Latest / Merryn Talks Money / How the Global Economy Has Been 'Rewired' and What That Means for Your Portfolio

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How the Global Economy Has Been 'Rewired' and What That Means for Your Portfolio · Merryn Talks Money

0:00
Speaker 1: John Hello, Hello, Now listen, we've got there's so much
0:04
Speaker 1: in the chat with my main guest, Alex Charters. This week.
0:08
Speaker 1: We covered the entire world, pretty much every market and
0:11
Speaker 1: even get to gold. But there's one thing that we
0:14
Speaker 1: that we mentioned in our chat, but we don't follow up,
0:17
Speaker 1: and I wish I had followed up with them, But
0:19
Speaker 1: now I think about it, I really it doesn't matter
0:20
Speaker 1: that I didn't because you're slightly obsessed with it as well,
0:24
Speaker 1: which is venture capital and private equity and how potentially
0:29
Speaker 1: incorrectly private companies are priced inside portfolios, in a particular
0:36
Speaker 1: inside investment trust portfolio, because I know that's what you've
0:38
Speaker 1: been writing about recently. Yeah, this is one that feeling
0:42
Speaker 1: slightly exercised about because my my guts at war with
0:47
Speaker 1: my brain slightly on it. The main point is that
0:51
Speaker 1: it's a private assets private companies. Venture capital private equity
0:55
Speaker 1: has obviously been a huge part of the bubble either
0:58
Speaker 1: there's been an awful lot of money and old in
1:00
Speaker 1: to it. Institutions have had it sold to them as
1:03
Speaker 1: this amazing diversifier and they've been more than happy to
1:06
Speaker 1: embrace it because one of the incentives for investing in
1:09
Speaker 1: this stuff as you get to make up the value
1:12
Speaker 1: that you put on it. So that means that whenever
1:15
Speaker 1: there's a down market, everything else in the portfolio has fallen.
1:18
Speaker 1: But you can point to your private assets and say,
1:20
Speaker 1: look they're not falling. In fact, they've gone up in
1:22
Speaker 1: the last quarter. And everyone's happy to engage in that
1:25
Speaker 1: collective delusion because it means you don't ever have to
1:28
Speaker 1: tell a client that the portfolio is going down. So
1:31
Speaker 1: there's been lots of male incentives, there's been hoping of
1:35
Speaker 1: the zero interest rates, lots of venture capital is obviously
1:38
Speaker 1: in kind of like tech and kind of bubble areas anyway,
1:41
Speaker 1: so I can totally totally see the private assets need
1:45
Speaker 1: to fall a lot in private valuations need to follow
1:48
Speaker 1: a lot. Okay, well, let let me stop be there
1:50
Speaker 1: to say that and highly agree with you. And one
1:52
Speaker 1: of the things that always slightly amused me of the
1:54
Speaker 1: last few years has been this idea that we should
1:57
Speaker 1: pay more for any particular you note of growth in
2:00
Speaker 1: a private company than we should in a public company,
2:03
Speaker 1: more for a unit of growth in an unproven company
2:06
Speaker 1: or a new company than we should in an older,
2:08
Speaker 1: proven company, which all seems to me to be incredibly bizarre,
2:11
Speaker 1: because it feels to me that we should pay much
2:13
Speaker 1: more per unit of growth in a company that we
2:17
Speaker 1: know something about, that we understand, that has a track record,
2:20
Speaker 1: than in one that we know very little about. So
2:21
Speaker 1: it's always been such surprising to me that we're not
2:24
Speaker 1: surprising given me a wider environment of the bubble and
2:26
Speaker 1: low interest rates, but on a rational level, private companies
2:30
Speaker 1: should be worth significantly less in the main, in the
2:33
Speaker 1: main the public companies. Yeah, and they used to be.
2:36
Speaker 1: I mean that this is all part of the bubble phenomenon.
2:38
Speaker 1: It's like, there's there's two things that stand one which
2:41
Speaker 1: is the people paying more for private companies in public ones.
2:45
Speaker 1: That's that's a bubble phenomenon for definite in terms of
2:48
Speaker 1: the multiples. But also and the the idea that the
2:52
Speaker 1: aliquidity is actually a good thing rather than a bad thing.
2:56
Speaker 1: That sort of is that they I've literally seen this
2:58
Speaker 1: argument change during the bubble period, where it's been actually
3:02
Speaker 1: it's a good thing that you don't know what the
3:04
Speaker 1: price is and that you can't sell because that stops
3:06
Speaker 1: you from selling at the bottom. So it's like this
3:08
Speaker 1: it's like a kind of psychological benefit that you're getting
3:11
Speaker 1: from it. Yeah, but there's kind of the job of
3:14
Speaker 1: fund managers and be a private equity or listed obviously,
3:17
Speaker 1: it's their job to not sell at the bottom, isn't it.
3:21
Speaker 1: I mean, you know, so we shouldn't need to put
3:23
Speaker 1: in place artificial mark to prevent them from doing it.
3:26
Speaker 1: Literally their job. It's a bit like what we said
3:28
Speaker 1: about Richie seen that last week. You know, that's your job,
3:31
Speaker 1: just your job, not a special promise, just you. But
3:35
Speaker 1: I mean, but so yeah, I mean, I think that
3:37
Speaker 1: it's been an extremely bubbly area capital. The Rosschild Investment
3:41
Speaker 1: Trust is one of the standout ones that have been
3:45
Speaker 1: getting kind of discussed. And my only question is whether
3:49
Speaker 1: those the risk that people start to over egg what's
3:54
Speaker 1: going on and oversimplify what's going on, because I guess
4:00
Speaker 1: apartently feels that looking at this so to take specifically
4:04
Speaker 1: the Telegraph obviously high profile shared column quest or wrote
4:08
Speaker 1: up broker note that had been released a bit online
4:11
Speaker 1: the earlier mentioning the no the amount of private assets
4:14
Speaker 1: in the portfolio had gone up significantly and the big
4:17
Speaker 1: risk was that this would get written down at some point,
4:20
Speaker 1: and that probably wasn't in the price of the portfolio,
4:23
Speaker 1: the things that the share price of filled by ten
4:26
Speaker 1: percent on the day that that article was published, like
4:30
Speaker 1: a month after this had come out, and you know,
4:32
Speaker 1: I mean so much for the efficiency of stock markets, etcetera. Well,
4:36
Speaker 1: it worries me, John, I tell you, it worries me
4:37
Speaker 1: because I wrote about that and the SHAP price didn't
4:42
Speaker 1: fall by champercent. One am I suddenly less influential than
4:44
Speaker 1: question exactly. So put me into a whole world of
4:48
Speaker 1: introspection and stress. Well it supposed it, Dift says. You
4:52
Speaker 1: didn't say selling by a different fund, which was the
4:55
Speaker 1: other thing about this column. They sort of said, well,
4:58
Speaker 1: it's not. It's not doing the same thing is say,
5:00
Speaker 1: capital gearing or rower. But with all due respect to
5:03
Speaker 1: the you know, the Telegraph journalist, I would say that
5:07
Speaker 1: that's not what sets out to do. And it's also
5:10
Speaker 1: not I've never mentally categorized it in the same place
5:13
Speaker 1: as those other funds. Those those other funds are kind
5:15
Speaker 1: of almost funds that you expect to do well in
5:18
Speaker 1: a beer market, which is written is more a kind
5:20
Speaker 1: of you know, shouldn't take too much of a kicking
5:23
Speaker 1: in a beer market, rather than one that's actively going
5:25
Speaker 1: to go up. So I mean this is all kind
5:28
Speaker 1: of you know, what have angels dancing a pin head?
5:31
Speaker 1: But I suppose my point is, you know, is trading
5:34
Speaker 1: at something like a twent discount now, And one of
5:37
Speaker 1: the things I think you probably have to look at
5:38
Speaker 1: is how much experience to these managers who ultimately because
5:42
Speaker 1: we can't value private companies, so a lot of the
5:45
Speaker 1: question is like, how much do you believe the actual
5:48
Speaker 1: managers these funds are any good at selecting this stuff?
5:52
Speaker 1: And where you've got I think that's where you've got
5:54
Speaker 1: to kind of start thinking about, well, is there a
5:56
Speaker 1: difference between saying the teams that's somewhere light writ capital
6:00
Speaker 1: and the teams that somewhere like soft Bank, which seems
6:02
Speaker 1: to be you know, seems to pilehead first any whatever
6:05
Speaker 1: golf is laid on their plates. And I think that
6:07
Speaker 1: that's the kind of the difference, and that's possibly where
6:11
Speaker 1: maybe some slightly more observant investors might be able to
6:17
Speaker 1: find opportunities. Now. I don't know, John, I think you're
6:21
Speaker 1: you're varing into as long as it's a good company
6:24
Speaker 1: who cares about the price terror No, no, no, I'm
6:26
Speaker 1: not thinking about that. I'm thinking, I'm thinking, if you've
6:29
Speaker 1: trained that descount a state that stated discount enough like
6:32
Speaker 1: say twice or secent, and remember again, I'll take that
6:36
Speaker 1: because it's a good example. I mean, Red's kind of
6:38
Speaker 1: historic descount. I mean retreated a premium for like five
6:43
Speaker 1: or six years. Um, So I'm just saying that price
6:47
Speaker 1: and then quite a lot. So what you're what you're
6:50
Speaker 1: saying is that the I think what you're saying is
6:52
Speaker 1: that the mispricing of the private equity portfolio is it
6:55
Speaker 1: in the price of the investment trust basically, so we
6:58
Speaker 1: don't need to worry about it anymore. Yeah, I mean
7:00
Speaker 1: I think there is a there's a that's kind of fair.
7:03
Speaker 1: There is a real problem with the pricing of private
7:05
Speaker 1: companies inside inside collective vehicles, in that you know who
7:09
Speaker 1: can possibly value them, how do you know what it's worth?
7:11
Speaker 1: So all you can do is I mean you're guessing, right.
7:13
Speaker 1: All you're doing is you're taking the prices of similar
7:16
Speaker 1: listed companies. And sometimes there isn't a similar listed company,
7:19
Speaker 1: or isn't there isn't a wide enough group of similar
7:21
Speaker 1: listed companies, or there hasn't been another private company that's
7:24
Speaker 1: had a you know, an event of some kind that
7:26
Speaker 1: offers you a price that that you can't really come
7:29
Speaker 1: up with something that's that's ideal, So you you stick
7:32
Speaker 1: a pin in the air, you you look around at
7:34
Speaker 1: similar companies and you make a vague price, and you
7:36
Speaker 1: do that maybe every six months. So there's always going
7:39
Speaker 1: to be a lag. And even with the lag, you
7:41
Speaker 1: know that the prices is still very unlikely to be correct.
7:44
Speaker 1: It's just the best guess. But then of course it's
7:46
Speaker 1: the best guess in the public markets as well. So
7:48
Speaker 1: this is a This is not a straightforward area. And
7:51
Speaker 1: I don't think you can expect companies to adjust the
7:54
Speaker 1: prices of the private companies in their portfolio more than
7:57
Speaker 1: you know, what's a quar to absolute max once every
7:59
Speaker 1: six months seems reasonable, So you know that Again it's
8:02
Speaker 1: the job of the market too, as you say, at
8:05
Speaker 1: a discount into the discount of the enemy of the
8:08
Speaker 1: investment trust, to reflect that this is not unreasonable. I mean,
8:11
Speaker 1: but I think this is the other benefit investment trust obviously,
8:14
Speaker 1: because you can get that pricing of all liquid assets.
8:20
Speaker 1: And you know, if you do believe, as you know
8:22
Speaker 1: broadly do that even if they're not efficient markets are
8:24
Speaker 1: the best collective guests at the value of an asset
8:27
Speaker 1: at any given point um. Then you know the nice
8:31
Speaker 1: name of investment trust as you can get in and
8:33
Speaker 1: out even if they underlying as it's are liquid um.
8:38
Speaker 1: But yeah, I mean I think that's it's not I
8:40
Speaker 1: suppose it's I'm just finding an interesting when you think
8:43
Speaker 1: about it, because it kind of on the one hand,
8:46
Speaker 1: my Baily sense thinks are look just you know what
8:49
Speaker 1: everything needs to bump to the ground, and you know,
8:51
Speaker 1: the likes that can the kind of really stupid things
8:55
Speaker 1: like the companies that invested in f t X without
8:57
Speaker 1: even thinking about the due diligence um, you know, and
9:01
Speaker 1: for like an awful law of trouble. But I do
9:03
Speaker 1: feel as if there's a tiny bit of maybe that
9:06
Speaker 1: is a kind of bideo with the bathwater of scenario
9:09
Speaker 1: or going on in here. Okay, and you've been writing
9:11
Speaker 1: about this, haven't you. So everyone should now go and
9:13
Speaker 1: read John's newsletter Money Distilled, and pick up all the
9:17
Speaker 1: rest of the information on this, and then you can
9:20
Speaker 1: decide for yourselves whether you want to go out and
9:22
Speaker 1: buy shares in our I T because everyone else is
9:25
Speaker 1: too negative or if you think, as John's barest sign
9:28
Speaker 1: believes that everything to just burn to the ground. Thanks John,
9:33
Speaker 1: Thanks Mail. Welcome to Marin Talks Money, the podcast in
9:41
Speaker 1: which people who know the markets explain the markets. I'm
9:44
Speaker 1: Marrin's some Setweb. This week, our guest is Alexander Charters,
9:48
Speaker 1: investment director at Rufer. Alex specializes in gear politics and
9:51
Speaker 1: in the investment implications of changes in gear politics. He's
9:55
Speaker 1: got a particular focus on European politics and on U S.
9:58
Speaker 1: China relations. And here's the co manager of two of
10:01
Speaker 1: roughest flagship funds. Not many fund managers managed to make
10:05
Speaker 1: a positive return last year. The Rougher Investment Company did
10:09
Speaker 1: up around five per cent or so last year, roughly
10:12
Speaker 1: flat year to date so far. It's not a very
10:14
Speaker 1: long year yet, but given what we went through last year,
10:17
Speaker 1: it's quite impressive to have made a little, not to
10:19
Speaker 1: have lost quite a lot. So I started out by
10:21
Speaker 1: asking alex what lessons did he, as a reasonable performer
10:24
Speaker 1: last year learned from it. It was a really extraordinary
10:29
Speaker 1: year on so many fronts, and it's it's difficult to
10:32
Speaker 1: know where to start. The real world shocks were, of course,
10:35
Speaker 1: what helped exacerbate the market shocks, and we had the
10:39
Speaker 1: biggest land war in Europe since nine. We had China's
10:43
Speaker 1: extraordinary experience with COVID. We had the biggest global energy
10:48
Speaker 1: crisis since the seventies, and for Europe it was the
10:50
Speaker 1: biggest ever. And then of course you have inflation at
10:54
Speaker 1: multi decade highs, the fastest rate hiking cycle in decades,
10:58
Speaker 1: and it made for a pretty toxic environment for almost
11:02
Speaker 1: all conventional assets. In fact, equities had their worst year
11:05
Speaker 1: since two thousand eights, bonds much longer, and of course
11:09
Speaker 1: balanced portfolio's traditional stock bond portfolio sixty forty in common parlance,
11:15
Speaker 1: was down nearly so there were very few places to hide.
11:19
Speaker 1: Three quarters in a row. Actually, the first three quarters
11:22
Speaker 1: of last year you could find almost no conventional assets,
11:25
Speaker 1: so you really had to be using alternatives and in
11:29
Speaker 1: our case, derivatives to ride out the storm. And those
11:32
Speaker 1: are the primary reason we were able to generate a
11:35
Speaker 1: positive return in last year's extraordinary cluster crisis. But Ruffer
11:40
Speaker 1: was kind of ready for it, right And honestly, you
11:42
Speaker 1: couldn't predicted the exact way the process crisis was going
11:45
Speaker 1: to turn out, But you know, as a company you've
11:47
Speaker 1: been talking about the everything bubble, you've been talking about
11:50
Speaker 1: the terrible mistakes made in monetary policy, you've been talking
11:53
Speaker 1: about the consequences that you expected from that, the main
11:56
Speaker 1: one being inflation. So it shouldn't been no surprise to
11:59
Speaker 1: you and your colleagues that most of the things that
12:02
Speaker 1: happened last year happened regardless of the triggers energy crisis
12:06
Speaker 1: were in Ukraine, et cetera. Obviously, we didn't know exactly
12:09
Speaker 1: what the various triggers would be. We didn't know that
12:12
Speaker 1: COVID was going to happen when it did, or that
12:14
Speaker 1: the Ukraine War was definitely going to happen when it did.
12:17
Speaker 1: But what you have been able to see for a
12:20
Speaker 1: number of years is the way that under the bonnet
12:23
Speaker 1: the global system has been rewiring itself to be more
12:26
Speaker 1: inflation prone and more volatile, and so higher inflation, more
12:31
Speaker 1: volatility were for us questions of when not if. And
12:35
Speaker 1: of course you had the one two of the COVID
12:38
Speaker 1: crisis and then the Ukraine War last year, and those
12:42
Speaker 1: really were great accelerations in terms of the stimulus. In
12:46
Speaker 1: the first instance, they dumped into the system the supply
12:48
Speaker 1: constraints they're applied. And then more supply issues, particularly around
12:53
Speaker 1: energy and commodities last year, and they revealed that rewiring
12:58
Speaker 1: under the bonnet, and we think that's all investors have
13:01
Speaker 1: really got to be focused on going forward, because it's
13:03
Speaker 1: a very very different environment to the one they've all
13:06
Speaker 1: been used to. Well, let's talk a little bit more
13:09
Speaker 1: about last year before we move on to the hell
13:11
Speaker 1: that might be this year. Was the use of derivatives
13:15
Speaker 1: that that have saved you last year. Tell us a
13:17
Speaker 1: little bit more about that. One of the great things
13:19
Speaker 1: about being an unconstrained asset managers that we can buy
13:22
Speaker 1: anything anywhere, anytime, as long as it's to support our
13:26
Speaker 1: core objectives, which are to preserve capital and grow it
13:29
Speaker 1: in any market conditions. And precisely because as you suggest,
13:33
Speaker 1: we've been worried about the risk of inflation and therefore
13:36
Speaker 1: an end to ultra low rates, and that this would
13:39
Speaker 1: force a reversal of the everything bubble where essentially all
13:43
Speaker 1: conventional assets have gone up together. Um, you'd find a
13:47
Speaker 1: world where high cross asset correlations, in other words, everything
13:51
Speaker 1: was then falling together would leave no places to hide.
13:54
Speaker 1: And that led us to a mix of derivative protections.
13:58
Speaker 1: So first of all, we wanted to own options on
14:01
Speaker 1: higher interest rates, and they were the principal driver last year.
14:05
Speaker 1: We also wanted credit derivatives because credit looked extremely expensive,
14:10
Speaker 1: and that's pretty correlated with equity declines, so eff equities
14:13
Speaker 1: for credit spreads tend to go up. And we also
14:16
Speaker 1: wanted direct protections on downside inequity markets, both at an
14:20
Speaker 1: index level and an individual stock level, and they all
14:23
Speaker 1: contributed to performance last year. And the other thing that
14:27
Speaker 1: you very publicly did in the portfolio and have talked
14:30
Speaker 1: about a lot over the last night of the last
14:32
Speaker 1: ten years or so, I think you've been been talking
14:34
Speaker 1: about this holding indicted linkets, long dated inflation linked bonds.
14:38
Speaker 1: You've been holding them for a long time on the
14:39
Speaker 1: expectation that they will be one of the things that
14:41
Speaker 1: would protect you when when the horrible day came, which
14:45
Speaker 1: you did last year, but that didn't quite work out.
14:48
Speaker 1: Right now, I think that's a very diplomatic diplomatic on
14:52
Speaker 1: these way of describing the ultralong dated UK inflation linked bonds,
14:57
Speaker 1: which are the longest dates of their kind in the world,
15:00
Speaker 1: were down I think more than bitcoin last year. Gosh,
15:04
Speaker 1: and that is really quite something, isn't it? That? That is?
15:07
Speaker 1: That is quite something. Now, I should point out a
15:09
Speaker 1: couple of things. First of all, we fully expected the
15:12
Speaker 1: bonds to decline, likely sharply, and that's why we'd hedged
15:16
Speaker 1: them carefully with these interest rate options, and those interest
15:21
Speaker 1: rate options more than offset the declines in the inflation
15:25
Speaker 1: link bonds in the strategy. So that's the first important caveat.
15:28
Speaker 1: They were hedged. It's true though, that they felt more
15:31
Speaker 1: than we expected. You'd anticipate when rates go up if
15:35
Speaker 1: you've got extremely long dated bonds with the jargon very
15:39
Speaker 1: high duration, which simply means they're very sensitive to changes
15:43
Speaker 1: in interest rates. Says rates go up, the bond prices fall.
15:46
Speaker 1: We would have expected more of an offset from the
15:50
Speaker 1: second component of the way you value an inflation link bond,
15:53
Speaker 1: and that is the inflation expectation. And the remarkable thing
15:58
Speaker 1: there in despite every thing that's happened over the last
16:01
Speaker 1: couple of years, is that long term inflation pricing remains
16:05
Speaker 1: pretty much the same as where it was pre COVID,
16:08
Speaker 1: So you've got no compensation in that element of the bond,
16:11
Speaker 1: and as a result, they would just punish for being
16:13
Speaker 1: long dated bonds. Needless to say, given our view the
16:16
Speaker 1: world there's more inflation prone and volatile going forward. We
16:20
Speaker 1: think that long term inflation pricing looks very complacent and
16:24
Speaker 1: we would expect it to rise and that will be
16:26
Speaker 1: the environment that's good for those bonds. Okay, Well, that
16:30
Speaker 1: brings us from very neatly into three. And the main
16:35
Speaker 1: topic that you know, the everyone was talking about, and
16:38
Speaker 1: we'll talk about all year, is inflation. Where it goes
16:40
Speaker 1: from here? Does it stay high, does it go low?
16:43
Speaker 1: Is the biggest risk is suddenly defl disinflationary environmental possibly
16:47
Speaker 1: near There are some people out there already talking about
16:50
Speaker 1: outright deflation. As prices come down very suddenly, you know,
16:53
Speaker 1: let's say that all the problems inside the supply chain,
16:56
Speaker 1: you know, gradually fixed themselves, and we see things loosening
16:58
Speaker 1: up already, right, we see it, and of being rates
17:00
Speaker 1: and all that kind of thing, we can see things
17:02
Speaker 1: beginning to loosen up. We begin to see a full
17:04
Speaker 1: off in the demand that came from the ridiculous fiscal
17:06
Speaker 1: stimulus of the pandemic. And let's say there's also not
17:12
Speaker 1: a further energy pricess. You know, we listened on the
17:14
Speaker 1: news this morning hearing that petrol prices are back where
17:17
Speaker 1: they were pre the war in Ukraine. So all these
17:20
Speaker 1: things come together, the inflationary problem disappears pretty much overnight.
17:25
Speaker 1: No thanks, by the way to the central banks, because
17:27
Speaker 1: it's actually no way that their interest rate increases could
17:29
Speaker 1: have worked for already, So only thanks to them that
17:31
Speaker 1: naturally these things happen. That's kind of the biggest, biggest surprise,
17:36
Speaker 1: potential surprise of the year. Possibly. Um, well, you're right
17:41
Speaker 1: on the central bankers mot and of course that won't
17:43
Speaker 1: stop them taking credit for it in just the same
17:45
Speaker 1: way they took credit for multiple decades of low and
17:48
Speaker 1: relatively stable inflation for reasons that we would say we're
17:52
Speaker 1: largely beyond their control. But we think that there is
17:54
Speaker 1: a disinflationary wave coming this year. You're already seeing it
17:58
Speaker 1: in the falling rates of inflation. So prices are still
18:01
Speaker 1: going up, but at a reduced level. And the energy
18:06
Speaker 1: story you talked about is part of that. But the
18:09
Speaker 1: real question now is around recession and around China's reopening
18:16
Speaker 1: and the effect this has on the path of central banks,
18:20
Speaker 1: because inflation, alongside central bank action is absolutely what's top
18:25
Speaker 1: and mr market's mind, and the truth is two reminds
18:29
Speaker 1: us maximum humility in this sort of environment is required.
18:34
Speaker 1: The truth is, no one actually knows how China's reopening
18:37
Speaker 1: is going to impact global inflation. Of course, if it
18:40
Speaker 1: pushes it up, that potentially means that the FED will
18:43
Speaker 1: have to stay tighter for longer because inflation pressures may
18:46
Speaker 1: be more resilient than the market expects. The bottom line
18:49
Speaker 1: at the moment is that the market is effectively pricing
18:53
Speaker 1: a Goldilocks story for this year. So it's expecting that
18:58
Speaker 1: either a recession will be avoided or it will be
19:01
Speaker 1: very shallow. That the Fed won't go as high as
19:05
Speaker 1: it says it will in rates, that inflation will drift
19:08
Speaker 1: back down towards targets as the central banks hope and
19:12
Speaker 1: pray it will. That is pretty optimistic, and there are
19:15
Speaker 1: obviously a lot of things that can go wrong with that. Okay,
19:18
Speaker 1: So as far as you're concerned, shallow is basically the
19:21
Speaker 1: new transient shallow and Goldilocks probably is the new transient. Look,
19:26
Speaker 1: it's definitely not out of the question. But as the
19:29
Speaker 1: experience of history shows, when you've got inflation that goes
19:33
Speaker 1: above about five, getting it back down sustainably to two.
19:38
Speaker 1: The average central bank target typically takes years because it
19:42
Speaker 1: finds its way into corners of the system. Now, to
19:45
Speaker 1: be absolutely clear, our thesis is that inflation is going
19:49
Speaker 1: to be volatile, not that it's just going to go
19:51
Speaker 1: up and stay up. And that's really important, and that's
19:53
Speaker 1: one of the reasons we think that this disinflationary wave
19:57
Speaker 1: is so important this year, because you're going to hear
19:59
Speaker 1: all lots of people if it happens saying, ah, the
20:03
Speaker 1: transitory story was right, the central banks have got it
20:06
Speaker 1: back under control. Nothing. See here, folks, We can go
20:08
Speaker 1: back to all the most popular trades of the last cycle,
20:11
Speaker 1: and we think that's dangerous because there will be plenty
20:14
Speaker 1: of opportunities for some of those assets to rally. But
20:17
Speaker 1: if you think that over the longer run inflation is
20:20
Speaker 1: going to be even modestly higher than it was in
20:23
Speaker 1: the post credit crunch era, that means a lot of
20:26
Speaker 1: the most popular strategies are simply not going to work
20:29
Speaker 1: as well as they did. Well, I'm going to take
20:31
Speaker 1: that as as an incredibly positive comment. Now, listeners, listen
20:35
Speaker 1: carefully to this. You might have an opportunity to get
20:39
Speaker 1: out of some of those text stalks you wish you'd
20:41
Speaker 1: got out of the late twenty twenty one at a
20:43
Speaker 1: higher present you can get today if people believe things
20:46
Speaker 1: that Alex thinks, they shouldn't believe that, right, Alex, Yeah, Look,
20:49
Speaker 1: there's there's plenty of opportunity if soft landing appears and
20:53
Speaker 1: for some reason the Fed does flinch. But look, the
20:56
Speaker 1: reality is, we think the Fed is going to be
20:58
Speaker 1: tighter for joy than the market thinks, that inflation pressure
21:02
Speaker 1: will be more persistent, even though prices are coming down
21:05
Speaker 1: this year, and that over the long run, you need
21:07
Speaker 1: to be reconsidering the fundamental basis of a lot of
21:10
Speaker 1: those strategies. So Alex, let's stop there and go back
21:13
Speaker 1: and look at why it is that you think that
21:15
Speaker 1: inflation is going to be much more volatile than it's been. Now,
21:18
Speaker 1: let's accept that there's a disinflationary wave coming. I agree
21:21
Speaker 1: with You're seeing a lot of the things that have
21:22
Speaker 1: driven up inflation over the last couple of years beginning
21:24
Speaker 1: to fall off. We're beginning to clear losely and supply
21:27
Speaker 1: jay and all this kind kind of thing. But is
21:30
Speaker 1: it not possible that inflation would just come down to
21:32
Speaker 1: I don't know, say two or three percent and kind
21:34
Speaker 1: of stay there for another couple of years. Wouldn't it
21:37
Speaker 1: be nice? Why would that not happen? Well, probably because
21:40
Speaker 1: the settlement that underpins those extraordinary low and stated inflation
21:44
Speaker 1: numbers for the last first years or so is being unpicked,
21:47
Speaker 1: and it's being unpicked in some cases pretty quickly. The
21:50
Speaker 1: obvious space to start is probably the Ukraine War, because
21:54
Speaker 1: it's an example of the kind of breakdown in world
21:57
Speaker 1: order that we've been worried about for a long time.
22:00
Speaker 1: And obviously China is the biggest player in the deflation
22:03
Speaker 1: engine in terms of the additions to supply that drove
22:06
Speaker 1: low prices in the last generation, and both China and
22:10
Speaker 1: the Western Bloc are now interested in strategic security and
22:14
Speaker 1: supply chain resilience is much more important. Resilience is going
22:16
Speaker 1: to increase cost pressures. Remember, wars, both hot and cold,
22:21
Speaker 1: both tend to be inflationary, so world orders a big
22:24
Speaker 1: part of it. On the domestic front, you can see
22:26
Speaker 1: that the Thatcher Reagan settlement that favored the small state,
22:30
Speaker 1: free trade, a lower taxes is on its way out,
22:33
Speaker 1: and in its place you have return of big government
22:36
Speaker 1: with activist fiscal reflexes that at the first whiff of
22:39
Speaker 1: grape shot pressure on the public's purses, you have calls
22:44
Speaker 1: for more subsidies, price controls, fiscal stimulus. We've seen it
22:48
Speaker 1: obviously with energy, which has been a huge shock for people.
22:51
Speaker 1: But you can hear the clamor also for mortgage help
22:53
Speaker 1: in many countries as the era of free money ends,
22:57
Speaker 1: and that's one of the central facts of our time,
22:58
Speaker 1: that suddenly debt matters again. And then, of course, on
23:02
Speaker 1: that note, you've got aging with huge bills for pensions
23:06
Speaker 1: and health and social care, so the pressure on government
23:09
Speaker 1: finances is going up. Just as rates start to go
23:12
Speaker 1: up more and demand more payment for interest rates bills.
23:17
Speaker 1: You've got deglobalization. All of these huge long term factors,
23:21
Speaker 1: not to mention wartime economics around issues like climate change
23:24
Speaker 1: mean higher inflation pressure and more volatility. It's interesting on
23:30
Speaker 1: government spending, isn't it. I mean, in the UK, for example,
23:32
Speaker 1: we never seem to get government spending down much below
23:35
Speaker 1: thirty five cent of GDP, but we've never in the
23:37
Speaker 1: past managed to get it up much above thirty eight
23:40
Speaker 1: of GDP for very long. But looking at the promises
23:43
Speaker 1: that the government is making Now, as you say around
23:46
Speaker 1: everything from the cost of living crisis to the NHS,
23:48
Speaker 1: but social care, etcetera, it's almost impossible to imagine as
23:53
Speaker 1: keeping that tax take below fort going forward. I think
23:56
Speaker 1: that's fair, But the reality is, when you can't raise
23:58
Speaker 1: enough money through taxes to pay your bills, what a
24:00
Speaker 1: you're gonna do? When you're going to square the circle
24:02
Speaker 1: through financial repression, And that in plain English means they're
24:05
Speaker 1: going to try and keep inflation and the rate of
24:07
Speaker 1: normal economic growth well ahead of the rate of interest,
24:11
Speaker 1: and that's going to erode the value of money, and
24:14
Speaker 1: that's how they're going to pay these bills. So it's
24:17
Speaker 1: a bad environment for savers. And you can see the
24:20
Speaker 1: kind of things already that are characteristic of financial repression.
24:24
Speaker 1: So if you think about all of these plans for
24:26
Speaker 1: your pension pots, when the government says, wouldn't it be
24:29
Speaker 1: nice if this money was funnel towards these important infrastructure projects,
24:35
Speaker 1: this will be a kind of compulsory part of your
24:37
Speaker 1: your pension allocation potentially in future. This is how they
24:41
Speaker 1: trap money in areas that they want it directed, not
24:45
Speaker 1: that are good for your long term preservation of wealth. Yeah,
24:48
Speaker 1: it effectively becomes a kind of tax, doesn't it end.
24:51
Speaker 1: It's the kind of government policy that would out very
24:53
Speaker 1: neatly with the order enrollment system, which I had think
24:56
Speaker 1: has been absolutely brilliant so far, you know, effectively provides
24:59
Speaker 1: it at a quite retirement for everyone and work in
25:01
Speaker 1: the UK until possibly the government starts at that should
25:06
Speaker 1: be put into our own productive investments in whatever it is.
25:10
Speaker 1: People should remember with all of the obsessive focus on
25:13
Speaker 1: is that they're going to do this, is that they're
25:15
Speaker 1: going to do that. The central issue is we've just
25:18
Speaker 1: seen clearly that central banks are not masters of inflation.
25:23
Speaker 1: It's an emperor's new clothes moment over the last couple
25:26
Speaker 1: of years, and the long term forces that have led
25:29
Speaker 1: to this disinflation era are very clear. They're going into reverse.
25:33
Speaker 1: That changes the symmetry of risk going forward. But remember
25:36
Speaker 1: central banks job is not primarily to control inflation. That
25:40
Speaker 1: might be what their legal mandates say. They're therefore possibly
25:44
Speaker 1: plus or minus unemployment or growth target here or there.
25:48
Speaker 1: But central banks were founded to help governments manage their
25:51
Speaker 1: debt and that is their central function today as it
25:55
Speaker 1: always has been. The Bank of England. That's the templates
25:58
Speaker 1: for most modern central banks was found in sixte to
26:03
Speaker 1: help the government get away its debt in order to
26:07
Speaker 1: pay for a rebuilding in the Royal Navy falling a
26:09
Speaker 1: drubbing by the French. Central banks are there to help
26:13
Speaker 1: manage government finances, not to protect your money. It's interesting,
26:16
Speaker 1: and we would expect them to become more political now
26:19
Speaker 1: than they've been in the past. We've had this sort
26:21
Speaker 1: of era where we have been allowed to believe, or
26:23
Speaker 1: allowed ourselves to believe that central banks are entirely non political.
26:26
Speaker 1: There they are there, they are out there, nothing to
26:29
Speaker 1: do with the government, not listening to any brea ministers
26:31
Speaker 1: or chances, just getting on with their core job of
26:33
Speaker 1: keeping inflation. Look that pretends is kind of garner, isn't it. Yeah,
26:37
Speaker 1: And they're in a window of political opportunity at the
26:40
Speaker 1: moment because they've done this extraordinary tightening, the fastest tightening
26:45
Speaker 1: we've seen for a generation. But the real economy isn't
26:48
Speaker 1: feeling the pain of that yet, So there's a window
26:51
Speaker 1: for them to get their hikes in before the political
26:54
Speaker 1: pressure to ease really comes in with a vengeance. Because
26:58
Speaker 1: they're not politically insensitive what what they say and what
27:02
Speaker 1: we're going to see this year is going to be
27:05
Speaker 1: really important. Are the FED, the e c B, the
27:08
Speaker 1: Bank of England, the b O J. Are these banks
27:11
Speaker 1: really prepared to inflict serious real economy pain against an
27:16
Speaker 1: already febra backdrop in order to push inflation back to target?
27:21
Speaker 1: Or will we see the kind of kite flying that
27:24
Speaker 1: we've already had from senior people at the I m
27:27
Speaker 1: F where suddenly you hear, well, maybe maybe a central
27:30
Speaker 1: bank inflation targets should actually be three or focus two percent?
27:34
Speaker 1: Pretty arbitrary, isn't it? Why? Why are we obsessed with
27:37
Speaker 1: getting it back there? Now? That that might be right,
27:39
Speaker 1: But it's a very important sign, just as the price
27:42
Speaker 1: controls and the clamor for fiscal steamers are of the
27:45
Speaker 1: direction of travel and it's not towards lower inflation on
27:49
Speaker 1: a structural basis. Well, the twoth sad thing is interesting,
27:52
Speaker 1: isn't it. I'm going to go off topic here here
27:53
Speaker 1: I go. John and JOHNA and I were looking at
27:56
Speaker 1: this last year and trying to figure out don and
27:59
Speaker 1: trying to agre out exactly where this two percent target
28:02
Speaker 1: came from. Where did the idea that two percent is
28:04
Speaker 1: the correct rate of inflation for a developed economy come from.
28:07
Speaker 1: And we looked and looked, and of course it's almost
28:09
Speaker 1: impossible to find the academic research to back this stuff up.
28:12
Speaker 1: And I eventually found an article in a now defunct
28:15
Speaker 1: magazine called The Status from I think nineteen four that
28:20
Speaker 1: referred to the original research, which was about developing economy
28:24
Speaker 1: is not developed, and referred to two percent as being
28:27
Speaker 1: an appropriate rate. I'm going to dig that out and
28:30
Speaker 1: I will try and find it for you, and I
28:31
Speaker 1: will put a link somewhere on the Bloomberg website. And
28:34
Speaker 1: a column of minx is absolutely fascinating, Yes, so so interesting.
28:38
Speaker 1: I mean, as far as central banks go and the
28:40
Speaker 1: markets this year, inflation is important obviously because it dictates
28:45
Speaker 1: how tight they keep policy. And over the short term,
28:48
Speaker 1: the big risk going forward, we think it's still around
28:51
Speaker 1: liquidity in the market, so how much money is there
28:54
Speaker 1: available to chase assets? And you've got to remember not
28:56
Speaker 1: only that rates have gone up very sharp plea, and
29:00
Speaker 1: we haven't felt the full effect that yet, partly because
29:03
Speaker 1: we haven't reached peak rates yet, but also because they're
29:07
Speaker 1: trying to run down their balance sheet holdings of assets,
29:10
Speaker 1: and that means just the moment that yields are already higher,
29:13
Speaker 1: they're going to start trying to dump more and more
29:16
Speaker 1: government bonds into the market for investors to absorb. So
29:21
Speaker 1: there's a real challenge for liquidity and um that's that's
29:26
Speaker 1: a big risk going into your alongside the recession risk
29:29
Speaker 1: to earnings, which is one of the reasons we're very
29:32
Speaker 1: low in equities at the moment, feel very low in equity.
29:35
Speaker 1: So you hold some equities obviously, so what do you hold?
29:38
Speaker 1: How does that work? I mean, if we if we
29:40
Speaker 1: take your your view that inflation is going to be
29:42
Speaker 1: very volatile, then there may still be quite a long
29:44
Speaker 1: way for the longer duration assets to fall to say
29:47
Speaker 1: growth docks, which feed a horrible couple of years and
29:49
Speaker 1: were horrible years. Should I say, value performed significantly last
29:54
Speaker 1: year and there's now a view which I keep hearing,
29:56
Speaker 1: that the growth stocks have fallen enough, the big UK
29:59
Speaker 1: to U S tech is on their way back. Enda
30:02
Speaker 1: you know now is the time to buy example, But
30:04
Speaker 1: if you're right, which by the way I think you are,
30:06
Speaker 1: that's just not true. Is it barely gun? Well? Last
30:10
Speaker 1: year was in many ways pretty orderly, So we think
30:14
Speaker 1: the everything bubble has started deflating. You had the most
30:17
Speaker 1: extreme and liquidity fueled extensions of that taking the hit first.
30:22
Speaker 1: So I think the crazy crypto activity, non fungible tokens
30:27
Speaker 1: the spack universe, a bonfire of the acronyms, and the
30:31
Speaker 1: real hit, The real shock for a lot of people
30:33
Speaker 1: was bonds because obviously your principal offset for most people
30:36
Speaker 1: as we as we mentioned at the top, didn't work.
30:39
Speaker 1: It was correlated with equity. So the bond shock was
30:41
Speaker 1: really the bigger one because equity draw downs the scale
30:44
Speaker 1: we saw last year aren't that uncommon, even though it
30:47
Speaker 1: was a bad year. Bonds draw downs on that scale
30:49
Speaker 1: are extremely uncommon. But there's still plenty of pain for
30:55
Speaker 1: assets that haven't yet felt the full effect of those
30:58
Speaker 1: high yields, and those would include heavily leveraged things like
31:02
Speaker 1: private equity, venture capital, corners of property. There's plenty of
31:07
Speaker 1: pain still to go. And of course, in terms of equities,
31:10
Speaker 1: remember all of the damage last year at a market
31:14
Speaker 1: level was d rating. In other words, investors prepared to
31:17
Speaker 1: pay play lower multiples for earnings of companies, but the
31:22
Speaker 1: earnings themselves haven't fallen yet, and indeed, earnings estimates are
31:26
Speaker 1: still pretty buoyant, although they're coming down. So this year,
31:30
Speaker 1: if the recession arise, it must be the most widely
31:33
Speaker 1: forecast recession in history. But let's assume recession does arrive
31:38
Speaker 1: this year, earnings risk is very material. If the economy
31:41
Speaker 1: goes into recession, earnings always go down. That's not going
31:46
Speaker 1: to be good for equities. And so as far as
31:48
Speaker 1: we're concerned, we've got only about ten ten ten in
31:53
Speaker 1: equity cash equity, but on a net basis is zero
31:57
Speaker 1: because we have derivative hedges on the other side of it. Okay,
32:00
Speaker 1: so what are you exposed to at the moment. We've
32:03
Speaker 1: got the ultralong dated in the Excellent bonds and quite
32:07
Speaker 1: a lot of shorter dated inflation protected bonds. We've got
32:11
Speaker 1: similar things in the United States thirty year tips, which
32:14
Speaker 1: we've been trading recently. We've got a position in oil,
32:19
Speaker 1: We've got quite a lot of derivatives still. We've got
32:22
Speaker 1: four and a bit persent in golds and a few
32:24
Speaker 1: other bonds, and we've got a very large cash and
32:27
Speaker 1: a near cash position, and we built that up over
32:30
Speaker 1: the course of last year to give us the firepower
32:33
Speaker 1: we wanted in expectation of dislocations starting to appear as
32:38
Speaker 1: liquidity was sucked out of the market at a record rate,
32:41
Speaker 1: and we were able to use that, for example, in
32:43
Speaker 1: the back end of last year when the UK guilt
32:46
Speaker 1: market went into meltdown after the Trust quarteng budgets, and
32:50
Speaker 1: we were able to trade some of those ultralong dated
32:52
Speaker 1: UK and excelling bonds quite well. But last year, the
32:56
Speaker 1: best conventional asset you could own was dollar cash. All
33:00
Speaker 1: other conventional assets fell. Cash has a very powerful value
33:04
Speaker 1: in a high risk environment, gives you a lot of optionality.
33:08
Speaker 1: We are keen to have some of that. It's interesting,
33:10
Speaker 1: there isn't it where we often write about how didn't
33:13
Speaker 1: times like this to hold cash and exactly that you
33:15
Speaker 1: must think of it in terms of its optionality and
33:17
Speaker 1: yours try not to think about the amount of purchasing
33:21
Speaker 1: power you're losing in real terms. And I looked back
33:24
Speaker 1: to the nineteen seventies, which is the last time we
33:26
Speaker 1: had an environment for the similar to this, you know,
33:27
Speaker 1: finance for oppression, ongoing crisis, et cetera. And there were
33:31
Speaker 1: very few periods in the nineteen seventies when rates on
33:35
Speaker 1: deposit accounts were not high enough that you were breaking
33:38
Speaker 1: even in real terms. You haven't occasionally, but the majority
33:42
Speaker 1: of the time, if you'd held cash, you've broken even
33:45
Speaker 1: in real terms. By the end of the year, completely
33:48
Speaker 1: different environment. We look back on the seventies of being
33:50
Speaker 1: a terrible time for savers, but relative to where we
33:53
Speaker 1: are now, that were fantastic, extraordinary. Okay, So let's talk
33:58
Speaker 1: a little bit about the goal, because as you know,
34:01
Speaker 1: I'm very keen on gold, and I think everyone should
34:04
Speaker 1: hold gold in their portfolios, and I've written several columns
34:07
Speaker 1: explaining over the years why bitcoin is absolutely not the
34:10
Speaker 1: new gold because it has none of the characteristics that
34:13
Speaker 1: gold has that make it so valuable as a form
34:15
Speaker 1: of money. Now, you might not necessarily agree with that,
34:18
Speaker 1: because you have in the past had a position in bitcoin,
34:21
Speaker 1: so you must have thought it had some potential for something,
34:23
Speaker 1: if not necessarily, to be the new gold. But let's
34:26
Speaker 1: put that aside. You probably don't want to talk about that.
34:28
Speaker 1: Let's stress a long time. So let's talk about why
34:33
Speaker 1: you all four or five of their portfolio and gold
34:36
Speaker 1: relative to our historic waiting that's pretty low. One of
34:40
Speaker 1: the reasons that's the case is that last year, when
34:42
Speaker 1: it was actually even lower, and we expected gold to
34:45
Speaker 1: take a hit as rates went up, and that's exactly
34:49
Speaker 1: what happened. Fundamentally, over the long term, you want to
34:52
Speaker 1: own things that the government can't print or it's harder
34:54
Speaker 1: for them to steal your savings, and gold is absolutely
34:58
Speaker 1: part of the mix. At the moment, it's some joining,
35:00
Speaker 1: a bit of relief as the week of Dollar comes
35:03
Speaker 1: into play, and there's expectation on the market's parts of
35:07
Speaker 1: easing up of rates further out into the back end
35:09
Speaker 1: of this year, but long term, long term doesn't really
35:13
Speaker 1: make any any difference. This is a short term argument
35:16
Speaker 1: for keeping your position slightly lower than it would have
35:19
Speaker 1: been over the longer term. If we're in a volatile
35:21
Speaker 1: inflation politically difficult and inflation the environment, geopolitical risk is
35:28
Speaker 1: going up, Inflation risk is going up, pressure on government
35:31
Speaker 1: finances is going up, financial repression risk is going up.
35:35
Speaker 1: All of those things over the long run should be
35:37
Speaker 1: good for gold. We've got a mix between bullion and
35:42
Speaker 1: gold miners, which off you leveraged exposure. Of course, last year,
35:45
Speaker 1: with very high energy and labor costs, they had a
35:49
Speaker 1: bad time. That's why we've been reducing them. But it
35:52
Speaker 1: starting to look interesting again. You've seen that in the
35:54
Speaker 1: market action. I think it tells you a lot that
35:57
Speaker 1: global central banks are picking up gold are quite a
36:02
Speaker 1: clip at the moment. Yeah, I saw that the Chinese
36:04
Speaker 1: Central bank buying quite a lot. Interesting. Um. You know,
36:07
Speaker 1: we often talk about what is money and what isn't money.
36:09
Speaker 1: I was went into a school quite recently and I
36:13
Speaker 1: was talking to them about the nature of money, and
36:15
Speaker 1: I was give them a few different things. When I
36:17
Speaker 1: go and do this a cow Reachelleach and give them
36:19
Speaker 1: the paper money, and I give the a little fingerful
36:21
Speaker 1: of those shredded dollar bills that you can you can
36:25
Speaker 1: get from the central bank in the US, and ask them,
36:27
Speaker 1: you know, which of these things is money? And the
36:29
Speaker 1: answers are really interesting. But we always get back to
36:31
Speaker 1: the end. If if people believe it's money, it's money,
36:34
Speaker 1: and gold is the only thing that people have consistently
36:37
Speaker 1: believed his money for for thousands and thousands of years, right,
36:40
Speaker 1: which effectively makes it money. And it's let's just go
36:44
Speaker 1: back a little bit and pick up on what you
36:45
Speaker 1: said about about China. Massive changes underway there which could
36:48
Speaker 1: end up being inflationary, could end up being deflationary. Took me,
36:51
Speaker 1: took me through how that works. Well. The shift in
36:54
Speaker 1: China is not to be underestimated for a few reasons.
36:57
Speaker 1: So on the inflation deflation, it's one of the key unknowns,
37:02
Speaker 1: as I mentioned, in terms of how it interacts with
37:05
Speaker 1: central bank policy making this year and therefore for markets.
37:08
Speaker 1: If it is driven by all the classic Chinese leavers,
37:11
Speaker 1: like real estate development, it's going to be commodity intensive
37:15
Speaker 1: that might feed through more directly into inflation numbers. You've
37:19
Speaker 1: also got to remember they've got three years of accumulated
37:22
Speaker 1: savings waiting to be spent, and I read that the
37:26
Speaker 1: totality of those savings is more than UK GDP. So
37:29
Speaker 1: if you think about the experience of Western countries as
37:32
Speaker 1: they did reopen, the argument would be that it is
37:35
Speaker 1: going to be more inflationary. Of course, we don't know
37:39
Speaker 1: what the shape of Chinese activity will be after three
37:42
Speaker 1: years of COVID, where they will be permanent scarring, whether
37:45
Speaker 1: it will be less real estate and commodity intensive, So
37:49
Speaker 1: the impact is is uncertain, but the fact of the
37:52
Speaker 1: pivot at all is potentially very significant because remember at
37:57
Speaker 1: the Congress last year, the communist past where g secured
38:01
Speaker 1: his third term and appeared to double down on all
38:04
Speaker 1: his signature policies, including zero COVID. The market really took
38:09
Speaker 1: fright and what we've had since then is the most
38:12
Speaker 1: extraordinary series of policy u turn. So not only have
38:16
Speaker 1: they scrapped zero COVID overnight despite all the medical constraints
38:21
Speaker 1: like low proportion of properly vaccinated over eight s and
38:25
Speaker 1: all the rest of it is, they've also scrapped the
38:28
Speaker 1: leverage ratios for developers and a huge number of other
38:32
Speaker 1: things like easing up on tech platform crackdowns, or at
38:36
Speaker 1: least some agencies have. So there does appear to be
38:39
Speaker 1: quite a significant pivot, and that's mirrored in the diplomatic
38:42
Speaker 1: space where China's tried to build bridges with Australia, a
38:46
Speaker 1: more emollient New Year address from Mr G and a
38:48
Speaker 1: appearance from him at the Barley summits with the G
38:51
Speaker 1: twenty last year, and that does suggest that there after
38:54
Speaker 1: some breathing space. Now that may of course indicate the
38:57
Speaker 1: severity of the domestic situation in China, but I think
38:59
Speaker 1: what you can have confidence in is that they are
39:03
Speaker 1: determined to make the reopening big bang of success, because
39:07
Speaker 1: particularly with health problems, they can't afford for it not
39:11
Speaker 1: to be, So that's very interesting in terms of who
39:14
Speaker 1: profits from a China reopening. Alex You and I were
39:16
Speaker 1: at a conference together a few months ago, and one
39:18
Speaker 1: of the speakers, Jim Melon, He was talking about the
39:21
Speaker 1: technological revolution, and one of the things he was saying
39:23
Speaker 1: was how disappointing it had been that over the last
39:26
Speaker 1: decade or so, we've had these huge technological leaps forward,
39:30
Speaker 1: and we've kind of wasted them all by watching dancing
39:33
Speaker 1: dancing nurses on TikTok and playing on Facebook and that
39:35
Speaker 1: kind of thing. We haven't used the technology that we've
39:38
Speaker 1: developed in such a way as to improve productivity and
39:42
Speaker 1: improve our lives. Now, when you look at that, do
39:46
Speaker 1: you think, well, possibly there's something in the idea that
39:49
Speaker 1: we could have had a productivity revolution of the last decade.
39:53
Speaker 1: We haven't, but we could now have won over the
39:56
Speaker 1: next decade as we start to embed our innovations properly
39:59
Speaker 1: into our economy. Yes, it's definitely possible in some areas
40:03
Speaker 1: that will happen. I mean, it's worth remembering though technology
40:07
Speaker 1: is often used as the sort of torpedo to the
40:10
Speaker 1: more inflation pressure arguments the idea that those sorts of
40:15
Speaker 1: productivity gains are going to prevent any recurrence of more
40:19
Speaker 1: inflation pressure. Let's remember that many of the biggest game
40:23
Speaker 1: changing technologies happened in periods of much more elevated inflation.
40:29
Speaker 1: You know, I'm not just talking about the combustion engine.
40:32
Speaker 1: I'm talking about aviation, I'm talking about dawn of the computers.
40:35
Speaker 1: I mean, these are all things that happened outside of
40:39
Speaker 1: the extraordinary deflationary era we've been in for the last
40:42
Speaker 1: generation and around which all of the most popular portfolio
40:45
Speaker 1: strategies are built. So we're not gloomy at all about
40:50
Speaker 1: technological prospects. In many cases, they're extraordinarily exciting. It's just
40:55
Speaker 1: that one they're not likely to overwhelm the return of
40:59
Speaker 1: the big state, the deglobalization forces, the more politicized central banks, aging,
41:04
Speaker 1: and pressure on labor markets as wage journalists get more
41:07
Speaker 1: power with relatively smaller pools of labor. It's unlikely that technology,
41:13
Speaker 1: at least in the immediate future, is going to be
41:15
Speaker 1: able to overwhelm all of those structural factors. And it's
41:19
Speaker 1: also the case that technology was the market darling in
41:24
Speaker 1: that deflation era because it was the one area you
41:26
Speaker 1: could consistently get growth. And we're simply saying that if
41:30
Speaker 1: there is a bit more inflation and nominal growth around
41:32
Speaker 1: and a bit more volatility, different things are going to
41:35
Speaker 1: work in the new era. Okay, well, let's talk briefly
41:38
Speaker 1: about what the retail investors should now do. I mean,
41:41
Speaker 1: obviously the first thing that you do is rush out
41:43
Speaker 1: and by rougher because you just explained us where that's
41:46
Speaker 1: a good idea. But outside that, a lot of the
41:49
Speaker 1: strategies that you use inside the fund and not really
41:52
Speaker 1: available to the ordinary retail investors. So if you can
41:56
Speaker 1: put yourself in their shoes and look out over the
42:00
Speaker 1: next say five years, what kind of sector or area
42:05
Speaker 1: would you be invested in? So you know, you worry
42:07
Speaker 1: quite rightly about hot wars and cold wars, and we
42:09
Speaker 1: can see that the risk of that happening everywhere and
42:12
Speaker 1: even Japan is now there's now building an offensive military capability,
42:15
Speaker 1: which is which is worrying for all sorts of people.
42:18
Speaker 1: And you worry about demographics obviously, worry about labor shortages.
42:22
Speaker 1: So is it the fence stocks, is it robotics? Is it? What? What?
42:26
Speaker 1: What is it? That you would think to yourself over
42:28
Speaker 1: the next five years, this is somewhere where a retail
42:30
Speaker 1: investor has just got to be. Every era has its uh.
42:34
Speaker 1: It's kind of dominant class of ideas, doesn't you know
42:37
Speaker 1: if we went back to the S and PS ten
42:42
Speaker 1: largest companies, would at least half of them would be
42:44
Speaker 1: oil um. You know, at the end of the eighties
42:48
Speaker 1: nineties it was Japanese banks, and then in two thousand
42:51
Speaker 1: TMT bubble you had all the tech names, and then
42:54
Speaker 1: a lot of them were Chinese. At the start of
42:57
Speaker 1: the last decade, and on the eve of twenty two
43:02
Speaker 1: and the Zegon vendor, as Schultz described it, it was
43:06
Speaker 1: all tech, wasn't it. And I think that the less
43:09
Speaker 1: of the last couple of years is that matter matters again.
43:14
Speaker 1: You know, it shortages a real You can't print energy,
43:17
Speaker 1: and in order to fulfill big visions around energy transitions,
43:22
Speaker 1: you need a lot of commodities. So to us, there
43:25
Speaker 1: is still value in energy and other commodities I mentioned earlier.
43:31
Speaker 1: We've got a bit of oil at the moment. On
43:33
Speaker 1: a long term wealth preservation against financial repression basis, inflation
43:38
Speaker 1: protected bonds, you'd expect me to saying gold are important.
43:41
Speaker 1: There's definitely going to be value around in maybe small capture,
43:45
Speaker 1: Pan or the UK. I think the difficulty is standing
43:48
Speaker 1: here at the start of three facing the kind of
43:52
Speaker 1: liquidity risk we think you've got, and the sort of
43:55
Speaker 1: recession risk that seems likely this year, and the uncertainty
43:58
Speaker 1: around the impact of mine is reopening. You don't want
44:01
Speaker 1: to have huge conviction directionally at the moment. This is
44:05
Speaker 1: a period for maximum humility, and our entire philosophy is
44:09
Speaker 1: based around not getting it completely wrong rather than getting
44:12
Speaker 1: it completely right. So when we're building a portfolio, Marian,
44:15
Speaker 1: we're not going around thinking here are the best ideas
44:18
Speaker 1: on a five year view. We're building a portfolio which
44:22
Speaker 1: should protect and grow capital regardless of what happens in
44:26
Speaker 1: the market. Um and hopefully this environment is a very
44:29
Speaker 1: good example of how that's powerful. Alex, thank you, thank
44:32
Speaker 1: you so much for joining us today. Hugely appreciate it.
44:35
Speaker 1: Thank you, Marian. Thank you for listening to this week's
44:42
Speaker 1: Marin Talks Money. We will be back next week in
44:44
Speaker 1: the meantime. If you like on you show, please rate,
44:47
Speaker 1: review it and subscribe wherever you listen to your podcast.
44:50
Speaker 1: Thank you very much for doing that. This episode was
44:52
Speaker 1: hosted by Meat marrism Set Web. It was produced by
44:55
Speaker 1: Summer Sadi, editing and sound designed by Blake Maples. Special
44:59
Speaker 1: thanks to you, Alexander Charters, of course, and to John
45:02
Speaker 1: Steppic And finally, do not forget to sign up to
45:05
Speaker 1: John's daily newsletter, Money Distilled. In it. He gives his blood,
45:08
Speaker 1: sweat and tears to tell you what you should be
45:10
Speaker 1: doing with your money. The least you can do for
45:12
Speaker 1: us is to read it. The link is in the
45:14
Speaker 1: show notes