Latest / Merryn Talks Money / Gold, Debt and the AI Boom: A Financial Historian’s Warning

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Gold, Debt and the AI Boom: A Financial Historian’s Warning · Merryn Talks Money

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  Speaker 2: podcast offer Onwards. Welcome to Marin Talks Money, the podcast
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  Speaker 2: in which people who know the markets explain the markets.
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  Speaker 2: I am Merin Sumsep, web editor at large form bloom
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  Speaker 2: clost Uk Wealth, and this week I am speaking with
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  Speaker 2: Edwards Chancellor, investment strategist and financial historian. Now he is
• 0:56
  Speaker 2: the author of the Price of Time, which I'm sure
• 0:58
  Speaker 2: all of you will have read by now, and if
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  Speaker 2: you haven't, now is the time to go get it
• 1:02
  Speaker 2: and start reading. He recently collaborated with Jeremy Grantsam on
• 1:06
  Speaker 2: the book The Making of a Perma Bear, The Perils
• 1:08
  Speaker 2: of long term investing in a short term world. We
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  Speaker 2: interviewed Jeremy a few weeks ago, so do you go
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  Speaker 2: back and listen to that one as well. We thought
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  Speaker 2: this would be a good moment to have a financial
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  Speaker 2: the story and on the show someone to help us
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  Speaker 2: point the market moves we've seen in the first quarter
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  Speaker 2: of the year into context, both the volatility around AI,
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  Speaker 2: but also more recently, obviously their reaction to the escalating
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  Speaker 2: conflict in the Middle East.
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  Speaker 3: What does that mean for markets going forward?
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  Speaker 2: And more importantly from Eddie, what does it mean for
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  Speaker 2: the price of money?
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  Speaker 3: Eric Chances, Let welcome to Maren Talks Money.
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  Speaker 1: Nice to see you again, Maren.
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  Speaker 2: Now we've got quite a lot to talk about it Actually,
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  Speaker 2: originally last week or a couple of weeks ago, and
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  Speaker 2: we thought about having you back on. We thought we'll
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  Speaker 2: just talk about bubbles, we'll talk about AI, we'll talk
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  Speaker 2: about the great rotation in stock markets, etc. But there's
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  Speaker 2: quite a lot more to talk about now. But let's
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  Speaker 2: start where we originally plan. And to start, shall we
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  Speaker 2: Let's start with before the conflict new conflict in the middle.
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  Speaker 2: He started at the weekend, we were looking at markets
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  Speaker 2: and going, look, there is something going on here. We're
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  Speaker 2: seeing a shift out of AI adjacent stocks and into
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  Speaker 2: something that connects more to real assets. We talked about
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  Speaker 2: the shift from Yolo and Fomo to Halo, all these
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  Speaker 2: things during columns that John and I have written on
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  Speaker 2: those things. So I wonder if I could just ask
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  Speaker 2: you to give us your thoughts on that what you
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  Speaker 2: think has been happening in the market over the last
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  Speaker 2: few months.
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  Speaker 1: The story but the market's response to AI is as
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  Speaker 1: with every sort of boom or bubble period, there are
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  Speaker 1: feedback effects and one narrative runs for a while and
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  Speaker 1: then another narrative takes savers. So I'd say at the
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  Speaker 1: beginning of this year I wrote a paper with Jeremy
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  Speaker 1: Grantham looking at AI from the perspective of previous technology booms,
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  Speaker 1: and it looked to the time that Oracle stock could
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  Speaker 1: come down shortly. Core Weave, which is one of these
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  Speaker 1: neo cloud operators that stop was off sharply. Then the
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  Speaker 1: big Hyperscala. The market was responding negatively to the amount
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  Speaker 1: of money they were spending and they're collapsing free cash flows.
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  Speaker 1: So it looked, you could say quite reasonably at the
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  Speaker 1: time that that things looked as if AI enthusiasm was waning.
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  Speaker 1: And then but then in the last couple of weeks
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  Speaker 1: we've seen really quite extraordinarily powerful viral AI stories or
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  Speaker 1: narratives came around. There was one note ace Uncle Matt Schumer,
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  Speaker 1: some Californian tech guy, which was a story of AI
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  Speaker 1: is coming for your job, a fairly conventional story but
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  Speaker 1: immediately got fifty million views on day one. But more
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  Speaker 1: interesting to my mind was the research that came out,
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  Speaker 1: a piece of research that came out I found called
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  Speaker 1: Cittrini research towards the end of last week, and that
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  Speaker 1: was that was mooting the idea that if AI were
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  Speaker 1: ready to realize its potential, there would be collapse in
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  Speaker 1: all white collar jobs followed by the mother of all recessions.
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  Speaker 1: And that actually is definitely worth reading as a as
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  Speaker 1: a story of what would happen if AI were actually
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  Speaker 1: to achieve what the likes of Sam Altman at open
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  Speaker 1: Ai claim that it will achieve. I I personally don't
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  Speaker 1: think it will get there, but and we can discuss.
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  Speaker 2: That, and why don't we discuss that right away so
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  Speaker 2: we know where so we can set this okay bit up.
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  Speaker 2: The idea being that if AI can really do what
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  Speaker 2: it's intense believers believe it can and effectively take over
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  Speaker 2: pretty much all white collar jobs massively improve productivity, then
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  Speaker 2: that gain gives us a huge level of unemployment and
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  Speaker 2: a recession as a result.
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  Speaker 3: So that productivity revolution destroys itself.
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  Speaker 1: No, but man, it's other than that. Is that? And
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  Speaker 1: this is the point goes back to Schumpeterus theory of
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  Speaker 1: the business cycle, that a great depression is created when
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  Speaker 1: a new technology comes along, interrupts established profit lines, and
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  Speaker 1: then the debt built upon that profit or cash flow collapses.
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  Speaker 1: So in fact, the Cittrini research is really a is
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  Speaker 1: a sort of trumpetarian dark picture. And I'm very well expressed.
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  Speaker 1: So why do I think I humble eye who can't
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  Speaker 1: code to save their life.
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  Speaker 2: I think that it's not don't need to code anymore, Edward,
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  Speaker 2: this is a lot of problems.
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  Speaker 1: So why do I think that it's it's we're not
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  Speaker 1: going to see the Citrini research scenario played out. And
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  Speaker 1: I think this goes back I was thinking It goes
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  Speaker 1: back to every every bubble. If you think about bubbles,
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  Speaker 1: there there's always a there's a core of truth to
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  Speaker 1: every bubble that something is revolutions, that's going to change word.
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  Speaker 1: And then there is an element of reality that is
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  Speaker 1: being overlooked. So the market, if you will, chases the narrative,
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  Speaker 1: and it chases the narrative uncritically, and it doesn't examine
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  Speaker 1: the niggling elements of reality. I'm afraid that is the
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  Speaker 1: nature of a bubble. So you call it group thing,
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  Speaker 1: or you can call it people's resistance to disonant information,
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  Speaker 1: cognitive distance, call it what you will. So what is
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  Speaker 1: the germ or what's the reality that the AI enthusiasts
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  Speaker 1: seem to be overlooking. Well, that's namely that as far
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  Speaker 1: as I can understand. Bear in mind, you know that
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  Speaker 1: I'm picking this up at the second hand. And if
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  Speaker 1: you listen, if you listen to the AI, certain of
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  Speaker 1: the AI specialists, and I'm thinking of Turing Award winners
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  Speaker 1: such as Yan Lacun who left META last year, fellow
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  Speaker 1: called Richard Sutton, also another Touring Award winner, And then
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  Speaker 1: I listened, and I recommend that your listeners look listen
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  Speaker 1: to it too. The Faraday lecture given at the Rod
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  Speaker 1: Sarti last week by some uncle Michael Woodridge, whose professor
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  Speaker 1: of AI and computing at Oxford, and all of them
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  Speaker 1: really say the same thing that the large language model
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  Speaker 1: is not a model that is actually engaged in reasoning.
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  Speaker 1: It's not engaged in seeking the truth. It's not engaged
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  Speaker 1: in logical processing. It uses and this where I get
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  Speaker 1: a bit fuzzy. It uses really a sort of probabilistic
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  Speaker 1: framework for guessing, so to speak, what comes next. And
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  Speaker 1: it does an incredible good job a lot of the time,
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  Speaker 1: but it also produced is these pesky hallucinations. It makes mistakes,
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  Speaker 1: and it doesn't correct those mistakes. It can't so far
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  Speaker 1: as as I can see. That is not learning from
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  Speaker 1: having made a mistake. Now, people like Lukun Sutton Wooldridge,
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  Speaker 1: they all say that this flaw is inherent to the
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  Speaker 1: large language model architecture. So far, the advances with the
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  Speaker 1: llms have come from using more and more compute, more
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  Speaker 1: energy and scaling everything, and that led to advances. But
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  Speaker 1: there are to my mind quite compelling argument that we're
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  Speaker 1: reaching the limits of scaling. And that's just that's not
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  Speaker 1: me saying it that the person who was saying that
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  Speaker 1: towards the end of last year was Ilia Sutzkava, who
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  Speaker 1: is one of the founders of the LM models. So
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  Speaker 1: think about this way. If these machines are not really
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  Speaker 1: reasoning and not really intelligent and have and whose tendency
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  Speaker 1: to create errors or hallucinations are built into the model,
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  Speaker 1: how far can you go with that technology?
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  Speaker 2: Okay, so the key point here is that AI is
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  Speaker 2: the new wind, nice to have around the edges, makes
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  Speaker 2: a good story, but why do not actually change our world?
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  Speaker 1: It's difficult to know where to draw lights. And the
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  Speaker 1: other thing I'd say, Maren, is this, and I've been
• 9:34
  Speaker 1: doing quite I'm writing a new chapter for my old book,
• 9:37
  Speaker 1: Devil tat the Heimos, The History of Spectation. So I'm
• 9:40
  Speaker 1: going over the whole Internet bubble, of the TMT bubble
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  Speaker 1: of the late nineteen nineties, and one thing what I
• 9:48
  Speaker 1: find interesting there is that, of course there's a huge
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  Speaker 1: amount of hype around around the Internet from the mid
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  Speaker 1: nineteen nineties onwards, and if you look back, actually that
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  Speaker 1: hype was justified. I think as we get into the
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  Speaker 1: modern era of technology like the Internet, I think of
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  Speaker 1: the Internet these companies laid down hundreds of thousands of
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  Speaker 1: miles of fiber optic cable. Now the businesses that did it,
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  Speaker 1: Global Crossing and other companies, they all went bust and
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  Speaker 1: that there was massive over capacities and in ninety five
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  Speaker 1: percent over capacity. But yes, then you had the infrastructure
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  Speaker 1: for YouTube and video and video conferencing and whatever. That's
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  Speaker 1: what's happening now. I'd say the difference I like to
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  Speaker 1: you and I like to see things from the point
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  Speaker 1: of view investors rather than society at large. So my
• 10:47
  Speaker 1: view is, if the benefits are delivered for consumers or
• 10:52
  Speaker 1: society at large, there's no need or requirement for any
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  Speaker 1: individual investor to provide the capital with expectation of lots.
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  Speaker 1: That's my caveat to the bubbles being necessary. I don't think.
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  Speaker 1: I don't think there is, let's say, a necessity to
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  Speaker 1: partaking them. In fact, actually I was mentioning earlier to
• 11:12
  Speaker 1: you the Sandy NaN's book Engines That Move Markets, which
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  Speaker 1: is really a tremendously good book, which I would recommend
• 11:19
  Speaker 1: to anyone who's interested in the incept of how markets
• 11:23
  Speaker 1: respond to new technologies. And it's really quite clear that
• 11:28
  Speaker 1: in the early stages of these new technologies. When there
• 11:32
  Speaker 1: is so to speak for bubble enthusiasm that investors don't
• 11:38
  Speaker 1: make mine that tends to be over investment, excess at competition,
• 11:43
  Speaker 1: and then eventually you get a fallout and a shakeout,
• 11:50
  Speaker 1: and then you get dominant companies appearing at that later station.
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  Speaker 1: Those dominant companies often make pretty good investments. You think
• 11:59
  Speaker 1: of a et dominating telephone, and we think, obviously more
• 12:04
  Speaker 1: recently of the likes of Facebook and Google. But Google
• 12:08
  Speaker 1: and Facebook were not on offer in the late nineteen
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  Speaker 1: ninety Frankly, when a new technology comes along, the investor,
• 12:18
  Speaker 1: almost invariably in the past would have done better just
• 12:21
  Speaker 1: to stay in bed for ten years and get out
• 12:24
  Speaker 1: of it and say, what is this thing? What is
• 12:26
  Speaker 1: this railroad? I'm going to buy some stock. It's just
• 12:30
  Speaker 1: better to hold back there is I was thinking that
• 12:32
  Speaker 1: Warren Buffett and Charlie Manger all they used to say
• 12:35
  Speaker 1: back tech technology that they had a tra sing too difficult.
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  Speaker 1: And really, when one looks at the outcome for AI,
• 12:45
  Speaker 1: given these uncertainties that I mentioned earlier about what its
• 12:48
  Speaker 1: capacities might be, and also given the huge amount of
• 12:53
  Speaker 1: investment that a number of extremely well funded companies are
• 12:57
  Speaker 1: engaged in and the probably quite alistic that you know
• 13:01
  Speaker 1: that the services they offer won't be particularly differentiated and
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  Speaker 1: therefore will probably earn their marginal marginal cost, which might
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  Speaker 1: not even paid back on the capital they've invested. Then yeah,
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  Speaker 1: why not why not stay? Why not? Why not go
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  Speaker 1: for a halo trade instead?
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  Speaker 2: Is that where we are now or where we were,
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  Speaker 2: let's say on Friday on the idea of investing in
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  Speaker 2: AI and a AI related stocks or not, which stage
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  Speaker 2: of this bubble.
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  Speaker 1: This is definitely a different bubble or inception of new
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  Speaker 1: technology than the ones we've seen in the past, because
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  Speaker 1: a lot of it is being driven in the private markets.
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  Speaker 1: We've never Last week or a couple of weeks ago,
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  Speaker 1: open AI raised I put in inverted commas one hundred
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  Speaker 1: and ten billions.
• 13:51
  Speaker 3: Why are we having inverted cost We're.
• 13:53
  Speaker 1: Having inverted commas because the first of all that there
• 13:57
  Speaker 1: was fifty million fifty billion come from Amazon, of which
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  Speaker 1: of which thirty five billion was contingent on open II,
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  Speaker 1: open AI achieving artificial general intelligence. I've told you there
• 14:11
  Speaker 1: are a lot of people who seem to know quite
• 14:15
  Speaker 1: a lot about it about AI, who say you're not
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  Speaker 1: going to get there, Okay, So that's an invertic. The
• 14:21
  Speaker 1: other thing is that you know that that open this
• 14:24
  Speaker 1: is the world's largest vendor financing operation because Nvideo was
• 14:29
  Speaker 1: putting up I can't remember how much, thirty five billion whatever,
• 14:32
  Speaker 1: and and open Ai was committing to using Amazon Web
• 14:37
  Speaker 1: Services and buying three gigabytes or whatever or gigawats of
• 14:42
  Speaker 1: nvideo compute. Now, if you remember, back in the late
• 14:45
  Speaker 1: nineteen nineties, the likes of Cisco and the other telecoms operate,
• 14:49
  Speaker 1: it's Nortel Telecoms equipment supplies, Nortel and Loocent. They were
• 14:55
  Speaker 1: all heavily engaged in vendor financing. Now, the vendor fine
• 15:01
  Speaker 1: everything yesterday, the vendor financing of these companies, which we
• 15:04
  Speaker 1: thought we all thought was an outrage when it was revealed.
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  Speaker 1: If you remember, it's actually total fifteen billion. It's small
• 15:11
  Speaker 1: change to compareion. No, I'm just saying that that that
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  Speaker 1: open Ai alone seems to be in his last funding
• 15:23
  Speaker 1: roughly eighty percent of it, roughly eighty odd billion dollars.
• 15:29
  Speaker 1: What was a sort of vendor financing operation.
• 15:33
  Speaker 2: But wouldn't we love to see the valuations of these
• 15:36
  Speaker 2: companies that are still private tested at an IPO.
• 15:39
  Speaker 1: This is I mean, okay. That's the other thing is
• 15:42
  Speaker 1: that I should have said that Amazon the thirty five
• 15:45
  Speaker 1: billion was to open Ai was contingent on either achieving
• 15:50
  Speaker 1: AGI or IPO. These are big companies. I think open
• 15:54
  Speaker 1: Ai is funding different figures, but I think around seven
• 15:57
  Speaker 1: hundred and thirty billion. But some say hi of the valuation.
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  Speaker 1: So the question then, what happens when if and when
• 16:05
  Speaker 1: the likes of Anthropic and open ai and SpaceX, if
• 16:10
  Speaker 1: they all come to the market and in throwing a
• 16:13
  Speaker 1: couple of other businesses and you're getting three trillion of
• 16:18
  Speaker 1: new market cap coming to the markets. Whether another scenario,
• 16:22
  Speaker 1: another sort of citremely type scenario, is you actually have
• 16:25
  Speaker 1: a sell off as these companies come and push into
• 16:29
  Speaker 1: the public market. Yeah. But on the other hand, I
• 16:32
  Speaker 1: was thinking that with the world, and particularly the US
• 16:35
  Speaker 1: markets so dominated by passive investment. They say roughly sixty
• 16:40
  Speaker 1: percent of the US market stop market is passive. That is,
• 16:44
  Speaker 1: of course the passive investors, the passive funds, just open
• 16:49
  Speaker 1: up their arms. There's nothing you can't sell them. In
• 16:52
  Speaker 1: some ways, perhaps that some of the thinking is to
• 16:55
  Speaker 1: build up to these huge trillion dollar valuations and then
• 17:00
  Speaker 1: ask them into the market and get yeah.
• 17:04
  Speaker 2: So once they get to that size, the IPO automatically work.
• 17:07
  Speaker 1: I mean, that's trying to think about and the again,
• 17:10
  Speaker 1: my view from an individual investors perspective is that you're
• 17:16
  Speaker 1: already picking up AI exposure. According to JP Morgan, last year,
• 17:23
  Speaker 1: roughly forty five forty seven percent of the US market
• 17:28
  Speaker 1: had exposure to AI. It would go up considerably, probably
• 17:33
  Speaker 1: to fifty five or sixty percent if these AI companies
• 17:37
  Speaker 1: were actually to achieve their IPOs. I think my view
• 17:41
  Speaker 1: is that the individual investor has other things to think
• 17:44
  Speaker 1: about because there are other opportunities in the world and frankly,
• 17:47
  Speaker 1: the passive blind capital of the index signs will absorb
• 17:52
  Speaker 1: the AI for better or for worse.
• 18:11
  Speaker 2: Let's move on to talking about what's happened over the weekend,
• 18:14
  Speaker 2: and when we've talked about AI in the past, I'm
• 18:16
  Speaker 2: and I'm interested that you'll view of the limiting factor
• 18:18
  Speaker 2: of the future of AI is in fact that the
• 18:20
  Speaker 2: models themselves that are inherently flawed so won't do what
• 18:23
  Speaker 2: the biggest optimists think they will do. But the other
• 18:26
  Speaker 2: limiting factor on AI has always been energy used right,
• 18:29
  Speaker 2: and that's been discussed a lot. And now we're finding
• 18:33
  Speaker 2: that there are massive constraints on energy globally, which I
• 18:37
  Speaker 2: think most people knew before, but those who hadn't recognized
• 18:40
  Speaker 2: before the energy fragility of our world are of course
• 18:43
  Speaker 2: learning that now. And you can see that fear reflected
• 18:47
  Speaker 2: in markets. For example, the fairly massive fall in the
• 18:50
  Speaker 2: career market this week is about the fact that it's
• 18:53
  Speaker 2: very heavily dominated by memory chip companies, two big companies,
• 18:57
  Speaker 2: and that the majority of their energy is imported and
• 19:00
  Speaker 2: that now becomes a major constraining factor on their manufacturing.
• 19:04
  Speaker 2: So we now see this constraint across the board, and
• 19:08
  Speaker 2: that's going to have quite an impact. Brings us back
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  Speaker 2: to halo, of course.
• 19:10
  Speaker 1: On the energy usage of AI. It's that's a political concern.
• 19:19
  Speaker 1: But before the Iran War broke out, so the US
• 19:23
  Speaker 1: electricity prices have been have been going up strongly. That's
• 19:29
  Speaker 1: causing political ructions, and there are the questions, will the
• 19:36
  Speaker 1: American populace put up with much higher electricst domestic domestic
• 19:41
  Speaker 1: electricity costs and the AI roll out the data centers,
• 19:45
  Speaker 1: And the answer is probably not. And I last week
• 19:50
  Speaker 1: President Trump said that the data centers are going to
• 19:54
  Speaker 1: have to start generating their own electricity. That should be
• 19:57
  Speaker 1: a good thing, I think, and particularly if it inc
• 20:00
  Speaker 1: courages the development of small scale nuclear and other alternative
• 20:05
  Speaker 1: sources of energy. We've heavily underinvested in conventional energy and
• 20:11
  Speaker 1: if you will, overinvested in the unreliable alternative energy, and
• 20:16
  Speaker 1: therefore there's a bit of fragility in the system. And
• 20:20
  Speaker 1: when that frigidity then gets exposed by a war in
• 20:25
  Speaker 1: the Gulf.
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  Speaker 2: It's interesting there have been two responses haven't led to
• 20:28
  Speaker 2: the war in the Gulf when it comes to energy.
• 20:31
  Speaker 2: One response in the UK is oh, my goodness, I
• 20:34
  Speaker 2: wish that we were doing more to exploit our own
• 20:36
  Speaker 2: fossil fuel energy resources, and the other responses will be
• 20:39
  Speaker 2: needing more wind and solo.
• 20:41
  Speaker 3: To deal with us.
• 20:41
  Speaker 1: I got hit an email from my nephew last night
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  Speaker 1: to that effect. We need energy security and the answer
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  Speaker 1: is yes, we do. But the unfortunate fact and the
• 20:51
  Speaker 1: game goes back to the bubble. The important salent facts
• 20:55
  Speaker 1: being missing from the bubble is that not going to
• 20:58
  Speaker 1: get energy security from wind and turbines, and we in
• 21:04
  Speaker 1: fact Britain is dependent on importing ever larger amounts of
• 21:09
  Speaker 1: electricity from the content, often from gas turbine powers stations.
• 21:14
  Speaker 1: I agree with President Trump. I think we need to
• 21:17
  Speaker 1: utilize our own possil fuel resources if we're going to
• 21:21
  Speaker 1: have energy security, at least given current technology.
• 21:25
  Speaker 2: Okay, now what does all this mean do you think
• 21:27
  Speaker 2: for the interest rate cycle? So before the war in Iran,
• 21:31
  Speaker 2: there was much discussion about easing cycles across the board.
• 21:34
  Speaker 2: We were expecting to see help. Some people were expecting
• 21:37
  Speaker 2: to see rates come down fairly significantly in the UK.
• 21:41
  Speaker 3: That now seems at risk.
• 21:43
  Speaker 1: So let's get back to the AI discussion. Citrini. Citrini
• 21:46
  Speaker 1: reached out and says, you know that you're going to
• 21:48
  Speaker 1: unleash the mother of all depressions, and that will be
• 21:52
  Speaker 1: a deflationary depression, and that would be a deflationary depression
• 21:57
  Speaker 1: that was resistant to central bank impetus. So under that scenario,
• 22:03
  Speaker 1: if AI were to realize its promise, then you might say,
• 22:08
  Speaker 1: perhaps interest rate inflation is coming down, deflation will replace
• 22:12
  Speaker 1: it in interest rates would come down. That's a sort
• 22:15
  Speaker 1: of theoretical position. I think if we have energy and
• 22:21
  Speaker 1: commodity inflation, then you would expect interest rates to rise.
• 22:28
  Speaker 1: On the back of in the old days, they always
• 22:31
  Speaker 1: they never referred to inflation as a consumer price. They
• 22:34
  Speaker 1: always referred to it as commodity price inflation. So I
• 22:38
  Speaker 1: think if one is going to get higher energy prices
• 22:42
  Speaker 1: and higher commodity prices, then one would expect the interest
• 22:46
  Speaker 1: rates cycle to pick up. And the only thing I
• 22:49
  Speaker 1: would say there is, for ust of my book The
• 22:51
  Speaker 1: Price of Time, that as always saying no one knows
• 22:54
  Speaker 1: how to predict interest rates, I like to say, the
• 22:57
  Speaker 1: only thing we know is that interest rates run on
• 23:01
  Speaker 1: very long cycles. I'm talking about long term interest rates
• 23:04
  Speaker 1: bond deals, and we had a good forty year downward
• 23:08
  Speaker 1: trend from nineteen eighty two to twenty twenty two, and
• 23:14
  Speaker 1: we're now in the fourth year of the art trend.
• 23:18
  Speaker 1: So my view has always been, regardless of what anyone
• 23:23
  Speaker 1: tells you, is we're on We are on the art
• 23:25
  Speaker 1: trend of interest rates for decades, and there will be
• 23:29
  Speaker 1: oscillations around it, and those oscillations are inherently unpredictable.
• 23:36
  Speaker 3: Okay, I'm feeling stagflation and UK public debt crisis.
• 23:40
  Speaker 1: I've been of that view, and instantly you know another
• 23:44
  Speaker 1: you and I are both sort of gold bugs. Correct.
• 23:48
  Speaker 2: Actually no, I'm not afraid. So I'm thrilled to say
• 23:50
  Speaker 2: I'm a gold bug if this is our time.
• 23:52
  Speaker 1: I actually I sort of wake up every morning I
• 23:54
  Speaker 1: think all these different scenarios of the world. I think,
• 23:58
  Speaker 1: actually is gold fit. It's take the citrinity model that
• 24:03
  Speaker 1: everything collapses and government finances would collapse at the same time.
• 24:08
  Speaker 1: Then you'd want gold for that. Take take the inflation model,
• 24:12
  Speaker 1: take the inflation and commodity you'd want the gold for
• 24:15
  Speaker 1: that government debt crisis. You want the gold for that.
• 24:20
  Speaker 1: And so I do think, and I wrote a piece
• 24:23
  Speaker 1: towards the end of last year saying that we are
• 24:25
  Speaker 1: in a new paradigm for gold, and I think that
• 24:29
  Speaker 1: I think that fast allocation going forward. People have just
• 24:34
  Speaker 1: got to wake up and have have gold as the
• 24:38
  Speaker 1: sort of a sizeable gold position as the anchor for
• 24:41
  Speaker 1: their portfolio. And when I say side of I'm talking
• 24:45
  Speaker 1: somewhere in the range of ten to twenty of the portfolio.
• 24:48
  Speaker 1: Our friend Russell Nape as fifty, which is fine, fine.
• 24:56
  Speaker 3: And does that mean that sovereign bond no longer have
• 24:59
  Speaker 3: a place in a.
• 24:59
  Speaker 1: Portfol I think someplace, but a much smaller one. I mean,
• 25:04
  Speaker 1: if you think about the sixty to forty being six
• 25:07
  Speaker 1: percent equities forty percent bonds being the traditional portfolio, I
• 25:13
  Speaker 1: think you can keep to the forty non equities. We're
• 25:16
  Speaker 1: go even higher fifty non equities and then whatever isn't
• 25:22
  Speaker 1: your gold position for your sovery And then of course
• 25:26
  Speaker 1: you're not obliged to buy sovereign bonds of near bankrupt
• 25:30
  Speaker 1: stakes like France or Britain, so you can actually buy
• 25:33
  Speaker 1: sovereign bonds elsewhere you can buy, and then you can
• 25:36
  Speaker 1: you can also choose to get inflation protected bonds. I
• 25:40
  Speaker 1: think the long term, I suppose my long term concern
• 25:43
  Speaker 1: with the bonds is that we are heading towards a
• 25:48
  Speaker 1: sovereign bond crisis in the among the advanced economies. And
• 25:53
  Speaker 1: even if you own the inflation protected bondze, there's no
• 25:57
  Speaker 1: guarantee that you know that when government is cut slashing pension,
• 26:03
  Speaker 1: slashing other forms of discretionary expenditure, they did turn on
• 26:06
  Speaker 1: the wrong tierce and say you should take a cut too.
• 26:10
  Speaker 1: I think, as I said, I'm very Awarrey, and I
• 26:13
  Speaker 1: over the last few years I've been cutting down my
• 26:18
  Speaker 1: inflation predicted bond SOSIA.
• 26:21
  Speaker 2: Yeah, as and you say, heading towards debt crisis and
• 26:24
  Speaker 2: various developed economies, do you feel that getting closer? We've
• 26:29
  Speaker 2: been discussing this public debt problem for some time now,
• 26:32
  Speaker 2: we both I think pretty much everyone now sees that
• 26:35
  Speaker 2: countries such as the UK really do have a very
• 26:38
  Speaker 2: severe debt problem, and that no ability or apparently no
• 26:41
  Speaker 2: incentive to attempt to cut spending to deal with that
• 26:44
  Speaker 2: sovereign debt problem. So how close is it and what
• 26:47
  Speaker 2: might make it go away?
• 26:48
  Speaker 1: I think it would appear much closer in France than Britain,
• 26:53
  Speaker 1: not just because France tax take is is much higher
• 26:57
  Speaker 1: than in Britain and therefore for this less room to
• 27:02
  Speaker 1: raise it, political paralysis in France would appear stronger. And
• 27:06
  Speaker 1: then you've got this the Eurozone problem. The fact is
• 27:10
  Speaker 1: we're now already in a position and you can see
• 27:13
  Speaker 1: that interest rates in Europe are too high for France
• 27:17
  Speaker 1: and too low for the periphery. So you've got strong
• 27:21
  Speaker 1: highest price inflation in Portugal weather and so I think
• 27:25
  Speaker 1: that I think probably we'll see also we have see
• 27:30
  Speaker 1: what the outcome of the French elections are. But the
• 27:35
  Speaker 1: I think the crisis first comes to France.
• 27:38
  Speaker 2: Let's go back to the equity part of their portfolio.
• 27:41
  Speaker 2: We talked about how much you should have in gold
• 27:43
  Speaker 2: and being slightly wary of the bond element of your portfolio.
• 27:46
  Speaker 2: In fact, while I'm just on that, I wanted to
• 27:48
  Speaker 2: ask you about one of the things that you've talked
• 27:50
  Speaker 2: about when we've been discussing this kind of thing before,
• 27:52
  Speaker 2: as the cracks in the system and how super low
• 27:54
  Speaker 2: interest rates get into all the cracks and you don't
• 27:56
  Speaker 2: see where the problems are until significantly later. I was
• 27:59
  Speaker 2: wondering if you were worried about private credit as the
• 28:02
  Speaker 2: source of one of our.
• 28:03
  Speaker 1: I'm everyone else else seems to be worried too. Private
• 28:06
  Speaker 1: credit story, as far as I see it, is that
• 28:12
  Speaker 1: it was engendered by the ultra low interest rates. We know,
• 28:15
  Speaker 1: we had this period where bank deposits were yielding nothing,
• 28:19
  Speaker 1: and there were these variety of different ways in which
• 28:23
  Speaker 1: you could achieve higher returns, and private credit grew, and
• 28:28
  Speaker 1: private credit grew to fund private equity in large parts,
• 28:33
  Speaker 1: and the and the private equity as it took over
• 28:36
  Speaker 1: life insurers in order to have us to have a
• 28:39
  Speaker 1: ready market to buy their the private credit issue to
• 28:43
  Speaker 1: fund the LBOs and yes, I think that. I think
• 28:46
  Speaker 1: something like eighty percent of private credit is what they
• 28:49
  Speaker 1: call sponsor backed or related to private equity. And we
• 28:53
  Speaker 1: know that in the up to the end of the
• 28:55
  Speaker 1: private equity boom, debt multiples were rising. In sure, it
• 29:01
  Speaker 1: wouldn't surprise you to know that I would not be
• 29:04
  Speaker 1: and they've never been advocating private credit exposure. And with
• 29:08
  Speaker 1: regards to my to the thesis of the price of time,
• 29:12
  Speaker 1: it was always that there would be a crisis eventually
• 29:16
  Speaker 1: coming out from the interest rates, these ultra low interest
• 29:20
  Speaker 1: rates getting into all the cracks. The only surprise, I mean,
• 29:24
  Speaker 1: it's a big surprise to my mind, is it's taken
• 29:27
  Speaker 1: quite a long time for these cracks to open up.
• 29:29
  Speaker 1: But there we are.
• 29:30
  Speaker 3: Yeah, everything longer than you think this kind of thing,
• 29:33
  Speaker 3: doesn't it.
• 29:33
  Speaker 2: Let's go back briefly then to the equity part of
• 29:36
  Speaker 2: a portfolio. Here we are tricky times with that fifty
• 29:40
  Speaker 2: percent of your portfolio that you're holding an extita is
• 29:43
  Speaker 2: one way or another, but how you managed that today?
• 29:46
  Speaker 1: The other idea of the price of time was with
• 29:49
  Speaker 1: interest rates very low and huge amount of so to speak,
• 29:53
  Speaker 1: financialization private credit that one, and with money going into
• 29:57
  Speaker 1: these ethereal assets. Can I use in verticom as again
• 30:02
  Speaker 1: like Tripp.
• 30:04
  Speaker 3: Yes you can. We can see you your own video.
• 30:07
  Speaker 1: One wanted one wanted investment had to get real. And
• 30:12
  Speaker 1: I told in the nineteen thirties, in nineteen twenties and
• 30:16
  Speaker 1: the hyper inflations of Germans talked about the defluct in
• 30:20
  Speaker 1: these in exact vertin the flight into things of real value.
• 30:25
  Speaker 1: So I was always in favor. I have for a
• 30:29
  Speaker 1: while been in favor of commodities, traditional energy companies, and
• 30:35
  Speaker 1: in particular there's another themes there which you'll be aware of,
• 30:38
  Speaker 1: the whole sort of capital cycle story of under investment
• 30:42
  Speaker 1: boom in both in energy investment and mining up to
• 30:47
  Speaker 1: about twenty thirteen twenty fourteen, and then this this ten
• 30:51
  Speaker 1: twelve year famine. And so I think so for me,
• 30:55
  Speaker 1: that has been a core part, it's the core part
• 30:58
  Speaker 1: of my folios for recent years. And it's done almost
• 31:02
  Speaker 1: it's done slightly too well. It's sort of a bit
• 31:04
  Speaker 1: worried about it. And then you like you, I'm a
• 31:08
  Speaker 1: japan bug, and I just I just I just I
• 31:14
  Speaker 1: like the story in Japan. And it took what it
• 31:18
  Speaker 1: took thirty thirty years for the bubble of the late
• 31:23
  Speaker 1: nineteen of the late nineteen eighties to wear off in Japan,
• 31:28
  Speaker 1: and we're now a few years into the recovery of
• 31:32
  Speaker 1: Japanese equities and the is not expensive and they're restructuring,
• 31:37
  Speaker 1: and so'm I have pretty big holdings in Japan. And
• 31:41
  Speaker 1: I like emerging markets too. I've been in the last
• 31:44
  Speaker 1: couple of years, probably most of money I've knew money,
• 31:46
  Speaker 1: I've invested largely in emerging Again, emerging not attractive fifteen
• 31:52
  Speaker 1: years ago, but one things change, and I think again,
• 31:57
  Speaker 1: we're a few years into an emerging who knows it
• 32:01
  Speaker 1: go up and down yep, but a few years into
• 32:03
  Speaker 1: an emerging cycle. And go back to what I was
• 32:06
  Speaker 1: saying earlier about energy is I don't trust economies that
• 32:11
  Speaker 1: have hugely uncompetitive energy costs, And so i'm I didn't.
• 32:17
  Speaker 1: I know that US UK equities are chieved, and I
• 32:20
  Speaker 1: know that European equity is a cheap, And I'm just
• 32:23
  Speaker 1: like our our friend Andy Lee's at Macris Strategy, I
• 32:27
  Speaker 1: think the economy is the is the transformation of energy.
• 32:31
  Speaker 1: And if you push energy costs out beyond control, it's
• 32:36
  Speaker 1: not the only thing. But if energy costs are too high,
• 32:40
  Speaker 1: you cripple an economy. So I'm I'm just where I
• 32:43
  Speaker 1: actually like to look at a chance, say who has
• 32:45
  Speaker 1: the lowest energy costs and just invest that, not just
• 32:49
  Speaker 1: invest there, but think Okay, then which one think through it?
• 32:52
  Speaker 1: I'm emerging has needless to say, very low energy costs.
• 32:55
  Speaker 3: Interesting. It slightly brings us full circle, doesn't it. Thank
• 33:00
  Speaker 3: you so much. That was really interesting. We loved having
• 33:03
  Speaker 3: you with us today.
• 33:04
  Speaker 1: Thank you, Mareon.
• 33:05
  Speaker 2: Thanks for listening to this week's Maren Talks Money. If
• 33:07
  Speaker 2: you like us, show, rate, review, and subscribe wherever you
• 33:09
  Speaker 2: listen to podcasts, and keep sending questions or comments to.
• 33:12
  Speaker 3: Marror Money at Bloomberg dot net.
• 33:14
  Speaker 2: You can also follow me and John on Twitter or
• 33:16
  Speaker 2: x and Mareness w and John is John Underscore Steppic.
• 33:19
  Speaker 3: This episode was hosted by Me Maren.
• 33:20
  Speaker 2: Sunset were books produced by Samasadi and Moses and Bettle.
• 33:25
  Speaker 2: Thanks to Edward Chancellor. Of course, I'm sound designed by
• 33:27
  Speaker 2: Blake Maples and Kelly Garrett.