Oct. 25, 2022

Can't Truss It

There are bubbles in politics just like there are in markets, and we're going to talk today about how the markets look at bubbles bursting in the political sphere, what they make of them, and whether this spells more trouble to come.

There are bubbles in politics just like there are in markets, and we're going to talk today about how the markets look at bubbles bursting in the political sphere, what they make of them, and whether this spells more trouble to come.


Richard: Welcome to Bubble Trouble, conversations between the independent analyst Richard Kramer, that's me, and the economist and author Will Page, where we lay out some inconvenient truths about how financial markets really work.

We're recording this on a tumultuous day in the UK politics scene, where we've just seen the Prime Minister resign, so there are bubbles in politics, just like there are in markets, and we're talking over today how the markets look at bubbles bursting in the political sphere, what they make of them, and whether this spells more trouble to come. More in a moment.

We're back with Will Page sitting up in Sterling, Scotland, the former capital of Scotland, to give us his [inaudible 00:00:43] Scottish perspective on just what a mess the English have made of the mother of all parliaments. [laughter] Will, what do you make of today's news?

Will: Thank you for passing the blame so I didn't have to. It's a big one, Richard. It- it's phenomenal. Uh, there's so much stuff we've got to get into in the space of 25 minutes, and I wonder whether the next government will last 25 minutes, or will it... Will we have another gov- government collapse, and by the the time this podcast goes out...

As our listeners know, and as the entire Blue Ring podcast industry knows, we still can't put music into podcasts because of licensing issues. For that, we apologize, but I would ask before we get into this week's podcast, for our listeners to go to YouTube, load up Cassette Boy, and look at the remix that he has done on Liz Truss, if only for one reason.

And to be clear, it's using the Wu-Tang Clan, the Cash Rules Everything Around Me. It's been put together in a matter of weeks. He managed to get it up there before she was [inaudible 00:01:34] power, but there's this one lyric there which I think summarizes this week's podcast, which is [laughs] "The only thing trickling down is the piss I'm taking."

But I found the first thing I wanted to ask you, Richard, is we have political terms which are five years long. Now, you have presidents, which run the show for four years, and you have Congress people who have to be re-elected every two years. We're only halfway through this story. What do you see as an American living in Britain, looking at what we're seeing today, what we've seen in the past 45 days, knowing there's still another two and a half years to go.

Richard: Well, I think, Will, if you step back and look at one of the major flaws of both the US and the UK system is that this notion of representative democracy has been m- massively skewed. Now, in the case of the UK is you have the first past the post voting system, which means-

Will: Mm-hmm.

Richard: In a particular area, constituency, if one guy gets... Or gal gets 34% of the vote, and the other two each get 33%, the person with 34% of the vote gets in so there is no direct selection of the leader of the country.

Now in the US, obviously, there's a direct selection of the leader of the country, but it's very indirect because that gets broken down into states, and the electoral college, which is a whole Byzantine system I don't want to go into now.

And then you have the two houses of Congress, one of which is based on two Senators per state, such that something like a third of the Senate represents a tiny percentage of the population. So there are two senators for California with the population of 40 million people, and there's two Senators for South Dakota, with a population of a few hundred thousand people.


Will: And a lot more sheep.

Richard: Well, I don't know whether they have sheep, or cattle, whatever they have, but they have a direct break of this link, of this foundational notion of representative democracy-

Will: Mm-hmm.

Richard: And that's when you get into all the problems because you want to get the sense that the voice of the people has been heard in a democratic society, but there are so many layers in between the voices of the people and what their leaders seem to be hearing.

And in the case of Liz Truss, uh, her policy was to listen to the voices of people directly around her who said, "We'd like a tax cut and bigger banker bonuses please." [laughter] I have a question for you. Now, when this very short lived, 45 day UK administration came up with it's new plan for taxes and growth, the pound absolutely tanked, and the Bank of England had to intervene to support the pension funds.

So could you, as an economist, break down for us what happened here? Most people were stumped because they woke up one morning and their mortgages were soaring up, and they were probably unaware that the tax that they pay was going to be used to bail out the balance sheets of the pension funds that were supposed to take care of their retirement.

I mean, can you give us a non-technical explanation of what the heck just happened to the UK economy and currency in the last 45 days?

Will: Well, I think what happened with the pension funds is complicated, and it's also dislocated from political events. I've done my homework on this one.

Richard: Mm.

Will: I can't give you the detailed description I want to give you. I do have an expert willing to come on the show and do just that, but for our listeners, the key points for me are the models used for managing these pension funds have a kind of steady state where you have so many people coming into the pension, so many people retiring, so much cash coming in, so much cash going out, and that's a steady state that holds the equilibrium.

And what happened here was a kind of dislocation of these models, which has seen too many people retiring, too much money was needed to shore up, and the bank had to intervene to back up those pensions.

Now, political issues aside, that sounds to me more like an issue to do with the models that are backing up these pension funds than the politics-

Richard: Mm.

Will: Which by no means didn't help at all. So, it's interesting, [inaudible 00:05:27] the bank actually did something. I think this is worth mentioning. The Bank of England did something. They haven't done much for 12 years, they did something here.

The European Central Bank is often [inaudible 00:05:36] to do rescue support for... It's usually financial dislocation, the Bank of Japan recently as well. On this issue, the banking world's done something, but I'm interested... And we can't really get it right on this show, but understanding how much of that was to do with politics, and how much of it was do with a dislocation of the economic models that support these pension funds.

Richard: So, Will, I want to challenge the notion that it was just the models because those models were based... Or were affected greatly by political decisions, so let's roll back a few weeks ago, when it was a Jewish holiday on a Monday, and I wasn't looking at my phone at all, and, and I woke up on Tuesday morning and found that, hey, the pound had crashed by 7 or 8%.

Now, from a market's perspective, if you imagine there was a UK company trying to acquire a company in the US, they woke up one day and realized that the value of the currency they had to make that acquisition had been devalued by 7 or 8% overnight, and that was really down to politics.

So was the error in the models of all of these pension funds to rely on the politicians making steady, sta- stable decisions backed by some sort of rational calculus, or was the error their own in just not understanding how volatile and dynamic the markets could be, and assuming that that interest rate rise they hadn't baked into their calculations would eventually come through?

Will: These models involve swaps, and I'll be frank. I'm out of my depth when we're gonna talk about swaps, but I guess the essence of it was the models starting predicting far too much retirement, of far too little intake of new pension contributions, and then you need to capital injection. They need to shore up these huge pension funds.

But I think there is... I think there is a need to assess [inaudible 00:07:25] about these pension models to do with the confusion that was emanating from our current government... Sorry, past tense. Our then current government that was in charge.

And I think those confusions stem from what we could see on the surface, but also what we were hearing backstage. But backstage, there was clear confusion as to whether the government was speaking to the bank, whether the right hand was talking to the left hand, and I think that can only accentuate a financial crisis like the one that we've just seen.

Richard: Again, and we needn't rake over the coals of an administration that lasted... Really, a hot minute, and- [laughter]

Will: [inaudible 00:08:01]

Richard: It- it's remnant of some of the appointees of the Trump administration that would fall afoul of Trump's ire, or wouldn't-

Will: Oh, my God. That's a good [inaudible 00:08:07]

Richard: Uh, do what he said, and then they would be out, and I don't know how many Secretaries of State, or various other Secretaries that didn't kind of do the bidding, or, or Press Secretaries that, that Trump had in his tenure.

But this notion that there should be some continuity, and predictability is essential in the markets. It's essential to the... Understanding the value... And we had a previous podcast about this. About the value of money.

Will: Mm-hmm.

Richard: What stands behind money? It's the expected future tax income that a country will be able to collect to pay off the money that it's borrowing today to fund it- its ongoing costs. And now, certainly, we all have a situation in the west that borrowing costs are rising precipitously, and an increasing portion of the budget is going to be spent paying for debt, paying for people to lend money to governments to allow them to, to continue carrying on their programs.

And I have to say, it's very disturbing because it seems to be lining up what was clearly hugely damaging on the global financial crisis, which is the argument for another bout of austerity, for a bout of belt tightening, and let us... Let us socialize the losses, and take it out on the people who can least afford the cuts in public spending, and so forth that everybody is going to now call for.

And, and you're going to leave a lot of people who are not particularly well off less well off while the well off will largely remain so. So, I don't know how you see that, Will, especially in the context of a Scot who, I think, would have a natural aversion to accept any view of the world presented by an Englishman.

Will: Let me just pick apart a couple of economic indicators for our audience's benefit. When you talk about tax revenues coming in, and the one metric you need to track to understand what's happening on the current account, that is the day to day running of government finances, is PSNB, Public Sector Net Borrowing.

That's the one you have to watch, so that starts creeping up, then you guys in the markets, Richard, are gonna get even more nervous again. So that's definitely the metric to watch for. Why is that metric volatile... And I could throw acronyms and stats at you all for the next 20 minutes, but the other one is to think about what happens when you have unemployment.

When you have somebody who's employed, when Richard is employed, he is contributing to the state, so that's one person contributing to the state. When he becomes unemployed, he is withdrawing money from the state in terms of benefits, and that's why these things are so volatile.

It's just one person who swings from contributing surplus to being a cause of a deficit, so-

Richard: Mm.

Will: If we are gonna go in austerity, if we are gonna have increasing unemployment, we're gonna have less money coming in, obviously, more money going out, obviously, but then all eyes in the markets go to public sector net borrowing. That's the one where it comes out in a wash.

You can't pay that figure, that's a pretty robust figure to focus on, so if you had one dashboard to look at, public sector net borrowing is the one.

Richard: But it is fascinating that we have such a problem... Fascinating and terrifying, really, with public sector net borrowing at a time when unemployment... And we can debate the statistics of this, is so remarkably low.

Will: I know.

Richard: So we have to close to full employment, we have relatively few people that are drawing from the system, and many more people that are, in some way... Maybe they're getting paid too little and not contributing much, but are contributing to the system.

And yet, we have these r- rising borrowing costs, which as we discussed on previous podcasts, and some of our listeners have written in to tell us how much they appreciated that. We are really seeing the, the negative fallout, the inequality that came from a decade or more of zero interest rate policies, of free money.

And now all of a sudden, we're waking up to the fact that money can't stay free forever, especially when headline inflation last month was, again, 10% in the UK, and let's not get into the composition of these inflation statistics.

But we can all see prices going up everywhere around us, and, and yet, we seem to be needing to borrow more and more, even though many people are contributing, as opposed to taking from the system. What's gonna break this law jam, Will?

Will: Well, first, let me just take on unemployment, and this is where you have pull me back up for air, but I want to get into the statistics on this one, just like we did about inflation a few shows ago.

But just remember, what you can measure is claimant count unemployment, that is, who has claimed unemployment benefit? Now, is that a true measure of who is unemployed? If I was unemployed, just to be frank to our listeners, I don't think somebody of my background is gonna actually claim unemployment benefit. I'll be unemployed, but then I'll go find a job, but I'm not gonna register as an unemployed person.

Richard: Mm.

Will: I don't think you would do either, I think a lot of people who could be losing their jobs don't actually claim unemployment. So, we have a known known, which is how many people said to the government, "I need unemployment benefit." Last week, last month, last quarter?

Unknown, unknown is labor force survey, [inaudible 00:12:52] again, Richard. And I don't want to be like Groundhog Day here, it's when you have to look at the statistics, how are they compiled, what judgements are involved, and is that a fair reflection of society?

The labor force survey is just 60,000 people, and it's got a response rate of around about 60%. United Kingdom has 68 million people, and I'm not sure in a dynamic labor market, a survey of 60,000, with a response of 60%, is enough to capture what's going on.

And I remember checking, I asked HR Department and said, "Google, Facebook, and Spotify, do you know what labor force survey is?" "Nope." "Okay, well that's interesting 'cause you're employers and you're creating jobs."

I often-

Richard: Mm.

Will: Argue it's easier to measure job destruct- destruction than it is to measure job creation in this new, tech-driven service sector economy, so that's just... I just want to throw one... That one at you, Richard, which is we only know what we know-

Richard: Mm.

Will: And all we actually know is how many people claimed unemployment benefit. That is not a good guide for how many people are out of work.

Richard: Indeed. And clearly as with any of the statistics that come out of the state, it's under a lot of pressure, and we had a brilliant example I'll bring up in a second about this. There are going to be a lot of spins on those numbers depending on what... How politicians want to present those... That data.

And just before we go to the break, I want to give you one of my favorite examples of this. [laughter] Clearly you have... You have the coronation... The re-coronation for a th-... Unprecedented third five year term of one of the most important political leaders in the world, Xi Jinping in China, and because the Chinese economy is clearly not doing very well, they postponed indefinitely the release of the third quarter GDP number, which has come out for decades without fail on the 15 of the month after the quarter closes.

So in this case, it was due to come out on October 15, which was right in the midst of the Party Congress. They postponed it indefinitely and did not give a date for when they would be releasing third quarter GDP. [laughter]

So, it may be that this number proves to be too embarrassing, and the Chinese say, "You know what? This idea of releasing GDP numbers, or economic statistics at all? Yeah, forget about it. We're just not gonna do it anymore." [laughter]

So, that is just a great example of where the statistics are the ones that companies, as we've mentioned many times in all of our Bubble Trouble sessions on the way managements present themselves, or governments will choose to present it in the best light, and choose-

Will: Yeah.

Richard: To selectively pick from the facts, and this is something that our listeners should really look at very carefully because when you get those numbers, you have to ask, "Well, what's the message behind them? Who wants to convey that message, and what might be left unsaid?"

With that, why don't we go to the break and I'll quiz you a little bit more about UK politics in the second half. We'll be back in a moment.

Will: Welcome back to Bubble Trouble, conversations between myself, Will Page, and the independent analyst Richard Kramer. We've called this podcast Can't Truss It, homage to a great Public Enemy song, and it's timely given that we thought we were gonna be discussing the current Prime Minister, Liz Truss, [inaudible 00:16:00] but since pressing the record button, she's resigned, and [laughs] not just she resigned, but we're gonna have a whole Cabinet reshuffle that we've got to figure out.

Richard, I want to tell a story about chancellors, but before I do, can you remind our audience how many chancellors we've been through, 'cause I've got five fingers on this hand and I'm not sure that's gonna be enough. Can you just give me the numbers, in terms of chancellor Executive shuffling that's been going on?

Richard: Uh, Will, I kind of lost count. I know we had Rishi Sunak this year. I know we briefly, for a hot moment, had Nadhim Zahari-

Will: [laughs] That's right.

Richard: Then we had... Then we had Kwasi Kwarteng, and he didn't last that long, even shorter than Liz Truss, and now we have Jeremy Hunt, so I guess that's four this year alone. And I guess if any company that I would look at in the market that changed their CFO four times-

Will: [inaudible 00:16:47]

Richard: You would be pretty much be referring to the loony bin because you would assume that there was some SCC correspondence letter, or some other sort of counting malfeasance that they needed to clean up, or some terrible corruption that you've un- unearthed within the business, or you had a caretaker CFO, or God forbid, that someone had a terrible health problem and had to resign, one of these things... Terrible things had happened.

But I have... I can tell you honestly, I have never seen, in 30 years of being an analyst, a company that had four CFOs in one year and remained a listed company.

Will: [laughs] It would be a really good one for [inaudible 00:17:18] When I was a government economist, I learned this great story from the treasury, which is what chancellors do when they leave office, which is you leave three envelopes in the drawer of a chancellor's office for the new chancellor to come in.

And the idea is that when things get bad in the economy, inflation goes up, unemployment goes up, [inaudible 00:17:38] down, you open envelope number one. You open it up and it tells you, "Blame your predecessor." "Okay, so all these problems are not of my making, they were the previous chancellor's making so blame him, not me." And you buy yourself some political capital.

Let's say inflation starts to get runaway, economic growth is really stagnating, unemployment is going to double dig- digit growth in unemployment levels, so you're told to env-... [laughs] Open up envelope number two, and envelope number two says "Blame the civil servants." "Come on, I'm trying to do my best, but I've got these dozy civil servants which is making a mess of everything, and that's why the economy isn't working."

So let's say now we're really seeing the Great Depression, there's queues of unemployment outside, the world's going to pot. You can see no escape, so you open up envelope number three, and you know what that says?

Richard: Tell me.

Will: "Wish the next chancellor good luck." [laughs]

Richard: Yeah, indeed. Uh-

Will: And those three envelopes go back into the drawer four times in the past 45 days.

Richard: Yeah. And I'll tell you, I want to draw the analogy from the markets, which I know so well, and I think, again, for the listeners, when they're watching what companies do and say, there's equally a tendency whenever a new management team takes the reigns of a company, let's say a new CEO or CFO, their initial pitch will be, "Well, mistakes were made. Our reach exceeded our grasp. We might have gotten over our skiis."

They'll use some sort of turn of phrase that says, "We need to retrench [laughter] and get back to basics." Which is a way of saying, "We need to throw over the side of the boat everything that our predecessors were doing, and sweep things away."

Now, in the parlance of the markets... And this is gonna get onto a topic I know you want to talk about. In the parlance of the markets, that often includes write downs. So, you buy a company for cash, uh... For $100 cash, and it has assets of 20, and you... The remainder is represented by 80 of goodwill, and while you paid actual cash for the company, the $100, a couple years down the road, the assets of 20, maybe they're only worth 15.

Fine, so they've depreciated, but that 80 of goodwill is still sitting there, but all of a sudden, no customers are buying the product anymore, and so that goodwill becomes worthless, or becomes worth half as much, and you write it off, and say, "Well, it's a non-cash charge."

Well, it was cash in the first place, and so if I think about the way in which companies treat goodwill, and write things off, and try to rewrite history of what they did, how do you think the governments are going to deal with the huge stock of debt that they've built up, those IOUs of money that they owe based on the currency that they trade in, which is rapidly devaluing.

How are governments gonna use their currencies to wriggle out of all those obligations to pay back the debt holders that they've got?

Will: Well, I think the short answer is inflate it away, which we've known over economic history over the centuries is what governments tend to do. Inflation's a great way to brush that debt under the carpet.

And if you look again at the spread of inflation against interest rates, the spread is wider than it's ever been. Technically, financing debt has never been cheaper, so I do wonder whether the backstory here... And I would like to allude to a brilliant analyst, someone I put on par with yourself, Richard, Russel Napier-

Richard: Mm-hmm.

Will: Who's been talking about this extensively, saying, "Perhaps... And I don't want to sound like a conspiracy theorist, but, but perhaps that's what governments are doing again." We're all drenched in debt, so let's firstly take back central bank independence. We all, we, we can't manage to stock a debt if those guys are independents, let's get them back under control.

Secondly, let's get a nice spread between the rate of inflation and the rate of interest, which we've achieved. And then thirdly, over time, that debt comes under control, punishing for the electorate, but hopefully they don't notice the trick that's being played, and that is a trick that's being played.

Richard: Yeah.

Will: I'm calling it out right now.

Richard: But I'm speaking to you today from being over here in New York City, and here, you have a slightly different situation because you have an incredibly strong dollar, and one of your central tenets of that playbook is that well, you let your currencies slide in value so when you pay back somebody else in pounds, those pounds are worth 20% less than the pounds that you had borrowed when you did, that debt issuance a year, or two, or five years ago, and you pay them back at a devalued currency.

What happens to a country like the US, which has the largest stock of debt in the world, has absorbed enormous amounts of borrowing capacity because its currency is so strong, so if you lend the US government money, they're likely to pay you back in the super strong dollar, so you're getting an extra benefit.

But what happens to that? How do they get out of that huge mountain of debt that they built up here, which dwarfs what Europe and the UK borrow?

Will: Well, there's two things here. One, I want to say the brilliant journalist Gillian Tett from The Financial Times, who asked what happens when governments lose their AAA rating? She wrote this article in 2010, when the banks were going to pot, and it always just struck me as, you know, we assume the state needs one thing and the market needs another, and one of the distinctions... There's many, but one is that companies can go bust but states can't.

Richard: Mm-hmm.

Will: Well, what happens if you reset that state rating from AAA to BBB, or even a C? Like, what happens if you start to factor in the idea of governments going bankrupt? That's interesting. That's a rabbit hole-

Richard: Hm.

Will: We can go down. The second thing, Richard, goes back to something I've touched on in the past, which is twin deficits, which is just a way that-

Richard: Mm.

Will: For a period, America ran a [inaudible 00:23:00] deficit and a current account deficit, and the real cause of that twin deficit was China putting all of their money into US dollar deposits-

Richard: Mm-hmm.

Will: So America could live beyond it's means, and by living beyond it's means, they could buy more and more Chinese goods and depreciate Chinese currency.

Richard: Mm.

Will: So, it's like a tr-... A double headlock that the Chinese had the American economy in. A, I'm gonna foster this culture of living beyond your means, so B, you can buy lots more of my goods, which is almost like saying, C, I'm gonna lend you money once and you're gonna pay it back twice.

That is something which I've never had anyone explain to me how you get out of that, that viscous circle.

Richard: I think as we speak, the Chinese are decoupling somewhat from owning US debt, but they, like many other companies, have their own problems, and I think it's interesting, this thought experiment about what happens if a country goes bankrupt, what happens if there is no lender of last resort? What happens if even the IMF, or the World Bank says, "No mas. [laughter] There's too much corruption in this country. We know if we lend the money, we're never gonna get paid back. There is no useful goods coming out of this country." And just cuts them off.

And I guess that's both a financial question and a moral question for... That, that will probably become increasingly pressing in the world we live in.

Will: When we brought Christopher Leonard onto this show, I thought the most interesting part of the conversation was regarding central banking performance in preventing boom and bust.

Richard: Yeah.

Will: That's what was interesting, which is we were given this theory of central bank independence, it was like a box ticking exercise, "Make the bank independent, job done. Pull it out of the oven in 30 minutes and you're ready to serve."

Did central bank independence lead to a reduction in boom bust economic cycles? I think the report card comes up with a fail.

Richard: Yeah.

Will: So then you have to go back to the drawing board again, and it's like this... You use this word a lot, and you're far more eloquent than me at this, which is doctrine of central bank independence, monetary policy, all these things seem to work like textbooks, but they're not working, Richard. They're not. We're back again staring at an economic mess.

Richard: Yes, and indeed, the authors of the textbooks will concede that they are only right in theory, [laughter] but in practice, it gets a lot messier, and I think indeed, it was 1997, I think, when Alan Greenspan gave the irrational exuberance speech and the dot-com bubble burst only four years later.

Will: Yeah.

Richard: So, it's not always going to follow one lockstep after the other when the central bank decides to take a sharp left hand, or a mild right hand turn that, that the markets will follow suit and take it on board straightaway.

Will: Now, let me ask you, Richard, I'm curious to know, when we see the spread of inflation against interest rates widen the way it has... That is, yes interest rates are going up, but inflation's gone up way more.

So, we're still in this weird position where inflation's above the rate of interest. That was never in the textbooks, but the gap has widened. What does that mean for a financial market's perspective? How the agents in your world behave? What does... What does private equity do in that type of climate?

Richard: Well, so let's park private equity for a second because it's less the world than the observable stock market. One has to consider whether if currencies are inflating, or deflating, then that gets expressed somehow in stock prices.

If you own a share of a stock in the UK, and at least a large portion of that as investors are coming from a currency environment outside of the pound. Well, all of a sudden, the UK market just got put on sale. They can buy those stocks [laughter] somewhat cheaper.

If those companies themselves have dollar earnings, or have half of their sales in the US, or some measure like that, they may indirectly benefit. They may see pound earnings go up. It's very difficult, given that most companies don't disclose their currency mixes down to the nth degree, it's very difficult to predict the ways in which direct translation of currencies will affect company accounts, and then there are the transaction risks around currencies because you do things like hedging.

If you know you're going to be making a big purchase in dollars-

Will: Yeah.

Richard: You may lock the exchange rate in. If you have a lot of employees in another currency zone, you may make a sort of derivative that allows you to pay their salaries at a flat rate for a certain period of time, you may some insurance against the currency going up or down.

So, we don't get visibility into the way those corporate treasury functions are working, but it can lead to some sharp surprises in the markets when companies report because very few analysts are really proficient, or get the information to be able to calculate the sort of [inaudible 00:27:34] impact on headline numbers, and how many people react to the beats or misses on headline numbers of companies.

Will: But do we... When we see big swings in exchange rates like we're seeing now, especially dollar to euro, dollar to pound sterling, do you-

Richard: Mm, and yen. The big one is yen right now.

Will: For sure. Now, does that, like, encourage of M&A tourism in that those companies which are cash rich in America just go out there and snap them up like Pacmen because they're cheap?

Richard: It, it can do, but again, there are a lot of other considerations in M&A, and as we talked about with acquisitions before, at the top of the market, when everything is raging away, and everybody feels good, people tend to make acquisitions and grossly overpay for them.

Things are looking uncertain, you're heading into a trough, you are concerned about conserving cash, things may be half off on sale, but you're not making those purchases, and consumers are very much the same way.

A lot of consumer discretionary purchases will get deferred because people are worried about rising costs, and tightening their belts. There are things that even when the goods might have cost more before they went on sale, people were thrilled to buy when it felt like everything was great in 2021.

So, it's... Part of it's psychology, part of it is exchange rates, part of it is fit and how much risk appetite companies have to make those sort of acquisitions.

Will: It's a tangential point, Richard, but I'm just thinking is while we talk a lot of about can Europe compete with Silicon Valley, can the rest of the world compete with America's dominance in tech, but does the, the acceleration in the strength of the dollar, and the weakening of all these other currencies, I just wonder whether that's gonna shore up American tech for another generation to come. Where would you want to list your company?

Richard: Um, yeah. I think that the flip side of that, Will, I'd have to say, is that... Realize that most of the large tech companies... Apple, for example, has a mid to high 30s percentage of sales in the US and everything else is abroad. Google has, I think, 46 or 48% of sales in the US and everything else is abroad.

So, those companies, by nature of being global businesses, are heavily exposed to that currency translation effect equally. They'll be sourcing a lot of components in different currencies, they'll be having staff outside of the US.

So, there are a lot of moving parts, not just to say that there is one stable currency, and the whole world will flock to the place where the currency holds its value. There are many [inaudible 00:29:53] opportunities to go and find incredible talent in tech centers in Europe, and in the UK, which, again, will have just been put on sale for companies that want to invest.

Will: Wow. So putting the supply side costs into euros, and putting the [inaudible 00:30:10] revenues into dollar, and you've got the perfect arbitrage to wait for an IPO.

Richard: Yes. Well, it's not always that easy, as you know.

Will: Let's go to smoke signals. Let me get my [inaudible 00:30:18] I roll something up and pass it to you. You're over there in America smoking away, looking at this thing. What signal should we be spotting, given how flux the political environment in this country currently is, Richard?

Richard: I think my first smoke signal... And I say this very unfortunately, but we have to accept that the politicians are losing control of events. The markets are clearly dictating terms to them. I don't like it as a citizen, but private capital's really calling the tune, and the public sphere is doing the dancing. You can't deny it.

You see the backlash to the tax cuts for the rich, that was really more about the wider market saying, "Hey, these cuts ain't... And lots of other ones, ain't funded." Than it was that wealthy market participants saying, "Hey, we don't need a tax cut, or we do, or actually, it's..."

The tax cut for wealthy people was a very small part of that exercise. The real issue that the markets said to Liz Truss and her team was that the numbers don't add up, and we're taking our toys off the playground and going elsewhere." And that really led to her, and her chancellor's defenestration.

Will: Wow. You're right. Nobody was, like, yelling for these tax cuts, but I think-

Richard: [inaudible 00:31:23] if you saw-

Will: It's the funded part that really secured it.

Richard: Absolutely. If you read the comments in the Financial Times, it was fascinating. There were lots of wealthy people saying, "We don't need a tax cut. We need to secure funding for the NHS. We need social cohesion."

Will: Yeah.

Richard: "We need to fund public services. Don't talk about giving us an extra few thousand pounds a year if it means you're going to screw over the wider society." And it was the tin ear, and being out of step with the times of Truss, and many of... In her administration, who real throwbacks to a different era, really trashing the conservatives' hard won, debatable reputation for fiscal prudence.

Will: And before we get to [inaudible 00:32:06] number two, I think it's worth flagging John McDonnell, the former Shadow Chancellor of the Labor Party under Jeremy Corbyn, made this point, which is we can do the [inaudible 00:32:14] politics, but financial markets are now running politics, and he, when he was Shadow Chancellor, would go to the city and say, "What I've got to say is not gonna please you, but here's why I'm gonna say it, here's how I'm gonna fund it, here's how I'm gonna substantiate my arguments."

We don't have that dialogue anymore. We have doubt, we have cynicism from markets to politicians.

Richard: Hm.

Will: All right, pull up another one, Richard.

Richard: A second I really want to impress, and I think it sets the agenda for a lot of other podcasts that you and I have on the drawing board, and guests we have to line up, and so forth, is there are still lots of bubbles to burst.

We need to have the purgative events to come. If I go back to when I founded my company in 2000, and we were telling everybody to sell everything in the dot-com boom, it really took until 2003, 2004 until you'd flushed all those poor quality companies out of the system.

You have housing values that are still wildly inflated in a world of rising interest rates, and huge numbers of people in the UK, for example, that have adjustable rate mortgages. And it's natural that companies will cling to hope, the management's still getting paid their salaries, the funders still hope to get the money out of the companies, but we have still some way to go 'til this last set of bubbles that was created in the free money era of a dozen years since the global financial crisis fully bursts and washes through the system.

And don't imagine that just because a stock... As we always say on Bubble Trouble, has gone down 80%. It can't go down 90%, which means it's still got half to fall.

Will: [laughs] Yeah.

Richard: And, and that notion that we still have a lot of excess in the system that looks unsustainable, or unsupported, and we need to flush all that out before we can get to a healthy place again to, to resume the growth that Liz Truss was so obsessed with finding.

Will: Yeah, we need to remove the froth. We need to remove the froth. Well, that's a wrap for this week. [inaudible 00:34:05] a week's a long time in politics, 45 days.

Richard: Oh my goodness. Oh my goodness.

Will: 45 days. Well maybe I can close out by just reminding myself of that famous motto in British politics, which is, "We should all vote for Guy Fawkes." 'Cause he was the last person to go into the Houses of Parliament with honest intentions. Maybe we need to get him back.

With that, my thanks to Richard Kramer, and my thanks to the production team here. You've been with Bubble Trouble. We'll be back again, there are a ton more bubbles and shit tons of troubles, trust me on that one.

Richard: If you're new to Bubble Trouble, we hope you'll follow the show wherever you listen to podcasts. Bubble Trouble is produced by Eric Nuzem, Jesse Baker, and Julia Natt at Magnificent Noise. You can learn more at BubbleTroublePodcast.com. Will Page and I will see you next time.