Gervais Williams, Fund Manager and Head of Equities, at Premier Miton Investors plc (LON:PMI), discusses with Darren Turgel, MD and founder of DirectorsTalk, whether capitalism is off course, the impact of globalisation and how we get it back on track.
Do you think capitalism is off course?
I approach the subject of capitalism with humility. I’m not an economist, I’m a practitioner. As a fund manager, I’ve applied capitalism over the last 35 years. However, its disciplines have been absent for the last thirty years. In truth, we’ve been living in a dishonest paradise for decades without the usual constraints of capitalism.
At its core, capitalism is a system by which decisions on a country’s trade and industry are shared between private owners motivated by profit, and the regulator determined by the state politicians. With capitalism, when demand rises, extra suppliers enter the market. When demand falls away, the most wasteful suppliers either become insolvent, or find a way to compete more productively.
Capitalism is all about cycles and the survival of the fittest. Darwinian pressures and market disciplines drive out excesses and waste.
So why has Capitalism not been working well for the last 30 years?
In my view, it all boils down to globalisation – the opening up of cross border trade to boost productivity. For the UK this has meant a surge of deflating imports, vast volumes of low cost clothing, a much broader range of foods from around the world, increasingly clever electronics – all at deflating prices, and meanwhile local costs, such as housing, have risen. The net effect is that inflation has appeared benign. Effectively, the Consumer Price Index as a curb on excess has been supressed for 30 years.
The nightmare of globalisation is that it’s been all summer, and no winter. Whenever the UK economy wobbled, the Bank of England have cut interest rates – at will. UK interest rates fell from 12% three decades ago – to just one half of a per cent with the Global Financial Crisis in 2008.
So, what do you do with an economic wobble when interest rates are already 0.5%?
The answer is simple. Just inject loads of artificial stimulus into the system via quantitative easing. And that’s what’s happened again and again since 2008. The near-permanent surge of low-cost imports coupled with artificial stimulus has driven a supernormal supply of credit.
Thirty years ago, many eminent economists advocated globalisation. They said globalisation would drag billions of people out of poverty across the world. And they were half right – from Asia to Eastern Europe, globalisation has indeed brought millions out of poverty. There have been losers along the way of course – in the UK, ask our former textile workers, or our shoemakers and miners if you want more detail.
But look again, the absence of the capitalist cycle has come with terrible side effects. We’ve all been advanced ever more credit and globalisation has made us into super consumers. At every economic wobble, extra credit has been injected to keep yet more consumption going.
We’ve been overconsuming for decades. Look around us at what we have become. A society of obscene excess:
Without the cycles of capitalism, our politicians have lost sight of the fundamentals. Our excesses are trashing our habitat – global forests are being cut down to keep up with the demand for meat.
Meanwhile since the global financial crisis, as the supply of credit has surged, bond prices have skyrocketed to ultra-high valuations. All other assets have followed suit: houses, stock markets, modern artworks and even football players. Fashionable megacaps, like Tesla, have reached stratospheric share prices, and lost touch with the real world.
It reminds me of the two traders who were shipwrecked on a desert island. They had no money but over the next three years, they made millions selling their hats to each other!
The surge of low-cost imports, coupled with artificial stimulus, has distorted market prices. And distorted market prices without an economic cycle over decades changes behaviour. The affluent don’t just buy a house to live in, they start buying more of them because they’re always going up.
The more credit is created, the more asset prices rise ever further. More participants join the race…it sucks people in, even when asset prices are already ludicrous. It becomes a one-way trade, so participants start to fund investments with yet more debt.
Of course, this isn’t the first time it has happened.
‘Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble, on a whirlpool of speculation.’
John Maynard Keynes – 1936
With stock markets rising and rising, speculators have zeroed in on the fastest rising assets – almost irrespective of what they are.
Like all asset bubbles, it leads to a gross misallocation of assets. In 1636 the fashion was tulip bulbs. Today it’s the FAANGs (the American technology companies: Facebook, Amazon, Apple, Netflix, and Alphabet – formerly known as Google).
Rising debt over decades comes with adverse consequences. It makes those with assets ever richer, whilst those without become more enslaved to the rising tide of debt. Asset bubbles don’t just boost overconsumption, or the misallocation of capital, but they’re also highly divisive as well.
So, globalisation may have ‘worked’ in theory – but in practice we find the suspension of the economic cycle has led to:
- a world increasingly dominated by super-scaled modern monopolies;
- binary polarisation between the rich and poor; and
- obscene levels of wastefulness…..in a finite world.
Without the capitalist economic cycle, we have lost sight of our absolutes. We’ve forgotten we’re limited to one world.
Seen from this perspective, it seems that things urgently need to change?
We desperately need change – everyone agrees. Indeed, the political and economic agenda is already in flux. Collectively our political climate is already radically changing: those advocating the status quo / more globalisation are being voted out, whilst those advocating different policies are voted in.
It can be confusing. The red wall, up north, didn’t vote Conservative because they had suddenly fallen in love with Etonian prime ministers. No, they voted for policies that contrasted with the decades of globalisation.
When the changing political and economic agenda is overlaid with COVID-19, we can all see the scale of this popular momentum for change.
As I mentioned at the start, I approach this subject with humility. I am not a renowned economist, I am a practitioner, and over the years I have learnt that being too certain about predicting the future is a mistake. It’s a bit like globalisation, I fear the overlooked and unknown implications.
John Kenneth Galbraith, the famous economist born over 100 years ago, knew this. “There are only two types of forecaster”, he said, “those who don’t know and those who don’t know they don’t know.”
Experimenting with novel political theories might seem a good way forward, but they come with unknown and potentially terrible downsides. So, I take comfort in the restoration of the normal economic cycle, that like nature drives out the excesses.It not only drives out waste, but also improves our productiveness. And improved business productivity, funds improvements in our health service, in our schools and outcomes for the vulnerable – the unemployed, the disabled and the aged.
How is the UK stock market a force for good?
To many the FTSE Index looks just like all the others – full of gigantic corporations that dominate our headlines. But in contrast to the others, our UK stock market has held onto its ties with smallness. We still have more quoted companies listed in London below than 1/2000th the size of Tesla than above that magnitude.
The UK has always had the vibrancy and diversity of smallness, and this part of the economy has a heritage of delivering:
- additional skilled employment,
- greater productivity improvement,
- and additional tax take through the economic cycle.
As it happens, we in the UK are better positioned than most others for this reason.
How would you sum up what changes are needed to get Capitalism back on track?
I believe it’s more important than ever to:
- relish the changing political and economic agenda, that is now challenging a world of distorted asset prices and divisiveness;
- pull back from our participation in the hamster wheel of debt, which is funding our staggeringly wasteful excesses in consumption; and
- recognise the absolute limits of our planet’s resources, and to live within its constraints.
In short, we need to welcome back the constraints of the usual capitalist cycle.
