20 Episode results for "Preston Pysche"

BREAKDOWN: What the $1.9T Stimulus Means for Bitcoin

CoinDesk Podcast Network

13:57 min | Last month

BREAKDOWN: What the $1.9T Stimulus Means for Bitcoin

"When these bitcoin is look at a one point nine trillion dollar stimulus bill. They're not really just thinking about a specific one point nine trillion dollar increase on the balance sheet. They're looking at a trajectory trajectory which to them inevitably leads to an impaired dollar and a greater demand for an un- inflatable asset. So far that's been a good fact. Welcome back to the breakdown. With meek. And i'll w it's daily podcast on macro bitcoin and the big picture power shifts remaking. Our world the breakdown is sponsored by next dot. Io and casper and produced and distributed by coin desk. What's going on guys. It is friday march twelfth. And today we're talking about the new one point nine. Trillion dollar stimulus means for bitcoin. To answer this question and really explore whether it means anything. The first thing we have to discuss is the conception of bitcoin as a macro asset. There are really two dimensions to this idea. The first is weather on a day-to-day level. The bitcoin price is responding to short term macro stimuli such as the fed press conference. Jay powell doing something that the market expects or something that the market doesn't expect stocks for example tend to be responsive to that sort of stimuli. This a couple of weeks ago and there is a lot of skepticism among bitcoin irs that bitcoin fonctions in this short term. Macro way there is a very diverse base of hodler's and many simply do not care about that sort of to day input in short time horizon of the average bitcoin holder inoculated from much of that short termism however from a long term thesis perspective. There is no denying that it has been a macro narrative of unfettered money printing. That has been driving new types of institutions and traditional financial players into the waiting arms of bitcoin. It's a particularly poignant day to remember that on march twelfth twenty twenty one year ago exactly we experienced black thursday one of the biggest crashes in bitcoins history. I was recording that night with preston pysche and we were actually watching the price of bitcoin. Get down all the way under four thousand uncertain exchanges as the rest of the market's tanked as well as the western world prepared for a covid nineteen shutdown a year later. Obviously bitcoin has rebounded and how it has attracted an entire new set of players. It has proven its metal and whether there is a connection or not between this latest stimulus and bitcoin. Bitcoin is on twitter at least certainly seemed to be making that connection yesterday. Pomp tweeted president biden has signed the historic one point nine trillion dollar stimulus package. It is historic because it will be the catalyst to put bitcoin to one hundred thousand. Thank you president. Let's actually dig in beyond tweets about what this stimulus might or might not mean for bitcoin. First let's that question in terms of this bill specifically the most relevant part is in the fourteen hundred dollar checks being sent directly to americans of the one point nine trillion total tab those checks represent about four hundred billion dollars of the bill. There are many who think that some meaningful part of that new buying power might find its way into bitcoin. Given the broad income based brush with which it's being distributed. What i mean by that is that this isn't some system whereby americans are showing. They have need. It is everyone who hits a certain income threshold and they're going to be many people for whom that fourteen hundred dollars is not going to need to go to essentials but who have some discretion in how they might wanna spend or save it last year when the first round of twelve hundred dollar stimulus checks went out. There was a slight but noticeable increase in the number of bitcoin buys on coin base of exactly twelve hundred dollars according to that company. So perhaps we'll see something like that as well with some of this four hundred billion dollars moving directly into bitcoin now other parts of this one point nine trillion dollar bill include a child tax credit increase three hundred and fifty billion dollars for aid to state and local governments which was one of the most contentious parts of the bill between democrats and republicans tens of billions for further pandemic response more than thirty billion dollars for emergency rental assistance and mortgage homeowner assistance a hundred thirty billion dollars for helping k twelve schools. Get back online and up and running again. Another forty billion for colleges to do the same eighty six billion dollars of relief for failing pensions. This was again another very contentious part of this bill as many of these. Pensions tended to be failing even before. This happened. Plus a bunch of smaller allocations as well. Now this list of items in this bill brings us to the real reason that many bitcoin c stimulus elected to bitcoins. Future in some meaningful way with this new one point nine trillion dollars the total that the us has spent on combating the pandemic will be over six trillion dollars for some perspective when adjusted for inflation. The us spent about four point one trillion dollars on world war two too many bitcoin irs including many of the new. Bitcoin is like the hedge fund. Guys paul tudor jones and stand druckenmiller. This ever expanding balance sheet inevitably has some pretty serious consequences. The notion is that we will eventually get to a point where the. Us has three options. I we could default on debt. That seems pretty unlikely. Given that we are the world's major financial power second raise taxes to pay back that debt while certainly tax increases seem to be on the menu. It seems entirely unrealistic. Implausible that we could ever tax citizens and corporations enough to both the debt and keep the country running in any sort of semblance of how it is now which brings us to the third option. Inflated away the idea here being that debt is denominated in today's dollars. If today's dollars are worth less in the future the burden of that debt is also less in the future if we owe one hundred dollars today but in ten years that one hundred dollars is worth one dollar then. We really only a one dollar. That's the idea of inflating the away. This question of how the us out of this is the major macro narrative that is driving new people to bitcoin. Looking for the best way to unlock your cryptos. Liquidity next dot. Io is exactly what you need borrow. Against your digital assets. At just five point nine percents apr earn passive income with yields up to twelve percent and swap between more than seventy five market pairs with the instant mac so exchange. Try the next wallet app to get the whole three hundred. Sixty degrees of crypto banking get started at echo dot io until now blockchain technology has been a series of compromises. No layer protocol exists in the market. That supports everything. Enterprises developers and consumers need from decentralized applications need casper casper provides the blockchain ecosystem with a solution that makes no compromises around deceleration security or performance. Learn more at casper dot network now the counterpoint. And there is a counterpoint. Because many people aren't concerned right now about this debt expansion are folks saying that the expansion of the balance sheet hasn't produced inflation yet. Despite a lot of hand wringing that it would near casare and tim. O'brien wrote a bloomberg editorial. This week called cove relief bigger than world. War two sounds right. Their argument is that there is simply no evidence of balance sheet increases leading to inflation. They point to a tripling of the balance sheet post great financial crisis with no corresponding increase in the cpi. They also argue that nineteen seventy stagflation had more to do with twin energy crises than spending and finally they point to cpi numbers that remain firmly below fed targets. Let's hold aside for a moment. Bitcoin arguments that. Cpi doesn't accurately measure inflation in terms of how it's actually experienced by people. The bigger point. That i wanna make is that. There is a shifting conventional wisdom. O'brien and cassandra are far from. Outside of the mainstream. There are more and more people who while not sure. Just how big a deficit we can run or how much money we can print are pretty sure. It's a hell of a lot bigger than what we're doing now. This group wants to see the federal government flex spending muscles even more jim bianco. The well-known macro researcher tweeted in case. You're wondering if we are in a universal basic income world biden is set to announce what's next before he even signs the current one point nine trillion dollar bill. There is a sense among many that the spending experiment we've seen in this covid. Nineteen response is still just the beginning and the next thing that comes is much more direct money to citizens be it in the form of some sort of universal basic income or less direct approach like the elimination of student debt. Now there are frankly a larger than you'd think number of bitcoin who believe that the fiat die around the us dollar has been cast and that programs like you be. I are net net use of extravagant money printing than things like well wars. At least they might argue the byproducts and negative extra of this type of experimental monetary and fiscal policy are potentially for a time to the benefit of people directly versus more abundance the tuition's or some foreign entanglement the point is that when these bitcoin is look at a one point nine trillion dollar stimulus bill. They're not really just thinking about a specific one point nine trillion dollar increase on the balance sheet. They're looking at trajectory. It's a trajectory which to them. Inevitably leads to an impaired dollar. A greater demand for an un- inflatable asset. So far that's been a good bet by the way the stock market seems to like the stimulus bill. Us stocks jumped to a new all-time high yesterday with tech companies in particular making up. Some serious ground that they had lost over the past few weeks by the way number two this is not just a us phenomenon and as a global asset. That's part of why. Bitcoin is even more appealing on thursday. The european central bank said it would significantly accelerate a plan to buy the equivalent of two point two trillion dollars worth of government bonds. The reason rising rates european central bank president christine lagarde said quote market interest rates have increased since the start of the year which poses a risk to wider financing conditions if sizable and persistent increases in these market interest rates when left unchecked could translate into a premature tightening financial conditions for all sectors of the economy. This is more or less what investors wanted to hear from powell last week but didn't and since we're already in government and macro mode let's round this out with a little regulatory roundup as well. I a piece of news from yesterday. That makes more sense today. By nance announced that they had hired maxwell. Baucus who represented montana in congress in the senate for almost forty years between two thousand. Fourteen and twenty seventeen was an ambassador to china for. It seemed like a move to try to get friendlier with the. Us and made a lot more sense today when it was announced that the was investigating finance for whether it had allowed us citizens to trade and trade particularly derivatives products. Now i'm seeing on twitter. A lot of people latching onto this as though it's going to be the major new fudd but it doesn't really strike me as an existential type of threat. The has an accused by nance currently of any wrongdoing and doesn't at least for now seem to be trying to make an example of them or anything like that second. I think a little bit more significant was the reintroduction of the token taxonomy act. This has been introduced by congressman warren davidson three times. In the last three years its goal is to exempt certain cryptos and digital assets from federal securities law and is ultimately a pro business. Act the release about the token taxonomy act states currently patchwork of laws and regulations creates confusion and even hostility to various blockchain businesses. The bill has bipartisan co-sponsorship. With ted bud a republican from north carolina. Darren soto a democrat from florida scott. Perry republican from pennsylvania and josh gottheimer democrat from new jersey effectively at argues that other countries are going to start lapping us. If they're not already. This follows the introduction of the eliminate barriers to innovation. Act which i discussed a couple of days ago that bill would establish a working group within ninety days that then produce a report within a year that would figure out what parts of this new space are meant to fall under the sec versus the cftc if those timelines feel incredibly slow to you welcome to government still. It is good to see that more of these positive pro-innovation pro. Bitcoin pro crypto bills are being introduced rather than some wave of new attacks on the space. I think if i had to sum up where we are in terms of this macro asset idea crypto markets are very weird there in an inbetween space where they are still functioning simultaneously as sort of correlated certainly compared to other assets butter increasingly apart of the macro conversation. Bitcoin with all of these new entrance into the market is obviously the one that has the greatest correspondents to the macro narrative. As we'll discuss tomorrow it feels to me like we're seeing the beginnings of another wave of institutional players announcing their entry into this market. So you can bet that this macro conversation is only going to increase over time for now guys. I appreciate you listening. I hope you're heading into what is going to be a great early spring weekend until tomorrow be safe and take care of each other piece.

Bitcoin Jay powell hodler preston pysche paul tudor jones druckenmiller biden
What the $1.9T Stimulus Means for Bitcoin

The Breakdown with NLW

13:57 min | Last month

What the $1.9T Stimulus Means for Bitcoin

"When these bitcoin is look at a one point nine trillion dollar stimulus bill. They're not really just thinking about a specific one point nine trillion dollar increase on the balance sheet. They're looking at a trajectory. It's a trajectory which to them inevitably leads to an impaired dollar and a greater demand for an un- inflatable asset. So far that's been a good fact. Welcome back to the breakdown. With meek. And i'll w it's daily podcast on macro bitcoin and the big picture power shifts remaking. Our world the breakdown is sponsored by next dot. Io and casper and produced and distributed by coin desk. What's going on guys. It is friday march twelfth. And today we're talking about the new one point nine. Trillion dollar stimulus means for bitcoin. To answer this question and really explore whether it means anything. The first thing we have to discuss is the conception of bitcoin as a macro asset. There are really two dimensions to this idea. The first is weather on a day-to-day level. The bitcoin price is responding to short term macro stimuli such as the fed press conference. Jay powell doing something that the market expects or something that the market doesn't expect stocks for example tend to be responsive to that sort of stimuli. We discussed this a couple of weeks ago and there is a lot of skepticism among bitcoin irs that bitcoin functions in this short term macro way there is a very diverse base of and many simply do not care about that sort of to day input in short time horizon of the average bitcoin holder. Inoculate much of that short termism however from a long term thesis perspective. There is no denying that it has been a macro narrative of unfettered money printing. That has been driving new types of institutions and traditional financial players into the waiting arms of bitcoin. It's a particularly poignant day to remember that on march twelfth twenty twenty one year ago exactly we experienced black thursday one of the biggest crashes in bitcoins history. I was recording that night with preston pysche and we were actually watching the price of bitcoin. Get down all the way under four thousand uncertain exchanges as the rest of the market's tanked as well as the western world prepared for a covid nineteen shutdown a year later. Obviously bitcoin has rebounded and how it has attracted an entire new set of players. It has proven its metal and whether there is a connection or not between this latest stimulus and bitcoin. Bitcoin is on twitter at least certainly seemed to be making that connection yesterday. Pomp tweeted president biden has signed the historic one point nine trillion dollar stimulus package. It is historic because it will be the catalyst to put bitcoin to one hundred thousand. Thank you president. Let's actually dig in beyond tweets about what this stimulus might or might not mean for bitcoin. First let's that question in terms of this bill specifically the most relevant part is in the fourteen hundred dollar checks being sent directly to americans of the one point nine trillion total tab those checks represent about four hundred billion dollars of the bill. There are many who think that some meaningful part of that new buying power might find its way into bitcoin. Given the broad income based brush with which it's being distributed. What i mean by that is that this isn't some system whereby americans are showing. They have need. It is everyone who hits a certain income threshold and they're going to be many people for whom that fourteen hundred dollars is not going to need to go to essentials but who have some discretion in how they might wanna spend or save it last year when the first round of twelve hundred dollar stimulus checks went out. There was a slight but noticeable increase in the number of bitcoin buys on coin base of exactly twelve hundred dollars according to that company. So perhaps we'll see something like that as well with some of this four hundred billion dollars moving directly into bitcoin now other parts of this one point nine trillion dollar bill include a child tax credit increase three hundred and fifty billion dollars for aid to state and local governments which was one of the most contentious parts of the bill between democrats and republicans tens of billions for further pandemic response more than thirty billion dollars for emergency rental assistance and mortgage homeowner assistance a hundred thirty billion dollars for helping k twelve schools. Get back online and up and running again. Another forty billion for colleges to do the same eighty six billion dollars of relief for failing pensions. This was again another very contentious part of this bill as many of these. Pensions tended to be failing even before. This happened. Plus a bunch of smaller allocations as well. Now this list of items in this bill brings us to the real reason that many bitcoin c stimulus as connected to bitcoin. Future in some meaningful way with this new one point nine trillion dollars the total that the us has spent on combating the pandemic will be over six trillion dollars for some perspective when adjusted for inflation. The us spent about four point one trillion dollars on world war two too many bitcoin irs including many of the new. Bitcoin is like the hedge fund. Guys paul tudor jones and stand druckenmiller. This ever expanding balance sheet inevitably has some pretty serious consequences. The notion is that we will eventually get to a point where the. Us has three options. I we could default on debt. That seems pretty unlikely. Given that we are the world's major financial power second raise taxes to pay back that debt while certainly tax increases seem to be on the menu. It seems entirely unrealistic. Implausible that we could ever tax citizens and corporations enough to both the debt and keep the country running in any sort of semblance of how it is now which brings us to the third option. Inflated away the idea here being that debt is denominated in today's dollars. If today's dollars are worth less in the future the burden of that debt is also less in the future if we owe one hundred dollars today but in ten years that one hundred dollars is worth one dollar then. We really only a one dollar. That's the idea of inflating the away. This question of how the us eventually climbs out of this is the major macro narrative that is driving new people to bitcoin. Looking for the best way to unlock your cryptos. Liquidity next dot. Io is exactly what you need borrow. Against your digital assets. At just five point nine percents apr earn passive income with yields up to twelve percent and swap between more than seventy five market pairs with the instant mac so exchange. Try the next wallet app to get the whole three hundred. Sixty degrees of crypto banking get started at echo dot io until now blockchain technology has been a series of compromises. No layer protocol exists in the market. That supports everything. Enterprises developers and consumers need from decentralized applications need casper casper provides the blockchain ecosystem with a solution that makes no compromises around deceleration security or performance. Learn more at casper dot network now the counterpoint. And there is a counterpoint. Because many people aren't concerned right now about this debt expansion are folks saying that the expansion of the balance sheet hasn't produced inflation yet. Despite a lot of hand wringing that it would near casare and tim. O'brien wrote a bloomberg editorial. This week called cove relief bigger than world. War two sounds right. Their argument is that there is simply no evidence of balance sheet increases leading to inflation. They point to a tripling of the balance sheet post great financial crisis with no corresponding increase in the cpi. They also argue that nineteen seventy stagflation had more to do with twin energy crises than spending and finally they point to cpi numbers that remain firmly below fed targets. Let's hold aside for a moment. Bitcoin arguments that. Cpi doesn't accurately measure inflation in terms of how it's actually experienced by people. The bigger point. That i wanna make is that. There is a shifting conventional wisdom. O'brien and cassandra are far from. Outside of the mainstream. There are more and more people who while not sure. Just how big a deficit we can run or how much money we can print are pretty sure. It's a hell of a lot bigger than what we're doing now. This group wants to see the federal government flex spending muscles even more jim bianco. The well-known macro researcher tweeted in case. You're wondering if we are in a universal basic income world biden is set to announce what's next before he even signs the current one point nine trillion dollar bill. There is a sense among many that the spending experiment we've seen in this covid. Nineteen response is still just the beginning and the next thing that comes is much more direct money to citizens be it in the form of some sort of universal basic income or less direct approach like the elimination of student debt. Now there are frankly a larger than you'd think number of bitcoin who believe that the fiat die around the us dollar has been cast and that programs like you be. I are net net of use of extravagant money printing than things like well wars. At least they might argue the byproducts and negative extra of this type of experimental monetary and fiscal policy are potentially for a time to the benefit of people directly versus more abundance the tuition's or some foreign entanglement the point is that when these bitcoin is look at a one point nine trillion dollar stimulus bill. They're not really just thinking about a specific one point nine trillion dollar increase on the balance sheet. They're looking at trajectory. It's a trajectory which to them. Inevitably leads to an impaired dollar. A greater demand for an un- inflatable asset. So far that's been a good bet by the way the stock market seems to like the stimulus bill. Us stocks jumped to a new all-time high yesterday with tech companies in particular making up. Some serious ground that they had lost over the past few weeks by the way number two this is not just a us phenomenon and as a global asset. That's part of why. Bitcoin is even more appealing on thursday. The european central bank said it would significantly accelerate a plan to buy the equivalent of two point two trillion dollars worth of government bonds. The reason rising rates european central bank president christine lagarde said quote market interest rates have increased since the start of the year which poses a risk to wider financing conditions if sizable and persistent increases in these market interest rates when left unchecked could translate into a premature tightening financial conditions for all sectors of the economy. This is more or less what investors wanted to hear from powell last week but didn't and since we're already in government and macro mode let's round this out with a little regulatory roundup as well. I a piece of news from yesterday. That makes a lot more sense today. By nance announced that they had hired maxwell. Baucus who represented montana in congress in the senate for almost forty years between two thousand fourteen and twenty seventeen was an ambassador to china for obama. It seemed like a move to try to get friendlier with the. Us and made a lot more sense today when it was announced that the was investigating finance for whether it had allowed us citizens to trade and trade particularly derivatives products. Now i'm seeing on twitter. A lot of people latching onto this as though it's going to be the major new fudd but it doesn't really strike me as an existential type of threat. The has an accused by nance currently of any wrongdoing and doesn't at least for now seem to be trying to make an example of them or anything like that second. I think a little bit more significant was the reintroduction of the token taxonomy act. This has been introduced by congressman warren davidson three times. In the last three years its goal is to exempt certain cryptos and digital assets from federal securities law and is ultimately a pro business. Act the release about the token taxonomy act states currently patchwork of laws and regulations creates confusion and even hostility to various blockchain businesses. The bill has bipartisan co-sponsorship. With ted bud a republican from north carolina. Darren soto a democrat from florida scott. Perry republican from pennsylvania and josh gottheimer democrat from new jersey effectively at argues that other countries are going to start lapping us. If they're not already. This follows the introduction of the eliminate barriers to innovation. Act which i discussed a couple of days ago that bill would establish a working group within ninety days that then produce a report within a year that would figure out what parts of this new space are meant to fall under the sec versus the cftc if those timelines feel incredibly slow to you welcome to government still. It is good to see that more of these positive pro-innovation pro. Bitcoin pro crypto bills are being introduced rather than some wave of new attacks on the space. I think if i had to sum up where we are in terms of this macro asset idea crypto markets are very weird there in an inbetween space where they are still functioning simultaneously as sort of correlated certainly compared to other assets butter increasingly apart of the macro conversation. Bitcoin with all of these new entrance into the market is obviously the one that has the greatest correspondents to the macro narrative. As we'll discuss tomorrow it feels to me like we're seeing the beginnings of another wave of institutional players announcing their entry into this market. So you can bet that this macro conversation is only going to increase over time for now guys. I appreciate you listening. I hope you're heading into what is going to be a great early spring weekend until tomorrow be safe and take care of each other piece.

Bitcoin Jay powell preston pysche paul tudor jones druckenmiller us biden
Read_512 - Why The Yuppie Elite Dismiss Bitcoin [Croesus]

Bitcoin Audible

46:37 min | Last week

Read_512 - Why The Yuppie Elite Dismiss Bitcoin [Croesus]

"The iq framework seems to hold up decently with regard to the moon bullies. But it doesn't count for the dance. And all the other brilliant yuppies that i know when i thought about. What is the defining difference between the bitcoin. Maximalist semi yuppie elite friends. The surface level distinctions. That popped out. Were political libertarianism. Trump's support second amendment rights. Black lives matter but these stem from deeper divide. The degree to which a person has trust in the system. The best in bitcoin made audible. I'm guy swan. And this is bitcoin audible. What is up. welcome back to bitcoin. Audible the place where you get your free. Phd in all things. bitcoin. I am guys while i'm the guy who is read more about bitcoin than anybody else. You know we've got a great piece Great read today brought back to my attention actually by preston pysche. A shout out to him for reminding me of this. One had gotten way down in my candidates. Board that i've got and i completely forgotten about it It is another amazing piece actually by creases who read his asset. Dna piece on the show and the amazing citadel. Twenty-one one publication and this one is about the yuppie elite class and why they are so poorly positioned to stand. What the hell. Bitcoin is despite their intelligence. So what could explain such a divide. We will dive into it in just a moment. I some love to bit box. Oh to the hardware wallet for the lovers of keys out there. Not your keys. Not your coins is rule number one in bitcoin and the bit box so too is the device for practicing that rule properly guys swan dot com slash bit box to check them out plus a number of other great security and backup products at their store. Then we have. The automatic sat stagger of the most stacks swan. Bitcoin and the dollar cost average savings plan. Use my referral swan. Bitcoin dot com slash guy. And it gets you some free sats when you start your automatic plan and thank both of our awesome sponsors for making bickering audible possible so with that. Let's dive into today's read. And it's titled you know who wins in the bitcoin. Game the people who look at their savings in sets the people who see their stack is higher this week than last. Not the ones who focused on the dollar price. The price is just noise. Trading is just something that takes a whole lot of work in order to give your bitcoin to somebody else and pay ungodly amounts of taxes. On it when you do when you could have just been automatically stacking bitcoin every week ignoring the fiat measuring stick and watching your sats go up. That is why. I use swan. Bitcoin dot com slash guy for my referral link to stack sats. All the time recording an audio book. A stacked with swan writing knows for my next episode stacked with swan reading another two hundred. Bitcoin articles while also stacked with swan every day every week every month whatever frequency or amount works for you set it and forget it does all the hard work and you keep doing what you do knowing that tomorrow. You will have more sats than you had yesterday swan. Bitcoin dot com slash. Guy will get you some free sats to start off why the yuppie elite dismiss bitcoin by creases exasperated with our conversation. I asked bluntly what do you think the probability is that. Bitcoin hits a million dollars per coin without hesitation. My friend replied zero point. Zero zero one percent laughed. And i said i put it at eighty percent. I asked if after thousands of hours of research on my part maybe there was some information a symmetry he quipped or may be self-motivated beliefs. That's dan he's one of my good friends from business school. He got a seventy on his g. Mat and is almost always the smartest man in the room. We both worked at one of the elite management consulting firms before attending one of the in the programs followed by returning to elite job opportunities in the most desirable cities in america. My be school friend. Group is full of dan's the kids who ran the gauntlet of achievement obsessed america and cleared the highest bar every time it rose higher the consummate yuppie elite yet. They are all resistant to bitcoin. It has become a topic of frustrated fascination for me my other friend groups have largely heated my vociferous and fervent testimony that bitcoin is the most important asset of the twenty first century. Yet my elite. Nba friends clinging to dismissive. Nece borders on outright hostility. Why this is a complex topic with a few layers. I will try to address here as a starting point. Let's introduce the closest attempt at an explanation. That i've seen to date. Okay paul's here about the least interesting thing to do in audio is to try to describe a meam but this actually has important context. Hopefully if you've seen it this murad mama. Dobbs iq bell curve mean regarding who it is. Thanks two hundred and fifty thousand dollars per. Bitcoin is realistic down at the bottom. There's the there's the incredibly low iq people who are concave heads no brain but think yo. Yeah we're definitely going to two hundred fifty k. Then there's the middle the bulk of the population from eighty-five iq two hundred fifteen iq range and they think two hundred fifty thousand dollars is just absolutely ridiculous than the upper end of the bell curve. One fifteen one thirty and hire the big brain who c. Two hundred fifty k. As obvious illustrating the dumbest and the smartest are the ones who think two hundred fifty k. Within reach okay and meme clever and compelling this model explains what many and bitcoin perceive some of the smartest people in the world think. Bitcoin is going to boom but so do some dumb asses importantly this model also explains the mockery and resistance. We see from our reasonably intelligent friends and family but it's too easy of explanation. I cannot claim to be smarter than dan. or the hundreds of other brilliant. Mba's in my graduating class. Not one of whom has reached bitcoin maximalism. As far as i know clearly there is something else going on here after. Mulling this over for a number of months. I think i've come up with a framework that while not perfect provides more explanatory power i. Let's separate the two hundred and fifty k believers in murad mean into what they really are. Bitcoin moon boys on the left and deeply researched. Bitcoin maximalists on the right. In truth they are two different groups. The first group believes that bitcoin is going to the moon largely because they believed that past performance is indicative of future results. We will say that. This group subscribes to coin moon. Ism the second group has come to understand the game. Theoretic inevitability of bitcoins continued rise in the context of central bank money. Printing the deterministic price mechanics of quadrennial supply shocks by bitcoins. Having and the market psychology that programmatic price appreciation precipitates and the winner takes all implications of an absolutely scarce store value asset. What we call bitcoin maximalism. The i q framework seems to hold up decently with regard to the moon boys but it doesn't account for the dan's and all of the other brilliant yet these that i know when i thought about what is the defining difference between the bitcoin. Maximalist semi yuppie elite friends. The surface level distinctions. That popped out. Were political example. Libertarianism trump's support. Second amendment rights black lives matter but these stem from a deeper divide the degree to which a person has trust in the system as a life long liberal recently cast into the netherworld of distrust of both parties. That one necessarily acquires. When the bitcoin rabbit hole far enough i feel reasonably qualified to speak to the liberal condition at the heart of liberalism is a belief that the system can work. If it could just be architect it well enough and administered competently and compassionately my personal journey to maximalism involved a painful dissociation from this fundamental worldview specifically in the course of digging into understand central banking monetary policy and the irresistible. Levers that come with it. As an aside i went to the best business school in the world and they didn't teach us anything about that for what it's worth. I don't think this was knowing or malicious of mission. I think this battle was one one hundred years ago in keynes's day with the self-serving support of governments weighing heavily on the outcome which is to say my professors learned from keynesians who themselves learn from keynesians. The business leaders and educators of today are completely unaware that they are passing on the shoddy propaganda version of monetary theory as a result of the largely successful ideological extermination of sound monetary theory. But i digress if we take murad. Iq framework split the two hundred and fifty k believers into their respective groups and add the dimension of trust in the system's ability to work. We get something like this. The graphic will be referred to a couple of times. So i'll just explain it this once. It's a simple four quadrant diagram with high iq at the top low iq at the bottom and high trust in the system on the right and low trust the system on the left and then basically a color gradient for the groups so this puts propensity for bitcoin. Maximalism up in the top left which is high iq but very low trust in the system then. Bitcoin moon ism dominates the bottom left low iq but also low trust in the system. Now there is some. Bitcoin moon ism in the bottom right low. I q but they still trusted the system. And then there's basically vacuum of neither in the top right. The high iq people who have very high trust in the system. So try to picture that in your mind cause it's referenced quite a bit for the rest of the article if this is a reasonable representation of reality. There are a number of insights. We might draw from it. Bitcoin maximalism is correlated with intelligence but also with distrust in the system. Someone who is very smart and has high conviction that the system is broken is more likely to reach bitcoin maximalism than someone lacking one of these qualities. All else equal bitcoin. Moon ism is less sensitive to one's distrust in the system. If you're a dumb ass you're a dumb ass but probably helps a little to be a dumb ass and distrust the system. It is easier to reach bitcoin. Maximalism if you are already primed for it thy a existing distrust of the system. This helps explain the early. Adoption of cypher. Punks anarchists libertarians. And even the current representational skewed towards trump supporters who share a distrust of the establishment on the flip side. It is more or less impossible to reach. Bitcoin maximalism while retaining any amount of trust in the system. Indeed this was my experience to get to maximalism. I had to. I grapple with the uncomfortable dissidents of my beliefs and the things. I came face to face with as i dug deeper into the rabbit hole. Confront them rather than turn back and ultimately tear down my entire worldview in order to resolve the dissonance and continued deeper down the rabbit hole. Fun times of greatest relevance to our particular focus however is the white space in the top right quadrant. Those with high intelligence and trust in the system's ability to work are very unlikely to subscribe to either bitcoin maximalism or bitcoin moon ism. Let's expand on this further. The upper right quadrant of the chart also happens to be the native home of the yuppie elite to succeed in the educated professional class. You have to be smart but it's also crucial that you know how to fit in. Be a good team player. Navigate industry politics be polite in likeable and above all be good foot. Soldier will link to sacrifice for your employer the requisite core beliefs to be able to be all of these things is trust in the system. Trust that if you are a good employee and play nice with others you will be rewarded via promotions and social standing in this sense if we were to plot. Where the yuppie elite live on our graph. It would look something like this. You basically just draws a rough quarter circle in the empty white space of the top right of this diagram in just the same way that bitcoin maximalists are some combination of smart and distrusting of the system. The yuppie elite are typically smart and trusting of this system. Some are more brilliant than others but the ones that are less smart and still successful are typically so because they are exceptionally committed and loyal employees. As you can see the empty corner of our two by two matrix is exactly where the nba's and other yuppie elites are from their vantage point belief in bitcoin is a peculiar phenomenon. That will surely go away. None of their yuppie elite friends believe in it and since they don't know much about bitcoin. They don't draw any distinction between bitcoin. Moon ism and bitcoin maximalism. It's all lumped together for them as a result. The yuppie elite tend to view belief in bitcoin. Like this same diagram with the top right. Just labeled the people in the know with the color gradient all just leading to the bottom left the dumb distrusting and this is the whole pool of people who quote fall for bitcoin unfortunately for them this perspective makes them unlikely to seriously consider bitcoin on its own merits. Part of what makes this disinterest. So resilient is that it falls into a neat pattern like many other things in the yuppie world the yuppie elite customers to having the best information the best education and the quickest of and access to trends yuppies believe. They are the people in the know. When you're in the ivory tower. You think the term ivory tower is a silly misrepresentation of your very normal life. When you're no longer in the ivory tower you realize how willfully out of touch you were with the world. Part of being in the ivory tower means being in a socially insular bubble interacting only with other elite yuppies. The natural outcome of this is that you tend to believe things are important and worthwhile. If the other yuppies in your social network believe they are after all yuppies are the people in the know. Conversely if people outside of the yuppie social world are engaged in something other yuppies aren't interested in it it must be something for people not in the know in this case. The lack of belief in bitcoin among the yuppie elite combined with the significant interest in bitcoin among non yuppies triggers a clear pattern recognition response. Bitcoin is for people not in the no. A second characteristic of yuppies also helps ensure that this heuristic label is not easily revised as smart people who are good at navigating the world yuppies need to understand something in order to believe in it. That's how they done well in life so far so that's what they're sticking to. Ironically it's the adherence to the central ethos of bitcoin that keeps yuppies from investing in bitcoin. Don't trust their affi- hood friend who has a sailboat. Captain for a living in his mind. I'm one of the smartest people he knows. When i strongly recommended that he look into bitcoin. He bolts on that same night. He didn't verify my thesis for himself. He trusted me. The same is not true for my yuppie friends they know it is unwise to invest money in something that they do not understand at the same time. They lacked the time conviction and persistence to replicate my years of research. What's more bitcoins. Surface layer provides it with a subtle camouflage the first hour or two of learning about bitcoin triggers a multitude of scam red flags for the business and financial elite who have honed their heuristic abilities. For filtering out the deluge of noise. They sift through on a daily basis in order to be effective in their professions. These red flags or a non starter for their entire adult lives. They have been reinforced to think within the box often calling it out of the box thinking the odds that a new piece of information comes along for which an hour or two of investigation creates more confusion than answers and yields several red flags but actually turns out to be an outstanding investment are vanishingly small. That's what heuristic do filter out the garbage based on a cursory investigation of substance. A typical member of the yuppie elite flags bitcoin as garbage to be ignored upon their first investigation of its merits. And because of the group think of yuppies only paying attention to what other yuppies are interested in that is where bickering remains. Of course this will all change as bitcoins mechanics. Continue to play out making up in time. Everyone will have to face the painful realization that their reasons for writing off bitcoin a wrong because of the dynamics at work with the yuppie class it may take longer for them to come around to bitcoin then with most new technologies or trends. Love this piece and it helps to explain something that i've thought for a long time. I'm know people in my life personally. Who kind of fit into this thing. And this this model. I guess you could say and i think i think crisis is right here that the determining factor is how much trust they have in the system is if they think it's basically operating as it should the quick filter for bitcoin is an obvious dismissal for a lot of different reasons. And i really i want to get into this and get guys take on this piece of real quick. Let's hitter sponsor and we will jump right back in so like i said there have been a lot of people in my own personal life I mean people that i know to be smart A who have this this same immediate turn off with bitcoin and even even people who have had that same resistance to it for eight years. You know i mean just Can continue to see succeed in believed that it's just everybody else who doesn't understand what's going on. And there's a handful of different dynamics that go on here. And i think honestly one of the big things particularly in the yuppie elite like i absolutely absolutely believe the one of the most determining factors is trust in the system but i think also being trustful of the system is deeply deeply tied to whether or not you have been rewarded by. There's actually an experiment done with a rigged game of monopoly that was done with a hundred random pairs of participants and what they literally did is at the beginning of the game. They would flip a coin. And whoever won the coin toss would be the privilege player. And whoever didn't would be the The week player the or. I think they labeled them the rich and the poor but it was basically someone who had rules in their favor and someone who had rules against them The first person the wealthy player got more money to start off with it. Got like an extra roll. Got to roll two dice instead of one. Day i can't remember exactly all of the different scenarios. But they heavily rigged the game in their favor and against the opponent and then they just watched how this played out and noted a bunch of different things about the the player who was winning and clearly. Winning the game would You know become become more loud and boisterous. They would start to flaunt their the amount of money that they had how easy it was like. Oh i'll just buy this property of ood. You owe me twenty four dollars or whatever. You're not gonna have any money soon. You know they just. They very much enjoyed their position and even even they would eat the snacks that were left on the table with them. They have like pretzels Did they would eat the snacks at a higher rate than the other participant but the critical factor is that at the end of this. They would ask the participants why they thought they won the game or why they thought the outcome of the game was the way it was and the the players who won the obviously rigged four players would never mention the coin toss. They would go in and talk about how all decisions they made and how they bought this property and they did this and this and this and they would not they would not attack. The game benefitted them. They wanted to believe they were conditioned to fall into the fact that their success was not unfair but that it was because of choices and things that they did even though obviously the game was rigged. I think this is a critical part of what's going on. You know if you're successful in some sort of system or institution and you know you're in a very tight social circle particularly a yuppie elite class who thinks they're in the know and are usually ahead of the game on this trend or this technology or this investment. You know these are smart people and they've gotten awards and they've always been the best in their class and it's cetera et cetera and they obviously have very tight social circles as well to to basically come to terms with the fact that that might not be legitimate or there may be something fundamentally wrong with that is to basically say you may not have earned all of those awards that social value that you may define who you are With could actually be like really ignorant about something very fundamental and creases talks about in this thing is like he had to deal with the crashing of his entire world view here and that does absolutely happen when you start going down the rabbit hole. You really understand money. And the critical the critical elements of it and specifically what the fall out of a corrupt money is and that you know. Maybe your success was actually learning how to benefit and play in a system. That's really horribly unfair that is at its base at its most layer corrupt by default. It would be to suggest that your success is explicitly at somebody else's expense that maybe i wasn't producing value in the world. Maybe i was actually just destroying the thing that got me the greatest reward in this rigged system again. Imagine that something easy to deal with I mean i. I remember when i was much younger now. I guess has been quite a long time in my history but coming to terms with how i thought like i was a very strict conservative kind of a flag-waving america is liberty sort of guy and the idea that i lived in a free country. The idea that this was a meaningful thing. And that's what the flag meant. And that's what. America represented in all of this stuff. Like my idea of what my country was and who i was was very deeply tied to that and i. It was really hard to come to terms with that. It was australian economics. It did is. This was good good longtime before bitcoin. Actually did. i had this breakdown so to speak But it really felt like you don't have this very disney idea of history that the good guys won prank and that veil was really just ripped away from me And it was very comfortable thing to believe you know. It was very easy to think that stuff workout in the end and the good guys won and You know. I live in a good country. I'm we're the good guys and what we do. Therefore is good by default. 'cause it's hilarious l. Silly i see the view now but nonetheless like i was very deeply tied to that idea and even though when it fell away when i could no longer believe that i remember feeling like there was this. Huge vacuum is that. I didn't belong anywhere. I didn't have a totem for what i believed outside of the context of america like how to define it and we get so much meaning from our social circles and if all of our social circles are rewarding us patting us on the back for some specific thing that we do some belief that we hold or some loyalty that we have to an institution or a system that has benefited us greatly the barrier the the mountainous wall that we have to break through to to get out of that to risk being thought of as stupid or crazy by that entire social circle. That is not something to just I guess i'll just deal with it like that. Changes who you think you are at literally shatters your world and when you've come to rely on or thrive on how everybody thinks so positively view or that everybody put you up on a pedestal as being very very smart or the very part of the team sort of thing is that that can really collapse. Your own self confidence. You find out that your self confidence is really based on how everybody else thought about you. Not how you thought of yourself that it was all an external thing and it can all come crashing down because it was mostly based on it was borrowed right. It wasn't yours you borrowed it from the from the people around you. That's a horrible reality to deal with And i i know from personal experience is having to deal with. You know talking about bitcoin for eight ten years. Whatever the hell it's been now even know is is me having to deal with everybody who felt like i was the smart one in the family or the smart one in the social group or whatever it is like in in in my social circles people thought of me is like oh yeah yeah. Guys is smart smart guy. He was always science dude and he was always building gadgets and robots and he was always the wind the caller. Fix your computer and blah blah blah and to openly. Talk about something that you know. The response is going to be. Oh my god you sad. Poor stupid little person. How have you gotten yourself trapped in this ponzi scheme into watch their respect and value of you like fall while you're talking to them to just just watch just a huge chunk of it just vanish. That's not easy to do. It's not easy to do. You really gotta deal with yourself and you're going to know what you think and you have to really question whether or not you want to go there. I think just kind of the idea of yuppie elite you know a social class that thinks of themselves is better than other people is typically a borrowed arrogance right. it's because they have been so successful and all of these successful friends. Think of them as the smartest people in the room. That's what it's based off of like when when they would have to challenge that there it kind of falls apart like without that social circle a lot of their self worth would die. Obviously there are exceptions. But you know i. It is not in our nature to challenge our social circles. It is it is in our nature to go along with them. And when i lost my politics my conservative view. My idea that america was freedom. By case it's one of the most difficult things i did in my life really. And i had some some political back and forth because i didn't you know especially during high school. I didn't quite fit into one of the boxes. But i always had that conservative. Leaning of america is freedom and america is my country and losing. I cried. I really did like i. I had a really really rough couple of weeks. Trying to deal with the fact that everything that i thought i knew about the world and what was right and wrong is really thrown into question. I remember thinking about like. I had gone like during the nine eleven era. I had remember thinking that we should nuke iraq. Like i soaked up that propaganda without even a second thought and i was like and i would make jokes about it like a. We should have lake iraq and You know. I was in like some republican circles. They're all the warmongering crap. And i remember like looking back on that not that far after that era on an realizing. What a hilarious sham that whole war was and just how many lives were perpetuated to get us into that conflict and how have nothing to do with it and then and then you think about like the innocent civilians you just think about like normal iraqis who probably don't even like from from the perspective of me losing confidence and trust in my political system. How many of me are sitting over in iraq going. What a bunch of cock suckers that are just destroying my country and starting some conflict and blah blah blah and suddenly. I saw a whole country just a just a random arbitrary line drawn on a piece of on a map. I'm not even on the ground right. It's not even it doesn't even exist own. The mound and i saw all of these innocent people who now had the stability of their entire world and livelihoods thrown into chaos because of what some political jackass may or may not have done based on a lie from somebody of the halfway around the world and that law and civility and normal normal basic human rights or just now out the window. And i look back on those comments that i made or the things that i thought and i just think what a monster what are like. What an unbelievably narrow idiotic view of the world that i had. That's not a healthy. You don't wanna think that about yourself right but nonetheless that was. That was how i saw things. i think. There's a lot of that that that whatever fundamental issue there is there with the yuppie elite they have been very very rewarded by their rigged monopoly game and they don't want to think that it isn't because of their competence that this happened because they are competent. Right there we're talking about a high iq people who get how the thing works or better yet. Maybe they understand how to play the system without understanding the moral principle underneath the foundation as to why playing the game that certain way does in fact benefit them massively. That's why i think most of our problems are giant conspiracy of ignorance crisis. Says in this piece you know. I don't think. I think like he didn't learn about sound monetary theory for any malicious or knowing reason. It wasn't somebody be like. We mustn't tell them about sound. Monetary theory It he just like he was taught by keynesians who were taught by keynesians. You were taught by keynesians who were taught by canes you know like like the ideological war that led to it. Being a unimportant era area of business school and economics was one hundred years ago. So honestly who would know about it and then when you build up that arrogance that confidence that i have learned economics. There's so many people who bliss themselves as economists in have degrees in economics. Absolutely guess i bet money on the fact that they would be the last people to understand. Bitcoin explicitly because of their economic education. But then you know that that feeling that you're in the know that your superior and friends are successful therefore They are the ones who praise. I want to receive that. Social circle has dismissed something. Why would you look into it. Why would they feel the need. And more importantly is and this is kind of what i think like Forgive me but bob murphy. And tom woods had like two or three conversations about bitcoin and read a couple of articles about bitcoin per per their own admission and then kind of felt like they got it. And i think that's because they're so good at economics they're so well versed in what they know like real economics to not not the crappy economics and i'm referring to here a previously. But they feel like there's nothing else to know their their level of understanding their own knowledge and assuming that they already get the important principles at play results in them not digging in further and actually learning so they have kind of a different filter but kind of the same problem with their filter. The creases talks about what the yuppies Eat says you know what's more bitcoin. Surface layer provides it with a subtle camouflage and this is something so so painful and difficult to break through for someone who is intelligent and will actually go out and try to make their own assessment as of something. Is that quote the first hour or two of learning about bitcoin triggers a multitude of scam. Red flags in quote absolutely absolutely. If you don't dig into bitcoin it looks like a scam and very very simple thing. If it walks like a duck if doug quacks like a duck it's probably a duck. That is what they're going to assume and so the dismissal is even that much easier not only socially reinforcing but it doesn't even pass through their basic filter works ninety five percent of the time. Hell it's probably like ninety nine percent of the time or at least that if they do dismiss something that was right or was successful. It's not a revolutionary thing. It's not a world changing thing. What are the chances of that that something like that comes along. It doesn't even come along every so often so if it works ninety nine percent time in the one percent of time it doesn't work they just missed a minor interesting investment but they're still wildly successful in all of their other endeavors. Why do they need to change their filter. Why did they need to dig deeper. That our to his good red flags. I'm out of creases. His like framing. Is that the fact that they are actually doing the very ethos of bitcoin. The core principle of bitcoin is. Don't trust verify. It is their adherents to that principle. That has them dismissing. Bitcoin because bitcoin is an incredibly difficult thing to understand and rightfully so they shouldn't invest in it if they don't understand it and to really grasp one of the core fundamental values of bitcoin is to understand sound money and it is to recognize that the monetary system we have is absolute crap. Is that the system. We have is inherently corrupt whether maliciously or not did it is a terrible failing system. And that's why i also think. Bitcoin is heavily on the rise is because the trust in the establishment is crumbling because the trust that the system can work is falling under its own weight under its own imbalances and normal people in normal conversation are openly talking about the absurdity of printing trillions of dollars people. I never thought to have that conversation with ever. The cracks are starting to show. The questions are starting to be asked. They don't may men understand it. They've certainly don't understand it. Actually the vast majority of them that i speak with. Don't get it. They don't have a strong grasp of why they don't have the economic principles behind really wrapping their heads around it. They certainly don't understand. Bitcoin or the core economic philosophy behind it what they do understand that. Something's not working. They do understand that. There's definitely some sort of contradiction here. Something not right and it may very well so happens to be the yuppie elites are the last ones to get there because the norm is now being punished by the system. They're now seeing the costs of this system. But that yuppie still probably has the furthest to go until the facade really starts to fall away for them and they probably have some of the tightest such circles. You're talking about being a great team player. Being a good foot. Soldier is such a critical part of being successful in that level or that the you know the ivory tower that's going to be an additional barrier but at the end of the day numbers going keep going up if big one continues to simply survive the game theory economics. The supply shocks the having 's the true discovery of the new perfectly scarce store value asset and the network effect the incredible power of bitcoin as an open permission list network for money and finance is going to steamroll. It is going be a black hole sucking so much capital out of that system. And i think it only accelerates as bitcoin becomes more legitimate and continues to grow larger and eventually everyone who has dismissed it even if it takes another ten years there will be a price they cannot look away anymore they realize that something has absolutely been missed and they take those two hours. And they turn it into ten and something clicks somewhere then unfortunately they may have to go down creases as creases says the rabbit hole of bitcoin and shake their very worldview to breakthrough but bitcoins success. If bitcoin success is strong enough there will be little to allow the cognitive dissonance to remain. The dissonance will be so loud. and so aggravating. They simply won't be able to ignore it so anyway it was really interesting framework and Love this piece Another another great one by creases We have. I'll have a link to his other piece that we read not too long ago. His bitcoin magazine piece. On the speculative attack and the asset dna loved how. That was all broken down and a huge. Thank you to sit at l. Twenty one for all of the amazing works and the magazines just just an awesome publication and the amazing stuff that they put out Always been a huge fan of citadel. Twenty-one also thanks to our amazing sponsors the bit box to hardware wallet and shift crypto with a lot of other great Security and backup tools that you can get on their store and then these swan. Bitcoin automatic dollar cost average bitcoin savings plan. It is my number one way to buy bitcoin Not only on my weekly plan. But also when i get some dry powder i go over and then i just smashed by and get some more so swan. Bitcoin dot com slash guy and guy swan dot com slash. Bit box actually. Just go to guy. Swan dot com with two inns. They're both up there in. Today's bitcoin resource is stood adele. Twenty one Easy one They i love their articles and it's one of the only places actually that you can actually find some really cool fiction pieces that are kind of like some cipher punk short stories and futuristic sort of sci-fi stuff. It's really there's actually a couple of A couple of the citadel twenty one series and there are so many great articles on check them out at citadel twenty one dot com and of course you also find creases article here why. The elite dismissed bist dismissed. Bitcoin enza l. and the means and the graphics. So if you wanna kind of get a picture if the audio explanation was really poor which is very possible. You should definitely check it out and see the actual graphic so you can kind of get an idea of what he was talking about but with that. Thank you so much for listening and six to show you guys make this show go round so to speak much loved to the To the new audio knots who have become patrons to the show. Recently it is awesome to see more people coming in and hanging out with the telegram crew of really love. You guys. i can't thank you enough and if you get a moment and want to help out the show go to my twitter and re tweet. I've been making a stink about knee. And i'm wanting to have american huddle on the show and he's gonna come on. It looks like we want to get dave smith on the show and or vice versa and up in kind of doing a monthly of bugging Dave smith to talk about bitcoin. And i'm a huge fan of him of bob. Murthy into bob murphy and tom woods no no disrespect. I know i mentioned them earlier on. But the whole like harry. Podcasting gang big fans and i'll listen all their shows and i just think they're missing such a huge opportunity to see and understand bitcoin. So help spread the word on the socials. Thank you guys so much. This is bitcoin audible. I am guy swan and into next time. everybody take it easy. This has been a one eleven production. And you're listening to bitcoin. Audible on the crypto konami network.

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TIP309: Real Estate & COVID-19 w/ Ian Formigle (Business Podcast)

We Study Billionaires - The Investors Podcast

58:47 min | 8 months ago

TIP309: Real Estate & COVID-19 w/ Ian Formigle (Business Podcast)

"You're listening to Ti pay on today's show. We bring back a guest by popular demand Mr an for meagerly an has over twenty four years of experience in real estate private equity startups in. Trading as the CIO at crowd street Ian has over four hundred offerings with over thirteen billion in commercial real estate. On the episode, we talked about the structural and infrastructure impacts for all types of real estate that cove it is having and what to expect moving forward. So without further delay, here's our interview with an for meekly. Were listening to the investors podcast while we study the financial markets and read the books that influenced self made billionaires the most we keep you informed and prepared for the unexpected. Welcome to stay show I'm your host brought us and always accompanied Bamako host Preston Pysche today we have one of our most popular guests with us, and that is Ian for meagerly chief investment officer at Croft Street, and he's with us for the fifth time. Thank you. Ian For joining us here today on the masters. PODCAST. Sticking president to push back on the show today and I must say the environment a little bit different than the last time that we spoke by cycles, our cycles, and so eager to talk about what's changing right now. You definitely righty and things are very very different. I guess that's sentence that we tend to say a lot more these days. We talked about how one of the strength of having commercial real estate in your portfolio is how uncurling this to other assets an external shocks to the Magi in general and think that we use the example that it was more important with store that opened the store than whether. Would see it in the trade with. China. For instance. So this kick this interview off this question, how commercial real estate performed so far in twenty twenty given everything that has happened. Stig. You're absolutely correct and we've previously talked about the importance of microeconomic drivers on commercial real estate values. I think what's interesting right now is that we are currently experiencing how a pandemic effects commercials state value. In the performance of the overall commercial real estate market in twenty twenty has really varied substantially by asset class and the performance of each asset class has strongly correlated to the effects of the pandemic so far however, regardless of the pandemic, the underlying common denominator here is demand both current and perceived future demand. This concept goes back to some of our first conversations on commercial real estate in that the ultimate driver of value in real estate is demand relative to its supply. You just can't get around that and right now the pandemic is exposing this concept yet once again. I'll walk through you major asset classes fairly quickly in the order of what I call worst to first. So kick it off the most effected asset class so far in the pandemic is hospitality. We've seen a precipitous drop in occupancy rates across the country. They hit as low as twenty, two percent nationwide in early. April and that pushed this asset class into a rapid state of distress. All of the country after hospitality retail is next up the worst hit segments here are malls. Followed by any type of retail that is experiential in nature, particularly those with a heavy food and beverage component. However, now kind of moving into the middle of retail there are certain types of that are faring relatively well right now. So for example, if you own a power center anchored by Home Depot or Walmart, you're shopping centers actually doing pretty well, and then you've got grocery anchored centers. We've seen per square foot sale numbers for grocery stores instantly double and to me that demonstrates that this type of retail is still important to our daily lives. So after retail office, really next up. It's probably going to see some distress in certain locations particularly in downtown locations of Major Metros. But overall I think it's released still too early to tell a lot about what is going to do and the results may end up being spotty. There just haven't been that many trades yet, but one indicator that you can look to is the publicly traded reits and office rates are down a fair amount right now so that it tells you what the public market is thinking about this space right now. Overall I think we'll know a lot more about the office market by the end of the year. So now moving onto more promising asset classes multifamily is hanging in there surprisingly well, right now, the national multifamily housing. Council reports apartment collection data nationwide every month. And for the month of June year over your collections were practically unchanged relative to twenty nineteen. So on the transaction side, we've seen small price discounts this year for deals that have traded since March I'd say anywhere from two to eight percent lower than where we'd see that property trade pre-coded. I. Think. The big question right now looming out there for multifamily is what happens as the additional six hundred dollars per. Week of unemployment benefits Burns off with as of today no new stimulus package in place, and for example, in June, the Aspen Institute published a study conducted by the COVID nineteen of defense project and it estimated that roughly one in five tenants in the United States is at risk of fiction by the end of September, absent, another major stimulus, and so because of this possible disruption, we might see later this year. We've been focusing on the higher quality properties that are less exposed to high unemployment rates censure. These are more the properties that are more populated by people working at home, High Class B and class. Properties. So essentially, if we can find a great multifamily property today in a great market that would have been bid up last year yet, we can get it at a discount. This year were pretty interested in that deal. And also we're pursuing ground up. Strong markets. Thinking that if a deal delivers in late, two, thousand, twenty, one or twenty two, we're now past most of the distress associated directly with pandemic. And we will now have a property that will be the nicest and newest on the block with little new supply behind it for about a year. And then finally moving on, there are certain asset types that are as strong as ever and their pricing reflexive. For example, in a world where most of our consumption is now being delivered. Receding Shallow Bay last mile industrial properties. See. Record demand. We are a little bit concerned with large class. A distribution centers that are near major ports given the downtick in international trade but generally speaking industrial is doing great and it's outlook strong, and as a final note, there are some additional niche asset classes that are also doing really well, right now such as needs based medical office data centers and manufactured housing. So I think that kind of sums up what we're seeing out there Peraza class. So in when we look at the recent rent collection numbers. In contrast to the unemployment numbers, they haven't been too bad to date but depending on whether a lot of the government programs that are providing assistance that could potentially change in. There's people that are saying that this is the calm before the storm. So without asking you whether we're in a U or V shaped recovery, what is your broad outlook for the rest of two thousand twenty? Pressing I'll definitely say. Macro economist. So just a real estate person out there in the market trying to figure it out but I will say that from a macroeconomic perspective, you know personally I'm somewhat concerned about the rest of twenty twenty but really the next twelve to eighteen months and to your point I think we are in a recession and a recession has to run its course and markets have to clear, and once we get to the back side of that we can see growth. In this case I do believe that the pandemic has already inflicted enough lasting damage that I think there's more downside ahead before we can see the emergence of a meaningful recovery. And as a lot of intelligent people out there, point out the consumer is seventy percent of our economy. So also have a thesis that until we see a vaccine or therapeutic treatment in place for Covid nineteen, we may end up stuck in what the economist refers to as the ninety percent economy. Now, from a real estate investment perspective, this outlook has translated into US asking the same question repeatedly, which is how will this deal? Make It to twenty two I think this market is looking at trough within the next year or so so were hyper focused on making sure existing portfolio assets and new assets that we bring to our marketplace. Are Equipped to navigate choppy waters before entering the growth phase of this cycle, which as I mentioned I, do think will occur by twenty twenty to. Remember that in real estate, we're investing from multiple years. It's not just having the right idea, but really building a business plan around that idea that will ensure you have enough. To realize your vision overall I think real estate will present some amazing investment opportunities over the course of the next year but you have to be well buttressed in the short term in order to realize outsized profits in the midterm. So Ian. This great resource on Cross Street is called St Beats, and you do we updates on commercial real estate and view of course, mature to link to that in the show notes. But what I'm not going through these videos is that you're talking a lot about metrics that you're paying close attention to examples would be consumer confidence reports collection the dismissed before let's just to name a few. So for someone like me who is not an experienced commercial real estate investor like you how do I process all of that information out there when evaluating the current situation and recovery? The debt markets are really critical to the function of the commercial real estate market because unless you're a major institutional investor without alone on a property, you just can't buy it. So that means we tend to see a high correlation between how many lenders are in the market making loans, and how many deals are actually transacting and transaction levels are critical to market visibility as we rely upon those most recent trades to tell us what's happening to valuations right now to give stock market analogy, I mean imagine a stock market where eighty percent of the volume just disappear overnight. It'd be pretty difficult to have any conviction and where values are heading. And so in. May. That's what it was like in the commercial real estate market, and so that's why we're just out there trying to gather up as much data as we can and synthesize it in hopes of making better informed decisions. So to answer question for investors who want to process that information I'd say pay attention to the trends. For example, one statistic eyesight in my video series, each week is the ending occupancy data for hotels provided by tr, and this is the nation's leading hotel research group from the beginning of April, the end of June in this hotel market, for example, we saw twelve weeks of successive increases in national hotel occupancy from a low of twenty two percent as I mentioned a few minutes ago backup to roughly forty six percent today. So that kind of a balance over a three month period tells me that the hotel industry is now in the early phase of a protracted recovery. However a forty six percent weekly occupancy rate is still really low. So from a historical perspective, it also tells me that the market is still weak and that any new hotel investments we contemplate must be capitalized with a large amount of operating reserves to help see it through to twenty two as I mentioned a few minutes ago as well, and that's the point where we expect there to be better demand for tells. So just like any market, we're using data in the commercial real estate market to try to help us make better investment decisions as we navigate the pandemic. So. I know you've been through quite a few boom and bust cycles through the years I'm just Kinda curious whether you've made any changes to your own portfolio here in two twenty twenty or made any drastic updates to the way that you look at the markets. So, from existing portfolio eight is largely comprised of illiquid investments. So for some of my existing investments they're doing somewhere between. Well. So I probably just waiting until the other side of this cycle and seeing where we go from here. But I would say that the number one biggest change have discretion over in my portfolio is that I've increased my cash position relative to two thousand nineteen and that's because real estate does move in multi year cycles. So now that we are entering downcycle, I'm looking forward to the opportunity to potentially invest in distressed assets over the course of the next year. or so with hopes to realize profits on those investments within a three to five year holding period, I'm still probably twenty plus years away from my retirement maybe more and so that means that I'm comfortable taking additional risk and prioritizing total return over cash flow but that's just my situation the interesting environment over the next twelve to eighteen months I think should provide opportunities to invest opportunistically and to the extent the appear I do plan to invest in a handful of. It's very interesting response and I also think it tells people something about the advantages of begins sets of in Liquid Taiba investment you sort of like got yourself against your own biases here on the show talking a lot about stock investing. We just know that from a listener that a lot of them have been selling out when they were. He was at the very bottom because he just looked so brutal it just looked like he was just never going to stop. So I really liked. Your take on that. So for the next question I just wanted to preface that we're recording here the twenty second of July you'll listen to this eighth of August and ride. Now there are some talks about new fiscal stimulus. We don't know exactly how it's going to pan out but what we can say safaris that fiscal stimulus have been supporting the Magi there strongly for many types of real estate investments. So which tai-bo fiscal stimulus do you look for in the time to come and why? So far through the pandemic, we have seen sponsors of crowds, portfolio assets. I'd say, really benefit from three types of fiscal stimulus. Two of them have been direct and one of them have been indirect and so far. You're totally correct that fiscal stimulus has been a huge beneficiary to commercials state assets all over the country. So. To dig into that, the first form of direct support that we've seen occur already have been economic injury disaster loans. Those are the idea loans they're made from the SBA, the maximum loan size of this program is two million. They have a three point seven, five percent interest rate for companies and the amortize. Over? Thirty? Years. You also get one year of deferral, an interest payments, and that's huge right now. So we have seen hotels in our portfolio received these loans up to the maximum amount. The second form of direct support has been funds received from the paycheck protection program. The P P that we've all talked and heard a lot about from what we saw hotels and senior housing facilities were the two largest recipients of this form of support. And these loans provided a critical lifeline for some of these properties. They were used to retain property level employees during the first three months of the pandemic. So based on that, we expect them to be substantially or fully forgiven the months ahead. The third form has been an indirect form of support as we talked about a minute ago that's coming from that six hundred dollars per week of additional unemployment benefits. We believe this form of stimulus. Has Been propping up multifamily collections at the lower end of the spectrum in the industry we referred to these as lower class, B or Class C properties and classy properties tend to be more highly occupied by lower earning service oriented workers and as we all know this is the type of employment that's been hardest hit during the pandemic so to answer your question on looking. Ahead I see two primary types of fiscal stimulus as having the largest impact, the first and to your point assuming this happens before August seventh would be a second fiscal stimulus that would extend these outside unemployment benefits and perhaps a second check directly to individuals, and that's going to benefit almost all forms of commercial real estate. But as I mentioned I think most notably the. Class B and class. C multifamily stands to benefit the most personally I'm concerned for a potential huge dropoff in multifamily collections for these types of properties. If we don't see that second package passed in Congress over the next couple of weeks and second I think that we finally start to see the effects of the six hundred billion dollar main street lending program later this year. Mer remember that the Fed announced this program in April but we're just now starting to see it actually hit the street. So while it's been slow to come out and I do think it will ultimately start making a difference later in twenty twenty. So I'm a little bit optimistic there and I'd say that overall there's no doubt that three trillion dollars of stimulus has a long way to bridge our economy. But I, definitely think we're going to need more stimulus to see it through and without that second package I do fear for what q four might look like. So I think we're all crossing our fingers that it's GonNa get done. Let's take a quick break and here today sponsor. Today's program is brought to you by Athletic Greens the all in one daily drink to support better health and peak performance. Even with a balanced diet, it's difficult to cover all attritional basis. That's where athletic green will help. The daily drink is like nutritional insurance for you. Body that's delivered straight to your door. Hell is very important to my wife and me and we like to have diverse to Ino Diet. 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Some may be short term and maybe long term and overall when I think about office right now I do find it fascinating to study. Because the pandemic is affecting our lives so much every day right now when it comes to the office space as we all continue to work from our homes and so we're thinking about it every day yet at the same time, we really don't know what it's GonNa look like two years from now. There's so many thoughts and ideas out there as to that future state of office a lot of them tend to conflict with each other yet most of them make sense. So that tells me that we really have a long way to go to gain some clarity on what the future of office is. Really GonNa look like regarding my own office thesis. I actually published an article on Forbes earlier this year and it was called three predictions for. The Post Pandemic Office. In that article, I highlighted changes that I already see coming to the sector as well as changes that I expect to see in the years ahead and it all boils down to essentially kind of a mixed bag of fact, on net demand the first thing, and we're already seeing this and were living example that my company is doing this as well is that we're retooling spaces across the country right now with significantly more. Space per employee to me spaces the new amenity and companies are going to use increased space to recruit employees as we roll out of the pandemic, and this is going to take precedent over these formerly important social amenities such as free food and Ping Pong tables and things like that. I think they're gonNA fade into the background for a while while space is GonNa be the new thing and increase space as a trend is important because it's reversing a nearly twenty year trend that we saw take place since the beginning of the century and we saw office space dropped from roughly two hundred and fifty square feet per employee. All the way down to just over one hundred square feet per employee in those most densely clustered open office settings, and that one hundred to one hundred and twenty five square foot per employee office. Well, that's gone for right now and we honestly don't know when or even if it's going to return when we look at office space I, think it's interesting to see how cushman and Wakefield has already created a prototype for the post cove office. In its Amsterdam location and they're calling it the six feet office one item of note that I found particularly interesting when I was studying that six feet office is that in one part of the office in an area that previously had twenty eight desks, it now has sixteen, and so that translates into a forty three percent reduction in density. Now, I don't think that means we're gonNA necessarily see a forty three percent increase in office space demand nationwide. But I. Think it's fair to say that our new distance office environments are going to create demand for more space per employee for the foreseeable future. The second thing that I see is that while we will see office spaces spread now. We will also see reductions and office space demand in two forms. The first of which is that office tenants are simply not looking to expand right now since they aren't even fully utilizing their current space is everyone's at home and we're going to see office demand also just lag relative year-over-year because we're in a recession and we're not hiring like we used to. So I think this is going to continue to be a drag on demand. If unemployment rate remains high and we have a protracted recession and as you noted, Preston, there's little doubt that we're going to see a greater percentage of our workforce remain working remotely after we exit the pandemic. With companies like twitter announcing that. Are Free to remain working remotely indefinitely and you have Morgan Stanley's CEO James Gorman going on record to say that his company could definitely operate with much less real estate. It's clear to me that we are at the beginning of a trend that will see more people working remotely indefinitely, and this is going to have a drag on demand for office space. The third trend that I see emerging is shift in the location of office demand, for example, if. You're a company officing in a high price tower in a central business district, and now you need to roughly double the allotment of space per employee even with that offset of remote workers, your existing space no longer pencils. So as companies grapple with office occupancy cost particularly in our highest price markets, a see two things happening. The first thing I see happening is that office tenants will relocate a portion of their employees from higher cost to lower cost Metros. So. For example, if a company was thinking of opening a second office in Austin rather than growing, it's HQ in San Francisco well, I think the pandemic may have just pushed that decision past the tipping point considering that Austin Office rents are less than half of those in San Francisco. The other thing that I see occurring is a resurgence in demand for suburban office space. And this is actually already started to occur so far in twenty twenty and we could even trace it back to twenty nineteen. So for example, in two, thousand, nineteen, sixty, nine percent of class, a net absorption occurred in the suburbs, and that was up substantially over its ten year average of sixty percent and when you think about it, suburban office offers A. Lot of things right now, that are compelling to workers who are uncomfortable entering an office right now such as it's plentiful nationwide vacancy about two percent higher than downtown locations it has free parking. It's usually low rise which lets use the stairs rather than crowd into elevators. They're typically closer to place homes. So that offers an easier commute, but most importantly, it's A. Lot cheaper thirty, eight percent cheaper nationwide at the class A. Level. So moving forward I, think we see large companies with a downtown HQ, at a suburban satellite office and as I mentioned a second ago, this is a trend that we are already seeing seeing some major users in the largest metros reach out to brokers and start to look for fifty to. One Hundred Thousand Square feet of suburban office when they occupy roughly a million square feet in the city core. So to sum it all up I, know there's a lot to unpack there but there's definitely changes coming to our office environment over the next year or so and I think some of those changes are going to continue to play out throughout this cycle. Ian On the show we previously talked about retail and retail has been struggling for quite some time going into the pandemic. Now, looking at the pandemic today, it has hurt most businesses, but brick and mortar retail business have been in a world of pain you mentioned more before as an example. Now as a value investor, I can't help but think that this might also be an opportunity but is there an opportunity in retail right now because it is so much unloved I do think there's some opportunity out there for retail but to begin, it's definitely fair to say, I mean as we mentioned about a minute ago, retail is taken the second largest hit so far during the pandemic and it's also fair to characterize the space overall as half having a relatively tough road ahead of it. and. I even had a value oriented thesis around retail coming into twenty twenty but certain aspects of it I don't think are valid anymore but it's definitely not all doom and gloom out there and retail and i. do think that there is opportunity the area that I see the most opportunity right now is in that grocery anchored shopping center and as I mentioned few minutes ago it's worth mentioning it again in that, we have seen store sales roughly double. At Grocery store anchors during the pandemic and the rate at which doubled is just mind boggling. We just haven't seen that kind of activity in retail before. So tells you that the space isn't dead and what that translates to. We now have the percentage of our food consumption that we currently purchase at grocery stores is back up to the mid sixty percent range, and that's a level that we haven't seen since the mid nineteen nineties. So knowing that we're. Probably, going to see some regression towards the mean as we exit the pandemic, I do expect grocery store sales to remain strong for a number of years. So really what that translates to right now is that whenever we see a grocery anchored center at a compelling price with a set of inline tenants that we think can mostly survive. We're interested because the price on that center is getting very low. An example of this is that we did just have. Our first post covid grocery anchored shopping center on our marketplace. Recently, it was located in Salt Lake. City is anchored by Lucky which for this center that means it's Albertson's credit. It was priced at ninety three dollars a square foot. It's really far below replacement cost. It's even below other western US trades that we saw for lucky anchored shopping centers in recent years, which had traded probably closer to more like two hundred dollars per square foot over that time period. So in an environment where you know that nobody is going to build a competing shopping center, they just really aren't building retail anymore across the country. And yet, you still have strong car traffic in front of you. In this example, it was sixty six thousand cars per day, which is good for a grocery anchored shopping center if you can buy that for under a hundred dollars per square foot. That's compelling in my opinion. So we would look for more opportunities similar to that moving forward. In. Another thing that I wanted to follow up on is our conversation about finding value in the megatrend with the rising popularity of H. Our cities. which impact do you expect code to how this trend and do see mispricing in the Maga just haven't been captured yet. I think anyone who's listened to one of our previous conversations knows that I'm am a huge fan of the eighteen hours city trend around the country and as we study it in twenty twenty I think the main fact that we're seeing so far during the pandemic is just simply an acceleration of it. So it's been fascinating right now you're seeing a spike in population migration out of the some of the. Largest Metros and it's going to those secondary eighteen our markets also going to tertiary markets as well and it's doing. So because you have this pandemic hitting some of the largest cities, the hardest and with some of the employers in those. Metros. Now, offering workers the flexibility to work remotely on an indefinite basis you're definitely seeing people take advantage of that situation and relocate to cheaper Metros that still offer a. Good quality of life for example, Marcus Chap recently published a migration trend study on this topic little over a month ago and we're studying that and we're, and we're even seeing also regional effects of this trend. For example, I think we're seeing some east coast behavior and west coast behavior on the east. Coast people are leaving New, York? City. Right. Now I do think that's a short term trend I do. Think that nine eleven and the great recession proved that New York is a resilient market. So it will be amazingly popular again but for today, people are leaving and they're leaving for places such as Florida other places like Charlotte. So lot of markets in Florida, as well as Charlotte and Nashville. Now, over on the west coast, you're seeing population migration flow out of California particularly concentrated in the bay area and. Again. Those the workers that are able to start to have flexibility and where they work and those people are continuing to relocate to Texas. This is a trend that's been going on for multiple years particularly Austin and as well. We're seeing them leave to smaller Metros such as Boise and Salt Lake. City greenstreet advisors are. published. A report on this trend and it discussed the cities that it sees as best position to thrive post pandemic. It's top five cities were Raleigh Durham Denver Charlotte Austin and Phoenix. When we think about mispricing in this market, we're definitely taking advantage of the current market opportunities to invest in deals. To either acquire assets or develop assets in locations. We like the most those include Austin Charlotte and Nashville as an addition to the pretty much most of the other cities that are listed in these studies from Green Street and Marcus a military. And we're seeing discounts relative to those prices. I'd say the total swing right now is about ten percent. So we would see a roughly five percent downtick and pricing this year over what would have likely been probably a five percent uptick and twenty twenty with no pandemic. So it's not a major shift, but it's giving us access to get into. Great. Assets in great locations at a discount in price. So anytime, we can see that kind of opportunity were definitely interested and the last thing that it's worth pointing out is that in twenty twenty in a recessionary environment away too good good deal and commercial real estate prices one way but the other way is the structure of the deal we're now in A. Market, where equity is harder to obtain relative to what it was a year ago, and that means that investors can receive more advantageous splits on profits, as well as preferred returns in private equity deals online capital, which is our segment. It's fluid dynamic, and we're seeing developers and operators come in motivated to incent investors with attractive terms in order to raise. The capital that they need and so overall I'm definitely excited to see that crowd streets secondary market. These is gaining more momentum and twenty twenty because we've spent the last six years positioning ourselves to obtain the best deal flow in these markets. So right now feels pretty good to be in that position and we're seeing some great deal flow as a result. Let's talk about the resurgence of the commercial mortgage backed securities market. The underlying loans are secured has loans for properties, success apartment buildings, complexes, factories tells office buildings, and many of the other types of commercial real estate, and they also diversified the mounds and terms to could you please talk to our audience about why the commercial mortgage backed securities is so important for us investors to the stand and whether you see the bad debt hidden. CNBC s plays an important role in the debt issuance in commercial real estate. It's relatively important also for all asset classes other than multifamily when you back out multifamily and the reason that you would back out multifamily as that agency debt namely, Fannie Mae and Freddie Mac will they really dominate that space so CBS does blend in the multifamily space, but it's an outlier source of capital, but it's important for all other asset classes and it really accounts for about twenty three percent of all commercial real estate debt absent multifamily. That was issued last year so it doesn't make. The lion share, but it's meaningful and I'd say that the reason that I pay attention to the C. N. B. BS markets is because for me they can serve as what I would have heard to as a canary in the coal mine for the greater commercial real estate market and they do so for a few reasons, the first reason that I think so that they are typically placed on riskier assets. This is a type of debt that you can have a property with some vacancy or some transition that needs to occur NCNB s execution is something that you can get. And so what that tells me is that is oftentimes the first type of debt to show signs of weakness when the market. And we're actually seeing this right now. So for example, CBS delinquency rates are skyrocketing today on hospitality and retail loans. For June delinquencies are now up to about twenty five percent and twenty percent respectively when both of those asset classes had sub five percent delinquency rates as recently as March since other forms of debt as I talked about the agency and also banked at, they haven't really shown a real spike in delinquency rates yet. So to me that really exemplifies how SAM BS can be a leading indicator for future distress commercial real estate market now when we think about Bad Hidden debt that's out there I. DO think it's reasonable to estimate that we will see some of that emerge in the hotel and retail sectors later this year, and it's also important to note that even with NCNB s industrial office and multifamily delinquencies while they're still sub five percent as of June. So it's also highlighting that we have a disparity going on right now in terms of performance across the different asset classes as we discussed earlier in the conversation. and. I. Think this disparity highlights a key difference between our current recession in two thousand, eight recession. And this recession so far has really been about how this pandemic crisis affects real estate specifically. In two thousand, eight was really all about how financial crisis affects real estate. Now. We may still see a bit of financial crisis ensue before this current recession is over. But I do think that our current recession will continue to play out differently than the last one. So I think it's definitely wise for investors to look at it from this is not two thousand and eight. This is two thousand and twenty and to pay attention to those differences. Another thing that I do when I looked to when it comes to see him. Yes. Is when it dries up quickly as it did in. March. You know that transaction volumes, GonNa draw, and then that means that a market is going to cease to function normally. So on top of that, we have these markets that stop seeing functioning normally and you have. Issuance rates at drop precipitously they basically just went two zero in March and April that activity in the. Market it definitely acts as a general. I would say is a psychological indicator out there and what that means is that all market participants start to get skittish about everything. So it's an important bellwether to pay attention to terms of what's going on out there. But then what's interesting is when it sidelined, but then it starts to come back as it starting come back right now. Now, it becomes a leading indicator for potential return to a better functioning market. This doesn't necessarily mean that prices are gonNA immediately rise but what it tells me is that when a market starts to function, normally you have better opportunity for markets to clear. And this again will create a bit of a psychological indicator out there and it starts to get all participants in that market a little more comfortable about resuming doing deals. So there's a lot to look at when we think about the BS market, but it's certainly worth paying attention to, and that's why industry professionals do so every day. So, he and I'm pretty sure everybody has some form of availability bias focusing too much on recent information and have a hard time zooming out looking at investments from a helicopter perspective as we're sitting here in the middle of covid nineteen, is there any part of commercial real estate that has fundamentally changed or will this be business as usual won't a few years? To begin with press and I completely agree that as a society, we tend to overemphasize the effects of short term trends I mean personally, I'm always skeptical of any argument that uses these short term trend extrapolation approach to me. That's a methodology for making massive miscalculations a few years out. So I say that despite some of the temptation to get caught up in these emotional swings, I try to always take a step back and I look at situations like our current one in two ways first identify short-term. That look like simple knee-jerk reactions, and then I like to play them counter-cyclically when given the opportunity but then second. Also seek to identify short-term trends but those that play into strong underlying demographics and when you see that will then those are the ones to run with. So let's give some examples of that and we can begin with the knee jerk reaction. So for example, there's a lot of people out there that are calling for an absolute end to the downtown Central Business District Office with the focal point of this thesis centered on Manhattan, and I can certainly agree that there's short term pain coming to the Manhattan office space but if we Were to see prices dropped precipitously there I become a buyer as I mentioned before I. Think New York has repeatedly demonstrated resilience over the long run I think it will do it again, and if we saw massive drop and in New York office prices than I want to opportunistically by now also remember there's a really another important reason why sometimes we can see this knee jerk reaction translate into future opportunity, and so for real estate lower asset values create the ability for new buyers to come in purchase those properties and then profitably. At lower rents sometimes, there's just nothing better than a basis reset to reinvigorate a market. So anytime, we can look at a scenario and say we like that market long-term. We like the opportunity to go in and buy low basis essentially out compete all the higher basis competition. It's a good way to make money over three or four years. Now, let's talk about a short-term trend that plays an to a underlying demographic movement. In an example of this movement I see happening is towards a form of residential housing called build threat. Now, these are essentially purpose built small single family communities, but they have the amenities of a multifamily complex. So maybe imagine small bungalows all clustered in a single community, but they have a club house they have a pool, a fitness center, and they are one hundred percent for rent. In this case I, see the pandemic as a driver of short term trend towards this type of housing. Because right now, people are opting out of downtown living in order to feel safe it just. Makes sense however when we look at the demographics of the millennial generation who are now on average about thirty years old and they're a cohort that is look to to absorb this type of housing also keep in mind that many of them now are in relationships and some of them have dogs, and almost all of them are saddled with student debt. Now, we have a short term trend, but one that is driving a shift in behavior in the direction of strong underlying demographic fundamentals. So in this case I, see this trend as potentially sticking due to the fact that I think this will play greater and greater into the ongoing demographic shifts of the millennial generation who will increasingly see this form of housing as an alternative to mid rise and high rise downtown multifamily. Let's take a quick break and here today sponsor you know how it feels when you find extra cash in your pocket. Now imagine you found five times that surprise money. That's the feeling with capital one we're new savings account earns five times the national average savings rate on any balance that means you earn more every day just for saving this is hassle-free hardworking savings. This is banking reimagined what's in your wallet? Capital one and a member FDIC. S You know Preston I. 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It really seems like Blaine kissed created the update that we all waiting for if I'm deciding if I want to take the time to read a full length book, I kept the blinks first and then make my decision. If it's really for me, I highly encourage you to check out the blinks for the book. SAPIENS. It's a book that Guy Spear recommended to our audience and a book that I read at least once a year after reading through the blinks I'm sure you'll pick up the full length book. Right now blinking has a special offer just for all audience. GO TO BLINK DOT com slash billionaires to start your free seven-day Trial and get a twenty five percent off blink his premium membership and up to sixty five percent of audiobooks. They're yours to keep forever. Thus blink dot com spelled B. L. I. N. K.. I S. T.. BLINKING DOT com slash billionaires to get twenty five percent off a premium membership and a seven-day free trial blinking dot com slash billionaires right back to the show. So let's talk about timing the market and I do apologize you and they can't help myself whenever a talk about timing Magi because every time we talk, we talk about crystal balls and how they're always been broken and timing the Magas differently hard. Having said that there's also a difference between the volatile stock market and then something like commercial real estate that you also mentioned. Jerry. Like the cycle suggest different and there's different volatility there and so going back in history what we've seen in previous crisis again, not to make comparisons. But what we've seen is that for single family homes in previous crisis, many of the. Best deals have come after say at twelve months or late a lack because people typically do everything they can to keep the homes and even if they try selling to have a pre-crisis evasion price, we just takes time to come down and even if instant foreclosures, that's a lengthy process to but that's something that might be a bit more familiar forty audience because they do see the for sale sign whenever they're driving around but getting into commercial real estate and keep that in mind you seen historically, would it be better to wait with your cash on the sideline before you invest in commercial real estate? Right, now. When you think about the commercial real estate market just like any market I think it's impossible to time it right now all we know is that the previous cycle just ended we're going into a down cycle. We know that a trough is out there at some point and then we know recovery at some point after that. But to think that I can figure out when that's going to occur and try to load up at the bottom then I probably. Say That for me. That's a fool's errand. So rather what I'm GonNa do is I'm going to simply look to layer into opportunities look attractive relative to the previous peak at the time when I have that opportunity also keep in mind that commercial real estate is really inefficient market in that not all assets are gonNA trade all the time so you may have a one and only opportunity to invest in a specific asset during this part of the cycle. The next time it trades may be five or six years from now in an entirely different part of the cycle. So it's interesting that you mentioned the single family residential market because the commercial real estate market can really behave differently than the single family market for a number of reasons. The first reason that I see as a difference is debt maturity. So one of our first conversations on this show, we discussed how perhaps one of the worst positions to. Find yourself in is with a real estate investment asset that is at the point of debt maturity during the trough of a market. Now remember the single family market. We all have these thirty year amortizing loans and people are going to make decisions to either buy or sell and or continue to pay to based upon their own ability to pay or if they move or so forth in commercial real estate is different. We have these shorter term loans mature. And if you mature during the trough while then that's when you're most exposed. So this means that some of the best deals will be timed actually to their debt maturity as they occur over the next year or two rather than a particular point in time we're an owner throws in the towel. So I, think debt maturity is just something really important to look at and that's going to create certain types of opportunities. Another thing I think to look at is that during periods of distress institutional owners can become fatigued. Or that they they can also determine that an asset is simply no longer a core part of their business strategy if this occurs. They tend to shed that asset and they get aggressive on price in order to liquidate it quickly. This was actually the case for a distressed hotel acquisition that we participated in earlier this year that's located in the Baltimore Inner Harbor I. Think the third thing to look at is that the nature of this downturn has as we've talked about before vastly different effects so far on these different asset classes. So I think this is going to translate to the quote unquote best deals for some of the asset classes such as hospitality and retail. To emerge earlier while other sectors such as office, they may take more time to materialize. So I think from that perspective, you want to pay attention to win the opportunities, present themselves in again I fall back on the if the deal looks compelling today relative to what it looked like yesterday that's when you don't want to take a hard look at it knowing that this may be the one and only time to look at that type of opportunity before. It changes and goes away. So I think when you put that altogether, I think this means that his buyers we tend to be rewarded if we pay constant attention and acknowledge that there is no one magic moment during the downturn to load up on all your investments but instead continue to pay attention and then jump on compelling opportunities as they arise I. Think if we do that, we're setting ourselves up to profit in the growth part of this next cycle. I think that's a great segue into the last question here because with everything we've talked about in this episode Ian One of the main key takeaways for the listener whenever they consider if this should be jumping into the commercial real estate market for the first time or perhaps adding to a position that already belts. There are so many takeaways from today but I think I'll leave you with four and hit the highlights of these. So number one, our last cycle just ended in February. As we study multiple real estate cycles. Those data suggests that the next twelve to eighteen months should bring us some of the best opportunities that we've seen to invest in commercial real estate since the last recession. So I think opportunities coming but we have to layer into it and we have to be a little patient. However, number two I'd say is that this recession is already demonstrating strong signs that it's going to be different than the last recession, some types of assets and deals they're going to become more distressed and discounted than even in two thousand nine. Hotel is a good example of that right now but others such as industrial. Well, they probably don't become distressed at all they just continue to appreciate. So if you wait to see distress in the best performing asset classes in this downturn, then I, think you miss this trough altogether I just don't think you can have it all and you're going to have to pick your spots third when you do look at distress deals. Really look at the discount to replacement cost distressed assets can be nearly impossible to reliably forecast just so hard when you're looking at a vacant hotel right now and asking, well, when does it get back to its normal occupancy level? So back in my private equity real estate days when we invested in two, thousand, nine and two, thousand, ten, we kind of had a a methodology where we would just stare into the abyss. And make a gut call that if the world returned to a normal state one day and we bought this asset at a current price that was offered to us if that would be compelling in a normal world, then we would make that call and then we would pair it with a strategy of looking at good assets. In good locations we'd make assumptions but. We would know that those suctions were almost surely going to be wrong and then we took risk and when we did it during two, thousand, nine and ten, we were rewarded with dabbled triple equity within a few years and fourth, and finally I think the most frustrating thing in a time like right now is to have the right idea but the wrong execution. So when we invest passively. My recommendation is a pay attention to the strength of the sponsorship. And make sure that the deal that you're investigating has enough runway to get to the other side of the pandemic as I mentioned right now when we look at opportunities today on the marketplace, we're looking at the beginning of opportunity around twenty twenty two but if we're only going to get the opportunity to purchase it either today later this year or early next year then we just simply need to have enough money in the deal to get us there remember that we're trying to earn profits in twenty twenty three to twenty twenty-five and just simply not get washed out before twenty twenty two so. In essence if you do those four things, you're ahead of the game. Ian Thank you so much for this outstanding discussion today I thoroughly enjoyed it. I know every time you come on the show I learned so much. So, if the audience wants to learn more about you, where should they check you out? State, impress and as I always point out in in each of our interviews, I'm very easy to find on linked in as I'm the only Ian for Magli on that platform people can feel free to connect with me there as you can tell how I always love to talk about real estate and I'm always happy to engage in conversations that help investors make better real estate investment decisions, and for those who want to study real estate investing in. More depth you can also find got a book on Amazon you can find it there some people read it and said, it's helpful. It's relatively quick. Read I think finally is that there's always a ton of great content on the crowd street website. So that's www dot crowd street dot com feel free to log in there. Lots of great information that our team puts out on almost a daily basis. So scrape resource for anybody who wants to learn more. All Right Ian thanks again for making time and coming on the show and so with that that's all we had for everybody today we look forward to seeing everybody again next week. Everyone have a safe and healthy week ahead. Thank you for listening to TI P to access. Our show notes causes of forums go to the investors podcast don't come. This show is for entertainment purposes only before making any decisions consult a professional this show is copyrighted by the investors podcast network written permission must be granted before syndication over forecasting.

Ian twenty twenty Magi Preston Pysche Greens United States Commercial Real Estate Investo Covid Home Depot Ti president China
TIP307: Cullen Roche on Stocks, Inflation, & COVID-19 (Business Podcast)

We Study Billionaires - The Investors Podcast

58:12 min | 9 months ago

TIP307: Cullen Roche on Stocks, Inflation, & COVID-19 (Business Podcast)

"You're listening to Ti on today's show. We have our good friend Colin Roach. With US Colin has managed hundreds of millions of dollars for the past two decades, and he always comes with unique insights during the two thousand eight Financial Crash Collins Private Investment, partnership was up fifteen percent for the year calling the founder of pragmatic capitalism and the author of multiple investing books in a regular guest on Bloomberg and major financial news outlets on the show. Today we talk about the current market conditions in various trade ideas for navigating this landscape so with that let's get started. You're listening to the investors podcast while we study the financial markets and read the books that influenced self made billionaires the most. We keep you informed and prepared for the unexpected. Will come today's show. I'm your host, Bros Ns, always I'm here with my co host Preston Pysche. On today's show, we'll be talking about equities inflation and what to expect in the financial markets. Therefore, we also excited to bring back. One of my favorite guests Colin Roach calling. Thank you so much for joining us today. Guys thanks for having me. So Colin talked a lot about the potential of new monetary system. Here on our show, we discussed this scenario of fear. Based system with the US dollar is the most important global research currency and the probability of having that system for at least a few more decades and I mean that's basically the system we have today, and then on the other side of the spectrum, also discussed the the opposite scenario with a new monetary system that might come sooner than most people expect. And I guess you can even say for listeners. For three hundred episodes we talked of everything in between, but we really curious to hear how you see this. How do you expect the monetary system to look like in college five years or twenty years from now? I've thought about this a lot especially with the rise of Bitcoin in the whole concept of decentralized money. My view basically is that it's never going to be an either or sort of scenario that plays out. My thinking is that people want something that is more decentralized that they have a little more control over. They have a little more anonymity over and something that is really more convenient for online and appeared here transactions, but here's The bay, and here's the big thing that I have trouble with something like any decentralized form of money. Is that the reason we use centralized forms of money, likely the US dollar to a large degree. This is one of the big drivers is it's backed by government that enforces it. I don't mean men with guns. I mean people are able to take other people to core basically so. From the beginning of time all money is credit. What I mean by that is that all money is basically an agreement between two parties. In the ancient times! The monetary system was basically develop for agrarian agreements where a farmer for instance would agree to lend a certain amount of seed. Somebody else. You needed to grow some crops and they would have this. Agreement between the two of them to next season deliver a certain amount of seed back to the far so for instance you need one hundred acres of corn grown. You would land the amass. To make that doable in the agreement would be that in the future that other farmer has to deliver even more corn seed in the future or something like that, and you'd have this unwritten agreement back then that over time essentially evolved into written contracts in the thing that makes government somewhat essential in all of this is that if those two parties ever have disagreement, farmer, a can take farmer a court, and he can enforce that contract, and it makes the money more credible so. So the debt contracts that we all create between each other in forcible, and that creates an inherent amount of trust inside of the money that we use because you know that it's good. It's good because it's enforceable. You know that the valued is something that you can recoup in the future if the other party just you know tries to nullify the contract for some reason, and so that's the thing that I have trouble with a lot of decentralize money. They don't have that. Degree of trust in them because there is no real way to enforce the contracts if there's ever a problem, that's the thing that I think somewhat hard to decipher with something like bitcoin is, that ultimately is very hard to create debt contracts from because a is not very stable, and be it somewhat hard to enforce, so I think what will ultimately happen is that they're still going to be too man for these other forms of decentralized money, but I think that it's. It's very hard to see a future where something like the US. Dollar or the centralized based types of money goes away just because I think that the legal system in the enforceability of these contracts is such an important part of the structure in any modern economy, and it's hard for me to see that going away in the future, so I could see the two systems kind of running parallel to each other, but neither one necessarily going away or overtaking the other. Thank you for the insatiable response, things very interesting that you it's not an either or would say this to a lot of people, but we can have two systems. You see that all the time even in today's system I. Mean You have a lot of nonfinancial firms that create things that are sort of money like I mean even dachshund. Bonds are issued by. Corporations are very money like I mean they're just financial contracts. Just like any a monetary contract isn't all of these systems are created by the private sector Kinda. Run parallel to the US dollar system in essence. So call in to continue issuing death. The US has to convince investors that the debt will not only be paid back, but that the buying power of the return currency will be retained. What are the arguments for and against investors continuing to trust US treasuries? The way that I like to think of treasuries, is that treasury bonds or really? Most government issued what we call debt. They're really money like instruments. So for instance. What's the big difference between a one month treasury bill that yields zero percent and the cash. No, it really is not much of a difference between these two instruments. The treasury bill in my view is almost as close to cash. Cash as the actual cash notice in the spectrum of money nece along which all of these instruments exists is just a matter of maturity duration basically what the interest rate is on it so a thirty year treasury bond is just a really ill liquid form of cash, basically where it's just harder for us to. You can't go to Walmart and buy with a thirty year. Treasury Bonds So. The degree of money nece in that instrument is relatively low compared to a cash bill, but I think the kicker is that it all comes back to inflation, and what is the level of trust? What is the level of demand for these things so I oftentimes see people say that there's a low demand for treasury bonds or that the US government debt probably can't be trusted in the future and to me. If that ever happens the way you'll see it, play out, is you'll see play out? Out as an increase in inflation, so the way I think this is that if the government were go out and try to finance a whole bunch of spending by just printing cash, they could dump a whole bunch of money on the street. People have to sell real goods and services for that money at some point, so the a whether or not you fund government spending through dumping Bills Street or issuing. Issuing bonds is sort of I. Think a an institutional or tactical operational sort of part of the whole process that the government doesn't happen you either or they don't money on the street. They could sell bonds if they want to. But in either case, the nongovernment sector funds that spending by putting a price on the instrument, and if the government were to go out and dump bills on the street, the. The price that we would see is the rate of inflation in essence, so if you ever saw that the US government load like it was losing credibility that demand for the government's financial assets was declining, you'd see a big increase in the rate of inflation as demand for money versus all other things declined, and so to me, think people sometimes make this differentiation between debt and cash, which is A. Very tactical level, it's a useful distinction. Government funding level I don't see it as being the key driver mean interest rates. The government can set interest rates on thirty year. Treasury Bonds Zero in perpetuity if they want to. The Non Garmin can't make them raise interest rates, the non-government can change the value of that thing, though versus all other goods and services in so that would show up as the rate of inflation increasing, and that's really the number to keep an eye on and we. We haven't seen signs of that yet, but we're in a pretty interesting experiment right now where I mean the US government ran in eight hundred sixty five billion dollar deficit last month. That's for comparison purposes year year. Comparison was I. think it was nine billion the year before, so we're talking about big big big numbers here. The US government talking about a new stimulus program, so we'll see how inflationary all of this government spending in the coming years. Let's talk more about inflation cullen, because whenever most people talk about inflation, this say that there is low or no inflation, the US because they look at the number. You also have a small group of people talking about that. We might have more higher flation because they primarily look at the increasing money supply. How do you Mesh Inflation? This kind no go back to our original discussion. I. See this some Austrian economy this refer to inflation as an increase in the money supply I think the reason economists don't like that is because especially economists who understand the idea of a credit based monetary system. They know that the money supply in the long term it will always increase because you have more and more arms who are trying. Trying to get seed for next season, these are just I mean basic mathematical facts, meeting with population growth, and some basic increases in productivity and things like that just output growing in general, you're going to have more and more of these debt contracts in the long term. No matter what just because people are interacting more, they're creating more financial agreements, and so to be specific. The money supply is. Is mostly treated by private banks. Private banks create loans create deposits and deposits our money, and the reason why those loans are typically always increasing in the long term is just because of those basic underlying economic drivers, the population growth and growth, just generally increasing in the long term as productivity increases so to me. It doesn't tell you anything to say that the money supply is going to grow. Grow because that's just an operational reality of the way we've structured debt based financial system, the amount of debt, the amount of deposits in the amount of loans, just always going to grow in the long term so at a more technical level. That's why I think a lot of economists prefer to refer to inflation as an increase in the price level, so we usually use a basket of goods. And inflation measure the rate at which that the price of those goods is increasing over certain time periods in I think one of the things that that economists also don't like is when people sort of Cherry pick an instrument in side of the good or the inside of the basket. For instance you could look like housing inside of the CPI, and you could argue that inflation is higher because of that, and that technically is. It doesn't represent inflation to represent. The entire basket of goods is the argument, so it would be like looking at the S. and P.. Five hundred, saying you know apple has done so well over the years there's asset inflation, but then when you look at the whole basket, you're like Oh. Basket hasn't actually done that much. The whole basket is a better representation of what's happening in the aggregate sort of Cherry, picking one or two items out of it, even if those items are important, doesn't reflect the whole aggregated basket of prices, and really weird dichotomy or bifurcation of what we've seen in the last, really the last couple of decades is that you have. Have these sort of extremes where technology and things that are highly deflationary or falling in price, a lot and a lot. These other more valuable services in good like health care and real estate have really serves in pricing. It's created I think this a really difficult way to assess. Is this good or bad? But at the aggregate level the way that most economists calculate something like the CPI. It abrogates out to not a huge change in prices, so whether or not they've constructed the CPI correctly or not i. think that's for somebody else to assess. But when you look at the aggregate prices, inflation has been low in. That seems to be reflected across. Again across a lot of financial markets as well I was point out commodities. It's amazing. The Look at commodity markets that are gown seventy percent from the two thousand eight highs and. Inflation is high. It's just is a lot of confirming evidence. That shows that inflation really hasn't been low. It's not just these deflationary. Tech Trans. So calling, you said that the risk of inflation is more likely to come from the Treasury, and not from the Fed. I would like to explore that statement a bit more. Could you explain the responsibilities of each of the two institutions and then transition into a discussion of where inflation could most likely come from? This ties into kind of everything we've been talking to with like the Fed end in a lot of money creation that we've seen the way that I think of the Fed is the Federal Reserve or Central Bank. Is Really. They're just a bank four banks, and this is the thing that I think confuses a lot of people when the Fed implement programs like quantitative easing. They're really trying to liquefy the banking system to some degree. They're not necessarily pumping money out onto. You know they're not going money on the streets for people. Go pick up and that's I. Think the vision that a lot of people have with. They're really doing. Is I mean for instance quantitative easing at the most basic level is the federal, reserve is creating new money and what they're doing in their creating central bankers, central bank reserves are the deposits that other banks us. Banks use reserves. No one else can access the Federal Reserve System. It's a closed deposit system for the banks, and when the Fed implements something like quantitative easing. They're literally swapping. They're using a reserve that creating from vinnie air. They're purchasing treasury bond, and the Treasury on leaves the private sector, and so the the way I've always thought about in the way that the reason have always described as being really a a non-inflationary event is because the Fed is. Is Doing is at the private sector level. They're swapping the composition of the private sector's financial assets. They're trading basically an interest bearing treasury bond, which is a very safe instrument, and there's flopping it out for a non interest, bearing or lower interest, bearing cash reserve basically, and so the the private sector doesn't have more financial assets because of this the same quantity of financial assets that their composition has changed in the the kicker. Is that the Fed? Again the Fed is the bank for banks. It doesn't operate in the private sector. It's not going out and competing for goods and services at Walmart, and so when they take that treasury bond out of the private sector that financial acid is as good as retired at least temporarily, and so that's a big part of why. I think people have sometimes confused. The feds programs for this idea of money printing in the. The treasury kind of comes into this in an important way, because the Treasury is the entity that. They're really creating access financial assets or net financial assets or the nongovernment sector and they do that by running a deficit basically, so for instance that eight hundred sixty four billion dollars that I mentioned earlier that is net new financial assets for the non-government, and in my view, that's important, understand because the Treasury is the entity that really prince, the money. It's not the Fed sort of accommodates everything the treasury does and the Fed commodites with the banking system does but the. The Treasury the entity with the big bazooka here and there the entity that could potentially create inflation and I've said this on a number of interviews in the last few months that I think that there's a real risk that the amount of spending the treasury's doing even given the depth and scope of the pandemic. There's a real risk that you could see inflation, not necessarily like the nineteen seventies, but there's a real risk that inflation could look a lot like the. Or even the early two thousands where you had like three four five percent inflation in various readings, which I think would be shocking to the Fed and I think it could have them on their heels in. Say I wouldn't be shocked if you saw rates of inflation like that in a twenty twenty two something like that probably not this year, the economy's way too weak. Everything's way to depress this year bobbly. Even the early part of next year to see something like that, but you get into twenty twenty two and have the Fed on their heels, a little bit, trying to backtrack on some of these programs and stuff and trying to control inflation. Calling you occupy that gross stocks typically perform better in a low inflation, environment and value stocks perform better in high inflation environment, so giving everything that you just set here and of your expectations about future inflation how to stock investors apply that principle. Inflation is such a big driver of all financial. It's reflective of I mean it. It drives the bond market, obviously into a large degree stocks in a sort of almost counterintuitive way in that, what inflation does for businesses that are very operational level is? It determines the amount of certainty that businesses have going forward, and so, what happens in periods like the nineteen seventies, or during any high moderately high inflation like that? Is You get a lot of business uncertainty in the way, consumers are spending because inflation create so much. A reflects so much uncertainty about what the future of the financial system. Is. GonNa? Look like and. That creates a lot of volatility in the financial markets and in the stock market in particular, because the stock market hates uncertainty about the future in the thing, about low inflation that is so good for stocks is that it just creates a huge amount of certainty going forward because entities are able to structure in better predict what their cash flows are gonna live by what consumer spending is likely to look like, and what becomes so problematic with the growth stock versus values. Stock Debate is that? That growth stocks tend to be firms like for instance something like Tesla that has a very sort of unreliable balance. She lot of the income statement. Items are sort of sketchy on inserm. They're typically uncertain balance sheets and income statements to a large degree. It's really what a gross stock in its why it deserves premiums, because there's huge amount of risk and uncertainty about what its future financial prospects are going to be at inflation can be very disruptive to something like that because it will magnify. Magnify the amount of uncertainty going forward, and so you've seen this. In the last thirty years that gross stocks just beat the pants off of value stocks, because to a large degree, the amount of certainty that growth stocks have. They're able to earn this huge premium, these huge revenue and huge earnings multiples because the amount of uncertainty is declining across time in the economy. If you see an uptick in inflation, you should see a reversion to the mean to some degree, because in essence value stocks. Stocks The all boring style companies they become much more reliable to become much more dependent in a higher inflation environment in a relative sense, just because the amount of uncertainty that the growth businesses have to operate within is going to increase so much which will reduce the amount of demand for their stocks in should reflective the balance sheets as well. It should result in necessarily lower earnings, but certainly a lot more unstable earnings, which should reflect especially on a risk adjusted return much lower returns. Let's take a quick break and here today sponsor. 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That's PB, dot com slash, T I P to experience a savings in your shipping costs with a free trial of send pro online from Pitney Bowes. Sakala. I've heard you argue that. The stock market is a better hedge of inflation than gold. And I'm sure. A lot of Warren Buffett's style Dow value investors would agree with you I I'm just curious if you can elaborate a little bit more on this. I guess it depends on what your Your definition better is but I. I like to look at it. From sort of a risk adjusted perspective, so for instance you look at the stock market over any fairly long time horizon, the stock market beats inflation by generally a pretty healthy margin. The Stock Market even tends to perform pretty well in hyperinflation. You see this in places like the Wu Mar Republic or more recently in places like Venezuela but. Even, in a a somewhat stable inflationary environment, we've seen in for instance in the USA in the last fifty to one hundred years. The stock market is a good inflation hedge in that it typically beats the rate of inflation by Gosh at least two three four five percent, in most cases across any ten or fifteen year rolling periods in the kicker with with regard to goal is that it's not necessarily a better nominal inflation hedge especially during periods where inflation is rising, it's a better risk adjusted inflation hedge. For instance over the last forty years, golden stocks have actually done bear similarly terms of their total returns. The difference is that the path that gold has taken to get there has been dramatically different than the stock market, the stock market even with the big downturn that we've seen in the last fifteen twenty years in the stock market, the stock market is just much much more stable. I think the standard deviation on the stock market in the last forty years is is something like seventeen or eighteen? This standard deviation on goal within the last forty forty five years is like thirdly. So, even if you're getting the same unit of return, you're taking the higher unit of risk, or at least your during a much higher amount of variability in terms are cross time by owning gold, and so you can look at it on nominal basis argue that they generated the same basic total return over long periods of time, which is true, but from a risk adjusted perspective from a cash flow management perspective, the stock market's actually been a better edge because it's giving you more certainty across that entire period of return horizon. Let's continue talking a bit more about this environment win now and Kobe and everything that place out. We've seen subsidies to keb rations at unprecedented levels in the past few months, and on one hand you have people saying that you must bail out close to all rations since covid nineteen is nobody's fault, and then the other hand you have people asking for the market to be less manipulated. What are your thoughts? I d. both sides of the argument and I think that I'm GONNA end up agreeing with both sides of the argument before this is all said and done my view basically was that when this thing really flared up back in March and April, my view was that it made sense for the government to step in and be highly involved. Because like you said this thing wasn't anybody's fault. It was almost like we got hit by natural disaster and to. To Satan, we required some sort of market outcome that was the as if this was the result of bad actors or something to me was sort of a false comparison. I mean this wasn't like the financial crisis where I was really the humanly against all the bank bailouts and a lot of the stuff that happened in two thousand eight, because that to me was it was a lot of that was just bad decision. Making that resulted in a big. Big Boom that you had to have a bust after all that and so a lot of banks they deserve to fail and to me. This is just different. This is more like a meteor hitting new, York City and with all his collateral damage and I don't think you can just sit around and say well the Bank of new. York deserves to fail because this meteor hit them i. think as a community. We had a responsibility at least if I. I to step in and try to help where we couldn't so I I thought it made a lot of sense for the government. Step in and try to be highly involved. Especially given the cost of funding below rate of inflation made government spending I think a lot more viable, the arrogant amount of pain this was gonNA cost to other people by spending an extra money at the government level was not gonNA, cause, hyperinflation, or anything like that and so. I thought that it made sense for the government to be really involved to try to build a bridge to getting us to the summer or appoint down the line where you can then be an appeal out of the stuff off the impact of this natural disaster kind of started to at least go away a little bit, and it's crazy now that this thing is still around, and the argument gets a lot more difficult because the more more we spend on this thing in the longer and longer, we do it, the higher the risk. Risk of inflation is and that will create a different kind of pain down the road for everyone, because inflation destroys are urging power in it creates an aggregate. McCain that the government could ultimately be the cause of and so were were nearing that point. I think where the government has to start making potentially some tough decisions about how are they going to to navigate the rest of this? Because when you can have a scenario here? Let's to be crazy for instance and say that Cohen become the seasonal thing that this thing is always. Always around every year for the rest of our lives in that it just mutates mutated in it kills honored thousand people every year for the rest of our lives. Are we going to spend four trillion dollars at the government level every year because of that? Maybe that's unrealistic scenario, but it's a scenario that we have to start to seriously consider the longer and longer. This thing plays out and I think we're nearing the point where people are starting to maybe consider that. Hey, this thing. Maybe we'll never have a vaccine for this or. Or, maybe we'll have a seasonal vaccine for this in. It might become less dangerous, but we can't spend four five six trillion dollars every year on this being an expect that we'll never have any sort of negative repercussions and so i. was in the beginning I. Think fully on board with. Hey, it's worth the risk given the low risk of inflation up front that we should spend a truckload of money on this end. Be Compassionate, support the economy as best we can, as we kind of move further and further along with this thing. I think I'm more transitioning into the other camp. Where are now beginning to say look? We've done a lot. And at some point, we have to accept the reality that you can't just spend insane amounts of money on this in perpetuity and expect that there's going to be no native precautions. So call and financial news seems to be more and more reported like it's a sporting event. Like sports, the state of the economy is unfortunately often over-simplified. What is a prevalent narrative of the US economy that you here right now? That's just wrong. Guy I mean there's a million mean you turn on financial news and you're totally right so much of the problem with financial media in my opinion is that? This is part of why I think podcast like yours are growing so much in a become so popular because. We're having an informed meaningful discussion about things here we're trying to educate. People were trying to spread real fact, based information and help people understand the world for what it is, and the problem with a lot of financial media that they don't give a crap about that. They don't care if you're informed day. Just want to drive eyeballs to whatever is the hopping today so turn on financial news these days in like CNBC is probably all Tesla all day today. It's all anyone talking about because it just happens to be a random company that's increasing in value a lot and at some controversial because. Because the CEO says some stupid things every once in a while and just a nonsense talking point though I mean the impact of Tesla on the aggregate economy is not really important in the long run, whereas the conversation that we're having about these things today, these things touch everybody in they impact people in their decision, making the future across the entire economy, and it's a totally different approach to discussing financial news than something like an eyeball driven media machine that has to meet a certain amount of profit or revenue every year that has shareholders in lots of different conflicts of interest in so. The financial media is in a lot of ways fake news because I'd argue that ninety five percent of the stuff that's reported on a daily basis is not even newsworthy. If not important stuff, it's just feeling space in getting eyeballs in in a lot of cases. It's scaremongering I. Mean that that would be my big complaint about the majority of financial news. Thing you absolutely right? It's interesting sitting here in Europe and reading the financial news in Europe and it seems like here. The narrative is the US market moves because of Europe then I read the. News and they're all about. Yeah. The European nation amongst move because of what's happening in the US so it's I guess. I was just one sample of how simplify things can often be and that recency and availability by us. So let's look internationally growing the money supply and subsidizing everyone or close. Everyone is not a US phenomenon as we've seen in the rest of the world. They haven't been shy of doing that. Either knowing that. which currencies do you think think could break out significantly from the current trading range with the US dollar? Gosh dollar so strong I actually I think there's a reasonable argument to make that. The majority of currencies could be strong in a relative sense in the next decade. Mean going back to our discussion about inflation may have you start to see the US government's impact on the rate of inflation. You should see this filter into the forex markets in. You should start to see if there's even a an optic of inflation to three to four percent. It should whack the dollar pretty good. A realistic. Where the European economy remained in this sort of very low inflationary environment. They look a lot like Japan to me in terms of. Just their demographics in the way that the em you is structured so It's much harder to implement big fiscal policies in the EMU because of their political structure in so if you were to see another ticket inflation in the next, say two three four years I you could see the dollar yet hit pretty hard and I. Know you've had some guests like Lebron and people like that. Who taught about this? And we disagree some of the technicalities about for instance rising interest rates on bonds and things like that but I think. Think. We see the risks similarly in that the I just view through the rate of inflation, whereas he might see it rising interest, rates or something like that and I. Don't think you'll actually see rising interest rates necessarily, at least at the Fed level. I think there's a decent chance actually that the Fed could rates at zero or sat and be way behind the Kerr, even as inflation rise, but you'll see it in the rate of inflation if the risk increases in if that happens, you're going to see a lot of these. These big long term trends. They're gonNA. Reverse the same sort of thinking along the lines of the value investor trade is that the value stocks become a better relative investment in rising inflationary Byron and the dollar should become a worse relative option. Versus virtually most currencies as inflation rises in relative sets, so call him. Where do you see value in international stocks? I'm of the view that A lot of Europe is not necessarily dead money, but very low roof money for a long time. I think that the political structure of Of the EMU makes it very difficult for them to fix a lot of the problems that we've seen in the last decade from the euro crisis. In my opinion, it was never really resolved I. Don't WanNa get too deep in the weeds about this, but the EMU just is deficient monetary union, because it does not have a centralized treasury in a way to fund the various entities aggregate level really, and so that's very problematic economic perspective because you're always gonNA have depressed levels of aggregate demand in certain places like Italy or Greece. GonNa have trouble funding a lot of their spending to a large degree, and so they have necessarily. Steer government programs going on across time, and so I could see a scenario where you're dead money and Hard for me to look at the United States and be super. Bowl is just because we've been on such a huge hair in tears, so central to a handful of tech companies, and I think there's a big opportunity for a lot of Asian Southeast Asian economies to really take a lot of global market share in the next couple of decades in you kind of starting to see this trend play out with the growth of China and India and places like that and I i. just don't believe that that trend is even remotely close to finish I think those economies are becoming more and more capitalist. Capitalist end as they do that, it's hard for media. Magin that they won't becalm really the center of the global economy over time, and that the the US as market share, especially as a share of market cap of total equities doesn't decline over time. Not necessarily. Go Away your you. US market doesn't have perform terribly over time, but in a relative sense I think that southeast. Asia is really their position so well to benefit from so many long term trends in the coming decades that to me, it makes it just a must whole for the long term as part of a an equity portfolio. So if that plays out, how do you put on a position with with that knowledge? Gosh you can do it in a lot of ways, I mean. Again, so much of this is tied to inflation in the way, the dollar performed I. Mean a lot of people look at international equities in the last ten years or so say that. All ever performed very i. should know these things and a lot of that is just that the dollar has been so strong that in domestic terms, the US market just looks like such a good relative play in large part, because you've had so many favorable tailwinds and again inflation is a big one regarding all of this. If you were to see that reverse, this is all tied into that same sort of trade that I been alluding to is the inflation trade where if the dollar goes down and you see inflation up to even a little bit does not gonNa live says even jumped two three four percent. You'RE GONNA have. Have a big reversal in the relative value of domestic versus international equities. That's the other big kicker. Is that owning international equities to some degree is it's an inflation hedge, and so it helps you better diversify portfolio, not just because it better reflects the global stock market, but because it better protects you from inflation to some degree, so international equities are just a way to diversify your stock market risk their away in a large degree to diversify currency risk so i. don't know I. Actually Answer Your Question. There I mean I can't recommend specific instruments just because I'm a portfolio manager, but out things that give you access to. I think especially emerging markets. They're very attractive on a long-term evaluation based basis, and I'm a big Fan of index funds I. Don't get into stock picking Llasso virtually any of the big low cost index funds. They give you access to this I. Think you gotTa be careful because these things are, they are risky, but that's where a lot of premium. The long-term premium will come from the fact that these. These. Things are riskier. You gotta be willing to hold them for the long term. Go through potentially by ten year period where they don't perform very well like they have in the last five to ten years, the tendency though will be that at least in my view that holding chunk of these will diversify a global stock market portfolio in a meaningfully important way in the coming ten twenty thirty years. Let's just jump back to one of the things you said about inflation there before you mentioned you. Inflation could go up to colder three four five percent in that case how the Fed look at this and how Treasury for that matter look that would that be a chilly, their targeting higher friction that today, but is that a nice way to start wiping off some of that debt like we've seen? Historically that inflation has been used like that, or will it be combated right away with a higher interest rate, and then everything that follows from high interest rate insurers. Who are the prices going down? I view the Fed. Most central banks is they're somewhat impotent. When it comes to trying to control inflation, just because the mechanism through which they do, it is so imprecise it so interacted so you're kind of going back to the beginning of the conversation. The Fed is just a bank for banks, and so when the Fed tries to, for instance, control the rate of inflation, they typically will raise interest rates, which basically raises the interest rate that banks are going to ultimately be trying to pass onto other customers, and the the weird thing is that. What this oftentimes does, it actually hurts. The banking system itself to a large degree, which makes it a little more difficult for banks to lend in you see this imperial two thousand early two thousands where the feds trying to raise interest rates. To try to mitigate some of the inflation that they're seeing the economy and they're really trying to get a hold on the housing market and they just can't seem to do it. They can't seem to stop people from wanting to buy homes. That's the that's the thing with so many of these policies that I think you can't stop people from doing crazy things like bidding up the Nasdaq in nineteen, ninety nine. You can't stop raising interest rates is. Is it gonNA, stop people necessarily from buying homes in two thousand six, and you see the same thing time and time again that these government policies tend to be very active in the way that they actually impacting. So you know going forward. If the we started to see some uptick in inflation, I think the federal do what it what it's been doing in the last few episodes where they'll raise interest rates, they'll be behind the curve the probably. Reduce I think balance sheet has become the main course of action for the way that they're trying to control things now like I was saying. You know controlling the balance sheet is it's just basically exchanging financial assets across the composition of the private sector, which is probably I mean in my view is an even more imprecise and meaningless sort of. Way to the rate of inflation and interest rates changes even are so the Fed I think is very their tools for fighting inflation. Going forward are very blunt, and I think that if if you saw an uptick in inflation, I think that you'd have to see in order for the government to try to get real control of it, you'd have to start seeing a change at the treasury's level the amount of spending that they're doing the amount of new debt there issuing. Politically feasible that is you know a lot of the the narratives? At least in the USA seemed to be trending in the direction of bigger bigger government programs things like the green new deal, and you be I a universal basic income things like that and so i. don't know it's hard for me to imagine a scenario where we don't see more. Progressive Policy implemented across the next ten twenty years. Let's take a quick break and hear from today sponsor. You know how it feels. When you find extra cash in your pocket, now imagine you found five times that surprise money. That's the feeling with capital one where renew savings account earns five times. The national average savings rate on any balance that means you earn more everyday just for saving. This is hassle-free hardworking savings. This is banking reimagined. What's in your Wallet Capital One? NA member FDIC. So. Let me tell you growing up. Cereal was one of the best parts of being a kid, but I had to give it up because I realized it was full of sugar and junk that you really shouldn't eat so here enters magic spoon. Magic Spoon is a serial that has zero sugar eleven grams of protein, and only three net grams of carbs in each serving. There's frosted blueberry cocoa, and there's a fruity flavor, and you can try all four of them in a variety pack. It tastes amazing, honestly too good to be true. It's Keno Friendly Gluten, free grain, free, soy, free, low CARB, and GMO free I personally really like the blueberry flavor and I just can't believe that it's. It's as healthy everything that I'm reading on the side of the box. So if you want to try this out, go to magic spoon dot com forward slash W. S. B. which stands for we study billionaires to grab a variety pack and try it today and be sure to use. The Promo Code WSB at checkout to get free shipping and magic spoon is so confident in their product. It's backed with one hundred percent happiness guarantee so if you don't like it for any reason, the refund your money. No questions asked. That's magic spoon dot Com Slash W., SP and use the code WSB for free shipping. We WanNa thank magic spoon for sponsoring the podcast right back to the show. So Colin. Here's the million dollar question. How can investors outperform today's market, but also have protection from these violent downward moves that we've seen? Being really patient is going to be the ultimate diversifier in the coming ten twenty years and I. think that what that means is I. Think you've got gotta be patient with a lot of different instruments. The world looks so certain me arguably the most uncertain that I've seen it in my career, May when I started out in this business guy, it was easy to generate. You could generate Ameri. You could put money in the bank and you could earn four year mean generating a four percent return was the cakewalk twenty years ago, whereas now the whole bond market looks. Incredibly, difficult to generate a real return from the stock market, arguably especially with the big surge in the last few months from evaluation perspective looks not necessarily really bleak, but certainly argue low return going forward, and so you look at a diversified portfolio your options just it's very difficult. I think to build a portfolio that's going to generate a stable and steady return going forward. You have to be optimistic for you have to be patient. You're going to have to let some of these markets. They're gonNA Evan flow. A stock market is going to see big downturns again. At some point I wouldn't be surprised at the bond. Market does too and so I think you've got to be patient. You gotta be really well diversified you you. There's a strong argument that alternative types of assets or more attractive now than they've been in a really really long time, and so things like commodities in gold and holding some cash and holding. If you own real assets, things like those I wouldn't be surprised if things like real estate or even commodities, which has been demolished in the last ten years or I wouldn't be shocked if things like those are the best performing assets in the next ten years, and so it's GonNa be just so important to be diversified, and you know one thing that I'm such a big advocate of is. People in a low return environment they need to be so much more mindful of their taxes in the vs because the taxes and fees are the things that you can control, you can control your mentality, and you can control taxes and fees ended up. Those are the things this is the only thing that going forward are going to generate certain additions to your total returns and. Lot of people can't control. They won't control them in. In environment where let's say we only earn four five percent. If you're paying high fees and you're paying a lot in taxes, and you're being undisciplined in your your hyperactive in your portfolio in you're creating all these taxes and fees because of that. You're cutting your return potentially by one two percent, which is in the grand scheme of things that's cutting your total return potentially in half. It's going to have a huge multiplier impact across a thirty or forty year time horizon. Calling this has been absolutely amazing. I'll definitely give have a Tunechi to give a hand off where the audience can learn more about you. A cavs listen and group. My firm is or Cam Group and I write a lot of material on cap, which is pragmatic capitalism. You are Elyssa P.. R., A. G. C. A. P., DOT, com, and own. If you want to learn a lot about I, write a lot about the nuts and bolts of the financial system go to the education section. There's a huge page at or Cam Group. That's my financial firm. There's a huge page there. where I listed kind of all of my favorite videos and outside resources in a lot of the material that I've written about how the monetary system works in how? How I think about things you can find most of it there, so you can also. I love to interact with people in an help. Where can I don't know everything but I like the Guy No, at least a little bit, and so I'm so happy to to try to help people and give back a little bit to educating people about things, because it's a tough tough thing to understand, money is a big confusing topic, and I don't think anyone really fully understands, but we can all kind of help each other out by trying to have good thoughtful conversations like this one. I can just say that Colin that your resource cat dot com is a fantastic resource because you're basically doing what you're doing here on the show you making something like money that is so complex and so abstract. You really simplify them, but you don't simplify the too much Colin again. Thank you so much for taking time out of your busy schedule to be speaking with the president of me here today. On the Masters podcast. We really excited already to bring you back again in the latter part of two thousand twenty. Awesome. You guys. All right guys so this time in the show we'll play Chris from the audience and this question comes from Nick. Nick from the UK here huge fan of the show. My question is about interest, rate, inflation and house prices. On the show recently that you expected house prices potentially go down in the next twelve months. Due to increased interest rates caused by inflation. I inflation was inversely correlated to interest rates. Some nights tyler show how that works. I'll be really interested. You could impact for his. Nick that's a great question and a very timely question. So when we talk about real estate prices, generally lower interest rate makes prices of real estate. Go up while higher interest rates make real estate prices go down. The reason is simply that ask a homeowner. You have a finite amount of money, and if you're installment up because of high interest rate you house, price must go down, and the is true, even if you personal fixture in Stolman, because the influx of new buyers would new terms will then lower the oil demand. The interest rate is used to control inflation society. Though as Colin. Roach mentioned in the episode is not a perfect tool to do so, but it is due to the same principle of supply and demand. If you want to lower inflation, we can hype interest rate because decreases the money supply in society released the fall in prices and vice versa. So when you ask me whether I think real estate prices will go down to the next twelve months I. Think yes, we'll see a modest drop I'm not as familiar with the UK with the US out of matching. It would be a similar thing in the UK, but it won't be so much because of the interest rate actually if we look at the interest rate right now, which is very hard to predict but I don't see that behind the next say twelve months because of the week Konami. Both in the UK and the US, but I see lower prices because of covid nineteen. You have a lot. Lot of people who are struggling to make payments on the homes, and some of they're either going to for closure or going on sale, and this process just takes a long time to play out because most people typically want to make sure that they're not losing their home, and even if the home is eventually put on sale, they typically have a higher division price that there will slowly lower also contributes to wide takes us a long time for this scenario, and then the other thing that you also have to include into this is that when we're talking about the prices of assets like this, they're always. Complex whenever you consider how many factors influences demand supply. Therefore the response when we talk about the impact of inflation fiscal stimulus. Interest rate is really everything else equal perspective. There are many different factors so just one could be that this is an election year in the US, and because they're so much. Political capital invested into fiscal stimulus because of covid nineteen. That's just another element you have to account for. So Nick just to kind of add onto with stick said I think it's important to realize that real estate is very local. You can go in two different cities different. And Real estate prices can act in in very different ways depends on how much land remains for the amount of buildings that are being constructed. It depends on how much industries flowing into and out of a specific region There's just a ton of factors that that go into this I. would argue that if you have a population. That's pretty steady, you have. An amount of land it's fairly steady as far as the supply and demand of it, and you have this geopolitical factor around that community. That's that's somewhat stable. As far as the economics around that area are stable I think you can use the generalization that when interest rates go down, the prices will go up and vice versa. As you can see, there's a lot of factors in a lot of variables that go into this so I think the most dangerous thing that a person can do is sometimes to simplify too much into say oh, well, we'll because of this one thing because of X. happening. Wise going to be the outcome I. think that you gotTa be really got a reserve against that so. Sticks comment about the covid nineteen impacts in a lot of people being out their jobs in particular industries, being impacted heavily by covid nineteen. Those are going to impact the the real estate market so I think it's it's A. It's a really great question. It's something that depends a lot on the region that you're specifically talking about and all the factors that are at play at that point in time, so nick for asking such a great question. We're going to give you a free subscription to our T. P. finance tool on our site. All you gotTA. Do if anyone's. Learn more about finances. Go to google and type in Ti p finance, or if you go to our investors podcast website, you can see there in the navigation bar. Click on finance and We're able to give this to you, so if anybody else out, there wants to ask a question. Get a play on the show. Go to ask the investors dot com, and if you get your question played on the show, you'll get a free subscription to RTP finance tool. Or I? Guys Preston I really hope you enjoyed this episode of the investors podcast. We'll see each other again next week. Thank you for listening to ti to access our show notes, causes or forums go to the investors. Put don't come. This show is for entertainment purposes only before making any decisions, consult a professional. This show is copyrighted by the investors podcast network written permission must be granted before syndication forecasting.

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TIP290: Current Market Conditions 4 April 2020 (Business Podcast)

We Study Billionaires - The Investors Podcast

1:14:37 hr | 1 year ago

TIP290: Current Market Conditions 4 April 2020 (Business Podcast)

"You're listening to T- IP SO. There's a famous quote that there are decades. Were nothing happens and there are weeks were decades happened and based on the current situation around the world that we're seeing. I think everyone can agree that. That's exactly what we're seeing. First and foremost our thoughts and prayers go out to all the families and people struggling around the world right now. Although our show is focused on great investing ideas and outperforming the markets. Please know that our sincerest interest is for everyone to have strength and courage to come out of this situation better than we came into it so on today's show. Stig I do another candid. Conversation about what's happening in the markets today and what we can expect moving forward. I hope you stay safe and enjoy the show. You're listening to the investors podcast while we study the financial markets and read the books that influenced self made billionaires the most. We keep you informed and prepared for the unexpected. Hey everyone welcome to the investors. Podcast I'm your host Preston Pysche and as always accompanied by my co host Stig Broder Sohn. And we're back with you here for another Current market conditions. Were trying to watch these things as best we can and provide the best feedback that we can't so we've got a list of things that we want to go through today and I'm just on the throat over to stick to kind of kick things off. Would you see where this takes us? The first thing we're going to talk about is what's happened to the stock market since we record last time is two weeks ago since you heard from US last time about the conditions and today's April I I have to say before. The market opens like these days. Everything is so volatile that you almost have to say not just the day but like what time of day? It's absolutely amazing now. A few different things to the type of market environment that we're in right now which is quite unusual to say the least first of all. I think it's important for the listeners to understand that you shouldn't believe the newspapers too much whenever they try to explain what's going on in the Magi that's because most newspapers treated ass spores right. They want to put everything into one headline. That's just how the newspaper business works. They can't be a little more confusing than helpful from time to time. So if the market goes up it's always because of spending or at least that's the way the phrase it and if he might go down it's always because the market is worried about something new with Kobe. Nineteen and think that quickly becomes very simplistic. Not just the past two weeks for quite some time now. It has been known to the market that the virus is very serious. And it's also been very obvious that you would see major fiscal spending and we are likely not done so as a stock investor. I think it's important that you swim out and understand truly going on what you see right now is that we get more. And more data that democracy is trying to factor in and they're trying to do that with known unknowns and unknown unknowns and that's just a very volatile process that takes some time to adjust for which also takes me to the next point because in times like these and I just mentioned before that it is actually important to say which time of Day Recording. And by the way we recording this before the market opens. So what I've been doing some of these days as I've been putting out older is that I'm looking at the futures market and I usually never look at the future smoggy and if I do I don't do it for that day so I just looked it up here and we are looking at something like the Maga opening in minus three percent. Now the reason why I'm saying this is that we often here on the show talked about using limit orders and I still don't think there's anything wrong about doing lindores. But we've seen days where the market has been like down ten percent or ten percent so it actually makes a lot of sense to look at futures if you are looking at the modern day to day basis so let me. Just give you an example. So I say that you put out limit order of the S. and P. Five hundred. That right now is trading at twenty five hundred and you put it out to say twenty four hundred ninety nine. Dushi under normal circumstances. If that was bet you met a long time ago. You can say that's fine because the markets are so volatile right now because you see these major major swings he can actually make sense for you to pay attention to the futures and remove some of those risks because the futures especially short-term are very very efficient and in that sense you can go in and not take the worst beating fight after you make that position and that goes for bioresearch as well as sell orders but all of them that I also just want to point out when you look at the past two weeks we see some crazy things happening. Seventeen percent in just three days last week was the biggest rela since one thousand nine hundred eighty three. So if you're wandering last time we talked about TV finance on new tool. We talked about the momentum of the market and we talked about how tool call the February twenty six that perhaps now is the time to go out of the market. That hasn't changed instead. I just WanNa add that for people that may be didn't experienced two thousand eight two thousand nine and they're looking at the volatility that we're seeing in the S. and P. Five hundred index and seeing these ten percent swings or five percent swing in a day and they're thinking this is crazy. This is pretty normal for what it looks like when you're in a recession type environment a crash. This is how the market behaves. And so much of it goes back to some of the stuff that we mentioned two weeks ago with the derivatives market. Because I think the best way for people to think about why you're seeing such abrasive moves in the market is because you have everybody that has to come into cash. They have to come into Fiat money in order to make good on those derivatives. And so when you have that playing out and it's because you have people that are having margin calls because you had the biggest supply demand shock world has ever seen with this corona virus. And so when you have that taking place you have this four selling you have these liquidations at our massive on scale and so if you see it go down by ten percent and then see the next day. It's up seven percent. That is your normal volatility especially through the initial part of something that has such ridiculous shock to the system. So the fact that we've seen a bounce. I'm not saying that it won't keep going higher but I'm also not saying that. The bottoms in. I think that what we're seeing right now is standard volatility for the type of trend the long term trend that I expect to continue to see with the current market conditions. So it's easy for people to look at this and say oh my God it's up twenty percent from the bottom. I missed the bottom and now I gotta buy and then they step into the market if you go to any large downturns that we've seen historically and I'm not even just saying mother. Nineteen twenty nine one because that's the most notorious one that literally went on clear out to nineteen thirty three every time. You thought all right. It's hit its bottom. Let me step into this and buy something. Because it's up forty or fifty percent. That was the next interim top for a mega downtrend. And I'm not saying that's what's happening here. I kind of expect it to happen. More my personal opinion but. I think it's important for people to have that realization. That if you see a thirty percent up that's not necessarily symbolizing that you've had a bottom here and I think something else to watch very closely as the volume that you see here if you don't see a massive amount of volume it's probably just within the momentum trend that we're seeing in. I think the long-term momentum trend here is in a downward direction. At least that's what our T. Ip momentum tool is recommending still read on pretty much every single company and ETF. That were viewing so. I think that's important for people to remember. I think you bring up a good point there. Preston. It's easy to have too much of a narrow focus if you just look last week a different looks like we're on the way up but we talk about bull markets and bail mangas assets a linear process. Or at least that's the way can be perceived but that's not how it works. It's not like you have seven years and it just goes up and then you have for years only goes down if you do a case study on some of the crash twenty nine or dot com for that matter in two thousand and it didn't just go down. You have all types of interventions financial stimulus package monetary policy. That's coming into the mix and you see this spike and a lot of people think well now it's over and just continues going down so I think you're right. I can easily see this down more than you might see. A spike again might see the market rally and slide down again. I Reference Radio A lot. I know I do. But he has some amazing points on helping people understand how the markets work. And when you start getting into some of these margin. Paul's especially very large shocks to the system. It has a self reinforcing effect to it. And that's where I think people who especially have participated in the markets over the last ten years and maybe didn't experience the two thousand seven to two thousand nine timeframe. Just don't have that experience of seeing how these actions in this selling that we're seeing has a compounding impact and I would argue for how much upside we saw in the last ten years when you think of it like winding up something that Spring loaded when you wind up and wind it up when you finally are able to push it any further because maybe with the source that you're using the wind it is just not strong enough to wind it any tighter. When it starts to undo itself it picks up steam and a picks up momentum as it starts spinning the other way. And so you're seeing that right now the fact that you have all this capitalization and when I say capitalisation you basically have central banks that have continued to supply more and more liquidity into the market which bids the prices of stocks which bids the prices of all these different things as a capitalization above the earnings power. So if I'm a company and I made ten dollars last year. I might be capitalized evaluation at one hundred dollars if I make just one more dollar to eleven dollars. Now my capitalization. Mike jumped to one hundred ten or one hundred fifteen dollars and so the whole market is bid in a way that it's capitalized. Meaning it's there's this multiple effect off of the earnings so those earning start to contract that capitalization is moving in the opposite direction. And so that has a compound. Impact to the valuations of how other things are priced. So like let's say I went out and I was getting a loan on my house but it was based on my net worth and my net worth was based on a capitalization of one hundred and ten but now all of a sudden because the earnings power that that underlying capitalization is moved down to call it seven dollars and now the market cap moves from one hundred and ten down to poets seventy or eighty or whatever. It might be now. I can't afford to go out and get that loan that I used to be able to get because my net worth was capitalized at whatever. And I'm just giving a really really really generic example to show how those forces compound upon themselves as things like this unravel and so that's why you see these bursts in these drops and these bursts up and then further drops down because that wheel is spinning in the opposite direction. And that is a really important concept for people to understand that they're self-reinforcing on the way up but then once that momentum shifts and you get into a long term trend in the other direction itself reinforcing in the opposite way as well with that in mind. Let's talk more about the fat and what's going on these days. The Fed has been very busy previously. They announced that there will now start to buy treasuries and mortgage backed securities traditional refer to qe quantitative easing. Now the change that to buy no limits in the amount needed to support smooth Margaret functioning. Which to me sounds like very fancy language to let sprint unlimited money more or less and I saw like enjoyed that phrasing but just to sorta like set the scene. What is quantitative easing? And we talked a few times on this here on the show but I think it's just important to preface discussion pro for those of you who say quick reminder about what is this all about really the process about the central bank buying mugs back securities and treasuries from its member banks and with the money from that it increases liquidity and the flow of money in capital markets practically. That means that the trade desk at the New York Fair Reserve Bank. They're handling all this for the Fed and even though it sounds like it's something that habits between banks the banks. The intention is to push out money in society and create growth or in this situation at least soften the blow from the economy contracting so if we are looking at the balance sheet of the fat. Be ready for some big numbers here. The latest number I could pull up was five point three trillion dollars and that was up. Twelve point four percent or just the last week and it continues to grow. I mean that's my boggling numbers. And the twelve point four increase. That was partly a function of the Fete. Adding two hundred fifty five billion interest stories and nine hundred billion mortgage-backed securities. But what I think was really interesting was the currency swaps. You see right now and that rose from just two weeks ago from twenty five billion to the two hundred and six billion dollars because there is a dollar shortage out there. The reason why the Fed has greatly expanded the currency swaps with central banks. This is both traditional pardons but she also a bunch of new partners with treasury trade for USD and because of the huge demand for dollar denominated assets. The Fed has greatly the currency swaps. So basically what's happening is they're trading. Us Treasuries with USD. And I would say that it's hard to know right now. How big the balance sheet can grow. I've read estimates that some are saying can reach ten trillion by the end of the year and Cuban. My we're just above five trillion. I have another frazier from the fact that just wants to say this regard that they would aggressively and forthrightly continue. Its efforts and not run out of ammunition so do the math. How much you think the balance sheet would grow to and just in comparison again in two thousand and eight doing the crash. We saw a three point seven trillion growth in the balance sheet doing that. I can easily imagine this would be a lot more. I think. Ten trillions low. I've seen some other things that were saying. Twenty plus now whether you get there in twenty twenty. I don't know but this brings up a really interesting discussion that I want to talk about which is really. How are they going to decide in a fair and balanced way of WHO GETS BAILOUT MONEY? Who GETS LOAN MONEY BECAUSE THEY'RE talking small businesses? We've got loans for you. But the large businesses will the Boeings will just give you the fifty billion dollars that you ask for with. No strings attached. I just don't see that playing out real well. From a social unrest standpoint especially all the elected officials in the various districts that they represent that some of these large cap companies that are quote unquote too big to fail just effectively. Getting a handout. I mean what you're seeing with some of the existing policies and the direction that a lot of this looks like it's going towards you. Affectively have socialism for the wealthy and the large cap companies and you have capitalism for the small cap companies and the masses and. I know that that sounds crazy. But that's effectively. What you're seeing with existing policies when a Boeing ask for fifty billion dollars and they just get it and your small businesses are saying. Hey I know you're not working and I know you don't have anybody there. You're not collecting any revenue. But we have alone. We're willing to offer up to you. I just see that really causing issues in the manner and how all this money is being distributed now where I think there's only amplifies itself is when you start getting into state and municipality. The issues that each one of them are having with their solvency. Going into this. I would say that you didn't have the most credit worthy municipalities and local government's. Going into this coming out of this when you look at some of these smaller towns here in the United States. They are relying on those few small to mid cab businesses in their regions for a significant portion of their tax revenues whether it's the employees paying the taxes or it's the company itself Pana taxes with these businesses have been shut down for. Let's say they're shut down two months. Everything comes completely back online with no issue. You've effectively had a twenty percent drop in what they would have received for the year. That is going to pause major major issues at twenty percent detriment and tax revenues. And Trust me. I don't think that it's going to be twenty percent in the grand scheme of things like when this all plays out everything is not gonna just come back online and everything's all Honky Dory like it was before this happened. So that's my concern. Moving forward is now. You're GONNA have municipalities. That are saying we need a bail out. You given all this money to all these companies you've given this money to whoever and so why don't we get the money and so you're GonNa have this constant request for additional capital that I don't necessarily think everyone is accounting for at this point? That's only going to amplify six months from now. Six months from now a lot of this is going to start to be realized. And you're going to see more and more and more organizations local governments state governments that are then saying we need some money and it doesn't help that. Interest rates are paved down into the zero or even negative. If you're talking in real terms how are people supposed to get yield in their portfolio? Especially if they can't tolerate volatility Alma world. Are they possibly going to get yield? And so if they can't they're gonNA have to do other things and there's really no other options in my personal opinion for them to go except for stepping into something very volatile on the related no to talking about this monetary policy and what the Fed is doing. I think it's very important to understand that we are in the very different situation than two thousand eight. I know we keep on comparing to last crisis because that is what most people remember but it is very different many ways and no we covered some of that in the last episode too but the Fed only raced rates four times back in two thousand eighteen. And if you do go back and listen press and I talked about interest rate a lot. I voice. A lot of concerns about not heightened interest rate more whenever the economy is going well for emergencies like this because what was the good situation during the last financial crisis you can even call the good situation but that was we had a lot more. Interest rates to work with the interest rate was lowered from five hundred to five two zero percent like really really fast which helped pump out a lot of liquidity in the market. But we don't have anymore. It was one and a half percent then ten days later or whatnot it was zero right so the Fed doesn't have as mottes in their toolkit anymore. Well we do know that they have quantitative easing. That's one of the first thing that the go-to ride now and that should be the last resort kind of thing and going to what you said before pressed in terms of who benefits if you look at something like quantitive easing. It's not as broad of the measure as something blowing the interest rate would be if you go in and buy financial assets there are definitely some groups called the half's that benefit a lot more than the have nots. And there's a lot to be said about this and it is an election year. That's the thing but it's very important to understand that element go into this. Who benefits when they were doing this now? I just want to piggyback on that. Because now that you're seeing the Fed step in and by the corporate bond market which has never been done ever. You have just opened up a whole new. Can of worms of them making decisions on. Who's going to remain solvent? Who can basically step into the market and ask for more money at a advantageous yield? Be ause the yield isn't real. The yield has been propped up in artificially lowered by the government at that point. 'cause you're not letting markets be free and open when you have government stepping in and buying the corporate bond market so you're in this fantasy land of reality bill like if I'm a business and let's just say that the yields on my banzer artificially kept low because the government has stepped in his buying these. Etf's now I can issue more debt at a lower interest rate relative to the risk that my company actually poses to its solvency. I don't care what anybody says that does not end well. That is something that in the end game. As long as that policy is going to be maintained in the end that will end in tears and tragedy. Because you're stepping in and doing in manipulating things at a mass scale. So where's the limit on that? If you turn something like that on you have to have you absolutely have to have a stop limit of this will only happen for one month and it can never be used again because of this dire situation you have to put in place when you stand it up you also have to put in place how it will be turned off forever and never used again but we haven't seen anything like that. I mean not even close. Have we seen anything like that? So if I'm a local government just going back to that argument and I'm asking for money or I'm asking for assistance with my debt to keep my yield blow because I can't afford for my yield to go higher. I just don't know how they could possibly say well. No you don't get it but this organization over here does in a year from now or six months from now. It's Kinda crazy to think that that's what's happening here. In the United States where we supposedly have free and open markets. Let's take a quick break and hear from today sponsor what do companies like ring hint and? 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That's next week dot com slash study net sweet dot com slash. Study net. Sweet business grows here brought to you by capital one. You know how it feels when you've saved enough for that long awaited home edition now. Imagine saving enough for an addition on that addition. That's the feeling with capital one. Where new savings account earns five times? The national average capital one is helping you earn more towards your savings goals. This is banking reimagined. What's in your Wallet Capital One? Na member FDIC. All right back to the show. I think you bring up good pointer free and open markets. That's not how kicked characterize what's playing out the there's just so many short term gains long-term pains involved into this where I'm like. How are you going to solve that? And get quoting rebel. You and we talked about rebel multiple times here. He mentioned the one of the reasons. Why defense the crisis two thousand eight was handled. So well was that more or less. Everyone was rescued. And I understand that argument. I think generally a good thing for like all the economy to do that but we just always also need to understand that if we set a precedent for hey no matter how much you mess up as long as you're big enough nothing bad will happen to you and whenever I see some of the things that's happening corporations today I might imagine that some have been looking bagging. What happened last time? I'm not talking just about bowling like okay. We do a bad job. Oh we can just get fifty billion dollars from no strings. Attach like it creates a lot of long-term or incentive for men's mince going forward and then you really have to figure out for yourself. What's the goal? Here is the goal to punish. Management's ran perform. Well is that a goal is to have a good capitalist system. Is it to save as many jobs. Short-term what's the goal and depending on what the goal is the policies. You want to carry out a very very different. You know we should talk about Adam Smith a lot more on this show when I look back at how long we've been doing the show. I'm kind of disappointed in us for not talking about Adam Smith more as everyone knows Adam. Smith's big points was the invisible hand or right now. You've got two very visible hands at our cajoling the living heck out of this market. So how are we calculating inflation? Well it's a basket of different commodities that make up that index less is talk about oil for a second so oil is pressing up on the twenty dollar price point with what I would tell. You is a trend that is going lower and I don't expect that trend to change at least not today here on the first of April maybe by the end of the month you might start to see this thing bottoming out. I don't know but it's completely dependent on how long people continue to not work here in the US. Everyone's on quarantine. The flights aren't flying. And you're seeing it all around the globe. People are spending way less extremely less than they normally do especially when it comes to oil so there's only so much of this that you can put in storage before the storage is hit Max capacity. I would argue. You're Kinda hitting those limits today. And as a result now all the producers now have to start producing less unless they want to start building capital infrastructure in order to store their oil as their opponent out of the ground which does not happen quickly. So you're GONNA continue to see price pressure on oil now. My point is going back to inflation. Let's just say for example? The price gets to fifteen or ten dollars a barrel okay. Which is insanely low like. It's mind boggling low. But let's say to ten dollars a barrel and everything comes back online. The first stuff that starts getting pulled out all the stuff in the containers everything that was in storage. It starts going well. All your manufacturing has slowed down significantly to account for what's happened and you just can't turn back on like a light switch. So there's this delay of ramping capability back online. So what does this do to the price? Well of course the price is going to go up when you're in that environment where demand is coming back online. Do I think you're GONNA see the same demand profile you saw before this happen? Nope it doesn't need to. It just needs to be more demand than what you were seeing so if the price goes from ten dollars back up to twenty dollars from an inflation standpoint we just saw one hundred percent inflation off the previous price right a hundred percent just going to twenty dollars. What if it goes to thirty dollars forty dollars? What does that look like from an inflation standpoint? Those numbers are massive. They are huge. And so when we're thinking about what that impact is going to have on the market on other securities when we're seeing what I would describe as not big nominal moves bit. Massive unprecedented percentage moves. That is going to cause some serious serious issues for other securities. So let's just talk through some of those so if we see some of these moves in commodities because I'm talking oil specifically but think about how commodities perform almost like a scarce resource due to the flow that they come out and so when you're measuring that compared to Fiat currency all at the dollar the euro the yen. Whatever when you're comparing that to a Fiat currency that's expanding at a rate that we've never seen ever you're gonNA see the price on a lot of these commodities pop so when we talk about how does that impact the bond market well bonds are measured on two main variables number one the risk of the company to. Actually return your principal. That's first and foremost how bonds at least corporate bonds not necessarily government issued bonds. But let's just say We're talking about corporate bonds. There I measured off of the ability of the company to repay it second. They're based on a premium above the inflation rate. So if my expectation is that inflation is going to be five percent. There's no way in hack in a free and open market that you should find the interest on that corporate debt below five percent right. That's your starting point. That's your based. Is the inflation rate. So if inflation is an amusing crazy numbers especially for the time. We're sitting in right now but laissez inflation seven percent. You should not be able to find a corporate bond below seven percent no matter what then you add the risk on top of that so if the company super risky will then maybe add ten percent above that if the company's super solvent and doesn't have any risk to going into default maybe it's a two percent premium above that inflation rate. My point is when those yields are going up due to the base layer of inflation. The first thing that your accounting for going up that means the price of the bonds are going down and they're going down in a major way especially if you have even a three percent adjustment to inflation. I can't even tell you how that impacts a hundred trillion dollar fixed income bond market it impacts hit in a dramatic and insane way so now. Let's pull the thread even one more notch. So let's talk about the equity market. How is the equity market priced? Well it uses a discount rate based off the free cash flows solicitors say. The free cash flows are completely the same. No change through any of this. The free cash flows are if it was a hundred yesterday. It's one hundred tomorrow. If you change the discount rate so that the percent is higher which is what will happen if you have any type of inflation gas. What the valuation of that business goes down just like a bond yield goes up the price for the bond or the price for the stock goes down and so. I think that these are some of the things that when you go back and you look at a chart from nineteen twenty nine. I'm not specifically pointing that out. Because it's analogous to this period which I think in some ways it is but I'm not pointing out for that reason I'm pointing it out for the reason that back. Then you saw the market go up. Fifty percent only to contract another sixty percent from there. I guess what I'm saying. This there was all these outs where people started stepping back into the market. Only to find out that it wasn't over yet so when I think about six months from now it may be the markets in better condition than where it was at. Its lowest point and people are saying okay. I think we're through this and demand is going to start coming back online. And then you're GONNA see inflation start stepping in a dramatic way just because you're looking at the delta of where the price was moving from before now. Issan that's going to start getting priced into the bond market. It's going to start getting into the stock market. And then you're in the situation where would appear to be a return to reality is only a wakeup Paul to the reality that there's been some serious printing going on and there's been some serious increase in market prices relative to where they were before and that is going to be priced into the market whether people want to believe it or not like to continue talking about inflation and perhaps talk a bit more about inflation. Good is it bad because I think that there is this common misperception that inflation his bat? Most people would say that deflation is also bad. So let's start there. Let's start talking about what is good. What is bad? And why in most of the developed world we target something like a two percent inflation rate. So we're not touting not having inflation all actually. We would like to have a bit of inflation now. What do we want that well? Inflation makes consumers expect prices to continue rising and whenever prices are going up. People buy now rather than pay more later. That's good because the increased demand in the short term and as a result store sell more factories produced more and they're more likely to hire new workers to meet demand and that just creates really good cycle because those workers get more money and the spend that in on the ghost deflation on the other hand is the opposite of inflation. And we don't want that so this is when prices go down across the board. We have deflation because think about what happened with inflation. That is the people consume now. But if you had deflation people will wait to see price of drug even more before buying and it cuts back on demand. Business reduce their inventory as for Seoul factories produced last. Perhaps a need to lay off workers as you have unemployment going up it also leads to wage deflation and now works have less money to spend so that means even less demand so this is one of those self reinforcing cycles so one was up and the other one was down. The Great Depression is perhaps the best example of this in nineteen thirty one and nineteen thirty two. We had a year or year deflation of more than ten percent each year. We don't want that. And if you look at the International Monetary Fund. They predict a recession here in the time to come in q two q three the outlook for global growth in perhaps just twenty twenty. It's just very doom. And Gloom a Seoul District Court here recently from Goldman Sachs. They predicted a thirty four percent. Contraction in q two US GDP now. What happened in two thousand eight? Inflation was only point. One percent the lowest since nineteen fifty four because of those deflation their precious that we're seeing right now and of course these pressures known to the government which is also why you see that governments worldwide. Continue Printing money through the central banks the lower interest rates if the can and the spend this much money as the hand and that is all to mitigate deflation so before we talk more about the potential scenario with hyperinflation that we talked about last time. If you've got a ton of questions about those scenarios and how to position themselves and what it means when they were inflation for US investor smooth talk about all of that but I'd like to preface some of that discussion but talking about global reserve currencies. Because I think it's so important on the stand that when you talk about inflation deflation you have to understand that. Some countries are in a different situation than others. So what is a global reserve currency ever so currency is a currency that accepted around the world for transactions and savings and the country that gets to print the world's primary reserve as the US. It's just the very privileged and powerful position because debt is denominated in that currency. That's one thing but also it's considered a stall of wealth and it's very important to understand that the most important reserve currency that's the US dollar that's sixty percent. Men Comes to Euroman twenty percent and then you have the yen and those three region or just in very different scenario when it comes to mitigating those deflationary pressure and the possibility of hyperinflation happening or just very very different too. So perhaps the best way I can explain hyperinflation and and explain the importance of having a global reserve currency is the textbook example of the Weimar Republic after the first world war and as an economist. I just love this example because it's so educational and it's so interesting whenever you hear those numbers era so whenever say. I'm a Republican. Just think Germany after World War One between July. Nine thousand nine hundred twenty two and the member nine thousand nine hundred twenty. Three price rose with three hundred eighty seven billion percent in a little more than a year. We had more than three hundred eighty seven billion percent increase in Germany. That was an inflationary crisis. It was not the world's reserve currency. And now what happened so after the treaty after First World War the Allies Demand Wall rations and it had to be paid in foreign currency and essentially have to be paid in gold to and as a result money was printed in Germany. Would no limits wanted to pay off that debt? But as a result of the Germans just printing Princeton Princeton Mark Mark was the name of the currency at the time day currency depreciated Ashrawi as inflation went up and you saw hybrid inflation and what happened was that the Weimar Republic was no better off and crisis. Basically just been a lot worse now. Why did Germany do what they did? Actually if you go back it sort of makes sense. Why did what they did at the end of the war? Germany couldn't borrow in their own currency and there was due to the war criticism. Just afraid that the won't be repaid so they couldn't do that in the German mark. There were two options that could not borrow money and be hundred percent sure with loose of war all the bar money in another currency typically in sterling or in the US dollar and if the won the war they expect it to be a global research currency print money and they could also enforce while reparations from the allies. We know what happened Germany loss for now? They're just this huge issue where they're supposed to do. There was a lot of negotiations going on especially the French. Didn't want to give the Germans any kind of debt relief and they wanted to be paid full. They want to keep Germany really week looking back. That was probably not the right thing to do. And you had the Nazis the rice of that and everything that happened during the Second World War but going back to what this means is that you have to look at. Is this flation. Mary always deflationary environment. I want to talk about this. Inflation versus deflation. Because I'll tell you. This is a really difficult concept for people. Because it's so relative to what you're referring to so let me give you an example. When you have inflationary policy which is what. I would argue the. Us and pretty much every other country in the world has implemented since Bretton Woods were. They've baked in two percent inflation or at least attempt to bake in two percent inflation of the currency which you get with that is this incentive structure for people to spend and for people to invest their money in order to try to outpace that two percent. So when you look at the advancements that we've seen over that eight year period of time it all makes total sense on how that has compounded over time and how we're seeing such drastic growth in productivity and in basically all the different products and services that we've seen over the last eight years progress at the rate that we've seen because we've had this rigid inflationary policy if you had the exact opposite policy. Let's say we were trying to bake in deflation of the currency at two percent over an eight year period of time. I think what you would see at the end of that eight period of time would be something that looks like society really just does not try to produce anything new. You would see people that really. Don't invest in anything and you'd see the polar opposite of what you've seen happen now with that said. There is a person that I have started the follow very closely because I think he has some amazing amazing arguments and amazing points of view in his name is Jeff Booth. He has a real vision discussion. That is available for free on Youtube. We'll put a link to that discussion in the show notes. Because I think some of the things that he's talking about are fascinating ideas. He has a book out. It's called the price of tomorrow. I'm currently reading this book. And I've currenly coordinated with Jeff to come on the show to have a discussion about some of these ideas and Jeff. He is a extremely successful entrepreneur. He has founded and multibillion dollar companies in the past and just a wealth of knowledge. Now one of the things that he's talking about which I completely agree with. Is that the policies that were watching at the end of using an inflationary policy for this long. They end in what we're currently all experiencing and as long as we continue to implement the same policies that we have in the past. You're going to get more of the same and you're going to accelerate more of the same from a social standpoint. What his opinion is is that you actually have to allow deflation to start to happen in order to bring things back to normalcy. But you have to do it in a controlled way. Something else that I think's important. So when we're defining inflation versus deflation when you have these inflationary policies from a monetary policy standpoint in place. What they create is deflation of price. Let me explain that. Let's just talk about the Internet and how fast you're able to shop and buy something in the past you'd have to get in your car. You'd have to spend gas money to go to the mall. You'd have to use your time in order to and if you're GONNA put a value on that you could put a value on your time in order to walk through the Mall. The find exactly what you're looking for then go there and purchase it and go to the person at the checkout counter. You'd be paying for all the people that are stocking those items in the mall. You're paying for the transportation of those items then go to the mall and then the transportation for them to go back to your house all of these things right. Those have a higher cost than me logging onto Amazon in less than thirty seconds and conducting purchase and then having the shipping come directly to my House. The price of that item becomes deflationary relative to the price that it used to be. So when you look at everything that's happening in the world over the last eight years we can see how that deflationary pressure has been in existence for a very very long period of time. Many of these ideas that I'm talking about are in Jeff's book the price of tomorrow and he talks about how a lot of this price captured because of the deflation. That's happened in the price of goods and services has not completely flown. Honey Genus Li. Pu the end user. Instead there's been some things that have gone down in price call it a TV whereas other things have gone significantly up in price all at healthcare and so he lays out an incredible argument in this book. We're going to have him on the show. We're GONNA talk about all these ideas and much more detail. Were also going to have a link in the show notes to one of the interviews that he's already done of people can check that out and I think it's important for people to understand that whenever we say all there could be hyper inflation in the future. It's all relative to what you're measuring it in so if I'm measuring the price of things going up and I'm using Dollars in order to measure that well you might have inflation. If you're using something else to major you might actually be able to say. Oh that's deflationary relative to X Y Z. People need to think about that. Context of how they're using that terminology whenever they're having these discussions because he can get extremely confusing very fast and those are just a couple examples of what I'm talking about. Let's take a quick break and hear from today sponsor. Are you tired of being? Let down by or design or local water essentials good life clothing offers premium EC. T shirts are made in America. Thoughtfully designed to celebrate individuals who live life to the fullest. Whether you're looking for a more refined rugged or adventus lifestyle good live. Has You covered uncomplicated? Designed to combat the complicated nature of modern life go to good life clothing dot com today and find the best version of yourself. Listeners of the Masters podcast network will get twenty percents off the next purchase with the code. T I P two zero again. That's good luck. Clothing Dot Com with Promo Code. T I P two zero for twenty percent off. Here's a message from Sponsorship Recorder. Right now we cannot be overwhelmed. We have to work. We have to work keep a loved one safe and protect our communities. We have to work to stay strong to stay connected to stay focused. We have to work to inspire to innovate to build new solutions. But for all of this to work we have to work together at Ziprecruiter. We connect employers and people every day. But today's different we're partnering a first responders. Government officials the medical community the innovators and the manufacturing transportation and food distribution industries. To make sure we are finding the right people for the right jobs right now. We have to work together now. Sikora dot com slash work together. All right back to the show. And when we hear about the financial stimulus pace of two point two trillion dollars being pumped out in society right now it might sound like the. Us is in the risk of something like hybrid inflation if not the Weimar Republic then something really bad because trillions of dollars. That's a lot of money right the size of the US GDP in comparison is twenty two trillion dollars. And if gold is right thank you too. We'll see a contraction of the economy of thirty four percent. It's not sound like so. Whenever you see all that money being pumped out we always have to relate to how much money is being taking out of the economy. And how much money do we want to take it out? And that's also why whenever we try to target different levels of inflation. It's not an exact science. We don't exactly know before it has happened. How much money's going in. How much money is coming out? A lot of is not controlled by the. Fed is not controlled by the government. It's controlled by the banks controlled by US as consumers and think that's so important to understand that scenario whenever you're talking about inflation so the question really is at least to me when I'm looking at this. Will we see a change in the current Fiat currency system we have where the US dollar Euro Gen for that matter dominates and would all the floors that we're seeing and we see a lot of mistakes in the system we have? I don't think we'll see that. I think that it would take something like a major major black swan before could happen. Something like a World War could make it happen. Something like a type of financial instability that led up to breadth and butch that could change the system before that happens. I don't see the system change. We can make a lot of arguments and I definitely on. The podcast made it a lot of arguments why the current system is wrong. I don't necessarily have to perfect solution myself. We talked about all the inherent mistakes you have in fear based currency system where. You're just different senses to doing what you're doing but at least that's the way I see. I'm curious to hear what Preston says. Do you think we'll see a major shift in the current yet based system I do as long as monetary policy and fiscal policy continued to be more of the same meaning. What we've seen in the past is pretty much what they're gonNA continue to do in the future. I think that a shift in how currencies are used in a new emerging currency is going to be demanded by society. It's just going to when that happens. I mean I have no idea I have absolutely no clue how. Or when that is absolutely gonNA take place with one hundred percent confidence. I have opinions on what I think timeline is going to be. And I kind of think that it's probably in the next four years my personal opinion. I think a lot of people would argue with that. I think that's a very aggressive in short timeframe for a lot of people to here. It's just my personal opinion and I have reasons to believe that to be true without getting into all those reasons. I think that it's important for people to develop their own opinion for them to troubleshoot and try to understand other people's opinions in order to kind of arrive at your own truth and you buy into that logic or not but I think that this is really important. The more that we use the same tools from the past bit more aggressively uses tools. Which is what I see happening right now. I think it only accelerates that timeline I think that it forces it to be pulled further to the left and for it to occur even sooner if all the policies that we've been seeing over the last ten years if they were playing out at the rate that they had been playing out. I would say that this is going to go out way further before you're gonNA see a demand for a shift in currency and basically policy but I think this corona viruses accelerating that personally. I think that because you had the corona virus because you had this massive volatility shock it has caused those policies to accelerate and pretty much unravel themselves. Miss what I kind of expect to see in the coming for years but I truly hope I'm wrong. I hope that's not what happens because I think there's going to be a lot of pain anytime. There's massive change like this. There's going to be paying for a lot of people and that's what I don't WanNa see is for for your common person to have to deal with such pain of change at such a large and massive scale. I don't WanNa see that but I do on the other side of all. This is probably going to be better for the world to whatever that shift becomes. I think globally. That's probably be a better solution. But it's going to be a painful experience to go through. The only thing that we do know is that it will eventually happen. The future is pretty longtime rebel. You discussed this. You can have made your shift within the reign of country. The era the US it can happen. You know breath what's an example and I'll say a major shift happened geopolitical after the first World War and to that like the UK if not ruled the world that if they had a lot say in terms of Munster policy around the world and there was a major shift after First World War and then Britain and the US dollar was the main currency was picked gold and the old currencies to the US dollars. That was a huge change and that can happen with having a thing redel refer to it as empire and I just want to give you a fun fact. We would make sure to link to this piece. He said that countries or empires typically last two hundred and fifty years give or take a hundred and fifty s. And it was like. That's an interesting stat. Briefly mentioned some of the quote Unquote Empires. You had the US took over from UK and before that we even had the Dutch being the reserve currency believe it or not we had so many different systems. And it's so interesting hearing redel you talk about these empires and something like that. That's Sorta what are referred to whenever see a gradual shift in power. I don't see any time soon and not talking about whether or not China would go as the biggest economy in the world. That's not the only one by a Jew political shift in that size and we have a system right now where the US. Europe Japan are quite happy or at least not as unhappy with the current system as the can be combined. It's just very very different size. Regardless of the next ten fifteen thirty years growth rate in China this is. I got a question for you. You got you B. I. Happening here and there's a lot of people that are pushing back saying it's not you be i. It's just a single chack that they're gonNA send out in the US to everybody for like a household with two kids you're GONNA get. I don't know like three thousand dollars or something like that here in the US so my question is is it a single check and I want to preface this with. We have an election coming up in. November is this a single check or is this something that's going to turn into multiple checks or many checks. Because I have a very strong opinion. I want to hear what your opinion is. Though I take door number three and the reason by set that was whenever you saw this bill passed in the Senate. The vote was ninety six to Ciro it election year. I WANNA take door number three. I don't know how they're gonNA possibly turn this off before November. I mean I think that you could potentially see it. Run clear out until November. I think it's going to be a very popular policy especially for the Palace of people that have lost their jobs and that are going to have difficulty getting jobs back after all this comes back online and then you look at how much money from a trillion dollar standpoint that encompasses for just a single track let alone checks till November and what kind of impact. That's going to have long-term on the amount of money supply. That's in the system. I was playing out the inflation scenario right when demand comes back online. You'RE GONNA have inflation pick up. And then it's going to greatly impact the bond and equity market and not any favorable way so that impact is going to require more bailouts from companies and municipalities. And I think that when we're looking at this in six to nine months from now and you compound it with the fact that you're in an election year. I don't know from my vantage point. I monetary policy and fiscal policy to be extremely loose and as wide open as you could turn it on. Not just now but clear out till the election at a minimum. My opinion is just looking at it. From how does that play out? In the markets based on those policies that I expect to occur based on incentive structures. That's how I'm looking at. It is our they incentivized. What actions do I expect him to take? And then how does that? Impact the markets from an and portfolio standpoint. I think that that's the only way that you can invest in the markets with a clear mind in order to be successful. You can't get polarized in one or the other you have to look at it. As objectively as possible based on the incentive structures all right so stiglitz quickly talk about our list or the companies that were looking at today for buys in the market. Because we've talked about a lot of gloom and doom but there's a lot of companies that are losing enormous market cap right now which means the prices are getting in a position where you want to start building your list of things to buy when you feel. That opportunity comes up so right now for me personally and I'm kind of curious how you're doing this but I'm literally going to the TI PC finance filter. I'm looking at the companies. That have a very low enterprise value in a very high earning capacity with respect to their three cash flows. And when I'm looking at that list the companies that are coming up completely at the top are all these finance based industries also seeing some insurance companies and when I'm looking at these companies and I'm looking at the earnings like let me just give you the first one here Charles Schwab K. So when you look at the enterprise value on the company it's at one point eight billion and when you look at the earnings before their interest and taxes it's four point eight billion which is crazy like that's just like you're getting literally four times the amount of earnings annually than the enterprise value of the business now the concern as we talk about something with such a insanely juicy ratio. When we talk about this you also have to consider that to you. Expect that earnings power. Which I'm looking at right now as as historic number is that number going to be just as high moving forward of course not. It's going to be lower but if we still go in and you do a an intrinsic value estimate on this. It's still coming up very large. And I think that it's important for people to start building these lists of companies at are in these positions as we're just looking at these and I'm not saying that Charles Schwab is a by at this point am absolutely not saying that I am not buying any of these picks at are at the top of my list. But I'm looking at them on paying close attention. I'm kind of curious how you're addressing it and how you're looking at maybe your potential bias when the opportunity strikes. The first thing that I notice is that all the companies that we're looking at more or less all the companies all the momentum has just Brett. They do talk about blots in the streets. And that's definitely true whenever you look at momentum of almost all stocks in the universe that we're looking at here I see a lot of great companies actually love the companies that we've been talking about during the Mazda discussion. Hp allstate. I think we even talked about Micron. Perhaps potential compounds are so. There's a lot of different interesting stocks trading at more interesting valuations that before and keep in mind that even if you do a discounted cash flow calculation which you can do on. Tv finance even if say with a ten percent discount rate that they won't make any money in the next twelve months. Let's just approximately ten percent. You have to pull off intrinsic value of the mouth. So it's very interesting if you go into this with the mindset of what's normalized earnings. Not What's the past twelve months necessarily definite and not what's the next twelve months but if you come into this and say what is your normalized earnings. I do think that wise. Not Super Super Cheap. It's different in March. Two thousand nine sheep but there are definitely more appealing stocks out there if you look at it in the filter perspective like sorting the cheapest months. I guess that's how I'm seeing it these days. It's kind of interesting to see which companies have been sold off the most that still a substantial amount of earnings if you're assuming that those earnings would come forward or even if you would say that it's a proportion of whatever maybe it's seventy five percent lasts or fifty percent. Last at the end of this you'd have to apply that same logic to pretty much across the board for most of these companies and it's interesting to see where they're already trading at in my expectation is that the prices are only going to get better and I'm going to continue to watch the filtering tool here pretty closely. Because as those prices adjust and some companies become even more advantageous. They're gonNA pop into the top of the filter so it's GonNa be interesting to see how some of these progress in just for the audience. Some of the ones at the top of the filter right now. Our finance companies were seeing some insurance companies. I see Delta's there in the mix micron. There's AFLAC it's up in the mix and these are just large cap companies that I'm talking about. It's getting fascinating. Don't try and time the BOB. I mean it would be fantastic. You have great communication at the end. The Parties Oh got the lowest price of all investors on the planet. But that's just not how it works. You know buying trances divided up in three four five from portions. Whatever this if you want to go into the Manga don't try and I don't want to miss out on that. Ten Year Bull Run in March twenty nine whenever everyone started with continuous sliding because you thought it would go even lower in April. No that's not the way to do it if you find stocks at reasonable price now or cheap price now. Perhaps it's time to put some chips in. I don't think there's any reason to access cash into the Manga right now. All right so this is the point in the show where we take a question from the audience in this question comes from Mario. Hi Preston steak. Thank you for the excellent pumped constantly. Keep up the great work. My question is around a conversation you had on your previous podcast on options way. You highlighted that it's worth understanding the cost of these options and whether it's worth for example putting in his normal stop on stock position rather than actually buying it put which could be very expensive particularly if it's very volatile. I wanted to understand. How is it possible to price these options because I understand this quite complex in our number factors involved and also we can find the resources and tools minority prices options so that you can ascertain whether it's worth buying an option if you wanted to have exposure on the downside but also now side you WanNa do leaps for example? Thank you Mario. I answered that question. I think that there is a strong misperception of how options work. And how they're priced so really like to go through like an example is going to be a few numbers. Please save with me. Perhaps you need to go back and listen to the example but I think it's very important for people to understand some of the math behind options that can give you an example with the price of perks of how the way and in this example. I just assumed that the price of Berkshire Hathaway's one hundred eighty dollars. The first term we need to clarify is what is premium and premium is just a fancy word for the price of an option. So what does it cost by now in this accent which is talking about a call option so we hope for the price of the underlying stock to go up and now we also need to clarify. What is the strike price so a strike price is the right to buy something and a given price? So let's take the example of how the YMCA four hundred eighty dollars. If you had a call option that gives you the right to buy one. Share Perks Halloway. Four hundred and fifty dollars a year from now two years from now that hundred and fifty dollars. That is your strike price now. We also need to have a third term and no it's becomes a little complicated now but as I mentioned before this just to give you some of the math. Some of the intuition behind Nicole option if the strike price is one hundred and fifty dollars if gives us the right to buy that. It's what we call the intrinsic value of a stock now piece. Don't be confused to know. We've talked a lot about insurance. You Valley which true value of stock but when we talk about options that basically just means that you can exercise that option now and you can get X. dollars out of it and so in this situation if one shares one hundred eighty dollars and there's a strike price of one hundred fifty dollars you haven't what's call intrinsic value of the option to be thirty dollars that's money you're more or less guaranteed with today's price now. The value of an option is also determined by where it's referred to as extrinsic value so the extrinsic value. That's your potential upside remembered. You don't have to exercise option today. That's the entire point. If you buy an option today you have the option opportunity to exercise that later. And that's very very important to understand. Then you have something like volatility that includes into pricing of an option so if we think that the way is very volatile it's actually not but if you think it's a very volatile that premium off perks halloway would go up. The price would go up because you don't care if you buy one share perks. Halloway if you just by the call option if the price goes down two hundred dollars or fifty dollars because remember you're guaranteed money as soon as it's worth more than a hundred and fifty dollars for one share perks of how and the last thing. Please stay with me guys. The last thing that's also determined by is the time for peration. Because the longer you have to wait for say the underlying value of perks the way to go up longer we have the more lucrative. Is that option? Because you can just sit and wait for good things to happen for the Manga to go in your direction or what so. Let's just have a practical example of an option of Berkshire hathaway today if you bought that at a strike price of one hundred and fifty dollars an expiration date twenty first of January two thousand twenty two the premium be fifty dollars. So let's talk about. Why does that make sense well? The stock is trading one hundred eighty dollars so we already know that you have thirty dollars an intrinsic value so the extra twenty dollars in premium comes from the penalty that Berkshire Halloway appreciates in price for more than one hundred eighty dollars. And we'll do that before the twenty first of January two thousand and twenty two now didn't give you another example. You could also have bought a call option out on the money with a strike price of three hundred dollars. The premium for that would only be sixty five cents. That's because it's highly unlikely that works. Halloway betrayed at more than three hundred dollars before January. Twenty twenty two. And even if it did it would like to not treat a lot higher than the three hundred dollars say for instance that the stock would be training at three hundred ten at the time. Which means that you can only take a ten dollar profit so to make money in options. You have to have a different opinion than Margaret. So whenever Preston I talk about potentially all price go to fifty dollars one hundred dollars and for us to buy an option on that you have to understand that the money it takes to make that bet. It's very very different than the potential outcome now. It has to correspond but it's not like oh I would much rather have an option with a strike process. One hundred fifty dollars because that's more than three hundred dollars that's obviously priced into the market. One way or the other. Do I think that sixty five cents is a good price. I would say that the arguments wide would be a fair price but food was trading at ten dollars. There's no way I would charge it but trading at once sent you bet by the options. I could get my hands on. I think the main thing people can take away from Stig's comment especially if you've never dealt with options is this is something that you typically have to get your hands dirty with in order to kind of understand how they work if you're just reading about the theory of it and you've never actually stepped in the market and actually purchased call option. It's not really going to sink in. You're not going to understand that. When you're buying out of the money call options that they're very illiquid and if you WANNA sell that position you're gonNA pretty much take shellacking as you offload it like those kind of things. You don't understand until you've taken the shellacking and so this is something that I want to tell. People that I think is really important. Most of how I deal with options I have taken straight out Joel. Green Bats Book. You can be stock market genius that book I think lays out some really sound ground rules especially for people that might be doing this for the first time. One of the most important pieces of the ground rules that he talks about is whatever principle you have in your portfolio. It should not make up more than ten percent at most of your portfolio. If you're doing options I think that's a very safe rule to how and some in the industry would look at ten percent is being extremely high so I would preface that. I live by that rule. The other thing that he talks about is he only does long call options in leaps and so I've adopted the exact same role. I only by call options. I don't participate in the derivatives market. And I'm sure a lot of people might be rolling their eyes and saying oh well that that's ridiculous. You're leaving a lot of opportunities on the table but for me it works. I know that whenever I buy that long. Call to your call. I have time for the position to be right and I also am in a position where my downside is limited to the amount that I put into it so if I put a thousand dollars into that position I can lose that entire thousand dollar position if I hold it to. Maturity in the price does not go above it the strike price on the call. But I'm fine with that. That's just how I personally do it and I know there's many arguments. Why could do more with my options strategy? But that's just how I do it. One note on the premium part of it so when an option is price using black scholes model. That's the model that if you took a derivatives class in an MBA program or something like that you're GonNa do these black scholes models and you're gonNA come up with evaluation for these options and it's GonNa come out to be whatever strike price for whatever security and for whatever duration one of the main factors in. This is the expectation for future volatility. So if you're dealing with a security that doesn't have a lot of volatility. The price for that option is going to be greatly impacted by the volatility if the volatility expectation or the past performance of the volatility has been very wide that also is going to be based into the price because when you think about the potential for the price going to the upside or the downside with a lot of volatility that has to be built into the equation. So you're going to pay a lot more for something with a lot of volatility so when you talk about a premium for an option the way I think about it is. The market is anticipating that underlying security going in a certain direction and so they're paying a price above the black scholes amount that you're calculating so like let's say if we did black scholes that option should be priced at two dollars per option but the market is currently trading at at three dollars per option. You could say that. There's a one dollar premium being placed on that option above the black scholes price because the market's anticipating that the trend of the underlying. Security's going to be going above the volatility range that is being calculated based on past performance. Because when you're doing black scholes you're basing that volatility on past performance black scholes. You can read a ton of it. We can put some links in the show notes to provide you the equation for black scholes and all the variables and how it's calculated if you WANNA learn some more. This stuff gets pretty complicated like you know if I was gonNA say one of the hardest classes I took whenever I was getting my. Mba was a derivatives class. I found it by challenging to do a lot of the math and to think through my long assured as a put is at a call all that kind of stuff gets pretty complicated. But I would tell you if you really do want to do this stuff. Definitely start out with very small position sizes if you get your hands dirty. It's going to help you out a ton to just kind of understand the nuances of it. Because when you lose money on a position let me tell you. There's no greater education you could possibly receive than by taking a loss or a hard lesson by buying things that are way out in the money and you don't have liquidity when you want to change your mind and things like that you learn all those hard lessons so anyway. Mario for asking such a great question we're going to give you a free subscription to RTP finance tool which we had talked about earlier on the show where you can go in. You can filter some of the results for every single stock on the stock market. You have access to the momentum tool which also gets into some of the long term volatility of some of these picks and we really appreciate you asking such a great candidate question that so many of us can learn more about so. Thank you for doing that and I hope you enjoy your subscription the TI P finance. All right guys thank you so much tuning in. That was all the press on. I had for this week's episode of the PODCAST. We see each other again next week. Thank you for listening to ti to access. Show notes causes or forums go to the investors. Podcasts don't come. This show is for entertainment purposes only before making any decisions. Consult a professional. This show is copyrighted by the investors. Podcast NETWORK. Written permission must be granted before syndication forecasting.

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TIP212: Billionaire Howard Marks (Business Podcast)

We Study Billionaires - The Investors Podcast

37:15 min | 2 years ago

TIP212: Billionaire Howard Marks (Business Podcast)

"You're listening to t I IP boy, are we excited about today's show? Because we have the absolute honor and pleasure to talk to billionaire Howard marks for many people in the investing community. They know Mr. marks because of his superior performance for five decades. In fact, Mr. Marx's performance in the distress, debt market has returned an average of nineteen percent annually for the past twenty two years back in two thousand eight Mr. Marxist company oaktree capital management. They raised ten point, nine billion dollars during the financial crisis, making it the largest stress debt fund in history. Mr. Mark as the author of the most important thing, and he also wrote a new book titled mastering the market cycle. So without further delay, here's our interview with the legendary billionaire Mr Howard marks. You're listening to the investors podcast. While we study the financial markets and read the books that influenced self made billionaires the most, we keep you informed and prepared for the unexpected. All right. Welcome to the investors podcast. I'm your host Preston pysche and as usual McCumber by my co host stick broder Sohn. And today we are joined with legendary investor mister Howard marks. Mr. marks welcome to the show. Thank you very much pleasure to be here with you. So Howard you have a brand new book titled mastering the market cycle. And in your book you start off with an excellent example that talks about the importance of understanding risk and probabilities. The demonstrate this idea. You talk about a jar of black and white balls, and I just love this example that you provided. And I was wondering if you could share this idea with our audience. My first premise in investing is that we never know what's gonna happen. We don't know what events will unfold. We don't know how the market will react to those the future. In all regards is a probability distribution, the best investors. I don't know what's going to, but they understand the possibly vents and they can reasonably assign them probabilities and your future as an investor in anything at anytime is similarly a matter of a probability distribution now that's not to say that distribution is always the same. One of the things that the book is about is that where we stand in the cycle, dominate the shaping of the probability distribution. If we're high in the Beykal, if psychology and prices are elevated, then the probability distribution just to the left, it becomes harder to make money and easier to lose money. And the expected outcome is less good. If we're low in the cycle, prices in psychology are depressed than the probability distribution just to the right and it's easier to make money. So I compare it as you say to say, a bowl. Fulla balls or lottery, and you're gonna pick one. That's the outcome from a bowl that contains many, those are the possibilities. So it sounds like an uncertain process. But if you vote the skill, if you understand what's going on and what the ramifications are, then you can say, well, now I know there are a lot of good balls in the bowl, not too many bad ones to distribution of possibilities. It's favorable. I'm going to invest heavily and I'm going to be aggressive. If it another time you understand that the cycle is precarious. You might say now I think there are not too many good balls in the ball only bad balls. I'm gonna take some ships off the table and invest more defensively in both cases. You don't know what's going to happen, but I think it obviously essential to understand how the probability distribution shifts. The distribution of balls. In the poll there will still only be one chosen, and there will be uncertainty and randomness associated with that's using. But that doesn't mean we can't know something about what's going on. One of the reasons why Preston and I and really the the show, the suspect fans of yours is that in value investing, but typically do not talk too much about macro and cycles. I mean is almost seems like it's a curse word here. We look at it differently and we know that you do too. So I'm curious if anything happened to you in your career and personal career, perhaps in some of the early years that led you to the opinion that you should understand the market cycles and it needs to be a part of your all analysis. Sure. The summer marked my fiftieth anniversary. I started with equities after ten years. I shifted to high yield bonds and convertibles, and in first time I was doing research in the second. Dan, I was managing money and then twenty years in in eighty eight. I was joined by my partner co-founder of oaktree, Bruce Karsh and we set about organizing or what I think was the first distressed debt fund from the mainstream financial. And we organized fund in eighty eight. And then in ninety, we had a sense that the elbows of the eighties had been over levered and we're precarious and the economy might falter. And so we raised a very large fund and the ability to Ed more capital if what we thought would materialize did, and it did that fund was much larger than the first one and invested very aggressively and headed extremely high unlevered return. And then we saw that the economy improved and the credit window reopened and. And became easy to borrow again, companies were doing well and the incidents of distress massively subsided in the mid nineties. There was again very little to do. So we contracted the size of our funds and we invested more carefully and we had to be more creative. And then of course in, oh one, oh two. We had the Bella com meltdown and we had an Ron scandals and we again had economic weakness and we again invested aggressively things got so good that we quickly liquidated one or two funds didn't raise a fund. You know, three raised much smaller funds in four, zero five, but then found ourselves on the first day of seven on what we thought was the doorstep with another opportunity. Now where we raised the biggest fund in history, eleven billion. So the point is after twenty years in which I had a sense that the environment was stable. In fact, if didn't change very much from sixty eight eighty eight in terms of the impact on me, I started to live with and be highly affected by these cyclical swings adapted to them and profited from them greatly every once in a while we'd have a big fun in distress moment that was with a high return. Then we'd go through some years of quiet when we did small funds that had low returns. And so my life came cyclical and that's when and how I gained the appreciation that I have now Howard for many people that are listening to the show, their number one question might be, you know, where we at today in the current credit cycle, I would assume that the approach that a lot of people might take to understand where we're at in a credit cycle would be to start with a narrative and then go back in history and study what was happening in that period of time to see if it looked similar. So let me give you an example. If someone thought today that we were to market high, maybe they'd go back to two thousand seven and look for clues and see whether it's similar to what we're experiencing right now. So my question for you is, is that a good idea or is that really a bad approach? First of all, one of the main themes in the book may be the main unifying theme is the Mark Twain attributed quote. History does not repeat itself, but it does rhyme and the cycles that we talk about are never the same from one to the next, the speed that the ration- the amplitude, the reasons the features effects are always different from one cycle to another. You'll never find to. They're exactly the same, but we look for analogy in order to understand patterns so that we can know what happened in the past and prepare for what might happen in the future. I just put out a memo last week entitled the seven worst where. It's in the world. And for a credit investor, which is what we are at Oakey seven. Worst words in the world are who much money chasing too few deals. I wrote a memo in February, oh seven, two entitled the race to the bottom. I felt there was too much money chasing too few deals, which has very dilatory effect on prospective returns and on safety. And of course memo was to have been roughly right, and I feel that in many ways, the current environment is also now who that period and reflects that theme and in the memo. You know, I've talked about what's going on in the markets. Nobody wants to invest in the bay for markets which pay one or two or three percent. And so the money is crowding into smaller wrist markets that people hope we'll pay six or eight or ten. But with the effect that I described of forcing up prices down, yields of risk down safety. I think the analogy is here now it doesn't hold in. Every detail and I go to lanes new memo to say, I'm not saying we're in a bubble is not a repeatable second in that regard. And I'm not going people. They should be out of the market, but I believe that people should behave with caution today because of the race to the bottom that I think is going on. How is it different from most? We'll first of all the banks are not nearly as levered as they were. So they're unlikely to get into systemic trouble and require a bailout, which panics the whole system. The building block for the, oh, seven events were subprime mortgages and mortgage backed securities, and there is no analogue to that today. There is nothing out there today, which is as massive in scale. And also though I'll say fraudulent. So the analogy is good as to the race to bottom, but not good in my opinion. As to bubble crash, one of the value investors that we follow him on the podcast that is send you back, she and he talks about stress adjusted returns. So it's not only about embracing that volatility is just as mud's limit good life while you managing your portfolio. I'm curious if that way of thinking is also playable for you, you managing so much money on behalf of not just yourself, but also clients, and it might seem that be are at the peak of the market cycle. Do you look to war stress, adjusted returns, or I looking to optimize returns? How do you see that trade off? Perhaps if there's even is a trade off. Last several years we've been operating when romance move forward of with caution. I reached the conclusion some years back and I still feel the same, although little so that the outlook is not so bad on prices are not so high that we have to go to maximum defense as we did in, let's say, oh six. On the other hand, the prices are not so good. The outlook is not so good that we should be aggressive. And so we're trying to balance investing with defense and also be, but stay in the game when I came up with that mattress some years back and that moment's since there were times when you might have said, you know, this is scary market. I wanna take some ships off the table going to cash virtually at any point in time in the last ten years would have been a mistake so move forward. But with caution means to us, we're investing, we invest every day. We are endeavouring to be fully invested. Other than funds, which have specific reserve components, but we are investing with caution. And since we consider ourselves cautious firm, that means more cautious than usual, one way. See that. That we haven't grown are a UM our assets under management in about five years, we changed our accounting this year to reflect twenty percent of double lines assets where we own twenty percent of the company. But other than that accounting Jane, we haven't really expanded our business in five years, not because we couldn't, but because we think this is not a time that warrants banding the business we try to do what would I just said. We try to expand when we're in the propitious part of the cycle and not expand when we're in the or even contract. As we have at times when we're in precarious part, I think I should mention a little bit about something. You touched on this question about whether what I call cycle positioning what other people might call market timing has any place for value investor, and you know, clearly Warren and Charlie don't time. Markets as far as we know. And you know, the goal is to buy into good situations, hopefully at good prices and hold for the long run, and that is absolutely the right thing to go. But the question is, if that is your underlying theme, and if you do that then and you enhance the results by also thinking about the faculty, I think he can, and frankly, not everybody is in the same position as Berkshire with regard to permanence both the permanence of capital in the permanence of jobs. And I wrote a foreword for a book called the Warren Buffett way, and I described the things that I think make Warren born the last one of which is that he's not worried about losing his job, and that's a blessing people who are in the business commercially of running money or people who might lose their nerve and sell out at the bottom, which is an amount of losing your job. If you're managing your. Money, they can't ignore it. And if the market's going to go through an upcycle for many years, they wanna be part of it. If it's gonna go to downcycle, they might like to not bear the full brunt. So thinks that the two can be integrated. We are value investors like retry who impetus up when the time is right and cool it off when the times, right. So Howard, when we look at the ten year treasury for the last thirty years, we can see that rates were as high as sixteen seventeen percent or something like that back in nineteen Eighty-one and they've progressively gone down since whenever I think about Warren and Charlie and one of their main engines for reading cash inside of their company. It's gyco in the insurance industry in general. When you look at the mall on why that has been such a great model is because they've got a huge float that they can invest. But what happens when interest rates assuming that this trend that we've seen for the last thirty years and that same. Central banks when they get any kind of trouble. It seems like QE is the tool of choice, and we know that when you use QE the impact on bonds is that the prices go higher in the yields go down. So if that's the case and we start pegging our interest rates at zero percent is the insurance industry become a big risk at that point because the only thing you can buy with a lot of this capital on a lot of this float or bonds at our yielding nothing. I'm kind of curious just to hear your opinion on that. That's really a high level question. That's it. Sixty four dollar question. Going back to what twain said his. He doesn't repeat. You have to accept the ability of events of the future to depart from the ability on the events of the pet. And you describe at a thirty six year blow is since I would say eighty two in which interest rates essentially have gone down now, arguably they stopped going. Down about four years ago, but they're still awful low. So we went from a so-called normal environment to a high return environment as a result of the inflation of the seventies and eighties. And then we went through this period of compression of heels, and as you say ten year, but when from I think fourteen or sixteen to one and a half, and you can't overstate the salutary of that on asset. Directly when interest rates go down bond prices go up and old outstanding bond of an old interest rate becomes more valuable in a new environment in which contemporary rates are lower. That's a direct impact. You take any income producing asset data company stock or a piece of real estate and either in fact, or implicitly, we value these things on discounted cash flow. We take the cash flows of the future. We discount them back to the president and we figure out what the thing is worth and clearly the discount rate changes. You discount the given stream future cash flows at a low interest at a high interest rate. You get a low value and when discounted at a lower interest rate, you get a higher value. And that happened and Huey and the interest rate cuts. And all of the stimulus measures had the effect to respond to the global financial crisis had the effect of hitting savers and hitting people living on on their income from their portfolios, and it. May cause asset appreciation and it helps people who owned assets and these things. The incremental impact of that is in the past rates cut down zero and today there too. But you know, I have a piece of paper on my wall from slip. I had from the Bank in eighty two with the interest rate of three quarters over prime. And I have slipped from the Bank saying the rate on your loan is now twenty two hundred quarters more recently I borrowed money at two and change, so that's not gonna happen again because we are at low levels businesses that he pens on income and insurance is the prime one. Don't have the opportunities today that they did then is today the ten years at three a business which is modelled on investing float. Is just not as good, no doubt about it. Of course. If you can go into businesses today, which pencil out based on the return on flow three and rates go up to fix, maybe it'd be back in the chips again in the years just before the crisis. All the money I had in the world. It wasn't at oak tree was in treasuries of one, two, three, four, five, six year through each already, the ladder portfolio. The dumbest form of investing noted man. No, it's perfectly happy because I had total safety totally quantity and the yield in the fixes. And of course today that portfolio would yield in the twos and it's very different story. The interesting question is would go back to fix something. That's the million dollar question. That's the billion dollar question Gordon. Yes. And clearly the world is a very mysterious place in that regard it we can't predict the economy. We can't predict inflation. If six was right for that environment, shouldn't we had to go back to six now, but you know. Who would bet there is money that the five-year will yield six and I feel the bed and the central banks of the world did something in the global financial crisis by taking their balance sheet up to twenty odd trillion. Tripling or quadrupling their balance sheets. They did something that had never been done before, and now they're at least the fed is in the process of unwinding. And in Europe, they're gonna stop, QE and Sunday. They'll unwind, I believe. You can't say, you know how it's going to go. You can theorize Howard. One of the things that we talk a lot about on our show with respect to where we're at in the credit cycle is the bond yield curve. And we've seen since the cycle that we've been going through, you know if you're calling the bottom of the last one, two thousand nine summer of two thousand nine was the bottom, and we've seen this huge upturn in the market specifically talking about the equity market. We have been looking at the bond yield curve because typically when the bond yield curve goes flat starts to go inverted and you're starting to see a top. So that's one of the main metrics that I've personally used, whether that's a good metric or not. But it's something that I pay very close attention to in what we've seen recently is that the bond yield curve is really starting to flatten itself out. It's definitely not inverted at this point, but it's flatten excel file. I'm kind of curious to hear your thoughts on the bond yield curve is being one of those metrics kind of gauge where you're at in a credit cycle, and then. Maybe some other really critical variables that you would assign to kind of giving yourself an idea where you're at in the cycle for the most part on not given to technical indicators of that nature. The flat yield curve or inverted yield curve certainly seems to have been coincident with recessions in the past, but I'm not sure of the quality and if I'm not sure the cause -ality it can't be too convinced that it's always going to be the case. It's not the main thing I look. I tend to look more at things that are internal to the markets like valuation and behavioral. As I said, taking the temperature, our people thinking, how are they acting? What are their attitudes? You know when people are fearless and unconcerned about risk and risk tolerance, and greedy, and confidence and credulous bad things happen. They paid too much for securities, they overlook risk. They bid to highly late, forget to demand risk premiums. If it gets it demand protective covenants and so forth, and prices go too high when people are fearful and exceptionally risk averse and skeptical pessimistic and so forth, and they demand high risk premium, and even good companies can't get money and they insist on wrong covenants and deals go, begging. And that's the climate I want to invest in. That's what I watch for. And so far it has worked back in Tober of, oh eight, which for us investors in credit with pretty much the low point in terms of prices were very low, and you could buy huge quantities from entities that were melting down. I noted ext. Stream negativism and I wrote a memo called the limits to negativism. And I said that one of our main jobs as investors skeptical somebody comes in and he says, I've managed money for thirty years and I've made ten percent a year between a range of nine to eleven. I'd never had it down month. Your job is to say, you know what? That's too good to be true. Mr. Mehta. But if somebody comes in and says, I tell the story in the book, the world is ending and you posit some assumptions and you show that even under those conservative assumptions, the portfolio was still do well. And that person says, no, I think if it'd be worse than that, and so you posit a more conservative and they say it could be worse than that and you positive with mold terrorism, they say, no, if could be more at some point you have to say, no, that's too bad to be. And that's what we will see in in the fall of, oh, a postman, and it's all you have to know there was only pessimism and no option. Let's take a quick break and hear from today sponsor. Has your company outgrown QuickBooks are shared spreadsheets manual processes in legacy systems costing you time and money will now is the time the move, your business to the cloud, introducing net suite by oracle, the business. 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You can only be a good investor and deal with the future. If you think probabilistically and to say it could happen is not to say it will happen or that it has a reasonable chance of happening. We have to think in terms of probability distributions and assign odds and have a sense or what the future distribution looks like and how it shifts. So if you look at the current cycle and perhaps the cyclists been longer than most of us expected, you have a wealth of experience here Howard, but I'm still curious, have you learn anything new from this cycle that didn't know before? Well, I would postulate now we're into the ninth year of recovery and. The ninth year of bull market. Historically, there's never been a recovery that went more than ten years. So I think one thing we all learned is that history can be violated. They say, sports records are made to be broken and one of the things when people deal with cycles and they put out rules like this has to happen if two years and this can only go for years. And this happened when the market rises and presenting twenty or thirty percent, I reject all rules. That's the part that does not repeat. It affects the probabilities, but I absolutely reject rule based investing when we got the history. So that's an important lesson. I think we've learned another important lessons than this recovery because for a long time, this has been the slowest recovery in history. Everybody kind of spared about that. I believe. Leave. What I've learned is that a slow recovery, all things being equal, has a better chance of being a long recovery because the slowness of the recovery, he just that expresses are not being he aided and it is from excesses on the upside that the need or a downward turn comes. Our our locked to talk more about the reflections that you have, what really less for you that you didn't know before, like Azure typing up all the experiences you have and was passing in onto the next generation of of investors. Did you have any role in piece of lead is great question. He goes a good answer. I had an outline and I think you know, most authors probably haven't hotline, and I knew which trapped her as a right. I was gonna write, what is the cycle and do they recur and talk about the economic cycle and the corporate profits. I go in the wing in psychology, and then the credit cycle and on and on. And as I was writing, one of the real reasons that I love to write is because I think things of new things as I write that I hadn't thought of before, and I'm a real believer in the importance of risk aversion in the market, and the market is only make sense if investors. Risk-averse as I was writing the chapter on psychology. I realized that risk aversion is such an important element in understanding markets and their potential that it deserved a chapter of its own in. So I added a chapter called the cycle in attitudes towards risk that and the credit cycle are probably the two most influential and most volatile and most important. How are people thinking about risk? And frankly, the way I feel it in the good times when everything's going smoothly, what do people say? They say risk is my friend, the more risk I take the more money I'm gonna make. So I'm gonna MAC, Todd, my risk I've actually told had people tell me that they're not gonna hire oak tree or a given assignment because they want to maximize risk and they know they can't do it without that with oak tree. But people say risk is my friend, the more. You take the more I'm gonna make and by the way, I don't see any worry about. That's how they think or speak. In the good times. You wanna get the hell out of the market. And if everybody says, never bear risk. Again, it's risk bearing is a big mistake, then you wanna get in and it's rather simple. Now, knowing what's going on is not always so simple and doing what I think is called for and be very difficult. It's uncomfortable to be a buyer when everybody else is seller for the simple reason that the reasons that motivate everybody else assail will bear on you as well. When I was finishing my last book, I had lunch with Charlie monger, and at the end when I got up to go, he said, just remembered. None of this meant to be easy and anybody who thinks this easy stupid and I never want to portray. That it's easy who come to correct superior conclusions and implement them when it's pretty clear what we must do. Pretty clear what wants to Dave Swenson, who runs the endowment Yale as a fantastic job road investment management by which I think he means superior investment requires the adoption of uncomfortably idiosyncratic physicians. First of all, the hurt is usually wrong. Secondly, if you do the same as the heard, you can't expect to outperform the hurt that doesn't make anything to be superior investor. You have to figure out what the hurt is doing, why the hurt is wrong, and do the opposite. And by definition that has to be uncomfortable now it can be satisfactory intellectually, but it's rare for it to be easy emotionally. And I think that understanding the attitude toward risk was a revelation to me as I wrote the book. And as I say, I think it's one of the most important chapters Howard we can't even begin to thank you for taking time out of your day to chat with us. You had mentioned in the interview, the letters that you write, Stig and I are both on your Email list received these letters. These letters are gold folks. We will have a Lincoln our show notes for you to sign up on his Email list for these letters that he puts out there and they are absolutely gold. The name of the book is mastering the market. Cycle, getting the odds on your side by Howard marks Stig his read the entire book about halfway through the book, and I'll tell you what this thing is. Awesome. As you can see the thoughtfulness just here in Howard respond to some of the questions. This is what the book is completely filled with an stick and I aren't probably the best endorsement, but here's an endorsement for you. Ray value says, Howard marks mastering the market cycles a must read. Charlie Munger says, I've always said there's no better teacher than history. Determining the future. Howard's book tells us how to learn from history and thus get better ideas of what the future holds. So Howard. Thank you so much seriously. This was just incredible. We are big fans. We've been big fans for quite a few years and is just an honor to talk to you. Well, it's been a great pleasure to respond to your questions. Thank you for having thank you Howard leisure. All right guys, that was all the pressed on I had for this week's episode of the podcast beseech again next week. Thanks for listening to CIP through access the show notes, horses, or forums Goto the investors podcasts dot com to get your questions played on the show, go to ask the investors dot com and win a free subscription to any of our courses on academy. This show is for entertainment purposes only before making investment decisions. Consult a professional. This show is copyrighted by the TI network. Written permission must be granted before syndication or rebroadcasting.

Howard marks Mark Twain Bank Preston pysche Warren Buffett Mr Howard mister Howard Mr. Marx Beykal broder Sohn Charlie Munger Europe Charlie
Read_506 - Pumping Iron [Arthur Hayes]

Bitcoin Audible

1:31:18 hr | 3 weeks ago

Read_506 - Pumping Iron [Arthur Hayes]

"Policymakers late between printing money which causes inflation and raising rates which causes asset losses and or a financial crisis. Forty years of this back and forth has resulted in almost twenty trillion dollars in zero or negative yield government and corporate debt the lowest interest rates in the last five thousand years and the most amount of global dead ever in human civilization. Today we hit. Arthur hayes is pumping iron. This is big audible along What is up guys. We have got a great one today. Welcome welcome back. I'm welcome to the significant influx of new listeners. We've had in the past couple of weeks. It has been rather remarkable to be honest. Thank you and join us. We have a great time over here. Don't forget to subscribe. Because i am putting out the best reads guys takes and chats with some of the some serious big winners all the time Near daily at this point. And i am your host guys swung the guy who's read more about bitcoin than anyone else you know. Welcome to the show before we get into another amazing piece by arthur hayes. Who also did choose your fiction. Which reread on the show. And this one is only absolutely insane macro environment. We find ourselves in. I think is a good backdrop for the conversation. We just recently had with preston pysche and this talks about how to position yourself to make it through to the other side of this thing but real quick spoke about where wallets the best way to hold your own keys and are awesome sponsor. Shift crypto has a great little beast for you open source very simple setup and i've gotten this feedback from so many listeners. Now who agreed that it. They couldn't believe how clean the whole process was. And of course it just looks good the bit box. Ot to bitcoin only or mosey asset. I'm a big fan of bitcoin. Only obviously Bit box co. To check them out at guys swan dot com slash bit box and the box. Where you wanna send your automatic withdrawals from your automatic. Bitcoin savings account with swan. Bitcoin dot com slash guy. Don't trade don't fight the algorithms don't fuss about to buy bitcoin just auto stack whatever you can afford every week month or every day. Let swan do it for you. Hassle-free send it to your cold storage automatically set it once and it just runs. Check them both out at guy swan with two wins dot com and with that. Let's get into today's read and eighties titled pumping iron by arthur hays disclaimer. Any views expressed in the below are the personal views of the author and should not form the basis for making investment decisions more nor be construed as a recommendation or advice to engage investment transactions. I used to be an amateur bodybuilder. Sometimes friends who haven't seen me since university remark it. How skinny. I am twice a day. Workouts in protein shakes were my life during university. Bonus points for anyone who can locate photos from the annual mr and mrs pin competitions from two thousand and five to two thousand and eight. The photos used to be on the internet. But i can't find them anymore. The barbell investment strategy resonates uniquely with my past. It consists of constructing a portfolio comprised of beta to participate in the upside and volatility hedges that compensate and eclipse losses on the downside. This strategy is the simple output of missing nicholas. Celebs musings about anti fragility and engineering a life that exhibits positive convicts city managing to find cheap. Convection city is quite difficult. You might happen upon it by chance. Only to have your vega disappear as time tiptoes forward. This is why entrusting a portion of your wealth to a skilled convective fund manager is wise. I found such a fund and the man in charge is a veteran. og trader. Every time. I sit down for coffee with him. I feel like. I'm getting bashed over the head with knowledge i usually have to go home and brush up on my option greeks to fully unpack the knowledge. He dropped vanna and volga where terms. I recently googled after. I got home from our latest meeting. He is plugged into all the major dealing desks and see structures that most retail and institutional investors will never witness tells me quote we by what the banks are selling. The best part is sell side. Traders don't really care about the long term implications of the options structures they price because of an annual bonus cycle if the bank blows up years down the line because a flawed pricing. It doesn't matter since they got paid cash money. Years prior this allows savvy volatility funds to buy long dated structures. That are fundamentally priced. But everybody wins so the dance continues in this world of central bank largesse all institutional money managers are grasping desperately for low risk yield therefore banks sell insurance and pension funds structured products with embedded options to enhance yield. The client is always selling volatility. The banks then have to recycle this so they offload complex structures sophisticated volatility funds. I routinely meet up with the fund manager to chat about his view on the markets this sojourn to the financial fringes always leads to talking about the ways in which central bank policy is distorting the financial markets and society itself he is steeped in our ages economic cannon. As one of his university professors was the us treasury secretary. Janet yellen he formerly rejects. Most economic. cannon is poppycock but his understanding of how the plumbing works allows him to purchase the right long tail hedges. Let them eat cake quote in two thousand twenty one. Inflation is coming. This statement is now common knowledge. Everybody knows that everybody knows that inflation will rise this year and into the future as such. What will the market decide is the asset that everybody should buy to protect their portfolios. From the ravages of inflation. I came into the meeting with the fund manager determined to find the answer after our our long conversation it clicked when he said arthur. You have the perfect bar. Bell portfolio for this age long crypto via my interest in one hundred x and long interest rate volatility via my fund. I wish i had met you five years ago. We talked about bitcoin for half the meeting. I asked him if he owned any and he said nobody tells all his clients. They should own it to him. It is the purest expression of inflation. Because it is the one asset class that central banks are not directly or indirectly managing through their policy mandate the next few thousand words will unpack our conversation and at the end of this essay. I hope you come away with the following one. The crypto currency complex led by. Bitcoin is the best hedge against hyperinflation. Because it presides outside of the mainstream financial system even the best performing traditional asset will never eclipsed the returns of the crypto complex during a period of inflation simply because all assets in the mainstream financial system are manipulated by central banks. So that they do. Not output the correct inflationary warning signals. To if policymakers decide to try to avoid the endgame of hyper inflation which has historically always been war and or revolution they will raise policy rates to push real interest rates into positive territory that will crush asset values including crypto. In this scenario you want to be long. Government bond interest rates usually via interest rate swap. Sion's both scenarios are extreme and the actions of global policymakers must be extreme due to the indigenous risk built up in the post world war. Two bretton woods petrodollar financial system. There will be no muddle through. It's either or and subsequently a violent whip saul between the two modalities a false geon bargain. Our government fiat petrodollar system began in nineteen seventy one when tricky dick aka president. Nixon ended the bretton woods system by removing the. Usda convertibility with gold then u. s. and. saudi arabia agreed that if saudi priced all oil in dollars the american military would protect the monarchy other opec nations followed suit. Such that oil could only be bought and sold with usd forcing all other nations to convert to usd on a massive scale in order to participate in what was arguably the most important market in the world. The time the petro dollar was born allowing the us to retain its dominance as the world's global reserve without having to be pegged to gold unconstrained by the straitjacket of gold standard. All currencies. Were suddenly floating against one another with no hard money anchor. All types of monetary folly became possible scale unprecedented in the history of human civilization with a newfound ability to set short and long term interest rates at the extremes. Central bankers of the major economies embarked on a journey to artificially control business cycles every time the economy wobbled the fed and its peers cut rates. They never let the system completely reset by forcing losses on those who profited in the boom the long e. c. d. government bond has been one of the best risk adjusted trades ever since the early nineteen eighties just about every financial titan. We worship today acted a strategy that essentially levered up on long government bonds and rode them onto a one hundred meter mega yacht. Risk parody is a prime example every time equity volatility spikes. I love her up on government bonds. You can call me. Ray dallaglio and i'll see you at burning man at ten esplanade. The two thousand and nineteen routes stage was lit. Thank you bridgewater. Latin debt crisis dropout rates to save the western banks from dodgy loans made to central and south america. us s. savings and loan crisis drop rates and guaranteed bank deposits in snl institutions that committed fraud in some cases with how they managed company and depositor funds russian debt crisis in asia debt crisis drop rates to save western banks and hedge funds from dollar loans made to russia and southeast asia subprime mortgage crisis drop rates to save the financial system from over investment in us prime mortgage credit twenty twelve euro crisis drop rates to save a politically created union with a common currency. But not a common government super. Mario said he will do whatever it takes and he meant it. Corzine was a bit too early in the trade. Sorry for your loss in global investors two thousand and thirteen taper tantrum. The fed chairman bernanke. He tried to take the punch bowl. Away via signaling. That in the future the fed would allow its balance sheet to naturally shrink as bonds matured the lack of a constant flow of future welcome caused yields to spike and the fed subsequently walked back such inflammatory language and covid nineteen drop rates and monetize government deficits to fiscal support the economy which government shutdown in an attempt to halt the spread of covid in many cases these frequent financial crises were themselves caused by central bankers raising rates to normalize or beat off uncomfortably. High inflation or financial asset appreciation raising rates causes a crisis where the remedy is to drop rates lower than before therefore while all these crises were painful. They never drove any meaningful changes on how we approach the management of our economies in the solution to each just sowed the seeds for the next financial. Flare-up policymakers oscillate between printing money which causes inflation and raising rates which causes asset losses. Andorra financial crisis forty years of this back and forth has resulted in almost twenty trillion dollars in zero or negative yield government and corporate debt the lowest interest rates in the last five thousand years and the most amount of global dead ever in human civilization the inflation barbell at one extreme print money to lower rates so that can be repaid with debased money. This supports asset prices which supports a high debt load those with financial assets benefit at the other extreme raise rates which in turn depresses asset values causing debtor's default enforcing them to hand their assets to creditors these assets fall in value toward their fundamental ability to generate cash flow. Those earning wages benefit as their labor can buy more real and financial assets. Previously policymakers could operate in the belly of the barbell. They didn't have to print excessive amounts of money nor was the act of raising rates slightly so debilitating however the current situation does not afford our high clergy the luxury of being able to tweak around the edges considered this in order to stave off the economic ravages of it and bring usd borrowing costs lower the us federal reserve has injected approximately three trillion dollars into the economy via quantitative easing to funded this effort. It has expanded its fiscal deficit to levels not seen since world war one or world war two and the big problem with using debt to stimulate the economy is you need ever increasing amounts of it to generate the same level of output. It wouldn't be so bad if the world entered cove with a low debt. Load but heading into quarter one. Twenty twenty global government debt to gdp was at its highest in human history if the fed were to raise rates at all it would inflict staggering losses on bond portfolio's worldwide when real rates. Go from nothing to even one hundred basis points. Higher negative convey exit destroys bondholders. That is why raising rates is the nuclear option. Instead they go with the palatable feel good option which is to continue piling on debt in the hopes that some transformational technological breakthrough allows productivity and output to accelerate so quickly as to expunge the crushing debt. Load the stated policy goal of the fed is to limit inflation two percent annually. One dollar loses half of its value after only thirty five years of two percent annual inflation for a young entrant into the workforce two percent inflation means your savings need to return fifty percent just to stand still over your working life. That's not hard to do. If a bank depositor fiat government bond yields in excess of two percent. But they do not. You are now forced to speculate in the quote fair free and open financial markets q. Everyone up there. Robin hood e. trade schwab app. If this is considered good inflation imagine how destructive even slightly higher levels are when you buy a bond with zero or negative yield to maturity. The only way you don't blow up is if central banks take rates even more negative as i mentioned earlier. The endgame of rampant inflation is always wore and or revolution. Show me a regime change. I will show you inflation when you work your ass off only to stand still or get poor any ism that promises affordable food and shelter for the unwashed masses will reign supreme. If you are starving to death nothing else matters except feeding your family. The symptoms of inflation are populism social strife food riots. high and rising financial asset prices and income. Inequality policymakers know that if they engineering inflation that is too rapid they will find themselves underneath the guillotine. So they're only hope is to move back to the other side of the barbell. I e raising rates before bloodshed begins fighting inflation. Our masters at the marriner. Eccles building told the world in no uncertain terms that they are willing for inflation to run quote. Hot in order to in their minds rebuild. The american economy i focus exclusively on the fed because every other central bank is subservient to them since the fed controls the global reserve currency heuristic in this time of monetary inflation did your portfolio appreciate at or above the increase in the broad money supply in into if not you underperformed. Us to expanded twenty five percent in two thousand twenty. Take a hard look at your portfolio. Did you or the fee charging flunky managing your money generate a return greater than twenty five percent with the threat of hyperinflation on the horizon. Your job as a steward of your own others. Capital is very simple. Find a way to store financial wealth today that will allow you to outpace inflation and purchase energy tomorrow rattigan carter a new favorite financial blogger of mine wrote an excellent essay ample liquidity and productive assets which expounds on money's energy purchasing power. The first law of thermodynamics is not a suggestion. Energy is not created nor is it destroyed it only changes shape. Our entire civilization is built upon the use of dense sources of potential energy to create goods and services. We take this energy and we turn it into food shelter transportation and entertainment on a universal scale. All energy that ever was or will be is already in existence as we move from potential stored to kinetic energy in action there is exhaust the lesser the waste the more productive. Our civilization becomes burning. Wood is less efficient than burning hydrocarbons which is less efficient than nuclear energy as a steward of personal capital. We must save in financial terms. In order to exchange for real goods. Saving real goods cannot be done at a personal level and it is extremely risky. A thought experiment. It's nine thousand. Nine hundred and coal is the densest form of energy known for industrial applications. Coal powers all the amazing inventions of this current industrial revolution. You decide to take all of your savings and own coal directly in the shed out back you a pit filled with coal and now believe your energy needs are secure in the future you believe regardless of any monetary inflation your coal holdings will allow you and your family to experience a constant quality of life. Vis-a-vis your energy consumption then oil is discovered in quantities that allow it to be used industrially. Kohl's societal value declines. It's still useful but it's way less efficient than oil. Therefore it's price versus financial assets declines. You are now actually poor because while you are long. A form of potential energy you are short human technological innovation. It is sub optimal to attempt to pick a winner amongst physical potential stores of energy potential. Energy is also expensive and difficult to store. In nonindustrial quantities it is better to accumulate a financial asset or monetary instrument that will stay constant or rise in its value versus the dominant form of potential. Energy gold has been quote money for almost the entirety of human civilization and while the most important current exchange rate may be financial asset or monetary instruments value versus a barrel of oil. Over the ten thousand years of human civilization. we have moved from animal to would to coal to oil to nuclear and renewable forms of energy historically saving in gold versus saving physical raw. Energy is a safer bed. But that doesn't mean. Gold is necessarily the best that as investors our goal is very simple but difficult to achieve construct a portfolio of assets that will benefit disproportionately as global fiat liquidity created by central bank money printing washes into them. This is a common knowledge game. What does everyone else believe. Everyone else believes retains value the degree to which an asset class captures the narrative is based on liquidity scarcity and transaction costs invest wisely and you can maintain or increase. Your standard of life against the rising fiat costs of energy invest poorly and the road to serfdom is real find yourself working harder for a declining standard of living and your fiat and assets will not be able to keep up with rising fiat cost of energy which asset. Let's do a quick tour. Around the major asset classes. I will evaluate them on liquidity scarcity transaction costs stunks for the long run. I didn't have a high enough. Gpa to attend jeremy siegel class at warton however his fame lives on in my memory. Liquidity a minus stocks are liquid. Each major economy has a domestic stock market and the us market can be accessed by most retail investors in some way scarcity be stocks are semi scarce tesla ee lawn can and does routinely decide to increase the float and dumped shares on the market as the stock price rises this continuous dilution at the discretion of management presents a risk to investors transaction costs a minus trading stocks is free quote unquote in some cases and another's carries low transaction costs. If the product is free you are the product. That's neither good nor bad. Just the truth at a macro level trading stocks is cheap. And we'll get cheaper with the explosion of digital finance verdict be plus stocks. Tick all the boxes so the question becomes which ones to buy. Every era has a sector. that is hot. Being hot means that investors suspend fundamental cash flow analysis in buy into the story. Tesla is the epitome of this and our current tesla is worth more than all other auto companies combined even though it produces an extremely small fraction of global cars each year it does not have positive unit cost economics on cars it produces when government subsidies are stripped away accompanied. That makes no money and depends on government largess to continue its operation has made its founder one of the richest men in the world. This is a story stock. Investors believe in some future that is so amazing it renders cash flow analysis moot all stocks trade on multiple to something the market cares about sometimes it sales cashflow active users etc. Each industry has its defining multiple that the market expects management to deliver on multiple. Expansion is when belief trump's reality if my results are constant but my stock price against those results increases equity holders benefit if my results are constant but my value against those results decreases equity holders suffer back to tesla if tesla's starts making money but it's multiple to ebitda or earnings before interest taxes depreciation and amortization declines stockholders lose money therefore as stocks or a sector switches from story driven to being judged on their fundamental cashflows multiples compress an equity holders are punished for the inflation minded investor. This is sub optimal. You want to invest in one or a few assets that just go up. Based on liquidity scarcity and transaction cost terms worrying about the price to value metric is hard to do over a long period of time. You can entrust your money to successful stock pickers but not everyone is deep value. The name of the game is beta to inflation. Why pay to twenty for. Beta stocks are very narrative sensitive asset class where the narrative is not constant across the entire universe of securities. I would put stocks as a top choice to hold value in a very inflationary environment. The buyer beware not all stocks can withstand the ravages of inflation in fact a recent piece by charles gov and dj dr say called inflation and the stock market called into question the belief that any stocks perform well in inflationary environments. I haven't had a chance to fully digest this piece but it's first glance. The authors provide compelling statistics that point to the total amount of excess returns for the s. and p. five hundred was driven by appreciation in disinflationary periods rather than inflationary or deflationary periods. I highlight to show that even my view that the broad index can perform well during inflationary periods might be erroneous. You can do better. real estate. Never goes down. Every time i hear this i cringe inside but it is to be expected. Shelter is an essential human need. As long as there are humans there will be a need for shelter. This is why intrinsically everyone gets. Why real estate holds value. Liquidity a c. Real estate is not liquid buying property in most jurisdictions takes between one to three months to close every property is different. There is no standardization or homogeneity of apartments in the same development therefore everyone can own the same type of unit which destroys fungibility scarcity. A plus real estate is scarce. They ain't making more land. This is especially true. If you focus on urban areas zoning laws restrict what can be developed and how this creates scarcity at a local level transaction costs d. It is extremely expensive to trade real estate property agents in most markets. Earn percentage points of commission once you factor in taxes commissions and legal fees can cost ten to thirty percent round trip to buy and sell a piece of property. We are trying to preserve wealth for energy consumption in the future. Not pay economic rent to the government lawyers and agents verdict c. Plus the good thing about real estate is that it has real cash flow. Either someone in theory could pay your rent or you could use it yourself. The bad thing is that it is really hard to put a lot of money to work in real estate quickly at the small investment scale. You don't get much diversification if you can only afford to invest in one piece of property you have to stomach a lot of local idiosyncratic risk endemic to its physical location that may or may not correlate global liquidity conditions. Energy is priced on a global scale at the margin not local fixed income. The problem with fixed income is in the name itself fixed. The returns are predetermined was not known is the level of inflation. That should be used to discount. Future cash flows abban that trades at fifty with one hundred par offers way more kentucky than bond that trades at one hundred with one hundred par liquidity a plus bonds are extremely liquid government bonds with the most liquid financial assets globally they trade trillions of dollars per day it is so easy to deploy capital into bonds and that is why it is hard for large asset managers to stray too far away from some fixed income allocation scarcity f bonds are not scarce well highly positively yielding ones are scarce but debt levels are at the highest level in history the more debt a government company issues. The harder is to pay back that debt in less cash flows accelerate quickly transaction costs be trading bonds is free or very expensive depending on the issue were. If you're trading government bonds. The transaction costs are very low if you were trading corporate bonds. The spreads are wide markets. Opaque just how the banks want to be verdict see bonds hate inflation so them is suicide at this end of the barbell. All that glitters are. We're about halfway through. Let's take a quick break. Hit the sponsor. And i gotta get something to drink and we'll be right back seriously. Are you still letting someone else hold your keys. That's not cool. Yo you gotta understand that. Keeps you a level zero bitcoin colloquially known as the pores that bitcoin is just an iou. Until you've got it on your bid box if this is a serious savings account you want for the long term. You're holding bitcoin to protect yourself. And as a way to invest in future the easiest way to jump pass level want to go straight to a level two at true bitcoin. Hodler is the big box. A secure personal cold storage while it. Hold your keys the big box. Oh two is the ticket. Bonus points if you get the bitcoin only version. That's the one i got. I use it. And i have tons of other people. Tell me how seamless the setup process was and the desktop app is super minimal and yet it's very powerful. Check them out at my referral guys. Swan dot com slash. Bit box. takes you straight to their site and offer code guy. Gui gets you. Five percent off plus shift. Kripo has a bunch of other really cool tools for safe. Backups tamper proof. Bags and other storage and things to check out on their store again. Check them out at guy swan dot com slash bid box. All that glitters. Now we move into the forms of money that may or may not stand the test of time in my twenty twenty peace. Choose your fiction available in audio at big when audible dot com. I laid out my view of the three types of money. Fiction plus physical violence government fiat fiction plus physical scarcity gold fiction plus digital scarcity. Bitcoin and crypto currencies debasing the domestic currency is the easiest option for government that cannot deliver productivity an economic growth to its subjects. That is the implicit assumption throughout this essay. Therefore i will not give a grade to any fiat. Currency they all trade relative to each government's willingness and ability to debase its currency to achieve mercantilist outcomes that is namely i want to devalue my currency so my export sector achieves global prominence that way my domestic industry is competitive profitable and hopefully wages at the lower end are sufficient to engender the middle class to my form of government. We humans believe in the fiction of gold it is shiny beautiful when handled by skilled craftspeople and holds its value versus dominant. Form of energy full disclosure. I myself am a gold bug. I owned the barbaric relic in the physical form and shares of gold miners liquidity be. I have traveled to many cities worldwide. And there is always a section of city where gold is traded. There's always someone willing to exchange something value for gold. The problem with gold is it is heavy in small quantities. This weight is immaterial. But as you start to hold large quantities of gold it becomes unwieldy to transport it also attracts a lot of attention. How funny is it that we spend energy to dig it out of the ground energy to lock it up safely an energy to transport it to the market. The paper markets are quite liquid but paper. Gold is just a trading vehicle. Etf's futures bank passbooks etc are gold derivatives. They are not the metal itself. If you really believe gold is money. You must own. the physical. Every other trading product is some financial actors liability and if the system is inherently unstable their promises will be found null and void in a time of crisis. Scarcity. a minus. A geologist can give an approximate figure for the total amount of gold contained in the earth's crust. We know how much is on earth. But what about in the cosmos at the rate space. Travel is being commercialized. It is not ridiculous to imagine. A gold discovery on the moon is stable asteroid in earth orbit that would dramatically change the supply. Marring extraterrestrial discoveries. Gold is sufficiently scarce to earn a high grade many have tried to create the philosopher's stone. None have yet succeeded. Transaction costs be if you own a few coins bars were pieces of jewelry. It is quite expensive to buy and sell gold. You pay up to ten percent in terms of by sell spread to acquire and dispose of your gold. This is not ideal if the goal is to one day exchange gold for energy in larger sizes. Gold spreads are tight. But what will cost. You is transport depending on where the gold comes from and goes to. It is not a trivial cost. That is the reason why central banks have historically stored their gold in one or more trusted money centers. London new york shanghai hong kong and singapore are some of the large trading hubs verdict. Be plus. Gold has history on its side. however it's physical weight is a drag on. Its usefulness rat poison squared. Warren buffett is an excellent trader. So i won't hold his comments about bitcoin against him. He's a pro at saying one thing but investing in another give him time he will see the light he used. Wmd's also known as derivatives adeptly when he bailed out goldman sachs in the two thousand eight grade financial crisis and took his pound of flesh in the form of warrants. Hypocrite is too harsh a term for such a smooth market operator. Bitcoin is fiction plus digital scarcity. The supply is fixed via open source code with prominent hedge fund managers corporate chieftains and pension fund administrators beginning to dip their toes into the market the narrative surrounding it has shifted massively. Find me a client willing to pay commissions to trade. Bitcoin and i will find you an investment bank with bitcoin. Reading people think banks hate bitcoin. No they hate one. A form of money or financial asset escapes their ability to re hypothecated and or charge commissions to trade. It it is also likely not the existential threat to banks. Some people think it is the extinction level event for commercial banks is not bitcoin or any other private digital asset. It is their domestic government allowing the populace to hold accounts directly with the central bank using a central bank digital currency or cdc stay tuned for my essay on this topic. Now the commercial banks clients believe. Bitcoin will protect their wealth from inflation. Every major sell side macro research analyst has a piece on it spoiler alert. They all think the price will appreciate markedly their arguments. Allow more beta chasing institutional money managers to justify purchasing it. They likely aren't wrong either. With bond yields at the zero bound fixed income is the worst thing. Money managers can own so they will have to rotate out of fixed income. Where market market losses are assured into something else. This will be the most important source of flows and commissions this decade. Watch out for academic papers deriding the balanced sixty forty equity versus bond balanced portfolio. That fixed income slice will get pushed lower and that will unlock trillions of dollars of fiat. That needs to find a home in one or more of the financial and monetary instruments described in this essay and the last important fact about bitcoin in the crypto ecosystem is that the vast majority of it is owned by individuals not central or commercial banks to my knowledge no government treasury central or commercial bank holds bitcoin on its balance sheet that means it cannot be sacrificed on the altar of credit which subsumes an asset into the financial firmament in which we operate liquidity. Be some friends of mine. Who worked for major crypto desks talk about the scarcity of physical the largest net sellers. Right now are minors everyone else huddling. This is the moment. The ecosystem has been waiting for since two thousand seventeen. Those who had to sell sold already a good metric monitor is the number of wallets from which nothing has moved in the last year and their percentage ownership of the total bitcoin float if that percentage is increasing it means less supply is available for sale and if it is falling more supply is available for sale another similarly interesting metric reported by glass. Node is the amount of bitcoin leaving exchanges. A sensibly to private wallets to be handled. All of this hoarding is great for your mark to market fiat value more fiat chasing dwindling supply leads to pump city but for those looking to put billions to work it will be expensive. There is simply not enough supply at this market cap to accumulate the trillions that will be printed in the coming decade. Either you believed. the price. Appreciation creates a positive feedback loop that encourages money managers to disregard the difficulty in putting on size and just yellow. Or you believe this will dissuade money managers from allocating a sufficient amount of capital forcing them to continue acting as marginal buyers that push up the last traded price remember. It's about the flow not the stock. The marginal buyer sets the last price. Not those who bought before. I firmly believe liquidity will expand as interest in the space increases while crypto on a macro level is the least liquid assets described in this essay. The market is ten plus years old and billions of dollars per day already trade across the various major exchanges and over the counter scarcity. a plus. There is no way to change the supply cap in less the network which now spans millions of self interested participants decides amongst itself to alter it the beauty of bitcoin. Is that if you bought it for. Its twenty million supply cap. Why would you vote to debase yourself. Could it happen. Technically would he be economic suicide for all participants in the ecosystem. Yup transaction costs be plus at a retail level trading cheap but still more expensive than trading stocks or government bonds. However it more than compensates for the higher cost by removing the need for relying on intermediaries to move value you simply pay the prevailing Per bite and no matter the day time or year you can transfer value from a to. B there are no centralized gatekeepers trading or transferring in the of the items described above require the friendly assistance of banks brokers lawyers and or security guards. They don't dance. No more they make money move as the. Oj's said all the time they wanna take your place the backstabbers backstabbers they smile in your face all the time. They wanna take your place. The backstabbers backstabbers verdict a minus. Bitcoin is the only monetary instrument that trades in a completely free market. Even if you nuke all the exchanges. Bitcoin can still be traded and transferred amongst global citizens. Its price is the markets. True reflection of the inflationary nature of the policies enacted at this end of the inflation barbell rising rates. What happens if inflation gets too hot and central banks must raise rates to a territory where real interest rates are positive financial armageddon. If it's so bad why would they inflict pain upon wealthy financial asset holders because the alternative is that the rabble rise up align themselves with a leader or system. That will forcibly. Remove wealth from those who prospered in the ancient regime. Therefore in the best interest of maintaining the social order some losses must be inflicted upon those who hold financial assets. The feds stated goal is two percent inflation. Let's assume they achieve that. And they hold the ten year bond at one percent interest that means real rates are negative one percent at that point bondholders are essentially paying the government for the privilege of lending money. Which naturally no one wants to do one way to monitor current real rates which are absolutely essential to churning out your investment strategy is to compare government bond yields against nominal gdp growth currently nominal usd government bond yields are rising but if nominal gdp is growing at a pace greater than the interest rate of the ten year bond. Real rates are still negative if nominal. Gdp growth is lower than the ten year. Real rates are positive as of market opened today. The us ten year treasury yield is one point four seven percent and given reflation expectations on the back of the covid vaccine rollout 2021 nominal gdp is expected to be well in excess of one point five percent so real rates are currently negative turning back to our example scenario of two percent inflation in one percent. Ten year bond yields. Let's assume that the fed recognizes the danger posed by negative real rates of negative one percent and freaks out engineering the interest rate of ten year bonds from one to two percent to match inflation and push real rates back to zero percent. Now let's evaluate what happens to the assets informs of money described above following that rate hike. Stunks i know funder mental. Don't matter but they do. Eventually the reason why investors can buy big tech even with anemic or negative. Beata is because money is cheap if you can crystallize gains in a story stock and then plow money into positively real yielding government bonds. That's a slam. Dunk the rotation out of growth into real yielding. Fixed income securities will be frenetic if the fed ever raises real rates above zero if you ever studied corporate finance or worked as an investment banking analyst. You should be able to build a discounted cash flow or dcf model. A stock should eventually pay a dividend. And therefore you can discount dividend payouts to the present and arrive at the value for a stock in any dcfs model. You forecast earnings out to appoint. Then you assume a terminal value a short equation terminal free cash flow times parenthesis one plus the terminal free cash flow growth rate divided by the weighted average cost of capital minus the terminal free cash flow. Growth rate equals its terminal value now. This sounds like a lot. But it's basically an equation complicated sounding way of establishing that we need to compare expected future earnings against the cost of the capital it takes to make those earnings or reality and as that changes over time it changes the expected. Value of the company are trump back in. Let's just look at the terminal value of a stock that has a hundred dollars earnings that will grow at two percent per year forever with a w. acc or weighted average cost of capital of five percent. It comes out to three thousand four hundred dollars. Remember that accompanies wac. C or cost of capital is a calculation of its cost of capital across all of its sources of capital including debt. Which has its interest rate dictated by the interest rate of government bonds. So if this company's w acc was five percent prior to the feds. One percent rakite. It is now six percent. Let's see what happens to the terminal value of a stock. It's now two thousand five hundred and fifty dollars the stock. That was worth three thousand. Four hundred dollars is now worth two thousand five hundred fifty eight twenty five percent drop caused by just a one percent rise in the cost of capital that is negative convict city as the stock price fell faster than the rise in the wac see bad news bears and it gets worse if the wac started at a lower level meaning. The spread to growth was tighter. Your initial value is higher but you're percent losses are greater. Let's plug in an initial three percent. Wac to the same stock before the one percent rate hike. Its ten thousand two hundred dollars after the one percent rate hike. Its five thousand. One hundred dollars at a three percent cost of capital. The terminal stock price is ten thousand two hundred and at a four percent driven by the rate hike. The stock price falls to five thousand one hundred stock price negative fifty percent w a c c plus one war such returns you deserve that. Two percent management fee if you buy an asset where funding costs are already depressed. The negative convict that results from a modest one percent rate hike is massive buying overvalued stocks because of a depressed a discount rate is great as long as more liquidity follows your purchase to keep the price high and rising that will persist as long as rates are low but if interest rates rise even modestly. Your losses will be magnificent real estate. The biggest real estate sector is residential. Most people buy their home with government or bank provided leverage the us has the largest mortgage market in the world. Let's look at a standard thirty year fixed rate amortizing mortgage. You have a constant payment over the next thirty years will pay off the principal plus interest. I will not go into the math but if you used the amortization functions on accel you can replicate my figures. The price of person can pay for a house depends on the affordability of the mortgage payment assume. The median family can afford to pay four hundred and twenty two dollars per month on a mortgage assume. They take out a thirty year mortgage with monthly payments at a fixed interest rate of three percent. That means they can afford to buy a one hundred thousand dollar house now. The rate rises to four percent. The median family can still afford to pay four hundred twenty two dollars per month but the rate increase means they can only afford to buy a house worth eighty eight thousand three hundred nine dollars. The rate rose one percent and now they can afford a twelve percent less has given the notional value of properties so large relative wages. Real estate is very sensitive to financing. If an asset cannot be financed. The price of the asset must be lowered so that the monthly payment is affordable in the simple market illustrated above the price of the median. House must fall twelve percent in unlevered terms so the median family can still afford it. Given most deals are done with some sort of financing levered losses on real estate portfolios will be substantial should interest rates rise fixed income as with most things in life bond returns are path dependent if you buy a bond in a low rate regime where we currently find ourselves your losses will be exponentially greater for any small move higher interest rates. This is why any asset manager with the fixed income allocation expresses. Nine tremors the mandate says take new capital and purchase currently low yielding bonds if rates rise. They are doomed. Allow me to straight keeping it simple. Let's value the fair price of a ten year. Bond issued before the rate hike. The face value of the bond is a thousand bucks. The coupon is two percent per annum and the risk free rate is one percent the present value as a percentage of face value is one hundred and nine point four seven percent. The fed raises the rate by one to two percent. Now this ten year bonds price drops to one hundred percent rates rose by one percent but the bond price dropped by almost ten percent negative complexity strikes again. Let's use the same numbers but instead the starting discount rate is five percent and rates rise one percent to six percent the bond price drops from seventy six point eight three to seventy point five six for a loss of approximately six point three percent for a one percent rise in interest rates. The complexity is still negative. But less so as i said earlier. Large asset managers with large fixed income allocation will take profit after a forty year bull market and deploy those trillions of dollars pounds euros francs etc into equities real estate precious metals crypto or anything else the establishment beliefs performs. Well in an inflationary environment. The math couldn't illustrate the ruin of fixed income investing at the zero bound of risk free rates. Any more clearly gold gold has no income is the common refrain from haters wallet. True the price of gold also tracks nicely against the ebb and flow of real rates of the global reserve currency simply put. Gold is a good hedge when real rates are negative but when they turned positive. Gold gets the stick. If i can easily earn a positive real return on my fiat. I don't need to save in gold. My income from investing in low risk positively yielding fixed income assets covers. The rising fiat cost of energy. The last mega gold bubble was during the nineteen seventies stagflation airy period where the cost of energy oil in real terms. Skyrocketed fed chairman volcker came in with the inflation hammer and raised short-term rates well above ten percent to depress inflation expectations gold subsequently crashed and is still below. Its inflation adjusted peak in the late nineteen seventies bitcoin. The value of bitcoin is digital hard money. That rides on its own transmission network. It has value both from fiat. Liquidity escaping inflation and the market's imputed value of the non aligned. Decentralized payments and communications network bitcoins value equals liquidity preference plus perceived technological value. I do not have a model for an estimate of the ratio between the two but at a high level if global fiat liquidity can earn a real return again in government bonds. It will exit. Bitcoin in crypto. The whole point of this exercise is to preserve or grow purchasing power against energy if that can be done in the most liquid asset government bonds then liquidity will take the easy option. The amount of remaining technological value is beyond my skills to estimate however it is much lower than the current fiat price of bitcoin. Today go long interest rates. It sounds so easy but it is so difficult. As outlined above the majority of financial and monetary instruments respond positively falling interest rates not rising ones. Who is a price. Insensitive seller of interest rate volatility by law many super pension and insurance funds must invest in fixed income. The yields are low so the funds sell interest rate options to banks to enhance the yield. The banks then turn around and sell these options to sophisticated volatility funds because the distortions in the interest rate markets are so large since every central banks stated policy is yield compression in the search for inflation these interest rate options soi options trade extremely cheaply the. Pm told me about large bond deal that was sold entirely to taiwanese insurance companies. The embedded bermudan options allowed him to buy one year by thirty year swap for a basis point on one hundred million of us devotional. A few percentage points rise in rates yields several million dollar payouts. Ship them in. Also the value at risk models are based on a flawed gaussian normal distribution which underestimates the tails and thus under prices risk therefore stomach small consistent losses. Massive payouts are possible when the system adjust to a rising rate environment again. This is to lead one a one. All his books are a must read. Great conceptually it makes sense however as a retail or even high net worth individual. You cannot buy these exotic. I have an is data with a major dealer. I get face ripped on otc options. However there are many instances for the bank will refuse to me a price. Even if i'm willing to cross the spread this why if you're able to invest in volatility funds it explicitly invest entail risks. Do it it solves neatly this side of the inflation barbell. If you can't options on eurodollar interest rate futures or put options on government bond. Etf's might be another way to benefit. Usually if we're in policymakers decide to raise rates. It's really quite simple. The imbalances inherent in the post world war two usd bretton woods and petrodollar regime can only be fixed at the extremes. The easy option is to keep real rates. Negative inflate the debt away. But for how long can this be done before. Those who do not hold enough financial assets revolt in the face of high and rising energy costs. If the societal discount crescendo to an unbearable. Level policymakers must change course that change will be to raise rates so that real rates are positive given the market believes that central bankers have solved. The business cycle a rate hike will be cataclysmic in terms of los as across the financial system. Is it better to have your head on your shoulders or another one thousand points. Higher on s and p five hundred build a portfolio of long crypto plus long interest rate volatility walkaway and watch the fireworks and again this one was by arthur hays from a bit mix and as i Put in a little aside as we read through it The choose your fiction article that he wrote some time ago is also available at audible dot com on just a search in library. It's there. I'll have it in the show as well should be relatively easy to find but One of the things one of the takeaways from this piece That just in general ninety. I mean he's great and he details it really well in this piece but just that people do not understand is how unique. Our financial situation is in history on. He's got a line in fact. It'll be the one that i put at. The beginning of this episode probably says forty years of this back and forth talking about raising. i mean. excuse me. Lowering rates trying to ease them Just a little bit too stein To to slow down inflation and then the subsequent lowering of rates in pumping in more debt in order to prop and continues the thing To to flatten out these business cycles and give the perception of all of this growth. So that's the forty years. The forty years of this back and forth resulted in almost twenty trillion dollars in zero or negative yield government and corporate debt the lowest interest rates in the last five thousand years and the most amount of global debt ever in human civilisation. Trying to figure out how all of this unravels is. I mean like he says you know hedge and watch the fireworks Because we have a horrible monetary foundation And basically the only option is one horrific extreme or another horrific extreme And as he says hyperinflation on a hyperinflation means death of a country it means revolution. It means war period. That's that's how it goes I don't think there is a single one in history. That are at least that. I can think of and you know he says in this piece you know you show me like you know. Terrible inflation or hyperinflation. I'll show you war in a revolution and it's obviously perfectly clear that populism social unrest That that was the other thing in fact. I actually tweeted that out on earlier. Today was Whereas the symptoms of inflation are populism social strife food riots high and rising financial asset prices and income inequality. I mean really aside from the food riots. Dance what what better way to describe. Last couple of years of this country held last decade or two. we don't have easy times ahead But again some of the very interesting things that could unfold in this transition And and i find it interesting. Really the The two positions basically here right long. Bitcoin crypto ends long. the volatility of interest rates. It's very easy to see back in two thousand nineteen before The crisis hit and it was clear that the financial markets are already basically cracking. We're about to explode back in this. Just after the summer it was actually like september of that year on overnight rates jumped from like one percent to ten percent it was just a huge liquidity crisis and the fed had to dump to a billion dollars or something like that into the market in a matter of hours just to suppress those interest rates. Because like you said he he details out and this is a perfect way to show the exaggerated losses that come from Basically goods in markets like in things that simply thrive because the interest rate is low in the lower the interest rate is more of they are benefiting from a discounted rate like a one percent. You know loans or something like that. That is making the cost of capital for somebody. Like tesla or uber or amazon. Some company that doesn't even make may not even make profit at all really or has incredibly minimal profit the fact that they have that incredibly low cost of capital is what makes them which is what boost their value so greatly and the more they are benefiting from that discount cost the greater their valuation is hit and he has this like simple simple model. That i'm sure sounds obnoxious in on an audio but the the simple idea is just that if you account for the difference in their growth rate versus the difference in their future cost of capital Take those rights into account and you have huge swings on the low end like a difference between ten percent and eleven percent cost of capital isn't very big. Might be two to three percent or something like that of the stock valuation. But when you're talking about going down to zero percent one percent rates for accessing capital and bumping that up one percent. You're talking about huge. Huge differences in the premium on these companies says the stock market's would implode like he's he's not wrong what they would literally implode like be financial armageddon. That's that is literally the mechanism by which the entire prices of all of these things have been propped up. I mean just look at look at the crash that happened back in march of two thousand twenty march of last year on and subsequently with bitcoin. Right same thing happened with bitcoin. Because of the demand the need for on basically liquidity in very short order to not get completely wiped out but everything everything took a massive hit with. Just you know minor ships in the the minor but you get the idea like the fact that there is. We are sitting that fragile in the financial markets. So many things to take a hit but that's kind of the beauty of bitcoin and I guess crypto sense just the the nature of the beast is that this thing is held entirely outside of the financial markets. But this is why one are talking with preston. This is this is why even that potential risk of If interest rates rise substantially so that they basically cut their own foot off to save their face Did it just to stop inflation into stop. What would potentially be a revolution in the country or across the modern world. Really even if they do that I think short term would hit any speculative asset anything that is seen as a hedge against the garbage yield that is across the financial space in across bonds. I can't help but wonder. I'm very very curious how it plays out if they can establish can establish real interest rates. 'cause that's kind of the beauty of it is that bitcoin is a free market. It's rates are real. It's not stuck within some paper. Credit market or a liability of some large institution. That's controlling the the trading. It's it's free flowing on its own transmission network and in doing so and is global obviously there's markets everywhere so arbitrage between any potential credit market or paper market that does attempt to manipulate bitcoin. Arbitraging across that to a market in bitcoin in taiwan or russia or south america somewhere the is legitimate and does have the proper rates becomes incredibly valuable and it really screws up the ability e even for big players to start manipulating the market. They eventually get outpaced. By the fact that this is global and all they can do is influence a single jurisdiction. That's even if they manage to do it at all. When is an asset that explicitly. People are holding themselves. He points out in. This is the the vast majority of those holding and working in are buying in bitcoin. In having it on their quote reserves are individuals it's not governments banks or central banks. The very people who are used to pulling all the reins but remember. Bitcoin is a basis for a new financial system. It has its own derivatives. It has its own market it will build its own board unquote risk free rates. The lightning network is a payment network. It pays returns in bitcoin. The establishment of its own basically financial language in a sense it will allocate better than whatever the government or central bank does in trying to correct the disastrous that they have caused. Bitcoin will be more efficient alligator because it is a market allah cater where they are a central alligator. It's a very simple assessment of real prices versus price controls. Real prices are going to do better period and on the context of a technological value. I don't really know that feels like an improper terminology. Maybe you know. What would you say. The technological value of tcp ip. As if you're just looking at t like what does that mean. Right is the value of an open permission list communications network. This is an open permission. List monetary network everything that can't be built or isn't allowed or doesn't have the regulatory framework or is it can't be done. In less it's custodial or can't be done globally or can't be done because the cost of just being an authority in the legacy. Financial system is too expensive for it to even be economically viable. All of those things will be built on bitcoin. So i don't know if you call that technological value but bitcoin isn't simply an asset. It is a network and a communication language so while in short term volatility in interest rates i think can absolutely calls excessive volatility and depressed the price of bitcoin and the whole ecosystem. As a whole. I don't think there's a long-term bear case for bitcoin. That isn't shot. Fifty-six gets broken really if it's simply continues to be an open permission list network with a secure monetary policy a really. Don't think there's a solid bear case. The best would probably be excessive attempts at austerity and Extremely strict fiscal conservativeness from governments in central banks. Basically across the modern world allowing the entire stunk system to completely explode allowing housing market to completely implode obviously under the presupposition that we are preventing a revolution from happening. This is essentially their only mechanism at this point to retain the status quo power structure. But even then you're looking at systemic risk everywhere maybe you're holding a derivative that benefits from volatility but is your institution going to be there to fulfill that bill whose liability is are they even are they liquid are they solvent. Is your government and to talk about in the context that they're going to let interest rates rise. How the hell are they gonna afford it without inflation. They're going to pay. They're gonna pay their own interest. They're they're going to use the entire Tax revenue of the government just to pay interest and offered no services whatsoever again. We're in a situation where we have. The the largest amount of global debt ever in human civilization is the is the united states government just going to default or are they going to inflate their debt. Away are not. i don't know it's just it's crazy absolutely crazy And people just don't realize like the mainstream just has no idea that we're we're all sitting with our dangling legs off the edge of the grand canyon here and the government is legitimately talking about coming by just pushing everybody off wherever you're like taking selfies and pretend like everything's okay. I don't want to be anywhere near that. Even even in the context of i mean he's absolutely right in the context of long volatility long interest rate volatility because volatility. If it i mean excuse me interest rates if they move at all. They're gonna move big and they're going to move very fast. And then we saw the point. Eight eighty basis points rise on. I think that's right and somewhere around there but it was pretty quick rise in just a matter of few days very recently. We're talking about just a couple of weeks ago and this has huge effect the macro voices I think it was macro voices. Saved a save the thing of it in my notes to get back to you and listen to but it was an episode of of macro-financial podcast of some sort talking about how a fifty basis points increase was the entire cost of like the us navy and the marines just in interest rates or payments interest payments by four government debt so yeah interest rates could increase. But how does the government afford it. How does the government pay any of it. And when there are real interest rates developing and multi trillion dollar markets developing in an open global near friction. 'less financial system that will continue to grow in build all sorts of novel applications. The can't be built in any other context non-custodial lead for that matter. I don. I don't know it'll be the base of development it'll be the pace of the infrastructure build out and those things are critical And it will also be. It will also be bitcoin defining its own its own interests its own Cost of capital overtime. Which again like. I said numerous times very recently i think this is the most absolutely bullish and fundamentally important things that the bitcoin space can do and in doing that. And having strong futures and derivatives markets you can start writing secure long-term contracts the coin denominated you can basically hedge against a significant price volatility or purchasing power volatility in bitcoin and it makes a circular closed economy a section of the bitcoin ecosystem that never leaves bitcoin far more likely far easier. And has that friction drops it will grow. It will grow at an incredible pace so we'll see This was a really interesting piece though. I love the way everything was framed and giving everything grade and you know just a couple years ago you never would have thought that serious hedge funds in large capital managers in anything. Whatever if put bitcoin up against this framing right sitting at legitimately next to gold real estate government bonds. All of these. I think this is just the beginning of bitcoin coming into this space and the the sheer just short term growth potential in realizing that everyone should be treating it. This way is massive and when it when it truly enters that space and truly has the infrastructure to handle that level of market movement and that level of capital it's perfect scarcity and as ing utility as a monetary network only increases that feedback loop to make it orders of magnitude more valuable the way that i think about because he says in this piece actually is that if you can have a higher yield with government bonds with today's reserve currency which is government. Dawn's why would you be speculating. On bitcoin or crypto but i see something more fundamental has shifted with the existence of bitcoin and long term. This will be the predominant shift the predominant narrative the predominant fiction whatever you wanna call it. That makes bickering. The replacement for government bonds as the world reserve currency gold was a bearer asset. That did not work well in a virtual environment but works great as a monetary good and in a strictly physical environment when markets were physical when markets were always in person to some degree. Gold was by far the best money because it had the best monetary attributes in the best scarcity when we moved to a virtual economy gold simply became a liability in fact all of our assets because of digital environment and the the natural centralization of all digital goods and finance in the digital space even the quote unquote decentralized goods even though even the bearer assets like gold simply became a promise he says in this piece paper gold futures eased tips. All of these things are just promises. Money switch from being a bearer assets that had value in its own right to debts to credit and in that context if money became credit no matter what you used whether you used gold and silver or real estate or whatever it is coups. Got the best credit. What's the most trusted credit instrument. What is seen is the basis of that civilization the basis of that society. The government's the one that can always steal from its people to fulfil that debt. Because we were in a virtual environment all money even even things were goods with real value stocks equities. All of it became the debt. Became someone else's liability there for the most reliable promise becomes the most reliable money the global reserve currency in this context. And what was it after. World war two. Us dollars the united states liability and in general sense. It's not really changed from that even when it was back when it was backed by gold it was their liability to fulfil something physical. And now it's just a liability to fulfil a cost fulfilled the the citizens of the united states to pay it back and the productivity of the us economy their liability is that it will do well and therefore they can drain of resources to pay back the value of those bonds but something fundamental has changed with bitcoin because bitcoin is both virtual and a bearer asaid. It's nobody's liability. We're in an environment where he doesn't have to be money anymore. It was only that way because a virtual paper environment made it necessarily so so since everything was credit the best credit was the best money but now we have been digital bearer asset. We don't have to have credit anymore as our money and even better the asset itself is programmable so we can have a liability. It's backed up by actual signatures and is non-custodial allocated to somebody. A whitening channel is essentially my promise to have liquidity to someone else. But they don't have to trust me not to take their funds and i don't have to trust them in order to offer it up. Bitcoin settles that agreement per the contract with no custodian service without a financial service provider. And i just think this is the beginning this is. This is the first thing we figured out we can do with. T. cpi p right. I think we fundamentally change the nature of money and on a short term timeframe. You know five to ten years. These things are all incredibly important. What we read in this article. I think is still spot on. And it's the most important these are some of the biggest fundamentals and macro to be concerned about and consider when you're looking at our situation and when you look at monetary history. This is a big thing that we are going through. But i think bitcoin is equally is is near equal in the shift. That's happening between isn't just another goal. The cost less to move around. I think that should be taken into account regardless liquidity crisis interest rates spike. Whatever it is this. This is all bitcoin for me. I don't even want to touch the legacy system or be at risk to any systemic problems at that thing might have i derivatives derivatives that require some institution or bank to pay out. I'd somebody else can find a way to feel like they're safe in that environment but it scares the living crap out of me so anyway Just a really interesting perspective. I loved this piece Arthur hays such a good job with writing these up. And i'm very curious. He said there was going to be another article about. What was it crap. I don't remember. But i'm gonna be i'm gonna read it. I'm gonna read it. I don't know what it is even like. The topic was really interesting. When i was reading through this piece and i was like. Oh that's going to be cool but completely forgotten it. So there's that are. Don't forget to follow bit. Max and bit mix research Which is just their blog and some of the things they write up in the data they they have available is just really amazing. This is a great great resource. That i've had on and they also just recently wrote the blocksize wars which i have not gotten to yet but i am super super excited about because it's one of the most fascinating an interesting historical times in bitcoin That we've had. And i think it's super critical. That people understand how that unfolded and the major reasons. Why would that Let me go ahead and close this out. Even said i wasn't going to do a guys take this time but look how well that worked out real quick. I want to get to today's bitcoin resource and before we do a huge thank you. I've gotten a handful quite a few new patrons to this show. Thank you so much for donating. It really means so much to me that you guys just want to support my work and jump into the telegram and hang out with the rest of the audio knots so thank you all Who recently joined in everybody. Who's stuck with me through years of this show at this point on a huge. Thank you to swan. Bitcoin for the no nonsense automatic savings account at swan. Bitcoin dot com. Bitcoin savings account. Excuse me swan. Bitcoin dot com slash guy for some free sets. When you open up your account and then of course you're safe open source sleek and just good-looking easy to use hardware wallet. The bit box co. From shift crypto. don't buy from a realist retailer. Don't buy that mess on amazon. Get straight from shift crypto or you can use my link guy. Swollen dot com slash. Bit box almost off is right there on my website. Guys wanna come okay. So today's it resource and i've only just sts like signed up and gotten on this thing but i've had a number of people tell me that it's worked and it's awesome and i'm so excited to start using it so i'm just going to go ahead and throw it out there. Pay with moon dot com. It is a way to create a virtual visa card. The you can you can just create on the fly. You pay lightning network you pay with lightning network to create this thing and you can just do it for any amount you possibly want so i could just create a card. I could go up on amazon for. You'll buy a bunch of stuff in my car. At four seventy three dollars and forty seven cents and i can create a pay with moon visa card for seventy three dollars and forty seven cents and then use those car details at the checkout and be done. You know i was excited. Really excited about service. When i heard about it and strike was actually offering five percent back to us pay with moon on. I'm not even sure if they're still doing that on. But i didn't get the immediately to be able to jump on. I was just kinda like i was like. Oh that's really cool. And then i've had enough people. Tell me that they've used it. And it worked and that is awesome that just today i was like all right i got i got a down and do this but i haven't used it yet because Well i'm not. I stacks at i. Try not to spend if i can avoid it but I might be spending it on some amazon or something here. A little bit tonight and i might use strikes that i'm just using from a bank account but anyway pay with moon dot com definitely. Wanna check out our guys. Thank you so much for listening to bitcoin. audible. I will catch you next time. We have got many many more great reads and episodes and a couple of really really awesome conversations. That i think are coming very soon. So stay. tuned subscribe until until next time. Everybody take it easy. This has been a one eleven production. And you're listening to bitcoin. Audible on the crypto konami network.

fed arthur hayes tesla Bitcoin preston pysche arthur hays mrs pin us treasury Janet yellen Bell portfolio dick aka Ray dallaglio us
TIP308: Trend Following Investing w/ Niels Kaastrup Larsen (Business Podcast)

We Study Billionaires - The Investors Podcast

51:11 min | 9 months ago

TIP308: Trend Following Investing w/ Niels Kaastrup Larsen (Business Podcast)

"You're listening to Ip on today's show. We have a veteran of the finance industry Mr Neal's coast Larson Neal's has been part of the Hedge Fund Industry for more than twenty five years, and throughout that period of time, he's implemented a trend following approach to investing through this episode, we discussed the specifics of this style of investing and how it's so different than all the other styles we've ever covered in the past. So further ado here's our interview with Neil's. You're listening to the investors podcast. Well, we studied the financial markets and read the books that influenced self made billionaires. The most we keep you informed and prepared for the unexpected. Welcome to the a message podcast. I'm your host Bros and as always I'm here with my co host. Preston Pysche today, we also have Nielsen coastal blossomed with US Nelson. Thank you so much for joining us today. Thanks for having me great to be here. So, nils I wanted to start the episode off with a story that I think's very telling when it comes to today's topic of trading and trend following you're one of the few people who interviewed the famous commodities trader Richard Dennis, and to set the scene for the interview. Could you please tell the audience more `bout who retired Dennis and specifically the legendary story of his turtle's CERITA. Danny's am legendary futures trader who worked into Pizza of Chicago back in the. Nineteen seventies, nineteen eighties, and who reportedly turned a few thousand dollars in two two, hundred, million dollars over a decade or so. But what's really fascinating about? Dennis. Is that despite his own trading success he believe that what he did could be taught. Now so as you mentioned, Dennis is a trend follower, his approach to investing, which really means that he's looking for big breakout soul momentum in the price of rocket, and in his case he was trading futures. To identify potential big move up. Move Down and not only that he was assistant matic trend follow meaning that he had rules full. What would essentially constitute an entry point as well as an exit point of any of the traits now so he was also a firm believer that emotions are investors worst enemy and I think many of us will know that to be true and because he had overcome this fact by using a rules based approach, he believe that you could teach you to other people and. That you did not need to have any special background or skill in order to be successful as long as you could do one thing and that was follow the rules. So in one, thousand, nine, hundred, four, he established the first of two classes of students. I think there were like fifteen or twenty in each of these causes and they are the ones that became known the turtles and essentially he told them for two or three weeks I think some simple rules before. He would let them trade his capital initially using those rules and then later on they adapted and improved upon this old but to make a long story short I, mean the turtle project was a big success and Oh, the full year so that it ran my understanding is that the turtles did really well for Richard Dennis and actually early on in my own career I worked for perhaps the most successful turtle namely Jerry Parker and for those who listened today who are. Familiar with my own podcast, they will know that I've done mini episodes with Jerry. But also as you say, you not being one a few people who have had retired then is on the podcast but I think what made it really special was that he was joined by two of his original turtles. I'll finish this little turtles story by saying that there has been a lot of speculation surrounding the story because rich denise had a business partner back then call Bill Epcot And allegedly, they had different opinions about whether you were born a good trader or whether could be told kind of this nature versus nurture experiment. So for decades, I, lot of people talked about how they had made a bet and actually that this whole bed was inspired by the movie that came out, I think around the same time coal trading places with Eddie Murphy. But at least rich told me when I spoke with him that the ever was a bit and certainly it had nothing to do with any movie. And in fact, he shared that he thought of the experiment on a Sunday afternoon was drinking some Johnnie Walker. Black. So now, health you are talking about rules based in that this could be taught. Could you talk about whether the most successful trend followers changed their rules? If yes, how often talked to us about this idea of kind of changing the rules set because I would think that that's probably something you don't want to tinker with if you get something that's working. I mean, I think the best way of talking about this is maybe using a concrete example from the firm that I work for because at Don. Capsule we actually one of the oldest trend falling firms in the world having been around since nineteen seventy four. So you could say for sure that we've been through a number of different market cycles the challenge you have as a rule space manager is as you allude to I mean every time you make a change there is the risk that you are GonNa get the wrong so first and foremost I would say in our own case we very rarely make meaningful. To the system, and in fact I would go on to say that from nineteen seventy, four to about two, thousand and six. We didn't really make any major changes at toll. Returns were strong and let's call it that they came with a healthy dose of volatility but all kinds were okay with that. So there's very little reason to change something as you say, that was already working if it ain't broke, don't fix it. But what has led off to Saad evolving the strategy in the past twenty years or so was really the recognition that trend following it's a really hot strategy for most investors to hold onto because returns a lumpy which means that we tend to make money and very few months of the year and we tend to have more losing months winning months. But of course, the reason why it works is. that. When we do have strong performance, it's typically much more than the typical sort of losing month. We have now most investors frankly they prefer the steady return stream like pro-hunting. Beta. Produced until it was clear that it wasn't real return so I think there is a saying something along the lines that you not the seduction of safety is often more dangerous than the perception of uncertainty and I think that's really true when when it comes to investing. But to answer your question, we've made about three or four major to change is when we come across some really important discoveries and a lot of it has been to do with how we manage risk. And how we get out of traits because actually identifying a trend and I'm sure many of your listeners will know this. Identifying trend is not that hard frankly almost dude with the naked eye looking at a chart. Harder to figure out how much to risk on a trade and also in during the lifetime over trade should you change joy exposure and also you know when is the train coming to an end? So those two things in my opinion at least has always been the weakness of trampling all losses tend to happen when they're either no trends. And when there are big reversals in the markets. So we worked very hard to find ways to improve that because if we can improve on this, what you'll end up with is better risk adjusted returns. and. You could say that the journey weeping on at least is really to try and deliver trend following in a a package. I think a lot of people forget actually that. Investing in stocks, for example, is a kind of an eight percent return strategy, but with fifty percent plus drawdowns from time to time, and we really want to do better than that. But let me also stress that were very humble about the markets and we're still students of. Trend there's always ways to improve what we do and I think it was Leonardo Da Vinci that at least is quoted for saying that simplicity is the ultimate sophistication and that's really what we're trying to do create something that is simple but not too simple but that can handle the complexity of of global markets. It sounds to me like you somehow figured out a way to apply the Kelly criterion to the way that you're looking at the trends and saying, Hey, this is one that we need to put more money on our more position size on because the trend is so strong relative to these other investments is at a accurate characterization. I think that's a pretty characterization absolutely and I think the challenge is that as you say, you want to build confidence in your position to those things that turns out to be you know a really strong and long-lasting trend at the same time you want to be able to get out of those positions that obviously one to work from the beginning. But actually also when you have been in a trend for awhile and suddenly things change you WanNa get out quickly and I think the. The challenge we've had as trend follows is that the old style of trend following the original style of trend falling was to get in slowly and get out slowly that's kind of how it worked and so going back to my initial point about why we didn't change a lot from nineteen eighty-four to the early two thousands was the trends were pretty long and so that kind of timeframe worked really. Well in fact, we've done a study on all sides where we go back to nineteen. Ninety And we look at what would have been the absolute perfect timeframe in terms of what we call the look back period for all trend model and we look at each year to see. Whether, that would be twenty days, two hundred days all three hundred days really a wide range off on these. And what you sees that it changes dramatically from year to year. So just from recollection in nineteen ninety I think the best look back was only twenty days like three weeks to very short term. then. The next year was forty days, which is twice, and then in one, thousand, nine, hundred, ninety, two, it was two, hundred, sixty days, right. So you get this massive wide range of possibilities and one of the things we've done now firm, which is really hard to do I think something we cracked in around two thousand six. He's to completely systematize how like these timeframes inside the model. So that would say one of the game changes for us because we don't want to have any kind of discretion into the system as soon as you do that. You can forget about all your research and bacteria you have to trade what you test and test what trade is no in between but it is definitely a challenge and as you both of you know well, and your audience markets keep evolving I. Think this year we've seen that we've had the quickest selloff in history. So yeah, it's a continued process to a bowl. One of the things that we wanted to talk to you about is that one of the billionaires that we follow here on the show that is read W and we call it his thoughts, your multiple times on the podcast about the holy grail of investing, which is having fifteen on correlated acids because the idea is that you will provide the best risk to return radio. So. Have you on this show. Now, a thing is interesting because we haven't really been covering falling like that before. So how does trend fallen plane? So this thesis So I let me say that I actually really like the way Ray daily explains the benefit of diversification and how this can really be a game changer for portfolio. If as you said seek, you can find truly on correlated acids and this is where the trump stopped right because many of the so so-called alternative investment strategies that people have been told can be a hitch quote unquote when equities go down have shown to be much more correlated and especially during the time of crisis. So to answer your question, the reason why trend following on diversified portfolio of markets meaning both financials and commodities is so powerful to include in a portfolio of stocks and bonds is Because, generally, it's not correlated at whole with stocks and bonds in the long run. Sorry. I think of our own experience since nineteen, seventy, four hour correlation to the SNP is minus zero point zero five, which is essentially zero and that's ideally what you want. But what is important understand is that it doesn't mean that we have zero correlation all the time we can be positively correlated when stocks go up, we can be negatively correlated when they go down. So it's not a fixed correlation and the other thing that I have come to appreciate over the years is that the key thing to understand is that non correlation is probably more important than excess return. meaning that if you can find an asset that gives you a slightly bit of return, then your stock portfolio bought is highly correlated. It won't do as well as picking a non correlated acid even if he gave you a slightly lower return and I think this is quite counter intuitive to people speaking of this, I came across study a few years ago where the author had essentially created like a million random portfolios with different weights to traditional acids, but also including traveling. and. One of the things they tried was to across these one million rations was to see and. To trend falling off thirty percent would increase the overall portfolio risk adjusted return. and. Can you guess in how many cases of thirty percent allocation to trend falling improve the risk adjusted return in all one million portfolios? So this is obviously really interesting to me, and also at least from my experience I've never come across a white paper that suggests that adding trend falling to portfolio of stocks and bonds won't be beneficial in the long run A. so then to aunts Yo other part of your question that is you know so you. Have Diversification, your portfolio, which is really important. But what about that abyss vacation inside the trend falling portfolio? How does that play into it and I would say that that is equally important. In fact, I would say it's vital because a lot of people think that the secret sauce to trend following is the rule where to buy where to sell. But frankly a lot of people unfortunately end up saying, okay. I'll just do trend falling on my stock portfolio. But turned falling on a single sector or single market may not work for a long period of time. The secret is that you traded on many truly different market. So in our case, we have commodities like grains and entities and medals, and meet some soft. In order to deliver these attractive returns. Now, here's the downside to this, and that is the challenge many managers come across, and that is if you want to grow your business really big then. At some point, the smaller markets, these commodity markets, which are the least correlated in your portfolio, become too small for you to have a meaningful allocation to them, and if you're tempted to kind of overstate your capacity to build your assets, then actually your returns most likely will be Loa over time and that I think has hurt our industry to some extent. The other thing which is super interesting, which is something that also came across recently because of what's happened this year. When you go back and you look at crisis periods and you look at your portfolio and you look at various different sickness that you have in your portfolio and we all think about crisis as equity market crisis and I think very tempting for people to believe that because trend follows can go long and short that we can make a lot of money from the short side inequities when they have like a thirty five percent Giorgio. But actually what you find is that the most consistent performing sector going through all of the crisis we've had in the last forty or fifty years is commodities. And this is of caught because there are a lot of things happening when you go into a crisis, right? and. So that kind of diversification is is really interesting and just to maybe take one step aside from this and something that I noticed just in the news this week. Manono this is obviously near and dear to your hearts and. And that someone like Warren Buffett I'm not an expert in Warren Buffett but to me, he's always stood of someone who kind of argued for diversification he invested in many different businesses. It's et CETERA. But I noticed because the success of apple recently that right now he has like a forty three percent exposure and he's portfolio to apple. So I think it's just an interesting point because you do need to find the sweet spot between doubles vacation conviction. So. I'm not saying that you can't end up with from time to time you know a large exposure in a certain sector for sure but it also is. So you know, for example, when I'm meet investors who come up to me and say, Oh, great you know I have an allocation to trend falling portfolio, and of course a that's fantastic. But. Then you learn later on that it's like two or three percent and that kind of you know it kind of sinks your heart because you know that it's not enough to make a meaningful impact on the portfolio as a whole. So it's a lot of different things to take into account. So now's you had mentioned earlier that done capital was founded back in nineteen seventy four. So what I find interesting is many younger generations are pulling data from the past and trying to develop whatever their model is you've been doing it with real data. So what does your data show about trend following since nineteen seventy four and I'm very curious what your thoughts are on about the last three or four years compared to the nineteen seventy four to now time period because I think what we're seeing in the last couple years just from a performance standpoint seems like it's kind of a standout. You're absolutely right I mean there's definitely benefits of having a forty five year track record vessel drawbacks as well because we tend to have had drawdowns along the way which people who just look at bacteria performance never show but the most important thing I find from having been around that long is that you have this real experience and experience from really some hard learned lessons that you can use in your research. One of the things you learn when you go through difficult times is, of course, act to one of your earlier points. You know the temptation of changing your model when you're losing money is very high, but it could be devastating if you did. So I think really experience is important. So to answer your question, the Tiber trend falling that we do have stood our clients very well I would say, and actually I just want to add one thing and which I think is important from for context point of view, and that is when we talk about all clients we really look at them as partners in this journey, and we demonstrate that by never having charged management fee for all services. So we actually only make money when we make money for clients and we think that's the fairest way to treat investors now but this is important because it. Informs US in terms of how our research should be done. But let me be a little bit vacant because of regulation I'm not really allowed to say how we've done unfortunately. But of course, if your listeners would go to our website and created themselves, they can see all data bought what a can say and I think this is relevant to answer a question. We have eight three really big improvements are two major improvement I would say over this period. So in two thousand six, we made a big improvement and in two thousand thirteen, we made a big improvement. and. So what I often like to do when we think about you know have returned change because everybody remember the seventies and the eighties and the nineties and think about certainty all world those being much much better than in the last ten years or so. So when I look at those three different periods, so you have thirty five year, you have a fourteen year period and you have a seven year period if I look at our annualized returns that. Identity and so this is important for two reasons. One is that at mentioned, a lot of people have complained about performance in the last decade or so because of the central banks and how they have manipulated, the markets are trying to control the markets. Now, I would say that it has not been easy and I will say the last five years has. Not, been great. But you know again, if we go back seven years actually all returns a pretty much the same as we've seen in the last thirty, five years. So that's one thing that's important. But the other thing that's from our point of view that we focus on is okay. So if we delivered the same level of return since two, thousand thirteen. have. We done that through research with better drawdowns with less volatility in the fact is yes. So the journey we started in trying to deliver this in the more appetizing way by making these improvements is is really turning out to being delivered to the investors but not in terms of more performance but actually in terms of same performance but less volatility, which is something that people generally tend to light. Let's take a quick break and hear from today sponsor. 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So you can either go to one of their multiple showrooms all across North America or better yet in the comfort of your own living room I chose the latter and with the help of my wife and Inner Chino's east to use videos we send in Chino the measurements four suit that fits me perfectly. Now, I already received the sued and I and more importantly my wife simply love the quality. Right now, get an extra thirty dollars off any purchase of three, hundred, ninety, nine, a more at Indochino dot com when entering investors at checkout plus shipping is free. That's Indochino DOT COM. The Promo Code Investors for thirty dollars off your total purchase of three, hundred, ninety nine dollars or more Indochino made for you. All right back to the show. One thing that's also interesting about the track record that you have nails is that very few people and contrary have been doing trend following when interest rates have going up and we're in this interesting point in interest exile today. But let's not forget that there were going up until nineteen eighty one and then actually been going down since that's a longtime trend. So how is trend following different different types of interest rates cycles. Would you look at trend falling returns us you say, most firms haven't been around that long. So they have generally all of them been trading through a period of falling interest rates and there's no doubt if you look at the attribution of return from the C. T. as in general, a lot of it in recent years have come from the fixed income sector. short-term into Straits and bonds. But as you rightly said, I mean we have D. traded through a period of rising interest rate I. think it was like Nineteen, seventy, six to nineteen, eighty one in particular. We saw quite a long period of significant rise in interest rates and when we look at our track record, we did really well during that period, of course. That's not a guarantee about any future returns on what they will look like. But what I will say is that since we can be sold as easily as we can belong in a market, my belief is that trend falling is one of those strategies that can do well when we do see a return to high interest rates, this is actually also interesting in another way because in the last twenty years or so we've had this perfect correlation between stocks. And bonds right. The sixty forty portfolio type approach has looked safe. But if you go back more than fifty years, you'll actually find that more often than not. So I think it's around sixty six percent of the time they're about stocks and bonds are positively correlated, which means they go up and down together, and so when that starts to happen again and we get into sort of more normalcy in terms of correlations that's GonNa be very little or no protection. To be had inside the sixty forty portfolio. and. Then you also asked about you know the various sectors and how they perform interestingly enough for example, equity sectors. Of course, when you have slow upward moves equity markets as we have seen from time to time in the last ten years for sure equities is a great place to be from a trend falling point of view the challenge what we've seen in recent periods with the equity sector ease that on several occasion now, it has gone into deep obamacare territory straight from an all time high and traveling. Of course, you have to be long as long as the market. Goes. All that means that typically we as trendfocus will have the largest long exposure right before the Maka terms. So we saw that in February of two thousand eighteen we've seen that in February of two, thousand and twenty you know when you go through a crisis equities I actually as I said earlier, not the place where we make a lot of money, we tend to make it in other places and yes. So but this is why you have to be diversified frankly not just you know in your own overall portfolio but but certainly also from a trend falling point of view. So Niles here at the investors podcast I would say our roots of our audience and I know stig and myself included is all about Warren Buffet style value investing. So for many of us now Miller with trend following what are the first few important steps that take us as we learn about this and to help us understand just the methodology in the approach. First of all, I mean, if you look at just any market, really value investor would be looking to buy a market that he's moving down. Right the cheaper gets more value you can get from it. So that's kind of the first main difference we as truthful as would never be buying in falling markets. So when it's cheap enough value investors would get into the. Market and as the market moves back to say fair value, you get a lot of the benefit of the trade will come in the initial phase, and of course, if the market moves open becomes expensive, then this is probably a time we're value investors would stop thinking about getting out. So again, from my experience, you kind of lift this buying low and selling high mentality. And now, I started out as a bond trade. So fully familiar with the benefits of buying low and selling high but then I came across trailing, which is really the opposite way you buy high because we're waiting for this breakout to show off the momentum to come in and then hoping you can sell even higher. So from just comparing trend falling to valiant y thing there good match is that okay trendfocus won't be buying the low for Shaw we'LL GONNA be weight and we're going. To be patient until the markets thoughts to show some sign of upwards move on the other hand we don't have this concept of something being too expensive. So we'll be quote unquote stupid enough to stay in the Trinh as long as possible west value investors have already left and I think maybe just speaking at this moment in time, Tesla is a great example of that. Right? Because a lot of people didn't expect Tesla to be able to go this high now we'll say we don't. Trade single stocks of Tesla but the concept is very important and what I found really interesting is that I found this and I. Think this ties into a lot of points in terms of our conversation today also as to why you may want to consider using rules rather than discretion in your approach because I think it was barren with this week came out with an article showing the quote unquote the analysts price talk at Fa Tesla, and the highest was something like two thousand three. Hundred dollars and the lowest with three hundred dollars shows you how difficult it is to assist the price of anything and of course, both of them are quite far away from where the actual prices and I think consensus is like half of what the actual price is. So so yeah, I think marrying discretionary type trading with systematic trading that gives you diversification on investment approach value and trend. Also in my view seems to be going well hand in hand because it's just another form of diversification. Whenever we looking at the market right now and the all the will tillis. He had this year. A lot of stock in the masters would say that it's been quite painful to lift through and allow the strategies. We have the unfortunate attention change during a crisis. Perhaps that's whenever you really need to stick with your strategy because we just can't handle left volatility but I'm curious to hear you could talk a bit more about how trend following strategies have performed in previous crisis because you have actual data on that but also how the covid nineteen crisis is different if it is different. So in all case, we've been through would say full crisis that most people remember right. So we had black Monday back in nineteen, eighty seven. Then we had the tech bobbled in year two thousand then the great financial crisis in two, thousand and eight right now two, thousand and twenty we have covid nineteen and that probably still unfolding right so these crises are very different black Monday was. A relatively short crisis on a few months the tech bubble was the longest in time. The great financial crisis was the deepest in terms of stock market losses, and then covert nineteen so far at least has been the quickest both going down and going back up again. So all of these things percents a lot of challenge for any investors, and of course, fall all trend follows as well. What I can say from our actual data as you said, we've done well in all of these four crisis, and perhaps that's because we kind of blend a couple of different types of trend following techniques together for what I will say which I think is maybe less talked about is that in order to be successful through here, it's like this. You really have to overlay your strategy with a very strict set of risk management rules and framework. So what decides whether you do? Poorly, he's not just based on the signals where to go long short. It's much dependent on how well you manage the risk because. Keep in mind that no investor can control the return. You just don't know what kind of return we're going to get from all trades but we can control is the risk we take and how we manage the risk. So I would say we spend a lot of time trying to become the best risk manager that we can and I'm sure the Knicks crisis going to be different from the previous one. So I mean of course, I'm incredibly biased having done this for more than thirty years. But what a truly love about trend following is that it's adaptive bright. So we only look at price and we don't have any preconceived notion as to how those prices should evolve and how they should change. And so. This is probably why we've been able to handle many types of environments but less buffet. Yeah. We don't do well in all environments. If you have short term sell-offs that jump back straightaway I, mean I can think of February of two, thousand, eighteen is one of them. That was not a great time for Trent Fuller but is only one month and that's what people have to recognize the importance within the investments and I know you guys believe in that as well. It's really having the patience to stay with the investment for long period of time. Now as you were talking about risk management and whenever I think about trend falling I, think it's so important to get something that when the trend changes that you have this sense of it continuing in the direction that you think it's going to go and so when I'm thinking about how I would manage the risk of something being super volatile and reversing that trend that I'm expecting the continued to go in a certain way, I would think that the market capitalization size of the particular pick that you're buying would have a huge part of managing that risk. Would you agree with that? Yes. So the way I would think about the question a little bit differently as maybe to say. So if you were trend following, you had one entry point right and one exit point. Yeah. I mean this becomes incredibly important but that's not how we do it in real life. Essentially, we want to build up confidence in a market right so we do it across different timeframes with it across different levels of momentum indicators in order to have this gradual move in to a position and as I said sometimes, it's a gradual move out sometimes. It's a quick move out if markets redid change. So I do think this is what makes it challenging Sony for individual investors to try and do it themselves I'm not actually a big proponent of kind of diy trend following symbol for the reason that you need a fair amount of capital to get enough diversification across markets across timeframes because otherwise you end up becoming incredibly reliant on as you say, on one specific price wants Pacific correction and therefore the dip returns may look very different to what you expect it. So that's another challenge for sure. I'm really trying to wrap my head around this combination of value in medicine entering falling in is sort of like connection shoot. Preston question before about like what should go from here because I guess what I'm assuming other investor looking for is whenever my normal value investing portfolios not performing then what will perform and so you're talking about February twenty eighteen before for instance, and you said well trained falling didn't do too well value investing it wasn't like balanced. Did Dwell compared to the rest of the Magi but like everything just fell at the same time so how does trend following play into this? I think the Ansari's that investors a deep down looking for something that can make the money when equities go down you can come with all sorts of reasons why people would consider trend following but I think it all comes down to that one point you wanna find something that can make you money when the rest of your portfolio down and this is what became known about ten years ago as crisis Alpha. Right so when there's a crisis then can we produce a Alpha And when I heard that concept initially, I was really excited because I thought wow this is something that a lot of investors can hold onto because it makes sense and it's easy to understand the challenges over the years the definition of a crisis have changed right so before two thousand eleven, we thought about these crisis as as I mentioned the dot com bubble and the debt crisis all the great financial. Crisis and they were like year and a half two year crisis periods. Then come something like February eighteen and his like one month or it's fact I think was twelve days. The markets went down and then they went straight up again for us that's not a crisis. So you have to look at these things in a much longer time horizon in order to see the benefit of combining these things like. You have to really with all types of investments. Now, what I can say is that leading into February of eighteen from trend falling point of view most trend follows had made significant amount of money especially naked teas. So a frank what happened in February eighteen was we gave back about half the prophets from the previous months, which is okay. Over five month period trend follows was still doing well but just. Not. To say that it's a hedge in the thing, this is the danger, and this is also why think hedge funds have become a little bit of a soul point with many investors because they used the word hedge in the name, we're not a hedge we're an on correlated return stream and there's a huge difference between being a negatively correlated I A- hedge or a non correlated as we talk about earlier. Sometimes we will be highly correlated to equities because if equities go up, we'll be long for sure and so on and so forth. So but you're right and I do think the Knicks five or ten years given what's happening in the world right now I, know from into many of your podcast episodes that there is a lot of concern out there in terms of what the world could look like. We are slightly different place from where we've been before and so I truly believe that the next five ten. Years what will make a break your portfolio is whether you get these strategic asset allocation right and so back to ray value and his holy grail I think that is the only thing we as investors can do, and that is to try and find things that are truly on correllated not on a daily basis, not on a monthly basis, maybe not even on a year basis but in the long run and then bill something whereby you don't have to sit and worry about your portfolio every single day every single month. Let's take a quick break and hear from today sponsor. You know how it feels when you find extra cash in your pocket. 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GO TO BLINK DOT com slash billionaires to start your free seven-day Trial and get a twenty five percent off blink his premium membership and up to sixty five percent off audiobooks yours to keep forever. That's blink his DOT COM spelled B. L. I. N. K. I S. T.. BLINKING DOT com slash billionaires to get twenty five percent off a premium membership and a seven-day free trial blinking dot com slash billion s all right back to the show. We had a call here not too long ago, and we were talking back and forth about this into you here today and I want to talk about one comment you had was to be successful in transforming. You just have to fight against all your basic human instincts and I sort of like that statement could you please elaborate on that? Especially for those who have been doing that trend falling trying to go through the pain of finding against everything that you think is true and right? From an overall point of view you could argue that nature could not have designed a worst investment than you and I ride so. Single Way, we've of. All right. So we've evolved for immediacy an instant gratification we've evolved for certainty we've evolved for taking action but success in in investing really takes dealing with uncertainty it takes restraint it takes patience and it takes not listening to your own God right. So when you combine our kind of human design with CNBC and Bloomberg where you constantly have this breaking news and trade recommendations which have caused deep down only qualified guesses about an unknown future it really. Sets. A lot of investors for disappointment when he comes to making the right decision and I think in fact, I think it was a study off or something that was published by fidelity whether they had done every you across all the client accounts and found that those who had done the best over the long run were typically people who had either forgotten that they had accounted the first place or they had passed away. I people who did not do a lot of trading. And so this is actually quite topical discussion right now because we have this huge resurgence in day trading with the Robin, hood is. Unfortunately, I think that when the next Bama comes I think a lot of these investors will be completely wiped out. So one, there's a clear correlation between activity and investment performance those who do the worst tend to be the ones who ironically keep the closest I on the markets and I think it was Jim o'shaughnessy who wrote in the book what works on Wall Street something like the first thing you have to do as a behavioral investor? is to recognize that you just as susceptible to the same dumb mistakes and crippling behavior as the next person. So we need to be aware of that. But of course, there are certain biases that I think I was referring to win we spoke initially and that is things like ego right we have this tendency to be very overconfident essentially and we see this in many different ways in life right if you ask someone if they're consider themselves a good Driver I think you'll find that a huge percentage will say, yes, we're you know I'm a great drive a right even heard about a study where they asked to. I think something like seven hundred men if they thought of themselves as good looking, and again you have this huge percentage saying Oh yes. Almost to the point where you feel that rely only five sit-ups away from dating supermodel right and so over-confidence is a big problem for US investors. The other thing is that we're very conservative as people right we like the status quo we don't really like change which is very hot to deal with when it comes to investing because it changes all the time and of course, the other thing which I think conman came out with this have we have this different perception of gains versus losses. Losses feels much harder on us as investors, which leads us to take the wrong decision at the wrong time. then. Another bias I can think of is we have this I think it's called attention bias where we think off the possibility of really dramatically bad outcome much more than the probability of it actually happening, and so again we fear we have can often play with our decisions when it comes to investments, and then of course, we have emotions we have generally speaking it really does course investors to overall under react to information I would say so this is really why trend falling nonsense is different right? Because we WANNA take out all of these emotions on biases from the Investment Strategy and. Just, follow rules and not trying to predict anything an interesting at the end of the comes back to human behavior, and so if you take an example from the equity world, just as take a step away from trend falling one person that has really worked out human behavior very well is Amazon stiff basis because what he's basically builds his business on his specific behaviors that he felt would never change namely that we would always want things as cheaply as possible and as quickly as possible. These are very basic behaviors and look what he's done. I mean the richest man in the world. So Niles, where can the audience learn more about you your to podcasts in Don Capital? Thanks for asking I think the best place to learn about don and journey weep in on his really on our website where there's also a lot of educational resources to their for that, you can go to John Capital Dot Com and you have to register to get access to all of the information, but that's purely for regulatory purposes, and of course, people want to follow kind of the ongoing journey and then the podcast is top traders dot. com. Before religious go have one question that I think that a problem not the only person here in the audience who are thinking about is to have a go to resource. Is there any kind of bestselling book in value investing people would have the intelligence vaster and that's the Bible? Do you have something similar about Trent falling that must resource? We are very big book recommendations here on the PODCAST. There are a few different resources on traveling, of course, and it all boils down to usually books or white papers, right. So the groups are the largest futures exchange on their website and there is in particular one short white paper. I would call it cold Dr Lyndon revisited. I. Think that's a great introduction because actually looks at some research that was done back in nineteen eighty three. And then revisit Willard still hold. So that's a good way of getting into that. But if you don't mind me being a little bit selfish here because I actually created this guide where I put in like one hundred different books that I think all investors should be at least contemplating diving into and in that guide, there is actually quite a few books mentioned specifically on trend following and I think from what we've done I think the link is top traders unplug dot com forward slash t ip, and when you go there, you actually also get a book that I co wrote specifically on trend I would say that's the best place to go. Fantastic. The website Neal's mentioned is top traders unplugged dot com slash ti P that's trained on plucked dot com slash t I t for analysis, book God and his Free Book. We'll make sure to link to that, and the other thing that we will Lincoln to is your new episode with Preston the US where you're talking about the failure of the US dollar. So who make sure to link to that in this show note together with the to all the resources that you just mentioned nails. Thank you so much of being so generous with your time and cheating us about investing and Trent following. Thanks much guys he was fun and thanks for having me. All right guys was all president. I have this week's episode of the masses podcast. We'll be back again with another episode next week. Thank you for listening to Ti p to access show notes, causes or forums go to the investors podcasts don't come. This show is for entertainment purposes only before making any decisions consult a professional this show is copyrighted by the investors podcast network written permission must be granted before syndication. Casting.

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Chat #58 - Preston Pysh on Monetary Revolutions

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Chat #58 - Preston Pysh on Monetary Revolutions

"That's that's ludicrous. i. I've been saying this since back. In the march event. I was saying we're going to see the lowest oil prices ever and then a year later year and a half later you're going to see some of the highest oil prices you've ever seen and so here comes right. This is this narrative of inflation coming back. And where. I think the icing on the cake for this is pumped out what was at one point seven trillion in. Uba checks so now. Think about that every person's going to get these checks they're then going to have some spending money for a little bit. They're probably going to have to do it again. And so these bs implications of everything coming back online and a fury along with the. Ub checks along with the qe. That's probably going to have to accompany it. In order to keep interest rates down even though the inflation gauge is going up is going to be a site that i don't think most people were ready to comprehend what is up guys. Welcome back to vicken audible. I am your host guys. Won the guy who has read more about bitcoin than anybody else you know. We have an amazing chat today with the one the only preston all about the insane macro economic environment that we have found ourselves in the the inflation that no one is prepared for the the complete lack of an in game. For the stimulus flood the unraveling of our financial markets. And at the same time. The fact that we're seeing the maturation of the bitcoin ecosystem the establishment of real market interest rates and exactly what that means for this bitcoin cycle. How long does it last. And do we actually come back down this time but before we get into it. I wanna talk about our amazing sponsors. You need to be stacking sats with swan. Bitcoin dot com slash guy. The automatic savings plan is the only savings plan for. Bitcoin is the easiest. And surest way to stacks at. I just automatically bought some Actually owned the dip. I didn't have to do anything swan. Bitcoin dot com slash guy. And of course make sure you have your funds securely withdrawn to keys that you hold in a simple secure hardware wallet the bit box. Oh two is really easy to set up. The big box app is great and intuitive and the have a bitcoin only version for added peace of mind. Check them both out at guy swan dot com without further ado. Let's go ahead and get into this awesome conversation. I had an absolute blast. And i'm so happy that preston was able to join me on this. Show our chat on monetary revolutions with preston pysche. Get it on. How long have you been doing that. Now i've been show. I think we. I think we started in thirteen in two thousand thirteen. So it's been. It's been a allowed. I was in the early days of early days. It really was man. I mean we did it for. I don't even know how many years with where we didn't even make a dime. We were just doing it because we are having fun. Yeah years years time did you. Were you planning on making money with it or were you just like we. Did you know they're doing it. We were just doing it because we truly love doing it and It's a good good timing that like when we did start making money because it was at that point where like okay like we've been doing every week for years thou like really needs to be a little bit of a reward here for us okay. I got my local one. Going awesome awesome. All right well I'm actually. I'm actually kind of curious about this. If you if if you want to dig into it. I'd love to hear about like how the podcast started. Oh yeah i'm big. I'm a big media geek myself. I i have a podcast and I'd love to hear the history of that thing. Yeah no doubt so. It really started at berkshire hathaway shareholders meeting so Stick and i were at this meeting. And i was flying out of omaha and i just we were sitting there at the gate and this guy hari rama chandra who. We have on as a as a person who participates on our mastermind discussions. He was sitting there at the gate and for anyone. That's never been to the o'mahony meeting. I mean you meet some really interesting personalities out there and so pretty much anyone you're talking to has a really unique story and So anyway this guy was standing there hari and he had this jacket on and it had linked in on it and this is when linked in was really kind of becoming a big silicon valley tech company and i just started a conversation with them and and we just we immediately hit it off or both big value investors in fans of buffet. And this and that and lo and behold we get on the flight more sitting next to each other when we sit down on the plane and so then we just kept talking and he was like he's like have you ever listened to a podcast. No what. I had heard of them. But i really had no clue even what it was like. There's this guy. His name is pat. Flynn you should listen to his podcast. Shit and and what was interesting. Is the reason that i was talking to him. Because i had stood up. This website called buffets books and it was this website where think i did like thirty five youtube videos that just teach people like the basics of value investing and whatnot and so hard. He's like you need to listen to this guys podcast and he does all this passive investing type things. Maybe it would help you out with your website. And i was like okay. So i put on my first podcast. It was pat. Flynn talking about passive income and immediately for me. I was like oh my god i could create content. That's just audio based and not have to do all this work that's involved in video content. 'cause the videos at made were like these in value investing but they had all these graphics and i spent all this time like making these things because i didn't hear you can be a headache headache. I'm getting back into it now. And i'm actually came from filmmaking. Yeah before i went into like just deep tech stuff and then came back around and got sucked into bitcoin. And now the podcasts. And now i'm like shoot him doing video again like i've been like out of it for so long and it's like oh god forgot about all the headaches and the the the graphics and the things fun but it's one of those things that like if you have a team that you're working with. I have a team now right. If i just want to record my voice they can do all. This animated stuff will back. Then i was one one man show and it was like if i want to make a fifteen minute video like editing fifteen minutes videos terrible if you want it to be like all right and i look back at some of the stuff i did that and it's i mean it's embarrassing but yeah so that if you look if you look one year in the past it's embarrassing that's terrible but anyway long story short. I listened to that. And i was like oh my god i could create this content and it just be audio based and like it takes all this effort and like the stuff that really takes so much time out of it and you can just generate con con You can have these conversations with people. And i just found it to be just the perfect fit for for me at that point and so i reached out to sustain and i had conversed a lot on forum about value investing. And so i was like. Hey you wanna do this with me. Because he was a really. I mean stick was the type of guy that he would show up on this forum and he'd have a ten page post like getting into all the details of some random oil pick and so i just i just always felt like he was the perfect person for me to do something like this. With and lo and behold like here we are like years and years later and like we like. I told you before we started like we were doing it for years where we never made a dime. There was no ad there was nothing back then. It was just because we enjoyed having conversations in inviting people want so. It's kinda crazy to kind of see how it all evolved but I mean if you don't love what you're talking about you're you're never gonna make it in in any of this space because it's just so competitive now but yeah i mean that's that's what it is right is if you found something that you can devote two years to without making any money you actually have a chance of making money at it. Yeah because sometimes it takes that two year of not making money to even get over the hump and yeah it. If you don't love what you're talking about like i would never have done this ship for three years like never if it weren't bitcoin. Like what the hell good god. This is a monumental network. You know how to work at six months. I've been like screw. This this sucks. I'm outta here though doubt now. Now i hear you're a fan of bitcoin huge fan of good good because that's what this show is about. How many shows do you guys have. Now you've got you get the. We study billionaires those far as like other shows. Yeah so we we have What is it one two three for. And we're we're going to be rolling out v. Show here pretty soon shit. Yeah what do you do you have a. Bitcoin centered one yet. Because that's yeah that's the one that if that's the one that i'm doing right now and i just started doing that i'd say september maybe or something like that. I started doing a weekly show. That's just about bitcoin. Okay all right. I'm going to have to add that into my role for dishes. Things to listen to doing and laundry is. He only read. Anything in. My house is clean because of podcast. So you found bitcoin in twenty seventeen. Fifteen twenty fifteen twenty fifteen. Okay somebody 'cause. I asked a couple people ask group for some questions or whatever and i think they they quoted you in like a tweet or something that you sold like seventeen thousand and twenty seventeen like lynn. Gist like chested. The peak basic. I got some sell orders at eighteen. Nice nice tell me what was going through your head. What was your perspective then versus now. How did you view bitcoin. Were you already like really hard core. Like i'm doing this bitcoin thing or was it just a trade then so when i first got into it in twenty fifteen The thing that really kind of moved me there was just how terrible the macro backdrop was so as a huge fan of of ray value and his whole thesis around gold and the q. Ee that just from the two thousand two thousand nine christ's it just seemed like there was nothing that was making this disaster of financial situation. That was going away. So i was. I was trying to understand what is what is the thing. That's going to make this market unravel. And whenever i first heard about bitcoin and having a fixed unit number of units to it it immediately was just like okay so this is digital gold and not only is it digital gold but it it's way more divisible you could you know. Send it to another person. With a smartphone at these really miniscule amounts so all of it just really kind of made a whole lot of sense and then i read This is right win. Paul is vinnie. The wall street journal he wrote the book A lordy came out in two thousand. Fifteen sounds familiar and there was a really big book. I can't remember the name of it as funny over. My shelf are somewhere But anyway he came out with his book. I read this book and I was immediately like The age of crypto currencies. The name of it okay. I read this book and i was like. Wow this is nuts like this is nuts. In fact stig. And i did a podcast episode about his book back in two thousand fifteen. This is probably like our twentieth show or somewhere around in there. I'd say i was in the art of the bear market to. Yeah it was. I mean my first by was two hundred and twenty dollars. I remember very well. Yeah and But yeah so i didn't. I didn't realize that we were in this big bear market. I knew the price had gone to one thousand. But i was looking at it more from a fundamental standpoint of like hey the addressable market cap on this thing is anywhere from a trillion ten trillion. At that point in time would have been my. You know the way i was looking at it. And this thing is you're framing was gold accent. Yeah yeah my framing was gold. And i was just like hey. This thing could go over a trillion dollars. I have no idea when that could happen. But based on all the actions by central bankers and this this could be really something big and especially after reading paul's book I was just like wow 'cause it's gets into a little bit of like smart contracts and that kind of stuff then. So i took a not a big position. Ten thousand dollars at the time or something like that and then i was. I was watching real vision and Trace mayor was on real vision. This is still probably like early to mid twenty fifteen and trae Trace was talking about network effects and he started just going into his. I'm sure most people are real familiar with his diatribe about network effects and he was just going by the numbers. And i'm sitting there and watching this video and i'm like my god. This thing is going to be crazy. And so then i seven network effects thing that he would break down yes that was such a such a brilliant framing early on in the space. Because you would just be like. Oh shit like no. Yeah it's going to loop all the way back around and it's just gonna to keep going. Yes and he would also talk a lot about game theory which i had read a lot of books on game theory and Or books that kind of cover game theory and So for me it right there. I was just like oh my god and so i took a. I took a decent position thereby like the middle of twenty fifteen So what i struggled with as we got into the summer of two thousand seventeen the whole The whole fork with bitcoin cash and and the bitcoin we know today was a very scary event for me. I relied on people. Like adam back and others who were in my opinion the real engineers niksic and some of those guys who in my opinion where the smartest people in the world and that had been trying to do it for for decades. And you know. I didn't fully. I don't think if i would say if i went back in that point of time. I didn't fully understand why i had the opinion that i had. I just knew that those people that i really admired and felt like they were the royal engineers in the room that they they were looking at the security. And i think if you'd go back into some on twitter post back in two thousand seventeen you'd see i was talking about how the security in the scaling and the long-term you're not gonna achieve it with the bitcoin cash Fork i understood that. But i was. I was taking my queuing from those people. And as the price continued to run the traditional finance type mindset that i obviously was geared for very early on and and where my roots really were at. Were telling me like this thing this. This thing's knock gonna go to a million right now. That's what everything like deep down inside me. It was like this thing might go to a million. But it ain't going to a million right now because when you look around like in your talk to your family friends just any but no one knew anything about it at that point. Yeah barely hit. Heard about it on tv or something. It's like yes let's see about what's going on absolutely bat shit lately. Yeah and you didn't have donor fingers. You didn't have like the infrastructure that you have now like at that point in time i was like. There's no way. I'm going to go to a store with my hardware wallow with my you know ledger. Whatever i think. I had a key at the time. I'm not gonna go there with key and plug it in or whatever like you just knew that like. It wasn't going to like there needed to be more people that had to keep showing up in droves in order for that price that keep around me so i was i was just desperately searching for some type of quantitative evidence for when i needed to really kinda reduce my position size and so trace again started. This was in the fall of seventeen. I kinda remember. He wrote this article. That was trying to say pay. This price is a little rich in. This is a price that is really price to perform. And he was using just he was just taking a ratio of the price compared to the two hundred day moving average and in his artists two and a half times or something. Yeah exactly and so. At the time he was he only had like seven data points on the article that he wrote. He's like here's one spot back in twenty fifteen when the price was point. Five compared to two hundred moving average here was a spot back and like literally only seven data points. And i was like. Oh okay we'll let me let me go back for the last seven years or however much data we had at that point in. Let me just calculate what this is for. Every single day that we've that the price is has been available right. And then. I just plotted it out. And and then. I did a statistical analysis of like. Hey what's what's three standard deviations now the the data was was not normal data so to three standard deviations all your stats people. Wig out. pit. Know i'd i don't look things very academically. I look at them in a very practical way. And i was like okay. It's not normal data. Bit it's it's close enough and this was three standard deviations to the left. This is three standard deviations of the right and based on. I think we got up to a like a three point five on that multiple and yeah in in late twenty. Seventeen am based on the stats. That i had run that it only happened two times in the history of the price action and so this is when the price was around eighteen thousand and we hit this three point five on that multiple and i was looking at the two other times that had happened in the two other times that had happened. The price cooled off for like a year after it hit that multiple in so i was. I had made a lot of money at that point especially at that point in my life. That was a lot of money that had made. And i was like all right. Well i'm going to sell this. And i should have if i had to go back and do the trade over again i would have done it differently but my performance would have been worse than what i did. So it's not too. Many people would probably tell you that if i had to go back and do the trade again i wouldn't have sold the entire position like all at once and that's pretty much what i did Within a couple of days. I had literally sold my entire position. If i had to go back and do it over again. I would have been using the mac daddy. I would have slowly gradually stepped out of it probably over a month or three months or some some timeframe like that it would have been much more logical. You live and learn. And i've learned through much smaller trades since that period of time that that's probably that probably wasn't the smartest way to do it even though i absolutely murdered the trade. I mean murder the tree in fact peer rashard can attest to this. When i sold the entire position. I d m tim on twitter and we were talking on tax. And i just don't dude. I just sold my entire position. He didn't talk to me. He didn't even reply but but yeah he was. I think he was like well. You're a loser and get rid of corn. But so but i told him i said hey i sold the position and i'm probably going to be back in a year from now because you know. Based on the data the data had suggested that when these kinds of prices got hit that it cools off for a year and so sure enough the the multiple again and the mayor. Multiple is what we kind of call it. It got down to a point four. I wanna say it's like a point. Four five or like a point. Four seven there in late What would have been two thousand eighteen late twenty teen early twenty nine thousand nine timeframe it got down to that and you know. I went back on twitter. I said hey bitcoins looking pretty sexy right now. I just reestablished a position again. And i shot pierre. I think was the first person shot at not. Hey i just Repurchased my bitcoin. Position and i'm ready to rock and roll again. I think this thing's going to you know. Start screaming back and him in. I think Him and michael had me on their show within a couple months after that or into the summer of eighteen. And i was ready for this thing to really start ripping again and sure enough. It did and this was before the whole plan b. thing really kind of came out and so yeah when his model came out. Because what did that. Come out and in Late two thousand eighteen time. Say it's not that old crazy how widespread it became so quickly. Yeah but yeah but when his model came out it immediately just clicked for me. I was like wow. This is exactly what's going on And because the one thing that i would say that i think gives me an advantage of being a business owner is. I like to look at the mining operations from a business lens. I like to say okay. If i if i was a minor which i'm not if i was a minor how would be playing this. And how would i be thinking about all the cap ex that i've got to deal with In order to remain competitive in a hardware market that the new entrant has an advantage over the person who had the older hardware and so When i when. I'm thinking of it from that lens and i'm looking at plan b's mall on saying this is what's setting the floor because for for years it's just a baffled me how we're able to see this metcalfe's law price chart in something that's free and openly traded right so like when. Yeah when you look at the price chart and this this would drive me crazy. And then whenever i saw plan b's model it really started to like solidify my opinions on what's going on. And so when you. I guess for me looking at price charts of all these other equities and things that i've that i've invested in through the years and then i look at the bitcoin price chart on a log scale. And it's like this perfectly shaped metcalfe's law like price chart which makes no sense when you when you take a step back and think about how can something like that occur in a market. That's just free and open for anybody to buy and sell it And so the conclusion that i've that i've come to. I don't know if it's right but this is. This is where i stand on it. Is that the miners are setting a floor. They're setting a price floor and the that two week difficulty adjustment combined with the four four year having those two functions inside the protocol working together are supplying this this floor to the price action. I would argue that that floor. The was penetrated and broke back in the march. Cova miller down. Yeah but because in the reason why i would say it was penetrated because so many Derivatives blew up so much fiat and credit that was built on top of the the really small fiat baseline that actually exists all that fiat and credit. That's constructed the promises that are constructed on top of that blew up at the same time which caused that price. When you think about the number of fixed units. I'm saying fixed with quotes here because we we all know. It's still being increased a little bit but the fixed units of bitcoin when you compare it to this really flexible Currency supply because of all. The promises built on top of it as that collapsed in a very short amount of time. I think that's why you saw. The floor get penetrated for just like a really small period of time but then as a central bankers stepped in they provide massive amounts of liquidity to reading in one way. They did it in a in a massive way. They replaced all those promises that had blown up and immediately. You saw the bitcoin price. Recover back to that stock to flow. Or i would call it. A production cost Almost immediately and what i found fascinating is his model was almost down to the dollar. On the day of the having event which chanced changed the whole new issuance. And yeah so many to start to flow the the whole. Like the idea that you can see you can see in metcalf curve on that chart. It's not is certainly insane but when you stop to think about money as a because it's not a productive good it's a it's a community good. It behaves much more like a language than a than an actual like product in the market does and because of that like you actually begin to see that like something like that actually could occur and it would be related to its actual supply like the existence of it as a valuable asset. Was funny like you bring up march. Because i think it was like american huddle like said something about it today on on twitter because like we're at the one year anniversary now and And it was so funny. Because like i know like a bunch of people like kind of freaked out for like what the hell the hell is going on and And i did too for like thirty minutes an hour or something like that. I was like i was searching. I was like major hack of shot. Fifty six broke in like this is just search. Google like anything that i could possibly find and there was like nothing and i was like so wait a second. This is just like a huge liquidity crisis like people need a liquid asset to dump. Because we've just got a deflationary shock in the dollar right now and so the prices plummeted and i immediately like it was like it was like you just flip a switch. I went from like scared to just like panicked excited. And i went through and i put. We have like these little little boxes. That are kind of our filing cabinet things like all of our papers and stuff. And i just yanked him all out of our shelving our shelving unit and just started dumping out papers looking for any sort of any dollars anywhere that i had and sure enough. I found old retirement account that i had a job that paid into and the employer had matched for like three or four years or whatever. I'd never done anything with. And i was like shit on cash. That shit out in like two or three days. You're going to pay taxes on. Like i don't give a shit. You seen the price of bitcoin. No i was recording. an interview. With nathaniel whitmore And as the price went down This is during the march event. The price went down through like if kissed like four thousand. Maybe just a touch below it and We were recording. And we were talking about a thin. And i distinctly remember There was a tweet that really resonated with with what was happening which is before us to nami hits the beach the tide completely get sucked out and there's sand everywhere and for people who don't understand what's happening. They're standing there little way out. What the hell just happened right before anybody who knows what that means. And starfish means there's a massive wave that's inbound and so that event for me and people can go back and listen to the conversation because i was describing exactly what i'm gonna tell you right now. The the event for me was a really obvious situation where the the water had just been completely sucked out and the response was going to be five x what was sucked out and so that night and the subsequent days. I had a very similar reaction to you where i mean. I'll just tell you. I pulled a Michael sailor for my company at that moment in time i this is going to be. This is going to be unprecedented. What happens next and you know it was a hard decision but just because i really dislike being in a binary kind of mindset is forest especially when it comes to investing but at this at that point in time for me it was such a unique situation especially for the price and where i kind of suspected the price would be in a year from then which you know i would. I was thinking we were back then. I would have told you. I would have thought we would have been around like twenty five to thirty thousand at this point this year. We were there for a day or two we. But so i took a just a massive massive position at that point in time and Yeah and and luckily i. It was correct but crazy times. I mean we. We are in unprecedented markets. This is not speaking of unprecedented markets. The macro situation just seems like a like just fake. It doesn't seem possible that we are in the financial situation that we are in. It seems so bad. Shit worlds in denial. For sure. I mean i i just there's like what twenty trillion dollars of negative yielding. Now yeah if. I'm not mistaken and this is what gets me with like looking at. Bitcoin is that i can't help. But look back and see you know like been through three of these cycles now. And so i'm like all right so we're going to do it again and we'll go up to two hundred and three hundred thousand or something and we'll come back down the seventy everybody freak out and his dead and balance around one hundred twenty. You're like i just. I can easily see that narrative happen all again. It's familiar and comfortable at this point. But i can't help but wonder if won't because back in two thousand seventeen when that happens like near you kind of have this position where you're talking about the infrastructure the real foundation of like a market interest rate like like futures markets that that that kind of stable based actually build a financial system on top of it was not at all. They're right like it was just big was still a baby embiid. One is not kind of now coming into its own and in a way that it could actually soak up an astronomical amount of this value and in two thousand seventeen you know. I wasn't going all in two thousand and nineteen. it's not like the dollar's going to be gone it you know like that. That market's not going anywhere but now just see like what choice do they have. What choice did they have. But print another two trillion dollars in three months. You know what like when does that. Is there any endgame to this. So i'm with you one hundred percent. I think that the thing that's going to surprise a lot of folks in the in the coming quarter to coming to quarters is they. You already have these signs of inflation coming back into the market. And that's even with their cpi gauge. Which is totally cooked to. Yeah to demonstrate no inflation so even with this just total fake gauge for measuring inflation. You're starting to see numbers and really the oil market for me is such a huge indicator of what's to calm and yeah just crossed all time just crossed the the high from last couple years right. Yeah you're at sixty five dollars a barrel right now and it would not surprise me in the least bit to see oil go to one hundred dollars a barrel by summer and people here that would be like. That's that's ludicrous. i. I've been saying this since back in the march event i was saying we're gonna see the lowest oil prices ever and then a year later year and a half later you're going to see some of the highest prices you've ever seen and so here comes right. This is this narrative of inflation coming back and where i think the icing on the cake for this is they just pumped out. What was it one point seven trillion in. Uba checks so now. Think about that every person's going to get these checks they're then going to have some spending money for a bit. They're probably going to have to do it again. And so am these bs implications of everything coming back online in a fury along with the ub checks along with the qe. That's probably going to have to accompany in order to keep interest rates down. Even though the inflation gauge is going up is going to just be a site. That i don't think most people were ready to comprehend so the the inflation that will when they quote unquote flip. Switch back on on. I don't think anybody's like really anticipating i like. They don't get how quickly it can work against us because everything's been static. It's almost like the lockdowns are necessary to prevent the flood. You know So just as you're right. And what a lot i find a lot of people miss is when you if you start doing this a lot and it seems like. That's the direction that this is going to go. Let's say they start doing the. Uba checks every quarter that spending going to find itself into these these metrics that they do use for cpi the bond market naturally is going to sell off which makes the yields go up but the the central bankers cannot allow the yield to go up. So then they're going to have to step into the market and buy and provide a backstop to that yield. That's trying to come up. And so then you're in this then you're in this game where you're not just doing. Qe you're doing ub simultaneously in their incongruent with each other where the ub is trying to push the gauge up and they have to respond in kind with more qe in order to to not allow the interest rates that go up because if they do the price of everybody's home their ability to to issue more debt into the market as a sovereign nation. Like all of those things unravel each with each other. And so that's what i suspect by mid summer is going to be the thing that when you turn on. Cnbc everyone's will be like. Oh my god what in the world is happening right now. This is nuts And there's bitcoin right. There's bitcoin the the thing that can't be manipulated with a fixed supply just soaking it. All in the the treasury yields spiked like we've we've recently had a spike in the interest And what do you think. What do you think that is. What's why now is this. Just because things are starting to open back up its inflation. Yeah so your fixed income. Investors are looking at this and saying. Wow look at the price of oil. Look at the price of of this. Look at the price of that. These things that are actually in the cpi gauge. And they're saying if if inflation's now this if my expectation for inflation is one point five percent Well if i'm owning this bond in it's less than one point five percent. I am losing money. And so they're selling they're selling that bond position because they don't want to be in that or they're they're guaranteed to get wrecked so they're selling out of it and that's what's causing the yields. Go up but unfortunately for the for the fed is they can't let the yield go too high or then. The price of everything starts getting crushed so basically they're becoming aware of what should have been obvious if you're following chap would or shadow stats or anything like that is that the real yield on. Those bonds is garbage right now. Total garbage i. I would tell you i think. The chap would index is still low. I think that the real inflation really higher than that. Yeah because i because what they're not accounting for like like any gauge or any basket that you're using in order to measure inflation. There's things that aren't in the basket and so Like lynn. Alden like Michael sailor i completely buy into the idea that you're m two. Is your inflation rate. It doesn't make sense that it could be anything other than that. Because if you're supplying and i use this example quite a bit now on many shows to kind of explain things but if we were playing a game monopoly in the banker is inflating the money supply on the board by five percent. They're increasing the money supply by five. Will the the inflation of everything on the board is increased by five percent. Right going into a service whether it's going into the value of park place whether it's everything on the board the whole economy and there is inflating a rise in the in the supply of money so why would A bigger scenario with a lot more variables be any different in my opinion. It's not you're seeing. This price is going up but it's just not in things that are in the basket. Yep yeah and like you realize to like the way the economy moves there has to be some sort of a trade for a price adjustment to move from one industry or from one area or products or You know factor of production or something to another Which so so if you're looking at inflation that's gets dumped into like equity markets. And like you know done in treasuries in corporate bonds and stuff like that but it stays there but you you don't have any velocity money you don't have any movement between the layers will then what you're actually looking at is like the fact that they took out a took out a loan at near zero interest rate and then bought back their stock that is the inflation rate. The point is is that it's in things they specifically measured in consumer consumer goods because it's cheap crap that doesn't last very long and it's nothing that anybody's stores for any length of time but the house that they wanted to buy goes up by twenty percent. The education they need to buy goes up by thirty percent. The you know their healthcare there everything that matters everything that significantly value valuable. And it's gonna last twenty or thirty years investing in a productive enterprise and actually getting a frigging retirement as opposed to dying on the sad pathetic social security. Those things the really valuable meaningful things have skyrocketed in price. You can't retire on a bond. What the hell you have to have like fifty million dollars to make ten grand. you know. it's just it's absolute shit. Negative negative ten grant to make negative dinner asked. We'll see negative interest rates like in the us. I mean as well. I think at this point it really comes down to how fast all this plays out. I mean you're already seeing them internationally. Would they try to do it here. Absolutely they've tried to do here. It bit it depends on how fast the overall market participants figure out what the escape hatches and we know what the escape hatches. Yeah so could we get there absolutely. We'll we i know because it really comes down to how fast people figure things out as to how this is all going on rabble so that leads me to this in yesterday's guys take episode. This is actually. What i ended on was the establishment. Oh actually we can get into contain go real quick but At i'll hit this. Maybe we'll maybe we'll circle back to it but the establishment of interest rates in bitcoin market and more importantly rates. They're real their actual market interest. Soup haven't had for fifty years. Like i mean. We haven't had an actual market in the price of time in ages. Now it happens to be in a monetize asset so the volatility and the like you say the the rush like when nami goes out the the massive rush of capital from between the two is going to throw everything into a bit of chaos but nonetheless this thing can actually respond to it which which means actually going to allocate capital properly And i think that's going to mean that the financial system as it gets built out on top of bitcoin is going to be so much more accurate and better at economic calculation. That like i just don't see how after the foundation of this thing matures two three four five trillion dollars. It just doesn't keep going. You know like i'm with you. I think that there is a very real possibility that it does keep going. And i've said for more than a year. Now that the stuff that i did back in two thousand seventeen i will not be doing on the cycle okay. I won't was actually going to ask. You got heard you say that. But i wasn't really no. I will not be doing those types of things on this cycle just because of what you just described the in talking with a lot of people especially newer investors people that have only been in bitcoin and never really participated in traditional financial markets especially equity valuations. The thing that i think most don't really understand is that your interest rates are kind of like the keystone of everything in the economy so that ten year treasury that we were talking about earlier in this traditional system. That's the thing that's driving the prices of literally everything over in this new crypto economy. That's being constructed right next to the traditional financial system you have real cost of capital you have real interest rates and their sky high their ten percent for us dollar there twenty percent for us dollar peer to peer sixteen percent. I think is what the numbers but over here in the traditional system were led to believe that that free and open market interest rate is one and a half percent right now but we know darn well. They've globally printed. I think the numbers around thirty trillion dollars since thousand eight crisis there's been about thirty trillion dollars of printing that has taken place and all of it has been stuffed straight and will not all of it as of the last year bit most of all of it has been printed and stuff straight into the fixed income bond market driving the prices sky high yields down to these yields that we see right now so if the cost of capital to go out and borrow and price everything is based off of those rates a premium to those risk free quote unquote risk free rates. What happens is is your is your valuations that everyone's doing for a stock. You name it apple stock. I don't care what the stock is. The price of real estate everything comes back to what's the interest. What's that interest rate. What's at risk free rate. And then what's the premium on top of it and so when you talk about economic calculation the equation if you really want to use the most basic equation possible for economic calculations your present value that you're that you're estimating something's worth today is equal to the up in the up in the numerator is your future free. Cash flows divided by a discount rate. That discount rate is based all around those risk free rates and then whatever premium you're attaching on top of him okay so as those risk free rates get pushed lower and lower and lower and the fact that it's in the denominator of the equation. That makes your present value go higher and higher and higher so if those rates are not one and a half but they're five percent ten percent fifteen percent. Guess what happens the present value it gets obliterated down right it goes down and it goes down in a horrific fashion like fast. So what one of the main reasons i keep talking about all these interest rates that are happening over in in this new financial system. That's being constructed is because when i see these rates where there right now if the market starts to say hey that's the real risk free rate not this one percent are one and a half percent or negative percent that i'm being force fed down my throat. The price of literally everything on the planet gets reassessed. Reevaluated re priced at a level that in my humble opinion. Let's just say the rates ten percent that the market then comes to that compared to where we're at today is an adjustment of seventy eighty percent from the market capture seeing in in the economy right now so if you've got a company that's a one hundred million dollar valuation it now becomes a twenty million dollars. Or what did i say. One hundred billion if it was a billion dollars now. It's a twenty year thirty billion dollar valuation and if that's a stock and it was one hundred now it's twenty or thirty. That's a devastating event for people. So that's why. I think it's so important to understand. A what's the real inflation rate be. What's the real cost of capital and what's the premium that it's getting bid above that inflation rate in three. Where the hell am. I finding a free and open market. That's providing me one of these rates today. Do i have any sort of a legitimate rate. Did go by. That's right and that's been the problem. There's there's basically been no escape valve to give a real sense of what the pressure that's been built up here is end and this this leads us to. Let's talk about the content. Go thing with one thing that i'll say guy. Yeah people who would listen to my show from years ago. They're saying preston you're becoming becoming mean or you're becoming right. You know what it is. I am so sick and tired of listening to these quote unquote experts especially the ones out of academia that act like we are seeing free and open markets and free and open cost of capital for the valuation of everything in the world right now. I'm aware i'm sick of air. I'm tired of living in this fantasy. Land where people act like we have free and open markets when we have nothing of the sort and it's not even a grain of sand on that beach and open market like it's nothing. That's what just blows my mind this latest. Yeah at the point. Now where i just wanna point at each one of these quote unquote experts and just wanna scream liar. You're a liar and what you're doing is it. I don't know if you don't understand what it is you're doing but you are causing your the root cause of the lack of critical thinking that has got us to this point in time. Where what you're trying to promote as being normal is nothing of the sort. And i'm sick of it i'm done. I'm like totally sick of it. And that's why i'm screaming from the mountaintops. How do you major inflation. What is what is inflation. Like what is the cost. Count is why it's important and what you think we're actually looking at. Yes you can have to define your denominator because what the fuck working with. Cpi talk glitz. Get into this container thing. So this is something that i've read about in a couple of pieces that mentioned it and i know you've brought it up on a lotta shows. This has been kind of thing. See hashtag contain go like on twitter. Yes it has. It has become a mean on what what is this. How does this the idea here is. This is a feedback loop or the kind of the establishment of financial markets and futures markets in bitcoin. It gives an incredibly good Essentially risk free return while at the same time. Bitcoin and therefore Lowering the liquidity in the actual by markets and pushing the price out which funnels doll process to happen again. What is it exactly. Break it down. Like i have no idea so i would. I describe it. Let's use oil as an example. The kind of guy what's going on so similar to what we saw with co vid so everyone who's an oil manufacturer sees the writing on the wall all right. We've got a slow down production because we just can't be we just can't continue to produce at the levels we were producing before. Because there's gonna be reduction of percents in the amount of cars on the road and all that kind of stuff so they the the problem in the oil market is is for them to make an adjustment to the supply and demand. It's not a quick process and more importantly when they do turn off those rigs that are that. Are you know harvesting the oil. It's a slow process to get it back. Turn to get it turned back on. It's an expensive process. They get turned back on. But in general a lot of this. Applying demand is is kind of predictive. Like they have a very good idea of what that demand flow is going to look like and and cova was one of the first times in history that you had such a monumental shock to the system as to the amount of supply and demand that was going to be either so the demand disappears. The supply is still producing at a pretty high level. And so this produces a situation where there's this over-supply being supplied into the market. Because of the time that it takes for them turned things off in whatnot game. Now what what happens to the price when you think about how that's going to impact the storage so you only have so much storage. That can that can hold this oil. That's being supplied. That's coming off because it's got this lag effect to it and so what will happen. Sometimes in the markets is and i'm not necessarily describing the event that we just saw it will happen sometimes in the market when there's this over-supply is the storage will start getting filled up and the people if you're if you've if you own one of these storage facilities and it's filling up really quickly. What do you do to the price of your storage. You start bidding the price saying hey it was. It was one hundred dollars story here last month. But now it's two hundred dollars because i know you can't put it anywhere else and i know it's still coming off the out of the you know it's still gonna be delivered on schedule and you can see with. That schedule is right. So what happens is is in the futures market that price to store. The oil starts getting bid into the future curve. So you're spot. Let's say you're spots fifty dollars. What happens in this catan. Go is maybe next month. It's not trading for fifty dollars it's trading fifty one dollars or fifty two dollars. There's a premium that's getting bid into the future price even though there's all this uncertainty and things like that because the cost of storage is now getting bid into added to the added to the mix of that price into the future and so the bigger the shock. Then then you add in the even the make it even more confusing If people that feel like the price is going to move faster like the price is going to go up faster than what it is. Then there's there's reasons to maybe by a future price higher or lower than the spot and all those kind of things get factored but in general. That's one of the key ingredients. That i would tell you is the cost of storage getting bid into the future price and so like why would somebody buy a futures contract three months from now that's higher than the current spot price. Well if they're expecting the cost store it to be really high higher than what they would pay when they actually need it three months from now they're willing to pay a higher price to ensure that they can in that fifty three dollars price because they don't have the storage capacity or whatever and they actually need it three months from now. Not right now okay. So that's why you see. A contancts occur in the market. Let me preface this. I'm not an expert a futures. I am not an expert at the evidence. I understand him a little bit enough to probably get myself in trouble. But there's people out there that are way smarter on the stuff than me i. I will preface that so the thing that makes the bitcoin tango so strange to me is there's no cost to store for the most part in general like if you're going to store is key management risk management. That's it like if you're going to store or one hundred million dollars worth of bitcoin like your cost to store to store that is meaningless in the context of hundred million dollars meaningless compared to one hundred million dollars and it's really meaningless if i have to store for one month versus five months it's like totally laughable. That's the same so then the question becomes will if there's really no storage costs it's not like it's cold or anything. It's it's really easy to do this. You can't accept immediate settlement. It's not like. I have to have it delivered to me four months from now because i can't store it myself right now like none of those things exist with bitcoin. And so my immediate question is why the hell's are a tango. And i don't know that i really have a good answer for you. What there's a couple of theories that i kind of have around this one of them is that If you're not allowed to own bitcoin but you're allowed to own a contract. Maybe that's why you own futures contract and into a certain date in the future. So that's one theory of why maybe there's maybe their structural limitations kind of like a regulatory tori. Yes that's a regulatory arbitrage situation that are forcing people to go out further out in the curve and they're bidding future price it's higher than the spot The another thing that i had heard from somebody with on some of these exchanges that allow you to go into a very deep level position. They're able to do this in the futures curve but they're not necessarily able to do it in the spot but in general the trade exists k. Why i would it out to your audience. And i'm sure you're gonna get some some awesome feedback as to the y. And i've tried. I just don't necessarily feel like. I've got a warm and fuzzy response from people as to why continues to persist and wyatt's there but if you go out and this is what plan b talks about of locking in ten and i think it's been as high as twenty percent risk free trade. They're going out there. Buying the spot at call it fifty thousand and then they turn around and they write a futures contract for three or four months later at fifty four thousand and they immediately realize a four thousand dollar gain or two thousand dollar gain when you annualized sell the contract in full right getting old dollar amount plus the like if they bought it for fifty thousand and sold it for fifty four thousand they had fifty thousand now. They have fifty four thousand. Yes yeah and when you do the math and you turn it into an annualized performance. Ten to fifteen to twenty percent depending on how much that spread is when you go to capture so not all markets are like this. The ones that we're seeing this trade materialize are the ones that allow the most leverage. So like these these exchanges where you can go twenty x leverage. These are the exchanges. Where you're seeing. This can tango trade where the spread exists. So i mean if you're if you're a person with a lot of money and you're you're looking at this you're saying okay. Well this is just free bacon. And what's what i find really important about. This is if i'm being incentivized to to put on this risk free trade. When i write that contract would i'm doing some locking up a bitcoin for a future dates delivery k which means there's bitcoin. That's being cloth the as long as this can tango continues to exist. There's bitcoin that's being caught off the market. Put an storage compartment. You know locked up and it doesn't come back on the market for being. It's not being sold. If it's not back on the market which drives price higher if the tango would disappear will then this whole thing falls apart like this whole locking up coins in that driving the price it falls apart but so far it. Hasn't it's just continues to persist now. This even more interesting is so. That's part one part two is now you have this borrowing and lending market all right. Let's take a quick break for our sponsor that is shift crypto and they have the bit box. Oh to hardware wallet not your keys. Not your coins. Is the most important rule in bitcoin and the best way is to secure your keys with a hardware wallet. The bit box. Oa-to has a bitcoin. Only addition is asleep little device and it is very simple to set up in using been using their default desktop app for long time. And it's really easy. It is a bitcoin wallet and nothing else which is a key part of lowering the attack surface of the device in removing any potential unnecessary complexity. It runs fully open source. Firmware with deterministic builds. Which just means that. You can fully verify the firmware being run on your device support from a lot of great wallets. Full node implementations it. Lets you connect to your own full node. It has coin. Control can connect directly over tour and for better efficiency at supports the newer bench two addresses. Check out the full list of comparisons by going to the page at guys swan and that's with two n.'s. Dot com slash bit box for how it breaks down against the other popular hardware while it's in the space and don't forget to use the discount code guy g. u. y. For five percent off again. That is at guys swan dot com slash box. More interesting is so that's part. One part two is now you have this borrowing and lending market so. Let's say. I have to bitcoin and the price of bitcoin. One hundred thousand dollars and i want to borrow One bitcoin worth fifty thousand dollars. So i go to a company like block. Fire wherever i go. Peer to peer lending on hoddle. Hot or you name it right and i lock up to bitcoin. I get one. Bitcoin's worth value back. I then go into this can tango trade. I get my ten percent premium. i go back. I repay my loan. And i get my to bitcoin back during that process of what i just described. I locked up to bitcoin so in both sides unlocking a bitcoin in order to do these trades. which means. I'm putting less and less bitcoin onto the market for for selling and i think that i would really like to have a person with a lot of experience in derivatives Down it's hard or or shoot holes through it or just say a cool story bro at but to date. I really haven't had somebody that's been able to to You know really kind of pick it apart. Now when i think about okay. So what's the real impact on the price. Like how many people were doing this relative to the the that would actually move the market or try to continue to propel it upward. I don't know what that number. I don't know what that percent is or what that ratio would be relative to the power of course having cycle. I suspect it's way less ripe way or less powerful but maybe it maybe it if somebody needs to run the numbers on it and do the math because i'm not going to futures markets are getting crazy volumes have been absolutely nuts the canada's etf. They launched broke records For for bitcoin they did like eighty million dollars worth in the first hour and then they hit the second the second day. It did three times as many as any. Etf on the entire market second day Like the the the fervor around the 'financialisation bitcoin right now is just kind of im- just impressive. Like every which way you look at it. And i think we'll probably get an etf really soon because they'll hit you late and just you know finally finally that. Which isn't really a big deal because basically everybody's worked around it now since two thousand seventeen at all kind of fizzled out. But one thing. That's really interesting. As as this market gets more and more liquidity as there are real interest rates and serious plays that people with a hundred million dollars. A billion dollars can actually participate in is what does this do for the treasury markets and more specifically. What does it do for the fed's ability to actually keep interest rates low artificially. This is the question. This is the most important question of all questions in my humble opinion of what you just asked because it goes back to. We were saying early. You got these two economies. You have these two financial systems that are now side by side. They're constructed one's massive in size. The other one is much smaller. Bit has the capacity to take the whole thing on. Yeah okay and that's the important part is it has the capacity to just devour in eat the entire other system and the spreads that i'm seeing from during that milkshake in the when you're looking at the at the the rates between these two. We're not talking about something. That's a percent difference in right so when you think about you know i go back to like fluid dynamics and engineering and when you think about something that's not only sucking in the other one is pushing at the same time and the delta between that pressure vacuum is astronomical ten ten percent in fixed income. You might as well literally have a different universe like you're literally in and you know what that fits with the analogy of a black hole is like maybe you're going from one universe it's going. It's getting sucked through a pinhole and then it's getting blown out into another universe and that's why it looks the way that it looks on the on the charts because that's effectively. What's happening because how in the world can you convince somebody who's buying contracts that guarantee the loss of their buying power to keep holding. That went over here. You can get a ten percent return and it doesn't make any sense and even the time comparison between the two you know like like i'm gonna buy a ten year bond. You know it just like what's this is an overweight. This is the hell is safe in ten years over rate that we're talk great grapes. And and the thing is is that the only reason the fed can keep the rates. Artificially low is because they they have just enough of that gap to pump back into the market to make the selling pressure go away to make the buyers like combat down like an like. Okay let me look at this again Because you know comparatively it starts to make more sense with all the legacy with all the fiat metrics but when there's a real metric to compare it to when there's a real market price and they begin to see. Bitcoin is legitimate and they place. A billionaire can put their phones and actually actually make a sustainable low risk return. How do you what. How does the fed coming in and buying and like correcting for the fall in buyers or the increase in sellers. How does that fix. The problem doesn't that doesn't fix the problem anymore. It's the only reason it ever worked is because there was no escape valve there was no door to the system. And now there is and it's big enough to fit a bunch of fat cats through it and the whole floor and there's no offset thing there's no they could get an off switch. Nigeria bandit like a couple of months ago in nigeria's now per capita the highest adoption rate in the world. Congratulations you just shut yourself with put. It just seems so crazy. That like this could legitimately and when they're in the exact same position where they have to. They're basically permanent. You be i. I don't see how they turn that thing off the and and like when you have those two things standing against each other and an exit door at the exact same time just like i've i can't help but i mean obviously it makes much more sense and it's much more reasonable impractical practical for me to go. Yeah we'll go. Through another cycle there will be a big shit storm and You know there will be a crash while blah like no hyper. Bitcoin is asian. But i honestly it would. It would make me go. Wow this is a little bit surprising. To be perfectly honest we ended up going through another cycle. Will maybe maybe what happens because you're array of potential outcomes is endless. So maybe what you. Yeah maybe what you see is a six month correction only four to pick back up again and start taking off completely out of sequence of this having cycle like were accustomed to maybe three months. Maybe it's this big giant three month correction thirteen fourteen thing again. Yeah maybe then it just picks up and just goes crazy rate so i. I'm not convinced that trying to time atop here is the smartest plays a good idea. Now i don't think it's a good idea i'm kind of i'm kind of right there with you on that one. I've thought about it a lot and thought. Oh i'll the top of the next ron. i'll cash out and pay off the house or something like that and just be debt free and all that good stuff but now i'm just like just hanging onto the debt. You're not going to be worth. Yeah you're gonna you're gonna get for free in relative terms. Yeah and the the other interesting thing is that you know a lot of people talk about you. Know the comparison with gold because that narratives real easy store value asset digital gold. And then you just kind of look at the broad scope of things. This has this yet for me is just so laughable. It's just kind of like. I don't know it's the tricycle to the mack truck. You know it's just is just not the important thing that's happening here. And the you look around and see how many things have developed a monetary premium and. There are so many like the money is just crap like going back to the example of when inflation dumps into the things that you care about and you want and that are valuable in that you want to have long-term retire owner that you live in look at those things and the monetary premiums. They have developed over the last ten years. Those monetary premiums will be soaked up when you have a real monetary asset whole and you talk about like a comparison with interest rates. Is that like a corporation. That's worth one hundred billion dollars. Well if that interest rates changes drastically suddenly it's thirty billion valuation. Like when you're talking about that comparison that's the capital. The goes to a monetary asset. That's the capital that readjusts into the the hedge against uncertainty and. That's what money is the language of an uncertain future for its community for its economy and all of that flood in and so we're looking at equities did massively overpriced housing that his massively overpriced. And i mean we're already talking about like fifty to one hundred trillion dollars and and you look at treasuries every single time. I look at treasuries. All i can think. Is that if if this thing actually works if this thing sticks around and this is truly sound monetary asset that is stable in the sense that like the thing is reliable and It truly builds a global found like foundation like financial system on top of it who wants to hold sovereign debt of a country. You know like the only reason sovereign sovereign debt exist is because it was money like literally was the money when we went into a quote unquote virtual a paper economy because gold no longer serve the purpose of facilitating the economic activity. It had to be a debt. So you go to the best debt. A country's debt right then when he used to be an asset. Those are the only thing that i would tell. You is the people that are buying it. Today are buying it. Because they are of the opinion that it's a high probability the government's gonna come in and buy it at a higher price than they bought it. That's why they own it And for forty years it's been one hell of a trade. They have continued to make money on this idea. That the government's gonna step in now. The for the first thirty odd years while for a lot of years the government was stepping in. And they were. They were bidding the price of the federal funds rate. Which is your overnight. Money rate but everything else would fall into line. Based off of that manipulation of the federal funds rate the longer tail of the of the of the bond yield curve would fall into place and follow this because of the tightening that was was taking place. So it's been a great trade. It's been a trade that that people have made tank loads of money on but like anything. It's it's run. Its course and now people that are still doing this trade i would tell you are the dinosaurs and people who are dancing in front of a steamroller. Picking up pennies and You know yeah the government gonna come in and bid great out is that is the government gonna come in and bid the price again on the ten year treasury at some point absolutely. They're they're going to is eventually going to get to a point where they're the only buyer probably so i when i look at things in terms of the relative gain to other opportunities. That's when it goes to your question you had earlier where it's just it's going to suck every last drop out of anybody who owns these things because like you're saying there is no money to be made in this trade anymore. It is done. It's just been absolutely sucked dry and it's fake money to like it's not even real return. It's all nominal Video that Shared out on a tiktok investors video. Of just i died laughing. I just could not stop giggling at this. And it was a a looked like a husband and wife or whatever couple talking about how. How did you see this. I re tweeted this thing that you said yes. The guy was like man. It's yeah the guy was like. Hey we want. We want to tell you about this. Investing thing that we're doing right when he goes up down here and then as it goes up. I sell some insane. How can you live. How can you lose and you know what it's one of those. It's one of those important things to stick a pin in in the time line of this meltdown. The we're seeing. It says a person twenty years from now will go back and watch that video and be like how in the world could people see what the heck was happening when they would watch videos like this. This is so obvious in hindsight. But they'd scream to me because nick carter. Was you know he was doing little clips and stuff from arlo screenshots. Or whatever from when money dies Which i actually haven't read in full. I'm kind of embarrassed. Because i've been wanting to read it and i just haven't gotten to it but he didn't lead dental expert from mar on from why mar republic when the mark Started to collapse and it was. It was a whole section. It was talking about like it was a description of there was a period of time where the stock market essentially were stocks. And everything just got crazy and everybody. Every single person was buying and selling thought that they were just making coups of money because with stocks were just just soaring and everybody thought they were getting rich right at the beginning of this and they were so excited about it and they were one of this down here and then it was going up their cell in it and things were wonderful for a little bit but that was actually the period where people were just denying the fact that this was unfolding and it just kind of scares me. The this is going to be a shit storm. Mia know locally a globally globally. We have managed to just spread. This isn't one country. This is everything everything. The euro's done this just as hard the japan's done it lake and they've been bleeding through it for twenty years on pathetic about why. So why is everybody going through it simultaneously. All at the what all goes back to bretton woods. So the the dollar was pegged to gold and then everybody else was pegged to the dollar so here we are all all in this together on a global scale as to what monetary policy was from one thousand nine hundred forty four up until the us comes off the gold standard. Us comes off the gold standard. Well guess what everybody else comes off the gold standard all simultaneously. And now. we're all just having these this free floating fiat currency game. But here's here's how they were able to keep everything together. You had high interest rates You had a high interest rates because you basically debase the money to the point where you couldn't make good on the gold and so and so now you're dealing with these sixteen percent interest rates. By the time you get into the eighties. it was at sixteen percent interest rates. Well you can keep all this glued together as long as everybody has interest rates to play with and you keep dropping the interest rates okay. So that's what they did for since early nineteen eighties s until now all around the globe bringing those interest rates down. Japan was the first one the bottom out right now. You're getting over in europe. They're bottoming out. And now you're starting to get the us and we're bottoming out. And so as as we collectively get down to this zero percent interest rates. Now you're in a situation where everyone's like this. It feels like things are breaking. It feels like the middle class is getting obliterated if feels like guess what that's because the bankruptcy our that's right. The bankruptcy that occurred on a global scale happened decades ago and they've just slowly manipulated interest rates in order to offset the realization of that bankruptcy. And here we are it surprise. It's arrived and luckily luckily for the world we have something that's a decentralized solution that is supplying a protection of buying power to everybody collectively because if it wasn't being supplied collectively fear for how the power vacuum would present. I still think that we were definitely not out of the woods. Just because we have like bitcoin. But i think it's going to help assist in everybody collectively being in the same situation. A little bit like kovic The whole world was experiencing it together and so it was A situation that i think is going to be very similar to to as bitcoin takes root on a global scale That as it's being supplied everyone's kind of in the same boat. It's not like the us or any one. Country has an advantage over the other based off of this being supplied as the solution and the cracks spider in so many different areas. That there's no. There's no explicit direction two point two or to flow from it. Just the whole thing is just kind of crumbling out from everybody. Wants on ann's. Like i can't help but think i kinda constantly go back between the markets are so digital connected in mobile today. The ability to respond and shift is faster than it's ever been so that gives me a lot of hope that the technology i mean. This is why. Bitcoin has moved at the pace. That had has right on is that there's the barriers to get into are literally. Just you gotta drink from the fire. Hose of what. The hell is money on podcast and youtube videos for five months to just understand what you're getting a hold of but after that the the transition is and that's gonna go away that's eventually go as the price gets to a certain point. They won't care. Yeah it's it's going to be. I'm really obvious that. Like oh my god. I need to own this. It's not it's not still like they're not gonna try to understand anything. Can everyone around me is getting loaded by buying this earlier and it seems like it's going to replace everything because everything's melting down and they're just gonna wanna own it whether they understand anything at that point. The i'd say that price. I would say that price is anywhere from like five hundred thousand two. Maybe two million dollars per. Bitcoin is when that i that mindset is gonna set in do you think that. Do you think this cycle touches that like you think. Do you think twenty twenty one. Maybe maybe let me put it this way. I think it's more probable than most people would think i always here. I think it's more probable than not to be perfectly honest. I would put it at a at a fifty fifty and that's that's safe which is equivalent saying. I don't know but you here. I know i've been on clubhouse. And i hear people say oh. Well you know in the next two decades and it's i've been and i've been in some conversations with jeff booth and myself and we always look at each other like two decades The hell you would three decades out right now. There's no way holy shit for decades. Bitcoin people who say that have no understanding of macro in my humble opinion and they just don't understand how broke everything is right now because when you look at it like i'm it's shocking tomorrow like if i woke up to more every day i wake up and like the whole global financial system isn't an absolute shambles. I'm like wow. That's surprising like well. I can't believe we've made it another day. And if it takes another three years to really unravel. I'm going to be surprised for three years but it really does seem impossible. That real prices have not just bitch slapped a whole market sideways And like with the constantly go back and forth between for instance like these. There's a isreaeli Letter shem some. Something i can't i can't remember the name but it was It's it's a big pension fund. They bought one hundred million dollars worth of bitcoin. Back in like december or something like that or november something. And but it's been too. They've made a decent allocation in tripled since then and they've since sold off like half of the principle that they actually put into it. But like i see that. And i think wow like so. The transition actually doesn't have to be an absolute show. It would be a show for the people who issue the bonds. It would be a shit show for equities that aren't making actual monetary flow. Those things are fine like those are the things that need to go right. Those are the unproductive capital sucking things in society. But if you know a pension funds and it's going to be very advantageous for people that are highly leveraged on it on real estate right. Yeah and and like and then somebody like opinion on. I always thought like all these pens are just going to get obliterated like like everybody who's been promised to retirement is just gonna get the shaft then. I think if they actually allocate three to five percent in bitcoin and bitcoin goes. You know ten axe from there. Do they get obliterated like can can. We actually prop- foundation just by like really quick shifting it over to bitcoin before the thing collapses you know what i mean like. We'll look can't help but wonder how bad it can get when things can move in shifts so quickly so this conversation gets a little hard to describe because we're doing is we're using us dollars. Today's valuation and we're interpolate him into the future. But let me just give you an example here. Let's say the price of one bitcoin. Let's say. Bitcoin replaces the fiat system for unit of account for measuring value Let's say the price and what just use it as a really round. Let's say that that value that one. Bitcoin is worth for that to happen in. Today's in the way that you understand the value of fiat today that values ten million dollars per bitcoin. If if you buy bitcoin anywhere to the left of five million dollars you if you converted your net worth into bitcoin for anything left five million dollars you are going to increase your buying power in this new world. It's just that simple. If you buy it to the left the five million dollars you're you're decreasing your buying power. I would argue anything to the to the right of seven million between seven and ten is when you would probably start to have some profound impacts to the buying power that you used to have in the old world right so now. Let's say that you're a person that was highly leveraged on your house like ninety percent leverage. Ten percent was actually put down on the house. And you're one of these really laggard type people where you didn't adopt bitcoin until like the seven million market went to ten million and just so people understand the price. If bitcoin takes over the price of bitcoin. We'll go to one hundred million bit in terms that we can understand today value. We're talking about buying power as we know it today that that mark we're gonna just us ten million dollars right if that person was highly leveraged in their house and they didn't adopt until really late in the game and they were a laggard. They're effectively going to get the house for free because the contract that they have for their mortgage stipulates at their repayment of it is in fiat dollars. So if they start converting their paychecks and they start getting paid in bitcoin. In this hyper. Bitcoin ization scenario. They can pay back the house very easily because they're going out and buying a bitcoin is now one hundred million dollars. Okay even know we were using the ten. That's why i said it's a little hard to understand. But when you get into this hyper inflation scenario. where the currency becomes completely worthless. One bitcoin will be one hundred million dollars or whatever whatever number you want to imagine. It's going to go there so paying back. That loan effectively becomes a free thing for that person to do. If they're highly leveraged. So when i think about the person who's going to get obliterated in this it's going to be a person who probably just retired. Maybe just paid off their house completely. They're out of work. They have a bunch of bonn's like they own right. Because if you own the bonds you're gonna get literally so you're like you're like you're doing this whole I'm sixty years old. So i should have sixty percent of my portfolio in bonds like the garments that these portfolio managers are telling you and so that's the person and then there are late laggard to to converting their whatever wasn't in bonds over to like that's the person who's gonna get just crushed on. This is going to be really crazy to see you know like on the the house example Like we we put essentially nothing down on the house We got an fha loan or whatever it was specifically to do that Just hang on our bitcoin and we also knew that we were going to be putting a lot into the house like we're going to do a lot of work on it so we'd have equity in some point anyway but the. Oh yeah. This is something that i want to say about that person. That person has been that. I just described has been a massive beneficiary of the actions that have occurred throughout their lifetime. If this person that i'm describing is accurately depicted as far as age because think about it. They bought a house at a dirt. Cheap price gay. They had very high interest rates. But they're advantage was they continue to to re up or change the terms of their Interest rates lower and lower and lower without the price that they paid which was a really low price in nominal terms on the house when they would have purchased their home now if they were if they were buying and selling homes throughout that period of time. It doesn't necessarily apply. But in generalities this type of person described had a huge advantage through the years up to this point where this event could potentially unravel a lot of those those beneficiary actions that they've had through policy. It's basically like in the grand scheme even though it's not consistent around along like any single person or even a generation really But like what you're looking at when you see like these massive market corrections is the undoing of all of the the the not real the unearned benefit the twenty twenty twenty years prior right so somebody bought a house for forty thousand dollars in nineteen eighty nine and now in twenty twenty one. It's worth three hundred and seventy thousand dollars. Not still were twenty thousand dollars. You've just been forty thousand dollars it you've just benefited. From the fact that the house has developed a monetary premium from the manipulation of the interest rates that is the spread that needs to be adjusted back down to actually correct for the problem. That's happened during that span. Exactly it's the union the yang. It's the it's the offset of everything that was a benefit is now going to be turned into a negative if they don't how to navigate the change in wind direction if they're on a boat and they're getting their wind from one side and then it shifts to the other. If you don't know how to manipulate the controls on the boat well the the the wind direction that was advantageous on one side is going to be absolutely terrible as it goes into one eighty in the opposite direction and There was a story that when i was first learning about money and australian economics on it completely stuck with me i've never i've never left me Just because i was like holy god. That's so crazy because like you realize how meaningless money is in the grand like like in the scheme of like it's a trust mechanism so when trust is lost so it's so as value about why mart republic And the german mark and it was a guy who actually like escaped germany at the time but he had His life savings in a in a bank and it was fifty thousand marks. Which i think at the time like was worth one hundred and fifty thousand dollars ish when in the value of when i was reading this and so it's fifty thousand marks and it ended up getting locked up and he had like fall to like try to get out and you know just capital controls restrictions. Just everything just didn't happen And then finally like six months later. They sent him his check for his life. Savings new screwed and it was fifty thousand marks and the stamp on the envelope that they sent him was a seventy thousand marks stamp. That was what it was worth. While mortis in the envelope than the worth of his life savings an just like just people don't realize how fast that can happen and never happened here. They don't want the ad. It's very inconvenient. To him to even broach the subject let alone allow their critical thinking to interact with somebody. Like yourself on the topic. Because i think deep down inside. They're afraid that in that conversation they might find the truth and they're not prepared to hear it. Yup it's crazy crazy times. It's so weird to see a dichotomy of like this market is one of the just craziest thing like i still can't i. I still call it an opportunity. Like i still say we're like we're alive. And watching something at the luckiest time ever because at the same time there is this world where things like are just getting absolutely terrible and things are collapsing but then right on the other side like you just look over here and one of the greatest opportunities in millennia is sitting over here end as just like like if you ever wanted to live during a boring time you got screwed but if you wanted an exciting life with like massive opportunity in the potential to learn and like when we actually fixed extraordinarily massive problems across the world like this is it you know like this is our opportunity to build things and fix it. Because it's all going to be in flux we actually can adjust and build the shit that fixes all of those problems. Now and we have a tool that lets us do it just. It's just so it's just fascinating every day. It's a very exciting time to be alive right now. it really is. it really is Maybe maybe that's a good place to in. Actually it's getting pretty late Where who should wash we listen to. That felt like twenty minutes. I'm just gonna people who are probably like. Oh my god. Are they ever going to be done. But that's like twenty minutes. So yeah i have a podcast on itunes. It goes by. We study billionaires. My bitcoin show comes out on wednesdays. there's a lot of traditional finance equity conversations valuation stuff Throughout the the other shows that go on throughout the week but yeah. I'm very active on twitter. Guy huge fan of what you're doing in the media that you're pumping out because i love the fact that you're putting out these really important works that you can consume in audio format and if people will you know i always say like turn your car into a learning laboratory because it's just. I have not listened to music probably in my car in africa. Music was like it's just so worthless to me. And i know that's going to upset people but for me it's just i have no interest in any of it I'm always trying to if i'm in my car i'm trying to learn and so like you making some of that stuff accessible while i'm in my cars is such a win So yeah oh yeah. Oh yeah i appreciate him and everybody knows you have your twitter tag and all the links and stuff in the show notes but if there's ever something that you want to hear or the you might not get an opportunity to read i hit me up. Yeah hit you a. Dm in always suggestions make my job that much easier. So yeah thanks for having me on thank you so much for coming on the show man in a blast absolutely.

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TIP289: Intrinsic Value Assessment of Berkshire Hathaway by Jake Taylor (Business Podcast)

We Study Billionaires - The Investors Podcast

51:57 min | 1 year ago

TIP289: Intrinsic Value Assessment of Berkshire Hathaway by Jake Taylor (Business Podcast)

"You're listening to Ti on today's show. We have Jake Taylor from Farnam street investments to talk to us about the intrinsic value for Berkshire Hathaway although this conversation was recorded prior to the aggressive market selloff today at the end of March Berkshire hathaway currently has one of the top twenty enterprise values relative to its earnings power for the entire. Us Equity Market during the show. Jake talks about buffets recently released shareholder letters in. He also gets into all the reasons why Berkshire is currently trading at an attractive price relative to all their stocks on the market so without further delay. Here's our conversation with Jake Taylor. Listening to the investors podcast. We studied the financial markets and read the books that influenced self made billionaires the most. We keep you informed and prepared for the unexpected guys. Welcome to the PODCAST. I'm your host brought us. Ns always accompanied by my co host Preston Pysche. We are here today with Jake Taylor. Ceo of Farnam Street investments. Jake thank you so much for joining us here today. Thanks for having me on the show guys so jake on today's show you'll be pitching. Berkshire hathaway and you will provide you a summation of the intrinsic value of the company. But before you pitch. That's your more. Bot your investment framework. Could you please elaborate on your stock selection process and how has or hasn't been influenced by Warren Buffett and Talamante her. My investment process is kind of difficult to explain because it tends to be just looking for things that makes sense to me and that there's no real morningstar style box that you can check. That says you know buying things that make sense to me so I ended up being very opportunistic and going into a lot of different places whether it's just buying outright cheap assets when they're available like a net net all the way up to hang up a little bit more for a good company that has good cap allocation and along runway to redeploy capital at essentially high return. So obviously buffet early on was very quantitative based investor and off only very cheap things and for most of my career. I've been more that way and it's only until recently that I felt a little bit more comfortable paying up for a good culture. And what am I thinking is evolved in that is one. I think you have to read a lot and been in the game for quite a while to have the trust in yourself that you can recognize those kinds of opportunities. The other problem is that it's very difficult to get to that point in this particular market for me because it seems like that's kind of whatever one is realizing recently compounders have become very popular and for good reason it makes business and investing sense is just the price is. I feel like maybe have gotten the little out in front of what might project into good returns for a lot of these businesses so while I recognize it I've been pretty slowed actually implemented because the price I felt like hasn't quite been there yet. Another interesting thing I've been thinking about lately on that Front. Is Everyone's looking for companies that have really high returns on invested capital and? I've been wondering if perhaps that you might be better off looking for ones. That are more moderate. Maybe like the ten to fifteen percent range. My thinking of that is that few have extraordinarily high returns on capital that is a signal that other entrepreneurs may WanNa come and compete those away from you and or at least share in some of that high return maybe at the ten percent range your side of flying under the radar and you're able to compound for a really long time at ten percent as opposed to a short period of time. Let's say fifty percent and the better bet is to take the longer duration ten percent one most likely so it's Kinda like I've heard Peter. Thiel talk about how companies who are actually monopolies. They don't advertise it. They're trying to hide it. Google will talk about how they're only a certain percentage of the entire advertising industry. They won't frame it as online advertising or search even worse right so in the same vein maybe the editor bet is to look for more mid range kind of Roi. See and see what you can find there. As opposed to like the highest flyer ones so jake on February twenty-second buffet sent out his annual shareholder letter. And I'm just curious what your key takeaways. Where from the letters this year? I thought it was interesting that he removed the Book Value Column. For the first time. Which kind of tells you how much value maybe as a metric for Berkshire has decayed in buffets mine. He's been talking about it for a while but he finally stopped reporting on that. I mean you just look at that. Market value though from nineteen sixty five to twenty nineteen at twenty point three percent return versus the SMP's ten percent and it's like it's such an amazing testament to doing something right for a really long time and the just the obscene compounding that can take place. It's just truly incredible to actually see it. Spelled out look at the float number nineteen seventy thirty nine million dollars today. Hundred Twenty nine billion dollars absolutely unreal. How Big Berkshire has got? And then my last one was interesting to see him. Say That g chain and Greg able will be more involved in the meeting this year which I think gives some hints about succession. Planning and I thought it was actually a little bit odd that todd and Ted wouldn't be included as much. He didn't mention them. At least so those were my takeaways from this year's letter but in general I would have probably given it an average rating other ones. I've liked more but anytime you can hear what's on buffets mind is worth taking a few minutes to Rita for someone like you have been reading all his letters. It is interesting to see how especially the last safe ten letters. I think he's giving away less and less. I guess that's how I look at it. They're still good lessons to learn but it seems like he's a different mode. It seems like he's a bit more in legacy mode than he is in the. Let me educate you about business mode. But it's definitely worth a read and we'll make sure she'll linked to that later in the show notes but jake. Could you talk to us about Berkshire Hathaway and no? We're going to talk about the evaluation the end. So we'll get to that but talk to us about berkshire-hathaway how would you outline the for someone who is not too familiar with the company in my mind? It's a supercharged S. and P. Five hundred it's very. Us centric Bat. They insurance operations are way above average the industry and then you have somewhat doing cap allocation. That's the greatest of all time. And typically you're buying it for less than the markets typical price due to some kind of a conglomerate discount so in my mind. It's not a bad plug in or an S. and P. five hundred exposure. If you wanted that instead could you talk to us about the five major segments of the business? Sure Yeah I mean you have the insurance operations which are big you have a railroad inside of their Burlington northern you have Berkshire hathaway energy. Which is we used to be mid American and now is growing quite a bit. They put a lot of money to work in both energy and railroads and earned that interesting ten percent regulatory return. Likely we're talking about return on capital and then you have a marketable securities portfolio of a lot of blue chip companies. That are baked inside of there. Then you have what's called the MSN. Which is the manufacturing service and retail and those are a bunch of grab bag of different businesses. Some bigger some smaller all the way down from precision cast parts which is making high tech aircraft manufacturing all the way down to shakes and Burgers at dairy queen. And everything in between so you have the whole swath of the US economy. So let's specifically talk about the Insurance Division. So the property casualty insurance business has really been the engine. Propelling Brooks Halloway growth since nineteen sixty seven year that the both the national indemnity and the the sister company National Fire and marine now today berkshire-hathaway hold six point four percent macchia and they're only trailing state farm is the biggest underwriter in the country. The Florida's you mentioned before stands one hundred twenty nine billion dollars. How do you see Burke Chef perform when it comes to macchia and profitability in the next day Kate specifically for the Insurance Division? I do recognize that. They are very disciplined in their underwriting. And the data point that I use to back that up as that. They've underwritten profitably in sixteen of the last seventeen years. That's a pretty good track record. If you know the insurance industry I found it very interesting that it seems like Geico's been the little slow to adopt telematics which things like snapshot that progressive has which is basically trying to figure out like. How much risk do you actually take while you're driving? Are you speeding or are you accelerating or slamming on your brakes all the time which is surprising to me given? Geico's history Of targeting originally government employees. That's the GE part of GE ICO so they were looking for operations that had lower risk profiles and one way of ascertaining that would be to keep track of how people actually drive and then base their insurance rates on this telematics idea but in the plus side of the category for them is that they've always had such a bulletproof balance sheet that they've been able to underwrite that no one else would really be able to take on. They've always operated at like one less deal than they could've been doing all along or one less big insurance underwriting thing and other companies even insurance industry I've seen their operating much closer to the full deals that they could do or even sometimes taking on leverage to do one more deal than they could've done and then they're always kind of digesting that deal so what it allows Berkshire to do is to use a lot of that float and invested into equities which earned quite a bit more than what most people were earning in their floats all the other insurance companies because they've stayed so far away from the edge of being bold deal maximize irs and full underwriting capabilities so they're conservative. Nature in a paradoxical way has allowed them to actually take more risk with their float. Better security portfolio. I've noticed the thing too about underwriting with prophet sixteen seventeen years and buffet has been very upfront by saying that he does not expect that to continue happening and you can put a lot of different things into not comment. Obviously wanted us that. Buffet always likes to play. Whatever he's saying. I mean giving the low interest red level. You would expect for this to continue at least for quite some time. The reason why I'm saying that as given the low interest rate you supposed to underwrite with the Prophet because the risk return you can get elsewhere. A lot of that goes into equity due to different regulations on all that can be put into equities. There was this matching principle so depending on the length of the claim You have to buy even long bonds which might seem a bit weird. These states interest rate. But that's just the way it is. It's not something we can do too much about. I'm sure buffet would if he could. But unfortunately that's not the case but the other thing that I found really interesting about how buffet has been addressing. The insurance business is also that concern shareholder Hussein with global warming with everything. That's been going on. What can we expect in terms of claims to Berkshire and he says you know most of these things by definition of renewed so like he can set new premiums and what he's saying is as much as it might seem bad one year. A lot of things happening from an insurance perspective. He's actually a good thing. Because the premiums would just go up and the mole uncertainty though are the better ensure because so many companies have to have insurance now Jig. Let's talk about the growing cast pile. It has been heavily debated for years among the shareholders off burks Halloway and today cast and chiltern investments are one hundred twenty eight billion dollars whenever I say. Today don't mean today much nine after the stock market has been tumbling for weeks. Now I mean that's the latest filing that have cast pile similar to what it was in Q. Three Twenty nineteen so as far as we know it's not growing but it stagnated at very high level. Well you know. I woke up this morning. And the market was down five percent plus and we had circuit breakers going so on days like today. You kind of have to love that cash pile right. I mean it's the optionality on it is growing with every tick down. I love the anti fragility of that cash pile when you combine that with Warren Buffett's cap allocation skills. He's proven that he can put up. Great numbers especially when the opportunities come along. I should say the only thing that I don't like about it is that it makes me a little bit sad that it's possible that he could be waiting for this one last chance to do some big deals that. Sorta cement his legacy. I've seen this before where grandparents are holding on to see that oldest kid graduate from college or something and then once it happens then they kind of let go a little bit and it'd be sad to think that longer that we can delay a crash and him putting money to work. Maybe the more time we get with him. I would be a little bit sad if he was able to bag that last elephant and now he's like I've done everything I need to do in this lifetime and I'm ready to move on but people typically do is look at decisive his portfolio and the thing here the year end it was around two hundred and forty odd billion dollars and then the look at the cast position and say wow he is a lot in cash that's not how buffet looks at it. He said actually just two weeks ago. I'm approximately twin percent cash right now and I'm that because I'm including the three hundred plus billion dollars in upbringing businesses plus we have multiple secure. It is and then we have cash if you do. The numbers is a different way of looking at it. He's looking had eight. Percent Equity is twenty percent cash. Who knows perhaps with everything that's been happening? He's not so much in passing anymore and the real ties into my next Christian. Warren Buffett kicked his stock buyback procam into high gear. Here lately spending two point two billion dollars on share purchase in the last three months of two thousand nineteen. And that's the most ever. He's done in a single quarter now. This is not significant. Pets the my cup of more than five hundred billion dollars and a lot of investors. See this estimate tunes. It's loading up on shares. It should also be noted here that the trading volume berkshire-hathaway is exceptionally low. So in that sense of buybacks yeahs. Buffet is restricted differently than other. Ceo's if he wants to repurchase a high numbers yes because he's so easily moves surprise he's been talking about how he look within the at the Osa who could buy back three four five percent without moving price but because of the volume of Berkshire hathaway she asked that is just Solo. He's been talking about or at least he's been hinting. He doesn't talk too much about it but he's been hinting of. Just one percent can actually move the needle in terms of influencing the price. But as much as we'll talk about later. What do you read into the stock buyback here? Siphon the obvious fact that buffet at times have found the shares modestly undervalued as. He puts his in his letter a lot of people. I talked to like to think that this buyback program puts a floor under the Stock. And he's talked before about in the one point two to one point three times book value ranges aware. Berkshire will kind of quote unquote defend the Stock Price. But not sure if I think that that's true or not. I think Mr Market can do a lot of crazy. Things in that can still apply to Berkshire. They'd spent five billion dollars over the last year to buy back one percent of the company. Roughly so that's in like two hundred dollars. A share for the B shares on the other side is selling. That's something that I always like to ask myself. And when it comes to Berkshire shares most of them are locked up in families who own the company. It's not the typical company that's owned by institutions or even like index funds. It's very under represented in indexes. Because of that so. I don't think that you may be get as much panic. Selling either there so maybe it's unlikely to go on crazy sale as much as other companies. I think I personally think that he would be better off looking for that next deal than buying out partners within. Berkshire itself and I don't think that there's a lot of willing sellers that will part with their shares at the prices. That are really mouth watering from a buyback perspective. It's just not the dynamics that I see in the company ownership structure. I think you bring up a good point because if you look at the ownership manual what he wants to do the least is to repurchase yash he wants to buy wonderful businesses and even before that he wants to build a widen the mortar round the assistant businesses. You wants to buy gas and other companies before he wants to buy out his own partners as he puts it is interesting especially at these prices ride now at the time of courting bricks hell awaits trading at one hundred ninety five and it would be interesting to see how much he loads up on his own. Yes in Q. Four if you look at the numbers the average spying price just for that quarter was two hundred fifteen so it might be well he would be buying back then but keep in mind that s the price of Berkshire hathaway's now trading much more appealing prices. So as more or less all the stocks on the planet you bring up a good point good. Cap Allocation is thinking of your shareholders as your business partners. And if you're buying back from them at breezy low prices you're benefiting one group of your shareholders at the expense of another and you're neglecting your duty as a captain of industry and as an allocated capital and a steward of capitalism by taking advantage of one party over another. I think you almost have a moral duty to try to keep your stock price. Trading close to the intrinsic value so that If some partner of Yours Aka shareholder needs liquidity for something. Perhaps they have to pay for a surgery. Or there's a charitable thing that there's really important to them that they need the liquidity. You should do what you can to help them. Get the liquidity that they need to run their lives. I think that there's a lot of good that can be done. The no one really talks about in capitalism by a CEO who keeps one shareholder group from taking advantage of the other too much. So that's really interesting. So buffet has mentioned in his letter to shareholders that ninety eight percent of his shareholders going into the year are the same shareholders. Going out at the end of the year and I think it's kind of an interesting metric because it shows you how strong his share by can be if he decided to use his significant cash position to conduct the buybacks. So something else I want to ask you about. Jake is your opinions on Warren. And Charlie's age There are many people that will argue that they're the true competitive advantage or at least significant portion of of the Companies Competitive Advantage. But as we all know Warren is going to be ninety. Charlie's ninety five ninety six years old. So what are your thoughts about the company with them eventually? Going TO BE REPLACED. Yeah I mean you really kind of have to get comfortable with answering. The question is Berkshire a man or is Berkshire a culture or is Berkshire and ethos or even maybe like an operating system for a business super high integrity decentralized to the point of abdication as Munger said capital Allocation Stock Selection Insurance underwriting king abandoned opportunities all these things are in the ethos of the company. I personally believe that there will generally be okay. It's hard to imagine that there isn't some impact so if I kind of go through each of the businesses like the insurance operations I think those don't change a ton thick. They've got plenty of brainpower with G to still manage that part I know. Buffet helps jeep but deal flow. I think absolutely has to be impacted. How many business founders sell their business for less than they could probably get somewhere else to sell to buffet specifically that I think is a very real advantage that he's built as a way of cashing in on his reputational capital that he's built over the last fifty years of doing business the right way. He deserves to pay less than market because he has done such a good job with his reputation. I also think the performance of any CEOS in the subsidiaries of all these different companies. It could go down. I mean when you are having to send a letter to Warren Buffett about your operations for that year and report to local Warren. Like how you did and you WANNA make him proud. He's not around. It could slip a little bit. I mean I think that's just sort of natural human nature. I think the portfolio management side of things will be just fine with Ted and todd. I think both those guys are really sharp but target imagine it. There isn't less remote host worn and Charlie just mostly probably because of the deal flow aspects. They have to get in line and pay. Whatever else is paying for acquisitions? You're just not going to get the same kind of deals and therefore the same kind of returns on the businesses that you're buying because you're probably GONNA have to pay a little bit higher price for everything so on net. It won't be as good but the ethos still makes it one of the better companies in the world as far as how clean they are and how they do business. Suject rule simply. What's the biggest threat to Berkshire Hathaway or opinion? I would probably say complacency and that can come in different ways. I think that this management team. That's been around since nineteen sixty five deserves the benefit of the doubt on all things they've earned it however is a shareholder you can get complacent about when things start slipping a little bit for instance picking the book value out of the report. It's a little bit of changing the goalposts somewhat. I mean the timing of when he's done it and there've been a few other changes. I won't go into them because they're they're down in the weeds for most investors. But if you want to read a deep dive on that I would suggest checking out semper. Augusta's letter I don't know if you've ever read that one. But Chris Bloom Strand I think is one of the best analysts on the planet and he does a call it. A fifty page write up of Berkshire every year. He's a true true expert at this company. But anyway I think he's highlighted some of the places where they will change a little bit of things in reporting or move parts of the business and it'll be a little bit less clear how that business did or what the returns on equity were for that segment of the business mostly in the name of trying to make the numbers easier for the average person to understand but for the very very deep dive analyst. It clouds some of what we used to be able to know about the company so those little things can slip here and there that the disclosures part of things because the management has earned such a reputation. You can get complacent about just assuming that they're always doing the right thing all the time and that can get you into a dangerous place. Let's take a quick break and hear from today sponsor brought to you by capital one. You know how it feels when you've saved enough for that long awaited home edition now. Imagine saving enough for an addition on that addition. That's the feeling with capital one. Where new savings account earns five times? The national average capital one is helping you earn more towards your savings goals. This is banking reimagined. What's in your Wallet Capital One? 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Bowes all right back to the show interesting speaking of those analysts and those people who are really into it. I have a very nerdy. Gigi questions for you here now. Jake how do you value the earnings retained by burks? Non Controlling investments in public companies game that only dividends are reflected in operating income. And perhaps you can just explain the framework behind. Why is that even a topic worth discussing sure? So if you imagine these companies that are owned by Berkshire inside of Berkshire but they're publicly traded companies and they're doing their own business they're generating their own cash flows and sometimes they're paying dividends to Berkshire and so last year there. Ten largest holdings in their securities portfolio delivered three point eight billion dollars in dividends. They got sent to Omaha. Checks that showed up in the Berkshire checking account while those companies had another eight point. Three billion dollars in retained earnings last year. So that's money that's created inside of the companies that they own but that Berkshire doesn't really have control over it. It's still within the company and when I say that eight point three billion dollars that's figured out by taking the percentage that Berkshire owns of the company and then applying that percentage to what the total amount was so just to make the math easier. Like let's say that. Let's say ten percent of Apple. An apple earned one hundred billion. Will inside of that you could imagine that Berkshire Kinda earn ten billion through their ownership of Apple. I think you can't assign a dollar for dollar valuation to those earnings is that it could very likely be that company. That is making the decisions on that dollar. Where does it go to could be making bad cap allocation decisions and even making that dollar worth zero like we've seen that before with companies that make stupid choices with the money that's generated? It does not accrue as shareholder value. It ends up disappearing so the first kind of metric that we have to look at is. What do they do with the money? And I think buffets obviously trying to choose companies that have the ability to invest in projects that will generate further returns on capital. And keep this engine running and even growing and so you start to see why he's such a big fan of buybacks is because that instead of that dollar inside of that portfolio company going off into maybe a project that is destroying value. Maybe it gets bought back now. And His share of the company now increases. Obviously the price paid matters for that as well. So if they're overpaying for their buybacks than they are destroying value for the remaining shareholders including Berkshire and then the other part that. I think you should think about there. Is that money stays within apple or wells Fargo or wherever it is that Berkshire owns berkshires. Not Having to pay taxes on it at the moment so there's already call it a fifteen to twenty percent. Maybe even twenty one savings by not sending that money to Berkshire to them control. So there's no easy answer there because it's very fluid on like what do they end up doing with the money that determines the future value of what that retained earning was worth but those are some of the parameters that I think about I look at the retained earnings inside of the portfolio companies. You know it's fascinating. This is a topic that Buffett has been talking about a lot lately. I think this is a great accounting discussion. And it's something that many young investors don't understand. I Know Stig and I have talked about look through earnings for the non operational subsidiaries numerous times on the show and it's really neat to see him bringing up more more and. I think it's important because there's a lot of value there. That's not immediately evident if you're simply looking at the income statement the consolidated income statement for Berkshire Hathaway Okay so with all of that said talk to us about your intrinsic value for Berkshire hathaway today. Well I think their different ways of doing it. I tend to be more on the simplistic side of my investment stuff. Like if I can't write it on the back of an envelope or on a short piece of paper and a few sentences then it's probably too complicated for me to take a swing at so for Berkshire. The first passed a look at it. And this will sound a little bit Glib because the answer is going to be kind of silly but if you imagine Berkshire as a bond that yielded ten percent and I think that's a reasonable actual approximation because their return on equity has been ten percent for quite a while and it's likely to be around ten percent for a long time just based on the projects that they're putting money into thinking specifically regulatory yield of NSF and be h energy. So if you imagine a bond that yielded ten percent and you could reinvest the coupons in the business at a continuing ten percent. What would you pay for that bond? Today how much would the market pay for bond? That yielded ten percent in my mind. Safer than Treasury's Today's rates right now. I mean it's like approaching it goes towards infinity right. I mean that's why I said this is sort of like the Glib answer. It's a ridiculously high number. Which I think is more a reflection of today's rates being in my mind kind of ridiculous and not so much a reflection of Berkshire so let's go to a more real answer than some of the parts is away a very popular way of analyzing Berkshire which is basically. Just take all the different little business lines. Add them up and come up with some kind of a number so my back of the envelope. Math for some of the parts is yeah. Let's call energy worth about fifty billion the railroad worth about one hundred billion the. Ms Are the manufacturing service retail is calling one hundred fifty billion insurance call at a thirty billion and then an investment or folio. Three hundred seventy billion ish. You add all those up and you totals up to about seven hundred billion which implies about two hundred eighty dollars per share for the B shares. Quite a bit north of where we are right now so another way of looking at it the business would be. Let's just do a simple? What has Berkshire typically traded around as far as price to book goes into the answer. There is roughly. Let's call it one point. Seven five times price-to-book-value. Today's book value. Let's call it. Four hundred twenty five billion that gets us to a seven hundred and forty billion dollar range of potential valuation. Okay that's in the Ballpark of r sum of the parts. That makes sense. All of these things are all just triangulation. Data points like anyone is not better than the other but if there are all kinds of telling you the same story then maybe you're onto something that's how I think about this. And then maybe the last one would be called like a two pronged approach. And that's basically like add up all of the investments and then try to put some multiple on the actual earning businesses and then add those together. And what does that number tell you in my rough calculations? Let's call it. Two hundred sixty billion for Equity Securities and other one hundred thirty billion for cash. That gives us a three hundred. Ninety billion dollar for Prong One and impromptu will take twenty four billion dollars of operating earnings and multiply that by ten that gives us two hundred forty billion. Add those two numbers together and you end up with six hundred thirty billion as another mark so all of them. In the seven hundred ish billion dollar valuation range so just to recap that. You're saying that the price of the BCS that's right now trading around one hundred ninety five we'll looking at around two hundred and eighty plus minus very interesting. Thank you for breaking that down for us. It is interesting what you would mention there about the potential discount because it is a conglomerate. I guess you would even have. People say that is actually the competitive advantage offer that is a conglomerate to the money would go where it's best used. I guess there's also a discount to Berkshire hathaway because it has not been performing as well. He'll the pastor. Yes it's actually been trading this p five hundred. I think that's probably also one of the reasons why whenever I talk about being good price and all that and I think most listeners were already know I am long. Berkshire Hathaway Cynthia take it for what it is whenever I'm complimenting Jag about why that's a great investment I am obviously biased and it kind of leads me into the next question which is something that which is about position sizing but it's just always such a interesting topic to discuss especially for company like Berkshire Hathaway many investors have different rules from cells when it comes to assisting sizing for example invest might have ruled that he or she won't bill position in a single stock would more than ten percent of their portfolio now. Warren Buffett is previously in his letters to shareholders commented on how many investors holding to how the way as their biggest position in the portfolio most notable himself with more than ninety nine percent of his net worth estimated that more than ninety percent of the shareholders has books. Halloway ask by far the biggest position. Please elaborate on how you see position sizing and if Berkshire Hathaway is an exception to the rules that we may have imposed ourselves giving that is such a diversified company already and may have the downside protection that you mentioned before it very much comes down to your own personal preferences at risk tolerance of how much exposure you're willing to take on any one facet of business or economy or anyone person so the first thing you have to ask yourself is about the opportunity cost. Do you have anything else that might do better than a relatively safe. Call at ten percent or Anam type of return profile if you do then Burke Shire may be sort of an anchor in your portfolio and maybe you don't want too much of it. I don't think that Berkshire is terrible. As a bond proxy maybe especially for someone who's a little bit younger relative to the prices of bonds today? So how much are you willing to do you want as a bond allocation for? Shire may fit the bill of that a little bit like we just talked about you know if it was a ten percent on a lot of portfolio managers who I've talked to and respect. They often will use Berkshire as a cache proxy so if they don't have anything else to invest in rather than whole cash they'll just stick it in Berkshire. I don't think that's a terrible strategy. However the whole point of cash that it doesn't move around at all and Berkshire definitely moves around. I mean in one thousand nine hundred eighty eight or was trading at three times price to book value. Right and typically. It's been one point seven but we've seen a below book value also so to think that it's just this like solid anchor that never moves around provides the liquidity that you want when you need it and I'm not so sure about that. The last thing I would say is that because it is so. Us centric it could form a bit of a home country bias. That is common for a lot of shareholders. People tend to own more whatever country that they live in because they feel like they know it better and if so if you are a US investor and you already own a lot of other US based securities and things that are tied to the US economy then being long Berkshire is just more of that same thing and so you may not have as much diversification geographically speaking when you may end up suffering even stronger to a home country bias but all in all I mean. It's pretty hard to imagine that. Berkshire in Penn. Twenty years is not worth more than five hundred billion dollars so if you have the stomach for long term. You could sleep comfortably at night. Earning probably a ten percent. Roughly return on equity over a long period of time and there are definitely scarier and harder ways of making money. I think you bring up a really interesting point and a good point so jake thank you for your thoughts about burkes. Halloway is always a pleasure to hear how people think about that business that we've been following since the very first episodes here and the masters podcast now. Speaking of that I wanted to end the interview on the slightly more abstract note. Because not only are you a great investor self you also one of the thought leaders in the value investing community or like to relate this to whenever I first started become interested in value investing. I think my motivation was like any other. I wanted to replicate if possible. Howard Buffett pick stocks and that was why but interest in the first place then after starting value investing for years and reading and rereading buffets wisdom. I slowly realize that it really wasn't just about the money. It's really the community around Brooks to how the way and Warren Buffett. It's not so much about business but Justice Matz about investing in a life. Well lived so in your amazing learn that you send out to your clients you talk about. How much of the human actions we've seen the world can be explained by deeply embedded scripts designed to source into hurricanes and. I know that we are going to bit APP. Start here just from talking specific numbers about Brexit Halloway. But I think it's a really good way of rounding off the into you to talk about value investing very specific and then to look at more the grand scheme of things. Could you please elaborate on that specific quote? And how you see this. Yeah no I think you're right to highlight that these guys are heroes for a lot of us but I think the amazing thing is that they're such good teachers and we benefited from them. Being willing to share all that they've learned it would have been very easy for them to just hide out. Never talk about any of this kind of stuff and share with us and just make all the money that they ever wanted to make in the world And but we'd all be much poor spiritually than than otherwise. I tried to reflect back that same thoughtfulness when I can and that same spirit of sharing and being kind others and back that these heroes have been so intellectually generous whether I'm successful or not could be debated but you mentioned one of the client letters that I wrote and in that letter I looked at what lobsters and Warren. Buffet have in common and then actually Buddhism as well so those three very weird things. And here's the punchline of that letter lobsters will fight each other for space and mates and territory and when they're able to win in a fight and get that space they have a bump in serotonin inside of the lobster so this chemical that makes them feel good. When they win and the lobster who loses has a decrease in Serotonin and ends up often retreating and then dying not that long after and so- nature has created this system where we have these chemicals that make us feel good. When we're at the top of the hierarchy. And we have that exact same serotonin molecule floating around in our brains when we sort ourselves into hierarchies that the lobsters do and lobsters are really old. They're older than dinosaurs. So like this serotonin mechanism has been with us and Ben with biology for a very long time and we're just as subject to it as other creatures are so. What does that have to do with Warren Buffett? Well I think one of the key insights about Warren Buffett is that he's always been willing to follow his own inner scorecard and not be holding to certain hierarchy sorting and trying to show off and be more than he is like he is very true to himself and including thinking for himself when it comes to investing and his personal life to at that are very colorful. I think what the takeaway for all of us is to try to recognize when we are in a hierarchical situation and can feel ourselves being drawn towards sorting and instead trying to opt out of that. I think Buddhism has some interesting principles. In it that are really about opting out of that. Serotonin Matrix that a lot of us live so. I all those things together for your investment portfolio that thinking for yourself knowing Mr Market are taking advantage of Mr Market. When you can all these things all tie back together and hopefully they also lead to a life. Well lived on your own terms that at the end of the day. You've minimized your regret. And you feel like you did things your way. Let's take a quick break and hear from today. Sponsor transfer wise is the smartest way to send and receive money internationally the MS podcast network has used transfer wise since two thousand sixteen. We can station of fifteen people and counting where most of US international transfers spin the service that we solely relied upon. If you ever had to move money across borders you know how expensive it can be. And how difficult is we changed? How we do payments internationally for exactly those reasons transfers is cheap and Matz issue that anything we found transfer is over six million customers who save nearly four million dollars every day back rates and hidden bank fees or even better is that you can even get your own bank details for the US UK euro-zone an Australia. Meaning you receive money from those countries for free. It's great for freelancers and anyone who works internationally. Try them out today. Get your first transfer free by visiting transfer vice dot com slash T I P that's transfer wise dot com slash CI. Ip fundraise is revolutionizing the investment world fundraise enables you to have a portfolio of high quality high potential private market real estate projects that are carefully vetted actively managed by team of real estate pros. All these without having to break the bank fundraisers rises cutting edge. Low cost model eliminates. The bloated costs and middle men have traditionally weighed down real estate investing saving investors. Time and money when you add fundraise real estate into your investing strategy you get to have a deeper sort of diversification beyond public stocks bonds and even other kinds of real estate like publicly traded. Reit's and one of the secrets that many of the country's wealthiest investors understand. Is that when you diversify your portfolio's not just resilient it's actually position to earn more overall no matter what kind of investor you are? Fundraise makes it simple to build a more perfect portfolio visit fund rise DOT COM SLASH BILLIONAIRE? That's F. U. N. D. R. I S. E. DOT COM slash billionaire to have your first three months of fees. Waived all right back to the show so jake. This is a great segue into your book. The rubble alligator In fact we have another show on our network that's hosted by Sean Murray. And it's called the good life and he interviews you about all the different aspects of your of your book and we'll have a link to that in the show notes if people want to check that out and I would encourage you to check that out. talk to us a little bit about the book and also talked to us about this idea of sorting and how it's demonstrated in the book. A lot of the impetus of the book came from having studied a lot of different managers in the decisions that they make around cap allocation and seeing a lot of what to me seemed like unforced errors by people who were plenty smart to make the right decision under the math is hard but the emotional quotient part of the equation and really following your own inner scorecard and doing what you think is right was ignored. And that's how the errors ended up coming together. People wanting to show off about some big merger and acquisition that was destructive for most of the shareholders. But they got to feel like they were the big man on campus because of it that is a hierarchical sorting kind of thing bragging. About how much revenue have but not being profitable. We see that a lot so I wanted to write a book that hopefully would give those managers and then also through other proxies investors who recognize managers. Who are doing that a little bit of a playbook on how to think for themselves to have the confidence to do it and so crazy enough. I ended up deciding to it in a fictional story. Format that only baked the lessons in and we're able to resonate with the reader a little bit more than just a dry nonfiction explanation of all of these cap allocation principles. So if you look at what the book really is. It's the karate kid if Mr Miyagi was like a Warren Buffett character. So that's the kind of spoiler for the story press definitely huge fans of your book and another person who is a big. Fan of your book. That is Charlie monger. So if you listen to the episode that Sean Murray did with you jake to actually have a chance to hear what you and China among talked about for twenty minutes after he called you more or less out of the blue to talk about the book. We'll definite short linked to that in the show notes. This has been absolutely amazing. Jake can the Audience l'amour about you you book and Following Street investments yet I write quarterly letters for my clients and but they're publicly available and those are at Farnam street dot com. It's pretty easy to sign up there. I go on twitter probably more than I should. It is a very fun place to be a lot of times in the financial space. So my handle there is at Farnam. Jake one pretty easy to find. I do a podcast with a couple of friends who you are. Well familiar with Tobias Carlisle and Bill Brewster this value after hours. It's like if three buddies got together after work. Long Day at the office buying companies and then kind of. We're talking about the inside part of baseball for investing. That's what the the show is approximating. It's a lot of fun to do. We do it once a week but yeah otherwise if you know anyone wants to reach out to me. My email is five good questions at g mail all spelled out. Fiv. So I'm not too hard to find. And as far as the rebel allocated goes it's available on Amazon in print digital and audio. So you can check it out there. That sounds amazing and again we'll Michio to link to all of that in the show notes. Jake thank you so much for taking the time to speak with Preston me here today. Thanks for having me guys all right guys so this show. We play Chris from the audience. And this question's very timely. It's from Nathan and Christian is about berkshire-hathaway high presidents take. My question is about Berkshire Hathaway in stock. It owns in his portfolio. Berkshire already owns a specific stock in its portfolio. How do you think about considering a by more than individually taking into account the fact that you already have some exposure to the stock through charts for Photo Nathan thing? That's a great question. I don't think that there are any issues. But you getting a bit more exposure to any of the stocks in buffets portfolio. Because when you do the math you have very little exposure to almost all stocks in his portfolio. Keep in mind. The Buffett's stock portfolio is less than half of the value of books. How the win the first place? They have a lot of operating companies to none even apple. You have two months exposure to now is the biggest position in Berkshire hathaway portfolio which is more than ten percent of the market cap off Berkshire hathaway in the first place and is almost a third of the entire public trade portfolio. But even so consider if you have ten percent Berkshire and then ten percent of that are made up of apple she s you still only have one percent exposure in your portfolio to apple. Now Bill is a little more. It might be closer to one point. Five one point seven in this example if you have ten percent in Berkshire hathaway but any case. It is very little. So even for buffets portfolio that is very top heavy and just an example if you look away from the top ten holdings the eleventh biggest holding is just a bit more than one percent above its entire public trade portfolio. So it's really not significant. It's really my way of saying that you shouldn't think of Buffett's stock picks at all whenever you consider your own portfolio unless you only hold berkshire-hathaway in your portfolio or very close to only hold on that one stock but where do think that. You should pay attention. Is THAT BUFFET. Like all the money. Managers with more than one hundred million dollars on the mennesman has to disclose with surprise the buy stocks. And that may give you good indication of with stocks that are currently undervalued. You can find those prices and those picks at guerrillas for free and we even have a resource Academy where can check out of its picks together with all the super invest us like spear Mona's pop rai and take a closer look at their portfolio. We'll make sure to linked both of those resources in the show notes and then four times a year. The stock picks become available. It's February fifteen may fifteen August fifteen and November fifteen. That doesn't mean that I'll do the same thing as they do but I do. Use Office picks and other supermassive specs ask inspiration and perhaps put a few on them on mental. What's List for further investigation? So Nathan great question. But I really can't add much value beyond Stig's response because I pretty much agree with exactly what he said. So with that Nathan for asking such a great question we're going to give you free access to our intrinsic value course for anyone wanting the checkout the course go to t I P intrinsic value dot com that's T- IP INTRINSIC VALUE DOT com. The course also comes with access to our T. I. P. Finance tool which helps you find and filter. Undervalued stock picks if anyone else wants to get a question played on the show go to ask the investors DOT com. And you can record your question there. If it gets played on the show you get a bunch of free invaluable stuff. All right guys knows all the press down. I had for this week's episode of the PODCAST. We see till again next week. Thank you for listening to ti to access our show notes causes or forums go to the investors. Podcast don't come. This show is for entertainment purposes only before making any decisions. Consult a professional. This show is copyrighted by the investors. Podcast NETWORK. 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Berkshire Berkshire Hathaway Warren Buffett Jake Taylor Berkshire Buffet Berkshire Us Ceo Big Berkshire Charlie monger Apple Preston Pysche Brooks Halloway Google Mr Market Chris Bloom apple Berkshire
TIP302: Investing During COVID-19 & Intrinsic Value Assessment of Intuitive Surgical w/ Arif Karim (Business Podcast)

We Study Billionaires - The Investors Podcast

1:07:29 hr | 10 months ago

TIP302: Investing During COVID-19 & Intrinsic Value Assessment of Intuitive Surgical w/ Arif Karim (Business Podcast)

"You're listening to t I, P. Hey, how's everyone doing out there? I think you guys are going to really enjoyed today's show. We have the talented Reef Karim. WHO's the senior investment analyst from ensemble capital management with us in the first part of the show, a reef talks about how he is adjusted his portfolio on the impacts of covid nineteen, then in the second half of the show reef provides an intrinsic value pitch for the fascinating medical, technology company, intuitive surgical finally at the end of the show, we a question from the audience about how the market can possibly be attempting new highs. Even though we're seeing all time, unemployment numbers in a devastated workforce so without further delay. Let's get started. You're listening to the investors podcast. Well, we study the financial markets and read the books influenced self made billionaires the most. We keep you informed and prepared for the unexpected. Let's take a quick break and hear from today sponsor. If you're in tech, you've been there before fueling the pain of hiring a freelancer or new employee for design development owner to find a month later. That's not a good fit and those type of mistakes aren't cheap. Instead Machel Mobile. APP Digital Technology Consultancy uses the process developed over the past ten years, delivering over six hundred projects to ensure fast and beautiful mobile. All wet APP is finished on time, and within budget, mutual mobile has built. Ask for numerous companies. The has been quiet such as euro quite by Emerson, flex drive acquired by lift and map. My fitness acquired under armor. You get a dedicated team to help you with your tech project from start to finish from ideation to project shipment to maintenance everywhere in between mutual mobile designs and builds beautiful mobile and Web APPs that increase the value of your business. If you had to sign them developing these schedule free thirty minute consultation at mutual mobile dot link slash billionaires to get started. That's Mu T., U., L. M. O. B. I. L. E. Dot L. I. In key less billionaires to get started with your free consultation today all right back to the show. Welcome to the S podcast. I'm your host brought us as always accompanied by my co host Preston Pysche. Today's main topic is investing through covid nineteen, and in the second part of the interview Arif is also pitching a stock for US intuitive surgical. Which I think you will find very interesting. Are If welcome to our show? Hey thanks again. Thank you for having me I appreciate having chance to chat with you. I can't help, but kicked this episode off by talking about all the volatility that we have experienced especially since February, but it has been a almost unprecedented time just looking back. It seems like it's been decades, but it's only been a few months. I have to ask. How has it been for you and your team to menace a billion dollars, and then you see the size that portfolio just plunge, and then only to see the market having the largest fifty day trading rally ever and now we're close to an all time high. Can you talk through some of the emotions that you've gone through over the past few months? It definitely has been an unprecedented time have. Out of the I in our careers delivered through has been really interesting and dramatic. This namic obviously started in China and one of the things that perked up. Interest was when I saw after lunar. New Year in the second largest economy in the world basically shut itself down. That was an amazing thing to see. And while very fewer concern about it here. That got me interested twitter. Amazing platforms I started following frontline workers in that they anything reports Taiwan Hong Kong by people hearing things out of China epidemiologist started tweeting about things going on there virologists for interests trying to find the people who would understand more about what's going on in China on the ground, and try to get data from them I, just kind of fell. What happens there? How the dramatic steps that society to the government took, and then kind of follow that into Italy as well right Kennesaw how the spread their happened so long story short. We were following what was going on in the market. Here took about A. A month after started China shut, itself found to react and so going into it, we were to some degree prepared we had thought about our portfolio was physician. What kinds of implications we have under certain scenarios, and so although we are long only we don't generally take back robots, we can make tactical changes in the portfolio to make it as resilient as possible to whatever may come, and so while we generally physician the portfolio that way for all seasons of course, when you speak information about an impending storm, you try to mitigate damage from the storm by best your portfolio for that store. Having said that you know in general as we think about investing. We're humble the fact that. The world is complicated. Lots of surprises happen on a fairly regular basis, right? Each surprise might be new or a Black Swan New in our lifetime, but the collection of surprises happens. Answer were always prepared emotionally for ourselves, and we re clients as well. There is surprised to the upside good things in this rise of the downside, and we have to kind of take them. Them as they come all the while remembering that our portfolio has to be positioned in a way that lives and thrives post any sort of crisis, and so the drought was large, it was fast dramatic. Obviously, it's not easy to see, but at the same time entry it in a way where we're very confident about the positioning of companies that we all and the portfolio. So we're, we've talked to us a little bit more about this. You're not shorting the market. The timing is very tricky. But how did you specifically change your portfolio covid nineteen hit? For us, our perspective is that over long arc of time the market has returned something on the order of nine percent a year, and that's you know with big ears and big down years right? That's to be expected so to the extent that you can have a long-term focus on the value being created by the companies that you own and their resiliency. That's really important, right? Right so when Warren Buffet talks about never lose money. Never lose money in other words from a permanent loss of capital perspective, that's a perspective that we take which is that we only want to own companies where we have strong sense for the resilience and Competitive Advantage, so that going through episodes like this, we have a very strong conviction, their ability to survive and thrive afterwards. Afterwards having said that in front of any crisis and we were to some degree fortunate that we read the tea leaves right and saw this. What looked like potentially a big Su- Nami our way we did the things that any normal investor would do which is, we've thought about our companies? Powder balanced restructured. What kind of financing they would be needing the next three to five. Five years. They have access to the markets. Will we the revenue? I mean one of the companies that we own. Our portfolio is booking dot com, which we think is that great business men a resilient business by obviously it was going to be in the hearts of this pandemic right, the travel industry just gotten clobbered, and so one of the stress test scenarios around with booking. How much of a revenue declined, would they have to see for the start losing money? And our conclusion was that it would have to be somewhere on the order of seventy percent they will be able to survive the resilient enough, and there was surviving out of this hotels of even more dependent on booking to help them gain customers again, so they are competitive. Andrew be strengthened in. In addition you have to look at other things such as what is the probability that company would be able to access the financial markets strike is a big part of this was going to be that the a big shock to the system potentially right, and that's what ended up happening with shutdown global economies and in that shock. You've got a liquidity crisis of heart which they have. Have Bills to pay and you a balance sheet, or they would need to access capital in order to make it through the trough of that sort of a going into the panic, and then point becoming out of there right, so we sort of thought about all those factors resilient to the can statement, resilience of cash flows illiquidity. The balance sheet ability to raise money I mean one. One of the things that we came out of this analysis was that larger companies would be at a relative advantage over smaller companies in terms of access to capital and resilience, and so we pruned within our portfolio companies that we have the lower conviction and added to the companies that we thought we had higher conviction in going into this. That really helped us emotionally resilient student. Arif s invest. We are always on the lookout for secular trends when we consider our current portfolio, and also with stocks that we have on our watch list, and you know some of the secular trend that we've known for a long time. One example could be the shift to ECOMMERCE and retail and. Shift towards renewables in the indie industry, also, they are to allots extent priced into the market. Which cyclical trends have you seen coming out of covid nineteen? If we can't even say the BE OUTTA? In most investors are looking for sickle or trends to find underscores value, but you have a different approach. You please elaborate on that. So I have a little bit of different view that I think the way most people view. You make money via secular trends so at elegant example. I think the notion of undiscovered under appreciated secular trends, very romantic I don't think it's necessary to bet on things that other people haven't seen and I'll give you example that e-commerce right obviously that accelerated in the U. of S. quite dramatically since the pandemic hit, and we have be blocked down here. That commerce ran has been around for twenty thirty years now right twenty five right irons last recession ECOMMERCE was maybe in the low to mid single digits sort of penetration of retail here in the US. US and Amazon of course was one of the leaders in that Amazon still one of the leaders, and maybe even a even a stronger leader today yet to say that you could have said ten years ago. That oh e is unknown trend. It should be discounted, but yet Amazon has way outperformed market returns right, which goes to say that although there are trends that are in place that are appreciated by seemingly everybody. It doesn't necessarily mean that you can't keep making money on that trend in a way that outperformed the market right I. Don't think the market. Necessarily fully discounts things that are well known, and so there's ways to basically capitalize on those existing another example I'll give you the trend of cash to digital payments right mastercard and visa have been around for what Fifty Years Right Mike. Colleague Sean was on your show a while ago, and he talked about mastercard, and that's been a phenomenal stock, although the premise of the company been around and in place for so long, so I don't think you necessarily need to bet on undiscovered trends or neutrons. Of course you have to understand what the secular trends are, because they will be wins at your back or headwinds ahead of you and you'd. You'd prefer tailwind rather than a headwind, but having said that I think the most important heart of best at analysis from our perspective is being a business out now understanding those companies that are competitive bandaged in the way that they're trying to capitalize on secular trends. Are they creating value for their customers? Are they creating value stakeholders in a way that competitors potentially may not be able to rights. They can create outside returns from Roi, see perspective and eventually be able to also gets the other part of it is growth duration right so to accept that the secular trend is within a very large market, so call it payments right from cashed. You can have decades decades. Outside returns in kind of a market provided the companies that you're betting on have the ability to create a differentiated competitively advantaged business that mark. Prior to this pandemic, very few investors had this kind of situation built into their model I. Know I personally do not have pandemic build into any models that I ever considered. Moving forward, how do you treat this in your model? Because we might have a second wave, we might have something else completely. Tell us some of your thoughts on this. I think that's why people get paid equity risk premium, but having said that one thing that I personally having worked ten years going into the great financial crisis ten years ago, one thing that coming out of it we learned was that people have what's known as recently biased right, which is we focus on those things that we person experience, and so the last ten years everyone's been worried about another financial crisis cup yet the financial systems have been made more resilient and central banks have become much. Much more aggressive in the way that they'll act. It's interesting. We saw in this crisis. The Fed step in very very aggressively very long before anything had happened, nothing had happened, and they were already. That's not entirely true. Because the credit markets were starting to freeze up, and they saw that happening, but the pace at which they acted, and the magnitude that the acted was unprecedented in a way. I think that's what's behind the massive recovery we saw both in the credit markets the equity Mark Brennan. Had to develop unprecedented tools that came out of his study of the Great Depression, but he also had to convince politicians. That Bay would be okay with the central bank taking these very large unprecedented steps, he sort of setup the framework to dealing with this sort of crisis. Right and it's something we were lucky having gone through what now the great financial recession ten years ago seems like a preview kind of a much bigger. Bigger type of crisis that we're going to this bigger shock that we're seeing all Jay pal had to do was basically reboot that playbook that Brennan Hat and then just turn up the volume till eleven right. He threw the kitchen sink, but the whole kitchen and the bathroom at and that to some degree has. I think supported financial markets. If this time around I think going forward like we definitely are worried about second-wave. Epidemiologist expect this as a given. We're no experts, but we're following the experts. It's hard to predict exactly how things will react one thing that seems clear as a human nature being what it is. The initial wave was a shock to society's at every size reacted differently right China reacted differently than the US or Germany or New Zealand. You know everyone reacted differently. At various levels of success in containing the pandemic of the second waves are likely to look very different in different societies different countries. Having said that you have to be prepared for the worst, and until there's a what's being said by the experts is until there is a effective durable vaccine available and deployed basically all around the world. We're going to be facing kind of new normal or next normal living with virus, and that could very well be two three four years. We hope and not longer than that in which we're serve delays, but having said that we are strong believers, and I think history proves is that humans are resilient and adaptable right, so what takes us as a shock in a surprise is tragedy that we're facing? Generally figure out ways to deal with them, we figure out ways to overcome them. figure out ways to outmaneuver the challenges that are presented to us. Are One of the reasons why you really wanted to speak with you here today is that you are a hard micro guy or like the rest of the world, also micro guys like leukaemia individual stocks we have to factor in like all the crazy macaroni, and that's also happening around us. Oh I, think it's been interesting after having speaking to different macro, guys who look at very much as As an a class more than specifically stuck pick to have the the complete opposite here like someone who really focus on the individual companies, but typically don't look at stocks. Just one brought asset class. No are making it very simplistic and I think you and Preston the me, and like we all in that spectrum, one way or the other between macro and micro, but knowing where your income from a curious to hear your thoughts about the trillions of dollars in stimulus packages that we've seen, and we have announcing repurchase both investment grade and high yield corporate bonds he recently. How can our community as value in masters best navigate the stock market. That's an interesting question and it's obviously one that all investors have had to deal with in China. Understand that macro landscape with past ten years the very least right like you mentioned where it much more micro oriented macro oriented, but so we spend ninety five south or more percent of our time, looking at companies, understanding competitive dynamics and such, but it's you have to understand the macro-contexts context what you live in, and that feeds into somebody overall sort of assumptions about the way the world looks today and going forward. Having said that you know I think it's. Just a little anecdote I just like many many people in the world. investors in the world was really perplexed by. Ten twelve trillion dollars in negative yielding sovereign debt is back in two, thousand, fifteen or sixteen. And I haven't comics, background, and I remember one of the key tenants of economic theory as I had learned this over twenty years ago, so things have probably changed since then. Things have changed, but one of the key tenets was that capital is scarce, and that's a fundamental driver of how entities. Actors companies decide how to out. Catholic scarce capitals you put it to work at the most productive uses of capital and in exchange there's a cost to capital which you can call on interest, rate or an equity premium or whatever you WANNA call it right. One thing that's become clear is that we no longer live in a scarce capital world. Starting in. Maybe it was thirteen fourteen fifteen sometime. Ben I began to shift the way I thought about the role of capital in the sense that when you have zero one percent negative one percent in capital with that tells you is that there's plenty of capital around. What there's not enough of is productive uses of capital. So what does that mean that means in order to make your capital productive? You have to find talent. Who is able to take capital and create practices out of it? It's interesting that we as investors sometimes are inculcated with these tenants about what's true about the world, and there's a rule about it. It's just this we believe right, and our forefathers believed it in they kind of pass it on to us right, but one of tenant is at Oh. If I have money that I've saved up. I should be able to put in the bank or by Treasury bond or A. A blend and get a positive return on it without taking me risk, there's a risk free rate well, who says your capital should earn anything without taking any risks if you remove at tenant then becomes really clear how you should be navigating the world ahead, which is that the central banks have basically taken the risk free rate down to zero across the world or most large sections of the world, and so I. Think what that ends up doing is creating opportunity or As well as challenges for us as investment practitioners to find either directly productive uses capital ourselves right where you can earn a good risk reward on capitol, a yield as a good risk reward, or find the talent to do that, and so we want find talented management teams running companies where they can earn outsized returns right, and so from our perspective that's return invest capital and have the ability to reinvest. Cashless coming out of their business in new opportunities that offer outside invest capital. Challenge in today's world and going forward where basically there's an abundance of capital, the cost of capital free as investors. We're not gonNA. Get a free lunch anymore. getting some yield without taking a risk right, and so our job. I think this place to our is to find those companies that are competitive advantage with management teams and cultures that revolved around creating value for customers, stakeholders and the world, and that in the end will end up paying us as shareholders apportion that value, and hopefully outside portion brought to the rest of that we're taking. So Ref-. Let's go ahead and transition to the second part of the show. I'm really excited to go through this pick because I think. The technology that this company has is really quite amazing. The name of the pick is intuitive. Surgical Ticker is I S R G talked to us a little bit about their business. It's a really interesting business. five business actually think about it, but intuitive surgical makes robotic surgical systems that surgeons use to perform minimally invasive surgery so. Some of your audience may have seen the robots cameo on some popular TV drama shows like grey's anatomy might be too old for it, but but basically it's what you'll see is this robotic scaffolding hovering over patients with four arms for large arms, these are remotely controlled by a surgeon from a separate standalone console, and what it enables the surgeon to do is it brings both new capabilities, but it also improves patient care from the sense that it allows surgeons to fix things within the patient treat patients. Without having kept their abdomen open, it allows you to perform certain procedures in a minimally invasive way, which minimizes how much of the body is open to the air, which reduces both blood loss as well as infection complications, so it's really innovative from the perspective of both improving the surgeons ability to perform certain procedures, and their start came from prostatectomy for prostate cancer, which is. Is Removal of the prostate hysterectomies, which is removal of the uterus for uterus cancer, but since then they've gone on too many more procedures, which is why the stock is not so well and it procedure account has grown dramatically from a couple of hundred thousand procedures. Call it back in two thousand twelve, or so to about one point, two million procedures globally done today. Let's take a quick break and hear from today sponsor. America's ready to get back to work, but to win the New Economy. You need every advantage to succeed. SMART companies run on that suite by Oracle the world's number, one cloud business systems with nets. We used visibility and control over your financials, HR, inventory, ecommerce, and more everything. You need all in one place whether you're doing a million or hundreds of millions in sales net sweet lets you manage every penny with precision. You'll have the agility to compete with anyone work from anywhere and run your whole. 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We'll talk shop friends and I, and so I learned from them about technology stuff in they learned from me about financial markets, investing kind of stuff, and so one of my engineer friends. Actually Google mentioned the companies to me and said Hey, have you seen this company? And this was back in two thousand twelve into a surgical. It's this really cool company that makes these surgical robots right and of course expected engineer. Gouldman be very impressed by surgical robot, right? Of the name, but it never really looked it or knew they did site took a look, and I was intrigued from my perspective as I looked at the company I. Think a you know. We talked about mental models right like like a mental image came into mind. which is that of the bionic? Surging this machine takes a human surgeon makes them bionic, just like most value investors probably at the. The time I kind of to the financial metrics and was like this. This looks really expensive. Actually and eighty percent of the procedures were this prostatectomy in the urology so prospect nine ecology mainly hysterectomies being density limited at the time, but I followed because I was interested and one thing that I have learned over my career. Is that oftentimes if you look at the curve of technological advances? There's a learning curve and both an application curve involved, and so I followed it because I was interested, but what I saw was that there fourth generation machine would just call the DAVINCI. They basically were talking about doing a lot more than just prospect urological gonNA. Call it logical procedures. So the the thing that got me though the key metric that got me so statistics was at as I studied more. I realize that you paid a million to two million dollars. Turn a regular surgeons, or by which incredible at capabilities potentially bring was incredible, and this is both in the way they did their job to be a better surgeon, but also in creating new ways to treat are performing their surgeries on patients. Bitter humans cannot perform right. You need to be inside body and. And have sort of a reverse angled wrist. Do these things, but secondly which is a financial guy. This was really interesting to me. Do as well as we're all familiar with the model of the razor blade model, so Gillette razors are a classic model which is when I was in high school like around seventeen years old I got a free Gillette Razor in the. The mail with one blade. You start using a guy a religious thing, right? We'll Gillette made no money. They actually lost money on that razor. They sent me right, but then I went and bought these expensive razor blades, and that becomes an annuity they make up, and so that model is one that the financial markets really like a lot where you pay some small investment. Investment up front at low or negative margin, and then you get high margin, sir, consumable that your customers pay for a long period of time. What with with intuitive? When I analyze their financial statements? It occurred to me or my guesstimate I came up as guesstimate that they were making something like sixty sixty five seventy percent gross margins on the robot on the razor. which to me was really interesting, because you have hospitals paying one two million dollars up front to become captive customers of intuitive, and then paying them something like an eighty to ninety percent, gross margin on the instruments that are the consumables on these robots, and so from Kirk Procedure Perspective robot, which typically lasts like five six seven years. They're paying two million dollars for, and then they're buying these instruments that had to be replaced. Replaced after every so many surgeries, and it roughly runs around eighteen to nineteen hundred bucks per procedure that intuitive receives for these instruments, and so that model was really interesting to me. The fact they collected such a high margin on their robots was really interesting to me, and there was no competition, soft tissue surgery, the only game in town, and then finally caused me to pull the trigger Internet. It's seeing a position was. Was Competitive Analysis. There's a moat there from my perspective, but it was an early market, but it was a large market that they can go after they were doing. You know low single digit. percent of surgeries at the world is something like three hundred million surgeries, not all of them are applicable to something as complicated as dementia robot, but some proportion of that is, and maybe it's twenty percent or thirty percent, but they. They were doing very very low percentage of that addressable market, and over time I was confident that with a new machine management talked about this improvement on that that there were new procedures they were going to try to ascertain for the machine to address, and that would layer on growth curves for them via those new procedures, any geographic at the time something like seventy five percent, or so of their procedures were. But the US only four percent global population of much bigger percentage of that in healthcare consumption, but still there is a large developed market out there that also could uses machine I'll just add one last thing that really impressed me up company, which is that? When I talked to the company, I asked him. How decided what procedures to go about targeting for new instrument? Instrument Development Bright, so you have this robot and it's got four arms. One of which is a video camera right that allows the surgeon to see what's going on this three. D. HD camera, but the other three arms have instruments that you use to actually do the procedure, and that varies depending on what procedure type you're doing, so I asked the company how. To allocate the resources to creating the instruments necessary for certain specific procedures that they seize being B.'s viable procedures for the robot doctors will adopt. I said how target that how you decide, and they were like. Honestly we have some ideas about what the machine can do, and we ourselves go and talk to doctors about that and we. Maybe we'll introduce an instrument the market to enable a certain type of surgery, but more often than not. We get doctors coming. Coming back to US and telling us. Hey, look I took your machine and try this procedure and I think it'd be great for this, and we can attest the market talk to other doctors in similar fields and ask them what they think, and they get this percolation of demand that comes up in organically from their user base their doctors. They're saying look. Use It for this thing, but this other thing is also applicable and I'm really excited to use. Other procedure, will you develop the right? Instruments can do that and that really impressed me that there's this inherent latent demand among surgeons for certain new procedures for the company developed because we're excited to use this machine patients for that. So this is a fascinating market They're doing around a million surgeries a year and there's a potential for three hundred million surgeries globally. If intuitive surgical capture that international market, so talk about the company's Competitive Advantage and what it takes to create intellectual property in this space. You know it's really interesting as a patient and a doctor, you're not going to let the first new device that comes along into a patient's body or your body. There is safety factors adult so I'd mentioned that when I first looked at it, there wasn't much in the way. Way of competition, but there's competition on the horizon to your point is a large market and some of the larger medical device makers like Johnson and Johnson medtronic have taken notice Saadallah into the history and Kinda tie that into your question about competition, so it's good. A surgical is start out of this group at Stanford Research Institute Sri that was working with the military in developing a remote tele presence surgical device. Used on the battlefield, right to help wounded soldiers that didn't go very far though there were some money invested in, and my guess is that it's probably because communication bandwidth wasn't quite there yet I ruined technically, and so that project basis spun out into what became into surgical, and initially it was about leveraging this technology. They built in a way that would address surgery, and they obviously found that several versions of the device that in two thousand I want to say or two dozen to bat. They hit onto the product market fit in the form of prostate removal in an era Kind of niche market. And so medical device makers who had very high profit margin laproscopy, rudimentary manual tools weren't going to invest a whole lot of money in this fancy robotic machine for some niche markets. What happened was over time intuitive got better and better developed new capabilities know-how. How earns trust amongst surgeons that were performing surgeries work their way to basically racking up a safety record over hundreds of thousands of procedures right in trained thousands of surgeons on using a machine in two thousand fourteen I think it was. They came out the DAVINCI exile machine. And word of that machine leaked out before was introduced around the Times introduced, and that's when Johnson Johnson medtronic's who make laproscopy general surgery starting to get worried and Sabet van realized the potential threat. This robotic surgery created for their own. Businesses, and that's only decided to invest money ended up narrow machines. So long story short I don't know if you've heard that story. This really intriguing to me, but that story when Jeff Bezos. Was the last year he was at the Economic Club of New York talking and he mentioned that they hadn't talked about aws. Amazon web services, which is their cloud computing initiative for many many many years right think it was started maybe in two thousand, five sick in that timeframe, and he said for seven years they didn't have a single competitor. Sit and talk about it. Because they had a lucrative, it was fastest growing anyone competitor now and over that seven year period than all this time to keep developing more more capabilities for aws will similarly with intuitive surgical for basically two decades. They had no competition. No one was working on the two decades. Decades headstart on know how and capabilities, reputation relationships and the record of successfully perform surgeries using their robots and fifty thousand trained doctors with experience, using their robot, which creates a really strong moat around the company and robotic, minimally invasive surgery. What you've seen as a result is that latronic endangered both had initiatives. I WANNA say prior to the excise introduction, but started subtitling development when they heard about it. Because target gentle surgery. Not just these niche procedures, not procedures. It was all surgery basically as they saw they threat. They've been developing it since their own robots since then J. J. A initiative, so they had their own bending created a JV with. With Google actually Google's healthcare division called verb, and so that was going to incorporate a bunch of machine, learning and AI and data analytics into it well a few months ago, Jaycee bought out that JV and they are delayed by I. WanNa say one to two years on introducing that machine so from my perspective, that doesn't look like it went all that well that jv with Google, and no word on when to expect that device, so I think intuitive surgical with the guy that's been out since two thousand fourteen been selling it the majority, the machines out there on the field today. That's their fourth generation device. That's GONNA be competing with first generation. Generation device for medtronic and John Jay, and in fact I would speculate that by the time medtronic and JJ with their first generation device, intuitive Laurie other fifth generation device out in the market at that point, so today have something like fifty six hundred fifty eight hundred robots out there in the field globally they've been growing their base by ten twelve percent. A year is a very mission during company, and because the focused on this one area I think they are likely to continue exceeding their competitors efforts in the area, so they've got a modal ready and I think that gets wider especially in light of Cogan and things that are going now. Let's talk about that. How do you expect Covid nineteen? If ever will impact intuitive, surgical business both short-term and long-term. So short term negative their first quarter back in April and time China was recovering from its covid nineteen actions having shut down the economy, but also hospitals had reduced the about surgeries were performed because they wanted beds available for Kobe patients, and this is throughout countries I mean. Although the damage was contained within China for the most part in that who bay province, which is about sixty million people are so they're worried about. About widespread Kobe infections, and what that would mean for the for the healthcare system so any surgery, this term used in surgery called term elective surgery, and so any elective surgeries postponement by elective is not plastic surgery. Ronan look good. It's more like it's a surgery. That's needed to be done, but it doesn't have to be done today. It can wait a couple. Weeks COUPLA months timeframe half of all of intuitive surgical. Surgical procedures are cancer treatment surgeries right, so they need to be done, but the timing can ship so in China. They saw a ninety percent reduction in their surgeries in February, but by the time they had their conference on April. That reduction was down to I think it was There were eighty percent of the pre code level so as a twenty percent reduction from ninety satisfaction, and recovering however the rest. REST OF THE WORLD! Is that hit in me too late February and then going to March April, so they didn't really give guidance for the quarter because nobody knows, but at the time they talked about their surgical procedures, being down sixty five percent in the US down sixty percent globally at the time of their conference. Call basically I, expecting a cue to be terrible quarter from a procedures perspective and a revenue perspective, And Q. Three macy some partial recovery, but it's not going to be a terrible quarter as well most likely what happens though is these procedures that have been basically delayed in anticipation of Kobe cases. They're gonNA. Come back because most of them are things like cancer, treatments or Hernia, treatments or other procedures that have to get done. It can be delayed, but they have to get done, and so there's this big backlog forming, and that's going to have to come. Come back and to the extent that the dating factor really will be the care teams, the doctors and the nurses and surgical teams that are available to perform be surgery Nali the backlog, but then the ongoing organic growth of the procedures right and so I think for in the Post Koga era. We don't know what to look like. In terms of what normal looks like, but most procedural recover most likely, and then you're gonNA. Have this big sort of. Of backlogged to cover over call three to five years, the demand for intuitive will have to be made up. Hopefully haven't lost too many people on the way waiting to get treatment, but never getting to that point where need treatment, but obviously it'd be a sad outcome. BED ADDS to the devastating effects of this endemic larger companies typically have all sorts of capital allocation priorities, so includes dividends includes buybacks includes their earnings per share prints of the quarter that. That sorta stuff just doesn't play a role for into Sigli focused company on the core value to the customers, and so I think that ends in a time like this where you may see medtronic Jay back their investments across divisions. We've seen nothing like that attitude intuitive surgical where they're continuing to focus on extending their capabilities so coming out of this period. I expect intuitive competitive vantage difference relative to competitors to be even wider than it already is. This take a quick break and hear from today sponsor. When The New Yorker magazine asked Mark Zuckerberg how he gets his news, he said the one news source. He definitely follows his tech team for more than two years and nearly seven hundred episodes. The tech me M-. Ride home has been silicon. Valley's favored Tech News podcasts the tech me M- ride home is a daily podcast only fifteen to twenty minutes long in everyday by five PM. Eastern it's all the latest Tech News, but it's more than just headlines You could get a robot to read the headlines The tech mean ride. Ride home is all the context around the latest news of the day. It's all the top stories the top post tweets and conversations about those stories as well as behind the scenes analysis. The technique ride home is like tld are as a service. The folks at tech are online all day. Reading everything so they can catch you up, so listen to the one podcast one. WHO's anyone in silicon? Valley listens to every single day. Search your podcast APP now for ride home and subscribe to the tech me M- ride home podcast. Studying the different generations often vinci robots I mean you can't help but be impressed by the capabilities, and I would encourage everyone to go to youtube, and like check out some of those videos, because it is really Sifi as you refer to it like it looks like something that almost shouldn't happen in twenty twenty and all audience, they're deeply rooted in the investment philosophy off Warren Buffett and buffet always makes it very clear that you don't want to invest in a company that has to reinvent itself and buffet is off using the example of see's candy. Chocolate doesn't have to be reinvented and and technology are not going to change. How consumed chocolate? How do you think about intuitive surgical need to reinvent itself and this is the ability of the business. That's a really good question. I think there's a couple of points in there to kind of unpack. Buffet is great at packaging, these pithy little sayings that have so much wisdom embedded in. Many ways when you simplify things teams, Einstein may be said, simplify things as much as possible without oversimplifying it something to that effect. He said it much more than I. Did I think it's a very simple message and it's an important one, but it is a little overly simplistic and I'll explain why, so in the chocolate business right? See's candy. You're right. The consumption of chocolate hasn't changed a whole lot. There's a lot of. Of Wisdom in thinking about sustainability, we do this all the time sustainability of business head of advantages and a lot of wisdom in trying to understand how much cash flows are thrown out by a business. Of course, the more capital intensive it is less cash flow comes out with shareholders, and that very much as part of how we value businesses actually is what the capital intensive businesses, so we're interested in the free cash flows. And of course, capital-intensive plays a big part of it. What I'll say is that when you have any business where it has to reinvent itself, it probably is not a great business, but the businesses that we find very attractive within the technology realm are those where the core part of the business, not being reinvented core value propositions reinvented. What's happening? Is You're extending that core value proposition? You're extending the scope of it a. you're expanding the growth runway for it. You're increasing value creating for customers. You can take a portion of. Of that back right in in the form of the value that you keep for employees shareholders in a way that's fair saw I'll give you a couple. Examples with intuitive surgical. What they're doing today is no different than what they did. In two thousand. The core value propositions no different what they've done via investments is they have extended the number of procedures that can do so the scope to which they can address. They've extended the capabilities of the surgeon creating value for the care team. They've extended with a surging do. All that is value created right and until get keep a piece of that which Louis C. reflected in revenues, a profit margins similarly. If you look at Google for example, are their core business still search right, which is what they started. What back in two thousand or whatever I late nineties two thousand when I started using Google for search? That's predominantly what I use it for today. That hasn't changed, but the investments they've made haven't reinvented search so much as extended. Extended its capabilities and the scope from the perspective. Oh now they have youtube so now search applies to video. They bought doubleclick and incorporated display ads into their business, which leverages their Edwards platform right towards another part of the business, and then you know, ai machine learning improves pawn all those businesses behalf, so the investments they made have extended the capabilities of core value proposition and the core technology, and the final example I'll give is which I think is very interesting. Interesting because I think this is a controversial name, but at the same time I think it's very instructive in addressing this question about having to reinvest in your business, and that's net flicks right, so we own net flicks for anxious to sixteen or so and one of the things that one of the first things I did. I came down Samba to fifteen was to look media industry in China understand whether it was an investable space for us and the key question. Question there was. How does the Internet change the way media's delivered consuming the value created out of it, and it was on the verge of being on investable because we didn't know or not. Many people knew how the effect the media industry right in the process of China understand what became really clear to me. Was Netflix's had the right strategy which is media delivering media went from being something tied to a pipe in other words, a cable company or telephone company. Wiring from there you know central office to your home, and then delivering media to you to this virtual network that the Internet brought to customers right so in other words, whereas most media companies were dependent on this wire, bringing their service to your home via distribution company. So in other words they ended up being regionally scaled. What the Internet did was disintermediated connectivity the customer from actual wire that connected unh. Some places became wireless. Wireless right with four G. Internet, and so what that made me realize was that Netflix was going to supersede the existing media companies i. must they change their strategies from being a regional scale model to global scale model all that meant that they had to invest heavily in content in order to apply their service leverages service around the world to billions of customers, all different viewing habits different languages, etc, what that entails in? In order to capture that market is investing capital to get to scale that you're applicable to global market, and once you're there because really hard to compete with you for the traditional media companies right because that scale has failed dynamics, so for example whatever the top movie or show is today, whatever it costs more than any other media company, because at the end of the media, companies produces, but they are also acquiring talent right. Right to produce show more than any other media company Netflix's and pay more than anybody else and get on a per subscriber basis. It costs it the least delivered that subscriber, and so that's the kind of scale economic netflix's invested in its scale is content catalog attracted a subscriber-based? That's now growing twenty percent, plus per year at huge scale have closing on two hundred million subscribers globally right and so tying that concept. Back, to the Warren Buffett Concert, you mentioned, which is you don't want to be invested in. Companies have to reinvent themselves. You don't want be in companies that use large amounts of capital. I would say that there's a new onset which is that see's candy, maybe two hundred million dollars, a year and revenue state, maybe a billion right, but they fail to. To capture the premium chocolate market like buffet says it is. You're going to bring your sweetheart a box of chocolates. You're not gonNA care about the price. What he's right, but guess what my sweetheart. My wife is not going to be like. Oh, honey, Rami a see's candy my birthday. It's awesome should be like it should have been Godiva. Something else something. Right some European chocolate and the fact that sees was unable to capture that premium market to go there because it didn't invest enough. I think that's flock. The chocolate market become a much bigger market than it used to be Hershey's bars at a dollar. A bar are no longer sufficient all these six dollar. Three dollar candy bars that sees could have been on top of, but they didn't. They didn't reinvest and reinvent themselves from a branding and marketing quality perspective to address that much larger, much more profitable market, and so the companies we invest in. We want management teams to. To be actively thinking about. How do they take first of all? We want them to be thinking about the competitive modes right thinking about return of capital. How do they maximize that in a way? That's also fair to their stakeholders, employees, customers, and then thirdly want to be able to reinvest excess cash flows in broader, preferably global scale opportunities as our best favorite ideas. Are you know MasterCard booking netflix's google? All these are global scale companies right? They address the global market, which is the huge long runway for growth, which is inherent part of valuation and value creation until. The company the revenues are growing like crazy. The CAP is reasonable. They don't dilute. Their shares outstanding. It's generating a Lotta. Cash flows with minimal debt. The addressable market is massive as you know it all comes down to the price so now the prices at five hundred and sixty dollars a share, so talk to us about how you're valuing this one is that we don't slap a P. E. or price to sales multiple to come up with our targets. We bottoms evaluation analysis based on what we believe to be good, free cash flow scenario, and that balances of the tail It could be upside to how the company performs. Performs, they could be downside long-term, but from our perspective, it's sort of like in this probabilistic range about seven hundred the right place there's not many companies that are able to durably sustain something along the lines of eighty percent return on the capital, and that's hard to do on a competitive market, but we've seen with intuitive surgical is that because of their focus and their two decade lead in this market? It's GonNa. Be Hard for competitors, even large ones to be able to take market share from them now. Having said that they're willing to. To rental market will go to competitors, but the markets we think is going to be growing fast enough for the next couple of decades that there will be space for competitors and intuitive to have great growth. I'll just say one last thing which is that if you look at about the million or so I think they did about one point, two million procedures in two, thousand, nineteen, relative, the entire surgical space, and where the opportunities for robotic surgery. It's very clear to us that the penetration of the available market is something in the range. Range of made single digits intuitive surgical, so there's a long ways to go for this market and finally I'll just add that our intrinsic value is based on the long term, right? We all know that we're living in unprecedented time one that we haven't seen in a century, and so it's very likely to be volatility along the way short-term. medium-term Intrinsic Sergio basically withdrew their guidance after reporting q one. We talked about the Q. Trends, and they didn't look very good for the near term because of the healthcare systems in many different countries being. By covid, and so from our perspective, it's GonNa. Be probably another year, or so. We have this lack of visibility because the world is dealing with covid. Some sort of a vaccine is here and deployed across billions of people. Could be longer right, but if you have a long term time horizon Andrew able to take. Advantage of the volatility we're likely to see in the sort of One two three four quarters. You could be set up for great prospective returns on a company as high quality this. Fantastic Ari, thank you so much for coming on our show and talk about investing through. Kobe, nineteen brings so many different case studies, not just from intuitive surgical, but so many other case studies in terms of how you think about stock investing. Where can the audience learn more, you and the summer capital? Our website, ENSEMBLE CAPITAL DOT COM, there's a by of me there, but also ways to reach me and my Alexan- research advisory there as well. We're also very active on social media, so we post blogs where we're talking about ideas both high level ideas, wells company specific ideas as a way for us to communicate with clients and also just peers, interested folks that are talking to us, so that block site is interesting investing dot com, and then finally were on twitter handle is intrinsic I N. N, V, so intrinsic investor just engines I envy. Is Our twitter handle? An were reactive on there, so all various ways to reach Justin. Learn more about what we're doing, please we welcome feedback and sharing of ideas and everyone we interact with that. We continue to learn grow, and a also want to say. Thank you for having on your podcast Alexandru podcasts. You guys do some great interviews. Great guests and I'm really honored to be invited to chat with you Preston about what you guys are doing. Thank you so much for your kind words. I hope we can invite you back on the show. Another time are if. I would love that. All right guys so for this segment of the show we'll play question from the audience, and this question comes from to your. High. Preston is big. This is Dior from Philadelphia Pennsylvania. As you've already discussed. The market has rebounded for the past month and a half to two months from its low. Of late March early April. I guess the question I have, is it? The market has left me bit confused. I! Don't know how. To make sense of. The unemployment that increases every week. And the stock market that goes up. Of heard you mention that the stock market doesn't necessarily reflect. The sentiments of the actual economy. In my opinion, that's Never Been Chore Than Today. Period, but I'm very curious if he can really spend a bit of time. Kind of given me or given us your opinion as to what do you think is going on with this market that in my opinion is schizophrenic. You're surely not alone to your door. I think we all looking at the stock market and the economy and one the what's going on right now. Now, the first thing on the stand is that the stock market is not the economy. It rhymes, but it's not the same thing. So. Let's first talk about what the economy is. The economy is the sum of all goods and services that Americans in aggregate produce. Before Cord Nineteen economy was around twenty two trillion dollars annually in the US and so everything else equal. When you have high unemployment, it won't be good for the economy. For the simple reason that. People don't produce many goods and services as employed people us. So else equal you absolutely right when you don't understand why. The stock market should go up when the economy's going down. But let's talk about what the stock market is. The stock market is the value. Investors put on the earnings of listed US businesses. That's also why the Philippian that we talked about bunce of times on the show is such a problem metric because it measures but price all investors put on the inflation just earnings over the past ten years. And implicitly in this number is also the maturity cost of all the assets and the growth potential of US equities, if the Sheila P. E. is high, it means that other asset classes are less attractive. It could also mean that the growth potential for US equities is really high, or it could don't mean that the stock market is overvalued, and typically it is a combination of the three. But going back to the original question? It's really important to understand that the US stock market is not the same as the US economy. Let me, give you an example, so apple has more workers abroad than in the US. Will also has more revenue international then in the US. However, apple is still consider you a stock. But in theory, even if the US went into a slump with declining revenue and declining Martin's for Abalos, a result of that the market would still rationally value the stock higher if the international business more than offset that. And that would in turn result in the US stock market being priced higher, so why just used ample generic assemble a hope that really showed why the economy and the stock market is not the same thing. And the are many other reasons why the stock market has just recently raised the twenty twenty loss. One reason is that the economy's general backward-looking whereas the stock market is forward looking. So when you hear the latest unemployment numbers anti-european numbers. It's something that has already happened. The stock market is trying to press in what's going to happen. And what's going to happen to the discounted cash flows of the remaining of the lifetimes of US equities? Now the stock market does get indication what's happening at the present, but in nature it's forward looking. And then you also have felt manipulating the market big time so whenever you have an enormous buyer bonds in the Maga that's plates more than two point, six trillion dollars, and just so far who what's going to happen in the future it presses down the yields bonds, which makes stocks and comparison more attractive because the opportunity cost of holding bonds changes, and that forces the stock market to go up. Now giving credit credit is due Preston mentioned this already. When the market was tanking back in March and this was with everyone was talking about the nineteen twenty nine stock market, dropping eighty five percent from his all time high. And Preston talked about how depend on the stock market is on the printing of the fat and given that he wouldn't be surprised if the stock market hit all time highs, so I think it was really interesting. Call that he made back in March, but if we can even add to that based on my point earlier, it's the expectation to the future more than what's happened already, and even being very local about printing matzos required. We know from earlier crisis, two thousand eight, but also other crises that the Fed can talk the Maga up and down just as effectively as actual printing money and buying securities, and that is what you see playing out right now. So Theodore I think my comment might sound. More cynical and the thing that I think a lot of people are misunderstanding about the markets today. Is there assuming that they're free and open? And I think that's a bad assumption. I think that what you have playing out right now is. Just an unprecedented amount of manipulation happening in the market, and so that's that's first of all why it doesn't feel normal or feel right that you're seeing the things that you're seeing. I don't know what the real unemployment number is Borussia, say the numbers between fifteen and twenty percent. How can you have those kind of numbers and the stock market? Making runs at all time highs. And the only way that that I can personally come up with how that's possible that there is intervention. There is manipulation happening in the market, so let me just give you an example. The Fed balance sheet before all of this went down in the February march time frame was hovering. Let's just say close to four trillion dollars just a hair more than that, but let for simplicity. We'll just say four trillion dollars. Today. The is now at seven trillion dollars. They printed that much money. They almost effectively doubled the size of the Fed balance sheet in a matter of three months. So when you think of it like you know and I know shares are not a fixed supply, but they're much more of a fixed supply, then some other things that are going on right now so I think you could. If you want to say, it's similar to go I, guess you can try to make that argument it's it's obviously not as far as the the supply base, and how much you can actually increase the supply of the shares outstanding. If you're looking at the market as a whole Ballista say that that's somewhat pegged or fixed. Would I think you're finding? Is that a lot of people in the market are looking at equities more as a form of sound money than they are looking at the earnings or the actual performance of the underlying security. And, so when you're looking at something that has somewhat of a fixed peg to it. The Equity Sh, the number of shares outstanding, and you're comparing that to the money supply. That's that went from four trillion to seven trillion in a matter of three months. People do not want to be sitting there on the sidelines holding Fiat cash when you literally had a Su- NAMI flood of Fiat that was added into the system. Now. What this is all in my personal opinion? What this is all coming down to globally is the dollar. And the you have so much dollar denominated debt all around the world, and what's happening is is, is they print as the Fed steps in, and they print more and more and more, and they add this into the system. What's not happening is the money's not making itself down into the general population where that money is going is going straight into the market capitalization of securities primarily in the bonds, and so that's why you're bond yields just keeps getting pushed lower and lower and lower all around the world, so all these these countries that have dollar denominated debt. They need that servicing. They need more liquidity added into the system. System, in order to keep the solvency of all these securities in check, but the problem is as the Fed keeps adding more and more liquidity into the system. It's going to servicing that and it's going into bidding the market capitalization of those opposed to actually trickling down into the economy where people actually need this money in order to you know, and if you check out the velocity of money, that's that's why the chart has been going down for year after year. So how do you? How do you look at this? As an investor I think is where you're really getting at it and as an investor. I. Think that if you're if you're heavily relying on valuation metrics, which is stigmatized bread and butter, you might find yourself in a tricky situation, because so much of what's happening in these big violent moves are based off of dollar liquidity in the system, and and it drying up, and then them replenishing it then at drying up, and then then replenishing it, and so if you're trying to do the. When when you're doing valuation, you're doing the these buffet style valuations. You're making an underlying assumption, and that underlying assumption is that you're dealing with sound money in you're dealing with a real cost of capital and economic calculation. That's that's occurring in the economy. My argument is today. You're not seeing that. Because all these interest rates are pegged and nothing percent in. If they're pegged nothing percent, you don't have a cost of capital and you can't do economic calculation for the valuation of things. So this is where I think becoming or least having more of a momentum style of investing in your approach can help significantly, because it really takes a lot of valuation piece out of it, and it's just looking at pure statistics of the price action and it saying hey, historically, this volatility is uncharacteristic. Therefore, it's going up or this. This move based on the price action. Action is uncharacteristic to the downside therefore I need to sell it, and so the calls that are are finance have been making for the S. and P.. Five hundred for the Nasdaq has been exemplary, because it's heavily relying on just the price action, and it's looking at the statistical volatility in basically giving you a thumbs up. Thumbs down whether it's within trend Outta trend. So I I really think that moving forward. That's going to be a really powerful tool for people because. So, much of what's happening, how can you come up with evaluation? When interest rates are zero percent, because every central bank in the world is is manipulating their economy in order to re have enough liquidity to service all this dollar denominated debt, and all these issues that we're now seeing playing out real time so I think that as we move forward I. Think you're GonNa see more violent whiplash like we have seen since the start of twenty twenty if we saw another leg down as As deep as what we saw before, and maybe even deeper that would not surprise me in the least bit if we made all time highs, that would not surprise me in the least bit and I know that doesn't sound like that helps anybody I. Guess what I'm really getting at. Is Your expectation moving forward should be that we are going to experience extreme volatility the reason why I think you're going to continue to see extreme volatility, because were in a major major currency, crisis and as. As that is you have so much credit in the system it contracts, and expands adding more, and the contraction is is happening because of all the all the issues that you have on the balance sheets for all these companies in the impairment that you're having on on balance sheets, and also in the derivatives market as you get into the supply and demand adjustments that are happening based on the expectation of of the demand for for for oil, now all the sudden covid, nineteen, going away or people. People were saying it's going away. So then all those derivatives get repricing will guess what all those derivatives are denominated in their denominated in dollars. So there's this surge for dollars. Is All this supply and demand contraction and expansion is occurring, so all those things are making this an extremely difficult time to navigate, so tell you to focus a lot on a momentum strategy, and if you can back it up with valuation metrics I think that that's probably going to be the best approach moving forward. So Theodore for asking such a fantastic question I'm excited to be able to give you a one year subscription to RTP finance tool where it has the momentum. To win their that assist you with some of these things so I'm really excited for years to be able to dive into that and to use it firsthand. If anybody else out, there wants to get a question played on the show to ask the investors DOT COM real easy. Just click a button you record your question, and if it gets played on the show, you get a free subscription to RTP finance tool. or I guess Preston I. Really Hope You enjoyed this episode of the investors podcast. We'll see each other again next week. Thank you for listening to TI P to access. Our show notes causes. Forums go to the investors, podcast. Dot Com. This show is for entertainment purposes only before making any decisions, consult professional. This show is copyrighted by the investors podcast network written permission must be granted before syndication.

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Bitcoin HODL FOMO with Brady Swenson

What Bitcoin Did

1:39:40 hr | 5 d ago

Bitcoin HODL FOMO with Brady Swenson

"The money's the pillar of civilization and our money's broken. It's breaking down. Its crumbling. Hello from bedford the bitcoin mecca of the world. How are you doing. You have a good week buddy. Bitcoin keeps going up. Sixty thousand keep open back most going on we wanted be much richer by now is bullshit some amazing news. My podcast causes the number one. Invest in podcast. In great berta. Right now i cannot believe it. More on from bedford talkin shit. Every week somehow has dislodged the bbc bloomberg and the financial times. It's ridiculous. i can't believe it's happened. But thank you to you. Any of you. Listening to the show shares are or whatever man thank you. It's a bit weird but thank you anyway. Welcome to the what. Bitcoin did podcast. Which is brought to you by gemini. Which i am now at using exclusively for by bitcoin. I'm your host. Peter mccormack and today. I'm going interview with my buddy brady swanson from swan where we're going to be discussing his huddle fomo thesis. But before that. I do have a message from my amazing show sponsors first up today. We're going to be kicking off with sports. Bet who i placed little cheeky. Bet with this week. Yes i put two hundred fifty pound to win and they won convincingly six hundred pound winnings lovely doubly. Thank you very much will depend obama's against real madrid lost. We lost very frustrating. Anyway i have convinced balls bet auto to give away a guinea yes an actual real life proper bad ass lambeau to one of the listeners of my show which is pretty cool. We worked on the mechanics. We will have an answer few soon but you will have a chance to win a lamborghini. Which i think is very very cool. Now we're suppose you do have every market. You could possibly be interested in their football tennis. Americans sports motorsports even go east sports and because a bad ass is they accept bitcoin and for new customers. They also have a range of promotions to find more just head over to sports bent for such promotions which is s. p. o. r. t. s. bt dot four slash promotions next up. We have access wallet. Now i have been telling you about these for a couple months now as you know fucking bank closed down my bank accounts after twenty five years of being a customer. They wrote me and said pete business anymore. You know give you sixty five days notice and to get the hell out of here. Which bullshit right. So i've increasingly been running my company on bitcoin any way i get paid in bitcoin. I pay people in bitcoin. But my accountant my lovely accountant. She is amazing but she has been. She's been monja she's like ip. Was bitcoin been sending and who you may. Send it to four hundred. I don't know so. I had to get a solution market audit and keep a track of everything and when exodus reached out. I was like okay. I'll let your wallet. I'm gonna use this so if you wanna find out more. If you wanna check out exodus please do head over to stop com or social exodus in the apple app stores and also. Let's talk about carter now. I know some of you have been making some good money in this bull. Run a bit some of you are morons and having your security sorted a better bet. You've got hundreds of thousands of dollars of bitcoin one hardware wallet which is stuffed on the mattress. Now i was like i was a more before but to cast on the more on. He stopped being a moron. And they'll let you up so i became a concert. Customer is coming to you now about a year so called. Because i am now protected from hackers owned mistakes in president attacks device failure and so much more and now kosovars have very big. So if you wanna go simple you can use a gold product. That's only ten dollars a month. And that's going to give you triple the security of hardware wallet. You can get their platinum product. Which is a three five multi sieg or you can go for concert diamond. The full service offering that includes a customized personal security review inheritance planning and of course at best in class insecurity. The is no better time to upgrade ubiqu- insecurity and get total peace of mind. And if you wanna find out more head of keys dot kassir which k y dot c s a okay onto the show. And i have my buddy brady. Swanson on the podcast. This is world over. I can't believe on like over three hundred thirty shows in brady's just coming on the show. I love this guy. Here's podcast citizen. Bitcoin is amazing. He is one of the best interviews out there. Every time i talked to him we can just shoot the shit. I could do for hours. Never have a break. So i love this guy. I can't believe it's taken this long to get him on now. A few months ago brady wrote this threat on twitter about the whole fomo. He talked about how this boron is different than the previous whereas in two thousand seventeen. A lot of people would just looking at bitcoin as a way of making fit gains. This time it's different with a macro backdrop institutions get involved is just a matter of time till we have a major nation state jumping in and no one wants to let go of their bitcoin so i asked brady to come on and go through this to be honest. I don't think looked at my questions once again. We brady really well so we just sat down and shot the ship for nearly ninety minutes. Now do some pretty pointed questions and some different ideas so many amicus will probably be like. Oh you just been status cook or whatever on twitter shower me or yell at me but these questions need asking these questions even if you think that dumb is important to explore these topics anyway. I really enjoy this. One always loved catching up with brady. Hopefully we'll be having a beer with him soon. If you do have any questions or feedback you can reach out to me. My email addresses. Hello what bitcoin did dot com or. You can just jump into montana. Graham group outside of that defines taking a two-month break is going to be relaunching in june. It's going to be relaunched. As the hijack under the hijacked media brand which won't chen also my email service. Never edit. that's gonna become hijack news but if you want to check that out now. That's never edit dot com your daily dose of macro bitcoin and tech. And as i said you're gonna questions you can reach out to me other than that. I have a great week. We'll see you on friday anyway. Man welcome thanks dude. This is the first time you've been on my show. Yeah it's it's been a then you've been on my show a couple of times We've had fun hanging out to hang out at bitcoin. Two thousand nineteen. That's a piano bar. Party was kind of crazy man so good that was a good one but I think of my thing was finding big enough to get. Yeah man. I had to wait until you really hit. The will appreciate it so much embarrassed head. You saw good man. We got a good topic to talk about as well. Yeah we're going to talk about the whole phone. My genetic i love this topic. Let's hear it. Because i think those who was together an iphone four. Was those two together. They describe this bull market. I think so too buddy. Everything that's going on and i was like fucking hell brady. You've literally crystallized this bull market into two words. I love it too because it flips fomo on its head right. It's like yemen. Foam was all about this lake. You know i gotta get in the game. It's steria hoddle's all about long term thinking and figuring this thing out and and You know the opposite of hysteria. It's like level-headedness and and patients and i love. I love the idea. Put them together in flipping. Fomo love it because i could play these screw two thousand seventeen upright if i if i have fomo two thousand seventeen correctly. I would be very very wealthy. This market See i didn't. I traded this shit up traded down and then what i've done this year. I just stack sats like everyone said. Yeah as much as i possibly can. I'm just sitting in through this. Yep and they just call. Men's then is can be. It's a nice place to be zim. Yeah wait for twenty x just sit through and and like one of the one of the most regular questions that people keep asking me especially in the comments on youtube. Dmz you know. What price do you think. The market tops out. When you're going to sell an i keep going back and saying look. I wish i knew and like if i had a good indication maybe would sell a little bit but realistically i do not wanna i wanna foam. Owed twenty twenty. What are we talking about. Twenty twenty five twenty twenty five shit I sold the wrong time. I'm now holding with a small stack right now. I don't either man i. I lived the same thing. I had a lot more bitcoin in twenty seventeen than i ended up with Trying to trade. You know. I i told myself and figure out the bitcoin was the thing but i told myself look i. Can you know trade in and out of these schick coins. That are pumping. Catch the right timing. I was trolling. Lake telegram bruce discord groups and trying to find like district going wales. That were you know like all right. This is the next one. We're gonna pump this one and And you know never never happen. I find those. I couldn't find those little pods of gold and you just you know you might hit a lucky a couple of times but it's no different than gambling know vegas. The house is going to win at some point. So i lost some bitcoin. I didn't understand the taxes you know. Just totally raked over the coals and taxes so yeah not good lessons learned. That's the that's how you four jehad right there dude. I used to keep this spreadsheet richie on my laptop and it was bitcoin as my shit coins and what they were valued in bitcoin and what my total bitcoin hordes was and that is at its peak. My time pool photo was like a hundred a hundred eighty to bitcoin right. Are you fucking kidding. Me did like one hundred and eighty two. Bitcoin karma the price. I don't i don't think we'd gone over six thousand at that point right because i bought i exile for core i bought. I bought these shit cleanse nothing right and they just exploded like i had one like i think it's like an exile position of about i to say about five hundred dollars winter thirty thousand so many that a big elsewhere and blah blah blah and and so but at that point i was like i'm going to be so fucking rich and that's when i was like okay now going get into mining and now i'm gonna stop like a trading business now going to buy more shit coins and a road all that shit down and then they might tax is not going to say because it didn't but like what nine ninety percent maybe more when i look back and i was like oh dish i mean what the fuck would that be worth. Now let's look allied to hillary lines where we are now ten million sixty thousand ten bucks ten points of a billion dollars update. It's all good coach. You know what. The u u What i respect about about that is that you hung on you like like you know. You didn't say fuck this. I'm out i'm gonna figure this thing out and i'm going to start. You know the biggest podcast space. And i'm gonna hustle and look what you've built men and you know you're here for the long haul now i think you've i think you've got that chronologically lou you you've babies are like alleged. Why actually happened. Was i started the podcast during that period. Because i like. I'm going to start mining company. I'm gonna start podcast right by the time. I was going nearly broke. The only thing on had left was the pike. That's all i had. I was just like when. I go need the kind of one point. I got to the point where i was like. My net might total net worth outside my house with sixty thousand or sixty thousand dollars right. But i but i also had a nine hundred thousand pound tax bill coming in and i had my house right so my net position was almost negative. I think about even including my equity in the house. Because i didn't have a job can get mortgage. I don't know what it's like the us raid. I had to get mortgage the mortgage trump company and now like well because you got a job. You can't give one so this is gonna confess one of those other things people are going to hear it and then give an o p you commit forward again. I kind i kind of told lie to get mortgage north four lie. I just kind of made out. I came a letter from my employer about my job and my job was what they did right right but i didn't connect the two that it was like. Just some shitty podcast. I wasn't doing anything. So i got my mortgage and i was down to my last sixty thousand dollars like of net everything right so is sixty thousand dollars in the bank and then i just fucking worked. A word nearly took a job at one point and then i got some checks on the podcast here. We are but like it was it was rough. And because i tell you tell you the worst thing about it is like i actually had some good money when i left my job when we close agency down. I'd like a few hundred thousand and i'm blue. That shit during the bull market watch and a car and three classes like more on sham kind of doing the same stuff. Now but like yeah. How's that s. That's funny thing is. I never know if it's like a marketing ploy or if you really got that as in you know like i just can't i can't tell because you're so good you're so good at doing that. You know. getting people riled up. You know. And so i just i don't even know anymore. Yeah no. I bought the car. Nice nice yeah like a dream. Yeah it is man. That's what i give a shit about his 'cause right like that's the point. I should have moved house. And i was like. I don't want to leave house. I'm like i'm okay with my house. Got fobel's and a bathroom. And i can watch tv here. I don't have a cool car. So i'm going to get going to get the car and post up the pitch of the garish like knowing full. Well that people would be like the fuck cutting good next up the football team the longbow dude. Listen that's what. I've gone idea brother. I think i can make that happen and this this woman to be about me about. You've just catching us treating you. How's how's this market treated you great men. I mean yeah like we were talking about. I'm zen watching this number. Go up You know. I'm just busy right now. Living the dream getting to work and bitcoin fulltime So that's super exciting. And i i'm just waking up in folks on that fallen asleep thinking about swan So it's basically swan and family time right now and It's it's fantastic man. I'm loving it and it's fun to be like. It was good timing. you know. We started about a year ago and Just kind of like had about six months at the end of the bear market and You know build build build and kind of had heads down and Then the thing kind of took off a little sooner than we thought but as you know i mean like number goes up in price number is going up on on the bitcoin businesses in every way possible as well so we're just trying to keep up and and scale and Having a great time man we have such a fun team. While we'll talk about that. I mean like you're right. Every number goes up right between them goes up yet. It downloads go out. Eat your inbox. goes up you spams. Spamming have to deal with goes up your shit annoying people you have to deal with. Go up all the people all the scammers trying to impersonate you goes way up i seven columbus. Remember his talk too a recently. But i actually prefer the bear market. Yeah on me. Almost every measure the need to measure the net wealth and downloads right because downloads is a measure of the business and net. Wealth is a measure of kosheh. You can go in the future. But everything else. I prefer about obamacare. The markets are pretty crazy right like you know. It's just a ton of work to do which is which is good. I mean it's good work like it's it's a good busy it's a fun busy But it is nice to be able to put your head down and like actually worked through some of the bigger projects. You know that you had in mind to get done because once this thing comes on you just trying to keep up with know incoming and There's not a whole lot of lake long-term projects that can be like you know really well thought out executed. It's just like we gotta get this thing out even though it's half baked and we're just gonna build the you know. Build the engine like while the plane is flying and You know it's it's fun. It's hell of a lot of fun I'm you know. I'm a kinda guy that likes that environment like the startup environment. I'm not like a corporate drone cubicle guy. i don't like kind of like that routine I want to have something different every day. Where a bunch of different hats and just like grind with the team that i love So this is suits me very well. You guys are killing as well. thanks man. yeah. I mean it's it's been a year. It's been a amazing year. We launched march thirty first last year. So just over a year. Now and yeah i mean it's i think there was just the market for you know. Bitcoin company focused on bitcoin. Focus on education and like not doing anything else right just doing those two things because you you teach people what's going on here. They're going to buy it and they're gonna buy more of it and people are nervous and scared about what this thing is. It's new it's your money. It's your wealth like You know we were on boarding a lot of boomers Which kinda surprised us. A little bit At first but it makes total sense now and what they want is trust and understanding and so you know having like a team that will get on the phone and talk to you or we're starting to do these series of webinars now where you know. We're just sent an email ago. You wanna learn about bitcoin We're going to be here. We're going to be doing these webinars every week. And you just jump in. And we'll give you a quick twenty minute overview and then. You can ask any questions you want. We're doing the same thing on clubhouse Literally just like walking people through the sign up process and answering their questions they go and it's it's been incredible. I mean that's just what people need. They need to understand what's going on here. You know Papa said like pumps all companies need to be is it needs to be all companies are media companies like. You need to be a media. One is one is a media company that sells bitcoin. Exactly right man that was from the from the very beginning was Be the media. You know just Creative content. And i think that's what creates a moat around a business like ours because everybody's going to be bitcoin at some point like in it's going to drive margins down And so you can't long-term rely on that business alone but what you can do is build a brand. That's really well trusted Because you've created a bunch of educational content. You really taking the time to teach people what's going on. And that trust is built a moat around your business and Hopefully will allow us to like be around for a while. I mean. I think we got an early enough on selling bitcoin that that's that helps to kind of get in a little bit early enough but i m being one of the first bitcoin only companies i think helps but yup be in the media and producing all. That stuff helps build a moat around the business and That's been a strategy since day one. Well i think it's been pretty impressive to watch from the outside you to publish them. You talk about volumes. Are you being included in coin market cap or anything. Yeah well we did. Launch a coin swan x. Rpm dot com and check that out You know what. I mean when they have the You know where. They showed the volumes. Yeah yeah no. I don't think we're on exchange volumes yet. We haven't published anything explicit But you know it steadily grown a lot. I think corey might want to publish it. At some point We've got tens of thousands of customers now The amount of bitcoin selling as gone up a lot. Since we launched one private and are taking a bunch of entities. So gotta think michael sailor for that man like you really kicked off that trend. And so there's there's this kind of niche for companies that you know the the big like night eggs of the world. aren't really interested in like they're kind of small fish for them But they need. They need You know they need to know what's going on. They need to learn. They want to talk to human and So we've been taken on a lot of leg midsized just kind of transitioning into really big companies and so that's really pushing up the name of bitcoin reselling Per customer. so yeah it's it's definitely taken off You know we're we're hit profitability in like eight months Corey's really good at keeping keeping A run our burn rate down and Just being mindful of the long-term men just like bitcoin long-term thinking like we wanna make sure we're around. Don't the bear market is going to come and we just want to be in a position. Survive it you know what i mean. Well i mean. Core is just the proper businessmen right. Yeah absolutely men. I've never seen network related. Yeah i met him. I in la. And the moment. I him as a big show here and but i just watching watching him operate from a distance and seen the movies made is. It's been it's been really interesting. Like i don't know if this was him. But the the advisers and the The kind of swan team. You assembled world kind of like a little team of superstars right all out there. Networking grading content. It was impressive to watch. Yeah just picked up. You know some of the best big winners in the space. No-one had done it really just building a bitcoin company and taking taking the bitcoin educators like everybody on our team. John you know he's he's written probably the best. You know intro book on bitcoin works. The system works And you know he's he's our our. Cto and co-founder Gd was on the squad for quite awhile book. He's you know he just moved over to see t You know the billion dollar. Bitcoin startup the norwegian Family is amazing. He's like employee one over there now. So yeah i mean we always joke that our engineering team better writers and educators than the rest of us so yeah it's is a cool theme But yeah man like this. This market is going crazy. And i think things are different. I think things are different this time. But that's what that's what we were. You know you're getting into the huddle foam thing i wrote. I wrote back on back on november thirteenth last year and been talking to preston pysche swanson alive about about Escape velocity is what he was calling it right and and then You know and then held wrote a piece that you know he talked about on your show. The super cycle you without that like december here. Yeah and so has been floating around. And i it essentially and it's really simple as just the the twenty. Seventeen run was driven by short-term retail trader. Speculation i mean they were denominating. Everything and fiat gains right. That's it and i think. This run is being dominated by individuals and corporations and entities that are understanding that this is a thing hold for the long term that this is a hedge against the massive inflation receiving and denominating their gains. In you know basically they're they're foaming into hobbling like all auto fomo. They're firmly in there like getting here at the best price possible and start converting some of this Sailor puts it this melting ice cube into something. That's not gonna be debased and so that like fundamental understanding that change that fundamental change in the understanding what bitcoin is will create hodler's with lots of with massive means rakes. Sailors not gonna sell any of his hundred thousand bitcoins and they will then set this floor much higher rate. I don't think we're going to see massive pullbacks because we're going to see people who understand what's going on scoop all that up right and so maybe fifty forty percent are gonna be like all right. This is a massive discount right. I'm gonna scoop this up and all the people who are waiting for that eighty percent drop or just going to be left behind right so it's interesting. The drawdown willett happen morning. It happened because like pseudo. No ride control by wales. I don't know if they'll be a bear market down. I don't know i've got a feeling. We won't because i've i've a feed and we've got a much deeper pool of Buyers right yeah. So i yeah the i but i don't know maybe we do. Maybe we do in this assembly of central. I don't know all i know is like one of the things. Really hard is telling tops and bottoms. And if you don't need to spend the money then it's best to hold in bitcoin I've done it. I don't know how much you you guys keep your treasury all as much as we can as much as we do. Yeah i do. I do anything beyond eight weeks of cash flow into bitcoin. This is just the pug 'cause dude and we to be thinking most of most of the money we've been putting in. Bitcoin now is essentially done anything from a four to a six x and now we've got the capital to launch other brands to try the things just because we did that. We don't have to raise venture money because we've held money bitcoin. But that's been that's been great. That's been really cool but if there is a thing me if there is a bear market like i have to think about what the drawdown is on the business reserves. That's something to really think about. So i vogue dude. I just hope it doesn't happen. Yeah you know and it certainly could right. I mean it could be the same thing where you know. People like companies are watching their balance sheets. You know talk about a melting. Ice cube like melts away in terms of dollars. And they're going to go back to lake looking. You know they're gonna get out. Maybe there's a casket again and that's certainly possible You know there are funds and insurance companies that are that have bylaws that say that they have to rebalance their their sheets. When you know the one acid it's to be you know too. High of a percentage of their total investments. And so that's going to put some pressure on You know there's The the graphs that i've been loving to watch is the just the precipitous drop in coins coming off exchanges. I do think part of that is an increase in people understanding that this is the thing hoddle in they're pulling it off exchanges to put it in cold storage but there are a lot more reasons to take your coins off exchanges in this cycle in the were in previous cycles. I mean they're the you know. The yield generating businesses are out there. People take their coins off trying to find seek some other yield The loan business. Bitcoin backed loans out there. You gotta pull your coins up exchanges. And and put those in is over. Collateralized usually in kind of lock those up. So that's another source of laker reason to lockup coins and not sell them So yeah i i mean. I'm just seeing that trend. I i know some of that. Some of that is not for long term hardly and some of it is but it's a very interesting trend to see these coins being taken off exchanges in droves like we'd never seen a couple of interesting things sailors done like fuck me guys come through like during the game like unbelievable if i don't agree with everything he says by. Also washington changes positions sometimes. I'm like okay like he's still learning himself. But what a fascinating person to listen to the two things the to really important things that add to the huddle foam narrative right like forget the billion two billion. He's he's gonna raised and spent on bitcoin ride. My favorite thing he does. Is that thing every month. Where like we bought another two hundred and fifty bitcoin without problems as part of our treasury strategy. I'm like that's the really important thing right. That's the real message. There is the it's not the massive. It's not a massive purchase which themselves are super interesting. Indiana will most improved to be a genius. But it's the actual the keep stacking like i call it million dollar cost averaging right. He's just like keeps that can keep stack. And like those amounts point spoil compared to the big stack be keep stacking like sometimes i don't if you ever have you think we're in a bull market. Now what's the point in stack in anymore because it's just like three hundred dollars this week. What was i even compare as even make a dent but should be so. That's the first thing. But also he's been instrumental in this narrative of the kind of russia's pick speculative attack that this should be spending. Bitcoin is a pristine asset. You should be borrowing against it. Yeah and he's fucking rhyme yemen both of those support. The huddle fomo did absolutely absolutely. Yeah i mean. I think that these of the huddle fomo is definitely strengthened by this macroeconomic environment. I i would. I would not think. That's an i didn't before all of this stuff happened. The the economic response to covid That you know this cycle would be any different than two thousand seventeen in terms of just You know there there's still a big information asymmetry between People who have been studying this thing for a while and people who are going to become in but with the monetary policy like just the massive amount of money printing and we're looking at printing another two billion dollars right and these are these are like just kind of steps toward a right and and Modern monetary theory that they're out there Just doubling down on this idea. This conceit. this This that they can manage this economy by the imprint. Whatever they want and manage the purchasing power of the money Over time with you know yield curve control and interest rates and all that stuff like. It's it's never happened in the history of the world. They are convinced utterly convinced. Now that they can't do it right. We got spartan enough like we understand enough now so we can actually do it this time. and i it's it's just not going to end well I was. I was talking with kaiser the other day on guys report and i was like look you be. I might be the best thing for us to transition to a bitcoin world. Because these guys have been you know the rich. The richest of the rich have been benefiting from this monetary socialism. This money printer the the cancel on effects. Where you know you're closer to yards the money printed the more you benefit that. Hey this like throw a little bit our way toward the end of this collapse of this money And maybe we can buy buy some bitcoin with it and have a little bit fair distribution because these big banks to come in now. And i think they're going to be. They're going to be taking that money. That cheap money from the printer once they wise of what's going on and they're gonna be like all right. This thing's going up and this is the better money and You know we're going to the gresham's law we're gonna drive it out And we're just going to buy up everything that we can so I i i see that happening and i think that that has been pulled forward from the future massively With this economic response and the idea that like yeah like we got this under control we can print however much we want was guys named kashogi with the with the is like the crazy eyes wide open. He's like he's like the you know the federal reserve as infant cash. Right when whatever that's like cbs interviewers and the mean goes around like they believe this man from the church. Stephanie kelton yeah. You interviewed her right did she. Yasim i think she made me look smart. Sometimes which always concerns me. I think if you make me this fucking wrong with you. Like she couldn't even also some basic questions i look. I understand if if you're not bitcoin right. And you're just in that world of kim economics. I can see how you rationalize mt because you can rationalize it. Because they've done it for so long. They've printed money and economiques ticket. Well in the they've spent they spent decades building up this This academic tradition justifying these ideas so Like they've minted all these economists and given nobel prizes to them and they they're stuck in their ivory towers these federal reserve banks regional banks in the you know the main federal reserve central bank. And they they just really really believe that they know better than everyone else and that they will be able to make this work and You know like daniel dino booth. She was she was like the right hand analyst for The chair of the dallas fed in the two thousand eight two thousand nine and he was actually the only fed share regional fed share do express some dissent in doubt about the approach the quantitative easing approach rape and And she writes in her book That it's it's incredible how convicted these people are about their own ideas and about their ability to manage The global economy and That you know. I asked her once like do you think that they get it like are they starting to understand. You know. they're just. They're just like zombies to these ideas Then there's so much skin in the game that they're never they're not going to change their minds until its maximum rate in the face. And then i don't know man well i keep referring people to jonathan heights. Book the spy because the thing that sticks out in that to me is not the lefty right thing is the more the fact that we take a position that we pose rationalized and i just think that's. That's what happens. How even even stephanie kelton had some doubts how does she come and go. Yeah war yeah. I got this wrong. Yeah bush we're basically blowing up the economy. How does she do that. Whole career built on the idea of empty. She's a publishable of based on that she get speaking engagements based on their zero incentive to to to objectively review room thesis because she's economically aligned now with md and. I think that's happened with a lower thing by the way. I also think bitcoin is sometimes completely guilty of this. I think sometimes we. We don't always look objectively at. These is because we are also concerned aligned. I just think that happens right but the mt thing i mean it's just out in the by the way then we've got massive debt here in the uk and we definitely seen inflation and the real inflation is very different from the Reported inflation. But i think you've got a much bigger problem out in the us. Like i feel like you guys are living in a reward at the moment you rather than a block real. You've got state reord. Like i keep hearing people are leaving new york. Severance is gone. Some people leaving the country and yeah. It's a bit of shown and the the the money brinton situation is just i come. I come to my head around these numbers like the one point nine trillion and now like biden's talking about was another three trillion. It's like what the book. Yeah yeah it. It's crazy You know those numbers in two thousand and eight the the bailout numbers were seven hundred billion rate and like they couldn't that that was astronaut. Michael that was mind blowing up total. That was the first bailout. Yeah it was seven hundred thousand dollars in two thousand eight hundred billion. Yep sorry yes. Seven billion seven hundred billion. Just doesn't seem that much now. Right exactly exactly. Yeah i mean I it's it is fascinating an listening to your with branding with brandon brandon with him. And you know how he studied. Yeah it was an awesome show. showman How he studied the the fourth turning a book by Neil how and this is. I mean i. It's is right on time for this sort of Breakdown of massive distrust in central centralized institutions And if we feel it here man definitely feel it. I think a lot of a lot of the world is feeling it but it is fastened happened. Here it's humbling right. This is the the american empire. The american dreams were we grow up. And we're you know fed that this is the the greatest country in the history of of the world. And you're you're lucky to be here and You know just your your birthright is a is a home in a car and a and a good job an easy retirements and all that stuff It just goes along with with Just the the hubris That comes along with you. Know we can manage all this money and we can run the world and we know exactly what we're doing An we're watching this play out man I you know another. I wanna talk about is like how i see. And this is the tagline on my show. You know the dawn of the bitcoin renaissance. And how. I see this happening house. He played out. But the first part you know the dawn the dark the darkness before the dawn is is the fall of the money and the end of the empire and money's the pillar of civilization and our money is broken. It's breaking down. Its crumbling right We use money to communicate each other our needs and wants right and if you distort that the signal that that language then we can't accurately get that stuff you know the those messages spread around The society right so when we've had eras of a fiat money and we've had eras of sound. Money is very clear what happens right so if you look like look at any kind of study this a little bit right. The fall of the roman empire that was absolutely like massive part of it was the debasement of the main currency that was circulating around the economy. That the darius There was a gold coin called the arias But that was too valuable to be used every day. So like your everyday roman be paid in silver coin called the darius and so when julius caesar i started minting them They had this you know. They were pegged to the aureus. The itself had started being debased all right so it was like eight grams of gold A hundred years later it was six and a half grams of gold. Another hundred years. Four half grams gold. So that base money was was being debased. The core money right but then you look at the or the Based on that right leg all of that. Just kind of pales in comparison So the was the backbone of the roman economy and so the citizens were earning this money right and the dairies began as four and a half gram silver coin and it stayed that way for centuries which was really the again the foundation of the roman civilization. Right it it really flourished as we know it was the greatest empire of the time right But after that things started to crumble because they started adding in base metals like copper blending in and they were coin clipping going on so it went from containing like ninety percent silver down to seventy percent in a century century later. It was all the way down to five percent. Silver by three fifty eighty all but worthless right And then there was economic chaos from the hyperinflation and rome went from this shining city of a million people. All the way down to fifty thousand people Because everyone everyone got the fuck out because it was you know it was completely crumbling. And like the fray. There's a phrase Bread and circuses. This idea they called bread and circuses and it was from this this roman poet and the idea is we still use it is like these offerings or benefits and entertainment from governments to placate discontent to distract from this policy situation that the government has you know basically ruined the country with or the empire with texas thing. Then yeah it's like you know. Big go ahead does have. Have you like compared the fall of the roman empire details. What's happening right now. Like when they were coin clipping. I'm assuming it was because what gree was it. Greed within the roomba like within the essentially the room and governance or was it because they were making mistakes and trying to pay for things. They couldn't afford painful wars. like i've never studied. It actually happened. Yeah man it was just a again. Human human hubris like they. They just wanted to expand the empire right when so in order to do that debates the money. They debase the gold too. But that was the money they were using for like international trade or like trade across Long largest citizens and settle you know like Big you know a big transactions so they debase that a lot slower. That was the money they were using right But they realize you know. Taxes were unpopular just like they are now people You know definitely throw throw fits about about Being taxed too much they they found out they realize we can just start taking silver out of the coins. Put some copper in their clip and we'll that's basically attacks and they don't even see it so no one gets upset about it and funded. The expansion of the empire and Just completely collapsed. It's the foundation when you're doing that of your empire crumbles and that's what we're seeing right now. The united states like the dollar In nineteen in nineteen thirteen purchasing power. The dollar now is worth a nickel right. So it's like is the exact same thing happening again right. Any recommended reading on the Fall of the roman empire founded on these reasonably. Come this the the stuff i found was just really a bunch of lake essays on the internet And i will russia this. I've been. I've been working on a piece for a long time but like It's just hard to get time to focus time to write with with so much going on again the bull market thing and just so busy but I put together a nice list of resources and I do have a book that i'm listening to right now about the medise So that kind of gets to kind of the the renaissance Side of it. The compare this comparison to the air. That i think we're heading into now but yeah the forego. There was that so called the cheese. Yeah i'll send it to you. I think it's just called them know. Again what the ascent ascendancy Digi chronicles bukwana see the medici by paul strathern. And there's definitely some stuff about you. Know the the advent of the florin and international trade and how that really builds up the In the renaissance era in europe But it's also there's fascinating stuff about politics and and betrayal and like all kinds of cool cool stories about like the the medici family and You know basically holding holding a in power over the papacy because they were like the The people powers like basically borrowing money using the mideast as their bank And all the power they wield anyway. It's fascinating stuff next up towards the brady more about foam before that. I've got a message from my amazing sponsors okay. We can talk about ledger. We're going to talk about hardware wallets now. Letter was the first hardware wallet i ever use. I bought my nano back four years ago. Now maybe it's even just slightly more than four years and i still have. I still got device today. I still use that device today. Okay i'm gonna tell you why i like ledger. Why of continued to use. Their device is mainly down to us. Okay i e. The device itself is really easy to use an obviously survived four years. So it's robust. We know that but also with the legend lives software that connects to your ledger. It makes it so easy to safely. Manage your bitcoin. Now if you're also an android phone user you manage your bitcoin on the go which nanno s you can connect it to your phone which is pretty cool now. I am a big fan of the product. But if you want to check it out. Please do head of alleged dot com which is l. e. d. e. r. dot com next up. I'm welcoming gemini as my new exchange sponsor. Big thanks to tyler and cameron for supporting the show. Now this is who i am now. Using exclusively for buying a senate bitcoin but really is just buying right. He said initiate right. Now you should not be selling your bitcoin right now. I'm not. I am just using for buying and genoa been so impressed with everything from germany. Firstly just impressed with how much talent camera wants to well. Bitcoin had very frank and open conversations about the lightning network sponsoring deaths. And they'll bring peace so that's very cool very very cool but also just a impressed with the product the product now. I signed up on their website. I've now got the app. I still have my repeat buys. I've been dipping in and them dips and easy to use just download and try out. You'll see exactly what i mean. How easy. It is to start by bitcoin on their app. If you want to find out more please do head over to gemini dot com which g. e. m. i. n. y. dot com today and my friends zach flurry over at block fi. It's coming it's gonna be here soon. The brock fire rewards visa credit card. I cannot wait to get my hands on this. How amazing will it be that with every card purchase you can access pretty cool right now. I did tell you about this before christmas. And we're now here in april but they have opened up the weightless to everyone. So even if you're not apply customer you are eligible to join that waitlist and they will be given a one point five percents rate in bitcoin on all those car purchases. So if you do want to join the this please do head over to. Their website is blocked by dot com which is b. l. o. c. k. f. I dot com. Do you don't find the find like enough time in the day right so like i am still working through individual. I'm also read in the anatomy of fascism. Listen to nick. Carter with lex friedman. The other days now downloaded the three body problem. I did interview with. Julian assange his brother father. So i've got junius oranges because life punks. I've got podcasts. Coming out my ears. I wanna read listen to just. I'm like i need some more fucking time days and then anytime interview somebody different. So fucking spot. They seem to have read every book. I need to read. And i'm like. When does everyone find the time house. If we're doing this. I i don't know man i don't know there's i think there's just people whose brains work faster and could process stuff a lot faster than mine but yeah i. It's it's amazing man. Bitcoin is in just that rabbit hole. And it leads to all of this Study you know like you just list off book that you have heard about and you wanna read in the last you know four weeks or whatever and that's that happens month after month after month It's amazing it's amazing. Still walking started walking now. Just so i can listen to audio books. I finally get through quick audiobook not reading it. I don't know if you have. It belonged reading a book. Sometimes i do that to do ten pages on like fuck. I didn't take any of that in. I don't even know what i've just read and have to go back. Yeah if i'm with an audiobook listen to a better so i just go out and you got wolf for an hour or two every day. Just try and try and get through some of this ship. It is like trying to keep up with everything. Is this too much man. I don't know how other people do. i'm just now. And then you get someone. Nick carter. He does this. You also runs a fund he guest on podcast and then he does his epic like essays that he writes. I'm like whoa abaci fund. All the time incredibly productive men and breedlove relive you know read everything and then produces incredible essays and Yeah there's there's some amazing people. And i i think You know this air will be studied in history Pretty closely 'cause it's going to be a massive pivotal point in human history. And i think all those guys you know that we hang out and talk with and and women too. I mean it just people in this space will be you know written in the history books And it'll be it's just kind of a privilege sit back and think about it to be here and to be hanging out and learning from these people directly. Yeah i was talking to. John vallis hill day on twitter about each other. And i'll say like how lucky we are to be living through this and the front volume. I feel so fortunate or two of these amazing people. They can be their time and patience to talk me through these these ideas. But you know it's funny you go to school right. You study history and you hear about well. We'll on world war two and then you you hear about the fall of the roman empire you never think like i never liked put myself in the shoes and thought. Wow what what would have been like to be a roman times. And i think you'd be you come a little bit ton of other complacent and you just think what you're living now will be forever right. You just think think anything drastically is going to change but actually in a decade the could be very different places like entirely different or two decades. And we're living through that and you know it might be bloody might be messy. We don't know how this is going to play out but we're living right through it and say write about this in the history books know is the period of time when money changed and if nothing else changed and i don't know how it'd be written because they don't know how it's gonna play out. I don't know if the theory of the sovereign individual is correct or whether we see the state's fly back whether we'll see china china take over and over will become subservient to the chinese. I've got no idea how this plays out but we're living through it. Yeah i it's an. That's what i love to think about right. That's what we do. These podcast for is to think about all stuff one. We try to learn from the history but then to try to figure out where we're going from here and what it all means and And yeah i mean that's that's the part you know the the second half of this piece i'm trying to trying to get out of my head. Is is the don of the bitcoin renaissance. And so what what happens from here right so you know. Obviously we think bitcoins better money And i think that we made it clear through history that we version is the best money. And i think during the renaissance. The one of the main reasons right was that we had this very solid foundation to build it on. The floor was the the main money for national trade in the main settlement layer essentially for three hundred years. And it's amazing that you know several families somehow un had this knowledge that you couldn't debase the money if you wanted to maintain a healthy economy over a long period of time That amazes me. I'm absolutely in awe that they were somehow able to resist that power for three hundred years. they re they attained a lot of power regardless and i think they had this sort of long term thinking that if we want to maintain this power for the future and for our Four our airs. Like we've got to main. You know maintain the integrity of this money and so the florin was trusted for because it had spanned generations. You know think about the middle two hundred years rape. Those people who lived at those middle two years never knew time where the floor and wasn't good money right. You couldn't trust that the floor and was going to be worth. You know the same amount ten fifteen twenty thirty years from now and That's what we've been talking about. Austrian coniston talking about. You know that we're we're all learning because big coins teaching us that this is the nature of money. This is the true nature of money and this is the way it needs to be. If you wanna have a flourishing economy and human society be able to communicate those needs and wants back and forth each other have efficient solutions delivered. And then you know decrease the pertinent the cost the relative purchasing a cost of those needs and wants solutions over time right and then we can all move up that mess. Lewis hierarchy of lake we have basic needs met. and then eventually we just have this time to To pursue our dreams right and something really interesting honar crafts and produce art and architecture. That's going to take ten fifteen twenty years because you know the money's going to be there to support the project fifty years from now and you can just handed down generations To to build something like that. You can't do that now at all. He can't plan a project for fifteen twenty thirty years in the future and us. You know like have a set of capital of dollars that you're going to just like say all right. Here's what we need to build this project. I'm just going to set here a it with this money You know. Let's say like some patriot like the mideast. I'm going to build this. Here's the money for it so much. I think it's gonna take and then fifty years from now. There's still pulling from that same fun. It has the same purchasing. Power is did you know when the project started. You can't do that so i think what we do. Moving forward is we have. We can start thinking that way again. And what's interesting now. There was different than as we've got this deflationary exponentially advancing technology right. So we're living in this you know there's you'd think of like x squared sort of asked him to your eight of the basic basic graph. We're right there on that on that elbow. And as jeff booth talks about he has that great visualization of like folding paper. You know and how long does it take for the paper to be widen off to get to the moon and it's like twenty seven folds or something like that in just blows your mind that because our brains can't think exponentially so we're this time and i think i think it's not that i think it's fifty fifty. Okay something that gets you to the sun. Yeah and i'm like. How many times do you follow this. And they do it. Seven as like. And i say like how many do you think it gets to the moon and then like eight million something. Like if and then like yeah. I mean they don't say bullshit. But then like bullshit dad. And i haven't and i'm like i'm telling you it does so then we end up getting our calculator right and we get the width of the paper. And then we start. Like doing the calculate. And i'm like you go there like no on. They still won't believe me. Yeah you're a fifty times if it is just like to the yeah fifty times. It's crazy so we can't we. Just don't think that way but were on where it's happening living through right now so You know one this. There's a scene in one of my favorite movies called waking life. Which just like totally blows. Your mind is just a a set of Scenes of discussions That richard link later had with people and so he sort of it's like this kind of autobiographical movie. And it's real trippy. It's it's like animated with like fifty different artists or something and It's a cool movie and check it out if you haven't yet But there's a scene where he's talking with this sort of philosopher and he's talking about the telescoping evolution of humanity and he's like look we had You know x. Amount of time for life to emerge two billion years for life to emerge six million years for the hamad to emerge one hundred thousand years for mankind as we know it ten thousand years for agriculture four hundred years for the scientific revolution hundred and fifty years for the industrial revolution. Thirty years for the information age the digital revolution and so it just telescopes and we are at that point. Now where this stuff's going to be happening these massive human advancements evolutions in the way we live our lives in the way that our bodies work with biohacking and merging of man and machine That you know this is going to be happening. Every ten years five years one year and you know with a and accelerating it like the idea is we're going to get to be the kind of superhuman right This neo human and We'll have this sort of new individuality. There'll be this this new consciousness The amplify you know. I think he talks about the amplification of the individual and this gets back to the sovereign individual rate That's before the old evolution was like kind of cold sterile efficient biological evolution And that manifest like these social adaptations because of the way that evolution works rate And so you would get these. Moral expression of that. Process was like competition parasitism. dominance force morality war Just because that's the way our biological evolution happen to like a battle in the survival of the fittest So in this sort of new age where we don't have those. We don't have to do that anymore right. Because we're we're sort of these like Evolved individuals to it to this new level That those kind of things will be subject to de-emphasis And then the new paradigm will have like these will really lift up these human traits rate that we have aspired due for a long time but have had been working toward over those hundred thousand years of truth loyalty justice freedom you know and that will will be able to finally In this kind of neo human. It's crazy and then becoming it. I'm not either dude. I'm not either my mind. It scares me but bitcoin fits right in with that. Fits right in with that. It's the kind of its deflationary. Money that supports that kind of deflationary technological advancement an exponential technological advancement. So into me. It's inevitable that it's going to happen and who knows where we go from here man. It's going to happen so fast. I think about my kids life. You know. well this is what. I think my kids. I'm like fuck like what the fuck we teach teaching this bush now like during the lockdown. I became really obvious. Because i hear my. I could hear my daughter in lesson cheese. Eleven years old and she was ten years older in the lockdown. And i'm hearing this stuff that teach them. I'm like what is this one. What a waste of time. It's like that this. Is ted talk with this guy to go. I'm going to tell you about this. Do not see in the ted talk with the teacher. Talks dont know habit. So he's about this kid who wants to learn about darts right. I've got to here there sir. Ken robinson you should check. So ken robinson tedtalk and he's essentially saying we do how quickly you like technologies evolved and the stuff we teach and the kids now. They're not going to need by the time they. We don't even know what they're going to need. My daughter finishes school in seven years right. Where are we going to be in seven years. Which which which industries would exist anymore but it does well with me out brady. I'm like of this woods. A meow mix. I don't know how dangerous it gets The neuralink stuff weeds. Because i'm like will we get to that point where you can just download any kind of information into your brain. Learn anything if you can like. What does that mean. Does that mean we can all learn everything or does it come down to. Who can afford it like this rumored. Moral questions is like if you're rich. You can basically download all the information of the superhuman. We end up a bit like like in that film. Limitless that weeds me out. So much of the whiz meow almost in some ways like einstein to think about wanting to escape from all of this is weird because i'm involved in bitcoin. I was Do you know what nana joy so she. I've been talking to a in clubhouse rooms of their last night talking on demon each other and just talking about going to buy bit land. Build a in the middle of nowhere and get away from all this shit. Because i'm like. I don't know if i want the will this week out. Dude yeah it totally weirds me out. Man i mean. We're not ready for this. It's happening too fast. We're not. I mean we are these the the product of this old paradigm And there's got something else is coming That's completely different and it's scary. You know and i i again. I'm scared for my kids. Because i don't know what it's gonna look like. I don't know what it means. It's one reason. I think we need bitcoin. Because it you know having so much power on purchasing power in the hands of so few people. The wealth inequality is a almost a direct product in my opinion of of fiat. Money And i mean obviously there's like you know. There are people who are going to earn more money than others even in a in a bitcoin world. But i think the drastic wealth inequality that we have is You know in large part due to to fiat money. And i think if we had a fairer money then we'd be able to of these technologies more fairly But at the same time these technologies will be more more quickly to people if we had deflationary money to pair along with the you know deflationary technology. The technology is advancing exponentially so all that stuff becomes more accessible to people. If we don't have an employee's fighting against that so that's i think a moral case for bitcoin too. Yeah let me ask you something. Do okay. i'm not completely sold on full hyper. Bitcoin is asian webuye. Bitcoin becomes a unit of account yet. Yes it might happen. But i'm just not completely sold on it. Yeah and i. I can remember with me or another interview. I heard nick carter talking about the. He still thinks. Bitcoin will exist a bit like gold alongside suffering currencies. So is it do we need to do. We need better money or do we need a better base money system like do we need the. Do we need hyper. Bitcoin is asian where we only spend indicas unit account. Or do we just we do. We need a system blake. Bitcoin which backsaw sovereign currencies which creates that level of fan as a responsibility or or is it does it. Don't bother his either-or yeah. I think it's either or can definitely see. I think there will certainly be currencies built on top of bitcoin and i think some of them will be sovereign link. Some of them will be corporate. I think some of them will be You know independent like And self sovereign like like the lighting network and. Yeah i think people will choose you know. The market shoes their preferred money and i think You know those currencies that are built top of bitcoin will be used for exchange but then people are going to want to settle their savings into bitcoin. As as much as possible. I would say or big onto the lightning network which which is pegged to bitcoin in a in a trust this way. So yeah. And i think i think what happens is that we have a kind of a de localization rare a de centralization also of of Of the way we govern ourselves and so there's this word i came across lake. It's a g- localization which is kind of a combination of globalization and localization so we have this global economy that's based on bitcoin and You know internet commerce at the very least. Bitcoin is the base money of the internet. And you know most more and more commerce. And i think most in the future will happen on the internet. So that's how bitcoin really kind of worms his way into becoming the base. Money is it's you know the base money of the internet And then the idea is that we can't we have. We are empowered then to you know basically kind of defined the nation state because we're going to put more money into this self sovereign money the more of our wealth there and kind of make the nation state less powerful. I think we're gonna move back toward more toward like a republic style structure that the country was founded on. This country is founded on and i think even more so will will devolve or like kind of move down into these much more local communities which is where humans naturally want to be right like grew up roaming the plains of africa. With you know hunt. Dunbar's number one hundred and fifty people or so. And that's like the group that could that could be sustained right. So i think the will biglaw allow us to sort of de centralize the way we live as well. Which i think is a good thing. Something i'm looking forward to. Yes i mean it's just it's gonna change everything but the thing i keep thinking about is like what's the bigger force. Change the money. Which i am absolutely convinced would change the way society works Over the next hundreds of years. But i think the greater force for change is just technology and were were just at this point where things getting a wild man Yeah and so. That's where i don't know. Take up with things. A couple of things are on my mind. Unlike no entirely the keep prodding away okay so one of them is like this idea of governance. Like i'm doing this. Sovereign individual stuff with breedlove. I'm working way way through the book. I'm working with my way through his essays. I'm i'm not convinced on this. Entire breakdown of the nation state in my happening might not i kind of think. The sovereign individual is ics. Somebody who just is able to roam in the shadows of all nation states just drift around the world go where they wanna go just almost be globally off grid. Yeah just think this an individual is right now. I don't know if you ever get to a state where or a nation completely collapses and we we moved to this kind of annika society. And i think even if you do i think it becomes more like countries may be become more like companies like but but the problem. I have with that. Is that this. You're still you're still centralizing power. And in some ways you centralize imperative different went. I don't know if it's better or not. Does it become more authoritarian and known. Do we see this breakdown of democracy is kind of like failed idea. Is that better or worse. I can't really get my head around that and is something you know. I've listened to balaj on tim. Ferriss week Ballot singapore and singapore is an efficiently run. Successful nation is also essentially kind of authoritarian. Better as that worse is democracy complete failure. He told me he talks about sending descended. Nations talks about the us in descending nation. Is you would argue one of the most free countries in the world but democracy is is we'd in america right now right so what happens there and then the other thing i can't get my head around is like how are imitates life if you play computer games of three hundred years in the future films in the future. The world ended up being split to write. It tends to be the red and the blue team was be like these two armies in a i remember if like total recall the running man which similar like that but i am i am i be like but i'm wondering if we end up going down that route because i don't know if you hype. Bitcoin is as if china goes through hyper because asian. I don't know if the too strong as an authoritarian regime with too much power and strength to afford either because asian and then you also see now. We're seeing the kind of us. Slides like dollar reserves is slip away with seeing russia. There's kind of axis of russia. China iran starting to do their own deals. You see brazil fallen even india. And i'm starting to see. Are we going to see this kind of diversion of two walls. Half the world adopts an accessory is other half dozen and what does that mean Yeah i don't know if i'm on like if i'm on my own thinking about this but the to broad concepts like cannot escape from myself at the moment. Yeah i mean that's some real good thoughts and yeah thinking about this stuff too i. I don't think that honestly and you know there'll be plenty of big winners out there that disagree vehemently with this but i don't think that will live in. Some sort of like libertarian anarchist society. I think there will be like you. Say pockets of the world like that. But there's there's efficiencies to be gained and comforts to be gained security to be gained by having a state and that's how the state began was lake collective security You know to protect wealth of Of a certain geographic or like social collective of people. And i think what we'll see is less economic control of the state economic centralization which changes the nature of the state a lot right. I mean there's a lot of things it makes. It makes war much less likely because it's hard to fund international war It's it makes it You know much like social security programs and stuff like that will would be less harder less Easy to fund Is that good. Is that bad rate. I think personally. I it's it's it's a good thing I think that that sort of those sorts of decisions should be more local I think that we should. Bitcoin will empower individuals to almost sort of shop around to find the way they wanna live. And i think there will be california's people that want to live like that. No be texas's and people who want to live like that and bitcoin will allow us to You know not have to live under the sort of massive Increasingly centralized nation state that is increasingly centralized because mainly they have the power to print. So i think it will. It will definitely lead to a decentralisation of power. But i don't think the state's going away completely and we're gonna live in some like mad max world. Whatever even mad max like there. Were you know like little like barter town you know. They came together and collectively people that sort of formed this way to live together. That's never gonna change. That's never going to go away. And i think you know. That's there's this truth this moral truth of The idea of centralization. Or what what. I like to call the will to power. Like the will to have power over someone and like decentralisation which is sort of based on the will to empower other people empower individuals right so i think that societies that seek or individuals that seek power over others will build the mechanisms of their own destruction. Eventually it's going to happen like it's not it's fragile. It's and i think that can society that seek seek power. Could it be a case that is accidental walls. So you know could there be a scenario whereby just hypothesize of top my head. Just say a group of bitcoin is get together like general. Fuck shit. let's nine and gondar thing is island has started off with few hundred people and then ends up like twenty thousand people but you still have to have a way of organizing these people right. There's not to say you're going to twenty thousand people who won creek. Commit some quote form of crime here. What are the crimes. What other laws. How does that island governor itself. Oh shit while we need have rules. We need judiciary. We need our police force. How do we vote in the leader of like you. Can you can theorize about some kind of like you open idea. But can you accidentally rebuild the same structures and when you accidentally rebuild the same structures. Do you accidentally put people in position of power and can can that pout instill corrupt and the reason i bring this up is because i always find it. Important to question is and i've never fully got away from the idea of the state and the problem with that is in the bitcoin world. You get what you refunding status cut blah blah blah blah. But the i'm trying to do is theorizes that that perhaps perhaps whatever we think of the state like whatever you'd think of liberty and freedom is something you just can't get away from is unlike a naturally occurring phenomenon phenomenon of how people organize themselves and also in some ways despite all the shit things about the state. Is it a net. Good like yes. If you're one person in your belief is ultimate liberty and freedom nobody has any power of me and you're absolutely going to disagree with us but is there a scenario whereby like when you just wear it up having some form status as a net. Good say something already controversial but i mean i mean it would intellectual honesty. There's a really interesting conversation between eric. Weinstein brett weinstein and it was following the death of george. Floyd and eric weinstein said something. That sounds highly controversial and a lot of people are going to lose this shit when they hear it but he said is actually a good thing that the state has monopoly on violence because even though the state can fuck it up like by having that monopoly violence at least you have like a explaining how he did but at least you have that kind of like central control violence rather than four mad max anneke and i think what he's trying to get is that we should never approve of state violence. But by having that inoperative violence perhaps net violence drops. Explain myself in a decent one. Yeah yeah you have. And that's that's definitely interesting. I think it comes down because it gets so much. Hey for this dude. Even bring the I mean my point being is like this is what i like about. This is what i liked it. I think it's important to bring this stuff up and talk about it because you know we. We don't want to. We want to continue to question ourselves. To and i think bitcoin is do have You know there is an ethic in in bitcoin that emerges that is Because of the properties bitcoin the kind of these emerging sort of ethics of from it and one of them. Is you know we just. We need to question We did not trusting you to verify. And so i think it's important to bring this stuff up. I think what it comes down to is the ability to choose right and jane that optionality and that really comes from having controlling your the resources you generate that is the base of this rate and not allowing a central party to control the resources that you're generating. It's time theft. It's it's the wto happened. Nineteen seventy-one show at the top of the top of the website. It's wages go flat line. Productivity continues so with bitcoin you get to reap the rewards of your increasing productivity over time in hold onto it. That gives you the optionality and i will be like i was saying. I think there's going to be states that will Value a much more central centralized control and people will appreciate that and go there and they'll have centralized a military is and they'll feel safer and you know they'll have a centralized education system and whatever and and healthcare and that's the way those people wanna live and that's fine. They have that they can pay the bill pay their taxes and bitcoin. They can to do everything they we live in a way that we like seems familiar now. But you won't have this monoculture of of the way nations or or areas geographic areas are governed And i think it's a good thing. I think it's there's going to be competition against different types of the way society's Live and i think we'll figure out Through that competition like what works well to protect yourself In a you know protect your physical self like what works well. Is it going to be a nation state. That does that is going to be private. Corporations accompanies is going to be like Collectives that come together and share in their in their so And i think that because because his physical that also reduces the propensity for physical violence. Because you can't with distributed multi say you can't just come and take my goal run away You know you'd have to go through a you know you know more more A harder process to get my bitcoin than you would come in here and take my gold jewelry or something So so i guess what you're really saying is like bitcoin just brings better rules and better discipline to society like even if the state doesn't go even if we don't lose the state we certainly change the role of the state. It's a bit like. I think i've talked about this before you. You get you earn whatever you earn every month working swan and you have a budget and you have a house and the of expenditure right and if you want to. You can take out a loan and if you can't pay your mortgage the bank the bank will come and take your house. We kind of want the. If there is going to be a state we have to accept. The state released one the play by the same rules but they don't the rules play by is that they can borrow money and if they fuck up they can just steal us. And that's one exactly that pisses. Everybody else is that. There's no consequence to them mistakes and they also tend to be removed from the problems because they have another incentive themselves which is re- to retain power on a bitcoin standard where the government kennel print. Money let's take don't print money and they have to essentially balance their own books so then they become a service provider so perhaps perhaps we don't lose the state or perhaps a transitionary period where the state reorganizes itself. But i think the other thing which doesn't help me is that you're in a very different situation. In the us you have optionality to go from california to wyoming or texas right have very diff- rules like in the uk doesn't matter where you go. You got the same fucking rolls i like. I can move to manchester or leeds or grimsby or wherever the fuck i move. I'm going to pay the same. Tax rates are going to have to live by the exact same rules. My own optionality is to leave the country which by the way. I'm definitely considering kinda wanna go to texas just because we don't have optionality. So i i keep thinking of like the balaj ten thousand city thesis whereby i i need to be able to compare cities globally. So it's and it's a bigger challenge right like if i could just move to london and pay lower taxes would and i still see. My kids is not an issue. Move into another country. I don't have that same optionality. Yeah i mean. I think i think that's what's going to happen. I think we're gonna see a less monoculture of of the way that we choose to live in more optionality and that was the idea behind this this country the united states and the republican You know having some sort of competition between states and citizens are can choose which Set of rules. They wanna live by the they prefer And we've this country is slowly kind of over time just become more and more centralized and the founders of the country understood the risks of central banking to the idea of of republic George washington wrote a letter to to Someone in delaware at one of the delaware and he said he said paper money has had the effect On your state as it ever will You know it will ruin your commerce. It will oppress people And then i think he's like open up the door to every kind of fraud or injustice or something like that and so the these these ideas Were being debated. The threats were understood and And sure enough you know and we. We fought battles against central banking for one hundred and fifty years until nineteen thirteen. You know when when the federal reserve was finally established into cold. So that's really what it is it comes down to. Is this if we can just decentralize the money. Then we will. We will have a just a lot more options on how we wanna live. And i think that's a fair way to do things And i think it'll be better For for people and we can live the way we want. It'll we can take our money with us. We can't we won't have a nation state authority. They'll say like like you know yawn pritzker. He understood bitcoin. You know a deep level of visceral level. Because his family escaped from from russia you know as a jewish family And and they. Because of capital controls got to leave with one hundred dollars worth of you know money in their pocket income the united states and they know all of their wealth was stolen so they didn't have that optionality. That's you know the reality for a lot of people around the world s in the uk and the us and we spend most of our time talking about like you know we wanna we wanna we invest in this thing. It's speculative asset it's the most asymmetric investment in human history and We're gonna get in early on this global base. Money's gonna make us rich but you know bitcoin's being used alex gladsden love talking to him about the stuff by so many people around the world right for reasons other than watching number. Go up so i think i think john's book is massively underrated. And i know it's it's i'm saying that knowing how much and how people think of it and i was really glad to in concert bring opinion Interview lex freedom. But i i actually got. I'm going to get people to think. I'm just saying this to be a dig but i think is more important book and the bitcoin standard i actually think is probably the first book people should read with regards to bitcoin. I think he did a fantastic job with a young and remote. Yeah i think is such a brilliant introit. He's such a graphic because he's quite quite short guy. He's not like pushy. Yeah Pushed the book. And so i'm his behalf by think is books fucking amazing. He's given away for free now. Men on bitcoin dot com slash free book. Yeah in anybody can go there and grab it. We have an impede. We got a kindle version. We got the audio version by guy. Swan so it's out there for free for anybody. Guy swan should not every they need a guy swan a ball. Now that can read. Every book tweeted that like two years ago. I was like all they want for. Christmas is about that. Reads my twitter. Feed to me and guys voice did you do. I twice did a book i did. Gd's book and then. I did it again. Just like just hearing his voice because he's like twang in it yeah. It sounds so good so southern yang copy of his book. We've given away from me. I'm gonna. I'm still going to buy again. You have you had gone on the show. I don't think i have now. I feel like a bird. And he gave me a copy of the book I think it was at tony's she to that point that that that might sound like a dick i sometimes. I don't remember if i've had because i've done. Three hundred thirty is now. Remember that it's been that many now and that's crazy thirty days if you haven't yet you should have him on. He's you know he's got a lot of good stories to tell And just really understands this thing from like economic and technical perspective and stuff. So yeah i think. I think reading the bitcoin standard. Gets you like kind of more of the economic history and context and the and then inventing. Bitcoin gives you some like the reasons. Why you know from a human rights perspective. Bitcoin important to yon individually but then just goes through how the system works. and so. that's the one two punch. I usually recommend his like learn about the money. Learn about how the system works and why it's important and those. Those books are good complement on. Let's see. Let's see if ben bends work with me not been burnt us man. I love the that was. Yeah that was you could pick did well. I met him at bar in boston. Just came up to me and immediately loved the guy and so ivory is listening right now. Ben make sure you get your book. Let's see let's see if this works. John on the show and talk about it but now he's such a great book. I always tell people to read that. I always read the safety and bitcoin standard by. Tell them to repel is all propaganda because like fundamentally disagree with his distaste of modern art. That's my thing was. I wasn't a big fan chapter either but you know it is what it is just because it's such an absolute opinion. I'm just like You know like not. All art is a banana taped to a wall or like you know. Some paint splashed on canvas or something like there's some pretty good modern art out there. But i i get it whatever. He's trying to make his point. Well he makes the point violating some ways when you because there is some bullshit out there and but also the point i have is are. There is a reflection on life right. So if if we're at a time like if we're at time like living on a feared standard of high time preference and therefore we've got crap architecture and products which had just shit like art reflects their the students you know. Art is also therefore doing his job of reflecting Life motorcoach i. I would buy by anyone that book. They won't repair of that job and safety as yeah. I mean he definitely has appointed right leg. I mean there's there is definitely a lot more art and architecture that happened in the renaissance for instance. That was much longer took a lot more time to produce And that was you know because we discussed like you had had some money that would respect your time and and gives you the confidence that you could invest that time jenin. Pay offer a long time. Do you think that do you thinks also it just. It was a different time. Different egos just. It was just a different time. Did you just the money. I think it was no definitely not necessarily the money. I just think it was a part of it. But despite that i still think there's some great modern art out there and i still think there's some great modern architecture out there Is just. It's just let i think it's you know it's kind of in. Despite of the money and the way the way the situation is i think if maybe during the renaissance it was easier to kind of like you know create those long term projects than it is now but yeah i mean you know i. I don't agree with the kind of absolutist tone that chapter takes Kind of rub me the wrong way. Especially when the first time. Although i i do have a more of an appreciation for now than i did when i first read it so i guess i'll admit that and i understand where it's coming from but i disagree with it but geno what like even though i'm dina like hate each other i actually previous book i think is book is is a good book. I think people should read i. Just there's a lot of his stuff. I don't buy but whatever man like we're all different meals exactly cooman or listen. You're one of those people. I can talk to. I don't even need like. I've got all my questions. I'm looking at them fucking once. I've just just just thought with hall of famer. We went from there. You're just taught to. I could literally twenty four hours or else you do want to talk about. I'd not asked you about a man. I don't know we've been through quite a bit And this is an a lot of fun men. Are you going to miami. You think you're going to be able to make. Well i'm i'm meant to be. Mc in the event so So i was gonna go to austin next week for bid devs the application in and i can travel for work like so. There's two things. Can i leave the u. k. And then can again in the us now. We have a lower the uk now. That says you can't leave. It sounds very authoritarian. Kind of is but we we. We've been trying to manage this covert situation. I'm not going to get into the rights wrongs for that right now. Let's just say the governor's rolls we had a lot of people who are leaving for work and really just influences going on holiday because they just won't be stuck in you can and there risking bringing covered back into the country and they put it in his new role if you traveled without a proper reason than you could get up to ten years in jail on the facial. It sounds super authoritarian. It's really just awareness. Stop fucking often bringing cova back into the country right so they put in place. But if you've got a proper business reason you can travel now. I do have a proper business reason. I'm mc the conference right. I need to be that. I think is appropriate business reason so the next thing is can get into the country so i applied to get in full bit deaths and rejected the. Us government said. It's not good enough reason. So my expectation is they'll do the same four miami now if nothing changes between now and the middle of may go kind of six weeks there is a chance that the us removes the uk off their list of the rid lists because we've got a successful vaccination program. Our affection rates are low or deaths alot probably be vaccinated by then but if it isn't i have to go somewhere for two weeks beforehand so it looks like i'd have to go someone like antiga because can fly direct. Wait there for two weeks. And then fly to miami if i have to do to doing. I'm not fucking missing miami but like a bunch of bush hoops to jump through. But we're dude. Listen everyone's going to be. Oh yeah we'll hang out. Swans going to have a dome outside like a air condition. Dome is a dome. It's going to be the the swan lounge become It's gonna be fun. It's gonna be wild man. We're going to set up a studio in there. You gotta come in and and Hang out recorded. Maybe even records show doing interview from from our studio if you want a special well. Let's get refocused on. There's like ten of you. Yeah that'd be that'd be good man. Let me get time so it's gonna be fun. I'm looking forward to hanging out with everybody including human. Let's we can sit down in the pub and and you know just talk for hours on my another because you came to the one in new new san fran san francisco san fran-. Yeah you won't be a did too. So i'm going to do. What did the get one of my favorite. But i want to tell you what this the one thing is. If you wanted to take bitcoin you just need to take out miami that we i don't know people say well you remember. We were at the beefsteak In two thousand nineteen and it was it was all the. There's that picture that i love like. Yeah mardi in may and peer. And you me and gary leland's stefan and it was just like i took that picture somebody posted like bitcoin. Podcasters centralization you know so like building collapsed or something in be over We'd have to so many others now. We've got fitness into a of john vallis recently. East such a fucking good interview. Right is a bother dan. I clashed with him. Before been chatting turned into a bit more recent. He does a good job. I think i need to pasta. The i think as you pronounce any does a really good job. She's on the rated and it's just good to have you know a woman amongst us with her opinion and her stuff and things. She does a great job. I think we're blessed to have so many. I mean maximum stacey killer. Of course it's just so many of us but it's a good thing mer talking to you. I'm so sorry it's taken episode. Three three twenty five three thirty five. We should on this long time ago. All good bro. it's all good. We were able to do it now. And it's not like we haven't been talking. We've been in touch. I know. I know so i just had to get big enough to to get you get you people to allow this funny. I mean i. I gotta say though. I respect what you built. Man tweeted this out the other day at you. Respect the hustle man and love to see What has grown into and see like you know big winners. You know getting getting paid to bitcoin. More and more and picking up. Ben is a big deal man. He's such a such a sharp dude and really cool. So tell you the difference. Haven't him on right. If you wanna come on the show now like if you wanna come on the show you can email me and you'd be on next week If you on the show now you're not gonna get on until two june like with fully booked like he is booked as how with solid ice all the way through to june. And we're having to turn down things because we just confident in He's prepping interviews. He's just doing is doing a solid job but now for very fortunate the show with number is number. Eleven in the us. Investing char when you think about it for my like take a step back. If go within four spaces you've got me pomp and we studied billionaires and let preston's doing a little bit chris. It's like three this three or four. Bitcoin show. You've got peter shift there as well which is essentially a bitcoin show because he doesn't the fucking shit is i on yourself now man. Yeah that'd be keeping an eye on the block but you see these are up invest in. There's a lot of people in that talking about bitcoin. People want to hear about it so super cool very cool. It's really cool. i brother well. Let's brother told to you We it won't be it won't be three hundred study. Shows that we do this again. Maybe maybe we'll do something in miami. Maybe you me and yan will sit down. Maybe you me breedlove. Whatever we'll sit down and we'll come we'll come up with a special hell. Yeah that sounds fantastic. Let's do that are did well. Listen you stay safe. You know if you ever need anything you just pick me. And i would do anything for you. Same same appreciate it. Thanks for all you do for. Bitcoin man and things conversation and i can't wait to hang out. Miami man can be wild. It's going to be great now. The hang of shit hang out hangovers. How cool is brady brady so cool love to look into brady. Such a smart dude man. Okay i definitely feel the huddle fomo timing the market tops and bottoms is of the hardest things in bitcoin and the idea of sending too early and never get in that. Bitcoin back terrifies me. I screwed up my big on so many times in the past especially in two thousand seventeen shit. If i the screwed that up i would be very rich person now but anyway we are where we are and so much of this macro environments change that i think is just. It's really really time to just hold on. Hold on tight downhill to tell you the same. Just huddle on also with the big money institutions on board. Maybe we won't see another age of trump he. I guess so many emails about the show all the people saying. When do you think this is going to be. What are you going to sell almost like. I don't know. I also really heated. He doesn't know he's gone idea. Who knows but. I don't wanna i don't wanna end up with a smaller stack enforced got now so i don't know maybe we just need to hulo forever but i would definitely be holding through this market. A little tiny bit. Go at one point. Maybe i'll take holiday. Maybe some away. But really i'm going to be huddling nine five percent maybe of stack anyway. Did you enjoy this. If you do have any questions about it you can reach out to meet my email addresses. Hallo a what. Bitcoin did dot com. Or so you can jump into my telegram channel and everyone is supposed to show big. Thanks as i said in the intro. I have the number one invest in podcast in great britain. Right now which is which is utterly utterly fucking stupid when you think about it just like some more on in bedford asking questions and head of the bbc in chile that but thank you so much. Everyone is supported the show. I can't believe a bit. Weird is very weird but anyway it is what it is. people obviously want to hear about bitcoin. But if you want to support the show if you like the show you think it deserves it. Can you go leave a nice lovely five star review on apple podcast. I think that helps with the rankings. So if mind doing that. That is very very cold. Outside of that. As i've said defiance my other podcasts. Taking a two-month break we'll be relaunching in june and the hijack brand. I'm not this media. Rangel hijack everything apart from bitcoin. Show is going to be going under that. My news service. Never edit come hijack news but if you want sign up to that you can do right now at never edit dot com that is carrying on as we speak anyway. Have a great week. Got another bank show coming out. Friday love all of them.

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TIP291: Commodity Investments During & After COVID-19 w/ Marin Katusa (Business Podcast)

We Study Billionaires - The Investors Podcast

53:20 min | 1 year ago

TIP291: Commodity Investments During & After COVID-19 w/ Marin Katusa (Business Podcast)

"You're listening to t I pay by popular demand. We bring back our most popular commodities guests mister. Marin CA TUSA from Catania Research Marin has financed over a billion dollars worth of deals in the commodity sector and on today's show we talk about the very hot topic of gold and oil additionally Marin talks about all the crazy supply demand impacts that are currently occurring due to the virus among much more. This is not an episode that you WanNa Miss if you have any kinds of investments in the commodity space and so without further delay. We bring you the thoughtful Marin Ca. Tusa you're listening to the investors podcast while we study the financial markets and read the books that influenced self made billionaires the most. We keep you informed and prepared for the unexpected welcome to the investors. Podcast I'm your host has always. I'm accompanied by MOCO host Preston Pysche. We are super excited to be here with fan. Favorite Marin Kutuzov for the fourth time marring thank you so much for taking the time to speak with us. Here at the master's podcast. It's my pleasure. So Marin I think it's safe to say that a lot has happened since we talked last time in December and just to summarize a few points that we talked about back then you talked about rates going lower. Us dollar strengthens and gold. Stocks are performing now going into the interview. We can definitely say that we could put check marks and all the boxes but let's set the scene for conversation Soom out from helicopter prospective. How and why is the crash? Different than previous crashed in two thousand eight and nine. It was a financial crash. It was bank. Leverage debt the financial industry with all their derivatives. So this one is very different. I call it the TRIFECTA stakes in in what we're having here is. We're having the health crisis at the same time as we're having a financial crisis with all the debt in the world and then also monetary financial and you got the economic issues going on that we see the layoffs the unemployment and then you have a monetary issue and this was the fundamental thesis of what. I've been talking about to your audience for well over a year and that's the new realm of where we are. You look at the Bank of Canada where you are the Bank of Switzerland the E C B the Bank of Japan the Bank of England. All of them are lining up for these swap lines. Now you don't line up birth swap line if you're trying to get rid of. Us dollars they are lining up for these swap lines because they need US dollars and part of the ironic result of the global financial crisis of two thousand eight was all that stimulus that came in it was like a binge a debt binge globally in over twenty trillion in us debt globally and infrastructure that is denominated in. Us dollars not combine that with a oil crisis for the Saudis and the Russians are Kinda. It's almost an inversion of the eighties. Oil or where. The Saudis and Americans work together to dethrone the Soviet Union. Now you're having this similar fact but different where now think about the ripple effect on all of the commodities and the emerging market nations that need those US dollars to service the debt but they're commodity prices are down by over fifty sixty seventy percent so that kind of sets the macro ten thousand foot view of where we are today the world is actually shortage of US dollars. And that's one of the biggest pushbacks I've had from people in my industry in the resource sector specifically in the gold sector and eventually all feeds crash and go to its centric value of nothing but right now the. Us dollar is continuing to stay strong. Now the swap lines and all these lifelines currencies are going to stay volatile but the dollar today is stronger than it was sixty days ago now. Marin before we started recording you are so kind to give us a little sneak peek into some of the things that he would doing. What your portfolio and we will talk about your portfolio in this interview and sort of like sum up what you've done since the last interview came out December twenty one. But could you talk to us about perhaps just one of the that you made here over the past month or two just to Kinda like preface some of the conversation that be going into surely I guess? I'm fortunate enough to have such a large diverse subscriber base from all around the world of subscribers and over one hundred countries and one of my subscribers is Canada's leading scientists for infectious diseases and in January my conference we got together and I asked him I go. Hey like how serious. This virus announced January twentieth and him and I continued this dialogue for about a week. And he said man in the data is changing rapidly every day and this is serious so we were one of the first to say that and luckily because of that we also we take all our principle investment off the table and that February third issue the Kiro that's our newsletter of five out of six precious metal stock. So we took our money off the table. We might largest position in my favorite and actually still up over forty percent on that one but I like that company so much that I was comfortable with it and then on March fifteenth. I sent out an alert saying hey this is what I think's going to happen. This is what the Fed just did. This is what trump's just did let's do some strategy here and put on alert on five stocks and it took a couple of days for the price on March eighteenth three days later. Two of our stock prices got hit and just ironically two days later we sent out another alert because we're up well over fifty percent on a north ten billion dollar market cap company so try to put this into perspective. These moves have been so volatile on the biggest stocks. This one company had a twenty billion dollar market cap just four weeks ago and we got in and it pays over ten percent yield. We've taken our money off the table. Granted I was a little bit too early fifty percent gain because within a week it went up another fifty percent. But that's fine. We still own a free ride. Which means we sold two thirds of our position to keep one third for free and we collect the dividend forever at no risk cost base. That's what I'm playing with right now. In our strategy is buying the highest quality the lowest cost producers and what we did on that one stock when another fund blew up liquidiation crisis. It's rush for cash to cover their debt. Their leverage and all these aspects and on that one stock. It's a fifteen billion dollar company has paying US over six percent yield bulletproof balance sheet. It truly is topped here in its industry in the world. Actually the strategy is do your homework. Figure out where you want. What price and you just wait. We are not out of the clear here and I just don't believe the economy is going to come back as fast as everyone is saying. So prepare yourself. We've had an incredible run here but I think the market's going to pull back and provide incredible opportunities for what I call a true value investor in the last ten years it's been about growth. The valley investor guys didn't have edge on the market. I think everything's GonNa Change in this decade. Where the guys who do the homework. The guys who know how to read balance sheets truly understand Michael. Warren Buffett value investing. This is our decade to truly shine so Marin Stig and I recently had a conversation about monetary inflation and its impact on price deflation. And I know you got some opinions on all this. So let's talk about the international markets. Recently you have said that the rest of the world is about to experience price deflation and then stagflation explain this to the audience. So let's take a step back here and go. Why in this world? It is the guy in Vancouver talking about deflation. Well let's look at across the board. The share price volatility the commodity price volatility. All the debt think of debt as this massive black hole unless they do this incredible once in a historical debt jubilee which I don't see happening yet by definition deflation is when there's fewer dollars chasing the same number of goods and even though there's been in this incredible stimulus it's still not enough. You go to any other commodity producers the big hopper guys like you go to Peru and Chile that right there is half of the world's coppers two countries coppers from three and a half to two dollars so you look at where they are. There's less money in the system chasing the same number goods and that's deflationary. Then what happens is governments? Fear deflation much more than they fear inflation. Now why is that the case if you have debt? Which all nations have. You could inflate that data way but when it's deflation there's less dollars to refinance that so it's actually more expensive to pay for that. So that's why the government's came up with these swap lines. Let's do an example of a real life example of what's going on right now behind the scenes at the Fed so whether it's the Bank of Canada that's lined up or bank of Australia our the the ECB. Let's use the European banks. I think the euro truly is GonNa be severely impacted here because look what's going on with Germany and its hasn't yet rippled through from the market standpoint. So the ECB got a massive swap line from the US Fed so the details of this. They're not making public. Which is interesting. But you can kind of put it together from historical swap line. So let's say the E C B says to the Fed we need a trillion or whatever the number you wanna make that's in. Us dollars there's going to be two aspects of that they're gonNA fix the amount and timeframe and the interest rate so that's in US dollar loan than the EC- converts that to subsidize. Or you know you WANNA call float or whichever way you look at that the industries that they need help. So let's use France as an example because they're in big trouble Nair economy. Lets us one of the major industries Airbus so now if Airbus gets a lifeline from the ECB they have to do that in euro so they have to fix the term and the rate that they're going to pay now let's talk about the ripple effects here. Do you think the Airbus is gonNA sell more planes in the next year or two or is there gonNA be deflationary pressures people travelling less less money in the system? So it's going to be competition with Boeing and it's kind of like a race to the bottom in a depressed market so Airbus is going to have to go back to the E C B and say. Hey we need more time to you. Know what I call amend to extend and pretend the debt is okay and so then the E C B needs more swap lines from the US Fed so the American government is subsidizing Airbus which is in direct competition with now the American government. That's subsidizing Boeing right. There big American airline which trump's openly stated that he's going it's a security the national security. So there's so many geopolitical angles here that okay. Well if you WANNA swap line you gotTA accept certain terms. And that's why I talk about this and and it's one of the biggest pushbacks I've ever had in my career that this is going to be the rise of America World War. Two all of the cost of the war. All of the allies axes. All the nations combined was about six trillion dollars. Now seventy five million people died in World War Two. We're just under fifty thousand deaths globally with the Kobe. And we've already to eat or if you WANNA think simply printed six trillion dollars globally to cover this war the virus when you look at what's going on here. Globally the non. Us nations are going to be in a deflation right now. They are an deflation. The government's panic that they're going to do stimulus but the unemployment is going to continue to increase. That's why we go shifted to a stagflation then as that continues. Then America's GonNa Benefit from this and it's going to have inflationary pressures in the American market once. Trump brings all these massive trillion dollar infrastructure projects. And the American economy's GonNa Benefit in your guest. See the big stocks when this is all set down within the next five six years it's actually going to exceed the highs we've recently seen and I know it's hard for people to grasp that but that's where we're going very very interesting so let's look at the US because in the US a lot about potential hybrid inflation and this is something we have discussed multiple times here on the masters podcast. So let's hear your take. Why or why not? Will we see hyperinflation in the US? Initially we won't. I know a lot of guys a lot of the big name. Market pundits are calling for hyperinflation. I think it's going to take that gradual shift from like I said the the rest of the world in deflation to stagflation. Then the Americans are GonNa get inflationary pressures that transition to hyper. Inflationary have while you gotta look at the demographics as a huge on pension funds. You look at all of the debt within the system almost as if it's a tale of two markets the big caps. Almost that they're too big to fail are going attract so much money and they're gonna be overvalued and then you're GonNa have this binary market where you have the small caps. That are struggling. That won't necessarily get the big government support that's going to be the true indicator of the economy in the near term. So if you look at take away the big hundred they're still severely impacted whereas the big caps are actually rebounding quite nicely here. So that's kind of where I see us in the near term. Look I don't have a crystal ball not try to pretend I know what happens in five years. All I can focus on is where we are here in the near term and how to best position in profit from this one thing everyone has to remember. Is the government's the Fed? The central bankers are going to do whatever it takes to push this along so if it means raising the debt ceiling is going to happen if it means more swap lines. Bigger swap lines in debt is going to be amended to extend. And pretend that's going to happen to and if you look at the oil patch that's been an incredible reverse and do not expect the price of oil to get back to sixty bucks quickly. The Russians and the Saudis are committing to this and the Saudis are bringing on over three million barrels here and they're committing that in when those wells remember these swing wells when they started producing that they can't just shift back right away. There's technical reasons for that. So they're building up ramping up. This is going to be a true gutting and if you look at places in Alberta Canada which is the center of our oil patch oils down to three dollars and eighty cents a barrel. That's cheaper than a cup of coffee and a donut in Midland Texas. It's gone as low as six dollars. A barrel recently the advantage there if your strategic and patient investor if you look at some of the refiners you're buying barrel of oil for five six bucks you want to store and produce some gasoline. It's seventy months. There's an advantage there now if you're going to bet on some of these ENP's the expiration producers that are heavily in debt. You might want to rethink that. So really understand the balance sheet and the debt profiles because now the junk market is a huge market. The bond market is multiple times bigger than the stock market but with so much be rated corporate debt that we know in this economy is going to be classified to be plus or even junk status. Essentially the cost of capital is going to be higher. I know people think that negative interest rates would take it right away to hyperinflation. It's the opposite that's deflationary because there's less money flowing around it's about the velocity and the speed of capital so who's GonNa Finance all this stuff so there's so many time bombs and things that people haven't seen yet and the politicians and the media really avoiding the reality of the market but the truth is in the balance sheets focus on the balance sheets some more and last time we had you on the podcast you talked about gold and you had suggested that if we had another sizable correction. You suspected that gold would sell off With the market during that initial period. And well that's been exactly right exactly what we saw in February twenty twenty and now we've seen somewhat of a bounceback. What are your thoughts? Moving forward from here as we're having this conversation At the beginning of April. I guess I'm the guy at at a cocktail party that people don't like talking to because I always focus on the facts and the truth. People love that angle of that goals. Nap Salute safe haven. While all I did was I went through the last hundred years whenever you see a crash when people need to sell anything and everything to gain. Us dollar that includes gold and silver and we saw that so moving forward. We're sitting at about sixteen hundred dollar. Us dollars that is a fantastic price for any producing gold company because at sixteen hundred dollars. Gold it's a great price but it's even better price because the US dollars can continue to stay strong as these nations are devaluing their currency. So if you look at the Russian ruble it's down over twenty five percent year to date you look at a different countries Of their currencies the Canadian currencies down over ten percent year to date the Australian currency over twenty percent down so in the local currencies. They're hitting all time. High prices in the price of their gold like the Australian people laugh but Australian price at its highest. Prices GonNa hit twenty seven fifty twenty eight hundred probably even three thousand dollars per ounce and Ozzy dollars because of the devaluing their currency. So then what's going to happen next? And I called the AK forty seven nations just because of one hundred countries. You go all these places at the mines where the security are holding. Ak47's what do you think the government's GonNa do to foreign producers? We're going to be the first ones that get the impact from the governments who are going to increase taxes increase. The government take ownership of the mind. And they're going to say it's in the best interest of the locals and one of the Forage GonNa do the four mining companies. They're going to have no choice. What are they going to go? The global courts. Now right so be very careful where you're owning gold mine so in the near term we're going to see downward pressure in the gold price because where the gold is being produced globally. It's such a high price and you even see in. Russia recently came out at our. We're going to kind of hold off from buying anymore gold now. There's many reasons for that but I think you're gonNA see more as more pressure comes into the market. I don't think we're out of the woods yet. Gold and stocks will continue as other funds. Blow up in nations need to gain cash. Or whatever happens. We're GONNA see more episodes of selloffs. Now that's okay because gold has its intrinsic value. What is the actual cost base? So you always focused. On the lowest cost producers like my friends like Ross Beatty with equinoxes gold or any of these companies. What is their true cost and they can make money at twelve fifty gold. So do I see gold going down to twelve fifty? I don't but I wouldn't be shocked to see it. Hit Thirteen fifty or fourteen hundred at that point. You WanNa reset your portfolio with some physical gold because no new mine. Production is GONNA come on at thirteen hundred dollar gold. Where do I see two three years out much much higher but in the near term I still see the price of gold being very volatile? I just want to say to the audience. That just before the interview had a talk with someone from Martin's team and he actually said be really cool graph with goal versus. Snp return since the election. Just wanted to make sure to link to that in the show notes and people can perhaps get a bit of you. An seal straight is some of the things that we're talking about here on the show but you're talking about it can scold before and this is something we talked about on the previous show. Exco Olympic gold there are two companies that are heavily invested in. And they've been volatile profitable investments since December. Which is not something you can say about most stocks. Have Your thesis for these. Two companies changed at all since twenty first. Not at all in fact. I'm actually more bullish now. So why let's take someone like equinoxes when the market is so shaken and across the board wearing the position that were doing better during this crash than a year ago we had very very strong? March a very strong twelve months but the general market is rattled and when markets rattled fund managers of rattled. And they're looking at this going. Okay their mandates are they're going to have to invest in gold will who are they going to invest in guys who've done it before like a raw speedy who's invested over two hundred million dollars of his own money into the stock as high as eight dollars and change recently and he's taken this company from essentially an idea that started in the Research Office to now over seven hundred thousand ounces of production in three years. Which by the way it's never been done before in the market in that fast and organically funded to get to a million ounces by the end of next year. They're obviously GONNA go. Because people are going to flock to that. For example I put out a chart to everyone that if you take all of the companies producing anywhere between five hundred thousand announces to two million. Ounces equinoxes is by far. We're talking about order. Magnitude difference of ownership by insiders about north of ten percent of the company is owned by insiders where the next highest company was one point eight percent. That's a big big difference than it goes all the way down to zero point two percent so people are GonNa Follow leaders who've done it before and then the other aspect is there's not many tier one world class deposits that aren't owned by Major. And now the majors are GonNa look around and say hey we want something in non AK forty seven nation that is has infrastructure that is tier one and that's going to actually get higher bid because in this market people will be willing to pay for quality so when you mentioned liberty goal that Black Pine asset and I'm one of the largest shareholders in the company and our newsletter average. Cost base two cents. And I'm not telling anyone to rush out of by I'm being very transparent with what might cost basis. I haven't sold a single share in the company and I'm top five shareholder in the company that deposit which we wrote about in two thousand seventeen I said would have two to three million ounces was my calculation while. I know I'm wrong. Now this thing is going to have north of five million ounces the majors it's a pass producer. It has infrastructure it's in the US it's in the great basin where you want to be. The big companies are going to look at that and say okay. We'll do I WANNA go in the middle of Africa for deposit like that. I know with the depreciating currency and I'm GONNA have to have diesel supporter. Do I need to go down to the great basin right have infrastructure and I can drive right up to the mine and have low cost power and the rule of law. That's where we're going back so over. The last twenty five thirty years in the resource sector stake. People went away from Canada in America and they went to the emerging markets and. I just find it absolutely insane. Actually that companies are having. Let's say in an AK47 nation has the same discount. Rate is something that is a pass producer in the great basin it just mathematically doesn't make any sense and eventually we're going to see the market come back to that because the risks are going to be too high and the government take is going to increase. The game is going to be reverted back to that. So that's why I'm very bullish on those two positions and let's see what they do if I'm right. This thing's going to be sold for a lot higher. Let's take a quick break and hear from today sponsor. Although we're value-based investors at heart it has long been known among investors around the world that systematic or quantity strategies have become a highly successful way for professional investors to extract returns from the market. In fact most of the top ten hedge funds in the world today like bridgewater associates and renaissance technologies discovered this decades ago. And there's one podcast that covers this area and finance in great detail in its top. Traders UNPLUGGED DOT com. And Right. Now you can get a free book explaining how to systematically identify and follow market trends as well as a comprehensive guide to one hundred of the best investment books of all time. Just go to top traders unplugged DOT COM SLASH T. I P to get your books today again. Just head over to top traders unplugged dot com slash T ip. You'll be glad you did Preston. And I are looking for a host for brand new show the intrinsic value podcast respect the show to feature different intrinsic value assessments and for you to interview guests just as we do with John. Stockton detailer felder. And so many others here in the master's podcast who also like you to have your own mastermind discussion where you pitch your favorite stocks and talk about the Kurd my conditions if you want to learn more about the position and how to be a part of the GOP team. Please send me an email at stake at the master's podcast dot com in your email together with your resume. Please include stock analysis office stock. You recently found interesting all right back to the show. So Marin if we're characterizing the goal market is being a little bit crazy. Let's talk about the market. That's been really crazy And that's oil and right now. You can't talk about oil without discussing the three. Ps and that would be Putin the prince and the pandemic so talk to us about the three PS and the oil market right. Now let's start with pandemic let's look at the actual tom-tom data the GPS data. It's showing us that. Even though the Chinese market is coming back people going back home right away. They're not going out they're not going to. The restaurants are driving around and even within China right now looking at the satellite data showing that the oil demands. Lower now looking. Currently our team went over this this morning. Looking at the tom-tom data that's available on satellite data. This morning it is showing eighty percent less infrastructure. Driving the roads trucks everything in North America today. So let's just say you know half the driving come back well right now the. Us are refining about sixteen million barrels a day and eight to nine of that goes into gasoline in barrels. With half's down right now. I think it's about two hundred. Thirty million barrels of gasoline isn't storage capacities. Three hundred sixty. You're talking about if I'm super conservative. Say only half the driving over the next thirty days comes in thirty days all of the. Us capacity for gasoline storage is filled to the rim. Nobody's talked about that yet. So that's the angle they're number two. Let's look at what Putin's doing and I'm not rushing. I don't get paid by the Russians. I have nothing to do with this. What he's done is true grandmaster at this. They are not dependent on. Us swap lines the sanctions them. Putin do think he just did this. As a price war with Saudi now he's playing multidimensional he is specifically attacking the US shale market share. And if he can rattle the US economy at the same time and maybe shake off some of those sanctions. Any one of those three or a combination is a win for Putin number two. Let's talk about the Prince Brothers Multi Angle here for him number one market shares. Obviously important bring back discipline within OPEC in the cheating members number two but the elephant in the room that nobody is talking about is what better way to take on. The Iranian regime been slaughter the Iranian market share while they are suffering a massive pandemic all the economic sanctions on Iran and then slaughtered their income from sales of oil from to China because the Saudis are taking that market share. That is something that is really interesting. We're not seeing much data come out of Iran but they are not massive crisis right now and both Iran and Russia at twenty dollars. Remember the ruble's down over twenty five percent year to date to the. Us dollar they can survive these oil prices. Ignore the media stuff that the Russians can't afford it or the Saudis can't afford it because they need eighty dollars to budget their economy. They can make changes okay and the production costs. The Russians in the Saudis are the lowest cortel cost producers so as Kuwait so the production is not going to decrease so this is going to be a serious gutting in the oil market and the two places to really focus on is Iran and the impact in the North American Canadian and the American Shale Patch. So Morin I think we all seen energy companies just being hammered and there are trading at prices not seen in decades. Are you looking to get exposure to oil in public maggots? Anything interesting in the private markets and perhaps nothing interesting at all when you see companies trading at fifty dollars two months ago trading now at fourteen fifteen and they're the largest in their sector? You have to pay attention but fundamentally the industry hasn't fixed itself they haven't been paying out cash flow in two thousand fifteen. We talked about the massive debt wall coming in twenty twenty in the oil patch so unfortunately for many of these emp oil companies both in Canada and the US both private and public. The Equity People Are GonNa get slaughtered because the debt guys who come in he who holds cash right now as king they're going to dictate terms and it's going to be a serious glutting. I don't think we're through it yet. Am I buying any oil companies right now? No I think there's still more paint to be seen but you want to focus on their balance sheet in. There's just an incredible amount of debt. That's gotta be restructured and we're not there yet so this next six months is going to be more pain in the oil patch so here on the show we've talked about buying out of the money call options on the underlying oil commodity long-term out of the money call options and. I'm just very curious to hear your thoughts on that trade idea. One think people have to be aware of and be understanding as the price of oil that they see isn't necessarily the price of oil that the companies are getting if you look at the western Canadian sedimentary price. It's under four dollars this morning if you look at Midland Texas. It's under six dollars so you've gotta be very careful on playing these call options. A lot of people are playing the contain go aspect and saying well you know we get a freighter in your your loaded. But that's the curves steepening. I think there's easier money to be made and I think that most retail people shouldn't play the options market. Because it's so fast moving most people in our busy taking care of their kids in home schooling now that they don't have the time to deal with how volatile and fast moving the one the big difference of this current prices and two thousand eight two thousand nine global financial crisis is how fast the information is moving and how fast information is impacting the markets. So I would be weary of playing any call options right now for the retail audience. Last time you here on the show. What I've really found fascinating was how you talked about that. The conventional wisdom about when the US dollar appreciates gold would weaken and and the opposite. So whenever the US dollar depreciates gold would strengthen now you acute their that. Their relationship has changed and now we would both see the US dollar and goal strengthen the same time. And we've seen that. It's very interesting to follow now. Let me complicate things a little. So please stay with me here. So how has a low all price historically correlated with gold and US dollar and what is the causality if any between all prize gold and US dollar from a production standpoint the price of oil being where it is now is going to actually improve the cost structure for the most gold producers is actually going to decrease the cost anywhere between five to ten percent across the board now? Each mine is different. Whether it's underground or open pit but that's a good rule of thumb to use oil as a serious. They cost not just on the energy aspect. But if you look at hires is a huge cost. It's three to five percent of the cost of every pound of copper producer. Every ounce of gold produce will that across the board is decreasing also so that's a low. Oil prices is a good thing for the cost. Now when we talk about a low oil price that also means that the emerging market and the oil producers their currencies are going to be devaluing further and the US dollar strengthening so for the US. People about eight months ago. I wrote a tongue-in-cheek article of why Americans should not buy gold in. The title was just to shock people so they would read the article essentially if you're a non. Us person you want gold. Because it's a store of value and for the Americans is still being stored value. You're not gonNA see the incredible appreciation that you would if you're Canadian or Australian or European Russian South American and so on and I think the big shocker to all of this will be when the Chinese Juan de pegs or unpegged from the. Us dollar that will be a major change to the price of gold. And we're still not there yet. We are going to be in a market where the US dollars in demand. So there's a strong bid for it so it's GonNa be ball tiles can move up down like for example this year loan in the last ninety days we've seen it from a Canadian perspective of as low as one twenty nine as high as one forty seven that's a massive range for a currency in ninety days. Historically that's what you would see in ten years not ninety days so that's the first aspect and gold is getting a serious bid globally and to put things into perspective. You have your physical gold market where you can actually hold the gold bars in your hand. Then you have the paper like the ATS. I just think that I've never been one of these paper gold guys 'cause if you're going to buy gold why not just by physical gold and Putin near safety deposit box or wherever you WanNa put it safely. Don't show it off to friends at a dinner party but rate now the largest Canadian bullion dealer shared with me yesterday that the physical demand rate now first of all the Royal Canadian men to shut down because and the premiums for gold and silver. He hasn't seen in thirty years. And the physical demand is ten times of what the paper demand is. Now yes the mint will come back online but it's going to be coming back online in a different way. The meant has obligations that it has to fill for the banks. Like it's going to start with gold and then it will go into the smaller denomination beliefs but one hundred out spars are going to be delayed. So you're going to have more premiums for those. So moving forward I think this is just a short-term blip the beauty of our market is always a solution and demand will be met in this near term. You'RE GONNA do the to safe. Havens are the US dollar and physical gold. We're very fortunate. Marin that this is the fourth time that we have you on our show and we analyze your approach from multiple angles. We talked about buying trances high conduct analysis and everything in between and we even talked about private placements now. Most of our listeners in mass in the public markets and the next question is about a more practical approach to investing in the last episode. You talked about being bullish on gold and that didn't need to own say forty stocks to make that play specifically you talked about gold stocks and finding say the best five stocks so. Let's say that you have five goal stocks on your radar. Say that they were just about to trade at attractive levels and you have one hundred thousand dollars to invest for in your entire portfolio. Could you talk to us? About how longest. Take for you to build a portfolio. How many Trans is do you buy? And how exposed to wants to be to gold in the first place. Let's first start by defining. If it's one hundred thousand dollars that you WANNA put towards the Gold Sector. I would break it up like this. I would say okay. Put Two thirds into investments in the gold sector and one third into speculations. Even that it's pretty aggressive. I'm forty one some an aggressive guy. We've done well in our fund in our newsletter and I'm solely focused on this sector so I have a bit of an advantage. I'm okay take a little bit. More risk by putting one third of my portfolio to non investments meaning. They don't generate any cash flow for me they're more speculations waiting to be bought out like a liberty gold so then. I break down and say okay. An investment will never be more than ten percent of my portfolio and speculation will never be more than five percent invested into the total portfolio. That's a good place to start as a rule of thumb for new investors in the gold sector. So I say a rule of thumb of you're going to buy four tranches of twenty five percent of your desired allocation in each trunch. And I wait. And it's very frustrating for me and it's difficult to be patient. I've gone to the Super Bowl. With the president of million ounce gold producer. We've bought we sold over seventy percent. Gain took a free ride on it and now I WANNA buy more of it and we missed my target price by. I think it was eight cents but you have to stay disciplined. That tells me don't worry. The markets volatile. It might be thirty days. It might be three days. Might be ninety days. I don't know when but history has shown me that it will come to my bid price. The AL goes will sniff out some limit prices. And you'll be hit now. That's the targets you have to do your homework. You do the research and then you just set your bids and don't chase stocks a big mistake. A lot of people make in the sectors the over allocate into one company. 'cause they like the pitch or they liked the Management Team. They like the newsletter writer. That said it stay disciplined. Basically I have a rule of thumb if a stock is keeping you up in the middle of the night. You've learned something about yourself. Sell it and move on. Life is too short in your instinct is telling you that this isn't the right thing for you. So perhaps if you're an older individual that doesn't WanNa take the risk don't do speculations. If you're a younger person that has a little bit more risk appetite. Maybe you do the one third or maybe a half speculations. Let's take a quick break and hear from today sponsor. Let me tell you about one of the most useful absolute phone as you know like to read at least one book a week but I'm not always successful would work family and friends. He's just hard to find the time to sit down and read. There's incredible APP to solve this problem. It's coupling kissed blinking unique. And it works on your phone your tablet or your web browser. I like blinking because not only can use it to read but even better reread. My favorite books blinky takes the best key takeaways the need to know information from thousands of nonfiction books. And convinces them down into just fifteen minutes that you can read or listen to one of my absolute favorite books is Stephen. Covey's book the seven habits of highly effective people instead of spending thirteen hours reading the book. 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Every three months and for a limited time subscribers get not one but two free gifts the shed travel bag valued at thirty nine dollars and the patented high performance Anti Chafing Manscaping boxer briefs so go ahead and get yourself the perfect package for your perfect package. Get twenty percent off and free shipping with the code investors at MANSCAPING DOT com. That's twenty percents off with free shipping at MANSCAPING DOT com and use code investors. Your partner your body and your balls will thank you all right back to the show tomorrow and I think it's safe to say that the key takeaway from what you just said was to stay disciplined in here on the show in the past. We've heard you refer to your investing strategy as if you were an alligator. That's just waiting for that. Perfect opportunity to take a high probability. Bite out of your prey so using that as a metaphor and knowing that we had you on the show last December. I'm curious what you've done. During that period of time from a training standpoint on February third we publish the first Wednesday of every month. And if I can get it out a couple of days early I do. We took free rides on all but one position are gold portfolios so we had an incredible run. A lot of the feedback was but you believe in liberty. Why are you taking money off the table or even be to gold in which is a fantastic company as a world-class Asa Cola club? Johnson's a good friend and just a total total winner. But I said look. We're up over eighty percent on a million dollars gold producer. Why not take a free ride and that Kinda surprising to a lot of people and then on March fifteenth I sent out. It was a Sunday and once that fed briefing happen. I called up. My team went into the office pulled. Eleven twelve hour day and we sent out a very detailed hitless turn. Alligator list of these are the five stocks. I want everybody to load up on and I did it myself personally. Add this prices that we disclosed. These are big companies that north of ten billion dollar market. Cap. So I'm focusing on top. Tier world-class Assets Lois Court tile producers that. Pay Me to hold like I haven't seen yields like this. They're better yields today than at the lows of two thousand eight and nine because the good companies have restructured themselves. They've reduced their DADS. They've lowered the cost of their debt. They've built the projects. They said they were going to build over the last decade and some of these are true cash generators. And we're going to sit back and wait. I put out an egg camera. This is something that a lot of people. Don't focus on but people are going to have to eat regardless everywhere in the world and farmers are GonNa have to increase their yield per acre. Will How do you do that? Fertilizers Okay So. Let's break it all down. From the potash and the phosphate the urea nitrogen aspects of the market. I took a very very different view. Because you have to focus on the whole market while the Russians with their ruble are devaluing their rubles so their cost. A potash is going to be a lot cheaper. Bellarusse their ruble are. Oh you really different than the Russian are you be? Ellie is down forty percent year to date. And They. They are major producer of fertilizers. Morocco's major producer. So you're GONNA see Deflationary forces in the cost of fertilizer and the irony of all this. There's actually excess capacity in the global markets very similar to steal. So that's GONNA be a cut to kill strategy for a lot of these emerging markets. Which then we'll be competitors to the US markets some of the biggest companies in the world. So I put on a very detailed report of every company in the world. Their cost base where I see happening over the twelve months. Fertilizers ARE NOT. GonNa to go away. But they're gonNA have deflationary pressures and then I've detailed one stock. I really want to own my own portfolio. But I'M GONNA be patient and I'm going to wait to the market comes to be and I truly believe it will. I don't know when like you said I don't need to buy the stock every day and I don't need to run out today. The key point of being an alligator is waiting and went usually. It's when funds have to sell like when citadel blew up and had to sell on this one position I gobbled up almost all of their stock. That's what I'm going to do in the fertilizer company and it takes patience and discipline. It's exactly what Warren Buffett does. He's the ultimate alligator in the market. He comes across as a nice guy. I guess I don't have that bedside manner of him and he's a likable person. But he's the ultimate alligator and he only comes up when the market needs him one of the key pivotal points in my career was a mentor of mine. A city in America. You want to finance these when they need you. Not when you need them. Then what resonated with that was when you're a fund manager all this money comes to you in a bull market and your shareholders want you to buy stuff because they're excited about the market. The irony of it is the redemptions. Happen when you should be buying and you can't from fund managers perspective. Their hands are locked and I actually don't do much in a good market. I'm a guy that excels in a bad market. That's when Warren Buffett truly excels is when the market needs him. Because then he dictates the terms the ultimate example that was Goldman Sachs a guy from Omaha got warrants through financing on Goldman Sachs. It's usually Goldman Sachs that gets the warms and that's a perfect example of him doing that financing when Goldman Sachs needed him and that's a strategy that everyone should pay attention to regardless that gold is still sixteen hundred dollars. We've gone through a market. Where many leading companies have blown up? They've been taken over. Management have been fired. They screwed up. And when gold was fourteen fifteen hundred they spent like it was twenty five hundred today. Gold Sixteen hundred but the management teams are still shell shocked. They're spending an acting like it's twelve hundred and so are the investors. So that's a great time where you can structure and get investments a discount to nap so a great point you mentioned was houses. Different than two thousand nate well. The producers are trading at a discount to Navlab if you take equinoxes for example and again. I'm not trying to tell people to Buy Stock. I'm using it as a real life example and you can come back in a year in you can say. Hey Marian you said this. It is treating right now if you use fourteen. Fifty gold is trading at like point. Seven five now while few sixteen hundred dollar gold. It's probably less than point. Six now in the accompanying equivalent in two thousand eight was still trading at more expensive valuation development companies that were producing nothing trade at a point six now in the last crisis. Now you can buy producers. We're talking about seven hundred thousand of gold big producer and it's going to get to a million within. Let's call it within the end of next year and it's organically funded. It's trading at a discount to NAFF at fourteen hundred dollar Golden Route. Sixteen hundred goal. That's a good time to start looking in doing research in the sector. Avoid paying over the sector got his three times now at the peak while. That's what you want to sell you buy when it's at a massive discount enough and you sell when it's at a premium to nap. It's not rocket science but it's incredibly hard to manage your emotion and your expectations because people feel confident than they feel. Good when everyone else is excited. But YOU WANNA be an alligator. You WanNa buy when no one else's by well Marin. Thank you for sharing these amazing insights on your own portfolio in your portfolio is available for subscribers of ketosis resource of chooses and. What's really cool about that? And I think even mentioned here on the in the episode is that you tell everyone what you do two days before you make the trade just to me completely fair for everyone. I hope you don't mind talking a bit more. Bacchus research opportunities and where the audience learn more about you. I just published a sixty five page report on Sunday. It was supposed to be published today but we were day and night. March has been an incredibly successful month for my subscribers myself on a portfolio stamp pace but it was really important to break down the different sectors that. I'm looking at and put out my allegation prices on the company's I want to buy it's a journey. I try to make it interesting with historical facts. Lots of charts. I show my math skills and I explained it all and then we have all the summaries and updates and I think the coolest part of the newsletters actually the video aspects. I have a studio here in Vancouver and I know all the guys so they come down to my office and I in the hit me about five years ago. I'm like you know it'd be probably really cool for subscribers to be a fly on the wall in my office because essentially every deal comes through our office and that's we set up the office and I bring in everyone and we do an interview. Acuna or when I go to the mind sites I bring the film crew and people can see what I see on their iphone anywhere in the world. Luckily it's not a Hollywood production style. But it's pretty good stuff and you get to see everything that. I see and I think think we're the only people that do that. So it's my portfolio. It's my money. I disclosed my cost base. And I love what we do. And we've done incredibly well so we're gonNA keep doing what we're doing. That definitely sounds like the right thing to do. And we'll make sure to linked to research dot com slash. Cip He which is a designated address where audience color more about Ketosis Resource. Toonces some of the investment. That you made in a few calls of what you made in the Magi that we're seeing playing out right now Marin. Thank you so much for taking the time to speak with me here and the Masters podcast was my pleasure. Thank you thank you for listening to. Ti P to access show notes causes or forums go to the investors. Podcasts DOT COM. This show is for entertainment purposes only before making any decisions. Consult a professional. The show is copyrighted by the investors. Podcast network written permission must be granted for syndication.

Us producer Gold Sector Marin America Fed Canada Putin Warren Buffett Bank of Canada Marin trump Preston Pysche Soviet Union Marin Kutuzov
TIP278: Contrarian Investing Ideas w/ Cullen Roche (Business Podcast)

We Study Billionaires - The Investors Podcast

1:03:16 hr | 1 year ago

TIP278: Contrarian Investing Ideas w/ Cullen Roche (Business Podcast)

"You're listening to T- IP on today's show we bring back a guest from five years ago. Mr Collin rose from pragmatic capitalism collins. Private an investment partnership was able to navigate the two thousand eight crisis with a fifteen percent positive return when the rest of the market was down more than fifty percent before starting his own investment confirm Colin managed to half a billion dollars for Merrill Lynch in the early two thousands and on today. Show we talk about contrarian ideas and Collins top down thinking for economic principles bulls so without further delay. Here's our discussion with Colin Roche. You're listening to the investors podcast. I well we studied the financial markets and read the books that influenced self made billionaires. Most we keep you informed and prepared for the unexpected. Yeah well constantly they show. I'm your host astigmatism. And as always I'm here with my co host Preston Pysche. We're here with Colin Roach from pragmatic capitalism Colin. Thank you so much for taking the time to speak big with us here today. Hey guys thanks so much for having me so calling again. Thank you so much for making time to speak with us. Because on today's show. We'll debunk different myth in economics and investing. But before we do that I wanNA talk to you about a very hot topic these days. I WanNa talk about this whole discussion about active Tiv- and passive investing and more funds than ever really invested in so called passive indexes than ever before and a lot of people talk about that creating a bubble but before we talked about that before we talk about. If it's truly passenger with a no you have an opinion about that I would like take a step back and talk about the very basic so perhaps you can. I explain the importance for the investors about the confusion. The term active and passive. Yeah I really tried to formulate a foundation for understanding the whole financial world that is very sort of operational in nature. Sort of looking at the world through the Lens of like an engineer would look at the way that he might construct a plane so you understand the basics of the dynamics of flight and then you can construct whatever you want that will actually achieve the goals that you want and from a financial angel perspective the active versus passive debate. It doesn't really make a lot of sense. I mean from from a strict. I think industry industry perspective. The reason these terms exist is pretty simple there basically just marketing BS. I think that the the passive community created the the term passive so that they could create an opposing side that they could demonize to some degree for marketing purposes. Press' so when you look at it. From a very sort of operational perspective it doesn't make a lot of sense to refer to anything as really active versus. Pass it because the reality is that everything we're doing in investment management involves a certain level of activity. You know this. It's really hit me over the head in two thousand eight. I was studying a perspectives. I'm the type of Nerd who will go through and actually read a full perspectives inspectors from a new. ETF and I'm sitting there reading perspectives from a new hedge fund. ETF One of the first few pages of it described the fund as a Passive Index Fund. And I was sitting there thinking to myself. Am what a load of garbage. This is a fund that is going to charge a three three percent. Management fee has super active underlying element of it that is invested in a bunch of sort of opaque and very the active strategies by any definition but they're calling themselves a passive index and it's interesting with the rise of ETF's that they kind of exposed this reality that nothing is really passive because an ETF is basically a it's a structure that takes an investment strategy and creates its own index and so by creating its own index. All it does is it tries to track that index so an example that your our listeners might enjoy is for instance let's say Warren Buffett wanted to start an ETF he would I mean. Warren Buffett is by no measure a passive investor. He's an active investor by any use of the word but if he started an ETF and he created the Warren Buffett Index and he tracked that Index Index. He could technically say that. He tracks a passive index. He is just passively tracking the index that he subjectively created in doing so he would be able to refer to himself technically as a passive investor. And that's what is happening. With a lot of these these index funds and passive funds funds. They basically create their own index fund or their own index and then they track it in what they refer to as a passive way but the the actual activity city of managing an index fund is highly active. If you look at the what's going on underneath the surface when someone goes out and buys for instance the Eh the vanguard S. and P. Five hundred fund which by the way the S. and P.. Five hundred is a very active fund. It's just a subjectively created set of five hundred companies beneath in a world of tens of thousands of public companies that are subjectively picked by the SNP indexing committee but when someone goes out and buys vise that index. They're actually what they're not seeing under. The surface is that there is a huge amount of market making activity and a a lot of action that goes on in the actual underlying management of the fund that investors don't see so one way to think of this. This is that if you were thinking of the end investor the person with the vanguard account as the person who is passive they actually are enabled bold by the market makers vanguard itself who was very actively managing the fund itself and so when you look at the totality of everything that makes that passive Passive Index Fund available and workable. There is no one side of the arguments very two sided perspective where you have to understand and the passive investor in that relationship is allowed or able to be passive because there is all of this activity on the other side the market making in the interaction with you know building the actual index in maintaining the index rebalancing the index. This is going on on every single minute of every single day. In these index funds these index funds are some of the some of them are the most active funds in the markets on a daily basis. This that exist in increasingly so as the grow in popularity so the distinction is more to me a marketing term for the fund management in companies than anything else in. So it's it's not as black and white people tend to portray it as so so call an I know you're a big fan of vanguards. low-cost e t AFS. But with that said you have some quibbles about the pro-cyclical portfolios and you've gone on the record to talk about the advantages of a countercyclical approach to control risk to tell us what this is all about. Yeah here I am criticising marketing terms in the our industry and I'm probably contributing some of the bad stuff to it myself but no I to me. Investment management is more than anything else. It is a battle with ourselves and we are fighting our own behavioral biopsies every day were bombarded with news is and things that are confusing and things that even people in the industry don't Foley understand and so it's a constant battle to stay disciplined and and really control yourself from being badly behaved basically and I think that one of the things that that can be problematic with the way that a lot of funds are constructed in the way that just a lot of investment management strategies are constructed is that they have an inherent inherent degree of risk embedded in them. That people don't fully understand that doesn't necessarily control for behavior. So for instance. Let's take a really simple index fund like a sixty forty fund. A sixty forty stock bond index fund is. It's actually a much riskier fund than most people realize in specifically. I mean that it is risky when you need it to to really help you control will for your bad behaviour and so a specific examples. Two Thousand and eight. Where in two thousand and eight a sixty forty fund which vanguard called their balanced fund? I might lead somebody to think that. They're invested in a a fairly moderate type of risk profile type of portfolio when the reality is that Ropley five percent of the actual risk or the volatility portfolio is coming only from the sixty percent peace. And that's because as the stock component of that portfolio is just so much more volatile than the forty percent bond piece. It's not really very balanced at all. So you're in terms arms of where your behavioral risk is coming from your incredibly unbalanced your massively overweight the stock market. And so you know for the last whatever eight nine in ten years sixty forty or any even one hundred percent stock index looks like a cakewalk. You know it's an easy behavioral ride because it's it's gone nothing but one directional but when the you know what hits the fan and people are exposed to what their real risk profile file is the real risk tolerance sixty forty exposes them to a thirty five percent draw down and for someone who thinks they're a moderate type of risk risk profile. That's one hell of a big draw down to go through and that will really test people. I mean I had a the moment where that hit me was also so two thousand and eight two thousand nine where I had a client who was invested in that in the Vanguard Balance Fund and he called me up and he said this is killing being me to be invested in a fund that seems to me to be a moderate risk profile and feels extremely risky and he couldn't take it so the behavioral risk was really outsized in a moment where he needed behavioral control in some undisciplined in the portfolio to reduce the amount of behavioral risk that he was exposed to and so the result or the cause of that is the fact that the stock market is inherently pro-cyclical. The stock market is not really if you build a stock portfolio I mean Even in a sixty forty if you just let it ride your portfolio will always grow to become increasingly exposed to the stock market so then guard. Interestingly sixty forty is actually a somewhat countercyclical portfolio that sixty forty in good year like this year for instance sixty forty grows it into whatever like seventy five twenty five or something like that and vanguard actually balances it back to sixty forty so they're actually implementing an element of a countercyclical like rebalancing methodology in their portfolio which I would argue that helps control for risk certainly more so than just letting adding it ride and letting it become the the market cap weighted portfolio that it would inevitably become which would be increasingly exposed to the stock market. But there's a lot of people out there who I would argue need an even greater degree of countercyclical management in controlling their our behavioral risks in the portfolio. And so. That's why I have become a big advocate of of what I call countercyclical indexing because I believe that it just just better controls for behaviorists by being better behaved consistently you reduce the risk for big big mistakes and in doing so I think for a Lotta people you actually increase your average annual return over long periods of time. Because you don't make the big mistakes that result in really catastrophic downside. You know. It's very interesting you would say that because we had you on the show here back on two two thousand and fifteen that was episode sixty. And they'll just want to say definitely won't be another four years if we bring you back on but it's crazy how time flies but I know people that people don't want to hear from me to offer back then the I listened to that episode when I was doing doing the The research for this episode. And we talked about you know economic modeling and it really made me think of this question that I wanted to ask to you so so perhaps I if you can talk about how you make models that reflects the economic realities and then intern. How has it changed? Perhaps just over the past four years ever member even back then back in two thousand fifteen we're looking at the shoulder and said It's not like we find a lot of cheap stocks walks right now so some very curious to hear your response to that. Yeah well I I think that's one of the things that has made at least value investing so difficult for so long that by almost any metric stocks have been overvalued for years and this isn't that unusual of an Birmingham. We could have had the same exact conversation in the mid nineties and then the late nineties and even the early two thousands of people you know would have been saying that the stock stock market was overvalued. And that's just the way that bull markets tend to work the stock market gets overvalued and it stays overvalued in my view on the the stock doc market is that I actually. I'M NOT EVEN A. I'm not a big stock picker in part because I don't think it's really possible to decipher where the risks are. We are in the stock market specifically I mean in terms of looking at like industries or even segments looking at like global index funds. I'm I'm I'm not a big believer in the idea that even anyone can pick where the best stocks around the world will perform at a at an indexing level. A lot of people like to Cherry pick the United States. But you know we can go through long cycles where United States underperforms you saw that in the early two thousands and whatnot when Europe massively outperformed performed United States so the way I view the economy is very similar to the way that I view the financial world in that I try to look at the the most pro cyclical elements of the the macro economy. And the reason I look at the most pro-cyclical elements of the macro comment. I'm referring boring to things like I mean if you look at things like the the yield curve and unemployment rates in these sort of big macro indicators that tend to two they tend to change somewhat predictably over the course of an economic cycle and they tend to be highly pro-cyclical in the reason that that's valuable to look look at is because the big bus in any economic cycle tend to actually come from wherever the big booms are so if you can some degree identify where a big boom is you can begin to. Dan can kind of compartmentalize mitigate the risks that you might be exposed to in the future and this is a i. I guess it's kind of the antithesis of momentum investing or something like that but it's more four for me again. It's kind of coming back to that. Behavioral Control Element. It's not necessarily trying to predict exactly where the risks are in the future but identifying you know where they're sort of frothiness is and trying to control for potential risks. Because you never really know where the big blow hopes are gonNA come from. But if you can mitigate and try to control for potential risks than you can reduce your potential exposure to the behavioral risks that will arise when a big blow up does occur. And that's why I think it's valuable to look at places where there have been been big big booms in an economy Hanalani because that's almost always wear the big bus end up coming from so the people look at the financial crisis in your they think it was like a regulatory aleatory problem or just Wall Street. Doing a bunch of funny stuff and that was all probably played a role but at the end of the day the financial crisis was really about people bidding up home prices people bid up home prices in an unsustainable way that resulted in a big bust that when the prices fell just reverberated through everything it reverberated through the economy through the construction section of the economy through people. We'll get unemployed. And then when people start getting employed it. It multiplies through Wall Street. In the all the products that were leveraged related to the prices of homes is in employment and all this stuff it all kind of starts to fall apart and so the the seeds of a bust are really planted in a boom. And so have you can kind of understand the degree to which a an economy is exposed to pro-cyclical elements. You can understand where the potential risks are and one of the really weird things about this. Economic Cycle is that it really hasn't been a huge boom anywhere. It's been in this sort of Malays almost across most of the economy there's been sort of segments may be where they're certain real estate markets pits. That have certainly gotten out of control. I think like places like San Francisco or probably way riskier than they. Otherwise would be a lot. A lot of the Pacific northwest is similar. So there's localized kind of frothiness in certain real estate markets in and even pockets of like you could argue that the the we work blow up in some of this venture capital stuff is is evidence of a fair degree of frothiness in some of the venture capital funding. Being in things like that but in general there hasn't been anything that looks like certainly not like a two thousand six two thousand seven type of of economic make environment where you have this really big pro-cyclical boom in some segment of the economy. That could cause a big big blow up. It's strange you have. Are you obviously have the financial markets where the financial markets have done really well or at least the I should say the United States financial markets have done really well the global stock market as not done nearly well and even from evaluation perspective is the international markets. Are Much more attractive. Give it strange because you have this really long late cycle occurring in US stocks. And you have a really I think limited limited macroeconomic downside risk coming from where the the way the economy is performed. So it's like always always. It's just a a difficult thing to I think analyze but to me you come back to the stock boom the even without necessarily -essarily trying to predict where the next recession or where the next big bust is gonNA come from. I think you still have to look at the Stock Market from a valuation perspective in view view it as a value investor. Because it's the only reliable way to try to control for risks in your equity piece because the the evidence is pretty clear here when valuations are high when the stock market does really really well for a long period of time it tends to in the future generate lower risk adjusted returns. And so it doesn't necessarily mean that when valuations were high that the stock market has to do both through a two thousand and eight or some sort of a big crisis but it means that the amount of risk you have to take to earn the same unit of return people especially in today's environment. I and I think they feel almost trapped into feeling like they have to pile into the stock market because the the bond market may be is in providing providing the return that they have become accustomed to or you know interest rates are too low to provide people with the income that they need and so they feel like they have to take more risks than. They're they're comfortable with and I think you have to be. I think you have to be careful of that. Type of mentality of shaping the stock market really late in in a market cycle. Just because you feel like it's the only place to be. Let's take a quick break and hear from today sponsor. If you don't know your numbers you don't Know Your Business. 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So what I would like to do for the rest of this episode is has to go through a number of the meth. That you debunk and to do that together with you because one of my favorites relates to what you just said the foreign. It's it's about about how we as investors we just have this perceived need to be beating the market. That's that's will be here all the time you should be Damore. You should go passive and as we established whatever passive might mean so. I guess that's the first of the myth that that I would like to talk about. Investors beating the market. It's funny I mean I I view the world probably more like a financial planner when I sit down with somebody and talk to him about their portfolio because I try to view money in financial asset management for what it is which is something. That's very very personal. And most those people at a very sort of personalized planning level. They just have no need to try to beat the market and in fact I think that most people who end up trying to beat the market what they really end up doing is they end up. Taking a lot of behavioral risk that actually creates the potential for exposure. They'll they'll behave poorly which will result in actually lower returns going forward if they do behave badly. So you know if you sat down with a CFP though you're a financial planner he would never stay. Our goal is to beat the market. They would say okay. What is your target return? What is your risk profile? And how can we create a portfolio. That's going to meet your financial goals. Whatever those are whether it's you know a retiree who has a four percent withdrawal rate and needs You know maybe they need a a four and a half or five percent type of return to sort of maintain or reduce the amount of principle a reduction. That's going to go on in the future. I know everybody would like to generate you. Know Eight percent ten percent twenty percent whatever. Obviously we're all trying to maximize is the amount of return. But I think that you have to be careful in trying to beat the market because it does expose you to that behavioral risk and it creates this inconsistency Z.. With People's financial goals in my view of the especially of the secondary markets is that secondary markets when I referred a secondary market. I mean the stock market in places where stocks are basically just exchanged the stock market to me is a place where people allocate their savings and it generates rates of return that is a function of the primary market so for instance when you buy Exxon Mobil stock. Exxon you're not funding Exxon's operations rations or you're you're not really impacting Exxon's operations in any meaningful way. But the return you're going to generate from Exxon stock is a function action of what they do on the primary market. So you you see this a lot. I've been really critical of some of these. Es G fund the more like socially responsible type of investing investing strategies because the place to impact a corporation is not on the secondary market. They're not funding their operations from the secondary very markets. And so. If you don't like what Exxon does you should stop buying Exxon gas. That's where you make an impact on the business that will filter through to the way that the secondary secondary market then prices their stock but boycotting the stock really has no impact. So you know people tend to have this sort of I think misunderstanding understanding of the the relationship between primary markets and secondary markets and secondary markets are where we just allocate our savings. It's where we we all go about in exchange stocks bonds to allocate our savings and most people just they have no reason to try to beat the market on a secondary market because a in the aggregate. They can't and be from a planning perspective. It creates more inconsistencies with your risk profile in your behavioral management of the portfolio than anything else so Colin. There's a lot of people saying gold is the place to be these days although stig and I have our own personal opinions on the matter we really like to hear alternative points of view so our audience can decide for themselves kind of approach. They WanNa take themselves so with that said. Let's hear your point of view on gold. Yeah this is. I know this is a controversial one so to me I think the the problem that I see with framing gold as a portfolio hedge is that if you actually look at the amount of volatility involved in gold over the course of of its entire history really it's an incredibly volatile asset and so it has no consistent history of necessarily Lee providing you with a good hedge in crisis periods. So I think the problem with gold is not necessarily that gold is bad ad. It's that in a relative sense. There are other assets. That better protect you in specific environments and so for instance a lot of people say that gold is a is the the ideal inflation hedge. And that's actually interesting because I would argue that. The stock market is is actually a much better inflation hedge than the gold market is because the stock market provides you with a much more consistent inflation adjusted return that in periods of a big boom especially when the economy is expanding and inflation is rising the stock market tends to perform really well knows environments very consistent with much much more consistently so than than gold does and so from a risk adjusted basis. The stock market is actually a great great inflation hedge. You even see this in a lot of cases of hyperinflation inflation the asset that actually performs the very best is a local currency stock market Venezuela. Just all this Venezuela stock market went bonkers in the the recent hyperinflation so the stock market is often times more consistently the much more reliable risk adjusted hedge for inflation. Then something like gold is so yes so. In periods of economic turmoil where there's a high degree of uncertainty and potential for recession risk. The bond bond market is actually the specifically the treasury bond market is the market the tends to perform the best because it is the in a world of financial financial assets that are limited the treasury bond market ends up being the market that everybody wants to hold in crisis environment because it's the highest is quality acid in the world. And that's a lot of people get this one wrong because they I think have a perceived political bias but the simple reality is that the the reason treasury bonds are such a good hedge in periods of crisis is simply because the US government issues this liability that is attached to the biggest income stream in the entire world. And that's a function of just the private sector being the most profitable all most productive economy in the world in the. US Government just happens to be the entity that can tax all of that income so when the sort of turmoil starts to rise is up. People will fluctuate towards treasury bonds because treasury bonds are secured by this massive private-sector income stream that people trust and believe is reliable in the future. So you see this in any period where really the stock market starts to go through a lot of turmoil treasury bonds tend into perform really. Well you saw last December during the big trade downturn you saw it in in two thousand eight treasury bonds are up twenty five thirty thirty percent that year so when you look at relative portfolio hedges I would. It's not necessarily that. Gold is so bad. It's that I just believe there are better in in specific environments and so in inflation. I would argue. The stock market is superior and in a crisis period. Where you really need? A behavioral Hedge wjr treasury bonds and really high quality bonds in general tend to be a superior downside hedge than Golda a more reliable downside head. So you know I I don't Wanna I don't WanNa beat up on gold too much and there's also there's a fair amount of evidence that adding in a third you know portfolio element there with gold. Goal is perfectly fine and I'm not going to bad mouth. Anybody who adds more more diversification to their portfolio with gold nonfinancial assets but to me understanding that bonds and stocks have specific sort of risk management structures for specific environments is is important and they're they tend to be superior in terms of inflation hedging and downside hedging than gold is in those specific environments. So this is probably one of the favorite myth that you have in there. That you're debunk here. Because you have this where you say more information will give me an immediate advantage advantage. You know that's how a lot of people looking at it. But could you please elaborate on why you want to debunk that meth. I run into an Endless number of people who they have watched something on the financial media. CNBC or Bloomberg or mainstream media about what's going on in the financial world and something. That sounds really scary or sounds like a big risk and people have this tendency to think that the more financial news. They watched the better informed. They'll be and the better. They'll be able to manage their risks. And the the reality that I often find for people is that watching financial. TV In exposing exposing yourself to these persistent narratives creates a lot of behavioral risk in the creates the urgency to to need to to do something and change something act and try to control for something that you probably can't control for predict in the first place and so it creates this big a conflict of interest where the financial media is incentivized to. I think rile people up to incite emotion and and get people to feel like they need to keep watching more that they need to. You know keep tuning in to so that they can be prepared in case the big one comes in and the reality is that for the most part the financial markets are really bored and there just isn't a lot of big exciting things going on and it. It probably isn't even worth having a daily full time twenty four seven running financial TV show about any of this stuff. But that's what's the narrative that were sold and people pay attention to this and in doing so end up creating a lot of behavioral risks for their own portfolio that expose them to the potential that they're going to perform poorly because they're just behaving badly they're over reacting to things that really just aren't that important in so I'm not a big GLIEBERMAN. The idea that people should just pay attention at all but I think you need to be mindful of the reality that it's fine to be informed. Fact Act I would. I mean I pay attention to the financial markets all day every day but I probably act on. I don't know not even one percent of the things that I actually hear about going on on any monthly or or daily basis and. I think that's where it's important to to build some balance in the way that you you consume financial media but don't feel prone to overreact to everything that is going on so it's fine to A. B. Informed it's important to be informed but that information won't necessarily help you react to all of the little changes that are going going on so it's it's important to understand that more information is not necessarily giving you better information. It's just giving you more information and so you don't shouldn't feel the need to react more just because you're listening to more information. We've talked about myth with Boston. Regards to investing and now like Talk Him myth busting in economics. But before we do that perhaps we need to take a to step back and really get out here because there is actually the difference between economic makes an investing and it's also important to know that different so a lot of people seems seems to be using these terms interchangeable. You know. That's something with money. Could you talk to us about that. I so what's what's the difference and then we can go in and debunks. The Myth about I cannot makes there's so much overlap in finance and Economics in at the same time though the financial markets are not the economy so a lot of people tend to look at these things as sort of interchangeable. And the reality is that there's there's big differences between the financial markets in and what the economy is doing. You see this now. With the way the stock market is performing versus the US economy the US stock market market has really boomed in the last ten years whereas the economy has sort of been in this big Malays for the most part in in a a lot of that to me is is understanding that the the Financial Markets Day can perform in certain ways because mainly mainly because certain segments of that financial market. Do really well. So for instance in the last ten years the majority of the outperformance of US stocks come specifically from the tech sector so the tech sectors done really well and you see this again this going back to San Francisco. This is consistent in the way that you see San Francisco no real estate prices going and the venture capital market going. You had a segment of the US economy that has done really really well but on the whole will the US economy has not done that. Well and that's really. I think the key to understand. Is that the financial markets are made of these kind of smaller you're components of the macro economy and you can have a macro economy that is just doing okay and a financial market that is doing really well related to bad economy because a component of that economy is doing really well and people have a tendency to conflate the two and and think of the two as being the same thing in there not in it's helpful to understand this both from a macroeconomic perspective but then Kinda you know really narrow down down in hammer into why does a macro market like the S. and P. Five hundred look so good in the reality is well reason it looked so good is in large part because a very micro microbe piece of it has performed really really well and so that makes the whole thing look good but in the grand scheme of things. The reality is that the whole thing in hasn't performed that great. It's just that the performance of it is due to some degree because of an outlier and that tends to be just the way the stock market works the vast majority already of the stock market's performance tends to come from a smaller section of it but people have this tendency to to then confuse that with the way the macro recon is is performing or more so today you see people arguing that the stock market just it has to be on the verge of collapse because the economy just isn't performing warming that well and that's that's not necessarily true that that one section of the stock market might be exposing to a lot more risk but it doesn't necessarily mean that the the whole thing is necessarily exposing you to a huge amount of risk so I think it's more important to look at these things from a global perspective give. I mean getting outside of the United States for instance. These days is important because the the global economy is also pretty weak and the the global stock market. I think better reflects the state of the global economy than what you see in the United States where you see basically a big tech boom that is driving the outperformance of US stocks and generating a huge amount of outperformance in creating this illusion that the the US economy in the US. The all of corporate America is performing really well when the reality is that a lot more localized than people think so. Now it's useful to differentiate between the two because the stock market is not the economy. That's a good point. You bring up and continuing talking about myth busting in economics. One of the myths. That you debunk is the government printing money. Could you please explain the reason for this misconception. Because it's something that we often hear like now. The government has ended in a trillion dollars or whatever that number might be. How should we think about that? Well this one's are to communicate. Sometimes the government literally does print the money that the physical money that we have in our walls but again going back to kind of a first principles type of thinking on this and more thinking of the world finance from an operational perspective who really creates most of the financial acids that we use on a daily basis to pay for things. So when I go out and I get a loan. A loan will create a deposit. The bank bank expanded its balance sheet. It creates both a loan asset for itself. Which is a liability for me and it creates a deposit asset for me which is a liability ability for the bank and so it expands its balance sheet and it applies some interest rates to? That's how the bank is going to make money on the loan going forward but the important point is that that deposit is money in every sense of the word in that I can take that deposit anywhere so almost any store via credit card or debit debit card and I can buy almost anything in the US economy with that deposit and this is the way that most of the money is created in our economy and and the interesting thing about physical cash is that and this is true of most of the money that the government creates. I refer to this in some historical academic papers referred to the two different forms of money as inside money and outside money inside. Money is the money that we all use on a daily basis for the the most part it is the money that is created inside the private sector so primarily by banks create inside money in the form of bank deposits. The government creates outside outside money outside. Money is money. That's created outside the private sector mostly in the forms of Hash and coins and the important thing to understand about that relationship. Is that the outside money. The cash coins they mostly facilitate the use of the inside money. So how does anybody get physical cash or coin. These days need to have a bank account. That money came from somewhere. I know most people get their cash from another person probably but from the first principles perspective that money all filters through the banking system. So you need to have a bank deposit. Before somebody withdraws the cash and then starts to distribute it into the economy so the real money creators are the banks and the government mostly just facilitates the use of the deposit system for the rest of us and this is true even of the inter-bank system. You want to get more nerdy walkie about this. The other big type of money that banks banks that the government treats outside money is bankers. And you hear about this a lot these days with the the KINDA REPO crisis that everybody's talking about the Federal Reserve is creating reserves because the banking system uses its own banking system. And that's what the Inner Bank reserve served system is so you can think of the deposit system that we all use is the inside private sector bank system system for us and then the banking system uses its own banking system which is basically the the Federal Reserve system and their deposits inside of that system our federal reserves so literally the reserves that they use are the deposits that the banks use themselves and so that's the other side of the outside money component but again old the reserve that exists. They only exist to facilitate the use of the banking system. So all of this forms of outside money. I like to think of them as being. They're just facilitating forms of money. They help the private banking banking system. Operate the payments system that it's in the business of operating on a daily basis and so the government doesn't really print money in the sense creating the money that we will use really the printing of the money occurs when banks create loans and create deposits and the government. Mostly just print money. That facilitates the use of a bank account. So people like to talk about the Federal Reserve Printing money and doing qe the and really all of that is tangential to the reality of where the real money creation comes from which is mostly through the deposit system and I think that you know an uninteresting related topic to this the the fact that there hasn't been a lot of inflation despite all of this supposed money printing in the the reason why that is because you look at data on lending and whatnot. There just hasn't been a lot of the real money printing there hasn't been a lot of banks making loans to to the degree that they historically have and so you've that's contributed to this low level of inflation because no matter how much the government tries to facilitate and improve the banking banking system. They don't directly control the quantity of loans that are made they can't force banks to make loans and so it's another related myth year that the the government controls the money supply or the Fed controls. The money supply through the money multiplier process that if they they add reserved that banks will then lend out those reserves serves in. Your banks can't even lend out reserves in the first place except to one another because the reserve system is a closed system but the government doesn't control the actual quantity quantity of money that is printed in the banking system and because they can't control the quantity of of loans that are made and so that's one of the main reasons reasons why we haven't seen a high inflation is because despite the government doing all these things to facilitate the banking system. It hasn't translated into real money. Printing which is lending in essence. Let's take a quick break and hear from today. 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Is that when you diversify your portfolio's not just resilient it's actually position position to earn more overall no matter what kind of investor you are. fundraise makes it simple to build a more perfect portfolio visit fund rise dot com slash billionaire air. That's F. U. N. D. R. I. S. E. DOT COM slash billionaire to have your first three months of fees waived so calling you take on sovereign debt. That's quite different than my own. Personal Opinions You have the opinion that the expanding fiscal deficit is not as big of a deal. That everyone's making out to be really like for you to describe to our audience your point of view on this one yes from an aggregate perspective. It's useful to look at all of the sectors in the economy Konami and understand that actually in the long run nobody pays back their debts. So it's kind of a big fallacy of composition. I might pay back my some of my debts on a monthly basis but in the aggregate over the long term that amount of debt that is outstanding will tend to only grow across the entire segment of the economy because the population is growing economic activity is increasing. People are just. They're taking out more loans to do more things on a a monthly and annual annual basis almost every year for all of modern financial history. And so you see this persistent growth in the amount of debt that that is is in the economy at an aggregate level because nobody in the household sector for instance cannot in the aggregate payback death. That would mean literally writing down the only all of the liabilities in the economy it would mean writing down all of the financial assets in the economy. And that's the kind of misunderstanding with all of this. Is that again when a a bank creates a new loan. They're not just creating a liability. You know people who say they use the term debt in mainly a sort of pejorative or negative way in the reality is that at is neither necessarily good nor bad debt can be good or it can be bad and because is it creates an asset and liability. It's more so about how people use those assets you know. So for instance if I borrowed a million dollars tomorrow to create some sort of world changing technology I created from a lending perspective just an asset liability with an interest rate and then I used that asset to then go out and create this enormously socially valuable asset that will actually add net financial assets. It will add net wealth to our economy in the aggregate in the long run. That's a good thing that's not yet. There's lots of examples of people just sort of frivolously spending on credit cards on nonsense and things like that and that's not necessarily the best type of debt to have but it's an error of composition to you argue. That debt is necessarily always batter that it has to go down at some point and be paid back because the reality is that in the long run we want debt to go up we want people to borrow and do good things and grow the economy in take out loans and expand that money supply. Because they're doing great things things. They're doing innovative things that will help us grow. In the long run and improve the living standards that were all experiencing around the world and at the government level able I tend to view the government is just sort of a function of the size of its private sector to a large degree. The I mean the reason the. US government is so big as not because the US the government is is some sort of you know great entity your this behemoth. All in of itself. It's enlarge for large because it's attached to this humongous and complex private sector and its servicing that private sector as it grows in the the tendency he will be that the the more the private sector growth the more complex the needs of that private sector become and so you end up getting a government that that services that private sector more and more so so you know but again going back to the paying back of the debts. It's the same basic thing with the government airman in order for the government to pay back. Its debts you'd have to write down all of the assets that the government has basically issued. So you're not just eliminating the liabilities again you're eliminating all the assets and that would be the equivalent of you know in the government's case you're writing down a lot of pension plans in treasury treasury bonds in savings accounts in programs that That might be actually a bad idea to wind down and you know to kind of caveat. I'm not a huge fan of an ever growing government or anything. I don't want to give people that impression. And I actually think there's a a lot of segments of the the US government that could be be substantially reduced in. There's probably a lot of areas where they just have no business being involved in the things that they're they're involved in so there are certainly sections actions of it that could probably be wound down and technically paid back but in the aggregate the government is never going to pay back all its it's dad's because it literally cannot because there are components of it that just economically cannot be reduced to zero which is the equivalent of what people are saying when they say eh we need to pay back the national debt. All right thank you so much calling for coming here on the show to speak with President meets always highly educational educational to speak with you and hope that it won't be another while this comes out in twenty twenty. I hope it won't be another five years before we bring you on again. Yeah me too. I will Look let's schedule something in three years. This time. Love the show. I I hope that I can get on. You know more frequently only so I love what you guys are doing. Appreciate you having me on. Thank you so much for saying that. So for this segment of the show we will play question from the audience and and this question comes from Harrison. Hi Guys Harrison. He for Melbourne Australia longtime listener. I I'm call. I have a question about using leverage to improve riverton on relatively safe while diversified index funds or. Ats In what ways can this be done in one of the associated risks given long term time horizon of of say twenty thirties. Geez guys so Harrison. A real like the question because what we're taught about the stock market is that it generally always go up which is not surprising given that over the last fifty five years world. GDP growth has been positive fifty fifty one of those years so if we think that the stock market will go up say ten percent annually just like it has done from one thousand nine hundred to two thousand why not say double triple net return with a leverage. ETF unfortunately that is not how liberty to fs work. There are nuts sit up for long term investors but shorter masters. So if you want to speculate in what the S. and P. Five hundred dust the next day alytus. It's it can be a very effective way if you're right but there Sara problems with this approach first of all. You shouldn't really speculate at any time. And what the market dust short-term is highly unpredictable and another thing is that just as you gain more if the stock market is moving in your favor it also punish you really really hard if it goes against you also considered levers apps a very expensive often around one percent expense ratio. We'd comes right out of your pocket. Asthma investor and one of the reasons is expensive is that it uses a combination of swaps and derivatives to get that Lewis exposure which she's just very expensive to acquire. I would highly discourage you to use leverage wherever you invest needs apps and if you are which again do not suggest that you do a better approach is to buy traditional each F and buying on margin meaning that you borrow against the value of the F.. They can't in theory work show to medium basis but over years as a long position. It's not sustainable. When the market tanks and you wilken called on meaning that you'll be forced to sell your position at just the wrong time unless you can back up your position? Cash which in defeats the entire purpose of using leverage in the first place that being said as much as we could come up with exceptions to using leverage position as hatching and short-term bats a real thing. It's the wrong question to ask and again. I would really for the fourth or fifth time discourse in your listeners. To go that route you need to know exactly what you doing at even if you do the emotional. Biases with using liberates in stock investing exponentially make it more difficult to match your portfolio troglio all right so Harrison one of two things is probably going on right now for you. You've either got a really good idea or you're just being a little impatient and you're trying to make some returns and I'm speaking Saying that because I've been in your same shoes and I've done the same things and I've experience the the the pain that sticks talking about and so It's it's interesting that you bring this question because I think there's a lot of people probably in our audience that have of ask themselves the same thing and that have may be even participated in some leveraged. ETF's so here's what I'll tell you. Sometimes you have great ideas and sometimes you just WanNa Kinda lever for up on those ideas in order to maximize returns and that's perfectly fine and perfectly acceptable. I do it I would tell you the better vehicle for doing doing that is not a levered. ATF though so what you can do. In the best way that I found to kind of leverage a position and not I have so much administrative friction eating away at your capital which is how I view a levered. ETF I look at leaps. I look at options long term options to your options in order to put on those positions. Because I don't feel like I get so much administrative friction and let me define that for you so when you do a levered. ETF STIG mentioned the fee but the other part of that that really choose away at your capital in volatility. So if you put on a let's say you buy a s and p five hundred levered. ETF It's a three X or two REX. ETF when that when let's just say there's a lot of volatility in the S. and P. Five hundred even though there there hasn't been that much volatility to date But let's let's just say that that position has volatility to what happens is as the managers of that. ETF are rebalancing that position That volatility Tilleke. Really choose away at its ability to go to axe to the underlying security. So let's just Say that the S P five hundred went up ten percent but there was a ton of chop in it going up ten percent meaning a lot of volatility. Going up ten percent you're Let's say you're in a two X S and P five hundred ETF. I would highly doubt you're going to see that thing. At twenty percent if if it went through a lot of volatility to get up if the underlying took a lot of volatility to get up to ten percent so the futures and all the things that they're doing in order to manage edge that levered position takes a lot of frictional cost and that is reflected in the fact that it doesn't actually get the twenty percent it might get to eighteen eight percent and you're paying for that so what I would suggest if you really really WanNa leverage position which sticking I really don't recommend for people to do but I know people are I'm GonNa do it anyway so This is how I would tell you is probably a better way to go about. It is through an option. Just go out an option and I would suggest a long-term option in fact I would tell you and I would highly suggest that you go read. Joe Greene Bats. Book in the name of the book is you can be a stock market genius and and you'll green black is a highly highly accomplished investor for people that are not familiar with him I would say his his net worth is hundreds of millions of dollars others in probably close to a billion dollars and he is brilliant absolutely brilliant. I forget what his returns were with his Gotham Fund that he ran for for more than a decade but I know that they were in excess of twenty percent. I actually want to say they are around thirty percent. They were extremely high. But anyway in this book he talks about his opinions on options and particularly chapter. Six in the book is where I would focus and what he talks talks about. I remember some rules very clearly. From this book. Rule one for for jewel was. Don't mess with anything other than a call option and I have kept this rule for myself for years If I'M GONNA do an option I pretty much only do call options and he talks about the reasons. Why why in the book? The other thing that he talks about in the book is your position size for your total portfolio. So let's say you have a thousand dollars in your portfolio. Your your options should not be more than your your entire options that you own should not be more than fifteen percent of that entire portfolio. So if if you have a thousand dollars you shouldn't have more than one hundred and fifty dollars invested in call options leaps which are the two year long term options so so that would be my recommendation? If you're interested in getting your hands into something that gives you a leveraged position so that you can put a little bit of capital forward and have a a huge massive return but you gotta realize that anytime you're dealing with options that if they would ever you put put out the money if it closes out how below that you're gonNA lose everything. I think the way that you manage that risk is you take smaller position sizes with the call options than you would with the the LEVERED ETF and. Let me close by saying you probably shouldn't be doing any of this stuff because they they most often are. The result of being impatient opposed to having a super really really high probability idea alright so Harrison for asking such a great question. We're going to give you free access to our intrinsic value course for anyone wanting to check out the course goatee. IP INTRINSIC VALUE DOT com. That's T I P intrinsic value you dot com. The course also comes with access to our T. I. P. Finance tool which helps you find filter undervalued stock picks. If anyone else wants to get a question played on the show Oh go to ask the investors dot com and you can record your question there if it gets played on the show. You get a bunch of free invaluable stuff for you guys out there. That was all the press. I I have this week's episode of the PODCAST. We see each other again next week. Thank you for listening to ti to access our show notes causes or forums forums go to the investors put. Costs don't come this. Show is for entertainment purposes only before making any decisions consulted professional. This show is copyrighted by the investors investors podcast network redon missions must be granted before syndication over forecasting.

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TIP225: Billionaire Peter Thiel Lessons Learned (Business Podcast)

We Study Billionaires - The Investors Podcast

46:15 min | 2 years ago

TIP225: Billionaire Peter Thiel Lessons Learned (Business Podcast)

"You're listening to t IP on today's show. We cover a very famous Silicon Valley billionaire Peter Thiel for people that aren't familiar with Peter. He's a graduate of Stanford University. And after he graduated from college he started off as a judicial clerk working as a securities lawyer any even did some derivatives trading at Credit Suisse before starting his own capital management company. But then in nineteen ninety nine he co founded a little company called pay pal. And he was the CEO until the sale to EBay in two thousand two for one point five billion dollars after the sale of pay pal. Till started a big data analysis company called Pailin your technologies. He also became the founder of a venture capital firm called founders fund with this firm -til became Facebook's first outside investor when he acquired a ten percent stake for five hundred thousand dollars in August of two thousand four Peter's personal net worth today is about two point five billion dollars in. He remains active in numerous tech businesses. So on today's show we cover a few of them. More interesting questions at Peter's responded to lately, and we're really looking forward to digging into some of his responses. So without further delay. Here's our episode covering Peter Thiel. You're listening to the investors pud cost while we study the financial markets and read the books that influenced self made billionaires the most we keep you informed and prepared for the unexpected. This free podcast is brought to you by sip recruiter. Start off the new year off strong, but going to sip recruiter dot com slash investors to hire the right people. Unlike other job sites, ZipRecruiter finds qualified candidates for you. It's powerful matching technology scans thousands of resumes to densify people with the right skills education and experience an actively invites them to apply to your job. So you get qualified candidates fast. That's why seep recruiter is rated number one by employers in the US, but trust pilot with more than one thousand reviews and ride now listeners of the investors podcast can try ZipRecruiter for free at this exclusive web address, sip recruiter dot com slash investors. That's ZipRecruiter dot com slash semesters. Sip recruiter, the smartest way to hire. All right. Back to the show. All right. Welcome to the investors podcast. I'm your host Preston pysche in his usual company by my co host, Stig broder Sohn. And like we said in the introduction where we covering everything. Peter till today for people that don't know Peter he was an early investor in Facebook. He was asked the question in reference to his early investment in Facebook. And he was asked why you should have a specific strategy for your business and stick to it. And this is how he responded tremendous amount written in the last number of years about Facebook and the crazy Facebook history. But I wanted to talk about one anecdote from the development of the company that I think was quite important, and that it's worth reflecting on a little bit more in this question of how and builds a great businesses was it just they stumble on this thing, and it happened to grow. And I think there was certainly some serendipity and luck around it. But I also think there was a tremendous amount of foresight. That I got to see firsthand in the company were already in the summer of two thousand four the were ideas about. How they wanted to build things out and how they envisioned this completely transformative social network that would be built over over many years aspects of that buried in changed over time. But in many ways, the outline of something much bigger was ready envisioned near the very beginning of of the company when I started to become involved in the summer of two thousand four when you have a company that get started. They often have a PowerPoint presentation. They will have a slide where they describe what the business is going to do and you have one type of company, which well, we can do many different things we can do a or b or c or d or e and you have a company where it's we are going to do a the company that says a through e is always worse than the one that just says a even though mathematically the opposite should be true. Not the medically you'd say eight three has to be better than just a. But when when you have a three it means that you've not really thought through any of these things, very, well, and probably they're all kinds of bad, and they have not been taught through. Well. Whereas if you have a specific idea, it's a. Dan, you can work against coordinating against measure yourself against and try to improve used to play chess a scholastically on junior high school high school in the US, and so one of the intermediate level chess. Thank you learn how to move the pieces and combinations. And how do get checkmate and things like that? But sort of one of the intermediate level things you learn in chess is that it's always good to have some kind of plan. Even if it's a bad plan, something you can measure yourself against versus having no plan at all. So what are you trying to do, you know, something recreate options for many different plans is an anti plan. It's a way an effect to avoid thinking about things the education question that Luda tune the opening comments that we've come to think about as I'm very much in favor of education. I think it's important. I think learning is important. But I think it's also very important ask why you're learning what is it for and and one of the strange paradoxes in the United States and many other countries educations, become increasingly status driven credential where you simply get it in order to get other things. And it is I think. The purist version of the indefinite future, and you can think of things like going to business schools. Maybe the most indefinite version of education, where why do you go to business school in order to become a businessman what sort of business doesn't matter? If you had a specific idea that would actually be seen as a bad thing because that'd be like you were too narrow to focused, and so we just create all these people who have these these very general backgrounds and you end up with this paradox. Where what do you do at the end of your high school years? Don't know you go to college. Would you do at the end of your call jeers? Don't know you go to graduate school. What do you do at the end of your grad school years? You don't know. But you get some sort of job not job you want to do the rest of your life. Or you think is important, but one that will be good for your resume. And we'll help you in some somewhat poorly defined way in the future. I was teaching class at Stanford this last quarter and spent one day meeting with about thirty students twenty minutes each giving them career advice. It was in the law school context. I think this is berry Representative of thinking. Any of these places about two thirds of them plying to work at major wa- firms, not a single one planning to become a partner, not a single one really excited about it. It was just this was what you did to build your resume, and then it would sort of mechanical process where you did not think about the future, and it would just sort of gradually unfold. And I think this is the question about education that's gone wrong. Is that it's become paradoxically away to avoid thinking about your future? You learn certain broadly applicable things, and then you just adjust as things go on. So I think this idea of having too many plans to many options has often become away to avoid a thinking very carefully about a specific plan or specific option or what you what you will do with that. So, you know, the thing that I've noticed about Peter Thiel is he's always inverting. He's going back to the Charlie Munger quote. You know, if you can't figure something out invert and see what you get then it's kinda neat to hear his perspective. Because I think if you asked one hundred people. What they would expect to hear out of Peter Thiel s to the first comment as far as having a business plan and kind of having three or four five different strategies in order to meet your end state. I think most people would say yet that sounds like a good idea. And then he comes out and says that what he's found in his investments is that one path is the best way to go. It just kind of flips everything on its head. So do I agree with everything that he said, I definitely agree with his comments on education. I will say that. I think that his comments on the venture capital stuff is more based on confidence my personal opinion. I think that when a person says, this is what we are going to do it demonstrates a confidence level in the person, the the venture capital person that they are going to achieve this in that they really don't have a shadow of a doubt that they're going to cheat it opposed to a person who would go in and say, well, we might do this. We might do that. Or we might do this over here that person doesn't have any idea as to what? The market forces are driving them to. And I think that maybe that's a little bit more of what he's getting at than saying that you should only have one path forward. I think you should have ideas on how you can still shape things in order to achieve your goal. It was interesting what you said about pita teals reflection. There about the businesses a thing you can look at this different ways and specifically mentions Facebook, and how they had this debts at plan of how they should change the way we interact together with this huge social network, a think it's also important to make this distinction between the very biggest tech companies and then into preneurs ship in general, if you are Silicon Valley company, you are living off the networking effects on on something like Facebook. And that's how you're going to grow. It has to be BIC either. It's big or it's nothing. That's the Silicon Valley way of thinking also has a lot to do with the way that money is plowed into these companies either it's going to be a massive. Success within those seven years that eventual capital fund would typically run for before close down all the attorney. There is that it will go bankrupt. And that's okay, too in a way as long as you have those big winners if you want to increase that volatility. So you're will get those outliers like Facebook, then yes, having one plant, and that's the vision, we not going to change anything that is the one plan, and if that's not gonna work is just gonna fail. Anyway, I think that mindset probably works in the valley. I think for all other enterpreneurs thing, it's a horrible way of conducting business the way most enterpreneurs thing is that they like the lifestyle the probably also passionate about a project or product service. They would like to make living a decent living out of having their own business and the finger of that's the way you approach business. Why not have business plan? A to e I just think it's very important to make that distinction. I think it's important for people to realize he's his comments are coming from a venture capital investment. Point of view. So if you go in there, and you're listening to a pitch from a company to do another series round of investing. You've got to understand what you're listening to. So you're listening to accompany who A doesn't have enough earning power to take care of themselves. Like they're going to go bankrupt. If they don't get this round of funding. So then the question quickly becomes okay? So what in the world? Are you going to do with all this money? I'm about to give you and if there's not a really clear path that says, I'm gonna take your million dollar investment. And I'm going to do x y and z. That's where these guys are looking. They're looking for something that is very direct like this is exactly what we're going to do in. This is how we're going to chief this. And then after that happens. This is the next thing that's going to happen. When people talk in those terms to venture capitalist the venture capitalist gets very excited because they see it as a very high probability event. Whereas if he's going in there, and he's listening to a pitch in the company saying, well, you know, we might do this, and we'll spend some of the money here. Here. We'll probably keep some of this in reserve. And I mean, they're just kind of talking all over the place. That's where I think his comment is more directed toward just a quick comment to that president because I was just reading Reid Hoffman split scaling book s some of you might know pay pal is founded by Peter Thiel, and he then merged with Ila mosque into this pay pal company and Reid Hoffman was then the COO and the mate this decision that they should give everyone ten dollars that they can just send away for free to a friend as long as they were having a pay pal account. And obviously this is not a profitable strategy. But the intention the goal behind pay pal was everyone should use. It should be a common payment standard. So this was just a way of marketing yourself real real fast. And this was the only plan that they had this is the thing that needs to be done. And if it doesn't work, then it's it's not. Okay. But then okay, we'll go bankrupt. That's it. We'll start another company. But then if we succeed then pay pal will be massively successful. Just to give some context to whenever you hear someone like Peter Thiel talk about having only one plan that is where it comes from. So on the next question that we're gonna play Peter was asked what is the importance of visionary founders that can articulate the mission of the company when it has no employee's. And this is how he responded many not all cases, they're quite good at ticketing it, which is actually a fairly unusual combination. So you often have classical engineer tends to be very introverted in many cases. These are people who are technical scientific engineering type people who happened to be rather eloquent at articulating it. Because one of the things that is very important in building. These things is they don't exist on day one. And so you have to actually motivate people, and you have to convince other people that this is a really important thing to work on. I think this is one of the one of the subtle things. That's that's really valuable about the sort of the breakthrough technology doing something unique different. That's not been. Done is it is so much better at motivating people debate. How how big this is? But one of my friends Adam DeAngelis start it's coming called core two years, which is sort of a new search engine, and it's a hard interesting problem. And there's a story around why this is a very important kind of a problem. Whereas if you're starting the social networking company. It's why should you work for this company rather than the next one? Why are you actually making a difference in the world you want these things to be successful as businesses, but it's not the only thing that motivates people, and it's it probably has it's really worth thinking through how these things do not motivational work. So there are all sorts of businesses that I think are possibly quite valuable but end up being very uninspiring. And you ended up with this very difficult problem of if you're starting them finding a very hard time attracting talented people, and conversely, if you have something where it's at least interesting, you have at least have a chance of getting sort of a critical mass of a very. Talented people. This was very true of the Genesis of the of the really great businesses. I think Google is still in some ways, very inspiring Zampa. But the first thirty people Google were unbelievable impressive. And then they somehow we're able to maintain this for the next three hundred, you know, some extent for the first three thousand even and I think it was in part because especially Larry page. It was very good at just articulating this vision of how in most important problem. The world was organizing the world's information. There was much more information than people knew what to do with and this so Google was working on sort of creating this universal library. That was the most important problem to solve at the end of the twentieth beginning of the twenty-first centuries, and you may or may not agree with that. But that was a good way an important way to drive this. You know, it's funny says that because I would never imagine the pitch to an early employee Google being what he just described. I really liked the way that he said that Stig. I'm kind of curious to hear your thoughts on this one. I really liked listening to Peter Thiel because he always. Thinks so differently about all problems that I hear people talking about. I've never heard someone talk about how to motivate employees in a company who's going to take over the world, but doesn't exist or kind of thinking is behind that to me that is absolutely amazing and one the reasons why I always feel so inspired listening to Peter Thiel when we talk about a critical mass or break even point. We always thinking about small start a Bill is talking about, you know, a restaurant or another kind of company that's set up you need to have four hundred guests per week to break even for that to happen. You need to have, you know, social many shafts and so on so many waiters. You know? That's the way you should think about this. What Peter Thiel is talking about is the critical mass you would need to have of employees before you can build your company looking at the world through really the looking glass of Silicon Valley this focus on having hottest a growth for. For those networking effects to stop working Facebook talked about before it has no value. If you own the person on the network, it doesn't have a value. If there was a five hundred thousand people at the network, you know, everyone or close to everyone has to use it, and then make sense for you to use it to and for more people coming. It's it's a stronger and better company. But before all that you can't just set that up just one man down in your basement you need to have. So and so many employees. I never really thought about it. Like that before. That's also why the venture capital function is so important to have in the business world because you need someone to take those those bats that can change the world. We can do something great. But we need to burn a lot of cast because this would not be sustainable full long long period time because in these so many ingineers before it could be set up. So I just want to comment more in general about Peter Thiel here for folks, if you are liking some of Peter's comments or maybe you don't. Have any exposure to him? He has a book out there called zero to one Stig, and I have covered. It will put our comments in the show notes. If you wanna listen to that before you go dive into the book fabulous really, really good book. There's also another book out there that covers Peter Thiel, and it's called conspiracy fascinating book gets into how Peter Thiel thinks his house strategic. He is and it talks about the whole Gawker hulk HOGAN thing and how Peter Thiel was involved in the in the litigation on some of the stuff in the funding behind the litigation. Really a fascinating read. I would highly encourage people to read that book. It was a very very good book. One of the things that came out of the book that I found fascinating was the author talks about how Peter Thiel thinks one of the things that he talks about is. You could ask Peter question and Peter would think a longtime before responding, and then he would say something like, well, you know, this type of person would answer that question. By saying ABCD f g and then he'd say, but this type of person would probably see that problem differently. And they would disagree with that first response, and they would probably respond by saying this, and then he would give all the reasons why. And what the authors getting at is Peter feels that there's a solution or there's an answer the that has an array of different ways to view it. And because he looks at things from such a complex and unemotional vantage point, he's able to really kinda thoroughly understand how things work better than most people, and I found that little bit of that discussion out of this book conspiracy to be really kind of enlightening, and it helped me challenge the way that I think about things in that. It doesn't have to be. So absolute it, it's actually something that maybe you should take a step back and say, well, let me let me think about what the person who would disagree with my personal point of view would say. And how would they respond in? What would be their reasoning for the response because they have a reason they're not just saying at the say, they have a reason I think when a person goes through that exercise. They're gonna find themselves being probably more thoughtful and more understanding of the people around them in the book, they said that he got this approach out of his training because he went to law school. And this is one of the things that they make you do in law schools that you have to argue maybe the side of the case that you don't want to argue and it forces you to kind of learn how to think this way, but Peter has continued to approach all problems in his life that way. So I just I find that really fascinating. I also find both of his books really worth people's time. If you want to dig into them, I'm reading this book right now of Ralph Debeli, the name is how to think clearly, and he goes back to this about having mental models of the world. And how you look at something like, you know, the second World War if you have a background in the military. You might be thinking terms of military solution. If you're having a background in politics, you think what could have they had done differently in terms of the political system. If you're in the communist, you're thinking, why couldn't we have supported economy better? And then we wouldn't have everything bad happening Europe at the time. So it's really about challenging yourself all the time and thinking in the virtually like teal is doing nothing. That's also why whenever you listen to him. He can reflect on a just a different level than almost any other person. You could think of because he has so much empathy and so much knowledge that he can go into the different shoes of so many different people and come up with a balanced picture of the situation. He approaches it from the position that he could be wrong. I think that that's one of the hallmark mistakes. I think a lot of people make is when they get into a discussion. And it's like, well, what do you think about this by providing their response to what they think it's almost like they have to dig a trench around them, and they have to get in there. And then they have to fight and defend that position where I don't think Pete. Or protas it from that vantage point, I think Peter till visit more from this is a discussion where I can learn something. So he starts off by saying, well, you know, I guess I would think that this would be the point of view that I have. But somebody else would probably argue against that. And this is how that argument would go, and he's and he's trying to understand what the truth is by understanding all vantage points, and I think that that's just the way different approach than what I think most people approach it from it. I think a lot of of the reasons why people DO NOT APPROACH it that way is probably because some deep rooted fear or insecurity about being viewed as being wrong and not being viewed as intelligent might be driving. A lot of the reasons why people don't approach things that way. And I think when you take a step back, and you look at and you say, well, if these people think I'm an idiot because a marketing with myself or because I'm just throwing out all these different ideas. I think that you just have to have a lot of calm and balance in knowing who you are and being comfortable with maybe being viewed differently to speak that way or to think that way. But I I highly admire that that about him this next one is an interesting question because it's something that's extracted out of his book zero to one where Peter talks about a question that he likes to ask all new job recruits that come into his company Peter extracted this question from a book that he had read and the name of the book is things hidden since the foundation of the world in this book, Peter learned that there are all sorts of secrets throughout the world that have just not even been discovered yet. And that there's people out there that know the secrets, but they just haven't been able to really kind of action them one of his questions that he asked people when they come in is what is it that you know, that nobody else in the world knows he usually gets a blank stare from people. But this is interesting because he was asked this question by somebody in the audience of this talk that he was doing in. This was his response. I think the sort of a conventional view is that are not that many answers left to this question. What's true that nobody agrees with you on we believe that all these transfer ready been discovered in the past. Maybe there's still some things, but they're just about impossible to figure out. And so there are conventions that we understand their mysteries that nobody can figure out I by contrast, their soil lot of things left on intermediate level. There are a lot of things that I call secrets which are truths that are hard but possible to discover I think there is always a secret at the core of every great business. There's some sort of research program that some area that people are really really focused on they think about really hard, and it sort of advances. They're thinking to the point where they get an understanding about something that other people do not yet have at pay pal? We're very interested in crypto currencies and encryption technology and currencies. And could they be intersected? Could you build a new digital currencies was questioned that animated us tremendously? We didn't quite succeed in building one. Pay pal. Even though we had t shirts that said that we're going to be the new world currency. We didn't quite succeed in that in that goal, but that's sort of a in-depth substantive focus actually did help us think really hard about how do you architect new payment system? How do you do certain things differently? And it was was a key part of inspiring us. I think there are sort of many secrets left, and this is something we generally do not understand. It's not obvious. We're one should look if you were living in the seventeenth or eighteenth century, you could look at a map, and the we're empty spaces left on the map, and you could become an explorer and go and discover those places so the sort of natural geographical sense in which there were secrets left or the nineteenth century, there were still places in the periodic table of elements that were empty, and you could sort of do some basic chemistry and find some secrets, and and there's sort of a sense that maybe basic Mistry in geography sort of feels that are closed, but think most fields are not like that. I think most fields are still ones where there's tremendous amount of innovation possible. Certainly this. True in on in the computer field where we've seen a massive innovation in recent decades in the world of bits computers internet mobile internet that whole on samba them. I think we've seen less innovation in the world of atoms on your transportation energy clean energy, biomedical biotech space travel, all the kinds of things people thought about in the fifties. And sixties I think it's not because there's some log nature that it's hard to innovate or impossible to innovate in these areas. It's just sort of in this cultural change where we haven't tried as much, and there's a lot of this has a self-fulfilment character. If you if you think that you can't find a secret, then you're not going to try, and you will not look, and you will not be a person ever finds one failure pessimism can have a self-fulfilling character as conversely, if you think is a lot to be discovered progress can accelerate and more where things can happen. So second sort of contrarian truth that I believe to be true is that there are actually are many secrets left to be discussed. Hard and other amazing clip here with Peter Thiel. I'm just amazed of how he's thinking about things, you know, in this day, and they inch. And you would think that innovation has just taken to new heights with everything that's going on. He's like, no, not so many things we can just look at Adam's atoms haven't really been innovative as we used to think I would like to talk about this clip and pay pal that he also mentions in this clip how Peter Thiel Emmanuel as felt that he failed with pay pal to me. This is very interesting that he actually originally set out to find a secret as he would call it behind banking that this could be done differently. Not even just having your own online payment system. But also inventing your own critic currency the own money that everyone could use and then mitigate the fees and all the problems you have to with banks. And I think today perhaps also because of PD teal. That idea sounds less number. You have all these ICO's out there. And it's doesn't seem like a big deal to have those thoughts. But back in the days, you know, very very few people if any really thinking about this and really considering this to me that doesn't example of a secret just haven't been discovered yet. What I find fascinating is it just shows you these guys understood the power of encryption back, then and they understood that encryption would be the the gateway to allow a digital currency to exist. But they just couldn't figure out the breakthrough which was really blockchain technology or some type of technology that enabled the encryption to allow a unit that can't be copied or pasted on a network. So that if you create a thousand units only thousand units could be exchanged that's what the blockchain technology stuff. Kind of really was the breakthrough on is that you can do that. And it seems to me like these guys understood that encrypt. Would have enabled that they just couldn't crack the code on on how they would implement that. Or make that real perfect example with with him understanding that there's these secrets out there that they can uncover. It sounds like they were on the something. But they just didn't get there on it. I think the most important thing that he said and all of that was there at the end, he talks about your perspective in your attitude. If you think that there's things out there to be discovered, then your probability of actually finding them are probably way higher. But if you have this negative mindset, or you have a pessimistic view on it. You're probably not gonna find anything. I just find that across all the things at Stig. And I study all these books like that is just such a common theme is just your perspective in in your attitude because I've been on a big kick of reading about the brain and things like that. And what's fascinating is how your brain pushes things into its subconscious like you, learn something. And then when you go to bed at night your dream. Ming and all this stuff is getting pushed back into your subconscious. And the way the brain is kind of functioning is which you continue to tell your brain is what it is then pushing into the subconscious. So if you're walking around all the time with this negative attitude all this sucks, or oh, we can't do this. What's actually happening is your flavoring or your coloring the way that your brain functions inherently because your subconscious is driving so much of your daily activities. Now, if you do the exact opposite in you're always thinking of things in a positive way. And you're saying I can discover something new I can do this. And you keep pushing all of those thoughts, and those ideas back into your subconscious, and you do this for years on end that will have a tremendous and profound impact on who you become an it's not something that you even realize is happening. It's all happening at the subconscious level. So he says that at the end, and I think that that is just a real nugget that he just kind of slipped in there as if it was nothing, but the more that you think about what? It is talking about and how insanely difficult it is to identify something that no one else in this world has identified or that very few of identified. You have got to protest it with that kind of mind center. You're just dead on arrival. Let's take a quick break and hear from today. Sponsor this episode of the investors podcast is brought to you by funder is the future of real estate investing fundraise enables you to instantly access high quality high potential private market real estate projects from high rises in DC to multifamily apartments in LA each real estate project is carefully vetted and managed by fund rises team of real estate pros. 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We dot com slash t IP now download their free crushing the five barriers to growth guide today at net sweet dot com slash t IP that's net sweet dot com slash t IP. All right back to the show. One example of this going back to this crooked discussion, perhaps someone the listless know Peter Thiel was one of the first major figures that invested in bitcoin, and he did that in the early days. I've read an interview with him that was reason very recent that he still felt that there was probably an eighty percent chance that bitcoin would be worthless. Whenever he did wait that outcome with the pro ability of it being right, or if that was I would say. A secret that was about to be revealed as he would probably say based on this question. It was just such a good bet that there was no reason why he shouldn't do it. And the thing that tells you so much about how he thinks about things that he's thinking as a contrary investor knowing that he's most likely wrong because very often the heard is right to some extent. But if you can pick the places where it's not, and if you have a good model or multiple models to figure out where the hurt is wrong. That's really when you can make money as investor and grow as a human being next question. This is the last one we're gonna play Peter Thiel was asked do you worry about artificial intelligence, and what it'll do to us and our ability to earn a living, and this is how he responded. I'm a strong is still play the long ways. Aw. If we ever words get artificial intelligence, whoever to build computers that are as smart as human beings in every way, this would be a momentus event. This would be you know, it'd be as a significant extraterrestrials landing on this on this planet and aliens landed the first question would not be about the economy. And what does it mean for your job? The first question would be political. Are they friendly? Are they unfriendly I think even frame it as a question about jobs is to understate the importance or or is it seismic nature. I would represent I think short of strongly. I However, I think people are way too worried about computers in this economic sense. I think we have we live in a financial in a capitalistic age. I argued elsewhere that I think we do not live in a scientific or technological age. And and most people in the US, western Europe, really don't like science. They don't like technology. They're biased against it. And also. Lots of ways. It's true people. It's true. The politicians it's true of the government's. It's true. The culture these way to see this as you just look at all the Hollywood movies that basically show technology that doesn't work the kills people's destructive. You can choose what it's matrix. Terminator avatar. I watched the gravity. Maybe we other day you'd never want to go to Mars even outer space be much happier being back on somebody island somewhere on this world. And that's that reflects the sensibility of most people that the future is something to be feared that we should try to prevent, and that's why people who are involved in the sign typic- or technological worlds are the counterculture in our society day, it's sort of berry unusual perspective to think that the future somebody. Hopefully, so roundabout answer this idea that today's computers are replacing people is just another one of these technological angst narratives we have. I think it's not true. I think appears in people are on a mentally different there. Good at really different things fundamentally complimentary not substitutes the much bigger challenge for the middle class. New development comes from the elbows ation because people in India people in China are actually not that different from us. They can't substitute for labor. And that's where the substitution is taking place. I don't think we should stop globalization. But know, it has some problematic aspects, I think technology has far fewer. So that's a pretty interesting perspective. I I don't know that I agree with him completely on the technological piece there. But I do agree with him on the globalization thing at the end, I think that he's exactly right that a lot of the jobs that are being performed here in the United States can absolutely be performed elsewhere. I'm not saying as an American that I necessarily like that outflow of capital from our country. But I agree with him on that point of view that that is something that is very real in a threat to the way that the US is going to continue to progress. I think that when you talk about the technological impacts. I immediately think driver. This technology, and what impacts that's going to have to the transportation of the in here in the United States. And I think that that's going to be a fairly devastating event in the next ten to twenty years this forest that displacement of drivers from Uber to all the truck drivers to all that stuff. I think that that's going to have a major disruption. I guess I this may be too negative. But I I guess I see it a little bit differently than him. Now, I will caveat that with he is much more attuned to what in the world is happening in Silicon Valley than I am. That's for sure. So you probably want to default more to his comment than my own. I would like to talk about fear and his comment about fear. How we are afraid of the new technology. That's coming. I'm currently reading this book thinking, clearly, the all talks about how we our program as human beings to fear change into feel what is unknown, and the reason for this is that we used to live among animals and other things that could kill us and being afraid was a matter of life and debt people who are cautious also survived and the past on those fear jeans to us now that we live in a prosperous and safe society, at least a lot more than we have in the past. We still wired to be afraid. One way to look at. This is imagine looking at a picture with ten Ankara faces and one that smiling you almost don't see the smiling face. And then if you look at a picture with ten smiling faces and one who's very angry. He knows that person right away and the intention of what Peter Thiel is saying. And also the takeaway from the book as we shouldn't be afraid, we should rather embrace the changes embraced innovation. Even though that is unknown. It really makes me think of the episode did do some time ago with Jack Ma where he talks about, you know, he's a father generation the work sixteen hours a day. And there were very Bessie his generation there were eight hours per day. And oh, we're so busy, and then his children's generation where it's going to be three hours per day because of artificial intelligence, and they're also going to say that they're very busy. But if we think about it the called. Yeah. Of all life because of those two nautical changes there for the greater good. They are across the board. Good for mankind. I guess that was my takeaway here from this clip. We shouldn't fear the future because machines and the people are fundamentally different. All right. So this is the point in the show where we play a question from the audience. And this question comes from Santos, hyper date today, higher question about the what imperfect has mentioned Soder dines dyke. Understanding interest rates is critical for investing. I believe traditionally is one of the important factors in understanding the states general I've heard from you board that flattening or version of Utica has historically been a signal back. Thanks to come for the stock market's at wanted to understand why having high into states for shark dumb compared to long term is bad for stock markets unholiday Barton should be giving the as value investors debate for okay? So I think it's important for people to first start off with the idea that. If if you do have a flat bond yield curve, it doesn't necessarily mean that you're gonna have a recession right then. And there I think you back in the time and see different periods where the bond you'll Kerr was flat and the market continued to run for a year to three years when it was in that condition. It's one point that you need to look at an array of many points to try to understand where you're at in a credit cycle. Now think of it from a business perspective, if you're a small business and now the rate that you have to lend or borrow money in and businesses are highly reliant on short term borrowing. So they need to go out. They need the borrow money in order to pay for a Bill, and then they pay that off thirty days later, sixty days later, or whatever. And so this short term lending market is very very important to small businesses. And so if you're a small business and all the sudden that short term borrowing interest rate becomes higher than. In the interest rate on long dated debt that starts to cause a lot of problems because for you as a business when you look at your income statement, and you got your top line, and then you've got all of your expenses. And then you get your bottom line those expenses in your interest expenses are going to start going up way higher than where they were before. As all these interest rates start going higher. This is typically an indicator of the market is pricing. The out years the growth expectations far worse than what you are currently experiencing. That's what the inversion is actually kind of showing you. It's just something that when you go back in the history you look at what kind of precedes him. Then follows these inversions in the bond yield curve, they typically are kind of a canary in the coal mine that you know, there's going to be troubles on the horizon. And so we're seeing that today in two thousand eighteen we are seeing the start of a flattening of the bond yield curve. I would not call it inverted at this point. Because the short term yields are. Are definitely still lower than the long-term yields. But they're coming up aggressively in it's starting to flatten out. There was a brief period of time. We're in the middle of the bond yield curve. There was an inversion, but it wasn't a complete inversion like we've seen in the past. So that's just a data point that something for people to think about and nothing to add to this is also at this part time where typically happens you see that the debt that needs to be serviced rose faster than the income in the economy. But you basically do whenever you have a flat reading the verdict yield curve is that you incentivize people to move to cash or if not cash then just tie your cash into instruments for their short period of time, which is as good as cash when something happens, and re really happens is that you are taking money out of the system, you I indirectly seeing a tightening of credit. So you are more prone to see at bubble pop at that point in time. I just want to add that as a piece of. Context to understand. What's what's going on in the financial markets because you would need to sell your financial assets to service that debt everything leading up to this flattening to inversion in the bond yield curve is expansion. You have credit expansion you have people's income levels going up as a function of all this. And so more people have money they're able to spend in gets into this whole Ray value description of how credit cycles work when you're at this point, white Stig was just describing is really that transition point where you start getting into the self reinforcing in the opposite direction where tightening is occurring in there's less money. There's lower incomes beget, those that service levels. Those those interest levels are now exceeding the income levels which further compounds the cycle and causes it to strengthen as it continues to go down. I look at it as a great way to kind of understand where you're at in the credit cycle and kind of understanding when you're kinda hitting top. I would say that you're starting to see that. Now. All right Santos. Thank you so much for leaving your question there as a token of our appreciation for leaving your question. We're going to give you access to one of our free courses on the academy page on our website. The course that we're going to give you is our intrinsic value course, and our intrinsic value course, teaches people how to determine the value of an individual stock. It also teaches you how to think about the market cycle. And when you're buying your stock, and it also teaches you some stuff about options trading. So we're really excited to give you this course, if anybody else out there wants to check out the course, you can go to T IP intrinsic value dot com, or you can just go to our website and click on a kademi link at the top of the page and courses right there. So if anyone else wants to leave a question on the show good at ask the investors dot com. And if your question gets played on the show, you'll get a free course. All right, guys. That was all the Preston. I had for this week's episode of the masters podcast. We see each other again next week. 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TIP316: Current Market Conditions w/ Preston & Stig (Business Podcast)

We Study Billionaires - The Investors Podcast

51:53 min | 7 months ago

TIP316: Current Market Conditions w/ Preston & Stig (Business Podcast)

"You're listening to T- IP. Hey everyone welcome to the investors podcast on today's show Stig I cover the current market conditions. Specifically, we're talking about some of the changes in Warren Buffett's portfolio where he sold a lot of bank stocks but he added more to Bank of America. We talk about a couple of different stock picks that are coming up on our value filter, and we also take a question from the audience where we talk about the optimal asset allocation mix right now with everything going on. So without further light, let's get this one going. You're listening to the investors podcast where we studied the financial markets and read the books that influenced self made billionaires. The most we keep you informed and prepared for the unexpected. Hey everyone. Welcome to the investors podcast. I'm your host. Preston Pysche is always accompanied by my co host Broder season and was just the two of us today sting so I guess we can just go ahead and kick this thing off and get right to it. So, Preston, let's start off by talking about billionaires or at least I have a one billionaire mind that I don't know if he says to anyone surprised that the and I wanted to talk about right now giving the conditions that is a gentleman named Warren. Buffett let's talk about what Warren Buffett is doing right now and I guess the cheeky answer is that headline could be that he's not. Really doing anything because everyone is really looking for him to bring on that elephant gun that he's been talking about for years and put some that hundred and four billion dollars of cash to work. But I don't really think that's the full story rather think that they are at least one actual purchase that he did or the past quarter, and there's a lot of interesting observations here for Warren Buffett. Most noticeable is that buffet has picked a winner in the US banking sector, and now we as investors know that it's very hard to pick a winner in any industry and that's even so that it's sometimes easy to see that as sectarian general will perform well. So Buffet picking a winner, you just better pay attention and so what a noticed here is that he picked up an additional two billion dollars of BANKAMERICA and at ever price around twenty four dollars and change. And Right now bank of America's trading very close to that price. So if you agree with buffet on this thesis and we'll talk more about what the investment thesis could be. There could be some value here and now. So what is the thesis while Warren? Buffett is hard to ask. So I guess you have to put up with Preston near today, but we have seen a few interesting things there because whenever I say he picked a winner just for. Like he picked up more Bankamerica but he also liquidated his positioning Goldman Sachs and he actually reduced his expulsion most of his other bank stocks. So it really seems like buffet has a key nine to the stock and buffet or Brooks a Halloween now owns twelve percent of the stock and what's interesting is that back in April the Federal Reserve Bank of Richmond, approved berkshires application to boost its stake as high as twenty four point nine percent. and. Quite crucial because you should talk about their ten percent limits for investors. So the CAM ten percent and if they do and I, have to get approval, it might be an issue because for instance, you don't want someone to have too much of one sector and perhaps that person would own. Role of the big players. So that's why needs to be approved and buffet can still by more than twenty four point nine percent. But then he would have to do another filing and then have the company become a bank holding company, which is a bit more complicated process but the other more practical implication of owning more than ten percent is that the way. Berkshire hathaway's now regulated is that they are now considered the insider. So that means that they can't just load up more stock without telling anyone actually have to disclose it every time that they're buying. So that's also why this purchase has been disclosed even though it's not in the findings yet because it's a very recent purchase and you might be thinking well stated and. You start off by saying that he had like a hundred and forty billion dollars in cash and he owned plowed into billion dollars. Well I. Still think it's worth mentioning for few different reasons. It's a public stock that most people can take advantage of. It's very easy to pick up. He also made another purchase which will talk about later, which might be A. Bit, horrified people to imitate. So it's very easy for most investors to do and Bank of America's. Now the second biggest public holding is only trailing apple and the exposure to Bankamerica now is more than twenty billion dollars. So it's bigger than both coke and American Express and just do WanNa say for the record that I do own she asked in Bank of America. And I just wanted to highlight most of what he's doing his pruning and adjusting his marketable securities. The Stock City owns within Berkshire Hathaway. When you look at his stock portfolio inside a Berkshire Hathaway, it's two hundred and two billion dollars as of the last quarter and so it's not like he's really added too much to it. The cash position like you said, what was it stick? One hundred and forty billion? Yeah, and this is an important highlight. So when you're thinking of how is that two hundred and two billion allocated in its portfolio eighty, nine, billion, that is apple stock. It's kind of interesting to see because a few years ago when he first started taking a position, it wasn't like this big overall position inside of his portfolio bit because it's Gone up in value so much. It's really kind of taken on and I think it's helped maintain his stock price significantly having all that apple stock in there, and then what you're seeing on the financial stuff with sticks talking about he's really just kind of re-based baseline, his allocation instead of owning be ny Mellon Pants, he financial us bank core visa mastercard all those he's cut back the positions that he's had there and he's added to the Bank of America position. It's kind of interesting to see what he's doing in that regard is how he's basically re baselining everything and making it more focused than having it spread out. Yeah and it's interesting. You say that Preston and a really wanted to talk what looks like it's just changed for someone like buffet. What happened whenever he did disclose as probably most of you would expect the price just showed up, which was probably just all he could. But then what happened after that is that the price is falling back to the point. That's a very classical thing you see with with a lot of buffets revised like you see like a shelter in fact and then. SORTA like you know there's another new cycle or whatnot, and then people forget about it, and then their price falls back down. But Bank of America in particular has really been on my radar for a long time and we can even go back to two thousand and eleven whenever he did that famous purchase off Bank of America. He bought five billion dollars a preferred stock with a six percent annual dividend and then seven hundred million shares or warrants it could be converted as she s. And for all audience that might be more familiar with Bankamerica from bill nygren that we had on here from Oman Fonts, and he manages more than three point, five billion dollars and together with Charlie monger Warren Buffett Guy spiritedly Liu. So quite a few investors you're probably familiar with he has made the most significant conviction bats on bank American. That was episode two, hundred, Ninety, three, and of course, we'll make sure to. Link to that. If that's something you interested in a Nygren just to give you a spot alert, he was looking at a fair valuation around forty. Dollars. Plus for one bank American, ride now is trading around I want to say just looking up here, twenty, four dollars four, seven cents. Before Maga, opens here the twenty second of September and I just wanted to mention a few things that I found interesting also about the. Stock. Generally I kind of feel that there's an interesting thing at play here with let's just call the interest rate protection and you might think, and what do we mean with interest rates protection because there's no way that interest rate is going up and DAPA has talked about it and giving covid nineteen and everything that's happening. Why would you even say that the reason why I am saying it is that you would. Probably have a normalized earning for a stock like this around three dollars and you're looking at a stock that back in ninety eighty revenue from non interest income was only fifteen percent. So I, guess my point is that bank America's really done a good job adjusting to the times with low interest rates back nineteen eighty revenue from non interest income was only fifteen percent and today where they're not really making any interest income. Today fifty percent of the revenue is now known interest primarily from fees as a lot of customers including sells might have noticed they're really good making money like that. So it was just something I found interesting, and as you go through that specific episode I, don't want to sit and repeat everything that Nike talked about but I would really concentrate on some of the arguments about having that concentration between the biggest banks in the US. There's just a lot of interesting things going on now combined ever around A. Maga share a third percent, but they're capturing fifty percent of the new deposit. So you see the same type of banking concentration in the US and the scene that for some time that you have seen in other western countries for some time. So there's just a lot of structural changes and their networking effects and the Communist scale, but I don't WanNa. Talk us about that because buffet did other things he recently but pressed Nano if you have any thoughts here before we talk about the Japanese investment that he made. When I'm thinking about Bank of American thinking about the future, your comment earlier about the interest rates going up is the thing that just kind of has my mind just turning because I don't think anybody really has a good idea as to how this is going to play out in the coming two years. His far is interest rates is when you're talking about a bank and you did a great job talking about how the fees are the real selling point here with Bank of America compared to some of the other banks are not relying on that interest rate income. But in a world where we're talking about Mt. And I guess from my perspective, I think that they're going to actually be able to implement this for I. Don't Know How long I think that's the question I. Think they're gonNA be able to implement em-empty i. think they're going to try this whole negative interest rate thing I don't think it's GonNa work. I think it's GonNa fail miserably but I don't know when it's GonNa fail miserably and it seems like an and I think another part of this too is I. Expect you be I to be a really huge part of what's going to happen next in the coming twelve months in the coming twenty four months I think that the you'd be I checks are going to ramp. Up I think the fiscal stimulus to small businesses and mid sized businesses are going to ramp up and so when you look at how these banks have Kinda benefited from these fiscal and monetary policies, even though there's no interest rates, they're still crushing it on the revenues and so when I'm looking at the valuations on this thing, and it appears like the price is being penalized because I think the rest of the market is kind of seeing things through a similar lens of what I just described as far as my confusion over how this is going to play out and I think a lot of market participants are saying I'm just not going to get near that because I just can't. What the future's GonNa polled as far as interest rates and whether the feds going to overprint and it's going to blow up a bond market or what rights the markets looking at that and saying I'm not getting near this thing will you can see it in the valuation because when I'm looking at this and doing an intrinsic value? On, the company based on free cash flows and not even having a growing free cash legit something. That's flat. I mean you're talking easily double digits on this like by a lot like I don't even want to say the number because it's so high based on the free cash list. So when you're looking at the math on how much they're earning and how much they're banking onto their balance sheet for the shareholders it's significant right now I mean really significant like it makes everything else look like you're in a completely different universe as far as the numbers go. So Do I. Onus, I don't own this mostly because of my confusion as to what's going to play out and plus I think that there's just a lot changing in this sector but I don't think that that's going to change abruptly as far as we're still going to have a need for banks like even though everyone knows I'm a big fan of bitcoin right in a bank in your life that you. Can put on your smartphone but I think that they're still going to be custody oil pieces to all of that. Especially when you're talking like large businesses, they're not gonNA want to be managing their private. He's they're going to be outsourcing that to a big bank to do a lot of this thing so I still see there being a world for this now whether they had the technical chops the step in. And Start Securing private keys and stuff like that and the crypto space. I don't necessarily think that they have that right now they're gonNA have to outsource it to like Gemini and some of these other big crypto cracking just became a charter for a bank. So I think there's a lot changing in this sector. Technologically, there's a lot changing I am not so sure where Bank of America sits relative to all. The. Other ones, it seems like fidelity's Kinda gotta jump on the transition to be able to go into this cryptographic world that it seems like we're going towards in the banking sector. But those are some of my thoughts and again, I don't own it. But I can tell you looking at the numbers. This thing is ridiculously juicy. So if any of those comments peaks your interest, I'd tell you dig into it more. About the common you had there about the interest rate the reason why I wanted to bring that up because I don't necessarily see you know the high interest rate being a big catalyst or anything like that. I don't really see going that way I guess one point is that it's always been very difficult to predict where interest rate is going to go. But the other thing is there's a lot of leverage companies right now there will be in the world of pain if the interest rate went up. So that was kind of like my point there had build in this call the hatch I don't know if that's the right term to use with Bank of America, keep in mind that even though it will increase their income, there will obviously be discount because you're with a high rate because high interest rate would make the value of all assets down i. just feel that's an interesting thing to consider to as you evaluating the risk of this business. I think it's extremely important if you're trying to by various banks at are discounted severely because of all the things we mentioned I think probably needs to be at the top of the list is how much of their revenue is based on things that are outside of interest rate income because my impression is in the coming year and the short duration interest rates are just going to keep getting pushed lower. These governments cannot allow interest rates to go up even though you got the Fed chairman going out there and saying, Hey, going to start hitting our inflation goals and if it's running a little bit hot, we're GONNA. Let it run hot. That's still doesn't mean that they're going to allow. Although they're trying to make inflation go in historically, interest rates are based on a premium above that inflation I don't think that that really is going to be the case because they're just gonNA keep buying the debt to keep interest rates low because fiscally they can't afford interest rates to go up I, mean I think everybody knows that I think they know that they can't allow interest rates to go up just because the economy could. Not even begin to handle that right now. So I think the trend for interest rate income for banks is they better expect rates to even go lower from here, which is crazy but I think that's probably the most likely scenario. So I think stig's point find something else you better have that at the top of your list if you're looking at the revenues and finding something that's that they're making money from something other than interest income. Going back to Mr Buffet here I think the Bank of America purchase, very interesting for most retail investors because it's so easy to follow that specific pick. If you want to do that, he also made it interesting purchase in Japan he recent he deploys six point, five billion dollars and it was your August thirtieth on his ninetieth birthday and the way the deal was structured was not as applicable to. Most ambassador. So simply he issued that in Gen and he used the proceeds from that he only paid point six, seven percent interest rate on that on average, and he matched that with his investment into those five major Japanese trading houses, and just a quick note to that because you might be thinking you know whenever you hear trading house like that silence risky and buffet and trading that should go hand-in-hand. Keep. In mind that training houses in Asia has very different construction than what we think of here in the West is really a thing that's ingrained in the culture and trading houses you know first of all the trade almost interpark think of so it's not financial derivatives necessarily that's that's not what you think. You should be corn or toys really whatever you can think of, and it's really not a boom and bust thing specifically the yield on these companies. Access a four percent, and it's generally perceived as one of the safest investment you can make because these companies are so systemic to the economy. It's a very different thing if you've been to Japan or press comments Negga slide more sense, but it doesn't seem as far out whenever I heard it I guess as it might to other investors. So I just found that that was interesting. So let's say the yield on those not talking about the dividend yield but. Type of return would probably be surprised. You know the way it's been prized. Let's say it's six Oh seven percent. The He's paying you know point six or seven percent for that I mean he can get say five percent spread or whatnot back with a lot of safety and his a found a place to park his cash an intelligent way. So I definitely more seed like that than any type of something you should try to mimic or any type of you know this is going to be a fantastic trade I. Don't think it'll be fantastic. It's just like a strong downside comedian single digit return. It's not too bad these days. So my only question is buffets way of doing the vix. Fars volatility I mean that's the only way that I see this is he's taking a position on increase trading and he expects that to continue in it seems like these companies that he in have kind of a stranglehold on that over in. Japan. So to me, it seemed like a really smart play. Okay. So we're going to go ahead and transition over to talking about some of the things that are coming up on the radar for TI finance tool. Stig's kick it off. I With Liberty Global on talk about this one. Let's take a quick break and hear from today sponsor. Although were value-based investors at heart, it is long been known among investors around the world that systematic or quantum based strategies have become the most successful way for professional investors to extract returns from the market. 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So in other words, it's not just cheap on absolute numbers, but also in relative numbers and just introducing liberty global its international broadband television company with rations and more than ten million customers in Europe, and it's not a small company in my cab is twelve billion dollars and they have an answer price value of twenty billion dollars. So he cares a lot. Of that too. But it is a stock that has been on my radar for quite some time as you guys know I follow a lot of different prominent vaster sort of like having I think money's POB. Right jokes about this and refers to the mass having the best investments s his unpaid analysts, which I found to be a funny way of looking at it. Seth clar men investor a really respect bought this company back in q three, two, thousand eighteen and he recently bought more here in Q. Two, twenty twenty and keep in mind that even though we're sitting here in Q. Three, we don't have any data for what he's been doing here in Q. Three this yet there will be out. Even. Since then the stock has generally continued to decline and it's now fourteen point seven percent of his portfolio. So the conviction from him is definitely high talking about what the prominent investments been doing. Berkshire has also on the stock for quite some time but the recent Detroit their position slightly in all fairness also did look like that either taught or tat made game that the current market value off the Berkshire position is only four, hundred, million dollars, and the last investor just wanted to mention here before taking more until the stock is that in Q. One Howard marks bold two million shares of the company quivalent you just above. One percent of his portfolio now again, my disclaimers. A don't want to sound like you should only buy stocks that sue investors put by. It's just really serves as a filter to perhaps where you might start looking, and then you can make up your own mind especially here in the situation with liberty global web have in. You might also really respect who bought a lot of the stock and it's now selling at even higher discount. It might be worth your time and you know sort of like weird thing s value investor I can almost not help. Herself feeling foam. But I feel foam on a very different way and of course, I'm saying this goofy way because I don't see ask with something goes up you know that's not how I feel like if something really goes down unlike should I really get up by into this? You want to say for the record though that most frequently it's not a good idea because there is a good reason why they're dropping and While the momentum is shifting but whenever you see such prominent ambassadors perhaps continue buying and buying when the price go down again, it might be not a place for you to invest, but it might be a place for you to start looking again it's not a pick for the fainted horace the momentum of the stock has changed since. February two, thousand eighteen. So keep in mind that you might be looking at A. Folding knife year and s you look closer at the stock the pick might look like it's all the places when you look at some of the key ratios, especially some of the margins or keep in mind that over the past five years liberty global has made five matrices, teaching acquisitions and also a lot of businesses. So it's not the same business. The HAB now was the have five years ago so it can be. A little tricky to compare alison apples, and initially this has been fueled by death and with a massive issue as yes. But together with strong focus on free cash flows, you really see those reserve have quickly build up and at the same time, the company has aggressively been buying back stocks that haven't been paid out in dividends, and since two thousand and sixteen as many as twenty seven percent of the outstanding has. been bought back. So if you do have a lot of faith in the management and in the business, you would definitely like that aggressive approach and the whole thing also want to mention is that asks you value the best nece whenever I see some of the things that the men's from they're saying talking about with the synergies I would probably be a big barrier that they work in European very fragmented markets so i. Would more go in Logo Taylor that specifically award phone -Sego specifically and say, okay, what's the some of the partier wanted anything else and so whenever you do decide to do your intrinsic value calculation I, guess would be quite conservative in your estimates and looking forward. Definitely do not expect a price to free cash flow to continue to who around five that's not what I'm seeing the hat went industries facing but shell term. You'll definitely see different casts coming out from liberty global but I wouldn't be surprised if this is a stock with an expected return that could digit if you can withstand the volatility that you might see. So I just wanted to mention that that's one of the stocks has been alright out the second cheapest talked enough filter but Preston I know if you have seen anything in tippy finance, she wanted to show the orients. My comments on the liberty global one. So two things really Kinda jump out at me and I'm I guess I'm a little bit more hesitant on this one I think the numbers when your value in the free cash flows it's exceptional. Amazing similar to like what we were seeing with Bank of America more. My concern on this one is really the momentum is this thing's been in a down trend like stick said, but it's it's really been a downtrend since the middle of Twenty fifteen and when you look at the volatility of the downtrend I, mean it's right inside of that volatility trend and yeah, Armenta tools is still saying this is red so I would be watching this, but I definitely wouldn't be taking a position until that thing would turn green. My concern is let much less evaluation standpoint is just when is the market going to start to recognize and realize the value that you're clearly seeing I'm seeing in all these other super investors are seeing but I do think you're going to be kind of in a falling knife scenario until the market just starts to recognize the value of it. So that's My concern with this pick. But I agree with you stick I think there's a lot of value there. It's just a matter when it starts to get recognized I've got kind of an odd one and I, don't own this but I do want to highlight it because it is coming up in the filter and this is coming up in the mid cap filter. And stick I'm curious if you even know this company have you ever heard a big lots? No, I never heard about it. So here in America I would argue most people probably know what big losses it's a retail store. It's like a TJ Maxx. Have you heard of Tj? maxx. No God I'm so ignorant president though is just it's an American thing. So you wouldn't know it's like a retail store. So like let's say Polo and you wouldn't I don't think. You'd find this a big lots but let's say you have a polo shirt and there's like a small amount of damage or like they have over stock or whatever they sell it to these retail stores at then go and sell them at a significant discount even though they're kind of like brand name things. So they're really popular here in in America. So big lots came up on the filter and because it has such a strong enterprise value and it has strong earnings. Hitting, the filter and whenever I'm looking at the top line, it's really flat. I mean this thing has literally not moved in ten years at all. It's just it makes five billion years pretty much. The answer key, this really got crushed in the march selloff. This went down to ten dollars share and today it's up at forty six dollars a share I mean. I can imagine what the intrinsic value wasn't March. When this thing hit ten dollars, it had to have been like thirty to forty percent return based on that price because case, the company's making five billion on their top line and then on their net income, they're making about two, hundred, million a year. Consistently this point is. What I would use so when I'm doing the intrinsic value on something like that and I'm using around two hundred million, I'm coming up with a fourteen percent return and that's at this recovered forty dollar this forty four dollar price I'm still getting fourteen percent return. So I think this is a company that's going to perform well in the environment that I kind of expect us to be moving towards here in the coming five years it appears like the company is very sound in their financials. They get current ratio one point two to an interest coverage ratio of nineteen. The debt to equity recently jumped up a little bit and I think it's mostly because they moved from of structure where they used to own the buildings to now were there leasing because I see on their balance sheet that capital leases have gone up significantly from where they were before. So people on twitter, hit me up if you have a better insight into this, but I kind of see that as being a. SMART play is for as leasing the properties because it gives them a little bit more flexibility may be to not have all these cap ex of sustaining building. So like they start running into problems that can just shut it down. It gives them that ability to be a little bit more flexible in how they manage their really expensive part of the business, which is all the infrastructure. So I don't know I I, see it as an interesting pick the momentum on its good ever since March. It turned green I. Don't know when our tool turned green bit. It turned green shortly after the march because it had a meteoric rise from the ten dollars something that check into own it but I do find the kind of interesting. And the other thing to note here precedent a really happy highlighted degreen momentum. You know I I tend to highlight the obvious businesses, recommend him and I guess people should also keep in mind you know they're using the filter like those are the cheapest of the cheap is companies think about the intrusion if something is very, very cheapest and if it's cheapest in the universe pro, because the price has gone down the momentum know turn red. So especially what Preston is looking for and correct me if I'm wrong here Preston you're looking at. Okay. So this is it's been very cheap but now like the Maga sorta found is about him and now it's on the way up that's what you're looking for. That's exactly it. Your pick that you have from a fundamental analysis standpoint I mean it's hard to find anything better I mean the thing is just crushing it. It's pumping out so much profit for how much you pay for each dollar of profit. It's amazing. But for whatever reason, the market is just continuing to say based on the momentum it's continuing say yeah, it's got more to fall. I. Mean You could have bought the bottom I? Just don't feel like I have the skill set to be able to say, right here's the bottom I'm going in. And I'm going to buy it. So I'm just looking for statistical when I say statistical what I'm saying were looking at the volatility of the price action for liberty. So you're looking at the volatility of the price action on a long-term basis. So for liberty, their annual volatility is around twenty three percent. So you should see the price action move within twenty percent range on an annual basis. So when the price is moving is long as it continues to move inside that call to twenty three percent trough and it's moving down in this twenty three percent trough. My expectation is that it's going to continue to do it until the price demonstrates that there's a change on the horizon, it almost be like this might be a good example like let's say we were tracking the temperature outside right in the volatility and the temperatures five percent over a a three month period of time, and I used three months because we're talking about something. That's an annual event, right so we're looking at a five percent volatility in the temperature and as long as temperature just keeps going down I'm saying, Hey, it's still winner is still going down now we hit a low of. Twenty degrees because we're up north or whatever, and then it's kind of staying that volatility range and then all of a sudden it starts going back the other way and it breaks out of that. Let's just call it five percent and I have no idea what these numbers would actually be but it went breaks out of that five percent I'm saying, hey, something's changed I. Think we're out of winner and we're about to go into the spring right? It's a very similar thing when you're trying to look at momentum for stocks, you can look at the momentum in an. Hourly Chart or you can look at momentum in a long-term trip since we're value investors were looking at them momentum from a very long period of time. That way we can say there's something here that has changed in the market. It could be a false breakout, but you can go in and look at the charts. They're pretty darn accurate. Asked him being able to forecast long-term momentum trends? So that's just my concern when I'm looking at something that is saying that screaming value but is still within that momentum trend trending down just not GONNA buy until it turns green. All right guys. So now that we had or billionaire segment and we talked about GOP finance now is the time to answer questions from the audience and this question comes from Yuri. Hey precedent stigma big fan listening for about two and a half years and I started listening right around an episode that mentioned retaliates all-weather portfolio where there's a forty sixty equity bond portfolio split. So with that, I want to know over the last six months to twelve months. How is your preferred portfolio allocation between different asset classes changed over that time period I know pressing you've mentioned in previous episodes. You're almost exclusively in Bitcoin and steak you. Seem to not be onboard with that. So I wanNA, know if you're like me someone who's not really interested in investing in bonds or what are some other options that you're seeing in powders that tie into some conversations you've had with professional asset managers that may also agree that Bonn's aren't yielding enough to justify that continued investment. So again, the question comes down to what are some different suggestions you have for portfolio allocation given the current environment our thanks. So Yuri fantastic question and I don't know that I'm GonNa give you a good answer. I'll start off with this. I definitely don't own any bonds and I'm looking at stig and he's nodding his head. You don't own any bonds rights they no. Yeah I think I think let's start with the easy part. It's interesting because at the start of the show we were talking about our expectation for interest rates to go even lower. So if you own bonds I mean that's the dream scenario. Right? The interest rates is keep going lower. The price of your bond just keeps going up I just don't trust like how much longer they're going to be able to. They being central banks be able to keep this farce alive. So from my vantage point, if you have something that has a lot of counterparty risk which bonds have complete counterparty risk like that is the last place I wanna be in the market right now like march was a perfect example when you see these big giant liquidity events where the market meltdown I think you're amateur investors will say that Oh it was. Just an emotional thing. Yeah. The emotions got hold of a Lotta people because they were looking at the supply and demand shock that was gonna come, and then what it was was it was all counterparty risk. It was derivatives blowing up it was debt blowing up it was complete impairment on a lot of balance sheets and it was forced selling people had the cell positions that didn't have counter-party risk in order to. Come up with the cash, the US dollars or whatever Fiat currency that they had their derivative or their counterparty risk denominated in the had to come up with that Fiat money in order to make good on the impairment that they had in their other positions. So I would stay away because I think that these shocks are going to continue. In fact, we might even be experiencing one right now for all, I know. The market has had a I don't know how much of a pullback bit happening quickly and these things can kind of unravel really fast because wants that impairment starts to roll. It just trickles down into all the other counterparty risk positions for everybody else and it just unravels itself in my expectation is when it happens again, the central banks are going to step in with an even bigger bazooka than they stepped in with. March and then they'll reflate it through more fiscal stimulus straight into the population, and the also do with more qe so that they can keep the interest rates continually pushed interest rates lower because they can't afford for them to go up soon how does this impact my portfolio? Well, you already mentioned it. I am heavily exposed to Bitcoin, and for people that are listening to this and saying that sounds absolutely nuts maybe it is. Maybe it is I. Don't have a good answer for you so far. It's worked out for me extremely well, I mean I've absolutely murdered twenty twenty thus far that doesn't mean that it's going to end that way but my anticipation is that it will. But instead of getting into all the nuances of that position that I have a very high concentration in I, would just tell you to really focus primarily on. Stick with the things that you understand that you know stick with things that don't have a counterparty risk because if you don't understand something and I, tell people this all the time especially with respect to bitcoin if it's not something that you understand, you're not gonNa have the temperament to continue to hold it when the price action goes in a direction that you're not prepared for especially when it's the volatile so. Like. I have a lot of conviction it because I feel like I understand technically what's happening with the code and I understand kind of the backdrop of what's going on or at least that's my impression in of course I have a bias in like anybody who has any position has a bias. So I would tell you to focus on things that you understand things that you're comfortable with and things that don't. Have counterparty risk, and that's why you look at buffet. What's he doing? He's in a lot of stocks. He's in stock city understands you go back to looking at buffets portfolio back in two, thousand, seven, two, thousand, eight, timeframe. He had a lot of bonds on his balance sheet tons because is anticipation was into the long term trend of interest rates were they just keep going down ever since nineteen eighties they just Keep going down. So of course, he's going to own that. But now where you look at where he's at, he's just sitting in cash and cash equivalents and stocks. That's what he's doing with all the retained earnings from his operational businesses, and so I would recommend people do something very similar is you need to have something in he on stocks which don't have the counterparty risk you have the risk that the. Company can dilute their shares, right? That's your counterparty risk I. Guess You could claim that that's counterparty risks that the company could step in and dilute their shares. But in general, there's no counterparty risk there when you're dealing with stocks. So that's where I would tell you to look I would focus on things that have good valuations like sticking I. Just talked about on this episode when you are buying equities and. Try to give yourself that advantage of if you are wrong, you had a large enough margin of safety in the price. Those are the things that tell you to focus on, and then the correlation is really important and this is coming from a guy that has a very highly concentrated portfolio. So here, I am saying one thing and doing something different but I tell you if you can try to correlate your. Positions that is vital that is really important. If you're wrong if you're dead wrong on one pick and it's correlated to everything else your whole portfolio doesn't move in that direction it's going to be compartmentalized as kind of the way that I would think about y correlation is so important in tippy finance tool, which we're going to give you access to it helps you piece out the correlation between your picks as well. Let's take a quick break and hear from today sponsor. With Sunpro online for Pitney Bowes, you can simply print postage stamps and she labels even when working remotely for as low as four dollars. Ninety nine cents a month you access to discounts of up to forty percent of USPS priority mail, and now up to sixty two percent off ups daily rates. Plus for being, we started billions listener you receive a free thirty day trial to get started and the free ten pound scale to ensure that you never overpay. Multiple features are included including scheduling package pig ups Amtrak shipments from departure to arrival. 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When one startup manages to solve the problem of access for everyone we call it an amazing opportunity. If you're looking for potential double digit returns with no correlation I, want to introduce you to masterworks featured on CNN Forbes and the New York Times there the first platform for investing in great works of art by the likes of bankruptcy 'cause Basquiat and many many more sign up at www dot masterworks dot io with Promo Code, WSB and skip the twenty five thousand person wait list that's www dot masterworks. With Promo Code WSB. All right back to the show. I think that's a good segue to what you ask their Yuri about redel. If anyone rebellious talks about having uncurling asset. So I think that's very timely and so whenever you talk about the all weather full, you just briefly outlining that for the audience really what rebel talks about when we talk about all well, if I follow, you was a different portfolio Mexico I just want to clarify that I third sent stocks fifteen percent in medium-term bonds Forbes launch bonds and seven point five percents in commodities and last seven point five percent in gold. Like Preston I would say that that is likely not the right way to structure portfolio right now but also wants to say that it really depends on who you are like different portfolios for different people Preston I follow the financial markets. We have an opinion about finish Magi also concentrated bats I recently talked with a few friends who've been in this wonderful situation that they're sold their company and they were like had a very different objectives than what I would imagine president. I have, which is about compounding our portfolio and they're all about not loosen principle but they're also about the didn't like volatility they would much rather have lower return and low volatility and if that's the case. Something like Y'all whether portfolio with different help you in terms of lower Tila you the way it's been structured and it gives you a decent return just give you the highest you can think of but again, that's not the objective. So I would say that a person could consider the all weather portfolio as an alternative to Dole averaging just with a lot lower volatility, and perhaps like lower return if they do not want to follow the facial monitor if it don't want to be active investors that could be a way to do it but now that you are asking. So how do we see this but we suggest and also want to say for the record now we are. Talking about rebellious rebel, recommend the all weather portfolio to invest in general. He also very strong opinion right now about how you should be positioned the market more than anyone he is active investor. The all wealth folio is a different portfolio Max for different master. So my approach really hasn't changed two months during covid nineteen. I would say the bonds are even less attractive, but they're already unattractive going to the pandemic. So the thesis for that really hasn't changed at all as sure many of you know I'm primarily inequities and at diversified away from the US, not fully still have US stocks but at diversified away to a bigger extend to international markets and having set that also just. Want to give a hand off to another resource by our friend pretender he recently this month publicist latest research on pricing the return, the US international markets, and it's published a where friends at Alpha architect and mature to link to that and the show notes. But he's just if one would be more interested in to learn more about investing to National Mangas, we've covered investing national markets quite extensively here over the past few months. So I don't want to repeat myself too much, and then also want to say that if it is possible for you Yuri if you have someone in your network, you really trust perhaps now's the time to look into private companies and it's sort of like. To come up with a guide to how can you in mass in private companies because it depends on like what you own? Competence where your friends and who do you trust. But you can definitely find higher yield than what you handed the stock market and not to speak of the Maga right now, and if you find the right people ever come with even lower risk if you do not have any network, you can also go through different investment platforms and there was a lot of great investment platforms out there. So that's the way to do it. Clearly, you know there's a middleman the had published with. Some pros and cons if you want to do that, perhaps one day began to an episode about how to go into private deals even though that's kind of like the the question this time, but giving the current environment guess my point is that if you're not dealing with one buffet billion type of money, it can be a good approach to come talk your wealth and protect your downside. Of course, also diversify away from the Maga. So there was again, you know that correlation piece. And so giving the current conditions, I would argue that you should consider having exposure to a fixed months. Her baseline goal could be an example of that and that is what rebellious have said earlier this year. So also included in his all weather portfolio, but he really talks about you know until assists of cash. GOPI. One example press dimension. Bitcoin. That's another example of that and then Dallaglio and you can even put Buffett in that would. Mention. Equities I'm primarily equities guy a more familiar with that and I like that play right now. So but really I see my portfolio in three buckets right now, equities private deals and then exposure to a fixed months baseline and for me, the latter would be smaller than the public and private ownership partly because Ado, seed as a hatch but also seed as a very interesting value to risk ratio and Les essais call it steady growth compounder. I'm just GONNA quickly explain ray values all weather portfolio for people that are listening and if they're not familiar with what it is. So with Yuri. He was describing their sixty percent bonds forty percent stocks would stig was describing was more accurate because included the commodities and gold piece actually encompassing about fifteen percent of the portfolio. The what ray had effectively discovered was that when the bond market was going up, the equity market would lag but when the Equity Market would go up the bond with lax alike there was his inverse correlation between bonds and stocks. But what was happening was is there was the stocks were twice as much volatile than the bond market. So what he did is he levered up the bond position so that it became more volatile and it was still producing. There's returns because we are in this long term declining yields in the bond market, which makes the bond prices go up for. Thirty, forty years. So he was playing this and I don't I'd be really curious if anybody out in the audience that's listening to this. If you get hit US up on twitter I'm really curious how he's managing this right now because I know he's come out publicly in stated that he thinks bonds are a terrible place to be right now and it would just shock me to see such a significant portion of his all weather portfolio still in bonds levered bonds I would suspect that's probably not the case right now but I'm sure there's somebody in our audience knows the answer and if you do not please tweet at me and I will re tweet it so. People can kind of see your response but based on historical interviews that he's done. That's how the all-weather portfolio works but I'm real curious to see what they're doing nowadays. All right. So Yuri fantastic question it's a really important one for people to think about and sticks point about it being personal choice and has to fit your personality and all the other things that you have going on in the backdrop as far as your earnings power and all those kinds of things. Those are really important considerations when you're designing your portfolio and the volatility that you're allowing yourself step into. So to help you manage this, we're going to give you free access to our finance tool. It helps you with the correlation. It helps you with the momentum helps you with the intrinsic value estimates. It helps you filter the best valued companies for the prophets that they're making does all those things and we're really excited to be able to give this to you. If somebody else wants to check this out, go to google and type in Ti p five, it should be the first thing that pops up. It's right there on our website, and if anybody else wants to get a question played on the show good ask the investors dot com you can record your question there, and if it gets played on the show, you get access to our tippy finance tool. Or guys those all the press on I had for this week's episode of the PODCAST. We see each other again next week. Thank you for listening to Ti, P to access show notes, causes or forums go to the investors podcast don't come. This show is for entertainment purposes. Only before any decisions consult a professional, this show is copyrighted by the investors podcast network written permission must be granted before syndication forecasting.

Bank of America America Preston Pysche Warren Buffett Liberty Global Berkshire hathaway Bankamerica Mr Buffet Stock City Yuri Berkshire liberty global president Goldman Sachs
Read_499 - The Bitcoin Black Hole Effect [William Clemente]

Bitcoin Audible

1:06:46 hr | Last month

Read_499 - The Bitcoin Black Hole Effect [William Clemente]

"If the us dollar really was to reach an uncontrollable level of inflation a last move by the fed may be to do this. Same trade on a federal level by printing dollars to acquire bitcoins to stack on their balance sheet. Only time will tell the best in. Bitcoin made audible. I'm guy swan and this is bitcoin. Audible welcome back everybody and thank yourself for enrolling in the bitcoin university where you will learn everything you need to know to protect yourself than our digital future and escaped the sinking ship of the. I am guy swan the guy who has read more about bitcoin than anybody else you know. And we've got an awesome read today. This is actually first time alter on the show. i think i've read a couple of pieces by him. A william clement clemente. the third by said that right but i'll have a link to his social following me rights for bitcoin rar ends bitcoin magazine on occasion So i'll have like. I said a link to his social so that you can follow him on twitter but this is just a really cool piece about the state of the financial system and how there are actually multiple feedback loops like like feedback effects within the bitcoin. Markets and the increasing financialisation of these markets with derivatives derivative tools. And and. we're actually seeing the rise of true interest rates in the collateralized loan markets and the these things could actually steamroll hyper bitcoin association and why So it's it's a really cool piece Real fast. I want to remind you always you gotta be stacking with swan bitcoin dot com slash guy in that swan spelled correctly with one in the us. It is your auto by auto withdrawal. Bitcoin savings plan. And you gotta hold your keys. Securely an independently. So don't forget to get your bit box. Owed to hardware wallet at guy. Swan spilled like my name with two n.'s. Dot com slash bit box and round out the full set. You gotta you gotta get bitcoin integrated mobile banking services with level dot code that his lv l. dot co find all of these amazing services. Our sponsors At guy swan dot com and a huge. Thank you to them for making bitcoin audible possible so without further. Ado let's get into today's read. And it's titled the bitcoin black hole effect by william clemente. The third hour savings accounts can be thought of as the some value of the energy output of our life's work inflation is a hidden tax on the common people. And is something you need to understand. And be positioned accordingly both an investor and citizen moving into the near future. Imagine the value of your life's work cutting in half every fifteen hours at no fault of your own. This is what happened during the worst case of hyperinflation ever in hungary nineteen forty-six given the unprecedented levels of money printing that have occurred in the united states since march of last year. Why haven't we experienced a dramatic rise in the prices of everyday goods and services around us. How is bitcoin the solution to this problem. What factors could accelerate this process. This article will answer these questions in vernacular that is easy to digest. What is hyper in. Layman's terms inflation. Can be defined as a greater amount of money for the same number of goods and services however hyper inflation can be defined as inflation occurring at rate greater than fifty percent a month. This means that by holding your wealth. And a hyper inflating. Currency the number of goods and services you are able to by the end of every month cuts in half the only way to maintain purchasing power in this environment would be to own a scarce asset that is appreciating relative to that currency as history has shown. This phenomenon is crippling to a nation's economy. As many participants are able to buy fewer goods and services thus shrinking economic output this shrinking and output causes businesses to cut back costs and ultimately a decrease in employment levels a decrease in jobs leaves a surplus of demand for the available supply of jobs. Meaning wages are bid down to the lowest taker and many are left out of work. This is contrary to the current environment of growth. We've become accustomed to where growth funded by debt leads to increasingly more jobs. This increase leads to a surplus of jobs for the number of skilled laborer seeking them thus causing wages to rise over time. We've established how hyper inflation would be detrimental to you. But why haven't we experienced it yet. Since twenty twenty after historic levels of money supply expansion through quantitative easing and liquidity inserted into the fixed income market to understand this. We must understand how we got to this point. Monetary policy backdrop following the two thousand and eight debt crisis that brought the global economy to the verge of a deflationary depression. Liquidity was inserted into the system to offset the destruction of value caused by the crises. Since then this liquidity insertion mainly taking place through quantitative easing has been the main tool used to keep the economy afloat along with the lowering of interest rates by inserting liquidity to the bond market. The fed is able to artificially inflate asset prices and other nominally measured values giving the illusion of real growth by lowering interest rates. The fed essentially gives businesses a larger profit margin which appears as economic growth but in reality is just decrease of interest rates these to quote tools. Qe and interest rate lowering have been used alongside each other to artificially stimulate economic growth. This was until after the march twenty twenty liquidity event that forced the fed to lower rates drastically coming close to zero percent thus leaving them no wiggle room to use interest rate lowering as an effective method of stimulation moving forward with businesses having to shut due to the pandemic revenues were unexpectedly dropped to historically low levels for many industries. This loss of revenues made it nearly impossible for some businesses to pay off their debts especially given how little savings many businesses are incentivized to have rather these businesses are incentivized via inflationary. Monetary policy to continually reinvest revenues into further growth instead of saving which would lose spending power sitting idle. This loss of revenues created a shortage of and put pressure on the fed to provide stimulus relief. In addition to this countries around the world flock to dollars and treasuries as a safe haven during this time of panic this massive demand for dollars needed to be offset by massive levels of stimulated liquidity insertion as well with this massive demand for dollars and interest rates point two five percent from zero. The fed had no choice but to insert historic amounts of liquidity into the system to offset this deflationary pressure in the chart below. You can clearly see the uptick in the value of the us. Dollar in march thus indicating. Strong deflation this is followed by a steady decrease in value up to today as the fed continues to insert more liquidity inflating. The dollar back. To some extent of quote equilibrium this insertion of liquidity weakens the dollar value while increasing the value of assets measured in dollars. How much liquidity did it take to cause inflationary forces to outweigh the deflationary. The answer is a lot over the last twelve months alone. The federal reserve balance sheet grew from four trillion to six point seven trillion dollars or over forty one percent of the entire supply of dollars that have ever existed the new one point nine trillion dollar stimulus plan. Proposed is greater than all the money printing. In twenty twenty combined this can be visualized below chart this chart as well as a few others earlier in this article. Demonstrating let is going through of. This is from the saint. Louis fed and we see a dramatic uptick in the federal reserve balance sheet in twenty twenty in chart. This is the simple reason why we have seen all time. Highs in the stock market since march and a massive rally in housing prices liquidity. Insertion is the only rational explanation for the rallies seen recently in almost every asset as they defied all logic for markets to have recovered so drastically during times of unprecedented debt levels and uncertainty for the economy during deflation. The value of the dollar increases as the value of assets decreases during inflation. The value of the dollar decreases as the value of assets increases the indescribable amounts of liquidity calls asset prices to rise by default given the definition of inflation is more dollars for the same amount of goods chart. And we just have another saint louis fed chart here. I m two money supply since the nineteen eighties and yet again we see a significant uptick in march twenty twenty and continued growth from there And funny enough They just announced that they will stop tracking the into money stock. Which is a pretty bad omen if you ask me in chart. This increase in asset prices is the main reason we have yet to see broader inflationary effects to traditional indexes such as the cpi or consumer price index rather than trickling down into the broader economy. Money is being stuffed into assets. This can be illustrated by the velocity of money. The velocity of money is a measurement of how often money is changing hands in the chart below. You can clearly see. As the expansion of the fed's balance sheet increases the velocity of into money. Stock is accelerating downwards. This phenomenon has massive societal implications. It means the wealth gap is increasing as the newly created. Money is put in the hands of the wealthy and stuffed into assets never trickling down at the same time. The average person with a savings account is getting their spending power diluted. This shows the paradox and hypocrisy of the fed acting as if money printing benefits the people but in fact has the complete opposite effect many of the social issues. We have seen unfold. In recent years can at least partially be accredited. Two decades of inflationary monetary policy causing greater wealth concentration. However eventually the newly created money will likely move into the broader over time as wealthy people sell assets to purchase goods and services after all assets are ultimately bought not for the ownership of the asset itself but for the hope of being able to buy more goods with the appreciation in value of those assets in addition to the q. e. that is being stuffed into asset market capitalizations. We have seen some you. Bi universal basic income as well. This is the direct insertion of liquidity into the hands of the people. However we have likely not seen the effects of this either as the uncertainty of the pandemic has incentivized austerity not to mention the limitation of services to currently by no travel no dining movies shopping etc once the uncertainty from the pandemic passes we are likely to see the full effects of the money supply expansion as people begin to buy more goods and services. Now that we've established how high levels of inflation have a high likelihood of taking place. Let's take a look at the solution. Bitcoin bitcoins unique. Properties traditionally the scarce asset of choice investors flocked to during latianara environments has been gold that is until bitcoin was founded in two thousand and nine as a ten x improvement on the properties that make gold and attractive asset to hold being a programmatic protocol existing through the internet. The amount of bitcoin supply can be audited at any time by anyone. Eighteen million six hundred thousand two hundred at the time of writing. This makes it absolutely scarce. There will only ever be twenty one million bitcoins in existence with the final coin. Being mind sometime around the year twenty one forty another key aspect of bitcoin that differentiates it from any other asset is its four year having cycles for simplicity purposes. We can describe this as the rate of supply of new bitcoins. Being created is cut in half every four years when these happenings occur demand can stay the same but price will go up by default. This initial impulse is what gives each bitcoin. Price runup momentum the security in two thousand twelve twenty sixteen in most recently in may twenty twenty. The chart above illustrates the supply of bitcoin. The blue line against the rate of new supply of coins which diminishes over time the orange line begin chart. This is As i often say the most important chart in bitcoin and the heart of what bitcoin is. This is a perfectly predictable. Stable monetary schedule. It is the bitcoin. Monetary inflation chart That we can see going out a hundred years into the future and are able to determine what it will be roughly at that given time if you have seen it you know exactly what i'm talking about. If you haven't followed the link in the show notes so that you can see it in chart this diminishing supply can be put into perspective. By considering the following there are eighteen point five million coins after twelve years of existence but the final coin will take nearly forty years to be introduced into supply. This means you're measuring something. Becoming exponentially scarcer bitcoin in something that is becoming exponentially less scarce. Us dollars three factors accelerating bitcoins black effect. This effect is accelerated by several phenomena. I think are worth understanding. The speculative attack on. Us dollars made popular by pierre. Rashard the thesis of a new risk free rate derived from bitcoin and the concept of lending over collateralisation that is ineffective seeking out this risk. Free trade both conceptualized and made popular by preston pysche. Pierre shards speculative attack speculative attack is the idea of leveraging the collapsing us dollar to acquire more bitcoin early in the transition to this new system based on the bitcoin monetary network as bitcoin appreciates in us dollar value. It makes the dollar denominated loan taken out to buy the coins easily payable this visual created by chris's. Btc illustrates this well chart. This is actually the same graphic that we In the piece crisis that we read very recently asset. Dna explaining bitcoins speculative attack. So if you want to kind of get a deeper dive on this concept and a whole episode dedicated to it. It is read for ninety three and you can find it on bitcoin audible dot com and just search in the library in chart. This concept has already happened. In the case of michael sailors micro strategy finalized on december twelfth twenty twenty micro strategy issued six hundred fifty million dollars of convertible debt notes at a point seven five percent annual interest rate using the capital to acquire more bitcoin sailor effectively leveraged the depreciating. Us dollar to stack more coins on his balance sheet which are appreciating. In my humble opinion. I see this as a genius. Move and one that others will likely copy in the coming months if the us dollar really was to reach an uncontrollable level of inflation. A last move by the fed may be to do this. Same trade on a federal level by printing dollars to acquire bitcoins to stack on their balance sheet. Only time will tell preston pitches. yield spread over collateralisation thesis. Recently preston fish has said that. He's starting to think hyper. Bitcoin is asian might be less qualitative and more quantitative in remarks. He made earlier in the year. He often suggested that the breakdown in fiat with for from an erosion of trust this trust didn't have a numeric value. which makes it difficult to determine wind. Such an event could occur but based on his more recent comments. Maybe it is becoming more quantitative. For example during a recent show with peter mccormick he talked about institutional investors and retail investors. Like being able to capture near risk free returns in the big win derivatives market since bitcoin is a very volatile asset buying the underlying and selling longer dated futures simultaneously provides substantial returns especially when compared to any other financial markets traded with this much liquidity. As an example of this. i'd like to reference a recent tweet from data analyst. Willie woo tweet from. Willie woo plan b quoted in a conversation. We had the right now looking at my trade screen. Forty six thousand four hundred sixty one dollars for june futures contract forty two thousand eight hundred and seventy three dollars. Btc price by btc sell futures market neutral. I pocket three thousand five hundred and eighty eight dollars in yield holding those positions to june expiry. That's eight point. Four percent return over four point five months in tweet unlike traditional debt markets. Much of lending in the crypto economy is done with over collateralisation for example if a person wanted to borrow one. Btc today they might need to deposit to btc worth of value while paying a nine point. Seven five percent annual interest rate this over collateralisation process is in effect causing more and more bitcoin to be locked into escrow while also protecting the btc lenders from default because the btc markets trade twenty four hours a day and three hundred sixty five days a year. now it's important to highlight that not all lending and borrowing platforms are requiring over collateralisation today particularly for institutional borrowers but many suspect as prices become even more volatile moving forward. Depositors will demand such over collateralisation to protect their funds unlike the traditional fractional reserve system that most market participants are accustomed to the crypto economy. Is dramatically different this shift to over. Collateralized is how risk is reduced between borrowers and lenders so if a person has a meaningful amount of bitcoin they can now borrow against that bitcoin to conduct the risk free trades described above in the futures market to keep adding additional yield to their portfolio. This appears to be providing an incentive structure to make bitcoin even more scarce and sought after as quote perfect collateral with no counterparty risk and near immediate liquidity. In fact this can be seen by current lending rates today. If a person. Were to deposit usb c onto a lending platform the interest being paid is double that of bitcoin. This is a crazy thought for people in the traditional finance world that view the quote risks of bitcoin to be indescribably higher than fiat currencies. But here it is on every lending platform around the world and in the free and open crypto market lending rates for fiat. Nine point six percent are higher than bitcoin. Four point five percent an additional consideration when thinking about the implications of this long short near risk free investment strategy is that it becomes more lucrative as volatility in prices become more dramatic. This means more and more. Bitcoin will be locked into escrow as the trade becomes more popular. Not only are traders implementing. This strategy locking up the bitcoins until the duration of contract is complete for european style contracts. But for physically settled exchanges the escrow to write the contract is one hundred percent. Collateralized on many exchanges so if the spreads provide greater returns for longer duration contracts. Does bitcoin up for even longer terms now. If this dynamic were true we should see the open interest for such derivatives. Grow over time. And here's the chart. Begin chart this actually if you go to the block crypto dot com and select data and the futures markets essentially all of these all of these charts just show a rapid increase from about september october last year into january and february of two thousand and twenty one on and in fact just to get an idea of back at right at the beginning of november of twenty twenty the entire market the entire open interest of bitcoin futures was right around four billion dollars and right now it is bouncing around between sixteen and nineteen billion dollars which is a four to five x increase in just four months of the link in the show notes if you want to check it out in chart given the coins are already being removed from the vailable supply or off exchanges at a record pace. This concept described by preston pitch will just accelerate the supply suffocation already occurring. The chart below illustrates the rate. At which coins are already being withdrawn from exchanges therefore not available to be bought chart if you have not seen the glass node Dot com chart of the balance on bitcoin exchanges and seen the incredible and persistent drop all the way back from march april and may of last year and they drop which continues representing removing supply from the market. You absolutely need to. This is a really big deal and we'll talk about it in the guys take afterward in chart bitcoins. Black hole effect on asset prices. Another important point that pitch discussed during the what. Bitcoin did podcast. Was this idea that lending rates will go higher. He suggested that is the price. In volatility grows in magnitude it could drive an influx of borrowing interest while also reducing bitcoin deposits thus driving the free and open interest rates into these markets higher. In fact it could potentially set off a light bulb moment for traditional fixed income investors as they viewed the disparity between nerpa lending rates and double digit free and open crypto rates. This concern only becomes more likely as bitcoin breaches trillion dollars market cap and is taken more seriously by global banks payment processors and institutions alike. If such a scenario would play out. One can't help imagining the result. It could have on discount rates and capitalization rates for equities especially in a world where everyone seems to believe. Inflation doesn't exist and rates continue. Go negative pitch used an example on the show where he suggested that if the market started to agree with. Us dc lending rates at ten percent that means equity p e ratios would need to be priced at ten or lower to attract big corners out of their position and into stocks as we know. Current market premiums are priced at thirty to thirty five times earnings today. So if such a scenario were to occur it would reprise. Stocks at two thirds. The price of today in bitcoin terms finally not forget about the one hundred twenty trillion dollar traditional fixed income market. What would it mean for that. Well if the entire market is denominated in eroding currency that the rest of the business world stops using to conduct economic calculation. I suspect it results in intense impairment for the owners of such financial instruments all right and that concludes the bitcoin black hole effect. And it's a combination of ideas from numerous concept's around how the value is basically self driving in the bitcoin. Space right now and other factors that could contribute to this on. I wanna talk about this For a little bit. Even though i'm a little late on time again but Let's go ahead and take a break and hit our sponsor and then we will come right back. The first rule of bitcoin is not your keys. Not your coins. The second rule of bitcoin is not your keys. Not your coins. Bitcoin is a revolution in the you can securely and independently hold value outside of a political or financial institution and the safest way to realize. This is with a secure easy to use hardware wallet like the bit box. Oa-to it is open source made a really sleek design. And he's even got a little screen saver with the box symbol in it bounces around And like an idiot actually watched it for like fifteen minutes today waiting for to hit in the corner because i've watched that office episode recently But the backup bras. Says is on a micro sd card. It takes just a few seconds and the bit box. Alp is as simple as it gets. If you have any substantial savings in bitcoin you need to take the next step and get a solid hardware wallet. Check out the bit box at guys. Swan dot com slash. Bit box all right so we start this out. This one's william clemente Which we have not read anything from him before on the show. But i really liked this article on the hidden a lot of stuff that we've kind of we've talked on in different aspects Own the show before but never quite altogether. I don't think But if you want to dive a little bit deeper into a lot of these different concepts. I'll have Like i think probably three or four different episodes in the show notes that you can dig into. So he hits. This hits this off Basically laying out the current conditions of the economy and The main data points that we know and we can pull from Which If we were going to state How the economy is doing right now. I would maybe characterize it as miserable on. That's a pretty pretty good word for it but i we have the With all the quantitative easing and liquidity provisioning that the federal reserve has done. We've had a massive increase in the money stock on into in one as well but into a more Pronounced because in two increases Or includes debt instruments on ends as he talks about with the low monetary velocity Money has not been exchanging hands. It's been accumulating and the people who get the money. I which are the wealthy so the into money stock has absolutely skyrocketed And there are a number of charts in this piece. I think i only can win into like half of them may be during the read. So if you wanna see these from the fred from a saint louis fed a definitely check out the article so that you can kind of see these data points in the charts that go along this to kind of illustrate this but since the end to stock is actually not going to be recorded anymore according to the saint louis fed. I haven't really dug more into this. Specifically i don't i don't know exactly this like across the board. Why is this decision. Made been made but this just seems like a seriously bad omen to me. You know this is this is. This is kind of an admission of defeat in a sense. I think they just know. The chart is going to look horrific going forward and just like in good central bank fashion. When real data does not work out in their favor they either change the calculation on the political system in the cpi They cook the books to cover it up. See quantitative easing markets and asset prices or digits. Stop reporting it. Because it doesn't look good so this may be less time. We have data points on the money stock. And i don't think there's really any good way to measure that independently on the banks would have to basically freely report that Because a lot of its behind closed. Doors so i don't. I don't know if we'll ever actually have good data points on that. We'll see a curious if anybody out there knows any other data points or something. That does a good job of estimating calculating the consequences of that. I'd love to hear about it. Because i use the saint louis a lot. And that's an important metric so might be gone but anyway of so we're actually already seeing the effects of the inflation and this is even with the money velocity down so one of the charts that were shown was how steeply declined. The money velocity is and the idea here is that they have issued massive massive amounts of new debt and just flooded this into the financial markets in liquidity efforts to keep up repo markets in treasury markets. And all this stuff in their their keynesian analogy of were to keep the engine running Would instead what's happened. This was to fuel economic activity right. But because uncertainty is so high and debts have been so unsustainable they've been using it basically to leverage and pay off the unsustainable debts that they had prior And essentially the wealthy have gotten this this money at no cost and they've turned around and done you know things like stock buybacks to make themselves wealthier And this is where we get insane p e ratios that. He talks about preston pitch discussing later on where equities developed this huge monetary premium and all the valuing models of stocks. Basically goes out the window and you know the wealthier all buying real estate just to park values and you get so many so much real estate that just sits empty get same thing in commodities and treasuries everything that the wealthy can get their hands on that will actually hold value for Period of time because servicing the debt cost them nearly nothing which was the whole point of issuing new debt is because basically our previous liabilities were not fundable on. They couldn't manage it so on. It was either collapsed or put in lower interest debt to pay off the higher interest because of this it does almost nothing to produce like to boost actual economic production and like a healthy economy. In fact it does the exact opposite. Right it produces an incredibly unhealthy economy. It prolongs all the misallocation that got us into this problem. In the first place and fuels massive stock market speculation and the paper economy so food has real costs and diminishing returns but if you buy stocks the the you know the there's no real costs in doing so and incredibly high return. So why would anybody bother making food or toilet paper. You know the economic incentive to produce the real things that we we really. We actually need to survive. starts to get priced out of the market. It gets drowned out by empty. Asset price runs and paper returns And this leads to people. Parking massive amounts of money and none of it gets rest gets to the rest of the economy. This also prevents the inflation from occurring in consumer goods until further down the line instead We have an exaggerated short term Really really potent canton effect where everything of real value and everything that sustains increases in value in the long run gets completely priced out of the middle class and lower class Potential like they can no longer access these things And their retirements get obliterated on because you know good luck with your social security paying for houses that go up. Twenty percent in price a year on But that inflation will come down the line. it's inevitable It just takes a little while but we're beginning to see it. We're already beginning seat if anybody's fill up your gas tank recently In fact i actually saw a thread earlier today. Trying to hunt it down again but i've not had any luck. I could've sworn i re tweeted it or made a comment on it. And i'm not finding in my list anywhere and i'm not finding searches. I'm gonna keep hunting but it was really good There was a bunch of screenshots of people. Getting a restaurant owners ends like other people being told by their suppliers that announcing increases in price like one was like five percent across the board. All bread Bread related products or whatever are increased by six percent on and the range in conversation like like. The threat of a lot of people were jumping in with other examples. And how they've seen the exact same thing and this was all really really recent And some were pretty incredible. One even said they'd seen products That have changed as high as forty percent over the past like like four to six months or something like that There was a lot of five percent six percent seven point five percent all of all of this range of just like prices going up. And i feel freda. Send us any questions or concerns. You have blah blah blah and like. I said anybody who's filled up their gas tank recently should notice. The price has risen If you go back six seven months. Or whatever i think it was like abbas seeing it regularly like two dollars two dollars and two sent mike in my area now. It's like two fifty to sixty around there. I mean that's twenty five percent you know And obviously it always fluctuates and part of this is inflation. But i think a lot of it is actually condie executive orders. That biden has done recently. I think he's like seventy executive orders in a matter of weeks on and a couple of them have hit the energy sector in the. Us really hard on particularly. I heard something about nevada getting just hit with Some fracking thing out specifically that was basically just made some subset of the work. Bear basically just banned I don't know any great details about it but I know all the all the green new deal stuff on this going to be coming down the line. We're probably gonna end up in a situation. Like france led to the elvis vests and They had like the price of energy. Ll double or triple or something. And i mean. I mean the consequences over there have been staggering And i think we'll probably see the same thing on even outside of just inflation in general on the access to energy will continue to increase and get worse and as we've seen like our infrastructure and the the energy markets themselves have gotten more fragile on and more poorly maintained because they age and don't properly replace them and basically you know like we have this crisis in texas. Where i'm they've relied so much on renewables in the renewable shut down when the snow comes through and they've they've lost so many of their backup like the gas overflow Uh systems and it just just a halt the conditions of all it it just got worse and worse and worse and worse and it's gonna compound on itself as costs go up and we aren't producing anything in everybody's just chasing pacer paper prophets everywhere so anyway like regardless just the fundamentals across the board. But there's a thousand things that you can point at as to why but these are all just systemic issues that are playing out in a lot of different ways and ultimately the money is is at the heart of everything here and this is. This is what we're seeing this is this is this is the collapse of a society. you know this is a this is an absolutely historic debt bubble A finally like every empire every empire collapses because of debts everyone look at history. We learned nothing and no. Nobody's even stopping to think that somehow it's different now somehow time that the major empires of the day have collapsed under their own financial incompetence and the debts. They ran up Their hubris Somehow it's different now because we have fiat it. Just it's an embarrassment but you know. I guess it's a cycle on and this happens all the time like this is kind of hay is across the board and you get all the social unrest. You get You get the rising inequality like it's the same story over and over and over again like every book of history just has after example and in you just read it and you're like holy shit. This explains what happened last week. You know like the this is a perfect copy. Pasta of of the conditions and the cultural the culture rot in everything that is going on today. This isn't a new story. This is the oldest trope in the book anyway. Get ready If you're not holding bitcoin or some other hard asset You were really going to feel the full consequences of all that poverty paper in In the next year or two and basically every metric Is backing up. That it's only gonna get worse and we've actually seen The five year ten year and twenty year treasury yields Start to spike which were very much suggests we're going to go back into Really really bad recession. And we're already we're already there right You know the holding onto some big winner getting exposure to. Bitcoin may very well be a necessity soon. Rather than a At least in my estimate rather than a nice to have But yeah off topic from the from the article not trying to get all doomsday. Think if we properly prepare and we look at it. I mean and remember. This is something that i've told people in the past like I have a conversation with my wife. My sister whatever and they'll be like. Oh my god. How bad is it going to be in. And i start. I try to remind them that you know this is. This is a monetary crisis right like it's not like the factories disappear snot. Like the we lose the ability to actually produce things or like the labor disappears like it's a monetary crisis. The ability to communicate value is breaking down which means that. If you actually have good money you'll be the only one with access to the resources. And that's what i think. We're getting an exaggerated effect in that. Because bitcoin is not only good money. But it's also one that is growing massively in the middle of just such an environment in which the bad money is getting worse. And all of the all of the bad conditions of that money are coming into coming to fruition. We're in the in game of keynesianism so to speak. So if you're in the bitcoin economy all prices are plummeting in relation to bitcoin. We're seeing a massive Natural deflation in the bitcoin economy because the supply or excuse me because the demand of trusted money. The demand of a sounder money is skyrocketing At the exact same time. This is predictable. Supplies stuck right where it's always been and it tells us exactly where we're going to be nothing. Ambiguous about it whatsoever but sucks. The average person is You know kind of being forced into speculating on the stock market Like ignorantly who don't know anything about the stock market or rushing to get in and buy equities and stocks than there might be like a really big crash while i mean am not maybe not Like like we saw in japan and we saw in Germany like during the hyperinflation. The german mark is some part of the beginning. Like what really kicked it off as people thought they were making boo. Who's of money in the german stock market on because they were having massive returns. But that was there were having nominal returns. They're actually doing is they. Were buying and selling a stock. That was just matching inflation and then they have a whole lot to have a whole lot more marks but in the mark started devaluing Like you just don't want to hold the marks but it makes perfect sense that this starts into you know everybody sees all these prices going. Everybody floods into the financial markets. Get massively massively bloated. On in fact another really great one is Another great pet. Great piece is a part of the gradually then suddenly series the great deep financial education right. So i don't forget it by Parker lewis saw a good peace and talks exactly about like how Bloated and over stimulated the financial markets and financial products into relatives in liabilities. And all of these things have become specifically because the simple ability to you know learn a skill produce on the market and then save that the which is a huge risk right. You dedicate years of your life and developing experience and skills. In order to do this is one of the greatest risk of your life is what you decide to dedicate your your productive enterprises in your economic life to producing for the world. This is one of the greatest risk we ever risks and investments. We take in our entire life and then it's stolen from us after we do it Like the fact that you can't just save money and the value isn't bleeding now. We're also forced into stock traders now also forced into becoming you know. Vc investors In order to just hold onto the value that we have already risk and we have already worked for him. we have already earned on and that That is going to unravel But that's where we are right now. It was really good quote. Actually by william in this piece A single out says quote at the same time. The average person with savings account is getting their spending power deluded. This shows the paradox and hypocrisy of the fed acting as if money printing benefits the people but in fact has the complete opposite effect end quote. So this is the canton effect for those. Who don't know and you'll hear about this from bitcoin offers a million different ways Because it is absolutely one of those poisonous things and it is where inequality comes from and it is not a product of free. Markets is a product of a central bank Effectively socialist monetary system But we recently talked about this actually in read four. Eighty nine this when moved by c. k. And i think he wrote it with somebody else. I can't remember the top of my head that's Sorry to whoever that else that was on but a a christian. Ck snark Is called the canton affect two point. Zero read for eighty nine have linked to that in the show notes on. But it's exactly how like the fact that someone is issuing new money. Whoever gets that money. I gets the gets essentially free or an incredibly cheap access to trillions in new money and they use it to bid up all of the really valuable goods in society and it makes them unreachable to the average person. You want to own a house. Guess what it's going to get twenty percent more expensive every year. The most critical shelter literally a food water shelter shelter is going to get Continuously increase more expensive every single year. Because it's actually a valuable scarce asset and it's one of those things is that the mental framing of trying to wrap your head around what that looks like under a sound money economy know people. Ask me it's really difficult. It's really difficult to have people. Ask me all the time. How do you afford a house if you can't go into debt and i'm like well the cycle of cheap debt to buy a house to to buy so. The house goes up in price so that you can afford the debt that like. That's why it's so hard to afford a house to begin with if the house price fell every year than only people who bought houses because they needed a place to live would buy the house. So you can't take the consequences of debt based fiat market. And then ask how you would how you would deal with those consequences in a in a naturally deflationary sound money economy because it doesn't exist in a naturally deflationary the A sound money economy. Nobody's going to buy like a third. A third of the real estate around manhattan sits empty. Because it's just rich people parking value. Do you know what that does to the price of housing to the price of rent there is a massive monetary premium. Own real estate. That does not need to be there and it is directly tied to our homeless problem. Because it's incredibly difficult to afford shelter when people are using it to park billions of dollars in value and leave it empty. It's a consequence of our money and you're brought up deflation And william talks about this Because this is something really important to point out and a lot of people. Don't understand this Like william talks about it in this piece correctly as a negative thing That's because we're talking about debt deflation. This is very different from natural deflation and most people do not understand the difference in in that in those contexts. So debt deflation. Maybe let's do is try to just do an acceptable. There's a hundred people and let's say half of them or more are broke and jobless got one hundred people and they can't really afford anything But the but we've got fifty brand new ipads apple releases some new ipad and there's only fifty of 'em all one hundred just got issued a credit card and almost all of them couldn't afford it on you know everybody's everybody's doing this on debt. They don't actually have the money to buy this ipad. They all have credit cards so now rush out and buy the ipad and the people who could actually by the ipad. Five hundred dollars now have credit card to bid it up to a thousand dollars because there's one hundred people chasing the ipad even though there's only fifty and even though a ton of them can't afford it they're able to put it on their credit card so the ipad gets bid up to a thousand dollars and the people who could afford five hundred. Now have to pay a thousand dollars and everybody who couldn't afford it has put a thousand dollars on their credit card. us during this part this is this is the first stage of a debt bubble This is what is when the economy looks like things are great right apple reports huge numbers. They've issued a whole bunch of new apple cards to customers. Revenues are high. The money velocity is high. The whole works right. Everything looks beautiful politicians or bragging about it. Our apple hired a bunch of new apple geniuses bla-bla-bla happy days will now now the bills start coming to. Maybe they get you know zero percent for like three months. And you know everybody kinda squeeze by and they're just barely barely get by but now the monthly bills start coming doom and after about the fourth or fifth month A bunch of people can't make a payment on now they got now. They got the interest coming in full and now they get a penalty. They get a penalty on top of what they owe and their interest rates. Go up after a year. Everybody's just barely squeezing by and stretching as far as they can But the because everybody's maxed out credit cards apple sales go down so they have to fire a couple of their apple geniuses and after a year it becomes clear that more than half of this debt is about an obliterated and tons of tons of them try to save themselves by selling their ipads in the secondary market to try to escape from underneath least fund. A little bit Pay for a little bit more of their credit card before they they basically will basically become destitute. So the price falls to seventy five dollars an ipad because everybody's dumping their ipads onto the market. Apple's not selling anything anymore and a bunch of the people have to default on their credit. cards the cards get frozen. Two thirds of the original bills don't get paid And and that's because not only could have people not afford it but the people who could afford it had to pay a much higher price that they couldn't afford just to get the ipad because the prices were bid up everything was a hugely inflated price. Prices inflated markets everything. This is the debt deflation scenario. The prices collapsed now in the market The the amount of debt collapses you get defaults an actual money supply disappears from circulation and this is horrible because now the price of ipads were were thousand dollars rather than correcting back to the natural five hundred dollars. Plummet all the way to like a hundred and this is kind of what we see in the housing markets. Is you get this exaggerated effect because you had such an exaggerated market going into it and rightfully so economists recognized this as a terrible thing. This is the horrible fallout of debt based economy paying the price of a of a lie of manipulation about the price of dead so when an economist tells you oh deflation is the devil and you could never have an economy work on it well. That's we're drowning in debt. And they're absolutely right in the current situation but it's also because they're stupid and i can't think of a world that's not run on their disaster of a fiat liability ridden system natural deflation on the other hand is what we got during the industrial revolution from like the eighteen seventies to maybe the beginning of the nineteen hundreds which was actually one of the greatest sustained increases in living standards that this in in the us entire history And it was when we were as shirley on the gold standard as we ever were And that is natural deflation And it is produced by the simple truth that if we can make ten percent more stuff after a year of building machines and factories and innovating and making new processes and turning what was a manual shipping process into a molding and stamping process If but we have. We can produce ten percent more stuff. But we have roughly the same amount of money in circulation. Everybody's wages can by ten percent more goods that's natural deflation. So you get paid the same. One thousand dollars your. Let's say your monthly salaries thousand dollars one year and A cost you five hundred dollars for all of your groceries but five years down the road. There's massive economic progress innovation. We keep producing where things are machines. Get better we put more robots to work now that same one thousand dollars five years later it now only cost two hundred fifty for the same amount of groceries and you actually get higher quality cleaner food. That is natural deflation. The value of your money just doubled. The debt. deflation scenario is when over inflated prices get overcorrected because of an imbalance. A natural deflation scenario is when everybody gets more productive. And we all share the rewards of that extra productivity. It's important not to confuse the to the debt deflation scenario is destructive and it's Representative of a massive correction in a broken market on the market trying to heal itself. And that hurts very bad While the other is extremely desirable and it is exactly what you want to happen. When everybody gets wealthier we all become more efficient We all get more leisure time Our wages go further -bility to quit a job. That's treating us badly and go to a better a higher standard job with air conditioning. And better hours and better vacation time gets easier and easier. that is the natural deflation and that not only. Do we definitely want that. We don't want an economy does anything but that that's the whole point of an economy if you if you don't get the reward of being able to make more stuff and having better quality stuff the halloween doing it. It's not like we go to work just because we like to work. Point is to make your life better. Thank god we actually have bitcoin to potentially transition us which is what we are seeing back to real prices and now this is already gone too long. This is where this is where the really interesting thing happens. And i really want to actually reached out to preston pysche To come on the show. Because i want him to break down this concept of the over collateralisation and the real interest rates. Because this is something that. I've been thinking about for a while. But i don't think i know the intricacies of The debt markets in the the collateralized loan markets. Well enough to kind of articulate this right now. But i want to do some digging. I'd love to be able to ask him some questions about it. So if you wanna Bombard him on twitter and helped me out to get breast and fish on the show. I would love you. Don't don't annoy the snot out of him. Bought him pass from a little bit but the the fact that will actually get like we have horribly horribly manipulated interest rates right now right and the price of time is one of the most critical prices in the economy. So if you manipulate the price of the interest of the price of time the price of capital you spend today versus actually producing and saving for the future you manipulate you manipulate and corrupt the value of everything. Everything is dependent on the price of time. The interest rate is one of the most important prices in the economy. And you describe everything if you just start arbitrarily dictating what that is so and even more is the interest rate cannot go up on. This was actually a for the for the us government. It cannot go up. There was nick. Carter got it ran around here somewhere Tweet something out about a macro voices. Podcast that i hadn't listened to yet but i've got my lineup now Okay here it is here. It is out of my mind was blown. This is nick. Carter by the way my mind was blown when i heard this from louis vincent gav on macro voices in one stat. Why the us government cannot afford for rates for rates to rise so Quote this is louis vincent gab or gave pronounce that well. I think a lot of that will depend on central bank policies central banks at some point. You know as bond yields inch higher which they are doing. we'll have to make a choice of either. You know fully embracing yield curve control and in essence crushing our currencies in the process option. One or letting the bond yields go back to natural levels but in doing so you know really putting pressure on the government to put things in context a fifty basis points at point five percent by the way basis points is one one hundred percent basis point increase in the cost of funding for the. Us government is equal to the cost. The annual cost of the us navy thirty basis point increase is equivalent to the cos