Latest / Merryn Talks Money / Hedge Fund Boss Barry Norris's ‘Moral Case’ for Fossil Fuel Investing

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Hedge Fund Boss Barry Norris's ‘Moral Case’ for Fossil Fuel Investing · Merryn Talks Money

0:00
Speaker 1: John been an exciting week, right, not least for Rischie Sunac,
0:04
Speaker 1: who has finally managed and god, he's worked hard on this,
0:07
Speaker 1: managed to bring inflation down, halved.
0:09
Speaker 2: It and that was one of his one of his targets.
0:11
Speaker 2: I think he's going to hit any of the others.
0:12
Speaker 2: But he's done this all by himself, right.
0:15
Speaker 3: He has it a spectacular achievement. He must have been
0:18
Speaker 3: running out in the scenes with his ails because we
0:21
Speaker 3: take our stamp all year cutting places.
0:24
Speaker 2: I mean, that's mean now.
0:27
Speaker 4: I did at Twitter poll this week asking people if
0:30
Speaker 4: they thought that inflation had been brought down, and I'd
0:33
Speaker 4: like to point out before we go any further, that
0:34
Speaker 4: is still over double over double the Bank of England
0:38
Speaker 4: target and up over sixteen percent over the last couple
0:40
Speaker 4: of years, so let's not get over excited yet. But nonetheless,
0:43
Speaker 4: under five percent is still a good thing. Anyway, I
0:47
Speaker 4: did a Twitter pole asking do people think that inflation
0:51
Speaker 4: has been brought down by that nice Ritchie Sunac or
0:53
Speaker 4: buy something else?
0:55
Speaker 2: And pretty much everyone voted for something else. And it
0:57
Speaker 2: is really something else, isn't it. Yeah?
1:00
Speaker 3: I mean something else is basically maths the you know,
1:06
Speaker 3: inflation went up or the inflation rates went up, and
1:09
Speaker 3: now inflation is not going up as quickly as it
1:11
Speaker 3: did last year, because it went up so quickly last year.
1:14
Speaker 3: I mean, you know, I think the government's it's sort
1:19
Speaker 3: of saying that it would have inflation was kind of
1:22
Speaker 3: the usual to have political thing. Some people pointed out, well,
1:25
Speaker 3: they took a lot of flak for inflation going up
1:27
Speaker 3: in the first place, and technically that wasn't really their
1:30
Speaker 3: fault either, so maybe it's okay for them, may you know,
1:33
Speaker 3: say that it's their actions that have halfed inflation. But
1:39
Speaker 3: but and also just a hostage to fortune because because
1:45
Speaker 3: nobody thinks that they're the ones that brought inflation down
1:48
Speaker 3: as much. And you know, we're still get a couple
1:50
Speaker 3: of months to go to the end of the year,
1:51
Speaker 3: and I don't think it will go back about five percent.
1:53
Speaker 2: Being ever know, and also we must be very careful,
1:57
Speaker 2: and we've talked a lot on this podcast, you and
1:58
Speaker 2: I and I guess about how difficult it is to
2:01
Speaker 2: bring inflation down properly below to two percent or below
2:05
Speaker 2: after it's gone over eight percent. And so we may
2:08
Speaker 2: be celebrating slightly now thinking oh well, this is all over,
2:11
Speaker 2: but history tells us that it very rarely is over
2:14
Speaker 2: in such a short time and there may be extremely
2:17
Speaker 2: difficult times now on that. Thinking of that, our interview
2:22
Speaker 2: today is with Barry Norris, and we talk a lot
2:25
Speaker 2: about that in wind We recorded the interview before John
2:27
Speaker 2: and I recorded this conversation and since the interview with Barrier,
2:31
Speaker 2: which is a large degree about renewable energy and about
2:35
Speaker 2: the price of wind power, et cetera. The government has
2:37
Speaker 2: announced what they.
2:39
Speaker 1: Call on their website boost for offshore wind as government
2:42
Speaker 1: raises maximum prices in renewable energy auction. Now that may
2:46
Speaker 1: be a boost for offshore wind, and that the maximum
2:49
Speaker 1: prices available to them have gone up by sixty six
2:52
Speaker 1: percent or will go up sixty six percent in the
2:54
Speaker 1: contract for difference around that they do next year. And
2:57
Speaker 1: there's also a funny little bit in here about how
2:59
Speaker 1: the project could get more money if they reduce their
3:02
Speaker 1: carbon emissions and their supply chains, which is an interesting
3:06
Speaker 1: bit in itself because we like to think that there's
3:07
Speaker 1: no carbon emissions involved in when and then if they
3:10
Speaker 1: demonstrate a positive social impact on communities. So what this
3:14
Speaker 1: is telling us that there is a recognition that when
3:18
Speaker 1: is significantly more expensive than people thought it would be.
3:20
Speaker 1: And we talk about this with Barry, But where is
3:23
Speaker 1: that cost going to end up? And we can tell
3:25
Speaker 1: you where it's going to end up. It's going to
3:26
Speaker 1: end up on your energy bill. The point being that,
3:29
Speaker 1: as we just said, there are still a lot of
3:32
Speaker 1: pressures in here that might push prices up rather than down.
3:36
Speaker 2: Right.
3:37
Speaker 3: Yeah, And I mean it's, as you say, history sures
3:40
Speaker 3: that this is the tricky bit getting it down from
3:44
Speaker 3: you know, five to four percent back the tilgate is
3:47
Speaker 3: the kind of graining difficult bet. And then I think
3:52
Speaker 3: Robot on that from research affiliates, so it was saying, hey, yesterday,
3:58
Speaker 3: I think it was making the point that it's actually
4:02
Speaker 3: quite lightly the inflation in the US will edge by
4:05
Speaker 3: a coup to four percent by the end of the year.
4:07
Speaker 3: And that's not necessarily like a massive deal in itself,
4:11
Speaker 3: but when you look at how the market reacted and
4:14
Speaker 3: how the market is still in this sort of mental
4:17
Speaker 3: mode of expecting interest rate cuts to just be around
4:22
Speaker 3: the corner, and I think that's where there's a massive
4:25
Speaker 3: potential source of disappointment for investors overall. You know, It's like,
4:30
Speaker 3: I mean, I'm quite happy with the idea of the
4:32
Speaker 3: rates have probably peaked for now, but the idea that
4:34
Speaker 3: they're going to come down and are basically, you know,
4:38
Speaker 3: now back on the kind of ski sclope down to
4:40
Speaker 3: zero you know any minute now is incredibly unrealistic.
4:45
Speaker 2: Yeah, it feels like that that is over. But there
4:48
Speaker 2: is one little upside right now, which is that for
4:52
Speaker 2: this period and may be a short period, we don't know,
4:55
Speaker 2: but right now, right now, interest rates are higher than inflation. Right,
4:59
Speaker 2: so you put conceivably get a real return order the
5:03
Speaker 2: positive caount.
5:04
Speaker 3: Yes, yes you can, which is jolly good. And also
5:08
Speaker 3: they are ISA rates, so because every every time mentioned
5:12
Speaker 3: that's on Twitter, people didn't saying oh yeah, but it's
5:14
Speaker 3: not tax free but a SA. No, you can put
5:16
Speaker 3: money in an ISA, assuming you haven't used up your
5:18
Speaker 3: twenty thousan pounds allowance shit, and you can get outwards
5:24
Speaker 3: of five point eight percent on a fixed one year iSER,
5:29
Speaker 3: which I mean, look, I think that that's that's a
5:32
Speaker 3: good deal when you're going to get almost more than
5:35
Speaker 3: likely a real return over the course of the year.
5:39
Speaker 3: If you feel that you know you've got cash and
5:41
Speaker 3: you don't want to put it in equities or bonds,
5:44
Speaker 3: for example, or you don't need instant access to it,
5:47
Speaker 3: then that seems like a pretty good deal.
5:49
Speaker 2: Excellent, take that Dale. Listen it. Welcome to Marin Talks Money,
5:59
Speaker 2: the podcast with people who know the markets explain the markets.
6:02
Speaker 2: I'm there in Sunset Web. This week we'll bring you
6:04
Speaker 2: a conversation with Barry Norris, the founder, CEO and CIO Argonaut,
6:08
Speaker 2: which he started in two thousand and five. Barry has
6:11
Speaker 2: managed a couple of funds, the Argonaut European Alpha Fund
6:14
Speaker 2: and the Argonaut and European Fund since he launched both
6:18
Speaker 2: in two thousand and five, and it also manages the
6:20
Speaker 2: Argonaut Absolute Return Fund since he started that one in
6:24
Speaker 2: two thousand and nine. Now, not all of you will
6:26
Speaker 2: be familiar with Barry, though I'm pretty sure some of
6:28
Speaker 2: you will be, so I started out asking him to
6:31
Speaker 2: tell us more about the fund itself, the Absolute Return Fund,
6:34
Speaker 2: and its performance.
6:36
Speaker 5: I manage a long short equity product, the Argonau Absolute
6:42
Speaker 5: Return Fund. The fund has been unique in the UK
6:47
Speaker 5: fund management world in that it has delivered double digit
6:51
Speaker 5: returns each of the last five calendar years and obviously
6:54
Speaker 5: very different market regimes. And we find that we also
6:59
Speaker 5: have skill which many managers don't have, which is that
7:02
Speaker 5: we're good at shorting, and as a result of that,
7:07
Speaker 5: we have delivered actually more than one hundred percent of
7:10
Speaker 5: our total return in the last five years in negative
7:14
Speaker 5: market months. So we always say that people were a
7:19
Speaker 5: fund which isn't correlated to the market, isn't correlated to
7:22
Speaker 5: any other fun whether it be active or passive, and
7:25
Speaker 5: then therefore we deliver at times that other funds don't deliver,
7:30
Speaker 5: and of course vice versa as well. So we blend
7:33
Speaker 5: very well, and it's worth paying an active management fee
7:37
Speaker 5: for a fund that actually isn't reliant on market beta.
7:41
Speaker 2: Okay, so long and short. There are a lot of
7:43
Speaker 2: funds out there that do say that they're long and short,
7:45
Speaker 2: but don't necessarily really focus on the short book in
7:47
Speaker 2: the way that you do. That's not like the general
7:49
Speaker 2: market environment. First, everybody we talk to has a different
7:52
Speaker 2: view on exactly where the market's going now. Everyone has
7:55
Speaker 2: a different view on interest rates and inflation, and the
7:57
Speaker 2: extent to which they matter to markets is a So
8:00
Speaker 2: when you look at the next few years, how do
8:03
Speaker 2: you see the overall environment?
8:04
Speaker 5: Well, I see a different macro regime, which many investors
8:09
Speaker 5: that perhaps have only experienced that post two thousand and
8:12
Speaker 5: eight regime have yet to come to terms with. So
8:17
Speaker 5: if we think about the last fifty years of investing,
8:21
Speaker 5: basically from the early eighties until two thousand and eight,
8:26
Speaker 5: governments were small, they ran very prudent fiscal budgets, and
8:34
Speaker 5: debt to GDP in the Western world was effectively thirty
8:37
Speaker 5: to forty percent. And then post the financial crisis, you
8:40
Speaker 5: see this massive expansion of the size of government balance sheets,
8:45
Speaker 5: which was financed by QE and that both meant that
8:51
Speaker 5: the cost of the debt and the quantity of the
8:53
Speaker 5: debt were favorable to governments, so they could increase the
8:57
Speaker 5: quantity of debt without increasing the cost because central to
9:00
Speaker 5: monetizing the debt, and that's led to government activity expanding
9:07
Speaker 5: since two thousand and eight, which has been relatively painless
9:12
Speaker 5: for everyone because central banks were buying it. But now
9:15
Speaker 5: the last couple of years we find that as a
9:18
Speaker 5: result of all of this money printing, which yes did
9:21
Speaker 5: get into the real economy, because the liability of those
9:24
Speaker 5: assets that the central banks were buying ended up in
9:28
Speaker 5: terms of expanding bank deposits that resulted in significant inflation.
9:34
Speaker 5: That means that interest rates have gone up, and I
9:37
Speaker 5: think what we're seeing is actually just a complete reverse
9:40
Speaker 5: of what happened since two thousand and eight, when long
9:44
Speaker 5: duration assets did very well, growth stocks did very well,
9:47
Speaker 5: private equity funding, profitless companies did very well. And actually
9:51
Speaker 5: what we're seeing is the reverse, which is a transfer
9:54
Speaker 5: back from long duration assets into short duration assets. And
9:58
Speaker 5: that really cont news to my mind, just simply because
10:03
Speaker 5: of the size of government now in the economy and
10:07
Speaker 5: the need for financial markets to keep funding government deficits
10:12
Speaker 5: and government spending. And bear in mind, the US deficit
10:15
Speaker 5: of the moment is eight percent of GDP, which would
10:19
Speaker 5: have keenes turning in his grave if he was actually
10:22
Speaker 5: buried rather than cremated, because of course keenes On he
10:26
Speaker 5: thought that government should stimulate when economies were in recession.
10:29
Speaker 5: So we're running a massive deficit in the unse of
10:33
Speaker 5: eight percent, which is stimulated the economy at the time
10:37
Speaker 5: where of full employment, when the FED is about trying
10:41
Speaker 5: to slow the economy. That is not only very unhelpful
10:45
Speaker 5: in terms of the path of global interest rates, but
10:48
Speaker 5: it eventually crowds out all other forms of investment if
10:52
Speaker 5: you like. The US deficit is a beast that needs
10:55
Speaker 5: to be fed, and in the absence of central bank QE,
11:00
Speaker 5: every treasury that's bought needs to be funded by another
11:04
Speaker 5: asset being sold, and that's basically risk assets everywhere else
11:07
Speaker 5: in the world. So this ends badly. Either ends with
11:11
Speaker 5: a fiscal recording where governments have to tighten their belts
11:15
Speaker 5: or we get hard landing that way, or it ends
11:19
Speaker 5: with treasury yields having to suck capital in for every
11:23
Speaker 5: other asset in the world and crowd out. And I
11:26
Speaker 5: think eventually, perhaps we always end with the easiest solution,
11:30
Speaker 5: which is probably that central banks go back to QQE
11:34
Speaker 5: and then you get rampant inflation again.
11:36
Speaker 2: And which of those two things do you expect, Barry?
11:39
Speaker 5: I think it's obviously depends on which politicians are in
11:42
Speaker 5: power to an extent, but I think at the moment,
11:46
Speaker 5: let's think that the political norms are very much that
11:49
Speaker 5: government has got a solution for every problem, and that
11:53
Speaker 5: leads me to believe that politicians aren't going to give
11:57
Speaker 5: up on big government particularly quickly. So I think the
12:02
Speaker 5: more lightly aspect is that risk assets continue to be
12:06
Speaker 5: crowded out by treasury yields, and then you get a crash,
12:11
Speaker 5: you might get some more responsibility in terms of fiscal spending,
12:16
Speaker 5: but ultimately the most likely aspect is you go back
12:19
Speaker 5: to qwe with central bankers denying that they're monetizing government spending,
12:25
Speaker 5: but of course many of us think the opposite.
12:28
Speaker 2: Okay, so we end up in a fairly long term
12:30
Speaker 2: inflation re environment as well, and we're seeing inflation coming
12:33
Speaker 2: down quite fast all over the place at the moment,
12:35
Speaker 2: but that feels pretty temporary in the scenario that you're
12:37
Speaker 2: talking about.
12:38
Speaker 5: Yeah, I think we should be clear that over the
12:40
Speaker 5: last couple of months, inflation started to go back up again,
12:44
Speaker 5: and it's kind of indicating this structural nature of inflation.
12:48
Speaker 5: We've had some rather big wage increases being negotiated, and
12:54
Speaker 5: the economy, particularly in the US, is still very buoyant
12:58
Speaker 5: because federal spending is up eleven percent year on years.
13:02
Speaker 5: So what the trade off between the economy not being
13:05
Speaker 5: in recession and rates is obvious, And I think if
13:09
Speaker 5: you had fiscal prudence and fiscal responsibility at the moment,
13:13
Speaker 5: interest rates would already be lower on a global basis
13:16
Speaker 5: because the economy and inflation would have already slowed down.
13:19
Speaker 5: But you can't have one or the other.
13:21
Speaker 2: So in this environment, how are you investing?
13:25
Speaker 5: Well, we follow an earnings surprise style, so in general
13:30
Speaker 5: we weren't stocks in the long book with upgrades and
13:32
Speaker 5: stocks in the short book with downgrades. I would say,
13:35
Speaker 5: with more value conscious than many of our peers that
13:39
Speaker 5: have done well over the last decade. And we definitely
13:43
Speaker 5: don't like unprofitable companies on high multiples to sale that
13:50
Speaker 5: are burning cash, particularly where we don't think they've got
13:54
Speaker 5: a credible product, or where that product is relying on
13:57
Speaker 5: government subsidies, which actually on fortunately, is so much of
14:01
Speaker 5: the investment world when fund managers are through ESG prepared
14:07
Speaker 5: to fund all of this stuff.
14:09
Speaker 2: Okay, well, let's talk about some of those areas where
14:12
Speaker 2: you are short some of the sectors where you think
14:16
Speaker 2: that other people are far too optimistic. And the classic
14:19
Speaker 2: for you there, I think is the wind industry, isn't
14:22
Speaker 2: it that you've been talking about a lot recently.
14:24
Speaker 5: Yes, Typically, as a short seller, if you're kind of
14:27
Speaker 5: feel comfortable being consensus or uncomfortable when you have antiqunsensus view,
14:33
Speaker 5: then short selling is never going to be for you.
14:36
Speaker 5: You have to walk into a room, listen to a
14:38
Speaker 5: management team and pick holes in it and work out
14:42
Speaker 5: what are the flaws, why are they telling me that,
14:44
Speaker 5: and what are they lying about? And therefore, short selling
14:49
Speaker 5: works best when you look at an industry where there's
14:53
Speaker 5: a high degree of groupthink and where most of the
14:56
Speaker 5: investors following that industry have bought into a narrative that
15:01
Speaker 5: exists solely because it's been repeated over and over again,
15:05
Speaker 5: and that narrative may not be true. That's why the
15:09
Speaker 5: money is in the companies. And what we also find
15:12
Speaker 5: in alternative energy is that it's a complex subject. It
15:18
Speaker 5: needs investors to invest a lot of time in understanding
15:23
Speaker 5: how electricity grids work, in understanding how governments intervene and
15:26
Speaker 5: distort the market. And it's also an industry where companies
15:32
Speaker 5: are very prepared to claim extraordinary, doubtful things about the
15:39
Speaker 5: future of the industry and the nature of their product
15:43
Speaker 5: solely on the basis that governments are prepared to provide
15:46
Speaker 5: subsidies and investors are prepared to believe their stories. And
15:51
Speaker 5: that is what we find pretty much all over the
15:53
Speaker 5: alternative energy space, whether it's battery power, hydrogen power, electric cars,
15:59
Speaker 5: heap umps, evs and are probably our kind of biggest position,
16:06
Speaker 5: which is the shorts that we've had in wind power,
16:09
Speaker 5: particularly operators and turbine companies.
16:12
Speaker 2: Okay, tell us a little bit more about the problems
16:14
Speaker 2: with the operators and the turbine companies.
16:17
Speaker 5: So, if you think about what electricity grid needs, an
16:22
Speaker 5: electricity grid needs reliable workers. It needs to know that
16:28
Speaker 5: those workers are going to turn up when electricity is needed.
16:32
Speaker 5: So if you think about the electricity grid as a
16:34
Speaker 5: factory that needs reliable workers to turn up between specific
16:38
Speaker 5: times when the factory is open and their labor is needed,
16:43
Speaker 5: now the energy transition basically involves transferring from reliable workers
16:51
Speaker 5: to unreliable workers. The wind and solar are unreliable because
16:56
Speaker 5: the weather is the constraining factor rather than when they're
17:01
Speaker 5: needed or power generations. So the first principle here is
17:06
Speaker 5: that weather depending power is a less good product, which
17:12
Speaker 5: in fact, the more you look at it, electricity grids
17:15
Speaker 5: don't find particularly useful. And at low shares of wind
17:20
Speaker 5: or solar, that doesn't matter so much because if you've
17:23
Speaker 5: got like one out of ten workers that is unreliable
17:28
Speaker 5: and nine workers that are reliable, so the reliable workers
17:32
Speaker 5: being gas, coal, hydro nuclear, even biomass, that doesn't matter
17:38
Speaker 5: so much because you kind of hide it. But when
17:41
Speaker 5: you want to go to one hundred percent renewable grid,
17:44
Speaker 5: and when you think that the plans that the UK
17:47
Speaker 5: government have got is to go from thirteen or fourteen
17:50
Speaker 5: gigawatts of offshore wind to fifty and maybe beyond, and
17:55
Speaker 5: for wind to go to fifty percent market share and beyond,
18:00
Speaker 5: there is simply no understanding of how electricity grids work
18:04
Speaker 5: and how they need reliable workers rather than unreliable workers.
18:09
Speaker 5: And the problem with this is that, and this is
18:12
Speaker 5: why basically electricity prices continue to go up, is that
18:18
Speaker 5: the factory owner still needs to contract the reliable workers
18:22
Speaker 5: because the reliable workers are the only thing that makes
18:27
Speaker 5: the electricity grid work. So you can keep hiring more
18:30
Speaker 5: and more unreliable workers, but it actually doesn't solve any
18:34
Speaker 5: problem in that the factory owner needs to resource the
18:38
Speaker 5: factory for reliable workers. And that is why we've had
18:41
Speaker 5: fort trillion dollars globally spent on renewable energy over the
18:45
Speaker 5: last decade, and the share of fossil fuels has gone
18:48
Speaker 5: from eighty two percent to just eighty one percent. It's
18:52
Speaker 5: a fundamentally low value product that actually gets even lower
18:59
Speaker 5: value in an exponential way the higher the market share
19:03
Speaker 5: of wind and solar becomes. And that is something that
19:07
Speaker 5: politicians don't understand, and seemingly very few investors understand either.
19:13
Speaker 2: The key point is that you're making is that it
19:15
Speaker 2: doesn't matter how much renewable power you have, and how
19:18
Speaker 2: much renewable power you feel you're able to put into
19:20
Speaker 2: the grid, you still have to pay for the backup.
19:22
Speaker 2: So the traditional power stations have to continue to be
19:25
Speaker 2: there and continue to be paid for, regardless of how
19:28
Speaker 2: many turbines you built, correct, And that's something that's very
19:32
Speaker 2: rarely factored in to the numbers. When you see people
19:35
Speaker 2: saying wind power is cheap or solar power is cheap,
19:38
Speaker 2: one of the reasons they can say that is because
19:40
Speaker 2: they're not factoring in the cost of the backup power
19:42
Speaker 2: that has to exist exactly.
19:44
Speaker 5: So, my argument would be, if you've got wind and
19:48
Speaker 5: solar companies to pay for the costs of intermittency, they
19:52
Speaker 5: would stop building it because they would find that the
19:54
Speaker 5: costs of intermittency to make wind and solar power the
19:58
Speaker 5: equal the other forms of power generation would be so
20:03
Speaker 5: prohibitively expensive that no rational person would build any more
20:08
Speaker 5: wind and solar, and I think that is basically the problem.
20:11
Speaker 5: The distortion in the market is if wind and solar
20:15
Speaker 5: companies had to pay for intermittency, then they wouldn't build anymore.
20:21
Speaker 5: And the wind and solar companies will say, oh, we're
20:24
Speaker 5: working on battery storage, or we're going to convert the
20:27
Speaker 5: excess power to hydrogen, or we're even going to export it.
20:32
Speaker 5: For reasons we can go into. That just isn't going
20:35
Speaker 5: to work either.
20:37
Speaker 2: Okay, another thing, let's come back to batteries and storage,
20:39
Speaker 2: because that's very important because it is the answer that
20:42
Speaker 2: everybody gives when they say, we build more wind power
20:44
Speaker 2: and the backup isn't the issue because over the next
20:46
Speaker 2: decade we'll be able to store the stuff. That's one answer.
20:48
Speaker 2: But the other answer you get when you talk to
20:50
Speaker 2: people about this subject is we just build more. We
20:53
Speaker 2: will more and more and more wind and then when
20:54
Speaker 2: the wind is and blowing in one place, it's going
20:56
Speaker 2: to be blowing in another place, and that way, they'll
20:58
Speaker 2: always be wind blowing so and the grid will always
21:01
Speaker 2: be supported by renewables. Why doesn't that work.
21:05
Speaker 5: If the wind's blowing in the North Sea, it's also
21:07
Speaker 5: blowing in the Irish Sea, and it's probably also when
21:10
Speaker 5: it's blowing in Denmark, it's also blowing in Germany and Sweden.
21:14
Speaker 5: So the problem with that is we already have wind
21:19
Speaker 5: turbines that all work at the same time and all
21:22
Speaker 5: turn up to work at the same time. Already in
21:25
Speaker 5: the UK we have when the wind blows, a glut
21:29
Speaker 5: of cheap power that we can't store profitably, we can't
21:33
Speaker 5: export profitably. So the question is why do we need
21:38
Speaker 5: to build more? What is the value of this product
21:41
Speaker 5: that we can't use? And I think you know, Boris
21:44
Speaker 5: Johnson came up with the idea that Britain was going
21:47
Speaker 5: to be the Saudi Arabia of wind. Well Saudi Arabia's
21:51
Speaker 5: production costs for a barrel of oil at five to
21:54
Speaker 5: ten dollars and they're currently selling it at ninety dollars.
21:57
Speaker 5: The problem with exporting wind is that when we have
22:01
Speaker 5: this glut, everybody else in Europe has the same glut
22:04
Speaker 5: and they've got low power prices. So what is the
22:06
Speaker 5: price that we're going to sell this glutter? Close to zero?
22:10
Speaker 5: And unfortunately you will then get close to zero power
22:15
Speaker 5: price for an export. The wind operators don't care because
22:19
Speaker 5: they're getting the guaranteed price that the government has guaranteed
22:23
Speaker 5: them through the CFD or the Rock certificate. And therefore
22:29
Speaker 5: you end up in Britain having an industry where the
22:31
Speaker 5: average price of generation is currently one hundred pounds permega
22:37
Speaker 5: hour on average, and you have to think, let's look
22:39
Speaker 5: at the whole instored base over the last fifteen years,
22:43
Speaker 5: and you'd be exporting it for five to ten or zero,
22:46
Speaker 5: and therefore it'd be a loss making industry. Who's paying
22:50
Speaker 5: for that not the wind farms, but the British consumer
22:52
Speaker 5: who pays through higher electricity bills. So Britain as the
22:56
Speaker 5: Saudi Arabia of wind, is quite possibly the worst economic
23:01
Speaker 5: business model that has ever existed.
23:05
Speaker 2: Okay, you're pretty clear on that. Explain why the optimism
23:09
Speaker 2: about batteries and storage is misplaced, Because the answer to
23:13
Speaker 2: everything that you've said, which is very compelling, to everything
23:16
Speaker 2: that you said as well, it doesn't matter because very soon,
23:20
Speaker 2: any day now, we're going to find a way to
23:22
Speaker 2: store all the success and that makes it all make sense.
23:26
Speaker 5: So look, the problem is that we don't yet have
23:29
Speaker 5: batteries that can store power on an industrial scale for
23:33
Speaker 5: a long time, and where those batteries, the biggest batteries
23:38
Speaker 5: at the moment, are incredibly expensive and obviously require so
23:42
Speaker 5: much lithium that they will almost inevitably consume all of
23:46
Speaker 5: the world's lithium that is mine.
23:49
Speaker 6: So there's a battery beg built in Trafford.
23:52
Speaker 5: Manchester at the moment, supposedly the biggest industrial or the
23:57
Speaker 5: largest lithium ion industrial battery in the world. It's going
24:01
Speaker 5: to cost seven hundred and fifty million at least, that's
24:03
Speaker 5: the stated cost. And the battery would store one giga
24:07
Speaker 5: what for two hours or two gigaw hours. Now that's
24:09
Speaker 5: enough to power the grid for three minutes and seventeen
24:14
Speaker 5: seconds in Britain. So if you think if we had
24:17
Speaker 5: one hundred percent renewable grid, we would need thousands of
24:21
Speaker 5: these batteries, and of course the cost of those would
24:24
Speaker 5: be more than one hundred percent of GDP. And remember
24:27
Speaker 5: as well that these batteries will only last eight to
24:30
Speaker 5: ten years, so it'll be more than one hundred percent
24:32
Speaker 5: of GDP every eight to ten years.
24:35
Speaker 6: Again, would quickly bankrupt Britain.
24:37
Speaker 2: Turbos don't last that long either, do they.
24:40
Speaker 5: That is the other thing, and that there seems to
24:41
Speaker 5: be this idea amongst net Zira's zealots the moving to
24:47
Speaker 5: a renewable grid is somehow one off costs. Now the
24:51
Speaker 5: wind farms will tell you that the wind farms last
24:55
Speaker 5: twenty five years. I think there's a body of I
25:00
Speaker 5: find very convincing research which suggests that actually, particularly offshore
25:05
Speaker 5: where you've got bad weather and salty waters, that actually
25:09
Speaker 5: the life of a wind turbine is probably closer to
25:13
Speaker 5: ten than twenty five. So all of these construction costs,
25:16
Speaker 5: which again are a pretty large part of GDP, will
25:20
Speaker 5: have to be taken on a pretty regular basis as well.
25:24
Speaker 2: So given all this, what is it that you short
25:27
Speaker 2: to reflect your opinions for your analysis here?
25:30
Speaker 5: Firstly, pretty diversified in our short book, successful shorting on
25:35
Speaker 5: a professional basis is very unlike the film The Big Short,
25:39
Speaker 5: where the guy goes to bed and he's either going
25:43
Speaker 5: to make a lot of money or is going to
25:44
Speaker 5: go bust.
25:45
Speaker 6: That is not the way to do it.
25:46
Speaker 5: And it's certainly in a daily dealing liquid fund that you're.
25:51
Speaker 2: Looking after, pointing very very disappointed, like any fun at all.
25:55
Speaker 5: Well, let me maybe talk you through or Steed the
25:58
Speaker 5: world's leading offshore wind company and the research that we've
26:03
Speaker 5: done on it and why we came to shortage so austed.
26:07
Speaker 5: If you look at the accounts, it gives no, hardly
26:10
Speaker 5: any visibility into its underlying projects. So none of the
26:15
Speaker 5: economics of the individual wind farms are disclosed, and you've
26:20
Speaker 5: got to therefore just look at the accounts, the group accounts,
26:24
Speaker 5: and just accept that that you're not going to be
26:26
Speaker 5: told anything about the individual projects. And I always find
26:30
Speaker 5: it amazing how none of the cell side analysts covering
26:33
Speaker 5: or STED has bothered to build a model covering the
26:37
Speaker 5: company from the bottom up by modeling its.
26:40
Speaker 6: Individual projects. So that is what we've tried to do.
26:44
Speaker 5: I would say this is a business that doesn't have
26:47
Speaker 5: any equity value because the projects, certainly those that have
26:50
Speaker 5: been built in the last five years, aren't going to
26:52
Speaker 5: be profitable enough, and they're not going to be able
26:54
Speaker 5: to service the debt in the special purpose vehicles, and
26:58
Speaker 5: they're going to have to write off all of the
27:01
Speaker 5: all of the cost of the unprofitable projects, and that
27:04
Speaker 5: of those a big hole in the balance sheet. We'd
27:06
Speaker 5: be delighted if there any wind enthusiasts that will look
27:09
Speaker 5: at that and tell us where we're wrong.
27:12
Speaker 2: And listeners, jes you send you a hate mail for
27:14
Speaker 2: this podcast, director Barry, rather than to me. I'm not
27:16
Speaker 2: sure my big enough for this, Barry.
27:22
Speaker 5: I think people don't seem to understand energy transitions. When
27:27
Speaker 5: in the Industrial Revolution we moved from essentially biofuels to
27:34
Speaker 5: coal or wood to coal, it was because coal was
27:37
Speaker 5: a better product and you could get more bang for
27:40
Speaker 5: barking energy. You could convert coal's chemical energy into mechanical energy.
27:46
Speaker 5: And then when oil and gas replace coal, it was
27:48
Speaker 5: because again the energy density was fantastic. You could store
27:53
Speaker 5: it in a liquid and that made it more easy
27:56
Speaker 5: to transport. It made it easy to use in an
28:01
Speaker 5: engine for cars and aeroplanes. Essentially, energy transitions only work
28:07
Speaker 5: when it's a superior product. The problem we've got at
28:10
Speaker 5: the moment if you've got an energy transition where all
28:13
Speaker 5: the products are inferior. So evs are infuriative internal combustion.
28:19
Speaker 5: I know someone will tell me they like driving their
28:20
Speaker 5: electric car for five miles a day, but evs or
28:25
Speaker 5: are inferior products. Heat pumps are inferior products. Wind is
28:29
Speaker 5: an inferior product. So in order to get people to
28:32
Speaker 5: use inferior products. You require governments to get involved through subsidies,
28:38
Speaker 5: through banning all the other more useful products, and you
28:42
Speaker 5: require zero interest rates in order for all of these
28:45
Speaker 5: projects to be stacked up with zero cost debt in
28:49
Speaker 5: order for equity of vesters to make a return, and
28:53
Speaker 5: all of we've reached a tipping point in all of
28:55
Speaker 5: that because governments can't afford anymore to subsidize it, consumers
28:59
Speaker 5: are fed up up with it, and investors are losing money.
29:02
Speaker 6: So it's time to wake up.
29:03
Speaker 2: Okay, well, I think you might have woken a few
29:05
Speaker 2: people up. Now let's move on and talk about what
29:10
Speaker 2: you're positive about. What are you holding in your portfolio
29:14
Speaker 2: as along that you like. And I'm going to prompt
29:17
Speaker 2: you a little bit by saying that last year you
29:19
Speaker 2: said there was a moral case for investing in fossil fields.
29:22
Speaker 5: Well, there's a very strong moral case from investing in
29:25
Speaker 5: fossil fuels because without fossil fuels, Western civilization will last
29:29
Speaker 5: about three hours. And if Western civilization lasts about three hours,
29:33
Speaker 5: and China and all the other countries that have different
29:37
Speaker 5: political values than the West keeps using fossil fuels and
29:41
Speaker 5: very quickly that our values that we all share for
29:47
Speaker 5: democracy and free speech, you're going to disappear from the world.
29:49
Speaker 5: So I think that's the moral case of fossil fuels.
29:53
Speaker 5: And bear in mind we've already haved our carbon dioxide
29:57
Speaker 5: emissions in the UK by switching to gas from car
30:00
Speaker 5: in the nineteen nineties and we've gone from six percent
30:04
Speaker 5: of global emissions to one percent now during that time,
30:07
Speaker 5: I don't remember the narrative on global warming changing because
30:10
Speaker 5: Britain had halved its carbon emissions. In fact, it seems
30:13
Speaker 5: to have got works. How anybody with any confidence could
30:16
Speaker 5: predict that by going to zero carbon emissions getting rid
30:19
Speaker 5: of the same amount we've already got rid of that.
30:22
Speaker 5: Somehow the narrative on climate change is going to change
30:26
Speaker 5: is beyond me. So what will effectively happen is that
30:30
Speaker 5: we're bankrupt ourselves, ruin our economy, degrade our geopolitical status
30:35
Speaker 5: in the world, and that will have very bad moral outcomes,
30:39
Speaker 5: not only with society falling apart, but also you know,
30:43
Speaker 5: with our political values as well.
30:44
Speaker 2: Now, Barry, this is exactly what Tony Blair says. Did
30:47
Speaker 2: you ever think that you're and Tony blow would be
30:49
Speaker 2: agreeing on something so contrariant.
30:52
Speaker 7: Answer that one my top red attacks under Tony Blair
31:00
Speaker 7: was forty percent, So it wasn't about it erealy, So talibul,
31:06
Speaker 7: what are.
31:06
Speaker 2: You actually investing in the long book at the moment?
31:08
Speaker 2: Then what's in there that you like that you can
31:09
Speaker 2: tell our listeners that.
31:10
Speaker 5: So look, if your multi asset, then you've got to
31:13
Speaker 5: appreciate that the times that we're in at the moment
31:16
Speaker 5: where government is big and government needs to be funded,
31:20
Speaker 5: means that government bonds will give you much better risk
31:26
Speaker 5: award than what they have over recent years. So if
31:30
Speaker 5: you're already getting five or five and a half percent
31:33
Speaker 5: in government bonds, their scope for that year to go higher,
31:37
Speaker 5: and you can manage that of course by low duration
31:40
Speaker 5: and be able to reinvest, but essentially the risk free
31:44
Speaker 5: rate now is much higher and that's a very different
31:48
Speaker 5: investing scenario than what we faced since two thousand and seven.
31:53
Speaker 5: So most people should have a government bond portfolio, and
31:59
Speaker 5: most privates, instead of investing in bank deposits that you
32:02
Speaker 5: get taxed on, should be investing in load coupon government bonds.
32:06
Speaker 6: Whether the yield to maturity is.
32:08
Speaker 5: Capital gains free Now on top of that, if you
32:12
Speaker 5: ask me, where in the equity market are you investing.
32:17
Speaker 5: If I'm right about the nature of the regime that
32:19
Speaker 5: we're going to be in for this decade, we want
32:22
Speaker 5: to be in short duration equities. So those are equities
32:26
Speaker 5: that are generating a lot of cash flow, are on
32:30
Speaker 5: very cheap multiples, and they're giving that cash flow back
32:33
Speaker 5: to investors for actually investors to maybe buy government bonds with,
32:38
Speaker 5: because government bonds have to be funded first before anything
32:41
Speaker 5: else in the global economy gets funded. We are pretty diversified,
32:47
Speaker 5: and the whole point of being a professional investor is
32:50
Speaker 5: you've got to generate returns pretty consistently over decades, not
32:54
Speaker 5: just have a couple of good years before you blow up.
32:57
Speaker 5: But if I say, look, what have we been really bullish?
33:00
Speaker 5: I think we really like the oil tanker companies, particularly
33:05
Speaker 5: the clean product cankers and the LPG tankers. And that's
33:09
Speaker 5: really because it's a pretty unglamorous old economy industry. The
33:13
Speaker 5: shipyards are full of container ships and LNG carriers. It's
33:19
Speaker 5: difficult to get new ships. But at the same time,
33:22
Speaker 5: this energy transition is creating such a dislocation in energy
33:26
Speaker 5: flows with Western countries trying to basically get fossil fuels
33:32
Speaker 5: off their own balance sheet. And for example, Australia doesn't
33:36
Speaker 5: have a single large oil refinery, so all of the
33:39
Speaker 5: refined products that Australia needs, gasoline, kerosine, diesel, it has
33:44
Speaker 5: to import. That creates huge demand for clean product tankers.
33:49
Speaker 5: And Europe used to import two thirds of its imports
33:53
Speaker 5: of these products came from Russia. Now post the war,
33:56
Speaker 5: obviously those products have been banned. Europe's got to import
34:00
Speaker 5: from elsewhere in the world because it doesn't have enough
34:03
Speaker 5: refining capacity. And Russia has also got an export to
34:08
Speaker 5: the rest of the world past Europe, and that results
34:11
Speaker 5: in more to demand for ton mileage, more demands for ships.
34:15
Speaker 5: So you've essentially got two global fleets at the moment.
34:17
Speaker 5: You've got all of the old tonnage which is privately owned,
34:21
Speaker 5: which Russia has been buying up to export beyond Europe,
34:25
Speaker 5: and then you've got the quoted sector which is exporting
34:29
Speaker 5: into Europe. And you've got all this dislocation in trade
34:33
Speaker 5: flows as well as a fact that very few countries
34:36
Speaker 5: want to be self sufficient in fossil fuels, so that
34:39
Speaker 5: requires more shipping. We're getting great yields and being paid
34:44
Speaker 5: back to us of you know, twenty twenty five percent
34:46
Speaker 5: a year. So the stocks that I would highlight their
34:50
Speaker 5: ATHNEA in clean products frontline include Dorian in LPG. These
34:57
Speaker 5: are stocks that we've already made a lot of money,
35:00
Speaker 5: are not any capital gains and dividends back, but we
35:02
Speaker 5: think I have to have the potential to keep doing
35:06
Speaker 5: well for a number of years.
35:08
Speaker 2: Okay, interesting, there is a sector not many people mentioned
35:11
Speaker 2: on this podcast. Anything else in there that's exciting.
35:15
Speaker 5: We've done very well this year by still being bullish
35:19
Speaker 5: on US housebuilders and that you might ask, how can
35:23
Speaker 5: you be bullish on US house builders and be bearers
35:26
Speaker 5: on treasuries, And I'd say one is it's great from
35:29
Speaker 5: it if you could find things where you think you're
35:32
Speaker 5: adding some value from the bottom up, which maybe contradicts
35:35
Speaker 5: some of your overall assumptions. They're great diversifiers in terms
35:39
Speaker 5: of the overall portfolio. But we just look at US
35:43
Speaker 5: housing and think there are far less housing starts being
35:47
Speaker 5: built now than what there were twenty years ago, and
35:51
Speaker 5: the population is a lot higher. Therefore, you've got incredible
35:54
Speaker 5: structural demand for houses. Obviously a lot of The story
36:00
Speaker 5: of the US is that, as Stanley Druckamuller has said
36:03
Speaker 5: that even his caddy and locker room attendant, every Tom,
36:07
Speaker 5: Dick and Harry and Sally have turned out their mortgages,
36:10
Speaker 5: and therefore you're getting very little inventory in terms of
36:15
Speaker 5: the secondary market. So if you effectively want to buy
36:18
Speaker 5: a house, you've got to buy a new build. We've
36:21
Speaker 5: also done pretty well in megacap tech. I'd say that
36:26
Speaker 5: offset some of the nasdat beata of the things we've
36:28
Speaker 5: been short of in profitless tech. But also I think
36:31
Speaker 5: the thing that people don't get about these mega megacap
36:35
Speaker 5: tech companies is they got huge cash balances which are
36:39
Speaker 5: formerly being paid nothing and.
36:40
Speaker 6: Now they're getting paid five percent on them.
36:42
Speaker 5: And that is if you like that, is this is
36:46
Speaker 5: why not all of the economy is being hurt by
36:51
Speaker 5: higher rates. There are people who've got significant tax cash
36:56
Speaker 5: balances that are actually benefiting from higher rates and ating
37:00
Speaker 5: more profit as a result.
37:01
Speaker 2: Yeah. I mean, that's a huge inflow of effectively free money,
37:04
Speaker 2: isn't it? Interest rates from zero five percent? You've got
37:09
Speaker 2: some Greek banks in your portfolio, tell us about those quickly.
37:12
Speaker 5: Yeah, So if you think about Greek banks ten years ago,
37:15
Speaker 5: they were the worst banks in the world. They owned
37:18
Speaker 5: a lot of Greek government bonds and one in two
37:22
Speaker 5: Greek loans had gone sour. So what happened as a
37:27
Speaker 5: result of Greek sovereign debt being restructured was actually Greece
37:31
Speaker 5: got just a fantastic deal. For thirty years, most of
37:36
Speaker 5: Greek government debt was guaranteed to only pay a one
37:41
Speaker 5: percent coupon, so they've effectively not only turned out their debt,
37:45
Speaker 5: but they fixed that at just one percent, and that
37:48
Speaker 5: means actually that didn't look so good in a zero
37:52
Speaker 5: percent interest rate world, but in a five percent interest
37:55
Speaker 5: rate world, that's now spectacally good. And Greece has got
38:00
Speaker 5: a fantastic deal. Now its economy is growing three four
38:05
Speaker 5: five percent at the moment, which is of course much
38:08
Speaker 5: higher than the zero elsewhere in Europe. It's banks have
38:12
Speaker 5: worked through their bad loans, so npls have come down
38:16
Speaker 5: from fifty percent to five percent. There are only really
38:20
Speaker 5: four banks in Greece, so there's not the same competition
38:23
Speaker 5: for deposits as we've seen in the US with their
38:26
Speaker 5: three thousand banks, so their Greek banks are getting great
38:31
Speaker 5: net interest margin expansion. There's been a center right government
38:35
Speaker 5: elected very pro business that's in for five years, and
38:38
Speaker 5: Greek banks which still trade significantly below our book value. Therefore,
38:44
Speaker 5: this journey back from investment hell back into investment grade
38:50
Speaker 5: will I think be very profitable for investors.
38:54
Speaker 2: Excellent. That's really interesting, and then I'm pretty sure there
38:56
Speaker 2: won't be many other people with that position. Now I
38:59
Speaker 2: want to ask you also about your fees. So you're
39:01
Speaker 2: overall charges end up reasonably high just because you have
39:04
Speaker 2: a performance fee, which is twenty percent of all returns
39:08
Speaker 2: above a five percent return, subject to a high watermark,
39:11
Speaker 2: and I just wonder in an inflationary environment if that
39:15
Speaker 2: five percent isn't a little unkind Well, I.
39:19
Speaker 5: Mean it was five percent when inflation was obviously zero,
39:24
Speaker 5: so we've been charged our fee structure has obviously been
39:27
Speaker 5: the same since the fund launched in two thousand and nine.
39:31
Speaker 5: I mean, my view about active management fees is that
39:35
Speaker 5: most people would be better off buying passive funds for
39:41
Speaker 5: exposure to market direction. And I think the problem that
39:45
Speaker 5: active management has is that ninety nine percent of the
39:49
Speaker 5: products in active management actually charge active management fees for
39:54
Speaker 5: and even performance fees for repackaging beta. We charge a
39:58
Speaker 5: performance fee. You only paid that performance fee when, of
40:01
Speaker 5: course the fund does well. And we think that an
40:06
Speaker 5: active management fee is justified if you're actually doing something
40:11
Speaker 5: different to passive and not charging for beta. You know,
40:16
Speaker 5: given that, given you know, we return obviously positive returns
40:21
Speaker 5: when the market doesn't. We've generated more than one hundred
40:25
Speaker 5: percent of our return over the last five years in
40:28
Speaker 5: negative markets. The correlation to the market is practically zero.
40:33
Speaker 5: So we are doing something very different to the rest
40:36
Speaker 5: of the active management world. We're not charging you for beta.
40:40
Speaker 5: And of course all fees at all times are already
40:44
Speaker 5: accrued in the daily price. So when we when we
40:47
Speaker 5: talk about performance, those are our net of fees. And therefore,
40:53
Speaker 5: you know, we think the active management industry in fund
40:57
Speaker 5: management only survives if it does something different to passive
41:01
Speaker 5: and certainly that's the business model that we've got.
41:05
Speaker 2: Okay, very I'm going to take you to a last question,
41:08
Speaker 2: very important question. Everyone who listens hangs on for the
41:11
Speaker 2: answer to this question, and we you know, we keep
41:14
Speaker 2: records and we've got a spreadsheet of the answers. That's
41:16
Speaker 2: very very important. Okay, I know your answer already, but
41:20
Speaker 2: I'm going to ask the question anyway, for ten years,
41:25
Speaker 2: you have to choose one of these one of these assets,
41:28
Speaker 2: only one, and you can't have anything else at all.
41:31
Speaker 2: Obviously this is never going to happen in real life,
41:33
Speaker 2: but for the purposes of the question, you can choose
41:36
Speaker 2: a deposit account in the UK, gold or bitcoin. What's
41:43
Speaker 2: it going to be?
41:46
Speaker 5: Well, definitely not bitcoin, because the only that I don't
41:51
Speaker 5: think bitcoin's worth zero, but it's only not worth zero
41:55
Speaker 5: because it's got a use in terms of funding terrorism
41:58
Speaker 5: and money laundring. So given that I'm not involved in
42:03
Speaker 5: any of those industries, I don't need to hold any
42:06
Speaker 5: bitcoin or invest in bitcoin.
42:10
Speaker 6: Don't bother writing it about that.
42:12
Speaker 2: By the way, they're going to.
42:19
Speaker 5: I think a deposit account in the UK, Okay, what
42:24
Speaker 5: are levels of personal taxation going to be?
42:27
Speaker 6: I mean five?
42:28
Speaker 5: So you get five percent headline. I'll put it this way,
42:33
Speaker 5: how much have I got in that deposit as well?
42:35
Speaker 5: Because it's pretty difficult to find bank accounts that prepared
42:38
Speaker 5: to pay you a decent rate of interest for a
42:43
Speaker 5: large deposit. So you know, if I've got ten grand
42:47
Speaker 5: and I'm not paying high rate of income tax, maybe
42:51
Speaker 5: I'll have that deposit account, so by default I end
42:54
Speaker 5: up in gold simply because I don't trust governments. I mean,
43:00
Speaker 5: if my deposit a cow in the UK is a currency,
43:05
Speaker 5: my bitcoin, despite all the anti currency rhetoric, is also
43:12
Speaker 5: an even worse form of currency. So I ended up
43:15
Speaker 5: in gold by default, so I'll choose gold.
43:17
Speaker 2: Okay, gold it is Barry. Thank you very much, thanks
43:25
Speaker 2: for listening to this week's Marin Talks Money. We'll be
43:28
Speaker 2: back next week. Catch our debrief on this week's conversation
43:31
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