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You're listening to Teip on today's show, we're excited to bring our good friend Ed Harrison from Real Vision TV. Ed is an expert in investment banking. He's a former diplomat and technology executive. Ed is an incredible host at Real Vision, and he conducts some of the most exclusive discussions with the world's most influential thinkers in finance. So we're really excited to have him on the show to talk about the current market conditions and various investment ideas in the third quarter of twenty twenty.


So without further delay, here's the talented Ed Harrison.


And you are listening to the investor's podcast where 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 person, and as always, I'm accompanied by my co-host, Preston Peche. Today's topics are value versus growth stocks, the economy and the coronavirus. And last but not least, we are covering the US dollar and the euro. We are super, super grateful to have it.


Harrison with us here for the very first time, arguably one of the top thinkers right now. And welcome to our show. Thank you. I don't know if I can live up to your billing of one of the top bankers, but I hope that I can provide some insights and the sorts of things I'm thinking about. Modest, I like that, and I just want to say for the record, Edward started this interview out in Swedish, so I mean, he of all people before the interview just speaking Swedish because apparently he knows how to speak Swedish.


He is probably the person in the world who should be the least modest at all. So putting a lot of pressure on you there at. Yes, and you know, the reason I speak Swedish as we were talking before, is because Danas was too difficult for me to learn, so I went with Swedish instead.


All right. So I wanted to kick this into you off with the discussion about growth and value, because whenever people hear growth stocks, at least most people are thinking about fang stocks and they relate their outperformance to an accelerated digital world. Now, you have a very interesting but different thesis of why growth is performing better than value right now. What is that? The macro view that I would posit is this is that we're in a very low growth, low inflation environment, which means that nominal GDP growth is lower as a result, it's lower both on the inflation front and it's also lower in terms of the actual GDP growth, the real GDP growth itself.


So if you look at cyclical turns in the past, say, for instance, in the 1970s or eighties, you got this massive jolt up in GDP and then this cycle continued higher, both on a real GDP basis and an inflation basis. So that means nominal GDP growth is low. And when you look at companies throughout the indices, the S&P, five hundred, Russell, two thousand, whatever it might be, in some senses, you can look at them as a proxy for GDP.


That is is that companies in aggregate are not going to outperform drastically what the nominal growth of the economy is doing. So as a result, you're seeing a lower trajectory of earnings growth. And that means that to the degree that people want to hit their earnings hurdles, that is they want to hit their hurdles for investing seven percent, eight percent, whatever it might be, they're going to have to go to the companies that are going to have the highest growth.


And so to me, that's one of the key factors, driving growth over value, at least since the great financial crisis. So you're doing some amazing writing, Ed, and you have a very interesting equation, you have momentum equals growth. Growth equals long duration in long duration equals secular stagnation. What does this mean and how do we complete the equation? So I wrote a post very recently fleshing out these ideas, so if you take what I was just talking about and you move it forward to what's happening right now and you look at nominal GDP growth across a wide swath of countries being lower this particular go round, just as they were in the last financial crisis, the last recession that we had.


What you see is a need for yield. What you see is that we're seeing the yield curve compress in a way that you have a flattening of the yield curve with interest rates spend at zero in the short term and then the rest of the curve flattening towards zero or even negative rates in Europe. And so what that definitely means is that you're going to need to have some yield pickup somewhere else. So to the degree that you need the yield pickup, the question is where can you get it and why is it that it's there?


If you look at it, let's talk about it from a discount factor perspective. If you look at the discount factor because of the yields falling, then that means that companies that pay their investors based upon prospects that are five, 10, 20 years down the line, those are companies whose prospects are more interesting in a low yield environment, because the discount factors mean that those earnings are, relatively speaking, more valuable than they would be in a five percent yield environment or seven percent yield environment.


And so I'm looking at those growth companies, which are the companies that actually pay investors, let's say the Teslas of the world or the what would be a good example of that? I think it's the Niccola is another great example that's similar to Tesla. Those kinds of companies are going to pay much further down the line. And those payments that they're going to get or the prospects of those payments are worth much more. So you're actually getting a long duration play.


It's a bond proxy, if you will, as a result, because you want to go to the longest duration and this is what you get when you get a growth company, is you get a long duration play and that is what's going to win in a low growth environment.


So, Ed, what do we do as investors to position ourselves based on this information that you just shared with us? So I think that the real problem is you can look at it from a portfolio perspective, I look at it in terms of the optionality that if you look at two thousand or the run up in the Nasdaq in the nineteen nineties, up to two thousand, what you saw was that some of these companies that had the prospects of great profits down the line went to zero.


They went bust and they went out of business. So perhaps if you took a portfolio approach and then you had the Amazons in there, you had the eBay's in there as well as the dot com in those portfolios, you would make out as well. But I think that what people are doing today is that they are saying to themselves, not only do we want to have the Nikola's in the Teslas in our portfolio that don't have any proven profitability, but because the world that we live in is different now, where the companies that are going to IPO actually have profit more, and actually the companies that have moats and that are going to give us profits five and 10 years down the line are bigger, like the Facebook's, the Amazons, the apples of the world.


We're going to invest in those. So I think that it's a barbell strategy, if you will, that is combining the growth companies of today and the growth companies of tomorrow together. So Amazon and Apple on the one side, Tesla and Niccola on the other side. Our audience are primarily value investors that sort of like of the very root of where we're coming from and we're used to all of these price to book ratios and price to earnings ratio and key metrics that the way that we were brought up just look different.


Now, the ratios are the same, but the performers for a long time have been different than what we have been taught. What are the outlook for us all school value investors in this environment? I think that it's really a question of picking winners and losers at a particular time in the market. I mean, even though I'm giving you the thesis as to why right now, you might be outperforming with growth over value. I think that over the course of a business cycle, there's going to be a reversion to the mean in terms of the outperformance of growth over value, because we've seen such a huge run up in the shares that I was talking about.


I'll give you an example of something I was looking at earlier. So, for instance, one of the divergences that we've seen between growth and value is as a result of what I would call the buy at home strategy versus the covid oriented companies. And a lot of the value stocks are in the Colbert oriented companies like Travel, like Leisure. A perfect example of that is Windom. I saw that Windom actually gets ninety six percent of its revenue from US based travelers.


So if you're thinking to yourself, here's a sector that's completely beaten down, it's gone down 40 percent on aggregate where what I found value within that sector on a relative basis that would be able to beat out the odds in this particular environment. Windom is an example of that kind of thing. So I think that even within the value world, in certain categories, there are winners and then there are losers. And you want to be able to pick the winners, not just in terms of do they have the wherewithal over time, but in terms of what's their price earnings?


Are they relatively cheap? And I think that those are the kinds of points that we're talking about. Let's transition and talk more specifically about covid-19 and the implications for us as investors. Previously this month, White House coronavirus adviser Dr. Fauci said that the chances of scientists creating a highly effective vaccine and highly effective here would be 98 percent more guaranteed protection. The chances of that happening was slim. Rather, scientists are hoping for a corona virus vaccine that is at least 75 percent effective.


But even 50 or 60 percent effective would be acceptable, too. So if we on the contrary, as investors believe that we actually will have an effective vaccine within the next 12 to 18 months, like you hear a lot of people talking about, it's like we need that medical bailout. I think that's a term that I got from you. If that is how we think about it, how can we best position ourselves? I was thinking exactly that word, the medical bailout.


That's what we're looking for, and I think that either you have the bailout or you don't have the bailout. I think that what Dr. Fauci is saying is essentially that we're not going to get a medical bailout, that even to the degree that we get a vaccine, it's going to be incomplete. It's going to take time to roll out. And so effectively, we're going to lose two years of earnings growth. That is in a normal world. We can have two years of covid associated growth.


So when we talk about this bifurcation in the market between the at home companies and the covid affected companies like the leisure and hospitality, when you look at it from a discounted cash flow perspective, you're talking in the order of six to 12 to 15 percent. Just think about a DCF, how far you can go. Even if you have two percent discount rate, you're still going to have a hit to year one to year two of those earnings. That could be as much as 15 or 20 percent that you're losing for certain companies.


And so I think then you have to ask yourself which of the companies are valued? Well, given that we're definitely going to be in this bifurcated market, is the differential that's been in play in the markets greater than the actual differential that you think that discount this 15 percent, this 20 percent discount would call for? And just going back to the Wyndham's as an example, I think that the answer is, is perhaps, yeah, you could pick the differential between a stock, which is a really a mature stock like Apple versus Wyndham in terms of the PE ratio, is that something that you're willing to pay for over a seven year period of time?


I think the answer is probably no, that you would want to pick up a company like Windom, which even though some of its earnings are going to be discounted over the first year, the second year actually are going to be this kind of less their earnings are going to fall less than the average company. And over time, you're going to see benefits as a result of that differentiation. So, Ed, I want to flip this on its head, how will the economy look in terms if we don't find an effective vaccine, but rather we have to live with covid-19 until everyone kind of reaches a herd immunity years from now?


And so how should we position ourselves for something like that? I think then it becomes a little bit more complicated in terms of the differentiation, the markets are already playing now for us. The market is basically saying is, is that certain sectors of the economy are just going to be crushed because covid-19 is going to be with us for the long term and there's going to be a wholesale shift and other sectors of the economy are going to do really well.


And the question is, is do the prices that are implicit in the price earnings ratios, the discounted cash flows, do they represent value on a relative basis in that scenario that you're painting? I think that the run up in the more speculative areas of the market don't represent value from that perspective. Tesla, Niccola, perfect examples of that. I think that there is going to be certainly big cap companies going to do better, but it remains to be seen whether or not the huge run up that we've seen in the technology companies is going to compensate you for the differential in outcomes, especially if you're looking at, say, Wal-Mart, large cap companies that have economies of scale, economies of scope.


They're going to figure out how to deal with this. They're already online. They're already allowing you to shop at home. I just saw something at Tesco hiring sixteen thousand employees in order to take advantage of the new at home shopping. Tesco is one of the biggest supermarkets in the UK. There's a perfect example of a company that should not be trading at a huge discount to other companies. But given the fact that it can adapt and it will have the wherewithal to be able to have the growth going forward.


So I think in that case, again, still you will see a relative outperformance, but it would probably be the larger cap companies within the value space, over smaller companies, within the value space. Without asking you to second guess Dr. Falchi and then even so, how are you thinking about it in terms of probabilities? A lot of people see this as a binary thing, like it's going to happen or it's not going to happen. Then I guess you can make the argument for that.


But there's a huge difference of a binary income, if it's ninety nine one or if it's 50 50 and without putting you on the spot like it's 62, which is 38 percent. But how do you think about it? How do we get information? How do you process your information whenever you are considering these theses which are so important in the investment climate that we're in right now? I'm thinking of it in terms of standard deviation and the bell curve, and I think that what a lot of people know from financial markets is, is that financial markets are not shaped by a normal bell curve in terms of the distribution of outcomes that their fat tails.


And then the question is, is why are their fat tails and where are we within that distribution? I think that the reason that there are fat tails is because even though there's a certain degree to which outcomes are random in the middle of the curve, the closer you get to either side of the curve to either tail, the more psychology comes into play. And so we're at a period in time where when you talk about what are the probabilities one way or the other, we've moved well over on the curve in terms of people talking about the probabilities of massive bifurcation in the market where certain companies go to zero and other companies just do outlandishly well that taking on a feeding frenzy that gets you to two or three standard deviation differentials between different parts of the market.


And to me, that's the setup for underperformance for those sectors, like the ones we were talking about earlier, the growth sectors over the medium term, that eventually, whatever happens, probability wise, is going to move you out of the fat tail edge of the curve, probably actually over to the other side immediately. That's how it usually works, is that you go from one fat tail to the other fat tail from the outperformance to huge underperformance before you revert to the mean in some capacity.


So that's what my expectation is, is, is that irrespective of what the probabilities are of outcomes for covid and in terms of the medical outcome that we're already into the second and third standard deviation differential move, and I wouldn't call it a bubble persay, I would just call it that. It's we're into the psychology segment of the market. That's so interesting that you say that, so then I have to put you on the spot again, I could say and say if if that is how you think about it in a portfolio perspective with those extreme outcomes that you just mentioned before, how should we position ourselves and what are some of the risks if we go X versus Y?


What are your thought process around that? I'm definitely much more oriented towards the value side in terms of how I'm thinking about it, and so this is a value podcast. What I started out talking about is how a growth investor might think about it. If you're thinking growth, let's say you're thinking about the portfolio, period. Think about it from the optionality aspect. What I said that, for instance, that all of your earnings comes from years, five, 10, 20 years out on a relative basis.


There's a lot of uncertainty there. So there's a high embedded optionality in terms of the equity prices that you're paying for those stocks. And as a result, some of them aren't going to do well. Others are going to do well in this period of time as compared to, say, 20 years ago when we had the tech bubble. Companies are more mature, so the optionality is a little bit less than it was before. But you still have to take a portfolio approach in order to not get caught out being overly allocated to companies that end up not doing well over the longer term.


But ultimately, I think that you're going to underperform even if you take the portfolio approach, because we've moved into the second and third standard deviation, a differential that the price earnings ratios within the at home segments of the market are so extremely higher than the industrials, than the value stocks, the bank stocks, the financials, the consumer staples, that if you take a large cap portfolio of stocks within those segments, you're much more likely to do well over the medium term.


And I'm talking about that in terms of a half or three quarters of a business cycle, say, five, seven years timeframe.


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So Ed, Stig and I are both big fans of Real Vision and definitely the work that you do there. One of the things you cover quite well is this contrast between economic expectations or impacts versus political decisions and the fallout from those decisions. When you look at these two variables, it's amazing to see how covid has produced effectively a binary outcome for businesses based on policy decisions. Talk to us a little bit about your thoughts on some of the stuff.


As you were saying that I was thinking to myself about how it's reflected in terms of markets, in terms of bifurcation, because the bifurcation that is the potential for companies, especially small companies, companies that are leveraged to close contact what I would call the covid companies, their potential to go to zero, i.e. bankrupt is greater in places that don't handle it well. So it makes a big difference as to how government policy is. And the way I'm looking at it now, especially if she's right that there's no silver bullet and that we're looking at another 12, another twenty four months from now, that we'll still be sort of in the post covid period on some level that you want to have a long term sustainable perspective.


So an example would be here in the United States where my son is going to go to high school. It's remote. And the reason that it's remote is because the contamination levels, the infection rates are so high that we're so afraid that you could get it in school and then bring it back to your family. So they have to do it virtually. It's about getting the virus levels down to a level where the community transmission is low and then starting to get the biggest mistake that the United States made relative to other countries is that we didn't do that.


We did the lockdown like other countries like Denmark, we did the lockdown like Norway. But then we left the lockdown before community transmission was clearly low. And we weren't ready for the testing associated with the levels of community transmission that we had when we came out of the lockdown. So now we had a huge second wave and then the knock on effects in terms of what I just said about schools and also shopping are great. So what happens in that environment to companies like small businesses that don't have economies of scale, economies of scale, either they merge or they potentially go bankrupt.


If you're a restaurant and you have three thousand different restaurants, it's a greater opportunity for you to have restaurants in places that have low transmission and people are spending money at the restaurant. Then one individual restaurant, which is completely at the behest of a local economy, that restaurant is much more likely the one, the local restaurant to go bankrupt. So in a country like the United States, that's what's going to happen, is going to have a much more concentrated industrial economy after the fact.


So let's zoom out a little here and talk about the US and the European economies. And given everything that has happened with covid-19, what really stands out for you? I would say that the Nordics stand out for me. There are two different parts of the Nordics, there are what say, Finland, Denmark and Norway have done versus what Sweden has done. I think both of the countries, both of the models are geared towards what's long term sustainable in Sweden.


What they decided is that we want to have is close to the normal life that we had over a longer period of time. And that's come at a cost in terms of the lethality of the virus and also in terms of the community spread. But the community spread in Sweden relative to places like the United States has been going down and has been stable to going down versus the United States. We had a second tick up. Then you have the Danes, the Norwegians, the Finns, which said, OK, we're going to lock it down, but we're going to when we come out of the lockdown, we'll be in a much closer position to do exactly what the Swedes had been doing the whole time.


And that has also been effective. So I think that it's in the rearview mirror with regard to what Sweden did. But I think that dichotomy is interesting in terms of thinking about where you are today and then therefore how you can talk about Europe versus the United States over time. And I think that the way that I'm looking at it is that really it's about community spread, it's about sustainability. And the US has really done the least effective job on both of those fronts.


What we see in the rest of Europe, like, for instance, Spain, even in places like France and Germany, is sustainability is a big problem because right now there's a increase in the number of cases in Spain, even in France and Germany. And we're now going into the fall where we have the flu. We also have people moving indoors. So it's really not clear whether or not this is sustainable, tamping down in those countries in the way that there has been or at least there seems to have been in places like, just to use an example, New Zealand.


Let's talk about some of the implications of covid-19. Let's first start with the US dollar. Do you see the US dollar losing its status as the main global reserve currency in the decades to come?


No, I definitely don't I think that if you look at the X Y, which is the index of the dollar index that people usually quote over, say, a 30, 40 year period, what you'll see is, is that the X Y has been much higher and it's been much lower than it's been recently. The channel that we've been trading in recently is both much below the highs for the dollar and much above the lows for the dollar. So we're not anywhere close to some sort of systemic crisis.


And then the question becomes, because a systemic crisis is something that will cause people to overthrow the dollar. What's going to replace the dollar? What's going to replace the dollar? Something that's freely convertible, something that has a lot of collateral in that currency that you could use in order to create money, make loans and things of that nature. Treasury bonds, as an example. You have nothing like that in China. You have nothing like that in Europe, because at a European wide level, there's not enough collateral there.


Japan's not going to replace the US in terms of issuing the reserve currency. So really, when you go through all of the different possibilities, the only possibility is the US dollar loses some of its role relative to a group of different currencies and different options, including, say, gold or Bitcoin. But it doesn't lose its status as the principal reserve currency. And so I don't think that there's either a meltdown coming in the dollar as a result of its losing its reserve currency or a meltdown that's going to create the loss of the reserve currency.


So ultimately, I think we're still range bound with the US dollar and we're sort of now at an oversold level. So we're hitting levels with ninety two on the X that are bumping up against resistance for the dollar in terms of its low. It's interesting that you would mention that why that's very often being quoted, one of the things that always stood out to me looking at it is the weight of the euro is very much a house that you were doing kind of index.


And this is not necessarily saying that there's anything wrong with that because it is the second most important currency.


But how would you say that the US dollar has fared against the other currencies in general? Are you specifically looking at the euro here? Is that the benchmark? Is the basket? Should that basket be different one way or the other? Yeah, well, I think what you're pointing out is it's kind of a flawed way to look at the dollar, especially given that other countries, there are a wide plethora of countries that have different characteristics than, say, the euro, which is a large percentage of the basket, the fiat currency countries that have relatively stable currencies versus the US dollar.


Those are the countries that I'm thinking about what I think about the X Y, whereas the emerging markets are a completely different story altogether. I mean, for me, the biggest problem with the emerging markets and the dollar is the extremes in terms of debtors and also in terms of assets. That is, is that emerging markets are using dollar assets and liabilities as an anchor in terms of creating credit. And that creates problems when the dollar goes up or down in drastic amounts versus their currency.


If the dollar goes way up in value versus emerging market currencies, suddenly if you're a dollar debtor, you're in big trouble because now your liabilities potentially have gone up at a huge percentage compared to your assets. On the other side is the fact that if the dollar goes down a decent amount, then the same thing is true with regard to those who hold US dollar assets that suddenly now their assets aren't worth anywhere near as much. And so they have the same problem in terms of their balance sheet.


So there's a lot more volatility there in terms of emerging markets. And so there's also the potential for trouble in emerging markets as a result of the bands being much wider than they are for the more stable fiat currencies. So and if the central banks keep printing like this, do we ever get to a position of hyperinflation or what happens?


My view in terms of hyperinflation is that hyperinflation is a resource phenomenon. That is is is that you are a country that needs real resources. Let's say you need steel, you need food stocks, you need all sorts of raw materials, whatever it might be. And in order to get those raw materials, those food stocks, you need it not necessarily in your own money. You need other people's money because you can't get those stocks on your own. Let's say it's oil that you need as an example.


So what happens is that then you start printing up money in order to get those materials or as an example, even within your own currency, your industrial base is depleted as a result of war, which is an example that you had with Germany during its hyperinflation. Then you start printing up the money and the money is chasing a finite amount of assets, but it's increasing exponentially and it's amount and that leads to the hyperinflation. So the real constraint there is real resources as compared to when you have massive overcapacity, as we do now in the United States and other places where you could really just ramp up the amount of things that you can do with the money.


There's no hyperinflation that's going to result from that. So I guess people out there listening in, they read in the financial news that now it's been printed a trillion dollars and then another trillion dollars, and it's like the Fed balance sheet is just exploding right now. So if the first thought that we already covered was, well, that must mean that we will have inflation.


You laid out the arguments. Why that's not the case. The follow up question to that would be, well, where's that money going?


Like, where can we now see those trillions, trillions of dollars?


That is the question then, what happens as a result of that, if you think of the credit outstanding United States economy and then you think of treasuries and the Fed's balance sheet as being a small percentage of that, what you really get is a sense that the private sector banks are the ones that are most important in terms of creating velocity of money, in terms of creating more credit. So what the Fed is basically doing is, in essence, filling a hole at the highest value areas of the economy.


So they're buying up Treasury bonds, they're buying up mortgage backed securities, they're buying up investment grade bonds, and they're giving the people who sold the bonds to them money. And then the question is, what happens with that money? Well, if there are no credit worthy customers to loan that money to, if you're a bank, you're not going to loan the money to them.


If you already have tons of your capital tied up in dodgy credit, as it is to oil companies, as an example, probably you will be constrained, credit constrained. And if you're a customer of those banks, of those financial institutions and you have in some way, shape or form problems with your own balance sheet, you're less likely to take on more debt unless you run the risk of bankruptcy. So really, at the end of the day, what we see is, is that the money is going to make it to the holders of very illiquid assets.


And then from there, the question becomes, where does the money go beyond those liquid assets? It gets displaced potentially into less liquid assets, but also still liquid like stocks and bonds, financial asset. It doesn't necessarily make its way into lending into the broader economy. So one of the reasons I think that you see QE money printing leading to asset prices going up is this because this is where you can take the money, you're displaced out of certain assets and then you move into the next available assets in quality down the line.


So how about the euro? Talk to us a little bit about that, Ed, as far as how you see it being positioned today in the global economy and how that plays out moving forward?


Yeah, I see the euro as a currency for Europe and that is for the euro area and for those who deal with the euro area principally. So if you think about countries like Poland, you think about Romania, Bulgaria, Hungary, some of those countries, you can take out mortgages in euros, even though the Polish laddy or the Hungarian forint are Eurocurrency, those are countries that would be within the euro area market. But when it comes to the global market, when you think about things like commodity prices, oil, et cetera, the euro plays no role.


Why? Because there are no euro assets that you want to hold other than specific country assets like German bonds. Or maybe it would be Finland and their government assets which aren't that great anyway. Or you could hold, say, Italian bonds, which actually are not highly rated. So that's not an asset necessarily that you want to use as collateral for loans. So what I think of the euro, I think of it really as a domestic currency, if you will, the euro area and the area around the euro.


Only when the euro area creates assets that people can use as collateral, then I think we'll see the euro take on more importance. So these Korona bonds, euro bonds that they're trying to start to put out, they'll be an interesting test to see whether the euro can create assets that have some sort of applicability that are triple-A that people might want to use as collateral for loans. And then people will look at them almost like money in the same way that they look at treasuries, almost like money, you know, what is it that a reserve currency needs to have things like as to be freely convertible?


That's definitely the case. It has to be a large market that's behind it. That's definitely the case with the euro. And then you start to go down the line and where you run into trouble for the most part, is where you come across the assets for collateral, where you come across the stability of the euro as a bloc. You know, when you think about Brexit as an example, that you could have a country from within. The eurozone actually leave the EU and therefore leave the euro as well.


Those are the things that create a certain level of instability that make you question whether or not the euro is moving in the direction of becoming much more of a reserve currency asset. So I think that it definitely depends upon where the euro is as a as the eurozone. Where is it from a political perspective? Is it politically holding together? And Italy is definitely top on the list when you think about that, because the greatest thing would be going forward.


Let's imagine you say to yourself, OK, so you have these triple B or double B plus Italian bonds that have been issued. But now we have these new Italian, German, French, Spanish, Dutch super bonds that are at the European level that are triple-A that I'm willing to buy and invest in. Actually, I can use them as collateral for loans. That's a totally different story, because now I know that Italy is staying within the euro zone and that the Germans have said that they're willing to mutualise their debt with Italy, at least in part, we have this debt mutualisation.


And OK, now I'm willing to say, yes, the euro is a project that is going to continue over the longer term. I mean, to me, that's where the rubber hits the road because debt mutualisation is a thorny political issue. And until you get the debt mutualisation, honestly, I don't think the euro becomes a greater reserve currency.


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Again, that's the Masters podcast dot com slash greenhouse. There was so much criticism, and rightly so, about the US dollar and all the shortcomings, but I always I can't help but think, well, try being in Europe and talking about a flawed currency and talking about so many limitations you're setting for yourself whenever it comes to the currency.


So it's just very interesting the way that you in many way, if I may say, as an outsider looking at Europe and the currency system, but also how you are looking at the US dollar and everything that's going on. And let me say, by the way, stick, because you're in Denmark, I mean, you're in a unique position, just think about this. I mean, Denmark is essentially using the euro on some level. I mean, it's like your relationship to the euro is like the Dutch Gilder's relationship to the deutschmark before the euro existed.


I mean, they're essentially the same in terms of how it works. But you have not given up your monetary sovereignty. Why? That's the question. Why would Denmark not give up monetary sovereignty to be into the euro? And that's the critical question. That is a problem with the euro as a reserve currency asset. If you have a country like Denmark, which is a part of NATO, which is a part of the euro system, which is a part of the EU in your monetary policy, is basically shadowing the policy of the ECB and you're not using the euro.


That tells you right there that there's something wrong with the euro. So let me just be provocative, as they can say that until Denmark gets on the euro, you know that the euro is not going to be a bigger part of the reserve currency status. I love that you say that and try to single me out, because I was just about to say before, the British are again the part of the EU not necessarily giving up the pound, but still, I think it's such a good point.


And, you know, the system we have, there's just so many exceptions because we are countries. Of course, you have a ton of exceptions in the US because you all have states. But there are so many things that are still regulated on the federal level. And it's just such a different system here. Like you talked about in the Nordic countries. You know, we have the Danish currency. It's it's pegged to the euro within the band of 2.5 percent, but it's a part of euro.


So that's effectively what it is. But it's not. Then you have Sweden. There are part of the EU, but they have a floating currency and then you have Norway and there are not a part of the EU, but still fall. A lot of the trade agreements, they have a floating currency, too. So it's just like you bring up such a good point. Like if you look at the numbers, you know, 500 million people size bigger than the US economy and you're like, oh, this should be something going on.


There should be something right going on. But then whenever you sort of like dig deep into what's really going on, it's just such a flawed system on so many levels. I can only agree with you. I think ultimately what it boils down to is that you need a political and monetary union to reflect one another. It's difficult to have a political union that is very different. But you do have from the monetary union and until the two are sort of coincident with one another, then you're going to have problems.


So, Ed, based on your comments for the dollar and the euro, how should investors think about that with their positioning? I think real interest rates, the progression of real interest rates over time, that's going to definitely be a interesting factor. The US curve, I think, has generally been steeper than the European curve. And so potentially you could actually make more money in US dollar assets at the long end of the curve, because the European Central Bank has shown that it's willing to go negative.


And the the US Central Bank has recently in the last two years, shown that it's willing to start jacking up interest rates even in the middle of a period where places like the ECB and the Reichsbank and so forth are having negative interest rates. So I think that this whole dollar's demise period is overblown in terms of the longer term. I think that the US dollar should hold up relatively well within the band that it's been trading within over the longer term and that we're near the bottom of that bed.


So when I think about the euro and I think about the US dollar, I think the euro like one 18, I don't really see it going up significantly more from here over the medium term. When we talk about the currencies, obviously the growth rates come into play as well. I would say that the US growth rate, most people are still of the opinion that US growth, nominal growth, as well as real growth will be superior to European growth.


And interestingly enough, if you look at the snap back from the covid rally, even though the United States has done demonstrably worse in terms of its effectiveness at halting the disease, its economy has done better than the European economy in terms of its growth rate, both on the way down and also on the way up. So I think that it may well be the case that over the medium term that the United States continues to outperform in terms of growth.


Maybe it's just because it's a more dynamic economy. I'm not going to get into that. I think that's a very almost political issue. But it should be helpful for the currency as well. Fantastic. All right, and I think every one of our listeners having listening to you and for you to outline your investment thesis, have you to talk about the economy and just for you to talk about currencies, I guess I can only say, wow, so many great nuggets to take off from this interview.


Yet where can people learn more about you and Relevation TV? Two different places, I wear two hats, I've been for the last. What is it now, 12 years I've been writing what was a blog, which is now a newsletter called Credit Write Down so they can come and see my own unfiltered view, if you will, a credit write downs, dotcom, where I think maybe every tenth, every fifth piece that I've put out is free, but the rest are behind the paywall.


Then I'm on real vision. I do interviews with financial investors, financial analysts, hedge fund guys. And I also do the Real Vision Daily Briefing, which you were talking about, which is our video podcast that goes out on a weekday basis. And I'm on that, say, two to three times a week so they can see me there. And that's also at Real Vision Dotcom. Fantastic at this has been such a pleasure, and I can already say now while I have you on record, we really hope that you want to come back on the show.


It's been an absolute pleasure. Thank you so much for coming on the show.


Well, thank you for having me, because I want to say exactly the same thing. I hope that was good enough because I'd love to come back. You ask the best questions, but are it a, uh, smooth and modest man?


What can I say? All right, guys. So this bad time in the show, we'll play a question from the audience. And this week we picked a question from Jim.


Hey, Precedent's Jim calling from Calgary in Canada. I just read your last current market conditions, which ended up with when the facts change, I change my mind. What do you do, sir? That famous quote from Keynes, I've been thinking about the bond market and the fact that so many investors have a large allocation to bonds in their portfolio. And as interest rates go down and as central banks manipulate markets, to me, bonds are becoming less and less attractive.


And knowing that the bond market is so much bigger than the stock market, is it possible that bond investors just start looking for something else? And so you get a rush of money out of bonds into other assets and maybe that stocks and if that's the case, we could start to see things like the Shiller P or P E ratios in general going way beyond historic levels. And a new normal becomes really high p e ratios. Anyway, just thought I would ask your opinion.


I love the show. So, Jim, I think this is such a wonderful question and it's something that investors are really considering right now. Bonds have been attractive for a long time since nineteen eighty one, because you see interest rate drop and because of that, returns have really been great for long term bond holders.


Today, as you point out, interest rates are really low. You might even be wondering why are so many investors still holding bonds? Now, you do have many insurance companies and pension funds that have to do that because that's simply how they're regulated.


That is due to a principle called duration. And they simply have to ensure that they have enough funds where they can expect to meet a certain amount of claims.


Another reason is that many investors like to have low volatility in the portfolio, and fixed income instruments such as bonds are just a much better way of ensuring that than something like stocks.


Now, my response so far has really been in so-called nominal numbers, not in real numbers. In other words, you need to account for inflation. So when people talk about double digit returns on bonds in the 1970s, well, inflation was double digits, too. So just because you might hold a, say, 50 percent return bond if inflation was the same, yes, the bond would be better in the hole in cash. But your purchasing power didn't change.


You will be making 50 percent more and everything would be 15 percent more expensive.


So what I'm worried about right now, and I think that's also what you're hinting at, is that what happens if we account for inflation? Because unless we enter a prolonged period of deflation, bonds would likely not be as attractive in real returns compared to many other asset classes. So when you ask whether we would see a new normal with a high Shiller P, you can say that we already there to some extent, the CLP is very high right now.


And the part of that reason is because the Fed is printing so much money and keeping a zero percent interest rate, and that just drives up the price of stocks. Asset classes should not only be seen in the light of nominal numbers, but rather investors look at what's the opportunity? And if you get zero percent on your bonds, suddenly a low to mid single digit return in equities might seem appealing. Now, whether or not it's a new normal, it really depends on how you define a new normal, because as we enter the next interest rate cycle and just to be completely up front, I have no clue whether that will happen if you have higher interest rates than certainly bonds and stocks change in value because stocks becomes less attractive because you can now get a higher return in bonds and bonds also changes value.


If you lock in long term bonds at the current price level, your bonds will drop in value as the interest rate go up. But it will, on the other hand, become more interesting to buy new bonds that are now paying a higher interest rate. So going back to what you said before, what do you do as a retail investor?


Well, if you're looking to compound your purchasing power, you do have a leg up compared to, for instance, pension funds, insurance companies, like I mentioned before, because you do not need to hold long term bonds. And if you like to have less volatility in your portfolio, you can buy short term bonds, which won't drop in value if you see an increase in interest rates.


And if you do think that interest rate stays long for a long period of time, you might consider looking into stocks instead. And if you're worried about inflation, you might also include a gold component. So, Jim, I know I covered a lot of ground here, and it is a tricky question that you ask, because it's very important to say, based on what's happening today, bonds are not attractive, but you do need to factor in what's going to happen in the future.


And that determines the value of the bonds and the decision that you make today. And you might have heard the quote that it's very difficult to predict, especially about the future. If I can even add to that, it's even harder to predict what's going to happen with the interest rate. So, Jim, from my vantage point, the question you're really asking is, how can I continue to measure something whenever a ruler doesn't exist anymore? Because for all these years, that's how we've looked at the fixed income market, particularly the 10 year Treasury, because that was always your ruler as to how you were measuring your returns above that risk free rate.


So if the risk free rate is zero, how in the world can I measure anything? And the expectation that I have moving forward that on a global scale, I think central bankers are absolutely going to try to implement this MMT where they're going to try to take rates negative. Now, the question really for me becomes, are they able to do that? And for how long are they able to do that if they if they are able to do it at all?


And for that and I think that's what Stig's getting at is like how in the world can you possibly answer that question? Because it's never been done before. This is implementing negative interest rates across people like, hey, give me some money and I'll guarantee you that I give you back less. That's never been done before. Now, does that mean it can't be done? Probably not.


I mean, who knows at this point? I do know one thing. If they go down that path, they've got to get rid of the hard currency that you have in your wallet, because what people are going to be incentivized to do is to go take out as much of that at the bank as possible, put it in a safety deposit box because you'll get a higher return than if you do it digitally with your checking account. We're not there yet, but all trends indicate that that's where they're trying to move things.


The reason they're trying to move it, they're the route as to why they're trying to move it there is because they can't allow interest rates to go up because of the fiscal spending that's happening not just in the US, but all over the world. So how do you deal with this as an investor? What it really comes down to is you need sound money. You need something that can't be debased. I think what you're seeing in the stock market right now is just that there are people that are bidding the value of certain companies, certain companies, companies that can protect their enduring competitive advantage.


Even in a depressed scenario, those companies are just bidding at levels that don't even make sense. Historically speaking, based on the earnings that the companies have created, everyone in the markets minds are exploding right now. Well, how is this possible? Why is this happening? Well, I think it's happening because people are treating that that stock, that equity as if it's sound money. Um, I think an important consideration to have is you need to own something that doesn't have counterparty risk.


When you think about debt, that has a counterparty risk, when you think about equity, it does not unless you're playing in the derivatives market. Right. But if you own the stock, that does not have the counterparty risk. So now if the if the company decides that the base or to create more shares of stock like what you're seeing with Tesla, that's a whole different story that that has. I guess you could argue that that has a counterparty risk because decision makers are debasing the stock.


But you need to find something that has sound footing, that is profitable, that is going to perform well in a depression, deflationary environment. And you're seeing a lot of that in the tech stocks and that's why they're running. Does that mean they're going to continue to run? I have no idea. I would suggest using some type of momentum strategy on those types of companies in order to protect your downside risk. I don't really know how else the person can can navigate this crazy central banking induced volatility environment that we're dealing with, other than treating it from that perspective, because we've pretty much taken the ruler, snapped it across our leg and thrown it in the trash can, which is your risk free rate.


So that's the best. That's the best I can do for you. I would I would tell you to try to get smart on momentum strategies and then focus on those companies that are going to continue to perform in a in a depression like scenario that have earnings so that they don't debase their their stock or dilute their stock. Those are the ones that I'd be looking at.


All right, Jim, so for asking such a great question, we're going to give you a free subscription to our tip finance tool. And this is on our site at the Investors podcast website. Anyone that wants to find this, they can go to Google and just search tip finance. And the good news for you, Jim, is we have a momentum tool on our Web site that will assist you on those types of companies to understand where the momentum stops and also when his has a positive momentum trend.


It's all there on the site and we're excited to be able to give that to you for free. Anybody else want to get a question played on the show? Go to ask the investors Dotcom. And if you get your question played on the show, you get a free subscription.


The tip finance was all the press I had for this week's interview here in the investors podcast. We see each other again next week. Thank you for listening to TI IP to access our show notes, courses or forums, go to the Investors podcast Dotcom. 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 before syndication or before casting.