April 14, 2023 • 48 mins
During the Panic of 1907, J.P. Morgan came up with a clever plan to slow the ongoing bank run. He told his tellers to count all the money twice before handing it over. The more time paying out the cash took, the more time there was to work on rebuilding confidence before money ran out.
Of course, that kind of tactic can’t work anymore, Ruffer Investment Director Duncan MacInnes explained on this week’s Merryn Talks Money. Now, he says, people can use the internet to move money anywhere anytime in the blink of an eye, a fact the world witnessed in real time last month. “This,” MacInnes says, was “not your grandfather’s bank run.”
But he adds that, for savers, it doesn’t really matter. Governments are standing by to protect depositors to the hilt. What you do need to worry about is the risk elsewhere. In the last decade, everyone has jumped up the risk curve in a desperate effort to make returns, MacInnes says. He’s seen those who once only invested in public markets move to private, those who used to do private equity go to venture capital—and the venture capitalists move to crypto.
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:00):
So, John, sometimes you're right. Occasionally it does help. Yeah,
and house press numbers just out from nation wide prices
down over three percent in March. That's a proper drop.
Add that to inflation, and you can pretty much call
it a house price crash. Yeah. I mean I think
I always. I don't think the bod crash is actually
(00:21):
all that helpful. Accept the scale people, I fair to
think of it as a healthy and necessary connection. John,
This is how we sell the podcast. This is how
we sell the podcast. We talk about house price crash.
It brings the listeners in, it's true, and then we
surprise them with brilliant busy of information and fun conversation
and great guess But it's hashtag house price crash that
(00:43):
gets them in. So that's why we call it that
you've changed. There's so many more models. No, I still
have the morals. We'll call it whatever you want. What
do you want to call it? I think I just
think it's interest because what you tricked me in is
saying that pieces would follow thirty percent. About three months,
(01:06):
we're already now like fourteen percent if you look inflation
as well, So halfway there, what's the next fifteen percent?
Where does that come from. Is that nominal or is
it inflation or is it a bit of both? And
even if prices fell away fifteen percent and nominal terms
from here, you'd still only be looking at where the
(01:27):
well at the start of twenty twenty, so before the
whole COVID freeze and then you know the Bank England
cutting interest race and throwing loads of money at the market. Again, yeah,
I think that that's more just for perspective low, because
I think the other key point why this isn't like
the nineties, for example, is because even if prices felt
that much, you're then only talking about that there's still
(01:49):
only be a tiny proportion of people and things like
negative equity. The number of homeowners with a mortgage in
the country als right in England and Wales is now
but low third, So again it doesn't have the same
wider impact on the economy as it did perhaps in
two thousand and eight. Um. The very fact that there's
(02:10):
that few mortgage womenos is partly the result of the
house places being too down high in the fast place,
but in a weird kind of way that's also providing
a very ventilation for the wider economy and the banking
sector because there are just fewer people with mortgages, and
the people who have been able to get mortgages are
buying large and a better financial position than the average person.
(02:33):
Still comes with a wealth effect, though, doesn't it. I
mean this is part of the transmission mechanism of of
monetary policy anyway, the idea that you can make people
feel poorer and therefore they spend less, and therefore you
have some control over inflation, although I would we have
a conversation another day about the extent with spank England
have any control over inflation at all Eyes who did
(02:53):
a podcast earlier with that with Little King with Moving
King on this matter, and I'll put the link to
that when it comes up, because we have quite an
interesting conversation about the extent to which central banks actually
control inflation, and I suggested it you and I have
talked about over the last couple of months that they
have rather less power to do so than they believe,
and I think he kind of agreed with me, So
(03:14):
that was kind of I agreed with were certain times fans,
and we also some interesting conversations about what it is
that central banks should and shouldn't do in the extent
to which possibly their briefs has been overexpanded, to the
extent that it's not very hard for them to focus
on their their core task of two percent? Two percent?
Why two percent? Who percent? Were doing? All? I know,
(03:36):
I know we've talked about it before. I did actually
look it up. You know, we talked about this the
other day. Where was that article that I wrote, I
don't know, two three years ago or something about about it,
And I looked it up again just to make absolutely
sure that I wasn't imagining the whole thing. But yes,
the whole thing came from an article written in a
(03:56):
version of the IMF staff papers, not even public um,
by a pleasant sounding academic who suggested that two percent
kind of intuitively made sense for most of other economies.
And that's it. And then there we go New Zealand
full of bay. Every other central bank in the world,
the FED, not until twenty twelve. I don't think that
they formerly adoptive percent. Anyway, I've gone off on an aside.
(04:18):
I'm sorry, house prices, Yes, we told yeah, well nice
And I think maybe the thing that central banks should
be focusing on, rather than something like inflation, is more
localized credit conditions such that you try and avoid bubbles,
because that that is the thing I've always found irritating
(04:39):
about central banks. And Alan Greenspan probably was the main
proponent of this, but everyone else did to this idea
that you can't spot bubbles, but it's okay because you
can more pop afterwards, and it's just not that complicated
spot or bubble. It's very hard spot when it's going
to bost a tree days. I mean, you just do
(05:04):
I mean, do you even gorby Jeremy and Einsom's thing
of x two standard deviations for the long run halverage?
You can you know? Or the fact that no one
under the age you're like thought five can flucted by
a host away claims at things I think should be
if there were some who may be a bit I
think the folks are, Yeah, I kind of. I agree
(05:25):
with you in theory. I agree with you in theory.
But nonetheless, the subjective targets. When do you decide when
something has gone over from bullmarket into bubble? When do
you decide when that bubble is dangerous? You know? These
is so subjective? And central banks, I mean, are they
not good at well? They do anyway? I mean, how
are we doing here? So do we want to give
them complicated subjective targets or are we good with just
(05:49):
one clear, straightforward target. Even if that target is it
is not the correct target, you know, a clear target
that everybody understands, everyone sees what they're aiming at. This
is maybe better than than the wooly stuff. I mean,
that's true. He's playing with fire train. Yeah, I mean
you are late from that point I view. Can't trust
them do it that we are wanting them to it. Basically,
(06:13):
vacancy has come up regularly at the Bank of England, John,
you should apply. I could be the talking contradian and
one of our old friends does keep applying every time
a vacancy comes up to the MPC, but he's never
been accepted, and he says that he believes that's because
he understands the effect of money on inflation and nobody
(06:36):
else does. I want to go back briefly, John, to
what you were saying about mopping up after bubbles, because
I was thinking this morning about MMT in modern monetary policy,
and you know we both read all those books about MMT,
didn't we a couple of years back about how if
you had a currency such as the pound or the dollar,
you could just print all the money you liked and
it didn't make any difference, and budget deficits don't really exist.
(06:56):
This is just a technicality. You can print, print, print, print, print,
do whatever you want, and if inflation starts to get
out of control, you to just mop it up, mop
it up, mop it up, and here we are, here
we are. We effectively had MMT way sooner than any
any of us would possibly have thought. We had that
in twenty twenty early twenty twenty. You print a powl
(07:18):
of money, you stick it in people's pockets, Inflation goes berserk,
has that mopping up saying going, yeah, it's not terribly well.
We can so people own lane tilness that we do
wan't understand MMT. You do realize that I know, and
people are telling me I don't understand cryptocurrency, so I
haven't used I understand cryptocurrency, I understand boitcoin, and I
(07:39):
also understand it M empty, and I think they're all
absolute nonsense. Hate mail to the usually address thank you.
In fact, no later in the podcast that I've done
with Duncan, I think I suggested all the hate mail
goes to his address because his views on crypto are
similar to us. So I think that on this occasion,
(08:00):
please contact Duncan McGinnis on Twitter. All your crypto hatemail
to him, just for a week and then I'll take
it back. Thanks very much. John, should get some hate
mail to you two. Oh yeah, I always like a
better hate mail. Keeps me humble, excellent, and you are humble, John,
And so welcome to Merrin Talks Money, the podcast in
(08:23):
which people who know the markets explain the markets. I'm
merin Somerset Web and today the person who knows the
markets inside out right Duncan is Duncan McGinnis, who is
the manager of one of Rougherst fact flightship funds and
co manager of another. And I think an awful lot
of listeners will be invested one way or another in
Rolph Rown. If they aren't at this point this year,
they're probably slightly wishing that they were. Duncan. Thank you
(08:46):
for joining us today. Thank you, thanks for having me. Now.
We've got a lot to talk about, but I think
that we might start with banking crisis. We've seen a
lot of term on in the financial sector over the
last couple of weeks. Is this going to develop into
a genuine financial crisis of the like that we've seen before.
Is everyone's slightly over reacting? Well, I think it would
(09:10):
not be a conversation with someone from Rougher if we
weren't concerned about something we have. I'd say, we have
structural concerns which we can maybe come back to, and
we have tactical concerns around this potential banking crisis. So
I think, first of all, that's sort of recap where
we are. If you went back to the thirty first
(09:31):
of December, three months ago, recording on the last day
of the quarter, and someone had said to you in
the coming three months, credit Suite is going to disappear,
and three of the top thirty banks, So three of
the top thirty banks in the US are also going
to disappear. Do you think the stock market is going
to be up? Your answer would probably be no, And
(09:52):
yet and yet they are. I think it's not a
full blown financial crisis. It's not like two thousand and eight.
It's not even a run on the banks. Someone wittterally
described it as a jog on the banks. But it's
a really difficult situation. So I think it is both
from a sort of listener's perspective, it's a simultaneously totally
(10:16):
irrational but also fully irrational to worry about moving your
money and consider moving your money right now. So it's
rational to worry about moving your money because we have
the odd situation where you can earn more money by
giving it to the government in a money market fund
or shortly to t bills and you can get less risk.
(10:36):
So more yield, less risk sounds pretty good. But the
irrationality is that I think it's highly likely that governments
will stand behind deposits. Your unsecured retail depositors are not
going to lose money in this crisis. I would be amazed.
It would be a huge mistake. I think if they
let that happen. Yeah, can I interrupt you then to say,
(10:58):
you know, this is one of the interesting things that
I would say, it's changed over the last couple of decades,
and that you know, I'd say even twenty thirty years ago,
there would have been an assumption that if a bank
went bust, then you know, you're only protected up to
the extent that your local regulary system protected you up to.
But that ship has definitely sailed, hasn't it. There is
absolutely no appetite from any government anywhere in the developed
(11:20):
world which to let a depositor lose money on a
bank failure. So we might as well say that all
depositors are now protected to infinity and that's that. Yeah,
legally they are still vulnerable, but I think you're absolutely right.
The political reality is that it is not acceptable for
retail depositors to lose money in mainstream banks. So however,
(11:45):
that doesn't mean they're not There's not lots of problems.
So there was a well publicized clip of Janet Yellen
testifying where I think she effectively signed the death warrants
for smaller regional banks, where where she did not guarantee.
They're very reluctant to make that explicit guarantee for depositors,
(12:05):
and she said that they wouldn't guarantee deposits unless it
was a systemic issue. So the incentive very clearly is
for is for money to move to the globally important
systemic banks. You're the very the very largest institutions. So
how does how does this all play out? I sort
of imagine the financial system and moving out from a
(12:26):
core in concentric circles, and at the very center of
the system you have the RRP, the FED te T
bills at lending money to the government, and the largest
financial institutions for your city, groups, your JP, Morgan's, etc.
And the money is sucking towards the center, from the
smaller peripheral banks to the center. And as the money
(12:50):
moves to the center, without getting too technical about things,
the sort of monetary energy or the monetary velocity DP decreases,
so the risk taking capacity of the overall financial system decreases.
And the scene that I have in mind when I
think about the incentives of corporate treasurers and individuals with
(13:11):
cash savings at banks is from the film Casino. So
if you remember the film Casino with Robert de Niro,
the old mobsters eventually get sort of caught by the
law and they're sitting around a table deciding whether or
not they're going to turn on each other or whether
their foot soldiers are going to turn informants on them,
and one of the old guys, who's clearly been around
(13:33):
a while, just says, why take a chance, and everyone
ends up dead. So everyone that knows anything ends up
shots and I think that's what depositors are doing currently.
They are They're shooting first and asking questions later. And
we're saying we're seeing it in the data, hundreds of
billions of dollars moving to money market funds and to
JP Morgan and the like, and this is catastrophic for
(13:56):
the smaller financial institutions the other Can I interrupt again? Sorry?
Follow up a question? What does that mean for the
smaller banks in the UK, for the startup deposit takers,
for our you know, disrupted banks. I think I think
it's existential. I think I think they will they will die.
They will, they will bleed to death unless something arrests
(14:20):
this situation. And the only two things that can arrest
it are at the government backstop guaranteeing those deposits, or
the banks. The banks have the option to raise the
interest rate that they pay on deposits. I mean, I'm
sure you'd be as much of a supporter of that
as I am. But because at the moment, of course,
(14:41):
they don't pay you base rate, but if they do,
it will evisceerate their profitability or whatever profitability they have.
So if they have to pay more to retain the deposits.
Then then they're they're going to they're going to kill
their net interest margin, and that too must die the
way bust if they don't raise their deposit rate, bust
if they maybe not maybe not bust, but certainly in
(15:03):
a vastly reduced circumstance. Now, now the other the more important.
Now this is not as awful as it sounds, because
it's not great for the sort of health of the
banking industry, but it's people will still have banking facilities
to the big banks. I'm more worried about the second
order consequences. So that's this is becoming pretty pretty well
(15:24):
known and widely discussed. But it's smaller banks that specialize
in commercial property lending and small and medium enterprise lending.
If you've got a small family business, you tend to
go to a smaller bank to get that loan. So
it's actually going to be the knock on consequences that
this will choke off credit to the to the real economy.
(15:45):
And that's that that's how how you get to bigger
problems like like a tightening lending standards and an enforced recession.
But at another angle of this, which is which is
new A new feature of this bank run is the
speed at which it's happened. So this is not your
grandfather's bank run. It's not even an eight because there's
(16:08):
no cues. There's no standing outside a brank of bank
or a branch of Northern Rock. There's an app you
can move your money almost instantly and frictionless. There's a
great story of how GP Morgan, the man not the institution,
slowed down the bank runs in nineteen oh seven. He
asked the bank tellers to double count the money, and
(16:31):
that really slowed the pace. There's just none of that now, people.
I mean that the modern equivalent is the closing our
website for service updates. Yeah, yeah, yeah, indeed there might be.
I think crypto does a bit of that as well,
doesn't it. Yeah. So there's there's a bunch of new
(16:51):
things going on here, and there's a bunch of things
that are sort of as old as as old as time. Okay,
so what are the consequences for investors from that? Now?
Obviously I suppose one of the things you could say
is that that that dynamic is fairly disinflation ry. Yeah.
So I think there's two elements. There is the sucking
(17:14):
of liquidity out the system, something that you know that
we've been worried about for a while. So there were
interest rates going up through all of twenty twenty two,
quantitative easing being reversed into quantitative tightening also through all
of twenty twenty two and potentially ongoing, and now the
slow motion run on the banks. So liquidity has been
drained from the system. That monetary energy that I mentioned
(17:36):
earlier is disappearing. So that's the first problem. The second
problem is how investors are positioned. I mean they're on
a sort of longer term basis. So everyone spent the
last decade or so iterating towards risk ear and risk
ear portfolios in a zero interest rate world in pursuit
(17:58):
of their return target. It's whether that's a retiree wanting
five to seven percent on their pension pot, or whether
that's an institution or endowment chasing a seven or eight
percent long term return target. And one American investor phrased
it so beautifully I thought when he said, my public
market investors are doing privates, my private market investors are
(18:21):
doing venture, and my venture investors are doing crypto. Everyone
everyone moved to the riskiest end of their mandate to
try and change returns in zerp world and now because
we've jumped from zero rates to five percent rates or
four and a half percent rates in a year or so,
every investment committee in the land is looking at the
same challenging picture, all of these cross currents from war
(18:46):
to inflation, to deglobalization to recession risks to a banking crisis,
as covered by my Colleaguallex Charters in a podcast of
you a few months ago, or in our Rougher Review
recently published. And by the way, everyone I have a
copy of that Rougher Review. It's excellent. If you're not
a Rougher client, I think you can still read all
the stuff on the website right and there is and
(19:07):
we did do that great podcast with Alex Charter's as
all the US is going to be even better Duncan,
so please don't feel for a second prefer him over.
But it has written a brilliant article in the beginning
of the Rougher Review twenty twenty three that everyone should
read to give them a sense of how the land lies. Yes, so,
so these investment committees are all sitting facing this incredibly opaque,
uncertain outlook, and all of a sudden they're realizing, wait
(19:30):
a minute, I can build a portfolio achieving my say,
seven percent return target, where a big, big chunk of
that is in cash and T bills earning four or five.
And to quote the president of black Rock from a
quarter or so ago, he thinks you can build a
seven percent expected return portfolio that only has twenty percent
in equities. So all these investment committees are sitting thinking,
(19:54):
I don't need to take anywhere near as much risk
as I used to to achieve my expected return. Yea,
because that's easier given they've all lost fortunes on those
higher risk portfolios. Well, yes, yeah, it would have been
better to start this process a year or so. Yeah,
a year and a half ago, I would have been
a better time to look at it. You know what
seven percent a year next to the thirty percent you're
already lost. Yeah, And that this the slide that I
(20:15):
sort of talked to in our pack on this I
have been using for two years. I would like to emphasize.
But the risk here is I think a globally synchronized
de risking of portfolios. So everyone moves from seventy percent equity,
sixty percent equity, whatever, down the curve de risking by
twenty or thirty percent towards lower risk assets. And if
(20:39):
everyone is doing that simultaneously, it is not obvious to
me who the buyer is, because who's the person that's
that's up wanting to up their risk in this world.
If someone said to me the other day, what about
China and the Middle East, these sovereign wealth funds, They've
got trillions of dollars that they might like to take
(20:59):
on that risk from the forced sellers. And I think
that it was a very interesting point. But because of
many of the sort of global techtonic things going on,
I think it's highly unlikely that the West will now
tolerate trillions of dollars of Chinese money, for example, coming
in and buying buying up stakes in US businesses. So
(21:22):
when China puts his hand up and says we're happy
to take twenty percent of Boeing or twenty percent of
Lockheed Martin, I think Congress at the Senate might have
a problem with that. So it's just not at all
obvious to me who the buyer is for this forced
not not forced selling, but rational selling that we think
will happen. Yeah, okay, well, let's go back a bit
(21:43):
and talk about this portfolio that can make you U
six or seven percent, well, only being twenty percent in equities,
what else is in it? We'll come back to equities
and the type of equities that might make up that
small apart. But what else is in a portfolio? I
mean most of us that used to thinking, well, you know,
the vast majority of our portfolio is an equity is seventy.
Maybe we have a little cash and a small world exposure,
but most people moved away, while individuals anyway moved away
(22:04):
from sixty forty a long time ago and aren't massively
overexposed in the upream market. So if we would genuinely
go down to twenty thirty percent in equities, what would
make up the rest? Yeah? So finally we're getting paid
a decent return on cash. So I think cash has
become a useful asset because because it pays a return
(22:26):
and because it gives you optionality to take advantage of
opportunities in the future. That's a new thing. Cash was
incredibly painful for the last decade, and beyond cash, I
find myself looking at risk premiums a lot this year
because there's a big diversion. Some are wide and some
are anomalously tight, and that dispersion should be pretty good
(22:48):
for active managers who are sort of worth their salt
and willing to have a differentiate in portfolio. So, where
our risk premiums tight and therefore it's not attractive to
take risk US equities would be would be the first
one I would I would cite investment grade credit, and ironically,
these are the things that investors have been moving into
(23:08):
this year. If you look at the earnings yield of
the SMP, it's five percent because it's on a pe
of twenty. Well, cash is five percent, So that very
crude metric, yeah, very crude metric of the equity or
as premium is basically zero. A more sophisticated measuring of
the equity risk premium has it in about two I think,
which is as low as it has been since two
(23:30):
thousand and seven. So benchmarked investors, because the US is
so big, have sixty percent of their money in that
particularly unattractive asset. I would say another sort of anomally
is investment grade credit yields. Check this morning the investment
Grade Index yields four and a half. Well, that's that's
less than cash. So that I mean that that is
(23:53):
something like hasn't happened in the forty or fifty years.
That people will say that's because the yield curve is
inverted on the investment grade index is eight years duration.
Blah blah blah. It looks to me like you're not
getting paid to take that risk. And that's why in
our portfolio or offer, we're still short investment grade credit
and high yield. That was very useful for us in
(24:13):
twenty twenty and last year. Then it was about a mispricing.
Now I think it's about deterioration and economic conditions. So
where are risk premiums wide? Where are assets attractively priced?
I think we're getting there. Things are getting better than
they were in twenty twenty one. That's the That's the
(24:34):
silver lining to this undoubtedly gloomy overview, is that expected
returns are better in places. But I think it's in
the nooks and the crannies that are less popular. So
I don't want to plug a competitor podcast Marin No,
and I don't want you to do that either, But
there's a very good interview out there with David Einhorn
(24:56):
of a very long standing successful house fund manager, and
his words chime with my own recent experience that nobody's
looking at active stock selection anymore. Nobody's looking at smaller
areas like like the UK. I which just given my
own experience I did to UK smaller companies meetings in
(25:19):
the last week and group calls. In fact, I dialed
into the group call and on the first meeting there
was only two other people on the line from family offices,
so no professional investors beyond myself on the call. And
then another call was similar, you know, less than half
(25:40):
a dozen people on the call, So nobody is paying
attention to the UK. And you've you've said a lot
about this, done podcasts with other people. I totally agree
with that, and I think something like this news flow
you're seeing about companies fleeing the UK to list in
the US is actually a contrarian, but I signal it
(26:01):
reminds me of In twenty sixteen, Vanguard had a gold
equities fund and they didn't close it, but they renamed it,
so it went from being a gold equities fund to
something like the Capital Cycle Fund, and that marked almost
exactly to the day the bottom and gold equities which
then doubled in the proceeding twelve in the next twelve months,
(26:21):
so I think UK equities have a very wide equity
risk premium. And Japan is notable because its rates are
still zero and it's equity market trades are a p
of twelve, So that's very very wide equity rist premium. Two.
The last thing I'd say, we can come on to
talk about commodities, but gold commodities in general very attractive,
(26:42):
we think. And inflation link bonds, so tips US inflation
link bonds will pay you inflation plus one point five
percent for the next twenty years lending to the global
hedgeman in dollars. It's pretty at track to I think
as a law risk asset. So whatever inflation is, you'll
(27:04):
get that plus one point five. Let's go back to
UK companies supposedly fleeing the UK and we get told
that that's about you know, regulation, days, regulation, that, etcetera.
But it's really about money, isn't it. CEOs get paid
a lot more in the US company. You can wear
your company to the US. You can double its valuation
pretty much overnight and then you can triple your pay
(27:29):
and get a bonus based on a different share price.
So there's a lot that the incentive here is very
much monetary. Yeah, yeah, absolutely, So the UK equity markets
had something like twenty one months of consecutive outflows. Before that,
we had a couple of months of optimism before coronavirus
crushed it, and then before that we had we had
(27:50):
Brexit and Scottish independence. So it's been a decade of
pretty relentlessly bad news for the UK equity markets, and
it's been the wrong sort of type of companies, factor
exposers and so on. And you're absolutely right. What is
it called jurisdictional arbitrage when you when you pick up
your company and move it to a different playground. It's
(28:11):
not a new thing, So Prada, I think, as an
Italian company listed in Hong Kong because Asian markets like
Luxury Goods Manchester United listed in the US rather than
the UK because they want to hire multiple Like you say, what,
I think it's rational for those companies to do that,
to seek a higher higher evaluation, which is a lower
(28:32):
cost of equity. I'm sure the CEOP is a factor,
like you say, but I think as a as an investor.
If you already hold those shares, then that's great because
you might get the rerating. But I think it shows
I want to be looking in the areas that are
unfavored with lower evaluations rather than looking at the multiple
(28:55):
the markets with the higher multiples. Okay, so when you
invest in that, let's just talk about the UK and Japan.
You're investing in individual companies, the very active burnt right,
there's nothing passive going on in the rough of portfolios. No,
that's right, Yeah, so we pick individual companies. We do. Also,
we're a house that leads with our top down macroeconomic
(29:19):
acid allocation thinking, but beneath that when we do invest
in stocks, we do invest in individual companies and sometimes
we consider things like like factors or themes. Okay, So
it give us a couple of favorite companies in the UK. Well,
I think the biggest holdings, the biggest risk in general
in our portfolio is commodities at the moment, and the
(29:42):
two biggest holdings are BP and Shell. So BP is
a is a very interesting example. I've been talking of
jurisdictional arbitrage. It trades on half the multiple of exon
now these are basically basically the same company, but because
one trades in the UK, it trades on sort of
(30:03):
eight times now and trades on fifteen times. But it's
the free cash flow yields that make energy equities very exciting.
I think. So current oil prices of its seventy five
you probably get a high single digit free cash flow yield,
which is which is great, pays an attractive four percent
dividend yield, it's paying down debt, it's buying back shares,
it's doing all the all the good things that you'd
(30:25):
like a company to do. But it's the sort of
optionality or convexity to use a fancy word, to higher
oil prices that makes them really attractive. So if oil
goes back to one hundred dollars, then all of a sudden,
these are on sort of twenty percent plus free cash
flow yields, so really generating a huge amount of a
(30:46):
huge amount of cash for shareholders. But another evolution in
our commodity strategy. So commodities has been a very important
part of the portfolio, particularly energy since since well since coronavirus.
We have sort of evolved the way that we're playing it.
So we now have almost twenty percent of the portfolio
(31:09):
and commodities, but half of it is in the exchange
traded commodities for the physical commodities rather than the equities
like BP, Shell, Glencore, ur, Slur, Mettall, etc. What why
are we doing that? I'd say it's because we want
to If we're right about our big picture view of
the world, which is more more inflation, more economic growth, volatility,
(31:34):
more geopolitical friction, then you want to own the Hamburger,
not McDonald's. So you want to own the thing that
is inflating, but that doesn't come with the price to
earnings multiple that a stock comes with. Because in general
we think these will be compressing, even though the commodity
(31:55):
ones are cheap to begin with. But also the company
is beset by regulator sorry pressures, it's beset by wages,
input costs, supply chain disruptions. All of this stuff that
we think will be a feature of the coming decade
affects the company, but is probably bullish for the commodity itself. Okay,
are there any favored commodities? Is this part of an
(32:17):
energy transition play? Is it part of the coming CAPEX boom?
Is it about reassuring, friend shoring, all those things a
bear and all of it. Yeah, so we're most excited
by by energy and oil in particular. So that's about
a ten percent of the portfolio, six percent in oil itself,
another another five percent roughly in energy equities. But we
(32:40):
have three percent of the portfolio in copper and another
one or two percent in um metals stocks, so so
Glencore or ar solar metalal CoA and so on, and
that that that the copper is more of a long
term energy transition play. There's the old Doctor Copper as
(33:01):
a was a PhD in economics. But there is a
there is a strong story there supply demand mismatch where
if we're going to transition the economy away from fossil
fuels towards electric, we need an enormous amount of copper,
and supply is constrained because it's very very difficult to
(33:24):
get the permitting and the capital to build a mine
and it takes a very long time. So we think
that governments are committed to the transition and therefore the
fiscal stimulus will come and the copper price probably has
to go up to incentivize the supply to be there.
And tell us just briefly for readers who want that, listeners,
(33:46):
listeners who want app on all this. Why do we
need so much copper? It's about the batteries, It's about
is it also about the energy infrastructure? About the grid?
Do we use copper and the gride as well? Yeah? Yeah,
you use copper and everything. So you can't have a
winter turbine, you can't have a solar panel. You certainly
can't have an electric car without copper, without lithium, without
(34:08):
without aluminium. All these, all these metals are incredibly important
to the energy transition, and the thing is that we
need to We need an awful lot of them up
front to build the infrastructure so that we can transition
onto that infrastructure. I was talking to someone the other
day about the UK electricity grid and such a disaster
(34:28):
in general, and he pointed out something that I kind
of knew but I hadn't quite taken on board, which
is that before we started using renewable energy at all,
there were only maybe six or seven points across the
entire country where electricity came into the grid, and now
there are eighteen ninety thousand. Well, and how can we
possibly expect to cope with that. What if you think
(34:50):
about it? Of course, you know, suddenly everyone used to
just take take energy out right, and the big power
stations put it in. That was it. And now everyone
with a solar panel, every one with the wind turbine,
all the big wind farms, et cetera, are putting energy in.
It's a totally different dynamic for an infrastructure. No wonder
it's creaking away. Right. Let's talk then about about gold.
(35:12):
One of our favorite topics are as John likes to
call it a physical bitcoin. You used to old some
bitcoin in the fun, but I'm guessing you don't want
to go back to that. It's always fun to talk about,
but we don't currently have any exposure. Interesting. But let's
before we go on to gold's bitcoin, then let's talk
about actual bitcoin. What would make you buy some back?
(35:34):
I think the hurdle is pretty high, so I have
never been more bullish on anything in my life. As
you might remember mearin as, I wasn't bitcoin in twenty twenty,
but I think the context was so perfect for a
four bitcoin. Back then, we had a zero interest rates,
massive quee, the market was obsessed with technology, We had
(35:55):
investors worrying about increasing cross asset correlations and desperately looked
for a diversifier, and perhaps cynically, we saw that there
was a lot of institutional interest building up. And one
of the great advantages of ruffers that we have the
ability to move very quickly. So we got in front
of that wave of institutional money that was coming into
(36:16):
the space. So we bought in November twenty twenty at
fifteen thousand, and we exted in April twenty twenty one
at sort of sixty odd thousand on the day that
coinbas iPod actually so it was a very very successful
investment for us. We only held it for five months
and we sort of more than tripled our money, and
you got the mist stunning amount of publicity from it.
(36:36):
It was so clever. Some some of that publicity was
positive and some was not, but so it was very
successful for us. It was never a huge part of
the portfolio, it was only two percent entry, but it
was It was useful contributor to performance in twenty twenty
and twenty twenty one. But today the context is completely different.
(37:00):
So five percent interest rates quantitative tightening rather than quantit
of easing. The market subsession with technology has gone away,
and now it's sort of show me your cash flow.
The inflation hedge narrative, the digital gold narrative have sort
of blown up. If we're we're honest, forty year realized
highs and inflation last year and bitcoin was down. Pretty
(37:22):
hard to argue that that was an inflation hedge. And
we had a very clever theory in house that called
Gresham's law and reverse. So Gresham's lass goes back to
the seventeenth or eighteenth century and it was the bad
money forces out good So if counterfeit notes are in
the system, those who are holding legitimate banknotes will hold
them and money monitory be lossity will collapse. Our view
(37:46):
was that in crypto, the good money, the institutional money,
was going to come in and clean out the bad money.
So it's why as Greshams Law and reverse and some
light would be the best disinfectant and all that sort
of stuff, we would drag bitcoin and crypto into the
and clean it up. And the reality over the last
couple of years is that the good money, the institutional money,
(38:07):
came into the space and it backed FTX. That was
that was the horrible irony, is that the crucially not rougher.
I would emphasize we've never had anything to do with them,
although I did ones meet SPF a story for the
pub perhaps, and the it just it just hasn't worked.
You know that it has not been cleaned up. And
(38:28):
now you have this operation choke point in the US
where the US regulator, in combination with various policymakers, is
really cracking down on crypto. Senator Elizabeth Warren doing a
victory dance that Silicon Valley Bank and Signature Bank were
both sort of crypto focused. The SEC suing coin Base
(38:51):
and ripple the CFTC coming after binands that there's a
tightening regulatory noose around crypto and that makes me very nervous. Now,
the truth is it's up thirty or forty percent year
to date, so perhaps we're wrong, but I think that
(39:11):
it's seriously challenged in the current economic environment and in
the current regulatory environment. The flap state to all this,
of course, the ultimate bill case is that Jim Kramer
is very beerish. That is interesting. We should definitely take
that into account. But I suppose the key thing there
on the regulation is it as much as the advocates
(39:32):
of crypto and of bitcoin in particular, are convinced that
you know, being decentralized, being independent, etc. Is the answer
to all the currency was they still need the banking
system to get it through, and if if they remain
unbanked and the banks are refused to deal with crypto, etcetera,
then the whole thing collapses in on itself. Anyway, Well, yeah, indeed,
(39:53):
I mean it was always our view that it would
be regulated via the FIAT on ramps and off ramps
ultimate und your coin based account from somewhere, and that
the banks of course would fully cooperate with the regulator
and in sort of giving full visibility of that. So
that was how it was going to going to come.
(40:14):
So yeah, I think fascinating topic, but absolutely no plans
to revisit revisit bitcoin in the future. Excellent. So all
those of you who like to send me hate mail
on Twitter and that kind of thing about how I'm
not keen on crypto and bitcoin can now send them
to Duncan. Duncan was your Twitter handle, So you can
accept my hate mail for a couple of weeks. Yeah, pass,
(40:37):
all right, Well I'm putting your Twitter handle in the
writ up for this podcast, so that it all goes
directly to you. Okay, although just everyone is. I do
still hold some bitcoin in my coin based account. No
idea how to get it out, but it's in the
worth lesson it was well more than it was, depends
how you look at it, right, So onto the real
thing gold. And by the way, one of the things
that John and I always love about bitcoin is the
(40:59):
way that every time someone tries to make a picture
of bitcoin, they do it with a gold coin with
a B on it. I love that. One of the
great ironies. Yeah, one of the gies. So gold gold
is just fascinating. I've always been a sort of gold
gold bug by nature. But it's very unreliable, isn't it.
So it's hard to know if it had a good
(41:22):
year last year because on the one hand, you could say, well,
we had a war in Ukraine, still of a war
in Ukraine, we had realized inflation at fourty year highs.
Why was gold not incredibly strong because it was flat
in dollars, modern pounds and pounds exactly. So it did
work in other currencies, definitely worked if you measured gold
(41:44):
and bitcoin the but then the other the other way.
Of looking at it as well, interest rates went up
five percent or four percent and gold was flat. So
that's actually a great performance because you would expect the
rising opportunity cost to be very negative for gold. But
I think zooming out a little bit just knowing that
(42:06):
if you hold gold in your portfolio it will be unreliable.
It has become a part of many multi asset portfolios,
including the Rougher portfolio, which means I think it's correlation
to risk assets has become higher than the fundamentals deserve.
And what I mean by that is, as we saw
in twenty twenty in the COVID crash, when markets get liquidated,
(42:28):
gold often gets caught up in that because things like
risk parity portfolios that are or vall targeting portfolios become
forced sellers of everything in their book, regardless of the fundamentals.
So but I think zooming out a little bit from
all that sort of market technical noise. We have seen
a potentially game changing event in the war in Russia.
(42:50):
If you are now not just a Russian, but anyone
who might be perceived to be a bad actor by
the West. The confiscation of Russian sets that we saw
all across the West, you know, bank deposits in London,
Geneva or New York. We're just taken. Then there's a
huge incentive now for you to hold your wealth in
physical gold in either close to you or in a
(43:13):
non Western location. Also, I suppose that a similar angle.
There's a lot of news this week about the rewiring
of the global monetary system. So that's a fancy phrase.
What does that mean. It means the Middle East and
China trying to denominate their trade in currency other than
(43:35):
dollars or maybe euros. So why are China buying oil
from the Ue priced in dollars when they could do
it in yuan or they could do it in gold.
And I think that sort of pivot in the currency
of trade towards gold or maybe partly gold is an
(43:56):
additional positive. Also, very simply, the cost of extracting gold
just gets ever higher, So wages are going up, Permitting
is more impossible than ever, capital equipment is more expensive.
Oil is a big input cost, so the cost of
extraction goes up, So the cost of gold probably has
to go up in the long term too. So behind
(44:18):
all the monetary conversation about well, whether the gold is money,
whether the gold is of money, the extent which it sold,
its value long term, etcetera. There is also the same
supply dynamic. Absolutely, this isn't all just theory. I should
say we have seen a huge increase in global central bank,
particularly non western central banks since the war in Ukraine started.
(44:40):
We have the data on this that there are big
institutional buyers of gold in the market. And there's the
old sort of famous trope that one ounce of gold
has over the last five hundred years always been able
to buy a saval row suit on average, And of
course the type the style of the saval row suit
has changed over the last five hundred years. But that
(45:02):
that's the that's the saying. And now what two thousand dollars?
You wouldn't get a salvo row suits for two thousand dollars,
So that was that. You know what a saval row
suit costs? What does it cost last time you went
to get a suit made on several row? What is that? Duncan?
I'm afraid I don't. I don't have the budget for
that or the desire for that. There is a funny
(45:25):
story about that, actually that Jonathan Ruffer, our founder UM,
was was once interviewed in the Ft and I think
it was Lunch with the Ft or something like that,
and the article with the sort of usual fluff around
it said Jonathan sat resplendent in his empire wearing a
fine Salvo row suit. The reality was it was a
sort of Mark and Spencers. You can stick it in
(45:46):
the watching machine. So it's all about it's all about
all about perception. Yeah, once one answer, Gold, We'll thank
you a long way in the Mark and Spencers closed department.
Even now, okay, let me ask you one last guard
and then if I was going to make you invest
in one thing right now, um and nothing else, and
(46:06):
I wasn't going to let you touch that one thing
for you're quite young, Let's make it twenty years, Thank you, Mary.
What would it be my pleasure for twenty years? Twenty?
I can make it ten if it's easier for you.
But as I say, you know you're you're young. Yeah,
so I think when you when you start talking about
time horizons as long as twenty years, then that the
(46:29):
power of the base rate, sort of the base effect
takes takes over. So I would probably say something like
um uk uk small caps or Japanese equities. If you
made it ten years, I would I would take I
would take energy, energy or commodity equities. And as you
(46:50):
and if I made it five years, gold, um, I'll
still I'll still take energy or commodity equities over it
over five years. Okay, that sort of issued emphasized. That
is a that is a return maximizing answer. And actually
at rougher what we what we prefer to do. Rather
your most investors go about return maximizing. How can I
(47:11):
find all my best ideas and then maybe I'll sprinkle
some hedges over the top and the hope that I
don't lose my shirt. Our approaches minimax regret, which is
borrowing a phrase from from Ben Hunt. So we're minimizing
the probability of our maximum regret. We're trying first and
foremost to not lose money, and then once we've comforted
(47:35):
ourselves that we've arranged that, then we decide how much
risk to take. So if I did it with my
minimax regret hat on, I think it's very hard to
beat either US tips or UK inflation on link bonds.
If you're a UK taxpayer, Okay, that's great. So we've
got the no Regret portfolio, and we've got the Duncan
wants to make some money. Yeah fees to pay for Yeah,
(47:59):
excellent two A clip portfolios. Dunk it so much for
joining us today. We really appreciate it, and we'll be
back and back in twenty years to see how it's going. Yeah,
thank you, Aaron please for having me. Thanks for listening
for this week's Marion Jok's Money. We will be back
next week in the meantime. If you like our new show,
(48:19):
rate review and subscribe wherever you listen to your podcasts.
This episode was hosted by me Marion Sumset Web. It
was produced by Samasati. Additional editing by Blake Maple's special
thanks to Duncan mckinness and to John steppec hate mail
for them as suggested earlier, and finally, our weekly reminded
to sign up to John's daily newsletter Money distilled the
linkage in the show notes and I know you will
(48:41):
enjoy it, particularly if you were interested in house prices,
because John is very interested in house prices
So, John, sometimes you're right. Occasionally it does help. Yeah,
and house press numbers just out from nation wide prices
down over three percent in March. That's a proper drop.
Add that to inflation, and you can pretty much call
it a house price crash. Yeah. I mean I think
I always. I don't think the bod crash is actually
(00:21):
all that helpful. Accept the scale people, I fair to
think of it as a healthy and necessary connection. John,
This is how we sell the podcast. This is how
we sell the podcast. We talk about house price crash.
It brings the listeners in, it's true, and then we
surprise them with brilliant busy of information and fun conversation
and great guess But it's hashtag house price crash that
(00:43):
gets them in. So that's why we call it that
you've changed. There's so many more models. No, I still
have the morals. We'll call it whatever you want. What
do you want to call it? I think I just
think it's interest because what you tricked me in is
saying that pieces would follow thirty percent. About three months,
(01:06):
we're already now like fourteen percent if you look inflation
as well, So halfway there, what's the next fifteen percent?
Where does that come from. Is that nominal or is
it inflation or is it a bit of both? And
even if prices fell away fifteen percent and nominal terms
from here, you'd still only be looking at where the
(01:27):
well at the start of twenty twenty, so before the
whole COVID freeze and then you know the Bank England
cutting interest race and throwing loads of money at the market. Again, yeah,
I think that that's more just for perspective low, because
I think the other key point why this isn't like
the nineties, for example, is because even if prices felt
that much, you're then only talking about that there's still
(01:49):
only be a tiny proportion of people and things like
negative equity. The number of homeowners with a mortgage in
the country als right in England and Wales is now
but low third, So again it doesn't have the same
wider impact on the economy as it did perhaps in
two thousand and eight. Um. The very fact that there's
(02:10):
that few mortgage womenos is partly the result of the
house places being too down high in the fast place,
but in a weird kind of way that's also providing
a very ventilation for the wider economy and the banking
sector because there are just fewer people with mortgages, and
the people who have been able to get mortgages are
buying large and a better financial position than the average person.
(02:33):
Still comes with a wealth effect, though, doesn't it. I
mean this is part of the transmission mechanism of of
monetary policy anyway, the idea that you can make people
feel poorer and therefore they spend less, and therefore you
have some control over inflation, although I would we have
a conversation another day about the extent with spank England
have any control over inflation at all Eyes who did
(02:53):
a podcast earlier with that with Little King with Moving
King on this matter, and I'll put the link to
that when it comes up, because we have quite an
interesting conversation about the extent to which central banks actually
control inflation, and I suggested it you and I have
talked about over the last couple of months that they
have rather less power to do so than they believe,
and I think he kind of agreed with me, So
(03:14):
that was kind of I agreed with were certain times fans,
and we also some interesting conversations about what it is
that central banks should and shouldn't do in the extent
to which possibly their briefs has been overexpanded, to the
extent that it's not very hard for them to focus
on their their core task of two percent? Two percent?
Why two percent? Who percent? Were doing? All? I know,
(03:36):
I know we've talked about it before. I did actually
look it up. You know, we talked about this the
other day. Where was that article that I wrote, I
don't know, two three years ago or something about about it,
And I looked it up again just to make absolutely
sure that I wasn't imagining the whole thing. But yes,
the whole thing came from an article written in a
(03:56):
version of the IMF staff papers, not even public um,
by a pleasant sounding academic who suggested that two percent
kind of intuitively made sense for most of other economies.
And that's it. And then there we go New Zealand
full of bay. Every other central bank in the world,
the FED, not until twenty twelve. I don't think that
they formerly adoptive percent. Anyway, I've gone off on an aside.
(04:18):
I'm sorry, house prices, Yes, we told yeah, well nice
And I think maybe the thing that central banks should
be focusing on, rather than something like inflation, is more
localized credit conditions such that you try and avoid bubbles,
because that that is the thing I've always found irritating
(04:39):
about central banks. And Alan Greenspan probably was the main
proponent of this, but everyone else did to this idea
that you can't spot bubbles, but it's okay because you
can more pop afterwards, and it's just not that complicated
spot or bubble. It's very hard spot when it's going
to bost a tree days. I mean, you just do
(05:04):
I mean, do you even gorby Jeremy and Einsom's thing
of x two standard deviations for the long run halverage?
You can you know? Or the fact that no one
under the age you're like thought five can flucted by
a host away claims at things I think should be
if there were some who may be a bit I
think the folks are, Yeah, I kind of. I agree
(05:25):
with you in theory. I agree with you in theory.
But nonetheless, the subjective targets. When do you decide when
something has gone over from bullmarket into bubble? When do
you decide when that bubble is dangerous? You know? These
is so subjective? And central banks, I mean, are they
not good at well? They do anyway? I mean, how
are we doing here? So do we want to give
them complicated subjective targets or are we good with just
(05:49):
one clear, straightforward target. Even if that target is it
is not the correct target, you know, a clear target
that everybody understands, everyone sees what they're aiming at. This
is maybe better than than the wooly stuff. I mean,
that's true. He's playing with fire train. Yeah, I mean
you are late from that point I view. Can't trust
them do it that we are wanting them to it. Basically,
(06:13):
vacancy has come up regularly at the Bank of England, John,
you should apply. I could be the talking contradian and
one of our old friends does keep applying every time
a vacancy comes up to the MPC, but he's never
been accepted, and he says that he believes that's because
he understands the effect of money on inflation and nobody
(06:36):
else does. I want to go back briefly, John, to
what you were saying about mopping up after bubbles, because
I was thinking this morning about MMT in modern monetary policy,
and you know we both read all those books about MMT,
didn't we a couple of years back about how if
you had a currency such as the pound or the dollar,
you could just print all the money you liked and
it didn't make any difference, and budget deficits don't really exist.
(06:56):
This is just a technicality. You can print, print, print, print, print,
do whatever you want, and if inflation starts to get
out of control, you to just mop it up, mop
it up, mop it up, and here we are, here
we are. We effectively had MMT way sooner than any
any of us would possibly have thought. We had that
in twenty twenty early twenty twenty. You print a powl
(07:18):
of money, you stick it in people's pockets, Inflation goes berserk,
has that mopping up saying going, yeah, it's not terribly well.
We can so people own lane tilness that we do
wan't understand MMT. You do realize that I know, and
people are telling me I don't understand cryptocurrency, so I
haven't used I understand cryptocurrency, I understand boitcoin, and I
(07:39):
also understand it M empty, and I think they're all
absolute nonsense. Hate mail to the usually address thank you.
In fact, no later in the podcast that I've done
with Duncan, I think I suggested all the hate mail
goes to his address because his views on crypto are
similar to us. So I think that on this occasion,
(08:00):
please contact Duncan McGinnis on Twitter. All your crypto hatemail
to him, just for a week and then I'll take
it back. Thanks very much. John, should get some hate
mail to you two. Oh yeah, I always like a
better hate mail. Keeps me humble, excellent, and you are humble, John,
And so welcome to Merrin Talks Money, the podcast in
(08:23):
which people who know the markets explain the markets. I'm
merin Somerset Web and today the person who knows the
markets inside out right Duncan is Duncan McGinnis, who is
the manager of one of Rougherst fact flightship funds and
co manager of another. And I think an awful lot
of listeners will be invested one way or another in
Rolph Rown. If they aren't at this point this year,
they're probably slightly wishing that they were. Duncan. Thank you
(08:46):
for joining us today. Thank you, thanks for having me. Now.
We've got a lot to talk about, but I think
that we might start with banking crisis. We've seen a
lot of term on in the financial sector over the
last couple of weeks. Is this going to develop into
a genuine financial crisis of the like that we've seen before.
Is everyone's slightly over reacting? Well, I think it would
(09:10):
not be a conversation with someone from Rougher if we
weren't concerned about something we have. I'd say, we have
structural concerns which we can maybe come back to, and
we have tactical concerns around this potential banking crisis. So
I think, first of all, that's sort of recap where
we are. If you went back to the thirty first
(09:31):
of December, three months ago, recording on the last day
of the quarter, and someone had said to you in
the coming three months, credit Suite is going to disappear,
and three of the top thirty banks, So three of
the top thirty banks in the US are also going
to disappear. Do you think the stock market is going
to be up? Your answer would probably be no, And
(09:52):
yet and yet they are. I think it's not a
full blown financial crisis. It's not like two thousand and eight.
It's not even a run on the banks. Someone wittterally
described it as a jog on the banks. But it's
a really difficult situation. So I think it is both
from a sort of listener's perspective, it's a simultaneously totally
(10:16):
irrational but also fully irrational to worry about moving your
money and consider moving your money right now. So it's
rational to worry about moving your money because we have
the odd situation where you can earn more money by
giving it to the government in a money market fund
or shortly to t bills and you can get less risk.
(10:36):
So more yield, less risk sounds pretty good. But the
irrationality is that I think it's highly likely that governments
will stand behind deposits. Your unsecured retail depositors are not
going to lose money in this crisis. I would be amazed.
It would be a huge mistake. I think if they
let that happen. Yeah, can I interrupt you then to say,
(10:58):
you know, this is one of the interesting things that
I would say, it's changed over the last couple of decades,
and that you know, I'd say even twenty thirty years ago,
there would have been an assumption that if a bank
went bust, then you know, you're only protected up to
the extent that your local regulary system protected you up to.
But that ship has definitely sailed, hasn't it. There is
absolutely no appetite from any government anywhere in the developed
(11:20):
world which to let a depositor lose money on a
bank failure. So we might as well say that all
depositors are now protected to infinity and that's that. Yeah,
legally they are still vulnerable, but I think you're absolutely right.
The political reality is that it is not acceptable for
retail depositors to lose money in mainstream banks. So however,
(11:45):
that doesn't mean they're not There's not lots of problems.
So there was a well publicized clip of Janet Yellen
testifying where I think she effectively signed the death warrants
for smaller regional banks, where where she did not guarantee.
They're very reluctant to make that explicit guarantee for depositors,
(12:05):
and she said that they wouldn't guarantee deposits unless it
was a systemic issue. So the incentive very clearly is
for is for money to move to the globally important
systemic banks. You're the very the very largest institutions. So
how does how does this all play out? I sort
of imagine the financial system and moving out from a
(12:26):
core in concentric circles, and at the very center of
the system you have the RRP, the FED te T
bills at lending money to the government, and the largest
financial institutions for your city, groups, your JP, Morgan's, etc.
And the money is sucking towards the center, from the
smaller peripheral banks to the center. And as the money
(12:50):
moves to the center, without getting too technical about things,
the sort of monetary energy or the monetary velocity DP decreases,
so the risk taking capacity of the overall financial system decreases.
And the scene that I have in mind when I
think about the incentives of corporate treasurers and individuals with
(13:11):
cash savings at banks is from the film Casino. So
if you remember the film Casino with Robert de Niro,
the old mobsters eventually get sort of caught by the
law and they're sitting around a table deciding whether or
not they're going to turn on each other or whether
their foot soldiers are going to turn informants on them,
and one of the old guys, who's clearly been around
(13:33):
a while, just says, why take a chance, and everyone
ends up dead. So everyone that knows anything ends up
shots and I think that's what depositors are doing currently.
They are They're shooting first and asking questions later. And
we're saying we're seeing it in the data, hundreds of
billions of dollars moving to money market funds and to
JP Morgan and the like, and this is catastrophic for
(13:56):
the smaller financial institutions the other Can I interrupt again? Sorry?
Follow up a question? What does that mean for the
smaller banks in the UK, for the startup deposit takers,
for our you know, disrupted banks. I think I think
it's existential. I think I think they will they will die.
They will, they will bleed to death unless something arrests
(14:20):
this situation. And the only two things that can arrest
it are at the government backstop guaranteeing those deposits, or
the banks. The banks have the option to raise the
interest rate that they pay on deposits. I mean, I'm
sure you'd be as much of a supporter of that
as I am. But because at the moment, of course,
(14:41):
they don't pay you base rate, but if they do,
it will evisceerate their profitability or whatever profitability they have.
So if they have to pay more to retain the deposits.
Then then they're they're going to they're going to kill
their net interest margin, and that too must die the
way bust if they don't raise their deposit rate, bust
if they maybe not maybe not bust, but certainly in
(15:03):
a vastly reduced circumstance. Now, now the other the more important.
Now this is not as awful as it sounds, because
it's not great for the sort of health of the
banking industry, but it's people will still have banking facilities
to the big banks. I'm more worried about the second
order consequences. So that's this is becoming pretty pretty well
(15:24):
known and widely discussed. But it's smaller banks that specialize
in commercial property lending and small and medium enterprise lending.
If you've got a small family business, you tend to
go to a smaller bank to get that loan. So
it's actually going to be the knock on consequences that
this will choke off credit to the to the real economy.
(15:45):
And that's that that's how how you get to bigger
problems like like a tightening lending standards and an enforced recession.
But at another angle of this, which is which is
new A new feature of this bank run is the
speed at which it's happened. So this is not your
grandfather's bank run. It's not even an eight because there's
(16:08):
no cues. There's no standing outside a brank of bank
or a branch of Northern Rock. There's an app you
can move your money almost instantly and frictionless. There's a
great story of how GP Morgan, the man not the institution,
slowed down the bank runs in nineteen oh seven. He
asked the bank tellers to double count the money, and
(16:31):
that really slowed the pace. There's just none of that now, people.
I mean that the modern equivalent is the closing our
website for service updates. Yeah, yeah, yeah, indeed there might be.
I think crypto does a bit of that as well,
doesn't it. Yeah. So there's there's a bunch of new
(16:51):
things going on here, and there's a bunch of things
that are sort of as old as as old as time. Okay,
so what are the consequences for investors from that? Now?
Obviously I suppose one of the things you could say
is that that that dynamic is fairly disinflation ry. Yeah.
So I think there's two elements. There is the sucking
(17:14):
of liquidity out the system, something that you know that
we've been worried about for a while. So there were
interest rates going up through all of twenty twenty two,
quantitative easing being reversed into quantitative tightening also through all
of twenty twenty two and potentially ongoing, and now the
slow motion run on the banks. So liquidity has been
drained from the system. That monetary energy that I mentioned
(17:36):
earlier is disappearing. So that's the first problem. The second
problem is how investors are positioned. I mean they're on
a sort of longer term basis. So everyone spent the
last decade or so iterating towards risk ear and risk
ear portfolios in a zero interest rate world in pursuit
(17:58):
of their return target. It's whether that's a retiree wanting
five to seven percent on their pension pot, or whether
that's an institution or endowment chasing a seven or eight
percent long term return target. And one American investor phrased
it so beautifully I thought when he said, my public
market investors are doing privates, my private market investors are
(18:21):
doing venture, and my venture investors are doing crypto. Everyone
everyone moved to the riskiest end of their mandate to
try and change returns in zerp world and now because
we've jumped from zero rates to five percent rates or
four and a half percent rates in a year or so,
every investment committee in the land is looking at the
same challenging picture, all of these cross currents from war
(18:46):
to inflation, to deglobalization to recession risks to a banking crisis,
as covered by my Colleaguallex Charters in a podcast of
you a few months ago, or in our Rougher Review
recently published. And by the way, everyone I have a
copy of that Rougher Review. It's excellent. If you're not
a Rougher client, I think you can still read all
the stuff on the website right and there is and
(19:07):
we did do that great podcast with Alex Charter's as
all the US is going to be even better Duncan,
so please don't feel for a second prefer him over.
But it has written a brilliant article in the beginning
of the Rougher Review twenty twenty three that everyone should
read to give them a sense of how the land lies. Yes, so,
so these investment committees are all sitting facing this incredibly opaque,
uncertain outlook, and all of a sudden they're realizing, wait
(19:30):
a minute, I can build a portfolio achieving my say,
seven percent return target, where a big, big chunk of
that is in cash and T bills earning four or five.
And to quote the president of black Rock from a
quarter or so ago, he thinks you can build a
seven percent expected return portfolio that only has twenty percent
in equities. So all these investment committees are sitting thinking,
(19:54):
I don't need to take anywhere near as much risk
as I used to to achieve my expected return. Yea,
because that's easier given they've all lost fortunes on those
higher risk portfolios. Well, yes, yeah, it would have been
better to start this process a year or so. Yeah,
a year and a half ago, I would have been
a better time to look at it. You know what
seven percent a year next to the thirty percent you're
already lost. Yeah, And that this the slide that I
(20:15):
sort of talked to in our pack on this I
have been using for two years. I would like to emphasize.
But the risk here is I think a globally synchronized
de risking of portfolios. So everyone moves from seventy percent equity,
sixty percent equity, whatever, down the curve de risking by
twenty or thirty percent towards lower risk assets. And if
(20:39):
everyone is doing that simultaneously, it is not obvious to
me who the buyer is, because who's the person that's
that's up wanting to up their risk in this world.
If someone said to me the other day, what about
China and the Middle East, these sovereign wealth funds, They've
got trillions of dollars that they might like to take
(20:59):
on that risk from the forced sellers. And I think
that it was a very interesting point. But because of
many of the sort of global techtonic things going on,
I think it's highly unlikely that the West will now
tolerate trillions of dollars of Chinese money, for example, coming
in and buying buying up stakes in US businesses. So
(21:22):
when China puts his hand up and says we're happy
to take twenty percent of Boeing or twenty percent of
Lockheed Martin, I think Congress at the Senate might have
a problem with that. So it's just not at all
obvious to me who the buyer is for this forced
not not forced selling, but rational selling that we think
will happen. Yeah, okay, well, let's go back a bit
(21:43):
and talk about this portfolio that can make you U
six or seven percent, well, only being twenty percent in equities,
what else is in it? We'll come back to equities
and the type of equities that might make up that
small apart. But what else is in a portfolio? I
mean most of us that used to thinking, well, you know,
the vast majority of our portfolio is an equity is seventy.
Maybe we have a little cash and a small world exposure,
but most people moved away, while individuals anyway moved away
(22:04):
from sixty forty a long time ago and aren't massively
overexposed in the upream market. So if we would genuinely
go down to twenty thirty percent in equities, what would
make up the rest? Yeah? So finally we're getting paid
a decent return on cash. So I think cash has
become a useful asset because because it pays a return
(22:26):
and because it gives you optionality to take advantage of
opportunities in the future. That's a new thing. Cash was
incredibly painful for the last decade, and beyond cash, I
find myself looking at risk premiums a lot this year
because there's a big diversion. Some are wide and some
are anomalously tight, and that dispersion should be pretty good
(22:48):
for active managers who are sort of worth their salt
and willing to have a differentiate in portfolio. So, where
our risk premiums tight and therefore it's not attractive to
take risk US equities would be would be the first
one I would I would cite investment grade credit, and ironically,
these are the things that investors have been moving into
(23:08):
this year. If you look at the earnings yield of
the SMP, it's five percent because it's on a pe
of twenty. Well, cash is five percent, So that very
crude metric, yeah, very crude metric of the equity or
as premium is basically zero. A more sophisticated measuring of
the equity risk premium has it in about two I think,
which is as low as it has been since two
(23:30):
thousand and seven. So benchmarked investors, because the US is
so big, have sixty percent of their money in that
particularly unattractive asset. I would say another sort of anomally
is investment grade credit yields. Check this morning the investment
Grade Index yields four and a half. Well, that's that's
less than cash. So that I mean that that is
(23:53):
something like hasn't happened in the forty or fifty years.
That people will say that's because the yield curve is
inverted on the investment grade index is eight years duration.
Blah blah blah. It looks to me like you're not
getting paid to take that risk. And that's why in
our portfolio or offer, we're still short investment grade credit
and high yield. That was very useful for us in
(24:13):
twenty twenty and last year. Then it was about a mispricing.
Now I think it's about deterioration and economic conditions. So
where are risk premiums wide? Where are assets attractively priced?
I think we're getting there. Things are getting better than
they were in twenty twenty one. That's the That's the
(24:34):
silver lining to this undoubtedly gloomy overview, is that expected
returns are better in places. But I think it's in
the nooks and the crannies that are less popular. So
I don't want to plug a competitor podcast Marin No,
and I don't want you to do that either, But
there's a very good interview out there with David Einhorn
(24:56):
of a very long standing successful house fund manager, and
his words chime with my own recent experience that nobody's
looking at active stock selection anymore. Nobody's looking at smaller
areas like like the UK. I which just given my
own experience I did to UK smaller companies meetings in
(25:19):
the last week and group calls. In fact, I dialed
into the group call and on the first meeting there
was only two other people on the line from family offices,
so no professional investors beyond myself on the call. And
then another call was similar, you know, less than half
(25:40):
a dozen people on the call, So nobody is paying
attention to the UK. And you've you've said a lot
about this, done podcasts with other people. I totally agree
with that, and I think something like this news flow
you're seeing about companies fleeing the UK to list in
the US is actually a contrarian, but I signal it
(26:01):
reminds me of In twenty sixteen, Vanguard had a gold
equities fund and they didn't close it, but they renamed it,
so it went from being a gold equities fund to
something like the Capital Cycle Fund, and that marked almost
exactly to the day the bottom and gold equities which
then doubled in the proceeding twelve in the next twelve months,
(26:21):
so I think UK equities have a very wide equity
risk premium. And Japan is notable because its rates are
still zero and it's equity market trades are a p
of twelve, So that's very very wide equity rist premium. Two.
The last thing I'd say, we can come on to
talk about commodities, but gold commodities in general very attractive,
(26:42):
we think. And inflation link bonds, so tips US inflation
link bonds will pay you inflation plus one point five
percent for the next twenty years lending to the global
hedgeman in dollars. It's pretty at track to I think
as a law risk asset. So whatever inflation is, you'll
(27:04):
get that plus one point five. Let's go back to
UK companies supposedly fleeing the UK and we get told
that that's about you know, regulation, days, regulation, that, etcetera.
But it's really about money, isn't it. CEOs get paid
a lot more in the US company. You can wear
your company to the US. You can double its valuation
pretty much overnight and then you can triple your pay
(27:29):
and get a bonus based on a different share price.
So there's a lot that the incentive here is very
much monetary. Yeah, yeah, absolutely, So the UK equity markets
had something like twenty one months of consecutive outflows. Before that,
we had a couple of months of optimism before coronavirus
crushed it, and then before that we had we had
(27:50):
Brexit and Scottish independence. So it's been a decade of
pretty relentlessly bad news for the UK equity markets, and
it's been the wrong sort of type of companies, factor
exposers and so on. And you're absolutely right. What is
it called jurisdictional arbitrage when you when you pick up
your company and move it to a different playground. It's
(28:11):
not a new thing, So Prada, I think, as an
Italian company listed in Hong Kong because Asian markets like
Luxury Goods Manchester United listed in the US rather than
the UK because they want to hire multiple Like you say, what,
I think it's rational for those companies to do that,
to seek a higher higher evaluation, which is a lower
(28:32):
cost of equity. I'm sure the CEOP is a factor,
like you say, but I think as a as an investor.
If you already hold those shares, then that's great because
you might get the rerating. But I think it shows
I want to be looking in the areas that are
unfavored with lower evaluations rather than looking at the multiple
(28:55):
the markets with the higher multiples. Okay, so when you
invest in that, let's just talk about the UK and Japan.
You're investing in individual companies, the very active burnt right,
there's nothing passive going on in the rough of portfolios. No,
that's right, Yeah, so we pick individual companies. We do. Also,
we're a house that leads with our top down macroeconomic
(29:19):
acid allocation thinking, but beneath that when we do invest
in stocks, we do invest in individual companies and sometimes
we consider things like like factors or themes. Okay, So
it give us a couple of favorite companies in the UK. Well,
I think the biggest holdings, the biggest risk in general
in our portfolio is commodities at the moment, and the
(29:42):
two biggest holdings are BP and Shell. So BP is
a is a very interesting example. I've been talking of
jurisdictional arbitrage. It trades on half the multiple of exon
now these are basically basically the same company, but because
one trades in the UK, it trades on sort of
(30:03):
eight times now and trades on fifteen times. But it's
the free cash flow yields that make energy equities very exciting.
I think. So current oil prices of its seventy five
you probably get a high single digit free cash flow yield,
which is which is great, pays an attractive four percent
dividend yield, it's paying down debt, it's buying back shares,
it's doing all the all the good things that you'd
(30:25):
like a company to do. But it's the sort of
optionality or convexity to use a fancy word, to higher
oil prices that makes them really attractive. So if oil
goes back to one hundred dollars, then all of a sudden,
these are on sort of twenty percent plus free cash
flow yields, so really generating a huge amount of a
(30:46):
huge amount of cash for shareholders. But another evolution in
our commodity strategy. So commodities has been a very important
part of the portfolio, particularly energy since since well since coronavirus.
We have sort of evolved the way that we're playing it.
So we now have almost twenty percent of the portfolio
(31:09):
and commodities, but half of it is in the exchange
traded commodities for the physical commodities rather than the equities
like BP, Shell, Glencore, ur, Slur, Mettall, etc. What why
are we doing that? I'd say it's because we want
to If we're right about our big picture view of
the world, which is more more inflation, more economic growth, volatility,
(31:34):
more geopolitical friction, then you want to own the Hamburger,
not McDonald's. So you want to own the thing that
is inflating, but that doesn't come with the price to
earnings multiple that a stock comes with. Because in general
we think these will be compressing, even though the commodity
(31:55):
ones are cheap to begin with. But also the company
is beset by regulator sorry pressures, it's beset by wages,
input costs, supply chain disruptions. All of this stuff that
we think will be a feature of the coming decade
affects the company, but is probably bullish for the commodity itself. Okay,
are there any favored commodities? Is this part of an
(32:17):
energy transition play? Is it part of the coming CAPEX boom?
Is it about reassuring, friend shoring, all those things a
bear and all of it. Yeah, so we're most excited
by by energy and oil in particular. So that's about
a ten percent of the portfolio, six percent in oil itself,
another another five percent roughly in energy equities. But we
(32:40):
have three percent of the portfolio in copper and another
one or two percent in um metals stocks, so so
Glencore or ar solar metalal CoA and so on, and
that that that the copper is more of a long
term energy transition play. There's the old Doctor Copper as
(33:01):
a was a PhD in economics. But there is a
there is a strong story there supply demand mismatch where
if we're going to transition the economy away from fossil
fuels towards electric, we need an enormous amount of copper,
and supply is constrained because it's very very difficult to
(33:24):
get the permitting and the capital to build a mine
and it takes a very long time. So we think
that governments are committed to the transition and therefore the
fiscal stimulus will come and the copper price probably has
to go up to incentivize the supply to be there.
And tell us just briefly for readers who want that, listeners,
(33:46):
listeners who want app on all this. Why do we
need so much copper? It's about the batteries, It's about
is it also about the energy infrastructure? About the grid?
Do we use copper and the gride as well? Yeah? Yeah,
you use copper and everything. So you can't have a
winter turbine, you can't have a solar panel. You certainly
can't have an electric car without copper, without lithium, without
(34:08):
without aluminium. All these, all these metals are incredibly important
to the energy transition, and the thing is that we
need to We need an awful lot of them up
front to build the infrastructure so that we can transition
onto that infrastructure. I was talking to someone the other
day about the UK electricity grid and such a disaster
(34:28):
in general, and he pointed out something that I kind
of knew but I hadn't quite taken on board, which
is that before we started using renewable energy at all,
there were only maybe six or seven points across the
entire country where electricity came into the grid, and now
there are eighteen ninety thousand. Well, and how can we
possibly expect to cope with that. What if you think
(34:50):
about it? Of course, you know, suddenly everyone used to
just take take energy out right, and the big power
stations put it in. That was it. And now everyone
with a solar panel, every one with the wind turbine,
all the big wind farms, et cetera, are putting energy in.
It's a totally different dynamic for an infrastructure. No wonder
it's creaking away. Right. Let's talk then about about gold.
(35:12):
One of our favorite topics are as John likes to
call it a physical bitcoin. You used to old some
bitcoin in the fun, but I'm guessing you don't want
to go back to that. It's always fun to talk about,
but we don't currently have any exposure. Interesting. But let's
before we go on to gold's bitcoin, then let's talk
about actual bitcoin. What would make you buy some back?
(35:34):
I think the hurdle is pretty high, so I have
never been more bullish on anything in my life. As
you might remember mearin as, I wasn't bitcoin in twenty twenty,
but I think the context was so perfect for a
four bitcoin. Back then, we had a zero interest rates,
massive quee, the market was obsessed with technology, We had
(35:55):
investors worrying about increasing cross asset correlations and desperately looked
for a diversifier, and perhaps cynically, we saw that there
was a lot of institutional interest building up. And one
of the great advantages of ruffers that we have the
ability to move very quickly. So we got in front
of that wave of institutional money that was coming into
(36:16):
the space. So we bought in November twenty twenty at
fifteen thousand, and we exted in April twenty twenty one
at sort of sixty odd thousand on the day that
coinbas iPod actually so it was a very very successful
investment for us. We only held it for five months
and we sort of more than tripled our money, and
you got the mist stunning amount of publicity from it.
(36:36):
It was so clever. Some some of that publicity was
positive and some was not, but so it was very
successful for us. It was never a huge part of
the portfolio, it was only two percent entry, but it
was It was useful contributor to performance in twenty twenty
and twenty twenty one. But today the context is completely different.
(37:00):
So five percent interest rates quantitative tightening rather than quantit
of easing. The market subsession with technology has gone away,
and now it's sort of show me your cash flow.
The inflation hedge narrative, the digital gold narrative have sort
of blown up. If we're we're honest, forty year realized
highs and inflation last year and bitcoin was down. Pretty
(37:22):
hard to argue that that was an inflation hedge. And
we had a very clever theory in house that called
Gresham's law and reverse. So Gresham's lass goes back to
the seventeenth or eighteenth century and it was the bad
money forces out good So if counterfeit notes are in
the system, those who are holding legitimate banknotes will hold
them and money monitory be lossity will collapse. Our view
(37:46):
was that in crypto, the good money, the institutional money,
was going to come in and clean out the bad money.
So it's why as Greshams Law and reverse and some
light would be the best disinfectant and all that sort
of stuff, we would drag bitcoin and crypto into the
and clean it up. And the reality over the last
couple of years is that the good money, the institutional money,
(38:07):
came into the space and it backed FTX. That was
that was the horrible irony, is that the crucially not rougher.
I would emphasize we've never had anything to do with them,
although I did ones meet SPF a story for the
pub perhaps, and the it just it just hasn't worked.
You know that it has not been cleaned up. And
(38:28):
now you have this operation choke point in the US
where the US regulator, in combination with various policymakers, is
really cracking down on crypto. Senator Elizabeth Warren doing a
victory dance that Silicon Valley Bank and Signature Bank were
both sort of crypto focused. The SEC suing coin Base
(38:51):
and ripple the CFTC coming after binands that there's a
tightening regulatory noose around crypto and that makes me very nervous. Now,
the truth is it's up thirty or forty percent year
to date, so perhaps we're wrong, but I think that
(39:11):
it's seriously challenged in the current economic environment and in
the current regulatory environment. The flap state to all this,
of course, the ultimate bill case is that Jim Kramer
is very beerish. That is interesting. We should definitely take
that into account. But I suppose the key thing there
on the regulation is it as much as the advocates
(39:32):
of crypto and of bitcoin in particular, are convinced that
you know, being decentralized, being independent, etc. Is the answer
to all the currency was they still need the banking
system to get it through, and if if they remain
unbanked and the banks are refused to deal with crypto, etcetera,
then the whole thing collapses in on itself. Anyway, Well, yeah, indeed,
(39:53):
I mean it was always our view that it would
be regulated via the FIAT on ramps and off ramps
ultimate und your coin based account from somewhere, and that
the banks of course would fully cooperate with the regulator
and in sort of giving full visibility of that. So
that was how it was going to going to come.
(40:14):
So yeah, I think fascinating topic, but absolutely no plans
to revisit revisit bitcoin in the future. Excellent. So all
those of you who like to send me hate mail
on Twitter and that kind of thing about how I'm
not keen on crypto and bitcoin can now send them
to Duncan. Duncan was your Twitter handle, So you can
accept my hate mail for a couple of weeks. Yeah, pass,
(40:37):
all right, Well I'm putting your Twitter handle in the
writ up for this podcast, so that it all goes
directly to you. Okay, although just everyone is. I do
still hold some bitcoin in my coin based account. No
idea how to get it out, but it's in the
worth lesson it was well more than it was, depends
how you look at it, right, So onto the real
thing gold. And by the way, one of the things
that John and I always love about bitcoin is the
(40:59):
way that every time someone tries to make a picture
of bitcoin, they do it with a gold coin with
a B on it. I love that. One of the
great ironies. Yeah, one of the gies. So gold gold
is just fascinating. I've always been a sort of gold
gold bug by nature. But it's very unreliable, isn't it.
So it's hard to know if it had a good
(41:22):
year last year because on the one hand, you could say, well,
we had a war in Ukraine, still of a war
in Ukraine, we had realized inflation at fourty year highs.
Why was gold not incredibly strong because it was flat
in dollars, modern pounds and pounds exactly. So it did
work in other currencies, definitely worked if you measured gold
(41:44):
and bitcoin the but then the other the other way.
Of looking at it as well, interest rates went up
five percent or four percent and gold was flat. So
that's actually a great performance because you would expect the
rising opportunity cost to be very negative for gold. But
I think zooming out a little bit just knowing that
(42:06):
if you hold gold in your portfolio it will be unreliable.
It has become a part of many multi asset portfolios,
including the Rougher portfolio, which means I think it's correlation
to risk assets has become higher than the fundamentals deserve.
And what I mean by that is, as we saw
in twenty twenty in the COVID crash, when markets get liquidated,
(42:28):
gold often gets caught up in that because things like
risk parity portfolios that are or vall targeting portfolios become
forced sellers of everything in their book, regardless of the fundamentals.
So but I think zooming out a little bit from
all that sort of market technical noise. We have seen
a potentially game changing event in the war in Russia.
(42:50):
If you are now not just a Russian, but anyone
who might be perceived to be a bad actor by
the West. The confiscation of Russian sets that we saw
all across the West, you know, bank deposits in London,
Geneva or New York. We're just taken. Then there's a
huge incentive now for you to hold your wealth in
physical gold in either close to you or in a
(43:13):
non Western location. Also, I suppose that a similar angle.
There's a lot of news this week about the rewiring
of the global monetary system. So that's a fancy phrase.
What does that mean. It means the Middle East and
China trying to denominate their trade in currency other than
(43:35):
dollars or maybe euros. So why are China buying oil
from the Ue priced in dollars when they could do
it in yuan or they could do it in gold.
And I think that sort of pivot in the currency
of trade towards gold or maybe partly gold is an
(43:56):
additional positive. Also, very simply, the cost of extracting gold
just gets ever higher, So wages are going up, Permitting
is more impossible than ever, capital equipment is more expensive.
Oil is a big input cost, so the cost of
extraction goes up, So the cost of gold probably has
to go up in the long term too. So behind
(44:18):
all the monetary conversation about well, whether the gold is money,
whether the gold is of money, the extent which it sold,
its value long term, etcetera. There is also the same
supply dynamic. Absolutely, this isn't all just theory. I should
say we have seen a huge increase in global central bank,
particularly non western central banks since the war in Ukraine started.
(44:40):
We have the data on this that there are big
institutional buyers of gold in the market. And there's the
old sort of famous trope that one ounce of gold
has over the last five hundred years always been able
to buy a saval row suit on average, And of
course the type the style of the saval row suit
has changed over the last five hundred years. But that
(45:02):
that's the that's the saying. And now what two thousand dollars?
You wouldn't get a salvo row suits for two thousand dollars,
So that was that. You know what a saval row
suit costs? What does it cost last time you went
to get a suit made on several row? What is that? Duncan?
I'm afraid I don't. I don't have the budget for
that or the desire for that. There is a funny
(45:25):
story about that, actually that Jonathan Ruffer, our founder UM,
was was once interviewed in the Ft and I think
it was Lunch with the Ft or something like that,
and the article with the sort of usual fluff around
it said Jonathan sat resplendent in his empire wearing a
fine Salvo row suit. The reality was it was a
sort of Mark and Spencers. You can stick it in
(45:46):
the watching machine. So it's all about it's all about
all about perception. Yeah, once one answer, Gold, We'll thank
you a long way in the Mark and Spencers closed department.
Even now, okay, let me ask you one last guard
and then if I was going to make you invest
in one thing right now, um and nothing else, and
(46:06):
I wasn't going to let you touch that one thing
for you're quite young, Let's make it twenty years, Thank you, Mary.
What would it be my pleasure for twenty years? Twenty?
I can make it ten if it's easier for you.
But as I say, you know you're you're young. Yeah,
so I think when you when you start talking about
time horizons as long as twenty years, then that the
(46:29):
power of the base rate, sort of the base effect
takes takes over. So I would probably say something like
um uk uk small caps or Japanese equities. If you
made it ten years, I would I would take I
would take energy, energy or commodity equities. And as you
(46:50):
and if I made it five years, gold, um, I'll
still I'll still take energy or commodity equities over it
over five years. Okay, that sort of issued emphasized. That
is a that is a return maximizing answer. And actually
at rougher what we what we prefer to do. Rather
your most investors go about return maximizing. How can I
(47:11):
find all my best ideas and then maybe I'll sprinkle
some hedges over the top and the hope that I
don't lose my shirt. Our approaches minimax regret, which is
borrowing a phrase from from Ben Hunt. So we're minimizing
the probability of our maximum regret. We're trying first and
foremost to not lose money, and then once we've comforted
(47:35):
ourselves that we've arranged that, then we decide how much
risk to take. So if I did it with my
minimax regret hat on, I think it's very hard to
beat either US tips or UK inflation on link bonds.
If you're a UK taxpayer, Okay, that's great. So we've
got the no Regret portfolio, and we've got the Duncan
wants to make some money. Yeah fees to pay for Yeah,
(47:59):
excellent two A clip portfolios. Dunk it so much for
joining us today. We really appreciate it, and we'll be
back and back in twenty years to see how it's going. Yeah,
thank you, Aaron please for having me. Thanks for listening
for this week's Marion Jok's Money. We will be back
next week in the meantime. If you like our new show,
(48:19):
rate review and subscribe wherever you listen to your podcasts.
This episode was hosted by me Marion Sumset Web. It
was produced by Samasati. Additional editing by Blake Maple's special
thanks to Duncan mckinness and to John steppec hate mail
for them as suggested earlier, and finally, our weekly reminded
to sign up to John's daily newsletter Money distilled the
linkage in the show notes and I know you will
(48:41):
enjoy it, particularly if you were interested in house prices,
because John is very interested in house prices
Host
Merryn Somerset Webb
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