Gerald: 0:00

Hello and welcome to another edition of Equital Conversations. My name is Gerald Ashley, and as ever I'm joined by my good friend and colleague George Cooper. George, welcome to the first podcast of the New Year.

George: 0:14

Thank you, Gerald. Looking forward to it.

Speaker 1: 0:16

Now, New Year is always a sort of strange time, although we're bashing through January as I speak, in that people feel everything has to be reset and re-evaluated, and uh, you know, we we start afresh and look at everything afresh. Um, I'm going to suggest that what's going on in financial markets at the moment is a continuation of a trend that really started to unfold last year, um, which is the this whole business of the debasement trade that was uh promulgated, I think, originally by JP Morgan. Um, in brief terms that Fiat money is in a bad shape, and that we're seeing tremendous moves in prices in bullion, both in gold and the speculators' favourite silver. Now, you and I, with a good friend of ours, Doug McWilliams, uh, went to dinner a couple of weeks ago at the Savoy Grill. Um I can assure listeners it was a deeply serious research project and is linked to the price of gold. So maybe a good way to to look at this whole business of what's going on with de debasement of assets in in fiat money is to start with what I think we would now call the Savoy Gold Dinner ratio. Perhaps you can explain.

George: 1:40

Um yes, well, I mean, uh you you get the credit for sparking this whole uh the this whole adventure off, Gerald. So um basically, just for the listeners, I I'll explain what happened. So uh Gerald and I were in a meeting a few months back, and uh the conversation turned as it frequently does uh to the price of gold. And it was then that Gerald recounted this story that I'd never heard of, but it was a story of a former star fund manager, a gentleman called Julian Bering, who in the I think it was the uh the 70s, eighties and nineties, uh he used to manage funds of gold mining stocks. And every now and again uh he would present a quirky way of looking at how the price of gold was changing in terms of its purchasing power. And the way he did it was through what he called his Savoy Gold ratio or his Savoy Dinners ratio. So he would go for dinner at the Savoy, have a slap-up meal, record the price of it, and then uh in his research notes, tell his readers how much the dinner had cost in terms of uh the prevailing price of a gold sovereign.

Speaker 1: 2:56

Hard work then, obviously.

George: 2:58

It was clear clearly he was suffering for his craft. Um so when when Gerald recounted this story, I thought immediately, okay, we it's time for for Gerald and I to take up the mantle and to make this open-ended commitment to fine dining. So we decided that we would um we would resurrect um Julian Bering's Savoy Gold ratio and uh and go to the Savoy, have dinner, and report back on what that cost in terms of gold.

Speaker 1: 3:32

And it turns it turns out to be quite a fascinating tale, really, doesn't it?

George: 3:37

Well it it is. So uh and I I I'll give you the figures in a moment, but so we we did that on uh January 7th. Um but obviously we wanted to to be able to get some sort of benchmark to compare where the prices are now against where they were historically. Um unfortunately we managed to find a complete copy of the Savoy Grill menu from August 19th, 1971, with all of the prices there. A very critical period, of course. Uh yeah, very, very critical. That w that was a great menu to find because that was just four days after President Nixon's uh Nixon shock, which is when he took the world off the gold standard. So what we could do with that menu was work out the equivalent cost of dinner at the Savoy just as the world was coming off the gold standard. Right. And compare that with today's cost and see how those prices and purchasing powers have changed over the last fifty-four years, which is the you know what I would call the the fiat monetary regime.

Speaker 1: 4:51

So we um came up with a fixing, and what was the result of the the 7th of January dinner?

George: 4:59

So the the fixing, the first dinner I can tell you, so Julian Bering picked the Savoy Grill because it was eye-wateringly expensive and considered to be a sort of very premium place to have have dinner. And I can tell you that today it is still eye-wateringly expensive. Um so the dinner came to £236.32 a head. A head. A head, yes. That that is that is including the tip. Um, and that is, I should say, that is choosing from pretty close to the bottom of a ferociously expensive wine list. So we were we were very conservative. Now some some interesting stats about that. So that £236 price, uh, that compares to uh the price of gold, which on the day was trading at $4,460, which works out at 300 uh 3,303 pounds per ounce. So we look at the ratio of those two costs, and that gives us on January the 7th this year a gold ratio of 14 dinners per ounce. So one ounce of gold will buy you 14 dinners at the Savoy Grill today.

Speaker 1: 6:17

So so if you're the lucky owner of an ounce of gold, um that sounds like a really good deal. I mean, you that's taking all you know close friends and family out, um, all on an ounce of gold.

George: 6:29

Well, uh I have to say it was more it was more than I thought. But then it gets really interesting when we we work out what the cost of dinner was back in 1971. And from the menu, we we went through it carefully and we picked as similar items as we could uh from the menu, and that came to five pounds sixty seven a head.

Speaker 1: 6:53

Good lord, that was when a pound was a pound.

George: 6:56

Yes, that was when a pound was a pound. £5.67 a head. Now back then, as I said, we'd just come off the gold standard, so gold was trading at about 40 dollars an ounce then, because it leapt up immediately after Nixon came off the standard. Uh and back then the sterling uh dollar, the cable rate, was pegged at 2.4, so it's the the pound was worth much more. So that gives us a value of 16.66 pounds per ounce of gold. Right. And when we work that out, that means that in 1971, an ounce of of gold only bought you three dinners at the Savoy.

Speaker 1: 7:38

Now that is a hell of a range, and it sort of prompts a couple of comments straight away that if I um well I do live in a world where I use sterling all day long, the Savoy is frighteningly expensive and was pretty expensive in 1971. But if I lived in a sort of parallel universe or um was sufficiently wealthy enough to to have gold sovereigns to hand, it's unbelievably cheap. So there's almost an inflation and a deflation element to this story.

George: 8:14

Yeah, in in in terms of gold, um that particular cost has got cheaper. But we can we can go a bit further, because the um the ONS, the Office of National Statistics, helpfully publish average weekly salaries in 1971 and average weekly salaries today. Right. So if if I just find those figures, so basically um the ONS says that in 1971 the average weekly wage in England was 20 pounds.

Speaker 1: 8:45

A thousand a year, basically. Around a thousand a year.

George: 8:49

Um there there are thereabouts, yes. So weekly 20 pounds, and today it's 736 pounds. Now that means that in 1971, dinner at the Savoy Grill cost 1.4 days of wages.

Speaker 1: 9:05

And that's maybe a better way to think about the true cost for somebody, I suppose, really.

George: 9:12

Yeah. So 1.4 days of wages. But interestingly, today it's almost the same cost. Today it costs 1.6 days of wages. Right. That is interesting. So actually, the the you know, we we can say from that that it's the Savoy grill has retained its sort of eye watering status uh as a as an eatery over that 54 years. Um it's retained its price relative to wages.

Speaker 1: 9:40

Without probably having known that calculation, but they've obviously managed to keep it in step.

George: 9:47

That's quite interesting. My my guess is actually it sort of happens naturally. As in, I suspect the bulk of the cost of eating at the Savoy Grill is actually labour cost. It's the chefs, the cooks, the the staff in the hotel and the restaurant. So naturally the price will keep keep pace with with wages. So that that's kind of interesting. But in terms of purchasing power, then what what does it mean? Well, it means that gold has increased its purchasing power relative to 1971 by about 4.7 times. So gold hasn't just been a good protection against inflation. It's actually, even though it doesn't produce any income, it's actually produced a real increase in purchasing power. So it has actually been a fantastic investment in that period.

Speaker 1: 10:37

It it it has to be a buy and hold, of course, because one could have been rather unlucky and bought in the 1980s spike of around eight to nine hundred dollars an ounce. So it is a very long-term and it depends, you know, there's path dependency here as well, obviously, as to what level you get in at.

George: 10:56

Yeah, the this is this is only um you know two fixings at the beginning and and now the end of the regime. If any b if any of our listeners happens to have a a Savoy grill menu from 1981, I'd be really fascinated.

Speaker 1: 11:11

Um I'm sure we'll be flooded by our very wealthy listeners uh demanding to uh to to show it to us.

George: 11:18

So there there's that side, but unfortunately, what we can't do with this set of data is while we can say that gold has gone up in value, it has been a good a good investment, a good store of value. What we can't say is, is it expensive now? No. We know it's more expensive than it was in 1971, but we also know that in 1971 gold was fundamentally extremely cheap. And we know that because that's why Nixon was forced to come off the gold standard. Indeed. Because his dollars were were artificially overvalued relative to gold. So we can say with a pretty high degree of certainty that that three to one ratio in 1971, when an ounce would buy three three dinners, we know that was probably the wrong price. It should have been able to buy many more dinners, and and a few years later I'm I'm sure it did. But what we can't say is whether today's price is wrong.

Speaker 1: 12:18

But well, I more is more research, I think. More research will be needed.

George: 12:23

Um yes, we we uh we plan to repeat the exercise next year and see where see what's happened. Um anyway, we we thought that would be interesting. We've um we're gonna write this up and uh we'll send it out to to our readers and and put it on our website. And for those that have a login to uh the Times newspaper, the the Times have actually written quite a quite an extensive article about uh our escapade at the Savoy Grill. Um so you know feel free to to look that up and read about it.

Speaker 1: 12:56

Excellent. Um now, of course, this podcast today we've called Let's Get Physical. And um no music will be coming from Olivia Newton John, but the point was uh the wider one, which in a way we've already started to address with the bullion price, which is that physical assets are starting to look attractive and well, not just attractive, maybe important. The great surge and I dare one say at the moment excitement about digital assets may be somewhat curtailed as the real physical world gets in the way. And the example I I I would think of straight away is obviously AI and all the huge amount of um hullabaloo around uh that sector, but it could well be constrained by um the cost and time of putting in data centers and believe it or not, simple things like the price of copper. So are we going back to maybe paradoxically a more physical asset world rather than just dare one say the ephemeral world of software and AI?

George: 14:12

Yeah, I I think this is an interesting question, Gerald, because there's if there's a few trends going on in financial markets at the moment that are pointing in a similar direction. So we've got the one we've sort of imp implicitly been talking about already, which is that gold is increasing in value and arguably becoming the uh investors' favourite sort of risk-off trade or safe haven trade. And it's dis displacing the previous uh safe haven asset, which of course was US treasuries and and government bonds generally. Yeah. So we've got a we've got a process there where the physical asset of of gold is becoming more attractive, and the the fiat money system where you can just reproduce money without really any constraint forever, that's going out of favor. And I see a similar thing happening in the stock market, where we've got you know mining companies, for example, commodity companies generally, becoming more attractive for investors. They're going up in price, up in valuation. And there's another cluster of companies on the other side that are suffering uh quite rapid deratings, and that that group is broadly called software as a service companies. And and the fear, I think, in the market is that AI can sort of quite easily reproduce the services that these software companies are delivering. I mean, they the obvious case that a lot of people are talking about is if you want to generate a digital image for an advertising campaign, uh, in the past you might have used the Adobe Software Suite and had some you know very skilled uh digital artist create the image that you want. Um pay them a lot of money to do that, pay Adobe a lot of money for their licenses to do that. Whereas now you go to an AI image generator and you you give it a few commands, you tell it broadly the image you want, and and you go through a sort of iterative process until you get one you like, and it costs essentially nothing to do that.

Speaker 1: 16:24

Now that that is a powerful force in in commerce and business of commoditization, isn't it? And um thinking back over the years, I've always been told that as a product you don't want to be a commodity, that markets punish commodities and that profit margins get very tight, if not disappear. And so, as you're saying, there's maybe a whole hawk, uh cohort rather, of uh companies such as Adobe, that's just one example, that could be under really serious threat.

George: 16:59

Yeah, I mean I what what I think we might be witnessing is the realization that it is very difficult to keep a moat around a digital asset, because by definition, the r the reason digital technology emerged was because you can create perfect reproductions of digital files very easily and very cheaply. So it's very copiable. And and this potentially ripples through into all sorts of of companies. So, for example, a company like Nvidia, it doesn't actually make its own products, it designs its own products, it's its value is its digital content, right? But if you know a few more generations later, if you can type into um into your AI uh you know, a simple instruction, build me a a better or design me a better uh GPU than Nvidia's and and ship the files off to T SMC and have them build it for me. Uh maybe there's not much value in that proprietary knowledge anymore if if it can be replicated.

Speaker 1: 18:08

Now that's that that that's a delicious irony, because in a sense, it will be eating itself. So definitely one to watch. Most interesting.

George: 18:19

Yes, it it it it is actually. Um it is quite a quite a fascinating thought. So maybe we're seeing you know the there's a realization of of this happening in the investment world, and there's a a realization of it happening in the monetary world, uh with you know uh fiat money versus traditional gold money, uh, and the two of course are intimately linked.

Speaker 1: 18:43

So now it's we widen this out a bit. Um this is going to lead to other physical assets, uh, things such as I've just mentioned the copper price. Um maybe we're going to see it in terms of shipping as well, in terms of just moving physical goods around the place. Um, are there any other sectors that you you could see that would come out of the doldrums and and you know be quite a big sea change in what's going on?

George: 19:12

Well, looking at the way the markets are are trading at the moment, it it seems to to us that the the the process is spreading now beyond the precious metals. It is going into the industrial metals. There's some signs that it's already starting to go into other other chemicals, things like fertilizers and and other chemicals. Um it it certainly hasn't happened yet in oil, which is a traditional inflation uh metric, but perhaps it w it will go there as well. So yeah, I th I think it is broadening out. And you know, maybe we we're gonna see a a change of investor sentiment where you know we a few years back we were all in love with asset light companies. Yeah. You know, we like profit heavy, asset light. Now a lot of those profit heavy, asset light companies, which were basically the software companies, they're now reversing they're reversing that and becoming asset heavy profit light as they are forced to invest more and more in in data centers. So maybe our love affair will move away from those companies and return back to you know things like shipping companies where they've got a tangible asset. Maybe uh mines where they've got a tangible asset, factories where you know we can see some tangible um thing that can't be just reproduced digitally.

Speaker 1: 20:41

Now, one of one of the sort of I was going to say unintended consequences, but I mean it's in a way it it just naturally flows, is that you could say that we're going from a a world that initially didn't need a great deal of capital to one that needs a huge amount of capital. Um certainly the physical world has always been very hungry for capital, and the people who are investing in data centres, not to mention talk of modular nuclear power plants, believe it or not, are going to need to have very deep pockets. And I wonder, does that slightly tilt the world in terms of government's ability to service its debt? Because there's going to be more there's going to be more demand now for capital and for borrowings.

George: 21:30

I think that's a I think that's a very good point, Gerald. Um I mean I I I'm not sure if I've said this on the podcast before, but I've certainly written about it before. It looks to me like most of the governments in the world are now in what uh the economist Hyman Minsky called the Ponzi stage of finance. And for for readers that don't know um what what what that means, Hyman Minsky was um an economist that studied monetary cycles and particularly credit cycles, and he used to talk about three phases of finance, uh, which he he called the hedge stage, which was where you bought assets with money you actually had. Yeah. And then he called a, I think the second one was the speculative stage, where you would buy assets on uh on the belief that the income from those assets would service the the cost of the borrowing that you'd you'd made. So you basically the asset would have a higher yield than than the debt that you'd borrowed. And then finally, uh he talked about the Ponzi stage of finance, where the interest charge on your debt was way above any earnings that you were getting from your assets, so that you were obliged to continually borrowing, continue to borrow even more money just to service the debt for your previous assets. And when you once you get into the Ponzi stage of finance, of course, you your debt just mechanically rolls up and gets bigger and bigger and bigger. And I think that's pretty much where we are with government finances now.

Speaker 1: 23:06

We're um we've got my favourite word which has come in to the lexicon a lot in the last year, which is trillion. Nobody talked about trillion until quite recently. Now UK government debt is well over a trillion, and even more uh sort of shattering number is that the interest on US debt is over a trillion dollars a year. And um that's got a bit of a Ponzi feel to it, hasn't it?

George: 23:33

Yeah, I mean I I I think the you know the the reality of the answer to your question about you know where's the capital coming from to fund all of these data centers, for example, basically we're we're printing it. Yeah. And where is it coming from to to fund the deficits? We're printing it. And and this is essentially why we're starting to see physical assets command a a premium because people are worried that we're printing too much of it.

Speaker 1: 24:04

Now, maybe one last little point before we come to the end of this uh first podcast of the year. Um rather paradoxically, as gold and indeed silver and platinum and all the rest of it has been going uh skywards, Bitcoin has stalled and is sort of clinging on about 25% below its all-time high. Um that that seems strange.

George: 24:31

Yeah, that that's an interesting one because, of course, a lot of people that were talking about the debasement trade 18, 24 months ago, um, a lot of that cohort were positioning for the debasement trade with Bitcoin. And and it turns out that that's not been the asset that's benefited from it. Um you know, maybe maybe again this is the same the same process. Investors are beginning to realize that Bitcoin is a digital asset and it can be reproduced without you know without limit. Now, we can't, of course, you know, uh people people will be writing in and shouting at me for saying that because uh you know they the the Bitcoiners do like to emphasize that there's only a certain number of bitcoin that can be made from but there's plenty of substitutes out there, right? Yeah, there's there's nothing there's nothing to stop uh there's nothing to stop us doing Bitcoin tranche two, tranche three, tranche four. You know, we're we're already basically doing that. There's lots of different cryptocurrencies out there now. So yes, digital currency can be reproduced. It's only it's only really a um a social construct that tells us that this particular version of of digital currency is special.

Speaker 1: 25:51

That that's a nice grenade to throw into the pond uh of of looking forward, uh if mixing metaphors, but looking forward this year. Um but it is it it is at the very least, as I say, paradoxical that that's going on. Um well, there's loads to chew on there. Dinner at the Savoy, uh the return of metal bashing and uh physical assets, and maybe some doubt about the defensive quality of digital assets, for the famous um moat that uh Warren Buffett always looks at uh when making investments. Can you defend your profit margins? So um lots of these themes I think we'll come back to in future episodes, but um let's call it a day on that side of things, and we'll do our usual trick of um recommending a couple of books at the end of the podcast. I've gone for a book, it is older than uh I realized. It's been on my bookshelf, I guess, when I first bought it um in 1989. Um it's by the sort of popular scientist, quite a serious scientist, but he's written some very good uh popular books for people like me. And it's called Does God Play Dice? Uh The Mathematics of Chaos. And it's a very easy, uh straightforward primer on all the issues that are now much more talked about, about chaos theory, strange attractors, uh how how do patterns seem to emerge and then, if you like, submerge. And um it's a very good read, Ian Stewart, and I think George pointed out to me that does God play dice is a quote or a partial quote from uh from Einstein in his conversations with the Danish physicist Niels Ball. Um one last point which I always look for in this book, there is very, very little in the way of frightening mathematics. So, you know, the old adage that if you put in a formula, you halve your number of readers. I don't think people are gonna find this a strenuous read. So does go play dice by Ian Stewart.

George: 28:03

Okay, Jonathan, I'm gonna go for a history book. I'm a bit of a sucker for uh history, especially ancient history, funnily enough. Um, and I'm gonna go for the book Genghis Khan and the Making of the Modern World by Jack Weatherford.

Speaker 1: 28:18

Right.

George: 28:19

Um I I've read this book a couple of times and I find it I found it even more interesting this the second time round. There's a few things that really jumped out at me with the history of uh of Genghis Khan and the and the Mongol Empire. And one is that it's not the the sort of simple, brutal, bloodthirsty empire that we we learn about in history. It was actually a surprisingly um multicultural empire. Um the there's documentary evidence of uh the the Mughal court holding debates between Muslim, Christian, and Hindu uh philosophers to to try to find out which had got the better belief system. Uh and indeed the army was multi-faith and multicultural, and Genghis Khan himself uh pioneered the the process of hiring people based on merit and not on family connections. So you know all fascinating stuff. And uh and there's also an interesting monetary angle to the um the Mongol Empire. They were um one of the first, maybe the first, to start issuing a version of the paper money system. And they did that to try and make it safer for um for traders who were moving goods across the the steppes.

Speaker 1: 29:42

Right.

George: 29:42

Uh they could carry paper rather than gold. Um, and of course, as soon as they did that, they they immediately ran into a problem of um people were issuing too much paper, so they had to start a prototype central bank to control the issuance of the paper. So that that's an interesting sort of little side story to all of this. And and then finally, um at the towards the end of the book, it talks about how Genghis Khan and the Mongol Empire got its bad reputation. And it turns out that's actually quite a recent thing. It comes from a period in French history when it was illegal to criticize the French king. So French playwrights started writing writing plays which were critical of Genghis Khan, using Genghis Khan as a metaphor for the French king. And that's uh and that sort of uh did for his reputation.

Speaker 1: 30:40

Well, we've we've um we've tied quite a few bits of string back together there at the end with uh the emergence of central banking paper money, and we've managed to have a slight dig at the French again, which we should try to temper our views on that, maybe, but quite an interesting little sideline on Genghis Khan. Uh George, thank you very much for today. Um more of these themes as the year unfolds, I would think. Um but for now, thank you very much.

George: 31:11

Thank you, Gerald.