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How to Get a 7% Return Without Buying Risky Equities · Merryn Talks Money

0:00
Speaker 1: So, John, sometimes you're right. Occasionally it does help. Yeah,
0:05
Speaker 1: and house press numbers just out from nation wide prices
0:08
Speaker 1: down over three percent in March. That's a proper drop.
0:11
Speaker 1: Add that to inflation, and you can pretty much call
0:14
Speaker 1: it a house price crash. Yeah. I mean I think
0:17
Speaker 1: I always. I don't think the bod crash is actually
0:21
Speaker 1: all that helpful. Accept the scale people, I fair to
0:24
Speaker 1: think of it as a healthy and necessary connection. John,
0:28
Speaker 1: This is how we sell the podcast. This is how
0:30
Speaker 1: we sell the podcast. We talk about house price crash.
0:33
Speaker 1: It brings the listeners in, it's true, and then we
0:36
Speaker 1: surprise them with brilliant busy of information and fun conversation
0:39
Speaker 1: and great guess But it's hashtag house price crash that
0:43
Speaker 1: gets them in. So that's why we call it that
0:46
Speaker 1: you've changed. There's so many more models. No, I still
0:54
Speaker 1: have the morals. We'll call it whatever you want. What
0:55
Speaker 1: do you want to call it? I think I just
0:58
Speaker 1: think it's interest because what you tricked me in is
1:01
Speaker 1: saying that pieces would follow thirty percent. About three months,
1:06
Speaker 1: we're already now like fourteen percent if you look inflation
1:11
Speaker 1: as well, So halfway there, what's the next fifteen percent?
1:16
Speaker 1: Where does that come from. Is that nominal or is
1:19
Speaker 1: it inflation or is it a bit of both? And
1:22
Speaker 1: even if prices fell away fifteen percent and nominal terms
1:24
Speaker 1: from here, you'd still only be looking at where the
1:27
Speaker 1: well at the start of twenty twenty, so before the
1:30
Speaker 1: whole COVID freeze and then you know the Bank England
1:34
Speaker 1: cutting interest race and throwing loads of money at the market. Again, yeah,
1:37
Speaker 1: I think that that's more just for perspective low, because
1:40
Speaker 1: I think the other key point why this isn't like
1:42
Speaker 1: the nineties, for example, is because even if prices felt
1:46
Speaker 1: that much, you're then only talking about that there's still
1:49
Speaker 1: only be a tiny proportion of people and things like
1:51
Speaker 1: negative equity. The number of homeowners with a mortgage in
1:56
Speaker 1: the country als right in England and Wales is now
1:59
Speaker 1: but low third, So again it doesn't have the same
2:03
Speaker 1: wider impact on the economy as it did perhaps in
2:06
Speaker 1: two thousand and eight. Um. The very fact that there's
2:10
Speaker 1: that few mortgage womenos is partly the result of the
2:14
Speaker 1: house places being too down high in the fast place,
2:17
Speaker 1: but in a weird kind of way that's also providing
2:19
Speaker 1: a very ventilation for the wider economy and the banking
2:22
Speaker 1: sector because there are just fewer people with mortgages, and
2:25
Speaker 1: the people who have been able to get mortgages are
2:28
Speaker 1: buying large and a better financial position than the average person.
2:33
Speaker 1: Still comes with a wealth effect, though, doesn't it. I
2:35
Speaker 1: mean this is part of the transmission mechanism of of
2:39
Speaker 1: monetary policy anyway, the idea that you can make people
2:42
Speaker 1: feel poorer and therefore they spend less, and therefore you
2:45
Speaker 1: have some control over inflation, although I would we have
2:48
Speaker 1: a conversation another day about the extent with spank England
2:51
Speaker 1: have any control over inflation at all Eyes who did
2:53
Speaker 1: a podcast earlier with that with Little King with Moving
2:56
Speaker 1: King on this matter, and I'll put the link to
2:59
Speaker 1: that when it comes up, because we have quite an
3:00
Speaker 1: interesting conversation about the extent to which central banks actually
3:04
Speaker 1: control inflation, and I suggested it you and I have
3:07
Speaker 1: talked about over the last couple of months that they
3:10
Speaker 1: have rather less power to do so than they believe,
3:13
Speaker 1: and I think he kind of agreed with me, So
3:14
Speaker 1: that was kind of I agreed with were certain times fans,
3:18
Speaker 1: and we also some interesting conversations about what it is
3:20
Speaker 1: that central banks should and shouldn't do in the extent
3:23
Speaker 1: to which possibly their briefs has been overexpanded, to the
3:26
Speaker 1: extent that it's not very hard for them to focus
3:28
Speaker 1: on their their core task of two percent? Two percent?
3:32
Speaker 1: Why two percent? Who percent? Were doing? All? I know,
3:36
Speaker 1: I know we've talked about it before. I did actually
3:40
Speaker 1: look it up. You know, we talked about this the
3:41
Speaker 1: other day. Where was that article that I wrote, I
3:45
Speaker 1: don't know, two three years ago or something about about it,
3:47
Speaker 1: And I looked it up again just to make absolutely
3:50
Speaker 1: sure that I wasn't imagining the whole thing. But yes,
3:52
Speaker 1: the whole thing came from an article written in a
3:56
Speaker 1: version of the IMF staff papers, not even public um,
4:01
Speaker 1: by a pleasant sounding academic who suggested that two percent
4:05
Speaker 1: kind of intuitively made sense for most of other economies.
4:08
Speaker 1: And that's it. And then there we go New Zealand
4:10
Speaker 1: full of bay. Every other central bank in the world,
4:12
Speaker 1: the FED, not until twenty twelve. I don't think that
4:14
Speaker 1: they formerly adoptive percent. Anyway, I've gone off on an aside.
4:18
Speaker 1: I'm sorry, house prices, Yes, we told yeah, well nice
4:23
Speaker 1: And I think maybe the thing that central banks should
4:26
Speaker 1: be focusing on, rather than something like inflation, is more
4:31
Speaker 1: localized credit conditions such that you try and avoid bubbles,
4:36
Speaker 1: because that that is the thing I've always found irritating
4:39
Speaker 1: about central banks. And Alan Greenspan probably was the main
4:42
Speaker 1: proponent of this, but everyone else did to this idea
4:45
Speaker 1: that you can't spot bubbles, but it's okay because you
4:47
Speaker 1: can more pop afterwards, and it's just not that complicated
4:55
Speaker 1: spot or bubble. It's very hard spot when it's going
4:58
Speaker 1: to bost a tree days. I mean, you just do
5:04
Speaker 1: I mean, do you even gorby Jeremy and Einsom's thing
5:07
Speaker 1: of x two standard deviations for the long run halverage?
5:11
Speaker 1: You can you know? Or the fact that no one
5:14
Speaker 1: under the age you're like thought five can flucted by
5:17
Speaker 1: a host away claims at things I think should be
5:20
Speaker 1: if there were some who may be a bit I
5:22
Speaker 1: think the folks are, Yeah, I kind of. I agree
5:25
Speaker 1: with you in theory. I agree with you in theory.
5:28
Speaker 1: But nonetheless, the subjective targets. When do you decide when
5:31
Speaker 1: something has gone over from bullmarket into bubble? When do
5:34
Speaker 1: you decide when that bubble is dangerous? You know? These
5:37
Speaker 1: is so subjective? And central banks, I mean, are they
5:40
Speaker 1: not good at well? They do anyway? I mean, how
5:42
Speaker 1: are we doing here? So do we want to give
5:44
Speaker 1: them complicated subjective targets or are we good with just
5:49
Speaker 1: one clear, straightforward target. Even if that target is it
5:52
Speaker 1: is not the correct target, you know, a clear target
5:55
Speaker 1: that everybody understands, everyone sees what they're aiming at. This
5:58
Speaker 1: is maybe better than than the wooly stuff. I mean,
6:01
Speaker 1: that's true. He's playing with fire train. Yeah, I mean
6:05
Speaker 1: you are late from that point I view. Can't trust
6:07
Speaker 1: them do it that we are wanting them to it. Basically,
6:13
Speaker 1: vacancy has come up regularly at the Bank of England, John,
6:16
Speaker 1: you should apply. I could be the talking contradian and
6:24
Speaker 1: one of our old friends does keep applying every time
6:27
Speaker 1: a vacancy comes up to the MPC, but he's never
6:30
Speaker 1: been accepted, and he says that he believes that's because
6:33
Speaker 1: he understands the effect of money on inflation and nobody
6:36
Speaker 1: else does. I want to go back briefly, John, to
6:38
Speaker 1: what you were saying about mopping up after bubbles, because
6:40
Speaker 1: I was thinking this morning about MMT in modern monetary policy,
6:44
Speaker 1: and you know we both read all those books about MMT,
6:46
Speaker 1: didn't we a couple of years back about how if
6:48
Speaker 1: you had a currency such as the pound or the dollar,
6:51
Speaker 1: you could just print all the money you liked and
6:53
Speaker 1: it didn't make any difference, and budget deficits don't really exist.
6:56
Speaker 1: This is just a technicality. You can print, print, print, print, print,
7:00
Speaker 1: do whatever you want, and if inflation starts to get
7:02
Speaker 1: out of control, you to just mop it up, mop
7:05
Speaker 1: it up, mop it up, and here we are, here
7:09
Speaker 1: we are. We effectively had MMT way sooner than any
7:12
Speaker 1: any of us would possibly have thought. We had that
7:14
Speaker 1: in twenty twenty early twenty twenty. You print a powl
7:18
Speaker 1: of money, you stick it in people's pockets, Inflation goes berserk,
7:21
Speaker 1: has that mopping up saying going, yeah, it's not terribly well.
7:25
Speaker 1: We can so people own lane tilness that we do
7:28
Speaker 1: wan't understand MMT. You do realize that I know, and
7:32
Speaker 1: people are telling me I don't understand cryptocurrency, so I
7:34
Speaker 1: haven't used I understand cryptocurrency, I understand boitcoin, and I
7:39
Speaker 1: also understand it M empty, and I think they're all
7:42
Speaker 1: absolute nonsense. Hate mail to the usually address thank you.
7:49
Speaker 1: In fact, no later in the podcast that I've done
7:52
Speaker 1: with Duncan, I think I suggested all the hate mail
7:54
Speaker 1: goes to his address because his views on crypto are
7:57
Speaker 1: similar to us. So I think that on this occasion,
8:00
Speaker 1: please contact Duncan McGinnis on Twitter. All your crypto hatemail
8:04
Speaker 1: to him, just for a week and then I'll take
8:05
Speaker 1: it back. Thanks very much. John, should get some hate
8:08
Speaker 1: mail to you two. Oh yeah, I always like a
8:10
Speaker 1: better hate mail. Keeps me humble, excellent, and you are humble, John,
8:14
Speaker 1: And so welcome to Merrin Talks Money, the podcast in
8:23
Speaker 1: which people who know the markets explain the markets. I'm
8:26
Speaker 1: merin Somerset Web and today the person who knows the
8:29
Speaker 1: markets inside out right Duncan is Duncan McGinnis, who is
8:33
Speaker 1: the manager of one of Rougherst fact flightship funds and
8:35
Speaker 1: co manager of another. And I think an awful lot
8:38
Speaker 1: of listeners will be invested one way or another in
8:40
Speaker 1: Rolph Rown. If they aren't at this point this year,
8:42
Speaker 1: they're probably slightly wishing that they were. Duncan. Thank you
8:46
Speaker 1: for joining us today. Thank you, thanks for having me. Now.
8:49
Speaker 1: We've got a lot to talk about, but I think
8:52
Speaker 1: that we might start with banking crisis. We've seen a
8:56
Speaker 1: lot of term on in the financial sector over the
8:58
Speaker 1: last couple of weeks. Is this going to develop into
9:03
Speaker 1: a genuine financial crisis of the like that we've seen before.
9:06
Speaker 1: Is everyone's slightly over reacting? Well, I think it would
9:10
Speaker 1: not be a conversation with someone from Rougher if we
9:12
Speaker 1: weren't concerned about something we have. I'd say, we have
9:17
Speaker 1: structural concerns which we can maybe come back to, and
9:20
Speaker 1: we have tactical concerns around this potential banking crisis. So
9:27
Speaker 1: I think, first of all, that's sort of recap where
9:29
Speaker 1: we are. If you went back to the thirty first
9:31
Speaker 1: of December, three months ago, recording on the last day
9:34
Speaker 1: of the quarter, and someone had said to you in
9:37
Speaker 1: the coming three months, credit Suite is going to disappear,
9:41
Speaker 1: and three of the top thirty banks, So three of
9:44
Speaker 1: the top thirty banks in the US are also going
9:46
Speaker 1: to disappear. Do you think the stock market is going
9:48
Speaker 1: to be up? Your answer would probably be no, And
9:52
Speaker 1: yet and yet they are. I think it's not a
9:57
Speaker 1: full blown financial crisis. It's not like two thousand and eight.
10:01
Speaker 1: It's not even a run on the banks. Someone wittterally
10:04
Speaker 1: described it as a jog on the banks. But it's
10:08
Speaker 1: a really difficult situation. So I think it is both
10:11
Speaker 1: from a sort of listener's perspective, it's a simultaneously totally
10:16
Speaker 1: irrational but also fully irrational to worry about moving your
10:21
Speaker 1: money and consider moving your money right now. So it's
10:24
Speaker 1: rational to worry about moving your money because we have
10:28
Speaker 1: the odd situation where you can earn more money by
10:31
Speaker 1: giving it to the government in a money market fund
10:33
Speaker 1: or shortly to t bills and you can get less risk.
10:36
Speaker 1: So more yield, less risk sounds pretty good. But the
10:40
Speaker 1: irrationality is that I think it's highly likely that governments
10:45
Speaker 1: will stand behind deposits. Your unsecured retail depositors are not
10:49
Speaker 1: going to lose money in this crisis. I would be amazed.
10:52
Speaker 1: It would be a huge mistake. I think if they
10:54
Speaker 1: let that happen. Yeah, can I interrupt you then to say,
10:58
Speaker 1: you know, this is one of the interesting things that
11:00
Speaker 1: I would say, it's changed over the last couple of decades,
11:02
Speaker 1: and that you know, I'd say even twenty thirty years ago,
11:05
Speaker 1: there would have been an assumption that if a bank
11:07
Speaker 1: went bust, then you know, you're only protected up to
11:10
Speaker 1: the extent that your local regulary system protected you up to.
11:13
Speaker 1: But that ship has definitely sailed, hasn't it. There is
11:16
Speaker 1: absolutely no appetite from any government anywhere in the developed
11:20
Speaker 1: world which to let a depositor lose money on a
11:24
Speaker 1: bank failure. So we might as well say that all
11:26
Speaker 1: depositors are now protected to infinity and that's that. Yeah,
11:31
Speaker 1: legally they are still vulnerable, but I think you're absolutely right.
11:34
Speaker 1: The political reality is that it is not acceptable for
11:39
Speaker 1: retail depositors to lose money in mainstream banks. So however,
11:45
Speaker 1: that doesn't mean they're not There's not lots of problems.
11:47
Speaker 1: So there was a well publicized clip of Janet Yellen
11:51
Speaker 1: testifying where I think she effectively signed the death warrants
11:55
Speaker 1: for smaller regional banks, where where she did not guarantee.
12:00
Speaker 1: They're very reluctant to make that explicit guarantee for depositors,
12:05
Speaker 1: and she said that they wouldn't guarantee deposits unless it
12:08
Speaker 1: was a systemic issue. So the incentive very clearly is
12:12
Speaker 1: for is for money to move to the globally important
12:17
Speaker 1: systemic banks. You're the very the very largest institutions. So
12:19
Speaker 1: how does how does this all play out? I sort
12:22
Speaker 1: of imagine the financial system and moving out from a
12:26
Speaker 1: core in concentric circles, and at the very center of
12:29
Speaker 1: the system you have the RRP, the FED te T
12:35
Speaker 1: bills at lending money to the government, and the largest
12:38
Speaker 1: financial institutions for your city, groups, your JP, Morgan's, etc.
12:42
Speaker 1: And the money is sucking towards the center, from the
12:46
Speaker 1: smaller peripheral banks to the center. And as the money
12:50
Speaker 1: moves to the center, without getting too technical about things,
12:54
Speaker 1: the sort of monetary energy or the monetary velocity DP decreases,
13:00
Speaker 1: so the risk taking capacity of the overall financial system decreases.
13:04
Speaker 1: And the scene that I have in mind when I
13:06
Speaker 1: think about the incentives of corporate treasurers and individuals with
13:11
Speaker 1: cash savings at banks is from the film Casino. So
13:14
Speaker 1: if you remember the film Casino with Robert de Niro,
13:17
Speaker 1: the old mobsters eventually get sort of caught by the
13:20
Speaker 1: law and they're sitting around a table deciding whether or
13:24
Speaker 1: not they're going to turn on each other or whether
13:26
Speaker 1: their foot soldiers are going to turn informants on them,
13:29
Speaker 1: and one of the old guys, who's clearly been around
13:33
Speaker 1: a while, just says, why take a chance, and everyone
13:37
Speaker 1: ends up dead. So everyone that knows anything ends up
13:40
Speaker 1: shots and I think that's what depositors are doing currently.
13:43
Speaker 1: They are They're shooting first and asking questions later. And
13:46
Speaker 1: we're saying we're seeing it in the data, hundreds of
13:49
Speaker 1: billions of dollars moving to money market funds and to
13:52
Speaker 1: JP Morgan and the like, and this is catastrophic for
13:56
Speaker 1: the smaller financial institutions the other Can I interrupt again? Sorry?
14:02
Speaker 1: Follow up a question? What does that mean for the
14:06
Speaker 1: smaller banks in the UK, for the startup deposit takers,
14:09
Speaker 1: for our you know, disrupted banks. I think I think
14:12
Speaker 1: it's existential. I think I think they will they will die.
14:16
Speaker 1: They will, they will bleed to death unless something arrests
14:20
Speaker 1: this situation. And the only two things that can arrest
14:24
Speaker 1: it are at the government backstop guaranteeing those deposits, or
14:31
Speaker 1: the banks. The banks have the option to raise the
14:33
Speaker 1: interest rate that they pay on deposits. I mean, I'm
14:35
Speaker 1: sure you'd be as much of a supporter of that
14:37
Speaker 1: as I am. But because at the moment, of course,
14:41
Speaker 1: they don't pay you base rate, but if they do,
14:43
Speaker 1: it will evisceerate their profitability or whatever profitability they have.
14:47
Speaker 1: So if they have to pay more to retain the deposits.
14:50
Speaker 1: Then then they're they're going to they're going to kill
14:52
Speaker 1: their net interest margin, and that too must die the
14:57
Speaker 1: way bust if they don't raise their deposit rate, bust
14:59
Speaker 1: if they maybe not maybe not bust, but certainly in
15:03
Speaker 1: a vastly reduced circumstance. Now, now the other the more important.
15:07
Speaker 1: Now this is not as awful as it sounds, because
15:11
Speaker 1: it's not great for the sort of health of the
15:13
Speaker 1: banking industry, but it's people will still have banking facilities
15:16
Speaker 1: to the big banks. I'm more worried about the second
15:19
Speaker 1: order consequences. So that's this is becoming pretty pretty well
15:24
Speaker 1: known and widely discussed. But it's smaller banks that specialize
15:29
Speaker 1: in commercial property lending and small and medium enterprise lending.
15:33
Speaker 1: If you've got a small family business, you tend to
15:35
Speaker 1: go to a smaller bank to get that loan. So
15:38
Speaker 1: it's actually going to be the knock on consequences that
15:42
Speaker 1: this will choke off credit to the to the real economy.
15:45
Speaker 1: And that's that that's how how you get to bigger
15:50
Speaker 1: problems like like a tightening lending standards and an enforced recession.
15:55
Speaker 1: But at another angle of this, which is which is
15:57
Speaker 1: new A new feature of this bank run is the
16:00
Speaker 1: speed at which it's happened. So this is not your
16:04
Speaker 1: grandfather's bank run. It's not even an eight because there's
16:08
Speaker 1: no cues. There's no standing outside a brank of bank
16:10
Speaker 1: or a branch of Northern Rock. There's an app you
16:13
Speaker 1: can move your money almost instantly and frictionless. There's a
16:17
Speaker 1: great story of how GP Morgan, the man not the institution,
16:22
Speaker 1: slowed down the bank runs in nineteen oh seven. He
16:26
Speaker 1: asked the bank tellers to double count the money, and
16:31
Speaker 1: that really slowed the pace. There's just none of that now, people.
16:36
Speaker 1: I mean that the modern equivalent is the closing our
16:39
Speaker 1: website for service updates. Yeah, yeah, yeah, indeed there might be.
16:44
Speaker 1: I think crypto does a bit of that as well,
16:46
Speaker 1: doesn't it. Yeah. So there's there's a bunch of new
16:51
Speaker 1: things going on here, and there's a bunch of things
16:53
Speaker 1: that are sort of as old as as old as time. Okay,
16:57
Speaker 1: so what are the consequences for investors from that? Now?
17:01
Speaker 1: Obviously I suppose one of the things you could say
17:03
Speaker 1: is that that that dynamic is fairly disinflation ry. Yeah.
17:08
Speaker 1: So I think there's two elements. There is the sucking
17:14
Speaker 1: of liquidity out the system, something that you know that
17:16
Speaker 1: we've been worried about for a while. So there were
17:19
Speaker 1: interest rates going up through all of twenty twenty two,
17:21
Speaker 1: quantitative easing being reversed into quantitative tightening also through all
17:25
Speaker 1: of twenty twenty two and potentially ongoing, and now the
17:30
Speaker 1: slow motion run on the banks. So liquidity has been
17:33
Speaker 1: drained from the system. That monetary energy that I mentioned
17:36
Speaker 1: earlier is disappearing. So that's the first problem. The second
17:40
Speaker 1: problem is how investors are positioned. I mean they're on
17:46
Speaker 1: a sort of longer term basis. So everyone spent the
17:50
Speaker 1: last decade or so iterating towards risk ear and risk
17:55
Speaker 1: ear portfolios in a zero interest rate world in pursuit
17:58
Speaker 1: of their return target. It's whether that's a retiree wanting
18:02
Speaker 1: five to seven percent on their pension pot, or whether
18:05
Speaker 1: that's an institution or endowment chasing a seven or eight
18:08
Speaker 1: percent long term return target. And one American investor phrased
18:12
Speaker 1: it so beautifully I thought when he said, my public
18:17
Speaker 1: market investors are doing privates, my private market investors are
18:21
Speaker 1: doing venture, and my venture investors are doing crypto. Everyone
18:25
Speaker 1: everyone moved to the riskiest end of their mandate to
18:29
Speaker 1: try and change returns in zerp world and now because
18:33
Speaker 1: we've jumped from zero rates to five percent rates or
18:36
Speaker 1: four and a half percent rates in a year or so,
18:39
Speaker 1: every investment committee in the land is looking at the
18:41
Speaker 1: same challenging picture, all of these cross currents from war
18:46
Speaker 1: to inflation, to deglobalization to recession risks to a banking crisis,
18:51
Speaker 1: as covered by my Colleaguallex Charters in a podcast of
18:54
Speaker 1: you a few months ago, or in our Rougher Review
18:57
Speaker 1: recently published. And by the way, everyone I have a
19:00
Speaker 1: copy of that Rougher Review. It's excellent. If you're not
19:02
Speaker 1: a Rougher client, I think you can still read all
19:04
Speaker 1: the stuff on the website right and there is and
19:07
Speaker 1: we did do that great podcast with Alex Charter's as
19:09
Speaker 1: all the US is going to be even better Duncan,
19:11
Speaker 1: so please don't feel for a second prefer him over.
19:15
Speaker 1: But it has written a brilliant article in the beginning
19:17
Speaker 1: of the Rougher Review twenty twenty three that everyone should
19:20
Speaker 1: read to give them a sense of how the land lies. Yes, so,
19:23
Speaker 1: so these investment committees are all sitting facing this incredibly opaque,
19:26
Speaker 1: uncertain outlook, and all of a sudden they're realizing, wait
19:30
Speaker 1: a minute, I can build a portfolio achieving my say,
19:35
Speaker 1: seven percent return target, where a big, big chunk of
19:38
Speaker 1: that is in cash and T bills earning four or five.
19:41
Speaker 1: And to quote the president of black Rock from a
19:43
Speaker 1: quarter or so ago, he thinks you can build a
19:46
Speaker 1: seven percent expected return portfolio that only has twenty percent
19:49
Speaker 1: in equities. So all these investment committees are sitting thinking,
19:54
Speaker 1: I don't need to take anywhere near as much risk
19:57
Speaker 1: as I used to to achieve my expected return. Yea,
20:00
Speaker 1: because that's easier given they've all lost fortunes on those
20:02
Speaker 1: higher risk portfolios. Well, yes, yeah, it would have been
20:06
Speaker 1: better to start this process a year or so. Yeah,
20:08
Speaker 1: a year and a half ago, I would have been
20:09
Speaker 1: a better time to look at it. You know what
20:11
Speaker 1: seven percent a year next to the thirty percent you're
20:13
Speaker 1: already lost. Yeah, And that this the slide that I
20:15
Speaker 1: sort of talked to in our pack on this I
20:17
Speaker 1: have been using for two years. I would like to emphasize.
20:21
Speaker 1: But the risk here is I think a globally synchronized
20:26
Speaker 1: de risking of portfolios. So everyone moves from seventy percent equity,
20:31
Speaker 1: sixty percent equity, whatever, down the curve de risking by
20:35
Speaker 1: twenty or thirty percent towards lower risk assets. And if
20:39
Speaker 1: everyone is doing that simultaneously, it is not obvious to
20:42
Speaker 1: me who the buyer is, because who's the person that's
20:46
Speaker 1: that's up wanting to up their risk in this world.
20:50
Speaker 1: If someone said to me the other day, what about
20:53
Speaker 1: China and the Middle East, these sovereign wealth funds, They've
20:57
Speaker 1: got trillions of dollars that they might like to take
20:59
Speaker 1: on that risk from the forced sellers. And I think
21:02
Speaker 1: that it was a very interesting point. But because of
21:06
Speaker 1: many of the sort of global techtonic things going on,
21:11
Speaker 1: I think it's highly unlikely that the West will now
21:14
Speaker 1: tolerate trillions of dollars of Chinese money, for example, coming
21:18
Speaker 1: in and buying buying up stakes in US businesses. So
21:22
Speaker 1: when China puts his hand up and says we're happy
21:24
Speaker 1: to take twenty percent of Boeing or twenty percent of
21:26
Speaker 1: Lockheed Martin, I think Congress at the Senate might have
21:29
Speaker 1: a problem with that. So it's just not at all
21:33
Speaker 1: obvious to me who the buyer is for this forced
21:38
Speaker 1: not not forced selling, but rational selling that we think
21:41
Speaker 1: will happen. Yeah, okay, well, let's go back a bit
21:43
Speaker 1: and talk about this portfolio that can make you U
21:45
Speaker 1: six or seven percent, well, only being twenty percent in equities,
21:48
Speaker 1: what else is in it? We'll come back to equities
21:50
Speaker 1: and the type of equities that might make up that
21:52
Speaker 1: small apart. But what else is in a portfolio? I
21:55
Speaker 1: mean most of us that used to thinking, well, you know,
21:57
Speaker 1: the vast majority of our portfolio is an equity is seventy.
22:00
Speaker 1: Maybe we have a little cash and a small world exposure,
22:02
Speaker 1: but most people moved away, while individuals anyway moved away
22:04
Speaker 1: from sixty forty a long time ago and aren't massively
22:08
Speaker 1: overexposed in the upream market. So if we would genuinely
22:11
Speaker 1: go down to twenty thirty percent in equities, what would
22:13
Speaker 1: make up the rest? Yeah? So finally we're getting paid
22:16
Speaker 1: a decent return on cash. So I think cash has
22:20
Speaker 1: become a useful asset because because it pays a return
22:26
Speaker 1: and because it gives you optionality to take advantage of
22:28
Speaker 1: opportunities in the future. That's a new thing. Cash was
22:31
Speaker 1: incredibly painful for the last decade, and beyond cash, I
22:36
Speaker 1: find myself looking at risk premiums a lot this year
22:39
Speaker 1: because there's a big diversion. Some are wide and some
22:43
Speaker 1: are anomalously tight, and that dispersion should be pretty good
22:48
Speaker 1: for active managers who are sort of worth their salt
22:50
Speaker 1: and willing to have a differentiate in portfolio. So, where
22:55
Speaker 1: our risk premiums tight and therefore it's not attractive to
22:58
Speaker 1: take risk US equities would be would be the first
23:02
Speaker 1: one I would I would cite investment grade credit, and ironically,
23:06
Speaker 1: these are the things that investors have been moving into
23:08
Speaker 1: this year. If you look at the earnings yield of
23:11
Speaker 1: the SMP, it's five percent because it's on a pe
23:14
Speaker 1: of twenty. Well, cash is five percent, So that very
23:18
Speaker 1: crude metric, yeah, very crude metric of the equity or
23:21
Speaker 1: as premium is basically zero. A more sophisticated measuring of
23:24
Speaker 1: the equity risk premium has it in about two I think,
23:27
Speaker 1: which is as low as it has been since two
23:30
Speaker 1: thousand and seven. So benchmarked investors, because the US is
23:34
Speaker 1: so big, have sixty percent of their money in that
23:37
Speaker 1: particularly unattractive asset. I would say another sort of anomally
23:41
Speaker 1: is investment grade credit yields. Check this morning the investment
23:46
Speaker 1: Grade Index yields four and a half. Well, that's that's
23:49
Speaker 1: less than cash. So that I mean that that is
23:53
Speaker 1: something like hasn't happened in the forty or fifty years.
23:56
Speaker 1: That people will say that's because the yield curve is
23:57
Speaker 1: inverted on the investment grade index is eight years duration.
24:01
Speaker 1: Blah blah blah. It looks to me like you're not
24:03
Speaker 1: getting paid to take that risk. And that's why in
24:06
Speaker 1: our portfolio or offer, we're still short investment grade credit
24:10
Speaker 1: and high yield. That was very useful for us in
24:13
Speaker 1: twenty twenty and last year. Then it was about a mispricing.
24:17
Speaker 1: Now I think it's about deterioration and economic conditions. So
24:22
Speaker 1: where are risk premiums wide? Where are assets attractively priced?
24:29
Speaker 1: I think we're getting there. Things are getting better than
24:32
Speaker 1: they were in twenty twenty one. That's the That's the
24:34
Speaker 1: silver lining to this undoubtedly gloomy overview, is that expected
24:41
Speaker 1: returns are better in places. But I think it's in
24:44
Speaker 1: the nooks and the crannies that are less popular. So
24:47
Speaker 1: I don't want to plug a competitor podcast Marin No,
24:51
Speaker 1: and I don't want you to do that either, But
24:54
Speaker 1: there's a very good interview out there with David Einhorn
24:56
Speaker 1: of a very long standing successful house fund manager, and
25:00
Speaker 1: his words chime with my own recent experience that nobody's
25:06
Speaker 1: looking at active stock selection anymore. Nobody's looking at smaller
25:13
Speaker 1: areas like like the UK. I which just given my
25:15
Speaker 1: own experience I did to UK smaller companies meetings in
25:19
Speaker 1: the last week and group calls. In fact, I dialed
25:23
Speaker 1: into the group call and on the first meeting there
25:26
Speaker 1: was only two other people on the line from family offices,
25:33
Speaker 1: so no professional investors beyond myself on the call. And
25:37
Speaker 1: then another call was similar, you know, less than half
25:40
Speaker 1: a dozen people on the call, So nobody is paying
25:42
Speaker 1: attention to the UK. And you've you've said a lot
25:45
Speaker 1: about this, done podcasts with other people. I totally agree
25:49
Speaker 1: with that, and I think something like this news flow
25:52
Speaker 1: you're seeing about companies fleeing the UK to list in
25:56
Speaker 1: the US is actually a contrarian, but I signal it
26:01
Speaker 1: reminds me of In twenty sixteen, Vanguard had a gold
26:05
Speaker 1: equities fund and they didn't close it, but they renamed it,
26:10
Speaker 1: so it went from being a gold equities fund to
26:12
Speaker 1: something like the Capital Cycle Fund, and that marked almost
26:16
Speaker 1: exactly to the day the bottom and gold equities which
26:18
Speaker 1: then doubled in the proceeding twelve in the next twelve months,
26:21
Speaker 1: so I think UK equities have a very wide equity
26:24
Speaker 1: risk premium. And Japan is notable because its rates are
26:28
Speaker 1: still zero and it's equity market trades are a p
26:32
Speaker 1: of twelve, So that's very very wide equity rist premium. Two.
26:36
Speaker 1: The last thing I'd say, we can come on to
26:38
Speaker 1: talk about commodities, but gold commodities in general very attractive,
26:42
Speaker 1: we think. And inflation link bonds, so tips US inflation
26:47
Speaker 1: link bonds will pay you inflation plus one point five
26:51
Speaker 1: percent for the next twenty years lending to the global
26:55
Speaker 1: hedgeman in dollars. It's pretty at track to I think
27:01
Speaker 1: as a law risk asset. So whatever inflation is, you'll
27:04
Speaker 1: get that plus one point five. Let's go back to
27:07
Speaker 1: UK companies supposedly fleeing the UK and we get told
27:12
Speaker 1: that that's about you know, regulation, days, regulation, that, etcetera.
27:15
Speaker 1: But it's really about money, isn't it. CEOs get paid
27:17
Speaker 1: a lot more in the US company. You can wear
27:21
Speaker 1: your company to the US. You can double its valuation
27:23
Speaker 1: pretty much overnight and then you can triple your pay
27:29
Speaker 1: and get a bonus based on a different share price.
27:31
Speaker 1: So there's a lot that the incentive here is very
27:34
Speaker 1: much monetary. Yeah, yeah, absolutely, So the UK equity markets
27:40
Speaker 1: had something like twenty one months of consecutive outflows. Before that,
27:44
Speaker 1: we had a couple of months of optimism before coronavirus
27:47
Speaker 1: crushed it, and then before that we had we had
27:50
Speaker 1: Brexit and Scottish independence. So it's been a decade of
27:54
Speaker 1: pretty relentlessly bad news for the UK equity markets, and
27:58
Speaker 1: it's been the wrong sort of type of companies, factor
28:01
Speaker 1: exposers and so on. And you're absolutely right. What is
28:05
Speaker 1: it called jurisdictional arbitrage when you when you pick up
28:09
Speaker 1: your company and move it to a different playground. It's
28:11
Speaker 1: not a new thing, So Prada, I think, as an
28:13
Speaker 1: Italian company listed in Hong Kong because Asian markets like
28:17
Speaker 1: Luxury Goods Manchester United listed in the US rather than
28:21
Speaker 1: the UK because they want to hire multiple Like you say, what,
28:25
Speaker 1: I think it's rational for those companies to do that,
28:29
Speaker 1: to seek a higher higher evaluation, which is a lower
28:32
Speaker 1: cost of equity. I'm sure the CEOP is a factor,
28:35
Speaker 1: like you say, but I think as a as an investor.
28:40
Speaker 1: If you already hold those shares, then that's great because
28:43
Speaker 1: you might get the rerating. But I think it shows
28:45
Speaker 1: I want to be looking in the areas that are
28:49
Speaker 1: unfavored with lower evaluations rather than looking at the multiple
28:55
Speaker 1: the markets with the higher multiples. Okay, so when you
28:58
Speaker 1: invest in that, let's just talk about the UK and Japan.
29:02
Speaker 1: You're investing in individual companies, the very active burnt right,
29:06
Speaker 1: there's nothing passive going on in the rough of portfolios. No,
29:09
Speaker 1: that's right, Yeah, so we pick individual companies. We do. Also,
29:15
Speaker 1: we're a house that leads with our top down macroeconomic
29:19
Speaker 1: acid allocation thinking, but beneath that when we do invest
29:24
Speaker 1: in stocks, we do invest in individual companies and sometimes
29:28
Speaker 1: we consider things like like factors or themes. Okay, So
29:32
Speaker 1: it give us a couple of favorite companies in the UK. Well,
29:35
Speaker 1: I think the biggest holdings, the biggest risk in general
29:38
Speaker 1: in our portfolio is commodities at the moment, and the
29:42
Speaker 1: two biggest holdings are BP and Shell. So BP is
29:48
Speaker 1: a is a very interesting example. I've been talking of
29:51
Speaker 1: jurisdictional arbitrage. It trades on half the multiple of exon
29:55
Speaker 1: now these are basically basically the same company, but because
30:00
Speaker 1: one trades in the UK, it trades on sort of
30:03
Speaker 1: eight times now and trades on fifteen times. But it's
30:05
Speaker 1: the free cash flow yields that make energy equities very exciting.
30:09
Speaker 1: I think. So current oil prices of its seventy five
30:13
Speaker 1: you probably get a high single digit free cash flow yield,
30:17
Speaker 1: which is which is great, pays an attractive four percent
30:20
Speaker 1: dividend yield, it's paying down debt, it's buying back shares,
30:23
Speaker 1: it's doing all the all the good things that you'd
30:25
Speaker 1: like a company to do. But it's the sort of
30:29
Speaker 1: optionality or convexity to use a fancy word, to higher
30:32
Speaker 1: oil prices that makes them really attractive. So if oil
30:35
Speaker 1: goes back to one hundred dollars, then all of a sudden,
30:39
Speaker 1: these are on sort of twenty percent plus free cash
30:42
Speaker 1: flow yields, so really generating a huge amount of a
30:46
Speaker 1: huge amount of cash for shareholders. But another evolution in
30:53
Speaker 1: our commodity strategy. So commodities has been a very important
30:55
Speaker 1: part of the portfolio, particularly energy since since well since coronavirus.
31:02
Speaker 1: We have sort of evolved the way that we're playing it.
31:04
Speaker 1: So we now have almost twenty percent of the portfolio
31:09
Speaker 1: and commodities, but half of it is in the exchange
31:11
Speaker 1: traded commodities for the physical commodities rather than the equities
31:15
Speaker 1: like BP, Shell, Glencore, ur, Slur, Mettall, etc. What why
31:20
Speaker 1: are we doing that? I'd say it's because we want
31:23
Speaker 1: to If we're right about our big picture view of
31:27
Speaker 1: the world, which is more more inflation, more economic growth, volatility,
31:34
Speaker 1: more geopolitical friction, then you want to own the Hamburger,
31:40
Speaker 1: not McDonald's. So you want to own the thing that
31:44
Speaker 1: is inflating, but that doesn't come with the price to
31:49
Speaker 1: earnings multiple that a stock comes with. Because in general
31:51
Speaker 1: we think these will be compressing, even though the commodity
31:55
Speaker 1: ones are cheap to begin with. But also the company
31:58
Speaker 1: is beset by regulator sorry pressures, it's beset by wages,
32:02
Speaker 1: input costs, supply chain disruptions. All of this stuff that
32:06
Speaker 1: we think will be a feature of the coming decade
32:08
Speaker 1: affects the company, but is probably bullish for the commodity itself. Okay,
32:14
Speaker 1: are there any favored commodities? Is this part of an
32:17
Speaker 1: energy transition play? Is it part of the coming CAPEX boom?
32:21
Speaker 1: Is it about reassuring, friend shoring, all those things a
32:25
Speaker 1: bear and all of it. Yeah, so we're most excited
32:28
Speaker 1: by by energy and oil in particular. So that's about
32:32
Speaker 1: a ten percent of the portfolio, six percent in oil itself,
32:35
Speaker 1: another another five percent roughly in energy equities. But we
32:40
Speaker 1: have three percent of the portfolio in copper and another
32:43
Speaker 1: one or two percent in um metals stocks, so so
32:48
Speaker 1: Glencore or ar solar metalal CoA and so on, and
32:52
Speaker 1: that that that the copper is more of a long
32:55
Speaker 1: term energy transition play. There's the old Doctor Copper as
33:01
Speaker 1: a was a PhD in economics. But there is a
33:07
Speaker 1: there is a strong story there supply demand mismatch where
33:11
Speaker 1: if we're going to transition the economy away from fossil
33:14
Speaker 1: fuels towards electric, we need an enormous amount of copper,
33:20
Speaker 1: and supply is constrained because it's very very difficult to
33:24
Speaker 1: get the permitting and the capital to build a mine
33:29
Speaker 1: and it takes a very long time. So we think
33:32
Speaker 1: that governments are committed to the transition and therefore the
33:35
Speaker 1: fiscal stimulus will come and the copper price probably has
33:40
Speaker 1: to go up to incentivize the supply to be there.
33:43
Speaker 1: And tell us just briefly for readers who want that, listeners,
33:46
Speaker 1: listeners who want app on all this. Why do we
33:48
Speaker 1: need so much copper? It's about the batteries, It's about
33:51
Speaker 1: is it also about the energy infrastructure? About the grid?
33:53
Speaker 1: Do we use copper and the gride as well? Yeah? Yeah,
33:56
Speaker 1: you use copper and everything. So you can't have a
33:59
Speaker 1: winter turbine, you can't have a solar panel. You certainly
34:03
Speaker 1: can't have an electric car without copper, without lithium, without
34:08
Speaker 1: without aluminium. All these, all these metals are incredibly important
34:13
Speaker 1: to the energy transition, and the thing is that we
34:16
Speaker 1: need to We need an awful lot of them up
34:18
Speaker 1: front to build the infrastructure so that we can transition
34:21
Speaker 1: onto that infrastructure. I was talking to someone the other
34:24
Speaker 1: day about the UK electricity grid and such a disaster
34:28
Speaker 1: in general, and he pointed out something that I kind
34:31
Speaker 1: of knew but I hadn't quite taken on board, which
34:33
Speaker 1: is that before we started using renewable energy at all,
34:36
Speaker 1: there were only maybe six or seven points across the
34:39
Speaker 1: entire country where electricity came into the grid, and now
34:43
Speaker 1: there are eighteen ninety thousand. Well, and how can we
34:47
Speaker 1: possibly expect to cope with that. What if you think
34:50
Speaker 1: about it? Of course, you know, suddenly everyone used to
34:52
Speaker 1: just take take energy out right, and the big power
34:55
Speaker 1: stations put it in. That was it. And now everyone
34:57
Speaker 1: with a solar panel, every one with the wind turbine,
35:00
Speaker 1: all the big wind farms, et cetera, are putting energy in.
35:03
Speaker 1: It's a totally different dynamic for an infrastructure. No wonder
35:07
Speaker 1: it's creaking away. Right. Let's talk then about about gold.
35:12
Speaker 1: One of our favorite topics are as John likes to
35:15
Speaker 1: call it a physical bitcoin. You used to old some
35:18
Speaker 1: bitcoin in the fun, but I'm guessing you don't want
35:20
Speaker 1: to go back to that. It's always fun to talk about,
35:23
Speaker 1: but we don't currently have any exposure. Interesting. But let's
35:27
Speaker 1: before we go on to gold's bitcoin, then let's talk
35:30
Speaker 1: about actual bitcoin. What would make you buy some back?
35:34
Speaker 1: I think the hurdle is pretty high, so I have
35:38
Speaker 1: never been more bullish on anything in my life. As
35:40
Speaker 1: you might remember mearin as, I wasn't bitcoin in twenty twenty,
35:44
Speaker 1: but I think the context was so perfect for a
35:46
Speaker 1: four bitcoin. Back then, we had a zero interest rates,
35:50
Speaker 1: massive quee, the market was obsessed with technology, We had
35:55
Speaker 1: investors worrying about increasing cross asset correlations and desperately looked
36:00
Speaker 1: for a diversifier, and perhaps cynically, we saw that there
36:04
Speaker 1: was a lot of institutional interest building up. And one
36:08
Speaker 1: of the great advantages of ruffers that we have the
36:10
Speaker 1: ability to move very quickly. So we got in front
36:13
Speaker 1: of that wave of institutional money that was coming into
36:16
Speaker 1: the space. So we bought in November twenty twenty at
36:18
Speaker 1: fifteen thousand, and we exted in April twenty twenty one
36:21
Speaker 1: at sort of sixty odd thousand on the day that
36:24
Speaker 1: coinbas iPod actually so it was a very very successful
36:28
Speaker 1: investment for us. We only held it for five months
36:30
Speaker 1: and we sort of more than tripled our money, and
36:33
Speaker 1: you got the mist stunning amount of publicity from it.
36:36
Speaker 1: It was so clever. Some some of that publicity was
36:40
Speaker 1: positive and some was not, but so it was very
36:45
Speaker 1: successful for us. It was never a huge part of
36:46
Speaker 1: the portfolio, it was only two percent entry, but it
36:51
Speaker 1: was It was useful contributor to performance in twenty twenty
36:54
Speaker 1: and twenty twenty one. But today the context is completely different.
37:00
Speaker 1: So five percent interest rates quantitative tightening rather than quantit
37:04
Speaker 1: of easing. The market subsession with technology has gone away,
37:07
Speaker 1: and now it's sort of show me your cash flow.
37:10
Speaker 1: The inflation hedge narrative, the digital gold narrative have sort
37:14
Speaker 1: of blown up. If we're we're honest, forty year realized
37:19
Speaker 1: highs and inflation last year and bitcoin was down. Pretty
37:22
Speaker 1: hard to argue that that was an inflation hedge. And
37:24
Speaker 1: we had a very clever theory in house that called
37:29
Speaker 1: Gresham's law and reverse. So Gresham's lass goes back to
37:32
Speaker 1: the seventeenth or eighteenth century and it was the bad
37:36
Speaker 1: money forces out good So if counterfeit notes are in
37:38
Speaker 1: the system, those who are holding legitimate banknotes will hold
37:42
Speaker 1: them and money monitory be lossity will collapse. Our view
37:46
Speaker 1: was that in crypto, the good money, the institutional money,
37:50
Speaker 1: was going to come in and clean out the bad money.
37:52
Speaker 1: So it's why as Greshams Law and reverse and some
37:55
Speaker 1: light would be the best disinfectant and all that sort
37:57
Speaker 1: of stuff, we would drag bitcoin and crypto into the
38:00
Speaker 1: and clean it up. And the reality over the last
38:03
Speaker 1: couple of years is that the good money, the institutional money,
38:07
Speaker 1: came into the space and it backed FTX. That was
38:10
Speaker 1: that was the horrible irony, is that the crucially not rougher.
38:14
Speaker 1: I would emphasize we've never had anything to do with them,
38:16
Speaker 1: although I did ones meet SPF a story for the
38:19
Speaker 1: pub perhaps, and the it just it just hasn't worked.
38:25
Speaker 1: You know that it has not been cleaned up. And
38:28
Speaker 1: now you have this operation choke point in the US
38:33
Speaker 1: where the US regulator, in combination with various policymakers, is
38:38
Speaker 1: really cracking down on crypto. Senator Elizabeth Warren doing a
38:42
Speaker 1: victory dance that Silicon Valley Bank and Signature Bank were
38:45
Speaker 1: both sort of crypto focused. The SEC suing coin Base
38:51
Speaker 1: and ripple the CFTC coming after binands that there's a
38:57
Speaker 1: tightening regulatory noose around crypto and that makes me very nervous. Now,
39:03
Speaker 1: the truth is it's up thirty or forty percent year
39:05
Speaker 1: to date, so perhaps we're wrong, but I think that
39:11
Speaker 1: it's seriously challenged in the current economic environment and in
39:15
Speaker 1: the current regulatory environment. The flap state to all this,
39:18
Speaker 1: of course, the ultimate bill case is that Jim Kramer
39:21
Speaker 1: is very beerish. That is interesting. We should definitely take
39:26
Speaker 1: that into account. But I suppose the key thing there
39:29
Speaker 1: on the regulation is it as much as the advocates
39:32
Speaker 1: of crypto and of bitcoin in particular, are convinced that
39:36
Speaker 1: you know, being decentralized, being independent, etc. Is the answer
39:40
Speaker 1: to all the currency was they still need the banking
39:42
Speaker 1: system to get it through, and if if they remain
39:46
Speaker 1: unbanked and the banks are refused to deal with crypto, etcetera,
39:49
Speaker 1: then the whole thing collapses in on itself. Anyway, Well, yeah, indeed,
39:53
Speaker 1: I mean it was always our view that it would
39:55
Speaker 1: be regulated via the FIAT on ramps and off ramps
39:59
Speaker 1: ultimate und your coin based account from somewhere, and that
40:04
Speaker 1: the banks of course would fully cooperate with the regulator
40:08
Speaker 1: and in sort of giving full visibility of that. So
40:12
Speaker 1: that was how it was going to going to come.
40:14
Speaker 1: So yeah, I think fascinating topic, but absolutely no plans
40:19
Speaker 1: to revisit revisit bitcoin in the future. Excellent. So all
40:23
Speaker 1: those of you who like to send me hate mail
40:26
Speaker 1: on Twitter and that kind of thing about how I'm
40:28
Speaker 1: not keen on crypto and bitcoin can now send them
40:31
Speaker 1: to Duncan. Duncan was your Twitter handle, So you can
40:33
Speaker 1: accept my hate mail for a couple of weeks. Yeah, pass,
40:37
Speaker 1: all right, Well I'm putting your Twitter handle in the
40:40
Speaker 1: writ up for this podcast, so that it all goes
40:42
Speaker 1: directly to you. Okay, although just everyone is. I do
40:45
Speaker 1: still hold some bitcoin in my coin based account. No
40:47
Speaker 1: idea how to get it out, but it's in the
40:49
Speaker 1: worth lesson it was well more than it was, depends
40:51
Speaker 1: how you look at it, right, So onto the real
40:53
Speaker 1: thing gold. And by the way, one of the things
40:56
Speaker 1: that John and I always love about bitcoin is the
40:59
Speaker 1: way that every time someone tries to make a picture
41:01
Speaker 1: of bitcoin, they do it with a gold coin with
41:03
Speaker 1: a B on it. I love that. One of the
41:06
Speaker 1: great ironies. Yeah, one of the gies. So gold gold
41:10
Speaker 1: is just fascinating. I've always been a sort of gold
41:13
Speaker 1: gold bug by nature. But it's very unreliable, isn't it.
41:19
Speaker 1: So it's hard to know if it had a good
41:22
Speaker 1: year last year because on the one hand, you could say, well,
41:26
Speaker 1: we had a war in Ukraine, still of a war
41:28
Speaker 1: in Ukraine, we had realized inflation at fourty year highs.
41:33
Speaker 1: Why was gold not incredibly strong because it was flat
41:36
Speaker 1: in dollars, modern pounds and pounds exactly. So it did
41:41
Speaker 1: work in other currencies, definitely worked if you measured gold
41:44
Speaker 1: and bitcoin the but then the other the other way.
41:50
Speaker 1: Of looking at it as well, interest rates went up
41:52
Speaker 1: five percent or four percent and gold was flat. So
41:55
Speaker 1: that's actually a great performance because you would expect the
41:58
Speaker 1: rising opportunity cost to be very negative for gold. But
42:03
Speaker 1: I think zooming out a little bit just knowing that
42:06
Speaker 1: if you hold gold in your portfolio it will be unreliable.
42:10
Speaker 1: It has become a part of many multi asset portfolios,
42:13
Speaker 1: including the Rougher portfolio, which means I think it's correlation
42:17
Speaker 1: to risk assets has become higher than the fundamentals deserve.
42:21
Speaker 1: And what I mean by that is, as we saw
42:23
Speaker 1: in twenty twenty in the COVID crash, when markets get liquidated,
42:28
Speaker 1: gold often gets caught up in that because things like
42:31
Speaker 1: risk parity portfolios that are or vall targeting portfolios become
42:35
Speaker 1: forced sellers of everything in their book, regardless of the fundamentals.
42:40
Speaker 1: So but I think zooming out a little bit from
42:42
Speaker 1: all that sort of market technical noise. We have seen
42:46
Speaker 1: a potentially game changing event in the war in Russia.
42:50
Speaker 1: If you are now not just a Russian, but anyone
42:54
Speaker 1: who might be perceived to be a bad actor by
42:56
Speaker 1: the West. The confiscation of Russian sets that we saw
43:01
Speaker 1: all across the West, you know, bank deposits in London,
43:03
Speaker 1: Geneva or New York. We're just taken. Then there's a
43:07
Speaker 1: huge incentive now for you to hold your wealth in
43:09
Speaker 1: physical gold in either close to you or in a
43:13
Speaker 1: non Western location. Also, I suppose that a similar angle.
43:19
Speaker 1: There's a lot of news this week about the rewiring
43:23
Speaker 1: of the global monetary system. So that's a fancy phrase.
43:26
Speaker 1: What does that mean. It means the Middle East and
43:29
Speaker 1: China trying to denominate their trade in currency other than
43:35
Speaker 1: dollars or maybe euros. So why are China buying oil
43:40
Speaker 1: from the Ue priced in dollars when they could do
43:44
Speaker 1: it in yuan or they could do it in gold.
43:47
Speaker 1: And I think that sort of pivot in the currency
43:51
Speaker 1: of trade towards gold or maybe partly gold is an
43:56
Speaker 1: additional positive. Also, very simply, the cost of extracting gold
44:02
Speaker 1: just gets ever higher, So wages are going up, Permitting
44:06
Speaker 1: is more impossible than ever, capital equipment is more expensive.
44:09
Speaker 1: Oil is a big input cost, so the cost of
44:12
Speaker 1: extraction goes up, So the cost of gold probably has
44:16
Speaker 1: to go up in the long term too. So behind
44:18
Speaker 1: all the monetary conversation about well, whether the gold is money,
44:21
Speaker 1: whether the gold is of money, the extent which it sold,
44:23
Speaker 1: its value long term, etcetera. There is also the same
44:26
Speaker 1: supply dynamic. Absolutely, this isn't all just theory. I should
44:30
Speaker 1: say we have seen a huge increase in global central bank,
44:34
Speaker 1: particularly non western central banks since the war in Ukraine started.
44:40
Speaker 1: We have the data on this that there are big
44:43
Speaker 1: institutional buyers of gold in the market. And there's the
44:46
Speaker 1: old sort of famous trope that one ounce of gold
44:50
Speaker 1: has over the last five hundred years always been able
44:53
Speaker 1: to buy a saval row suit on average, And of
44:57
Speaker 1: course the type the style of the saval row suit
44:59
Speaker 1: has changed over the last five hundred years. But that
45:02
Speaker 1: that's the that's the saying. And now what two thousand dollars?
45:07
Speaker 1: You wouldn't get a salvo row suits for two thousand dollars,
45:10
Speaker 1: So that was that. You know what a saval row
45:12
Speaker 1: suit costs? What does it cost last time you went
45:15
Speaker 1: to get a suit made on several row? What is that? Duncan?
45:19
Speaker 1: I'm afraid I don't. I don't have the budget for
45:22
Speaker 1: that or the desire for that. There is a funny
45:25
Speaker 1: story about that, actually that Jonathan Ruffer, our founder UM,
45:30
Speaker 1: was was once interviewed in the Ft and I think
45:33
Speaker 1: it was Lunch with the Ft or something like that,
45:35
Speaker 1: and the article with the sort of usual fluff around
45:37
Speaker 1: it said Jonathan sat resplendent in his empire wearing a
45:41
Speaker 1: fine Salvo row suit. The reality was it was a
45:44
Speaker 1: sort of Mark and Spencers. You can stick it in
45:46
Speaker 1: the watching machine. So it's all about it's all about
45:50
Speaker 1: all about perception. Yeah, once one answer, Gold, We'll thank
45:55
Speaker 1: you a long way in the Mark and Spencers closed department.
45:57
Speaker 1: Even now, okay, let me ask you one last guard
45:59
Speaker 1: and then if I was going to make you invest
46:02
Speaker 1: in one thing right now, um and nothing else, and
46:06
Speaker 1: I wasn't going to let you touch that one thing
46:09
Speaker 1: for you're quite young, Let's make it twenty years, Thank you, Mary.
46:14
Speaker 1: What would it be my pleasure for twenty years? Twenty?
46:18
Speaker 1: I can make it ten if it's easier for you.
46:19
Speaker 1: But as I say, you know you're you're young. Yeah,
46:24
Speaker 1: so I think when you when you start talking about
46:26
Speaker 1: time horizons as long as twenty years, then that the
46:29
Speaker 1: power of the base rate, sort of the base effect
46:33
Speaker 1: takes takes over. So I would probably say something like
46:39
Speaker 1: um uk uk small caps or Japanese equities. If you
46:44
Speaker 1: made it ten years, I would I would take I
46:46
Speaker 1: would take energy, energy or commodity equities. And as you
46:50
Speaker 1: and if I made it five years, gold, um, I'll
46:55
Speaker 1: still I'll still take energy or commodity equities over it
46:57
Speaker 1: over five years. Okay, that sort of issued emphasized. That
47:02
Speaker 1: is a that is a return maximizing answer. And actually
47:06
Speaker 1: at rougher what we what we prefer to do. Rather
47:09
Speaker 1: your most investors go about return maximizing. How can I
47:11
Speaker 1: find all my best ideas and then maybe I'll sprinkle
47:15
Speaker 1: some hedges over the top and the hope that I
47:17
Speaker 1: don't lose my shirt. Our approaches minimax regret, which is
47:23
Speaker 1: borrowing a phrase from from Ben Hunt. So we're minimizing
47:27
Speaker 1: the probability of our maximum regret. We're trying first and
47:31
Speaker 1: foremost to not lose money, and then once we've comforted
47:35
Speaker 1: ourselves that we've arranged that, then we decide how much
47:39
Speaker 1: risk to take. So if I did it with my
47:40
Speaker 1: minimax regret hat on, I think it's very hard to
47:43
Speaker 1: beat either US tips or UK inflation on link bonds.
47:48
Speaker 1: If you're a UK taxpayer, Okay, that's great. So we've
47:51
Speaker 1: got the no Regret portfolio, and we've got the Duncan
47:54
Speaker 1: wants to make some money. Yeah fees to pay for Yeah,
47:59
Speaker 1: excellent two A clip portfolios. Dunk it so much for
48:02
Speaker 1: joining us today. We really appreciate it, and we'll be
48:04
Speaker 1: back and back in twenty years to see how it's going. Yeah,
48:07
Speaker 1: thank you, Aaron please for having me. Thanks for listening
48:14
Speaker 1: for this week's Marion Jok's Money. We will be back
48:17
Speaker 1: next week in the meantime. If you like our new show,
48:19
Speaker 1: rate review and subscribe wherever you listen to your podcasts.
48:22
Speaker 1: This episode was hosted by me Marion Sumset Web. It
48:25
Speaker 1: was produced by Samasati. Additional editing by Blake Maple's special
48:29
Speaker 1: thanks to Duncan mckinness and to John steppec hate mail
48:32
Speaker 1: for them as suggested earlier, and finally, our weekly reminded
48:36
Speaker 1: to sign up to John's daily newsletter Money distilled the
48:39
Speaker 1: linkage in the show notes and I know you will
48:41
Speaker 1: enjoy it, particularly if you were interested in house prices,
48:45
Speaker 1: because John is very interested in house prices