Episodes

Male:                          Broadcasting from the Investor Hour Studios and all around the world, you're listening to the Stansberry Investor Hour.

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Male:                          Tune in each Thursday on iTunes, Google Play, and everywhere you find podcasts for the latest episodes of the Stansberry Investor Hour. Sign up for the free show archive at InvestorHour.com. Here's your host, Dan Ferris.

Dan Ferris:                 Hello and welcome to the Stansberry Investor Hour. I'm your host, Dan Ferris. I'm also the editor of Extreme Value, published by Stansberry Research. Today, we'll talk with Cullen Roche. He's one of my favorite macro investors and one of my favorite people, in fact. He'll teach us a thing or two this week, just like he does every time he comes on the program.

This week, in the mailbag, listener Voytech C. writes in to tell us about the research he himself conducted on the use of trailing stops. It's controversial, but he's right. You won't want to miss this.

In my opening rant this week, I'll give you a few interesting ideas from around the Stansberry universe, including one of our top traders on the big setup in silver. That and more right now on the Stansberry Investor Hour.

It's really, really good to come to you this week with lots of ideas from around the Stansberry Universe. It's great to be in this universe, as I am every day. I get to interact with these people. Even though we're all locked up at home, we're still interacting, and there's all kinds of wonderful ideas that go back and forth, and I learn a lot more than I would if I weren't plugged into all the good folks at Stansberry.

One of the latest things is from Scott Garliss of Stansberry Newswire. I've talked about Scott before. He reads more stuff than – I think he reads more stuff than anybody in the company, just in terms of market data and market news. Every day he comes out, morning and night, and a lot of times in between internally, with all kinds of stuff.

And just before we started recording, he said that it looks to him like the White House and Congress are coming together around another fiscal stimulus bill, and that they maybe want to get something done by the time the summer recess starts on August 3rd. Now they will return from Independence Day recess on July 20th. Boy, that's a good job, isn't it? Lots of vacations.

And so that gives them two weeks to figure out a huge new stimulus package. Now the House of Representatives passed the Heroes Act, a stimulus package with a $3 trillion price tag. Republicans are saying maybe this new one will have a $1 trillion cap, but they're suggesting it's also negotiable, too. So maybe it'll be a $1 trillion, $2 trillion package by early August. I bet the market's going to like that. And it'll likely include more direct payments to households, but we'll see.

The thing is, the stimulus is happening, man. The pedal is to the metal, and the market has been eating this stuff up. So yeah, you'll hear me raving about how stocks are overvalued, but with this kind of stuff going on, you know, I just think the market is going to be in love with it. And I'll leave it at that.

Another sort of just general kind of trading idea, we have a guy named Mark Putrino. He's a – he used to work for Steve Cohen, really smart trader guy here in the Stansberry universe. And Mark, he's like Scott. He just – he reads a lot of stuff, and he just likes to put out internal emails and keep us all up to speed with what he sees.

And he just pointed out shortly – like maybe an hour or two before we started recording this, he said, I just wanted to point out that silver is testing important resistance around $18.75 an ounce. And he says, it's the sixth time over the past year that it reached that level. And look, you know me, right? I like precious metals. I like gold. I like silver. And if there's a trade in there, I'm interested. If I think that I can get an advantage on my timing in silver, I'm way interested.

So I thought I would pass that along to you. You know, I recommend it. In Extreme Value we have one of the publicly traded silver trusts. If you just want to do a straight trade on the price of silver, or just to hold silver for long term, those are great options. But if you're a big time trader and you're doing futures and options and all kinds of stuff, you probably don't need me to tell you what to do. You probably already know how you want to time the silver trade.

All right, the next thing I want to talk about comes from Whitney Tilson of Empire Finance Research. I'm proud of the fact that I had a bit of a hand in bringing Whitney into the Stansberry universe. We knew each other for years, and he just called me up, and he talked to me and he said, tell me what it's like to be published by Stansberry. And I told him, and before you know it, we were partnering up with him, and he's got this great new product called Empire Financial Research.

And so he puts out a lot of stuff, too. Again, another guy who just takes in tons of information and frequently puts out these really cool emails for readers, and internally too. So he's talking about Tesla, and we've got to talk about Tesla, right? The stock started the year off at $400.00, so that's like $430.00 I think, the first day, the first trading, and now it's like $1,400.00, right? That's like better than a triple.

As Whitney points out, he says, this extends the company's lead as the world's most highly valued automaker. I think it's worth more than like Ford and Honda and GM and Fiat/Chrysler combined, something like that. I think Tesla's market cap now is just shy of $260 billion. Insane. I mean, Toyota is like the biggest car company, right? The one that makes the most. And I think its market cap is like in the $120s. It's like $120 – a little below $130 billion.

So here's Tesla. He says it's the most highly valued automaker, despite producing fewer than 5% of the cars as the former number one, Toyota Motor, former No. 1 in value, right? No. 1 manufacturer. And he says, and 5% fewer cars in the second quarter than the same period last year. In other words, not only does Tesla hardly produce any cars compared to the people who make a lot of cars and make a lot of money making cars, but they produce fewer cars than they themselves produced in the same period one year ago.

So they're shrinking, and the stock is like skyrocketing to the moon. It's insane. And right at this moment when the entire world wants to pump this stock to death and push it to the moon, what's happening? Elon Musk, the man behind it all, is taunting the world. He recently sent out a tweet that is so crude I can't repeat it. The tweet says, SEC, three letter acronym, middle world is Elon's. Okay? That's all I'm going to say. It's really crude. Get somebody to explain it to you, because I can't go any further than that. Super crude, taunting the SEC, who he also refers elsewhere as the short sellers enrichment commission, right? Which is absurd. It's stupid. The SEC goes after short sellers all the time, when they should be going after the crooks and the people like Elon, you know? It's crazy.

So he's taunting further by offering these flaming red Tesla short shorts, right? He's making fun of the shorts, making fun of the SEC, and he's selling them for $69.00. He said, I'm selling them for $69.420. Four-twenty, which refers to his fraudulent tweet about the company being acquired and him having funding secured to take the thing private. You remember that? And the SEC said, you can't do this. And he's calling it $69.420. That's the price on the red short shorts.

Mocking the SEC, mocking the short sellers, right at the moment when his company is so absurdly overvalued it's a joke. It's ridiculous. And you know what? My point here is that this is exactly the kind of thing you see in a stock like Tesla. It's dot com-ish. It's just like the dot com companies, right? All hype, all hat, no cow. All hype. And very, very, very little substance. And what substance they have is shrinking. They're selling fewer cars than they were a year ago.

This thing is going to end badly. Now will the stock hit? You know, you tell me. I don't know, $2,000.00, $5,000.00, before it crashes back to nothing? I don't know. And Whitney has said this, too. He's been all over this. He puts out a special email that's mostly devoted to Tesla, and he keeps up with it. He was saying, you know, today he's neutral on the stock – or actually, he said that months ago. Months ago he said, you know, he's neutral on the stock, terrible long, terrible short, stay out of the way, etcetera. And I agree, right? You can't short a thing like this, because it shouldn't be anywhere near where it is today, and who knows where it'll be tomorrow? Fourteen hundred today, $2,800.00 tomorrow. Who knows? Or $280.00. You just don't know, because it's so insane. It's lost its tether to reality, so you can't trust it.

At some point, it will be a phenomenal short, but man, you'd better top tick it perfectly. Just really, really difficult. Even the greatest short sellers have this problem. Jim Chanos – I got a chance to meet him a few years ago, and we were talking. We got to talk about this problem. And he said, yeah, you just – there's nothing you can do. We control it with position size, and we'll stop out of it if it goes against us, etcetera, etcetera. I mean, you know, there's no magic, right? There's no magic to timing these things. But man, is it insane. It is absolutely insane.

So with that, let's go talk to Cullen Roche. He's a really cool guy, love having him on the program. Great communicator, very good thinker. When we talk on the podcast – when I talk on the podcast and when some of our guests talk on the podcasts, there's a lot of like value investing orientation. A lot of people want to be long gold and silver, the way I do. A lot of people criticize the Federal Reserve, which I've done some of that.

Guys like Cullen are much more informed about those things. I freely admit it, right? This guy just – he knows more about these macro issues that influence the price of gold, the price of the overall stock market, and he's more informed about what the Fed does and what its real influence is. Let's talk to him about all that right now.

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Dan Ferris:                 When my friend and colleague Steve Sjuggerud talks, I listen. Steve predicted the rise of gold in 2003, the top of the dot-com bubble in 2000, and he even called the bottom of the great recession in 2009. Steve is once again pounding the table in a new prediction. He believes that a mania will hit the U.S. stock market and take most investors by surprise. He said that thousands if not millions of dollars will change hands as a result of the anomalies he found in the market. If you want to find out how you can profit from Steve's prediction, he has laid everything out in a video that just went viral. Go to www.InvestorHourTrueWealth.com to watch the video and find out how you can profit in this roller coaster of a market.

I watched it, and what Steve found is astonishing. Again, that's www.InvestorHourTrueWealth.com.

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Dan Ferris:                 We have a new show here at Stansberry Research. It's a weekly recap, Inside Stansberry Research and the World. Our financial correspondence Jessica Stone hosts it each Friday at 5:00 PM, and we hope you'll give it a listen. Find it everywhere you listen to podcasts, including StansberryInsiderWeekly.com.

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Dan Ferris:                 Today's guest is Mr. Cullen Roche. Cullen Roche is the founder of Orcam Financial Group LLC. Orcam is a financial services firm offering research, personal advisory, institutional consulting, and educational services. Prior to founding Orcam, Mr. Roche ran a private investment partnership in which he generated substantial alpha, high risk adjusted returns, with no negative 12-month periods during one of the most turbulent periods in stock market history. Before founding his own businesses, Mr. Roche helped oversee $500 million in assets under management with Merrill Lynch Global Wealth Management. Cullen, welcome back to the program, man.

Cullen Roche:             Hi, Dan. How are you doing? It's good to be back.

Dan Ferris:                 Doing well, in spite of everything. I mean, guys like us are doing great in the whole lockdown scenario, right? We just sit at home and do our thing, right?

Cullen Roche:             Right. Yeah. No, I – it's actually – you kind of see the bifurcation in the world with the work from home thing going on now and the way that half of the economy seems to sort of be prospering, to a certain degree. You see this especially with the tech stocks, the way that a lot of the tech firms are seemingly doing better because of all of this stuff, and then you've got kind of the old economy, the brick and mortar stuff, that is just – it's being decimated.

Dan Ferris:                 Yeah. Yeah. It's getting ugly out there. I wonder – actually, you know what? I was wondering where to start this interview, and I looked around on your website and on Twitter, and I found the perfect – for our listener, the quintessential Cullen Roche Twitter post. And there were actually three of them right in a row. I'll just read them real quick.

The first one says, interesting new paper here finds that fiscal stimulus was so large and so well-targeted in individuals that the poverty rate fell in early 2020. Never expected to read that. Then the next post was, I know I'm a broken record here, but the big bazooka wasn't the Fed. It was the Treasury and the huge expansion in spending via the CARES Act. And then the third one is like quintessential – this is like why I read your Twitter feed. It says, this is part of why Fed trutherism is dangerous. It's largely politicized nonsense that leads people to fundamentally misunderstand how things work, which leads to all sorts of false conclusion and paranoia.

Cullen Roche:             Yeah. I said that.

Dan Ferris:                 Yeah. Yeah. Explain, man.

Cullen Roche:             I – you know, I was thinking about this the other day, and why – because I see this a lot just in – it's in my face all the time as an investment manager. I see so many people who contact me or reach out to me because of some of the papers I've written or something like that where I spend a lot of time sort of at a first principles mode, trying to explain how things work, because that's – I mean, my business entails trying to understand how the world works, the financial world in particular, so that I can try to navigate it and help people navigate it better.

And so understanding at a sort of apolitical, non-ideological, and very operational level is important. I'm acutely aware of my own tendencies to be biased by politics and narratives and things like that, and I've tried to build this sort of operational view to sort of shelter myself, and ultimately the people I work with, from really these biases that I find tend to, I think, sort of, muddy the waters in investment management, when you're trying to navigate the asset management world.

And the Fed is one of these entities that just, I think, is not only very widely misunderstood, but is highly politicized in a way that it leads people to sometimes come to, I think, extremist sort of conclusions. And the main one is this sort of narrative that the Federal Reserve is constantly doing things that make the financial markets look more like a Ponzi scheme than an actual organized and somewhat efficient type of marketplace.

And there's probably some truth to the – there's certainly some truth to the idea that the Federal Reserve is highly involved and doing things that influences people potentially in negative ways and causes people to potentially bid up asset prices that they don't understand or do things that make the markets operate in what is perceived as a somewhat less efficient manner than they would if the Fed wasn't so involved. But I think people have a tendency to sort of take this to an extreme.

And I think that the CARES Act and the stimulus that was initiated in March was such a great example of that, because if you focused only on what the Fed was doing, I think the tendency was to conclude that, well, the Fed's buying all this stuff, they're printing all this money, they're manipulating asset prices, and there's no way that this rally is sustainable, because there's nothing fundamentally good happening underneath.

And I think that what a lot of people missed was that the real bazooka in March wasn't what the Fed was doing so much. It was what the Treasury was doing. And I think that's the real kicker with what's been happening in the last three, four months with the stock market, because one of the things that I think a lot of people miss is that like it or not, when the government spends a ton of money, that money goes somewhere. And what tends to happen in the United States is ultimately most of that money ends up in the coffers of corporate America, because Americans just for whatever reason, we don't seem to save a lot. We spend well in excess of what we probably should in the long term. And the U.S. personal savings rate tends to be very, very low.

And I think what the stock market is doing right now is it's seeing that the U.S. government is going to spend three, four, five, who knows? By the time this year, we might have a deficit that is $6, $7 trillion. These are colossally huge numbers that – that's money that in the long run very likely ends up in the coffers of corporate America.

And I think that's the thing that a lot of people miss, that while the government was out there initiating all of these huge spending programs, yeah, the Fed was doing a lot of stuff to bolster liquidity in the bond market and in the banking system and stuff like that, which definitely has an upside impact on everything, for certain. But there was this real underlying, fundamental driver of what was happening that if you didn't have a focus on what the Treasury was doing, and you were only focused on this supposed conspiracy theory by the Federal Reserve, then you completely missed what I think is a very important, fundamental driver. Whether it's sustainable is a totally different long-term argument.

But in the short term, at least, there was some, I think, rationale for what's been going on in the stock market in the last few months, and I think you could probably argue – I would argue certainly that it's probably gotten way ahead of itself at this point, but it's not all this big scam, this big fake, you know, Fed-inflated bubble that I think a lot of the narratives tend to conclude.

And that's the thing that bothers me about some of these narratives, is that I find a lot of people that, because they think it's all a conspiracy theory, they find themselves oftentimes just irrationally missing out on the upside.

Dan Ferris:                 True enough. Yes. That we know – we know for a fact that there are lots of folks who practically just make a living being bearish and talking about how awful the Fed is. So I get that. But you covered a lot of different points there, and one of them was that we Americans don't save much, right? You said we like to spend, so that corporate America winds up with cash, and the rest of us wind up with goods and services.

I think your Fed critic will tell you, well, you know, we don't save much because it's not worth it anymore, because the interest rates are so low, because the Fed has pushed them down. The Fed does influence the general level of interest rates, though, do they not?

Cullen Roche:             They do. So it's really complex, but I'll try to kind of summarize this as cleanly as I can. The way that I like to think of this is that the Fed basically controls the ultra-short-term part of the yield curve. And so the way to think of what the Fed basically does is that the Fed is operating the banking system for the banks, okay? And they provide – they have to, by definition, they have to provide a certain quantity of deposits for the banks to be able to do their business with each other. And we call those reserves.

So central bank reserves are what the Fed provides to the banking system to allow the banks to be able to basically settle payments with one another. And those reserves have an interest rate. They have to, in order for the Fed to be able to influence the quantity that they need to issue over time.

And the problem with the reserve system is that the reserve system is a closed system, okay? So what that means is that the banks can't lend their reserves out to non-banks. They can only lend them to other banks. And so it's a banking system specifically for the banks. But the problem is because it's a closed system, and the banks, they're required by regulations to hold these reserves, but the reserves are – these are assets that don't earn any income for them. So they try to lend them out to other banks when they have too many of them.

And what this does is because they can't lend them out in the aggregate, it drives the short term overnight rate to 0%, and this is one of the big things that I think some of the Fed critics misunderstand, is that the actual natural rate of the reserves in the interbank system, in the Fed system, is 0%. So the Fed can't manipulate rates lower. The rate that they control is naturally 0%, because that's where the banks want it to always be, basically, because that's where they drive it. They have to, because they can't lend them out in the aggregate. So they're always putting downward pressure on interest rates.

And the Fed, since the very beginning of its existence, the Fed has been basically manipulating that rate higher. So the Fed always has to manipulate the short-term interest rate from 0% up to whatever the – today, it's – we call it the interest on excess reserve rate, which is a de facto Fed funds rate. But they're always driving rates higher than they otherwise would be.

But that misses the point, because the rate at which banks lend in the interbank market is not the primary rate that impacts the rest of us. The rates that impact the rest of us are really – primarily, they're credit-card interest rates and they're basically mortgage rates, mostly 15 and 30 year mortgage rates.

And those rates, they're somewhat tied to the overnight rate, but those other rates, really, they float more so in a – in what is much more like a free market, in that the – I mean, your credit card rate, for instance, it could be 15, 20, 25%. I mean, it has almost – I mean, not no correlation to the overnight rate, but it is phenomenally higher on average than what the overnight rate will be. And that's set mostly based on what – basically, what your personal credit is. Mortgage rates are very similar, in that the banks are setting those interest rates based on mostly what is the homeowner's credit, and what is the – there's usually a bit of a credit hedge in there based on the homeowner's credit, and then there's usually like an inflation hedge for the bank, and that's the – usually where the correlation to the overnight rate comes from, to some degree. So if you overlaid a 30-year mortgage rate with the overnight rate, you'd see some correlation. But the Fed isn't controlling the 30-year mortgage rate. The 30-year mortgage rate is mostly tracking, really, the rate of inflation.

And that's the kicker, is that the Fed can't exactly control the rate of inflation, and what they're trying to do with the overnight rate is influence inflation. So they're almost like a man walking a really big dog, and they've got really tight control of the short end of the leash, but the long end of the leash where the 30-year mortgage rate is, that thing just moves wildly. It moves wherever the dog is, and the dog is inflation, and the Fed is constantly chasing inflation, and never really in control of it, is the way I like to think of it.

Dan Ferris:                 I'm just going to take the role of kind of pushing back and being on the other side of it and asking you about just the average – what people see that causes these viewpoints. Like if you look at the 30 year, it sure seems like it kind of follows the rest of the curve and is a lot lower than it used to be. And if you look at mortgages, same thing. It seems like there's some influence.

And again, whenever we get these announcements that the Fed says, well, you know, we're going to lower the Fed funds rate by such and such an amount, you always get this pop in the bond market where the rates up and down the curve drop pretty much, though, right? So I feel like you're telling me, well, there's limited influence, and there's this closed bank system that doesn't have as much influence as people think, but just looking at those – and those are big markets, right? I mean, Treasury securities are big ass markets, right?

So is there a connection that you haven't discussed yet that is different than what people think?

Cullen Roche:             Yeah. Well, it's somewhat related to what I was talking about earlier. I would argue that – I think this is the thing. I think a lot of people think that the Fed is the entity that really prints money in the United States. And we have this – a lot of us who learned economics in school, we learned this textbook idea of like the money multiplier, that the Fed basically sets a certain quantity of reserves, and then the banks can all go out and lend new money.

So this was the big misconception following QE1, was that the Fed was flooding the banking system with all these reserves, and if the banks went out and started lending all these reserves, then this would create hyperinflation, because all this money gets out, and we start all buying goods and services like crazy. And that's just – it's very fundamentally wrong in that the banks can't lend out their reserves. They don't lend reserves outside of the interbank system.

And so when you flood the banking system with reserves, you're not giving the banks more power to be able to lend necessarily. You're just giving banks more reserves to be able to do whatever they want to do inside of the interbank market, which is this closed system. And so it doesn't necessarily have this multiplier effect that we learned in school with the idea of sort of fractional reserve banking and how banks have to get reserves before they can lend.

And I think that's one of the big misconceptions that leads people to believe that the Fed is this big money-printing entity that is able to flood the financial system with money whenever it wants to. And I think that what that does is it confuses people from the real money printer, who is basically the U.S. Treasury. The U.S. Treasury is the entity that for all practical purposes, in addition to banks – I mean, banks, when they lend, they do actually create new money, but that's not directly tied to what the Fed is doing necessarily. I mean, the Fed can support banks, but the Fed doesn't necessarily give banks more power to lend just by giving them more reserves.

And so the entity that is much more powerful in terms of its money printing prowess is the U.S. Treasury. And you see this in – I mean, God, over the last 10 years, you saw just unprecedented amounts of monetary stimulus from central banks that didn't lead really to very much actual inflation in terms of what we see in the CPI and goods and services prices.

And what you saw on the fiscal side was, for instance, Europe was very tight fiscally, and the U.S. was not nearly as tight, but certainly tightened up as we got past 2015. And I think that's where people missed the boat there, was that you didn't get inflation because the real – the entities that really have the printing press bazookas, which are all of the government treasuries, they weren't really printing that much new money.

And we have this – a lot of this is a terminological, I think, dispute over the concept of what is money, and are treasury bills money, or are they money-like? Are they like a savings account, sort of, or like a money market fund?

I think these terms sometimes confuse people, and we call treasury bills government debt, but they're really much more money-like than people tend to think. And in my view, that's the entity that really has the big bazooka. They're the entity with the big printing press. And the Fed is mostly just doing things that it influences the banking system – it tries to get the banks to lend more, to create their own money, but it's a very indirect and sort of blunt instrument to try to do so.

Dan Ferris:                 Okay. So when Ben Bernanke says on 60 Minutes, we go to the computer and we mark up the account, that's a money printing moment, isn't it? Or no?

Cullen Roche:             Well, it is to some degree in the sense that I think you have to look at what is happening in totality. So when he says that, he's referring specifically to quantitative easing, and what happens in QE, when the Fed creates new money, they are just marking up their computer. The Fed can create reserves just like a bank creates new loans. It creates them from thin air. It marks up their computer. The assets and liabilities in the whole financial system all expand. The balance sheet gets bigger.

And when the Fed does that, I think the kicker, thing that people misunderstand or don't fully think through with quantitative easing is that the Fed marks up their balance sheet, okay? So the Fed has a reserve asset that they then use to purchase a treasury bond from a bank. And what happens there is that looking at the private sector economy, what happens there is the bank now has a reserve asset and doesn't have a treasury bond asset.

And so what the Fed has done is it's taken one very safe asset and it's swapped it for a similarly safe asset. And they've taken that treasury bond, and for all practical purposes, the Federal Reserve now is holding that treasury bond, and it's holding it off balance sheet. It's holding it in what is essentially a black hole. The Fed doesn't go out and buy groceries. They don't compete for goods and services like – I mean, if I create a new loan, when I go to a bank and I create a new loan, I create a new deposit. Our balance sheets expand. The bank's balance sheet expands, my balance sheet expands. I have new purchasing power.

I go out. Both of these entities now, we have in aggregate – we've created new purchasing power for the aggregate economy, because my balance sheet is competing with everybody else's balance sheet to purchase goods and services. When the Fed expands their balance sheet, they're not the same, because the Fed isn't going out and necessarily buying groceries at Walmart or your local grocery store or anything.

So when the Fed takes that treasury bond off of the private sector's balance sheet, they're not retiring it, but for all practical purposes, they're burying it. It's just – it's gone. And that's one of the things that I think is really important, because when the Fed actually implements QE, and they take this treasury bond out of the private sector, they're removing interest income from the private sector.

So they've swapped a safe asset for a safe asset, but they've reduced our incomes, in essence. They've reduced private sector income, in essence. And so in the aggregate, my argument has always been that QE, when they implement it in this way, when they implement it by purchasing a treasury bond, which is a similarly money-like instrument to a central bank reserve, what they're actually doing in my view is they're creating a marginal amount of deflation or dis-inflation, which is a falling rate of inflation.

And that's part of why I think that we've continued to see a low rate of inflation, is because these policies that a lot of people think are inflationary are, from an operational perspective, they're not actually inflationary. They might actually be deflationary.

And I think that's the thing that a lot of people miss when Bernanke says he's expanding his balance sheet. He is, but he's also in a sense – he's un-printing a T bond when he prints the reserve.

Dan Ferris:                 Right. And the experience of Japan and Europe bears this out, because we haven't seen exorbitant inflation there, and they've both done, like _____ said, whatever it takes in terms of all this type of activity.

Cullen Roche:             Yeah, that's the thing. I mean, one of the things that I think is sort of strange about monetary policy and all these things that the Fed and all these central banks are doing is that if these policies were successful, we'd have much higher inflation than we do now. And the fact that we, despite all of this, the fact that we still have very low inflation, is evidence, in my view, that none of these policies actually do what people seem to think they do.

So it's sort of a catch-22, that people think that all of these programs should be inflationary, but the fact that they haven't produced the inflation – I mean, the central banks can't even hit their inflation targets when they want to with these programs. And the size of these programs has been so monumental that it's hard for me to look at the evidence and say, "these policies are really effective at creating the sorts of outcomes that central banks want." Because if the central banks really were good at this, if they were good at creating inflation, in my view, we'd have much higher inflation than we do, because they've been trying so hard, and they've failed so badly.

Dan Ferris:                 So – okay. Does all of this fundamental misunderstanding that you tweeted about and everything you just explained to us, does this mean the Fed can do this as much as they like, and everything is hunky-dory? People are worried about nothing, and they shouldn't worry about inflation? Does it mean that?

Cullen Roche:             No, because it's more complex than that. So there's – a lot of people would argue that the Fed is just funding the U.S. Treasury, which is – there's probably some truth to that, to some degree. And so the two are more interconnected than I'm probably making it seem.

But the – I think you still have to avoid putting the cart before the horse here, that it really is the Treasury that is driving the bus here. I mean, they're the ones that are dictating the terms of future potential inflation here. And the Fed is just sort of accommodating whatever the Treasury does, to some degree.

And so in my view, I actually – I do worry to some degree about what is going to be the long-term impact of all this. I've been sort of a well-known... not deflationist, but low-flationist, for, I don't know, as long as I can remember. I mean, maybe forever, as long as I've been analyzing economies. And certainly coming out of the financial crisis I was kind of beating the drum of this is all going to result in low inflation and lower interest rates, yada yada.

But I do worry that we're seeing numbers now from treasuries and governments that the numbers are so big that it'll be really interesting to see if we do get inflation out of this, because the likelihood in my view is that by 2021, 2022, the virus is long gone, the economy has returned mostly to normal, and you have the lingering impact of what will be $5, $6, $7 trillion deficits from the governments that – at least in the USA – over the last few years.

And it's hard for me to believe that with the collapse in productivity and production in general, that you can have all of this stimulus, paying people in essence to sit at home and do nothing, which is what a lot of the last two or three months has been, basically, and not see any sort of resulting, I think, stagflationary type of environment. Not necessarily a 1970s environment, but I could easily see an environment where you have in 2022, you have 3, 4% type of inflation, kind of a return to like the early 2000s or even the '90s type of inflation, that has the Fed on their heels and backtracking on a lot of the things that they've been doing in the last few years.

Dan Ferris:                 Okay. So we've actually been talking a while here. So second to last question, then. Are there any asset allocation ideas that you have for us? Or even a stock pick or a bond or anything at all? You can be as specific or as general as you like. What do you do right now?

Cullen Roche:             You know, I – gosh, I feel like I was bearish last time we talked in September, and I hate to tell you that I'm probably more bearish right now than – I had a really odd conversation with somebody the other day. Somebody came to me, ultra-high net worth person. They said, look, I have a withdrawal rate in my IRA of about 3.5 to 4%. I'd like to hit that return in a very safe way. And I've never said this to a potential client, and I looked at all the numbers, and I tried to come up with something, and I said, honestly, I do not think I can provide that target return for you without buying something that is going to implement or introduce a lot of risk into your portfolio, stocks, bonds, long term bonds, preferred stock, something that's going to introduce a lot of principal volatility. I've never had that conversation with somebody.

I think that the stock and bond markets right now, they look about as bleak as I can ever remember in aggregate. I mean, there's obviously times where the stock market, I think going forward, had far worse future prospects. But the totality of a stock/bond portfolio right now is about as bleak-looking as I've ever been able to remember it.

And I think part of that is just the huge boom we've had in the last few months. I actually wrote in late March that the long-term investor should be licking their lips at the prospects of future stock returns, but that's – it's completely flip-flopped now. And the stock market looks like it's going to be at best a low return generating type of asset going forward. And the bond market, I'd be shocked if the bond market could even beat the rate of inflation going forward.

So I think right now that if you're putting asset allocations together, I think it's probably never been more important to be really diversified, probably diversified outside of financial assets. You probably need some inflation hedging risk component in there, so things like real resources. Your house might be your best performing asset in the next ten years going forward in terms of a risk-adjusted trade. Commodities are probably not a horrible diversified in the future. Alternative assets, things like that.

I think you need a lot more than just stocks and bonds in a portfolio to be able to generate a decent risk-adjusted return going forward.

Dan Ferris:                 You're singing my song. More diversification, real diversification.

Cullen Roche:             To be honest, cash, yeah, diversify, but cash is – I usually say – I would not nine times out of 10, and I actually said this... I remember at the 2017 Stansberry conference, when I was really bullish on long term bonds then, and I'm completely flip-flopped there. I would actually say cash is king now. Cash is not trash. Or cash is trash, you know, three, four years ago, when bonds looked a lot more attractive. But on a relative basis now, cash is king.

And I think that people who are patient, who wait for this thing to play out – I wouldn't be shocked if we have another big leg down here in the fall. If this thing – you know, it looks like the numbers are ramping up. It looks like there's a potential that schools get cancelled in the fall, and I wouldn’t be shocked if most professional sports get cancelled in the fall. And if the virus continues to jump up, you're going to have a rolling series of defaults in the fall that it could potentially make the market volatility in March looks like a cake walk.

Dan Ferris:                 You're singing my song in almost every respect there. My final question is the same final question I always have, but I think you've already answered it. I always ask my guests, last question, if you had one idea that you could leave us with, what would it be?

Cullen Roche:             Patience.

Dan Ferris:                 Patience. There you go.

Cullen Roche:             Patience is the ultimate diversifier. It is the thing that differentiates good investors from bad investors. And part of that is actually – in my view, is holding a diversified portfolio that you're patient with. If you have a good plan in place and you can afford to be patient with it, then a lot of these short-term gyrations don't matter. If you're someone who's been sitting in cash for 10 years and you've been waiting for the big hyperinflation or something like that, and you don't know what to do, you still need to be patient, I think, putting that money to work, because it's going to be really tricky over the next 6 to 12 months, implementing a lump sum allocation like that, just because I think there's going to be so many ups and downs and uncertain periods regarding how this whole virus thing plays out.

Dan Ferris:                 All right. Patience is the ultimate diversifier. I've never heard anyone say that. Thank you for that. That's a great nugget.

So that's it. I mean, we're out of time. But as always, a highly stimulating conversation that I thank you for. We'll talk to you again soon. Bye bye for now.

Cullen Roche:             All right, Dan. Yeah, it was great catching up. Be safe, everyone.

Dan Ferris:                 Okay. That was a lot of fun. It's always fun to talk to Cullen. I think he's a great educator, and he's somebody who has some different ideas outside a lot of the buy gold, be afraid of the Fed type of universe that I think a lot of us get stuck in.

So with that, let's go and see what's in the mailbag.

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Dan Ferris:                 Okay, let's check out the mailbag. In the mailbag each week you and I have an honest conversation about investing or whatever is on your mind. You just send in your questions, comments, and politely worded criticisms to [email protected]. I read every word of every email you send me. I did it again this week. And I respond to as many as possible.

First up this week is Gary D. Gary D. is a frequent correspondent, just an all-around nice guy. Gary D. says – he wrote a longer email. This is just the part that I thought was really interesting that you'd want to hear. He says, so, Dan, going forward, where do you think taxes will go over the next decade? Are the governments of the world ever going to try to repay all this debt? Is it even possible? And if not, why even try? Will they just keep accumulating and accumulating this debt until – until what? Gary D.

The answer, Gary, is yes. They will. And no, repaying it is on no one's mind. And there are a lot of ideas swirling around. In fact, one of our previous guests, Mark Dow, recommended a new book called The Deficit Myth by Stephanie Kelton, and it's all about this modern monetary theory, where because you can print your own currency, if you're like the United States, you can print your own currency and issue your own debt, well, you know, having big deficits and debts, so these folks say – I'm not sure I agree at all – is not a big deal, and we're crazy to worry about it.

I'm going to keep worrying, but I'm also going to read this book. But I think these ideas, they're getting traction, so here we are. The Fed's got a $7 trillion balance sheet. Wait till that thing hits $70 one day, or $17, you know? I'm convinced that we'll see – I'm convinced we'll see $17 in my lifetime. And who knows? Maybe even $70. Because I think they look around and they say, well, we did all this stuff and ran the balance sheet up after the great recession in 2008, and they're looking around and they're saying, well, you know, it's not that bad. We got this COVID-19 thing where we're shutting down the whole economy, and we've run the balance sheet up to $7 trillion, we're looking around. The Fed's buying corporate debt outright, as well as debt EFTs. I'm sure they're going to buy equities at some point. And they're looking around and they're going, hey, this kind of works.

So this idea is getting traction. I promise you, they're not worried about paying off debt. So taxes, who knows? Maybe we won't see a lot of high new taxes. But I think we are going to see a lot of money printing and debt accumulation. Good question.

Bill H. writes in and says, the subject of my question is about the pros and cons of physically holding/storing significant amounts of gold bullion versus owning shares in Sprott Physical Gold Trust, ticker symbol PHYS, versus owning bullion stored in a remote, even foreign located bullion vault. All three scenarios seem to have their pluses and minuses. Thanks again for a great show and newsletter. Bill H.

Oh, thank you, Bill H., for being an Extreme Value subscriber as well as a podcast listener. So yeah, you've got three scenarios, but you realize, two of your scenarios overlap, if you're a U.S. investor, because Sprott Physical Gold Trust, that gold is held in the Royal Canadian Mint in Canada. So you have some of that foreign located bullion vault thing that you're talking about.

I think you spend less – your fees are going to be lower, probably, I'm guessing, on the Sprott Physical Gold Trust versus just owning the bullion stored in a vault with your own account. And then you also mentioned just physically holding and storing significant amounts of gold bullion. I assume you meant like on your own property or something. Look, you want to be careful about that, because if word gets out, you're going to get unwanted visitors, or you could get them.

So there's a lot to think about, Bill. It's a personal issue, ultimately. I'm sorry that I have to leave you at that, but it really is a personal issue. But it's one that I bet a lot of people are thinking about, and I didn't want to say nothing, okay?

All right. Now we come to Voytech C. Voytech has written in before. He's a very thoughtful, very intelligent guy, and I can't read his whole email because it's a little too long to read, but the basic idea is he says he's tested trailing stops. And I'll tell you – this is part I can read that is relevant. He says, after 2008, I did extensive testing on 50 years of stock and commodity data, and every conceivable type of protective and trailing stop. The results were consistent and unambiguous. You make much more money with random exits than with any kind of stop. It should make sense intuitively as well, since whenever you exit on a stop, you always exit on weakness. Therefore, you always give up something.

And he's pretty passionate about it. He says trailing stops are a harmful myth. But Voytech, I've got to tell you, we know this. Porter Stansberry said this in public like starting a few years ago. We know that you give up something to use trailing stops, but here's the thing, Voytech. From your email, I'm going to guess – I don't know. I don't know you, but I'm going to guess that you're much more highly disciplined than 99% of the folks within the sound of my voice, and 99% of Stansberry readers. There are so many of them, it's just like a huge cross-section of humanity. And most of humanity is terrible at this stuff.

So what do they do? They buy into something they don't know anything about and they hold on way too long and sell out at the bottom. So their options aren't random exits or trailing stops. It's selling out at the bottom and having catastrophic losses. That's why we do it. We do it to protect our readers from catastrophic losses.

But you are correct, technically speaking, and I wanted to acknowledge that. And thank you for that email. I read the whole thing. It's really thoughtful, and I enjoyed seeing it. You're absolutely right. But that doesn't mean that most of our readers shouldn't use trailing stops. I will say all day long the opposite. They should use them. If not, they're going to get murdered, because they won't exit randomly, Voytech. They will exit routinely at the most catastrophic moment. Talk about selling into weakness, they'll sell into the most weakness. It's just human nature, and it's human nature for people who are less experienced to make that mistake.

All right. Tom B. writes in and says, I have not heard anybody discuss the fact that we have a very large number of people living paycheck to paycheck. If you have no savings, you can't take a hit from a loss of income. Certainly, we have a lot of that from the virus. Can you discuss this and present the impact it could have on investing and our economy? It seems to me that the virus would have much less effect if most people had six to nine months of income in the bank, as most financial planners recommend. Thanks, Tom B.

True, Tom. I would even say like 9 to 12 months of income, after tax, cash. But here's the thing. Yeah, you're right. Lots of people live paycheck to paycheck. It's really bad for them. So this kind of bifurcates, it splits our society into the haves and have nots even more than already has been the case. And a lot of people place some of the blame for that inequality – a lot of the blame on the Federal Reserve.

So here's the thing, though, Tom. I think – remember I talked about Scott Garliss was telling us, hey, it looks like there's $1 trillion or two of stimulus coming, and a lot of it's going to go directly into people's accounts. And then I mentioned modern monetary theory and how there's a whole group of people who think that you can just – you can borrow and print a lot more and deficit finance a lot more than anybody thinks, and it's not bad.

And rather than that savings you're talking about, Tom, that people really should have, they're going to wind up getting deficit financed dollars in their accounts. But it won't be a replacement, though. You're right. You know, it won't be enough. Where it all ends up, I shudder to even think about it.

Okay, lastly this week, Malcolm, Malcolm from down under. Thank you for writing in, Malcolm. I can't read your whole email because it's rather long, but this is really interesting, folks. Listen to what Malcolm says here. He recommends a book called The Ponzi Factor: The Simple Truth about Investment Profits, by Tan Liu, L-I-U, Tan Liu. The Ponzi Factor.

He says, this book may explain the propensity for some people to love growth stocks, especially of the FAANG variety, which have minimal or no dividends. The essence of the book is the choice between two proposals. Proposal one, a business owner approaches a group of investors and says, I'm selling shares in my company. If you invest in my business, you'll receive a note saying you own a share of the company, and if the business makes money, you will receive a share of the profits.

Proposal two, a business owner says to a group of investors, I'm selling shares of my company. When you invest, you'll receive a note saying you own a share of the company, just like with proposal one. However, with proposal two, you won't receive any money from the business, and the company is not obligated to pay you anything ever, but you can make money by selling the note to other people. You might get lucky and get more than you paid.

Those are two interesting scenarios. I'm sure I would take proposal one all day long.

Malcolm continues, these days, I usually look for double digit dividends, up from my previous 8%. Thank you for mentioning at least in passing some yummy but hyper-volatile industries listed on the NYSE, namely international shipping, especially oil tankers, plus U.S, gas, not oil, production and distribution.

Then he says, in the end, I will buy the book by Rupal Bhansali, who previously worked with Soros, and I will avoid thinking about politics. Wish you well, Malcolm from down under. Thank you, Malcolm.

Malcolm was referring to – I did kind of a little mini-rant last time, because one person said that she wouldn't listen to the podcast or anything I ever had to say anymore because I had Rupal Bhansali, who is a brilliant investor. We interviewed her on the program a couple of weeks ago. Just go to InvestorHour.com and scroll right down, and she's right – one of the top choices there.

And she was great, but she previously worked for Soros, and people have political issues with Soros, so anything that has Soros anywhere near it they say is no good, which I think is stupid, and I said so. So yeah. Yeah, Malcolm, buy that book of hers. It's called Non-Consensus Investing. I have it right here on my desk. I refer to it frequently. It's a great book. Really good stuff.

All right. That's another episode of the Stansberry Investor Hour. Hope you enjoyed it as much as I did. Do me a favor. Subscribe to the show on iTunes, Google Play, or wherever you listen to podcasts, and while you're there, help us grow with a rate and a review. You can also follow us on Facebook and Instagram. Our handle is @InvestorHour. Also, follow us on Twitter, where our handle is @Investor_Hour.

Have a guest you'd like me to interview? Drop us a note at [email protected]. Until next week, I'm Dan Ferris. Thanks for listening.

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Male:                          Thank you for listening to this episode of the Stansberry Investor Hour. To access today's notes and receive notice of upcoming episodes, go to InvestorHour.com and enter your email. Have a question for Dan? Send him an email, [email protected]. This broadcast is for entertainment purposes only and should not be considered personalized investment advice. Trading stocks and all other financial instruments involves risk. You should not make any investment decision based solely on what you hear. Stansberry Investor Hour is produced by Stansberry Research, and is copyrighted by the Stansberry Radio Network.

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