During their recent episode, Taylor, Carlisle, and Russell Napier discussed:

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TRANSCRIPT

Tobias: I think we’re live. This is Value: After Hours. I am Tobias Carlisle, joined as always by my cohost, Jake Taylor.

Our very special guest today is Russell Napier. He’s best known perhaps for his book, Anatomy of the Bear, his research service, the Solid Ground, or The Library of Mistakes that Jake gave us veggies on a few weeks ago. Russell, welcome.

Russell: Great. Thank you, Tobias. Thanks, Jake. Good to see Jake. You could make it to Edinburgh and get to the library.

Jake: Yeah, I much appreciate arranging the tour for me. I had a great time, and then I tried to bring back some of the things that I saw there to the audience. So, it’s much appreciated.

Russell: Just for a minute, I thought you were going to say you tried to bring back some of the books, but [Jake laughs] thank goodness you didn’t.

Jake: No. Couldn’t fit them all in my suitcase.

Tobias: Russell, I want to just introduce you to folks who perhaps don’t know. You’ve done a lot of work on financial history. And it’s your view, your philosophy, that financial history is perhaps a better way to learn than economic theory. And to that end, that’s why you’ve created the library of financial mistakes, and written the books, and documented, and so on. You also spend a lot of time looking at very deep bear markets and the characteristics of those markets, what a bottom would look like, and so on. Is that a fair representation of– Have I missed anything?

Why Financial History Matters More Than Economic Theory

Russell: No, that’s about it. I mean, just why financial history and why not economic theory? So, financial history includes psychology, philosophy, sociology, politics. And surely, surely when we look out the window today, we realize that we need some of that in our understanding of finance, economics, and investment. I think it’s possible to leave university with a degree in finance and not have any of it.

Certainly, no understanding of economic financial history. Perhaps not even comparative economic thought, never mind politics, sociology, and philosophy. So, we stand as an adjunct to any traditional training in finance, economics and investment.

Jake: And where’s the breakdown there? Is there an initial assumption that’s made in economics that then is the keystone that you pull that out and the whole edifice collapses?

The Myth of the Rational Economic Man

Russell: There is. There is. That is the rational economic man who I am yet to meet. I have a library of 5,000 books. He’s not in any either. [Jake laughs] And of course, there’s a problem, because he’s not rational, he’s not entirely motivated by economics, and of course, he’s not even a man, because half the population of the world are not men.

So, the problem is that the field of economics has chip away at the rational economic man. He’s not completely rational, he’s slightly irrational. But fundamentally, it’s the edifice, as you say, there’s something wrong at the core of this.

And of course, we live in an age where we can understand human behavior much better, because we have MRI machines, rapid eye scanners, with our breakthroughs going on in neuroscience and psychology. But economics hasn’t really adapted that yet, because if you take out the rational economic man, that cornerstone, many of the equations really make a lot of sense anymore. In fact, the whole mathematization of the field, to turn it from a social science to a wannabe physical science, crumbles.

So, the rational economic man, he’s a bit like those guys in the old Westerns. Probably take him a long time to die. He’ll stumble around, hit a few chairs, crash through a desk, go through a saloon wall, over a window, through a horse, and only then will he be dead. But the death of the rational economic man, I think, has begun. But I think it’ll be a long, slow death. Max Planck famously said, “Science advances one obituary at a time.” So, we’re not expecting revolution here, but we can do our little bit for evolution.

Tobias: Do the behavioral economists– Does their line of inquiry appeal to you as people who are rejecting rational economic men?

Russell: Well, I think they’re chipping away. I think that’s the problem. They’re looking for the irrational bits. And that isn’t enough. I think you need to go back to the very core of this and say, “Well, what is this person, rather than to modify the rational economic man?” So, I’m not critical. I mean, it’s a huge breakthrough. It’s a tremendous thing. But if you think of the work, particularly, I’m thinking of the work of Daniel Kahneman, a lot of it relates to the psychology of the individual.

One thing we know about this business is its group psychology. I think there’s so much more we can do. I think it won’t be the chipping away by behavioral. All the behavioral stuff will fit very neatly into a new theory once we find out what this person really is like. And as I said, advances in neuroscience and psychology mean that can happen. And the behavioral economist will be incredibly useful in being part of that, but they’ll just be part of it. I think the root cause lies deeper than slight irrationality.

Jake: And Russell, do you think there’s any of this– maybe the slow death of this could be attributed to– We’ve seen rates from, let’s say, early 1980s to maybe 2021, going from 15 to 0. No one needs to be that smart or needs to really be that self-reflective when everything’s just going up into the right and levitating from rates. So, if we were to imagine ourselves, as maybe I’ve heard Jim Grant say here recently, that we could be in another rates regime for the next 30 years, or however much these rate cycles take. Maybe we will have to be a little bit more reflective of these things and maybe there– Any thoughts on that?

Structural Regime Change: From Falling Rates to Government Control

Russell: Yeah, I think that’s absolutely right. I would particularly go to the nexus between government and market. We have that long decline in rates, but we also, for a lot of that period, not recently, we had a decline in the role of government relative to markets. And in that world, it’s possible to believe that the markets become more important, the mathematics become more important. And then, one morning you wake up and realize that the clunking fist of the government is getting involved in economic decision making again. You know what? Then you need to understand the clunking fist. You need to adjust and rethink how this works. How does this man, woman, rational or otherwise fit within that system? So, in other words, a structural change.

So, once you get a structural change, and that is, as you say, the end of that long decline in rates, but also, I think a structural change in the relationship between the state of markets, you need a whole new skill set. Actually, I think it exists. Most emerging market investors I know [chuckles] fully understand how the government interferes in capital allocation, corruption frankly as well. So, we have lived in a system and we’ve come to learn the rules of the system.

It’s been enfranchised in economic thought and economic theory. But at least I always say to fund managers today, “If you want someone to look after your portfolio, go and hire a South African or Brazilian. They have a different skill set, and it may be one we all need now.” So, you’re absolutely right. It’s time now to start thinking differently. We’re not in a vacuum. We have other people who’ve done it before, and we have historical examples to call upon.

Tobias: Russell, when you talk about the government, are you talking about fiscal measures that popular governments make, or are you talking about central banks, or is it all rolled up into one?

Russell: Yeah, I think that’s the interesting thing, because if I asked you what is the role of government in markets, we’d go fiscal or monetary, and I’m not talking about either of those. I’m talking about regulatory. Certainly the period from 1945 to 1979, 1980, which is the period, I do think, from which we can get a lot of insights.

Actually, the power was in the use of the regulatory state, in the allocation of capital. Now, that was directly by interference with investment funds, pension funds, life funds, and basically getting them to invest where you wanted them to invest. In that case, mainly government bonds. But if you were in mainland Europe, there were lots of industrial sectors and infrastructure, clearly all had to be rebuilt after World War II. So, I’m talking about that’s really the task of the regulatory state rather than the fiscal state.

Now, we know that for many developed world economies, the government has tapped out on borrowing. Well, they’re not tapped out if they can manipulate the wealth of a nation, the savings of a nation. So, that’s what I mean about Brazilians and South Africans understanding it. These guys did not lose their savings necessarily through the misuse of fiscal and monetary authority, though misuse of monetary authorities played a role. They lost it through the misuse of the regulatory authority of the state. We can see it. It’s happening. It is happening live in front of our eyes.

Even in a country like the United States of America, where the rule of law is enshrined really, even there, we can see the government using leverage to redirect private sector capital flows, even not even of American corporations. I mean, there’s quite a lot of leverage by the US administration on Korean and Japanese corporations. So, that’s what concerns me, the regulatory state. And of course, it’s not something that people write about, because it’s tedious and boring and has been, as you pointed out, Jake, irrelevant for 30 or 40 odd years, but it isn’t irrelevant anymore.

Tobias: One of the difficulties, I think, with that regulatory state is it’s a little bit faceless. It’s hard to find a person, or a name, or anybody who’s making an argument for it. It’s just exists there a little bit undetected.

Russell: Yeah, I think it’s a great point, Tobias, because I think what is interesting about it is it’s not even necessarily by design. It’s like whack a mole. The market delivers something the government doesn’t want and the regulatory state is put into action to deliver something else. So, there may not be some great controlling hand sitting in the White House or sitting in Westminster, sitting in the Reich Chancellery. They may just be reacting to market prices.

But if you keep whacking the mole with the regulatory hammer, you structure a whole new type of business government relationship. So, if there’s a mastermind out there, I’ve yet to meet him or her. No doubt maybe one day there will be. At the minute I think it’s reactionary, but what does it matter to us? We have to live with it whether there’s a guiding master hand or whether there isn’t. At the minute it’s all dressed up under the guise of the re-industrialization and reducing reliance upon Chinese supply chains, defense, those are the reasons that we need this.

Once you put the national security thing on it, then you can do a lot of this. Now, the new US national security document was published on the 5th of December. It’s a stunning 29-page document. Because about half of it is to do with economics. National security document. It’s about who America’s enemies are and how they have to be punished, who Americans allies are and how they have to be economically benefited, and all of the industries that America has to invest in.

So, using the regulatory state when national security is at stake is the easy way to go about it. We’re in that world. So, at the minute, it would seem if you read the documents that the guiding hand of this is actually the Secretary of War. I’m not sure that’s correct. But anyway, at the first blush, this is about preparation for Cold War. But I think it’ll be much more than that in due course.

Jake: There’s an irony to me that the US has to look more like China in order to not be too beholden to China.

Russell: It’s fantastic. I know this inside bizarre, but I made that point in 1998 [Tobias laughs] during the Asian financial crisis when I traveled down to Bali. I lived in Hong Kong then to meet a group of US multinational corporations. They were absolutely cock-a-hoop. The crony capitalism of Asia had been destroyed. Free market capitalism was coming to Asia. Victory was declared. Dare I say, mission accomplished. The banner was…

[Jake laughs]

But my point was that in North Asia, which I would include Japan, Taiwan, Korea, and of course, China, there’s a very different form of capitalism up there. It wouldn’t be so easily dislodged. I call it social capitalism. It’s not really or hadn’t really been focused on return on equity and return on capital. That was a difficult nut to crack. And so, it’s proved that the ability and willingness of the Chinese to constantly over invest, that is the regulatory state at play there, has destroyed returns for many good companies in the developed world. As you say, Jake, has forced us to become a little bit more like them. So, they became a little bit more like us, now we’re becoming a little bit more like them.

For the avoidance of doubt, we don’t become Communist China. But yeah, we’re sliding along the continuum a little bit. So, that synth, to me, in 1998, it always seemed likely that that synthesis would come along, unless someone had very quickly stopped China abusing its exchange rate, whether using tariffs or something else. And of course, that didn’t happen. So, there’s a synthesis going on. As you say, it is rather ironical that we’re becoming more like China.

Tobias: When you have the government controlling the financial system, you have a little bit of subordination of the financial system to the government, so financial system starts seeking the government’s ends. I think you’ve described it as financial repression. That was the era from 1945 to 1979 was an era of financial repression, and now it seems like we’ve entered back into one again. I don’t know, when do you start the date of the [crosstalk] year?

Jake: Well, can we unpack what that means a little bit first? Like, what’s the government telling the banks, or whatever the mechanisms are of that?

The Rise of the Regulatory State and Financial Repression

Russell: Yeah. So, it’s not my term. It dates to the 1960s. As far as I can work out, I think he’s an American, despite his name, Ronald McKinnon. Very Scottish name, but I think he’s an American. He came up with the term financial repression. It was aimed more at emerging markets, but it was effectively how the state uses the savings of a people for its political ends.

So, the mechanisms are manifold, actually. In fact, it’s interesting, you can class them in two groups. How to get savings where you want it to be through telling it to be there, and then the other one is how to make other things so unattractive that they have to go there? It’s a matter of doing both.

So, obviously, the easy one is to go to, say, life insurance funds and say, as of tomorrow, we want 20% of all your assets in US, British, French, German government bonds. And that usually happens during warfare. So, that’s the most overt thing. Now, what you could do there, and the reason you would do that is to hold bond yields down while nominal GDP growth is strong, so there’d be a high element of inflation in that. Over a prolonged period of time, your debt to GDP comes down, and the government gets fully funded, and everything the government wants to fund gets fully funded, but debt to GDP is coming down, that would be the obvious way to do it.

Here, in the United Kingdom, we have a thing called the Mansion House Accord, in which numerous pension funds under threat of what’s called mandation have agreed to invest a lot of money in direct investment here in the United Kingdom, selling overseas assets, or at least almost certainly selling overseas assets to fund that. So, that’s carrots and sticks, I suppose you’d say to get that.

In another very nice example, I think, is residential property. So, residential property in a free market has a yield, but it’s an inflation linked yield. And if you put in rent controls, you take out the inflation protection and the yield, and therefore my residential property doesn’t look as attractive as a bond. Well, not necessarily anymore. So, there are ways of doing that. You can have very high transaction taxes on equities and no transaction taxes on bonds, which is what the United Kingdom did in this period.

So, the end goal of all of this is to bring down debt to GDP. But today as well, there’s a new goal, which is to prepare for a cold war which we keep getting told over and over and over again by our politicians is imminent. I think the population doesn’t want to believe it frankly, but that’s what we’re preparing for. So, you now need to also get some of that capital going to fund that re-industrialization program.

One final thing I think you should add. That’s a balance sheet not as fixed. Obviously, the savings rate can go up year to year, and it goes up a little bit. But right at the core of this, it has to be the commercial banking system. One of the reasons I think commercial banks have done so well this year is a dawning realization that in this system, commercial banks are key to it. And over the long term, that may not be wonderful for bank profitability, but it’s a reintermediation of credit assets here after a 40-year disintermediation, that’s probably going to good for bankers.

And of course, the beauty of banks is their balance sheets can expand. That’s not a fixed pot of money. That’s the nature of fractional reserve banking. It creates its own liabilities when it creates its assets. So, that’s going to be a key tool for any financial repression. Also, it creates the money you need to have higher nominal GDP growth. So, I don’t know if that unpacked it or lumped it all together. I suspect maybe lumped it all together. I think I wouldn’t say I’ve scraped the surface, but we could talk five, six other things that the regulatory state would bring to bear on achieving this goal.

Tobias: James Montier, he’s a GMO now. He wrote a paper in, I think it was 2010, calling for the era of financial repression. I’m guessing that was probably based on what had occurred through the global financial crisis, and some of the steps that had been taken then that were then starting to manifest in 2010. He made the point that they can take decades to work through these regimes. Do you have any expectation for– I mean, we’re 15 years in. Are we 15, 25 years to go?

Russell: So, there is some reason for optimism in the Anglosphere, but pessimism elsewhere, which is not what you get. What you get, if you use the word debt, people think mad Anglos are always gearing the hell out of everything. So, I happened to look at the data this morning. So, if you take the United States of America, total debt to GDP, so that’s the government and the private sector, we’re back to 2009 levels. Our 2009 levels were very high, but at least, we’re going to our 2009 levels. If you just take the private sector, forget the government, the US private sector debt to GDP is back to 2001 levels.

You get pretty similar answers for the United Kingdom. Actually, our private sector debt to GDP is back to 2000 levels. They’re an interesting comparison, because the United States has had really good economic growth over that period of deleveraging, which is a stunning achievement. Maybe that there’s been some misallocation of capital along the way. Now, the United Kingdom has had a gross deleveraging, and frankly, it’s been a pretty rough 15 years for the economy. So, there’s some good news, and where has this got us to? Well, we’re not Germany. The United Kingdom, United States are not Germany. But we’re getting closer.

Then, of course, you get to the other end of the scale, which would be China, Japan, and France. Now, those are not the three that people bring up when we talk about inflating away debts, countries with debt problems. Well, they haven’t even begun this process yet. They haven’t even started their debt to GDP since the great financial crisis has been going up, and going up dramatically in all three countries, particularly China and France.

So, I think the answer to the question is there is some of this to come for the UK and the US, but we’re down at 240% of GDP for the US, 234% of GDP for the United Kingdom. France is at 322%, Japan at 380%, and China is just bursting through 300%. So, we may find that some of the heavy lifting of financial repression is more in France, Japan, and China than it is in the UK and the US.

But yeah, James is right. It takes a long time. By the way, Ray Dalio refers to this as beautiful deleveraging. I don’t call it beautiful, because if you own government bonds, you lose an absolute fortune. So, it is beautiful, by the way, compared to all the other alternatives, unless you can get exceptionally high real GDP growth. So, to that extent, the word beautiful is better than austerity, default, or hyperinflation. But [Jake laughs] if you’re a saver, there’s not much that’s beautiful about it.

As James was writing that piece, we had a, I don’t remember his name here, a British policymaker who wrote a book on the same thing saying, “We did this after World War II. We can do it again. Let’s run a financial repression.” There are other things behind that financial repression, by the way. It is a period when wealth inequality comes down.

So, for certain parts of the political spectrum, it’s really quite attractive, because you’re taking money from savers and giving it to debtors. And genuinely speaking, there are more voting debtors than there are voting creditors.

[laughter]

Russell: That’s not so true when you have a very old population, but even so. So, there’s something else behind the financial repression thing, it is a wealth redistribution tool as well, so that’s why it’ll likely catch on.

Jake: So convenient, huh? [chuckles]

Tobias: Can I just take you back to the inflation that you were discussing? You said not hyperinflation, but high inflation. Do you feel that since 2020 some of the COVID stimulus response in the US and the rest of the world, we saw that very pronounced spike inflation. And that showed up in a lot of different financial series from lumber to– It’s been this rolling spike that–

Inflation has now come down relative to that very high peak, but it’s still well above the Fed self-imposed 2% mandate. Yeah, the 2% target that they seem to be trying to target from the upside rather than the downside. You’ve said that you don’t think that we’re going to see hyperinflation, but we will see high inflation. So, can you perhaps just unpack that a little bit?

Inflation Without Hyperinflation: The New Political Constraint

Russell: Yeah. There is a formal academic definition of hyperinflation. I think it’s 60% a month. Most people, if you say hyperinflation, they think 15% per annum, so not 60% a month. I don’t think it’ll be 15% per annum either.

Actually, the COVID experiment has given us a reasonable guide to what the range of inflation might be, which is, financial repression has to be the art of the possible. And those people who allowed inflation to get out of control realized they wouldn’t be in office to deliver the art of the possible. So, there is a level. I think we’ve now tested the level at which it doesn’t really work for you as a politician.

Now, we were in exceptional circumstances from 2020 to 2023. 40% of all the dollars ever created in human history were created. So, that’s something that isn’t going to happen again. I think they’re going to create a lot of money, but I really don’t think they’re going to do that again, because the repercussions in terms of inflation, political discontent, changes in leadership, were just too high.

So, as you say, this takes a long time, but what level of inflation could actually make it work over that long period of time? Well, four to five with 2% real. They’ll get you there if you can clamp down on the growth and particularly in non-bank credits, so something along those lines.

Now, the crucial thing is, would you have a central banker who would agree to that? Does it really matter? If we look at what Scott Bessent’s doing with the banking system in America, he’s clearly freeing it up to produce higher growth in bank credit. That’s the asset side of the balance sheet. The liability side means higher growth in deposits or money.

Now, the crucial question for any central banker, whether appointed by Trump or anybody else, is do you have the guts to go to war with the government to stop it? And for that, we need to read The Anguish of Central Banking, a speech given by Arthur Burns in Belgrade in 1979 after he’d finished his term at the Fed, and was largely seen as a mistake, largely seen as a man who had inflation get out of the way. He said, “Look, you think I’m stupid? You think I didn’t know what I should have done?” But people were fighting a war in Vietnam. There was a great society program. This is what the nation needed.

Now, under the guise of national security, if this is what the nation needs, what central banker appointed by Trump or anybody else steps up to the plate and says, “The banks mustn’t grow money at that rate, we mustn’t have inflation at this rate.” A very good example, actually is Emmanuel Macron, who’s given several speeches recently about how the inflation target for the ECB is far too low.

Doesn’t surprise me when his country’s geared up the– [crosstalk] He wants higher levels of inflation. But no French president would ever have criticized that inflation rate before, but now, it’s fair game. Look, I’m going to pick 4% to 5% inflation. That’ll erode your wealth really very, very quickly, unless you take action to do something about it.

Tobias: During that, you said that it was predicated on their ability to control non-bank credit. It seems like non-bank credit, private credit, is out of control in the States.

Jake: Yeah. How does private equity and private credit a different wild card in the equation compared to previous runs of this?

Russell: Yeah, they’ve got to be coming to an end. I recommend everybody reads that national security document, because in it, there’s a line that says “The future belongs to makers.” Now, what has that got to do with national security anyway? There’s two whole paragraphs on it.

So, if the future belongs to makers, why didn’t it belong to makers in the past, and who did it belong to? Well, it belonged to financial engineers. That’s who it belonged to. Some of the greatest fortunes in America have been made by financial engineers. And in a world where credit is somewhat constrained, as discussed, America nor other nations can simply afford to allow anybody to find an existing income stream and gear the hell out of it.

The future belongs to makers means that credit’s available for people who build capacity, and in building capacity employ Americans and build a supply chain that is diversified away from China and perhaps others as well. That’s what it means. Now, how would you do that? Well, you could change the tax code. It wouldn’t be difficult to change the tax code, so that the deduction of interest, expense and the computation of corporation tax is no longer available to everyone, but only available to makers.

Now, I’m not saying I’m recommending any of that, but you can see the rhetoric which would say, “Here are the makers, they get the tax break. Here are the financial engineers, they don’t get the tax break.” Now, we know that private equity is very, very politically powerful, but there’s something in that national security document which would lead you to think they’re maybe not as powerful as they think they are. So, yeah, private equity is running rampant, but debt to GDP is coming down.

Now, this is what people forget about the United States. It’s easy to focus on a little subset of credit which is private credit, which does seem to be out of control. Private credit in the aggregate is not as bad as it has been. So, it’s not good. Don’t get me wrong. It’s not good, but it’s not as out of control as it is in some other countries. My forecast for private equity is one day, it will live up to its name and I’ll be full of equity.

Jake: [laughs]

Tobias: It seems that part of this process is this re-industrialization bringing some of the manufacturing back from China to the States. I think that the policy tool that the administration seems to have chosen for that is tariffs. How effective do you think those will be, and what else are they likely planning?

Re-Industrialization, Friend-Shoring, and the Anti-China Shift

Russell: Well, I think they will be pretty successful. We’ve already got the Koreans putting more capacity in the Philadelphia shipbuilding. Yesterday, we had the Koreans announcing a big zinc and base metal smelter coming. I can’t remember where that’s going to be in the United States of America. So, it works. It works, and every nation in the world will be–

I think Canada is the best example. So, we, here in Europe, we’re talking about becoming free or reducing our reliance on China. That’s been underway for a while, much like America. But none of here in Canada. You want to reduce your reliance on China and America. Can you imagine how much investment Canada might have to do that? So, this is not a phenomenon of the United States of America.

But why the National Security Strategy document is so interesting, is that America is not seeking to bring all productive capacity back to America. It is very happy, if you read that document, to align with its allies, to see that productive capacity move to its allies. So, the Vietnam deal perhaps being the best and most interesting deal. As long as Vietnam is aligned against China, it can keep producing stuff and selling it to America. Mexico, in the last couple of days, has moved to put significant tariffs on China. Therefore, plenty of production will still be done in Mexico.

The stuff that comes back to the United States of America is more of the strategic in nature stuff. So, what the Trump administration is trying to do, and I think relatively successful, is to realign the world to be an ex-China world. So, this is really, really negative for China. I think it’s really, really positive for Korea, Japan, Taiwan, Thailand, Malaysia, and potentially Latin America. Latin America has a history of opposing US presidents. Maybe let’s call it some volatility along the way in the relationship with Latin America.

So, yeah, there’s lots of beneficiaries of these. But it’s not an American reindustrialization. It is really happening. It’s anti-China industrialization. Therefore, it can happen in lots of places. Therefore, in terms of the stocks you own, they could be absolutely anywhere. They could just as easily be in Japan as America as anywhere else.

Jake: Friend-shoring.

Russell: Friend-shoring was Janet Yellen. Janet Yellen couldn’t bear to say de-globalization.

Jake: [laughs] Yeah.

Russell: That’s the one thing about politicians. If they change their minds and do exactly the opposite of what they told you were going to do, they’ll have the good grace to give it a different name. So, friend-shoring it is, but it’s accelerated friend-shoring.

Jake: Is that inherently inflationary though? I imagine the cost structures of all of these productive capacity has to be higher than– When we went to China and saw some of the things there, it’s like, “Geez, we have nothing like this here.”

Russell: It’s inherently inflationary. Depending how quickly it happens, is potentially the biggest supply shock since 1914, certainly a bigger supply shock since the 1939. So, you’ve got your supply shock coming in, and then if I’m right and we’re using lots of bank credit to fund this, that’s high growth in bank credit means high growth in broad money, which if you’re of my bent, inflation is everywhere at all times a monetary phenomenon, then you add a little bit of monetary inflation to that. So, yeah, very inflationary.

The politicians will want to assure that that shows up in wage inflation. If you listen to the American Secretary of the treasury– You’ll hear a lot about that, about blue-collar America industrialization and blue-collar this and blue-collar that. And so, yeah, it’s going to have to show up in wages. But it is inherently inflationary if we start to reverse China’s great emergence into the world.

There are many, many people who don’t want to believe this. I could be wrong, let’s put it that way. But most people don’t want to believe that, because the whole structure of the global monetary system, global supply chains, return on equity, everything is– It’s a world turned upside down. If the Trump administration achieves this, packed against China. But it’s a world of massive opportunity. I guess we should then get to value investing. A lot of the stocks that have been depressed in this long, long period– I should have used about five longs there really [Jake laughs] shouldn’t– long-long period, are those who’ve had to suffer Chinese competition.

And of course, actually, if you’ve survived it, you’re probably a pretty good company to have survived, or you’re getting big public subsidies. I mean, one of the two. So, if you lift the yoke of Chinese competition, there are so many opportunities. And of course, there are basically all of them I would expect outside the S&P 500, because these are pretty small companies, whether they’re American or whether– Whatever you look, pick an index anywhere in the world, the companies that benefit from this are probably not in that index.

Tobias: Russell, I’ve got a two-part question for you. But the first part is, if the world follows this path that you believe that it will, what are perhaps some of the counterintuitive things that we can expect to see that deviate a little bit from the mainstream– whoever represents the mainstream?

Russell: So, financial repression, if it’s holding down the discount rate and pushing up the nominal growth rate, you’d say, I’d buy equities. It seems just the most intuitive thing in the world buy equities. There is a problem with that, though, and it’s a big problem, which is, if I tell you to buy bonds–

If you’re an institutional investor, I tell you to buy bonds, the question is, what are you going to sell? Now, one of the few things you have that’s liquid to sell is equities. If you look at global portfolio investors over the last 35 years, what you notice is a decline in home bias. But someone had to benefit from that. Well, we all know who benefited from. It’s a market that’s 70% of global market capitalization. It’s the S&P 500.

Jake: USA. [chuckles]

Russell: And indexation means that many of those investors just bought the index. They didn’t bother to try and pick stocks. So, perhaps, a counterintuitive bit of a low discount rate at a high nominal growth rate is the S&P 500 comes down. But not in a form in a way that most people think. So, as you know, I run this course in financial history. We look at the mean reversion of the Shiller PE. It doesn’t always collapse. If you ask anybody how equities come down, they go, “Quickly.” But actually, it’s not true.

There’re two periods, 1901 to 1921, 1966 to 1982, where they come down slowly. And that would be this environment, a slow grinding liquidation of massive overweight positions in the S&P 500. So, I think that’s the first place where I think people could be intuitively wrong in this financial repression where obviously–

And the other thing is, at the end of World War II, buy equities was a great thing to do. But of course, the dividend yield on the– Don’t think it was the S&P, maybe the Dow Jones was 10% and the Shiller PE was about 9%. Well, that’s not where we are today. As we say in Ireland, it depends a lot where you start. So, equities in aggregate are not the place to be in a financial repression. But as we’ve discussed, there are lots of equities that would be like that.

And then, gold is, I think, counterintuitive because it looks very expensive. Inflation adjusted, it’s off the top end of the chart. We were teaching the course a few weeks ago, and we have gold prices back to 1297. This is for the United Kingdom. United States not being in existence as a Republic in 1297. We have inflation numbers for the United Kingdom to 1297 as well. Some very busy financial historians in this country.

So, we have a lovely chart there of a 300-year rolling real return for gold, [Jake laughs] 100-year rolling. And you know what the real return for gold is over 300, 100 year is? It’s zero, the real return, except for the last 30 years where it’s been plus six. So, as a financial historian, I should be saying to you, “Look, it’s gone. It’s in the price.” But in this world, actually, despite its really superlative real returns relative to history over the past 30 years, it’s still gold, because this is not just about negative real rates of interest. This is about a government that wants to move your money around.

Despite President Roosevelt’s actions in 1933, moving around people’s gold is still difficult. And frankly, who cares? There’s so little of it relative to all the financial assets in the world. You just go after the low hanging fruit. So, I’m sure I’ve missed a couple of the unintended or things that are intuitively not quite right, but gold can keep going and the S&P 500 can come down despite. If you do a Gordon’s dividend discount model, you get a low discount rate and a high growth rate, you’re going to go buy equities and suddenly, you’re seeing the grind and grind and grind. But fundamentally, nominal corporate earnings growth probably goes up, but the valuation slowly over a long period of time comes down. That’s more like 1966 to 1982.

Tobias: It’s a chart that I look at occasionally that compares the S&P 500 to the price of gold. It doesn’t run it back 300 years. It might go back 70 years or 80 years. I think it is interesting that we do seem to be in a period of time where– Jake and I have discussed this offline, where as much as gold has run, it still looks reasonably cheap relative to the S&P 500 compared to the other extremes on that chart.

There have been periods of time where gold has been very, very expensive and the S&P 500 has been very cheap, and we’re clearly not in one of those periods right now where the S&P 500 is expensive. It looks to me on that chart that if it follows this long run pattern that it seems to have followed, that we’re more likely to get more expensive gold and cheaper S&P 500 on a relative basis. I’m not necessarily picking one or the other, I’m just saying that relationship seems to be, as you’ve described.

Jake: Stretched.

Russell: Yeah. Gold is nobody’s liability, which is important in a world swathed in debt, particularly as I say, Japan, China, and France. So, having an asset which is no one’s liability may be quite useful in this world.

Tobias: This is a value investing podcast, and I didn’t mean to necessarily direct you that way, but it does seem to me like you’re describing a scenario, where the higher growth, longer duration equities that have been dominant over the last 15 years are the ones that suffer a little bit more under that regime, and the stuff that has closer to commodities and more tangible assets seems to do a little bit better. Is that a–

Russell: Yeah, that’s a very–

Jake: Please tell me that that’s what you’re saying.

Tobias: [laughs]

Jake: No [crosstalk] reasoning.

Tobias: I just want some clarity. I just want to clarify that.

Why Value Investing Works in Financial Repression Regimes

Russell: Very fair. So, let’s give some numbers back to the 1966 to 1982 period, where if you go into the S&P 500, you obviously do very badly in real terms. But we have the French and Fama data for that period. They divide up into value. So, we’ve got value series going back a long time. Let’s say in 1966, you bought mid-cap value in the US. Now, you’ve got this dreadful performance from the S&P 500 in real terms. In real terms, you hold your value in mid-cap value. That’s pretty impressive given what was going on in the S&P 500.

In 1977, Buffett writes this famous article fortune called High Inflation Swindles the Equity Investor, there are lots of bits of that, but clearly points out that one of the things, is that you did get a march higher in the nominal rate and the discount rate and the valuations came down. So, part of the reason that equities perform so badly relative to inflation from 1966 to 1982 was you bought them at a very high valuation. So, if you can buy them at a very low valuation, it’s not clear to me that actually inflation is that negative.

Now, Buffett, I think he lists six other characteristics there. And at the margin, I think they’re probably negative. But there are lots of positives going on at the same time. As I said, nominal earnings growth from 1966 to 1982 for corporations is pretty strong. I keep stressing the word nominal, not real, but anyway.

So, for value stocks, that was a pretty good time to buy. So, if we’re in the same situation we are– That is not a situation where we were aggressively moving supply chains away from Russia in a cold war, because we’ve done that already. We were aggressively building armaments, we were aggressively building machinery to get us into space, but we weren’t aggressively moving our supply chains around the world. [crosstalk]

Jake: Guns and butter, wasn’t it?

Russell: Yeah. There’s an added impetus now to help those mid-cap value stocks. So, I look at this as a man who’s written the book about bear markets and generally seen as being quite gloomy and really get quite excited about where we are. When I started my career, the book that we all read was One Up on Wall Street by Peter Lynch, published, I’m going to say, in the mid-1980s. He talked about the excitement of going to the Midwest, going to the Rust Belt, and finding all these companies that nobody had visited for 20 years, seeing how cheap they were.

I think on a global basis, that’s true, again, because those companies have been so depressed by Chinese competition, so they may be in Korea or Japan or America. So, I think it’s an exciting time to be a value manager, an exciting time to be a stock picker, but as you know a lonely time to be a value manager.

Jake: [laughs]

Tobias: The Shiller PE received some criticism for lots of reasons that I don’t want to really go into, but you can find any other Tobin’s Q, or there are lots of other metrics that basically line up with Shiller PE. So, I don’t know how good those arguments are, but one of the–

For that Shiller PE chart that I look at for the US, it stands out that 1966 is a cyclical peak and 1982 is a cyclical trough. And in between those two, over that 16-year period, the S&P 500 went sideways. Yeah, just chopped around. There were lots of– [crosstalk] 1973, 1974 was obviously a terrible bear market and that was both bonds and equities. So, I was just wondering, if you apply your framework, your bear market framework, does that period feature at all?

Russell: Yeah, just a quick aside. This will sound unconnected, but it isn’t– In 1967, Elmer Bernstein, the man who wrote the soundtrack for The Great Escape and The Magnificent Seven, wrote a musical 1967 called How Now, Dow Jones. And the premise of the musical, is that this woman had a fiancé and the fiancé would only marry her when the Dow Jones went through a thousand. Pretty pathetic [Jake [laughs]…

thing.

But anyway, as you probably know, it did go through a thousand and then came down. So, it spent this entire time just [unintelligible [00:42:34] through. Whether the poor woman ever gets married in the musical, I don’t know. It’s not one that gets– [Tobias laughs] It’s star song, by the way. Maybe a sign of the times was called Step Away from the Ledge.

When people ask me to pick a period of what the equity market’s most likely to look like, I say, it is 1966 to 1982. Maybe we’d better looking at that in the context of a non-American market because America wasn’t really running much of a financial repression post-World War II. It does get into that as the Bretton Woods Agreement comes under strain, as American gold rush begins to drain, and that is one of the features of that period from 1966 to 1971, obviously is the attempt to stop capital outflow.

President Kennedy introduced the Interest Equalization Tax of 1963. Presidents Johnson and Nixon would often get corporates into the White House and say, “Stop investing overseas.” So, there’s an element of rising financial repression even in America. But for other countries, that have been underway for a long period of time. So, I think we can learn an awful lot from that period. That’s the one I would like to pick out, particularly, because if you pick 1945 to 1966, you’re picking low equity valuations, going to high equity valuations. But we are starting with high equity valuations. So, why not focus on 1966 to 1982?

That’s a period of war. America was at war. It almost, but didn’t quite impeach a president, because he resigned first. The city of New York, not the state, went bankrupt. We had a bankrupt bank, Franklin National Savings bank, which I think was the 12th biggest bank in the United States of America. If you look at any movies made in New York in the mid-1970s, it looks like Berlin 1945. This was pretty awful period of financial history, and value stocks produced positive real returns. Not big ones, but they did.

Jake: Is there any AI plus robots, technological advancements that can pull a rabbit out of the hat and save us from all of this?

Russell: Well, that must be true, actually, because the one thing that you can predict through history is surges in productivity growth. Surges in productivity growth are usually associated with technological breakthrough, whether it’s the canals, the railroads, electrification, the internal combustion engine.

So, I think one of the startling things of my career is I know how productive I am today and all the technology I have today, and I’m speaking to you on this. And yet, the evidence for quite a long period of time now, certainly over here in Europe, is it didn’t produce any productivity growth. It’s quite astounding. It leads one to think that the data must actually be wrong, because given how productive we all now are.

So, the problem with AI and any technological revolution is you just don’t know how big that can be. Now, if we can elevate real GDP growth by, let’s take it from two to four, clearly, this is pulling rabbits out of a hat. But I don’t think any of us can predict that. I just don’t think it can be done. I’ve never known it happen in the past. Just because you do that, it doesn’t mean to say that the returns from that accrue to the people who made the investment either.

Jake: Usually not, right?

Russell: Yeah. They over invest, they get poor returns, but somebody else gets to use the capacity at very cheap and economical rate. But even so, it doesn’t really matter if it elevates productivity growth.

Look, the number one thing that will get everybody out of a mess is really cheap energy, full stop. Look at why were the canals and the railroad successful? Because the price of coal collapsed, because you could suddenly get coal around it quite quickly. So, if there’s something out there that brings the oil price back to $8, then we have to have a more optimistic outlook on real growth. We don’t need as much inflation, and we don’t need as much financial repression. I don’t think it’s forecastable. But if I had to forecast, it wouldn’t be AI I’d be looking at, it’d be low energy prices. What is AI likely to do, is likely to push up energy product.

Jake: [chuckles] Right.

Tobias: There is a possibility there that it brings attention to how much energy AI consumes. That does seem to be a little bit of a push among some of the Mag 7 to build their own nuclear reactors or to invest in nuclear in some capacity. So, it is possible that does spur some cheaper energy in that area. But that’s not necessarily– Oil is still inextricably tied up with the global economy. So, I think that oil investors would say that wherever we are today, 56 bucks or 55 bucks is pretty cheap. I don’t think the suppliers like it at that level.

Russell: Well, we have these little mini nuclear reactors as well. I’m not an energy economist, so I’m not going to sit here and pontificate about that. As I said, you cannot forecast, but there could easily be something out there. Not easily, but there could be something out there which brings us cheap energy. That would be much more powerful than AI.

There are only five ways to get out of a high debt GDP position, default, austerity, hyperinflation, financial repression or high real growth. And wouldn’t we love it if it was high real growth? So, if there’s anybody watching this who can guarantee elevated productivity growth, then we don’t need the first four, and we can just buy equities indiscriminately and hope to get richer even at whatever we are at 40 times Shiller PE. I’m betting against that obviously, but I don’t rule it out.

Tobias: Yeah, what are the prospects for high real growth?

Russell: I don’t think they’re good because of the gearing situation. One of the ways you unleash high growth is to get the public and private sector to gear up. And if you’re starting in a situation where they’re already highly geared, then you’ve got a problem. So, if we go to the end of World War II, it’s true that we inflate away the debt, but private sector debt to GDP was exceptionally low without a depression where people paid back their debt or defaulted. We had a world War where credit went to the government rather than the private sector. So, given that both the public and private sectors are quite highly geared, I wouldn’t hold my breath that we can have that.

Also, look, a lot of the investment we’re going to do now is investment of a very different kind. It’s going to replicate existing capacity. We concluded that strategically we can’t rely on Chinese capacity. Well, replicating an existing capacity is not really very good for productivity, is it? So, I’m not banking on it, but as I said, I rule it out because that is the get out of geo free car.

Jake: It doesn’t it matter what you put the money into also? I mean, if you’re building dams that are still going to be around in 100 years, early development, Keynesianism maybe works better there, but maybe there’s some point down the line where you are pushing on a string with all of this.

Russell: Yeah. That’s the story of financial repression. I think it’s interesting that the word stagflation isn’t invented. I think it’s 1966. It’s a British Chancellor of the Exchequer called Iain MacLeod. It’s in the House of Commons. He uses this word. No one’s ever heard of this word before, but he’s reflecting something that the world had never seen. It wasn’t low growth and high inflation. It was high unemployment and high inflation. These two things weren’t supposed to go together, but that I think was the consequence of financial repression.

If the clunking fist of the state is involved in capital allocation, guess what? You’re ultimately going to build the wrong capacity in the wrong place at the wrong time. In other words, the supply side does not adjust based on the price mechanism, and therefore you can get redundant investment with lack of supply, high inflation, and high unemployment. The question is, how long does it take? It can take quite a long time before we realize that that is true. So, I think that is where we probably end up. But as we begin with, we have to build all this capacity that China has. It could take a long time to get there. But of course, we’ll get there to the misallocation of capital through government subsidies, through the use of government carrots, or the use of government sticks. I’d say it’ll take 10 to 12 years. Maybe longer.

Jake: How long did Russia go just building left shoes [chuckles] before it finally stopped working?

Russell: Yeah, it has to be said that we only keep it going for a long time, but not while paying dividends to investors.

Jake: Yeah. True.

Tobias: What about demographics, Russell? Because we’ve got the aging population in the US., aging population in many countries in the western world. That would seem to exacerbate the problems that we have or the challenge that we face.

Russell: Yeah, if your neighbor force isn’t growing, you need particularly strong growth and productivity. So, it just makes it more difficult. So, yeah, we need really strong growth and productivity. But the story of mankind is just when you’re about to give up, it happens. I wish we could all forecast it, but it doesn’t seem forecastable. But it has happened, it can happen. As I said earlier, the one that would really do it would be cheap energy even more than AI, so we can’t rule it out.

Tobias: Can we talk a little bit about The Library of Mistakes?

The Library of Mistakes and Learning From Repeated Errors

Russell: Yeah, sure. Sure. So, we have three libraries of mistakes. We have them for the reason we began with, which is economics, finance, and investment, has got diverted into a mathematical sport, pursuit, if I’m being more charitable to those who do it, which is a bit like distillation. We’re pretty big on distillation here in Scotland. I’m quite a fan of it, personally.

Jake: [laughs] Distillers.

Russell: The whole point of distillation is to throw things away. So, that to get to the purity of the equation, we’ve thrown away sociology, psychology, philosophy, and all that stuff. So, when you read financial history, you’re just bringing all that stuff back in again. And frankly, it’s easier than doing a degree in psychology or philosophy or politics. And secondly, it’s more entertaining.

So, we have the libraries to try and get people engaged and to popularize the study of financial history. We have one in Edinburgh, we have one on Lausanne, Switzerland, we have one in Pune, India. Next year, we will open in Singapore. We’ve announced that.

Jake: Nice.

Russell: A team trying to open one in Montreal. There are two other locations which I can’t mention, because we haven’t signed that bit of paper yet, but really confident they’ll happen. So, we should have four more open next year. It’s just a small thing, but it’s a thing to try and get people refocused on financial history, and the blood and guts of economics. I say that literally, because I used to be a butcher. My father was a butcher, and I worked in a butcher shop and I saw that economics, and then I read an economics textbook and I’m going–

Jake: This doesn’t fit. [laughs]

Russell: [crosstalk] what’s going on here. But it turned out, economics textbook was really about the skeleton, but it was a skeleton. It wasn’t really a blood and guts muscle or even the behavior of the beast. So, the textbook went so far, but in my experience didn’t really explain all the interesting bits. So, that’s why we have a Library of Mistakes to try– It’s a charitable venture. It’s not a commercial venture. It’s all supported by donors. We’re here at Edinburgh, we’re a social enterprise, and sales of the course help to support The Library of Mistakes.

Tobias: And so, the library has physical books in it, like a library?

Russell: Yeah.

Jake: [crosstalk], Toby. [laughs]

Russell: No, don’t laugh. That’s the number one question I get asked about Library of Mistakes is, “Is it a room for the books?” It’s a legitimate question these days, isn’t it? So, yes, it is a room full of books. There are 5,000 of them here in Edinburgh, and that’s roughly what we hope to replicate across the world in the rest of the libraries. I’ve just been in the library recording my Christmas message.

I am the keeper of The Library of Mistakes. I was able to pick up a book and draw upon some forecasts made in the September 1932. Contemporaneous opinion about the future, whether right or wrong, has value, because in my first book, I looked at the four great bear market bottoms and concluded the way you find the bottom of a bear market is when everybody makes the same mistakes. Not that there are some people who are incredibly right and you follow them. It is consistent errors of opinion about the future. So, there’s so much going on in financial history that we can learn from, and that’s why we do it.

Tobias: In real time 2009 valuations, it didn’t really ever get incredibly cheap on a Shiller PE basis. I think we got back to the long run average, maybe a fraction under the long run average. How are you forecasting a bottom in that scenario?

Russell: I’m glad you asked me the question because of course, I did. So, that’s fortunate.

Jake: [laughs]

Tobias: Yeah, I’m aware.

Russell: [crosstalk] the answer. It would be very embarrassing to say I spent two years writing that book, and then to get the wrong answer after two years of research. [Jake laughs] So, the conclusion of the book, is that equities get cheap. Obviously, as you say, not as cheap as they did, because the world believes in deflation. When you believe in deflation, it’s not actually clear whether equity, that fine sliver of hope between assets and liabilities, whether it survives at all.

And fundamentally what changes, is that there’s a reflation which changes it. And that invariably means change in the structure of the monetary system, so leaving the gold standard in 1932, moving to Bretton Warrens, which turned out to be a more inflationary thing in 1949, and you need to abandon money supply targeting so you get these big structural shifts in money supply, which means the deflation isn’t going to come.

But I remember on the not quite the bottom 17th of March is St. Patrick’s Day, I was standing in the Grocer’s Hall in London with the sun shining through the windows trying to persuade everybody in the room to buy equities on this basic argument. And the way that format works is the organizers pay me to go and speak, and then two other people pay to come and sell their funds. As I walked up and down demanding everyone buy equities, I turned around to realize the two guys behind me were selling bond funds.

So, this was…

[Jake laughs] experience for them. But yeah, so, that’s it. If you can see that the deflation isn’t going to come, those equities were not at their all-time low valuations, but they were discounting. Obviously, I know that, because I go out and I speak to the market. They’re my clients are the people I advise. If you could see people saying, “It’s all deflation, it’s all deflation.” But see the structural changes in monetary policy, particularly obviously the reinvention of quantitative easing, then you could say, “This isn’t going to continue and society can’t bear it to continue, so we’ll do something about it.”

That’s not true in every situation, if you don’t have a flexible monetary standard and you can’t change it, you’ve got a bigger problem, bit like Greece at the same period of time. But for the United States of America, that was the bull signal. I know no one believes me, but I actually wrote down the minute at bottom. I was sitting in my study and I think it was 666. Maybe it was that number that drew my attention. I wrote on a piece of paper, “This is the bottom of the market.” Sadly, I didn’t publish it. But anyway, believe me, I did write it down. So, I think there were plenty of signals from financial history that that was going to be one of the great bottoms for the stock market.

Tobias: Russell, we’re coming up on time. You have an offer for a course? We have a code for the course. Can you just explain what that is?

Russell: Yeah. So, as I said, the library is a social enterprise, and we have a course called The Practical History of Financial Markets. It has a slightly different name in the online version, Advanced Valuation in Financial Markets, but it’s the same course. There’s about 18 hours of video material in that course. We also do an in-person course, but you’ve got to come to London to do that. Not everybody’s cup of tea will be in London in June and September next year, if you want to do that. But otherwise, if you go to libraryofmistakes.com, you’ll find tab at the top course. We have a promotional code. You’ll get a 20% discount on TAP20, T-A-P 20, for listeners to your podcast.

What is it about? It’s really about finding the best measures of value, actually, interestingly, you mentioned one of them, Tobin’s Q, cyclically adjusted PE. But then, we look at why these things mean revert. I think you’ll be very aware. They don’t always mean revert in a time frame that can keep you within business.

Jake: They take their sweet time, don’t they? [laughs]

Russell:…

So, the rest of the course really focuses on these other factors, and what plays into that mean reversion, and hopefully helps a little bit on the timing. And of course, timing is more easy at extremes, like it was in the spring or in early 2009 or it was in summer of 1932. But that’s what the course is about.

So, it’s not a chronological history of financial markets. We’re using data going back. We were joking about how long you can get a moving average for equity returns. But we have American data from 1800s, so you can get an 1800-2025 very soon. 2025 number, 225 years of data. So, we use as much data as we can to try and see which measures of value work, which ones don’t, then why they mean revert. So, that’s a lovely Christmas present for somebody who likes to know a lot more about investment.

Tobias: The code is T-A-P-20. Russell, thank you very much for spending some time with us today. We really do appreciate it. We’ve been listeners for a long time.

I just want to say this is going to be the final episode for the year. So, I wish Jake and I both– Jake may say his own piece, but I wish happy holidays. Merry Christmas to everybody. Particularly everybody who let me know from Boise, Toronto, St. Julian’s, Malta. I think that might be a first. Breckenridge. London. Lausanne. East Haddam. Tallahassee. Bellevue. Kennesaw, Georgia. Tomball, Texas. Boise. Milton Keynes. Mittersill, Austria. Dubai. Seattle. Mosman, Australia. Good for you. San Jose. San Diego. Valparaiso. Indiana. Gurnee, Scotland. Snohomish. Cincinnati. We’ve got a good spread. Thanks, everybody. JT, any final words?

Jake: No. Just happy holidays, everybody. And take this time, disconnect, spend some time with your family, leave all this market shit alone for a while. You’ll come back to it fresh with new insights, like you can’t think about it all the time. And yeah, be good to each other. And if you’ve been lucky in life, you probably owe it to make someone else feel a little lucky. So, do something to raise up your fellow man.

Tobias: John Battle gave us a tip, too. Thanks, John. We very much appreciate it. Russell, thank you so much for spending time with us. We are genuinely very grateful, particularly, because you said that values is going to outperform.

Jake: [laughs]

Russell: Which is not why you invited me.

Tobias: That’s not at all. That’s not at all. That was a bonus.

Jake: That’s Christmas present for Toby.

Tobias: That’s right. That’s right.

[laughter]

Tobias: All right. Thanks, folks. We’ll see same bat time, same bat channel.

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