Dan’s been ranting about excess in the stock market for ages. And today, he’s found the perfect example… when earlier this week one of the least innovative businesses in recent memory soared over 1,400% thanks to some surprising news.
Then on this week’s interview, Dan welcomes guest Amity Shlaes on to the show. Amity chairs the Board at the Calvin Coolidge Presidential Foundation, famous for sponsoring the Coolidge Scholarship, a full academic scholarship for academic merit.
Amity has written five books, four of which are New York Times Best Sellers, including The Great Society: A New History, The Forgotten Man, Coolidge, and The Greedy Hand. Dan and Amity discuss several of her books and how the historical episodes she writes about are instructive for investors today.
And finally on the mailbag, one listener asks Dan… what’s going on with silver? And another listener asks, Dan, you’ve been right on so many calls… why aren’t you more aggressive?
NOTES & LINKS
1:20 – Why did one of the biggest disaster stocks of the last few decades suddenly have a huge resurgence?… “Kodak was up as much as 1400% over a two day period this week.”
8:05 – Why choose Kodak to produce drugs? “I don’t know how this was justified! I’m just trying to read the minds of the idiots who do this stuff.”
15:45 – Dan has a conversation with this week’s guest, Amity Shlaes. Amity chairs the Board at the Calvin Coolidge Presidential Foundation, famous for sponsoring the Coolidge Scholarship, a full academic scholarship for academic merit. Amity has written five books, four of which are New York Times Best Sellers, including The Great Society: A New History, The Forgotten Man, Coolidge, and The Greedy Hand.
22:58 – Dan discusses Amity’s book, The Forgotten Man, “We just thought about government so differently, it seems to me, about the role of it in our lives before 1930s than we did after 1930s and WWII.”
28:11 – How the New Deal shifted American life… “It became the way of life, that the federal government was the answer to a problem. There was this fundamental shift.”
32:40 – Amity addresses the question, what can we learn from the 1930s and the Great Depression and how we can apply that knowledge today?
39:12 – Amity shares a great book that listeners can read to get a great background on the time… Gene Smiley’s, Rethinking the Great Depression
44:01 – Amity and Dan discuss an entirely different era in the past we can look to for striking similarities to today. “You have a book that came out about that, why don’t you tell us about that…”
50:37 – Amity shares the mission of the Coolidge Foundation… “At Coolidge, what we do is we devote ourselves to education… the kids can make up their own mind, but they do need to know the facts.”
56:03 – Dan shares what life is like in outside Portland Oregon. “I live across the Columbia River from Portland, Oregon… I’m not sure if we’re on the 60th straight night of violence in the streets, but we must be close.”
58:12 – Amity stresses to the listeners, “The U.S. is not changed irretrievably.”
1:01:52 – During this week’s mailbag… why has silver been on fire lately? What’s the best way to learn forensic accounting? Are oil royalty companies any good? And should Dan be more aggressive investing in his favorite ideas?
Broadcasting from the Investor Hour Studios and all around the world, you're listening to the Stansberry Investor Hour. 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.
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 Amity Shales. She has written several books, including four New York Times bestsellers. We'll talk about one or two of those today and how the historical episodes that she writes about are instructive for us today. This week in the mailbag Tony J. has a question about why silver has been on fire lately. And listener Dave P. wants to know why I'm not being more aggressive with my advice. In my opening rant this week we'll talk about signs of excess in the stock market. If only I could find them! That and more right now on the Stansberry Investment Hour.
Where, oh where are they? Where are the signs of excess in the stock market? Oh – oh, oh, wait a minute. What's this? It seems that Kodak was up as much as 1,400 percent over a two-day period earlier this week. My goodness, what's that all about? Well, it's a little crazy. Actually I take that back. It's a lot crazy.
The thing is Kodak – of course you know who Kodak – Eastman Kodak, the film company, right? They were the big film company. Their brand was as solid as any brand has ever been, you know, in the '70s, in the '80s, and somewhat into the '90s, although that's when they started getting heavy competition from Fujifilm. Actually they screwed the pooch – Kodak screwed the pooch by not sponsoring the 1984 Olympics, which I think it was in Los Angeles that year, and they let Fujifilm do it. And Fuji got market share and gave them some serious competition and was frankly ahead of them technologically on a couple of things. So yeah, Kodak declared bankruptcy in like – I think 2012, came out of in like 2015-ish, and the stock is – until this Monday it was down like 96 percent from its high in maybe 2014 or so, so just insane, right? One of the biggest disasters of the past several decades.
And, you know, they really didn't have to be a big disaster. They – a guy at Kodak invented the first self-contained digital camera in the '70s, in like 1975, a guy name Steve Sasson or Sassoon, something like that as I recall. Yeah, so look, the person who invents something doesn't always make a lot of money. There's a whole book called The Innovator's Dilemma, this whole idea that the innovator, the one who invents something usually doesn't make a lot of money off of it. But it seems to me like they had a first mover advantage there that they could've taken advantage of. But they didn't do it, and they became the disaster known as Kodak.
Until, what, Tuesday? And that's when we got the news that – well, actually we got the news – it's really suspicious, right, because what happened was Monday the stock was like nowhere. It was like two bucks or something. And Tuesday the stock traded a little bit higher, like, you know, a buck or so higher or whatever, on like maybe 10X the volume, the normal volume. You know, instead of like 100,000 shares, it was like over a million shares. Like, huh, what's this? Oh, then after that, then we get the announcement that sends it to the moon. So somebody knew. Somebody was buying the stock 'cause they knew. And the announcement was a $765 million loan from – who else? Who else would lend this company money? The government, right? I mean, they're lending them $765 million. The market cap was like $100 million before the announcement, you know, in that ballpark anyway. It was like $90 million, $92 million, something like that as of the close on Monday. It closed at $2.10.
So, you know, this thing is worth whatever, $100 million, but hey, let's throw a $765 million loan at them that gets paid back over 25 years. And the reason they did that was because the government is invoking this thing called the Defense Production Act, okay? So the Defense Production Act from 1950 – basically it was in response to the Korean War. They passed the bill in September 1950. And, you know, these laws that they pass in Congress, they have the short name – "The Defense Production Act" in this case – and then they have the long name, which tells you all the stuff in the law and exactly what we're doing and why we're doing it.
So the long title of the Defense Production Act of 1950 is this: An Act to Establish a System of Priorities and Allocations for Materials and Facilities, Authorized the Requisitioning Thereof, Provide Financial Assistance for Expansion of Productive Capacity and Supply, Provide for Price and Wage Stabilization, Provide for the Settlement of Labor Disputes, Strengthen Controls Over Credit, and By These Measures Facilitate the Production of Goods and Services Necessary for the National Security and for Other Purposes.
Now I love those last few words, "and for other purposes," right? Because this is just like a kind of – it becomes a blank check act. And, you know, national security is vague enough, but then for other purposes – oh, wow, whatever we want. We invoke the Defense Production Act.
So that's what's happening now. The government's invoking this thing and throwing money around to protect the national security. And one of the national security issues these days – everybody's all upset that so much of our medicine that we take in the United States is actually manufactured in China and India. And everybody thinks that's terrible and so we've got to stop that. We've got to subsidize and make more medicines at home. And that's what Kodak is going to make. They're going to make basically ingredients for medicine, is what I got from it.
I mean, look, there's a bit of a problem here already because – the problem is this. This thing had $100 million market cap. It probably should never – like, no banker would look at this thing and say, "Hey, man, let's lend them $765 million and give them 25 years to pay it back," right? No one would ever say that. And it's a big fat loser. It was managed straight into bankruptcy and straight into the ground. And that's the company that they pick to give money to? I don't know. Maybe they say, "Well, you know, Fujifilm came in and they took their business away, and so, you know, they're the target of a foreign business," or something. I don't know. I don't know how this is justified. I'm just trying to, you know, read the minds of the idiots who do this stuff.
But there was an article in Barron's where they were just kind of spit-balling around and they figured maybe a generic drug company, they spend a buck in assets to generate 40 cents worth of sales, and if you can do that every year for long enough at a decent margin you've got a decent business. And they thought, "Well, we'll get a few hundred million in revenue, maybe the business is worth eventually in the general ballpark of just say half a billion," right? $500 million, let's just say.
Well, the stock actually hit a peak of $59.98 earlier this week, you know, on the day this announcement really hit the ticker. So that would be like $2.6 billion maybe – and Barron's is totally spit-balling. They don't know. You know, they're just throwing numbers around because it's early days. We don't know exactly how it's gonna turn out. But they're throwing this number around, you know, it's like half a billion, and that's half a billion if everything goes swimmingly. That's half a billion if everything works out just perfect and Kodak indeed does create a brand-new business from this loan they never could've gotten on their own merits. I consider this highly unlikely, but okay.
So why then did the thing get to a market cap of $2.6 billion? And the last _____ I looked at was like, you know, a billion – it was like $1.5 billion, $1.5 billion still, you know, two, three times any reasonable notion of what – not what it's worth, but of what it might be worth. Even if it trades at $500 million or $600 million today based on that, that's like – that's a gamble. It's a gamble if they peg, you know, the most optimistic intrinsic value in the market today, right? But that hasn't happened. The stock went absolutely ape. It went nuts. So, you know, like I said, if only I could find signs of excess in the stock market.
Another thing I saw was on Twitter. I'm sorry, I don't remember who posted it, but somebody pointed out that – at the time, at the moment he posted it he said Shopify was trading at 870 times EBITDA, which don't even worry about what that means. It's just like the most optimistic view of earnings power of a company, all right? And it was 870 times that at the time, and I immediately thought of Yoda, right, Yoda, the little green guy from Star Wars. He lived to be 900 years old. He was 900 years old when he died in Return of the Jedi. Do you remember? He told Luke. He said, you know, "You won't look so good when you're 900." You remember that?
So I thought, "Well, Shopify is like – if there's a Jedi master born today who is gonna live to be 900 years old, this is his one-stock retirement plan." Because in the most optimistic view of earnings you'll get paid back 870 years from now on your initial investment. But then if you live to be 900 like Yoda, you're living high off the hog for 30 years, man. It's just free money from that point on. Or, you know, Methuselah from the Bible, he lived to be, what, 969? So, you know, even longer, what, almost – just call it 100 years.
But then I kind of looked at the financials. Like I just took a quick look. I was like, "What is Shopify's EBITDA?" Well, it turns out that it's – that the guy online, on Twitter who posted that, he left off one teensy-weensy-weensy little thing, which is a negative sign. It's negative EBITDA. It's negative 870 times EBITDA.
So you know, Yoda's retirement plan is shot. I've got nothing for him. If a Yoda is born today I don't know what to tell him. And, you know, like I said, it was the most optimistic view of earnings anyway but now it's losses, you know, almost 900 times losses. If only there were some place in the stock market where I could find signs of excess. And of course, you know, we talk about Tesla – talked about that. And Vitaliy Katsenelson, he actually kind of nailed the excess in Tesla. He wrote a piece about it, and you can go find it on his Contrarian Edge website. And the piece's title says it all. It says, "Tesla's stock price discounts temporal wormhole into the future," which is basically what I was saying about Shopify and the whole Yoda thing, right? Because you've got to go through a wormhole 900 years into the future to get any reasonable discounting, right? The market is a discounting mechanism. It's a valuation mechanism. That's all discounting means there. It means it's placing a value on businesses. And when you place this kind of value on businesses you're saying investors are willing to wait, you know, 800 years to get their money back, and it's crazy.
So yeah, yeah, I might be a little sarcastic when I say I can't find signs of excess in the stock market, because there's obviously at least three of them and I'm sure there's many more. You could probably write in and tell me – write in to [email protected]our.com and tell me the ones you see, right? So we covered Tesla, Shopify, and Kodak. Let me know if you see one that is truly insane and discounts a temporal wormhole into the future, all right?
I think that's about all we need to say about that for the moment. Let's talk to Amity Shlaes. I really am excited that she's here. I absolutely love her book The Forgotten Man so I'm going to talk to her about that. And she has a new book out called The Great Society. We'll talk about that, too. Let's do it right now.
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Dan Ferris: All right, it's time for our interview. Boy, I'm looking forward to this one. Our guest today is Amity Shlaes. Amity Shlaes chairs the board of the Calvin Coolidge Presidential Foundation, a foundation which is based at the birthplace of the 30th president in Plymouth Notch, Vermont, with an office in the Georgetown area of Washington, D.C. The Coolidge Foundation is the sponsor of the popular Coolidge Scholarship, a full college scholarship for academic merit, and the Coolidge Senators Program, which exposes gifted student to the values of President Coolidge. Hey, that's a worthy cause, isn't it? Her newest book is the Great Society: A New History, and Shlaes is the author of five previous books, four of which are New York Times bestsellers: Germany: The Empire Within, The Greedy Hand: Why Taxes Drive Americans Crazy, The Forgotten Man: A New History of the Great Depression, Coolidge, and The Forgotten Man graphic edition. She was a syndicated columnist for 10 years, first at the Financial Times then Bloomberg. Before that she served as an editorial board member of the Wall Street Journal. Over the decades she has published in periodicals including the New Republic, the New Yorker, the Spectator of London, the New York Times, the Washington Post, and National Review. For the past five years she has chaired the jury of the Hayek Prize, the Manhattan Institute's book prize. She also serves as Presidential Scholar at the King's College in New York. Amity Shlaes, welcome to the podcast.
Amity Shlaes: So glad to be here.
Dan Ferris: And we're really glad to have you. I actually met you briefly years ago at the Grant's Conference when you were giving out copies of your book The Forgotten Man. And I saw the title of it and right away I was suspicious, because I know people throw that phrase around – they're very sloppy with it, aren't they? But it means something very, very specific that I'm hoping we'll talk about today. But first I'm just curious, Amity. Why this particular career direction? You write about very interesting topics, usually from a very different perspective than we get on those particular subjects, on the Forgotten Man and the Great Society. How did you become Amity Shlaes?
Amity Shlaes: Business is part of life. The economy is part of life. The economy is our joy and our sorrow. And most historians aren't so interested in the economy. They've never thought about it or it's not apparent to them what role the economy plays in our culture. So I think it's very important and it offers some corollary lessons to whatever the public sector is offering. Calvin Coolidge said, "The chief business of the American people is business," and that is true. He said it in tandem with, "The chief ideal of the American people is idealism," so he had them both. But the under-told story of the heroism and flaws of business and of what rules do to business called out to me – and foretelling, that's the truth. But of course the short answer is I lived near communist places and I saw what it looks like when business isn't allowed, and I worked at the Wall Street Journal – that was my graduate school – where I learned all about business. So those are the short answers.
Dan Ferris: So I'm curious about what communist places you lived near.
Amity Shlaes: Well, you know, you think about your children, right? As a child my talent was foreign language. That's sort of like musical talent. It's unreliable and it fades, but such as it was that was my talent. So as a kind of cultural person I knew German and I happened to get a fellowship to Germany following university, following college in America, and I happened to work for Newsweek and the New York Times as their junior helper. And I went over to East Berlin and all that. I was always attracted to Berlin, the divided Berlin – this was pre-'89. And if you work in communist places, then I ended up, you know, eventually going to Poland and Czechoslovakia and Russia and the Baltic nations. And what you see over and over again is money that doesn't work. What's that about? Money that's like toilet paper.
Dan Ferris: Yeah.
Amity Shlaes: And the organizing principle for a lot of these countries was not culture, which is what's taught at school. "Chinese are like that because Maoism comes from Confucianism." You know, that's sort of the way we're – it's not so at all. The organizing – the economic regime affects the culture. Chinese and Russians and Americans aren't that different. What's different is our system and how our system treats business, enterprise, the economy. So this became very clear to me, that it wasn't the language – it was the economic rules that made the culture. A good example would be Poland never totally collectivized agriculture. People got to keep their chicken, you know, their little plot, and that meant that people in Poland starved less often than they might have in the Ukraine or in Russia where collectivization was more thorough and violent. So econ was clear to me was the key to explaining most everything.
Dan Ferris: That's really a profound, encompassing statement, isn't it, that last one that you just made.
Amity Shlaes: You think of it from the point of view of my father, who was a real estate appraiser and developer and a very thoughtful man, and you know, I could see how in real estate there are so many regimes, too. You have the state regime. You know, you have federal law where there'd be say a big federal loan for a certain kind of development or discouraging a certain kind of development or effect upon interest rates. And I could see my father, a little craft very beautifully built, trying to navigate the waters of the United States and the different jurisdictions, and he'd be cast up against some wall or other he hadn't seen in terms of business. So that affected me, too, how very much a change in rules ca affect a business.
Dan Ferris: Right. And one of the big reasons why I wanted to talk with you today is because it struck me when I read your book The Forgotten Man what a perfect focus that was for understanding how different all those rules were – well, they were non-existent really before the 1930s. And then after the 1930s and after World War II it was just – it's almost like two completely different countries. We just thought about government so differently, it seems to me, about the role of it in our lives before the 1930s than we did after the '30s and after World War II. And I just think it's a really – it just is such an insightful thing to me to focus on the Forgotten Man as the way to understand that. And I was hoping that we could start talking about this and that you could sort of educate our listener a little bit about the two ways – you know, the Forgotten Man, the original conception by William Graham Sumner, and then explain what happened to that term during the New Deal. Can you do that for us?
Amity Shlaes: Yeah. You were wondering if I had got the Sumner, right?
Dan Ferris: I was. I was like –
Amity Shlaes: Yeah, that's what surprised you when you first read it, yeah.
Dan Ferris: Yeah.
Amity Shlaes: So the way it goes is what we know in our history is that Franklin Roosevelt, the New Deal president, declared he would help the "Forgotten Man" – it's called the Forgotten Man Speech. It was a campaign actually where he first said it – the man at the bottom of the economic pyramid. And in my cartoon version of Forgotten Man there are some pictures of that scene where he's delivering the speech and you can sort of feel the phrase resonate with the country even as it goes over the airways: Forgotten Man, Forgotten Man. This is at a time when one in four was unemployed, so wow, I'm the Forgotten Man. And what he meant was the poor man, the unemployed man, and what he meant, Roosevelt, also was, "We must help him by sending him money," it turned out. That was the New Deal, or giving him some kind of make work job, or….
But the phrase was not invented by Roosevelt. It existed in the culture. It was a meme before then, because there was a professor at Yale named William Graham Sumner who wrote about the Forgotten Man, and his concept was different. He had a sort of little algebra that he offered with the Forgotten Man. He said, "Person A and Person B want to help Person X," the man at the bottom, the man Roosevelt described, the poor man, the man really in trouble, Person X. That's fine. So they get up a law to do something to help X, and along the way they coerce C into cofounding their perhaps good but perhaps dubious project for X. C, this third party – the taxpayer, for example – is the casualty, the collateral damage of what we do for X, sometimes good things, but sometimes just a sanctimonious operation that virtue signals, right? We're going to do X, Y, Z for poor people – doesn't even help them and it always makes C, this third party who maybe doesn't have a voice, captive to the whole project. So C, Sumner said, is the Forgotten Man, the man who pays, the man who prays, the man who is not thought of.
And Sumner said that – you know, he was from a preacher background. He'd become a sociologist, but culturally he was from a preaching background. And he said that as though in a sermon hundreds of times. "C, the Forgotten man, the man who pays, the man who prays, the man who is not thought of." And these two concepts, the taxpayer who funded the perhaps dubious New Deal project on the one side, and then the recipient who supposedly benefited, the poor man on the other, these two concepts of which you favor, which Forgotten Man – they were well aware of this conflict in the '30s and wrote about it extensively. It's only subsequent to the '30s we forgot all about Sumner and we only focused on the Forgotten Man, the poor man who was want to help. But the question is whether – is the aforedescribed method the right one? So there was this big fight, and the fight must be revived because there is always a C who pays, and sometimes what we do for X isn't worth the pain we cause to C.
Dan Ferris: Right. And would you agree that this is – I mean, I think it's an ideal way to understand the difference in the United States, our view towards government in general in the United States, before and after that period from 1929 to 1945.
Amity Shlaes: Well, yes. We had progressive ways in the United States before. That's the reason Sumner spoke up.
Dan Ferris: Right, right.
Amity Shlaes: He really hated progressivism. It mostly lived at the state level. So you think of states doing progressive projects before the federal government got to the progressive projects. Remember, up until 1935 or so state and local governments had a greater presence in the U.S. economy than the federal government did. When they said government they meant state, not federal. So the federal government grew beyond the states and the towns in the '30s under Roosevelt's New Deal even in peacetime. I should emphasize we're talking about peacetime periods – war is always an exception. And it became the way of life that the federal government was the answer to a problem. There was this fundamental shift. And then the question after that, particularly after a war, after World War II, is can the private sector ever catch up? Do we have terms under which it can catch up? Because the hypothesis postwar was, well, enough growth will obviate the federal government, and at times that seemed like it might be true.
Dan Ferris: Yeah, I'll say. So do you – let's see. I want to come at this the right way. Do you think – I mean, I've been telling our listeners for months now that they really should study this period of the Great Depression, not because I think we're headed for another Great Depression or another World War II, but just because of this enormous sea change in response to a crisis, enormous sea change in the way we thought about government and enormous growth in the federal government, which I think in itself becomes a machine for creating, you know, all kinds of unanticipated outcomes.
Amity Shlaes: Idealism is dangerous.
Dan Ferris: Okay, well-said.
Amity Shlaes: And when young people or politicians are idealistic, or tendency is to say, "Aw, they're idealistic. Let them have that program. I'm at the office and I'm worried about something else." But the idealism gets to the office. It costs the office. So what happened in the 1930s was we had a downturn. It didn't have to be a Great Depression. The economy can be anthropomorphized. It's like a person. It makes choices. Recoveries are like people. Every year in the 1930s the recovery chose to stay away and for a different reason. There was nothing inevitable about the Great Depression. There was no need for a suspension of disbelief. "Oh, it came over us as trouble came upon Job. It came over us the way a hurricane comes over, or a twister, or the way the twister comes over Dorothy and her Kansas town in Wizard of Oz." That's not true. There were conscious political policy choices made every year of the 1930s that made it more likely the depression would become great.
So what's interesting there – there was an economist in the period who's not famous now. He's like Sumner where, you know, put his name everywhere: Benjamin Anderson. He was no sideline economist. He was at the center of the world. He was the chief economist of Chase. And he said, "What the government is doing is playing God, and when it fails at playing God, when the outcome isn't good, when the recovery it promises will arrive because of its policy does not arrive, what does it do? Rather than throw up its hands and say, 'Maybe I shouldn't be playing God,' it just plays God more vigorously." So you think today of like the third stimulus that came after the 2008 crisis or the new stimulus that lawmakers are working on right now because of the COVID crisis. What does government do when it fails at playing God? It plays God more vigorously. I just had to laugh when I read that.
Dan Ferris: Yeah.
Amity Shlaes: And this is known worldwide that government played God in the 1930s, did a lot of things that no one expected. It messed with the agriculture market, to put it very, very simply, got all involved. It messed with industry through the National Recovery Administration. It messed with promising industries. The sort of Internet of the era was utilities, and utilities had the power, just as energy had recently, to bring recovery they were so promising. Everyone wanted electricity no matter where the economy was. And instead of permitting the electrification of America to be the engine that took us out of the doldrums or the Depression, the Roosevelt administration tortured the electricity utilities industry and made it into the kind of domestic animal of the government that to some extent it remains today, right?
Dan Ferris: Yeah.
Amity Shlaes: So that was a terrible error. You take what can take you to recovery and you chain it up so it lacks the power. That's very similar to now in mentality. And so the first time that mentality had ever really been tried was with the New Deal. And what will happen – your listeners will give feedback. "But the Great Depression was so great, and it was inevitable, and it was monetary, and only certain very clever people can understand that, and I can understand it because I went to Stanford graduate school," et cetera.
Dan Ferris: [Laughter]
Amity Shlaes: It's not that complicated. They made a lot of monetary errors. The truth about monetary is if you have a stable, predictable regime, usually you do okay and try to honor the currency more or less. It wasn't just monetary. And I'm very gratified, Dan, because one of the first things that happened – Forgotten Man was published more than 10 years ago and now we have a cartoon version for your teenagers, which I love. But one of the gratifying things that happened when it came out was economists rallied around me, and they said, "Thank you for putting some narrative to what we know from our data points." One of my _____ _____ just _____ _____. Most histories in the history books or in high school texts don't talk about the labor price in the 1930s because that's supposed to have to do with, I don't know, equilibrium and monetary and we're not supposed to be clever enough to understand that.
Dan Ferris: Right.
Amity Shlaes: But you can put it very simply. The government made the labor price too high through wage rules. You think of like minimum wage style rules, but more than that, and through a very aggressive labor law called the Wagner Act, which has been neutered subsequent to World War II through Taft-Hartley, but still – you know, still has pressure. So there was suddenly federal upward pressure on wages, and employers who might've laid someone off – specifically might have reduced wages, which is painful to do but better than laying someone off – couldn't reduce wages because the government wouldn't let the companies reduce wages. So the companies laid people off, paid the new high wage the government forced them to pay, but paid fewer people. And that's the ugly rigidity of the unemployment of the '30s that gives the Great Depression the label great. Why is the Great Depression great? The Great Depression is great because there was unemployment over 10%, _____ over 15% the whole darn decade.
Dan Ferris: Yeah.
Amity Shlaes: And why was that? We had a new national high wage policy. You know, Keynesian explained. So that's pretty obvious. You don't pay people a lot if you don't have a lot of profit just now, and you do hesitate to rehire if the government says you have to pay people a lot. That's how the Great Depression got great, and one of the scholars who came around was Lee Ohanion of UCLA, who with Harold Cole of Penn is writing a magnum opus on this, but they've got plenty of papers out. And you weren't allowed to say this: "Oh, the government made wages high. Oh, well, that goes in the _____ and monetary explanation." You don't need the monetary explanation to see this, and in fact the monetary explanation supports your argument because what happened – we had deflation. What happens in deflation? You promise to pay someone something – $1 – and it turns out that $1 is more expensive as paid than you imagine because you're in deflation. [Laughter]
Dan Ferris: Right.
Amity Shlaes: So the labor leaders got even better deals than they needed. They got a $1 wage increase for the worker. Well, really they got $2 dollars in the terms of the day they inked the contract, right? Deflation makes labor even more expensive if you're locked into a commitment. So there you are. You can't just say cost of living for him to be able to work as he did before. I can pay him $0.75 now. There wasn't even a consciousness of deflation.
So all of these factors made it worse. And I like monetary. It's part of the story but it's not the big part of the story. The big part of the story is discretion in monetary and fiscal policy was not useful. Bold, persistent experimentation, which is the phrase FDR used and he had a kind of glee about it – "I'll just try because I feel like it" – that uncertainty was fatal.
Dan Ferris: Right, right. I love the image which you had in your book – and I guess Gene Smiley wrote about it, a couple people – of FDR basically sitting in bed eating his soft-boiled egg just kind of arbitrarily experimenting on the economy. And you could say it was almost like a godlike fashion, right? He's just playing God every morning and just kind of seeing what happened. And one –
Amity Shlaes: Do you know – yes. The – every story has a kind of wise fool as in Shakespeare, right? Who's part of the action, probably one of the idiots, but also comments from time to time, in a way sort of talking to the audience. And the wise fool in that scene was the man who had become Treasury Secretary, Morgenthau, who was kind of a goofball, a rich kid. The Roosevelts knew the Morgenthaus because they both lived in the same part of New York, you know, and not really up to the job of monetary advisor of Treasury Secretary. So Morgenthau had learned enough, though – he was trying, right – to know that stability was probably good for markets. His father was a big investor. And he – Roosevelt said, "Well, let's raise the gold price" – let's see – yeah. A weird exercise when we were no longer on the gold standard, but anyhow, "Let's go in the market and try to affect the gold price, and let's have it rise by a certain increment, say $0.21." And Morgenthau said, "Why 21, Mr. President?" And Roosevelt said, "Well, because seven is a lucky number."
Dan Ferris: [Laughter]
Amity Shlaes: And you know why Roosevelt was doing that. He saw the effect of deflation on credit. But it was so arbitrary, and Morgenthau went home and wrote in his diary, which I recommend to everyone, at the Roosevelt library now – it's there, "If anyone knew how we set the gold price, they would be frightened," that is – how arbitrary it was, that the decision that's so important to transactions day to day, that's so important for international market, that's so important to nations that are struggling – remember, Europe is not recovered and is heading towards fascism. What is the U.S. doing? It's just fooling the heck around.
Dan Ferris: Right.
Amity Shlaes: So that scene stuck with me. Gene Smiley describes it well. I recommend Gene Smiley's primer on the Great Depression.
Dan Ferris: Absolutely.
Amity Shlaes: It's a very basic book. He's a very modest man. It's short. He was at Marquette. So he kind of laid it out. That was helpful to me in writing Forgotten Man.
Dan Ferris: Yeah, I agree. I just finished it recently. But, you know, it occurred to me as I thought about that scene – you know, it's very arbitrary and kind of crazy. It's picking lucky numbers or whatever. But at the same time, you know, you could've employed an army of economists at that same moment to do the same job and have them be the most informed people in the world, and they still would've screwed it up. They couldn't have done any better, in my opinion.
Amity Shlaes: Well, you know, your listeners will have different monetary views, but I think we can all agree we like stability and a predictable regime.
Dan Ferris: Right.
Amity Shlaes: And the, heck, you've-got-to-intervene thing, that is political. Keynesianism is window dressing for vote getting in the monetary or in the fiscal. Well, you know, it's like a patient who is dying on the table and he's going into a coma and you say, "He needs a transfusion." That would be a monetary stimulus, right? Or, "He needs an apparatus to make his heart jump." Okay, but why is he dying on the table? He may be dying because he has an endocrine problem and he's in a coma because he's hypothyroid. That's the best analogy. You can stimulate him back to life for a little bit, but the underlying problem is incremental, gradual, modest, cheap to fix.
Dan Ferris: Yeah.
Amity Shlaes: _____ a few Synthroid and he'll be better, or – you know, oh, it's falling off... it needs to be amputated. No, he has gout and two pills will change him in a week, no amputation. So it's sort of like sort of a preference. Economists like to be surgeons because it's dramatic, preferably heart surgeons, when they might be better served being – I don't know – wise rheumatologists or endocrinologists or – you know, it's not always – the remedy is not always as dramatic as the disease.
Dan Ferris: Yeah, I agree. The way I tell Keynes in a general theory, it's like it's an incantation, right? It's this academic incantation and you say it, you know, a number of times and you walk backwards over the grave at midnight, and then you go and do whatever the hell you want. You _____ away with the – it's an _____.
Amity Shlaes: Well, economists – there are two problems in economics. I say this as someone who loves economists. One is economics are the servant of politics now or is the servant of politics now. So Keynesianism gets more credit than it deserves given its now extensive record.
Dan Ferris: Yep.
Amity Shlaes: And the second – so related to that as part one is economists trend "lefter" than they used to. So they want the Keynesianism to work or they even want redistribution, which – you know, _____. But the second problem is they're a guild, and they're like a guild from the Middle Ages. And unless you have the right kind of degree – their kind of degree – and were the student of their own teacher, they don't respect you. So what will they do? They mystify economics. They say, "Well, you're not quite clever enough to understand this. You don't have the Masters in math. You don't have whatever. So therefore trust me. I am wizard and you are poor citizen." That's crazy. Economics is not that hard really. We can't always solve it, we can't figure out why we don't end inflation now, but it's – you know, we know it's one of eight factors. And this mystification to scare off challengers is very tiresome.
Dan Ferris: It is. They're – you know, "You don't know Latin. I know Latin and I can talk to God, so you just be quiet and let me handle it," is what I hear when they say those things.
Amity Shlaes: Very related, very medieval.
Dan Ferris: Yeah, yeah.
Amity Shlaes: It's – so that – so what can the rest of us do? Well, thank God there's business school, which is more open. Usually in business school there's enough pragmatism that you kind of can pick from the point of view of the firm – that helps a lot. But anyway, that's part of our problem. When an economist says something, when a Fed person says something, we all just bow and scrape.
Dan Ferris: Okay. So, Amity, I'm gonna shift gears a little bit. We're actually – we're getting toward the end of our normal time, but maybe we'll just go a few extra minutes here. A lot of folks right now, they're – we live in a time of great tumult. You know, it's – this virus is running around, people have shut down economies, fiscal, monetary – it's all gone haywire. So what I hear people doing is everyone's looking for a historical analog, you know, and I'm telling people, "Well, study the Great Depression and World War II." But you have another idea and you have a book to back it up that just came out. Maybe tell us a little bit about that.
Amity Shlaes: Well, the New Deal didn't finish and it kind of got discredited if you look at what Congress did to Truman after World War II, right? They changed that darn labor law. They rejected certain actions, expansion actions. But it picked up speed again, the progressive impulse, the New Deal, in the 1960s starting with idealism. And Johnson more or less explicitly – I will say explicitly vowed to continue what Franklin Roosevelt had started, and that was the program called the Great Society. Johnson – it shared ambition as now. Johnson didn't say, "I want a Good Society." He said, "I want a Great Society."
So in this book what I look at is what the government did with the Great Society, and frankly you can include JFK and Richard Nixon as government expanders in the Great Society. You can. So the whole '60s we were expanding away, inadvertently or advertently. And we wanted to get to great. Okay, we want to get to great. There are two ways to get to great. One is through the public sector and one is through the private sector. So in the Great Society book what I do is I look at the public sector, I look at what the government did. There's a chapter on the Camp David agreement on monetary policy of the summer of 1971, which was the world's worst set of economic policies handed down by Nixon.
Dan Ferris: Yeah.
Amity Shlaes: But, you know, I also look at companies and how they navigated the waters in this turbulent period. And it turned out the companies actually had a pretty good shot of getting great results as well. Example would be Fairchild, the company that had the staff that became Intel, the Gordon Moore – think of. So Gordon Moore example – we want to help Native Americans... they're in trouble. Gordon Moore and others at Fairchild started a factory in New Mexico on an Indian reservation and became the greatest private sector employer of Native Americans. They were good at making chips at the factory because the Native Americans in New Mexico are good with needlework. They know how to play with little fidgety things and make them beautiful, which is what you need for chips.
Well, gee, was this better than a federal program? Probably. It was a much-loved experiment. It didn't last, probably because of politics, but the private sector in a great way, of course, across the economy created marvelous things that improved the quality of life, that made our modern life great. So the Great Society book is about a competition between the private sector and the public sector with the private sector doing better than you think given how hobbled it was by the public sector. _____ _____, you know, hare and tortoise maybe, but – and that's the emphasis.
Another company in the book, one that got into big trouble but is at the heart of what Americans know about enterprise is General Electric. Another company is Toyota. And the assembly line of Toyota and the Big Three are compared in the book, because ironically we think of Japan as a very subservient culture. Of course there was more liberty on the assembly line for the worker in Japan than there was on our assembly line, where a worker could not halt the line or make a suggestion. The union got in the way. So an important factor in the book is the damage of big unions. I have a character in the book, Walter Reuther, and older listeners will know his name. He was the leader of the flamboyant, bold United Auto Workers. I think he hurt – I know that he hurt Detroit with the collusion or the cowardice of the automakers who went along and priced our automaking out of the market. And I tell that story about Toyota and so on coming in.
Dan Ferris: So, Amity, can you – you know, before we started recording it sounded like you thought that period was a pretty good time to study if you want to understand the present better. Did I get that right?
Amity Shlaes: The policies being called for now resemble both those being called for under the progressive New Deal and under the progressive Great Society. There's a chapter in Great Society about guaranteed income, which is what our COVID money is clearly going to attempt to flip into, right?
Dan Ferris: Right.
Amity Shlaes: Payment for everyone all the time so they're not poor. So yeah, I think those periods are relevant, and the epigram of the book is, "Nothing is new... it's just forgotten." The record suggests that the Great Society didn't work. That's why Bill Clinton agreed to end welfare and make government smaller, or at least less big. But that is forgotten because we, you and I and everyone listening to this who's over 25, failed to ensure that our schools give kids a fair picture. What's wrong with us that we kind of gave it a pass? That's my question all the time. And at the Coolidge Foundation where I'm the chairman, what we do basically is offer kids common sense history and let them decide, because unfortunately our schoolbooks do not offer common sense history. They offer one-sided kind of identity politics history which suggests that redistribution is always the answer. U.S. history does not suggest that, so you want to be sure kids know all about this. I think we kind of looked away as our schools did this and now we're paying the price.
Dan Ferris: Well, you can say that again, yeah. Some of the things the kids would come home with from school, I just had to bite my lip because I knew I couldn't do anything about it.
Amity Shlaes: Well, and you're constantly telling your children – pick your battles, right?
Dan Ferris: Yeah, that's right, exactly.
Amity Shlaes: But one too many battles and they're exhausted. "Well, my mom says, but at school they say, and I might get a B-plus instead of an A-minus if I do what my mom" – you know, like that.
Dan Ferris: Exactly.
Amity Shlaes: I'm not speaking about myself. I'm speaking globally. It's really sad. And I know that some of the Bloomberg readers used to write me about this. Bloomberg is a wonderful constituency, the subscribers, and they used to write me about their stories from school because they were so mad, you know? The dads and moms went to work and they would – look, do you know what my kid read last night? So this is a general problem, and at Coolidge what we do is just devote ourselves to education. We have various vehicles, but that's what we do. The kids can make up their own minds, but they do need to know the facts.
Dan Ferris: Well, sure, just to be introduced. At this point it's a great service just to introduce the other viewpoint because if you leave it alone the way it is they'll never hear it, right?
Amity Shlaes: They'll never hear it, and what's more important is they see no advantage to hearing it. Ambitious children want to succeed. That's ambition. And if they see that the entire progressive culture is where – that all the credentials of success are within the progressive culture – that would be true for the humanities. If you want to get an "A," you do have to pander to the teacher's views unfortunately. That didn't used to be so much true but it is now. If you want to get into a good college, you often have to write what they want to hear, and what they want to hear is a progressive narrative. So any sensible kid says, "I'm going to do tis and later I'll make up my mind," and that is so sad. So our job is to establish not only heroes but also credentials to show that respectable people who you might admire, who might later give you a job or who might have a job that one day you would dearly want, have a different view to what's being taught in high school, and that that view has been honored by other people, not just a bunch – a couple options trader or a couple people in the Bloomberg – or a couple people on the newsletter. But, you know – so part of it is just sheer survival, and I think it just behooves us to create new institutions and credentials so young people see some advantage in acknowledging reality before they're 30 years old.
Dan Ferris: Amen. So do you – yeah, I haven't read the Great Society yet. I'm behind. I have Coolidge and I have Forgotten Man but I don't have Great Society yet. Do you address the, you know, sort of violence in the streets that took place during this era? Does that play a part in your story?
Amity Shlaes: Oh, absolutely. I mean, that's – there were the terrible riots in the '60s. That's what all the TVs are showing now, pictures of Watts or – which was the first one that changed the consciousness, pictures of Detroit. There was a recent movie about Detroit. And what I discovered – the general response to a riot or the potential for a riot is, "Don't let it happen again, or prevent it." And on the left people – progressives want certain things, which – and they have a lot of authority because the right says, "I just don't want this to happen again. I don't want one more Starbucks to be vandalized, right? Make it go away. We'll pay anything to make it go away." So that's the political spectrum.
So in the '60s as now the police were, you know – there was a call for police reform, definitely warranted. But there was also a call for sort of sidelining local government and community action, which is what the legislation is going to be about now. And that community action was just terrible. Indeed as I show in the story of Watts is that community actions foments riots. It doesn't prevent them. What I'm talking about is federal funding for community action, because what happened in the '60s – it will sound very familiar – is the federal government, led by a very idealistic office, sent money to community action groups, the Black Lives Matters of the '60s, who then had a very radical posture towards the government.
And it's quite amusing and sad to watch because the mayors who were most befuddled were often Democratic mayors, as now, and they said, "Wait a minute, I supported Lyndon Johnson and helped him get elected. I supported Kennedy, Mayor Daly, perhaps too much, of Chicago. And I have poverty plans. I have a reformer. Why aren't you sending money to my poverty office?" Mayor Daly said, right? Or that's what the mayor of LA said, Sam Yorty. Instead the federal government, feeling the mood, feeling cool send the money to groups that ended up opposing the sitting Democratic mayors who were elected, so they had some authority, or should, and the two groups would get in fights, the far-left group funded by the federal government and the mayor and his offices. And in the case of Watts what happened was they fought so much young people didn't get the jobs that were promised or a lot of other outlays that were promised for the summer of – I think it's '65. Now I'm thinking. And Watts exploded in frustration over basically a jurisdictional fight.
Dan Ferris: Wow.
Amity Shlaes: So you think about community action now, which is going to be the next thing, new police, social workers instead of policemen, all that, it's just a replay of the '60s. So I have quite a bit of material on that, and the name of that chapter is "The Revolt of the Mayors," because the mayors, as I say, they thought they were the reformers. They were elected to fix the police. Maybe they hadn't done a perfect job yet, but that conflict – when you have federal intervention as virtue signaling or fear of more riots, that's a recipe for more riots.
Dan Ferris: Yeah, I live across the Columbia River from Portland, Oregon, where I think – I'm not sure if we're at the 60th straight night of violence in the streets but we must be close. It was 58 a night or two ago. And it's just – it's odd to me to see – I mean, the mayor kind of looks like he likes the violence. He's kind of – he sounds like he supports what they're doing and supports – you know, that he wants them to take over a portion of the city. It's just – it strikes me as counterintuitive to say the least –
Amity Shlaes: But when mayors play to money outside the city things go wrong, and that actually started with urban renewal in the '60s. So federal money would come along for highways, so they'd build highways because then they wouldn't have to raise taxes. But the highways they built did not _____ to cities and hurt the vulnerable populations. In the Detroit riot they said that the people who'd been displaced had disappeared, displaced by highway construction. But they came back and materialized in the Detroit riot, because awful things happen when the federal government intervenes on the local level. There's a wonderful book called the Black Silent Majority by Michael Fortner, not very well-known, about African-American casualties to racially oriented sanctimony.
Dan Ferris: Hmm. Sounds like a bit of timely reading today, too. So, Amity, we're actually kind of at the end of our time, which I really hate saying that because I want to hear more about the Great Society. But I ask all my guests the same question when we get to the end of the interview, and I'm really curious to know what you'll say. If you could leave – you know, given what we've been discussing here today and the state of the world as we speak in the latter half of the year 2020, if you could leave our listener with just one thought, what might that be today?
Amity Shlaes: The thought is that the U.S. is not changed irretrievably. There's a lot of ruin in a nation, as has been said, and one of the things I believe in doing is highlighting the past that's more rational. That's why I give my life to this underrated president, Calvin Coolidge. And we're in a time when statues are coming down. Those of us who don't like to see statues come down in a violent way, at least not all of them, I counsel everyone to build institutions and not just sit on the defensive. "Oh, they shouldn't take down this statue of Frederick Douglass because, heck, he was an abolitionist." Why is that? Instead build your own statues. Build your own institutions. Build your own schools. I hope the listeners will join me at the Coolidge Foundation. We aim to get Coolidge to get more Americans. We have high school debate programs and so on. But build your own institutions. Build new ones. Don't give up or get – live perpetually in a defensive crouch.
Dan Ferris: Oh, that's good. Yeah, absolutely. Thank you for that, and – okay, so, Amity, I'm going to – you know, I will read The Great Society. You've made me more curious than ever about it, and maybe after I get through that we can have you back and talk about it so more.
Amity Shlaes: Oh, don't worry about it. The audio reader is really good. His name is Terry Aselford. I like him a lot. The parts that would relate to you – and I appreciate it, and it looks like your podcast is serious – are the Arthur Burns chapter which is called – he was, as you probably know, the Fed chairman.
Dan Ferris: Okay – yeah, yeah.
Amity Shlaes: Arthur Burns, so – I don’t know your emphasis, but anyway, it's called "Burns Agonistes" and it's about how Arthur Burns sold his soul for popularity with Richard Nixon basically. But it's about the Camp David economic policy.
Dan Ferris: Okay.
Amity Shlaes: But another chapter is this mayors chapter. I think another chapter, Dan – a third emphasis which is one I didn't understand was important till I did the research for this book is the role the unions played in America in that period and how they helped to set social policy and how they made Detroit uncompetitive. It's just heartbreaking. And you know, at the time – you know about right to work, right? I'm sorry. I don't know –
Dan Ferris: Sure.
Amity Shlaes: But – okay. So we have sort of a wonderful natural experiment. States can opt to be right to work, and then you see how is economic growth there – and I have a lot of charts at the end of the book. And right to work is a loophole that was created by Taft-Hartley, a law passed over the veto of Truman right after World War II, intentionally creating a loophole so states could opt out. And in the '60s it was almost closed, the loophole. Johnson intended to end right to work because the unions understood that the right to work loophole was an existential threat to them as businesses moved to right to work states. Johnson didn't manage to do that because he was preoccupied with Vietnam. His political capital was used up with Vietnam. But you have to wonder what would've happened had we ended right to work and had a closed shop in all 50 states. Oh my God.
Dan Ferris: Yeah, really.
Amity Shlaes: And I hadn't thought about that till I did this research.
Dan Ferris: Okay, I will read and I will think about all that, and whenever I'm done with it we'll invite you back.
Amity Shlaes: Oh, sure. Well, we – let me know. I talk a lot to investment groups, also to, you know, their top clients and so on, and it's very easy – one thing that is a big topic for them I should mention is how to talk to your kids about money, particularly about wealth, because rich kids feel guilty.
Dan Ferris: That's something, isn't it?
Amity Shlaes: And the thing to do is to channel their guilt towards something productive such as charity, not to social activism that actually hurts everyone, you know?
Dan Ferris: Sure.
Amity Shlaes: Yeah, so anyway.
Dan Ferris: All right.
Amity Shlaes: Yeah, I mean, that's – if you ever have clients that's very, very valuable to them. And you know, you go around the room with clients and one after another, they say, "My kids hate Trump," or, "My kids believe in a 75% tax rate."
Dan Ferris: Ugh, yeah. I may have heard something like that from our own.
Amity Shlaes: "What do I do? I feel bad." Particularly the moms, I will say.
Dan Ferris: Yep.
Amity Shlaes: Don't feel bad. They're wrong, so.
Dan Ferris: That's right. That's right. That's right. "Don't feel bad. They're wrong." That's good. That's a good mass doctrine, Amity.
Amity Shlaes: You know, they're wrong. It may not be you who can tell them that. That's the thing.
Dan Ferris: Yeah, that's not controversial. It is actually not me who can tell them that, so yeah. [Laughter]
Amity Shlaes: How many children do you have?
Dan Ferris: We have three.
Amity Shlaes: Oh, that's great. How old are they?
Dan Ferris: They are 26 – or I'm sorry – gosh, woo, boy – 27, 29, and 30.
Amity Shlaes: 27?
Dan Ferris: 29 and 30.
Amity Shlaes: Oh, excellent. Yeah, we have 29. Where are they, the little Ferrises?
Dan Ferris: They're actually not Ferrises. They're stepchildren for me. But they are –
Amity Shlaes: Oh, they're stepchildren?
Dan Ferris: Yes. They are – well, we live in southern Washington and they all live in southern and central Oregon.
Amity Shlaes: Oh, excellent. Well, I'm glad to talk to you. Thank you for this chance, and I'm sorry about the slow arrival.
Dan Ferris: No worries at all. Thanks for calling in and talking with us today. That was really interesting, and I hope that – I hope you guys will read about the Forgotten Man. I think it's a really important – it's an important meme, as Amity called it – I think that's as good a word as any – because of the – like I was saying, just the difference between the original conception by William Graham Sumner in the 1880s and then what it became after the 1930s and after the New Dealers got done with it. If there's one sort of focus point that can show you the complete difference that I'm trying to emphasize to you, our listeners, between the United States before that period and after, learning about the Forgotten Man is an excellent way to grasp that. And her book, Amity's book The Forgotten Man, is an excellent way to understand the difference.
All right, let's take a look at the mailbag.
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 to [email protected] I read every word of every e-mail you send me and I respond to as many as possible. I read every one but I don't respond to every one. I respond to as many as I can.
All right, first up this week – there were quite a few. We have some good ones. First up is James K., and basically James K. – I won't read the whole thing. He's just asking about the trailing stop percent function on E*TRADE. And, James, the way you describe it, yeah, that does the job. That's exactly what it is, what you're describing. You have a little quote here. "Select trailing stop percent to buy or sell a security when its market price reaches a trailing stop price." Boom, done – yeah, that's it. If that's all you want to do, that's all you need.
Now you're asking me about TradeStops, and the best thing to tell you is to go to TradeStops.com and click around and learn more about it, 'cause it does a lot more than just that function. There's one really cool thing where it can tell you when to get back into the thing you stopped out of, to the stock that you stopped out of. And we've got some data to suggest that the results from that are off-the-charts excellent. So I hope that helps, James. Good question.
Romeo B. has a lot of questions in a really short e-mail, which is just the way I like it. He says, "Hi, Dan, so many questions for you this week but I will try to keep it short." He's got three of them. "The first one is what's the best way to learn forensic accounting? Joel Litman seems to be the authority in this space but I don't think he has a book out explaining his methodology."
Romeo, I did two things. I googled forensic accounting and I searched for it on Amazon. And a book came up on Amazon, Forensic Accounting for Dummies. And maybe that's a good place to begin? I don't know. I don't know the book, but I'm not a forensic accountant so I know I'd probably start there. And there were some good links. If you just google forensic accounting there were, you know, definitions that tell you what it is and other things, too. So that's all I would do. I hope that's helpful.
Your next question is, "Say gold goes to $10,000.00 an ounce. Is it the right price or is it a bubble? Is it still portfolio insurance or just another safe asset transformed into toxic waste by Wall Street?" Hey, this is a neat question because when you make that assessment of bubble or transformed into toxic waste, it's usually in response to – you know, relative to the earnings power or the yield of the instrument, right? But gold doesn't do that. It's not that kind of an instrument. It's a monetary instrument. It's different.
So I'll tell you two things. First of all, I saw somebody online – I won't say his name. He's kind of a popular journalist. And he said – he posted something that had the inflation-adjusted gold price. Don't do this. There's no such thing as the – the gold price is the adjustment. The gold price is the inflation adjustment. So inflation-adjusted gold price makes no – it's a redundancy. And if you try to do the math to inflation adjust, you're doing it wrong. Just look at the gold price. That's the adjustment.
So if it goes to $10,000.00 an ounce it's adjusting for – it could be adjusting – a frenzy in the gold market. You've got to make the assessment at the time. You can't really look forward and tell. But my guess is also, you know, given what's happening, given what the Federal Reserve is doing and what the government is doing, if we get to that kind of a thing within the next several years here, it will be discounting that much damage to the currency. But really the answer is you've got to wait until you see $10,000.00 and then you look around and say, "Hmm, is this right or not?"
Finally you ask, Romeo, "Are oil royalty companies any good? The sector is pretty hated right now so there might be some interesting bargains." Great guess lately – keep them coming, Romeo B. Oil royalties – so as a general rule, since we're talking about the whole sector, all the people – and I know people who basically make a living buying royalties, and all they ever talk about is the underlying asset, the quality and earnings power of the underlying asset. So that's really what determines if the oil royalty company is any good mostly. So that's really all I can tell you as a general rule, because from there it becomes a bottom-up assessment of each one. So you're gonna have to do some homework and figure out what the good assets are.
But I like the way you're thinking. The sector is hated. I shot that idea by Mike Barrett, the guy who works here on Extreme Value with me. And he was saying, "Hmm" – he thinks we're gonna get – he said, "I think we're gonna get some better pricing," meaning lower pricing in oil and royalty companies. So, you know, he doesn't know; neither do I. We're just spit-balling there.
So now we get to Dave P., and Dave P. says, "Dan, I love your broadcasts and the very interesting guests you have on your show. I think you have a really good handle on what's happening in the financial world, but you never seem to capitalize on your good logic. You loved silver and gold but have no position in either."
Stop you right there, Dave. What in the world are you talking about? I've owned – personally owned gold metal and silver metal and equities consistently, like the whole time I've been telling everybody else to buy them, which I've been doing really starting in January of 2018 when I recommended what I believe is the first gold-related equity anyone should buy. I'm not gonna tell you because it costs a lot of money from my newsletter and people wouldn't like it if I went around telling everybody for free.
So I don't know what you're talking about when you say, "You loved silver and gold but have no position in either." It makes no sense to me. In Extreme Value right this minute one, two, three, four equity recommendations that relate directly to the price of silver and/or – but mostly gold. Don't know what you're talking about. I have – in my wife's 401(k) is loaded with gold stocks. Don't know what you're talking about or how you could know anything about that.
Then you continue. "As a 35-year retired veteran from Merrill, and one that is really enjoying trading in these bizarre times and making some cash, I wish you were more aggressive in your investing to capitalize on your correct thoughts." Don't know what you're talking about. But, Dave – he does say in the end here, "Keep up the good work. I look forward to your podcasts every Thursday evening. You're a breath of fresh air in a very polluted and corrupt sea of financial advice." Well, thank you, Dave. Except for that one little thing where I have no idea what you're talking about, it's a wonderful note.
Next comes Ricky T. Ricky T. says, "I have been listening to your show and I've learned a lot from you and the guests. Thanks for your dedication. I have a very basic, stupid question I want to ask." No stupid questions, Ricky. He continues, "I was reading Porter's book The Battle for America. On page 180 he was talking about how to find the intrinsic value of the stock and he mentioned never pay more than about ten times the maximum annual free cash flow for operating companies. I understand what is free cash flow but I don't know how to calculate if the stock price is overvalued or undervalued. Thanks for answering my stupid question. Thanks, Ricky T."
Ricky, it's not stupid at all. Look, it takes two us to write Extreme Value, and one guy, Mike, Mike Barrett, the process that we use is so complex I need a whole person to just focus on nothing but that for every stock we recommend. And you know, it's not something he whips up in five minutes. It takes a long time and there's a lot of input and a lot of work. So not a stupid question at all. It's hard, and I can't even tell you – you know, I have talked about this before on the program and I have tried to simplify it. But the truth is it's just not that simple, okay? It's just not that simple.
And Porter's – you know, that's his rule, never pay more than ten times. If that was your rule in the stock market over the past like 30 years, you weren't buying any stocks 'cause none of them were ever that cheap. So believe me, if they were less than ten times I'd be all over them all the time. But thank you, Ricky. It's not a stupid question. It's an excellent one and it goes right to the heart of the difference between good – you know, bad or just good and truly great investors.
All right, now we come to the Mack Daddy, question by – the last one is a question by Tony J. I can't read all of Tony's question 'cause it's too long, but basically what he's saying is that a company called Sprott Asset Management based in Toronto, they have these publicly-traded, physical bullion trusts, so when you buy that, you're actually buying a stake in the physical metal. They have a gold trust, they have a silver trust, and they also have a gold and silver trust. So he said, "Well, Sprott filed for a $1.5 billion secondary offering recently for the silver trust, and does that mean it's gonna be acquiring 71.5 million ounces of silver in the upcoming weeks? 'Cause that's ten percent of the 2020 forecast mine supply."
But then you answered your own question, Tony. You called Sprott investor relations – good for you. That's exactly what you should do. And they explained that this is just a renewal and that a shelf prospectus is something that sits on the shelf for whenever they need it so they don't have to go through the rigmarole and they can quickly issue the shares if there's a bunch of new demand. And it's non-dilutive, right? You issue a share and you buy exactly that much money to cover it, so it's not dilutive when they issue shares for this thing.
But you answered your question as far as I'm concerned. And you asked me at the end, you know, "Is there some reason to think Sprott will be acquiring 71.5 million silver ounces in the upcoming weeks? Could it be that investors are overreacting to this event? Don't get me wrong. I welcome the strength in gold and silver and wish it will continue, but if the shelf prospectus is the impetus, maybe I worry it won't last too long."
He says, "And what are your thoughts, Dan?" My thoughts are, Tony, you answered your own question, and I don't think that that shelf prospectus is what propelled the silver price higher. I think it's been a long time coming. And sure, when something goes straight up the way silver and gold have recently, they correct. And you know, precious metals are volatile anyway. The share prices of the metals and then, you know, as a derivative of that even more volatile are the prices of the shares – I said share prices of metal. Of course I just meant metal prices.
So, you know, I wouldn't be surprised to see some kind of a correction in silver and gold, but I think both of them are going a lot higher. And I wouldn't sell gold stocks or silver stocks or metal, gold or silver metal here. I think, Tony, you are an example of what to do. You had a question. You read something in, you know, wherever you saw it. Then you called the company and asked them about it, and they explained to you, "Oh, it's not quite like that." So good for you, and that's all I have to say about that. And thank you, Tony. It's a good question.
Well, that's another episode of the Stansberry Investor Hour. I 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. Our handle on Twitter is @Investor_Hour. If you have a guest you want me to interview, drop us a note at [email protected] Till next week, I'm Dan Ferris. Thank you for listening.
Thank you for listening to this episode of the Stansberry Investor Hour. To access today's notes and receive notice of upcoming episodes, go to InvestorHour.com and enter your e-mail? Have a question for Dan? Send him an e-mail, [email protected]
This broadcast is for entertainment purposes only and should not be considered personalized investment advice. Trading stocks and all other financial instruments involves risk. You should not make any investment decision based solely on what you hear. Stansberry Investor Hour is produced by Stansberry Research and is copyrighted by the Stansberry Radio Network.
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