Latest / Merryn Talks Money / The Revenge of the Zero-Rate World Is Coming with Edward Chancellor

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The Revenge of the Zero-Rate World Is Coming with Edward Chancellor · Merryn Talks Money

0:00
Speaker 1: John, do you know what it's coming up for Christmas?
0:03
Speaker 1: This is exciting. Let's talk about chocolate. Have you got
0:05
Speaker 1: your Advine calendars for kids yet?
0:08
Speaker 2: Ah?
0:08
Speaker 3: Yes, but we don't do chocolate. I think calendars.
0:10
Speaker 2: We do it all.
0:11
Speaker 3: It just once. Thank you very much.
0:12
Speaker 1: You are so middle class and I'm trying my bit. Okay,
0:18
Speaker 1: so we did that for ages, absolutely, you know, no chocolate,
0:21
Speaker 1: full on religion. And then my day I thought, what's
0:23
Speaker 1: the matter with you? The kids prefers chocolate to god
0:26
Speaker 1: guds and chocolate adving calendars. But to make it not
0:30
Speaker 1: too awful, I started buying them their chocolate advint calendars
0:34
Speaker 1: in hotels.
0:34
Speaker 3: Chocola right, you call me middle class.
0:39
Speaker 1: It's all gone very well so far, except for one
0:41
Speaker 1: year when I bought vegan ones by mistake, not so good.
0:44
Speaker 1: And another year when I bought the kids ones that
0:46
Speaker 1: I thought was milk chocolate in fact were a little
0:48
Speaker 1: bit too dark and they didn't like that either. But
0:50
Speaker 1: otherwise I'm very impressed by the chocolate. It's all gone
0:53
Speaker 1: very well. It's almost like not buying them chocolate admint
0:56
Speaker 1: calendars because they're quite potch Adwin calendars. You know, it's
0:59
Speaker 1: kind of okay, but now I'm getting worried. Hotel Chokola
1:03
Speaker 1: has been taken over by Mars American company, and it's
1:06
Speaker 1: one of the many UK small and mid cap companies
1:09
Speaker 1: that is being taken off the UK market by foreign
1:13
Speaker 1: investors at a massive premium to portraying share price. Now, John,
1:19
Speaker 1: we have been telling, telling our listeners and our readers,
1:23
Speaker 1: but I accept for too long that they've got to
1:26
Speaker 1: get out there and buy this cheap stuff before somebody
1:29
Speaker 1: else does. And it's now happening somebody else is buying
1:33
Speaker 1: out by cheap companies, right.
1:36
Speaker 3: Yeah, And I mean this I mean to feel this
1:38
Speaker 3: isn't the first one. It was just kind of particularly
1:39
Speaker 3: eye catching, partly because it's Hotail chocolas a lot of
1:42
Speaker 3: people know it, and also because it was one of
1:45
Speaker 3: the two companies that get taken out that day, and
1:47
Speaker 3: Speil the other one was it was a pub company
1:50
Speaker 3: that get bought by another pub company. But the point
1:53
Speaker 3: is they both went for you know, bake premiums. I
1:57
Speaker 3: mean the chocolu particularly Males Clear. They just thought, no,
2:00
Speaker 3: let's get this over and done way, we just wanted to,
2:03
Speaker 3: So they paid something like one hundred and seventy percent
2:05
Speaker 3: over the prevailing share price. I mean that was part
2:08
Speaker 3: because Hotel Chocolat for all that, you know, you know,
2:11
Speaker 3: whether you think of the product quality, they have had
2:14
Speaker 3: some trouble recently, did a couple of profit warnings.
2:20
Speaker 1: Yeah, those Christmas selection boxes just came come and everybody.
2:24
Speaker 3: See now, you know, we take the podcast for Christmas.
2:28
Speaker 3: But but yeah, so they you know, the point is
2:31
Speaker 3: that they somebody sees the value in these companies and
2:36
Speaker 3: if us as retail investors don't see that, or more pointedly,
2:41
Speaker 3: global fund managers don't see that, well, you know, tough
2:44
Speaker 3: people are just going to pick the low hanging fruit.
2:48
Speaker 3: And you know, as a retail investor, you mate as
2:50
Speaker 3: well benefit from.
2:51
Speaker 2: That, is my view.
2:52
Speaker 1: Well you might as well. I mean another journalist, the
2:54
Speaker 1: one who we approve of, said the other that this
2:57
Speaker 1: is a once in a generation opportunity for UK investors
3:00
Speaker 1: and they don't come along very often. And I am
3:03
Speaker 1: when I was talking to him on Twitter and I tweeted,
3:05
Speaker 1: you know, if you missed as many of us did
3:08
Speaker 1: twenty twenty, and you missed two thousand and nine, you know,
3:11
Speaker 1: the markets are looking You're saying to the power cheeps
3:13
Speaker 1: about here. Other people are going to buy it. If
3:15
Speaker 1: you don't, why don't you want this cheap stuff? What
3:17
Speaker 1: are you frightened up here? I'll still be frightening the breaksit.
3:19
Speaker 1: This is a silly get over.
3:21
Speaker 3: Yeah, that's interesting because it's I mean, you said that
3:24
Speaker 3: the last time, but it's not. These opportunities don't usually last,
3:30
Speaker 3: and often the reason that people don't take advantage in
3:32
Speaker 3: at the time is because at the time they're very scary.
3:35
Speaker 3: So you know, two thousand and eight or COVID or whatever,
3:38
Speaker 3: But this time it's lasted for ages. The backdrop is
3:44
Speaker 3: arguably better than at any point. If you were scared
3:47
Speaker 3: about Brexit in twenty sixteen, and if let's trust freak
3:51
Speaker 3: to you a year ago, even though it wasn't exactly hard,
3:53
Speaker 3: but let's skip over that for a moment. You cannot
3:55
Speaker 3: deny that, you know, the political outlook at the moment
4:00
Speaker 3: is much less chaotic than at any point, and that
4:03
Speaker 3: it's been since exit. So even if that was the
4:05
Speaker 3: thing that was bothering you, it doesn't make sense that
4:07
Speaker 3: it's still bothering now.
4:08
Speaker 1: A place to go, right, I want to go on
4:10
Speaker 1: about this, but the place to go has got to
4:12
Speaker 1: be investment trust, right. I know you've written about this
4:15
Speaker 1: recently about the investment trust. We've talked about this before,
4:17
Speaker 1: and we're going to keep talking about it until it's
4:20
Speaker 1: not there anymore. These huge discounts on investment trust So
4:23
Speaker 1: you've got this double discount of exceptionally cheap companies inside
4:27
Speaker 1: some of the small and MidCap focused investment trusts. So
4:29
Speaker 1: you've got the cheap companies and then you've got the
4:31
Speaker 1: discount on top of it. It really looks like something
4:35
Speaker 1: that all retail investors should at the very least be
4:38
Speaker 1: looking at. Right, And you've written about some of the
4:40
Speaker 1: bigger discounts and more interesting trusts out there. That's in
4:42
Speaker 1: John's Money Distilled newsletter. Unless you want to mention any
4:45
Speaker 1: of them now, John, Well, it's.
4:47
Speaker 3: More I think you can look at the sector and
4:51
Speaker 3: obnestly you can go to the Association of Investment Companies
4:54
Speaker 3: website yourself and have a look as well and explore
4:58
Speaker 3: these things. Is a really good website. The only the
5:00
Speaker 3: one Most of these things are cheap. The main thing
5:03
Speaker 3: I would kind of point out is that you can
5:06
Speaker 3: look at the discounts. But one thing where we are
5:08
Speaker 3: of is that. Certainly in the smaller cap site, a
5:10
Speaker 3: lot of the investment trusts are basically too small to
5:15
Speaker 3: be invested in because and some of them are either
5:17
Speaker 3: winding up or you look at them in the bed
5:20
Speaker 3: off or spread is insane. I mean, there's a couple
5:23
Speaker 3: of ones that kind of looked at and it's like, oh,
5:24
Speaker 3: that looks interesting and then you realize that you're losing
5:26
Speaker 3: six percent as soon as you buy it. So it
5:29
Speaker 3: does be aware of that if you can invest in
5:31
Speaker 3: in kind of smaller trusts. So it's there's a lot
5:36
Speaker 3: of stuff out there. So have a day of.
5:37
Speaker 1: About Welcome to Marin Talks Money, the podcasting which people
5:43
Speaker 1: who know the markets explain the markets. I'm Marren sum
5:46
Speaker 1: said web this week we bring you a conversation with
5:48
Speaker 1: Edward Chancellor. He's a financial historian. He's a journalistic that's
5:51
Speaker 1: not a strategist, and we have been following his work
5:54
Speaker 1: for years. His most ways and books is The Price
5:56
Speaker 1: of Time, The Real Story of Interest. So I started
5:59
Speaker 1: the conversation with ed on his area of expertise. Interest rates.
6:04
Speaker 1: Now at one of the things that you are an
6:06
Speaker 1: absolute expert on, and it turns out almost nobody is,
6:09
Speaker 1: although one would wish that there were more experts on
6:11
Speaker 1: this is interest rates. And here we find ourselves today
6:15
Speaker 1: in a fairly extraordinary situation where it looks like our
6:18
Speaker 1: central banks don't necessarily understand how interest rates and inflation works.
6:23
Speaker 1: And we have rates having gone up at the most
6:27
Speaker 1: tremendous speed as everyone focuses purely on inflation and nothing else,
6:33
Speaker 1: bringing down inflation at the expense of all else. And
6:36
Speaker 1: it feels like we might be missing some other things
6:40
Speaker 1: that are happening in the economy as a result of
6:43
Speaker 1: this phenomenally fast rate and interest rates. And I'm wondering if,
6:47
Speaker 1: at the same time, right now, as other people are
6:50
Speaker 1: beginning to think, oh, everything's fine, inflation is coming down
6:55
Speaker 1: soft landing ahead, you might be feeling a little more nervous.
7:00
Speaker 1: Yeah I am, Yeah, I thought you might be. I
7:03
Speaker 1: thought you might be talking about why.
7:06
Speaker 2: You know, the context this is that we just come
7:11
Speaker 2: off this period of the lowest interest rates in history.
7:14
Speaker 2: And when we last spoke, we talked about the new
7:19
Speaker 2: book I had The Price of Time, which was a
7:23
Speaker 2: history of interest, well not really of interest rates per same,
7:26
Speaker 2: but what interest was when it came about and what
7:29
Speaker 2: it did. And you know, we've got five millennaire of
7:34
Speaker 2: interest rate history, and say, we've got a lot to
7:37
Speaker 2: draw on. But if we think about the last fifteen years,
7:42
Speaker 2: we went to this very low period of interest rates,
7:45
Speaker 2: zero rates, policy rates, and negative rates in Europe and Japan.
7:49
Speaker 2: And the question is what did those zero and negative
7:54
Speaker 2: rates do? And my the argument in the book was
7:57
Speaker 2: I said, I was saying, well, actually they can and
8:00
Speaker 2: the policymakers don't really understand interest. They see it purely
8:04
Speaker 2: as a lever to control inflation. And we should talk
8:07
Speaker 2: about that lever a bit later on, because it is
8:10
Speaker 2: something to think about. But as I in the book,
8:14
Speaker 2: I draw attention to these other functions of interest, which
8:17
Speaker 2: is the capitalization rate for valuing assets, the hurdle rate
8:23
Speaker 2: for making investments, the price of risk, a price put
8:27
Speaker 2: on risk or a price put on leverage, an inducement
8:31
Speaker 2: to save, and these other functions of interest were ignored
8:37
Speaker 2: by the central banks, and I think that they led
8:41
Speaker 2: to huge build up of risk in the financial system,
8:45
Speaker 2: and actually because of the impact on the allocation of capital,
8:48
Speaker 2: to a misallocation of capital. And I think that will
8:53
Speaker 2: take people who read my books and oh, Chancellor wants
8:57
Speaker 2: higher interest rates. Well, I mean I wasn't exactly saying that.
9:01
Speaker 2: I was saying interest rates should never be this low
9:05
Speaker 2: or should never have gotten this low. And once you
9:09
Speaker 2: get that low, you're in a position of what the
9:12
Speaker 2: economists would call disquilibrium, or if you want to make
9:17
Speaker 2: a slightly even more complex, you could say we were
9:21
Speaker 2: in a state of intertemporal dis equilibrium.
9:24
Speaker 1: In other words, you're going to have to explain that so.
9:28
Speaker 2: Merin so, you know, the interest is the price of time.
9:32
Speaker 2: All financial activities take place over time. To be in balance,
9:37
Speaker 2: your current borrowing and saving an investment has to be
9:41
Speaker 2: in line some or other with what your future spending
9:47
Speaker 2: is going to be. If you distort the rate of interest,
9:51
Speaker 2: you distort the price of time, and therefore the present
9:55
Speaker 2: and the future become out of whack. Now one way,
9:58
Speaker 2: you know, I think very easy to see this. And
10:02
Speaker 2: you were talking to Jeremy Grant and the other day
10:04
Speaker 2: my former boss, as Jeremy would say, if you push
10:08
Speaker 2: up valuations, you're going to get lower returns in future.
10:12
Speaker 2: Is just straight forward. And the point is we pushed
10:16
Speaker 2: up valuations without taking on board that the overall returns
10:20
Speaker 2: from our investments were going to come down, and therefore
10:25
Speaker 2: we were not going to earn as much as we
10:27
Speaker 2: anticipate in the future. Now that problem has been partly
10:31
Speaker 2: taken away by the rise in interest rates, which brought
10:34
Speaker 2: acid prices, bond prices, and equity prices down last year,
10:39
Speaker 2: but I think that is still an ongoing process, and
10:42
Speaker 2: there are all these other areas allocation of the misallocation
10:46
Speaker 2: of capital, the so called zombie companies created by the
10:50
Speaker 2: low rates, that have yet to sort of feed through.
10:54
Speaker 2: So I think.
10:54
Speaker 1: Interrupt you briefly just to ask you where you think
10:57
Speaker 1: these main misallocations of capital taken place, and we talk
11:01
Speaker 1: about these zombie companies of the particular areas where capital
11:04
Speaker 1: has been misallocated, and that's going to cause us specific
11:08
Speaker 1: problems in the future.
11:10
Speaker 2: So if you remember I am in the chapter I
11:15
Speaker 2: write on the impact of interest on capital allocation. I
11:19
Speaker 2: argue that that interest really serves the function of to
11:24
Speaker 2: propel Schumpeter's creative destruction, taking resources from low return uses
11:32
Speaker 2: to high return uses. And I think that that the
11:37
Speaker 2: very low interest rates were a form of loan forbearance,
11:41
Speaker 2: and therefore capital was trapped in activities with low returns,
11:47
Speaker 2: and that from what one sees, is fairly global phenomenon.
11:52
Speaker 2: You see it particularly in Europe, you see it in
11:57
Speaker 2: the United States, and you see it actually in China too.
12:02
Speaker 2: As for the sectors, I think that's really quite across
12:07
Speaker 2: the board, the type of sectors in which capital is
12:10
Speaker 2: trapped in. You can think of any area in which
12:13
Speaker 2: businesses that are not returning and earning enough profit to
12:17
Speaker 2: even pay their low interest costs. That they might be
12:21
Speaker 2: in retail, they might be in manufacturing, they might now
12:26
Speaker 2: particularly be in in commercial real estate.
12:30
Speaker 1: You wouldn't so you wouldn't pick. You wouldn't pick particularly
12:33
Speaker 1: on say a residential property or renewable energy or anything
12:37
Speaker 1: like that.
12:39
Speaker 2: Renewable energy that that is, I mean, I'm glad you
12:43
Speaker 2: picked that up because you know, the the renewable energy boom,
12:49
Speaker 2: particularly in these wind farms and solar farms, that was
12:54
Speaker 2: a beneficiary of the ultra low interest rates, because the
12:59
Speaker 2: capital costs of these great wind turbines was all up
13:04
Speaker 2: front and they were rendered viable by the very low
13:09
Speaker 2: interest rates. And as you've seen, you know, the the
13:13
Speaker 2: you know or Sted, one of the big wind farm
13:16
Speaker 2: more brats has run into trouble. Its stock is down
13:19
Speaker 2: seventy five percent. I think that's to a large extent
13:24
Speaker 2: a function of the very low interest rates. So when
13:27
Speaker 2: the speed of the energy transition was accelerated by the
13:32
Speaker 2: very low interest rates, and I think as interest rates
13:35
Speaker 2: rise that the whole thing slows down. But actually that
13:39
Speaker 2: I want to get on because there's another aspect of
13:41
Speaker 2: the misallocation of capital, which is in and I suppose
13:46
Speaker 2: you could include alternative energy in this in venture capital
13:50
Speaker 2: in projects that have very distant returns, whose profits lie
13:56
Speaker 2: in the future. So we saw this massive appital flow
14:01
Speaker 2: into Silicon Valley and the great sort of unicorn phenomenon,
14:07
Speaker 2: and some of the unicorns, you know, earned earned their
14:11
Speaker 2: their faith, such as Facebook, but the others were the
14:15
Speaker 2: likes of we Work, which went bust in the last
14:19
Speaker 2: couple of weeks. We Worked, the office rental company that
14:22
Speaker 2: sort of dressed itself up as a sort of tech
14:25
Speaker 2: renting office space over an app. The these a lot
14:29
Speaker 2: of the venture capital businesses have run into trouble. And
14:32
Speaker 2: what I understand now is that VC investments are now
14:38
Speaker 2: trade passing hands between partners, are sub a massive discounts
14:43
Speaker 2: to their to their official price, So I think the bench.
14:49
Speaker 2: So it's in a way there's a sort of bar bell.
14:51
Speaker 2: You have the zombies, if you will, sort of old
14:55
Speaker 2: fashioned businesses that unprofitable where capital is locked in by
14:59
Speaker 2: the low range. And then you have the sort of
15:01
Speaker 2: the high tech venture capital stuff, which also is marked
15:06
Speaker 2: by a tremendous misallocation of capital.
15:08
Speaker 1: You have a sense of what kind of discount on
15:10
Speaker 1: of these non profit moting VC assets are trading it
15:14
Speaker 1: to say their last round.
15:16
Speaker 2: I've heard discounts as sort of forty percent thereabouts. And
15:21
Speaker 2: we know that huge capital inflows in the French capital
15:25
Speaker 2: happened up until twenty one, and that those capital flows
15:31
Speaker 2: have dried up. So I think the returns thrown the
15:36
Speaker 2: fact that the low interest rates boost valuations. I think
15:41
Speaker 2: the returns of venture capital up to twenty one over
15:46
Speaker 2: the recent years have been frankly exaggerated by the low
15:51
Speaker 2: interest rates, and that will resets. I would expect quite
15:55
Speaker 2: a long shakeout in that area and people, because it's
15:59
Speaker 2: not listed, it takes longer, as you know, for private
16:02
Speaker 2: equity and venture capital to mark their investments to a
16:06
Speaker 2: proper market price. But that would happen.
16:09
Speaker 1: It's rather suggested that you haven't fallen for the story
16:12
Speaker 1: that we've heard so much over the last decade or so,
16:15
Speaker 1: that private equity is simply better at managing companies than
16:20
Speaker 1: ordinary listed company management, and they can do things in
16:22
Speaker 1: different ways, and they're one hundred percent ownership as opposed
16:25
Speaker 1: to small ownership needs that they can really make things
16:28
Speaker 1: work better, and that explains their superior performance, not in
16:32
Speaker 1: any way the very low interest rates that have allowed
16:35
Speaker 1: them to have capital for priety glee free. And you
16:38
Speaker 1: seem to be disagreeing with that.
16:40
Speaker 2: Private equity is different from venture capital. Yes, of course,
16:44
Speaker 2: private equity is to my mind, really largely a matter
16:48
Speaker 2: of financial engineering. It works well when interest rates are
16:53
Speaker 2: below the returnal capital because you can lever up and
16:57
Speaker 2: squeeze out profit. Now, one definition of interest is the
17:01
Speaker 2: price of leverage. So it comes as no surprise that
17:06
Speaker 2: the private equity business starts in nineteen eighty two with
17:10
Speaker 2: the former US Treasury Sectory Bill Simon taking over a
17:17
Speaker 2: leverage buyout of a greetings card business called Gibson Greetings,
17:22
Speaker 2: and that is tremendously successful. And after that you get
17:26
Speaker 2: the arrival of some KKR and Blackstone and so on.
17:29
Speaker 2: And these people are really more investment bankers than investors,
17:35
Speaker 2: and they know about structuring the balance sheet to squeeze
17:40
Speaker 2: out to leverage some profit. And you're going to get
17:42
Speaker 2: a profit, as I say, if your cost of borrowing
17:45
Speaker 2: is below your return on capital. And that worked very well.
17:49
Speaker 2: And I was covering the private equity boom going into
17:52
Speaker 2: the financial crisis, and I thought it was going to
17:55
Speaker 2: be tremendous shakeout then and it didn't really happen cause
18:00
Speaker 2: the very low interest rates after the global financial crisis,
18:04
Speaker 2: which in effect allowed the private equity companies that have
18:08
Speaker 2: been hugely irresponsible up to two thousand and sem, they
18:13
Speaker 2: basically were able to refinance their portfolio companies after two
18:19
Speaker 2: thousand and eight at very low rates. And then you've
18:21
Speaker 2: got big bull markets. You've got an exit for their businesses.
18:25
Speaker 2: But I think the private again, private equity has been
18:30
Speaker 2: in trouble. You've probably heard about it. There are a lot
18:33
Speaker 2: up to twenty twenty one private equity firms in the
18:37
Speaker 2: United States were I think they were doing deals on
18:41
Speaker 2: nine times a bit DAR earnings before interest, tax and
18:45
Speaker 2: depreciation and amortization, and they were putting more. They said
18:49
Speaker 2: they were doing highest valuation deals with the largest amount
18:53
Speaker 2: of debt, and a few of them. I think the
18:58
Speaker 2: only one I know of that actually stood back was Apollo,
19:01
Speaker 2: the buy out private equity company that actually just pulled
19:05
Speaker 2: back when deals were very highly priced and when too
19:09
Speaker 2: much doubt was going onto the companies. But I think
19:11
Speaker 2: the rest of the industry carried on going over the
19:14
Speaker 2: cliff and having trouble. Now, now take for instance, Blackstone
19:19
Speaker 2: off They have something which you probably read about the
19:21
Speaker 2: Blackstone Real Estate Investment Trust be read and there again
19:28
Speaker 2: the market price of that has been trading below the
19:31
Speaker 2: declared asset price, and there was an offer to buy
19:34
Speaker 2: out private investors in that at a forty percent discount
19:40
Speaker 2: to the net asset value, again a similar level of
19:44
Speaker 2: discount that you're seeing in venture capital space.
19:49
Speaker 1: It sounds to me as if those critics of yours
19:52
Speaker 1: after you published your book, they said, oh, Edward once
19:55
Speaker 1: higher interest rates were rather right in that while you
19:59
Speaker 1: may not have actively wanted there to be dislocations in
20:02
Speaker 1: the economy as a result of rais rising, it certainly
20:06
Speaker 1: will bring us back to a position where capital we
20:09
Speaker 1: will be correctly allocated and where the sectors and companies
20:14
Speaker 1: has been incorrectly allocated, will disappear, So it really can
20:17
Speaker 1: only be seen as a good thing. And we used
20:20
Speaker 1: to say, yeah, carry on, well.
20:24
Speaker 2: Look, I mean, alcoholics shouldn't be drinking a bottle of
20:29
Speaker 2: whiskey a day. But it's it turns out that if
20:32
Speaker 2: you take a bottle of whiskey away from an alcoholic,
20:35
Speaker 2: you can actually kill them. I mean, in other words,
20:38
Speaker 2: coming off an addiction is a dangerous and fraught process.
20:44
Speaker 2: And yes, it would have been ideal not to be
20:47
Speaker 2: an alcoholague. It'd be ideal not to have you know,
20:51
Speaker 2: you know, live in a world and where assets are
20:54
Speaker 2: over valued, capital is misallocated, people are saving too little,
20:57
Speaker 2: and future atts on investments again to disappoint, but that's
21:02
Speaker 2: the world, the world we live in, and the question
21:06
Speaker 2: is how do you get out of that world? My
21:10
Speaker 2: and I don't think people understand that this process is
21:15
Speaker 2: extremely fraught, and we'll also take a long time. You know,
21:20
Speaker 2: we could say the progress from too low interest rates,
21:23
Speaker 2: we might you know, it was almost a twenty five
21:26
Speaker 2: year process. You could say that perhaps long term capital
21:30
Speaker 2: management blow up in ninety eight the Hedge Fund, when
21:34
Speaker 2: the Fed responded by lowing rates and then we got
21:37
Speaker 2: dot com bubble and then they lowered the interest rates further,
21:41
Speaker 2: and we've got a real estate bubble and they lower
21:42
Speaker 2: the interest rates ever further. So we've been this in
21:45
Speaker 2: this twenty five year period of rates for coming down,
21:53
Speaker 2: and that's in the context of a forty year period
21:56
Speaker 2: of a ball market in bonds of ever a long
22:00
Speaker 2: term interest rates. So I don't think this thing just
22:05
Speaker 2: changes overnight. I think that the impact of the higher
22:11
Speaker 2: interest rates takes a while to feed through. And you
22:16
Speaker 2: can see this, for instance, in people what does take
22:20
Speaker 2: people's take housing for instance, in this country, a lot
22:25
Speaker 2: of mortgages around two to three year fixes, and it
22:29
Speaker 2: takes a while for those fixes to come off on
22:32
Speaker 2: floating rates. In the US, it takes even longer because
22:35
Speaker 2: people borrow on long with long dated mortgages, so that
22:42
Speaker 2: takes really a long time for the impact of higher
22:46
Speaker 2: interest rates to feed through. It's likewise the case for
22:50
Speaker 2: corporate boring or you know, in the area of very
22:54
Speaker 2: low interest rates. So it's a great inducement, as you know,
22:57
Speaker 2: for companies to take on more debt, which they could
23:01
Speaker 2: either use to buy back their shares or to buy
23:05
Speaker 2: other companies, and a lot of that debt would be
23:09
Speaker 2: termed out, so they wouldn't they wouldn't have to as
23:14
Speaker 2: interest rates rise in the short term it doesn't affect
23:18
Speaker 2: their cash flow. But that doesn't that's only a relatively
23:22
Speaker 2: temporary basis. I was talking the other day to a
23:26
Speaker 2: European telecoms company that had I think around sort of
23:30
Speaker 2: fifty billion euros of debt and about I think it
23:34
Speaker 2: had a billion dollars of billion euros of free cash flow,
23:38
Speaker 2: but its loans were termed out for three or four years.
23:42
Speaker 2: It wasn't going to be an immediate problem, but at
23:44
Speaker 2: the current interest rates, that business was going to run
23:48
Speaker 2: into extreme problems if it was going to have to
23:52
Speaker 2: refinance at the market rates of interest rates that we've
23:55
Speaker 2: seen this year.
23:57
Speaker 1: And then on the other hand, you have some companies
23:59
Speaker 1: and even these day technology companies that have huge ants
24:02
Speaker 1: of cash on their balance sheet and with interest rates
24:05
Speaker 1: knocking around four five percent, that's a rather nice little
24:08
Speaker 1: boost for them. It goes both ways.
24:11
Speaker 2: I did you see a chart that Albert Edwards SoC
24:15
Speaker 2: Gen showed a couple of months ago where he was
24:19
Speaker 2: He showed chart saying that actually the net interest income
24:22
Speaker 2: of US corporations had actually risen year today and as
24:27
Speaker 2: a result of the cash, you know, earning more. I
24:31
Speaker 2: think the trouble with that type of analysis is that
24:35
Speaker 2: Apple may have a lot of cash, but someone else
24:38
Speaker 2: has a lot of debts. So if one looks at
24:40
Speaker 2: these things inaggregate, everything might look better than it actually is.
24:46
Speaker 2: If you remember marrying before the global credit crisis, everyone
24:49
Speaker 2: said credit doesn't matter. One man's debt is another person's asset. Well,
24:54
Speaker 2: it just didn't really work out like that because one
24:56
Speaker 2: person's one person's asset was not The person who was
25:00
Speaker 2: in debt couldn't actually afford to pay the debt, and
25:03
Speaker 2: therefore that wasn't particularly good for the other person's assets.
25:06
Speaker 2: So you have to be slightly careful with this aggregate analysis.
25:10
Speaker 1: Fair enough, So take all that together, what do you
25:14
Speaker 1: see from here a sort of slow burn misery for
25:18
Speaker 1: a decade as we work our way out of this,
25:21
Speaker 1: or a crisis of some kind.
25:23
Speaker 2: I don't want to sort of cop out, but one
25:27
Speaker 2: thing I would say is that the crisis that we
25:31
Speaker 2: have been experiencing over the last twenty five years are
25:35
Speaker 2: becoming analytically more complex. For instance, again go back to
25:39
Speaker 2: the dot com bust was pretty simple. You really had
25:44
Speaker 2: to be done not to understand how that was coming
25:47
Speaker 2: and how to analyze it. I think the credit crisis,
25:50
Speaker 2: global financial crisis was much more complicated, with the structured
25:57
Speaker 2: credit and problems in subprime collactualized debt obligations. I think
26:02
Speaker 2: the problem that we have today is not so much
26:07
Speaker 2: complex financial structures, but the fact that the low interest
26:13
Speaker 2: rates that prevailed for so long had such wide effects.
26:20
Speaker 2: I cite in the book the Harvard economist Jeremy Stein,
26:23
Speaker 2: who was a briefly of FED governor. He says that
26:26
Speaker 2: interest rates get into all the cracks. And I like
26:30
Speaker 2: that comment because it should be telling you that the
26:35
Speaker 2: problems created by the very low interest rates have got
26:40
Speaker 2: into a whole load of cracks, some of which will
26:42
Speaker 2: be pretty obvious. I mean, so for instance, take for instance,
26:48
Speaker 2: just a specuative boom in SPACs and so on. There
26:50
Speaker 2: was an amusing comment by the spacing chammer if you
26:55
Speaker 2: remember him, and he said the other day the trouble
27:00
Speaker 2: with rising interest rates is it renders your business valueless. Well, okay,
27:06
Speaker 2: if you have an inherently valueless business, yes, the rising
27:10
Speaker 2: interest rates exposed So we've seen the sort of we
27:14
Speaker 2: saw the blow off in hyperspecutive stocks. Okay, pretty easy,
27:19
Speaker 2: pretty obvious. But then, for instance, we knew that the
27:24
Speaker 2: bond prices were elevated, that yields were negative, and it
27:29
Speaker 2: wasn't tremendous surprise that long dated bonds suffered a lot
27:34
Speaker 2: over the last couple of years. However, I didn't know,
27:37
Speaker 2: and I don't know if you knew in advance that,
27:39
Speaker 2: for instance, the UK pension funds had leveraged up their
27:44
Speaker 2: holdings of fifty year UK index linked bonds and negative
27:49
Speaker 2: yields and they'd levered them up five six times. Now
27:52
Speaker 2: that that blew up in September of last year, but
27:55
Speaker 2: it wasn't that was what I thought interesting about that
27:58
Speaker 2: was we knew there was a entran problem were caused
28:02
Speaker 2: by the ultra low interest rates, and how this inflated
28:05
Speaker 2: their liabilities, and how they had to hedge it. You
28:08
Speaker 2: didn't know. I wasn't quite sure what they'd done about
28:12
Speaker 2: it until after the facts. I wasn't anticipating to blow up,
28:16
Speaker 2: and in fact, actually a lot of as we you know,
28:18
Speaker 2: you and I know some of the investors who were
28:20
Speaker 2: caught on the wrong side of that trade so it
28:24
Speaker 2: wasn't anticipated, even by quite smart people. The question is
28:27
Speaker 2: to where we are going forward. Some obvious problems obviously
28:31
Speaker 2: ones reading about problems with commercial real estate and that
28:35
Speaker 2: would make people working from home and so on, that
28:38
Speaker 2: you can see that commercial real estate is going to
28:41
Speaker 2: be in trouble. I don't know. Take for instance, the
28:45
Speaker 2: problems at the regional banks earlier this year with Silicon
28:48
Speaker 2: Valley Bank going down and a couple of other big
28:51
Speaker 2: banks going down. Now you'd have thought that, you know,
28:56
Speaker 2: one's taught that higher interest rates are good for banks
29:00
Speaker 2: because they gives them a steeper yield curve so that
29:04
Speaker 2: they borrow short and lend long and they make money.
29:06
Speaker 2: In fact, actually in this case the banks had borrowed
29:10
Speaker 2: short and then they from their depositors and then had
29:14
Speaker 2: bought medium term debt and had capital losses. So there
29:17
Speaker 2: was a problem that one wasn't necessary immediately anticipating. And
29:22
Speaker 2: then you know, there's for instance, with a banking system,
29:26
Speaker 2: the banks, as you know around the world, sitting on
29:28
Speaker 2: massive excess reserves. They have massive deposits, with the central
29:33
Speaker 2: banks having served as a conduit for selling all those
29:37
Speaker 2: bonds during quantitative easing. Now I don't quite know what's
29:42
Speaker 2: going to happen to those excess with US. I don't
29:44
Speaker 2: think the taxpayers at the moment are paying interest on
29:48
Speaker 2: There is this whether that actually leads to problems for
29:52
Speaker 2: the banks, whether where the governments around the world become
29:55
Speaker 2: reluctant to pay it. So again, so as a question
29:58
Speaker 2: mark would hold it to my mind, is over the
30:01
Speaker 2: entire banking system. Then we've got China. The problems with
30:07
Speaker 2: real estate in China pretty obvious with China's realistic and
30:12
Speaker 2: I've been banging on about China's real estate bubble for
30:15
Speaker 2: at least well thirteen years and the same it was
30:19
Speaker 2: a bubble that went on and on and on and
30:21
Speaker 2: got bigger and bigger and big and it's been blowing
30:24
Speaker 2: off the last couple of years. And we've seen you know,
30:28
Speaker 2: Evergrand go down and then Country Garden the biggest developers.
30:33
Speaker 2: But we don't really know the long term outcome of
30:40
Speaker 2: the higher interest rates and bringing and how and what's
30:43
Speaker 2: going to happen to China's real estate and China's economy
30:46
Speaker 2: and financial system. I mean, one, you know, one outcome
30:50
Speaker 2: that I've thought possible was that China's currency would sort
30:57
Speaker 2: of blow at some stage, but it or crack. Let's
31:02
Speaker 2: say that. But I mean that's one potential outcome. But
31:06
Speaker 2: I think there will be you know, there definitely be
31:09
Speaker 2: problems coming from China over the coming years. I would
31:12
Speaker 2: thought the Chinese are very good, will have been very
31:15
Speaker 2: good at hiding debts within the system. But I don't
31:19
Speaker 2: think that process it can go on forever. So that's
31:25
Speaker 2: you know, that's there's then you've got residential real estate
31:29
Speaker 2: that's taking I mean taking the UK for instance, it's
31:32
Speaker 2: taking a while to come down. You know, the benign
31:37
Speaker 2: situation there is for you know, the nominal price to
31:42
Speaker 2: house prices to rain more or less level, but with
31:45
Speaker 2: inflation eroding the value. But you know, also potential for
31:51
Speaker 2: a crack. So i'd say that you know that there
31:54
Speaker 2: are a whole load of areas that one, you know,
31:58
Speaker 2: one has to analytically worry about.
32:03
Speaker 1: Okay, I'm going to put that down as an I
32:06
Speaker 1: don't know, but not so scary stuff out there. There's
32:09
Speaker 1: an answer to the original question. Yeah, Now, let's get
32:13
Speaker 1: that fair. We're worried. That's not fair.
32:16
Speaker 2: That's fair. That's fair.
32:18
Speaker 1: I'm sorry, that's fair.
32:20
Speaker 2: I'm saying the problem is too complex for any individual
32:25
Speaker 2: analyst to get their head around. It's a global problem,
32:30
Speaker 2: and the problem and the low interest rates have got
32:32
Speaker 2: into all the cracks and those problems because prices take
32:38
Speaker 2: asset prices take a while to turn and take in
32:42
Speaker 2: private acuity and venture capital. And because interest rates people
32:46
Speaker 2: who borrowed fixed for a short time, that the impact
32:50
Speaker 2: of the interest rates isn't felt immediately, either for home
32:54
Speaker 2: buyers or for corporations. It's going to take a while
32:58
Speaker 2: to feed through.
33:00
Speaker 1: Okay, Edward, right back at the beginning, you said you
33:02
Speaker 1: wanted to come back to interest rates as a lever
33:05
Speaker 1: to control inflation. You have something you wanted to say
33:07
Speaker 1: on that.
33:09
Speaker 2: Yes, so it's actually something. It's something I didn't actually
33:14
Speaker 2: write much about in the book. I think because it's
33:19
Speaker 2: the one area that the central banks seem to understand
33:24
Speaker 2: about interests that you can have You can use interest
33:28
Speaker 2: to control inflation by putting up the interest rate. And
33:36
Speaker 2: I'm actually coming to the view that this of the
33:39
Speaker 2: various functions of interest, that actually using the interest rate
33:44
Speaker 2: as a leader to control inflation is the least it's
33:48
Speaker 2: the least reliable of the functions of interests. It's pretty obvious.
33:53
Speaker 2: If you take down the discount rate, you're going to
33:55
Speaker 2: have higher valuations. It's just sort of pretty obvious. Now,
33:59
Speaker 2: the trust is a cost of doing business, and if
34:04
Speaker 2: you push up the interest rate, you actually push up
34:08
Speaker 2: people's cost of doing business. And for instance, if you
34:12
Speaker 2: and if you're a worker and you've got a mortgage
34:14
Speaker 2: and your mortgage cost cup, then you actually need a
34:17
Speaker 2: pay rise in order to pay your higher mortgage costs.
34:22
Speaker 2: So in that sense, actually the rising interest rates has
34:28
Speaker 2: a perversely an inflationary effect. And you see this, I
34:34
Speaker 2: think you see this where you landlords putting up rents
34:38
Speaker 2: having faced higher mortgage payments, or farmers who heavily leverage
34:43
Speaker 2: having to charge more for their food and so on.
34:45
Speaker 2: Then there is this. If you want to get more
34:47
Speaker 2: technical theoretical, there's a guy at Stamford called have you
34:53
Speaker 2: come across him called John Cochrane who has something which
34:57
Speaker 2: he calls the fiscal theory of the price level across Not.
35:03
Speaker 1: Yes, but now I'm going to go and have to
35:04
Speaker 1: go and look it up and put it in the
35:06
Speaker 1: show notes.
35:07
Speaker 2: I mean, it's ridly theory of.
35:09
Speaker 1: The price cycle. Sorry, listeners, this is what we have
35:12
Speaker 1: to do.
35:13
Speaker 2: Yeeah cockrid. It's written eight hundred He's written eight hundred
35:18
Speaker 2: page book on the subject of which you know most
35:22
Speaker 2: of it is equations, says sort of over my head. However,
35:25
Speaker 2: I think I understand his The basic insight, which is
35:28
Speaker 2: it is that in a world with in a modern
35:33
Speaker 2: world of fear currencies and so on, governments do not
35:37
Speaker 2: go bust and instead they inflate away their debt. Okay,
35:41
Speaker 2: you accept that if you have lower interest rates, the
35:45
Speaker 2: debt becomes more sustainable, and therefore you'll have less fiscal
35:52
Speaker 2: incentive to get to inflate away or debt. However, when
35:55
Speaker 2: you have higher interest rates, then the debt is less sustainable.
36:00
Speaker 2: Therefore it's technically more insolvent, and as it becomes closer
36:05
Speaker 2: to the insolvency, you get more inflation to pay it off,
36:09
Speaker 2: and that the thing that makes sense. The other thing
36:12
Speaker 2: that it's quite interesting is if you have Although it's
36:16
Speaker 2: true that lower interest rates made the debt more sustainable,
36:21
Speaker 2: of course the politicians couldn't resist the impulse to take
36:25
Speaker 2: on more debts. So you had, particularly during the sort
36:29
Speaker 2: of COVID period, you had this massive increase in government
36:32
Speaker 2: debt induced by the very low interest rates. I think
36:36
Speaker 2: you and I spoke what three years ago about the
36:39
Speaker 2: whole lockdown thing, and my view was that lockdown simply
36:43
Speaker 2: wouldn't have happened had there not been such cheap financing
36:48
Speaker 2: of government debt at the time. For instance, in the UK,
36:53
Speaker 2: the Bank of England was buying up, in effect, all
36:57
Speaker 2: of the bonds that the that the British government were
37:02
Speaker 2: issuing and charging fifteen basis points for it.
37:06
Speaker 1: Without that, all the business of lockdowns and furlough and
37:09
Speaker 1: helped to buy, helped to eat, whether they were called
37:12
Speaker 1: eat out to help out, etcetera. Now that would have
37:14
Speaker 1: been possible without super low interest rates, would it?
37:17
Speaker 2: I mean no, it wouldn't have been done because people
37:19
Speaker 2: would have people would have thought twice. The trouble back
37:23
Speaker 2: then is there was no thinking twice about what they
37:26
Speaker 2: were doing. But where are we now? I saw some
37:29
Speaker 2: data at the cost of government debt financing in the
37:33
Speaker 2: developed world has almost doubled in the last year. I
37:37
Speaker 2: think the American cost of debt servicing is running at
37:40
Speaker 2: about fifteen percent of expenditures. British debt is you know,
37:46
Speaker 2: so you can see that the governments themselves even if
37:49
Speaker 2: we had didn't have any of these other concerns. We
37:52
Speaker 2: can see that the governments again to have huge problems
37:57
Speaker 2: financing their debts, having got into such having splurged so much,
38:02
Speaker 2: and that gives them an incentive to keep interest rates
38:08
Speaker 2: below where they ought to be in order to control inflation.
38:11
Speaker 2: In other words, for all this talk of getting inflation down, there,
38:15
Speaker 2: there isn't at some higher level a you know, a
38:19
Speaker 2: strong incentive to do it. There's a much stronger I'm
38:22
Speaker 2: sure you are too. I'm in the Russell Napier camp
38:25
Speaker 2: of financial repression that interest rates will be below the
38:30
Speaker 2: cost of the level of inflation and the debt will
38:33
Speaker 2: be burnt off that way. And if financial repression it
38:38
Speaker 2: can be quite in theory, it could be quite smooth.
38:40
Speaker 2: And you and I know Russell. Rus Russell thinks that
38:44
Speaker 2: it's very bullish for equities, and it probably is. Is
38:48
Speaker 2: keeping interest below the inflation it probably helps it, you know,
38:53
Speaker 2: it probably does help equities. I'm just concerned that just
38:57
Speaker 2: moving nominal rates, even if they're negative in real time
39:00
Speaker 2: of very low levels, will cause a few more hiccups.
39:04
Speaker 2: And people are expecting all.
39:06
Speaker 1: We do now right now, we're in a very unusual
39:09
Speaker 1: period in the UK where the interest rate is actually
39:11
Speaker 1: above the ratio inflation stick. Come on in it cause
39:14
Speaker 1: account today and you can for a very short period
39:16
Speaker 1: only actually make a real return.
39:19
Speaker 2: Yep.
39:20
Speaker 1: That you know, take what you can get when you
39:22
Speaker 1: can get it, and right now you're going to have
39:24
Speaker 1: a real returnal They possibly not have.
39:25
Speaker 2: To tell Marion that I am put out a paper
39:28
Speaker 2: on historical experiences of inflation going back years and they
39:35
Speaker 2: one of the points they make there that inflation tends
39:38
Speaker 2: to remain persistent in countries that they describe as having
39:43
Speaker 2: premature celebrations. The premature celebration is when you think you've
39:50
Speaker 2: got inflation under control, and you haven't quite got it
39:53
Speaker 2: under control, say it bounces back. And that's really the
39:56
Speaker 2: experience of the seventies where a lot of premature I
40:00
Speaker 2: think we had three inflation cycles. If you go from
40:03
Speaker 2: the late sixties, late sixties, mid seventies and then late
40:08
Speaker 2: seventies is three inflation peaks, and in between you get
40:12
Speaker 2: these premential celebrations. From what we've talked about already, you
40:16
Speaker 2: can see this huge interest in keeping interest rates low,
40:20
Speaker 2: so they will leave at any use to cut rates,
40:24
Speaker 2: and therefore if the past was any guide, it wouldn't
40:27
Speaker 2: be entirely surprising. If I'm plating with the bounced back.
40:30
Speaker 1: Yeah, and that we can say, going back to Russell Napier,
40:33
Speaker 1: and this is very bullish for equities. Might give us
40:36
Speaker 1: some positive news that we may see a return to
40:40
Speaker 1: making good returns in the equity markets, even though it
40:43
Speaker 1: might not be fully justified by valuations.
40:46
Speaker 2: Well, you know, when you're talking to Jeremy Grantham, as
40:49
Speaker 2: he says, the US market is very very overvalued and
40:53
Speaker 2: aggregate and therefore one would expect, you know, for me
40:59
Speaker 2: that I'm a bit surprised at how strong it's remained.
41:03
Speaker 2: And as Jeremy was saying, this bit of a sort
41:05
Speaker 2: of AI bubble this year that has kept up the tech,
41:09
Speaker 2: the big tech names. But I would expect the US
41:13
Speaker 2: to have disappointing returns or possibly no returns.
41:18
Speaker 1: If we look at the US market, if we look
41:20
Speaker 1: at all markets, but in particularly if we look at
41:22
Speaker 1: the US market on an equal weighted basis as opposed
41:25
Speaker 1: to a market cat weighted basis, so we do the
41:27
Speaker 1: indices differently, it doesn't look nearly as overvalued as it does.
41:31
Speaker 1: If you did on a market cap basis, right, So
41:34
Speaker 1: if you effectively equal weight the astonishing performance of the
41:38
Speaker 1: Big seven, it looks a little different, I think. So.
41:43
Speaker 2: I haven't been looking at recently, but in my old firm, GMO,
41:46
Speaker 2: they will do forecasts for you know, US value and
41:49
Speaker 2: this and that, and I don't I think that you
41:52
Speaker 2: get much more attractive valuations outside the United States. I mean,
41:57
Speaker 2: you you typed.
41:59
Speaker 1: You you came Japan, and you've been counting Japan recently.
42:04
Speaker 1: Tell us about that quickly.
42:06
Speaker 2: So I've long been a japan bull.
42:12
Speaker 1: Yeah, that's me too. It's been a tough gig, hasn't
42:15
Speaker 1: It been a long time Japan bull. But we're finally
42:17
Speaker 1: getting our awards, I think. Yeah.
42:19
Speaker 2: I mean, actually you saw the piece I wrote. In fact,
42:22
Speaker 2: since twenty ten, Japanese equities have returned seven point three
42:27
Speaker 2: percent reel. I mean that's part more more than the
42:32
Speaker 2: average long term returns to the US top market, and
42:35
Speaker 2: really a return of you know, back to the returns
42:39
Speaker 2: that Japan used to deliver before the the you know,
42:45
Speaker 2: the end of the bubble economy in nineteen ninety. So
42:49
Speaker 2: I think you know that some of the headwinds for
42:51
Speaker 2: Japan were high valuations, and then this period of deflation
42:56
Speaker 2: and deleveraging that hurt Japanese margins and return on equity.
43:02
Speaker 2: And I think that was over ten years ago. So
43:04
Speaker 2: that was our reason for being bullish ten twelve years ago,
43:08
Speaker 2: and that's been more than vindicated. Let's say, however, one
43:12
Speaker 2: of the problems, if you remember of Japan, of investing
43:16
Speaker 2: in Japanese equities is that there were all these companies
43:19
Speaker 2: that looked cheap, in particularly these so called net nets,
43:23
Speaker 2: the companies that market cap was below the cash and
43:28
Speaker 2: working capital. And these are the businesses that sort of
43:30
Speaker 2: Ben Graham's of this world wanted to own, and then
43:35
Speaker 2: they would go along, they'd buy Japanese companies netnets and
43:38
Speaker 2: find that you couldn't you go to the company and say, look,
43:42
Speaker 2: you've got much more too much cash from your ban sheet.
43:45
Speaker 2: You've got these divisions that are not earning any capital
43:48
Speaker 2: and not caught, not earning a return on capital, and
43:50
Speaker 2: they're not caught your business. When you get rid of
43:52
Speaker 2: them and the management, we just look at them and
43:55
Speaker 2: you tell them to go away. And now that is changing.
44:01
Speaker 2: And that's what I wrote about recently, and actually I
44:03
Speaker 2: visited Japan a few times, just over ten years ago
44:06
Speaker 2: with a colleague of mine who was a Japan expert.
44:09
Speaker 2: He was very against Western activism in Japan. He thought
44:13
Speaker 2: that they, you know that these Americans who rived in
44:17
Speaker 2: Japan took a stake in a company and then banged
44:20
Speaker 2: their fists on the table were doing it all wrong.
44:22
Speaker 2: And and the firms that did that in the early
44:25
Speaker 2: two thousands, it was one American company called Steel Partners.
44:29
Speaker 2: They were rebuffed and they had disappointing returns. But now
44:33
Speaker 2: my former colleague Toby Rhodes, who has a small cap
44:39
Speaker 2: Japan business, he says that now the situation completely changed.
44:45
Speaker 2: He for instance, has been made a or nominated to
44:49
Speaker 2: be an independent director of a company in which he
44:51
Speaker 2: has an investment. There is there are you know, we've
44:56
Speaker 2: seen the beginning of hostile takeovers in Japan, and you've
45:00
Speaker 2: seen the Tokyo Stock Exchange has told companies whose market
45:07
Speaker 2: cap is below their book value, which roughly half the
45:11
Speaker 2: companies listed in Tokyo are priced at below book These
45:15
Speaker 2: companies have been told to come up with a plan
45:19
Speaker 2: to get their market cap above book. Now, the Ministry
45:24
Speaker 2: for Economy, Trade and Industry METI wants Japanese companies to consolidate,
45:30
Speaker 2: and in order to dry this consolidation, it wants shareholders
45:35
Speaker 2: to push companies to get rid of poorly performing divisions
45:39
Speaker 2: and to merge. And I think that so obviously Japan
45:43
Speaker 2: it's not the market is not as cheap as it
45:46
Speaker 2: was when it was you know, roughly almost a third
45:49
Speaker 2: of its current price twelve years ago. But now there's
45:53
Speaker 2: potential for unlocking value in Japan, for activism and for
45:59
Speaker 2: proper true value investing, as you probably know, requires activism.
46:04
Speaker 2: That's what Ben Graham, who was the father of value investment,
46:07
Speaker 2: he was an activist investor. And I think that now
46:11
Speaker 2: activism is coming to Japan with the support of the authorities.
46:16
Speaker 2: That is a major change and gives a prospect for
46:20
Speaker 2: really decent returns from Japan going forward.
46:23
Speaker 1: Excellently.
46:24
Speaker 2: See your final question, are you ready?
46:27
Speaker 1: I have to because are you ready? Course you are,
46:30
Speaker 1: and you know the answer. I have to ask everybody
46:32
Speaker 1: this one. Okay, if I were to make you give
46:36
Speaker 1: me all your money and lock it, lock it away
46:38
Speaker 1: for ten years, and I told you that I can
46:39
Speaker 1: put it for you into either a deposit account in
46:43
Speaker 1: the UK and interest paying deposit account in the UK,
46:47
Speaker 1: gold or bitcoin? Which would you choose?
46:53
Speaker 2: You know, the answer trick question.
46:56
Speaker 1: It's not a trick question.
46:58
Speaker 2: I would say. I would say because we've taught that
47:02
Speaker 2: we expect financial oppression on deposits to hurt, and you
47:06
Speaker 2: think bitcoin is a sort of bubble acid and you
47:10
Speaker 2: know there's a reasonable chance if we get financial oppression
47:14
Speaker 2: you'll get a gold bubble, as we did in the
47:17
Speaker 2: in seventy nine eighty, in which case gold would be
47:21
Speaker 2: out that ten thousand dollars. Now it's and one have
47:24
Speaker 2: done very well, but you know I would have that.
47:28
Speaker 1: I've been a gold bug for so long. Wouldn't it
47:30
Speaker 1: be nice if suddenly we had a proper gold bubble
47:32
Speaker 1: and we'd be vindicated in it in our affection for
47:35
Speaker 1: gold edvar Thank you so much. I think you know
47:38
Speaker 1: you've given all the answers that I really like. By
47:40
Speaker 1: Japhan by gold, I mean, this is fantastic. Thank you
47:43
Speaker 1: so much. Thanks for listening to this week's Merin Talks Money.
47:51
Speaker 1: We're off next week. We're back the week after. Catch
47:54
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47:56
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48:15
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48:18
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