Latest / Merryn Talks Money / The Capital Cycle Is Turning

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The Capital Cycle Is Turning · Merryn Talks Money

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Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News.
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Speaker 2: Welcome to Marin Talks Money, the podcast in which people
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Speaker 2: who know the markets explain the market. I am Maren
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Speaker 2: Somerset Web and this week I am speaking with Luke Bridgman,
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Speaker 2: Senior partner and portfolio manager at Hosking Partners. I invited
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Speaker 2: Luke on because they are a very interesting group of investors.
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Speaker 2: At Hosking. They invest based on the capital cycle. We're
0:37
Speaker 2: going to talk about that, what it means, how it works,
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Speaker 2: and at the same time we talk about everything from
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Speaker 2: why they're invested in Japan to oil and in particular
0:46
Speaker 2: about dram memory and about shipping. Luke, Welcome to Marin
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Speaker 2: Talks Money.
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Speaker 1: Great to be here. Thank you, Mary.
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Speaker 2: Well listen, Luke. I asked you on because I think
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Speaker 2: a lot of our listeners are quite interested in capital
0:57
Speaker 2: cycle investing. We've written and spoken about it a few
1:00
Speaker 2: times in the past, and looking at the massive levels
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Speaker 2: of capital spending going on, particularly of course in the
1:07
Speaker 2: AI area, it seems like something we probably should begin
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Speaker 2: to focus on. So that's the reason that I thought
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Speaker 2: I want to talk someone involved in a capital cycle
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Speaker 2: style of investing, and you came to mind so I
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Speaker 2: wonder if we could just start by me asking you
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Speaker 2: what exactly is it that you do at Hoskin and
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Speaker 2: how does the investing style work?
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Speaker 1: Great? Thanks Marin. What we do at Hosking is is
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Speaker 1: very simple. We have a single strategy and that's global equities.
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Speaker 1: We do that with a team of five portfolio managers,
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Speaker 1: and we are slightly different from other firms in that
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Speaker 1: we are all global generalists investing across the whole world
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Speaker 1: without specialization, using this capital cycle approach, and we do
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Speaker 1: this with a very diversified portfolio of about four hundred stocks.
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Speaker 2: If that answers the question, it begins to answer the question.
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Speaker 2: But the second bit is to explain because we do
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Speaker 2: not have a fully expert audience. We have educated amateurs
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Speaker 2: at our audience in the main. So now we need
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Speaker 2: to explain exactly what it is that you mean by
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Speaker 2: capital cycle investing.
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Speaker 1: Okay, so the capital cycle is based on the very
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Speaker 1: simple paradigm. The high returns tend to attract capital, and
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Speaker 1: that capital competes away those returns to the point that
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Speaker 1: the returns fall due to obsolescence or bankruptcy or merger.
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Speaker 1: And then in the absence of competition, the returns recover
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Speaker 1: and the cycle begins again. And that's not rocket science.
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Speaker 1: Is very simple. It's a simple observation about business and economics.
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Speaker 1: As capital cycle investors, we're really focused on where that
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Speaker 1: doesn't work, and that means we're really looking for two
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Speaker 1: types of situation. Broadly speaking, we're looking for high return
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Speaker 1: companies where capital can't get in. So those are sort
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Speaker 1: of Warren bufferty Moti barriers to entry. Situations where there's
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Speaker 1: some reason why capital can't come in to compete and
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Speaker 1: the returns can be sustained for higher than the market
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Speaker 1: recognized in the price. They're able to beat the fade
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Speaker 1: and show persistence. And then we're also interested in situations
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Speaker 1: where returns have been beaten up and capital has been withdrawn,
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Speaker 1: and that gives us the confidence to make the bet
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Speaker 1: that the returns are going to pick up sooner than
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Speaker 1: the market is given credit for. And so the benefit
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Speaker 1: of the capital cycle approach is that it's able to
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Speaker 1: plot all companies somewhere in this sort of view of
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Speaker 1: the world, but it makes it incredibly versatile. That's the
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Speaker 1: governing principle, the lens through which we see the world,
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Speaker 1: which allows us all to be generalists trying to take
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Speaker 1: advantage of this huge opportunity set.
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Speaker 2: So in a sense, you're looking at investing through the
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Speaker 2: lens of supply rather than through the lens of demand.
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Speaker 2: I mean, I was actually on a podcast the other
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Speaker 2: day talking to someone about this and saying that one
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Speaker 2: of the very first things that I learned when I
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Speaker 2: first started as a stop in Tokyo was to look
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Speaker 2: in particular at semiconductor stocks and to say, when these
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Speaker 2: things look cheap is when you shouldn't be buying them,
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Speaker 2: and when they look expensive is when you should be
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Speaker 2: buying them, because given the way the capital cycle works,
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Speaker 2: you want to be selling them when they are incredibly popular,
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Speaker 2: making powers of money and holds more capital that's coming
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Speaker 2: into the market, because that's when you know that prices
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Speaker 2: will soon fall, whereas on the other end, when they
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Speaker 2: look very expensive, they're not. But sorry, yes, when they're
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Speaker 2: not making any money, that's when you want to be
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Speaker 2: to be buying them, because there's very limited amounts of
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Speaker 2: capital in the market.
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Speaker 1: Right, Yeah, Yeah, you're completely right. Two points. Yes, it's
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Speaker 1: about supplier rather than demand, So we're sort of able
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Speaker 1: to observe those things which are observable we can count
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Speaker 1: factories being opened, we can look at job hires, we
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Speaker 1: can see the reverse in terms of bankruptcies or failures.
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Speaker 1: We can see the amount of debt being raised or
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Speaker 1: the amount of equity being issued, rather than trying to
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Speaker 1: predict how many widgets are going to be sold in
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Speaker 1: North America in two years time. But you're also right
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Speaker 1: that it's something which is inherently contrarian. And if we
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Speaker 1: see high returns as capital cycle investors, our first thought is,
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Speaker 1: you know, how likely are those returns to be competed away?
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Speaker 1: Where we see poor returns which are hated and neglected
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Speaker 1: by everybody else, we ask ourselves, well, could they be wrong?
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Speaker 1: And is there an opportunity for returns to recover because
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Speaker 1: capital has been withdrawn from this particular sector. So, as investors,
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Speaker 1: taking contrariy decisions is emotionally very very difficult, and if
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Speaker 1: we have some sort of intellectual or rational tool which
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Speaker 1: helps us to make emotionally difficult decisions, then that's got
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Speaker 1: to be something in our favor.
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Speaker 2: Yes, well, that's why we always say that good fund
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Speaker 2: management as much as that character of strategy, don't.
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Speaker 1: We Yeah, I think that's very true.
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Speaker 2: Right, So let's move that on to talking about did
5:52
Speaker 2: you write this piece about the share prices of the
5:54
Speaker 2: three companies which dominate the global deram membory thing was
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Speaker 2: that you?
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Speaker 1: Noh, yeah, I did. I did write that.
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Speaker 2: Yeah, worry about that?
6:00
Speaker 1: Well?
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Speaker 2: Excellent, of course you wrote it, and it's excellent. This
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Speaker 2: is the area when we're talking about the capital cycle.
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Speaker 2: We look at companies such as the easy you talk
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Speaker 2: about Micron and Skhiinex and Samsung. And obviously there's been
6:11
Speaker 2: a lot going on in career over the last couple
6:13
Speaker 2: of weeks while I've been on holiday, so the cost
6:15
Speaker 2: bit is now down from its peakback in June, right,
6:17
Speaker 2: and some of these big, big companies have had rather
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Speaker 2: nasty negative momentum moves recently. But nonetheless, the conversation is
6:26
Speaker 2: about the extent to which these companies that currently dominate
6:30
Speaker 2: the memory market will be subject to an old fashioned
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Speaker 2: capital cycle.
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Speaker 1: Yeah. It's a fascinating subject because we've been investing in
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Speaker 1: the memory semis, by which I mean the manufacturers of
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Speaker 1: DRAM in particular, and those are the two Korean companies
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Speaker 1: Samsung and sk Heinex, as well as Micron in the US.
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Speaker 1: But we've been investing in them since inception, which for
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Speaker 1: us is twenty fourteen. It's a really interesting sector because
6:55
Speaker 1: to understand that, you really need to go back to
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Speaker 1: the discovery of DRAM, which was by In funnily enough
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Speaker 1: in nineteen seventy and despite being the pioneer in this industry,
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Speaker 1: it actually exited fifteen years later in nineteen eighty five
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Speaker 1: to focus on logic chips, where it saw itself having
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Speaker 1: a greater advantage. And the reason why it exited DRAM
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Speaker 1: despite having been the pioneer is that it just saw
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Speaker 1: more and more competition coming into this highly commoditized market
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Speaker 1: for memoryships, which were all interchangeable and which we're suffering
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Speaker 1: from excess investment. There was a constant progress in what's
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Speaker 1: called Moore's law. The number of transistors you can get
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Speaker 1: onto a chip shrinks at a fairly regular pace every
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Speaker 1: two years, broadly speaking, and so the constant need keep
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Speaker 1: investing with the latest technology before you'd even really made
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Speaker 1: a return on the previous investment cycle. And this led
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Speaker 1: what had been thirty DRAM companies around nineteen eighty five
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Speaker 1: when Intel exited, to fall to just three years later
8:00
Speaker 1: in twenty twenty thirteen, twenty fourteen s and that was
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Speaker 1: because they couldn't keep up with that pace of investment,
8:07
Speaker 1: and so the lack of a return on capital meant
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Speaker 1: that they were either forced into bankruptcy or gobbled up
8:14
Speaker 1: by other d round companies until there were just three left.
8:17
Speaker 1: And then what happened at that point was the physics
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Speaker 1: really reached its natural limit and it became more and
8:24
Speaker 1: more difficult to shrink the number of transistors on these chips,
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Speaker 1: and that gave the three surviving companies the breathing space
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Speaker 1: to slow down. And the capex was still very high,
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Speaker 1: which was a significant barrier to entry, preventing other companies
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Speaker 1: really from coming in. And we can come onto the
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Speaker 1: Chinese companies.
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Speaker 2: Later, Oh yes, that's the plan.
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Speaker 1: But in the meantime it allowed them to generate a
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Speaker 1: return on capital rather a return of capital. And so
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Speaker 1: the chip industry is still cyclical. It's based on and
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Speaker 1: mark cycles, and chip companies need to run their kit
9:03
Speaker 1: at a full capacity, so you get a mismatch between
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Speaker 1: supply and demand. But that's just a normal inventory cycle.
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Speaker 1: But because the market had consolidated because no new capital
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Speaker 1: was coming in from outside, what we found was that
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Speaker 1: through each cycle, the reternal capitul in each got higher
9:20
Speaker 1: and in each low as well, which was a fairly
9:22
Speaker 1: attractive phenomenon. So as long term investors, we were able
9:27
Speaker 1: to trim at the peaks and add at the bottoms,
9:30
Speaker 1: which we did fairly successfully up until twenty twenty two
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Speaker 1: in November when chatchpt first launched itself on the world,
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Speaker 1: and we saw the beginning of a huge demand cycle
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Speaker 1: which we're still in and that has turned these companies
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Speaker 1: into trillion dollar companies. I'm not sure where they are
9:50
Speaker 1: to dating. The share prices are moving very violently because
9:54
Speaker 1: of all of the retail participation and momentum in the market,
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Speaker 1: and so that's really put our previous approach to the test.
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Speaker 1: And what we're trying to do is actually keep doing
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Speaker 1: what we have been doing, which is trim as the
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Speaker 1: prices get higher and higher while retaining exposure, so that
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Speaker 1: we probably will be adding at some point in the
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Speaker 1: future if prices fall dramatically further from where they are.
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Speaker 2: So when you say that that it challenged your previous approach,
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Speaker 2: I mean you still refer to this as a cycle.
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Speaker 2: This is not a permanent increase in demand constantly. Are
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Speaker 2: still a cycle. It's just a matter of figuring out
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Speaker 2: what sort of cycle it is and how long a
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Speaker 2: cycle it is.
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Speaker 1: And there are wheels within wheels here, there's this sort
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Speaker 1: of capital cycle life to've been describing their inventory cycles.
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Speaker 1: There are product cycles, they're economic cycles. But we've got
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Speaker 1: to try and keep an eye on the bigger picture
10:42
Speaker 1: in terms of the capital cycle. And I think the
10:44
Speaker 1: thesis remains intact that there are still just three d
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Speaker 1: RAM companies, but we've got to recognize that there is
10:51
Speaker 1: exuberance in prices. There is the threat that the Chinese
10:55
Speaker 1: will catch up, and there is the risk that other
10:58
Speaker 1: ship companies may try to come into the memory market. Yeap.
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Speaker 1: Where we take some comfort for the time being is
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Speaker 1: just the huge amount of capital and know how required
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Speaker 1: to compete with these companies. And even if they themselves
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Speaker 1: are going to lose discipline in terms of capex, and
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Speaker 1: we're fairly confident that they are aware of their own
11:19
Speaker 1: sins in the past and determined not to repeat the
11:21
Speaker 1: same mistakes. Never say never, But nevertheless, the amount of
11:25
Speaker 1: time required to bring on new capacity is long in
11:27
Speaker 1: terms of building these new fabs and equipping them and
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Speaker 1: getting them going, and so on, so we've got some
11:33
Speaker 1: time yet.
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Speaker 2: Yeah, so you're not too worried about the Chinese competition
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Speaker 2: coming through.
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Speaker 1: I think at the moment the view is that as
11:43
Speaker 1: the Chinese advance, so too will the incumbents, and so
11:47
Speaker 1: catching up will always be difficult, and there's much less
11:50
Speaker 1: value in the previous generation of chips than the leading edge.
11:55
Speaker 1: But I think you'd be foolish to assume that the
11:58
Speaker 1: Chinese aren't capable of eventually catching up. So it may
12:01
Speaker 1: simply be a question of time.
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Speaker 2: Yeah, only say the end that, of course, superprofits will
12:06
Speaker 2: eventually bring on new supply, because they always do, with
12:10
Speaker 2: inevitable consequences for returns and ultimately for share prices.
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Speaker 1: But that's a way of Yeah. I mean it's interesting
12:17
Speaker 1: speaking to the companies themselves. They are so conscious of
12:20
Speaker 1: having screwed up previous cycles. They are now entering into
12:24
Speaker 1: so called long term supply agreements with their customers to
12:27
Speaker 1: try and keep everyone on the same page and make
12:30
Speaker 1: sure that supply matches demand. But very difficult to do them.
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Speaker 2: Yeah, because you have that vague feeling, don't you, that
12:37
Speaker 2: there may be an earnings bubble in here, and you
12:39
Speaker 2: look at the valuations going back to what we were
12:41
Speaker 2: talking about at the beginning, is that historically, when a
12:43
Speaker 2: company like this is look cheap, regardless of the fact
12:46
Speaker 2: that it's had an extraordinary share price run, you look
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Speaker 2: at the p and you go, oh, four times six times,
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Speaker 2: that looks very cheap. But I think historically that has
12:53
Speaker 2: been the time to sell.
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Speaker 1: Yeah, I mean, mid single digit pe looks very cheap.
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Speaker 1: But on the other hand, much higher price to book
13:01
Speaker 1: multiples than we're used to. I mean, previously priced to
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Speaker 1: book multiples peaked in this industry at about three times,
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Speaker 1: and they are six, seven, eight times at the moment.
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Speaker 1: And if you can put capital to work and the
13:14
Speaker 1: stock market's going to give a value to that capital
13:18
Speaker 1: six times what you just put in, then that's a
13:20
Speaker 1: great incentive to overinvest.
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Speaker 2: Yeah. Okay, well we'll watch that one and we'll keep
13:25
Speaker 2: feeling sorry or worrying about the Korean retail investors. I've
13:30
Speaker 2: been on holiday and one of the things that have
13:31
Speaker 2: stood out to me on my return has be this
13:33
Speaker 2: number that three percent of adults in career received a
13:36
Speaker 2: margin call. It seemed extremely worrying.
13:39
Speaker 1: Yeah, I mean, that's human dimension to that, which is horrifying,
13:43
Speaker 1: But clearly there's a huge amount of exuberance in the
13:45
Speaker 1: market at the moment, and that's partly a phenomenon of
13:49
Speaker 1: momentum and indexation and all those phenomena we're.
13:52
Speaker 2: Familiar with and reminded that diversification is super useful. Right,
14:08
Speaker 2: What else is interesting at the moment for you? I mean,
14:10
Speaker 2: I see looking at the fund fact cheap for the
14:13
Speaker 2: hosting Global Equity Fund that Japan is still the top exposure.
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Speaker 1: Yeah, I mean, that's really one of the themes in
14:22
Speaker 1: the portfolio. Trying to interpret the four hundred stocks in
14:25
Speaker 1: our portfolio and grouping them into themes, and Japan is
14:29
Speaker 1: one of those. But there are different ways to slice
14:31
Speaker 1: to slice the portfolio. We've been overway Japan for about
14:35
Speaker 1: four years, and like I'm sure many of your other guests,
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Speaker 1: Japan has gone from all the purpose of corporate Japan
14:42
Speaker 1: has gone from providing full employment to the Japanese working
14:44
Speaker 1: population to providing returns on capital for the retired Japanese
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Speaker 1: population as the demographics have aged and valuations have been
14:53
Speaker 1: very cheap, and there's been a massive tailwind from the
14:56
Speaker 1: combination of activism by overseason vesters and domestic institutions wanting
15:02
Speaker 1: to improve return on equity by Japanese corporates. So we've
15:07
Speaker 1: really been taking advantage of that, and I think that continues.
15:10
Speaker 1: And the interesting question is which other countries are going
15:12
Speaker 1: to be next, whether it's career. Malaysia has a value
15:15
Speaker 1: up program as well.
15:17
Speaker 2: Yeah, well Career has a program now very similar to
15:19
Speaker 2: the Japanese one, pretty much copied, right, so you may
15:22
Speaker 2: begin to see things broaden out in career.
15:25
Speaker 1: Yeah, And I mean an interesting thing in career is
15:28
Speaker 1: coming back to the memory semis. They've been making so
15:30
Speaker 1: much money that their unions have successfully negotiated profit participation
15:37
Speaker 1: in the pay of their employees. And these super profits
15:40
Speaker 1: are going to result in I think a huge amount
15:44
Speaker 1: of wealth filtering down into the Korean population, which should have,
15:49
Speaker 1: you know, pretty strong ripple effects on the rest of
15:51
Speaker 1: the Korean stock market.
15:52
Speaker 2: Yeah, which would be interesting. Let's go back to Japan then,
15:55
Speaker 2: and what sectors have you got exposure to, entrepaneur is
15:58
Speaker 2: this just across the board, We.
16:01
Speaker 1: Have pretty broad exposure. We have really been able to
16:05
Speaker 1: take advantage of the diversified nature of our portfolio to
16:09
Speaker 1: have quite a lot of more audiosyncratic risk, by which
16:13
Speaker 1: I mean really size and liquidity, so smaller cap Japanese
16:20
Speaker 1: companies where other people running more concentrated strategies would find
16:27
Speaker 1: it difficult to put money to work. Because we have
16:30
Speaker 1: this broader portfolio, we can invest in those companies and
16:33
Speaker 1: take advantage potentially of the work of other activist investors
16:37
Speaker 1: who may have been working with the company behind the
16:40
Speaker 1: scenes for several years in some cases, and also situations
16:44
Speaker 1: which might be relatively liquid because of a family sheholder
16:47
Speaker 1: or something. Because we have over fifty stocks in Japan,
16:51
Speaker 1: we're not reliant on any one situation paying off within
16:56
Speaker 1: a certain timeframe, and so we can manage that liquid risk.
17:01
Speaker 1: I think a little better thanks to the diversification. But
17:04
Speaker 1: it tends to be more domestic companies, but we also
17:07
Speaker 1: have export facing companies as well. But yeah, across all
17:10
Speaker 1: sorts of sectors.
17:12
Speaker 2: And it's interesting, isn't it that Japan is one of
17:14
Speaker 2: the places where small caps have started to auform larger
17:16
Speaker 2: companies rather like in the US. Not in the UK
17:19
Speaker 2: unfortunately as usual, but in Japan and the US you've
17:22
Speaker 2: started seeing a bit of a shift from very large
17:24
Speaker 2: companies at performing to the small and medium sized companies
17:26
Speaker 2: at performing at the last couple of quarters.
17:28
Speaker 1: Yeah, I mean, you still find companies in Japan with
17:32
Speaker 1: negative enterprise values, and some of these small companies just
17:35
Speaker 1: have very inefficient balance sheets which result in just very
17:38
Speaker 1: cheap valuations, and they really have been overlooked, whereas some
17:41
Speaker 1: of the more successful world beating Japanese companies are still
17:45
Speaker 1: trading it really quite phenomenal valuation multiples which haven't yet derated.
17:49
Speaker 1: And so there's a degree of rotation and mean reversion there.
17:54
Speaker 2: And then there's even though the market has performed very
17:56
Speaker 2: well recently, there's also the possible additional kicker from a
18:00
Speaker 2: strengthening Yan.
18:01
Speaker 1: Yeah, careful what you wish for, but I mean I
18:04
Speaker 1: think certainly Japanese financials well positioned to benefit from that,
18:09
Speaker 1: in particular at the large banks, but the pace at
18:11
Speaker 1: which that will happen, a manner in which will happen
18:14
Speaker 1: is unclear, and so that again, having a diversified portfolio
18:18
Speaker 1: in the context of a larger global portfolio gives us
18:21
Speaker 1: some sort of comfort.
18:23
Speaker 2: And careful what we wish for. What should we be
18:25
Speaker 2: worrying about with a strengthening yan.
18:27
Speaker 1: Well, there is a huge amount of debt in Japan
18:30
Speaker 1: which is one of the reasons why interest rates haven't
18:33
Speaker 1: yet managed to rise to the level needed to stabilize
18:36
Speaker 1: the currency, and so there are those perennial fears that
18:41
Speaker 1: the BOJ will lose control of the exchange rate. On
18:44
Speaker 1: the other hand, there are huge amounts of assets belonging
18:47
Speaker 1: to Japan overseas, and if they would come back, then
18:51
Speaker 1: that would have the opposite effect. So it's really interesting
18:54
Speaker 1: times to be investing in Japan.
18:57
Speaker 2: I suspect that almost everyone who listens to this podcast
19:00
Speaker 2: it's invested in Japan, because we have been going on
19:02
Speaker 2: about it for a very long time, very long time.
19:06
Speaker 2: There's a wonderful chart. I like this chart enormously in
19:09
Speaker 2: the fact cheap for the fund which has bubbles on
19:11
Speaker 2: it so we can see where the fund is allocated,
19:15
Speaker 2: and I'm interested to see there are quite big bubbles
19:17
Speaker 2: for both mining and oil.
19:20
Speaker 1: Yeah, if you remember, I was saying, we're really looking
19:22
Speaker 1: for two sorts of situations, high return situations where those
19:26
Speaker 1: returns can be sustained, and lower return situations where we
19:30
Speaker 1: have confidence that the returns are going to pick up
19:33
Speaker 1: sooner than the market things is likely. And mining and
19:37
Speaker 1: shipping into examples of that. Latter mining went through its
19:41
Speaker 1: supercycle when China really opened up and everyone started is
19:46
Speaker 1: selling resources to China, and naturally, human biases being what
19:52
Speaker 1: they are, this results in massive having investment ad buys
19:54
Speaker 1: mining companies, which resulted in terrible returns, which results in
19:59
Speaker 1: punishment and capital starvation. Until mining companies were trading ten
20:04
Speaker 1: years ago at big discounts to well, they should be
20:07
Speaker 1: valued at discounts book value in some cases, and the
20:10
Speaker 1: return of capital discipline and the opportunity for investors like
20:14
Speaker 1: us to get involved in the large mining companies which
20:18
Speaker 1: had got religion again in terms of understanding capital discipline,
20:21
Speaker 1: and they've been a feature of portfolio for a while. Obviously,
20:25
Speaker 1: the time taken to bring on a new mine is
20:27
Speaker 1: measured in the years, if not decades, and again it'll
20:30
Speaker 1: run like memory semmes. That gives us the confidence that
20:33
Speaker 1: that picture is not going to change too quickly and
20:35
Speaker 1: they're going to have the opportunity to sustain high returns
20:39
Speaker 1: for a while. Yet shipping is something similar. I mean,
20:42
Speaker 1: before the financial crisis, abundant liquidity and very very low
20:47
Speaker 1: barriers to entry. This is not a high quality sector.
20:51
Speaker 1: Meant that a huge amount of money flooded into shipping.
20:53
Speaker 1: You could borrow money from your bank, you'd get some
20:57
Speaker 1: sort of credit from the shipyard which didn't require money
21:00
Speaker 1: up front. You could raise money in the equity market
21:03
Speaker 1: fairly quickly, so anyone could could raise a capital to
21:08
Speaker 1: put in an order for a ship, resulting in massive
21:10
Speaker 1: over ordering. Financial crisis happens with Lehman, Yet the ships
21:15
Speaker 1: continue to be delivered from the shipyards even after the
21:17
Speaker 1: financial crisis. A massive oversupply claps in shipping rates bankruptcies,
21:24
Speaker 1: and then a full storm and around so of twenty
21:26
Speaker 1: sixteen when private equity felt that it could get involved
21:28
Speaker 1: and take advantage to the distress, which resulted simply and
21:31
Speaker 1: more ordering in the deferral of the recovery. But the
21:34
Speaker 1: great thing about ships is that they have a finite life.
21:37
Speaker 1: Typically for a blue chip customer, twenty years is the limit,
21:42
Speaker 1: which from an investment point view is fantastic because it
21:45
Speaker 1: means we have visibility into the future. We can see
21:48
Speaker 1: not only how many ships are on the water today,
21:51
Speaker 1: but what their age is and when they're likely to
21:54
Speaker 1: need to be scrapped. And so we've been really investing
21:58
Speaker 1: in shipping since these companies came out and started to
22:01
Speaker 1: come out Chapter eleven and refloat and taking a basket
22:07
Speaker 1: approach with this sort of diversified portfolio, investing in a
22:11
Speaker 1: number of different shipping companies and in a number of
22:14
Speaker 1: different shipping asset classes. And more recently we've really focused
22:18
Speaker 1: on tankers and we've sold our shipping in container carriers
22:23
Speaker 1: LNG carriers in particular, as more capital has gone into
22:27
Speaker 1: those areas. And if you were to go to China
22:28
Speaker 1: or Korea today, you would see a large number of
22:31
Speaker 1: shipyards all very busy working on a construction of new
22:36
Speaker 1: LNG carriers and container carriers, but relatively little supply coming
22:41
Speaker 1: into inter tankers or dry bulkers or into those categories.
22:45
Speaker 2: Okay, so that's an area that's got a bit to run.
22:48
Speaker 1: You think, well, we were, as I say, we're out
22:51
Speaker 1: for LNG carriers, we're our containers, and we have been
22:55
Speaker 1: taking profits in tankers and some of our dry bulk,
22:58
Speaker 1: so you know, we are towards the end of that cycle.
23:01
Speaker 1: As I said, the barriers to entry and shipping are
23:04
Speaker 1: much lower than other areas, so you are really constrained
23:08
Speaker 1: by the availability of capacity in the shipyards. And the
23:11
Speaker 1: great thing is we have visibility into that. They do
23:13
Speaker 1: publish their order books, and you should never underestimate the
23:17
Speaker 1: ability of somebody to come in and take a view
23:20
Speaker 1: that the market could support more capacity.
23:23
Speaker 2: Interesting, I would have thought the barriers that entry and
23:25
Speaker 2: the shipping industry would be huge. That's not a simple
23:28
Speaker 2: thing to get into.
23:30
Speaker 1: The LCC costs one hundred and fifty million dollars, say,
23:34
Speaker 1: but other types of shipping, you know, cheaper, and there
23:37
Speaker 1: is an entire industry of financiers and brokers and owners
23:43
Speaker 1: and yards who can help you ordership.
23:47
Speaker 2: Let's shift back to the energy sector. We've got holdings
23:49
Speaker 2: in oil and coal and all sorts of things. And
23:53
Speaker 2: one of the interesting things about the energy sector at
23:55
Speaker 2: the moment is that the transition, which I think a
23:57
Speaker 2: lot of people predicted at the beginning, has not turned
23:59
Speaker 2: out to be a transition, but to be in addition,
24:02
Speaker 2: so the whole energy infrastructure is expanding in every area,
24:06
Speaker 2: partly because going back to the beginning of our conversation,
24:09
Speaker 2: partly of course, down to the energy requirements of AI.
24:13
Speaker 1: Yeah, I mean, and actually, funnily enough, with shipping, one
24:15
Speaker 1: of the common themes there is energy. I mean, with
24:18
Speaker 1: the exception of container shipping. Most shipping is about the
24:21
Speaker 1: transport of energy, whether you're talking about coal or oil
24:25
Speaker 1: or protein. Shipping is really something to enable you to
24:29
Speaker 1: ubcharge the price of energy in one place versus the
24:32
Speaker 1: price of energy in another. But yeah, all this enthusiasm
24:38
Speaker 1: for the energy transition has led some people to assume
24:41
Speaker 1: or that traditional fossil energy is going to stop being
24:45
Speaker 1: consumed in a very short period of time, and as
24:49
Speaker 1: a result, been under investment in traditional energy and related areas,
24:55
Speaker 1: one of which is shipping, another of which might be
24:58
Speaker 1: the offshore drilling company needs for example. So we are
25:03
Speaker 1: very conscious that well, we're no better than anyone else
25:06
Speaker 1: are predicting the price of energy, But there is a
25:09
Speaker 1: whole load of activities around energy which have suffered from
25:13
Speaker 1: under investment, and therefore we're confident are going to see
25:16
Speaker 1: improving returns.
25:18
Speaker 2: Look, when you look at the portfolio, four hundred stocks
25:21
Speaker 2: has quite a lot to keep an eye on. Obviously
25:24
Speaker 2: that you have, there's a team of you. But what
25:26
Speaker 2: worries you, what keeps you up at night?
25:28
Speaker 1: That's a great question. We do take great comfort from
25:31
Speaker 1: the diversification in the portfolio. I don't just mean the
25:34
Speaker 1: number of stocks, but I also mean the non non
25:37
Speaker 1: correlated nature of the ideas within the portfolio. And thanks
25:41
Speaker 1: to the versatility of this capital cycle approach, as I said,
25:44
Speaker 1: we are able to sort of map any company we
25:48
Speaker 1: come across through this capital cycle lens.
25:51
Speaker 2: So yeah, it's nothing to worry about.
25:55
Speaker 1: Many many things can go wrong, but hopefully as they
25:58
Speaker 1: go wrong, they're not going to dominate the portfolio. Our
26:02
Speaker 1: largest position is around two percent of the portfolio.
26:05
Speaker 2: In market crist as a whole. I mean, as we
26:07
Speaker 2: were saying earlier, you were saying earlier, there's a lot
26:11
Speaker 2: of excitement in the market, there's a lot of momentum,
26:13
Speaker 2: and there's a lot of retail participation, the sharp rises
26:17
Speaker 2: in the store market, and say not just career but
26:20
Speaker 2: also maybe the US have participated to a fairly healthy
26:23
Speaker 2: wealth effect across the board. If there is a reversal
26:28
Speaker 2: in global store markets, maybe it really is led as
26:32
Speaker 2: long predicted by big tech, etc. Then you don't just
26:35
Speaker 2: get a market collapse, you also get a reverse wealth effect,
26:39
Speaker 2: and maybe you get much more ever of a follow
26:42
Speaker 2: through impact then you might have had previously. I don't know.
26:45
Speaker 2: A lot of things keep me up at night.
26:46
Speaker 1: You're completely right, and we do look at this sort
26:48
Speaker 1: of passive driven momentum in the market and keep anticipating
26:53
Speaker 1: its demise, which never seems to happen. But what you
26:55
Speaker 1: wish for, and when it does happen, there will be
26:58
Speaker 1: all sorts of second and third all the consequences which
27:01
Speaker 1: will impact all of us. I am hopeful that we
27:04
Speaker 1: will do better than most other participants in the equity market,
27:08
Speaker 1: but everything, if everything is crashing, then we will suffer
27:11
Speaker 1: with everybody else.
27:13
Speaker 2: Yeah, I mean, you wouldn't need to hope that. I
27:15
Speaker 2: don't think I've ever had anybody on the stop market
27:17
Speaker 2: who said that their expectation is that things should go wrong,
27:20
Speaker 2: they'll do worse than everybody else. We have a bad
27:24
Speaker 2: beginning for a conversation or end for a conversation.
27:29
Speaker 1: That's fair enough.
27:31
Speaker 2: Listen, Lick. I don't know if you've had you been
27:34
Speaker 2: on holiday yet or not, but one of the things
27:36
Speaker 2: that we're asking everybody at the moment is what they're
27:38
Speaker 2: reading when you when you finally head to the beach,
27:41
Speaker 2: or perhaps you've already been to the beach, what are
27:43
Speaker 2: you taking with you?
27:44
Speaker 1: I've just come back. I took one book which I
27:47
Speaker 1: didn't manage to open, but I'm looking forward to, which
27:50
Speaker 1: is The Mask of Demetrius by Eric Ambler, which is
27:52
Speaker 1: an old fashioned thriller which I've had recommended by a
27:55
Speaker 1: couple of people, set in Istanbul and apparently a writer
27:59
Speaker 1: admired by Graham Green and Ian Fleming. The book I
28:03
Speaker 1: did read on holiday most recently was Recession by Tyler Goodspeed,
28:09
Speaker 1: which is a really interesting piece of economic history, interesting
28:14
Speaker 1: not just for the thesis itself, but just for the
28:17
Speaker 1: wide ranging examination of three hundred and twenty five years
28:21
Speaker 1: of economic history in the US and the UK, and
28:24
Speaker 1: its basic thesis is that, contrary to most people thinking
28:30
Speaker 1: that economic expansions eventually collapse under their own weight or
28:35
Speaker 1: die of old age, that there's no reason why there
28:39
Speaker 1: has to be the case, and recessions come along for
28:43
Speaker 1: almost random reasons. They're a function of not bubbles getting
28:48
Speaker 1: two or economic expansions lasting too long, or economies getting
28:54
Speaker 1: too hot, but more external things like war, failed harvests, plagues, strikes,
29:02
Speaker 1: and energy shocks in a way that's reassuring.
29:05
Speaker 2: Not really, I think we've got strong chances of all
29:08
Speaker 2: those things.
29:10
Speaker 1: There's a lot of geopolitics getting on at the moment
29:12
Speaker 1: where you're talking about Russia, Ukraine.
29:15
Speaker 2: El Nino and harvests.
29:17
Speaker 1: Eran, Taiwan, all of that, and then also, I mean
29:21
Speaker 1: oil and energy prices are you know, they are within
29:26
Speaker 1: within historical bounds at the moment, but that may not
29:30
Speaker 1: stay the case. That that may not stay the way forever.
29:33
Speaker 2: Yeah. Interesting, Okay, So I'm fascinated by the fact that
29:36
Speaker 2: you spent your holiday not reading a thriller that everyone loved,
29:40
Speaker 2: but reading a possibly rather too long book on recessions.
29:46
Speaker 2: I hope there are a couple of romantic nobles in that.
29:48
Speaker 2: It was something.
29:51
Speaker 1: Yeah, that's a book by Ben Lerner as well, which
29:54
Speaker 1: I've got in my bag.
29:54
Speaker 2: But all right, good. We've had some excellent recommended since
30:00
Speaker 2: this year. Actually, I'll send I'll send you a list.
30:02
Speaker 2: Should you be going on holiday again, is all over
30:05
Speaker 2: for this year?
30:06
Speaker 1: That would be great And I'm yeah, I am. I
30:08
Speaker 1: am actually going on and getting off to your Pat
30:10
Speaker 1: Moss at the end of the month, so that would
30:12
Speaker 1: be fun.
30:12
Speaker 2: Okay, brilliant, Luke, thank you so much for joining us today.
30:15
Speaker 2: That was all really interesting. Thank you, Marion, thanks for
30:28
Speaker 2: listening to this week's maryn Dogs Money If you like
30:30
Speaker 2: our show, Greek review and subscribe wherever you listen to
30:33
Speaker 2: podcasts and keep sending your questions or comments to Merrorn
30:35
Speaker 2: Money at Bloomberg dot net. You can also follow me
30:38
Speaker 2: and John on Twitter or ex I'm at marys w
30:40
Speaker 2: and John is John Underscorestepic. This episode was hosted by
30:43
Speaker 2: me marin Sunset Web. It was produced by Someersardi and Moses,
30:46
Speaker 2: and it sound designed by Blake Mabels and special thanks
30:49
Speaker 2: to Luke Bridgeman