 Hello and welcome to episode 98 of the market maker podcast and to give you an idea of what we're going to cover this week, it has of course been the big US investment banks reporting their corporate earnings, some good, some bad, some incredibly ugly. So we will, we'll dive into those numbers and hopefully explain a little bit about the kind of composition of the banking space and why banks like GS and MS are slightly different to like so JPM or city, and then where the asset managers and boutiques fit into this mix so we'll look to And then also we're going to talk about the debt ceiling, something that I know Piers and I have lived through in previous episodes of volatility so we'll talk a little bit about that back in 2011. But we'll talk about it in the context of right now because the US government could default. That's kind of a big deal so we'll, we'll discuss what the probability of that is and what the process is, and so on, but before I begin two things just to mention one, just as we hit the record button for this some users just dropped down the tape alphabet or Google. They're planning to cut roughly 12,000 jobs globally equates to around 6% of the workforce I was just kind of tallying it up with the likes of Microsoft, I think it was 10,000. And then Amazon was 18,000 sales force was 8,000 Twitter seven and a half. It's racking up right. Yeah, I mean, Silicon Valley mean the unemployment rate as as has spiked. So, yeah, I mean, it's obviously a natural function of the ebbs and flows of the economic cycle. So, you know, continued job cuts at these big tech firms is definitely the direction of travel is not surprising this information. But yeah, I guess, you know, that should come a little bit sort of over bloated. And yeah, you're getting a lot, I think a lot of incredibly well paid sort of middle management stuff that, you know, what do they do. I mean, like Musk is, I guess Musk has set the cat amongst the pigeons doesn't he, strolling into Twitter and basically saying that this company could function on one quarter of the staff. And he's gone ahead and done it. And I don't know, obviously time will tell whether, whether he's right or not. I think it's certainly the case that these these big tech firms are very bloated and yeah they need to cut some fat. And sticking with the tech theme before we get into the banking earnings. I don't know if you saw that Sky News report that was circulating this week. It was titled recruitment team unwittingly recommended a chat GPT candidate for a job interview. So someone had submitted basically so you know when you do these application processes often it involves something like write me a 500 word statement about a topic that you're interested in. Right. Yeah. So basically they set it up and they acted as a candidate but use chat GBT and only 20% of the candidates at this communications company got made it through fast track to get through to interviews and top of the class of course. Was your buddy chat GPT. I was making a point of this in a post I did a few days ago because already I've incorporated it into my working practice because quite often for an information gathering exercise to spark content ideas for content writing for a large degree blog writing. It's all very much well equipped to to fill those types of things. But one of the things is the allure that I can imagine that a lot of finance students are feeling when it comes to that arduous process of banking applications. And it's like write me 300 words about why I should work at Goldman Sachs. So I guess the post I did was just a word of warning in the. I mean look, the results that punches out are impressive. I mean it sounds great what it writes, and it may well save you time and see you through the process quicker, but ultimately, it's a pretty rigorous testing process you go through for one. Amplified simulations are pretty much embedded in every assessment center for top financial institutions where you will you have to participate and your behavior will be monitored and tracked about your ability to function in a specific role so unfortunately the the AI is not going to come to your your saviour in that circumstance so I guess just a word of warning. Be prepared. Yeah, you'll get you'll get found out in the end. Or I won't appeal my face off. I'm a Tesla bots with open AI technology. Who knows, but let's let's delve into these these banking earnings then and as I said earlier. I think one of the most kind of divergence that we saw was because they reported on the same day at the same time and that was Goldman Sachs and Morgan Stanley. Who are often kind of put in the same conversation often given their their businesses and how they operate but almonds fell almost 8% and they've had a pretty bumpy ride. Recently, for a number of different reasons, consumer banking to restructuring to banking fees and everything in between but Morgan Stanley have been operating within that same environment. Their shares were up almost 6%. So what happened. Yeah, well I mean, big, yeah, big kind of divergence I guess it's, I guess it's to answer that question. We need to talk about what because they're massive institutions these banks, and it's got pretty complex. There's now multiple kind of divisions and elements of the bank and it's, I think we need to kind of step back and look at the structure of these big banks in order to be able to answer that question as to why is the performance between Morgan Stanley and Goldman is so so different when you know historically they're like the same kind of business right they're absolute direct rivals and so. And I think maybe we could step back even further just briefly and talk about banks, I mean, there's investment banks and then there's commercial banks. Or you could even say retail banks as well. Right. I think from a sort of let's call them consumer banks. You know that's the traditional format of, you know, bank that essentially takes deposits from consumers. And for that the bank will pay that consumer an interest on their deposit of course since the financial crisis. And the interest rates at zero. So, you know, if you've if you've opened your first bank account within the last, well, let me think within the last 13 years. Then you'll be thinking what interest on my deposit account what are you talking about. Obviously interest rates have just gone up sharply in 2022 so you might now see this weird kind of income coming into your deposit account each month is like what I'm actually earning some money by depositing my cash at a bank. So that's what happens the bank pays you right they pay you a deposit rate. But then of course the bank's business model on the on the retail and commercial banking side the bank's business model is they then take those deposits and they lend them. They lend that money. Okay. I think mortgages for example, so they're kind of borrowing on the short term and essentially paying a really low interest rate to borrow from the consumer and then they're lending on the longer term mortgages let's say and they're charging a much higher interest rate for the loans. Okay. And this is how historically, these kind of big consumer banks make money they call that the net interest income, right. It's the net income from that paying the deposit rate to your depositors versus earning the lending rate from your loans out into the system and when interest rates rise. This is beautiful. This is a perfect moment for these banks, because then the difference between short term rates and long term rates increases. So essentially the next interest income gap widens. So historically, in an interest rate hiking cycle. This is good news for these banks. Okay, so that's like the commercial or the consumer bank side. And then you have investment banks, which is nothing to do with deposits. This is now think goldman's and Morgan Stanley, and then, and even those banks are split into kind of two big divisions right so when you think goldman's you tend to think right M&A, you know it's all about the investment banking division the IBD side and so they're they're generating fees for the services that they're providing in helping their clients raise capital. They're helping their clients grow through mergers or acquisitions. Okay, then the other side of the bank is more on the market side. And so that's your sales and trading activities the trading floor these banks and, and they're, they're earning money through fees again for services that they're providing but the service they provide is to their financial clients, where they're helping hedge funds and asset managers trade. Okay, they're helping facilitate their trades they're also providing some, you know the prime brokerage divisions for example are providing some advisory services to hedge funds and so on. Okay, now typically with the investment banks, those two sides. The thing is about these fee generating parts, certainly on the IBD side, they're very cyclical, because right, how much money can you make as an investment banking division is obviously a function of. Well, how many companies are looking to raise capital, how many companies are looking to make acquisitions, and obviously that goes up and down with the economic cycle so in 2022. We'll talk about the stocker of a year because we had a downturn in the cycle of everything was very depressed risk appetite was incredibly low so companies weren't looking to acquire other companies. Companies weren't looking to do like IPOs and raise capital and so this meant that the IBD side of the banks had a really bad year. Okay, we'll talk about the figures in a minute. But the way they've set up is they've got an equal and opposite side of their bank. So the trading side, the sales and trading divisions, they actually make more money when market volatility increases. What happened in 2022 was whilst the IBD divisions income dropped and dropped and dropped. Actually the market side saw their revenue go up, because market volatility stepped higher which is typically what happens in a downturn. Yeah, and with one of the things I remember Stephen saying in a previous podcast was about how a company like Goldman's is valued, given that it sees this variance as you say, comparative to someone like Morgan Stanley, who might have a much larger wealth asset management business, or take that even a step further like JP Morgan, who's then starting to be involved in some of these commercial activities as well. So, these wealth management divisions, yeah, I should add that in I mean they are certainly now becoming bigger, I'd say over the last decade have become an ever bigger portion of these, these banks like Goldman's like Morgan Stanley city group JP Morgan. You know they've almost kind of taken up it's almost like a buy side sort of entity in terms of their asset and Welsh man wealth management divisions. But, you know the thing about, I guess the thing about Goldman's, and look you do have to go back to the financial crisis very quickly to just explain why Goldman's are doing what they're doing now and actually then we'll talk about the fact they're doing it really badly. Go back to the financial crisis, Goldman's and Morgan Stanley where they were like the old kind of broker dealer format they were the old sort of straight up investment bank, no deposits at all it was just M&A advisory and then it was on trading on the market Okay, but what happened in the crisis was all these big broker dealers were over leveraged, and we're getting killed by the big market collapse and of course the poster child of that crisis was Lehman Brothers. So when bankrupt, they were a big broker dealer took too much risk markets collapse and they went out of business prior to Lehman's collapsing. There was Bear Stearns and Merrill Lynch, who were also going down that same pipe. Okay, but they got bailed out by essentially being bought. So Bear Stearns was bought by JP Morgan. I say bought. I think they famously paid $1. And then Bank of America bought Merrill Lynch and essentially the US government pretty much forced them to buy Merrill Lynch. Because if they don't, they'll go bankrupt and it will create this systemic risk and and then Lehman's were the third one in line and anyway, Barclays were going to buy them and they got vetoed anyway Lehman's went bankrupt, right. So then next, so it's Bear Stearns first they were the most exposed. They got bought by JP Morgan Merrill Lynch for the second most exposed they got bought by Bank of America. Lehman's were third most exposed they went bankrupt. Morgan Stanley were the fourth and Goldman's were the fifth. So now it's like, oh right Morgan Stanley right you're now basically they were on the slope with Lehman's and they were going to go bankrupt and Goldman's as well was all imploding. And the US government did a deal. And what they did was they said to Morgan Stanley Goldman Sachs. Look, you need to take on a commercial banking license. To do that, you will then be able to access our Federal Reserve overnight emergency lending window, which will essentially give you the liquidity you need to not go bankrupt. But taking on a commercial banking license the reason why they hadn't done that in the past was because that then opens you up to much more regulatory oversight. And once to do it they had no choice. Fine, they took on a commercial banking license. Okay, that's how it all started. I mean, fast forward a decade plus now. And you could argue taking on a commercial license and being a commercial bank is a good thing for diversification. It's certainly like when you look at 2022 as a year where M&A activity collapsed you're like, ah, thank God for the diversification of a commercial banking side right. So that's kind of where it all started but Goldman's have you know really quite aggressively been going after this diverse commercial banking operation. And the big reason why Goldman's results were so bad was because of their botched attempt at trying to grow their commercial banking size side of the business and actually David Solomon, the Goldman CEO on the earnings core because when when companies have their earnings reports, right, yes they release this report with all the facts and the figures, but they also then have typically have a call, like literally an online call with investors and with their shareholders and kind of talk walk them through the report and talk about it and then there's a Q&A session. And one of the investors asked David Solomon, what went wrong? I mean, what, why is this so bad? And David Solomon's response, he basically said that the firm he admitted the firm had tried to do too much too fast in terms of their commercial banking expansion. And he said that they had lacked the talent to pull off some of the wide rate, some of their wide ranging ambitions. And like a couple of points that add to that, firstly on the mishap with the commercial side. So to put some figures on that, they republished new earnings figures for the last three years. And so showing that that particular unit, the consumer banking side had made a loss of three billion US dollars since 2020. So to put that into perspective. The other thing you mentioned there is about talent. Yeah, Goldman's have just recently cut roughly 6% of its global workforce. However, in Q4, Goldman spending on compensation and benefits was up 16%. Yeah, you see that this is the classic problem with these firms, like when they have these cyclical. But that their IBD divisions that their revenues were down 50%. Right. 50% down, but compensation went up. Because here's the problem. Right. If you don't pay them, I mean these bankers have got that they're in this situation where look if you don't pay me. It's almost like performance is now completely disconnected to actual remuneration. If you don't pay me, then I'm off. When your reference point has been 21 and 2020 when you've got massive bonus. Right. So if you don't pay me, I'm off. Thanks. And there's other people who will employ me. And actually, yeah, more news this morning, perhaps we'll talk about it in a bit more detail in a minute but UBS have just kind of stepped up and going right. We're hiring, we're aggressively high or you lot that have just been really pissed off with your rubbish, your rubbish bonuses doors open, come on over. So, yeah, on that point, what's interesting is there's two sides of that. So one you're absolutely right the headline kind of reads disgruntled. UBS are basically headhunting disgruntled deal makers and they're disgruntled because of the lack of this ginormous bonus that they've become somewhat accustomed to. But the interesting thing there as well was about the shift of talent that's been coming out that apparently from the last decade out of bulge bracket banks into boutiques. Yeah, actually, investment banks find it incredibly hard to retain staff, even at that level. So, yeah, very interesting and paying 16% increase on a year. And these boutiques I mean I often think the word boutique. I mean that when you think about boutique you think think about something really small. Yeah. And these boutiques are not small now. As you say over the last decade I mean here are some names like the big, the big boutiques are Julianne Loki. The DJT partners there's Evercore, Lazard, Green Hill, Robbie Warshaw. These are the kind of bigger boutiques and yeah they've been running this sort of strategy of essentially allowing the big banks to hire and train new graduates. So in a couple of years at Goldman's, get Goldman's to essentially pay for their training, then you hire them after they've been there for two, three years or so. Bring them across to let's say Evercore, and then you've got, yeah, a ready made, you know, analyst with experience. So that's what's been happening actually will, wills over in New York at the moment and actually yesterday and I say, Tuesday and Wednesday we're working with Evercore. There's a M&A simulation for Evercore and then Will was having a meeting with Julianne Loki yesterday. So we're kind of, our simulations are, you know, starting to, you know, creep into that boutique M&A, well, yeah, boutique, it's not quite the right word. But these these kind of, these more kind of standalone M&A houses, where it's just less complicated they're just straight up than just M&A. They've got all of this other bolt on diversification stuff. They're just kind of keeping that kind of thing simple. Yeah, so you almost think that, you know, in a non finance way, if you were thinking about any job sector, a company built for purpose with one goal. Yeah, would surely create the best pool of talent, you would have thought. That's interesting with numbers. I mean Evercore was only founded or M&A transactions they've only been doing since 1995. What do you reckon is the size, total size of dollar value of the deals that they've done. What Evercore. Yeah, since 1995. Yeah. Wow. Total value of deals done. Yeah, total value of the M&A transactions. Any question. All right, let me think I'm going to go. I'm going to say 800 billion. Not even close. Like multiple trillions. 4.7 trillion. Yeah. I mean that. I thought they might start off small. Yeah. And then in terms of staff. I mean, how many staff are we talking about? I think the, I think the technology department of JP Morgan is 45,000 employees. Yeah. Give you some content technology department. That's not their biggest department. Evercore have under 2000 staff. Is that right? Wow. Yeah. So that I mean if you think about it then you would have to say that this is like the SAS of the M&A world. Right. It's the absolute. Yeah, specialists. Let's not get distracted by multiple divisions and diversification. And I like, and as David Solomon has said, I mean, growing your, your kind of business by diversifying is very hard. You know, doing one thing well is hard, but then trying to do many, many things well all simultaneously, then you know, you're opening yourself up to kind of slipping on a few banana skins, which even the mighty Goldman Sachs seemingly has done. And with Morgan Stanley one, one final point there was they had actually record wealth management revenues. Yeah. Offset that decline in banking fees. So there's that there comes that diversification mix right protecting. I guess it's backing the right diversification horse. So Morgan Stanley expect much more time backing that growth in their wealth management division, whereas Goldman's have been way more aggressively going after that kind of commercial bank side. And yeah. direction. Yeah, the problem with the, I find, superficially talking, I think it's like if you're going to go into the commercial side. Now you start stepping into fintech and technology. Yeah, I'm not sure that's the right horse to back, whereas wealth. I think that's a much more alignment in terms of your client side and the platform interaction software that is required. I think it's just under. Yeah, and it's as you say way more aligned to your kind of core business, you know, both on the IBD side and on the trading side right if you're if you're got wealthy people who are your clients and that kind of feeds in you can cross sell. You know your other products from the core part of your business so yes way way way closer to that core. Okay, well let's talk about one other pocket of the, the financial space which was asset managers and the reason why is because the world's largest one black rock also reported there just to give you an idea sense of numbers. The $446 billion of quarterly long term net inflows record four year net sales of Aladdin, which might need a bit of an explanation Aladdin's platform. So kind of the industry benchmark platform. They had an 8% decrease in their full year revenues, primarily driven by the impact of sort of can be lower markets and dollar appreciation on average assets under management and lower performance fees. But their revenues EPS both beat expectations against where the street was was looking. So yeah, how, how do what's an asset managers play here whether they fit in and where they're deriving their performance from and are they just more stable than than what you've described from some of these other banks. Well, so yeah it's an entirely different setup, of course so an asset manager will manage assets. So this is where people with surplus income wealthy people who want to invest that money can choose to give it to an expert investor. So therefore will hand over their cash to a black rock of this world. And black rock will then manage it and it depends on the black rock who got so many investment products that they're selling to wealthy people right and, you know, the big winner for black rock over the last few years has been their ETFs. It doesn't require any management, this is not actively managed money this is passive right so this is where an individual can buy, you know a fan ETF, where they can then get themselves invested in the, the growth in share price of the tech stocks for example. So there's lots of ETF products that has attracted in a huge amount of inflow right so when black rock when they report their quarterly so they reported a quarterly long term net inflow of $146 billion right in quarter before. What does that mean did they make $146 billion was that revenue or profit was neither of those. All it is is on nets that was the amount of money coming in as in clients depositing it you could call it a deposit, but it's not a deposit like you would think about JP Morgan right. So this is a deposit where they're buying one of the investment products that black rock are running. Okay. So, the way that black rock generate revenue is two fold. It's through a management fee, and that will be a percentage of the assets they have under management. It's a bit of their revenue stream that's super stable, and it's not volatile, and it's annually reoccurring. And these are very, this is very attractive from a revenue point of view right stable annually reoccurring that feeds just a percentage of assets under management. The percentage depends on the product right. So if you've got an ETF where that doesn't require much management at all, or then the percentage fee they charge is much smaller, and it might be somewhere between 0.1 0.1% up to maybe 0.5% right. So there are other products that black rock and these other asset management firms run which are actively managed funds which requires a portfolio manager and expertise and they're trying to deliver a return over and above the index right and there they'll charge a management that's going to be high and maybe up to 2%. Okay. So how much assets they have under management directly essentially computes their revenue they get for that year through these management fees. So if the if black rock have got 10 billion, sorry, 10 trillion under management, then then then fine, they're going to be generating huge revenues. The other side of their revenue is then from performance where they'll take a percentage of the profit. So certainly in the actively managed funds, they'll take a percentage of profit and obviously there that's much more volatile. But in 2022 you've got a double whammy negative double whammy for asset managers, because the value of the assets under management dropped, not necessarily because clients were pulling their money out. But if the value of asset share prices went down. And so the value of assets dropped, which means their fees dropped, and of course performance while stock markets dropped so the performance fees were much lower as well. To give you an idea black rocks quarter for revenue was $4.3 billion revenue. They're the biggest asset management asset manager in town 4.3 billion. Do you want to know JP Morgan's revenue quarter for Go on 35.6 billion. Almost. Well what's the mass there not not 10 times but not far off but obviously much much much much much bigger as a kind of entity from a revenue point of view, but JP Morgan a big giant consumer bank and they're a big giant investment bank. If you looked at goldman's who are more of an investment bank right well goldman's revenue was 10.6 billion. So goldman's a double, more than double black rock, in terms of revenue. But black rocks revenue is more stable it's less cyclical so you could say it's a bit more. Well yeah, it's it's more you could say it's more valuable from a valuation point of view because there's more stability there. I was just trying to have a look at from a software perspective with Aladdin, which is the electronic curve system that's been built in the house by black rock for their risk management division and for their users to manage their portfolio so I was just trying to see what how that factors in whether you get that the freebie just through like when you are using their services or I believe so it's actually a good question I don't know definitively I'm not a black rock customer but so I don't know what products you need to be buying in order to qualify for that kind of system. So I'm actually not sure. I was just looking at it has roughly 30,000 investment portfolios and managed through that particular platform. So I think that's for their more sort of premium side of their offering, which will be for people who have a little bit of expertise and perhaps want to run their own manage their own portfolio but they're kind of using black rock to execute trades through but also then you know using their kind of clever tech in order to better manage that. To conclude this this segment then so black rock would sit on the buy side and everyone else who discussed is more sell side. So from a young person thinking about my career from a top level. What would my working. What's the difference between working at a black rock or working at a goldman's from a day to day lifestyle point of view work life point of view. Yeah, they differ and doesn't have to be goldman's but like investment banking to asset management. I would say that asset management's much more markets is more geared around markets because you're investing, you're taking risk you're on the buy side so that would mean that your day is going to be geared around market opening. When's the market open so you'll tend to get into work a lot earlier. You need to be in before the open right, and it depends what markets you're kind of investing in but you're going to typically get in early you might get in it. I mean I used to I mean I used to trade. I used to trade German markets that those markets would open at 7am London time so I would need to be in the office before 7am before the open. We're often running at seven and then those markets used to kind of close. Well, back in the day anyway used to close at 4pm. So I'd be in before seven and then after four right and then, you know, tidy up sorting things out but I'm probably out of the door by 430. So you start earlier and you finish earlier, but it's way more intense during those hours because the markets are up and down. It's a lot of volatility you're managing risk and it's you're at the cold face of market volatility and you're taking risk right so your P&L swinging. It's really intense. When you work in IBD at Goldman's the differences are from the timing point of view you're in much later you're not, you know, you're not dictated by financial market hours you're working on deals right. And so you might be in later you might start work at nine, even 930 but you're typically going to stay a lot later. You might work till 930 p.m. so you might do a 12 hour day. Also, you're going to when deals are happening you're going to be working weekends. I mean that's the beauty of being a trader or being on the buy side when markets are shut or markets are shut. The weekend markets aren't open, right. But when you're doing a deal. When the timelines are tight, then yeah you're going to have to work through you know through the night you're going to have to work weekends when you're when the deadlines are approaching. And so I think the hours are longer in banking. But there are a lot of the time it's much less intense unless you're unless you're right up against a deal deadline and they're getting me wrong you're going to be under a lot of pressure and it's going to be really intense but most of the time. You're going to be against a hard deal deadline. So it's just a little bit more. It's less intense, you know, your, your each hour of the day is going to be less intense. From a remuneration point of view, similar or is is management more consistently stable and then investment banking a byproduct of the environment. Yes, that that on the one hand that's true. So banking is more volatile. But as we've just discussed, it's difficult for banks to properly pay you a lot less when we're in a downturn because they're worried about losing the talent, right. And even with that said, yeah, your, your, your income as an employer will be more volatile. But on the buy side. Yeah, on an asset management certainly an asset management firm yeah you'll have a more stable income but then it depends if you're a trader. If you're a trader a hedge fund, then actually a large portion of a much larger portion of your income is based on your performance. So it's a portion of the profits you make. So if you met if you have a great year and make huge profits great you're going to earn a lot of money. But if you have a bad year and you lose money then your, your, your income is going to drop sharply. If you're a hedge fund, I'd say that's probably where your earnings are most volatile, you then travel through the buy side. So you go into the asset management space and it becomes much more stable. Then you go across into investment banks and on the investment bank markets side is probably a bit more stable but then you go to the IBD side and it becomes more volatile. I would say. High risk high return then. Such as life. That's right. All right, well let's, let's just spend 10 minutes if we can just to have a quick chat through something else, I think to put on people's radar. You mentioned before about the fact that if you've opened a bank account the last 12 or 13 years and you probably haven't been used to earning some interest on your money at the bank well the debt ceiling. The debt ceiling for you and I I know brings back memories out 2011 and I know you're going to explain what happened in 2011 but I remember because I was in Hong Kong on holiday at the end of the year. And I was being called multiple times saying where the expletive are you like you need to do your job basically and I was like, really, like other people can't just do this for like a day or two. And I literally had to spend the entire day of my holiday covering. And this was literally on New Year's Eve, I think, when it rolled over and it was like, right, this system we're going off the cliff was fear was at the time. And yeah, brings back horrific memories of absolutely ruining my holiday at the time but yeah the debt ceiling why are we talking about it. The US Treasury is now taking extraordinary measures to meet its debt obligations. It has transpired this week, and that's after the US government hit its $31.4 trillion borrowing limit. So, to kick things off, what is this debt ceiling and why does it matter. Yeah, the US then just the debt ceiling concept has been around for over 100 years actually, but history for you. The US government set in place the debt ceiling the first time was in 1917. So that basically this is about borrowing and spending. Right, it's about controlling the government's budget. How much are we going to spend on stuff. And, right, do we need to actually therefore borrow some money if we if we want to spend more than we're earning, obviously governments earn through tax. If we do want to spend more than we're earning right we might need to borrow some money pre 1917 there were no controls on it, it was just the government made a decision on a case by case basis right should we spend money on that we spend money on this you know just case by case. Then the First World War kicked off and spending ramped, obviously on defense. So they thought, yeah, actually, we perhaps should set in place some rules around how much the government is allowed to spend and therefore borrow. Otherwise, this could get out of control. So they set in place this thing called the debt ceiling which is basically an agreement by Congress. That's the US government and there's two parts to Congress there's the House of Representatives and there's the Senate, and Congress has to each year, essentially agree a maximum amount that their debt level can get to just so that it's kind of kept in check, So that's the kind of background to it, but add in the entirely bipolar, and maybe you might call dysfunctional US political situation. Then you have a big problem. And again to simplify massively, you've got the Democrats and the Republicans. Okay. And they've got very different ethos is about how you run a country. The Democrats are typically they like larger government that has much more spending. So the government's in much more control over the economic system they typically spending a lot more, and therefore the to borrow in order to spend and they'll tax more. Okay. That's like the Democrats side, big government, more in control. Republicans, the opposite, they're like small government. It's like, let's not interfere too much. Let's just let this system play out market forces and all the rest of it so that the Republicans typically therefore like to spend less, and they like to tax less. Okay. So when you've got this bipolar situation where you've got the Democrats and the Republicans, and they're both equally as powerful. And at the moment you've got the scenario where the House of Representatives is controlled as a majority of Republicans in the house. The majority of Democrats in the Senate, both parts of Congress have to vote through an increase in the debt ceiling, both sides, which basically means the Republicans and the Democrats all have to agree on an increase in the ceiling. But of course, for those Republicans it's often very much going entirely against their entire political ethos to increase the debt ceiling. But that's kind of where we stand. Obviously, Biden's in the White House, that's the kind of third leg of the stool of the US government kind of make up, and obviously Biden's a Democrat, right? So this is where we stand. So each year, the government has to, if they want to agree on a budget, which underpins the government's entire spending for an entire year, spending on literally everything. In order to agree a budget, they essentially have to agree to increase the debt ceiling in order to achieve that budget. And periodically, if the political situation is bipolar enough and dysfunctional enough, then they don't agree and they can't agree. And the Republicans are like, no, I'm not agreeing for you the Democrats to spend more money and increase our debt, or I'm only going to agree to that if there's concessions and you agree to XYZ of things that we want. Okay, and it becomes this political tool, this political gamesmanship, but the problem is the stakes couldn't be higher because worst case scenario if they can't agree. Legally therefore the debt ceiling can't increase, or then literally the US government runs out of cash. And therefore, they can't do things like, well never mind pay their staff or pay the military or pay their pensioners or stuff like that, they also cannot pay the interest on their debt. There are bond coupon payments, which could mean that the US default. And if you have the biggest government on the planet with the most amount of debt defaulting, well then that's your Armageddon scenario. I'm a politician then, like Donald Trump, and I want to fund my wall, like back in 2018, then all what I would say is like right, I'll sit here and have the longest government shutdown in US government history, 35 days. And look, your blink. Yeah. And that went on and on and on, you remember. And so you're right. So this is the what the government shutdown that you've just mentioned. That's when literally, well they hit the debt ceiling. And so right, we need to now obviously avoid default. So we're going to close down and we're going to basically run with a skeleton crew. We're going to go bankrupt and let's get a deal done ASAP. So we can actually continue to actually run this country. And so yeah, Donald Trump forced to shut down. Yeah, was it 35 days in the end, wasn't it? Yeah, that was the longest one. There were two government shutdowns while he was president, actually. Yeah, the latter I think was the longest in history at the time. But yeah, I remember that that's all well and good from Trump's perspective to force the hand to get fund his wall. However, what then started to happen is the longer the government is shut down, the bigger the economic consequence and it starts to compound then over time as does then how people view your government. So it becomes then a self defeating exercise and then there in comes it well then I'm not going to bargain with you and then it goes on and on and hence the cliff edge does become a tangible reality. So 2011 what happened there and how the rating agencies fit into this conversation. Yeah, well, this is very first thing says this is very normal. Right. It's almost every year and actually here's the stat. The US government has agreed to raise the debt ceiling. 78 times since 1960. In 1960 will hang on what's that 63 in 63 years, they've agreed to raise the ceiling 78 times 49 times under Republican presidents 29 times under Democrat presidents. Okay, so it's all the time this way. Okay, we've got to negotiate we've got to raise the ceiling we've got to raise the ceiling US debts going up and up and up every now and then. So it's different where the stakes are higher. The political gamesmanship is much greater. You know the bipolar dysfunctional nature of Congress is at an extreme. And this is where you hit one of those moments where they, they're playing chicken with each other. And it kind of gets out of control. And they go into a government shutdown, and they're facing, you know, essentially default. And so what happened in 2011 is when, and they were talking about this kind of yeah the cliff, the fiscal cliff, this is where look if you guys if you don't actually Congress if you can't agree, we literally will get Armageddon Armageddon scenarios getting closer and closer and closer and so what happened was that default risk started to increase. I mean the default risk on us debt is as close to zero as you can get it's supposed to be the risk free asset. If your default risk is super low you normally have a credit rating that's really high triple a rated. Right. That means virtually no risk of deep at all in 2011, the S&P the standard and pause rating agency. This risk got the default the fiscal cliff risk, the Congress risk if you want, got so high that the standard and pause said, actually you know what, the risk of defaults now tangibly gone away from zero to the point where we're going to have to now downgrade your credit rating. And for the first time ever in history, in the summer of 2011 standard and pause cuts, the US credit rating, only by one notch from triple a to double a but it was very symbolic and markets global markets went into kind of panic mode, because it was like wow okay normally this stuff just in the end gets dealt with but if the standard of pause have gone and said look this is different. When default risk is now getting meaningful and they've cut rating and so suddenly markets started to price in this Armageddon scenario actually maybe maybe the unthinkable maybe actually happening. I suppose then to to conclude, with all of this debt ceiling talk reemerging as it has done now. If there was a genuine threat, as far as perceived investors, this market should theoretically be going through the floor, but it's not. I mean that's not to say we haven't declined over the last 24 hours or really since that weaker retail sales report I think we have midweek. But that came on the context of a pretty stellar start, I think it was the best performance we've had at the beginning of the year and last month or so in in US equity so. Yeah, I think, yeah, you look at the dollar you look at yours right now the markets not freaking out right. No, but it's one to it could well be that this 2023 is another one of the actually this one's different, and it's going to be more impactful than normal. And that's just because I don't know if you were following the house speaker election House of Republicans this guy Kevin McCarthy in the end got nominated as the house speaker but it was a massive political battle to kind of engineer him into the position. The concession he had to make in order to get the job and the house speakers in charge of the house basically right. In order to get the job, the he had to agree to allow three members of the what's called the House Freedom caucus. This is the part of the Republican Party that's like super right wing extreme right. So everything I was saying there about conservatives don't like to spend and borrow and tax, they like small government no spending no borrowing no tax right. Well these the House of Freedom caucus of death. The idea of spending more it's like, like the devil worship. Okay, so, but three members of that caucus have been put on to what's called the rules committee. McCarthy had to put them on the rules committee to get to get their votes and get them over the line to become the house speaker. This is going to come back to bite these lot in the ass because nothing can be debated on the on the House floor that hasn't been signed off by the rules committee. So, will the House of Representatives vote through an increase to the debt ceiling. Well the answer is, it's going to be way harder this year than it has been for a long time because of the political situation so I would predict. I mean, not alone in this that this year the debt ceiling issue is going to be more impactful than it has been for quite a while. Now I'm not saying the US again defaults, because in the end, yeah, the more realistic scenario then is that Biden will have to concede. And so that's going to be politically harming in the short term for him. In a nutshell, yeah. It's funny. What's what's the point of a president. Yeah. So it's definitely one to what it's a meaningful risk on the, on the horizon and something to monitor this is all going to play out over the next few months. Right. So when we move into the summer, we get the closer we get to the summer, the bigger an issue it's going to get. So for now just be aware of it. It's not impacting markets today, but it's one to monitor. Well, look, let's wrap it up there. And thank you very much. If you've made it to the end of the episode for sticking with us. And if you have done and you haven't already dropped us a rating and a review on Spotify, Apple, wherever you listen, please do. It helps then just push out the podcast as many people and if you can pass it on if you enjoy the episodes to just one other person. And if everyone did that who scribes and listens, it would make a huge difference. So, yeah, please do. It would mean a lot to us. So yeah, hopefully you enjoyed that episode and we'll see you again next week. Thank you very much. Have a good weekend.