How to Get a 7% Return Without Buying Risky Equities

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 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, 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 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 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 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.

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 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 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, 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 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. 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

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 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 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 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, 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

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.

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 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 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, 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

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

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 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 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 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 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. 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, 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 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, 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, 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 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 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

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 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 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 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, 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 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 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.

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 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 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 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 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 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 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

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 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 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 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, 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 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 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 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 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 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 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 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 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

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 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 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 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 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 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 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 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 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, 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,

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 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 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 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 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 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 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 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

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 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 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 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 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, 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 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 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 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

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 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, 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 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 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

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. 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? 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 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 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. 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.

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 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 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, 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 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 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 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 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, 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. 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, 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 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 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 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 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, 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.

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 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 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

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 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. 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 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 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 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 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 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 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 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 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, 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, 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 enjoy it, particularly if you were interested in house prices, because John is very interested in house prices