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The ‘Soft Landing’ Skeptics Are Still Out There with Deutsche Bank's Jim Reid · Merryn Talks Money

0:01
Speaker 1: Welcome to Maren Talks Money, the podcast in which people
0:04
Speaker 1: who know the markets explain the markets. I'm Maren Suset
0:07
Speaker 1: where this week, Jim Read, global head of economics and
0:09
Speaker 1: thematic research at Deutsche Bank, joins me to discuss his
0:12
Speaker 1: latest research which closely examines how US tech stocks have
0:16
Speaker 1: soared so called Magnificent seven American tech chants combined market
0:20
Speaker 1: cap alone would make it the second largest country stock
0:23
Speaker 1: exchange in the world. We talk about whether this level
0:26
Speaker 1: of concentration should be concerning for global stock markets, and
0:29
Speaker 1: of course for you I love for my conversation with Jim.
0:33
Speaker 1: Do say tuned because Bloomberg columnist John Authors is joining
0:36
Speaker 1: me for our weekly debrief. Jim, Welcome, Thank you so
0:39
Speaker 1: much for joining us today.
0:41
Speaker 2: Thank you pleasure to be here, Right.
0:43
Speaker 1: Jim, I want to start with a note you wrote
0:46
Speaker 1: recently called everything Poised to a soft landing except for history.
0:49
Speaker 1: And what I particularly like about this piece is the
0:53
Speaker 1: very first slide percent of Bloomberg articles mentioning soft landing
0:59
Speaker 1: in total articles, It says, and then there's a wonderful
1:02
Speaker 1: chart that says that we tend to mention soft landings
1:05
Speaker 1: a lot. Just before there isn't one. And then there's
1:09
Speaker 1: another chart underneath that that shows that we love to
1:11
Speaker 1: talk about recessions after they've already started, so they're not
1:16
Speaker 1: charts that really show us journalists in the best of light.
1:19
Speaker 1: So I wonder if we could start by talking about
1:22
Speaker 1: why it is that we're usually wrong about soft landings,
1:25
Speaker 1: and why it is that we may well be this
1:27
Speaker 1: time as well, not me, by the way.
1:29
Speaker 2: Then it's a fun kind of icebreaker for the pack.
1:33
Speaker 2: I suppose if you think about it, if you've got
1:37
Speaker 2: an economy that's operating in a relatively normal manner and
1:42
Speaker 2: then it overheats, and then central banks types and policy
1:46
Speaker 2: to remove some of that heat, data will soften, and
1:52
Speaker 2: therefore as it softens, you probably get more and more
1:56
Speaker 2: people talk about soft landing, and the news are mentioned
2:00
Speaker 2: it spike, and then I suppose you've got a question
2:03
Speaker 2: is that the final destination or is it just the
2:06
Speaker 2: pathway to a harder landing? And I suppose the only
2:11
Speaker 2: problem with that graft that I put in my piece
2:13
Speaker 2: is that there's only thirty forty years of data, so
2:16
Speaker 2: you've only really got three or four cycles, and therefore
2:19
Speaker 2: you can't base a whole investment thesis on it. But
2:22
Speaker 2: it's interesting that before the last you know, three or
2:25
Speaker 2: four recessions, you have had a soft landing talk spike
2:30
Speaker 2: quite aggressively, you know, six to eighteen months beforehand. So
2:35
Speaker 2: it has happened in those cases. I don't think we
2:37
Speaker 2: can say for certain it's going to happen again. But
2:39
Speaker 2: soft landing has been all the raised in the last
2:42
Speaker 2: two or three months and doesn't necessarily mean we have one.
2:45
Speaker 1: Well, let's talk about the case for a soft landing.
2:48
Speaker 1: I mean that it is definitely the case still that
2:50
Speaker 1: most people believe that not just the US, but across
2:52
Speaker 1: the board there will be a soft landing. And even
2:54
Speaker 1: you know, in the UK recently we have these numbers
2:57
Speaker 1: dropping US into a technical recession and everyone's said, gosh,
3:00
Speaker 1: don't worry. In fact, even a doutsche Bank put out
3:02
Speaker 1: of you saying don't bank, it's a short and small
3:04
Speaker 1: technical recession. I there's nothing to see here, nothing to
3:07
Speaker 1: see here. So what is the case for a global
3:12
Speaker 1: soft landing?
3:13
Speaker 2: Yep. I think the main case probably rests on inflation
3:19
Speaker 2: falling rapidly enough and making enough progress towards two percent
3:24
Speaker 2: that the central banks can cut rate just in time
3:29
Speaker 2: to stop the lag of policy being too threatening to
3:34
Speaker 2: the economy. And I think that is the key thing inflation.
3:37
Speaker 2: Inflation has fallen quicker than virtually everyone expected over the
3:40
Speaker 2: last twelve twelve to fifteen months. Let's say even the
3:43
Speaker 2: most pullish on inflation probably didn't see inflation coming down
3:47
Speaker 2: as quickly as it has done so. And I suppose
3:50
Speaker 2: that the next point is does it go the last
3:52
Speaker 2: mile towards two percent?
3:55
Speaker 1: Is always the hardest bit, right, the last mile is
3:58
Speaker 1: always the hardest bet. We guessed on this show. Over
4:00
Speaker 1: the last year or so, we've looked at the history
4:03
Speaker 1: of inflation once it's gone to double digits or close
4:06
Speaker 1: to double digits, and there are so many experiences historically
4:10
Speaker 1: in developed economies of that number coming down maybe you know,
4:14
Speaker 1: four percent, five percent, but then not being able to
4:17
Speaker 1: get through that last bed, and then quite often you
4:18
Speaker 1: see you see it rearing its ugly head again. So
4:21
Speaker 1: getting down to five percent or four percent even feels
4:25
Speaker 1: like the easy bit.
4:27
Speaker 2: I think that's right. And look, a lot of the
4:30
Speaker 2: models do say inflation it's going to return to two
4:33
Speaker 2: percent within a reasonable time frame, So that would be
4:37
Speaker 2: what the soft landing basis is based upon, and that's
4:41
Speaker 2: where I suppose we can have the biggest debate is
4:43
Speaker 2: that going to happen this time or not? But that
4:47
Speaker 2: is definitely what the soft landing basis is based around.
4:49
Speaker 1: But we have slightly lots of confidence in models, haven't we,
4:52
Speaker 1: particularly central bank models. And I know there's lots of
4:55
Speaker 1: talk about her central bank is in the Bank of
4:56
Speaker 1: England in this particular, is going to have a good
4:58
Speaker 1: look at their models and improve them and changes, etc.
5:01
Speaker 1: But there's not been time for that yet, so they're
5:03
Speaker 1: still using the structures that have been phenomenally wrong for
5:07
Speaker 1: four or five years.
5:09
Speaker 2: No, I think that's right, and I think the I
5:12
Speaker 2: was shocked at how complacent markets were, you know, two
5:16
Speaker 2: three years ago about inflation, given you've just seen the
5:19
Speaker 2: biggest money supply spike since World War Two, And actually,
5:24
Speaker 2: if you look at longer term data, you'd have to
5:26
Speaker 2: go back about one hundred and fifty years to the
5:29
Speaker 2: late nineteenth century to see a spike in money supply
5:32
Speaker 2: bigger than the one that we saw in COVID. So
5:36
Speaker 2: you know, anybody who's got any kind of monetarist leanings
5:40
Speaker 2: that had to have brought proper inflation. So yeah, the
5:45
Speaker 2: market and the markets central banks hadn't really covered themselves
5:50
Speaker 2: in glory on inflation in the last handful of years,
5:53
Speaker 2: So you know, one has to take that into account
5:56
Speaker 2: when you think about predictions of inflation.
5:59
Speaker 1: Yeah, do you have monagorist leanings, because if you do,
6:01
Speaker 1: you have to believe that inflation is going to continue
6:04
Speaker 1: on its way down, right, because we've seen one of
6:05
Speaker 1: the sharpest sharpest contractions in money supply in a long time.
6:09
Speaker 2: Yeah, And I would say that my biases are that
6:13
Speaker 2: inflation is a monetary phenomena. It's probably a slightly more
6:18
Speaker 2: complicated than that. And I suppose one of the interesting
6:21
Speaker 2: things at the moment is whether you the stock versus
6:24
Speaker 2: the flow. So if you were making a case that
6:28
Speaker 2: inflation might linger a little bit longer, you would probably
6:31
Speaker 2: say that the stock of money in the system is
6:34
Speaker 2: still big enough. You know, from that massive helicopter drop
6:38
Speaker 2: till or three years ago, that even though the flow
6:41
Speaker 2: of money is now contracting, so money supply numbers are
6:44
Speaker 2: negative most of the across most of the important parts
6:47
Speaker 2: of the world, maybe that stock of money, that reservoir
6:52
Speaker 2: of money from the huge stimulus is still there. Kind
6:55
Speaker 2: of around around the system. So that's where it's confusing,
6:59
Speaker 2: and that's stock versus flowing.
7:02
Speaker 1: Yeah, and we keep thinking that people's savings are going
7:04
Speaker 1: to run out, that that stock is going to disappear,
7:06
Speaker 1: but it doesn't, does it.
7:08
Speaker 2: No. Actually, in the US, where we probably spent a
7:10
Speaker 2: bit more time analyzing this before the revisions to GDP
7:14
Speaker 2: in September, they do annual benchmark revisions. We thought that
7:18
Speaker 2: the stock of excess savings would run out by the
7:20
Speaker 2: end of last year, so you know, six weeks ago.
7:23
Speaker 2: But with the revisions that were seeing our cautpulations meant
7:28
Speaker 2: that xcess savings had another year, So that that again
7:33
Speaker 2: might be one of the reasons why we haven't had
7:36
Speaker 2: a recession yet because there is that stock of excess
7:40
Speaker 2: savings that lingers from from the pandemic stimulus.
7:44
Speaker 1: Yeah, and the labor market's still strong pretty much everywhere.
7:48
Speaker 2: Yeah, I mean, the labor market is a lagging indicator,
7:51
Speaker 2: so one has to be careful. But at the moment
7:54
Speaker 2: that another big I suppose what most people who believe
7:57
Speaker 2: in the soft land in the police degree think is that,
8:02
Speaker 2: you know, the miracle has been the central banks have
8:05
Speaker 2: put the biggest hiking cycle in forty years into the
8:08
Speaker 2: system and it's dealt with inflation and has had no
8:13
Speaker 2: consequence on unemployment, and that you'd have to say that's true.
8:17
Speaker 2: But is whether unemployment is a lag and indicator or
8:21
Speaker 2: not on history says it is, so you shouldn't take
8:24
Speaker 2: too much from that.
8:25
Speaker 1: And are they forgetting the believers in self landings just
8:29
Speaker 1: how long the lag of monetary policy can be. You know,
8:32
Speaker 1: everyone for the last couple of years has behaved. Is
8:35
Speaker 1: that central banks put up interest rates, and that's that
8:37
Speaker 1: it happens immediately, But in fact the lag is always
8:40
Speaker 1: very long and conceivably could be longer in this cycle
8:44
Speaker 1: because of the way people fix their debt during the
8:46
Speaker 1: very low interest rate period.
8:47
Speaker 2: Right, yeah, And I mean we did a look at
8:51
Speaker 2: the last thirteen US hiking cycles over the last seventy years,
8:56
Speaker 2: and apart from the Vulka FED INDIUCED recession in the
9:01
Speaker 2: early eighties, the earliest a recession that started after the
9:05
Speaker 2: start of a FED hiking cycle is nineteen months. I
9:09
Speaker 2: should probably rephrase that and say, now the thirteen cycles,
9:12
Speaker 2: the Volka recession happened eleven months after the start of
9:15
Speaker 2: the hiking cycle, but the next earliest was nineteen.
9:18
Speaker 1: Months, okay, and that would take us to when that.
9:22
Speaker 2: Would have taken us to October last year, So a
9:25
Speaker 2: very early recession would have happened in Q four of
9:28
Speaker 2: last year basically. And I suppose, well, if you look
9:30
Speaker 2: at history, a lot happened kind of between of nineteen
9:36
Speaker 2: and thirty months, if that makes sense, from the initial
9:40
Speaker 2: hiking cycle dark date. And that means that we're kind
9:43
Speaker 2: of in that window. Okay, we're in that window now effectively. Yeah,
9:47
Speaker 2: this is where history would say, you know, kind of
9:50
Speaker 2: sniper's alley of recessions from a historical point of view,
9:55
Speaker 2: is it's more probabilistic. And actually, the interesting thing is,
9:59
Speaker 2: twelve months ago, most of the most analysts were thinking
10:03
Speaker 2: you'd get a recession within you know, we were in
10:05
Speaker 2: a recession, all close to it at that point, and
10:07
Speaker 2: that would have been very early historically. Yet nobody now
10:11
Speaker 2: is that worried, even though now probabilistically you're at more risk, okay.
10:16
Speaker 1: And how worried are you when you when you when
10:19
Speaker 1: you say, well, this is happening. Look at history, we
10:21
Speaker 1: always talk about soft landings. These this kind of soft
10:24
Speaker 1: landing data is no different to how it's been in
10:26
Speaker 1: the past, just before something nasty happens. How worried are
10:30
Speaker 1: you about the nasty.
10:33
Speaker 2: If I'm being completely honest, that's.
10:35
Speaker 1: What I'm after, completely honesty, John, the whole way through.
10:39
Speaker 2: Only only between you and us. Tell anybody else.
10:42
Speaker 1: Won't tell anybody else.
10:44
Speaker 2: Absolutely, if I'm being really honest. We got the inflation
10:47
Speaker 2: call spot on. We were very early on it. We
10:50
Speaker 2: got the bed call spot on. We thought they would
10:52
Speaker 2: move it very aggressively before anybody else. We've got the
10:55
Speaker 2: recession called wrong so far. I thought you'd been a
11:00
Speaker 2: recession by the end of twenty twenty three, so you know,
11:03
Speaker 2: a couple of months ago. So I you know, I
11:06
Speaker 2: have to be I have to look at you know,
11:09
Speaker 2: the things I've looked at and think whether they're still valid.
11:14
Speaker 2: I would say the thing that has probably prevented a
11:18
Speaker 2: recession most has been the excess savings in the system
11:21
Speaker 2: and the fact that companies and entities probably have less
11:25
Speaker 2: borrowing these than maybe they would normally have at this
11:29
Speaker 2: stage of the of the cycle. Now both can't last forever,
11:34
Speaker 2: so excess savings, even if we revised our forecast based
11:39
Speaker 2: on the revisions, they probably will run out by the
11:43
Speaker 2: end of this year, and you know, for most consumers
11:46
Speaker 2: sooner than that, and there is a refi wall coming
11:50
Speaker 2: in leavered credit in commercial real estate, and therefore that
11:53
Speaker 2: I think again the soft landing narrative probably does need
11:58
Speaker 2: the FED to be cut in rate this year to
12:03
Speaker 2: just about get us over the line before we have
12:06
Speaker 2: more difficult times ahead. So we thought you'd be in
12:09
Speaker 2: a recession and you're not. A history would say that
12:12
Speaker 2: the risk is still going to be there for probably
12:16
Speaker 2: the next year. And I suppose the question is can
12:18
Speaker 2: the FED cut rates quick enough and aggressive aggressively enough
12:23
Speaker 2: that you get back to a more normal kind of
12:25
Speaker 2: monetary position before an accident happens.
12:28
Speaker 1: That sounds like a really nasty situation, because if we
12:31
Speaker 1: agree that inflation is still looking a bit dicey, and
12:34
Speaker 1: we agree that it may be, as you say, the
12:35
Speaker 1: stock rather than the flow that is keeping inflation a
12:38
Speaker 1: little higher and more volatile than people expected, then it
12:41
Speaker 1: gets very hard for central bank. Is maybe not so
12:44
Speaker 1: hard for the FED with its dual manddate, but certainly
12:46
Speaker 1: hard with the legs of the Bank of England to
12:49
Speaker 1: start cutting rates in time for this to happen. The
12:52
Speaker 1: way you describe it, it sounds incredibly precise. And one
12:55
Speaker 1: thing we do know is that monet people, I see,
12:56
Speaker 1: it's very hard to make it precise for it, particularly
12:59
Speaker 1: in this environment.
13:00
Speaker 2: The way I think about it is that in this
13:03
Speaker 2: last you know, three four years or so, you've had
13:08
Speaker 2: two forces in the opposite directions of just once in
13:13
Speaker 2: a lifetime size. So you have the kind of the
13:15
Speaker 2: once in the lifetime increase in the money supply on
13:19
Speaker 2: one side, which was ginormous around the world, and then
13:23
Speaker 2: followed by, you know, the biggest hike in interest rates
13:28
Speaker 2: in forty years and the biggest contraction in money supply
13:30
Speaker 2: for the best part of eighty eighty years. And to
13:35
Speaker 2: think that they can be perfectly calibrated to kind of
13:40
Speaker 2: slowly drift you back to two percent inflation and two
13:44
Speaker 2: percent growth, it's not impossible, but given the lag of policy,
13:48
Speaker 2: that would also require a lot of good fortune, I think,
13:51
Speaker 2: and the deutsch Bank house viewers moved to a soft
13:54
Speaker 2: landing has been our central case scenario, and that clearly
13:59
Speaker 2: looks like like the most likely scenario at the moment.
14:02
Speaker 2: But I would say that probably the tails of that
14:04
Speaker 2: distribution are bigger than the market expects. So you know,
14:08
Speaker 2: the no landing scenario is probably a higher risk than
14:10
Speaker 2: the market inspects. And I still think the hard land
14:12
Speaker 2: in scenario probability is probably higher than the market inspects.
14:16
Speaker 1: Oh, let's talk about the no landing scenario. How does
14:19
Speaker 1: that work?
14:20
Speaker 2: Well? I think the no landing scenario is one where
14:24
Speaker 2: the inflation data just stalls enough that the FED either
14:29
Speaker 2: can't cut rates, or you know, maybe does a cut
14:34
Speaker 2: and then has to stop, or even contemplates Rizon again.
14:38
Speaker 2: And I suppose where that would be an issue is
14:41
Speaker 2: if that rates are quite restricted now, so if you
14:45
Speaker 2: look at real rates in across the world, they're pretty restrictive,
14:50
Speaker 2: and therefore, you know, the probablity of an accident does
14:54
Speaker 2: what accumulative probability of an accident probably increases steadily the
14:57
Speaker 2: longer you have rates at these sort of levels. That's
15:00
Speaker 2: probably the risk of a no landing.
15:02
Speaker 1: Is there an argument that the central banks are loathed
15:05
Speaker 1: to cut interest rates because they're actually quite keen to
15:08
Speaker 1: get rates back to long term historical levels. When I
15:11
Speaker 1: say long term historical, I mean sort of five thousand
15:13
Speaker 1: year levels rather than twenty year levels. And so in
15:16
Speaker 1: an ideal world, they'd like to be able to stay
15:18
Speaker 1: up at four percent or so.
15:20
Speaker 2: I suppose the way I like to think about it
15:23
Speaker 2: is more from the angle that you know, if you
15:27
Speaker 2: listen to central bank speak, you're never more than a
15:31
Speaker 2: few days away from a central banker mentioned in the
15:33
Speaker 2: nineteen seventies trying to ensure that we don't repeat the
15:38
Speaker 2: mistakes of the nineteen seventies. I mean the Unfortunately, the
15:41
Speaker 2: Arthur Burns bed is not particularly not held particularly well
15:46
Speaker 2: in academic and central bank circles, and therefore most central
15:50
Speaker 2: bankers really don't want their legacy to be that they
15:53
Speaker 2: also made similar errors. So I think on balance, the
15:57
Speaker 2: central bank's probably main priority is not to ease too early.
16:03
Speaker 2: Doesn't mean to say that their priority is not to
16:06
Speaker 2: ease if the data is there. I think, ingrained, it's
16:11
Speaker 2: almost like every central banker has been to the virtual
16:15
Speaker 2: nineteen seventies open university course. They don't want to be
16:19
Speaker 2: seen to be making the same mistake. And I think
16:22
Speaker 2: the central banks have been saying this, but the markets
16:25
Speaker 2: kind of between October and January weren't listening to them
16:29
Speaker 2: and didn't believe them. And I think in the last
16:31
Speaker 2: you know, last two or three weeks, the markets have
16:34
Speaker 2: kind of stood up and kind of taken a little
16:37
Speaker 2: bit of that warning. So there's a bit more balance
16:40
Speaker 2: in market pricing now. But yeah, central banks, I mean,
16:44
Speaker 2: if the US inflation data of the last week isn't
16:47
Speaker 2: a one off, then that seriously raises the question of
16:52
Speaker 2: whether the BED can start an easy in cipher law.
16:56
Speaker 2: If they do start, how you know, they probably wouldn't
16:58
Speaker 2: get very far in.
17:00
Speaker 1: Saying And everyone I'm talking to at the moment about
17:02
Speaker 1: various things is where everyone's listening to the same The
17:04
Speaker 1: Rest is History podcast about the nineteen seventies, right literally,
17:08
Speaker 1: it's at the forefront of everyone's minds, and I reckon
17:11
Speaker 1: central bankers are probably listening to that as well and
17:13
Speaker 1: thinking to themselves, God, and the last thing I want
17:15
Speaker 1: to be is one of the central bankers. You've got
17:17
Speaker 1: it wrong, particularly haven't got it so wrong for the
17:19
Speaker 1: last four or five years. Everyone wants to be remembered
17:21
Speaker 1: as a vulgank lot of burns, and that may have
17:23
Speaker 1: impacts for all of us.
17:25
Speaker 2: Yeah, listening to the central bankers, they're remaining on the
17:31
Speaker 2: courtious side in terms of rate cuts. I suppose what
17:35
Speaker 2: market will still choose to ignore them if they believe
17:37
Speaker 2: that they have a better insight into the data. But
17:40
Speaker 2: we've probably moved a bit more in balance in the
17:42
Speaker 2: last few weeks.
17:43
Speaker 1: Yeah, okay, let's look at what this idea that we're
17:47
Speaker 1: moving from a into a soft landing scenario has meant
17:51
Speaker 1: for markets. Now, you wrote recently about the Magnificent Seven,
17:56
Speaker 1: the Seven, the seven companies in the US there are
17:59
Speaker 1: effectively driving US markets, and in driving US markets, driving
18:03
Speaker 1: global markets because the US is such a big component
18:06
Speaker 1: of the global market. So we have these seven companies
18:09
Speaker 1: that are basically the drivers behind our pensions, our ices,
18:15
Speaker 1: our assets. What is going on with them? The US
18:18
Speaker 1: market is now what nearly as concentrated as has ever
18:21
Speaker 1: been in history, with these big companies taking up most
18:24
Speaker 1: of the market, and time after time after time we
18:26
Speaker 1: look at them, we say, this can't go on. This
18:28
Speaker 1: is ridiculous. This never ends well. But maybe it is
18:31
Speaker 1: going to end well.
18:33
Speaker 2: What the first thing to say is I wish I
18:34
Speaker 2: did have them in my eye, says I, with all
18:37
Speaker 2: due respect, I wouldn't be speaking to you. I'd be
18:39
Speaker 2: on the beat if I'd.
18:40
Speaker 1: Have had you must have some of them in your
18:43
Speaker 1: I say you must have a nice global tracker or something,
18:46
Speaker 1: and Deutsch you must have given you a nice pension
18:48
Speaker 1: which ought to enroll you into some lovely US trackers.
18:51
Speaker 2: Surely, maybe in those decisions that I haven't had anything
18:54
Speaker 2: to do with, maybe there's a little bit in the
18:57
Speaker 2: back burner.
18:58
Speaker 1: That's how it works for me as well, Jo, if
18:59
Speaker 1: I've got any It's not a decision I made.
19:02
Speaker 2: Yep, sadly, sadly for both of us. Look, I think
19:07
Speaker 2: they are astonishing in terms of their size and their breadth.
19:12
Speaker 2: So the US market is pretty much the most concentrated
19:16
Speaker 2: it's been in history, really, very similar to the where
19:19
Speaker 2: it was in nineteen twenty nine in terms of the
19:22
Speaker 2: weight of let's say the top five constituents. So top
19:27
Speaker 2: five make up about twenty five percent of the market now,
19:31
Speaker 2: so that's as big as it has been in history.
19:35
Speaker 2: And look, as an economic historian, I have a bias
19:39
Speaker 2: to believe that this is nonsense and doesn't make sense
19:44
Speaker 2: and is warning of us of a more difficult time
19:48
Speaker 2: to come. Yeah, I suppose this is where you've got
19:50
Speaker 2: to be slightly careful of history, because we've probably never
19:54
Speaker 2: had a situation in history where the companies that make
19:58
Speaker 2: up that top five per or a Magnificent seven, et cetera,
20:02
Speaker 2: make as much money already. You know, this isn't like
20:04
Speaker 2: two thousand, where there was a lot more speculation in
20:09
Speaker 2: companies that weren't profitable. And just you know, a stat
20:12
Speaker 2: to throw out out at you. If the Magnificent seven
20:16
Speaker 2: were a stock market on their own, if you exclude
20:19
Speaker 2: the US, there'd be the third biggest stock market in
20:21
Speaker 2: the world by profitability, so only China and Japan would
20:26
Speaker 2: be ahead of them.
20:27
Speaker 1: Yeah, and they'd be the biggest by market cap. I
20:29
Speaker 1: saw as well in your work. So they would be
20:32
Speaker 1: that those seven alone would be in taking out the
20:35
Speaker 1: rest of the US, would be the biggest stock market
20:38
Speaker 1: in the world, China coming just buying them, Japan to
20:40
Speaker 1: soft there than India, France, etc. And then you have
20:43
Speaker 1: individual US companies Microsoft, Apple, which are bigger as single
20:49
Speaker 1: companies in terms of market captain than all of the
20:52
Speaker 1: UK markets, all of the Canadian market, all of the
20:55
Speaker 1: German market. I mean, it's just nuts.
20:57
Speaker 2: It is, as I said, my natural inclination to say
21:00
Speaker 2: this is crazy, and then you look at how much
21:02
Speaker 2: money they make and it's still expensive and elevated, but
21:08
Speaker 2: it starts to become you can start to build a
21:11
Speaker 2: narrative of some discript So, for example, the amount of
21:13
Speaker 2: annual profit that Apple makes is around sixty percent of
21:17
Speaker 2: the entire listed stock market in France.
21:19
Speaker 1: Yeah, no, I mean that absolutely extraordinary. I've got I've
21:22
Speaker 1: got your chart in front of me, which so if
21:24
Speaker 1: you look at it in terms of billions for the
21:26
Speaker 1: profits Apple one hundred and one, all of the UK,
21:31
Speaker 1: all of it, two hundred and seventeen, all of Canada
21:35
Speaker 1: one thirty six, all of Germany one eighty eight, and
21:39
Speaker 1: then you go to alphabet Alphabet, Alan seventy four, Amazon
21:43
Speaker 1: alone thirty, etc. Matter alone, though, it was absolutely extraordinary
21:47
Speaker 1: how successful these companies are. And as you say, once
21:50
Speaker 1: you start to look at it like that, maybe these
21:53
Speaker 1: valuations are.
21:54
Speaker 2: Okay individually within the seven there may be some that
21:58
Speaker 2: are look a little bit more stretched than others. But
22:00
Speaker 2: I mean, if you're talking about, you know, the lights
22:02
Speaker 2: of Apple and Microsoft, you know these are very profitable
22:06
Speaker 2: companies that probably will stay profitable for a period of time.
22:09
Speaker 2: I'm not a micro analyst, and I don't understand the wizards,
22:15
Speaker 2: et cetera. But I would say as a minimum that
22:18
Speaker 2: these aren't uber crazy valuations. It's just whether you think
22:22
Speaker 2: that they are rich or not.
22:25
Speaker 1: Well, they are still high. I mean, if you look
22:26
Speaker 1: at the average of this even again I'm looking at
22:29
Speaker 1: your chart, the average trailing pee for those seven stocks
22:33
Speaker 1: is thirty seven times. I mean, it is high. It's
22:35
Speaker 1: not one hundred. You know, this is not Japan in
22:37
Speaker 1: the middle of its great bubble, but it's still high.
22:40
Speaker 1: And then you know, the most expensive Nvidia on ninety.
22:43
Speaker 1: And then you come back to the UK as a
22:45
Speaker 1: whole and it's got an average pe of seventeen. So
22:49
Speaker 1: they're expensive, but not as expensive as we've seen in
22:53
Speaker 1: previous bubbles.
22:54
Speaker 2: Yeah, I think that's probably the way to put it.
22:57
Speaker 2: And I suppose if you were trying to put it
22:59
Speaker 2: into a historical context as well, in this era we
23:03
Speaker 2: live in today, we probably have more globalization that allows
23:10
Speaker 2: companies to cross borders, maybe even more than it was
23:13
Speaker 2: let's say the nifty fifty or obviously people are talking
23:16
Speaker 2: a lot about the nifty fifty in the late sixties
23:18
Speaker 2: early seventies, although the company's sold products around the world,
23:23
Speaker 2: the world was much more localized back then, so you know, Kodak,
23:28
Speaker 2: for example, although it was a global company, wouldn't have
23:32
Speaker 2: the same kind of global presence as some of the
23:34
Speaker 2: Magnificent Seven. Today, the Internet has also kind of been
23:40
Speaker 2: a global phenomena, and therefore, you know, the Lights and
23:43
Speaker 2: Magnificent seven can access global consumers in a you know,
23:48
Speaker 2: a press of a button in the way that maybe
23:50
Speaker 2: we couldn't have done fifty years ago, one hundred years ago,
23:53
Speaker 2: et cetera. So the world has changed a little bit
23:56
Speaker 2: to allow dominance of individual companies more than they would
24:00
Speaker 2: have in the past. But it's just what price or
24:03
Speaker 2: you want to pay for that.
24:04
Speaker 1: Yeah, and there is risk. And we talk about globalization
24:07
Speaker 1: being one of the big drivers behind these companies, and
24:10
Speaker 1: of course it has been, but one of the things
24:11
Speaker 1: we're looking at now is a degree of deglobalization. And
24:15
Speaker 1: it's never going to happen as fast as some people
24:16
Speaker 1: believed it would. But this is not the world of
24:19
Speaker 1: five years ago. It's a very different world. And there
24:21
Speaker 1: are a lot of governments out there that are increasingly
24:24
Speaker 1: controlling the Internet and increasing they want to control the
24:26
Speaker 1: way these big companies operation, in particular control their profits
24:31
Speaker 1: and how those profits are taxed and to control the
24:35
Speaker 1: information that they can carry or not carry. So there's
24:37
Speaker 1: still a lot of risk there when you think about geopolitics, right.
24:41
Speaker 2: Yeah, I know, and it's a good point. And look,
24:44
Speaker 2: if you think about markets, I mean, we make the
24:47
Speaker 2: point in the report that the top five biggest companies
24:50
Speaker 2: over in the US, for example, do change over time
24:54
Speaker 2: and in fairly unpredictable ways that you wouldn't have known
24:57
Speaker 2: maybe five ten years in advance. They tend to be
24:59
Speaker 2: quite stable in the short term, but quite they move
25:03
Speaker 2: quite a bit in the medium term, if that makes sense.
25:05
Speaker 2: So you know, the top five biggest companies in ten
25:08
Speaker 2: years may be a completely different cohort and because of
25:12
Speaker 2: things that we don't know yet. So we don't know
25:14
Speaker 2: if globalization is going to really cause a kind of
25:18
Speaker 2: a schism in the world order at some point in
25:20
Speaker 2: this decade. You know, we don't know if there's a
25:22
Speaker 2: new silver bullet that's going to come around that makes
25:26
Speaker 2: some of the technologies redundant. We just don't know, and
25:29
Speaker 2: that's part, you know, part of investing is obviously trying
25:32
Speaker 2: to lean against things that you don't know if the
25:37
Speaker 2: price is probably the wrong price, and that's a feel
25:41
Speaker 2: that probably helps you in the long term, but doesn't
25:43
Speaker 2: necessarily help you in the short term.
25:45
Speaker 1: Yeah, shorter term though, I suppose we could say that
25:48
Speaker 1: these are all growth companies. So it is the expectation
25:52
Speaker 1: that rates will fall reasonably soon that it's been one
25:55
Speaker 1: of the drivers. I mean, obviously as AI and this
25:58
Speaker 1: kind of thing, But it's also so the idea that
26:01
Speaker 1: rates will fall, and there's obviously give for growth companies.
26:04
Speaker 1: So if we do see rates not falling as expected,
26:08
Speaker 1: may we see a sudden turn in the Magnificent seven
26:12
Speaker 1: or is that too simplistic?
26:13
Speaker 2: Well, I think if you'd have said that to me six, nine,
26:16
Speaker 2: twelve months ago, I would have agreed. But we've had
26:20
Speaker 2: some concern about rates in the last month or so,
26:24
Speaker 2: and actually it's the smaller stocks that have suffered, So
26:26
Speaker 2: the Russell two thousand, it's been much more sensitive to
26:31
Speaker 2: the rate volatility that we've seen in the last few weeks,
26:35
Speaker 2: whereas the Magnificent seven have just powered on. So it
26:38
Speaker 2: seems like, you know, the Magnificent seven investors are saidler,
26:42
Speaker 2: under any macro scenario, now we think these are going
26:45
Speaker 2: to win. But if the FED is going to raise rates,
26:49
Speaker 2: that's not very good for the small caps in the US, etc.
26:52
Speaker 2: So I think your proposition is a fairly sensible one.
26:56
Speaker 2: But in recent weeks, in recent months, it seems to
26:59
Speaker 2: be the they are decoupling from that rate expectation. Now,
27:03
Speaker 2: whether that can last is a moot point. But for
27:06
Speaker 2: now they are Yeah.
27:08
Speaker 1: So basically recovered from everything. They've moved into their own
27:11
Speaker 1: little world, beyond our world.
27:13
Speaker 2: Beyond our comprehension, a bit like AI that they are. Yeah,
27:17
Speaker 2: they have superior intelligence to us.
27:20
Speaker 1: I think, Okay, so you're not going to rush out
27:22
Speaker 1: after US chat and buy more abusing things for your ISA. Sorry,
27:25
Speaker 1: some of these things for your ISO?
27:27
Speaker 2: I am confused about it. In doing this report, I've
27:31
Speaker 2: really learned how great these most of these companies are.
27:36
Speaker 2: I genuinely, you know, I've been doing this job a
27:37
Speaker 2: long time and I look at these stops as a
27:39
Speaker 2: macro man all the time. But I genuinely learned a
27:42
Speaker 2: lot about how great these companies are from a profitability basis,
27:47
Speaker 2: and it was really instructive to compare that to whole
27:50
Speaker 2: countries stock markets. Mate, whether I want to pay up
27:53
Speaker 2: for that, I'm always somebody likes to see a bargain
27:56
Speaker 2: rather than pay up for something on the expensive side,
28:00
Speaker 2: if that is the wrong trade, I tend to try
28:03
Speaker 2: to be a bit of a bargain hunter.
28:04
Speaker 1: Yeah, I'm with you there, Jim, and look and look
28:06
Speaker 1: what that's got. I say, absolutely, Let's talk about other
28:10
Speaker 1: markets then. I mean, one of the things that we
28:12
Speaker 1: can see so clearly in your chance about the Magnificent
28:15
Speaker 1: Seven is just how lonely some of these European markets,
28:19
Speaker 1: in the UK market in particular, are valued at the
28:22
Speaker 1: moment relative to the US market. I mean, obviously, if
28:24
Speaker 1: you take the Magnificent Seven out of the US market,
28:27
Speaker 1: it's not nearly as expensive as it is with them included,
28:30
Speaker 1: but nonetheless there's still a US premium in there. And
28:33
Speaker 1: when we look at the UK, which we do relentlessly
28:36
Speaker 1: on this podcast, because John and I are both both
28:38
Speaker 1: have a value by us that we can't shake. When
28:41
Speaker 1: we look at the UK, we keep thinking, well, surely
28:43
Speaker 1: that that's the place to be, that's the place to be.
28:46
Speaker 1: Is that a market that looks attractive to you.
28:48
Speaker 2: Are someone likes of value, then it's hard to say
28:51
Speaker 2: the UK is bad it's bad value. I do think
28:54
Speaker 2: there's a legacy problem. I think there's a fair proportion
28:58
Speaker 2: of international investors that have kind of sides that the
29:00
Speaker 2: UK post brexit, and that has left the market relatively cheap.
29:08
Speaker 2: I spoke the one thing you say about the UK.
29:10
Speaker 2: I've talked at length about how concentrated the US market is,
29:14
Speaker 2: but I just looked actually earlier, the top five names
29:17
Speaker 2: in the foot see make up about thirty two percent
29:20
Speaker 2: of it. So I approcate that's the PUTSI one hundred
29:23
Speaker 2: rather than the S and P five hundred, So not
29:25
Speaker 2: quite the same, but it is. The UK market has
29:28
Speaker 2: always been concentrated to kind of banks and commodities, and
29:31
Speaker 2: therefore that there is a little bit of healthcare and
29:33
Speaker 2: there they're obviously a little bit of what goes on
29:35
Speaker 2: in those sectors probably overrides things.
29:38
Speaker 1: But do you think that the numbers coming out of
29:40
Speaker 1: both Europe and the UK are beginning to suggest a
29:42
Speaker 1: foreign investors that, well, the UK isn't exactly in the
29:46
Speaker 1: best of health. There's no obvious indication in the numbers
29:51
Speaker 1: that we're doing significantly worse than the rest of Europe.
29:53
Speaker 1: So at some point you have to look at it
29:55
Speaker 1: and say, well, I need to I need to get
29:56
Speaker 1: over myself about this Brexit business and just look at
29:59
Speaker 1: things as they are.
30:00
Speaker 2: I definitely think you're seeing that a little bit from
30:02
Speaker 2: my conversations I have with people around the world. It
30:05
Speaker 2: probably needs a bit of momentum to get it going.
30:07
Speaker 2: It's a bit like M and A. You know, once
30:09
Speaker 2: once you get maybe a couple of big deals for
30:11
Speaker 2: overseas companies buying cheap UK companies, maybe there'll be a
30:16
Speaker 2: bit more activity. And maybe for that you need the
30:18
Speaker 2: interest rate environment to be a bit more stable across
30:21
Speaker 2: the world. But yeah, I think, look, I think the
30:23
Speaker 2: UK market does look pretty good, good value. I've always
30:28
Speaker 2: liked dividends, and you get quite a bit of dividends
30:30
Speaker 2: in the UK market.
30:32
Speaker 1: We keep saying to people John and I, you know,
30:33
Speaker 1: there's a lot of cheap equities listed in the UK
30:36
Speaker 1: and if you don't buy them, eventually somebody else will.
30:39
Speaker 1: And you know, here we are with Curries Curries earlier
30:41
Speaker 1: this week. Obviously the deal hasn't been done yet, but
30:44
Speaker 1: you know it will be beginning to see these companies
30:47
Speaker 1: that have done nothing but see their share prices fall
30:49
Speaker 1: for years and trading on very low valuations with potential
30:52
Speaker 1: they are starting to get snapped up. And we keep
30:54
Speaker 1: wondering just how many of them have to get snapped
30:56
Speaker 1: up before other investors look at the market and go, yeah,
30:59
Speaker 1: that'll do me.
31:00
Speaker 2: From reading your work, you look at this a lot
31:02
Speaker 2: more closely than me, So I would bow to your
31:05
Speaker 2: kind of expertise here.
31:06
Speaker 1: But excellent, that's the kind that's the kind of.
31:09
Speaker 2: Guest we like. Yeah, absolutely, Yeah, from from that corec
31:13
Speaker 2: point of view, I wouldn't. I wouldn't disagree with the
31:16
Speaker 2: kind of conclusions you come with.
31:18
Speaker 1: Yeah, yeah, well, I think I think we do keep
31:20
Speaker 1: looking at it, But John and I don't entirely agree
31:23
Speaker 1: on that. We'll have to have another conversation on that one.
31:26
Speaker 1: I did want to ask you about if you were,
31:29
Speaker 1: if you were coming into government now as a new
31:32
Speaker 1: chancellor in the UK, what would you do, given your
31:35
Speaker 1: knowledge of economic history and your knowledge of how the
31:37
Speaker 1: UK works, what would you do to make things better?
31:41
Speaker 2: I think if I was chancellor and I came in
31:44
Speaker 2: with a clean slate, Look, we're in a difficult situation
31:49
Speaker 2: in the decades ahead because we do have a lot
31:54
Speaker 2: of entitlements that we've promised people that that means the
32:00
Speaker 2: pressures on the government coppers are going to go up
32:04
Speaker 2: and up. So I think you have to try to
32:06
Speaker 2: find ways of extending people's working lifetime in a way
32:11
Speaker 2: that is politically tenable. And IM not sure I know
32:15
Speaker 2: how to do that, but I think to be a
32:17
Speaker 2: success as a chancellor you need to try to find
32:20
Speaker 2: ways of doing that. And I think you probably also
32:24
Speaker 2: need to find ways of borrowing money that you can
32:29
Speaker 2: invest to make the economy better. And although I'd like
32:34
Speaker 2: to pay lower taxes, maybe maybe that's not always the answer.
32:40
Speaker 2: Maybe in some cases it's the answer, but you've got
32:42
Speaker 2: to find ways of making what are still quite low
32:45
Speaker 2: long term real rates work for you as an economy.
32:48
Speaker 2: I mean, look, government debt borrowing. There shouldn't be one
32:52
Speaker 2: hard and fast rules. It probably should be how attractive
32:55
Speaker 2: it is to borrow. So in eras where rates and
32:58
Speaker 2: real rates are very very low, government should be incentivized
33:01
Speaker 2: to borrow in ways that they can productively increase the economy.
33:06
Speaker 2: If rates are high, real rates are high, then governments
33:09
Speaker 2: shouldn't you know, should be quite proval. So I think
33:12
Speaker 2: you have to have an element of flexibility. I still
33:14
Speaker 2: think real rates are relatively low enough that you can
33:19
Speaker 2: borrow more than what might look to be prudent if
33:24
Speaker 2: you're investing it in the right things.
33:26
Speaker 1: Now, listen, there is one thing that I do have
33:28
Speaker 1: to ask you about. I do have to ask you
33:30
Speaker 1: about before we can finish up here. And I know
33:32
Speaker 1: that neither of these things will be your area of expertise,
33:34
Speaker 1: but we don't care. We just want an answer. We
33:37
Speaker 1: ask everybody if we were going to lock them away
33:40
Speaker 1: somewhere for ten years, someone nice, By the.
33:43
Speaker 2: Way, Can I leave my kids at home? Can I
33:46
Speaker 2: leave the kids somewhere else? Yes?
33:47
Speaker 1: You can. You can, although we're the entire audience is
33:51
Speaker 1: already judging you for that, but you can.
33:53
Speaker 2: You can.
33:54
Speaker 1: And then once you're in this lovely place, before you
33:57
Speaker 1: go sorry, you have to invest all your money in
33:59
Speaker 1: every penny in one of two things, either gold or bitcoin.
34:05
Speaker 1: And you don't have to tell us why you make
34:07
Speaker 1: the choice. You're about to make all that as nicer
34:09
Speaker 1: if you do. But what would it be?
34:11
Speaker 2: Do you think I would say gold? And I think
34:15
Speaker 2: the reason I would say that. Look, I'm someone that's
34:19
Speaker 2: broadly an inflationist. As an economic historian, I know that
34:23
Speaker 2: inflation is always there because in democracies and the election cycles,
34:28
Speaker 2: there is always going to be incentive to create money,
34:31
Speaker 2: you know, at some point relatively soon. Even if the
34:34
Speaker 2: macro models don't suggest there will be inflation, there will
34:36
Speaker 2: always be a political reason to create inflation, especially in
34:39
Speaker 2: a world post Breton Wood system where it be it
34:43
Speaker 2: money rules. So I'm always an inflationist. So therefore I
34:46
Speaker 2: do like things that protect you against inflation. Now, to
34:49
Speaker 2: be fair, gold isn't a brilliant hedge for a lot
34:53
Speaker 2: of history, apart from if you've got inflation, So to
34:56
Speaker 2: make gold work, you actually do need inflation. Bitcoin. I
35:02
Speaker 2: do think that in a world where we're moving into
35:07
Speaker 2: a digital world, there will be kind of some digital
35:11
Speaker 2: demand for store value. I just don't know if bitcoin
35:16
Speaker 2: is that long term winner or whether the regulators will
35:20
Speaker 2: deal with it in a different way than they have today.
35:22
Speaker 2: So I wouldn't say bitcoin is a total disasters investor investment.
35:28
Speaker 2: I just don't know whether it's the winner, and I
35:31
Speaker 2: don't whether know whether the regulators will clamp down on
35:34
Speaker 2: it in years to come. I would prefer gold, Okay,
35:39
Speaker 2: that puts you.
35:39
Speaker 1: In firmly in the merin Talks Money podcast, majority.
35:45
Speaker 2: Is that a good thing?
35:46
Speaker 1: I don't know. We'll find out when we're in a decade. Jim,
35:48
Speaker 1: thank you so much joining us today.
35:50
Speaker 2: Very kind, pleasure, lovely to be invited. Thank you.
35:59
Speaker 1: With me now reflect on what we just heard from Dutchbanks.
36:02
Speaker 1: Jim read is fellow Bloomberg columnist John Author's John, you
36:05
Speaker 1: are kind to join us today.
36:07
Speaker 2: It's a pleasure. Now.
36:09
Speaker 1: I know that you've known Jim for a long time
36:11
Speaker 1: and you've been reading his work for a long time. Yes,
36:14
Speaker 1: when you listen to him speaking today, did you think
36:16
Speaker 1: to yourself that man is absolutely right? I agree with
36:19
Speaker 1: everything you said. Is that how you felt?
36:22
Speaker 3: I'm not sure I agree with everything he says, but
36:25
Speaker 3: in general he's one of the people who thinks in
36:27
Speaker 3: a very similar way to me, and that means that
36:32
Speaker 3: he's occasionally been too bearish, just as I have been
36:35
Speaker 3: over over the last couple of decades. But in general,
36:41
Speaker 3: I think you're in pretty safe ground following him. He's
36:45
Speaker 3: got an incredibly acute sense of history, which I think
36:49
Speaker 3: is always very important, and he has the rare ability
36:55
Speaker 3: to combine big picture thinking. What you heard that in
36:59
Speaker 3: this the conversation with extremely granular nerdy focus on on data,
37:07
Speaker 3: and it's unusual to have somebody who can who can
37:10
Speaker 3: actually do both equally.
37:12
Speaker 1: Well, okay, that's a that's that's pretty positive.
37:16
Speaker 2: Hm.
37:17
Speaker 1: Now we talked a lot about something that I've written
37:20
Speaker 1: about a lot, and I know you've written about a lot,
37:22
Speaker 1: which is the concentration in the US market, the Magnificent Seven.
37:26
Speaker 1: And you know his statistics on this is just absolutely extraordinary.
37:30
Speaker 1: That report on on the Magnificent Seven, about them they're
37:33
Speaker 1: in terms of market cap and profits being more like
37:35
Speaker 1: countries than companies was wonderful. But of course it rings
37:38
Speaker 1: every warning bell in the book for bears like him
37:41
Speaker 1: and me and you. Right, we look at that and
37:43
Speaker 1: we don't go, isn't this wonderful? It's going to last forever.
37:45
Speaker 1: We love this. We look at and we go, oh
37:46
Speaker 1: my god, this guy's going to fall in.
37:49
Speaker 3: Yes, And but we also have this painful thought that
37:52
Speaker 3: it's going to it's going to look really embarrassing until
37:55
Speaker 3: it turns because I just cannot cannot justify jumping in
37:59
Speaker 3: at this level, and that's going to look bad for
38:02
Speaker 3: a while.
38:03
Speaker 1: Well, Jim said that as well, not in his ISA.
38:08
Speaker 3: Acid happens as it happens at the precise moment we are,
38:13
Speaker 3: we're recording this about an hour after trading started in
38:17
Speaker 3: New York on them on Thursday. So my factoid for
38:20
Speaker 3: you is, after an hour of trading following its results
38:23
Speaker 3: coming out, in Vidia's market cap is up something like
38:27
Speaker 3: two hundred and forty billion dollars. The total market cap
38:32
Speaker 3: of Intel is one hundred and eighty billion dollars. So
38:37
Speaker 3: our response to the news the results that in Nvidia
38:42
Speaker 3: have announced is to decide that they are more than
38:45
Speaker 3: a whole Intel's worth more valuable than we thought they were, which.
38:51
Speaker 1: And also one of our other colleagues said that it
38:54
Speaker 1: was also equivalent to the entire market capitalization of Greece.
38:59
Speaker 3: That makes sense, which, interestingly, according to a chart from
39:04
Speaker 3: Jim Reid, Thank you, Jim, our hero, Our hero, Greece
39:09
Speaker 3: is now now that Japan has managed to take out
39:12
Speaker 3: it's all time high. Poor old Grease is now in
39:15
Speaker 3: the lead for the stock market that's gone the longest
39:19
Speaker 3: since its last all time high. Interesting, and Greece is cypress.
39:23
Speaker 1: Yeah, Greece is going to turn into the measurement of
39:25
Speaker 1: stock market units, isn't it? Like Wales is the measurement
39:27
Speaker 1: of the scale of everything in the UK. It's five
39:29
Speaker 1: wells as two Wales, as one Wales, etcetera. We're now
39:32
Speaker 1: going to say it's worth five greases, ten greases, forty
39:34
Speaker 1: five greases.
39:35
Speaker 3: It's all a little because Greece has hit bottom and
39:38
Speaker 3: is now turning into one of the one of the
39:40
Speaker 3: safer places to invest in Europe, which is just as
39:43
Speaker 3: well after all the pain it had to go through
39:45
Speaker 3: to get where it is now. But in terms of
39:47
Speaker 3: how far away it is from it it's high, and
39:50
Speaker 3: how long ago it is, it's got a lot of
39:52
Speaker 3: sledting to go. It's yeah, it's in many ways comparable
39:55
Speaker 3: to Japan. Anyway, Sorry, Jim, Well.
39:57
Speaker 1: Let's stick with Japan, because okay, there's not much point
40:00
Speaker 1: in us talking much longer about how wonderful we think
40:02
Speaker 1: Jim is and how he's absolutely right on everything. Goodness me,
40:05
Speaker 1: what a man. So why don't we talk about the
40:08
Speaker 1: other thing that you and I are both fascinated by,
40:10
Speaker 1: which is Japan and the new high in Japan, which
40:13
Speaker 1: we've been waiting for a long long time. I started
40:17
Speaker 1: my career in Japan back when the nicket was roughly
40:19
Speaker 1: where it is now, you know, and I've been writing
40:22
Speaker 1: for a decade telling our readers that you know it's
40:25
Speaker 1: going to turn. It's going to turn. It's really it's
40:27
Speaker 1: going to turn. It's definitely going to turn. There's a
40:29
Speaker 1: new high out there, and now it's finally happened, and
40:32
Speaker 1: you wrote a column about.
40:34
Speaker 3: Yes, God's right, you wrote a column.
40:36
Speaker 1: About this this morning, and you think you think this
40:39
Speaker 1: can continue?
40:40
Speaker 2: Right?
40:40
Speaker 1: Not over yet, Mornia, and I moren you highs ahead
40:43
Speaker 1: a new high every day.
40:45
Speaker 3: I don't know that I would say that this is
40:48
Speaker 3: definitely a more solid high, more of a foundation for
40:54
Speaker 3: further gains than the last one, which is one of
40:57
Speaker 3: the safest comments I've ever made in my life.
41:00
Speaker 1: This isn't why we ask you on John, I'm going
41:01
Speaker 1: to have to raise again.
41:03
Speaker 3: So if you want just to continue the Japanese stock
41:08
Speaker 3: markets their part in my downfall or whatever. My first
41:13
Speaker 3: ever day at work for the Financial Times was January
41:16
Speaker 3: the first, nineteen ninety and the nick had topped the
41:21
Speaker 3: day before. So this is the first all time high
41:25
Speaker 3: I have ever witnessed in Japan in my thirty four
41:30
Speaker 3: and a half thirty four years in financial journalism. So yep,
41:34
Speaker 3: this is a this is a very big deal. I
41:37
Speaker 3: do think in this case What matters is that corporate
41:43
Speaker 3: Japan has sorted itself out in a way that wasn't
41:48
Speaker 3: true before in terms that Jim Reid would approve of
41:53
Speaker 3: very greatly if you, despite having been at such low
41:58
Speaker 3: levels for such a long time in terms of interest rates,
42:01
Speaker 3: there are far fewer zombie companies in Japan than there
42:05
Speaker 3: are in the States. For all that Japan's growth has
42:09
Speaker 3: been slower, a lot of Japanese companies haven't actually taken
42:17
Speaker 3: the opportunity of low rates to just continue their existence.
42:21
Speaker 3: There has been some degree of necessary pain and consolidation,
42:27
Speaker 3: and the reforms that really got going over a decade
42:30
Speaker 3: ago as part of our benomics to improve corporate governance,
42:34
Speaker 3: to persuade Japanese companies to be nice to their shareholders
42:39
Speaker 3: are beginning to have an effect. They're buying back stock
42:41
Speaker 3: in a way they've never done before. Their dividends are
42:43
Speaker 3: going up. So that's on the fairly boring level. I
42:48
Speaker 3: do think if you're a value investor, if you're caring
42:52
Speaker 3: about the longer term, I think Japan still looks like
42:55
Speaker 3: a fairly decent bet. If we then want to get
42:58
Speaker 3: into the macro surrounding central banks, what might happen to
43:01
Speaker 3: the end where the Bank of Japan goes next. Then
43:03
Speaker 3: there's all kinds of very significant risks you could discuss.
43:07
Speaker 1: Yeah, we can talk about that as well, but you
43:10
Speaker 1: also put you put a lovely chart in your column
43:13
Speaker 1: this morning from sock Gen showing that projections for two
43:17
Speaker 1: thousand and four two thousand and five earnings pur chare
43:19
Speaker 1: have fallen across the world with the sole exception of Japan.
43:24
Speaker 1: And it's a great short, a great chart because over
43:26
Speaker 1: the last however, many decades, every time we look at
43:28
Speaker 1: a chart where something about Japan is the sole exception,
43:32
Speaker 1: it's been in a bad way, all right. So to
43:34
Speaker 1: see a chart where it's Japan is unique and special,
43:38
Speaker 1: but in a really good way. It's kind of exciting.
43:41
Speaker 3: Were again, it's this is why we don't retire, why
43:44
Speaker 3: we carry on doing our jobs. There are actually every
43:46
Speaker 3: so often there's something you've never seen before comes up.
43:49
Speaker 3: But yes, exactly like the macro trends are such that
43:53
Speaker 3: I wouldn't I certainly wouldn't say yes, definitely stick with
43:57
Speaker 3: the stick with Japan. Fill your boots because there are
44:00
Speaker 3: macro risks, But in terms of the kind of investing
44:05
Speaker 3: that is somewhat out of fashion, but which both of
44:07
Speaker 3: us have spent a long, long careers encouraging people to do.
44:12
Speaker 3: The actual companies you're buying and the cash flows they
44:15
Speaker 3: are trying to generate for you that you buy when
44:17
Speaker 3: you buy their stock do actually seem to be a
44:21
Speaker 3: fundamentally much healthier place than they have have been in decades.
44:26
Speaker 3: And that is relative to Japan being a disaster for
44:31
Speaker 3: a long time. I'm not saying that proves their better
44:34
Speaker 3: value than X y Z and other countries, but it
44:37
Speaker 3: certainly suggests that Japan is no longer the negative exception.
44:41
Speaker 3: You've really got to be careful about. It's got well managed.
44:46
Speaker 3: Companies like Sony aren't as exciting as they used to be,
44:49
Speaker 3: but they've never gone away. The Japanese, the Japanese car
44:52
Speaker 3: makers never went away, and so on. That there are
44:56
Speaker 3: opportunities there.
44:57
Speaker 1: And do you think that jaman has also taught us
44:59
Speaker 1: something about GDP and how to look at GDP because
45:02
Speaker 1: everyone looks at Japanese gd GDP growth and says that's awful,
45:06
Speaker 1: this is terrible, But no one ever takes into account
45:09
Speaker 1: the fact that Japan has a static or falling population
45:12
Speaker 1: and Therefore it's GDP per head is really really just fine.
45:15
Speaker 1: Whereas we have our own GP looks like it it's
45:17
Speaker 1: growing it well, not exactly reasonable levels, but growing, But
45:21
Speaker 1: our GDP per head is absolutely shock exactly.
45:25
Speaker 3: It's it's that that is a very important point. I
45:28
Speaker 3: mean again, it's one of the standard negative points, and
45:31
Speaker 3: with some reason on Japan that it has this aging demographic.
45:36
Speaker 3: But yes, you looking around Tokyo, I don't know some
45:41
Speaker 3: of the regions of Japan. Looking around Tokyo and you
45:45
Speaker 3: do not. It's nothing remotely like a place that's been
45:49
Speaker 3: in a slump for a quarter of a century. It's
45:51
Speaker 3: an exciting, buzzing place where people obviously still have a
45:55
Speaker 3: very very pleasant standard of living. And I think, yes,
46:02
Speaker 3: that that is quite quite easily easily forgotten. It's you're
46:08
Speaker 3: not buying the country. I suppose, if you're buying a
46:11
Speaker 3: domestic Japanese stock, if the population is going down, that
46:14
Speaker 3: that's some kind of a limit on there their growth.
46:17
Speaker 3: But but generally speaking, you're you're you're you're buying a
46:22
Speaker 3: country that has continued to have one of the highest
46:27
Speaker 3: living standards in the world and has continued to have
46:31
Speaker 3: a very large economy and.
46:35
Speaker 2: That's that's uh.
46:38
Speaker 3: Allowing allowing the population to to to skew your judgment
46:44
Speaker 3: is is a mistake.
46:45
Speaker 1: I agree with you, and possibly a lot to teach
46:48
Speaker 1: the rest of us about Asian populations and how to
46:50
Speaker 1: manage them. Suddenly Japan is perfect, right, Suddenly this country
46:54
Speaker 1: can be no wrong. Praising a disguise, they can do everything.
46:58
Speaker 2: Yes.
46:59
Speaker 3: The other thing that interesting about Japan that has changed
47:02
Speaker 3: over the years is that at this point, career is
47:08
Speaker 3: the other example of this. But Japan is cool. My
47:12
Speaker 3: kids are in their teens, they are fascinated by Japan.
47:16
Speaker 3: They're fascinated by manga, they're fascinated by anime, jpop. That
47:22
Speaker 3: all of this stuff is exciting and interesting to them.
47:28
Speaker 3: And you know, they are envious when I go to
47:31
Speaker 3: you know, not that I go to Tokyo anything like
47:34
Speaker 3: as much as I would like to, but you know,
47:35
Speaker 3: I have to have shopping lists with stuff to bring
47:38
Speaker 3: back because they are so fascinated by everything Japanese. That
47:42
Speaker 3: wasn't true at all from what I recall. When Japan
47:46
Speaker 3: was lasted as it's high we all had to go
47:49
Speaker 3: around with a sony aukman or whatever. But it wasn't
47:51
Speaker 3: as though, you know, Japan was sort of enviably powerful
47:55
Speaker 3: and rich, then it wasn't cool, It wasn't exciting, and
47:58
Speaker 3: it's cultural significance has grown quite significantly during the years
48:05
Speaker 3: that its economy has gone off the boil. You could
48:08
Speaker 3: incidently see some parallel there with our own country, Britain.
48:11
Speaker 3: You know, the nineteen sixties and seventies were not a
48:14
Speaker 3: great time for the British economy, but the Beatles and
48:16
Speaker 3: David Bowie or whatever, it became a much cooler place,
48:20
Speaker 3: a much more interesting cultural place during the worst years
48:24
Speaker 3: of worst economic years for Britain, and arguably something similar
48:29
Speaker 3: might have been going on in Japan. Do I think
48:31
Speaker 3: Britain is cool?
48:32
Speaker 2: Ha ha.
48:34
Speaker 3: I'm a little too out of contact with it, generally speaking.
48:39
Speaker 3: Generally speaking, my gauge for this is where my kids
48:43
Speaker 3: are on things. They are fascinated by the Beatles and
48:48
Speaker 3: the Bowie, not just my influence. I don't think they're
48:51
Speaker 3: so fascinated by Dua Lipa or whoever else We would
48:55
Speaker 3: say was that okay, So.
48:57
Speaker 1: We can't hope that there'll be a cool Britannia trigger
49:00
Speaker 1: for the UK market to suddenly joined the Jeff Harry's
49:03
Speaker 1: market in this Harry Styles.
49:05
Speaker 3: Harry Styles, if he could get back together with Taylor Swift,
49:08
Speaker 3: that could transform the country. If you could actually write
49:12
Speaker 3: a song about how wonderful it is to be back
49:14
Speaker 3: with Harry, then then that probably is the catalyst that
49:20
Speaker 3: at that point you fill your boots with the fill
49:22
Speaker 3: your boots with the foot Sea Absolutely fantastic.
49:25
Speaker 1: But do you know if you've heard it here first,
49:27
Speaker 1: keep an eye on Harry Styles. We've been looking for
49:29
Speaker 1: a catalyst for the UK market for a couple of
49:31
Speaker 1: years now. That could be it. John, Thank you so much,
49:35
Speaker 1: Thank you thanks for listening to this week's Maren Talks Money.
49:42
Speaker 1: We'll be back next week in the meantime. If you
49:45
Speaker 1: like ours show, rate, review, and subscribe wherever you listen
49:48
Speaker 1: to your podcasts, and of course tell your friends about us.
49:51
Speaker 1: And finally, we have our show email, so send along ideas,
49:54
Speaker 1: questions or comments to Merin Money at Bloomberg dot net.
50:00
Speaker 1: The episode was hosted by me Maren sumset Web. It
50:02
Speaker 1: was produced by some Asadi, Additional editing by Blake Maples
50:05
Speaker 1: and special thanks to Jim Reid and to John Authors.