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Deflation May Be Coming Sooner Than You Think · Merryn Talks Money

0:00
Speaker 1: John. You know how lots of people say they're passionate
0:03
Speaker 1: about stuff, and we really disapprove of that. And I'm
0:06
Speaker 1: always saying to people, you know, stop being passionate about stuff.
0:09
Speaker 1: Just be good at stuff. You know, no one cares
0:11
Speaker 1: about your passion, They care about the result. Am I wrong? No? No,
0:15
Speaker 1: I'm not wrong anyway. So yesterday we did a Twitter
0:18
Speaker 1: spaces you know me because we're kind of young and
0:20
Speaker 1: modern and down with the kids, right, and I suddenly
0:24
Speaker 1: realized that I am passionate about pensions. I mean, who hasn't.
0:28
Speaker 1: Let's be feeling who among us has not been passionate
0:31
Speaker 1: about pensions at one point? And I'll wait, everyone, everyone,
0:35
Speaker 1: But that's because they don't know how fascinating they can
0:39
Speaker 1: be and how exciting it is to have actually done
0:42
Speaker 1: some proper work on this, because you know, you know research,
0:45
Speaker 1: sometimes we do it, sometimes we don't. Having done some
0:47
Speaker 1: actual research into how that the UK pension system works
0:50
Speaker 1: and how it works relative to other pension systems around
0:53
Speaker 1: the world, and we find that niceally, relatively speaking, it's
0:57
Speaker 1: pretty good. And we talked about this rating system, the
1:00
Speaker 1: most of pensions rating system that the looks at pension
1:03
Speaker 1: systems around the world in terms of all their different
1:06
Speaker 1: parts as opposed to just the state pension. And we
1:08
Speaker 1: found that in terms of global ratings, the UK is
1:12
Speaker 1: really high up there, better by the way than Switzerland
1:15
Speaker 1: or Germany. That makes me feel kind of excited, as
1:18
Speaker 1: it should. I mean, I think I said it was
1:21
Speaker 1: a really good chart. Actually it was. It was very interesting,
1:24
Speaker 1: and I think everyone should go out and listen to.
1:26
Speaker 1: Someone's going to put the link in the show notes. Um,
1:29
Speaker 1: but just as a little added incentive, we talked about
1:32
Speaker 1: house prices the last thing we did one of these
1:34
Speaker 1: Twitter spaces and it ended up being one of the
1:37
Speaker 1: most listened to Twitter spaces that Bloomberg's haven't done. So
1:40
Speaker 1: what we'd really love is if you look could go
1:42
Speaker 1: out right now and listen to the pensions one and
1:44
Speaker 1: help us to beat a personal record. John and I
1:47
Speaker 1: are target driven. We talk about our pbs all the time,
1:50
Speaker 1: don't we. John KPI is coming out earliers absolutely, but listen,
1:56
Speaker 1: let's let's give them an incentive here. What was the
1:59
Speaker 1: most interesting thing for you that came out of that
2:02
Speaker 1: chat yesterday about pensions? What made you think, God, my
2:04
Speaker 1: retimement is going to be great. Apart from me pointing
2:07
Speaker 1: out that you haven't got a defined pension, defined benefit
2:09
Speaker 1: pension and you don't work in the public sector, which
2:11
Speaker 1: is a bit of a downer. But what was the
2:13
Speaker 1: thing that really made you feel that, actually this is
2:15
Speaker 1: not so bad. Well, I think the these thing is
2:18
Speaker 1: that it is that idea that we've finally again. It's
2:24
Speaker 1: not so much more own pension. It's the sense that
2:26
Speaker 1: Britain was actually doing something right and right and and
2:32
Speaker 1: in quite a significant way. It's actually the system is
2:35
Speaker 1: a lot better, and it's also kind of backed by
2:37
Speaker 1: actual money as opposed to a promise to pay at
2:41
Speaker 1: some point in the future. But the other thing actually
2:44
Speaker 1: that I thought was was interesting but also agent was
2:48
Speaker 1: we were on with Stuart True who's Blue Miss Pension columnists,
2:51
Speaker 1: and he pointed out that there was actually a really
2:53
Speaker 1: good deal on buying then missing national insurance years. At
2:59
Speaker 1: the moment you made thirty five of those, right in
3:01
Speaker 1: thirty five of those to get a full state pension.
3:03
Speaker 1: And if you haven't got those, which you might not have,
3:06
Speaker 1: you taken time off, you know, for parenting, caring or
3:09
Speaker 1: just you know, hanging around, going to yoga, retreats whatever.
3:12
Speaker 1: You may not have those full thirty five years, and
3:14
Speaker 1: there's a deal on a sale on at the pension's
3:16
Speaker 1: department right where you can you can buy them back. Yeah.
3:20
Speaker 1: It's really good value. You get the money back in
3:22
Speaker 1: three years. Yeah. No, it was really impressive. So so yeah,
3:26
Speaker 1: actually you really should license you this, you know, even
3:28
Speaker 1: if it is just for that, but the rest of
3:31
Speaker 1: it is also excellent. Um. But you know, you can
3:33
Speaker 1: really make a defency your personal finances in the long
3:36
Speaker 1: term if you haven't got those contributions and you make
3:40
Speaker 1: them before April. Yeah. And you know what I was
3:42
Speaker 1: thinking afterwards, well five minutes ago, actually that the auto
3:46
Speaker 1: enrollment system, the way that the auto enrollment system that
3:49
Speaker 1: we have in the UK is by the way you
3:51
Speaker 1: getting money at fifty five. You don't get that anywhere else. Um.
3:54
Speaker 1: The way that interplace with the state pension system, which
3:57
Speaker 1: is there is back up, etcetera. This interming angling of
4:01
Speaker 1: private and state financing that has worked so brilliantly to
4:05
Speaker 1: fully rescue the UK's pension system and make it one
4:09
Speaker 1: of the best and most resilient in the world. I'm
4:12
Speaker 1: thinking NHS, Yeah, I think that's a good idea controversial,
4:19
Speaker 1: absolutely hate mail to the usual address. Please right, everyone,
4:24
Speaker 1: listen to that Twitter spaces. It's really interesting. There's a
4:27
Speaker 1: lot to say about pensions, and I know you think
4:29
Speaker 1: it's boring, and I know it's one of those things
4:30
Speaker 1: you just want to put out of your head, you know.
4:32
Speaker 1: Please God, let you never have to be old enough
4:34
Speaker 1: to to retire and take a pension. But this is
4:36
Speaker 1: going to happen. You need to know about it. And
4:38
Speaker 1: John and I are passionate about pensions and that comes
4:42
Speaker 1: through in the Twitter spaces. Go listen, help us reach
4:45
Speaker 1: our targets because that matters to us as well. Thank
4:48
Speaker 1: you very much, Sean Love reach out to you as usual.
4:52
Speaker 1: Passionate pensions about pensions. Let's make that on a news
4:55
Speaker 1: strap line. Welcome to Marion Talks Money, the podcast in
5:03
Speaker 1: which people who know the markets explain the markets. I'm
5:06
Speaker 1: there in Sumset Web this week. Our guest is my
5:08
Speaker 1: old friend and ex colleague, James Ferguson, founder of the
5:11
Speaker 1: Macro Strategy Partnership. He's got over twenty five years of
5:14
Speaker 1: experience as a stockbroker, sector analyst and as a Matt
5:18
Speaker 1: Grows strategist. James and I well, we kind of started
5:21
Speaker 1: our careers together as the stockbrokers over in Japan, so
5:25
Speaker 1: we've known each other a long time. We've had a
5:27
Speaker 1: lot of conversations in those years. James, Hello, thank you
5:30
Speaker 1: for joining us. Now listen, James. One of the reasons
5:33
Speaker 1: I always want to have you on my podcast because
5:35
Speaker 1: you tend to look at things a slightly different way
5:37
Speaker 1: to other people. They'll be a little bit contrarian, well,
5:39
Speaker 1: quite a lot of contrarian, and very often you turn
5:41
Speaker 1: out to be absolutely right, and we like that. So
5:45
Speaker 1: this year, I'm looking at a PC. Recently, you are
5:48
Speaker 1: expecting this to be the year not of high inflation,
5:51
Speaker 1: not even maybe of inflation, but possibly the beginnings of deflation.
5:55
Speaker 1: Don't hear that? Often in the old days, deflation was
5:59
Speaker 1: to find as a contraction in the nominal money supply. Now,
6:04
Speaker 1: on that basis, the U S money supply has been
6:07
Speaker 1: falling nominally, so not a justif inflation just the headline
6:11
Speaker 1: big has been falling since February of last year. So actually,
6:15
Speaker 1: from that point of view, we've we've actually been in
6:17
Speaker 1: deflation since February. That The trouble is that we have
6:19
Speaker 1: what Milton Freatment called long and variable lacks, and so
6:23
Speaker 1: I think it's going to be this year where the
6:27
Speaker 1: lags um play out and we end up with something
6:32
Speaker 1: that looks, at least on the surface quite deflation route. Yeah, okay, well,
6:36
Speaker 1: let's let's just define deflation for the purposes of this
6:39
Speaker 1: podcast and this audience is being a general fall in
6:42
Speaker 1: the price level as measured by a CPI. Can we
6:45
Speaker 1: do that rather than a contraction in nominal money supply.
6:49
Speaker 1: That's why we didn't have deflation last year, or even
6:51
Speaker 1: though that's the textbook definition, but we will have it
6:54
Speaker 1: this year, I think. Okay, So what's driving it purely
6:57
Speaker 1: this contraction and money supply? The sort of absolutely sort
7:00
Speaker 1: of first mover is the base effects. And now you
7:03
Speaker 1: may remember people talking about base effects when we had
7:05
Speaker 1: the inflation. The the authorities when the inflation started to
7:09
Speaker 1: crop up in sort of early one, talked about how
7:13
Speaker 1: it was still transitory and all that we were seeing
7:16
Speaker 1: were base effects. I because inflation had dip lower than
7:19
Speaker 1: trend in the sort of March April May period of
7:22
Speaker 1: twenty Then in the same March April May period of
7:25
Speaker 1: twenty one, you were comparing the year on your change
7:28
Speaker 1: has been compared with something artificially depressed. So the base
7:32
Speaker 1: effect was making the inflation look was their argument. And
7:35
Speaker 1: those of us who said no, you've you've got to
7:37
Speaker 1: watch money supply was saying, no, it's not just base effect.
7:40
Speaker 1: It's going to carry on going, And sure enough it did.
7:43
Speaker 1: This time we have exactly the same thing in reverse.
7:45
Speaker 1: So we had much stronger than trend prints basically May,
7:51
Speaker 1: certainly April May. The peak was June, and then there
7:55
Speaker 1: was still above trend but starting to fall back again
7:57
Speaker 1: in July and August. So therefore we're likely to see
8:00
Speaker 1: base effects. This ti'm working in reverse, so this time
8:03
Speaker 1: the base is too high or higher than trend. So
8:05
Speaker 1: therefore it's going to make the prints for each of
8:08
Speaker 1: those months look on a year on year basis lower
8:12
Speaker 1: than the underlying rate of inflation really is. And that
8:15
Speaker 1: effect will peek out in June and give us potentially
8:19
Speaker 1: as much as a sort of two and a half
8:21
Speaker 1: percent lower than the underlying trend figure. So let's assume
8:25
Speaker 1: that there are roughly three pre sized components of CPI.
8:29
Speaker 1: Um there's goods, which actually a bit smaller than an
8:31
Speaker 1: equal size, but goods if you include energy prices, then
8:35
Speaker 1: you've got services, which is about the same pretty much
8:37
Speaker 1: as wages, and then you've got shelter as the third component,
8:40
Speaker 1: which is basically house prices and a little bit of rent.
8:44
Speaker 1: If we assume that two thirds eye services slash wages
8:48
Speaker 1: and shelter are both running at six percent. But because
8:51
Speaker 1: we've finally unwound the supply blockages, then goods inflation can
8:56
Speaker 1: come back down to normal, and that, of course, in
8:58
Speaker 1: the near term, means an overshoot to below possibly blow zero.
9:02
Speaker 1: But let's just say for the lilitrative purposes, if goods
9:04
Speaker 1: are one third and their zero and the other two
9:06
Speaker 1: components are six percent, then the underlying trend will be
9:10
Speaker 1: about four actually four So if the underlying trend is
9:15
Speaker 1: four percent, but because these base effects, by June, we
9:18
Speaker 1: can have a figure that's two point five percent lower
9:20
Speaker 1: than whatever the trend is. You can see that even
9:23
Speaker 1: on that assumption, we're basically looking at maybe a figure
9:26
Speaker 1: at one point five for June, which will probably lead
9:28
Speaker 1: to much dancing in the streets outside the fed um
9:32
Speaker 1: and everyone telling us that inflation has been conquered because
9:36
Speaker 1: they're missing the base effects. So the number one thing
9:39
Speaker 1: is the base effect But what makes that really interesting
9:43
Speaker 1: is that also if you look at the huge amount
9:45
Speaker 1: of excess money that was printed in the COVID period um,
9:48
Speaker 1: that led to a sort of bubble of what even
9:50
Speaker 1: the Fed now acknowledges is excess savings, and that was
9:54
Speaker 1: what has been driving the nominal bit of nominal GDP inflation.
10:00
Speaker 1: But those two things cross over because the money supplies
10:03
Speaker 1: being on a sort of very gentle downward trend, and
10:06
Speaker 1: not a normal GDP has been on a very sharp
10:09
Speaker 1: upward trend. Those two crossover around about April and May.
10:13
Speaker 1: So suddenly in June you're gonna have two things. You're
10:15
Speaker 1: gonna have a base effect that makes the print of
10:17
Speaker 1: artificially low, but you're also gonna lose assuming we don't
10:21
Speaker 1: find a sort of sudden surgeon money's like, you're always
10:24
Speaker 1: going to lose that that bubble of excess savings. So
10:27
Speaker 1: we could suddenly be looking at something that really does
10:29
Speaker 1: look quite deflation. Arry By say May June July of
10:33
Speaker 1: this year. Okay, but that sounds like good news. It
10:36
Speaker 1: sounds like great news. So suddenly we've gone from environment
10:39
Speaker 1: when we're definitely worried about inflation, and most figures I
10:42
Speaker 1: have one at the moment say that they expect inflation
10:44
Speaker 1: to full very sharply, and again I'm talking cp I here.
10:47
Speaker 1: Expect inflation to full very sharply. But after that they
10:49
Speaker 1: expected to not fall to stay tube center and stay there,
10:52
Speaker 1: but to be very volatile. So that's what most people
10:55
Speaker 1: are expecting, relatively high, relatively volatile inflation. And if it's
10:59
Speaker 1: actually going to fall down to you know, one percent
11:02
Speaker 1: to percent and stay there for a bit, this seems
11:05
Speaker 1: like great news. Um. Yes and no. So the first
11:10
Speaker 1: thing is that, yes, that's great news because it's what
11:12
Speaker 1: the FED was trying to do. I they they are
11:15
Speaker 1: the cause of the error. Same with the Bank of
11:17
Speaker 1: England in this country. They printed the money because according
11:20
Speaker 1: to their theory, lots of excess money can't possibly lead
11:23
Speaker 1: to inflation. I know. I mean, there isn't anyone else
11:26
Speaker 1: on the planet virtually believes that that they believe they're
11:29
Speaker 1: in judge Um, and so that's what caused the problem.
11:32
Speaker 1: But they don't believe it anymore, do they, James. They
11:34
Speaker 1: don't believe it anymore. They should have learned something, but
11:37
Speaker 1: don't forget. Cognitive dissonance is likely to be that the
11:40
Speaker 1: overriding condition because in order to learn that, they will
11:45
Speaker 1: have had to have learned that everything they've learned at
11:47
Speaker 1: university was wrong. And that's so there's does they're more
11:51
Speaker 1: likely to go there. I told you it's transitory rather
11:55
Speaker 1: than throw out every textbook they have and tear up
11:59
Speaker 1: there their PhD s and and go back to school
12:02
Speaker 1: as it, or demand that someone starts, you know, digging
12:06
Speaker 1: out the old monetary or monetarist traps. So, yes, that
12:12
Speaker 1: we have a preside problem. We don't know how much
12:14
Speaker 1: they believe that they got it wrong and and how
12:17
Speaker 1: what they ascribe that too, But but it does we
12:20
Speaker 1: all become very pertinent because say we get to the
12:22
Speaker 1: summer and say we now have a sort of deflationary
12:25
Speaker 1: environment with a bit of a wages overhang, as wages
12:28
Speaker 1: always lack at that point, what does the FED do? Now? Historically,
12:32
Speaker 1: as soon as you start getting a recession, which you
12:35
Speaker 1: usually get because unemployment, which has just been bubbling around
12:39
Speaker 1: the bottom, suddenly goes quite sharply upwards, and the FED
12:43
Speaker 1: usually cuts rates quite quickly, I mean, you know, within
12:47
Speaker 1: a couple of months quickly. So what they've said they're
12:49
Speaker 1: going to do, But I don't believe. I think, you know,
12:52
Speaker 1: events will overtake this, but their plan at the moment
12:55
Speaker 1: is to hike rates to a certain point and then
12:58
Speaker 1: hold them. Based on the fact of these spase effects,
13:01
Speaker 1: they wouldn't be hiking rates any further, but they seem
13:05
Speaker 1: to be still intent on that, and they certainly wouldn't
13:08
Speaker 1: be holding them at that high level if the drop
13:11
Speaker 1: in inflation comes with a recession, which is actually what
13:16
Speaker 1: we're talking about. Okay, tell us more about the recession,
13:19
Speaker 1: because I was saying someone the other day, possibly even
13:21
Speaker 1: on this podcast, that when people talk about the recession now,
13:24
Speaker 1: they refer to the mild recession, and I said, maybe
13:28
Speaker 1: mild is this year's transitory. In the US, we've had
13:31
Speaker 1: seven recessions post for recessions that you know, we have
13:36
Speaker 1: the data force. So there were actually someone who immediately
13:38
Speaker 1: after the World War that it's quite hard to get
13:41
Speaker 1: the data for. So I'm talking about since like nine fifties,
13:45
Speaker 1: since ninety fifty had seven recessions. But the average decline
13:49
Speaker 1: in real earnings in the US. This is corporate earnings,
13:53
Speaker 1: not not people. The average decline was in real terms.
13:58
Speaker 1: So the idea that you can have a can you know,
14:01
Speaker 1: you could theoretically have a mild procession, but how would
14:04
Speaker 1: you have a mild procession? The point about inflation is
14:07
Speaker 1: that the feeders let the cat out of the bag.
14:09
Speaker 1: The point about raising rates or type tighter monetary policy
14:13
Speaker 1: is in order to destroy demand, to get rid of
14:15
Speaker 1: some of that inflation. What is the destruction of the mound? Well,
14:18
Speaker 1: it's a recession. It's it's you know, it's just being
14:21
Speaker 1: disingenuous to pretend otherwise. When the Fed is tightening policy,
14:24
Speaker 1: it is tightening policy to create a recession, because if
14:27
Speaker 1: it doesn't create a recession, it will be doing nothing
14:30
Speaker 1: to reign back inflation. And how do you create a recession, Well,
14:34
Speaker 1: basically you stop money supply growth in the sense that
14:37
Speaker 1: you you you know, you constrain bank lending. Now, bank
14:41
Speaker 1: lending is still running quite strongly at the moment, but
14:43
Speaker 1: obviously money supply growth is already negative. That The thing
14:46
Speaker 1: about the recession is we have almost record high corporate
14:49
Speaker 1: profit margins. And corporate profit margins obviously rely on two things.
14:54
Speaker 1: They're allowing firms being able to sell their goods to
14:57
Speaker 1: the household sector, and the household sector is increasingly less
15:01
Speaker 1: able to buy their good They were able to buy
15:03
Speaker 1: them because they're this big chunk of excess savings from
15:06
Speaker 1: the money printing during COVID. But as as I said,
15:09
Speaker 1: this is going to evaporate come April May, whereupon households
15:13
Speaker 1: are going to need to get the extra money they
15:15
Speaker 1: need to buy all these corporate products from their earnings.
15:18
Speaker 1: But we know that real earnings are shrinking because although
15:21
Speaker 1: wages are rising at record higher rates, they're rising less
15:25
Speaker 1: than prices are. So therefore we have a cost of
15:27
Speaker 1: living crisis. It's not quite as severe in the US,
15:30
Speaker 1: but it's it's driven on by very similar things to
15:33
Speaker 1: to our situation. So that by the time the excess
15:36
Speaker 1: savings are used up, which as I said, best guesses
15:39
Speaker 1: maybe April, then households in general don't have enough financial
15:44
Speaker 1: resources to keep buying ever more expensive goods, so they
15:48
Speaker 1: start buying less unless it gets discounted, which is squeezing
15:52
Speaker 1: corporate profit margins. And then they go back to their
15:55
Speaker 1: boss and they say, I need a bigger way of
15:57
Speaker 1: pay rise this year. So when the corporates are looking
16:00
Speaker 1: at this, they see, oh, so now our costs with
16:02
Speaker 1: a leg Our biggest cost is wages and those those
16:05
Speaker 1: costs are going up at the same time we're having
16:08
Speaker 1: trouble pushing through the higher prices of our goods. So
16:12
Speaker 1: it is often observed in the past that the first
16:14
Speaker 1: year of inflation is loved. Everyone likes the first year
16:17
Speaker 1: of inflation. It's years two, three, and four that get
16:20
Speaker 1: really much more difficult. And if you basically have that situation,
16:24
Speaker 1: that margin squeeze situation, and that declining corporate revenue situation
16:30
Speaker 1: occurring at the same time that you prevent people borrowing. Um,
16:34
Speaker 1: I think you've got type mountry policy. That is the
16:37
Speaker 1: usual preamble to tour researtion. And this is gonna be
16:40
Speaker 1: a horrible shot, which usually not off cent offending, okay,
16:45
Speaker 1: real in real time, it's gonna be a horrible shots.
16:47
Speaker 1: But if the inflation evaporates, then it will not get
16:49
Speaker 1: off in normal terms as well. Where's the bit where
16:51
Speaker 1: I get to interrupt you? For God's sake, I saw
16:53
Speaker 1: the body language and I just rolled straight over. We
16:57
Speaker 1: can see each other, listeners you see in it. It's
16:59
Speaker 1: not necessarily a good thing. Now. Corporate margins in the
17:03
Speaker 1: US have been expanding for a really long time. Everyone's
17:05
Speaker 1: gotten used to the idea that they expand expand expanding,
17:08
Speaker 1: record highs, etcetera. And there is a general assumption which
17:10
Speaker 1: you can feel that they're sort of stable that this
17:13
Speaker 1: contraction I think will be a horrible shock to people. Historically,
17:17
Speaker 1: one of the most difficult things for corporates was pricing.
17:21
Speaker 1: You know, it's not like you're running a petrol fore
17:23
Speaker 1: court where you can you can flick a switch and
17:25
Speaker 1: change the price every day. Each delivery you know as
17:29
Speaker 1: a different cost to you, and you just change the
17:31
Speaker 1: price up on the big board for what people are
17:34
Speaker 1: going to have to pay to fill up their cars.
17:36
Speaker 1: But most companies can't do that. Seventy percent able products
17:39
Speaker 1: are calling at lander fed are what we call sticky prices.
17:43
Speaker 1: And sticky prices on average don't change more often than
17:45
Speaker 1: about once every twelve months. So if you can have
17:47
Speaker 1: a sticky then obviously pricing becomes very difficult. Now, in
17:52
Speaker 1: a low, stable, low inflation environment, pricing isn't really a
17:57
Speaker 1: big deal. But once you get into more volatile inflationary
18:01
Speaker 1: environment pricing, if you get your price too high, you're
18:04
Speaker 1: going to pay the price in terms of lower sales.
18:06
Speaker 1: If you get your price too lower, you're gonna get
18:08
Speaker 1: lower margins very very hard for everybody to get pricing
18:12
Speaker 1: right once we have inflation. If margins are going to
18:15
Speaker 1: fall by then that tells us presumably that the U
18:19
Speaker 1: s ecuary market is still massively of the valued. The
18:22
Speaker 1: US equity market at this level probably doesn't have a
18:25
Speaker 1: valuation problem, but it does have an earnings problem, and
18:29
Speaker 1: that that means that you get the slightly different You
18:31
Speaker 1: get certainly different impacts on which bit of the market
18:34
Speaker 1: that might do well. For example, if you have a
18:37
Speaker 1: bit of an earnings problem, then the sorts of companies
18:40
Speaker 1: that might do well might be more value and stables
18:45
Speaker 1: than growth and discretion, Whereas if you have a valuation problem,
18:49
Speaker 1: then you might actually find that the stuff that does
18:52
Speaker 1: well is the opposite. So it's really more about where
18:55
Speaker 1: you might expect to see the pain or feel the pain. Yes,
18:58
Speaker 1: if the equity market is no longer bad value, that
19:02
Speaker 1: assumption is predicated entirely in the fact that it doesn't
19:04
Speaker 1: lose any money. If earnings go down, then obviously that
19:08
Speaker 1: immediately the extent which they go down makes the market
19:11
Speaker 1: look worse value. Again, what can we buy in a
19:15
Speaker 1: situation like this, Well, it's a very unfashionable thing to say.
19:18
Speaker 1: But the first thing that this makes me think about,
19:21
Speaker 1: at least for now, is the fact that the available
19:25
Speaker 1: quantity of dollars has been shrinking since February of last year,
19:31
Speaker 1: whereas the available quantity of euros or sterling or almost
19:35
Speaker 1: all other currencies has been going up. If you think
19:39
Speaker 1: that the value of things should go up if the
19:41
Speaker 1: supply relatively shrinks, then the first thing to bear in
19:44
Speaker 1: mind is that after recent weakness, the dollar might be
19:47
Speaker 1: worth the look. And the second thing to think about
19:50
Speaker 1: is is um that most of the valuation problems and
19:54
Speaker 1: the profile of growth stocks compared to value stocks favors
20:00
Speaker 1: the US. So if we're now going to start favoring
20:03
Speaker 1: value over growth, and the reason we'd be favoring value
20:05
Speaker 1: over growth, by the way, is because of two things. One,
20:09
Speaker 1: value stocks tend to be cheaper, which means they tend
20:11
Speaker 1: to have a higher earning sield. And the higher earning
20:14
Speaker 1: seald is what you require to protect you against inflation.
20:18
Speaker 1: We know from the eighties that seventies and eighties that
20:22
Speaker 1: the US stock market went into the period with a
20:26
Speaker 1: sort of twenty five times be multiple and it came
20:28
Speaker 1: out with a six or seven times be multiple. In
20:31
Speaker 1: other words, the destruction of value really occurred with the
20:36
Speaker 1: destruction of p s. And and so what you we
20:40
Speaker 1: we're guessing you need to protect yourself is start with
20:44
Speaker 1: a nice, decently low pe and you only find that
20:46
Speaker 1: in the value sector. The other thing about the value
20:48
Speaker 1: sector is it tends to be boring, which is good
20:50
Speaker 1: because you can protect your margins better. And it also
20:53
Speaker 1: tends to pay a dividend deal, and dividends are basically
20:57
Speaker 1: that that the the thing that that again you enables
21:01
Speaker 1: you to hold your head above water during inflation reperiod.
21:05
Speaker 1: I know I'm talking about inflation evaporating in the near term,
21:08
Speaker 1: but if we get onto it later, I think it
21:11
Speaker 1: will probably come roaring back in. Let's hear about that
21:15
Speaker 1: right now, because that's the interesting bit. So you are
21:17
Speaker 1: fitting fitting into the inflation will be volatile camp really yes,
21:21
Speaker 1: And so so the reason why I think it'll be
21:23
Speaker 1: volatile is, firstly, we'll we'll get out of the basing
21:26
Speaker 1: effects as we go into the second half of this year.
21:28
Speaker 1: If we still have a declining broad most supply in
21:32
Speaker 1: the US, it won't really make much difference. We'll have
21:35
Speaker 1: four percent the underlying four percent inflation rate will be revealed,
21:40
Speaker 1: will come back to be revealed because the base effects
21:42
Speaker 1: will have dissipated. Um. But if we if we've got
21:45
Speaker 1: to sort of four percent inflation rate into the end
21:48
Speaker 1: of this year and at the same time money supply
21:51
Speaker 1: is still shrinking, most people will fairly reasonably and accurately
21:56
Speaker 1: predict that this is sort of a lagged effect and
21:59
Speaker 1: that flation within another twelve months, if we haven't got
22:02
Speaker 1: any money supply growth will be kind of back at zero.
22:05
Speaker 1: And that is absolutely true. I mean, you know, if
22:08
Speaker 1: you want to destroy inflation, m then all you're gonna
22:12
Speaker 1: do is hold money supply growth as close as you
22:15
Speaker 1: can to zero and wait twelve to twenty four months.
22:20
Speaker 1: We know this because it was done in the after
22:23
Speaker 1: the post Second World War inflation. The problem is that
22:27
Speaker 1: the way the reason why this works and the way
22:29
Speaker 1: it works is recession. And so what the FED tends
22:32
Speaker 1: to do when it realizes it's been successful and it's
22:35
Speaker 1: created a recession is it then tends to panic and think, well,
22:38
Speaker 1: I've gone too far. Let's let's take my foot off
22:41
Speaker 1: the off the throat of the economy. And so the
22:44
Speaker 1: normal response once we have a recession, and particularly the
22:48
Speaker 1: bit of the recession that the FED will be concentrating
22:50
Speaker 1: on is unemployment. But that is almost kind of how
22:53
Speaker 1: you would define what a recession is. Um If unemployment
22:57
Speaker 1: suddenly starts a surge, and it usually doesn't search until
23:00
Speaker 1: the recession starts, and once the recession starts and then
23:02
Speaker 1: tends to search quite vertically um that then leads to
23:07
Speaker 1: the FED to panic in the opposite direction and start
23:09
Speaker 1: slashing rates and presumably in our case, canceling QT at
23:14
Speaker 1: the same time. And before you know it, we've got
23:17
Speaker 1: money supply growth coming back up again. And it is
23:21
Speaker 1: worth bearing in mind that although we tend not to
23:23
Speaker 1: be we tend to be very simplistic about inflation, but
23:26
Speaker 1: technically inflation is more complicated than people think. And if
23:31
Speaker 1: your inflation is coming from overseas. China's reopened this year,
23:35
Speaker 1: they're going to start demanding more loyal more copper, more lithium, more,
23:40
Speaker 1: more of everything to get their hands on an aal
23:41
Speaker 1: tend to push the prices up, but that's not the
23:44
Speaker 1: same as inflation. You know, if the US has falling
23:46
Speaker 1: money supply, but everything it wants to important gets more expensive,
23:50
Speaker 1: that's not inflation. That's what economists called a detrimental shift
23:54
Speaker 1: in the terms of trade. This is what happened during
23:57
Speaker 1: the Aile crisis, and the correct, well at least the
24:01
Speaker 1: textbook correct policy response to hire our costs from overseas
24:07
Speaker 1: is not to raise interest rates. That's the correct response
24:10
Speaker 1: to getting rid of inflation in your own economy caused
24:12
Speaker 1: by you growing the money supply. If the inflation has
24:15
Speaker 1: been caused by much more expensive imports of commodities and
24:19
Speaker 1: raw materials than in order to prevent that having such
24:22
Speaker 1: a comprehensively negative impact in the economy, the correct policy
24:25
Speaker 1: response is to ease montro policy cuprates and try and
24:29
Speaker 1: encourage money supply growth. So we could be looking at
24:33
Speaker 1: a FED that is trying to do the exact opposite
24:36
Speaker 1: within as little as twelve months, and that could pushed
24:38
Speaker 1: inflation back up next year the exact what it's doing now.
24:41
Speaker 1: All right, well, this is miserable, James, thank you for
24:43
Speaker 1: coming on. I'm really going well, I think it's not miserable.
24:46
Speaker 1: It's dismal. This is economics, and the correct description economics
24:49
Speaker 1: is the dismal science. All right, let's let's move over
24:53
Speaker 1: to the UK UM and I think similarly dismal here. Um, well,
24:58
Speaker 1: we've you know, there there are sort of our inflation
25:01
Speaker 1: rate is now higher than the US, partly because everyone
25:04
Speaker 1: in Europe has paid the price of reliance on well,
25:09
Speaker 1: not so much of the reliance on Putin's gas pipelines,
25:12
Speaker 1: but the complacency of not restocking liquid natural gas in
25:18
Speaker 1: the summer ahead of the winter, which has amazingly not
25:22
Speaker 1: really been picked up much by the press. But here's
25:24
Speaker 1: the main root cause of of of this enormous cock
25:28
Speaker 1: up that we've had. But anyway, that's now there are
25:31
Speaker 1: being bailed out on that via a fairly mild winter
25:34
Speaker 1: and uh and having paid exorbitant prices to redirect l
25:40
Speaker 1: n G from around the world towards Europe's storage tex.
25:44
Speaker 1: So we we currently have sort of a much higher
25:47
Speaker 1: level of headline inflation, and that's partly been supported by
25:50
Speaker 1: the fact that we're also growing money supply, whereas the
25:53
Speaker 1: US is actually shrinking money supply. M not that we're
25:56
Speaker 1: growing money supply particularly aggressively. So both Europe and the
26:00
Speaker 1: UK are kind of heading into a more gentle recession
26:06
Speaker 1: scenario because frankly, the central banks aren't raising rates as
26:10
Speaker 1: fast as they are in the States, or as high
26:12
Speaker 1: as they've raised rates in the States, and they aren't
26:16
Speaker 1: slowing money supply growth as much. So therefore they've got
26:19
Speaker 1: kind of more of an inflationary overhang to work through.
26:22
Speaker 1: But I'm quite sure that if you give it enough time,
26:25
Speaker 1: we'll see a similar story playing out in Europe as
26:29
Speaker 1: the one we're going to see first in the US
26:31
Speaker 1: is alwayst always first, you know, it's it's first into
26:34
Speaker 1: the dawn turn, it's first out of the dam turn.
26:37
Speaker 1: They tend to have much more have a history of
26:39
Speaker 1: much more aggressive policy responses, too much harder in Europe,
26:42
Speaker 1: as you've got always people who are different nations require
26:46
Speaker 1: different degrees of policy response, whereas in the US they
26:50
Speaker 1: tend to add act at a federal level and so
26:53
Speaker 1: they can make things move. Okay, let me then ask
26:56
Speaker 1: you about a subject that I know you you suddenly
26:58
Speaker 1: used to think about an awful lot and our listeners
27:00
Speaker 1: think about all the time, which is house prices. Um.
27:04
Speaker 1: You know, John and I have been talking a lot
27:06
Speaker 1: about house prices, and here's now announced that he believes
27:08
Speaker 1: that they'll fall at least before all this is over.
27:12
Speaker 1: And used to be a terrible old bear on the
27:14
Speaker 1: house prices. Would you agree with John on that? In
27:16
Speaker 1: the UK? So you know, we've we've always known that
27:18
Speaker 1: ours prices are pulled by to completely opposite forces. One
27:22
Speaker 1: is the multiple of incomes. Obviously, you can never expect
27:26
Speaker 1: to pay off your mortgage in the future if the
27:29
Speaker 1: price you pay for a house starts to become too
27:32
Speaker 1: higher multiple of your income. On the other hand, the
27:36
Speaker 1: amount you're paying every month depends to extraordinary extent on
27:41
Speaker 1: the interest rate. So therefore, if interest rates are super low,
27:45
Speaker 1: the income multiple of houses goes up because the monthly
27:49
Speaker 1: outgoings are are relatively low. And we've obviously just come
27:52
Speaker 1: up a period where monthly outgoings have been lower than
27:56
Speaker 1: they've been for if you believe that bankal England five
27:59
Speaker 1: thou years, and that obviously therefore means that house prices
28:04
Speaker 1: as a multiple of incomes, while still remaining affordable, have
28:08
Speaker 1: gone up to the highest multiple we've probably ever seen.
28:12
Speaker 1: So it seems quite reasonable if unless you think introstructor
28:16
Speaker 1: going back down to to that five thousand year lobe,
28:20
Speaker 1: and if they do, I would argue that they won't
28:22
Speaker 1: stay there very long. Then um, you know the chances
28:26
Speaker 1: are that the house prices have to reset in terms
28:28
Speaker 1: of multiples of incomes, and unless incomes are going to
28:31
Speaker 1: come down in nominal terms, which I think is unlikely
28:34
Speaker 1: even if they don't do so brilliantly in real terms,
28:37
Speaker 1: that it's kind of a no brainer to say that
28:41
Speaker 1: house prices in that mix have to come down relative
28:45
Speaker 1: to incomes. And if incomes aren't rising hugely, that means
28:49
Speaker 1: house prices have to come down full stop. You sound
28:52
Speaker 1: to me like you're in John Camp. Well, I uh,
28:56
Speaker 1: you know. The thing about economics is every time something
28:58
Speaker 1: starts moving towards a target, itself has an effect, and
29:02
Speaker 1: that effects causes people to check. So, you know, yes,
29:06
Speaker 1: if we if we let's say we had a you know,
29:09
Speaker 1: we had interest rates at three and a mortgage rate
29:13
Speaker 1: across the economy of five, and that was having enough
29:17
Speaker 1: damage on house prices that alone could lead to the
29:20
Speaker 1: Bank of England cutting interest rates in order to take
29:23
Speaker 1: the pressure of house prices potentially. So therefore, every single
29:27
Speaker 1: bit of the economy, you know, that's the economy's saying
29:30
Speaker 1: ceterris parables. We hold everything equal, then something might do that,
29:34
Speaker 1: but of course nothing is equal in economies. Every single
29:37
Speaker 1: thing that moves has an impact on every other thing,
29:40
Speaker 1: and they all reset after. It's more like sort of, um,
29:44
Speaker 1: that parlor game where you go around musical chairs. We've
29:48
Speaker 1: reset every time the music stops. Yeah, yeah, okay, listen
29:51
Speaker 1: just before we go. Um. It sounded to me like
29:54
Speaker 1: you were bizarrely positive on the UK stock market, which
29:58
Speaker 1: people keep telling me is now investor bill again. Having
30:00
Speaker 1: been uninvestable last year, suddenly it is in vestable for
30:03
Speaker 1: reasons that you know those words who aren't private to
30:05
Speaker 1: their precision of thought inside the institutional fund management market
30:08
Speaker 1: can't quite understand. But if it's now investable again, are
30:12
Speaker 1: you considering that as something reasonable for the retail investor
30:15
Speaker 1: to buy the UK market as a whole. Well, two things. One,
30:18
Speaker 1: it's quite interesting that the retail investor is supposed to
30:20
Speaker 1: be the thickest guy in the room and the institutional
30:23
Speaker 1: investors are the smart money. But the reason why the
30:26
Speaker 1: institution investors now think the UK is investable again is
30:29
Speaker 1: not because it was about to go up twenty compared
30:33
Speaker 1: to the US um induseas. It's because it has gone
30:36
Speaker 1: up relative to the U s induseries UM so it
30:41
Speaker 1: turns out there aren't any smart guys in the room
30:42
Speaker 1: where it comes to Finland. But the second point to
30:46
Speaker 1: make is because it's quite relevant to the time when
30:48
Speaker 1: the US equity market really outperformed the U S which
30:52
Speaker 1: is basically from four through until around about the mid eighties.
30:57
Speaker 1: Um that it outperformed for the same read them that
31:00
Speaker 1: it's kind of out performing right now, which is it
31:03
Speaker 1: started from a low enough base, having previously been brutalized
31:07
Speaker 1: the nineteen seventy four Those in the UK are just
31:11
Speaker 1: you know, just unbelievable really when looked at on a
31:14
Speaker 1: historical perspective, but of course coming from a really low
31:17
Speaker 1: level and having in this instance got the jump on
31:20
Speaker 1: the US, the US was still trying to find a floor,
31:22
Speaker 1: which you didn't find until two whereas the UK never
31:27
Speaker 1: went lower than the n So the UK was basically
31:31
Speaker 1: it wasn't going up that much, but it was going
31:34
Speaker 1: it was going sideways when all around them we're going there.
31:38
Speaker 1: So the best way to outperform is to be cheap.
31:41
Speaker 1: You know, this is why we the emphasis on buying
31:44
Speaker 1: things with low p s, which kind of lost all
31:47
Speaker 1: currency during the low interest rate growth period. You know,
31:51
Speaker 1: when that comes back, that comes back into fashion when
31:53
Speaker 1: people will start looking for ways to protect themselves. And
31:56
Speaker 1: the reason why low ps protect you is that that
31:58
Speaker 1: provides the floor that you know, it isn't necessary for
32:02
Speaker 1: other things, but it is worth bearing in mind. You know,
32:05
Speaker 1: you may not be necessarily making a lot of money.
32:08
Speaker 1: If you look at the US stock market over there
32:11
Speaker 1: the seventies and eighties, and there were two oil shops
32:14
Speaker 1: exorginous oil shops. So this is a worse very much
32:17
Speaker 1: a worse case scenario. It is worth bearing in mind.
32:19
Speaker 1: In the index nominally, when absolutely flat sideways didn't do
32:24
Speaker 1: a dawn thing and adjusted inflation, it fell sevent So
32:29
Speaker 1: you know, sometimes if you want to invest for the
32:33
Speaker 1: long run, you want to invest an interest rates are high,
32:36
Speaker 1: and I'll go about to embark on a on a
32:39
Speaker 1: twenty or thirty year down trend. It's very hard to
32:43
Speaker 1: not not to look at our scenario after that forty
32:48
Speaker 1: years interest rate DWN trend and say that we're now
32:51
Speaker 1: going to have to redress the balance, which might mean
32:54
Speaker 1: at least ten years of generally rising interest rate trends,
33:00
Speaker 1: which might mean that we've got to kind of, you know,
33:02
Speaker 1: payback that idea that what you're gonna do with the
33:05
Speaker 1: equity investments is by them and then you know, check
33:08
Speaker 1: them every year see how much they've got up. That
33:10
Speaker 1: may not work so well in an environment where and
33:13
Speaker 1: hasn't historically worked well in an environment where interest rates
33:16
Speaker 1: go up and interest rates up, in an environment where
33:18
Speaker 1: inflation keeps coming back. And it's worth bearing in mind
33:21
Speaker 1: that inflation kept getting kept appearing to be defeated in
33:26
Speaker 1: the late sixties and early seventies or through until the
33:30
Speaker 1: early eighties. But what happened was each time it came
33:33
Speaker 1: back stronger than other. So what made it be defeated, well,
33:37
Speaker 1: central banks hiking interest rates, triggering recessions down it would
33:41
Speaker 1: come again. What made it then take off and go
33:43
Speaker 1: back higher than ever. Well, I think the fact that,
33:46
Speaker 1: you know, psychologically speaking, people no longer believed that inflation
33:52
Speaker 1: was dead, so wage hikes, wage demands were always just
33:55
Speaker 1: a little you know, built in a buffer. You know,
33:58
Speaker 1: treasury investors does my under a higher yield built in
34:01
Speaker 1: an inflation protection buffer? And I don't see that yet
34:04
Speaker 1: in inflation in treasury yields. I think the modern investor
34:09
Speaker 1: hasn't yet been brutalized enough by this experience to building
34:13
Speaker 1: these buffers. But as people do building these buffers, you know,
34:16
Speaker 1: everything just grinds to a to a slower halt. So
34:19
Speaker 1: I you know, I think one has to be thinking,
34:22
Speaker 1: probably quite carefully about how to find value, how to
34:26
Speaker 1: not be greedy, how to protect principle, and possibly to
34:30
Speaker 1: diversify into things like you know that for a long
34:33
Speaker 1: long time, I wasn't having any of it when you
34:35
Speaker 1: want to talk about gold, but actually I think this
34:39
Speaker 1: is the sort of environment where gold, you know, which
34:42
Speaker 1: has done nothing for ten years, um, But this is
34:45
Speaker 1: the sort of environment we're going into. Imagine if you
34:48
Speaker 1: if the FED can'ts rates hard because we have a
34:50
Speaker 1: recession and starts to reignite money supply growth into say
34:58
Speaker 1: which is you know not that are after and everybody
35:02
Speaker 1: still remembers twenty twenty two very well, and then they
35:04
Speaker 1: start seeing interest rates being cut the fair this money
35:07
Speaker 1: supply picking up again. What are all those people going
35:10
Speaker 1: to think will happen to inflation? And if they all
35:13
Speaker 1: think it's gonna come back, then you know they're all
35:16
Speaker 1: going to go and buy gold. Yeah, Okay, I'm want
35:18
Speaker 1: to stop you there, James, because I've worked really really
35:21
Speaker 1: hard over the last half herd to get you to
35:23
Speaker 1: say something positive about any asset class and I've got there, right,
35:28
Speaker 1: you see something positive about about gold. I'm going to
35:30
Speaker 1: quit while I'm ahead. Thank you so much for joining
35:35
Speaker 1: us today, and thank you for finally, after all these years,
35:39
Speaker 1: coming around to my way of thinking on gold. I
35:43
Speaker 1: appreciate its taking me what twenty five years, but we
35:45
Speaker 1: always go there in the end. Thank you. Thank you
35:49
Speaker 1: for listening to this week's Marin Talks Money. We will
35:52
Speaker 1: be back next week. In the meantime, If you like
35:54
Speaker 1: our show, which I really hope you do, rate it,
35:57
Speaker 1: review it, and subscribe wherever you isn't to your podcast.
36:00
Speaker 1: This episode was hosted by me Marion sumset Well. It
36:03
Speaker 1: was produced by Sammersadi. Additional editing by Blake Maples and
36:07
Speaker 1: special thanks of course to James Ferguson, Stuart Trout, and
36:11
Speaker 1: to John Stepec as usual, and of course our weekly
36:14
Speaker 1: reminder to sign up for John's daily newsletter Money Distilled.
36:18
Speaker 1: The link is in this show notes. It's very good
36:21
Speaker 1: and you won't regret it. James, if you signed up
36:23
Speaker 1: yet the John's newsletter, Yeah, absolutely, first thing I did
36:26
Speaker 1: this morning and isn't it good? Yes, well I knew
36:29
Speaker 1: you'd asked me about it, so I thought i'd better
36:31
Speaker 1: get in. Excellent, And you agree it's very good, and
36:34
Speaker 1: everyone else should sign up. Yeah. John Sepec is a
36:36
Speaker 1: very very bright guy. There we go, Thank you very much,