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[0:40]How you doing there? It is time for the podcast. John has just told me that he actually dislikes people. He said, if I could In general, just all people. You've got a big head and you you've had interactions with the human race in the last 24 hours. And you don't really like us. Well, see I can only I can only handle so many at a time. Yeah, it's a sort of your the frontal the frontal cortex goes But Matt, do you know, remember, I was always growing up I would always kind of jump my bike and cycle up the mountains on my own. Yes, this is Despite the fact this this podcast is the the misanthrope's See, the worst thing about John is Christmas time, right? Because he's forced to go to parties. No, I do No, I do. I love going to parties. I love going to bars, but in small doses, in small doses. So, you know, what I what I love about John is his resolute dislike of small talk. My daughter is the same. She just straight into some big heavy duty topic. So, if you are of that bent, you have a friend in this podcast. Me, on the other hand, is a social idiot. Happy to talk to anyone. But John's having none of it. So what kind of picture you're painting of me. How are you? You good anyway? I'm good. I'm good. Yeah, yeah, great, great. There's no one around, is there? There's no one around, it's just it's just you and me. It's only the two of us. All is good. We are going to talk today about last week's podcast with Russell Napier. It's the second part of it. And let me explain what Russell was saying just before we go back to the second part. And again, what I love about Russell is that northern Presbyterian voice, which is absolutely serious. Yeah. And you have to listen to everything that he said. And and there was no fat in what he was saying. He straight. He was Presbyterian. They're very economical. Don't worry, I'm married to one. I know them. They're economical with everything. So, Russell's point was the following, that although we haven't put a name on it, there has been an international financial system not unlike the gold standard, which has been based around China in the last 30 years. The Chinese have been doing two things which is led to a third thing. So, the first thing is the Chinese tied their exchange rate to the dollar at a rate that was highly competitive. In order to remain competitive and keep that exchange rate lower than it should otherwise be, the Chinese needed to, John, buy assets of other countries. Which means they were selling their own currency, buying other assets of other currencies, driving their currency down. So they bought in the main lots of things, but mainly they also bought American treasuries. This meant that the rate of interest on American treasuries, the 30-year bond, was lower than it otherwise should have been, given the conditions in America, which were a booming economy. What this created was low real interest rates. And low real interest rates globally, but anchored in the United States, but driven by China. Yeah. What this does then is it encourages people to buy speculative assets.
[4:35]So interest rates are low, the future always looks bright, because the cost of money, which is the interest rate, is very, very discounted. Okay. So, once we understand that, so so ultimately what you're saying then is because interest rates are low, because China kept them low, that we borrowed as much as we could and now we're leveraged up the Ying Yang. We're A, we borrowed as much as we could. B, the other reason that interest rates stayed low and you're absolutely right, we'll get to the leverage up the Ying Yang, which is a technical term. I understand. Yes. Is that the other side of this was the fact that the Chinese invested heavily in their own country, in capacity. So they were able to produce lots and lots of consumer goods very cheaply. So those consumer goods flooded into the West and that kept the Western inflation down. So central bankers in the West decided that this was the great central banking achievement of their monetary policy and you've heard them talk about this at places like Jackson Hole and all that sort of stuff. However, it was the Chinese in effect playing a trick on us, right? So we then have this as you say, massive boom in speculation and asset prices, all that sort of stuff. Yeah. But the counterpart that as you're right, is debt. So we've been living in the past 20, 30 years in a kind of a false economy. This is what Russell is saying, right? So, last week's podcast got us up to here, which is the point of massive asset price appreciation, a great sense that everything's hunky dory for the rich, not for the poor. Yeah. And as we always say, the reason we have populism, our a reason we have populism is the left behinds are actually left behinds. It's not a perception, they're actually left behind because those people who depend on asset prices, rents and dividends for their income, have got very rich, and those people who depend on wages for their income have not only got relatively poor, but their wages have always been impacted by Chinese wages, which is dragging industrial wages down globally. Right. So this is where Russell's goes, and that's where we left it. That if you're in your twenties and you want to understand why you cannot, for example, get on the property ladder like your parents did, this is an explanation of it, and it's quite fascinating, global, and I think quite persuasive explanation for what is going on. Now, the counterpart, as you've pointed out, John, of high asset prices is high debt, because people borrowed in order to buy those assets, and this is where we start this podcast, which is what happens now to a heavily indebted world, when the Chinese decide that they are reversing their policy. So the policy that encouraged deflation around the world for the last 20 years has led to this particular juncture. Now the Chinese are wanting to reflect their economy, and what Russell's going to tell us is what that means for the global economy. Fascinating. He mentions a term which I think we will hear again and again and again in the next half decade called National Capitalism. So let's go back to I think it was the Black Island in Scotland. Yes, it was. Talk to Russell Napier, part two. So now let me give you some numbers. The total value of US assets owned by foreigners is 57.2 trillion. People listening will say, is that still a big sum of money? I don't know. I'm completely lost. Uh yeah, yes, it is. It's 202% of GDP. Now, gross numbers are one thing, but let's talk about net, because we all know Americans have lots of ownership of foreign assets. But when you take those off, you're still left with a deficit for Mr. Trump of 22 trillion U.S. dollars. Now, is that a big number? Yes, it is. It's 77% of GDP. So if you go around the world hacking off people who are funding you, as you say, in the kindness of strangers, then you're not actually in the strongest position as you think you are. Now, to be clear, the Chinese actually have a very small proportion of that. Most of that wealth is not owned by the Chinese. It's owned by the foreign private sector, pension funds, life funds, Canadians, Irish, British, Germans, French, Australians. Uh, but you have to be pretty careful if you're reliant upon those strangers not to dissuade them from investing in the and that you know, as you say in Ireland, it depends where you start. Uh, and he's he's starting with a lot of money in there from the friends and the and the and the strangers. So, uh, yeah, it's a very good point. I think one not not often made. Uh, people look at America as it's exceptionally strong and it's its gearing levels are high, but no worse than most countries. But it does rely a lot on foreign investment. So you mentioned the very top. The mutiny of what was it again, the place? Inver Gordon. Inver Gordon, right? So, if for this one moment and then it's like a lot of these things, then the entire system begins to unravel and I always like the fact that we can start with a naval mutiny. That's always a good one. It's always a good one, right? But that system, the gold standard, didn't last that long. In fact, 70 odd years, not a huge amount of time. Sometimes economic historians and monetary historians seem to give off the vibes that gold standard was around for centuries. It wasn't, right? But all systems come to an end, they are reset, we start again. How does this system come to an end or does it have to? Or can we just keep going on like this? Maybe this time it has to be the Shanghai mutiny. Let's let's explain that. The problem for China is it worked for a long time, but it stopped working for them quite some time ago, because in in aggregate it stopped working in 2014. They stopped buying these bonds in 2014, and that's because there was capital leaving China, lots of people trying to get their money out of China. So now you are on the other side and you're trying to stop your currency depreciating. And when you do that, then you're not actually creating a lot more money in China. So if we look at the Central Bank balance sheet of China, it has barely grown really since 2014. Everywhere else in the world, we all know these Central Banks have been expanding their balance sheets, buying bonds, but in China, it's been very moderate, and that's a result of this policy. And the consequences of that are it's got very high debt, it's got falling residential property prices, it's got very low inflation. And and these are the conditions which spark the Inver Gordon Mutiny. Now, they had to be quite a bit worse. The Great Depression was worse than anything that China faced. But you're moving that territory. You're moving towards deflation, unemployment, excess capacity, all these things that most people who don't speak the language of economics call a recession. Are a shitty time, as opposed to a better time yesterday. Okay. And then the people say, we don't want to take this anymore. Now, this is interesting because he lives in a dictatorship, not in a democracy. But the Inver Gordon Mutiny in 1932 is only about four years after the United Kingdom becomes a democracy, because it really can't be called a democracy until women without property get the vote and that's 1929. So there is a speculation that Xi Jingping will let the people suffer. But actually, David, three months ago, he changed his mind and they started to change their policies. So there are indications that even the man who doesn't have to get elected in China, is responding the way to the British responded to the Inver Gordon Mutiny. Right, so he's responding now. What's he doing and what does that mean for the rest of us? And we're going to get around to house prices in a second. Yeah, so there if you're targeting your exchange rate, then that sort of ties your hands as to what you can do elsewhere. The problem is, he started doing other things elsewhere, which are incompatible in my opinion, with managing the exchange rate. So, in particular, he has started to buy, the Central Bank has started to buy Chinese government bonds. And if you look at the balance sheet of the Central Bank, you'll see they haven't added to that holding since 2007 until September. Once again in October, and they're doing that under the direct orders of Xi Jinping. That's no secret. That's public. It's been explained by the PBOC. So suddenly now you've got a dual target. I know economists love dual targets. David, so maybe you could talk about the the difficulty of trying to run a dual target exchange rate targeting, while at the same time buying as many domestic government bonds as you as you like. It's it's a difficult situation to pull off. Yeah, it was it's a crack in the dam. You're you're kind of you're intervening and you're sterilizing and you're intervening and you're sterilizing all the time. Okay. So there's a crossroads for the Chinese. Either they allow the market do its thing, in which case the currency may depreciate, and this will lead to problems with them because they'll obviously if they're if their currency is depreciating, you can get inflation, but maybe they want inflation, but on the other hand, they might end up selling dollar assets. If they decide to sell dollar assets, well then Mr. Trump and the rest of the world is going to have to sit up and listen. Well, there's a there's several problems with what happens when the currency falls. I think our tariffs on them probably will go up. We're we're already saying they're far too competitive at the current exchange rate. So we may want to put more tariffs on them. But remember the whole reason they're doing this is to generate more domestic inflation. And the inflation that they want is higher cash flows for the for the household sector and the corporate sector. That's the form of inflation that helps, because it's a form of inflation that helps you pay your debts much more so than import price inflation. So that's the system they're moving to. So we then in the rest of the world find ourselves in a situation with higher Chinese inflation, higher tariffs on China. And then the question is where do our interest rates set to? That's the end of the old monetary system. What does the new one look like? Where do interest rates set relative to inflation? What does it mean for house prices? You can see I've got lots of questions here, because I know you're going to have all the answers. No. So we're look we're moving into a much higher rate world where the rate of interest resets upwards across the board. Well, if that happens, then we're all going bankrupt. So it is more likely that they do something to stop it happening, because the levels of debt to GDP, once again, in both the government and the private sector are so high, uh, we may we may be call this a quasi cortag moment. Maybe that's a good phrase for it, but that changes things. Policy has to change. So it's my opinion that when that shock comes to the system, we go into a thing called financial repression, national capitalism, because we can't allow that gap to close. That artificial gap, the Chinese created between the growth rate and interest rates. If we let it close, then we're looking at a great depression. So the question is, what has to be done to stop it close it? So national capitalism is a term I like, because listeners will know, the kind of international capitalism is the world we lived in the last 30 years, money flowing in and out. Didn't really matter a huge amount, how much you saved in your economy, because you could always borrow stuff from other people. That's we're saying a low rate of interest. What you're saying is national capitalism as expressed by the Mega movement as well is like our money is our own. We're going to use it however we like and you can't have it. Yep. So for the people of Ireland, the United Kingdom, or Europe, we we the government simply goes to the savings system, life funds and pension funds and says, here are the things that you will be investing in. Now we've already got there in the UK. I mean, for those who watched or listen to the Mansion House speech last week, uh it came with the interim pension review and it said, here are the things you're going to invest in. And if you don't invest in them, we're going to make you invest in them. And David, the crucial thing about this is what are they going to sell? You know, if you're going to force them to invest in thing A, they're going to have to sell thing B. And it's pretty clear from the British government that what they want the thing B to be is overseas assets. They don't want, you know, the pension funds liquidating government bonds to put it into a private equity fund. They want them selling the overseas assets, bringing it back to the United Kingdom, investing in the United Kingdom. And I think that is very much a global phenomenon. And if we sat here and netted all that out, the biggest asset that all be selling is the United States of America, because that's the one they all own. And and this I mean, I this is what Macron was talking about the other day, wasn't it? Oh, Macron's got a fantastic speech. You should read it. It's mostly I mean, I think Macron deep down actually is a Presbyterian based upon the title of his speech, which he called Europe. It can die. He said Europe it can die. Europe it can die. It's February 26th. La So Urban. You should, you should read it. You know, I get a I get a reputation for being pretty bearish, but I don't go go around saying, Europe it can't die. But anyway, And what he's saying about balances and and French investment in in America and all that sort of thing? Because I want to come back to the fragility of the mega message, interests me as well as this whole reset. Well, what he said is, and the irony of this, I'll get get to in a minute. He said, every year the people of Europe invest 300 billion U.S. dollars in the United States of America. This is absurd. Right, he's right. Particularly if all they're going to do is slap us around and tell us we're cheesy and surrender monkeys, and we are lazy and yada, yada, yada, we're nothing more than Europe's nothing more than a museum piece, et cetera. So what he's saying is we could take our money back. If if the world goes down the let's say if the world goes down the 1930s. We started with 1932. If we go down this tariff and counter tariff and trade, uh, barrier route, the person who has who is the biggest creditor, flexes their muscles. Yeah, so the interesting thing is the creditor comes from all over the world to Donald Trump. He doesn't have one. It's basically the whole of the rest of the developed world and even the emerging world. But that that's just finish on Macron for a second. What he's saying is that we should force the savings institutions, we the government. Okay. To force the savings institutions to do these things. And he lists the things they should be doing. Draghi publishes his European competitiveness report. He publishes a list of things that should be done, but we're back in the same position as the United Kingdom. How are you going to fund it? And how are you going to fund it is selling your overseas assets to fund it. And as I said, if you took all the institutions in the world and put their number one overseas asset, it's dollars. It's either treasuries or it's the S&P 500 equity market. And this is the world we're getting to. I thought I'd invented the word national capitalism by the way, but there's somebody who beat me to it. I've been told by a client that actually it was Vladimir Lenin who invented the word national capitalism. We've got to love it. We've got to love it. And I mean the they also had the great expression for money, the great illusion. So national capitalism, take our Lennist reference, we're possibly moving towards a world where money does not flow internationally, because governments mandate and instruct where that money goes. Yeah, that's the world we're in. I mean, let's let's say we I'm right about this. And I have been wrong before, but let's say I'm right about this. Would Donald Trump allow all this money to flow out of America given the consequences that it would have, particularly if he says, look, this money isn't flowing out of its own free will. The investment managers of Europe love our magnificent seven equities. It's that chap Macron, he's forcing them. And we can't allow governments, particularly French governments to dictate the interest rates of America. And this takes us to the, what I think, is been obvious all along. You can't have a trade war, and we all know we got a trade war, without a capital war, and it sends into this higher plane, which we all want to ignore. And that's the, uh, the real impact. We've got a long way from Dublin house prices here or residential house prices generally. But the whole point, and where it's linked, is this is the unraveling of the system. This is a new system. It's a very different system. And, uh, and I did throw the ball into your court to tell us what we do about it. But anyway, we can we can speculate on what we do in the new system, but it's very clearly a new system. And it's a new system and what you maintain is because the old system didn't really have a name. It wasn't a Bretton Woods. There wasn't a sort of a descriptive story that we could put to it. We're not really aware that we're moving from one system to another. So it's really it it's it's the one that's really taking us by surprise. Absolutely. I mean, I mean you would think that uh, you know, when there was a gold standard, I would say the average docker, or even sailor in Inver Gordon knew what the global monetary system was. And I'd probably worked out what the consequences were, certainly by 1932. But today, I don't think most people do and even people, I mean, my job is advising institutional investors. I'd say many of them don't want to think about it or don't it's it's the story of the fish. You know the story of the fish, don't you? David Foster Wallace's story of the fish. No, no, no, go for it. The old fish is swimming along and two young fish come swimming towards him. And he says to the two young fish, beautiful day, boys, how's the water? And the two young fish swim past and one turns around and he goes, What the hell is water? And when you live in a system and it's a system that's been around for 30 odd years, you don't even know you're in it. And you certainly don't know that the tide's going out. And that's where we are. Okay. Right back to Dublin house prices. If interest rates readjust upwards to where they would have been, had it not been for our Chinese friends intervening, you get a sudden and dramatic increase in the cost of borrowing. And that dramatically impacts the ability of your average punter to pay these enormous multiples of their income. And either their income goes up in inflation or the asset price goes down in deflation. What's our bet? Well, Ireland's peculiar because you don't have your own Central Bank. Now, in any country with his own Central Bank, you can kind of bet that that Central Bank would come in and buy these bonds. Yeah. And I think we have to bet actually the ECB would do the same thing. But ultimately, I think the, uh, the government of Ireland will force the savings system of Ireland to buy the government bonds, as that will happen across the developed world. This is it's usually done only during warfare. It's called war bond drives. In a national emergency, that's what you do. And I think that's what would happen. So even even if the central banker wasn't around the corner to buy these bonds and depress interest rates, there is a huge pool of savings out there which can be easily manipulated because it's regulated. And that's what ultimately does it. So so that is not that bad for the debtor, but it's very bad for the saver. So that that what I mean, this financial repression thing we briefly discussed, I like to call it stealing, stealing money from old people slowly. So this is So this is how the generation war ends. Yep. This is a redistribution of wealth from the old to the young. Hope your son's listening to this. He'll be smiling from ear to ear. Well, great things. Most of our listeners are under 30. He spent it already. Yeah, that's my son. Listen, Russell, this was been a wonderful conversation, really eye-opening, lots and lots of questions. We're going to come back to them. Great stuff. Thanks, David. Cheers, John. Thanks.
