David Kuo talks to economist Roger Bootle.
You can download or listen to this podcast here.
David:
This is Money Talk, the weekly investment podcast from the Motley Fool. I'm David Kuo, and today I am joined by one of the City's best known economists, Roger Bootle. Welcome to The Motley Fool, Roger.
Roger:
Pleasure.
David:
It's a pleasure to have you here, I have been a follower of yours for decades.
Roger:
You're the one!
David:
I am the one! – yes, from the old Channel 4 days. Now Roger, you've written what I consider to be one of the most enlightening books about the economic downturn, the book is called "The Trouble With Markets", but instead of calling the economic downturn a depression, or a recession, you prefer to call it an "implosion" – why have you chosen such an emotive word?
Roger:
Well, I think it does describe what happens to financial markets and banks towards the end of 2008. It wasn't so much that there was, we didn't know there was going to be an economic depression anyway, but the events in the financial markets were truly amazing, I mean I've never known anything like it in the whole of my career, which of course, as you can see and the listeners can't, goes back to about 1883; I mean, never anything like it, banks on the point of collapse left, right and centre, share markets collapsing, just about everything collapsing. I think implosion accurately described what that felt like.
David:
But isn't it fair to say that not all banks imploded? – I mean, the good banks remained standing, like HSBC and Barclays, they were OK, but not all banks were affected in exactly the same way?
Roger:
Well, not all banks collapsed, because they weren't given enough time to do that, I mean my suspicion is that, if central banks and governments on both sides of the Atlantic hadn't intervened the way they did, I suspect just about every single significant financial institution, and quite a few insignificant ones as well, would have actually collapsed.
David:
Even the good ones?
Roger:
Yes.
David:
So what caused this mess then, Roger? Who took their eye off the ball here?
Roger:
Well, there's a very long list of people who are responsible, and my own view is that the banks and the financial markets are themselves partly responsible for embracing too much risk, but the failure can't be, I think, laid just at the door of the private sector, because after all these were regulated, these banks, and the amazing thing is that all the banks that went bust, or nearly went bust, had earlier on easily met their capital requirements, as laid down in the Basel I and II regulations, and the regulators were completely asleep on the job, that's quite clear, they were just box ticking effectively, they knew vaguely what was going on, but they didn't seem to see what the real consequences were.
I go through in the book a whole list of characters that I think are partially responsible for what happened, but then I try to get to the underlying causes, and I think you could say that part of the underlying cause is to do with China, it's the fact that China's saving so much put the countries of the west in a very difficult position, and I think it was the Chinese behaviour that effectively led to what must be regarded as a huge monetary policy mistake by the central banks, that's to say, running interest rates.
David:
So are you saying saving is a bad thing then?
Roger:
No, I'm not saying saving's a bad thing, this very much goes back to Keynes, the so-called Paradox of Thrift, in general saving's a very good thing, and as Winston Churchill said, particularly if your parents have done it for you, but no, it's a question of whether there are going to be other people in society who can take up the resources that you're releasing by your saving, spending that money in order to create demand, and what we had was a system where the Chinese were doing tons and tons of saving, over and above the investing they were doing, which meant we had to do lots of spending over here to make up for their non-spending, and how did we do that? – well, by cutting interest rates and by allowing easy credit, that was the root, and the result was bubbles.
David:
But the point is, you see, was the Bank of England looking at the wrong thing? I mean, we at The Motley Fool were writing for months before the crash, that we could see an asset bubble forming, we could see the housing market accelerating at such an extent, that we said, it cannot carry on, and so we were saying that something needed to be done. So shouldn't the regulators have been doing something about that?
Roger:
Well, wonderful though you were, you weren't the only ones to see the bubble in the housing market!
David:
Well, exactly, yes.
Roger:
Some of the rest of us saw a bubble in the housing market too. From the point of view of the Bank of England, and the authorities, the Bank of England, of course, doesn't set the inflation target, that was set for it by the Chancellor and the Treasury, and I suppose the Bank could defend itself by saying, look, we were told to hit 2% on the CPI, that was our job, we did the best we could in the circumstances.
Actually, I think that's a bit disingenuous, because they could have interpreted their remit a bit more broadly, I think. My view is, in what sense can you say that you've got a system characterised by stability over the medium term, if you've got the most important asset class of all, namely property, going up by 20 or 30%? So the CPI may be going up at 2%, or 1%, but so what? – you know that that can't last, if property is raging away. So I think there was a big failure by the authorities in general, by the Bank of England and the Treasury and the Chancellor.
David:
So what have we learnt from this then? How are they going to avoid bubbles forming in the future? Is it the job of the Bank of England, or the FSA, or the Treasury, to prick bubbles wherever they see them?
Roger:
Well, I don't think it is the job of any of those people to prick bubbles wherever they see them, of course we don't yet know what the final answer to all this will be, we're still debating it, and my suspicion is that monetary policy will have to take more account of bubbles. Now, I don't want to see a system which the Governor of the Bank of England, or anybody else, sits down and says, "Aah, there's a bubble", and interest rates go up – tries to burst bubbles left, right and centre, I think that would be crazy, but equally I think it's crazy to go to the opposite extreme, the one we've been in, where effectively the central bank turns a blind eye, or almost a blind eye, to the fact that property prices are inflating by 20 or 30%. So in my world, where a central bank saw that, it would say, "Aha – this is a clear indication that monetary policy's too loose, and even though the current rate of increase of the CPI is low, interest rates have got to go up."
David:
So what did we learn from the days of the dot-com boom then? When we saw the dot-com boom, the bubble bursting there, Alan Greenspan cut interest rates quite drastically, and he tried to increase liquidity in the market, some people are laying the blame on Alan Greenspan, and saying, he might have been the guy that was at fault?
Roger:
Oh, I think he does carry some responsibility for what's happened, but I wouldn't want to be too hard on him as an individual, I mean he was just operating in a general context of what he was supposed to do, what central banks were supposed to do, and I go back to the point about China – why did Alan Greenspan feel that he had to generate all that demand in the United States with very low interest rates? – and the answer is, because it wasn't coming from the rest of the world, they were doing all this saving.
David:
So is China going to reverse all this now? Are the Chinese going to start spending all their savings?
Roger:
Well, this is the 64,000 dollar/yuan question, I suppose, they're going to be a difficult lot to budge, I suspect. I say in the book that I can't see a return to full employment and real prosperity and stability in the west unless China and the other super savers (because it's not just China), unless they change tack, and if they do change tack, and they expand domestic demand significantly, then I think there's a lot of room for optimism around.
Why shouldn't they, after all? – we're used in this country to the idea that it's pretty difficult, and difficult politically, to persuade people to spend less, but why should it be so difficult to persuade people to spend more, particularly in the case of China, when people are so poor? So I think there is the potential there for a macro solution in which we all live happily ever after.
David:
But how will China expanding spending within its own country – I mean, isn't it a bit arrogant of us to believe that just because the Chinese are spending money, that they're going to start importing UK goods or goods from Europe?
Roger:
Well, there's a bit of a problem as far as the UK is concerned, because we don't sell that much into China, they don't seem to want the sort of stuff that we provide, you know, broadcasts from the Motley Fool, and economists' books, and so on, but for the world as a whole, I think much increased demand from China would make a big difference, and of course they could actually bend their purchases a bit more towards the outside world by allowing their exchange rate to rise, and in our case, the benefits might come indirectly, I mean for instance Germany has done very well in its experts to China, well if Germany and France and other countries sell a lot more to China, then they'll be in a better position to buy more from us.
David:
But if the Chinese currency rises, if the yuan rises, doesn't that export inflation from China into the UK? – I mean, those flip-flips that we bought for a pound, for that pound now we'll only be able to afford the flip, not the flop? – the flop will cost another pound now?
Roger:
Well, no, I mean the Chinese aren't going to allow their exchange rate to go up a very long way, are they? The flip-flops used to cost a pound, maybe they're going to cost £1.10, I think we can cope with that, frankly.
David:
That's a 10% inflation, isn't it?
Roger:
That's right, well of those particular goods, it will be, yes. Maybe what will happen is that inflation will be a bit higher than it would otherwise be, but it would otherwise be, in my view, extremely low, so I think we could tolerate a bit more inflation.
David:
The other thing is, how much are economists to blame for this recession? – because didn't the economists predict 20 of the last three recessions?
Roger:
Oh, economists are absolutely useless, they're terrible!
David:
You yourself being an economist!
Roger:
Oh yeah yeah, I'm about to be shot, I think, by the Economists' Guild, I really do think the economists are the group who, as I say in the book, are ultimately responsible for all this, because they're the ones who came up with the ideas (I say economists, of course not all economists), but in particular the lot that come from Chicago, and I'm in danger of being lynched by the Mayor of Chicago, and a few other people, I really have a go at the contribution of Chicago University, and the idea that you can leave the markets well alone, I know you're a fan of free markets, but I think there are limits, and the so-called efficient markets hypothesis. This is the thing that I think really explains what went on – it's the idea that the markets don't have problems, don't create bubbles, and you can leave well alone, and the great irony of all this, my own view, is that the regulators came to believe it. If you ask yourself the question, why didn't the central banks and regulators and the authorities do more to stop all this, I think the answer at bottom is because they didn't believe it needed to be stopped, because the markets know best.
David:
Well, the thing is the markets do know best, over the long term, don't they?
Roger:
Well, we all know what Keynes said about the long term! – and we were very nearly dead in pretty short order, in my view, at the end of last year. No, I mean, it's quite clear, I think, the evidence is that markets produce bubbles, and sometimes bubbles can be extremely dangerous.
David:
So are we out of the woods yet? – can we put our feet on the coffee table, and go get that can of beer and enjoy ourselves now? Is the worst over now?
Roger:
No, I don't think we can relax – the worst is probably over, in the sense that I think we're not going to suffer another complete financial collapse like the one we suffered in what I call "the great implosion". In my view, largely because banks, central banks and governments, although you don't want them to do this, because they've stepped in, and shored the system up, I don't think it'll be quite as grim as it was towards the end of last year.
Having said that, I think many things can go wrong still, my view is that housing markets are still over-valued in many countries, I think there's a big risk of protectionism, a lot of the bounce we've seen so far is short term in nature, and of course we've had this massive stimulus by governments and central banks, which can't be continued forever, we can't go on printing money or churning out these huge deficits, letting the debt ratios rise, so at some point or other that tap's got to be turned off, but for all those reasons, my own view is, it's going to be a long, hard slog.
David:
So are you in favour of quantitative easing? – I mean, was the government right to step in and start printing 175 billion pounds' worth of new notes?
Roger:
Well, I was in favour of it actually, but more, as it were, for lack of much else that could reasonably be done, I mean like the Irishman asked the way to Cork, of course I wouldn't be starting from here, but I hope I'm not going to be pictured as some sort of anti-racist prosecution now, talking about Irishmen being asked the way to Cork, but anyway, I wouldn't have started from here; but given that we are starting from here, I think they've done the right thing, yeah, and I don't think quantitative easing is the answer to a maiden's prayer, and it so far hasn't done a huge amount of good, it seems, but at the margin I think it has done some good, it's boosted asset prices, reliquified the markets a bit, and I think on balance that's been good.
David:
Do you believe in moral hazard?
Roger:
Not for me, no – I'm completely upstanding. Well, I do believe in moral hazard, yes, and I think this is a real problem for the system, and it's a sense in which we've got to have fundamental reform, we must not allow again the situation to rise, I think, where the rules of the game aren't clear, and the authorities are making them up as we go along, and bankers get bailed out, and then they pay out these huge bonuses – this is absolutely crazy, so we have to completely refashion the system, I think, in such a way that some institutions can go bust, and we know which ones, and what's more, they know which ones too.
David:
Really?
Roger:
Oh yeah.
David:
And so you believe in the separation of banks then? You believe in the separation of the investment bank from the retail bank?
Roger:
Yes, I don't think this is a perfect answer, I mean there are people who see it as a magic bullet, I don't see it that way, but I think it's got the guts of the answer, that's to say that large parts of the system, in my view, have got to be protected against everything, and therefore, of course, have got to be regulated, because you can't have it both ways, and other parts of the system can largely be left to their own devices, I think not completely, but largely, and in those other bits of the system, the presumption must be that they could be allowed to fail.
David:
So people listening to this podcast now will be saying, look, you can't let Roger go before he actually tells us about the four asset classes. Now, we'll start with the first one – cash, do you think that sterling will fall in value for UK investors?
Roger:
Well, I always say about exchange rates that economists can't say anything useful about them, and I then go on to give a view, so I don't want to ruin that record. I mean, economists' record on exchange rate forecasting is absolutely dreadful, and I don't think these things are perfectly unforecastable. Having said that, my suspicion is that sterling's average value is actually low, and especially low against the euro, so I don't do tipping for investments, so I don't even do short-term investing myself, I try to work out what I think the fundamental value is and I invest accordingly, and if I were having to do this for a run of years, for three, four, five years, I think I'd be better off in sterling than in the euro.
David:
You dumbfounded me for a second there – you think the sterling will outperform the euro?
Roger:
Yes, I do. The dollar's a different kettle of fish, because the dollar and the sterling are two currencies beset by very similar problems really, and I just don't know; my sense is that the right value for the pound is probably a bit lower than this against the dollar actually, so I don't think I'd make a bet on that actually. If I was forced to make a currency bet, I think it would be sterling euro.
David:
So reading between the lines, Roger, are you almost saying that the pound shouldn't go into the European monetary system then?
Roger:
Well, I've never said the pound should go into the European monetary system, I mean the euro, you mean. If it ever was going to go, I suppose it would be advantageous to go in at this exchange rate, compared to where we were several years ago, but I've never been a fan of this from Britain's point of view, and in particular those people who now say we should go in, because we've taken advantage of this huge drop, they of course are by and large the same people who said we should go in when the pound was about 30% higher, and although I don't think this is likely, it's to my mind not inconceivable that, over a five or ten-year period, we might want and need the pound to go substantially higher against the euro, which of course we couldn't achieve if we'd gone in, fixed the exchange rate now, we couldn't have it, so I think we benefit from having exchange rate flexibility.
David:
OK, so what about property now? – is property an asset class that you think that people should be looking at seriously?
Roger:
Well, I draw a real distinction between commercial and residential property, and as far as commercial property is concerned, I've now started to get a bit bullish, the prices have fallen a long way, the yields are pretty high, and it's not outrageously cheap, but I think now it's looking reasonable value. Of course, you've always got to do your homework, you've always got to buy well, not pay too much, all that sort of stuff, but you can do that, of course, when the macro circumstance is either against you or in favour of you, and now I think, for commercial property, they're broadly in favour, and I think there will be some opportunities there.
Residential property I still don't like, from an investment point of view. Now of course, this is complicated, because people have got to live somewhere or other, and there's more to life than money, so I'm not suggesting that people should sell up necessarily, or stop buying, or don't not buy their dream house, because of something about prospects for capital increase; but for my money, if I were investing purely for investing, as it were, I don't like the residential market.
David:
Right, OK. So can we move on to bonds now? – how do you feel about UK gilts?
Roger:
Oh, I'm in love with them, I always have been, I treasure my war loan and kiss it every night. I feel differently, I'm an economist, so I'm allowed at least two views, as you understand, usually ten; in this instance I have two. In the long term, I think gilt holding is extremely dangerous, because the yields are very very low, and in the medium term they're going to have to, at some point, go higher, conferring capital losses of course on existing holders.
My own view is that that's going to be some way off, and I actually quite like gilts for the immediate future, I suspect the yield, believe it or not, may come even lower, conferring some capital gains to holders, but these are not riskless instruments, and if you go in for the long end, as I do, you've got to be very conscious that you're holding something that's potentially extremely risky, and at some point or other, that's when things turn, you've got to get out.
David:
OK, and finally the fourth asset class is equities, or shares – how do you feel about shares as an investment class?
Roger:
I feel reasonably happy about UK equities at the moment; not as happy, of course, as I would have been six months ago, but yeah, I think they look reasonably valued, they're not stonkingly good value, but they look to me to be reasonably good value. I don't expect, by the way, a wonderful performance over the next six months, because they've gone up so much this year, I think they're probably getting to the end of their short-term tether, but for someone like myself indeed, who doesn't trade, doesn't fiddle around with stocks, but tries to invest for the long term, my suspicion is that, if you buy at this level over the long term, you'll get a reasonable return.
David:
That's very good. So, of course the killer question now is, Roger – where are you investing your money yourself?
Roger:
Cash! No, I've got money in all these various categories that I've said I like, I've got probably too much in gilts, given I want a sort of balanced portfolio, but I feel I understand them, I know the risks and I feel reasonably comfortable with them. I only hope I manage that OK, but I did buy equities earlier on this year, I think they look reasonable, and some commercial property, and dare I say it, still a certain amount of cash.
David:
Well, that's wonderful, and I have to also reveal that today was the day when we issued a press release saying that we believe that the FTSE will hit 7,000 points in 2010, and the reason why we actually say that is because we believe that so much of the FTSE 100 is no longer UK companies as such, they are companies that do a lot of their business overseas.
Roger:
They're abroad, yes.
David:
That's right, so therefore I think, even if the UK economy doesn't recover, the rest of the world could recover quite strongly. One of the most amazing things is British American Tobacco does not sell any tobacco here in Britain at all!
Roger:
Yes, it's all exports.
David:
It's all exports, all of its brands are completely unheard of in the UK, and a lot of people think, oh, you know, doesn't ICI still exist? – no, it doesn't, it no longer belongs to us, and all these other great companies like GlaxoSmithKline is as much American as it is UK; AstraZeneca is Swedish, Anglo Swedish; and Royal Dutch Shell is, as the name suggests, Dutch, so many of these companies no longer belong to the UK. But anyway, we have a copy of your book to give away to our listeners, but they have to answer this simple question, Roger, right? – and this question is, at which one of the three great universities did Roger study economics? Was it at Oxford, Cambridge or Hull?
Roger:
Do I answer that?
David:
No you don't answer this, Roger!
Roger:
I can't remember actually!
David:
No, I stole this from Blackadder by the way, and please email your answers to moneytalk@fool.co.uk. Thank you very much for coming in, Roger, today.
Roger:
A pleasure.
David:
It was great to have you in. Now, I end each podcast with a quote, and today's quote comes from Homer Simpson, of all people, and Homer said: "If I was President Obama for a day, I'd order the Treasury to stop printing money and start brewing beer, that would end this depression pretty damn fast" – and I think he kind of sums it up there, we tend to worry too much about these things sometimes, and maybe if we just break open a can of beer, we'd feel a lot better.
Roger:
Well, for me it'll be a bottle of wine, I'm afraid.
David:
OK, good for you! Right, so this has been Money Talk, I have been David Kuo, and my guest has been Roger Bootle. If you have a comment about today's show, you can post it on the Money Talk blog, which you can find at www.fool.co.uk/podcast, and if you have a suggestion about future topics, you can email me at moneytalk@fool.co.uk. Have a great week everyone.
More podcast transcripts:
