With votes still being tallied in several states days after Election Day, this race has been closer than many in the mainstream media expected.
Our mailbag has been exploding with hundreds of questions from listeners about the impacts of each side winning could have on the markets.
It’s an extremely complex issue that could have big implications for you and your money. So Dan decided to bring in geopolitical expert, Marko Papic, onto the show for this week’s interview to help him answer some questions.
Marko works as partner and chief strategist at Clocktower Group, an alternative investment asset management firm where he leads the firm’s strategy team providing bespoke research to clients and partners on geopolitics, macroeconomics, and markets.
Marko is also author of the book, Geopolitical Alpha: An Investment Framework for Predicting the Future.
Dan and Marko talk about the implications of a Trump victory versus a Biden victory, the likelihood of the Senate switching, as well as some industries that could explode whether Trump or Biden is elected.
But Marko has a warning for the bulls. He says that his research shows there’s about a 30% chance there could be a big ‘hiccup’ that currently isn’t being priced into the market…
Partner and Chief Strategist at Clocktower Group
Marko leads Clocktower's strategy team, providing bespoke research to clients and partners on geopolitics, macroeconomics, and markets. Prior to joining the firm, Marko founded BCA Research's Geopolitical Strategy practice (GPS) in 2012. Marko began his career as a Senior Analyst at Stratfor. He holds graduate degrees from UT Austin and the University of British Columbia.
NOTES & LINKS
2:26 – Elections are tradable events, not something to base your long-term investments off of. Dan reviews his two favorite election trades, cannabis and bitcoin.
6:21 – “I don’t think it’s controversial to say, if Trump gets elected, there will be violence in the streets… If Biden gets elected, ya know, if the party of love and compassion and caring gets elected, there won’t be violence in the streets.”
12:11 – Past guest, Mark Putrino, found one bearish indicator in his research that caught Dan’s eye… “The percent of investors expecting a correction has dropped to a 3-year low.”
15:34 – This week, Dan invites Marko Papic, a partner and chief strategist at Clocktower Group, an alternative investment asset management firm based in Santa Monica, California. He leads the firm’s strategy team providing bespoke research to clients and partners on geopolitics, macroeconomics, and markets.
21:00 – Dan challenges Marko on the title of his book, Geopolitical Alpha: An Investment Framework for Predicting the Future… “Our listeners of this podcast, Marko I’m not kidding, have heard me say ‘you can’t predict the future’ like a hundred times.”
26:05 – Dan asks Marko’s opinion on where the U.S. election is heading… “What happens after? What do investors do?”
32:43 – Marko provides Dan with an in-depth analysis of what he predicts will likely happen in the markets for both a Biden and Trump presidency…
38:00 – “The second thing I worry about is, what does Trump do during his [potential] lame duck session?” Marko points out that if Trump loses, there are few foreign policy constraints on the president during his final months in office.
42:03 – “Yeah it seems like just everywhere you go, people who are betting real money, making odds, any poll you look at, the idea that a lot more people are turning out, it all points in one direction… but the only thought in the back of my head, Marko, I feel like we were saying all the same things four years ago.”
49:24 – Marko provides some evidence that shows we could be entering a Dollar bear market. Plus he shares a few industries that he’s bullish on over the next 5 years.
55:40 – Marko concludes his time with one final piece of advice for listeners from his book Geopolitical Alpha, “We cannot invest with any bias or any kind of thought about what is right or wrong… when we have our investment hats on, we need to bathe ourselves in indifference.”
1:00:40 – On the mailbag this week, Dan tries to respond to as many readers as possible… One listener asks Dan if the riots and unrest have reached his doorstep. Dan also fields several questions about long-term investing in world run by MMT. And another listener asks about how to sensibly exit a position that has turned into a massive winner. Listen to all these and more on this week’s episode.
Announcer: Broadcasting from the Investor Hour Studios and all around the world, you're listening to the Stansberry Investor Hour. [Music plays] Tune in each Thursday on iTunes, Google Play and everywhere you find podcasts for the latest episodes of the Stansberry Investor Hour. Sign up for the free show archive at investorhour.com. Here's your host, Dan Ferris.
Dan Ferris: Hello and welcome to the Stansberry Investor Hour. I’m your host, Dan Ferris. I'm also the editor of Extreme Value, published by Stansberry Research. Today, we'll talk with Marko Papic. He's a global macro investor with a brand-new book out whose title says he has a method for predicting the future. Bring it on, Marko. Can't wait to talk about that. This week in the mailbag, comments and questions about government inefficiency, value investing, crazy anarchists and more.
In my opening rant this week, well, let's face it – there's only one topic right now. And that is what we will talk about. You guessed it: the 2020 U.S. presidential election. That and more right now on the Stansberry Investor Hour. Yes. There is one topic and one topic only. As much as I would like to say that I'm the guy who's strong enough not to give in and be swallowed up by the zeitgeist here, can't do it. Got to talk about it. Well, we've talked about it already. So I need to revisit where we've been and see where we might be going. Now, I'm going to break with tradition and tell you exactly when I am recording this. Because it's important this week. I am recording these words as I'm speaking to you on Election Day, many hours before the polls are due to close, back east. OK?
So we don't know who's president yet. That's a good thing, I think, because – I'll remind you of what I've said, and then we will... next week, we'll get to revisit this, and we'll get to find out, "How right was Dan?" Maybe even when we get to our interview, how right was Marko, too, right? I think that'll be a good little exercise for us – kind of keep me honest.
So what have I said? Well, I've said that elections by and large are not investable like long-term. In other words, who the president is... it doesn’t really matter. They're tradable, I've said – meaning there's a lot of noise around them, and there's a lot of concerns about how a given candidate's policies are going to affect the economy and how that might affect the stock market or particular industries.
So they're tradable, short-term. Can be. Can be really good. But not investable, I've said. We'll see how I do on that one. And I've also said that I thought two good... really post-election, right? You can do them now before we know the result. But I've said they're kind of long-term, maybe six months or more, 12 months even. Probably less than 12 months, I'm thinking. More than six, less than 12. Cannabis is one of them. And two episodes ago, we talked with our cannabis guru here at Stansberry, Tom Carroll. If you didn't listen to that, we got right to the issue of what the election means for cannabis, if it means anything different for either candidate.
I encourage you to listen to that just because Tom is so knowledgeable about cannabis in general. And he's bullish over the next year no matter who wins. So there's that. Then there's the other sort of post-election trade. This is much longer-term, though. It's bitcoin, right? Because we think that no matter who gets elected – Trump, Biden, Kamala Harris [laughs]... you know? I don't know. Jerome Powell? Whoever gets elected, they're going to have to engage in a substantial... or, we strongly expect them to engage in a substantial amount of really coordinated monetary and fiscal stimulus. Sort of Bank of Japan style between, you know, the Fed and the government.
And as we talked about before, right, the Fed can print money. It can buy securities. But unless that money is lent and spent, it just doesn't create the inflationary effect that people anticipate. In fact, that simple act of taking that bond – when the Fed buys that bond, takes it out of the market – that's actually deflationary, right? Because they're taking income out of the market. And they're not – you know, they don't have a... it's not going into somebody's retirement account. It's just taking it out and replacing it with a dollar of reserves. So if the reserve doesn’t get lent and spent, we don't see the increased demand relative to the supply of goods and services. We don't see price inflation.
But given the way things are these days, mostly due to the draconian government response to the COVID-19 pandemic, we don't see how either candidate – whoever gets elected, we don't see how the president is going to be able to escape the need for especially coordinated fiscal and monetary stimulus. So that degrades the currency. Bitcoin becomes more attractive. So cannabis and bitcoin – those are our trades. And we'll see how investable this election really is. This is what I've said, right? It sounds like I'm saying, "Well, it doesn’t really matter who gets elected. These are the trades. Either candidate is good. You know, over time in history it hasn’t really mattered who the president was long-term."
But my gut is telling me – it's telling me something different. And I would feel remiss if I weren't completely honest. I think maybe I'm too caught up in the news. But I feel like, certainly, I don't think it's controversial at this point to say that if Trump gets elected, there will be violence in the streets. and I suspect that the stock market will not like that at all. If Biden gets elected, we don't... you know, if the party of love and compassion and caring gets elected, there won't be violence in the streets. [Laughs] If the party of love and compassionate doesn’t get elected, then there will be violence in the streets. You know? That's a joke.
You know me. I don't care. Left, right, Democrat, Republican – I really don't care. I don't have a prejudice either way. But I just thought that was a funny joke that I saw on the Internet. So, you know, it's reasonable to expect that there's like a short trade if Trump gets elected. You know? A short-term short trade, but a short trade nonetheless. And I couldn’t help noticing Raoul Pal, the global macro investor guy who runs Real Vision who we've had on the program – he did a little Twitter thread, real quick, just a few things. And he noticed, as he put it, that he thought the market was anticipating this reflation effect.
And hedge funds are net long. They're longer on stocks than they've ever been and shorter on 30-year Treasurys than they've ever been. And that is kind of interesting, right? And they're shorter on dollars, right? So over the long term, we have no doubt that the dollar is toast. But when you get these short-term phenomena, you know, the odds aren't bad. Thee really good bet tends to be to go the other way. And I did this once before. I actually did this in public, and I did it in the Stansberry Digest. And Porter Stansberry had to go in the next day and explain, "Whoa. Whoa. Whoa. Whoa. Whoa. You know, long-term, short-term," whatever. You know? His view is the exact opposite of mine.
And I was saying, "Look." And it was April 1 or the end of May, the last day of May, first day of April 2011. And of course, I said: "Everybody hates the dollar. So dollars are what you should own." And of course, that was the beginning of a – I think it was, you know, 19% or 20% drop in the stock market through the first week of October, right? Because if the dollar strengthens, there's more demand for dollars, maybe it means there's less demand for stocks. Well, there's less demand for something if people are buying dollars. They're selling something.
And with, you know, hedge funds long as they've ever been on stocks – and you can see this phenomenon too. I was going to say it was hedge funds as long as they've ever been on stocks, short as they've ever been in Treasurys and dollars. And Raoul Pal said it's like four standard deviations. He said, "No matter how you slice it, they're shorter than they've ever been on Treasurys." And just for a little gut check kind of a thing, I went to TD Ameritrade.
And sure enough, the first thing I see is this article by their chief market strategist that says, "Wall Street votes for spending. Whoever wins could reignite fiscal stimulus hopes." Right? The reflation. Which could be good for stocks, good for gold, good for bitcoin – all up as I'm talking to you. In fact, the S&P 500 and bitcoin as I'm speaking are both up exactly 1.88% or – they're fluctuating – 1.89%. Interesting. So meaningless, random data point. But the reflation trade is on. People are buying bitcoin. People are buying stocks. People are buying gold.
And my gut tells me that this is the right way to be and that the strong dollar thing that could be a short-term phenomenon... that that's the bet. And the bet is, you know, maybe – I don't know, just call it the next two months, say, between now and... between now and December 31, short equities could be the trade. I personally own put options on big stock indexes. I also own a call option or two. And they're different time frames, right? So this is going to be really interesting to say the least. The outcome in the stock market – I mean, here I am, I'm the guy who says, "It's not investable. It's tradable."
And granted, I'm offering you trading ideas, not long-term investing trends. But I'm saying, "Geez. This thing could be like, a huge trade." You know? But these are speculative ideas, right? What I'm describing are speculations based on all kinds of data points – you know, how short the hedge funds are, how long the hedge funds are, the market's going straight up here on Election Day – up 2%... the sentiment is really high... there's a couple sentiment indicators. I don't want to get into the sentiment because you really need to line them all up together.
And even then, they're not necessarily good. But actually, I take that back. I will get into one of them because our guy Mark Putrino, who we interviewed on the program – he was talking about the investor's intelligence percent of investors expecting a correction, has dropped to a three-year low, he said. "It could be very bearish." He said, "The indicator has been reliable lately. It gave a signal back on September 2 right at the peak." So, you know, he doesn’t know how this plays out. Could be a little ominous. There could be a short trade here. We'll see. It's speculative. You know, small amount of capital if you do anything about it.
And you should do your own work on these speculations. I'm just throwing ideas out there and tell you what I’m doing. All right? So I think that's enough said about the election. OK? This is where we are. That's what I've said. It's Election Day as I'm speaking into the microphone, and the next time – you know, the next episode, we'll revisit all this, and we will see how it turned out. And maybe we'll even see by the time this very episode is published, which could be interesting, right? It's a good way to keep me honest. I don't know the outcome, and yet we're going to publish this thing after the outcome might be known.
And I say "might be known" because there's a lot of talk about the fact that this election might be contested – it might take a long time to count up all the ballots. And, you know, Trump is saying – he's going to get his lawyers in gear as soon as the election is over. And I know his intent in saying that. I think I know it. But it sure sounds like it could be misconstrued that he's going to try to steal the election. Well, Trump should be careful what he says a lot of the time. He's really kind of a sloppy talker. He'll say anything, anytime to anyone. But in this particular case, it's kind of a sloppy thing to say. We'll see. We'll see how it all turns out. Well see if there even if a new president by the time you're hearing these words after the election. All right?
This is a nice little exercise, isn't it? All right. That's enough of that. Let's talk with Marko Papic and find out how to predict the future. Let's do it right now.
[Music plays and stops] You know how I'm always saying that I don’t want this show to be too political? Because after all, it's a finance show, and some politics is appropriate. But, you know, it can get too much really quick, right? Well, maybe you're interested in politics. Maybe you're interested in American and global economics and politics. If so, you're probably going to be pretty excited to know that Trish Regan, the famous finance and political journalist, is now part of the Stansberry team.
And Trish Regan has a brand-new podcast. It's called American Consequences. You can find it anywhere that you listen to podcasts – iTunes, Google Play, anywhere – or you can just go straight to americanconsequencespodcast.com. And she's already had some huge names on the show like billionaire businessman John Catsimatidis and former U.S. Senate candidate Tom Del Beccaro. So check it out. It's available anywhere you listen to podcasts, or just go to americanconseuqncespocdast.com. [Music plays and stops]
I am really looking forward to this one. We're talking to the right guy at the right moment, and his name is Marko Papic. Marko is a partner and chief strategist at Clocktower Group, an alternative-investment asset-management firm based on Santa Monica, California.
He leads the firm's strategy team, providing bespoke research to clients and partners on geopolitics, macroeconomics, and markets. Prior to joining the firm, Marko founded BCA Research's geopolitical strategy practice in 2012. The financial industry's first dedicated political analysis investment strategy. The GPS service generated Geopolitical Alpha by identifying gaps between the market's political expectations and the firm's forecast. Marko was a senior vice president and the firm's chief geopolitical strategist.
Marko began his career as a senior analyst at Stratfor, a global intelligence agency where he contributed to the firm's global geopolitical strategy as well as its analyst recruitment and training program. In his academic work, he helped create the Center for European Union Studies at the University of Texas at Austin. He holds an MA in political science from University of Texas Austin and an MA from the University of British Columbia. And he is the author of Geopolitical Alpha, an investment framework for predicting the future, a provocative topic. We'll get into that. It's a book that introduces his constraints-based framework to investors. Marko Papic, welcome to the program.
Marko Papic: Thank you. Thank you for having me, Dan. It's a real pleasure.
Dan Ferris: So, Marko, when we interview folks who are in your line of work I always like to ask them... I like to start out by knowing at what point in your life did finance become your definite career direction? Was it very early or after college, or when was it?
Marko Papic: Oh, no. No. No. It definitely was not early. It was not after college. It was sort of when I realized that there was a market inefficiency in how people in my line of work at the time, which was political risk, talked to investment professionals and how investment professionals talked to people in the political-risk community. There was a real disconnect between the two groups of people. They had become over-professionalized from the end of the Cold War until 2010. And I remember exactly the day when I realized that I should do what I do now. I was at Stratfor, and I was pulled into this conference call with a hedge fund in Connecticut.
And I barely knew what a hedge fund was back then. And this is 2010. And they ask, you know, "When you talk to your Europe expert" – and at the time I was a Europe analyst at Stratfor. And the question was, "Look. The German president just resigned. And we're going to sell everything. You know? This is it. We've been waiting. We have a view. Europe is going to collapse. The euro's going to go down, and we want to use this as a catalyst." And I'm at the middle of the conference room and I'm like, "I have no idea who the German president is."
And it was like a record skipped. You know? And the guy on the other side is like, "You know, what the F do you mean? We pay you a lot of money, and you're the Europe guy at the shop." And I'm like, "No. No. You guys don't get it. Like, I'm the best Europe guy, and I don't know who the German president is. Like, it doesn't matter. He's Queen Elizabeth. He kisses babies. You know? Like, forget it. I don’t know what he got – why he resigned. I guess I'll have to go back and look at the news." You know?
And anyways, the conversation ends. They were very appreciative because I gave them a straight-up answer like, "This doesn't matter. Like, go back to making money." You know? And I remember the salesperson sitting next to me. She looked over at me and says, "Wow. These guys are really dumb." I remember, like, the kind of – it was thick with – it was thick with arrogance. You know? Like, "These guys don't know what they're talking about." And I thought to myself like, "No. These guys can buy me to tutor their kids for the rest of their lives." Like, I would say yes. If they walked in here and said, "Hey. Can you tutor my kids for the next 10 years," I'd be like, "Yep. Sure. That's good. Get me out of here." You know? [Laughs]
And so, I just sat back, and I said, "They're not dumb. They're over-professionalized." You know? They spent the last 10 years in this Washington consensus where Washington FOMC notes was part of your job. And they are not ready for what's coming." You know? The euro-area crisis to me was the first moment when what was coming was a massive government interference in the way markets work. And I realized that I had a career. Literally, that was the moment where, like, I realized there was a career to be made out of bridging these two communities and not – breaking these walls of arrogance that I think epistemic communities, knowledge communities, build up around themselves to make themselves feel professionalized.
Dan Ferris: Wow. That's a cool moment. I recognize that story from your book, Geopolitical Alpha. But yeah. Very, very cool. Must have felt really, really good for you.
Marko Papic: Yeah. I mean, it was good to know what you want to do.
Dan Ferris: Yeah. It is. It is good to know what you want to do. I agree. There's a time in your life when you go, "You know, this is the right direction." It just feels right. I've experienced a bit of that myself lately. But, Marko, I can't help jumping right to the subtitle of your book. This is like – I can't turn away from this. It says, "An investment framework for predicting the future." Because our listeners of this podcast... Marko, I'm not kidding you. They've heard me say "you can't predict the future," like, 100 times. And literally 100 times. So what is the constraints framework, and do you use it to predict the future?
Marko Papic: Yeah. No. That's a strong subtitle. I will admit to that. and I'll tell you why. I'll tell you why. Because the No. 1 thing that I'm fighting with that subtitle is this view in the financial community as, "You can't predict politics." Which I 100% disagree – not because you can predict the future but because you can't predict the markets, either. All right? So look. Here's the thing. There's a sense in the financial community that we're professionals that, you know – figuring out where the market is going. But over there, in that camp on that corner, those people are charlatans, and they look at chicken entrails.
And I'm like, "No. No. No. No. We're all charlatans. Like, let me just be straight-up. We are all looking at chicken entrails. Like, don't tell me you're more quantified than those people in that corner. No. No. No. We're all" – but it doesn’t mean you can't be systematic about how you, you know, put together the push, and it becomes the snake juice you're selling. And let me just explain what I mean by that. It means that there is a systematic way to approaching uncertainty.
And in the political world, the way to do that is not to talk to old, wise men in smoke-filled rooms or these consultants who name-drop within the first breath they draw. It's like they'll tell you the three people they had lunch with that week. The way to do it is to think about policymakers as essentially constrained individuals who will have to pursue policies – not that they say they want to pursue but that ultimately, the material context in which they live, in which they find themselves, forces them to do.
So is Donald Trump going to leave NATO? The answer is hell no. Here's why. You know, A, B, C, and D. Because he is constrained by the material reality in which the NATO alliance is actually quite meaningfully important for American geostrategic interest. Is he going to pursue a trade war with China? Yes, he will, because constitutionally Congress has passed several pieces of legislation to give him quite an unencumbered, you know, kind of platform when it comes to free trade. At the same time, he is ultimately constrained. And therefore, he will both pursue trade war and end it.
So it’s not about preferences. It's not about what these people say they want to do. It's about the material world they exist. Now, there are different ways in which this constraint framework is used. For example. The shop that I started my career at, they kind of gave me the idea that it's more than just what people want. It uses a very geopolitical view of the world. And I think that's really, really useful framework. I use part of that in my thinking as well. Geopolitics is important. Geography, demographics, these kind of immutable variables over a long course of time are really relevant.
But if you try to figure out what Joe Biden's going to do, if he has a Republican Congress, it doesn't really help you to think about American in terms of two oceans. It's not meaningful. So you have to kind of dig a little bit deeper. And so, what I've done is, I've expanded a set of constraints that I look at to include things like political capital, ability to pursue legislation to Congress, economic constraints, financial constraints like the bond market, and then legal Constitutional constraints. You construct the mosaic, and then you can have a pretty decent view, probabilistic view. It's not a sure thing. But you can have a pretty decent view of where these policymakers are going to take their policies over a certain period of time and bet against the market.
Dan Ferris: OK. So that's our kind of theoretical description of the tool or whatever. In the same way – well, look. Before I say my next question, I have to say you must be the most honest guy in finance because I promise you nobody is coming onto this program and saying, "You know, chicken entrails and snake juice, and you just need a more systematic way of making snake juice." So that's awesome. From that alone, like, you know, you and I are sympatico.
But the next question, the next thing that I simply cannot avoid asking about – of course, as we talk to you... and I'll just sort of pull the curtain back on the podcast for our listener a little bit. We're around 3 p.m. or so on Election Day that we're talking to Marko. This is really well-timed, this conversation. Because we can talk about it. Then we'll see the outcome, and then we'll see how things play out. This could not have worked out better for us. So that's my next question, Marko. What is happening? What has happened during the campaign? What do you think is going to happen in the election if you have a view about that? And what happens after? What do investors do?
Marko Papic: Well, first of all, let me refer back to your point about honesty and knowing that, "Look. You're dealing with a very – with a lot of uncertainty." Philip Tetlock wrote a great book. Superforecasting. He also wrote a couple of other books. And, you know, he will tell you that in order to be a very good forecaster, you can't be parsimonious. You cannot just rely on one thing. You have to have an ad hoc method. And if you read my book, Geopolitical Alpha, you'll see that that's where the snake juice kind of comes from. It comes from being flexible. Because policymakers face different constraints at different points in time on different policies.
So let's talk about this election. How will the constraint framework help you, as an investor deal, with the deal with the election and uncertainty? This is what it comes down to. To me, the biggest constraint in policymakers in the U.S. over the next two to 10 years is going to be that the median voter has moved to the left on economic policy. Period. Massive empirical evidence of this. You know, I know a lot of listeners – this is an investment, finance kind of community we're speaking to. There's going to be a lot of like fist-shaking at my statement.
I'm sorry, but it's just a fact. You know, the median American has moved to the left – including, and this is most important – Trump voters themselves. Like, who is out there shaking their fist at the budget deficit other than, like, Mitch McConnell? You know, nobody. So the median voter is really the price-maker, then. And policymakers are just price-takers. So what I would say to you is that this election is between two outcomes – not Joe Biden versus Donald Trump. This election is between two outcomes, which are pro-growth and anti-growth.
The pro-growth outcomes would be the blue wave and a Donald Trump reelection. Ironically, both of those are bad for bonds, good for stocks, relatively good for stocks – at least nominal terms – and ultimately I think negative for the dollar. Because the U.S. is now at the margin of unorthodoxy. You know We are at the frontier – we are at the frontier of unorthodox. In the U.S., I think we're going to lead the rest of the world into this world where fiscal policy becomes extremely meaningful to growth, and we do not reverse it as we did in the last cycle where we pretty much had the Tea Party rebellion within 18 months of the recession, 2010, and we had austerity.
Dan Ferris: OK. Marko, I want to interrupt just – I just want to make it clear. You said, "Donald Trump and blue wave." Not red wave. Blue wave, right?
Marko Papic: Yep. They're the same.
Dan Ferris: OK. Interesting combination. Yeah.
Marko Papic: No. To me, I'm a macro investor. Now, obviously sectorially there's going to be differences. But, you know, you don't want to talk to Marko Papic about sectoral implications of these two presidents. I mean, first of all, I think they're fairly obvious. Second of all, that's not what really interests me. I'm talking about big-picture. In big-picture, I think both Donald Trump and a Joe Biden unencumbered by Republicans in Congress are going to get the same outcomes in terms of fiscal policy. The argument against this that I often get is, "Well, Nancy Pelosi will be a problem for Donald Trump." On fiscal policy? On fiscal stimulus? No. Of course not. She won't.
She will actually push him towards the median voter, which is to have more. And I think this is profound shift in American policy-making. And I think that's why there's that outcome. That outcome has about 70% probability, I think, of coming true. Now, there's a 30% probability – which is higher than what I think the market is pricing. And that’s that I'm wrong and that we're all wrong. Look at how the 10-year has been basically creeping up, the yield has been creeping up in expectation of this pro-growth outcome being true, like revealing itself. I think there's a meaningful 30% probability that we actually have a hiccup in this very neat story of reflation and fiscally-led, you know, growth.
And that's that Biden wins, but he doesn’t get the Senate. In that case, now that's – you know, that's the gridlock outcome. Most investors have, in the past, really liked that. You can look at a number of sell-side reports that will tell you how gridlock is great. Not in today's paradigm. Today's markets are fiscally-led. They are addicted to fiscal policy. And I think the market, if we don't get clarity in the Senate tonight – which we may not, it's pretty close – I think the market is going to have a hiccup. Because it's going to have to ask itself, "Will Republicans in the Senate, if they were to retain the Senate, give Joe Biden what he wants on fiscal policy?"
Now again. The counter to that is, "But, Marko, doesn’t gridlock mean less tax uncertainty?" And my view on this is kind of controversial. I think there's very little chance that Joe Biden will be able to raise taxes – at least in corporates. I think on individuals... yeah. I think on individuals, for sure. My mental map for this is 2017. Donald Trump comes to power. We have a red wave. We have a unified government behind Donald Trump. But his marginal senator is a liberal Republican. So the marginal senator becomes Susan Collins, Lisa Murkowski and John McCain, who refuse to repeal Obamacare.
And similarly, I think in 2021 you have to understand that the marginal senator in the Senate is going to be a conservative Democrat – say, Montana's Jon Tester or Mark Warner from Virginia or, you know... who's a venture capitalist – very successful man who's done a lot in finance. So are you telling me that these relatively centrist conservatives or Manchin, by the way, in east Virginia who is a straight-up conservative. Are these conservative-centrist Democrats going to pass tax increases of 8%? And my answer is no. So you have this very binary outcome in terms of probabilities where the constraints on Biden, on fiscal policy, will be nonexistent – he will spend a lot.
But the constraints on tax increases are considerable. And so, that's skewed between the two sets of material constraints tells me that if we do get a blue wave, bonds sell off, equities do well, dollar doesn't. Donald Trump is very similar. You don't have a threat of tax increases, obviously. So that's a positive. But he will spend as much as Biden – maybe not exactly the same, but he'll spend as he has proven he will. And then, the only downside in all of this is if the Senate turns red or stays red – you know, stays Republican.
So what does that mean for investors? I think for investors, it means that we could be in for a surprise tomorrow. You know, the bond market could rally in the short-term as the uncertainty on the Senate outcome continues. You know? We may be in a situation where we have to wait for Georgia's, you know, second round in December to get a clarity on the Senate situation. If Biden wins.
And if Biden loses, then I think it's pretty much smooth sailing. I think for the most part, the market will breathe. A sigh of relief and say, "Well, Donald Trump – he may have his flaws. But one thing we know is, he can get fiscal stuff through Congress with Nancy Pelosi." They're actually quite an interesting pair, and they work actually quite well together when it comes to indebting America [laughs] for the future.
Dan Ferris: Interesting.
Marko Papic: I just insulted all your listeners, by the way. Literally all of them.
Dan Ferris: No. No. No. No. No. No. [Laughs] They're a pretty thoughtful crew, actually. I get a lot of really thoughtful, intelligent e-mails from these folks every week. So I think you'll be better received maybe than you anticipate.
Marko Papic: Awesome. Good.
Dan Ferris: So tell me again. Let me just go back to – you know, you said there could be a hiccup. Because I wonder about this, too. And I'm not a geopolitical guy. But I look at things like sentiment and positioning. And, you know, people want to be – they want to be short the 10-year, 30-year right now. They want to be short the dollar. So when I see that, I think, "Well, long-term I think the dollar's toast." But when we get these short-term extremes in sentiment, a great way to raise a bunch of cash if you want to, of course, is selling equities. So that's kind of where I was on the possibility of what you term "a hiccup."
Marko Papic: Yes. Let's talk about a hiccup. Everybody talks about contested election. Look. I don't think that's really the problem. I think the problem – I mean, you know, sure. That could be the hiccup. Whatever. You've heard it from other people. I'm not going to repeat. I think to me, it's that we don't know the outcome of the Senate race. You know? You could have a world where Biden wins – yeah. You could have a world where Biden wins Texas. But some of these Senate polls are actually quite close. The Democrats have to gain four without losing Michigan. And, you know, Arizona looks pretty much locked for them.
But North Carolina, Georgia, Colorado, Minnesota, Montana, Maine, South Carolina – they're all within the margin of error. And they need to win four of those. And if they end up having to rely on Georgia, Georgia's likely to go to the second round. And so, we have to wait until December. Now, who's going to be motivated in December to vote in Georgia? Let's say Biden wins. Who's going to be motivated to turn out for the Georgia Senate election? I think it's going to be Republicans who are going to say like, "OK. Fine. Biden won. Great. But you know what? We want to put some – we want to put some constraints up on him – some guard rails. So I'm going to show up, and I'm going to vote for the Republican candidate in Georgia."
And then, we have this – that's why I think it's a 30% probability that, I agree with you, the market is not pricing in – the 10-year has been selling off. The 30-year, as you say, positioning I think is at an all-time-short. Same with the dollar. And I think that that would be how you get the hiccup – that there's uncertainty on the Senate. And that's why I'm not really interested as an investor. You know, I use politics and geopolitics the way a value investor uses valuations or the way a technical analyst uses charts. Politics and geopolitics are in my methodological bias. That's what I'm the best at, if you will, as an investment professional.
But to me, I don't think there's any alpha to be generated by getting Biden or Trump right. I think it's about this Senate constellation. And that's where I don't think enough has been written about, I don't think people have focused on it enough. And I think 30% is a one-in-three odds of a meaningful reversal of some of the positioning you're talking about. Because it is a hiccup that could last three to six months. There's two other things that I think we should look at, by the way – that if I can quickly just add these two other issues. Joe Biden doesn’t become a President until January 20. So there's going to be a period of time where he's just kind of talking on the sidelines.
And I can see him talking about lockdowns from the sidelines. You know? So one of the things that could happen is that the market has to price in a meaningful shift in how America has dealt with COVID instead of this kind of localized state-by-state approach, suddenly Joe Biden is out on the sidelines chirping at Trump like, "You know, we need a Federal shutdown," which is likely impossible to do. But he's going to be talking up like, "Look. We have a third wave. It's huge. You haven't done anything." The market might have to respond to that, even though I believe that by the time he becomes the President, the third wave will start breaking as it has in the past. It's usually a four to eight-week kind of a thing.
And then, the second thing that I worry about is, "What does Trump do during his lame duck session?" You know, people talk about lame duck as if the President is a lame duck. But Constitutionally – and again, in terms of constraints, he doesn’t have any constraints on foreign policy in those three months. Like none. He can do whatever he wants. And if you go back to '92, Bush Senior lost the election and then invaded Somalia with 30,000 troops in December trying to lock in the populous, Leftist Bill Clinton from Arkansas. Bush was worried that this kind of guy from the middle of nowhere was going to come in and be an isolationist.
So he tried to lock in the coming President with a foreign policy action. And could Trump do something similar in those three months? So I feel that even if we have this blue wave where the market kind of cheers certainty, VIX collapses, the 10-year sells off some more, I think there's a couple more things from now until February where we could have a hiccup and meaningfully change the direction of the positioning that you're referring to.
Dan Ferris: Very interesting. Man. I'm so glad that we're talking [laughs] to you. I really am. There was something that I saw that I wanted to ask you about, Marko. I noticed a couple of reports of the voter turnout is already pushing record numbers. Does that mean anything to you at all?
Marko Papic: I think marginally, man. Marginally. You know, I think too much is made out of this by the media. They're trying to spin this as super-positive for the Democrats. What I would say is that – and you know Nate Silver and professionals, folks who look at this 12 hours a day and don't do anything other than trying to predict like the U.S. election... they will themselves tell you that this is cannibalization. The Democrats are cannibalizing the vote on the election day. So that's the first thing I would say. So if you're kind of a Trump supporter-
Dan Ferris: What does that mean?
Marko Papic: Well, it means that these people were going to vote on the Election Day, but they just voted early. You know? There's no – that's what it means. It means that on the Election Day, we just had a lot of people who would've voted on election vote now. So, you know, a lot of the media is reporting that there's a skew toward the Democrats in the early votes. And my point is just that Democrats could've voted on the election day. But it does mean the turnout is going to be huge. The turnout is going to be very, very elevated.
And I do think that hurts the incumbent. You know, generally speaking if you're the incumbent, a huge turnout kind of tells, "You know, people are angry." It doesn't mean people are really happy. And so, I don't think – I don't think the skew toward the Democrats means anything. I think that's a wash. But I do think that the odds that his turnout is going to be huge is a problem for the incumbent – similarly to how 2018 mid-term election. You know, we had the highest turnout two years ago since 1914. And it was a pretty robust... yeah. Yeah.
And it was a pretty robust victory for the Democrats. The only thing Republicans say is that they held the Senate. But the Democrats were defending a vast majority of the Senate seat because the Senate goes one-third, right? So that 1/3 – that cohort – of 2018 Senate races was heavily skewed toward Democrats. And they managed to not lose more seats, which was impressive given how much more seats they were defending.
And so, overall I think it's just – you know, it's not a good sign for Donald Trump. But on the other hand, you know, he doesn’t have 0% probability of winning. I think only The Economist is really pegging him at under 10%. There are still ways... there's still paths for him to win. It's just, I think just empirically speaking, the math doesn't really help right now for Donald Trump.
Dan Ferris: Yeah. It seems like just everywhere you go, people who are betting real money making odds, any poll you look at... the idea that a lot more people are turning out – it all points in one direction... But the only thought in the back of my head, Marko, is I feel like we were saying all this exact same stuff four years ago.
Marko Papic: Absolutely.
Dan Ferris: [Laughs] You know? Like, right up until – the odds didn't change until like it was almost like 9:00 Eastern time. I mean, the odds didn't start going the other way. It was crazy.
Marko Papic: Well, you know, that's why – look. The prediction markets... you got to understand. Like, you know, I mess around with PredictIt. I think it's cool. It's fun. The maximum bet I can make is $800. That's the maximum bet you can make. So you got to be very careful. This is a tool for like consensus. And so, I think the difference this time around, though, is that there's a meaningful divergence between professional forecasters who are more confident this time around... and I don't mean New York Times, and I don't mean Huffington Post – which, I think in 2016 gave Trump like 1%. I mean like Nate Silver.
You know, a lot of people don't like Nate Silver, but he did give Trump like 32% probability of winning. Look. If you're like a basketball professional and you shoot a three-pointer at 32%, you're like a marksman. You know what I mean? So, like, in Silver's defense, that was quite a bit. I gave Trump 42% last time around. It was – to me, it was basically a toss-up. And, you know, I thought that Hillary Clinton was slightly favored. But yeah. I mean, I thought that this election was a toss-up, and I had said in early 2016 like, "Look. He has a path to victory that goes through, you know, a turnout of the white voters." I think this time around, though, what's different... this time around, the context is not favorable to him.
You know, you could argue this isn't really – you could say it's his fault, it's not his fault. I don't care whose fault it is. But the fact of the matter is that, like, he had 3% unemployment rate 12 months ago. Now it's substantively higher. You know, he's making a case that it was a V-neck recovery. And, I mean, I'm sympathetic to that view. It's just that those are the facts. The context is much worse. An incumbent fighting a reelection in a post-recession environment is just very difficult for them to win. The other thing I would say that's different is that, if you look at the polling, they are much more calmer, more ossified – unlike in 2016.
And then, the final point I would say is that there's a PTSD kind of way to think about it. I think a lot of people have PTSD from 2016, and they feel that, you know, "Well, we should throw out all these polls." The polls weren't that wrong. They were wrong about 1.2%. So anyways. I don't really want to spend too much time talking about the forecasts because, ultimately for us as investors, I think what's important is to get away from Joe Biden versus Trump and to think of this election in kind of pro-growth/anti-growth outcomes. I think that's really the key. And as you said, everyone's aligned on the pro-growth outcome. and I do think it's the favorable at 70% probability of that. But there's a nice, juicy 30% – one in three – and I don't think enough people are kind of worrying about what happens to the Senate.
Dan Ferris: Right. So maybe that's your short-term trade, and it takes a while for that confidence to return. And then, who knows?
Marko Papic: Listen, Dan. That's literally what Geopolitical Alpha means. And I don't know how many people, like, gamble in sports on his podcast. [Laughs] But I don't. I don't. I don't. But I'm fascinated by it. And, you know, what we have to understand as investors is that we need to approach this the way a professional gambler approaches sports. Why? You don't care if the Patriots beat the Bills. You're not a fan of the game. You're not a fan of a team. You just look at it, and you're saying like, "OK. You know, they're favored by a touchdown.
But it's in Buffalo. It's cold, and Tom Brady is not the quarterback anymore. Like, I'm betting against that line." You're not betting that the patriots are going to lose. You're just betting against the line. Similarly, in politics I think the number-one way that investors make mistakes and don't generate Geopolitical Alpha is that they think this is about outcomes – that this is about who wins. We're not doing that. We're simply putting a bet on.
And right now, I think – given what you said, given positioning – I think there would be a short-term tactical trade, as you say, that kind of says, "Hey. Maybe the bonds actually rally in the short-term because that 30% probability is not being priced in." In other words, the market is right now giving the blue wave team a touchdown and a field goal over the anti-growth outcome... and that's maybe too much.
Dan Ferris: Got you. Actually, that's a great analogy. I love the sports analogy there. That works great. And I love the fact that you are not taking this as a straight Trump-versus-Biden trade. This all makes a lot of sense to me. I'm really, really glad that we're talking to you. We're talking to the right guy. So here's my – it's not my final question, but... maybe we'll ask you another question or two. What I want to know – like, it's nice to hear people talk about their strategy and what they would do, what the outcomes they think are going to be.
But let's face it... You and I both know it's like where the rubber meets the road. You know? It's not what you say. It's what you do. So I wonder if you could – you know, I don't want you to give away the secret sauce or anything. But if you could share your ideas about portfolio positioning or maybe how things might change depending on outcomes that we get from this election... just give us a couple thoughts there.
Marko Papic: Yeah. Of course. So look. Clocktower Group is an alternative investment management firm. So our business lines, you know, are much more illiquid. And so, I don't manage public equities or public assets. You know, we have a VC in fintech. We are very focused on the private markets. We seat hedge funds. So I communicate quite a bit with managers in the hedge-fund space.
So I kind of know where the universe is broadly positioned... and I would say you're, by the way, absolutely correct about positioning. And then finally, I mean, we also have a very interesting China business as well where we think that seating managers in China will be an interesting, you know, business opportunity. So given all of that, that's kind of my caveat – that when I give you my views on portfolio, this isn't something that we're actively putting money on. These are just kind of my personal views where I think the market is going. And I think that beyond the –
Dan Ferris: OK.
Marko Papic: Yeah. Beyond the short-term hiccup that we're discussing where all this positioning gets washed out, I do think we're in a dollar bear market. We're starting a dollar bear market. And it's because America is at the frontier of this monetary policy and fiscal unorthodoxy. It has first-mover advantage. And I'm sure a lot of listeners will be like, "Wait? Advantage, dollar bear market? I don't get it."
Well, of course, it's like a way to reflate the economy. May not be a bad thing to enter a bear market. Now, a lot of dollar bulls, they build a strongman argument against the bear argument. And they say, "Well, Marko, you're a defeatist. You know, you think the dollar will cease to be a reserve currency." I mean, excuse me. But the dollar's been in three decade-long bear markets since 1970. Three. And America – you know, America didn't lose like geopolitical power in that time. In fact, it just gained it. You can have a dollar bear market, and American can still have its reserve currency. So, you know, relax. This isn't about that.
This is about the fact that central banking has basically told us where it is. You know, the Fed is anchored at zero. They're going to let inflation overshoot. American's going to fiscally stimulate much more than I think other major economies. This is going to have this upside-down world where real yields go down. And if I tell you that I'm a dollar bear, then you can fill out your global asset allocation based on that view. And so, that means a lot of I think EM longs – you know, small-caps versus large-caps as well. I think XOP, energy-producers... I think there's going to be an interesting bid after the kind of election uncertainty gets away. I think that we're at the start of a new bull market, the start of a new cycle. Whether a vaccine comes or not, I think it almost doesn’t matter because humans are becoming increasingly more desensitized to COVID-19.
You can see this in the mobility data. Every wave has less and less of an implication for the macroeconomy. And so, I would be short bonds, long equities, especially long the rest of the world relative U.S. – short dollar. And in terms of emerging markets themselves, I really like Chinese tech and also Latin America. I think Latin – if you look at them relative to EM, broad EM, it's been getting killed for good reason. Commodity bear market. I think commodities are going to be well-bid over the next couple of years. So that would be my kind of asset allocation and positioning over the next five years.
Dan Ferris: Just really quick, do you have a view on the energy sector, like oil?
Marko Papic: Yeah. So I would be bullish over the next 12 months. As I said. I mean, a key – there's two sources of bearishness right now. It's the third wave and potential lockdowns that are as severe as the previous lockdowns. I would say that if you actually read through what the Europeans are doing, you can see that it's not the same as February, March. I think it's politically... I think political constraints on 2020 Q1 lockdowns are huge. You know, why? Because earlier this year... look. Dan, we thought – well, I didn't. But, like, the consensus was that the WHO mortality rate of 3.4% was true.
Of course, it wasn't. The denominator – like, the ratio was off. We didn't have the cases. We now know that the mortality rate is somewhere between 0.5 and 1%. So, no, this is not a flu. Trump is wrong. However, at the same time, human beings are going to have a different outlook toward a risk of 3.4% mortality and 0.7, 0.5 – especially given different applications of that mortality rate in different age cohorts. And you can see this in the mobility data.
If you plot a Google mobility chart with cases, you can see how the correlation was 1 to 1 in Q1, Q2 of this year, and then every subsequent wave... we as a society – like the median human – just cares less and less. And, you know, I'm not making a statement whether this is good or right or wrong. I'm just saying a fact. So I think that's the first bearish view on energy, is, "Wait. This is going to continue. We're going to have more lockdowns." And my argument is, "There will be diminishing returns to each lockdown." In other words, fear has a short half-life. We desensitize. The second issue is, Middle East.
There's this assumption right now that if Joe Biden wins, like, boom – there's like three million barrels coming out of Iran tomorrow. And I would push back on that. I think, first of all, he's not going to be our President until January. That's the first issue, January 20 is when he gets inaugurated. I think he's going to want his kind of, like... he's going to want to extract something out of Iran. They're going to push back. They have an election in June of this year.
So they might delay meaningful conversation with America until that's over. The point is that there's that. There's also then the risk that Israel and Saudi Arabia say, "Hey. Hold on a second. What? No. We don't want that barrels to come online." They're going to push back, whether through kinetic action, whether through – Saudi Arabia could take matters into its own hands in other ways. My concern is that, right now, everyone's focused on China/U.S. relationship. I'm someone who's been writing about their relationship for a decade.
I've been a huge kind of pessimist. I've said the rivalry would get more and more heated. But now, I think, like, pendulum of attention has moved too much to U.S./China. and I don't think people are focused enough on the Middle East. So I think the combination of geopolitical risk in the Middle East and a combination of a surge in demand once we realize these lockdowns have a diminishing impact on mobility... I think we'll create a very interesting entry point for things like XOP. So energy producers and oil prices.
Dan Ferris: All right. So, Marko, actually we are getting long on time here. I have a final question that I ask all my guests. I think it's an especially great question for the Geopolitical Alpha guy. And the question is simply, if you could leave our listeners with one thought today, what might that be?
Marko Papic: You know what? Instead of giving you a view on where to seek out the Geopolitical Alpha, I'm going to give you kind of the tools to generate it yourself. Because that's what I'm obsessed about. You know? Like, when I started writing this book, somebody asked me, "Marko, why are you giving away your framework? Like, that seems silly." Well, because I’m passionate. I'm passionate about seeing people succeed around me.
And the other issue is, just because I tell you how to swing a racket doesn't mean that, you know, you're going to become number-one tennis player, right? But at the same time, I do... I want to share the framework. And if I can tell you anything about this framework – constraints, material constraints, this and that, blah-blah-blah-blah... look. It comes down to this. The constraint framework – the secret sauce of this framework is that by focusing on the material world, not only are you focusing on things you can measure and observe but it's also things where your bias and your ideology has less influence than when you think about policymakers and their preferences.
And so, if there's anything I could leave investors with, it's that we cannot invest with any bias or with any kind of thoughts about what is right or wrong. There is a time to be a human, and there's kind of a time to be an investor. And when we have our investment hats on, I think we need to bathe ourselves in indifference. And that's kind of the message of the book.
And I think the framework is conducive to making investors be as unbiased as possible. Doesn't mean you're going to be fully unbiased, but I think it gets you there. And so, I hope that folks read it, and I hope they like it. And feel free to reach out to me and tell me you hate it or you love it. Yeah. So thank you for the opportunity to [laughs] talk about this, Dan. I had a lot of fun.
Dan Ferris: Well, I haven't read the whole thing. But what I've read I really liked. So put it that way. And yeah. We will reach out again. I'm glad you said that. You know, maybe we'll check in with you in six or 12 months, or maybe we'll let the next administration go a year or two, and then we'll find out what you're thinking then.
Marko Papic: You know what, Dan? I'm sure that nothing else is going to happen for the next five years. You know? I think it's going to [laughs] – I'm sure there will be nothing else geopolitical to talk about.
Dan Ferris: There we go. That's right. We won't need to be talking to you. It's going to be really boring. It's going to be really boring.
Marko Papic: It's going to be boring. Yeah.
Dan Ferris: So we'll do that. And like I said, thanks so much for being here. And I guess that's bye-bye for now. Thanks.
Marko Papic: Yes. Thank you so much, Dan. Really appreciate it.
Dan Ferris: All right. Man. Talk about the perfect person to speak with at the perfect moment in time. I'm really, really curious as to how the next few days work out and how the next several months work out. And I can't wait until the next time that we sort of check in with Marko and find out what he's thinking then. Really great conversation. I hope you enjoyed it as much as I did. All right. Let's check out the e-mail bag. [Music plays and stops] Hey, guys. I get a lot of e-mails asking, "What happened to Buck Sexton?"
Well, Buck Sexton is not on the podcast anymore, but he's doing a lot of other things. And you know he's a former CIA guy, and he knows all the ins and outs of what's going on in Washington, D.C. And he's written a brand-new book called The Socialism Survival Guide to help investors and other people navigate the political trends – the disturbing political trends – that we've talked about on the podcast fairly recently that are ongoing today in our country.
And Stansberry Research wants to give you a free digital copy of this book. Yeah. Free. Buck Sexton's new book free of charge. I kind of had to do a double take when I heard it myself. And to get it, you just go to www.investorhourbook.com. You don't need a credit card or a Subscription or anything. Just get a free copy of the book by going to www.investorhourbook.com. That's Buck Sexton's brand-new book, The Socialism Survival Guide. Check it out. [Music plays and stops] In the mail bag each week, you and I have an honest conversation about investing or whatever is on your mind.
Just send your questions, comments and politely worded criticisms to [email protected] I read every word of every e-mail you send me, and I respond to as many as possible. And there are many to respond to this week. So I'll dive right in with SC. And SC says, "Hi, Dan. I've got another theory about why Unified Administrations yield 14.52% annual market returns." Now, before I continue with SC, you remember last week we discussed this. We gave some numbers, some statistics on how stocks perform in various administrations. and there was this one statistic that said, "When it's all-Democrat or all-Republican in House, Senate and the White House" – it doesn't matter which one it is. "But when it's all one Party in those three, historically the market has risen 14.52% per year."
Which is a weird statistical anomaly. And I said, "You know, maybe it's because the market likes the predictability of believing it knows how a given Party is going to behave." So SC continues. He says his theory is, "Unified Administrations presume that their Party will get all of the credit for improvements in the economy and in the market averages. The long-run unintended consequences – that is inflation – will be someone else's problem, and their actions will be long forgotten. So Unified Administrations – either Democrat or Republican – will spend more money and make greater attempts to juice the economy in the averages. In a mixed administration, the branch of the legislature that doesn’t share the Party affiliation with the President will be much more stingy about juicing the economy. They will claim to be doing the responsible thing, albeit for partisan reasons. SC."
SC, I think this falls under the general idea that I had that the stock market believes that there's a predictability... I think you've gone in, and you've described the nature of that predictability, right? So the long-run unintended consequences are some other future administration's problem. "You know, we're all in the same Party in the House and Senate and White House. We all agree. Let's just get it done and juice the economy" – yeah. Yeah. I think that makes sense, and I think it lines up well with what I said. So I definitely am receptive. I'm picking up what you're putting down, SC.
Next comes James K. And James K. has a lot to say here. I'll try to parrot down a little bit. Sorry, James. Can't read your whole thing. He says, "Hi, Dan. I'm just listening to your episode with Matt McCall. In your rant, you mentioned an article that talks about so-called spurts of growth during times of crisis. Doctor Robert Higgs wrote a book called Crisis and Leviathan on this topic, and I highly recommend it. Also recommend Higgs as a guest for your show. If I remember correctly, Higgs strongly disputes the idea that GDP, or productivity in general, goes up due to government intervention."
And he says, "Government is inefficient in everything they do, period. If the numbers say otherwise, you'd better look again at the source of those numbers. Again. Going from my faulty memory, Higgs focused on the misguided notion that World War II pulled us out of the Great Depression. And then, he concludes, "Forced central planning is always a bad idea." And he also mentions this is typically Frédéric Bastiat, an economist.
"This is typically Bastiat's struggle between the seen and the unseen. We can all look back and see the tanks, bombs and airplanes produced by the war machine, but we cannot fathom all the lovely, peaceful things that would've otherwise been created by entrepreneurs and inventors for willing consumers in a free market. Great work as usual. Keep it up. Loyal listener and True Wealth Subscriber, James K."
James, I'm going to let your comments stand on their own. I am highly sympathetic, and it makes a lot of sense to me. Next comes Pete L. "Hi, Dan. Long-time listener here. Great job. Great interview with Tobias Carlisle. Regarding modern monetary theory, what if Congress, the White House, the Treasury, and the Fed are all-in on MMT? How do we go about investing to protect against this crazy MMT idea put together by lifelong academics that have never run a business in their lives? I'm thinking about the answer to this question often. Seems very likely no matter who the U.S. President is we seem to be going all-in on the MMT idea. I want to make sure that I invest, save appropriately. Or is cash trash, as Mr. Dalio touts?"
He's talking about Ray Dalio, founder of the biggest hedge fund in the world, Bridgewater Associates. And he continues. "I know you say you are going to see Bitcoin, gold and silver have a place in fighting living with MMT. Let's hear what you have to say about investing in a deranged, long-term MMT dystopic besides these three asset classes. Thanks, Dan. You're a rare voice of reason, intellectual thought in America's strange world of disinformation here in October 2020. Pete L." Thank you, Pete. Kind words, good thoughts, good question.
So what I have to say about investing in a deranged, long-term MMT dystopia is, believe it or not, I think it takes probably longer than most people anticipate for it to become really dystopian. Even as I say that, my gut says, "Dan, you better be careful. This thing could get ugly quick." And so, then where do I wind up, Pete? I wind up back where I always am. Be truly diversified. Because what you're really asking me – whether you agree with this or not, Pete – I really think your question boils down to what speculation can I have if I'm highly certain that a particular deranged, long-term MMT dystopia is in our future?"
What I'm saying is, I don't like MMT on the face of it. It seems like a bad idea to me. But you still can't pretend that you have a lot of certainty about the outcome. That's the problem. No matter what, it's really problematic to say, "Oh. Well, you know, we're going to get inflation. That's all there is to it." Think about all the people who said, "We're going to have terrible inflation," back in 2008 and 2009 because the Fed had to print a lot of money to fix the financial crisis. You know, they were – I mean, I suppose if they bet on the stock market, they were right. But, you know, otherwise they walked straight into a pretty steep bear market in gold that started in, what, 2011 and lasted through like – just call it 2015, early 2016. You know, gold and gold stocks together.
So you really have to be careful about looking inside your own thinking and finding the places where you're trying to get certainty about the future and wanting to be on that. So that's why I say hold your stocks, hold your bonds. But also, hold plenty of cash. Also, hold gold, silver and bitcoin. I feel like I'm disappointing you, but that's what I have, and that's why I have it – more importantly. I think the "why" is important. When you know the "why" of your assets, when you know the "why" of your portfolio, you hold it with conviction. And it'll work harder for you, I believe.
Also, I have to point out, for example, I read this thing called The Daily Shot. It used to be on the Wall Street Journal. It's not anymore. You have to subscribe to it separately. A bunch of charts that they put out every day. And one of the recent editions last week was, they made this point that we had this big drawdown on – what was it? I think it was October the 28. So the market was down, and they said, "You know, the traditional market just didn't work that day."
The bonds and the gold and I think utilities and maybe one or two other things that they pointed out... they said, "They just didn't work that day. Because when people want cash when the market is really heading straight down, people want cash. So that's where I am, Pete. I'm not changing my tune, man. Be truly diversified. Stocks, bonds, cash. In the financial system, gold, silver, bitcoin and whatever kind of other thing that you know about like... you know, we mentioned whiskey and wine and guitars and all kinds of collectibles and things that gets you outside the financial system.
Great question. Great topic. Brian E. writes in and says, "Dear Dan. Seeing that the crazy anarchists have moved north out of Portland to your town, just a short note. Wishing you the best and hope you and your family are not being impacted by the lawlessness. Keep up the good work. Brian E." Brian, thank you. I have a lot to say about that. I'm kind of going to keep it to myself. And I hope you're right. I hope that the unrest, as they like to call it – my father laughs at that term "unrest." He says, "It's violence. It's not unrest. They're burning buildings down."
And the point is well-taken. Yeah. We'll see if the "unrest" makes its way to my door. I think – I'm hoping not, of course. But I think not, probably. Next is Arnold C. Arnold says he's an investor who started with $10,000 and made $2 million. First of all, yay, Arnold. I'm applauding you. [Clapping] Awesome performance. He continues. "Problem with value investing, the real assets of companies do not display on the balance sheet. The management and employees, patents, research and development, intellectual property and so on. Arnold C."
That's not the problem with value investing. That's the problem with book value as a measure of business value. Just to be clear. Probably with value investing is that, you know, if people want stocks that are super expensive and they want to speculate and buy things that are growing really fast and not buy the cheapest stocks in the market, the capital flows the other way. Plain and simple. But eventually, the force of gravity kind of kicks in, and it generally goes the other. We'll see if this time is different. I suspect, "This time is different," will be as big of a mistake as it always is. But I'm glad you wrote in.
Next is from Theran S. who, thank you... I used to call Theran "TJ" because I didn't know how to pronounce his name. He says, "It's sort of a weird Cajun thing, I think he said. [Laughs] Thank you, Theran S., for telling me that, and thank you for writing in because I disagreed with you, but you're a very thoughtful correspondent. You keep writing in. I appreciate it. He says, "Dan. Like you, I have serious reservations about the ultimate success of MMT. Unlike you, I think post-COVID-19 it will be de facto the way the monetary system will be handled."
Going to stop you right there. Gosh. If I said that... I don't 'think I feel that way, Theran. I think that we will be hearing a lot more about MMT and de facto. You're right. They will be printing money and buying stuff... whether it's Treasury securities or ETFs as they're doing now – bond ETF's – or even outright equities or whatever, remains to be seen. But I also think there will be a coordinated effort between the Fed and the government, right? The Federal Reserve and the government. The monetary and the fiscal will coordinate, and we'll wind up with de facto MMT. So the twin levers there are printing money and buying stuff and raising taxes.
So anyway, Theran continues. "The traditional way of explaining sovereign debt will not change. But behind the curtain, MMT will prevail. The reason is simple with the astounding amounts of fiscal stimulus being issued to keep the world economy afloat in response to COVID. There's no other way to manage that level of debt. A side benefit of MMT is, the transparent weight explains the accounting process of central banks and their corresponding treasury departments. Here's an example of counter-intuitive nature of fiat money accenting. If today you were to pay your taxes with cash, that currency goes into the shredder. What does that do? It reduces the money supply. And that's how MMT proposes to control inflation by raising taxes. Yep. That's not crazy, and I'm not sure how you sell that notion. Here's an idea. The government could create a new program. Let's call it Whip Inflation Now, or WIN. But to fund this effort, we have to raise everyone's taxes."
Yep. That might work. "Keep up the great podcast. Theran S." You know, there may be some short-term effect in which that would work. Because God knows when you tax something, you get less of it. So, you know, if you tax people's incomes, you give them less incentive to go out and earn. But as I've said before, I think it is sheer insanity to trust any human being or group of human beings who believe that they can control, for the benefit of all, a $20-trillion economy from the top down with two simple levers of money-printing and taxes. They are the Wizard of Oz, who was a complete fool who knew nothing and had everyone scared. He was a complete fool who knew nothing. There was nothing there. And I think that's who the Fed is. It's the Wizard of Oz. Complete fools. They know nothing.
All right. Next is Sanjiva S. I think we have two more of these. Sanjiva S. says, "Hello, Mr. Dan Ferris. I regularly listen to your podcast. It's always interesting and enlightening to listen to your thoughts on the current market situation. Unlike you, I am a momentum trader, not a value trader. I have a question for you. Assuming you're an investor in the dot-com bubble, you made money to your top in dot-com bubble in 2000, how would you secure your profits and trim your exposure to the market in a graceful way when the market begins to fall like it did in the 2000 dot-com burst? Asking this question since I don't want to get caught in such a scenario in my life. At what time shall I trim a position – after 100% or after 200%? I'm confused in these situations. I hope we are not in a similar situation. Please advise, Sanjiva S."
[Laughs] Well, that's the million-dollar question. Isn't it, Sanjiva? When do you sell? And it's not just, "When do you sell?" It's, "When do you sell if you're participating in an outright insane mania?" The only answer that I know of is that there's no one-shot deal at this. You either are a good, experienced trader who knows how to enter and exit a position or you're not. And only you know for sure. I hate to make it binary because so many things in life are not.
But I think in this case, you know, making it binary saves a lot of people a lot of money if they listen to me. [Laughs] Don't assume that you will get out at the top or near it. You know, assume that you are a human being, and you will get caught up in the frenzy as stocks go up, and you will get caught in the despair as they go down. And you should have – you need to have your own strategy worked out. No one can answer a question of this kind in a simple way that would then lead to you directly allocating capital. Be careful, Sanjiva. Just be careful out there. Either know what you're doing, or don't play.
Mike S. is our last question this week. He says, "Dan, help. I'm really confused. I've been following three commodity indexes, and lately all of them have moved very high percentages into Treasury and government bonds. Seems to me this is the opposite of what I want – owning things that hurt when I drop them on my foot. I recently sold all my DBC to buy into GSG and BCD, and now those have followed suit. So I'm selling out of them. Is this normal as they cycle through futures contracts? Thanks, Mike S." It might be. But, Mike, the thing is I hate about these things. I hate these funds that, like... a typical thing will be, you know, they'll roll – they're constantly rolling the first two months of futures contracts, right? So you get this sort of 30-day moving average kind of a thing.
And, you know, on the first day you start out with one contract. And then the second day, you've got a whole lot of one contract and a little bit of the next. And the day after that, there's a... you know, you get less of the nearer-term and more of the second one. That’s how they roll it, right? Maybe. I mean, it's approximately something like that. But, man, I just hate these because there's just too much opportunity to constantly lose money, right? You get this kind of thing that they call negative roll yield, right? What if you're – and it really affects things like the VIX and other things worse than that.
But it can affect the commodities, too. And this idea of these things, these commodity funds or indexes, holding lots of Treasurys and government bonds... you know, they might be trying to mitigate that negative roll yield that you get where you are just kind of constantly chipping away and losing value because it's going against you. I hate these things, Mike. I would never buy them. I would never tell anyone to buy them. Sorry, buddy. You're on your own. That's all I got for you with that. [Laughs] But I wanted to get my opinion in there. Thanks for asking about it. All right. That's another episode of the Stansberry Investor Hour. I hope you enjoyed it as much as I did.
And if you want to hear more from Stansberry Research – especially on the topic of politics – check out Trish Regan's new podcast at americanconsequences.com/podcast. And do me a favor. Subscribe to the show on iTunes, Google Play, or wherever you listen to podcasts. And while you're there, help us grow with a rate and a review. You can also Follow us on Facebook and Instagram. Our handle is @InvestorHour. Also, follow us on Twitter where our handle is @Investor_Hour. If you have a guest you want me to interview, drop us a note at [email protected] Until next week, I'm Dan Ferris. Thanks for listening. [Music plays]
Announcer: Thank you for listening to this episode of the Stansberry Investor Hour. To access today's notes and receive notice of upcoming episodes, go to investorhour.com and enter your e-mail. Have a question for Dan? Send him an e-mail. [email protected] This broadcast is for entertainment purposes only and should not be considered personalized investment advice. Trading stocks and all other financial instruments involves risk. You should not make any investment decision based solely on what you hear. Stansberry Investor Hour is produced by Stansberry Research and is copyrighted by the Stansberry Radio Network.
[End of Audio]