Thirty-seven years of wisdom

0:06Pushkin. Hey, listeners. Today, we have a special episode of Unhedged. We've got a conversation with the FT's Jonathan Guthrie. Jonathan is the head of LEX, the FT's distinctive column on companies and markets. He is retiring at the end of this year after 31 years at the FT and 37 in financial journalism. I'm reporter Ethan Wu here in the New York studio, joined by the man himself, Jonathan Guthrie in London. And also from New York, but not in the studio, one Robert Armstrong, who for listeners, I know it's not a visual medium, but in our video call here. Rob is named Guthrie Stan Account. Welcome, Rob.

0:50What's going on? Well, Jonathan, we loved your, what we call it, a graduatory piece. Valedictory. Yeah, excuse me. Sorry, sorry. That was the word I was looking for. Jonathan, we loved your valedictory piece in the Financial Times recently. You lay out a few lessons you've learned in your 37 years in financial journalism, and we thought we would talk about them. Some of these are, you know, lessons that are learned just through experience. And, you know, I think it starts here at the top. And personal pain, Ethan. Misery and personal pain as well. You start here, speaking of pain, with market crashes, and you make the point that individual incentives, that's a recipe for instability.

1:35Absolutely so. And one of the things that I suppose I've struggled with a bit is the question that's often asked, why did nobody see this coming? And indeed, why has no one learned the lessons of the past? And I don't think there's much incentive to learn the lessons of the past. If you think about it at a personal level, if you can make bonuses on a yearly basis that essentially crystallize asset price inflation, then that's not a bad business to be in. You might have a rough year or two, but you come away with quite a lot of wealth. That, of course, is not really socially particularly beneficial because the crashes that are an inevitable part of that hurt a lot of people across society.

2:20But haven't we spent the last at least 20 years trying to figure out incentive structures that give executives more skin in the game, clawbacks, stock comp, et cetera, so that people have a long-term connection to the businesses they run. That's all designed to reduce volatility. So does it work, Rob? What's your observation, having been in this business for almost as long as me? Well, I think, Jonathan, maybe one corollary of individual incentives favor collective instability is that when we make collective efforts to improve stability, such as the post-financial crisis regulations, there's a lot of individual grumbling about it because it clashes with individual incentives.

3:09Yeah, you can you can absolutely see that in what happened to the deregulation of some of the rules around regional banks in the US, which obviously would appear to have fostered instability and at least a couple of crashes earlier this year. Absolutely right. Jonathan, the second lesson that you leave us in your column is you don't hear the whistle of the bullet that hits you. Meaning, usually when there's a crisis, it's the one that you don't foresee. If something is foreseen, usually it doesn't become a major crisis. I think that's probably true because people do fret about particular situations that they think could go wrong.

3:47So one of the kind of popular beliefs is that there's a willful blindness to possible threats to markets. It's a kind of idea of keep dancing while the punch bowl is going around. But of course, all the market strategists are thinking all the time about threats to the financial system, threats to stability. the problem is that if you have factored those into your thinking they're probably a bit less likely to happen so something else will go wrong i mean before the great financial crisis some of the strategists i talked to were quite worried about the asian carry trade and it's true it was a highly speculative activity and a lot of leverage money was going into it and it could easily have gone wrong but that wasn't the thing that sent things crashing obviously it was subprime mortgages.

4:36And Jonathan, you mentioned in your column, the basis trade, which we've talked about on this show with Katie Martin. And the basis trade, of course, is hedge funds exploiting a pricing difference between regular treasury bonds and treasury futures. And this has all the characteristics of something that would get those sort of financial analysts freaked out, right? There are big numbers showing it's at the greatest trading activity of all time. Why not? It's extraordinary. It's extraordinary. $660 billion worth of exposure. Incredible. You think it probably can't crash the financial system for exactly the reason that you just laid out, that everybody's looking at this, including us.

5:12If we on this show are talking about it, it probably can't become a crisis. What I can tell you, Ethan, is I'm going to make an absolute bet here and now that the basis trade isn't going to crash the world financial system. and then I'm going to retire on December the 31st and I'm going to leave the Financial Times and I will have absolutely no accountability for my prediction whatsoever. I swear to God, Jonathan, I will come to your house. I will doorstep you with a microphone. Well, you know what? The other people standing on my doorstep are going to have to make space for you because there's already a bit of a queue.

5:51Because the reality is you will know, Rob and Ethan, that if you are a commentator on finance, you're basically a predictionist and a proportion of your bets are going to go quite badly wrong. Yeah. As Rob and I learned this year, betting all our stock picks against a recession, it didn't work out. Did not work out. No. Yeah. Well, we on Lex had a bet in favor of renewables, which essentially has gone as haywire as a two-armed wind turbine. Well, Jonathan, lesson three in your column, This one's straightforward, but I want you to unpack it too. Big banks are not conventional businesses. What do you mean?

6:31So I don't think big banks are conventional businesses. And I think that wouldn't matter if journalists and CEOs and all those other people didn't talk about them and write about them as if they were. What they are is quasi-public franchises with big state guarantees that happen to be financed by private capital that may or may not make a return on that investment. And they're essentially there, so central banks and governments, I'm talking about the largest institutions here, so that central banks and governments can distribute money and create money around the system without having to do a lot of boring and rather grimy individual credit provision and deposit taking.

7:17So that, it seems to me, is what they do. They're mostly too big to fail now. And the problem is that people think it's like investing in a supermarket. And the reality is that in concept, in terms of business model, they're a lot more complicated. Do you mean this in a kind of Martin Wolfie way, where you think this makes it a horrible outrage that the CEOs make the money that they do and that profits should be capped? end or do you have is there a sort of reform side to this no no not really the only reform side to it would be that if you are making a deal with the private markets and you're getting private investors to finance a public service which is what you're doing within banks they need to have some degree of reliability of return otherwise the cost of capital just goes higher and higher and this is what has happened to banks, particularly in Europe.

8:13In America, banks are slightly more like private entities. They still depend to a large extent on a franchise from governments and central banks, but they have a bit more freedom to maneuver. But in Europe, these are terrible investments and I've been a bear on European banks forever. And they've done a bit better as a result of rates, but broadly, you would have made a lot more money by investing in something else. So that has been a good call over the last decade or so for me. Jonathan, your fourth lesson in the column, this is a bold one, chief executives sometimes matter. Yeah, chief executives, I guess, probably believes that they matter all the time.

8:52But I think the reality is that in these in very large, mature, steady state businesses, they just keep on flying. It's a bit like if the pilot falls asleep, there's almost an autopilot function. Divisional chief executives generally know what they're doing. Members of staff know what they're doing. So observably in businesses where a chief executive leaves for some reason and there's an interregnum, it doesn't really make much difference to trading results. The reason that investors are willing to pay quite a lot of money for chief executives is essentially an insurance policy in case they're important.

9:28Let me give you an opportunity to settle some scores here, Jonathan. Looking back over your decades of service, are there kind of great examples of leadership in crisis or its absence that spring immediately to mind? You can probably name names of the successful ones. You can give kind of witty cover names to the less competent ones. You're worrying me now because you make me think I'm going to sort of perpetrate all terrible libels. But of course, you can cut them out. I mean, I think that Bob Diamond was an example of a damaging chief executive at Barclays because he was very much the investment banker to his toes and he took a lot of risk.

10:12And then he wasn't really willing to take responsibility for them when it all went wrong. Probably the chief executive I have admired most, or at least one of them, was a man called Richard Cousins, who nobody will have heard of, I suspect. Richard was the chief executive of Compass, which is a rather boring, steady state, large caterer that has just grown and grown and grown. Caterer, wow. A caterer, exactly. Contract caterer, restaurants and things like that. And he just set very clear expectations in terms of cost, behavior and management. And he led his team, by example, and the business just grew steadily on the hill.

10:54and very sadly, he died with his entire family in a plane crash on a leisure flight in Australia a few years ago. I always remember Richard because he actually didn't like journalists very much. He got on all right with me, but he wasn't much about signaling or about public performance, I think. He just got on with it. He just got on with it. He set the tone and he didn't do big destructive deals. Lastly, Jonathan, and this one might take a tad bit of explanation, You say stock analysts are hedgehogs, you know, an animal with a single conceptual framework for the world, rather than foxes, an animal with many ways of looking at it.

11:35You're known for your nature writing. I mean, break that down. Stock analysts are hedgehogs, not foxes. So this was a definition that came from a writer called Isaiah Berlin, and he was adapting an earlier one, which had come from, I think, from a Greek philosopher. and the idea really was that hedgehogs had a single conceptual framework for the world and foxes were able to dot about and grab different concepts you know one one day they might be a marxist economist the next they might be you know a theologian or a political analyst and of course all of us we tend to talk to analysts quite a lot equity analysts market strategists, people like that.

12:18Super smart people often, much smarter than me, a lot of them. But I do feel that they suffer from a kind of perceptual narrowing. Very often they have a model either for companies that they cover or whole economies. And they're very, very tied up in that. They're trying to make the numbers work. They're trying to predict what's going to happen. And they tend to miss out on things. They tend not to spot left field issues. They are much more driven by numbers they feel they can quantify accurately than factors that may not be quantifiable or involve a very wide range. so an example of that would be when a company has a liability they tend to underestimate it anything from deep water horizon to bp to philip's problem with sleep apnea advice they start off with very low numbers and then you watch it go up and up and up so i i think what i've learned is that don't try to be too precise in mathematical modeling of the world because the world isn't susceptible to it.

13:31All right. We'll be back in a moment with Long Short. Welcome back. This is Long Short, that part of the show where we go long the thing we love, short the thing we hate. Jonathan, are you long or are you short something? I'm long native predators because I think we need more of them. And in Yellowstone, the reintroduction of wolves created a much healthier environment, a much healthier ecosystem. In the United Kingdom, native otters are driving out American mink, which are quite destructive introduced species here. So I think we need to give a bit more space to those animals and sometimes be a bit less afraid of them.

14:15And I think in terms of what I would go short of, I think it's probably ESG. And I hope that pleases Rob. That is my Christmas present to him. Immensely. This would be environmental, social, and governance-based investing. As a bag, as a combined category of dissimilar things. There you have it. Jonathan Guthrie. All right. The final word. All right, Jonathan and Rob, thank you both for being here. and listeners will be back in your feed on Tuesday with another episode of Unhedged. Catch you then.

15:16is available to everyone else. Just go to ft.com slash unhedged offer. I'm Ethan Wu. Thanks for listening.