Russell Napier: give everybody in China a credit card

Merryn Somerset Webb talks to economic strategist Russell Napier about quantitative easing,Brexit, and how to get China spending.

If you missed any of Merryn's past interviews, you can see them all here.

Merryn: Hi, I'm Merryn Somerset Webb, editor-in-chief of MoneyWeek magazine. Welcome to another one of our videos. We are super lucky today; I have with me Russell Napier, who, among many other things, is the author of this book, Anatomy of the Bear. Now, I'm afraid that when you read this, and I really hope you do, you'll find a rather gushing introduction from me at the beginning, because I do think that Russell is one of the greatest economists of our time. Russell, how about that?

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Russell: I prefer strategist to economist.

Merryn: OK, strategist, of course, yes, he's not an economist; not an economist, a strategist.

Russell: Well, the economic profession is in some disarray. The strategy profession has always been in disarray; I prefer the latter.

Merryn: OK, so the only way is up for a strategist really.

Russell: Absolutely.

Merryn: OK. Well, what we're going to talk about today is where the world is, where it's going and what our strategy as investors should be on the back of that. We last talked about a year ago, year and a half ago, and things have moved on considerably since then. You weren't looking then for a deflationary scenario that's playing out quite nicely. And since we last talked we've begun to see interest rates go lower and lower and now turn negative.

So let's talk about that first, is that a policy you approve of or one that you think might work?

Russell: No, it's a policy which obviously the financial system, when it was set up, never contemplated coming to pass. It is worth thinking, well, if we set up the financial organisations and suddenly something brand new happens, what does it mean? If you, and people watching this, begin to think about it from first principles, it does actually begin to undermine many of the financial models that exist. The key one obviously is banking, and we think of banking today and what it means for banking, and that's fairly obvious. it could, if this filtered through into deposits in any significant way, lead people to prefer the banknote to the deposit; we're not there yet, but it could happen.

That clearly used to be called a bank run, and that's exactly what it is for a very different reason. But it clearly creates problems with the financial system, not benefits for the financial and the banking system. And it's not really bringing down interest rates. Lending rates are certainly not having that effect in Sweden, where it's been in place longer than anywhere else. So the policy was there to try and presumably make lending cheaper or borrowing cheaper, and it hasn't done that.

Merryn: Oh, but that's interesting. Why isn't it bringing down lending rates, why doesn't it work?

Russell: I would say that one of the reasons it's not working is there's a lack of demand for money. We always work on the basis that this is a supply-side issue, that the financial system just needs to be better fixed and then there'll be demand at a certain level of interest rates. And I would keep going back to this demographic function. The banking system, particularly outside of Europe, has been disintermediated, so most of the big corporations borrow outside the banking system. So that leaves us, the individuals, borrowing inside the banking system.

And there's a demographic issue there that we just spent the last 30 years gearing up and in preparation for retirement are now presuming to gear down. So interest rates that are supposed to stimulate demand for credit don't seem to be working. There's some impact in the corporate sector; you can particularly see that in the United States of America. But we now have a big de-gearing, a headwind and it may be irrelevant what interest rates are. When you get to a certain age you either de-gear or you don't retire.

And I just need to mention insurance companies as well, because they don't get enough publicity. The Bundesbank wrote a paper in October 2014 forecasting that by, I think it was 2020, there'll be solvency issues for 20% of the German insurance industry, given the yield curve in October 2014. Now, the whole yield curve has shifted down since then, therefore exacerbating this problem.

Now the Bundesbank is not a strategist, it's respectable, and that's a respectable analyst suggesting severe solvency issues for one of the safest insurance industries in the world. And the more we get to negative rates, the reinvestment yield available that's gone to nothing, it's gone to zero, it's going below zero, is really threatening these models.

So the key problem is not just that so far we haven't had a policy response in terms of a pickup in demand, which maybe demographic and structural, but it's undermining insurance companies' and banks' business models. And that has been confirmed, I think, in the first couple of months of this year, because you're looking at... well, certainly from October you're looking at major bank share prices down 50%. Now the idea that bank share prices come down 50% and this neither reflects the fundamentals nor has an impact on the fundamentals seems to me a bizarre conclusion. But that seems to be the consensus conclusion oh, this is unwarranted, why on earth is it happening? I think you have to pay attention with bank share prices.

Merryn: OK, so you think this fall in bank share prices that we've seen coming into this year is all about the markets suddenly beginning to understand the effect of negative interest rates or super low interest rates on bank balance sheets?

Russell: Yes. And also the lack of demand. And finally for Europe, an important structural shift as well, which is a piece of legislation called the Bank Resolution and Recovery Directive, which very formally raises the issue of BLNs, in other words, large scale depositors, ie not guaranteed by the state,and bondholders would pay a price if a bank had to be resolved. That was always there theoretically in the past, but this piece of legislation came onto the statute book on 1st January.

This is very important. To me it means a structural re-pricing of bank capital, which means bank capital is more expensive for banks, which means in some way they have to feed it on to the consumer. Now we're trying to get interest rates down. But the re-pricing of bank capital is putting the cost that a bank has to charge you and I up. So that was a very necessary structural shift, we all know why it was put it, but it is running entirely counter to the monetary policy.

Merryn: Yes. So we have monetary policy and regulation working in opposite directions, which is something we've seen since the beginning of the crisis, isn't it?

Russell: Correct. It's been there, but this really put it into a different gear, this Bank Resolution and Recovery Directive. If you believe it would be implemented, if you believe that they would actually do it, massively changes the risk of owning bank bonds, bank shares and therefore. There's been quite a few regulatory counter, what would you call it, a headwind, but this one is the biggest one yet and I think that's why the prices have fallen. And if you say something is structural you're implying that they don't go back up and that is what I'm implying, that we just have a one off reset to a lower level.

One of the first responses Deutsche Bank had to this was to go out and buy back its bonds. Well, that's a bank, commercial bank, shrinking its balance sheet. The point of monetary policy is to get a commercial bank to expand its balance sheet. The market cheered when Deutsche Bank bought back its bonds. It might be the right thing for Deutsche Bank, but is it the right thing for the European economy?

So since we last spoke, many things have happened in markets. Some of them affect the real world, it's called reflexivity, Mr Soros. Can a security price reflect the real world? Well, if a 50% decline in the biggest bank share prices in Europe don't affect the real world then, you know, I might as well go and become an economist.

Merryn: Oh no, don't do that, don't do that. So no bank shares in your portfolio?

Russell: No.

Merryn: Never will be?

Russell: No. There's two reasons. One is this cyclical issue and that structural re-pricing. But if you believe in financial repression, which I think most people watching this will understand is eventually creating inflation and holding interest rates below the rate of inflation, in that scenario you'd really want to be investing in people who borrow money, not people who lend money. Also, we're looking at a government which is significantly in financing. So structurally a bank could become a funding mechanism for the state, for the government, and it could be funding it at interest rates below inflation. This is not my view in the next one or two years, but in a structural view that's what banks could become and that isn't somewhere you won't invest.

Merryn: OK. Well, let's talk a bit more about this then. One thing we know there isn't much we know but one thing we know is that governments and central banks are absolutely determined one way or another to get inflation. The other thing we know is that they're not doing a very good job with this at the moment, although actually there are signs of inflation popping through in the US in the moment, aren't there? But nonetheless we're looking at the broad... broad spectrum we can see there's not much success here. So what do they do next? I think we can agree that negative interest rates aren't really working very well as a policy, what's the alternative, where do you see us going next?

Russell: Well, we keep focusing on central banks. I think it's easy to get back inflation into the system, I think we could do it tomorrow morning. But it wouldn't be the policy of the central bank; it would have to be the policy of a government. We could list all of these things which are coming onto the agenda which would create inflation. My favourite, we have discussed it before, is the forgiveness of student debt.

Merryn: And interesting we've seen some movement on this in the US, haven't we, where we've seen... there is a legal redress for students who feel that they've been somehow scammed by their university, they can claim their fees back if they haven't.

Russell: I think it was also a leading policy of Bernie Sanders and may account for his very high polling amongst the youth vote. They may be ideologically committed, but they may also just like to have some of their debt forgiven. It's something that will crop up more and more. There is a premise, this is not monetary policy. So if you were to forgive, I think it's now $1.1trn worth of debt of American students, they would go and borrow money and they would have to borrow it effectively from the banking system, and they'd buy houses and cars

Merryn: Well, they'd be able to borrow money.

Russell: Correct.

Merryn: right now if you've got $150,000 or $200,000 worth of student debt you can't go out and borrow money to buy a house.

Russell: Sure.

Merryn: But if that disappeared, of course, you could.

Russell: Sure. But this is the problem for investors. I think that will happen, but I know it can't happen today, because it has to be done by Congress. Now because of obvious reasons, Congress isn't doing anything until November, and even post November it may not be doing very much. Let's face it, it hasn't been doing very much for the last couple of years, Congress is still trying to agree a date for Christmas for this year.

So the problem and I think it's worth to go back to the last crisis remember, the extreme monetary policy didn't start with quantitative easing in March 2000, it started long before that, it started in 2007, they were doing different things and new things, opening credit lines to banks didn't work. What worked I think was quantitative easing, but also TARP, and people forget about TARP. And TARP was a massive fiscal programme. But how bad do things have to get before Congress sign TARP? I'm sure many people watching this sat up late at night to watch Congress try to pass TARP and watched them fail. I think the index fell 500 points. The stockmarket fell 500 points.

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So my view would be is, if central bank plays out, yes, the government can take over and yes, the government will succeed could be quantitative easing for the people but just how bad do things have to get before you would generate sufficient political capital to do any of what they would consider to be incredibly extreme things? Direct monetary financing of the government, forgiveness of student debt those things will need severe disruption pain before you would get politicians doing it.

Merryn: OK. So you sound utterly convinced that things will get that bad.

Russell: I have a problem in sounding utterly convinced when I'm not.

Merryn: OK, you think there's a very strong chance that things will get that bad.

Russell: Yes.

Merryn: Let's just talk through that. What takes us to that point?

Russell: I should warn everybody watching this that I once trained as a lawyer and the problem with lawyers is they sound utterly convinced about things that they believe on the balance of probabilities.

Merryn: Well, that's good enough for us. Your balance of probabilities is better than most people's balance of probabilities. We'll take it.

Russell: I believe, on the balance of probabilities, that these things will happen, just for the avoidance of doubt.

Merryn: OK. What's going to happen next to get us to that point? What gets us to the point where things around us look so bad that suddenly governments are prepared to forgive debt and to monetise their own debt, etc? What gets us there?

Russell: I don't think you have to look very far because the central bankers have set a target for their success and if they fail, then we have to go to plan B. Now, failure

Merryn: But they've been failing for a long time and we haven't gone to plan B.

Russell: Well, not in their own terms. Their own terms would be we're sworn enemies of deflation and they haven't actually got it yet, but they're damn close; you know, a recession with deflation, and anything happening to undermine the stability of the financial system itself these are all things. Maybe just one, certainly two, and definitely all three of those would You know, you have to imagine when president Clinton calls her cabinet to order next year, that she will

Merryn: Now we know the result of the American election as well. This is great.

Russell: She will look around the room let's say America was slowing down or even in recession she'll look around the room for answers. And I suspect that if Janet Yellen suggested quantitative easing, she might continue to Secretary of the State Krugman. His answers would be somewhat more dramatic than Janet Yellen's. So, I don't know how much everybody who watches this is reading about the new debate boiling under the traditional approach to this, but if you read what Martin Wolf is writing in the Financial Times, if you read what Lord Turner has written in his book, if you read anything by Krugman, you can see the next set of solutions are all just below the surface.

Merryn: Yes. And also, of course, you know Martin Wolf and Adair Turner accepted their solutions are not considered to be in any way cranky by the Bank of England. You know, these are conversations that are had very seriously in the corridors of power.

Russell: That is, kind of, my point. The things that were extreme five years ago are now just below the surface. They're just below the surface. So if you lost faith in central banking, they are the people who will be driving policy forward. That is where we go next. There isn't anybody else in the wings for other suggestions. These are what were seen as extreme solutions are the next set of solutions if central banking fails.

Merryn: OK. Is there anything else that might bring us back a little growth and a little inflation without having to resort to all this?

Russell: Yes, I think China would be the key to that. And there is a dream scenario for China. I give it a low weighting, that's why I used the word dream. But it's possible, and if it's possible, we need to consider it. China could, tomorrow morning, launch a major reflation based on consumer credit. Now the problem with all yes, absolutely every single post-war reflation in China is it's been driven by lending to state-owned enterprises, who build capacity. That's not what we need, given where the world is today. We need demand.

Merryn: Yes. So that is not what we need specifically just because it produces more and more of a supply which of course increases the deflationary impulse rather than reduces it.

Russell: Yes. So what happens instead if we mailed everybody in China a credit card? Well, the older generation would rip them up, the younger generation might use them. Imagine a growth prospect in China driven by the consumer. And actually I think it's much easier to achieve than people think because consumer debt to GDP is quite low and it can move up quite quickly so it could be achievable. It could even be achievable with a stable exchange rate, if the Chinese opened up lots of avenues that promised high returns to private investors.

And that would not be difficult either because there's lots of state-owned enterprises that can be sold at closed down or sold at good prices. And of course the financial system itself could be opened. But this is the problem. And this is why I call it a dream scenario. It effectively means the communist party giving up a lot of control, getting out of state-owned enterprise and getting out of that banking system and financial system. So it's a possibility but not a probability. But imagine

Merryn: But they have made it very clear that they want to make this shift towards a consumer-driven society.

Russell: Sure.

Merryn: So maybe it's not as improbable as you think.

Russell: Well, it's this conflict. Now, can you have a consumer-driven society controlled by the state? I raise it as a question. How many state-owned, controlled?

Merryn: Don't we have one?

Russell: Everything's relative. So compared to China, no. So I think that is the issue. To have that type of society, you might actually have to back down from control. Everything that Xi Jinping has done since he was I was going to say elected technically elected was more control. More control, more control and more control.

So it's not impossible that it could evolve fast, and effectively giving up these reigns of control. But that's why you shouldn't bet on it. You can't bet on it. We're now forecasting the activities of one man. I think it's easier to forecast the activities of millions of people together than the activities of one, and I learned that lesson trying to forecast Hank Paulson who bailed out Bear, bailed our Freddie, bailed out Fannie and let Lehman's go bust. You know, so forecasting one man it's a possibility, it doesn't seem like a probability given his control of the reins of power. But that would be the one thing which I would, you know, demand to come back and do another interview and say it's going to be inflation.

The other thing, and very quickly, is that I'm completely wrong about the US baby boom generation, and they decided the best thing to do now is go shopping. And retirement is irrelevant, their gearing is irrelevant, and they want to go shopping. And as someone said to me once, a long time ago, nobody ever got rich underestimating the greed and stupidity of the baby boom generation.

Merryn: It still doesn't seem very likely though, does it, simply because they've got 30 years to finance and save those 401ks. They know they're not going to go as far as they'd like them to. And they now know that house prices can fall, which was a shock for the baby boomer generation.

Russell: We have to have an open mind. I think it's unlikely, but we have to have an open mind. This baby boom generation has been capable of things that no other generation contemplated they have been capable of doing them. So we can't categorically say that this is not something that's going to happen. The evidence is there.

Particularly how they've responded to lower oil prices which is through somewhat higher consumption but not a consumption boom is suggestive that as saving ticks slowly upwards as well, is suggestive that they are responding to the tax cut of lower crude by actually saving a bit more rather than being very adventurous with their spending. And there's another interesting trend since we last met which is that it's more clear that the consumption patterns are towards services and experiences rather than goods, which is something we, kind of, hypothesised about, but that's becoming clear as well. That has huge implications for China.

You know, if you've got a whole generation that has furnished its homes, the nest is feathered but heavily mortgaged, what happens next? Maybe there's no more feathering and a lot of de-gearing. Now if that's true, it changes the entire planet in my opinion, that. And particularly China is extremely vulnerable if the Americans are into, you know, okay, we've got a little bit of a tax break with the oil price down let's go out two nights a week to a restaurant and not one. China doesn't get any of that money. Whereas, let's buy our flat screen television has a completely different impact. And global trader numbers are very poor and, I think, reflect demographics.

Merryn: So that reflects people buying services rather than stuff.

Russell: Yes.

Merryn: And of course we've heard quite a bit about this in the UK recently where we had one of the senior management at IKEA saying he thought we might have hit peak stuff in the UK.

Russell: Yes.

Merryn: Certainly hit peak stuff in this house, I think.

Russell: Well, there's two points of that. There's obviously the baby boom generation, of which you are not one. But there's the millennials as well, and I don't know any millennials but I keep reading about them and I'm told that they like to own their stuff as well. If you put those two things together, I'm fairly certain that the baby boom generation peak stuff is true. But if we're actually saying there's a younger generation that are not that interested in stuff, those two together would be incredibly powerful an incredibly powerful impact on global trade and the whole business model we've set up for three decades.

Merryn: OK, let's look briefly at what's happening in the mining and oil markets at the moment because we've you know, everyone had become accustomed in the first few weeks of this year, first few months of this year, to thinking that metal prices were now going to collapse and stay down forever, oil prices were going to collapse and stay down forever. And in the last couple of weeks, we've seen a massive rebound, people now talking about being a little bit more optimistic on Chinese demand, etc. But you're clearly not. What's going on there?

Russell: I'm not optimistic on demand but that's not a reason for not buying these share prices. I think one of the excellent books on it, apart from Anatomy of the Bear obviously is Capital Returns, which I'm sure you've read.

Merryn: Yes, which I've written about. In fact, we there's another interview with Edward Chancellor probably just below this one on the screen.

Russell: OK. Well, the great thing about the book is it focuses on how you make money not out of demand but how you make money in changing supply. And if I look across the world today and say, who is getting a market signal to close supply, it's got to be commodity and energy prices. So I'm not a bull on demand but I'm quite bullish on supply.

Three weeks ago, if we'd been sitting here, we'd have been speculating on who was going bankrupt. For some reason today, that's off the radar screen. It could be back next week. But at some stage, this supply will close down. And where else is that happening? So, you know, on a longer term view, maybe not today but maybe in a couple of weeks from now. There's a lot of short squeezes in the commodity markets; maybe when that's gone and prices come back down again, I wouldn't have a problem at all on a five, ten-year view, taking positions in these commodity stocks.

You want someone at the low end of the cost curve, and you want someone with a good balance sheet, and you buy and you hold it. And of course there are very major long-term structural issues for oil, but those are very major. Those very long-term issues for oil won't have an effect in the next two, three, four, five years. So that is one bit that's worth looking at.

Merryn: OK. And gold?

Russell: Yes, gold has changed since we met. my view was that gold would come into its own in deflation actually, that although real rates of interest would be rising, ie your nominal rates capped, close to zero, but you'd get falling inflation turning into deflation, the real rates go up, should be bad for gold but then we would begin to have these conversations about outright monetary finance, QE for the people, and then people would begin to realise that maybe the actions of the government would be so strong and robust that we might consider gold. And that's what we discussed, I think, last time. And we're just so much closer to that. And that's why gold is going up. So gold has gone up, even though the dollar has been I wouldn't say strong but the dollar's not been weak, and gold has gone up anyway. And it's a good sign

Merryn: And it's going up because more people understand what's going to happen next, yes?

Russell: Yes, I think people can see that. You know, we all know that when President Clinton calls that meeting, the answer is, oh, let's give up. You know, we all know that when she goes around the room and asks the policymakers what happens next, they say, well, monetary policy didn't work and I think we should just give up. So the more that it's everybody else in that room, not the central banker, the more I think the gold price is going to go up. And that's how it's reacting. And there is clearly major, major geopolitical issues on the way, particularly the relationship between Turkey and Russia, and particularly the stability of Saudi Arabia/Yemen. That always keeps gold going up.

Merryn: Keeps the gold price up.

Russell: So I think possibly the last time we met I said when it starts going up and the dollar goes up, it's entering a 20 to 30-year bull market. I think that's just started.

Merryn: So the turn of the year represented the beginning of a 20 to 30-year bull market in gold?

Russell: That's a forecast that's going to be right or wrong. Probably quite quickly.

Merryn: But we won't know for 30 years.

Russell: No, well I think it won't find a new low. That was the low and it will go up from here. Because these policies will succeed in generating inflation, I'm not of the view despite being notoriously pessimistic I'm not of the view that we are Japan. If you think this is going to be Japan, the global economy enters in Japan style, you wouldn't buy gold because you'd think, even these policies would not generate sufficient inflation.

Merryn: Well, Japan hasn't tried all the policies that you're talking about on the same scale.

Russell: No.

Merryn: You know, they've sat around for a long time. They're late for the party when it comes to really inflation-producing policies.

Russell: Absolutely. They have a society that can cope with that form of growth and we don't. We don't.

Merryn: Yes. Other emerging markets? Not that Japan is an emerging market. Emerging markets, should I say.

Russell: Emerging markets. I know that a lot of people are getting excited, saying it's a five-year bear market, then it's over. I disagree with that. I wrote a report just before Christmas, looking at the condition of their external clients and comparing that to previous bottoms so that would've been 2009, 2002, early 2003, and 1998 and saying, are the external accounts in the sort of condition that we'd associate with previous equity bear markets? In other words, have their current accounts improved significantly? Has there been massive liquidation by foreigners of domestic assets? And the strange answer to that is no.

I think the headlines seem to suggest that's true. But actually the improvements in the current accounts they're there but they've actually been quite marginal compared to historically, to historic levels. And also what I think many people forget when they look at emerging markets is this debt market, the local debt market, and just what a high percentage of that is owned now by foreigners. And this is brand-new thing. And the liquidation of that yes, there's some of that underway but some of these markets, they own a third of that debt market. So I think that shoe hasn't fallen yet and I would be nervous based on 25 years now of investing in emerging markets nervous of buying the equity market, regardless of the of the value. I want to stress that regardless of the value, until the current accounts were in a fairly robust condition.

Merryn: OK. Is there any one market around the world such an open question but still a good one any one market around the world that you love, that is really cheap, that you look at it and you think, that offers value that's not recognised by other investors, somewhere I'd go?

Russell: Well, I'm a Presbyterian, I don't use the word love. But I quite like Japan.

Merryn: Fond of.

Russell: I'm fond of Japanese equity still because I do believe that they will win this game of depreciation. I do believe that. To find a country that wins that game, you need to find the country where the fiscal and monetary authorities are already entirely aligned. And we've discussed why that isn't the case in America. It's fairly obvious why it can't be the case in Europe, given that the Germans want more fiscal rectitude. But in Japan it's there and therefore they will prevail. And for people invested in the equity market and particularly hedging the currency, they will do very well. A market, no. A style, yes. people may or may not be aware that we divide the world in our equity world up into growth and value. And growth has had a hell of a run relative to value.

And you may remember from 2000, we had this grossly [unclear] equity market. But the value managers were buying stocks that went up, actually went up in nominal terms, in real terms. You actually got positive returns from 2000 to 2003, even though the stockmarket came crashing down. And if we'd been sitting here a year ago, I would've struggled to say that that gap between value and growth was big enough. But I think now probably it is. So if you're looking for a growth manager, I think there is a possibility that they could maintain your value in nominal terms. And particularly if they were looking out at Japan, I think, as well. So there's a little bit more hope, I think, in the equity field but it's very much towards the value area where some things do look pretty reasonably priced and that's the that's the issue generally for equities they've looked overpriced.

Merryn: OK. So we're now buying Japan, we're buying gold. We're waiting a little while and we're buying mining and oil.

Russell: Yes.

Merryn: And if we're looking for style, well, we're going for value.

Russell: Yes.

Merryn: Wonderfu. Now, before I let you go, the really important question. Brexit.

Russell: Yes.

Merryn: Where are you going to vote? Oh, you don't have to tell me that.

Russell: Well, I will not answer the question.

Merryn: Oh, go on.

Russell: And anybody who knows me knows exactly where

Merryn: I said you didn't have to but really I wanted you to.

Russell: OK. Well, if I have an answer to the question, it would be based on nothing to do with economics, nothing to do with finance and nothing to do with strategy it would be based on sovereignty. And I believe in the sovereignty of the individual state. And therefore, if you believe in the sovereignty of the state, you vote for an exit and you accept whatever economic consequences flow from it.

So, well, that's not helpful to anybody watching this because it's based on something other than economics. I don't have a strong view on how we perform economically or otherwise outside of Europe. But there are some things that are more important than money. And that's probably the most important thing I'll say in this entire discussion.

Merryn: That is. That's so important. And as I think you know, I agree with you on it. But and I suspect rather a lot of our readers do as well. But let's look at the economic consequences. if we if we do vote out, how worried will you be?

Russell: Well, can I just change is slightly and say that the most important thing from our vote is that it won't be the first one. I'm sure it won't be the last one. So this we have a European experiment, to take Europe to a federal system. And the alarming thing is that nobody knows what that federal system will look like. If you take all the people currently involved in this, they'll all have a different view. And, you know, this is really embarrassing but they haven't talked about it because they disagree about it. It's remarkable. We've begun this journey towards this system without knowing the final destination because it's too embarrassing to talk about it. Well, the Brexit vote

Merryn: Because no one knows what they really want it to be.

Russell: And no one can politically get there anyway. They all know politically. They, kind of, think if they take it in baby steps, they can get the voters to the end. And that's what's happened and that's what Brexit's all about. And we're not in the euro clearly, so it makes our decision, I think, significantly easier. But this is a baby step, baby step, baby step. And it may be that in this vote that's coming up, we find here's a population not prepared to keep taking little baby steps and eventually, by accident, end up in a European federal state. We are not the only country in Europe where the voters and the electorate are having those decisions. You only have to look at Denmark, the Netherlands, France.

So when we and I think one of the useful things today, when you're trying to analyse politics and stuff like this rather than businesses is to jump forwards five or six years look back and say which bit of this would be the important bit. And actually much more important in the history books would be if it triggered other referendums in Europe. Our departure, given that we're not in the euro, is a big issue. But if a member of the euro decided to depart, that would certainly, in rewriting the history of this period, be well ahead of Britain's decision to leave the European Union. Because extracting yourself from a single currency is, I think, constitutionally impossible but practically obviously it would be done. And obviously it's happened before but the last major one to do it I think was the confederate states of the United States of America and that one was a bit messy.

Merryn: No, that didn't work so well. OK. Interesting. And Brexit, for Scotland. We both live in Scotland and we've talked a lot about the Scottish referendum, Scottish independence and there is this view that Brexit would automatically lead to a Scottish referendum which would lead to the breakup of the union. Now you worry that Brexit would not worry, but suggest that the that Brexit might lead to the breakup of the European Union in the end. Would it also lead to the end of our union?

Russell: Well, I think it puts us in a very interesting situation. So let's say that that did have to take place, Scotland did vote separately I don't know about a Scotland vote, but it did vote separately and stayed in the European Union

Merryn: But it wouldn't be staying, would it?

Russell: Well

Merryn: Because it'd already be out.

Russell: Well, okay, it comes back into the European Union what happens to the border between Scotland and England? Because one of the reasons that England voted for this or I shouldn't call it England the rest of the United Kingdom voted to leave was that it would not have a porous border. And yet Scotland would have a porous border, and it would have a porous border with England. So, you know

Merryn: There really would be a fence.

Russell: Well, let's just call it a wall. Who would pay for it, however, we'd have to ask Mr Trump.

Merryn: That would be a long, long conversation.

Russell: So what I'm trying to get at is the whole question for Scotland, if it did get another vote in independence, is completely reframed by the fact that the rest of the United Kingdom is outside. And of course the oil price. For those who were voting on more economic grounds rather than grounds of sovereignty or whatever, the oil price completely reframes it as well. So I would think that that would push the vote more towards the union than it has in the past, because there are different questions to be asked by the voters of Scotland on independence, given the fall in the oil price and given the fact that the rest of the United Kingdom would be outside. It is possible, of course, that everybody leaves the United Kingdom except Northern Ireland and it and it proclaims itself to be the United Kingdom, in which case I'll just have to go home.

Merryn: And be in charge. Russell, thank you very much.

Russell: Thank you.