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Ed Yardeni Says The Roaring Twenties May Be Back · Merryn Talks Money

0:04
Speaker 1: Welcome to Meren Talks Money, the podcast in which people
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Speaker 1: who know the markets explain the markets. I'm mere in
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Speaker 1: sumset Web. This week we bring you a conversation with
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Speaker 1: veteran market economist Eddie Adenny, the president and founder of
0:14
Speaker 1: your Denny Research. I've been reading his work for years
0:17
Speaker 1: and highly recommend it. You can read it as well
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Speaker 1: if you visit one of his websites here Denny quick
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Speaker 1: Takes dot com ed. Hello, thank you so much for
0:26
Speaker 1: joining us today. We really appreciate it.
0:28
Speaker 2: Thank you.
0:29
Speaker 1: Now, there's so much to talk about today, and so
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Speaker 1: much positive stuff to talk about, is what I'm hoping
0:34
Speaker 1: for here, and you have an excellent record of being
0:37
Speaker 1: both optimistic and correct.
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Speaker 2: Right well, thank you for staying that.
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Speaker 1: So what I want to talk about today is where
0:47
Speaker 1: you see us going from here. We won't bother meandering
0:49
Speaker 1: around the past too much. I want to talk about
0:51
Speaker 1: the odds of something brilliant happening over the next couple
0:55
Speaker 1: of years, and the odds of something awful happening over
0:57
Speaker 1: the next couple of years. And in one of your
0:59
Speaker 1: recent notes, and I will say, by the way, anyone
1:01
Speaker 1: who's listening who doesn't know ed I'm a very enthusiastic
1:05
Speaker 1: reader of all his work, and if been following me
1:07
Speaker 1: for a while, you will have seen him quoted everywhere,
1:10
Speaker 1: so you'll know a little about Rethinks already. So Ed
1:14
Speaker 1: in a recent note, you talked about three possible things
1:19
Speaker 1: that could happen, three possible historical periods that the next
1:22
Speaker 1: few years could be. Right about what could be like?
1:24
Speaker 1: And you mentioned the nineteen seventies. I don't think we
1:27
Speaker 1: really want that. The nineteen nineties. We wouldn't mind the
1:29
Speaker 1: late nineteen nineties, would we And the nineteen twenties, which,
1:32
Speaker 1: of course we didn't really have a Roaring twenties in
1:34
Speaker 1: the UK, but you definitely had one in the US.
1:37
Speaker 1: So shall we start with the bad things that might happen?
1:42
Speaker 1: The bad decades? We might follow them? We can end
1:44
Speaker 1: on a high note, right, So what might be similar
1:48
Speaker 1: to the nineteen seventies? You give that a twenty percent probability.
1:53
Speaker 2: Well, the nineteen seventies from a macroeconomic standpoint stood out
1:58
Speaker 2: as being inflationary, and there's been a lot of concern
2:03
Speaker 2: that we may repeat that experience because back then we
2:09
Speaker 2: had two energy shocks in nineteen seventy three and again
2:13
Speaker 2: in nineteen seventy nine, and they both came out of
2:15
Speaker 2: the Middle East, and as a result of that, as
2:19
Speaker 2: energy prices went up, it spread throughout the economy. Energy
2:24
Speaker 2: is extremely important to the economy, clearly, and so it
2:28
Speaker 2: spread into wages, and from wages it came back into prices,
2:31
Speaker 2: and so we had a wage price rent spiral. People forget,
2:35
Speaker 2: but rent inflation was also a big problem in the
2:37
Speaker 2: nineteen seventies. Well, it could be DejaVu all over again
2:43
Speaker 2: in the current decade. It doesn't feel like it to
2:45
Speaker 2: me right now, because inflation has come down dramatically, but
2:49
Speaker 2: it came down dramatically in the nineteen seventies following the
2:53
Speaker 2: nineteen seventy three shock, and then we got hit again.
2:56
Speaker 2: And it's conceivable given that the Middle East once again
3:00
Speaker 2: is boiling, and that there's a potential. Not a potential,
3:03
Speaker 2: but it sure looks as though a lot of the
3:05
Speaker 2: conflicts are spinning out of control. If that starts to
3:09
Speaker 2: affect the price of oil and pushes it up dramatically
3:13
Speaker 2: because of supply disruptions caused by the conflicts over there,
3:18
Speaker 2: then it would be very similar to the nineteen seventies again,
3:22
Speaker 2: and so I think it's certainly a possible scenario, given
3:25
Speaker 2: the way things are going over there. But what's interesting
3:29
Speaker 2: to me is will the news has been awful. The
3:32
Speaker 2: price of oil has been remarkably tame subdued. It's down
3:36
Speaker 2: still sharply from its peak of last year in September
3:41
Speaker 2: twenty seventh, and that's despite the war between Israel and
3:47
Speaker 2: Hamas and the escalation of tensions by Rand's proxies in Syria, Iraq,
3:55
Speaker 2: Yemen and so on, and of course the disruptions to
3:59
Speaker 2: Red Sea shipping. So put that all together and we've
4:03
Speaker 2: got a geopolitical crisis. But so far, the price of
4:06
Speaker 2: oil has been remarkably tame, and I think that's because
4:09
Speaker 2: China is in a recession, Europe center recession in the US,
4:12
Speaker 2: but the US is doing pretty well. So all in all,
4:16
Speaker 2: from an economic standpoint, so far, so good. From from
4:20
Speaker 2: a geopolitical standpoint, not so much. It's quite quite quite
4:24
Speaker 2: a bad situation.
4:25
Speaker 1: Yeah, And there's still a chance that putting putting oil aside,
4:30
Speaker 1: the disruption to shipping through the Red Sea could have
4:33
Speaker 1: implications through the supply chain and we could have an
4:35
Speaker 1: inflationary impetus from that regardless of the oil price.
4:40
Speaker 2: Well, it's you know, so ships aren't going to Sewers Canal.
4:43
Speaker 2: And then from what I understand, there's an issue with
4:46
Speaker 2: the level of the Panama Canal which has also reduced
4:50
Speaker 2: the ability to get a lot of ships through that
4:53
Speaker 2: way to other routes. So, yes, I think you're absolutely
4:58
Speaker 2: correct and bringing that up.
5:00
Speaker 1: I mean, it is one of the things that we
5:01
Speaker 1: worry about relentlessly on this podcast. We worry about inflation
5:04
Speaker 1: a lot. I mean, there was a similar point in
5:06
Speaker 1: the nineteen seventies of where we are now. Inflation is
5:09
Speaker 1: dead and that's that it's all fine and behaved as
5:12
Speaker 1: the worm, when of course it hadn't actually been destroyed,
5:15
Speaker 1: and back it came, and in spades twice.
5:17
Speaker 2: I think what's different this time is that the FED
5:21
Speaker 2: is much more sensitive to inflation. It took them a
5:25
Speaker 2: little while to recognize that it was a problem in
5:29
Speaker 2: twenty twenty two, but they scrambled and they I think
5:33
Speaker 2: went from behind the curve to ahead of the curve,
5:35
Speaker 2: the inflation curve, and so I think the Fed's credibility
5:40
Speaker 2: on fighting inflation has actually improved quite a bit. The
5:43
Speaker 2: other thing is I think we've discovered that quite a
5:45
Speaker 2: bit of the inflation we've experienced has turned out to
5:48
Speaker 2: be transitory, and it has been very much related to
5:51
Speaker 2: the pandemic and the supply disruptions related to the pandemic,
5:55
Speaker 2: and so far those disruptions were much more widespread and
5:59
Speaker 2: much more inflation than what we're seeing so far in
6:02
Speaker 2: the current situation.
6:04
Speaker 1: Yeah, it's hard to write it off though, isn't it.
6:06
Speaker 2: Yeah, I give it a twenty percent subjective probability, so
6:09
Speaker 2: you know, and then there's two other scenarios exactly.
6:12
Speaker 1: And I was going to say that what he said
6:14
Speaker 1: the other day, Grunt snaps, as we are moving from
6:16
Speaker 1: a post war world to a pre war world, and
6:19
Speaker 1: you know, nothing is a forerunner of inflation more than war.
6:21
Speaker 1: It's pretty much. It was a leading indicator of inflation
6:24
Speaker 1: coming So.
6:25
Speaker 2: Wars our inflationary wars are definitely inflationary historically.
6:29
Speaker 1: If inflation were to come back or whatever, it's already
6:32
Speaker 1: coming back. Numbers slightly higher than than expected in the
6:35
Speaker 1: UK this week. It's hard to see rates coming down
6:38
Speaker 1: in the way that most people seem to expect, isn't it.
6:42
Speaker 2: Well, it becomes in the nineteen seventies. Again, the scenario
6:46
Speaker 2: there was that Paul Volker came in the late seventies
6:50
Speaker 2: and basically decided that he had to let monetary policy
6:56
Speaker 2: wreck the economy in order to bring inflation down. And
6:59
Speaker 2: that's been sort of the key thought process of pessimists
7:05
Speaker 2: since twenty twenty two, since the FED started raising interest rates.
7:09
Speaker 2: The basic concept was that there's no way we're going
7:11
Speaker 2: to bring inflation down without a recession. Historically, it typically
7:15
Speaker 2: takes a recession to bring inflation down, but I think
7:18
Speaker 2: one of the reasons that hasn't happened is because the
7:21
Speaker 2: Chinese and the Europeans have done us a great favor.
7:23
Speaker 2: They've had a recession, and because of the particularly the
7:26
Speaker 2: recession in China, there's been falling goods prices. So we
7:31
Speaker 2: still do a lot of business with China, and this
7:34
Speaker 2: certainly had a deflationary impact on the global economy and
7:38
Speaker 2: particularly the US. So we didn't have to have a
7:41
Speaker 2: recession in order to bring inflation down. They did it
7:44
Speaker 2: for us.
7:44
Speaker 1: Yes, it's given us. What is it you who calls
7:47
Speaker 1: it immaculate disinflation? Right, it's given us that we've been
7:51
Speaker 1: very lucky. Okay, So that's a twenty percent likely head,
7:55
Speaker 1: but pretty much everyone else he comes on the podcast
7:57
Speaker 1: gives it about an eighty percent likely hit. So we're
7:59
Speaker 1: already moving forward nicely with the optimism here, thank you.
8:03
Speaker 1: The second the second possibility that you actually only have
8:06
Speaker 1: only quite recently started talking about it as a distinct possibility,
8:10
Speaker 1: which again you give twenty percent, is the late nineteen nineties,
8:15
Speaker 1: which went bad at all until nineteen nineteen ninety thousand
8:17
Speaker 1: punds suddenly got bad. But the late nineteen nineties they
8:20
Speaker 1: were a hoot, right, that wouldn't be all bad.
8:22
Speaker 2: Well, Speculative bubbles are wonderful as long as you remember
8:25
Speaker 2: to get out right before the bubble bursts. You can
8:27
Speaker 2: certainly make a tremendous amount of money in a very
8:30
Speaker 2: short period of time. But you can also lose your
8:33
Speaker 2: mind and conclude that you know, it's a new era
8:37
Speaker 2: and everything is just amazing and it's going to be
8:39
Speaker 2: amazing forever. And then not only do you keep speculating,
8:44
Speaker 2: but you leverage the speculation, so there is a potential
8:48
Speaker 2: for irrational exuberance similar to what happened in the late
8:51
Speaker 2: nineteen nineties. And yeah, all of a sudden I'm seeing
8:54
Speaker 2: a lot of similarities. I mean, in videos a great company.
8:58
Speaker 2: I don't recommend to buy, sell, or hold individual stocks,
9:04
Speaker 2: but it is an amazing company. I mean, they went
9:06
Speaker 2: from making a lot of money selling chips for gaming
9:09
Speaker 2: to selling a lot of chips for mining bitcoin, and
9:12
Speaker 2: then suddenly they were the only people selling picks and
9:19
Speaker 2: shovels for the gold rush in artificial intelligence. So the
9:24
Speaker 2: company's stock price has just kind of gone straight up,
9:28
Speaker 2: especially since open ai introduced chat GPT in November of
9:34
Speaker 2: twenty twenty two, and the stock's been hot. But so
9:37
Speaker 2: of other stocks like Microsoft, anything that's remotely related to
9:42
Speaker 2: artificial intelligence has been really off the charts, and I'm
9:47
Speaker 2: struggling whether it's hoopla or hype. I think some combination
9:52
Speaker 2: thereof I think it's going to take a while before
9:55
Speaker 2: AI makes a huge difference to our economy, but I
9:58
Speaker 2: think it'll make some difference. I Meanwhile, there's a lot
10:00
Speaker 2: of other technologies that I think will be very good
10:03
Speaker 2: for my base case, But for this scenario, the similarities are.
10:09
Speaker 2: You know, a tech bubble, tech lead bull market that
10:14
Speaker 2: becomes increasingly narrow focused on the large cap companies that
10:19
Speaker 2: are likely to benefit. Back in the late nineteen nineties,
10:22
Speaker 2: the stock that really took off was Cisco. Cisco makes
10:27
Speaker 2: a lot of equipment for the Internet, and the stock
10:31
Speaker 2: went up eightfold from nineteen ninety seven to two thousand,
10:35
Speaker 2: and then it collapsed for all sorts of reasons. But
10:40
Speaker 2: the reality is Internet certainly continued to proliferate. But I
10:46
Speaker 2: think for the reason Cisco collapses because everybody bought their equipment,
10:51
Speaker 2: partly for the for the Internet expansion, and partly because
10:55
Speaker 2: of the concerns about the Y two K problem. So
10:58
Speaker 2: when we crossed into the new millennium, companies had spend
11:02
Speaker 2: a tremendous amount on redoing their technology, and then suddenly
11:06
Speaker 2: all that demand kind of vanished at the turn of
11:10
Speaker 2: the clock. So it's conceivable that we could have that
11:14
Speaker 2: kind of scenario. We're maybe in the early phases of
11:17
Speaker 2: it right now.
11:19
Speaker 1: But to get into that kind of melt up, we'd
11:21
Speaker 1: need to see but we need to see rates falling fast.
11:24
Speaker 1: So we'd need to see everyone getting concerned that inflation
11:26
Speaker 1: was going to fall to two percent or below, and
11:28
Speaker 1: then we'd need to see actual rate cuts come through
11:30
Speaker 1: from the Fed.
11:31
Speaker 2: At least, it's a fascinating scenario to think about, because
11:37
Speaker 2: you know, put yourself in the shoes of FED shared
11:41
Speaker 2: your own Powell, he's just more or less said that
11:44
Speaker 2: they're done raising interest rates, that it's restrictive enough, And
11:47
Speaker 2: he and a few other FED officials have said, you know,
11:49
Speaker 2: if we do keep making progress and bringing inflation down,
11:53
Speaker 2: we will have to think about lowering the Fed funds
11:55
Speaker 2: rate because if we don't do that, then the inflation
11:58
Speaker 2: adjusted FED funds rate actually be going up. And so
12:02
Speaker 2: we don't want to be more restrictive than we are,
12:04
Speaker 2: so we might have to consider lowering rate. So, just
12:07
Speaker 2: having said all that, the markets have had a tremendous rally.
12:11
Speaker 2: I mean, we're up thirty five percent since the bottom
12:15
Speaker 2: of the bear market back on October twelfth, twenty twenty two,
12:19
Speaker 2: and a lot of that has been led by technology,
12:23
Speaker 2: which is very very much of a high beta sector.
12:30
Speaker 2: That's the best way leverage, way to play an economy
12:34
Speaker 2: that's growing without interest rates going up any further. And
12:38
Speaker 2: if the market starts to sense that the federally is
12:41
Speaker 2: about to cut interest rates, imagine how much higher things
12:45
Speaker 2: might go. So, I mean, I think Fred Chert, Jerome
12:49
Speaker 2: Pile knows all that, and I think he might very
12:52
Speaker 2: well start to push against it and say, you know what,
12:55
Speaker 2: we're actually not in any rush at all to lower
12:57
Speaker 2: interest rates. I mean, look, the economy doing well, inflation's
13:01
Speaker 2: coming down, what's the rush to lower interest rates. Nevertheless,
13:06
Speaker 2: if the FED becomes less relevant because we're not spending
13:10
Speaker 2: you know, nights and days wondering how much higher they're
13:13
Speaker 2: going to take interest rates, the markets can focus on
13:16
Speaker 2: the fundamentals and on the hype. And right now, the
13:20
Speaker 2: fundamentals look obviously good for the economy, and there's plenty
13:23
Speaker 2: of hype about AI.
13:26
Speaker 1: Yeah. I mean, it feels like it would be a
13:27
Speaker 1: great shame for the FED to start cutting rates aggressively
13:30
Speaker 1: again when they finally got them to a level that
13:32
Speaker 1: feels historically normal.
13:34
Speaker 2: I agree.
13:35
Speaker 1: So in less there was a wopping great recession, it
13:37
Speaker 1: would make sense, surely for central bankers around the world
13:41
Speaker 1: to go, thank god, we have an opportunity to normalize here.
13:44
Speaker 1: Let's try and stay somewhere around four percent, because that's
13:47
Speaker 1: roughly where they've been for the last three thousand years,
13:49
Speaker 1: and it's kind of works well.
13:51
Speaker 2: I think you make an excellent point, is that in
13:53
Speaker 2: some ways. While we all know that the central banks
13:56
Speaker 2: have been tightening, they've also been normalizing. We had a
14:00
Speaker 2: very abnormal period from two thousand and eight, the Great
14:02
Speaker 2: Financial Crisis through the Great Virus Crisis in twenty twenty
14:06
Speaker 2: two where central bankers were just obsessed with bringing inflation
14:11
Speaker 2: back up to two percent. Those were the days, right,
14:17
Speaker 2: and so they put interest rates at zero, they had
14:20
Speaker 2: quantitative easing. Quantitative tightening was not something that they envisioned
14:27
Speaker 2: at all. And at the same time, some of them
14:30
Speaker 2: had negative interest rates. So we're we're kind of back
14:33
Speaker 2: to normal. So why not leave it that way for
14:35
Speaker 2: a while? What's the rush to lower interest rates? And
14:38
Speaker 2: if they do lower interest rates, then they really have
14:43
Speaker 2: a risk of instead of worrying about price inflation, they
14:47
Speaker 2: may have to worry about asset inflation.
14:50
Speaker 1: And then of course they if they do cut again
14:52
Speaker 1: when we're not in an actual recessorary situation, they've got
14:55
Speaker 1: nothing left if we do move it. That's right, another
14:57
Speaker 1: nasty period.
14:58
Speaker 2: Come.
14:59
Speaker 1: I to ask you, as lets sign asmastide, do you
15:02
Speaker 1: have any thoughts about where the two percent target came
15:05
Speaker 1: from and whether it's valid. You know, we spend a
15:08
Speaker 1: lot of time on all our podcasts and all our
15:10
Speaker 1: articles talking about two percent and the importance of two percent,
15:13
Speaker 1: and John and I have traced it to a paper
15:16
Speaker 1: written in New Zealand a couple of decades ago, but
15:18
Speaker 1: we can't go back. Yeah, and that's it, right.
15:22
Speaker 2: I think you're right. I think the New Zealand was
15:24
Speaker 2: the first central bank, or among the first, to have
15:27
Speaker 2: an inflation target, and it kind of caught on. It
15:30
Speaker 2: became sort of an obsession with macro economists that maybe
15:35
Speaker 2: if the FED targeted some very low inflation rate, we
15:40
Speaker 2: could have nirvana. And you might recall there was a
15:45
Speaker 2: description of a period there in the eighties and the nineties.
15:48
Speaker 2: It was called the Great Moderation that the central banks
15:52
Speaker 2: had figured out how to calibrate their policy so that
15:58
Speaker 2: inflation would be very low, very moderate, and the economy
16:03
Speaker 2: would continue to grow. And it looked like a pretty
16:07
Speaker 2: good scenario until the central bank started to go wild
16:11
Speaker 2: about deflation, being terribly concerned about deflation, and suddenly they
16:16
Speaker 2: become obsessed about getting inflation up to two percent. I
16:18
Speaker 2: had no problems with inflation below two percent personally. I mean,
16:22
Speaker 2: I think most of us who had jobs, and most
16:25
Speaker 2: people did have jobs. Low inflation is a good thing,
16:28
Speaker 2: and zero inflation is fine, but they were paranoid that
16:31
Speaker 2: if it got down to zero, my god, it could
16:33
Speaker 2: turn into deflation. You're just need a little bit more cushion.
16:36
Speaker 2: So it's kind of nonsense, quite honestly.
16:39
Speaker 1: Okay, good because that's what I thought that it was
16:41
Speaker 1: kind of nonsense. So I'm glad to hear you confirm that.
16:44
Speaker 1: Of course, that period you talk about the Great Moderation,
16:46
Speaker 1: that was the period when our chandler dot to see
16:48
Speaker 1: to bolish boom and bust, which will not sure about that.
16:52
Speaker 2: It gives them something to do, you know, they can
16:54
Speaker 2: write papers about it and then try to implement policies
16:57
Speaker 2: to achieve that target. I guess it's a way to
17:01
Speaker 2: sell their importance. But I think the central banks have
17:05
Speaker 2: become way too important in our investment lives and our
17:10
Speaker 2: business lives because they are so meddlesome and.
17:13
Speaker 1: We also, I mean, if you look at the way
17:14
Speaker 1: that inflation has come down over the last year or so,
17:18
Speaker 1: it's not a given that that has anything to do
17:20
Speaker 1: with central banks. Anyway. They're very good at claiming credit.
17:23
Speaker 1: But you could say that the previous period of disinflation
17:26
Speaker 1: has nothing to do with them, and the inflation was
17:28
Speaker 1: something to do with them with the frantic money printing,
17:31
Speaker 1: but that coming down again wasn't necessarily anything to do
17:34
Speaker 1: with them. Well, a lot of taking credit where it
17:36
Speaker 1: might not be you.
17:37
Speaker 2: You and nice should go on a road show because
17:39
Speaker 2: it seems like we agree. And I'm sorry, I don't
17:45
Speaker 2: mean to finish your sentences off, but you know, I'm
17:48
Speaker 2: inspired by the spin your putting on things, because the
17:51
Speaker 2: same spin I've been putting on is, you know, you've
17:54
Speaker 2: got to be empirical, you've got to be data dependent.
17:57
Speaker 2: They keep saying they're data dependent, and yet they come
17:59
Speaker 2: up with it Kakamami theories that they try to force
18:04
Speaker 2: the data to fit. But you're absolutely right. I think
18:08
Speaker 2: we're we've learned that inflation isn't just a monetary phenomenon.
18:14
Speaker 2: I won't say that it's not a monetary phenomenon, but
18:16
Speaker 2: it's not just a monetary phenomenon. There are a lot
18:19
Speaker 2: of moving parts there, and I think historically when you
18:22
Speaker 2: look at inflation, it tends to be very spiky. The
18:24
Speaker 2: faster it goes up, once it peaks, it comes down
18:27
Speaker 2: almost as fast, and it does tend to be spiky.
18:30
Speaker 2: The seventies is actually an aberration, and again I think
18:33
Speaker 2: a lot of that had to do with the geopolitical
18:35
Speaker 2: crises in the Middle East.
18:37
Speaker 1: That's why we need to keep an eye on those
18:38
Speaker 1: geopolitical crises we've got at the moment, right, should we
18:41
Speaker 1: move on to the good bit? The good bit, the
18:44
Speaker 1: bit that you give a sixty percent probability to the
18:46
Speaker 1: Roaring twenties. And John and I have been really, really
18:50
Speaker 1: hoping for a Roaring twenties. We started talking about it,
18:52
Speaker 1: I think when you first did we read that and
18:54
Speaker 1: we were like, Yes, that's what's going to happen, that's
18:56
Speaker 1: what we need. And since then there's been kind of
18:59
Speaker 1: precious little kind of a Roaring twenties.
19:01
Speaker 2: Well, you know, at the beginning of the decade, I
19:04
Speaker 2: did start to think about the possibility that the twenty
19:09
Speaker 2: twenties could be like the nineteen twenties if nothing else
19:13
Speaker 2: kind of rhymes. And they do say that history doesn't
19:17
Speaker 2: repeat itself, but it does rhyme. And it was interesting
19:20
Speaker 2: that the nineteen twenties before that, just before the nineteen twenties,
19:24
Speaker 2: there's a horrible war. It was called the Great War.
19:28
Speaker 2: They didn't have World War iiO to call it World
19:31
Speaker 2: War one at the time, and it was horrible, and
19:34
Speaker 2: not only did people die from the war itself, but
19:37
Speaker 2: then because of all the diseases that the soldiers gave
19:42
Speaker 2: one another in the trenches. We had the Spanish flu
19:46
Speaker 2: in the late in nineteen eighteen nineteen nineteen, and so
19:51
Speaker 2: we had a pandemic, We had a war, and in
19:55
Speaker 2: the United States, and I think around the world in
19:58
Speaker 2: thee twenty there was a recession. And back then they
20:02
Speaker 2: still still talk call these things depressions. So it must
20:06
Speaker 2: have been pretty depressing to think about the outlook for
20:09
Speaker 2: the nineteen twenties at the beginning of the decade. And
20:12
Speaker 2: yet it turned out to be the roaring nineteen twenties
20:15
Speaker 2: because of technological innovations, things as high tech as plumbing,
20:21
Speaker 2: the auto manufacturing adapted more efficient ways of producing things,
20:31
Speaker 2: and as a result of that, we had a tremendous
20:33
Speaker 2: productivity boom. And productivity is a wonderful, wonderful economic variable
20:39
Speaker 2: because the more you can get productivity to grow, the
20:42
Speaker 2: more output you get per worker. By definition, you get
20:47
Speaker 2: less inflation, you get wages rising faster than prices because
20:51
Speaker 2: people workers do tend to get paid their real wage
20:57
Speaker 2: in productivity. So it was a great period. It ended
21:02
Speaker 2: badly in nineteen twenty nine nineteen thirty, though I point
21:07
Speaker 2: out that it was not because of the It wasn't
21:09
Speaker 2: the economy's fault. It was because of this smooth ally tariff.
21:13
Speaker 2: But that's a whole nother subject. But so there are similarities.
21:18
Speaker 2: Now we've had a pandemic. I think we've got a
21:21
Speaker 2: technology revolution that started in the nineteen nineties. It was
21:25
Speaker 2: fairly crude back then. If you could replace secretaries with
21:30
Speaker 2: selectric typewriters who were on selectric typewriters with Word, or
21:34
Speaker 2: if you could replace a lot of bookkeepers with the
21:39
Speaker 2: Excel spreadsheets, then you could increase productivity. But the technology
21:43
Speaker 2: wasn't all that applicable to businesses across the board the
21:48
Speaker 2: way it is now. I think now every company is
21:50
Speaker 2: a technology company. You either make it or you use it.
21:53
Speaker 2: If you don't use it, you're going to lose it,
21:56
Speaker 2: You're going to go out of business. So there's a
21:58
Speaker 2: lot of pressure in companies to use alogy to increase productivity,
22:01
Speaker 2: particularly since there's a chronic labor shortage. So you put
22:05
Speaker 2: that all together and I think we're in the early
22:07
Speaker 2: stages of a productivity growth boom, and I think it's
22:10
Speaker 2: already sort of been. The data is already there to
22:13
Speaker 2: show that it's happening. Back in twenty fifteen, on a
22:18
Speaker 2: five year trailing basis, the productivity growth rate was zero
22:22
Speaker 2: point five percent at an annual rate. So in the
22:25
Speaker 2: five years prior to the late twenty fifteen there's only
22:29
Speaker 2: zero point five close to zero then, I mean, and
22:33
Speaker 2: now the number is one point eight percent on a
22:35
Speaker 2: comparable basis, So that's a tripling of productivity growth. I
22:40
Speaker 2: think it's going to go to three to four percent,
22:42
Speaker 2: which sounds delusional maybe you know, far fetched, but that's
22:48
Speaker 2: the kind of productivity growth we've gotten in the previous
22:52
Speaker 2: three productivity growth booms. And I think this one of
22:55
Speaker 2: the technology lends itself to increasing productivity and just about
22:59
Speaker 2: every business I can think of.
23:02
Speaker 1: It's interesting, isn't it, And that they're an awful lot
23:04
Speaker 1: of people who spend their entire time worrying about falling populations,
23:08
Speaker 1: about lack of labor, about demographic pyramids, etc. But if
23:12
Speaker 1: you look back in history, some of the greatest periods
23:14
Speaker 1: of productivity growth have come in periods when the labor
23:17
Speaker 1: foruth has been shrinking quite fast rather than rising, because
23:20
Speaker 1: that's when there's enormous pressure on people to create the
23:23
Speaker 1: innovations that will keep things going. And I think the
23:26
Speaker 1: dynamic is the same in the US, but certainly in
23:28
Speaker 1: the UK we hear constantly about how we must have
23:31
Speaker 1: more and more people, we must replace the disappearance of
23:35
Speaker 1: our own workers with constant immigration, because that's the only
23:37
Speaker 1: way the economy will keep going. But I tend to
23:41
Speaker 1: feel rather as I think you do, that is the
23:43
Speaker 1: shortage of labor that forces innovation, forces creativity and forces productivity.
23:48
Speaker 1: And after all, the UK, the UK population has been
23:50
Speaker 1: increasing very fast over the last decade or so and
23:53
Speaker 1: it's done us very little good at all. GDPP ahead
23:55
Speaker 1: has been flat, very slightly rising, but certainly doesn't reflect
23:58
Speaker 1: anything particularly good. So I'm very much with you on
24:03
Speaker 1: this one. And if you look, for example at Japan,
24:05
Speaker 1: there's a I think one of the newspapers had a
24:07
Speaker 1: big piece earlier this week about Japan and the amazing
24:12
Speaker 1: innovations you see there in terms of robotics and AI
24:15
Speaker 1: to help deal with the falling population.
24:17
Speaker 2: Yeah, I completely agree with that.
24:19
Speaker 1: And if One of the things that we've been worried about,
24:21
Speaker 1: both in the US and in the UK, across Europe
24:24
Speaker 1: as well has been low real wage growth. This productivity
24:27
Speaker 1: boom that will finally push up real wages and finally
24:30
Speaker 1: give us some fans of a shift in the income
24:32
Speaker 1: inequality dynamic. Well, I mean sounds wonderful.
24:35
Speaker 2: Absolutely, look on real wages. I've actually been pointing out
24:40
Speaker 2: that the data shows that wages are divided, you know,
24:44
Speaker 2: average hourly earning is divided by the price deflator, which
24:48
Speaker 2: is the best kind of monthly way to keep track
24:50
Speaker 2: of real wages. They've actually been growing since nineteen ninety five.
24:55
Speaker 2: The period of stagnation was prior to that, particularly during
24:58
Speaker 2: the seventies and the eighties, because of the industrialization, because
25:03
Speaker 2: of globalization taking jobs away from Americans and others. A
25:10
Speaker 2: lot of jobs went to Japan in the suventies and
25:13
Speaker 2: the eighties, and then we saw China coming in to
25:18
Speaker 2: the global economy. But the reality is the data shows
25:22
Speaker 2: that real wages have been increasing at an annual rate
25:26
Speaker 2: on average of one point four percent since nineteen ninety five.
25:30
Speaker 2: So the reality is workers on collectively have actually seen
25:36
Speaker 2: their real wages going up and that compounds pretty nicely. Now,
25:40
Speaker 2: I think we could see real wages growing even faster
25:42
Speaker 2: than that because of faster productivity growth. There's a very
25:46
Speaker 2: close correlation between productivity and real wages. So I'm optimistic
25:51
Speaker 2: on that score. And as you said, there's a shortage
25:54
Speaker 2: of labor, I mean you've got a shortage of labor,
25:56
Speaker 2: you've got to pay a higher price for it. And
25:58
Speaker 2: the only way that works without causing a wage price
26:01
Speaker 2: spiral as if productivity does in fact make a comeback,
26:04
Speaker 2: and I think that's what companies are scrambling to achieve,
26:07
Speaker 2: and I think they are achieving it.
26:09
Speaker 1: Actuals. Do you worry about the effect of the rise
26:12
Speaker 1: of passive investing on the market. I'm one of the
26:15
Speaker 1: things that you write a lot about a lot is
26:17
Speaker 1: the Mega eight or the Steep seven. However, you like
26:18
Speaker 1: to look at these few technology stocks and one of
26:21
Speaker 1: the things that have pushed their prices up over and
26:23
Speaker 1: over and over is the momentum that comes from money
26:26
Speaker 1: continually pouring into index based ETFs. Is that a long
26:30
Speaker 1: term problem for markets?
26:32
Speaker 2: Well, I think it can be a problem during bull market,
26:36
Speaker 2: so obviously it can kind of feed on itself. The
26:41
Speaker 2: problem with the ETFs with passive investment is that people
26:45
Speaker 2: just pile into indexes, and if they all kind of
26:47
Speaker 2: pile into the same indexes, then you wind up with
26:51
Speaker 2: a potential concentrated market with just a few stocks doing
26:56
Speaker 2: very well. Active managers aren't going to put more than
27:02
Speaker 2: two percent of their portfolio, maybe three percent of their
27:05
Speaker 2: portfolio and any one stock. They tend to diversify, they
27:09
Speaker 2: don't put all the eggs in one basket. But the ETFs,
27:13
Speaker 2: of course, can have much more weight in just a
27:18
Speaker 2: few stocks. So we have what I call the megacap eight.
27:22
Speaker 2: Others call them in the magnificent seven. I watch a
27:25
Speaker 2: lot of movies, so I want I want Netflix to
27:28
Speaker 2: be in that composite. And the megacap eight now account
27:33
Speaker 2: for something like twenty seven twenty eight percent of the
27:38
Speaker 2: share of the market capitalization of the S and P
27:41
Speaker 2: five hundred and no very few active investors are going
27:47
Speaker 2: to concentrate their portfolio that much in a handful of stocks,
27:52
Speaker 2: much to their chagrin obviously, because that's where the performance
27:55
Speaker 2: is vide because.
27:57
Speaker 1: They're always end up performing as a result. Okay, so
27:59
Speaker 1: let's go back to the Roaring twenties.
28:02
Speaker 2: Sure.
28:03
Speaker 1: Hopefully this is excellent for stock markets. Right. It's not
28:06
Speaker 1: quite the melt up, but it's a better longer term
28:10
Speaker 1: bullish case.
28:11
Speaker 2: It's a better longer term bullish case from a fundamental perspective.
28:15
Speaker 2: The risk is that everybody else besides you and me
28:21
Speaker 2: and a few others kind of joins the party here.
28:23
Speaker 2: So you know, I think, didn't Prince sing a song
28:26
Speaker 2: about let's party like it's nineteen ninety nine, So I
28:31
Speaker 2: think favorite, Yeah, So I think that the nineteen twenties
28:34
Speaker 2: is great for the fundamentals. It's great for productivity and
28:39
Speaker 2: real wages and prosperity. Hopefully the stock market just doesn't
28:44
Speaker 2: get too ahead of it.
28:46
Speaker 1: The stock market does pretty much always get ahead of things,
28:48
Speaker 1: and it's already possibly a little ahead of itself already.
28:51
Speaker 1: I mean, it's certainly smashed through your forecast at the
28:53
Speaker 1: end of last year, and I don't know if it's
28:55
Speaker 1: smashing them already this year, but can't be far off.
28:57
Speaker 2: I have to tell you, I do talk to people
29:02
Speaker 2: in the press on a fairly regular basis, and I
29:04
Speaker 2: had an interview recently with a young fellow from a
29:09
Speaker 2: Korean newspaper, and you know, I thought we were going
29:14
Speaker 2: to have a pretty broad range conversation, but he kept
29:17
Speaker 2: coming back to you know, he said to me that
29:20
Speaker 2: retail investors in Korea are very excited about artificial intelligence.
29:25
Speaker 2: How can they play it? And it's just dawned me
29:27
Speaker 2: that it's a big world out there with lots of
29:30
Speaker 2: people playing the market. And if this really catches on
29:35
Speaker 2: on a global basis as like a really hot place
29:37
Speaker 2: to be, then it could turn into the nineteen nineties.
29:41
Speaker 2: But even if it does, it's not the end of
29:43
Speaker 2: the world. I mean, we had, you know, a tech
29:46
Speaker 2: wreck in the stock market in the early two thousands,
29:51
Speaker 2: and yet we're well advanced beyond that in terms of
29:56
Speaker 2: real GDPs and an all time record high real consumer spending,
29:59
Speaker 2: all time ra or highest standard of livings that would
30:01
Speaker 2: never have been better. I know people argue with me
30:04
Speaker 2: about that, but the reality is, even if we have
30:08
Speaker 2: a speculative bubble in stocks and tech stocks and it bursts,
30:12
Speaker 2: it's probably not going to change the course of progress
30:17
Speaker 2: that would be made fundamentally in a twenty twenty and
30:20
Speaker 2: a roaring twenty twenties kind of scenario. As I mentioned before,
30:24
Speaker 2: Cisco was a hot stock in the late nineteen nineties
30:27
Speaker 2: that crashed in early two thousands. But that wasn't because
30:31
Speaker 2: suddenly somebody slammed the bricks on Internet. Quite the opposite.
30:35
Speaker 2: The Internet has become a ever president in our lives.
30:40
Speaker 1: So we can have unless it, it would be all bad.
30:42
Speaker 1: We could have a Roaring twenties and a late nineteen
30:45
Speaker 1: nineties at the same time.
30:47
Speaker 2: Absolutely, so sixty plus twenty is eighty percent. So I
30:50
Speaker 2: guess I'm quite polish.
30:52
Speaker 1: You're very village. I'd call that extremely villished. Okay, so
30:55
Speaker 1: here I am. I'm a retelavestor. I'm an ordinary persident
30:57
Speaker 1: in the UK or the US. I'm listening to you too,
31:00
Speaker 1: and I'm thinking this is fantastic. Marin's finally got someone
31:02
Speaker 1: on who's positive about stuff. What should I buy?
31:06
Speaker 2: Well, I think that what they do is of go
31:11
Speaker 2: with the underlying fundamentals. The underlying fundamentals I think are positive,
31:16
Speaker 2: particularly in the US. I would overweight the US and
31:20
Speaker 2: a global portfolio.
31:21
Speaker 1: Would you even at these valuations, even though significantly more
31:25
Speaker 1: expensive than most of the markets, You'd still overweight it.
31:28
Speaker 2: I've been favoring what I call a stay home over
31:32
Speaker 2: a go global scenario since two thousand and nine twenty ten,
31:38
Speaker 2: and it's worked pretty well. I guess at some point
31:40
Speaker 2: I'm going to overstay my welcome there. But for example,
31:43
Speaker 2: I've been opposed to investing in China. I just don't
31:47
Speaker 2: think it's a good place to invest from the point
31:50
Speaker 2: of view of the political intervention by the communist government
31:54
Speaker 2: in the economy. So I've been down on that very
31:58
Speaker 2: right there. India has been a great place to invest.
32:01
Speaker 2: But talk about a bull market, I mean, that's been
32:05
Speaker 2: a very hot market. So you know, when you actually
32:08
Speaker 2: go around and look for places that are cheap, some
32:12
Speaker 2: of them are cheap for a good reason and aren't
32:14
Speaker 2: necessarily going to turn around. I guess, you know, you
32:17
Speaker 2: could look at Vietnam, which is actually still viewed as
32:19
Speaker 2: a frontier market as opposed to even emerging market. That's
32:23
Speaker 2: in other words, it's still on the dicey side. Mexico
32:26
Speaker 2: is a big beneficiary I think of de globalization because
32:31
Speaker 2: production is going from places like China to Mexico closer
32:35
Speaker 2: to the United States. But the United States in some
32:38
Speaker 2: ways as an emerging economy, believe it or not, we're
32:41
Speaker 2: seeing a tremendous amount of spending on shoring and bringing
32:45
Speaker 2: manufacturing back to the United States. We have an extremely
32:48
Speaker 2: diversified economy. If you want tech, it's hard to get.
32:52
Speaker 2: I mean, I don't know that there's really any companies
32:55
Speaker 2: comparable to the Megacap eight around the world. I mean, Samsung,
32:59
Speaker 2: maybe I won Semi. I mean, they're clearly some great
33:02
Speaker 2: companies around the world. But in terms of leading age technology,
33:07
Speaker 2: a lot of it seems to be here in the US.
33:10
Speaker 2: Maybe we come up with a lot of the concepts
33:12
Speaker 2: and then we produce the concept somewhere else. But yeah,
33:15
Speaker 2: I would I would overweight the United States, even though
33:18
Speaker 2: it's not cheap. What's really not cheap, of course, is
33:21
Speaker 2: the Megacap eight. And that's where the potential for a
33:27
Speaker 2: nineteen ninety scenarios come in. Is that everybody trying to
33:29
Speaker 2: kind of gives up and says, all right, I didn't
33:32
Speaker 2: get into these stocks. I just got to get into them,
33:34
Speaker 2: and everybody gets that has missed it gets in at
33:37
Speaker 2: the top. But I would say technology finance industrials are
33:42
Speaker 2: the areas of the market that I've favored. You know,
33:45
Speaker 2: my problem in giving advice these days is it was
33:49
Speaker 2: better advice near the bottom, which is when I actually
33:53
Speaker 2: did turn bullish back in October of twenty twenty two,
33:56
Speaker 2: about two weeks after the market bottom, so there's a
33:59
Speaker 2: lot more value there. But small and mid cap stocks
34:03
Speaker 2: have actually been very frustrating for me because they've looked
34:06
Speaker 2: really cheap for a long time and suddenly they finally
34:10
Speaker 2: caught on. Since October of last year, I think once
34:15
Speaker 2: the markets started to believe that the FED was done
34:17
Speaker 2: raising interest rates, the market started to broaden, and then
34:21
Speaker 2: just recently it started to narrow again. So it's been
34:25
Speaker 2: kind of a checking game to play. But I think
34:27
Speaker 2: if you're looking for some really good values, there's a
34:31
Speaker 2: lot of small cap midcaps areas of the market, and
34:35
Speaker 2: again I would focus on technology financials. Biotechnology has been
34:40
Speaker 2: doing better, so there are opportunities for sure, But as always,
34:45
Speaker 2: worked with a good financial advisor that you feel comfortable with,
34:49
Speaker 2: that knows what your needs are and can help guide you.
34:53
Speaker 1: Now and that little run around the world just now,
34:56
Speaker 1: we covered India, we covered Mexico, and we covered pretty much.
34:59
Speaker 1: Ever you did not mention either Japan or the UK,
35:03
Speaker 1: both markets that a lot of people would say are
35:05
Speaker 1: fundamentally cheap, and well they might have had difficulties are
35:08
Speaker 1: both cheap and jam full of fairly interesting companies, but
35:12
Speaker 1: neither of those have made it onto your radar.
35:14
Speaker 2: Yeah. Well, we were just talking about emerging economies, which
35:18
Speaker 2: is why I kind of mentioned them. But developed economies obviously.
35:23
Speaker 2: In terms of global aggregates, stock aggregates include of course
35:28
Speaker 2: Japan and the UK. I've got no problems with investing there.
35:32
Speaker 2: Japan has been actually on fire, so it's not as though,
35:35
Speaker 2: you know, we're discovering something that nobody knows about. Quite
35:39
Speaker 2: the opposite. It's it's been a very hot market indeed,
35:43
Speaker 2: and the UK is as well.
35:47
Speaker 1: I'm just saying we haven't been on fire. No hot
35:49
Speaker 1: market here, nothing on fire. Yeah, we just stumble along.
35:53
Speaker 2: Yeah, maybe there are some opportunities there. But look, I
35:57
Speaker 2: think Europe generally speaking has a demographic issue. It's aging rapidly.
36:04
Speaker 2: I mean, there has been a lot of migration. But
36:06
Speaker 2: you know, maybe you know, all this migration that's occurring,
36:10
Speaker 2: it's unsettling, it's an be destabilizing politically, but history shows
36:15
Speaker 2: that immigration is actually a source of economic growth if
36:21
Speaker 2: there are good incentives for people who are looking for
36:25
Speaker 2: a better life to actually do that on their own
36:27
Speaker 2: rather than to depend on the government for a better life.
36:31
Speaker 1: Yeah. Well, the immigration interaction with the welfare system maybe
36:34
Speaker 1: makes now different to historical environments that have been the same.
36:38
Speaker 1: Who knows.
36:39
Speaker 2: Now it's more destabilizing politically than it's stimulative economically.
36:43
Speaker 1: Okay, Well, let's not move into a non jolly conversations
36:46
Speaker 1: because you're optimist here, remember that network. We're very much
36:49
Speaker 1: sticking with eighty percent bullish scenario here. But I have one,
36:53
Speaker 1: actually two really important questions from here, and the first
36:56
Speaker 1: is the question that we ask everybody who comes on
36:59
Speaker 1: the podcast. An answer is compulsory. Okay, if I said
37:06
Speaker 1: that you could only have one of the following assets,
37:09
Speaker 1: and we can argue about whether assets or not for
37:12
Speaker 1: ten years, nothing else, just one of these, which would
37:15
Speaker 1: you choose? And you get to choose between gold, bitcoin,
37:20
Speaker 1: or a deposit account straightforward savings account, cash cash.
37:23
Speaker 2: Basically, I don't get a chance. I don't get a
37:25
Speaker 2: choice of buying buying equities or bonds.
37:27
Speaker 1: Nope, nope, nope, no nope, that's not how the game works.
37:30
Speaker 1: That's not how the game works.
37:32
Speaker 2: Oh my god, And I have to make a choice
37:34
Speaker 2: of those three. Oh well, then if you. If you
37:37
Speaker 2: put me in that kind of world, what the heck
37:39
Speaker 2: I'll take. I'll take a run on bitcoin, though I
37:42
Speaker 2: know almost nothing about it, and I've not been a
37:46
Speaker 2: fan of bitcoin because it doesn't pay a dividend, it
37:51
Speaker 2: doesn't pay interest. From that perspective, I guess it should
37:54
Speaker 2: be in deposits if they pay interests. But if you
37:57
Speaker 2: tell them, you get interest. If I do get it
38:00
Speaker 2: on that asset, put half half, okay.
38:05
Speaker 1: Half in cash, half in bitcoin. I'm not going anywhere
38:07
Speaker 1: near gold. No gold.
38:09
Speaker 2: I think bitcoin's sort of become the new gold. So
38:13
Speaker 2: you know, if I'm going to be both conservative and
38:16
Speaker 2: speculative at the same time, I'll take my chances in
38:19
Speaker 2: half in deposits and half in bitcoin.
38:22
Speaker 1: Excellent digital gold. It is. Okay, thank you so much. Now,
38:26
Speaker 1: one last question, and this is this is slightly off topic,
38:28
Speaker 1: but how did you train your dog to be so
38:31
Speaker 1: well behaved?
38:32
Speaker 2: Well, they're King Charles Cavaliers and we've got three of them,
38:36
Speaker 2: and they're they're very they're couch potato dogs. They sleep
38:40
Speaker 2: a lot, they're wonderful members of our family.
38:43
Speaker 1: Okay, Well, I wish we'd had this conversation last week
38:46
Speaker 1: because while your dog is meandering around sweetly and obediently
38:50
Speaker 1: in the background. I've got an eight week old body
38:53
Speaker 1: Border Terrier puppy downstairs that I can hear yapping right now.
38:58
Speaker 1: I think you gonde here wrapping, so I wish I'd
39:01
Speaker 1: gone for a spaniel. That's a bit of advice I
39:03
Speaker 1: could have done with it earlier. Ed thank you so
39:06
Speaker 1: much for joining us today. It's been wonderful.
39:07
Speaker 2: Talking to you my pleasure. Indeed, thank you.
39:13
Speaker 1: Thanks for listening to this week's Maren Talks Money. We'll
39:15
Speaker 1: be back next week in the meantime. If you like
39:17
Speaker 1: our show, rate review and subscribe wherever you listen to
39:20
Speaker 1: your podcasts, and do tell your friends. This episode was
39:23
Speaker 1: hosted by Me Maren Sumset Web. It was produced by
39:25
Speaker 1: Summersidi additional editing by Blake Maples. Special thanks to Eddie,
39:29
Speaker 1: Danny and I Know. We always plug John's brilliant newsletter
39:32
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39:34
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