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Everyone Wants Their Money to Come Home with Russell Napier · Merryn Talks Money

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Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
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Speaker 2: Welcome to Merin Talks Money, the podcast in which people
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Speaker 2: who know the markets explain the markets. I'm Maren zumset Web.
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Speaker 2: This week I am speaking with someone who really does
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Speaker 2: know the markets, financial historian friend of the show, Russell Napier.
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Speaker 2: He's also the founder of Edinburgh's Library of Mistakes and
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Speaker 2: the author of the Solid Ground Global macro Strategy Report.
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Speaker 2: His book Anatomy of the Bear, first published in two
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Speaker 2: thousand and six, forecast a major correction for the US
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Speaker 2: dock market, and he later wrote a report called Finding
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Speaker 2: the Bottom, published in the first quarter of two thousand
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Speaker 2: and nine. The forecast the market had bottomed, which, of
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Speaker 2: course it had safe to say Russell knows his stuff,
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Speaker 2: and I suppose we should say as disclosure that I
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Speaker 2: wrote the introduction to the second edition of Anatomy of
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Speaker 2: the Best. So very much a friend of the show
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Speaker 2: and of mine, Russell, welcome back. Thanks for joining us again.
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Speaker 3: Maren, Thank you, thank you for that introduction.
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Speaker 2: My pleasure. Now listen, we have got a lot to
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Speaker 2: get through. You've written a lot of really interesting things recently,
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Speaker 2: and it feels like we're at turning points all over
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Speaker 2: the place in markets and economies, aren't we? So can
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Speaker 2: we just start by talking about something you've been writing
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Speaker 2: about quite a lot recently, which is the return of
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Speaker 2: national capitalism and how the election of Donald Trump accelerates
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Speaker 2: the adoption of that across the Western world. Can we
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Speaker 2: just set the scene by explaining.
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Speaker 3: That, absolutely, let's start with President Macron. Actually, because he
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Speaker 3: articulates things, he articulates things slightly better than Donald Trump.
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Speaker 3: Let's just leave that statement there. So, speaking on the
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Speaker 3: twenty Secon of April at the Sorbonne in Paris, Macron said,
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Speaker 3: he said, I'm kind of making this up. It's not
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Speaker 3: going to be exactly a word for word, but you'll
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Speaker 3: get the gist of it. Every year Europeans invest three
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Speaker 3: hundred billion euros in America. This is absurd, That's what
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Speaker 3: he said. What's he going to do about it? And
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Speaker 3: what he's saying here is he's talking about national savings
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Speaker 3: for national investment. Our own chancellor is saying the same thing,
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Speaker 3: and the previous chancellor, who was a conservative, said exactly
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Speaker 3: the same thing. Our national savings are not being used
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Speaker 3: to fund enough national investment. Now it's global I mean
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Speaker 3: Donald Trump is famous for his tariffs, I suppose, but
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Speaker 3: that's all aimed at driving more investment in America. That's
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Speaker 3: the ultimate aim of this. Tariffs will hurt the consumer
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Speaker 3: for people, industry that is competing with foreigners will it
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Speaker 3: will help them. Andrew Carnegie, for instance, become a very
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Speaker 3: very wealthy man behind the barrier of tariffs. So it's
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Speaker 3: a different expression of national capitalism. But there are two
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Speaker 3: bits to this. It's not just you know, building lots
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Speaker 3: of factories and building all the capacity in the industrial
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Speaker 3: capacity that France or America don't have. It's mobilizing the
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Speaker 3: savings of the people to do so. And just the
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Speaker 3: final point on that, if like Rachel Reeves, you want
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Speaker 3: more investment in the United Kingdom, you are indirectly at
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Speaker 3: least mandating that they sell their overseas assets, they bring
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Speaker 3: it back to the United Kingdom, bring it back to France.
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Speaker 3: So that, in a kind of a nutshell, is national
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Speaker 3: capitalism using national savings to fund national investment.
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Speaker 2: Okay, so there's two strands to this, and the first
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Speaker 2: one is the impact on all the individual economies of
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Speaker 2: bringing cash effectively home and forcing it into their domestic economies.
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Speaker 2: And the second strand is the fact that we're all
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Speaker 2: that money that is now going to be we think
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Speaker 2: dragged home will probably be dragged out of the US.
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Speaker 2: Is that fair?
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Speaker 3: That's absolutely accurate. There are two countries, major countries that
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Speaker 3: are really on the line if everybody. So it is
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Speaker 3: interesting because everybody has to do it. You know, we're
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Speaker 3: talking net here as opposed to gross and absolutely America
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Speaker 3: is first front and foremost both in its bond market,
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Speaker 3: its treasury market, where I think thirty percent of that
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Speaker 3: as owned by foreigners. That equity market. I don't have
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Speaker 3: an up to date number, but I think it's nearly
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Speaker 3: forty percent of that equity market is owned by foreigners.
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Speaker 3: And as over the last several decades capital has kind
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Speaker 3: of drifted away from what we used to call home bias,
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Speaker 3: America has been the major beneficiary. So American number one,
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Speaker 3: but France number two. And this is I think the
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Speaker 3: untold story of this problem is that the other country
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Speaker 3: that really is in trouble here is France. Fifty four
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Speaker 3: percent of all French government debt is owned by foreigners.
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Speaker 3: The equity markets probably forty percent owned by foreigners. So
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Speaker 3: France the winners, by the way, Japan. Obviously, Germany's relatively
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Speaker 3: good position, except of course it's shackled itself to the
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Speaker 3: French through its single central bank, which is a different
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Speaker 3: story but connected to this story.
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Speaker 2: We might want to come on to that single central
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Speaker 2: bank and the survival of the Euro later. But so
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Speaker 2: let's having set the scene there by talking about Macron,
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Speaker 2: let's go and talk about the US and about Trump. So, well,
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Speaker 2: how do you think this is going to unfold in
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Speaker 2: the US, Because at the moment, because it's very positive
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Speaker 2: vibe around American GDP, around the American market, and there
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Speaker 2: is I know, you and I and various other people
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Speaker 2: endlessly talk about how American exceptionalism isn't as real as
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Speaker 2: we think, and how valuations never stay at these levels indefinitely,
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Speaker 2: there will be a reversion to the mean, etc. Etc.
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Speaker 2: And we get ourselves in a in a bit of
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Speaker 2: a note about the shill appee and that kind of thing.
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Speaker 2: But nonetheless, around much of the rest of the market,
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Speaker 2: there is a view that there is no point in
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Speaker 2: fighting this, that there is going to be significant GDP
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Speaker 2: growth in the US under Trump, and the US market
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Speaker 2: will continue to surprise to the upside or surprise US
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Speaker 2: to the upside.
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Speaker 3: Yeah, well I don't agree with that. I mean, as
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Speaker 3: we've already discussed, Trump is very relied upon foreign servings,
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Speaker 3: and put that to any investor, they'll say, well, well,
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Speaker 3: what's the problem with that. He's got these tremendously innovative,
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Speaker 3: wonderful companies. They lead the digital hero, their hero. They'll
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Speaker 3: continue to attract capital for ever. So for America, one
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Speaker 3: direction of the flow of capital and it must be
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Speaker 3: from old, weak, dilapidated Europe towards America. Well you can
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Speaker 3: buy that story. I think there's a lot of truth
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Speaker 3: to it if you believe that private central capital flows
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Speaker 3: are always free to flow where they wish to flow to.
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Speaker 3: But then in the world that we've just discussed, that's
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Speaker 3: not what's going on. It may be that you and I,
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Speaker 3: or at least who managed over manages our pension van
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Speaker 3: wage much prefer to own Amazon than crime Mattal of Germany.
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Speaker 3: But they may not have a choice. They may wish
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Speaker 3: to own the great digital companies of America rather than
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Speaker 3: French government bonds, but they may not have a choice.
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Speaker 3: And Trump is moving and exacerbating this war, and we
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Speaker 3: keep calling it a trade war, but in my opinion,
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Speaker 3: you can have a trade war without a capital. So
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Speaker 3: the cape, as we all know, thirty eight times, it's
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Speaker 3: only been higher than that. I think since eighteen eighty one,
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Speaker 3: I think there's only been higher than that one and
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Speaker 3: a half percent of the time. That's fine as long
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Speaker 3: as America keeps drawing in all of that capital to
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Speaker 3: fund all of that growth and sustain all of those
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Speaker 3: high value fair enough. But the world that Trump is unleashing,
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Speaker 3: and I don't blame him entirely, everybody's up to it
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Speaker 3: is a world workout where that foreign capital isn't there
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Speaker 3: in the same way to sustain high valuations on high growth.
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Speaker 3: If like Japan, it was entirely if you like, internally funded,
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Speaker 3: that would be very different. But it's not the way
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Speaker 3: America is today.
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Speaker 2: And this is inevitable, isn't it. I mean that this
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Speaker 2: is just the way that geopolitics is pushing the world.
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Speaker 2: That there is a sense that we must all be
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Speaker 2: more financially independent inside our countries, that the US must
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Speaker 2: become more independent from China in fact, that we all
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Speaker 2: must be less reliant on China, that we all must
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Speaker 2: try and rebuild our domestic manufacturing, etc. There wasn't realistically
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Speaker 2: a way for things to continue in the direction they
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Speaker 2: were going previously.
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Speaker 3: I think the only way is a dramatic change in
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Speaker 3: the leadership of China. So we'll just leave that. I'm
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Speaker 3: not forecasting it, you can't forecast it. But short of that,
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Speaker 3: then we all have to do this. It is part
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Speaker 3: of a secondary thing apart from building resilience against an
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Speaker 3: aggressively aggressive China, and that is inflating away our debts.
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Speaker 3: And this is actually part and parcel of inflating away
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Speaker 3: our debts. If we can find a lot of this
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Speaker 3: investment through bank credit, create more money, higher nominal GDP growth.
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Speaker 3: So it's not just about the geopolitical strategic issue. There's
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Speaker 3: climate change as well in investing for net zero that's
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Speaker 3: another key driver of this. But it's also about getting
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Speaker 3: that higher level of growth nominal I think because it's
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Speaker 3: very hard to spare and very hard for government policy
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Speaker 3: to change the trend rate of real growth. But if
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Speaker 3: you can get norminal growth up, you might even begin
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Speaker 3: to bring debt to GDP dowing. And these numbers are horrific,
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Speaker 3: I mean absolutely horrific. We're well above World War two
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Speaker 3: levels for many countries. If you look at debt composed
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Speaker 3: of both the government sector and the private sector. So
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Speaker 3: the inevitability in this is short of a Chinese government
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Speaker 3: change geopolitical. But secondly, the absolute necessity now to begin
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Speaker 3: to inflate away excessively high debt level.
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Speaker 2: Okay, So if we were to try and find an upside,
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Speaker 2: it is that this could be the beginning of bringing
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Speaker 2: these debt levels down, and at the same time we will,
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Speaker 2: for example, in the UK, perhaps I'm sure that lots
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Speaker 2: of this capital will be misallocated by the government, because
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Speaker 2: that's just the way it works. But nonetheless we may
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Speaker 2: get some start on rebuilding our domestic infrastructure, which doesn't
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Speaker 2: work anymore.
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Speaker 3: Yeah, I see lots of upsides, not necessarily for savers,
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Speaker 3: you know. I mean, obviously we're on the podcast to
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Speaker 3: stock talk about savers, where both savers the listeners are savers,
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Speaker 3: so we're inherently interested in savers. But there is more
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Speaker 3: to an economy than savers. In a world where you're
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Speaker 3: inflating away debt, you're leaving pressure upon debtors that is
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Speaker 3: a large proportion of the economy, and it is a
9:43
Speaker 3: large proportion of younger people as well. So there's there's
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Speaker 3: a redistribution of wealth uder way here, there's a movement
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Speaker 3: of money more towards blue collar jobs because a lot
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Speaker 3: of this stuff is going to be more manual in nature.
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Speaker 3: If we're going to reindustrialize. It's probably too broad a term,
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Speaker 3: but that sort of thing. So you know, we did
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Speaker 3: this before. After World War Two. Europe did it more
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Speaker 3: spectaculary because it had to literally rebuilds its physical capacity.
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Speaker 3: And in France, for instance, this is known as the
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Speaker 3: Trunt Gloria is the thirty Glorious Years. Well, if you
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Speaker 3: were an owner of French government bonds, you kind of
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Speaker 3: purchasing part was kind of wiped out during the Glorious Years.
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Speaker 3: And that's what I think we all have to remember.
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Speaker 3: A saver. So now the question is, as a saver,
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Speaker 3: how can you realign your portfolio to benefit from that
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Speaker 3: realignment of wealth, Because I think the beautiful thing is
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Speaker 3: we have a I'm going to say a deep equity market,
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Speaker 3: not in terms of liquidity for the United Kingdom, but
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Speaker 3: there's a wider range of corporations one could invest in
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Speaker 3: which aren't necessarily losers. In a world where we do
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Speaker 3: national capitalism and flat away debts and redis wealth. You
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Speaker 3: are a loser in the bond market, full stop. I
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Speaker 3: think that's pretty simple, pretty easy.
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Speaker 2: Yeah, And I think that's the easy bit, isn't it
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Speaker 2: From everything that you said and everything we've talked about before,
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Speaker 2: you and I and other guess on this on this podcast.
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Speaker 2: If you're investing for the medium or the long term,
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Speaker 2: you just want to be a clear of sovereign bond markets.
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Speaker 3: Yeah, so that's easy. But the more difficult bit is
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Speaker 3: which equity is to own? And I'm pretty sure they're
11:09
Speaker 3: not the ones that dominate the indices. So you have
11:12
Speaker 3: to be what some people would call radical. But I
11:15
Speaker 3: think there are you know, there are ways to preserve
11:17
Speaker 3: the purchasing power of wealth in the sort of global
11:20
Speaker 3: in the structural shifts that are not already underway.
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Speaker 2: Can we come back to that bit. I want to
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Speaker 2: go to currencies and ask you, although things relatively obvious,
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Speaker 2: what happens to the dollar and the scenario?
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Speaker 3: Yeah, so there has to be a tipping point for
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Speaker 3: the dollar in which it's basically compulsorily sold by its creditors,
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Speaker 3: as I said, not through their own free will. When
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Speaker 3: does that tipping point come? Well, I think for the
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Speaker 3: United Kingdom and this pot of money Rachel Reeves is
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Speaker 3: putting together, I think it's a twenty five billion. Then
11:51
Speaker 3: it gets geared up. That's almost certainly already causing some
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Speaker 3: seals of dollars. It's not phasing on the dollar because
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Speaker 3: it's not big enough, but of the whole world gets
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Speaker 3: into that, then it begins to put dime with pressure
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Speaker 3: on the dollar. The more difficult thing is to work
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Speaker 3: out what's going on. So it's the end I'm going
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Speaker 3: to say, Sterling, I've been saying starting for a couple
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Speaker 3: of years. Everybody felt it was insane. But as you,
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Speaker 3: I think anybody listening to this will know, Starting has
12:15
Speaker 3: just broken out against the euro. You know, it's looking
12:18
Speaker 3: exceptionally wonderful actually compared to what's going on within the
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Speaker 3: European Union.
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Speaker 2: And what do you think the driver behind that? Is
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Speaker 2: that just that the European Union countries are in such
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Speaker 2: a hideous state, or is that already capital moving back
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Speaker 2: into the UK.
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Speaker 3: What we can say for sure is it's capital flows
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Speaker 3: because we run a cardcount deficit. They run I'm depending
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Speaker 3: where you are better for surplus, So it's capital flows.
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Speaker 3: Now the question is Is it these flighty short term
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Speaker 3: capital flows that like to come in because our interest
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Speaker 3: rates are higher than European rates, or is it something
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Speaker 3: more profound than that? And the frank answer is because
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Speaker 3: we've just broken out, we don't know. The market will
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Speaker 3: say it's just interest rates differentials. I suspected something bigger
12:58
Speaker 3: and deeper than that. You know, I spend a lot
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Speaker 3: of time talking to institutional investors, but also a little
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Speaker 3: bit of time talking to wealthy families in Europe. They're terrified.
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Speaker 3: They have seen what their governments are capable of in
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Speaker 3: the past, and effectively it's sequestration. I'm not saying the
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Speaker 3: British government isn't ultimately capable of doing the same thing,
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Speaker 3: and you know we Yeah, the post war period wasn't
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Speaker 3: that great. But on a relative basis, it is easy
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Speaker 3: to look at the UK budget and point out how
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Speaker 3: horrific it might be for growth. But compared to what
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Speaker 3: is happening in France and in Germany, I think we
13:31
Speaker 3: are benefiting from wealth, assuming that we will not be
13:36
Speaker 3: as confiscatory. No, maybe Dubai but benefits a lot more.
13:39
Speaker 3: Maybe Singapore benefits spectacularly, but to some extent, I think
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Speaker 3: the United Kingdom on a relative basis is, Look, there's
13:46
Speaker 3: so many things we don't have to worry about in
13:48
Speaker 3: the United Kingdom that you're that are deeply ingrained in
13:51
Speaker 3: Europe's male ais and the single currency is you know,
13:54
Speaker 3: right plastered across all of them. So not having to
13:58
Speaker 3: deal with, you know, one monetary policy to rule them
14:01
Speaker 3: all is actually such a huge benefit that I think
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Speaker 3: we're finally beginning to benefit. I mean, one more thing
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Speaker 3: on the United Kingdom, and I don't want to sound
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Speaker 3: like I'm just massively bullish on everything, but look, we've
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Speaker 3: had lots of problems, and we've had the biggest constitutional
14:14
Speaker 3: change in the history of this country since sixteen eighty eight.
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Speaker 3: Despite that, not collapsed, maybe not grown, but not collapsed.
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Speaker 3: But the other thing we've done is massively de geared.
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Speaker 3: I mean, if you look at the private sector of
14:24
Speaker 3: household in corporates in this country, we have taken our
14:28
Speaker 3: private sector debt service ratio down from about nineteen percent
14:31
Speaker 3: to fourteen percent. And if you have a prolonged period
14:33
Speaker 3: of de gearing, you're probably not going to get good
14:35
Speaker 3: investment and growth, and we certainly haven't had it. But
14:38
Speaker 3: when it's completed when you've got relatively good levels of gearing,
14:41
Speaker 3: and to read the press, you'd think we've got horrific
14:43
Speaker 3: levels of gearing. We haven't got good gearing in the
14:45
Speaker 3: state sector. Private sector gearing is pretty good. When you
14:48
Speaker 3: get that sort of out, then you can begin to reinvest.
14:50
Speaker 3: France has gone exactly the opposite direction. I mean exactly
14:53
Speaker 3: the opposite direction. It's the second most highly geared country
14:56
Speaker 3: in the whole planet in terms of the major countries.
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Speaker 3: So why a st going up? Well, we have a
15:01
Speaker 3: much better private sector balance sheet. I think we have
15:03
Speaker 3: a state which is slightly somewhat less confiscatory somewhat, and
15:09
Speaker 3: that helps you to bring money in. So I don't
15:12
Speaker 3: think it's just the interest rate differential. I think there's
15:14
Speaker 3: something a bit more positive for the United Kingdom.
15:17
Speaker 2: And does that make you generally positive on the UK
15:19
Speaker 2: stock market? And one of the things that John and
15:21
Speaker 2: I talk about endlessly is sort of the slow leaking
15:24
Speaker 2: away of the UK stock market, the disappearance of so
15:28
Speaker 2: many of our companies. John and I talked about this
15:30
Speaker 2: now on our Roundup podcast this week, about the number
15:33
Speaker 2: of companies that are disappearing from the market as a
15:36
Speaker 2: result of being taken private as a result of m
15:38
Speaker 2: and A as a result of shifting in case of
15:40
Speaker 2: ash did this week primary listing to the US etc.
15:44
Speaker 2: And the fact that our government doesn't seem to have
15:48
Speaker 2: any real interest in changing that in supporting our stock market.
15:54
Speaker 2: So looking at that and looking at what you've just said,
15:57
Speaker 2: do you still feel positive on the stock market posted
16:00
Speaker 2: just on the UK in general?
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Speaker 3: Yeah, very positive on the stock market. All the things
16:05
Speaker 3: you said, maybe apart from the last one about the government,
16:07
Speaker 3: all say the same thing. They're too cheap. They're cheap.
16:10
Speaker 3: They either want to relist because they realize they're not
16:12
Speaker 3: getting their right valuation or they're getting taken out because
16:15
Speaker 3: they're too cheap. And as an investor, it's good to
16:18
Speaker 3: buy things that are too cheap as opposed to buy
16:20
Speaker 3: things that are too expensive. So you absolutely want to
16:23
Speaker 3: be investing in the British stock market. We had and
16:26
Speaker 3: I think and of course you were there. We had
16:27
Speaker 3: Anthony Bolton speaking at the Library Mistakes. People can see
16:31
Speaker 3: that on our website Library mistakes dot com. One of
16:34
Speaker 3: the great questions somebody asked him is if he was
16:36
Speaker 3: beginning his career again and his career was just UK equities. Initially,
16:40
Speaker 3: would he be happy just being confined to buying UK equities?
16:44
Speaker 3: And he basically kind of said he'd be delighted. He
16:45
Speaker 3: can think of a better time to be confined to
16:49
Speaker 3: buying only UK equities given the valuations he sees in
16:53
Speaker 3: the marketplace. So I thought that was a revealing statement,
16:56
Speaker 3: the one I completely agree with. And we are in
16:58
Speaker 3: a very bifurcated world of excessively highly valued equities and
17:02
Speaker 3: excessively cheap equities as well, and that ground for encouragement.
17:06
Speaker 3: That's not as if everything's overvalued. There are some things
17:08
Speaker 3: that look really cheap, and UK equities are one of them.
17:12
Speaker 2: Russell, Is it a great time for active management?
17:15
Speaker 3: Yes, And I would have said that last year, and
17:18
Speaker 3: I would have said that the year before. And we
17:20
Speaker 3: all know there has to be a tipping point when
17:21
Speaker 3: the machines, and the machines are just don't mean the algorithms,
17:25
Speaker 3: I mean indexing, When the machines dominate the market, at
17:28
Speaker 3: some stage, the human beings are going to make a
17:30
Speaker 3: make a killing. And I say again that we have reached.
17:33
Speaker 2: That point, given what you said about Europe and how
17:37
Speaker 2: nice it is for us not to be caught up
17:38
Speaker 2: in the single currency and possibly not to be caught
17:41
Speaker 2: up in various so that European crises coming out. We're
17:43
Speaker 2: about to see the benefits of brexits, you think.
17:46
Speaker 3: Yeah, I mean, I think the benefits of breaks that
17:48
Speaker 3: have been profound, though not economic. And it's nice to
17:52
Speaker 3: talk about everything in economics, that's what we do here.
17:55
Speaker 3: But it was about the devolution and the decentralization of power,
17:59
Speaker 3: which is something I have and to believe in. And
18:01
Speaker 3: the British people have had a series over the last
18:04
Speaker 3: quarter of a century, a series of votes on the
18:06
Speaker 3: devolution of power, and almost without exception, they always vote
18:09
Speaker 3: to devolve par Now we have in this country the
18:12
Speaker 3: most devolved power we've ever had, because we obviously have
18:14
Speaker 3: our assemblies in Wales, Scotland and Northern Ireland, but we
18:18
Speaker 3: have these mayors who've got a relative degree of autonomy
18:21
Speaker 3: as well. We probably haven't been rewarded yet for having
18:24
Speaker 3: that degree of tolery.
18:25
Speaker 2: I think I don't feel particularly rewarded for Scottish devolution yet.
18:29
Speaker 2: I mean, I live in hope, but not yet, not yet.
18:31
Speaker 3: I am a great faith in the people to change
18:34
Speaker 3: their minds. So let's see if they can finally, whichever
18:37
Speaker 3: assembly or whichever merit is, get one who's prepared to
18:39
Speaker 3: deliver for the people. And that I share your skepticism
18:43
Speaker 3: as to where the Scottish Parliament can do that. But
18:46
Speaker 3: let's see, so here we are massively devolved, massively the
18:51
Speaker 3: geared in the private sector, and Europe insists on going
18:54
Speaker 3: for more and more and more and more centralization. So
18:57
Speaker 3: everybody keeps putting their heart and so how come Europe's
18:59
Speaker 3: not growing? I come at such a disaster. But if
19:02
Speaker 3: you constantly centralize par in Brussels and Frankfurt, what do
19:06
Speaker 3: you think is going to happen? Why do we think
19:08
Speaker 3: that's a brilliant idea? And you know, I think you
19:12
Speaker 3: may be getting new forms of hate mail now I've
19:14
Speaker 3: given them. I'm being so negative about the European Union.
19:17
Speaker 3: But I mean, do you know that fifty eight percent
19:20
Speaker 3: of all France's spending is government spending? Fifty eight percent?
19:24
Speaker 3: Now that the IMF very kindly provides as a list
19:27
Speaker 3: of that data for every country in the world. Now,
19:29
Speaker 3: the good news is for France, it's not the worst
19:31
Speaker 3: in the world at fifty eight percent. There are two
19:33
Speaker 3: countries that have got a higher level of government expenditures
19:36
Speaker 3: of percentage of GDP, and they are Kiribati and Micronesia.
19:40
Speaker 3: So you know that is not sustainable. And if you
19:43
Speaker 3: say to somebody is not sustainable, they will reply. But
19:46
Speaker 3: it's France. That's not a good answer. If something cannot
19:50
Speaker 3: go on forever, it will end to quote Herbstein, So
19:54
Speaker 3: we are whatever you think of the United Kingdom, it
19:56
Speaker 3: is somewhat flexible, it is somewhat changeable. It is the vault,
20:00
Speaker 3: you know. I don't want to make it sound like
20:02
Speaker 3: everything is rosy in the United Kingdom. It isn't.
20:04
Speaker 1: No.
20:05
Speaker 2: I mean, it's important to point out that around forty
20:07
Speaker 2: five percent of UK GDP is state spending.
20:11
Speaker 3: Yeah, well, we could run through all the data. That's
20:13
Speaker 3: not normal, you know that kind of fruit of that board.
20:15
Speaker 3: I think the US is at thirty four or something,
20:17
Speaker 3: so that's that's that's the outlier. But for other states
20:20
Speaker 3: in the world, the UK is not is not an idol.
20:23
Speaker 2: And China, just for fun, is about thirty percent, isn't it.
20:25
Speaker 3: I don't know, we'd have to google that.
20:27
Speaker 2: I think it is around thirty, which I think is
20:29
Speaker 2: away was a.
20:30
Speaker 3: Fun I think the problem in China is trying to
20:33
Speaker 3: work out what's public and private.
20:35
Speaker 2: That's that, but then that may also be the case
20:38
Speaker 2: going forward. And you know, one of the things about
20:40
Speaker 2: national capitalism isn't it is that we're going to end
20:43
Speaker 2: up with capital directed by government into what we might
20:48
Speaker 2: technically call private companies or private investments. And so that
20:52
Speaker 2: forty five forty six percent in the UK is in
20:55
Speaker 2: effect going to be much higher going forward if, for example,
20:59
Speaker 2: Rachel reeves get she wants and gets a large percentage
21:02
Speaker 2: of the UK pension money because of course, why do
21:05
Speaker 2: you look to pensions, because that's where the money is
21:07
Speaker 2: of a lot of that money ends up being directed
21:10
Speaker 2: by the state into investment in the UK. Then again,
21:14
Speaker 2: just like in China, what is public and what is
21:16
Speaker 2: private becomes very very blurred.
21:17
Speaker 3: Right, That's why they're doing it. The government balance sheet
21:20
Speaker 3: is stretched to a limit, maybe not the limit, a limit.
21:23
Speaker 3: Then you have to get this off balance sheet financing,
21:25
Speaker 3: this contingent financing, and that's where we're that's what we're
21:29
Speaker 3: doing here. There's so many contingent liabilities on the government
21:31
Speaker 3: balance sheet anyway, in terms of future pensions for public workers,
21:36
Speaker 3: et cetera, et cetera. So I think with gay abandon,
21:39
Speaker 3: I think they will add a lot more because what else?
21:41
Speaker 3: What else is there?
21:42
Speaker 2: Okay, let's go back to China. Briefly. We were talking
21:46
Speaker 2: about investing in cheap markets. Why it's important in the
21:49
Speaker 2: medium to long term to hold things that you bought
21:52
Speaker 2: cheap rather than things that you bought expensive. Now China
21:54
Speaker 2: looks cheap, but you also think it's uninvestable, right.
21:58
Speaker 3: Yeah, So back to our cyclically adjusted pe, which I
22:01
Speaker 3: do think for the long term holder. Only for the
22:03
Speaker 3: long term holder is a good guide to value. And
22:05
Speaker 3: China did just before it launched its reflection. It got
22:08
Speaker 3: less than ten times cape, and that is the traditional Hey,
22:11
Speaker 3: these things are cheapest chips level. I have actually do
22:16
Speaker 3: presentation twenty one lessons from financial history, and one of
22:19
Speaker 3: those is always by equities below ten times cape. Unless
22:24
Speaker 3: you don't have monetary independence, you're about to go to war,
22:29
Speaker 3: or you face confiscation of assets. Potentially China faces all three.
22:34
Speaker 3: This is the problem, and hopefully a cold war and
22:37
Speaker 3: not a hot war. We are already fighting two cold
22:40
Speaker 3: war or two proxy wars with China, given that they
22:42
Speaker 3: buy the oil of both Iran and Russia, and ultimately,
22:46
Speaker 3: do you have private sector property rights in China? Will
22:49
Speaker 3: you could you enforce your rights to own property as
22:52
Speaker 3: a shareholder against the government in a court of law.
22:55
Speaker 3: There are people I know who said the answer to
22:57
Speaker 3: that is yes. The answer my answer to that is know.
23:00
Speaker 3: More specifically, if we do get into a cold war
23:03
Speaker 3: with China, the assets of China will be treated the
23:06
Speaker 3: same way as Russia. And for the unfortunate portfolio managers
23:09
Speaker 3: who had Russian equities in their portfolio, they are now
23:12
Speaker 3: valued at zero. So you can run, you know, you
23:15
Speaker 3: can roll the dice on this game, and you can
23:17
Speaker 3: hope that none of that happens. And they are cheap
23:20
Speaker 3: and they would produce good remnom B returns, But will
23:24
Speaker 3: they produce good sterling returns or good dollar returns if
23:27
Speaker 3: you ultimately can't get your money out of that country.
23:30
Speaker 3: And that's where we are with Russia, and I really
23:32
Speaker 3: strongly believe, but hope and pray that that's not where
23:35
Speaker 3: we end up with China.
23:37
Speaker 2: So you have have the risk of war, obviously the
23:39
Speaker 2: risk of the invasion of Taiwan at some point over
23:41
Speaker 2: the next decade. Perhaps several people have mentioned that on
23:44
Speaker 2: the podcast over the last last few months. You have
23:46
Speaker 2: that risk, you have the absolute riskyal property rights, and
23:50
Speaker 2: of course you have uncertainty around the currency.
23:53
Speaker 3: Yeah, and that's the key point. I mean, China headed
23:55
Speaker 3: into a debt deflation and very recently, by which I
23:58
Speaker 3: mean the consumer price index was flat to falling, the
24:02
Speaker 3: producer price index was falling, the price of residential property
24:06
Speaker 3: prince was falling, the debt to GDP ratio was soaring.
24:10
Speaker 3: Why why did they get themselves into such a mess?
24:13
Speaker 3: Because they insisted on managing the exchange rate. Now I'm
24:16
Speaker 3: using past tense. Most people would use present tents for
24:19
Speaker 3: managing the exchange rate. But if you look at what
24:21
Speaker 3: they're doing to reflat and what they have to do
24:24
Speaker 3: to reflair, they ultimately aren't going to be able to
24:26
Speaker 3: sustain the stable exchange rate. But anyway, if the consensus
24:30
Speaker 3: is right and mister g is absolutely adamant that this
24:33
Speaker 3: exchange rate can never go down, then he's also surrendered
24:36
Speaker 3: a high degree of manatary independence. So those three things
24:39
Speaker 3: are now working against you. Now I think he isn't.
24:41
Speaker 3: I think he's going to give that up, and I
24:42
Speaker 3: think they'll focus on reflating but the longer he clings
24:45
Speaker 3: on to managing the exchange rate and no monetary independence,
24:48
Speaker 3: likelihood of conflict cold or hot, plus confiscatory government ten
24:54
Speaker 3: times cyclically adjusted PE, it's still not a buye Okay.
24:58
Speaker 2: So where can we expect inflation to go? Let's stick
25:02
Speaker 2: with the UK and m as we listen as the UK,
25:05
Speaker 2: where can we expect inflation to go?
25:06
Speaker 3: Here?
25:06
Speaker 2: I mean, you've long been an inflationist, right and that
25:09
Speaker 2: you believe that one of the way, one of the
25:11
Speaker 2: main ways to get rid of debt is a period
25:14
Speaker 2: of inflation.
25:16
Speaker 3: I have, and I strongly believe that in the longer term,
25:19
Speaker 3: but I changed my mind a few months ago on
25:20
Speaker 3: the shorter term.
25:21
Speaker 2: That's where I was going.
25:23
Speaker 3: Yeah, that is because in the governments have got this
25:26
Speaker 3: wrong again. So during COVID, too much money was created,
25:31
Speaker 3: I argue, created due to government action in guaranteeing government
25:35
Speaker 3: commercial bank credit, which encouraged them to expand their balance
25:39
Speaker 3: sheets and create money. We'll not go through the technicalities
25:41
Speaker 3: of that, but basically the government was complicit in the
25:44
Speaker 3: excess money creation. Then they addict for obvious reasons. When
25:48
Speaker 3: we've seen in America what the rate of inflation has
25:50
Speaker 3: done for politicians who don't take it seriously, and they
25:54
Speaker 3: handed the sort of rains back to the central bankers.
25:56
Speaker 3: And the central bankers have again got it wrong, because
25:59
Speaker 3: we really since the beginning of twenty twenty two, there
26:02
Speaker 3: has been virtually no growth in the supply of money
26:05
Speaker 3: across the developed world. And people will say, well, that
26:09
Speaker 3: just shows it's not important. Because if there's been no
26:11
Speaker 3: growth for two years and the economy has continued to
26:14
Speaker 3: grow and inflation has continued to go so prices have
26:17
Speaker 3: continued to go up even though the rate of inflation
26:19
Speaker 3: has come down, clearly the growth rate in broad money
26:22
Speaker 3: has no impact whatsoever. And I think I'll come to
26:25
Speaker 3: the exact opposite conclusion. So much money and was created
26:29
Speaker 3: from twenty to twenty two, that kind there's a tank
26:32
Speaker 3: full of it there and we're running it down. But
26:34
Speaker 3: once it's exhausted, what we're putting into that tank is
26:36
Speaker 3: close to zero, and that's a recipe for much lower growth.
26:41
Speaker 3: I need to put that into context. Of the current
26:43
Speaker 3: rates of growth and broad money are the lowest we've
26:45
Speaker 3: seen since the Great Depression. You know, it was really
26:48
Speaker 3: bad and sluggish from two thousand and ninety to twenty nineteen,
26:51
Speaker 3: particularly in Europe. But what we're seeing today is I mean,
26:54
Speaker 3: not much worse than that, but marginally worse than that,
26:56
Speaker 3: which puts us right back into the nineteen thirty. So
27:00
Speaker 3: they're writing for a fall with this monetary policy. And
27:03
Speaker 3: I can't tell you when those previous monetary balances will
27:06
Speaker 3: be run down, when we're going to watch something break
27:09
Speaker 3: in the global system, when inflation is going to fall.
27:11
Speaker 3: I don't know when that's going to happen, but we've
27:14
Speaker 3: been We're two and a half when nearly three years
27:16
Speaker 3: into a period of no growth in broad money. So
27:18
Speaker 3: we're running on empty here, and I think it's a
27:21
Speaker 3: deflation shop we get before we have to move back
27:24
Speaker 3: to something more aggressive, And there's something more aggressive is
27:26
Speaker 3: going to be The government's back involved in this. More aggressively.
27:29
Speaker 3: They discovered in twenty twenty. Governments make money, not our
27:32
Speaker 3: central bankers make money. They give it up, they got frightened,
27:36
Speaker 3: they give it up, but they'll be back. And the
27:38
Speaker 3: way you make money is get banks to lend money,
27:40
Speaker 3: and you could get them lending to all of your
27:41
Speaker 3: lovely national capitalist projects as well. So it's coming the synthesis.
27:46
Speaker 3: It's for all that, and all that, it's coming yet
27:50
Speaker 3: for all that Scotland's National Bard once.
27:54
Speaker 2: Okay, all right, let's get onto the good bit. So
27:58
Speaker 2: we've set the scene. We understand what's happening to time,
28:01
Speaker 2: what you think is going to happen anyway, How in
28:04
Speaker 2: your global scenario, how we investing. We're investing in the
28:07
Speaker 2: UK stort market into the best value we can find.
28:10
Speaker 2: That bit we get. What else are we doing?
28:12
Speaker 3: Well, we're also buying putting money with value managers. They're
28:16
Speaker 3: only one, there are only two of them left. And
28:17
Speaker 3: what I recommend, if you can do it, is actually
28:19
Speaker 3: go and attend a value manager's conference. It's really I'm
28:23
Speaker 3: sure I'm showing my Presbyterian here. It's quite good fun.
28:26
Speaker 3: You know. They talk about the stocks that I know. Yeah, yeah, yeah,
28:29
Speaker 3: So they talk about the stocks that they like and
28:30
Speaker 3: stuff like that, and you'll meet some of them and
28:33
Speaker 3: and I do mean this, they do. They do huddle
28:35
Speaker 3: together for warm of these days. They're not difficult to find.
28:38
Speaker 3: So so go and do that. You might get some
28:39
Speaker 3: good stock ideas. I've had a few belters over the years,
28:43
Speaker 3: but you might find a fund manager that you you like,
28:46
Speaker 3: so you're doing that. We if we get into this
28:49
Speaker 3: position with China, lots of corporations are going to do
28:51
Speaker 3: excessively well out of that because the yoke of Chinese
28:54
Speaker 3: competition will be lifted. And if you're making anything in
28:58
Speaker 3: competing with China, you survive the last thirty years, then
29:01
Speaker 3: I suspect you're pretty good at it, that you're going
29:03
Speaker 3: to be actually good at it when that's lifted. And
29:05
Speaker 3: of course we can't move on without discussing gold. So
29:08
Speaker 3: all of this is very good for gold, and we're
29:10
Speaker 3: seeing the goal price reacting to that already. But what
29:14
Speaker 3: I'm talking about, and we haven't talked specifically about it,
29:16
Speaker 3: but in general, it's the end of an old global
29:18
Speaker 3: monetary system we're talking about here. And you know, the
29:22
Speaker 3: last time and an old monetary system broke down, gold
29:25
Speaker 3: went from thirty five dollars to be one hundred and fifty.
29:28
Speaker 3: I cannot say that that will happen again because gold
29:30
Speaker 3: has been floating, and it hadn't floated up until seventy one.
29:34
Speaker 3: So well, a lot of if you ad a lot
29:36
Speaker 3: of inflation to price end quite quickly. But when monetary
29:39
Speaker 3: systems break down, goal price can go a long way.
29:41
Speaker 2: Okay, now we have listeners out there, we'll be listening
29:44
Speaker 2: to this and saying, geez, that is so old hat
29:47
Speaker 2: these days, when monetary systems break down, what you need
29:51
Speaker 2: is bitcoin, particularly when you've got a Trump government place
29:54
Speaker 2: who ostensibly at least hugely support bitcoin, talking about adding
29:58
Speaker 2: it to reserves and regulatory environment, et cetera. Bitcoin is
30:02
Speaker 2: the place to be, not gold at all.
30:07
Speaker 3: So obviously I disagree with that.
30:09
Speaker 2: There's that's not obvious. That's not obvious. We never know
30:11
Speaker 2: who's going to go witch my own bitcoin.
30:14
Speaker 3: Several reasons to disagree with that. The first one is
30:18
Speaker 3: I've got a long record on gold, and I have
30:20
Speaker 3: a pretty good idea what makes it goes up and
30:22
Speaker 3: what makes it comes down. It doesn't means I can
30:24
Speaker 3: forecast that accurately, but at least I know why, and
30:27
Speaker 3: I do need a lot of gold bitcoin experts. And
30:29
Speaker 3: I said, then, please tell me why it sometimes has
30:32
Speaker 3: I know why it goes up more buyers than sellers.
30:35
Speaker 3: And they'll tell me, well, there's more sellers than buyers
30:37
Speaker 3: when it goes down. But this is true for any asset,
30:40
Speaker 3: any good, any service on the planet. I need something
30:43
Speaker 3: a bit more. If I'm going to recommend to people
30:45
Speaker 3: listening to this podcast that they should buy bitcoin as
30:48
Speaker 3: to when you can expect it to fall and when
30:50
Speaker 3: you might want to take proactive action, and no one
30:53
Speaker 3: yet has been able to explain that to me, So
30:55
Speaker 3: that necessarily means you I have to be cautious. There
30:59
Speaker 3: is no fun fundamental which I can point to that
31:01
Speaker 3: drives it up and drives it down beyond mere assertion
31:03
Speaker 3: that everybody will always want them to buy a number one.
31:06
Speaker 3: Number two government policy. Trump is keen on crypto. There
31:12
Speaker 3: are three types of crypto. There are central bank digital currencies,
31:14
Speaker 3: which I think we won't talk about. I don't think
31:16
Speaker 3: they will take off. But then the other two are
31:19
Speaker 3: stable coins and private sector crypto, which is bitcoin. In
31:23
Speaker 3: terms of the national capitalism financial repression agenda, one of
31:28
Speaker 3: those is incredibly helpful, and one of those is incredibly dangerous.
31:31
Speaker 3: And the one that's incredibly dangerous is private sector crypto
31:35
Speaker 3: because it allows people to escape a financial repression, and
31:39
Speaker 3: that's why they like it. And if you hear people
31:41
Speaker 3: talk about it, they'll tell you that's exactly why they
31:43
Speaker 3: hold it. Now a world where a government allows that
31:46
Speaker 3: portal away from the repression they're trying to bring in.
31:50
Speaker 3: Is a strange world, and I don't think one that's
31:52
Speaker 3: ultimately sustainable. So I don't think that's on the agenda
31:56
Speaker 3: today or tomorrow. But if let's say government bonnials in
31:59
Speaker 3: America were spiking higher and it turns out that everybody
32:02
Speaker 3: was getting the money out of the country by a bitcoin,
32:04
Speaker 3: I think you can see it changed quite quickly. Stable Coin, however,
32:07
Speaker 3: is really very very helpful for governments, and particularly for
32:10
Speaker 3: the United States of America, because ultimately it's largely these
32:14
Speaker 3: days backed by holdings of UST bills. And if the
32:18
Speaker 3: world can come to hold tether or any other stable
32:22
Speaker 3: coin and believe that it's effectively a dollar, then it
32:25
Speaker 3: funnels money into President Trump's currency, and it funnels it
32:29
Speaker 3: into his government debt market, and that's what he's going
32:33
Speaker 3: to like. So I think as time goes on, we
32:35
Speaker 3: might see that the Trump administration is really very keen
32:38
Speaker 3: on properly regulated stable coin, which is really little more
32:42
Speaker 3: than a money market fund attached to the blockchain, but
32:45
Speaker 3: not so keen on that portal, which is a private
32:50
Speaker 3: sector currency which allows people to avoid national capitalism. So
32:54
Speaker 3: let's see where we get to. But those are the
32:57
Speaker 3: fundamental reasons, and no one can tell me what bitcoin
32:59
Speaker 3: is for. I mean everyone now they used to say
33:01
Speaker 3: was a currency. Everybody's convinced it's not a currency anymore.
33:04
Speaker 3: So I've won't described it as a you know, a
33:06
Speaker 3: very very liquid, large efficient baseball card. And it is
33:10
Speaker 3: possible to make money out of baseball cards, but you
33:14
Speaker 3: need to understand the baseball card market. But it doesn't
33:16
Speaker 3: have a use beyond being a speculative asset for the
33:20
Speaker 3: avoidance of the government. And that's why people like it.
33:24
Speaker 3: And if you think it can continue to be an
33:25
Speaker 3: asset in which you can constantly avoid the government, whether
33:28
Speaker 3: you are doing that legitimately or as a criminal, then
33:31
Speaker 3: it has a future.
33:32
Speaker 2: Okay, well, I'm just bracing myself with a hate mail
33:36
Speaker 2: actually the Twitter campaign against not just me this time,
33:39
Speaker 2: but you as well, so at least still have company.
33:41
Speaker 2: Thank you for that. The one thing we haven't talked
33:44
Speaker 2: about that I would like to talk about briefly is Japan.
33:46
Speaker 2: How is Japan affected here?
33:48
Speaker 3: Yeah, Japan's fascinating now, I think because just on that
33:51
Speaker 3: short term issue, it also hasn't gotten much thin broad money,
33:54
Speaker 3: and they've spent thirty years not working this out. I
33:56
Speaker 3: mean thirty years of them sitting around going what's going
33:58
Speaker 3: on here? How come our dads is going up relative
34:00
Speaker 3: to our GDP? Could it be perhaps that you don't
34:04
Speaker 3: create enough money to have a higher level of normal GDP?
34:07
Speaker 3: Could that possibly be what's going on here? So it
34:10
Speaker 3: has to be said that like everybody else, they still
34:12
Speaker 3: haven't worked that out. But they're going to have to
34:14
Speaker 3: work it out. So Japan's going to face I think,
34:17
Speaker 3: the same short term problems as the rest of us.
34:21
Speaker 3: But now to their advantage, they have this huge balance
34:25
Speaker 3: of overseas assets SORR. They have gross number, but they
34:27
Speaker 3: also have a net balance, and they can begin to
34:30
Speaker 3: repatriate that. They can begin to continue to hold down
34:33
Speaker 3: their government bond yields. And at some stage someone's going
34:36
Speaker 3: to work out. If you banks lend money, they create money,
34:39
Speaker 3: and nominal GDP goes up, so equities there are more
34:44
Speaker 3: reasonably valued, and certainly the second tier equities look still
34:48
Speaker 3: still use the word cheap. So there are still opportunities
34:51
Speaker 3: in Japan. But we may be in for one of
34:52
Speaker 3: these shocks, these deflation shocks, which sure you know just
34:56
Speaker 3: coming across the developed world based on where broad money
34:59
Speaker 3: growth is. I don't know as it to buy Japanese
35:01
Speaker 3: equities for long run, but I think maybe it's just
35:03
Speaker 3: time to be a little bit more cautious because of
35:06
Speaker 3: the trends in money supply growth.
35:08
Speaker 2: Okay, brilliant, really useful, Thank you, right. I think we
35:12
Speaker 2: have pretty much covered everything that I wanted to talk about,
35:16
Speaker 2: although I know there's so much more. But I wanted
35:18
Speaker 2: to ask you one last question, and this is a
35:21
Speaker 2: Christmas related question. If there was one book that you
35:24
Speaker 2: felt all our listeners should be asking for for Christmas,
35:27
Speaker 2: one that isn't written by either you or me, which
35:29
Speaker 2: I know narrows it down quite a lot. Is there
35:32
Speaker 2: one that you would say, really is a must read
35:34
Speaker 2: for someone who wanted to understand some things that we've
35:37
Speaker 2: been talking about, or somebody just wanted to be a
35:38
Speaker 2: better investor.
35:40
Speaker 3: Yeah, there is one book I always recommend. It's out
35:42
Speaker 3: of print, so that not particularly helpful, but let me
35:45
Speaker 3: start with that one, and I'm sure you've read it.
35:47
Speaker 3: It's called Triumph Off the Optimists Dimson, marsh and Staunton,
35:52
Speaker 3: and it will sound like the world's most boring book,
35:54
Speaker 3: but it's the history of the return of various assets
35:57
Speaker 3: or a very long term holding periods. And the reason
35:58
Speaker 3: that's so essential to read it it is to calibrate yourself.
36:01
Speaker 3: And I think, particularly if you're not a finance professional,
36:04
Speaker 3: it's easy to become uncalibrated. And if you ask, certainly
36:07
Speaker 3: I remember this back in the dot com bubble, if
36:09
Speaker 3: you ask people what was the what they thought the
36:12
Speaker 3: average long term return from equities was in a bill market,
36:14
Speaker 3: they came up with twenty five percent per annum. You know,
36:18
Speaker 3: completely totally already uncalibrated to realize that the answer is
36:21
Speaker 3: about six and a half real terms, But you're can
36:25
Speaker 3: look at all the asset classes, so that will calibrate you.
36:27
Speaker 3: And it also helps inoculate you from dodgy sales people
36:31
Speaker 3: who promise you twenty five percent to infinity and beyond.
36:35
Speaker 3: So there's that one, and I would recommend that one
36:38
Speaker 3: if you can get a copy, and I'd recommend to
36:39
Speaker 3: the publisher that they republish it and get it back
36:42
Speaker 3: into the system and potentially even updated. Because it only
36:44
Speaker 3: runs to the year the year two thousand.
36:47
Speaker 2: Okay, well, maybe we can create enough demand that it
36:49
Speaker 2: does get reissued.
36:51
Speaker 3: Be wonderful if you could do that, You've got poar
36:54
Speaker 3: beyond your knowledge. I think you're going to do it.
36:56
Speaker 2: Okay, Russell, thank you so much for joining yesterday. We
36:59
Speaker 2: reallyppreciate it. That was fascinating great.
37:02
Speaker 3: Thank you.
37:12
Speaker 2: Thanks for listening to this week's Marin Talks Money. If
37:15
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