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Inflation Isn’t Done: Why the Next Shock Could Be Worse · Merryn Talks Money

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Speaker 1: Bloomberg Audio Studios, Podcasts, radio news.
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Speaker 2: Hey Marin Talks Money listeners.
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Speaker 1: Earlier this week, we had our subscriber event in the
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Speaker 1: Bloomberg offices in London. It was so wonderful to see
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Speaker 1: so many listeners and so many readerserves, so thank you
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Speaker 1: so much.
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Speaker 2: To all of you who came, and to those of
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Speaker 2: you who couldn't come.
0:21
Speaker 1: We are bringing you some of the conversations we had
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Speaker 1: that evening to the podcast feed. So first up we
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Speaker 1: have my conversation with Sebastian Lion of Troy Asset Management. Enjoy.
0:33
Speaker 1: Welcome everybody, and thank you for coming to Marrin Talks Money,
0:36
Speaker 1: the podcast in which people who know the markets explain
0:39
Speaker 1: the markets. Now we are recording this episode with those
0:41
Speaker 1: of you aren't here, do come next time in front
0:44
Speaker 1: of an audience of subscribers at the Bloomberg London offices.
0:48
Speaker 2: Now there'sill be three sections to it.
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Speaker 1: There's gonna be this bit where I talked to Sebastian,
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Speaker 1: and then we'll do some more personal finance stuff and
0:54
Speaker 1: we'll take lots of questions. Do use that QR code
0:56
Speaker 1: to ask questions, but you will also be able to
0:58
Speaker 1: ask for the mic at the end, I don't feel
1:00
Speaker 1: you have to use the QR code. Now we're going
1:02
Speaker 1: to start all this with Sebastian.
1:03
Speaker 2: Who's a long term friend of the show and mine.
1:06
Speaker 1: We were just saying earlier we started our businesses around
1:08
Speaker 1: the same time twenty five twenty five years ago, and
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Speaker 1: I think we've been talking about the gold price pretty
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Speaker 1: much ever since, ever since.
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Speaker 3: Without without break, we've aged well, we have, we have
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Speaker 3: and serves the gold price certainly has.
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Speaker 1: Yep, right by Sebastian, thank you for coming and doing this.
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Speaker 1: Then let's start with the general miseries, shall we.
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Speaker 2: I mean listening how many are there? So many listening
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Speaker 2: to that list of sigmons.
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Speaker 1: The first thing that I think strikes you is how
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Speaker 1: extraordinarily calm markets are in the wake of that sort
1:37
Speaker 1: of bizarrely unexpected list of things that have happened in
1:41
Speaker 1: the last two and a half three months, on two
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Speaker 1: and a.
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Speaker 3: Half weeks, let alone two and a half weeks. I mean,
1:46
Speaker 3: people have forgotten about the fed appointment. Really that happened
1:48
Speaker 3: at the end of January, and it's just sort of
1:49
Speaker 3: in the midst of time. But actually so much has
1:51
Speaker 3: happened since then, so I'm having to deal with that,
1:54
Speaker 3: having to keep your focus, are having to be consistent
1:57
Speaker 3: as a fun manager with all of that. I mean,
1:59
Speaker 3: the noise level are off the scale, but consistency, as
2:03
Speaker 3: you're the seers are, yes, absolutely what we do try,
2:06
Speaker 3: That's what we are there for.
2:08
Speaker 1: So I think what we really want to talk about
2:10
Speaker 1: this evening is how exactly you manage money and construct
2:13
Speaker 1: a portfolio in this kind of environment, because really the
2:16
Speaker 1: style that you use was really.
2:18
Speaker 2: Designed for this kind of environment, right.
2:20
Speaker 1: I mean, there are a period in the markets when
2:22
Speaker 1: you want to be in expensive growth dove and where
2:24
Speaker 1: you want to be thinking mainly about how do I
2:26
Speaker 1: grow my capital, how do I make more money all
2:28
Speaker 1: the time, And then there are berriers such as this
2:30
Speaker 1: when mainly you're thinking about how on earth do I
2:32
Speaker 1: protect what I already have.
2:34
Speaker 3: It's about preparing for dislocations basically, because dislocations happen, whether
2:38
Speaker 3: it be COVID, whether it be the financial crisis, whether
2:41
Speaker 3: it be the dot com bust another instance, whether it
2:44
Speaker 3: be the Gulf Wall, the invasion of or not the
2:48
Speaker 3: invasion of Iran yet, but we'll see about that maybe
2:50
Speaker 3: in a few weeks time. So we are waiting for those.
2:54
Speaker 3: Those events give us opportunities, but we also know that
2:57
Speaker 3: we need to be ready for them. We were ready
2:59
Speaker 3: for COVID, although COVID came totally out of the blue,
3:04
Speaker 3: we were prepared for the point of view, our act
3:06
Speaker 3: allocation was relatively low because xtually markets were high going
3:09
Speaker 3: into COVID. There was a lot of vulnerability. There's a
3:11
Speaker 3: lot of fragility within XIT markets.
3:14
Speaker 2: So when ready for COVID.
3:15
Speaker 3: So we weren't ready for COVID because no, absolutely not.
3:17
Speaker 3: But you've got to be ready for these instances and
3:19
Speaker 3: they come from left field. I mean, if you think
3:20
Speaker 3: about even three weeks ago, markets were very abulliant. People
3:26
Speaker 3: were talking very positive about ciclicality, about bank stocks, about
3:31
Speaker 3: house builders, all those areas of the market. Heavily cynical
3:35
Speaker 3: businesses which we tend to steer clear of. Those businesses
3:40
Speaker 3: now are down fifteen to twenty five percent just in
3:43
Speaker 3: the last two and a half weeks, with the your
3:46
Speaker 3: price going up. All you've got to do is be
3:49
Speaker 3: prepared to say, actually, those are not the kind of
3:51
Speaker 3: companies that I want to be in, because you know
3:54
Speaker 3: that those sort of instances can happen and do happen,
3:57
Speaker 3: and those businesses are more fragile, moreulnerable. I was with
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Speaker 3: a property agent, a West End property agent this afternoon.
4:04
Speaker 3: He said that all transactions are just stopped literally on
4:07
Speaker 3: a pin, just until this situation is resolved, which may
4:11
Speaker 3: be weeks, it might be months. Transactions have just finished.
4:15
Speaker 3: So one has to be ready for events such as that.
4:21
Speaker 3: What they actually bring is opportunity. So as a long
4:24
Speaker 3: term investor, one can actually take opportunities when one sees
4:30
Speaker 3: huge risk a version. And we haven't seen that yet,
4:32
Speaker 3: by the way, But if and when we see huge
4:35
Speaker 3: risk of version, we see markets full as we did
4:37
Speaker 3: during COVID markets fell thirty five percent within the space
4:39
Speaker 3: of nine weeks, then you've got to be ready to
4:42
Speaker 3: act and lean in and take more riskers you're paid
4:44
Speaker 3: to take more risk. That's how you generate long term
4:47
Speaker 3: returns but also protect the downside. And the key thing
4:50
Speaker 3: for us, for personal assets or for the Trojan Fund,
4:52
Speaker 3: is that we want to give our investors a more
4:55
Speaker 3: comfortable ride that they sleep at night, that we're consistent,
4:59
Speaker 3: that they know they can run on us. So if
5:01
Speaker 3: markets do suddenly fall twenty five or thirty percent, that
5:05
Speaker 3: that they know that the Trajuy fund or personal asets
5:08
Speaker 3: would have fallen considerably less than the market a couple
5:10
Speaker 3: of percent. Well it could be a couple of percent.
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Speaker 1: And when you when you look at their portfolio, you
5:17
Speaker 1: are not measuring yourself relative to a benchmark. You're always
5:21
Speaker 1: thinking about inflation. And that's it about first maintaining the
5:24
Speaker 1: real value of the assets before you think about growing them.
5:27
Speaker 2: Absolutely not about how it's perfect you're doing.
5:29
Speaker 3: It's not about absolutely not. I mean, obviously we look
5:31
Speaker 3: at the foot see obviously we look at the MSCI,
5:35
Speaker 3: the long term track record of the Trojan fun which
5:37
Speaker 3: is the longest track recording in back twenty five years.
5:38
Speaker 3: You mentioned, we've generated the equity type returns seven percentage,
5:42
Speaker 3: about the same as the UK stock market, but with
5:46
Speaker 3: less than half of volatility, so about six percent per
5:48
Speaker 3: year volatility rather than the market being thirty and.
5:50
Speaker 2: Measuring yourself against RPI rather than the CPI.
5:54
Speaker 3: Well that's going to change, but I don't want to
5:56
Speaker 3: give any too many surprises away because of the change
5:59
Speaker 3: in the RPI that will ultimately change. We need to
6:02
Speaker 3: review that. But yes, it has always been the RPI.
6:05
Speaker 3: We are trying to protect the real value of people's
6:08
Speaker 3: capital income helpful though it is is a residual. We
6:12
Speaker 3: never reach for income. It's one of the pluses of
6:14
Speaker 3: the whether we do it. Some of the people who
6:16
Speaker 3: invest for capital preservation have the tendency to reach for yield,
6:22
Speaker 3: and we actually do the opposite.
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Speaker 1: Okay, let's start the next bit by talking about your
6:30
Speaker 1: inflation expectations, because I know a lot of the portfolio
6:33
Speaker 1: has historically been designed around your expectation of fast rising inflation,
6:38
Speaker 1: and obviously the war is going to feed into that absolutely.
6:41
Speaker 3: Yeah. So I mean, with the your price up but
6:43
Speaker 3: one hundred dollars and it my spike further, I wouldn't
6:46
Speaker 3: be surprised if it sprites further. Then obviously we're going
6:48
Speaker 3: to see an inflation shock to the RPI, so that
6:52
Speaker 3: none of those numbers have gone in we think. I mean,
6:55
Speaker 3: it's very interested listening to your podcast two weeks ago
6:57
Speaker 3: with Edward Chancellor. That book The Price Time We've given
7:02
Speaker 3: its clients. It's a remarkably well timed, brilliant book. But
7:07
Speaker 3: what he is effectively saying, what we have recognized as
7:10
Speaker 3: investors over the last five six years, is that in
7:14
Speaker 3: twenty twenty with COVID. Things changed, and things were going
7:18
Speaker 3: to change anyway when an event happened, whether it be
7:21
Speaker 3: a recession or or whether it be a pandemic, as
7:24
Speaker 3: it happened, but interest rates basically bottomed, and we had
7:28
Speaker 3: this extraordinary period of a decade where interest rates were
7:32
Speaker 3: at zero and nailed to the floor, and we recognized
7:35
Speaker 3: that we were going to go into a world of
7:36
Speaker 3: rising rates and probably as a result, higher inflation all
7:42
Speaker 3: the other way around. We saw those inflationary pressures build up,
7:45
Speaker 3: which we saw with the war in Ukraine. RPI went
7:49
Speaker 3: to thirteen percent CPI and the US went to nine.
7:52
Speaker 3: It has been above target since then, so central backs
7:57
Speaker 3: have failed to get it below target. We think we
8:00
Speaker 3: are in a world obviously clearly helped by the old
8:04
Speaker 3: price going out to two hundred dollars, where the surprise will
8:08
Speaker 3: be on the upside for inflation rather than downside. Twenty
8:10
Speaker 3: ten to twenty twenty one, the surprise was permanently on
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Speaker 3: the downside. The centerprise was struggling as hard as they
8:16
Speaker 3: could to get actually inflation up. Now we're in a
8:20
Speaker 3: very different world.
8:21
Speaker 2: Okay, but you know this was very much the case.
8:24
Speaker 2: But before the oil preach started to move.
8:26
Speaker 3: Yes, well, we yeah, absolutely, we believe that we're in
8:30
Speaker 3: a secular period whereby as Edward is, where yields are rising,
8:36
Speaker 3: where the bond market, bond market yields bottoms in August
8:40
Speaker 3: July August of twenty twenty, yields have been rising since then. Yes,
8:44
Speaker 3: there will be downward moves. What's very interesting about this period,
8:48
Speaker 3: the last few weeks is that actually, although the expectation
8:51
Speaker 3: would be with the rising oil price of flight to quality,
8:55
Speaker 3: yields would actually fall, they haven't. In fact, they've risen.
8:58
Speaker 3: So there isn't that protection, that natural protection of the
9:02
Speaker 3: sixty forty sixty equity forty bonds. And we knew that
9:06
Speaker 3: we were in a different world where sixty forty type
9:09
Speaker 3: structure of a portfolio. You asked me about the structure
9:12
Speaker 3: of the portfolio. We moved from a world where you
9:14
Speaker 3: do not want to have sixty forty because actually equities
9:16
Speaker 3: and bonds can go down at the same time within
9:18
Speaker 3: an inflationary world.
9:20
Speaker 2: Stick with inflation. What are the drivers of this change?
9:23
Speaker 1: I mean, I think we can probably list them all
9:26
Speaker 1: in geopolitics supply.
9:28
Speaker 3: Chaine, well geopology, but in particular tariffs, the world getting larger,
9:37
Speaker 3: rather so the world was always getting smaller with global
9:42
Speaker 3: lotation that really has been reversing for quite a long
9:47
Speaker 3: time now. That has meant that there's a greater fragility
9:51
Speaker 3: in supply chains. And that is meant when we've seen
9:54
Speaker 3: these crisis, whether it be Ukraine, whether it be Iran,
9:58
Speaker 3: that the response is higher prices, whereas we've been used
10:02
Speaker 3: to lower and lower and lower prices, and it takes
10:05
Speaker 3: these shocks where there's a very oh okay, we're back
10:09
Speaker 3: in this world again. We're back in this world of
10:11
Speaker 3: higher prices. The old price. You know, there is a
10:15
Speaker 3: higher prices are deflationary. Well, yes, if the price goes
10:18
Speaker 3: to one hundred and fifty dollars, suddenly demand disappears because
10:21
Speaker 3: people can't afford the old price at that level. So
10:25
Speaker 3: that that's when we get the risk. I think there
10:28
Speaker 3: is a risk which I don't think is being discounted
10:30
Speaker 3: at the moment of recessionary courses.
10:33
Speaker 1: And you would you also think that the public debt
10:35
Speaker 1: problem feeds into the inflationary environment.
10:38
Speaker 3: The public debt problem doesn't help, doesn't help at all. No,
10:42
Speaker 3: it's because effectively policy makers are stuck as stuck in
10:47
Speaker 3: this period whereby they have to consequently out of the debt.
10:50
Speaker 3: I mean in the UK the interest bills now weout
10:54
Speaker 3: one hundred and ten billion pounds. In the US it's
10:56
Speaker 3: one point one trillion, So that desperately trying to keep
11:00
Speaker 3: the interest rates down, but clearly at the moment that's
11:04
Speaker 3: not necessarily likely to be the case. If anything, interest
11:06
Speaker 3: rates are going to be on hold. As central banks
11:09
Speaker 3: try and work out could there be a policy error
11:12
Speaker 3: of putting rates up or keeping rates on hold when
11:15
Speaker 3: actually demand falls off due to a high old price,
11:18
Speaker 3: or should they be cutting because it's that we're into
11:21
Speaker 3: a recession and you.
11:22
Speaker 1: Think recession risks in the US everywhere globally.
11:27
Speaker 3: Yes, absolutely so that I'm not predicting a recession, but
11:34
Speaker 3: there is far more of a risk recession than markets
11:37
Speaker 3: are discounting. After two and a half weeks of this.
11:39
Speaker 3: If this carries on and the gover of Homers stays
11:42
Speaker 3: shut for a prolonged period of time, call it three
11:45
Speaker 3: to six months rather than three to six weeks, then
11:49
Speaker 3: you could have real issues. And you know, I do
11:52
Speaker 3: see the lightly of the downtown and the downturn. There
11:56
Speaker 3: were risks of a downtime back in twenty twenty two
11:58
Speaker 3: twenty twenty three with with the invasion of Ukraine. But
12:03
Speaker 3: fortunately in that situation there were huge pent up savings
12:07
Speaker 3: from consumers, so consumers were actually in a very good
12:10
Speaker 3: place back in twenty twenty two twenty three they could
12:12
Speaker 3: withstand the higher prices to some extent. This time around,
12:15
Speaker 3: you've got a K shape recovery. I a mismatch between
12:19
Speaker 3: the haves and the have not have not You've got
12:21
Speaker 3: in the UK, you've basically, as you know, married very well.
12:24
Speaker 3: You've got zero growth as of the quarter to the
12:28
Speaker 3: end of January before this happened. And in the US
12:32
Speaker 3: actually growth has been not as strong as as many
12:36
Speaker 3: have expected, you know, sort of two percent, but by
12:38
Speaker 3: US standards actually relatively modest. So it's coming at a
12:41
Speaker 3: difficult time.
12:53
Speaker 1: The challenge to your moving away from recession, the it
12:58
Speaker 1: challenged your view on inflation, is that the technological progress
13:03
Speaker 1: that we're making at the moment is very deflationary. That
13:06
Speaker 1: the combination of AI, robotics, all these things coming together
13:10
Speaker 1: is a huge deflationary impulse across the global economy.
13:15
Speaker 3: Technology always has been a deflationary impasse. But I think
13:18
Speaker 3: that what's happening in terms of the reversal of globaliza.
13:22
Speaker 3: Globalization makes it, I think, much more difficult. That's why
13:24
Speaker 3: I mean, technological gains have been been made over the
13:30
Speaker 3: last five years, have been made materially since twenty twenty,
13:34
Speaker 3: since twenty twenty two. Yet we're in a position where
13:37
Speaker 3: inflation is above and sticky and above targets. So I
13:42
Speaker 3: think the technological revolution view of keeping inflation down yes,
13:49
Speaker 3: at the margin, but I think there are other factors
13:51
Speaker 3: at play which are frankly more important, that are sort
13:56
Speaker 3: of overruling the factors of of technology. Just at the moment.
14:02
Speaker 3: We will see maybe that will evolve, But so far
14:07
Speaker 3: that technological argument over the last five years hasn't really worked.
14:10
Speaker 1: Okay, let's go back to the conversation we started about
14:14
Speaker 1: bond and the sixty to forty portfolio.
14:17
Speaker 2: That really doesn't work anymore.
14:19
Speaker 1: But that doesn't mean there aren't fixed income holdings in
14:22
Speaker 1: your portfolio.
14:22
Speaker 3: No, But they're very very short duration, so we're just
14:26
Speaker 3: not taking any duration risk at all, and we haven't
14:28
Speaker 3: taken any duration risk for a very long time. So
14:31
Speaker 3: with a very long bond, clearly you're taking a lot
14:34
Speaker 3: of duration risks. A lot of the value of that
14:36
Speaker 3: bond is out into the twenty thirties, twenty forties, twenty fifties.
14:40
Speaker 3: The capital value to that bond is at risk if
14:43
Speaker 3: yields rise, as we expect yields to be sticky and
14:47
Speaker 3: continue to rise over time until governments ultimately intervene, which
14:51
Speaker 3: I expect them to do at some stage in the
14:53
Speaker 3: next four or five years, because this whole situation is
14:56
Speaker 3: ultimately unsustainable. Intervene now intervene in possible two ways. One
15:00
Speaker 3: would be your curve control because the interest is just
15:03
Speaker 3: not affordable. Well, the tried and tested ways are either
15:07
Speaker 3: the your curve control or actually a cutting of the coupon,
15:11
Speaker 3: which has been done in the past as well. If
15:13
Speaker 3: you remember but Warlane, which I used to own in
15:15
Speaker 3: the fact, remember, which is a very very long dated
15:19
Speaker 3: UK government bond, in fact about the longest dated that
15:22
Speaker 3: the yield was cut of seven percent to three and
15:24
Speaker 3: a half percent between the wars, So yields coupons have
15:28
Speaker 3: been cut, but yu curve to control is probably the
15:31
Speaker 3: most likely that was used in the US after the war.
15:33
Speaker 3: But there are tried and tested They're not very pleasant
15:36
Speaker 3: and clearly they are default and clear they have implications
15:38
Speaker 3: for currencies, but the unsustainable nature of sovereign government bonds
15:45
Speaker 3: higher yields than today are very material. That is why
15:50
Speaker 3: the UK government is subsessed by the guilt market because
15:55
Speaker 3: you know that has huge ramifications for them.
15:58
Speaker 1: Okay, so what replaces the traditional bond part of a
16:01
Speaker 1: portfolio so effectively it's liquidity, and we've got liquidity.
16:06
Speaker 3: We've got index linked so for example, we'd benefit from
16:10
Speaker 3: that inflation. If you look at what index link bonds
16:13
Speaker 3: have done since twenty twenty since inflation started to pick up,
16:16
Speaker 3: and what conventional bonds have done, Index lenth bonds have
16:19
Speaker 3: done much better because we've been taking that inflation every month.
16:24
Speaker 3: So we've got short but short dated index link. The
16:28
Speaker 3: longer dated index link bonds were very, very badly hit
16:31
Speaker 3: in twenty twenty two where we saw that inflation, but
16:33
Speaker 3: ironically people had long duration indexcellent bonds thinking that they
16:37
Speaker 3: were going to get the outside and actually the duration
16:39
Speaker 3: killed them even though they got they got the inflation.
16:42
Speaker 3: The shorter dated index links, which we had, got the
16:45
Speaker 3: inflation without the risk of the duration, so we didn't
16:47
Speaker 3: get hurt nearly as badly in twenty twenty two as
16:51
Speaker 3: a sum. But I think the key thing is is liquidity,
16:55
Speaker 3: and then you've got the greater flexibility as well. So
16:57
Speaker 3: our bonds are less than two years in duration. We
16:59
Speaker 3: could look don't very very quickly and move into other
17:02
Speaker 3: asset class if need be. And the other thing obviously
17:04
Speaker 3: within equities forty percent in equities and gold as well,
17:09
Speaker 3: which is ten percent of the portfolio.
17:11
Speaker 2: Let's talk gold last we yes, I think we must
17:14
Speaker 2: say it.
17:15
Speaker 1: Everyone expects us to talk about gold, right like it
17:17
Speaker 1: if we didn't yet, everyone wants justus talk about gold.
17:19
Speaker 1: Tis end of the portfolio. Still it's the biggest holding.
17:22
Speaker 1: But you have sold down quite a lot.
17:23
Speaker 3: We have sold down quite a lot. I think it's
17:26
Speaker 3: more a question of tempering our enthusiasm. We have done
17:31
Speaker 3: very well in gold, going right the way back to
17:32
Speaker 3: when we met. I think we first bought gold for
17:34
Speaker 3: the Trojan found back in twenty two thousand and four,
17:38
Speaker 3: so over twenty years ago. Gold price was four hundred
17:41
Speaker 3: and twenty four dollars back then. We've held it uninterrupted
17:44
Speaker 3: all of that time. We haven't been in and out
17:45
Speaker 3: and in and outs. We held it a long time
17:47
Speaker 3: and since after the financial crisis. We've in between about
17:50
Speaker 3: ten and twelve percent. But when I met you three
17:56
Speaker 3: years ago sitting on the stage, I think the price
17:59
Speaker 3: was around just over two thousand, two thousand, two hundred
18:01
Speaker 3: dollars something like that. Today it's five thousand dollars plus
18:04
Speaker 3: on minus. It's been a hell of a run. We
18:07
Speaker 3: know the reasons as to why that has been the
18:11
Speaker 3: A well exercise particularly interesting and not about consumers or
18:15
Speaker 3: institutional investors particularly adding to gold. Be much more about
18:19
Speaker 3: central banks diversifying their portfolios, and that has continued and
18:23
Speaker 3: that's been of great support to the market. So I'm
18:25
Speaker 3: not overly pessimistic about gold at these levels. However, they
18:29
Speaker 3: have had a great run and we need to get
18:31
Speaker 3: our risks proportionately correct. We allowed gold to run out
18:35
Speaker 3: fourteen percent at the end of last year within the portfolio.
18:39
Speaker 3: In January, the price spiked above five thousand, five hundred dollars.
18:43
Speaker 3: We sold some just over about five thousand, one hundred,
18:46
Speaker 3: five thousand, two hundred dollars, and we brought it down
18:49
Speaker 3: to ten percent. So it's a very bitch. We've cut
18:51
Speaker 3: our goal hold in about thirty percent in a day.
18:53
Speaker 3: Shows how liquid it is.
18:55
Speaker 2: A ten percent.
18:57
Speaker 3: At ten percent, I think expresses low long term confidence.
19:02
Speaker 3: In the short term, I think it's going to be
19:03
Speaker 3: quite bumpy. It's traveled a long way very quickly, and
19:07
Speaker 3: I think it's not necessarily going to protect in a
19:11
Speaker 3: way that it has done in the past from volatility
19:15
Speaker 3: within markets because of that high level. So it's just
19:20
Speaker 3: not going to be that necessarily that portfol insurance. And
19:23
Speaker 3: we've seen that in the last two to three weeks.
19:25
Speaker 3: We've seen the bomby of Iran at a time the
19:28
Speaker 3: gold prize actually hasn't done anything in Sterling. It's up
19:31
Speaker 3: a little bit because the dollars strengthened, but really it's
19:34
Speaker 3: done nothing. And you would have expected it if you
19:36
Speaker 3: were to say to me, right lo Gate, the US
19:38
Speaker 3: is going to bomb Iran with Israel tomorrow morning, what
19:41
Speaker 3: do you expect the gold price to do? You would
19:44
Speaker 3: naturally expect it as a flight to quality, for the
19:46
Speaker 3: gold price to go up. It hasn't, and I think
19:48
Speaker 3: that and when, when, eventually, whenever it is, the US
19:54
Speaker 3: steps back from the war, then it would be interesting
19:59
Speaker 3: to see what happen the gold price. Then I wouldn't
20:02
Speaker 3: be surprised if it has a correction, but that I
20:06
Speaker 3: would view that as a long term opportunity. I think
20:08
Speaker 3: with everything we've talked about in terms of sovereign debt risk,
20:12
Speaker 3: that is not going away, and that will be very
20:15
Speaker 3: positive gold, both from the point of view of weak
20:16
Speaker 3: ocurrencies and debasement, but also from the point of view
20:19
Speaker 3: of owning another asset other than fixed income. So so
20:23
Speaker 3: I don't think the bull market is over, but I
20:27
Speaker 3: think we have had a very strong run, and I
20:29
Speaker 3: think there's reason to be a little bit more circumspect
20:32
Speaker 3: from these levels. And just there is no right answer
20:36
Speaker 3: about how to size this thing. I've got friends who've
20:40
Speaker 3: got fifty percent in gold. I've got friends who've got
20:42
Speaker 3: one percent in goals. I've got friends who've got no gold.
20:45
Speaker 3: So it is not necessarily to size. What I've always
20:49
Speaker 3: felt is that you've got to have enough to make
20:51
Speaker 3: a difference, but not so much that the tailwork's dog.
20:55
Speaker 3: So I've always felt between eight and twelve percent about right.
20:58
Speaker 3: Were allowed to get to fourteen, we came back to ten,
21:02
Speaker 3: But I think that's the right sort of level for
21:04
Speaker 3: the environment that we're in. And it is an educated guest.
21:06
Speaker 1: Frankly, always of course, but you would expect to invest
21:10
Speaker 1: a demand for gold to go up if you think
21:11
Speaker 1: that for many decades until relatively recently, everyone had four
21:15
Speaker 1: or five, six, seven percent of their portfolio in gold,
21:17
Speaker 1: and now the everage person still has.
21:19
Speaker 2: Maybe zero percent in gold.
21:21
Speaker 1: So you would expect as people starting to build up
21:23
Speaker 1: gold holdings again in response to the conversations had about
21:26
Speaker 1: bond and diversifiers and balancers, you would expect there to
21:29
Speaker 1: be a big level of retail demand coming through.
21:32
Speaker 3: Yes, and I think that a lot of the diversifiers
21:35
Speaker 3: that people hope we're going to work, let's say in
21:37
Speaker 3: twenty twenty two, didn't work. And so yeah, gold has
21:41
Speaker 3: worked for the right reason.
21:43
Speaker 1: So many people would say the bitcoin has worked to
21:45
Speaker 1: a degree, to a degree perhaps, but you've got none
21:48
Speaker 1: of that.
21:49
Speaker 3: No, I'm afraid there are sometimes I admire the works
21:53
Speaker 3: of mister Buffett, Mistermonger, and you know, sometimes they say
21:56
Speaker 3: it goes into the two hard bucket, A nets cop
21:59
Speaker 3: out MAREA.
22:01
Speaker 2: I'll take coin.
22:02
Speaker 3: Definitely goes into the two our bucket, and I will
22:04
Speaker 3: leave that so far fast, people, let's talk almost.
22:08
Speaker 2: I don't know who else bitcoin.
22:12
Speaker 1: There.
22:13
Speaker 2: Listeners audience are on your side.
22:16
Speaker 3: Who owns gold?
22:17
Speaker 1: I know everyone owns gold, right, hands up for gold
22:23
Speaker 1: For those who aren't with us, pretty much the entire audience.
22:27
Speaker 2: We are an audience with a converted.
22:29
Speaker 1: Then let's talk about the actually part of the portfolio
22:32
Speaker 1: and how you do that, because you know, when I
22:35
Speaker 1: look at it, I don't see any of much of
22:38
Speaker 1: the stuff that John and I have been.
22:39
Speaker 2: Talking about on the podcast.
22:40
Speaker 1: Basically, you don't see much in the way of energy stocks,
22:44
Speaker 1: or metals and miners or anything that really fits the
22:47
Speaker 1: the halo vibe hot and slower obsolescence, et cetera.
22:50
Speaker 2: You haven't. You haven't gone in for that, and I
22:53
Speaker 2: might have expected you to.
22:56
Speaker 3: Yeah, we have a little bit. We have diversified more.
22:59
Speaker 3: I mean, we like to invest in higher quality businesses.
23:05
Speaker 3: Quality is in the either beholder, and the key thing
23:08
Speaker 3: is is that we don't overpay for those quality businesses.
23:12
Speaker 3: So when events like Iran happen, when events like COVID happens,
23:17
Speaker 3: those businesses get Actually, the miners have sold off quite
23:21
Speaker 3: a lot in the last two or three weeks, so
23:26
Speaker 3: that was very much the zeitgeist of two or three
23:28
Speaker 3: weeks ago. Whether it is in a year or t
23:30
Speaker 3: his time. We will see our preferences to own businesses
23:35
Speaker 3: which are defensive, where there's consistent cash generation, where there's
23:39
Speaker 3: consistent rewards for investors in terms of in terms of
23:42
Speaker 3: particularly dividends, which we prefer rather than buybacks, and we
23:46
Speaker 3: hold companies usually for a very long time. Where we
23:49
Speaker 3: have changed a little bit in the last year or
23:51
Speaker 3: two is we've been reducing our exposure to US equities
23:55
Speaker 3: in favor of European and UK, but particularly European equities
24:00
Speaker 3: we think valuations are better, which where we agree with you,
24:04
Speaker 3: and also where we have sold out in the US.
24:07
Speaker 3: We've sold things like American Express, which is very vulnerable
24:10
Speaker 3: to a downtown, which we've done did phenomenally well, and
24:13
Speaker 3: for example, we own that for over a decade, so
24:16
Speaker 3: we can hold companies for a very long period of time.
24:18
Speaker 3: We sold Procter and Gamble similarly, we'd own that for
24:21
Speaker 3: a decade, which had done very well and have a
24:23
Speaker 3: very material rerating. And we also sold Moodies because we
24:26
Speaker 3: were concerned about the risks there in terms of valuation.
24:29
Speaker 3: So the quality is fine, the qualities are given. It's
24:32
Speaker 3: a question of the valuation and what we don't do
24:35
Speaker 3: is what we don't do. Unlike some quality growth investors
24:39
Speaker 3: run their winners, run their winners. We're very careful about
24:41
Speaker 3: making sure that we manage the risk. And coming back
24:45
Speaker 3: to your point about trying to not target an equity index,
24:49
Speaker 3: we don't stretch the portfolio anywhere along index lines. But
24:52
Speaker 3: also we have pretty strong risk controls whereby if a
24:56
Speaker 3: stock goes above five percent, we trim it naturally anyway,
25:00
Speaker 3: because we don't want to have you know, we never
25:02
Speaker 3: know what could go wrong. Yeah, yeah, But the other
25:05
Speaker 3: thing that we've been doing within the portfolio is so
25:08
Speaker 3: we've been selling those sorts of stocks and buying things
25:10
Speaker 3: like railroads. We bought Canadian National. We've bought which obviously
25:15
Speaker 3: is does fit the theme. We bought insurance, so we've
25:19
Speaker 3: always had an exposure to insurance because we like insurance
25:21
Speaker 3: from a portfolio construction point of view. It does something
25:24
Speaker 3: very different. It plays to a different cycle from the
25:26
Speaker 3: equity cycle or the financial cycle. So we bought Chubb
25:29
Speaker 3: a couple of eighteen months ago, which has done well
25:34
Speaker 3: so and we bought Hubble, which is actually makes grid
25:37
Speaker 3: infrastructure not an AI play particularly actually, but just I
25:41
Speaker 3: don't know if you're were of this, Marin, But in
25:44
Speaker 3: the Californian wilfars that we had just over a year ago,
25:48
Speaker 3: one of them was started by electricity equipment that was
25:50
Speaker 3: one hundred and four years old. The US really really
25:54
Speaker 3: really needs to invest in its electricity infrastructure, and Hubble
25:57
Speaker 3: will be a beneficiary of that whatever happens to AI.
25:59
Speaker 3: So we have shifted subtly. The portfolio quality is a
26:04
Speaker 3: difficult one because quality evolves and the portfolio has to
26:09
Speaker 3: evolve with it, and we don't want to get stuck
26:11
Speaker 3: in things that, in particular where valuations are too high
26:15
Speaker 3: and there's valuation risks. That's the biggest risk of the
26:18
Speaker 3: way that we invest as valuation risks, because the businesses
26:21
Speaker 3: generally continue to grind out pretty well. But what we
26:24
Speaker 3: don't want to do is we want to be careful
26:26
Speaker 3: when Marcus get ever excited, as they did, particularly in
26:29
Speaker 3: twenty twenty one, and we reduced our exposure quite a
26:33
Speaker 3: lot during that period.
26:35
Speaker 2: Okay, we're going to have to finish.
26:36
Speaker 1: I feel like we could go on for a very
26:38
Speaker 1: long time, so I'm going to finish with one last question.
26:41
Speaker 1: What is the thing you are most worried about at
26:43
Speaker 1: the moment, I would ask other people what they're most
26:45
Speaker 1: optimistic about.
26:45
Speaker 2: But with you, I'm going to go with womo is worried.
26:47
Speaker 3: About sovereign government bonds has to be that over the
26:52
Speaker 3: next and I'm thinking about the next five years. That
26:55
Speaker 3: has got to be the thing that's the major worried
26:57
Speaker 3: because while I've said how it might be solved, it
27:01
Speaker 3: will be messy before then.
27:02
Speaker 2: Excellent.
27:03
Speaker 1: Thank you for finishing on that high notes. Qastian, thank
27:06
Speaker 1: you so much for joining us today.
27:08
Speaker 2: Spats your line right, you're off, Thank you, Thank you,
27:17
Speaker 2: Thanks for listening for this week's Maren Talks Money.
27:19
Speaker 1: If you like our show, rate review, and subscribe wherever
27:22
Speaker 1: you listen to your podcasts, and keep sending questions or
27:24
Speaker 1: comments to marrin Money at Bloomberg dot net.
27:26
Speaker 2: You can also follow me and John.
27:27
Speaker 1: On Twitter or x I'm at marins w and John
27:30
Speaker 1: is John unders.
27:31
Speaker 2: Course step back.
27:32
Speaker 1: This episode was hosted by Meet Maren Umset, where it
27:35
Speaker 1: was produced by Zamasidi and Moses and sound designed by
27:38
Speaker 1: Aaron Kasperspy Sor thanks of course, just Sebastian Lion