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Hello, Bren Talks Money Listeners, It's Maren Sunset Web. We are bringing you something very special over the next week, recordings of the conversations I had at Pamier House for the Edinburgh Fringe Festival. Now, for those of you who don't know, and I'm sure there aren't very many of you who don't know this, The Friends is a three week arts and culture festival that began in nineteen forty seven and takes place in Edinburgh in Scotland every August.
For the past few years, I've been hosting conversations about markets, economics and investings from one of the most special locations as part of this festival. I do it from Pamier House, which is the last home of Adam Smith, philosopher and father of modern economics. It's where he completed the last editions of his best sellers, The Theory of Moral Sentiments and The Wealth of Nation's top reads, both of them.
This year we did a four day.
Run in mid August, and we are bringing you the slightly edited conversations from three of those days for this panelized spoke with Bloomberg Senior reported John Steppeck, James Ferguson, who is the founder and partner at macro Strategy, and Ed Conway, author of Material World, a substantial story of our past and the future, which is an excellent reading.
If you haven't read that, go out by it right now. It's fantastic. Enjoy listening. Thank you for coming.
I know there's an awful lot of shows at the festival and there are a million things you could have been to which are Builder's comedy and might have been more amusing than this.
So we're very very grateful to you for coming here today. Thank you.
The way this works is I ask all my brilliant guests to come up with their favorite Adam Smith quote. Although that's difficult because everyone has a lot of favorites, they're one that is both their favorite and most relevant to today. They give their quote, and then we talk about the context of that quote, where they like it, where it matters today, and then we talk about all sorts of other things that we didn't intend to talk about but which kind of come up as we go.
So each one will do that, we'll discuss it, then we'll move on the next one, and then in forty minutes or so we will have questions and someone win the book and it'll be great. So we are going to start with ed who is broken the first rule of the show before you even starts, the first rule being please have a short quote.
It wasn't really me that broke it.
I think that was Adam Smith because he was not not known for his brevity. He was and he wrote very very as a result my quotes.
If the audience is going to see here, and.
That's what I mean when I say we may not have a full twenty minutes of questions.
So that's that's our hour, isn't it. Do you want me to reader? I'm going to do it. I'll do a bit.
Well, well, I tell you what, why don't you pull out a bit of the c and then I mean you can you can read, you know, maybe Okay.
So it's it's from the Wealth of Nations and it's about woolen coats. The woolen coat, for example, which covers the day laborer, as coarse and rough as it may appear, is the produce of the joint labor of a great multitude of workmen, the shepherd. The sort of the wool, the woolcomba, or kada, the dire, the scribble, you to get the idea, and it goes on a bit. The dire, the scribbler, the spinner, the weaver, the full of the dresser, with many others must all join their different arts in
order to complete this homely production. How many merchants and carriers besides must have been employed in tron splant, transporting the materials from some of those workmen to others who often live in very different different parts of the country.
I'm gonna stop there, because you get the ideas. So when I started kind of getting interested in economics, there was this essay called Eye Pencil by a guy called Leonard Reed, an American economist, and it was all about the story of a pencil and how a pencil is made.
And that's fascinating because in.
The course of this essay you learn how you know that actually this is a very complex thing.
To make a pencil.
You need the wood that's chopped down from a tree in the US, You need the lead, the graphite that comes from another part. You need the metal that becomes the bit that attaches the eraser. You need the rubber, and so on and so forth, and the kind of punchline of this is there is no single person who knows how to make a pencil, and I remember being quite.
Obsessed with this.
But of course, as with so many of these themes, Adam Smith came up with at first, and actually his point here is that the complexity of even supply chains back in the eighteenth century was way beyond what any single per and could fathom. And each of us carry around or where in the case of wool and coats, we carry a oron products that are made by so many different people in different parts of the world, with such complexity, and we just don't spend much time thinking
about it. And it's one of the wonders I think of the modern world that the market often can help us produce these things which are just amazing. And so you know, I'm going to try not as much as I can not to puff my book in the course of doing this, but it's hard because it's been ingrained
in me in the last year. So one of the things I tried to do in that book is to do the same thing for a smartphone, and it's just it's obviously it's impossible, but even before the semiconductor that becomes the heart of that smartphone, you know, is actually made, the silicon that you need to make that goes through this incredible transformation, goes around the world multiple times, it gets kind of vaporized, turns into all sorts of different things.
Hundreds of different companies are working on it. These things are just hidden away. And I think the more that we spent some time thinking about how stuff is made, how it got to us, then the more a I think we would appreciate the stuff, the more b I think we'd have wonder in the world around us, because it really is kind of amazing what's happening inside our devices.
And also see I think we would understand a little bit more about the kind of compromises that happen along the way, because to make anything involves quite a lot of emissions. It involves a lot of energy and involves a lot of effort, and in economics we're not particularly good at kind of embedding those things within it each
of different models. There's a vague talk about externalities, but the closest I've come to kind of actually trying to understand the challenges facing us as we do that zero and also just understanding the wonder of the world is to think about an item of product and what it takes to make it. So, you know, Adam Smith, I think,
had that kind of principle early on. It's inspiring to think about how things are made and how many people are underneath that kind of hidden, that hidden backstory of all the things that we're touching.
And when it kind of starts frightening, doesn't it when you think there isn't a single person who knows how to make a whole hair, a plane, Oh, knows how to make a whole car.
No, well, they don't know how to make a pencil.
And so let's alone, you know, the plane, or the semiconductor or all of these other things. But that's the wonder of economics. And I think that's what Smith was trying to get across it. This is quite an early quote in the book. It is this is amazing because this is the human story, is how we cooperate to make things. And so he was talking about wool and co at that point. You know, wool was one of
the great industries of this nation. But it goes today, it goes today, and I think we need to tell those kind of stories in an inspiring sense, but also in a kind of realistic sense about there's some challenges there about carbon emissions, about water use, all of the other things as well.
It's the drive to zero that really made you start thinking about this and that one of the things.
And it becomes very interesting.
When you look at it because we listened to politicians speak and we listen to activists speak, and they make it sounds.
So incredibly simple. We should just do this, we should just do this.
But in fact, if you read your book, the underlying the mining, the materials, the energy required to produce an energy transition make it much much more complicated, much harder than most of the people who discussed it understand.
Well.
I mean, in a way, actually it's the other way around. I didn't intend to write a book that touched on you know, net zero and all of that different stuff. I didn't intend to get into covering the energy transition. But when you start to think, I kind of just wanted to understand how smartphone it's made. You know, how the different pits and pieces actually came together. You know
what it actually takes. But when you go down that rabbit hole, you just see that making everything everything involves an enormous amount of energy and involves a enormous amount of carbon emissions. You know, to make the semiconductor, just to make the silicon that comes up the ground, you quarry some rock, you turn it into what's called metallurgical silicon. By the way, there's a whole load of other processes
before it becomes a silicon chip. But just that process you have to throw it into a furnace alongside coal. You know, when people are kind of tweeting about are we really need to have fewer emissions, they are doing it on an item that has coal in its production, Doing it on an item that whose battery has has literally has oil inside it. And understanding those complexities and realizing that it is everywhere just made me think, like
I can't. There's no way of describing the current world, which is the idea, without touching enormously on this, this thing, this undertaking that we have we well, the country the government has signed up to you. By the way, does anyone know how many hours of debate there was in the House of Commons before we officially signed zero into law?
Actually zeros, no, it's one, it was one. It was actually eighty eight minutes.
Eighty eight minutes to debate the single most consequential because I think it is the single most consequential thing law that we have ever agreed to. And then it was There wasn't even a vote, It wasn't there wasn't there was no division, It was just a and then it went through because it was done as a statutory instrument. We signed up to these things, I think, you know.
Having having then gone into these kind of various rabbit holes, I realized that we have just not still at all about what this involves.
And this is because we're one of the things you talk about. Whatever we discussed, this is everyone believing they live in an ethereal world or forgetting that they really live in a material world. So that debate was all about something theoretical without a thought of the practicalities behind us.
Looks very easy if you live in and I inhabit that world as well. You know, I live in kind of London. I spend a lot of time talking to policymakers and think tank peoples and finance people and economists, and it's just ideas, and we kind of think that the physical things don't really matter for ideas, and that's just couldn't be more wrong, you know, anything, Any communication that we have goes these days in the Internet via some fiber optic cable. And what's that fiber optic cable
made of. It's made of glass, and that what's that glass made of, It's made of sand. And understanding that physical kind of set of foundations that underlies everything, it's like the GDP that we kind of think of. I don't want to kind of get into slagging off GDP because that's very well we slag of all sorts of things are but gross messag product. It gives its enormous value because we pay enormous value and it generates enormous values to things like social networks. But you wouldn't have
any social networks without the fiber optic cables. You wouldn't have any social networks without the servers that you need to provide that. You wouldn't have social networks without the energy that we need. And the whole point is that that GDP is like a big inverted pyramid with all of the big stuff, you know that kind of constitutes a lot of the value at the top, and everything is balanced on this tiny, precarious little bit of GDP, which technically speaking, is only a few dollars. But it's
the stuff that makes everything else tick, you know. It's the concrete, it's the materials, it's the fiber optics, it's the semiconductors. They're worth a bit more, to be honest with you, these a but still that stuff is relatively small, and all we kind of tend to think about a lot of the time is the slice at the top. But without the stuff at the bottom, the whole thing
just falls. And I think, particularly in this country, we need to think about that quite importantly, because we don't make much of the stuff anymore, for better or for worse, and it matters because without it, we're all screwed.
We we need to think about all the dirty stuff at.
The bottom, and it's very dirty to make it.
All that's were filthy, Yeah, we did.
We were talking about rare earth metal to Ecceter on a podcast recently and.
Saying that if we if we really really believed in that zero, we would have to dig up most of cornwall.
Yeah you get out, Well, there's a lot of copper. There's a lot of copper. In fact, some of the grades you find of copper in Cornwall are better than some of the grades that you get in Chile, which has the world's biggest reserves of copper. So technically speaking, we could go there and mind the hell out of Cornwall and be probably copper independence.
From the rest of the world. But so we're not going to do that. Seem reluctant. Nim seem reluctant too.
And personally, you know, I reckon we could do with that bottle minimal but well.
Yeah, nonetheless it's it's protected, so it's so no chance and and and that's that's one of the issues I think we're coming into at the moment that our ability to make all this amazing kind of stuff happen is is it's limited not so much by the geology, you know, there's no shortage of any of the stuff we need. It's limited by our reluctance to go and get it, and also to some extent by our expertise, because we're forgetting,
we're forgetting how to do this stuff. One of the world's most important mining colleges in Cornwall, at Cambourne, they've they've they've shut down one of their courses for the last few years because there's not enough people who want to go and learn about mining.
And this is absolutely extraordinary, isn't it, Because we're now to anyone got kids to university age done, just done a levels, looking for courses, and it's amazing how few go go into this. And you hear it over and over and over that they have trouble filling the geology courses, the mining courses, that mining engineering courses, et cetera.
Because they want to save the environment.
Yeah, but that's where the money is. Actually, by the way, they'll tell your children to go into the oiland.
Yeah, that's how that's how you save the environment. But bye bye.
By understanding how to how to get stuff out of the ground and turn it into another kind of amazing thing that will help change the world, that is how we do it. And right now, particularly in this country, we're kind of forgetting about this.
But we've forgotten about it across the West.
I mean gen to bring you in and we see this stuff, I know, sorry, we see this in the stock market right where we see the mining sector in the US. In the UK, smaller and smaller and smaller section of the mind getting the big tech companies are bigger and bigger and bigger. Part so you can see people adding value to the ethereal world and no value to the material world.
Yeah, but you know this is potentially a function of weird things in the market rather than necessarily how things always going to be. If you have passive ETFs, then big components like the Magnificent seven and the passive ETF go on.
Not everyone's an investor explaining the Magnificent seven.
Oh well, the Magnificent Seven was a group of seven stocks in the US which were more than their weight in the action of the of the index was very, very high. So if you look at the formans of the S and P, it's gone up quite substantially. With the SMP equal weight, it's been pretty much flat, and the only components that have made it go up are
the biggest stocks in the index. But there's kind of a catch twenty two going on here, because if people put their money into the index and ETF, then the index has to buy the stocks more of the stocks that have gone up than of the stocks that didn't go up, which means you're compounding your error. If it is an error. We'll probably go into whether it is an error or not. Well, I got I say one thing quickly back so the main it's no longer a
magnificent seven. Tesla dropped at and then Amazon dropped at and you know, it's brilliant Vidia. So basically, in Vidia is sort of driving this whole story. But in Vidia is is precariously balanced. I thought of this when you were doing your pyramid. In Vidia is precariously balanced on three numbers. It has very high margins because it charges very high prices, and because it's doing this, it's creating growth, so it has a very high multiple. But it does
mean that those are three very vulnerable. You don't need to kill more than one of those and it's all over, and if you kill more than one at once, maybe all three go. So so we've built ourselves a very precarious situation that will be revealed soon but not yet.
And I think that's quite analogous to what's happening in the world of students who all think that, you know, all you've got to do is buy an electric vehicle, and you're saving the planet genuinely, probably, and even the people teach and then probably genuinely, they haven't thought through it much more than that, and we'll discover.
Okay, so back to lydia error AI bubble.
The thing about AI is that a I don't know anything about it, but they're telling us that they can create artificial intelligence with large language models. This is generative AI as opposed to sort of narrower I think narrower functioning AI is fine, you give it a specific task, but then that's not really AI, is it. But once you talk about sort of wider use AI your tea, you're basically saying, learn it from this data.
What data?
Well, the stuff on the internet. Go and read the internet. So they go and use these large language models and they read the Internet, and they come back and go, right, I know everything you okay? Can you tell them there's been stuff that's true, stuff that's false? Define sarcasm. Do you know when someone's taking making a joke or being rude or being naughty? You know they have doesn't got a clue. So we've got this major I think block between what a child learns and really, you know, we
should look at young children and what they learn. And they learn a language in three years, even though no one tells them what it is, what a language is, but they learn it, you know, and they and they understand how to walk, rebalance themselves, not fall over too often, and they all the time they're they're looking at these I remember once when the earliest stages of AI, the military was trying to design software to identify foreign enemy
tanks versus friendly tanks. And that was fine, except then they discovered that all the pictures of the tanks that they'd taken, which were enemy tanks, they've taken on cloudy days, and all the friendly tanks were blue sky days. So they had this problem that the software was identifying the weather. So then they said, okay, that we've got to make it cleverer than that. And then they had tanks driving through bushes and you know, the software is going like, well,
that's a bush. And so in the end they tore their hair out and went back to it. So AI is going to come along in my career in finance, which is now Mariam waspening the other day, far too long, we've had probably every at least every sort of cycle, there's been some fantastic new mathematical idea that's going to
take off and revolutionize investing. Start all the way back in eighty seven with portfolio insurance, and then we had you know iterations of similar types of iterations ever since, and almost all of them fall down on almost always really quite basic stuff. For example, the reason why we had the collapse of sort of subprime housing securities was because they made a decision that when modeling securities that all the datall be independent. Well, most people aren't statistians probably
know what that means. But that assumption is that whatever happens today is going to have it's going to be totally independent from what happens tomorrow. So you go, okay, fine, So in your world, if the market crashes today, everyone wakes up tomorrow and trains as if it hadn't. It's
obviously unrealistic because obviously nonsense. They go, Yeah, it's really hard to model otherwise, Well, okay, in case, you should mention the fact that the model may not be very reliable, particularly not when things when.
It matters back roomly to AI, I mean that that is incredibly energy intensive, so that that makes the whole electricity shortage problem.
It works.
If you look at the kind of the domestic electricity demand and projections in the United States, it is going through the roof.
It's kind of amazing.
Having been flat for quite a long time, and let's keep electricity demand.
Is better, almost diminishing, and then suddenly it's kind of going up through the roof, and it's it's because of AI.
It's because it takes it. It takes an incredible amount.
Of energy, particularly to train the AI models but also to run them as well. And a lot of the people, you know, they want the servers to be to be there, so and of course you need a lot of chips for it, and making those chips partly users cold. But you know, in it's relatively small quantities. The thing that the thing that I kind of feel about AI is, on the one hand, it will it will be far more material centric than people kind of expect, because it
just is the world is. People discount this stuff, and that's the point of the book. But I think the other the other thing that gives me hope is that I think if you were looking for various different challenges, so I'm not I am desperately uninterested in the l M side of AI, the you know, chat, GPT and all of this nonsense, because I just am I'm sorry, I just can't, I can't get.
That enthusiastic about it. Too old, I'm just too I'm just too old.
However, the side that I am interested in is, for instance, recently deep Mind, the Google bit of AI, they discovered various different ways to kind of protein folding basically, so they were able to anticipate how different proteins would form. This is a challenge that that that mainstream science has spent so much time trying to work out. Then I think even more recently they came up with millions and millions of different new novels, entirely novel crystal formations how
you make crystals. Now, all of that stuff just different crystalline forms, different kind of molecular forms that if you were looking for some sort of thing which is potentially
going to revolutionize the world, it's stuff like that. Because if you think about what's happening in labs, for instance, when people are trying to work out you know, whether it's new medicines or whether it's they're working out a cleverer way of squeezing lithium out of a rock, it's working out it's experimenting with different types of crystals.
And historically people have just.
Gone into the lab and they've just try and tried to come up with the best thing they can think of. But if AI is able to come up with millions of these things, and I think humans so far have only come up being able to come up with either tens or hundreds of thousands of novel crystal forms, if AI can do that that is totally transformational, then potentially we do have a way of reducing our energy consumption
in the future. I think for every extra ten percent of energy demands that AI will be responsible for, I think it will also be responsible for mass reducing energy demand by making all of our various different processes better. But that's not the chat GPT side of things that most people are most excited about, and so I have I don't know how much that's costed into the market or not.
Isn't isn't this? This is kind of the fundamental issue is energy because as you're saying, the economy is energy transformed, and the problem we net zero to an extent is that we're kind of kidding ourselves on that we can use less energy without reducing the quality of our lives. And the problem is, actually the only way out is this is actually is true. We need to find ways
of making energy less damaging. So basically we need to have exponentially more energy with kind of whatever, the opposite of exponentially less environmental consequences, as opposed to the approach which is kind of we'll replace everything with something somewhat less efficient. But then all that ends up happening is that we, I guess stagnate.
Being that almost all economic growth, great periods of progress have been majoring periods of cheap energy, and so if you go through a process where you make your energy more expensive rather than cheaper, you can't really expect to have very fast growth as a result. And you can pretend they having fast growth because you're spending so much on a transition, but it's not real growth.
Economic progress is energy deployment. It's deploying more energy to do more stuff. That's what we've done. You know, every industrial revolution through history has been about getting more energy and doing more things. You know, whether it was kind of water wheels, or whether it's using coal, or whether it's using oil, whether it's using nuclear. We've been on this kind of trend of getting ever more energy out
of the different fuels that we're using. And the thing that happened in the nineteen seventies, it's kind of sixties seventies is everyone got a bit scared of nuclear understandably given the accidents that you had there, and everyone got kind of scared about just the environments. And again understandably, you know when you look at some of the conditions
back then. Nonetheless, if you're looking back at our kind of economic history and looking at kind of you know, when it was that we suddenly saw our productivity starting to diminish, I don't think it is a coincidence that was in that period where we started to fixate on trying to reduce our energy consumption around the world. Yes, by all means we need to kind of do stuff
with fewer emissions. But the idea that we need to do less stuff, which is kind of what you know is implied by deploying less energy, that to me is quite tragic. I think we need you know, you know, as John was saying, we need to have way more energy. We need to have energy abundance. The question, of course, is how we can do that in a way that doesn't that isn't kind of massively environment.
Yeah, there's nuclear, isn't it. There is only one answer.
Yeah, I think I think big part of it is nuclear.
But but I think it's just that look that this association and extra energy is bad. That's been the thing that's sunk in. I think, you know, since the kind of Jimmy Carter days, the energy is bad is just sunk in to I think throughout the corporate world to some.
Extent as well.
No energy, energy is good, but it needs to be a cleaner form of energy that doesn't actually you ruin the planet.
But we need more energy.
We need to do more stuff because the more energy that you have, then at that point point, you know, the potential is kind of limitless. You know, you can have as much water as you want, you can have as much materials as you want, you can do anything at all. But until we have that limitless energy, and the problem is, of course nuclear is massively expensive, and
we need to find a way of confronting that. But we could if only we had this startup with the mindset of we need to do more stuff rather than we need to do less stuff. And it's been that let's do less stuff that's been the dominant kind of mindset in the last kind of thirty forty years.
Of course, we may and we have one podcast guest he's been on a couple of times. She tells us we don't need worry about any of this because it won't be long now that we can just beam solar power direct from the Sun from space through a series of mirrors directly Earth.
And sorry about it anymore.
Yeah, it does, but through the mirrors, through the mirrors that beams down directly.
And you know, I don't. Okay, we didn't completely understand it. Do you understand it completely the time? And I didn't either. I can't pretend it.
It's nice to people thinking of these ideas, though, isn't it. I think it's interesting ideas.
Right, we've got to move to another quote, and we're not going to get the questions as wish we use your quote next.
John, Well, we did already talk touch on passive invest and but this is this is interesting. This is Adam Smith's view or in basically shareholder companies. So the companies were used to listed companies that are called joint stock companies in those days, and he's actually not a huge fan.
So he says the trade of a joint stock company is always managed by a court of directors, and this is frequently subject in many respects to the control of a general court of proprietors, so that should board of directors and your shareholders, he says, But the greater part of those proprietors seldom pretend to understand anything in the business of the company, and give themselves no trouble about it, but receive contentedly such half yearly are rearly dividend as
the directors think proper to make to them. And he says, but the problem is the directors of such companies, being the managers of other people's money rather than their own, it cannot be well expected that they should watch over it with the same anxious vigilance with which the partners in a private partnership frequently watch over their own. Negligence and profusion therefore must always prevail more or less in
the management of the affairs of such a company. So basically, what he's saying is that the problem is it's it's kind of like it's a classic economics problem where the owners of an asset and the managers of an asset have different incentives. So the owners just want the money that the asset generates, and the manager just wants to do the least amount of what they can possibly do
whilse satisfying the needs of the owners. And what I think is interesting why is this kind of relevant today, is because increasingly the shareholder class actually is kind of absentee landlords. You know, this has been one for a long time. Like everyone in this room, I don't know, I suspect them. Actually, probably more people in this room are slightly active investors than the average population. Your average person just pays a bit of money into their pension
every month. The money in their pension gets handled by money managers, but a lot of the time now that might just go straight into a passive tracker of the type that was just talking about. So money just flows into the biggest companies with no real interest as to what those companies are doing, whether there are better options for the money. And the problem with that is we gradually undermines, or you can argue that it gradually undermines
market efficiency. And market efficiency is basically the principle that if you take everyone's opinions, then the average averages out to be roughly the correct price for a company or for an asset, whereas the passive investment, it's more like you get one person's opinion and then everyone else is following them, and so the market becomes horribly skewed towards
one set of companies, such as the Mega texts. And I think that this is not necessarily what Adam Smith would have had in mind as being the best way to efficiently allocate capital and human resources.
But you fix it, John, We've had this problem has been around so since you had this original insight that if you have an owful lot of owners of a company, you automatically give the power to the manager of the company rather than to the shelders. Right, that's a managerial capitalism.
Right.
We've been worrying about that for decades, but it hasn't changed, and there's been all sorts of conversation. I've written a book about this myself, about how to give power back to the shareholders and how to get shelders to use the rights they should have to.
Do more than just accept evidence. And I'm not going to change this.
It's a really tricky issue. I think it's I think it's one of those annoying subjects where it's more about just haven't any government and population has to stay on top of where the most likely abuse of power is. So the moment, for example, So you've got there's basically three big passive funds providers, so you get black Rock, Fine Garden, State Street, and then also underneath that you've
got three big dominant index providers. So not only do you have a concentration of power among the asset managers, the indexes that are constructed that these funds follow and that they pay license fees to to use are also dominant. So I think it's S and P and Footsie, Russell
and one of the other ones. So you kind of got this this agglomeration of power at the top of the market, and they are almost like a toll road through which all of our money goes, and they take their wee cut and they get very well off of it, and it matters. But it's not obvious because they're technocrats, not like Larry think that black Rock will occasionally stand up and say something semi political, but most of the time they understand that their position depends on them not
being political and not being overtly influential. You know, whenever you've got you know, one company owning say, I mean, like some people have started to write papers wondering is this undermining competition as a whole because for example, like in the airline sector, almost every airline is at least I think it's about twenty percent owned by Black Roxy. And then you start to think, well, wait, man, mostly black roll going to twenty percent of the overall airline sector.
Then doesn't that encourage them to say, well, it doesn't matter if Ryanair is better or a Visy Jet is better. And actually the good thing would be as if they all colluded a bit to set prices, because then the overall airline sector would make higher profits as a whole. Now that's a very contentious view, and personally speaking, I don't think that anything that overt is happening. But the point is you can erode capitalism, and as I say, they kind of.
That all the gooblazing monopolies and appeal from the same business meeting together in credit rooms to discuss price fixing exactly.
I mean, the wealthy nations is basically a massive diatribe against monopoly type arrangements. And I think it's more that it's almost like a game of Lacker mole, and you do see it. I mean, obvious governments are starting to look at regulating the big tech companies harder for example, because I mean, and I guess that's just part of the whole game of if you know, they get ahead
and then the kind of population gets ahead. Because we spent lots of time being distracted by arguments about network effects, but then we kind of ignored the fact that Facebook just went over and bought Instagram because that network was getting more popular than Facebook, so that that was like a red hearing. So I think that, yeah, it's more like an arms race between governments and populations and corporations.
Did anyone ever, anyone who owns shows evergain voted in AGM?
Well, very engaged of.
You, right, I mean, how could you get more people to do that?
You know?
I mean, at the end of the day, even if you own testco shares, and you actually do individually owned testco shares, it's.
A lot of work, but it shouldn't be a lot of work, and you can game a file this stuff, right.
And one of the things that that are a lot of people been talking about, and I've written about GUD a lot, is the idea that it's possible for your pension provider to give you the ability to use every vote and every fraction of vote that you might have relative to the shares that you're holding your pension portfolio, and that you should be able to go on a website, see what that company does, see what votes are coming up, and.
Just you know, click through.
Of course, this would ruin everything for the managers and ruin everything for the fund managers.
You like to have that kind of control.
Ask question, did everything just start going wrong when we had kind of unlimited liability? And would everything just be better if if everything was a partnership? Would that be possible?
There is an a'll doom in a boat idea for and so that's one of the big arguments I think in the way of the nations all haven't reade then at all.
I know he that Adam Smith was very very suspicious of the idea of bringing in limited liability.
Very suspicious.
But on the other hand, it's the idea of not having liability that allows people to continually innovate. You know, it's very hard if you say to people, you know, if you if you go ahead with your brilliant idea and it fails, you're going to lose everything. Who's going to go ahead with a brilliant idea? So limited the limited liability company. If you look at it like that, A lot of people think, and I agree, it was possibly the greatest invention of all.
Time and coincided with all the industrialal.
Because it allowed people to suddenly go okay and have a go at this, and I'll only lose what I put in, and They'll be able to have another go and another go and another going take risks.
It can innovate etca.
It's called America, right.
I suppose it's fairly sill. If the investment banks had still been partnerships when before eight, then probably wouldn't have happened, or it wouldn't have been as bad as it was, you know, if they were all owed the hook for whatever. Then But then that is that arguing a risk taking versus lescer version.
Do you know how many people went to jail for abusing the rules on bank leverage? Next zer it was much more importantly? Why why did they not do any perp walks? Why was no one even prosecuted the war idiots for the bureaucrats, the ones who were the ones who were in charge of policing it were the ones who caused it, damn.
But and then you can also argue that the poor buggers that get done for labor or a bit five years later when they're all exploited in the public. You know, perception will scapegoats. I mean, I know that's slightly off topic.
I think what happened in Libor is probably a little much for this this panel and podcast. So we're going to go to our last quote, James, make it snappy because I'm running out of my question.
Time, right. There is no art which one government sooner learns than another of another than that draining more from the pockets of the people.
Would you like me to read it?
Yeah, it's a miracle. I got through that. It was one smudge going to another smage and the shortest smudge in the middle.
There is no art which one government sooner learns of another than that of draining money from the pockets of the people.
And remember that quote because it's going to become incredibly important over the next ten years. So this country's debt to GDP just prior to the financial crisis was a about thirty six percent, and it's now around about one hundred percent. Now, if you divide up the increase in government debt by years, that's an increase of about four percent a year. Do you remember the economy roaring along
at four percent a year? Probably not. In the last two years, the US government has borrowed three trillion dollars and from that managed to generate two whole trillion dollars of nominal, not even real GDP. So it turns out that government expenditure is incredibly unproductive and does nothing really in the even the short term, other than add to the debtedness of the country and therefore the future interest bill.
Who knew, but.
This really matters because basically under our watch without anyone really noticing. By the way, the data gave for the UK excludes bailing out the banks, so it's done nothing to do with financial crisis. This is just the fact that they thought, well citive had a financial crisis, and no one seems to be watching, and interest rates and yields have gone really low. We can borro up a storm and spend lots of money gerrymandering and buying votes and all the rest of it, although there's not much
evidence that even works in terms of buying votes. But the fact is that when the government takes over half the economy, which is the case now in the UK and in fact, if you exclude England, it's more than two thirty the economy in all the other parts of the UK, So you know the economy the private sector e comomy don't get Government doesn't fend any money at all. It just redirects private sector money and redistributes it to worthy causes that are reliant on government hand adds and
pretends it's their money. So government takes private sector tax revenues or future tax revenues if they borrowed the money, and gives it to other people and says, we gave it to you, not the other people who'd actually earned it. Now, this is a major problem because when you get to the stage where you have far too many people receiving
as beneficiaries of these payments, they're obviously disinclined. As I think the great American agony Aren't whose name escapes me for a second said, The givers have to say when enough is enough, because the takers rarely do for which we never do. So we've got this, We've got this massive problem. Bill Brice was pointing out in his book about his childhood that in nineteen fifty seven, I think it was Americans were as happy as they've ever been,
and it's been downhill since then. The Encyclopedia of Mental Disorders, the big dictionary of mental disorders in the US, had one hundred and four different psychiatric problems in nineteen in the nineteen fifties, it now has over four hundred. So what has happened is that everyone has become much less happy because they've become much more mentally ill.
How are you? How are you doing this? Back to the tax take, because and I'm going with it so far.
That makes what makes many people mentally ill is the fact that it is a gateway to personal independence payments, which are far higher than boring bogs do. Added unemployment payments. The unemployment benefit is very, very low. But if you can add some interesting tassels to your unemployment, then not only do they tell you don't have to look for
a job, you'll get more money. It's very hard for people who are given free money for doing nothing to turn around and say, actually, one of the reasons I'm feeling low is I haven't got a job. I better go and get a job, particularly if they start by taking a job lower down before they work their way up where the effective tax rate. Because they're not making much more money than they got me. You know, it
is very is very punitive. So we've got a situation where nine million working age adults in the UK are not in work and not looking for work.
And this is a results through incentive structure, yes, but.
It's an unaffordable incentive structure. So the real point I want to make is is that you could just about keep this thing going as long as interest rates were just about zero because the payment the interest payments on the debt, the debt was never coming due like a console, and the interest payments were super low. We could kind of keep this gig going. And the politicians went, yeah, I mean, you know, let's buy another election if we can.
Okay, well, James, look at it this way. There is no way that state spending is going to full. State spending is definitely going to rise that certainly of this government and probably the next government. There is absolutely no way that we're going to see a full in overall government spending.
It's going to go up.
How's it going to be financed? Where do you think that taxes? Tax risers are going to come?
Well, initially, the tax risers will come all all over the place. But don't forget that we already have a government that's spending forty eight I think is percent of GDP tax revenues are all like about thirty four sense, so the rest is dead.
I mean this is inmpting, isn't it, Because certainly in the UK, all nations seem to have their own limit of the amount of tax that they're prepared paying. If you look at the history of the UK, we kind of top out of thirty seven percent of GDP A taxpayers simply refused to pay more.
Yeah, I mean it comes a stage where if it's if you're if you're someone else is taking money off you, then you're okay with ten percent, You're okay with twenty percent, probably okay with thirty percent, you're okay with forty percent, as long as it's a marginal rate at least recular. But if it comes a stage we just get or
I won't bother working. So if you all people are bothering working being paid for a while, all the people who are bothering working, but then the people who are bothering working turn around and say I'm no longer incentivized to work.
Will you lead?
Oh, you leave I mean here we have this growing problem the UK of our very rich leaving and are young leaning.
I'm not sure they are very rich, but there's some very rich who temporarily popped over and then went, you're changing my tax datus, I'm off, which is interesting in itself. You know, if you want to if you want to lose rich people, you increase the tax and they either stop working, move abroad like the brain drain from the from the labor period, or if they're foreigners, they go well, I don't If they're really rich, they can be living anywhere.
What everyone really wants to know is if the capital gains tax is going to go up.
Well, if you look at the list of taxes that people don't mind going up, there, it is exactly the same as the list of taxes that most people don't expect to pay. So it's higher rate taxes on high earners, capital gains tax and corporation tax. Of course, what everyone is still forgetting is that, you know, the art of taxing is to pluck the goose with the minimum amount of hissing. And if you basically keep plucking the goose and the hissing gets too loud, you'll end up losing
as well. So you know, corporation tax goes up, what you think companies won't put their bricers up to come and say, you know, suddenly you're going like, oh my tax hasn't gone up, but by cost of living health? Can you start taxing higher? Owners? Owners start saying, well.
Well work that hard. Okay, On that happy note, Let's have questions.
Do you not think the growth stuff index funds? It is because most upon managers are skeptics, but the two of you and therefore miss out investing in some of these incredible prosinesses which faky apps bed for it from the internet and smartphones and all this sort of stuff. And he's a world really driven index is forward and you know most fund managers haven't had enough invest in
these companies and there therefore underperformed. And there for most investors see what we're not going to put money into acted for managers, We're we're going to a gust our harder sendings and to turn next spunds.
So the question is really are passive funds there to protect investors from fund managers?
Now jams John.
My opinion would be that it depends whether the movement into ETFs is sort of cyclical or structural in the sense that we went from a position not having much money in ets to now almost all the money is in ETFs. And whilst the money is still increasingly going into ETFs, it will keep pushing ETF's performance ahead of active fund managers. But once that submarine surfaces and flops onto the.
Surface, and what would make that happen, well, we'll get.
To get to the tipping point. Trouble with tipping points is it's easier to say there's a tipping point coming than to say when it is or where it is. But if that tipping point comes and it turns out that, you know, active fund managers seem to have quietly been performing very very well. You know, the Russell two thousand has done nothing, the S and P equal weight has done nothing, and the S and P and NASDAQ have
gone through the roof. But the last time that happened was in nineteen ninety nine, and then two thousand happened, and by the end of two thousand and one, the Russell two thousand and the SMB equal massively at performed the S and P and NASDAK. So the problem with taking views at any moment in time, and then extrapolating that that will happen forever, is that by the time everyone agrees that it will appen forever, that's the day the market tops and it all changes.
Yeah, John, did you have that either.
Oh? Yeah, I think it's a good question. I think's so a good point, and I think passive investment is a good thing. I mean, to be very clear, I mean when we were at money Week, we were among the first to go on about how passive investment is a lot better than active investment because active managers, and I don't to be fair, I don't think it's because of what people are investing in. I think it's more
to be the cost. Passive investment is much much cheaper than active investing, and certainly in the last five years or so, there's also been a regulatory move to focus on costs, which is also persuaded financial advisors and pension funds, et cetera to focus very much on cost and therefore essentially price out active managers. So I don't think there's bad about that. It is, but it is more that issue of eventually going to tasee stuff up too far.
And again it's interesting that the US has outperformed to the point where people now assume the US has always outperformed, and so that's not the case. The US was underperformed in the UK as recently is kind of two thousand and four, two thousand and five, so it's more, you know, this has been a long cycle, which I would say is also to do with zero percent interest rates. But yeah, passion is a good thing. Beaking of too much a good thing.
Basically, fair enough, more questions, but one right here in the front.
Today he would be an advocate or at paramids but become sective calmon taxes.
It's a really good question.
Yes, this is the shortest answer I could think of that didn't have a compact.
HI don't know.
I mean, I probably don't know enough about Adam Smith to give a really kind of to the answer.
I mean, it's always a mistake to try and extrapolate from people.
You know, what would they think today?
Carbon taxes are so so want economists love them so much because they solve everything, but they just you know, we are biggest carbon tax in this country.
We keep cutting it.
It's fuel duty by far and away our biggest carbon tax. You know, Jason was talking earlier about the taxes that people say they're willing to pay.
The ones they think they're not going to ever. The other, Yeah, they think other we will pay.
But the issue with carbon taxes is often, often they feel often these are the things that people notice. And that's the difficulty is it solves everything. It's great, it's amazing, it solves everything if you can put a price on carbon. But like, show me a country that has actually been able to implement it properly and hasn't gone through exactly
the same issue that we're going through. So I imagine I don't know whether would would Adam Smith have been able to kind of see all the way through that?
I mean, I think probably not.
I mean, obviously, as I say, it's very high and very against saying, what would so and so who's been dead for three hundred years think about that?
I don't think.
But I don't think he would. I don't think you like her.
He spoke a lot about taxes, and he wrote about taxes relentlessly, and who is very very clear that taxes should be simple, straightforward, completely understandable, easy to pay, all.
This kind of thing.
And I suspect that a carbon tax would actually fail on pretty much every single one of his criteria, because.
He's very pragmatic. It's like super pragmatic.
Yet he'd be just wanted taxes to be simple, straightforward, easy for anyone to pay at any time. And obviously our tax sysm is absolutely not be anymore. And if she were to extrapolate what he might have thought, I think he would look at our taxes stem to say and go and disable that economy is destroyed, absolutely destroyed, because a taxysm of that length and complexity creates such appalling incentives and difficulties and such an overlay above admin
hell for everybody that this can't possibly work. I think he'd be horrified already. And if you then said to him, how about a carbon tax? I think he would turn over in his grave. So many times.
Well he wondered aloud at the amazing fortuitousness of an economic system that allocated resources are productively and efficiently, even though no one was doing it. And now we have a system where we have people allocating resources deliberately and aggressively, unproductively and inefficiently. I think you'd be horrible.
The invisible hands is not going to work.
Under these circumstances, right, I'm not going to do any more questions because I want to ask the panel one last question before we end, which is because this is technically we should be.
Talking more about investment.
If you could just make one investment today, only one, what would it be?
James quickly, quickly.
Come back to John.
I've been.
A point in UK equities for a while, and I still think ukcaus are a good bit because Britain spent so so long being detested by the world's fund managers, and that's very recently, probably only this year, started to turn around. And now they've all got the excuse for saying, oh, well, I wanted to eat until the Tories without a government, so I think that'll continue.
Okay, you coats, thank you. James. You can't look at it. He's not an investor, okay.
Well I silver, Oh, gold's gone to new highs. I'm a little bit worried about gold because gold, if you look at gold compared to the price index, it's looking awfully high. And if gold's supposed to protect real wealth and stuff will be a real reflection of inflation, then you know you'd really wanted a discount to that, but silver historically tracks gold, not very tightly, but it does sort of track it. It usually goes to a premium to gold near the top. That's how you know it's
the top. And at the moment it's a substantial discoup.
Okay, all well, stuff UK silver a lot of silver and sellar panels as well.
So yeah, Ed, you don't have to answer this one.
But I can't.
I can't mainly because I don't know. Theoretically I'm not you know, I'm not laty, but also I have I have.
No clue you have no chant.
All right, Well, I think that's a great place to end with it. Don't know, because I don't how we all feel about most things, isn't it.
Thanks for listening to this week's Maren Talks Money.
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