James Ferguson: you may not make any money this year – so just try not to lose any

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Transcript

Merryn Somerset Webb: Hello, and welcome to the MoneyWeek magazine podcast. I am Merryn Somerset Webb, editor-in-chief of the magazine, and today, I have with me James Ferguson, founder and partner at MacroStrategy. 

Now, you all know James. He’s been knocking around the magazine for the last couple of decades. He’s been one of our go-to commentators. And it’s particularly important that we talk to him at the moment, because James actually knows what’s going on. Right, James? 

James Ferguson: Well… 

Merryn:  Just say yes. Just say yes. 

James: I guess so, yes. Yes. 

Merryn:  Then I’m going to ask you a question and you can prove it. All right, we are talking in a week… It is 22 September 2022. We are talking in a week of interest rate rises. The Fed has seen a rise yesterday. We’re speaking as we wait for the Bank of England to announce what they’re going to do. 

Here’s the key question, James, the most important question in markets, finance and for all of our living standards going forward: are these interest rate rises going to cure the inflation problem? 

James: I’m going to answer that in two ways. The first one is to point out why they’re raising rates. And the reason why they’re raising rates is because they created inflation. They like to pretend it was Putin, but it’s worth bearing in mind, US inflation was already 8% before Putin even invaded Ukraine. 

And the way they created inflation was that they decided during Covid to do very easy fiscal and monetary policy together. In other words, they handed everybody cheques, unemployment cheques in the case of the US and furlough payments in the case of the UK, and funded that through printing money or QE. 

And what they did therefore was massively inflate the money supply. And this, as any monetarist would have told you, will lead inexorably, with what Milton Friedman called long and variable lags, to inflation. They’re all Keynesians in the Central Bank, so they didn’t believe that that was a risk at all, despite literally thousands of years of history of inflations being caused by the debauching of the currency in some form or other. 

So this was always a bit of a mystery to any observer and commentator. But what it means is that they’re now joining the party very late. And like new converts the world over, they’re joining it with a newfound enthusiasm that certainly wasn’t visible even a few months ago. 

So you’ve now got the Fed, that had been completely dovish, which is the term we use to explain very complacent and soft on their monetary policy, now turned very, very aggressively hawkish, and they’re talking about pain to come and how inflation must be conquered. They neglect each time to mention that they caused the inflation, but that inflation must be conquered, and it must be conquered by higher rates, and that that will lead to a lot of pain. 

So the first thing to bear in mind is that we’ve got the central banks now raising rates aggressively to effectively undo the policy they did during Covid, which was very ill advised, far too intemperate, and we’re now reaping the reward. So first of all, bear in mind, these guys really have proved that they don’t really understand what they’re doing. 

And in the Fed’s case, if we take one single measure, which is the real Fed funds rate, so that’s the Fed funds policy rate minus the rate of inflation, the Fed has never been so far behind the curve in its history. So they haven’t just cocked it up. They’ve cocked it up arguably more seriously than at any time ever. So that’s what having… I think they have 400 economic PhDs working at the Fed. This is the most egregious example of groupthink you’ve ever seen. 

So this is why we’re here. We’re here with them raising rates to deal with a cost of living crisis that they themselves caused and perpetrated and didn’t really, and still maybe don’t understand. And they’re trying to cure it by raising rates. 

But if we cast our mind back to why it happened in the first place, it was because of this excess money creation. And you go back and look at the history of previous monetary expansions that led to inflation, a really obvious one being, in the case of the US, the Second World War, where they massively increased the money supply but stopped people spending money during the war, mainly because you couldn’t buy a fridge or a car or an oven because all the metal manufacturers were busy making tanks and planes and battleships, but once… 

But they had printed the money. So it was much like Covid. You printed the money but you didn’t let anyone go out and spend it. And then after the end of the war, they were all allowed out to spend it, and inflation quickly reached 20%. So how did they deal with that inflation? 

Well, interesting lesson for us today. The Fed immediately prevented any further increase in money supply. For two, nearly three years, they kept broad money supply growth almost completely flat. And that basically leeched all the inflation out of the system, turned the economy into a downturn and a recession. And so they started doing this about 1947. And by 1949, it was all looking pretty miserable, recession and even, at one stage, negative inflation, so deflation. And then it all bounced back again from the beginning of 1950. 

So that’s very similar to where we are today. If you look at the US, there has been no growth in broad money supply since the beginning of the year. Now, whether this is intentional or not is hard to say, because according to what the Fed says, they don’t look at money supply measures, so they don’t know that this is the case, and they certainly don’t think it’s important. But then maybe they’ve had an epiphany, so we have to be careful about that. 

But you have got the strange situation in the States where we have quite strong money supply growth coming from normal bank lending sources. So bank loan growth is really very robust, well into the double digits. And that would normally be enough to give you broad money supply growth. 

And, of course, you’d hear people say, oh yes, but don’t forget, the Fed is doing QT. Well, the Fed has only just started doing QT, and on top of that, the Fed… At the beginning of this year, it was still doing a QE for a moment. But on top of that, the QT it’s been doing is very mild, very passive. It basically involves allowing maturing bonds to roll off. So they’re not actually selling stuff at the long end. 

And the reason why that’s important is that what matters for money supply is that there’s an interaction between a bank, be it the Fed or a commercial bank, with a non-bank. And that only really happens at the long end. So without getting too technical, the missing link in this picture is that the Fed has started allowing money market funds to deposit their money in what’s called the reverse repo…

Merryn:  You’re getting technical. Getting technical. 

James: Okay. Well, anyway, the fact of the matter is we haven’t got any money supply growth. So inflation could slow down relatively quickly in the US, just like it did post-war, except we do still have a measurable excess money overhang from what was printed up during Covid. So it will probably take a year or so, even if there’s no money supply growth, before we start really getting into conquering inflation. But that said, inflation…

Merryn:  Yes, but hang on, let’s go back. When you say that there’s a nasty… There’s still this overhang of cash, where is this cash? You mean sitting on individual’s balance sheets? 

James: Yes. So individual. The Fed has what it calls its flow of funds, and that measures things, but they only tell us with quite a long lag. But [inaudible] we can say with some confidence that the US household sector had a bit less than $1.5 trillion in the bank pre-Covid, and it now has over $4 trillion. So that big extra chunk of money is… It’s about $3.2 trillion. I slightly exaggerated how much they had in before Covid. So that big chunk of money is just sitting there. 

Now, the Keynesians would say, well, it’ll sit there as precautionary balances, i.e. everybody likes to have some money in the bank for a rainy day. And everyone else would say, yes, but if they feel like spending it because prices are going up, they will. A very important point in the US as well. 

So there’s two big differences between the US and Europe. One, they have all this excess money in the bank. We have much less excess money in our banks. In fact, our excess money will probably run out by the end of the year, whereupon we no longer have an inflationary impulse. 

But we do have something the US doesn’t have, which is this radical shift in the energy terms of trade. So the difference between terms of trade and inflation is inflation happens to everything, the terms of trade happens to only one thing. So we’ve certainly got this massive spike in energy costs, courtesy of handling Putin so badly and imposing sanctions on him which end up looking an awful lot like sanctions on us. 

Merryn:  Sanctions on us. 

James: Anyway, that particular brand of idiocy has led to obviously the European economies looking like they were going to rush headlong into nasty, nasty recessions. But instead of that, we’ve come up with what Mervyn King called a paradox of policy. 

And a paradox of policy is that you do something wrong and get yourself in a mess, and then you have to do the same thing to mitigate the mess, and that doesn’t make sense. So in the case of the Great Financial Crisis, it was having interest rates too low for too long, and then when the crash happened, they had to have interest rates too low for too long to help out. 

In this instance, we caused inflation by very easy fiscal policy, which is Economics code for sending everyone a cheque but telling them they can stay at home. And this time, we’re solving that inflation by sending everyone a cheque and telling them they can stay at home. 

In this instance, we don’t send them the cheque. We send the cheque direct to the gas suppliers and tell them to bill households a lower bill. But it amounts to very much the same thing, with one slight caveat, depending on how you fund it. If we were going to fund it with QE, it would be exactly what we did during Covid. But at the moment, it’s not clear if we’re going to fund it through QE or through increased borrowing. 

Merryn:  So I’m picking up mild hints of optimism that the inflationary environment around us may only last a year. 

James: Well, yes, this unfortunately does get, again, a bit technical. If prices go up, most people would call that inflation. If it’s only really energy prices going up, that’s actually technically a shift in the terms of trade. But to everyone who is experiencing it, it mostly seems like what we used to call inflation. The oil shocks appeared like inflation because prices were going up. But prices were particularly going up for one specific area, which was oil/energy. And that’s what we’re facing again today. 

And in fact, the impact of those sorts of inflations is kind of deflationary because it leaves you less money at the end of the week to spend on discretionary items, so you start delaying discretionary purchases, which is why it’s recessionary. So this is how we ended up with stagflation, a recession at the same time as inflation, is because, technically, it’s not really an inflation, but no one wants to get into the nitty-gritty of that. And that’s the sort of thing we’re facing. 

So when you say inflation may be gone, technically speaking, inflation is the thing that is caused by the money supply growth and affects all prices nearly equally. So yes, that type of inflation will be gone. But it’s being replaced by this energy terms-of-trade shock, which seems just like inflation because we’re still going to have the news telling us that, this month, CPI inflation was up again. It’s just that it’s a slightly different beast and it has a slightly different way of conquering it. 

For example, you can deal with overall inflation caused by an excess money supply by preventing money supply growth happening and waiting for it all to balance out again. You cannot cure an energy supply shock with tighter monetary policy. 

Merryn:  Okay. It kind of looks like we’re going to have a go at curing it with tighter monetary policy. 

James: So there which goes to show that the people in charge don’t understand even some fairly basic economics. And that is a worry, because they caused the inflation by not understanding, even at a fairly basic level, the economics. And now, they’re blundering around, doing other potentially ill-advised things, and we as investors have to work out not just what the right thing to do is but what these guys are more likely to do, and then… 

Merryn:  Yes. Well, perhaps what the right thing to do is, is slightly irrelevant at this point, because that’s not what we’re thinking about. We’re not thinking about what we would do, what you would do, what a monetarist would do. We’re thinking about what central banks are likely to do. And as far as I can see it, as you said, they’ve come to the party late with the zeal of a convert, and it looks like we’ll continue to see interest rates rising for some time to come, and that’s going to have a very unpleasant impact on our portfolios.

James: Yes. And, of course, don’t forget, the central banks can always throw us by learning. So we watched what they did do. We assume they’re going to continue in their ignorance. But what if they go, oh god, actually, it turns out those other guys were right, and what if they start learning? And if they start learning, they’ll change their behaviour and be even harder to predict. But you’re absolutely right. 

So the really big problem at the moment is that the correct policy and, in fact, the policies that are being enacted in America compared to Europe are quite different. Now, we don’t normally have policy divergence. Normally, everyone is doing pretty much the same thing at the same time to the same extent, because they’re all pretty much facing the same issues. 

But this time, in America, because they don’t have the energy shock and they do have more excess money supply built up from Covid, they have a very clear tight monetary policy programme which means they’re raising rates. But if you look at Europe, we have a very easy fiscal policy programme, i.e. every country pretty much is subsidising, to some extent, the gas and electricity consumption of their populations during this, hopefully, temporary spike in LNG prices. 

So you’ve got tight monetary policy in the US against easy fiscal policy in Europe. And possibly that easy fiscal policy turns into easy monetary policy too, but that is what’s causing this massive spike in the Dollar. Almost every country seems to be running around, fretting about why their currency is so weak. But if you look at them, you’ll see they’re all weak, and they’re all weak compared to just one thing, the Dollar. 

So the reason why the Dollar is going up is that investors are saying, well, policy is going to be tight, so they’re going to keep hiking rates until they beat inflation. And in Europe, they might even end up doing QE to fund the gas payments. So you’re looking at the world, and saying, well, I’m going to get higher and higher rates in Dollars and lower and lower rates in Euros and Sterling and Yen. Well, it’s a no brainer. And that’s why you’re getting this burst up in the Dollar, with no near-term end in sight. 

So how long will the Americans raise rates for? Well, the problem with trying to combat inflation with higher rates is that, A, it’s not dealing with the number one problem, which is the excess money supply. It’s supposed to because higher rates are supposed to put people off borrowing, and therefore, it’s supposed to slow the rate of growth of money supply. But at the moment, that’s being influenced by some technical factors at the Fed, so we won’t worry about that right this sec.

Merryn:  No, let’s not worry about the technical stuff. We’ll just take it on faith there, James. You said it, so it’s got to be true. 

James: Yes, exactly. But the really important thing to think about is that inflation, by definition, is a lagging indicator. We’re asking how much prices today are up compared to last year. And so if you did something to create inflation, as Milton Friedman said, long and variable lags, it takes time for that to appear. It takes time for workforces to wait until it’s their annual pay negotiating round, and then say, look, we need more money. 

So basically, inflation is a lagging indicator, whereas increased interest rates are not lagging. They’re immediate. So you’re trying to stop something which is lagging by inflicting pain which is immediate. And this is why you usually get to a stage where the recession hits before the inflation is conquered. 

Merryn:  Right. And is that going to happen this time? 

James: Probably. The only time it didn’t happen, apart from the time when the Fed was strictly monetarist and… Well, actually, in actual fact, even the 1947-49 inflationary and deflationary period was immediately followed by another upsurge in inflation. Once you’ve unleashed inflation, it’s incredibly hard to get rid of it, because everyone’s mindset has changed. If you think about everybody pre the inflation, nobody really concentrated much on pay rises. Nobody really concentrated much on buffers, safety buffers. Now, that’s pretty much all people think about. 

So everybody is thinking, well, geez, the engineers, they got 4.5%, we should get at least 5%, and everybody wants a pay rise that beats inflation. Almost all pay rises in both the US and the UK have lagged inflation, which means the pay rises need to grow after the inflation is already falling, which it’s started to do. And, of course, all that means is that the goods price inflation that drove the early phase will be replaced by a services price inflation, and don’t forget, services are twice the size of goods, as we go into the latter phases. 

So it’s incredibly hard to beat inflation, unless you are Paul Volcker, who was the Fed Chair back in the early 80s who was given a mandate to basically keep the screws on, keep the pain going for two or three years. And so basically, from 1980, with a brief hiatus, all the way through to the end of 1982, he kept rates super high, and in fact kept rates really high even after that. So even after the inflation fell, he kept rates high to make sure that the inflation didn’t come back. 

Merryn:  But he was also helped out by the supply side, wasn’t he? Because he came in to do this job around the same time as President Reagan’s supply-side revolution kicked off, so you got both sides at once. So Volcker got a little help that the Fed is unlikely to get this time around. 

James: Yes. He effectively got a mandate to keep the screws tight and keep the pain going. Now, all previous Feds had just not had that mandate or didn’t believe they had that mandate. And so you can talk tough, like Jay Powell is now, about pain to come and it’s bound to hit house prices and it’s bound to hit jobs because that’s what we need to do to get rid of the inflation. Well, that’s fine. 

But as soon as politicians find that their constituents are losing their jobs or worried they’re losing their jobs and are seeing their house prices go down in value and all the other things that voters hate, then suddenly the political feedback to the Fed is far less supportive. 

And historically, the Fed takes its foot off the brake too soon. It thinks it’s done enough, and then, not one, two or three years later, the inflation, which never went back to where it came from, was resurgent. And so where is inflation likely to fall to this time? If we consider that inflation is effectively split into three component parts, one is goods, that’s peaked, that’s gone. So goods inflation will probably come back to target. I’ve got no problem with that assumption. 

But we then have two other components, all of equal size, all three with equal size as each other. And the first one is shelter, which is how they tried to incorporate rent and the value of houses. And that component massively lags moves in both… So, for example, the rent component is up 6.3% in the US, and actual rents, by the widest measure, appear to be up 40%. So they’re massively behind. So you’ve baked into the cake the fact that the shelter component of CPI, unless it’s going to lose all touch with reality, will have to grow at 5.5-6% for the next three years. 

And then the third component is services, other services, which we probably most easily can capture as wages. So what are wages going to do after you’ve had a massive inflationary surge, and real wages were behind the curve and therefore fell? 

Well, people are going to demand more money, especially in a tight labour market. At the moment, there are two jobs for every applicant in the US, and they have almost record low unemployment. So it’s going to take a long time to turn that labour market around so that the power is with the employer. 

So you can pretty much bet that we’ve got inflation beating wage hikes driving one third of CPI. And the fact that it’s massively lagging what’s already happened, doesn’t matter what happens to house prices now, it’s the big rise that was missed out completely in the lagging shelter component that still has to go up. 

So the fact that some people think that because goods’ prices and bottlenecks are finally being fixed, that it’s all over, just I don’t think they’re considering this element at all. So I think we’re clearly going to see inflation rate halve, let’s say, but I think it’ll be very unlikely to see inflation go all the way back down to that nice pre-Covid target. And therefore, we have to deal with high yields. 

Merryn:  Okay. So this brings us to, well, the bit everyone is waiting for. We have to deal with high yields. We have to deal with them over short term, probably medium term, probably long term, depending how we define all these things. And how is that going to affect the way we should invest? 

James: Well, the first thing to do is think, what do we think these high yields will look like? Without being… I think, being quite reasonable, the one-year US Treasury and the two-year US Treasury are both now yielding 4%, so it seems pretty unlikely to assume that the Fed funds rate won’t go up to 4%, given the fact that it’s currently 3.25% and the fact that the one-year is already there. So even a conservative estimate of where we’re going to is 4%. 

But 4% Fed funds rate, when we still have inflation at more than double that, still looks remarkably easy. It’s very easy to imagine that the Fed funds rate… Several of the FOMC members have actually already now said that rates need to be positive in a real sense, i.e. they have to be higher than inflation. 

So although inflation is coming down to meet us, good, we’ve still got a long, long way for rates to be higher than inflation. And every single previous inflationary episode has required rates to be in positive real territory. So this is the Fed starting so far behind the curve, well, it’s never been further behind the curve.

But let’s say, okay, if we think we’re going to have… And don’t forget, the long-run, and I’m talking 5,000-year-average-run level of interest rates throughout history is around about 5%. And I think the actual figure that they worked out at the Bank of England was something like 4.72% or something. So 4% to 5% seems like a pretty reasonable figure to plug into our basic model. 

If we did do that, what should mortgage rates be? I am talking about the US still, because we’ll have to have a slight deviation onto how things are slightly different in Europe. But that certainly makes it… Mortgage rates have to be about 7%. And if mortgage rates are 7% and the risk-free rate is 5%, what should the bond yield be? 

Well, if we have a completely flat bond yield, that means the long bond yield has to be 5%. Well, it’s currently 3%, so we’ve got a nasty bond bear market in tow. And if we then have a steep yield curve… Actually, no, there’s no point in assuming a steep yield curve. 

So basically, we still have to have bond yields at 5%. And if we’re going to have bond yields at 5%, then we also have to have the equity earnings yield at 5%, because historically, these things have been around about the same level. And that means that you have to have a market P/E of 20. 

Now, that’s about where the market P/E is now in the US. So at the moment, the US market is… Bond market still looks vulnerable, and the equity market, arguably, is hanging on in there by the skin of its teeth. But that’s only if we have this really quite complacent and conservative assumption of rates going to 5%. 

But while rates are going to 5% in US Dollars, they possibly are not going to do anything like that on the other side of the pond. Ans so what you’ve also got here is this big sucking sound of the Dollar looks like the right place to be. And when the Dollar is the right place to be, almost every other asset tends to suffer. 

So in this round, so over the next year or so, this looks like it’s still very supportive of the Dollar, and that’s a difficult environment for most other assets to enjoy. But at least, it’ll look like inflation is easing off. I think, further down the track, we’re going to have a new problem, which is going to be that inflation is not dead…

Merryn:  Yes. 

James: And resurgent again. And then we get into a much more difficult thing. Because if bond rates go above 5%, then you’re going to do serious damage in the latter stages, even to equities. But for now, equities are… 

Merryn:  So for now, US equities are reasonably priced under the circumstances. If you’re holding… 

James: Yes, under… 

Merryn:  If you’re still holding US equities, which most of our listeners will be, and you’ve been holding them for however long and you’ve lost your 10%, 15%, 20%, depending on where you are in the market, over the last year, are you safe to keep holding from here? 

James: Only if what I would call the very safest conservative assumption that I made about 4% to 5% on interest rates in the US comes into play. And so that is what I would call the best-case scenario. My best-case scenario is that US equities are correctly priced, and all my other scenarios suggest that they’re overpriced. And the biggest threat to them long term, by long term, I’m meaning five to ten years, is if inflation is not defeated. If inflation comes back, then rates will have to go higher again. 

This is certainly the experience of the late 40s, early 50s, it’s certainly the experience of the 60s and 70s, that once unleashed, inflation comes in these waves that, initially, the bond market assumes, wrongly, are one-off and transitory, and then realises that, actually, it’s cyclical and upwardly trending. And that’s when the real damage is done. 

So if the Fed doesn’t completely annihilate inflation this time around with a combination of high positive real rates and zero money supply growth for a sustained period, then this could be a very grim decade for investors. 

Merryn:  Okay. And there was I, thinking we were going to end in a reasonably cheery, it’s kind of okay kind of way. 

James: Oh, you know that never happens. 

Merryn:  I know, and it certainly never happens with you. Occasionally, I get people on who are terribly jolly, where none of us quite know what to think. So here we are. Possibly, best case, the US is knocking around fair value. Best case. Is there any market globally, or any sector of any market, where one could say that it’s better than fair value, and you really could be reasonably safe, even with rates going beyond 5%? 

James: Well, the answer to that is sort of just about any of them. The US has had a barnstorming period and it has outperformed all the other markets, but it’s outperformed them by also getting more expensive relative to them. 

And the really big lesson from the inflationary period was that even though corporate earnings grew faster than general prices, so there was real corporate earnings growth, and even though corporate dividends grew faster than the rate of inflation, so there was real dividend growth, even so, inflation adjusted, the Dow Jones lost three quarters of its value over the… 

Merryn:  You’re talking about the 1970s? 

James: The 1970s. So what was going on? Well, basically, people often say that equities are safe in an inflationary environment because, unlike bonds, they are basically hitching a ride on inflation. If prices go up, well, so… Their costs may go up, but their sale prices also go up. And so, therefore, they should be neutral in an inflationary environment. 

And what we saw in the 70s is that they’re definitely not, because although they do slightly better in terms of their earnings and their pay-outs, where they lose is on valuation. So the market says, I used to pay 20 times this year’s earnings, which is a yield of 5%, but now, if we have inflation, I think the appropriate yield has to be 10%, which means I’m only paying ten times. So the value of your company has to halve. 

And that is exactly what happened during the 1970s. The thing that went wrong was earnings yields. Or the inverse of that, P/Es. P/Es went down, earnings yields went up. And earnings yields tracked bond yields. So where bond yields go does matter a lot, historically, to equity investors. 

But at the moment, bonds are much more exposed and in a much more dangerous spot than equities, because, amazingly, bonds have had an even bigger bull market over the bubble period, or the two combined bubble periods, than equities did. 

Merryn:  So when you appeared on my show at the Edinburgh Fringe, which I’m very grateful, thank you very much, you were absolutely brilliant, you said that the best thing people could do right now is to be in cash. Was that you? That was you. 

James: Yes. 

Merryn:  Yes. Is that still a reasonable way to look at things? 

James: Yes. Markets are always volatile beasts and they keep getting optimistic and then pessimistic. So we were speaking at the end of the summer, and most markets, especially the US, had a summer rally, thinking that the Fed might pivot, as they call it, which means change its mind. 

Though subsequently, the Fed has been trying to emphasise the fact that it is definitely not going to change its mind, at least not for now, and I don’t think it will change its mind until there is some serious recessionary pain to make the political pressure make it change its mind. So for now, you can pretty much rely on the Fed raising rates to the level of inflation, and then above that level, to try and re-establish its inflation-fighting credentials. 

So at that time, equities were doing surprisingly well. They still are, because I think there’s more and more pain to come. And as that gets reflected in bond markets, that’ll then increasingly have to be reflected in equity markets. So I think things are, at the moment, quite close to as good as they get from a valuation point of view. 

‘And if the Fed is determined to basically hike rates, which will lower valuations until there’s a recession, which… So first of all, they’re going to lower the P/E, and then there’ll be a recession where they’ll lower the E out of EPS. So on that basis, as a general top-down view, it’s hard to see where the winners are. 

And if you can’t really see where the winners are, then you should basically be in cash, looking for the opportunities. And I think I made the point that the cash currency I would choose is Dollars, because in the US, policy is tightening, and in Europe and Asia, China, Japan, all of Europe, UK, policy is easing. 

Merryn:  Okay. So that’s it then. 36 minutes we’ve been talking, and the answer is cash in Dollars. 

James: Well… 

Merryn:  Not that everything we’ve talked about over the last 36 minutes hasn’t been completely fascinating. Of course it has. I was just hoping for something at the end that would say, invest in Japanese small caps and [unclear], something like that. 

James: Well, what we’re talking about here is having a year or maybe two, at least, until we see how this pans out, where you don’t really make any money at all. But the idea is, I think this is a year to concentrate on not losing any money at all. 

And as the Cool Hand Luke, Paul Newman in the movie, Cool Hand Luke, he got his name, Cool Hand Luke, because he was playing poker in the prison and he bet everything and he had nothing. But he won. He got the other guys to fold, and he won. And his reply was, sometimes nothing is a pretty cool hand. And I think this might be the year of Cool Hand Luke. Nothing, making nothing, but losing nothing could be a pretty cool hand. 

Merryn:  Yes. Okay. Well, that, I think, is the message for everyone to take away. Try not to lose anything because you’re very unlikely to make anything. Thank you, James. 

James: Hey, any time you find yourself inadvertently feeling all optimistic and bouncy, just give me a call. 

Merryn:  Thank you. Okay. James, I couldn’t have appreciated you coming on more today. And as you know, I had you on for a reason, not just because you are one of the most pessimistic men that I know and that usually works with the way I feel too, but also because you have been part of the MoneyWeek family since we launched this magazine. 

Regular readers will know that James and I have known each other for pushing 30 years at this point, and he was on my team when I first started as a stock broker at Warburgs in Japan many years ago and taught me most of what I know, which some people say is not very much, but there we go. 

And I’m telling you this because this is the last MoneyWeek podcast that I will be hosting. I am retiring as editor-in-chief of MoneyWeek later this month. So, let me see, it has been 22 years since Jolyon Connell, Kerin O'Connor, who was a publisher, and I launched this magazine. I was the launch editor and then the editor-in-chief for I don’t know how many years. I suppose another eight, nine years. 

So I just want to use this opportunity, sorry, James, you have to listen to this, to say how grateful I am to all those who have backed us over the years. We’ve been through Felix Dennis, then Angus MacDonald, then Bill Bonner and back to Dennis Publishing, and now we are with Future Publishing and we are very pleased to have been backed by all those wonderful companies over the years. 

I’d also like to say thank you while I’m here to all those of you who have been reading us and listening to us for the last few decades. I have loved every moment, well, most moments, of being part of this fantastic publication. And as you will know if you have been reading over the last few months and seen Andrew writing the Editor’s Letter occasionally, I’m leaving it in excellent hands. 

I’m not off in a hurry. I’m going to be chairing our Money Summit in November and I’ll be popping up in the magazine every now and then. As long-term and regular readers will know, I find it quite hard to keep my opinions to myself. Anyway, just to say thank you for listening and thank you for reading. I hope you continue to do so.