 1: thinking is resharing industrial industrialization of say the Middlands of
• 37:03
  Speaker 1: the UK. That sounds interesting. I don't really know what
• 37:07
  Speaker 1: companies I would buy to make that theme part of
• 37:11
  Speaker 1: my portfolio. So I tell you what I'll do. I'll
• 37:13
  Speaker 1: go out and I'll buy some buy to let houses
• 37:15
  Speaker 1: in the Midlands.
• 37:17
  Speaker 3: Should they do that?
• 37:18
  Speaker 1: That's what they're thinking. I know they are right right
• 37:20
  Speaker 1: to me listeners if I'm wrong, But I know that's
• 37:23
  Speaker 1: what you're thinking, because everything ends up on should I
• 37:25
  Speaker 1: buy another house?
• 37:26
  Speaker 3: Everything? Well, I mean, this is the point, isn't it.
• 37:28
  Speaker 3: It's going to be harder. You have to sort of
• 37:30
  Speaker 3: do a bit more research before you buy stocks. In
• 37:35
  Speaker 3: terms of housing, you know, I think that you know
• 37:39
  Speaker 3: clearly we're in a difficult period of housing right now,
• 37:41
  Speaker 3: just because the speed of the moves in interest rates.
• 37:45
  Speaker 3: You know, it's it's I think it's more about the
• 37:46
  Speaker 3: speed than the level of interest rates. Interest rates have
• 37:50
  Speaker 3: moved very very quickly, and so you know, people get
• 37:53
  Speaker 3: immediately squeezed because of that moving interest rates. I think
• 37:58
  Speaker 3: over time, I think the housing market can actually live
• 38:01
  Speaker 3: with higher levels of interest rates. And the reason for
• 38:04
  Speaker 3: that is that it's not just the interest rate that matters,
• 38:07
  Speaker 3: it's income. And so if we're in a world where
• 38:10
  Speaker 3: nominal wages and nominal profits are growing more quickly than
• 38:14
  Speaker 3: they were in the past because it's more inflation, then
• 38:17
  Speaker 3: actually you start to live with higher levels of high
• 38:21
  Speaker 3: levels of interest rates and you get used to it.
• 38:23
  Speaker 3: And so I think, you know, at the moment, I
• 38:25
  Speaker 3: wouldn't want to exposeure to anything related to housing over
• 38:28
  Speaker 3: the next sort of eighteen months on a five year horizon,
• 38:32
  Speaker 3: I think that the housing market copes with that sort
• 38:34
  Speaker 3: of environment. And if you look at sort of look
• 38:38
  Speaker 3: at commercial property and you look at how it responds
• 38:42
  Speaker 3: to inflation, you know, clearly very high levels of inflation
• 38:47
  Speaker 3: are bad. But this sort of moderate inflation that we're
• 38:50
  Speaker 3: talking about, I don't see that as a bad environment.
• 38:54
  Speaker 3: I just think right now I wouldn't touch any of
• 38:57
  Speaker 3: this stuff. It's you know, again, it's this conflict between
• 39:01
  Speaker 3: a recession risk, which is you know, fairly imminent and
• 39:05
  Speaker 3: the longer term. And I think they're demanding you to
• 39:08
  Speaker 3: do very different things as an investor.
• 39:11
  Speaker 1: All Right, that's hosing sorted. That'll make everyone satisfied. Let
• 39:14
  Speaker 1: me ask you two quick questions before I before I
• 39:17
  Speaker 1: let you go, because I'm sure you have more sessions
• 39:20
  Speaker 1: to think about. If you had to hold something for
• 39:24
  Speaker 1: ten years starting now. You're at stockpickers, so I'm not
• 39:27
  Speaker 1: asking you for a specific stock recommendation, but if you
• 39:29
  Speaker 1: had to take one of your sectors, one particular area,
• 39:33
  Speaker 1: to invest in right now and hold for ten years,
• 39:35
  Speaker 1: what do you think it might be?
• 39:38
  Speaker 3: Yeah? I mean I'm not a stockpicker. I tend to
• 39:40
  Speaker 3: do it in terms of themes. Yeah, so you've got
• 39:44
  Speaker 3: a lot of themes.
• 39:44
  Speaker 1: What's your favorite?
• 39:45
  Speaker 3: I think No, I think it's all about value stocks.
• 39:48
  Speaker 3: So if you think about growth versus value, and you
• 39:52
  Speaker 3: can get the data on this back to the nineteen twenties,
• 39:57
  Speaker 3: you see that the twenty tens period was just real,
• 40:00
  Speaker 3: really bizarre and weird. You know, that constant outperformance of
• 40:04
  Speaker 3: growth overvalue. There is no other period in history that
• 40:08
  Speaker 3: it behave like that. And it was it was an
• 40:11
  Speaker 3: artifact of zero interest rates and sort of endless QE
• 40:15
  Speaker 3: and the idea that interest rates would be at zero forever.
• 40:17
  Speaker 3: I think if we're looking at a different sort of world,
• 40:20
  Speaker 3: then we go back to sort of more historic norms,
• 40:23
  Speaker 3: which is where value starts to outperform. So I would,
• 40:27
  Speaker 3: you know, I'd be sort of very long value at
• 40:30
  Speaker 3: this point on that sort of horizon. You know, over
• 40:33
  Speaker 3: the next six months, value could get absolutely hosed just
• 40:37
  Speaker 3: because you know, central banks are cutting interest rates again
• 40:39
  Speaker 3: and we've got a recession fear, and you know, we've
• 40:42
  Speaker 3: seen the tendency of investors to jump back into all
• 40:46
  Speaker 3: of those sort of crappy tech stocks as soon as
• 40:48
  Speaker 3: they think interest rates are going down again. Yeah, we've
• 40:51
  Speaker 3: seen that this year already.
• 40:53
  Speaker 1: Okay, that's exactly what the listeners like to hear as well,
• 40:55
  Speaker 1: very very value orientated listeners, I think we have on
• 40:58
  Speaker 1: this podcast. And final question, and this is a this
• 41:02
  Speaker 1: is not a trick question, but there is an answer
• 41:04
  Speaker 1: that I know we all expect gold or bitcoin.
• 41:09
  Speaker 3: I think I know what the answers you expect.
• 41:12
  Speaker 1: You don't have to give the expected answer. You can
• 41:14
  Speaker 1: answer however you like but we'll sneer if you give
• 41:17
  Speaker 1: the wrong one.
• 41:18
  Speaker 3: Well, I mean, you know, bitcoin has basically been a
• 41:20
  Speaker 3: sort of digital tulip as far as I can see,
• 41:23
  Speaker 3: for the last sort of four or five years. And
• 41:27
  Speaker 3: I you know, I actually wrote about this and sort
• 41:28
  Speaker 3: of similarities between what was happening with cryptocurrencies during the
• 41:32
  Speaker 3: pandemic and tulip mania, because they both happened sort of
• 41:36
  Speaker 3: backdrop of a pandemic. If you look at this sort
• 41:38
  Speaker 3: of breakout of the plague in that period in Amsterdam,
• 41:42
  Speaker 3: you know, when all that stuff was kicking off, you
• 41:44
  Speaker 3: basically had these sort of bored traders sitting around in
• 41:47
  Speaker 3: taverns bidding up the price of the price of tulips.
• 41:51
  Speaker 3: And I think we had a sort of, you know,
• 41:54
  Speaker 3: an element of that. You know, to me, bitcoin has
• 41:57
  Speaker 3: behaved like a sort of long duration, extremely speculative asset,
• 42:02
  Speaker 3: and I don't think that's how gold behaves. And I
• 42:05
  Speaker 3: think if we're in a world where you've got more
• 42:09
  Speaker 3: sort of secular inflation than I think, you know, gold
• 42:11
  Speaker 3: does better in that environment. I don't know how bitcoin
• 42:14
  Speaker 3: page in that environment because we've never had that environment
• 42:17
  Speaker 3: before with bitcoin.
• 42:19
  Speaker 1: That'll be the interesting bit but I think we can
• 42:21
  Speaker 1: probably guess how it might behave Daria, that was the
• 42:24
  Speaker 1: correct answer. Thank you very much for being with us today.
• 42:29
  Speaker 1: We hugely appreciated, no worries.
• 42:32
  Speaker 3: Good to be on the show.
• 42:42
  Speaker 1: Thanks for listening to this week's Marin Talks Money. We'll
• 42:45
  Speaker 1: be back next week in the meantime. If you like
• 42:47
  Speaker 1: our show, rate review, and subscribe wherever you listen to
• 42:51
  Speaker 1: podcasts positively if you can. This episode was hosted by
• 42:54
  Speaker 1: me Marey's Unset Web. It was produced by Someasadi. Additional
• 42:58
  Speaker 1: editing by Blake Maple's special thanks Sadaria Perkins and of
• 43:02
  Speaker 1: course to John Steppe. And finally, your weekly reminder, your
• 43:06
  Speaker 1: important reminder to sign up to John's daily newsletter, Money Distilleder.
• 43:10
  Speaker 1: The link is in the show notes.