In this programme Graham Rowan interviews Money Week writer and value investing fund manager Tim Price about the effects of the coronavirus pandemic. This is the first of a series of Money & Me COVID-19 Specials, click the subscribe button and turn on notification to see more.
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Hello and welcome to Money, Me and COVID-19 where we talk to experts in the world of finance and property to find out what is going to be the impact of this unprecedented virus and the way in which governments are reacting to it. How's it going to affect our daily lives over the coming weeks, months and years. My guest today is the well-known money Wheaton writer, author and value investment fund manager, Tim price. Tim, welcome to the show.
Thanks very much, Graham. Pleasure to be here.
Uh, you know, I said that Tim's a value investor. Um, you know, that even applies to his it equipment, so please do not adjust yours. There's not a problem with the webcam on Tim's computer. It's just that you went to the bargain basement in Aldi and he got the only computer in the country that doesn't have a webcam. So he's joining us in audio only, but it's great to hear from you. Anyway.
No, let me go straight in with the 64 trillion Biloela questions him. What on earth is going on? What, what do you, what do you make of the way governments are reacting to cope with 19? What is that doing to the markets and how us, our investors supposed to respond?
These are all excellent questions that I'm not sure I have the answer any more than anybody else does. What's abundantly clear is that governments are not responding to this in a unified way. There is no, that seems to be no real coordination of effort going on. So everyone's coming into this crisis pretty much from a blank sheet of paper. Um, some governments seem to have been better prepared. The likes of South Korea, Singapore, Japan, other governments seem to have been without pointing fingers seem to have beans that are rather slow to, to wake up to the reality. But at the end of the day, it's, it's like that old Irish joke that becomes increasingly less funny over time, which is the guy asked for directions and the person, you are who you are, he says, well, I wouldn't start from here, but we're all sadly starting from here in terms of the market situation. Mmm.
it, it, it's, this is so fast evolving. I think it's difficult to make any hard and fast conclusions. The, what I would advise any investor is to sort of firstly take a sort of calm assessment. The job of markets is to look forward into the future, try and price in what hasn't actually yet happened. And obviously the, the, the violence swings that we're seeing in stock markets suggest that the market simply hasn't got a clue what's going on. So I would try and sort of take, take a step back, look at things from 30,000 feet and splitting things up into let's say, asset class types. I think the critical thing will be, firstly, this is, I think this is an issue of capital preservation, survival first and foremost. Then we can worry about where we're going to make profits in the, in the future. So I think the first thing is to kind of triage your portfolio and see where the risk lies.
So for me, as an asset class level, the risk undoubtedly lies in bonds, in fixed income instruments, in government debt, corporate debt, Mmm. And then everything else is secondary because it's quite clear that firstly the big state is back. The big state is back with a vengeance and that has monetary and fiscal implications. There is, I'm just seeing if I can find it. There's a quote that Marriott, Marriott Draghi wrote a piece for the ft for the actual times, uh, last week. And I'm just going to read out one paragraph from that piece if you'll bear with me. Yeah. The challenge we face is to said the former head of the ECB, the European central bank. The challenge we face is how to act with sufficient strength and speed to prevent the recession from morphing into a prolonged depression made deeper by a plethora of defaults leaving irreversible damage. It is already clear that the answer must involve a significant increase in public debt. The loss of income incurred by the private sector and any debt race to fill the gap must eventually be absorbed wholly or in part onto government balance sheets. And then this is the killer punchline. Much higher public debt levels will become a permanent feature of our economies and will be accompanied by private debt cancellation. Wow.
Yeah. And you wanna just explain that what will actually private debt cancellation.
Yeah. So I think what Maria drag is getting at there is firstly, when he talks about much higher public debt levels, he means that the, the amount of government debt, sovereign debt in the system is going to go even higher than it already was. And it was already egregious and, and unacceptably high. When he talks about private debt cancellation, I think he's basically talking about corporate debt being defaulted, uh, being, um, you know, just, uh, what's the phrase? A Jubilee lead, uh, just being forgiven. But basically what that means is if you're a holder of that, of that private debt, uh, your, your portfolio just got vaporized.
Exactly. And one of the things that concerns me is if you, you know, if you speak to a high street financial advisor, they would say, Oh, the stock markets are looking a bit dodgy. Let's do a flight to safety and we'll all go into government bonds. And that's the very thing you're saying could be the highest risk asset.
Yeah, I think so. I mean, we, we've been concerned about debt levels for a while. We were concerned about debt levels coming into the global financial crisis now 12 years ago. Amazing. Amazing to, to recap. Um, so we were worried about debt then. If we were worried about debt, then we have to be much more worried about it now because you know, at the end of the day, that's all very well if you're the borrower. Okay. But it's, it's kind of catastrophic if you're the investor and then you start seeing words like debt cancellation being banded about with abandoned by people who are [inaudible] at the epicenter of this financial assessment sector.
But also, I suppose if you, let's say you choose to avoid corporate debt that you feel might be higher risk, but you then go into government treasuries and so on, then are looking like most of them are going to be kind of zero or negative return. So even that's a guaranteed loss.
Uh, not only that, I mean, that's correct, but not only that, it's worse than that to the extent that if, again, I say it's kinda too early to make some of these conclusions because things are moving so quickly, but it is entirely plausible that inline with this huge increase in government debt, we're also going to potentially see, uh, in the, in the near to medium term an outbreak of either messily high inflation, given the amount of money that's being printed and there's going to be nothing on the other side to offset it in the way of say, tax revenues because so many people and businesses are gonna are going to go under as a result of this. Um, so on the one hand you've got the debt, the debt load getting higher and on the other hand you've got potentially high inflation or stagflation, that old, you know, that all keyword from the 70s, if anyone remembers that either way, you know, the debt as an asset class has never been this expensive in 5,000 years of history. That would suggest to me that it's probably best avoided if at all possible.
If you have the chance. The other side, obviously I think most of the stock markets we've seen like a 30% drop. We've seen a little bit of a boom when the massive trillion dollar recovery schemes are announced. But some people seem to think that being smarter, getting in now and you know, buying these reduced price assets. What, what's your view on how close we are to the bottom of the store?
Um, it seems to me that that try trying to pick a bottom in the stock markets generally now is where like trying to catch a falling safe. Um, so from a technical perspective, you, it probably is best not to buy until you've had confirmation that we've hit bottom and that bottom has been tested and, and found robust. So I don't think we're there yet, but I, I don't know, maybe wrong. What I'd also add is not all markets are created equal going into this crisis. So for the sake of argument, just just use an example. Um, Japan, which has long been our favorite market geographically. Um, as a, as a, as a region, um, Japanese companies have been hoarding cash for the last 25 years because they've been dealing with their own domestic deflationary depression. As a result, Japanese companies, by and large now have the healthiest balance in the world.
They've also tripled their dividends over the last six years. And they are, for want of a better phrase, those companies that have little or no debt are pretty Bulletproof by comparison, say to dot, dot, dot. You know, big finish, the U S so us companies are coming into this crisis with more debt than they've ever had on their balance sheets, uh, with the valuations of their listed equity of fueled by lots of lots of years of easy share buybacks, which had benefited the management but not necessarily anybody else. And as a result, they look very, very vulnerable to me. So we're not a hedge fund, but if we were a hedge fund, we'd probably be long Japan short us, for example.
Okay. And one of the things I know, obviously markets I'm meant to do is kind of price discovery. And if you could just imagine a scenario where I, I own a, a big brand chain of hotels I long ago did a sort of sale and lease back. So I no longer own the bricks and mortar. I just kind of operate and I will close. What is it, what is a fair share price for my company in this area?
Speaker 1 (12:55):
It's a very good question. I don't have the answer to that.
Yeah. So, so, so to me
essentially it's nothing
Xero. Exactly. Exactly. It logically it zeroes
the way I'd look at the market, you know, in large is, and I mentioned triaged earlier, I think it's, it's, it's simplistic, but it's perhaps legitimate to say, well, there's going to be three types of businesses, um, that, that you might be looking to invest in or, or for that matter, steer clear of the green, uh, sector, if you like, are those businesses that actually stand to benefit from this crisis? And I think there probably aren't that many of them, but they might include certain pharmaceutical companies, um, certain businesses that are catering to the rise in remote working, which now looks like it's going to be accelerated. You know, it's the power of 10 by, by this mass. Then you've got the, the, the, so the Amber companies, which are going to be impaired inevitably by the slow down by the lockdown, but they'll come through the other side hopefully. And then you've got the red companies and the red companies aren't going to make it or if they are going to make it, they'll only make it through extraordinary governmental support, which I would frankly be loath to seek cause we had enough of that mess 12 years ago.
Oh yeah. We still, we still have his own because he's from there. So, um, so if he goes through the asset classes, I think it's clear that the shares are, uh, quite shaky. You have to be very selective bones. Obviously you've made it clear what you think of those. What, what do you think the impact on the property market will be from all of this?
Um, I think it'll vary by region cause obviously be, you know, it's, it's, it's that oral argument about valuation or sorry about, uh, what, what do they call it? Location, location, location. So clearly not everyone will be, will be entering this, this crisis in the same, same position, but, but ultimately property is a bond like asset. Um, and then you're getting into the realm of no basically how, what future behavior is going to be like. It's probably too early to say, but I suspect that the one impact from this, this global pandemic will be that the business attitudes change that people's attitudes change for, um, I, I noticed that we work, which is one of the more sort of the poster children of sort of insane dotcom level, you know, corporate insanity and access to cheap capital and all the rest is sort of an outsourced office provider. I'm not convinced that I'm, I'm convinced that remote working IEP, we're working from home, it's likely to accelerate. I'm not convinced that people are going to know what to spend, let's say more time in offices. Where as when the dust settles. So some, some types of businesses may just go away and never come back.
Well let's talk about another sector, another asset class. I know it's close to your heart and that's, that's the stuff they, the yellow metal. Um, what do you think the impact on the gold price?
I sense that, I mean I, I'm coming from the backdrop of an acknowledged a over supply of debt that's been building for years. If you accept the thesis that we already have, we've had too much debt for years, but there's going to be more of it in our issued per, you know, per, you know, what Mario Draghi was writing about, I cited earlier, if you accept the thesis that the debt load is, is already gigantic, then there you have to look at what's going to be the, the, the route out of this predicament. So one route out is that governments around the world are able to engineer enough economic growth to keep that debt serviced. I think that was impossible before and I think it's doubly impossible now. The second option is that you default on it. We also operate in a debt based, a credit based economy. So widespread default is equivalent economic equivalent of Armageddon. So let's pause option two. What is inbox number three? What is in box number three is what every heavily indebted government has always reverted to over time, throughout all recorded history. And that's inflate inflated away inflation. So if you, if you buy into that thesis, then the one asset that you probably want to own over any other is gold. Why? Because it's a form of money. It's always been money. Uh, it's a form of money that can't be printed as simple as that.
Okay. So, so are you increasing your own holding of gold at the moment?
Well, I already own so much. I can barely walk in a straight line, but um, yeah, what we've been doing for example within our fund is we've been rotating out of industrial cyclical stocks that we already liked anyway, but they've clearly been whacked by, by the sort of the, the Dan drafted the generalized downdraft. But we've rotated those holdings into basically precious metals, minors, um, predominantly in Australia, uh, that have little or no debt because our thesis would be firstly that the gold price does go higher, but let's assume just stays where it is. These companies which have little or no debt already have great margins. Those margins, if the gold price rises, we'll, we'll get even more attractive. So although, as I say, you know, all markets are not created equal. I think there are pockets of opportunity within the markets if you know, if you, if you look hard enough.
Okay. So, so you have had to make some changes because in a sense as a value investor had a challenging few years whilst all the money's being part of the, into these tech stocks as the, as you are the guar, finally, Ari Bay for value investing, then
I, I th well, I don't answer it a different way. I think that the, the, the growth story and the passive investment story and, um, and are fighting their Waterloo because you've had years and years of easy money basically by dental, the bull market. So, so the investors made easy money or what, what looks with hindsight to be an easy money by buying cheap funds, you know, market trackers, et cetera, et cetera. I think that that story, that, that narrative, that whole narrative is probably going to change. Um, I think investors may finally, belatedly wake up to the value in being a bit more discerning because they say, let's say you're, you're tracking the S and P 500 in the States or the footsie 100 here, or whichever your index that index is to contain good, bad, and different stocks. But some of those stocks are going to go to zero. I think as a result of this crisis. You know, you look at, you didn't have to look at the U S jobless figures and the having sort of tootled around for whatever few hundred thousand, they've suddenly shot up to 6.6 million. You know, the, the chart, it's like I saw a tweet earlier from someone who just said it, they, they chose that iconic scene from jaws and the, the caption was, we're going to need a bigger y-axis.
So the trouble is, you know, when, when you talk to sort of market analysts and forecasters, they, they tend to heavily lean towards, you know, tomorrow is going to be like more of today.
Right? The thing that works now, I think, sorry to interrupt. I think that's, that's the danger that people revert to. Well, this has always worked in the past. So it's a brave new world now.
It is [inaudible] smarter people than me seem to be suggesting that it's highly unlikely that the next 10 years in, for example, the stock market can possibly produce anything like the returns you've experienced in the last 10 years.
No, I, I absolutely agree. I don't see how they can, at least in terms of the trends. So for the last 10 years, you only to make good money in the stock market, you really only needed to make one decision and that decision was to own the U S over everything else. The second decision was then actually not even to own the U S it was just to own the shares of Facebook, Amazon, Apple, Netflix, Microsoft, and Google. And there you are. So you're like six or seven stock portfolio beat just about everything else on the planet. That's not just to denigrate those companies. And some of those I'm sure will continue to do extremely well, but it just goes to show what a bifurcated market environment we've lived through over the last decade. So basically you didn't need international diversification, you just needed to own the U S and he didn't need to own the U S in market and entirety. You just needs to own half a dozen stocks. I don't think that story is going to play out in the same way over the next 10 years.
Okay. Well, just, just moving on to the other impacts of code in 19, um, obviously you, you, you run your investment fund. Have you had to make any changes in how you operate your business as a result of all the lockdown measures?
No, not really. I mean, I've been working remotely for the last several years anyway, so we, we meet, uh, we, we have had an office, Hatton garden for example, and we meet there to meet clients. But that aside, I know I've been working remotely from a little bit without a webcam. I, uh, I'm afraid, uh, for some time. Um, my colleagues have now also started working remotely because they'd be office effective in lockdown too. So the beauty, I mean I hate to be sort of whistling past the graveyard, but the, the beauty of, of for example, an asset management business, a private client wealth management businesses that it can all be done remotely. No, apart from the client meetings and client meetings in future desks, they will be done over zoom or Skype or you know, covenant services. This is why I said I think things really will have the potential to change quite quickly. A face to face meeting is desirable, but it's not essential.
Now finally it's him that the one area that I somewhat concerns me more than I think many people are, these kinds of scenarios is the impact on, uh, you know, government increases in power and restrictions on our Liberty, which never quite seem to get ratcheted back after the crisis. Witnessed the Patriot act still on the statute book in America 20 years after nine 11. Do you have any concerns about, you know, big government and yet more permanent restrictions on enough freedom?
Absolutely. I mean, I think the, I think a number of things are likely to change the result of this crisis. One of the things I hope changes is the role of the media. I would say the mainstream media has done an appalling job of covering this, particularly in the U K so I am tired beyond measure of seeing hatless journalists just, just sort of launching gotcha questions. A minister's who is frankly doing the best they can under extremely difficult circumstances. Um, but in terms of, yeah, how things are going to change, I, I think we can even begin to speculate about how things might play out in the, in the fullness of time. Um, one thing I, I absolutely hope happens is that there is some way of peacefully effecting change in the, the, at the epicenter and sources crisis, which is China. So I have no problem with the people of China, but I have a big problem with the Chinese communist party, which suppresses inflammation, then lied about it. And as a result, fast tens of thousands of people have been, uh, have died prematurely as a result.
Yeah, absolutely. They, and, uh, although you know, the, you know, Boris jokes about an Englishman's right, to have a beer in the pub, but the reality is what we're kind of almost under martial law and house arrest at the moment. So it's unprecedented.
Yeah. We've, we've never, I don't think even in the second world war we've had this kind of, um, S such a, a dramatic such a sudden and so severe, uh, sort of curtailment of rights that the most moving thing I've seen recently was, I don't know that many politicians, but the one NP that I have met personally once or twice to Steve Baker, who's the MP for Wickham. And if you want to see something deeply moving, you just need to go onto YouTube and see the footage of him, sort of rod, the reluctantly agreeing to support the, you know, these, these draconian measures in parliament. And he has, he has tears in his eyes. It's very, very, very, very moving.
Okay. Well, so I, to summarize,
you know, the, the, the sort of Tim cries view of the world at the moment. If I was to say, uh, sell bonds by go, would that be a fair summary? Yeah, I think that'd be fair. So we split the world up basically into three asset types. So we split the world up into value stocks, effectively defensive listed businesses that you're paying no great premium or ideally you're buying at a discount to own run by principle, shareholder friendly managers with a commitment to, you know, with a real ability at a, at a capital allocation. So that's a portion we invest in. Um, uncorrelated assets. So that's for us, that systematic trend following funds, funds that have the capacity to make money in falling markets, which most traditional funds can't. And then the third component, and probably the our highest conviction call at the moment, given you know, the, that the current and anticipated both monetary and fiscal stimulus is real assets, notably the precious metals, gold and silver and related mining concerns, which have little or no debt. So that, that, that, that sort of range of three assets is what we've always invested in and what we'll continue to invest in.
Fantastic. Well that's, that's great advice to end on, Tim price. Thanks very much for joining us. Join us again next time for another money. Me and COVID-19