Thirty-seven years of wisdom

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Ethan Wu (0:36)

Thank Pushkin.

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.

Robert Armstrong (1:21)

What's going on?

Ethan Wu (1:23)

Jonathan, we loved your, what would we call it? Graduatory piece.

Robert Armstrong (1:29)

Valedictory.

Ethan Wu (1:30)

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 lessons that are learned just through experience, and I think it starts here at the top.

Jonathan Guthrie (1:51)

And personal pain, Ethan.

Ethan Wu (1:52)

And personal.

Jonathan Guthrie (1:53)

Misery and personal pain as well.

Ethan Wu (1:57)

You start here, speaking of pain, with market crashes, and you make the point that individual incentives, that's a recipe for instability.

Jonathan Guthrie (2:05)

Absolutely 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.

Robert Armstrong (2:50)

But 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.

Jonathan Guthrie (3:14)

So, does it work, Rob?

Ethan Wu (3:19)

You know, observation, having been in this business for almost as long as me. 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.

Jonathan Guthrie (3:40)

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.

Ethan Wu (3:54)

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.

Jonathan Guthrie (4:10)

I think that's probably true because people do fret about particular situations that they think could go wrong.

So 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 round. 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's 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.