Why Are Brits Poorer Than They Should Be | Andrew Craig on TrailBlazers, Part I

Britain used to be 10% of the world's stock market. Now it's under 3% and it's cost the country an estimated £20 trillion in lost wealth over 30 years.

In this episode, Johnny sits down with Andrew Craig, founder of Plain English Finance, author and a nearly 30-year veteran stockbroker. Together they unpack how bad policy, the rise of passive investing and a financially illiterate political class quietly gutted UK capital markets. They cover the "death" of the London IPO, why pension funds abandoned British companies, the "inelastic markets hypothesis" and why Britain's world-class science and IP rarely turns into British wealth.

This is part one of a two-part conversation. Part two is coming soon, subscribe so you don't miss it!

🔗 Get in touch with Johnny: https://www.linkedin.com/in/johnny-isaacs/
🔗 Learn more from Andrew Craig: Plain English Finance (YouTube & plainenglishfinance.com)
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Chapters:
00:00 Intro
00:54 Andrew's background & books
02:04 What a Stockbroker Actually Does
03:42 Founding Plain English Finance
06:11 The UK Stock Market's Collapse in Numbers
11:08 How UK Pensions Abandoned British Shares
13:22 Britain's Biotech IP: DNA, Stem Cells & DeepMind
17:23 Active vs Passive Investing Explained
21:13 Why Britain Became a "debt" Economy
23:28 The rise of ETFs and Passive Funds
33:54 Why Big Tech has Stopped Truly Innovating
46:14 Wealth Inequality: Cash vs Equity
1:06:21 The ESG Fallacy & Real Climate Solutions
1:16:27 A Practical Fix: a UK "Baby Bond" Proposal
1:39:03 The Laffer curve: Ireland vs the UK
1:47:26 The Cantillon Effect & Who Really Loses
1:51:29 Get in Touch with Andrew Craig

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Get in touch with Johnny on LinkedIn

Transcript

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SPEAKER_00 0:00

We have shot ourselves in the foot in the most cataclysmic comprehensive way. Britain is world leading at its exporting our own capital. In the last 30 years, the decisions we've made that have eviscerated the stock market have probably cost the British economy something like £20 trillion in lost wealth creation. That is a tragedy of epic proportions. We have great entrepreneurs, we have great scientists, we have an awful lot to be proud of. If you have a pretty good robust of all things finance, you're far more likely to end up reasonably wealthy than if you don't.

SPEAKER_02 0:31

Welcome to the conversation. In this episode of Trailblazers, Johnny is speaking to Andrew Craig, author and founder of Plain English Finance. In the first of a two-part episode, Johnny and Andrew will be discussing the collapse of UK capital markets, Britain's IP, and why everything feels just a little bit broken right now. Be sure to subscribe, follow us on social, and come back for part two.

SPEAKER_01 0:54

Welcome back to Trailblazers. Today we are joined by Andrew Craig. Andrew, is it three or four books? How to own the world?

SPEAKER_00 1:01

Or some maybe three and a half, because one of them's what we call a work book, so it's not quite a fully fledged book. Actually, well, gosh, sorry, I'm completely fluffing my lines here, just speaking nonsense already.

SPEAKER_01 1:10

But no, four, just call it four books. Okay, we'll call it four. So how to own the world, how to own the world for less under 30. Uh sorry, no, live understanding. Live on less investor rest the rest, how to own the world under 30. Before you're 30, yeah. Yeah, before you're 30, and then our future is biotech, which obviously brings us into our core area of focus, which is life sciences, and something that you've been investing in for a long, long time.

SPEAKER_00 1:32

Investing investing time in and trying to invest in, yeah, exactly.

SPEAKER_01 1:36

Um today we're gonna have a pretty far-reaching discussion about a few different topics, but before we get into anything specific, what I'd probably like to do is a bit of a scene set. First, in terms of giving an introduction to yourself, sure. And then covering, you know, your latest, one of the latest series that you're um putting out is this active versus passive investing. So I'd like to set some primers in terms of what ETFs are, how money moves, all of that sort of stuff, just for a bit of a scene set.

SPEAKER_00 2:04

Okay, so we'll start with the the question that all British people hate is like, tell me about yourself. So Americans are great, they give you a lot of people.

SPEAKER_01 2:10

Right back on the couch and tell me a little bit about yourself.

SPEAKER_00 2:13

Um I was trying to dispatch this as quickly as possible. But I mean, basically, I started in the city in the late 90s with Swiss Bank, what was then SBC Warburg. Now now that's UBS, but like i.e. big investment bank. And I was basically a plain vanilla cash equities person, which means a stockbroker. And so just and I think it's quite important to unpack what that actually is, because it's sort of a generalist audience or people who aren't in financial markets, perhaps don't really know what that is. And we're going to come back to, I think, the merits of capitalism and them and what the what stock markets have done for the world. These are all topics that are close to my heart. But you know, the reason I feel passionate about that stuff is that basically a stockbroker is somebody who just tries to raise money for companies in the main, right? Is you know, you as an example, earlier in my career, um, I was in I was a relatively junior member of a team that raised 200 million pounds for EasyJet to buy a load of aeroplanes. And in the time since then, you know, it's become a business that employs 18,000 people and flies 90 million people around Europe every year. And I think that's really good for the economy, right? So I I guess all I'm trying to say right from the office, so I was a stockbroker, I've been a stockbroker, it focused on smaller companies from the late 90s until today. And and I'm a a big part of my passion is the very real link between the real economy and the stock market and capital markets. Because I think that's something that in sort of the contemporary zeitgeist of nowadays is is actually really poorly understood. A lot of people think about financial markets and the stock markets, just a bunch of sort of you know, nasty rich people ripping each other's faces off as a very sort of parasitic thing. It it really isn't. Uh, it certainly it shouldn't be. So so so yeah, I guess um knocking on 30 years of of doing that, and then um along the way I started a business called Plain English Finance, and the mission of that is very considered, which is basically financial literacy, and it's this idea that financial literacy I think is I describe as a silver bullet for individuals because basically everyone who knows has effective financial literacy can genuinely make a life-changing um have a life-changing impact on their life outcomes. Probabilistically, if you have a pretty good grasp of all things finance and you kind of know the main capital markets, the main asset classes, you're far more likely to end up reasonably wealthy than if you don't. Yes. And we have an epidemic of, you know, I mean, Aviva did a survey not that long ago that found that 60% of British adults don't understand what count compounding is, which tells you that at least 60% of British adults are not doing a very good job with their finances. And I think we all know intuitively that it's way more than that, but but possibly far more important than sort of selfishly at the individual level, you know, every individual that sources out is a huge result. But I would contend, and I'm doing a lot of work on at the moment, that at the level of society, part of the reason that 19 million British adults are financially challenged, and you know, we have food banks up and down the land and and and lots else besides, is because of of the failure of, you know, a failure in financial literacy. Because if you have a if you have a uh basically a financially illiterate population, you have a much worse society, you know, and you have lower tax receipts, lower capital formation, less innovation. So yeah, this is um sorry, so I said I was gonna try and give you a short answer, I failed completely. But basically, my mission is is to engender financial literacy because the impact it has on, it could have on tens of millions of people, and arguably more importantly, but by extension from that on society as a whole.

SPEAKER_01 5:26

Yeah, I think it's a a noble mission, and I think it's incredibly important. I think the the financial literacy, one could argue that it is, you know, and and it also seems to straddle many different social strata as well. If anyone is trying to build a business in the UK, for example, one would argue potentially some of the decisions that are being taken by the people running the show would seem slightly bizarre and and well a little bit out of step with what we need.

SPEAKER_00 5:51

Well, that's certainly reflected in some pretty eye-watering stats, you know, what's happened in the UK in recent years. I mean, and maybe if we could unpack some of those, just something as so Eve as I contend, and I think it's quite an evidence-based position, um, a thriving stock market, um, by which I mean the ability of companies to raise lots of money to do stuff. So I gave the example of EasyJet earlier. You know, we needed to raise a couple hundred million quid to buy some airliners to build an airline business, right? I think that's quite important. Actually, uh, if I may, my favourite ever transaction I like to mention, just because it's sort of well, it's certainly one that I'm gonna tell my kids about reasonably soon who are eight and six. But um, so I think we raised $300 million in the matter of hit entertainment acquiring Lyric Entertainment, which in the vernacular of a four-year-old is um Bob the Builder paying for Barney the dinosaur, the big purple dinosaur. But my point, I guess all I'm going back to is that you know, these are real economy things, right? And so if so, Eve, your position is as minor, is that the stock market really matters, like it really matters for jobs and tax receipts and growth and innovation and healthcare and life sciences, which we can come back to. It's probably not a good thing that 30 years ago there were 3,250 stock uh stock market listed businesses in the UK, and we were 10% of the global, the value of global stock markets. Today there are fewer than 1,600, and we're more like 2.8% of global stock markets, right? So, in in one generation, in basically 30 years, we've our stock market has been eviscerated, right?

SPEAKER_01 7:21

I just think to double-click on that point a little bit, what's really important is to also have some comparison with other OC countries to understand their exposure in this in this regard. So we were 10% of the global stock market, we've now contracted to 3.5, if I believe.

SPEAKER_00 7:38

Yeah, it depends on which numbers you're I mean we call it around 3%, yeah. Because it by the way, because it's we're hemorrhaging a billion quid a month, and we have been for 60 months.

SPEAKER_01 7:45

Wowzers. Okay, right. So we've contracted to 3.5. We're now in a position where also we are the only country going in the direction of investing less into our own.

SPEAKER_00 7:56

Yeah, so that so so look, there are structural reasons why there are fewer stock market listed companies in the world, one of the which is the rise in companies that aren't listed on stock markets, so which is venture capital and private equity. And we've had to come back to that. So all over the world, more and more of the world's money is allocated to private equity and venture capital, which means that you you could uh well, and this this is a subtle thing, you could argue that that's one of the fundamental drivers of there being fewer companies. One of the other drivers is that very, very big companies, and these things are all related, like when there are multi-trillion dollar companies in the world, they hoover up a lot of small companies, they buy lots of them, right? So companies don't remain independent. We can perhaps come back to whether or not that's a good thing, because it's a real winner-takes all society. But yeah, but to your point, a big, a big part of the reason it's happened beyond those sort of structural drivers is is policy and really, really bad regulatory decisions, basically from in the UK from from Blair and Brown onwards. This isn't a party political point. It was it's been dreadful under both parties for 30 years. We have shot ourselves in the foot in the most cataclysmic, comprehensive way. And and and you know, by the way, the net I I've done a lot of work on this recently, but basically with some fairly conservative assumptions, the impact on British wealth is of the order of 20 trillion pounds, right? By doing what we're gonna come back to. That's 460,000 pounds per working-age British adult. So in the last 30 years, the decisions we've maken that have eviscerated the stock market um have probably cost the British economy something like 20 trillion pounds in lost wealth creation, which is a big part of why our GDP per capita is, you know, half of what a lot of so in that time frame, we've gone from being roughly in line with a lot of other developed world economies. You know, we all made $40,000, $45,000 a year GDP per capita. In that 30 years, we've basically been static, and loads of Singapore, Australia, Denmark, America, you know, by the way, if you want to hold Denmark up as a sort of socialist utopia, you know, it's it's not just the left-right thing, it's this, it's just sort of prosaic structural things that have held us back. And I would actually argue, even more important than income, GDP per capita, like your annual income per member of the given society, is probably more important, is wealth. So the average British person today reaches retirement with somewhere between a quarter and a sixth of what the average American or Australian and indeed Singaporean and others reach retirement at, which comes back to this whole 20 trillion pound point, right? Because if we fail to build 20 trillion pounds worth of wealth in the last 30 years that we could have built had we not cocked this all up, that is that basically goes almost the whole way to just to explaining why Americans retire with half a million, six hundred thousand-ish, um, Australians of a similar order of magnitude, and Brits are more like a more like a hundred thousand. And that to me, that's a tragedy, right? That is that is a tragedy of epic proportions. And and to the point you were making, and sorry for being long and rambling as I habitually am, but basically, a big so I talked about the structural drivers to why the stock market's got half the number of companies. Um one of the other huge drivers is that um in in the early noughties or late 90s, early noughties, 50% of our pension assets, British pension, so you British pension funds, Aviva, England general, you know, all these sorts of big where people have their pens, where private sector pensions sit, 50% of that money was in the was in the UK stock market, right? And today it's less than 3%. Now, in the so today, so today Japan is 50% of global stock markets, and uh they have 40% of their pension money still in Japanese equities. And that's true in Australia, something like one and a half percent of global stock markets. Australia has about 40% of its pension assets in Australian companies, right? So there's this sort, there's this sort of to my mind, and you know I've done a lot of work on this on my YouTube channel, but there's this idea that, well, American companies are better than British companies, you know, money should flow away from London, the London stock market should be falling on its ass, because you know, Tesla's better or Apple's better or whatever. But what that fails to really sufficiently take a uh understand is this idea of the counterfactual, which is that with 50% of UK pension assets being driven away from UK shares and very often into those very same American companies, right? Um, there's a guy called Charles Hall who runs the you know uh term Peel Hunt in London, who went into the House of Lords and said one of the things that Britain is world leading at is exporting our own capital, right? So imagine the scenario where we hadn't sent one and a half trillion quid, because that's basically what it's like, three trillion of pension assets, 50% of which was in equities. Now it's hardly any, right? So just call it one and a half trillion quid for the sake of argument that we've pushed away from our own companies. Well, funny enough, if you push one and a half trillion pounds away from the British economy and British companies, they're not going to perform very well. And actually, it's completely remarkable how well they have performed. Not I mean, and all the more frustrating because it's like, you know, Britain's really good, it's got the English language, it's got time zone advantages, it's got British law. We have all these, we we have great entrepreneurs, we have great scientists, we have great, you know, actors and and you know, writers, and we we are, we are, we have an awful lot to be proud of. And it's for that reason that we've managed to sort of by this by the skin of our seat and by our fingernails, actually hold on and not be a total car crash disaster, even though our political class have like torpedoed, you know, one and a half trillion quid away from our companies. And you know, the final thing I'll say about this is I feel this really acutely, and it's uh I was so angry and frustrated about it that I wrote a book about, you know, I wrote this book, Our Future as Biotech, to kind of explain it, is I feel it really acutely because I've spent the last 10 years trying to raise money for life sciences, British life sciences businesses, and businesses from elsewhere in the world, but but British ones in particular, and you just can't. Like, so in the country where we we have basically more Nobel Prizes, and certainly more Nobel Prizes per capita, that have been relevant to the creation of what is an eight trillion dollar industry. Like biotech globally now is eight trillion, the top 750 listed companies involved in life sciences is something like 7.4 trillion market cap, and the rest you can easily get to 8 trillion from all the privates and other players. Um of that 8 trillion of value creation, real wealth, right? Um, a huge amount of that rests on British intellectual property. From all the way back to Watson and Crick, like who figured out what DNA was, right? Yep. Um and Rosalyn Franklin, we should mention, who sadly didn't, you know, given the nature of how the Nobel Committee were back then, she probably didn't get the look in that she deserved. But anyway, parking that, you know, Cambridge University, um, John Gerdon stem cells, you know, regenerative medicine, uh basically the genesis of what's called the monoclonal antibody industry. Immune checkpoint inhibitors are a $60 billion a year category of drug already. They're gonna be $100 billion a year or more by 2030. And then you've got Demis Hasabis from Deep Mind, who just won the Nobel Prize in 24 for Alpha Fold, obviously owned by an American company, but this is still people in London and British IP, right?

SPEAKER_01 15:01

But there's also an argument about the acquisition that Alphabet were able to make of DeepMind.

SPEAKER_00 15:07

One of my friends, Alex Shepherd, is very frustrated about the fact that that is something that even happened because we should have had a fund that was enabled us to hold on to the which is you know complete music to my ears, because so to this point, my point is British IP, British science coming out of Oxford, Cambridge, Bath, Dundee, you know, loads of great British units, Manchester, whatever. But the key point is it has been at we wouldn't have an $8 trillion life sciences industry globally without that IP. How much of that has accrued to Britain and British people? A pathetically small, like pathetically small amount. And the main reason for that, or a very big reason for that, is because of all this stuff I'm talking about, because we've had terrible policy, like literally just stupid shooting ourselves in the foot policy for 30 plus years. You know, a political class who just don't understand equities and don't understand capital markets. So I think that's pretty easy to credit. It's never been worse than it is today, which we can perhaps come. I mean, it's been bad and now it's so bad. And, you know, so just to credit that a little bit more other than me just being a sort of shouty, you know, purveyor of hyperbole, you know, I have lived and breathed this for 10 years and written a book about it. But as another sort of evidence point, so 14 British biotech companies have floated on a stock market since 2018. First thing says they're all tiny. Yeah. The second thing says, and none of them floated in London. One of them did. So that's hell, and the reason for that is you can have incredible science uh addressing, you know, breast cancer or dementia or whatever it might be, world-leading science that we just we don't have, that we have we have a three trillion pound economy, and we have somewhere between four and five trillion of assets in the UK just in our pension and insurance funds, and we can't find we can't raise 30 million quid to do a phase two clinical trial in this country. And we certainly can't build 50 billion or 100 billion pound companies, which we should. It's our science.

SPEAKER_01 17:01

I mean, it's absolutely ludicrous. Let's so one thing I want to do just quickly is wind this back a little bit because I think this does have a bearing in this in this broader conversation. So one of the things that obviously you've spoken a lot about is this active versus passive, yeah, and where that comes into you know the kind of conversation is this winner-take all case that you spoke about.

SPEAKER_00 17:23

And it by the way, which is really important for wealth inequality as well, which we're about to come back to, yeah.

SPEAKER_01 17:28

So, you know, to start from first principles, you have an idea for a company, let's just say you're a biotech company, right? Yeah, you have an asset, you build the company, you've got your researchers, you want to you build some success, you get some commercial viability, you know, you've got a decent chunk of change. Now, you need to get investment because this is where you know companies grow. As you as you say in your series, you know, if you're going to grow and scale a business, you give away share options in order to do that.

SPEAKER_00 17:55

Yeah, you sell the stock market has done that for two or three centuries, which is it's just a technology that enables us to sell a bunch of paper to a large group of people to share risk and pool capital to get stuff done that a small group of people or one person couldn't done. Couldn't do. Sorry, great grammar, but you it's just a technology, and that's what's so poorly understood.

SPEAKER_01 18:17

And without that, obviously, you don't get this situation where these companies can continue to grow and scale. So, inevitably, what we end up doing, as you say, is we we drive them into the arms of foreign investments. US investors or Asian investors, and thus we give away the IP from a company that should have been homegrown, that we should have been able to nurture. Now, I think this is a more broad problem that's actually across not just the UK. UK is particularly bad, but it is also across Europe as well. Um, so explain a little bit about this winner-take-all situation that we've the role of passive, particularly. And the role of passive and how that's come into why these smaller companies are not also getting the investment that they should be getting because the cash isn't there for them.

SPEAKER_00 19:02

And therefore never growing into bigger companies on our side of the Atlantic. Precisely. All the all the all the value goes to Eli Lilly or you know, or Apple or Google or to the URL example, or whoever else might be. So there's some structural prosaic reasons, and when I say it's our own poor policy, right? Let's unpack some of that. So one of the things we've done in the UK is our political class just don't understand equities, the stock market. So, you know, if you've got a choice of putting money in the stock market or bonds, for you know, economic theory, financial market theory for years have said bonds are sort of safe and equities are dangerous, which is incredibly simplistic, naive. Uh, and I think, you know, people who actually have front office jobs and investment banks, and indeed a lot of commentators and thoughtful people, if you're you know, for anyone who's interested in reading books about finance or the great economists or whatever, the record of three centuries now by now is that equities have structurally higher returns than bonds, right? And you create real wealth using equities, particularly in a world which is more about technology and biotechnology, because it because it's just to unpack that. So if you have a business like a restaurant or a hotel or a pub, you can go to the bank and borrow money. So bonds is is basically bank loans, right? We'll maybe come back to that, but for people who don't aren't familiar with fixed income as an asset class, but there's basically debt, which is bonds and loans, borrowing money from a bank, and then there's equity, which is selling shares in a business, which is a which is a different thing. And and traditionally, you know, a lot of Europe, Britain and a lot of Europe have been very sort of focused on bank lending. And bank lending, that's partly because we're a more old economy, or we were a more old economy thing, because a a bank will lend money to a company that's just completely ringing the cash register every day, selling beer, selling hotel rooms, whatever. A biotech company might need a billion dollars and eight years before it can even make any money, or a tech company, right?

SPEAKER_01 20:50

You know, you use the example of Uber.

SPEAKER_00 20:51

Uber. Uber lost $31.5 billion over nine years before it turned a profit. Now it's a $180 billion company, right? And the models changed. And we've been 30 years behind everyone else, which is why America went away with the ball. So anyway, so so we've basically been sort of philosophically and and intellectually, Britain's been more of a debt focus of kind of a more of an old economy thing. Unfortunately, given what I said about British IP, particularly in biotech, but also in tech, you know, arm holdings, what you know, whatever else. But so, so, but and I think our political class in particular just do not understand the merits of equities. They don't understand this model of, you know, you put $50 million into 20 things and one of them becomes a trillion dollar company and the others all go bust, which the Americans are very good at, right? And it's a shame because as I said earlier, we've got four or five trillion quid. So we don't have to put that much of it on into that kind of model of approach to get that outsized return. So maybe dare we hope we have a British company that's a trillion that's a chimera. Have you heard that expression, by the way? Yes, yes. I I only encountered it actually when when we met the first time in Dubai. It's the first time I'd heard I knew what a unicorn was, um, but now. Lots of VCs in the states talking about chimeras, which are trillion dollar companies, not billion-dollar companies. And Britain should absolutely we should have four of them. We should have five.

SPEAKER_01 22:06

I mean, maybe that's slightly uh chimera's head of a lion or yeah, body of a lion, the head of a unicorn, something like that.

SPEAKER_00 22:14

Something like that. Strange. It's a very, very strange thing to have jumped to, but I loved all that mythological where do these things come from? Were they real once upon a time anyway? Moving, moving, moving swiftly back. But um, so where was I going? I mean, so basically, so there's the structural reasons are we've we've been very averse to equities. So a lot of our regulation has driven pension funds in particular into fixed income, lower risk, to sort of make sure that we don't lose the money by the time people retire. That's turned out to be a really bad approach. And then what money we do have in equities, for all sorts of reasons to do with the tax wrappers, things like ISES and other policies that we have in the UK, we've driven an enormous amount of that money offshore to Charles Hall's point. We are very good at exporting our capital. So there's been very little left for British business to support British businesses, kind of whatever they do, right? And just to unpack that a bit more, in terms of passive versus active, so the biggest theme in equity markets for the last 30 years and certainly the last 10, 20 years, has been this massive rise of a disproportionate amount of money going into market cap-weighted passive funds. And for you know, your audience who perhaps that sounds dull and technical. I mean, but what is a passive fund? An exchange-traded fund. It's actually a brilliant invention, right? It's it enables somebody put as little as even a pound in, but preferably sort of 25 quid a month, into literally thousands of companies. And an awful lot of people have chosen to put it into 500 companies, the S ⁇ P 500. So, and that's you know, that's been trillions of inflows. Um seven of which make up 40% of it, by the way. Yeah, correct. And 50 of which make up, wait, 10 of which make up 50%, or whatever the stuff. But yeah, that's or 20, but you're I I knew those numbers. I was working on those numbers this morning, so I should know them rather better than I just did. But the point is it's hugely concentrated. And there's a reason for that, and there are a couple of things to unpack here. Um, firstly, because basically it it the madness of crowds nowadays has never been more strong. And to unpack that a bit, when the dot-com boom happened in the late 90s, right, um some pathetically small percentage of the world's population even had an email. Like sort of white-collar work at lawyers and doctors and stuff in the West, in the developed world, had email addresses in 1997, 1998, but an unbelievably large, you know, nobody did in Kenya, right? Or Nigeria or Indonesia, or so we kind of underestimate just how nascent the internet was in the 90s when there was the dot-com boom. Yeah. Today we've got three billion people use Meta in some shape, you know, or or Google. I mean, three billion people are on social media comfortably, and that's growing all the time, and six billion people are on the internet. So when there's a theme that catches fire, the what's what economists call the madness of crowds, like herd mentality, can and is stronger than it's ever been in history, right? So we had a dot-com boom with hardly anybody on email and a few people with the e-trade accounts, and that was enough to send markets to the moon and crashing back down to the tune of 56% or whatever it was, right? This time, not only do we have the madness of crowds, we have this wonderful product called an ETF, which is on paper, face value, a very good thing. Hey, you want to get exposed to the stock market, you can invest in it very inexpensively and tax effectively, through, and you can you can own 500 of the best companies in America very easily with this thing called an ETF. So then, so so an awful lot of people are doing that. Then you have Vanguard and BlackRock, who people will know may be familiar, the two biggest providers of these products, right? Who and so this only occurred to me probably within the last 10 years, and and it was a real penny drop moment. So we all know that McDonnell Douglas and Lockheed Martin, you know, nasty defense contractors lobby the Pentagon and you know pay for congressmen to have you know nice trips to the Hawaii Hawaii or whatever to see stealth bombers being launched. We all kind of are familiar with that congressional lobbying in and in American politics, right? And and and loads of billions of dollars sort of basically you should call it bribery, right?

SPEAKER_01 26:22

Well, it's there's there's no uh I think the strongest concentration of lobbyists actually exist uh and live in the Washington. In DC, yeah, within a few blocks of DuPont Circle, yeah. And and the largest proportion of them actually work for social media platforms.

SPEAKER_00 26:35

Yeah, well, so so this is exactly the point. It's like sort of do no evil, like good tech companies, right? But similarly, Van Gogh and BlackRock have delivered an amazing technology, the ability for hundreds of millions of people all over the world to access investment inexpensively, tax-effectively. But what they've also done, so you get sort of evil, you know, people lobbying the Pentagon to spend hundreds of billions of dollars on stealth bombers. We all understand about that. Evil pharmaceutical companies, you know, lobbying for high drug pricing and um, you know, COVID tests in America were like $100 per test more than they were in Europe, which we can come back to because of the revolving door issues with ex-people on the board of Abbott and stuff. I shouldn't mention any names on this popcorn, but you know, I mean there's there's it's very easy to criticize that element, but what I hadn't fully appreciated is just how effective Vanguard and BlackRock have been at lobbying Congress, such that if you run a Fortune 500 pension scheme in the States now, it's basically more than your job's worth to take you the people that work for you, which could be tens of thousands of employees at a big company, right, and put their pension stuff in anything other than an SP 500 ETF. Right? So there has been a huge regulatory and political pull through of untold hundreds of billions of dollars of flows into passive ETFs, right? And just so to your point, when if a billion dollars flows into an SP 500 uh ETF, it's what's called market cap weighted. So the bigger companies get much more money. Of course. So Apple, a billion dollars goes into an SP 500 ETF because it's coming from all these pension funds, 70 million goes into Apple, 100,000 goes into CarMax or whatever the smallest ones, seven seven hundred times more goes into the big ones than goes into the small ones in the same 500 index, right? So that's so so so just to just sort of run back what what's driven passive. So legislation, regulation, we could be pretty worried about. Yes, right. So then that's been massively turbocharged by the fact that because that has then started driving American shares to perform based largely on saccharine artificial inflows rather than actual Apple selling more iPhones, right? Which we can come back to is the big concern about all of this is basically there, it it exhibits many of the elements of a Ponzi scheme. Like as strictly defined. What is Ponzi scheme? You know, money coming in today is funding the money that went in yesterday, right? And all these sorts of things, and it's unsustainable, and when it unwinds it, creators, right? The SP 500 passive situation looks a lot like a Ponzi scheme, right? It's not quite, but anyway. But then if you think about what's then been turbocharged, so you've had hundreds of billions of US capital going into it, hundreds of billions go into it because it's a good thing, yeah, originally, right? A good idea, then every single asset allocator in the world, so if you're sitting in Zurich or Tokyo or Frankfurt or London or wherever, if American equities are the only game in town and banging out 14% annualized returns, you have to be in them. Yeah. Otherwise, you'll get sacked, right?

SPEAKER_01 29:34

Well, then also on top of that, you know, you've got more and more of these decisions with these EFTs, ETFs, sorry, being made, but algorithmically.

SPEAKER_00 29:40

Well, and that was the next one I was going to say. So that's exactly right. So now more than 80% of trades on the New York Stock Exchange are made by bots, by algos. All the hedge funds that run algos, a lot of those strategies are momentum driven. So while it's all going up, it's all going up, right? So you've got this massive turbocharged situation. And to the point we're making earlier, so if Apple gets 70 million, so last year, Vanguard ETFs on the SP 500 took in new net inflows of about $250 billion. It's extraordinary, right? Yeah. Because of everything we're talking about. That's about a billion dollars of trading day, right? There's actually that's roughly that. Let's just call it a billion dollars because it's as close as. So that's 70 million that goes into Apple, right? That's net inflow. There's no outflow. So the inflow is bigger than any out any sellers, right? Buyers are much bigger than the sellers because of where we're at demographically and all these um structural things we're talking about. What does that mean for Apple's share price? Well, all the academic work being done by Harvard, Chicago, you know, physicists who run hedge funds in France, a guy called Jean-Pierre Bouchot, some of the smartest people in the world. And what blows my mind is that this is understood by almost no one, even in the finance industry, and particularly in the UK finance industry. It's all there, right? And it's this has been brewing for years. We know this stuff. But the the the as near as you can work it out, $70 million a day is going to Apple. That artificially increases Apple share price by 0.17% a day. In the course of a year, that's 23%. And that's happening to NVIDIA, Microsoft, like all of these stocks, right? So the so the they're going up 20 plus percent a year in recent years, not because they're selling more iPhones, but just purely artificially because of inflows. It's called them, it's called the inelastic market hypothesis. It's understood by almost no one, which is why I've just made a series of videos about it, right? And the problem is so big picture, why do you invest? Because of human progress, right? Because you know, stock markets basically over many decades go from bottom left to top right because of scientific development and growth in the population. And you know, a hundred years ago, nobody flew. Today, billions of us fly, you know, good stuff, real stuff, right? I still think that anybody, certainly anybody listens to me, should that's a laudable thing. Is you want to invest in human progress, you should be an investor. Being an investor is much better than not being an investor. The problem is that everything we've just talked about, which sounds a bit technical and dull in the last few minutes, what it's doing to me is if that's the sort of throughgoing trend, although for the camera it should be that way around, right? Bottom left to top right, in the olden days, the the sort of animal spirits of boom and bust, which is a natural consequence of human greed and fear cycles, right? For all sorts of reasons, war, geopolitics, whatever, the natural cycle was a bit like that, right? But the tr it was quite close to the trend. I mean, plus or minus a 15% bull market, 15%. Because of what we what we've done with you know, the lobbying of all everything we've talked about, US equities have gone on a sort of trajectory well, well naughty. So what could now happen is if that's the trend over you know a century, it's now gonna be like this, which means it will probably be like that before it's like that again, right? Whereas if the sine wave was like that in the past, now it's gonna be like that, and we are here right now, and so everyone has said, Oh, you should invest in the SP 500, and you'd be an idiot to invest in an active firm where people try to pick stocks, and you shouldn't invest, and we'll come back to the IPO point because I don't know that's where you wanted to start with, and then I will shut up. Not at all. You gave me too much coffee, but but the but the pro the problem is when you're making substantial decisions about the what the future's gonna look like from the vanish point of being up here, when there are all sorts of reasons where you know these companies have to spend hundreds of billions of dollars on GPU chips and all the CapEx for AI, and so there's that we haven't even talked about that, right?

SPEAKER_01 33:32

Well, there's also something else that occurs to me here where actually your incentive to be that innovative is a little bit lower, and it probably serves it serves to explain a lot of the frustrations that to use Apple as the example, people have had since 2007, right? So 2007, the iPhone, this revolutionary piece of technology comes along. Everyone's like, oh my god, you've got a piece of magical glass in your pocket. Yeah, realistically, nothing's changed. What have they done in the last 20 years?

SPEAKER_00 33:58

Well, and so so you're right. So we'll come back to that. You've raised a really good point, which I just alluded to and we're gonna come back to. So, one, it means we're much further away from the long-run trend than we probably should be, which means it's gonna have pretty cataclysmic uh results at some point. We can't predict when, because the problem with this is the rubber band can keep carrying on getting even more stretched, because it has for 14 years now, and you know, everyone goes well, you're an idiot, you don't know what you're talking about because the SP's up another 15%. Yeah, it doesn't mean that anything I'm saying isn't true. And then you've got that concept of too big to fail, because if it does all tip over, how many people just wipe out? And how systemically problematic it is. Well, I think they've all got massive cash balances, which is which is good, right? But but but the other couple of points to your point. So, first it's it's problematic because the the record of history is that most innovation comes from smaller companies. Like real, you know, Apple was a five billion dollar company 25 years ago. It made pink computers and then they came up. You know, it was a really small company in the context of the stock market. And when it was a really small company, by the way, Nokia was a 300 billion euro company, which is now a peak.

SPEAKER_01 34:57

I mean that that put that into context. Five 20 years ago, Apple. Apple was 5 billion billion.

SPEAKER_00 35:02

Nokia was I think it peaked at 300 billion euros, it was certainly well north of 200 billion for quite a long time. And yeah, and by the way, and I was at Swiss bank with we had a Helsinki office, we covered Nokia, you know, Nokia, Sony Ericsson, uh Siemens, Motorola, where are they today in iPhones? In in in right? And this is I mean we I talk about this with respect to things like Bitcoin. So people really underestimate how the incumbent dominant 600, 800 pound gorilla in any market, how quickly it isn't anymore. But let's put a pin in that about because I just want to come back to so so your point's really well made. Winner takes all means sort of often the evidence of history shows I think Google's pretty innovative, I think Apple's pretty innovative.

SPEAKER_01 35:44

But the culture in these companies is is kind of like they've done a lot of work to stimulate that.

SPEAKER_00 35:50

But they get sclerotic and and um they perhaps don't deploy capital as effectively as you know. We've had a recent example. What's the Chinese AI um firm that last year spooked the markets? Because Oh, deep seek deep deep seek or deep, yeah. But the point being is that you know, ChatGPT and and they've managed they've managed to build an LLM that was comparable to ChatGPT. Exactly right nuts. Yeah, so so that's a a recent example. And if you take that across everything that we're doing technologically in the world, and by the way, in biotech, it it gets quite interesting, right? But but and but to go to that, the other problem to your point about winner takes all with this, which again is understood by almost nobody. I really mean that, so arrogant and conceited as that sounds. And not at all.

SPEAKER_01 36:33

I think I I I think anyone who's experiencing this, and this is I think the point that you're gonna come on to now, anyone who's experience of the lived day-to-day is I'm working harder and I'm seeing less in my pocket.

SPEAKER_00 36:45

Well, well, yeah, I well, I was so the two things I was gonna go to are wealth inequality, which we'll come back to, but before that is the death of the IPO market and that halving in the number of companies listed on the stock market, which is hugely prejudicial to capitalism and human progress, as hyperbolic as that sounds, right? Because so in 2006 we floated hundreds of companies in the London stock market and we raised 20 billion quid, right? We've just had a Chancellor, Rachel Reeves, and I think it's Lucy Rigby, um economic treasury minister, crowing on social media recently about the fact that the London stock market's open for business because we raised £2.1 billion last year. Most of which came in Q4, by the way. By the by by September of last year, London had raised London, the once might London had raised 200 million quid. That is literally like a five-pound note down the back of a sofa. And we've got politicians who either don't know just how horrendous it is and what peanuts that is. It was 2.1 billion by the end of the year, but 2.1 billion is still in a three trillion pound economy, we should be raising tens of billions every year for new companies doing stuff, right? Particularly given how good our biotech science is, but you know, or to do an airline. So I was I made a video in September of last year, part of that series that you've currently been watching, where so by then London had only raised 200 million quid, and the year before we raised 600 million, so like peanuts, right? And I said that when I was in the team that floated EasyJet in November of 2000, we raised 200 million quid, right? Just for EasyJet. Just for one company. Just for one company to buy some 737s. London last year by September, the whole of London had raised 200 million, right? Now, so which just shows you how in twenty so 25 years later, when the world economy is immeasurably bigger, when you know, how is it how can we possibly think that the US economy has grown by the factor of 40%, right? Right. Well, GDP per capita's doubled in that time. In Britain, it's static and it's all related, right? Yeah. And nobody knows this stuff. This wasn't even an electoral issue last year. Nobody talks about it. Everybody's bleating on about Brexit, which by the way, compared to this, is a sideshow. Whatever your view on Brexit, the quantum of the impact on the British economy and the British people of Brexit, in my considered opinion, after doing a lot of work on this, is a fraction of what I'm talking about. The destruction of the the fact that it's basically impossible to raise any money in the UK to do anything serious, serious mind.

SPEAKER_01 39:08

Ask any entrepreneur on the street. Correct. And the world that we operate in, you know, you need to be, you know.

SPEAKER_00 39:15

But it's hard enough to raise 10 million quid, let alone 500 million quid, is what we really need to be able to do, right? So to your point, your clients have, I would, I'm imagining when you say entrepreneur, you're talking about people who might want to raise 10 million quid or VCT money or EIS money, right? That's incredibly hard. But even worse than that, because we're actually still okay at that. We're okay at Angel, we're okay at Series A, we're okay at spinning something out of Oxford or Cambridge and putting a few million quid in at the beginning, right? There's enough.

SPEAKER_01 39:42

Yeah, but it's the it's the scaffolding to scale. So actually, we we we work with some companies that are involved in kind of the the space um space biodevelopment side of things, and the the point where they need pardon the pun, escape velocity money, you know, that's what they need. They don't need you know, one million quid, ten million quid. They need an injection of 500, 200, like more money that they can deploy in meaningful ways that mean that they can scaffold and scale.

SPEAKER_00 40:11

And Britain, and the way you do that, because obviously it's risky, right? You know, tech companies, biotech companies, very risky, lots of them will go wrong, lots of them go to zero. But that doesn't change the fact that Britain, with four or five trillion pounds, that doesn't include family offices and hedge funds, by the way. That's just pension and insurance assets, right? Between four and five trillion, depending on the animal spirits of the market. We we don't have an investment industry. I think that's what people in the general population don't understand when they think of the city of London, oh, we're world leading, we've just topped a league table again, right? Because we're really good at insurance mainly. We're terrible equities, and we haven't built a new we should be building 100 billion, 150 billion, 200 billion, and if Nova Nordis can build, sorry, if Denmark can build Noma Nordis, which topped out $500 billion market cap or thereabouts, has come back since then. But if you know a nation of pig farmers, I've got a lot of I love Denmark, I think Denmark's amazing, but they've they are the genius people that basically turned pig farming as their number one sort of national pastime into the biggest diabetes business in the world, right?

SPEAKER_01 41:12

And and it's really funny. This could be like a six degrees of separation thing, because I was this is so tangential to pair with I was watching something about Italy and there was this huge scandal about um fake um a palma ham that was being made. Yeah, exactly. It was like a huge scandal that the Italians were all up in the middle of the room. Well, you can't have this. This wasn't fed with acorns or whatever. Yeah, exactly. But you're completely right, you know, you've got this small country, like tiny, really, able to grow this behemoth in in the global um diaspora of companies, especially in the life sciences, what the dickens is going on.

SPEAKER_00 41:54

And we and we had arguably much better IP that's created much more value in stem cells and antibodies, as just as dimension, just two, right? Regenerative medicine. So so, but just to take a step back again to the point we were getting to earlier, and we'll maybe come back to wealth inequality before we forget. But so we can't float companies on the London stock market. I was making the point that there's just peanuts being raised on the LSE, right? And the whole ecosystem of nasty, scaly-skinned stockbrokers and bankers and fund managers have all lost their jobs. I mean, the number of people in their early 50s right now in the UK who had a great career, and this is all the- there aren't any seats left for the the whole ecosystem's dead, right? The number of companies on the London stock market's halved. The amount of money being raised has gone from 20 or 30 billion to one or two, right? I mean, it's that bad, right? Um I mean, that blows my mind. Yeah, it's just insane. Because that's again, the people don't realise the real economy impact. But just tell them about why that is and why it's related to the growth of passive and the size of Tesla and Apple and Microsoft, right? And this winner takes all thing across borders, right? Is because like when I was raising money for EasyJet and dozens of other things, you know, I did Burberry and HMV and lastminute.com and Campari early in my career. The model used to be there were a few dozen funds that were UK smaller company funds, right? So their job was to look at hundreds of businesses on the London stock market, like the ones I just mentioned, Campari's Italian, but you know, the British ones. And um, and you know, my job was to call up those dozens of people, and all my colleagues we split the list of maybe 200 of these sorts of we're talking about Aviva, legal in general, 91 asset management, Invesco, Bailey, Gifford, Standard Life. You know, people will have heard some of these brands, right? And call them up and say, we're trying to raise 200 million quid to help this guy build an airline. Will you take a meeting? They say yes, you go and see them, they look at the numbers, they listen to Stelios as the guy from the Stellios. Stelios, the the guy and Ray Webster, the CEO at the time. And then they make a substantive decision based on analysis and animal spirits and art as much as science, whether or not to give you 5 million quid or 10 million quid in the IPO and build a book, right? That model, believe me when I tell you that model is gone. And the reason it's gone, prosaically, is because all the companies I just mentioned, so like they they might have had a 600 million pound UK small cap fund, right? That's 600 million quid of money in it from investors all over the UK and overseas, right? They give a fund manager 600 million quid to make these substantial decisions about which UK smaller companies to Games Workshop's another example, amazing success story, right? Fabulous company. Brit Vic, or you know, FeverTree or ASOS, or you know, these are all names, just the sort of for every part of the UK economy, many of these are global businesses, right? In software, in whatever, who what was it? Um, Grand Theft Theft Auto, who came up with that?

SPEAKER_01 44:47

Style games.

SPEAKER_00 44:48

British company back in the day, right? IDOS, based on all these amazing companies. Great British innovation, able to raise hundreds of millions in the stock market because there were dozens of funds that had 300 million or 500 million or 600 million pounds, when all the money, largely driven by policy and regulatory decisions, get basically says, no, no, no, better that we put it all in Apple and Tesla and Microsoft. And it was it was slow, slow, slow, then fast, fast, fast, right? Because that's how exponentials work. So now you've got, you had a you're a Viva, you had a 500 million pound UK small cap fund, now you've got a 30 million pound UK small cap fund, but you still have two fund managers and five analysts to pay their salaries and expensive office space in London and flights to pay for for them to go to conferences and meet all these companies. What do you have to do? You have to shut the fund down because it's not economically viable anymore, right? So literally in the last few years, all of those brands, so Jupiter, Bailey Gifford, 91 asset manager, all of the brands have simply shut down the UK Small Company Fund. And that is why you can't IPO businesses anymore, because the people who used to decide whether or not to invest them have simply gone. They're either gone or they had they used to have a billion quid, now they have 40 million quid. That is quite literally the order of magnitude, that is quite literally the scale of the problem. So the road back is a very, very long one because you have to not what what is also now gone is the whole ecosystem of the talent of the fund managers and the stockballers and bankers. Yeah, it's gone.

SPEAKER_02 46:14

Join us in part two where Johnny continues his discussion with Andrew Craig.

SPEAKER_00 46:18

The British state today is a bigger percentage of the British economy than the Russian state was in the 80s under communism. And here's the next point: everything's shit. Wealthy people don't lie around like Smaug the Dragon on piles of gold or cash. You know, wealth, wealth when it's equity is a completely different thing. When government is a hugely disproportionate percentage of society as a whole, the reason everything's crap is because government's crap at doing everything.