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Live from Fringe: Why No One In Government Understands Anything with Ed Conway · Merryn Talks Money

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Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
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Speaker 2: Hello, Bren Talks Money Listeners, It's Maren Sunset Web. We
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Speaker 2: are bringing you something very special over the next week,
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Speaker 2: recordings of the conversations I had at Pamier House for
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Speaker 2: the Edinburgh Fringe Festival. Now, for those of you who
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Speaker 2: don't know, and I'm sure there aren't very many of
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Speaker 2: you who don't know this, The Friends is a three
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Speaker 2: week arts and culture festival that began in nineteen forty
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Speaker 2: seven and takes place in Edinburgh in Scotland every August.
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Speaker 2: For the past few years, I've been hosting conversations about markets,
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Speaker 2: economics and investings from one of the most special locations
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Speaker 2: as part of this festival. I do it from Pamier House,
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Speaker 2: which is the last home of Adam Smith, philosopher and
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Speaker 2: father of modern economics. It's where he completed the last
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Speaker 2: editions of his best sellers, The Theory of Moral Sentiments
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Speaker 2: and The Wealth of Nation's top reads, both of them.
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Speaker 1: This year we did a four day.
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Speaker 2: Run in mid August, and we are bringing you the
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Speaker 2: slightly edited conversations from three of those days for this
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Speaker 2: panelized spoke with Bloomberg Senior reported John Steppeck, James Ferguson,
1:01
Speaker 2: who is the founder and partner at macro Strategy, and
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Speaker 2: Ed Conway, author of Material World, a substantial story of
1:08
Speaker 2: our past and the future, which is an excellent reading.
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Speaker 1: If you haven't read that, go out by it right now.
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Speaker 1: It's fantastic. Enjoy listening. Thank you for coming.
1:19
Speaker 2: I know there's an awful lot of shows at the
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Speaker 2: festival and there are a million things you could have
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Speaker 2: been to which are Builder's comedy and might have been
1:25
Speaker 2: more amusing than this.
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Speaker 1: So we're very very grateful to you for coming here today.
1:28
Speaker 1: Thank you.
1:29
Speaker 2: The way this works is I ask all my brilliant
1:32
Speaker 2: guests to come up with their favorite Adam Smith quote.
1:34
Speaker 2: Although that's difficult because everyone has a lot of favorites,
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Speaker 2: they're one that is both their favorite and most relevant
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Speaker 2: to today. They give their quote, and then we talk
1:42
Speaker 2: about the context of that quote, where they like it,
1:44
Speaker 2: where it matters today, and then we talk about all
1:46
Speaker 2: sorts of other things that we didn't intend to talk
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Speaker 2: about but which kind of come up as we go.
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Speaker 2: So each one will do that, we'll discuss it, then
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Speaker 2: we'll move on the next one, and then in forty
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Speaker 2: minutes or so we will have questions and someone win
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Speaker 2: the book and it'll be great. So we are going
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Speaker 2: to start with ed who is broken the first rule
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Speaker 2: of the show before you even starts, the first rule
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Speaker 2: being please have a short quote.
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Speaker 3: It wasn't really me that broke it.
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Speaker 4: I think that was Adam Smith because he was not
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Speaker 4: not known for his brevity. He was and he wrote
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Speaker 4: very very as a result my quotes.
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Speaker 3: If the audience is going to see here, and.
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Speaker 2: That's what I mean when I say we may not
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Speaker 2: have a full twenty minutes of questions.
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Speaker 3: So that's that's our hour, isn't it. Do you want
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Speaker 3: me to reader? I'm going to do it. I'll do
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Speaker 3: a bit.
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Speaker 2: Well, well, I tell you what, why don't you pull
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Speaker 2: out a bit of the c and then I mean
2:27
Speaker 2: you can you can read, you know, maybe Okay.
2:29
Speaker 4: So it's it's from the Wealth of Nations and it's
2:31
Speaker 4: about woolen coats. The woolen coat, for example, which covers
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Speaker 4: the day laborer, as coarse and rough as it may appear,
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Speaker 4: is the produce of the joint labor of a great
2:40
Speaker 4: multitude of workmen, the shepherd. The sort of the wool,
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Speaker 4: the woolcomba, or kada, the dire, the scribble, you to
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Speaker 4: get the idea, and it goes on a bit. The dire,
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Speaker 4: the scribbler, the spinner, the weaver, the full of the dresser,
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Speaker 4: with many others must all join their different arts in
2:53
Speaker 4: order to complete this homely production. How many merchants and
2:57
Speaker 4: carriers besides must have been employed in tron splant, transporting
3:01
Speaker 4: the materials from some of those workmen to others who
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Speaker 4: often live in very different different parts of the country.
3:06
Speaker 4: I'm gonna stop there, because you get the ideas. So
3:10
Speaker 4: when I started kind of getting interested in economics, there
3:12
Speaker 4: was this essay called Eye Pencil by a guy called
3:15
Speaker 4: Leonard Reed, an American economist, and it was all about
3:18
Speaker 4: the story of a pencil and how a pencil is made.
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Speaker 3: And that's fascinating because in.
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Speaker 4: The course of this essay you learn how you know
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Speaker 4: that actually this is a very complex thing.
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Speaker 3: To make a pencil.
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Speaker 4: You need the wood that's chopped down from a tree
3:29
Speaker 4: in the US, You need the lead, the graphite that
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Speaker 4: comes from another part. You need the metal that becomes
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Speaker 4: the bit that attaches the eraser. You need the rubber,
3:35
Speaker 4: and so on and so forth, and the kind of
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Speaker 4: punchline of this is there is no single person who
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Speaker 4: knows how to make a pencil, and I remember being quite.
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Speaker 3: Obsessed with this.
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Speaker 4: But of course, as with so many of these themes,
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Speaker 4: Adam Smith came up with at first, and actually his
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Speaker 4: point here is that the complexity of even supply chains
3:55
Speaker 4: back in the eighteenth century was way beyond what any
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Speaker 4: single per and could fathom. And each of us carry
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Speaker 4: around or where in the case of wool and coats,
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Speaker 4: we carry a oron products that are made by so
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Speaker 4: many different people in different parts of the world, with
4:10
Speaker 4: such complexity, and we just don't spend much time thinking
4:13
Speaker 4: about it. And it's one of the wonders I think
4:14
Speaker 4: of the modern world that the market often can help
4:19
Speaker 4: us produce these things which are just amazing. And so
4:23
Speaker 4: you know, I'm going to try not as much as
4:25
Speaker 4: I can not to puff my book in the course
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Speaker 4: of doing this, but it's hard because it's been ingrained
4:28
Speaker 4: in me in the last year. So one of the
4:30
Speaker 4: things I tried to do in that book is to
4:32
Speaker 4: do the same thing for a smartphone, and it's just
4:34
Speaker 4: it's obviously it's impossible, but even before the semiconductor that
4:39
Speaker 4: becomes the heart of that smartphone, you know, is actually made,
4:43
Speaker 4: the silicon that you need to make that goes through
4:45
Speaker 4: this incredible transformation, goes around the world multiple times, it
4:49
Speaker 4: gets kind of vaporized, turns into all sorts of different things.
4:53
Speaker 4: Hundreds of different companies are working on it. These things
4:56
Speaker 4: are just hidden away. And I think the more that
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Speaker 4: we spent some time thinking about how stuff is made,
5:01
Speaker 4: how it got to us, then the more a I
5:03
Speaker 4: think we would appreciate the stuff, the more b I
5:06
Speaker 4: think we'd have wonder in the world around us, because
5:08
Speaker 4: it really is kind of amazing what's happening inside our devices.
5:12
Speaker 4: And also see I think we would understand a little
5:15
Speaker 4: bit more about the kind of compromises that happen along
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Speaker 4: the way, because to make anything involves quite a lot
5:21
Speaker 4: of emissions. It involves a lot of energy and involves
5:24
Speaker 4: a lot of effort, and in economics we're not particularly
5:27
Speaker 4: good at kind of embedding those things within it each
5:29
Speaker 4: of different models. There's a vague talk about externalities, but
5:33
Speaker 4: the closest I've come to kind of actually trying to
5:36
Speaker 4: understand the challenges facing us as we do that zero
5:39
Speaker 4: and also just understanding the wonder of the world is
5:42
Speaker 4: to think about an item of product and what it
5:44
Speaker 4: takes to make it. So, you know, Adam Smith, I think,
5:47
Speaker 4: had that kind of principle early on. It's inspiring to
5:50
Speaker 4: think about how things are made and how many people
5:53
Speaker 4: are underneath that kind of hidden, that hidden backstory of
5:57
Speaker 4: all the things that we're touching.
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Speaker 2: And when it kind of starts frightening, doesn't it when
5:59
Speaker 2: you think there isn't a single person who knows how
6:01
Speaker 2: to make a whole hair, a plane, Oh, knows how
6:03
Speaker 2: to make a whole car.
6:03
Speaker 3: No, well, they don't know how to make a pencil.
6:05
Speaker 4: And so let's alone, you know, the plane, or the
6:08
Speaker 4: semiconductor or all of these other things. But that's the
6:10
Speaker 4: wonder of economics. And I think that's what Smith was
6:12
Speaker 4: trying to get across it. This is quite an early
6:13
Speaker 4: quote in the book. It is this is amazing because
6:17
Speaker 4: this is the human story, is how we cooperate to
6:20
Speaker 4: make things. And so he was talking about wool and
6:22
Speaker 4: co at that point. You know, wool was one of
6:24
Speaker 4: the great industries of this nation. But it goes today,
6:27
Speaker 4: it goes today, and I think we need to tell
6:29
Speaker 4: those kind of stories in an inspiring sense, but also
6:32
Speaker 4: in a kind of realistic sense about there's some challenges
6:34
Speaker 4: there about carbon emissions, about water use, all of the
6:36
Speaker 4: other things as well.
6:37
Speaker 2: It's the drive to zero that really made you start
6:39
Speaker 2: thinking about this and that one of the things.
6:41
Speaker 1: And it becomes very interesting.
6:42
Speaker 2: When you look at it because we listened to politicians
6:44
Speaker 2: speak and we listen to activists speak, and they make
6:46
Speaker 2: it sounds.
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Speaker 1: So incredibly simple. We should just do this, we should
6:49
Speaker 1: just do this.
6:49
Speaker 2: But in fact, if you read your book, the underlying
6:54
Speaker 2: the mining, the materials, the energy required to produce an
6:59
Speaker 2: energy transition make it much much more complicated, much harder
7:02
Speaker 2: than most of the people who discussed it understand.
7:05
Speaker 5: Well.
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Speaker 4: I mean, in a way, actually it's the other way around.
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Speaker 4: I didn't intend to write a book that touched on
7:10
Speaker 4: you know, net zero and all of that different stuff.
7:12
Speaker 4: I didn't intend to get into covering the energy transition.
7:17
Speaker 4: But when you start to think, I kind of just
7:19
Speaker 4: wanted to understand how smartphone it's made. You know, how
7:22
Speaker 4: the different pits and pieces actually came together. You know
7:24
Speaker 4: what it actually takes. But when you go down that
7:27
Speaker 4: rabbit hole, you just see that making everything everything involves
7:32
Speaker 4: an enormous amount of energy and involves a enormous amount
7:35
Speaker 4: of carbon emissions. You know, to make the semiconductor, just
7:38
Speaker 4: to make the silicon that comes up the ground, you
7:41
Speaker 4: quarry some rock, you turn it into what's called metallurgical silicon.
7:44
Speaker 4: By the way, there's a whole load of other processes
7:46
Speaker 4: before it becomes a silicon chip. But just that process
7:49
Speaker 4: you have to throw it into a furnace alongside coal.
7:51
Speaker 4: You know, when people are kind of tweeting about are
7:53
Speaker 4: we really need to have fewer emissions, they are doing
7:56
Speaker 4: it on an item that has coal in its production,
8:00
Speaker 4: Doing it on an item that whose battery has has
8:02
Speaker 4: literally has oil inside it. And understanding those complexities and
8:06
Speaker 4: realizing that it is everywhere just made me think, like
8:09
Speaker 4: I can't. There's no way of describing the current world,
8:13
Speaker 4: which is the idea, without touching enormously on this, this thing,
8:18
Speaker 4: this undertaking that we have we well, the country the
8:21
Speaker 4: government has signed up to you. By the way, does
8:23
Speaker 4: anyone know how many hours of debate there was in
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Speaker 4: the House of Commons before we officially signed zero into law?
8:34
Speaker 3: Actually zeros, no, it's one, it was one. It was
8:38
Speaker 3: actually eighty eight minutes.
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Speaker 4: Eighty eight minutes to debate the single most consequential because
8:45
Speaker 4: I think it is the single most consequential thing law
8:47
Speaker 4: that we have ever agreed to. And then it was
8:49
Speaker 4: There wasn't even a vote, It wasn't there wasn't there
8:51
Speaker 4: was no division, It was just a and then it
8:53
Speaker 4: went through because it was done as a statutory instrument.
8:56
Speaker 4: We signed up to these things, I think, you know.
8:58
Speaker 4: Having having then gone into these kind of various rabbit holes,
9:01
Speaker 4: I realized that we have just not still at all
9:04
Speaker 4: about what this involves.
9:05
Speaker 2: And this is because we're one of the things you
9:06
Speaker 2: talk about. Whatever we discussed, this is everyone believing they
9:09
Speaker 2: live in an ethereal world or forgetting that they really
9:11
Speaker 2: live in a material world. So that debate was all
9:13
Speaker 2: about something theoretical without a thought of the practicalities behind us.
9:17
Speaker 4: Looks very easy if you live in and I inhabit
9:19
Speaker 4: that world as well. You know, I live in kind
9:21
Speaker 4: of London. I spend a lot of time talking to
9:23
Speaker 4: policymakers and think tank peoples and finance people and economists,
9:27
Speaker 4: and it's just ideas, and we kind of think that
9:30
Speaker 4: the physical things don't really matter for ideas, and that's
9:34
Speaker 4: just couldn't be more wrong, you know, anything, Any communication
9:37
Speaker 4: that we have goes these days in the Internet via
9:40
Speaker 4: some fiber optic cable. And what's that fiber optic cable
9:42
Speaker 4: made of. It's made of glass, and that what's that
9:45
Speaker 4: glass made of, It's made of sand. And understanding that
9:48
Speaker 4: physical kind of set of foundations that underlies everything, it's
9:52
Speaker 4: like the GDP that we kind of think of. I
9:54
Speaker 4: don't want to kind of get into slagging off GDP
9:56
Speaker 4: because that's very well we slag of all sorts of
9:58
Speaker 4: things are but gross messag product. It gives its enormous
10:02
Speaker 4: value because we pay enormous value and it generates enormous
10:05
Speaker 4: values to things like social networks. But you wouldn't have
10:08
Speaker 4: any social networks without the fiber optic cables. You wouldn't
10:10
Speaker 4: have any social networks without the servers that you need
10:13
Speaker 4: to provide that. You wouldn't have social networks without the
10:15
Speaker 4: energy that we need. And the whole point is that
10:17
Speaker 4: that GDP is like a big inverted pyramid with all
10:20
Speaker 4: of the big stuff, you know that kind of constitutes
10:22
Speaker 4: a lot of the value at the top, and everything
10:25
Speaker 4: is balanced on this tiny, precarious little bit of GDP,
10:28
Speaker 4: which technically speaking, is only a few dollars. But it's
10:32
Speaker 4: the stuff that makes everything else tick, you know. It's
10:34
Speaker 4: the concrete, it's the materials, it's the fiber optics, it's
10:37
Speaker 4: the semiconductors. They're worth a bit more, to be honest
10:39
Speaker 4: with you, these a but still that stuff is relatively small,
10:42
Speaker 4: and all we kind of tend to think about a
10:44
Speaker 4: lot of the time is the slice at the top.
10:46
Speaker 4: But without the stuff at the bottom, the whole thing
10:48
Speaker 4: just falls. And I think, particularly in this country, we
10:53
Speaker 4: need to think about that quite importantly, because we don't
10:56
Speaker 4: make much of the stuff anymore, for better or for worse,
10:59
Speaker 4: and it matters because without it, we're all screwed.
11:02
Speaker 1: We we need to think about all the dirty stuff at.
11:04
Speaker 3: The bottom, and it's very dirty to make it.
11:06
Speaker 1: All that's were filthy, Yeah, we did.
11:08
Speaker 2: We were talking about rare earth metal to Ecceter on
11:10
Speaker 2: a podcast recently and.
11:11
Speaker 1: Saying that if we if we really really believed in
11:14
Speaker 1: that zero, we would have to dig up most of cornwall.
11:16
Speaker 4: Yeah you get out, Well, there's a lot of copper.
11:19
Speaker 4: There's a lot of copper. In fact, some of the
11:21
Speaker 4: grades you find of copper in Cornwall are better than
11:24
Speaker 4: some of the grades that you get in Chile, which
11:25
Speaker 4: has the world's biggest reserves of copper. So technically speaking,
11:28
Speaker 4: we could go there and mind the hell out of
11:30
Speaker 4: Cornwall and be probably copper independence.
11:33
Speaker 3: From the rest of the world. But so we're not
11:35
Speaker 3: going to do that. Seem reluctant. Nim seem reluctant too.
11:38
Speaker 1: And personally, you know, I reckon we could do with
11:40
Speaker 1: that bottle minimal but well.
11:42
Speaker 4: Yeah, nonetheless it's it's protected, so it's so no chance
11:45
Speaker 4: and and and that's that's one of the issues I
11:47
Speaker 4: think we're coming into at the moment that our ability
11:50
Speaker 4: to make all this amazing kind of stuff happen is
11:53
Speaker 4: is it's limited not so much by the geology, you know,
11:56
Speaker 4: there's no shortage of any of the stuff we need.
11:58
Speaker 4: It's limited by our reluctance to go and get it,
12:00
Speaker 4: and also to some extent by our expertise, because we're forgetting,
12:03
Speaker 4: we're forgetting how to do this stuff. One of the
12:05
Speaker 4: world's most important mining colleges in Cornwall, at Cambourne, they've
12:10
Speaker 4: they've they've shut down one of their courses for the
12:12
Speaker 4: last few years because there's not enough people who want
12:14
Speaker 4: to go and learn about mining.
12:15
Speaker 2: And this is absolutely extraordinary, isn't it, Because we're now
12:17
Speaker 2: to anyone got kids to university age done, just done
12:21
Speaker 2: a levels, looking for courses, and it's amazing how few
12:24
Speaker 2: go go into this. And you hear it over and
12:26
Speaker 2: over and over that they have trouble filling the geology courses,
12:28
Speaker 2: the mining courses, that mining engineering courses, et cetera.
12:31
Speaker 3: Because they want to save the environment.
12:32
Speaker 2: Yeah, but that's where the money is. Actually, by the way,
12:33
Speaker 2: they'll tell your children to go into the oiland.
12:35
Speaker 3: Yeah, that's how that's how you save the environment. But
12:37
Speaker 3: bye bye.
12:38
Speaker 4: By understanding how to how to get stuff out of
12:40
Speaker 4: the ground and turn it into another kind of amazing
12:43
Speaker 4: thing that will help change the world, that is how
12:46
Speaker 4: we do it. And right now, particularly in this country,
12:48
Speaker 4: we're kind of forgetting about this.
12:49
Speaker 1: But we've forgotten about it across the West.
12:50
Speaker 2: I mean gen to bring you in and we see
12:52
Speaker 2: this stuff, I know, sorry, we see this in the
12:54
Speaker 2: stock market right where we see the mining sector in
12:57
Speaker 2: the US. In the UK, smaller and smaller and smaller
12:59
Speaker 2: section of the mind getting the big tech companies are
13:01
Speaker 2: bigger and bigger and bigger. Part so you can see
13:03
Speaker 2: people adding value to the ethereal world and no value
13:05
Speaker 2: to the material world.
13:06
Speaker 5: Yeah, but you know this is potentially a function of
13:10
Speaker 5: weird things in the market rather than necessarily how things
13:13
Speaker 5: always going to be. If you have passive ETFs, then
13:17
Speaker 5: big components like the Magnificent seven and the passive ETF
13:20
Speaker 5: go on.
13:20
Speaker 1: Not everyone's an investor explaining the Magnificent seven.
13:23
Speaker 5: Oh well, the Magnificent Seven was a group of seven
13:25
Speaker 5: stocks in the US which were more than their weight
13:30
Speaker 5: in the action of the of the index was very,
13:32
Speaker 5: very high. So if you look at the formans of
13:34
Speaker 5: the S and P, it's gone up quite substantially. With
13:36
Speaker 5: the SMP equal weight, it's been pretty much flat, and
13:39
Speaker 5: the only components that have made it go up are
13:41
Speaker 5: the biggest stocks in the index. But there's kind of
13:43
Speaker 5: a catch twenty two going on here, because if people
13:45
Speaker 5: put their money into the index and ETF, then the
13:49
Speaker 5: index has to buy the stocks more of the stocks
13:51
Speaker 5: that have gone up than of the stocks that didn't
13:53
Speaker 5: go up, which means you're compounding your error. If it
13:55
Speaker 5: is an error. We'll probably go into whether it is
13:58
Speaker 5: an error or not. Well, I got I say one
14:00
Speaker 5: thing quickly back so the main it's no longer a
14:03
Speaker 5: magnificent seven. Tesla dropped at and then Amazon dropped at
14:05
Speaker 5: and you know, it's brilliant Vidia. So basically, in Vidia
14:09
Speaker 5: is sort of driving this whole story. But in Vidia
14:12
Speaker 5: is is precariously balanced. I thought of this when you
14:15
Speaker 5: were doing your pyramid. In Vidia is precariously balanced on
14:19
Speaker 5: three numbers. It has very high margins because it charges
14:23
Speaker 5: very high prices, and because it's doing this, it's creating growth,
14:26
Speaker 5: so it has a very high multiple. But it does
14:29
Speaker 5: mean that those are three very vulnerable. You don't need
14:32
Speaker 5: to kill more than one of those and it's all over,
14:36
Speaker 5: and if you kill more than one at once, maybe
14:39
Speaker 5: all three go. So so we've built ourselves a very
14:42
Speaker 5: precarious situation that will be revealed soon but not yet.
14:47
Speaker 5: And I think that's quite analogous to what's happening in
14:50
Speaker 5: the world of students who all think that, you know,
14:53
Speaker 5: all you've got to do is buy an electric vehicle,
14:56
Speaker 5: and you're saving the planet genuinely, probably, and even the
14:59
Speaker 5: people teach and then probably genuinely, they haven't thought through
15:01
Speaker 5: it much more than that, and we'll discover.
15:04
Speaker 1: Okay, so back to lydia error AI bubble.
15:08
Speaker 5: The thing about AI is that a I don't know
15:11
Speaker 5: anything about it, but they're telling us that they can
15:17
Speaker 5: create artificial intelligence with large language models. This is generative
15:23
Speaker 5: AI as opposed to sort of narrower I think narrower
15:25
Speaker 5: functioning AI is fine, you give it a specific task,
15:28
Speaker 5: but then that's not really AI, is it. But once
15:30
Speaker 5: you talk about sort of wider use AI your tea,
15:33
Speaker 5: you're basically saying, learn it from this data.
15:36
Speaker 6: What data?
15:36
Speaker 5: Well, the stuff on the internet. Go and read the internet.
15:39
Speaker 5: So they go and use these large language models and
15:41
Speaker 5: they read the Internet, and they come back and go, right,
15:43
Speaker 5: I know everything you okay? Can you tell them there's
15:46
Speaker 5: been stuff that's true, stuff that's false? Define sarcasm. Do
15:51
Speaker 5: you know when someone's taking making a joke or being
15:54
Speaker 5: rude or being naughty? You know they have doesn't got
15:56
Speaker 5: a clue. So we've got this major I think block
15:59
Speaker 5: between what a child learns and really, you know, we
16:02
Speaker 5: should look at young children and what they learn. And
16:05
Speaker 5: they learn a language in three years, even though no
16:07
Speaker 5: one tells them what it is, what a language is,
16:09
Speaker 5: but they learn it, you know, and they and they
16:11
Speaker 5: understand how to walk, rebalance themselves, not fall over too often,
16:15
Speaker 5: and they all the time they're they're looking at these
16:17
Speaker 5: I remember once when the earliest stages of AI, the
16:20
Speaker 5: military was trying to design software to identify foreign enemy
16:25
Speaker 5: tanks versus friendly tanks. And that was fine, except then
16:29
Speaker 5: they discovered that all the pictures of the tanks that
16:32
Speaker 5: they'd taken, which were enemy tanks, they've taken on cloudy days,
16:34
Speaker 5: and all the friendly tanks were blue sky days. So
16:36
Speaker 5: they had this problem that the software was identifying the weather.
16:40
Speaker 5: So then they said, okay, that we've got to make
16:41
Speaker 5: it cleverer than that. And then they had tanks driving
16:44
Speaker 5: through bushes and you know, the software is going like, well,
16:48
Speaker 5: that's a bush. And so in the end they tore
16:50
Speaker 5: their hair out and went back to it. So AI
16:52
Speaker 5: is going to come along in my career in finance,
16:54
Speaker 5: which is now Mariam waspening the other day, far too long,
16:58
Speaker 5: we've had probably every at least every sort of cycle,
17:03
Speaker 5: there's been some fantastic new mathematical idea that's going to
17:06
Speaker 5: take off and revolutionize investing. Start all the way back in
17:10
Speaker 5: eighty seven with portfolio insurance, and then we had you
17:13
Speaker 5: know iterations of similar types of iterations ever since, and
17:17
Speaker 5: almost all of them fall down on almost always really
17:20
Speaker 5: quite basic stuff. For example, the reason why we had
17:25
Speaker 5: the collapse of sort of subprime housing securities was because
17:31
Speaker 5: they made a decision that when modeling securities that all
17:36
Speaker 5: the datall be independent. Well, most people aren't statistians probably
17:39
Speaker 5: know what that means. But that assumption is that whatever
17:42
Speaker 5: happens today is going to have it's going to be
17:44
Speaker 5: totally independent from what happens tomorrow. So you go, okay, fine,
17:47
Speaker 5: So in your world, if the market crashes today, everyone
17:51
Speaker 5: wakes up tomorrow and trains as if it hadn't. It's
17:54
Speaker 5: obviously unrealistic because obviously nonsense. They go, Yeah, it's really
17:57
Speaker 5: hard to model otherwise, Well, okay, in case, you should
18:00
Speaker 5: mention the fact that the model may not be very reliable,
18:03
Speaker 5: particularly not when things when.
18:04
Speaker 2: It matters back roomly to AI, I mean that that
18:08
Speaker 2: is incredibly energy intensive, so that that makes the whole
18:11
Speaker 2: electricity shortage problem.
18:15
Speaker 1: It works.
18:16
Speaker 4: If you look at the kind of the domestic electricity
18:19
Speaker 4: demand and projections in the United States, it is going
18:23
Speaker 4: through the roof.
18:24
Speaker 3: It's kind of amazing.
18:25
Speaker 2: Having been flat for quite a long time, and let's
18:26
Speaker 2: keep electricity demand.
18:28
Speaker 4: Is better, almost diminishing, and then suddenly it's kind of
18:31
Speaker 4: going up through the roof, and it's it's because of AI.
18:33
Speaker 3: It's because it takes it. It takes an incredible amount.
18:35
Speaker 4: Of energy, particularly to train the AI models but also
18:39
Speaker 4: to run them as well. And a lot of the people,
18:41
Speaker 4: you know, they want the servers to be to be there,
18:43
Speaker 4: so and of course you need a lot of chips
18:46
Speaker 4: for it, and making those chips partly users cold. But
18:48
Speaker 4: you know, in it's relatively small quantities. The thing that
18:52
Speaker 4: the thing that I kind of feel about AI is,
18:54
Speaker 4: on the one hand, it will it will be far
18:56
Speaker 4: more material centric than people kind of expect, because it
18:59
Speaker 4: just is the world is. People discount this stuff, and
19:02
Speaker 4: that's the point of the book. But I think the
19:04
Speaker 4: other the other thing that gives me hope is that
19:09
Speaker 4: I think if you were looking for various different challenges,
19:12
Speaker 4: so I'm not I am desperately uninterested in the l
19:15
Speaker 4: M side of AI, the you know, chat, GPT and
19:17
Speaker 4: all of this nonsense, because I just am I'm sorry,
19:21
Speaker 4: I just can't, I can't get.
19:22
Speaker 3: That enthusiastic about it. Too old, I'm just too I'm
19:27
Speaker 3: just too old.
19:28
Speaker 4: However, the side that I am interested in is, for instance,
19:32
Speaker 4: recently deep Mind, the Google bit of AI, they discovered
19:38
Speaker 4: various different ways to kind of protein folding basically, so
19:44
Speaker 4: they were able to anticipate how different proteins would form.
19:48
Speaker 4: This is a challenge that that that mainstream science has
19:51
Speaker 4: spent so much time trying to work out. Then I
19:54
Speaker 4: think even more recently they came up with millions and
19:58
Speaker 4: millions of different new novels, entirely novel crystal formations how
20:02
Speaker 4: you make crystals. Now, all of that stuff just different
20:05
Speaker 4: crystalline forms, different kind of molecular forms that if you
20:09
Speaker 4: were looking for some sort of thing which is potentially
20:12
Speaker 4: going to revolutionize the world, it's stuff like that. Because
20:15
Speaker 4: if you think about what's happening in labs, for instance,
20:17
Speaker 4: when people are trying to work out you know, whether
20:19
Speaker 4: it's new medicines or whether it's they're working out a
20:22
Speaker 4: cleverer way of squeezing lithium out of a rock, it's
20:26
Speaker 4: working out it's experimenting with different types of crystals.
20:29
Speaker 3: And historically people have just.
20:31
Speaker 4: Gone into the lab and they've just try and tried
20:32
Speaker 4: to come up with the best thing they can think of.
20:35
Speaker 4: But if AI is able to come up with millions
20:38
Speaker 4: of these things, and I think humans so far have
20:40
Speaker 4: only come up being able to come up with either
20:41
Speaker 4: tens or hundreds of thousands of novel crystal forms, if
20:45
Speaker 4: AI can do that that is totally transformational, then potentially
20:48
Speaker 4: we do have a way of reducing our energy consumption
20:52
Speaker 4: in the future. I think for every extra ten percent
20:55
Speaker 4: of energy demands that AI will be responsible for, I
20:58
Speaker 4: think it will also be responsible for mass reducing energy
21:01
Speaker 4: demand by making all of our various different processes better.
21:04
Speaker 4: But that's not the chat GPT side of things that
21:06
Speaker 4: most people are most excited about, and so I have
21:09
Speaker 4: I don't know how much that's costed into the market
21:11
Speaker 4: or not.
21:12
Speaker 7: Isn't isn't this? This is kind of the fundamental issue
21:15
Speaker 7: is energy because as you're saying, the economy is energy transformed,
21:19
Speaker 7: and the problem we net zero to an extent is
21:22
Speaker 7: that we're kind of kidding ourselves on that we can
21:25
Speaker 7: use less energy without reducing the quality of our lives.
21:30
Speaker 7: And the problem is, actually the only way out is
21:32
Speaker 7: this is actually is true. We need to find ways
21:35
Speaker 7: of making energy less damaging. So basically we need to
21:39
Speaker 7: have exponentially more energy with kind of whatever, the opposite
21:43
Speaker 7: of exponentially less environmental consequences, as opposed to the approach
21:47
Speaker 7: which is kind of we'll replace everything with something somewhat
21:50
Speaker 7: less efficient. But then all that ends up happening is
21:52
Speaker 7: that we, I guess stagnate.
21:54
Speaker 2: Being that almost all economic growth, great periods of progress
21:58
Speaker 2: have been majoring periods of cheap energy, and so if
22:00
Speaker 2: you go through a process where you make your energy
22:02
Speaker 2: more expensive rather than cheaper, you can't really expect to
22:05
Speaker 2: have very fast growth as a result. And you can
22:07
Speaker 2: pretend they having fast growth because you're spending so much
22:09
Speaker 2: on a transition, but it's not real growth.
22:11
Speaker 4: Economic progress is energy deployment. It's deploying more energy to
22:15
Speaker 4: do more stuff. That's what we've done. You know, every
22:19
Speaker 4: industrial revolution through history has been about getting more energy
22:23
Speaker 4: and doing more things. You know, whether it was kind
22:25
Speaker 4: of water wheels, or whether it's using coal, or whether
22:27
Speaker 4: it's using oil, whether it's using nuclear. We've been on
22:30
Speaker 4: this kind of trend of getting ever more energy out
22:33
Speaker 4: of the different fuels that we're using. And the thing
22:36
Speaker 4: that happened in the nineteen seventies, it's kind of sixties
22:38
Speaker 4: seventies is everyone got a bit scared of nuclear understandably
22:41
Speaker 4: given the accidents that you had there, and everyone got
22:44
Speaker 4: kind of scared about just the environments. And again understandably,
22:47
Speaker 4: you know when you look at some of the conditions
22:49
Speaker 4: back then. Nonetheless, if you're looking back at our kind
22:53
Speaker 4: of economic history and looking at kind of you know,
22:56
Speaker 4: when it was that we suddenly saw our productivity starting
22:58
Speaker 4: to diminish, I don't think it is a coincidence that
23:01
Speaker 4: was in that period where we started to fixate on
23:03
Speaker 4: trying to reduce our energy consumption around the world. Yes,
23:07
Speaker 4: by all means we need to kind of do stuff
23:08
Speaker 4: with fewer emissions. But the idea that we need to
23:11
Speaker 4: do less stuff, which is kind of what you know
23:15
Speaker 4: is implied by deploying less energy, that to me is
23:18
Speaker 4: quite tragic. I think we need you know, you know,
23:20
Speaker 4: as John was saying, we need to have way more energy.
23:23
Speaker 4: We need to have energy abundance. The question, of course,
23:26
Speaker 4: is how we can do that in a way that
23:27
Speaker 4: doesn't that isn't kind of massively environment.
23:29
Speaker 1: Yeah, there's nuclear, isn't it. There is only one answer.
23:31
Speaker 3: Yeah, I think I think big part of it is nuclear.
23:33
Speaker 4: But but I think it's just that look that this
23:37
Speaker 4: association and extra energy is bad. That's been the thing
23:40
Speaker 4: that's sunk in. I think, you know, since the kind
23:42
Speaker 4: of Jimmy Carter days, the energy is bad is just
23:44
Speaker 4: sunk in to I think throughout the corporate world to some.
23:47
Speaker 3: Extent as well.
23:49
Speaker 4: No energy, energy is good, but it needs to be
23:51
Speaker 4: a cleaner form of energy that doesn't actually you ruin
23:54
Speaker 4: the planet.
23:55
Speaker 3: But we need more energy.
23:56
Speaker 4: We need to do more stuff because the more energy
23:58
Speaker 4: that you have, then at that point point, you know,
24:01
Speaker 4: the potential is kind of limitless. You know, you can
24:02
Speaker 4: have as much water as you want, you can have
24:04
Speaker 4: as much materials as you want, you can do anything
24:06
Speaker 4: at all. But until we have that limitless energy, and
24:10
Speaker 4: the problem is, of course nuclear is massively expensive, and
24:12
Speaker 4: we need to find a way of confronting that. But
24:14
Speaker 4: we could if only we had this startup with the
24:16
Speaker 4: mindset of we need to do more stuff rather than
24:19
Speaker 4: we need to do less stuff. And it's been that
24:21
Speaker 4: let's do less stuff that's been the dominant kind of
24:23
Speaker 4: mindset in the last kind of thirty forty years.
24:25
Speaker 2: Of course, we may and we have one podcast guest
24:27
Speaker 2: he's been on a couple of times. She tells us
24:29
Speaker 2: we don't need worry about any of this because it
24:30
Speaker 2: won't be long now that we can just beam solar
24:32
Speaker 2: power direct from the Sun from space through a series
24:36
Speaker 2: of mirrors directly Earth.
24:37
Speaker 1: And sorry about it anymore.
24:38
Speaker 2: Yeah, it does, but through the mirrors, through the mirrors
24:41
Speaker 2: that beams down directly.
24:42
Speaker 1: And you know, I don't. Okay, we didn't completely understand it.
24:44
Speaker 1: Do you understand it completely the time? And I didn't either.
24:47
Speaker 1: I can't pretend it.
24:47
Speaker 4: It's nice to people thinking of these ideas, though, isn't it.
24:50
Speaker 4: I think it's interesting ideas.
24:52
Speaker 2: Right, we've got to move to another quote, and we're
24:53
Speaker 2: not going to get the questions as wish we use
24:55
Speaker 2: your quote next.
24:55
Speaker 7: John, Well, we did already talk touch on passive invest
24:59
Speaker 7: and but this is this is interesting. This is Adam
25:03
Speaker 7: Smith's view or in basically shareholder companies. So the companies
25:08
Speaker 7: were used to listed companies that are called joint stock
25:10
Speaker 7: companies in those days, and he's actually not a huge fan.
25:14
Speaker 7: So he says the trade of a joint stock company
25:16
Speaker 7: is always managed by a court of directors, and this
25:19
Speaker 7: is frequently subject in many respects to the control of
25:21
Speaker 7: a general court of proprietors, so that should board of
25:24
Speaker 7: directors and your shareholders, he says, But the greater part
25:27
Speaker 7: of those proprietors seldom pretend to understand anything in the
25:30
Speaker 7: business of the company, and give themselves no trouble about it,
25:33
Speaker 7: but receive contentedly such half yearly are rearly dividend as
25:37
Speaker 7: the directors think proper to make to them. And he says,
25:40
Speaker 7: but the problem is the directors of such companies, being
25:43
Speaker 7: the managers of other people's money rather than their own,
25:46
Speaker 7: it cannot be well expected that they should watch over
25:49
Speaker 7: it with the same anxious vigilance with which the partners
25:52
Speaker 7: in a private partnership frequently watch over their own. Negligence
25:56
Speaker 7: and profusion therefore must always prevail more or less in
26:00
Speaker 7: the management of the affairs of such a company. So basically,
26:03
Speaker 7: what he's saying is that the problem is it's it's
26:06
Speaker 7: kind of like it's a classic economics problem where the
26:09
Speaker 7: owners of an asset and the managers of an asset
26:12
Speaker 7: have different incentives. So the owners just want the money
26:17
Speaker 7: that the asset generates, and the manager just wants to
26:20
Speaker 7: do the least amount of what they can possibly do
26:23
Speaker 7: whilse satisfying the needs of the owners. And what I
26:27
Speaker 7: think is interesting why is this kind of relevant today,
26:29
Speaker 7: is because increasingly the shareholder class actually is kind of
26:34
Speaker 7: absentee landlords. You know, this has been one for a
26:37
Speaker 7: long time. Like everyone in this room, I don't know,
26:41
Speaker 7: I suspect them. Actually, probably more people in this room
26:43
Speaker 7: are slightly active investors than the average population. Your average
26:47
Speaker 7: person just pays a bit of money into their pension
26:50
Speaker 7: every month. The money in their pension gets handled by
26:54
Speaker 7: money managers, but a lot of the time now that
26:56
Speaker 7: might just go straight into a passive tracker of the
26:59
Speaker 7: type that was just talking about. So money just flows
27:03
Speaker 7: into the biggest companies with no real interest as to
27:07
Speaker 7: what those companies are doing, whether there are better options
27:10
Speaker 7: for the money. And the problem with that is we
27:13
Speaker 7: gradually undermines, or you can argue that it gradually undermines
27:18
Speaker 7: market efficiency. And market efficiency is basically the principle that
27:23
Speaker 7: if you take everyone's opinions, then the average averages out
27:28
Speaker 7: to be roughly the correct price for a company or
27:31
Speaker 7: for an asset, whereas the passive investment, it's more like
27:34
Speaker 7: you get one person's opinion and then everyone else is
27:38
Speaker 7: following them, and so the market becomes horribly skewed towards
27:41
Speaker 7: one set of companies, such as the Mega texts. And
27:44
Speaker 7: I think that this is not necessarily what Adam Smith
27:47
Speaker 7: would have had in mind as being the best way
27:51
Speaker 7: to efficiently allocate capital and human resources.
27:54
Speaker 2: But you fix it, John, We've had this problem has
27:57
Speaker 2: been around so since you had this original insight that
28:00
Speaker 2: if you have an owful lot of owners of a company,
28:02
Speaker 2: you automatically give the power to the manager of the
28:04
Speaker 2: company rather than to the shelders. Right, that's a managerial capitalism.
28:09
Speaker 3: Right.
28:09
Speaker 2: We've been worrying about that for decades, but it hasn't changed,
28:13
Speaker 2: and there's been all sorts of conversation. I've written a
28:15
Speaker 2: book about this myself, about how to give power back
28:17
Speaker 2: to the shareholders and how to get shelders to use
28:20
Speaker 2: the rights they should have to.
28:22
Speaker 1: Do more than just accept evidence. And I'm not going
28:24
Speaker 1: to change this.
28:25
Speaker 7: It's a really tricky issue. I think it's I think
28:29
Speaker 7: it's one of those annoying subjects where it's more about
28:34
Speaker 7: just haven't any government and population has to stay on
28:38
Speaker 7: top of where the most likely abuse of power is.
28:41
Speaker 7: So the moment, for example, So you've got there's basically
28:45
Speaker 7: three big passive funds providers, so you get black Rock,
28:48
Speaker 7: Fine Garden, State Street, and then also underneath that you've
28:52
Speaker 7: got three big dominant index providers. So not only do
28:55
Speaker 7: you have a concentration of power among the asset managers,
28:58
Speaker 7: the indexes that are constructed that these funds follow and
29:04
Speaker 7: that they pay license fees to to use are also dominant.
29:08
Speaker 7: So I think it's S and P and Footsie, Russell
29:10
Speaker 7: and one of the other ones. So you kind of
29:12
Speaker 7: got this this agglomeration of power at the top of
29:16
Speaker 7: the market, and they are almost like a toll road
29:19
Speaker 7: through which all of our money goes, and they take
29:22
Speaker 7: their wee cut and they get very well off of it,
29:26
Speaker 7: and it matters. But it's not obvious because they're technocrats,
29:30
Speaker 7: not like Larry think that black Rock will occasionally stand
29:33
Speaker 7: up and say something semi political, but most of the
29:36
Speaker 7: time they understand that their position depends on them not
29:40
Speaker 7: being political and not being overtly influential. You know, whenever
29:46
Speaker 7: you've got you know, one company owning say, I mean,
29:50
Speaker 7: like some people have started to write papers wondering is
29:55
Speaker 7: this undermining competition as a whole because for example, like
29:59
Speaker 7: in the airline sector, almost every airline is at least
30:03
Speaker 7: I think it's about twenty percent owned by Black Roxy.
30:07
Speaker 7: And then you start to think, well, wait, man, mostly
30:09
Speaker 7: black roll going to twenty percent of the overall airline sector.
30:12
Speaker 7: Then doesn't that encourage them to say, well, it doesn't
30:16
Speaker 7: matter if Ryanair is better or a Visy Jet is better.
30:18
Speaker 7: And actually the good thing would be as if they
30:20
Speaker 7: all colluded a bit to set prices, because then the
30:24
Speaker 7: overall airline sector would make higher profits as a whole.
30:27
Speaker 7: Now that's a very contentious view, and personally speaking, I
30:31
Speaker 7: don't think that anything that overt is happening. But the
30:34
Speaker 7: point is you can erode capitalism, and as I say,
30:38
Speaker 7: they kind of.
30:40
Speaker 2: That all the gooblazing monopolies and appeal from the same
30:43
Speaker 2: business meeting together in credit rooms to discuss price fixing exactly.
30:47
Speaker 7: I mean, the wealthy nations is basically a massive diatribe
30:51
Speaker 7: against monopoly type arrangements. And I think it's more that
30:56
Speaker 7: it's almost like a game of Lacker mole, and you
30:59
Speaker 7: do see it. I mean, obvious governments are starting to
31:01
Speaker 7: look at regulating the big tech companies harder for example,
31:05
Speaker 7: because I mean, and I guess that's just part of
31:08
Speaker 7: the whole game of if you know, they get ahead
31:13
Speaker 7: and then the kind of population gets ahead. Because we
31:17
Speaker 7: spent lots of time being distracted by arguments about network effects,
31:21
Speaker 7: but then we kind of ignored the fact that Facebook
31:23
Speaker 7: just went over and bought Instagram because that network was
31:27
Speaker 7: getting more popular than Facebook, so that that was like
31:29
Speaker 7: a red hearing. So I think that, yeah, it's more
31:32
Speaker 7: like an arms race between governments and populations and corporations.
31:37
Speaker 2: Did anyone ever, anyone who owns shows evergain voted in AGM?
31:41
Speaker 1: Well, very engaged of.
31:42
Speaker 7: You, right, I mean, how could you get more people
31:45
Speaker 7: to do that?
31:46
Speaker 2: You know?
31:46
Speaker 7: I mean, at the end of the day, even if
31:48
Speaker 7: you own testco shares, and you actually do individually owned
31:51
Speaker 7: testco shares, it's.
31:53
Speaker 2: A lot of work, but it shouldn't be a lot
31:55
Speaker 2: of work, and you can game a file this stuff, right.
31:57
Speaker 2: And one of the things that that are a lot of
31:59
Speaker 2: people been talking about, and I've written about GUD a lot,
32:01
Speaker 2: is the idea that it's possible for your pension provider
32:04
Speaker 2: to give you the ability to use every vote and
32:08
Speaker 2: every fraction of vote that you might have relative to
32:10
Speaker 2: the shares that you're holding your pension portfolio, and that
32:12
Speaker 2: you should be able to go on a website, see
32:14
Speaker 2: what that company does, see what votes are coming up, and.
32:16
Speaker 1: Just you know, click through.
32:18
Speaker 2: Of course, this would ruin everything for the managers and
32:20
Speaker 2: ruin everything for the fund managers.
32:21
Speaker 1: You like to have that kind of control.
32:23
Speaker 4: Ask question, did everything just start going wrong when we
32:26
Speaker 4: had kind of unlimited liability? And would everything just be
32:29
Speaker 4: better if if everything was a partnership? Would that be possible?
32:32
Speaker 7: There is an a'll doom in a boat idea for
32:35
Speaker 7: and so that's one of the big arguments I think
32:37
Speaker 7: in the way of the nations all haven't reade then
32:39
Speaker 7: at all.
32:40
Speaker 2: I know he that Adam Smith was very very suspicious
32:42
Speaker 2: of the idea of bringing in limited liability.
32:45
Speaker 1: Very suspicious.
32:45
Speaker 2: But on the other hand, it's the idea of not
32:47
Speaker 2: having liability that allows people to continually innovate. You know,
32:50
Speaker 2: it's very hard if you say to people, you know,
32:52
Speaker 2: if you if you go ahead with your brilliant idea
32:55
Speaker 2: and it fails, you're going to lose everything. Who's going
32:57
Speaker 2: to go ahead with a brilliant idea? So limited the
32:59
Speaker 2: limited liability company. If you look at it like that,
33:02
Speaker 2: A lot of people think, and I agree, it was
33:03
Speaker 2: possibly the greatest invention of all.
33:05
Speaker 3: Time and coincided with all the industrialal.
33:08
Speaker 2: Because it allowed people to suddenly go okay and have
33:10
Speaker 2: a go at this, and I'll only lose what I
33:12
Speaker 2: put in, and They'll be able to have another go
33:14
Speaker 2: and another go and another going take risks.
33:16
Speaker 1: It can innovate etca.
33:17
Speaker 5: It's called America, right.
33:20
Speaker 7: I suppose it's fairly sill. If the investment banks had
33:22
Speaker 7: still been partnerships when before eight, then probably wouldn't have happened,
33:28
Speaker 7: or it wouldn't have been as bad as it was,
33:31
Speaker 7: you know, if they were all owed the hook for whatever.
33:33
Speaker 7: Then But then that is that arguing a risk taking
33:37
Speaker 7: versus lescer version.
33:39
Speaker 5: Do you know how many people went to jail for
33:41
Speaker 5: abusing the rules on bank leverage? Next zer it was
33:48
Speaker 5: much more importantly? Why why did they not do any
33:51
Speaker 5: perp walks? Why was no one even prosecuted the war
33:56
Speaker 5: idiots for the bureaucrats, the ones who were the ones
33:58
Speaker 5: who were in charge of policing it were the ones
34:00
Speaker 5: who caused it, damn.
34:01
Speaker 7: But and then you can also argue that the poor
34:03
Speaker 7: buggers that get done for labor or a bit five
34:05
Speaker 7: years later when they're all exploited in the public. You know,
34:09
Speaker 7: perception will scapegoats. I mean, I know that's slightly off topic.
34:14
Speaker 2: I think what happened in Libor is probably a little
34:16
Speaker 2: much for this this panel and podcast. So we're going
34:19
Speaker 2: to go to our last quote, James, make it snappy
34:23
Speaker 2: because I'm running out of my question.
34:24
Speaker 5: Time, right. There is no art which one government sooner
34:28
Speaker 5: learns than another of another than that draining more from
34:32
Speaker 5: the pockets of the people.
34:33
Speaker 1: Would you like me to read it?
34:35
Speaker 5: Yeah, it's a miracle. I got through that. It was
34:38
Speaker 5: one smudge going to another smage and the shortest smudge
34:40
Speaker 5: in the middle.
34:41
Speaker 2: There is no art which one government sooner learns of
34:44
Speaker 2: another than that of draining money from the pockets of
34:46
Speaker 2: the people.
34:47
Speaker 5: And remember that quote because it's going to become incredibly
34:50
Speaker 5: important over the next ten years. So this country's debt
34:55
Speaker 5: to GDP just prior to the financial crisis was a
35:00
Speaker 5: about thirty six percent, and it's now around about one
35:03
Speaker 5: hundred percent. Now, if you divide up the increase in
35:06
Speaker 5: government debt by years, that's an increase of about four
35:09
Speaker 5: percent a year. Do you remember the economy roaring along
35:11
Speaker 5: at four percent a year? Probably not. In the last
35:15
Speaker 5: two years, the US government has borrowed three trillion dollars
35:19
Speaker 5: and from that managed to generate two whole trillion dollars
35:22
Speaker 5: of nominal, not even real GDP. So it turns out
35:27
Speaker 5: that government expenditure is incredibly unproductive and does nothing really
35:32
Speaker 5: in the even the short term, other than add to
35:35
Speaker 5: the debtedness of the country and therefore the future interest bill.
35:39
Speaker 6: Who knew, but.
35:40
Speaker 5: This really matters because basically under our watch without anyone
35:43
Speaker 5: really noticing. By the way, the data gave for the
35:45
Speaker 5: UK excludes bailing out the banks, so it's done nothing
35:48
Speaker 5: to do with financial crisis. This is just the fact
35:50
Speaker 5: that they thought, well citive had a financial crisis, and
35:52
Speaker 5: no one seems to be watching, and interest rates and
35:55
Speaker 5: yields have gone really low. We can borro up a
35:57
Speaker 5: storm and spend lots of money gerrymandering and buying votes
36:00
Speaker 5: and all the rest of it, although there's not much
36:02
Speaker 5: evidence that even works in terms of buying votes. But
36:05
Speaker 5: the fact is that when the government takes over half
36:08
Speaker 5: the economy, which is the case now in the UK
36:10
Speaker 5: and in fact, if you exclude England, it's more than
36:13
Speaker 5: two thirty the economy in all the other parts of
36:16
Speaker 5: the UK, So you know the economy the private sector
36:19
Speaker 5: e comomy don't get Government doesn't fend any money at all.
36:22
Speaker 5: It just redirects private sector money and redistributes it to
36:25
Speaker 5: worthy causes that are reliant on government hand adds and
36:29
Speaker 5: pretends it's their money. So government takes private sector tax
36:33
Speaker 5: revenues or future tax revenues if they borrowed the money,
36:36
Speaker 5: and gives it to other people and says, we gave
36:38
Speaker 5: it to you, not the other people who'd actually earned it. Now,
36:42
Speaker 5: this is a major problem because when you get to
36:43
Speaker 5: the stage where you have far too many people receiving
36:47
Speaker 5: as beneficiaries of these payments, they're obviously disinclined. As I
36:51
Speaker 5: think the great American agony Aren't whose name escapes me
36:55
Speaker 5: for a second said, The givers have to say when
36:58
Speaker 5: enough is enough, because the takers rarely do for which
37:02
Speaker 5: we never do. So we've got this, We've got this
37:04
Speaker 5: massive problem. Bill Brice was pointing out in his book
37:07
Speaker 5: about his childhood that in nineteen fifty seven, I think
37:10
Speaker 5: it was Americans were as happy as they've ever been,
37:13
Speaker 5: and it's been downhill since then. The Encyclopedia of Mental Disorders,
37:18
Speaker 5: the big dictionary of mental disorders in the US, had
37:20
Speaker 5: one hundred and four different psychiatric problems in nineteen in
37:25
Speaker 5: the nineteen fifties, it now has over four hundred. So
37:28
Speaker 5: what has happened is that everyone has become much less
37:31
Speaker 5: happy because they've become much more mentally ill.
37:34
Speaker 1: How are you? How are you doing this? Back to
37:36
Speaker 1: the tax take, because and I'm going with it so far.
37:39
Speaker 5: That makes what makes many people mentally ill is the
37:41
Speaker 5: fact that it is a gateway to personal independence payments,
37:45
Speaker 5: which are far higher than boring bogs do. Added unemployment payments.
37:49
Speaker 5: The unemployment benefit is very, very low. But if you
37:51
Speaker 5: can add some interesting tassels to your unemployment, then not
37:56
Speaker 5: only do they tell you don't have to look for
37:57
Speaker 5: a job, you'll get more money. It's very hard for
38:00
Speaker 5: people who are given free money for doing nothing to
38:03
Speaker 5: turn around and say, actually, one of the reasons I'm
38:05
Speaker 5: feeling low is I haven't got a job. I better
38:07
Speaker 5: go and get a job, particularly if they start by
38:10
Speaker 5: taking a job lower down before they work their way
38:13
Speaker 5: up where the effective tax rate. Because they're not making
38:17
Speaker 5: much more money than they got me. You know, it
38:20
Speaker 5: is very is very punitive. So we've got a situation
38:22
Speaker 5: where nine million working age adults in the UK are
38:27
Speaker 5: not in work and not looking for work.
38:28
Speaker 1: And this is a results through incentive structure, yes, but.
38:31
Speaker 5: It's an unaffordable incentive structure. So the real point I
38:33
Speaker 5: want to make is is that you could just about
38:35
Speaker 5: keep this thing going as long as interest rates were
38:37
Speaker 5: just about zero because the payment the interest payments on
38:41
Speaker 5: the debt, the debt was never coming due like a console,
38:44
Speaker 5: and the interest payments were super low. We could kind
38:46
Speaker 5: of keep this gig going. And the politicians went, yeah,
38:49
Speaker 5: I mean, you know, let's buy another election if we can.
38:51
Speaker 2: Okay, well, James, look at it this way. There is
38:53
Speaker 2: no way that state spending is going to full. State
38:55
Speaker 2: spending is definitely going to rise that certainly of this
38:57
Speaker 2: government and probably the next government. There is absolutely no
38:59
Speaker 2: way that we're going to see a full in overall
39:02
Speaker 2: government spending.
39:03
Speaker 1: It's going to go up.
39:04
Speaker 2: How's it going to be financed? Where do you think
39:06
Speaker 2: that taxes? Tax risers are going to come?
39:08
Speaker 5: Well, initially, the tax risers will come all all over
39:10
Speaker 5: the place. But don't forget that we already have a
39:12
Speaker 5: government that's spending forty eight I think is percent of
39:15
Speaker 5: GDP tax revenues are all like about thirty four sense,
39:20
Speaker 5: so the rest is dead.
39:21
Speaker 2: I mean this is inmpting, isn't it, Because certainly in
39:23
Speaker 2: the UK, all nations seem to have their own limit
39:26
Speaker 2: of the amount of tax that they're prepared paying. If
39:28
Speaker 2: you look at the history of the UK, we kind
39:30
Speaker 2: of top out of thirty seven percent of GDP A
39:33
Speaker 2: taxpayers simply refused to pay more.
39:35
Speaker 5: Yeah, I mean it comes a stage where if it's
39:37
Speaker 5: if you're if you're someone else is taking money off you,
39:40
Speaker 5: then you're okay with ten percent, You're okay with twenty percent,
39:43
Speaker 5: probably okay with thirty percent, you're okay with forty percent,
39:46
Speaker 5: as long as it's a marginal rate at least recular.
39:48
Speaker 5: But if it comes a stage we just get or
39:50
Speaker 5: I won't bother working. So if you all people are
39:53
Speaker 5: bothering working being paid for a while, all the people
39:54
Speaker 5: who are bothering working, but then the people who are
39:56
Speaker 5: bothering working turn around and say I'm no longer incentivized
39:59
Speaker 5: to work.
39:59
Speaker 1: Will you lead?
40:00
Speaker 2: Oh, you leave I mean here we have this growing
40:02
Speaker 2: problem the UK of our very rich leaving and are
40:05
Speaker 2: young leaning.
40:05
Speaker 5: I'm not sure they are very rich, but there's some
40:08
Speaker 5: very rich who temporarily popped over and then went, you're
40:10
Speaker 5: changing my tax datus, I'm off, which is interesting in itself.
40:14
Speaker 5: You know, if you want to if you want to
40:15
Speaker 5: lose rich people, you increase the tax and they either
40:18
Speaker 5: stop working, move abroad like the brain drain from the
40:22
Speaker 5: from the labor period, or if they're foreigners, they go well,
40:26
Speaker 5: I don't If they're really rich, they can be living anywhere.
40:28
Speaker 2: What everyone really wants to know is if the capital
40:30
Speaker 2: gains tax is going to go up.
40:32
Speaker 5: Well, if you look at the list of taxes that
40:34
Speaker 5: people don't mind going up, there, it is exactly the
40:37
Speaker 5: same as the list of taxes that most people don't
40:39
Speaker 5: expect to pay. So it's higher rate taxes on high earners,
40:43
Speaker 5: capital gains tax and corporation tax. Of course, what everyone
40:47
Speaker 5: is still forgetting is that, you know, the art of
40:50
Speaker 5: taxing is to pluck the goose with the minimum amount
40:53
Speaker 5: of hissing. And if you basically keep plucking the goose
40:57
Speaker 5: and the hissing gets too loud, you'll end up losing
41:00
Speaker 5: as well. So you know, corporation tax goes up, what
41:02
Speaker 5: you think companies won't put their bricers up to come
41:04
Speaker 5: and say, you know, suddenly you're going like, oh my
41:06
Speaker 5: tax hasn't gone up, but by cost of living health?
41:08
Speaker 5: Can you start taxing higher? Owners? Owners start saying, well.
41:12
Speaker 1: Well work that hard. Okay, On that happy note, Let's
41:15
Speaker 1: have questions.
41:16
Speaker 6: Do you not think the growth stuff index funds? It
41:19
Speaker 6: is because most upon managers are skeptics, but the two
41:23
Speaker 6: of you and therefore miss out investing in some of
41:26
Speaker 6: these incredible prosinesses which faky apps bed for it from
41:30
Speaker 6: the internet and smartphones and all this sort of stuff.
41:35
Speaker 6: And he's a world really driven index is forward and
41:39
Speaker 6: you know most fund managers haven't had enough invest in
41:42
Speaker 6: these companies and there therefore underperformed. And there for most
41:44
Speaker 6: investors see what we're not going to put money into
41:47
Speaker 6: acted for managers, We're we're going to a gust our
41:50
Speaker 6: harder sendings and to turn next spunds.
41:52
Speaker 2: So the question is really are passive funds there to
41:55
Speaker 2: protect investors from fund managers?
41:57
Speaker 1: Now jams John.
41:59
Speaker 5: My opinion would be that it depends whether the movement
42:03
Speaker 5: into ETFs is sort of cyclical or structural in the
42:07
Speaker 5: sense that we went from a position not having much
42:09
Speaker 5: money in ets to now almost all the money is
42:11
Speaker 5: in ETFs. And whilst the money is still increasingly going
42:14
Speaker 5: into ETFs, it will keep pushing ETF's performance ahead of
42:19
Speaker 5: active fund managers. But once that submarine surfaces and flops
42:25
Speaker 5: onto the.
42:25
Speaker 1: Surface, and what would make that happen, well, we'll get.
42:27
Speaker 5: To get to the tipping point. Trouble with tipping points
42:30
Speaker 5: is it's easier to say there's a tipping point coming
42:33
Speaker 5: than to say when it is or where it is.
42:35
Speaker 5: But if that tipping point comes and it turns out that,
42:38
Speaker 5: you know, active fund managers seem to have quietly been
42:41
Speaker 5: performing very very well. You know, the Russell two thousand
42:43
Speaker 5: has done nothing, the S and P equal weight has
42:46
Speaker 5: done nothing, and the S and P and NASDAQ have
42:48
Speaker 5: gone through the roof. But the last time that happened
42:52
Speaker 5: was in nineteen ninety nine, and then two thousand happened,
42:55
Speaker 5: and by the end of two thousand and one, the
42:58
Speaker 5: Russell two thousand and the SMB equal massively at performed
43:02
Speaker 5: the S and P and NASDAK. So the problem with
43:04
Speaker 5: taking views at any moment in time, and then extrapolating
43:08
Speaker 5: that that will happen forever, is that by the time
43:11
Speaker 5: everyone agrees that it will appen forever, that's the day
43:13
Speaker 5: the market tops and it all changes.
43:15
Speaker 1: Yeah, John, did you have that either.
43:17
Speaker 7: Oh? Yeah, I think it's a good question. I think's
43:19
Speaker 7: so a good point, and I think passive investment is
43:21
Speaker 7: a good thing. I mean, to be very clear, I
43:23
Speaker 7: mean when we were at money Week, we were among
43:25
Speaker 7: the first to go on about how passive investment is
43:28
Speaker 7: a lot better than active investment because active managers, and
43:31
Speaker 7: I don't to be fair, I don't think it's because
43:34
Speaker 7: of what people are investing in. I think it's more
43:36
Speaker 7: to be the cost. Passive investment is much much cheaper
43:39
Speaker 7: than active investing, and certainly in the last five years
43:43
Speaker 7: or so, there's also been a regulatory move to focus
43:47
Speaker 7: on costs, which is also persuaded financial advisors and pension funds,
43:51
Speaker 7: et cetera to focus very much on cost and therefore
43:55
Speaker 7: essentially price out active managers. So I don't think there's
43:59
Speaker 7: bad about that. It is, but it is more that
44:03
Speaker 7: issue of eventually going to tasee stuff up too far.
44:07
Speaker 7: And again it's interesting that the US has outperformed to
44:10
Speaker 7: the point where people now assume the US has always outperformed,
44:14
Speaker 7: and so that's not the case. The US was underperformed
44:17
Speaker 7: in the UK as recently is kind of two thousand
44:19
Speaker 7: and four, two thousand and five, so it's more, you know,
44:22
Speaker 7: this has been a long cycle, which I would say
44:24
Speaker 7: is also to do with zero percent interest rates. But yeah,
44:28
Speaker 7: passion is a good thing. Beaking of too much a
44:29
Speaker 7: good thing.
44:30
Speaker 1: Basically, fair enough, more questions, but one right here in
44:33
Speaker 1: the front.
44:36
Speaker 6: Today he would be an advocate or at paramids but
44:39
Speaker 6: become sective calmon taxes.
44:44
Speaker 3: It's a really good question.
44:46
Speaker 5: Yes, this is the shortest answer I could think of
44:51
Speaker 5: that didn't have a compact.
44:55
Speaker 3: HI don't know.
44:56
Speaker 4: I mean, I probably don't know enough about Adam Smith
44:57
Speaker 4: to give a really kind of to the answer.
45:00
Speaker 2: I mean, it's always a mistake to try and extrapolate
45:03
Speaker 2: from people.
45:03
Speaker 1: You know, what would they think today?
45:05
Speaker 4: Carbon taxes are so so want economists love them so
45:08
Speaker 4: much because they solve everything, but they just you know,
45:12
Speaker 4: we are biggest carbon tax in this country.
45:14
Speaker 3: We keep cutting it.
45:16
Speaker 4: It's fuel duty by far and away our biggest carbon tax.
45:20
Speaker 4: You know, Jason was talking earlier about the taxes that
45:22
Speaker 4: people say they're willing to pay.
45:23
Speaker 3: The ones they think they're not going to ever. The other, Yeah,
45:26
Speaker 3: they think other we will pay.
45:27
Speaker 4: But the issue with carbon taxes is often, often they
45:29
Speaker 4: feel often these are the things that people notice. And
45:32
Speaker 4: that's the difficulty is it solves everything. It's great, it's amazing,
45:37
Speaker 4: it solves everything if you can put a price on carbon.
45:39
Speaker 4: But like, show me a country that has actually been
45:42
Speaker 4: able to implement it properly and hasn't gone through exactly
45:46
Speaker 4: the same issue that we're going through. So I imagine
45:48
Speaker 4: I don't know whether would would Adam Smith have been
45:50
Speaker 4: able to kind of see all the way through that?
45:52
Speaker 1: I mean, I think probably not.
45:53
Speaker 2: I mean, obviously, as I say, it's very high and
45:55
Speaker 2: very against saying, what would so and so who's been
45:57
Speaker 2: dead for three hundred years think about that?
45:58
Speaker 1: I don't think.
45:58
Speaker 3: But I don't think he would. I don't think you
46:00
Speaker 3: like her.
46:00
Speaker 2: He spoke a lot about taxes, and he wrote about
46:03
Speaker 2: taxes relentlessly, and who is very very clear that taxes
46:06
Speaker 2: should be simple, straightforward, completely understandable, easy to pay, all.
46:10
Speaker 1: This kind of thing.
46:13
Speaker 2: And I suspect that a carbon tax would actually fail
46:16
Speaker 2: on pretty much every single one of his criteria, because.
46:18
Speaker 3: He's very pragmatic. It's like super pragmatic.
46:21
Speaker 2: Yet he'd be just wanted taxes to be simple, straightforward,
46:24
Speaker 2: easy for anyone to pay at any time. And obviously
46:26
Speaker 2: our tax sysm is absolutely not be anymore. And if
46:29
Speaker 2: she were to extrapolate what he might have thought, I
46:31
Speaker 2: think he would look at our taxes stem to say
46:33
Speaker 2: and go and disable that economy is destroyed, absolutely destroyed,
46:36
Speaker 2: because a taxysm of that length and complexity creates such
46:39
Speaker 2: appalling incentives and difficulties and such an overlay above admin
46:43
Speaker 2: hell for everybody that this can't possibly work. I think
46:46
Speaker 2: he'd be horrified already. And if you then said to him,
46:48
Speaker 2: how about a carbon tax? I think he would turn
46:50
Speaker 2: over in his grave. So many times.
46:51
Speaker 5: Well he wondered aloud at the amazing fortuitousness of an
46:55
Speaker 5: economic system that allocated resources are productively and efficiently, even
47:00
Speaker 5: though no one was doing it. And now we have
47:02
Speaker 5: a system where we have people allocating resources deliberately and aggressively,
47:06
Speaker 5: unproductively and inefficiently. I think you'd be horrible.
47:09
Speaker 1: The invisible hands is not going to work.
47:10
Speaker 2: Under these circumstances, right, I'm not going to do any
47:14
Speaker 2: more questions because I want to ask the panel one
47:17
Speaker 2: last question before we end, which is because this is
47:20
Speaker 2: technically we should be.
47:21
Speaker 1: Talking more about investment.
47:22
Speaker 2: If you could just make one investment today, only one,
47:25
Speaker 2: what would it be?
47:26
Speaker 1: James quickly, quickly.
47:30
Speaker 5: Come back to John.
47:32
Speaker 6: I've been.
47:34
Speaker 7: A point in UK equities for a while, and I
47:36
Speaker 7: still think ukcaus are a good bit because Britain spent
47:41
Speaker 7: so so long being detested by the world's fund managers,
47:44
Speaker 7: and that's very recently, probably only this year, started to
47:47
Speaker 7: turn around. And now they've all got the excuse for saying, oh, well,
47:51
Speaker 7: I wanted to eat until the Tories without a government,
47:53
Speaker 7: so I think that'll continue.
47:55
Speaker 1: Okay, you coats, thank you. James. You can't look at it.
47:58
Speaker 1: He's not an investor, okay.
48:00
Speaker 5: Well I silver, Oh, gold's gone to new highs. I'm
48:07
Speaker 5: a little bit worried about gold because gold, if you
48:08
Speaker 5: look at gold compared to the price index, it's looking
48:12
Speaker 5: awfully high. And if gold's supposed to protect real wealth
48:15
Speaker 5: and stuff will be a real reflection of inflation, then
48:19
Speaker 5: you know you'd really wanted a discount to that, but
48:21
Speaker 5: silver historically tracks gold, not very tightly, but it does
48:26
Speaker 5: sort of track it. It usually goes to a premium
48:29
Speaker 5: to gold near the top. That's how you know it's
48:31
Speaker 5: the top. And at the moment it's a substantial discoup.
48:34
Speaker 3: Okay, all well, stuff UK silver a lot of silver
48:37
Speaker 3: and sellar panels as well.
48:38
Speaker 1: So yeah, Ed, you don't have to answer this one.
48:41
Speaker 6: But I can't.
48:42
Speaker 4: I can't mainly because I don't know. Theoretically I'm not
48:47
Speaker 4: you know, I'm not laty, but also I have I have.
48:48
Speaker 3: No clue you have no chant.
48:49
Speaker 2: All right, Well, I think that's a great place to
48:51
Speaker 2: end with it. Don't know, because I don't how we
48:52
Speaker 2: all feel about most things, isn't it.
48:55
Speaker 1: Thanks for listening to this week's Maren Talks Money.
48:57
Speaker 2: If you like, I show, rate, review, and subscribe wherever
49:00
Speaker 2: you listen to podcasts, and keep sending your questions or
49:02
Speaker 2: comments to Merrin Money at Blueberg dot net. This editors
49:05
Speaker 2: were produced by me Marren Sunset Web. It was produced
49:07
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49:10
Speaker 1: By Moses and Best.
49:11
Speaker 2: All thanks to John Stebeck, Thank you again, John, James
49:13
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49:14
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49:15
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49:22
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