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Hello, it's Maren's unsetweb here.
Just want to remind you before we begin that I will be at the Fringe Festival in Edinburgh once again this year, hosting four days of riverting conversations in Adam Smith's old home, Pan Meo House. I'll be there from August's seventeenth to August twentieth. John will be there with me on a couple of days. You don't want to miss those days, and we're going to tell you which ones they are. Get your tickets by heading the main Fringe website and searching for Maren. And don't forget these
tickets do sell out quite fast, so move quickly. Now back to our regular programming today, my guest is going to be James Ferguson of macro Strategy Partnership, which he founded, but first as always senior reporter, author of the Money Distilled newsletter and technical analysis fan John Steppeck is with me.
John, I love that introduction.
You are a fan of technical analysis. What was going on about your charts? Having to look at that chart this happens, you know, I mean, it's all so science.
Support and resistance the only two fundamentals to.
Know exactly the stuff works, right, Okay? Right? John?
Here we are John and I, by the way, are talking before the election results are out. So as we talk, as is the case of my conversation with Mark, we have absolutely no idea who will be Prime Minister of the UK at the end of the week, is there.
Right John?
Not a Scooby?
Absolutely, I mean it's on a nine edge.
No, no, no idea who could be who could be in charge?
Okay, but whoever it is, whoever it is, there's a consensus here that this is not an election to win.
You win this election, you inherit.
Are horrible economy of horrible stuff going on, very low grade Brexit.
Oh my goodness, it's so awful.
Low growth, loper capital growth, terrible living standard's nasty, inflation.
I mean, it's very bad. Right.
You don't want to win this election, that is the consensus. But when you actually dig deeper into the numbers and take away the overlay of misery that BRIT's like to put on top of anything that happens anywhere, it's not so bad. This is not the poisoned chalice that Goldon Brown handed over back in twenty ten, it's something else altogether.
Yeah, definitely not. I mean, if you look back at the elections or in the two thousands, basically certainly fall in the financial crisis. I don't think there is another election that you would with a street face, I wish I could win that one instead. Maybe twenty fifteen. We certainly not twenty seventeen or twenty nineteen or twenty ten.
Well, nineteen ninety seven, Tony Black got a pretty good deal.
Oh no, But I mean in the two thousands, this is but I think, yeah, what I'm saying is this is the best election when for quite a long time we've had quite a few that have been a lot worse than this one. And should we talk about why we're saying that, given that everyone else is saying the you know, the economies in the state and it's terrible, and why are those people wrong? Go on, John tell us, So dead to GDP is very high. This is true, it's about one hundred percent. But everyone else in the
G seven except for Germany, is worse. So that's the first thing that you have to remember when we're talking about debt. If it was just us that stood out, that would be bad. But it's not.
Okay, just just be absolutely clear.
What you're saying is that it doesn't matter that we have debt at one hundred percent of GDP because other people have higher levels of debt relative to their GDP. John John, John John, Yes, we try really hard to be absolutely not relative on this podcast, and look, you just come up with the hugest bit of relativism I think I've ever heard from you.
Yes, but you do have to be relative on this. Whenever it comes to government debt, the state everyone else actually does matter because all of this money is in government bonds needs to be somewhere, and if you don't look like the worst candidate, then something that's going to come your way. I mean, it's not an ideal situation to be in, but it's not an urgent situation, and I think that's probably the more important point. It's one of these things where you don't need to come in
and go nuts. Whereas in twenty ten, there was a reasonable argument to say that the government of the day
then did actually have reasons to be fearful. It's not to say that the policies that were adopted are necessarily the right ones, but there was a good reason to be coming in and seeing how we can get this debt down, because you know, actual sovereigns were going bust Ireland and Portugal and Iceland and things like that, Whereas in the moment the situation is dire but is not acute, I think, is the point, and I think that's getting lost about it.
I'll accept that bit of relis.
Okay, So we're not gonna worry about debt for now. I mean, obviously we have to worry about at some point, but it's not an immediate worry that can be dealt with. And then outside that things really don't look so bad do Their growth is kind of fine. We're not in recession anymore. In fact, we're well out of recession. Growth in the first quarter was pretty good. Households and businesses are both apparently reasonably confident and crucially sitting on big pats of cash.
Right, Yeah, I think that's that's really important. I think that's something every time I bring this up. I don't know about you, but if you'd say this you on Twitter, are in public, then people don't believe that consumers are actually in a relatively good place. But the households has its household balance sheets are so much healthier than they we are again back in two thousand and eight, and
people have actually been de leveraging since then. So you actually have a consumer who is prayed to go going major credit field spendings pre given the excuse, but the point is that you know there is capacity there, and that's one reason why device and interest rates hasn't knocked the blazes out of the economy because actually, corporations and households we're in a better position than anyone really gave them credit for. So I think that's actually that's much
more important actually than the sovereign debt issue. We have the makings of a healthy economy, maybe even an economy that is the potential to boom in the right circumstances. And it really kind of is on whoever wins on Thursday to not screw that up, rather than marching in and saying, oh, everyone's terrible, we're going to have to do this, We're going to have to do that. But I mean, we'll see what happens.
So we'd expect as interest rates begin to come down and as we say, a period of political stability with whoever wins, we would then expect consumers to come out and get spending and companies to start investing. I mean, companies have a big pile of catch and they haven't been investing much over the last couple of years. So we could see an investment boom and a consumer boom which could take us through the next couple of years.
Released.
Yeah, I think so. And I think the main thing is that whoever does get any power shouldn't do this panicky thing about the first hundred days, which I don't know where that crept into the political discourse from, but it's nonsense and it's what ruined trusts actually, I think. But you know, they need to not panic, they need to come in, they need to say, Okay, we're sitting
on a majority, quite feasibly a very big majority. So rather than using that to sledgehammer through a whole load of things in the first six months, it's just sort of sit back and say, right, how can we not ruin and derail what is actually a recovering economy, and how can we you know, try and note, how can we be in mind we've got five years ahead of its let's not run in like bulls in the China shop.
Yeah, I suppose one of the one of the problems with a government with a big majority coming in with lots of plans, coming into an economy that is much more stable and a much better shape than you expect, is that you may think it can bear more in the way of cost.
And regulation than it really can.
Yeah, and that's where the risk of messing it up comes in. Oh, look everything's fine, there is money, so we'll do this, this, this, this, and this, which of course we're reverse thing.
That's interesting of one of the biggest concerns with the Labor government is they don't even have an ideological stance against red tape. The Tories in theory don't like it. In reality, I mean, why the reasons they love it probably going to give what to do it is because
they haven't actually stood behind that theoretical ideology. But at least there's something there, whereas labor doesn't actually see it as our problem, or you could see more botons or companies that already have lots of botons.
Well, this is not a political podcast, so John and I know absolutely nothing about that kind of thing, but we do know quite.
A lot about stock markets. Welcome to Maarren Talks.
Money in the podcast in which people who know the markets explain the markets.
I am larn sumset web onto.
My conversation with James Ferguson of the Macro Strategy Partnership. James, one of the reasons I wanted to have you on, among many is a piece you wrote a couple of months back called Union Jack in the Box about UK equities and as you know this podcast, we are very keen on UK equities and you talked about how it being absolutely no wonder the foot Sea had just broken
out to a new six. You're yeah, Hi, you appeared very positive, but actually you weren't quite as positive as some of the other UK bulls.
Right.
Bit in here is there's the paradoxical sting in the tail.
So there's two things that make equities go up. It's either the profits going up the EPs bit of the equation, or it's the pe bit going up, which we call a rerating. And obviously, you know, we're seeing a lot of re rating in the US. For example, at the moment, there's not a huge amount of profit growth going on in the US, but a very strong market is causing a rerating, which is putting the multiples up.
But that is an expectation of profits going up. I mean, that's a point, right.
Yeah, absolutely, So if you can look at the UK, you've got very little expectation of profits going up much. And I still wouldn't wouldn't push that point too hard. But what you have got, and the reason that I was writing a UK check in the box in terms of the fact that we have this breakout to a new six year high and why that could go higher, is that the UK is very cheap, so the multiples are very low, so there is a potential possibly for
a rerating. And what would cause a rerating usually would be the fact because if you think about the pe, that's actually the inverse of the earnings yield. So then we can compare equities fairly directly based on their earnings.
Two bonds, So if interest rates are going to come down, if there's a lot of scope for interest rates to come down, then that means that bond yields are coming down, which means that earnings yields should be able to come down, which means that even if there's no increase in earnings, you could get a positive rerating. And that argument is
predicated on where we are in the cycle. In the UK, I mean if the Bank of England was operating truly independently rather than being kind of a slave as indeed I think ECB is to what's happening in the US. They don't like to do anything different to the FED, and they don't like to do it at a different time, and then don't usually like to do it much in
terms of a different scale. But the fact is that the US printed more money during COVID relative to the economy than either the Europeans or the UK establishment or central banks did, and as a consequence, their overhang of excess savings has lasted longer, so they are taking longer to quash inflation and longer before they start to realize that maybe the economy isn't nearly as strong as they think it is once they've used up all those excess
savings that were printed during COVID. If you look at the UK on a standalone basis, I would argue that the Banklingion should have been cutting rates for months now, I mean, possibly starting as almost a year ago, and when they realize what they've done or what they haven't done, and they start to cut rates, there is a huge scope for rate cutting in the UK, and if they cut rates anything like as much as they could and should, then of course you're going to get at least short
term bond yields coming down a lot. That should steepen the yield curves deep in the yeld curve is very good for earnings prospects. But also if you lower the yield the bond yield, then you should be able to lower the earnings yield, which is the same thing as saying re rating the pehih. And that is the springboard that I think is open to the UK potentially a lot of interest rate cuts which could potentially have a
very big impact. I say potentially because it lost the still reliant on Andrew Bailey.
Let's just go back a little bit so just bically, when you say the Bank of England is not behaving like an independent central bank, you don't mean that it's taking some kind of secret instruction from the government. You mean that it's acting as a sort of subsidiary of the FED.
Yeah, it's more a subsidiary of the economic theories that are dominant in the FED. So you know, monitarist theories have been completely disallowed in all the central banks, but particularly in the FED. The FED has six hundred pH economics PhDs, and apparently not a single one of them knows anything much about economic history. But they all are heavily steeped in what we might call neo Kainsian theory. And according to the Neokanesian theory, everything is measured by
and ruled by interest rates. They pay no attention to money supply. Now, obviously, as far as monetarists were concerned, interest rates are merely a means to an end. If you lower interest rates, the main idea to that was that that would lead to an increase in money supply, because it would make it more attractive with a steeper yield curve for banks to lend and therefore for borrowers to borrow. But because they didn't do that, they completely
missed the impact of their money printing on inflation. So they completely missed inflation, which, if you remember, they called when it did appear transitory, and then when it stuck around,
well they just started flapping about. And the problem therefore is that whilst this idea is still going on, you've got central bankers who are almost incapable of play, saying the ball that they're being balked, and particularly this side of the Atlantic, because the economic growth has slowed even sharper here and earlier here than in the US, and they should have been cutting rates, they should be realizing
what will happen to inflation? But they've got no idea what will happen to inflation because it's not playing ball according to their discredited theory. So therefore, instead of cutting rates because the economy is slowing down and they can see what will happen to inflation, never get Inflations are always lagging by at least twelve months. In fact, the inflation lag based on what you do to money supply is more like two years. So they shouldn't know what's
going to happen to inflation. They should have known it was going to go up, they didn't, and they should now know it's going to go down, and they still apparently don't.
But Hi on James, it has gone down, is going down, so they do know that.
Well, they only know what has happened, and they can only look backwards at what has happened, and they consistently talk about how it's sticky. I mean, you look at a chart of inflation in the UK, and the concept of it being sticky is a total head scrutture. I mean, it is just it's gone down pretty much in a straight line, in the same way that when it went up during the transitor period it went up in pretty
much a straight line. They don't seem to have any concept or ability to get in front of the curve or understand what is driving inflation. Inflation is always measured on a twelve month basis, whereas GDP because of the US way of looking at it, or is always measured on an annualized quarter on quarter basis. If you measure inflation on an annualized quarter on quarter basis, you'd see that it's way lower than targeting, even in the US.
So there's a real sort of problem that the people who are sort of in charge of these things don't really seem to understand what it is they're looking at, and therefore they are data driven or data dependent, and the data being lagging means that their policy responses are heavily lagging as well.
Okay, so as far as you're concerned, interest rates in the UK should now be falling like a stone. And one of the things that John and I talk about a lot is the idea that when interest rate do start falling, they won't fall back to the levels that people have previously got used to, So we're not going to see rates falling back to one percent, two percent, etc.
But it's dead.
Central banks are going to attempt to kind of normalize the rate at more like four percent, But it sounds to me as though you're suggesting it should go further than that.
We never get We're juggling a few different things here, most of which are being sort of corrupted by what the authorities are doing, either the central bank authorities or the political Treasury Department authorities. But if you look at it purely from a point of view of what we're getting in terms of GDP, etc. Then I think three percent is a more accurate target to have in mind
for interest rates than four percent. But I agree with you, you can't go back to the old super low levels because they use all these governments to use the super low levels to massively crank up borrowing. And now we have a major problem that we have far too much government debt, which means you're really struggling to find out who is going to buy this debt, and the only way you can sell debt that you couldn't normally get buyers to buy it is by making the price lower,
which means the yield higher. So I think you're actually right to assume that there's no way interest rates and yields are going back to the old lows. But at the same time, given the very tight environment we have in economies from the US all the way across the Atlantic through Europe as well, is that interest rates and real interest rates in particular, are far too high for the private sector to do anything other than retrench, and therefore they need to be cut, and cut quite aggressive.
Okay, well, come back to debt, I think, but let's just stick with equities when interest rates come down. The assumption is that equities do well, as discussed, But is there any particular area and the equity market that people should be looking at. I mean, everyone says, well, you know, rates come down, and growth stocks do well, small caps do well, infrastructure does well, et cetera. Why would you lie well?
One of the things, one of the things about a rerating is that you know pretty much everything should do well, in the sense that all earnings yields should come down, and therefore all prices should go up. Now, there will
be some differences to be sure. I mean, we used to argue back in the old days that low interest rates are extremely good for growth because we're supposed to be looking at the lifetime earnings from a growth company, and if it's all dream, it's all far in the future, then the cost of waiting is much less when interest rates are low. Therefore, if you do a dividend discount model calculation, you can afford to pay more for a growth stock today long before it actually starts to deliver.
But we've got this irony going on now that tech stocks are going up in the US even though interest rates are well real interest rates are now it's sort of depending on exactly which ones you look at, and I think it could be as much as forty year high.
You know, these are interest rates that normally and indeed are arguably sort of would be crushing the private sector and many many measures the US private sector, the consumer, the equal weighted S and p pretty much almost anything that isn't sort of in the Nvidia AI sort of orbit is actually disappointing quite heavily, and you're you're getting some some really quite aggressive drops in share prices for a whole host of blue chip stocks and the US
that are very slightly disappointing in terms of their quarterly announcements.
We'll talk us through the text the tech stocks. Why have they been rising in a high interest rate environment? What's that all about? And you know, it's been surprising people now for months and months and months. Everything's too narrow. This isn't going to last. There are bubbles all over the place. You know, we've heard all the stories about the US TEX stocks. What's going on there?
Well, perstly, I would, I would say, you're not getting bubbles all over the place. This is really very concentrated. You know, the bubble that we're seeing is concentrated in AI in general, chips and chip machine makers more specifically. And so what you're seeing is an ever tighter concentration. Now Historically tight concentration markets, particularly those that are relying on rerating either ps going up even faster than the earnings,
These historically end badly. And so anyone who's sort of a bit long in the tooth and has seen this sort of thing before, you know, is tempted to believe it'll end badly. That said, we also all know that bubbles aren't over until they're over, So you know, many, many people who think it'll end badly also feel compelled to play. I mean, it's certainly you know what was happening in the dot com, for example, where you know almost anybody who wasn't a retail punter was looking at
these things and saying it can't last. But having said that, if it lasts one more quarter and I'm not playing, I'll lose my job. So you find a lot of people get forced into the late stages of a highly concentrated, very expensive, parabolic market. And if you look at the earnings side of it, you know there are some companies, well pretty much only one in video that's making really big earnings gains, but it's making big earnings gains in ways that seem to non stock specialists in this area.
And I would consider myself one of these non specialists. But they were very reminiscent of companies like Cisco back in the dot com. And what Cisco was doing the dot com was that it was selling to its own clients. It was basically forwarding the money to its own clients and funding their purchases. And Video has basically got these
monstrous margins, very high price acceleration. That's all great, but there's one problem with tech that we all know, and that is that they're more cutting edge of the tech. The sooner obsolescence for your particular bit of tech kicks in. There's a great line in Sleepers in Seattle where their bookshops closing down. I think it's Sleepers in Seattle and their bookshops closing down, and they're all worrying what's going
to happen? And they turned to the elderly lady who worked to the bookshop and says, what will you do? And she says, oh, don't worry about media. I bought Intel at six. Now you know that was not only meant to and was understood by the entire cinema audience as you know, a good a good entry price, and therefore she was fine. But the other thing I bring to your attention is Intel. Who are they?
You know?
Intel was was you know, Cisco and Intel were the leading stocks in the dot com and they are just not even also runs in this one, so you know, next time we have a big tech bubble, chances are and video isn't even an Also around Therefore, what multiple of sales is in video a good deal on if you think that it might only have no matter how stratuspheric the growth rate at the moment. If you think that, you know it's probably not going to be a player in a decade's time.
Do we mind about very narrow bubbles? I mean, let's assume you and I and most of our listeners are probably not holding vast amounts in the video or any of the other few stocks caught up in this, as you say, increasingly narrow bubble. So when the end comes, it comes for these stocks that might affect the rest of the mug a little, but maybe not that much.
I remember post dot com, not that many people in the end had been caught up in the dot combat, and everything kind of carried on with the benefit for the benefit of an awful lot of other people's capital being put into developing the infrastructure around the tech, which was not a bad thing either.
Well, you know that was particularly it was a particularly beneficial side effect. Not that anyone would have noticed two years after the peak in the dot com that there were only beneficial side effects, but the fact that there was a huge amount of capacity put in particularly in terms of optical fiber and the like. You know, it was a tremendous benefit and everyone lived off that for
the next decade or more. It's not entirely clear with AI that there is any capacity that we are going to benefit from, because AI still remains I would argue, completely unproven and you know, fake it till you make it may work in Silicon Valley, but for the rest of us. You know, I think once bitten twice shy
it may be more appropriate for AI. You know, if AI cannot be trusted if you have to check, then AI is effectively, in my mind, useless, because if you have to check, then you have to do the work anyway, which case got right on AI. So if AI is going to have hallucinations, you know these eyes is where AI basically makes stuff up and it can't differentiate between truth and lies, and it even can't quote sources because it makes up the sources. Then you know, these are
big problems. And there are other elements to the way AI thinks in the murders commerce that make it not intelligent. Now, it's a great search tool, clearly already, and there are some very limited narrow uses where a that's and it's probably not right to use the term AI on this, but there are some narrow areas where the enhanced computing power can be extremely useful. But the trouble within enhanced computing power is that if it's not generally useful, then
people can't generally use it and deploy it. It'll just start annoying them because I'll say, well, that would be interesting if I thought it was true, but I had to check. And secondly, it's very very energy hungry.
Yeah.
I was going to ask you about that. The carbon emissions are huge, and there was an article act yeah, I think in the FD the other day pointing out that AI is in itself a threat to the goal of zero by twenty thirty.
There are several other threats to go. Yeah.
I mean, you know, the irony of the AI type ideas being thwarted by the net zero type campaigns is great, But to me, I look at it in a much more old fashioned way. You know, if AI is very energy hungry and energy costs money, then AI is getting
more and more expensive. Forget Nvidia charging more and more more for its chips, you also have to pay more and more and more to run those chips in your servers, and therefore you end up with something that is very expensive and as yet to prove anywhere really outside of some narrow applications that it's paying for itself.
We've talked about the narrowness of the bubble, and we've talked about interests, right, it's not coming down, etc. Do we avoid the US as a whole and just keep our money in in the UK and cash?
But where do we go with the story on the US.
The irony is that if you look at US small caps, they're actually very cheap because they know, because they are not AI in a not large cap, and they're not in Vidia, and they're not tech, they've actually been allowed to fall back, you know, not quite as far as the UK, but you know, in a similar way to the UK. So there's a lot of value to be found in the US. The trouble is that that value is to be found in good old fashioned ways of trawling through small caps and looking for businesses that are
growing in a good old fashioned, steady way. So you could easily exp be to have the headline indices coming off way more than say the equal weighted S and P and that coming off way more than they you know, maybe some of the Russell small gap indices. But the first thing to bear in mind is that you know, year one of any sell off, headline sell off takes pretty much everything down with so then we go into recession.
Normally does the recession calls the sell off or the self cause a recession that's often semantical, but often after the first year or so of that, the policy response has been to cut rates aggressively. The Fed usually cuts rates far faster than it hikes them during inflationary episodes. And as it cuts rates to try and steepen the yield curve, we get down to a level where you know, suddenly it pays to borrow and invest in good old fashioned type ideas again. And and what I was talking
about in my note about the UK. The lower interest rates go then obviously you know earning zields can cauld afford together. Lower i P is going to would go up, and so you often get before earning's bottom out, you get the market already bouncing because people just start paying a higher pe for stocks even before the earnings have finished botoming out because they're going it's such a low
interest rate environment that's a good thing to do. That does not apply to those areas which are massively overrated and still need to fall all the way down to finding a buy.
Let's go back to debt. You mentioned earlier. There's incredibly a high level of public debt in the UK. Obviously that's a problem in the US now. John and I were talking earlier about this, and John was saying that he wasn't that worried about the UK debt to GDP ratio going in the next couple of years, because while it's horrible in the UK, it's a lot worth in other places when you're trying to get money out of
bond investers. The stuff is all relative. But if we look at it from the other side, I suspect you would say, well, it does matter because very high levels of debt is such a drag on productivity and so on. Is that fair?
Well, yes, I mean I think John's been too complacement. I mean, I don't see why there is a natural buyer for UK government debt when we were debt to GDP is one hundred percent. You know who's the natural buyer for our guilts unless we basically pay quite a decent term coupon. So therefore, you know, there is a constraint which will stop guilt yields coming down that far.
This is why we were talking about earlier. You know, you know, is three percent for interest rate short term interest rates the right sort of realistic target, And if it is, there's no way, you know, the long guilt is getting down to that sort of yield. The long guilt's probably going to be lucky to get down to four, very lucky to get down before maybe four and a half.
Okay, Jims, how do we get out of this debt problem? I mean that the long term conversation we've been having, you and me, various the other people in the market, John except who have been talking about how it is inflation that will gradually erode the debt and make everything okay, but without inflation and without the financial oppression inflation brings. How do we get out of the debt problem?
First and foremost, inflation can only get you out of your debt problem if you're already basically trying to deal with your debt problem. Now, if you're dealing with to deal with your debt problem, the first thing you must do, the very first thing you must do it is no longer run a primary deficit. Even if you're no longer running a primary deficit, particular, if you've got inflation, you're still going to find that your interest payments will make
you run an actual deficit. And as you keep running an actual deficit, then your debt by definition, is getting bigger and bigger compared to GDP. And if your debt's getting bigger and bigger compared to GDP, you're kind of caught in a mailstrom. And that's why I said, I think John is probably being too complacent about this. Once you have let debt get out of control, then it is incredibly hard to rein it back. And the only real way to run it back is to start taking
some really tough decisions in terms of government expenditure. So the first thing you've got to do is have government expenditure down at a sensible level. Now, historically, sorry, I'm not even talking about very long histories. I mean, in the last twenty twenty five years or so, the UK hasn't been able to run even for a year or two a primary surplus unless government expenditure.
So this is.
You know, government spending as a proportion GDP is down at about thirty five percent. It's currently forecast to hit forty eight percent in the next year or so. This is a massive shift. So if if one third of your economy is government spending, then two thirds are private sector, and our private sector by definition, has to be productive otherwise any entity in the private sector is not productive
goes bankrupt. So therefore you've got two thirds of the economy growing and one third of the economy as a tax almost literally on that which is government spending, which is unproductive, taxation of the productive part of the economy to pay for things which the politicians think by votes, be they you know, education, health, defense, welfare benefits, eight to single mothers, whatever they want to send money to
to put people off thinking they have to work. But the thing is, once you get government debt and government spending up closer to forty or fifty percent of GDP, then what is happening is that the private sector is now equally matched. For every two percent growth annual growth that the private sector can deliver, for example, government can
destroy two percent, so you end up with almost zero growth. Now, since the GFC a great financial crisis, this is going back sixteen years in the last sixteen years, the UK, which had per cafeter GDP growth from the Second World War until sixteen years ago, was growing at a steady consistent rate of about two and a half percent. Since that sixteen years ago time, when government spending started going through the roof, per catter GDP has grown at zero
point three percent per annum. I mean, you know, we've an annihilated the private sector by crowding in the public sector. And yet if you read the newspapers and you listen to particularly labor politicians, but the Conservatives are responsible for this, so they're no better, you would believe that we in this country had experimented with cutting back on government and trying a low tax, low spend experiment. We did nothing
of the sort. We've taken tax as a proportion of GDP up to a seventy year high, we've taken government spending to a peacetime record high, and we've squeezed the private sector almost out of it's exaggerated, it's out of existence, but it's now virtually no bigger than the public sector, and therefore whatever good it delivers in terms of productivity and growth is taken away and completely nullified by the
public sector. And until we realize and I'm not just talking about US, I'm talking about Europe and I'm talking about even the US. Now, until all of these Western economists realize this is what what's going on, we are doomed and destined to continue to do the same. You know, Argentina now looks like one of the few Western countries where you could actually turn around and say with approval, that looks good. Maybe I shouldn't therest their mille is doing.
You know, it's taken a hundred years of catastrophe before the Argentinas have finally turned around and gone, you know what, this government, this corruption of everything that you know, the private sector holds, freedom and growth, This has been destroying us and we're now heading down that road all of us.
Okay, this doesn't sound good, James. It's going to take one hundred years for us to pull ourselves together and turn around.
I mean, I don't see.
Let's take what you're saying and see how it is fixable. I cannot see how you could take the way that government runs at the moment and make the kind of dramatic changes required to take government spending back to somewhere in the mid thirties of GDP, not without a massive growth bird that led to GDP expanding at extraordinary speed
and therefore leaving the percentage of government spending behind. And that can only happen if we have this great leap in productivity that we've talked about before, great leap in productivity that everyone now believes will come from AI and digitalization. But from what you said a few minutes ago, I don't feel like using it's coming from digitalization.
No.
I mean, we know what causes productivity, because we had very good growth in productivity even in the UK up until about sixteen years ago since the Second WLD War, and what caused productivity growth, and you could also break it down into different periods, so we had much stronger productivity and perk capital GDP growth during periods when government debt was going down than we did over the periods
when government debts going up. The great benefit of the huge debt that was built up in the Sagma War is that most of the period after the Sagma War was a period where government debt was going down. I governments were running services, even the UK upuntil the sixties and early seventies were running services was we had great productivity growth. If you crowd in the private sector. If you say in the private sector, what do you require so that you can grow, the private sector will resoundingly
say the same thing. Less government, You guys do nothing to help the problem. Get out of the way. What are labor suggesting? Labor suggesting that they can create growth whilst also increasing equality. Those are that's a complete oxymoral. You cannot possibly have those two things together. You have to either have growth and freedom or you have to have equality and stagnation. And you have to decide, and
you have to decide on what the balance should be. Historically, probably the best balance that gave us enough growth to allow the pie to get bigger whilst also allowing a big enough slice for the bits that we thought were vulnerable and needed protecting, occurs around about one third government two thirds private sector. Economists who studied this and see what the the most effective share is find it's more
like twenty percent government and eighty percent private sector. You know, there are some basic elements of what government does which are very necessary and required, predominantly around the rule of law and property rights. Beyond that, almost everything government tries to do is a corruption of at least the freedom and growth elements. Some people may not want freedom and growth, you know, socialists as are all don't want freedom and growth.
They think it leads to inequality. They're absolutely right, it does. You know, there's no doubt about it that if your economy grows, you will start to see those who are more productive pulling ahead further from those who are unproductive. And that means that even if the unproductive are better off, they're relatively worse off. And if we can't be mature enough to have that conversation, then until we're mature enough to have that conversation, things will only get worse.
James, we are having this conversation before we know the election results, and I suspect that we was elected.
I think we do.
I think that we might have elected a government that won't really be hearing what you're saying. So I don't think we can expect any of the changes that you would like anytime soon, or indeed probably ever at this rate. So let's go back to what we can do about it. We've agreed that investing in the UK, at least in the short term, in pretty much anything, is a reasonable idea.
We've agreed that US small caps are looking cheap, but that maybe now is not a good time, given that if the very narrow bubble collapses, it'll take everything down with it, at least temporarily. Is there anywhere else, whether the retail investor, the ordinary investor, the private investor should be looking and saying, well, this is a good place for my money, possibly even a safe place.
Well, one of the things, which obviously I say obviously but by implication, is not going to be very safe. You know at the moment if you look at most of the West, but I'll concentrate in the UK, so that's where we're talking. You know, government spending has gone up to record postwar highs, but the tax rate, although the tax has also gone up to record postwar highs, but the gap between the two is still a big worry. So now there's only two ways you can deal with that.
You can either cut back on spending, which we're kind of all agreed that they're not incentivized to do because the electro haven't yet told the politicians forceful enough that they don't trust their worldview. They're starting to This is why you're getting these these very disruptive political votes. These the press pyctical and populist votes, but they're not to
my mind, they're protest votes. You know, in the UK, why would anyone vote for the Conservatives who've just acted exactly like a labor government would have acted in terms of taking government debt and government spending through the same.
I've got to interrupt because I'm not feeling you getting any closer to offering me a positive investment as safe investment. I'm feeling you getting closer to negative stuff.
If you want to, if you want to leave out all the all the whys and whereforce, they're going to have to raise taxes. So so what can you buy that they won't be able to raise taxes on. You know, they're going to raise taxes on on equities, They're going to raise taxes on second homes, They're going to raise taxes on probably on pensions. They're probably going to raise taxes on isis one of the few sorts of things that they can't raise taxes on because it's just too
sort of difficult and inefficient. Might be things like wine. Aren't classic cars, So one of the things you might want to think about is putting your money into things that you're at least confident will hold their value, but which can't be taxed, or at least the gains on them can't be taxed. So that's that's one way of looking at it. One of the historic things you want to do is look at your old sixty forty portfolio.
The problem is that even if bonds are going to do well, as the economy sort of looks a bit weaker. And this is certainly the states where consensus is very much that there will be no recession. But I would say since they've nearly used up, but according to Sandfrist scope FED they have used up all of the excess savings, they could be on for quite an abrupt shock there.
That would suggest that, you know, they're going to get some better performance from bonds in the near term, but in the medium term a propos your point, you know, it's hard to see that bonds are going to be a great investment over the next decade or two because government debt's too high. And if government debt's too high, then they're going to have to offer quite high interest
rates to get people to lend them. And if they're going to get that, then they're also going to find that their interest bill stays high, and if the interest bill stays high, the deficit stays high. It's a catch train too, is horrible catch training too.
Okay, I'm not really feeling for coming out of the end here, James, with anything set for buy wine and drink it.
Well, that's because we haven't really looked a little bit further afield. So I've already mentioned looking further afield within the US small caps, looking further afield with in other markets. Developed markets. You know, look at Spain, look at Italy, look at the UK. They're all very very cheap markets. And when everyone starts to think that the main game in town is no longer worth playing, then they're going to start being more attractive to things which are on
extremely low peece or extremely high earning yields. Another area that looks very interesting in this point of view is emerging markets. You know, emerging markets have not done well at all in this environment, but that's because this has been a very sort of late cycle, highly US large cap dominant cycle. So in many respects, the great secret if you think of big changes coming is not necessarily
what to buy, but what not to own. You know, when the banking crisis came along, the number one and possibly only decision you had to make was take your bank waiting to zero and stay that way. So if we're looking at at a big shift away from maybe US growth large cap growth stocks, maybe that is the single most important and only decision you need to make. Get a nice diversified exposure to all the stuff which on all old fashioned metrics is cheap.
And just don't have the bubble stuff. Yeah, brilliant, perfect, Okay, right, last question, James, last questions. You're ready ten years. You've got to hold one of them. Gold or bitcoin.
I'll tell you it's very difficult. Gold historically is supposed to you know, famously brought you a fine suit of clothes in Roman times, and ad buys you a fine suit of clothes today. Therefore, if we consider that gold, it should be measured against inflation. If you run gold compared to US CPI, you'll find that gold is almost bang on the highest point that it hits in any stage since the Second World War. In other words, gold
has done its dash. Not very well, thank you very much, but it's done its dash.
Okay, great, But still you have to choose.
What wh is that?
Because that is the way the podcast works, the way it works, that's the way we finished the podcast.
Bitcoin well, well, well, because I've got a sort of a reasonable view to think that gold is probably fairly fully valued, and I've got no concept in my head at all about how bitcoin should be valued, I would probably say on that basis bitcoin.
Okay, Bitcoin, it is James Ferguson, thank you very much, indeed, very good to have you on.
Don't hold me to the bitcoin thing, please, thanks for listening, is which Marrendalg's Money will be back next week. In the meantime, you like I share, rate, review, and subscribe wherever you listen to podcasts, and keep sending your questions or comments to Merrin Money at Bloomberg dot net. This episode was hosted by me and Maren thumset What It was produced by Summersidy Productions, Important
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