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The Edward Chancellor Aftershow · Merryn Talks Money

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  Speaker 1: Welcome to Maren Talks Money, the after Show. This is
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  Speaker 1: where we unpack all the commentary you hear in our
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  Speaker 1: regular podcast for free.
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  Speaker 2: I'm merin some set web This week.
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  Speaker 1: John Steppick, senior reporter at Bloomberg and author of the
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  Speaker 1: Daily Money to Skilled, a newsletter, joins me to discuss
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  Speaker 1: my conversation with Edward Chance, left finite historian, journalist, investment strategists,
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  Speaker 1: and expert on everything to do with interest rates. John,
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  Speaker 1: you know, I really enjoyed talking to Edward. I and
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  Speaker 1: Edward a long time. I've had lots of public conversations
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  Speaker 1: with him. And the worrying thing, and this is the
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  Speaker 1: worrying thing, is that I kind of agree with him
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  Speaker 1: on everything.
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  Speaker 2: I try not to.
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  Speaker 1: Because he's such a misery guts, but it's quite hard
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  Speaker 1: not to. He's so intelligent, he's so compelling. He has
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  Speaker 1: such a sweep of history behind everything that he says.
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  Speaker 1: You know, he's not just plucking random, random.
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  Speaker 2: Fact from the air like some authors.
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  Speaker 1: He really knows what he's talking about, and he's got
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  Speaker 1: thousands of years worth of history and data to back
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  Speaker 1: it up. And I listened to him speaking and all
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  Speaker 1: I can think is I can cletely agree with you difficult, right.
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  Speaker 3: It's difficult, and I agree with them as.
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  Speaker 2: Well, And damn I was hoping you wouldn't.
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  Speaker 3: Well, I know, we all sort of swing Austrian in
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  Speaker 3: terms of the economics. You know, you hear terms like
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  Speaker 3: capital misallocation and you know, okay with this, this is
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  Speaker 3: you know, the kind of Austrian view. The only the
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  Speaker 3: only thing to do then is to sort of try
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  Speaker 3: and push back against their own views and think about
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  Speaker 3: what the what's what's the kind of upside case or
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  Speaker 3: what is the potentially benign outcome here? And I do
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  Speaker 3: think that's important because you know, we have a lot
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  Speaker 3: of these end of the world moments in financial history,
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  Speaker 3: and most of the time it's not actually the end
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  Speaker 3: of the world. And even two thousand and eight, which
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  Speaker 3: was kind of the closest thing that I guess, we've
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  Speaker 3: got to the end of the financial world in a
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  Speaker 3: long time since the kind of great depression. Maybe that
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  Speaker 3: didn't end up with the sort of like cathartic moment.
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  Speaker 3: I know, lots of people still sort of feel as
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  Speaker 3: if there's some unfinished business there or whatever. And I
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  Speaker 3: suppose it's just worth thinking about, well, how could this
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  Speaker 3: interest rate cycle have a pretty benign ending, or at
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  Speaker 3: least a you know, one where things go on as
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  Speaker 3: usual and actually nothing in particular blows up. And I suppose, well,
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  Speaker 3: if you think about that, there's maybe two ways in
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  Speaker 3: which it could be okay. And maybe the reality is
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  Speaker 3: that since two thousand and eight, consumers and businesses have
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  Speaker 3: actually deleveraged to a certain extent in most countries, they
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  Speaker 3: weren't they're not as indebted as they were at the
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  Speaker 3: peak in two thousand and eight. If you then except
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  Speaker 3: that alo the people who do have debts and the
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  Speaker 3: companies they do have debts have it on fixed rates
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  Speaker 3: for prolonged dish periods, and then that means they've got
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  Speaker 3: time to think before they take the hit, the financial hit,
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  Speaker 3: and they also have time for inflation to play a
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  Speaker 3: role in driving up wages and you know, corporate incomes.
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  Speaker 3: So let's say that that happens, and so you get
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  Speaker 3: a gradual sort of like the pain keeps coming, but
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  Speaker 3: not in a way that actually blows anything up. And
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  Speaker 3: then you've got the sovereign side. But the reality is
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  Speaker 3: that government balance sheets actually can take a lot of stress,
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  Speaker 3: particularly if they're all in it at the same time,
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  Speaker 3: It's like it would be one thing if the UK
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  Speaker 3: had roughly one hundred percent debt to GDP and everyone
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  Speaker 3: else was, you know, Hunky Dorrian, they were all in
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  Speaker 3: twenty percent, but well not we're all checking that ound
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  Speaker 3: that area. And actually I think if you look at
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  Speaker 3: the G seven, I think the UK is actually below average,
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  Speaker 3: was slightly better off in terms of date to GDP.
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  Speaker 3: So maybe it just maybe inflation washes it over time,
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  Speaker 3: which I guess. I mean that does sort of still
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  Speaker 3: come down on it would say, because that's financial repression,
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  Speaker 3: but you don't get that kind of end of day's moment.
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  Speaker 1: And maybe just maybe at the same time, we get
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  Speaker 1: the beginning of the productivity revolution we've been waiting for
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  Speaker 1: for so long, and that helps move things forward by
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  Speaker 1: pushing out GDP growth more than one might have expected,
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  Speaker 1: and pushing up corporate growth of the better companies at
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  Speaker 1: least more than one might have expected, and that might
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  Speaker 1: act as something of a cover for the companies operating
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  Speaker 1: in areas where capital have been misallocated.
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  Speaker 2: Yeah, I mean, I'm really really trying here.
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  Speaker 3: Maybe artificial intelligence will do more than my imagination currently
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  Speaker 3: kind of runs too really.
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  Speaker 1: On the other hand, maybe it is true that the
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  Speaker 1: state of this this equilibrium or I mean, I don't
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  Speaker 1: know if you've read Bernard Connolly's latest book. We've got
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  Speaker 1: to get him on the podcast. I am working my
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  Speaker 1: way through it to the moment and more in there
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  Speaker 1: about the what he calls a temporal disequilibrium.
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  Speaker 2: We've pulled, pulled future growth forward.
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  Speaker 1: With very low interest rates, and you know that can
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  Speaker 1: only end end badly and only end with financial crisis.
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  Speaker 2: And you know it's a it's a depressing read. But
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  Speaker 2: Connolly has a good.
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  Speaker 1: Record, and here's someone who Edward reads as well, and
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  Speaker 1: you know they've they've looked at each other's work a lot,
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  Speaker 1: and they end up in the same place that another
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  Speaker 1: financial crisis is really not very far away, that markets
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  Speaker 1: will collapse, central bankers will give in and cut interest
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  Speaker 1: rates as a price, this well go up again, and
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  Speaker 1: you know we're back where we were. There's no easy
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  Speaker 1: way out of this, which is going to lurch from
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  Speaker 1: crisis to crisis to crisis.
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  Speaker 2: Capital continues to be misallocated.
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  Speaker 1: In that capital misallocation leads to financial crisis, which central
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  Speaker 1: banks react to in their usual rubbish way by creating
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  Speaker 1: nu acid bubbles and in the end, I don't know,
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  Speaker 1: maybe the world does end in the end.
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  Speaker 3: I mean that does feel. The issue I have with
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  Speaker 3: that is a public facts monumentally the present.
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  Speaker 2: Is very really depressing.
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  Speaker 3: I don't think that's politically sustainable. I think you get
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  Speaker 3: to a point where people get sufficiently fed up that
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  Speaker 3: I mean either something like you know, nasty happens in politics,
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  Speaker 3: which is obviously what people are all panicking about just
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  Speaker 3: but also you know, if you think back to kind
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  Speaker 3: of poll vocal the nineteen seventies, eventually they kind of
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  Speaker 3: the cure of high inflation got much more painful down
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  Speaker 3: the cure of of a stating recession. And that kind
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  Speaker 3: of put us stop to to that because like it
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  Speaker 3: kind of this is the political side sort of became
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  Speaker 3: too difficult to indulge the easy answer that cutting interest
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  Speaker 3: rates all the time. So I can see possibly that
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  Speaker 3: would happen at some point in the future to you know,
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  Speaker 3: stop this. And but equally, you know, the geopolitical picture
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  Speaker 3: is messier than it has been for a long time,
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  Speaker 3: and that I find very uncomfortable. I have to say,
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  Speaker 3: you know, I mean me and you are kind of
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  Speaker 3: grew up in the nineties, late eighties, when other things
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  Speaker 3: were actually genuinely getting better on that front to a
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  Speaker 3: quite spectacular extent, you know, the Cold War end and
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  Speaker 3: completely unexpectedly, regardless of what anyone says. Now, nobody saw
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  Speaker 3: the Berlin Wall falling, you know, six months before it happened.
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  Speaker 3: But now, you know, it feels like we're really going
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  Speaker 3: back the way badly on that front.
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  Speaker 2: And too.
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  Speaker 3: You know, this might be just middle aged, but to
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  Speaker 3: the extent, it feels as if we squandered you know,
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  Speaker 3: the kind of benefits of that era.
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  Speaker 2: We totally did.
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  Speaker 1: So spend all the money we said that we didn't
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  Speaker 1: have to spend on defence, didn't.
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  Speaker 2: Yeah, let's not get started on that.
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  Speaker 3: But that's so I think that's that's that's actually the
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  Speaker 3: thing that worries mean more because I think that the
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  Speaker 3: financial side, oddly enough, companies still have enough freedom and
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  Speaker 3: individuals still enough freedom to get by despite all of
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  Speaker 3: the mess mistakes that are made, you know, at the
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  Speaker 3: higher levels. But as soon as we're starting to get
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  Speaker 3: any actual kind of like shooting wars were you know,
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  Speaker 3: dangerous kind of enemies, then that that's not a that's
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  Speaker 3: a bad situation. I think that's probably what I'm more
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  Speaker 3: worried about. If it was the else is in decity
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  Speaker 3: that it's the thing that cannot ends up causing all
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  Speaker 3: the trouble.
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  Speaker 2: Yeah, the one part of this comes back to that.
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  Speaker 1: The one part of the interview Chancellor that I found
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  Speaker 1: very interesting is that about halfway through we're talking about
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  Speaker 1: when I'm saying to him, you know what's going to
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  Speaker 1: happen next, that we're just going to it's just going
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  Speaker 1: to be slower and misery for a decade or so
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  Speaker 1: as we try and work away out of this.
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  Speaker 2: Is there going to be a big crisis?
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  Speaker 1: And I know that his core case is that there
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  Speaker 1: is likely to be a financial crisis of some kind.
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  Speaker 2: But one thing that he.
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  Speaker 1: Says is that this is becoming analytically his words, more complicated.
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  Speaker 4: But one thing I would say is that the crisis
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  Speaker 4: that we have been experiencing over the last twenty five
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  Speaker 4: years are becoming analytically more complex. For instance, go back
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  Speaker 4: to the dot com bust was pretty simple. You really
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  Speaker 4: had to be done not to understand how that was
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  Speaker 4: coming and how to analyze it. I think the credit crisis,
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  Speaker 4: global financial crisis was much more complicated. With the structured
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  Speaker 4: credit and problems in subprime and collectialized debt applications. I
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  Speaker 4: think the problem that we have today is not so
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  Speaker 4: much complex financial structures, but the fact that the low
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  Speaker 4: interest rates that prevailed for so long had such wide effects.
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  Speaker 1: Any points out that we go back to dot com bust,
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  Speaker 1: that was really simple.
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  Speaker 2: Everyone could see it coming.
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  Speaker 1: It had been an absolute idiot not to see that
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  Speaker 1: there was a massive bubble based on this allocation of
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  Speaker 1: capital and piles of cash being given to unbelievably stupid companies, etc.
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  Speaker 1: Really really stupid not to know that that was going
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  Speaker 1: to crash and crash big time. Of course, you couldn't
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  Speaker 1: quite get the timing right, and lots of people got
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  Speaker 1: the timing wrong. In short, all those companies were far
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  Speaker 1: too long before they actual crashed. But the fact that
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  Speaker 1: they were going to crash it's an absolute given. But
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  Speaker 1: later crisis, the crisis, the Gooble financial crisis, all these.
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  Speaker 2: Things much more complicated.
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  Speaker 1: The cdios, the subprime, the structure credit stuff, all these
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  Speaker 1: really complicated financial structures made it really complicated to analyze,
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  Speaker 1: complicated to see what was going to happen next.
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  Speaker 2: And so the core point I'm trying to make is
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  Speaker 2: that right now?
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  Speaker 1: Anyone who tells you that they can see exactly what's
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  Speaker 1: going to happen, even us, John, even us, anyone they
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  Speaker 1: can see exactly what is going to happen, it's very
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  Speaker 1: probably wrong because I mean, everybody'ses this wonderful phrase. Interest
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  Speaker 1: rates get into all the cracks, and you know, you
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  Speaker 1: can't even see some of the cracks. Central interest rates
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  Speaker 1: go up and then the pushout starts. So you just
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  Speaker 1: don't know in this incredibly complicated financial environment where the
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  Speaker 1: nightmare is going to be what's gonna what's going to
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  Speaker 1: start something? Or if maybe nothing will start And as
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  Speaker 1: you say, we just sort of slow burn through the
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  Speaker 1: misery for a decade and maybe we have a huge
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  Speaker 1: productivity boost and maybe company company managers are really as
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  Speaker 1: brilliant as they often can be. Things send out to
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  Speaker 1: be kind of fine. But we literally don't know. And
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  Speaker 1: that's the key thing for investors understanding that no one
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  Speaker 1: really quite understands, and so you have to be really
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  Speaker 1: careful how you invest with a constant eye to the
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  Speaker 1: endless unknown unknown unnn unknowns.
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  Speaker 3: Yeah, and I suppose the editating thing about all this
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  Speaker 3: is that when then comes down, well, what does this
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  Speaker 3: actually mean for your money? All it really means is, well,
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  Speaker 3: this is why you need to have a diversified portfolio.
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  Speaker 3: But also, you know, you need to have something that
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  Speaker 3: takes to your political risk in your account. So I
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  Speaker 3: guess the main difference is it's like when we say diversified,
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  Speaker 3: you don't actually mean sixty forty Boin's equities. We mean
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  Speaker 3: Boin's equities and some gold, and probably you know, think
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  Speaker 3: of cash as being a quarter the cash I know.
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  Speaker 2: I mean.
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  Speaker 1: The thing is, these conversations are so interesting, aren't there
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  Speaker 1: particularly one with Edward's so interesting, absolutely love talking to.
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  Speaker 1: But in the end the solution is really quite pooring.
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  Speaker 2: For an investor.
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  Speaker 5: You can't come out of this going, god, this is
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  Speaker 5: so exciting. I'm going out to buy Singapore and small caps,
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  Speaker 5: although by the I think they're quite cheap too, someone's
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  Speaker 5: telling me the other day. But you know, you can't
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  Speaker 5: go out with an exciting investment strategy.
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  Speaker 2: You're just like, oh my god, to be a bit diversified.
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  Speaker 1: And you know, Japan because every by the way, it's
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  Speaker 1: also a Japan bull and I enjoyed that about them
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  Speaker 1: as well, because you know, just agrees on everything.
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  Speaker 4: So I think you know that some of the headwinds
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  Speaker 4: for Japan were high valuations and then this period of
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  Speaker 4: deflation and deleveraging that hurt Japanese margins and return on equity.
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  Speaker 4: And I think that was over ten years ago. So
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  Speaker 4: that was our reason for being bullish ten twelve years ago,
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  Speaker 4: and that's been more than vindicated.
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  Speaker 1: Let's say, I guess right by Chief stuff and gold,
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  Speaker 1: by Japan, by gold, and many of the things you
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  Speaker 1: and I have been saying for. He wasn't having any
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  Speaker 1: truck at all with bitcoin. I think he thought it
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  Speaker 1: was a true question. It was not a truck question.
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  Speaker 3: Well ideah, let's well, let's not have the bitcoin chat again.
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  Speaker 3: We could do. I still feel I think it's interesting
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  Speaker 3: that a historian of money and it's you know, because
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  Speaker 3: it is. I think it is fair to take money
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  Speaker 3: as a social technology and the idea that.
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  Speaker 2: I love the way you proved for us that you
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  Speaker 2: read books.
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  Speaker 3: Yes, yes, occasionally read one creeps in there and yeah
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  Speaker 3: it's that the thing you think, Well, you know, maybe
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  Speaker 3: maybe I don't think. I don't think bitcoin is a scam.
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  Speaker 3: I think it's it's maybe niche, but it's definitely there's
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  Speaker 3: there's a technology there that that is for real, unless
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  Speaker 3: you know, the world's greatest tackers have mice to keep going.
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  Speaker 1: This is what we've learned back John Today, John reads
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  Speaker 1: books and John's a money launderer. Thanks for listening to
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  Speaker 1: this week's Marin JUG's Money the After Show. This episode
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  Speaker 1: was hosted by me Maren zumset Web alongside John step Back.
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  Speaker 2: Thank you John.
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  Speaker 1: It was produced by some Aersadi additional editing by Blake Mabels.
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  Speaker 1: Please review us, Please tell your friends thank you.