Transcription
Well, ahead of crashes, there's always similarities to excessive leverage. And we have that today, and we had that in 1929. We uh I I don't have the numbers, but I suppose we had it before many of the crashes like in 1987 and 19 2000. Um Excessive leverage is a a common feature of crashes, but it's not a given that one causes the other.
Hello everyone, and welcome to another edition of Triangle Investor Interviews. I'm your host Lucien Valkovich, and before I announce my guest, just a quick reminder of a disclaimer. This interview and all my interviews are not a recommendation to buy or sell any shares, products, or services. Always do your due diligence and consult with your financial advisor.
Joining us next, Mr. Clive Thompson, the veteran Swiss wealth manager and investment strategist. Clive, delighted to have you back in the show. I always enjoy our sessions.
Well, thank you very much, Lucien, and thank you very much for bringing me back on your show. I see you're confusing your viewers by having three different times on the wall behind you. Um it looks like it could be 6:00 in the morning, midday, or 3:00 in the afternoon.
Yeah, it's uh Central European, it's Eastern, and it's uh Pacific. So, the most common uh zones that I'm speaking with my guests. Clive, like I said, delighted to have you back. We have a lot of things to discuss. Uh you recently came back from China. We will touch on that. I really am eager to hear more about that. But before we do that, let's uh start with uh with the topic of that uh leverage systematic system risk. US US stock market margin debt has reached an all-time high of approximately, if I'm not mistaken, 1.5 trillion as of July 2026. My first question, what does that tell you about today's level of speculation and investor sentiment? And actually, how concerned are you that this record levels of margin debt could amplify the next market correction through a forced liquidations and margin calls?
Well, look, margin debt is definitely not a problem unless the market goes down. And if it goes down, then it's a problem for everyone who's got it because even even if you're well covered and you have plenty of leeway after the market's gone down, you're nowhere near as well covered as when you took out that debt. And therefore, when you took the debt out, you took out a debt with which you at a level which you felt comfortable with at that particular level. But after a market decline, you're no longer at the level where you feel comfortable. And that creates psychological pressure even though you're not forced to sell, but it creates psychological pressure to sell, and therefore people do lighten up on their stocks to reduce their margin. But that becomes in a way self-fulfilling because behind them, there'll be somebody else who feel starts to feel uncomfortable when it goes down a bit more. And ultimately, you reach the situation where you start to hit the people who were praying that the market would bounce because they hadn't taken the action to reduce their margin, and suddenly they hit the limit. For example, banks might lend 60 or 70% of the value of your portfolio, and suddenly you find your value of your your margin debt is at 61% of the portfolio value, and the bank says, "Can you put some money in, please?" And that's when the panic sets in. What do you do? Do you reduce the debt by selling stuff or do you find some money somewhere which might mean selling some something somewhere else to to meet the margin it's so when it starts it's dangerous. But it's not dangerous when it's not starting.
Now we are in a situation where markets are looking like they may have topped out. We're in particular we're looking more at the technology sector and even more so at the semiconductor sector. Many people have failed to realize that semiconductors are a cyclical industry. They've been buying semiconductors because they are in massive demand at the moment thanks to AI demand generally and that's pushed created a shortage in semiconductors at the moment which means prices are high which means the profits of semiconductors companies are forecast to rise rapidly maximum pretty know but we're going to see in many of these cases 30 40 50% rises in their profits and that's getting people very excited and they they've been buying and we're talking past tense here. They've been buying these stocks and driven them to levels which would be quite reasonable if these profits that we're about to see reported will be maintained. But unfortunately there's the law of supply and demand and what will happen is that the supply of semiconductors will increase until it exceeds demand then the price of semiconductors will come down and when they come down the price of semiconductors or at least the forecast of future profits for semiconductors will be lower than they're going to make this year and when that happens the price of those semiconductor will come companies will drop a lot.
Now just to put cards on the table I'm not completely out of my semiconductor stocks or my technology stocks I have a few left but I've significantly lightened up over the last month or two. It's not that I want to I'm not so I'm not I want to tell people I'm not forecasting a crash. I'm not saying it's tomorrow. But I'm aware that the risks are higher than they have been and that is the reason uh I have chosen to to reduce my exposure to that area. But I'm not the sort of person who ever says I'm out of something completely. You know, it's it's a question of how much you're exposed and how you're going to feel if it goes the wrong way. Uh if it goes wrong way now, I won't feel bad because I've got so little.
Yeah, you you took a careful approach here. I understand that and that is the right way if you ask me. Uh a few days ago I watched a documentary about 1929 9 crisis. And there are a lot of resemblances resembles when when we compare today's uh uh factors com- compared to that period. I mean, we have re- again, record margin debt. Uh elevated valuations. The stock market is just going up up up. Uh uh Do you think that this is 1929 2.0? Are there any similarities or do you think we are living in a totally different era?
Well, ahead of crashes, there's always similarities to excessive leverage. And we have that today. And we had that in 1929. We uh I I don't have the numbers, but I suppose we had it before many of the crashes like in 1987 and 19 uh 2000. Um excessive leverage is a common feature of crashes, but it's not a given that one causes the other. However, excessive leverage is a factor that when things start to go down, then it could be self-fulfilling that it triggers the stop losses and people are forced to sell.
Um 1929 was followed by uh the the stock market crash of 1929, which by the way wasn't the biggest ever. Uh the biggest ever stock market crash came in 1987. Um now the 1927 29 stock market crash was followed by a great recession, the Great Depression in fact, which lasted for many many years. And it took decades for stocks to get back to their old level. The 1987 stock market crash, which was much larger in amplitude than 1929. When I say larger in amplitude, I'm talking about larger in percentage terms. Of course, it was all every virtually every crash we ever have today is larger in money terms, but it was larger in percentage terms in terms of the stocks going down further than 1929. I think 29, the day of the crash was something like 13% down and 87 was something like 22% down in the USA. Uh much further in overseas markets, um in 87. Um but 87 was not followed by a recession or a Great Depression. It just happened to be uh, I don't know what one can call it, a freak occurrence. I mean, there were some factors around which uh, we can say were contributory to the 87 crash. I mean, there was a uh, a huge spat going on between America and Iran. Uh, they were fighting and uh, Iran I think had attacked an American vessel and America attacked an Iranian rig, things like that. And Iran was at war with Iraq, um, and America didn't like that very much because it was uh, they were friends with Saddam Hussein at the time. Uh, so um, then the other factor was the uh, the dollar which something which isn't true today yet. Uh, the dollar was very weak uh, at the time in 87. Um, and they were talking about putting up interest rates, which we are talking about now. We weren't talking about that a few months ago, but we are talking about So, there are some similarities and there are some differences and we don't know how it's going to play out if we do have a crash.
Um in all probability, uh the crash will come at some point. It always does, but whether that's next week, next month, 5 years from now, I don't know. You know, markets can go a lot higher than they are today without a crash. A good example of that was the period from 1996-97 through to 2000. By 1997, stocks were looking remarkably overvalued and Alan Greenspan uh made his famous speech in which he used the words irrational exuberance, which panicked the market for about a day and then the market proceeded to rise another 300% before finally topping out in March 2003 or 3 and 1/2 years later. Uh so, anybody who'd said, "Well, stocks are too high in the end of 1997 and if the chairman of the Federal Reserve is telling us they're too high, I better get out." missed out on massive gains over the next 3 years. Now, give give it another 3 and 1/2 years, they were all right. They got back to where they were. Um but it must have been a very painful experience to be out of the market uh when everything was rising. So, I whilst I think it's we will have a crash at some point, I don't think I would say you should get out of the market. I think it's a question of which sectors you want to be in so that if the crash happens, and the big word is if, you could be comfortable that the companies you own will get to the other side and still be there and still paying dividends. That's the important point.
That's a good point. Uh Clive, what do you think is the probability of US recession? Not US, global recession over the next 12 months. We are I'm not talking market crash. I'm talking a long, painful recession. Okay, will we see that? And when?
The funny thing is businesses are making a lot of profit, but a lot of people are out of work. Despite the so-called non-farm payrolls numbers, which tell us that there are new jobs created every month. You only have to compare the latest figures with the figures of a year ago to see that despite positive numbers every year, we're going backwards. In other words, there are every month more people, much more people, who do not have jobs in America than there are people who have jobs. And the the number of people employed is dropping. That's that's simple fact. Just look at the figures of of the latest down figures and compare them with the figures of a year ago or 2 years ago, and you'll see those numbers are dropping. And they're dropping at a time when the population is rising. So, that clearly is recession-like.
Um but having said that, companies are reporting higher profits. And one of the reasons they're reporting higher profits is because they can produce the same amount of goods with less staff. So, what's a How do we What How do we define a recession? It's a fall in GDP. Well, GDP is going up because companies are making more profit.
And and to keep the the buying going, we have the government I'm talking about USA here, but the picture is very similar around the world. It's not just the USA. So, let's When I say the numbers, I'm talking USA, but the whole world copies the USA anyway, so it's the same thing. The government continues to borrow money. This year it's going to borrow a record $2 trillion, all-time record. The interest payments are going to be uh over 800 billion. Nearly half of what they borrow will be to pay the interest because they're basically borrowing from Peter to pay back Paul and pay the interest to Paul. And half of So, half of what they borrow nearly is paying the interest on the national debt. But, what that means is the government's getting poorer by the day. When the government gets poorer, someone else somewhere gets richer. What does he do? He's either he spends the money, keeps the economy going, or he invests it. But, it's not everybody because you can realize that money which is being spent by the government because they're borrowing it doesn't go all to the one group of people. Of course, it it will hit the social security claimants first and people like that to that stuff and the the military and things like that. But, once these people have spent their money, they own iPhones or Netflix subscriptions or an exercise bike. So, someone behind these companies which sell these services has a large number of shares and their profits are going up and their share price is going up.
That's again good point, Clive. Okay. Which asset classes do you believe are best positioned if we experience a combination of slower economic growth, persistent inflation, and elevated debt levels, or even the thing we mentioned, the market meltdown?
Well, again, I think it's sensible to maintain a diversified approach, which means you probably don't want to have nothing of any of some things. But, I would not have a lot of government bonds. That'd be my first area to bring us fairly close to zero. Uh cash isn't going to be very rewarding in a high inflation environment. Um stocks, in theory, and I I'm using the word in theory because it's very hard to prove, uh but in theory they go down ought to go down in a recession because profits are lower. The trouble with stocks is they anticipate so far in the future. They're at sometimes they're anticipating recessions which never come, and sometimes they're anticipating recoveries which are years away. So, it's it's not easy to prove, but in theory stocks should be lower.
Um there are What What you do get in recession is more business failures. So, in a recession people the man in the street will cut back on his spending because he's lost his job, typically. Or he fears he'll lose his job, one of the one of the two. So, that's not everybody cuz plenty of people don't fear that, but there are going to be vast waves of people who will say, "Ooh, I'm I'm in the construction industry, and nobody's buying buildings at the moment. Therefore, it's only a question of time before my current projects finished, I might lose my job." They fear it. And therefore, they start to spend less than before. And that reduces profits and it reduces turnover, and there are going to be some companies at the margin who needed that extra buyer who now are not getting it, and now they're into negative cash flow, negative profit, and they can't pay all their employees, and ultimately some of them will fail. And when some fail, the fear of fail more failures increases. So, as a general, companies don't look like they're a good idea in a recession.
If you hold a physical metal like gold or silver, it will never fail. The price might go down, and probably will go down in a recession because people are able to afford it less, but it's going to get you to the other side because when you get to the other side, you're still going to have the same number of coins as you had before. Whereas if you have shares in a company, you might have the same number of shares, but they might be the company might not exist anymore. So, suddenly gold and silver coins or uh some uh safe alternative to it, which is uh and I I think ETFs are safe enough. Um people will I know people are going to argue with that. They're going to say, "Oh, well, the government can go and take all the gold in the ETF and all sorts of things." Um that's all all everything all of that's true, but from a risk-adjusted point of view, I think gold-backed physically backed ETFs are safe enough. That's my personal view. So, those sort of things are going to get get to the other side. They're still going to be there. They won't default. Um whereas if you own shares in a company which is making widgets somewhere, uh unless uh they've got a good moat and and uh a product which people absolutely need, there's a risk that you might find your company doesn't exist when you get to the other side. You've lost all your money.
So, what kind of companies can you own which will get to the other side? Well, the the ones which will definitely get to that other side are first of all, many of the companies which I'm not saying I'd buy because they're overpriced, you know, the Nvidias of this world. They're overpriced, but they'll still get to the other side. They're still still going to be doing business. No problem. Um and Microsoft and others. But somewhere in the middle, you've got the companies which are selling the basic necessities of life. You know, the toilet paper, the shampoo, the toothpaste. Uh they are still a little bit expensive right now, but they'll still be there. And if you look a little bit harder, you'll find lots of interesting businesses which are out there which have the probability that they'll get to the other side um because they have a product which where the demand is growing. I mean, a good example of that I own a I can't tell you the name cuz I can't even remember it. Doesn't matter what the name is cuz it's not investment advice, but I own a company, I think it's in Denmark, which makes software which is used by police forces, border controls all around the world to download information off your phone. So, as you know, when you cross a border, there's an increasing risk that if they have a concern for whatever reason, for a concern that maybe you're an illegal immigrant, maybe a concern you're coming to work when you shouldn't be, maybe a concern that you shouldn't be in the country for some reason, they'll ask you for your phone and your password, and then they'll download everything to and the software will then examine what's on your phone and inform the authorities if there's something to be concerned about. So, this company makes that sort of software. Now, I don't think the demand for that is going to go down. The reason I don't think it's going to go down is cuz I've crossed the border countless times and never yet, to this day, ever seen any customs officer asking for anybody's phone, let alone mine. But, I think it's coming.
Yeah, yeah, yeah.
Well, really good point. Uh return to gold, you mentioned gold. Uh could significant gold sales, let's say by Russia, trigger a broader chain reaction? Uh Russia has economic troubles, as we know. Could this trigger uh broader chain reaction with other countries liquidating reserves or would or do you think that uh central bank demand likely would absorb that uh supply again?
Um I think most central banks around the world will increase their gold holdings or want to increase their gold holdings, but maybe feel politically constrained. Uh so, I think if there's significant sales by any country, they'll be absorbed by other buyers. And we've seen quite significant purchases of gold by China and by Poland this year.
Um that they are standout examples. There's plenty of other buyers around. And we've seen the World Gold Council announce that a higher percentage than ever of the central banks surveyed have said that they think they will increase their gold exposure in the coming 12 months. Uh that's obviously not a commitment of any sort by them, but it's the percentage has gone I can't remember the figure because it's not relevant, but um I don't have it in my head, but it's gone up a lot and in the last or gone up to an all-time record percentage of we think we'll buy gold in the next 12 months. So, I do think that if Russia or some other central bank, maybe Turkey, is forced to sell because they need to raise cash, I think there'll be buyers, plenty of buyers, standing there to take the gold off them. Uh but of course it does have a negative effect when it's happening. Um but then, you know, down the line the fundamentals for holding gold are still intact. We know that the world's debt system, government debt, it cannot last in it forever. I can't tell you how long, uh and we don't we don't have a magic number of debt to GDP where the system breaks because there isn't a magic number. It's not It's not a debt to GDP number which breaks. You You can't say, "Oh, when we go from 60 to 61% is the end of the world." You can't say that. I mean, that was the figure which was set in the Maastricht Treaty, 60 No government should go above 60% debt to GDP. Well, many of them are above that now. Uh but it's so it's not the magic number, it's the level of confidence of those who would be a buyer. And that confidence can swing rapidly in very short periods of time. At the moment, we're sitting in a a world where we're somewhere between no confidence and full confidence, but we're certainly closer to full confidence in US Treasuries as an example than we are to no confidence. but that level of confidence can swing violently, perhaps because of some event, some action, some words by a person. We don't know what could happen. It might swing one day, and suddenly you're in a debt spiral, just as we saw happened in the United Kingdom. I think it was a 20 couple of years, 2022 or 2021, when we had what's called the guilt crisis, the Liz Truss moment, when they said use the wrong words in the budget. There's nothing wrong with the budget, to be honest with you, but they used the wrong words, and the market took fright. And then suddenly it turned out that all the pension funds, unknown to anybody, had bought these weird derivatives, which were improving their yields on gilts, provided something impossible didn't happen. And then the impossible happened, and suddenly there was mad panic. Luckily for the pension funds, and lucky for everybody, the British government stepped in and said to the Bank of England, "Please save the market." And the Bank of England said, "Well, what are you going to do for us?" And the British government said, "We'll indemnify you and protect you 100% against any losses you make." So the Bank of England then stepped in and bought every gilt which was being sold, supporting the market, and then the crisis could unwind itself gradually instead of in a mad in a mad panic.
But you know, you never know when something happens like that, and the authorities don't step in in the way that in a way which saves the market, or maybe they can't save the market. I mean, a good example of not being able to save the market was the um sterling crisis of 19 When was that? 1997, I think, something like that, '98, when Britain was part of the European Exchange Rate Mechanism, and they had to stay within a band against the other currencies in the ERM. So there was a narrow band, and they were Britain was bouncing along at the bottom, and there was some smart guy, George Soros, I think it was his name, who thought that Britain was going to have trouble maintaining itself in this band and that if they drop out, they'll drop out big time cuz Britain was spending It was basically spending all its reserves to buy sterling. Spending its It was selling its dollars and other currencies to buy sterling to try and keep it in the band. And George Soros made this bet against the the Bank of England. They say he made a billion dollars on the bet. But what happened at some point, the pound was struggling to stay in the band and they raised the interest rate. I think the interest rate was about 8%. They raised it to, from memory, something like 10% in the afternoon. And then later in the day they raised it to 12% and the pound was still struggling. And then finally it collapsed through the bottom of the band dropping 20 or 30% in the day. So, you know, these things can happen. And nobody in England was expecting that a week before it happened.
Yeah. Uh Clive, your your return from China, like I mentioned in the beginning of the interview. And we talked about digitalization, about the digital money before we pressed the record button. My question to you, do you believe that the future of digitalized money is only the way for the governments to cancel their debts and impose more control on on people spending, people holding. And of course, tell me more about the experience in China.
Well, the first thing to say about digital money is it's going to be quite hard to stop it. I like I don't like the idea of it for my children and my grandchildren. I'm not bothered for myself. Um but frankly, when it comes, all hopes of privacy are gone. If you want to go and see a fortune teller to ask the fortune teller about whether your husband is being faithful to you,
Um that's going to be in your digital wallet. It's not the old days where you got to cross her palm with a few coins of silver um, and your husband doesn't know that you went to see the fortune teller. So, the the days of privacy are gone or will be gone.
Um but I I I think that the intention of governments is to bring it in. It will run alongside physical cash for a while and ultimately uh, there'll be two things which will force physical cash out of the system. Firstly, the convenience factor. Most people will say, "You know what? It's much easier to pay with my watch, my phone, my credit card. That's the way I'm going to do it." So, shopkeepers like the like is happening now in China has already happened to a large extent. Uh, most of them can't take cash. They don't have cash facilities because everybody, 100% of people have a way of taking cash or paying cash via WeChat or WeChat or Alipay. So, in practical terms, uh, I I think I I never had the experience of someone taking cash. I mean, I didn't actually even try it because it wasn't wasn't worth the effort. But, I don't think anyone ever I never saw in in 15 days I never saw a single bank note change hands ever. And I was in the shopping mall every day and buying food and everything like that. So, you know, and restaurants. So, really, it's all digital practically. So, you got the one the practical side and two, you got the second side of it which will be an enforcement of digital money by the governments because they're going to say, "We need everybody to trade or buy things and sell things with digital money so that we can keep an eye on you for terrorism, for crime, for money laundering, and for tax evasion." So, it will become increasingly difficult to carry out a private transaction with the style of cash we had we've been using up until up until now. Uh there may be alternatives around, um but to what extent they'll be legal, I don't know. Um but yeah, digital money is is coming. So, I do worry about that. Uh what was the what was the other part of your question? It was it
Uh impressions from from China.
Uh the Chinese population are very very friendly. I mean, everywhere I went, uh I never saw a single foreigner the whole time I was there. I was there for 15 days, uh mostly in a city called Deyang, a little bit in Chengdu. Never saw a single foreigner until I left at the airport of Chengdu when I saw one foreigner out of the thousands of uh Chinese people. And when I got to Beijing to change plane, then there were plenty of foreigners. But uh in Deyang where I was and Chengdu, the many of the people have never seen a foreigner in the flesh. Of course, they have seen us on television and on the internet. So, we're not that unusual, but we are sufficiently unusual for people to wave at me in the street. You know, that the people wave at me. People people say hello that you're Oh, how are you? I was on the um Chengdu underground, the subway system, and this lady was sitting uh on one side of the cap seat a seats and and her friend was sitting on the other side. Now, I was two or three seats down, and she was talking to her friend in fairly loud voice. And she said in the Sichuan dialect, which I do not speak, but um I'll my wife happened to be born in Sichuan, so she does speak Sichuan dialect. Um one lady was saying to the other, "Look, there's a foreigner on our train." And And she said, "Don't look. Don't look. He'll see you." And then she said, "Look, he's got Nike shoes on. Oh, and Nike socks. Fancy that, a foreigner wearing Nike on our train." Then the uh every train has got a guard on it. So the subway in on subways we've got a guard in every carriage. So the guard came over to the ladies and told them to talk in a quieter voice because they you know they the job of the guard is to keep the the peace and make sure people don't do things like leave litter, put their feet on the seats, talk too loudly, play music, or eat food of course. So he came up and and told them off and then he went down the corridor corridor to tell somebody off else off who was talking too loudly. But great you know, the fantastic thing about China is everywhere you go you'll see funny things, strange things that you least expect. Just one small example you go in the shopping malls that they're luxurious, they're really luxury more luxurious than we have in the west. Now 10 years ago there were street markets. Now they're luxurious smart malls. But they're all empty, but come into the walls to get out of the heat. So they come and sit on the floor and on the floor they're playing cards with each other. The kids come into the play areas for the children. But if you go to the the toilet area because they're luxury malls they built toilets but they still have five cubicles which are called squat toilets. And by the way I've never used a squat toilet in my life. Some people might know them as Turkish toilets but I've never used one I don't intend to. And they if you're lucky they'll have one which is called um seated toilet. The seated toilet is always vacant which is the good news. You whereas inside each each cubicle they have a little machine on the wall with a QR code and if you'd like some toilet paper you scan the QR code with your phone it will help itself to I don't know one RMB or five RMB off off your phone, you know, 10 cents or 50 cents, and deliver you some toilet paper. That's how it works.
Unbelievable.
So, everything you see is kind of different from what I'm used to and and surprising.
Yeah, China is very interesting. Very, very interesting country. Clive
One one funny thing. We we went to a mushroom restaurant. And when we'd finished eating, the lady came up to me, she said, "Please give me your phone number." And I said, "What what do you want my phone number for?" She said, "Well, we off off We always If if anyone falls sick or been poisoned, we we're taking a sample of the food you've just eaten, and we call everybody who's been in the restaurant to say they've been poisoned."
Oh my god.
Get the food tested and to see to see what poison you've got. And they okay.
That's really unbelievable.
That's what we do. They're poisoning me.
Yeah, yeah, yeah. Clive, how can my viewers my followers reach out to you and hear more about
So, I've got a webpage called clivethompson.com. And on my webpage, you can get many interesting things, but one of the things you'll get for absolutely for free is a copy of one of my five books called Little Trot learns to save money. It's a a really fun book about the Toy Town global financial crisis with the goblins and Little Trot who puts his money in the bank and finds the bank has gone bankrupt. But, the idea of the book, it's a story, it's in poetry, Dr. Seuss-style, but the idea is to introduce to young kids the vocabulary that I wish I would have known at the age of 18. So, if you have families or friends who've got kids and there's a birthday party and you're looking for an educational present, which is a story, it's not educational, it's not a textbook, this is these books, there's there's five of them in English. We got Little Trot learns to save money, Little Trot discovers inflation where the price of things go up faster than you can save. Little Trot invests in stocks. Little Trot and the Great Gold Rush. And Little Trot and the Goblin Tenants where he becomes an unfortunate landlord. The book is also available in German and it's called ML.
The future best sellers I see. I see them.
The first one's for free on my on my website. Just help yourself to it. Read it with your kids on your iPad. But if you want to buy it as a gift, it's on Amazon.
Clive, this was fun and very very informative as always. Thank you so much for joining me today.
Great fun being on your show. Thank you very much Lucy Jen and look forward to being on your show again. And also I would like to say to your viewers, I've seen that many of them write lovely comments and it's nice comments which actually keep me going. You know, I wouldn't do this if people didn't write such lovely comments. So thank you everybody.