Robin Wigglesworth: index funds matter in ways we are only starting to fathom

Merryn talks to the FT's Robin Wigglesworth about how passive investing via index funds can't be blamed for inflated stockmarket valuations, and how the current fad for ESG may erupt into a new mis-selling scandal.

By MoneyWeek

published 1 April 2022

in Features

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Merryn: And you’re also the author of one of the very few non-boring books on finance I have ever read. So, readers, I commend to you Trillions: How a Band of Wall Street Renegades Invented the Index Fund and Changed Finance Forever. This, by the way, really isn’t a boring story and it is genuinely important. Before we start, I’m just going to read you one little quote from the epilogue to remind you how important it is.

Robin: So Warren Buffett had never really had a high opinion of his own industry. He’d always slighted professional money managers and there are many countless fascinating speeches he’s given about this, but at one point in the mid-2000s he started getting so annoyed at all the money that was going to hedge funds that he offered to bet a significant amount of money, it ended up being a million dollars, that an index fund that tracks the S&P 500 index in the US could beat any group of high-flying hedge funds over a longer period, so a ten-year period. Eventually a fund of hedge funds manager, so a guy that invests in hedge funds on behalf of other wealthy people, took him up on this bet. He’s called Ted Seides and worked at Protégé. That was really the investment bet of the century, I think.

Robin: Well, drum beat, Warren Buffett won. He tends to win these things. He’s not an intellectual slouch, as you know. Initially it didn’t go that well for him because this bet was made in 2007 and when the financial crisis started to rumble, the index fund did what index funds do. It just tracked the entire US stock market down the drain basically. Hedge funds, because they invest in many other different things and they can also bet against stocks and other securities, did slightly less awfully in 2008, but from 2009 the differential starts narrowing.

Robin: Yes. He did actually. He’s a very cerebral character himself, Ted Seides, and I think he’s really honest in that he admitted to me that, frankly, if he had a do-over of his life, he’s not sure he would have chosen to be a professional investor because he said that investing is one of the few areas of life that you don’t always get better at as you get older. In most things, as we get more experience, you get better.

Also, in investing, you never really know whether it’s your brilliance that got those results or those screw-ups. It’s quite often just simple luck. So he just thinks that it’s a really hard job, though he does think that Buffett probably overstates his case. I do think he’s right in pointing out that it was an unusually amazing period for the S&P 500 and the fees embedded in the hedge fund structure… I think the wrong choice was to choose five funds of hedge funds because there’s fees on fees.

Merryn: Now, I’m interested in your hedge fund manager. I love the idea that he might have chosen a different career if he could live his life over again because I do not believe it for a second because there’d be almost no other career which would have given him the lifestyle I bet he has now. They say that stuff when they’re super-rich, once they get to that level. Oh, I would this or I would that. I don't need the money. The money doesn’t mean anything to me, etc. Try living without it.

Robin: That is very true and, frankly, it’s hard for a lot of people to admit this. Nobody wants to say that maybe I’m not that good at my job. I hate doing that when I screw up. It’s human nature. When we screw up, it’s always somebody else’s fault. When we do amazingly well, it’s always because of our own brilliance. I don't think money managers are any different from the rest of us when it comes to that. It’s just that the stakes are so much higher because they’re managing money on our behalf.

Merryn: Now, the second thing to say there is about this being a particularly brilliant period for the S&P 500. I do think that’s really relevant to this argument. A lot of things out there that are so recent in terms of the volumes that it’s hard to really know the truth about them. So ESG outperformance is the classic of this. Everyone has been telling us for the last five or ten years that ESG portfolios always outperform.

The answer to that is, well, how on Earth do you know? There’s only been huge volume in ESG since, what, 2015 and we know that that’s just really been about high-growth. If long-duration and high-growth assets are doing very well, then ESG funds do very well. So we don’t know what’s going to happen next. Now, index funds have… Obviously the whole index thing has a much longer history, but nonetheless, the huge flood of money into passive has really only happened over the last decade.

Robin: Well, it has been astonishingly strong over the past ten years. It started in 71. We celebrated the 50th anniversary of the first index funds last year, but it’s true that… Let’s say really from the dotcom crisis onwards and then the magic of compounding the growth rates, just staying that strong on a bigger and bigger asset base, just means that in the last decade, it has just gone incredibly. It has just gone parabolic almost. When I started researching for my book in 2018, there was around $10trn in index funds. By the time I actually finished the first version of it in early 2020, we were talking $14trn. By the time the book came out, it was $17 trillion. Now we’re probably close to $20 trillion. So we’ve doubled just since 2018.

Merryn: Yes. So given that, and we’re going to talk about a lot of things to do with [unclear] now, but can we just start by saying that given that, we can’t be absolutely sure yet about how passive affects the market, about how this is going to impact returns, costs, anything over the long term. It may be that the failure of active funds over the last decade has been a function of us being in… I say the failure, I mean the relative failure has been a function of us being in a fairly extraordinary bull market.

Robin: I do think it has been an extraordinary bull market. I agree 100% on that. I’m just not sure whether the lesson we can draw from that is that the next decade is going to be any different because if you look at any rolling ten-year period, certainly in developed equity markets, whether it’s the UK FTSE or Europe or the US or Japan or the world as a whole, active managers underperform in the long run. The chances that you find somebody that will perform well in any ten-year period is de minimis, certainly in the next ten-year period, and that doesn’t really change even though there have been periods where the market’s overall returns, the beta as people call it, has waxed and waned.

There have been lost decades for various markets and it doesn’t really alter the fundamental calculus. Unlike a lot of passive investing fans, I do think that it is having an impact on markets. I think it’s undeniable. I just think something that big… It’s hard to imagine it not leaving a footprint. I’m just not sure it’s nearly as large as some people argue and certainly not as malignant as a lot of active managers have complained, frankly, for 50 years as they do a terrible job.

Robin: Well, the argument is that it helps the big get bigger. There are various facets to these arguments and it tends to reflect the biases of whoever you talk to. So growth managers have a very different perspective than a small-caps manager, for example. I think the way I see it is that we can very simply separate them into micro and macro aspects. Can we see in certain specific corners of the stock market, index fund flows in and out having an impact? Let’s say dividend stocks. There are lots of big dividend stock ETFs that index funds have and I think so because, frankly, some of those markets aren’t huge and the ETFs and index funds are so big now that it’s having an impact.

I think in certain stuff around index inclusions and exclusions… So if somebody drops in or out of an index, that has an impact, although depending on when you measure it, but on the market efficiency as a whole, does the global capital market still do the job that it was designed to do? I think it does that and it does it better than ever before because, frankly, the most likely people to get squeezed out are the mediocre managers, the bad ones, the lazy ones, or the unlucky ones in some cases. Over time, the bar to do well in markets keeps getting higher and higher because of this competition from a cheap, passive competitor as it raises the bar for everybody and the markets are actually, I think, becoming more efficient, are more efficient today than they ever have been before in their history.

Robin: So in the US, it depends on how you slice and dice it. Globally, as all capital markets, it’s still pretty small. Let’s say the equity markets are, what, 50 or 60 trillion? I can't remember. It depends on whether you count small-caps and so on, but let’s say in the US, half of the asset management industry is passive. That’s just the mutual fund side. That doesn’t include insurance companies. It doesn’t include households. So as a percentage of the market cap of the entire US stock market, I think it’s around 20% and that’s one of the highest rates in the world.

Robin: Ideally, yes. Frankly, as you know, real life never quite fits like a stylistic model and I’ve never found it fits my stylistic models, but, yes, I think that’s what is happening, frankly, though, frankly, the asset management industry still has astonishingly fat margins. The average listed US asset manager has fatter margins than Google. So I don't think this is an industry that we need to cry for quite yet. There are more mutual fund managers around the world today than there ever have been before in history. My favourite stat is that there are still more US hedge fund managers than there are managers of Taco Bell restaurants in the US.

Robin: Exactly. So that’s the career choice I always recommend people, but it is incredible. I think the market can get far more passive and should and I hope it will because, frankly, a lot of what is going on is de facto rent extraction from savers, people like you and me, either in our individual funds or through our pension plans, and for mediocre results on average. So over time, I think this is going to happen and I think it’s fine because even if we go to 50%, 60%, 70%, there’ll still be enough active managers and they’ll probably be the best ones standing and they will be able to keep the market active because passive funds are fundamentally price-takers, not price-makers.

Merryn: So as far as you’re concerned, the main benefit or possibly even the only benefit to the rise of passive investing is price, that it means that we aren’t handicapped by having to hand over, say, 25% of our returns every year to fund managers. If you assume that you make somewhere between 4% and 6% per year and you have to give 1.5% or 2% to a fund manager, you’re handing away every year a vast amount of your returns. If that goes down to 0.1%, then everything changes in terms of the compounding of your returns. That’s the main benefit, right?

Robin: Well, like I said, I do think that one of the things that made markets inefficient and, frankly, kept good active managers gainfully employed was that there was a lot of dumb money, and not just your proverbial dentists in Brussels day-trading, but mediocre fund managers that just weren’t very good. I think as they get squeezed out, actually there might be some very ephemeral socioeconomic benefit from slightly more efficient markets overall.

Merryn: So we’re less likely to get caught up with the useless, expensive managers and, generally speaking, the majority of our pension funds are mostly going into passive stuff these days, so we’re getting much cheaper access to the market. So this is good. No one can deny this is good, right? But it would be bad if the very existence of passive investing makes stocks more expensive in the short term so that our long-term returns are not what they would be.

So one of the big criticisms of passive is that it effectively makes everybody a momentum investor. I know that you don’t think that’s really that much of a big deal, but if all the money comes in and keeps pouring into the same stocks… This is why the index companies or companies that create the indices are really important because they remind us that, in the end, there’s no such thing as passive investing because somebody chose the constituents. So in a way, the index companies become the most important fund managers out there.

Robin: Well, I agree 100% on the massive power and influence that has accrued to the index providers themselves almost under the radar. People still don’t appreciate that this is, I think, one of… I wouldn’t say one of the downsides but definitely one of the things that we need to keep an eye on, a far better eye on. When it comes to momentum, I think that there could be a momentum effect but on the margin. I think it’s fairly minimal compared to the fact that we’ve observed the momentum effect through all markets, through all time periods, long before passive funds existed. There was a momentum effect in the 1700s and 1800s as well when Louis Bachelier was just a glint in his grandparents’ eyes.

When it comes to how much… Do they make certain stocks more expensive? Look. Just imagine as a mental exercise if the index fund didn’t exist. Where would the money now be going into? It’d be going into active funds. Frankly, humans have demonstrated throughout history, through centuries, that we do all sorts of heinously stupid things in markets. Even the professionals do dumb things. We had bubbles long before indexing even existed, let alone was a major factor.

Merryn: Well, exactly. I remember the age of the closet tracker and I don’t write them anymore because they don’t exist in quite the same way, but 20 years ago, 15 years ago, even ten years ago, I used to write maybe every six months an article about the shocking examples of closet trackers you could come up with where they did absolutely nothing but track the index. Their active share was non-existent and they charged as though they were hedge funds. Infuriating. They don’t really exist now. They exist a little bit but not so much. That’s been a major positive of the rise of passive.

Robin: I think because closet tracking has become such a well-known issue and most investors, certainly big pension fund trustees, now track things like Active Share, but if there’s one thing that being a financial journalist has taught me, it’s that if you give people a metric, they figure out a way to game it. I’m sure there’s all sorts of… It’s very easy to just jigger around an index and be a de facto index-hugger without actually being clocked as one. That’s fairly easy to do and we know that active managers as well, and I actually feel sorry for them, feel more and more pressure to not deviate too much from the index.

So they’re not truly active and this isn’t their own fault. This is the mandates that we give them because they know that if they have one big year, they’re kind of toast. It’s really hard to be an active manager and this is why… I’m not a passive jihadist, as I call them. I don't think markets are efficient. I think there are active managers that can and do add tremendous value. I just think there are far fewer of them than people think, I think on average they charge too much money, and I think the job is just far harder, wildly harder, than even people in the industry appreciate.

Merryn: Let’s look at this idea that the rise of passive is actually causing problems in the real world. So there’s an idea that you hear a lot that passive investing or the existence of huge amounts of money in passive funds causes inflation. So there’s the common ownership problem where the big, influential passive managers... They hold all the different competitors in a sector and that means that they’re not forcing competitive pressure. They’re not saying to one group, you need to do better than this group and you need to do better than this group, because they own them all. So they want them all to do just fine. So that reduces competitive pressure and so creates inflation. That’s one part of it.

The other part of it is this idea that if expensive stocks get more expensive and cheap stocks stay cheap… Well, they may think [?] that would happen anyway. That means that for the cheapest stocks, they have a slightly higher cost of capital. They have no real incentive to expand. So maybe we get underinvestment in industrial companies, in energy companies for example, and that gives us inflation and leads us to regular higher prices. So there’s this overspill from what you could think of as just a technical issue in the financial markets. Actually it can overspill fairly unpleasantly into the real world.

Robin: Well, I think all of that is true to a degree, but I think, for example, a lot of the sins that people put at the feet of passive investing is just better… It fits better at home somewhere else. Just for example, how valuations have gone up over the past ten, 20, 30 years… Obviously it waxes and wanes with financial crises and pandemics, but broadly speaking, the past 40 years has been one of a once-a-millennia fall in interest rates around the world.

The idea that passive investing, something that is still a fairly small phenomenon on the global scale and basically just does something that people have been doing for a long time, just in a cheaper and honest and transparent way, is having any sort of impact compared to the massive gravitational pull of interest rates, I think, is preposterous. I do think things like ESG… Again, that is probably starving certain sectors, by design, of capital. We can see that having an impact, but again, value stocks and energy stocks have had a phenomenal 2022 or few years.

So these things work themselves out. If some people are willing to accept below-market returns because they want to shun certain sectors that they think are bad for the world, then there are other people that don’t have the same qualms that can harvest a sin premium that used to be in tobacco stocks. Maybe there’s a sin premium in energy stocks that people can harvest over the next ten or 20 years.

Robin: Well, it goes to the heart of one of the reasons why I wrote this book. The investment industry is very good at what people call datamining. If you torture the data long enough, you can find whatever you want. Lo and behold, when people wanted ESG and why they wanted to buy ESG and do better for the world or wanted to sell ESG… You can believe that that helps returns. Then you look over the past ten-year period and you see, lo and behold, that ESG does look well.

Well, if you scratch below the surface, you realise that it’s because, like you pointed out, ESG tilted towards growth and tech stocks. Techs don’t have a lot of emissions. They score well on certain measures of governance and social inclusion. So I think this is one thing that we’ve discovered in the investment industry over the past 100 years and one of the things I try to really dig into in my book is that a lot of the stuff that we used to think was alpha, that pure above-market returns that a fund manager has generated, is in reality some form of market return in drag. It’s just hidden away.

Robin: Yes, the nifty 50s. So I think ESG… Look. I think if people want to invest in ESG, I think they need to realise that the only way it can work is if they accept below-market returns. I am exceptionally sceptical of claims from the asset management industry that you can save the world and make money doing so at the same time. I think that is potentially going to maybe become a misselling scandal in the industry in the coming years.

Robin: Yes. Well, I’m sure you’ve noticed this as well. ESG is not something you can get anybody saying anything mean about in public, but my emails, whenever I talk about this, tend to the, yes, this is completely true, I can’t believe we are bigging this up. And I’m a good Scandinavian. I care about this stuff. I think we do need to save the world. I think ESG is probably a good thing. What I hate and I think is dangerous is it being mis-sold and I think we have seen tendencies towards that in recent years.

Merryn: Well, let’s talk a little bit more about ESG, social responsibility, and passive. Let’s chuck Larry Fink in there, shall we? Now, one of the big problems, what I see as a big problem, and we’re not talking about my book, but this is what I wrote about it in my most recent book, Share Power. It’s about this quite scary dynamic whereby the rise of passive and, in fact, the rise of us all investing one way or another through a middleman, has given enormous power to the three big companies. Well, to the others as well, but in the main to Vanguard, to BlackRock, to State Street for these absolutely vast [unclear]. BlackRock now manages more than ten trillion.

So you’ve got a huge amount of money controlled by these big companies, which means that they control of course the votes that come with that, and we hear endless do-goodery and ESG talk from the likes of Larry Fink in his annual letter, etc. So we now have a position where the shareholder democracy that used to exist, in theory at least, now really doesn’t exist. The big decisions about how companies should or shouldn’t behave are being made by a small group of very powerful men and that’s got to be a long-term problem. I certainly see it as one.

Robin: I agree. I think this is the criticism of passive investing that I find resonates with me the most. I don't think Larry Fink is a bad person. I don't think BlackRock and Vanguard are evil. I think actually they do a lot of good work and there are no right answers to a lot of these things, but just the sight of the mounting concentration in the investment industry, and that goes beyond just passive investing but is particularly acute there, I think, opens up a scenario where the vast majority of listed companies around the world are going to be de facto controlled by, yes, a handful of people that work in the people that create indices, that sell index funds, and work at proxy advisors, for example.

I think that’s the kind of concentration… Sometimes I find myself playing devil’s advocate and saying, well, maybe I don't think there was a golden era of corporate governance, certainly not in the US and large parts of Europe. Minority shareholders have never really been good at steering or had their rights protected very well, but maybe in an era of more concentrated ownership where essentially most companies have Fidelity, Capital Group, BlackRock, Vanguard, State Street in there and these companies are under pressure to do more active ownership work, maybe this will be a good thing. But I don't feel comfortable with the idea that that kind of economic power is that concentrated.

Also this feeds into the ESG stuff we were talking about. There’s more and more pressure on these companies to do the right thing, but we humans don’t agree on what the right thing is. It feels like we’re almost basically outsourcing major public policy issues to privately owned asset managers that manage money on behalf of other private institutions and private individuals. I don't think that is actually the right thing. I think if we want a sensible climate policy, that has to come from elected lawmakers. It shouldn’t come from BlackRock and Vanguard.

Merryn: Yes. This is exactly my concern and exactly why everybody at Share Power are keen to say exactly that. How can we put these things that are really matters of public policy into the hands of these vast private companies? The other thing that I find interesting about this is, you say that you don’t think there’s ever been a golden age of corporate governance and I agree, but there’s never been a period when ownership of the equity market in particular has been both so concentrated and so diverse at the same time.

So if you go back to the 50s or 60s in the UK, only about 3% of the population owned any equities at all. Maybe they engaged with companies. Maybe they didn’t. Some of them did, turned up at AGMs, read their annual reports, wrote irritable letters to CEOs, etc. That’s still a tiny number of them, but now of course, thanks to auto-enrolment in the UK and in many other countries as well, pretty much everyone in work owns equities. So the ownership base is both absolutely huge and encompasses every adult in the country but also completely tiny because the power of all those people has been delegated into a tiny little group. That seems to me the interesting dynamic right now. Everyone’s an owner. No one feels like an owner.

Robin: I think that’s a great way of looking at it. I’d be curious, though. Maybe this is me being slightly a techno-optimist on a whole range of issues. Do you think that we might get the technology to be able to devolve some of that shareholder voting rights to the individual customers through… For example, if you are a member of the USS pension scheme, then you can vote directly your shares the way you feel like it. Or if you are invested in Robinhood or whatever it’ll be… We’ve made it somewhat easier to trade shares and invest in shares. That’s easier and cheaper than it’s ever been before in history. Do you think technology might also help us solve this problem that you’ve identified?

Merryn: Yes, absolutely. That’s where we’re at now. These are the things that I’m concerned about just like you and I can feel us on the cusp of that. The technology absolutely exists. I don’t think it did ten years ago, but you can do this now. You could give everybody a look-through vote if you wanted to. Whether that’s the right way to go about it is another issue altogether. It may be better just to have people offer their votes on things that are not routine. We don’t want to get caught up in everyone having to give 17,000 votes a year.

There are lots of different ways to return power to people and I’ve talked about this on this podcast as well, so we won’t bore people for too long, but there are some really good smaller companies at the moment working to reconnect companies and owners. Some of the big pension fund managers in the UK already work with this little company called Tumelo, which I’m a huge admirer of, where they can set up a site [unclear] you have a pension fund with any of these companies. LNG do it. Aviva do it. You can go to them. You can go onto the website. You can see every single thing that you have a fractional ownership in and you can see what votes are coming up and you can express a non-binding view on those votes.

So it is already happening. There’s a lot of talk about it at the regulatory level, particularly in the UK and the US. So I do think we’re at the beginning of a turning point for shareholder capitalism. Exactly how it pans out I don't know because we’re at the beginning of, how will it work? What percentage of votes could you return? How do you do it if some people have half a share and some people have a million shares, how does that work, etc.?

Even BlackRock are doing a lot of stuff on this. They’ve already done something where they had some of their votes backed at other institutional owners. So a large fund manager gives power to another large fund manager, which is not quite what we have in mind, but it’s a start. I don't know if you read Larry Fink’s letter this year when he specifically said that he could see a day when even individual shareholders had some of their rights back. So this bit could be fixed.

Robin: Yes. I think so as well. I thought the Larry Fink move to hand power back to some of the big investors was indicative of both the way we might see a broader movement, but also the index fund giants, a BlackRock, a Vanguard, a State Street… I’ve talked to all of those. This is the criticism that they agree with the most. They don’t think people are right to fear them. They’re human beings. They can see that nobody feels comfortable with that kind of concentration because it’s not just about where we are today. It’s where we’re going to be in 20 years’ time.

Robin: I agree. One of my favourite bugbears is that we focus a lot on the big three, they’re called in index funds. So that’s BlackRock, State Street, and Vanguard. In reality, it’s just a big two because BlackRock and Vanguard are so much bigger than State Street and growing quicker and Fidelity now is bigger than State Street. The asset management industry is pretty balkanised. Even BlackRock with its 10trn is probably only an eighth of the entire investment industry. So compared to many other industries, that’s not that concentrated. In the index provision themselves, FTSE, Russell, S&P, Dow Jones, and MSCI account for 80% of all financial indices.

So that industry is hugely concentrated, but the most concentrated industry of all are the proxy advisors. Glass Lewis and ISS are absolutely dominant and I’d love to see a world where maybe a mix of entrepreneurship and technological solutions means that actually that space gets blown up and maybe you choose the proxy advisor almost like you choose a political party. They have a platform that suits you. So then, yes, you outsource a lot of the day-to-day proxy vote work and shareholder work to them, but you can fit something that fits your views and your personal beliefs a little bit better.

Merryn: That’s why. So in your next life, you wouldn’t be a hedge fund manager. Listen. I’m keeping you for too long, but before I let you go, I’ve got to ask you about markets because this book is your side gig. Your day job is looking at markets every single day. We look around us now. At MoneyWeek, we just look around ourselves and they see the collapse of long-duration assets. They see the tech wreck. Is it a dot-com bubble or is it something worse? They see hugely volatile commodity prices, inflation numbers all over the place. They’re worrying about policy error. They’re seeing bond prices collapsing.

Robin: Well, I’ll have a stab at a better answer, then, but I do think that I’ve interviewed a lot of brilliant money managers in my career and even the smartest people among them screw things up to a comically frequent degree. It’s just that this is very hard. So I always say, look, ignore the journalists, don’t listen to me, put your money in your index fund and forget about it for the next 20 years ideally or at least until retirement. But I do agree that there is a lot going on now and I do feel I’m slightly less worried about tech than I was maybe a year ago just because we might fall further. There’s certainly some speculative corners I still think have a lot further to go, but broadly speaking, the tech bubble wasn’t really a proper bubble. Tech companies just made an insane amount of money.

Maybe that changes, but I still think there isn’t… You need quite draconian antitrust decision-making in the US and Europe for that to happen. I just don’t see that. So I think, broadly speaking, that side is fine. I’m worried about obviously Russia-Ukraine and I’m less worried about inflation in the long run. I just don’t see the fundamental socioeconomic conditions that made an inflationary spiral happen in the 60s and 70s. Actually they don’t really exist today.

Robin: Well, you might have angry young people. Young people generally are angry. I was when I was younger. It’s only now that I’m middle-aged that I’ve mellowed out a little bit, but I just don’t think… They don’t have bargaining power. There are some areas that people are going to be able to demand sky-high salaries, sadly, not journalism, but I think as a whole, the western world has eviscerated labour unions. It’s very hard to see people get their wages back. If wages go up a little bit now, that’s great, but I just, sadly almost, don’t see that becoming a major thing that will trigger an inflationary spiral…

Merryn: Robin, quick interruption. Given that I know we’re nearly at the end here, quick interruption. Now, is it not possible that it is not unionisation that drives rising wages and rising inflation but rising inflation that drives unionisation? If you look back to the 60s, for example, there was very strong unionisation, but the labour disputes and anger didn’t start until inflation started to rise. It isn’t the unions that drove the wage rises. It was the other way around, right? So it’s perfectly easy for workers to reorganise now. Union membership is already going up. They have social media and all kinds of different ways to communicate and organise. I’m wary of this assumption that there isn’t going to be a wage-price barrier because we don’t have unions in the same way we did before.

Robin: No. I think that is somewhat flippant, though I do think my broader point is labour bargaining power. I think unions are a component of that and I do agree that it’s a little bit chicken-and-egg and usually the answer to those cases is, it’s a little bit of both. Maybe faster inflation now does make people band together more. I just don’t see, across these swathes of the economy below the chattering classes, a lot of real power to set wages markedly higher, though if they do go up a little bit or quite a lot, hallelujah. This is something I’d love to be proven wrong at.

But fundamentally I tend to think that people who worry about inflation have a very low opinion of how well market economies work. Market economies are immensely powerful, adaptive, dynamic things. I don't think we’re going to go back to the prices of 2019. I think the inflation rate is going to calm down, but I do think… And this is speaking of markets. I think central banks might be heading towards what I would probably call a policy mistake, broadly speaking, being far more aggressive than is currently priced in. Like I said, I think the one massive force that has powered pretty much everything we’ve seen in finance in the past 40 years has been falling interest rates.

Now, I don't think interest rates are going back to the 1980s, but interest rates… A Fed funds rate at 5%, I think, would inflict a lot of damage on a financial system that has become completely inured to the idea that interest rates can go up. So that is my worry, that right now we are pricing in the perfect Goldilocks situation, that central banks will be able to raise interest rates and engender maybe only mild recession that gets inflation back on track and everything’s hunky-dory. That’s going to be a very tough balancing act, but, frankly, I would have said the same thing five years ago and look at all the market returns you would have lost out on.

Merryn: Yes, but do buy Robin’s book. We’re going to have to leave it there. You’ve been so incredibly interesting that we’ve made a slightly longer podcast than usual, but I think the readers and listeners will forgive us. So, everybody, please go away and buy Trillions: How a Band of Wall Street Renegades Invented the Index Fund and Changed Finance Forever. It’s also got a very pretty cover, by the way. Robin, thank you so much for joining us. I note that you are not on Twitter, so we can’t follow your thoughts on a second-by-second basis.

Merryn: @RobinWigg. Go find him on Twitter and then you can follow every single thought he has and decide for yourselves which ones to ignore and which ones not to ignore. If you want to get more from MoneyWeek, you know where to go, moneyweek.com, where of course you can sign up to our daily e-letter, Money Morning, written by the brilliant John Stepek. You can follow us on Twitter and Instagram, etc. @MoneyWeek, me @MerrynSW, John @John_Stepek. Thank you so much, Robin, and we will talk to you all again next week.

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