January 27, 2023 • 36 mins
James Ferguson, founder of MacroStrategy Partners, isn’t worried about inflation this year. Instead, he sees the beginnings of deflation. On this week’s Merryn Talks Money, he tells host Merryn Somerset Webb that it’s purely a matter of remembering what the monetarists said: Print money and (with a long and variable lag) you will get inflation; Yank money out of the economy (as the US Federal Reserve is doing) and you will get the opposite. According to Ferguson, there will be deflation by April.
Plus, John Stepek joins Merryn for a passionate chat about pensions. Yes, it can be done. An extended version of that chat can be heard here:
https://twitter.com/i/spaces/1PlJQpeNWZqGE?s=20
And of course, sign up for John Stepek's daily newsletter: https://www.bloomberg.com/account/newsletters/uk-wealth
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:00):
John. You know how lots of people say they're passionate
about stuff, and we really disapprove of that. And I'm
always saying to people, you know, stop being passionate about stuff.
Just be good at stuff. You know, no one cares
about your passion, They care about the result. Am I wrong? No? No,
I'm not wrong anyway. So yesterday we did a Twitter
spaces you know me because we're kind of young and
(00:20):
modern and down with the kids, right, and I suddenly
realized that I am passionate about pensions. I mean, who hasn't.
Let's be feeling who among us has not been passionate
about pensions at one point? And I'll wait, everyone, everyone,
But that's because they don't know how fascinating they can
be and how exciting it is to have actually done
(00:42):
some proper work on this, because you know, you know research,
sometimes we do it, sometimes we don't. Having done some
actual research into how that the UK pension system works
and how it works relative to other pension systems around
the world, and we find that niceally, relatively speaking, it's
pretty good. And we talked about this rating system, the
most of pensions rating system that the looks at pension
(01:03):
systems around the world in terms of all their different
parts as opposed to just the state pension. And we
found that in terms of global ratings, the UK is
really high up there, better by the way than Switzerland
or Germany. That makes me feel kind of excited, as
it should. I mean, I think I said it was
a really good chart. Actually it was. It was very interesting,
(01:24):
and I think everyone should go out and listen to.
Someone's going to put the link in the show notes. Um,
but just as a little added incentive, we talked about
house prices the last thing we did one of these
Twitter spaces and it ended up being one of the
most listened to Twitter spaces that Bloomberg's haven't done. So
what we'd really love is if you look could go
out right now and listen to the pensions one and
(01:44):
help us to beat a personal record. John and I
are target driven. We talk about our pbs all the time,
don't we. John KPI is coming out earliers absolutely, but listen,
let's let's give them an incentive here. What was the
most interesting thing for you that came out of that
chat yesterday about pensions? What made you think, God, my
retimement is going to be great. Apart from me pointing
(02:07):
out that you haven't got a defined pension, defined benefit
pension and you don't work in the public sector, which
is a bit of a downer. But what was the
thing that really made you feel that, actually this is
not so bad. Well, I think the these thing is
that it is that idea that we've finally again. It's
not so much more own pension. It's the sense that
Britain was actually doing something right and right and and
(02:32):
in quite a significant way. It's actually the system is
a lot better, and it's also kind of backed by
actual money as opposed to a promise to pay at
some point in the future. But the other thing actually
that I thought was was interesting but also agent was
we were on with Stuart True who's Blue Miss Pension columnists,
and he pointed out that there was actually a really
(02:53):
good deal on buying then missing national insurance years. At
the moment you made thirty five of those, right in
thirty five of those to get a full state pension.
And if you haven't got those, which you might not have,
you taken time off, you know, for parenting, caring or
just you know, hanging around, going to yoga, retreats whatever.
You may not have those full thirty five years, and
(03:14):
there's a deal on a sale on at the pension's
department right where you can you can buy them back. Yeah.
It's really good value. You get the money back in
three years. Yeah. No, it was really impressive. So so yeah,
actually you really should license you this, you know, even
if it is just for that, but the rest of
it is also excellent. Um. But you know, you can
really make a defency your personal finances in the long
(03:36):
term if you haven't got those contributions and you make
them before April. Yeah. And you know what I was
thinking afterwards, well five minutes ago, actually that the auto
enrollment system, the way that the auto enrollment system that
we have in the UK is by the way you
getting money at fifty five. You don't get that anywhere else. Um.
The way that interplace with the state pension system, which
(03:57):
is there is back up, etcetera. This interming angling of
private and state financing that has worked so brilliantly to
fully rescue the UK's pension system and make it one
of the best and most resilient in the world. I'm
thinking NHS, Yeah, I think that's a good idea controversial,
(04:19):
absolutely hate mail to the usual address. Please right, everyone,
listen to that Twitter spaces. It's really interesting. There's a
lot to say about pensions, and I know you think
it's boring, and I know it's one of those things
you just want to put out of your head, you know.
Please God, let you never have to be old enough
to to retire and take a pension. But this is
going to happen. You need to know about it. And
John and I are passionate about pensions and that comes
(04:42):
through in the Twitter spaces. Go listen, help us reach
our targets because that matters to us as well. Thank
you very much, Sean Love reach out to you as usual.
Passionate pensions about pensions. Let's make that on a news
strap line. Welcome to Marion Talks Money, the podcast in
(05:03):
which people who know the markets explain the markets. I'm
there in Sumset Web this week. Our guest is my
old friend and ex colleague, James Ferguson, founder of the
Macro Strategy Partnership. He's got over twenty five years of
experience as a stockbroker, sector analyst and as a Matt
Grows strategist. James and I well, we kind of started
our careers together as the stockbrokers over in Japan, so
(05:25):
we've known each other a long time. We've had a
lot of conversations in those years. James, Hello, thank you
for joining us. Now listen, James. One of the reasons
I always want to have you on my podcast because
you tend to look at things a slightly different way
to other people. They'll be a little bit contrarian, well,
quite a lot of contrarian, and very often you turn
out to be absolutely right, and we like that. So
(05:45):
this year, I'm looking at a PC. Recently, you are
expecting this to be the year not of high inflation,
not even maybe of inflation, but possibly the beginnings of deflation.
Don't hear that? Often in the old days, deflation was
to find as a contraction in the nominal money supply. Now,
on that basis, the U S money supply has been
(06:07):
falling nominally, so not a justif inflation just the headline
big has been falling since February of last year. So actually,
from that point of view, we've we've actually been in
deflation since February. That The trouble is that we have
what Milton Freatment called long and variable lacks, and so
I think it's going to be this year where the
lags um play out and we end up with something
(06:32):
that looks, at least on the surface quite deflation route. Yeah, okay, well,
let's let's just define deflation for the purposes of this
podcast and this audience is being a general fall in
the price level as measured by a CPI. Can we
do that rather than a contraction in nominal money supply.
That's why we didn't have deflation last year, or even
though that's the textbook definition, but we will have it
(06:54):
this year, I think. Okay, So what's driving it purely
this contraction and money supply? The sort of absolutely sort
of first mover is the base effects. And now you
may remember people talking about base effects when we had
the inflation. The the authorities when the inflation started to
crop up in sort of early one, talked about how
it was still transitory and all that we were seeing
(07:16):
were base effects. I because inflation had dip lower than
trend in the sort of March April May period of
twenty Then in the same March April May period of
twenty one, you were comparing the year on your change
has been compared with something artificially depressed. So the base
effect was making the inflation look was their argument. And
those of us who said no, you've you've got to
(07:37):
watch money supply was saying, no, it's not just base effect.
It's going to carry on going, And sure enough it did.
This time we have exactly the same thing in reverse.
So we had much stronger than trend prints basically May,
certainly April May. The peak was June, and then there
was still above trend but starting to fall back again
in July and August. So therefore we're likely to see
(08:00):
base effects. This ti'm working in reverse, so this time
the base is too high or higher than trend. So
therefore it's going to make the prints for each of
those months look on a year on year basis lower
than the underlying rate of inflation really is. And that
effect will peek out in June and give us potentially
as much as a sort of two and a half
(08:21):
percent lower than the underlying trend figure. So let's assume
that there are roughly three pre sized components of CPI.
Um there's goods, which actually a bit smaller than an
equal size, but goods if you include energy prices, then
you've got services, which is about the same pretty much
as wages, and then you've got shelter as the third component,
which is basically house prices and a little bit of rent.
(08:44):
If we assume that two thirds eye services slash wages
and shelter are both running at six percent. But because
we've finally unwound the supply blockages, then goods inflation can
come back down to normal, and that, of course, in
the near term, means an overshoot to below possibly blow zero.
But let's just say for the lilitrative purposes, if goods
(09:04):
are one third and their zero and the other two
components are six percent, then the underlying trend will be
about four actually four So if the underlying trend is
four percent, but because these base effects, by June, we
can have a figure that's two point five percent lower
than whatever the trend is. You can see that even
on that assumption, we're basically looking at maybe a figure
(09:26):
at one point five for June, which will probably lead
to much dancing in the streets outside the fed um
and everyone telling us that inflation has been conquered because
they're missing the base effects. So the number one thing
is the base effect But what makes that really interesting
is that also if you look at the huge amount
of excess money that was printed in the COVID period um,
(09:48):
that led to a sort of bubble of what even
the Fed now acknowledges is excess savings, and that was
what has been driving the nominal bit of nominal GDP inflation.
But those two things cross over because the money supplies
being on a sort of very gentle downward trend, and
not a normal GDP has been on a very sharp
(10:09):
upward trend. Those two crossover around about April and May.
So suddenly in June you're gonna have two things. You're
gonna have a base effect that makes the print of
artificially low, but you're also gonna lose assuming we don't
find a sort of sudden surgeon money's like, you're always
going to lose that that bubble of excess savings. So
we could suddenly be looking at something that really does
(10:29):
look quite deflation. Arry By say May June July of
this year. Okay, but that sounds like good news. It
sounds like great news. So suddenly we've gone from environment
when we're definitely worried about inflation, and most figures I
have one at the moment say that they expect inflation
to full very sharply, and again I'm talking cp I here.
Expect inflation to full very sharply. But after that they
expected to not fall to stay tube center and stay there,
(10:52):
but to be very volatile. So that's what most people
are expecting, relatively high, relatively volatile inflation. And if it's
actually going to fall down to you know, one percent
to percent and stay there for a bit, this seems
like great news. Um. Yes and no. So the first
thing is that, yes, that's great news because it's what
(11:12):
the FED was trying to do. I they they are
the cause of the error. Same with the Bank of
England in this country. They printed the money because according
to their theory, lots of excess money can't possibly lead
to inflation. I know. I mean, there isn't anyone else
on the planet virtually believes that that they believe they're
in judge Um, and so that's what caused the problem.
But they don't believe it anymore, do they, James. They
(11:34):
don't believe it anymore. They should have learned something, but
don't forget. Cognitive dissonance is likely to be that the
overriding condition because in order to learn that, they will
have had to have learned that everything they've learned at
university was wrong. And that's so there's does they're more
likely to go there. I told you it's transitory rather
(11:55):
than throw out every textbook they have and tear up
there their PhD s and and go back to school
as it, or demand that someone starts, you know, digging
out the old monetary or monetarist traps. So, yes, that
we have a preside problem. We don't know how much
they believe that they got it wrong and and how
(12:17):
what they ascribe that too, But but it does we
all become very pertinent because say we get to the
summer and say we now have a sort of deflationary
environment with a bit of a wages overhang, as wages
always lack at that point, what does the FED do? Now? Historically,
as soon as you start getting a recession, which you
usually get because unemployment, which has just been bubbling around
(12:39):
the bottom, suddenly goes quite sharply upwards, and the FED
usually cuts rates quite quickly, I mean, you know, within
a couple of months quickly. So what they've said they're
going to do, But I don't believe. I think, you know,
events will overtake this, but their plan at the moment
is to hike rates to a certain point and then
hold them. Based on the fact of these spase effects,
(13:01):
they wouldn't be hiking rates any further, but they seem
to be still intent on that, and they certainly wouldn't
be holding them at that high level if the drop
in inflation comes with a recession, which is actually what
we're talking about. Okay, tell us more about the recession,
because I was saying someone the other day, possibly even
(13:21):
on this podcast, that when people talk about the recession now,
they refer to the mild recession, and I said, maybe
mild is this year's transitory. In the US, we've had
seven recessions post for recessions that you know, we have
the data force. So there were actually someone who immediately
after the World War that it's quite hard to get
the data for. So I'm talking about since like nine fifties,
(13:45):
since ninety fifty had seven recessions. But the average decline
in real earnings in the US. This is corporate earnings,
not not people. The average decline was in real terms.
So the idea that you can have a can you know,
you could theoretically have a mild procession, but how would
you have a mild procession? The point about inflation is
(14:07):
that the feeders let the cat out of the bag.
The point about raising rates or type tighter monetary policy
is in order to destroy demand, to get rid of
some of that inflation. What is the destruction of the mound? Well,
it's a recession. It's it's you know, it's just being
disingenuous to pretend otherwise. When the Fed is tightening policy,
it is tightening policy to create a recession, because if
it doesn't create a recession, it will be doing nothing
(14:30):
to reign back inflation. And how do you create a recession, Well,
basically you stop money supply growth in the sense that
you you you know, you constrain bank lending. Now, bank
lending is still running quite strongly at the moment, but
obviously money supply growth is already negative. That The thing
about the recession is we have almost record high corporate
profit margins. And corporate profit margins obviously rely on two things.
(14:54):
They're allowing firms being able to sell their goods to
the household sector, and the household sector is increasingly less
able to buy their good They were able to buy
them because they're this big chunk of excess savings from
the money printing during COVID. But as as I said,
this is going to evaporate come April May, whereupon households
are going to need to get the extra money they
(15:15):
need to buy all these corporate products from their earnings.
But we know that real earnings are shrinking because although
wages are rising at record higher rates, they're rising less
than prices are. So therefore we have a cost of
living crisis. It's not quite as severe in the US,
but it's it's driven on by very similar things to
to our situation. So that by the time the excess
(15:36):
savings are used up, which as I said, best guesses
maybe April, then households in general don't have enough financial
resources to keep buying ever more expensive goods, so they
start buying less unless it gets discounted, which is squeezing
corporate profit margins. And then they go back to their
boss and they say, I need a bigger way of
(15:57):
pay rise this year. So when the corporates are looking
at this, they see, oh, so now our costs with
a leg Our biggest cost is wages and those those
costs are going up at the same time we're having
trouble pushing through the higher prices of our goods. So
it is often observed in the past that the first
year of inflation is loved. Everyone likes the first year
(16:17):
of inflation. It's years two, three, and four that get
really much more difficult. And if you basically have that situation,
that margin squeeze situation, and that declining corporate revenue situation
occurring at the same time that you prevent people borrowing. Um,
I think you've got type mountry policy. That is the
usual preamble to tour researtion. And this is gonna be
(16:40):
a horrible shot, which usually not off cent offending, okay,
real in real time, it's gonna be a horrible shots.
But if the inflation evaporates, then it will not get
off in normal terms as well. Where's the bit where
I get to interrupt you? For God's sake, I saw
the body language and I just rolled straight over. We
can see each other, listeners you see in it. It's
not necessarily a good thing. Now. Corporate margins in the
(17:03):
US have been expanding for a really long time. Everyone's
gotten used to the idea that they expand expand expanding,
record highs, etcetera. And there is a general assumption which
you can feel that they're sort of stable that this
contraction I think will be a horrible shock to people. Historically,
one of the most difficult things for corporates was pricing.
You know, it's not like you're running a petrol fore
court where you can you can flick a switch and
(17:25):
change the price every day. Each delivery you know as
a different cost to you, and you just change the
price up on the big board for what people are
going to have to pay to fill up their cars.
But most companies can't do that. Seventy percent able products
are calling at lander fed are what we call sticky prices.
And sticky prices on average don't change more often than
(17:45):
about once every twelve months. So if you can have
a sticky then obviously pricing becomes very difficult. Now, in
a low, stable, low inflation environment, pricing isn't really a
big deal. But once you get into more volatile inflationary
environment pricing, if you get your price too high, you're
going to pay the price in terms of lower sales.
(18:06):
If you get your price too lower, you're gonna get
lower margins very very hard for everybody to get pricing
right once we have inflation. If margins are going to
fall by then that tells us presumably that the U
s ecuary market is still massively of the valued. The
US equity market at this level probably doesn't have a
valuation problem, but it does have an earnings problem, and
(18:29):
that that means that you get the slightly different You
get certainly different impacts on which bit of the market
that might do well. For example, if you have a
bit of an earnings problem, then the sorts of companies
that might do well might be more value and stables
than growth and discretion, Whereas if you have a valuation problem,
(18:49):
then you might actually find that the stuff that does
well is the opposite. So it's really more about where
you might expect to see the pain or feel the pain. Yes,
if the equity market is no longer bad value, that
assumption is predicated entirely in the fact that it doesn't
lose any money. If earnings go down, then obviously that
immediately the extent which they go down makes the market
(19:11):
look worse value. Again, what can we buy in a
situation like this, Well, it's a very unfashionable thing to say.
But the first thing that this makes me think about,
at least for now, is the fact that the available
quantity of dollars has been shrinking since February of last year,
whereas the available quantity of euros or sterling or almost
(19:35):
all other currencies has been going up. If you think
that the value of things should go up if the
supply relatively shrinks, then the first thing to bear in
mind is that after recent weakness, the dollar might be
worth the look. And the second thing to think about
is is um that most of the valuation problems and
the profile of growth stocks compared to value stocks favors
(20:00):
the US. So if we're now going to start favoring
value over growth, and the reason we'd be favoring value
over growth, by the way, is because of two things. One,
value stocks tend to be cheaper, which means they tend
to have a higher earning sield. And the higher earning
seald is what you require to protect you against inflation.
We know from the eighties that seventies and eighties that
(20:22):
the US stock market went into the period with a
sort of twenty five times be multiple and it came
out with a six or seven times be multiple. In
other words, the destruction of value really occurred with the
destruction of p s. And and so what you we
we're guessing you need to protect yourself is start with
(20:44):
a nice, decently low pe and you only find that
in the value sector. The other thing about the value
sector is it tends to be boring, which is good
because you can protect your margins better. And it also
tends to pay a dividend deal, and dividends are basically
that that the the thing that that again you enables
you to hold your head above water during inflation reperiod.
(21:05):
I know I'm talking about inflation evaporating in the near term,
but if we get onto it later, I think it
will probably come roaring back in. Let's hear about that
right now, because that's the interesting bit. So you are
fitting fitting into the inflation will be volatile camp really yes,
And so so the reason why I think it'll be
volatile is, firstly, we'll we'll get out of the basing
(21:26):
effects as we go into the second half of this year.
If we still have a declining broad most supply in
the US, it won't really make much difference. We'll have
four percent the underlying four percent inflation rate will be revealed,
will come back to be revealed because the base effects
will have dissipated. Um. But if we if we've got
to sort of four percent inflation rate into the end
(21:48):
of this year and at the same time money supply
is still shrinking, most people will fairly reasonably and accurately
predict that this is sort of a lagged effect and
that flation within another twelve months, if we haven't got
any money supply growth will be kind of back at zero.
And that is absolutely true. I mean, you know, if
(22:08):
you want to destroy inflation, m then all you're gonna
do is hold money supply growth as close as you
can to zero and wait twelve to twenty four months.
We know this because it was done in the after
the post Second World War inflation. The problem is that
the way the reason why this works and the way
(22:29):
it works is recession. And so what the FED tends
to do when it realizes it's been successful and it's
created a recession is it then tends to panic and think, well,
I've gone too far. Let's let's take my foot off
the off the throat of the economy. And so the
normal response once we have a recession, and particularly the
bit of the recession that the FED will be concentrating
(22:50):
on is unemployment. But that is almost kind of how
you would define what a recession is. Um If unemployment
suddenly starts a surge, and it usually doesn't search until
the recession starts, and once the recession starts and then
tends to search quite vertically um that then leads to
the FED to panic in the opposite direction and start
slashing rates and presumably in our case, canceling QT at
(23:14):
the same time. And before you know it, we've got
money supply growth coming back up again. And it is
worth bearing in mind that although we tend not to
be we tend to be very simplistic about inflation, but
technically inflation is more complicated than people think. And if
your inflation is coming from overseas. China's reopened this year,
(23:35):
they're going to start demanding more loyal more copper, more lithium, more,
more of everything to get their hands on an aal
tend to push the prices up, but that's not the
same as inflation. You know, if the US has falling
money supply, but everything it wants to important gets more expensive,
that's not inflation. That's what economists called a detrimental shift
in the terms of trade. This is what happened during
(23:57):
the Aile crisis, and the correct, well at least the
textbook correct policy response to hire our costs from overseas
is not to raise interest rates. That's the correct response
to getting rid of inflation in your own economy caused
by you growing the money supply. If the inflation has
been caused by much more expensive imports of commodities and
(24:19):
raw materials than in order to prevent that having such
a comprehensively negative impact in the economy, the correct policy
response is to ease montro policy cuprates and try and
encourage money supply growth. So we could be looking at
a FED that is trying to do the exact opposite
within as little as twelve months, and that could pushed
inflation back up next year the exact what it's doing now.
(24:41):
All right, well, this is miserable, James, thank you for
coming on. I'm really going well, I think it's not miserable.
It's dismal. This is economics, and the correct description economics
is the dismal science. All right, let's let's move over
to the UK UM and I think similarly dismal here. Um, well,
we've you know, there there are sort of our inflation
(25:01):
rate is now higher than the US, partly because everyone
in Europe has paid the price of reliance on well,
not so much of the reliance on Putin's gas pipelines,
but the complacency of not restocking liquid natural gas in
the summer ahead of the winter, which has amazingly not
(25:22):
really been picked up much by the press. But here's
the main root cause of of of this enormous cock
up that we've had. But anyway, that's now there are
being bailed out on that via a fairly mild winter
and uh and having paid exorbitant prices to redirect l
n G from around the world towards Europe's storage tex.
(25:44):
So we we currently have sort of a much higher
level of headline inflation, and that's partly been supported by
the fact that we're also growing money supply, whereas the
US is actually shrinking money supply. M not that we're
growing money supply particularly aggressively. So both Europe and the
UK are kind of heading into a more gentle recession
(26:06):
scenario because frankly, the central banks aren't raising rates as
fast as they are in the States, or as high
as they've raised rates in the States, and they aren't
slowing money supply growth as much. So therefore they've got
kind of more of an inflationary overhang to work through.
But I'm quite sure that if you give it enough time,
we'll see a similar story playing out in Europe as
(26:29):
the one we're going to see first in the US
is alwayst always first, you know, it's it's first into
the dawn turn, it's first out of the dam turn.
They tend to have much more have a history of
much more aggressive policy responses, too much harder in Europe,
as you've got always people who are different nations require
different degrees of policy response, whereas in the US they
(26:50):
tend to add act at a federal level and so
they can make things move. Okay, let me then ask
you about a subject that I know you you suddenly
used to think about an awful lot and our listeners
think about all the time, which is house prices. Um.
You know, John and I have been talking a lot
about house prices, and here's now announced that he believes
that they'll fall at least before all this is over.
(27:12):
And used to be a terrible old bear on the
house prices. Would you agree with John on that? In
the UK? So you know, we've we've always known that
ours prices are pulled by to completely opposite forces. One
is the multiple of incomes. Obviously, you can never expect
to pay off your mortgage in the future if the
price you pay for a house starts to become too
(27:32):
higher multiple of your income. On the other hand, the
amount you're paying every month depends to extraordinary extent on
the interest rate. So therefore, if interest rates are super low,
the income multiple of houses goes up because the monthly
outgoings are are relatively low. And we've obviously just come
(27:52):
up a period where monthly outgoings have been lower than
they've been for if you believe that bankal England five
thou years, and that obviously therefore means that house prices
as a multiple of incomes, while still remaining affordable, have
gone up to the highest multiple we've probably ever seen.
So it seems quite reasonable if unless you think introstructor
(28:16):
going back down to to that five thousand year lobe,
and if they do, I would argue that they won't
stay there very long. Then um, you know the chances
are that the house prices have to reset in terms
of multiples of incomes, and unless incomes are going to
come down in nominal terms, which I think is unlikely
even if they don't do so brilliantly in real terms,
(28:37):
that it's kind of a no brainer to say that
house prices in that mix have to come down relative
to incomes. And if incomes aren't rising hugely, that means
house prices have to come down full stop. You sound
to me like you're in John Camp. Well, I uh,
you know. The thing about economics is every time something
(28:58):
starts moving towards a target, itself has an effect, and
that effects causes people to check. So, you know, yes,
if we if we let's say we had a you know,
we had interest rates at three and a mortgage rate
across the economy of five, and that was having enough
damage on house prices that alone could lead to the
(29:20):
Bank of England cutting interest rates in order to take
the pressure of house prices potentially. So therefore, every single
bit of the economy, you know, that's the economy's saying
ceterris parables. We hold everything equal, then something might do that,
but of course nothing is equal in economies. Every single
thing that moves has an impact on every other thing,
and they all reset after. It's more like sort of, um,
(29:44):
that parlor game where you go around musical chairs. We've
reset every time the music stops. Yeah, yeah, okay, listen
just before we go. Um. It sounded to me like
you were bizarrely positive on the UK stock market, which
people keep telling me is now investor bill again. Having
been uninvestable last year, suddenly it is in vestable for
reasons that you know those words who aren't private to
(30:05):
their precision of thought inside the institutional fund management market
can't quite understand. But if it's now investable again, are
you considering that as something reasonable for the retail investor
to buy the UK market as a whole. Well, two things. One,
it's quite interesting that the retail investor is supposed to
be the thickest guy in the room and the institutional
investors are the smart money. But the reason why the
(30:26):
institution investors now think the UK is investable again is
not because it was about to go up twenty compared
to the US um induseas. It's because it has gone
up relative to the U s induseries UM so it
turns out there aren't any smart guys in the room
where it comes to Finland. But the second point to
make is because it's quite relevant to the time when
(30:48):
the US equity market really outperformed the U S which
is basically from four through until around about the mid eighties.
Um that it outperformed for the same read them that
it's kind of out performing right now, which is it
started from a low enough base, having previously been brutalized
the nineteen seventy four Those in the UK are just
(31:11):
you know, just unbelievable really when looked at on a
historical perspective, but of course coming from a really low
level and having in this instance got the jump on
the US, the US was still trying to find a floor,
which you didn't find until two whereas the UK never
went lower than the n So the UK was basically
(31:31):
it wasn't going up that much, but it was going
it was going sideways when all around them we're going there.
So the best way to outperform is to be cheap.
You know, this is why we the emphasis on buying
things with low p s, which kind of lost all
currency during the low interest rate growth period. You know,
(31:51):
when that comes back, that comes back into fashion when
people will start looking for ways to protect themselves. And
the reason why low ps protect you is that that
provides the floor that you know, it isn't necessary for
other things, but it is worth bearing in mind. You know,
you may not be necessarily making a lot of money.
If you look at the US stock market over there
the seventies and eighties, and there were two oil shops
(32:14):
exorginous oil shops. So this is a worse very much
a worse case scenario. It is worth bearing in mind.
In the index nominally, when absolutely flat sideways didn't do
a dawn thing and adjusted inflation, it fell sevent So
you know, sometimes if you want to invest for the
long run, you want to invest an interest rates are high,
(32:36):
and I'll go about to embark on a on a
twenty or thirty year down trend. It's very hard to
not not to look at our scenario after that forty
years interest rate DWN trend and say that we're now
going to have to redress the balance, which might mean
at least ten years of generally rising interest rate trends,
(33:00):
which might mean that we've got to kind of, you know,
payback that idea that what you're gonna do with the
equity investments is by them and then you know, check
them every year see how much they've got up. That
may not work so well in an environment where and
hasn't historically worked well in an environment where interest rates
go up and interest rates up, in an environment where
inflation keeps coming back. And it's worth bearing in mind
(33:21):
that inflation kept getting kept appearing to be defeated in
the late sixties and early seventies or through until the
early eighties. But what happened was each time it came
back stronger than other. So what made it be defeated, well,
central banks hiking interest rates, triggering recessions down it would
come again. What made it then take off and go
(33:43):
back higher than ever. Well, I think the fact that,
you know, psychologically speaking, people no longer believed that inflation
was dead, so wage hikes, wage demands were always just
a little you know, built in a buffer. You know,
treasury investors does my under a higher yield built in
an inflation protection buffer? And I don't see that yet
(34:04):
in inflation in treasury yields. I think the modern investor
hasn't yet been brutalized enough by this experience to building
these buffers. But as people do building these buffers, you know,
everything just grinds to a to a slower halt. So
I you know, I think one has to be thinking,
probably quite carefully about how to find value, how to
(34:26):
not be greedy, how to protect principle, and possibly to
diversify into things like you know that for a long
long time, I wasn't having any of it when you
want to talk about gold, but actually I think this
is the sort of environment where gold, you know, which
has done nothing for ten years, um, But this is
the sort of environment we're going into. Imagine if you
(34:48):
if the FED can'ts rates hard because we have a
recession and starts to reignite money supply growth into say
which is you know not that are after and everybody
still remembers twenty twenty two very well, and then they
start seeing interest rates being cut the fair this money
supply picking up again. What are all those people going
(35:10):
to think will happen to inflation? And if they all
think it's gonna come back, then you know they're all
going to go and buy gold. Yeah, Okay, I'm want
to stop you there, James, because I've worked really really
hard over the last half herd to get you to
say something positive about any asset class and I've got there, right,
you see something positive about about gold. I'm going to
(35:30):
quit while I'm ahead. Thank you so much for joining
us today, and thank you for finally, after all these years,
coming around to my way of thinking on gold. I
appreciate its taking me what twenty five years, but we
always go there in the end. Thank you. Thank you
for listening to this week's Marin Talks Money. We will
(35:52):
be back next week. In the meantime, If you like
our show, which I really hope you do, rate it,
review it, and subscribe wherever you isn't to your podcast.
This episode was hosted by me Marion sumset Well. It
was produced by Sammersadi. Additional editing by Blake Maples and
special thanks of course to James Ferguson, Stuart Trout, and
to John Stepec as usual, and of course our weekly
(36:14):
reminder to sign up for John's daily newsletter Money Distilled.
The link is in this show notes. It's very good
and you won't regret it. James, if you signed up
yet the John's newsletter, Yeah, absolutely, first thing I did
this morning and isn't it good? Yes, well I knew
you'd asked me about it, so I thought i'd better
get in. Excellent, And you agree it's very good, and
everyone else should sign up. Yeah. John Sepec is a
(36:36):
very very bright guy. There we go, Thank you very much,
John. You know how lots of people say they're passionate
about stuff, and we really disapprove of that. And I'm
always saying to people, you know, stop being passionate about stuff.
Just be good at stuff. You know, no one cares
about your passion, They care about the result. Am I wrong? No? No,
I'm not wrong anyway. So yesterday we did a Twitter
spaces you know me because we're kind of young and
(00:20):
modern and down with the kids, right, and I suddenly
realized that I am passionate about pensions. I mean, who hasn't.
Let's be feeling who among us has not been passionate
about pensions at one point? And I'll wait, everyone, everyone,
But that's because they don't know how fascinating they can
be and how exciting it is to have actually done
(00:42):
some proper work on this, because you know, you know research,
sometimes we do it, sometimes we don't. Having done some
actual research into how that the UK pension system works
and how it works relative to other pension systems around
the world, and we find that niceally, relatively speaking, it's
pretty good. And we talked about this rating system, the
most of pensions rating system that the looks at pension
(01:03):
systems around the world in terms of all their different
parts as opposed to just the state pension. And we
found that in terms of global ratings, the UK is
really high up there, better by the way than Switzerland
or Germany. That makes me feel kind of excited, as
it should. I mean, I think I said it was
a really good chart. Actually it was. It was very interesting,
(01:24):
and I think everyone should go out and listen to.
Someone's going to put the link in the show notes. Um,
but just as a little added incentive, we talked about
house prices the last thing we did one of these
Twitter spaces and it ended up being one of the
most listened to Twitter spaces that Bloomberg's haven't done. So
what we'd really love is if you look could go
out right now and listen to the pensions one and
(01:44):
help us to beat a personal record. John and I
are target driven. We talk about our pbs all the time,
don't we. John KPI is coming out earliers absolutely, but listen,
let's let's give them an incentive here. What was the
most interesting thing for you that came out of that
chat yesterday about pensions? What made you think, God, my
retimement is going to be great. Apart from me pointing
(02:07):
out that you haven't got a defined pension, defined benefit
pension and you don't work in the public sector, which
is a bit of a downer. But what was the
thing that really made you feel that, actually this is
not so bad. Well, I think the these thing is
that it is that idea that we've finally again. It's
not so much more own pension. It's the sense that
Britain was actually doing something right and right and and
(02:32):
in quite a significant way. It's actually the system is
a lot better, and it's also kind of backed by
actual money as opposed to a promise to pay at
some point in the future. But the other thing actually
that I thought was was interesting but also agent was
we were on with Stuart True who's Blue Miss Pension columnists,
and he pointed out that there was actually a really
(02:53):
good deal on buying then missing national insurance years. At
the moment you made thirty five of those, right in
thirty five of those to get a full state pension.
And if you haven't got those, which you might not have,
you taken time off, you know, for parenting, caring or
just you know, hanging around, going to yoga, retreats whatever.
You may not have those full thirty five years, and
(03:14):
there's a deal on a sale on at the pension's
department right where you can you can buy them back. Yeah.
It's really good value. You get the money back in
three years. Yeah. No, it was really impressive. So so yeah,
actually you really should license you this, you know, even
if it is just for that, but the rest of
it is also excellent. Um. But you know, you can
really make a defency your personal finances in the long
(03:36):
term if you haven't got those contributions and you make
them before April. Yeah. And you know what I was
thinking afterwards, well five minutes ago, actually that the auto
enrollment system, the way that the auto enrollment system that
we have in the UK is by the way you
getting money at fifty five. You don't get that anywhere else. Um.
The way that interplace with the state pension system, which
(03:57):
is there is back up, etcetera. This interming angling of
private and state financing that has worked so brilliantly to
fully rescue the UK's pension system and make it one
of the best and most resilient in the world. I'm
thinking NHS, Yeah, I think that's a good idea controversial,
(04:19):
absolutely hate mail to the usual address. Please right, everyone,
listen to that Twitter spaces. It's really interesting. There's a
lot to say about pensions, and I know you think
it's boring, and I know it's one of those things
you just want to put out of your head, you know.
Please God, let you never have to be old enough
to to retire and take a pension. But this is
going to happen. You need to know about it. And
John and I are passionate about pensions and that comes
(04:42):
through in the Twitter spaces. Go listen, help us reach
our targets because that matters to us as well. Thank
you very much, Sean Love reach out to you as usual.
Passionate pensions about pensions. Let's make that on a news
strap line. Welcome to Marion Talks Money, the podcast in
(05:03):
which people who know the markets explain the markets. I'm
there in Sumset Web this week. Our guest is my
old friend and ex colleague, James Ferguson, founder of the
Macro Strategy Partnership. He's got over twenty five years of
experience as a stockbroker, sector analyst and as a Matt
Grows strategist. James and I well, we kind of started
our careers together as the stockbrokers over in Japan, so
(05:25):
we've known each other a long time. We've had a
lot of conversations in those years. James, Hello, thank you
for joining us. Now listen, James. One of the reasons
I always want to have you on my podcast because
you tend to look at things a slightly different way
to other people. They'll be a little bit contrarian, well,
quite a lot of contrarian, and very often you turn
out to be absolutely right, and we like that. So
(05:45):
this year, I'm looking at a PC. Recently, you are
expecting this to be the year not of high inflation,
not even maybe of inflation, but possibly the beginnings of deflation.
Don't hear that? Often in the old days, deflation was
to find as a contraction in the nominal money supply. Now,
on that basis, the U S money supply has been
(06:07):
falling nominally, so not a justif inflation just the headline
big has been falling since February of last year. So actually,
from that point of view, we've we've actually been in
deflation since February. That The trouble is that we have
what Milton Freatment called long and variable lacks, and so
I think it's going to be this year where the
lags um play out and we end up with something
(06:32):
that looks, at least on the surface quite deflation route. Yeah, okay, well,
let's let's just define deflation for the purposes of this
podcast and this audience is being a general fall in
the price level as measured by a CPI. Can we
do that rather than a contraction in nominal money supply.
That's why we didn't have deflation last year, or even
though that's the textbook definition, but we will have it
(06:54):
this year, I think. Okay, So what's driving it purely
this contraction and money supply? The sort of absolutely sort
of first mover is the base effects. And now you
may remember people talking about base effects when we had
the inflation. The the authorities when the inflation started to
crop up in sort of early one, talked about how
it was still transitory and all that we were seeing
(07:16):
were base effects. I because inflation had dip lower than
trend in the sort of March April May period of
twenty Then in the same March April May period of
twenty one, you were comparing the year on your change
has been compared with something artificially depressed. So the base
effect was making the inflation look was their argument. And
those of us who said no, you've you've got to
(07:37):
watch money supply was saying, no, it's not just base effect.
It's going to carry on going, And sure enough it did.
This time we have exactly the same thing in reverse.
So we had much stronger than trend prints basically May,
certainly April May. The peak was June, and then there
was still above trend but starting to fall back again
in July and August. So therefore we're likely to see
(08:00):
base effects. This ti'm working in reverse, so this time
the base is too high or higher than trend. So
therefore it's going to make the prints for each of
those months look on a year on year basis lower
than the underlying rate of inflation really is. And that
effect will peek out in June and give us potentially
as much as a sort of two and a half
(08:21):
percent lower than the underlying trend figure. So let's assume
that there are roughly three pre sized components of CPI.
Um there's goods, which actually a bit smaller than an
equal size, but goods if you include energy prices, then
you've got services, which is about the same pretty much
as wages, and then you've got shelter as the third component,
which is basically house prices and a little bit of rent.
(08:44):
If we assume that two thirds eye services slash wages
and shelter are both running at six percent. But because
we've finally unwound the supply blockages, then goods inflation can
come back down to normal, and that, of course, in
the near term, means an overshoot to below possibly blow zero.
But let's just say for the lilitrative purposes, if goods
(09:04):
are one third and their zero and the other two
components are six percent, then the underlying trend will be
about four actually four So if the underlying trend is
four percent, but because these base effects, by June, we
can have a figure that's two point five percent lower
than whatever the trend is. You can see that even
on that assumption, we're basically looking at maybe a figure
(09:26):
at one point five for June, which will probably lead
to much dancing in the streets outside the fed um
and everyone telling us that inflation has been conquered because
they're missing the base effects. So the number one thing
is the base effect But what makes that really interesting
is that also if you look at the huge amount
of excess money that was printed in the COVID period um,
(09:48):
that led to a sort of bubble of what even
the Fed now acknowledges is excess savings, and that was
what has been driving the nominal bit of nominal GDP inflation.
But those two things cross over because the money supplies
being on a sort of very gentle downward trend, and
not a normal GDP has been on a very sharp
(10:09):
upward trend. Those two crossover around about April and May.
So suddenly in June you're gonna have two things. You're
gonna have a base effect that makes the print of
artificially low, but you're also gonna lose assuming we don't
find a sort of sudden surgeon money's like, you're always
going to lose that that bubble of excess savings. So
we could suddenly be looking at something that really does
(10:29):
look quite deflation. Arry By say May June July of
this year. Okay, but that sounds like good news. It
sounds like great news. So suddenly we've gone from environment
when we're definitely worried about inflation, and most figures I
have one at the moment say that they expect inflation
to full very sharply, and again I'm talking cp I here.
Expect inflation to full very sharply. But after that they
expected to not fall to stay tube center and stay there,
(10:52):
but to be very volatile. So that's what most people
are expecting, relatively high, relatively volatile inflation. And if it's
actually going to fall down to you know, one percent
to percent and stay there for a bit, this seems
like great news. Um. Yes and no. So the first
thing is that, yes, that's great news because it's what
(11:12):
the FED was trying to do. I they they are
the cause of the error. Same with the Bank of
England in this country. They printed the money because according
to their theory, lots of excess money can't possibly lead
to inflation. I know. I mean, there isn't anyone else
on the planet virtually believes that that they believe they're
in judge Um, and so that's what caused the problem.
But they don't believe it anymore, do they, James. They
(11:34):
don't believe it anymore. They should have learned something, but
don't forget. Cognitive dissonance is likely to be that the
overriding condition because in order to learn that, they will
have had to have learned that everything they've learned at
university was wrong. And that's so there's does they're more
likely to go there. I told you it's transitory rather
(11:55):
than throw out every textbook they have and tear up
there their PhD s and and go back to school
as it, or demand that someone starts, you know, digging
out the old monetary or monetarist traps. So, yes, that
we have a preside problem. We don't know how much
they believe that they got it wrong and and how
(12:17):
what they ascribe that too, But but it does we
all become very pertinent because say we get to the
summer and say we now have a sort of deflationary
environment with a bit of a wages overhang, as wages
always lack at that point, what does the FED do? Now? Historically,
as soon as you start getting a recession, which you
usually get because unemployment, which has just been bubbling around
(12:39):
the bottom, suddenly goes quite sharply upwards, and the FED
usually cuts rates quite quickly, I mean, you know, within
a couple of months quickly. So what they've said they're
going to do, But I don't believe. I think, you know,
events will overtake this, but their plan at the moment
is to hike rates to a certain point and then
hold them. Based on the fact of these spase effects,
(13:01):
they wouldn't be hiking rates any further, but they seem
to be still intent on that, and they certainly wouldn't
be holding them at that high level if the drop
in inflation comes with a recession, which is actually what
we're talking about. Okay, tell us more about the recession,
because I was saying someone the other day, possibly even
(13:21):
on this podcast, that when people talk about the recession now,
they refer to the mild recession, and I said, maybe
mild is this year's transitory. In the US, we've had
seven recessions post for recessions that you know, we have
the data force. So there were actually someone who immediately
after the World War that it's quite hard to get
the data for. So I'm talking about since like nine fifties,
(13:45):
since ninety fifty had seven recessions. But the average decline
in real earnings in the US. This is corporate earnings,
not not people. The average decline was in real terms.
So the idea that you can have a can you know,
you could theoretically have a mild procession, but how would
you have a mild procession? The point about inflation is
(14:07):
that the feeders let the cat out of the bag.
The point about raising rates or type tighter monetary policy
is in order to destroy demand, to get rid of
some of that inflation. What is the destruction of the mound? Well,
it's a recession. It's it's you know, it's just being
disingenuous to pretend otherwise. When the Fed is tightening policy,
it is tightening policy to create a recession, because if
it doesn't create a recession, it will be doing nothing
(14:30):
to reign back inflation. And how do you create a recession, Well,
basically you stop money supply growth in the sense that
you you you know, you constrain bank lending. Now, bank
lending is still running quite strongly at the moment, but
obviously money supply growth is already negative. That The thing
about the recession is we have almost record high corporate
profit margins. And corporate profit margins obviously rely on two things.
(14:54):
They're allowing firms being able to sell their goods to
the household sector, and the household sector is increasingly less
able to buy their good They were able to buy
them because they're this big chunk of excess savings from
the money printing during COVID. But as as I said,
this is going to evaporate come April May, whereupon households
are going to need to get the extra money they
(15:15):
need to buy all these corporate products from their earnings.
But we know that real earnings are shrinking because although
wages are rising at record higher rates, they're rising less
than prices are. So therefore we have a cost of
living crisis. It's not quite as severe in the US,
but it's it's driven on by very similar things to
to our situation. So that by the time the excess
(15:36):
savings are used up, which as I said, best guesses
maybe April, then households in general don't have enough financial
resources to keep buying ever more expensive goods, so they
start buying less unless it gets discounted, which is squeezing
corporate profit margins. And then they go back to their
boss and they say, I need a bigger way of
(15:57):
pay rise this year. So when the corporates are looking
at this, they see, oh, so now our costs with
a leg Our biggest cost is wages and those those
costs are going up at the same time we're having
trouble pushing through the higher prices of our goods. So
it is often observed in the past that the first
year of inflation is loved. Everyone likes the first year
(16:17):
of inflation. It's years two, three, and four that get
really much more difficult. And if you basically have that situation,
that margin squeeze situation, and that declining corporate revenue situation
occurring at the same time that you prevent people borrowing. Um,
I think you've got type mountry policy. That is the
usual preamble to tour researtion. And this is gonna be
(16:40):
a horrible shot, which usually not off cent offending, okay,
real in real time, it's gonna be a horrible shots.
But if the inflation evaporates, then it will not get
off in normal terms as well. Where's the bit where
I get to interrupt you? For God's sake, I saw
the body language and I just rolled straight over. We
can see each other, listeners you see in it. It's
not necessarily a good thing. Now. Corporate margins in the
(17:03):
US have been expanding for a really long time. Everyone's
gotten used to the idea that they expand expand expanding,
record highs, etcetera. And there is a general assumption which
you can feel that they're sort of stable that this
contraction I think will be a horrible shock to people. Historically,
one of the most difficult things for corporates was pricing.
You know, it's not like you're running a petrol fore
court where you can you can flick a switch and
(17:25):
change the price every day. Each delivery you know as
a different cost to you, and you just change the
price up on the big board for what people are
going to have to pay to fill up their cars.
But most companies can't do that. Seventy percent able products
are calling at lander fed are what we call sticky prices.
And sticky prices on average don't change more often than
(17:45):
about once every twelve months. So if you can have
a sticky then obviously pricing becomes very difficult. Now, in
a low, stable, low inflation environment, pricing isn't really a
big deal. But once you get into more volatile inflationary
environment pricing, if you get your price too high, you're
going to pay the price in terms of lower sales.
(18:06):
If you get your price too lower, you're gonna get
lower margins very very hard for everybody to get pricing
right once we have inflation. If margins are going to
fall by then that tells us presumably that the U
s ecuary market is still massively of the valued. The
US equity market at this level probably doesn't have a
valuation problem, but it does have an earnings problem, and
(18:29):
that that means that you get the slightly different You
get certainly different impacts on which bit of the market
that might do well. For example, if you have a
bit of an earnings problem, then the sorts of companies
that might do well might be more value and stables
than growth and discretion, Whereas if you have a valuation problem,
(18:49):
then you might actually find that the stuff that does
well is the opposite. So it's really more about where
you might expect to see the pain or feel the pain. Yes,
if the equity market is no longer bad value, that
assumption is predicated entirely in the fact that it doesn't
lose any money. If earnings go down, then obviously that
immediately the extent which they go down makes the market
(19:11):
look worse value. Again, what can we buy in a
situation like this, Well, it's a very unfashionable thing to say.
But the first thing that this makes me think about,
at least for now, is the fact that the available
quantity of dollars has been shrinking since February of last year,
whereas the available quantity of euros or sterling or almost
(19:35):
all other currencies has been going up. If you think
that the value of things should go up if the
supply relatively shrinks, then the first thing to bear in
mind is that after recent weakness, the dollar might be
worth the look. And the second thing to think about
is is um that most of the valuation problems and
the profile of growth stocks compared to value stocks favors
(20:00):
the US. So if we're now going to start favoring
value over growth, and the reason we'd be favoring value
over growth, by the way, is because of two things. One,
value stocks tend to be cheaper, which means they tend
to have a higher earning sield. And the higher earning
seald is what you require to protect you against inflation.
We know from the eighties that seventies and eighties that
(20:22):
the US stock market went into the period with a
sort of twenty five times be multiple and it came
out with a six or seven times be multiple. In
other words, the destruction of value really occurred with the
destruction of p s. And and so what you we
we're guessing you need to protect yourself is start with
(20:44):
a nice, decently low pe and you only find that
in the value sector. The other thing about the value
sector is it tends to be boring, which is good
because you can protect your margins better. And it also
tends to pay a dividend deal, and dividends are basically
that that the the thing that that again you enables
you to hold your head above water during inflation reperiod.
(21:05):
I know I'm talking about inflation evaporating in the near term,
but if we get onto it later, I think it
will probably come roaring back in. Let's hear about that
right now, because that's the interesting bit. So you are
fitting fitting into the inflation will be volatile camp really yes,
And so so the reason why I think it'll be
volatile is, firstly, we'll we'll get out of the basing
(21:26):
effects as we go into the second half of this year.
If we still have a declining broad most supply in
the US, it won't really make much difference. We'll have
four percent the underlying four percent inflation rate will be revealed,
will come back to be revealed because the base effects
will have dissipated. Um. But if we if we've got
to sort of four percent inflation rate into the end
(21:48):
of this year and at the same time money supply
is still shrinking, most people will fairly reasonably and accurately
predict that this is sort of a lagged effect and
that flation within another twelve months, if we haven't got
any money supply growth will be kind of back at zero.
And that is absolutely true. I mean, you know, if
(22:08):
you want to destroy inflation, m then all you're gonna
do is hold money supply growth as close as you
can to zero and wait twelve to twenty four months.
We know this because it was done in the after
the post Second World War inflation. The problem is that
the way the reason why this works and the way
(22:29):
it works is recession. And so what the FED tends
to do when it realizes it's been successful and it's
created a recession is it then tends to panic and think, well,
I've gone too far. Let's let's take my foot off
the off the throat of the economy. And so the
normal response once we have a recession, and particularly the
bit of the recession that the FED will be concentrating
(22:50):
on is unemployment. But that is almost kind of how
you would define what a recession is. Um If unemployment
suddenly starts a surge, and it usually doesn't search until
the recession starts, and once the recession starts and then
tends to search quite vertically um that then leads to
the FED to panic in the opposite direction and start
slashing rates and presumably in our case, canceling QT at
(23:14):
the same time. And before you know it, we've got
money supply growth coming back up again. And it is
worth bearing in mind that although we tend not to
be we tend to be very simplistic about inflation, but
technically inflation is more complicated than people think. And if
your inflation is coming from overseas. China's reopened this year,
(23:35):
they're going to start demanding more loyal more copper, more lithium, more,
more of everything to get their hands on an aal
tend to push the prices up, but that's not the
same as inflation. You know, if the US has falling
money supply, but everything it wants to important gets more expensive,
that's not inflation. That's what economists called a detrimental shift
in the terms of trade. This is what happened during
(23:57):
the Aile crisis, and the correct, well at least the
textbook correct policy response to hire our costs from overseas
is not to raise interest rates. That's the correct response
to getting rid of inflation in your own economy caused
by you growing the money supply. If the inflation has
been caused by much more expensive imports of commodities and
(24:19):
raw materials than in order to prevent that having such
a comprehensively negative impact in the economy, the correct policy
response is to ease montro policy cuprates and try and
encourage money supply growth. So we could be looking at
a FED that is trying to do the exact opposite
within as little as twelve months, and that could pushed
inflation back up next year the exact what it's doing now.
(24:41):
All right, well, this is miserable, James, thank you for
coming on. I'm really going well, I think it's not miserable.
It's dismal. This is economics, and the correct description economics
is the dismal science. All right, let's let's move over
to the UK UM and I think similarly dismal here. Um, well,
we've you know, there there are sort of our inflation
(25:01):
rate is now higher than the US, partly because everyone
in Europe has paid the price of reliance on well,
not so much of the reliance on Putin's gas pipelines,
but the complacency of not restocking liquid natural gas in
the summer ahead of the winter, which has amazingly not
(25:22):
really been picked up much by the press. But here's
the main root cause of of of this enormous cock
up that we've had. But anyway, that's now there are
being bailed out on that via a fairly mild winter
and uh and having paid exorbitant prices to redirect l
n G from around the world towards Europe's storage tex.
(25:44):
So we we currently have sort of a much higher
level of headline inflation, and that's partly been supported by
the fact that we're also growing money supply, whereas the
US is actually shrinking money supply. M not that we're
growing money supply particularly aggressively. So both Europe and the
UK are kind of heading into a more gentle recession
(26:06):
scenario because frankly, the central banks aren't raising rates as
fast as they are in the States, or as high
as they've raised rates in the States, and they aren't
slowing money supply growth as much. So therefore they've got
kind of more of an inflationary overhang to work through.
But I'm quite sure that if you give it enough time,
we'll see a similar story playing out in Europe as
(26:29):
the one we're going to see first in the US
is alwayst always first, you know, it's it's first into
the dawn turn, it's first out of the dam turn.
They tend to have much more have a history of
much more aggressive policy responses, too much harder in Europe,
as you've got always people who are different nations require
different degrees of policy response, whereas in the US they
(26:50):
tend to add act at a federal level and so
they can make things move. Okay, let me then ask
you about a subject that I know you you suddenly
used to think about an awful lot and our listeners
think about all the time, which is house prices. Um.
You know, John and I have been talking a lot
about house prices, and here's now announced that he believes
that they'll fall at least before all this is over.
(27:12):
And used to be a terrible old bear on the
house prices. Would you agree with John on that? In
the UK? So you know, we've we've always known that
ours prices are pulled by to completely opposite forces. One
is the multiple of incomes. Obviously, you can never expect
to pay off your mortgage in the future if the
price you pay for a house starts to become too
(27:32):
higher multiple of your income. On the other hand, the
amount you're paying every month depends to extraordinary extent on
the interest rate. So therefore, if interest rates are super low,
the income multiple of houses goes up because the monthly
outgoings are are relatively low. And we've obviously just come
(27:52):
up a period where monthly outgoings have been lower than
they've been for if you believe that bankal England five
thou years, and that obviously therefore means that house prices
as a multiple of incomes, while still remaining affordable, have
gone up to the highest multiple we've probably ever seen.
So it seems quite reasonable if unless you think introstructor
(28:16):
going back down to to that five thousand year lobe,
and if they do, I would argue that they won't
stay there very long. Then um, you know the chances
are that the house prices have to reset in terms
of multiples of incomes, and unless incomes are going to
come down in nominal terms, which I think is unlikely
even if they don't do so brilliantly in real terms,
(28:37):
that it's kind of a no brainer to say that
house prices in that mix have to come down relative
to incomes. And if incomes aren't rising hugely, that means
house prices have to come down full stop. You sound
to me like you're in John Camp. Well, I uh,
you know. The thing about economics is every time something
(28:58):
starts moving towards a target, itself has an effect, and
that effects causes people to check. So, you know, yes,
if we if we let's say we had a you know,
we had interest rates at three and a mortgage rate
across the economy of five, and that was having enough
damage on house prices that alone could lead to the
(29:20):
Bank of England cutting interest rates in order to take
the pressure of house prices potentially. So therefore, every single
bit of the economy, you know, that's the economy's saying
ceterris parables. We hold everything equal, then something might do that,
but of course nothing is equal in economies. Every single
thing that moves has an impact on every other thing,
and they all reset after. It's more like sort of, um,
(29:44):
that parlor game where you go around musical chairs. We've
reset every time the music stops. Yeah, yeah, okay, listen
just before we go. Um. It sounded to me like
you were bizarrely positive on the UK stock market, which
people keep telling me is now investor bill again. Having
been uninvestable last year, suddenly it is in vestable for
reasons that you know those words who aren't private to
(30:05):
their precision of thought inside the institutional fund management market
can't quite understand. But if it's now investable again, are
you considering that as something reasonable for the retail investor
to buy the UK market as a whole. Well, two things. One,
it's quite interesting that the retail investor is supposed to
be the thickest guy in the room and the institutional
investors are the smart money. But the reason why the
(30:26):
institution investors now think the UK is investable again is
not because it was about to go up twenty compared
to the US um induseas. It's because it has gone
up relative to the U s induseries UM so it
turns out there aren't any smart guys in the room
where it comes to Finland. But the second point to
make is because it's quite relevant to the time when
(30:48):
the US equity market really outperformed the U S which
is basically from four through until around about the mid eighties.
Um that it outperformed for the same read them that
it's kind of out performing right now, which is it
started from a low enough base, having previously been brutalized
the nineteen seventy four Those in the UK are just
(31:11):
you know, just unbelievable really when looked at on a
historical perspective, but of course coming from a really low
level and having in this instance got the jump on
the US, the US was still trying to find a floor,
which you didn't find until two whereas the UK never
went lower than the n So the UK was basically
(31:31):
it wasn't going up that much, but it was going
it was going sideways when all around them we're going there.
So the best way to outperform is to be cheap.
You know, this is why we the emphasis on buying
things with low p s, which kind of lost all
currency during the low interest rate growth period. You know,
(31:51):
when that comes back, that comes back into fashion when
people will start looking for ways to protect themselves. And
the reason why low ps protect you is that that
provides the floor that you know, it isn't necessary for
other things, but it is worth bearing in mind. You know,
you may not be necessarily making a lot of money.
If you look at the US stock market over there
the seventies and eighties, and there were two oil shops
(32:14):
exorginous oil shops. So this is a worse very much
a worse case scenario. It is worth bearing in mind.
In the index nominally, when absolutely flat sideways didn't do
a dawn thing and adjusted inflation, it fell sevent So
you know, sometimes if you want to invest for the
long run, you want to invest an interest rates are high,
(32:36):
and I'll go about to embark on a on a
twenty or thirty year down trend. It's very hard to
not not to look at our scenario after that forty
years interest rate DWN trend and say that we're now
going to have to redress the balance, which might mean
at least ten years of generally rising interest rate trends,
(33:00):
which might mean that we've got to kind of, you know,
payback that idea that what you're gonna do with the
equity investments is by them and then you know, check
them every year see how much they've got up. That
may not work so well in an environment where and
hasn't historically worked well in an environment where interest rates
go up and interest rates up, in an environment where
inflation keeps coming back. And it's worth bearing in mind
(33:21):
that inflation kept getting kept appearing to be defeated in
the late sixties and early seventies or through until the
early eighties. But what happened was each time it came
back stronger than other. So what made it be defeated, well,
central banks hiking interest rates, triggering recessions down it would
come again. What made it then take off and go
(33:43):
back higher than ever. Well, I think the fact that,
you know, psychologically speaking, people no longer believed that inflation
was dead, so wage hikes, wage demands were always just
a little you know, built in a buffer. You know,
treasury investors does my under a higher yield built in
an inflation protection buffer? And I don't see that yet
(34:04):
in inflation in treasury yields. I think the modern investor
hasn't yet been brutalized enough by this experience to building
these buffers. But as people do building these buffers, you know,
everything just grinds to a to a slower halt. So
I you know, I think one has to be thinking,
probably quite carefully about how to find value, how to
(34:26):
not be greedy, how to protect principle, and possibly to
diversify into things like you know that for a long
long time, I wasn't having any of it when you
want to talk about gold, but actually I think this
is the sort of environment where gold, you know, which
has done nothing for ten years, um, But this is
the sort of environment we're going into. Imagine if you
(34:48):
if the FED can'ts rates hard because we have a
recession and starts to reignite money supply growth into say
which is you know not that are after and everybody
still remembers twenty twenty two very well, and then they
start seeing interest rates being cut the fair this money
supply picking up again. What are all those people going
(35:10):
to think will happen to inflation? And if they all
think it's gonna come back, then you know they're all
going to go and buy gold. Yeah, Okay, I'm want
to stop you there, James, because I've worked really really
hard over the last half herd to get you to
say something positive about any asset class and I've got there, right,
you see something positive about about gold. I'm going to
(35:30):
quit while I'm ahead. Thank you so much for joining
us today, and thank you for finally, after all these years,
coming around to my way of thinking on gold. I
appreciate its taking me what twenty five years, but we
always go there in the end. Thank you. Thank you
for listening to this week's Marin Talks Money. We will
(35:52):
be back next week. In the meantime, If you like
our show, which I really hope you do, rate it,
review it, and subscribe wherever you isn't to your podcast.
This episode was hosted by me Marion sumset Well. It
was produced by Sammersadi. Additional editing by Blake Maples and
special thanks of course to James Ferguson, Stuart Trout, and
to John Stepec as usual, and of course our weekly
(36:14):
reminder to sign up for John's daily newsletter Money Distilled.
The link is in this show notes. It's very good
and you won't regret it. James, if you signed up
yet the John's newsletter, Yeah, absolutely, first thing I did
this morning and isn't it good? Yes, well I knew
you'd asked me about it, so I thought i'd better
get in. Excellent, And you agree it's very good, and
everyone else should sign up. Yeah. John Sepec is a
(36:36):
very very bright guy. There we go, Thank you very much,
Host
Merryn Somerset Webb
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