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You're listening to Teip on today's show, we have our good friend Colin Roache with us. Colin has managed hundreds of millions of dollars for the past two decades, and he always comes with unique insights. During the 2008 financial crash, Colin's private investment partnership was up 15 percent for the year. Colin is the founder of Pragmatic Capitalism and the author of multiple investing books and a regular guest on Bloomberg and major financial news outlets. On the show today, we talk about the current market conditions and various trade ideas for navigating this landscape.


So with that, let's go ahead and get started.


You were listening to the investor's podcast. When 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 today's show, I'm your host. Brought us in and as always, I'm here with my co-host, Preston Peche. On today's show, we'll be talking about equities, inflation and what to expect in the financial markets. Therefore, we are also excited to bring back one of my favorite guest, Colin Roach.


Colin, thank you so much for joining us today. Hey, guys, thanks for having me. So, Colin, we talked a lot about the potential of a new monetary system here on our show, we discussed the scenario, a fiat based system with the US dollar is the most important global reserve 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 at the other side of the spectrum, we also discussed 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 that they would say that for three hundred episodes we talked of everything in between, but we were curious to hear how you see this. How do you expect the monetary system to look like in college five years or 20 years from now? I've thought about this a lot, especially with the rise of Bitcoin and 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 peer to peer transactions.


But here's the big kicker. 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 like the US dollar? To a large degree, this is one of the big drivers is it's backed by a government that enforces it. I don't mean men with guns.


I mean people are able to take other people to court, basically. So from the beginning of time, all money is credit. And what I mean by that is that all money is basically an agreement between two parties. I mean, in the ancient times, the monetary system was basically developed from agrarian agreements where a farmer, for instance, would agree to lend a certain amount of seed to somebody else who needed to grow some crops. And they would have this financial agreement between the two of them to next season, deliver a certain amount of seed back to the farmer.


So, for instance, you needed one hundred acres of corn grown. You would lend the amount of seed to make that doable. And 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. And the thing that makes a government somewhat essential in all of this is that if those two parties ever have a disagreement, Farmer A can take Farmer B to court and he can enforce that contract and it makes the money more credible.


So the debt contracts that we all create between each other, they're enforceable. 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 value of it is something that you can recoup in the future if the other party just tries to nullify the contract for some reason. And so that's the thing that I have trouble with a lot of decentralized money.


They don't have that inherent degree of trust in them because there is no real way to enforce the contracts if there's ever a problem. And 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, it's not very stable and B, it's somewhat hard to enforce. So I think what will ultimately happen is that there's still going to be demand for these other forms of decentralized money.


But I think that 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 and 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 the way 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 insightful response. I think it's very interesting that to you, it's not an either or which is 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 non-financial firms that create things that are sort of money like I mean, even stocks and bonds that are issued by corporations are very money like I mean, they're just financial contracts, just like any monetary contract is.


And all of these systems are created by the private sector and they kind of run parallel to the US dollar system, in essence.


So call in to continue issuing that 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, I mean, what's the big difference between a one month Treasury bill that yields zero percent and a cash? No, there really is not much of a difference between these two instruments. The Treasury bill, in my view, is almost as close to cash as the actual cash note is.


And the spectrum of money this along which all of these instrument exists is just a matter of maturity, duration, and basically what the interest rate is on it. So a 30 year Treasury bond is just a really illiquid form of cash, basically, where it's just harder for us to I mean, you can't go to Wal-Mart and buy things with a 30 year Treasury bonds. So the degree of money, this and 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? And so I oftentimes see people say that there is 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 it play out as an increase in inflation. So the way that I think of this is that if the government were to 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 money, whether or not you fund government spending through dumping bills on a street or issuing bonds is sort of I think, of an institutional or technical operational sort of part of the whole process that the government doesn't have to do either. Or they could dump money on the street. They could sell bonds if they want to. But in either case, the non-government 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 price that we would see is the rate of inflation, in essence. And if so, if you ever saw that the US government looked 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 the demand for money versus all other things declined. And so to me, I think people sometimes make this differentiation between debt and cash, which is a I mean, at a very technical level, it's a useful distinction.


But at a government funding level, I don't see it as being the key driver. I mean, interest rates, the government can set interest rates on 30 year Treasury bonds at zero in perpetuity if they want to. The non government can't make them raise interest rates. The non government can change the value of that thing, though, versus all other goods and services. And 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 an eight hundred and sixty five dollars billion deficit last month. That's for comparison purposes. Year over 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 is in the coming years.


Let's talk more about inflation, Colin, because whenever most people talk about inflation, they say that there is low or no inflation in the US because they look at the CPI number.


You also have a small group of people talking about that. We might have much higher inflation because they primarily look at the increasing money supply. How do you measure inflation? This kind of goes back to our original discussion. I see this some Austrian economists refer to inflation as an increase in the money supply. And 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 farmers who are trying to get seed for next season.


And these are just I mean, basic mathematical facts. I mean, 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 all 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 mostly created by private banks. Private banks create loans which create deposits and depositor 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.


And so to me, it doesn't tell you anything to say that the money supply is going to grow because that's just an operational reality of the way we've structured a debt based financial system. The amount of debt, the amount of deposits in the amount of loans is 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 measures, the rate at which that the price of those goods is increasing over certain time periods.


And I think one of the things that that economists also don't like is when people sort of cherry pick an instrument inside of the good or the inside of the basket. For instance, you could look at it 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. It doesn't represent the entire basket of goods, is the argument. So it would be like looking at the S&P five hundred and saying, oh, Apple has done so well over the year, there's asset inflation.


But then when you look at the whole basket, you're like, oh, well, a whole basket hasn't actually done that much. The whole basket is a better representation of what's happening in the aggregate than sort of cherry picking one or two items out of it. Even if those items are important, it doesn't reflect the whole aggregated basket of prices. And that's the really weird dichotomy or bifurcation of what we've seen in the last really the last couple of decades, is that you have these sort of extremes where technology and the things that are highly deflationary are falling in price a lot.


And a lot of these other more valuable services and goods like health care and real estate have really surged in price.


And 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 aggregates 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 and that seems to be reflected across, again, across a lot of financial markets as well. I always point out commodities. It's amazing to look at commodity markets that are down 70 percent from the 2008 highs and think that inflation is high.


It's just there's a lot of confirming evidence that shows that inflation really has been low. It's not just these deflationary trends.


So, Colin, you've 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 the Fed and in a lot of the money creation that we've seen, the way that I think of the Fed is the Federal Reserve or any central bank is really they're just a bank for banks.


And this is the thing that I think confuses a lot of people. When the Fed implements programs like quantitative easing, they're really trying to liquefy the banking system to some degree. They're not necessarily pumping money out onto they're not dumping money on the streets for people to go pick up. And that's, I think, the vision that a lot of people have.


What 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 is they're creating central bank reserve. Central bank reserves are the deposits that other banks use and only 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 the reserve, they're creating from thin air.


They're purchasing a Treasury bond and the Treasury bond leaves the private sector. And so the the way I've always thought about it in the way that the reason I've always described QE as being really a non inflationary event is because what the Fed 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 they're swapping 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. They have the same quantity of financial assets. It's just that their composition is change. And the kicker is that the Fed, again, the Fed is just the bank for banks. It doesn't operate in the private sector. It's not going out and competing for goods and services at Wal-Mart. And so when they take that Treasury bond out of the private sector, that financial asset is as good as retired, at least temporarily.


And so that's a big part of why I think people have sometimes confused the Fed's programs for this idea of money printing in the Treasury kind of comes into this in an important way, because the Treasury is the entity that they're really creating excess financial assets or net financial assets for the non-government sector.


And they do that by running a deficit, basically. So, for instance, that eight hundred and 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 to understand, because the Treasury is the entity that really prints the money. It's not the Fed sort of accommodates everything the Treasury does and the Fed accommodates what the banking system does. But the Treasury is the entity with the big bazooka here.


They're 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 is a real risk that the amount of spending that the Treasury is 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 is a real risk that inflation could look a lot like the 90s or even the early 2000s where you had like three, four or 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, say, twenty, twenty two or something like that. Probably not this year. The economy is way too weak. Everything is way too depressed this year and probably into even the early parts of next year to see something like that. But I think you can 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 argued that growth stocks typically perform better in a low inflation environment and value stocks perform better in a high inflation environment. So giving everything that you just set here and some of your expectations about future inflation, how do stock investors apply that principle? Inflation is such a big driver of all financial assets, it's reflective of I mean, it drives the bond market, obviously, and to a large degree stocks in a sort of almost counterintuitive way.


And that what inflation does for business is that a very operational level is it determines the amount of certainty that businesses have going forward. And so what happens in periods like the 1970s 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 creates so much it reflects so much uncertainty about what the future of the financial system is going to 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. And 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 and better predict what their cash flows are going to look like, what consumer spending is likely to look like, and what becomes so problematic with the growth stock versus value stock debate is that growth stocks tend to be firms like, for instance, something like Tesla that has a very sort of unreliable balance sheet.


A lot of the income statement items are sort of sketchy, uncertain. They're typically uncertain balance sheets and income statements to a large degree. That's really what a growth stock is. It's why it deserves a premium is because there's a huge amount of risk and uncertainty about what its future financial prospects are going to be.


And inflation can be very disruptive to something like that because it will magnify the amount of uncertainty going forward.


And so you've seen this in the last 30 years, that growth stocks just they 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.


And if you see an uptick in inflation, you should see a reversion to the mean to some degree, because in essence, value stocks, the old boring style companies, they become much more reliable. They 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 and should ultimately reflect the balance sheets as well.


It should result in not 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 hear from today sponsor with Centro online from Pitney Bowes.


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So, Colin, 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 style value investors would agree with you. I'm just curious if you can elaborate a little bit more on this.


I guess it depends on what your definition of 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 beat inflation by generally a pretty healthy margin.


The stock market even tends to perform pretty well in a hyper inflation. You see this in places like the Winmar Republic or more recently in places like Venezuela, but even in a somewhat stable inflationary environment like we've seen in, for instance, in the USA in the last 50 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 or five percent in most cases across any 10 or 15 year rolling period.


And the kicker with with regard to gold 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. And that, for instance, over the last 40 years, gold and stocks have actually done very similarly in 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 downturns that we've seen in the last 15, 20 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 40 years is is something like 17 or 18. The standard deviation on gold in the last forty, forty five years is like 30.


So even if you're getting the same unit of return, you're taking the higher unit of risk, or at least you're enduring a much higher amount of variability in the returns across time by owning gold. And so you could look at it on a nominal basis and argue that they've 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 hedge because it's giving you more certainty across that entire period of return horizon.


Let's continue talking a bit more about this environment we're in now and covid everything that plays out, we've seen subsidies to corporations at unprecedented levels in the past few months.


And on one hand, you have people saying that you must bail out close to all corporations since covid-19 is nobody's fault. And then on the other hand, you have people asking for the market to be less manipulated.


What are your thoughts? I see both sides of the argument, and I think that I'm going to 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 a natural disaster.


And to say that we required some sort of market outcome that was 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 vehemently against all the bank bailouts and a lot of the stuff that happened in 2008, because that to me was it was a lot of that was just bad decision making that resulted in a big boom that you had to have a bust after all that. And so a lot of banks, they deserved to fail. And to me, this is just different. This is more like a meteor hitting New York City.


And with all of this 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 at first, to step in and try to help where we couldn't. So I I thought it made a lot of sense for the government to step in and try to be highly involved, especially given the cost of funding, the low rate of inflation made government spending.


I think a lot more viable. The aggregate amount of pain this was going to cost to other people by spending some extra money at the government level was not going to cause hyperinflation or anything like that. And so at first 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 a point down the line where you could then begin to peel a lot of this stuff off.


And 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 and more we spend on this thing in the longer and longer we do it, the higher the risk of inflation is. And that will create a different kind of pain down the road for everyone because inflation destroys our purchasing power and it creates an aggregate amount of pain that the government could ultimately be the cause of.


And so we're we're 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, I mean, you can have a scenario here. Let's to be crazy, for instance, and say that covid becomes a seasonal thing, that this thing is always around every year for the rest of our lives, and that it just mutates and it kills a hundred 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 an 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 maybe we'll have a seasonal vaccine for this. And it might become less dangerous, but we can't spend four or five, six trillion dollars every year on this thing and expect that we will 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 and be compassionate and support the economy as best we can. And as we kind of move further and further along with this thing, I think I'm more transitioning into the other camp where I'm now beginning to say, look, we've done a lot. And at some point we have to accept the potential reality that you can't just spend insane amounts of money on this in perpetuity and expect that there's going to be no negative repercussions.


So call financial news seems to be more and more reported like it's a sporting event and like sports, the state of the economy is unfortunately often oversimplified. What is a prevalent narrative of the US economy that you hear right now? That's just wrong? God, I mean, there's a million. I mean, you turn on financial news and you're totally right. So much of the problem with financial media, in my opinion, is that and this is part of why I think podcasts like yours are growing so much and have become so popular because we're having an informed and meaningful discussion about things here.


We're trying to educate people. We're 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 is that they don't give a crap about that. They don't care if you're informed. They just want to drive eyeballs to whatever is the hot thing today. So turn on financial news these days. And like CNBC is probably all Tesla all day today. It's all anyone's talking about because it just happens to be a random company that's increasing in value a lot.


And it's somewhat controversial because the CEO says some stupid things every once in a while. And just the nonsense talking point, though, I mean, the impact of Tesla on the aggregate economy is not really important in the long run, whereas the conversations that we're having about like these things today, these things touch everybody and they impact people and their decision making in 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.


And 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.


It's not important stuff. It's just filling space and getting eyeballs in in a lot of cases, it's scare mongering. I mean, that's that would be my big complaint about the majority of financial news.


I think you're absolutely right. It's interesting sitting here in Europe and reading the financial news in Europe, and it seems like here the narrative is, you know, the US market moves because of Europe and then the US news and they're all about, yeah, the European financial markets move because of what's happening here in the US. So it's I guess that was just one example of how simplify things can often be and that recency and availability bias. So let's look internationally.


Growing the money supply and subsidizing everyone or close to everyone is not a US phenomenon as we're seeing in the rest of the world. They haven't been shy of doing that either. Knowing that, which currencies do you think could break out significantly from the current trading range with the US dollar?


Gosh, the dollar's been 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. I mean, going back to our whole discussion about inflation. If you start to see the US government's impact on the rate of inflation, you should see this filter into the forex markets and you should start to see if there's even an uptick of inflation to three to four percent.


It should whack the dollar pretty good. A realistic scenario where the European economy remains in this sort of very low inflationary environment. They look a lot like Japan to me in terms of just their demographics.


And the way that the EMU is structured is so it's much harder to implement big fiscal policies in the EMU because of their political structure. And so if you were to see an uptick in inflation in the next, say, two, three, four years, I think you could see the dollar get hit pretty hard. And I know you've had some guests like Luke Roman, people like that who have talked about this. And we disagree on some of the technicalities about, for instance, rising interest rates on bonds and things like that.


But I think we see the risks similarly in that the I just view it through the rate of inflation, whereas he might see it through rising interest rates or something like that. And I don't think you'll actually see it in rising interest rates necessarily, at least at the Fed level. I think there's a decent chance, actually, that the Fed can keep rates at zero percent and be way behind the curve even as inflation rises. But you'll see it in the rate of inflation if the risk increases.


And if that happens, you're going to see a lot of these big long term trends they're going to reverse. It's the same sort of thinking along the lines of the value investor trade is that the value stocks become a better relative investment in a rising inflationary environment, and the dollar should become a worse relative option versus virtually most currencies as inflation rises in a relative sense.


So 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 growth money for a long time. I think that the political structure 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 want to get too deep in the weeds about this, but the EMU just is a deficient monetary union because it does not have a centralised treasury in a way to fund the various entities in aggregate level, really. And so that's very problematic from economic perspective, because you're always going to have depressed levels of aggregate demand in certain places like Italy or Greece, because they're going to have trouble funding a lot of their spending to a large degree. And so they have necessarily sort of austere government programs going on across time.


And so I could see a scenario where Europe is dead money and it's hard for me to look at the United States and be Super Bowl is just because we've been on such a huge tear and the tear is so central to a handful of tech companies. And I think there's a big opportunity for a lot of Asian South-East Asian economies to really take a lot of global market share in the next couple of decades. And you kind of have started 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 finished. And I think those economies are becoming more and more capitalist. And as they do that, it's hard for me to imagine that they won't become really the centre of the global economy over time and that the the US's market share especially is a share of market cap of total equities, doesn't decline over time, not necessarily go away, or the US market doesn't have to perform terribly over time.


But in a relative sense, I think that South-East Asia is really there positioned so well to benefit from so many long term trends in the coming decades that to me it makes it just a must hold for the long term as part of an equity portfolio.


So if that plays out, how do you put on a position with with that knowledge?


Gosh, you could do it in a lot of ways. I mean, again, it's so much of this is tied to inflation in the way the dollar performs. I mean, a lot of people look at international equities in the last 10 years or so and say that all that. Perform very well, I should known 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. And if you were to see that reverse, this is all kind of tied into that same sort of trade that I've been alluding to.


That is the inflation trade where if the dollar goes down and you see inflation up to even a little bit, doesn't have to go up a lot to even jump to three, four percent, you're going to 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 our 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. They're way in a large degree to diversify your currency risk. So I don't know if I actually answered your question there. I mean, I can't recommend specific instruments just because I'm a portfolio manager.


But things that give you access to, I think, especially emerging markets, they're very attractive on a long term valuation based basis. And I'm a big fan of index funds. I don't get into stock picking a lot. So, I mean, virtually any of the big low cost index funds that give you access to this, I think you got to be careful because these things are they are risky, but that's where a lot of the premium, the long term premium will come from.


The fact that these things are riskier, you've got to be willing to hold them for the long term and go through potentially five, 10 year periods where they don't perform very well like they have in the last five to 10 years. The tendency, though, will be that, at least in my view, that holding a chunk of these will diversify a global stock market portfolio in a meaningfully important way in the coming 10, 20, 30 years. Let's just jump back to one of the things you said about inflation there before you mentioned inflation could go up to called it three, four, five percent.


In that case, how would the Fed look at this and how would the Treasury, for that matter, look at that? Would that be a cheerleader? They're targeting high inflation 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 in terms of other asset prices going down?


I view the Fed and most central banks as 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's so indirect. And 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 rates that banks are going to ultimately be trying to pass on to other customers.


And the weird thing is that what this oftentimes does is it actually hurts the banking system itself to a large degree, which makes it a little more difficult for banks to lend. And you see this in periods like two thousand, the early two thousands where the Fed is trying to raise interest rates to try to mitigate some of the inflation that they're seeing in 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. And 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 or you can't stop raising interest rates. Is it going to stop people necessarily from buying homes in two thousand and six?


And, you know, you see the same thing time and time again, that these government policies tend to be very reactive in the way that they actually impact things.


And so, you know, going forward, if the we started to see some uptick in inflation, I think the Fed would 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, they'll probably reduce. I think the balance sheet has become the main course of action for the way that they're trying to control things now. And 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, it's an even more imprecise and meaningless sort of way to impact the rate of inflation that interest rates changes that even after.


So the Fed, I think, is just very their tools for fighting inflation going forward are very blunt. And I think that 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 they're issuing. And I don't know how politically feasible all that is.


You know, a lot of the the narratives, at least in the USA, seem to be trending in the direction of bigger and bigger government programs, things like the Green New Deal and UBI, 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 10, 20 years.


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All right, back. 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 10, 20 years, and I think that what that means is I think you've got to be patient with a lot of different instruments. The world looks so uncertain. I mean, arguably the most uncertain that I've seen it in my career when I started out in this business, it was easy to generate.


You can generate I remember you could put money in the bank and you could earn four percent a year. I mean, generating a four percent return was the cakewalk 20 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 a valuation perspective, looks not necessarily really bleak, but certainly, I would argue low return going forward. And so when 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.


And I think you have to be opportunistic going forward. You have to be patient. You're going to have to let some of these markets, they're going to ebb and flow. The stock market is going to see big downturns again at some point. I wouldn't be surprised if the bond market does, too. And so I think you've got to be patient. You've got to be really well diversified. You you know, there's a strong argument that alternative types of assets are more attractive now than they've been in a really, really long time.


And so things like commodities and 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 10 years, I wouldn't be shocked if things like those are the best performing assets in the next 10 years. And so it's going to be just so important to be diversified. And 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 and their fees because the taxes and fees are the things that you can control. You can control your mentality and you can control taxes and fees. And those are the things those are the only thing that going forward are going to generate certain additions to your total returns. And a lot of people can't control, although they won't control them and. In an environment where let's say we only earn four or five percent, if you're paying high fees and you're paying a lot in taxes and you're being undisciplined and you're you're hyperactive in your portfolio and 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 30 or 40 year time horizon call calling.


This has been absolutely amazing. I'll definitely give you a opportunity to give a hand off where the audience can learn more about you. Primitive capitalism and Orkan group.


My firm is Orkan group, and I write a lot of material on Prakash, which is pragmatic capitalism, the early Praag, Happy Dotcom, and 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 IRCAM Group, which is that's my financial firm.


But there's a huge page there where I've listed kind of all of my favorite videos and outside resources and a lot of the material that I've written about how the monetary system works and how I sort of think about things.


And you can find most of it there. So you can also I love to interact with people and and help where I can. I don't know everything, but I like to think I know at least a little bit. And so I'm so happy 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. And money is a big, confusing topic. And I don't think anyone really fully understands it.


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 call in that your resource captain is a fantastic resource because you're basically doing what you are also doing here in the show, you making something like money that is so complex and so abstract, you really simplify them, but you don't simplify them too much. Kullen, again, thank you so much for taking time out of your busy schedule to be speaking with Preston and me here today on the Investor's podcast. We really excited already to bring you back again in the latter part of twenty twenty.


Awesome. Well, thank you, guys. All right, guys. So at this point in time, the show, we'll play question from the audience. And this question comes from Nick.


Hi, President Stig. It's Nick from the U.K. here. Huge fan of the show. My question is about interest rate inflation and house prices. I heard many of you say on the show recently that you expected house prices to potentially go down in the next 12 months due to increased interest rates caused by inflation. I thought inflation was inversely correlated to interest rates. So I'm not entirely sure how that works, I'll be really interested if you could impact it for as.


Nic, 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 as a home owner, you have a finite amount of money. And if your installment go up because of high interest rate, your house price must go down. And the latter is true even if your personal fictional installment, because the influx of new buyers with new terms will then lower the overall demand, the interest rate is used to control inflation in society.


Those Colin Rotch mentioned here in the episode.


It's 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 high interest rate because it decreases the money supply in society, which leads to falling prices and vice versa.


So when you ask me whether I think real estate prices will go down in the next 12 months, I think, yes, we'll see a modest drop. I'm not as familiar with the U.K., same with the US. I would imagine it would be a similar thing in the U.K., 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 12 months because of the weak economy both in the UK and the US. But I see lower prices because of covid-19. You have a lot of people who are struggling to make payments on the homes and some of them are either going to foreclosure 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 reservation price that there will slowly lower, which also contributes to why it 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 and supply.


Therefore, the response when we talk about the impact of inflation, fiscal stimuli, interest rate is really and 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 there is so much political capital invested into fiscal stimulus because of covid-19, you know, that's just another element you have to account for. So, Nic, just to kind of add on to what Stig said, I think it's important to realize that real estate is very local.


You can go into different cities, different regions, and real estate prices can act in very different ways. It 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 is 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 amount an amount of land that'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 and a lot of variables that go into this. So I think the most dangerous thing that a person can do is sometimes to simplify it too much into say, oh, well, Will, because of this one thing, because of X happening, Y is going to be the outcome.


I think that you've got to be really got to reserve against that. So Stig's comment about the covid-19 impacts and a lot of people being out of their jobs, in particular industries being impacted heavily by covid-19, those are going to impact 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 tip finance tool on our site while you got to do if anyone's looking to learn more about IP finance, just go to Google and type in tip finance. Or if you go to our investors podcast website, you can see it there in the navigation bar. Just click on finance and we're excited to be able to give this to you. So if anybody else out there wants to ask a question and get a play on the show, go to ask the investors dotcom.


And if you get your questions played on the show, you'll get a free subscription to our top finance tool.


All right, guys. Preston, I really hope you enjoyed this episode of the Investors podcast. We will see each other again next week.


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