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Edward Chancellor on the Real Story of Interest · Masters in Business

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Speaker 1: M. This is Mesters in Business with very Results on
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Speaker 1: Bloomberg Radio. This week on the podcast, I have another
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Speaker 1: extra special guest. Edward Chancellor is a legend amongst financial
0:16
Speaker 1: journalists and historians. His book on the History of Speculation
0:21
Speaker 1: and Manias and Bubbles Devil Takes the Hindmost is just legendary.
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Speaker 1: It is the full history of financial speculation. His latest
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Speaker 1: book could not be more timely, The Price of Time,
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Speaker 1: The Real Story of Interest. It's all about the history
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Speaker 1: of interest rates, money lending, investing, speculation, funded by banks
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Speaker 1: and loans and credit. According to Chancellor, interest is the
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Speaker 1: single most important feature of finance, both ancient and modern,
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Speaker 1: and it's how we allow transactions to take place across time.
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Speaker 1: I found this conversation to be fascinating, informative. He is
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Speaker 1: a one of a kind and I'm confident you will
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Speaker 1: find this to be fascinating also. With no further ado
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Speaker 1: my conversation with Edward Chancellor. Let's start with your background
1:17
Speaker 1: in academia. So you study history at Trinity College. What
1:21
Speaker 1: is a Master of Philosophy in Enlightenment UM and history
1:26
Speaker 1: from Oxford? Am I mangling that? In American what we
1:29
Speaker 1: called it m phillis is a shorter version of a
1:32
Speaker 1: doctorate or de phil. Read a research paper and you know,
1:38
Speaker 1: and one had exams at the same time. It was
1:40
Speaker 1: originally created as a sort of academic teaching degree, but
1:43
Speaker 1: then got somewhat usurped by the PhD. And that was
1:47
Speaker 1: where I was going to go. It looks like you
1:49
Speaker 1: were setting yourself up for a career as an academic.
1:53
Speaker 1: I thought about it, and then I was invited with
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Speaker 1: the other graduate students to my history professor's how it's
2:00
Speaker 1: the outskirts of Cambridge, and I thought, well, this is
2:04
Speaker 1: where this is where the guy who's you know, he's
2:09
Speaker 1: got to the top at Oxford, Liz, I'm going to
2:12
Speaker 1: go and get a job in the city of London.
2:14
Speaker 1: So that's what I did, and I sort of didn't.
2:18
Speaker 1: My thinking on leaving you, on leaving academia is that
2:22
Speaker 1: if I need to earn a living, I might as
2:23
Speaker 1: well make money from money, which is, you know, what
2:26
Speaker 1: Aristotle disapproved. So it was a sort of anti Aristotelian
2:30
Speaker 1: act of going into the city. That's really interesting. So
2:34
Speaker 1: you go into the city of London, and is that
2:37
Speaker 1: where you began at Lazard Brothers or part of your career.
2:40
Speaker 1: I started at Lazard's no relationship to the US Lazar
2:45
Speaker 1: They're all they called it Las Brothers in London, last
2:48
Speaker 1: Fare and in Paris and that's out Frere here. So
2:52
Speaker 1: they've now all been drawn together. But when I was there,
2:54
Speaker 1: there were sort of interconnected shareholdings that were joining the
2:58
Speaker 1: different branches together. Uh. I went into what's called corporate finance.
3:03
Speaker 1: You know people would see now a sort of m
3:05
Speaker 1: and a department in the in London that had to
3:08
Speaker 1: be pretty busy time. Well, I was actually in a
3:12
Speaker 1: sort of subgroup there which was called corporate Strategy. We
3:15
Speaker 1: were sort of doing. Our job was basically to give
3:19
Speaker 1: sort of a strategic advice to Lazard clans which would
3:24
Speaker 1: generate capital raising, mergers and debt financing for these companies.
3:30
Speaker 1: It was sort of self interested advice. But I didn't
3:34
Speaker 1: last very long there because I thought I didn't like
3:36
Speaker 1: corporate finance as sort of I felt they were sort
3:39
Speaker 1: of ruthless, cynical, always looking for a deal. And I
3:46
Speaker 1: remember once, you know, one of my colleges says that
3:49
Speaker 1: a friend, one of the French Lazard Frere partners was
3:53
Speaker 1: asked by a sort of junior how much should we
3:56
Speaker 1: tell our plant to bid? And the French partners said
4:00
Speaker 1: the price is right, which Earth's our client say. There's
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Speaker 1: a lot of cynicism in corporate finance. I didn't find
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Speaker 1: it intellectually interesting. You know, you had all those deal
4:13
Speaker 1: books you can imagine, and tedious, not not thrilling, And
4:18
Speaker 1: I was a sort of grunt level sure, and um
4:22
Speaker 1: I came to the point where I thought, well, I'd
4:24
Speaker 1: sooner be driving a bus and continuous. So how did
4:29
Speaker 1: you transition from Lazard to g MR. It wasn't a
4:33
Speaker 1: straight path. I When I was at Lasar's, I heard
4:37
Speaker 1: you can't work in finance without people talking about the
4:39
Speaker 1: great speculative bubbles of the past. So people we would
4:43
Speaker 1: mention the sort of British railway man near the eighteen forties,
4:46
Speaker 1: and Tulip Maine and so forth. And I I left
4:52
Speaker 1: with no more money than I had when I came in,
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Speaker 1: and I decided I would write a history of financial
4:58
Speaker 1: speculation of my own bat. I mean, I've read the
5:03
Speaker 1: other stuff in your Kindleberger, Braith and that sort of stuff,
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Speaker 1: and I still felt there was run to write a
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Speaker 1: new book. The space had not been mine to exhaust
5:12
Speaker 1: I think. I think Kendleberger is very good, but if
5:15
Speaker 1: you're in he's writing a sort of taxonomy of the bubble,
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Speaker 1: And as an historian, I wanted to write the narrative
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Speaker 1: of the bubble. Now you're probably wearing a Charles McKay's
5:24
Speaker 1: extraordinary popular I mean, that's your eighteen forties narrative, and
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Speaker 1: it's highly inaccurate, and yeah, it's full of sort of
5:35
Speaker 1: ledgen me talks about the black che lip and stories
5:39
Speaker 1: of people bite you know, people biting them in with
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Speaker 1: the tulip beell. He talks about you know, sailor coming
5:46
Speaker 1: along and mistaking a tulip bull for an onion and
5:49
Speaker 1: eating in it and it turning out to be a
5:53
Speaker 1: you know, a red tulip bulb worth thousands of Amsterdam
5:58
Speaker 1: town house. And um, McKay is also from a sort
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Speaker 1: of investment perspective. You don't really get a proper picture
6:05
Speaker 1: what's going on. Um, So in some ways I was
6:08
Speaker 1: sort of writing and then obviously McCary writing here, and
6:12
Speaker 1: he covered Mainia, south Sea Bubble and the Sippy bubble,
6:15
Speaker 1: so I thought one could write a sort of arc
6:18
Speaker 1: of financial speculation up to the current day. And then
6:22
Speaker 1: in the course of writing it, the dot com bubble
6:27
Speaker 1: started to form. So that made it more pressing and
6:30
Speaker 1: in a way more interesting because you could when I
6:34
Speaker 1: see it in real time exact but also you could
6:38
Speaker 1: see these parallels. So I was writing about the British
6:43
Speaker 1: railway Mania. Railways were this revolutionary technology that was going
6:48
Speaker 1: to change the world, going to change civilization, the speed
6:51
Speaker 1: with which and roughly at the same time, remember Mary
6:54
Speaker 1: Meeker at Morgan standing right with the Internet report that
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Speaker 1: was being sold in barn some Noble in ninety six,
7:02
Speaker 1: and you know I read the book, but also in
7:05
Speaker 1: some journalism ninety in the f T saying hey, you know,
7:09
Speaker 1: this internet stuff looks a lot like the railway main
7:13
Speaker 1: near of and hadn't really started getting going. As a reminder,
7:21
Speaker 1: Alan Greenspan's infamous irrational Zuberan speech was late in December. Yeah,
7:28
Speaker 1: and it we were really just ramping up for the
7:30
Speaker 1: next couple of years. Yes, So the book comes out
7:34
Speaker 1: I think June, is that right, correct? That that's fairly
7:39
Speaker 1: auspicious time. So it came out with Faris Strauss and
7:42
Speaker 1: Cheru here, and I said to Jonathan Classy, the editor,
7:46
Speaker 1: you've got to get this out quickly, and FSD, to
7:50
Speaker 1: their credit, reduced the publication time from their normal one
7:54
Speaker 1: year to six months. You still had, you know, fifteen months. Well,
7:58
Speaker 1: let's say June, you had nine months before things really
8:02
Speaker 1: topped out. Yeah. Well, as you know, bearish messages often
8:05
Speaker 1: type early, even it was it better to have left
8:10
Speaker 1: the publication date later? I don't know. I mean you
8:12
Speaker 1: remember a bit later. Robert Stiller's Irrational Exuberance came out
8:17
Speaker 1: two thousand, right, Yeah, so I was probably a sort
8:20
Speaker 1: of eight nine months before. But it's a book. It's
8:23
Speaker 1: not you know, you're not picking the top or bottom.
8:26
Speaker 1: A book is a multi year process, and it's you know,
8:31
Speaker 1: it could have been down thirty six thousand, which came
8:34
Speaker 1: out around the same time I I were. The first
8:38
Speaker 1: thing I spoke at was a Goldman Sachs asset management conference,
8:43
Speaker 1: strange enough, in a place called Carefree Arizona, and the
8:48
Speaker 1: thirty six thousand people were there, and I was saying,
8:51
Speaker 1: this is a great bubble which is about but this
8:53
Speaker 1: would have been in late and I said, you know,
8:58
Speaker 1: we're hearing Carefree Arizona. But around the corner is a
9:02
Speaker 1: place called Truth or Consequences. And you know, perhaps we
9:06
Speaker 1: should really be meeting there. You can imagine you give
9:09
Speaker 1: a bearish message at a bullish investment conference and no
9:17
Speaker 1: one listen to you, and not a single one of
9:19
Speaker 1: the partners or anyone like that thanked me or really
9:23
Speaker 1: viewed for the talk. It was. It was just, you know,
9:25
Speaker 1: completely I felt completely blank. But actually I'm later met
9:28
Speaker 1: one of the diathetic six thousand people, Kevin has I
9:32
Speaker 1: met him. He's actually very nice fellow. And he did
9:35
Speaker 1: when I met him, let's say in two thousand and ten,
9:39
Speaker 1: he acknowledged that they've got things wrong. James Glassman and
9:44
Speaker 1: Kevin Hasset has it now not too long ago, just
9:48
Speaker 1: before the pre pandemic period. Like Lates, they kind of
9:53
Speaker 1: came out when the Alford's crossed thirty six thousand, maybe
9:56
Speaker 1: it was one um, they kind of came out and said, see,
10:00
Speaker 1: we told you. And it's like, you know, if you
10:04
Speaker 1: write a book dow a hundred thousand, well, I guess
10:07
Speaker 1: you just got to come back in sixty years say
10:10
Speaker 1: I told you so. But twenty three years later, you
10:12
Speaker 1: don't get credit for saying you could buy starts right
10:16
Speaker 1: here right before they collapse. But the other point is
10:19
Speaker 1: that when when people saying, oh well, and I think
10:23
Speaker 1: Wolf Street Journal had an editorial, that's how you know
10:28
Speaker 1: it's going to be Yeah. But then if you look
10:30
Speaker 1: at the valuation the market at the time, the market
10:33
Speaker 1: was the US market at the end of last year,
10:37
Speaker 1: So probably where on the what we call the shill
10:38
Speaker 1: Ape ratio, the cyclically adjusted price Sarnings ratio, which is
10:43
Speaker 1: the sort of most reliable long term valuation measure, it
10:46
Speaker 1: was at its highest level at the end of last
10:48
Speaker 1: year than at any point apart from the last stages
10:52
Speaker 1: of the dot com bob, higher than in n UM
10:57
Speaker 1: and higher in the nineties from markets expensive um. And
11:02
Speaker 1: you know what we also know, these of us who
11:04
Speaker 1: worked in investment, is that your future returns inversely related
11:09
Speaker 1: to the valuation level. So perhaps every time we get
11:12
Speaker 1: to thirty six thousand, you can expect a long period
11:16
Speaker 1: of decline. I mean, in the end, inflation will and
11:19
Speaker 1: accrued earnings will mean that we'll get to thirty six
11:22
Speaker 1: thousand one day on a sustained basis, but just probably
11:25
Speaker 1: not the next decade or so. That's interesting. So you
11:29
Speaker 1: write the book, it's published, a great acclaim. How did
11:32
Speaker 1: you go from that and other writings to GMR. So
11:38
Speaker 1: the quant shops, Jeremy Grant and GMO, Rob Arnard, First
11:44
Speaker 1: Quadrant and our research affiliates Clive as News a QR,
11:48
Speaker 1: a q R. They were in trouble. They were not
11:52
Speaker 1: buying into the TMT bubble. They were buying their beloved
11:56
Speaker 1: value stocks and nay one was everyone just saying they
12:00
Speaker 1: idiotic quantz and that that approach was no longer to work.
12:04
Speaker 1: So then they found that they saw this book came
12:07
Speaker 1: out saying look the you'll be right eventually, and then
12:10
Speaker 1: they looked at the dot com bubble looks a lot
12:13
Speaker 1: like these historical bubble. So all of them independently, Jeremy
12:17
Speaker 1: rob Cliff read the book and got in touch with me,
12:22
Speaker 1: and Jeremy became you know, I became more of a friend,
12:27
Speaker 1: but I didn't go straight into g m O. I
12:30
Speaker 1: then I was doing journalism for Breaking Views, which was
12:34
Speaker 1: the sort of dot com startup f x f T
12:38
Speaker 1: people now owned by Reuters, and started doing some and
12:44
Speaker 1: then I did some research for Crispin Odu, London hedge
12:48
Speaker 1: fund guy, and so Crispin and I were having lunch
12:53
Speaker 1: in late two thousand three, Crispin said. We were talking
12:57
Speaker 1: about what was going on in the markets and world,
13:01
Speaker 1: and Crispin's I said, it's really all about credit. And
13:05
Speaker 1: I said, yeah, I agree, And he said, well, why
13:08
Speaker 1: didn't I just pay you to write a report and
13:12
Speaker 1: to analyze what's going on. So I spent next sort
13:14
Speaker 1: of nine months looking at what was going on in
13:17
Speaker 1: the US and the UK and the credit boom and
13:19
Speaker 1: real estate boom and development of you know of securitized
13:24
Speaker 1: lending and sub prime so forth. And then I put
13:28
Speaker 1: that out. I said, I did that for Crispin, but
13:31
Speaker 1: I also sold it as a report, but not for
13:34
Speaker 1: wide distribution, sort of thousand dollars a shot, and that
13:38
Speaker 1: went to a sort of a few people. I gave
13:41
Speaker 1: a copy to Jeremy as a present, and then I
13:45
Speaker 1: was having lunch Jeremy and Boston. I was. I was
13:47
Speaker 1: working for Breaking Views in New York and we were
13:50
Speaker 1: we were returning to England after copy years. I was
13:53
Speaker 1: having lunch Jeremy and the In um summer two thousand seven,
13:58
Speaker 1: just after the best terms, hedge funds started blowing up,
14:01
Speaker 1: and Jeremy said, well, at least there's enough structural redundancy
14:05
Speaker 1: in the banking system, and I said, what the hell
14:09
Speaker 1: makes you think that? And what was his response? Well,
14:13
Speaker 1: he sort of he thought about it, and then I
14:18
Speaker 1: went home. I went we have a house in Cape Cord,
14:20
Speaker 1: and I went to Jeremy Cord and said, would you
14:22
Speaker 1: like to join the AST allocation team? And it's a
14:27
Speaker 1: hard thing to say no to? Why, I said non initially, um,
14:31
Speaker 1: and then went back to England. Then he called again
14:35
Speaker 1: and you know, because he's investors sometimes say lights throw
14:38
Speaker 1: job office around them, very serious. And then he called
14:41
Speaker 1: a couple of months later, and then I decided, yeah,
14:44
Speaker 1: I would take it. And Jeremy wanted a obviously I've
14:48
Speaker 1: done a lot of work on the credit boom, but
14:51
Speaker 1: he also wanted sort of and not I said, you know,
14:54
Speaker 1: to Jeremy, I'm not a quant and a lot of
14:58
Speaker 1: GMO is, so to speak, quanti filled with quants quantza
15:03
Speaker 1: and Jeremy said, I'm not a quant either, So he
15:06
Speaker 1: wanted a sort of non quantity view input into the
15:10
Speaker 1: acid allocation process. And I assume that worked out pretty well. Um, yes, yes,
15:17
Speaker 1: and they did. They did well during the financial crisis
15:22
Speaker 1: thanks to me that they were well positions. Yeah, they
15:26
Speaker 1: had you knew the ecty allocation. I mean, I didn't
15:30
Speaker 1: want to blame my own trumpet too much because most
15:33
Speaker 1: of the positions were in place. The quality funds, you know,
15:39
Speaker 1: which more defensive and less leveraged and low allocation to
15:46
Speaker 1: UM a relatively low allotaication to equities, and then the
15:50
Speaker 1: hedge funds, you know, sort of long short positions have
15:52
Speaker 1: benefited in the financial crisis. My only real contribution that
15:57
Speaker 1: year was right at the beginning when I the first
16:00
Speaker 1: week I joined GMO, I had written a piece in
16:04
Speaker 1: an FT column I had at the time saying, don't
16:07
Speaker 1: believe this story that emerging markets can decouple from the
16:11
Speaker 1: rest of the world, and UM Jim was still sitting
16:16
Speaker 1: on a massive emerging market the position in the asked
16:21
Speaker 1: allocation team, and I tried to sort of chip away
16:26
Speaker 1: that with Jeremy and not having much success. And then
16:29
Speaker 1: a the c ls A Asian Economists called Jim Walker.
16:34
Speaker 1: I didn't I ever came across him. He sort of
16:36
Speaker 1: gottsman with a sort of voice like a Presbyterian minister.
16:41
Speaker 1: He was also on the sort of anti decoupling story,
16:46
Speaker 1: and he he was barish on him. And I dragged
16:48
Speaker 1: Jeremy to Jim Walker, and he said that this scotsman
16:54
Speaker 1: with his gloomy voice was more effective at persuading in
16:57
Speaker 1: than I, with my language English drew. And then Jeremy
17:01
Speaker 1: went out and sold all the emerging positions several billion dollars,
17:06
Speaker 1: and within I didn't know two months, he brought them
17:10
Speaker 1: back at half the price. So you earn your keeper,
17:13
Speaker 1: I mean only by I think it was Jim Walker
17:15
Speaker 1: who did the thing, but at least I got Jim. Yeah,
17:20
Speaker 1: and that sort of I suppose I used to say
17:22
Speaker 1: that sort of paid my way while I was there.
17:25
Speaker 1: Absolutely fascinating. So let's talk about what's with this quote
17:29
Speaker 1: that I like from a nineteenth century trader, James Keene.
17:35
Speaker 1: All life is speculation. The spirit of speculation is born
17:39
Speaker 1: with men. Tell us about that, huh, well, I mean
17:44
Speaker 1: the act of speculation is to look out into the future.
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Speaker 1: The words speculator is um Latin and was a Roman
17:56
Speaker 1: military guard whose job was to look out and see
17:59
Speaker 1: whether the speculate on dangers with kind of out of
18:03
Speaker 1: the hill um. And particularly when you get into what
18:07
Speaker 1: financial markets, a capitalist world, you're always trying to anticipate
18:14
Speaker 1: what's going on. Since in that sense you know, even
18:17
Speaker 1: people who describe themselves as investors are also necessarily speculators.
18:26
Speaker 1: But when we talk about speculation, we often talk about
18:31
Speaker 1: sort of unfounded or irrational or dangerous gambling type tendencies.
18:39
Speaker 1: So that leads me to the question, what is the
18:42
Speaker 1: actual difference between speculation and investing? Clearly they're both a
18:48
Speaker 1: gamble on the future. Is it about the amount of
18:52
Speaker 1: risk taken and the psychology of the person involved, or
18:57
Speaker 1: is it something a little more quantitative? You've read Sweds
19:01
Speaker 1: where are all the customers yachts? And you remember there
19:04
Speaker 1: he says, the difference between speculation and investment is that
19:10
Speaker 1: speculation is an attempt, normally unsuccessful to turn a little
19:16
Speaker 1: amount of money into a lot, whereas an investment as
19:19
Speaker 1: an attempt normally successful to make sure a lot of
19:22
Speaker 1: money doesn't doesn't become a little French wed? Right? Is
19:26
Speaker 1: that a fred ready right? So um embedded in that
19:30
Speaker 1: is the idea is that the speculator is going to
19:33
Speaker 1: be taking more risk and and not concerned with preservation
19:37
Speaker 1: of capital all the way an investor might be. Is
19:39
Speaker 1: that so the speculator, now called the book devil, take
19:43
Speaker 1: the highmost, And that is really reflection of the you know,
19:48
Speaker 1: what they call the greater full theory of investment is
19:52
Speaker 1: are by a shibu in new coin or a n
19:56
Speaker 1: f T and sell it to you Barry when bike,
20:00
Speaker 1: because I think Barry is a bigger sucker than I am,
20:03
Speaker 1: and that he'll take it off me from a bigger prices.
20:05
Speaker 1: That's a sort of Pondsi scheme or pyramid chain letter
20:10
Speaker 1: dynamic to a speculative bubble. And the other aspect of
20:16
Speaker 1: the speculator is he often gets lured into envisioning how
20:23
Speaker 1: the world will be and gets drawn into these new technologies,
20:28
Speaker 1: you know, whether it's you know, radios or cars in
20:32
Speaker 1: the twenties, or internets, stocks in thees and various types
20:40
Speaker 1: of you know, we'll think of all those SPACs and
20:42
Speaker 1: rotric vehicles of the last couple of years. And the
20:47
Speaker 1: speculator the trouble is that they look into the future
20:52
Speaker 1: and they draw they imagine the future is actually much
20:57
Speaker 1: closer than it turns out to be. And so you
21:00
Speaker 1: could say that there operating with a sort of hyperbolically
21:04
Speaker 1: discounting the future, or just say they have two low
21:08
Speaker 1: discount rates, so they're drawing everything forward. And even with
21:12
Speaker 1: the Internet, which as we know, established and change in
21:14
Speaker 1: one's life within very short period of time. Even then,
21:19
Speaker 1: you didn't stop the NASDAC coming down by more than cent,
21:23
Speaker 1: a lot of these dot com businesses flaming out. But
21:28
Speaker 1: by the way everybody talks about the Internet happening so quickly,
21:32
Speaker 1: it began in THEES as a way to survive a
21:37
Speaker 1: nuclear attack and be able to launch the retaliatory codes
21:41
Speaker 1: through DARPA. So it took decades to be commercialized, in
21:46
Speaker 1: more decades to become more broadly adopted. So if you
21:51
Speaker 1: were an Internet investor in the late eighties or early nineties,
21:56
Speaker 1: most of those companies didn't do well. But I didn't
22:00
Speaker 1: cite and devil take the homemost was some research from
22:04
Speaker 1: a guy I think he was at Bell Labs at
22:08
Speaker 1: the time called Andrew Odslico, who is now at University Minnesota,
22:13
Speaker 1: and he and a colleague worked out in that the
22:20
Speaker 1: projections for Internet traffic growth, that that the likes of
22:26
Speaker 1: world Com, the big telecoms company, was saying that the
22:30
Speaker 1: Internet traffic growth was doubling every couple of months, and
22:33
Speaker 1: Odico found out that actually the rate of growth was
22:37
Speaker 1: slower than that. It's still doubling, but I think once
22:40
Speaker 1: every six months or so, and the result was getting
22:44
Speaker 1: in the mania. People get over fixated on growth, they
22:47
Speaker 1: have growth projections, over optimistic growth projections. Then you get
22:52
Speaker 1: the over investment, speculative companies raising money the overinvestment. And
22:57
Speaker 1: then if you remember, after the dot com bust, you
23:00
Speaker 1: had these miles and miles of so called dark fiber
23:03
Speaker 1: because you had excess capacity uh in fibotic cable, which
23:09
Speaker 1: I mean I saw commonly cited about excess capacity, and
23:13
Speaker 1: that ran for several years, a bit like the sort
23:15
Speaker 1: of if you think about it, the excess US home
23:19
Speaker 1: building during the real estate bubble, which took you know,
23:23
Speaker 1: when they're more than I think it really took from
23:25
Speaker 1: two thousand and six to two tho twelve before that
23:30
Speaker 1: excess build had really just worked his way out of
23:32
Speaker 1: the system. And then the hangover from that is we
23:34
Speaker 1: were underbuilding houses for the rest of the decade because
23:38
Speaker 1: once bit and twice shy and then when suddenly there
23:41
Speaker 1: was demand for houses, there's no inventory. There's a shortage. Yeah,
23:46
Speaker 1: that's I mean, given now what we're going to get
23:49
Speaker 1: around to later now that thirst year mortgage rate to
23:52
Speaker 1: stubble I think the Americans are going to be grateful
23:56
Speaker 1: that they didn't do that much building in the last
24:00
Speaker 1: few years, because otherwise we would really have a replay
24:03
Speaker 1: of two thousand seven eight. That's really quite fascinating. So
24:06
Speaker 1: I mentioned earlier the book comes out in June, pretty
24:11
Speaker 1: auspicious timing, but it raises the question, with the publication
24:15
Speaker 1: of your new book, how often does history repeat itself?
24:19
Speaker 1: Are all of these bubbles and manias and collapses? Is
24:24
Speaker 1: it pretty much the same playbook that just substitute internet
24:30
Speaker 1: for railroads, substitute houses for telegrams? Do do all these
24:36
Speaker 1: things just follow the same sort of cycle just forward
24:40
Speaker 1: in history? Well, Jim Grant has a comment that, as
24:44
Speaker 1: he says, well with stepping on the same rake. And
24:49
Speaker 1: I have a friend of mine financial structures. It's in
24:53
Speaker 1: Edinburgh called Russell Napier runs. Oh, I know the name
24:56
Speaker 1: he wrote a book on. He wrote a book called
24:59
Speaker 1: The Anatomy Are the Bear That's right, the excellent book.
25:03
Speaker 1: He has a financial library in Edinburgh called the Library
25:05
Speaker 1: of Mistakes. And the idea is that you can learn
25:09
Speaker 1: everything you need to know in finance for an investment
25:12
Speaker 1: career by actually working out the mistakes people have made,
25:15
Speaker 1: and that does seem to be yes, a sort of
25:18
Speaker 1: similar pattern, although I should add that you know, it
25:23
Speaker 1: certainly doesn't help you on the short side betting against
25:26
Speaker 1: spective bubbles. When I was at GMO, we colleague and
25:30
Speaker 1: I ran a sort of quantitative analysis of aspective bubbles
25:34
Speaker 1: and we we crunch released my assistant did ten thousand
25:38
Speaker 1: years of data of various commodity markets and real estate
25:43
Speaker 1: markets and stock markets around the world. And what we
25:47
Speaker 1: found is that bubbles are indeterminate in length and they
25:54
Speaker 1: also intertermined as to how high they can go. So
26:00
Speaker 1: if you don't know how long the bubble is going
26:02
Speaker 1: to last and how high it's going to to rise,
26:07
Speaker 1: then you might be able to identify a bubble. And
26:09
Speaker 1: I don't think that's frankly that hard, and I think
26:13
Speaker 1: that's useful. If you're just you know, a long only investor,
26:15
Speaker 1: you can stay out of the bubble market. But the
26:18
Speaker 1: timing on the downside is really difficult. Yeah, and think
26:21
Speaker 1: what we've been you know, look at the last decade
26:23
Speaker 1: we had. You know, people were talking about dot com
26:28
Speaker 1: two point zero back in if remember and you know,
26:33
Speaker 1: I actually one of my last projects that gm A
26:35
Speaker 1: was to do a sort of to look at what
26:38
Speaker 1: was going on from economic sentiment perspective, looking at various
26:42
Speaker 1: different measures in a bull bear ratio, amount of margin,
26:46
Speaker 1: loans and the system. I can't quite remember what they were,
26:49
Speaker 1: but only I put them all together and it looked,
26:51
Speaker 1: you know, that speculative sentiment was very inflated in twenty
26:56
Speaker 1: and actually I presented this to Jimmy Clans and Jeremy
26:59
Speaker 1: got up had said, I think the boom mark it
27:01
Speaker 1: has lot good to run. And the other day he
27:04
Speaker 1: was tweaking my names by saying, you know, reminding me
27:08
Speaker 1: that that I had been barished and that he'd been
27:11
Speaker 1: a relatively bullish But Katie knew there was another seven
27:15
Speaker 1: years and it got pretty um. What happened in was
27:20
Speaker 1: nothing like you know, it was off. I mean, by
27:24
Speaker 1: the way I have. My partner, Michael Batnick wrote a
27:27
Speaker 1: book that your colleague Russell Napier would really appreciate, called
27:33
Speaker 1: Big Mistakes, The Best Investor and Their Worst Investments, And
27:38
Speaker 1: he went through the history of George Soros and Warren
27:41
Speaker 1: Buffett and all these you know, legendary investors and their
27:46
Speaker 1: giant mistakes and what they learned from them. I'll send
27:49
Speaker 1: you guys a copy. You'll appreciate it. And that definitely
27:52
Speaker 1: belongs to the Library of Mistakes. Yes, for sure, it's
27:55
Speaker 1: literally exactly what he was discussing. So again we see
28:00
Speaker 1: auspicious timing on your part to put out a book
28:03
Speaker 1: on interest rates in the middle of the most rapid
28:08
Speaker 1: increase in inflation since you know, the nineteen eighties, the
28:13
Speaker 1: fastest rising set of rates from central banks. I think
28:17
Speaker 1: you could say, ever from zero to three and a
28:19
Speaker 1: half on the way to four or four and a
28:21
Speaker 1: half percent. Your timing is quite auspicious. When did you
28:25
Speaker 1: first start thinking about maybe it's time to write a
28:28
Speaker 1: book about interest rates? Well, quite a long time ago,
28:33
Speaker 1: I think I. I got interested in the whole subject
28:36
Speaker 1: about a decade ago, and I felt when I did
28:39
Speaker 1: this work on the credit boom before the financial crisis,
28:43
Speaker 1: I belonged to the school the thought that when the
28:47
Speaker 1: Greenspan Fed took us FED funds right down to one
28:50
Speaker 1: per cent after the dot com bust, that ignited in
28:53
Speaker 1: my mind the Rita's tate bubble obviously a giant factor.
28:57
Speaker 1: Has anyone actually made a case to say no, no
29:00
Speaker 1: keeping rates under two percent for three years and under
29:04
Speaker 1: one percent for a year had no impact on real estate.
29:08
Speaker 1: I mean it's not the only factor, but it's pretty
29:10
Speaker 1: hard to say, oh no, not relevant. Whether you know
29:13
Speaker 1: the FED under Nobel Lauriate Banankey, don't we all know
29:19
Speaker 1: that's nonsense? They yeah. I mean I think I write
29:22
Speaker 1: about that in this new book, where money flows off
29:27
Speaker 1: to the emerging markets when dollar rates are low, and
29:30
Speaker 1: then it comes back because these guys they're not saving,
29:35
Speaker 1: they're actually just buying long dollars and they're buying them
29:40
Speaker 1: to manipulate their currency in China most of all. Um.
29:43
Speaker 1: But then you know, I suppose difference between Banankee me
29:46
Speaker 1: is that blanc has a sort of abstract view of economics.
29:50
Speaker 1: Was I trying to look at what's going on in
29:52
Speaker 1: the real financial world. Although to be fair for an academic,
29:56
Speaker 1: he actually got to put his theories into practice, is
30:00
Speaker 1: fed yea yes, And that's um problematum. I mean you
30:06
Speaker 1: you remember it was in Milton Friedman's birthday and right
30:12
Speaker 1: when it pass two Freedman's ninety birthday party in the FED,
30:17
Speaker 1: Bananci says, you know, facetiously to Freedman, apologizing for the
30:22
Speaker 1: Great Depression on behalf of the Federal Reserve and ensuring
30:26
Speaker 1: that it won't happen again. And then, you know, five
30:28
Speaker 1: years later we get melt down. You know that Bananchi
30:32
Speaker 1: in the Fed had, in particular Bananche you know, had
30:37
Speaker 1: no inkling of what was about to happen. And then
30:41
Speaker 1: we didn't get a great depression, but we then got
30:45
Speaker 1: into this era of extremely low interest rates and of
30:51
Speaker 1: quantitative easing, and that was associated with a period of
30:56
Speaker 1: what they call secular stagnation or extremely low growth, and
31:01
Speaker 1: we never really got out of that until the pandemic.
31:05
Speaker 1: Well we didn't get out. I mean, the pandemic was
31:07
Speaker 1: just the last gasp when they went back to quantity
31:10
Speaker 1: of easing and they really became into the House of Lords.
31:15
Speaker 1: British House of Lords rate a report on quantity easing lastly,
31:19
Speaker 1: which they called a dangerous addiction, and Bnanche introduced the
31:26
Speaker 1: this financial dope and I went off to work for
31:32
Speaker 1: hedge funds or whatever he does nowadays. He's a consultant.
31:36
Speaker 1: He's a consultant, right, they consult So let's bring us
31:40
Speaker 1: back to the book, which is really quite fascinating. You
31:43
Speaker 1: start in Babylon with the origins of interest, and you
31:46
Speaker 1: go straight through the most recent boom and bust. How
31:50
Speaker 1: did the concept of paying interest on money begin? Well,
31:57
Speaker 1: what we know is an interest is a very old
32:00
Speaker 1: phenomenon five millennia at least before Babela. I mean, well,
32:06
Speaker 1: if you look at the words in in the ancient languages,
32:10
Speaker 1: including Assyrian and Greek and Latin and Egyptian, all the
32:16
Speaker 1: words for for interest a link to calves and lambs
32:22
Speaker 1: and kid goats. So there is this sense that interest
32:28
Speaker 1: must have existed in prehistoric societies. And the idea was,
32:33
Speaker 1: you know, I'll lend you my cow, but a year later,
32:39
Speaker 1: I want the cow and a calf back, and you
32:41
Speaker 1: can keep if it has you can keep the milk.
32:45
Speaker 1: Now you can keep the extra cars. And actually, as
32:47
Speaker 1: I sit in the book, you know the Americans were
32:50
Speaker 1: still in at the beginning of the twentieth century. They
32:53
Speaker 1: out in the Midwest or whatever. People were still lending
32:57
Speaker 1: livestock and demanding interest payments in the offspring of the livestock.
33:03
Speaker 1: That I think is the origin. And then, as I say,
33:06
Speaker 1: in ancient Mesopotamia, these which had large cities and trading
33:11
Speaker 1: quite in a way, quite capitalistic and you can see
33:14
Speaker 1: that interest was used on loans, contains a sort of
33:19
Speaker 1: risk factor that people were you were using borrowing and
33:23
Speaker 1: paying interest to finance shipping ventures, to finance local local
33:29
Speaker 1: businesses and trade crafts, and also you know, for for
33:33
Speaker 1: financing the purchase of houses. So you see that in
33:37
Speaker 1: this sort of proto what you might call a proto
33:39
Speaker 1: capitalistic society, interest is serving a number of different important functions.
33:46
Speaker 1: And my my reason for going back to that point
33:51
Speaker 1: is to is to try and underline how how important
33:56
Speaker 1: the function of interest is um if the the Yale
34:01
Speaker 1: historian William Gertzman says that the invention of interest is
34:05
Speaker 1: the most important finds invention in the history of finance
34:09
Speaker 1: because it allows people to transact across time. And my thought,
34:16
Speaker 1: you know, when I was doing this work, is we're
34:18
Speaker 1: at a moment of zero interest and of negative interest
34:24
Speaker 1: in many countries, and that the zero negative interests with
34:29
Speaker 1: the sort of second most important development in the history
34:32
Speaker 1: of finance and possibly the most to my mind, worrying development.
34:38
Speaker 1: We're going to talk more about negative interest rates in
34:41
Speaker 1: a moment, but I have to reference the title of
34:45
Speaker 1: the book The Price of Time. Interest and interest rates
34:50
Speaker 1: are all about being able to engage in commercial transactions
34:55
Speaker 1: over time. Essentially, that's what interest rates allow. So time
35:01
Speaker 1: has Ben Franklin says, is money. Time is valuable. Time
35:06
Speaker 1: is our most precious possession, and we must use time well.
35:15
Speaker 1: All our economic actions are taking a place across time,
35:20
Speaker 1: and we need to sort of coordinate those actions. How
35:23
Speaker 1: much are we going to save, how much we're going
35:26
Speaker 1: to invest, what type of investments we're going to make,
35:30
Speaker 1: what valuations will be placed upon the house that we're purchasing,
35:34
Speaker 1: whether you should we invest in this country, how much
35:37
Speaker 1: risk should we take? All all these factors have an
35:41
Speaker 1: interest rate embedded in them, and um. The American economist
35:47
Speaker 1: Irving Fisher says that interest is an omnipresent phenomenon. And really,
35:55
Speaker 1: what I'm trying to do with this book is to
35:58
Speaker 1: take this oldest of financial institutions, this omnipresent phenomenon that
36:06
Speaker 1: to my mind, had been neglected and by modern economists
36:11
Speaker 1: who who really just see interest as a lever to
36:14
Speaker 1: control inflation and ignore these other functions. And thrust of
36:21
Speaker 1: the argument of the second half of the book is
36:24
Speaker 1: that the when the central banks focused only on using
36:28
Speaker 1: the interest to prevent the price level from falling after
36:33
Speaker 1: the global financial crisis. They neglected the impact the saving
36:38
Speaker 1: has on valuations, on the allocation of capital, on savings
36:43
Speaker 1: and pensions, on the amount of risk taking, and on
36:48
Speaker 1: capital flows and the direction of capital flows. And in
36:52
Speaker 1: each of these other areas we see any chronicle in
36:56
Speaker 1: the book problems building up. So if you take, for instance, valuation,
37:03
Speaker 1: we just discuss you discussed earlier how valuation of the
37:08
Speaker 1: U S stock market was very high last year. But
37:10
Speaker 1: aggregate household wealth that the Fed actually gathers the data
37:15
Speaker 1: six times GDP against an average of for in a
37:20
Speaker 1: half times GDP. And what you can see if you
37:23
Speaker 1: chart them, and I showed chart in the book, is
37:25
Speaker 1: I share the household wealth with the Fed funds rate,
37:28
Speaker 1: and each time the Fed funds rate goes down, the
37:31
Speaker 1: household wealth sort of pushes higher and higher and higher.
37:34
Speaker 1: So that's obviously a source of instability because then when
37:39
Speaker 1: you raise rates, hey press to the markets come down
37:43
Speaker 1: in tandem, where the bond stocks, everything bubble gives way
37:49
Speaker 1: to the everything bust. So clearly, the cover of the
37:53
Speaker 1: book has an hour glass showing time slowly seeping away.
38:00
Speaker 1: How important is time to those of us working in
38:05
Speaker 1: finance and engaging in transactions where capital is put it
38:11
Speaker 1: at risk. Well, I mean it's vitally import First, I'd
38:14
Speaker 1: say time is important to all human beings. And what's
38:19
Speaker 1: called time preference, people's tendency to prefer the present to
38:25
Speaker 1: the future, to disc what we call discount the future.
38:29
Speaker 1: It appears to be a universal phenomenon, just people. Some
38:33
Speaker 1: people are. Another way to take talking about is impatience.
38:37
Speaker 1: Some people are more impatient than others. That say, everyone
38:41
Speaker 1: has their own um internal interest or discount rate in finance.
38:48
Speaker 1: All finance is about transacting across times, load lending, investing,
38:54
Speaker 1: and so forth. It's it's absolutely essential. There's no active
39:00
Speaker 1: in finance that doesn't involve an interest rate. And I mean,
39:03
Speaker 1: I cite a description of you know, the failure of
39:06
Speaker 1: the Soviet economy. Even if you have a Soviet planned economy,
39:10
Speaker 1: you need to allocate resources across time, and if you're
39:15
Speaker 1: not guided by the interest rates, which the Soviets weren't,
39:20
Speaker 1: you're going to have these misallocations of capital that eventually
39:24
Speaker 1: clog up the system. So let's talk about that. I
39:26
Speaker 1: love this quote. Interest rates are the most important signal
39:30
Speaker 1: in a market based economy and the universal price affecting
39:35
Speaker 1: all others. You're suggesting because that signal was missing from
39:39
Speaker 1: the Soviet economy, it eventually crashed and burnt, Yeah, among
39:44
Speaker 1: other reasons. What I'm saying. What I'm saying is that
39:48
Speaker 1: every suscept because it's innate human, because you know, all
39:52
Speaker 1: humans are constrained by their mortality. All actions take place,
39:55
Speaker 1: economic actions take place across time that even if you
39:59
Speaker 1: didn't have a capitalist or market economy, something would need
40:03
Speaker 1: to rational to direct your resources or direct your behavior
40:07
Speaker 1: across time. In a way, it's more explicit in a
40:10
Speaker 1: capitalist economy because you're paying a certain rate of interest
40:14
Speaker 1: on your loan, or you have a certain required hurdle
40:18
Speaker 1: rate on your investment, or you're applying a certain discount
40:23
Speaker 1: in the valuation of an asset. So in that sense,
40:27
Speaker 1: you know the time value of money. It is this
40:29
Speaker 1: sort of first thing one learns in finance. So prior
40:33
Speaker 1: to the financial crisis, I never thought about zero interest rates,
40:39
Speaker 1: and I certainly never thought about negative interest rates. That
40:43
Speaker 1: the decade that followed that seem to have create all
40:48
Speaker 1: of these negative rates. How do they affect economies? How
40:51
Speaker 1: do they affect trade, and how do they affect the consumer?
40:55
Speaker 1: So the zero rate leads to these build ups of
40:59
Speaker 1: financial instability and at the same time contributes to a
41:06
Speaker 1: misallocation of capital. But you're not getting any yield on
41:10
Speaker 1: fixed income, so you tend to go to more speculative
41:13
Speaker 1: Exactly the whole TEENA. There is no alternal of exact.
41:18
Speaker 1: I cite you know the the English nineteent century finance
41:22
Speaker 1: wright Award Badget where he says John bulls, you know,
41:25
Speaker 1: the eponymous englishman John Bull can stand many things, but
41:28
Speaker 1: he cannot stand two percent. And you know when people,
41:32
Speaker 1: you know, we talked about yield chasing or or carry
41:35
Speaker 1: trading when rates very low with the negative rates. Do
41:39
Speaker 1: you remember the argument negative rates was that they were
41:43
Speaker 1: going to turbo charge the economist. This was a phrase
41:46
Speaker 1: who was by Ken Rogoff, the Harvard economist who read
41:49
Speaker 1: a book called The Curse of Cash in twenty I
41:52
Speaker 1: think twenties sixteen, where he argued, you know that you
41:56
Speaker 1: need to get rid of cash so that we could
41:57
Speaker 1: have properly negative rates. Well, the way I see negative
42:01
Speaker 1: rate is it's it's a tax on capital which is
42:04
Speaker 1: instituted by an unelected bank central bank or policy maker
42:10
Speaker 1: without anyone, without anyone voting for it. These people who
42:15
Speaker 1: wanted us all to have accounts with the central bank,
42:17
Speaker 1: with the central bank, you know, having an authority just
42:20
Speaker 1: takes much of our capital away. It seemed to undermine
42:23
Speaker 1: property rights. But leaving aside that, where we've seen in
42:27
Speaker 1: place like Japan and Europe, there was no turbot charging
42:32
Speaker 1: of the economies. In fact, as you know, banks can't
42:36
Speaker 1: make money at negative rates and they are reluctant to lend.
42:41
Speaker 1: This is the point that Bill Gross, pimco's formers or
42:44
Speaker 1: bond king, was making very early on in the era
42:48
Speaker 1: of zero rates. So you know, he says it's sort
42:50
Speaker 1: of created as it was like sort of you leukemia
42:53
Speaker 1: in the financial system, the negative rates that destroyed the
42:56
Speaker 1: vitality of the banking system. But he said, you know,
42:59
Speaker 1: he says, um, you need positive carry for the financial
43:03
Speaker 1: system to carry on making leans. Now negative rates makes
43:07
Speaker 1: thing a lot worse. I mean, what you saw when
43:09
Speaker 1: the Japanese went over to negative rates in you know,
43:13
Speaker 1: there were articles in the newspaper about Japanese, you know,
43:16
Speaker 1: buying safes to store their money. And one of the
43:19
Speaker 1: large German banks also announced that it was going to
43:22
Speaker 1: be storing cash, and then you get these absurdities. So
43:26
Speaker 1: the note, I don't think it's impetus to credit growth,
43:29
Speaker 1: but you have these absurdities like Danish home buyers actually
43:34
Speaker 1: receiving payments on their mortgages, so you're having a transfer
43:38
Speaker 1: of wealth from savers to borrowers. And then which makes
43:45
Speaker 1: no sense. No, no, I mean that we've been living
43:47
Speaker 1: in Alice in Wonderland world, you know, I mean, I
43:50
Speaker 1: think you know it's it's just a Lewis Carroll world.
43:53
Speaker 1: And nobody. I mentioned somewhere that long dated Japanese bonds
43:57
Speaker 1: at negative yields, that some jab his life insurance guy
44:01
Speaker 1: who says that yields state matter, and people were buy
44:07
Speaker 1: buying long dated bonds a negative yields in anticipation of
44:11
Speaker 1: them going along of yields getting lower, and therefore you
44:15
Speaker 1: could get capital gains from bonds with negative yields, and
44:20
Speaker 1: if you wanted income, you had to buy equities. How
44:23
Speaker 1: is that any different than the people buying, you know,
44:26
Speaker 1: some of the coins you mentioned, or the n f
44:28
Speaker 1: T s. You're buying a negative yielding instrument. I'll give
44:31
Speaker 1: you a hundred dollars for a century and in a
44:34
Speaker 1: hundred years give me back ninety eight dollars. How is
44:37
Speaker 1: that any different than buying an n F Take well,
44:41
Speaker 1: I mean you're right, other than you get yours. I
44:44
Speaker 1: mean you've got the credit of the government. But look
44:45
Speaker 1: look at what happened in the guilts market recently, okay
44:49
Speaker 1: quite recently. So you had these long dated index link guilts,
44:55
Speaker 1: the one I side linker, so they equipment of a
44:59
Speaker 1: fifty year by and here in the US, but actually
45:02
Speaker 1: trading on a negative yield at last year of two
45:06
Speaker 1: and a half percent. Been trading down for a long
45:09
Speaker 1: time this year that bond has lost its value at
45:15
Speaker 1: the trough before the Bank of England intervened to try
45:18
Speaker 1: and sort of stop the guilt's market completely blaying apart.
45:22
Speaker 1: It was it was yielding to redemption one point one.
45:28
Speaker 1: You blew of capital to end up with an asset
45:33
Speaker 1: with an expected real return held to redemption of just
45:37
Speaker 1: over one per cent doesn't sound like a great trade
45:40
Speaker 1: to me. It was a trade that, as you know,
45:43
Speaker 1: the UK pension funds engaged in to the tune of
45:48
Speaker 1: hundreds of billions of of pounds. And to make things
45:52
Speaker 1: more interesting. They use leverage too, So there there is
45:56
Speaker 1: a sort of really a story for our times of
46:00
Speaker 1: pension funds induced to because of the low interest rates
46:04
Speaker 1: and because that made you know, affected there the present
46:07
Speaker 1: value of their liability says your discount rate. Again, they're
46:11
Speaker 1: forced to go in and do sort of water badge
46:13
Speaker 1: that type stupid things of leveraging up these long dated
46:17
Speaker 1: bonds while at the same time owning stuff that you
46:20
Speaker 1: know would have had a higher return, but then getting
46:22
Speaker 1: into a mess. So let's talk about what's been going
46:25
Speaker 1: on around the world, and here in the United States
46:28
Speaker 1: we have inflation at its highest level in forty years.
46:33
Speaker 1: How much blame do you assign to central banks for
46:37
Speaker 1: the current circumstances. How significant were those quantitative easing and
46:44
Speaker 1: zero interest rate policies to the current spade of inflation?
46:51
Speaker 1: What do you think? I mean, pretty significant. I think
46:52
Speaker 1: it's one of many things, but obviously a very big one. Yeah,
46:56
Speaker 1: I mean, the inflation is complex phenomenon, right, But we
47:00
Speaker 1: had massive fiscal stimulus, then the closing and reopening, but
47:06
Speaker 1: within the long standing environment of zero for a decade. Yes,
47:10
Speaker 1: so I think you know mentioned quantity easing becoming a
47:13
Speaker 1: dangerous addiction. Initially, the quantity of easing after financial crisis
47:19
Speaker 1: was a time where the sort of financial system was
47:22
Speaker 1: de leveraging, the money wasn't really making its way to
47:26
Speaker 1: main street. Beside main street was high unemployment and so
47:30
Speaker 1: and so forth. Um, it's different when with the lockdowns
47:36
Speaker 1: and not just the US, Britain and around the world,
47:39
Speaker 1: around the world, you had you know, I think eight
47:41
Speaker 1: trillion dollars of central bank quee or balance cheat expansion
47:46
Speaker 1: and roughly dollar for dollar increase in government spending, right,
47:52
Speaker 1: what's it? And then you know, obviously you people were
47:55
Speaker 1: just staying at home with their stimmy checks and a
48:00
Speaker 1: they were going out and you know, buy meme stocks,
48:04
Speaker 1: having you know, looked up on wolf Street bets which
48:08
Speaker 1: stocks to be targeting and and borrowing at two from
48:13
Speaker 1: robin Hood. And so here's the question. If artificially low
48:16
Speaker 1: rates helped get us into this mess, will raising rates
48:21
Speaker 1: help get us out of this mess? Now? I'll tell
48:25
Speaker 1: you what I mean. The thrust of the book is
48:28
Speaker 1: that you've got yourself into a paris position. Too much debt,
48:34
Speaker 1: too much risk taking, over inflated valuations, too little real savings,
48:42
Speaker 1: too much financial engineering, and too little real investment, and
48:48
Speaker 1: once you're in that position, it's very difficult to get
48:52
Speaker 1: out of it. Durber. After the financial crisis, that was
48:56
Speaker 1: commonly used this phrase kicking the can. And you know,
49:00
Speaker 1: really for the last you know, you could save. The
49:02
Speaker 1: last twenty five years or so, we've been kicking the can.
49:07
Speaker 1: And now we've reached the point where we have in platient,
49:11
Speaker 1: as we say, and it's more difficult for the central
49:15
Speaker 1: banks to come in and kick the can any further
49:19
Speaker 1: because you know they're in danger of losing credibility. The
49:22
Speaker 1: can is kicking back. Can got bigger. It's like a
49:25
Speaker 1: sort of quantum can. Each time you kick it gets
49:28
Speaker 1: bigger and bigger and bigger, and they were now sort
49:30
Speaker 1: of sitting under a massive can. So I want to
49:33
Speaker 1: roll back to the financial crisis because I suspect I'm
49:38
Speaker 1: reading between the lines a little bit, or maybe not
49:40
Speaker 1: so much. When we rescued a lot of the banks
49:44
Speaker 1: and then kept rates very low for the next seven
49:48
Speaker 1: eight years, we ignored some of the things we had
49:52
Speaker 1: learned previously. When we go back to Walter Badgett, shouldn't
49:59
Speaker 1: we have taking these banks and allowed them to go
50:02
Speaker 1: to that lovely building with the columns downtown, the bankruptcy court,
50:07
Speaker 1: and allow all these banks to you know, wipe out
50:11
Speaker 1: the equity holders, give the bond holders a haircut, and
50:15
Speaker 1: clean up their balance sheets and send them back into
50:17
Speaker 1: the world revitalized like the zombie banks. We kept on
50:21
Speaker 1: life support of low rates. Wasn't fixing one problem, eventually
50:26
Speaker 1: setting us up for the next problem. I think, well, uh,
50:30
Speaker 1: you know, the policymakers say, and central banks they say,
50:34
Speaker 1: there was no alternative, and if you criticize us, you
50:37
Speaker 1: were wishing another great depression. But in fact, actually I said,
50:42
Speaker 1: right towards the end of the book, the case of
50:45
Speaker 1: Iceland as a counter of factual, because what happened in Iceland,
50:49
Speaker 1: Icelanders went completely crazy. Yes, and you remember that that debt,
50:55
Speaker 1: with foreign debt with ten times GDP, that current gut
50:58
Speaker 1: deficit to GDP. You know, they've completely given up fishing.
51:03
Speaker 1: They'd all turn into bankers and then it blew. But
51:06
Speaker 1: Iceland was not part of the EU say, no one
51:08
Speaker 1: was really coming to their rescue. The FED didn't offer
51:12
Speaker 1: you credit lines, dollar swaps to the Icelandic Central Bank,
51:17
Speaker 1: and so poor Iceland was just left on its own
51:20
Speaker 1: And what's interesting is they sort of followed that course
51:24
Speaker 1: that you described, and the big banks went past. They
51:26
Speaker 1: put into receivership. Domestic depositors were protected the mortgage borrowers
51:33
Speaker 1: who interest rates went up, but mortgage borrowers were protected
51:37
Speaker 1: by giving taxation relief on their interest payments. And the
51:40
Speaker 1: foreign debt was defaulted on and currency decline. There were
51:46
Speaker 1: capital controls, but after a few years capital controls were
51:50
Speaker 1: taken off. And this is what's most interesting, is that
51:54
Speaker 1: the Icelandic economy transformed away from finance to war wards
52:00
Speaker 1: tourism and technology as well. So you had this Schumpeterian
52:06
Speaker 1: creative destruction. The government debt relative to g d P
52:12
Speaker 1: came down, the economy within six or seven years, Iceland
52:18
Speaker 1: was growing, had recovered all its losses and was growing
52:22
Speaker 1: faster than any other European country. So making the creditors
52:28
Speaker 1: take a haircut, forcing them take out that goes back
52:31
Speaker 1: to these ancient Mesopotamian practices of of debt jubilees. That's
52:37
Speaker 1: that they originated the debt jubilee, the giving up the
52:40
Speaker 1: writing off of debt, which also the Egyptians and the
52:44
Speaker 1: Israelites did so, and that's seen as a sort of
52:47
Speaker 1: left wing idea, but I don't think it. Essay has
52:49
Speaker 1: to be if you've made loans that are bad loans,
52:54
Speaker 1: then it's right that the creditor should take a haircut.
52:58
Speaker 1: And hence bankruptcy courts exist for a reason, right they shouldn't.
53:02
Speaker 1: They're not just there to show off the architecture of
53:04
Speaker 1: those columns. I never, as I mentioned in the book,
53:08
Speaker 1: the insolvency rates was sort of absurdly lit. We talked
53:12
Speaker 1: about the Great Depression. The new headlines were, oh, you know,
53:15
Speaker 1: the worst financial the worst crisis, it's the Great Depression.
53:19
Speaker 1: It was called the Great Recession. And then actually you
53:21
Speaker 1: look at insolvencies, they were lower than the insolvancies after
53:25
Speaker 1: the dot com bust or the insolvencies after the savings
53:28
Speaker 1: and loan crisis of the early You didn't get your bankruptcy. Instead,
53:33
Speaker 1: you get the zombies. And the zombies are sort of
53:36
Speaker 1: living dead, which is sort of death to a capitalist
53:39
Speaker 1: economy because they don't you know, they discourage entrepreneurs, they
53:42
Speaker 1: discourage investment, they discourage productivity growth, no doubt about that.
53:47
Speaker 1: And there are you know, ramifications and unanticipated consequences that
53:53
Speaker 1: we're still living with to this day. Whether it's a
53:57
Speaker 1: very low growth rate that be got a rise of
54:00
Speaker 1: authoritarianism both here and abroad, you can trace that back
54:05
Speaker 1: to not allowing the banks to go through that process. Yeah,
54:11
Speaker 1: well I do. In my chapter the book ends with
54:14
Speaker 1: it called the New Road Serfdom and the argument channeling
54:19
Speaker 1: High Friedrich High, the Austin economist philosopher, and he read
54:24
Speaker 1: a book in the Second Mold War thinking that the
54:28
Speaker 1: advance of the state during the war into the economy
54:31
Speaker 1: and into people's lives was not going to retreat, and
54:34
Speaker 1: it wasn't really right. There wasn't a retreat. But my argument,
54:39
Speaker 1: drawing on High, is that if you take away the
54:44
Speaker 1: universal price, the price of interest that guides the captive system,
54:50
Speaker 1: then the system will fail. And the more system fails,
54:55
Speaker 1: the more the authorities have to come in to prop
54:59
Speaker 1: things up, until you get a position where you're no
55:04
Speaker 1: longer in a way have a capitalist society. And I
55:07
Speaker 1: suppose that's that that you know the juncture we are today.
55:10
Speaker 1: Are are we going to sort of go through the
55:14
Speaker 1: problems of adjusting from the low rates to normal rates
55:18
Speaker 1: whatever you know, whatever that takes, or are we going
55:22
Speaker 1: to just shift into a sort of a different type
55:24
Speaker 1: of paradigm in which the state allocates capital and control.
55:30
Speaker 1: Saying that I'm not saying that we're going down that route.
55:33
Speaker 1: I'm just raising the question that how it talks about
55:37
Speaker 1: people sort of stumbling progressing without really no real intention
55:42
Speaker 1: blind progression, and one senses that there's sort of been
55:46
Speaker 1: a blind progression, and no one, I mean, there's absolute
55:49
Speaker 1: clear to me that no one in any position authority
55:52
Speaker 1: considered the actual ramifications of monetary policy and of these
55:57
Speaker 1: low rates quite fascinating. I only have you for a
56:01
Speaker 1: few more minutes before we have to send you off
56:03
Speaker 1: to the airport, So let's blow through these five questions
56:06
Speaker 1: in in a few minutes. Starting with tell us, what
56:10
Speaker 1: kept you entertained during the pandemic? What were you listening
56:13
Speaker 1: to or watching? Well, we watched Succession and we watched
56:17
Speaker 1: them the other HBO, the White Lotus, I watched White Lotus,
56:22
Speaker 1: I watched UM the you know the TV this series,
56:27
Speaker 1: A Game of Thrinds. We watched a lot of Game
56:29
Speaker 1: of Thrinds. Tell Us about some of your mentors who
56:33
Speaker 1: helped to shape your career? Well, when I was writing
56:38
Speaker 1: Devitah miss I went to see Charles Kendall Berger outside
56:43
Speaker 1: outside Cambridge, Massachusetts. Crispino Do who I mentioned, commissioned me
56:49
Speaker 1: to do that work on the credit, which has been
56:52
Speaker 1: very useful for me. Another investment from Marathon Asset Management.
56:56
Speaker 1: A friend they're called Charles Carter. I edited a couple
56:58
Speaker 1: of books for them on something cool, the capital cycle
57:01
Speaker 1: theory of investment, which has been sort of quite important
57:04
Speaker 1: to me. And then Jeremy Grantham at GMO has has
57:08
Speaker 1: been my mentor. I'd say that's an impressive list. Let's
57:11
Speaker 1: talk about other books in addition to what you've written.
57:14
Speaker 1: What are some of your favorites and what are you
57:16
Speaker 1: reading now? My wife and I get it into quite
57:19
Speaker 1: a lot. And my favorite novelist is Arcane Narayan, who
57:25
Speaker 1: Graham Green said was the best writer in the English language.
57:29
Speaker 1: Now actually open, I start that book with an epigraph
57:34
Speaker 1: of from Narayan's The Financial Expert. On the sort of
57:39
Speaker 1: Indian thing. I've been reading these colonial thrillers set in Nies,
57:47
Speaker 1: Calcutta by an Indian Scottish writer called Maka g. I
57:52
Speaker 1: can't quite remember his first name. They're pretty good, have
57:55
Speaker 1: you can't cause Bacliff Smill, the the actless Smill, you know,
57:59
Speaker 1: is the an agent scientists who who writes about energy
58:03
Speaker 1: and civilization and has written Last year I read a
58:06
Speaker 1: book called The Great Transition, and this year he's written
58:10
Speaker 1: a book about called How the World Really Works. And
58:14
Speaker 1: smills argument is, you know, it is to look at
58:18
Speaker 1: how mankind's move from one energy source to another. I
58:23
Speaker 1: think that ye Bill Gates says he's his favorite. I
58:26
Speaker 1: don't think that's a recommendationally interesting Our last two questions,
58:30
Speaker 1: what sort of advice would you give to a recent
58:32
Speaker 1: college graduate who was interested in a career in either history,
58:36
Speaker 1: journalism or finance? Sort of almost think again. I mean,
58:44
Speaker 1: I don't think academia is placed to go into now.
58:47
Speaker 1: Journalism is much less in My grandfather worked at Reuter's.
58:52
Speaker 1: You know, he was Shanghai bureau chief in the nine thirties,
58:56
Speaker 1: and in those days you could earn a decent live
59:00
Speaker 1: being and have a decent career and jury it's it's
59:02
Speaker 1: hard way in Bloomberg. You know that guys here have
59:04
Speaker 1: paid reasonable financial journalism pays most other journalism doesn't pay.
59:08
Speaker 1: So I probably say, if we're going to go into journalism,
59:10
Speaker 1: do financial journalism and in finance. Huh. You know again,
59:17
Speaker 1: I in my view, I went into finance, as I say,
59:21
Speaker 1: almost cynically, it actually then became a calling for me
59:26
Speaker 1: because I actually turned out to be genuinely interested in
59:30
Speaker 1: finance and finance history. You know, people have drawn into
59:33
Speaker 1: finance because you know, people are paid better, and we've
59:36
Speaker 1: had the financial sector growing and the market's rising. Now
59:39
Speaker 1: if we've reached a cusp and the markets are going
59:42
Speaker 1: to be not rising any future, they're actually that sort
59:45
Speaker 1: of premium that you learned from finance is perhaps not
59:49
Speaker 1: going to be there. And I say, if I was
59:51
Speaker 1: sort of recommending so and I and said they want
59:54
Speaker 1: to go in investment, I would say, you know, are
59:57
Speaker 1: you sure your talents caren't be used more beneficially elsewhere,
1:00:04
Speaker 1: Because if you think you're just going to enter into
1:00:06
Speaker 1: this sector because you're going to be paid five to
1:00:09
Speaker 1: ten times more than anyone else than the average, then
1:00:14
Speaker 1: I wouldn't be sure that that's going to be the
1:00:16
Speaker 1: case going forward. In our final question, what do you
1:00:19
Speaker 1: know about the world of speculation bubbles, interest rates today?
1:00:24
Speaker 1: You wish you knew thirty or forty years or so
1:00:26
Speaker 1: ago when you were first starting out, huh, well I didn't.
1:00:32
Speaker 1: I didn't know anything. I mean, I didn't know anything.
1:00:35
Speaker 1: Then it's we've been living through the most extraordinary period
1:00:41
Speaker 1: we knew we had. I used to think the dot
1:00:43
Speaker 1: com bubble was amazing. It was until we supersized. No,
1:00:48
Speaker 1: I think that, And then I thought, you know, wow,
1:00:50
Speaker 1: I wasn't the security subprime security, so that was extraordinary.
1:00:55
Speaker 1: And then you know, we had, you know, the pandemic
1:00:58
Speaker 1: everything bubble, and you know, we have lived through the
1:01:02
Speaker 1: most extraordinary period in the history of finance. I had
1:01:06
Speaker 1: no idea that that was going to be the case
1:01:09
Speaker 1: when I started my career. Absolutely fascinating. Thank you Edward
1:01:13
Speaker 1: for being so generous with your time. We have been
1:01:16
Speaker 1: speaking with Edward Chancellor, author of Devil Takes the Hindmost
1:01:21
Speaker 1: and The Price of Time, The Real Story of Interest.
1:01:25
Speaker 1: If you enjoy this conversation, well, be sure and check
1:01:28
Speaker 1: out any of the four hundred and fifty or so
1:01:31
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1:01:45
Speaker 1: IB podcast at Bloomberg dot net. Sign up for my
1:01:49
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1:01:55
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