#8 – GREED and Fear

Chris Wood - Behind The Balance Sheet

Chris Wood has been one of the world’s top strategists for 20-odd years. Pre-Covid, he wrote the weekly GREED and Fear publication from a different city almost every week, and offered an incredible range of insightful commentary on everything from Taiwan’s economy to the political complexion of the next Fed appointee. In this episode, we discuss the regime change after 40 years of falling rates, why government in China puts the UK to shame, why ESG has peaked, why Tesla will beat legacy auto, the importance of M2, why he doesn’t use Zoom and the relative merits of gold vs bitcoin. And much more. Warning – we jump around a bit and cover a lot of ground, I wouldn’t listen at 1.5x speed. We recorded before the tragic invasion of Ukraine.

SUMMARY

In this wide ranging interview, Chris, Global Head of Equity Strategy at investment bank Jefferies, talks about his route to success, why he is bullish on energy stocks, some of his fun trades (long Ryanair, short Zoom), why he doesn’t use Zoom, how the pandemic has altered his approach and why his multi-million air miles account won’t get built up quite so much going forward. We cover the long term outlook for the global economy, why the Fed has a straight jacket, and how the world will look as we move from a regime of falling rates. Spoiler – he doesn’t see a repeat of ‘20/21 in ‘22.

INTRODUCTION

Chris Wood started as a journalist, so it’s no surprise that he writes well. That introduction and a training in economics equipped him ideally for his current role. At the hedge funds, my week was not complete without reading his weekly, GREED and Fear, which is like a North Star for many investors who use Chris as a guide through an often turbulent world.

GETTING INTO INVESTING

Chris achieved all he wanted to at the Economist, having seen the US savings and loan crisis as Bureau Chief in New York and then watching the fallout from the bursting of the bubble in Japan as Bureau Chief in Tokyo. He is best known from his long stint at CLSA which was then the number one broker in Asia where he was repeatedly voted the number 1 Asia Strategist, before moving to Jefferies in 2019.

NO LONGER A DISINFLATIONIST

Wood was in the disinflation camp for many years, since the 1980s in fact, partly a legacy of his time observing the fallout from the Japanese bubble, and for all the usual reasons – technology, demographics, globalisation and debt. The response to Covid was so extreme with an explosion of the money supply that he reversed his 3 decade held view.

GOLD VS BITCOIN

Wood has been a long time gold enthusiast, using an allocation to the precious metal as a hedge in portfolios. In 2021, he re-allocated a portion of his gold allocation to bitcoin and increased the exposure on a dip. His rationale was that when the cryptocurrency became accessible to institutional investors, he wanted to have exposure. He explains his rationale, why he believes that bitcoin has real integrity and why he now holds both gold and bitcoin in his model portfolios.

STING IN THE TAIL

Wood believes that the US economy will prove resilient to higher rates and that consumers will benefit from rising wages, while the Fed will only go so far in increasing rates. But he believes that markets will continue to be uncomfortable with this environment and that there will be a sting in te htail, from hidden leverage. He explains where the problems might surface.

OTHER TOPICS

We covered a lot of ground from Exxon to GM to Tesla to Alibaba; from ESG to China’s Covid policy; from developed markets to Chine and India.

We recorded this before Russia’s shocking invasion of Ukraine. Neither Chris nor I thought that was a likely outcome. I mentioned in the podcast that I had looked at Russia but I didn’t feel it was a sufficiently uncomfortable trade – a lucky miss for me and another reminder that risk management is critical. I have been donating some of the losses I avoided to Ukraine.

There was so much in this interview and I could have gone on. In fact we continued chatting in the lobby for another 20 minutes before we had to rush to other appointments on a windswept London day. My takeaway – it’s so much better to conduct these conversations in person than over Zoom.

If you would like to hear more of Chris Wood’s views, there is a video on the excellent Jefferies website here and more insights here. But listen to the podcast first!

ABOUT CHRIS WOOD

Prior to entering the investment business, Wood was a financial journalist. He started at the Hong Kong-based Far Eastern Economic Review (1982-84) and moved to The Economist (1984-94), and served as both the New York and Tokyo Bureau Chief.

He was also the author of three acclaimed books while at The Economist. “Boom and Bust: The Rise and Fall of the World’s Financial Markets” published in 1989; “The Bubble Economy: Japan’s Extraordinary Speculative Boom of the ’80s and the Dramatic Bust of the ’90s” published in 1992; and “The End of Japan Inc.: And How the New Japan Will Look” published in 1994.

Evidently, stockbroking keeps him busier than journalism as he hasn’t written any more books. He is best known as the number 1 Asia strategist, an award he won multiple times at CLSA, where he worked until moving to Jefferies in 2019, where he is Global Head of Equity Strategy.

Chris has been publishing his renowned weekly investment report GREED & fear since July 1996. He was ranked No. 1 Equity Strategist in the Asia Money polls between 2002-2004 and 2006-2021. There have been 1,269 issues of GREED & fear (including regular and ad-hoc flash notes) over the past 23 years of publication.

 

Chris+Wood+pic

Source: Jefferies

For the first time in more than 21 years, GREED & fear has not been published over the past four consecutive weeks (as we go to press in mid-March, 2022). The last time this occurred was in the four weeks ended 19 March 1998 during a previous contractual-driven interlude. The other periods since the first publication in July 1996 where GREED & fear had not been published were a two-week period in November 1998 and a two-week period in December 2001.

Chris recommends a number of portfolios, of which the longest running is his Asia ex Japan long only. Since inception at the end of 3Q02, that portfolio has risen by 3,196% (annualised 19.9%) ($, total return) to end-‘21, vs a 659% (11.1% p.a.) increase in the MSCI AC Asia ex-Japan Index and a 759% (11.8% p.a.) increase in the S&P500. In 2021, it rose by 12.1% (vs a 4.5% decline in the benchmark). He’s pretty good.

BOOK RECOMMENDATION

Chris recommended The Road to Serfdom, a book written in the early 1940s by Austrian-British economist and philosopher Friedrich Hayek. We have been getting quite a few older books recommended by podcast guests which is interesting – if it can stand the test of time, a book is probably worth reading. And my reading list has been increasing which is probably good news for my education.

HOW STEVE KNOWS THE GUESTS

At my first CLSA Forum in Hong Kong, I woke up after my usual interrupted sleep (for the first few days, I always wake up at 3am and fall asleep at 4pm in Hong Kong) and dragged myself to the grand opening of the conference – a double act with Chris and economist Dr Jim Walker. I didn’t quite know what to make of it – they each expressed quite different opinions on the state of the world. I later grew accustomed to the relaxed attitude at CLSA which allowed its star analysts to say what they thought, even if it meant disagreeing with a colleague. After all, at least one of them would be right; I am not sure if this was an official line, but it was quite smart.

Wood’s presentation was impressive and I read his note every week for several years and always tried to attend to his group presentations on his London visits. I only ever had a single 1-1 meeting with him, which we laughed about when we met for the podcast (I am not allowed to disclose the details). But Chris was an invaluable guide to the macro world when I was at the hedge funds and I imagine it would be so much more difficult without his unique insight.

I was really pleased when Chris agreed to do the podcast and hope listeners enjoy it half as much as I did.

 

Chapters

00:02 – Financial Journalism and Fund Management
08:05 – Emerging Markets and Stock Performance
32:47 – Crypto Assets and Monetary Tightening
46:46 – ESG Movement and Chinese Stocks

Transcript

STEPHEN CLAPHAM: Hi, welcome to the Behind the Balance Sheet podcast where we meet leading investors and commentators and educate ourselves about the world of investing and the world. Our mission is to remove some of the mystique around investing and improve our understanding of what makes a successful investment or indeed an unsuccessful one. Our goal is to inform, educate and entertain.

DISCLAIMER: We hope you enjoy this and every episode behind the balance sheet and affiliates and podcast guests may own shares or have an economic interest in securities discussed in this podcast which is aired for your education and entertainment only nothing in this podcast should be construed as investment advice or relied upon for investment decisions. Always do your own research.

STEPHEN CLAPHAM: This podcast is intended to educate as well as entertain and it has a more serious purpose. We are big supporters of the Financial Times financial literacy and inclusion campaign, a new charity which you can check out on F T dot com forward slash F L IC. It’s the most disadvantaged in society who often get taken in by financial scams by payday loans and similar artful devices to park people with their money.

STEPHEN CLAPHAM: We can change this. It’s a straightforward task of education. This really is a great cause and I urge you please to support it. The podcast is sponsored by Cento and I asked them because I use the research platform almost every day for equity analysts. It’s in many respects the ideal tool. If I didn’t have a professional platform, I would need several different software systems.

STEPHEN CLAPHAM: Cento saves me a lot of time and ensures my research can be done in one place. I like it because first, the data is reliable and it aggregates all content. Second, it’s easy to use and much more intuitive than some other platforms. Third, it features I have never seen in other systems. My favorite is the ability to go into a 10-K and extract a history for a particular data table if I want to see the trend in a parameter.

STEPHEN CLAPHAM: And I often do this, I snap my fingers without having to dig through multiple 10 KS. It’s much faster and easier, but most important, it’s the price. There’s a huge price advantage over other systems. If you’re a smaller fund or even a large fund equipping analysts sent is definitely worth looking at visit sent dot com forward slash BT BS for behind the balance sheet, for more details.

STEPHEN CLAPHAM: Chris Wood has been one of the world’s top strategists for 20 odd years. Pre COVID, he wrote the weekly Greed and Fear publication from a different city almost every week and offered an incredible range of insightful commentary on everything from the Taiwanese economic outlook to the political complexion of the next Fed appointee.

STEPHEN CLAPHAM: When I was at the hedge funds, it was one of very few publications that I wouldn’t miss in this wide ranging interview, Chris talks about his route to success. We discuss the regime change after 40 years of a falling rates environment. Why government in China puts the UK to shame how E S G has likely peaked, why Tesla will beat legacy auto, the importance of M two and the relative merits of gold versus Bitcoin.

STEPHEN CLAPHAM: Chris explains why he’s pollution, energy stocks. And he talks about some of his fun trades. Long Ryanair short, Zoom was a big winner. He doesn’t use Zoom and we talk about how the pandemic has altered his approach and why his multimillionaire miles account won’t get built up quite as much going forward.

STEPHEN CLAPHAM: And of course, we cover the long term outlook for the global economy and why the Fed has a straitjacket and how the world will look as we move from this old regime of falling interest rates spoiler. He doesn’t see a repeat of 2020 2021 in 2022. I hope you enjoy this episode as much as I enjoyed recording it, warning, we jump around a bit, we cover a lot of ground. I wouldn’t listen at 1.5 times. Speed.

STEPHEN CLAPHAM: Chris, welcome to the podcast. Thanks so much. For coming on. I’m so excited to be here with you.

CHRIS WOOD: Thank you. Good fun.

STEPHEN CLAPHAM: So, listen, you started off as a journalist. How did you get from journalism to being the number one strategist in, in Asia?

CHRIS WOOD: Well, yeah, I always did financial journalism, but actually I originally worked for a fund management company, but when I was at University for a couple of a couple of long vacations in Hong Kong. So I, I, I always had an idea of the financial world and obviously I would, I would done much better to have stuck with that fund management company rather than going into journalism.

CHRIS WOOD: But I, I, I always wanted to be a journalist, but primarily actually I did financial journalism. So in a way, it’s not too different what I’m doing now from what I was doing when I was a financial journalist.

STEPHEN CLAPHAM: Well, you still got that weekly discipline of having to write. How do you manage to write 20 page? Not every week? I mean, that, that’s incredibly difficult.

CHRIS WOOD: How do you, that, that’s where the journalistic background is because I was working basically, I did work for newspapers, but I primary worked for two weeklies. One was called the first the Far East in Economic Review in which was the Bible of everybody doing Asian markets back in the seventies and 19 eighties.

CHRIS WOOD: So I worked for that and then I worked for the economist and in the economist, I was mainly doing financial journalism and most of my time in the economist was either in New York or Tokyo.

STEPHEN CLAPHAM: All right. And what, what got you into Brooking?

CHRIS WOOD: Well, because actually I, well, I nearly, throughout that period when I was working as a financial journalist, I would always get brokers trying to employ me or, and, but then when I really done what I wanted to do in journalism because I’d covered New York in the late eighties, Wall Street. So, you know, I was there for the Bowski scandal.

CHRIS WOOD: October 1987 crash, the whole S N L crisis. So that was, and late eighties, New York was quite, you know, that was, that was when Wall Street was more, more fun. It really was fun. Yeah, I remember it and, you know, I used to go and interview guys like John, good friend who ran Salomon.

CHRIS WOOD: I knew all these guys well. And then, and then I went, I literally went to Tokyo to cover the, the bust in Tokyo. So my timing was quite good. But because I got to Tokyo, actually, I got there six months late, I’ve been going to Tokyo to do special articles in the late eighties, but I arrived in Tokyo here six months after me.

CHRIS WOOD: So this b then B O J Governor Prick the bubble, right? And so I was three years in Tokyo and by then I really done what I wanted to do. So actually I decided to go into the, then I got interested in Russia because the Russian market was just beginning. That was like 93 94. In fact, I invested some money in Russia and then I decided I joined this group which were doing, Russia and em meg markets.

STEPHEN CLAPHAM: That was, I mean, that was a very hairy time, right, in the mid nineties in, in Russia, I mean, I, I, I was working for Flemings at the time and they very cannily opened an office in, in Moscow, been quite early in the boom and some guys with guns arrived in the office and said, you’re moving. I thought, well, that’s, that’s, that’s slightly racy.

CHRIS WOOD: Yeah. Yeah. Well, I was with the, actually I joined a group with Morgan Grenville. All right. Well, they were capable guys with Morgan Greville doing Latin America, Eastern Europe, Russia was when the people were, were buying their Russian privatization vouchers. And Morgan Gremel, a long established office actually in Moscow was probably a branch of the, of the British Intelligence.

CHRIS WOOD: So I did that for a couple of years, but then it didn’t really, it wasn’t really working out from a secondary brokerage standpoint. It was more a, it was more a corporate finance, debt driven business so that an old friend of mine persuaded me to go back to Asia, right?

STEPHEN CLAPHAM: Interesting. And so you, I mean, God, you’ve seen an amazing amount of change in global markets. I mean, well, of course, we both have but you probably more closer, closer up. But, I mean, it, it’s, it’s been like an extraordinary time to be doing this job. Right.

STEPHEN CLAPHAM: And, and particularly now because in the last 10 years, which more of the listeners will be able to relate to. We’ve had the global financial crisis and then COVID and negative interest rates and things that you would never have imagined seeing. I mean, how do you manage to think through all this stuff?

STEPHEN CLAPHAM: Because ordinarily you would expect that after having a long 30 40 year career, that you would know everything, you would understand everything you’ve seen it all before. But it isn’t like that. I mean, there’s things that are happening that we’ve never seen. How did you, how did you cope?

CHRIS WOOD: Well, yeah, because you see back in the late eighties when the when you had the, the 87 crisis into the S N L crisis and then Citibank actually blew up in 1992 people forget that. So at that time, one thought the debt problems were going to cause more, more trouble.

CHRIS WOOD: But then the penny dropped that the system was always, was going to bail people out all the time. So because I wrote a book called Boom and Bust back in the late eighties, which was, had a lot, a lot accurate, but it was, it was too bearish because what I was underestimating was the willingness of people to to bail everybody out, contrary to the laws of what, what are meant to be the laws of capitalism.

CHRIS WOOD: So once you realize that, then you realize the game was changing and then you had the L T C M crisis in the late nineties when the, when the, when that big hedge fund was bailed out. And then obviously, we, then we had the, the big bailout in 2008.

CHRIS WOOD: So if you were managing money, you, it was all about understanding when the bailout was coming. And then obviously, you had the, the, the the most extreme bailout. It’s not a, it’s not a bailout but the most most extreme monetary and fiscal policy response when COVID hit.

STEPHEN CLAPHAM: And I mean, does this, can this all continue though? I mean, you, you know, you, you’re kind of alluding to the, the, the laws of capitalism have been bent and they are like quite out of shape.

CHRIS WOOD: I mean, no, but yeah, but the difference is, I mean, L T C M being bailed out was completely outrageous, but it was only understood mainly by financial professionals. But when the bailout happened in 8 2009, then it became clear to main Street that there was one law for main street and another law for Wall Street and that I that it clearly is driven political change.

CHRIS WOOD: So people now understand this and those people actually quite understandably. Are it? So, at least they, they present is too strong a word. It’s, it’s now understood and it’s, it’s bred all kinds of political blowback. And you, but I’m talking in the western world, I’m not talking in Asia. Yeah.

STEPHEN CLAPHAM: No, sure. But, I mean, do you think that, that there will be a reaction to it?

CHRIS WOOD: I mean, do you think, well, there has been a reaction to it, you know, Donald Trump wouldn’t be, got being president unless you had this reaction because the, the, the, the, a lot of the populist, a lot of these more popular, well, there’s a reaction both on the left and the right. But, but basically, yeah, it’s created different political dynamics.

STEPHEN CLAPHAM: So we’ve had 40 years of falling rates and we’re, now we can’t, well, there is a theory, I suppose that rates could continue to fall and we could have just have rates of negative 5% so that you had to pay 5% to keep your money in the bank. I think that’s probably less likely than rates going up.

STEPHEN CLAPHAM: We’ve seen the start of that. I mean, what happens now? I mean, we’ve had 40 years of falling rates so you could basically just borrow as much as you could and invested it in, in almost anything. And, and you made money, does the reverse happen over the next 10, 20 years?

CHRIS WOOD: Well, I don’t see the political system allowing the rates to go up that much personally. But the key, but it did, there has been a key inflection point because I had like when I had a deflationary disinflationary view of the world all the way from the early mid eighties.

CHRIS WOOD: Literally, I maintain that view until this policy response hit to COVID. So I was in Japan in the early nineties and that made me understand that interest rates could go very low. And it made me understand how powerful these deflationary forces are. Be they high levels of debt, be they demographics be they technology, be they globalization.

CHRIS WOOD: All these things were driving the deflationary trend. But the policy response to COVID in the G7 world, particularly the US was so extreme in terms of the fiscal and monetary policy response. That in my view, that that marks that marked the beginning of the end of the disinflationary deflationary era.

CHRIS WOOD: And the key thing that made me form that conclusion was explosion in US money supply growth. So US M two growth I believe has increased by 40% in absolute terms since the year March 2020 when this money printing began. And basically, we’ve moved to a policy of what I call M M T light where the central banks are indirectly financing the governments.

CHRIS WOOD: And what’s interesting back in the late seventies and early eighties when I first began to be aware of markets, everybody was a monetarist and the most important data point every month was the US money supply data. You know, markets were obsessed by the money supply data. There was huge trading around that data point.

CHRIS WOOD: But in the intervening years, monetarism has been totally what’s the word put to the side? Money supply data is ignored. Actually, economists didn’t even have money supply forecasts. The the the data that’s caused the the markets obsessed over for the last 20 years has been the US payroll data.

CHRIS WOOD: No one talks money supply growth. And so that’s why a lot of people have been wrong footed by this pick up in inflation, including the Fed because they don’t look at money supply anymore. But if I showed you a this is not complicated, I’m not an economist, but I have studied economics. But the reason inflation picked up is because of this massive surge in broad money supply growth, which was nothing like what we saw post 2008.

CHRIS WOOD: A monetary policy works with a lag. Now, if the Federal, the Federal Reserve was maintaining the transitory inflation line until the end of November last year, they are now done. Actually the biggest u-turn I’ve ever seen in my life on the part of a major central bank. So they appear to, to be serious about trying to really tighten monetary policy.

CHRIS WOOD: So, so long as they’re sounding like they’re serious, the markets are going to be very volatile and basically, you want to be selling high b to growth stocks on rallies. But are they really going to be as tough as they’re talking? I have a hard time believing it, although, but for now they’re so far behind the curve, the last inflation print was 7.5%. The target is 2%.

CHRIS WOOD: So they’ve got to be seen to be trying to do something. And the other point is that for the first time in literally decades, until since the seventies, there’s political pressure in Washington for the Fed to be seen to be doing something because the Biden administration, you know, is polling very badly on the economy because the view is they’ve led inflation surge and the Republicans are beating them up successfully on this.

CHRIS WOOD: And, you know, you’ve got the midterm elections in November. So literally, this is the first time since the 19 seventies, there’s pressure on the Federal Reserve to tighten. So that is not good for markets. It’s basically, I’m calling it the inverse of goldilocks, you know, term for that.

STEPHEN CLAPHAM: But I like that the, the, the problem they’ve got though is that they can’t really use interest rates as a tool to control inflation because they’ve got so much debt.

CHRIS WOOD: I mean, well, now they’re in a box. So, but yeah, so to me, they’re going to end up imposing some form of financial repression. So I don’t believe the rates are really gonna, you know, go up but I’m assuming that for now they’re talking like they’re serious. But obviously, if they did really raise the rates, then the government debts, servicing requirements would become too extreme.

STEPHEN CLAPHAM: And that’s the case everywhere.

CHRIS WOOD: I mean, it’s not everywhere, it’s in the G7 world. I I make a distinction between the G7 world and the emerging markets because the emerging markets throughout this period have been following more classically orthodox policies. So they actually have been doing the what the textbooks recommend.

CHRIS WOOD: There’s one law for developing countries and one law for developed countries when the developing countries goes bust, they’re told they’ve got to cut their budget, you know, do all the things. The IMF recommends the IMF as the doctor telling you to do things that are good for you but are painful.

CHRIS WOOD: But if it’s developed countries, then those laws don’t apply, they just get bailed out. So again, that’s just like the work of the main street realizes one law for Wall Street and one law for mainstream in the developed world. Developing countries understand that there’s one law for them and one law for the others.

STEPHEN CLAPHAM: So why have, I mean, why have stock markets, emerging markets, stock markets not been stronger then? Because I mean, if you believe that that the Fed is actually going to put rates up? I don’t know that people, they believe they’re gonna put rates up seven times.

STEPHEN CLAPHAM: I don’t know, they believe they’re going to put rates up 17 times. But you would have thought that people were going well. Actually the emerging markets look quite good shape relative.

CHRIS WOOD: No, they do. But the well last year, actually the emerging market under the performance looks horrible on a chart. But actually it’s not, it’s actually very distorted that because it reflects the huge weighting of the Chinese internet stocks. So it’s in the internet sector and the Chinese internet stocks were smashed by regulatory action by the Chinese government.

CHRIS WOOD: And actually what the Chinese government did there, many spokes made a lot of sense. They just didn’t tell anybody, they’re going to do it before they did it. So it’s not, the emerging market performance has not been as bad as I say, I’m not.

STEPHEN CLAPHAM: Yeah, of course, I not looked at the charts of emerging markets.

CHRIS WOOD: They would look nothing. I’ve never seen one sector.

STEPHEN CLAPHAM: So distort a regional index which of course, of course it would be, they’ve been absolutely abysmal, but you’re, you’re quite keen on them now.

CHRIS WOOD: No, now I think there’s a mean reversion trade in the internet stocks because obviously I haven’t been in China. So that’s this cabinet because I’ve been able to go there for two years. But all the, all the noises coming out of China is that the regulator, the new regulatory agenda has been set for the Chinese internet sector. They’re not gonna, they still support the sector.

CHRIS WOOD: The new rules have been set And so the real issue is what’s the appropriate level of valuation for these stocks now that they operating in this stricter regulatory environment, it would be a bit like if the if the American Europe suddenly implemented the regulation of big tech, which many people have been advocating right in the US and Europe for many years, there’s a lot of people been advocating it, but nothing’s really happened.

CHRIS WOOD: Let’s say that actually happened because actually a lot of what the Chinese have implemented is what advocates of big tech regulation would like to see happen in the West. And if they did that these stocks would be de rated.

STEPHEN CLAPHAM: Well, you, I mean, Mark Zuckerberg would, would argue that he’s already been.

CHRIS WOOD: Well, yeah, I’ve argued that’s good for my other recommended pair trade. I I started in October of employing October of Long J D via the Chinese e-commerce company Short short, the company formerly known as Facebook.

STEPHEN CLAPHAM: That’s been, that’s been very successful so far.

CHRIS WOOD: That’s working. Yeah.

STEPHEN CLAPHAM: Yeah, I the this then you mentioned that you’ve not been to China. I mean, how much has it hampered your ability to do your job? Not being able to travel and not being able to speak to people face to face?

CHRIS WOOD: No, no, no. It’s definitely hampered it particularly in the case of China because China, you always have more conviction. I at least I always have more conviction, talking or writing about China after I’ve been there.

CHRIS WOOD: But it’s possible that people I would talk, used to talk to in China may not be as comfortable about talking as they would have been before. I don’t know that, but that’s what I’m told. But personally because I used to be a journalist, I still think it would be useful to go to.

CHRIS WOOD: It would be better if I go there. But obviously I, I had, I know China and I know who to talk to and I know what, what to read. So it’s not a disaster if I’d never, if I was starting out there, let’s say I was starting out would be impossible, please.

STEPHEN CLAPHAM: I mean, we should explain that you weekly used to come from? Oh, I don’t know. It seemed like it came from a different city every week.

CHRIS WOOD: Yeah. So I put, I’ve been putting out greed and fear since 1996.

STEPHEN CLAPHAM: And has anybody counted up how many cities it’s come from?

CHRIS WOOD: I should do that.

STEPHEN CLAPHAM: It would be quite, but it did seem like you were in a different city every week. Did you? I mean, did you used to travel every, all the time?

CHRIS WOOD: I mean, not all the time but a lot of the time and often I’d be doing, I’d be combination of either doing, doing research visits or I’ll also be seeing investors. So, if I went to China or India, I would both see fund managers who were clients in those countries. But I’d also do my research meetings and I would, you know, I, I could go and see the central bank. I could see Corporates, any number of people.

STEPHEN CLAPHAM: So, quite good for the air miles but not very good for your health and your mental state. Is it? I mean, it was very stressful doing all that traveling, isn’t it?

CHRIS WOOD: Yeah. No, it would be now, I think. Yeah, I’ve got used to not traveling.

STEPHEN CLAPHAM: So you are you going to change your, are we going to see less, less cities on you’re going to see less cities?

CHRIS WOOD: So but I do need, but China is 111 needs to be able to go to China at some point. So that’s, that is a big India is I know I know India very well, but that’s less important because India is more accessible from a distance because they obviously it’s not closed up.

STEPHEN CLAPHAM: Yeah, but they, I mean, there, there, I mean, Zoom is no substitute for being face to face with people.

CHRIS WOOD: No. Zoom only works if you already know the person. Yeah. So I would say Zoom is fine for existing relationships. Otherwise I would say it’s the most overrated technology on earth.

STEPHEN CLAPHAM: And I would also the of course, the share has already fallen a long way. I’ve been having this argument with them with various people and 11 guy on Twitter. I, I did a, a valuation course, an online valuation course. And I use Zoom as one of the examples.

STEPHEN CLAPHAM: And I, and he, this guy was very bullish in Zoom and he bet this friend of mine $5000 that Zoom would beat my pals, beaten up retail stock trading at E V to sales of 50000.15 or something. And I was laughing and, oh, you know, you’ve obviously got a lot of money, You can afford to give away $5000. But maybe you, maybe you would like to, to, to, you know, have a look at my evaluation work.

STEPHEN CLAPHAM: And he said, no, I don’t really do valuation. Steve. He said, I just look at the company and say, is it going to be bigger in five years time? Zoom at the time with the market capitalization of 100 and $70 billion. And that to me encapsulated the, the sort of the craziness we that, that we saw in the middle of the pandemic.

CHRIS WOOD: I mean, but for a time there became part of the language like Google. So that is worth, I mean, in the short term, that’s worth a lot of money. But the reality is you’re having a conference call with someone, let’s say you don’t really know them. But let’s say you’re going through a presentation.

CHRIS WOOD: Actually, it’s a more efficient way to do the presentation to be on an old fashioned landline. And everybody looking at the presentation than having the distraction of Zoom because you’re looking at charts. It’s, it’s actually in my view it’s a distraction.

CHRIS WOOD: I, I really don’t think it’s efficient. I think it’s much more efficient. I think an old fashioned landline is 10 times more efficient.

STEPHEN CLAPHAM: That’s interesting. I’ve not heard that you before, you’re obviously somebody who does a lot of presentations as many as no, unless there’s a reason I will do it on a telephone.

CHRIS WOOD: So, yeah, because it’s got, I haven’t got the distraction of the technology in the work. I mean, I don’t need to look at, you know, I’m, I’m talking about economics. It’s not, it’s not a fashion parade but you do need to look at the charge.

STEPHEN CLAPHAM: Right. Yeah, that’s interesting. That’s interesting. Well, we’ll maybe come back to Zoom and, and, and travel. Although I should just, I mean, are you still based in Hong Kong?

CHRIS WOOD: Yeah, but that’s, I’ve been a lot of the, yeah, that’s been a real problem because I have, I Asia has been basically closed, so I’ve spent much more time in Europe as a result of this.

CHRIS WOOD: So I was last in Hong Kong in October. Right? Where? But you have to do the quarantine, but I was luckily managed to only do two weeks. But it’s a nightmare, isn’t it? For people who are it? It’s a golden prison.

STEPHEN CLAPHAM: So, I mean, that’s gonna permanently impair the opportunities for Hong Kong, isn’t it? I mean, if the pro decide the CEO decides to relocate to Singapore and not Hong Kong, I mean, well they will.

CHRIS WOOD: But the, but the reality is Hong Kong is a far more efficient place to operate in Singapore historically. Yeah. And the people are, I mean the work ethic in Hong Kong is very, is, is huge. It’s a highly efficient place. So I personally don’t think it’s the end of Hong Kong.

CHRIS WOOD: But many people think that what will happen is many expats will leave but they will be replaced by mainlanders. And so long as Hong Kong has a closed. So as long as China has a closed capital account, which it does, Hong Kong will play a critical role.

STEPHEN CLAPHAM: That’s interesting. Well, what about China? I mean, we’ve talked about the the internet stocks. I mean, interestingly, I quite curious, Charlie Munger buying Alibaba because he seems to have bought the US court in Alibaba which seems seems to me highly risky because still be repatriated.

CHRIS WOOD: Well, well, to me, if you’re gonna buy Alibaba, I would recommend, I mean, Alibaba looks quite relatively cheap now so I can see so I can understand exactly why he’s buying it.

CHRIS WOOD: But personally, I would recommend people to buy Alibaba quoted in Hong Kong.

STEPHEN CLAPHAM: Yeah, that seems like a more thing to do.

CHRIS WOOD: I didn’t get there and there’s a potential positive catalyst for Alibaba because Ali any at any time China could announce that it’s going to allow Alibaba into the Hong Kong stock connect. If that happens, it means that mainland investors will for the first time be able to buy Alibaba through what they call the South bound route. No, that, that will be hugely that is yet to happen.

STEPHEN CLAPHAM: Yes. Well, we’ll, we’ll see. Now, one of the things you wrote was that gold’s underperformance is one of the biggest surprises last year.

CHRIS WOOD: Yeah, because we had such negative rates.

STEPHEN CLAPHAM: So what, why is gold not going up? I asked this question. So a month ago, Dylan Grace was in exactly this seat because we did it in, in person. And I asked him exactly the same question. And once you’ve answered, I’ll tell you what he told me.

CHRIS WOOD: Well, first of all, God had a good move the year before. So you could say it’s partly partly discounted that. But also, but I personally think some of the money went into the crypto stuff that was, was in would have gone into gold because actually Bitcoin is an alternative narrative for gold. And the reality is that millennials are going to buy crypto and not buy gold.

CHRIS WOOD: But, but what’s encouraging right now, what is encouraging though about gold? It never broke the 1717 50 level, which to me would have would have been worrying on a chart. And what’s encouraging right now, we’ve got this, we’ve got all these economists, all these economists who are saying no rate hikes forever last year. And now competing to who, who can, who can forecast the most rate hikes in 2022.

CHRIS WOOD: And what’s encouraging is that gold has barely, gold has actually gone up. So the interesting point right now is, is gold going up because of this Ukraine nonsense or is it going up for some other reason? So it’s going to be very interesting if, and when this Ukraine issue is resolved, it will be interesting to see, does gold correct on that? Because I’m not, if it’s going up just because of Ukraine, that’s less positive.

STEPHEN CLAPHAM: No, no, sure. That’s, something obviously could color people’s opinions. Although I’m not sure that, I mean, you would imagine that if, if the market really thought that there was going to be, a war in Ukraine that the ruble would have collapsed already and it hasn’t.

CHRIS WOOD: No, no. So I’m hoping goals going up for other reasons. It’s just, you’ve got this Ukraine thing.

CHRIS WOOD: But I’m expecting some sort of resolution on this Ukraine dispute quite soon. So that’s why I’d be interesting to see how gold behaves if gold doesn’t correct sharply on when the Ukraine issue is resolved. There’s two investment clues, one very bullish for gold and two people should be buying Russian people who believe my view on Ukraine should be buying Russian equities now.

STEPHEN CLAPHAM: Yeah, it’s one of these things, you know, I can only do it when I really can’t bear to do it. So, you really, and, and I can kind of see the logic of it. But, I, I’m still, I’m still sort of on the fence. I, I, I think I should probably buy some Russia but we don’t want to get into the short term stuff, for too much. But Bitcoin and by the way, Dilan said he had no idea why gold hadn’t gone up. He said it should have gone up.

CHRIS WOOD: But they, they were a chart of, he just chart chart of gold with negative rates should be better. It should be. No. Listen, it’s a big, I completely agree with him, but I can’t see, I’m surely sure some money went from gold to Bitcoin.

STEPHEN CLAPHAM: So you’ve actually allocated part of your portfolio to Bitcoin. I’m really curious about that. I mean, I think I understand why you did it. But what I’m curious about is what’s been the reaction of the professional investors, but you speak to some of the most powerful people, professional investors in the world. When what?

CHRIS WOOD: No, I think some of those guys have bought Bitcoin because you see anybody, if you are a free, if you’re kind of a free market guy who believes in capitalism, it’s, it’s quite clear to people like that, which obviously many of these guys that, that the system’s been kind of corrupted, right?

CHRIS WOOD: The central and the central banks aren’t basic so corrupt is too strong a word. But you’ve got these sort of M M T like policies. So therefore Bitcoin, if you believe the Bitcoin formula, the halving, if you believe that has real integrity, then you should be interested in Bitcoin because actually it’s got a more supply constrained dynamic then then go.

CHRIS WOOD: And what I, I taught how to take Bitcoin seriously when somebody I knew, taught me, he, he asked his maths his maths professor University to go through the Bitcoin formula to see if it had real integrity. And the guy concluded it did unless somebody control more than 50% of the Bitcoin. So then this maths professor went out and bought the Bitcoin.

CHRIS WOOD: That was several years ago. So I think so. I think it really does have that store of value aspect. That’s 1.2. It looks like it’s going to be regulatory, allowed to exist. I mean, it’s very hard for the governments to kill it anyway, but it, it makes it a lot more easier if it’s not being regulated out of existence.

CHRIS WOOD: And three, the reason I put it in my originally put it in my portfolio because I did that only when it became possible for institutions to buy Bitcoin because clearing arrangements, custody arrangements were set up before that it was impossible for an institution to buy Bitcoin and you had that hacking risk.

CHRIS WOOD: And the fourth reason is the demographic one that it may be the case that millennials will just never buy gold.

STEPHEN CLAPHAM: No, that’s absolutely true. Henry, the sound engineer.

CHRIS WOOD: Yeah. Yeah. Yeah. But they, well, they may buy gold, but for a period, they’re not going to buy gold and they’re probably not going to buy gold mining stocks because a lot of MLL have, you know, these more green orientated views about mining companies, of course, as you know, so the, but when you put that in that allocation, did you get lots of inbound calls from people saying, you know, what are you doing? How do we know?

STEPHEN CLAPHAM: No, no, everybody was, everybody was on side with it.

CHRIS WOOD: Well, not no story but, but it, it went up a lot very quickly afterwards. So that, that was you though.

CHRIS WOOD: But the no, because I just reduced a very big gold allocation also on Bitcoin. Now I sold all the gold and put it all in Bitcoin, but I wouldn’t do that. But they, because obviously goals got the test of history.

STEPHEN CLAPHAM: But have your clients, I said to you, I’ve bought some Bitcoin and I’m feeling really comfortable. I mean, is it part of the debate you’re having with them or right now?

CHRIS WOOD: But right now with this monetary tightening going on, you know, anybody owning crypto assets out there, they should understand that all the crypto assets are got downside risk while these guys are claiming to be tightening monetary policy.

CHRIS WOOD: And are they for real, tighten monetary policy, for real, you know, then you know, the all the all this stuff is vulnerable, just like just like high, you know, high biotech stocks are vulnerable and high p digital, digital futuristic plays are vulnerable while they may be very good long term stories.

CHRIS WOOD: All these guys, all this stuff is vulnerable but Bitcoin is less vulnerable than the protocols. So if I’m going to own anything through this Fed tightening cycle, I’m going to own Bitcoin. I mean, thee and all this other stuff is equivalent to high, high P text stocks.

STEPHEN CLAPHAM: Why is Ethereum worse than Bitcoin?

CHRIS WOOD: Because it’s not a store of value. It’s a protocol based on usage. So Ethereum has got the bulk of all the D five business. So that’s so I, you know, that makes my total sense. The, the, but the risk is you can’t be sure who’s going to end up the dominant right now.

CHRIS WOOD: Ethereum is dominant in D I, but we can’t be sure it’s going to win the race and Ethereum is going to make this transition from what you call it, proof of to the state. So now they meant to have done that transition, I think already keeps getting delayed.

CHRIS WOOD: So to me, that transition goes successfully, that’s very good for a the, but I wouldn’t, nobody should own this crypto stuff or leverage if the Fed is tightening. No, of course, because if I, if I showed you a chart of us M two and the crypto Asset class, which I haven’t done, but my guess is, is quite correlated.

STEPHEN CLAPHAM: Yeah, I’m sure, I’m sure it would be. I saw, the, the Ethereum inventor speak at a conference and talking about the fork and he’s highly impressive again. He, he was in some hotel room and he looked like he was doing something else at the same time, he was doing this presentation to this massive conference. So he was doing it, you know, on a teleconference and, we’re doing his yoga.

STEPHEN CLAPHAM: Well, somebody said, I, I, there was a crypto conference in London and, I went along to have lunch with one of the guys who was involved with it who, who I had known from real vision. And it’s very funny because this, this guy had me on real vision several times and he said, oh, I’m coming to London, so we should meet because we’d only met on Zoom, which is one of these things.

STEPHEN CLAPHAM: So I, I along to the hotel and, of course, he’s six ft five and I’d only ever seen him on Zoom and I, it was quite a shock when I met him in, in person. But they all these, this, this crypto conference, I mean, it was mobbed unbelievable and, you know, money was no object, the, the, the service providers. I mean, what I would like to find in crypto is the, the, the equivalent of the shovels.

CHRIS WOOD: But the, the, the, that would, that would be surely things like coin base. Right.

STEPHEN CLAPHAM: Yeah, I, I, I’m not sure.

CHRIS WOOD: I’m not sure that somebody’s the trouble.

STEPHEN CLAPHAM: I’ve got a, I’ve got a 70 page note on coin base in my reading pile.

CHRIS WOOD: Which, when was this conference?

STEPHEN CLAPHAM: It was, 23 months ago. It was late, late 21. Very, very, very, very popular, very, very oversubscribed conference.

CHRIS WOOD: You see, Paul made his admission on inflation not being transitory on November 30th.

CHRIS WOOD: All right. I’m not sure.

STEPHEN CLAPHAM: So yeah, so probably, yeah, coincided with that could have done the M M T light, you said, I mean, M M T. Is it madness? I mean, are you?

CHRIS WOOD: No, I don’t agree with M M T but the reality is there’s a, there’s a lot of, there’s a powerful political lobby that does believe in it or, or, or at least believes in a sort of M N C light. But what it means in reality, just what it means in practical reality, political reality is that the central bank just becomes an instrument of the treasury or of whatever the financing arm of the government.

CHRIS WOOD: And so central bankers will be rendered as just puppets, puppets, which isn’t good. Right. Well, frankly, they’ve been puppets for already. They’re just not, they’re just not being the puppets to, they haven’t been independent for many years.

CHRIS WOOD: No, I suppose that, but actually they believe, but I think they believe what they were saying, but the difference about M M T is you now have people explicitly advocating it and, but their, but their line was that M M T, wouldn’t be inflationary, but actually given the current inflation surge, they’re on the back foot.

STEPHEN CLAPHAM: And do you think that they will lose credibility as a result? Because that, it seems to me that, well, that’s possible.

CHRIS WOOD: That’s possible.

STEPHEN CLAPHAM: Yeah, it seems, you know, people like Stephanie Kelvin just haven’t been challenged and, you know, it seems like a lot of nonsense being spouted and, yeah, but the very fact that, the Fed is now talking orthodox means that, yeah, they, they turn their back on this M N stuff.

CHRIS WOOD: But the trouble is when their pip starts squeaking and, when they start raising rates, the all important question is, does the Fed do another U turn? So cynic like me will be assuming they’re going to do a u-turn, but right now they’re, they’re, they’re talking not only about rate hikes but, but contracting the balance sheet, the market will not want to do.

CHRIS WOOD: The market will be spooked by quantitative tightening. And what freaked the markets out at the start of this year with the Fed minutes at the beginning of January revealed to the surprise of the market and also frankly to the surprise of me and most fund managers that the Fed was contemplating bringing, you know, quantitative tightening forward in time that was not expected.

CHRIS WOOD: So, so for now, if they continue like this, then we should expect credit spreads to rise, which is already happening, started to happen. And the and I think the US economy will be quite resilient for for the moment in the face of higher rates because people have received a lot of money in transfer payments and wages are rising.

CHRIS WOOD: The question is what kind of, what kind of problems out of the financial world are gonna come appear when rates start rising and they start reducing the balance sheet because there’s all this hidden leverage, there’s all this hidden, there’s all this hidden leverage and you won’t see it unless, but once they start tightening, this will start to come out and that’s what could short circuit the whole process, any clues as to where we should be looking for that hidden leverage and it’s all this probably in all this private private world.

CHRIS WOOD: So it’s not in the stock market, in the private, private equity, all this stuff that people have been pouring money into and which is completely non transparent and is not marked to market it daily.

CHRIS WOOD: So if you’re in the world of private equity, as opposed to a fund manager dealing or a hedge fund guy dealing in listed securities, you’ve got a huge advantage because your portfolio is not marked to market every day. So yeah, that’s so I think that’s the real issue what emerges out of the, financial world if these guys really start tightening.

STEPHEN CLAPHAM: But the, I mean, when they get to 3% for, I mean, where do you think they’re going to stop?

CHRIS WOOD: Where, where do you think they’re going to go? I think the pit, I think things are gonna start moving long before that. Oh, really? Yeah. But if, but let’s say I’m wrong, let’s say that, let’s say that, you know, they’re really, they’re really serious and they realize they’ve messed up and inflation is coming back and they really want to do something about it.

CHRIS WOOD: So let’s just be charitable, right? So then I think I would define meaningful monetary tightening is raising rates to 3% and contracting the balance sheet back to where it was pre pandemic, which would be going, I’m talking Fed balance sheet, which would be basically going from nine trillion to six trillion.

CHRIS WOOD: I mean, that’s still a big balance sheet, but we have to be fair. That would be meaningful monetary tightening. Now let’s be conservative and say because the base effect on inflation should start getting better from the March data which will be announced in April.

CHRIS WOOD: So if you wanted to be optimistic, you could say maybe inflation is as low as 3% by year, end year on year. But if they raise rates six times, let’s say, which is 100 and 50 basis points.

CHRIS WOOD: So on the current market expectations, they’re going to raise rates to 1.5% and inflation is gonna, you know, Federal funds rate 1.5%. But with inflation, 3% year on year, you know, that’s, there’s still negative rates but it, but I would say the balance sheet issue is as important as the rate hikes.

STEPHEN CLAPHAM: But in your scenario, stock markets will be good again.

CHRIS WOOD: Yeah, but I’m not going to, you have to wait for what they say because I, I might, I might be wrong because actually I wasn’t expecting the Fed to be. There’s no way I was expecting the Fed to move balance sheets, contraction of the agenda. So it tells me there are some Fed governors who actually do really want to try and clean things up.

CHRIS WOOD: But all I’m saying is they’re gonna get a lot of political pushback for now. The politicians want them to be seen to be doing something, but that’s not gonna last. So right now what you want to own is, you know, the key thing you want to own, right? And you should already own it, but you have to own cyclical stocks, but you’re gonna own one thing. You have to own energy stocks. Yeah.

STEPHEN CLAPHAM: Well, you’re very bullish about oil.

CHRIS WOOD: Yeah, because oil and it’s because it’s the perverse consequence. The reason oil is going to explode in price further already has gone up a lot is the perverse consequence of the political attack on fossil fuels which has been obviously obviously explode been mounting in recent years.

CHRIS WOOD: And the reason that’s had the perverse consequence of causing people producing oil not to invest in oil because all the political signals have been not to invest in oil. And the problem is as of 2020 which is the last year, we have data for 83% of world energy consumption was for fossil fuels. See this extraordinary situation where people are, where people are trying to accelerate this transition.

STEPHEN CLAPHAM: When we’re not ready for the transition, I listened to an interesting podcast with a guy called Luke Groman who publishes something called Forest For the Trees. And he’s a really smart guy.

STEPHEN CLAPHAM: He’s a bit of a conspiracy theorist sometimes, you know, but he was saying, why is it that, you know, Mercedes are talking about having 30 electric cars by 2026 Audi going fully electric G M having a huge rain. He says, when you think about the difficulty of transitioning from a combustion engine to an E V, it’s completely different supply chain. This, this is like a mammoth undertaking.

CHRIS WOOD: No, no, it’s all been, it’s all been forced on them by political incentives by a combination of sticks and carrots.

CHRIS WOOD: So so, but yeah, I completely agree. It’s a highly risky strategy, hugely important industry for Germany, huge component supply industry in Germany. I think it’s, I think it’s insane and the I’m not saying the E V s are insane.

CHRIS WOOD: I’m saying the company should be left to decide if they want to do that themselves. But to create all these sticks and carrots and you, you can’t be sure that a company a trans, what’s the word? A legacy automaker has the skill set to build an E V.

STEPHEN CLAPHAM: Well, they think they do actually.

CHRIS WOOD: Yeah, but yeah, but you can’t be sure of what you can be sure of is that Tesla, you know, Tesla is has been only focused on the E V. So Tess has got a better chance of success than these other guys. It’s just common sense because they’re prepared because Tesla so far as I understand it is integrating hardware and software in a much more natural way, right?

CHRIS WOOD: Because it’s starting from a ground zero. Also, Tesla has this massive advantage. But again, I’m not a, I’m not an expert. I did used to cover the auto sector many years ago. But my understanding is Tesla doesn’t, isn’t gonna use any dealer network and that’s, that’s revolutionary in the auto sector. All auto companies have dealer networks.

CHRIS WOOD: Yes. So I think what’s going to happen is every legacy automaker in the next two years is going to come up with an extraordinary number of electric vehicle products. And the risk is they all come up with too many. The customer’s confused. Tesla’s just gonna stand out. So the issue for Tesla is can it come up with a successful volume product.

CHRIS WOOD: It’s obviously it’s already come up with this obviously successful high end products.

CHRIS WOOD: And me, I mean, the model three is not that, yeah, so I’ve never met anybody who didn’t like the Tesla. So I have to say that’s so that if that, if that’s the, if that continues to be the case, then actually the customers or the brand ambassadors for Tesla. Right.

STEPHEN CLAPHAM: Well, there are people, my, my neighbor is Tesla decided to go for a walk on his own and interesting, he, he got out the car, there was a, there was a traffic jam, he got out of the car to look and the car started going and it was like running back to get in the car.

CHRIS WOOD: Very, very. But I think, I think it’s a real, I completely agree, it’s a massive undertaking for the auto sector.

STEPHEN CLAPHAM: No, I, I mean, I think, you know, this whole E S G movement has been, well, be interesting. What, what do you think about it? I mean, my, my simple view is that, you know, every fund that can put an E S G label anywhere in their product is looking to that the big oil companies are disadvantaged because they’re trying to make a transition into something they don’t know anything about.

CHRIS WOOD: So in the, no, no, no, that’s the same thing with the oil companies. I mean, does an oil major have core competence, renewables? No. In which case? Yeah. So, but on the E S G stuff, look, if you are smart and you started an E S G product 10 years ago, that was a really smart commercial decision and you’ll be able to charge higher fees. You attract a lot of assets right now.

CHRIS WOOD: An E S G thing is no, is everybody’s E S G almost every funds est, so there’s no added value doing E S G. Now my guess is that E S G is a movement peaked fourth quarter last year. Yeah. Oil stocks, I think it’s probably peaked. Oil stocks fourth were the best performing sector in the S and P last year. So far this year when I last year, oil stocks are the best performing sector.

CHRIS WOOD: So this is interesting because basically what’s been working this year in most cases is what didn’t work last year stock wise, but oil stocks so like renewable stocks work really well last year they’re not working this year. But oil stocks are the one thing work last year and also working this year.

CHRIS WOOD: So I think what’s going to happen is the more oil goes up, the more the energy sector is performing, the E S G funds are going to redefine themselves to allow themselves to buy oil stocks. So I’m also, so I’ve actually, it’s quite difficult to do that, but it’s gonna happen. I’ve already seen evidence of it.

CHRIS WOOD: So they, so they’re gonna be, there’s gonna, and you know, it’s not a, it’s not such a crazy point. So they’re saying, rather than only buying green companies, we’re going to be able to buy greening companies. I best in class companies trying to do the right thing. So, so, but actually that’s, that’s actually sensible.

CHRIS WOOD: But the, but the other point with the other very important development recently is the Eu’s decision to declare nuclear and I think gas green green energy. Yeah, because everybody I know who knows anything about energy has always told me if you really are obsessed, you know, this carbon thing, I’ve got a view on.

CHRIS WOOD: But if you’re obsessed to have a carbon free world, if you really want to do have a carbon free world, then you really have to go nuclear. So actually, I think it’s highly significant that the Eu has declared nuclear green energy, which clearly reflects the French influence and nullify the German policy which was embarked upon by madame Merkel, Frau Merkel. When, when was Fukushima after Fukushima 2012.

CHRIS WOOD: So I personally think more common sense is going to prevail because otherwise, if they continue with this very extreme green approach, you’re going to have a massive inflationary surge in energy costs, which will be socially, very divisive because these higher energy prices hit poorer people the most.

STEPHEN CLAPHAM: But that, I mean, you can’t get away with without that because I mean, the the investment hasn’t taken place.

CHRIS WOOD: So there, so there’s gonna be big pushback politically from people making the obvious point that these policies, you put stuffing down people’s throats are socially highly regressive because they hit poorer people first or what’s more likely to happen is the governments will continue with the policies but they will do big subsidies to to subsidize the costs of imposing this on people because they are being imposed.

CHRIS WOOD: So if you’ve got a diesel car in the UK, I am my understanding you have costs imposed on you, right? Don’t you have to pay a higher parking?

STEPHEN CLAPHAM: Well, I, I mean, I never understood the argument for, for diesel.

CHRIS WOOD: I mean, I don’t, don’t seem to be less polluting and no, but when I came up the auto sector many years ago, diesel was, was sold as cleaner than petrol. Yes, I, I never, no, but yeah, but people, a lot of people bought cars on that assumption because I mean, I suppose if the fuel consumption is, is better, so it was, it was sold as cleaner.

CHRIS WOOD: I, no, I, I, I, that, that never, I, I never really, I never, but yeah, but, but, but they, yeah, but they will, they will trigger a big social political reaction if you, if you force people. So I think the governments will continue in this line. I just think they’ll subsidize people, which means big fiscal deficits which, which will then be indirectly financed by the central banks.

STEPHEN CLAPHAM: Yeah, that, that was my next question. So where is the money going to come?

CHRIS WOOD: It’s going to be printed. But for the moment they’re, they’re pretending that they’re serious, but that’s double doubly inflationary, right?

STEPHEN CLAPHAM: You got higher energy costs and you need higher taxes to pay for that. Right? So, I mean, this is a nightmare.

CHRIS WOOD: They’re gonna end up financing it all. So this is financial, it’s going to be a miserable world one day, whether you need to go to places where they, they believe in orthodox policies. So don’t do this stuff.

CHRIS WOOD: So, so in Asia, when you had COVID, the big difference between the policy response in the G7 world in Asia because this inflationary problem is not in Asia by the way. And the reason it’s not is because demand has not been artificially stimulated.

CHRIS WOOD: So in the US UK Europe, basically, a lot of people are paid a lot of money to do nothing if I had to put it crudely on in, in the in the, in the, in the pandemic right now, I can tell you in China and India, the government didn’t pay people money to do nothing.

CHRIS WOOD: And that’s why you haven’t got the same. They, they did, they, they, they, they had all kinds of support policies, but they didn’t just do crude transfer payments in India. Actually, they handed out food, literally no food trucks. So that’s why we haven’t had such a big surge in money supply growth in these countries. And that’s why the inflationary pressures are not so great. China actually tightened policy most of last year.

CHRIS WOOD: But obviously the China China’s focus was on actually trying to control the pandemic with these very aggressive lockdowns but not on paying people.

CHRIS WOOD: Yeah, so it’s a very different approach and they’ve had much more control over the pandemic in, in Asia, they’ve had much more control. And so up till now, it’s been very successful. Chinese polls show that the Chinese government is trusted by the population.

CHRIS WOOD: I mean, that’s just, you know, people don’t want to hear that in the West, but that’s the reality. But I would say the President Xi has now got a really difficult decision to make because he’s invested his political capital has increased dramatically domestically by the perception that he China has controlled the COVID better.

CHRIS WOOD: There’s far fewer people dead than in the West. So that, but his problem is right now that we’ve got this Omnicom variant and everything we’ve learned about Omni in the last two months in the West makes you question whether the Chinese policy is practical with the in terms of suppressing local outbreaks because it’s so highly infectious spread so easily.

CHRIS WOOD: And a lot of people don’t have any symptoms and it’s not very dangerous and it’s not very dangerous.

CHRIS WOOD: So he’s got a real decision to make, which I think, you know, the decision time is coming because with the end of the, the Olympics, because if he sticks, if he politically, he’ll want to stick to the policy because he’s getting reappointed at the end of the year and he’ll be worried if he relaxes, the number of deaths will surge.

CHRIS WOOD: On the other hand, the risk he’s running if he sticks with this policy is that he’s going to go from being popular to unpopular because it’s going to have real material economic impact. And the Chinese people may decide that it’s not dangerous, it’s not worth it doesn’t warrant it.

CHRIS WOOD: So a very interesting development last week as the Chinese ordered the bought the Pfizer drug COVID pill and this is the first foreign, foreign vaccine or medication rate of COVID they’re bought. So that to me is a signal that they could be thinking about a relaxation.

CHRIS WOOD: And but I mean, this is, this could go either way this is, but if they decide to relax on COVID, that will be very important, that will be very positive for Chinese stocks.

STEPHEN CLAPHAM: And I mean, you you’re not worried about the sort of fallout from ever grand and the property.

CHRIS WOOD: No, no, because that’s all induced by the Chinese government. So that’s the opposite. The people call that a China Lehman moment is absolutely, it’s actually the, it’s the inverse of the China lemur moment because Lehman was a spontaneous market driven collapse which you know, surprised, you know, the the regulators weren’t prepared for. It was a genuine shock to the system which is why it created such impact.

CHRIS WOOD: Whereas the ever grand crisis, the clock started ticking when the Chinese government, I think it was the summer of 2021 announced a policy. They call the three red lines policy where they said very, very transparent way. All property developers have to meet three financial leverage ratios by a certain period in time. And if they don’t meet those criteria, we’re going to tell the banks to stop funding them.

CHRIS WOOD: So it couldn’t have been clearer. So they induced the crisis. So it’s just like you’d induce a baby. And what’s gonna happen? What is happening actually is the big S O E developers get a benefit from the consolidation and we’ll take over the projects. But ever grand and other companies like they can’t complete ever grand has been too leverage. It’s been obvious for two leverage.

STEPHEN CLAPHAM: But if you’re a Chinese household thinking of buying that second or third property, your confidence will be entered a little bit a bit.

CHRIS WOOD: Yeah, but I thought I’m not sure so extreme, but you might want to buy a property from. You might be more come to buying a property built by China Resources Land, which is a big S O E developer who stopped, by the way is trading when I last checked at one year highs than buying it from a private sector developer. The problem is all these hedge funds in Hong Kong and the bonds of the private sector developers.

CHRIS WOOD: So there’s a financial but it’s not in the Chinese government’s interest to destroy the property market. But oh of course not. But I mean, but it’s so pivotal to the whole story and what they, what they will be determined to ensure that all projects where companies like are taken presales, you know, taking money from people that those projects are completed.

STEPHEN CLAPHAM: But we need to do that because otherwise, otherwise the companies really would have happened.

CHRIS WOOD: And so that is the number one priority. But I’m assuming I, you know, I might be assuming too much, but I’m assuming they’re prepared to deal with this because they induce the problem.

STEPHEN CLAPHAM: Yeah. Well, you would imagine they’ve got a plan, they’re not the UK government.

CHRIS WOOD: No, but the track record you see of the Chinese government means you should give them the benefit of the doubt to sort these things out because that’s what they do because they think about it ahead of time. Whereas as you rightly say, you wouldn’t have that confidence.

STEPHEN CLAPHAM: No, not here. It’s been fantastic talking to you. I always ask people one last closing question, I only do this because when I listen to podcasts, that’s what they seem to do.

STEPHEN CLAPHAM: So this marks the end and what I generally ask you was if you were, if you had a nephew or a niece thinking of becoming a strategist or an economist. I still don’t know what the difference is between them. But what is there a book that you would recommend? What would you, what would you recommend to them to, to read?

CHRIS WOOD: Now, there’s no one book on the markets I would recommend. But on the sort of more broader political economy, I’ve always told people to read the, road to surf them, which I read when I was about 17 with Buy Hayek.

CHRIS WOOD: Hayek was the was, you know, Hayek was the economist who wrote that the rate of certain the sort of best polemic against socialism of the written that was written in the 19 thirties, I believe at the same time as you know, Kings was writing his book.

STEPHEN CLAPHAM: Brilliant. That’s a fantastic recommendation. Chris, thank you so much. It was great having you. I really appreciate your, your time. Thank you. Thank you. After listening to that, I’m sure you understand why Chris Wood is more number one analyst awards than almost anyone I can think of. What is unique about his approach is that he has an incredible in depth understanding of economics, of business and of politics.

STEPHEN CLAPHAM: But he also has that market savvy touch that very few economic commentators can boast. There aren’t many economists who are also Charter and I think it’s that pragmatism which makes Wood so successful and indeed so interesting. I’m trying to bring you a really different investment podcast. I hope you’re enjoying this macro series.

STEPHEN CLAPHAM: Please feel free to email me at info at behind the balance sheet dot com. Tell me your views and please don’t forget to leave a review or even just a rating on Apple podcasts and make sure you sign up for my newsletter at behind the balance sheet dot com. And if you subscribe to the podcast, you will want to listen to next month’s episode, which features two amazing investment talents. I can’t wait.