Latest / Merryn Talks Money / Inflation Will Fall, Just Not the Way You Think

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Inflation Will Fall, Just Not the Way You Think · Merryn Talks Money

0:00
Speaker 1: John, Hello, morning, Melton. There's so much to talk about.
0:04
Speaker 1: I don't know where to start, and really importantly, so
0:06
Speaker 1: much to talk about in areas where you and I
0:09
Speaker 1: have just been right.
0:13
Speaker 2: That's always the best idious to talk about. I feel.
0:16
Speaker 1: I know, I know now you've written and we're not
0:20
Speaker 1: going to talk about this. I just want to write
0:21
Speaker 1: down a market so everyone knows that we were right.
0:24
Speaker 1: You've written about the Japanese equity market today, and you
0:27
Speaker 1: and I have been talking for a while about her.
0:30
Speaker 1: Japanese equity is farty, cheap, everything's changing. When I say well,
0:33
Speaker 1: I mean it really a very long while. And finally
0:36
Speaker 1: they've broken through what our old friend Jonathan Allen mused
0:40
Speaker 1: to call the iron coffin lid, which means that the
0:42
Speaker 1: only way is up right, just say yes, because we're
0:45
Speaker 1: all going to talk about this. They can go and
0:46
Speaker 1: read Money Distilled and read all about it there. Your
0:48
Speaker 1: job is just to say yes, yes, excellent. The thing
0:52
Speaker 1: I really want to talk about today is the other
0:53
Speaker 1: thing that you and I have been writing about for
0:55
Speaker 1: a long time. We've been writing about her. Nobody understands
0:58
Speaker 1: how widely spread read the tax burden is in the UK,
1:03
Speaker 1: so we read you and I how many years ago
1:06
Speaker 1: now we read an article I think in the New
1:07
Speaker 1: York Times about fourteen twenty fourteen, because we also have
1:12
Speaker 1: good memories, which is important to rather. You have a
1:14
Speaker 1: good memory, and sometimes you remind me about stuff we've
1:17
Speaker 1: talked about in the past, and we've read this article
1:20
Speaker 1: which we thought was absolutely amazing because it explained the
1:24
Speaker 1: fluidity of income earning in the US and how over
1:28
Speaker 1: a lifetime people are sometimes in the bottom quintile of earning,
1:31
Speaker 1: sometimes in the top quintile of earning, often in the
1:34
Speaker 1: middle quintiles, et cetera. But seventy six percent of people,
1:38
Speaker 1: according to the study, passed through the top quintile of
1:43
Speaker 1: income generation in the US at least once during a career.
1:48
Speaker 1: And you know what the top quintile income in the
1:50
Speaker 1: US is.
1:52
Speaker 2: As you know, it's on my head.
1:53
Speaker 1: No, luckily I do. Back when back when the article
1:57
Speaker 1: was written, it was was slightly lower, but it's now
1:59
Speaker 1: about to two hundred and sixty nine thousand dollars, or
2:02
Speaker 1: that was the number last year. So that mean seventy
2:04
Speaker 1: six percent of income tax paying workers in the US,
2:07
Speaker 1: at some point during a year earn around two hundred
2:11
Speaker 1: and seventy thousand dollars. Absolutely amazing and a great testament
2:14
Speaker 1: to the meritocracy and fluidity of the US economy. Now,
2:19
Speaker 1: everybody thinks that that is not the case in the UK,
2:23
Speaker 1: right So when we had all this stuff up from
2:25
Speaker 1: the IFS this week explaining that in a couple of years,
2:28
Speaker 1: twenty percent of income tax paying workers in the UK
2:32
Speaker 1: would end up in the forty percent bracket, everyone went, oh,
2:35
Speaker 1: my god, that's awful twenty percent of people. And you
2:38
Speaker 1: and I thought back, and we remembered that article that
2:40
Speaker 1: we'd read, and we thought, twenty percent people is the
2:44
Speaker 1: bottom band there, because in fact there'll be fluidity in
2:48
Speaker 1: the UK economy as well. Incomes are not static, particularly
2:51
Speaker 1: in the private sector. They move around the place all
2:54
Speaker 1: the time. You can sometimes be in a lower bracket,
2:56
Speaker 1: you can sometimes be in a higher bracket. Let's go
2:58
Speaker 1: back to the quintiles move around the place inside these
3:01
Speaker 1: going to us. And what we didn't know though, is
3:04
Speaker 1: exactly what those numbers might look like in the UK.
3:08
Speaker 1: And now I'm handing out to you because one of
3:09
Speaker 1: our brilliant colleagues at Bloomberg pointed us to some ons
3:13
Speaker 1: data which gave us some clues.
3:14
Speaker 2: Right, Yeah, So Conrad in the office very kindly dugout
3:20
Speaker 2: this particular port called income dynamics. I think is that
3:25
Speaker 2: the name of the report, and it's often I mean,
3:27
Speaker 2: it's nowhere on there is granular. I think that was
3:29
Speaker 2: an academic study that the US was referencing, and so
3:33
Speaker 2: that I had actually gone through an entire lifetime. But
3:36
Speaker 2: even looking at just ten years, what this study found
3:42
Speaker 2: was that while people in the top quin title in
3:45
Speaker 2: twenty ten were more likely to stay there for the
3:51
Speaker 2: whole time, between twenty ten and twenty twenty, you still
3:54
Speaker 2: found just basically half of them weren't there by the
3:59
Speaker 2: time that the decade ended. You also found that more
4:04
Speaker 2: than half the people who started in the bottom quint
4:06
Speaker 2: title had then moved out of it by the time
4:09
Speaker 2: that kind of decade ended. And in the middle there's
4:12
Speaker 2: virtually there was just a lot of moving about, so
4:15
Speaker 2: people were in the second and then the third, and
4:17
Speaker 2: then the fourth and vice versa. So the point isn't
4:20
Speaker 2: so much that, and I mean there are specific kind
4:23
Speaker 2: of statistics and money distilled from earlier this week, but
4:27
Speaker 2: the point is that, yes, there is a lot of
4:29
Speaker 2: income fluidity here too, and there might not be as
4:31
Speaker 2: much as the US. In fact, I'd be astonished if
4:34
Speaker 2: there is as much as in the US, because obviously
4:36
Speaker 2: the US is the kind of kreme de la creme
4:38
Speaker 2: of meritocracy and kind of capitalist dynamic and all that
4:42
Speaker 2: sort of stuff. But it's very clear that, as you said,
4:46
Speaker 2: the idea that twenty percent of income tax payers will
4:50
Speaker 2: be paying forty percent tax is a very low bar estimate.
4:55
Speaker 2: And I would wager that the majority of work use
5:00
Speaker 2: as in more than half will pay forty percent income
5:03
Speaker 2: tax at some point during their careers. And I think
5:06
Speaker 2: that the important thing about that is that it should
5:08
Speaker 2: make us think about this differently. I mean the one
5:12
Speaker 2: actually that I pick up on and I think we
5:16
Speaker 2: should discuss this another time, But we're always talking about
5:19
Speaker 2: who you know, maybe tax relief on pensions is skewed,
5:22
Speaker 2: and two it should be done differently. But the thing is,
5:26
Speaker 2: if there are points in most people's careers where they
5:30
Speaker 2: are forty percent tax payers, those are also the times
5:33
Speaker 2: in their lives where they're going to be wanting to
5:35
Speaker 2: put away as much as possible for their pensions. So
5:38
Speaker 2: perhaps this idea kind of flattening the tax releaf and pensions,
5:41
Speaker 2: isn't such a good idea and not is it actually
5:44
Speaker 2: particularly fair, particularly in anyone who has yet to be benefit
5:48
Speaker 2: from that tax relief. That's slightly separate issue.
5:51
Speaker 1: Well, I think I just pick up that one quickly.
5:53
Speaker 1: Oh yeah, I obviously I agree with you on everything,
5:56
Speaker 1: and I particularly agree with you on this, and it's
5:57
Speaker 1: one of the main reasons why I feel that the
6:00
Speaker 1: annual allowance is the problem, that the lifetime allowance was
6:03
Speaker 1: never the problem. The problem is the annual allowance because
6:06
Speaker 1: as soon as people get to a point, which as
6:09
Speaker 1: it turns out, more people than you think do, get
6:11
Speaker 1: to their few high earning years, those are the years
6:14
Speaker 1: when they're then told they're not allowed to contry be
6:16
Speaker 1: very much into a pension. And that's where the problem comes,
6:19
Speaker 1: you know. So it's the whole system is set up
6:23
Speaker 1: with the belief that politicians have because most politicians cannot
6:26
Speaker 1: see be on the end of their own noses, they
6:28
Speaker 1: believe that everybody's income is like there's the same every year.
6:33
Speaker 1: Because anyone who works in the public sector will, particularly
6:37
Speaker 1: as an MP, because you don't get promoted or demoted
6:39
Speaker 1: outside going in and out of the cabinet, right, their income,
6:42
Speaker 1: bar a little inflation adjustment, remains static year after year
6:46
Speaker 1: after year, and they make policies for that situation, not
6:51
Speaker 1: for the situation which these these numbers that we're looking
6:54
Speaker 1: at show most people on or in.
6:58
Speaker 3: See.
6:59
Speaker 1: I'll give you wyes.
6:59
Speaker 2: Think that's an interesting point. The one thing I would
7:03
Speaker 2: say is I just query slightly whether they have that excuse,
7:07
Speaker 2: because I mean.
7:10
Speaker 1: You're too nice to have I been too nice.
7:14
Speaker 2: I mean, career politicians may have a sort of static income,
7:19
Speaker 2: but I mean, you know, every four years they run
7:21
Speaker 2: the risky getting thrown out in their backsides and then
7:23
Speaker 2: they don't have anything. And then also there's all the
7:25
Speaker 2: ones who you know, quite rightly in my view, kind
7:28
Speaker 2: of make money on the side. So in a funny
7:31
Speaker 2: kind of I think they should be more used to,
7:35
Speaker 2: you know, ups and downs in their their annual income
7:38
Speaker 2: than so I'm not sure that they have the excuse
7:40
Speaker 2: that I could see if they want normal public sector workers,
7:43
Speaker 2: you know, because there's like pay grades and bands and
7:46
Speaker 2: all that sort of stuff, and it generally is kind
7:49
Speaker 2: of matter, you know, as long as you stay in work,
7:51
Speaker 2: you go up the way. But with politicians, they have
7:54
Speaker 2: a much more volatile career path if they're at all
7:57
Speaker 2: I mean, if they're at all ambitious. So it just
8:00
Speaker 2: strikes me that actually, I'm not sure they have that excuse.
8:04
Speaker 1: Well, they're just making crap then anyway, that was that
8:08
Speaker 1: was a sign. Where were you actually going with this conversation?
8:12
Speaker 2: I have totally forgotten already, But no, I think it's
8:15
Speaker 2: it's this thing of well, actually, the other interesting about
8:18
Speaker 2: this politically is that I do think that people will
8:21
Speaker 2: start to notice because it's been popular to talk about taxing,
8:29
Speaker 2: you know, the rich and then throwing income at a
8:33
Speaker 2: certain level in as being the rich, and the more
8:38
Speaker 2: people who get hit by higher rate tax not to
8:42
Speaker 2: mention kind of horrendous kind of marginal tax rates as
8:44
Speaker 2: child benefits, withdrawing, etc. The less likely that charge is
8:48
Speaker 2: to stick.
8:49
Speaker 1: I mean.
8:49
Speaker 2: One of the things that I thought was interested and
8:51
Speaker 2: quite clever about the way the IFS publicized this is
8:55
Speaker 2: they made the point that in the early nineteen nineties,
8:57
Speaker 2: virtually no nurse toll was paying forty percent tax, and
9:04
Speaker 2: by twenty twenty seven, some poate one in eight of
9:08
Speaker 2: them will be paying twenty percent. One in four teachers
9:15
Speaker 2: almost like I mean like well over our third to
9:18
Speaker 2: police officers.
9:19
Speaker 1: Yeah, but that's at one static point. Yeah, exactly, Many
9:24
Speaker 1: many more of them will move through this rate over
9:27
Speaker 1: their careers. And that's the key thing. The point that
9:29
Speaker 1: we're desperately trying to get across to everybody is that
9:33
Speaker 1: it might be one in four policemen in two years
9:36
Speaker 1: if you if you take a static point, but it'll
9:39
Speaker 1: be many, many, many more of a career. So this
9:41
Speaker 1: explains why, and this is really important listen our politicians.
9:46
Speaker 1: This explains why electorates are generally against the top rate
9:52
Speaker 1: of taxes going up, because they know that there's a
9:55
Speaker 1: very strong chance that they're going to pay that rate
9:58
Speaker 1: of tax at some point, and it's going to be
10:00
Speaker 1: in the one or two years when they suddenly go,
10:02
Speaker 1: oh wow, I'm really earning now. Someone else took everything.
10:07
Speaker 2: Yeah, it's yeah. They should learn that and they're going.
10:10
Speaker 2: I mean the point thing that worries means they'll learn
10:12
Speaker 2: the wrong lesson and they'll decide to just shunt a
10:15
Speaker 2: load of tacks when it's something else and make our
10:18
Speaker 2: lives miserable that way. But yes, I think the focus
10:24
Speaker 2: needs to fall on how do we make more money? Overall,
10:27
Speaker 2: how do we grow the pie again rather than sitting
10:31
Speaker 2: kind of you don't threaten about saving bets here and
10:36
Speaker 2: there and cutting this and cutting that, and all of
10:40
Speaker 2: that kind of goes back to we should have a
10:41
Speaker 2: smaller state, et cetera, et cetera, regulation, you.
10:46
Speaker 1: Know, and that we had horrible productivity numbers. Again today,
10:48
Speaker 1: focus on growing, focus on productivity read money to stilled
10:51
Speaker 1: by the way, because there's also some bits and bobs
10:53
Speaker 1: in there. There's a growing body of anecdotal evidence at
10:56
Speaker 1: least that people are virting with their feet and wealth
10:59
Speaker 1: creators are beginning to leave the UK for warmer climbs
11:02
Speaker 1: in every possible way. So that's very important. I just
11:04
Speaker 1: want to leave you with these numbers again. We've told
11:07
Speaker 1: you them before, but in this podcast, but listen again.
11:11
Speaker 1: You think that in the UK the rich of the
11:13
Speaker 1: rich and the poorer the poor, But in this quintear
11:16
Speaker 1: data we've been looking at over the ten year period,
11:19
Speaker 1: nearly fifty percent of those in the top quartile at
11:21
Speaker 1: the beginning were not there at the end, and over
11:26
Speaker 1: sixty percent of those who are in the bottom quartile
11:28
Speaker 1: at the beginning were not there at the end. The
11:32
Speaker 1: rich are not the rich and the poor are not
11:34
Speaker 1: the poor. There's a lot of fluidity in the UK,
11:37
Speaker 1: right John.
11:38
Speaker 2: Yep, it's not all lost, and you know.
11:41
Speaker 1: Maybe the US is better, but I wonder I'd really
11:44
Speaker 1: like to have proper data on this right.
11:46
Speaker 2: Hopefully somebody out there listening right now is the start
11:51
Speaker 2: offices or a university somewhere. You might have this data.
11:54
Speaker 2: You might be looking at it.
11:56
Speaker 1: Send it to us, Send it to us. Put your
11:58
Speaker 1: political prejudices aside one at universities, send us the data.
12:05
Speaker 1: Welcome to Merendalk's Money, the podcast in which people who
12:07
Speaker 1: know the markets explain the markets. I'm Meren sum Set
12:10
Speaker 1: where this week a conversation with Sharon Bell, Managing director
12:13
Speaker 1: and senior European equity strategist at Goldman Sachs. Yes, our
12:17
Speaker 1: first guest from Goldman Sachs. Sharon, thank you so much
12:22
Speaker 1: for joining us today. We hugely appreciate it.
12:24
Speaker 4: Thank you, Thanks for in fighting me kind.
12:26
Speaker 1: Of come now listen. I want I know, I know
12:29
Speaker 1: that you're basically one of those rare guests we have
12:31
Speaker 1: who knows absolutely everything. And you know, I could ask
12:34
Speaker 1: you about any market around the world and you'd know
12:36
Speaker 1: the answer. So what I'd like to do, if you
12:38
Speaker 1: don't mind, and I think that their listeners will love this,
12:41
Speaker 1: is just start by saying, could you give us an
12:43
Speaker 1: overview the huge question right an overview of global markets
12:48
Speaker 1: at the moment? What is going on out there, what
12:50
Speaker 1: are the main dynamics bind market moves, and what should
12:54
Speaker 1: we be looking at.
12:55
Speaker 4: I will tell you everything, But in some ways I
12:59
Speaker 4: think global markets is surprised people this year.
13:01
Speaker 3: On the positive side, a lot of investors expected weaker
13:05
Speaker 3: returns this year. We've had pretty strong returns actually, especially
13:10
Speaker 3: in Europe, double digit returns for a lot of indices
13:13
Speaker 3: already and we're not even halfway through the year. And
13:17
Speaker 3: the US market as well, especially the NASDAK, but the
13:19
Speaker 3: S and P five hundred as well up to year
13:23
Speaker 3: to date, so reasonably good returns on equities, and particularly
13:27
Speaker 3: given all the things that actually face interest rates have
13:30
Speaker 3: been rising, commodity prices have come down, growth has definitely slowed,
13:36
Speaker 3: orbit not in recession yet, so in some ways I
13:39
Speaker 3: would say the market's been quite resilient so far this year.
13:42
Speaker 3: And then on top of all of that, we've had
13:44
Speaker 3: all the stress in the US banks with some bank failures, etc.
13:49
Speaker 3: And concerns about slowing a loan growth as well. But
13:53
Speaker 3: I guess the things that have really boosted the market
13:55
Speaker 3: and helped the market, especially in Europe, which is my
13:58
Speaker 3: focus is energy, is gas prices weren't as high as
14:02
Speaker 3: people feed worried about coming into this year.
14:04
Speaker 4: They came down.
14:05
Speaker 3: That's how the consumer, it's how governments as well, hell,
14:09
Speaker 3: because they promised to cushion the consumer from higher prices. Also,
14:14
Speaker 3: the contagion, the feared contagion from the bank stress in
14:18
Speaker 3: the US hasn't been as bad yet as feared.
14:21
Speaker 4: Of course that could come.
14:22
Speaker 3: But at the moment we've only seen a small tightening
14:25
Speaker 3: and credit conditions and a small fall in loan growth.
14:28
Speaker 3: So I'd say that markets have digested things relatively well.
14:32
Speaker 3: But our main concern for the equity market at the moment,
14:35
Speaker 3: particularly in the US, is that it's not cheap. It
14:38
Speaker 3: trades on a pe ratio of sort of eighteen to
14:41
Speaker 3: nineteen times, that's about its twenty year average. And of
14:44
Speaker 3: course there is now another asset class out there which
14:47
Speaker 3: is quite attractive, offering you four or five percent yield,
14:50
Speaker 3: and that's short term rates.
14:53
Speaker 4: Given where interest rates are now.
14:54
Speaker 3: So I would say resilient, but a little bit mixed,
14:58
Speaker 3: and we do have and that returns will be low
15:01
Speaker 3: from here.
15:02
Speaker 1: Yeah. So basically when you say resilient, what you mean
15:04
Speaker 1: is it's too resilient, it's scarily resilient. Something doesn't feel
15:08
Speaker 1: quite right. I mean, last year, we had this sense
15:10
Speaker 1: that we were going to revert to some kind of
15:13
Speaker 1: valuation norm and possibly you know, profit margins were going
15:16
Speaker 1: to revert to some beginning to revert some kind of
15:18
Speaker 1: historical norm as well, and that that was something that
15:21
Speaker 1: we'd see going through into this year. And some of
15:24
Speaker 1: that didn't happen this year. Instead, we've seen a reversion
15:27
Speaker 1: back to the dynamic of the last few years, the
15:31
Speaker 1: prove twenty twenty two years, as opposed to a continuation
15:34
Speaker 1: of the dynamic of twenty twenty two. Very unexpected.
15:37
Speaker 3: Yes, I'd say that's probably fair in a number of senses.
15:41
Speaker 3: One in the sense that great expectations have started to
15:43
Speaker 3: come down, so that twenty twenty two was very characterized
15:46
Speaker 3: by high inflation, inflation constantly surprising on the upside, economists
15:51
Speaker 3: had to let go of this idea that it was transient.
15:53
Speaker 3: It turned out that inflation was very sticky. Last year,
15:56
Speaker 3: our interest rates had to go up and were constantly
15:58
Speaker 3: rising above people's expertsations. So while this year, I think
16:02
Speaker 3: a big boost equities in many ways has been the
16:05
Speaker 3: expectation that interest rates will be peaking.
16:07
Speaker 4: We in fact, do you think that interest rates have
16:10
Speaker 4: peaked now in the US at the short end.
16:12
Speaker 3: Where we differ, I think from the consensus is that
16:15
Speaker 3: we don't expect them to come down very rapidly, so
16:18
Speaker 3: we think rates will plateau for a period of time.
16:20
Speaker 3: But yes, you're right, it's been very resilient, and maybe
16:23
Speaker 3: overly resilient, not reflecting some of the risks out there,
16:26
Speaker 3: which is that the remainder of this year you'll like
16:29
Speaker 3: to see very slow grows. There's a risk of recession.
16:31
Speaker 3: It's not in our forecast, but there's certainly a risk
16:33
Speaker 3: of that. And there's also not much risk premium priced
16:36
Speaker 3: into equities. I guess you would say, because the yould
16:40
Speaker 3: you can get another other assets is quite attractive relative
16:42
Speaker 3: to equity.
16:44
Speaker 1: Okay, so let's just stick briefly with the interest rate
16:48
Speaker 1: inflation dynamics. So you're expecting that rates have pretty much
16:52
Speaker 1: plattered what peaked, shall we say, But are going to
16:55
Speaker 1: stay at this kind of level for a longer period
16:58
Speaker 1: than some others might think. Does that also suggests that
17:01
Speaker 1: you expect inflation to remain reasonably high in the short
17:05
Speaker 1: to medium term.
17:06
Speaker 3: We do expect inflation to come down. Inflation has already
17:10
Speaker 3: come down from its peaks in most places to remain
17:13
Speaker 3: quite sticky and high in the UK, but in most
17:16
Speaker 3: places and the US inflation recently printed below five percent
17:20
Speaker 3: headline inflation. Core inflation has been coming down to so
17:25
Speaker 3: that is helpful for global economies because you won't need
17:28
Speaker 3: such heart interest rate rises if inflation is already starting
17:32
Speaker 3: to normalize. The fact that energy prices and commodity prices
17:35
Speaker 3: have come down from their peaks as well, it's also
17:37
Speaker 3: helpful in.
17:38
Speaker 4: Bringing down inflation. But there are some elements of inflation
17:41
Speaker 4: that are like to be sticky.
17:42
Speaker 3: The service sector still looks very strong, and that's services
17:45
Speaker 3: consumption is a big part of economies in pretty much
17:48
Speaker 3: all Western economies. Also, wage growths, although it's come down
17:52
Speaker 3: off its peaks in the US, are still very high
17:54
Speaker 3: and in Europe there is often two year wage deals,
17:59
Speaker 3: so it took a wa Wages to pick up in Europe,
18:02
Speaker 3: member sort of a year org. Also, people were constantly
18:05
Speaker 3: asking why aren't German wages picking up more? But I
18:08
Speaker 3: think that's largely because the two year deals. You're starting
18:10
Speaker 3: to see those come through now. Also, labor markets are
18:14
Speaker 3: very tight still. We keep hearing about this, and pretty
18:16
Speaker 3: much every country labor markets are tight, and again that's
18:19
Speaker 3: going to be higher wages.
18:20
Speaker 4: Higher wages feeds into core inflation.
18:22
Speaker 3: So for those reasons, we think inflation will come down,
18:26
Speaker 3: but it's not going to come down rapidly in the
18:29
Speaker 3: way that it would have done before because of this
18:30
Speaker 3: tight labor market.
18:32
Speaker 1: It's interesting, I mean, wages, fast rising wages seem to
18:35
Speaker 1: be the major worry. I mean, in some sense, of course,
18:38
Speaker 1: there's not a worry. If wonderful, If people can keep
18:40
Speaker 1: their real incomes constant, right, or even if real wages
18:43
Speaker 1: don't go up a little, possibly even significantly, that's a
18:45
Speaker 1: good thing in general. But of course it's very bad
18:48
Speaker 1: for inflation. And one of the things that people keep
18:50
Speaker 1: telling me is that again this rising wages is transient,
18:54
Speaker 1: that it's a one off that will get high rises
18:57
Speaker 1: that this year, but then that'll be that. But I
19:00
Speaker 1: keep looking even thinking, well, hang on, a take you know,
19:03
Speaker 1: after many, many years of people not demanding high wage
19:06
Speaker 1: rises because they haven't seen high levels of inflation, they
19:09
Speaker 1: now understand the inflation dynamic and see what happens when
19:14
Speaker 1: inflation is high and erodes their real learnings, etc. So
19:18
Speaker 1: it seems to me that there's been a bit of
19:19
Speaker 1: a sea change in the way that labor and the
19:22
Speaker 1: unions approach wage increases, and that this could easily carry
19:27
Speaker 1: on for many years from here. Them say inflation settles
19:31
Speaker 1: that four percent as opposed to two percent, which seems
19:33
Speaker 1: quite likely, right, or that it's volatile around four percent,
19:36
Speaker 1: why would the unions and workers in general not demand
19:40
Speaker 1: with rises next year of another five six seven percent.
19:44
Speaker 1: I mean, private sector wages are running at what about
19:46
Speaker 1: seven percent at the moment. It's hard for me to
19:48
Speaker 1: see why that wouldn't continue next year.
19:50
Speaker 4: Yeah, I understand. I have a lot of sympathy with
19:54
Speaker 4: that view.
19:54
Speaker 3: I think that real wages have deteriorated over time. Even
19:59
Speaker 3: nominal wages have been reading and good in the last
20:01
Speaker 3: couple of years, and then for a long time, medium
20:03
Speaker 3: wages in real terms haven't really increased. So I think
20:08
Speaker 3: this is a bit of a fight back by workers
20:11
Speaker 3: and unions in particular to regain some of that income
20:15
Speaker 3: over time. Company margins are quite high, so they could
20:17
Speaker 3: try and push for higher wages workers take a little
20:20
Speaker 3: bit more of the share of the overall pie of
20:23
Speaker 3: the economy. And I think that the other thing which
20:26
Speaker 3: is the cause allowing allowing this is the tightness of
20:28
Speaker 3: the labor market. And I think there's a few potential
20:33
Speaker 3: reasons for why the labor market is so tight, but
20:36
Speaker 3: you see it in many different regions, and I do
20:38
Speaker 3: think there's an element of different things going on here.
20:42
Speaker 3: One of them is just's cyclically quite tight, but also
20:46
Speaker 3: I wonder if it's structurally a bit more type now
20:48
Speaker 3: given declining working auge populations, not necessarily declining overall populations,
20:53
Speaker 3: but declining working out population.
20:55
Speaker 4: In Europe, we're seeing.
20:57
Speaker 3: Population declines of half percent to one percent a year
21:00
Speaker 3: in terms of working age population that's quite large accumulates
21:04
Speaker 3: very very quickly, so that decline in working as population
21:07
Speaker 3: means those workers now have potentially more power.
21:11
Speaker 4: And then another trend is that in the.
21:13
Speaker 3: Last couple of decades, companies either moved their workforce to
21:19
Speaker 3: the emerging world, to China in particular, where wages were cheaper.
21:23
Speaker 3: Wages have gone up in those places now, so slightly
21:25
Speaker 3: less obvious move. But also there are concerns about moving
21:29
Speaker 3: your labor force to those areas, given geopolitical risk, given
21:33
Speaker 3: what's happened with Russia, given that the ESG dynamics as well,
21:37
Speaker 3: wanting to bring your supply chain back home to your region,
21:41
Speaker 3: given political policies as well.
21:43
Speaker 4: The Inflation Production Act in the US has got.
21:46
Speaker 3: An element of local supply, and so has the Green
21:49
Speaker 3: Deal in Europe as well, I got an element of
21:52
Speaker 3: local supply.
21:53
Speaker 4: So there's a couple of things going on.
21:55
Speaker 3: Policies trying to support bringing labor back into some particular region.
22:00
Speaker 3: The labor forces out a shrinking a little bit, so
22:04
Speaker 3: I think for all those reasons, you're starting to see
22:07
Speaker 3: labor looking to regain a little bit more of the pie.
22:10
Speaker 4: So I do have sympathy with that view.
22:13
Speaker 1: Yes, okay, so inflation could be slightly more sticky than
22:17
Speaker 1: many people think for quite a few years to come
22:19
Speaker 1: on that basis. Okay, So inside all this, as you know,
22:24
Speaker 1: there's one more thing I want to talk about before
22:25
Speaker 1: we go to markets that got more specific markets. You
22:29
Speaker 1: mentioned profit margins being consistently high, and that there's space
22:34
Speaker 1: in there for wage increases. But one of the things
22:37
Speaker 1: that we have been expecting, or many economists have been
22:39
Speaker 1: expecting for years, is some kind of reversion to the
22:42
Speaker 1: mean of profit margins, and particularly US profit margins, and
22:46
Speaker 1: it simply hasn't happened. And even you know, last year
22:49
Speaker 1: and this year, when we're seeing inflation coming through, when
22:51
Speaker 1: we're seeing these wage rises, and do you think, well,
22:53
Speaker 1: surely now, surely now profit margins will start to shrink,
22:57
Speaker 1: But no, what is going on there?
23:01
Speaker 3: You know? I think profit margins did come down last year,
23:05
Speaker 3: even for those really big companies, the FANG companies, the
23:10
Speaker 3: top five, also US big tech companies. Margins have started
23:15
Speaker 3: to come down for these companies. So from very very
23:19
Speaker 3: high levels, margins have come down in the US and
23:24
Speaker 3: a tiny bit in Europe as well.
23:26
Speaker 4: Estimates have started to come down.
23:27
Speaker 3: And I think that's a combination of things, but sort
23:30
Speaker 3: of rising costs certainly one of them.
23:32
Speaker 4: But margins are still pretty high.
23:35
Speaker 3: I agree, And when I say they've come down, it's
23:38
Speaker 3: quite small versus the games that margins have made in
23:41
Speaker 3: the last twenty or so years. And our US strategus
23:45
Speaker 3: have recently wrote a paper on this. Most of the
23:48
Speaker 3: games in the last twenty years or so have been
23:50
Speaker 3: in what they call costs of goods sold, so that
23:54
Speaker 3: is you're either squeezing your suppliers, we were just getting
23:58
Speaker 3: cheaper raw materials globally, and it is difficult to see
24:03
Speaker 3: that sort of constantly cheaper global raw materials persisting when
24:07
Speaker 3: we know that there hasn't been a lot of investment
24:11
Speaker 3: in recent years into commodities and things like that, which
24:13
Speaker 3: makes those markets very roadlind other reasons why you've had
24:17
Speaker 3: higher margins have been lower taxes. That doesn't seem likely
24:20
Speaker 3: at the moment given government indebtedness globally. Number all the
24:24
Speaker 3: tax cuts that Trump first put in when he came
24:28
Speaker 3: into power, and that definitely boosted s and p margins.
24:32
Speaker 3: And then another thing has been interest costs coming down
24:35
Speaker 3: constantly because you always borrowed at lower and lower rates,
24:38
Speaker 3: and that's in reversal now.
24:40
Speaker 4: So it may not be a really sharpfaul, but I
24:45
Speaker 4: do think that you will start to.
24:49
Speaker 3: See margins certainly not expand in the way that they
24:51
Speaker 3: did over the last decade.
24:53
Speaker 1: Okay, so it certainly feels like a turning point.
24:56
Speaker 3: Yes, it's certainly going to be a very different cycle
24:59
Speaker 3: this next one than it last.
25:01
Speaker 1: Okay, that doesn't sound great for exit markets.
25:03
Speaker 3: Now, and again this comes back to this point of
25:05
Speaker 3: equities levitating a little bit this year at quite high levels.
25:08
Speaker 3: I've described it as resilient in the face of starring
25:13
Speaker 3: economic growth, a sort of pattern of potential for margins
25:17
Speaker 3: which isn't so strong this next cycle, and another competing
25:20
Speaker 3: asset class, which is which is casual bonds, which now
25:23
Speaker 3: offer your better yield. Having said that, equities do have
25:26
Speaker 3: some factors which I understand which would kind of explain
25:31
Speaker 3: a little bit their resilience. I think that you have
25:34
Speaker 3: got in the biggest cap stocks in equities in.
25:37
Speaker 4: The US, You've got the tech companies.
25:39
Speaker 3: They're seen as the developers the gainers from artificial intelligence,
25:43
Speaker 3: which is a big new technology wave. Obviously that's going
25:46
Speaker 3: to influence economies and markets over this next decade. So
25:49
Speaker 3: that's that's going to be crutal for those stocks, and
25:52
Speaker 3: they are a big part of the market cap. I
25:54
Speaker 3: also think with interest rates peaking, so we think the
25:57
Speaker 3: FED has got to the peak in its cycle, and
26:00
Speaker 3: even though we don't expect a sharp cutting interest rates
26:02
Speaker 3: we're no longer interest rates rising, and that's helpful for
26:05
Speaker 3: these long duration companies, these tech companies in particular. And
26:09
Speaker 3: then in Europe you've got we call them the granolas.
26:12
Speaker 3: The biggest companies in Europe are really healthcare companies, brand
26:16
Speaker 3: and consumer goods companies, some of the big tech companies
26:19
Speaker 3: in Europe. These are by far the largest in terms
26:21
Speaker 3: of market cap. And these companies, they I think they
26:26
Speaker 3: will benefit in the next few years from trends like
26:30
Speaker 3: aging populations are going to help healthcare companies. AI will
26:34
Speaker 3: help healthcare companies as well. Some of the tech companies
26:36
Speaker 3: will benefit from AI. Brand and consumer goods is extremely strong,
26:42
Speaker 3: so I think, and protect their margins even in higher
26:45
Speaker 3: inflation environments. So some of the what's in the markets,
26:49
Speaker 3: I guess you could say what the markets are made
26:50
Speaker 3: up of?
26:51
Speaker 4: Since this environment.
26:53
Speaker 1: Okay, interesting, Let's go back to commodities, because you mentioned
26:57
Speaker 1: when we were talking about inflation that it seems unlike
27:00
Speaker 1: actually that will continue to see what we saw until
27:03
Speaker 1: a few years ago, constantly falling commodity prices exactly, so
27:06
Speaker 1: the cost of them for companies falling, falling, falling, And
27:09
Speaker 1: you mentioned those markets are much tighter. Now, is that
27:11
Speaker 1: an area where the ordinary retail investors should be invested?
27:14
Speaker 4: Do you think so? Intercommodities directly or intel?
27:18
Speaker 1: Not directly, I don't think that's a good idea, But
27:21
Speaker 1: in commodity related equities.
27:23
Speaker 3: If you're invest in commodities directly, you've got the danger
27:26
Speaker 3: that suddenly you might certainly find it in your house. Yeah,
27:29
Speaker 3: Finns and oil turning off in your golden which may
27:31
Speaker 3: obviously good.
27:33
Speaker 4: So yeah, I.
27:34
Speaker 3: Probably wouldn't recommend direct investment in commodities, but I do
27:39
Speaker 3: think that it is one of the scarce resources going forward,
27:42
Speaker 3: and therefore some exposure to commodities is a good idea.
27:47
Speaker 3: And you can get that ya the equity market, because
27:49
Speaker 3: of course there are companies which are commodity producers in
27:53
Speaker 3: the equity market, so energy stocks or the mining companies
27:56
Speaker 3: for example.
27:57
Speaker 1: And the UK is a brilliant place for that because
27:59
Speaker 1: you've got a great big miners, the reattended, b Top etc.
28:02
Speaker 1: Which pay you a fabulous yield while you said around
28:04
Speaker 1: waiting for commodity prices to go up.
28:06
Speaker 3: Yeah, So those and those companies are doing two things
28:09
Speaker 3: with their cash at the moment. They are paying a difference,
28:13
Speaker 3: and they're buying by shares, but they're not really doing
28:15
Speaker 3: one thing but their cash, which is investing it in
28:19
Speaker 3: new quantity supply.
28:20
Speaker 4: Investors aren't really paying for that at the moment, they're
28:23
Speaker 4: not key on them doing so.
28:25
Speaker 3: And now that's partly for ESG reasons, partly for environmental reasons.
28:29
Speaker 3: You want see more of cash stid towards the companies
28:31
Speaker 3: of investing in renewable projects. Certainly true that big oil
28:34
Speaker 3: and big energy is as well investing in some lower
28:38
Speaker 3: carbon projects, so some incrementally going into that, but there
28:41
Speaker 3: isn't a lot going into traditional energy production or into
28:46
Speaker 3: other commodities like industrial metal investment.
28:48
Speaker 4: So because of that, and these are quite long lead times.
28:51
Speaker 3: Because of that, these markets are quite tight, probably going
28:54
Speaker 3: to mean higher prices this next cycle than the last one.
28:57
Speaker 1: It's tricky and isn't it, though, Because if you want
28:59
Speaker 1: an environmentally friendly energy transition, you have to dig up
29:02
Speaker 1: and all a lot of metals together. You need those
29:05
Speaker 1: industrial metals, you need all those minerals, you need the
29:08
Speaker 1: rarer metals, etc.
29:09
Speaker 4: Etc.
29:10
Speaker 1: You know, and it might be nasty to dig copper up,
29:12
Speaker 1: but you can't have an energy transition without digging up
29:14
Speaker 1: an awful lot of copper.
29:15
Speaker 3: Yeah, absolutely, I mean copper is needed for electrification, which
29:19
Speaker 3: in Europe is largely going for electrification as a way
29:22
Speaker 3: of producing pollution, and that's going to require lots of cables,
29:26
Speaker 3: lots of copper, lots of investment. That requires equipment, machinery, metals,
29:31
Speaker 3: et cetera.
29:31
Speaker 4: So we will still need a lot in this next
29:34
Speaker 4: decade for that transition.
29:35
Speaker 1: So there are some hideous conflicts there in the world
29:37
Speaker 1: of ESG aren't there That always off? But you need
29:43
Speaker 1: you need to be really dirty to get clean.
29:47
Speaker 4: Maybe that's the case. I don't know.
29:50
Speaker 1: I give that to you as a title for a
29:52
Speaker 1: note one day. Thank you for that.
29:56
Speaker 3: Now.
29:56
Speaker 1: The other thing we talked a little bit about the
29:58
Speaker 1: UK is we talked about the HP and and real
30:00
Speaker 1: Jinto etc. And the yields available. And one of the
30:03
Speaker 1: things that we talk about a lot on the podcast
30:05
Speaker 1: because it's incredibly irritating is the state of the UK market.
30:09
Speaker 1: And you recently put out a note called UK in
30:12
Speaker 1: pursuit of the American Dream about the UK companies or
30:16
Speaker 1: desperate to shift their listening to the US so that
30:19
Speaker 1: they can get much higher valuations and of course the
30:21
Speaker 1: CEOs can be considerably better paid, because that's one of
30:25
Speaker 1: the big parts of moving to the US is that
30:27
Speaker 1: not just to your sholders get more money because you
30:30
Speaker 1: hope your rating goes up. But of course your your
30:32
Speaker 1: management can get paid as much as they like without
30:34
Speaker 1: being constantly nagged by shaholders as they are here. So
30:38
Speaker 1: this is true, this is happening. Is there a way
30:41
Speaker 1: out for the UK?
30:42
Speaker 3: So I think when you say it's true, it's happening,
30:45
Speaker 3: it is happening for a few companies. But I always
30:48
Speaker 3: think that if you're going too maybe you're listening, you
30:51
Speaker 3: do have to have a reason for maybe you're listening.
30:53
Speaker 3: So you need to be a company with a lot
30:55
Speaker 3: American footprint, for example, And there are to be fair
30:59
Speaker 3: lots of UK companies in that position, so that you
31:03
Speaker 3: know that mainly narrows your list of companies, but it's
31:06
Speaker 3: not really narrow. There are lots of companies in that position.
31:10
Speaker 3: So I do think you or you have to be
31:12
Speaker 3: in an area where you believe that you can attract
31:16
Speaker 3: a lot more US investment. So if you're a domestic
31:19
Speaker 3: UK company or a company with a footprint which is
31:21
Speaker 3: more European then there is really less reason for listing
31:25
Speaker 3: in the US.
31:26
Speaker 4: I think, look, it's it's a tricky one.
31:29
Speaker 3: I do feel the main reason that UK and European
31:32
Speaker 3: companies because I don't think it's just a UK issue,
31:35
Speaker 3: but the main reason that European companies are on lower
31:38
Speaker 3: valuations in US companies is that there isn't a large
31:42
Speaker 3: domestic investor base in Europe.
31:44
Speaker 4: If you look at the US.
31:45
Speaker 3: Dock market, around eighteen to ninety percent of its own
31:48
Speaker 3: domestically by the big pension funds endownment funds, but also
31:52
Speaker 3: by individuals themselves.
31:54
Speaker 4: You know, all the meme stocks and things like that.
31:56
Speaker 3: They're generally US companies that people have wanted to hold directly.
32:00
Speaker 3: If you ask most people, they would know they've heard
32:03
Speaker 3: of the Dow and the S and P and those
32:06
Speaker 3: big indices in the US, whereas investment in Europe has
32:11
Speaker 3: seen as much more niche fewer people invest and it's
32:15
Speaker 3: a smaller share of household wealth. Households in Europe tend
32:18
Speaker 3: to invest more in housing, more in bonds, and more
32:22
Speaker 3: in cash deposits, so that has been.
32:26
Speaker 4: A bit of a problem. Really Europe can't attract it all.
32:29
Speaker 3: This point about the US's deeper capital markets or yes,
32:32
Speaker 3: but that's because there are lots more domestic investors and
32:36
Speaker 3: the UK in particular, I think has an issue it.
32:39
Speaker 4: Didn't used to in the nineteen nineties.
32:41
Speaker 3: We never talked about this, and the reason we never
32:44
Speaker 3: talked about it was that eighty five percent of the
32:47
Speaker 3: market in the mid nineteen nineties was owned domestically.
32:50
Speaker 4: In the UK.
32:51
Speaker 3: Now only around a third of the markets owned domestically
32:55
Speaker 3: in the UK, and that's because insurance and pension funds
32:58
Speaker 3: that were the big holders of UK equity having sellers
33:02
Speaker 3: in the last twenty or thirty years, and that means
33:05
Speaker 3: that there isn't really a domestic investor base which wants
33:09
Speaker 3: to buy UK listed.
33:10
Speaker 1: Shares and they've sold for that. There are all sorts
33:13
Speaker 1: of reasons. It's about their decline of defined benefit pension schemes.
33:16
Speaker 1: It's about regulation that has driven them to be supposedly
33:19
Speaker 1: more diversified or into so course stay for assets like
33:22
Speaker 1: government bonds and that kind of thing. So there've been
33:24
Speaker 1: all kinds of regulator changes that have shifted the way
33:27
Speaker 1: that the huge UK pension funds invest and it's a
33:31
Speaker 1: rather worrying when you think that you're pretty much everyone
33:33
Speaker 1: in work in the UK at the moment is inequity
33:35
Speaker 1: invested via their auto enrollment pension. But they're not really
33:39
Speaker 1: invested in the UK in the way that we like
33:41
Speaker 1: to think they should be. And this doesn't look like
33:43
Speaker 1: it's going to turn around, does it. So domestic invested
33:46
Speaker 1: us still into a much smaller degree, but still net
33:49
Speaker 1: sellers of UK stocks.
33:51
Speaker 4: Yeah, they are still net sellers.
33:53
Speaker 3: They have less and less to sell because they're a
33:56
Speaker 3: smaller share of the UK market now. But I think
34:00
Speaker 3: that they're encouraging more domestic investment in public equity, would
34:08
Speaker 3: would encourage sort of high evaluations for public equity as well,
34:13
Speaker 3: and I think that there have been in the past
34:16
Speaker 3: or of ways when you had in the late eighties
34:18
Speaker 3: and nineties a lot of privatizations for example, people became
34:22
Speaker 3: involved in those and wanted to invest in those. Insurance
34:25
Speaker 3: companies and pension funds as well did use to own
34:28
Speaker 3: a lot of UK equity, and I agree with you
34:30
Speaker 3: for regulation, asset match and reasons they.
34:33
Speaker 4: Produced that weight.
34:34
Speaker 3: But I do think a little bit more of an
34:36
Speaker 3: ecty culture in Europe and the UK will be helpful,
34:40
Speaker 3: and it's one of the reasons that you don't see
34:42
Speaker 3: such deep capital markets in Europe.
34:45
Speaker 1: Might the cheapness of the UK equity market really began
34:48
Speaker 1: to attract external investors, so foreign investors and a net
34:52
Speaker 1: bias right over the UK again not only huge scale,
34:55
Speaker 1: but net bios and the discount of the US market
34:58
Speaker 1: KA market to the US market vast. And while everyone says, oh, well,
35:01
Speaker 1: that's about sectors and it's about as not having growth
35:04
Speaker 1: and Isabella's not being tech, etcetera, etcetera, I know that
35:06
Speaker 1: even when you adjust for that, the discount is still
35:08
Speaker 1: pretty big. And we're beginning to see private equity bids
35:12
Speaker 1: forall for some of our companies, smaller ones in particular.
35:15
Speaker 1: So is there a chance that you just get to
35:17
Speaker 1: the point where the market is cheap enough that American
35:20
Speaker 1: investors in particular look at it and today, well, why
35:22
Speaker 1: are we invested here? Or we give invested in similar
35:24
Speaker 1: companies over there at half the price and we begin
35:26
Speaker 1: to see a wave of capital coming into the UK?
35:28
Speaker 1: Or is that high in this guy thinking, which I'm prone.
35:31
Speaker 3: To definitely not, I actually think this has been happening
35:35
Speaker 3: and well continued to happen. So I have a lot
35:37
Speaker 3: of conversations with global investors that see that UK up
35:40
Speaker 3: as being relatively inexpensive. So I think in a way,
35:43
Speaker 3: this gap between the US and the UK, or the
35:46
Speaker 3: US and Europe overall, there are really only are four
35:49
Speaker 3: ways it can close.
35:50
Speaker 4: It can either.
35:51
Speaker 3: Close because you see global investors buying Europe and the
35:56
Speaker 3: UK sort of fun and flows as it were, and
35:58
Speaker 3: you have seen fun flows out of the US in
36:01
Speaker 3: recent years and into Europe over the last few months,
36:04
Speaker 3: particularly sort of the end of last year very early
36:07
Speaker 3: this year, so we have seen some of that fun
36:09
Speaker 3: flow move. Another way that it can close, as you mentioned,
36:12
Speaker 3: is acquisitions. So companies buying companies are private equity companies
36:17
Speaker 3: buying public listed equity, which perhaps looks quite inexpensive. And
36:21
Speaker 3: again we have seen quite a lot of inward acquisitions
36:23
Speaker 3: into the UK in recent years, particularly smaller companies, not
36:27
Speaker 3: necessarily the high profile ones that make the news, but
36:30
Speaker 3: a lot of smaller companies.
36:32
Speaker 4: That's another way the gap could close.
36:33
Speaker 3: Another one we've talked about before is UK companies or
36:36
Speaker 3: European companies relisting in the US and trying to close
36:40
Speaker 3: the gap via that. Although I do think that will
36:42
Speaker 3: be relatively niche not not every company can or would want.
36:45
Speaker 4: To do that.
36:46
Speaker 3: And then the final way the gap could close is
36:48
Speaker 3: just that UK companies say we're too cheap, we've got
36:52
Speaker 3: cash on our balank sheet, we will use that to
36:54
Speaker 3: buy our own equity. And you've seen buybacks rise considerably
36:59
Speaker 3: in the UK, particularly amongst financials, oil companies, mining companies, etc.
37:04
Speaker 4: Which are on very low valuations.
37:06
Speaker 3: So buying back your own shares has been another route
37:10
Speaker 3: to try to close this gap.
37:12
Speaker 1: As recommended by Warren Buffett in his latest letter.
37:16
Speaker 3: Yeah, I mean look, it's also going to help in
37:19
Speaker 3: terms of improving your earnings per share. If you've got
37:21
Speaker 3: fewer shares the same number of earnings, same amount of earnings,
37:25
Speaker 3: then you'll see a better earnings per share grows over time.
37:27
Speaker 4: And the US market's.
37:29
Speaker 3: Been fantastic at achieving that in recent years, and I
37:31
Speaker 3: think increasingly, particularly if you've got If you're in a
37:35
Speaker 3: more cycnical business like a commodity business for example financials,
37:39
Speaker 3: you don't necessarily want to commit to dividends every year,
37:41
Speaker 3: but when you have additional cash, buying back shares if
37:43
Speaker 3: your share price achieved makes a lot of sense.
37:46
Speaker 1: Although there's always a slight worry that a lot of
37:47
Speaker 1: those buybacks are related to chief executive bonuses.
37:51
Speaker 3: Yeah, I mean, I guess it's one way of boosting
37:55
Speaker 3: the share price and creating should return and a lot
37:57
Speaker 3: of people would like to see more money in best
38:00
Speaker 3: did in growth, and I do think that's one area
38:04
Speaker 3: of the UK and the whole of Europe.
38:06
Speaker 4: Is not keeping pace with the US, to be fair,
38:09
Speaker 4: and I do wonder.
38:10
Speaker 3: I don't think this is necessarily the incentives placed on
38:14
Speaker 3: top management. I'm not quite sure of the reasons for it,
38:16
Speaker 3: but if you think about the US, there's a lot
38:18
Speaker 3: of incentive to on top management to do share prices
38:21
Speaker 3: by any short term means. They often have renumeration related
38:25
Speaker 3: to return on actuity or shareholder returns, which is quite
38:27
Speaker 3: short term. So, if anything, US companies should be quite
38:30
Speaker 3: short terms, but they tend not to be so much.
38:33
Speaker 3: They invest a higher share of their cash vow from
38:36
Speaker 3: operations in what we would call growth capex, which is
38:39
Speaker 3: either capital expenditure open above depreciation or R and D.
38:44
Speaker 4: SO US companies they spend.
38:47
Speaker 3: About a third of their cash vow from operations on
38:51
Speaker 3: that gross investment, whereas European companies.
38:54
Speaker 4: It's around a fifth.
38:55
Speaker 3: So even in a place like the US where there's
38:59
Speaker 3: a lots will focus on the top managements, renumeration being
39:03
Speaker 3: related to share prices, etc. Even there, they've got quite
39:06
Speaker 3: a lot more full sight and they are looking and
39:08
Speaker 3: investing for growth.
39:10
Speaker 1: Maybe we should stay invested in the US now, Sharon,
39:13
Speaker 1: With all these things that we've talked about, where do
39:16
Speaker 1: you think the most interesting parts of the market are
39:19
Speaker 1: for retail investors at the moment? So, you know, speak
39:22
Speaker 1: Japan has had a fabulous run so far this year.
39:25
Speaker 4: Is that.
39:25
Speaker 1: I know it's not quite your area, but maybe that
39:27
Speaker 1: is interesting. I know you've written recently about the luxury
39:30
Speaker 1: goods companies being very interesting. We've talked about commodities. We've
39:34
Speaker 1: talked about the UK and Europe relative to the US.
39:37
Speaker 1: But if you had to pick out a couple of
39:38
Speaker 1: areas that were particularly interesting to you and therefore should
39:42
Speaker 1: be interesting to ordinary investors right now, what do you
39:44
Speaker 1: think they would be?
39:45
Speaker 3: Yeah, So, I think for ordinary investors there's a combination
39:50
Speaker 3: of lots of different assets you can invest in right now.
39:53
Speaker 3: Even cash and bonds provide you with some reasonable return,
39:58
Speaker 3: whereas if you don't the clock three or four years ago,
40:02
Speaker 3: you were getting certainly negative real returns in those if
40:05
Speaker 3: not zero nominal returns, so.
40:08
Speaker 4: You didn't have a lot of opportunities.
40:10
Speaker 3: So I think there's an opportunity for diversification, which is
40:12
Speaker 3: always important for retail investors. For all of us, we
40:15
Speaker 3: want to diversify. I don't want to put everything into
40:18
Speaker 3: one basket and take on too much risk. But if
40:20
Speaker 3: I'm looking with be in the UK equity, which I
40:22
Speaker 3: don't think is particularly expensive at the moment. I mentioned
40:25
Speaker 3: right at the outset that US equity looks quite expensive
40:28
Speaker 3: on eighteen or nineteen times PE, the UK market is
40:31
Speaker 3: on ten or eleven, and some of the cheapest areas
40:33
Speaker 3: are financials and commodities.
40:35
Speaker 4: So as a kind of.
40:36
Speaker 3: Longer term, medium, longer term view on these areas being undersupplied,
40:41
Speaker 3: particularly commodities, and being relatively inexpensive, and the companies having
40:45
Speaker 3: options like buying back their own shares or paying additional dividends,
40:49
Speaker 3: that looks like a reasonable area. But having said that,
40:52
Speaker 3: I would have a bit of a bar bow strategy.
40:55
Speaker 3: We're going for some of this cheaper stuff that looks
40:57
Speaker 3: potentially undersupplied, but also some of the newer growth that
41:00
Speaker 3: areas look interesting. Anything that looks like it would likely
41:04
Speaker 3: gain from productivity improvements from AI for example, bits of healthcare,
41:09
Speaker 3: luxury goods, tech all look reasonable as well.
41:13
Speaker 4: From the medium term for investors, you won't get paid
41:15
Speaker 4: so much in the way of.
41:16
Speaker 3: Dividends from those or buybacks, but you probably will have nice.
41:19
Speaker 4: Longer term growth.
41:20
Speaker 1: Yeah, okay, that's interesting. Now, final question, no warning for
41:26
Speaker 1: this bitcoin or gold gold for.
41:29
Speaker 4: Me, No shadow of down are there.
41:34
Speaker 3: I think bitcoin is highly volatile asset, very difficult to
41:41
Speaker 3: pin down in any way to sort of economic fundamentals.
41:44
Speaker 3: In comparison, gold I think provides you a nice little
41:47
Speaker 3: hedge against two risks that.
41:49
Speaker 4: Are around there.
41:51
Speaker 3: One is that we do go into a deeper down
41:53
Speaker 3: term and expected maybe there is a further banking stress
41:56
Speaker 3: causing loans to tighten.
41:59
Speaker 4: Credit congits to Titan. Gold is attractive in that sense.
42:03
Speaker 3: The other risk that's out there, and we talked about
42:05
Speaker 3: a lack of supply of commodities. We talked about maybe
42:08
Speaker 3: higher inflation because of that lack of commodity supply, but
42:11
Speaker 3: also higher wage growth. Higher inflation means you really want
42:14
Speaker 3: to own real assets and gold in a sense as
42:16
Speaker 3: a real asset as well, so I prefer gold on
42:20
Speaker 3: that basis.
42:21
Speaker 1: Okay, brilliant.
42:22
Speaker 4: Do you know.
42:22
Speaker 1: I don't think I've had anybody yet He's chosen bitcoin
42:27
Speaker 1: spread my net wider. There's got to be someone out there. Sarah,
42:33
Speaker 1: thank you so much for joining us today. That was
42:34
Speaker 1: great fun. I hope we can talk against you.
42:36
Speaker 4: Thank you, thanks for inviting me.
42:43
Speaker 1: Thanks for listening to this week's Marin Talks Money. We
42:45
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42:47
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42:50
Speaker 1: to podcasts. This episode was hosted by Me, Marry and
42:53
Speaker 1: Sunset Web. It was produced by Some Society. Additional editing
42:56
Speaker 1: by Blake Maple's special thanks to Sharon Bell and of
42:59
Speaker 1: course as ever to John Steppe and of course our
43:02
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43:06
Speaker 1: link is in this show notes at the top of
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43:10
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