Latest / Merryn Talks Money / Live From Fringe: What Adam Smith Would Say of Bond Market Turmoil

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Live From Fringe: What Adam Smith Would Say of Bond Market Turmoil · Merryn Talks Money

• 0:02
  Speaker 1: Bloomberg Audio Studios Podcasts Radio News Music Welcome to Meron
• 0:18
  Speaker 1: Talks Money, the podcast in which people who know the
• 0:20
  Speaker 1: markets explain the markets.
• 0:22
  Speaker 2: I'm Meron Somerset Webb.
• 0:23
  Speaker 1: It is that time of year again, and we are
• 0:26
  Speaker 1: bringing you something very special. Over the next few days,
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  Speaker 1: you are going to hear recordings of the conversations I
• 0:32
  Speaker 1: had at Pamir House for the Edinburgh Fringe Festival. The
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  Speaker 1: Fringe is a three-week arts and culture festival that began
• 0:38
  Speaker 1: in 1947 and takes place in Edinburgh in Scotland every August.
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  Speaker 1: And for the last few years, I have been hosting
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  Speaker 1: conversations about markets, economics and investing from one of the
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  Speaker 1: most special locations.
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  Speaker 2: In Edinburgh as part of this festival. I do it
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  Speaker 2: from Pamier House.
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  Speaker 1: Which is the last home of Adam Smith, philosopher and
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  Speaker 1: father of modern economics. It's where he completed the last
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  Speaker 1: editions of his bestsellers, The Theory of Moral Sentiments and
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  Speaker 1: the Wealth of Nations. In the previous show, you'll already
• 1:05
  Speaker 1: know that this episode is the second of three conversations.
• 1:09
  Speaker 1: I spoke with Richard Wilson, the CEO of Interactive Investor,
• 1:12
  Speaker 1: one of the UK's largest retail investment platforms, Anna MacDonald,
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  Speaker 1: Investment Strategy Director at Hargreaves Lansdowne, and Professor Russell Napier, financial.
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  Speaker 2: Historian, author, and keeper of the Library of Mistakes.
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  Speaker 1: Each one of our panelists selected their favorite Adam Smith quote,
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  Speaker 1: and of course, we discussed it.
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  Speaker 2: Along the way, we chat about the.
• 1:29
  Speaker 1: Global bond market, second-order consequences of economic policy, the similarities
• 1:33
  Speaker 1: between the invention of the steam engine and the emergence
• 1:36
  Speaker 1: of AI, and of course, the fiscal constraints that bind
• 1:39
  Speaker 1: the UK government.
• 1:40
  Speaker 2: Enjoy the show.
• 1:48
  Speaker 1: Now, last year was a great year for this show
• 1:50
  Speaker 1: because we were talking about the 300th year since Adam
• 1:53
  Speaker 1: Smith's birth. And, you know, we were talking about him
• 1:55
  Speaker 1: and his life and the salons he had here and
• 1:57
  Speaker 1: all that kind of thing. It gave a great energy
• 1:59
  Speaker 1: to the whole thing. But this year is the 250th
• 2:02
  Speaker 1: anniversary of the publication of The Wealth of Nations. Now,
• 2:06
  Speaker 1: when he published that, he published it into the beginning
• 2:09
  Speaker 1: of the greatest industrial revolution the world had seen at
• 2:12
  Speaker 1: the point and has seen until quite recently. It was
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  Speaker 1: the same year that James Watt unveiled his steam engine.
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  Speaker 1: So that was the beginning of something absolutely extraordinary. When
• 2:21
  Speaker 1: we look at this year, I'm going to talk about
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  Speaker 1: this a lot today, I think, we're at the beginning
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  Speaker 1: of another extraordinary industrial revolution, which will be probably more
• 2:28
  Speaker 1: life-changing than that one was, the beginning of the AI revolution,
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  Speaker 1: the beginning of us all feeling the AI revolution. So
• 2:36
  Speaker 1: we're going to talk, I think, today about the way
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  Speaker 1: that will change the way we live, change the way
• 2:40
  Speaker 1: we feel, and I think we'll also talk a little
• 2:42
  Speaker 1: bit about moral sentiment's and Adam Smith's view of humanity
• 2:46
  Speaker 1: and what it is to be human, because that is
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  Speaker 1: another thing that we're going to need to confront over
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  Speaker 1: the next four or five years. If AI can imitate
• 2:54
  Speaker 1: everything about us, how can it be human but also
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  Speaker 1: not human? What is the struggle that makes us feel
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  Speaker 1: other people's loss, pain, and joy, which Adam Smith, as
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  Speaker 1: the only person in the room who has read both
• 3:05
  Speaker 1: books we'll know, wrote a lot about. So, And the
• 3:10
  Speaker 1: way we do this is we have three guests.
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  Speaker 2: And you all know this. You've all been before. Who
• 3:15
  Speaker 2: hasn't been before? And I'll speak directly to you.
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  Speaker 3: Okay.
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  Speaker 1: Those of you who haven't been before, the way it
• 3:21
  Speaker 1: works is I ask each of my guests for their
• 3:24
  Speaker 1: favorite Adam Smith quote. And amazingly, they all have a
• 3:28
  Speaker 1: favorite Adam Smith quote.
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  Speaker 2: And amazingly, it's not the same one every year. And
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  Speaker 2: then miracles, miracles.
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  Speaker 1: And then we talk about that quote. We talk about
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  Speaker 1: why they chose it. It's relevant to them. It's relevant today.
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  Speaker 1: We'll all chit-chat about that. There will definitely be investment advice.
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  Speaker 2: Right, Richard?
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  Speaker 3: Absolutely. Regulated advice.
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  Speaker 2: Okay.
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  Speaker 4: Right, Anna?
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  Speaker 2: Definitely investment advice. Anyway, on to introducing the panel. You
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  Speaker 2: thought I'd forgotten them. I haven't.
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  Speaker 1: Far corner, there is Anna MacDonald, who is the Investment
• 3:59
  Speaker 1: Strategy Director at Hargroves Lanzer. And she's been on the
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  Speaker 1: podcast a few times. Who's here to Anna on the
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  Speaker 1: pod and already knows she's brilliant.
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  Speaker 5: Excellent.
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  Speaker 6: Thank you.
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  Speaker 2: Next to Anna, Russell Napier, the keeper of the library
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  Speaker 2: of mistakes. Has anyone been to the library of mistakes?
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  Speaker 4: Yeah.
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  Speaker 3: Okay.
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  Speaker 1: If you haven't been to the library of mistakes, look
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  Speaker 1: it up and go. It's absolutely brilliant. And it's all
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  Speaker 1: because of Russell that it exists at all.
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  Speaker 2: Fantastic.
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  Speaker 1: He's also our favorite investment strategist and financial historian.
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  Speaker 2: And you all heard Russell on the podcast before, right? Yes,
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  Speaker 2: and he's brilliant, right?
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  Speaker 3: Yes.
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  Speaker 1: Finally, Richard Wilson, CEO of Interactive Investor, who has also
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  Speaker 1: been on the pod several times. So we are going
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  Speaker 1: to start. Russell, I think we'll start with you and
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  Speaker 1: your favorite quote this year.
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  Speaker 4: Yeah, when you said you've written lots of books, I
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  Speaker 4: nodded just for accuracy, two.
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  Speaker 2: And also, to be clear, I've only written the introduction
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  Speaker 2: to one, right?
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  Speaker 4: Yeah.
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  Speaker 1: We did have one wonderful show when everyone had written
• 5:02
  Speaker 1: a book. And someone said they'd written a book. And
• 5:04
  Speaker 1: I said, oh, I wrote the introduction to that. And
• 5:06
  Speaker 1: he said, yes, you did. And then we moved on
• 5:08
  Speaker 1: to the next guest and he talked about his book.
• 5:09
  Speaker 1: And it turned out I'd written the introduction to all
• 5:11
  Speaker 1: three books. Writing introductions is much easier than writing books.
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  Speaker 4: I'll let you know if anybody ever asked me to
• 5:18
  Speaker 4: write an introduction. So we'll begin with the man of system.
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  Speaker 4: I think it'll be obvious when I read this why
• 5:24
  Speaker 4: it's topical, but I'm going to talk about it anyway.
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  Speaker 4: But it's a rather long one. The man of system,
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  Speaker 4: on the contrary, this is from the theory of moral sentiments,
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  Speaker 4: by the way, which four of you will know. The
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  Speaker 4: man of system, on the contrary, is apt to be
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  Speaker 4: very wise in his own conceit and is often so
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  Speaker 4: enamored with the supposed beauty of his own ideal plan
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  Speaker 4: of government that he cannot suffer the smallest deviation from
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  Speaker 4: any part of it. He seems to imagine that he
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  Speaker 4: can arrange the different members of a great society with
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  Speaker 4: as much ease as the hand arranges the different pieces
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  Speaker 4: upon a chessboard. He does not consider that In the
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  Speaker 4: great chessboard of human society, every single piece has a
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  Speaker 4: principle of motion of its own, altogether different from that
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  Speaker 4: which the legislature might choose to impress upon it.
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  Speaker 1: And why have you chosen that one, Russell?
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  Speaker 2: I think we're probably all guessing.
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  Speaker 4: I think you can all guess. I thought when I
• 6:19
  Speaker 4: woke up every morning I was perfectly normal, because when
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  Speaker 4: I wake up every morning, I have no intention whatsoever
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  Speaker 4: of telling anybody else what to do. It wouldn't even
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  Speaker 4: occur to me that this would be my role in
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  Speaker 4: life to say that somebody else should do something. But
• 6:32
  Speaker 4: it turns out that that is the main qualification to
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  Speaker 4: be elected to public office, is to wake up every
• 6:37
  Speaker 4: morning and have a view that you should be telling
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  Speaker 4: other people what to do. Now, the reason that that
• 6:42
  Speaker 4: is on the rise is lots of the variables, we
• 6:44
  Speaker 4: can call them economic variables, market variables, are kind of chaotic,
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  Speaker 4: or they are signaling things that the men of system,
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  Speaker 4: and of course we now have to say women of system,
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  Speaker 4: Smith didn't, but we do, that they don't like, those
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  Speaker 4: outcomes they don't like, so they want to change those variables.
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  Speaker 4: And topically, last week, the US Secretary of the Treasury,
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  Speaker 4: Scott Besant, decided that he would intervene to begin to
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  Speaker 4: determine the price of selected US government bonds, which is
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  Speaker 4: the biggest financial market in the world. This is even
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  Speaker 4: more bizarre, because he's a former hedge fund manager. sworn
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  Speaker 4: enemy of the men of system. And here he is,
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  Speaker 4: enfranchised with power, willing, able, and desperate to exercise it.
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  Speaker 4: He also decided that he would intervene in the foreign
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  Speaker 4: exchange market between the dollar and the yen, the second
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  Speaker 4: biggest currency pair in the world. So this man of system,
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  Speaker 4: converted from a hedge fund manager, has decided to do something.
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  Speaker 4: And I think the problem with the men of system,
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  Speaker 4: in my experience, and I've met a few, but also
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  Speaker 4: in history, is that their mantra, their motto is, if
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  Speaker 4: at first you don't succeed, try, try again. So for
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  Speaker 4: the people in this room who don't know what Scott
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  Speaker 4: Besant has done, it's worth having a look at. They'll
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  Speaker 4: be back. The men of system are on the rise.
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  Speaker 1: But they're also, I mean, the catchphrase is as much...
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  Speaker 1: Try Try Again is something must be done. You know,
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  Speaker 1: we called on the podcast, something must be done-ism. Something
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  Speaker 1: isn't quite right.
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  Speaker 3: It's the name.
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  Speaker 4: Of a book by Vladimir Ilyich Lenin. So there is
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  Speaker 4: a comparison here.
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  Speaker 2: There you go.
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  Speaker 1: So we talked yesterday in the show, we talked about
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  Speaker 1: price fixing. We talked about this idea that you can
• 8:24
  Speaker 1: fix the price of food, which I think Scotland might
• 8:26
  Speaker 1: have finally abandoned this idea. But it came up before
• 8:29
  Speaker 1: the election that we could have supermarkets in which we
• 8:31
  Speaker 1: could fix the price of food.
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  Speaker 2: And of course, this is happening in New York.
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  Speaker 1: And the idea of fixing the price of energy, fixing
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  Speaker 1: the price of labor, fixing the price of things, rent
• 8:39
  Speaker 1: controls being the absolute classic from the man of system,
• 8:42
  Speaker 1: rents are too high, so we will make them low
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  Speaker 1: regardless of what the market wants or doesn't want.
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  Speaker 4: Yeah, so it's not as if this is new. It's
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  Speaker 4: all been done before and it always fails. So that's
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  Speaker 4: the problem with the man of system, or the man
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  Speaker 4: of system, or the people of system. Let's use people
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  Speaker 4: of system. It doesn't matter that it failed before. It's
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  Speaker 4: really not relevant to them that this is proven not
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  Speaker 4: to work because it signifies and signals to the electorate
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  Speaker 4: that they care.
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  Speaker 2: And they never think of the second order effects.
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  Speaker 4: They don't care about the second order effects. They just
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  Speaker 4: want to send a signal to the electorate that they
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  Speaker 4: really care. And in the long run, you fix all
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  Speaker 4: the prices and you end up in 1976 Britain, which
• 9:20
  Speaker 4: is bankrupt. But we have a very good jet that
• 9:23
  Speaker 4: moves very rich people across the Atlantic very quickly. So
• 9:25
  Speaker 4: we did get something out of it.
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  Speaker 7: Isn't there a problem really with what Scott Beston's trying
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  Speaker 7: to fix is something that can't be fixed by banks?
• 9:36
  Speaker 7: basically borrowing at the short end of government debt and
• 9:43
  Speaker 7: buying back long-end government debt. So it's actually about the
• 9:47
  Speaker 7: deficit itself and this extraordinary, and actually it seems bipartisan
• 9:52
  Speaker 7: way of thinking about the level of.
• 9:57
  Speaker 2: US government borrowing.
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  Speaker 7: It doesn't seem that the Democrats, if they get in,
• 10:00
  Speaker 7: are going to change anything particular. And we're running at 7, 8%
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  Speaker 7: of GDP deficit, which is not seen outside big wars
• 10:08
  Speaker 7: and big recessions.
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  Speaker 4: So we agree that that fails. The problem is, what
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  Speaker 4: does he do next? And when that fails, what does
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  Speaker 4: he do next? And that's the problem with the managed system.
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  Speaker 4: They keep coming back.
• 10:18
  Speaker 7: But the underlying issue is that level of debt.
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  Speaker 1: And all this is fiddling around the edges. The solution
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  Speaker 1: is to do something about the debt, but that is
• 10:25
  Speaker 1: not politically possible.
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  Speaker 3: Yes.
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  Speaker 4: The Americans will justify, are justifying this on an existential
• 10:30
  Speaker 4: risk to the state in China. So there will be
• 10:34
  Speaker 4: lots of rhetoric around, we have to do this or
• 10:37
  Speaker 4: China is going to rule the world. And that's how
• 10:40
  Speaker 4: you justify massive deficits. That's how you justify massive government debt.
• 10:44
  Speaker 4: There is an existential geopolitical threat. It's not that overt yet,
• 10:48
  Speaker 4: but it's going to get more and more overt. So
• 10:50
  Speaker 4: all of these interventions, because the most intervention and bond
• 10:52
  Speaker 4: marks you ever see are during warfare, will be China
• 10:56
  Speaker 4: is a threat, therefore we have to do this.
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  Speaker 2: Richard, I know you wanted to say something.
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  Speaker 8: I was curious that both the chairman of the Fed
• 11:05
  Speaker 8: and the trade secretary were both potagers of the same
• 11:09
  Speaker 8: hedge fund manager who came out the other day and
• 11:12
  Speaker 8: said there was a drastic mistake um and also that
• 11:16
  Speaker 8: you now have the the treasury operating directly in competition
• 11:22
  Speaker 8: with the fed so that just reads through the market
• 11:25
  Speaker 8: as questionable confidence in the sustainability of the position which
• 11:29
  Speaker 8: is going to be fascinating i.
• 11:31
  Speaker 4: Have a problem with stanley drukenmiller this is going to
• 11:33
  Speaker 4: win me lots of.
• 11:34
  Speaker 2: Questions by the way This is a safe space, Russell.
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  Speaker 4: He's hampered by being an economist and not a political economist.
• 11:43
  Speaker 4: So his economic analysis is 100% correct, and I agree
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  Speaker 4: with every word of it. But the only way you
• 11:49
  Speaker 4: can work out what's happening in the world today is
• 11:51
  Speaker 4: through the prism of political economy. And if these guys
• 11:54
  Speaker 4: need to fix prices, they will fix them, full stop.
• 11:58
  Speaker 4: And Stanley, I've just written this morning that the next
• 12:00
  Speaker 4: book will be called Stanley in Wonderland. Stanley has lived
• 12:05
  Speaker 4: in a world, this is not a criticism, you know,
• 12:07
  Speaker 4: he is a genius, but he's lived in a world
• 12:10
  Speaker 4: that rewarded that form of intelligence and analysis. And that
• 12:14
  Speaker 4: world's gone.
• 12:16
  Speaker 8: It's fascinating that the best in things, listen, the price
• 12:19
  Speaker 8: is just wrong, so I'm going to fix it.
• 12:21
  Speaker 2: Fix the price.
• 12:23
  Speaker 3: That ends in the same place as the question of when.
• 12:25
  Speaker 8: At least 76 was hot here as well and dry.
• 12:27
  Speaker 4: Coincidence. I remember the queen in, I think it's Alice
• 12:31
  Speaker 4: in Wonderland, not through the working glass, said, Sometimes it's
• 12:34
  Speaker 4: necessary to believe six impossible things before breakfast. Stanley will
• 12:38
  Speaker 4: have to believe all six of them.
• 12:40
  Speaker 2: Russell, how does it end?
• 12:41
  Speaker 4: Like a political economist.
• 12:42
  Speaker 2: How does it end? What's the investment takeaway here?
• 12:44
  Speaker 4: Well, the investment takeaway is don't own bonds unless they
• 12:47
  Speaker 4: force you to own bonds. The history, we've done all
• 12:49
  Speaker 4: this before. Gold does well. There are selected equities that
• 12:53
  Speaker 4: can do well, particularly value equities, cheap equities. And the
• 12:57
  Speaker 4: number one rule of a financial repression is if you
• 13:00
  Speaker 4: don't have to be there, don't be there. If you
• 13:03
  Speaker 4: can invest in a country that isn't going to run
• 13:05
  Speaker 4: a financial repression, this was the lesson in the post-World
• 13:08
  Speaker 4: War II period, Switzerland.
• 13:11
  Speaker 1: Be very clear for the members of the audience who
• 13:13
  Speaker 1: are not financial experts, why do we not own bonds
• 13:16
  Speaker 1: right now?
• 13:18
  Speaker 4: The reducing debt to GDP ratio, total, government and private,
• 13:23
  Speaker 4: is the number one reason you run this system. That's
• 13:25
  Speaker 4: what business ultimately started tinkering with. So your real returns
• 13:29
  Speaker 4: will be poor. Can I give you one example?
• 13:32
  Speaker 2: Yes, please give us one example.
• 13:34
  Speaker 4: January 2021, the government of France comes and they sell
• 13:37
  Speaker 4: a bond. They're borrowing money until 2072. The coupon on
• 13:40
  Speaker 4: that is 0.5%. They sell it slightly below par. The
• 13:47
  Speaker 4: yield is 0.52%. The great savings institutions of Europe buy
• 13:50
  Speaker 4: this bond.
• 13:51
  Speaker 3: 2021.
• 13:52
  Speaker 4: You've now lost 76% in nominal terms buying the risk-free asset.
• 13:58
  Speaker 4: And French inflation is up 18%. So that's how it works.
• 14:03
  Speaker 4: French debt to GDP has come. Well, it's actually going
• 14:05
  Speaker 4: up despite this. So that's why you don't buy bonds.
• 14:07
  Speaker 4: You might say, well, surely there could be nothing more
• 14:09
  Speaker 4: damaging than what's happened already. Well, perhaps. But you can
• 14:13
  Speaker 4: still lose money in real terms.
• 14:14
  Speaker 2: That's true.
• 14:15
  Speaker 7: But you are choosing an example, which is a very
• 14:18
  Speaker 7: low coupon, long duration bond. And for some clients, actually,
• 14:23
  Speaker 7: it can be quite advantageous from a capital gains perspective
• 14:28
  Speaker 7: to buy a bond that might be maturing in two, three,
• 14:31
  Speaker 7: four years time, locking in a decent yield. And if
• 14:34
  Speaker 7: you buy a low coupon one, you will get that
• 14:36
  Speaker 7: gain completely CGT free.
• 14:38
  Speaker 3: So there's my tip. Okay, good tip.
• 14:41
  Speaker 2: Thank you, Anna. Would that be okay?
• 14:42
  Speaker 1: Russell, you'd be happy with people buying very short-term bonds?
• 14:46
  Speaker 7: You can get to that 5.75 or so, and it's
• 14:49
  Speaker 7: unlikely inflation's going to hit that over the next.
• 14:52
  Speaker 4: I have explained to the Treasury that most wealthy people
• 14:54
  Speaker 4: in this country aren't paying tax anymore. Because of this,
• 14:58
  Speaker 4: because of selling their sovereigns, their forests, their ices, you know,
• 15:02
  Speaker 4: there's a huge section of the population who really just
• 15:04
  Speaker 4: don't have to pay tax anymore. They are elderly or older.
• 15:08
  Speaker 4: I don't think the Treasury's worked out yet how many
• 15:09
  Speaker 4: people can really avoid paying tax, not only perfectly legally,
• 15:13
  Speaker 4: through the various methods, one of those methods and all
• 15:15
  Speaker 4: the other ones.
• 15:16
  Speaker 8: Well, I was just going to go back on the
• 15:18
  Speaker 8: tax giveaway. For those who are not familiar, this quirk
• 15:22
  Speaker 8: that you don't pay capital gains tax on the discount
• 15:26
  Speaker 8: on gilts is only available to retail investors and has
• 15:30
  Speaker 8: driven a massive reallocation of assets into these short-dated gilts.
• 15:37
  Speaker 8: And the tax giveaways around three billion pounds a year
• 15:40
  Speaker 8: just to wealthy people, just to take money out of
• 15:43
  Speaker 8: equities and stick them in gilts. So I think it
• 15:45
  Speaker 8: was a mistake. I don't know where it came from
• 15:47
  Speaker 8: in history. Someone one day would be able to say
• 15:49
  Speaker 8: who made up this silly rule.
• 15:50
  Speaker 3: But when interest rates went to zero, you had all
• 15:53
  Speaker 3: these gilts.
• 15:54
  Speaker 8: Being issued at almost kind of zero coupon rates. So
• 15:57
  Speaker 8: all the value is in the discount. And everyone who's
• 15:59
  Speaker 8: got any money is buying them. Anybody here got any
• 16:02
  Speaker 8: low-coupon gilts?
• 16:04
  Speaker 2: Of course you do.
• 16:04
  Speaker 3: There we go.
• 16:05
  Speaker 6: Charlie.
• 16:06
  Speaker 2: There you go. Tax the rich, I say.
• 16:09
  Speaker 3: Sorry.
• 16:09
  Speaker 7: So does Adam Smith, actually. I haven't looked at the
• 16:13
  Speaker 7: index linkers recently.
• 16:16
  Speaker 2: So you're not a fan, as far as I remember.
• 16:18
  Speaker 4: I mean, it's okay. They will fiddle with the definition
• 16:22
  Speaker 4: of inflation. I think that's happened already. That's your risk.
• 16:25
  Speaker 4: And gold is better. So I You know, sometimes it's just,
• 16:28
  Speaker 4: this is okay, but it's just not the best way
• 16:31
  Speaker 4: to do this. There are other ways to do it, forestry,
• 16:33
  Speaker 4: et cetera, et cetera.
• 16:34
  Speaker 1: There'll be one message you can all take away from
• 16:36
  Speaker 1: this show by the end, which is that gold is
• 16:37
  Speaker 1: always better. That'll basically be it. Right, we are going to,
• 16:41
  Speaker 1: we'll come back to some of these themes, but let's
• 16:43
  Speaker 1: move on to another quote.
• 16:45
  Speaker 4: Richard.
• 16:45
  Speaker 3: Right. My glass is on, bear with me. I tried
• 16:48
  Speaker 3: to read it earlier.
• 16:50
  Speaker 1: We all thought for a lovely moment earlier that Richard
• 16:52
  Speaker 1: was reading a quote without his glasses, but it turned
• 16:54
  Speaker 1: out he just couldn't find them.
• 16:55
  Speaker 8: So this says here, this was for the Wealth of Nations,
• 16:58
  Speaker 8: and it says, the greatest improvement in the productive powers
• 17:01
  Speaker 8: of labour and the greater part of the skill, dexterity
• 17:05
  Speaker 8: and judgment with which it is anywhere directed or applied
• 17:09
  Speaker 8: seem to have been the effects of the division of labour.
• 17:13
  Speaker 8: The reason why that struck me as my most recent
• 17:16
  Speaker 8: favourite was that I think Adam Smith passed, what, in 1790?
• 17:23
  Speaker 8: And you mentioned the steam engine was revealed, was it
• 17:26
  Speaker 8: 1770 or thereabouts? It was part of the mechanization process,
• 17:32
  Speaker 8: the first wave of the Industrial Revolution. There was a
• 17:36
  Speaker 8: big recession in the 1830s, and then there was another
• 17:39
  Speaker 8: great expansion as you went through the mechanization and then
• 17:43
  Speaker 8: the mass production, assembly lines, etc. So a lot of
• 17:47
  Speaker 8: the division of labor outcomes came post- Adam Smith. But
• 17:52
  Speaker 8: here we are today, and we're looking at, certainly I'm
• 17:55
  Speaker 8: looking at this in the businesses that I'm involved in.
• 17:58
  Speaker 8: In the world of AI, you say, well, what does
• 18:00
  Speaker 8: that mean? Because the mechanics of labor and actually doing
• 18:04
  Speaker 8: and making stuff doesn't actually require people. So all the
• 18:10
  Speaker 8: things that we learned in terms of organizational structures, career pathing, scale,
• 18:17
  Speaker 8: back office, front office, is all, in my mind, going
• 18:21
  Speaker 8: to be dissembled and you won't have these because the
• 18:24
  Speaker 8: labor is infinitely scalable. The question of labor is how
• 18:28
  Speaker 8: much of that's the price of a token versus the
• 18:31
  Speaker 8: price of wages. I think we're entering into an extraordinary
• 18:36
  Speaker 8: period where some business models will just collapse. The notion
• 18:39
  Speaker 8: of business process outsourcing and the growth of these businesses
• 18:44
  Speaker 8: in India where you swapped massive clerical work for the
• 18:48
  Speaker 8: the scaling of cheaper labour, that's all redundant. So I
• 18:52
  Speaker 8: think we're going to face all sorts of heart-searching questions
• 18:56
  Speaker 8: the next couple of three years as this starts to land. Well, there's,
• 19:00
  Speaker 8: I think, the division of labour or division of thinking
• 19:03
  Speaker 8: with the question of how we organise our own time
• 19:07
  Speaker 8: and what creates value because we'll still be employed. I
• 19:11
  Speaker 8: suspect I'll retire never because I don't think the notion
• 19:13
  Speaker 8: of retirement is going to survive either.
• 19:16
  Speaker 2: You think AI can't do your job?
• 19:19
  Speaker 8: Clearly not, Meryn. It can do large parts of it.
• 19:23
  Speaker 8: I mean, some of the stuff that I do with
• 19:25
  Speaker 8: the various engines to articulate business plans and strategies, they're
• 19:30
  Speaker 8: just better than me. I mean, the stuff it produces
• 19:33
  Speaker 8: is scarily good.
• 19:34
  Speaker 6: Yeah.
• 19:35
  Speaker 7: Do you think, though, if we're all using a few engines,
• 19:39
  Speaker 7: that everything becomes very homogeneous and very undistinct? I've been
• 19:47
  Speaker 7: hearing about using what are called small language models and
• 19:51
  Speaker 7: training it very much internally so that you don't let
• 19:55
  Speaker 7: your business knowledge out.
• 19:57
  Speaker 8: Which we mean we do and because that's the premium
• 20:00
  Speaker 8: of actually the the value of your own data i
• 20:03
  Speaker 8: mean what i think we'll find the some things will
• 20:06
  Speaker 8: be commoditized quite quickly But the scale and speed of
• 20:10
  Speaker 8: what we do and the speed of getting things done
• 20:14
  Speaker 8: will just accelerate. And so the cognitive load or the
• 20:18
  Speaker 8: intellectual challenge is going to be this all becoming compressed
• 20:22
  Speaker 8: where things would take three years and you could do
• 20:24
  Speaker 8: five of them. Now you can do 50 of them
• 20:26
  Speaker 8: and it takes you six months. And that intellectually is
• 20:30
  Speaker 8: sort of three degrees further up the evolution than we are.
• 20:34
  Speaker 8: It's going to be a big challenge.
• 20:35
  Speaker 6: I think.
• 20:36
  Speaker 1: Last year, when we were talking about this on the show,
• 20:38
  Speaker 1: you explained the movement of AI through your company in
• 20:42
  Speaker 1: terms of your customer services division and how much of
• 20:46
  Speaker 1: the workforce can be replaced by AI and how that
• 20:49
  Speaker 1: was working. How's that developing?
• 20:52
  Speaker 8: What it's producing, and we're still in reality, people talk
• 20:56
  Speaker 8: a lot, but the actual deployment and meshing through systems
• 21:01
  Speaker 8: is a, longer process. We haven't reached critical mass in
• 21:06
  Speaker 8: many areas yet. But what's happening is that you have,
• 21:10
  Speaker 8: take a simple process where your average complaints handler can
• 21:16
  Speaker 8: manage about 1.2 complaints a day.
• 21:19
  Speaker 3: With some very basic tooling.
• 21:22
  Speaker 8: They can do complaint handling in 40 minutes. So in
• 21:27
  Speaker 8: terms of seven times more productive work and three times
• 21:31
  Speaker 8: faster in terms of discovery. You apply that across lots
• 21:35
  Speaker 8: of areas. The acceleration is huge. There's also a big
• 21:39
  Speaker 8: thing about what problem you're solving. People talk a lot
• 21:43
  Speaker 8: about the large language models and the hyperscalers. And those
• 21:47
  Speaker 8: have basically got super LLMs sitting on neural networks. And
• 21:50
  Speaker 8: that's all about the question of reasoning, which is kind
• 21:56
  Speaker 8: of the higher end of But most of the stuff
• 21:59
  Speaker 8: that we do is deterministic. There's a set of rules,
• 22:02
  Speaker 8: and you apply those rules, and you get an outcome.
• 22:05
  Speaker 8: Some are very complex rules, but they're still deterministic. So
• 22:08
  Speaker 8: a lot of the work we're still doing in terms
• 22:09
  Speaker 8: of delivery and speed will be the very basic use
• 22:14
  Speaker 8: of some high-powered tools, but it's not the large-time tools.
• 22:16
  Speaker 1: And those can all be done, as Anna said, on
• 22:18
  Speaker 1: SLMs with the data centers and contained in terms so
• 22:22
  Speaker 1: that you have the element of privacy, because one of
• 22:24
  Speaker 1: the big dangers of LLMs, you let your employees spend
• 22:26
  Speaker 1: too much time-prompting LLMs. You're giving away quite a lot
• 22:29
  Speaker 1: of data at the same time, and there's a rising awareness.
• 22:32
  Speaker 8: We don't allow that. Our job one is no leakage.
• 22:35
  Speaker 8: So we have a very clear separation between inside and outside,
• 22:38
  Speaker 8: because once you've leaked, you're not.
• 22:40
  Speaker 3: Getting it back.
• 22:41
  Speaker 2: Okay, go back to employment and AI.
• 22:44
  Speaker 1: The employment optimists will point to Gevron's paradox and say
• 22:46
  Speaker 1: that every time this has happened in the past, there's
• 22:48
  Speaker 1: been a big technological leap. It's been absolutely fine because
• 22:51
  Speaker 1: endless new jobs are being created and we see more
• 22:54
  Speaker 1: and more employment.
• 22:55
  Speaker 2: But from what.
• 22:56
  Speaker 1: You're saying, I suspect that you feel that in an
• 22:59
  Speaker 1: environment like this, sure, more roles may be created, more
• 23:03
  Speaker 1: things to be done may be created. But if those
• 23:06
  Speaker 1: can be done by a mixture of AI and robotics,
• 23:08
  Speaker 1: Gevron's paradox doesn't hold for humans.
• 23:11
  Speaker 8: Well, it may hold, but if you look at the
• 23:14
  Speaker 8: example of the steam engine, which that caused mass unemployment
• 23:19
  Speaker 8: and the collapse of the textile sector between 17, what,
• 23:25
  Speaker 8: 17 and 1800, and then generated kind of huge employment
• 23:30
  Speaker 8: and wealth in the UK, one, because of access to
• 23:33
  Speaker 8: cheap coal and so on. So that could be the case,
• 23:36
  Speaker 8: but If it's true that it takes you 30 years
• 23:38
  Speaker 8: to kind of turn that circle, that's not a great
• 23:41
  Speaker 8: story in terms of social fabric. And that's the question is,
• 23:45
  Speaker 8: what's the impact as you go.
• 23:46
  Speaker 3: Through that journey?
• 23:47
  Speaker 1: And that leaves a horrible, horrible gap for the man
• 23:51
  Speaker 1: of system to step into, doesn't it, Russell? The man
• 23:54
  Speaker 1: of systems who looks at this and goes, well, this
• 23:56
  Speaker 1: is awful. Lots of people are unemployed.
• 23:58
  Speaker 2: This isn't working as I want it to work. Therefore,
• 24:00
  Speaker 2: I will fix it. And what will they do?
• 24:03
  Speaker 3: Absolutely.
• 24:04
  Speaker 4: It's a big problem to fix. And I don't think
• 24:06
  Speaker 4: they can succeed in fixing, but it won't stop them trying.
• 24:09
  Speaker 4: So the fundamental thing about matter of system is not
• 24:12
  Speaker 4: what they do. It's the unintended consequences of what they do.
• 24:16
  Speaker 4: I'd love to sit here and tell you what they're
• 24:17
  Speaker 4: all going to be, Maren, but I think we just
• 24:19
  Speaker 4: have to wait and see. But there will be unintended consequences.
• 24:23
  Speaker 4: I think the one thing that, in my opinion, that
• 24:26
  Speaker 4: they will never do, the AI will never do, is sales.
• 24:29
  Speaker 4: So if you have children, teach them to be good
• 24:31
  Speaker 4: communicators and salespeople. And the real singularity is when a
• 24:34
  Speaker 4: robot is as successful as selling an investment product as
• 24:37
  Speaker 4: a human being. I think that one's quite a long
• 24:39
  Speaker 4: way away, but we have experts on that here.
• 24:42
  Speaker 1: Well, interestingly, I was just writing today about whether AI
• 24:46
  Speaker 1: can provide investment advice or not and how you should
• 24:49
  Speaker 1: use it. And I don't know if you saw, but
• 24:50
  Speaker 1: the FCA had a little report out yesterday saying how
• 24:53
  Speaker 1: shocked they were.
• 24:54
  Speaker 2: Shocked, I tell you. that people trust.
• 24:56
  Speaker 1: AI for financial advice more than they trust journalists. I
• 24:59
  Speaker 1: don't know how that could have happened, but it's happened.
• 25:03
  Speaker 2: And it's interesting because the FCA are very upset about this.
• 25:06
  Speaker 1: It's not what they want, but the FCA is also
• 25:09
  Speaker 1: very upset about the advice gap. They constantly complain that
• 25:12
  Speaker 1: not enough people get enough financial advice. And it feels
• 25:16
  Speaker 1: to me that AI is the perfect solution to that
• 25:19
  Speaker 1: because the problem, from the FCA's point of view, is
• 25:22
  Speaker 1: that they feel that everyone should have some kind of
• 25:24
  Speaker 1: unique advice.
• 25:25
  Speaker 2: Everyone's circumstances are unique.
• 25:27
  Speaker 1: Everyone is different. Everyone needs different financial advice. And I
• 25:30
  Speaker 1: think that's absolutely nonsense. Almost everyone needs basically the same
• 25:33
  Speaker 1: financial advice.
• 25:35
  Speaker 2: And if a reasonable.
• 25:36
  Speaker 1: LLM can tell you roughly what you should do with
• 25:38
  Speaker 1: your money. And I experimented a lot this morning typing
• 25:41
  Speaker 1: into all sorts of different models. What do I do
• 25:43
  Speaker 1: if I have no money and I get given.
• 25:45
  Speaker 2: £ 100, 000? The answers were excellent. Absolutely excellent.
• 25:48
  Speaker 1: It only gets difficult when you start asking the models
• 25:52
  Speaker 1: to optimize your taxes and to deal with you know,
• 25:55
  Speaker 1: that kind of thing. But of course, you wouldn't worry
• 25:56
  Speaker 1: about that because like everyone else, you don't pay any tax.
• 25:59
  Speaker 3: So not a problem.
• 26:00
  Speaker 4: Didn't quite say that.
• 26:01
  Speaker 1: But it's only when you get very precise and arithmetic
• 26:04
  Speaker 1: that it turns into a problem.
• 26:05
  Speaker 4: Well, financial advice and sales are different things. Financial advice
• 26:07
  Speaker 4: is advice and sales is getting someone to sign the contract.
• 26:10
  Speaker 5: Fair.
• 26:10
  Speaker 4: I think human beings will be good at that for
• 26:13
  Speaker 4: a very long period of time to come. Well, whatever
• 26:15
  Speaker 4: form of selling it is, financial advice being said.
• 26:17
  Speaker 1: Although people are already developing strong relationships with their bots
• 26:21
  Speaker 1: and strong and LLMs can influence imitate empathy very effectively
• 26:26
  Speaker 1: obviously it's not real empathy because as previously discussed you
• 26:30
  Speaker 1: have to live the struggle to feel genuine empathy but
• 26:32
  Speaker 1: you can imitate empathy pretty easily and if you can
• 26:35
  Speaker 1: imitate empathy can you sell.
• 26:37
  Speaker 4: Well that is the singularity when machines can sell better
• 26:39
  Speaker 4: than human beings then that's the singularity.
• 26:42
  Speaker 8: And it all depends in our in our world i
• 26:45
  Speaker 8: think about 40 percent of our our customers come from
• 26:49
  Speaker 8: trusted referrals your trusted friend And the question is, who's
• 26:53
  Speaker 8: that trusted friend? Is it the bloke in the pub
• 26:56
  Speaker 8: or the lady in the pub?
• 26:56
  Speaker 3: Or is it an engine?
• 26:58
  Speaker 8: I mean, my money says that the engines will win.
• 27:03
  Speaker 3: And pretty soon.
• 27:04
  Speaker 7: It's interesting. Did you have a look through the sources
• 27:08
  Speaker 7: which they were referring to when they gave? Because it's
• 27:11
  Speaker 7: quite a broad spread. And it's very different from what
• 27:15
  Speaker 7: we've been discovering is it's very different from what you
• 27:17
  Speaker 7: would expect from If you were, I don't know, if
• 27:21
  Speaker 7: you were a financial advisor where you might go to
• 27:24
  Speaker 7: sort of look for in press and trade press, for example,
• 27:29
  Speaker 7: the LLMs use a very strange.
• 27:32
  Speaker 2: Group of publications.
• 27:34
  Speaker 7: Some are great and some are just forbidden. I mean,
• 27:36
  Speaker 7: they can't access this is money, but they can access.
• 27:40
  Speaker 2: A lot of it is Vanguard and that kind of thing.
• 27:42
  Speaker 2: So it starts with.
• 27:43
  Speaker 1: You know, have a financial cushion, put aside six months
• 27:46
  Speaker 1: worth of living money, followed by use your allowances, followed
• 27:49
  Speaker 1: by use your ISR allowance, use your SIPR allowance.
• 27:52
  Speaker 2: Followed by, and here's how you should invest. And that's
• 27:55
  Speaker 2: where it runs into trouble, right?
• 27:56
  Speaker 1: Because every single one I looked at told you that
• 28:00
  Speaker 1: you should then, the bit that it agrees you should invest,
• 28:02
  Speaker 1: should be 60 or 70% invested in an MSCI World ETF.
• 28:07
  Speaker 1: And I'm pretty sure, and I don't approve of that,
• 28:09
  Speaker 1: I think a terrible idea at the moment because it
• 28:11
  Speaker 1: leaves you 70% in the US with a really, really
• 28:15
  Speaker 1: heavy allocation to tech, you'd become a tech momentum investor
• 28:17
  Speaker 1: by mistake, which I'm pretty sure.
• 28:19
  Speaker 2: Would you go for that, Russell, at the moment?
• 28:20
  Speaker 3: I agree.
• 28:22
  Speaker 2: You agree with me or you agree with my model?
• 28:24
  Speaker 2: I agree with you.
• 28:24
  Speaker 4: Perfect.
• 28:25
  Speaker 2: That's what I want.
• 28:25
  Speaker 4: Anna?
• 28:28
  Speaker 7: I actually do think that you can have quite a
• 28:31
  Speaker 7: broad investment by investing in index funds.
• 28:35
  Speaker 2: But not in an MSC World ETF. Would you be 70%
• 28:39
  Speaker 2: in the US right now?
• 28:42
  Speaker 1: Would you be the top 30% of that index is
• 28:45
  Speaker 1: all US tech?
• 28:46
  Speaker 3: But it is the truth today, isn't it? It is
• 28:49
  Speaker 3: the truth.
• 28:51
  Speaker 7: I think US tech is a very, if you think
• 28:55
  Speaker 7: about those individual tech companies, they're all pretty different. They're
• 28:59
  Speaker 7: all doing pretty different things. They're exposed to, some are
• 29:03
  Speaker 7: very advertising exposed. NVIDIA just blew the lights out. It
• 29:09
  Speaker 7: was expected to have 70% revenue growth Sorry, 45% revenue
• 29:13
  Speaker 7: growth this week. It came out at 70, and it
• 29:16
  Speaker 7: said it could have hit 100 if it had sufficient capacity.
• 29:19
  Speaker 2: But no one really believed it, did they? Because their
• 29:21
  Speaker 2: price went up 7% or so.
• 29:22
  Speaker 6: 9%.
• 29:22
  Speaker 7: 9%.
• 29:23
  Speaker 2: All right, 9%. 9% for doubling.
• 29:26
  Speaker 3: Doubling.
• 29:27
  Speaker 2: I mean, that looks to me like people going, yeah,
• 29:29
  Speaker 2: don't know about that.
• 29:30
  Speaker 8: Yeah, but you've got the other side of the argument,
• 29:32
  Speaker 8: which is, let's suppose now you say, I'm going to
• 29:34
  Speaker 8: break that model. I'm going to.
• 29:37
  Speaker 3: Intervene and overweight in Britain.
• 29:40
  Speaker 8: And now you've got your fund is now underperforming the
• 29:44
  Speaker 8: MSCI index materially. And you're explaining to your customer that
• 29:50
  Speaker 8: you did the right thing because that US thing just
• 29:53
  Speaker 8: can't be right, even if it's true. And don't worry,
• 29:56
  Speaker 8: one day you'll catch up. That's a difficult one.
• 30:00
  Speaker 4: We can split the world into two, value and growth.
• 30:02
  Speaker 4: I think probably most people in the audience know how
• 30:05
  Speaker 4: that split is done in the equity market. So two buckets,
• 30:08
  Speaker 4: cheap shares and then the growth shares. This year to date,
• 30:12
  Speaker 4: the MSCI world growth index is up 9%. The world
• 30:17
  Speaker 4: value index is up 16%. That's the capital return. And
• 30:21
  Speaker 4: I think you probably get about 2% extra from a
• 30:23
  Speaker 4: dividend yield. So you probably doubled the return not being
• 30:27
  Speaker 4: in growth stocks this year. This year. Yeah, this year.
• 30:30
  Speaker 7: Absolutely.
• 30:31
  Speaker 2: Pick your time slice. Ten years back, not quite the same.
• 30:35
  Speaker 6: True.
• 30:35
  Speaker 4: So, you know, the idea that you have to be
• 30:38
  Speaker 4: in growth to do well has been true for a
• 30:41
  Speaker 4: very long period of time. I was thinking about this.
• 30:43
  Speaker 4: I started the industry in 89. I was told that
• 30:46
  Speaker 4: at a well-known Edinburgh investment company, I was told there
• 30:48
  Speaker 4: was only two things you could prove statistically about markets
• 30:51
  Speaker 4: and everything else was up for question. Number one, small
• 30:54
  Speaker 4: cap always beat big cap. And number two, value always
• 30:57
  Speaker 4: beats growth. Of course, completely wrong now from, what, seven,
• 31:00
  Speaker 4: eight years. But what happens if it's right?
• 31:03
  Speaker 2: Long term.
• 31:03
  Speaker 4: Long term.
• 31:04
  Speaker 2: Long term. And you believe it is, don't you?
• 31:05
  Speaker 4: And there is a little bit of evidence showing up
• 31:07
  Speaker 4: that mid-cap's value is outperforming growth. And statistically, and I
• 31:11
  Speaker 4: think the data is back to 1926, that Fama and
• 31:15
  Speaker 4: French database, growth beats value, beats growth, and small cap
• 31:19
  Speaker 4: beats large cap. And it hasn't been true for seven years.
• 31:22
  Speaker 4: Seven lean years, seven fat years.
• 31:26
  Speaker 8: Back to your point on the advisors, though, the route
• 31:29
  Speaker 8: is that they, I mean, I worked for banks for
• 31:33
  Speaker 8: about 50 years of my life. And until 25 years ago,
• 31:38
  Speaker 8: the branch manager was sacrosanct. It was all about making
• 31:41
  Speaker 8: his or her life easier, better meetings, much better kind
• 31:46
  Speaker 8: of presentation to customers. That's all just disappeared. You can't
• 31:50
  Speaker 8: afford to have all these empowered branches. It's too much money.
• 31:54
  Speaker 8: Financial advice, the cost of advice, and you get the
• 31:56
  Speaker 8: full stack between platform, product, and advice is running at
• 32:01
  Speaker 8: 150 basis points.
• 32:02
  Speaker 2: 1.5%.
• 32:03
  Speaker 8: Which is just nonsensical and will probably drop, for me,
• 32:07
  Speaker 8: down to, what, 20 points over the next 5, 10 years.
• 32:11
  Speaker 8: You're not paying a bunch of people to go and
• 32:12
  Speaker 8: buy themselves boats on that money. So the whole model
• 32:15
  Speaker 8: is going to change.
• 32:15
  Speaker 6: It just is.
• 32:30
  Speaker 2: Anna, your quote.
• 32:31
  Speaker 7: Tax, which each individual is bound to pay, ought to
• 32:34
  Speaker 7: be certain.
• 32:36
  Speaker 2: It's a very short one.
• 32:38
  Speaker 7: And I thought this was quite apt for what's going
• 32:43
  Speaker 7: to be quite an interesting couple of months ahead of
• 32:47
  Speaker 7: the next budget. And we know that we might have
• 32:53
  Speaker 7: a new prime minister, but we have a lot of
• 32:56
  Speaker 7: the same old fiscal constraints. We've discussed the US ones,
• 33:01
  Speaker 7: but I think the UK ones are just as important.
• 33:09
  Speaker 7: Our interest costs are now about the third or fourth
• 33:12
  Speaker 7: biggest line item in terms of how much it's costing
• 33:18
  Speaker 7: the government to finance our debt. And we have a
• 33:21
  Speaker 7: huge and growing non-productive spend. Um, that sounds terrible, but it's,
• 33:28
  Speaker 7: if you think about things for, for the state pensions,
• 33:32
  Speaker 7: incredibly expensive benefits bills are going up. Um, NHS is, is, is,
• 33:38
  Speaker 7: is hugely expensive too. So the chancellor Healy, he faces
• 33:45
  Speaker 7: a really tricky budget. And I think the mood music
• 33:48
  Speaker 7: that I'm hearing is that you don't want to try
• 33:50
  Speaker 7: and scare the horses too much. And he's really keeping
• 33:55
  Speaker 7: his defence sort of securities seal around the treasury. We're
• 34:01
  Speaker 7: not finding out that much really about what his plans
• 34:04
  Speaker 7: might be. But I think that what we do know
• 34:08
  Speaker 7: is that having isolated about two thirds of the tax
• 34:14
  Speaker 7: take and said, we're not touching that, that's income tax,
• 34:17
  Speaker 7: national insurance for employees, and VAT. By doing that, we
• 34:23
  Speaker 7: know that they have to start looking around the edges,
• 34:26
  Speaker 7: those sort of slightly more esoteric taxes or the ones
• 34:29
  Speaker 7: that people don't consider the second order effects of. And this,
• 34:34
  Speaker 7: we have seen, therefore, in the last, this is the
• 34:36
  Speaker 7: third year where we've had actually pretty good first half growth,
• 34:39
  Speaker 7: we were leading G7 economy in the first half. And
• 34:42
  Speaker 7: it peter's away in the second half and i think
• 34:45
  Speaker 7: that's a lot to do with businesses and households delaying
• 34:49
  Speaker 7: spending decisions um and and being just generally lacking in
• 34:53
  Speaker 7: confidence and i i think that um so yeah so
• 34:58
  Speaker 7: we've got the october budget coming up that is um
• 35:01
  Speaker 7: going to be quite a significant moment but i think
• 35:05
  Speaker 7: the least less pitch rolling the better um the less
• 35:09
  Speaker 7: sort of suggestions around what might happen to your pension.
• 35:12
  Speaker 2: But what is left to tax? What is left to tax?
• 35:15
  Speaker 1: Where could you possibly find the amount of money that
• 35:18
  Speaker 1: is required?
• 35:20
  Speaker 7: Well, the last few years, a couple of years, we
• 35:23
  Speaker 7: saw on the platform a lot of people worried about
• 35:27
  Speaker 7: what was going to happen to tax-free cash in their pensions.
• 35:30
  Speaker 7: And a lot of people took money out for something
• 35:33
  Speaker 7: that never happened. And that was.
• 35:37
  Speaker 7: That was unfortunate, because then you're outside of that wrapper,
• 35:40
  Speaker 7: that tax efficient wrapper, as we call it. So there,
• 35:46
  Speaker 7: we hope that there will be no increases to CGT.
• 35:50
  Speaker 7: I mean, I think that is quite well versed in
• 35:54
  Speaker 7: the Treasury, that sort of why can't I increase CGT,
• 35:58
  Speaker 7: but almost every study shows that that would have a
• 36:03
  Speaker 7: deleterious effect.
• 36:04
  Speaker 1: It's already a wealth attack, right? It's already a wealth
• 36:07
  Speaker 1: tax because it's not indexed to inflation. So when you
• 36:09
  Speaker 1: pay it, you're paying it on your nominal gains, not
• 36:11
  Speaker 1: on your real gains. So you're already, in an awful
• 36:13
  Speaker 1: lot of cases, losing wealth.
• 36:15
  Speaker 7: Yeah, there could be some kind of reformation. You know,
• 36:18
  Speaker 7: they could change it. They could reform it. We would
• 36:21
  Speaker 7: love property taxes to be simpler and to remove all
• 36:25
  Speaker 7: those transaction charges. We'd like stamp duty to be removed.
• 36:28
  Speaker 7: There's so many things that could be done that actually would,
• 36:32
  Speaker 7: in the long run... be beneficial but in the short
• 36:35
  Speaker 7: run they would cause disruption, delays and even more stagnation
• 36:41
  Speaker 7: perhaps in assets. So it is incredibly difficult to know
• 36:45
  Speaker 7: but I don't know and I'd love to hear other
• 36:47
  Speaker 7: people's views whether the Prime Minister or the Chancellor are actually,
• 36:53
  Speaker 7: would be brave enough to go back and change what
• 36:56
  Speaker 7: was set out in the manifesto and And so all
• 37:02
  Speaker 7: they're left with is cut spending.
• 37:05
  Speaker 2: Which is politically impossible.
• 37:06
  Speaker 7: Which seems to be politically impossible unless they can actually
• 37:11
  Speaker 7: get their MPs, if the Prime Minister and Chancellor can
• 37:14
  Speaker 7: get their MPs behind them.
• 37:15
  Speaker 2: Brings us to financial repression, presumably.
• 37:18
  Speaker 4: That's one of them. I mean, Colbert, who was an
• 37:20
  Speaker 4: economic advisor to Louis XIV, said the secret of taxation,
• 37:24
  Speaker 4: it's like a goose, it's to extract the maximum amount
• 37:26
  Speaker 4: of feathers with the least amount of hissing. You have
• 37:31
  Speaker 4: to pay attention to the rhetoric. The rhetoric is now clear.
• 37:34
  Speaker 4: There are two types of income in the world. There's
• 37:36
  Speaker 4: earned income and there's unearned income. So it's unearned income.
• 37:40
  Speaker 4: I mean, there's financial repression, but it's unearned income. So
• 37:43
  Speaker 4: one of the things being floated now is all those
• 37:45
  Speaker 4: horrible pensioners who get too much out of their pension
• 37:47
  Speaker 4: fund will have to pay national insurance because that is
• 37:50
  Speaker 4: unearned income. So when you draw that line ideologically, it
• 37:54
  Speaker 4: isn't difficult to come after unearned income, as if it's
• 37:57
  Speaker 4: some sort of evil because it isn't earned. But of course,
• 38:00
  Speaker 4: to have.
• 38:00
  Speaker 2: It was earned in the first place.
• 38:01
  Speaker 4: To have the bloody income in the first place, you
• 38:03
  Speaker 4: had to earn it, you had to pay the tax
• 38:05
  Speaker 4: on it, you had to save it and not spend it.
• 38:07
  Speaker 4: So I think you're going to see more of this.
• 38:09
  Speaker 4: But these people are in the seat of unearned income.
• 38:10
  Speaker 4: And that's exactly what the last Chancellor Healey was very
• 38:13
  Speaker 4: big on. This Chancellor Healey, I suspect, will be paying
• 38:16
  Speaker 4: more attention to that.
• 38:17
  Speaker 7: Yeah, and it's an interesting thought when you project what
• 38:21
  Speaker 7: you were talking about, Richard, on AI and jobs. If
• 38:24
  Speaker 7: you're not going to have the same level of income
• 38:27
  Speaker 7: tax and the same level of national insurance being paid
• 38:30
  Speaker 7: because you've got fewer people working, you are going to
• 38:33
  Speaker 7: have to find other ways to raise revenue.
• 38:36
  Speaker 1: And what if, here's the interesting bit for you, Richard,
• 38:39
  Speaker 1: with them hanging on to US stock market, right? Stock markets,
• 38:43
  Speaker 1: we like to think they're about valuations, but in the
• 38:45
  Speaker 1: short term, at least they're all about flows, right? The
• 38:47
  Speaker 1: amount of money flowing into a market tells you what's
• 38:49
  Speaker 1: going to happen to it. And if you look at
• 38:51
  Speaker 1: the US market, one of the things that has been
• 38:53
  Speaker 1: happening there is the flows come from people's 401ks from
• 38:56
  Speaker 1: their retirement funds. That money goes into the retirement fund,
• 38:59
  Speaker 1: flows out immediately, usually into a S & P 500
• 39:02
  Speaker 1: track or whatever. Money flows out, market goes up. Now,
• 39:05
  Speaker 1: if we follow your line of thinking, which is that
• 39:09
  Speaker 1: a lot of, in particular, higher income jobs... are going
• 39:12
  Speaker 1: to be done by a combination of AI, robotics, etc.,
• 39:16
  Speaker 1: then that flow stops just like that.
• 39:18
  Speaker 2: It begins to dribble away. You have a flow out,
• 39:21
  Speaker 2: not a flow in.
• 39:22
  Speaker 1: So the arrival of AI on the scale that you're
• 39:26
  Speaker 1: talking about leads automatically to market collapse.
• 39:30
  Speaker 3: In the US.
• 39:31
  Speaker 2: This is fun, isn't it?
• 39:33
  Speaker 3: That's the optimistic view. The end of days.
• 39:38
  Speaker 8: But there's also a view that says that, in fact,
• 39:41
  Speaker 8: what will happen is that there will be a much
• 39:44
  Speaker 8: greater polarization of wealth, which has its own We're already
• 39:48
  Speaker 8: seeing some of the effects today of kind of the
• 39:51
  Speaker 8: scaled enterprises grabbing big chunks of the world market and
• 39:55
  Speaker 8: concentration of, was it the top seven wealthiest people have
• 39:59
  Speaker 8: more wealth than the entire southern hemisphere, I think is
• 40:02
  Speaker 8: the stat.
• 40:03
  Speaker 3: So that's that. You don't like that stat? Take that
• 40:06
  Speaker 3: one away.
• 40:07
  Speaker 2: Well, I think it's an irrelevant stat, actually.
• 40:08
  Speaker 3: No, but the point.
• 40:09
  Speaker 8: Is, if you've got a small number of enterprises that
• 40:15
  Speaker 8: are consuming or attracting most of the profits in the
• 40:19
  Speaker 8: world and the value of labour is dropping, what you
• 40:22
  Speaker 8: have there is you have a small number of people
• 40:25
  Speaker 8: with a great amount of wealth.
• 40:26
  Speaker 3: The question is, how much do you tax them?
• 40:28
  Speaker 4: Let's look at the data. You mentioned it earlier, actually,
• 40:30
  Speaker 4: when we were talking. We've just released, National Bureau of
• 40:33
  Speaker 4: Economic Research just released data American corporate profits as a
• 40:36
  Speaker 4: percentage of GDP, it's at an all-time high. Now, that
• 40:39
  Speaker 4: data also, I think, is 1926. I used to say
• 40:41
  Speaker 4: this is the most mean reverting series in the whole
• 40:44
  Speaker 4: of economic history.
• 40:45
  Speaker 6: I know.
• 40:45
  Speaker 1: I've written a column about how it's going to mean
• 40:46
  Speaker 1: revert every year for 20 years.
• 40:48
  Speaker 4: And we could prove that by running an Audie Dickie
• 40:51
  Speaker 4: Fuller test against it, which worked perfectly until 20 years ago,
• 40:54
  Speaker 4: until you started writing about it. And then I used
• 40:57
  Speaker 4: to say, well, it always mean reverts in a free society.
• 41:01
  Speaker 4: But clearly, if you're not in a free society, it
• 41:03
  Speaker 4: doesn't have to mean revert at all. Labour doesn't get
• 41:06
  Speaker 4: to fight back. Creditors don't get to fight back. The
• 41:08
  Speaker 4: taxman doesn't fight back. So there are two conclusions on America.
• 41:12
  Speaker 4: Either it's not a free society or it will mean revert.
• 41:15
  Speaker 4: So in terms of raising taxation, the corporate has to
• 41:19
  Speaker 4: be one source of this. But more importantly, wearing my
• 41:23
  Speaker 4: Adam Smith hat. Greater competition and destroying the oligopolies has
• 41:27
  Speaker 4: to be the other way to bring down. And you
• 41:29
  Speaker 4: think oligopolies, you think of Google. I don't think of Google.
• 41:33
  Speaker 4: I think of beer. How the hell can you have
• 41:35
  Speaker 4: a global beer oligopoly? But that's what we've got.
• 41:38
  Speaker 2: Four providers of beer globally, right? Four providers, but 70,
• 41:41
  Speaker 2: I can't remember, but four providers, 70%.
• 41:42
  Speaker 4: And my brewery is the fifth one. But Smith, you know,
• 41:46
  Speaker 4: Smith was sitting here, he'd say, this is ridiculous. It
• 41:49
  Speaker 4: is ridiculous that A, the joint stock company dominates the
• 41:52
  Speaker 4: world and B, that they have such a huge market share.
• 41:55
  Speaker 4: So you don't have to be in favour of sort
• 41:58
  Speaker 4: of more taxation if you can just be in favour
• 42:01
  Speaker 4: of not having the world run by oligopolies. And as
• 42:04
  Speaker 4: you said, Richard, the technology is going to make that worse.
• 42:07
  Speaker 4: So at some stage, even in the United States of America,
• 42:10
  Speaker 4: there will be a political movement potentially of the right
• 42:13
  Speaker 4: to end this. The American president who took the most
• 42:16
  Speaker 4: actions under the Federal Trade Commission to break up big
• 42:19
  Speaker 4: business was Eisenhower. that well-known left-wing activist. So you can
• 42:25
  Speaker 4: be on the right of politics and be completely against
• 42:28
  Speaker 4: big business. And if you want to know how that works,
• 42:30
  Speaker 4: just watch It's a Wonderful Life. It's in favor of
• 42:34
  Speaker 4: small bankers.
• 42:35
  Speaker 2: Not big bankers. We have to have questions.
• 42:37
  Speaker 1: We said there'd be questions, and if we didn't have them,
• 42:39
  Speaker 1: we'd be lying. Now, I do want to see at
• 42:43
  Speaker 1: the back, the person who has read both The Wealth
• 42:46
  Speaker 1: of Nations and Moral Sentiment, do you have a question?
• 42:48
  Speaker 1: You don't have to, but if you did have a question,
• 42:50
  Speaker 1: we would take it first.
• 42:53
  Speaker 2: You do.
• 42:53
  Speaker 8: Excellent.
• 42:54
  Speaker 2: Wait for the microphone. There we.
• 42:57
  Speaker 3: Go.
• 42:57
  Speaker 6: Excellent.
• 42:57
  Speaker 5: So you talked about the structure of US government debt,
• 43:00
  Speaker 5: but you didn't touch so much on the UK's plans.
• 43:03
  Speaker 5: I think the Treasury plans to issue more short-term debt
• 43:07
  Speaker 5: and less long-term in moving towards the US direction. What
• 43:15
  Speaker 5: impact do you see coming from that?
• 43:18
  Speaker 4: Well, the good news is it's where we start. So
• 43:20
  Speaker 4: we have one of the longer termed out debts in
• 43:22
  Speaker 4: the world. So it's not a great thing to do.
• 43:24
  Speaker 4: But at least we have this huge advantage over just
• 43:27
  Speaker 4: about everybody else in the developed world because we have
• 43:29
  Speaker 4: long term debt. So not good if you keep at
• 43:31
  Speaker 4: it for a long time, but it'd be even worse
• 43:33
  Speaker 4: if you were starting already with lots of short term
• 43:36
  Speaker 4: government debt and little debt. Long term, you might know
• 43:39
  Speaker 4: the numbers for the average maturity across the developed.
• 43:41
  Speaker 7: World, but we're at the long end of that. They're
• 43:53
  Speaker 7: not just skeptical about the pension funds.
• 43:55
  Speaker 2: They were the pension funds.
• 43:57
  Speaker 1: This is a good time to ask a question I
• 43:58
  Speaker 1: haven't asked yet. Who has a defined benefit pension? Lots
• 44:01
  Speaker 1: of you look the right kind of age for this.
• 44:02
  Speaker 1: The ones where the money just keeps.
• 44:03
  Speaker 2: Pouring in every month. Congratulations. Congratulations to all of you.
• 44:08
  Speaker 2: That's marvelous.
• 44:09
  Speaker 1: How many of you have a defined benefit pension that
• 44:13
  Speaker 1: comes from some kind of public sector work?
• 44:18
  Speaker 6: Yes.
• 44:19
  Speaker 2: Well, that's expensive for the rest of us, isn't it?
• 44:22
  Speaker 2: So that's why we need all this debt.
• 44:26
  Speaker 7: What the effect of this will be is that actually
• 44:28
  Speaker 7: you will, as Prime Minister Burnham said, you are more
• 44:32
  Speaker 7: in hock to the bond markets when you're more reliant
• 44:35
  Speaker 7: on short term debt, which makes it just even more
• 44:39
  Speaker 7: critical and that you have spending under control and that
• 44:44
  Speaker 7: you have a plan. And so we can hope for that.
• 44:49
  Speaker 3: Yeah.
• 44:49
  Speaker 2: So the answer is yes, that's true. And it's not
• 44:51
  Speaker 2: necessarily a good thing. Other questions?
• 44:54
  Speaker 4: Well, we can put the stats. So the UK government
• 44:55
  Speaker 4: debt to GDP is 88%, ridiculously high. France is 116%.
• 45:00
  Speaker 4: And we're heading, as Anna.
• 45:01
  Speaker 2: Said, towards 7%.
• 45:02
  Speaker 7: Italy is 132%.
• 45:02
  Speaker 2: And Japan, I think, is 160%. So we've got a
• 45:03
  Speaker 2: horrible number, but.
• 45:03
  Speaker 4: Not as horrible as some people.
• 45:12
  Speaker 6: I think one shouldn't underestimate how much the Trump administration
• 45:16
  Speaker 6: has punished hedge funds going short and long. So I
• 45:21
  Speaker 6: think they've put quite a bit of effort into making
• 45:23
  Speaker 6: sure that they don't offer one-way bets to people. So
• 45:26
  Speaker 6: people going along the oil market or the gas market
• 45:29
  Speaker 6: or whatever have been horribly burnt by Trump coming out
• 45:33
  Speaker 6: with statements. So it's perfectly possible that what Besant's been
• 45:36
  Speaker 6: doing is making sure people don't think that the bond
• 45:39
  Speaker 6: market in the States is a one-way bet. So I'll
• 45:42
  Speaker 6: just give you that as an alternative way of thinking
• 45:44
  Speaker 6: about it. Anyway, Reinhart and Rogoff wrote a great book
• 45:48
  Speaker 6: called This Time is Different. And if you look at
• 45:51
  Speaker 6: the kind of assets to income ratios, you know, we
• 45:55
  Speaker 6: are back in bubble territory that looks like the dot-com
• 45:58
  Speaker 6: boom in 2008 and all sorts of other booms. We've
• 46:02
  Speaker 6: kind of talked about it, but I guess I'm interested
• 46:05
  Speaker 6: to know whether or not anybody can make a bull
• 46:08
  Speaker 6: case for for the AI profits are going to keep
• 46:11
  Speaker 6: on going up and this time really is different or
• 46:13
  Speaker 6: whether or not Reinhardt and Rogoff.
• 46:15
  Speaker 3: Are going to be right.
• 46:15
  Speaker 4: Yeah.
• 46:17
  Speaker 1: Well, I think Russell can make you the bear case.
• 46:20
  Speaker 1: You might be able to make a bull case.
• 46:23
  Speaker 8: I've sold everything myself, so I'm a very modest bull.
• 46:30
  Speaker 8: I think the risks are not on the upside. The
• 46:34
  Speaker 8: leverage in the system and the multiples are And the
• 46:39
  Speaker 8: absolute numbers are absolutely huge. So back to all the
• 46:43
  Speaker 8: metrics compared to the dot-com boom, you look at the
• 46:45
  Speaker 8: math there and you say, okay, well, the market can
• 46:48
  Speaker 8: go along much further than we can think, but if
• 46:51
  Speaker 8: history is any precedent, you've got a hyper bubble in
• 46:55
  Speaker 8: your hands.
• 46:56
  Speaker 2: I'm afraid I would agree with that.
• 46:58
  Speaker 1: And I'd also pick up what Anna was saying about SLMs,
• 47:01
  Speaker 1: but the big build-out of the data center has been
• 47:03
  Speaker 1: based on the idea that LLMs are the answer.
• 47:06
  Speaker 2: But once you get to.
• 47:07
  Speaker 1: The point, holding a lot of this, once you get
• 47:09
  Speaker 1: to that point where, in fact, you find that SLMs
• 47:12
  Speaker 1: can do around 85% of what an LLM can do
• 47:15
  Speaker 1: for you at about 50% of the cost and hanging
• 47:18
  Speaker 1: on to your data privacy, once that becomes more thought about,
• 47:22
  Speaker 1: you may see the beginning of the end.
• 47:24
  Speaker 2: I don't know. Russell?
• 47:25
  Speaker 4: Can I refer to the pit of uncertain use?
• 47:27
  Speaker 6: Absolutely.
• 47:27
  Speaker 4: Because I only get to do it every five years,
• 47:28
  Speaker 4: so I shall do it again. Go on, do it.
• 47:30
  Speaker 4: So one of the most beautiful places in the world
• 47:32
  Speaker 4: is in the middle of Strangford Lock. You reach it
• 47:34
  Speaker 4: by a bridge and it's an old monastic site. It's
• 47:37
  Speaker 4: in ruins, but each thing is labelled.
• 47:39
  Speaker 6: Where is this?
• 47:39
  Speaker 4: It's in Strangford Lock. You must know where that is.
• 47:42
  Speaker 4: County Down.
• 47:43
  Speaker 3: Oh, County Down. No, I'm Scottish, sorry.
• 47:46
  Speaker 4: And so each thing is... So the chapel is labelled
• 47:50
  Speaker 4: and the refectory is labelled. There's a bloody big hole
• 47:52
  Speaker 4: at the back and it says, Pit of Uncertain Use.
• 47:56
  Speaker 4: And this... This is important because that's what the stock
• 47:59
  Speaker 4: market has been for a long period of time. It's
• 48:01
  Speaker 4: not raising capital. It's been pouring capital back to investors
• 48:05
  Speaker 4: for a generation. At one stage, that cash flow yield
• 48:08
  Speaker 4: was about 8%. Now it doesn't. This is to your point.
• 48:11
  Speaker 4: Now it doesn't. So now we have a competition. We
• 48:14
  Speaker 4: have a competition from a corporate sector that needs capital
• 48:16
  Speaker 4: for the first time because, frankly, all of that Capital, heavy,
• 48:20
  Speaker 4: intensive stuff was done in China and the government. And
• 48:23
  Speaker 4: the two of them are now in a battle. This
• 48:24
  Speaker 4: is where Besant's intervention is important. They're now in a
• 48:27
  Speaker 4: battle for capital. The government wins. I think that plays
• 48:31
  Speaker 4: a role in this cycle that we're in. But the
• 48:34
  Speaker 4: definitive book on this is Sandy Nairn's Engines That Move
• 48:37
  Speaker 4: Markets of this parish. Read that book and you'll get
• 48:40
  Speaker 4: a pretty good idea of how these things come and go.
• 48:42
  Speaker 4: So I think there were three railway booms. I'm sure
• 48:45
  Speaker 4: there'll be at least three AI booms. Timing those is
• 48:48
  Speaker 4: going to be pretty tricky. Anna?
• 48:52
  Speaker 2: Bull case?
• 48:54
  Speaker 7: Well, I mean, I talked about Nvidia earlier and it
• 48:57
  Speaker 7: might surprise you that something growing that fast is actually
• 49:00
  Speaker 7: only on 18 times forward earnings. So that's not hugely
• 49:05
  Speaker 7: expensive for something that grows that quickly. I think actually
• 49:10
  Speaker 7: that you do need to have diversification. I do think
• 49:14
  Speaker 7: you genuinely need to have holdings in stocks that are
• 49:21
  Speaker 7: real assets. And actually, that's why the FTSE has done
• 49:25
  Speaker 7: pretty well this year. It's got its pharmaceuticals. It's got banks.
• 49:29
  Speaker 7: It's got mining stocks. It's got oil companies, those kind
• 49:33
  Speaker 7: of things. So you can actually diversify your exposure away
• 49:37
  Speaker 7: quite successfully here. But the key mistake, it's so tempting
• 49:41
  Speaker 7: to try and time markets. But if you miss the
• 49:45
  Speaker 7: best days and two thirds of the best days that,
• 49:51
  Speaker 7: you know, we're talking, you know, several percentage increases, two
• 49:55
  Speaker 7: thirds of those best days come within three weeks of
• 49:58
  Speaker 7: the worst days. So it is very easy to sort
• 50:01
  Speaker 7: of just think, oh, that's looking a bit toppy. I'll
• 50:05
  Speaker 7: take some profits there. You'd be surprised. how very, very
• 50:09
  Speaker 7: difficult it is. And I tell you, when the market
• 50:12
  Speaker 7: is falling several percentage points over a few months, it
• 50:17
  Speaker 7: never feels like you want to go back in and buy.
• 50:20
  Speaker 7: So I think that you just, I would personally, and
• 50:25
  Speaker 7: this is what I do, is I have some pretty
• 50:28
  Speaker 7: low cost investment tracker funds. I have some really interesting
• 50:33
  Speaker 7: active funds that I really like and I follow and
• 50:36
  Speaker 7: I think that the way to to sort of maybe
• 50:39
  Speaker 7: navigate some of the particularly in technology or in some
• 50:42
  Speaker 7: very specialized sectors is to is to go with people
• 50:46
  Speaker 7: who i wouldn't you know i i think you don't
• 50:49
  Speaker 7: want to be you don't want a generalist fund manager
• 50:51
  Speaker 7: looking after your tech exposure or your biotech or some
• 50:55
  Speaker 7: financials even i think or insurance companies maybe i think
• 50:58
  Speaker 7: you really want very, very specialist funds for those. So
• 51:02
  Speaker 7: I think there are plenty of opportunities.
• 51:04
  Speaker 5: And I.
• 51:06
  Speaker 7: Think diversification is key. And yes, some parts of the
• 51:10
  Speaker 7: market are quite expensive. Yes, equity is high. Yes, the
• 51:14
  Speaker 7: mega caps have gone through an awful lot of that
• 51:16
  Speaker 7: cash flow that they were generating. But you don't have
• 51:20
  Speaker 7: to own those stocks. You can own other stocks too.
• 51:24
  Speaker 2: Thank you so much to our panel today. You are wonderful.
• 51:27
  Speaker 2: And thank you. You've been a wonderful audience.
• 51:39
  Speaker 6: Thank you.
• 51:42
  Speaker 1: Thanks for listening to this week's Merrin Talks Money. If
• 51:45
  Speaker 1: you like our show, rate, review, and subscribe wherever you
• 51:47
  Speaker 1: listen to your podcasts. And keep sending questions or comments
• 51:50
  Speaker 1: to merrinmoney at bloomberg.net. You can also follow me and
• 51:52
  Speaker 1: John on Twitter or X. I'm at MerrinSW, and John
• 51:55
  Speaker 1: is John underscore Stepak. This episode was hosted by me,
• 51:59
  Speaker 1: Merrin Somerset Webb. It was produced by Sam Asadi and
• 52:01
  Speaker 1: Moses Andam. Sound design by Blake Maples. And special thanks,
• 52:04
  Speaker 1: of course, to Richard Wilson, Anna MacDonald, Russell Napier, Blair Barrows,
• 52:08
  Speaker 1: and Alan Lloyds, and everyone at Panmere House.
• 52:13
  Speaker 3: Bye.