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Embracing the Bond Market: Masters in Business with Robin Wigglesworth · Masters in Business

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  Speaker 1: Bloomberg Audio Studios. Podcasts.
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  Speaker 2: Radio. News. I'm Barry Ritholtz. You're listening to Masters in
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  Speaker 2: Business on Bloomberg Radio. My extra special guest returning to us,
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  Speaker 2: Robin Wigglesworth, editor of FT Alphaville, one of my favorite
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  Speaker 2: sites on the web. It's the Financial Times finance blog,
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  Speaker 2: which he runs from Oslo, Norway, with a team of
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  Speaker 2: writers both in London and New York. He co-hosts The
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  Speaker 2: Story of Money, a financial history pod, and writes the
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  Speaker 2: newsletter By the Dip. His new book, A Fabulous Debt,
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  Speaker 2: the epic story of how bonds built the modern world,
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  Speaker 2: is out. It frames bonds as the world's largest, most
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  Speaker 2: powerful financial engine. I'm halfway through it, and I've been
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  Speaker 2: loving it. The conversation was fascinating. I think you'll really
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  Speaker 2: enjoy it. With no further ado... My interview of Robin Wigglesworth. Robin,
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  Speaker 2: welcome to Bloomberg.
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  Speaker 1: Well, it's a massive honor to be here. So thanks
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  Speaker 1: for that, Barry.
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  Speaker 2: So before we talk about the book, I want to
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  Speaker 2: spend a little time discussing your very interesting background. You
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  Speaker 2: get a bachelor's in journalism and contemporary history from City University,
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  Speaker 2: and then a master's in history of international relations from
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  Speaker 2: the London School of Economics, focused on political Islam. Was
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  Speaker 2: the original Korea plan always journalism?
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  Speaker 1: No, I always dreamt of being a physicist, maybe specifically
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  Speaker 1: an astrophysicist.
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  Speaker 2: There is zero physics in international relations. I guess that's really...
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  Speaker 2: intergalactic relations.
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  Speaker 1: Well, weirdly, you know, when you try to self-analyze, it
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  Speaker 1: always gets a little bit weird, but I like figuring
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  Speaker 1: out how the world worked, and I like physics. I
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  Speaker 1: loved understanding and learning about the galaxies, and I realized
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  Speaker 1: I was pretty good at maths and physics up until
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  Speaker 1: a point I realized I would be nothing other than
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  Speaker 1: a mediocre physicist.
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  Speaker 2: It's amazing. You can be great at the secondary level,
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  Speaker 2: and suddenly in college, oh, those guys.
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  Speaker 1: Are really good. Yeah, those guys are really good.
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  Speaker 2: I had that same experience, yeah.
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  Speaker 1: And it's fine. It's kind of knowing your limitations, what
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  Speaker 1: you're good at, But journalism in many ways I've kind
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  Speaker 1: of come to see is similar in that you're just
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  Speaker 1: figuring out the world from a different perspective. And financial
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  Speaker 1: journalism has at least a little bit of math, albeit
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  Speaker 1: not quite at the level of PhDs.
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  Speaker 2: So am I correct in saying your first gig out
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  Speaker 2: of LSE was Bloomberg News? Is that right?
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  Speaker 1: No, I had one intermediate step. I was a financial
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  Speaker 1: journalist for a small trade mag in Dubai. They just
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  Speaker 1: ingest journalists and then spit them out if they're bad.
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  Speaker 1: And I didn't know anything, but it was kind of
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  Speaker 1: this first awe inspiring moment where like, oh my God,
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  Speaker 1: I get paid to ask smart people about stuff. And
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  Speaker 1: it was so fun. I knew nothing. And luckily I
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  Speaker 1: didn't embarrass myself. So they kept me around and, but
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  Speaker 1: I quickly moved to Bloomberg because I knew that was
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  Speaker 1: a great place to learn.
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  Speaker 2: So the middle East and Dubai, um, is a theme
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  Speaker 2: that comes up. You're the Gulf correspondent in Abu Dhabi
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  Speaker 2: covering the Arab spring from both Bahrain and Libya. How
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  Speaker 2: do you go from that to covering finance?
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  Speaker 1: Well, so the first job had been covering bonds, Islamic bonds, actually, Sukuk.
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  Speaker 1: And I worked at Bloomberg as an economics and politics reporter,
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  Speaker 1: but also kind of you get roped into everything. Bloomberg's
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  Speaker 1: a great place if you want to spread your wings.
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  Speaker 1: So I covered like FX and rates a lot as well.
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  Speaker 1: So the FT was a Middle East correspondent, a Gulf correspondent,
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  Speaker 1: but you kind of do a bit of everything then.
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  Speaker 1: And it was a lot of Dubai going bankrupt. This
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  Speaker 1: was 2008. Dubai was going, you know, having a hard time.
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  Speaker 1: It was fascinating. It was also covering things like labor
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  Speaker 1: movements in Bahrain and Saudi Arabia. But when the Arab
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  Speaker 1: Spring happened, I did get to cosplay as a war
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  Speaker 1: correspondent for a bit. And it was a wild time.
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  Speaker 1: I'm actually interviewed for a financial journalist job at the
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  Speaker 1: FT back in London from the army barracks of the
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  Speaker 1: rebel government in Benghazi.
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  Speaker 2: So how do you end up covering capital markets in
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  Speaker 2: New York for the Financial Times?
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  Speaker 1: Well, I went to London. I did get that job
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  Speaker 1: despite the slightly bad backdrop of Benghazi army barracks. I
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  Speaker 1: got the job covering capital markets for the FT in Europe.
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  Speaker 1: And it was the Eurozone crisis. And it was an
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  Speaker 1: incredible time. You learn, as you know, you learn so
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  Speaker 1: much more so much quickly in a crisis. So it's
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  Speaker 1: terrible for the world, great for us. And after a
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  Speaker 1: few years, I got moved to New York to head
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  Speaker 1: up the markets team there. And that's kind of, for me,
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  Speaker 1: that's the... That's the Premier League or the World Series.
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  Speaker 1: You know, it's New York finance. It doesn't really get better.
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  Speaker 2: You know, I love quoting Robert Duvall in Apocalypse Now
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  Speaker 2: during the financial crisis to some young analysts. There's a line, someday, son,
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  Speaker 2: this war is going to end. He says, wistfully, and
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  Speaker 2: in the middle of a crisis, there's very much that experience. Like,
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  Speaker 2: you better appreciate this because these only come along every
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  Speaker 2: twenty years or so and they're amazing learning experiences. You
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  Speaker 2: experience that repeatedly, first with the Arab Spring, then with
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  Speaker 2: the great financial crisis. What was the next big economic
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  Speaker 2: crisis that really affected how you saw the world?
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  Speaker 1: I say COVID is the obvious one. There are lots
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  Speaker 1: of little mini things in the, in the, I remember
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  Speaker 1: all the brouhaha about the first time the Fed was
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  Speaker 1: going to raise interest rates. That was a big deal,
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  Speaker 1: but actually ended up being a bit of a nothing burger.
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  Speaker 1: But COVID was, was, it was incredible just on the personal,
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  Speaker 1: but also professional level. I remember talking to one of
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  Speaker 1: our best young promising journalists who was, she was feeling
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  Speaker 1: quite stressed out at the time. And I said, look,
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  Speaker 1: it's tough. It's difficult, but this will make your career.
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  Speaker 1: This is, if you, If you just throw yourself into it,
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  Speaker 1: you will grow by leaps and bounds over the next days, weeks, months.
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  Speaker 1: We don't know how long this is going, but just
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  Speaker 1: try to enjoy it. Get enough sleep and just try
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  Speaker 1: to almost revel in it. Try to turn around. This
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  Speaker 1: isn't just stress. It's something that will shape you. And
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  Speaker 1: it shaped me as well. It was incredibly exciting.
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  Speaker 2: So your last book was about index funds. This book
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  Speaker 2: is about bonds and debt. which occasionally blow up and
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  Speaker 2: cause a crisis. I'm curious, how fundamental was the Dubai
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  Speaker 2: debt crisis you mentioned to how you frame the world
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  Speaker 2: of debt and credit and how you think about the
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  Speaker 2: bond market, which you've described as the most powerful financial
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  Speaker 2: engine in the world?
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  Speaker 1: That's a great question, actually. I'd always thought my first
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  Speaker 1: job was covering these Islamic bonds and I had to
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  Speaker 1: learn about the bond market that way. And they're really
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  Speaker 1: quite funky. They're kind of No interest rates, right? No
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  Speaker 1: interest rates in theory, but kind of it walks, talks
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  Speaker 1: and quacks like a fixed income bond.
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  Speaker 2: You're buying it at a discount. So it's like a
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  Speaker 2: zero coupon bond. So there is interest.
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  Speaker 1: Yeah. They do lease backs basically like that. I'll lease
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  Speaker 1: you buy a house. The bank will buy it for
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  Speaker 1: you and lease it for you at fixed payments for
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  Speaker 1: the next 20 years, for example.
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  Speaker 2: And then you own it. Yeah.
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  Speaker 1: And then they own it. And then you own it.
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  Speaker 1: Then for Bloomberg, I covered most of the rate space.
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  Speaker 1: So it was quite exciting because Iceland was part of it.
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  Speaker 1: And you remember Iceland really blew up. Uh, during the
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  Speaker 1: financial crisis.
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  Speaker 2: Oh, it was completely wiped out.
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  Speaker 1: Yeah, it was, it was. And again, it's terrible because obviously,
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  Speaker 1: you know, terrible people.
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  Speaker 2: In terrible time, but great, but fantastic.
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  Speaker 1: So interesting. But yes, Dubai, I think was the first
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  Speaker 1: time I really covered kind of distressed death and realized
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  Speaker 1: that the full panoply of crazy stuff that can happen
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  Speaker 1: with fixed income and, and how much it pays to
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  Speaker 1: read the bond docs. lots of investors don't really read
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  Speaker 1: the documentation, as we've seen again and again. There was
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  Speaker 1: one Islamic bond issued by Dubai. It was backed by
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  Speaker 1: land that was actually supposed to be reclaimed from the sea,
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  Speaker 1: but it literally was just the seabed. And good luck
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  Speaker 1: trying to seize that if you're accredited, right?
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  Speaker 2: It's underwater, both literally and figuratively.
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  Speaker 1: So it was a wild time, and the characters in
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  Speaker 1: that world, they were just very different, the credit investors,
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  Speaker 1: the special situations people, from the rates people I'd kind
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  Speaker 1: of mostly known. So it was fascinating. So it definitely
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  Speaker 1: kind of deepened my love affair with fixed income.
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  Speaker 2: And we're going to talk more about the book, but
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  Speaker 2: I love all the examples you pull and these great
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  Speaker 2: narrative tales throughout history to illustrate. I found the book
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  Speaker 2: really fascinating. You must have studied, I want to say centuries,
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  Speaker 2: but maybe it's millennia, maybe it's a thousand years ago.
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  Speaker 2: of of government borrowing of bond issuance of debt of
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  Speaker 2: credit uh.
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  Speaker 2: Why do we see the same patterns happen over and
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  Speaker 2: over again there there's credit sometimes you have people creating
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  Speaker 2: frauds sometimes there's a mania like who would have imagined
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  Speaker 2: wheat railroad bonds and why is that sexy and yet
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  Speaker 2: we see the same things over and over and over
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  Speaker 2: again is it just This is our nature. You have
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  Speaker 2: to accept it.
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  Speaker 1: I think that's exactly it. I mean, there's a famous quote.
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  Speaker 1: I never remember which British philosopher said it, but from
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  Speaker 1: the crooked timber of mankind, never a straight thing was made. And,
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  Speaker 1: you know, the technology changes, society changes, human nature doesn't
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  Speaker 1: change that much. And we can see the patterns again
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  Speaker 1: and again. And, you know, that's great for financial journalists
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  Speaker 1: like us, but... less bad for society, but, you know,
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  Speaker 1: broadly speaking, that still, despite those big crises, those big cycles,
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  Speaker 1: those huge mess-ups, basically, along the way, we're still better
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  Speaker 1: off now than we were before, right? So I think
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  Speaker 1: that's part of the magic of maybe even modern capitalism.
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  Speaker 2: No longer living in caves. Yeah. Indoor plumbing.
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  Speaker 1: Yeah, I like indoor plumbing.
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  Speaker 2: I'm a big fan, to say nothing of Japanese toilets,
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  Speaker 2: which is just next level. But all these things, all
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  Speaker 2: these infrastructure things, electricity, light, uh... internet it made possible
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  Speaker 2: from the fixed income market you note bonds financed infrastructure
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  Speaker 2: and innovation but also conquest and slavery how do you
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  Speaker 2: assess their contribution of progress while simultaneously acknowledging some of
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  Speaker 2: the destruction that bond underwriting has funded no.
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  Speaker 1: It was something I struggle with, but to what extent
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  Speaker 1: do I sort of, I mean, this is unquestionably my
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  Speaker 1: love letter to the bond market.
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  Speaker 2: Clearly. Yeah.
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  Speaker 1: The, the, the working title was the greatest show on earth,
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  Speaker 1: an affectionate biography of the bond market.
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  Speaker 2: Uh, and the fat, a fabulous debt is, is an
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  Speaker 2: even better title. It's a great quote from somebody. We'll
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  Speaker 2: get to that in a bit. Um, but, but as
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  Speaker 2: I read through the book and that, that, uh, uh,
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  Speaker 2: construction and destruction, The bond market is essentially a tool.
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  Speaker 2: You could build something with a hammer, you could collapse
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  Speaker 2: someone's skull. It's the same tool.
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  Speaker 1: Exactly. So basically any big project in mankind, whether it's
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  Speaker 1: wars of conquest, wars of liberation, slavery, hospitals, they've all
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  Speaker 1: at their heart actually had debt. And it's almost overwhelmingly
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  Speaker 1: the bond at their center. There have been plantation-backed bonds.
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  Speaker 1: The first investment fund ever in history is a Dutch fund.
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  Speaker 1: It was literally a steel chest or an iron chest, sorry,
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  Speaker 1: locked with three locks with little bond certificates inside that,
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  Speaker 1: that some of those bonds were slavery bonds, basically.
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  Speaker 2: Really?
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  Speaker 1: They're also highway bonds in Sweden and Denmark. They're also
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  Speaker 1: Dutch perpetual bonds as well. So it goes both ways.
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  Speaker 1: Like America financed its war of revolution by the sale
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  Speaker 1: of bonds to foreign investors. You know, wars, World War II,
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  Speaker 1: World War I. One of the large reasons why the
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  Speaker 1: Allies won in the end was because they were able
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  Speaker 1: to finance themselves more efficiently. So, yes, I think.
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  Speaker 2: To say nothing of Napoleon, to say nothing of the U.S.
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  Speaker 1: Civil War.
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  Speaker 2: Again, we'll get into the details. You know, I have
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  Speaker 2: a friend I speak to all the time, and once
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  Speaker 2: a week they always ask me, who are you going
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  Speaker 2: to sit down, who are you talking with this week?
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  Speaker 2: And I said, oh, Robin Wigglesworth. Who's he? FT reporter.
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  Speaker 2: He's like, oh, I know the name. What's the book about?
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  Speaker 2: And I mentioned, I go, well, his first book was
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  Speaker 2: about index investing called Trillions. This book is called The
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  Speaker 2: Fabulous Debt About Bonds. And the immediate answer was, why
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  Speaker 2: is he so attracted to the most boring aspects of finance?
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  Speaker 2: But when you read the book, it is not. It's
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  Speaker 2: everything from catastrophe to war to innovation. Bonds sound boring,
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  Speaker 2: but they really aren't.
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  Speaker 1: Yeah, I mean, bonds are kind of designed to be boring,
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  Speaker 1: but yeah, this is my attempt to reclaim that kind
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  Speaker 1: of that or, or revive its reputation of being where
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  Speaker 1: the real stuff happens. I mean, I always joke, and
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  Speaker 1: this is like me, cause I do love the stock
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  Speaker 1: market as well. And some of my best friends are
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  Speaker 1: equity investors, but it's like trading Pokemon card. Like it
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  Speaker 1: doesn't really matter. The overwhelming amount of activity in the
• 13:29
  Speaker 1: stock market is secondary market staff is one person. buying
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  Speaker 1: or selling a stock from another person. It doesn't matter
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  Speaker 1: to the company whatsoever. We talk a lot about the theory,
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  Speaker 1: about the signal it sends, but really it isn't that important.
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  Speaker 1: The bond market, every single day, there is a bond
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  Speaker 1: being sold. Financing, sewage plants, walls, companies, plants. Not just traded,
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  Speaker 1: but the underwrite. Yes, exactly. If you want to see
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  Speaker 1: where capital actually flows, like capitalism, at its most primal,
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  Speaker 1: that's the bond market.
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  Speaker 2: And to put some numbers on this, the bond market
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  Speaker 2: is a multiple of the size of the equity market.
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  Speaker 1: Oh, yes. Yeah.
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  Speaker 2: 3x, 4x, something like that?
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  Speaker 1: Well, it depends on how you cut and how you
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  Speaker 1: define the equity market. In the US, certainly. And globally,
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  Speaker 1: the bond market actually is bigger than the entire banking
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  Speaker 1: system as well. That's one of the reasons why I
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  Speaker 1: wrote it because, look, I love the stories. I think
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  Speaker 1: it's fascinating. I love history. And the bond market is
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  Speaker 1: blessed with some incredible characters. But the reason why I
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  Speaker 1: think something warrants being a book isn't just that it's navel-gazing,
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  Speaker 1: backward-looking history. It's because it's relevant to the present day.
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  Speaker 1: And the bond market is now the engine of the
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  Speaker 1: global economy, more than the stock market, more than the
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  Speaker 1: banking system. It's the bond market that, to paraphrase the
• 14:39
  Speaker 1: Wu-Tang Clan, bonds rule everything around us.
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  Speaker 2: That's exactly right. But I have to ask one question.
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  Speaker 2: Why eight and a half centuries of bond history?
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  Speaker 1: Well, I studied even more. As you said, I studied
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  Speaker 1: over a millennia. I studied a few millennia, in fact,
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  Speaker 1: and I wasn't quite sure where I was going to start.
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  Speaker 1: The Mesopotamians, 4,000 years ago. traded clay tablets of loans
• 15:02
  Speaker 1: where they had a little thing called the tanker room
• 15:05
  Speaker 1: clause almost where basically you'd rather than give a loan
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  Speaker 1: to you know Barry I just write it to a
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  Speaker 1: merchant so that person could sell the loan to somebody
• 15:13
  Speaker 1: else that's what we think what they did.
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  Speaker 2: That's a few thousand years ago I want to say
• 15:17
  Speaker 2: about 1500 years ago you could buy Japanese rice futures
• 15:21
  Speaker 2: yes and there was an underwriting on that also that
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  Speaker 2: was transferable It's really fascinating how far back this goes.
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  Speaker 1: Yeah, finance and credit has actually a far longer, more
• 15:32
  Speaker 1: vibrant history than most people realize. But the reason why
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  Speaker 1: I decided to start in Venice in 1171 is because
• 15:38
  Speaker 1: really when I see, I want to see intellectual genealogy,
• 15:41
  Speaker 1: as it were. Like, what really was the stuff that
• 15:44
  Speaker 1: led to B, to C, to D? And, you know,
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  Speaker 1: the Mesopotamian invention, they invented credit, they invented, they discovered,
• 15:51
  Speaker 1: they used credit. They had a very vibrant system of credit,
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  Speaker 1: in fact. But really, when you see what the acorn
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  Speaker 1: was that everything grew from, it was this humble, accidental
• 16:03
  Speaker 1: war loan in Italy in 1171. Because that's what you
• 16:07
  Speaker 1: can see then copied in the other Italian city-states. Then
• 16:12
  Speaker 1: France and Spain, the Netherlands really jacked it up. They
• 16:15
  Speaker 1: really cranked it up by six notches. And the British
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  Speaker 1: copied that. Then the Americans, Hamilton copied that again. And
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  Speaker 1: that's basically where it all came from.
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  Speaker 2: Really fascinating. Coming up, we continue our conversation with Robin
• 16:27
  Speaker 2: Wigglesworth discussing his new book, A Fabulous Debt, the epic
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  Speaker 2: story of how bonds built the modern world. I'm Barry Ritholtz.
• 16:38
  Speaker 2: You're listening to Masters in Business on Bloomberg Radio. I'm
• 16:43
  Speaker 2: Barry Ritholtz. You're listening to Masters in Business on Bloomberg Radio.
• 16:47
  Speaker 2: My extra special guest this week is Robin Wigglesworth, whose
• 16:51
  Speaker 2: name is fun to say. You should try it at home.
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  Speaker 2: He is not only the editor of FT Alphaville, he
• 16:57
  Speaker 2: is the author of a fabulous new book, A Fabulous Debt,
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  Speaker 2: the epic story of how bonds built the modern world.
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  Speaker 2: His first book was Trillions, all about index fund investing.
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  Speaker 2: That was published in 2021. So you mentioned earlier you
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  Speaker 2: start in Venice in 1172. Tell us a little bit
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  Speaker 2: about what was going on in Venice with the spice trade.
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  Speaker 2: what was happening with sort of city-states and local wars,
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  Speaker 2: and how the idea of doing an underwriting really came about.
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  Speaker 1: Have you been to Venice, by the way, Barry?
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  Speaker 2: I've been all over Italy. I have never been to Venice.
• 17:37
  Speaker 1: Well, I definitely recommend it. I want to go back
• 17:39
  Speaker 1: there because it has extra emotional resonance for me now.
• 17:43
  Speaker 1: I went there as a feckless teenager many years ago.
• 17:48
  Speaker 1: And it's beautiful.
• 17:49
  Speaker 2: Got to see it before it sinks beneath the sea.
• 17:52
  Speaker 1: Exactly. Venice is just an incredible place. The history of
• 17:55
  Speaker 1: the place is incredible. So it was actually founded not
• 17:58
  Speaker 1: by some royal offshoot of the family, as it were,
• 18:02
  Speaker 1: but it was actually refugees fleeing the Vandals. The Vandals
• 18:05
  Speaker 1: were actually just German tribes, barbarians that would periodically raid
• 18:09
  Speaker 1: into northern Italy. And they fled to Venice because it
• 18:12
  Speaker 1: was a swampy hellhole that nobody else wanted to live in.
• 18:15
  Speaker 1: It had no natural resources, no farmland. No metals, nothing.
• 18:19
  Speaker 1: All it had was essentially being anonymous. Because of that,
• 18:23
  Speaker 1: they had to learn off their wits. So they became
• 18:25
  Speaker 1: kind of Europe's preeminent traders, their most mercantile city-state, kind
• 18:32
  Speaker 1: of like Singapore on steroids, maybe. And they were technically
• 18:36
  Speaker 1: ruled by the Byzantine Empire in Constantinople, in today's Istanbul,
• 18:41
  Speaker 1: because Charlemagne never managed to conquer Venice and really didn't
• 18:44
  Speaker 1: really care that much about it. But they were Catholics.
• 18:47
  Speaker 1: They were part of Italy as well. So it was
• 18:48
  Speaker 1: kind of, they were caught between East and West, and
• 18:50
  Speaker 1: they were the main, some intermediaries there. But the Byzantines
• 18:54
  Speaker 1: really thought they were an uppity bunch of nouveau riche arses, basically.
• 18:58
  Speaker 1: They didn't like them at all. And they argued and
• 19:02
  Speaker 1: argued until basically Constantinople quietly said, we're going to arrest
• 19:05
  Speaker 1: every single Venetian. They just were fed up. We're going
• 19:08
  Speaker 1: to arrest every single Venetian in the Byzantine Empire. So
• 19:12
  Speaker 1: when this came out, the Venetians were outraged. They decided
• 19:15
  Speaker 1: to send a fleet to teach their liege a lesson.
• 19:20
  Speaker 1: But they needed money, lots and lots of money because
• 19:22
  Speaker 1: wars were expensive. They normally had borrowed money from some
• 19:26
  Speaker 1: of the bankers that started crop up in Italy. They're
• 19:28
  Speaker 1: called bankers because they literally had like wooden tables in
• 19:31
  Speaker 1: the square called the Rialto, which were called banchi. But
• 19:34
  Speaker 1: they needed too much money. So they basically forced everybody
• 19:38
  Speaker 1: in the city to pay a proportional war tax according
• 19:40
  Speaker 1: to their wealth. And to soften the blow, they said, well,
• 19:45
  Speaker 1: everybody has to pay it, but we're going to make
• 19:47
  Speaker 1: it a loan. And we'll pay you 5% the year.
• 19:50
  Speaker 1: until we've taught Constantinople a lesson and freed our citizens
• 19:55
  Speaker 1: and exacted reparations. And we'll also make the receipts tradable.
• 20:00
  Speaker 1: And that bit was revolutionary. So we don't know how
• 20:04
  Speaker 1: much they raised. We do know they actually lost that war.
• 20:07
  Speaker 1: And because of that, And the Doge who engineered all this,
• 20:11
  Speaker 1: he was murdered by his own citizens, who was outraged.
• 20:16
  Speaker 1: The bond was kind of made permanent because they couldn't
• 20:19
  Speaker 1: pay it back, but they could pay the 5%. And actually,
• 20:22
  Speaker 1: quite quickly, the Venetians discovered that actually it was pretty
• 20:24
  Speaker 1: cool being able to buy an income stream. You could
• 20:27
  Speaker 1: actually then make money from your savings. And in fact,
• 20:30
  Speaker 1: you can use that receipt as collateral. And for merchants
• 20:34
  Speaker 1: like the Venetians, this was revolutionary. Suddenly, this was a
• 20:37
  Speaker 1: whole new use case for it.
• 20:38
  Speaker 2: Giant spice trading, a lot of international trade from the
• 20:43
  Speaker 2: Far East.
• 20:43
  Speaker 1: Spice, gold, iron, silks, everything. Marco Polo was from Venice.
• 20:50
  Speaker 1: That's no coincidence. Shakespeare name checks the Rialto Square and
• 20:54
  Speaker 1: the merchants of Venice many centuries later. It became famous.
• 20:59
  Speaker 1: It was kind of the New York and Chicago and
• 21:04
  Speaker 1: Amsterdam and Singapore of its era. It was the beating
• 21:07
  Speaker 1: heart of the Mediterranean. And this kind of unfortunate accident,
• 21:13
  Speaker 1: kind of relic of one of their lowest points as
• 21:15
  Speaker 1: a city-state, actually became kind of a testament to their
• 21:18
  Speaker 1: commercial ingenuity, their financial ingenuity, that it actually became a
• 21:21
  Speaker 1: super valuable thing. People wanted to buy this stuff. And
• 21:25
  Speaker 1: they'd pay it back gradually. And then occasionally, if they
• 21:27
  Speaker 1: fought another war, which always happened in Italy around then,
• 21:29
  Speaker 1: and they were expensive, they'd sell more of these prestiti,
• 21:32
  Speaker 1: as it was called. Yeah, and other people copied it
• 21:36
  Speaker 1: and it's pretty from there.
• 21:37
  Speaker 2: So let's talk about the next group that copied it
• 21:41
  Speaker 2: There's a stretch in the book about the Netherlands and
• 21:43
  Speaker 2: the Dutch water boards and you know most of Holland
• 21:49
  Speaker 2: and that region is below sea level so building dikes
• 21:53
  Speaker 2: and managing The infrastructure of keeping the sea at bay
• 21:57
  Speaker 2: is a giant part of what the government does explain
• 22:02
  Speaker 2: how flood controls are become a milestone in fixed income history.
• 22:08
  Speaker 1: Well, you don't know exactly when the Dutch started to
• 22:12
  Speaker 1: use bonds. They spread from Italy northwards around Europe, where
• 22:16
  Speaker 1: they're called like Rance in France and Renten in Germany
• 22:20
  Speaker 1: and the Netherlands. But the Dutch really discovered the potential
• 22:24
  Speaker 1: of mobilizing the savings of its own industrious people. They
• 22:27
  Speaker 1: were kind of the successors to Venice as the most
• 22:30
  Speaker 1: commercially-minded people in Europe at the time.
• 22:32
  Speaker 2: The Dutch.
• 22:33
  Speaker 1: The Dutch, yeah. And they kind of invented modern capitalism,
• 22:36
  Speaker 1: I'd say. They used them because, you know, building dikes,
• 22:40
  Speaker 1: these incredibly elaborate, intricate... waterworks and dykes and flood guards
• 22:47
  Speaker 1: is super expensive. It's capex expensive, essentially. So they sold
• 22:52
  Speaker 1: bonds to do this. Every single local waterworks, hundreds of
• 22:55
  Speaker 1: them spread across the entire country, that high region, the
• 22:59
  Speaker 1: low countries, the Netherlands, and bonds were the way they
• 23:04
  Speaker 1: did it. And that kind of started what was probably
• 23:08
  Speaker 1: the first true proper bond market by lots of different
• 23:12
  Speaker 1: issuers that would sell bonds fixed rate, often at a
• 23:17
  Speaker 1: fixed maturity, but mostly perpetual and at market set interest rates.
• 23:22
  Speaker 2: And there are still some perpetual bonds from the 1600s
• 23:25
  Speaker 2: that are still generating yields.
• 23:27
  Speaker 1: Yes. So there's eight in particular issued by one waterworks.
• 23:30
  Speaker 1: They're still outstanding. One of them is owned by the
• 23:31
  Speaker 1: New York Stock Exchange. It celebrated its 400th birthday party
• 23:35
  Speaker 1: In early December 2024, I actually was invited to that
• 23:39
  Speaker 1: birthday party and my wife thought I was mad. But
• 23:43
  Speaker 1: luckily she's used my madness, so she let me go
• 23:46
  Speaker 1: and I had a blast. I got to meet the
• 23:49
  Speaker 1: world's oldest living Bond that still pays interest, 13 euros
• 23:53
  Speaker 1: a year, to the New York Stock Exchange.
• 23:55
  Speaker 2: That's very funny. So that's the 1600s. Let's fast forward
• 23:59
  Speaker 2: a century and change. Napoleon is running roughshod all over Europe.
• 24:05
  Speaker 2: He hasn't quite yet stumbled into Russia, which doesn't work out.
• 24:10
  Speaker 2: But he dismisses Britain. I love the quote, a nation
• 24:14
  Speaker 2: of shopkeepers. But at the same time, London's bond market
• 24:18
  Speaker 2: and the ability to collect all of the savings of
• 24:21
  Speaker 2: those shopkeepers and combine it into the largest pool of
• 24:25
  Speaker 2: capital the world has ever seen, to quote you, is
• 24:29
  Speaker 2: arguably is what defeated Napoleon. Explain how shopkeepers brought down
• 24:34
  Speaker 2: the greatest general maybe in European history. Yeah.
• 24:38
  Speaker 1: Well, France was the superpower of the era. Huge country,
• 24:41
  Speaker 1: bigger country than England. They controlled everything. They had Napoleon.
• 24:45
  Speaker 1: And Britain was able to fight for so long because
• 24:49
  Speaker 1: it could finance itself almost indefinitely. I mean, not indefinitely.
• 24:53
  Speaker 1: It's felt like that to the French. And send material
• 24:56
  Speaker 1: and subsidize its allies like the Prussians. for years and
• 25:00
  Speaker 1: years and years because they could use the bond market.
• 25:02
  Speaker 1: They'd created, they'd basically seen what the Dutch had done.
• 25:05
  Speaker 1: The Dutch had kind of surpassed them. And that was
• 25:07
  Speaker 1: very embarrassing for the Brits. So they basically, they imported
• 25:10
  Speaker 1: a Dutch prince, imported things like the Bank of England
• 25:13
  Speaker 1: or a central bank. They imported lots of the way
• 25:16
  Speaker 1: they sold the bonds. They consolidated all the state debts
• 25:19
  Speaker 1: into something called the Consolidated Annuities Market.
• 25:22
  Speaker 2: Consoles.
• 25:22
  Speaker 1: Consoles. And that really is the bedrock. That's the world's
• 25:26
  Speaker 1: first true free risk reap. It was the erred treasury market,
• 25:31
  Speaker 1: as it were. That's what people bought around the world.
• 25:33
  Speaker 1: The Dutch bought it, the Germans bought it, the French
• 25:35
  Speaker 1: bought it, even. And that meant that England could finance
• 25:39
  Speaker 1: itself almost forever in this war to the immense frustration
• 25:43
  Speaker 1: of the French, who, you know, Napoleon was actually quite
• 25:46
  Speaker 1: an able administrator, but France's creditworthiness was pretty feeble, so
• 25:50
  Speaker 1: they paid, you know, two, three times the interest rates
• 25:53
  Speaker 1: that England did.
• 25:54
  Speaker 2: And so it was much more expensive, really, you know,
• 25:57
  Speaker 2: the modern world, we're seeing this war of attrition between
• 26:01
  Speaker 2: thousand-dollar drones versus million-dollar missiles. It's very parallel to Napoleon.
• 26:07
  Speaker 2: So there were a number of people, some of whom
• 26:09
  Speaker 2: opposed the war, some of whom were just, more of
• 26:13
  Speaker 2: whom were kind of puritanical about the debt. The title
• 26:18
  Speaker 2: of the book comes from Thomas Babington Macaulay's dismissal of
• 26:24
  Speaker 2: predictions of disaster and due to Britain's enormous accumulation of debt.
• 26:30
  Speaker 2: Fabulous debt is how he described it. Explain.
• 26:34
  Speaker 1: Well, so I was looking into the history and how
• 26:36
  Speaker 1: the British were talking and thinking about the debt, especially
• 26:39
  Speaker 1: that they had accumulated after the Napoleonic Wars. It is
• 26:42
  Speaker 1: still the biggest debt burden, debt to GDP burden we've
• 26:46
  Speaker 1: ever seen in history, pretty much. But obviously, England, as
• 26:49
  Speaker 1: we know, managed to grow out of it. It was
• 26:51
  Speaker 1: completely fine. But there were periodic freakouts over the expense
• 26:56
  Speaker 1: of wars. And the discussions were incredibly strikingly modern, as
• 27:01
  Speaker 1: in what I call the repeated protestations of the debt scolds.
• 27:06
  Speaker 1: And not to say that these aren't things that we
• 27:08
  Speaker 1: are fair to worry about, but Babington Macaulay, not the
• 27:11
  Speaker 1: Macaulay of Macaulay duration, unfortunately, which I was disappointed to learn,
• 27:15
  Speaker 1: but Babington Macaulay, he wrote this phenomenal polemical book on
• 27:20
  Speaker 1: the history of Britain around this time. And he pointed
• 27:23
  Speaker 1: out that every time people said, after this war, after
• 27:26
  Speaker 1: this war, after this war, the British debts kept growing
• 27:28
  Speaker 1: and growing and growing. And actually, no, rather than leading
• 27:32
  Speaker 1: to ruin, it was not just not impeding Britain's wealth
• 27:36
  Speaker 1: and growth. It was actually helping capitalise it, capitalise it.
• 27:40
  Speaker 1: The fact that Britain had a vibrant bond market, because
• 27:43
  Speaker 1: these consul could be used as security for loans, you
• 27:47
  Speaker 1: could buy an income stream. It was, in fact, a
• 27:50
  Speaker 1: fabulous debt. It was a blessing. And I thought that
• 27:53
  Speaker 1: was just, when I stumbled over it, I thought that
• 27:55
  Speaker 1: that's it. That's my title. Love it.
• 27:57
  Speaker 2: The shocking parallel. And I don't recall if this is
• 28:00
  Speaker 2: Macaulay or not. They erroneously imagine there was an exact
• 28:05
  Speaker 2: analogy between the case of an individual who was in
• 28:08
  Speaker 2: debt to another individual and the case of a society,
• 28:12
  Speaker 2: which is in debt to a part of itself. That
• 28:15
  Speaker 2: analogy leads to endless mistakes. What was that first? Was
• 28:19
  Speaker 2: that Macaulay? And second, Isn't that the argument the deficit
• 28:23
  Speaker 2: scolds have been having both here and abroad for, I
• 28:26
  Speaker 2: don't know, the past 50 years? Yeah.
• 28:28
  Speaker 1: No, it's over 200 years ago, Barrington McCauley pointed exactly
• 28:33
  Speaker 1: that issue, that you cannot consider government debts in the
• 28:37
  Speaker 1: same way you do the household. It is a seductive
• 28:40
  Speaker 1: but wrong assumption, a metaphor, and it will lead you astray, essentially.
• 28:47
  Speaker 2: It's really quite amazing. Let's stay with some history and
• 28:51
  Speaker 2: and fast forward a little more uh... you have alexander
• 28:55
  Speaker 2: hamilton who decides to uh... take the mess that is
• 29:01
  Speaker 2: just a run of of revolutionary war dead and all
• 29:04
  Speaker 2: sorts of different state debts and create uh.
• 29:08
  Speaker 1: uh.
• 29:09
  Speaker 2: sort of more modern basis for financing the government i'm
• 29:13
  Speaker 2: curious uh... what did he do that was uh... so
• 29:17
  Speaker 2: smart And how much does the modern treasury owe to Hamilton?
• 29:24
  Speaker 1: I mean, an immense amount. I mean, I had to
• 29:27
  Speaker 1: have A. Ham in the book. But even I was
• 29:31
  Speaker 1: surprised at how corsatingly brilliant the guy was. I mean,
• 29:38
  Speaker 1: how far ahead of his time. and reading between the
• 29:41
  Speaker 1: lines of what he says and some of his speeches
• 29:43
  Speaker 1: and his writings and his thinkings and this first credit
• 29:47
  Speaker 1: report that he presents to Congress about what to do
• 29:49
  Speaker 1: with all these defaulted state bonds after the revolution, I
• 29:53
  Speaker 1: think is, I mean, incredible. I mean, it is almost
• 29:58
  Speaker 1: like a founding document for the United States of America.
• 30:01
  Speaker 1: So he realizes, when he was a soldier and before that,
• 30:05
  Speaker 1: he'd studied the British financial system. He'd studied the console market.
• 30:08
  Speaker 1: He realized that consoles actually were not a public curse,
• 30:12
  Speaker 1: as people like James Madison would say. They were a
• 30:15
  Speaker 1: national blessing. That this was actually a key source of
• 30:19
  Speaker 1: Britain's financial strength. And he realized after the war, because
• 30:23
  Speaker 1: they can become like money. Like essentially bonds, especially when
• 30:26
  Speaker 1: the word physical objects, you can use them as collateral,
• 30:29
  Speaker 1: also use them as money. And then in a country
• 30:32
  Speaker 1: or a very newborn country that had a desperate lack
• 30:35
  Speaker 1: of specie of coins, gold, silver, and things like that,
• 30:38
  Speaker 1: that could be incredibly powerful. So he proposed to take
• 30:41
  Speaker 1: all the state debts that were bank defaulted on all
• 30:44
  Speaker 1: the external debts, but everything else, domestic bondholders, there'd be restructured,
• 30:49
  Speaker 1: but they're to get some paper, they get some money back.
• 30:51
  Speaker 1: the external debt would be turned into these new treasuries.
• 30:54
  Speaker 1: The federal government would assume responsibility for all those bankrupt
• 30:58
  Speaker 1: states and their debts. And by doing so, the argument
• 31:03
  Speaker 1: was that this was about restoring America's creditworthiness, her credit,
• 31:07
  Speaker 1: making her stand upright among the other nations of the world.
• 31:11
  Speaker 1: But really, I think it's because he realized a new
• 31:15
  Speaker 1: treasury bond market would be incredibly powerful and catalytic for
• 31:20
  Speaker 1: the US economy that was still struggling after the revolution,
• 31:23
  Speaker 1: after just suddenly being cut off from its single biggest
• 31:26
  Speaker 1: trading partner. And also, and this is something the Venetians
• 31:29
  Speaker 1: discovered almost by accident, if you make your citizens creditors
• 31:34
  Speaker 1: as well, they have a vested interest in your good governance.
• 31:38
  Speaker 1: So suddenly by making all these American soldiers and Wall
• 31:41
  Speaker 1: Street speculators and farmers creditors to this new federal government,
• 31:45
  Speaker 1: they had a vested interest in it sticking together, in
• 31:49
  Speaker 1: it holding. That actually was very, powerful glue at an
• 31:53
  Speaker 1: incredibly wildly chaotic time for the Republic.
• 31:56
  Speaker 2: And soon after and Napoleon plays comes back into the story.
• 32:04
  Speaker 2: He needs to raise some capital to continue funding his
• 32:08
  Speaker 2: world and was it Madison sends somebody over to negotiate
• 32:14
  Speaker 2: or was it Madison who went over negotiate with the
• 32:17
  Speaker 2: French to essentially buy everything west of the Mississippi that
• 32:21
  Speaker 2: the French owned from Louisiana west.
• 32:26
  Speaker 1: Well, Louisiana was important. I mean, it was big, of course.
• 32:29
  Speaker 2: And it's at the mouth of Mississippi from which all
• 32:31
  Speaker 2: commerce in the middle of the country traveled, or at
• 32:34
  Speaker 2: least most of it. And having the French control that
• 32:37
  Speaker 2: was strategically problematic.
• 32:39
  Speaker 1: Yes. Even Jefferson, who was fairly sort of non-interventionist, talked about,
• 32:43
  Speaker 1: you know, this would be like somebody holding the juggler
• 32:46
  Speaker 1: of the American economy. The Mississippi was so important, they
• 32:48
  Speaker 1: couldn't let another big, potentially hostile country or own it.
• 32:53
  Speaker 1: And the French had basically taken it from Spain. And
• 32:57
  Speaker 1: it was, what do they do about it? Well, it
• 32:59
  Speaker 1: turns out that Napoleon was desperately short of money and
• 33:01
  Speaker 1: he didn't really want to spend, expand in the Western
• 33:04
  Speaker 1: hemisphere so that a deal could be made. It was Monroe,
• 33:07
  Speaker 1: James Monroe, also another future president that was sent to negotiate.
• 33:12
  Speaker 1: And it was because of Alexander Hamilton's restoration of American
• 33:16
  Speaker 1: credit that a British investment bank Bearings, together with its
• 33:21
  Speaker 1: sort of allied shop in Amsterdam called Hope & Co,
• 33:25
  Speaker 1: was able to engineer what I think is probably one
• 33:27
  Speaker 1: of the most remarkable financial deals in the history of
• 33:29
  Speaker 1: the planet.
• 33:31
  Speaker 2: $ 15 million. That's the original sum, which was over his,
• 33:36
  Speaker 2: I think, what was the budget? $ 9 or $ 10 million originally?
• 33:39
  Speaker 1: And he just said, yes, I'll hit it. I'll get
• 33:41
  Speaker 1: it done. I don't care. This is a good deal.
• 33:43
  Speaker 1: And he was right to do so. And I mean,
• 33:45
  Speaker 1: can you imagine if you, I mean, investment bankers now
• 33:47
  Speaker 1: are always worried about hung deals and deals going bad.
• 33:50
  Speaker 1: There's no limited liability in this day. So bearings is
• 33:53
  Speaker 1: taking the entire risk because basically the U S didn't
• 33:56
  Speaker 1: have the money. So they have to sell bonds and
• 33:59
  Speaker 1: basically sell those bonds to France and, and, uh, bearings
• 34:02
  Speaker 1: would have to underwrite and manage the whole thing. And
• 34:04
  Speaker 1: they were getting paid at the time generational wealth to
• 34:07
  Speaker 1: do so. In fact, if you look at it, if
• 34:10
  Speaker 1: you look at the fee, they got paid versus what
• 34:11
  Speaker 1: they paid for Louisiana. It's like getting paid all of
• 34:13
  Speaker 1: North Dakota, but it's, there's no limited liability. And the
• 34:18
  Speaker 1: letters between the bearings partners. keep talking about how they
• 34:21
  Speaker 1: tremble at the size of this American business. This is
• 34:24
  Speaker 1: not make or break. This is literally dying in death's prison,
• 34:28
  Speaker 1: all the deal going through.
• 34:30
  Speaker 2: Amazing. And then let's fast forward a quick century. The
• 34:36
  Speaker 2: argument in the book is that the North won over
• 34:40
  Speaker 2: the South in the U.S. Civil War because the North
• 34:44
  Speaker 2: had all the banks and bankers and Wall Street, and
• 34:47
  Speaker 2: they were able to finance... Lincoln and the North's ongoing
• 34:55
  Speaker 2: battle to reign in the South. How accurate is that?
• 35:00
  Speaker 1: Well, I'm no Civil War historian, so I'm not an
• 35:02
  Speaker 1: expert on that. But I do know that many people
• 35:05
  Speaker 1: in the South felt it was the North's superior ability
• 35:08
  Speaker 1: to finance themselves. That was decisive.
• 35:11
  Speaker 2: That's a theme throughout this throughout history is, hey, if
• 35:14
  Speaker 2: you're going to go to war, yeah, you need guns
• 35:17
  Speaker 2: and bullets, but you need some bankers making sure you
• 35:20
  Speaker 2: can pay for those guns.
• 35:21
  Speaker 1: Exactly. I mean, Ulysses S. Grant also thanked. So it
• 35:24
  Speaker 1: was actually a private banker that engineered this because Salmon Chase,
• 35:28
  Speaker 1: the treasury secretary at the time, was not an enormously
• 35:33
  Speaker 1: competent treasury secretary, probably. So you essentially, um, privatize the
• 35:39
  Speaker 1: role of selling all these war bonds to a private
• 35:41
  Speaker 1: banker called, uh, Jay cook. Mm-hmm and he did a
• 35:44
  Speaker 1: phenomenal role. And actually it was the first time you
• 35:47
  Speaker 1: really see bonds mass marketed to people with like propaganda
• 35:51
  Speaker 1: and flies and advertising and newspaper articles, cuz they had
• 35:54
  Speaker 1: to teach people what even a bond was. He also
• 35:58
  Speaker 1: touched upon that. A bond is not like a government
• 36:01
  Speaker 1: bond is not like a household finance. You should need
• 36:03
  Speaker 1: to think about this differently. Britain is strong because of
• 36:06
  Speaker 1: its large console market we can do the same and
• 36:09
  Speaker 1: and he sold a prodigious amount of Bonds to help
• 36:12
  Speaker 1: finance the North's victory.
• 36:14
  Speaker 2: Now cook if I'm remembering correctly Big on the railroad
• 36:17
  Speaker 2: bonds as well. So so I love this line The
• 36:22
  Speaker 2: bond market was the track on which the trains truly
• 36:25
  Speaker 2: ran that that's a huge statement how giant was the
• 36:30
  Speaker 2: appetite for for railroad bonds and And how huge was
• 36:35
  Speaker 2: laying intercontinental rail? How big a deal is this?
• 36:39
  Speaker 1: Yeah, I mean, we think of rail as such an
• 36:42
  Speaker 1: ordinary means of transport now, right? It's so old world.
• 36:47
  Speaker 1: But it was unimaginably revolutionary at the time. People were
• 36:51
  Speaker 1: genuinely concerned that the human mind couldn't handle those kind
• 36:55
  Speaker 1: of speeds, that people would go mad. The newspapers write
• 36:58
  Speaker 1: horror stories about people going mad when trains that drove
• 37:01
  Speaker 1: faster than 20, 30 miles an hour. At one point,
• 37:04
  Speaker 1: some people generally thought that maybe over 40, 50 bodies
• 37:08
  Speaker 1: might get vaporized. We just weren't built for those kinds
• 37:11
  Speaker 1: of unimaginable speeds. And in Europe, I mean, railways, there
• 37:16
  Speaker 1: were railway manias everywhere. Lots of them. There were almost
• 37:19
  Speaker 1: like a series of mini booms and busts around the world.
• 37:24
  Speaker 1: But in Europe, you know, rails connected one town to
• 37:26
  Speaker 1: the other. In the US, Rail built towns. They built states, essentially.
• 37:31
  Speaker 1: It really created America as we know it. The U.S.
• 37:35
  Speaker 1: embraced railways with more zeal, with more mad abandon than
• 37:40
  Speaker 1: anywhere else. And Jay Cook was at the center of
• 37:43
  Speaker 1: it first before the Civil War. That was where he
• 37:46
  Speaker 1: made his first fortune as a banker. And then afterwards, well,
• 37:50
  Speaker 1: he kind of stepped away. It was clearly a mania.
• 37:53
  Speaker 1: He wasn't sure about it. But the transcontinental railways were
• 37:56
  Speaker 1: so exciting. They were like the Apollo programs of the era,
• 38:00
  Speaker 1: and especially symbolically important after the Civil War, binding the
• 38:03
  Speaker 1: country together, binding West and Eastern coasts together. So he
• 38:07
  Speaker 1: got sucked into this belatedly, and it ended very, very
• 38:12
  Speaker 1: badly for him.
• 38:12
  Speaker 2: Well, he was briefly, or maybe not so briefly, the
• 38:16
  Speaker 2: wealthiest person in the country before it all went belly up.
• 38:21
  Speaker 2: You know, we call the 1930s the Great Depression, but
• 38:25
  Speaker 2: before that, the panic of 1873, driven primarily by railroad bonds,
• 38:31
  Speaker 2: was originally known as the Great Depression. How did all
• 38:35
  Speaker 2: of this blow up? It sounds vaguely familiar. A debt-fueled
• 38:42
  Speaker 2: infrastructure build-out, bigger than anything. Why does that sound so familiar?
• 38:47
  Speaker 1: Yeah, it does feel a little bit uncannily familiar. Uh, no,
• 38:51
  Speaker 1: I mean, it is complex and it's actually kind of
• 38:53
  Speaker 1: almost seems a little bit more modern where the real
• 38:55
  Speaker 1: trigger was a financial crisis in Europe, in Germany and
• 38:58
  Speaker 1: Austria of all things. It was a big mass of
• 38:59
  Speaker 1: stock market mania in Germany, Austria, a tech bubble, basically.
• 39:03
  Speaker 1: It was called the founder, the founders bubble, and it
• 39:07
  Speaker 1: became the founders crash, the Grunderkrack in German. Uh, but
• 39:12
  Speaker 1: unfortunately lots of European investors who had lost money on
• 39:14
  Speaker 1: German and Austrian stocks also had lots of money invested
• 39:17
  Speaker 1: in Europe, in US railways. So they pull their money out. Classic, like,
• 39:21
  Speaker 1: you know, you lose money in one area, then you
• 39:23
  Speaker 1: have to pull it back somewhere else. And that hammered
• 39:27
  Speaker 1: railway bonds in the U.S. just as people were getting
• 39:29
  Speaker 1: worried because of all sorts of dodgy scandals. There was
• 39:32
  Speaker 1: so much bribery going on at the time. And it
• 39:35
  Speaker 1: implicated even the vice president. Also, you know, corruption high
• 39:39
  Speaker 1: up in administrations also. Couldn't happen today. No, no, of
• 39:42
  Speaker 1: course not. So then Jay Cook was stuck with all
• 39:47
  Speaker 1: these bonds he'd promised to sell for the Northern Pacific
• 39:50
  Speaker 1: Railway on his balance sheet. There's no Federal Reserve.
• 39:53
  Speaker 2: In other words, when you say on his balance sheet,
• 39:55
  Speaker 2: he's going to syndicate this, but essentially he's assuming all
• 39:59
  Speaker 2: the responsibility and the liability.
• 40:02
  Speaker 1: Exactly. There is no limited liability. So the bank is
• 40:05
  Speaker 1: basically buy the bonds at a discount from the seller
• 40:10
  Speaker 1: and then sell them ideally, hopefully at a higher price.
• 40:13
  Speaker 1: But if you can't sell them at all, you're on there,
• 40:15
  Speaker 1: you're on the hook. And he personally advanced money to
• 40:18
  Speaker 1: the Northern Pacific. Repeatedly. He took control, yes, many times.
• 40:20
  Speaker 1: He just kept doubling down. And the Northern Pacific was
• 40:23
  Speaker 1: plagued by all sorts of problems because he was crossing
• 40:26
  Speaker 1: straight through Sioux lands, for example.
• 40:28
  Speaker 2: Meaning hostile Indian territory.
• 40:30
  Speaker 1: Yeah, basically. It was a very troubled project from the get-go.
• 40:37
  Speaker 1: And somehow this brilliant, brilliant man, he was undoubtedly brilliant,
• 40:43
  Speaker 1: was blinded somehow. And suddenly best with no federal reserve,
• 40:47
  Speaker 1: no other way of supplying liquidity. They abruptly have to
• 40:50
  Speaker 1: close their doors on 1973 in 1873. And this is
• 40:55
  Speaker 1: unimaginably shocking. I mean, this is like suddenly if we
• 40:58
  Speaker 1: wake up tomorrow and JP Morgan says they're bankrupt, this
• 41:02
  Speaker 1: is not just the biggest bank in America at the time.
• 41:05
  Speaker 1: It's Jay cook that the dominant financier of the era,
• 41:08
  Speaker 1: he was John Pierpont Morgan before John paper Morgan was anybody. Uh,
• 41:13
  Speaker 1: so it's such a psychological shock that this shock that
• 41:16
  Speaker 1: first maybe starts in Europe and ricochets over to the
• 41:19
  Speaker 1: U S then ricochets back to Europe and it starts
• 41:21
  Speaker 1: feeding on itself. It just becomes an epic financial crisis.
• 41:24
  Speaker 1: One of the biggest we've seen in the world. And
• 41:26
  Speaker 1: it leads to this very long, nasty recession.
• 41:30
  Speaker 2: And it became known as the great depression for until
• 41:33
  Speaker 2: 50 years later, a bigger great depression.
• 41:35
  Speaker 1: And we call it now the long depression because it's
• 41:38
  Speaker 1: still the longest economic contraction in us history.
• 41:41
  Speaker 2: So before we move into the 20th century, you've mentioned
• 41:46
  Speaker 2: Barings and you've mentioned Hope. We haven't talked about Rothschild,
• 41:51
  Speaker 2: which was by far the biggest, most powerful bank and banker,
• 41:57
  Speaker 2: not just in Europe, but in the whole world. Tell
• 42:00
  Speaker 2: us a little bit about Rothschild and how he managed
• 42:03
  Speaker 2: to become such a dominant figure in the world of
• 42:07
  Speaker 2: bonds and banking.
• 42:09
  Speaker 1: Well, so the Rothschild family started as a merchant family,
• 42:12
  Speaker 1: like many think. But it was Nathan Meyer Rothschild that
• 42:14
  Speaker 1: morphed that into a bank. And that was not uncommon
• 42:16
  Speaker 1: for the era. But he was also, I mean, unquestionably,
• 42:20
  Speaker 1: a coruscatingly smart man. And he kind of single-handedly created
• 42:27
  Speaker 1: what I call the first international, truly international bond market.
• 42:30
  Speaker 1: Something that looks, walks, and talks, and quacks a bit
• 42:33
  Speaker 1: like what we see today. So he was shut out
• 42:35
  Speaker 1: from some of the Napoleonic financing. For example, Bearings was
• 42:38
  Speaker 1: very close to the U.S. government. So he didn't get
• 42:41
  Speaker 1: any of those mandates.
• 42:43
  Speaker 2: Shut out also because he was Jewish and they weren't happy.
• 42:47
  Speaker 1: Yeah, and the Bearings was a proper English family. And they, like,
• 42:51
  Speaker 1: I mean, it's just, it's amazing what people with chips
• 42:54
  Speaker 1: on their shoulders can do, right? Like, I'm going to
• 42:56
  Speaker 1: prove them wrong. It's motivational. Yeah. And he had, obviously,
• 43:01
  Speaker 1: the whole family had We're wealthy little outposts in Paris,
• 43:05
  Speaker 1: in Frankfurt, in Vienna. So we're strategically positioned. They're quite
• 43:08
  Speaker 1: capital rich. They made a lot of money in the
• 43:10
  Speaker 1: Napoleonic Wars, mostly smuggling gold on behalf of the British.
• 43:13
  Speaker 1: But they had good British contacts then, good British contacts
• 43:16
  Speaker 1: among British investors. So when Prussia, Spain, even France, Italy,
• 43:22
  Speaker 1: all these new states or older states started wanting to
• 43:25
  Speaker 1: issue bonds to rebuild after the Napoleonic Wars, he became
• 43:29
  Speaker 1: the go-to person to do so. And, and that really stated,
• 43:32
  Speaker 1: he made them explicitly bearer bonds. So they'd be state
• 43:35
  Speaker 1: stateless and became portable wealth essentially. And you can go
• 43:39
  Speaker 1: to any of the Rothschild houses and collect the interest.
• 43:42
  Speaker 2: In, in cities, dotting all of Europe. You show up
• 43:45
  Speaker 2: with a bearer bond and you can present it and
• 43:49
  Speaker 2: get paid in the local currency.
• 43:50
  Speaker 1: And that was hugely powerful. Investors loved it. He also
• 43:54
  Speaker 1: got a lot of these countries to open up a
• 43:56
  Speaker 1: little bit their books because he said, well, British investors
• 43:58
  Speaker 1: who were the biggest in the world then. they want
• 44:01
  Speaker 1: to see a bit of transparency. That's what they've gotten
• 44:04
  Speaker 1: used to. So he told them there's lots of these
• 44:05
  Speaker 1: remarkable letters that Neil Ferguson, the historian, has found going
• 44:08
  Speaker 1: between the Prussian finance minister, getting almost told off by
• 44:13
  Speaker 1: a Jewish banker in London, saying, dude, you have to
• 44:16
  Speaker 1: open up your books. You have to be accountable. You
• 44:18
  Speaker 1: have to do this and that. Otherwise, like, I've done
• 44:21
  Speaker 1: what I can. And Gingley's able to coax them into
• 44:24
  Speaker 1: doing a little bit of that because, generally speaking, investors
• 44:27
  Speaker 1: like countries that are credible, that are trustworthy... transparent and
• 44:31
  Speaker 1: well governed and the bond market has rewarded those with
• 44:35
  Speaker 1: lower borrowing costs and then it becomes a positive feedback loop.
• 44:38
  Speaker 2: Who knew bond vigilantes existed a couple hundred years ago
• 44:42
  Speaker 2: Rothschild eventually becomes like up here in British society he's
• 44:47
  Speaker 2: given some official rank because he's just been so helpful
• 44:52
  Speaker 2: to the British government and the Rothschild fortune that still
• 44:58
  Speaker 2: exists in some form today, doesn't it? Yes.
• 45:00
  Speaker 1: So he had a lot of sons and cousins of
• 45:03
  Speaker 1: the family. It was kind of the Jewish royal family
• 45:06
  Speaker 1: of Europe for a long time. The immediate generation was
• 45:10
  Speaker 1: actually also incredibly talented, if not maybe as talented as
• 45:13
  Speaker 1: Nathan Meyer Rothschild. But also the family starts spreading. But
• 45:17
  Speaker 1: still to this day, there are prominent investment banks that
• 45:20
  Speaker 1: are smaller these days called the Rothschilds. And it's a
• 45:23
  Speaker 1: very wealthy family. They own Chateau Lafitte, for example, I
• 45:27
  Speaker 1: think they still own. So they're still a very prominent
• 45:30
  Speaker 1: family today, albeit not as titanically, dynastically wealthy as they
• 45:34
  Speaker 1: were back in the 1800s.
• 45:36
  Speaker 2: Well, even still, two centuries later, still, you know, used
• 45:40
  Speaker 2: to be three generations from shirtsleeves to searchleeves. They've beaten that.
• 45:45
  Speaker 2: So now let's move forward to the 1980s. And I
• 45:48
  Speaker 2: have to talk about Louis Ranieri. who really pioneered securitization,
• 45:54
  Speaker 2: converting individual residential mortgages into collateralized mortgage-backed obligations, CMOs. This
• 46:03
  Speaker 2: traces back to an earlier form from Fannie Mae that
• 46:09
  Speaker 2: a part of the post-Depression era financing. I'm fascinated by
• 46:15
  Speaker 2: this area because I don't think many Americans understand how
• 46:21
  Speaker 2: unusual and rare a 30-year fixed mortgage is. And I
• 46:26
  Speaker 2: also think people don't realize how productive and powerful that
• 46:30
  Speaker 2: tool is.
• 46:31
  Speaker 1: Yeah. No, I think he, because of what happened in 2008,
• 46:36
  Speaker 1: securitization and mortgage-backed securities became a dirty word. But it
• 46:41
  Speaker 1: is genuinely one of the most fascinating and important financial
• 46:45
  Speaker 1: innovations of the past half century. And Louis Ranieri, you've
• 46:48
  Speaker 1: seen the big short, right?
• 46:50
  Speaker 2: Of course.
• 46:51
  Speaker 1: Well, he's introduced this big loud mouth and he changed
• 46:53
  Speaker 1: your life more than the iPod. And that's true. He
• 46:57
  Speaker 1: really did. And, you know, my view of financial history,
• 47:01
  Speaker 1: having studied a lot of this now over the years,
• 47:03
  Speaker 1: is that, you know, we take stuff too far. But
• 47:07
  Speaker 1: the bad inventions, they die and they don't always come back.
• 47:10
  Speaker 1: The good ones are reforged. reinvented, rebuilt on, and they stick.
• 47:16
  Speaker 1: And securitization is still a massively powerful force, thanks to
• 47:20
  Speaker 1: some of the work that Larry Fink at First Boston
• 47:22
  Speaker 1: as well did, his team there, and Louis Ranier at
• 47:25
  Speaker 1: Salomon Brothers. And the 30-year mortgage that we have today,
• 47:28
  Speaker 1: or you guys here have today, it's kind of a
• 47:32
  Speaker 1: miracle of the modern world.
• 47:33
  Speaker 2: Yeah, no, very much so. But I want to stay
• 47:36
  Speaker 2: with the idea of some of these things blowing up.
• 47:40
  Speaker 2: When you look at most of the giant financial messes
• 47:44
  Speaker 2: of the past 50 or 800 years, it's not usually stocks.
• 47:50
  Speaker 2: I mean, the dot-com implosion was kind of mild. Yeah,
• 47:54
  Speaker 2: the Nasdaq fell over 81%, but most of the big blowups,
• 47:59
  Speaker 2: the GFC, long-term capital management, portfolio insurance in 87, maybe
• 48:06
  Speaker 2: not a true bond, but it always seems that bond
• 48:09
  Speaker 2: underwritings that go bad do much more damage than a
• 48:12
  Speaker 2: stock that blows up. Yeah.
• 48:14
  Speaker 1: No, I mean, I think there are many reasons. I'm
• 48:16
  Speaker 1: glad you raised the dot-com, because that's a great example.
• 48:19
  Speaker 1: I mean, the stock market fell, what, 50% from peak
• 48:21
  Speaker 1: to trough, pretty much?
• 48:22
  Speaker 2: That's about right.
• 48:23
  Speaker 1: Yeah.
• 48:24
  Speaker 2: I think the Dow only fell about 36%, 37%. Yeah,
• 48:26
  Speaker 2: because it's.
• 48:27
  Speaker 1: A bit more industrial. Right. And there's much tech stuff. Well,
• 48:30
  Speaker 1: I mean, economically, it was a nothing burger. That was
• 48:34
  Speaker 1: like one of the shortest, shallowest recessions in US history.
• 48:37
  Speaker 1: And I think that shows that, you know, obviously, it
• 48:39
  Speaker 1: wasn't fun for people that lost money. And it was
• 48:42
  Speaker 1: a big event. Even I remember that pretty well. But economically,
• 48:46
  Speaker 1: it doesn't matter as much as when the bond market
• 48:48
  Speaker 1: even slows down, it's quite painful. And when it breaks bad,
• 48:52
  Speaker 1: it's horrifically bad because it's kind of the bond market
• 48:54
  Speaker 1: represent money and the bond market breaking. It's like money dying. It's,
• 48:58
  Speaker 1: you know, there's this famous quote from Mark Twain. He said,
• 49:01
  Speaker 1: it's not what you know for sure. No, it's not
• 49:04
  Speaker 1: What you don't know, that's the problem. It's what you
• 49:06
  Speaker 1: know for sure that just ain't so. It's when you
• 49:09
  Speaker 1: take something that you think is safe and solid and
• 49:12
  Speaker 1: good and it blows up in your face. That's when
• 49:14
  Speaker 1: you get shocked. That's when the big, nasty economic outcomes happen.
• 49:18
  Speaker 1: So if you invest money in stocks or even like
• 49:19
  Speaker 1: junk bonds, it kind of, you kind of know it
• 49:22
  Speaker 1: can go bad.
• 49:23
  Speaker 2: It's right there in the title, right?
• 49:24
  Speaker 1: If you're going to call it junk, you.
• 49:26
  Speaker 2: Can't be surprised when it goes bad. But at the
• 49:29
  Speaker 2: same time, you think of treasuries, you think of conservative, A-rated,
• 49:35
  Speaker 2: even corporate bonds, investment-grade bonds, they're called investment-grade. You don't
• 49:40
  Speaker 2: expect them to go belly up. There's so many things
• 49:46
  Speaker 2: I want to talk about with this. You trace the ancestry,
• 49:53
  Speaker 2: since we're talking about junk and high investment-grade, you trace
• 49:58
  Speaker 2: the ancestry of credit ratings to Louis Tappan, an abolitionist
• 50:05
  Speaker 2: who built a credit reporting business more than a century ago.
• 50:10
  Speaker 2: How did gathering information about borrowers become not only an industry,
• 50:15
  Speaker 2: but an industry with huge authority?
• 50:18
  Speaker 1: No, that was one of the more delightful chapters to write, actually,
• 50:22
  Speaker 1: and it surprised me because I didn't think it was
• 50:24
  Speaker 1: going to be that interesting. There were lots of abolitionists, actually,
• 50:26
  Speaker 1: in various stages of this story I was pleased to see.
• 50:30
  Speaker 1: So Lewis Tappan, him and his brother ran a... uh,
• 50:35
  Speaker 1: classics of merchanting business. Uh, they were ardent, hardcore abolitionists.
• 50:40
  Speaker 1: They were for not just abolishing slavery. They were for,
• 50:44
  Speaker 1: for example, full equal treatment, which even for some abolitionists
• 50:49
  Speaker 1: would have been a step too far at the time.
• 50:51
  Speaker 1: So the famous Amistad case, they were the ones that
• 50:53
  Speaker 1: bankrolled that on the abolitionist side. Uh, so if you
• 50:57
  Speaker 1: see the film, he's played by Stellan Skarsgård, uh, Lewis Tappan.
• 51:00
  Speaker 1: But at one point, the business, because they're boycotted by
• 51:04
  Speaker 1: the South, they're hated broadly in the South, they're boycotted.
• 51:07
  Speaker 1: They have a hard time in one of the sort
• 51:09
  Speaker 1: of periodic downturns. And, you know, they come through, but
• 51:13
  Speaker 1: they almost go bankrupt. They still eventually manage to pay
• 51:16
  Speaker 1: back every creditor. But they learn to distaste debt and
• 51:20
  Speaker 1: also be wary of clients going bankrupt. So they buy, basically,
• 51:24
  Speaker 1: Lewis Tappan buys from a bankrupt law firm, a big
• 51:27
  Speaker 1: registry of basically, like, judgments of like how credit worthy
• 51:31
  Speaker 1: various businesses in America or in New York, primarily in
• 51:34
  Speaker 1: the East coast are. And they build this into something
• 51:36
  Speaker 1: called the mercantile agency, which some people almost historically call
• 51:40
  Speaker 1: like a private spy ring. But really what it was,
• 51:43
  Speaker 1: it was like agents who worked for mostly part-time who
• 51:46
  Speaker 1: would report on like, which people were seen to be trustworthy,
• 51:50
  Speaker 1: which were fine, upstanding citizens and worthy of credit. And
• 51:54
  Speaker 1: for anybody merchants, cause a lot of this. actually all happens,
• 51:57
  Speaker 1: commerce has always happened a lot on credit and trust
• 52:00
  Speaker 1: and merchant advances and things like that. So who you
• 52:02
  Speaker 1: trust was a hugely valuable thing. And among those people
• 52:05
  Speaker 1: were a young, all these reporters that worked for the
• 52:08
  Speaker 1: mercantile agency were a young Abram Lincoln, Ulysses S. Grant,
• 52:13
  Speaker 1: a few other future presidents. And I think Harding as
• 52:17
  Speaker 1: well worked for one of them. And that morphs into
• 52:21
  Speaker 1: this credit reporting side, morphs eventually into statistical analysis and
• 52:28
  Speaker 1: into ratings eventually. The actual, the famous letters that we
• 52:32
  Speaker 1: know that John Moody might have invented to build on. First,
• 52:36
  Speaker 1: there was the credit reporting agencies. Then you had Standard & Poor's.
• 52:39
  Speaker 1: That was Henry, Vaughan & Poor. They actually kind of
• 52:41
  Speaker 1: cajoled bond issuers, primarily railways, to give him data. He said, look,
• 52:47
  Speaker 1: if you guys are going to sell bonds to the public,
• 52:49
  Speaker 1: you should give us information. So he really pushed that
• 52:52
  Speaker 1: quite hard, that transparency. And John Moody took that information
• 52:57
  Speaker 1: and did it with a bit of marketing flair, turned
• 52:59
  Speaker 1: them into grades that have over time, it kind of
• 53:02
  Speaker 1: become what I call the language of credit. And rating
• 53:06
  Speaker 1: agencies get a lot of, you know, bad press and
• 53:10
  Speaker 1: Lord knows they can make mistakes, but so can everybody else.
• 53:14
  Speaker 1: And in fact, there's this other great saying I love
• 53:18
  Speaker 1: that all models are wrong, but some are useful.
• 53:20
  Speaker 2: George Box. Yeah.
• 53:21
  Speaker 1: And the rating agency, the ratings can be wrong, but
• 53:25
  Speaker 1: it's just a very handy shorthand. And if they didn't exist,
• 53:29
  Speaker 1: we'd have to probably invent something like it.
• 53:31
  Speaker 2: There's being wrong and then there's selling your ratings to
• 53:34
  Speaker 2: the highest bidder, which we saw during the financial crisis.
• 53:39
  Speaker 2: And they gave up a lot of their financial authority
• 53:43
  Speaker 2: and credibility. I have to be honest, I don't really
• 53:47
  Speaker 2: think bond investors give a whit anymore. about rating agencies
• 53:53
  Speaker 2: because they proved, hey, you're not trustworthy if you're willing
• 53:57
  Speaker 2: to sell yourself to the highest bid or why should
• 54:00
  Speaker 2: I care what you.
• 54:01
  Speaker 1: Have to do? Those incentives haven't changed. That is unquestionably problematic.
• 54:05
  Speaker 1: I still remain concerned about that. I would say investors
• 54:08
  Speaker 1: have never really, unless you were the proverbials of idiots
• 54:12
  Speaker 1: in Dusseldorf buying AAA CDOs unquestionably, Uh, most investors view
• 54:18
  Speaker 1: trading ratings at the starting point, no self-respecting bottom land.
• 54:22
  Speaker 1: This would treat as the ending point. And actually, look,
• 54:25
  Speaker 1: I studied a lot of financial crisis post-mortems because there's
• 54:29
  Speaker 1: an entire chapter on like how that all played out.
• 54:33
  Speaker 1: The ratings were, I was staggered to see pretty good.
• 54:38
  Speaker 2: Oh, really?
• 54:38
  Speaker 1: Yes. So the price action was awful because obviously people
• 54:42
  Speaker 1: didn't trust anything. So the price is even a triple a.
• 54:46
  Speaker 1: tranches of these CDOs just tumbled and lots of the
• 54:50
  Speaker 1: synthetic stuff completely blew up. But most of the stuff,
• 54:54
  Speaker 1: like if you look at the actual RMBS and CNBS markets,
• 54:57
  Speaker 1: they track pretty much, there were losses in triple A's,
• 55:00
  Speaker 1: which there shouldn't be, that's supposed to be like as
• 55:02
  Speaker 1: good as gold. But broadly speaking, they definitely like weren't
• 55:06
  Speaker 1: massively out of whack when it final, the final losses
• 55:10
  Speaker 1: were counted out. And I was shocked as well.
• 55:14
  Speaker 2: I would love to see that data because I am
• 55:16
  Speaker 2: absolutely on the other side.
• 55:18
  Speaker 1: Of that trade. For sure.
• 55:19
  Speaker 2: Coming up, we continue our conversation with Robin Wigglesworth, author
• 55:23
  Speaker 2: of A Fabulous Debt, looking at how the history of
• 55:26
  Speaker 2: bonds compare to the current bond market. I'm Barry Ritholtz.
• 55:31
  Speaker 2: You're listening to Masters in Business on Bloomberg Radio.
• 55:36
  Speaker 1: I'm Barry Ritholtz.
• 55:37
  Speaker 2: You're listening to Masters in Business on Bloomberg Radio. My
• 55:40
  Speaker 2: extra special guest this week is Robin Wigglesworth. Not only
• 55:44
  Speaker 2: is the editor at FT Alphaville, one of my favorite sites,
• 55:49
  Speaker 2: and the author of Trillions about the history of indexing,
• 55:52
  Speaker 2: his new book, A Fabulous Debt, the epic story of
• 55:56
  Speaker 2: how bonds built the modern world, is out now. So
• 56:01
  Speaker 2: I'm curious. There are so many fascinating characters throughout the book,
• 56:06
  Speaker 2: and we've mentioned a few. I'm curious... Who kind of
• 56:09
  Speaker 2: surprised you? This is almost a thousand years of research.
• 56:14
  Speaker 2: Who surprised you as someone who maybe isn't well-remembered but
• 56:19
  Speaker 2: perhaps should be?
• 56:20
  Speaker 1: Well, it's hard to... I mean, people often ask my favorite,
• 56:22
  Speaker 1: and that's always so difficult. It's like choosing your favorite child.
• 56:24
  Speaker 2: Yeah. Well, the other question is simply so many fraudsters. Oh, yeah.
• 56:30
  Speaker 2: And so many... I don't know. Is the phrase financial
• 56:34
  Speaker 2: adventurers a real thing? Yeah. Who in the book do
• 56:39
  Speaker 2: you think would be a great movie character?
• 56:41
  Speaker 1: Yeah. Well, I mean, Gregor McGregor, I mean, he's like,
• 56:44
  Speaker 1: obviously not a hero and shouldn't be rehabilitated, but just
• 56:48
  Speaker 1: delightful scoundrel who invented an entire country to sell bonds in,
• 56:53
  Speaker 1: in the 1800s in England. And he's just, his entire
• 56:56
  Speaker 1: life is just, I'm astonished. Somebody hasn't made a movie
• 57:00
  Speaker 1: about him already. Cause I mean, he's like, he, he
• 57:02
  Speaker 1: fought with Simon Bolivar in Venezuela. He was a soldier
• 57:07
  Speaker 1: in the Napoleonic Wars, and then he did this, one
• 57:10
  Speaker 1: of the most outrageous financial scams in history. Though he
• 57:13
  Speaker 1: might have actually, ironically, somehow believed this country, it might
• 57:18
  Speaker 1: be he was essentially trying to do a 19th century
• 57:20
  Speaker 1: version of fake it till you make it.
• 57:22
  Speaker 2: Right.
• 57:22
  Speaker 1: Like, he wasn't just trying to scam people. He was
• 57:24
  Speaker 1: trying to will a new country into existence, and he
• 57:27
  Speaker 1: was just... incompetence, essentially. We don't know exactly, but he
• 57:31
  Speaker 1: was incredible. But Jay Cooke was like, he was a
• 57:34
  Speaker 1: guy who hugely admired Native Americans. He named his palatial
• 57:40
  Speaker 1: estate after a chief he'd befriended in his youth in Ohio.
• 57:44
  Speaker 1: But obviously his railways just trampled through a lot of
• 57:48
  Speaker 1: Native American lands. He hated graft. He hated graft. He
• 57:53
  Speaker 1: always says that I think corruption is awful. It's the
• 57:55
  Speaker 1: root of all evil. but he was pretty good at it.
• 57:58
  Speaker 2: Sometimes you want to get something done, you've got to
• 58:01
  Speaker 2: keep it fair, a little something on the side.
• 58:02
  Speaker 1: He had this incredible palatial mansion, one of the biggest
• 58:05
  Speaker 1: houses in America at the time built. It was just
• 58:07
  Speaker 1: like fake Roman ruins, his own private cinema, radio, the
• 58:12
  Speaker 1: whole works, incredible. But really the only thing he really
• 58:15
  Speaker 1: enjoyed was talking about theology with priests and he'd let
• 58:19
  Speaker 1: the priests run, poor priests could come and stay with
• 58:22
  Speaker 1: him whenever they wanted in his holiday home and discuss theology.
• 58:26
  Speaker 1: and fishing. So his biography, he has an entire chapter
• 58:29
  Speaker 1: about fishing, but his wife gets mentioned, I think, two
• 58:31
  Speaker 1: or three times. So he's just an incredibly complex character
• 58:35
  Speaker 1: and was clearly quite, he looks also in pictures, he
• 58:38
  Speaker 1: looks like kind of an evil Santa Claus, like very
• 58:41
  Speaker 1: intense eyes, big bushy white beard. I think he was
• 58:44
  Speaker 1: fascinating and also maybe because he's now so synonymous with
• 58:48
  Speaker 1: the crash of 1873, his genuinely valuable role that he
• 58:52
  Speaker 1: played in America and I think maybe So.
• 58:59
  Speaker 2: I'm legally obligated to ask a question about AI these days.
• 59:05
  Speaker 2: You were quoted saying you were profoundly relaxed about the
• 59:09
  Speaker 2: possibility of AI. of an AI bubble, but then piling
• 59:13
  Speaker 2: on all of this debt changes things. So what changed
• 59:18
  Speaker 2: your mind?
• 59:19
  Speaker 1: Well, I'm profoundly relaxed about bubbles just because I'm not
• 59:22
  Speaker 1: an efficient market zealot, but I just, I can't spot them. Certainly,
• 59:26
  Speaker 1: I don't really believe anybody can. And in fact, I
• 59:29
  Speaker 1: think bubbles are an essential part of how the world works.
• 59:34
  Speaker 1: They are an important part. They're even a valuable part.
• 59:37
  Speaker 1: We want people to occasionally take leave of their senses
• 59:40
  Speaker 1: and chuck money at stuff, to hope and dream rather
• 59:43
  Speaker 1: than just kind of be a boring journalist who always
• 59:46
  Speaker 1: thinks everything's going to go badly. That is how quite
• 59:50
  Speaker 1: often big leaps of progress happen. But I do think
• 59:53
  Speaker 1: that bubbles, when they burst, they tend to burst in
• 59:56
  Speaker 1: more violent, nasty ways when they are driven primarily by credit.
• 1:00:00
  Speaker 1: So we talked about the dot-com bubble as a classic
• 1:00:02
  Speaker 1: example that was primarily in the equity landscape. Didn't really
• 1:00:05
  Speaker 1: matter economically. That's how I felt about the AI bubble
• 1:00:10
  Speaker 1: for a long time. Yes, it's great. I mean, I'll
• 1:00:12
  Speaker 1: write about things. This is mad or this is good
• 1:00:14
  Speaker 1: or who cares? Nobody cares. I don't know. I'm a journalist.
• 1:00:17
  Speaker 1: But I do see the signs that It is becoming
• 1:00:21
  Speaker 1: increasingly fueled, not just by the cash flows of these
• 1:00:24
  Speaker 1: incredibly successful companies, tech companies, but also by credit and
• 1:00:28
  Speaker 1: now increasingly off balance sheet liabilities. And I'm not saying
• 1:00:32
  Speaker 1: that we should freak out now, but I think if
• 1:00:36
  Speaker 1: there is eventually, and I think is a classic thing
• 1:00:41
  Speaker 1: that if we talk in a few years, this time
• 1:00:43
  Speaker 1: about the big AI crash of 2027 or eight or
• 1:00:45
  Speaker 1: nine 29. We'll point to this as symptoms. Obviously, we
• 1:00:51
  Speaker 1: saw this coming. It was this and that and that.
• 1:00:53
  Speaker 2: You remind me, there's a wonderful book that, if you
• 1:00:56
  Speaker 2: haven't read, you should absolutely put in the top of
• 1:00:59
  Speaker 2: your list, which is, it's by Dan Gross, Pop! Why
• 1:01:04
  Speaker 2: Bubbles Are Great for the Economy. My favorite chapter is
• 1:01:08
  Speaker 2: all of the fiber that was laid, Rollable Crossing, Metromedia Fiber,
• 1:01:12
  Speaker 2: $ 1, 000 a mile. And afterwards, after it comes out of
• 1:01:17
  Speaker 2: bankruptcy and it's bought for pennies a mile, no one
• 1:01:21
  Speaker 2: would pay $ 300 a month for YouTube, but $ 10 a
• 1:01:25
  Speaker 2: month is affordable. So I'm assuming you believe there's a
• 1:01:31
  Speaker 2: giant misallocation of capital to AI, and on the other side,
• 1:01:35
  Speaker 2: it'll work to everybody's benefit.
• 1:01:38
  Speaker 1: I don't know. I don't know whether it's misallocated. I mean,
• 1:01:40
  Speaker 1: if it is, if it's going to cure cancer, bring
• 1:01:42
  Speaker 1: peace to the Middle East and make us an interplanetary species,
• 1:01:45
  Speaker 1: maybe this isn't misallocation. I don't know. And I think
• 1:01:48
  Speaker 1: we all have to be humble given what's going on
• 1:01:51
  Speaker 1: about how much we do know. I'm just inherently cynical.
• 1:01:55
  Speaker 1: I'm a journalist. It's kind of a professional requirement. But
• 1:01:59
  Speaker 1: I tend to be happy about it. I think this
• 1:02:01
  Speaker 1: is a good thing. And yes, maybe we'll just have,
• 1:02:04
  Speaker 1: if essentially the future is a small... language models that
• 1:02:09
  Speaker 1: actually stuff that you can run on the phone. I mean,
• 1:02:10
  Speaker 1: most people, most ordinary people that use AI today, as
• 1:02:14
  Speaker 1: far as I can see, they, it's like a souped
• 1:02:16
  Speaker 1: up Google search. They want to pair a wine with
• 1:02:19
  Speaker 1: their dinner or whatever. And you don't need, you don't need, well,
• 1:02:24
  Speaker 1: basically if chat GPT, if you look at the, what
• 1:02:25
  Speaker 1: people are actually using chat GPT and Claude for, we
• 1:02:28
  Speaker 1: hear about the cutting edge examples, but really the vast
• 1:02:31
  Speaker 1: majority of usage, I suspect is that very low level
• 1:02:34
  Speaker 1: stuff that you don't need AI. massive data centers to write.
• 1:02:38
  Speaker 2: The best description I heard is if you're doing it
• 1:02:42
  Speaker 2: on a transactional basis, it's the same as Google search.
• 1:02:46
  Speaker 2: But if you're using it on a collaborative basis, you're
• 1:02:50
  Speaker 2: going to make your own work deeper, broader, and potentially
• 1:02:56
  Speaker 2: better as long as you don't cut and paste AI
• 1:02:58
  Speaker 2: generated text. which continues to be garbage, but that's.
• 1:03:04
  Speaker 1: Getting a lot better. I think people, I mean, some
• 1:03:05
  Speaker 1: of the newer frontier models, we've kind of had this
• 1:03:09
  Speaker 1: crystallized view of what it looks like because we've tested
• 1:03:11
  Speaker 1: chat GPT two or three or something. It is getting
• 1:03:15
  Speaker 1: incredibly good. And I've been in AI nuts since look,
• 1:03:18
  Speaker 1: I've spent part of my paternity leave here in New
• 1:03:22
  Speaker 1: York in March, 2016, watching AlphaGo beat Lisa doll at go.
• 1:03:27
  Speaker 1: Which was a big deal. It was a huge deal.
• 1:03:29
  Speaker 1: It was one of those first, it was the last game.
• 1:03:31
  Speaker 2: First you had chess. Yeah. Then you had Jeopardy.
• 1:03:33
  Speaker 1: Yeah.
• 1:03:34
  Speaker 2: And for reasons inherent in the rules of Go. Yeah.
• 1:03:38
  Speaker 2: it's even harder than both of those because those are
• 1:03:41
  Speaker 2: so predefined.
• 1:03:42
  Speaker 1: Yeah, it is so difficult. I mean, AlphaGo is now
• 1:03:46
  Speaker 1: almost trivial for what these models can do. But for me,
• 1:03:49
  Speaker 1: I covered quantitative hedge funds. I could see how they
• 1:03:52
  Speaker 1: were using things that we don't talk that much about,
• 1:03:54
  Speaker 1: but machine learning and neural nets. I mean, neural nets
• 1:03:57
  Speaker 1: obviously are coming back now and natural language processing. And
• 1:04:02
  Speaker 1: it was super cool. And I could see how there
• 1:04:05
  Speaker 1: were some quantitative hedge funds that in their holiday downloaded
• 1:04:09
  Speaker 1: lots of heart scans from the Cleveland Clinic, I think
• 1:04:12
  Speaker 1: it was, as a Kaggle competition, and were able to
• 1:04:15
  Speaker 1: design something that better and more quickly identified heart disease
• 1:04:21
  Speaker 1: than human doctors. And that's just... So for me, it
• 1:04:23
  Speaker 1: was mind-blowing. I'm a huge optimist on all these things,
• 1:04:26
  Speaker 1: but I think we just... I also know the pattern
• 1:04:30
  Speaker 1: that we get overly optimistic, and we talk about human
• 1:04:32
  Speaker 1: extinction and curing cancer. I mean, we'll see. All I
• 1:04:37
  Speaker 1: know is there's a lot of money going into this.
• 1:04:39
  Speaker 1: It's increasingly debt financed. It's increasingly off balance sheet financed.
• 1:04:44
  Speaker 1: And historically, that has not ended well. And rail, like
• 1:04:48
  Speaker 1: you say, rail is a great example of a capex
• 1:04:50
  Speaker 1: boom that ended badly economically and financially, but still was
• 1:04:54
  Speaker 1: a huge societal bean for America. Cable as well, all
• 1:04:56
  Speaker 1: the cable we laid. But that lasts longer than a
• 1:04:59
  Speaker 1: GPU chip.
• 1:05:01
  Speaker 2: That's for sure.
• 1:05:02
  Speaker 1: So that's what I'm a little bit worried about.
• 1:05:04
  Speaker 2: So what's the bigger issue? Is it the size of
• 1:05:06
  Speaker 2: the debt that's being issued? Is it the circularity or
• 1:05:10
  Speaker 2: is it just the overall quality with that off balance
• 1:05:14
  Speaker 2: sheet stuff, which ultimately I believe the reason Lehman wasn't
• 1:05:21
  Speaker 2: rescued is repo 105. They were pretty much insolvent and
• 1:05:25
  Speaker 2: had spent a good couple of years hiding it. Yeah.
• 1:05:28
  Speaker 1: No, I think that's very right. And also that when
• 1:05:31
  Speaker 1: you don't see, it's the stuff you don't see, like
• 1:05:32
  Speaker 1: that old Mark Twain quote, the stuff you don't know about.
• 1:05:35
  Speaker 1: I'm not actually worried because, I mean, so AI hyperscalers,
• 1:05:39
  Speaker 1: I think, have issued around $ 500 billion worth of debt
• 1:05:42
  Speaker 1: this year after $ 200 billion or so last year. I mean,
• 1:05:44
  Speaker 1: it's like big numbers. But these are incredibly large, successful,
• 1:05:48
  Speaker 1: big companies. YouTube still prints money. Amazon still prints money. Facebook,
• 1:05:53
  Speaker 1: WhatsApp still prints money. It's fine. They could even issue
• 1:05:57
  Speaker 1: lots more. And the rating agencies, God bless them, they
• 1:06:00
  Speaker 1: are actually looking past these and into these off-balance sheet commitments.
• 1:06:04
  Speaker 1: It is getting integrated. And despite all those liabilities, these
• 1:06:08
  Speaker 1: are still pretty strong companies. There are asterisks around, let's say,
• 1:06:12
  Speaker 1: an Oracle that is looking like the weaker member of
• 1:06:15
  Speaker 1: the herd, but even that doesn't look like an imminent disaster.
• 1:06:18
  Speaker 1: But we are still in the foothills, and we can
• 1:06:23
  Speaker 1: see where things are going. So right now, I struggle
• 1:06:26
  Speaker 1: to see this ending horrifically badly, but I've been wrong
• 1:06:30
  Speaker 1: before and we might be talking in a year's time
• 1:06:32
  Speaker 1: and it's like, oh my God, that broke pretty bad.
• 1:06:36
  Speaker 2: So let's talk about U.S. debt and U.S. Treasury. We
• 1:06:45
  Speaker 2: discussed earlier how the deficit scolds, everything they've been warning
• 1:06:50
  Speaker 2: about The U.S. won't be able to finance its debt.
• 1:06:54
  Speaker 2: It'll crowd out private capital, cause hyperinflation. All those things,
• 1:06:59
  Speaker 2: none of them come true. At what point do you
• 1:07:02
  Speaker 2: begin to get worried about U.S. debt? You said you've
• 1:07:06
  Speaker 2: gone from 1% worried to 3% worried. What would take
• 1:07:10
  Speaker 2: you up to 15%, 20% worried?
• 1:07:13
  Speaker 1: Yeah, I've been thinking, I mean, this is the big subject.
• 1:07:16
  Speaker 1: It's the $ 40 trillion question, I guess, or really given
• 1:07:19
  Speaker 1: the importance of the U.S. economy, it's sort of the
• 1:07:21
  Speaker 1: the biggest question in the world right now. I'm not
• 1:07:26
  Speaker 1: that worried. I mean, the numbers are staggering. I came
• 1:07:29
  Speaker 1: across a stat that the US celebrated its 250th birthday
• 1:07:33
  Speaker 1: this year. Happy birthday, Barry. In its first 240 years,
• 1:07:38
  Speaker 1: the US borrowed around $ 20 trillion. And it's borrowed another
• 1:07:41
  Speaker 1: $ 20 trillion in just the past 10 years.
• 1:07:43
  Speaker 2: Yeah, it's... really a story of unforced errors the past decade. Yeah.
• 1:07:49
  Speaker 2: I mean, giant tax cuts, wars of choice, tariffs, you
• 1:07:52
  Speaker 2: could go down the list. Yeah. All these things were decisions, not, hey, sometimes,
• 1:07:59
  Speaker 2: sometimes there's a catastrophe or a pandemic and it requires
• 1:08:03
  Speaker 2: a response. Other times we just make bad decisions.
• 1:08:06
  Speaker 1: Yeah. I mean, you and I, we remember the late 90s.
• 1:08:09
  Speaker 1: there were genuine concerns about what would happen if the
• 1:08:11
  Speaker 1: US paid down all its debts. Because it was running
• 1:08:14
  Speaker 1: such big budget surpluses, it stopped issuing 30-year treasuries for
• 1:08:18
  Speaker 1: a period. That's right. I mean, you tell kids that
• 1:08:20
  Speaker 1: these days, that sounds like fantasy land. But there were
• 1:08:23
  Speaker 1: genuine concerns about what would the global financial system look
• 1:08:26
  Speaker 1: like if there were no treasuries. And now that is
• 1:08:30
  Speaker 1: not the thing we're worried about.
• 1:08:32
  Speaker 2: Not a concern. I spent the better part of the
• 1:08:35
  Speaker 2: 2010s begging the Treasury Department to issue 50- or 100-year
• 1:08:38
  Speaker 2: debt and by the way refinance everything rates are at
• 1:08:42
  Speaker 2: record lows and the response was well if we lower
• 1:08:47
  Speaker 2: our interest rate will just spend more money now you
• 1:08:50
  Speaker 2: can spend more money anyway the question is what's it
• 1:08:52
  Speaker 2: going to cost to service it and just generational idiocy
• 1:08:58
  Speaker 2: since you quoted Twain I'll quote Twain he is an
• 1:09:01
  Speaker 2: idiot and a congressman but I repeat myself I mean
• 1:09:05
  Speaker 2: that is just the greatest observation about politicians.
• 1:09:10
  Speaker 1: Yeah. I mean, Mark Twain had a way with words.
• 1:09:12
  Speaker 1: He should have written some books. He should have.
• 1:09:13
  Speaker 2: He absolutely should have put some pens to paper.
• 1:09:15
  Speaker 1: Yeah.
• 1:09:16
  Speaker 2: So, so let's, let's stay with, let's stay with.
• 1:09:18
  Speaker 1: When do I worry?
• 1:09:19
  Speaker 2: Yeah.
• 1:09:20
  Speaker 1: Okay. So, so people focus on debt to GDP, but it's,
• 1:09:23
  Speaker 1: that's a nothing indicator. It doesn't say anything about a
• 1:09:25
  Speaker 1: country's Ability to carry that the other plan is a
• 1:09:28
  Speaker 1: great example.
• 1:09:29
  Speaker 2: Well, it should argue that if you have a big
• 1:09:33
  Speaker 2: robust GDP You can afford servicing that debt, right? Yeah,
• 1:09:37
  Speaker 2: the doom mongers who you talk about in the book.
• 1:09:40
  Speaker 2: They only look at the debt They don't look at
• 1:09:42
  Speaker 2: the other side of the ledger.
• 1:09:44
  Speaker 1: Yes.
• 1:09:44
  Speaker 2: Hey, it's called double entry accounting for a reason Yeah, if.
• 1:09:47
  Speaker 1: People want to think of in household terms if imagine
• 1:09:50
  Speaker 1: if you borrowed bought a house for one time your
• 1:09:54
  Speaker 1: income Wouldn't feel very levered with it, right? No exactly.
• 1:09:57
  Speaker 2: Yeah, and the rule of thumb is what three or
• 1:09:59
  Speaker 2: four times.
• 1:10:00
  Speaker 1: Yeah, so the US has a way to go before
• 1:10:02
  Speaker 1: I'm not saying that's good and I have to me
• 1:10:04
  Speaker 1: like I cannot look at the budget situation now and
• 1:10:07
  Speaker 1: think that given the health of the US economy given
• 1:10:11
  Speaker 1: the health of the global economy given the lack of
• 1:10:15
  Speaker 1: any major crises and that 6% budget deficit is a
• 1:10:19
  Speaker 1: good thing. That is unambiguously not a good thing. But
• 1:10:21
  Speaker 1: I think the U.S. has far more capacity to carry
• 1:10:24
  Speaker 1: debt than most Americans certainly realize. If you look at
• 1:10:28
  Speaker 1: debt servicing as a percent of GDP, just how much
• 1:10:30
  Speaker 1: it costs to pay interest, as a part of the
• 1:10:34
  Speaker 1: budget in the U.S., it looks pretty big because the U.S.
• 1:10:37
  Speaker 1: government is pretty small compared to the size of the
• 1:10:39
  Speaker 1: economy compared to most other developed countries. So the U.S.
• 1:10:41
  Speaker 1: can tax a lot more and it can spend probably
• 1:10:44
  Speaker 1: a bit less as well. But if you look at
• 1:10:46
  Speaker 1: this percent of GDP, it's around three and a half
• 1:10:48
  Speaker 1: percent of GDP.
• 1:10:49
  Speaker 2: It's really very modest.
• 1:10:51
  Speaker 1: Yes, it's up from around two and a half percent
• 1:10:54
  Speaker 1: a few years ago, but it's actually less than most
• 1:10:56
  Speaker 1: other countries, developed countries. It's really only when you get
• 1:10:59
  Speaker 1: around five percent of GDP when you can see some
• 1:11:03
  Speaker 1: evidence of other countries historically struggling a bit more.
• 1:11:06
  Speaker 2: So we're two thirds of the way there. We have
• 1:11:09
  Speaker 2: to do something to either lower rates. or lower our
• 1:11:12
  Speaker 2: deficit or some combination there, or we will eventually run
• 1:11:15
  Speaker 2: into trouble.
• 1:11:16
  Speaker 1: Yeah, so the CBO, I think the last calculations, I
• 1:11:19
  Speaker 1: think they indicate it will hit around 5%, all things
• 1:11:22
  Speaker 1: being equal, in a decade or so, like 10, 12 years.
• 1:11:26
  Speaker 1: And even then, frankly, countries are fine. It's just that
• 1:11:30
  Speaker 1: quite often we've seen countries then reverse course. So the
• 1:11:34
  Speaker 1: UK in 1980 is a great example under Thatcher.
• 1:11:36
  Speaker 2: Yep.
• 1:11:37
  Speaker 1: A country that didn't reverse course and the debt started
• 1:11:40
  Speaker 1: snowballing is Canada in the 90s.
• 1:11:43
  Speaker 2: Oh, really? Yeah.
• 1:11:44
  Speaker 1: So the Canadian, for all sorts of fun reasons, but
• 1:11:47
  Speaker 1: also they struggled to get inflation down after the 80s.
• 1:11:50
  Speaker 1: They had lots of, not a huge debt stack, but
• 1:11:53
  Speaker 1: it became quite onerous to service. So Canadian government debt
• 1:11:57
  Speaker 1: as a percent of GDP peaked at almost 10% of
• 1:11:59
  Speaker 1: GDP in 1995. Uh, but then they had a bigger
• 1:12:04
  Speaker 1: study program. It was the nineties. It was kind of fine.
• 1:12:06
  Speaker 1: It was good to retrench a bit when the global
• 1:12:09
  Speaker 1: economy is doing fine. Uh, I really want to study
• 1:12:12
  Speaker 1: that episode because they only looked at the numbers on
• 1:12:13
  Speaker 1: the IMF database because I'm a, I'm a sad person
• 1:12:17
  Speaker 1: who spends my evenings looking at IMF data. But, uh,
• 1:12:20
  Speaker 1: I really want, that's one thing I'd love to dig
• 1:12:22
  Speaker 1: into to finding out like how Canada, how they got
• 1:12:25
  Speaker 1: that far. Like why did things start snowballing at around 5%?
• 1:12:29
  Speaker 1: Why they didn't stop then and how they did eventually
• 1:12:31
  Speaker 1: stop stuff.
• 1:12:32
  Speaker 2: So we're talking globally. The number in the book about
• 1:12:36
  Speaker 2: global debt is $ 340 trillion. What does that mean for
• 1:12:42
  Speaker 2: the world to be carrying all of this global debt?
• 1:12:46
  Speaker 1: Well, I mean, the book's already out of date. I
• 1:12:48
  Speaker 1: think it's $ 370 trillion now.
• 1:12:51
  Speaker 2: A trillion here, a trillion there. Pretty soon it all
• 1:12:54
  Speaker 2: adds up.
• 1:12:54
  Speaker 1: Yeah, exactly. Well, look, I am both very insistent I
• 1:12:58
  Speaker 1: am not a debt scold. But debt... unambiguously does make
• 1:13:03
  Speaker 1: stuff more fragile. That is an asset as well as
• 1:13:05
  Speaker 1: a liability. I think some countries could and should borrow more.
• 1:13:10
  Speaker 1: I think this is a healthy thing, but it does
• 1:13:12
  Speaker 1: make the system fragile. We have a lot of stuff
• 1:13:14
  Speaker 1: in the world that encourages people to borrow money, whether
• 1:13:17
  Speaker 1: it's like in this interest rate deduction for interest payments to,
• 1:13:22
  Speaker 1: you know, it's just favorable tax break. Or like if
• 1:13:25
  Speaker 1: you're a private equity firm, you're always optimizing the balance
• 1:13:27
  Speaker 1: sheet to increase your equity returns. I don't think that's healthy.
• 1:13:32
  Speaker 1: It does mean that it's an economy that is more
• 1:13:34
  Speaker 1: fragile to shocks. And I would, in an ideal world,
• 1:13:38
  Speaker 1: have a system that is a little bit more resilient
• 1:13:40
  Speaker 1: because there are always shocks coming. And I think we
• 1:13:44
  Speaker 1: could do a bit more to maybe buttress the sinews
• 1:13:46
  Speaker 1: of the bond market, especially to help that.
• 1:13:49
  Speaker 2: So when the tariffs were introduced, when there was a
• 1:13:52
  Speaker 2: whole bunch of all the nonsense with Canada and Greenland
• 1:13:56
  Speaker 2: and all this back and forth and to say nothing
• 1:13:58
  Speaker 2: of the Iran war, Some folks talked about the end
• 1:14:03
  Speaker 2: of the US hegemony, perhaps the end of the dollar
• 1:14:06
  Speaker 2: as a reserve currency or the central role of the
• 1:14:10
  Speaker 2: US Treasury in global finance. What's your take on that?
• 1:14:15
  Speaker 2: Is that an overreaction? Is there an alternative to the dollar?
• 1:14:19
  Speaker 2: Is there an alternative to treasuries?
• 1:14:21
  Speaker 1: I think it's both an overreaction and there is an alternative.
• 1:14:25
  Speaker 1: So I think even if there was an alternative, I
• 1:14:28
  Speaker 1: think people underestimate the immense force of inertia and how
• 1:14:35
  Speaker 1: slowly things change. So I am, on the scale of
• 1:14:40
  Speaker 1: the spectrum of how worried people are, I am definitely
• 1:14:42
  Speaker 1: on the very relaxed side of things. Maybe wrongly, who knows?
• 1:14:46
  Speaker 1: But I also definitely think there is no alternative. I mean,
• 1:14:49
  Speaker 1: Europeans own, I think, $ 15, $ 16 trillion worth of US assets.
• 1:14:55
  Speaker 1: There was lots of talk and chatter about them withdrawing,
• 1:14:58
  Speaker 1: pulling out, but you know, where are you going to
• 1:15:00
  Speaker 1: put that money? I mean, there is no other market. Japan?
• 1:15:04
  Speaker 2: The Euro?
• 1:15:04
  Speaker 1: Yeah. Beijing? Do you trust Beijing? I mean, despite the
• 1:15:07
  Speaker 1: administration's foibles, do you trust Beijing more than you trust D.C.?
• 1:15:12
  Speaker 1: I'm not so sure. So, I think people will, like,
• 1:15:17
  Speaker 1: you know, there's some things we underestimate the rate of
• 1:15:19
  Speaker 1: change on and some things we massively overestimate. We think,
• 1:15:22
  Speaker 1: almost feel innately that, yes, the U.S. should be punished.
• 1:15:26
  Speaker 1: Us Europeans, even Asians, I've talked to people about this.
• 1:15:28
  Speaker 1: There's almost this visceral sense, there should be consequences. I
• 1:15:34
  Speaker 1: just don't say it, if I'm being honest.
• 1:15:35
  Speaker 2: All right, before I get to my favorite questions, I
• 1:15:37
  Speaker 2: have one last question, and it's a quote that I love,
• 1:15:42
  Speaker 2: that I recognize in the book.
• 1:15:44
  Speaker 1: J.K.
• 1:15:45
  Speaker 2: Galbraith, there can be few fields of human endeavor in
• 1:15:49
  Speaker 2: which history counts for so little as in the world
• 1:15:52
  Speaker 2: of finance. Why is that? I mean, all the information
• 1:15:56
  Speaker 2: is here. You can find these mistakes and yet we
• 1:16:02
  Speaker 2: relive them over and over again.
• 1:16:03
  Speaker 1: Yeah. Well, some of it's human nature doesn't change. And
• 1:16:06
  Speaker 1: I think also finance is, and one of the reasons
• 1:16:09
  Speaker 1: why I love it is its complexity, its nuance, its depth.
• 1:16:14
  Speaker 1: And it just means that if you are a world-class
• 1:16:17
  Speaker 1: bond person, it's very, how much time do you really
• 1:16:21
  Speaker 1: have to get it to suck into the history or
• 1:16:22
  Speaker 1: know about the equity world? You and I see this
• 1:16:25
  Speaker 1: probably all the time that people are world-class experts in
• 1:16:28
  Speaker 1: this one narrow field, if you take them, if they
• 1:16:31
  Speaker 1: start opining about central bank monetary policy, you realize they're
• 1:16:35
  Speaker 1: over their skis. And these are very smart, intelligent people.
• 1:16:38
  Speaker 1: I mean, world-class people. It's just very hard to know this.
• 1:16:42
  Speaker 1: It's a very complex system, our global world. And I
• 1:16:45
  Speaker 1: think history, I wish more people studied it because it
• 1:16:48
  Speaker 1: has at least helped me understand the world. I'm not
• 1:16:51
  Speaker 1: saying the world makes perfect sense when you know it's history,
• 1:16:54
  Speaker 1: but It has helped me enormously. I'm hoping it can
• 1:16:57
  Speaker 1: help other people as well.
• 1:16:59
  Speaker 2: I couldn't agree more. I'm always surprised when I'm speaking
• 1:17:03
  Speaker 2: to someone and I'll reference what I think of as
• 1:17:07
  Speaker 2: a well-known historical fact. And they're like, no, that can't be.
• 1:17:11
  Speaker 2: It's the same mistake we're made now. We couldn't have
• 1:17:14
  Speaker 2: done that in 1987. Yeah, no, it's exactly.
• 1:17:17
  Speaker 1: All right.
• 1:17:18
  Speaker 2: Let me jump to my favorite questions I ask all
• 1:17:21
  Speaker 2: my guests, kind of revealing about who you are. Uh,
• 1:17:25
  Speaker 2: starting with who your mentors that helped shape your career.
• 1:17:29
  Speaker 1: Hmm. Well, the first guy gave me a job once
• 1:17:31
  Speaker 1: ago in journalism was a guy called Paul McNamara. And
• 1:17:34
  Speaker 1: he was very sort of almost performatively doubt, but in
• 1:17:37
  Speaker 1: quite a funny way is very dry person. But he
• 1:17:40
  Speaker 1: was one of the first people that made me think actually,
• 1:17:42
  Speaker 1: maybe I can do this for a living. So when
• 1:17:44
  Speaker 1: you're young, you're always filled with insecurity. And he was
• 1:17:47
  Speaker 1: not somebody who gave praise likely, but he said I
• 1:17:49
  Speaker 1: was not terrible. And that meant a lot coming from him.
• 1:17:52
  Speaker 1: And I learned a lot from him. Here at Bloomberg, actually,
• 1:17:55
  Speaker 1: since we're here, there was an editor here when I
• 1:17:56
  Speaker 1: worked here called Chris Kirkham, who was my team leader
• 1:17:59
  Speaker 1: when I covered economics and politics in the Nordic region.
• 1:18:02
  Speaker 1: I thought he was phenomenal. Very old school. He'll very
• 1:18:04
  Speaker 1: happily yell at you if you screwed up. But the
• 1:18:08
  Speaker 1: only time I had a really big mistake, he didn't
• 1:18:12
  Speaker 1: say anything. He called up, said, look, I'm not going
• 1:18:14
  Speaker 1: to say anything. I think you know that was not great.
• 1:18:17
  Speaker 1: Go out, get drunk. I'll pay for it all. and
• 1:18:20
  Speaker 1: then come back tomorrow, and tomorrow's a new day. And
• 1:18:23
  Speaker 1: I really appreciated that. He'd yell at the small stuff,
• 1:18:25
  Speaker 1: but the big stuff, he knew he didn't need to
• 1:18:27
  Speaker 1: beat you up. I beat myself up more than anybody
• 1:18:30
  Speaker 1: else could. So I thought that was quite inspirational, actually.
• 1:18:34
  Speaker 2: Really interesting. So you wrote two books, Trillions and A
• 1:18:37
  Speaker 2: Fabulous Debt. What are some of your favorite books, and
• 1:18:42
  Speaker 2: what are you reading currently?
• 1:18:44
  Speaker 1: Peter Bernstein, Against the Gods. classic it's just incredible I
• 1:18:49
  Speaker 1: mean somebody once said that I Trillions was similar and
• 1:18:52
  Speaker 1: I I've never blushed so it's such a crimson shade
• 1:18:57
  Speaker 1: ever in my life it was incredible it's not true
• 1:19:00
  Speaker 1: Bernstein is a giant William, I mean, this, I mean, God,
• 1:19:05
  Speaker 1: I mean, I always feel like I can think of
• 1:19:07
  Speaker 1: all the people that like, I'd love to say, but like, uh,
• 1:19:11
  Speaker 1: I've recently read the arc at our Hamid's, uh, 1873 book,
• 1:19:15
  Speaker 1: which was spectacular. Also covers some of the same ground.
• 1:19:18
  Speaker 2: He's the author of the Lords of finance, which won
• 1:19:21
  Speaker 2: a Pulitzer. Yeah. I have that book next up in
• 1:19:24
  Speaker 2: my queue and I've heard from several people. It's spectacular.
• 1:19:29
  Speaker 1: Yeah, no, I love it. And I love it because
• 1:19:31
  Speaker 1: it's almost like a compliment to my book. Cause he
• 1:19:33
  Speaker 1: talks about some of the same stuff, but from that
• 1:19:35
  Speaker 1: Grunda crack perspective in Europe, primarily through the prism of
• 1:19:38
  Speaker 1: the Rothschild family. And I mean, loads of finance is,
• 1:19:41
  Speaker 1: you know, I've read some Pulitzer prize winning books that
• 1:19:43
  Speaker 1: have been disappointing. It loads of finances, spectacular. It's one
• 1:19:46
  Speaker 1: of the best narrative history books ever. It's incredible.
• 1:19:51
  Speaker 2: And told from the point of view of four separate
• 1:19:55
  Speaker 2: central bank chiefs is such a great frame. Anything else
• 1:20:01
  Speaker 2: that you've read recently that you want to mention?
• 1:20:03
  Speaker 1: Well, belated because I spent so long studying and researching
• 1:20:07
  Speaker 1: for my own book. I only read stuff that was
• 1:20:08
  Speaker 1: relevant to my book until recently. So I've been catching
• 1:20:11
  Speaker 1: up on some old stuff. My colleague, Dan McCrum, who
• 1:20:13
  Speaker 1: took down the German company Wirecard, he wrote a book
• 1:20:17
  Speaker 1: called Money Men, which is, look, I read it because
• 1:20:20
  Speaker 1: like he's a friend and a colleague and it's an
• 1:20:22
  Speaker 1: incredible story, but I thought I knew that story. I
• 1:20:24
  Speaker 1: read about in the FT, the book is incredible. And,
• 1:20:27
  Speaker 1: and actually telling a writing a narrative story about something
• 1:20:32
  Speaker 1: like a German payments company is such a feat of writing. Uh,
• 1:20:37
  Speaker 1: I just thought this as I just admired the craft.
• 1:20:39
  Speaker 1: I thought it was incredible.
• 1:20:40
  Speaker 2: What about streaming you listening to any podcasts or watching any, uh,
• 1:20:45
  Speaker 2: streaming shows that, that, uh, are worth repeating?
• 1:20:48
  Speaker 1: Uh, I am watching the beer with my wife. It's
• 1:20:51
  Speaker 1: making us very hungry and miss New York a lot. Uh,
• 1:20:54
  Speaker 1: I mean, I know it's set in Chicago, but generally
• 1:20:56
  Speaker 1: having a food scene slightly better than the one in
• 1:20:58
  Speaker 1: Oslo is something we'd appreciate. Uh, so we're about to
• 1:21:03
  Speaker 1: finish that. So if you've got any good tips, I
• 1:21:05
  Speaker 1: need something new. Uh, I listened to more podcasts now,
• 1:21:08
  Speaker 1: certainly than I used to, because we have our own,
• 1:21:10
  Speaker 1: the story of money, a history, a financial history podcast. Um,
• 1:21:15
  Speaker 1: But yeah, the rest is history. I mean, they don't
• 1:21:17
  Speaker 1: need a shout out from me. It's a juggernaut at
• 1:21:20
  Speaker 1: this point.
• 1:21:20
  Speaker 2: What sort of advice would you give to a recent
• 1:21:22
  Speaker 2: college grad interested in a career in either journalism or finance?
• 1:21:30
  Speaker 1: Probably for both to learn basic data work. One thing
• 1:21:34
  Speaker 1: I've noticed, you know, some things change and some things don't.
• 1:21:37
  Speaker 1: When I joined the FT, the fact that I knew
• 1:21:39
  Speaker 1: how to use Excel and was at least I could
• 1:21:43
  Speaker 1: put two and two together. No, I was an Excel
• 1:21:45
  Speaker 1: wizard because I knew how to use it. I very
• 1:21:48
  Speaker 1: quickly got sort of skilled out of that side. So now,
• 1:21:51
  Speaker 1: you know, not just we have a data and visualization
• 1:21:54
  Speaker 1: team that is just does astonishing work and are extremely
• 1:21:59
  Speaker 1: world class programmers in the right. But even the average
• 1:22:03
  Speaker 1: of the grad trainees that don't do this are still just,
• 1:22:05
  Speaker 1: they're so much better than me. And if I had
• 1:22:08
  Speaker 1: more time, but you kind of always have to run
• 1:22:10
  Speaker 1: to say still, I'd relearn so much more. I'd love
• 1:22:14
  Speaker 1: to learn to code properly. I'd love to really get
• 1:22:18
  Speaker 1: better at that. But I think at this point, maybe
• 1:22:20
  Speaker 1: I just need to defer to.
• 1:22:22
  Speaker 2: People younger and smarter than me.
• 1:22:24
  Speaker 1: I think that's incredibly handy because you don't actually maybe
• 1:22:28
  Speaker 1: need to have to learn to code, but being facile
• 1:22:31
  Speaker 1: with data, that I think in almost any job is
• 1:22:34
  Speaker 1: going to be incredibly handy.
• 1:22:35
  Speaker 2: 100%. And our final question, what do you know about
• 1:22:39
  Speaker 2: the world of bonds, credit, debt today might have been
• 1:22:44
  Speaker 2: useful 30 or so years ago when you were first
• 1:22:46
  Speaker 2: getting started.
• 1:22:48
  Speaker 1: YOLO my student loan into Apple stock, maybe? I almost did.
• 1:22:52
  Speaker 1: I mean, not the entire student loan, but I remember
• 1:22:54
  Speaker 1: buying the first iPod in Norway, probably. I was told
• 1:23:00
  Speaker 1: it was, but I don't know if it's true. And
• 1:23:02
  Speaker 1: I was just blown away by that. God, this is incredible.
• 1:23:04
  Speaker 1: It's the only time I thought about buying a stock.
• 1:23:06
  Speaker 1: And I didn't. And I've never dared to go. I
• 1:23:08
  Speaker 1: would have sold it off.
• 1:23:09
  Speaker 2: So wait, you don't have any equity investments?
• 1:23:11
  Speaker 1: I do on behalf of my children. But I am
• 1:23:14
  Speaker 1: extremely leveraged long Norwegian property and a little bit London
• 1:23:17
  Speaker 1: property as well.
• 1:23:18
  Speaker 2: When you say leveraged long, that just means you have
• 1:23:20
  Speaker 2: a mortgage.
• 1:23:21
  Speaker 1: Essentially, yes.
• 1:23:22
  Speaker 2: Thank you, Robin, for being so generous with your time.
• 1:23:25
  Speaker 2: We have been speaking with Robin Wigglesworth, editor at the
• 1:23:29
  Speaker 2: FT Alpha Bill, author of Trillions and his latest book,
• 1:23:33
  Speaker 2: A Fabulous Debt. Epic story of how Barnes built the
• 1:23:37
  Speaker 2: modern world is out now. I would be remiss if
• 1:23:41
  Speaker 2: I didn't thank the crack team that helps put together
• 1:23:44
  Speaker 2: all of these podcasts over the past 12 years. This
• 1:23:48
  Speaker 2: is 664 or so. Samantha Danziger is my video producer.
• 1:23:54
  Speaker 2: Sean Russo is my researcher. Anna Luke is my podcast producer.
• 1:24:00
  Speaker 2: I'm Barry Ritholtz. You've been listening to Masters in Business.
• 1:24:04
  Speaker 2: on Bloomberg Radio.