On this week's Stansberry Investor Hour, Dan and Corey are joined by Paul Podolsky. Paul previously worked as a strategist for Bridgewater Associates – one of the largest hedge funds in the world – for nearly 16 years. Now, he's the founder of Still Press, an author, and the host of the Things I Didn't Learn in School podcast.
But first, Dan and Corey discuss Ben & Jerry's recent tweet about "stolen Indigenous land," as well as the broader implications for businesses engaging in political activism. They explore the potential impact on market performance, consumer behavior, and the overall perception of companies like Target, Disney, Starbucks, Unilever, and Anheuser-Busch. As Corey explains...
When it comes to stock prices and business, politicizing [products that don't] need to be politicized generally doesn't work out too well.
After that, the conversation briefly shifts, and they discuss how it's becoming more difficult to accurately predict market reactions based on current sentiment the longer inflation persists.
Paul then joins the conversation to highlight his experiences at Bridgewater under billionaire investor Ray Dalio and share insights on the second-largest economy in the world, China. He emphasizes that whether or not people choose to invest in China, the country will still be a major player. Its economic growth has had a significant impact on the global market, and the volatility of its growth has influenced economic trends worldwide. China's weak post-COVID recovery, for instance, has contributed to the current global inflation ebb. Paul says...
One of the reasons why commodity prices are so weak – inflation is so weak – is because of what's going on with China right now.
Paul advises investors to weigh the potential benefits and risks associated with including Chinese assets in their portfolios. He says Chinese assets can offer positive expected returns and low correlation with other assets, which makes them attractive today. However, Paul draws from his experience with trading Russian assets to inform his views on China. He emphasizes that the future of both China and Russia remains uncertain. While the two countries have made progress in adopting market-based economic systems, questions arise regarding their long-term stability.
Lastly, Paul shares his insights on another potentially lucrative emerging market... Chile. Despite the challenges Chile faces due to political fluctuations, Paul explains how it remains an investable option for those seeking diversification. He questions Chile's economic trajectory and ponders why it hasn't achieved the same level of prosperity as countries like Norway or Australia. By drawing parallels between these countries' structures, he highlights the commonalities: small populations strategically positioned atop a vast reserve of valuable commodities...
Latin America is another part where this global debate over the optimal system is playing out. And Chile is part of it.
As global economic debates continue, it's crucial for investors to carefully evaluate the potential returns and risks of investing in emerging markets. Today's podcast provides some interesting points for investors to consider, so you won't want to miss it.
Host of the "Things I Didn't Learn in School" podcast
Paul previously worked as a strategist for Bridgewater Associates - one of the largest hedge funds in the world - for nearly 16 years. Now, he's the founder of Still Press, an author, and the host of the "Things I Didn't Learn in School" podcast.
Dan Ferris: Hello and welcome to the Stansberry Investor Hour. I'm Dan Ferris. I'm the editor of Extreme Value and The Ferris Report, both published by Stansberry Research.
Corey McLaughlin: And I'm Corey McLaughlin, editor of the Stansberry Digest. Today, we talk with Paul Podolsky, former Bridgewater Associates portfolio strategist, and now the founder of Cape Capital and Still Press.
Dan Ferris: And today, Corey and I will talk about Ben & Jerry's, and the Fed, and whatever else is on our minds.
Corey McLaughlin: And remember, if you want to get in touch with us, send a note to [email protected]. Tell us what's on your mind.
Dan Ferris: That, and more, right now on The Stansberry Investor Hour. I don't want to spend too much time on this. But let's talk about the Ben & Jerry's thing, because there is a point that I have to make here. Of course, the Ben & Jerry's thing is that they tweeted on July the 3rd, the tweet says: "This Fourth of July, it's high time we recognize that the U.S. exists on stolen indigenous land and commit to returning it." Then it says, "Learn more and take action now," and gives a little link to click on, which I didn't click on because I don't care.
It's not that I don't care about indigenous people. It's just that you could argue every inch of the country is indigenous land that was stolen, or you know. That's just the way history has worked out. I mean, can you imagine if we tried to give everything back to everyone like that, we would be – you know, how far back would you go? Would you go back 200,000 years? I don't know. I have no idea. All of those efforts are misguided, reparations, and all the rest of it. It's all entirely misguided.
And so in the ensuing few days here, you know, the S&P 500 lost about 0.9%, and Unilever lost more than 2%, like $3 billion in market cap. So I was realizing something, like Target, Disney, Anheuser-Busch, Unilever, it used to be that we just sort of tolerated what we might call "woke politics", or any type of political statement by any corporation. Right? People just kind of rolled their eyes. They just said, "OK, whatever," and continued buying the product. Nobody really took it seriously.
I'm not saying boycotts didn't exist for various, you know, boycotts have always happened. But it seems like this sort of thing is getting harder and harder to get away with, and people are more serious. They're, you know, they're seriously tired of it. And, you know, they sell the stock, and they don't buy the product, especially in the case of Bud Light. That one, I have to say, really surprised me. And, you know, Target, they're boycotting target. So this is becoming, you know, it's really impacting business. And you know, it'll probably, I mean, Ben and Jerry's, like $900 million in sales, according to Statista.com. And that's like, you know, Unilever's like $60 billion in sales, so less than 160th, right?
So, overall, I think, you know, the business will probably be fine. People will still probably eat Ben & Jerry's ice cream. They'll get past this, etc., etc. But it seems like these sorts of things keep happening and keep making a dent in people's real behavior.
Corey McLaughlin: Yeah, it's interesting, a few different angles to these stories. You know, Ben & Jerry's, Bud Light, others, Target, like you mentioned, I think there's been some others too, like, none of them work out well for the companies. You know, [laughter] like politicizing products just doesn't seem to go over well, with at least people who are in the markets. I mean, there may be people that work at those companies that are in favor of those things, and it may, you know, boost some employee morale, or maybe something like that.
But like when it comes to stock prices and business, I think the lesson is politicizing stuff that doesn't need to be politicized generally doesn't work out too well, I think, on balance. You know, it's like, and I'm not saying anything's right or wrong. I'm just saying, like, when the vocal minority wins, the silent majority gets pretty – if not upset, just more apathetic about whatever cause it may be. So I think that's what you're kind of seeing play out there, I mean, with Ben & Jerry's with Bud Light. Like, I saw somebody drinking a Bud Light the other day, and I was like, whoa, are they making a political statement now? Like, it's [laughter] it's stuff you don't really want to think about.
I think most people don't want to have to go through the thing, you know, about whether they're being judged for doing something right or wrong. Like if you shop at Target, you just, you know, you're looking just to buy the everyday essentials that you need. Like, it's not like whatever. [Laughter]
Dan Ferris: Right. You don't want to make a political statement. You just need to get stuff. You have a life to live.
Corey McLaughlin: Yeah, I just need milk.
Dan Ferris: You're busy.
Corey McLaughlin: Yeah.
Dan Ferris: Yeah. [Laughter] That's exactly right. I have to say my greatest disappointment with all these things is that they're not better buying opportunities. [Laughter] Really, you know, I wish, like, Unilever owns 400 brand. They have, you know, a lot of great brands under their belt. And if one wanted to buy such a thing, which wouldn't be a terrible thing to own for the long term, I would think, you would kind of want there to be, as Warren Buffett might put it, this one time solvable problem. And I just wish it was a bigger problem [laughter] because, you know, if I want to own the stock, I want to see the problem look like it's a disaster, but not really be one.
And in the case of, I'm just looking at charts here. I've just got them all on one chart. Anheuser-Busch. Target. Disney was another one impacted by this. Unilever. I mean, the worst one-year performance is Target, minus 12%. And the best one-year performance is Unilever's plus 10%. Bud is about flat. And Disney is about minus, just call it 9%. So I don't know, they're all within, you know, like minus 12% is the worst of all of it. I don't know. It's a non-event. And if you still want to buy any of these stocks, I think you should. I think that's my conclusion.
I don't know if I have a lot to say about the Fed, we normally do. But it just seems to me looking at the FedWatch tool from the CME Group, that the highest probability like 95%, basically 95% probability is for a 25-basis-point hike at the next meeting. And then if you go each futures contract out to March of '24, the highest probability remains, you know, basically 25 basis points above where we are now. Then, starting in May '24, the highest probability is 20 – is right where we are now. In other words, hike. Several months go by. Then next May, we cut 25 basis points according to the futures market right now.
But as you and I were speaking before we hit the record-button, this tool doesn't really tell you anything about the future, does it? It just tells you what people are thinking right now. And I think the primary use of it is just find out how wrong it is. [Laughter]
Corey McLaughlin: Right. It gives you the kind of consensus view, I would say, which, yes, has been wrong for as long as I've been paying attention to this thing closer the last couple of years, year plus. So it's, yeah, it has no predictive value when it comes to predicting things. It just shows you what the sentiment of Fed things. The more I was – when I saw the market react to these jobs numbers last week, and then I think of when the Fed keeps saying they're data-dependent, and they're waiting to see the impact on the economy now. What they're talking about is jobs. And what the markets looking at is jobs more – most closely.
Dan Ferris: Mm-hmm.
Corey McLaughlin: And so I do think there will be maybe some volatility the next couple of months as these, the read on the jobs market gets clearer or shows some sort of trend, or not a trend, or whatever it shows. I do think that there's uncertainty in the market as far as when the timing of any job market, like kind of significant weakness will happen, which has been kind of the story of the last year really, after you got past the, people got past the shock of the rate hikes.
Dan Ferris: Yeah, I keep thinking about Paul Volcker and 1980. And as I've said, shoving rates back up to 20%. And I'm looking at Bloomberg data, I've read elsewhere, it was 19%, but just call it 20%. And four times. [Laughter] Like, oops, up to 20%. OK. You know, is he looking at some data or the market reaction? I don't know. And then, OK, back down to like 10%, 15%, whatever. Nope, back to 20%. OK, back down. Oh, nope, you know, like four times. I mean, an extremely high level, four times. And these guys are sitting there in Washington right now, saying, let's pause, and then let's do a 25 bps hike or something.
Just like if they want to have the effect that they claim, which is to target 2%, which I totally disagree with, I think is insane, they're not there yet. And why not just beat it over the head? Like we know what has worked in the past. Right? You got to jack rates up even higher than you think, and then you get the effect that you're looking for. And then you can bring them back down. You know, according to very, you know, there's not a lot of these episodes in history.
Corey McLaughlin: Right.
Dan Ferris: But I don't know, according to the last big one.
Corey McLaughlin: Yeah. The longer you look at this data, with like the inflation data, it's coming down, but slowly, what the number of the Fed looks at the quarter, PCE, the pace of it slowing. Like, the longer it goes on the way it is, I think the higher they'll eventually have to raise rates anyway. So I know everybody wants to like freak out over 0% to 5%, but that seems like nothing. Obviously, it's been, I mean, some of the tech companies adjusted to it, but it hasn't really hit the majority of the economy yet.
I mean, there's – and I think another interesting point is I saw mortgage rates are over 7% today, a 30-year fixed mortgage, which obviously discourages people from buying and moving around. But a huge chunk of people still have mortgages below, you know, say 4%, three person. So higher rates aren't having an effect on that. Like, those people are just, if anything, that's like inflationary. [Laughter] Like, if, you know, if you're staying in a low mortgage, while rates are going higher, that's inflationary for people who are OK with staying where they are, and not paying, you know, 1,000 more dollars a month, or whatever it is on interest, you know, on their mortgage, so.
Dan Ferris: Right.
Corey McLaughlin: And I think it's got a long way to go still.
Dan Ferris: Yeah, they're long-term contracts. I mean, I looked at the yield from the iShares MBS ETF, mortgage-backed-securities ETF, it's like 2.73%. I mean, it'll always be, it'll tend to be lower than the prevailing rate. But, you know, according to Bank Rate, they, you know, they publish these like national mortgage-rate numbers, and it's like, 7.3%. [Laughter] Or, let's say, 7%, yeah, 7.3%. [Laughter] So I was like, OK. I guess, you know, there's some catch-up to play there.
But yeah, I think for now, though, we've talked about this, that phenomenon of hanging on to your 3% mortgage, it just crimps the supply, and keeps the housing market, you know, less well supplied, and keeps prices supported, and provides people who really, you know, who can swing it to an incentive to say, OK, well, we better get our 7% mortgage while we can, because it might be ten next year.
Corey McLaughlin: Yeah, which I think might be true the way we're going.
Dan Ferris: Yeah. All right. So I still like home builders, by the way. But mortgage-backed securities, not yet. [Laughter] You know, wait until you can get enough of them to create enough MBS yielding 7%, 8%, 9%, then they get interesting. And in that respect, to be fair, like, you know, two-year Treasurys are interesting at 5%, which is really amazingly cool. Like for years and years, you couldn't get anything. Like a normal person trying to build a portfolio, like they couldn't build it on – and there's no safe return. You can't put money in a bank account. You couldn't put it in Treasurys, but now you can do that. So I think that's, like, one of the best things that's happened in the past year, is the rates went up so people can get, start getting better returns.
Corey McLaughlin: Yeah. And if you think about the, quote, "cash on the sidelines", right, [laughter] making more money than ever, even if it's just sitting in a money market account, or if you're in T bills, with extra cash, is that disinflationary if you feel like you have more, more cash on hand than you did in the last 15 years? I mean, or if it's growing, you know, if it's growing, even if even if inflation is still eating away? Like, I don't know, it's a lot of stuff that a lot of people haven't seen before, I think, including myself, so still trying to figure it out. But I do like 5% interest rates on low risk cash holdings, for sure.
Dan Ferris: Yeah, I think the two-year was 5% in – the last time it was 5% was like 2007 or something.
Corey McLaughlin: Yeah. Yeah, it was [crosstalk] –
Dan Ferris: That's a very long time.
Corey McLaughlin: Yeah. Before the financial crisis was the last time. And but then if you look back at that, there was a higher before, way before that, than the two decades.
Dan Ferris: Oh, sure.
Corey McLaughlin: Like we're not in like, crazy uncharted territory here as much as people, it may seem to a lot of people.
Dan Ferris: Right. I still feel like there's a ways to go, but I don't know, I think I think it's going to wind up shocking people. I think the level of rates has the potential, I won't guarantee or predict anything, right, but it has the potential to shock the hell out of people six to 12 months from now. And they they're looking at these five handles on fed funds, and, you know, two-year, and everything, and they're saying they're getting used to it. Right?
Corey McLaughlin: Right.
Dan Ferris: And, and then, you know, a six will be like, whoa. And a seven would be like, holy, you know, it just – and that's one of my fears. Overall, of course, you know, I want things to be cheaper, and I want the market to be priced for better return. So I want lower prices, higher cash flow yields, higher yields of every kind. But they're still not there. And getting there, I think, like getting there doesn't have the – it's not going to be painless. You know? That's my fear. Like, I like 5%, two-year Treasurys. But, man, getting there, ugh. I just, you know, I worry about that with folks. Anyway.
Corey McLaughlin: Yep.
Dan Ferris: Dan's worried. So what? [Laughter]
Corey McLaughlin: Dan's worried. No, there will be...
Dan Ferris: Again...
Corey McLaughlin: There will be consequences. I mean, we saw it with the banks, you know, earlier this year, the worst banks were, you know, got in trouble fairly quickly. So, yeah, say interest rates double from here, there's going to be a lot of people caught off guard. Yeah.
Dan Ferris: So we have, we've covered a lot of ground today. And I think what can we sum it up? If you want to buy Disney, or Target – well, maybe not Disney, we said, but Target, or Unilever, or, you know, Anheuser-Busch, or whatever, if you want to buy them, you shouldn't, I don't think you should about the woke political problem. And I still like housing. Love 5% two-year Treasurys. Boy, we did cover a lot of ground. Good for us.
Corey McLaughlin: We did Yeah. I would just say buy your milk wherever you want to.
Dan Ferris: All right. Well, let's, let's talk to somebody who might have some ideas about this, and some other things that we'd like to hear. Today's interview is with Paul Podolsky, formerly of Bridgewater, now Cape Capital. And I really enjoy reading his sub stack. I enjoyed meeting him at the VALUEx Vail Conference, and just can't wait for you to hear our interview with him. So let's go ahead and do that right now.
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Paul Podolsky: Thanks for having me.
Dan Ferris: So I'll just let our listeners know that we met at the VALUEx Vail this year. And I found, of course, as soon as anybody says I used to work for Bridgewater, like everybody wants to hear the stories of what it's like to work with Ray, and you did go through some of that. And we've had we had Bob Elliot on the show, and I had to go through that with him too. But I did want to touch on one thing for our listeners' benefit. You talked about his work ethic, Ray Dalio's work ethic was like – and look, you, yourself have been around. You've seen some work ethic in your day, right? But his just stands out. And I wonder if you wouldn't mind describing that, before we do anything else, to our listeners, because I think it's important.
Paul Podolsky: Sure. So I worked closely with Ray for many years. He was actually the person who interviewed me. Bridgewater was small enough when I joined, had about 140 people. Then in those days, Ray did the first interview of everybody, including me. And this wasn't just like, "Hey, how you doing," type of thing. It was, I think we spoke for 90 minutes. And it started off with, you know, 90 minutes on a prospective interview, that he didn't even know if he was going to hire me.
And so that is an example of the care. And it definitely influenced me because I think from the outside, people see, you know, a successful guy, a wealthy guy. They don't necessarily see the work that went into it. And maybe you get a sense, I had, I actually had him on my podcasts, talk a little bit about his life story, what made him the way he was. But another example of that is I remember working on presentations, anybody who's in finance, you know, there's a lot of PowerPoints between you and the goal. And I remember walking into his office, and a lot of times, my experience of the Street, was people just crank these things out.
And he was gnawing on an eraser, which was – or a piece of tape, I think, that was this classic thing, sweating over the wording of a single bullet point on the front page. And that tells you something. And it was that way with everything. I think the story I shared with you was Christmas cards being exhausted on a trip. And that some people bail out holiday cards, some people don't, but a lot of times is pretty formulaic, like, "Happy Holidays. Thinking of you. Wishing you all the best." No. Detailed, long, involved. And so everything was like that done with that degree of care. And I think it showed the end result.
And it's something that I took away, which is that a little bit like, you know, if you've ever traded intensely for sport, and you've been with people that are really that focused on the goal. And you're, you know, you finish a workout, you're completely exhausted. Like, now I'm going to the weight room for 45 minutes. And you're like, what, like, my whole body is saying, "Go home, lie down, and close your eyes for 20 minutes." They're like, "No, no, I want to get something." It was a little bit like that.
And so, and I don't think, in a way, he pushed himself. But, you know, Ray, of course, would say let him speak for himself. But I also think it was just sort of his natural – that's the rate at which he was comfortable operating.
Dan Ferris: That's great. So I also, I wanted to get into a couple of things. One of them is, I was wondering if you could just say a few words about China. Now, I know there are things that you'd rather not get into, which is fine. You know, I'm not going to ask you to do that. But it's a subject that comes up a lot on the podcast. And we you know, people wonder, "Should I buy these stocks? Should I buy Chinese stocks? Should I not buy Chinese stocks?" I hear so many things, you know, right?
Paul Podolsky: Right. So China, I think China is an incredibly fascinating topic. And I think the key thing is the framing of China for investors. So the first thing is, is whether they invest or not, China is going to matter to them. And the reason is, it's the second biggest economy of the world. And if you look at the volatility of the growth in China, so if you think about their growth contribution, because their ups and downs have been bigger than the U.S. economy, which is the biggest economy, their growth contribution, in other words, the ebbs and flows of growth globally, China is responsible for more of that than the U.S. is.
And I think that matters, for instance, right now. In other words, why is inflation ebbing globally? Well, there's a lot of different parts to that, but I think one of the things is, is China is having a very, very weak post-COVID recovery. And so even if you're just trading the U.S. stocks and bonds, or Europe, you're just trading Europe stocks and bonds. The reason, one of the reasons why commodity prices are so weak, and inflation is so weak is because of what's going on with China right now. We can talk about what those dynamics are. So no matter what you do with China, you can't not pay attention to it. You need to understand how it's working.
The second thing is, is I think having a good framework for growth is, it's almost sort of like understanding of physics, is that growth everywhere is incumbent borrowing. And so to understand on a forward looking view what China is, you have to look at the nature of its income, how competitive it's going to be, what its population growth rates going to be, what its productivity is going to be, and what its capacity is for taking out debt and spending. And I think in these, in both these areas, income and borrowing, China's quite challenged right now. In other words, it has a shrinking population. And the debt level, in aggregate, particularly for a still developing economy is quite high.
And so if you think about the capacity of taking on more debt, or having real productivity boom, I think it's quite limited. So if we're accustomed to China growing 5%, 6% range, I think the forward-looking picture is much weaker. So the first thing is it matters a lot. Second thing is having a logical framework for income and borrowing. And then the question is, is do you want these things into your portfolio? I think it really depends what your goals are, and where you are. My message for investors inside China would be different, it would be different from my message outside China.
The argument, the pro for having Chinese assets in your portfolio, is that they have a positive expected return, and that they're lowly correlated to the assets you have elsewhere in your portfolio. The con to me is, right now, geopolitical. Which is that if you look at the way these systems work, China, the way I describe China is it has 5,000-year-old hardware. That's the culture. And then the software is basically Soviet. So if you think about the structure of the government, the person at the top, and an operating body, bah, dah, dah, but this is all basically Soviet software that they're operating on.
And one of the key things with Soviet software is, is who, as they refer inside China, who person No. 1 is really matters a lot. And, for me, I think that the geopolitical situation right now is quite fraught. And I don't put things in my portfolio that I don't understand. And I don't understand right now, what China's true intention is, regards to Taiwan. I know what would happen if they moved on Taiwan, which is there would be sanctions, etc. And so the key thing I asked for is: am I taking compensated risk or uncompensated risk?
And to me, the risk premium on Chinese assets would have to be so high for me to do that, that when I look at the numbers there, I don't find it compelling as a U.S.-based investor right now. And that's very much influenced by my experience with trading Russian assets. I started my career in Russia. So I feel like I know the Soviet software well. And the Russian experience around Ukraine really influenced how I saw the cause effect relationships that can happen when a geopolitical conflict goes from one of words, and sort of threats, to actual actions.
So I think China is fascinating. I have a lot of dear friends there. I think that has so much potential to contribute to global growth. So I don't want to seem like I'm somebody that is sort of like a PeRBA anti-charter person. I'm just trying to be – look at the facts in terms of expected return on investment. And right now, I'm personally not comfortable.
Dan Ferris: It seems to me, when I think about these two countries, maybe I'm just a product of, you know, the past decades, you know, since I've been an adult, just say. I'm 60-ish now. So, you know, the prospect of, you know, a war, of an invasion of Taiwan, by China, it just – I know, it's real, but it just seems so otherworldly. It's something that I find difficult to accept that it could really truly happen. It's easy to say you could accept the Ukraine thing because, you know, we're in hindsight now. But even before, like, the, you know, the actions in the Crimea, and so forth. There was a history there, right? This China/Taiwan thing feels newer, and somehow, I want to say more extreme more – less likely.
Paul Podolsky: Yeah. Well, I think you may be right, and also these things are dynamic. I mean, they're shifting over time. There's no question that I think that Zhongnanhai, which is basically leadership complex there, is taking information about what happened in Ukraine, and informing them about what could happen in Taiwan. What I went through, so going into the Russia incident in – or the invasion of Ukraine, I had held, going back years, I'd held positions in Russian stocks and bonds over various points in time.
And what attracted me to them was that, basically, I felt like there was particularly, so when did they invade? They invaded in '22. So 2021, that their, you know, I think about assets in terms of what is the expected return on the asset, and how does it compare relative to my alternatives? So if you looked at things like some of the Russian assets, it's a classic example of Sberbank, which is the big state owned bank there. It's a pretty well functioning bank. And it traded at a massive discount relative to the dominant bank in the U.S., like JPMorgan. And it was literally banking is banking. [Laughter] And there's one here, and there's another here.
Moreover, from a portfolio standpoint, I always look at how I can combine assets together. And the thing I liked is that not only did you have a stock, which I thought was attractive, you could pair it with a Russian government bond, which was offering a pretty attractive yield. And I thought that if growth really weakened, and you begin to get credit problems in Russia, that the stock would go down, but the bond would go up, and vice versa. Plus, there was a currency piece there, the Russian ruble, I thought was relatively depressed. So I liked holding these in my portfolio ahead of that.
But then, you know, there began to be this troop build-up to your point about the Chinese thing that I – you know, could have happened. And I was like, this is nuts. Like, Russia has worked so hard to open up its capital markets, and put in refurbs, and all these pipelines that they've developed, and the whole integration with Germany, blah, blah, blah. Like, this doesn't make any financial sense. And by the way, they know that the Soviet Union collapsed, because of a bad economy. That was the presenting problem there. And then I called up my close friends, you know, who are in Russia. And I was like, "What's going on?" They were like, "It's a bluff? It's a bluff. It's a bluff."
So I thought about it, I said, well, the risk of these assets has just grown exponentially. So what is appropriate risk management? Well, you shrink them. So even though I liked these assets, I just shrunk the size of them. And that I read, you know, more stuff going on, there's troop buildup. So then I'm thinking about, like, moving all these tags, and helicopters, and the reports, and I shrunk it even further. And then, finally, by like November of '21, I said, listen, I might be a little bit skittish here. But, again, going back to the Taiwan thing, I can't predict what Putin is going to do. He's the only person that's going to make this decision. As wise as my friends are, they don't know either.
And so I cut the entire position. I had zero, go again. And then this, this is a huge thing to risk management, which is how heavily do you weigh low probability events that can crush you. It's a really, really tricky thing. And it's, we can talk about this with stocks, etc., around depressions, etc. This is a huge issue, how much you weigh this. I know, as an investor, having done this for years, I tend to be more skittish. But it's also what's led me to survive, I think. I've had a low steady return. And I've had a lot of situations where I've sold things, like I sold Russia needlessly, that I was too freaked out.
But Russia is a classic case example where it saved my butt. Those people that have those assets, you cannot get them out. I don't even know if you could transact to them, because you might violate sanctions, and all sorts of stuff like that. Money is gone. And I know people that have lost significant pieces of wealth due to it. So now play this thing forward to Taiwan. It also seems so strange to me, like China is not a wealthy country. If you get out of a major country, if you get out of Shanghai and Beijing, and you're taking the trade, you look out the window of the trade, you will see peasants, who were living very, very simple lives.
And if, if I were charged there, and I know a lot of technocrats there, you'd be thinking growth, growth, growth, growth. Don't pick a huge geopolitical fight. But if you actually read the statements of Xi, he seems to be very clear that he values reunification. So this is a situation where I know what I don't know. And if I can't predict that, I'm not willing to take the risk.
So even if I agree with you, it's a low probability event. It's high enough, the consequences of it are such that I don't want to have it in my portfolio. And I basically, I try to take the simplest possible bets in a portfolio. I'm like, why trade complexity? Trade simple. Like I want a simple idea that I can understand, that I can understand how that idea relates to other ideas. If I get into something like that, that's too complex. I'm like next.
Dan Ferris: Right. I'm glad you brought something up, this whole topic actually. The idea in both cases in Russia and in China, that they may be motivated, highly motivated, it seems, by things other than economics, other than growth, as you mentioned, after seemingly doing like decades of work to get to a, like they're not, they're not done. Decades of work to begin to get to a point, where then you can grow some, some more, you know, and really meaningfully raise the standard of living of lots and lots of people. And then to do this...
Paul Podolsky: Yeah, that's the other departments story that I shared with you, that maybe it's worth sharing here, which is: how does that work? And the answer is, is that in both places, there's technocrats. This is the people that work the Central Bank at the Ministry Finance and the CSRC, at the Ministry of Economics in Russia. And many of these people are trained at top universities in the West. And if you talk with them, it's just like talking with people here. The outgoing now chief of the Central Bank of China, Xi Yang, is a former professor from the University of Illinois. And that's one department. And that's the reform department.
But in both those places, there's a second department, and that department is the secret police department. And they operate according to a different calculus. And they're not the people going to Davos. They're not the people meeting with foreign investors. They're not the people doing all that type of stuff. And that's the group that you're contending with. And that's the people that arrested the journalist, the Wall Street Journal journalist in Russia, Gershkovich, it's the people who would then, you know, be leading to the arrests and the abductions in China. And so both these things are true.
And the story I told you, the other department, is I was meeting with a senior official in China, and I was talking about, this was some years ago, about the abductions of the Hong Kong booksellers, at the same time, that they're opening their capital markets. And I said it sends a mixed message to investors. Because on one hand, these very thoughtful, articulate technocrats are saying, "Incorporate our stocks and bonds into your portfolio. They'll be so diversified," blah, blah, blah. Makes sense. And then you're resting. And he said, the answer was, he goes, "Oh, that's a different department."
So it's a different department that is –. And so that's the way they think about it. Like, I'm doing my technocrats stuff, everything's lined up. Foreign investors are protected. But what about that other –? And they're like, "That's a different department." And but as investors, we have to confront with both departments.
Dan Ferris: That is, like that way of thinking, look, I'm not saying we don't have bureaucracies in the West. We certainly do. We certainly do. But that level of, of it, like it seems so un-Western. It's like, it's – it's something that you just can't wrap your head. You're like, well, if they're arresting people, they disappear in the middle of the night, surely, I can't buy shares in the, in their bank, or whatever.
Paul Podolsky: That's Soviet software. That's what that is. And that dates all the way back to beginnings of Russian history, and Stalin's upbringing, and how he was trained, etc. That's all that that's the remnants of that. And that's why I think that in terms of, particularly for the stuff that attracted me about investing, macro investing, yes, you need to be very rooted in fundamentals. What is the right framework for a stock? What is it for bond? What do you think about inflation-like bonds? What's the commodity, etc.? But you also really need to be rooted in history and culture, I think, to have the whole picture. And it's not easy. It requires a lot of homework. But, boy, is it interesting.
Dan Ferris: Yeah. And what's another interesting thought I just had is that, in a way, like we're talking about these huge countries, China and Russia, and it's sort of this is "Emerging Markets 101," isn't it? Figuring out if – now are the secret police going to be a problem? You know, is the dictator who appointed himself for life going to be a problem? Because they have these really great businesses there. It's just such a juggling act. And it's easy to dismiss it, and say it's not worth doing it, isn't it?
Paul Podolsky: Yeah, though, I think it depends on how you a little bit define emerging markets 101. In other words, I think the classic EM story is the country that was a little bit more – I mean, the classic story would be like a South Korea, or Singapore, or something like that, that a time seemed more rickety, and then developed a more robust, you know, very investor-friendly framework. And if you're owning that, you basically saw a secular increase of the PEs. But I think what we're talking about in Russia and China is a little bit more of an opening up, and then a closing down.
Dan Ferris: Right. That is so strange. We all had this idea, like China was going to be this great power. And it may yet be. But I don't know, I find it, I guess I'm where you are. I can't wrap my head around it. I can't put a dime into it is really where I am.
Paul Podolsky: Well, I think that I've talked with, I've thought about it a lot. And I think the thing I mean to step back, is that the process of modernization. Like if you look at the last couple of 100 years, basically, productivity is essentially, you know, in the, in the early part of the 18th century, not that much changed from the Roman Empire. And then you get this, you know, this huge rapid shift that we're dealing with now. And that puts enormous strain on governing systems and cultural systems to adapt.
And I think that the thing that both Russia and China are going through is, particularly China, is it's an ancient culture. And adapting that to modernity is a very stop/start slow process, that has to do with authority, and rule of law, and education, all these things. And it does not move in a straight line. There could be big ebbs and flows. And I think we were, the formative part for my career with the Berlin wall falling, and all that excitement. And I remember being in Russia, watching all those changes. And, you know, we got a shift in one direction. But then, I think, particularly 2008 was a big rattle, like, of their confidence in that model as being appropriate for meeting their goals, and you began to see a shift in the other direction.
Dan Ferris: Right. So in terms of maybe decades, you're describing, you know, two steps forward, one step back, and maybe appointing oneself dictator for life, and, you know, invading Ukraine, and so forth.
Paul Podolsky: Yes.
Dan Ferris: This is one step back, each of these large...
Paul Podolsky: Exactly. And if you think about it, the scale of things like is, you know, is Putin a war criminal in Ukraine? I think it's unequivocal. I think, yes. I'm not a lawyer. But I think if you look at the evidence, yes. At the same time, if you look at how many people Putin has killed, compared to how many people Stalin has killed, he's a much milder variant. And so it's strange to look at it that way. And I would be scared to be in Russia right now. And I would have been terrified to be there under Stalin. But it, you know, maybe it's a less virulent form of the same thing.
Dan Ferris: Right. So what are the odds are, it seems to me like both Xi and Putin die in office. I mean, you know, this, they're, they're both there for the duration.
Paul Podolsky: I think so.
Dan Ferris: And maybe the way Putin is going, who knows how long that could be. And then what happens? I mean, that becomes, doesn't that – that becomes an even almost worse situation, a country like that, in that kind of turmoil?
Paul Podolsky: I think it depends. It's hard to say. It's hard to say. I think with each of these things, you know, if you think back over longer timeframes, the 20th century is basically a debate about two things. What is the optimal governing model for a place? So communism versus, you know, top-down versus democracy. And then what is the optimal economic model for a place? I think the collapse of the Soviet Union ended the second debate. I think that people basically agree that if you want to create growth, you need to have the system. So that is a huge step forward, actually, I think for just creating wellbeing for people.
I remember when I was first in Russia, [laughter] when I was, I moved there right after college. And I was talking with this woman, and, you know, she, it was like one of these moments. You know, first of all, it's like eight in the morning. She's dragging on a Marlboro for breakfast with a cup of coffee. And I was, like, very naive at that point. And I was, like, you know, what's it really like to live here, etc.? And she goes, "Paul, they tried to build socialism in the desert." And I said, "Yes." And she goes, "Do you know what happened?" I said, "No." She said, "They ran out of sand."
And so her point was that the systems produced unbelievable shortages of incredibly basic things. And I think that that has been well-established. And so what happens with these people go? Well, it's hard to predict. But I think that the question is, the big debate right now is what is the optimal operating system of the governments to produce a system that that works out for the majority of its participants? And I think that both what the Kremlin and Zhongnanhai would say is that the Western system has all these defects, and they can go through them. We could talk about them here. And you know, and that the West would have a different answer for that, which is that it has huge defects, but it has the ability to debate and improve on them.
So the question is, is when the collapse comes, how do these two people forward? And I think they'll be faced with that situation, the move to a more market-based economy, I think is unequivocal. And the question is how far they move in that other direction, and if you believe it.
Dan Ferris: So let's, so we've talked about these two places. And I thank you for sharing like facts, and also process about basically things you don't know, things you can't know. Really valuable. I was reading a bit about a piece about Chile that you had here on your sub stack called "Letter from Santiago," just before we started recording. And maybe we should talk a little bit about that country, as a place. Are you more comfortable? Do you feel there's less that you don't know about Chile, maybe than about, you know, what Xi or Putin are going to do?
Paul Podolsky: Well, I feel like I know enough about Xi and Putin not to invest in that. So that's already something. It simplifies your life. There's lots of other good stuff to invest in. In terms of Chile, I went down there. I'm a big believer of doing lots of homework, but also seeing things firsthand. That's actually something that I learned, and it was reinforced by working with Ray. And Chile, obviously, is going to be the center of the production of a lot of raw materials that are critical for the one of the big shifts that's underway, which is the shift to electric vehicles. And I just wanted to see if this was going to improve the country or not.
If you look at Chile, there's no reason really why it shouldn't be as wealthy as like a Norway or Australia. The structure of the country is very similar. It's small populations sitting on top of a lock hold of commodities. But it's not that way, and doesn't have the wealth of a Norway or Australia. And one of the reasons is, is because of these incredibly strong shifts between left and right there, which they are in the middle of right now. And shortly after I was there, the current administration came out and talked about nationalizing or pseudo nationalizing one of their key private sector lithium exporters.
So I think that Latin America is another part where this global debate over the optimal system is playing out. And Chile is, Chile as part of it, but you can see it, see it all over. And, you know, El Salvador would be a classic example there, where, I wrote about this, too, this sort of have like a hipster dictator there that has abandoned civil liberties, but also seems to be having an incredibly high popularity rating. So this broad debate, which we all see the United States of, you know, will the system deliver rewards to enough of the people to have confidence in the rule of law is what's going on in Chile, and it's what's going on globally.
Dan Ferris: Does this make Chile uninvestable at this time?
Paul Podolsky: I don't think it makes Chile uninvestable. But, you know, there's a question of if, you know, what's the degree of diversification that's going to get you here to get you relative to what you can get at existing assets. So, again, back to my, you know, I have a very small exposure to Chilean assets right now. But the, you know, the question is, is can you get – are there simpler ways of you be able to earn your return, and I think there are right now. So, you know, I look at what's going on in the United States. So there's a significant tightening of monetary policy, and I've talked about it a lot on your show. And to my mind, a very rapid falling in inflation.
And so over relative to the past, I have to look at Bloomberg to remind myself the time frame, but you [laughter] can get 5% for sitting in cash right now. So a lot of people are very happy to earn 8%, 9% returns. OK? You can get the first 5% of that by taking no risk. Like if you own 5% two-year notes and hold them to maturity, your risk is zero. You're going to get paid five. And so it doesn't take that much work to build a portfolio on top of that, I think they can get you 8% or 9% with those, with these types of cash rates, with not that much risk.
So to me, you know, the relative merits of throwing in a Chile or any other things, it all depends on the alternatives. And I actually think that right now, what's happened to the world is we have this pandemic. It was a massive disruption. It caused inflation to spike within the context of relatively deflationary forces globally. Going into this, we had hyper competitive technology, that's only going to get more competitive. AI, lots of other ways of trying to outsource and squeeze margins instead of things. Any business with middlemen in them is systematically getting destroyed. And that is actually very deflationary.
And so we had this huge spike up. The Fed and other central banks were very slow to realize what was going on. And now we've had the pendulum swing into a pretty significant reaction to, my mind now verging on overreaction to the other way. In other words, you know, inflation, the United States has fallen from 9% to 4%. PCE is now down at 3.8. If you look at – just the morning, we're talking, I don't know what this is going to be aired, but isn't prices paid now fell the lowest it's been since the pandemic. And so you've had this huge swing.
And I think that it's creating the situation that is actually very favorable for investors in the sense that trying to build a great portfolio on real interest rates were negative, which is they were for many years, relative to now you can build one where short-term Treasurys are offering you a real yield that's 2%. That's much more favorable for investors. I just think of investing as basically renting out your money. And the rents are a lot higher now than they used to be.
Dan Ferris: Oh, an interesting way to put it. Yeah. So it sounds like you like the U.S.
Paul Podolsky: Yes.
Dan Ferris: And we don't need to mess with Russia and China and Chile to get a really good return.
Paul Podolsky: I don't think a lot. I've got a, you know, I've got maybe a couple percent of my portfolio right now in emerging market. That I'll expand or contract. But right now, I'm not seeing that particularly compelling relative to the alternatives that are closer at hand.
Dan Ferris: All right. Do you know what I think? I think I think it's actually time for my final question. Which, yeah, it's the same question for every guest. And, like, even if we have a guest that is a nonfinancial topic, we had a sort of a health-and-fitness guru on here one time, and couple other different folks, we had Ron Paul on once, everybody gets the exact same final question.
Paul Podolsky: I like that.
Dan Ferris: Yeah, a very simple question. The question is simply: if you could leave our listeners with one thought today, what would that be? What would you like to leave them with?
Paul Podolsky: Follow your curiosity. Listen to it. Because if you – there are hints there. And a lot of times, those hints come from different parts of your brain, but you got to listen to it. One of the most influential essays, I know I've been a little bit long in my answers today. But one of the most influential essays I read was by – there's an American novelist that recently died, Cormac McCarthy. I don't know that you've read his work. So he wrote, to my mind, one nonfiction essay, and it's called "The Kekulé Problem". You can get it, I think you can Google it and get it.
But it's, basically, and there's an interview you can find on YouTube about it. And I thought it was quite fascinating. It basically said that there's not much we understand are about our unconscious, but our unconscious will solve basically any problem we give it. And one of the things, I think you have to give it is like what are you genuinely interested. In other words, you clearly enjoy these conversations and drawing people together and stuff like that. And I think that one of the keys for fulfilling life is really listening to what you're genuinely curious in, and following that. And that leads to all sorts of unbelievable openings. And I feel like it's only gotten better over time.
So macro investing, when I started out, I literally didn't know what the difference was between a future and a cash market. I had no idea. And that was like a little thing. And then it just kind of opened up, and got more complex and deeper over time. But it was all just following curiosity. And when I talk with young people, a lot of times, they come out of school, and they're focused on, you know, how they did this class, or that class, and stuff like that. And I'm just like, you know, what were your extracurriculars? What type of conversations are you having with your friends? Home in on what that thing is that you're actually really, really deeply curious about, and I think that'll lead you to a good place, whatever that place is.
Dan Ferris: Wow. That was a really fantastic answer. This is something that has impacted my life directly. And just by – to me, it's pausing, and breathing, and thinking, what is really going on in me? What am I really feeling about that? What do I really want to know? And what I'm doing, I think you would say is, I'm letting my curiosity well up –
Paul Podolsky: Yes, exactly.
Dan Ferris: – and I want to be able to identify it.
Paul Podolsky: Yes.
Dan Ferris: Allow it, you know, just to allow it. Because I've gone through my career thinking what am I supposed to do here?
Paul Podolsky: Yes.
Dan Ferris: And we were in school, and what answer are we supposed to give here?
Paul Podolsky: Yes.
Dan Ferris: That's not real learning.
Paul Podolsky: As opposed to what answer is there.
Dan Ferris: Yes. Yes.
Paul Podolsky: And if you listen to it.
Dan Ferris: Exactly. What is the answer? Not what do they want me to say? What is the answer, or an answer? Because there's no "the answer", usually.
Paul Podolsky: Yeah. And then when it wells up, it's crazy, it's crazy positive. So we're probably over time here. But when I left Bridgewater, it was a little bit of, you know, I was used to working in that structure. Ray was the dominant influence. And I was like, you know, what is it – one the things for me is writing for me is like breathing. Like, I can't not write, I realized. Even if I had a reader of two, I can't not right. And so that writing led to the sub stack, which then got me invited to that conference, which then led me to connecting to you today.
And all that was, like I had no idea that you existed. But all that had to do with me following that curiosity. Like I can't think without writing. And if I write this thing, I'll share it, and then we'll just see where it goes. And there you go.
Dan Ferris: It's interesting that you say that about writing because our hosts at VALUEx Vail is a very much – he writes every day. Vitaliy Katsenelson. He's been on the show three or four times, and is a big advocate of writing. And for me, I, you know, I think better when I write because, you know, you can't escape it. It's on the page staring back at ya. [Laughter] And you really have to think about it.
Paul Podolsky: And there's this powerful thing, both conversations, and I think writing, they help draw that thing out, whatever it is, that's buried in there. Like, what is the question?
Dan Ferris: All right. That was a great answer. I thank you for it, Paul. And thanks for being here. I really enjoyed talking with you.
Paul Podolsky: Sure. Thanks so much for your time. Talk to you later, Dan.
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I'm really glad that we had Paul on the show. His comments on China and Russia, and the process by which he sort of assessed the risk. That whole discussion of what's going on in those countries, and how he thinks about the risk is really very, very important. And I think it's we talk a lot, with a lot of investors, about a lot of things. And we talk about a lot of different countries. And it rarely, occasionally, you get somebody who really provides you with more than just a stock pick, or even an idea about how to pick a stock. It's a framework for – and you heard when he started talking, he said, you know, the framework is important. And that's what he gave us. It's a very important way of thinking about things.
And the whole bit about, you know, the way they think about things in China and Russia, everything's in a different department. You know, there's the [laughter] economic growth department, and then there's the secret police making people disappear department. And to our Western ways, that is just so weird. You know, and the way things are now, like we said, you know, they've taken a couple steps forward. Maybe they're taking a step back for a few years here. And then we'll see. You know, how things come out in the next several years in those two countries.
And, of course, we talked a little bit about Chile. I think I'm probably more interested in Chile than Paul is. I didn't really get into it. I didn't want to get into a debate about it. I just wanted to know what he thought. Because I, again, the idea that Xi and Putin are so focused on things that could hamper the important economic, you know, progress that they've made over a period of decades, it just seems a little crazy to me. And I suppose the same thing could certainly happen in Chile, if they nationalize the lithium mines or whatever.
But I think what's happening there is, like, is Chile really going to go as far as shooting themselves in the foot, or in the head really. If they mess with the copper mining, that's shooting themselves in the head. I mean, that's their economy. That's a huge, huge part of their economy. They're done No. 1 copper producer. So I would think that if the rhetoric really ramps up there, and you know, they start talking about nationalizing the copper, that I don't know if it'll ever actually happen.
But you can probably safely avoid Chile, and just invest in copper anyway. Because we're going to get the demand for it, and we don't have the global supply to meet all this new demand. And if some problem happens with the supply in Chile, guess what? [Laughter] That's just more supportive of prices. So there's a lot to think about. And I like the fact that Paul underscored that you can't be an investor today without having some view about China, without understanding how it impacts global financial markets. Really great stuff. I really enjoyed that.
All right. So that's another interview. And that's another episode of the Stansberry Investor Hour. I hope you enjoyed it as much as we did. We provide a transcript for every episode. Just go to InvestorHour.com. Click on the episode you want. Scroll all the way down, click on the word "transcript," and enjoy.
Make sure to follow us on Twitter. Our handles are @Stansberry and @investor_hour. For my co-host, Corey McLaughlin, until next week, I'm Dan Ferris. Thanks for listening.
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