After bitcoin plunged 54% from its all-time-high in April, many crypto speculators are feeling quite shaken…
But Dan points out that it’s what didn’t happen after the crypto crash that’s worth noting…
No banks went under… the Fed didn’t need to bail anyone out… We didn’t see a big systemic collapse…
And bitcoin is still standing…
Not to mention, Dan points out that one of the biggest names in the investing world just announced he bought some bitcoin for the very first time…
Then on this week’s interview, Dan invites Hugh Hendry onto the show. Hugh is an award-winning hedge fund manager, market commentator, real estate investor, and podcaster.
Hugh previously worked at Odey Asset Management, before he founded Eclectica Asset Management in 2005, where he achieved a 31.2% return during the 2008 financial crisis.
During their conversation, Hugh elaborates on his stance that inflation is more of a social phenomenon than many people give it credit for.
Hugh also explains how if you spot some of these social trends, and are willing to take a contrarian stance, you could find some amazing investment opportunities at the best value they’ve been in years.
He even shares the names of four or five stocks trading at rock-bottom prices that he absolutely loves going forward…
Then on the mailbag this week, one listener asks Dan an in-depth question about life insurance and holding cash… And another long-time listener asks what Dan thinks about the popular assertion that gold will plummet when a crisis happens…
Listen to Dan tackle these questions and more on this week’s episode.
Founder Eclectica Macro Hedge Fund
Hugh Hendry is an award winning hedge fund manager, market commentator, real estate investor, podcaster & surfer. Hugh has 18 years' industry experience with Baillie Gifford, CSAM and Odey Asset Management. In 2005, he founded Eclectica Asset Management.
3:28 – Dan shares a suprising bit of news that could be a bullish sign for Bitcoin’s recovery… “The other thing I can’t help mentioning, is that Ray Dalio, of all people… I saw one article said that he owns 6 Bitcoin…”
6:10 – The quote of the week is from an anonymous online blogger, known only as FedGuy, who claims to be an insider at the Fed… “Control of inflation is moving out of hands of the monetary authorities and into hands of the fiscal authorities. Future inflation will largely be determined by the level of fiscal spending and taxation, which drains money out of the economy. The one thing the Fed can still do is protect the “moneyness” of Treasuries – that means lower rates and more asset purchases, forever. Just like the ECB and the BOJ. There is no normalization – we are firmly in a new paradigm.”
8:25 – This week, Dan invites Hugh Hendry onto the show. Hugh is an award-winning hedge fund manager, market commentator, real estate investor, and podcaster. Hugh previously worked at Odey Asset Management, before he founded Eclectica Asset Management in 2005, where he achieved a 31.2% return during the 2008 financial crisis.
15:12 – Dan asks Hugh about one of his more contrarian stances… “How is inflation a social phenomenon? I don’t get it…”
18:52 – Hugh says, “The most golden beautiful bullish opportunities present themselves in a way where those who know it best – the insiders – love it least. And that’s banking today…”
23:00 – “… I believe the Fed has created a language and a conversation around quantitative easing, which is very much like the Wizard of Oz… The mighty wizard is omnipotent…”
26:49 – Hugh explains what happened with the Fed and inflation in the 1970s… “Think of a poker game where there’s just two people at the table, one is the Fed Chairman and the other is JP Morgan…”
35:21 – “The thing that’s missing again is the verve, the verve of the entrepreneur, of private sector, commercial agents saying, my pecker is up! – forgive me if that’s a misogynistic term – but this idea of… bring it on, I want to take risk!”
40:22 – Hugh explains the new big trend dominating the social mood going forward… “the social mood is dominated by ESG investing, Environmental, Social and Governance…”
48:24 – Hugh shares how ESG investing is revealing some great opportunities elsewhere in the market… “It’s a function of ESG investing… tobacco stocks are so damn cheap, but it’s like oh my god, you can’t say that, you can’t say invest in that! Social mood can provide opportunities…”
51:08 – “Policy today vs policy after 2008, there is a pivot that policy is getting less rigid and that would seem to be a boon to businesses with commercial risk… I’ve never found so many instances of stocks I want to buy. I want to buy GM, I want to buy Ford, I want to buy U.S. Steel, I mean, I’m blushing!”
52:50 – Hugh leaves the listeners with one final thought, “…In the enterprise of risk-taking, never be fearful of being wrong. If you’re fearful of being wrong, you’re approaching it the wrong way…”
1:00:10 – On the mailbag this week, a listener asks Dan an in-depth question about life insurance and holding cash… And another long-time listener asks what Dan thinks about Harry Dent’s assertion that gold will plummet when a crisis happens… Dan gives his take on these questions and more on this week’s episode…
Announcer: Broadcasting from the Investor Hour studios and all around the world, you're listening to the Stansberry Investor Hour. [Music plays] Tune in each Thursday on iTunes, Google Play, and everywhere you find podcasts for the latest episodes of the Stansberry Investor Hour. Sign up for the free show archive at investorhour.com. Here's your host, Dan Ferris.
Dan Ferris: Hello and welcome to the Stansberry Investor Hour. I'm your host, Dan Ferris. I'm also the editor of Extreme Value published by Stansberry Research. Today, we will talk with hedge fund industry legend and just all-around-contrarian original thinker, Hugh Hendry. I am so excited to have him on the show. I wish we could just do a two-hour show of nothing but Hugh. It's so cool having him here. This week in the mailbag... questions about life insurance cash and what gold will do in a crisis.
And remember, the mailbag is a conversation, so talk to me. Call me. Leave me a message on our listener feedback line and hear your voice on the show... 800-381-2357. Call me up. In my opening rant this week, I just want to point out two quick things about the recent drop in bitcoin. That and more, right now, on the Stansberry Investor Hour. So really quick, just a couple of things. And I'll do a quick quote of the week, too. Bitcoin, of course, it peaked a while ago, weeks ago, at just around $65,000 – just called it. And then, it bottomed recently at around $30,000. So, you know, more than half. Like a 54% drop.
And a lot of that happened last week, like March 19 to 21. That was like a 40%-plus drop in that brief three-day period. So, wow. What do we think about this? You know, two things. First of all, it's the stuff that didn't happen, right? Like, no bank went under. The Fed didn't have to bail anybody out. There were maybe some overleveraged speculators that got crushed. And the whole crypto space lost like $1 trillion of value, right? And we're not hearing a million stories about the broken financial system and the end of the world.
Now, of course, that's because bitcoin is new, and it's not as widely adopted... it's not as big as the regular financial system, right? So I think that's part of a function... but I think it's also a function of the nature of bitcoin itself. It was designed – it came out of the financial crisis, really. That's when it came on the scene, you know? Somebody got really sick of the financial system, and he or it or they – we don't know, they're anonymous – created bitcoin in 2009. So it's kind of – it kind of justified its existence, really, I guess is one way to put it.
But we didn't see a big, systemic collapse because bitcoin and crypto had a horrible week and a horrible several weeks, really. You know? That's the one thing. The other thing that I can't help mentioning is that Ray Dalio of all people says he now owns – I saw one article that said he owns 6 bitcoin – which as I speak to you is probably worth a little less than $240,000. He's a billionaire, so that's like walking-around money. It's nothing for him. But he owns it, and he talks about it. And he says, "You know, the biggest challenge is its success."
Now, what does that sound like to you? To me, the biggest challenge of Microsoft is its success, right? Department of Justice went after them years ago, and the biggest challenge of Facebook and Google and huge social media companies that are like, you know, the greatest businesses that have ever existed is their success. So these comments by Dalio and the fact that nothing blew up... I mean, except for like – there was an article in the South China Morning Post that said like $10 billion of liquidations occurred like last week – like 19th through the 21st – and that big 40%-plus part of that drop.
And that's fine. It doesn’t really – you know, it makes you wonder... a lot of these people were using 100-to-1 leverage. You can do that in the crypto space. So if all these people were using 100-to-1 leverage, where are the blowups and the disasters? Well, obviously somebody – you know, the counterparty on the other side were the broker or the exchange or whatever the heck – however the market is structured, I don't really know. Somebody was over-collateralized or collateralized enough somewhere so that people using 100 – and I even saw one thing 125X – I think is available on Binance.
Leverage didn't blow up the world. So somebody somewhere is collateralized enough to handle that, right? And just the speculators got wiped out. And if that's all that happens, you know, "Hey, who cares? The good speculator wakes up the next day and they're right back at it." So I just wanted to – I just wanted to point all that out, you know? Ray Dalio, like one of the most successful investors of the past several years, has bitcoin in his pocket.
He's got bitcoin, and he's an advocate. And he should be, because as he points out it's a success so far. And you know it's a success when it crashes 54% and everything's just fine, OK? Let me do a quote of the week really quick. I couldn't resist telling you this. There's a blog called Fed Guy, an insider from the Fed who puts out a blog, fedguy.com. And he says, "Control of inflation is moving out of hands of the monetary authorities and into the hands of the fiscal authorities. Future inflation will largely be determined by the level of fiscal spending in taxation which drains money out of the economy.
"The one thing the Fed can still do is protect the 'money nest'" – in quotes – "in Treasurys. That means lower rates and more asset purchases forever, just like the ECB and the BOJ. There is no normalization. We are firmly in a new paradigm." That's the end of the quote. And we're going to talk with our guest Hugh Hendry, today, about inflation because he has a really interesting idea about it. He says it's a social phenomenon. So I wanted to get that quote in there, in your mind. And you know some things that I've said about inflation.
So let's do it. Let's talk with Hugh Hendry about inflation or whatever else is on his mind. He's a great guy. You're going to love this. Let's do it right now. [Music plays and stops] Every week, I tell you I'm the editor of Extreme Value published by Stansberry Research. But I don’t usually say anything more than that. Well, to my dedicated listeners who are looking to find incredibly valuable, long-term investments, I'll tell you right now. My Extreme Value newsletter is a monthly publication that focuses on buying safe, cheap stocks only when the price is right.
And I'm not overexaggerating... Extreme Value picks have earned one of the most impressive track records in the industry. Mike Barrett and I spend hundreds of hours each month pouring over balance sheets and SEC filings to find stocks trading at huge discounts to their true worth, giving subscribers a large margin of safety on every pick. You can learn more about that or sign up for the newsletter at investorhourdan.com. So you can support the show and find some of the most profitable ways to invest all at once... investorhourdan.com. Check it out. [Music plays and stops]
Today's guest is Hugh Hendry. Hugh Hendry is an award-winning hedge-fund manager, a market commentator, a real estate investor, podcaster, and – perhaps coolest of all – a surfer. Hugh founded Eclectic Asset Management in 2005 after working at Odey Asset management and achieved a 31.2% positive return during the 2008 financial crisis. In 2010, Hugh was named the most high-profile Scot in the controversial hedge-fund sector and was even featured on the financial news list of the 100 most remarkable people in European capital markets. And he's an all-around great raconteur, I can say. Hugh, welcome to the show.
Hugh Hendry: There were so many half-truths in that statement, but thank you very much for having a renegade like me.
Dan Ferris: Yeah. You know, I dig the whole renegade thing about you, Hugh. With some people, it comes off obnoxious. But with you, it's endearing almost. I just want to hear you say something crazy like, "Inflation is a social phenomenon," or something. It's just so different from what I hear from anybody else.
Hugh Hendry: Dan, inflation is a social phenomenon. [Laughs] It truly is. We'll get to that. But I often thought... actually, I often thought it was my thought bubble this morning in the shower – I am just new to Twitter in the last 12 months. And it is enriching my life. And I put something out last night. I just – you know, everyone's been talking about Elon's discovery about the energy intensity of bitcoin mining. And I thought to myself, "Hey, what is the energy intensity of Visa? Mastercard?" Because it's enormous. It's out there, and you ask a friend on Google and boom, you've got a bar chart.
And then you push it out into the decentralized, intellectual community... I mean, obviously, you get bombarded by comments. But when you sift through it, you educate yourself. It's magnificent. But to my point in the shower, I always thought that hedge funds kind of lacked or downplayed the role of a kind of John the Baptist of a kind of crazy-guy machine and who kind of went about it a different way – pursued curiosity and unorthodox, you know, kind of demeanor. And just sometimes, that crazy guy was the one that could just get a glimpse around the corner to time. And that's certainly my modus operandi.
Dan Ferris: That sounds really cool. You should write – that sounds like the beginning of like the forward for a book or something. You're working on a book, aren't you?
Hugh Hendry: I am. Yeah. With a ghostwriter. And my buddy sending, "Oh, yes. Oh, my." And it was like macro investing, the principles – I don't know. That's not my [laughs]
Dan Ferris: No. No. No.
Hugh Hendry: My book. I mean, we'll see. It's almost done. It's short. And, you know, it's that journalistic kind of lazy path from A to B, you know? The mistake that all investors make is that we're going to travel on a linear progression from point A to point B.
Dan Ferris: Oh, yeah.
Hugh Hendry: And for me, I came from – if you will – the projects. Like a really, really tough kind of pure and criminal and fearful sort of community in Glasgow in Scotland. And here I am today, and I'm in this billionaire island of St. Barts and feel 10 years younger. And like you say, I did my hot yoga this morning. I'll take some waves later on, on the board. I'm presently renting a little apartment in town because with my real estate ventures the island's some of the most beautiful houses on the planet. And I'm a gypsy. I move over. You know, I live in the back of the Defender, or this week, I'm in this little kind of nice, little apartment by the harbor.
Dan Ferris: You've lived out of the back of your car at St. Barts? Is that what I heard? [Laughs]
Hugh Hendry: Yeah. I think I was saying with Raoul in Real Vision on Friday the first of January. It was just raining and just, yeah... The cover on the back – I've got a 110. I mean, it's long. I mean, you can just – I mean, I don’t do it that often. But I like a bit of camping. I like to see the stars. I like to think... but, boy, when it rains you just got poop. You know, the drop on the nose – it is impossible. And that was one of the reasons why I ended up entering this year with 27 hours of consciousness and then 10 days of COVID. [Laughs]
Dan Ferris: Oh, man. So you're naturally immune now, I guess.
Hugh Hendry: Oh yeah. And who knows? But, you know, I'm fit, I'm lean. You know, there are... my members of my peer group are fiat currency billionaires. And I'm not. But I tell you, you can be a billionaire in different metaverses. And in my metaverse, I am rocking it.
Dan Ferris: All right. Well, you sound like the right guy to have on the show. I can't get away from this idea of – if t's too soon, let me know. But this idea of inflation as a social phenomenon... I mean, it stuck in my – I heard you say that like last week on Real Vision. And I keep thinking of it. And you didn't really have a chance to weigh into it. And I thought, "Man, I have got to find out what the hell he means by that." Because, you know, everybody says the same... everybody says, "You know, inflation is a monetary phenomenon in all times and places," or whatever that quote from Milton Friedman is. And a social phenomenon, I mean like, "How? How is inflation a social phenomenon?" I don't get it.
Hugh Hendry: OK, OK. First of all, most people plug in about this time last year. So I closed my hedge – I closed, you know... I kind of lost the last kind of big client [laughs] at the end of – would you believe in the same week that Hurricane Irma struck the Caribbean and across America? And they closed down my residential properties for about nine months. So, boom. You know? And then, I kind of came to – I had so much of my identity wrapped up there, and did I fail?
You know, closure's a strange thing. You know, what happens after closure? I probably went into a kind of – I went into my own personal confinement. And as is the way with my life, you know, I found myself kind of at odds and with a different cadence to the rest of society. And so, of course, about this time, about 14, 15 months ago when the world was kind of going into their own enforced enclosure, I was kind of coming out. I've been very fortunate again that St. Barts has been just one of those kinds of little bubbles where life has kind of prevailed. Long and short to say that I launched many efforts on social media.
And I think you mentioned that in the intro and that there was Hugh Hendry officially on video doing podcasts. I'd got a neglected but a nice, jolly-looking website, which is autonomous. It just has my name, with the official... and if you go on there, I believe you can get access or it will badger you. There will be a pop-up saying, "Hey, get The Dawn of Chaos." And so, I wrote a paper. And it's to this point – of the social phenomenon of inflation. I would encourage you to read that. But of course, now I will attempt to preface it.
And I'm not seeking to replace the Milton Friedman comment because obviously, it's true. But I think it supersedes the monetary phenomenon... changes in the mood of society. And that can be a very large macro description of society, or we can make it micro. And the micro consideration – the mood, which is most important and which I believe has been neglected in the whole quantitative-easing debate, is the mood of risk-takers. And more narrowing, again, the mood of bank lending officers.
Because ultimately, money printing in a fractional reserve system – money printing is the domain of risk-seeking commercial bankers extending loans to pay for these liabilities that we call deposits. And being a bank is – and, you know, I would love – love – to set up the bank today. That's another story. Those who – that was a wonderful saying that goes back to a wonderful comedian strategist – and I'm going to forget his name at the present time. What is he called? It's not Higgy. He's American.
Anyway, and the most golden, beautiful, bullish opportunities present themselves in those areas where those who know it best – the insiders... those who know it best love it least. That's banking today, and that's kind of like one of my funky things which validate why I'd love to set up a bank today. But banks don't like being banks today. Banks are fearful of the consequences of lending. And the central banks in the context of America – the Federal Reserve – have been bombarding this little social community of commercial bankers with reserves... with free reserves.
The Fed is... if you will – typically the role of the Fed is a bit like my role as a parent. I got teenage kids. And left to their own devices, they will smoke cigarettes, drink alcohol and god knows what other kind of nefarious drug-like products. And if I'm not there, they will have all of their buddies. I mean, I remember I was in St. Barts and I got a call from a neighbor saying, "We have a five-story house... I fear for the kids." Because they're jumping from rooftop to rooftop, you know?
So I'm the Fed. The kids are the banks, right? And there are times. There are times such as the period from... let's face it, from like 2003 to 2007 where the bankers are kind of like my crazy teenager jumping from rooftop to rooftop, swigging bottles of whiskey, smoking marijuana. And the Fed's kind of going, "Hey. Hey, guys. Calm down." You know? This is not one of those periods. Ever since the debacle of the financial crisis in 2008. And remember. Let's just be bold. The U.S. financial system pretty much became insolvent. You know, it was the 1930s 2.0.
And we could be sitting here today with nominal GDP kind of at 20%. But all those levels, if central banks had pursued an orthodoxy of intellectual prejudice and a kind of hard-money regime... now, I say "could" because that's conjecture. You know, it didn't happen. I'm just judging against the now hypothesis of what has happened. But anyway. Anyway, so the Federal Reserve is kind of saying to these kids today, "Hey, listen, have one on me. Like, what if they printed – well, "printed" is an upstart term.
But they have facilitated about $7 trillion of free reserves just saying... which essentially is fags and booze. It's just like guys with, "I'm out of the country. Have fun." And the remarkable aspect is that such is the kind of curmudgeonly and fear-laden attitude of the bankers that are like, "You know what? I've still got a hangover. I still don't have an appetite to go crazy." That's the social mood that has yet to change. And quite remarkably, I mean, in the last three weeks I think it was the COF for JPMorgan who was kind of – it was unprecedented things, saying, "Stop. Stop sending deposits."
You know, they're phoning their biggest clients and saying, "Guys, we love you, but we're kind of full. And for us, we just don't have the risk-taking capacity to extend credit to offset these liabilities you keep throwing at me." So I believe the Fed has created a language and a conversation around quantitative easing, which is very much in keeping with the king of Wizard of Oz. The mighty wizard is omnipotent and is out there and it's doing something – you know, J-Po last year and is very... it's not unprecedented, but it happens rarely that Fed chairmen go on daytime TV, you know?
And the notion is like "the real folk watch daytime TV." And it's like, "Hey. You know, we're with you. We got your back, and we're doing something." But he actually said, "We're printing." He actually kind of convoked this idea of a printing press. And it's baloney, but in a kind of social universe, he feels the need to impress upon the aegis of society, "Hey, guys. I'm trying." But like the Wizard of Oz analogy, when you look behind the curtain and you examine the reality, you're like, "Hold on a second. Really? This is the omnipotence? The omnipotence is putting $7 trillion of reserves but banks have no appetite to lend? Really?"
So clearly, you know, we've had a profound drawdown in nominal GDP. And we had layoffs and unemployment which surpassed – I'm going to use the benchmark of the 1973, 1974 economic recession. Because when oil initially went from – $2 to $10 – in terms of crunching GDP declines, that was enormous. And yet, obviously, last year just took it out. It was just far greater. And so, we're... and that was – normally these things are brought about by dysfunctional behavior by risk-takers. You know, by bidding up house prices, bidding up technology prices, et cetera.
And then when they fall over, getting into difficulty... or bidding up the oil prices and increasing shortages. Last year, we had an Invasion of the Body Snatchers. We had an alien invasion of the human body, and we got this profound smash. But that is like a kind of ship, and it's kind of writing itself. The problem that remains and for all the financial press, a great area to watch social mood and the financial press is shouting, 'Hey. Inflation. Inflation" – it may come, but it's going to need a change in the social need... the social vector of the banking sector.
And you can kind of chill out. Just sit and watch, you know, large U.S. banks and their expansion of balance sheet expansion. Once it starts getting tumultuous between 6%, 9%, 10%, "Hey. Taper. Raise risk." But nothing. There's nothing happening. So that is social mood. You know, Volcker typifies the challenge of the social mood of the banking community. And it's best thought of as the poker game. Now, I know if wear sunglasses so you can't see my eyes. But I got so many body tics. Like, when I'm unhappy you're going to know about it. You know? I'm the worst poker player. So take me out of it.
Think of a poker game where there's just two people at the table. One is the Fed – it's the Fed chairman – and one is JPMorgan, right? And back in '79, the banking community... it was kind of the opposite. Was it the opposite? Yeah. They had profound credit... that we had this creation of Euro to dollars. When the oil price went up, the Fed out and all of their cousins and neighbors had this influx of money, they put it on the account of both U.S. banks domestically and offshore creating the Euro-dollar market. Banks were flush with liabilities.
And they lent. They lent to Brazil. They lent to the sovereigns of South America thinking that was risk-free. That was erroneous. And they lent to corporate and household America. And a bank is like a hedge fund. And it only has two options. It can invest in U.S. Treasurys, bills, or it can invest in free enterprise... corporations and the personal sector. And all of its time is just kind of trying to make decisions between the two. And what we're seeing just now is, the banks are like, "Boom." They're like, "We want riskless assets." OK?
But back then, the banks were, "We want kind of risky assets. We want loans because we're fearful of inflation, and at least we feel we have inflation protected, embedded in the smart loan contracts that we have with our clients." So now, you have this new Fed chairman whose Texan guy comes in, "Ka-ching, ka-ching, ka-ching," and sits down at the table and is like, "Guys, I'm crazy, right? So you all know that I said to you '73, '74 was a mean, mean recession."
And it was brought on by an oil cartel. And, hey, look at the front page, and they're doing it again. We've gone from $10 to $40. We know the story. You know, these risky assets that you have – they're going to have to endure all-mighty recession. Are you sure?" And the bank's like, "Oh, I'm still sore. I'm still sure because I can see the inflation." And then, Volcker was like, "Hmm. OK. Tomorrow's Saturday. I'm going to rates by 100 basis points."
That's how crazy I am. It's like, you're talking about we're going into the mother of all recessions and you're going to raise rates. It's like, "Yeah. And then next month, I'm going to do it again. And until you mothers change your dumbass attitude, I'm going to keep doing it. How brave do you feel now?" And so, you know, this went on for 18 months. But Volcker changed the course of history because he changed the social mood of the bankers. And not quickly, but the gravitational pool went from risky assets back into buying risk-free with yields of 15%. And he changed the course of history.
Dan Ferris: Right. The beatings continued until morale improved. But here's what I don't get. And I'm glad you went through all that. I have read the piece. But, you know, I read things, and I stop and I read – I probably haven't finished it because I read in all the wrong way. I start at the end, I got to the middle... it's a mess. But here's the thing. Maybe I'm making a mistake in differentiating QE – which as you point out, QE, you're swapping a dollar... you know, the Fed maybe prints that dollar, right?
That's what Bernanke said. "We go to the computer and we mark up the account." And then, they switch that dollar, they take income-producing assets out of the system and they leave this dollar reserve. And if it doesn’t get lent and spent, who gives a crap? Right? Like you're saying. But I'm differentiating that from what is traditionally called monetization, right? When the government says, "OK, we are just going to spend, and we're going to do it by borrowing a couple of trillions. And we've got programs because" – oh, let's say, as you put it – "The Invasion of the Body Snatchers happened, and we responded to it in a particular way, and it was worse than the Great Depression for six months," or something.
"And so, we're going to do the spending. We're" – in other words, to me that monetization event is like the government saying, "OK. So the social mood isn't changing. We're going to step up and be the first in line, and we're going to go big or go home. And we aren't going home." That's what I'm seeing. That's how I look at it. Am I wrong to see it that way? Am I wrong to differentiate in that way?
Hugh Hendry: A little bit, in that, constitutionally – can I say constitutionally? I don’t think I can. But the Federal Reserve updated for – I don't know – 1935... and in full transparency, I'm enrolled and I encourage others to be enrolled in the Eurodollar University put out by Jeff Snider. If you are a youngster and you're harboring ambitions to work in a macro hedge fund, if you were to come to me we could not, quote, "Touch and verse" – from what Jeff puts out there every week on his YouTube channel – I'd show you the door very quickly.
What Jeff's forgotten about the Federal Reserve Act and the power of the Federal Reserve – what he's forgotten in a lunchtime and I've still to gain over a lifetime of curiosity. And I'm quoting Jeff in that, you know, the Fed is not empowered to monetize the U.S. government's debt... its deficit. So you have to remember – and it kind of all sounds like semantics, but it's not. It's clearly not.
Because we don't actually have inflation. More importantly – again, in terms of social moods – whilst here are relative price increases, whilst there has been a movement in long-term bond yields... long bond yields are still hovering around about 1.6%, 1.7% even with your outline case for the government stepping in. You know, even for Stanley Druckenmiller saying this was the most, you know – this is the most irresponsible U.S. government intervention we can ever think of. And yet, 1.6%, 1.7%. We could extend to five-year forwards with inflation covers. And again. Experts, people whose social mood has to change, it's not changing. They're like, "This is nothing."
So Federal Reserve quantitative easing and how it would interact with these larger, larger deficits – the Federal Reserve is issuing perpetual liabilities to purchase those bonds from the private sector. And so, it is not technically – and I think in reality, there's no monetization going on. And then, Jeff I think really nails it... why all of these – you know, "Hey. Japan's public government debt to GDP in the last 25 years" – and I'm making this up, Dan. But I want to say it's gone from 45% to 245% of GDP.
And GDP has been kind of, you know, Goldilocks. Not too hot, not too – I mean, certainly not too hot and kind of verging kind of a little bit too cold. And so, what's missing? The thing that's missing, again, is the verve... the verve of the entrepreneur, of private sector commercial agents saying, "My pecker is up." Forgive me if that's a misogynistic term. But, you know, bring it on. The ball is this size. I want to take risk. I'm looking for partners to take risk. And we're not seeing that.
You know, I find myself on the other side of a quasi-religious debate about the 10-year yield getting to what it was – what, 43 basis points last year? Did it get there and after... at the height of the TNT bubble, Fed rates were like five. Longest would've been five. So to go from, over 20 years ago, five to kind of let's call it zero. Was that because the Fed, the QE, or is that because of the economic climate? And I would say it's the latter. It's the social mood, that there was a desire on the part of private, commercial risk-seeking entities that they denied themselves risk-seeking opportunities. The reward wasn't sufficient.
And all they lusted after, risk-free, riskless securities. And that would extend itself from 10-year Treasurys to Amazon, to Netflix. You know, with the Invasion of the Body Snatchers, with the greatest economic decline in our lifetime. We got data. We got observation points. We got to see businesses which remained not only robust and intact but expanded. And so, you kind of put the two together. Wow. We just had the biggest nominal GDP contraction kind of almost ever. We just had the biggest explosion in adult unemployment ever.
And these business's profits went up. They are riskless. And therefore, this kind of move – there's no intellectual ceiling on the valuation that I can pay for them or justify paying for them today. And by extension, that took Treasurys to 0% yield. So I fear I've meandered away from your question. But the government saying, "Hey. We got it. You know, our tech is up," kind of doesn’t matter because that form of spending is one-off... whereas, we're talking rows up there with this exponential age.
The power of private-sector money printing is that it's exponential... that it draws in the fractional reserve system... that I go, I take a loan, I create commerce, I succeed, and then there's a whole kind of universe around me that starts copying me, and then banks are lending and lending and off we go. That is not initiated by bureaucrats in Washington. And that's not a value judgement against them. It's just not the nature, again, of risk and culture and social soft factors.
Dan Ferris: OK. All right. Let's say I'm buying this. Your bullishness, then, on commodities – usually that has a lot to do with inflation expectations. But yours apparently does not. And I know you're saying, "Well, we're probably" – you thought we had the third wave after the financial crisis, but you think we're on the cusp of a third wave of commodities kind of outperforming here. Correct?
Hugh Hendry: Yes. Yes. Yes.
Dan Ferris: But it doesn’t have to do with inflation, though.
Hugh Hendry: Well, it actually... central to it, again, is a social mood. And so, it's a social mood, which –
Dan Ferris: You're so moody, Hugh.
Hugh Hendry: Tell me about it. I'm superiority. You think I’m joking. I'm not. [Laughs] Creating a change in relative prices – now, whether those higher relative prices, the higher relative prices are commodities... whether it accounts for more widespread inflation, we will see. For the present, I don't need it to persist to make money. I need it to persist to make money over a longer arc of time. But in the here and now, I don’t need it. So the social mood – again, social mood – is dominated by ESG... environmental social governance. And ESG is itself kind of delineated by carbon emissions... limiting, abolishing carbon emissions.
All of that I believe is a function of a society which is rich. You know, the people who invest in YouTube fitness videos and personal trainers and God knows what are rich people. Like, life's great when you're rich. And you just want more of it. You want to – you're like, "You know, I've got to be Peter Pan. I've got to stay young. I've got to – I love this life." You know? And so, of course rich economies are the first ones to embrace staying alive, and it's existential from what we're doing to – what we're doing to the planet.
And we've seen that in terms of flows,,, flows of equity. Equity flows are by a huge factor dominated by this phenomenon. So again. It's social mood. I would say to you that we had a change in social mood in the 1930s which – and there's a bit of – there's a shard of it today, which of course is the revulsion of credit, the revulsion of bankers. Back in the '30s, social mood dictated that we had to kind of take this kind of nuclear arsenal away from the banks.
We split them up in terms of the connection with the stock market, and we said to them, "No more master of the universe. No more bonuses. We just want you to be boring book clerks." And for 40 years, society's demand was granted... up until the early-1970s. And it passed simply because the most vociferous exponents of that... that mood died. So today, I would liken ESG and – I mean, it's a profoundly deep-rooted phenomenon, especially in the young today, that things have to be done. And things have been done.
So stock markets, or capital markets – it's all about sex at the end of the day. It's all about you procreating. It's about the selfish gene. And what markets do is, they like things – they really like them. They fall into love with them. And these things go up. You get reflexivity which comes in and accentuates them. But the market's saying, "We love this so much. We want you to do more and more. Like, go and buy things. Go and spend lots of money or print things. Just make yourself more plentiful because we love you. We just can't get enough of you."
And of course, then you get the opposite. Typically, industries, they do that. We've seen this... we see 20-year cycles in semiconductors, fabrication. A fab-site can be – heavens, back in my day, it was $1 billion. It must be $2 billion. You got to kind of think long and hard before you commit to that. You got to think long and hard where you put it. And you've got this crazy stock market going, "Do it, do it, do it." And then when you come through, then the market's like, "Oh. Too late."
And then, they hate you for... so as hedge-fund speculating guys, we get to understand psychos like that. And so, bringing it back to the present, mining is deemed to be... it's like, "We don't want you having any more babies. You know, we don't want you procreating. We want you to disappear." I think we saw the – what was it – the International Energy Association saying, "By 2015, no more mining projects." You know, paraphrasing a little bit.
But it's like, "We want it to die. If you're not investing like that, you're not going to have a future. You're going to move from being a perpetuity" – you know, stocks are dated. Stocks, the underlying preposterous assumption behind any stock in the stock market today is that it's a Godlike creature that will persist in infinity. And what ESG is saying, "We are taking that data away from you, and you are going to expire."
So today, let's look at the huge mining global, largely European headquartered mining stocks. The BHP Billiton, Rio Tinto, and then you've got the kind of Brazilian Mondeo. Like, "We hear you." So normally, the signal is, "More, more... I'm in love with you, and I'm bidding your price up, so I'm giving you the green light. Go. Go and explore. Go and be brave. Go and find me more of this stuff." And the miners are like, "Uh-uh, ain't doing it, baby." You know?
Two things. I listened to you crazy guys between 2009 and 2011 when you took gold from $600 to $1,800 and everything else. And you told me, you know – I listened to you. And BHP spent $20 billion in capex in 2012. I know it was just one company. They all did. It was all poorly timed, and the sector was 75% of this value because of the value destruction. So eight, nine years later, like, "I ain't doing that." Plus, I've got ESG guys on my board, my biggest shareholders... every damn question I've got to answer is, you know, trying to kind of justify our existence.
So you know what? Instead, Billiton's going to give you $20 billion in cash. "Look, here's the money back. We're not procreating. You go and procreate with windmills and solar panels, OK?" So the money which would create a supply response to the last year's price increases is not going to happen... which is to say that the price increases are going to be accentuated until something gets... and they aren't going to build it. If they aren't going to build it, there's going to be shortages. Now, for the wider economy you've got to remember. Commodities are typically things that you need, you know?
You got to fill your car up with gas. And if the price doubles or triples, then maybe you don't go to the cinema and maybe you don't eat out as much,,, maybe you kind of – you know, there's discretionary and nondiscretionary. So I'm not sure where... I know where the leap is. The leap is when you have that phenomenon of higher prices which continue. And, again, remember you've got a central bank which – at least for a year or so – it's just going to sit there and going to, as best as it can, do nothing. I just think you've got free road to, you know, have fun in these stocks.
And not just specifically those mining stocks. There's a profound change going on. You know, those who said the stock market is a bubble and that it's dangerously overvalued, I – again – would contend and would go against that. I think that's kind of lazy thinking. What is remarkable – remarkable – when you survey the landscape of large-cap equities is how many stocks that you can find trading at the same normal price as they were at the end of the 1980s. So in a bubble, one of the –
Dan Ferris: Whoa.
Hugh Hendry: Yeah. I mean, you know – and, A, it's a function of ESG. You're like... again. And it's like, "Heavens." I procrastinate. I was going to say, "Tobacco stocks sold down cheap." But it was like, "Oh, my God. You can't say that. you can't invest in it." Social mood can provide opportunities. But, you know, Exon – I mean, heavens. I can take you through so many sectors. So what happened was, 10-year Treasury risk-free securities kind of repriced to zero.
And therefore, if you can find commercial activities that seem to have all this no-commercial risk, then they become infinite. So, you know, Apple becomes the first trillion-dollar asset. And then, it becomes No. 3 trillion in today's world. I call trillions "apples." You know? So Apple, today, is about 2.25 apples. You know? And we've got about five or six stocks which all trade for this apple – or trillion, vernacular. They command and distort the valuation metrics of the indices.
But behind that, the run-of-the-mill companies that had commercial risk – they've been sold into almost extinction. And the market is getting that now. And maybe that's back to your point, that the policy was set too tight after 2008 for various reasons. And for sure, the most obviously tightness was in the public sector, right? You know, even today – yesterday, I read about President Macron in France. I mean, he should lose with social mood. The election is next year, and he's going to be up against Marine Le Pen.
And she's many things. She's populous, but she comes with a kind of dirty background and kind of fascist-like father, and they've been trying to leave that behind her. She's populous. And France should be... the sovereign should be spending, spending, spending like America. And it isn't. And Macron's in trouble. But anyway. The U.S. taking the lead as usual. So we definitely have policy today versus policy after 2008. There is a pivot. The policy is getting less rigid.
And that would seem to be a boom – or a boon, rather – for businesses with commercial risk. And I've never found so many instances of stocks I want to buy. I want to buy GM. I want to buy Ford. I want to buy U.S. Steel. I mean, I'm blushing. You know? I want to buy Canadian oil sands. I want to buy coal companies. I want to buy Credit Suisse. I want to buy Rolls Royce. I want to buy stocks that prices have prevailed steady years ago. Bring it on.
Dan Ferris: Yeah. All those names you threw out, I think you just threw me into the way-back machine. That's actually really cool. No one I've interviewed has said that. That's great. We've been talking for quite a while, and I've loved it. I wish I could just pour myself another cup of coffee and do this for another 45 minutes. But I have a final question that I ask all my guests. And I've been actually dying to get to it with you because I can't imagine what the answer would be. I can often guess the answer. But with you? No idea. And the final question I ask every guest on this show is, if you could leave our listener with just one thought today – and you may have already done so. That's cool if you did. But if you could leave our listener with just a single thought in mind today, what would it be?
Hugh Hendry: Oh, man. Man. So I really dislike expert – like accountants and lawyers. Because when you ask and – because when you ask them a really tough question, they change the question to something that they can answer. And I'm going to do that. [Laughs] So I'm going to leave you with my typical kind of scatter gun. I want to leave you with a thought in the enterprise of risk-taking. Never be fearful of being wrong. If you're fearful of being wrong, you're approaching it the wrong way.
So, you know, that gave me longevity. I secured 15 years of tenure as a hedge fund manager. Some blasted filthy person went onto the Wikipedia page and put eight words of prejudice on my page, saying, "He closed the fund down after" – I don’t know – "six years of mediocre returns." Who said they were mediocre? You know I was out there providing convex returns in the event of a volatility eruption, which never came to happen. In 2013, I said to my guys, "Take the money because this is a dumb endeavor. I just can't foresee that happening."
And then, one great fear that I have – and obviously great fear I hope it doesn’t come to pass. But I fear something... I fear the further aggravation of the social mood in America as an economy. I'm not there. I'm looking from the outside in. And so, you know, that has good and bad points. But it feels to me like an outsider that America just feels more fractional and more divided than at any point. And it brings back how people described the German Republic after the first world war... very fractious society was north or heading south with Catholics against Protestants. You name it, you know?
And the great fear that we have to be on the lookout for is some... and it tortures me to say this but some heinous intervention where someone is killed owing to the social mood. And Germany is often underlooked. There was a candidate for president that could've brought the nation together. He seemed to be the less toxic – he was charming as a speaker, and he was assassinated. And that created – that was the dawn of chaos. Like, once you start killing politicians of that stature all bets are off. There's no smart contract to protect you.
We saw the same thing, I want to say, in about 1935. They had a kind of – the Japanese had a kind of John Maynard Keynes' character... spent a lot, ran up big budget deficits. And that was a boon for the military complex, and they militarized and we all know what happened. But from about 1935, the job was done and he wanted to reign back the liquidity. And of course, that was a cointervention to what the military was planning in the years ahead. They assassinated the guy. You know, they basically lined him up against the wall and boom. He's the only central bank governor in Japan to feature on a banknote – I think 50-yen CNY banknote. So God forbid, you know... and last year with obviously – at least, we saw something begin there with death. We got to hope that that stays out of the kind of upper echelons of the political system.
Because a death assassination would be the dawn of chaos. And then, I think we would be looking at some hideous outcomes. But for the time being – and that's the probability of that I think is still remarkably low, and I think the probability of making money from all of these... from making money against this kind of crazy cult called ESG which has left some like unbelievably cash-generative businesses trading at unbelievably highly attractive valuations... for me, that's the zeitgeist just now. So there you go.
Dan Ferris: So in some ways, one of the best answers I've ever gotten. But in one way, of course, the worst because it was like five things instead of one. But it was a cheat. Yeah. It was a cheat. But it was a good cheat, Hugh. A very good one. Thank you. And listen. Thanks a lot. I will definitely be inviting you back onto the show, so just prepare for that e-mail in six or eight months or so.
Hugh Hendry: Love it. Love it. Thank you very much.
Dan Ferris: All right, Hugh. Enjoy the sunshine. Thanks a lot.
Hugh Hendry: OK. Take care, guys. Thank you very much. Bye-bye.
Dan Ferris: Bye-bye. Wow is all I can say. That was certainly one of our longest interviews. And I knew it would be because I know once Huge gets going, you know, it's hard to stop him. And I don't want to stop him. Really, I just could do this for another hour I feel like. But I hope you realize that you just got an incredible education in what you might call a global macro investing. That's what Hugh is. If you've heard that global macro is dead, I mean, he just threw out five or six names. And he also mentioned – the other day, I heard him mention a steel company too.
And he mentioned steel. He said U.S. Steel, and he mentioned Thyssenkrupp, a German steel company. So, I mean, that was loaded with names and loaded with viewpoints that we will just never hear anywhere else. That view on ESG as being a reason to buy mining stocks... I don't know if that's a reason – I don’t know if you're going to hear that elsewhere. It was great. Loved it. All right. Let's do the mailbag. [Music plays and stops]
In the mailbag each week, you and I have an honest conversation about investing or whatever is on your mind. Just send your questions, comments, and politely worded criticisms, please, to [email protected] I read as many e-mails as time allows and I respond to as many as possible. You can also call us at the listener feedback line. Please do. If you call us and it's good, I'll put you on the air. You'll get to hear your voice on the show. 800-381-2357. 800-381-2357. Tell me what's on your mind and get on the show. How cool would that be?
First question this week is from Mike B. He's a paid-up Alliance member. And he says, "Dan, I appreciate your approach to investing and have shared similar thoughts on diversifying into other non-equity assets such as precious metals, collectible's, et cetera. I do have a whole life insurance policy that I've had for about 13 years and has a decent amount of cash value. Do you consider the cash value of that policy to be part of your plenty of cash in your asset allocation? I can always take out some of that to invest in the market if it has a large correction or I need it for emergency funds, et cetera. Thank you, Mike B."
Mike, you know, that is such a personal thing. But all I would say... for me, if I were in that position, I would view that cash as absolute last resort, you know – down to my last penny, no other resources. That's the way I would view it. How you view it is up to you. But it's a good question. I personally would not think of it... when I say, "Make sure you're holding plenty of cash," I mean liquid cash in your account ready to pull the trigger. Good question, though. Our second and only other question this week comes from Ludvik H., who writes in quite a bit. And keep it coming, Ludvik. I love your stuff, man.
And he says simply, "What do you think about the claim from Harry Dent that gold will go down when the crisis and collapse happen?" So I don't really keep up with Harry Dent's predictions. I know he's always making a big prediction of some kind. But all I will say about your question is that we've learned that it makes sense to assume that if we get a really horrendous bear market or a market crash or financial crisis that gold drops in price too. Everybody seems to want cash more than they want anything else. And so, you get the price of gold falling.
And it did that in the financial crisis, and it did it also in the COVID crisis. So I think, you know, it's a logical expectation. People just – when they initially panic, they just want gold. And it usually – it was kind of a head-fake in 2008 because then we got this thing, this idea, that the Fed was going to unleash inflation which never really materialized. And so, gold took off, made new highs, and then went into a really steep bear market through 2015, 2016.
So yeah. Your question makes sense. I think Dent is right about that much at least. I won't say anything else about what he predicts, but I think he's right about that. At least temporarily, right? You never know how the crisis is going to play out or precisely what kind of a crisis we could be looking at. Maybe it's one in which people really start to worry about the value of the U.S. dollar... which they never seem too terribly worried about for very long in the last 10, 15 years.
But it's a good question, though. Thank you for that. That's another mailbag. That's another episode of the Stansberry Investor Hour. I hope you enjoyed it as much as I did. We provide a transcript for every episode, but sometimes it takes a while to get it done. Just go to investorhour.com, click on the episode you want and scroll all the way down and click on the word transcript. If you like this episode, Send somebody a link. Just tell them to check it out on their podcast app or at investorhour.com so we can help the show grow.
Do me a favor, too. subscribe to the show on iTunes, Google Play, or wherever you listen to podcasts. And while you're there, help us grow with a rate and a review. You can follow us on Facebook and Instagram. Our handle is @InvestorHour. Follow us on Twitter. Our handle there is @Investor_Hour. If you want me to interview somebody, tell me about it. Drop me a note at [email protected] or call the listener feedback line and get your voice on the show. 800-381-2357. Tell me what's on your mind. Till next week. I'm Dan Ferris. Thanks for listening.
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