Theatrics of the Market

Richard Kramer:

Welcome to Bubble Trouble, counter cyclical conversations between the independent analyst, Richard Kramer, that's me, and the economist and author Will Page, that's the other guy. And this is what we do. Try to lay out the inconvenient truths about how business and financial markets really work. For you, our audience, we want to avoid getting hobbled by the herd-like behavior of markets journalists and even podcasts, and try to carve a different path that drifts into something we call sanity. This week, we want to lay out the current theatrics of the market. Blink, and you'll have missed banks avoiding collapses and earnings beats and misses. So with our eyes wide open, take your seats in the stalls so we get up and close and personal with the theatrics of the market. More in a moment.

Will Page:

Welcome back, Richard. Just me and you today, which is often the best way. And this week what I wanted to do is draw on a paragraph from my book Pivot, where I was tearing apart the net promoter score, the NPS, everybody's filled out one of those in our time. They're the worst. And you know the NPS which is, it's the only the extreme numbers which count towards performance. And there was this UX expert, design expert called Kate Rotter who often referred to analytics theater. And that was the allure of the economic cycles, the earning cycles, the market data cycles, the NPS cycles, and it creates dramatic swings in numbers and it exaggerates volatility, but it hides the magnitude.

And that can be good for headlines, but bad for what I would call making the world a better place. Why are we drawn to this theater and how do we step back from it so we can make a more meaningful assessment to where we are so we can place better bets? I think our audience is going to benefit from this conversation, and I know where the wealth of knowledge you can bring to it is really going to give us a valuable insight into getting around this chaotic headlines, this chaotic swings in market behavior and into something like you said in our introduction, something we call sanity. So let's just take stock.

Richard Kramer:

Well, before you kick in, you've already sparked some thoughts for me, which is how you get these emails that say, how would you rate your bank? Or British Airways or whatever company, one to nine. And what they really do when you click on them is take you down the rabbit hole of a five-minute time-wasting survey where unless you're motivated by absolute love for a brand, pretty damn rare, or vitriolic hatred, more often you're not going to bother to fill it out. So who bothers filling out one of these surveys and puts five in the middle, but in those sort of ones and noughts?

Will Page:

Let's build that out for a second. That's the famous story of Abraham Wald and the bullets in the airplane. Long story short, Abraham Wald, a famous statistician, was looking at bullet halls and planes as to where to put extra protection in World War II. And of course you could see bullet holes in the wings, so we should protect the wings, we could see bullet holes in the tail, we should protect the tail, and there's never any bullet holes in the fuselage, why do we need to protect the fuselage? I'll tell you why. Because the bullets hit the fuselage, those planes never came back, so you couldn't assess where they got hit. And it's a great example of thinking about the NPS. A, you've got to complete the transaction on some clunky, antiquated website in order to receive an NPS survey. So what about the zeros, the planes that never came back, those who didn't complete the transaction?

Richard Kramer:

The bounce rates.

Will Page:

And certainly, you had to complete some horrible survey before you fill out your score and who bails out halfway through the survey? So the responses you are getting are not reflective of a market. That said, you then you've got the problem, which is on a scale of zero to nine, only eight or nine count performs performance. Everything beneath it is seen as either agnostic or degrading towards performance, so you can't give a seven out of nine score and expect it to register on the radar. Everyone knows this.

So we gain the system and we enter market theater, we'll go for exaggerated swings and performance so we get recognized. I think the NPS is a good hook for this conversation because I think the headlines I'm seeing out there, it just feels like every extreme from the analyst lexicon, from Armageddon, staring into the abyss, the wildest lie, last one off the boat gets it, all the way back to it bounced back, invest in Meta, tech rallies. I'm hearing all of these terminologies here and it's mixed signals. Tell our audience how to be careful about these big signals. There's no common theme at the moment. It just seems to be everything at once.

Richard Kramer:

Well, look, the core of Bubble Trouble is that the market is all about stories and narratives. We'd like to think it's based on incredibly rational data, but it's not. It's how you interpret that data and efficient market hypothesis has never been proven because if that was the case, we would perfectly value every stock all the time, there'd be no volatility in the market. So to some extent, that market is always going to be disconnected from reality. And now every single company that gets on a conference call is obliged to say what their position on AI will be. And no one dares to admit that a year ago they were all talking about appointing a chief metaverse officer. So every single company is going to tell you about macro headwinds because that's a blanket excuse for issuing really low targets, so that what we saw in this earning season we're the midst of right now is that 80% of companies are able to beat their targets. That's like telling your parents you're going to get a D and then they're really happy when you get a C.

Will Page:

It's all relative.

Richard Kramer:

You get an average grade, they thought you were going to fail. So there's obviously, as we've talked about so many times on this podcast, a huge incentive in talking up the market and cheerleading the companies. And we've also seen as in the banking sector, in tech, in so many other areas, those slower moving antelope at the back of the herd getting picked off. So every day, you're going to see one or another company that's falling off the pack 20 or 30% just seeing the share price plunge because of some unforeseen incident. And it just tells you how much perception colors our reality of the world, especially in these markets which everybody thinks are so quantitative.

Will Page:

And you do inspire a thought there. I remember John Kay saying to me there are way too many funds to invest in, the paradox of choice. If you go into a fund platform, AJ Bell, Hargreaves Lansdown, and you want to pick a fund, there's still many funds. One's income, one's accumulation, one's class D, one's class C. Does that make choice easier? And I just wonder whether there's not too many stocks out there, but when you have such a crowded marketplace of choice, you've got to act extra irrationally to stand above the noise. Do you think there's something now?

Richard Kramer:

Well, no, I think actually the scary thing you're seeing now is something quite the opposite, which is in the first quarter of the year, there were seven stocks in the US, seven, mostly large tech stocks that made up almost the entirety of the rise in the market.

Will Page:

Wow.

Richard Kramer:

So when you have these mega cap tech stocks that are sitting atop the market and taking up so much of the overall value of the market, it crowds the market, it crowds all investors into owning those stocks. And part of the problem is that those stocks might be too large for investors to own too much of, and therefore they're obliged to try to pick the winners and losers among the rest of the stocks of the market. And it distorts the picture of the market because a lot of funds, simply if they're not tech funds or they're value funds, they're never going to own the high-flying tech stocks that are at premium evaluations.

Will Page:

I hear it. In the Bay Area, I remember a famous investor, Ron Conway, saying to me that in the Bay Area, Apple is a tracker fund. Do you agree with that premise?

Richard Kramer:

Yeah, I mean we've, as professionally, and I don't like to stray into how we rate stocks on this podcast for regulatory reasons, but we've talked about it before as a store of value in the sense of it has a very stable ecosystem. It tends to get a lot of repeat purchases from its customers. Once you're in the ecosystem, you tend not to leave. And it has this luxury goods mantle and you may not believe it, but the largest market cap stock in Europe is actually LVMH.

Will Page:

Wow.

Richard Kramer:

It's a luxury goods company. It shows you what Europe is the best at.

Will Page:

That's incredible.

Richard Kramer:

And it's because they have so many amazing luxury good brands that people keep coming back to. They keep buying the latest collection of, or they keep engaging with the brand.

Will Page:

It's the number one stock in Europe by market cap.

Richard Kramer:

It is the largest market value stock in Europe is LVMH, a luxury brand company.

Will Page:

Geez. Wow. Moving forward, Richard. In fact, let's just move back a second. Let's move back a month. We did a podcast called Down by Duration, the story of how SVB Bank collapsed, and we got a lot of great feedback from our audience there. How you explained duration, how duration was the cause of the bank's downfall. Just like you did last year explaining a wash trade, you took a complex subject and you explained it by leaving no one behind. You invest in doing up your house, but you have to wait for the house to appreciate value to get the return on your investment, and you can get caught in that time lag by changes in the market behavior. Now that was great, Down by Duration, really proud of that effort for our audience. But did I blink and miss another bank going to the wall this week?

Richard Kramer:

Look, there's been several, and many of them are hitting the wall for very much the same reason. So First Republic, a very large West Coast bank, famed for its customer service was just bought by JP Morgan effectively before the government had to step in, shut it down, and dismember it. And a lot of them are facing the same problem in that they've taken in deposits on the premise that those deposits would be sticky, that people wouldn't withdraw their money.

But lo and behold, in the era of the internet and herd behavior and social media, when people get a whiff of trouble at the bank, they yanked their deposits out and the idea was that those banks would bring in those deposits and park the money in US treasury bills, the safest investment you could find. And the bills that they were buying six or nine months ago, those bonds that they were buying were paying 1% and all of a sudden the going rate and savings accounts rises from two to three to four or 5% and all of a sudden those bonds paying 1% trade at 98 or 97 or 96 cents on the dollar. And they have a mismatch between the value of the assets that they bought to cover the liabilities of the interest that they have to pay for holding those deposits.

And it's old news now to see these bank failures play out. We're now going through and scrutinizing, we, I don't say we because it's not something I'm doing, let me rewind that. The market is going through and scrutinizing the balance sheets of every tier two bank and saying, "Have they created a problem for themselves by locking their money up in low interest vehicles but having to pay high interest the depositors who gave them that money to earn a return on in the first place?" And every bank is now under the microscope. The regulators are trying to talk down the contagion risk of a banking crisis. But the reality is there was a lot of complacency in the sector, and they thought money would be free forever and they just had to collect assets and invest them any way they could.

Will Page:

Like Richard Thaler's hot-hands fallacy, when a basketball player gets it in the hoop first time, then second time and third time, of course they're going to get it a fourth time, but probability has no history. So when money is free for five years, for 10 years, for now 15 years, of course it's going to continue to be free. And then interest rates went up. And just to clarify that point for our audience, you had a bond that paid 1% and that was relatively more attractive than interest rates were on the floor. When interest rates got up above the rate of your original bond, that's the crossfire point. Is that correct?

Richard Kramer:

Yeah. I mean, it's obviously a bit more complicated than that and I don't want to simplify this. Matt Levine from Bloomberg who's an incredibly astute commentator, has laid out two simple theories. Banks borrow short to lend long. In other words, they use deposits to fund loans and buy bonds, or they really borrow long to lend long and they use deposits to fund loans and buy bonds. And as a technical legal matter, those deposits are short term but they aren't really, no one's going to take them out. And all of a sudden, theory number two started to break down because they were gambling with money that wasn't theirs.

But everybody came around and said, "Can I have that money back?" And that created a huge problem. And one of the nuances of our social media driven internet era is that we all have mobile banking apps and the first whiff of fear we get about Virgin Money or Revolut or any of these other consumer platforms, well, pretty quickly all the consumers are running for the exits. And that's the same thing that happened with the VCs having money tied up as deposits in SVB. They said, "Let me stampede to the front of the queue and get my money out first." And obviously that was the collateral SVB was holding against the liabilities, the bonds that it owed.

Will Page:

That's interesting. And that inspires a thought, which is when you have a theory of how sticky something is, be it a bank, be it a subscription proposition, people often ignore how technology can move its stickiness. It's very easy to get your money out on a mobile banking app. From my world of subscription media, it's very easy to unsubscribe on a mobile banking app as well. Has that been functioned or factored, should I say? Has that been factored into market behavior? Let me just stick-

Richard Kramer:

Well, and let me add one really important thing about the modern age. And we talked about this when we had our podcast probably a year or so or more ago about the GameStop phenomenon and.

Will Page:

Great Netflix subscription.

Richard Kramer:

All this day trading that was going on, on Robinhood. And once something gets into the public consciousness, my bank might fail. It's so greatly amplified by social media. The narrative takes over and all of a sudden, everybody's panicking. So that measured calm resolution that you might hope for where if everybody had left their money in SVB, it might still be with us today, doesn't happen in this market.

Will Page:

You know who I want to get on the podcast? Mario Draghi, the former.

Richard Kramer:

Oh well, I don't think he's about ready to come. Unless you got-

Will Page:

When we last had that big, big speculative strike on the Euro and you'll see he said, "We'll do whatever it takes to shore up the Euro," as assuming-

Richard Kramer:

The bazooka.

Will Page:

Come see.

Richard Kramer:

Yes.

Will Page:

And he did nothing. But he kept saying to the market, "I'll do whatever it takes," without actually doing anything. Let me just stick with interest rates there. Just, I think it's 15 years now, we've had the rate of inflation above the rate of interest rates. So people are doing GCSE economics not knowing what a normal monetary condition is like where banks actually save you money. Now we've even got inflation up, we've got interest rate up, we still have inflation above the rate of interest, but we know that interest rates are probably going to keep on creeping up for a bit, and we know that inflation is cooling. Less so in Britain, more so in America. Do you see a new age of normality on the horizon? Are we still going to be in this dislocation for a good decade to come?

Richard Kramer:

I think the best lesson I can take from my 30 years of looking at the markets through dot com, dot booms and busts, and the global financial crisis and all of that is normality is a myth. We have had so many black swan events that I feel like all swans are black. Nassim Taleb needs to find another metaphor because the black swan keeps getting trotted out, the hundred-year flood keeps getting trotted out every other year. When we first got to know each other, since then, we've had COVID, we've had the pandemic, we've had the Ukraine war, we've had a massive interest rate cycle that got reversed after a decade of free money. I mean, what is normality? Tell me what constitutes normality in the markets?

Will Page:

Yeah, I think you've got something quite big there. I think you've got potentially a book right there actually. And I just reiterate, how often do you see the word crisis being used for an event.

Richard Kramer:

Now it's poly crisis, right? That's the term de jour because we have so many crises that they're all over the place.

Will Page:

All right, last one before the break, the word rally. I want to get my head around this and I want my audience to get my head around this too. What does the word rally really mean? Because I've heard that getting touted in this age of Armageddon quite a few times in the past two or three weeks, there's a tech rally, Meta's on a rally, don't miss out on the rally. What does a rally mean when you've got so much doom and gloom going on and you have this glimmer of hope called a tech stock rally creaking through the clouds? Walk me through what that word means in today's abnormal times.

Richard Kramer:

Okay, again, one should never underestimate the opportunity for segments of the market to be dislocated from what you might call observable reality. This happens frequently in the energy market where the perception of future supply is going to impact today's prices. It's going to happen in the food market where the reality of availability of food sends cheese, milk, and eggs skyrocketing up 20, 30%, which is a real issue for the vast majority of the population. The word rally is one I'd categorize alongside the word strong as a meaningless bit of purple prose. It's just there to excite people and say a bit of FOMO, you might be missing out, get on the train and actually buy the stock that's after it's gone up a lot. Now if you said the stock market was plunging.

Will Page:

Sorry, you're right there because it's not the word rally that you hear most often. It's a word rallied, Meta rallied this week.

Richard Kramer:

Too late, you missed it. Great.

Will Page:

But what's going to happen next week?

Richard Kramer:

Right. And for all of the high profile commentators about the market, the last news they want to get on and deliver every day is the market plunged. Things look awful, take your money and go home. And they don't have a vested interest to give you news about the 80% of the stocks that are clearly underperforming, those mega cap tech stocks and a few others in the market that are lucky enough to have beat low-balled earnings. So for all of the companies that are plunging, they just don't get the airtime. As a matter of fact, when you see the CNBC-type commentator, it's always going to be about when you get outside of the tech space. It's going to be about household names, it's what's happening to Starbucks or to Nike or to Exxon.

You don't tend to hear a lot of commentary on those bubble trouble-type channels talking about utility stocks, talking about automakers, talking about stocks where the business doesn't, talking about insurance companies. When was the last time you heard CNBC go on about insurance as a great investment? Those are the stocks that don't excite the market, don't excite retail investors, don't garner attention and they don't tend to rally because their very nature of their business models isn't to have explosive growth or collapsing profits.

Will Page:

And perhaps they don't capture people's attention, which means they don't help sell adverts, which means they're not worth talking about. Richard, I think our podcast generally stretch out to around 40 minutes, but I know somebody who presents on CNBC and she said to me she was trained to explain financial markets in 40 seconds.

Richard Kramer:

Yeah.

Will Page:

We got 40 minutes, she's got 40 seconds. And I think that might be part of the problem just to battle for your attention means I got to make a punch land in 40 seconds. And that leads to language that obviously doesn't chime yourself, but chimes with the audience of just exaggerative terms of market theatrics. And I think we're really picking it apart. I think this has been a really, really helpful conversation for our audience to understand what is a sane balanced view what's going on given this language that we're hearing. So let's come back in part two and we'll go down a rabbit hole referencing a book that you've cited several times for me, which dates back to 1967, long before either of us were born. So back in a moment with part two.

Welcome back to Bubble Trouble, where we are dealing with market theatrics, the theater of the market, the theater of the language which causes these huge swings and cycles in the market and we're unpicking it. And one thing that I want to do in part two is to go a little highbrow. Now, Richard, what makes you different from me and you is, A, I run faster than you, but B.

Richard Kramer:

Not true.

Will Page:

You eat.

Richard Kramer:

Untrue.

Will Page:

B, you eat faster than me. So I'll give you the benefit of speed of read as opposed to speed of feet. Now one book you cited to me in the past is The Society of the Spectacle, a 1967 worker philosophy and Marxist critical theory by Guy Debord.

Richard Kramer:

Guy Debord.

Will Page:

Guy Debord, all right then. So the author develops and presents the concepts of the spectacle and it's considered a seminal text in the situational movement over half a century ago. Is history rhyming? When you think back to that book that you cited me many times when you've tried to keep pace with me on hamster teeth? And why?

Richard Kramer:

So first of all, Will, I have to say not only do you run substantially slower than me, but you don't do the highbrow thing as well as I do. It is Guy Debord, it is the situationist movement half a century ago. And I think it was a fantastic example of someone who saw just how these spectacular mass events would start to take over our lives. And this was at the dawn of television. This was at the dawn of motion pictures or motion pictures as a mass entertainment form.

Will Page:

A dawn of when you could get one to many, one broadcast to many consumers.

Richard Kramer:

Yes. And of course that was really pioneered from the twenties with radio. And obviously radio played a huge role in Hitler coming to power, and really that was the dawn of the era of mass communications even beyond publishing. Now, I think if Guy Debord came back today and was a guest on Bubble Trouble, he would be saying everything is spectacle now. And it gets to be as prosaic as companies' IPO, they go on the public markets to get attention. Yes, they pay Wall Street banks 7% of the money they raise, that's another great example of a cartel, as a complex PR exercise.

And they have their set piece analyst days, which are not really to reveal the inner workings of their business, but to convince investors via their cheerleading analysts that they're worthy of attention in an attention economy. And it's just all about who shouts the loudest or pushes certain narratives best. And some companies are incredibly adept at this, of managing this spectacle of allowing the narrative to determine the perception of their company. Take a look at JP Morgan. Now, the principle of the banking sector in the US is that you don't want to have one bank controlling more than 10% of deposits. But JP Morgan just won the federal government auction to buy First Republic and now it's going to have 17%.

Will Page:

Wow.

Richard Kramer:

Of all deposits in the US. In other words, about one in five of dollars held in deposit accounts in the US is going to be held by one bank. But wasn't the global financial crisis all about stopping too big to fail?

Will Page:

That's no flow of eggs in one basket, Richard.

Richard Kramer:

Yep, it is. And look, you equally have the spectacle in France where Guy Debord hailed from, where there are riots in the street for daring to disturb the dream of a cushy retirement at age 62. God forbid one should work two years longer at age 64 or actually look at the sums in how public finances are looking. And do you either want a banker of the French state or get a couple more years retirement early, or sorry, get a couple more years of early retirement? And it just is astonishing that the spectacle has taken over from the reality in so many fields in politics and business and entertainment. And I think Guy Debord would really recognize this as a very modern phenomenon.

Will Page:

And just for our audience, this book by Guy Debord, The Spectacle, easy to find? Does the documentary have it?

Richard Kramer:

Impossible, I'm sure. I don't know, I'm sure. I don't know if it's still in print. I'll have to look. I want to ask you a couple things.

Will Page:

Kick it.

Richard Kramer:

Let's talk about theatrics in the music industry. Music is a product we all know, we all have an affinity for and then there's the production of it. Can you talk me through how the theatrics of the reaction to one AI track, which may or may not have infringed upon the copyright of Drake, has thrown the entire music industry into a tizzy. Discuss.

Will Page:

It's a very simple bit of mass to explain it. The tizzy around Drake and The Weeknd, this artificial intelligence created song to sound like Drake and to sound like The Weeknd was that it got 20 million streams before take down. And the truth of the matter is that was 20 million people. And what that tells you is 20 million people each streamed it once each. I thought, eh, I'll go back to the real thing. That's how to read between a headline and understand what's really going on. So you have your headline, 20 million people streaming a computer generated song, what you don't read is that they never came back and streamed it twice.

Richard Kramer:

Could it have been 20 million bots streaming their song?

Will Page:

Well, I tell you where we are looking into the abyss, and again, I only go to my safe zone of music as a microcosm for other industries. There's an app called Boomy, which is AI generated music. And if you think about this for a second, there is-

Richard Kramer:

Did we lose Will?

Will Page:

Putting 17 million songs on the streaming platform. And when I say they, who am I actually referring to when it's computer generated from source? So it's quite interesting to see how these new players are coming to the market with AI music. And again, we have discussed on this podcast many times, is there too much choice? Do we need two new podcast shows every minute going on to iTunes? Do we need a hundred thousand new songs going on to Spotify? Do we really need 17 million computer generated songs going onto the digital shelf as well? And if that's one company, what happens if there's a hundred more coming down the pipe as well? So that's where I get worried.

Richard Kramer:

So Will, I want to get from you the hard man Scottish view of the new big trend in politics. Channeling your LSE colleague, Mariana Mazzucato, and into the leader of the UK opposition party, we now have not one, not two, not three, but five missions for government. Is that not a spectacular theatrical effort to shift attention to a far-flung future, and avoid talking about, for example, the parlor state of finances or the endless distractions of culture wars? Isn't that just showing that politics is equally completely captured by these theatrics, when frankly we should be talking about what's the composition of the budget in the UK? Where does the money go, and do we have enough to pay teachers?

Will Page:

Yeah.

Richard Kramer:

Doctors, nurses, all the people we desperately need to help us live a decent life.

Will Page:

Yeah, I think this is a big one, Richard. I think the political capital required to resolve some of the more short term problems is so great, so ugly, an easy cop out to say we're going to be net-zero and we're going to make the world a better place, and here's five mission statements to justify it. And I think that's going on here. I'm fond of saying whatever you look at in politics, the more warts you're going to see. Closer you look, the more those warts become apparent. You take the pension system and the British university system, that's a ticking time bomb. You could roll up your sleeves and try and fix that, but imagine the enemies you're going to make when you try and fix it. Well, it's better to say I'm net-zero, I'm going to make the world a better place.

Richard Kramer:

Wow.

Will Page:

The NHS, perilous state of our national health service here, I mean it really is crunch time there. Are you really going to go in and fix that or are you going to make the world a better place? The bailout or the cop out even is just to go long term with some fluffy vision as opposed to committing yourself short-term to serious political capital to do public sector reform. It's not easy for anyone, but I do think you've got a point. What I'm hearing now, and this is here in the UK recording this on the day of the local election results where it's looking likely that we're going to have a swing of power, is people are peeling off short-term hard decisions and opting for long-term fluffy ones instead.

Richard Kramer:

But I guess when you think about the theatrics, we know that politics is theatrical and about inspiring confidence, but at what point, just like with the markets, does the rubber hit the road? And you have to look at the cash flow underpinning evaluation, or where the money is going to come from to fund the improvements in the NHS or the education system or underpin the pension system.

Will Page:

I know, and you alluded to France, I think that's a great example of some stuff you just can't brush under the carpet, it's going to come back and haunt you.

Richard Kramer:

Yeah.

Will Page:

And we have, the demographics aren't hard to understand. An aging population, a more dependent population, this thing is going to pile up. So I do think there's a generational powder keg in the pipeline and I don't think politicians have got the will to campaign to resolve it. It's much easier to campaign for fluffy things and solve all this, but when the rubber does hit the road, then you've got a huge problem in your hands.

Richard Kramer:

But this reminds me of the chief executive or the chief financial officer who knows that they can stretch out working capital, tweak their revenue recognition, or play any of the other accounting games that you know are available to them at any given time to make another quarter or two and see if things don't get better. And we've seen this time and again, you can see all the red flags where companies are squeezing working capital, where they're calling their cash flow improved because they've collected money more quickly from the people who owe it to them and delayed their payments to others who they owe, all the usual ways and games that they can do to flatter their numbers. You can only keep those plates spinning for so long.

Will Page:

Yes, the plate spinning is a great analogy because you've made me think about PFI, private finance initiative or public private partnerships to build public services, Labor government in the noughties ODed, overdosed on these initiatives. And to their credit, we got a lot of great new schools and hospitals built up and down the country, but to their detriment, they saddled themselves with payments to private sector contractors for the next 30 years, which far exceeded the cost of doing it under the public sector initially. You can build a hospital for 300 million or pay public private sector contractors 30 million for the next 30 years instead. And I don't need to be a mathematician to understand the cost and benefits of each option.

Richard Kramer:

Absolutely.

Will Page:

The other thing, I'll answer that quickly is a joke about the Chancellor of the Exchequer. When you become, and we do have [inaudible 00:34:09], our new Chancellor of the Exchequer, when you have a change in power and you have a chancellor checker gets to number 11 Downing Street, they're invited to open a drawer. And you open a drawer when things get really bad under your tenure, let's say there's some strikes, let's say some inflation, let's say the central bank's hiking rates and you've got your first of three envelopes to open.

And the first envelope you open when things get bad and it says blame your predecessor. "Okay well, I'm doing a great job, but it's all my predecessor's fault that we have all these issues I have to solve." Let's say the strikes get worse, the inflation gets out of control, interest rates are double-digit, unemployment's going through the roof. I've got so many people offering to clean my windows, I've not gotten any glass left. And when things hit really bad, you open envelope number two and that says blame your civil servants. "I'm doing the best job I can, but these dodgy civil servants are messing it up for me." Let's say you have riots in the street and things are completely out of control and you get voted out of power, you're invited to open the next envelope and the final envelope says, wish the next chancellor good luck. And it's the cycle of the envelopes. Blame the predecessor, blame the civil servants, wish the next one good luck.

Richard Kramer:

I thought you were going to say you were going to open the envelope and it would say there's nothing there. We're out of money.

Will Page:

Oh, that's the Bank of England. That's the Bank of England's envelope.

Richard Kramer:

Yeah.

Will Page:

Let's go to smoke signals. Real quick to wrap up this show, this has been clever. Theatrics, the theatrics of the market, the theatrical language of the market, this book that you refer to, which really does sound like it's got a second life when we talk about the spectacle, give us some smoke signals so we can avoid the theatrics and spot the spectacles.

Richard Kramer:

So the first one that I'm hearing all over the place is everybody wants to blame this unusual beast called the macro, the macroeconomic environment. And look, we would think that every single company out there has a Will Page style chief economist whose job it is, as you said to me your job once was, to look around the corners. And you have to wonder, can company managements all be blind to the data? Both that they see in their local shops when your corner shop has all the staples going up 20 or 30%, or of the markets of the cost of capital going from zero to 5% in six months or eight months or 12 months.

And forget the selfish brigade of venture catastrophes as Scott Galloway would call them, people who profit from the misfortune but shouldn't all these responsible companies that are talking about sustainability and ESG and so forth be so hyper aware of the pressure that's building in the economy in real time? So the idea that they should blame some external force for how tough their business is as opposed to take responsibility for planning or anticipating what they do in the cost discipline and their cost base and getting carried away with fads. I mean, this to me seems like a classic case of we've all had bubble trouble and we didn't learn the lessons from the last many, many bubbles.

Will Page:

Boy who cried wolf kept on crying again and again. All right, smoke signal number two, sir.

Richard Kramer:

The other thing that we're seeing is that there is a tendency to think that there's a snap your fingers, quick fix of cost savings. Let's just fire, well, we talked before about the magic number from the Stanford professor of 6% of your workforce because that's around one in 20 and not too disruptive, but sends the right message or whatever the psychological reasons are for-

Will Page:

It's a round number.

Richard Kramer:

It's a round number, but price in the savings from firing those people before you do the hard work. It's what some, maybe your wife at some point might call savings, we're going to spend to save. Well, for some companies they, of course unadjusted earnings. They can exclude those pesky severance and restructuring costs from their figures and analysts will never imagine the disruption that happens inside those companies when they lose those grizzled veterans who know where the bodies are buried, how things really work, what the documentation of that software or that project was, why we signed that deal with that company way back when in the first place.

And they automatically assume that spending 100 million on restructuring brings 100 million of savings without considering that it might bring 100 million less in sales. And so I think there is a lazy tendency to think that just cutting costs is enough, or that will cure all the ills or excesses that have happened in these frothy markets and I don't think it does. I think it takes more introspection and it's just not that easy for companies to snap their fingers, fire some people, and all of a sudden have a magically lower cost base but the same or higher revenues.

Will Page:

It is a nice reminder of an earlier podcast we'd done called Third Cut of the Deepest, where we went through the various cuts in the government. And also an interesting backstory to that was during austerity 2008, 2009, 2010 where the government's making seriously big cuts in a global financial crisis. I remember this debate in government going on about cutting the building of a prison. So what do you mean? Said, well, we're building this prison somewhere in Middlesborough and austerity's here so we're going to cut it. It's like, but don't you want to finish the prison so you realize the asset value of what you invented in the first place? No, we have to cut. It's like, but you're three quarters of the way through completion.

Not all cuts are the same. So when you do hear these headlines of you've got to cut by 6% or you got to reduce turn headcount by 10%, no, it's far more nuanced than these fat round figures would claim. Very helpful, very helpful podcast. Theater's in the first part, spectacles in the second. I, for one, feel a little bit wiser thanks to your insight, Richard. I'm sure our audience feels the same. This has been Bubble Trouble and we'll be back next week with more scandalous behavior of markets to dissect. But for myself and Richard Kramer, thank you very much for listening.

If you're new to Bubble Trouble, we hope you'll follow the show wherever you listen to podcasts. And please, share it on your socials. Bubble Trouble is produced by Eric Nuzum, Jesse Baker, and Julia Natt at Magnificent Noise. You can learn more at bubbletroublepodcast.com. Until next time, from my co-host Richard Kramer, I'm Will Page.