Edward Bonham Carter: things will only get harder from here

Transcript

Merryn: Hello and welcome to the MoneyWeek magazine podcast. I am Merryn Somerset Webb, editor-in-chief of the magazine. Apologies for no podcast last week, I was on holiday, John was sort of on holiday, and we didn’t get one done. But that’s OK because we are more than making up for it this week. This week, we have yet another special guest. This is Edward Bonham Carter, a well-known name in the fund management industry.

Edward joined Jupiter Asset Management in the 1990s, hugely successful career there, ending up as vice chairman, having been through being CIO, joint CEO, and chief executive. He also led Jupiter through a management buyout and through an IPO. So, there’s nothing this man doesn’t know about the industry. He’s now gone part-time and is the director of stewardship and corporate responsibility at Jupiter.

But that’s not all, he’s also senior independent director at ITV and at Land Securities, and a director of the Esme Fairburn Foundation. And finally – in fact, it might not be finally, there may be more that I haven’t mentioned and Edward can tell us if there is – but I should also mention that he is the chair of Netwealth, which is an online wealth manager, of which I am a director.

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So, we have something in common there and we see each other relatively frequently in our roles at Netwealth. I don’t know if that counts as a conflict or not, but it is, at least, a strong connection. Edward, thank you for joining us today. Welcome.

Edward: Thank you, Merryn, it’s a pleasure to be here. Yes, I suddenly remembered, I’m an adviser to Livingbridge, which is a private equity business, and also, I sit on the Investor Forum – and we might come to that, Merryn – which was set up in the wake of the Kay Review on pensions, which was designed to improve stewardship between asset managers and their underlying investments, particularly in UK companies. So, a few other things.

Merryn: We will definitely come to that. I’d forgotten about that. I think what I would like to start with is this very long career. How many years have you been in fund management?

Edward: Well, it’s not that long. October 82.

Merryn: It’s quite long.

Edward: It’s reasonable, but as you pointed out, hopefully, we’re all living longer, maybe in better health, so actually, I’m roughly – what am I? 61 – so, I started my career when the great bull market started in October 82. I think, sadly, it was coincidental, rather than causation, but there you go, and that was back in Schroders in those days.

Merryn: So, what has kept you – let’s put money aside for a minute, because everyone knows this is a high earning industry – but outside that, what’s kept you in this sector for so long? What makes it compelling?

Edward: One of my features, as my family likes to point out, is I’ve got a very low attention span. And if you think about investments and the world, it’s infinitely changing. Sometimes very quickly, sometimes very slowly. It’s a mixture of geopolitics, economics, human psychology, which I often think is underrated. And so, if you’re interested in those things, which I am, investment, in the wider sense, is a perfect place to be.

My wife, Victoria, challenges me and says why don’t I do something more interesting? And I think that’s a good challenge and I haven’t come up with an answer yet. But I think it’s the endless fascination of the investment world, and to be more serious, it is a responsible thing to do because you’re being trusted, entrusted, with people’s hard won savings.

And over time, the organisations that people work for should, hopefully, grow it at least faster than the rate of inflation or their personal savings basket, but we might come back to that. Would I rank it morally higher than teaching or medical? We don’t have time to cover that, but, I think, a fascinating thing to be in.

Merryn: I think this idea that is there something more interesting, it may well be, as you say, as this encompasses absolutely everything, when I look at the things that active managers invest in and the things I write about, everything from, as you just mentioned, longevity to innovations of every sort across the sectors, it’s hard to imagine that there’s anything that could be more interesting to someone, as you say, with a short attention span. Fund management and journalism, perhaps we’re both in similar businesses.

But the other thing that you just mentioned, which I think is incredibly important, is this idea of moral responsibility. And one of the things that I often write about is this idea that if you are a fund manager, you hold people’s futures in your hands. Their hopes, their dreams, etc. And you’re also the only industry, in fact, the only – let’s see, government as well – government and the fund management industry, the only two areas that take money directly from people that are able, you know... the government can take money directly from you in taxation and the fund management industry takes money directly from your account. No other industries can do that. So, both of these things give you an extraordinary moral responsibility, probably at least that of, say, teachers.

Edward: Yes. I think there is a big responsibility and we shouldn’t, as an industry, forget that.

Merryn: And do you think the industry has forgotten that over the last 20 years? I would say it might be slightly coming to the fore now, but 20 years ago, was your industry looking at this moral responsibility in the way that we’ve just discussed it?

Edward: The honest answer is it’s hard to objectively measure. I think, as always, there’s a dispersion between people cross-spectrum. Some really have it front of mind, the equivalent of the Hippocratic oath. I think there should be one in fund management. And those that are a bit more speculative, put it that way, and forget that it might not be their money. So, I think there’s a range.

Would I say we’re better or worse than 20 or 30 years ago when I started in this industry? I would hesitate to make a comparison. I think some things have got better and some things maybe have got worse.

Merryn: Well, let’s talk about the things that have got better. What’s got better?

Edward: Yes. What has got better? I think there’s a general improvement, I wouldn’t over-egg it, that people appreciate, in the wider sense, appreciate the value of the savings industry, that they can grow their wealth over time. I wouldn’t push that argument too far, because there are still a lot of people who don’t have enough knowledge, which is the fault of the system, and I’ll come back to that and talk about what it is and what we can do about it.

But it’s become, I wouldn’t say more democratic, but I like to think there’s a greater appreciation of collective vehicles for savings, such as unit trusts and investment trusts. Is there a wide and deep knowledge of the financial markets among the average citizen? No. I wouldn’t suggest that. Is there more choice? Yes, there is more choice. Maybe there’s too much choice and maybe there’s too much false choice for savers.

I think the industry, on some levels, has become more complex. Some aspects have become cheaper with the rise of index funds and passive [funds], no doubt we’ll chat about that. Short-termism, which is a bugbear of mine, again, have we become or short-termist? Possibly and maybe we can pick up on where we are now, in terms of bids in the UK market.

But I think that is one of the fair criticisms in general, that the industry, as a whole, tends to be too short-termist in its outlook and behaviour. So, that’s probably a negative. Let’s leave it there for the moment.

Merryn: Let’s go back briefly to you saying that it’s a worry that there isn’t a deeper knowledge of investment and how markets work among the general population. And you’re right, there isn’t. There’s only a small percentage of the population that appears to be genuinely interested in and knows a certain amount about how the markets work, and about how investment works, and about what they’re even invested in.

But I suppose the question there is, why do people need this knowledge? Surely, as we discussed earlier, they’ve delegated this responsibility to you, the fund manager. Should they have to know anything about it or can’t they just leave it in the hands of the industry? Everyone now has a pension – everyone earning over £11,000 has a pension provided by their employer.

It all goes in, one way or another, not one way or another, but most of it goes into the equity market, particularly in the early stages of their careers. Why do they need to know any more? That’s it, it’s enough.

Edward: Yes. And I’m sympathetic, in part, to that argument. But you still have to make choices, as an individual, about where you put your savings. Yes, you could choose an adviser who, he or she, is paid for giving that advice. But part of me thinks that the more knowledge you have, it’s not an obsessive knowledge you need, but the basics about how the industry works, how the charging works, etc. What are the risks and what are the rewards.

And I’d take it one step back from that, Merryn, is that generally, in school, people sadly leave with not a great knowledge. You don’t need high level maths, but you do need some knowledge of what percentages refer to, what compound interest is, what’s inflation, let alone before you get to a knowledge about what the market’s going to do and the economics.

There, I completely agree, people don’t need to really understand, unless they’re interested in the views of the various economists and so called market experts. But personally, I think most of it’s a lot of hot air. But I do think that if individuals had a basic knowledge of, I would say it’s mathematical knowledge, but also, basic economic concepts, like what is inflation and what that can do to your savings, I think that is probably quite important.

That probably is a failure of the educational system, that people are leaving with various qualifications, but some of it not suited to how they can make rational decisions as to their savings.

Merryn: And should that be taught in schools?

Edward: Yet another burden for teachers. What gets dropped? Languages? Sport? Music?

Merryn: I think we already dropped languages and sport, didn’t we?

Edward: Yes. And music. Do I think it should get dropped in schools? In the past, we’ve been supporters, as others have, of PFEG, which is financial education for schools. Yes, along with other things in schools, a general knowledge about it could be technology, relationships. I can hear my wife saying what about cooking? And financial education. I think skills for the modern era, of which finance is a subset, yes, I do think should be taught.

Merryn: I always worry about this a little bit in that there’s a lot of evidence that if you teach personal finance in schools, everyone forgets it before they need it. So, if you teach a 17 year old about a mortgage and they don’t need a mortgage until they’re 29, it makes no sense to them at all. So, I always slightly veer towards perhaps we should really focus a bit more on teaching maths.

Teaching mathematical concepts better and for longer, rather than getting involved in the detail of what a product is and what a product isn’t. But I think I’m almost alone in that everyone seems to believe that teaching about personal finance products is a thing.

Edward: I would agree.

Merryn: Would you? Excellent. There we are. And I agree with you that some conversation about real and nominal numbers, and that kind of thing, a little bit of that basic economic knowledge. Not too much personal finance, we can get bogged down in that stuff. Anyway, now I’m getting bogged down. Listen to me. So, back to the changes.

You mentioned earlier that one of the big changes in the industry over the last 20 years has been in terms of cost, because of the competition coming in from the passive sector. Now, you’ve been working in the active sector for your whole career. Jupiter is very much a manager of active funds. But of course, Netwealth, where you and I are both directors, is a business that uses passive funds.

Although just to be clear, there’s no such thing as passive in itself, because someone actually has to choose those funds in the first place, whatever they are. But nonetheless, there’s a big difference between the type of funds used in Netwealth and the type of funds that you have made your career out of. I don’t even know what the right question is here. Is it good value? Where’s the value? This change, you obviously approve of the shift from active to passive, but there’s a place for both of these in the market, right?

Edward: Yes. When you say I approve, I think people having real choice, I don’t think is a good thing. Is passive or active, is either necessarily better? They both have their pluses and minuses, just to do the lawyers for the economist copout. It is definitely more expensive, because you’re paying for humans, and we might talk about the rise of machines and AI later. At the moment, it’s starting to have an impact, but not much.

Active market share has definitely fallen to passive, and that may continue with the continued rise of exchange traded funds, ETFs. But is that a good thing? Are there different ways up the mountainside, in terms of providing vehicles to grow wealth for people? Yes, it’s a choice. Is active industry perfect? No. One of the challenges is for the underlying investor and, or the adviser to say before they start investing, which of the active fund managers are going to deliver value after all costs in the future?

And this industry is based, like a lot of financial industries, on a promise and an expectation. It’s a series of probabilities, uncertain probabilities, that you are going to get value for money in your returns. And is that rational? That’s an interesting question. I think some active fund managers, obviously, do well and others don’t do well over a period of time. I think the lack of predictability of future outperformance is part of the financial industry and it’s here to stay.

But that might account for the rise of passive, because people will accept they’re not going to beat the market, but they want the certainty of roughly the market returns for a lesser cost. And that’s fine.

Merryn: And is there a problem if passive gets too big? How much active fund management do we need? There’s a view that over time, the majority of money in the market will be managed passively, but there will still be enough genuine active management there to make the market a real market.

Edward: A fascinating question. The obvious answer is no one knows what happens if passive gets to 40%, or 60%, or 80%. As you say, who sets the marginal price? And when does the pricing mobility of the market become markedly less efficient? And the honest answer is we don’t know. I suspect we are not there yet. The other test for us all that seems to be a long time is what happens if we have a prolonged bear market?

I don’t mean a V shaped bear market that we’ve had in previous crises of 08, 2000, etc., 87 as well. But what happens if we have a Japan-like bear market, how will, then, behaviours change, both investor behaviours, active managers who keep on saying they’re going outperform the bear market, and passive managers as well. That is going to be a possible test, which will happen at some point in future. But your points are fair, we do need people to set prices.

And if that becomes a rarefied art, the efficiency that comes from pricing [?], my definition would go down. There’s not going to be a number that you get to, like 63.7% passive share, then it declines. It’s going to be a spectrum of decline. I suspect it’s one of those questions we won’t know, until we actually get there and then we’ll look back and say we should have done something about it, whatever that is.

Merryn: Well, it’s very unusual of you, as someone working in the financial industry, not to offer a pointlessly precise number, such as 63.7, or 68.2, or 47.932. That would be much more financial of you. Let’s skip forward a little bit. I want to come back to the whole idea of stakeholder versus shareholder, which has been one of the shifts over your career. But as you’ve mentioned becoming bear market, let’s talk about where we are.

Obviously, during your career, you’ve seen quite a lot of booms and busts, several bubbles, several bear markets. What have those experiences told you about where we might be now and what might be coming?

Edward: That’s a very interesting question. You’re too polite to say, Merryn, what actually have you learnt since 9182? I was asking myself on the way in on the bicycle this morning.

Merryn: That’s the real question.

Edward: What have I learnt? And I have a very short answer, the folly of trying to predict the future with any pretence of reliability. Because we all have prejudices and I tend to be too overly cautious as an investor, thinking that things are expensive and they go up a bit more, and I thought that for some time, which is a dangerous… Conservatism can be a dangerous thing in the short-term, or maybe even in the long-term.

So, I think the main thing I’ve learnt is probably don’t try and predict markets, but you can have some sort of probability in your head along the lines of are things generally cheaper or more expensive relative to history? And I think that the probability of below average returns, whatever that means, we can come back to, that investors are going to enjoy from here is much higher. In other words, that it’s much more likely that things are going to be more difficult from here.

And we can all hazard a guess to the reasons why. But basically, it’s because we’re starting from a much higher point in valuations. And within that, there are some cheaper assets, relatively, in the UK, relatively cheaper, but it’s the old rising tide lifting all boats. If there are big asset classes out there that are cheap, we can discuss that, Merryn, but I’m finding it hard, scratching my head at not esoteric asset classes.

They could make a case, which I’m partial to, to emerging markets. I think there’s a case that what should investors do if they’re giving money to their lovely children or grandchildren? Putting money into emerging market funds, whether unit trusts or investment trusts, I think a 20 or 30 year view, when we’ll have another chat, might be a good strategy.

Merryn: But why? They’re not particularly cheap. They haven’t delivered what we expected over the last 20 years, why should they over the next 20?

Edward: Maybe it’s a naïve belief that…

Merryn: And a lot of emerging markets, of course, is China. All those funds that take all the emerging markets, they will often have a whole pile of China in them, and maybe that’s maybe not looking that attractive right now.

Edward: On a 20, 30 year view, my essential philosophy is humans, and I come to climate change, muddle through it as a species. We’re capable of great idiocies, but also, great achievements within the same human brain. And I broadly think the capitalist system, with its massive flaws, and they are substantial, is still the best system we’ve come up with, compared to the others currently on offer.

And that on a 20 year view, the best way for people in the world is to trade, to have the invisible hand, for want of a better expression, Adam Smith described, and to raise their level of wealth to reduce child poverty, increase longevity, and also, improve education, etc. It’s not perfect, but I think most countries are on that path, some with greater success than others. Is China a challenge to that? Yes, to some extent. But I think China is part of a world economic system in its own way. But yes it does face substantial challenges.

Merryn: Interesting. Do you think capitalism is a system that we’ve come up with or do you think it’s just a human default?

Edward: I think it’s a system that… Well, I think human development, going back in time, we started with agriculture and then at some point, maybe before agriculture, we came up with trade. And I think that the trends of trade and, crucially, specialisation that I could cut some flint tools and buy some fur off you, that you happen to be clever at hunting. As soon as we started doing that as a species, that was the win-win that people like to call it. And that was then a form of capitalism, I would say.

It then became institutionalised, etc. So, was it a default? I can’t answer. I don’t think it was a genetic default. I think it was just humans realising they’d be better off with some form of capitalism.

Merryn: I just feel that is it the system that works with the way humans naturally are? It seems that way. It’s where we head when we can.

Edward: I think, to your point, which may allude to where we are today in COVID, I think humans are fundamentally social entities. And linguistics and language would support that. And by and large, except on our summer holidays maybe, we enjoy the company of others, as long as they’re not too many. So, if you want to say that’s capitalism as default, I would probably agree with that.

Merryn: Fine. That brings us back then, we’re going to pop around a bit, but I’m going to bring us back now to the whole idea of the difference between stakeholder capitalism and shareholder capitalism. As much discussed, and I’ve written about it endlessly, and I’m sure you’ve discussed endlessly, the last 20, 30 years have all been about what we might call shareholder capitalism, i.e., the supremacy of the needs of the shareholders in big companies over the other people who are involved with those companies.

And what we’re now finding over the last, say, five years or so, is a shift to the belief that in fact, companies should not just cater to their shareholders, but they should take on what you might call maybe a more Asian capitalist model and pay attention to the other stakeholders in their companies, so their suppliers, their employees, the communities around them, etc. Now, you’ve seen that shift happening, is it the right way for us to go?

Edward: I think there’s an element of back to the future about this, that if you look at those companies, we’ll take the States, and go to an ancient somewhat on index, the Dow Jones Index, which is pretty odd in many ways, but anyway, it’s lasted a long time, so it has some historical merit, and look at a company like Johnson & Johnson, for example, and I think they came up with, they call it their credo, their set of beliefs. And you’ll have to check this, Merryn, but it was something like this in the 20s.

And they expressed their purpose, as people now like to call it, vision, or whatever it is, to look after their customers, who then, from memory, I think were American midwives and their mothers, and then secondly, to look after their colleagues, they called them their employees or the workforce, and only then would shareholders get their just and fair return. So, this theory of stakeholders, I think, has been around, maybe not in the same words, for some time.

And those companies that have longevity, they get this issue of the environment they work in. And now you’re saying well, why has it suddenly become fashionable? I don’t think it’s a new idea. I think there’s a lot of element of fashion about it. Climate change is obviously a crucial challenge for us all. But there’s an element of back to the future, and some of it, I slightly question. We’re going through a range of bids at the moment in the phone sector in the UK.

I haven’t seen, unless you correct me otherwise, much consideration given to the wider stakeholders in the debate in the premium shareholders are being offered. It’s still being viewed in financial terms. There is a bit of coverage, people saying well, these are crucial industries and shouldn’t government intervene or whatever? But there’s still very little chat about what does it mean for the workforce? What does it mean for the subcontractors, etc.?

There’s a bit of that. But I don’t think it’s central to the debate yet. So, I question some of this as being a new thing in the same way, in the sense of is it really affecting behaviours in a fundamental sense?

Merryn: So, there’s an awful lot of talk and not that much action. Because sometimes I look at it now and I think are we beginning to ask too much of companies? Are we beginning to ask not just that they find interesting things to do and ways to employ people, and ways to make money that they can return to all of us, so that we can have nice pensions. But we’re asking them to take care of every single external consideration as well, to be a big part of the culture wars, to worry about all sorts of things.

Even in the past, you might have said well, actually, that’s the government’s job. Your job is just keep employing people, paying them reasonable salaries, and returning the excess or handing the excess over to people who have entrusted their savings to you.

Edward: You’re absolutely right. I think it’s got much more complex for boards, as a whole, both management, executive management, and for boards to juggle in, sometimes, competing interest. People will still have to make painful decisions, and it usually comes down to a bid, when it happens, either agreed or hostile, that these issues come to the fore. And then you see how people really make decisions.

The pensioners, as you say, or the asset managers who hold the shares on behalf of their underlying investors, by and large, they’re making decisions through a financial lens. I’m willing to be corrected. But it’s still the majority view is what’s the size of the premium and does that reflect, in inverted commas, fair value? And then there’s occasionally government bits, intervention, if it’s a strategic industry.

And then there’s a bit of stuff about are you going to keep employment in this country or whatever. I haven’t seen a study of past bids in the last 20 years of what companies made which undertakings, and has it worked? Or is it just PR words to get the bid through?

Merryn: And then there’s this question about is it reasonable or is it the right thing for companies to do, to allow themselves to be taken off the public markets onto the private markets. The public markets, where what they do is transparent and very much supervised, and the private markets when maybe not so much so. A classic example, and I’d be interested in your views on this with your director of Stewardship and corporate responsibility hat on, but take, for example, the fossil fuel industry.

Now, there’s an industry that an awful lot of people have divested from and said we’re not going to be attached to this, we’re not going to be involved with it. And so, there may be a future ahead when much of the fossil fuel industry is held off the public markets, and where the revenues from it don’t necessarily accrue to the pensioners that, well, me, for example, and other people who are saving for their pensions, may not get that revenue. It goes somewhere else.

And these fossil fuel companies are then held off market, and we might say well, we can’t watch them quite as closely as we could in the past. So, is that a good result? Is it good stewardship of a company to allow it to move off public markets and onto private markets?

Edward: No. What is it today, BHP looking to sell its oil and gas, and said it’s then taking a stake in Woodside or something like that in Australia. And, by the way, delist, as it’s apparently listing from London. No, there’s an element of that. And of course, remember that a lot of the oil and gas industry, in terms of reserves, is held by estate entities anyway.

So, real system behaviour change will rely on how we alter the behaviour of such enormous companies, such as Aramco, that Russia [overtalking] the Iraqis and Iran. Even huge monsters like Exxon, they haven’t gone private yet, they don’t really move the needle in the carbon debate as possible. But you’re right, it does squeeze the balloon if it goes into the private sector.

Now, the interesting thing about the private sector is that often, they’re just assets that are parked there, and then they come back to the public markets in some form. It’s not always a permanent solution. So, there is a symbiotic relationship between the two sides, and it is ironic to note that pension funds, who often say, well, active fund management is too expensive, and it can be too expensive, and then seemingly willing to pay at least two or three times the price of the account for a performance fee we leverage in private equity assets. So, there’s a bit of financial magic tricks going on here.

Merryn: Why do you think they’re prepared to do that? Because they believe that the long-term returns from private equity are so high that it’s a reasonable thing to do?

Edward: Yes, exactly that. It’s the old cliché, past performance is not a guide to future performance. Well, sadly, that’s how people make their investment decisions, they look at past performance and they do think it’s a guide to future performance. And in some cases, they’re absolutely right. The origins, and I used to work for a private equity firm, Electro Investment Trust, many years ago, it was great returns.

Partly because the early [?] entrants, get in there, take the advantage of cheap assets, A. B, they could leverage at a broadly favourable time, and then take the advantage of the increased wave of money coming into the sector. And this industry hasn’t been tested by their market either, and no doubt, that will happen. And returns will come down, because supply and demand still works.

The more money that goes in to chase these assets, inevitably there will be more competition, and prices will be bid up, as we’re seeing in Morrisons. I can’t tell if it’s a good deal or a bad deal for the buyer. It’s too early. But a lot of it, not all of it, relies on leverage for their returns.

Merryn: And it’s an interesting dynamic, watching prices in the private equity sector being bid up, when the past performance has been based on prices being at a slightly different level. Shall we go back to the UK and the bids here? We talked earlier, briefly, about how there may be some asset classes left in the world that may be worth buying in. You said emerging markets over maybe a 20 year view.

Is there, perhaps, a shorter timeframe in which you might expect to make good returns from the UK market? certainly, some people seem to think so or we wouldn’t be seeing these bids, right?

Edward: Yes. You have to aim more for home bias and all the rest of it, and I though the UK has been relatively cheap for some time. Why do I say that? Because the PEs are not unreasonably high. There is a good reason for that, and part of the challenge is for the UK is most of our large companies, not all, most, are in, in inverted commas, old industries. You referred to mining as being one of them or oil and gas being another.

I think that is a big challenge for the long-term for the UK. Where are our big tech companies? And we might come back to that. But if you believed inflation may pick up as a possibility, and I don’t have a crystal ball, but I think the probabilities of inflation picking up are rising, then shares are a good place, or a less bad place, to invest in, as long as inflation doesn’t go much above 5% or 6%. Because then what happens is the quality of earnings, by and large, on a generalisation, goes down and PE contracts.

But shares are much better placed than bonds, obviously, and I think the chances of inflation picking up more than the short-term amounts [?] that are rising. I do think that we’re going through a short-term coming out of COVID phase, what’s normality going to look like in 30 months? And some distortions to the labour market with low unemployment, which is surprising to a lot of us, plus, the furlough scheme having to come off.

So, it’s quite hard to get a fit on what’s really happening. But you would expect inflation to pick up to, I don’t know, even if it picks up to 3% or 4% on average, over the long-term, that can have an effect of significance.

Merryn: But wage inflation is a tricky one for stock markets, isn’t it?

Edward: Yes, it certainly is. And returns to capital, as Mark [Unclear] will call it, has been high in the capitalist system, relative to labour. And I think one of the issues for the system is globalisation and are we hunkering down, as a global system? And just leaving COVID aside, are the barriers to trade getting higher? By and large, they probably are at the margin, and I believe that that’s not good, generally, in terms of the capitalist system.

Is there a case that in certain parts of the economy, labour rates are going to go up? Yes, I think it’s happening already, funnily enough. And previous Conservative governments, the minimum wage has gone up, and I think there’s evidence that the least well off is having marginal improvement, if they’re in work, than the so called squeezed middle. There is a case to be controlled [?] there.

Merryn: It seems like a positive thing. Edward, we’ve been talking a long time, so let me just ask you one big question. What are you worried about, in terms of markets, obviously, not your summer holidays and the weather, and that kind of thing?

Edward: I’m worried that are we, through various, in inverted commas, artificial needs, brave monetary experiments, QE, government expenditure, trying to keep the system going and to avoid sell offs, because we think it’s going to be too painful for a recession? Yes, I think there’s an element in central banks and government policies that are, in inverted commas, running scared of what I call a natural diamond cycle.

Because we’re all twitchy democrats in the sense of the word that both people’s attention spans and pain thresholds are quite low. And I think the danger of that is that we can try and artificially pump things up on monetary morphine. So, I think that’s a concern. I think there’s a broader philosophical concern that you touched on earlier that is capitalism, as we know it, delivering? In other words, do people perceive that they’ve got a reasonable chance in life to work through the system?

And that’s not just capitalism, that’s democracy and all the rest of it. I think that’s creaking, which is why people are looking at other systems, which are yet to be proved for their value. So, I think that that is a concern long-term. Climate change is obviously a big one, and the intended and unintended consequences of that. Your comment about are companies being asked to do too much.

Inevitably, when something becomes, in inverted commas, fashionable or the focus of the majority, which is the stakeholder base for climate change, you just know that capital is going to be wasted. The question is how much and how badly? I suspect we’re in the midst of that at the moment. The current debate is, for example, what’s it going to cost to convert most of wonderful British housing stock to have green heating systems and heat pumps. Well, it seems to me that it’s going to be a hell of a lot of money.

Merryn: It’s going to be an awful lot, particularly if the heat pumps don’t work and we all need electric heaters as well.

Edward: Exactly. So, all we know is that the other rule of going back to what I have actually learnt, one of them is that we consistently underrated unintended consequences of policies [?], both as investors, and as economists, and as governments. We rarely look at what could go wrong, and [Unclear] is obviously a case in point on that.

Merryn: That’s a lot of worries.

Edward: Well, just a democratic system, and that sort of thing.

Merryn: That kind of thing and the future of the planet. Let’s flip it, what are you most excited about? Again, I don’t want to hear any more about your summer holidays. Well, I do, but after we finish the podcast.

Edward: The possibility of human ingenuity.

Merryn: OK. That’s always the right answer. And where is that ingenuity…

Edward: Is it?

Merryn: Absolutely. Where is that ingenuity going to make the most impact, do you reckon, over the next decade?

Edward: We haven’t even talked about it, but the possibility of benign use of AI in its wider sense. I think it will probably take longer than ten years, and I think there are some big question marks around the word to use of benign, so it’s a hanging question there. But that could be significant. And as a related subset in the whole are of genetics, and medical understanding, and pre-screening, I think, is a really interesting area. Health screening.

Your point about longevity, of fear and opportunity, conditions of the human brain. And as I get older, I think we’re dealing with some of the things that normally kill us or make our lives miserable, like cancer and heart conditions. I think the brain is still the Jacques Cousteau mystery, if you want to look at the underworld that we don’t really understand. And could there be a significant upside in understanding of the grey matter between our ears? I’d like to think so.

Merryn: That sounds suitably optimistic. And we will come back, Edward, as clearly, we’re both going to still be around, and unfortunately, working in 30 or 40 years, we will come back to all this then and see how we did. But thank you so much for coming on today.

Edward: A pleasure, Merryn. I enjoyed it.

Merryn: If you would like to review the podcast, please do so, on your choice of podcast provider. We like reviews, we particularly like good reviews. The better reviews we have, the more likely we are to be able to get on brilliant guests, like Edward. You can hear more from us at moneyweek.com, where you can sign up for our daily newsletter, Money Morning, written by the brilliant John Stepek.

You can follow us on Twitter and Instagram, you can follow me on Twitter at @MerrynSW, and of course, you can follow John on Twitter at @John_Stepek. And we will be talking again next week. Thank you very much for listening. Edward, you’ve been a wonderful guest, and we’ll talk to you again soon.

Edward: Thank you. Bye.