Oct. 17, 2022

When the Levee Breaks

This week we want to take stock of the central banks and the hiking interest rates. Those rates are still way behind the rate of inflation. So what does that all mean for bubbles?

This week we want to take stock of the central banks and the hiking interest rates. Those rates are still way behind the rate of inflation. So what does that all mean for bubbles?


Will Page: Welcome back to Bubble Trouble, conversations between, uh, myself, Will Page, the author and economist, and the independent analyst, Richard Kramer, where we lay out some inconvenient truths about how the financial markets really work. And it's the only podcast out there that's showing a clear correlation with the stock market. That is, when the market goes down, our audience goes up. So we're gonna welcome our new listeners this week. So this week, we want to take stock in the central banks. They're hiking rates in the US, they're hiking rates in the UK, but those rates are still way behind rate of inflation. So what does that all mean for bubbles, especially tech bubbles who are dependent on a different form of finance, that is venture capital? That venture capital is one step removed from conventional lending, so that's what I want to dig into this week. More in a moment.

So for Richard, the best lesson you've thought me on this podcast, and we've had almost 60 episodes now, is when you famously said, "You know what happens when the stock market falls by 90 percent? It means it fell by 80%, then it halved." That loss-of-faith moment, the psychology of fear and greed, the herd-like behavior, the animal spirits if you want to call it. And I thought that'd be a great way to dig into this week's turmoil in the stock markets. And I'm hearing a lot, but let me ask you, what are you seeing out there in the marketplace?

Richard Kramer: So Will, I think the first point we want to get into is that we are about 250 days into a bear market, into stocks falling.

Will Page: Mm-hmm.

Richard Kramer: And what that tends to mean is that people in the first 100 days of that are always wanting to believe that things will get better. There'll be mean reversion, stocks will go back up. And then slowly, very slowly, you start to see a few people, as you talked about fear and greed, getting a little panicky. And now I think after the interest rate rises, after the volatility we've seen in the past few months, you see people jamming the gear box into reverse and then pounding down on the accelerator.

Will Page: [laughs].

Richard Kramer: So there are a whole series of areas across the markets where people are now recognizing not just inflation, energy prices, the war in Ukraine and all the attendant inflation that springs from that are going to change patterns of behavior. And we've talked time and again on this podcast about behavior. So the behavior that we saw in the pandemic, this time spent on gaming and on TV content, the dog years of e-commerce that- that raced forward seven years in terms of the penetration curve, all of that is gonna get wound back because people aren't going to have the extra discretionary income that instead is gonna have to go on their energy bills, is gonna have to go on their food bills, and it's gonna get eaten away by the devaluation of the currencies that we all live with. And certainly here in the UK, we are rapidly dropping to one-to-one parity to the dollar. And many times in the past, uh, certainly when I came to the UK 30 years ago, it was two dollars to the pound, and now it's gonna go one-to-one.

So for all the companies in the market, as well as the investors, their thinking has to change. So if you're a big telecoms company, one of the big inputs for running your network is your energy costs, and those are going through the roof. If you're a car company, do you need to run TV ads because, guess what, you weren't able to produce as many cars as you'd hoped for this year, certainly not as many electric vehicles, and everything's getting sold six months in advance. Why do you need to advertise? So you're seeing lots of instances like this where companies have to change their behavior, and that's seeping through to investors who have to think about the types of stocks that they want to own. Are they gonna chase growth or act in a defensive manner, and just figure out what is absolutely essential to preserve looking forward for the next 12 months or so?

Will Page: Right. So they go into a defensive manner, that would be going back into the safe zone of stocks, I guess. But I want to turn attention to the tech market, because that is different. I mean, interest rates are going up, inflation's going up even more. That might mean, dare I said it, like governments are simply inflating away their stock of debt. Never could that happen. But for the tech market, they kind of work in their own bubble, to name check this podcast, because they have friends and family with deep pockets, they have venture capitalists which would take a principle in the company. What does all this mean for tech?

Richard Kramer: Well, okay. When you talk about tech, Will, you have to go from on the one hand, the Apples of the world, or Googles, or Microsofts or Amazons, which are trillion to two trillion dollar market cap companies with hundreds of billions of dollars of cash on their balance sheet, down to the-

Will Page: To which they can buy back their own stock.

Richard Kramer: Where they can buy back their own stock if it goes to deflated values. They can continue to invest through the cycle, and that's one of the reasons we've talked time and again about why big tech retains its power through these difficult economic times. They can sustain their employee base, they can sustain their capital investments, they can sustain their R&D. And then you all the way down the scale to the little tech companies that are living off that venture funding or angel investor funding, where they've raised enough money to keep going through six months or a year from their friends and family, or they've got one VC that's made a bet on them that hoping that they can develop a product. Now the problem for most of the companies in the market that are more down to the bottom end of the scale is that their business plans depend on lots of other companies that are also getting funded. So not only were there 8 or 10 companies in London that were promising to run a quick commerce business model and bring you a Snickers bar and a Coke in 10 minutes-

Will Page: [laughs].

Richard Kramer: ... and spending like drunken sailors to acquire you to download their app, now if all of those companies aren't out there trying to get you to download their app, that means the companies that specialize in finding audiences for app installs-

Will Page: Mm-hmm.

Richard Kramer: ... or user acquisition, they will also suffer.

Will Page: An element of contagion.

Richard Kramer: If there's a small software company that produces software that helps very small businesses find temporary talent to recruit, to work on projects, well if all those little companies are no longer hiring, well they'll fall by the wayside. So again, just like the energy price example I had for a telco or a manufacturer, when they're, one of their big input costs goes up, they have to adjust. You have all these little companies that were maybe inventing a world changing product, but they were expecting to sell it to a lot of other little companies, and those little companies aren't gonna get funded anymore. They aren't gonna be able to buy those products. And indeed, even for some of the largest tech giants, the Facebooks or the Googles of the world, a lot of their spend comes from small and medium sized enterprises aggregating their overall demand. And if their overall demand falls, they'll see it in their numbers too.

Will Page: That one part of the financial community that we never really discuss that much in this podcast, but I think it's worth just touching on here is the bond market. And I have to admit, I struggle to follow the dynamics of the bond market, but as these interest rates start going up, as this inflation starts going up even higher, do you want to just walk me through what that means in the bond market as well?

Richard Kramer: Well, if you remember back probably three or four years ago when people were worried about deflation and you had countries like Germany and Switzerland that were perceived as incredibly stable, well funded countries, and they were issuing bonds with negative interest rates. So, here's a 50 year bond. If you buy a bond worth 100 Swiss francs, in 50 years, we'll give you back 98. And you thought that inflation would eat away the value of money such that 98 Swiss francs would be worth a lot more relative to all the other currencies in the market in 50 years' time. The worry was about deflation and that asset prices would go down, there'd be a lack of demand, and we'd all be in a market where we'd be lucky to keep our money flat.

Now as interest rates are rising, you have a major change in the calculus, in the thinking about expected returns from other asset classes, whether it's real estate or- or venture investing or the stock market. And again, if you have $100 and you put it in a bond that at a 0% interest rate, what do you get back in 10 years? You get the same 100 back, right?

Will Page: [laughs].

Richard Kramer: But now if you have an interest rate of 3 or 4% and you think of this, uh, compounding over 10 years and you put it into a bond at 100 now, 10 years later, you're gonna have $140 or pounds or euros, or whatever the currency is. So all of a sudden, the hurdle rate, the risk free rate if, as long as you don't assume that the person who issued the bond is gonna default on you, the risk free rate, leaving aside inflation, is now a much higher hurdle rate.

Will Page: Right. So isn't-

Richard Kramer: So the returns you need to expect from investments like tech stocks or venture investments or any sort of investment becomes that much higher because you have a place to put your money, let's say your bank account, which for the last 10 years, you've gotten no interest income effectively. And now all of a sudden, as interest rate rises come through, you'll start getting interest on the cash that's sitting in the bank doing nothing, which means you've got to find something even better to put it in in a tough economy to make it worth investing outside of that bank account.

Will Page: Very clear. It's almost like we've installed this market which has been so frothy for the past three or four years with a brand new benchmark. Is that a fair comment? It's gonna bring money back to its senses.

Richard Kramer: I would say very unfortunately, since the global financial crisis, you have effectively made money free. The consequences of that are fairly clear. The people who could borrow a lot of money at literally no cost got a lot richer, and what you've seen over the past decade or more since the global financial crisis is a massive increase in inequality.

Will Page: Yeah.

Richard Kramer: I think it's pretty clear that making money free has allowed people to take risks and to make tremendous sums, uh, of profits that haven't trickled down through the rest of the economy, whether you believe in trickle down economics in the first place. And now all of a sudden, money is not free. There's going to be an additional cost to it. And again, it's going to change the calculus. It's gonna change the thinking of investors and how they approach risk and how they approach what they do with the money they can borrow.

Will Page: We introduce a bond market to the way this bubble trouble world functions, it's a bit of a reality check, but this whole interest rate scenario must mean different things to different people, and I wonder whether you could kind of walk me through what does that mean for founders, what does it mean for pension funds, what does it mean for the venture capitalists? Do they all respond the same way or do some of them see an opportunity? Do others see a threat?

Richard Kramer: There's gonna be a spectrum of everything from absolute despair to cheering from the rooftops when these interest rates go up. The bond market has struggled with the concent of risk because when your base rate is zero or 1%, it's not too exciting. And so it encourages the bond market to pursue junk bonds, to pursue higher risk investments with less promise of paying back, in search of that precious yield, because really what they're trying to do is make sure over a very long period of time, if you're running an insurance company or a pension fund, that a large portion of your assets will have a guaranteed rate of return.

Now, for the other end of the risk spectrum, those who- who don't want h- low risk, they want high risk, founders or VCs, they're looking for spectacular returns and they're willing to roll the dice. Now all of a sudden, their ability to get free funding to pursue their pet projects is becoming a lot tougher. It matters for raising money. It, because again, you have to promise greater returns and those greater returns have to be promised against what is clearly going to be, and I don't think it's any great forecast to drop on our listeners, what's going to be an extremely tough economic backdrop between now and the end of next year.

Will Page: Before we go to the break, I also want to bring it back to a favorite subject of yours, which is SPACs.

Richard Kramer: Ah.

Will Page: We've got a podcast called Back in SPACs. We've played around with how to describe them as a premature baby minus a business plan, but they've been back in the headlines as well, and we've discussed this recently, which is SPACs are beginning to wobble. I can get why. But you've said that it's not gonna be contagious. It's too small. You have the term too big to fail. This is too small. It looks to me like some sort of the- the martyred SPAC players seem to be going belly up.

Richard Kramer: So, indeed. One of the things I'm going to be most proud of when we look back on our 60 episodes plus of Bubble Trouble and many more to come is having called things like SPACs correctly. Now my definition of SPACs, at the time, was, hey, give me money for an idea I haven't had yet. In other words, deposit money in this blank check company. Put all sorts of money in my bank account. I will only take a bit of it away from you as my promoter fee. And I am going to scour the universe on your behalf to find fantastic investments.

Now, this was a huge money spinner for the banks, which launched all these companies. It was a great money spinner for the promoters, which had a sort of heads I win, tails you lose situation to get their money out first. But big pools of money built up, chasing ideas, and a shortage of ideas for them to buy. Now the thing with the SPACs, as we talked about, is they have a time limit on them. After two years, if you haven't found a target to put your special purpose acquisition company to work acquiring, then you've got to give the money back. Uh, they're not open ended bank accounts where you can just leave the money there in perpetuity. And investors, now that they know they can get 3 or 4% elsewhere, are not gonna want to leave the money there.

So one of the loudest, biggest ego, some would say completely psychopathic, promoters of the SPACs was-

Will Page: [laughs].

Richard Kramer: ... a- a Silicon Valley executive, ex-Facebook executive named Chamath N. Palihapitiya.

Will Page: Friend of the show, friend of the show.

Richard Kramer: I'm not exactly sure how you pronounce his last name. And he has shut down his two high profile SPACs and said, "Look, I can't find any targets for them." Now, this was the guy who was a year ago saying, "Give me all your money. I as the, a smaller subset of the versions of messiah, I am going to take your money to the promised land of riches." And he raised two big blank check companies of a billion and a half dollars.

Now for me, this is a signal that bubbles are bursting. There are still hundreds of SPACs out there, having raised billions of dollars, and they all need to find targets in a very short amount of time, but let's face it. The hurdle rate for them to make returns for their investors is a lot higher. Those investors will get extr- increasingly touchy about getting their money out, and Chamath, well I don't think he's gonna be humbled by this, but I certainly don't think anyone will be handing him money anymore after he took it for two years and wasn't able to find a target to spend it on.

Will Page: [laughs] And those investors, like you said earlier, now have options 'cause you have this new benchmark in the market called bonds. So, if you want to run for cover, that option is there for you. So after two years of watching the playing field to get down the runway, you can go back to the safe zone.

Richard Kramer: Well, I think there's one other thing that- that I think is really important because where Chamath really made his name was investing in a stock called Virgin Galactic, the idea that consumer space travel would be the next big thing. And of course when we were all locked in our, uh, living rooms or dens or dining rooms or what have you in the pandemic, it was wonderful-

Will Page: [laughs].

Richard Kramer: ... to dream about things like space travel or the metaverse or whatever w-

Will Page: [laughs].

Richard Kramer: ... other nonsense you were willing to invest in because frankly, as we talked about with our episodes on Robinhood and Game Stop, this had become kind of a- a- an amusement. It wasn't serious investing. It was just, uh, something to play around with. And Chamath obviously sold out his stake in Virgin Galactic at a much higher price. The SPAC has crashed, uh, from 55, I think at one point, to $5.

Will Page: [laughs] Jesus.

Richard Kramer: And obviously now, the notion that this will scale into a real business is getting questioned in a more serious way, or that people have woken up and the scales have fallen from their eyes and that they've come back after the wild party and are all hungover. You can argue all sorts of different scenarios for how this all unwound, but the reality is, people were backing all sorts of crazy ideas just out of something to do in the pandemic, and now all of these SPACs, not having been able to find acquisition targets, are sitting there literally empty handed. Cash rich and asset poor. And on that basis, you're gonna expect a whole heap of lawsuits, acrimony, and the idea that you can have open ended fund raisings with no specific idea in mind. The idea of, give me money for an idea I haven't had yet, just fill my boots and I'll see if I ever come back and fill yours, I don't think that's gonna fly anymore.

Will Page: Wow. As we go to the break, let me just wrap it up by saying to my audience here that I think what Richard's done is illustrate the transmission mechanism interest rates, you can jack up rates, but how does that feed through to the market. And I always like to think of direct effects, indirect effects and induced effects, like throwing a stone in the water. You throw a stone in the water, it makes a splash. It's a direct effect. Then it causes a ripple. That's an indi- indirect effect. Then it could raise the water level. That would be an induced effect. And I think what we're seeing here is, as interest rates work their way through the market, it's the induced effect. The introduction of a bond market that's been D-E-A-D for many years now gives investors a safe zone to lead their capital back into. And that adjustment, that benchmark is gonna change a whole lot more than we're currently bargaining for.

So we'll be back in part two to go down the rabbit hole on one of these topics, and we'll see you in a moment.

Richard Kramer: Welcome back to part two of Bubble Trouble. In the first part, I was talking a bit about interest rates with Will and how the hurdle rate for investments has just gone up, because you might actually get some interest for the money you have sitting now in the bank. Now I want to turn back to the cause of that rise in interest rates, the dreaded inflation, the prices we see going up all over the place. When I go to the supermarket, when I go to buy a coffee, when I go for restaurants, the price of everything seems to be rising, and I don't even drive a car. I haven't seen my fuel costs go up. I don't dare to look at my electricity or gas bills. All that is gonna be rising and rising.

Now Will, a few weeks ago, you came on this pod and you cried foul on the way in which the government calculates headline inflation numbers. And you were arguing, hey, it's not as bad as it seems.

Will Page: Mm-hmm.

Richard Kramer: I gather you want to get back into the ring and fight for your cause one more time. So, let's hear it. Tell me why the inflation we see all around us isn't nearly as bad as we think.

Will Page: Well, you called me out last time, so I am gonna go back in the ring and go boxing with you because I do think I've got some evidence to justify my case, and the way I gathered the evidence base was I did a really novel thing, Richard. Can you guess what that is?

Richard Kramer: Uh, some research?

Will Page: Well, not just research, but if you want to question government st- statistics, I spoke to a government statistician at length to understand how this metric is made up. And I'm talking about the statistician in Newport, Wales who is responsible for their 8.9% inflation target which [inaudible 00:20:10] the markets. I spoke to him. I went straight to the top. And I just want to kind of help you and the audience understand what I uncovered. So, let's go back to my original case, which is pru- simply, a lot of people spent a lot of money commuting to work pre-lockdown. A lot of those people no longer have to commute to work post lockdown. Therefore, they've had a huge saving that overshadows all the increases in the prices of tea and croissants and petrol that they experience, because they don't have to pay for those train season tickets anymore. I'm not saying that's everyone. I'm saying that's someone, but there's a lot that have gone through that effect.

I also add it to the next credit tools, which makes doing work less expensive, real estate, which you don't need so much of. There's other stuff going on in the market which pulls the price down. None of that's in the basket. What matters most is being measured least, and this sort of effe- events that's happening in the economy aren't being measured at all. So, here's how it kicks in for me, and you have inflation, which is a measure of prices. The price of milk goes up from one pound to one pound, 10 pence. If that is the only thing in the inflation bucket, basket, inflation's gone up 10%. Okay. But then you have the weights. And this is where it gets interesting. The weights into which you're ... How much of the weight of the consumer basket should that item represent?

So we have weights and we have prices. Richie, the big discovery I learned is that the prices change, but the weights do not.

Richard Kramer: But Will, hang on a second. I'm gonna use the off license local shop around the corner from your house. When I went in last weekend after our run to buy a few things before I cycled home, he showed me two butters, one which had a price on it which said 1.89 and the one that had just been delivered to him which said 2.39. That was a 50p increase in the price of butter. It was a 25% plus increase in the price of butter. Now, I do not think the weight in the basket of groceries, of butter as an essential commodity, certainly in my diet, is gonna change dramatically. I understand your point that we might be commuting less, we might need less center city real estate and the value of real estate outside and in the suburbs goes up, because we're commuting less, we might spend more on this or that, but the central weights of, for example, food prices or energy prices, they should be as part of fulfilling Maslow's hierarchy of needs, relatively constant in the basket. Tell me why that's wrong.

Will Page: Well, the weights is where it does get quite interesting. And you have a point, and I respect that point. I use olive oil on bread, not butter, but that's your choice. You have your point. But for me, when I look at the weights, what I learned when I spoke to the- the statistician responsible for all this, is they're out of date. Well, they're not out of date. They are what they are. They are two year old weights used in the current year. So in the year of 2020 when the world changed, the weights that were applied to making up the inflation basket were de- by design two years old. They're related to 2018 when the world was normal.

Does that not strike you as a little bit fishy, Richard, the fact that we're gonna see the world transform in a pandemic, you know, silence the streets of London, but the weights which decide how we spend that money remain unchanged from 2018?

Richard Kramer: So I have a problem with how you're approaching this analysis as a whole, because again, back to my Maslow's hierarchy of needs, we need shelter, we need food, we need clothing.

Will Page: No, no, no, no. Let me add, let me add something to that. My hierarchy of needs is I need weights that reflect today, not the world two years ago.

Richard Kramer: And you're willing to be on a hunger strike as long as it takes to get those weights?

Will Page: [laughs].

Richard Kramer: But let's leav- let's pause that. I'm saying the basket, that the items which go into the basket of calculating what our, what inflation, how inflation is measured, yes they can change based on a pandemic year or two years earlier or two years later, and our social behaviors change. I get that. But the core measures of inflation, and I haven't looked at the numbers nearly as long as you have, but those core measures of inflation should be around some core baskets of things that we can't live without. We can't leave without these-

Will Page: No.

Richard Kramer: ... wonderful utilities we've come used to.

Will Page: Richie, you're like a newspaper editor pushing back my fine investigative journalism, so let me come again. So let me hit you hard on the commuter point. The thrust of my argument, people don't commute anymore. People don't spend stupid amounts of money to commute to work anymore. If you lived in Reading and you worked in London, you were spending 6000 pounds a year on a season ticket for the trains.

Richard Kramer: Okay, yeah.

Will Page: So then I probed in my investigations, trying to understand how does this all work? How does travel work? He said, "Oh, we don't do commuting as part of the CPI basket. We just have train travel grouped as one." So I said, "So, how would it work if I'm no longer spending 6000 pounds on a season ticket because I can work from home? Which is possibly behind the mortgage and private school fees, the second, third biggest budget line item in the family account. So, I don't spend that. I work from home. But you can't spot that." They said, "Yes." That made me worried.

Then I probed further and said, "Hold on a second. What if I no longer have to spend on just, you know, essential travel, that is to commute to work. So I'm up 6000 pounds in my family budget, but I do decide to travel to Scotland more often to see my parents, that's discretionary budget. Can you differentiate in that?" They said, "No, we don't do that in the ONS." They don't do that type of breakdown. So the thrust of my argument is the cost of commuting has been transformed. What I have proven, my newspaper editor, you can soon use to reject my story, is that they can't spot it.

Richard Kramer: So, again, I'm not here to perform some autopsy on the calculation of consumer price inflation. You gave a great example there of why on the one hand, it implies that someone needs to make a million pounds to spend 0.6% of their income on commuting, which means a 6000 pound season ticket, but I balance that off against myself, and I do all of my commuting by bicycle. So I've never been part of that train travel commuting cost.

Now, I don't know what goes into the complete and utter sausage factory of government statistics. I know there are a lot of fine people working on that and whatever their output is will be massaged by the politicians, because I've heard enough on Radio 4 in the morning of those massaging efforts by the government to skate over the topics that a presenter might ask them six or eight times to answer a direct question and they avoid it. So, I- I'm not going to argue with you about the composition of those weights or the fact that they ought to have changed. My simple point was what I observe around me is the same as the proprietor of, uh, the off license on your corner selling all these groceries. We are all observing prices going up. And I would argue the central problem for inflation is our wages are not going to go up nearly as quickly as the prices do. And certainly the wages are not going up nearly as quickly as our energy costs are, and that leaves a lot of people out of pocket.

I'm not gonna get involved in dissecting these government statistics, but honestly, what are these weights? Who comes up with them? And are they really relevant? Do people really use them for policy making?

Will Page: They do. And this is where it gets really interesting. I say to my editor rejecting my story again at the desk, which is I found out what the weight is for train travel in this country. It is a whopping, huge, monstrous 0.6% of expenditure from your average person in the British society. Now, if that person, uh, who is traveling from Reading to London every day for work has to spend 6000 pounds on a ticket and they're on a 60,000 pre tax salary, you can work out the maths, but at 0.6%, that assumes that person's earning a million pounds a year. So again, this is all train travel, work and leisure, Eurostar and underground. That's their metric that they used.

And I get it, s- statisticians, their job is to count the beans. The economist looks at the gaps between the beans. And I'm simply saying, that might work statistically for the theory of calculating inflation. I don't think that type of weight with this much turmoil in the market, with the effects of a pandemic, with the introduction of working from home, is practical. There's no way that you can say that 0.6% of expenditure goes on train travel pre-pandemic and has not changed since. So there's issues there. I just don't think it's convincing.

Richard Kramer: Okay. But where I push back on this whole weights question across the board, and I'm sorry for my cub reporter Will Page, he's gonna have to go back to the desk and rewrite the story again, is that it has ever been thus. Okay. That all of these measures at a societal level have always been imperfect because it's like asking what the average height of a man or a woman in the UK is.

Will Page: [laughs].

Richard Kramer: There are always going to be outliers. There are always going to be flaws in how you calculate these consumer price baskets. And you or I may buy no items that are in that basket, or we may buy all of them.

Will Page: I know.

Richard Kramer: There's no easy way to get that- that- that bottom up clear view in the same way as if you look at America, just the mere fact of counting the population, the census every decade, has become incredibly politically fraught. So again, I would say I don't care about the weights, Will. Talk to me about the real ways in which prices people pay every day are going up ineluctably.

Will Page: Well let me just come in on that. So again, the thrust here is that the weights are the problem, not the prices, and the problem is the weights don't change. They are constant and they're two years out of date, and that's how the world works. That's how financial markets respond. The other thing here is statisticians are not interested in behavior. They're interested in a basket. The basket doesn't change, but the behavior does. If you talk about beer for a second, if I go to a pub and I see that in a typical evening I'll drink three pints of beer and it's 4.20, and the prices are jacked up to 4.85, there's a huge amount of inflation there. But if I change my behavior to typically buying two pints instead of three, then I've actually got deflation in the economy. Now that's just common sense. Prices went up, won't drink so much, have two pints instead of three. I've actually made a cost saving, not experienced inflation.

That's common sense. My point is that's not of any interest to the statistician who produces the headline ticker that we all worry about today.

Richard Kramer: To me, the bridge that you're, you need to make from that three pints to two pints is that if the retailer is only selling 60 million times two pints instead of 60 million times three, the beer producer is making a third less beer, then there is going to be a contraction in the economy despite the inflation. And that is the big risk when you have a new government that's just been installed. I won't say elected. They've been installed, and their mantra is, "We're going to go for growth." But inflation is robbing people, like you, from thinking, I can buy that third pint and even the fourth and the fifth, because after the fourth and the fifth, you stop being able to count, you-

Will Page: [laughs].

Richard Kramer: ... the inflation is robbing people of the resources to grow and to invest and to spend more because each of the individual things they're buying costs more, and let's face it, wages and the money people have in the bank aren't going up nearly as fast as inflation.

Will Page: Mm-hmm.

Richard Kramer: Now measured however the heck you want, n- geek out over the weights, it doesn't matter to me. I look around and I see evidence of prices rising all over the place, and whatever you put in the basket, we know we'll be paying more apples to apples one month to the next for the next year.

Will Page: All right, Ben Bradlee, Bob Woodward here going back to his desk to write tomorrow's story about ratchet and restaurants.

Richard Kramer: What I want you to go back to desk and do is give us some smoke signals.

Will Page: [laughs].

Richard Kramer: For all of this cautionary tales about government statistics you've given us-

Will Page: I did my research, though. I did speak to a statistician, and trust me-

Richard Kramer: Uh, I know. and- and they're a-

Will Page: ... I enjoy going to dentists more like than speaking to statisticians, but I did my hard work, boss.

Richard Kramer: There are lies, damn lies and statistics. We have all heard that before.

Will Page: Okay.

Richard Kramer: So, give us the smoke signals you would be worried about when you think about this notion of inflation, and I'll drop one on you with the interest rates.

Will Page: Okay. I'll give you a couple here, one real quick. And we talked about the risk to central bank independence two, three weeks ago, and I think that's gonna be prevalent. I think the other thing, and I mentioned it in part one of this podcast, is governments inflating away the stock of debt. Classic trick that's been used for centuries. I think that's raising its head again. Second one, on a more upside to turn your frown upside down, is the Estee Lauder effect. Did a little bit of research on this, but in past recessions, the company Estee Lauder has seen an uptick in demand for lipstick. Interesting. Not me, not you, but other people buying lipstick, fine. And the reason why is it's seen as an affordable luxury.

So it's to look for those goods in the market where you cut back on let's say European holidays, where you cut back on West End theater, but you do pick up spend on affordable luxuries, which give you that sense of comfort. And I find that interesting, if that's the way the economy's going just now, is to think, what are those Estee Lauder items in the basket of goods that we're actually gonna consume more of-

Richard Kramer: Mmm.

Will Page: ... as time- times get tougher. So, stock up on your lipstick, brother.

Richard Kramer: That's a fascinating insight, Will, and it also reminds me, and it's a very unfortunate fact, that inequality is clearly with us in every country. You don't need to know what a genie coefficient is to see how that's progressed. And the reality will be in the next year, that those who still have the resources are likely to enjoy those luxuries, whereas the rest of us are going to have to do with Estee Lauder lipstick. So, Will, I'm going for the sort of bright red. I don't know what shade you're going for.

Will Page: [laughs].

Richard Kramer: Either way, it's been another enlightening episode of Bubble Trouble. We have many other really interesting economic topics to discuss, and indeed, there's a lot of bubbles that I think we're gonna see bursting. So, thanks for listening.

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