Episodes

Dan Ferris: The Fed wants you to believe they've got inflation under control, but I believe we've only seen the beginning of a devastating new crisis, and if you don't prepare now, you could see your savings evaporate as inflation and interest rates soar even higher over the next two years. It all traces back to a golden thread that ties together the biggest financial calamities in America's history, but it seems the entire financial world is falling into the very same denial trap that led to massive devastation the last time this crisis played out. If you know your history, you know there will be winners and losers and now is when you decide which one you'll be. I've spelled it all out in an urgent new report. Go to www.BankRun2024.com to get your free copy. I'll also show you how to get my complete playbook for navigating this crisis, including the three critical steps to take immediately. Again, that's www.BankRun2024.com your free copy of my new report.

 

Dan Ferris: Lyn Alden, welcome to the show. Really glad you could be here.

Lyn Alden: Thanks for having me.

Dan Ferris: Oh, you bet. So, I really – I was curious to get you on the show, because I follow you on Twitter and I enjoy doing so, and I have lately become more interested in macro concerns than I was when I was – years ago I started as a sort of bottom-up, one-stock-at-a-time kind of a guy. And so, you're one of my favorite people to follow to do that. But you're new on the show actually, so let's orient our listeners a little bit and tell them a little bit about you. To me you're like – you're a macro investor. If I had to characterize you with one label, that's the one I throw on you. Is that fair?

Lyn Alden: Yeah, I think that' – I mean, that's what probably my biggest audience is or what I'm known for. Like you, I went through a similar process where I actually was more initially interested in equities, individual equities. But it was by around 2017 or 2018 that I realized that the macro component was likely going to be a lot larger in the coming years than individual equity selection. And so, that really started drawing my attention.

And I guess the – I mean, the full background is basically that I started out in engineering actually, then went into engineering management, engineering finance. And so, I take a systems engineering approach to a lot of things, which is basically – in system engineering you're designing or overseeing something that's more complex than any one person knows how it works. For example, I used to work with aircraft simulators and there's electrical, there's mechanical, there's software, there's aerospace code, there's individual avionics. No one person knows every component in the simulator but you have to somehow come together, build it, and then be able to troubleshoot it or operate it and know how it works.

And so, it kind of comes down to control logic, understanding the inputs, the outputs, the governing logic that happens in between. And I approach macro the same way, which is basically that we have these monetary systems that were built... they're essentially engineered systems. They were constructed a certain way, they work a certain way, they have certain failure modes and then certain responses to those failure modes. There's inputs, there's outputs, there's governing logic. And so, I really kind of study macro through a system engineering lens. And so, that's really what I've shifted to over the past several years. Ever since around that 2017, 2018 period, I've really kind of focused on those topics.

Dan Ferris: All right, So, that's interesting to me. It's interesting to me that there was a conscious decision on your part that macro was going to become more important. Most people say, "Well, it just felt right and it attracted me" or "It's what I studied in school or something," but I think that's really interesting. So, what do you see what? What did you see and maybe still see in the world that tells you "You know something. it's not good enough to be in equities, dude, anymore. I've got to get out there and be a macro person"?

Dan Ferris: So, what I saw was that the U.S. deficit as a percentage of GDP was rising at a time when we were not in a recession and the unemployment rate was still going down, and that had not happened since the Vietnam War. And back then it only happened temporarily. And so, really before that it happened back in the '40s, for example. This was an unusual macro phenomenon and it led me to kind of do more research on – I always had the big question, like how does – so, we're building up all this debt in the system, higher and higher debt, and everyone says, "Well, it's not an issue now but one day it's going to be an issue."

So, my question was, well, when is that one day coming? When it's an issue, how does it manifest as an issue? Are there periods in the past where they had this type of problem? Obviously, they're not going to be exactly the same thing, but are there types of ways that they ran into this head – this issue? And how did they address it?

And so when I saw that deficit starting to rise, even when unemployment was falling, I was like, I think we're entering the early stages where some of this actually starts to matter. And so, that kind of went down a whole rabbit hole of monetary history research. How did they handle debts in the past? The difference between, say, physical dominance and monetary dominance. And so, even the big macro themes that I focus on today, like the impact of the fiscal side, really kind of started – my interest in that started back in that kind of 2017 period because that's when that trend initially emerged. And it took time to gather steam and become a larger and larger component in macro, but now that we're seven years into that situation I think it's continued to manifest and strengthen.

So, that's really the key thing that I think made me have a conscious decision to say there are things happening here that I have to understand because they're going to – if I do individual stocks, these other things are going to push them around. They're not going to necessarily behave as they – any sort of, say 30-, 40-year back test for things like this. I think we're in a different environment where there's other things you want to be aware of because I still do individual stock analysis to varying extents because they help inform the macro but I have to always analyze them with the macro in mind, at least the way that I do it.

Dan Ferris: So, what really excites me is to find something in common with a guest. And the fact that you picked out 2017 just now, 2017 changed things for me too. That was when I started getting – actually, it was May 2017 specifically. In my newsletter I was writing about how animal spirits, basically, to sum it up were in charge to too great an extent. Of course, that continued for a while, but something definitely did change. And – like, in particular, if you look at something like CAPE ratio, it's spent a lot of time in what I would call kind of expensive bubbly, even mega-bubbly territory since then, which augurs poorly for future returns.

So, right now when I read your stuff and hear you talk, this issue that you mentioned of fiscal dominance comes up. Why don't we get into that a little bit and explain what it means to our listener and why it's important to you.

Lyn Alden: Sure. So, fiscal dominance is when the fiscal deficit and federal debts – or, in another countries a sovereign debt – when those are large enough that they start reducing the options that a central bank has, that it kind of constrains their options and the fiscal side becomes a more important impact on the economy than the monetary side. And so, as an example back in the 1970s, it was an example of not being in fiscal dominance. So, if you look at where new money was coming from, more money creation was happening from the private sector, bank lending and corporate bond issuance, than from deficits. Even though deficits were a background issue as well, there was just quantifiably more money creation coming from bank lending. And federal debt was very low. It was 30% to GDP. And so, a way to slow down that inflation was what Volcker did, which is raise interest rates super high, slow down the rate of bank lending, put the economy into a recession, and that helped cool off the inflation.

It also – I mean, there's even a darker side, which is basically it put Latin America into a depression because they had all these dollar-denominated debts. It put them into a depression, so they consumed less oil, which is – it impacts the supply demand balance. But there's all sorts of reasons why that worked. But basically, the interest expense of the federal government did increase because of all that higher rates, but the – when 30% of debt to GDP pays more interest out, that is a – that's less of an impact than all the slowing that that did on the private sector lending. And so, that was an example of you're in monetary dominance, so there are monetary solutions to the monetary problems that are happening.

When we fast forward to what's happening today, what, say Powell's dealing with, is there's 120% debt to GDP, or about 100% held by the public, and there's – the federal deficit is larger than the sum of new bank loans and new corporate bond issuance in a given year. And that was not the case back then... it's the case now – at least in most years. And so, when they try to – when they run into inflation, inflation did not happen this decade because of excessive bank lending. There's not a high rate of bank lending... it's kind of a modest rate of bank lending. Instead, it happened because there were very large monetized fiscal deficits and then various bottlenecks as those deficits kind of worked their way through the system. And right now, when there's still high inflation – and back especially when it was higher, the Fed raised rates to try to deal with that inflation. But the problem is that most of it's not coming from excessive bank lending... most of it's coming from very large fiscal deficits. And high interest rates are not really going to change what the deficits are doing. And when you increase industries at a time when you have 100% debt to GDP held by the public, you actually increase those deficits even more than the rate that you slow down bank lending.

And so, although the higher rates did have a downward disinflationary effect on the private sector money creation, the impact it did on the federal side is kind of equal or bigger. And so, interest rates started having a more mixed result in dealing with inflation. On one hand they are recessionary and disinflationary when you raise them, but on the other hand they're actually stimulatory. If you're owning money markets, every time the Fed raises rates, you get a raise. If you're Exxon Mobile, you have long-term debt locked in and you have cash equivalents on your balance sheet, so you get a raise. A lot of corporations, they get a raise every time the Federal Reserve increases interest rates. And that was not the case in the '70s. That was not the case in certain other periods.

And so, basically there's just kind of interesting dynamics at play when a country gets about over 100% debt to GDP, and then especially when they also have unresolved fiscal imbalances. And of course, one way to kind of sum it up is that basically we've had 40 years of inclining debt to GDP on the public level and 40 years of falling interest rates. And so, that was an offset. But when interest rates finally hit zero or start going sideways, that rising debt to GDP and the interest expense associated with it starts to actually matter. And I think we're in that period now and so are some other countries, like Japan, for example, but the U.S. being the largest country that is kind of entering this fiscal dominance mode.

Dan Ferris: All right. Well said.

Corey McLaughlin: Yeah, Dan – or, Lyn, that's something Dan has talked about a lot and we've talked about here, like flipping the last 40 years on its head. It's everything – it's kind of what you just said there. It went from – or, in the last 20 – low interest rates to an actual interest rate here. And – but what does – I mean, so do you – how do you see this kind of unfolding ahead, this fiscal dominance? I mean, I know you've talked at other places about the 1940s, how there's some similarities here, but once a period this gets going. What's – what did you find about what are the next steps in it?

Dan Ferris: So, basically in general they're unable to raise rates as high as they prefer because they start running into bank solvency issues that become systemic and the effects that they have start to turn backward, which is you can – if it gets bad enough, you can get their situation where rate hikes are inflationary. The U.S. is kind of teetering on that range. We're not firmly in that range, but you see that in certain emerging markets where rate hikes actually result in more money creation because of basically the larger sovereign deficit, for example, which is someone else's income. And so, they can get into kind of a tail spin where that's not the main variable and it starts to actually exacerbate it.

So, I think, I mean, bringing it back to developed markets, basically I think that we're in a period of higher-than-baseline inflation for kind of the foreseeable future – I mean, until something more structural changes. And generally speaking, when sovereigns get to these debt to GDP levels, those bonds in real purchasing power terms are not going to do well. Basically, the sovereign defaults one way or another and when you control your own currency it's usually not nominally... it's usually through gradual loss of purchasing power and finding ways to make nominal GDP go up faster than the sovereignty debt, or at least as fast as it.

And so, back in the '40s they did yield curve control, kind of like what Japan's doing today, where they basically have above-target inflation but they still pin the full yield curve down anyway to varying degrees. Right now, the U.S. is trying a different approach, which is "OK, we're going to jack up interest rates, we're going to try to strengthen the dollar, we're going to keep energy prices low, we're going to try to slow down the rest of the world that has all this dollar-denominated debt because that can help curtail inflation." But they have somewhat limited tools for what they can really do at the end of the day.

And so, I think basically, when you have an emerging market that has above-target inflation for a long time, the hard part is no one's got an exact reason of why it's happening. It's a bunch of factors happening together and it's just – it's kind of this background factor that people have to deal with in that economy. It just becomes part of what they have to deal with. And I think that the U.S. is going to be in an emerging market light situation, which is to say that some of the things that you see happening in emerging markets or some of the things you see happening in the developed world back in the 1940s, that's kind of the background thing that we're going to have now for a period of time to varying degrees. I think the highs of inflation and the lows of inflation are both going to be higher than they were, say, back in the 2010s. They already have been but I think that that's something that I don't think we're going to comfortably go back to just 2% inflation, at least during periods of time where you're not in a recession. You could get inflation down in a recession but as soon as you try to come out of recession I think that inflation's kind of ready to reemerge there until there are more structural changes. And given how polarized or locked in a lot of the structure is, I don't really see those structural changes happening for the foreseeable future, like an investment horizon.

Dan Ferris: All right. So, I keep going back to one of your initial thoughts when you said, "When does all this blow up?" Because I have to tell you, this concern with deficits and debts and things I've been hearing about – I'm 62 and I've been hearing about it my whole life. My whole life I've been hearing about this from – and when I was young, the analysts who were saying it and the investors who were saying it were old. So, it's something that a lot of folks have constantly been thinking about. But the fact that you made a very sort of conscious decision in 2017 to change your focus, do you have an idea of the kind of time table we're talking about? When does this – when does it sort of – I want to say blow up, but when do debts and deficits very obviously start to matter? Right now?

Corey McLaughlin: Yeah, like, become something that people have not – are not familiar with. Like the world looks – that everybody, it's obvious to everyone.

Dan Ferris: Right. You know what I'm talking about. It becomes so important that people just – they don't talk about anything else for however long. It's like a crisis.

Lyn Alden: Yeah, so it's a good question. I think it happens as stages. I think one of the first ways this manifests was back in 2019 with the repo spike, and those of us that were monitoring fiscal dominance at the time were like "OK, it seems like on the service it's a repo problem, but really it's a T-bill oversupply problem relative to how many reserves were in the system and how much liquidity is available to buy them." And repo was used as a funding source, for example, to buy T-bills. And so, me and others said, "Well, the Fed's probably going to have to just outright buy T-bills even though it's – on the service it's a repo problem."

And sure enough, in mid-September the repo rate blew out. First they were helping with repo markets, but then by mid-October the Fed's like "OK, we're going to actually buy some T-bills. We're just going to buy and hold more T-bills. We're going to stop reducing our balance sheet. We're going to start moderately increasing our balance sheet again." And that was basically that the Fed had to respond to the fiscal side of what was happening because they cannot abide by illiquid or otherwise dysfunctional Treasury markets.

In March 2020, when everything shut down of course initially there was a bid to the Treasurys, so yields dropped. But kind of at the worst part of it they got to a phase where the dollar was spiking and you see a lot of foreign entities start to sell assets to get dollars to meet their dollar liabilities, and that even includes Treasurys. So, Treasurys were going down in yields, up in price until it got bad enough that even Treasurys started to have problems. And then the Fed steps in with a trillion dollars of liquidity in a matter of weeks to basically re-liquify the Treasury market and get it functioning again.

And that's – and then also basically the early 2023 banking issue, that basically they had to shift to being somewhat pro-liquidity for a multi-month period, despite the fact that they're fighting inflation, ironically because banks are having solvency issues around Treasurys and the sheer amount of Treasurys that they bought. And now banks are less of a Treasury purchaser.

So, first – and fiscal dominance initially shows up in some of these kind of more notable but still fairly benign issues. And of course the inflation we had over the past few years, like we got up to 9% official CPI, a lot of that was that the fiscal impulse that happened. I think we only get to a phase of kind of structurally being in physical dominance and people fully knowing we're in physical dominance when a couple things happen. One is that the Federal Reserve is no longer able to shrink its balance sheet despite above-target inflation. That's one hallmark that basically there's so much Treasury supply coming to market that the Fed has to kind of accommodate that to varying degrees, even though inflation might be 2.5, 3, 4%, there might be still periods of time where they have to be pro liquidity, even though inflation's above target. That's kind of one big hallmark. That's kind of what Japan's in now. They have above-target inflation, but they're still increasing their balance sheet, but of course their inflation is still low. It's Japan, so we kind of – they get sort of a pass for now. But I think they're going to be stuck in that situation for a while. And I think that the U.S. is going to enter that situation, but without some of the things that Japan has. So our CPI will probably be higher.

And I think the second time it manifests is when you get another energy price spike. I mean, as long as energy's kind of range-bound, like oil prices, gas prices, as long as that's range-bound, that really helps keep inflation in check and some of the more obvious things don't manifest. The problem is when you're running fiscal dominance the Fed is basically having to accommodate the Treasury supply despite above-target inflation and you're in that period for a period of time and it still seems kind of contained. And then the situation runs into some sort of energy shortage, just kind of structurally higher energy prices. Then you kind of say, the Fed can say, "Well, we can't really fight that because we're accommodating the Treasury situation." And that's what a lot of emerging markets find themselves in. And I think that the U.S. is kind of gradually entering that period of time.

And to your point around people have been saying that debt's been an issue for a while, it's funny, because in some of my newsletters, I'm fully aware of that. So, by the time someone says that debt's that's a problem, everyone's like "Of course. We've heard this before for decades." And one thing I pointed out is that if you look at federal interest expense as a percentage of GDP, back in the late '80s and early '90s that hit a peak because it's – basically, kind of peak interest rates, rising deficits. And so, for example, the national debt clock went up in the late 1980s and Ross Perot ran the most successful independent presidential campaign, largely based on the debt and deficit in the early '90s. That was kind of the peak zeitgeist for the "Debt matters, deficits matter, this is unstainable."

But then China opened up to the world, starting in the '80s and really accelerating in the '90s and 2000s. The Soviet Union fell around that time and opened – basically, a lot of labor and energy from the East connected to capital in the West. And this was a 30-year structural period of kind of exceptional disinflation, globalization, productivity, and it really offset a lot of the things.

So, a lot of people that feared at the time didn't expect 30 more years of falling interest rates, zero interest rates, some countries even negative interest rates, and the sheer amount of kind of efficiency we'd have. And I think going forward – and what a lot of people learned in that period – a lot of people learned in the 2010s, especially after the global financial crisis, they were like "OK, debts don't really matter. This is never going to be an issue." And I think that they learned the wrong lesson from that period. And I think that now in recent years the peak zeitgeist became "This is never going to really matter in any of our lifetimes."

And I think that that was kind of precisely the wrong time. And I think the pendulum has kind of hit one side... it's starting to slowly come back. And so, I think going forward we're in a period where it gradually starts to matter again. The large monetized fiscal deficits mattered during COVID. They matter now. And I think it's going to be a recurring thing where they actually are a big background thing that matters.

Dan Ferris: Yeah. And as a guy focused mostly on equities all of this smells like Irving Fisher, permanently high plateau thinking. "Well, the profit margins are just wider because, well, it's a new world and we have a lot of – there are a lot of businesses that just didn't exist before and they are higher-margin businesses with – that get higher returns." And similar arguments. And therefore, they garner higher valuations, so maybe that plateau is permanently higher as well. But we see how this has turned out in history, haven't we? Every time somebody starts to think this way, it's almost a sign that the end is near and the cycle is about the turn, isn't it? I mean, it just...

Lyn Alden: Yeah, I think basically – yeah, the idea that interest rates can be zero, you can pay any valuation for equities, and the deficits don't really matter, there's a limited bid for Treasurys, that was kind of – things are invincible basically. That was the zeitgeist in, say, the late 2010s. It was like, look, if we even got past the global financial crisis, you can print your way out of anything without consequences. Or, you can print your way out of things and it won't really manifest.

But looking into the nuances where that's important – so, for example, a lot of my work in 2020 was trying to show why some of this stimulus was actually going to be inflationary this time, because people were like "Look, we saw this in 2008. People said it's going to be inflationary. It was not inflationary." And so, I'm sitting there in 2020 saying this is different than 2008. I mean, this isn't just recapitalizing banks. This is money that's getting out into the broad money supply.

Corey McLaughlin: You're sending checks to people. Yeah.

Lyn Alden: Yeah. Yeah. And so, I mean, this is going to be very different. And we saw that play out. And since then it's just been a matter of going through the cycle. So, in 2022. I'm like "OK, now they're tightening... now it's going to be bearish." But then we started to see signs of fiscal dominance reemerging by kind of early 2023. It's like "OK, we're actually kind of through the looking glass now." Some of these rate hikes risk actually being stimulatory for those receiving it.

And I think – I mean, one of the hallmarks of fiscal dominance is there's bigger than normal divergence between sectors. So, economists are like "We're looking for a recession in 2022." We never really got one, but certain sectors are in recession. For example, manufacturing went through a recession. Commercial real estate's obviously in a recession, basically depression. Whereas if you're – so, if you're one of the areas that's impacted by the tight monetary policy, you went into a recession or nearly so, whereas if you're one of the entities that is on the receiving side of the deficits, you're not really in a recession. Sometimes you're in a boom, sometimes you're at least treading water, you're doing well and so you get kind of bigger-than-normal performance gaps between different sectors, which is relevant for equity selection and things like that.

Dan Ferris: Right. So, who's on the receiving end? We mentioned energy, right?

Lyn Alden: Yeah, energy. I mean, from the deficits particularly, who's on the receiving side is people who hold a lot of assets, especially some of that shorter-duration interest-bearing security. So, for example, if you hold money markets, like if you're a – let's say you're an upper middle class homeowner. You've got your locked-in mortgage. You've got your money market fund. Now, every time the Fed raises interest rates, they actually just pay you more in your money market fund. And if it translates into more CPI, then it translates into higher cost of living adjustment for Social Security and you receive more from that.

And so really kind of the older, wealthier segment is kind of on the receiving side. Also the medical spending. Basically Medicare, Social Security, and interest – people who hold things that get a lot of interest. So, it's kind of like the wealthier segment or those that are similarly positioned. So, financially, my profile looks kind of like that demographic as well even though I'm younger. I have locked in mortgage, I have some money markets, and literally just that's more investment income that is technically spendable.

And so, a lot of them are spending on travel, they're spending on restaurants, they're spending – some in that demographic are helping their kids or grandkids afford a house or a wedding. Some of that does circulate back into the economy. And so, that's what we're seeing. If you're on the right side of the deficits, you're in a pretty good position, whereas if you're on the wrong side of monetary tightness – if you've got a lot of short-duration debt, for example, on assets that are no longer in their prime, that's when you're in major trouble. And so, I think – and I think that state's going to be with us for quite a while.

Dan Ferris: Quite a while – like years? Ten years? Five years? Just ballpark... I don't need you to be precise.

Lyn Alden: Yeah, I like to think in five-year increments generally, but basically I expect – I mean this – I expect this to go into the 2030s. I mean, if you look at the Social Security fund, that's expected to run down in 2034. So, that changes a little bit. They kind of – sometimes they move it back a year... sometimes they move it forward a year. So, they have a big decision point when that happens. Basically, Social Security receivers would get a haircut because they would no longer have that fund to draw from and they'd only be able to pay it out of incoming receipts. But that obviously is a huge political issue. So, there are certain decision points that come in the 2030s. But basically, I think at least until then this is a state that the economy is going to be in to varying degrees.

Dan Ferris: All right. So, what – I'm an investor. I want to do something with my money. It sounds like a money market or maybe rolling T-bills is not a terrible idea. What else?

Lyn Alden: Yeah. Generally in inflationary periods, shorter-duration debt is, if you're owning it, is better than longer-duration debt. I've been emphasizing the topic of the three-pillar portfolio, which is instead of just stocks and bonds, because stocks and bonds are both geared toward structural economic growth and disinflation, disinflationary growth – that's what they prefer. If you look at the – there's four decades in kind of modern history where the developed world ran into some degree of significant energy inflation and overall CPI inflation. So, those were the 2010s – I mean, the 1910s, the 1940s, the 1970s and then the 2000s.

And in all four of those decades, a 60/40 stock/bond portfolio did not do very good in real terms, generally kind of chopped along in nominal terms. You might have gone up in nominal terms but you kind of underperformed in real terms. And what historically did well in those environments were some combination of energy, energy producers, precious metals, hard assets, things like that. And the problem with a lot of those assets is they perform poorly for two decades and then they have an amazing decade and then they perform poorly for two decades and then they have an amazing decade. But it just so happens – and it's not an accident, that the decades that those tend to do well are those inflationary decades where the 60/40 does not do particularly well.

And so, I think one thing that investors should consider is basically having that slice in a portfolio of things that should do well in that more inflationary or stagflationary type of environments, and those are things that are right now currently under-owned, not very expensive. And so, I like to find assets that if energy chops along sideways for a while, these stocks are still going to do pretty well, but then if you do get structurally rising prices, then they're going to do disproportionately well. And so I think looking for things like that to add to a portfolio matter. I also think that balance sheet analysis matters more than it did in the prior decade. So, if you find entities that have a lot of low duration locked-in debt and then they have variable cashflows that kind of go up with price increases and money supply, they're in a pretty good position as long as the valuation is reasonable.

Dan Ferris: All right. Are you – I know you have subscribers to your newsletter to think about, but are you comfortable giving us a name or two? Or no?

Lyn Alden: Well, I mean, for example, Enterprise Products Partners is a pipeline and they locked in something like 20-year average duration debt with a four-handle on average, and then they're – they've got 25 years of consecutive distribution increases. They're trading at historically low valuations. And so, that's the type of entity. I mean, obviously that's a lower volatility, higher income type of play. There are other ones. I like a lot of the energy producers in general, particularly ones that can get through the cycles.

I've actually been looking at some Latin American equities because there's really early signs that they might be bottoming compared to some of the U.S. assets and that they might have gotten through some of the worst of their – they were struggling under a strong dollar environment during the whole kind of 2015-to-2019 period, then they got hit by the lockdowns, then they got hit by the Fed raising rates to fight inflation after the lockdowns. And a lot of them had to – a lot of them raised rates to double digits. They got super positive real rates in many cases and now they're kind of initially showing signs of easing. And anything that – and the companies that kind of made it through that turmoil are kind of hardened and under-owned and inexpensive, because no one's sitting there waking up today and saying, "You know what I want to own? I want to own Latin American banks."

Dan Ferris: Exactly.

Lyn Alden: No one's saying that.

Dan Ferris: That was the one I thought of too.

Lyn Alden: And so, I think with – yeah. So, like with careful position sizing, I think that's an area worth looking into because I am finding things that just – their fundamentals are now recovered but their price hasn't because investors have been well trained to just avoid all that, put everything into U.S. large-cap growth, and sleep well at night. But I think some of these kind of rotations are happening. It doesn't mean it's going to happen next year. But if they stopped making lower lows, especially in total return, because some of them paid good dividends, but if you start looking at total returns, some of them have not really made a new low versus U.S. equities in two or three years. And so, I think they're starting to get interesting.

Dan Ferris: All right. Have you got a specific country or no?

Lyn Alden: I've been looking at Brazil, Columbia, Mexico. There's – Argentina is a more complex case obviously. But yeah, ones that are doing reasonably well but they're still very inexpensive, because quite understandably there's no appetite for foreign investors to really have much exposure. So, I have been kind of looking at – again, just careful with position sizes, but things that made it through the 2014-to-2023 period, they're pretty hardened and they're pretty cheap.

Dan Ferris: Yeah. Years and years ago I recommended Bladex in my newsletter and I think it was – the price tag was single digits and I made the exact same argument. It's like if these people – these are Latin American bankers and they're still around. Consider what you have to do to just survive, let alone sort of thrive in that environment. And this thing is dirt cheap right now – back then, I was making that argument. So, I'm really – it's funny, your – many of your arguments and your ideas just kind of are a little heartwarming to me because they represent things in my past and I'm glad to hear someone younger than me thinking this way. So...

Let's see now. I think we are getting near to – yeah we're right at the time for our final question, which is the exact same question for every guest, no matter what the topic. Even if it was a nonfinancial discussion, it would still be the exact same final question. If you've already said the answer, by all means feel free to repeat it. And the question is very simply: If you could leave our listeners with just one idea today, what would you like to leave them with?

Lyn Alden: I think one idea to be familiar with is how technology impacts money. And that's a different topic than we were just discussing. This is very kind of value-oriented, macro-oriented. But basically – so, right now, if you look around the world, there's 160 different currency monopolies, fiat currencies, and they all have monopolies over their own jurisdiction. And the money that flows in or out of them is pretty tightly controlled because obviously physical value through an airport is pretty restricted and bank transfers are pretty restricted and surveilled.

But technology's gotten to the point now with things like bitcoin or stablecoins where value can just flow up across borders in a more peer-to-peer way. It kind of goes around those gateways. And so, for example, if I hire a graphic designer in Nigeria, she can hold up a QR code on a video call or she can send me a payment string over a DM or an e-mail and I can pay her in whatever money she wants. It could be dollar stablecoins, it could be gold-backed stablecoins, it could be bitcoin, it could be whatever she wants. It can go around her country's fake exchange rate... it can go around her country's local currency. And that really only reached macro scale in the past five years. So, even though bitcoin was around for 15 years, the stablecoins are now about 10 years old, they were small assets until the past three to five years. And stablecoins are now something like a $100 billion market. Obviously, bitcoin's over a trillion, but it's more volatile. And so these assets are starting to get kind of a macro scale and that has macro implications. They're big enough that they actually matter on the macro level rather than just the idiosyncratic investment level.

And what that essentially means is that capital can flow around the world faster now in a more decentralized way, in a way that especially if you're trying to operate a monetary system in that country and you've got structural inflation and capital controls and things like that, all the tools that people have to go around that and protect themselves are way stronger now. And so – and I think that's going to start having macro impact. I think that that a lot of these currencies are going to become untenable. And peer-to-peer trading and things like that just goes around a lot of their capital controls as long as society is reasonably well connected.

And so, I think that's something to look at from an investment perspective, either having exposure to those type of things or at least any time you make an investment be like "Is this disruptable by the fact that money can now flow across the world, across borders, around these things much faster." I mean, in Africa there's something like 40 currencies, and in Latin America there's something like 30 currencies. And every – imagine if every state in the U.S. had a different currency. Imagine all the frictions that would happen. And basically, all of those cross-border flows are frictions and some of these things just go around it. Stablecoins can just move around from one entity to another entity in a different country as long as they're not on some sanctioned list. And as long as that's the case, that really kind of alleviates some of the bottlenecks that some of these companies and people have had in those regions when they start to really kind of realize that's happening or they're able to catch on. And right now, it's not evenly distributed. So, for example, Nigerians are way more into this stuff than, say, Egyptians, even though they have kind of similar currency problems and they're among the two most populous countries in Africa.

So, it's not like it's happening everywhere equally, but there are certain kind of Vanguard regions where this is starting to have a pretty significant impact, and I think that that can be a bullish development for a lot of these places that can now access money they prefer to access and move around more efficiently. That alleviates a bottleneck they've been dealing with for decades.

Dan Ferris: Oh, that's a cool answer. Thank you for that. That's great. And it sounds like there's a lot more to talk about. Maybe we'll have you back on the show and we'll talk about that, but thanks for being here. I really enjoyed it.

Announcer: Opinions expressed on this program are solely those of the contributor and do not necessarily reflect the opinions of Stansberry Research, its parent company, or affiliates.