Sept. 19, 2022

Summer Troubles, Autumn Bubbles

As we're all back from our holidays this week is just Will and Richard trading postcards, anecdotes, and observations of what they've seen during our time away.


As we're all back from our holidays this week is just Will and Richard trading postcards, anecdotes, and observations of what they've seen during our time away.

Transcript

Richard Kramer: 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. This week we're gonna keep pace for the metaverse, but in our own special way. And since we're all back from vacation, we want to pull over to the internet hard shoulder and take stock of what's happened with the bubbles over the summer, and put a spotlight on some of the troubles forthcoming this fall. Back in a minute.

Will Page: Welcome back to Bubble Trouble, and as we're all back from our holidays, this week it's just myself and Richard trading postcards, anecdotes, observations of what we've seen during our time away. And we would just want to take stock of the many bubbles which have burst and a few of which are just bubbling along.

Richard Kramer: Well, Will, I wanna start off with some big picture economics, and we've seen currencies like the UK pound or the euro, are they- are they turning out to be bubbles? We see all of these currencies at multi-year lows versus the dollar. I mean, when I showed up in the UK those many years ago, it was $1.75 to the pound, and now it's $1.15 and heading lower.

Will Page: I know.

Richard Kramer: Is the US dollar the bubble of all time ready to burst or, or are all of these other currencies turning out to be bubbles?

Will Page: [laughs] Well, there's two sides to every coin of a currency, as you know, Richard, but there's a few things we can kind of tease out in the currency front. Firstly, I don't think sterling is in trouble as much as the euro's in lots of trouble. So if you look at sterling against euro, pretty strong. Look again, sterling against dollar, all right, a little bit weak. You look at the euro against the dollar, oh my goodness, it's almost flipped-

Richard Kramer: Mm.

Will Page: ... on its head. It's like going in the other direction. So I think that's a challenge and maybe you need to look at those countries which perhaps shouldn't have joined the eurozone in the first place, not naming any, Greece and Italy, to understand why, but I think that's a big one. I mean, it does kick in a couple of issues which is, is America gonna be able to export anything at this rate? Just a thought? I mean, you wanna build that story out a little bit further. I've always, yeah, remember vaguely when I was doing economics at university in early noughties, looking at the twin deficit problem. Real quick, Richie, America has a capital account deficit with China and a current account deficit with China, which essentially means that China lends it money so it can live beyond its means. And by America living beyond its means, it can buy lots more Chinese goods, which means America has to pay back China twice.

I think those types of imbalances are much more important than the current state of sterling-dollar exchange rates. That said, our producer is American, and if he comes to visit us, he's definitely buying the drinks.

Richard Kramer: Yeah. But, but I, I think if you look now, China is not really, uh, lending America money anymore, and hasn't been for the past few years, but it is a big issue. Will we, in Europe or the UK, be able to buy anything from anyone else in the world? Because to the extent they're based in dollars is certainly buying things from the States, it's, it's gone up in price by 15%, which may not be that much to someone who is at, at your August strata of the economic spectrum, but for the average person is going to be a heck of a headwind.

Will Page: [laughs] I think the short answer to that is, we may not be able to buy anything, but we could export everything. That's the, the two sides of the exchange rate coin. I mean, remember if you go back to 1992 and Black Wednesday, that was the disaster for the British economy. Agreed. Agreed, but it was also the savior. We had an export boom, which went on for a decade. So we gotta keep these things in balance.

Richard Kramer: If only Americans were better at drinking, because we got a lot of scotch whiskey sitting there in barrels up in your, your native land, they can export to them. So, let me ask you about something else on a big picture economic perspective, inflation.

Will Page: Mm-hmm.

Richard Kramer: You hear this word everywhere. You hear about the cost of living crisis. We know, and we've talked on previous podcasts about how that basket of goods that makes up the inflation number, it may or may not be really representative of, of everyone's lives. But, but let's think about this inflation topic. What does 9% or 10% inflation, especially over a number of years, really do to an economy and to the, to the stores of value sitting within it?

Will Page: Right. So our audience can't see me right now. I've got green ear plugs in my ears, but I've got steam coming out of them because this inflation thing is bugging me out. In my book, I talk about the pessimism paradox, that is only bad news becomes the news. Nobody wants to know good news. We want bad news, scare stories and the number of-

Richard Kramer: If it leads, it bleeds.

Will Page: ... doom and gloom comm... [laughs] the number of doom and gloom commentators out there just now talking about inflation. I have three issues with the way that we're measuring inflation, and I think they're reasonable issues. I'm just gonna throw them at you, and if you consider them garbage, then call me out on it, but just follow me here, three things which are not in the basket for measuring inflation, which are actually immensely deflationary.

One, Richard Kramer has a mortgage to pay, and his next biggest expenditure is his commute to work in the morning, which is a season ticket on the train systems in the UK. Now you're working from home, you don't have to pay for that train travel anymore. A huge chunk of your outgoings has disappeared. Now, I'm not saying this is all people. I'm not saying this is just some people, but for a lot of people, the second biggest part of their monthly budget, paying for our wonderful privatized railway system, has disappeared. That's deflationary. That brings a cost of inflation way down. It's not captured in the basket.

Two, off-seas no longer need masses of expensive real estate in the city centers of this country. They are downsizing, and often migrating out. That, again, is a deflationary force. And then three, creative tools, for want of a better word, is making it easier and easier to outsource more and more projects. The LinkedIn gig economy, that, in many ways, is another deflationary force. So, my big mantra, my big buck bear with government stats is what matters most is often measured least. These are three things which really matter to a lot of people. Don't have to travel to work anymore. Can outsource a lot of projects. Don't need the real estate that I used to need. They all bring the cost, or the price level, down but none of them are factored into the current debate of runaway inflation. I just think this debate needs more balance.

Richard Kramer: Okay, I'm going to call bullshit on at least two out of three of those. The first one, as someone who runs a business, I am telling my people, "Get back in the office most days of the week. Yeah, I get the idea that you want some flexibility and to work from home, but-”

Will Page: That's who you...

Richard Kramer: "... the offices are where..."

Will Page: People like you... You, you look like Jacob Rees-Mogg. I get it now. I see the similarities. Yeah.

Richard Kramer: Okay. So, we are, we are generally going to see people coming back to work. That's what the big companies are saying. That's what small companies need. A lot of work needs people interacting with one another. Second, all of that city center real estate that you're talking about, which is admittedly heavy cost overheads, that cannot quickly be repurposed to, uh, coffee shops and, and, and flats, and luxury flats overnight. So that's a sunk cost that's going to still be sitting there on somebody's balance sheet, and on somebody's [inaudible 00:07:35] space, because, look, I know in my business, we sign five-year leases. We don't get out of them after a year if, if all of a sudden no one shows up at work.

And third, I, I take your point totally that the government numbers are measuring the wrong things. A hundred percent agree, but what you see is inflation in household energy bills, which no one can avoid, and we've just had a huge handout to everyone in the country, both businesses and consumers cope with that. And, you see inflation in food costs, and don't tell me that's not happening. I have my known value items I get all the time at the supermarket, or buy in the markets, or buy from my favorite vendors, and I know what they cost before, and I see them going up. So, a lot of those to me are the real unavoidable costs. We need, under Maslow's hierarchy of needs, shelter, warmth, and food, and-

Will Page: Alcohol.

Richard Kramer: ... all of those costs are fundamentally going up.

Will Page: Yeah, y-y-you're right, but that doesn't necessarily mean I'm wrong. All I'm saying is over the past three years, there has been some massive deflationary forces on-

Richard Kramer: A hundred percent.

Will Page: ... the cost of living and the way we run our lives, the way we run our businesses. And all I'm saying is, I get it. I get it. I remember walking out of a New York deli with a croissant and a tea, and I looked at the receipt and it was $16. I was like, how on earth can a cup of tea and a croissant be $16? I get it. What I am saying is all that stuff that brought the price level down wasn't in the basket. So, there is some good news out there, we just haven't measured it. We just haven't factored it. We just haven't talked about it until now.

Richard Kramer: Yeah. Now, the UK government is on the verge of borrowing 100 to 150 billion pounds partly to give a giant tax cut to rich people, but also to help people pay their energy bills. And, I know this is something we've talked about on previous Bubble Troubles, and, and when you build up these giant pools of debt, who, whose debt is it? Where does... When the government borrows money or a government prints money, where did it come from? So, walk me through this because I thought we had got to that point where we can't keep printing cash, where we can't keep borrowing money, but every time the politicians run into a problem, rather than face it head-on and telling people we've been living beyond our means, or some of the stuff they never like to hear, we get more borrowing, and, and, and more money printing. So, tell me what's going on here and how this is all going to end. In tears, or something worse?

Will Page: I'll shortcut the first part of your question with some reference points, and then go deep on the second. The reference point, I think, is if you listen to when we had our great Oxford economist on talking about quantitative easing, that's a great way to understand whose debt is it. So, I would tell our listeners to jump back to that episode. And then, on top of that, there's a book by Stephanie Kelton called A Deficit Myth, which really challenges this belief that we have to pay this money back. You could just run deficits or borrow extensively. Bernie Sanders kind of embraced this in some of his economic logic as well. Do I buy into it? No, but, you know, it's, it's a well-structured argument and it does have leg. Let's just reiterate, 34.6% of the stock of debt this country owes, we owe to ourself through quantitative easing. Why don't we just have a debt jubilee and wipe that off? The bank owes it to the treasury. We own both institutions, as well. So, there is that element. So where does all this end up? Well, let's just park the fiscal economic dilemma that we're in and go back to [inaudible 00:11:21].

Richie, what I think is going to happen is that thing that Gordon Brown introduced within two weeks of coming into power in 1997. In fact, within two days of coming into power in 1997, do you remember what he did within the first two days of his office? He made the central bank independent.

Richard Kramer: Mm-hmm.

Will Page: And around the western world, “central bank independence” was the phrase du jour. You need to make your bank politically independent from election cycles [inaudible 00:11:47] and so on. I think that's coming to an end. What I think-

Richard Kramer: Mm-hmm.

Will Page: ... you're going to see happen over the next few days, weeks, months, years, is politics is going to start invading monetary policy once again.

Richard Kramer: Right.

Will Page: So, "Hold on on those interest rates, I've got an election coming up." "But we've got inflation." "I said I've got an election coming up, and that matters more to me." So, I think where this is going to end up, forget the fiscal dilemma, there's a much bigger cloud gathering over central bank independence on the monetary side of this, this economy.

Richard Kramer: Will Page, you're a couple of years too late because in 2019, I think it was, Trump called Powell into his office and said, "Let's have a dinner, and by the way, I know you were starting to raise interest rates, but stop. Leave them low. It may be because the country and the economy needs to keep chugging along so I can get re-elected and maybe because my real estate empire depends on low interest rates." For whatever reason, Powell acquiesced and he didn't cut the knees off potential inflation and money printing back when he could have in 2019, and so, many people think now, two to three years later, we're in a worse situation today.

Will Page: Right, but let's just be clear, independence prevailed because, when they had that dinner, they split the bill equally. So, that's the key point for an American-

Richard Kramer: I'm sure they did. Now-

Will Page: Because they got... Richie, Richie, Richie, there's a bigger point you've got to delve into here as well. And, you've probably already spotted it with that astute analyst eye of yours, which is when you have so much debt, raising the interest rates increases the cost of paying back that debt. So, in a simple trade off-

Richard Kramer: Mm-hmm.

Will Page: ... I could pay for five new hospitals up and down the country, which would be politically appealing, but if the central bank raises interest rates, I can't because I've got to pay so much of my own money on financing-

Richard Kramer: Yes.

Will Page: ... this stock of debt. And those trade-offs, I think that's where the rubber's going to hit the road. I think that's where the central bank's going to get leaned on. I think, boom-

Richard Kramer: Right.

Will Page: ... there goes central bank independence.

Richard Kramer: Well, and I'll tell you. The... One of the problems with the deficit myth, and something that was widely discussed here in the UK in the midst of this latest 150 billion additional borrowing we're going to have to cover the energy bills is that our borrowing costs are going to skyrocket, not only because the interest rates are going up, but because we're adding to the amount we're borrowing. So, if you're going to borrow another 100 billion at a, at a 0% interest rate, hey, I'll take as much of that [laughs] as you want to give me. Uh, but if you have to borrow it at a three or a 5% interest rate, all of a sudden you're talking real cabbage. [Laughter.] And the more of those combinations of rising borrowing and rising interest rates, it starts to cripple the economy because more and more of the tax receipts are going just to keep the hamster wheel turning.

Will Page: Then maybe beyond that we should look at getting a guest from Italy on the show to discuss their forthcoming elections where the cost of living-

Richard Kramer: Oh yeah.

Will Page: ... in that country are... It's... I'm struggling to get the Y-axis of my chart to contain that cost of borrowing, vis-a-vis the Germans, even though they share the same currency. That's the irony of what's happening in Italy right now.

Richard Kramer: Absolutely, and you know those Germans love to go to Tuscany and enjoy the food and wine there. I've got one last question topic for you, coming back from our summer holidays. You've been to climate-ravaged, heat-waved Spain. You've been up in bonnie Scotland. You know. Tell me-

Will Page: Wasn't that supposed to be climate-ravaged, heat-waved Scotland, or is that an oxymoron?

Richard Kramer: No. I don't think that happens, about one day a year a most when it gets above 20 degrees Celsius. Tell me, what did you observe on your travels about the state of the real economy, not the one that we like to think we participate in, but don't really, sitting in places like London or New York?

Will Page: Well, back home in Scotland, and given we've had political upheaval since that holiday, the political dimension of Scotland is interesting. I call it the marriage of inconvenience. So you have the Conservatives in power with a governing majority in the UK, and the Scottish Nationalists in power with a governing majority, or just about a governing majority, in Scotland, which is weird to have that balance. But they hate each other, but they love each other, and here's why. The Conservatives love having the Scottish Nationalists in power because it keeps Labour out of power in the UK. Labour will not win an election until they get those 55 seats they used to get for granted from Scotland, so that helps them. And the Scottish Nationalists love having the Conservatives in power because it's easy for "Yah, boo, blame it on the English politics", which sounds the cause of nationalism. So you have this kind of marriage of inconvenience which is "I hate you, you hate me, but if we would learn how to love to hate each other, we can actually keep this party going on for another five years." That's what I learned from Scotland.

In Spain, I'm just blown away by just... The dependency on tourism in their economy is just...

Richard Kramer: Mm.

Will Page: You've got to think of it this way, their input costs... Germany's input cost of production of building factories, producing cars, and they're bloody good at it. I give them credit. Spain, your input cost is a coastline that God gave you for free. [Laughs.] Okay. Slap some hotels and we're at the races, and Benidorm, close to where I was for a good two or three weeks, and it's just built the biggest residential skyscraper in Europe, full of Russians, twin towers. It looks eerily like the Twin Towers. A plane could fly through the middle of it. Um. It just doesn't stop building its coastline. Keep slabbing concrete on that coastline. Keep going. And the other thing about Spain, going back to the earlier discussion we had. Is this the black economy? Like, are we actually measuring what's really going on?

Richard Kramer: Mm.

Will Page: And just how, when you hear unemployment go up, that means the black economy's gone up, and when unemployment goes down, that means the black economy's gone down. People are working formally in the labor market, as opposed to we informally in the black economy. That's something that always strikes me about Spain. Their economy, by statistics, does a roller coaster journey of boom or bust, but in reality it just keeps on chugging along. But expect more concrete and more cost in coastline cities.

Richard Kramer: All right. With that, I think we need to head to the break. All of Will's insights about central bank independence, inflation, and the black economy in Spain behind us, and we'll be back in a moment with more bubbles coming in the autumn, and more troubles for sure.

Will Page: We're back. Part two of Bubble Trouble, with myself Will Page and the independent analyst Richard Kramer, where we're basically trading postcards from what we've learned on our summer vacation before we get back into the swing of the Bubble Trouble series. Now, we spent a good chunk of June and July discussing the metaverse with some incredible guests. I mean, we really had blessed, Eric Kress was awesome, Ernest Lee from AmazeVr, the hottest VR product on the market. We had Seth Gerson, there's no better veteran of the gaming world than him to talk about the metaverse. And Yoshio, laying out a vision from our consultancy perspective about where this market's going. We discussed lots of that. And Richard, you cited the McKinsey report saying the metaverse was going to be a five trillion, gazillion, billion, dillion dollar business. I think Credit Suisse have trumped that by 3X. So, the investment banks are playing a game of how many zeroes can you put behind the metaverse projection? And, this umbrella of metaverse sits with NFTs, with crypto, there's a lot of this stuff here, and it feels frothy.

So just bring me up for air. Do what you do best for our audience, and just clear the decks here. What should we be looking at when we look at these funky terms like metaverse and NFTs today? We're going into the fall, is it troublesome or is it still bubblesome?

Richard Kramer: Well, Will, in a word, it's both. It's a bubble, and it's still trouble. [Laughter.] And, I guess the way I think about it is a competition to make the most outrageous claims really for the simple point of attracting attention. I mean, it used to be, back when you and I were little boys, just seeing a woman in a bikini top was enough to titillate us, and now you, you have... Nudity seems to be everywhere and anywhere, and there's no end of outrageousness.

So, I think once someone started to whisper a little bit about the metaverse, then someone started to talk in a, in a normal voice about it, and then all of a sudden it was a competition for who could shout loudest from the rooftops. Now, clearly one of the lessons from all of the guests we had was that this is going to take a lot longer, and the other lesson is that it can't be simply the province of one company. No one company is going to colonize the, the ether, that metaverse, whatever that digital space is, and gather everyone in the world under its umbrella.

Will Page: I think you're right. That was-

Richard Kramer: Sorry, you wanted-

Will Page: That was problematic for the investors because it's going to take a lot longer than the investor maybe has budgeted for, and also there's going to be no [inaudible 00:20:41], that's when what you're investing in becomes its own monopoly. That was one of the, the recurring themes of where this bubble becomes trouble is the timeline and the fact you don't own it.

Richard Kramer: Well, look. Investment is almost always a spectrum of uncertainty. At one end, you have companies like Telcos and utilities, where they're incredibly certain that a large number of their customers are going to keep paying their bills every month, and they're valued as such. They're unlikely to change dramatically what they do. Your water company or your electricity company or your Telco company isn't going to dramatically change the terms of service in the next three to five years. Think back, what a Vodafone or an Orange was doing for you five years ago-

Will Page: Uh-huh.

Richard Kramer: ... and what they do today. It's still pretty much the same. What's Thames Water doing? It's still pretty much the same.

Will Page: Mm-hmm.

Richard Kramer: And then you have, at the other end of the spectrum, the completely speculative stuff. All of these troublesome bubble companies that promise to do something that is comple-, incredibly uncertain. Invent a new world in which you will want to spend your time, populated by all sorts of ancillary technologies that will titillate you or entertain you or inform you, and lure you in to literally devote your world, your, your, your life attention to it. And that's a huge uncertainty that can be very appealing, very seductive when someone lays it out for you, until you start scratching the surface and reali- realizing all the hard to get from A to B. And I think there is this, this hype cycle, this famous hype cycle curve, that Clayton Christensen and others. You know, you have that wall of hype, [laughter] and then you fall into what is typically called the "trough of despair", and I think we have just begun the fall into the trough of despair.

And, that trough could be, especially in difficult economic times, a very, very long trough, or a very deep trough that could last for many years. Partly because, in difficult economic times, the first thing you cut back on is all the non-essential flights of fancy projects, like the metaverse, that aren't likely to deliver returns in the very short term, that are the least certain of your opportunities, and you've got to put your, put your, the wood behind the arrows of the most certain of your opportunities, and back them fully because that's what you're going to need to survive the next couple of difficult years.

Will Page: The phrase "wall of hype", it made me think about... There's this wonderful woman I met by chance in [inaudible 00:23:26] coffee shop who listens to the show, which was even more reassuring. But she gave me this wonderful expression called "the yeast of fiction", and I kind of love that. [Laughs.] How you might have a factual business case sprinkled with the yeast of fiction. You know what that does over time? It rises.

Richard Kramer: Yeah, it does.

Will Page: So we need to adopt that. Well, that-

Richard Kramer: And, and of course, that yeast of fiction refers to the way in which as one souffle rises a bit, the next one's got to top it. And to gain attention, [laughter] the third has to go even higher. And you just keep building those giant puff ball souffles until one of them explodes, and that is usually what happens to bubbles.

Will Page: [Laughs.] The yeast of fiction, okay. If we have to rebrand the show, I think we have our headline. But you know, it's just, just to sort of bring that metaverse discussion full circle, I come back to that one point which irks me most, which is speak to a festival promoter who lays out huge talent budgets to fill festivals, or fills Wembley stadiums, and ask them, "Are you at all worried about people wanting to be in the metaverse and not in your stadiums?" Richard, I went to see Coldplay at Wembley stadium, night five of six. Six nights, sold out, 85,000 a night, best concert of my life, all of a sudden it's become cool to love Coldplay again. And by the way, you can sing along to every Coldplay song by knowing just three words. One is "ooh", the other is "ahh", and the other is "whoa". You know those three words, you can do all the chorus sings. They finished that and they've just announced another six stadium gigs in the UK at the end.

They're going to do a million tickets to the British population at 100-plus a head. I just think... I don't think these promoters are worried, and if they're not worried, I struggle to get worried or struggle to believe the yeast of fiction that surrounds the metaverse. But we have more guests. We have some very big guests coming on the show shortly to swing the pendulum in the path of the optimist on this front as well. So we remain, we remain open to be persuaded otherwise, but I want to flip it. We did a podcast way back in the early days called Back in SPAC, and I've been reading the occasional article while sitting on the beach in Spain, or freezing my bollocks off in Scotland, talking about now those SPAC loans need to come back in, and I get confused here.

Richard Kramer: Mm.

Will Page: SPAC is a premature baby that's yet to develop a business plan, in my opinion, but presumably it's a loan so you can front track an IPO, and if things don't work out, well you have to pay the loan back. What's... Break it down for me. What's going on in the world of SPACs right now?

Richard Kramer: So, SPACs are special purpose acquisition companies. And, if you recall, back in that podcast on SPACs, I defined them as "give me money for an idea I haven't had yet". So, hey Will, [laughter] you think I'm a clever guy. Hand me your life savings, I'll find something to do with that money, generate a return, take a slice of it, and hand you back something better than the cash you gave me in the first place. Okay. Besides from the fact that it's batshit crazy and rarely works, it sounded like a great idea, but the-

Will Page: And then the drugs wore off, right?

Richard Kramer: Yeah. And, the technical issue with most special purpose acquisition companies is they have a bounded period of time, typically two years, to invest that money. So what you had was a bunch of companies raised capital in 2020 and now they're coming up in 2022 to that period of two years when they need to put the money to work. They need to find an acquisition target. Now, guess what. Not only has any company that would make a sensible acquisition target been approached by dozens of these potential SPACs, but also it's becoming harder and harder to find decent targets in an economy which is clearly going to hit the skids and go into some form of technical, or otherwise, recessionary climate for the next year or so. So, it's harder to find value creating targets, and the clock is ticking on all of these SPACs. And if the promoters have to return the money, they're out of pocket for all the costs of the SPAC. So this is a slow motion-

Will Page: Wait, wait, wait, wait, wait. I-Is that-

Richard Kramer: ... car crash-

Will Page: Is that a little bit like, heads I win, tails you lose, then?

Richard Kramer: Well, it's heads I win, tails you lose if the SPAC finds an acquisition candidate, merges with it, and it turns out to be a dog. Then the promoter has taken their cut, they've taken all their costs and they might be able to sell, but leave you with the dog that they've bought.

Will Page: Mm-hmm.

Richard Kramer: But, a- and obviously a lot of this depends on a greater fool theory. They buy a company for $100 million, but they think they can gussy it up and add some value to it, and, with their celebrity name or what have you, and float it on the market for a $1 billion, and we'll all be richer. And this is precisely what's happening to the company that was formed... The DWAC company that's trying to buy, uh, merge with Trump Technology. They're coming up to the two year period where they need to consummate the merger, and if they don't, they are supposed to hand the money back and also shoulder their own costs. And so, you have many of these instances where pools of capital were raised and they simply weren't able to find a home for that capital and now they're, they're faced with the, the stark reality of, "Well, this probably wasn't a great idea to begin with, and it was a hugely crowded market, and just a bit of a bubble that's now in the process of bursting."

Will Page: It's clear but it's concerning. And forgive me if I'm reading this wrong, but let's say there's a spite of SPACs that fail to pay back their loans. Now, that might happen, that might not. If it was to happen, could that lead to contagion? Do you think that could rock the bigger boat that is the financial economy?

Richard Kramer: No, no. SPACs are a tiny slice of the wider market.

Will Page: Okay. Got it.

Richard Kramer: And, the money sitting in there is largely still sitting in there. If a SPAC raised $100 million and simply wasn't able to find something to buy, well, they have $100 million, less some costs, to hand back to investors. So, really all they've done is sit on the money for the past year or two years, and then they'll hand it back. So, hmm, it's not like that money bleeds off somewhere else. And it's not like the cost of carrying a bank account, which is what a SPAC effectively is, is so great that that money is going to disappear.

Will Page: Got it.

Richard Kramer: Now there was another, another podcast episode in which we poured extremely cold, I would say even frigid... You can't really pour frozen water, but the, the coldest you can get without freezing [laughter] on the notion of NFTs. And I know we had a few guests that were trying to convince us otherwise, but what you see now is the leading NFT marketplace, OpenSea, is now drier than the Great Salt Lake in Utah, or the Gobi Desert in Africa.

Will Page: Whoa. I see what you did with words there. I see what you did there.

Richard Kramer: They are... There you go. They are... This, this whole NFT craze seems to have gone very quiet. And I know everybody was all excited about Web3 and decentralized finance and block chain, and blah-diddy blah-diddy blah, but again, when wiser, cooler heads prevail and start to look at how many wash trades were there-

Will Page: Yes.

Richard Kramer: ... what's the real underlying value of the assets? How much demand is there downstream for these NFTs?

Will Page: How much signaling value is there where it's me with this little animation on only my phone that only people looking at my phone can see? I think that was the big one that got me, was you're not buying-

Richard Kramer: Will, you have that animation on your phone? Oh my God, you're so cool.

Will Page: [Laughs.] I know. I need to put sunglasses on so I can see clearly. Come on. I, I got to move you forward here-

Richard Kramer: Yeah.

Will Page: ... because there's another term I gotta get to, and I'm hearing this term a lot, which is from SPACs softening to start-ups going sour. There's this term I'm hearing a lot called a "down round". That is companies being raising a lot of cash, particularly from companies like SoftBank, who are investing a lot more cash than was asked for, by the way. But now I'm hearing this term like down round, and I'm trying to get my head around it. Again, the dumb kid in the classroom here a bit. Like, a mortgage, if you over mortgage and what happens when the house price falls. But can you just do what you do best, and just break down what happens when a down round takes place?

Richard Kramer: Sure, and I think there are two important points to understand here. The first simple one is a down round is a company raising money at a lower absolute valuation for the whole entity than the last time it raised money. So, let's say a company had raised some portion of money, I'm going to come into the details of that in a moment, at a $10 million dollar valuation and the next time it raises money the purported valuation of the company, the future potential of it, people think it's only worth five. But, the first thing that's important to realize is that if you raise money... If I'm raising money at a billion dollar valuation, it might be that I sold you a 1% stake in that company for $10 million. So there are natural inflations in these valuations, assuming there's a greater fool, and I, we both might think that we can find someone to sell the whole company to for $2 billion, but let's say that didn't work out. Right?

So, let's say I burned through that $10 million that you gave me, and I come back and say, "I need another $10 million, Will," and you say, "Hey, Richard, you look a little desperate here, and also, you said you were going to do all this stuff and you haven't done any of it. So, I have the cash you need, but I need you to give me 10% of the company for $10 million." Then I would have raised money at $100 million dollar valuation, not $1 billion. That would be a down round. The company would be worth, what is a widely abused term, the last portfolio evaluation. The last time people put money in at a total value of the company. Now, the big fallacy here is that no one ever buys the whole company for that total valuation. They're putting in a very small slice, and equally, each successive round of capital raising tends to dilute the previous shareholders.

So, if... Again, back to the example, if you gave me $10 million for 1% of my company that was worth $1 billion, and I raised another 10 from you, but you said, "No, I've got to have 10% of that," then my stake which was 99% before, putting in no money but just getting 10 from a dumb schmuck like you [laughter] and having $990 million for myself, is now diluted to you giving me another $10 million but, but you having 11% of the company and me, little old me, my $990 million just suddenly went down to $80 million, which is the $10 million you first put in-

Will Page: Right.

Richard Kramer: ... if I haven't burned it yet, and the second $10 million you put in. So, I'm massively diluted by these down rounds, but I need to keep the money coming in to keep the plates spinning to have any hope that either of us are going to get anything out of that transaction.

Will Page: Because the rule of anti-capital is you're not lending money, you're investing in the principle as well. That feels like a podcast on its own. I think we should come back to that because it's certainly an expression which I'm hearing with an eerie amount of frequency these days.

All right. We are wrapping this podcast up with smoking, and it's just me and you. I guess I'm going to pass the dutchie to the left-hand side and give you the first puff on this cigarette, just a cigarette. You don't need to inhale. But, what would be your smoke signal as we head into the fall?

Richard Kramer: Well, I have to look at the current climate out there with cost of living crisis, and energy inflation, and potential another round of a bear market in the stock market. Any company that isn't talking about how they are planning to control or reduce their costs, since many of those costs are simply going to be out of their control, I mean, we can't do anything about the war in Ukraine. We can't do anything about food prices going up. We can't, we, we... Let me say that again. Many costs are simply going to be out of control. We can't do anything about the heating bills to keep our companies warm in the winter. We can't do anything about the rising price of food in our staff canteen. Well, any company that doesn't have an eye on controlling, or limiting, or cutting their costs, they're just being delusional, which frankly where I think the UK government is sitting right now. [Laughter.]

Will Page: Okay.

Richard Kramer: Will, what's your smoke signal?

Will Page: It's kinda similar, but I'm going to turn my anger to the Governor of the Bank of England, who I believe you knew his previous occupation. But, I'm just not convinced that he's on the ball with where we are right now. I mean, I step back from all I know about monetary economics and I say there's no excess demand in this economy. Okay? GDP is coming off the floor during a pandemic. It's not above trend. The labor market is tight, agreeable, but it's not measured particularly well and there's an awful lot happening outside the labor market which is quite flexible, the gig economy. It's not an excess demand situation to which the texts would say you raise interest rates to cool demand and get inflation back under control. Raising interest rates right now, and I think you touched on this in your smoke signal, does not solve the war in Ukraine, does not solve the labor bottlenecks caused by Brexit, does not solve the supply side bottlenecks which are building up an economy.

Raising interest rates do none of that, but this is where I think it gets trickier or worse, is reverse causation, something that comes a really better day. "Hey, I've got this formula that works based on this line of causality." "Well, have you tested for reverse causation to see if it goes the other way?" If I raise interest rates, I say to Richard Kramer, "Your mortgage is going to become more expensive." To which you say to your boss, "I need a raise because my mortgage has got more expensive," which means that raising interest rates drives inflation. Nobody tests for that. I think that could be happening here, but I... Just to reiterate, I think the Governor of the Bank of England is a grade A tool because he, he's raising interest rates with no excess demand in the economy and with all the causes of inflation are not solved by his actions. So, there is a chance that you're making a bad problem worse by doing what the textbook told you to do, but what happens in theory rarely plays out in practice.

Richard Kramer: That's a smoke signal that I think we'll send over to Threadneedle Street and see if there's any reaction to it. Will, I think we're going to wrap it up there. Thanks for our audience coming back after the long summer break. On Bubble Trouble, we have some phenomenal guests-

Will Page: Big time.

Richard Kramer: ... lined up over the course of the next 12-

Will Page: We have some-

Richard Kramer: ... to 15 weeks.

Will Page: ... blockbuster guests. Just as a CinemaScope bankroll, we have some blockbuster guests.

Richard Kramer: We will come back to you with many more episodes of Bubble Trouble between now and the end of the year.

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 Nuzum, Jesse Baker and Julia Natt at Magnificent Noise. You can learn more at bubbletroublepodcast.com. Will Page and I will see you next time.