December 13, 2024 • 38 mins
Market historian Russell Napier joins Merryn to explain that economic nationalism will have negative consequences for some nations. They also talk Bitcoin and cryptocurrencies.
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Episode Transcript
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Speaker 1 (00:03):
Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2 (00:19):
Welcome to Merin Talks Money, the podcast in which people
who know the markets explain the markets. I'm Maren zumset Web.
This week I am speaking with someone who really does
know the markets, financial historian friend of the show, Russell Napier.
He's also the founder of Edinburgh's Library of Mistakes and
the author of the Solid Ground Global macro Strategy Report.
His book Anatomy of the Bear, first published in two
(00:40):
thousand and six, forecast a major correction for the US
dock market, and he later wrote a report called Finding
the Bottom, published in the first quarter of two thousand
and nine. The forecast the market had bottomed, which, of
course it had safe to say Russell knows his stuff,
and I suppose we should say as disclosure that I
wrote the introduction to the second edition of Anatomy of
(01:01):
the Best. So very much a friend of the show
and of mine, Russell, welcome back. Thanks for joining us again.
Speaker 3 (01:07):
Maren, Thank you, thank you for that introduction.
Speaker 2 (01:09):
My pleasure. Now listen, we have got a lot to
get through. You've written a lot of really interesting things recently,
and it feels like we're at turning points all over
the place in markets and economies, aren't we? So can
we just start by talking about something you've been writing
about quite a lot recently, which is the return of
national capitalism and how the election of Donald Trump accelerates
the adoption of that across the Western world. Can we
(01:33):
just set the scene by explaining.
Speaker 3 (01:35):
That, absolutely, let's start with President Macron. Actually, because he
articulates things, he articulates things slightly better than Donald Trump.
Let's just leave that statement there. So, speaking on the
twenty Secon of April at the Sorbonne in Paris, Macron said,
he said, I'm kind of making this up. It's not
going to be exactly a word for word, but you'll
get the gist of it. Every year Europeans invest three
(01:57):
hundred billion euros in America. This is absurd, That's what
he said. What's he going to do about it? And
what he's saying here is he's talking about national savings
for national investment. Our own chancellor is saying the same thing,
and the previous chancellor, who was a conservative, said exactly
the same thing. Our national savings are not being used
(02:18):
to fund enough national investment. Now it's global I mean
Donald Trump is famous for his tariffs, I suppose, but
that's all aimed at driving more investment in America. That's
the ultimate aim of this. Tariffs will hurt the consumer
for people, industry that is competing with foreigners will it
(02:39):
will help them. Andrew Carnegie, for instance, become a very
very wealthy man behind the barrier of tariffs. So it's
a different expression of national capitalism. But there are two
bits to this. It's not just you know, building lots
of factories and building all the capacity in the industrial
capacity that France or America don't have. It's mobilizing the
savings of the people to do so. And just the
(03:01):
final point on that, if like Rachel Reeves, you want
more investment in the United Kingdom, you are indirectly at
least mandating that they sell their overseas assets, they bring
it back to the United Kingdom, bring it back to France.
So that, in a kind of a nutshell, is national
capitalism using national savings to fund national investment.
Speaker 2 (03:21):
Okay, so there's two strands to this, and the first
one is the impact on all the individual economies of
bringing cash effectively home and forcing it into their domestic economies.
And the second strand is the fact that we're all
that money that is now going to be we think
dragged home will probably be dragged out of the US.
Is that fair?
Speaker 3 (03:41):
That's absolutely accurate. There are two countries, major countries that
are really on the line if everybody. So it is
interesting because everybody has to do it. You know, we're
talking net here as opposed to gross and absolutely America
is first front and foremost both in its bond market,
its treasury market, where I think thirty percent of that
as owned by foreigners. That equity market. I don't have
(04:01):
an up to date number, but I think it's nearly
forty percent of that equity market is owned by foreigners.
And as over the last several decades capital has kind
of drifted away from what we used to call home bias,
America has been the major beneficiary. So American number one,
but France number two. And this is I think the
untold story of this problem is that the other country
(04:23):
that really is in trouble here is France. Fifty four
percent of all French government debt is owned by foreigners.
The equity markets probably forty percent owned by foreigners. So
France the winners, by the way, Japan. Obviously, Germany's relatively
good position, except of course it's shackled itself to the
French through its single central bank, which is a different
(04:46):
story but connected to this story.
Speaker 2 (04:48):
We might want to come on to that single central
bank and the survival of the Euro later. But so
let's having set the scene there by talking about Macron,
let's go and talk about the US and about Trump. So, well,
how do you think this is going to unfold in
the US, Because at the moment, because it's very positive
vibe around American GDP, around the American market, and there
(05:08):
is I know, you and I and various other people
endlessly talk about how American exceptionalism isn't as real as
we think, and how valuations never stay at these levels indefinitely,
there will be a reversion to the mean, etc. Etc.
And we get ourselves in a in a bit of
a note about the shill appee and that kind of thing.
But nonetheless, around much of the rest of the market,
there is a view that there is no point in
(05:31):
fighting this, that there is going to be significant GDP
growth in the US under Trump, and the US market
will continue to surprise to the upside or surprise US
to the upside.
Speaker 3 (05:41):
Yeah, well I don't agree with that. I mean, as
we've already discussed, Trump is very relied upon foreign servings,
and put that to any investor, they'll say, well, well,
what's the problem with that. He's got these tremendously innovative,
wonderful companies. They lead the digital hero, their hero. They'll
continue to attract capital for ever. So for America, one
direction of the flow of capital and it must be
(06:02):
from old, weak, dilapidated Europe towards America. Well you can
buy that story. I think there's a lot of truth
to it if you believe that private central capital flows
are always free to flow where they wish to flow to.
But then in the world that we've just discussed, that's
not what's going on. It may be that you and I,
or at least who managed over manages our pension van
(06:23):
wage much prefer to own Amazon than crime Mattal of Germany.
But they may not have a choice. They may wish
to own the great digital companies of America rather than
French government bonds, but they may not have a choice.
And Trump is moving and exacerbating this war, and we
keep calling it a trade war, but in my opinion,
you can have a trade war without a capital. So
(06:45):
the cape, as we all know, thirty eight times, it's
only been higher than that. I think since eighteen eighty one,
I think there's only been higher than that one and
a half percent of the time. That's fine as long
as America keeps drawing in all of that capital to
fund all of that growth and sustain all of those
high value fair enough. But the world that Trump is unleashing,
and I don't blame him entirely, everybody's up to it
(07:06):
is a world workout where that foreign capital isn't there
in the same way to sustain high valuations on high growth.
If like Japan, it was entirely if you like, internally funded,
that would be very different. But it's not the way
America is today.
Speaker 2 (07:21):
And this is inevitable, isn't it. I mean that this
is just the way that geopolitics is pushing the world.
That there is a sense that we must all be
more financially independent inside our countries, that the US must
become more independent from China in fact, that we all
must be less reliant on China, that we all must
try and rebuild our domestic manufacturing, etc. There wasn't realistically
(07:45):
a way for things to continue in the direction they
were going previously.
Speaker 3 (07:49):
I think the only way is a dramatic change in
the leadership of China. So we'll just leave that. I'm
not forecasting it, you can't forecast it. But short of that,
then we all have to do this. It is part
of a secondary thing apart from building resilience against an
aggressively aggressive China, and that is inflating away our debts.
And this is actually part and parcel of inflating away
(08:10):
our debts. If we can find a lot of this
investment through bank credit, create more money, higher nominal GDP growth.
So it's not just about the geopolitical strategic issue. There's
climate change as well in investing for net zero that's
another key driver of this. But it's also about getting
that higher level of growth nominal I think because it's
very hard to spare and very hard for government policy
(08:32):
to change the trend rate of real growth. But if
you can get norminal growth up, you might even begin
to bring debt to GDP dowing. And these numbers are horrific,
I mean absolutely horrific. We're well above World War two
levels for many countries. If you look at debt composed
of both the government sector and the private sector. So
the inevitability in this is short of a Chinese government
(08:53):
change geopolitical. But secondly, the absolute necessity now to begin
to inflate away excessively high debt level.
Speaker 2 (09:00):
Okay, So if we were to try and find an upside,
it is that this could be the beginning of bringing
these debt levels down, and at the same time we will,
for example, in the UK, perhaps I'm sure that lots
of this capital will be misallocated by the government, because
that's just the way it works. But nonetheless we may
get some start on rebuilding our domestic infrastructure, which doesn't
(09:21):
work anymore.
Speaker 3 (09:22):
Yeah, I see lots of upsides, not necessarily for savers,
you know. I mean, obviously we're on the podcast to
stock talk about savers, where both savers the listeners are savers,
so we're inherently interested in savers. But there is more
to an economy than savers. In a world where you're
inflating away debt, you're leaving pressure upon debtors that is
a large proportion of the economy, and it is a
(09:43):
large proportion of younger people as well. So there's there's
a redistribution of wealth uder way here, there's a movement
of money more towards blue collar jobs because a lot
of this stuff is going to be more manual in nature.
If we're going to reindustrialize. It's probably too broad a term,
but that sort of thing. So you know, we did
this before. After World War Two. Europe did it more
(10:04):
spectaculary because it had to literally rebuilds its physical capacity.
And in France, for instance, this is known as the
Trunt Gloria is the thirty Glorious Years. Well, if you
were an owner of French government bonds, you kind of
purchasing part was kind of wiped out during the Glorious Years.
And that's what I think we all have to remember.
A saver. So now the question is, as a saver,
(10:25):
how can you realign your portfolio to benefit from that
realignment of wealth, Because I think the beautiful thing is
we have a I'm going to say a deep equity market,
not in terms of liquidity for the United Kingdom, but
there's a wider range of corporations one could invest in
which aren't necessarily losers. In a world where we do
national capitalism and flat away debts and redis wealth. You
(10:49):
are a loser in the bond market, full stop. I
think that's pretty simple, pretty easy.
Speaker 2 (10:53):
Yeah, And I think that's the easy bit, isn't it
From everything that you said and everything we've talked about before,
you and I and other guess on this on this podcast.
If you're investing for the medium or the long term,
you just want to be a clear of sovereign bond markets.
Speaker 3 (11:05):
Yeah, so that's easy. But the more difficult bit is
which equity is to own? And I'm pretty sure they're
not the ones that dominate the indices. So you have
to be what some people would call radical. But I
think there are you know, there are ways to preserve
the purchasing power of wealth in the sort of global
in the structural shifts that are not already underway.
Speaker 2 (11:23):
Can we come back to that bit. I want to
go to currencies and ask you, although things relatively obvious,
what happens to the dollar and the scenario?
Speaker 3 (11:32):
Yeah, so there has to be a tipping point for
the dollar in which it's basically compulsorily sold by its creditors,
as I said, not through their own free will. When
does that tipping point come? Well, I think for the
United Kingdom and this pot of money Rachel Reeves is
putting together, I think it's a twenty five billion. Then
it gets geared up. That's almost certainly already causing some
(11:56):
seals of dollars. It's not phasing on the dollar because
it's not big enough, but of the whole world gets
into that, then it begins to put dime with pressure
on the dollar. The more difficult thing is to work
out what's going on. So it's the end I'm going
to say, Sterling, I've been saying starting for a couple
of years. Everybody felt it was insane. But as you,
I think anybody listening to this will know, Starting has
just broken out against the euro. You know, it's looking
(12:18):
exceptionally wonderful actually compared to what's going on within the
European Union.
Speaker 2 (12:23):
And what do you think the driver behind that? Is
that just that the European Union countries are in such
a hideous state, or is that already capital moving back
into the UK.
Speaker 3 (12:33):
What we can say for sure is it's capital flows
because we run a cardcount deficit. They run I'm depending
where you are better for surplus, So it's capital flows.
Now the question is Is it these flighty short term
capital flows that like to come in because our interest
rates are higher than European rates, or is it something
more profound than that? And the frank answer is because
we've just broken out, we don't know. The market will
(12:55):
say it's just interest rates differentials. I suspected something bigger
and deeper than that. You know, I spend a lot
of time talking to institutional investors, but also a little
bit of time talking to wealthy families in Europe. They're terrified.
They have seen what their governments are capable of in
the past, and effectively it's sequestration. I'm not saying the
British government isn't ultimately capable of doing the same thing,
(13:16):
and you know we Yeah, the post war period wasn't
that great. But on a relative basis, it is easy
to look at the UK budget and point out how
horrific it might be for growth. But compared to what
is happening in France and in Germany, I think we
are benefiting from wealth, assuming that we will not be
as confiscatory. No, maybe Dubai but benefits a lot more.
(13:39):
Maybe Singapore benefits spectacularly, but to some extent, I think
the United Kingdom on a relative basis is, Look, there's
so many things we don't have to worry about in
the United Kingdom that you're that are deeply ingrained in
Europe's male ais and the single currency is you know,
right plastered across all of them. So not having to
deal with, you know, one monetary policy to rule them
(14:01):
all is actually such a huge benefit that I think
we're finally beginning to benefit. I mean, one more thing
on the United Kingdom, and I don't want to sound
like I'm just massively bullish on everything, but look, we've
had lots of problems, and we've had the biggest constitutional
change in the history of this country since sixteen eighty eight.
Despite that, not collapsed, maybe not grown, but not collapsed.
But the other thing we've done is massively de geared.
(14:23):
I mean, if you look at the private sector of
household in corporates in this country, we have taken our
private sector debt service ratio down from about nineteen percent
to fourteen percent. And if you have a prolonged period
of de gearing, you're probably not going to get good
investment and growth, and we certainly haven't had it. But
when it's completed when you've got relatively good levels of gearing,
and to read the press, you'd think we've got horrific
(14:43):
levels of gearing. We haven't got good gearing in the
state sector. Private sector gearing is pretty good. When you
get that sort of out, then you can begin to reinvest.
France has gone exactly the opposite direction. I mean exactly
the opposite direction. It's the second most highly geared country
in the whole planet in terms of the major countries.
So why a st going up? Well, we have a
much better private sector balance sheet. I think we have
(15:03):
a state which is slightly somewhat less confiscatory somewhat, and
that helps you to bring money in. So I don't
think it's just the interest rate differential. I think there's
something a bit more positive for the United Kingdom.
Speaker 2 (15:17):
And does that make you generally positive on the UK
stock market? And one of the things that John and
I talk about endlessly is sort of the slow leaking
away of the UK stock market, the disappearance of so
many of our companies. John and I talked about this
now on our Roundup podcast this week, about the number
of companies that are disappearing from the market as a
result of being taken private as a result of m
(15:38):
and A as a result of shifting in case of
ash did this week primary listing to the US etc.
And the fact that our government doesn't seem to have
any real interest in changing that in supporting our stock market.
So looking at that and looking at what you've just said,
do you still feel positive on the stock market posted
(16:00):
just on the UK in general?
Speaker 3 (16:02):
Yeah, very positive on the stock market. All the things
you said, maybe apart from the last one about the government,
all say the same thing. They're too cheap. They're cheap.
They either want to relist because they realize they're not
getting their right valuation or they're getting taken out because
they're too cheap. And as an investor, it's good to
buy things that are too cheap as opposed to buy
things that are too expensive. So you absolutely want to
(16:23):
be investing in the British stock market. We had and
I think and of course you were there. We had
Anthony Bolton speaking at the Library Mistakes. People can see
that on our website Library mistakes dot com. One of
the great questions somebody asked him is if he was
beginning his career again and his career was just UK equities. Initially,
would he be happy just being confined to buying UK equities?
(16:44):
And he basically kind of said he'd be delighted. He
can think of a better time to be confined to
buying only UK equities given the valuations he sees in
the marketplace. So I thought that was a revealing statement,
the one I completely agree with. And we are in
a very bifurcated world of excessively highly valued equities and
excessively cheap equities as well, and that ground for encouragement.
(17:06):
That's not as if everything's overvalued. There are some things
that look really cheap, and UK equities are one of them.
Speaker 2 (17:12):
Russell, Is it a great time for active management?
Speaker 3 (17:15):
Yes, And I would have said that last year, and
I would have said that the year before. And we
all know there has to be a tipping point when
the machines, and the machines are just don't mean the algorithms,
I mean indexing, When the machines dominate the market, at
some stage, the human beings are going to make a
make a killing. And I say again that we have reached.
Speaker 2 (17:33):
That point, given what you said about Europe and how
nice it is for us not to be caught up
in the single currency and possibly not to be caught
up in various so that European crises coming out. We're
about to see the benefits of brexits, you think.
Speaker 3 (17:46):
Yeah, I mean, I think the benefits of breaks that
have been profound, though not economic. And it's nice to
talk about everything in economics, that's what we do here.
But it was about the devolution and the decentralization of power,
which is something I have and to believe in. And
the British people have had a series over the last
quarter of a century, a series of votes on the
devolution of power, and almost without exception, they always vote
(18:09):
to devolve par Now we have in this country the
most devolved power we've ever had, because we obviously have
our assemblies in Wales, Scotland and Northern Ireland, but we
have these mayors who've got a relative degree of autonomy
as well. We probably haven't been rewarded yet for having
that degree of tolery.
Speaker 2 (18:25):
I think I don't feel particularly rewarded for Scottish devolution yet.
I mean, I live in hope, but not yet, not yet.
Speaker 3 (18:31):
I am a great faith in the people to change
their minds. So let's see if they can finally, whichever
assembly or whichever merit is, get one who's prepared to
deliver for the people. And that I share your skepticism
as to where the Scottish Parliament can do that. But
let's see, so here we are massively devolved, massively the
geared in the private sector, and Europe insists on going
(18:54):
for more and more and more and more centralization. So
everybody keeps putting their heart and so how come Europe's
not growing? I come at such a disaster. But if
you constantly centralize par in Brussels and Frankfurt, what do
you think is going to happen? Why do we think
that's a brilliant idea? And you know, I think you
may be getting new forms of hate mail now I've
(19:14):
given them. I'm being so negative about the European Union.
But I mean, do you know that fifty eight percent
of all France's spending is government spending? Fifty eight percent?
Now that the IMF very kindly provides as a list
of that data for every country in the world. Now,
the good news is for France, it's not the worst
in the world at fifty eight percent. There are two
countries that have got a higher level of government expenditures
(19:36):
of percentage of GDP, and they are Kiribati and Micronesia.
So you know that is not sustainable. And if you
say to somebody is not sustainable, they will reply. But
it's France. That's not a good answer. If something cannot
go on forever, it will end to quote Herbstein, So
we are whatever you think of the United Kingdom, it
(19:56):
is somewhat flexible, it is somewhat changeable. It is the vault,
you know. I don't want to make it sound like
everything is rosy in the United Kingdom. It isn't.
Speaker 1 (20:04):
No.
Speaker 2 (20:05):
I mean, it's important to point out that around forty
five percent of UK GDP is state spending.
Speaker 3 (20:11):
Yeah, well, we could run through all the data. That's
not normal, you know that kind of fruit of that board.
I think the US is at thirty four or something,
so that's that's that's the outlier. But for other states
in the world, the UK is not is not an idol.
Speaker 2 (20:23):
And China, just for fun, is about thirty percent, isn't it.
Speaker 3 (20:25):
I don't know, we'd have to google that.
Speaker 2 (20:27):
I think it is around thirty, which I think is
away was a.
Speaker 3 (20:30):
Fun I think the problem in China is trying to
work out what's public and private.
Speaker 2 (20:35):
That's that, but then that may also be the case
going forward. And you know, one of the things about
national capitalism isn't it is that we're going to end
up with capital directed by government into what we might
technically call private companies or private investments. And so that
forty five forty six percent in the UK is in
(20:55):
effect going to be much higher going forward if, for example,
Rachel reeves get she wants and gets a large percentage
of the UK pension money because of course, why do
you look to pensions, because that's where the money is
of a lot of that money ends up being directed
by the state into investment in the UK. Then again,
just like in China, what is public and what is
(21:16):
private becomes very very blurred.
Speaker 3 (21:17):
Right, That's why they're doing it. The government balance sheet
is stretched to a limit, maybe not the limit, a limit.
Then you have to get this off balance sheet financing,
this contingent financing, and that's where we're that's what we're
doing here. There's so many contingent liabilities on the government
balance sheet anyway, in terms of future pensions for public workers,
et cetera, et cetera. So I think with gay abandon,
(21:39):
I think they will add a lot more because what else?
What else is there?
Speaker 2 (21:42):
Okay, let's go back to China. Briefly. We were talking
about investing in cheap markets. Why it's important in the
medium to long term to hold things that you bought
cheap rather than things that you bought expensive. Now China
looks cheap, but you also think it's uninvestable, right.
Speaker 3 (21:58):
Yeah, So back to our cyclically adjusted pe, which I
do think for the long term holder. Only for the
long term holder is a good guide to value. And
China did just before it launched its reflection. It got
less than ten times cape, and that is the traditional Hey,
these things are cheapest chips level. I have actually do
presentation twenty one lessons from financial history, and one of
(22:19):
those is always by equities below ten times cape. Unless
you don't have monetary independence, you're about to go to war,
or you face confiscation of assets. Potentially China faces all three.
This is the problem, and hopefully a cold war and
not a hot war. We are already fighting two cold
(22:40):
war or two proxy wars with China, given that they
buy the oil of both Iran and Russia, and ultimately,
do you have private sector property rights in China? Will
you could you enforce your rights to own property as
a shareholder against the government in a court of law.
There are people I know who said the answer to
that is yes. The answer my answer to that is know.
(23:00):
More specifically, if we do get into a cold war
with China, the assets of China will be treated the
same way as Russia. And for the unfortunate portfolio managers
who had Russian equities in their portfolio, they are now
valued at zero. So you can run, you know, you
can roll the dice on this game, and you can
hope that none of that happens. And they are cheap
and they would produce good remnom B returns, But will
(23:24):
they produce good sterling returns or good dollar returns if
you ultimately can't get your money out of that country.
And that's where we are with Russia, and I really
strongly believe, but hope and pray that that's not where
we end up with China.
Speaker 2 (23:37):
So you have have the risk of war, obviously the
risk of the invasion of Taiwan at some point over
the next decade. Perhaps several people have mentioned that on
the podcast over the last last few months. You have
that risk, you have the absolute riskyal property rights, and
of course you have uncertainty around the currency.
Speaker 3 (23:53):
Yeah, and that's the key point. I mean, China headed
into a debt deflation and very recently, by which I
mean the consumer price index was flat to falling, the
producer price index was falling, the price of residential property
prince was falling, the debt to GDP ratio was soaring.
Why why did they get themselves into such a mess?
(24:13):
Because they insisted on managing the exchange rate. Now I'm
using past tense. Most people would use present tents for
managing the exchange rate. But if you look at what
they're doing to reflat and what they have to do
to reflair, they ultimately aren't going to be able to
sustain the stable exchange rate. But anyway, if the consensus
is right and mister g is absolutely adamant that this
exchange rate can never go down, then he's also surrendered
(24:36):
a high degree of manatary independence. So those three things
are now working against you. Now I think he isn't.
I think he's going to give that up, and I
think they'll focus on reflating but the longer he clings
on to managing the exchange rate and no monetary independence,
likelihood of conflict cold or hot, plus confiscatory government ten
times cyclically adjusted PE, it's still not a buye Okay.
Speaker 2 (24:58):
So where can we expect inflation to go? Let's stick
with the UK and m as we listen as the UK,
where can we expect inflation to go?
Speaker 3 (25:06):
Here?
Speaker 2 (25:06):
I mean, you've long been an inflationist, right and that
you believe that one of the way, one of the
main ways to get rid of debt is a period
of inflation.
Speaker 3 (25:16):
I have, and I strongly believe that in the longer term,
but I changed my mind a few months ago on
the shorter term.
Speaker 2 (25:21):
That's where I was going.
Speaker 3 (25:23):
Yeah, that is because in the governments have got this
wrong again. So during COVID, too much money was created,
I argue, created due to government action in guaranteeing government
commercial bank credit, which encouraged them to expand their balance
sheets and create money. We'll not go through the technicalities
of that, but basically the government was complicit in the
(25:44):
excess money creation. Then they addict for obvious reasons. When
we've seen in America what the rate of inflation has
done for politicians who don't take it seriously, and they
handed the sort of rains back to the central bankers.
And the central bankers have again got it wrong, because
we really since the beginning of twenty twenty two, there
has been virtually no growth in the supply of money
(26:05):
across the developed world. And people will say, well, that
just shows it's not important. Because if there's been no
growth for two years and the economy has continued to
grow and inflation has continued to go so prices have
continued to go up even though the rate of inflation
has come down, clearly the growth rate in broad money
has no impact whatsoever. And I think I'll come to
(26:25):
the exact opposite conclusion. So much money and was created
from twenty to twenty two, that kind there's a tank
full of it there and we're running it down. But
once it's exhausted, what we're putting into that tank is
close to zero, and that's a recipe for much lower growth.
I need to put that into context. Of the current
rates of growth and broad money are the lowest we've
(26:45):
seen since the Great Depression. You know, it was really
bad and sluggish from two thousand and ninety to twenty nineteen,
particularly in Europe. But what we're seeing today is I mean,
not much worse than that, but marginally worse than that,
which puts us right back into the nineteen thirty. So
they're writing for a fall with this monetary policy. And
I can't tell you when those previous monetary balances will
(27:06):
be run down, when we're going to watch something break
in the global system, when inflation is going to fall.
I don't know when that's going to happen, but we've
been We're two and a half when nearly three years
into a period of no growth in broad money. So
we're running on empty here, and I think it's a
deflation shop we get before we have to move back
to something more aggressive, And there's something more aggressive is
(27:26):
going to be The government's back involved in this. More aggressively.
They discovered in twenty twenty. Governments make money, not our
central bankers make money. They give it up, they got frightened,
they give it up, but they'll be back. And the
way you make money is get banks to lend money,
and you could get them lending to all of your
lovely national capitalist projects as well. So it's coming the synthesis.
(27:46):
It's for all that, and all that, it's coming yet
for all that Scotland's National Bard once.
Speaker 2 (27:54):
Okay, all right, let's get onto the good bit. So
we've set the scene. We understand what's happening to time,
what you think is going to happen anyway, How in
your global scenario, how we investing. We're investing in the
UK stort market into the best value we can find.
That bit we get. What else are we doing?
Speaker 3 (28:12):
Well, we're also buying putting money with value managers. They're
only one, there are only two of them left. And
what I recommend, if you can do it, is actually
go and attend a value manager's conference. It's really I'm
sure I'm showing my Presbyterian here. It's quite good fun.
You know. They talk about the stocks that I know. Yeah, yeah, yeah,
So they talk about the stocks that they like and
stuff like that, and you'll meet some of them and
(28:33):
and I do mean this, they do. They do huddle
together for warm of these days. They're not difficult to find.
So so go and do that. You might get some
good stock ideas. I've had a few belters over the years,
but you might find a fund manager that you you like,
so you're doing that. We if we get into this
position with China, lots of corporations are going to do
excessively well out of that because the yoke of Chinese
(28:54):
competition will be lifted. And if you're making anything in
competing with China, you survive the last thirty years, then
I suspect you're pretty good at it, that you're going
to be actually good at it when that's lifted. And
of course we can't move on without discussing gold. So
all of this is very good for gold, and we're
seeing the goal price reacting to that already. But what
I'm talking about, and we haven't talked specifically about it,
(29:16):
but in general, it's the end of an old global
monetary system we're talking about here. And you know, the
last time and an old monetary system broke down, gold
went from thirty five dollars to be one hundred and fifty.
I cannot say that that will happen again because gold
has been floating, and it hadn't floated up until seventy one.
So well, a lot of if you ad a lot
of inflation to price end quite quickly. But when monetary
(29:39):
systems break down, goal price can go a long way.
Speaker 2 (29:41):
Okay, now we have listeners out there, we'll be listening
to this and saying, geez, that is so old hat
these days, when monetary systems break down, what you need
is bitcoin, particularly when you've got a Trump government place
who ostensibly at least hugely support bitcoin, talking about adding
it to reserves and regulatory environment, et cetera. Bitcoin is
(30:02):
the place to be, not gold at all.
Speaker 3 (30:07):
So obviously I disagree with that.
Speaker 2 (30:09):
There's that's not obvious. That's not obvious. We never know
who's going to go witch my own bitcoin.
Speaker 3 (30:14):
Several reasons to disagree with that. The first one is
I've got a long record on gold, and I have
a pretty good idea what makes it goes up and
what makes it comes down. It doesn't means I can
forecast that accurately, but at least I know why, and
I do need a lot of gold bitcoin experts. And
I said, then, please tell me why it sometimes has
I know why it goes up more buyers than sellers.
(30:35):
And they'll tell me, well, there's more sellers than buyers
when it goes down. But this is true for any asset,
any good, any service on the planet. I need something
a bit more. If I'm going to recommend to people
listening to this podcast that they should buy bitcoin as
to when you can expect it to fall and when
you might want to take proactive action, and no one
yet has been able to explain that to me, So
(30:55):
that necessarily means you I have to be cautious. There
is no fun fundamental which I can point to that
drives it up and drives it down beyond mere assertion
that everybody will always want them to buy a number one.
Number two government policy. Trump is keen on crypto. There
are three types of crypto. There are central bank digital currencies,
which I think we won't talk about. I don't think
(31:16):
they will take off. But then the other two are
stable coins and private sector crypto, which is bitcoin. In
terms of the national capitalism financial repression agenda, one of
those is incredibly helpful, and one of those is incredibly dangerous.
And the one that's incredibly dangerous is private sector crypto
because it allows people to escape a financial repression, and
(31:39):
that's why they like it. And if you hear people
talk about it, they'll tell you that's exactly why they
hold it. Now a world where a government allows that
portal away from the repression they're trying to bring in.
Is a strange world, and I don't think one that's
ultimately sustainable. So I don't think that's on the agenda
today or tomorrow. But if let's say government bonnials in
America were spiking higher and it turns out that everybody
(32:02):
was getting the money out of the country by a bitcoin,
I think you can see it changed quite quickly. Stable Coin, however,
is really very very helpful for governments, and particularly for
the United States of America, because ultimately it's largely these
days backed by holdings of UST bills. And if the
world can come to hold tether or any other stable
(32:22):
coin and believe that it's effectively a dollar, then it
funnels money into President Trump's currency, and it funnels it
into his government debt market, and that's what he's going
to like. So I think as time goes on, we
might see that the Trump administration is really very keen
on properly regulated stable coin, which is really little more
than a money market fund attached to the blockchain, but
(32:45):
not so keen on that portal, which is a private
sector currency which allows people to avoid national capitalism. So
let's see where we get to. But those are the
fundamental reasons, and no one can tell me what bitcoin
is for. I mean everyone now they used to say
was a currency. Everybody's convinced it's not a currency anymore.
So I've won't described it as a you know, a
(33:06):
very very liquid, large efficient baseball card. And it is
possible to make money out of baseball cards, but you
need to understand the baseball card market. But it doesn't
have a use beyond being a speculative asset for the
avoidance of the government. And that's why people like it.
And if you think it can continue to be an
asset in which you can constantly avoid the government, whether
(33:28):
you are doing that legitimately or as a criminal, then
it has a future.
Speaker 2 (33:32):
Okay, well, I'm just bracing myself with a hate mail
actually the Twitter campaign against not just me this time,
but you as well, so at least still have company.
Thank you for that. The one thing we haven't talked
about that I would like to talk about briefly is Japan.
How is Japan affected here?
Speaker 3 (33:48):
Yeah, Japan's fascinating now, I think because just on that
short term issue, it also hasn't gotten much thin broad money,
and they've spent thirty years not working this out. I
mean thirty years of them sitting around going what's going
on here? How come our dads is going up relative
to our GDP? Could it be perhaps that you don't
create enough money to have a higher level of normal GDP?
Could that possibly be what's going on here? So it
(34:10):
has to be said that like everybody else, they still
haven't worked that out. But they're going to have to
work it out. So Japan's going to face I think,
the same short term problems as the rest of us.
But now to their advantage, they have this huge balance
of overseas assets SORR. They have gross number, but they
also have a net balance, and they can begin to
(34:30):
repatriate that. They can begin to continue to hold down
their government bond yields. And at some stage someone's going
to work out. If you banks lend money, they create money,
and nominal GDP goes up, so equities there are more
reasonably valued, and certainly the second tier equities look still
still use the word cheap. So there are still opportunities
(34:51):
in Japan. But we may be in for one of
these shocks, these deflation shocks, which sure you know just
coming across the developed world based on where broad money
growth is. I don't know as it to buy Japanese
equities for long run, but I think maybe it's just
time to be a little bit more cautious because of
the trends in money supply growth.
Speaker 2 (35:08):
Okay, brilliant, really useful, Thank you, right. I think we
have pretty much covered everything that I wanted to talk about,
although I know there's so much more. But I wanted
to ask you one last question, and this is a
Christmas related question. If there was one book that you
felt all our listeners should be asking for for Christmas,
one that isn't written by either you or me, which
(35:29):
I know narrows it down quite a lot. Is there
one that you would say, really is a must read
for someone who wanted to understand some things that we've
been talking about, or somebody just wanted to be a
better investor.
Speaker 3 (35:40):
Yeah, there is one book I always recommend. It's out
of print, so that not particularly helpful, but let me
start with that one, and I'm sure you've read it.
It's called Triumph Off the Optimists Dimson, marsh and Staunton,
and it will sound like the world's most boring book,
but it's the history of the return of various assets
or a very long term holding periods. And the reason
that's so essential to read it it is to calibrate yourself.
(36:01):
And I think, particularly if you're not a finance professional,
it's easy to become uncalibrated. And if you ask, certainly
I remember this back in the dot com bubble, if
you ask people what was the what they thought the
average long term return from equities was in a bill market,
they came up with twenty five percent per annum. You know,
completely totally already uncalibrated to realize that the answer is
about six and a half real terms, But you're can
(36:25):
look at all the asset classes, so that will calibrate you.
And it also helps inoculate you from dodgy sales people
who promise you twenty five percent to infinity and beyond.
So there's that one, and I would recommend that one
if you can get a copy, and I'd recommend to
the publisher that they republish it and get it back
into the system and potentially even updated. Because it only
runs to the year the year two thousand.
Speaker 2 (36:47):
Okay, well, maybe we can create enough demand that it
does get reissued.
Speaker 3 (36:51):
Be wonderful if you could do that, You've got poar
beyond your knowledge. I think you're going to do it.
Speaker 2 (36:56):
Okay, Russell, thank you so much for joining yesterday. We
reallyppreciate it. That was fascinating great.
Speaker 3 (37:02):
Thank you.
Speaker 2 (37:12):
Thanks for listening to this week's Marin Talks Money. If
you like us show, rate, review, and subscribe Wherever you
listen to podcasts and keep sending questions or comments to
Mirror Money at Bloomberg dot net. You can also follow
me and John on Twitter or x. I'm Maren s
w and John is John Underscore Steppe. This episode was
hosted by Me Maren Sumset Web is produced by Someasadi,
production support and sound design by Moses Andam Special thanks,
(37:34):
of course to Russell Napier. Want to listen to episodes
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(37:55):
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Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2 (00:19):
Welcome to Merin Talks Money, the podcast in which people
who know the markets explain the markets. I'm Maren zumset Web.
This week I am speaking with someone who really does
know the markets, financial historian friend of the show, Russell Napier.
He's also the founder of Edinburgh's Library of Mistakes and
the author of the Solid Ground Global macro Strategy Report.
His book Anatomy of the Bear, first published in two
(00:40):
thousand and six, forecast a major correction for the US
dock market, and he later wrote a report called Finding
the Bottom, published in the first quarter of two thousand
and nine. The forecast the market had bottomed, which, of
course it had safe to say Russell knows his stuff,
and I suppose we should say as disclosure that I
wrote the introduction to the second edition of Anatomy of
(01:01):
the Best. So very much a friend of the show
and of mine, Russell, welcome back. Thanks for joining us again.
Speaker 3 (01:07):
Maren, Thank you, thank you for that introduction.
Speaker 2 (01:09):
My pleasure. Now listen, we have got a lot to
get through. You've written a lot of really interesting things recently,
and it feels like we're at turning points all over
the place in markets and economies, aren't we? So can
we just start by talking about something you've been writing
about quite a lot recently, which is the return of
national capitalism and how the election of Donald Trump accelerates
the adoption of that across the Western world. Can we
(01:33):
just set the scene by explaining.
Speaker 3 (01:35):
That, absolutely, let's start with President Macron. Actually, because he
articulates things, he articulates things slightly better than Donald Trump.
Let's just leave that statement there. So, speaking on the
twenty Secon of April at the Sorbonne in Paris, Macron said,
he said, I'm kind of making this up. It's not
going to be exactly a word for word, but you'll
get the gist of it. Every year Europeans invest three
(01:57):
hundred billion euros in America. This is absurd, That's what
he said. What's he going to do about it? And
what he's saying here is he's talking about national savings
for national investment. Our own chancellor is saying the same thing,
and the previous chancellor, who was a conservative, said exactly
the same thing. Our national savings are not being used
(02:18):
to fund enough national investment. Now it's global I mean
Donald Trump is famous for his tariffs, I suppose, but
that's all aimed at driving more investment in America. That's
the ultimate aim of this. Tariffs will hurt the consumer
for people, industry that is competing with foreigners will it
(02:39):
will help them. Andrew Carnegie, for instance, become a very
very wealthy man behind the barrier of tariffs. So it's
a different expression of national capitalism. But there are two
bits to this. It's not just you know, building lots
of factories and building all the capacity in the industrial
capacity that France or America don't have. It's mobilizing the
savings of the people to do so. And just the
(03:01):
final point on that, if like Rachel Reeves, you want
more investment in the United Kingdom, you are indirectly at
least mandating that they sell their overseas assets, they bring
it back to the United Kingdom, bring it back to France.
So that, in a kind of a nutshell, is national
capitalism using national savings to fund national investment.
Speaker 2 (03:21):
Okay, so there's two strands to this, and the first
one is the impact on all the individual economies of
bringing cash effectively home and forcing it into their domestic economies.
And the second strand is the fact that we're all
that money that is now going to be we think
dragged home will probably be dragged out of the US.
Is that fair?
Speaker 3 (03:41):
That's absolutely accurate. There are two countries, major countries that
are really on the line if everybody. So it is
interesting because everybody has to do it. You know, we're
talking net here as opposed to gross and absolutely America
is first front and foremost both in its bond market,
its treasury market, where I think thirty percent of that
as owned by foreigners. That equity market. I don't have
(04:01):
an up to date number, but I think it's nearly
forty percent of that equity market is owned by foreigners.
And as over the last several decades capital has kind
of drifted away from what we used to call home bias,
America has been the major beneficiary. So American number one,
but France number two. And this is I think the
untold story of this problem is that the other country
(04:23):
that really is in trouble here is France. Fifty four
percent of all French government debt is owned by foreigners.
The equity markets probably forty percent owned by foreigners. So
France the winners, by the way, Japan. Obviously, Germany's relatively
good position, except of course it's shackled itself to the
French through its single central bank, which is a different
(04:46):
story but connected to this story.
Speaker 2 (04:48):
We might want to come on to that single central
bank and the survival of the Euro later. But so
let's having set the scene there by talking about Macron,
let's go and talk about the US and about Trump. So, well,
how do you think this is going to unfold in
the US, Because at the moment, because it's very positive
vibe around American GDP, around the American market, and there
(05:08):
is I know, you and I and various other people
endlessly talk about how American exceptionalism isn't as real as
we think, and how valuations never stay at these levels indefinitely,
there will be a reversion to the mean, etc. Etc.
And we get ourselves in a in a bit of
a note about the shill appee and that kind of thing.
But nonetheless, around much of the rest of the market,
there is a view that there is no point in
(05:31):
fighting this, that there is going to be significant GDP
growth in the US under Trump, and the US market
will continue to surprise to the upside or surprise US
to the upside.
Speaker 3 (05:41):
Yeah, well I don't agree with that. I mean, as
we've already discussed, Trump is very relied upon foreign servings,
and put that to any investor, they'll say, well, well,
what's the problem with that. He's got these tremendously innovative,
wonderful companies. They lead the digital hero, their hero. They'll
continue to attract capital for ever. So for America, one
direction of the flow of capital and it must be
(06:02):
from old, weak, dilapidated Europe towards America. Well you can
buy that story. I think there's a lot of truth
to it if you believe that private central capital flows
are always free to flow where they wish to flow to.
But then in the world that we've just discussed, that's
not what's going on. It may be that you and I,
or at least who managed over manages our pension van
(06:23):
wage much prefer to own Amazon than crime Mattal of Germany.
But they may not have a choice. They may wish
to own the great digital companies of America rather than
French government bonds, but they may not have a choice.
And Trump is moving and exacerbating this war, and we
keep calling it a trade war, but in my opinion,
you can have a trade war without a capital. So
(06:45):
the cape, as we all know, thirty eight times, it's
only been higher than that. I think since eighteen eighty one,
I think there's only been higher than that one and
a half percent of the time. That's fine as long
as America keeps drawing in all of that capital to
fund all of that growth and sustain all of those
high value fair enough. But the world that Trump is unleashing,
and I don't blame him entirely, everybody's up to it
(07:06):
is a world workout where that foreign capital isn't there
in the same way to sustain high valuations on high growth.
If like Japan, it was entirely if you like, internally funded,
that would be very different. But it's not the way
America is today.
Speaker 2 (07:21):
And this is inevitable, isn't it. I mean that this
is just the way that geopolitics is pushing the world.
That there is a sense that we must all be
more financially independent inside our countries, that the US must
become more independent from China in fact, that we all
must be less reliant on China, that we all must
try and rebuild our domestic manufacturing, etc. There wasn't realistically
(07:45):
a way for things to continue in the direction they
were going previously.
Speaker 3 (07:49):
I think the only way is a dramatic change in
the leadership of China. So we'll just leave that. I'm
not forecasting it, you can't forecast it. But short of that,
then we all have to do this. It is part
of a secondary thing apart from building resilience against an
aggressively aggressive China, and that is inflating away our debts.
And this is actually part and parcel of inflating away
(08:10):
our debts. If we can find a lot of this
investment through bank credit, create more money, higher nominal GDP growth.
So it's not just about the geopolitical strategic issue. There's
climate change as well in investing for net zero that's
another key driver of this. But it's also about getting
that higher level of growth nominal I think because it's
very hard to spare and very hard for government policy
(08:32):
to change the trend rate of real growth. But if
you can get norminal growth up, you might even begin
to bring debt to GDP dowing. And these numbers are horrific,
I mean absolutely horrific. We're well above World War two
levels for many countries. If you look at debt composed
of both the government sector and the private sector. So
the inevitability in this is short of a Chinese government
(08:53):
change geopolitical. But secondly, the absolute necessity now to begin
to inflate away excessively high debt level.
Speaker 2 (09:00):
Okay, So if we were to try and find an upside,
it is that this could be the beginning of bringing
these debt levels down, and at the same time we will,
for example, in the UK, perhaps I'm sure that lots
of this capital will be misallocated by the government, because
that's just the way it works. But nonetheless we may
get some start on rebuilding our domestic infrastructure, which doesn't
(09:21):
work anymore.
Speaker 3 (09:22):
Yeah, I see lots of upsides, not necessarily for savers,
you know. I mean, obviously we're on the podcast to
stock talk about savers, where both savers the listeners are savers,
so we're inherently interested in savers. But there is more
to an economy than savers. In a world where you're
inflating away debt, you're leaving pressure upon debtors that is
a large proportion of the economy, and it is a
(09:43):
large proportion of younger people as well. So there's there's
a redistribution of wealth uder way here, there's a movement
of money more towards blue collar jobs because a lot
of this stuff is going to be more manual in nature.
If we're going to reindustrialize. It's probably too broad a term,
but that sort of thing. So you know, we did
this before. After World War Two. Europe did it more
(10:04):
spectaculary because it had to literally rebuilds its physical capacity.
And in France, for instance, this is known as the
Trunt Gloria is the thirty Glorious Years. Well, if you
were an owner of French government bonds, you kind of
purchasing part was kind of wiped out during the Glorious Years.
And that's what I think we all have to remember.
A saver. So now the question is, as a saver,
(10:25):
how can you realign your portfolio to benefit from that
realignment of wealth, Because I think the beautiful thing is
we have a I'm going to say a deep equity market,
not in terms of liquidity for the United Kingdom, but
there's a wider range of corporations one could invest in
which aren't necessarily losers. In a world where we do
national capitalism and flat away debts and redis wealth. You
(10:49):
are a loser in the bond market, full stop. I
think that's pretty simple, pretty easy.
Speaker 2 (10:53):
Yeah, And I think that's the easy bit, isn't it
From everything that you said and everything we've talked about before,
you and I and other guess on this on this podcast.
If you're investing for the medium or the long term,
you just want to be a clear of sovereign bond markets.
Speaker 3 (11:05):
Yeah, so that's easy. But the more difficult bit is
which equity is to own? And I'm pretty sure they're
not the ones that dominate the indices. So you have
to be what some people would call radical. But I
think there are you know, there are ways to preserve
the purchasing power of wealth in the sort of global
in the structural shifts that are not already underway.
Speaker 2 (11:23):
Can we come back to that bit. I want to
go to currencies and ask you, although things relatively obvious,
what happens to the dollar and the scenario?
Speaker 3 (11:32):
Yeah, so there has to be a tipping point for
the dollar in which it's basically compulsorily sold by its creditors,
as I said, not through their own free will. When
does that tipping point come? Well, I think for the
United Kingdom and this pot of money Rachel Reeves is
putting together, I think it's a twenty five billion. Then
it gets geared up. That's almost certainly already causing some
(11:56):
seals of dollars. It's not phasing on the dollar because
it's not big enough, but of the whole world gets
into that, then it begins to put dime with pressure
on the dollar. The more difficult thing is to work
out what's going on. So it's the end I'm going
to say, Sterling, I've been saying starting for a couple
of years. Everybody felt it was insane. But as you,
I think anybody listening to this will know, Starting has
just broken out against the euro. You know, it's looking
(12:18):
exceptionally wonderful actually compared to what's going on within the
European Union.
Speaker 2 (12:23):
And what do you think the driver behind that? Is
that just that the European Union countries are in such
a hideous state, or is that already capital moving back
into the UK.
Speaker 3 (12:33):
What we can say for sure is it's capital flows
because we run a cardcount deficit. They run I'm depending
where you are better for surplus, So it's capital flows.
Now the question is Is it these flighty short term
capital flows that like to come in because our interest
rates are higher than European rates, or is it something
more profound than that? And the frank answer is because
we've just broken out, we don't know. The market will
(12:55):
say it's just interest rates differentials. I suspected something bigger
and deeper than that. You know, I spend a lot
of time talking to institutional investors, but also a little
bit of time talking to wealthy families in Europe. They're terrified.
They have seen what their governments are capable of in
the past, and effectively it's sequestration. I'm not saying the
British government isn't ultimately capable of doing the same thing,
(13:16):
and you know we Yeah, the post war period wasn't
that great. But on a relative basis, it is easy
to look at the UK budget and point out how
horrific it might be for growth. But compared to what
is happening in France and in Germany, I think we
are benefiting from wealth, assuming that we will not be
as confiscatory. No, maybe Dubai but benefits a lot more.
(13:39):
Maybe Singapore benefits spectacularly, but to some extent, I think
the United Kingdom on a relative basis is, Look, there's
so many things we don't have to worry about in
the United Kingdom that you're that are deeply ingrained in
Europe's male ais and the single currency is you know,
right plastered across all of them. So not having to
deal with, you know, one monetary policy to rule them
(14:01):
all is actually such a huge benefit that I think
we're finally beginning to benefit. I mean, one more thing
on the United Kingdom, and I don't want to sound
like I'm just massively bullish on everything, but look, we've
had lots of problems, and we've had the biggest constitutional
change in the history of this country since sixteen eighty eight.
Despite that, not collapsed, maybe not grown, but not collapsed.
But the other thing we've done is massively de geared.
(14:23):
I mean, if you look at the private sector of
household in corporates in this country, we have taken our
private sector debt service ratio down from about nineteen percent
to fourteen percent. And if you have a prolonged period
of de gearing, you're probably not going to get good
investment and growth, and we certainly haven't had it. But
when it's completed when you've got relatively good levels of gearing,
and to read the press, you'd think we've got horrific
(14:43):
levels of gearing. We haven't got good gearing in the
state sector. Private sector gearing is pretty good. When you
get that sort of out, then you can begin to reinvest.
France has gone exactly the opposite direction. I mean exactly
the opposite direction. It's the second most highly geared country
in the whole planet in terms of the major countries.
So why a st going up? Well, we have a
much better private sector balance sheet. I think we have
(15:03):
a state which is slightly somewhat less confiscatory somewhat, and
that helps you to bring money in. So I don't
think it's just the interest rate differential. I think there's
something a bit more positive for the United Kingdom.
Speaker 2 (15:17):
And does that make you generally positive on the UK
stock market? And one of the things that John and
I talk about endlessly is sort of the slow leaking
away of the UK stock market, the disappearance of so
many of our companies. John and I talked about this
now on our Roundup podcast this week, about the number
of companies that are disappearing from the market as a
result of being taken private as a result of m
(15:38):
and A as a result of shifting in case of
ash did this week primary listing to the US etc.
And the fact that our government doesn't seem to have
any real interest in changing that in supporting our stock market.
So looking at that and looking at what you've just said,
do you still feel positive on the stock market posted
(16:00):
just on the UK in general?
Speaker 3 (16:02):
Yeah, very positive on the stock market. All the things
you said, maybe apart from the last one about the government,
all say the same thing. They're too cheap. They're cheap.
They either want to relist because they realize they're not
getting their right valuation or they're getting taken out because
they're too cheap. And as an investor, it's good to
buy things that are too cheap as opposed to buy
things that are too expensive. So you absolutely want to
(16:23):
be investing in the British stock market. We had and
I think and of course you were there. We had
Anthony Bolton speaking at the Library Mistakes. People can see
that on our website Library mistakes dot com. One of
the great questions somebody asked him is if he was
beginning his career again and his career was just UK equities. Initially,
would he be happy just being confined to buying UK equities?
(16:44):
And he basically kind of said he'd be delighted. He
can think of a better time to be confined to
buying only UK equities given the valuations he sees in
the marketplace. So I thought that was a revealing statement,
the one I completely agree with. And we are in
a very bifurcated world of excessively highly valued equities and
excessively cheap equities as well, and that ground for encouragement.
(17:06):
That's not as if everything's overvalued. There are some things
that look really cheap, and UK equities are one of them.
Speaker 2 (17:12):
Russell, Is it a great time for active management?
Speaker 3 (17:15):
Yes, And I would have said that last year, and
I would have said that the year before. And we
all know there has to be a tipping point when
the machines, and the machines are just don't mean the algorithms,
I mean indexing, When the machines dominate the market, at
some stage, the human beings are going to make a
make a killing. And I say again that we have reached.
Speaker 2 (17:33):
That point, given what you said about Europe and how
nice it is for us not to be caught up
in the single currency and possibly not to be caught
up in various so that European crises coming out. We're
about to see the benefits of brexits, you think.
Speaker 3 (17:46):
Yeah, I mean, I think the benefits of breaks that
have been profound, though not economic. And it's nice to
talk about everything in economics, that's what we do here.
But it was about the devolution and the decentralization of power,
which is something I have and to believe in. And
the British people have had a series over the last
quarter of a century, a series of votes on the
devolution of power, and almost without exception, they always vote
(18:09):
to devolve par Now we have in this country the
most devolved power we've ever had, because we obviously have
our assemblies in Wales, Scotland and Northern Ireland, but we
have these mayors who've got a relative degree of autonomy
as well. We probably haven't been rewarded yet for having
that degree of tolery.
Speaker 2 (18:25):
I think I don't feel particularly rewarded for Scottish devolution yet.
I mean, I live in hope, but not yet, not yet.
Speaker 3 (18:31):
I am a great faith in the people to change
their minds. So let's see if they can finally, whichever
assembly or whichever merit is, get one who's prepared to
deliver for the people. And that I share your skepticism
as to where the Scottish Parliament can do that. But
let's see, so here we are massively devolved, massively the
geared in the private sector, and Europe insists on going
(18:54):
for more and more and more and more centralization. So
everybody keeps putting their heart and so how come Europe's
not growing? I come at such a disaster. But if
you constantly centralize par in Brussels and Frankfurt, what do
you think is going to happen? Why do we think
that's a brilliant idea? And you know, I think you
may be getting new forms of hate mail now I've
(19:14):
given them. I'm being so negative about the European Union.
But I mean, do you know that fifty eight percent
of all France's spending is government spending? Fifty eight percent?
Now that the IMF very kindly provides as a list
of that data for every country in the world. Now,
the good news is for France, it's not the worst
in the world at fifty eight percent. There are two
countries that have got a higher level of government expenditures
(19:36):
of percentage of GDP, and they are Kiribati and Micronesia.
So you know that is not sustainable. And if you
say to somebody is not sustainable, they will reply. But
it's France. That's not a good answer. If something cannot
go on forever, it will end to quote Herbstein, So
we are whatever you think of the United Kingdom, it
(19:56):
is somewhat flexible, it is somewhat changeable. It is the vault,
you know. I don't want to make it sound like
everything is rosy in the United Kingdom. It isn't.
Speaker 1 (20:04):
No.
Speaker 2 (20:05):
I mean, it's important to point out that around forty
five percent of UK GDP is state spending.
Speaker 3 (20:11):
Yeah, well, we could run through all the data. That's
not normal, you know that kind of fruit of that board.
I think the US is at thirty four or something,
so that's that's that's the outlier. But for other states
in the world, the UK is not is not an idol.
Speaker 2 (20:23):
And China, just for fun, is about thirty percent, isn't it.
Speaker 3 (20:25):
I don't know, we'd have to google that.
Speaker 2 (20:27):
I think it is around thirty, which I think is
away was a.
Speaker 3 (20:30):
Fun I think the problem in China is trying to
work out what's public and private.
Speaker 2 (20:35):
That's that, but then that may also be the case
going forward. And you know, one of the things about
national capitalism isn't it is that we're going to end
up with capital directed by government into what we might
technically call private companies or private investments. And so that
forty five forty six percent in the UK is in
(20:55):
effect going to be much higher going forward if, for example,
Rachel reeves get she wants and gets a large percentage
of the UK pension money because of course, why do
you look to pensions, because that's where the money is
of a lot of that money ends up being directed
by the state into investment in the UK. Then again,
just like in China, what is public and what is
(21:16):
private becomes very very blurred.
Speaker 3 (21:17):
Right, That's why they're doing it. The government balance sheet
is stretched to a limit, maybe not the limit, a limit.
Then you have to get this off balance sheet financing,
this contingent financing, and that's where we're that's what we're
doing here. There's so many contingent liabilities on the government
balance sheet anyway, in terms of future pensions for public workers,
et cetera, et cetera. So I think with gay abandon,
(21:39):
I think they will add a lot more because what else?
What else is there?
Speaker 2 (21:42):
Okay, let's go back to China. Briefly. We were talking
about investing in cheap markets. Why it's important in the
medium to long term to hold things that you bought
cheap rather than things that you bought expensive. Now China
looks cheap, but you also think it's uninvestable, right.
Speaker 3 (21:58):
Yeah, So back to our cyclically adjusted pe, which I
do think for the long term holder. Only for the
long term holder is a good guide to value. And
China did just before it launched its reflection. It got
less than ten times cape, and that is the traditional Hey,
these things are cheapest chips level. I have actually do
presentation twenty one lessons from financial history, and one of
(22:19):
those is always by equities below ten times cape. Unless
you don't have monetary independence, you're about to go to war,
or you face confiscation of assets. Potentially China faces all three.
This is the problem, and hopefully a cold war and
not a hot war. We are already fighting two cold
(22:40):
war or two proxy wars with China, given that they
buy the oil of both Iran and Russia, and ultimately,
do you have private sector property rights in China? Will
you could you enforce your rights to own property as
a shareholder against the government in a court of law.
There are people I know who said the answer to
that is yes. The answer my answer to that is know.
(23:00):
More specifically, if we do get into a cold war
with China, the assets of China will be treated the
same way as Russia. And for the unfortunate portfolio managers
who had Russian equities in their portfolio, they are now
valued at zero. So you can run, you know, you
can roll the dice on this game, and you can
hope that none of that happens. And they are cheap
and they would produce good remnom B returns, But will
(23:24):
they produce good sterling returns or good dollar returns if
you ultimately can't get your money out of that country.
And that's where we are with Russia, and I really
strongly believe, but hope and pray that that's not where
we end up with China.
Speaker 2 (23:37):
So you have have the risk of war, obviously the
risk of the invasion of Taiwan at some point over
the next decade. Perhaps several people have mentioned that on
the podcast over the last last few months. You have
that risk, you have the absolute riskyal property rights, and
of course you have uncertainty around the currency.
Speaker 3 (23:53):
Yeah, and that's the key point. I mean, China headed
into a debt deflation and very recently, by which I
mean the consumer price index was flat to falling, the
producer price index was falling, the price of residential property
prince was falling, the debt to GDP ratio was soaring.
Why why did they get themselves into such a mess?
(24:13):
Because they insisted on managing the exchange rate. Now I'm
using past tense. Most people would use present tents for
managing the exchange rate. But if you look at what
they're doing to reflat and what they have to do
to reflair, they ultimately aren't going to be able to
sustain the stable exchange rate. But anyway, if the consensus
is right and mister g is absolutely adamant that this
exchange rate can never go down, then he's also surrendered
(24:36):
a high degree of manatary independence. So those three things
are now working against you. Now I think he isn't.
I think he's going to give that up, and I
think they'll focus on reflating but the longer he clings
on to managing the exchange rate and no monetary independence,
likelihood of conflict cold or hot, plus confiscatory government ten
times cyclically adjusted PE, it's still not a buye Okay.
Speaker 2 (24:58):
So where can we expect inflation to go? Let's stick
with the UK and m as we listen as the UK,
where can we expect inflation to go?
Speaker 3 (25:06):
Here?
Speaker 2 (25:06):
I mean, you've long been an inflationist, right and that
you believe that one of the way, one of the
main ways to get rid of debt is a period
of inflation.
Speaker 3 (25:16):
I have, and I strongly believe that in the longer term,
but I changed my mind a few months ago on
the shorter term.
Speaker 2 (25:21):
That's where I was going.
Speaker 3 (25:23):
Yeah, that is because in the governments have got this
wrong again. So during COVID, too much money was created,
I argue, created due to government action in guaranteeing government
commercial bank credit, which encouraged them to expand their balance
sheets and create money. We'll not go through the technicalities
of that, but basically the government was complicit in the
(25:44):
excess money creation. Then they addict for obvious reasons. When
we've seen in America what the rate of inflation has
done for politicians who don't take it seriously, and they
handed the sort of rains back to the central bankers.
And the central bankers have again got it wrong, because
we really since the beginning of twenty twenty two, there
has been virtually no growth in the supply of money
(26:05):
across the developed world. And people will say, well, that
just shows it's not important. Because if there's been no
growth for two years and the economy has continued to
grow and inflation has continued to go so prices have
continued to go up even though the rate of inflation
has come down, clearly the growth rate in broad money
has no impact whatsoever. And I think I'll come to
(26:25):
the exact opposite conclusion. So much money and was created
from twenty to twenty two, that kind there's a tank
full of it there and we're running it down. But
once it's exhausted, what we're putting into that tank is
close to zero, and that's a recipe for much lower growth.
I need to put that into context. Of the current
rates of growth and broad money are the lowest we've
(26:45):
seen since the Great Depression. You know, it was really
bad and sluggish from two thousand and ninety to twenty nineteen,
particularly in Europe. But what we're seeing today is I mean,
not much worse than that, but marginally worse than that,
which puts us right back into the nineteen thirty. So
they're writing for a fall with this monetary policy. And
I can't tell you when those previous monetary balances will
(27:06):
be run down, when we're going to watch something break
in the global system, when inflation is going to fall.
I don't know when that's going to happen, but we've
been We're two and a half when nearly three years
into a period of no growth in broad money. So
we're running on empty here, and I think it's a
deflation shop we get before we have to move back
to something more aggressive, And there's something more aggressive is
(27:26):
going to be The government's back involved in this. More aggressively.
They discovered in twenty twenty. Governments make money, not our
central bankers make money. They give it up, they got frightened,
they give it up, but they'll be back. And the
way you make money is get banks to lend money,
and you could get them lending to all of your
lovely national capitalist projects as well. So it's coming the synthesis.
(27:46):
It's for all that, and all that, it's coming yet
for all that Scotland's National Bard once.
Speaker 2 (27:54):
Okay, all right, let's get onto the good bit. So
we've set the scene. We understand what's happening to time,
what you think is going to happen anyway, How in
your global scenario, how we investing. We're investing in the
UK stort market into the best value we can find.
That bit we get. What else are we doing?
Speaker 3 (28:12):
Well, we're also buying putting money with value managers. They're
only one, there are only two of them left. And
what I recommend, if you can do it, is actually
go and attend a value manager's conference. It's really I'm
sure I'm showing my Presbyterian here. It's quite good fun.
You know. They talk about the stocks that I know. Yeah, yeah, yeah,
So they talk about the stocks that they like and
stuff like that, and you'll meet some of them and
(28:33):
and I do mean this, they do. They do huddle
together for warm of these days. They're not difficult to find.
So so go and do that. You might get some
good stock ideas. I've had a few belters over the years,
but you might find a fund manager that you you like,
so you're doing that. We if we get into this
position with China, lots of corporations are going to do
excessively well out of that because the yoke of Chinese
(28:54):
competition will be lifted. And if you're making anything in
competing with China, you survive the last thirty years, then
I suspect you're pretty good at it, that you're going
to be actually good at it when that's lifted. And
of course we can't move on without discussing gold. So
all of this is very good for gold, and we're
seeing the goal price reacting to that already. But what
I'm talking about, and we haven't talked specifically about it,
(29:16):
but in general, it's the end of an old global
monetary system we're talking about here. And you know, the
last time and an old monetary system broke down, gold
went from thirty five dollars to be one hundred and fifty.
I cannot say that that will happen again because gold
has been floating, and it hadn't floated up until seventy one.
So well, a lot of if you ad a lot
of inflation to price end quite quickly. But when monetary
(29:39):
systems break down, goal price can go a long way.
Speaker 2 (29:41):
Okay, now we have listeners out there, we'll be listening
to this and saying, geez, that is so old hat
these days, when monetary systems break down, what you need
is bitcoin, particularly when you've got a Trump government place
who ostensibly at least hugely support bitcoin, talking about adding
it to reserves and regulatory environment, et cetera. Bitcoin is
(30:02):
the place to be, not gold at all.
Speaker 3 (30:07):
So obviously I disagree with that.
Speaker 2 (30:09):
There's that's not obvious. That's not obvious. We never know
who's going to go witch my own bitcoin.
Speaker 3 (30:14):
Several reasons to disagree with that. The first one is
I've got a long record on gold, and I have
a pretty good idea what makes it goes up and
what makes it comes down. It doesn't means I can
forecast that accurately, but at least I know why, and
I do need a lot of gold bitcoin experts. And
I said, then, please tell me why it sometimes has
I know why it goes up more buyers than sellers.
(30:35):
And they'll tell me, well, there's more sellers than buyers
when it goes down. But this is true for any asset,
any good, any service on the planet. I need something
a bit more. If I'm going to recommend to people
listening to this podcast that they should buy bitcoin as
to when you can expect it to fall and when
you might want to take proactive action, and no one
yet has been able to explain that to me, So
(30:55):
that necessarily means you I have to be cautious. There
is no fun fundamental which I can point to that
drives it up and drives it down beyond mere assertion
that everybody will always want them to buy a number one.
Number two government policy. Trump is keen on crypto. There
are three types of crypto. There are central bank digital currencies,
which I think we won't talk about. I don't think
(31:16):
they will take off. But then the other two are
stable coins and private sector crypto, which is bitcoin. In
terms of the national capitalism financial repression agenda, one of
those is incredibly helpful, and one of those is incredibly dangerous.
And the one that's incredibly dangerous is private sector crypto
because it allows people to escape a financial repression, and
(31:39):
that's why they like it. And if you hear people
talk about it, they'll tell you that's exactly why they
hold it. Now a world where a government allows that
portal away from the repression they're trying to bring in.
Is a strange world, and I don't think one that's
ultimately sustainable. So I don't think that's on the agenda
today or tomorrow. But if let's say government bonnials in
America were spiking higher and it turns out that everybody
(32:02):
was getting the money out of the country by a bitcoin,
I think you can see it changed quite quickly. Stable Coin, however,
is really very very helpful for governments, and particularly for
the United States of America, because ultimately it's largely these
days backed by holdings of UST bills. And if the
world can come to hold tether or any other stable
(32:22):
coin and believe that it's effectively a dollar, then it
funnels money into President Trump's currency, and it funnels it
into his government debt market, and that's what he's going
to like. So I think as time goes on, we
might see that the Trump administration is really very keen
on properly regulated stable coin, which is really little more
than a money market fund attached to the blockchain, but
(32:45):
not so keen on that portal, which is a private
sector currency which allows people to avoid national capitalism. So
let's see where we get to. But those are the
fundamental reasons, and no one can tell me what bitcoin
is for. I mean everyone now they used to say
was a currency. Everybody's convinced it's not a currency anymore.
So I've won't described it as a you know, a
(33:06):
very very liquid, large efficient baseball card. And it is
possible to make money out of baseball cards, but you
need to understand the baseball card market. But it doesn't
have a use beyond being a speculative asset for the
avoidance of the government. And that's why people like it.
And if you think it can continue to be an
asset in which you can constantly avoid the government, whether
(33:28):
you are doing that legitimately or as a criminal, then
it has a future.
Speaker 2 (33:32):
Okay, well, I'm just bracing myself with a hate mail
actually the Twitter campaign against not just me this time,
but you as well, so at least still have company.
Thank you for that. The one thing we haven't talked
about that I would like to talk about briefly is Japan.
How is Japan affected here?
Speaker 3 (33:48):
Yeah, Japan's fascinating now, I think because just on that
short term issue, it also hasn't gotten much thin broad money,
and they've spent thirty years not working this out. I
mean thirty years of them sitting around going what's going
on here? How come our dads is going up relative
to our GDP? Could it be perhaps that you don't
create enough money to have a higher level of normal GDP?
Could that possibly be what's going on here? So it
(34:10):
has to be said that like everybody else, they still
haven't worked that out. But they're going to have to
work it out. So Japan's going to face I think,
the same short term problems as the rest of us.
But now to their advantage, they have this huge balance
of overseas assets SORR. They have gross number, but they
also have a net balance, and they can begin to
(34:30):
repatriate that. They can begin to continue to hold down
their government bond yields. And at some stage someone's going
to work out. If you banks lend money, they create money,
and nominal GDP goes up, so equities there are more
reasonably valued, and certainly the second tier equities look still
still use the word cheap. So there are still opportunities
(34:51):
in Japan. But we may be in for one of
these shocks, these deflation shocks, which sure you know just
coming across the developed world based on where broad money
growth is. I don't know as it to buy Japanese
equities for long run, but I think maybe it's just
time to be a little bit more cautious because of
the trends in money supply growth.
Speaker 2 (35:08):
Okay, brilliant, really useful, Thank you, right. I think we
have pretty much covered everything that I wanted to talk about,
although I know there's so much more. But I wanted
to ask you one last question, and this is a
Christmas related question. If there was one book that you
felt all our listeners should be asking for for Christmas,
one that isn't written by either you or me, which
(35:29):
I know narrows it down quite a lot. Is there
one that you would say, really is a must read
for someone who wanted to understand some things that we've
been talking about, or somebody just wanted to be a
better investor.
Speaker 3 (35:40):
Yeah, there is one book I always recommend. It's out
of print, so that not particularly helpful, but let me
start with that one, and I'm sure you've read it.
It's called Triumph Off the Optimists Dimson, marsh and Staunton,
and it will sound like the world's most boring book,
but it's the history of the return of various assets
or a very long term holding periods. And the reason
that's so essential to read it it is to calibrate yourself.
(36:01):
And I think, particularly if you're not a finance professional,
it's easy to become uncalibrated. And if you ask, certainly
I remember this back in the dot com bubble, if
you ask people what was the what they thought the
average long term return from equities was in a bill market,
they came up with twenty five percent per annum. You know,
completely totally already uncalibrated to realize that the answer is
about six and a half real terms, But you're can
(36:25):
look at all the asset classes, so that will calibrate you.
And it also helps inoculate you from dodgy sales people
who promise you twenty five percent to infinity and beyond.
So there's that one, and I would recommend that one
if you can get a copy, and I'd recommend to
the publisher that they republish it and get it back
into the system and potentially even updated. Because it only
runs to the year the year two thousand.
Speaker 2 (36:47):
Okay, well, maybe we can create enough demand that it
does get reissued.
Speaker 3 (36:51):
Be wonderful if you could do that, You've got poar
beyond your knowledge. I think you're going to do it.
Speaker 2 (36:56):
Okay, Russell, thank you so much for joining yesterday. We
reallyppreciate it. That was fascinating great.
Speaker 3 (37:02):
Thank you.
Speaker 2 (37:12):
Thanks for listening to this week's Marin Talks Money. If
you like us show, rate, review, and subscribe Wherever you
listen to podcasts and keep sending questions or comments to
Mirror Money at Bloomberg dot net. You can also follow
me and John on Twitter or x. I'm Maren s
w and John is John Underscore Steppe. This episode was
hosted by Me Maren Sumset Web is produced by Someasadi,
production support and sound design by Moses Andam Special thanks,
(37:34):
of course to Russell Napier. Want to listen to episodes
of Marin Talks Money ad free, become a Bloomberg dot
com subscriber today check out our special intro offer right
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(37:55):
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Crime Junkie
Does hearing about a true crime case always leave you scouring the internet for the truth behind the story? Dive into your next mystery with Crime Junkie. Every Monday, join your host Ashley Flowers as she unravels all the details of infamous and underreported true crime cases with her best friend Brit Prawat. From cold cases to missing persons and heroes in our community who seek justice, Crime Junkie is your destination for theories and stories you won’t hear anywhere else. Whether you're a seasoned true crime enthusiast or new to the genre, you'll find yourself on the edge of your seat awaiting a new episode every Monday. If you can never get enough true crime... Congratulations, you’ve found your people. Follow to join a community of Crime Junkies! Crime Junkie is presented by audiochuck Media Company.