On this week’s show, Dan brings repeat guest Kevin Muir onto the show to talk about some big macroeconomic ideas.
Kevin is a former institutional equity derivatives trader with decades of experience who now writes about a wide range of financial topics in his newsletter The MacroTourist. Kevin has a way of explaining difficult macroeconomic ideas in ways that are much easier to grasp.
The pair discuss a number of topics including market moves around the upcoming election, the long-term effects of the massive spending during the pandemic, and the validity of Modern Monetary Theory.
Kevin even shares some predictions about some of the big five tech stocks that you won’t want to miss.
Plus, we have a mailbag for the ages this week. One listener writes in questions Dan’s objectivity in pointing out issues on both sides. Has Dan been influenced by the Northwest liberal bubble? And another listener asks Dan to make the argument against two of his favorite investments… gold and bitcoin.
Author of MacroTourist
The author of the MacroTourist newsletter, Kevin is a former institutional equity derivative trader for a big bank who decided that bank-life wasn't for him, so proceeded to trade for his own account for a couple of decades before joining his current firm, East West Investment Management where he is the Market Strategist.
NOTES & LINKS
1:21 – The media is pushing two different narratives weeks before the election… Dan takes a look at both and determines if it means anything for your portfolio. “This type of news is utterly worthless, but I think there are a lot of eyeballs on it right now…”
7:05 – Dan lays out the three most important ideas he shared during the Virtual Stansberry Conference last week.
12:19 – Tech stocks have been on fire for the last few years. But Dan finds some interesting evidence that shows value stocks could outperform other stocks in the coming years
17:56 – Will we see negative interest rates? “I kind of think we will, we’ll see… time will tell.”
21:32 – This week, Dan invites Kevin Muir onto the show for a great conversation. Kevin is a former institutional equity derivatives trader with decades of experience. Kevin also writes The MacroTourist newsletter that explores a vast range of financial topics in a fun and lighthearted manner.
22:15 – Dan asks Kevin what’s on everyone’s mind… “Is there an election trade? And if so, what is it?”
27:01 – What happens when the private sector is unable to borrow? If the banks lower rates to zero, and still no one borrows, is another crisis imminent?
34:29 – Kevin gives the listeners a quick basic lesson in Modern Monetary Theory (MMT), “The main thing to remember about MMT is the fact that they do not believe a currency issuer is ever financially constrained…”
39:15 – Kevin says that when you study MMT, you get into the plumbing of how money is actually created. But MMT can introduce some contradictory ideas that are baffling at first, like how “the government spends first but borrows later…”
43:28 – Kevin says, “I’ve always argued that Donald Trump was actually the most MMT president that we’ve ever had, and the reason I say this is 8 years into an economic expansion, at a point when the Keynesian would have told you to balance the budget… what Donald Trump did was he cut taxes…”
44:50 – Dan counters with some arguments against MMT, “I think it’s too naïve, it’s too trusting, it depends on human beings not responding to political power grabs and it depends on human beings to being prudent at all times…”
51:16 – The national narrative has shifted, now no one talks about balancing the budget… “The market responses that we saw in the Great Financial Crisis, they’re not going to be the same this time, and the reason is because the government is spending…”
55:26 – Kevin says there could eventually be a shift of wealth from the older generation to the younger generation… But Dan says, “yeah but wait a minute, the older generation… they own real assets, the younger generation can’t afford anything, that’s the problem, right? And their wages haven’t grown.”
59:44 – Kevin says it’s important to look at which countries are truly investing their stimulus money to make their society more productive and which countries are just giving it away. “That’s how I would be choosing [which countries to invest in]…”
1:04:43 – Kevin leaves listeners with an ominous final thought… Tech stocks could be in big trouble. “I don’t know how this isn’t a bubble in terms of valuation, and I don’t know when it’s going to end but I definitely think that those 5 big stocks are hugely overpriced…”
1:12:39 – On the mailbag this week, we start things off with some politely-worded criticism when one listener questions Dan’s objectivity. Has Dan been immersed in the liberal Northwest bubble for too long? Others write in and ask Dan, what was your biggest investing mistake and what can we learn from it? And another asks what are some valid reasons NOT to own gold or bitcoin?
Announcer: Broadcasting from the Investor Hour Studios and all around the world, you're listening to the Stansberry Investor Hour. [Music playing] 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 Kevin Muir. We haven't talked with him for about a year, back on Episode 119. He's one of our favorite macro investors. And I promise you, my first question will be something you want to know. Stick around for that. This week in the mailbag, listener Lance K. says he questions my objectivity because I refuse to take his side of the argument. [Laughs] I'm not kidding. I'll read his whole e-mail to you. You'll love it.
In my opening rant this week, I'll start out talking about why reading the news is harder than it looks, and I'll finish up with a very short version of my presentation from last week, Stansberry Virtual Conference. That and more, right now, on the Stansberry Investor Hour. Earlier this week, I guess it must've been on Sunday – the Financial Times came out with a headline. And they said, "U.S. Investors Pivot to Blue Wave as Odds Favor Biden. Market shifts toward small-cap companies and value shares over growth stocks." And we'll look at that idea in a minute. So basically, that headline and article, if you read it, says, "Shifts in markets," suggest investors are starting to prepare for the Democrats to win, not just the White House in the next month's election, but both Houses of Congress as well in a so-called blue wave.
And that that's been good for some parts of the market, OK? So investors pivot to blue wave. That was earlier this week, OK? then the day after that – that was Sunday. Then on Monday, when Bloomberg... their headline says, "Investors turn skeptical of U.S. Democrat blue-wave victory." Some analysts question if Democrats will win control of the Senate. Tech growth stocks both outperformed other sectors on Monday, right? So you see what's happening here? Like, within a very short span of time – I guess you could say, "Well, the FT article was from Sunday. And this article was from Monday. So, you know, they're just commenting on the daily moves." My point is that this type of news is utterly worthless.
But I think there are a lot of eyeballs on it right now. I think that there are a lot of people who are thinking about, "What should I do?" And there are extremes of this. The big mistake most people make, as we discussed on an earlier episode, is that they will say, "If so-and-so gets elected – and I don't care if it's Trump or Biden – doesn’t mean anything to me." "If so-and-so gets elected, I'm going to sell everything." Or even more radically, "If so-and-so gets elected, I'm going to sell everything and leave the country." Right? That, as I pointed out, is a great mistake. However, if you think the odds favor one or another candidate getting elected – and the polls right now suggest that the odds favor Joe Biden getting elected over Donald Trump.
And I don’t really necessarily have a view either way. I would point out that Trump fooled us in 2016, didn't he? Because all the polls said Hillary, Hillary, Hillary. The odds in Vegas were clearly in favor of Hillary winning. And of course, Trump... he didn't get the popular vote, but it was a landslide for the electoral college, right? In other words, more state – a lot of states voted for him in the electoral college. So who knows? I don’t know what's going to happen. I don’t know who's going to win, right? Now the polls say Joe Biden, but maybe Trump pulls another one out of thin air and takes it again. I have no idea.
But I would suggest that when you get some of the up days that we've had recently and the polls are showing that Joe Biden is going to win... I would suggest that the trade there is that for some reason, the market likes Biden and is cool with it even if it's just the certainty. You understand? It's not necessarily that the market wants to see one particular candidate voted in or not. It's that there seems to be some certainty because Biden is leading several polls. So they say, "OK. Biden's going to be the president. We can make plans. There's some certainty, and we can move forward." That, of course, is a mistake. [Laughs] Right?
Because we never know what the outcome is going to be. And the more the market goes up, the more the market really likes what it sees, the more skeptical I become that anybody who's trading on the election is doing it right. And we'll talk to our guest today, Kevin Muir, about this. I'm going to ask him – I'm going to hit him the first question, you know, "is there an election trade?" And if so, please tell us what it is. and we'll see what he comes up with. But that's what it looks like to me. It looks like the market has certainty, and I don't think it should ever have certainty. And our other point, I hope, is made pretty well just by reading you these two headlines, you know?
Within 24 hours of each other, they're reading the stock market and saying, "Oh. You know, the market is favoring a blue-wave victory, a Democrat blue-wave victory." Meaning Biden gets elected, Democrats win control of the Senate... versus investors skeptical of a blue-wave victory. It's ridiculous. But Nassim Taleb likes to say, "You know, if you really want to cure yourself of depending on the news and relying on the news" – trusting the news really – "just read it a week apart." Or "read it a week late." I'm sorry. "Read it a week late." Right?
So if you read it a week late, you can see what happened in the previous week. And you can see how meaningless all of today's headlines really are, right? So you have to learn to – you just have to learn to read the news in a much better way. And I just wanted to present this sort of example to you as a way of making that point. Now, the last thing I want to do in my rant is just give you a small taste of what I told folks in the Stansberry Virtual Conference. Some of these points I've made before. Some of them – I think all of them bear repeating. I'm sorry. I just do. I think, you know, like I said when I started out, I need to be – I feel the strong need to be heard on this stuff. I really do.
Because I don't think that the markets are reflecting my viewpoint right now at all. The first thing, of course, we already covered. Elections are tradable. They're not investable. All the people who say, "I'm going to sell out if so-and-so gets elected" – they always wind up being wrong. Having said that, stocks are bumping up near all-time-high valuations. So at the very least, I think you might see a lot of the very expensive names falling off and a lot of the cheaper names rising up, right? So in other words, being a value investor is probably a better idea now then it was certainly over the last [laughs] 10 years, right?
Over the last 10 years, hasn't been that great. Next 10, I think it's going to be a lot better. Because these are mean-reverting phenomenon, right? The tendency is for the market to revert to the mean. So when one part of it goes crazy ballistic, straight up – and if you look at just about any big market index, certainly the U.S. indexes since March has been... whoosh. It's been a straight up move. Those moves tend to revert back to the mean. In fact, the harder you get the up move, the harder the mean reversion comes. And then when something underperforms for such a long time – like value stocks and emerging markets – then that tends to revert back. And these things, they move – they tend to move opposite one another for reasons. People get tired of this... They go into that. It's not a difficult thing to wrap your head around intellectually.
So I think that's where we are with equities. You definitely should own them because, let's face it, it's a relentless – the ascent of man is a relentless trajectory over the long term. Innovation is a relentless trajectory over the long term. We just can't stop wanting to make our world better and raise our standard of living. And that keeps – to me, that keeps equity in the forefront of my mind as a main portfolio component. Because I want to own a piece of those businesses that are creating real value. I'm not saying it's easy to figure out which ones they are all the time. But you do want to learn them, and you do want to own them.
And owning an index can work out. It certainly has worked out lately. I think there are problems with that today because – for example – the top five stocks of the S&P 500 is like one-fourth of the index. It's a bigger piece than it's ever been before. And that is a problem because the phenomenon here is that they get a dollar of capital, and they just automatically buy those stocks. Well, what happens on the other side when the investor wants to raise a dollar of cash? Well, they sell those stocks. So the ones they are buying the most of, when they're most expensive and everyone is focused on them the most... they're the ones that they're going to like the least and take the most out of.
And of course, all of the headlines for the other stuff that I'm talking about emerging markets – and especially value – have been like... I can just grab – I just grabbed a random bunch of headlines. Forbes.com has a value [inaudible comment] that stopped working from last fall. The Denver Post just last month: "Road to Retirement: Why Value Investing Isn't Working." Cora.com, right? "Is Value Investing Outdated Today?" And then, one of my favorites is from CNBC, Yun Lee appears to be a very young woman. So young that she was alive at any time when value investing was working.
And she says, "Is value investing dead? It might be, and here's what killed it." I'm not... if she knows that, it doesn’t appear to have come from experience. And then, of course, people who have the experience like the folks at Research Affiliates, Rob Arnett and his crew, they point out, "Yes. Value hasn’t worked well." They say for the past 13 years. But reports of its death may be greatly exaggerated. And they point out, you know, that only two episodes over the 57-year history of their analysis that has value been this cheap before. And, you know, with today's value versus growth valuation gap... at an extreme. The hundredth percentile, right?
It's cheaper than it's ever been. They say the stage is set for potential historical outperformance of value relative to growth over the coming decade. So that's where I am. And we had Toby Carlisle on the program, and he talked about – and you can look this up on his website greenbacked.com. He talked about how value worked well in Japan during a really bad time. For the Japanese stock market overall, from 1980 to 2011, but especially during the bear market that spanned two decades from 1990 to 2011. During that time, just five basic value strategies using the basic value metrics like price-to-book and price-to-earnings – that kind of stuff.
So during that time, the Japanese stock market lost 62%. But those basic value strategies multiplied $1 like between four and 17 times, depending on which one of the metrics you leaned heaviest on. And of course, lately we've seen Warren Buffett putting about $6 billion into a bunch of big Japanese stocks, and it looks like they're going to – the reporting is that they're open to investing a similar amount more. And FT, I think – Financial Times – is correct in their article. They said, "You know, Buffett's move looks as much a negative step away from the U.S. market as an endorsement of the companies."
And I agree with that. It makes sense. Because you know, at heart, he does want to buy value. He wants to buy $1 for less than $1. No matter what it's based on, right? No matter what it's based on – whether it's based on this outlook for the company or he thinks it's a stock that's going to grow forever, he's always wanting to buy more earnings for less. Then last week in my presentation, I talked about how people don't understand risk, right? They think the risk-return graph is – it just goes up and to the right. As you go higher in risk, you go higher in return. But that's not true at all, right? Because otherwise, it wouldn’t be risk. What really happens is that you get a wider range of outcomes with more downside as you go up the risk spectrum.
So the narrow range of outcomes with smaller downside would be something like Treasurys, you know? U.S. Treasurys. Very narrow range of outcomes, right? But lower risk. Whereas higher risk would be something like small-cap stocks. A lot of the time, you're going to lose money – maybe even most of the time, you're going to lose money. But sometimes, you'll make huge money. So a much wider range of outcomes between, you know, negative 100% and plus-10, 50, 100 times. Whatever. And so, that's the real way to think about risk. And that's the real reason why I'm telling – part of the real reason why I'm telling people to hold lots of cash.
And they – investors simply don't appreciate how quickly you can be drawn down. And when the market draws down very quickly like it did in March, all-of-a-sudden the oxygen has been sucked out of the room. We've discussed this phenomenon. You want to have the cash before them, right? And frankly, look at a chart of the S&P 500 over the past three years. Overall, it's been wrong to be bearish, right? Because the market is pushing up near all-time highs. But I noticed that since I turned bearish in May of 2017, the market has seen higher highs and lower lows, right? The low in late 2018 was not as low as the low in March of this year, right?
So you've seen higher highs, but also lower lows. And that's like what we just talked about, right? We just talked about how risk is a wider range of outcomes. So I saw more risk. I think I've basically been right about that. We also wrote about an increase in volatility, and we've certainly seen that. So yeah. Wrong to be totally bearish overall up to this moment. But we've certainly had plenty of volatility, and our view on risk has played out. Interest rates. I don't have a lot to say about that. But I do notice one thing that I want to get across to you, which is that if you look at what has happened to – and you could use just any big European country to do this, but I used the German five, 15, 30-year bond, government bonds.
Ever since July 2012 when then European Central Bank President Mario Draghi said, "I'll do whatever it takes the fix the economy," interest rates have plunged. So the five, 15 and 30-year bond are all negative-yielding. But the Euro has not liked that. It's lower than it was then, and it has plunged as well. And you could do the same exercise for the yen – the other big reserve currency besides the euro. And if you look at the U.S. dollar since around 2011. It doesn't like what has happened. Now, it's a better-looking chart. It's a better-looking chart. I'm sorry. I said since 2011. My chart on the dollar is long term. It's like back to 2000. Sorry.
So in that longer-term chart, basically the year of lots of central bank activity in the United States and around the world, the dollar is lower now than it was then. So it doesn’t like that. We don't have negative interest rates. We're getting near it. We're pushing toward it. But we're not really there yet. And who knows? We may get there. We may not get there. I kind of think we will. We'll see. Time will tell. You don't have to bet on it. You don’t have to place a bet on it. So just that observation. The currency knows what's up when you start pushing interest rates down low. And, you know, how long will this last? How long will these low interest rates last? I don't know.
I tend to think that people like... there was an article in Bloomberg where they said it was going to last for five years. And there are other articles where – the Fed actually said through 2023. So we'll see. I tend to think that the deflation that is pre-staged by low interest rates is probably not – it could materialize, but the response to that will be lots of money-printing, and you'll get inflation sooner than you would've ever believed. So you've got to own some gold and silver and some bitcoin and whatever else gets you out of the currency. And, you know, I'm not the only one who say all this stuff that I'm saying. You can hear similar comments from people like Howard Marks, David Tepper, Bill Gross – the bond king. He's getting really defensive these days. Stanley Druckenmiller says, "I think we can easily see five to 10% inflation in the next four or five years."
So, you know, this is not like Dan – this is not really a flaky viewpoint at all. And that kind of are the basic bones of what I told everybody in the Stansberry Conference last week. and so, I wind up in the same place I always do with my true diversification bit, right? Own stocks, start tilting toward value, have plenty of cash, gold and silver, and bitcoin. And I also mentioned long volatility. But if you know what that is, you don't need me telling you about it. If you don't know what that is, you don't need to mess with it.
And then, there's this other category of stuff like land and art and whiskey and Ferraris or guitars or whatever it is you understand that might hold value over time and is outside the financial system, right? So that's my basic true diversification package. All right. Well, I obviously had a lot on my mind this week, and I hope you found it useful. Let's just get on with it and talk with Kevin Muir. Let's do it right now. [Music plays and stops] You know how I'm always saying that I don't want this show to be too political? Because after all, it's a finance show. And some politics is appropriate, but it can get too much really quick, right?
Well, maybe you're interested in politics. Maybe you're interested in American and global economics and politics. If so, you're probably going to be pretty excited to know that Trish Regan – the famous finance and political journalist – is now part of the Stansberry team. And Trish Regan has a brand-new podcast. It's called American Consequences With Trish Regan. You can find it anywhere that you listen to podcasts – iTunes, Google Play, anywhere. Or you can just go straight to americanconsequencespodcast.com. And she's already had some huge names on the show like billionaire businessman John Catsimatidis and former U.S. Senate Candidate Tom Del Beccaro.
So check it out. American Consequences With Trish Regan. It's available anywhere you listen to podcasts or just go to americanconsequncespodcast.com. [Music plays and stops] Today's guest is Kevin Muir. Kevin Muir is a former institutional equity derivatives trader who, for the past couple of decades, has traded for his own account. Kevin writes The MacroTourist newsletter that explores a vast range of financial topics in a fun and lighthearted manner. I love Kevin's fun and lighthearted manner. He's a great Twitter Follow. I highly recommend him. Kevin, welcome back.
Kevin Muir: Thanks. Great to be with you today, Dan.
Dan Ferris: Yeah. So, Kevin, I’m going to contort myself and mix my metaphors and dive in headfirst and feetfirst at the same time here. And I have a question that I’m fairly certain is just on the mind of just about everyone listening to the sound of our voices right now. And that question is, "Is there an election trade? And if so, what is it?" And I think you're the guy to ask.
Kevin Muir: Well, it is great because the market is actually being discounting over the past couple of weeks and increased the chance of Biden winning. And if you'd asked me kind of a month ago what the markets would – if that was the case and the market would be discounted Biden winning – I would assume that the market would've been going down. But, you know, just in another example that the news makes the... or, the headlines makes the news and the fact that markets interpret things depending on whether they're in a bullish or bearish type of mood.
The Biden win has actually been interpreting it as actually being really bullish for the market. Meaning that when we get a Biden and a Democratic sweep, we're going to see a situation where we're going to get all sorts of stimulus. And not only that. He's not going to go and change any of the taxes. And so, this is great for the markets, and that's what's happening right now. So when you ask me, "Is there a trade out there?" Whenever the market anticipates something to such a high degree, I'm always thinking the other way. I’m thinking that by the time we get there and the event actually happens, it will be fully baked into the price.
And if anything, I think the surprise will be that the market – we get a Biden win and – which is what the polls are saying right now – and yet the market sells off on increased fears of basically higher taxes and maybe not as much stimulus as we thought. So it's one of those things that if you – I think we rally as we go into the election. And then, watch out. Because if we get what we want, it's one of those kinds of those maxims of "be careful what you get. You might just – or what you ask for. You might just get it good and hard." It might be a situation where, by the time we get the Biden win, the market is selling off hard.
Dan Ferris: OK. So this is classic by the rumor, sell the news type trade. Which makes sense. Yeah. You know, I follow Victor Niederhoffer, the –
Kevin Muir: Right. Yeah, the squash player.
Dan Ferris: Yeah, the squash player. Exactly. [Laughs] And he, of course... he's a longtime trader and market watcher. He's getting pretty old now. And you can tell in his Twitter feeds, you know? You can almost not understand it. But he said something that I thought I'd bounce off of you, especially right after your idea you just gave us. He said, "The market likes socialism and Marxism and big government." And I'm pretty sure he was serious. What do you make of that?
Kevin Muir: I think he's misinterpreting kind of what's happening in terms of, the market likes fiscal stimulus. And a lot of the fiscal stimulus is taking the form of increased government spending. But it doesn’t necessarily have to do that. Fiscal stimulus would also be just tax cuts. But he is correct in that – this kind of goes back to one of my themes that I've had for the past kind of few years – the monetary kind of policy has become completely ineffective. And if we go back and think about the past half-century or maybe 40 years... ever since Volcker... what's happened is, Volcker in '79 crushed the back of inflation through higher rates.
And then, since then the government and the central bankers have relied on monetarism to fix every single kind of ail in the economy. So what happens is, we get a slowdown and a recession. It's fixed with lower interest rates. But unfortunately, by relying solely on those monetary stimulus – the monetary lever – what it does is, through those lower interest rates it actually encourages the private sector to take more and more debt out. And so, every time you get a recession it's the same playbook. The central bank lowers interest rates. Eventually, that causes the private sector to borrow more and the economy perks back up. But the trouble is, the next time you get you get a recession there's more debt.
So therefore, it takes an even lower interest rate to encourage the private sector to borrow more and so on and so on. And that's why when you look throughout history, you'll see that every single kind of peak in interest rates – especially on the Fed funds level – was lower and lower and lower. OK? So what eventually happens, though, is you hit a point where the private sector becomes unable to borrow anymore. And this is what happened in the Great Financial Crisis. You went, we get the private sector – took too much debt out... economy rolls over... the central bank lowers interest rates.
The trouble is that the private sector doesn’t respond. All of a sudden, interest rates are at zero, and everyone's faced with a balance sheet recession, and it doesn’t work. Now, that's when things got a little kind of dicey and that the central banks then decided to try to do extreme monetarism – meaning quantitative easing and a host of other kind of policies. And even in Europe and Japan, they take interest rates negative. But at the heart of it is the fact that each and every time they tried to fix it with monetarism. Now fast-forward to this time. The COVID comes, and the market realizes – or, sorry, the central bankers and the government realizes that they can't just put rates to zero. That's not going to solve the problem. And they actually start to do fiscal stimulus. Meaning that they go, and they spend.
And they spend in a big way. And I think that the big surprise for a lot of kind of bears – or I would call them the "thin-twit Illuminati" that were expecting this to implode on itself... the big surprise was, when the government went and did this fiscal stimulus, that both the economy and the stock market rallied hard. And this is, in essence, kind of a change in attitude that is as large as the change that happened in '79 when Volcker realized that he could crush the back of inflation with higher rates. Back then, nobody believed that you could stop inflation. There were some very famous guys out there – Henry Kaufman from Solomon Brothers. They called him "Doctor Doom." He was the original Doctor Doom instead of Nouriel Roubini.
And he thought inflation was just unavoidable. We were just going to go up and up and up and up. And what happened was, Volcker was proven wrong. And then when he had four decades of disinflation. Now this kind of moment that we've had – the COVID, the 2020 – this has changed the attitude amongst governments. And it has made it so that they were willing to take deficits, and the deficit hawks are like... they've been shot out of the sky, and their bodies are lying on the side. And even though this is happening, people still don't believe we can create inflation. But I think that what's happened is that, you know – just like Volcker ushered in four decades of disinflation – this change in attitude is going to usher in four decades of inflation.
Dan Ferris: Wow four decades, huh? I mean, I agree with you. But yeah.
Kevin Muir: Well, I'm not sure it's going to be four decades. But it's a change in attitude. And, you know, one of the things that I've talked about a lot is that I've really dug into MMT. And I know a lot of people. They kind of throw up in their moat a little bit when they hear MMT. They get very upset with it. And I've always been of the belief that as a trader, as an investor, you can sit there, and you can talk about what should be done. But that's not going to help you in terms of managing your portfolio, and you should focus on what will be done.
So one of the things that I've repeatedly emphasized... that you may not like MMT. You might think that this is terrible policy. I disagree, but anyways. It doesn’t matter – because the reality is that it's coming. And I think that this 2020 was the first example of – the COVID response, was the first example of this MMT. Ad what it's done is, it's kind of blown the doors off of the way that we thought economics works. And the reason that it's blown the doors off is because everyone always assumed that debt was something that was the same for currency users as currencies kind of issuers.
And I completely agree that when you're looking and analyzing balance sheets of corporations or balance sheets of individuals, they have to pay that debt back. But it's not the same when you start to go in to look at sovereigns like the United States government and the variety of other big sovereigns that issue in their own currency. And in doing so, by the fact that they can go, and they can basically create money whenever they want – and it's slightly different than quantitative easing because everyone thinks that quantitative easing is creating money, you know, like buying bonds. And we can get into that.
But it is actually different. When the government spends money into existence, it's a lot different than the Federal Reserve basically buying bonds in the open market. When the Federal Reserve buys bonds in the open market, you might have heard some people talk about it being an asset shift. It's just kind of changing the composition of the amount of money that's out there. And I know that a lot of people push back on that. We could talk about that. But the important thing is that when a government goes and spends money or taxes less, that actually creates money.
So I go back to my four decades we've relied on monetary stimulus to fix things. Well, every time it's taken more and more monetary stimulus. Now the government is finally woken up to the fact that they can create it through fiscal stimulus, and that's why you see J. Powell out there begging the government to issue to spend money. Because he says, "We are just a lender. You are the spender. You are the ones that are able to create it." And I think that once governments get a taste of this and once it flips, we're going to find that they're going to be more than happy to do it, and we're going to be creating inflation way more easily than anyone expects.
So I think things like bonds are going to be a disaster in your portfolio. A lot of people talk about them being a ballast to your risky stock portfolio. I think they're going to be an anchor that drags your whole portfolio down. And I look at things like, "Break even. Inflation breaks even and steepen your trades," and gold and precious metals as something that you should be looking at in terms of your portfolios to protect yourself against this coming inflation that I see.
Dan Ferris: Yeah. I agree with you about inflation. And bonds too. And one of the things about bonds... you know, people have this expectation that bonds are going to function as a hedge for your equity portfolio because sort of, in the last couple of decades era of, you know, the almighty central banker, it's been that way. But over the longer term, you can easily see that bonds and stocks have correlated positively plenty of times. Chris Cole at Artemis Capital included that in a paper a couple years ago.
Kevin Muir: So generally, stocks and bonds are negatively correlated during periods of disinflation. And then, often in periods of inflation they actually become positively correlated. And Chris Cole from Artemis Capital did highlight that. So if you go look at the '60s and the '70s, bonds and stocks were positively correlated. And not only were they not negatively correlated, they were positively correlated.
Dan Ferris: Right. So when the currency is under attack, look out. And as you've pointed out, the currency is now – we've had this shift in perception. And by the way. We should tell our listeners. MMT stands for modern monetary theory. And Kevin talked about that a little bit. Maybe you could just give us a very quick little lesson in the basics of modern monetary theory – just as it pertains to the comments you've already made.
Kevin Muir: OK. Sure. The main thing to remember about MMT is the fact that they do not believe that a government, a currency-issuer like a government – a sovereign government that issues its own bonds – is every financially constrained. And what that means is that the level of debt doesn’t matter because it can always issue more currency to pay that debt. And at which point, you're going to say, "Wait. That doesn’t make any sense. That if you go and you pay it off with cheapened dollars – that means that you're going to create inflation."
And MMTers would say, "Of course, you're going to create inflation. And that is your true restraint or constraint." So meaning that there never is an issue about a government being 110 or 150% of GDP, and they got to stop spending at that point. What they have to stop spending on is when they start creating inflation. And one of the ways to think about this is, in World War II when the government – Pearl Harbor was bombed – the government didn't go and say, "Well, there's no way we can go and build all these ships and do all these things – build tanks and all the war that we need." The reality is that they just did it. They went and spent it.
And one of the things that I think is interesting is that people go and say, "But wait. They paid for that through war bonds." Well, the reality is that they didn't actually need to pay for it through war bonds. And the war bonds were created to change the behavior of the private sector. Because if you're thinking about it as a society and you're trying to focus as many resources as you can to building as many ships as you can, the last thing you need is some fellow that's making money on the line going out an buying a new Buick. That new Buick is going to take sheet metal. It's going to take resources and stuff like that.
So what you want them to do is just take his money and save it. So they made these war bonds to change the behavior of the private sector. Anyways, back to MMT. They believe that the government can go and is better off by spending, or investing the money in the economy, as long as there's excess slack. Meaning that as long as there's people unemployed or there's resources underutilized, we are better off as a society of creating that money and spending it. And eventually, what's going to happen is that as you do more and more of it, you will eventually bump up and you will create inflation and that that is your true constraint – not some arbitrary financial amount of debt.
Dan Ferris: Right. So the underlying assumption here is about... it's about the – how shall we say – the robustness of being able to print your own money, you know? That is... I feel like the MMTers are saying, "Oh. You've got a great tool here. You need to use it more. And you need to understand that printing money is not as bad as you think it is." And I just find it so utterly convenient that MMT – which has been around a while but has really... it's gotten a lot of traction at this point in the cycle. Do you find that as convenient and coincidental as I do?
Kevin Muir: Well, I would argue that it was a natural outreach of the fact that we've tried to solve all of our problems with monetary stimulus and that eventually we were going to come to this point. Because the reality is that monetary stimulus doesn't work.
Dan Ferris: Exactly.
Kevin Muir: Yeah. So I think MMT – I was attracted to it because... I'll tell you a little story about what I came upon. And it was a few years back, and I didn't know what it stood for. and I'd heard or read about people talking about MMT. And I thought to myself, "I better go and look into this." So I reached out to a buddy who put me onto some kind of economics papers and some professors. And I went home, and I started reading about it. Now, up until this point – don't forget – I'm a trader that's traded my own account. I'm actually an economics major. But if you would ask me, "Do economic professors have anything to offer," I would've said, 'Not a chance. These guys lose you money all the time. They don't understand how the real system works. They have all these crazy theories that these – equations that don't work in the real world.'"
And I was a huge skeptic about all of the scholarly study of economics. So then, I went and I started learning about MMT. And I started listening to it. And I watched them go through the plumbing of how money is created and how it works. And I thought to myself, "Holy smokes." And there was a lot of things in there that are very difficult to kind of swallow, like when you start to hear – one of the things that they believed is, they believed that the government spends first and borrows later. And you think to yourself, "Well, wait. That doesn't make sense. You got to have the money to actually append it." Well, the money is – the government is just an entry in accounting somewhere.
And then, the other thing I realized is that there's actually the rule that we need to go... when a government goes into deficit and basically spends more than it takes in, they actually have to go and borrow in the open market by law. But that is a self-composed constraint. And once I kind of thought about this, I was like, "Wait. You know, they could just spend it. And if they were allowed to" – currently they're not allowed to. But there's nothing stopping them from just spending it and basically upping the amount of dollars in circulation. And you think to yourself, "Wait. That just makes no sense."
But then, you realize that eventually they do that too much, they're going to create inflation. And there's so many things in MMT that made sense once you realized that the way that the system works... like for example. Let's talk about QE and the fact that – if you remember back to the Great Financial Crisis, there was all sorts of market strategists, economic professors and thin-twit bigwigs. They were talking about how we were going to create all this inflation.
But the reality is that QE didn't cause any inflation. And you ask, "Why is that?" Well, let's just stop and do kind of an MMT experiment and kind of follow the money. So imagine JPMorgan goes and sells $500 million of some bond to the Federal Reserve on one of the quantitative easing programs, OK? So now all of a sudden, the Federal Reserve owns $500 million more bonds, and JPMorgan has $500 million cash, OK? Now, the old school of thought is that JPMorgan has $500 million cash that's in the system. That's going to go, and it's going to get basically loaned out. You're going to put a velocity – a money-multiple effect on it – and that it's going to create this runaway inflation.
And that's what everyone thought when we had quantitative one, quantitative two...remember quantitative two there was that open letter to Ben Bernanke by all these people that were saying that this was going to cause runaway inflation. The MMTers understood that that was not going to do – that was not going to create inflation. And the reason that it doesn’t create inflation is, if you think about JPMorgan and their behavior in terms of actually going out and making loans, does the fact that they have $500 million more in cash change their desire or their propensity to make any more loans?
I would argue that what... yeah, right? Like, they need a good borrower, and the fact is that they're not interested in how much cash they have on the balance sheet. They're more interested in their balance sheet in terms of the equity and the capitalization of their balance sheet that they're lending against. So when they go and sell that bond to the Federal Reserve, they don't make any more loans, and that doesn't happen. And what actually ends up happening is, it goes back eventually onto the Federal Reserve balance sheet in terms of it gets deposited back with them as interest on excess reserves.
And so, this goes back to like MMT understood this. And once I started to get into this, I realized that they understood the plumbing. Now, a lot of people will say MMT is being highjacked by the left to justify all sorts of spending. Well, if you actually go and look at what MMT professors say, they will argue that those are political choices that you make as consequences of understanding how the system works. But we could just as easily – instead of doing fiscal spending, we could just as easily do tax cuts. And I've always argued that Donald Trump was actually the most MMT president that we've ever had.
And the reason I say that is because, eight years into an economic expansion, at a point when the Keynesians would've told you that you should be balancing the budget, the Austrians would be telling you that they should be raising rates because rates are too high and that's going to cause problems... what Donald Trump did was, he cut taxes. And when they asked him why if the economy's so good are you cutting taxes, he responded, "Because there's no inflation." And that is a pure MMT argument.
And so, when you go back and you're asking me, you say, "Is it convenient that MMT is gaining prominence at this point," I would argue that this was a natural outcome to the fact that monetary policy at the zero-bound becomes ineffective and potent. and so, the reality is that we either would have to accept – [clears throat] – sorry, excuse me – European-type kind of stagnation... or not even stagnation, deflation, because they have outright deflation, or come up with another solution. And so, to me MMT is a logical outcome to what we've been doing.
Dan Ferris: Right. And doesn’t MMT – to me, MMT... it's too naïve, it's too trusting. Like, it depends on human beings to not respond to political power-grabs. And it depends on human beings to be prudent at all times and to recognize that not creating inflation is more important than getting your pet political projects paid for. I just feel like – and our explanation, I like it better. I mean. I was just sort of saying, "Yeah. It's convenient, isn't it?" But I feel like you backed up what I said because you're saying, "Yes. This is the logical outcome." Because let's face it, Kevin. In the end, the only tool they have is printing money, right?
Kevin Muir: Right. But –
Dan Ferris: The last refuge.
Kevin Muir: Yeah. So I don't disagree. Now, having said that let's look at the alternative. The alternative is, we continually have an economy that is operating under potential, and we have a situation where we try to solve it with more and more negative interest rates. Which you see Kenneth Rogoff or Carmen Reinhart talking about how we should all go digital, because that's the only way we're going to get the economy going. And so, I look around, and I think to myself, "No, I don't think that's a good solution either." I always joke and say if I was the benevolent dictator of Europe, what I would do is immediately raise rates to 100 basis points, and then I would cut taxes and spend until the economy balanced."
And I guess where I differ a little bit from those who say, "You know, we shouldn't even go down the MMT road," is that I look at it and say, "Yes. I acknowledge that eventually MMT will be abused. But I would kind of point out that monetarism is been abused. We have obscenely low interest rates in Europe. We keep trying to fix these things with quantitative easing. And so, I look at it and go, "Yeah. OK. It's not perfect. But it's better than anything else." And then regardless of whether we think it's better or not, what you should be asking yourself is, "What is going to happen?" And I look at that, and that's an easier answer to, you know... question to answer.
Dan Ferris: Yeah. I agree. When I hear you say these things – you're in favor of this, or you think that – I don't hear you actually endorsing any of this. I hear you taking the world as it is – I mean, and by all mean correct me if I'm wrong here. I hear you taking the world as it is and not thinking, for example, that we're actually going to shrink the government and shrink spending by some dramatic amount. You don't even bother with that because you know it's not going to happen.
So what you might want to happen doesn’t enter into it. And that's one of the things that I like about you. And frankly, we've had Mark Dow and Cullen Roche and some of the other macro guys on the program. And you all have that perspective. You all share that. You take the world as it is and try to figure out what's most likely. And I don't know. It's just really valuable. And I kind of don’t do that enough. I'm always injecting what I want the world to look like, you know? So I need you to keep me sort of on the right track and keep the listeners dealing 100% with reality. And I appreciate it.
Kevin Muir: Well, it's very kind of you to put me with those two other fellows that I think the world of. One of the things that I will say, though, is if all-of-a-sudden I saw the deficit hawks were turning to the political forefront – and let's just say, for example, we got a situation where the Tea Party made a grand resurgence and that took over – well then, I would change my investment philosophy. Because even though I think bonds are terrible, if we did try to solve it by cutting and we did do procyclical cuts at this point, it would mean that we would enter into a, you know, environment that's very similar to Europe and we could actually have negative rates. I just don't see that as a logical outcome.
Dan Ferris: You don't see negative rates as logical outcome?
Kevin Muir: No. Oh, no. I don't think we're going to have negative rates. I think that the Federal Reserve has basically told you they don't want them and that they keep emphasizing that it is time for fiscal to take over. And the only way that we're going to have negative rates in my opinion is if we get grid lock in Washington and the spending stops. But I look at Washington, and I look at... it's not just Washington. It's throughout the world. I look at it that the governments have woken up to the fact that monetarism doesn't work and therefore, they are – basically it is their obligation to spend to fix the economy. Either that or they just accept a kind of an implosion and a credit contraction.
And you might argue that this is morally more correct. But I would say it doesn’t matter what's morally more correct, but this is what happens. And if we – like, let's go back to the Great Financial Crisis. There is a big part of me that thinks that we might've been better off just letting the banks go bankrupt, and we go through it all – take the pain, and we have kind of six months to a year of really bad environment and then, boom, boom, boom, we wipe off a lot of debt and we start much cleaner, and we're more able to grow. And that would've been kind of an Austrian-type response. They believe in kind of the cleansing correction.
And I say, "Well, you know, it doesn’t matter. We could argue all day long about what's better off. The reality is that the society has showed that they have no desire, no stomach, to go through that sort of kind of correction." And since then, we've only added more debt. So I just see that that's – it's not something that is going to turn around. And I think that, as I say, 2020 was a change in attitude. Even back in the Great Financial Crisis, there was still... even the Democrats were talking about trying to balance budgets, being prudent and stuff like that.
No one talks about that anymore. Here, I'm a Canadian here in Canada. Our government came up and said, "We are spending and going into debt so that you don't have to." And this is a much different narrative change. And in that narrative change, we need to understand that the responses – the market response that we saw in the Great Financial Crisis... they're not going to be the same as this time. And the reason is because the government is spending.
Dan Ferris: All right. You know, you paint the picture of someone [laughs] who takes reality at its value. And I really appreciate that. In your heart of heart... I'm going to try to squeeze this out of you here, now that we've established that. In our heart of hearts, Kevin, does all this money-printing bother you? Because I have to tell you, it bothers the hell out of me. It just seems so wrong. It's not real wealth. And you print enough of it, and it gets allocated into all kinds of places where money would not have been allocated. You know once the velocity gets going, once people actually start spending. And like you say, it usually starts with the government. It just bothers the hell out of me. It seems so wrong. Take me to school here. What do you think?
Kevin Muir: Well, you know, we are venturing into what should be done as opposed to what will be done. It doesn't bother me as much. And I'll tell you a few reasons why. First of all, I think that we're going to have some big conflict between generations going forward. And a lot of times when I hear people talking about the problems with money-printing they happen to be from the Boomer generation. Now, I want to tell you I'm a Gen X. The Gen X is notorious for being lazy and just sitting around watching as the Millennials and the Boomers yell at each other.
So I [laughs] am kind of squarely in the middle. But I'm sympathetic to the idea that the Millennials will sit there getting lectured about the problems of a government's spending and printing. Meanwhile, the Boomers have allocated themselves all this – let's just say all these pensions and all these kinds of benefits. But the reality is that they've left us more in debt. And so, they actually haven't – all those benefits that they've promised themselves haven't actually been set aside, you know? If we just take the group as a whole.
And so, I know I'm getting myself into trouble with the Boomers, and a lot of Boomers will be kind of cursing me that they have gone, and they've saved money and they've put it aside. And I do understand that. And I am sympathetic to those people who were prudent. But as a whole, our society has not been prudent and has not put that money aside. And trying to balance it now at this stage will be putting an undue burden on the younger generation that will be forced to pay for the older generation. And so, I guess I understand the pushback for those that have saved and are going to see their value of their assets go down. I would go back and say, "Instead of worrying about what should be done, let's just think about what will be done. And therefore, as a Boomer with those assets, I think you should be protecting yourself against inflation." Because that is who inflation is going to hurt. Most people think that inflation hurts the poor and the most... and I am sympathetic to that idea. But I suspect that what you'll find is, we will see kind of minimum-wage going up. We will see governments adjusting for that. But what will really happen is that these financial assets that have been kind of propped up through monetarism... they will go down in value against real assets. And that is what's going to happen. And in doing so, there's going to be a shift of wealth from the older generation to the younger generation.
Dan Ferris: Yeah. But wait a minute. The older generation, they own real assets though. The younger generation can't afford anything. That's the problem, right? And their wages haven't grown.
Kevin Muir: So you're correct. So they do own stuff. But if you think about the younger generation, they have more debt. And so, who benefits from inflation?
Dan Ferris: Ah. I see.
Kevin Muir: Well, I can tell you who doesn’t, you know? Anybody that owns Treasury bonds is going to get crushed, right? Those things are all – anybody with debt that's worth... that debt gets inflated away. Think about what – everyone talks about the skyrocketing amount of debt. Well, think about what happens if we have a decade of 5% inflation. A lot of that debt goes away. Now listen. There are huge amounts of all sorts of problems that occur to society when you start to get inflation.
And I am not trying to diminish that. I am not trying to tell you that this is for sure going to work. I'm not even telling you that it's going to... that they're going to be able to control it. Many MMTers will argue that they're going to be able to control it. I'm more in your camp. I think they're not going to be able to control it. I think the surprises will be to the upside. And again. I think this is what's going to happen. I think it's going to be abused, so therefore I want to have my portfolio set up in a way that benefits from that.
Dan Ferris: Well, it's certainly– your view is certainly all of a piece and makes sense. I guess I got you some – a little bit. I got you to kind of tiptoe into the land of what ought to be. [Laughs] So I'm grateful for that.
Kevin Muir: You're trying hard. You're trying hard to get me to go... so, Dan, I will tell you – I will tell you one thing in terms of this. I believe that the government spending money to put unemployed people to work is a good thing. And I look at it as, if we're thinking about how much society produces, having an unemployment rate of five, 10, or even 15% makes no sense to me. And I'll tell you another thing that I disagree with many MMTers. They believe in this UBI. Universal basic income.
And you give everyone money. I don’t believe in that. I think that's a terrible policy. Having said that, in terms of a job guarantee – meaning that the government will put everyone to work – I do believe in that. I don't see any reason why you should have unemployment. I would rather have people going – the government paying them to do something even paying them to go to school to get retrained and to make it so our economy produces more. And ultimately – so one of the things that I will agree with you, and I'll give you this is that I get really frustrated with Paul Krugman.
And the reason I get frustrated with Paul Krugman is that he doesn't seem to believe in the broken window fallacy, meaning that he'll say that you can go and kind of get some people to dig a ditch and then other people to fill that ditch up and our economy's better off. I call it BS on that. That's terrible. That's not helping our economy. Not only from that. From an MMT point-of-view, I would argue that that's making it less productive, so therefore we will bump up against inflation much quicker. And so, we are going to produce less.
And so, I go and think about it as like if you're Stansberry Research, if you guys all of a sudden went and took out a $1 million loan and blew it all on a huge, big party and you got The Killers to play and there was free booze and it was just a great time... yeah, that would be a short-term economic kind of benefit as that money went out into the system. But it wouldn't be making our system more productive and your company more productive. And not only that, it would be leaving you worse off. Now having said that, if you went out and got a $1 million loan and hired people and went and bought more computers and invested in your company, that's a dramatically different kind of equation.
And so, when you go back to your argument about whether this money-printing is good or bad, I definitely think that one of the things that we are going to start to have to focus on is, "Which governments are truly investing their stimulus money, and "Which governments are just giving it away?" And I think that that is how you should be choosing... if you were thinking about a global environment or a global kind of landscape and you were you trying to pick which companies to invest in, that's how I would be choosing it. "Which are just basically giving people more money so that they can go buy another big-screen TV, and which are investing and actually making their society more productive?"
Dan Ferris: I have to say, when I hear the words like government investment or think about government capital allocation, it sounds like an oxymoron to me.
Kevin Muir: Right. So, Dan, you are a true – the right-wing kind of MMT... the guy who's pushed back on it. So I will tell you this. MMT was created by a fellow by the name of Warren Mosler. Warren Mosler was a bond trader, a hedge-fund manager. And he's actually very right-wing. Well, I wouldn't call him right-wing. But he's very libertarian, let us say. And he's very entrepreneurial. And he always kind of says that MMT means that you do fiscal stimulus. What if instead of the government spending that money... what if they taxed less? And I would argue that – let's just take the current environment. I don't think that taxing the upper... like, the problem with Trump's tax cuts is that it went too much to the corporations and to the wealthy.
Now, I know from a moral point of view people say, "But those are the people that pay taxes." And most taxes. And so, to make it effective you basically have to do it there. Well, put aside what should be done. Let's just talk about what will be done or what has been done and what the effects are on the economy. If you take and give a really wealthy fellow or woman a tax cut, chances are that they are going to – they've already got everything that they need. They're not going to go buy another toaster oven. They're not going to go spend it buying a bigger house.
Or maybe they buy a bigger house, but probably not because they probably already have a big house. They're just going to bid up the price of financial assets is what's, in essence, happened. Same with the corporations. The reality is that they gave them a tax cut, and they just bought back stock with it. But if we went and gave a tax cut to the lower end – like think about... I don’t know what it is I the U.S. But in Canada, your first $12,000 is tax-free. So let's just assume it's the same. What if you made it, instead of your first $12,000 was tax-free, you made it your first $25,000 was tax-free? And then, think about where that – what would happen to that money.
And so, when you say that you don't like fiscal stimulus with the government spending because the government has a huge kind of history of basically allocating incorrectly, I say, "Fine. Another alternative is, instead of the government spending that money, why don't we just tax less? But let's tax less in a way that actually helps our economy. And that would be by taxing the lower-end people because they have the propensity to spend much greater than the higher-end people.
Dan Ferris: Well, I like the sound of that. And I know when you call [laughs] – when you say I'm right-wing, you're just reacting to a viewpoint that we haven't given a lot of context to. But I need my listeners to know that that is not me at all, and I'm –
Kevin Muir: Oh. I'm sorry, Dan. I didn't realize that.
Dan Ferris: I would put myself – no. No. No. I would put myself squarely in the laissez-faire camp. Just let's leave it at that. Just for the listener's sake, because he might be boiling on the other end of this. [Laughs] He might be sitting there going, "Dan's right-wing? I didn't know that." You know?
Kevin Muir: Oh, I'm sorry. I did not realize that. One of the things that I find – yeah. Like, it's difficult... is that often I meant right wing in terms of maybe your economic beliefs. and too often, I find people kind of confuse the two. And I do apologize of that. I didn't mean to put words in your mouth, Dan.
Dan Ferris: No, no, no. You're being very polite, which I know you're a very polite guy. But don't worry about it, Kevin, at all. It's not a big deal. That was just between me and the listener. So, you know, I love talking with you, man. You're a breath of fresh air to me because a lot of people like – I always feel like they're trying to tell me what they think the world wants to hear rather than what they really think based on their – in your case, decades of experience and your particular perspective as a macro guy. And I really appreciate it. I'm glad you come and talk to us, and you will be getting another invitation in, you know, six or 12 months or whatever it is. We're at the end of our time. But I want to do what I always do, Kevin. I want to ask you, if you could leave our listener with just one idea today, what would that one idea be?
Kevin Muir: OK.
Dan Ferris: It could be anything.
Kevin Muir: Sure. Let's talk about... over the past decade, the United States has definitely been the market to be in, in terms of the stock market and even the bond market. Because the rest of the world actually had negative real rates, meaning the rates were below the rate of inflation. And the U.S. had positive real rates for most of it. And with that, we've had basically capital throughout the globe be attracted to the U.S. And if you think about it – like imagine if you're a European pension fund manager. Could you have been invested in European stocks? Chances are if you were, instead of U.S. stocks, you don't have a job anymore because European stocks have stunk.
But anyway. So what's happened is, we've had a decade of the U.S. attracting all the capital and the stock market being the place to be. And in doing so, it is kind of – the price of both the financial assets and even the currency has gone way up. And most of the world is overweight U.S. financial assets. Now, I think that what's going to happen is that, as the... especially as the Democrats. I don’t think that they're going to be that friendly to business. And I look at the full valuations of the tech stocks in the U.S.
And I think to myself, "I don't know how this isn't a bubble," in terms of valuation. "And I don't know when it's going to end, but I definitely think that those stocks – those five big stocks – are hugely overpriced." And I think to myself, "I look at it and say, 'This – we're going to wake up a year from now, and these stocks will have greatly underperformed the rest of the world. And I would argue that the Internet is always local.'" Meaning that if you go and you want to buy something, you buy it on Amazon.
But someone in China buys it on... whatever the Chinese equivalent of Amazon is. and so, one of the things that I like – I like still being invested in tech but buying the emerging markets ETF – which is the emerging markets and tech ETF... which is EMQQ. And what that is, is it's the emerging markets Internet and e-commerce ETF. It has a wide variety of kind of tech names that are throughout the world. And I think that you're going to wake up, that will have greatly outperformed the FAANG when we look kind of one, five-years, or 10 years out.
Dan Ferris: OK, Kevin. I need you to confirm for our listener that you and I did not talk about that before you came on the program. Because I've said it a bunch of times. We didn't, right?
Kevin Muir: I didn't realize that. No. I didn’t realize that. Are you a big fan?
Dan Ferris: No. I'm not a fan. I think – yeah. I think it's overdone. Everything you just said, I’m sitting here nodding my head going, "Yes, yes, yes."
Kevin Muir: Yeah. Oh, you mean you're not a fan of the EMQQ. You're more of just the fact that the-
Dan Ferris: No, no, no. I'm not a fan of the FAANGs.
Kevin Muir: So actually, I fell over the main reason... is the fact is that if you watch this – what is the movie that's... there's a new movie on Netflix about the Silicon Valley and the effects on the – I can't remember. I can't remember this now. Silicon Valley... Netflix... is that movie. And it's a documentary. And everyone that's listening will be like, "Oh. I know the documentary." There's a documentary, and it goes through the problem with technology and the problem that were facing in terms of the bad effect that it has out in the kind of...in the environment. How it's changing us.
And I look at this, and I think to myself, "The mood amongst kind of consumer is changing. People are realizing that being glued to Twitter, being glued to Facebook is not good. And so, I just look at these things, these stocks, and I think to myself, "They're fully priced. You have the government coming after them. Even the people are starting to realize they're not good for them. And meanwhile, everyone's over-invested in the U.S. assets in general. So I think that these FAANGs are a disaster waiting to happen. And I think that you should be kind of skipping them.
And the one last thing I'll leave you with is that if you are a retail investor, you have one of the biggest advantages out there. It's the fact that you are not benchmarked to whatever benchmark that these institutional guys and gals are benchmarked to, meaning that they cannot afford to not be long the FAANGs because if they're not long and they keep going up, then they underperform and it's really a huge amount of pressure. And they lose assets. Whereas you, as a retail investor, can look at this and say, "This is madness. This is overpriced. I understand that I might underperform for the next three months, six months, even a year – maybe two years. But I know that in the long run I'll be better off." That is one of your biggest advantages. Make sure you take advantage of it.
Dan Ferris: Great. Well put. Thank you. And thanks for being here today. I had a great time talking with you.
Kevin Muir: My pleasure. It was great to be with you too, Dan.
Dan Ferris: All right. That was a great talk. I love talking with Kevin. Like I said. He just always lays it out there. And you are getting a really genuine view by a real risk-taking practitioner with decades of experience. And it doesn't – it hardly gets better than that. I don't know if it gets better than that at all. Fantastic. All right. Let's forge ahead and see what's in the mailbag today. [Music plays and stops] I want to tell you about my friend Steve Sjuggerud for a minute. Steve has been at Stansberry just about as long as I have. He's been in the newsletter business longer than I have by a couple years.
And he is a really sharp guy. You know how I say I don't make predictions because I’m not good at it? Steve is good at it. He predicted the dot-com crash. He predicted the housing bust, you know? The Financial Crisis. He predicted the Dow Jones Industrial Average would hit 20,000, and it did. And the most amazing thing to me is, he has been consistently bullish on stocks for the past 11 years. He's always said we're going to get a raging bull market after the big 2009 crash. And we did. And he was right. And he stuck with it.
And he's got this other idea about the melt-up about how stocks are going to surge upward. And he tells me he's got a prediction. He does it. He doesn't tell me what it is. So I don't know what it is. But on Wednesday, October 21 at 8 p.m., Steve is going to make a big announcement about what you ought to do with your money before the end of this year. And look. It's already late in the year. So you don't want to miss this, right? We're living in very uncertain times. Everybody is constantly e-mailing and writing in and asking us, "You know, what do we do? What do we do?" Especially with the election coming up. And I can think there's no better person than Steve Sjuggerud to answer that question.
So if you want to see – if you want to sign up and see what Steve has to say, Wednesday, October 21, 8 p.m., you can just right now to go investorhourmeltup.com. That's investorhourmeltup.com. Sign up. Find out what's on Steve's mind. You won't be disappointed. [Music plays and stops] In the mailbag each week, you and I have an honest conversation about investing or whatever is on your mind. Just send your questions, comments and politely worded criticisms please to [email protected] I read every word of every e-mail you Send me, and I respond to as many as possible. We had some good stuff this week. A little on the lighter side this week but some good stuff.
First, we have Lance K. And Lance K. falls squarely into the politely worded criticisms department. And he says, "Hi. I really enjoyed your convo with this guy" – meaning Gad Saad from last week. "Made me chuckle more than once. I have to tell you your comment about right and left wackos being equally bad was amazingly naïve. How can you even think that? Where are the conservative riots? Looting? Was there ever this type of howling in public or Congress on the right during Obama's term? I honestly [laughs] think you have been immersed too long in the parasitic liberal culture of the Pacific Northwest. This view honestly makes me question your objectivity. Otherwise, regular listener. Like your show, especially the mailbag. Lance K."
So you question my objectivity. The guy who says both sides have problems, you question that guy's objectivity. The guy who says, "On the right and on the left, neither one of these bands of idiots is shrinking the government. So they're all having the exact same net effect on society." That guy is not objective? The guy who says, "Right or left, you're a statist. And a statist always wants more control of my life." That guy is not objective about right and left? What are you smoking, Lance? [Laughs]
And you say, "I've been immersed too long in the parasitic liberal culture of the Pacific Northwest," even though I tell you I can't stand these people? I'm surrounded by people I can't even talk with at a cocktail party? I don't – I'm sorry, but you're taking that comment and you're kind of running with it without thinking about what you're saying in my opinion. But I sort of get it, but you're dead wrong, I think. And of course, I'm going to say I'm objective about this. [Laughs] But you say, "It makes me question your objectivity," when I criticize both sides equally. You know, stop me when you get it.
You know, just stop me from talking when you finally get it because there's no way that the guy who says both sides have big problems, and both sides have the same net effect on society... is that guy really the one whose objectivity you need to question? How about the ones who stand up in public with a straight face and say, "I'm on this side, and I hate this side"? I question their objectivity. OK. You get the point. We got a little note from Ludvik H. this week. Ludvik is a longtime listener and frequent correspondent. He writes in much more often than I respond to. And, Ludvik, sorry I couldn’t read your whole e-mail. But you did say, "I have a few investment-related questions."
I love this first one, Ludvik. "No. 1: What sector outside gold, bitcoin, and real estate are you considering for investments for a mid-30-year-old legally blind Dutch Jew who's fleeing Europe?" That's an interesting way of putting that. But the second question you said is, "No. 2: What is your biggest mistake, and what can we learn from it? Ludvik H." Well, my answer to the first question is, I'm not sure about the 30-year-old legally blind Dutch Jew being... that person is go got have to think about what being 30 years old, legally blind, Dutch. and a Jew means to their portfolio. I can't – I'm not that, so I can't really comment on it.
You know, I'm a 58-year-old, not legally blind American theist of some kind. I don't even know. But you know the song I sing here, Ludvik. It's the same one. It's what I call the "true diversification portfolio." And the basic elements that I think represent a true diversification are stocks, plenty of cash – like 20% or more – plenty of gold and silver and a little bitcoin. And I think that the gold and silver and bitcoin get you outside of the financial system, or you could – I've also called it the currency regime several times on the program. But you get it, right?
So when the currency – when there's a problem with the currency, maybe there's also a problem with all the financial assets – the stocks and bonds. But maybe at that time, your bitcoin and your gold and silver are protecting you and gaining in value. You get it? So you got both parts of that. And there are other assets that you could put money into that'll get you outside the system. And I've encouraged you to think about it in a personal way. I found an anecdote which I told in my presentation last week at the Stansberry... we had a virtual conference because we couldn't have our annual Las Vegas Conference.
And I found this anecdote of a guy who was investing in casks of whiskey stored in a warehouse in Scotland, and he was making money with it. And he understood that very well, and he thought that was a good idea and that was something he believe in. I met a guy several years ago who told me... I just met him one time. I wish I could get an update. But I just don't have his contact information. And he said, "You know, I have most" – or a good chunk or a large portion or something like that – "of my retirement in Gibson, Les Paul, and Fender Stratocaster guitars." Which I found interesting. He was a musician, and he collected guitars. And he knew that space, right? It meant something personal to him.
So whatever that is for you, think about that. Some people know a lot about real estate. Some people know a lot about collectable coins. You get the point, right? You figure out what that is. And most of those things will get you outside the currency regime. No. 2 question. "What is your biggest mistake, and what can we learn from it?" My biggest mistake is something that I... actually, we have a video about it. And it tells you about the mistake and how I fixed it and so forth. And it was when I was very young, and I saved up a couple-thousand bucks. And I bought a certain, you know, direct-mail package that told me I could make a lot of money safely with less risk in commodity futures.
And it was like the most ill-timed, stupid, wrong thing in the world. And the guy eventually got prosecuted by the government for something. [Laughs] And the whole thing was like a big disaster. And what we learned from it is, it falls very hard on the comment I just made about personal investing. What we learned from it is, know your business, right? One of Ben Graham's foundational principles. Know your business. Know what you're doing. Understand it thoroughly. Don't just read some guy's pitch and go off half-cocked, you know? When I send out my newsletter, I hope my readers are looking at it and thinking about it and maybe doing a little of their own investigation. And some of them are. They write in, and they're very thoughtful folks. But that was the mistake. That's what I think you can learn from it. Good question. Thank you, Ludvik.
And let's see. Looks like we got a couple more here. One is from Romeo B. "Hi, Dan. Hope you are well as the narrative for gold keeps getting stronger, I fear that I am suffering from a huge confirmation bias. I was wondering if you could cover some of the most compelling reasons not to own gold on the podcast. Same question for bitcoin. I've recently heard that the bitcoin mining requires an unsustainable amount of electricity. Do you believe this is a valid argument? Thanks a lot. Romeo B."
That unsustainable amount of electricity does not sound right. I haven't heard a lot of that. I heard a little bit of it, but people who know what they're doing in mining bitcoin just point to various areas of the world where – because you do need a substantial amount of electricity to mine a lot of it. And they just point to the places in the world where electricity is cheap. As being, you know, not a bad spot to mind bitcoin. And a couple years ago, folks were saying, "Hey. You know, Pacific Northwest, we've got this cheap hydro power up there. That's not a bad place." That's all I know about that. I don’t know anything else.
But the most compelling reasons not to own gold on the podcast – same question for bitcoin. You said not to own gold. Well, it doesn’t yield anything. It doesn’t pay you anything. It's not going to pay you an income. It's not a bond. If you're looking for income, gold... you're just out of luck. While it is a monetary-type asset – it's money. But try spending it at the grocery store. You can't do it. Because it's not legal tender. Even though I think it makes great money, not everybody agrees with me. Certainly the government doesn’t like the competition. So they're not going to let you use it. and so, none of the businesses can accept it. The price of it will fluctuate in U.S. dollars with the strength or weakness of the U.S. dollar.
Over the longer-term, I mean... it's like an approximately 50-bagger since it was cut off from – since the U.S. dollar and gold parted company in 1971, gold is like approximately a 50-bagger. And so long term, it's done a great job. But, you know, in any given period, gold was like – very briefly, it was like $8.50 in 1980 and wound up down around $2.50 in 1999. So hey. If the dollar's strong for basically – just call it two decades, your gold is not going to look like it was a good idea. So those are some of the most compelling reasons I can think of not to own it.
And for bitcoin, the only compelling reason that comes to mind is, "What the hell is it?" Right? "What is it?" It's encoded bits and bytes somewhere, and you can take your encoded bits and bytes, and you can put them on a little like bitcoin wallet that's not online so it can't be hacked by someone in Russia or something. But, you know, meantime what the heck is it? [Laughs] I mean, I can give all the standard answers, but I'm basically reading from the bitcoin website or something. And why would anyone – why would you think that that is money when the price of it has fluctuated so wildly? That doesn’t look like a very good currency, does it? [Laughs]
That's one possible argument against it. Or really, I guess, two, right? Not knowing what the heck it is and seeing it fluctuate wildly against U.S. dollars. And what if it's – you know, it's actually been what I would call rather widely adopted. Lots of people will accept it. But what if this is it? What if this is the limit of bitcoin demand, and people decide, "Eh. You know, not worth it. We accept it, but none of our customers use it. So therefore, we're not going to accept it anymore." And otherwise, Romeo, that's all I got. I hope that helps you.
But just to be clear, I think you should own gold, and I think you should own bitcoin. That's the advice that I've given solidly on bitcoin for since, what, last December or so and on gold for the past few years. Actually, in gold almost since I've been a [laughs] published analyst. I've always liked gold. OK. Next and last, we hear from Tebish R. And Tebish just wants to share some comments. He says, "Hope you are well. I'm catching up with episodes as I recently had a baby girl and have been a little bit busy." Well, congratulations, Tebish. "I loved Episode 173," she says, "Especially a response on forest fires and climate change. I always wanted to share my thoughts on the issue but managed to hold out until today."
And then, I'm just going to skip ahead. He wants to share us a book with us that he thinks is a good idea to read. I have not read it. It's called The Great Global Warming Blunder: How Mother Nature Fooled the World's Top Climate Scientists, by Roy Spencer. And the reason I'm sharing it with you is because he's also published a chart in his e-mail to me. And the caption on the chart is something that I've pointed out in passing a couple of times. It's a chart of many, many, many of the climate models. There have been over 100 of them. I saw one figure. It was 130 of them.
And it says, "Observations continue to show considerably less warming than the climate models upon which energy policies are based." And I would say probably this is a Wittgenstein's ruler problem where, you know, the thing being measured is really the yardstick, right? So it's the energy policies that are dictating the existence of the climate models. The climate models are created to push the policy, in other words, right? In my opinion.
And the graph shows very clearly that the actual satellite data is the least-warm thing on the chart, you know? Since the '70s and '80s. The satellite data is much cooler, much less warm, just about the whole time over about roughly four decades, versus 100 or 130 climate models which are used to push agendas and seize control of government and so forth are much hotter, predicted much more warming. Thank you, Tebish, for pointing that out. It gives me another chance to repeat it. [Laughs]
So that's the mailbag, and 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 follow us on Facebook and Instagram. Our handle is @InvestorHour. Also follow us on Twitter where our handle is @Investor_Hour. If you have a guest you want me to interview, drop us a note at [email protected] Until next week. I'm Dan Ferris. Thanks for listening. [Music plays]
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