[Music] Consuelo Mack: This week on WEALTHTRACK, renowned
financial historian and bestselling author Niall Ferguson explains how understanding
history can make you a better investor. Niall Ferguson: Models will
mislead you, ultimately, you have to apply history and have a
feel for how exactly the great events, big unexpected events like a
pandemic can change the game. Consuelo Mack: An interview with Niall Ferguson
is new this week on Consuelo Mack WEALTHTRACK. Announcer: Funding provided by
Morgan Le Fay Dreams Foundation, ClearBridge Investments,
Royce Investment Partners, Matthews Asia, First Eagle Investment
Management and Strategas Asset Management. [Music] Consuelo Mack: Hello and welcome to this edition of WEALTHTRACK.
I'm Consuelo Mack. If there is one adjective we have heard repeatedly in the last year-and-a-half,
it is unprecedented. It has been applied to describe the amount of monetary and fiscal
stimulus that has been poured into the economy. It's been used in relation to the
pandemic lockdowns and reopenings. and the record breaking winds in stocks,
bonds, real estate and commodity markets. Is there no historical precedent for these events? Who better to ask than Niall Ferguson, who has
studied booms, bust, the rise and fall of empires, the power of societal networks and catastrophes
of all sorts, including plagues and pandemics. Ferguson is one of the world's leading historians
and an influential commentator on contemporary politics and economics, a senior fellow at
the Hoover Institution, Stanford University and at the Belfer Center for Science
and International Affairs at Harvard, Ferguson is the author of numerous articles
and a regular columnist for Bloomberg Opinion. The titles of some of his 16 books
underscore his wide scope as an historian. Colossus: The Rise and Fall of the American
Empire, The War of the World: 20th Century Conflict and the Descent of the West, The Ascent
of Money: A Financial History of the World, The Square and the Tower: Networks and
Power from the Freemasons to Facebook. Ferguson is also a television producer. His most
recent PBS series, Niall Ferguson's Networld, is based on his bestseller,
The Square and the Tower, about the power of networks through the
centuries. He also won an international Emmy Award for his PBS documentary
series based on The Ascent of Money. His most recent book is Doom
The Politics of Catastrophe, which analyzes how societies have reacted
to crises from the Roman response to the eruption of Mount Vesuvius to various
governments’ handling of COVID-19. He has also branched out into the investment arena
as founder and managing director of Greenmantle, a macro-economic and geopolitical advisory firm
offering historical perspective and research services to a select group of clients, including
many top hedge funds and investment firms. According to Ferguson, experience has
taught him that understanding history does help make us better investors. I
began the interview by asking him why. Niall Ferguson: When the financial crisis struck
back in 2008, I was very struck by how few people in charge of major financial institutions had
really any handle on the relevant history, which was, after all the 1929 stock
market crash. There was a real risk that we might plunge into
a second Great Depression. And very few people in positions of responsibility. A notable exception
being Ben Bernanke, had actually studied the relevant financial history. The people
who were running the big institutions were essentially flying blind because they only had
the history of their own personal experience. And I remember looking it up. Most of
the CEOs of the big Wall Street firms had careers that had started in the early 1980s,
so they hadn't even personal first-hand memories of the great disruption of the 1970s. My
observation was that financial history could, in fact, be of immense use to decision
makers both in the public and private sector. And I think actually Ben Bernanke bears
that out. He made some crucial decisions in late 2008 based on the
insight that we were running, the risk of another Great Depression. And
that was one reason why Fed policy was so aggressive so early. Not everybody on the
FOMC agreed with him, but he was the chair. He could drive it through. And ever since then,
I've tried to argue that the people on Wall Street and the other financial centers
that you need to have financial history in your repertoire of tools, you
can't just rely on some model. The model may work 90 percent of the time,
but what about the 10 percent of the time when things go nuts and something happens
that you've never encountered before? The idea behind Greenmantle was to
try to apply history systematically to all the kind of big issues that
asset managers and investors face. Some of those are macro questions. Is there going
to be an enormous contraction in the wake of a financial shock like Lehman Brothers?
Some of them are political questions. Who's going to win the next election and what
will that mean? But in all these questions, there is a history that you can bring to
bear to answer it. And that's really been the approach I've taken for the last 10 years.
Consuelo Mack: Niall, what is the history that you brought to bear with the
last presidential election, which you did say would be messy and close. We
all felt [inaudible 0:05:24] in that period, that there's never been anything like this.
Clearly there were. What were the analogies? Niall Ferguson: A couple of analogies came
to mind. One was the election exactly 100 years before, which happened after
the great Spanish influenza pandemic. And that election was won handily by the
challenger, the Republican candidate at that time, Warren Harding. And he
campaigned on a normalcy ticket. He offered normalcy after the extraordinary
events of the previous years under Woodrow Wilson, which, of course, included not
only a pandemic, but also a world war. And that normalcy slogan was
tremendously effective. I saw Joe Biden as a normalcy candidate running against somebody
who had brought a wrecking ball to Washington. And I certainly felt that the pandemic greatly
reduced Trump's chances of re-election, particularly with elderly
voters who'd been crucial in key swing states 4 years before. That was one
of the historical analogies that we thought about. And, of course, the last thing that you
always have to ask yourself when you think an election is going to be close,
is will this be Truman vs. Dewey? In other words, are you going to actually find a
massive upset that catches the media by surprise? I thought a lot about that, but came
to the conclusion in the end that when you thought about it long
and hard, Trump was going to lose. It wasn't going to be a landslide
in favor of the Democrats. It was going to be close and it was going
to be messy. Precisely because, as in two, there would be at least one state. It turned out
there were more than one state where the result could be could be challenged. I felt that using
that historical approach got to a much better projection than political scientists were
coming up with using polling and models. I talked to some very eminent political scientists
and pollsters in the period prior to the election, and they were predicting much larger Electoral
College majorities for Joe Biden. I think that's because models will mislead you. Ultimately,
you have to apply history and have a feel for how exactly the great events, big, unexpected
events like a pandemic can change the game. Consuelo Mack: When you're
talking to a Greenmantle client, what were the investment ramifications? What
did you advise they do based on that outcome? Niall Ferguson: Let me take you back to the
beginning of 2020 first, because before we got to the election in November, we had to navigate
a pandemic. One of the things that I think really helped was having a feel for how pandemics begin.
Back in January of 2020 from a pretty early-stage week 3 maybe of that month, I was convinced
there was going to be a global pandemic. I remember telling clients this is
going to be big. It's going to be certainly comparable with some of the big
influenza pandemics of the 20th century. You should expect it to be
global, highly disruptive, beginning with supply chains out of China. And
therefore, brace yourself for some really major financial as well as macro disruption.
Consuelo Mack: And again, that was a big call, Niall, back then because that was way before
other people realized how serious this could be. I might add in my introduction to you,
I mentioned your most recent book, Doom, The Politics of Catastrophe. And this very much
plays in of you are well equipped to analyze this. Niall Ferguson: I think that if you've studied
history, you run into plagues it's hard to miss them. Because they’re big disruptive events,
whether you’re a medievalist looking at the 14th century Black Death or in my case, someone
who'd worked a lot on the 1918-19 influenza. The red flags were there from very early
on that something bad was happening, especially when the Chinese government denied
that there was human to human transmission. Which was just the kind of thing that made
me think it almost certainly was going on. But I think back to that time when I first started
to argue that we were facing global pandemic, the clients were overwhelmingly skeptical, as
were people at the World Economic Forum in Davos who wanted to talk about climate
change. Which was, of course, climate change is always the top of the agenda. That was at a time when the pandemic was already
underway and planes were flying from Wuhan to European and American destinations. It
really took a while to persuade people that this was going to happen and happen globally. Even in February I can remember having very
heated conversations with people who thought it would be contained in China or that it certainly
wouldn't be more than the seasonal influenza in the United States. Again, history helps because it
tells you that in the early phase of a pandemic, it doesn't look like exponential growth because
the case numbers initially are relatively small. And at first it looks like it's linear. But
that's exactly what it looks like at the beginning of a pandemic. The beginning
of a pandemic is a time when there are little tiny red flags and you have to look
a bit closely to see them. But the pattern was similar also to 1957, which also began
as so many pandemics have begun in China. And initially looks like it was a
Chinese problem and became global very rapidly. And of course, we now are far more
reliant on-air travel than sea travel. It was easy to predict that it would go really quickly global
if it was as contagious as I suspected it was. Consuelo Mack: And again, to bring that
to the real world investment decisions, then what were the investment decisions
that one would make that you would talk about with your clients in expectation that
this pandemic would be a very serious event? Niall Ferguson: You had to get
very defensive. Because, of course, it was inevitable that with all the
disruption of production and supply chains, there would be a financial crisis of
some sort. And in March it struck and it was very severe and it extended right
into even the US Treasury market briefly. There were 2 things to say. Number one, you have
to be ready and very defensive for this shock, because at some point everybody's
going to wake up to the reality. And the second thing, of course, what will
the authorities do under these conditions? And again, I think it was important to realize
that if you were sitting at the Fed or at the Treasury, this may not have been a financial
crisis, but it looked a lot like one by March. It wasn't difficult to predict that there would
be very quickly quantitative easing infinity, a big expansion of the Fed balance sheet as
well, of course, as a great deal of spending, the Carers ACT, which was very hastily improvised.
My sense was that there would be this temporary, very sharp shock of panic when people realized
that this really was a global pandemic. And then a great firehose of fiscal and
monetary support would be turned on, rather, as had been done in 2008-2009,
only on an even larger scale, because many people from that period had concluded
we didn't do enough. That was, again, a matter of applying history and trying to figure
out how to sustain that reflation would be. And it's not difficult when the Fed is
signaling zero rates as far as the eye can see to anticipate rapid appreciation of
financial assets. There were a few tricky questions like was gold a better bet than
Bitcoin when things really were ugly? That wasn't an immediately easy question
to answer, but the broad answer here. The answer was the Bitcoin was a much better bet
than gold. That wasn't immediately obvious. At first they actually behaved rather similarly.
Everything sold off at that moment in March. Bitcoin took off and gold did not
in the rest of 2020. And if you believed, as I do, that Bitcoin is a digital gold
or maybe technically an option on digital gold. It was actually a better thing to hold in
your portfolio than gold over 2020 as a whole. Consuelo Mack: That is such a radical idea. It's
not radical in certain circles. But honestly, the digital gold idea, I've certainly heard
that before. There are a lot of skeptics out there about that. Matt McLennan being one of
them at First Eagle, who is a friend of yours. Let's go to digital currency. And again,
are there historical analogies to that? And what's your take and understanding of where
digital currencies are going, what they represent? Niall Ferguson: First, Consuelo,
credit where it's due. One of the beauties of Greenmantle was that I get to have
conversations with people like Matt McLennan. And it was actually in conversation with him that
the idea of an option on digital gold came up, because I've been asking, is this digital gold? And Matt said, think of it as an option
on digital gold, then it'll behave much more like an option. This was a brilliant
insight. And I remember incorporating it into a new edition of my book, The Ascent of
Money, back in 2018. The question of what is Bitcoin or what is cryptocurrency has been
around, though, since the financial crisis. Let's not forget the original paper that explained
Bitcoin. The Satoshi paper was published in 2008, the same year that Lehman blew up. And my initial
response I remember was a kind of fuddy-duddy old professor type response. This is not a
credible challenge to existing payment systems. Don't even talk to me about this as money. That
was my response to my teenage son. Another person whose opinion I greatly respect. But by the
time we got to 2017 and he'd been nagging me for some years about it, I had to rethink my
view and I rethought it in a couple of ways. First, it's probably a mistake
to think of Bitcoin as money. At least it might become money, but it's not money
yet. But what it certainly can be is a digital asset. And the same was true of the theory
of another digital currencies that were being added to the ecosystem at that time. If you look
back in history and asked, what is this like? Which is always my question, what's this like?
It was a bit like the early days of equity finance. In 2017 people will use the initial coin
offerings kind of the way the early equity issuers were using stocks to raise money in ways that
were novel and quick and not encumbered with regulation. My first take on crypto was, this
is just the kind of new way of raising money. And in that sense, like the experiments
with the early equity companies that produced the bubbles, the famous
Mississippian South Sea bubbles. It was obvious, A, that you were going to get bubbles because
that's kind of part of financial innovation. But, B, that something would
survive when the bubble burst. And my guess was that although there would be this
bust, that Bitcoin and other tokens, particularly Ethereum, would survive and it would be
a mistake to expect them to go to zero. Including some friends of mine, some people argued
it's all going to zero, bitcoin is expletive coin. I thought that was wrong. And my sense was
that financial history tells you it's an evolutionary process. There are a lot of
things that go extinct. But innovation ultimately will produce some survivors and
those survivors will then become very important. We saw that in 2020 in a moment of total panic
when it seemed as if not only the financial system, but potentially the international trading
system would break down in the pandemic. A great many people, especially in countries with somewhat
rickety banking systems, turned to crypto. And this adoption process where people
say, look, I should have at least some percentage of my portfolio in this. Even
if it’s only 0.2 percent. My prediction in 2018 was that adoption process
will drive the Bitcoin price up. If it’s 0.2 percent of the portfolio
of every millionaire in the world, then you were on 15,000 dollars of Bitcoin.
And if it's 1-percent then it's 75,000. And that gives you a range I think of roughly
where, where things have gone in the past year. Consuelo Mack: Back to the
election, you figured out as far as Trump's losing a close messy election,
that Joe Biden was the normalcy kind of candidate. Then we had the other wrinkle, which was the
Georgia runoffs. Explain what a turning point that election has been and its significance.
And again, the investment ramifications. Niall Ferguson: This was one of those
occasions when you have to bet against history, because history said that the
Democrats probably wouldn't win both. But there was something very exceptional going on and an enormous amount of firepower was directed
at those campaigns by the Democratic Party. It became clear that the stakes
were high, very high, because on these runoffs depended whether
or not they would have a majority in the Senate. Remember, as I said, the election
was close. The Democrats won the presidency not by a huge margin, enough to be contested. They
did not do well in their Senate and House races. And there they were, everything
hinging on 2 runoffs in Georgia. And for that reason, I think they were
able to mobilize votes and devote resources in a way that beat the historic track
record and produced those victories. Now, the consequences for investors were colossal,
because at that moment when those results came in, the Democrats had with Vice President
Arista's casting vote majority in the Senate. And that meant that Mitch McConnell was
no longer the most powerful man in Washington. That the Senate was going to start at least
voting through some of the Biden administration's agenda. And as that agenda emerged as
really a very bold, big spending agenda. Tackling not only COVID relief, but
also infrastructure and a bunch of other things that it mattered enormously
from the point of view of fiscal policy that the Democrats could actually do this and
they weren't going to be thwarted in the Senate. I think if you take a step back and ask,
what is the big question for investors now in mid-2021, it's got to be, is inflation
coming? Have they overshot or are they doing too much fiscal on the back of an
economy that is already recovering rapidly, thanks primarily to vaccination? This was a
question Larry Summers posed back in February. It didn't make him very popular with
his friends in the Democratic Party, but it was the right question to ask because
clearly this is a very large fiscal package, total price tag in the initial proposals,
close to 6 trillion dollars when the output gap is nothing like the one that we
confronted after the financial crisis. The big question -- and here I think history is
extremely helpful -- is how are we heading not just for transitory inflation, which
the Fed admits is going to happen. But for an actual uncoupling of inflation
expectations and a new inflation trajectory, unlike anything we've seen in decades. And that's the kind of question that I
don't think an economic model can tell you. You need to think historically
to try and get the answer. Consuelo Mack: Where did you look or where are
you looking historically and what's the answer? Niall Ferguson: I remember kicking
around a couple of possible analogies. One was the way the US economy
behaved after World War II. When controls of which there had been a great
many were taken off. You had a real surge of inflation. But I came to the conclusion
that a better analogy was with the 1960s. And maybe that's appropriate,
because I've heard it often said by his supporters that Joe Biden is a
transformative president like Lyndon Johnson. Certainly, if you look at what happened
under Johnson's presidency, he inherited an inflation rate below 2-percent. It had been
pretty flat in the first years of the 60s. And then in 2 big jumps, inflation went
to 3-percent to 6-percent by the end of the Johnson presidency. And that happened
because fiscal policy was stimulative, Great Society plus Vietnam and monetary
policy under the Fed was too accommodative. And most people who've studied this would agree that the mistakes were made in the late 60s
that led to the big inflation of the 1970s. I think that's the worry that you have to have if
you're at the Fed. Allan Meltzer wrote this great history of the Fed, the late, great Allan
Meltzer. If Alan were here today, he'd be saying, they're making the same mistakes they made
in the 60s, but on a much larger scale. Because remember, the deficits and the balance
sheet expansion of the late 60s is much less. They’re both much less than we've seen in
the past year. I think there is a significant chance that you're going to get a rerun of
that 1960s shift in inflation expectations, which then, of course, went even further in the
1970s, when the oil price shock struck in 1973. And there's another historical analogy there that
I think is important and worth thinking about. We talk all the time about green
infrastructure, green new deals, Europe, America. Most countries
have bold ambitions to be carbon neutral at some stage in the coming decades.
That is not a free lunch, contrary to what some people are claiming. I think that will impose
significant costs when you actually work out what it means to transition away from things like
shale gas to transition to so-called renewables. That is going to have a cost, maybe not as
drastic as the oil price hikes of ’73 and ‘79. But it is going to have an impact and I could
conceive of ways in which it actually could reinforce that existing inflation impulse. What
you got seems to me is the initial impulse comes from fiscal and monetary policy. It's the Fed that
just delays a little bit too long and tightening. And then you have some supply side factors like
this energy transition that actually further reinforce the inflation tendency. Am I certain
about this? No, nobody can have total certainty about where this goes. But is that an appropriate
historical analogy to consider? I think it is. Consuelo Mack: Niall Ferguson, always a treat
to have you on WEALTHTRACK. It's been too long, and I look forward to talking to you again about
whatever your next project is in your next book. Niall Ferguson: Thanks, Consuelo. [Music] Consuelo Mack: At the close of every WEALTHTRACK,
we try to give you one suggestion to help you build and protect your wealth over the long term.
This week's Action Point is read. Niall Ferguson's latest book, Doom: The Politics of Catastrophe,
a particularly important read for current times. Ferguson discusses how disasters, earthquakes,
wildfires, financial crises, wars and pandemics are inherently hard to predict. He
argues that historical perspective shows we are getting worse, not
better, at handling these crises. The New York Times Book Review
characterized Doom as insightful, productively provocative and downright brilliant, which promises to make a contribution to
improving our management of future disasters. It certainly expands are the readers
understanding of them and puts COVID-19 in the various ways it was handled around
the world into perspective. Let's hope our response as a nation to the next inevitable
crisis won't turn it into a catastrophe. Next week, in Part II of our wide-ranging
interview with Niall Ferguson, we explore protecting ourselves against crisis
risk, whether natural disasters or manmade. In this week's extra feature, Ferguson shares
his reasons for branching out into the investment world with his advisory firm Greenmantle and
the exciting opportunities it is presenting. For those of you active on social media,
thank you for following us on Facebook, Twitter and our YouTube channel. And thank
you for watching and listening to us today. Have a super weekend and make the week ahead
a healthy, profitable and productive one.
