Ep.81: Kim Kardashian Launches PE Firm & Stocks Rise Despite Higher Rates

Hello and welcome to episode 81 of the Market Maker podcast. And this week, to give you a bit of a heads up, we're going to talk about Kim Kardashian. Not probably the most usual character that would appear in our, our podcast, maybe in Piers's browser history, but not so much as a talking point for us. Um, and why? Because she's about to break the PE world this time, not the internet. So we'll understand what exactly that is and why she's getting involved with the Carlyle Group, a previous head honcho there, trying to take on the private equity world. We'll also talk about central banks. Um, we've seen the Fed hanging tough with their kind of inflation focus, with Powell speaking yesterday. The ECB have hiked 75 basis points, so we'll discuss the kind of implications of that. And in fact, markets are going up. Which is slightly contradictory, um, for many listeners who might think that was the real reason why we were going down. So we'll explain why exactly that's, that's happening, or at least attempt to. Um, and then the UK has appointed finally the new Prime Minister, Liz Truss, and she's announced that £150 billion package to shield Britain from the ongoing energy crisis. So we'll go into some of the details there and our thoughts about the impact that that could have But before we begin, of course, have to pay tribute to Her Majesty Queen Elizabeth II, a remarkable woman, served her country with dignity, loyalty, and grace. But question I've got for you, uh, Piers. Yeah, her nickname apparently in inner circles was cabbage. Who do you think started that and referred to her as cabbage?

I've never— I mean, this is, this is new. I've never heard this. Um, do I need to be like watching The Crown or something to get that kind of knowledge?

Perhaps. I wouldn't know because I, I don't watch The Crown or haven't.

Um, I'm gonna go Prince Philip.

Perhaps you're right. Perhaps that's because maybe you call your wife the cabbage as well. My little cabbage, my little loving cabbage. But you absolutely nailed it. Um, the other nickname that she had was Gan Gan. Who do you reckon calls her Gan Gan? Here comes Gan Gan. There's a tip.

It's got to be one of the little grandkids, isn't it? George?

George Dupuy. Yeah, you got it.

All right, fire!

Pop quiz tonight, who wants to be a millionaire? Um, but yeah, obviously a nation in mourning, but a tremendous, um, figure in most of our lives. And in fact, there was one thing you mentioned to me, Piers. Yeah, about the percentage of people who are writing alive over that time.

Well, the reason why it's quite shocking slash surreal— I mean, it's not surprising, but, um, it's— yeah, 80% of the UK's population was born after she became Queen. So she became Queen in 1952, so 80% of current the population were born after 1952. So all you, all you've ever known Yep, is the Queen.

So yeah, and strange times until we have another Queen. Could be for a very long time, well beyond our lifetimes, um, perhaps.

Yes, that's right.

Incredible.

Well, most likely. Yeah, for sure.

Um, but look, from one Queen to another, let's talk about Kim Kardashian and the reality TV star, but I don't like calling her that. I like calling her a businesswoman because this woman is pretty tremendous, I think. Yeah, all things put aside. Um, so she's launched— a bit of background here— this week she launched her own private equity firm, co-founded with the former partner, a guy called Jay Sammons, at the investment firm the Carlyle Group. It's called Sky Partners. It's going to focus on consumer and, as you would imagine, media. Businesses. Um, and then her partner in crime here, a little bit of background on him. He was the former global head of the consumer media and retail at the Carlyle Group, which, if you don't know who Carlyle Group are, they're an American multinational investment firm.

And fourth, fourth biggest, fourth biggest private equity.

And the reason why this guy is quite unique is that his clients over the years, amongst many, one of which included Beats by Dre.

Yeah.

And I was just trying to think of the circles here, like, how did, how did Kimmy meet Jay? And I was thinking, okay, so Beats, there's that Jimmy, Jimmy Iovine, I think his name is, and he's the guy that basically took Dre when he was coming up.

Okay.

Managed him. Coming out of the NWA days, um, and they started Beats Together, and that's what turned Dre into a billionaire. And I was just thinking, okay, so yeah, maybe there's that connection, but then also there's probably Kanye. Kanye and Dre know each other, and then like you think about, you think about like the circle here, it's quite a small world. You can probably tie them all together. Um, but the background here, and I guess where I want to take this, is that Kim Kardashian launched a shapewear label, SKIMS. And here's another tenuous link: she actually recently, um, did a SKIMS line on Beats headphones.

Oh wow.

So there's the hook, there's the connection to probably J. Right, in that sense.

Um, you know how much that— you know how much— you know how much that— so Skims.

Yep.

I was reading, I mean, this is quite extraordinary. It only launched in 2019. Do you know how much it's valued at as of— well, as of January 2022. So this valuation is most likely gone south like most valuations, but anyway, it's the only stat I've got. So by January 2022, it was valued at $3.2 billion, having launched in 2019. That's, that's pretty decent.

She's also launched the skincare brand.

Yeah.

Which is also out there. So she's not— I think it was someone else I was reading about the other day, which was J.Lo. Oh yeah, and she's a billionaire as well.

Yeah, they're just all at it. Gwyneth Paltrow, savvy individual, worth a few bill because of Gloop.

Then you've got Leo, Ashton Kutcher. They're all in the PE world, these, uh, these people. So I thought what would be a good place to start was, as we've just described there, Kim Kardashian's had a phenomenal. She's been a phenomenal success, whether you like her or you, you don't. Yeah, business perspective, it's— she's been an incredible, uh, success story. So why does she need to go down this private equity route? What does that offer her, being someone of phenomenal wealth, um, who has already started businesses and been successful at doing it? What is she trying to untap here?

Well, I think it's like any uber-wealthy person, you know, at the end of the day you get so wealthy that your lifestyle is, is kind of peaked, that you can't— it can't get better. You can't spend more money to make it better because you're already— you've hit the ceiling, right?

And so then tell me how that feels, Piers.

Yeah. It's pretty dull when you get there. You'll find out. And what happens is they've got so much surplus wealth, right? But then it's about, right, put this money to work. And you're getting advisors, like your money's got to be managed by someone, right? And when you're getting uber wealthy, it's going to be managed by one of the big funds and then So you kind of enter that world of investment. And I think over time, like when you're— like a lot of these celebrities, they get super wealthy when they're incredibly young. And I think they're so naive and they really know nothing about the world of money and investment. And they often get taken advantage of, I would say, by these big wealth management firms. And it's not really on their radar. And I think as they get older, it's a classic case here with Kim Kardashian. As they get more savvy, they get more business savvy, they start to understand this world because they've been in it for 10 years now. And then they start to, I think, make connections like this guy from Carlyle Group through their friends of friends. And, you know, we're at a party and we're having a glass of Dom Pérignon. And you know, one thing leads to another. I'm in the jacuzzi, you know. And so it's just about very wealthy people becoming more savvy about the investment world and wanting to put their money to work in different ways. So that's it. That's what's happening here. I think it's interesting that she's gone PE route. Because maybe we should just step back and just talk about, well, hang on, private equity. Because I was going to say a lot of these celebrities would maybe more go VC type of route, venture capital. But she's gone PE. I would assume it's just because of the fact that through her connections she met this dude from Carlyle Group who for whatever reason left the Carlyle Group. And I guess he's trying to, you know, find ideas. What am I going to do next? And met Kim, and, you know, so I would say probably it's that connection as to why she's gone down the PE route. I perhaps wouldn't say it was a conscious thing necessarily, but anyway, private equity— I mean, just from the super basics for those that aren't quite fully aware, it's a word people obviously— people know the name private equity, but actually what is it and what makes it different to VC and other forms of kind of investment? So Private equity, I mean, as the name suggests, is about investing in private companies. So this isn't, this isn't investing, this isn't buying shares in Apple, right? That's what kind of hedge funds do. So buying shares in Apple, that's on the secondary market, that's on the stock exchange. Private equity is all about buying private companies or In certain cases, it's taking companies that are public and buying them, taking them back private. So they buy all the publicly issued shares and take them private. And so it's about taking a normally a majority stake ownership in the business and then having a direct influence on how that business is run. And often they'll— so very hands-on, often they'll drop in a CEO to kind of take over. So if they're buying a majority stake, then they're definitely gonna be having big influence on the board, which of course then has an influence on company strategy and so on. So it's about private company investment and it's about long-term. And again, a big differentiator between, let's say, hedge funds and private equity is the time horizon of the investment. This is long-term and really illiquid. Because think about it, if you want to get out of your trade, if you've bought 60% of a company that's private, how do you get out? Well, you're going to need to find someone to buy it, right? It's not like listed on the stock exchange and I just sell my shares. So it's super illiquid. And they're looking for normally a 3 to 5 turnaround. Between time of investment and then exit. And then typically looking for 3 times their money over that 3 to 5 year period. Another thing that different— So the difference between VC and private equity, I would say is typically, like 2 things actually. It's typically about, well, where is this company in its life in terms of its journey? VC tends to be much more startup land, you know, new companies, much higher risk, um, whereas PE is looking for a bit more mature companies that normally are profitable, in fact. Um, so that's a kind of key category difference. And then the other one is how the purchase is financed. So the private equity world is very, very famous for its leveraged buyout. That's the kind of modus operandi for how a private equity firm would finance the purchase of the company. So this is where they would— you know, they— so this is about leveraging their funds under management. So let's say, I don't know, let's say you want to buy— let's say you want to buy out a company for $100 million. And you've got a fund. So these private equity firms, they raise money, right? They go to investors and say, right, we're raising a new fund and here's our track record. Have a look at all our funds over the last couple of decades. When we've raised a new fund, on average we've invested and generated a return in 3 to 5 years of X. That's what's happened the last 5 funds. We're starting a new fund now. Are you in? At that point, they don't know who they're going to be investing in normally. They raise the money and then it's, right, okay, let's start finding opportunities to invest in, right? Now, if they raise $100 million— or sorry, well, yeah, let's just say they raise $100 million, okay? They don't just go out and buy firms with that $100 million. They leverage it up. So what they'll do is if they want to buy a company for $100 million, normally they do a 90/10 deal. They'll raise $90 million through borrowing, and they'll use $10 million cash of their fund to then buy the company. Okay. And if, let's say, the company triples in value and they exit in 5 years' time, their, their holding has gone from $100 million to $300 million. Okay. They exit, they've got $90 million of debt, So they pay that off. So they're left with $210 million. So they've made $210 million from deploying just $10 million of cash. That's leverage. It's much higher risk. And actually, in my personal opinion, they're quite— they're bullies, private equity firms. They'll go and take advantage of companies who don't really know about all this. Because what they do when they borrow this money, they actually use the company they're buying as the collateral to underpin that loan. And often the company they're buying has to pay at least some of the interest on that debt. Um, so, but often these companies are desperate for the cash, right? Especially if they're not profitable, and especially these days if their cash burn's high and suddenly the economic outlook's not so sweet, then, right, they have to raise and they're being forced to into these PE deals.

But so these companies would go with a Carlyle Group for their expertise, their exposure, their connections, right? That's the upside for the company irrespective of the commitments it's then tied to, to be forced to grow.

Yeah, and I'd say it's kind of— it sends you down a different, slightly different path as a business. I would say it's often— a PE deal would often be, especially if they're buying a majority stake, it will often be an exit opportunity for founders or early shareholders. And these days, I'll come on to a point in a minute, but I'll mention it now, these days is actually PE firms just sell their stake to other PE firms.

Right.

It's just like this baton, they pass it on and they get to mark up the value of that trade. And then they get to say, right, we're raising funds, we're raising a new fund. Look at what happened with our last funds. 'Cause they just flogged their holding to another PE firm for a higher inflated price to make the numbers look good. But, But I'd say it takes the company—

I think I've seen something about this with like the analogy in the FT, and they were talking about they used to compete with each other, now they're all Bezzies, all these people.

Yeah, well, I'll talk about that in a minute, just in terms of how the PE world has evolved. But it does take the business, I think, in a different direction, because all of a sudden your company is now majority owned by a PE firm who's basically now in control. And they have a 3 to 5 year time horizon. That's it. They all— 100— the 100% focus on growth is about growing in that 3 to 5 year period, which can be good. I'm not saying that's necessarily a bad thing, but, you know, I think most businesses would probably benefit from a slightly longer time horizon growth strategy, but I don't know, it's not always the case, but, um, yeah, so they really do take control because they own the majority, right? But the PE world, I mean, it has evolved, um, quite dramatically, I would say. Um, like Blackstone, so they're the king, um, they're the biggest in terms of assets under management, but it's kind of got a bit messy because So Blackstone have got $881 billion under management, okay? And they're a private equity firm, except they're really not anymore. They're part private equity. Um, in fact, of their $881 billion, only $126 billion is private equity. Um, and that's similar for all of these big boys. So Blackstone are the biggest, then KKR are number 2, CVC Partners number 3, Carlyle Group um, number 4, or 3 or 4 in there. Anyway, they're kind of big 4, if you like. But a lot of these private equity firms have really morphed into credit investment businesses, because what happens is these deals have got so leveraged. So an example would be a deal that got done earlier this year, okay? And this is where these big deals, you actually get two private equity firms coming in and teaming up to do the deal. If you go back 20 years, private equity was super cutthroat. It was like fiercely competitive. Your arch enemies, any other private equity firm out there is dog eat dog. We've gotta beat them. We've gotta beat them to the deal. Now they're all pally and cozying up and partnering up. So we had a deal for Zendesk earlier this year. So Hellman Friedman was one of the PE firms, and the other one was Permira. And they bought Zendesk, they took Zendesk private, and they bought it for $10.2 billion. Obviously a leveraged buyout. I think they raised $4 billion in debt as part of the financing for that deal, right? $4 billion. This is for Zendesk, which was a company whose profits last year totaled $80 million. So they bought it for $10.2, raising $4 billion in debt, with Zendesk the business being the collateral. But it's a business that only makes $80 million. Now, the problem with that deal is it's so leveraged, it's so risky. You can't go to a big investment bank and raise that debt. They won't— they— so not only will they not, they can't lend to you for regulatory reasons because the risk level is too great. So where the hell do you get the money from then? And this is the thing, they get the money from other PE firms. So who was the lead lender in that deal? Blackstone, a consortium of PE firms, Blackstone at the lead, led that $4 billion debt financing round that then gets pumped into this deal. Then what happens is, well, as I said, when you kind of need an exit, 'cause it's 3 to 5 years and you've gotta keep your track record going, you've gotta, 'cause one thing from an investor, right? If you're investing in a private equity firm, You want your money back in 3 to 5 years. You understand it's illiquid, but I don't want it stuck in there after 5 years, thanks. They really need to flip these deals. And so sometimes it's hard. So what do they do? I'll just flip it to our mates. We'll just sell it to another PE firm. Just get it off the books. And they all kind of— it's turned out to be quite incestuous, incredibly leveraged. Quite high risk, entirely unregulated, and possibly vulnerable if the brown stuff really hits the fan in terms of the economy. You know, if we do get the Armageddon scenario, which we may not obviously, but you know, the PE world's pretty, pretty leveraged up to the eyeballs, um, and it's a space you've just got to be careful of. And it's so big, 25% of M&A deals now are PE. And it's like $10 trillion industry. So the regulator needs to start catching up.

You sound like a super fan of PE.

You know, seriously, it's— It's just, um, it's one of those things like it's kind of, it's kind of gone a bit bubbly, the size of it, and it's kind of gone under the radar a little bit and it's all of a sudden massive and they're having to resort to do, doing incestuous deals to pull off these super risky plays. It's like a bit of a House of Cards in some ways. Um, but there you are.

Yeah, it seems like then that the, um, if you were thinking about the, the way of which these different industries within finance kind of put themselves forward, yeah, it always seems a bit cloak and dagger of what's actually going on in the PE world. Yeah, come down to my crypt and meet my investors. And we will discuss, which was a real life story I could tell another day. But yeah, it's always a bit funky, bit different.

I don't wanna be too cr— I mean, look, from a career's point of view, look, a lot of people listening to this will perhaps be quite really interested and intrigued by the PE world and wanting to go down that pathway from a career's point of view. And look, these Blackstones, they're so massive. Massive organizations. And yeah, it's a great career path, you know, from a grad level, you know, you'll learn a huge amount, you know, about cutting-edge M&A. And they're so massive in terms of the institution size now that, you know, they're rivaling some of the big banks, right? So your kind of career paths and career ladders and career opportunities can look pretty interesting. But I would say it's pretty tricky getting into a PE firm as a grad. Their normal kind of mode of operating is that they hire people who've got a couple of years of IBD experience at a big bulge bracket bank. That's what they'll tend to do. They'll basically— Goldman's, you can pay for the, you can pay for the graduate training You know, yeah, once you've been there a couple, a couple years, we'll pluck you. And I mean, I've— I know of someone who signed for Goldman Sachs as a grad. Before they signed the Goldman Sachs contract, they signed another contract with a PE firm that said, absolutely, go to Goldman's, and in 2 years' time you come to us. So that he pre-signed a PE position for 2 years with all transparent. They knew that he's going to Goldman Sachs, but obviously Goldman Sachs didn't know.

Yeah. So was there a little, uh, brown paper bag involved in order for that to— for the person to actually then go to Goldman Sachs under the guy?

I'm right, they're getting paid. Yeah, there's a, there's a There's a signing on, there's money changing hands for sure. Signing on fee.

Yeah. Yeah. Wow. Well, I was just on the Carlyle website actually.

Oh yeah.

Um, and for anyone who's been in, you know, just kind of stoked their interest in what we've just been discussing, it's quite interesting taking a little nosy around, um, their website. Obviously they pitch themselves now as like environmental. Yeah, green, and all the investments are to make for a better planet. But beyond that, beyond that angle, um, it's got some quite interesting— the anatomy of a PE deal, and they've kind of got the steps of investment deal sourcing, the due diligence, the investment period leading to the exit, as you'd kind of described. So yeah, worth checking that out, um, and having a look around for sure. But look, let's move on. Let's talk about, let's talk about a little bit back to our bread and butter of macro global markets. And yeah, really it's just to discuss the fact that, well, a couple things. Jay Powell has done very little to dispel expectations that the Fed are gonna, gonna pull the trigger on the third successive 75 basis point rate hike. He said the U.S. central bank needed to act forthrightly to ensure elevated inflation did not become entrenched. And entrenched is what exactly the Bank of Canada said. Bank of Canada also hiked rates by 75 basis points, signaling more rate hikes to come. They're in fact Canada's central bank, the highest policy rate amongst all major advanced economies now. They're already at 3.25%. Remember, they hiked 75, they hiked 100 the prior meeting. They were front— they were like the the advocate of front-loading quite quickly out the gate. And then the ECB, of course, have come out this week, an unprecedented 75 basis point— unprecedented for them, not for the marketplace, as I'm sure you'll discuss in a, in a second. And Lagarde said determined action had to be taken, inflation remains far too high. So at this point, the expectation is now moving for the ECB to potentially maintain this kind of pace. For the US, Fed funds rate are now pricing 86% probability that they'll go 75. So that's pretty much the highest it's been following the Powell speech. And we've only got, I think it's 12 days until the meeting, so it's not far out now. And the blackout period will kick in— blackout period being this kind of period of time a week before the event when they cannot speak. And so really if their forward guidance strategy is working, then if they disagreed with that market pricing, they really need to say something pretty quickly. Otherwise, a 75 is in the bag. So yeah, just your thoughts on, you know, is 75 the new 25? And the idea of, particularly with the ECB, because you've kind of got the extremities here of the Bank of Canada super quick and aggressive to the ECB super slow playing catch-up. Who out of these three or more are going to be the winners and losers of the different strategies that they've done to counteract the inflation situation?

Yeah, that's a good question. I mean, obviously time will tell. If I was to predict, I was a betting man, then my money would not be on the ECB. I can tell you that. Um, I would say the way markets have taken this, this week, because, because as you were saying, like Jay Powell being hawkish, you know, probability of a 75 hike in a couple of weeks, that probability now at its highest. Um, ECB going 75 when actually, I mean, it was probably the consensus in the end, but there was a healthy minority that were expecting only 50. So it's been a hawkish hawkish week, and yet stock markets are up, um, the dollar's weakened. And I think, all right, it's a bit of profit-taking and so on, but I think it's actually in many ways the way you were talking it through there. So in many ways it's the Bank of Canada that are the, the— what, how do I describe— the lead indicator because the Bank of Canada hiked 100 basis points, then they hiked 75. So what's the direction of travel there? Well, it's a reduced size in hike. Even though 75 6 months ago was like crazy town, um, it's now normal. And Bank of Canada went that one extra, and now they're coming back. And so I think markets are trying to always look ahead. You know, markets are forward-looking. They're very much pricing in future expectations. So what are our future expectations? And it's been incredibly cloudy. It's been very difficult to be anywhere near certain about what might happen end of this year into the start of next year. But maybe that Bank of Canada thing has just meant that people are looking beyond these 75 hikes and they're expecting these central banks to start to slow down. Ironically, the ECB are speeding up, but they're always the last ones to the party. Um, and well done, they've done it again.

Well, there's a great comment that I saw, which is one of the kind of factors that might well determine the success or not of these strategies, and it came from your friend, your dear friend Jim Reid. Oh yeah, of Deutsche. Yeah, still knocking around there. They're very— still—

that's amazing. He's still— is he— it's still producing his daily—

the Daily Read.

Daily Read. Yeah, yeah, early morning read.

So one of his snippets this week that was, was this. He said that, um, well, why both the ECB and the Fed are now praying and hoping that a recession strikes soon because the longer it takes for the economy to contract, the longer financial conditions have to be restrictive, the greater the pain and fallout once the hammer finally does hit, and the greater the monetary stimulus that will be required to reverse the damage that is currently inflicted by the central banks themselves.

I, I love that. I think that's spot on. And what a What a screwed up world we live in. Praying the recession hits soon, like the sooner the better. I mean, it's quite— yeah, I mean, it's, it's, it's spot on though, right? They're desperate to stop hiking or slow down their hiking. Desperate. But they can't if data stays strong and inflation kind of continues to remain elevated. And then, yeah, that's right, the rates going up further. What, what's the peak in interest rates during this hiking cycle is basically what he's talking about. And the higher that peak, the more damage, the more hurtful it will be, you know, on the other side. And then therefore the more stimulus it's going to require to kind of bail us out of the hole again.

So you don't want to join me at the 4,500 club in the S&P just yet then?

Well, I was looking, I was looking quite good there for a while. Those, just to remind listeners, we had a bet, um, a few weeks ago. I think we were trading, I think the S&P was trading at 4,200, and the bet was Ant thinks it'll hit 4,600, and I said it'll hit 3,700. Um, then we had a 2-week big sell-off, uh, and I was, I was very smug, uh, but we only got down to 3,900. We've now kind of bounced back above 4,000. So yeah, it's kind of—

you're a million miles away from your target, so I'm feeling all right still. I'll keep it, keep it cool. We're all good.

Um, but it's not only the stocks. I mean, what's happening into the end of the week in markets, across all markets, it's all linked. It's so highly correlated at the moment. What's happened is the dollar's weakened a bit. It's still like super, super strong, you know, relatively. It's been strengthening all year, but the dollar index hit 110 and now it's dropped back to 109. Okay, so a little bit of profit taking. Okay, bit of dollar weakness, and that has just fed through markets. So stocks have gone up a little bit, commodities are up, um Bitcoin's gone up. I mean, everything's bounced because this dollar strength's just come off the top and there's been a bit of profit taking.

Well, look, we'll talk about the pound on the back of our talk about the UK because there was quite an interesting comment from, uh, the legendary investor Bill Gross, who, um, we can talk about a little bit because not everyone would be aware of who he is. He's quite old school, now retired actually.

The Bond King.

The Bond King. But the Bond King's been talking about FX and he hasn't got a very good track record, so we'll talk about that in a moment because he's put out some pretty punchy sterling calls, right, this week. But talking of the UK, Prime Minister Liz Truss has announced an estimated £150 billion package to counteract soaring energy prices. But with just 6 months cover for businesses compared to 2 years is what we're going to see for households. The Energy Price Guarantee will limit average annual household bills to £2,500 over the next 2 years. Just £2,500. So it's— yeah, it's okay. But there was kind of— so there's 4 factors here that I see that I wanted to kind of pick your brains over, which is First off, the two ones I've mentioned. So there's two approaches here. There's household on a timeframe of 2 years, and then there's businesses, which is far shorter at 6 months. The third, third area is then she announced a £40 billion liquidity facility to help energy companies deal with volatility in response to requests this week for the government to help deal with potential cash flows crisis that the companies, the energy companies themselves are having. So that's the third one. And then the fourth one, she's given the go-ahead to fracking and more North Sea licenses to accelerate production of domestic energy. So of those four things, or the package in its entirety, um, from the points to the overall economic impact. What's been your thoughts this week?

Well, it's a big, bold package. It's about the— it's pretty literally the opposite end of the spectrum to what Liz Truss would have wanted to do. You know, in terms of her being a bit of a Thatcherite, sort of conservative, you know, big state handouts is the opposite end of the spectrum politically. But obviously we're in a unique situation, so she's come in big and she's come in and is big. She's got a really big bat out here. And, um, I think that firstly, so can I just clear something up, because everyone's going, "Look, it's $150 billion." But it definitely might not be $150 billion. No one knows how much it'll be because you can't predict where gas prices are going to go in the next 12 months, 24 months, sorry. This is a 24-month package. So what will gas prices be? Because ultimately that will determine how much the government have got bailout here. So if gas prices stay uber high for that entire 24-month period, then sure, it might be $150 billion. It could be a hell of a lot less than that. But I guess it gives certainty to the public, which is a good thing. It's still a step. Now, one key thing here, which I've been trying to debate in my own brain, is this inflationary or not? Because inflation's our big issue at the moment, and obviously that's tied into energy prices, right? But like Liz Truss and the government are saying, this is a— this will curb inflation and boost growth, is their line, which is kind of a bit of an oxymoron. Because if you're boosting growth, then that's increasing demand, which leads to inflation. So they, they're a bit confusing with their message here. But it— so the— on the growth side, first of all, how will it boost growth? Well, that's obviously straightforward, in so much as people will only spend a maximum of £2,500 a year on their energy bill. We've been predicting, if there was no government support here, that that might go up to £5,000 or even £6,000 Right, that would— that— well, that's your killer. That is your economy destroyer right there, which is why they've had to step in. So at least now they've capped it at £2,500, meaning that income above that can now get spent on the high street, whereas it might not have done if there was no government support. So that's where they're saying it will boost growth. But right now, energy bills are about £1,900. So it will get more expensive for people. So is that— I don't see how that's— that when they say boost growth, they mean relative to what would happen if they didn't provide this support. It's going to be a growth negative from a consumption point of view if you take surplus household income today versus in in a couple of months' time, that surplus household income's going down 'cause energy prices are gonna move from 1900 to 2500. So how much it boosts growth, I don't know. But from the inflation point of view, again, two angles. Number one, it caps energy prices. So therefore that's a positive for like trying to bring inflation down, okay? But if people go, weh-heh, I've now got the £1,000 that I was going to have to spend on greater energy bills, weh-heh, I can now go down to H&M and fill my boots. Does that happen? If it does, then that's inflationary. And I guess the big issue and the big risk here with this big, bold package is that fine, it solves one issue over here, energy crisis issue, but it just adds fuel to the other big issue that's over here, and that's inflation. And so ultimately you may still end up in a dark place with interest rates super high and stagflation, where we've got a recession and inflation's really high. Um, so But I mean, that— so that, that's, that's my two cents. I mean, to be honest, I don't think she had much choice. I think in some ways it's probably worked out well that we had a change of leader, because you know what it's like, it's like a fresh piece of paper, right? There's no baggage from the previous administration, right? Let's, let's start out on the right foot with some giveaways. And I think that's been a benefit of all of this. Kind of political turmoil. On the business side then, yeah, I mean, look, it's a bit more difficult on the business side, I think. I mean, so they've said, look, we'll support for 6 months. What they have said then is, from there onwards, we'll review it and we may continue to support selected sectors because it's not fair for some businesses who are much more energy consumption as part of their process. You know, it's not fair on them versus a business to produce their product is less energy consumption. So they might try and offset that. Of course, what they're hoping is gas prices come back down and this $150 billion thing turns out that it's more like $50 billion. But will prices come back down? And this comes to then, well, your fourth point. Like, let's desperately, desperately find other suppliers and not have to rely on Russia. And fine, then there's this good headline grabbing, oh, let's start fracking, you know, or let's, let's sign off some on some new exploration deals in the North Sea, whatever, you know. And that's like I think that's more for the headlines more than anything. I mean, that's not a quick fix. That doesn't mean to say it shouldn't happen, but of course it's very negative from an environmental perspective. But you could say, I don't know, an argument is that let's shelve that climate issue because we've got a bigger, more immediate problem. But I mean, I'm not sure that's the best way to behave. So You know, I think out of all of this, a continued increase in breaks and funding for green energy is, is the way, um, and that's definitely going to happen. It's just whether they can find a short-term solution for alternative gas supplies, which I doubt.

So at this point then, if I was a strategist for Putin, knowing that they're basically— their entire trade is based on inflationary conditions are going to ease, energy prices will settle. It's just a matter of staying tough and hanging in for the long game. Europe cannot be agile enough to change quick enough, so the war in Ukraine will continue for the foreseeable, unfortunately.

I mean, I think Putin from a gas price point of view, he's got to play this game where he keeps gas prices super elevated. But obviously to do that, he's selling less gas. It's not like on oil, it's a bit different. I know he's selling less oil to Europe, but India and China are buying it all. But with natural gas, because of the the deliveries through the pipelines, right, which are fixed channels. It's easy to divert a ship that normally would go to Germany. Well, let's just ship it around the top to India, right? Um, it's much harder to, you know, sell your gas elsewhere because the infrastructure is not there. So to keep the gas price high, which is in his interest politically, um, is hitting him from a kind of revenue point of view. He's having to sell less, but Will he just entirely switch the tap off? Wow. I doubt it because he needs some money coming in. So it's like a trickle. Let's keep it like Nord Stream 1 at 20%, keep those prices super high, really put the pressure on. But ultimately, medium to long term, he's shooting himself in the foot because obviously it's just accelerating Europe's pivot away from just fossil fuel energy, but also then away from, you know, you being so reliant on Russia. So medium-long term, this is going to backfire.

Um, maybe he could, um, maybe he could do a backdoor deal with Mr. China whereby China commit to an upfront increased order size to offset his loss of gas income, on the premise that then by securing the geographic defensiveness of that eastern part of Ukraine and so forth, it allows China to exercise its long-term trade routes utilizing those areas that have been safeguarded by the Russians. So I'd be engineering a deal if I was Putin, and China would be quite pivotal to make sure that then you encapsulate, or you try to maximize, this opportunity that you have on Europe. At this point in time.

Yeah, absolutely. And if he does a deal with China, a long-term deal at a price point that's quite heavily discounted from the current very elevated price, right, then actually you're still doing it at a price that longer term is pretty decent. Thanks very much.

Yeah.

So, I mean, yeah, so we'll see. I mean, I do. I think that Truss, she was forced into this. I don't think she had a choice. I think she's done the right thing by putting it at a 2-year timeframe. I think that's the right play. I think what Boris was doing was going, right, well, we'll have a cap at whatever. I can't even remember the numbers now, but we'll have a cap for the next 3 months and then we'll review it. And then you get to 3 months and you're like, ah, shit. Price is still really high. Ah, okay, well, let's have another cap for another 3 months. I mean, that's, that's the worst case scenario. So I think getting out in front of this 2-year deal, I think that's the right thing.

Yeah, strategically, I think you're right. You go out there, you put the bazooka on the table. We can go up to 150, right? Your intention is it never gets close to 150. Yeah, but the point has been made. Political favorability is backing then your authority to control the situation. And yeah, yeah, well, look, let's see. Early days indeed. But yeah, what, what did, um, Bill Gross, to finish, have to say? Well, we'll use that as our conclusion. So Bill Gross, for those who are not familiar, was what, the co-founder of PIMCO? And PIMCO is— at the time he was, he was running what, the world's biggest— is the world's biggest bond fund. And he was the man in charge, and he was a dictator, some might call him. Yeah, he was the real, um, infamous character, let's say, uh, in the world of finance. He, he exited PIMCO, I think— well, I can't remember what year that was now— several years ago. And I think he joined Janus Henderson. Yeah, he's West Coast-based. Newport Beach, I think, is where PIMCO are based. Uh, he's, he's now packed it in as of 2019, but he's not shy, is our dear Bill, of putting out a few bold calls. Um, so there was one, um, I'm trying to find the actual headline. He said he—

what's he say, like below parity or something?

No, no, no, the opposite. He said he is a big buyer of sterling right now.

Oh wow.

So his rationale was basically talking about the fact that he thinks that the overvaluation of the dollar against all major currencies. He said that continued large trade deficits and a ceiling on the Fed's ability to raise rates to anticipated levels, right, due to future recession, will limit further depreciation of the pound and will likely lead to future relative increase— increases compared to the dollar. So he's, he's calling for long dollar despite fiscal, political problems. Long sterling, excuse me, right, at this point. Um, but yeah, he's calling the top of the dollar. Yeah, basically. Um, and then he— but the problem is he was criticized. I think it might have been back in 20— either 2010, 2012. He said the opposite. He was balls deep calling short sterling. Um, he said, he said the UK economy is built on nitroglycerine or something at the time. And he was wrong. So the bond king is trying to give some FX advice. But yeah, any thoughts on that?

Well, calling the top of the dollar brave, I mean, it is very, very, very high. I mean, to the point where we're in potential intervention country, like thinking about the yen, for for example. Um, and I was just saying to the guys earlier on the desk that, look, the ECB, at least they've hiked 75, right? So that might just keep that euro-dollar around parity now. You know, that thing was trending lower, it hit 99, it was going down, and I think they've done— they've been hawkish enough to just, just flatten that off now. So I think we've got parity for euro-dollar probably for for the next couple of months at least. Um, so that, that will help to just calm that dollar strength thing down. But, you know, ultimately, I think for now we've gone through phase 1 of dollar strength, which has been driven by a hawkish— a more hawkish Federal Reserve than versus the other central banks. That's driven phase 1. There is a potential phase 2 to the dollar strength. Which is about recession and how bad is the recession and how much stimulus might be needed to deal with it. And I think the US recession will be milder than Europe. So personally, I think there's a potential for further dollar strength just from that recession differential, which is, is still ahead of us.

Yeah, and we're, we're only 2 months out or so from the midterms as well. And actually, that looked like quite clear that Biden was going to get hosed. Doesn't actually look quite as clear now in terms of the, the House and the Senate. I was looking at some initial modeling that was coming out of the FT you put together this week, and it's— the model is wide.

Yeah.

So there's a lot of uncertainty now over what is quite a radical change in the last month. I'd say.

Yeah, I think the— because the— I think the odds are they'll stop— the Republicans will win the House of Representatives, but the Senate might stay in Democrats' hands. But yeah, you're right, that the polling has dramatically shifted, like from the start of the summer to now the end of the summer. There's been a I mean, Biden camp has, has been a great, great few months.

When you're down, the only way is up, baby.

When you've hit rock bottom.

All right, on that note, we'll wrap it up. So if you enjoyed the episode, please do leave us a rating and a review. We hugely appreciate it. It really helps kind of boost the visibility on the various different podcast platforms. To get this out to as many people as possible. But yeah, check out the links in the show notes for our daily Amplify Me newsletter and our Finance Accelerator free simulation sessions. They're still happening every Wednesday. I would love to have you on board if you've not already done one. But with that, Piers, thanks very much and take care, everyone.

Have a good weekend.