0:05

Hello and welcome to Behind the Memo with

0:07

Howard Marks. Today

0:10

Howard and I are joined by

0:12

a special guest, Edward Chancellor, the

0:14

journalist, financial historian and author of

0:17

multiple books, including Devil Take the

0:19

Hindmost and most recently, The Price

0:21

of Time, The Real Story of

0:23

Interest. Howard's latest

0:26

memo, Easy Money, was inspired by The

0:28

Price of Time. So I am very

0:30

excited to be able to speak with

0:32

both Edward and Howard about the history

0:34

of interest rates, the profound

0:37

impact they've had and the

0:39

potential dangers of keeping them too low. Edward

0:44

and Howard, thank you both so much for joining me. Thank

0:46

you, Anna. It's great to be here with you as always. Thanks

0:49

for having me. Howard, I'm going to start with

0:51

you. As I mentioned, your

0:53

most recent memo is inspired by Edward's

0:55

latest book, but this is actually your

0:57

second memo to be inspired by A Book

0:59

of Edward's. So to begin, can

1:02

you speak about that previous memo and

1:04

its relationship to this one? Glad

1:06

to do so. Most of my readers

1:08

know the story, but I began to write the memos in

1:10

1990, continued to do so

1:13

for a decade without having a

1:15

single response. But in the

1:17

fall of 1999, I was

1:19

reading Edward's terrific book, Devil Take

1:21

the Hind Most, about

1:23

financial speculation, which starts off with the

1:25

South Sea bubble and covers the tool

1:27

of bubble and so forth. I

1:30

was reading things there that Edward had

1:32

written and saying, hold on, that's exactly

1:34

what we're seeing today. It talked about

1:37

people leaving their day jobs to trade

1:40

and all kinds of behavior. Of

1:42

course, behavior, as Twain pointed out, it's not

1:45

exactly the same, but it does rhyme from

1:47

occasion to occasion. And I think that's the

1:49

fascinating thing about Edward's books is the way

1:52

the behavior he describes from 200, 300 years

1:54

ago, the descriptions are very relevant to today.

2:00

and that helps us in figure out

2:02

what's going on. So anyway, I wrote

2:04

a memo called bubble.com about

2:06

what I was seeing in the tech

2:09

bubble. Again, people leaving their day jobs

2:11

and their MBA programs to become day

2:13

traders. bubble.com went out

2:15

the first day of 2000. It had two

2:18

virtues. It was A, correct and B,

2:21

correct soon. If you're too far ahead

2:23

of your time, it's indistinguishable from being

2:25

wrong, the old saying goes, but this

2:28

one was correct in a timely fashion

2:30

and garnered a lot of response and

2:32

put me on the map memo writing

2:34

wise. So I will take the high

2:37

most. Edward's book was extremely important in

2:39

my development. Edward, now let's

2:41

turn to the latest book. This

2:43

is an expansive study of interest rates, although

2:46

I should also add a highly readable history

2:48

of interest rates. So this may be a

2:50

somewhat difficult question when we're talking about thousands

2:52

of years of history, but can you explain

2:55

the overarching argument of this latest book? Yeah,

2:57

you can try. I should say why

2:59

the book was inspired. It was inspired

3:01

by the fact that in the middle

3:03

of the last decade, we were

3:06

going through this period of extremely

3:08

low interest rates, and they

3:10

seem to be affecting everything

3:12

in the financial world that

3:14

one saw. In particular, high

3:17

valuation of asset prices, beginning

3:19

of hyperspeculation in cryptocurrencies, we

3:21

saw how it's written

3:24

about this, but the deterioration of

3:26

underwriting standards and a chase for

3:28

yield. And this was

3:30

against background of very weak productivity

3:33

and the rise of so-called zombie

3:35

companies, businesses that probably shouldn't be

3:37

in operating. And I came

3:41

to the conclusion that you couldn't

3:43

really understand the world of the mid

3:45

2010s unless you

3:47

understood interest, just like you couldn't really

3:49

understand what was going on before the

3:52

global financial crisis if you didn't understand

3:54

credit. And in fact, if you go

3:56

back previous decades, you couldn't understand what

3:58

was going on. in 1999-2000

4:00

unless you understood speculation. So we

4:03

moved from a focus on speculation

4:05

to one on credit and up

4:07

to the GFC and then I

4:10

think interest became all-encompassing. I went

4:12

to see, I think, Jim

4:14

Grant in New York and I asked

4:17

him, has anyone written anything interesting on

4:19

interest, on the subject of interest? Now

4:21

of course there's the famous book, Sidney

4:23

Homer's, updated by Dick Sillis, the history

4:26

of interest rates. But there wasn't anything

4:28

written about the concept of interest

4:30

except for the frankly boring book

4:32

that had been written in the

4:35

1960s. So I embarked on the

4:37

project and what I found is

4:39

that you can see the history

4:41

of interest going back five millennia

4:43

to the ancient Near

4:45

East and what you find in

4:47

the ancient Near East is interest

4:50

performing a lot of the functions

4:52

that it does today. Loans were

4:54

made and loans were made of

4:56

interest and commercial loans for overseas

4:58

voyages carried higher interest charges because

5:00

they had a risk premium in

5:02

them. Loans were made on mortgages

5:04

and therefore the creation of a

5:06

real estate market and trading in

5:09

houses and valuation of houses became

5:11

possible. And then there were

5:13

consumption loans and there were loans of

5:15

barley for farmers for grain stock. So

5:18

that was the sort of the history of

5:20

interest. Yeah, one of the fascinating things that

5:22

you say early in the book is that

5:24

interest is really the first financial innovation. In

5:27

fact, because we can see the

5:30

word interest in ancient etymologies linked

5:32

to the productivity of livestock, we

5:35

can guess that even in prehistoric

5:37

periods people were loaning their livestock

5:39

in exchange for interest. And there's

5:42

a very perceptive comment which I

5:44

cite by a Yale economic historian

5:46

Bill Gertzman in which he says

5:49

that interest is the most important

5:51

invention in the history of finance

5:53

because it allows people to transact

5:56

across time. And it's

5:58

a fact that that all economic

6:01

and financial activity take place across

6:03

time. It's an obvious fact that

6:05

people tend to neglect it. And

6:07

as I then read more into

6:09

the theory of interest as it

6:12

evolved over time, there

6:14

is a definition of interest I cite

6:16

coined by the Englishman in the 16th

6:19

century where he says the usurers, the lenders

6:21

of interest are the sellers of time and

6:23

that interest is the price of time, which

6:26

is what I took as the title of

6:28

my book. In Howard's memo, he

6:30

actually notes how much he liked your choice of

6:32

title, the price of time. Why

6:34

do you think it's important for people to think

6:36

about interest in this way? And

6:38

why this is important, and

6:41

this is really the most important

6:43

thing, is that if all our

6:45

activities are savings and our investments

6:47

and our consumption have a time

6:49

element to it, it's very important

6:51

that all these activities should be

6:54

coordinated. How much you're gonna borrow

6:56

today and how much you're gonna

6:58

consume, what type of investments you

7:00

make, what the valuation of those

7:02

investments is in current terms today,

7:04

what they yield in future, all

7:07

this will be affected by the

7:09

prevailing level of interest. And

7:11

this is encapsulated very well

7:13

by the great American economist

7:15

Irving Fisher where he says

7:17

that interest is an omnipresent

7:19

phenomenon. It is everywhere, whether

7:21

you know it or not.

7:24

Or as Joseph Schumpeter, the

7:26

Austrian economist says, interest enters

7:28

into every calculation. Once you

7:30

begin to understand that, well,

7:32

at least once I began

7:34

to understand that, I then

7:36

got a sense of the

7:38

extraordinary corruption of the economic

7:41

and the financial system that was

7:43

occurring at a time when the

7:45

policy rates of central banks were

7:47

kept at zero, or in

7:49

some cases at negative levels.

7:51

Now, if interest is the price

7:53

of time, a negative interest rate

7:56

is really turning the clock back.

7:59

Now, Anna, you were a great- views for well I

8:01

don't know if you saw a piece I wrote back

8:03

in 2020 which was about Alice and why

8:05

he was looking at the financial markets.

8:07

I do remember that yes yes yes

8:09

and it was trying to show that

8:11

everything was up back to front. I

8:13

read a comment a couple of years

8:15

ago when Japan embraced negative interest rates

8:17

something that interest rates didn't matter as

8:20

long as interest rates were falling you

8:22

could have capital gains on your bonds

8:24

so in fact I was saying that

8:26

piece where you owned equities for income

8:29

and long dated bonds at

8:31

negative yields and 30 years Swiss yields

8:33

were out negative rates you own those

8:35

for capital gains and that is a

8:38

very upside down world in

8:40

which VC was doing very well

8:42

a lot of very flaky businesses

8:44

were being floated but very speculative

8:47

world a world in which was

8:49

very difficult for active managers to

8:51

distinguish themselves without actually taking on

8:53

more risk. So I think that

8:55

these negative rates and these zero

8:57

rates were really the most extraordinary

8:59

event if the invention of interest

9:01

is the greatest invention then I think the

9:03

advent of the negative rates was the most

9:06

in a way shocking event in the entire

9:08

history of finance. And as

9:11

Edward was giving that answer and

9:13

really talking about the ubiquity of

9:15

interest rates what it made me

9:17

think of is that interest rates

9:20

really are the main factor or

9:22

the basic factor that defines the

9:24

investment environment and the greater financial

9:26

environment in the same way that

9:29

weather defines the environment for

9:31

everything else. So weather

9:33

determines weather will wear a coat,

9:36

weather will carry an umbrella, weather will put

9:38

the top down in the car or keep

9:40

it up and thing after

9:43

thing is all dependent on the

9:45

weather in the same

9:47

way interest rates are the dominant

9:49

consideration in giving rise to financial

9:51

behavior and investment behavior and

9:54

I think that if people think of it that

9:56

way I think it'll be beneficial. There's

9:58

another metaphor strikes me and

10:01

I didn't really draw it out enough

10:03

in the books. It came to me

10:05

a bit later, although I do mention

10:07

it, that Warren Buffett, let's say five,

10:09

six years ago, makes this comment that

10:11

interest is to valuation, what gravity is

10:13

to matter. Now, go back to

10:15

what I was saying earlier, that all

10:17

these economic variables, our consumption, our borrowing,

10:19

our expected rate of return, the type

10:22

of investments we make are all dependent,

10:24

influenced by the interest. Then you could

10:26

actually take a grand pitch and say,

10:28

well, interest is like the gravity that

10:30

holds the planets on their paths.

10:33

Do you remember Isaac Newton makes his

10:35

comment during the South Sea Bubble when

10:37

he was a spake agent in South

10:39

Sea Bubble? He's reported as saying, I

10:41

can calculate the motions of the heavenly

10:43

bodies, but not the madness of people.

10:46

Now, once you take interest rates down

10:48

to very low levels, it's actually even

10:51

harder to work out what's happening in

10:53

the market. It's harder to get the

10:56

coordination which is required for an economy

10:58

in order to be stable and growing.

11:00

I think that is what we saw.

11:03

The analogy between interest rates and

11:06

gravity is a very interesting

11:08

one. Of course, Warren puts

11:10

everything terrifically. But it's important

11:12

to take note of the distinction,

11:14

which is that the law of

11:16

gravity is a physical law and

11:18

immutable. When we

11:20

drop things, they always fall down. They never

11:22

fall up. But interest rates,

11:25

especially in the short run,

11:28

have a very strong psychological

11:30

component. In the short

11:32

run, interest rates like the price

11:34

of anything else can do whatever

11:36

they want or whatever people want

11:38

and become excessive and inadequate and

11:40

thus produce extremes of behavior, whereas

11:42

gravity is consistent and reliable. I

11:45

think that's an important distinction. Yeah,

11:47

to add a comment that Charlie

11:49

Munger, Warren Buffett's recently deceased partner,

11:51

made back in 2020 at the

11:54

time when the interest rates were

11:56

once again at zero and central

11:58

banks printing money. These

12:00

are the most extraordinary financial markets in all

12:03

of history. And then I had I like

12:05

that comment in your note where you side

12:07

of fries it comments have taught him and

12:09

his to you in to size and I

12:11

can put it in America and pays a

12:13

backslash. I met him put it at the

12:16

front of the American paperback version of my

12:18

books. The As he said

12:20

to me actually wrote me. Maybe

12:22

we have a new version of

12:24

Lord Acton the law. Of course,

12:26

Lord Acton said that power corrupts.

12:28

An absolute power corrupts Absolutely. Charlie

12:31

says easy money corrupts And really

12:33

easy Money corrupts Absolutely. That's the

12:35

theme of Edward as the same

12:37

of myself running through. What we've

12:39

written here is the corrupting influence

12:41

of interest rates that are to

12:43

allow. That. Makes me think

12:45

of another quote edward from here. but

12:48

it's actually something that Howard notes is

12:50

really one of his save rate quotes

12:52

from the book. It's I believe some

12:54

the over and gurney crisis in the

12:57

eighteen sixties when that bank went under.

12:59

You know, a banker John Mill saying

13:01

as a rule Sonics do not destroy

13:03

capital. They. Merely revealed the extent

13:05

to which is has previously been destroyed

13:07

by it's betrayal into hopelessly unproductive works.

13:10

And like you both to speak about

13:12

the idea that this quote is expressing

13:14

and why it's so important. The

13:17

error is in the bad

13:19

decision was the hive calls

13:21

and again I learned this

13:23

from Edwards. Both gonna love

13:25

it. Mal investment. We think

13:27

those investing as big as

13:29

constructive activity variety money for

13:31

projects but mal investment is

13:33

the use of money. The

13:35

error takes place at the

13:37

time the investment is made

13:39

erroneously but it only becomes

13:42

apparent as the time that

13:44

a distressed by events in

13:46

the environment. Warren. buffett said

13:48

i think it was early or nine just

13:50

commenting on what we had seen in the

13:52

global financial crisis that it's only when the

13:55

tide goes out that we find out who's

13:57

been swimming naked i wrote in one of

13:59

my books and the service of risk that

14:01

you may have a construction flaw in your

14:04

house but it only becomes

14:06

apparent when there's an earthquake. Of course

14:08

I was living in California at the

14:10

time where people actually think about earthquakes

14:12

from time to time but it's the

14:14

same thing. Bad investment does not show

14:16

up as an error right away. Bad

14:19

investment shows up as an error when

14:21

it is stressed and tested by difficult

14:23

circumstances in the environment. If

14:26

one would get to look at this question

14:28

of malinvestment from a technical point of view,

14:30

when the interest rate is

14:32

very low people will tend

14:34

to invest in assets whose

14:36

income is in the long

14:39

distant future with greater payback

14:41

periods. These may be

14:43

of respective nature. They're often real estate.

14:45

Real estate is a classic, probably

14:47

the most obvious area in which bubbles

14:49

are inflated by low interest because real

14:51

estate has long dated assets funded on

14:54

debt on the whole. Also

14:56

the VC stuff that we mentioned and

14:58

in the last year and a half

15:00

since interest rates have been going up

15:02

you see a whole load of venture

15:04

capital businesses failing and then what I

15:07

said is during the boom the malinvestment

15:09

is characterized by large investment during the

15:11

boom and then get to the end

15:13

point and there aren't enough funds to

15:15

finish off the investment so they become

15:18

incomplete investments and that is the best

15:20

phase which we are to some extent

15:22

living through at the moment. If you

15:24

pick up the paper the business

15:26

pages on an almost daily basis

15:28

you will see examples of so-called

15:30

malinvestments that are businesses that have

15:33

failed as interests rise. For instance

15:35

what's quite interesting you've had this

15:37

shift to alternative energy and you

15:39

see in the last few months

15:41

a lot of these wind turbine

15:43

businesses again you have classic businesses

15:45

with long dated revenues levered up

15:47

quite a lot and they have

15:49

been running into trouble over the

15:51

last year or so. So there's

15:54

another example no one would really

15:56

think offhand that the shift

15:58

from hydrocarbons of energy

16:00

was hugely influenced by the levels of

16:02

interest, but it is the case and

16:05

suddenly as interest rates go up, a lot

16:08

of these businesses no longer appear viable. So

16:12

just to play devil's advocate, Edward

16:14

and Howard, you've both written

16:17

that when returns on

16:19

safe assets are too low because interest rates are

16:22

too low, people will often reach for yield and

16:24

go into more speculative things. And as

16:26

a result, capital often flows into companies

16:29

that eventually go under. But

16:31

what we've also seen historically during these periods

16:34

of ultra low interest rates is that

16:36

capital flows into very innovative things

16:38

like the internet. And

16:41

after the bust following the boom,

16:44

you may see a lot of companies go

16:46

under, but the ones that don't can end

16:48

up really pushing the economy and society forward.

16:51

So my question is then, if we're

16:54

thinking of an environment in which interest

16:57

rates are higher than people have become

16:59

accustomed to, is there a

17:01

risk that that could stifle innovation

17:03

long term? Well,

17:06

I think we know that it's possible

17:08

for rates to be quote too high.

17:10

And you ask would that stifle innovation?

17:12

If you think about it, the main

17:14

way that rates get too high is

17:16

that the central banks make them too

17:18

high. And their purpose in doing so

17:20

is to cool off an economy which

17:22

is inflating. So their purpose is yes,

17:25

it's to stifle and you can't make

17:27

an omelet without breaking some eggs. You

17:29

can't cool off the economy without causing

17:31

some projects to be ignored that might

17:33

have had merit. And by the way,

17:35

normally you can't cool off a recession

17:37

without raising the unemployment rate and

17:40

making some people lose jobs. But

17:42

just to go back to Anna's point,

17:44

you have canals and railways and let's

17:46

say electricity utilities rolled out in the

17:48

1920s and then the internet in the

17:50

1990s and AI today. And I

17:55

think bubble in technology can speed up

17:57

the adoption of a new technology. It

18:00

may be good for society, it tends not

18:02

to be good for the investors. I'd

18:05

say i think I say sun devils hey

18:07

I'm at some that raises have some time

18:09

ago or them but I think I'd probably

18:11

say that the steaks the made it benefits

18:13

that consumers as the expenses investors. I think

18:16

the other point is that you can the

18:18

have back tell us what we do with

18:20

my second to get misallocation kept it tends

18:22

to be a very inefficient use. Kept love

18:24

to the railway made the British ad in

18:26

the eighteen forties and Eight and forty four

18:28

eighteen eighty five Huge number. Of new rail

18:31

roads were protected and they will get

18:33

a call see prevalent as entire British

18:35

Gdp said as an example to best

18:37

of the wasn't litigants they places we

18:39

can be to greater demand on capital.

18:42

And. Health minister those projects cancelled that

18:44

even of the projects and will realize

18:46

and I liked site this is between

18:48

London and Peterborough it's his had city

18:50

it not far from Cambridge north of

18:53

London the with free railway lines running

18:55

in London and beat for whereas one

18:57

would have done the job posts be

18:59

to the one would have done the

19:02

job of those resources. A wasted A

19:04

when you waste investment resource is just

19:06

like consumption but without the pleasure of

19:08

consumption. Yeah, this type of waste

19:10

you're talking about. It's definitely something with on

19:13

the internet bubble. And this

19:15

is it May spot members huge

19:17

investment in fiber optic cables. Everybody

19:19

has a picks and shovels of

19:21

the and said oh you meant

19:23

for getting so excited about and

19:25

nice Nine two thousand and then

19:27

massive excess capacity in fiber optic

19:29

cables coming straight up to. And.

19:32

Today another little spurts of investment

19:34

in a I as much more

19:36

resource intensive some people say. I

19:39

said some conference last week in

19:41

which A has was saying that

19:44

Microsofts entire electricity consumption doubled within

19:46

a two month period. As it

19:48

is making the shift towards a

19:50

I'd. Say. There are huge resources

19:53

that are consumed and I think thirty

19:55

one syncing of life from the investors

19:57

perspective which is where our diet coming

19:59

from. the expected main area is to be

20:01

avoided. So to switch

20:04

gears a little bit, one

20:06

of the things that we've been discussing is

20:08

this massive shift from a period

20:11

of ultra-low interest rates to much

20:14

more normal interest rates. And

20:17

you would think that that would lead to

20:19

significant problems in the economy, much

20:22

higher rate of unemployment, but we

20:24

haven't seen that. The U.S. economy

20:26

has been surprisingly resilient. So I'd

20:28

like you both to speak about

20:30

this soft landing narrative

20:32

that is currently so dominant.

20:35

If you say, well, we'd like to

20:37

cool off the inflation rate but not

20:39

cause anybody to lose their jobs, normally

20:41

that's considered impossible. At the

20:44

moment we're going through a thing

20:46

here where it looks like the

20:48

hope of the so-called soft landing

20:50

might be realized, and that is

20:52

the cooling off the economy to

20:54

lower the inflation rate without causing

20:56

a recession and an uptick in

20:58

unemployment. Normally considered unlikely, possibly is

21:00

going on at this time. I

21:02

know the optimists think so. I

21:05

think I'm sticking to my guns

21:07

and saying if the nub of

21:09

the book I wrote in the

21:11

years I spent thinking about these

21:13

ultra-low rates is that the financial

21:15

world was distorted out of all

21:18

recognition, removed so far from normality,

21:20

by the fact that interest rates were low and

21:22

the assumption that rates were going to remain low

21:24

for a very long period of time. It

21:27

would seem to me an extraordinary

21:29

surprise that you could

21:31

shift from this ultra-low

21:34

rates to, as Howard quite

21:36

correctly points out in his letter,

21:38

a just a normal rate, not

21:40

a high rate, just a normal

21:42

rate. So my hunch is you

21:44

cannot make that transition without the

21:46

wheels coming off the bus. And

21:49

Howard, you're probably following this more closely than

21:51

I am, but first half of last year

21:53

seems to be evidence of a downturn in

21:55

the credit cycle and you could see unit

21:57

tightening of the Fed's data on the senior

21:59

loan officers. They have a friend to

22:01

calculates something called the credit impulse which

22:03

is knocking at the difference in rate

22:05

of credit growth two month period another

22:08

and if credit starts growing most ladies

22:10

and the predisposed that has this of

22:12

negative shock the Feds impulses next to

22:14

them first half of last year and

22:16

now it seems as if some of

22:18

these indicators are turning a bit but

22:21

to me the system hasn't cleared. As

22:23

you see in the papers we get

22:25

a lot of stuff ordinate commercial real

22:27

estate that again the Us I think

22:29

a of culprits. To engage in finance

22:32

engineering to the Alcs low interest rate

22:34

said they will be protected for a

22:36

short period to the transition to higher

22:38

rates, but whether they have interest rate

22:41

taxes taken out, insurance on short term

22:43

rates, or whether they can extend their

22:45

loans for short periods, but in time

22:47

that will mature and I'll have to

22:50

responded at higher rates. I think the

22:52

real estate market takes a while to

22:54

tug six in the Us where people

22:56

burrow long dated thought. I think that

22:59

that says to. High rates particularly

23:01

in countries in movies market site

23:03

where I am in the Uk,

23:05

Australia and Canada where the movies

23:07

apprised of short term debt that

23:09

will be painful those is it

23:11

amusing stories. So I read this

23:13

morning a government minister bleed it's

23:15

own out as Resigns says He

23:18

says that his ministerial salary of

23:20

one hundred and twenty thousand pads

23:22

year with puts him in the

23:24

top three percent of English incomes

23:26

was insufficient to pay his book

23:28

is is is mortgage payments. Had

23:30

gone from eight hundred pounds a month

23:32

to two thousand pounds a month which

23:35

was I think that calculated from a

23:37

rad thirteen percent to just over thirty.

23:39

said. I think this city to higher

23:41

rates and impact them is a long

23:44

the dated one. With. Definitely saw

23:46

bit of a lack of a Gf see

23:48

from when things first started to slow down

23:50

until the real crisis it I was holding

23:53

that pretty closely and as I'm sure you

23:55

worth. If you remember in

23:57

two thousand seven I think and

23:59

pools. The news says you think

24:01

she's has of the bastards hedge

24:03

funds windows. Everything's fine, you got

24:05

the strongest economy and the Us

24:07

stock market heat. It's pizzotti of

24:09

a sudden in October Seven, so

24:11

it's even in two Two thousand

24:13

eight the indicates it's were a

24:15

bit confusing as to how serious

24:17

this was going to be and

24:20

in that sense it reminds me

24:22

In retrospect we will see these

24:24

things.com bust all the credit boss

24:26

has been very clear everyone. youth,

24:28

diseases, most people take that and.

24:30

Of my thought about that is it

24:32

and I gave that while both terribly

24:34

grab some investors service argument is. Off.

24:36

To super bubbles they're on a

24:38

soft landings and this the everything

24:40

bubble was definitely a super bubble

24:42

that history is not a hundred

24:45

percent accurate. We used to say

24:47

for most dangerous was in the

24:49

English language. worth this time is

24:51

different is this observant A Now

24:53

we have to qualify that. say

24:55

the five most expensive words they

24:57

use. Language at this time is

24:59

never different. You have to be

25:01

site be cautious, blood still sticking

25:03

to my guns and saying the

25:05

what we cool. A hard landing

25:07

coming from this out for low rate

25:09

period is still on the cards, but

25:12

I could be wrong. I

25:14

just want to point out back in

25:16

Nineteen Ninety Nine, if you will, When

25:18

the tech bubble was raging, people use

25:21

the for worst words in the world

25:23

is different this time to justify that

25:25

bubble. Saying very simply, the Internet will

25:28

change the world and there was excess

25:30

investment And the internet and anything internet

25:32

related or ecommerce related. Everything that came

25:35

out doubled or tripled quadrupled the first

25:37

day. Companies found they could increase the

25:39

value of their stocks by adding the

25:41

to their corporate name's Guess what? The.

25:44

Internet change the world. It's inarguable.

25:46

And the companies they're aware broad

25:49

public. In Nineteen Ninety Nine or

25:51

early Two thousand, the vast majority

25:53

of them ended up worthless. So.

25:56

The to are not inconsistent.

25:58

It was around. Is excessive

26:01

investment abetted by speculative

26:03

sinking producing capital destruction?

26:07

And. I can as you when you

26:09

read about the Ai excitement today, doesn't

26:11

that have it is a resonance Friend

26:13

Since I got peace in my email

26:15

inbox day with a link to a

26:17

woman on Cnbc saying we should no

26:20

longer value companies with her earnings. Put

26:22

all my in as a rick to

26:24

be a market cap to Innovation Max

26:26

and Ninety Nine Two Guys and we

26:28

had these terrible i could use a

26:30

strong was a terrible indicators advantage of

26:33

these of I bulls of this let's

26:35

say. I think have you noticed

26:37

out how they're talking about our A eyes

26:39

gonna. Change. Productivity And

26:41

now. Hey. So that means

26:44

we're not going to have to work

26:46

and these companies will be fantastic. A

26:48

valuable, at least as liberal thought capital

26:50

gains. It reminds me very much Shoots

26:52

the talk ran Ninety nine, two thousand.

26:54

So yes a I'd probably will change

26:57

the world in the ways of the

26:59

internet. probably not as much or units.

27:01

What you're proving is this theme I

27:03

keep going back to are attributed to

27:05

Mark Twain. History does not repeat but

27:07

does ride and whoa we're doing is

27:10

we're seeing in the handle. turned once

27:12

more and. Just like the Internet in

27:14

Ninety Nine Nine are made to bold

27:16

statements: Number one, A I Will Change

27:18

the World and number two: Most.

27:21

Of the companies that people

27:23

are invest the and today

27:25

for a purposes will end

27:27

up worthless and those two

27:29

things are not inconsistent is

27:31

when the naive or hopeful

27:33

investor tastes a leap that

27:35

see irresistible trend will produce

27:37

sure profits. That's when you

27:39

get into trouble. What's interesting

27:41

to me listening to this conversation is as

27:43

or talk about Ai. Whether you're talking about

27:46

the potential for a soft landing assets in

27:48

so much market commentary, people focus on Syria,

27:50

or they focus on forecasting models. You're both

27:52

looking at what's happening through the lens of

27:55

history, so I was hoping you could both

27:57

speak a little bit more about what. Are

27:59

the benefits of doing that as

28:01

opposed to were lying so much

28:03

on theory or forecasting models? I.

28:06

Think that again. If we're talking

28:08

about science, we could talk about

28:10

Syrian forecasting models and how things

28:13

are supposed to work. I

28:15

always quote the great says Richard

28:17

find him and who said that

28:20

physics would be much harder for

28:22

electrons had feelings. The problem is

28:24

that our field of financial behavior

28:27

stems from human behavior. and humans

28:29

have ceilings so. They. Tend

28:31

from time to time to

28:34

excesses in both directions from

28:36

which we have to retreat.

28:38

So Bubbles addresses. This is

28:40

the result of psychological swings

28:42

and there's nothing that kin

28:44

a bed a psychological swaying

28:46

more than excesses in interest

28:49

rates. So. When they're

28:51

too low is a bets

28:53

speckled behavior. And the search

28:55

for profit in risky things

28:57

and when they're too high

28:59

it causes the retreat from

29:01

the center. So arena and

29:03

pain in terms of price

29:05

declines and projects going begging.

29:08

And. Old. I'd say that uses

29:10

of his in science is a comment

29:12

I like from gym grants visas. Progress

29:15

in science is linear that in finance

29:17

it's seek to cool all symbols a

29:19

light say we keep on standing on

29:21

the same rate and eat any say

29:24

it's and this is one thing science

29:26

he picked up had when I was

29:28

real writing that will take the high.

29:30

Missed his the Japanese in the late

29:33

nineteen eighties. It was a great opposite.

29:35

We'd have a seat and take notice

29:37

see by then electronic. communications technology

29:39

was pretty fast and then you

29:41

have the ensnared of episode features

29:44

stock market bubble infatuation terms and

29:46

excesses again with the internet it

29:49

says you in fact that any

29:51

of our technological or even economic

29:53

theoretical advances didn't at sea same

29:56

survey than if anything is a

29:58

lousy twenty five years. They've

30:01

been more extreme than at any time in

30:03

history. So I think the history gives you

30:05

an inkling of what's going to happen. Then

30:07

what actually happens is quite shocking because it's

30:09

often more extreme than the history books contain.

30:12

Danielle Pletka One last topic I'd like

30:14

to discuss. Howard, in your memo

30:16

and Edward, in your book, you're both somewhat

30:18

critical of the activism of central banks that

30:20

we've seen especially in the last 15, 20

30:23

years. But what would we think of

30:25

as a better alternative looking forward? What would

30:27

that mean? Edward F. Kennedy Well,

30:29

I wrote a memo in the fall of 22 called what

30:33

really matters. And in there

30:35

I decried hyperactivity, not just with regard

30:37

to central banks, but in general. And

30:39

I said when I was a boy,

30:42

there was a saying, don't just sit

30:44

there, do something. And what I would

30:46

suggest is to invert that, don't just

30:48

do something, sit there. There's

30:50

an assumption that because we have

30:52

theories of how the economy works,

30:55

that if we turn a certain crank

30:57

or flip a switch or take a

31:00

policy action, we'll get the result we're

31:02

supposed to get. But these tools are

31:04

crude and unreliable and they

31:06

don't always work. As a

31:08

result, there's not always something good

31:10

to do. Just like with market

31:13

timing, I think that policy decisions

31:15

at central banks can be rather

31:17

reliable if made at extremes, but

31:19

unreliable in between because they don't necessarily

31:22

work the way they're intended. So

31:24

I think that the central banks

31:27

should get out of the business

31:29

of being activist every day and

31:31

only take very strong measures at

31:34

extremes when necessary. Edward F. Kennedy

31:36

I agree with that. My feeling is

31:38

that the central banks should definitely get

31:40

out of the way of putting a

31:42

safety net under financial markets. That is

31:44

encourage people to take on more risk,

31:46

which means that they have to roll

31:48

out a bigger safety net time and

31:50

time again. The other thing I think

31:52

the central banks should do is not

31:54

just focus on their near-term inflation target,

31:56

but consider other stuff. You want to

31:58

see what's happening. To asset prices

32:01

that credit grade school, quality of credit

32:03

or med leverage to the system since

32:05

they really need a much broader focuses,

32:07

narrow focus on the short term inflation

32:10

target with a bit of financial safety

32:12

nets. Raid in for free is really

32:14

what we've had the last twenty five

32:17

years and has taken us from one

32:19

grade bubble to another. More people made

32:21

great deal of money from that sonos

32:23

I may once happy to The main

32:26

street is not happy with the outcome

32:28

and I think the central. Banks are

32:30

in denial to their route with. Let.

32:33

Me Just add that there are

32:35

people who believe that the government

32:38

an output central banks under that

32:40

heading are great at the things

32:42

they're supposed to do and they

32:44

want them to do more and

32:46

more and six allies for them.

32:48

And there are other people you

32:50

might cost free market people there

32:52

leery of that proposed and they

32:55

want the government's do less is

32:57

that's another pendulum which swings from

32:59

government's doing more to government's doing

33:01

less and it'll ever be. So.

33:04

To end what has really been a

33:06

fascinating discussion I'd like to hear. From

33:08

both of you to seventy final thoughts or

33:10

take a ways that you'd like to leave

33:12

our listeners with. Last summer

33:14

I wrote a memo called Taking the

33:17

Temperature talking about five market cause that

33:19

I made that happen to have been

33:21

successful and in every case it was

33:24

basically done not to subject matter expertise

33:26

with regard to technology and two thousand

33:28

for residential mortgages in two thousand and

33:31

eight, but rather understanding the behavior of

33:33

investors. Taking the temperature of the Market

33:35

and let's bear in mind that the

33:38

temperature of the market is largely determined

33:40

by what the central banks do with

33:42

interest rates and their influence. On

33:44

speckled of behavior. my last

33:47

though it is out and i had

33:49

this fathers of the credit cycle and

33:51

i'd seen as hussein ali with added

33:53

an interesting point to the credits i

33:55

could it looks as if it might

33:57

be telling us with i'm suspecting with

33:59

that life false news. I would keep

34:01

my eye on the Thank

34:06

you both so much for joining me. This

34:08

was a really, really fascinating discussion. Edward, thank

34:10

you for participating. Thank you for

34:12

having me, Alex. You're sending a lot of my books.

34:14

Good. Thank you. Thank you. Thank

34:17

you, Anna. Notes

34:26

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