BM Talks: Ben Ashby speaks Q2

We are joined in our latest edition of BM Talks for a Q2 update from Ben Ashby, CIO of Henderson Rowe.

We asked: 

• How long will the energy shock last?
• How is the conflict in the Middle East part of the US National Security Plan?
• How does this compare to the Tanker Wars of the 1980s and the Oil Embargo of the 1970s?
• How will interest rate markets respond?
• Could we see a currency crisis and capital controls?
• What is happening to market liquidity? 
• Have we seen the top in US stock markets?
• What happens to Gold?

Transcript

SPEAKER_00 0:09

Hello and welcome to the latest edition of BM Talks with me, Helen Thomas, CEO and founder of Blonde Money, and our returning guest, Ben Ashby, CIO of Henderson Row. Hello and welcome back, Ben.

SPEAKER_01 0:22

Hello, Helen. How are you?

SPEAKER_00 0:24

I'm very well. It's a great joy to have you back with us. We are going to be trying to do these quarterly as a discipline, both for me and for Ben, to see uh how we were getting on and what we were thinking. Now, I'm gonna start actually, Ben, with one of the things that uh last time we spoke in January, I was left very strongly with your impression about energy. Uh, you were very embedded in the world of energy. You were looking at a lot of energy stocks. And obviously, as we sit here today talking, the world is now talking about energy. So, do you want to fill us in on what you're looking at, what your thesis is, how the Middle East conflict may have changed, or indeed just uh sort of embedded what you were already thinking. So, yeah, go for it.

SPEAKER_01 1:08

Where do you start? So, as you know, I've long held the view that we were heading for a sort of 1970s rerun, and one of the things that triggered off all the problems with the inflation in the 1970s was uh an energy spike. All the conditions were in place for that before we had the Iran uh conflict. Uh we've massively underinvested in traditional energy. Uh, I believe even Tony Blair has come out uh this morning as we're speaking and saying that Ed Miliban has an ideological view about net zero, which is seriously damaging the economy, and it is seriously damaging the economy. So we've had all of that sitting in place. I think there's also slightly more technical field, but there's a view that the US shale gas was some kind of infinite non-exhaustible uh resource they could plug into. I think there's doubts about that. So I think you had a lot of rundown with regards to traditional energy sources. It's depleting asset, the fields weren't drilled, the new technology doesn't work, and you were just waiting for an appropriate trigger, whether that would have been price or or indeed a major war, and that's happened. And I think the shock is real, it's going to be enormous, and I think it's going to last quarters and quarters uh to work its way through, or maybe, maybe even years in some of those cases.

SPEAKER_00 2:21

Yeah, so effectively it's taking your original thesis and we're now building and growing on that. We've got we kind of got that times, well, exponential potentially. Uh certainly, you know, it's a bit more than times two, isn't it? I guess, in terms of what the impact is. Do you want to can you delve? I don't know if you can reveal about your portfolio, but do you have a sense if we just talk about the energy sector? Are there any stocks, bonds, sectors, aspects of that world we should be focusing on more that are of uh value given this extra additional energy shock that you'd want to talk about?

SPEAKER_01 2:56

Yeah, can I just start off and just say that the shock hasn't actually hit yet? And that's one of the big problems as we're discussing. So uh oil at sort of$100 a barrel is still cheap by historical standards.

SPEAKER_00 3:07

So the Oh yeah, actually, really, yeah, I'll tell you you did say something about this the other day. Where was the peak? Uh was it 2008? If you adjust it for inflation, what what what would we be talking about today?

SPEAKER_01 3:19

$215 a barrel.

unknown 3:21

Wow.

SPEAKER_01 3:22

And we're at$100.

unknown 3:23

Yeah.

SPEAKER_01 3:23

So it's got a long way to go. The other problem we have as well, and it's just watching the news and everything, is they quote the spot price, and the spot price is not particularly useful. You what you want to have a look at is what's the sort of forward price and the physical delivery. And that's already 50-60% higher than where we are at the moment. So once the ships stop turning up, which is basically this week, they'll start running down what's in the tanks. And that we're just talking about oil for Europe and and most of our listeners here, which are obviously UK-based, uh or certainly European-based, uh, gas is the bigger problem. And that's that is structurally a much bigger problem than oil. So that's all still to flow its way through. The thesis that I had was at some point um there was likely to be a pivot away from the Middle East for various reasons. I had talked about I thought there was a reasonable chance that the war would restart in the Middle East. It's actually in the uh US National Security Strategy, which they published last November. And I know we talked to time that nobody seems to have read this, that they were talking about dealing with Venezuela and uh I think the term they use is resolving Iran. Uh which very uh very all-wellian expression. I'm not quite sure that how that's working out for them.

SPEAKER_00 4:31

But um but it was part of the plan. It didn't come out of the blue, did it?

SPEAKER_01 4:34

This was no, it was part of the plan they were going to do it. So we kind of positioned for that. Um, so yeah, North American oil and gas, uh Australian oil and gas, um what we did initially with a lot of uh our clients was we linked it closer to the infrastructure. So things like the liquefication plants that are being built in North America, a lot of the pipelines that are being built in North America. Now you've got the opportunity for an outright um opportunity in the actually the the upstream kind of um energy producers themselves and that component. And I think that's potentially something that's going to rumble through for two or three years at least. Why? Because it's still cheap. You've got this depletion of assets. I can't see people going back to some of the Middle Eastern resources, even if stuff is resolved uh immediately. And it's the second big energy shock for Europe now in less than five years.

SPEAKER_00 5:23

Yeah, well, I there's yeah, I mean there's all this talk is about talk about Asia, but yeah, the impact on Europe uh pretty pretty significant, really. Um is there any particular country you would pick up that is more vulnerable or or us right and okay, go on. So what actually why is that? Why why is that?

SPEAKER_01 5:45

No, there's worse countries. Um I think out of the G7, I think even the IMFs now come out and say we're the most uniquely vulnerable to it, which is quite remarkable given that we should have still substantial uh domestic resources, which is another thing that kind of annoys me about the argument where you see a lot of people saying, Well, North Sea's tapped out. Well, yeah, that's because the fields deplete and nobody's been allowed to drill for any new fleets, uh uh uh new uh wells or even uh new resources. So of course it just will deplete over time, and then you get the secondary argument of um somehow it's going to destroy the planet by drilling, but it won't make a difference at the same time. There just seems to be a lot of people trying to argue why you shouldn't do these. At the end of the day, I'm a professional investor. I should be able to make those choices. Yeah, it shouldn't be a bunch of civil servants. And if I think the opportunities are there, which I think they genuinely are, the market should be allowed to decide, not some guy with an MSc who's never worked in business, commerce, or anything outside of politics, um, deciding what is appropriate for the UK economy.

SPEAKER_00 6:48

Well, now it sounds like we're drifting into political theory of free markets, communism based capitalism, but let's not go too far with that. Um, I want to now uh take you to um some of the specifics of the Strait of Horn moves for a minute because it might feel like that topic's been done to death, but I think actually uh there's two elements that you have flagged to me that I've I've considered to be quite underreported. So the first one is the physical space to maneuver through. So there's a lot of, I think is it 23 miles people talk about for the actual strait. Now, you're telling me it is in navigable, operable terms, far narrower than that.

SPEAKER_01 7:29

Yeah, it's six miles. It's two two mile wide channels, and there's a two-mile gap between the two because occasionally, as we saw with that big US container ship hitting the bridge, occasionally you get engine problems, so they leave that kind of gap in between for a ship losing power and things like that. So it's only six miles, and it makes for a shooting gallery.

SPEAKER_00 7:49

Yeah, and and talk to me about LNG. So you again, you know, I very rudimentary understanding of the tanker wars in the 80s, where there were um there was there were actually ships escorted by uh American naval ships during that period, Iran-Iraq war. Yeah. I mean, this is different, and you're sure you can explain why, but but I think LNG is is is you've said one of the key differentiators and what that actually means. So yeah, tell us about that.

SPEAKER_01 8:18

Yeah, if I just go back to your point about the Iran-Iraq war, first of all, the war took place at the northern end of the Gulf, so it was a long way away from the Strait of Hormuz. Secondly, the US wasn't a belligerent, so again, nobody really wanted to upset the US, so them escorting tankers was an issue because it was basically Iran and Iraq shooting at each other's tankers. Um, so that again, once the Americans got involved with a, I believe there might have been um some British and and uh other countries involvement from memory. But it's a completely different geographical location and it wasn't as tight, and the US wasn't one of the belligerents. So I think that is fundamentally different. The other thing, as well, is uh LNG is a relatively modern thing in terms of shipping this stuff around. It's only kind of you know, it's been around for a while, but it's only really kind of become mass scale in the last 20 odd years. An LNG tanker is is liquefied natural gas, it's a bomb, and you've got a really good example of that uh because the Ukrainians allegedly managed to hit a Russian shadow um LNG tanker in in the Mediterranean, it's still floating around. The ship was a band that nobody wants to go back on it because nobody knows when it's going to blow up. And that's and that's right now, isn't it?

SPEAKER_00 9:28

That should be like as we're talking. That happened what, a week or two ago, was it?

SPEAKER_01 9:32

No, about a month ago, and it's just been the barren. Oh no, still no one's still no one wants to go near it. Yeah, and that's the problem you have. You don't need a lot of damage on just think about throwing, you know, you don't throw gas cylinders onto a bonfire, they tell you to do it. It's kind of a similar principle with that. It's a pressurized container that could potentially go bang. So, what crew's gonna get on board that and who's gonna want to ship that through? So I um that's a big problem because, like I say, the uh LNG is the big swing fuel factor, it's not crude, um, for certainly Europe and and chunks of Asia.

SPEAKER_00 10:06

And of course, Qatar, who are one uh you know, the big producer, aren't they, of LNG, uh, I've got that right. Um, have it's not just about that, they've had some actual damage to the plant that will take, I think they've said years and billions to uh put back together, effectively, to repair back to full production. Is that right?

SPEAKER_01 10:25

Yes, it is. So uh showing how old I am, I remember when the financing was done the first time around, which I helped finance stuff that's now being blown up. Uh I think they've got something like it's either high teens or low 20s of the various kinds of liquefication units. And I think they've had about three or four knocked out, which I think accounts for about 15 to 20 percent of production, and those things will take several years to bring back online because they are very specialist bits of equipment. I think there's only about four manufacturers for them in the world, and they're usually done with long lead times because they don't, under normal conditions, expect these things to be blown up.

SPEAKER_00 11:01

Well, and now if I take back further in time in a parallel, um, you mentioned the 1970s. Um, are there any lessons from that that do apply here or don't apply? I mean, uh, there was a you know political decision there in terms of the oil embargo in um the mid-70s. Uh tell me about that. But also then I would like to know from an investment perspective, what did we learn from that that could manifest? There was, I believe, an on that an ongoing issue with the banking sector in that period. Could we be facing anything like that this time around, or is it actually different this time?

SPEAKER_01 11:36

Oh, I think we're gonna have a problem with the banking sector. Uh, it was actually the shadow banking sector in the 70s. So they called it the uh it's always history repeating itself. So they called it the secondary banking crisis. So effectively, British banks could only lend on the strict criteria. They couldn't lend to a load of stuff like commercial real estate, very much what you're seeing with private credit at the moment. A whole bunch of things that were called secondary banks were set up, which would be called shadow banks or you know, private credit funds, whatever you want to describe them. I mean, it's the same concept, slightly different structures. And the big thing that was takeaway was the interest rate shock. That's what actually blew everything up. It wasn't the oil price per se, it was the fact that the oil price fed through into an interest rate shock. And that's where suddenly all these secondary banks got into difficulty. And everybody thought, oh no, it's fine, they're small, they're kind of isolated. And then people found out that actually some very big banks had lent to these banks because it was profitable, and that was when the problem spilled over. And famously, Net West had to get bailed out.

SPEAKER_00 12:34

Yes, I was gonna ask you some of the names. Do you can you remember some of those names of those secondary banks? Or well, maybe Nat West.

SPEAKER_01 12:39

Yeah, there was Cedar Holdings, was probably the most famous one. Uh, there was a couple of others, so those names might come back to me as we're having this discussion with the biggest. Nat West was the big bank that got dragged into the problem because they'd gone and lent to it, and that's exactly what a lot of the big banks have done this time around.

SPEAKER_00 12:53

Yeah, goodness me. History.

SPEAKER_01 12:56

And that's what I think will be the bigger issue. It'll be the interest rate movement, and that's what puts pressure across the whole cycle, and that's the repricing of capital, and that's where you get wider problems.

SPEAKER_00 13:07

Well, we've obviously had pretty violent moves in certainly UK and EU uh rates, rate markets. You're from what you're talking about, you it makes it sound like that's merely the beginning rather than the end, that that was maybe a tremor, not even the main earthquake. Is that or or will it be, do you envisage uh another because that's a pretty quick move we've seen in in a lot of these markets? Or are you looking at maybe just a sort of ratcheting process, a slightly it won't be as violent, but it eventually will get us to much higher interest rates, or what do you see for the yield curve?

SPEAKER_01 13:42

I th I think you've described it exactly. I think we're gonna have a ratcheting effect. So there'll be movements back and forth. But if you look, the trend is is higher. So people are paying higher rates, and I think that ultimately feed through to the states as well. Because again, in many ways, it's almost the perfect storm for the Americans because you sort of sit there and they think, well, we're isolated from this. Well, yeah, not exactly. And let's say you're gonna feed through, plus you're borrowing a load of money, and you're borrowing money in the short end, so very short-dated debt. And again, that's the most sensitive to interest rates. So we are going to see, but I think the trend is wider. There was also it's just worth saying that structurally, what's different between this one and the 70s? 70s was a political thing by OPEC, it could be reversed relatively quickly. This time is structural damage, and not clear to me where where the resolution is. And secondly, there was a second interest as um oil price shock. It wasn't as big a shock because obviously we were already coming from elevated levels, but that was around the second time round. And I think in many ways that's more kind of constructive about where we are, um, or more constructive guide to where we are. So, yeah, I I think it's a big problem.

SPEAKER_00 14:50

But if you're talking there, uh my mind was thinking on this concept of a lot of debt needs to be refinanced. Uh, some of what you're describing is is often the hallmark of an emerging market country, which is where you shorten the term of your debt. Uh, inflation you know, looms, uh, central banks have to hike, and it just becomes and then you get a currency crisis, actually. I mean, could we see that in America? Or, you know, is it or could we see it in India? I mean, the rupee is obviously very weak already. They've even um, I believe the RBI has already taken steps to um just regulatory uh steps to try and prevent too much shorting in the currency. But could we be looking at something like that? You know, EM style in the developed world?

SPEAKER_01 15:32

Well, the EMs have well, sorry, the developed markets have done a fantastic job of making their balance sheets look like emerging markets and they're behaving like emerging markets, so I don't see why a lot of them aren't going to have emerging market-like outcomes. Um, the US appears to have replicated Brazil's balance sheet circa 19, mid-1980s with heavy reliance on short-term financing, but obviously the dollar is a very different beast to the Brazilian real, or at least I hope it is, and we're going to discover one way or the other, I suspect, quite um soon. I think if you start to see higher rates, I think there's a certain point where the US will be forced to intervene and whatever they call it, you'll get a second round of QE. So I think the there is a high probability the dollar will rally for technical engineering reasons. Um I might be wrong on the code.

SPEAKER_00 16:20

Capital flows and just money around shortage. A short, you know, when you're in a shortage, it tends to boost the dollar, doesn't it?

SPEAKER_01 16:27

Yeah, and I think there's also sort of an unwind. I mean, look at the other stuff that's going on as well. So some of those Gulf states are big sovereign wealth funds, and again, they're going to be liquidating assets, and they're going to be liquidating assets to turn that into cash. So they're going to need to find cash and they're going to pay for things, whether it's food imports or or new stocks and missiles or whatever it is, or new plant to be uh reinstalled into the plant. So I think there's a reasonable chance we get a dollar squeeze, which I know is not what people think. Medium term, I totally agree with the consensus. The dollar's going to be weaker. But then it comes to the second credit, you're an XFX trader, weaker against what?

SPEAKER_00 17:03

Mm-hmm. Well, indeed, exactly. And it's a relative game, often currencies, right? Which is why I was interested to hear you talk about that because I was thinking, yeah, sure, okay, the US does have this massive debt pile. It does still have exorbitant privilege of reserve currency status. Um, in the world we're describing of a kind of stagflationary environment where there's huge amounts of debt to be refinanced, it still feels to me like the US wins the sort of ugly contest. But um, you know, I uh I don't, you know, don't disagree. We could see periods of of it being being uh being bad for the dollar. I mean, the st sterling's an interesting one. Um I mean you you hear a lot of how guilts are the high beta, and I think we've really seen that over these last few weeks. As in in a rally, they rally more, in a sell-off, they sell off more, right? They are they appear to you know really be moving a lot more than than the bond market's moving a lot, by the way. We should say for people who are listening to this who are not in the day-to-day of bonds, these are pretty significant moves we've had, right? Yeah, and it's actually I'd like to ask you as as someone in the markets every day, liquidity then strikes me liquidity must be poor or or or is it people getting things done? It's just there's a lot going through, so you're getting big moves.

SPEAKER_01 18:19

The liquidity's poor, um, and it's deteriorating. So the credit market is significantly deteriorated, which is probably most problematic for again. That's how corporates and a lot of other things get financed. There isn't um there's bits of the government market that are pretty liquid. But the fundamental problem, think if you're trying to price anything else in the world and your guilt market is moving around or whatever government bond you're looking at, but guilt's in particular, then it's very hard to price anything else because you've got no stability over what quote the risk-free rate is.

SPEAKER_00 18:51

Yeah, the risk-free asset is is moving more than it kind of should, really.

SPEAKER_01 18:54

Yeah, you can see like 40-50 basis points movements, you know, cumulatively over the course of a week. And it's like, well, how can I price a mortgage off that? You know, well, I can on the spot basis, but you can't make longer-term sort of decisions. So it it the other second thing it kind of triggers as well, it sucks liquidity out of the market because as the vol increases volatility, it forces people to have higher margin, it forces people to reduce kind of two-way flow. So slowly but surely the liquidity is is disappearing and financial conditions are tightening.

SPEAKER_00 19:25

Well, that's something else I wanted to pick up on is this concept of whether we're going into more of a general liquidation period, because we on our last talk about a quarter ago, you've got uh a wonderful bunch of models that you look at. Um I allowed to reveal the name.

SPEAKER_01 19:40

Yeah, you can. The cat.

SPEAKER_00 19:43

Quant cat. Love it. Uh, and um, and in fact, you've got a substack, haven't you? What's the name of your substack?

SPEAKER_01 19:50

Uh T Bills, Thrills, and Belly Aches. Very good, which is an early before your time, early 1990s reference to announce.

SPEAKER_00 19:57

Yes, I know. I was trying to remember which one is it um Happy Mondays.

SPEAKER_01 20:02

Happy Mondays.

SPEAKER_00 20:03

I was happy Mondays. Oh god, lost on my street cred there. Um, and I don't think I had any, uh, but I do, yeah. I was I suppose I was more blur than Oasis, and maybe that's where I've gone wrong in my and probably take that as well. So just lost all the listeners.

SPEAKER_01 20:17

No, not at all because all of the things we've referenced, including me, even the Happy Mondays are even older than that. So uh half our listeners probably don't even know who any of these people are.

SPEAKER_00 20:25

Well, yeah, that is true. I know.

SPEAKER_01 20:26

Well, they're only when the Beatles were, you know.

SPEAKER_00 20:31

Um, but that is a great your substack's great, and you do have Quantcat and it pulls in all these different types of model. And I seem to remember there was um, and and wonderfully it spits it out in words you can understand. And I remember there being discussion of a sort of rounding top or blow-off top. I can't remember what it was, you can remember, in the sense that the liquidation measures, all the other quantitative measures that this model looks at were sort of suggesting we were headed into some kind of topping out on uh certainly on that US equity markets on the SP 500. Is that a fair way to describe it?

SPEAKER_01 21:06

Yeah, that's absolutely fair. It it's trained on mainly on US data. Um, there's there's other versions. There's actually a family of models, but effectively they were slowly rolling over and it's what they call a rounding top. So not all stock markets or end at a point and collapse. Sometimes you kind of get this slow rounding motion as it rolls over and then goes into a longer-term sell-off. They're often indicative of much deeper sell-offs because again, it's it's a general exhaustion of buying people beginning to kind of wake up. Uh, the behaviourism of, you know, what am I paying for? Um, that was what the market the model was suggestive of.

SPEAKER_00 21:42

It was and that was before this even this conflict broke into view, right? Yeah, yeah, exactly.

SPEAKER_01 21:48

That means it's got increasingly unhappy since October, November, and talked about a very unstable market, and then March was the thing that just pushed it over. And we could have we could we could have secondary effects as well. I mean another thing we've not really talked about, but um you were talking about the Substack, but we both do stuff for the CFA. I wrote a long paper on the CFA about the Japanese carry trade, which is again quite a technical aspect of the market. And I just said, look, there is a structural change going on, but it might be quite measured and slow unless there's an external shock. Well, guess what? You know, Japan is very dependent on energy imports, and this looks very much like an external shock.

SPEAKER_00 22:27

Yeah, at the moment of its currency being, you know, one of its weakest points for decades with a yeah, a new reflationary um prime minister.

SPEAKER_01 22:36

Yeah. And that could quite significantly start to disturb a lot of other things in the market. So you've got again, it's the interest rate shock that might just trigger wider problems. And yeah, you've got that as another thing that's laying around in the market that could now potentially go bad.

SPEAKER_00 22:52

Does this mean that systemic risk is kind of looming on the if you were to get, you know, sort of trying is trying to frame the risks out there? Because we have talked about a ratchet effect, a kind of slow-motion car crash type thing going on, a general liquidation, but we we haven't talked uh systemic issues, although you slightly alluded to them, but is that kind of on the radar, maybe, or still extremely low probability to go to that extreme?

SPEAKER_01 23:21

It's a rising probability. Any sovereign distress is uh is systemic. You know, you're not talking about one or two banks rolling over in California, you're talking about countries potentially having significant problems refinancing their debt and therefore perhaps turning to the printing press, which I suspect they will at some point, which will trigger another round of problems because then people will start to get lose confidence. So it's almost like MNT is just about to get stress tested, and then we're all gonna see why MT doesn't work as a theory, because people will all turn around and go, You're printing money because you can't finance your debt anymore. I don't want to go anywhere near your currency or your debt. And that's a significant problem for certain countries. One of them would be us with 20% foreign um investor involvement. So I think slowly but surely we're marching towards the world where we're gonna get more um printing press finance over debt. So I think there's enough bits and pieces in there laying around the commercial property market problems haven't been resolved. They've been slowly cooking off over the last um few years since COVID. You've got private credits, probably not by enough by itself, but again, with a wider interest rate shock, with wider problems in sovereign funding, I think there's enough things around. I think we're just about to get the bill of the last 15 years of money printing.

unknown 24:35

Wow.

SPEAKER_00 24:35

Well, you and I have been talking about that for some time. And uh you kept telling me, no, no, not yet, not yet. It's not because you know, I think I probably have a reputation for being bearish, which I don't mean to. I just have a rep I just want to be the one to spot those risks on the horizon. You don't want to what was it that I mean, you know, the Titanic basically went down because there was uh there was a a box with binoculars in it, but they forgot to bring the key or something. That's at least one theory I heard. The other one's about steel rivets. Have you heard those theories about it?

SPEAKER_01 25:04

No, I haven't. I haven't. But yeah.

SPEAKER_00 25:06

So I want to make sure you've got the binoculars. That that's that's kind of my job. Uh, mostly looking at the.

SPEAKER_01 25:11

But you also, if you look at your wider client base, I mean, I look at this every day, you look at this every day, but you've got uh a client base that probably doesn't even understand what to ask all the questions that they have. But you know, the key message is we've created a lot of nitroglycerine, we've left it all around the market in various places, and we finally got somebody running through with a torch. And let's just see what ignites.

SPEAKER_00 25:35

Well, then they may well say, but hang on a minute, Ben. Um there's always somebody who rides to the rescue. You mentioned a printing press. Um, I mean, it's kind of I was just about to ask you, how do you do QE when you, you know, if interest rates are at 5%? But of course you can, you can do yield curve control, do whatever you like. Uh if you want to uh really go for it, you could do capital controls, you could you could do exchange rate pegs, you know, there's all sorts of things you you could do.

SPEAKER_01 26:01

But um, but I mean, yeah, that's uh Can I sound like a heretic here if I think capital controls need to come back. I I don't actually think a world without capital controls has been particularly beneficial. I think it creates a lot of hot money, and I think it's caused a lot of the financial imbalances in systems has occurred because there hasn't been capital controls. And I know it sounds completely shocked me with that.

SPEAKER_00 26:31

You have shocked me with that.

SPEAKER_01 26:33

I'm an old Keynesian at heart. I don't mean the 1960s theory, I mean Keynes himself, and he would be the first to talk about you need to pour sand into the wheels of uh capital because otherwise money just flows around too quickly. And I think a lot of the structural problems we've got in the UK and the US is because of effectively the trade balance has become so distorted, and we end up absorbing a huge amount of foreign capital, which means we ultimately have to sell things or get into debt to finance that. And I think that's caused a structural hollowing out of the industry. Which for it for his many flaws, and we could probably do a week-long podcast on Trump's flaws, but I think there's an element of the US trying to rebalance its current account, um, is totally justified by what's happened.

SPEAKER_00 27:20

Yeah. Well, we we possibly should do uh a podcast series on that. Please write in those of you listening if you'd like us to do that. Um right, okay, I don't want to go on for too long. Um what so let me see what else I'm gonna ask you about. You do you want to talk about the Henry Hub gas? You did touch on energy earlier, or do you feel you covered that?

SPEAKER_01 27:41

Uh probably covered at Henry Hub, which is the US sort of onshore natural gas pricing mechanism, is probably a bit too technical for most listeners, but it would be one of the things I would look out just as a second thing, if you want to see problems. I because I think the US could still avoid a recession at this point. I think it's heading for stagflation.

SPEAKER_00 28:00

That was my next question, was yes, a US recession question mark.

SPEAKER_01 28:03

Yeah, I think all things being equal at the moment, it would take more than this to push the US economy over. I don't think it's in a particularly healthy state because I think a lot of the growth has been artificial. There's obviously a huge uh fiscal stimulus going on. But I think if you started to see a general widening of energy problems in the US, I think that's enough to push things over. And I think Henry Hub, which is their domestic gas price, which by the way, I think is going up anyway over the next two or three years. But I think if that was to go up significantly in the next few months, that's something that would very quickly have widespread problems in the US economy.

SPEAKER_00 28:37

I can believe it. Um okay, so final couple of questions. Um gold?

SPEAKER_01 28:45

Let's talk about gold. I think if you're a diehard believer in the thing, it's fine on a medium-term view. And I think that there's money printing coming. But on the short term, I don't want to go anywhere near it. Um, for a couple of reasons. So, first of all, if you just divide it into two halves, I've always preferred the miners, as you've know. I think look, you divide gold into two sides. First of all, I've always had a problem with the physical side of things because it's a behavioural asset. You look at who buys it and only six percent of its industrial use. Everything else was basically speculation or wow, not just quite speculation.

SPEAKER_00 29:20

Is actual use case of gold.

SPEAKER_01 29:22

Yeah, everything else is buying for reserves. Well, why are you buying that? Well, because the central bank thinks it's a good idea. Okay, well, objective. Where's the scientific merit in that? I know it's got a long-term history, but there's nothing more than behaviourally we put a value on the thing. Then there's jewellery, then there's outright speculation, and that's with 94% of demand. Yeah.

SPEAKER_00 29:40

Very keen on this, Ben, except I don't know if people can see. Sorry, I'm showing off my my very very pleasant Tiffany necklace. Although apparently, although apparently the diamonds are worth nothing now, right? Because apparently you can grow them in a lab or something for about five quid. You heard these lab showing diamonds. China has managed. China have yeah, screwed up my um jewelry. Thanks. China.

SPEAKER_01 30:01

Yeah, on the gold thing, the other thing is remember, most gold mines are tapped out. Um, they're usually miles from anywhere for reasons uh that's where you find gold these days, because all the stuff that used to be convenient has kind of been mined out. And they require huge amounts of energy. You have to ship energy there to do the mining operation, so there's a cost in doing that, and then there's the cost of actually drilling this stuff, which again is pretty much an oil play because effectively it's a liquid form that the fuel turns up in, and that's now suddenly really expensive. Plus, the price action just told you there was a whole bunch of um speculators going on in that market. So I think that there's a reasonable chance of a liquidation going on, and for anyone that wants to look back at 2008, everybody thought the financial systems fall apart. It pretty much did um until government involvement came in, it's and gold was there for a good proxy, it went down by 40% in the short term because it's as you've made the point, it there's a good chance of a general liquidation, and people just have to sell what people are prepared to buy, and that isn't necessarily what you want to sell. I don't think people have fully understood the energy is a across the supply chain shock. It's everything transportation costs, going on holiday this summer, the cost of your food, you know, the cost of the air conditioning. Singapore this morning is beginning to look into I mean, even Singapore, which is obviously very rich, beginning to look at the cost of energy because, of course, they're a heavy energy users because of air conditioning. It's an absolute industry-wide shock, energy.

SPEAKER_00 31:22

Yeah, and I on the Japan point, I saw this again this morning that the Prime Minister was saying, well, we think by so they're going to release extra uh strategic reserves to Japan that in from May, um, and they are securing as much as they can, you know, from different uh places. So they hope that by May they think more than half of their oil imports will be will not have come from anywhere near the Strait of Horvoos. Now, the flip of that is this is a supply shortage. So if they're getting it, someone else isn't getting it. Because uh, you know, there's gonna be the price of this stuff, if you can pay to divert the tanker to your ports, it's not gonna end up somewhere else, right?

SPEAKER_01 32:01

Yep, absolutely. Absolutely.

SPEAKER_00 32:03

So it's uh, you know, rich nations might sort of somehow do marginally better, but well, not is that's not even necessarily the case. In fact, we should talk about China then, really, because this is a geopolitical uh shift. Well, it's part of a bigger geopolitical shift that's been going on for some time but has been accelerating under Trump's second term, as you sort of touched upon. You have recently been to China, in fact, if I may ask you for your sense of how it was. I would like to uh note that you um flew with an airline that um could fly over Russian and Chinese airspace, which I thought was a very smart move then.

SPEAKER_01 32:41

Well, it was until the food turned up, and then I started to regret my life choices. Um I've been to Japan as well. Look, they've both got quite large energy reserves. So the first point you were making is yeah, we'll be paying more. Some countries just won't get it. And so they're actually there is a bigger problem for some of the countries. Um, we're the biggest importer, I believe, of jet fuel at the moment from the United States. So, again, that's partly because a lot of flights have started to be rerouted through Heathrow instead of Dubai. So it's an ill-wind that blows no good, uh though I'm not sure how much benefit that has for the wider economy. The Chinese economy um seems to be a lot slower than the official numbers are suggesting, which doesn't usually shock me. Uh, they have got rising problems with youth unemployment, which again doesn't shock me. Um also the amount of data coming out of China has gradually reduced over the last few years, which is usually not indicative of good news since uh less news seems to be finding its way to the outside world or less statistics. So I think they've got some time, but I think the problems for them are quite significant now. You've got basically a deflationary bust because property, you've got all the trade problems and you've got higher energy costs. So I don't think it's a very happy mix for them.

SPEAKER_00 33:51

Uh Ditto Japan, where also producer prices, producer prices just came out and have gone positive. They've been deflationary for three and a half years. Now that is nominal terms because of uh, you know, these rise in energy prices, but you're saying generally is it's still a disinflationary, if not deflationary uh economy. Is that what you're saying? It the because of the debt, because of the unproductive allocation of capital and you know all of that sort of thing.

SPEAKER_01 34:18

Yeah, I think there's been a massive misallocation capital. And it looked like you describe it in their case. So you've got manufacturing um that they can't make a lot of profit on. As you say, the price has gone up partly because there's an energy component to it. So nominally it pushes it up. And at the same time, you've got a deflationary bust. Uh all in all, it's quite an impressive policy mix.

SPEAKER_00 34:37

So you've got all the inflation where you don't want it and all the and all the deflation where you don't want it.

SPEAKER_01 34:42

Yeah, yeah, absolutely. I mean, remember they're a big food importer as well as other things. So, again, uh there are opportunities elsewhere. So, for example, uh the uh big uh South African um petrochemical company, no, it's not actually petrochemical, but uh SASO hasn't made a profit for years. Uh it's been in series of restructuring, but of course, all their stuff is derived from coal feedstock left over from the apartheid era. I'm not quite sure where they acquired the technology, but it seemed to turn up around 1945 of turning coal into oil. But uh that has suddenly benefited them. It's benefiting stuff in South America because again, it's on a completely different supply chain. So there are opportunities out there. You were talking about the portfolio elsewhere. I'm just not sure that now is the time to go in there. I think now the times to preserve capital.

SPEAKER_00 35:30

Yeah. All right. Well, we will end it there. Uh and thank you very much, Ben. And just to conclude, if anyone has any thoughts, we welcome your feedback. Please do contact me, Helen, at blommoney.co.uk, or I am on Twitter and LinkedIn as usual. And thank you very much, Ben. We'll see you again in three months' time.

SPEAKER_01 35:47

In three months' time. Well, who knows what war will be uh started by then.

SPEAKER_00 35:51

Joy, leave you with that. Thank you.