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Why UK Value Stocks Are Still the Trade of the Decade · Merryn Talks Money

0:00
Speaker 1: John, I'm going to read you a quote, and then
0:02
Speaker 1: I want you to guess who feels this way about themselves.
0:06
Speaker 1: This is a group who feels that they should get
0:10
Speaker 1: credit for being agile in changing conditions and being fast
0:15
Speaker 1: to adjust projections.
0:18
Speaker 2: Is the IMF.
0:20
Speaker 3: Yes, yes, if they would like you to give it that,
0:25
Speaker 3: they'd like you to ignore the fact that they're always completely,
0:29
Speaker 3: absolutely totally wrong about everything and give them credit for
0:34
Speaker 3: the fact that after stuff has changed, they change their productions.
0:38
Speaker 1: Good work, guys, I mean.
0:40
Speaker 2: If to be a fit, I think changing your prediction
0:43
Speaker 2: in GDP from negative point three percent to plus point
0:48
Speaker 2: four percent, which is a swinger point of seven percentage points.
0:52
Speaker 2: In our minds, that's pretty, I jail. It's quite stupid,
0:55
Speaker 2: but it's quite It's pretty, I jail.
0:56
Speaker 1: It's agile, it's fast, it recognizes changing conditions, and you know,
1:01
Speaker 1: I'm going to give them recognizing changing conditions because I
1:04
Speaker 1: don't know. If you watch the poor old Chief Examinment
1:07
Speaker 1: keep the Poortry of economists at the Bank of England
1:10
Speaker 1: yesterday talking for the Treasury Committee, well, he was explaining
1:14
Speaker 1: that the reason that they get everything wrong is because
1:18
Speaker 1: their model cannot react to changing conditions. It's worth watching.
1:22
Speaker 1: I put the link in, I put the link on Twitter,
1:24
Speaker 1: I put the link somewhere else. I'll put it at
1:25
Speaker 1: the end of the blog. I put it somewhere. Go
1:27
Speaker 1: and watch it, and it's absolutely fascinating to watch a
1:30
Speaker 1: man who's way cleverer than me and dare said, John
1:33
Speaker 1: probably way cleverer than you talking, I know, talking about
1:38
Speaker 1: a model that he has that is an extrapolation machine.
1:45
Speaker 2: I think Marty King has always said this about the
1:48
Speaker 2: model law, which is what I'll find slightly we are doing.
1:51
Speaker 2: A guy who actually used to run the Bank of
1:53
Speaker 2: England and not that long ago, keeps saying the problem
1:57
Speaker 2: with the Inflation podcast model is that it assumes that
2:00
Speaker 2: the bank will definitely get inflation back to two percent,
2:04
Speaker 2: so everything they put and ends up coming back to
2:06
Speaker 2: two percent. I mean, like Meevin himself has said, that's
2:09
Speaker 2: how how can the chiefic coandom is not already be
2:13
Speaker 2: aware that this is a potential flaw in the model.
2:17
Speaker 1: I know he needs he needs to be more agile,
2:21
Speaker 1: but his point was that in the last thirty years
2:25
Speaker 1: everything's being kind of the same, so is a bit
2:28
Speaker 1: difficult to build a model that doesn't assume that everything's
2:32
Speaker 1: going to be kind of the same. It's not really
2:34
Speaker 1: design for stuff that changes.
2:36
Speaker 4: And you think, well, okay, that's that's nonsense, but it's
2:40
Speaker 4: kind of clausible nonsense.
2:42
Speaker 1: And then you think, I want to take care. There's
2:45
Speaker 1: been a lot of change, a lot of just pretty
2:47
Speaker 1: big stuff has happened. And why did a lot of
2:50
Speaker 1: that big stuff happen? A lot of that big stuff
2:53
Speaker 1: happened because the Bank.
2:55
Speaker 4: Of England has been running one of the biggest monetary
2:57
Speaker 4: experiments of all time. Is it possible that some of
3:01
Speaker 4: the change has come from Bank of England policy? And
3:04
Speaker 4: if that might be the case, how could their model
3:08
Speaker 4: not be ready for the effects of stuff they did?
3:11
Speaker 1: I mean, I don't mean to be down on the
3:12
Speaker 1: Bank of England, as I say, John, like cleverer than us.
3:14
Speaker 1: I was going to say, demonstrably clever enough, But that's
3:16
Speaker 1: not actually true, is it.
3:19
Speaker 4: We just assume, we assume and be cleverer than us,
3:24
Speaker 4: and here we are, here we are.
3:26
Speaker 2: I mean, you know, it uses a long time. I mean,
3:30
Speaker 2: I mean, I mean, that's like pretty much two thoughts
3:33
Speaker 2: of the time I've been alive. And as we all know,
3:36
Speaker 2: the coined me didn't really start doing anything until on eighteen,
3:40
Speaker 2: and so realistically I can see why you would only
3:43
Speaker 2: go back thirty years ago, because that obviously is the
3:47
Speaker 2: only reliable history that we've got.
3:49
Speaker 1: I love the way you think macroeconomic policy and macroeconomics
3:53
Speaker 1: is correlated to your eighteenth birthday, buddy. It must have
3:55
Speaker 1: been a humdigger.
3:59
Speaker 2: I mean, I may not intelligent as kind of like
4:02
Speaker 2: the buying England by I'm feeling ourcissistic, So I think
4:06
Speaker 2: that qualifies me to comment on these things.
4:10
Speaker 1: Yeah, and you know, one thing I do want to
4:12
Speaker 1: say is that the reason why models don't work ever,
4:18
Speaker 1: is because modeling is incredibly difficult. And if it were
4:21
Speaker 1: possible to model the future, then you know, that would
4:25
Speaker 1: be really great because then we would know what was
4:27
Speaker 1: going to happen. But it's not possible. We can't ever
4:29
Speaker 1: know what's going to happen.
4:30
Speaker 5: So we can't actually ever expect a model to work.
4:33
Speaker 5: It's inconceivable that the model could work. So the problem
4:37
Speaker 5: here is not so much the model doesn't work, it's
4:39
Speaker 5: kind of a given. The problem is that.
4:44
Speaker 1: Forecasters be at the IMF, be at the Bank of England,
4:46
Speaker 1: be at some of them. Many other forecasts that you
4:48
Speaker 1: and I talked to somehow seem to believe, or seem
4:52
Speaker 1: to believe that other people should believe that their forecasts
4:55
Speaker 1: are valid. Now that's the problem that they're not saying,
4:58
Speaker 1: this is my best guess, but you know it's really
5:01
Speaker 1: unlikely to be correct. They're saying, here's my forecast, it's valid,
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Speaker 1: base your behavior on it, and that's why we run
5:09
Speaker 1: into trouble.
5:10
Speaker 2: Yeah, I mean, but part of the problem there is
5:12
Speaker 2: that they do tend to try to have their cake
5:14
Speaker 2: and eat it. Because you know if you said that,
5:17
Speaker 2: I can guarantee if you said that to any of
5:19
Speaker 2: the guys in front of the Treasury Select Committee yesterday,
5:22
Speaker 2: they would have said, well, it's just a model, and
5:24
Speaker 2: we do have a fine chart which shows that, you know,
5:27
Speaker 2: the connect because if you look at this thing, particularly
5:29
Speaker 2: in the moment, the outliers froy still not still not
5:32
Speaker 2: wide enough, but you know they are, they are quite wide.
5:35
Speaker 2: So they would say, oh, but yet, we all know
5:37
Speaker 2: the forecasts don't actually predict the future, but they only
5:41
Speaker 2: really say that whenever they haven't predicted the future. And
5:45
Speaker 2: I think the other point that you would then make
5:48
Speaker 2: is well, look, why do you make these forecasts? I mean,
5:52
Speaker 2: by the Bank England, I can see because they've got
5:55
Speaker 2: themselves tied up and not sway you know, forward guide
6:00
Speaker 2: and all that sort of stuff. There is a case
6:03
Speaker 2: whereby they need to sort of justify the path that
6:07
Speaker 2: they're on. But imf, I mean, it's kind of why
6:10
Speaker 2: do you come up with this stuff in the first place. Whenever.
6:13
Speaker 2: On the one hand, if you're challenge this to why
6:15
Speaker 2: you get it wrong all the time, you say, well,
6:16
Speaker 2: you're not meant to take it seriously, And it's kind
6:18
Speaker 2: of like, well, okay, we'll stop stop bombarding is with it,
6:23
Speaker 2: you know, and stop blaming the newspapers for putting it
6:25
Speaker 2: in headlines. Whenever you've said something headline grabbing. No clever
6:29
Speaker 2: person says that the UK will endure it its worst
6:32
Speaker 2: recession and living memory is a headline. It's a news story.
6:35
Speaker 2: You know, you might not agree with it, it might
6:37
Speaker 2: be based on fundamentally flawed data, but you know you
6:40
Speaker 2: can't blame newspapers for reporting it in that way. So
6:43
Speaker 2: I mean, I think if they all backed off from
6:45
Speaker 2: making the forecast in the first place, then that would
6:49
Speaker 2: probably help a lot, because it would make people kind
6:55
Speaker 2: of have to think and look at the data themselves.
6:57
Speaker 2: Apart from that and else.
6:58
Speaker 1: Okay, So our message this week then is this sort
7:01
Speaker 1: of down with the I ms.
7:04
Speaker 2: Yes, smash the thing takes or whatever, even as I
7:08
Speaker 2: don't know, but I think that yeah, I think actually yeah,
7:14
Speaker 2: been more a bit more humility on the part of
7:18
Speaker 2: you know, policy makers in general a mess and a.
7:23
Speaker 1: Bit more group think. I mean, people have been accusing
7:25
Speaker 1: the Bank of England of group think for a long
7:28
Speaker 1: time now, and I think that they're going to have
7:30
Speaker 1: to start addressing this. It's time to bring some new
7:33
Speaker 1: thinking into the Bank of England. And you know, John,
7:35
Speaker 1: I know you're there for them, aren't you? Just cool? Guys?
7:38
Speaker 1: Just cool?
7:39
Speaker 2: I mean a dB index linked pension. Yes, but I
7:45
Speaker 2: see you went wrong there, Merton. You should have said
7:48
Speaker 2: I'm there for it.
7:49
Speaker 1: You've just reminded me. And it's harpy I linked as well,
7:53
Speaker 1: isn't it. Hey, Everyone around the Bank of England get
7:56
Speaker 1: a little diversity of thought in I am for you.
8:00
Speaker 2: So I think the Bank England's ever had a female
8:03
Speaker 2: Central Bank governor.
8:05
Speaker 1: Oh, now I'm really here for you.
8:07
Speaker 4: Yeah.
8:08
Speaker 2: I think I think we've We've solved a number of
8:10
Speaker 2: problems with this one certainly.
8:13
Speaker 1: Have because they're interested in diversities, so they keep saying.
8:17
Speaker 2: Right, actually, just on this topic. Very quickly, you tweeted
8:21
Speaker 2: something today about the Wall Street Channel had published an
8:24
Speaker 2: opinion column based on this, this finding from two top
8:30
Speaker 2: economists that the pandemic and the fiscal stimulus, the magic
8:39
Speaker 2: combination of these two things had actually caused the inflation
8:44
Speaker 2: that we're all seeing now, something that that in itself
8:47
Speaker 2: was funny enough.
8:49
Speaker 5: Who pay these people?
8:51
Speaker 1: I'm here for you too. Whoever pays these people are
8:54
Speaker 1: here for you too.
8:56
Speaker 2: But do you know who the two guys were, Ben
9:00
Speaker 2: ber Nanke and Olivia Blanchard, so like so so not
9:07
Speaker 2: just like two top obscure like you know, but noble
9:10
Speaker 2: prize when in whatever economists or a couple of academics
9:13
Speaker 2: like sitting somewhere in an ivory towel saying, oh, this
9:17
Speaker 2: is how the inflation happened. It's the guy that used
9:20
Speaker 2: to run the FED for ages and ages and ages
9:23
Speaker 2: and then and also a guy who used to be
9:25
Speaker 2: a chief economists that the IMF.
9:27
Speaker 1: Well, you know, Billy, he did say yesterday, we've got
9:30
Speaker 1: a lot to learn about inflation. Do you know what
9:33
Speaker 1: Andrew we have or you have transit where you look
9:38
Speaker 1: at it? Anyway, John and I are available for any
9:41
Speaker 1: job that involved a RP I linked dB. Just call us.
9:46
Speaker 1: You know where we are. Welcome to Marren Talks Money,
9:54
Speaker 1: the podcast in which people who know the markets explain
9:56
Speaker 1: the markets and Maren sumset Web. This week, our guest
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Speaker 1: is Rob Arnott, founder and Chairman of the Board of
10:02
Speaker 1: Asset Allocations Specialist Research Affiliates. Rob, thank you so much
10:07
Speaker 1: for joining us today. We really appreciate it.
10:09
Speaker 6: It's a privilege.
10:11
Speaker 1: I think it's more a privilege for me. Actually we'll
10:13
Speaker 1: find out the next half and out. Now, I want
10:16
Speaker 1: to start by talking about in fact, we may talk
10:18
Speaker 1: about this for twenty five minutes. I don't know the
10:20
Speaker 1: most important thing out there, the only thing out there
10:22
Speaker 1: that is going to make the difference to how our
10:24
Speaker 1: assets behave over the next decade or so inflation. And
10:28
Speaker 1: you've written about this extremely well, and everyone should go
10:31
Speaker 1: in and you should read Rob's work on inflation because
10:32
Speaker 1: it is fascinating and it's not encouraging either, is it.
10:36
Speaker 6: It's not encouraging, but it's also not discouraging in that
10:41
Speaker 6: even bad news can be a source of insights into
10:45
Speaker 6: how to invest. So the good news is that the
10:51
Speaker 6: widely accepted narrative that this inflation is transitory, that it
10:55
Speaker 6: will dissipate in reasonably short order over the next two
10:59
Speaker 6: or three years, is entirely possible. It can happen, It
11:05
Speaker 6: has happened. It is also the benign end of the
11:09
Speaker 6: spectrum of a much wider spectrum. The reality is not
11:13
Speaker 6: that it's benign and will dissipate. The reality is anything
11:17
Speaker 6: can happen. And where this gets interesting is the causes
11:23
Speaker 6: of the inflation. We did a study in which we
11:27
Speaker 6: looked at all fourteen countries that the OECD calls developed
11:32
Speaker 6: economies today and called develop economies in nineteen seventy. So
11:36
Speaker 6: that's our that's our peer group, and so it leaves
11:40
Speaker 6: out current so called developed economies like Turkey, but countries
11:47
Speaker 6: that have been developed for the last fifty years. You've
11:49
Speaker 6: got fourteen countries fifty three.
11:50
Speaker 1: Years later in itself, before we even start on the
11:52
Speaker 1: rest the fact that globally there were only fourteen countries
11:55
Speaker 1: in nineteen seventy that counted as developed and still do.
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Speaker 6: Yeah, the ones that did still do so. Becoming a
12:03
Speaker 6: developed economy is a good path towards remaining a developed economy.
12:09
Speaker 6: But be that as it may. UK has had inflation
12:13
Speaker 6: surge past eight percent three times in the last fifty
12:16
Speaker 6: years US twice in the last fifty years. Around the world,
12:24
Speaker 6: that's too few data points you can't draw any conclusions.
12:27
Speaker 6: But around the fourteen countries it's twenty nine times an
12:30
Speaker 6: average of two per country. That's enough to draw some conclusions.
12:34
Speaker 6: So what did we find. We found that when you
12:37
Speaker 6: cross four percent inflation, half the time it goes higher
12:40
Speaker 6: and can last longer. Half the time it rolls over,
12:44
Speaker 6: and you don't go higher. When it rolls over, on average,
12:48
Speaker 6: it dissipates back down below two percent within two years. Okay, great,
12:53
Speaker 6: that's transitory inflation. Now, when you get to six percent inflation,
12:58
Speaker 6: and especially when you get to eight and higher, it
13:01
Speaker 6: is a consequence not of an exogenous shock that can
13:05
Speaker 6: dissipate and with it allow the inflation to dissipate. It's
13:11
Speaker 6: a result of conscious policy choices that are bad and
13:17
Speaker 6: unless the policy choices change, the inflation pressures remain. Back
13:22
Speaker 6: to the topic of four percent inflation, there have been
13:26
Speaker 6: sixty seven episodes. Of those, almost five per country, Half
13:30
Speaker 6: of those dissipated quickly, half of them didn't. The ones
13:35
Speaker 6: that didn't almost in all cases went higher and lasted
13:40
Speaker 6: an average of fourteen years.
13:42
Speaker 1: Okay, that is quite a long time.
13:44
Speaker 6: Right, eight percent, But we've.
13:47
Speaker 1: Already way past four percent. We're in we're in the
13:50
Speaker 1: other world now.
13:51
Speaker 6: Correct above eight percent. What we found was twenty nine examples,
13:56
Speaker 6: two per country. What we found was that two of
13:59
Speaker 6: those dissipated fast within two years. So there are two
14:03
Speaker 6: cases of transitory eight percent inflation. Those who anchor on
14:08
Speaker 6: the notion that this will dissipate in the coming two
14:10
Speaker 6: three years have historical precedent to point to to say, yes,
14:14
Speaker 6: it can happen. Of the rest, a dozen of them
14:18
Speaker 6: are still in progress. You're left with sixteen that have
14:23
Speaker 6: been resolved, and so you can gauge the amount of time,
14:28
Speaker 6: and other than those two that were transitory, the rest
14:31
Speaker 6: averaged fourteen years. Okay, So this is bad news in
14:37
Speaker 6: the sense that inflation is rarely transitory and doesn't dissipate
14:44
Speaker 6: until the policy choices that led to the inflation are reversed.
14:49
Speaker 6: There are those who say that Powell's hero is Paul Vulkar,
14:55
Speaker 6: and that he's channeling his inner Volcar. Think about that
15:00
Speaker 6: for a moment. Paul Vulker inherited an economy with serious inflation.
15:07
Speaker 6: He inherited a political backdrop where citizens were so horrified
15:13
Speaker 6: by how inflation was destroying their plans, destroying their retirement plans,
15:19
Speaker 6: destroying their portfolios, that they basically said, do whatever it takes.
15:25
Speaker 6: Vulkar did that. When inflation crested at fourteen point seven
15:31
Speaker 6: percent in March of nineteen eighty, the Fed funds rate
15:35
Speaker 6: was already nineteen point nine percent. It was five percent
15:39
Speaker 6: above inflation. When inflation crested year and a half later,
15:42
Speaker 6: it was twenty two percent. Now that is that is
15:47
Speaker 6: using a relentless force to deal with inflation, the inflation
15:55
Speaker 6: that we have here, and I'm speaking from the US perspective,
16:00
Speaker 6: and Europe rhymes with us in terms of the way
16:03
Speaker 6: the inflation looks, it's a bit worse here in the US.
16:09
Speaker 6: Powell declared the inflation to be transitory in March of
16:13
Speaker 6: twenty twenty one. What did inflation look like then? It
16:18
Speaker 6: had just crossed four percent, And I've already said four
16:21
Speaker 6: percent inflation half the time it's transitory. So it sounds
16:24
Speaker 6: like it would ring true except for one thing. Half
16:27
Speaker 6: of that four percent had happened in the prior three months,
16:30
Speaker 6: So you had four percent inflation that was accelerating. Nine
16:35
Speaker 6: months later, in November of twenty one, he declared that
16:40
Speaker 6: the word transitory was not appropriate. Good news on that
16:45
Speaker 6: to recognize that, and so slowly but surely, the FED
16:52
Speaker 6: began to take inflation seriously. Inflation crested in the summer
16:56
Speaker 6: of twenty twenty two at nine point one percent for
17:00
Speaker 6: US above ten for you guys. Nine point one percent inflation?
17:05
Speaker 6: Was he channeling his inner Volkar? Did he have the
17:07
Speaker 6: FED funds rate at fourteen five percent higher? No, he
17:11
Speaker 6: had the FED funds rate at one point two one
17:14
Speaker 6: point two. It was eight percent under inflation.
17:18
Speaker 1: Yeah, I mean this is new, isn't it when it
17:21
Speaker 1: comes to fighting inflation. To have the interest rates so
17:24
Speaker 1: far behind that is relatively new.
17:27
Speaker 6: It's been tried in lots of countries. It'll tried it.
17:30
Speaker 1: Not in the developed countries that we've Italy.
17:33
Speaker 6: Did, Italy UK lots of times tried.
17:36
Speaker 1: K In the nineteen seventies, generally interest rates were okay,
17:40
Speaker 1: not high enough, but higher than inflation most of the time,
17:44
Speaker 1: if she most of.
17:44
Speaker 6: The time, but in the early surges of inflation. No,
17:48
Speaker 6: And that's the difference with Vulcar. Now, I like to
17:52
Speaker 6: join the joke that central bankers, instead of trying to
17:55
Speaker 6: channel their Innervolcar, should channel their inner Powell. I don't mean,
18:00
Speaker 6: I mean Colin Powell. Colin Powell said, if you're going
18:05
Speaker 6: to commit to war, one, you have to have a
18:08
Speaker 6: very specific goal, regime change whatever. Two you have to
18:14
Speaker 6: have strong conviction that you can win. Three you have
18:20
Speaker 6: to have an exit strategy. And four you have to
18:23
Speaker 6: be willing to use overwhelming force to bring it to
18:26
Speaker 6: a conclusion quickly, because that's the humane answer. It minimizes
18:32
Speaker 6: damage to you and your adversary to end it fast.
18:39
Speaker 6: So Vulkar used overwhelming force. He had a specific goal
18:43
Speaker 6: get inflation under control. He was willing to use an
18:46
Speaker 6: overwhelming force. He had an exit strategy, don't lower interest
18:51
Speaker 6: rates until inflation is moderating fast. And the consequence was
18:58
Speaker 6: it was brought under control. It took six.
19:00
Speaker 1: Years, still took six years.
19:02
Speaker 6: It was six years from that peak in inflation until
19:05
Speaker 6: inflation briefly dipped below two. That's daunting. Now. Instead of
19:15
Speaker 6: channeling his inner Vulcar, if he was channeling his inner Powell,
19:20
Speaker 6: he would be saying, well, our goal is to bring
19:23
Speaker 6: inflation under control. Our specific plan is to raise interest rates.
19:29
Speaker 6: Crush demand. I mean, inflation is just supply and demand.
19:33
Speaker 6: You have supply chain disruptions. You have people paid to
19:38
Speaker 6: stay home and not work. You have people pretending to
19:42
Speaker 6: work from home. You have a whole host of pressures
19:47
Speaker 6: at work that hold down the supply of goods and services.
19:52
Speaker 6: On the other side, your cost of living goes down
19:55
Speaker 6: if you're working from home, so you have more money
19:57
Speaker 6: to spend. You have stimulus checks being and so demand
20:04
Speaker 6: goes up, supply goes down, bingo inflation. Well, how do
20:09
Speaker 6: you equalize that? The Fed, the central bankers around the
20:13
Speaker 6: world look at this and say, I can't do anything
20:14
Speaker 6: about supply, but I can crush demand. Okay, let's crush demand.
20:20
Speaker 6: I'm reminded of the colonel in Vietnam who was quoted
20:23
Speaker 6: as saying, we had to destroy the village in order
20:25
Speaker 6: to save it. Central banker's answer to inflation is we
20:28
Speaker 6: have to destroy the economy in order to save it
20:30
Speaker 6: from inflation. Does it work. Yes, it's a very painful, which.
20:37
Speaker 1: Of course is why they're not doing it properly. At
20:39
Speaker 1: the moment, we could get rid of inflation in a
20:42
Speaker 1: matter of weeks if okay, maybe not weeks, but you
20:46
Speaker 1: kill it pretty quickly. You could kill it really slammed
20:48
Speaker 1: up interest rates ahead of the rate of CBI by
20:51
Speaker 1: a very significant amount. I mean, no one's ever going
20:53
Speaker 1: to do that, but it's theoretically possible.
20:55
Speaker 6: And the government pushback on doing that is very straightforward.
20:59
Speaker 6: The cost of the government debt. Now that the government
21:02
Speaker 6: debt is in many developed economies triple or quadruple what
21:07
Speaker 6: it was in the inflationary surge of late seventies and
21:10
Speaker 6: early eighties, they're going to say, you're going to have
21:14
Speaker 6: us spend our entire tax receipts on interest.
21:17
Speaker 1: Yeah, do say nothing of the welfare builds that come
21:19
Speaker 1: with defrowing an economy correct temporarily correct.
21:22
Speaker 6: So my view on this is really extremely simple, and
21:27
Speaker 6: that is that the way to bring inflation under control
21:31
Speaker 6: is on the supply side, and that there is zero
21:34
Speaker 6: political will in either party in the US or here
21:38
Speaker 6: to do that. The way to boost supply is to
21:44
Speaker 6: unshackle the private sector and let innovation lead to a
21:48
Speaker 6: surge of productivity. I like to joke that the role
21:51
Speaker 6: of government is to find out what the people are
21:53
Speaker 6: up to and put a stop to it. If the
21:56
Speaker 6: goal is to say, technologically, innovation is all well and good,
22:01
Speaker 6: but these guys are too successful, their companies are too powerful,
22:06
Speaker 6: let's put a stop to it. That's problematical.
22:09
Speaker 1: Well, the role of government to a degree these days
22:12
Speaker 1: is to look for problems, to go out and seek
22:14
Speaker 1: a problem and then try and solve it, to misdiagnose it,
22:17
Speaker 1: and then come up with an incorrect policy to solve it.
22:19
Speaker 6: Which that's I think exactly right.
22:21
Speaker 1: Can't remember who's quoite that it, but it seems to
22:23
Speaker 1: be exactly what what governments do at the moment in
22:25
Speaker 1: the right, in the developed world at least, And that
22:27
Speaker 1: tends to put a bit of a stopera on innovation
22:30
Speaker 1: and creation, right. Creation.
22:32
Speaker 6: Now, one of the things that's just fascinating is inflation
22:37
Speaker 6: is terrible for bonds. It's terrible temporarily for stocks, but
22:43
Speaker 6: once the stocks reprice to a lower level, they do
22:47
Speaker 6: participate in inflation, so you get back to a good
22:50
Speaker 6: real return. The other impact that inflation has is it
22:55
Speaker 6: rewards value? There's a narrative out there that value investing
23:02
Speaker 6: wins in a higher interest rate environment because the long
23:06
Speaker 6: term growth in the growth side of the market is
23:09
Speaker 6: discounted at a higher rate, bringing the net present value
23:13
Speaker 6: of that growth down. And that's less true of value stocks,
23:17
Speaker 6: where the here and now profitability is the dominant factor
23:21
Speaker 6: that resonates. It ignores the fact that growth rates and
23:26
Speaker 6: the discount rate are linked. So they can cancel. But
23:32
Speaker 6: what can't cancel is inflation. If inflation, there is no
23:38
Speaker 6: such thing as elevated and stable inflation.
23:40
Speaker 1: This is the key point, isn't it. When people talk
23:42
Speaker 1: about inflation staying higher and all, A lot of people
23:45
Speaker 1: think themselves that means inflation running it a steady four
23:48
Speaker 1: and a half or five percent for a reason long
23:50
Speaker 1: amount of time, and that would be just fine. It
23:52
Speaker 1: will be fine. We can live with that. It'll road
23:54
Speaker 1: a lot of government debt, it a lot of private debt,
23:57
Speaker 1: bit by bit. And if we could have a steady
23:59
Speaker 1: four percent for a decade, boy, a lot of our
24:01
Speaker 1: problems will be completely solved. But that does not how
24:04
Speaker 1: inflation works.
24:05
Speaker 6: We've had thirty years of inflation steady in the two
24:09
Speaker 6: to two and a half percent range, with an occasional
24:11
Speaker 6: blip up to four or five and an occasional drop
24:14
Speaker 6: to near zero. But eighty percent of the time the
24:19
Speaker 6: rolling twelve month inflation was in the one and a
24:23
Speaker 6: half to three range. So is today's eight percent inflation,
24:29
Speaker 6: let's say, going to be in the seven to nine range. No,
24:34
Speaker 6: it's going to be in the four to fourteen range.
24:38
Speaker 1: As you wished to go back a little bit and
24:39
Speaker 1: talk about why it's what it is that will be
24:42
Speaker 1: the drivers behind inflation from here that stop it from
24:44
Speaker 1: being transient, because you still hear the argument that you know,
24:47
Speaker 1: bit by bit that households are getting rid of the
24:50
Speaker 1: savings that they accumulated during the policies around COVID, and
24:53
Speaker 1: the supply chains are working themselves out, and China's back
24:56
Speaker 1: on track, et cetera. So you still hear the transient argument.
25:00
Speaker 1: So we should just talk briefly about what the dynamics
25:03
Speaker 1: are that prevent it from being transient.
25:06
Speaker 6: Yeah, and by the way, a key point here is
25:09
Speaker 6: not prevented from being transient, but make that improbable it
25:15
Speaker 6: could happen. Think about the causes of inflation, demand stimulus
25:22
Speaker 6: from people having more pocket money, from work from home,
25:25
Speaker 6: and from massive stimulus air drops of cash into people's accounts.
25:30
Speaker 6: Is that going to persist into the future. Well, hybrid
25:35
Speaker 6: work is now the norm.
25:37
Speaker 1: Well, there's a lot of employers trying to change it
25:39
Speaker 1: back to how it was.
25:40
Speaker 6: The millennials will resist that fiercely. In the US polls
25:45
Speaker 6: suggests that required to work five days a week in
25:49
Speaker 6: the office would for forty percent of millennials cause them
25:52
Speaker 6: to quit. That's interesting, and it's particularly true in certain
25:57
Speaker 6: segments of the skill sets that don't require office interactions.
26:02
Speaker 6: It programming, marketing, marketing. People travel all the time anyway,
26:08
Speaker 6: so what's the big deal? And so work from the
26:11
Speaker 6: office tends to be resisted pretty fiercely. So part of
26:16
Speaker 6: that added demand remains, and that's good. That's good. Demand
26:22
Speaker 6: is a good thing, not a bad thing. Supply chain
26:26
Speaker 6: disruptions deglobalization is with us for a good long time.
26:32
Speaker 6: It's not going to reverse course fast. The China saber
26:36
Speaker 6: rattling with regard to Taiwan means that even if the
26:42
Speaker 6: China supply chains get fully back to normal, there will
26:45
Speaker 6: be resistance to relying as heavily on them as in
26:48
Speaker 6: the past, and as countries shift their production to be
26:52
Speaker 6: more domestic and less based on the classic economic rule
26:58
Speaker 6: of comparative advantage, where one country can produce x better
27:04
Speaker 6: than another country, that that is not coming back fully.
27:09
Speaker 6: So that'll be the with us for a long time.
27:12
Speaker 6: So you're going to have work from home diminish but remain.
27:16
Speaker 6: You're going to have people paid to be home and
27:20
Speaker 6: not work diminish but remain. You're going to have supply
27:25
Speaker 6: chain disruptions diminish but not go away. You're going to
27:30
Speaker 6: have wage pressures because there is a mismatch between those
27:38
Speaker 6: willing looking for work and work looking for employees. That
27:43
Speaker 6: mismatch is not likely to disappear anytime soon. So none
27:48
Speaker 6: of the core causes of the supply demand mismatch and
27:52
Speaker 6: of the inflation are going away.
27:54
Speaker 1: They're all likely to make It seems like a particularly
27:57
Speaker 1: big deal to us. And there used to be a
28:00
Speaker 1: view that union power led to inflation, but of course
28:05
Speaker 1: it's the other way around. Inflation leads to union power,
28:08
Speaker 1: and once you get right.
28:10
Speaker 6: That's a really important point.
28:11
Speaker 1: Really, I think very misunderd so misunderstood. You know, the
28:14
Speaker 1: unions for the last However, many decades in the UK
28:17
Speaker 1: have been very weak because there's been no need for
28:19
Speaker 1: them not to be and then demand from their members
28:21
Speaker 1: because when inflation is running it one or two percent,
28:23
Speaker 1: most people it's nothing. It doesn't mean anything to them,
28:26
Speaker 1: so there's no particular need to demand pay rises. But
28:29
Speaker 1: inflation has now been cripplingly high for people in the
28:33
Speaker 1: UK and elsewhere for so long that everyone now understands
28:36
Speaker 1: inflation and how it works and what it does to
28:38
Speaker 1: their purchasing power. And even if inflation were to go
28:41
Speaker 1: back to two or three percent next year, even if
28:44
Speaker 1: it were, which it weren't, but if it were to,
28:46
Speaker 1: I still think you'd see people saying, well, hang on,
28:48
Speaker 1: I take care. I now understand that my real purchasing
28:51
Speaker 1: power has been destroyed over a twenty year period, not
28:53
Speaker 1: just a one year period, and I'd like that back.
28:55
Speaker 1: So the echo of labor power this year would I
28:59
Speaker 1: think continue for several years anyway, And we did have
29:03
Speaker 1: our bank Fngland governor if they did say that, he
29:05
Speaker 1: now sees that we are in a wage price viral. So,
29:07
Speaker 1: like like all, central bank is a little behind the
29:09
Speaker 1: rest of us, but we get there in the end.
29:11
Speaker 6: Now, one thing that I think is quite hilarious is
29:15
Speaker 6: that we all wait with baited breath for the latest
29:18
Speaker 6: prognostications of our central bankers about what the expectation is
29:22
Speaker 6: for inflation, for unemployment, for GDP growth. A vast proportion
29:30
Speaker 6: of United States economics PhDs work for the FAD. Yes,
29:37
Speaker 6: they are all cut from a similar mold. They're all Neocainsians.
29:40
Speaker 6: They range from mild Neokainsian to extreme MMT. And they
29:47
Speaker 6: say that's diversity of views. No, no, it's not. And
29:52
Speaker 6: there's a fellow named George Box who was co developer
29:57
Speaker 6: of the Box Jenkins models, who famously said all models
30:02
Speaker 6: are wrong, some models are useful. I love that, Don't
30:07
Speaker 6: that great?
30:07
Speaker 1: True? If any people have said that at the beginning
30:09
Speaker 1: of the pandemic, right.
30:12
Speaker 6: Right, It's true in medicine, just as it's true in economics.
30:16
Speaker 6: And we have economists who say, the model says this
30:21
Speaker 6: will happen. The model says the economy will do this
30:25
Speaker 6: if we do that, And instead of saying, how can
30:29
Speaker 6: our models work better by mimicking the way the economy behaves,
30:35
Speaker 6: they argue with the economy and say the economy is wrong.
30:38
Speaker 6: It should do this, So that's a good way to
30:41
Speaker 6: get models that are not useful. The implication of all
30:46
Speaker 6: of this is that the forecasting ability of us FED,
30:51
Speaker 6: for instance, is slightly worse than useless, worse than useless,
30:59
Speaker 6: meaning that they're or directional forecasts are worse than the
31:04
Speaker 6: than the capital markets, and worse than a coin toss.
31:09
Speaker 6: Why do we care what they have to say?
31:11
Speaker 1: Why do we keep listening? It's a really good question,
31:13
Speaker 1: but we do. We do keep listening. We put it
31:15
Speaker 1: on the front of our newspapers. Yes, every time one
31:17
Speaker 1: of them comes out and speaks on the front of
31:19
Speaker 1: the newspapers, everybody's listening, and everyone's using those words to
31:22
Speaker 1: predict their own futures, even though we know that they're
31:25
Speaker 1: almost always wrong.
31:27
Speaker 6: Yeah, and there's one good reason to listen to them,
31:30
Speaker 6: and that's that their forecasts and their prognostications are driving
31:33
Speaker 6: their decisions. So if you know that the consensus view
31:41
Speaker 6: on inflation is it's going to dissipate reasonably quickly, and
31:45
Speaker 6: if the FED says we've got this, we're getting it
31:48
Speaker 6: under control, having some part of your portfolio that's betting,
31:53
Speaker 6: well maybe not is a useful response. So it is
31:57
Speaker 6: useful to know what they're projecting, but not from the
32:00
Speaker 6: vantage point of believing it, Which brings me to what
32:04
Speaker 6: do you do in this environment?
32:06
Speaker 1: Yeah, so when we say this environment, we're talking about
32:08
Speaker 1: the environment we would expect inflation to be volatile between
32:11
Speaker 1: you know, I don't know, say four and ten percent.
32:14
Speaker 6: Yeah, where you're expecting inflation to be elevated and volatile
32:17
Speaker 6: for a decent span of times every fourteen years. Apparently
32:21
Speaker 6: that's the history. That's I do not want to be
32:26
Speaker 6: quoted as saying I'm expecting fourteen years of this. I'm
32:30
Speaker 6: expecting longer.
32:31
Speaker 1: We'll put that in the headline good good.
32:34
Speaker 6: I'm saying, let's expect inflation to have higher odds of
32:40
Speaker 6: being higher and longer than most people think. It could
32:44
Speaker 6: settle back down, but it very likely won't. And in
32:50
Speaker 6: that environment, bonds are troublesome. Stocks are troublesome until they're cheap.
32:56
Speaker 6: In the UK they're cheap, So in the UK I'd
32:59
Speaker 6: be fine with stock ownership. In the US, I wouldn't.
33:01
Speaker 1: Well, you did write and it didn't you go trade
33:04
Speaker 1: of the decade? Yes, that UK, John, and I let that.
33:08
Speaker 6: Oh, I got so much pushback on that from britt
33:11
Speaker 6: did you from BRIT's saying this guy's an idiot?
33:15
Speaker 1: Interesting? You know, foreigner investors in that buys at the moment,
33:18
Speaker 1: domestic domestic investors still as sell us. Where is it
33:22
Speaker 1: demivable law? Don't we? Well?
33:25
Speaker 6: Everybody is when performance has been disappointing, Yes, everyone. You
33:29
Speaker 6: can't have a bargain without having created the bargain by
33:32
Speaker 6: inflicting pain and losses. Yes, and yet human nature says,
33:36
Speaker 6: you want me to buy more of this well.
33:39
Speaker 1: When Netflix repilated? Aren't we humans?
33:41
Speaker 5: Yeah?
33:41
Speaker 1: Yeah, so tell me your case.
33:44
Speaker 6: I think the way to invest in this environment is
33:47
Speaker 6: very straightforward. Mainstream stocks and bonds represent vulnerable markets in
33:54
Speaker 6: a period of rising inflation with a carve out, and
33:58
Speaker 6: that carve out is markets that are cheap are fine.
34:03
Speaker 6: Inflation helps value partly because inflation pushes up that discount rate,
34:09
Speaker 6: and the important thing is the real discount rate. It
34:12
Speaker 6: pushes the real discount rate up, and partly because a
34:18
Speaker 6: period of heightened uncertainty is a time when investors want
34:22
Speaker 6: the margin of safety associated with having a good base
34:29
Speaker 6: of profits, of book value, of sales, of dividends, and buybacks.
34:37
Speaker 6: For broad measures of the economic footprint, of a business.
34:41
Speaker 6: For every hundred pounds or dollars or euros they invest,
34:45
Speaker 6: they want a decent base of profits, sales, etc. And
34:52
Speaker 6: that's value. The value side gives you that. The growth side,
34:55
Speaker 6: you're paying for hopes and dreams which are nice, Which
34:59
Speaker 6: are nice, and hopes and dreams have certainly prevailed this
35:02
Speaker 6: year to day on the back of chat, GPT and
35:06
Speaker 6: the narratives about AI. The thing about narratives is the
35:11
Speaker 6: good news is they're usually at least partly true. The
35:15
Speaker 6: bad news is they're already in the price.
35:17
Speaker 1: Yeah, it's not that they don't have value, it's just
35:19
Speaker 1: that it's already they are predictive.
35:22
Speaker 6: They aren't predictive value. And that's the thing that people
35:25
Speaker 6: just have trouble getting a handle on with narratives. Whatever's cheap,
35:29
Speaker 6: there's always well what about this? What about that? Yeah,
35:32
Speaker 6: it's in the price, that's why it's cheap.
35:34
Speaker 1: So when you look at the UK market, how are
35:36
Speaker 1: you defining cheap?
35:38
Speaker 6: I love the Shiller pe ratio price relative to ten
35:41
Speaker 6: year average earnings. It's a measure of how much profit
35:46
Speaker 6: the company is likely capable of delivering on a long
35:50
Speaker 6: term basis for every one hundred pounds you invest, and
35:53
Speaker 6: the Shiller Pe ratio for the UK last I checked
35:56
Speaker 6: was about fourteen times. For the US, it's about twice that.
36:01
Speaker 6: The US doesn't have a margin for safety, mostly because
36:04
Speaker 6: of the fang stocks. The value stocks in the US
36:06
Speaker 6: are about sixteen eighteen times, but in the UK there's
36:11
Speaker 6: a margin of safety. That's great. The other thing I
36:13
Speaker 6: would say is diversifying away from the mainstream stocks and bonds.
36:21
Speaker 6: Out of mainstream stocks and bonds, emerging market stocks and
36:24
Speaker 6: bonds interesting. Merging markets bonds yield more than US junk
36:28
Speaker 6: bonds do. Now, that's interesting.
36:31
Speaker 1: And emerging market equities are looking briefly cheap on almost
36:34
Speaker 1: all measures, right, they're about it so reasonably as opposed
36:37
Speaker 1: to vary.
36:37
Speaker 6: They're about the same as the UK. That's reasonably cheap,
36:41
Speaker 6: and emerging markets value is very cheap. Merging markets values
36:46
Speaker 6: trading at a Shiller Pe ratio a little under ten.
36:49
Speaker 6: And Fundamental Index, which we invented eighteen years ago, which
36:54
Speaker 6: has a stark value tilt and increases your allocation as
36:58
Speaker 6: a stock gets cheaper instead of as stock gets more expensive.
37:03
Speaker 6: Fundamental Index on emerging markets is currently priced at eight
37:06
Speaker 6: times earnings and has a dividend yield of just under.
37:10
Speaker 1: Five Okay, I mean that's that does sound like that's
37:12
Speaker 1: pretty cool.
37:13
Speaker 6: Yeah, But it means shedding your desire to have results
37:19
Speaker 6: similar to your neighbors, because if it zags when your
37:25
Speaker 6: neighbor's portfolio zigs up, your patience will be tested. So
37:29
Speaker 6: don't don't put more in it than you're comfortable.
37:32
Speaker 1: Oh, you don't look at your portfolio very often.
37:34
Speaker 6: Another option, that's a beautiful option. I do that with
37:39
Speaker 6: my own personal portfolio client portfolios. I don't have the
37:44
Speaker 6: luxury of just saying call me in three years and
37:47
Speaker 6: let me know how it's going.
37:48
Speaker 1: Yeah, yeah, what about Japan? Where does that come?
37:51
Speaker 6: When your valuations actually relatively cheap?
37:53
Speaker 1: And it's been quite interesting, right, John and I we've
37:55
Speaker 1: been long term bulls of Japan, possibly rather too long
37:59
Speaker 1: at this point, but you know, finally we seem to
38:02
Speaker 1: be getting some momentum there and we're at thirty o
38:04
Speaker 1: DA highs and more jun calls are oural friend Jonathan
38:08
Speaker 1: Allen used to call the iron coffin lid on on
38:10
Speaker 1: top of Japanese equities appears who've been lifted, and they
38:14
Speaker 1: do look readily cheap.
38:15
Speaker 6: But they're about eighteen times that's not bad. They do
38:19
Speaker 6: have a demographic challenge. The population is shrinking, the working
38:23
Speaker 6: population is shrinking.
38:24
Speaker 1: Faster, but that just means they're a little ahead of
38:26
Speaker 1: the rest of US. So they're getting on top that.
38:29
Speaker 6: Right well in US are UK is in better shape
38:33
Speaker 6: demographically than cotton el Europe by a big margin, and
38:37
Speaker 6: US is better than most of the developed world by
38:39
Speaker 6: a big margin. In the case of both, immigration is
38:44
Speaker 6: a big part of that, and in the case of
38:47
Speaker 6: the US, the fertility rates have not fallen to the
38:51
Speaker 6: extent they have in much of the developed world. China
38:55
Speaker 6: has the demographic wall of China coming big time.
39:00
Speaker 1: And well, they always said about China, didn't they old
39:03
Speaker 1: before rich?
39:04
Speaker 6: Right, So, in twenty twenty, the ratio of working age
39:08
Speaker 6: Chinese to senior citizen Chinese was the same as it
39:13
Speaker 6: was in the US in nineteen fifty, beautiful benign circumstance
39:18
Speaker 6: for rapid economic growth. The view was get rid of
39:23
Speaker 6: the one child policy and women will start having more
39:27
Speaker 6: kids too late. It's too late. Besides which, the invention
39:32
Speaker 6: of birth control in nineteen sixty means women can choose
39:36
Speaker 6: if women split equally between those who want no kids,
39:40
Speaker 6: those who want one kid, and those who want two
39:42
Speaker 6: or more kids. The fertility is going to be in
39:44
Speaker 6: the one one and a half range. That's where it stuck,
39:48
Speaker 6: and in China it fell during the pandemic to about
39:53
Speaker 6: one point two. That demographic challenge means that they go
39:57
Speaker 6: from being where we were in ninety teen fifty too,
40:02
Speaker 6: by the year twenty forty five, they'll have a higher
40:05
Speaker 6: support ratio than the US, and by twenty sixty higher
40:09
Speaker 6: than Europe. As bad as it is, it will be
40:10
Speaker 6: in Europe by then. So I view China's saber rattling
40:14
Speaker 6: as a very big geopolitical concern right now. If we
40:18
Speaker 6: can get to twenty forty without them acting on the
40:21
Speaker 6: saber rattling, they won't be able to raise an army
40:24
Speaker 6: big enough to matter.
40:26
Speaker 1: But I did see you're reminding me of a piece
40:28
Speaker 1: of research I saw a couple of years ago that
40:30
Speaker 1: drew the most fascinating correlation perfly al, which when you
40:34
Speaker 1: think about it, between wars and the percentage of a
40:39
Speaker 1: country that is male between sixteen and twenty nine. I
40:44
Speaker 1: as you must have seen that bit of research somewhere.
40:48
Speaker 6: If we had time, I was going to go to
40:49
Speaker 6: almost exactly those statistics. Yeah, testosterone filled young men, especially
40:57
Speaker 6: in a country where there's not enough women, eighty million
41:00
Speaker 6: missing women of China. Hey yea yai.
41:04
Speaker 1: Then we can get get through the next few decades
41:07
Speaker 1: and we'll be at the other end of that bump, right.
41:10
Speaker 6: And so I view China as the biggest geopolitical source
41:16
Speaker 6: of a risk of instability in the world today. And
41:21
Speaker 6: I view them as I don't know, is this broadcast
41:25
Speaker 6: in China a paper tiger years to take the risk?
41:30
Speaker 6: I would view them as a paper tiger twenty years
41:32
Speaker 6: from now.
41:32
Speaker 1: Okay, So you know Chinese equities right now then not
41:36
Speaker 1: so much.
41:36
Speaker 6: They're actually reasonably fully priced by emerging market standards. The
41:40
Speaker 6: reason that emerging markets value is so astonishingly cheap is
41:46
Speaker 6: that emerging market's growth is dominated by the Chinese version
41:49
Speaker 6: of the Fang stocks, the batstocks by Dula, Baba and
41:52
Speaker 6: ten Cent. Those three stocks comprised fifteen percent of the
41:56
Speaker 6: emerging markets at their peak, three stocks, and today they
42:01
Speaker 6: comprise about eight or ten percent. Three stocks. They're all
42:05
Speaker 6: on the growth side. So what you're left with is
42:07
Speaker 6: value is very, very cheap and is mostly non China.
42:11
Speaker 1: Yeah, okay, right now we're doing well. Yeah, we're getting
42:14
Speaker 1: a lot of interesting things for listeners to go away.
42:16
Speaker 1: I look at we've told them that the UK is
42:18
Speaker 1: traded the decade. I know you don't believe us, but
42:20
Speaker 1: I think it could be true.
42:22
Speaker 6: Well, so far, so good. Yeah, I know, I know
42:25
Speaker 6: relative to the rest of the world, UK stocks have
42:29
Speaker 6: done beautifully.
42:30
Speaker 1: Yeah. Yeah. What about the commodity sector? Commodity so we
42:33
Speaker 1: don't want anyone rushing off directly into commodities. We almost
42:36
Speaker 1: made that mistake in our last podcast when we talked
42:38
Speaker 1: about investigating commodities and suddenly had to remind everybody we
42:41
Speaker 1: didn't mean actual commodities. We mentor commodity acrities.
42:45
Speaker 6: I think if people buy live cattle for their backyard,
42:52
Speaker 6: they can get rid of the lawnmower and they have
42:54
Speaker 6: a commodities investment. But more seriously, but you're not advising
42:59
Speaker 6: that more seriously, commodities are relatively fully priced right now.
43:06
Speaker 6: Commodities should fall in real prices on a long term basis,
43:12
Speaker 6: and they do one to two percent a year because
43:15
Speaker 6: of rising productivity. It gets back to the issue of inflation.
43:20
Speaker 6: The answer to inflation is rising productivity.
43:23
Speaker 1: Although people do say people do say, but in this
43:26
Speaker 1: market at the moment, in the quantities market, particularly metals
43:29
Speaker 1: mining and fossil fuels, rising prices are not necessarily the
43:32
Speaker 1: cure for rising prices as they have been in the past,
43:35
Speaker 1: because the environmental concerns mean that it's very hard to
43:38
Speaker 1: get permissions for the expiration and production you might have
43:41
Speaker 1: done in the past, or you know, digging in new
43:43
Speaker 1: mind somewhere is not as easy as going on and
43:45
Speaker 1: digging in new mine. So the dynamic has changed, so
43:48
Speaker 1: you could argue that that one to two percent for
43:51
Speaker 1: the year is not necessarily in play like it was.
43:54
Speaker 6: It depends in part on the country of mining for
43:57
Speaker 6: copper in Chile under a hard left new regime is
44:03
Speaker 6: going to be difficult. Mining for earth metals and other
44:09
Speaker 6: exotic metals in China is not a problem. So one
44:14
Speaker 6: of the things that I think would be useful is
44:17
Speaker 6: to do cost benefit analysis on do we want to
44:21
Speaker 6: restrict this or do we want to lightly discourage it.
44:25
Speaker 1: Yeah, and that makes a difference for the long term.
44:29
Speaker 1: I'm still not kind of picking up whether you're saying
44:31
Speaker 1: it a good idea to be in the commodity sector
44:33
Speaker 1: or not.
44:34
Speaker 6: I think commodities are terrific long term play, just not
44:38
Speaker 6: so much right now. And it's a terrific long term
44:41
Speaker 6: play from two perspectives. Firstly, you're going to earn the collateral,
44:46
Speaker 6: so elevated interest rates, Okay, you're earning that. That's your
44:51
Speaker 6: protection against current inflation. You also get protection against inflation
44:56
Speaker 6: shocks because commodities magnify inflation or does inflation shocks by
45:01
Speaker 6: about five to ten to one. In the US, inflation
45:04
Speaker 6: expectations on a ten year basis are two and a quarter.
45:07
Speaker 6: Why do I say that tenure bond is at three
45:09
Speaker 6: and a half ten your linkers are at one and
45:13
Speaker 6: a quarter. The difference is too and a quarter. So
45:15
Speaker 6: if inflation is two and a quarter, and then both
45:19
Speaker 6: bonds have the same return, all right. So that's all
45:22
Speaker 6: well and good. But our work suggests that a better
45:26
Speaker 6: estimate of inflation on a ten year basis is at
45:28
Speaker 6: about three and a half because inflation dissipates slowly, and
45:32
Speaker 6: if we're right, then that represents a positive inflation shock,
45:37
Speaker 6: and commodities magnet fly inflation shocks by about a percent.
45:43
Speaker 6: So that's one and a quarter percent above that would
45:46
Speaker 6: mean that when inflation expectations rise to three and a
45:52
Speaker 6: half that commodities will have risen about ten twelve percent.
45:56
Speaker 6: So that's a nice expected return.
45:58
Speaker 1: Okay, two quick questions. It's like the quickfire round.
46:03
Speaker 6: Let's go for it.
46:04
Speaker 1: If if inflation did tend to be transient, it was
46:08
Speaker 1: down at two percent by next year, if that was
46:10
Speaker 1: the scenario we expected, how would we invest? Now?
46:14
Speaker 6: This is why I think you want to think of
46:17
Speaker 6: things probabilistically rather than in terms of black and white.
46:21
Speaker 6: This is why I resist the idea of Arnat says
46:25
Speaker 6: inflation will be higher and longer. No, inflation is likely
46:31
Speaker 6: to be higher and longer than most people expect. So
46:34
Speaker 6: you wind up with a diversified portfolio with more than
46:38
Speaker 6: your historic.
46:39
Speaker 1: Norms in the more probable area.
46:41
Speaker 6: In diversifications away from mainstream stocks and bonds, and in value.
46:46
Speaker 6: And the beauty is right now, value is very cheap.
46:50
Speaker 6: It's in the cheapest quintile relative to growth in history.
46:55
Speaker 6: In the summer of twenty twenty, it was in the
46:58
Speaker 6: cheapest percentile in history, and you could not persuade anyone
47:03
Speaker 6: to buy value. Well, it has snapped back beautifully, but
47:08
Speaker 6: there's still plenty of juice left in that orange. So
47:10
Speaker 6: if value is cheap, that's a reason to overweight it.
47:14
Speaker 6: If you think inflation is likely to surprise to the upside,
47:19
Speaker 6: that's a reason to overweight value. So today, like I said,
47:23
Speaker 6: I think the twenty twenties will be a decade for
47:26
Speaker 6: diverse fires outside of mainstream stocks and bonds, and for
47:29
Speaker 6: value in the stock market.
47:30
Speaker 1: Okay, now the final question, no probabilities about it. No,
47:35
Speaker 1: maybe it's no diversifications. You've got to come down on
47:37
Speaker 1: one side or the other. But I promise you I
47:39
Speaker 1: won't make it the headline. Okay, you can make it
47:42
Speaker 1: the headline bitcoin or gold.
47:46
Speaker 6: Gold.
47:47
Speaker 1: Perfect. That's my favorite answer because then I don't have
47:50
Speaker 1: to argue with you.
47:51
Speaker 6: Yeah.
47:52
Speaker 1: Well, thank you so much for joining us Stox hugueally
47:54
Speaker 1: appreciate it. We'll talk again soon and see how it
47:56
Speaker 1: panned out.
47:57
Speaker 6: This was great fun.
48:05
Speaker 1: Thank you for listening to this week's Marin Talks Money.
48:07
Speaker 1: We will be back next week. In the meantime. If
48:09
Speaker 1: you like us, show, rate, review, and subscribe wherever you
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Speaker 1: we do have one bad review. Someone who does not
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Speaker 1: try and make it positive. We prefer those. This episode
48:24
Speaker 1: was hosted by me Maren Sunset Web. It was produced
48:27
Speaker 1: by Someasadi Moses and and Mohammed Faruk. Additional editing by
48:31
Speaker 1: Blake Maple's special thanks of course to Rob Arnott and
48:33
Speaker 1: to John Steppeck and of course our weekly reminder to
48:36
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48:40
Speaker 1: The link as ever is in the show notes.