The MoneyWeek Podcast: the things on which we are definitely right

Transcript

Merryn: Hello and welcome to the MoneyWeek Magazine Podcast. I am Merryn Somerset Webb, editor in chief of the magazine, and with me today, I announce with great excitement, is John Stepek, our executive editor. John, I announce with great excitement because we haven't actually done a podcast together for a while, I've had endless guests. They've all been wonderful, obviously brilliant –if you haven't listened to the last four or five podcasts, please do, there's lots of good stuff on them –but obviously, it's nice when it's just us, isn't it?

John: Oh, yes, definitely. These are the gold dust podcasts. This is why everyone subscribes, ultimately.

Merryn: We can humour each other, reinforce our prejudices.

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John: Exactly. No cognitive dissonance on this podcast,

Merryn: Absolutely none, works for me. Now, we should start speaking of things you and I believe and things that we've been telling everybody for ages and things other people might have pushed back on a little bit, and things on which we are definitely right.

And we're going to talk about our extraordinary rightness in the V-shaped recovery in the UK. So we just had out this morning the main manufacturing PMI numbers at 66.1, when they were forecast to be 60.8. And of course, the higher the better, which suggests that things really are going very well in that sector.

We've had the retail sales numbers for a fantastic 9.2% month-on-month rise in retail sales in April. So that was, correct me if I'm wrong, but I think more than twice the consensus forecast. That's all the non-essential shops opening and people rushing to the shops.

And I've had my own experience of this –going to John Lewis last week, which was absolutely jammed. Edinburgh John Lewis has been fully, fully revamped to make it – this is quite interesting in terms of the way retail works – to make it more of an experience destination than a place where you go to buy a dustbuster, which was disappointing for me because I was trying to buy a dustbuster.

But there's lots of design areas and bits, and a lot of it is about picking up a little bit of paper to go and order some things, you can pick it up somewhere else, click and collect it etc, it's much less about buying and going to the till. So that was an interesting change, you can see they've thought about it very carefully. I'm not sure they're right by the way, because nearly everybody who went in there was trying to buy something and take it to the till. So the queues at the till were really very long.

And you can see that in the overall numbers. So there was a nearly 70% rise, not just at Domino's, by the way 70% rise in clothing and footwear sales. So everyone's obviously mad to go out and buy new clothes. So, all good.

We've been talking about this for a while and saying that we've been expecting a massive boom in the UK economy, which obviously will eventually feed through into earnings numbers for the companies that we look at. So we're expecting to see a lot of earnings upgrades I would expect over the next four or five months. And that will make the UK possibly –, and here we get to the bit that really matters to our listeners – look even cheaper than it does already.

John: Yes. And it's also been good news on the tax front. It looks like Rishi is going to have a lot more room for manoeuvre than maybe he thought he had, or at least was presenting that he had at the Budget, which in turn means that there may not be as many tough decisions made. And also maybe it means that we won't be in for the kind of scary tax hikes or changes that we might have been concerned about early on in the year.

Merryn: It's interesting isn't it because the OBR’s estimates for how much we're going to have to borrow have consistently proved to be too big – too big, too big. Things have never got quite as bad as they think it should have been, just been incredibly pessimistic about 2021 growth… why don't they read Money Week, these people?

John: I don't know. I don't know. Maybe we should give the Treasury a free subscription or something like that.

Merryn: Nothing free! They can print the 100 quid!

John: Bargain! But yes, it's interesting, because, there's also the pound, which, I guess we don't talk about currencies that often because at the end of the day, they're just one of those things. But you've not just got the fact that the UK is relatively cheap, you also have the fact that the pound itself has been hammered by Brexit. And it's only now just coming back to where it was whenever we voted to leave.

And clearly if the tax situation looks better, and the borrowing situation looks better, and the economy is recovering faster, then that's likely to continue higher as well.

Now, if you're a British investor then, at the end of the day, that doesn't matter so much for your sterling assets. It matters more for if you had shifted a lot of money out towards dollar denominated assets and other things like that, then maybe it's worth having a little look at how your portfolio is just now, because if sterling's going to get stronger, then you perhaps want to look at taking profits in some of your overseas holdings, which is particularly relevant I guess to the US stuff. Because the US, as we've been pointing out for a while now, is very expensive.

Merryn: Yes, what's interesting, maybe if the pound strengthens a bit we may find less in the way of foreign companies, particularly American private equity companies, diving in to snap up our public companies, because this is one of the fascinating dynamics so far of this year as being foreign investors in particular, looking over and going, “Oh, hang on a tick, the UK isn't a basket case, it's actually really politically stable, it's done an amazing job with the vaccine, Brexit is kind of sorted”, I agree, there's uncertainties here but generally speaking, we're done with that – foreign investors looking over and going actually, and it's cheap, so we should look at it.

But what I think we would have liked to see is these people coming in and buying up shares in listed companies, what we didn't necessarily want was them coming over and buying entire listed companies.

So if you look at the list of companies that have seen that M&A action so far in 2021, it's really very long, and it's full of names that everyone knows that will disappear from our public markets. There's been £42bn worth of M&A so far this year already, and it's still going on.

Obviously, that's mitigated to a degree by the new listings – there's been £30bn+ worth of new listings or equity issuance onto the market, so it's not as bad as it sounds when you look at the big number – but nonetheless, it represents a shrinkage in the size of the UK market, which I always find very uncomfortable.

I wrote about in my editor's letter this week; I always feel that healthy economy, healthy shareholder democracies, have healthy and expanding, not shrinking, public markets.

John: Yes, and because the latest one I think is John Laing, which is obviously our infrastructure, and that's being bought over by KKR. One of the interesting things is that it feels like there's almost this panic – buy these bargains while they're still there.

But yes, I guess Britain's historically been quite open to overseas bidders. And that lack of complication, I think, is a good thing. It's just a shame that they are the only ones that seem to take advantage of it, that are open to these payment takeovers.

Merryn: I did see in the paper today, this is a slightly separate subject, that there might be a Tesla plant opening in the UK. Apparently, Elon Musk has been off in Germany and found that it's all a bit too bureaucratic so we might look at the UK after all, I don't know if that is exciting news or trying news.

John: It's interesting, Elon is obviously a past master of just making stuff up so

Merryn: No, no, no...

John: Yes, yes. Well, his cyber trucks. Somebody was pointing out the other day, they had that cyber truck thing about a year ago, and so far there haven't been any actually built.

Merryn: Interesting, I'd forgotten all about that.

John: Well, exactly.

Merryn: The only reason to listen to Elon Musk these days – well, obviously there are lots of reasons to listen, I take that back – we all hold Tesla, by the way, all of us, because we all hold Scottish Mortgage. Certainly, you and I do. And so I think do most of our listeners, one way or another, because it is in our investment trust portfolio. They have sold down that Tesla position, but it's still in there. And if you hold any kind of tracker of any kind, you will hold Tesla.

So it's worth listening to Elon Musk and worth looking at what he's doing. But here's the question, John: is it worth listening to him on bitcoin? See how I moved there from UK M&A straight into bitcoin?

John: That was slick, you should do this for a living. Yes. See, I think that Elon Musk is – a lot of people sort of describe him now as the central banker of bitcoin and the Jerome Powell of crypto. There's an element of truth to it, in that obviously the fact that Tesla went out and bought 1.5 billion dollars’ worth of bitcoin, which it may or may not still hold, and put it on its balance sheet was seen the vote of confidence. But I don't think it's just that.

I do think it's been pretty clear that probably since April or so that bitcoin had plateaued, if you like, the $60,000 mark was its latest high in this particular bull market. And it had been wobbling around there for a while. So, to be honest, I think this week's kind of tipping point is just that, I think it's been looking for an excuse to have a big drop. And now whether or not that means that we'll have a three year bear market for it or not, I don't know. But I think that it needed something to prick the bubble and take some steam out, and that certainly happened last week.

Merryn: Yes, but the excuse there, or the thing that... well, the two things that we've been talking about for ages. The first is the regulatory environment, which is that there is no way that big governments are prepared to have their monetary sovereignty threatened by this kind of startup, right? We have the Chinese saying, well, you can't accept cryptocurrencies as payment, and you can't offer services around the edge of the cryptocurrency boom. And then we have the Biden government – this is on front of the FT today and that was one of the things that moved it over this week – cracking down on cryptocurrencies for tax evasion.

So from now on a cryptocurrency transfer of more than $10,000 is going to have to be reported to the US tax authorities. And you might say, well, quite right too, everything else has to be reported to the US tax authorities. But the point is that one of the discussions among the “hold forever” bitcoin people is that they can somehow escape the long fingers of monetary law effectively, and be apart from it, but now you see the government stepping up and saying, well, actually, you can't – we're in charge of money, you don't get to have your own money outside the system. That's not how it works. And that seems to me to be the real trigger here.

All the stuff about bitcoin and its environmental friendliness or not – and boy, that argument on Twitter is never going to end, is it? How bad is bitcoin for the environment? How much energy does it use? How much does it use in the way of renewals, etc, etc? I think you and I've been in markets long enough to know that if the financial case was good enough, we'd never hear a word about the environmental case.

John: Well, also, the fact is that that can be used as a stick to batter bitcoin over the head, so that is not going to go away for as long as the regulatory authorities don't want that to go away.

The truth behind whether bitcoin uses too much energy or not is quite subjective anyway. But the point is that it doesn't matter. The point is that it can be used as an ESG stick to beat it with.

If they really wanted to, then, presumably, central banks and governments could turn around and say, well, bitcoin is classed as something you can't hold in ESG portfolios. And we're going to just pass a regulation that says that. So I think that, as you say, the real issue is the regulations.

And the other interesting thing is that the Fed actually came out yesterday and did a wee video talking about central bank digital currencies. And one of the interesting things is that it didn't so much talk about bitcoin, as it talked about the stable coins. And I think one of the things about bitcoin is that....

Merryn: You have to explain stable coins.

John: Sorry, yes, of course, stable coins are crypto currencies whose value is pegged to the dollar. The one that is in the news all the time is the thing called tether. Now, I don't understand exactly how they work. But in principle, I think you can view them as being almost like shadow currencies. And the same way that you can view the shadow banking sector.

Merryn: But why do we need those? If you have something that's pegged one to one with the dollar, why don't you just use the dollar? This is the bit I never quite get.

John: I think, see, again, this is where I don't know enough about it. But I think the idea is that you can have much more easy... the whole point is to eliminate cross border transaction costs and all that sort of stuff.

Merryn: OK, so this is the bitcoin story – not bitcoin, sorry, blockchain story. So when we talk about stable coins, this is where we're talking about the worth of the blockchain.

John: Yes. And this is basically, I suppose the issue for I think one of the reasons the Fed is bringing that up is because this is where you could get genuine competition, because no one's no one is ever going to use Bitcoin as a medium of exchange. It's already demonstrated that, there's the impracticality which is to do with the transaction costs and all the technical stuff, but there's also the fact that you'd be nuts to be selling or to use bitcoin, when today it's worth, $10,000 and tomorrow, maybe worth $20,000 or $5,000. There's no way something like that is ever going to be a medium of exchange.

I do actually agree that there are elements of gold there and that there is potentially a lot of value in something that you can easily move across borders in a hurry. That's where I think bitcoin and gold have got something in common. But I don't think it's ever going to be used as money, whereas stable coins could, or at least the technology behind them, could end up being something that would allow for an actual currency.

And, just as you say, there's no way that governments are going to relinquish their monopoly on that stuff. So basically, the Fed was coming out and saying that they're accelerating looking at a digital dollar, and they're going to launch a big consultation on it this summer.

But it's interesting that they're so far behind. But my view on that is because the US dollar is the incumbent currency. And we all know that incumbents in any business of any industry, are always behind when it comes to dealing with new technology, because they'd much rather it just went away. Because it's horrible, having to build up a moat and then realising that someone can vault over it. And you just rather ignore it.

Merryn: Yes, I see that, are you still holding any bitcoin?

John: Actually, no, but that's only because – I'm slightly reluctant to say – but my exposure to it was via a spread bet, purely because that was the most convenient way to get it. And of course, what happens is the FCA very sensibly banned derivatives based on bitcoin, which meant that you could only hold it but you couldn't add to it.

And then of course, it gets stopped out, because like any sensible person who ever gets involved in anything to do with spread betting, I did have a stop loss in place. And unfortunately, it kicked out just before, I think it was just before January….

Merryn: Just before the latest bull run.

John: Exactly, exactly – double the price. So yes, that's why I don't. You've still got bitcoin and ethereum as well haven't you?

Merryn: This is really interesting. I still have bitcoin – not very much, by the way, not not enough to have been particularly upset by the events of the last week, put it that way.

But I have some ethereum, which I didn't mean to have. But remember a few weeks ago – months ago, whenever it was – when I was trying to figure out NFTs and I was writing about that. I made an NFT and I thought, well, I would try to sell the NFT and then I got bored and meandered off –as is often the way –so I never got around to actually selling the thing, so I don't know if anyone would have bought my NFT, which is a shame.

But in order to go through the whole process of setting up an account on Mintable, which is the one that I was using, as instructed by Dominic Frisby, of course. But in order to do it, you need to have ethereum because the whole NFT thing works in ethereum. So I bought £80 worth of ethereum in my Coinbase account, where my bitcoin is.

And of course, I couldn't actually get onto Coinbase yesterday to see what had happened to my bitcoin and ethereum. And the whole thing, it just doesn't work, does it?

John: Yes, that's the problem

Merryn: But the last time I looked at my ethereum my £80 had turned into £400 and something pounds.

John:

That is quite – I knew ethereum had shot up and also shot down, but –

Merryn: So I briefly thought to myself, why am I bothering with all this writing columns business when I could just be like everyone else and keep buying cryptocurrencies? They go up when I wasn't looking, then I too would be a billionaire. Luckily, I didn't chuck any of my jobs in the week before last.

John: Day trading, what could go wrong?

Merryn: What could possibly go wrong? So I will still be typing columns for some time to come because I still can't get into my Coinbase account. So I can't tell you what my ethereum is worth now, but I'm guessing a little bit less than it was before.

John: There's so much interesting stuff in this space. And I do think that one thing I found interesting about when bitcoin crashed and any time that bitcoin crashes is that Twitter comes alive with people who hate it. A lot of them are financial journalists, and they all simply believe that it's basically just a fashion and that there's nothing to it. And that I think is just lazy thinking, there clearly is an underlying purpose to all this stuff.

Merryn: OK, what is it John, what is the underlying purpose?

John: Take bitcoin. Bitcoin is a digital bearer asset, right? And you can move it from Venezuela to Britain in seconds. If you tell me that it's not worth something then I say, what is worth something? You can move your money from one side of the world to the other under the nose of the authorities and it's guaranteed to be worth something at the other end.

Merryn: Who gives you that guarantee?

John: Nobody gives you a guarantee on anything. It's like somebody tweeted something about the Tinkerbell effect the other day. This was in a Deutsche Bank report, which was neither bearish nor bullish on bitcoin. But it is the Tinkerbell effect – something only works if you believe in it.

Merryn: This is about fairies by the way, those of you who haven't yet had children or are too old to remember the story. You have to believe in fairies for them to be able to fly. And if you stopped believing in fairies, they'll just all fall on the ground immediately. And the book doesn't go into details of what happens when all fairies fall to the ground. But we can leave that...

John: We can guess. Even at that age, you could guess. The thing is that this idea that stuff only works because we believe in it is such an incredibly mundane observation, it's true of literally every single structure that we have as human beings. That's true about all money is not just true about bitcoin, or any of the rest of it.

Merryn: No, no, no, no, no, it's not. It's not. Because if currencies are backed by banks, backed by central banks, the existence of the central bank gives it value as a medium of exchange.

John: That is true, but the central bank itself is a social structure and is part of a social structure. Whenever you boil anything down, it's just a bit of belief.

Gold is exactly the same. Gold has good value, because we believe it has value. But we've believed it has value for at least 2000 years or more. So at some point, you have to start saying, well, simply observing that this is belief does not therefore make it ephemeral, or that it is going to vanish.

So you have to sit there and think well, bitcoin's been around since 2008. What underpins this belief that it's worth something? And what underpins that belief is the blockchain technology.

Now, don't get me wrong, maybe the blockchain technology's made up, maybe Satoshi Nakamoto is a deep cover Russian or Chinese agent, who has somehow convinced everyone with very convincing maths that bitcoin and blockchain are a real thing. But if it does work the way that it's claimed to work, then it is worth something because you've got a way of having something in the virtual world that is proven to – a. you definitely own it, and b. is definitely unique. So that has got a value, because it's a way of creating a scarce asset whose ownership can be identified completely, without any doubt, and therefore, that's good value, because it's something that you can do stuff with.

So I think there's a reason behind the belief, if you like. There's a sensible reason to believe that bitcoin has value. Now, the question is, I don't know how much value it's got. But it is a thing. And something like ethereum is interesting as well, because you can programme smart contracts, and you can disintermediate various ledgers all over the world, the whole point is getting rid of that centralised – I suppose, it comes down to the decentralisation thing. So I think there's a reason for all this. And I think it would be interesting to see what comes out of it.

Merryn: Seems to me that you should be opening your own Coinbase account. If you can't value something, but feel that it should have value, you should own a little bit of it, right?

John: Oh, yes. I'm just lazy. I look at Coinbase and I think wait a minute, so bitcoin crashed, and you crashed as well. The infrastructure around it is terrible.

Merryn: What's it worth if you can't get your hands on it when you need it? And when we know, don't we, all of us from – well, not all of us, but a lot of us – from bitter experience over the last few years, what happens when you hold an investment that turns out to be illiquid? It's not really an investment anymore, is it?

This counts for Woodford and for the property funds and for everything. You can tot it up on your list of what you're worth. But if you're totally unable to sell it, and you have to sit back and watch its value change to your detriment while you are unable to trade it. Is it an investment? Is it anything?

John: I agree. Certainly, something like bitcoin should be much more liquid than it is and that's an issue. Obviously property does get liquidity problems. You can't sell property during a crash either. It's just that we expect something different whenever this is digital and is traded.

To be fair, most assets can become illiquid in a real crash. And at the end of the day, as an investor, that's why you hold cash even in the best of times because – in fact particularly in the best of times – because you don't want to get caught short and actually have to pull money out during the crash.

So I think that the liquidity is particularly bad here, but I don't think that illiquidity in itself makes something a bad investment. It's just something you need to be keenly aware of. And that's definitely an issue in this area.

Merryn: OK, John, I think we're going to have to leave it there. But I think that the takeaway here is that – well, what's the takeaway from this podcast?

Let's see... that the UK remains cheap and you should go out and possibly up your holdings in the UK market before there's nothing left listed in the UK because foreign private equity companies have bought the lot, something to keep an eye on. So John and I definitely agree on that.

But then, thrillingly, I think we have some disagreements on the matter of bitcoin and John will be going out to open an account because I'm being a little bit more bearish on it, but I actually have the stuff, and John Stepek, the great bitcoin bull – no diamond hands there, right? I won't have it!

John: Just because I think there's a use for something it doesn't mean I think that is priced correctly.

Merryn: I tell you what, when I'm a cryptocurrency billionaire, I will not be having you on my yacht given that you’re all hat and no cattle about this stuff.

John: You're meant to say “have fun staying poor”.

Merryn: OK, have fun staying poor John.

Everybody, thank you so much for listening today. Do review the podcast if you feel like it on your chosen podcast – remembering that it's really better for us if you review us very well, the more stars the better. John's been brilliant today, and obviously I should have him on much more often. But if you want to listen to the big name fund managers, which we have been getting on over the last few months or so we need good reviews. Thank you very much.

If you would like to hear more from us, of course, you can go to our website moneyweek.com. There you can sign up for Money Morning, which is usually written by John and is of course fantastic. It's on bitcoin today, isn't it, john?

John: Yes, much more articulately.

Merryn: Hardly. And if you want to follow John on Twitter, it's @john_stepek and I am @MerrynSW. And of course, you can follow Money Week at @MoneyWeek.

Thank you very much, and I will look forward to talking at you all again next week.