Welcome to Maren Talks Money, the after Show. This is where we unpack all the commentary you hear in our regular podcast for free.
I'm merin some set web This week.
John Steppick, senior reporter at Bloomberg and author of the Daily Money to Skilled, a newsletter, joins me to discuss my conversation with Edward Chance, left finite historian, journalist, investment strategists, and expert on everything to do with interest rates. John, you know, I really enjoyed talking to Edward. I and Edward a long time. I've had lots of public conversations with him. And the worrying thing, and this is the worrying thing, is that I kind of agree with him on everything.
I try not to.
Because he's such a misery guts, but it's quite hard not to. He's so intelligent, he's so compelling. He has such a sweep of history behind everything that he says. You know, he's not just plucking random, random.
Fact from the air like some authors.
He really knows what he's talking about, and he's got thousands of years worth of history and data to back it up. And I listened to him speaking and all I can think is I can cletely agree with you difficult, right.
It's difficult, and I agree with them as.
Well, And damn I was hoping you wouldn't.
Well, I know, we all sort of swing Austrian in terms of the economics. You know, you hear terms like capital misallocation and you know, okay with this, this is you know, the kind of Austrian view. The only the only thing to do then is to sort of try and push back against their own views and think about what the what's what's the kind of upside case or
what is the potentially benign outcome here? And I do think that's important because you know, we have a lot of these end of the world moments in financial history, and most of the time it's not actually the end of the world. And even two thousand and eight, which was kind of the closest thing that I guess, we've got to the end of the financial world in a long time since the kind of great depression. Maybe that didn't end up with the sort of like cathartic moment.
I know, lots of people still sort of feel as if there's some unfinished business there or whatever. And I suppose it's just worth thinking about, well, how could this interest rate cycle have a pretty benign ending, or at least a you know, one where things go on as usual and actually nothing in particular blows up. And I suppose, well, if you think about that, there's maybe two ways in
which it could be okay. And maybe the reality is that since two thousand and eight, consumers and businesses have actually deleveraged to a certain extent in most countries, they weren't they're not as indebted as they were at the
peak in two thousand and eight. If you then except that alo the people who do have debts and the companies they do have debts have it on fixed rates for prolonged dish periods, and then that means they've got time to think before they take the hit, the financial hit, and they also have time for inflation to play a role in driving up wages and you know, corporate incomes. So let's say that that happens, and so you get a gradual sort of like the pain keeps coming, but
not in a way that actually blows anything up. And then you've got the sovereign side. But the reality is that government balance sheets actually can take a lot of stress, particularly if they're all in it at the same time, It's like it would be one thing if the UK had roughly one hundred percent debt to GDP and everyone else was, you know, Hunky Dorrian, they were all in twenty percent, but well not we're all checking that ound
that area. And actually I think if you look at the G seven, I think the UK is actually below average, was slightly better off in terms of date to GDP. So maybe it just maybe inflation washes it over time, which I guess. I mean that does sort of still come down on it would say, because that's financial repression, but you don't get that kind of end of day's moment.
And maybe just maybe at the same time, we get the beginning of the productivity revolution we've been waiting for for so long, and that helps move things forward by pushing out GDP growth more than one might have expected, and pushing up corporate growth of the better companies at least more than one might have expected, and that might act as something of a cover for the companies operating in areas where capital have been misallocated.
Yeah, I mean, I'm really really trying here.
Maybe artificial intelligence will do more than my imagination currently kind of runs too really.
On the other hand, maybe it is true that the state of this this equilibrium or I mean, I don't know if you've read Bernard Connolly's latest book. We've got to get him on the podcast. I am working my way through it to the moment and more in there about the what he calls a temporal disequilibrium.
We've pulled, pulled future growth forward.
With very low interest rates, and you know that can only end end badly and only end with financial crisis.
And you know it's a it's a depressing read. But Connolly has a good.
Record, and here's someone who Edward reads as well, and you know they've they've looked at each other's work a lot, and they end up in the same place that another financial crisis is really not very far away, that markets will collapse, central bankers will give in and cut interest rates as a price, this well go up again, and you know we're back where we were. There's no easy way out of this, which is going to lurch from crisis to crisis to crisis.
Capital continues to be misallocated.
In that capital misallocation leads to financial crisis, which central banks react to in their usual rubbish way by creating nu acid bubbles and in the end, I don't know, maybe the world does end in the end.
I mean that does feel. The issue I have with that is a public facts monumentally the present.
Is very really depressing.
I don't think that's politically sustainable. I think you get to a point where people get sufficiently fed up that I mean either something like you know, nasty happens in politics, which is obviously what people are all panicking about just but also you know, if you think back to kind of poll vocal the nineteen seventies, eventually they kind of the cure of high inflation got much more painful down
the cure of of a stating recession. And that kind of put us stop to to that because like it kind of this is the political side sort of became too difficult to indulge the easy answer that cutting interest rates all the time. So I can see possibly that would happen at some point in the future to you know, stop this. And but equally, you know, the geopolitical picture is messier than it has been for a long time,
and that I find very uncomfortable. I have to say, you know, I mean me and you are kind of grew up in the nineties, late eighties, when other things were actually genuinely getting better on that front to a quite spectacular extent, you know, the Cold War end and completely unexpectedly, regardless of what anyone says. Now, nobody saw the Berlin Wall falling, you know, six months before it happened. But now, you know, it feels like we're really going back the way badly on that front.
And too.
You know, this might be just middle aged, but to the extent, it feels as if we squandered you know, the kind of benefits of that era.
We totally did.
So spend all the money we said that we didn't have to spend on defence, didn't.
Yeah, let's not get started on that.
But that's so I think that's that's that's actually the thing that worries mean more because I think that the financial side, oddly enough, companies still have enough freedom and individuals still enough freedom to get by despite all of the mess mistakes that are made, you know, at the higher levels. But as soon as we're starting to get any actual kind of like shooting wars were you know, dangerous kind of enemies, then that that's not a that's
a bad situation. I think that's probably what I'm more worried about. If it was the else is in decity that it's the thing that cannot ends up causing all the trouble.
Yeah, the one part of this comes back to that.
The one part of the interview Chancellor that I found very interesting is that about halfway through we're talking about when I'm saying to him, you know what's going to happen next, that we're just going to it's just going to be slower and misery for a decade or so as we try and work away out of this.
Is there going to be a big crisis?
And I know that his core case is that there is likely to be a financial crisis of some kind.
But one thing that he.
Says is that this is becoming analytically his words, more complicated.
But one thing I would say is that the crisis that we have been experiencing over the last twenty five years are becoming analytically more complex. For instance, go back to the dot com bust was pretty simple. You really had to be done not to understand how that was coming and how to analyze it. I think the credit crisis, global financial crisis was much more complicated. With the structured
credit and problems in subprime and collectialized debt applications. I think the problem that we have today is not so much complex financial structures, but the fact that the low interest rates that prevailed for so long had such wide effects.
Any points out that we go back to dot com bust, that was really simple.
Everyone could see it coming.
It had been an absolute idiot not to see that there was a massive bubble based on this allocation of capital and piles of cash being given to unbelievably stupid companies, etc. Really really stupid not to know that that was going to crash and crash big time. Of course, you couldn't quite get the timing right, and lots of people got the timing wrong. In short, all those companies were far too long before they actual crashed. But the fact that
they were going to crash it's an absolute given. But later crisis, the crisis, the Gooble financial crisis, all these.
Things much more complicated.
The cdios, the subprime, the structure credit stuff, all these really complicated financial structures made it really complicated to analyze, complicated to see what was going to happen next.
And so the core point I'm trying to make is that right now?
Anyone who tells you that they can see exactly what's going to happen, even us, John, even us, anyone they can see exactly what is going to happen, it's very probably wrong because I mean, everybody'ses this wonderful phrase. Interest rates get into all the cracks, and you know, you can't even see some of the cracks. Central interest rates
go up and then the pushout starts. So you just don't know in this incredibly complicated financial environment where the nightmare is going to be what's gonna what's going to start something? Or if maybe nothing will start And as you say, we just sort of slow burn through the misery for a decade and maybe we have a huge productivity boost and maybe company company managers are really as brilliant as they often can be. Things send out to
be kind of fine. But we literally don't know. And that's the key thing for investors understanding that no one really quite understands, and so you have to be really careful how you invest with a constant eye to the endless unknown unknown unnn unknowns.
Yeah, and I suppose the editating thing about all this is that when then comes down, well, what does this actually mean for your money? All it really means is, well, this is why you need to have a diversified portfolio. But also, you know, you need to have something that takes to your political risk in your account. So I guess the main difference is it's like when we say diversified,
you don't actually mean sixty forty Boin's equities. We mean Boin's equities and some gold, and probably you know, think of cash as being a quarter the cash I know.
I mean.
The thing is, these conversations are so interesting, aren't there particularly one with Edward's so interesting, absolutely love talking to. But in the end the solution is really quite pooring.
For an investor.
You can't come out of this going, god, this is so exciting. I'm going out to buy Singapore and small caps, although by the I think they're quite cheap too, someone's telling me the other day. But you know, you can't go out with an exciting investment strategy.
You're just like, oh my god, to be a bit diversified.
And you know, Japan because every by the way, it's also a Japan bull and I enjoyed that about them as well, because you know, just agrees on everything.
So I think you know that some of the headwinds for Japan were high valuations and then this period of deflation and deleveraging that hurt Japanese margins and return on equity. And I think that was over ten years ago. So that was our reason for being bullish ten twelve years ago, and that's been more than vindicated.
Let's say, I guess right by Chief stuff and gold, by Japan, by gold, and many of the things you and I have been saying for. He wasn't having any truck at all with bitcoin. I think he thought it was a true question. It was not a truck question.
Well ideah, let's well, let's not have the bitcoin chat again. We could do. I still feel I think it's interesting that a historian of money and it's you know, because it is. I think it is fair to take money as a social technology and the idea that.
I love the way you proved for us that you read books.
Yes, yes, occasionally read one creeps in there and yeah it's that the thing you think, Well, you know, maybe maybe I don't think. I don't think bitcoin is a scam. I think it's it's maybe niche, but it's definitely there's there's a technology there that that is for real, unless you know, the world's greatest tackers have mice to keep going.
This is what we've learned back John Today, John reads books and John's a money launderer. Thanks for listening to this week's Marin JUG's Money the After Show. This episode was hosted by me Maren zumset Web alongside John step Back.
Thank you John.
It was produced by some Aersadi additional editing by Blake Mabels. Please review us, Please tell your friends thank you.