Episodes

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 Lawrence Lindsey. We're going to talk about his new book, Currency War, which is a fiction book, but Lawrence is an interesting guy. He was a Fed governor, and he's got lots of stuff to tell us about that and the book Currency War and his thoughts on the economy. I can't wait to talk to him.

This week in the mailbag, a huge crypto question answered by Eric Wade. And listener Dale T. wants to know how to be short stocks. And remember, the mailbag is a conversation, so talk to me. Call our listener feedback line, 800-381-2357, and tell me what's on your mind, and maybe hear your voice on the show. And my opening rant, this week… inflation, inflation, inflation. I'll talk about that and more right now on the Stansberry Investor Hour.

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So as I sit here in front of my little microphone, inflation came in 5.4% in July, Core Consumer Price Index came in 4%. That 5.4% figure is the same as June. And the core rate of 4%, that's minus food and energy. [Laughs] I've never understood this. Why are food and energy not part of the core? If there's anything that's core to my life, it's food and energy. And the other stuff, vehicles and restaurant meals and just all the other stuff that's in the regular CPI inflation index is a little bit less core than food and energy. [Laughs] So, I don't really get it, I don't know what economists think they're doing.

When I hear the word "economist," I go, "Oh, boy, here we go." But the narrative from the Federal Reserve is inflation is transitory, right? It's just a temporary effect, and it's exacerbated by the COVID lockdown and coming out of that, and the surge in demand for goods pushes up the prices of those goods. Because the supply was limited, people couldn't go to work, they couldn't make things, inventories were run down, etc., etc., right? So, it's just all an effect of the COVID lockdown and maybe stimulus checks. Of course, people can buy things, so they do want to buy them, there is demand, and since the supply is lower, we get higher prices.

I don't buy it. I don't think that you can print trillions of dollars in short order. The latest figure I heard was that 40% of all the dollars in existence were printed since the beginning of the COVID episode – just call it March 2020. And I know all the arguments for why that hasn't multiplied throughout the economy, right, the Fed prints money, it buys bonds, and those bonds go into the Fed's balance sheet, cash goes onto banks' balance sheets as reserves and just sits there. Because the banks aren't lending like crazy, so they can't lend and spend and multiply that effect throughout the economy. But first of all, the government can spend a lot, can't it, and we can spend a lot, because the government gave us a bunch of money, gave people a lot of money for that purpose, so they could spend it. [Laughs]

So, I think there is some real inflation, and my point is, I don't know what number is real, but I think a substantially greater portion of these inflation numbers is real inflation not merely caused by the supply-demand imbalances than people suspect. And I think we are completely, as a society, all our institutions –government, the Fed, businesses – just as a society, we're so accustomed to being told that we don't have inflation, when the prices of things have been going up for years and years. Your rent has gone up, it's higher than it was a few years ago, many years ago, a year ago. And your food gets more expensive, and life generally gets more expensive. So, you can't tell me there's been no inflation.

Overall, though we just haven't seen this rampant... prices soaring at the gas pump, and prices soaring like 1970s-style, so we just have this strong expectation that there is no inflation. I think there's a huge psychological component to that, so we're not prepared. And we look at inflation going up 5%, and maybe we end the year higher than that, and maybe next year, instead of 5%, it's 10%, or maybe eight, nine – whatever. These numbers keep going up and they'll sneak up on us, and then we'll start talking about it. It's the same dynamic as with stock prices, right?

At the bottom, nobody wants to buy. Halfway up, people are skeptical. Three-quarters of the way up, people are starting to get interested. And then at the top, when everybody's crazy, everybody wants to get involved. And there's a similar dynamic with inflation. But you know what I say, because I've said it a bunch of times, and I will continue saying it because it's the only thing that makes real sense, that doesn't depend on speculating on a prediction. If you want to speculate on a prediction of inflation, be my guest. You're not doing anything that makes sense to me, but I'm not you. Maybe that's cool for you, that's a good idea for you. That's your decision.

But my advice and my view is that you prepare, you don't predict. And I keep reiterating that the ultimate preparation-not-prediction portfolio is… keep your stocks – I say stocks and bonds, but mostly stocks, really… have plenty of cash – and by that I mean 20% or more, between 20 and 40, not 50%, you know, you don't want half your portfolio in cash, doesn't make sense… keep some gold and silver… and buy a little bitcoin – or not, bitcoin might not be for you. And then other people I've recognized have these other stores of value over the very long term, the longest term, for generations, in things like art and real estate and – and gold is actually one of those.

But I want to focus on, not the gold and the real estate, I want to focus on stocks, how are stocks supposed to be in this. If I think we're going to have inflation, that's bad for business, right? Yeah, it is. But if you are focused on businesses that earn consistently high returns – I talked about my five clues, last week, and what was the last one? Consistently high returns on equity. So, if inflation is running really hot, 8, 9, 10%, and you've got a portfolio of businesses doing 20, 30, 40, 50% returns on equity, the one that we're recommending this month – in the new issue of Extreme Value that comes out this Friday, Friday the 13 of August – they have been on a growth jag, and their returns on equity are up around 40, 50, 60, 70%.

They're a bit volatile, I explain why in the report, but – but if you're doing that kind of stuff, 40% returns on equity, you're crushing inflation – you're crushing it. And that is why you want to focus on those metrics, those return metrics. That's why we like – businesses that gush free cashflow, they tend to be businesses – well, by definition, they're businesses that make a lot more cash profit after all taxes and expenses and reinvestment in the business. So, they have relatively lower capital requirements, that reinvestment in the business, and investments in new growth. Those are capital expenditures, maintenance and new growth capital expenditures.

If you're gushing cash in excess of those requirements, by definition, you are crushing your capital requirements, so you're earning relatively great returns on capital. And if they're consistently high over time like that, you got a great business on your hands and you're going to trounce inflation. Now, overall, if you look at the returns on capital of the S&P 500, and I just got a quick chart, this morning, going back 30 years. And actually, the data didn't even – I hit the 30-year button and I only got back to 1999. [Laughs] So just call it 22 years, then. We're looking at, basically, a sideways movement in returns on equity, with the peak up around 18% and the trough in an absolute crisis between 8 and 10% returns on equity.

So, over time, if you're returning 14, 15% returns on equity, as long as you're beating inflation, that relative margin of 5% is probably actually going to treat you pretty well. It doesn't sound like much, but over time, it will treat you pretty well. And you don't have to settle for that, because I don't think it's really difficult to identify businesses that earn high returns on capital and have good competitive advantages. The hard part isn't the technical part of identifying those good stocks. The hard part is hanging on to them. [Laughs] The hard part is hanging on to them when they fall 20 or 30%.

Amazon has fallen 30%-plus multiple times, on the way to a major enormous 1,000-fold, multi-multibagger. And other really great businesses do less well than that, but they still do, you know, 10, 20, 30, 40, 100 times your money. But you've got to hold through drawdowns. There's no way you're going to make that kind of return without holding through the drawdowns. And that's the tough part. That really is where I need to stop.

Because what have I told you? I told you that, yes, hold your gold and even your bitcoin, by all means, do that, to prepare your portfolio for inflation. But don't forget that the returns on the capital, the equity capital that the businesses that you own are investing, when they get that big return and then reinvest it for another round of that big return, that compounding at those high rates, man, you can't beat that. You can't beat it. It's just emotionally difficult to hang on over the long term, and that's what you got to learn to do. And that, I think, is how you really – you've got to use that tool to prepare for inflation.

All right, so my quote of the week is sort of, it's an abstract reference to this idea of preparing, right? And it's by Thomas Sowell, it's in his book Basic Economics – which is an excellent book, by the way. I read it years ago when it first came out, and maybe I need to dip back into it, because this quote is gold. Thomas Sowell says, "Life does not ask us what we want. It presents us with options. The market is what it is. It doesn't matter what you want out of it. It matters what the alternatives are available at any given moment."

What alternatives are available today? Well, [laughs] you could buy a 10-year bond yielding something like, I don't know, 1.3% or something. You can buy stocks at 30 times adjusted earnings, like CAPE earnings. And you can buy real estate that's just gone up a whole bunch. It's not easy, but these are the options you're presented with, you have to know yourself as an investor, and you've got to decide what to do with your money. "Life does not ask us what we want. It presents us with options." Thomas Sowell, from Basic Economics, good stuff.

All right, can't wait to talk with Larry Lindsey. Let's do it right now.

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Today's guest is Lawrence Lindsey. Dr. Lawrence Lindsey is the president and chief executive officer of the Lindsey Group, an economic advisory firm based in Washington, D.C. And he's held leading positions in government, academia, and business. God bless you, Larry, for doing all three – few have. Lindsey served as George W. Bush's chief economic advisor during the then candidate's 2000 presidential campaign. He later held top positions in the Bush Administration, including assistant to the president for policy development, and director of the National Economic Council. From 1997 until 2001, Lindsey was managing director of Economic Strategies, a global consulting firm.

From 1991 to 1997, he was a governor of the U.S. Federal Reserve system, and you'd better believe we're going to talk about that one. He's the author of numerous articles and five nonfiction books, The Growth Experiment, Economic Puppet Masters, What a President Should Know…But Most Learn Too Late, The Growth Experiment Revisited, and Conspiracies of the Ruling Class. And we're going to talk about his new fiction book, Currency War, today.

Larry Lindsey, welcome to the show, sir.

Larry Lindsey:            It's a pleasure to be here.

Dan Ferris:                 You've been a busy man, over the years. [Laughs]

Larry Lindsey:            Yeah, well, my father would look at that resume and say, "You can't hold a job, that's what it looks like."

Dan Ferris:                 [Laughs] That's right. So, I have to dive in because I'm too curious, my curiosity has gotten me here, a governor of the Federal Reserve system for, what, eight years?

Larry Lindsey:            I was there for five and a half.

Dan Ferris:                 Five and a half, I'm sorry, eight was the other stint. So, five-and-a-half years as a governor of the Federal Reserve system – boy, the stories you must have to tell.

Larry Lindsey:            Yes, but, mm, I can't tell some of them. [Laughter]

Dan Ferris:                 You'd have to kill me, right? OK.

Larry Lindsey:            Right, right.

Dan Ferris:                 Is it something that you just don't like to comment on because it's kind of bad for you to do so? Or –

Larry Lindsey:            No, I talk about monetary policy all the time, but things that are confidential remain confidential, and but that doesn't inhibit me. I'm a pretty outspoken fellow.

Dan Ferris:                 Yeah, that's right [laughs], hence, your presence on the show. So, I'm just curious if you have kind of heuristics, rules of thumb or key insights that you learned from five-and-a-half years sort of inside the belly of the beast.

Larry Lindsey:            Sure. Well, that and my other experiences taught me that what really drives public policy is institutional self-interests, not necessarily individuals. And the Fed acts to preserve itself and expand its power. And delivering good outcomes is part of that process, and sometimes it has and sometimes it hasn't. But I think it matters less who the chair is, and more what the institution thinks it should do.

Dan Ferris:                 So, and what the institution thinks, so that tells me there's consensus involved in all these decisions, we're not just getting the Jerome Powell version, in other words. He's taking in a lot more opinions and processing them.

Larry Lindsey:            The FOMC is more like a board of directors, it's not a legislature. And so, most votes tend to be unanimous, as they are on a board of directors, but that doesn't mean the people sitting around the table are potted plants.

Dan Ferris:                 [Laughs] OK, not potted plants. Hopefully, "not potted plants" is not the best thing that we can say about the Federal Open Market Committee. I'm not sure where I was headed with this Fed thing – I just saw it on your bio and I thought, "Wow, we've never had such a guest on the program," so there has to be something juicy that you can tell us. Not potted plants, you know, [laughs] [crosstalk].

Larry Lindsey:            [Crosstalk] that doesn't do it, but you can go back. I was a troublemaker. I was definitely not a potting plant. I was like a fast-growing vine, or something like that, and at that point, I was sort of a record-setter in terms of dissent. I dissented four times out of 41, so it was like a 10% dissent rate, and that made me virtually an apostate. So, yeah, well, I paid the price. The chair, Alan Greenspan – who, by the way, I consider a good friend [laughs] – didn't, you know, wanted to make sure that I knew I was being a troublemaker, and wanted to keep me out of mischief as much as possible. So, he gave me the two assignments no one really wants to do.

First, I had to head the division called Community Affairs, Consumer and Community Affairs. So, I had all kinds of fun things to do, like anti-discrimination legislation, Community Reinvestment Act, things no one in their right mind would want to touch, because even back then, anything you said made you a little bit toxic. And my other sanction was, I got to be the Fed governor who had to travel to Japan all the time, 14-hour flight [laughs], and that kept me out of the country and all the rest. So, on the other hand, those two experiences taught me a lot, because when we got to the housing bubble and crash, first of all, I had seen a bubble firsthand, when I traveled to Japan. And when I did Consumer and Community Affairs, I was right there in low-income housing markets, and I could see what a housing crash would do. So, in the end, I think, when I finally got a real job in the private sector, my experiences really helped me out.

Dan Ferris:                 OK. And I know we're probably going to talk about the Fed more – we should dive in, and we should start talking about this new book of yours, so, Currency War. And it is a fiction book, not a nonfiction book, not a pure economics book. First of all, what possessed you to write a fiction book?

Larry Lindsey:            [Laughter] Oh, that's a great question. Well, I think –

Dan Ferris:                 It's a little bit competitive out there in the fiction world.

Larry Lindsey:            Yeah, no, there is – most people tend to think of economics as being a dry subject, and, so, I wanted to reach a broader audience, I think it has a very important message. It's about credibility for currencies, it's about what China is up to in trying to replace the dollar. And lathering that up with action, suspense, and sex was probably a good way to sugarcoat it and make it go down more easily. And that was intent No. 1. The other thing is, you can say a lot more in a fiction book than you can in a nonfiction book, because things are much more easily implied.

So, if you want to see Secrets of the Temple, they're right there in Currency War, it's just that they're gussied up in fiction. And as we all know, in a work of fiction, any resemblance to people or events is purely coincidental.

Dan Ferris:                 Purely. [Laughs]

Larry Lindsey:            Right, absolutely, and if you believe that one, then you believe everything we say in Washington.

Dan Ferris:                 Right, OK, which is, they're all telling the truth, as well, right?

Larry Lindsey:            Ah, we know that.

Dan Ferris:                 [Laughs] That's right, what do you know, you're just a fiction writer, you're just a storyteller.

Larry Lindsey:            That's right. [Laughs]

Dan Ferris:                 So, as soon as I saw the title of the book, I thought of James Rickards' book, which came out I think about nine or 10 years ago, it's called Currency Wars, and he makes reference to at least one previous one. He says that the measures that Nixon took in 1971 were to try to end a currency war that was hurting the U.S. dollar rather badly. And it makes me wonder, it makes me wonder about the nature of the current currency war that you are writing about. Obviously, it's a work of fiction, but we assume the currency war is real. [Laughs]

Larry Lindsey:            Sure. Well, so, Nixon got us out of the bind that we'd created after World War II. We became "the" currency, and everyone else based their currency against the U.S. dollar. Well, that meant they could move their currency values up and down, generally down, to gain competitive advantage, and we were stuck. And what Nixon did was get us out of that arrangement. I'm not sure it was as much of a war, because it was really more of self-defense, I guess. The alternative would've been to run a much tighter monetary policy, and that just wasn't politically in the cards. So, that's one difference.

The other – and this is more important – is this war is deliberate. This is a war of aggression. Xi Jinping is quite different from his predecessors in that his primary goal isn't to make China rich, it's to make China powerful and to keep the Communist Party completely in charge of China. And so, one way of dislodging America is by dislodging the dollar as the world reserve currency.

Dan Ferris:                 So, I'm sure our listeners, at this point, are going to go, "Oh, wait a minute, he was talking about China, and then he talked about dislodging the dollar." So, in other words, to keep the communist party in power and to keep China in power, to give China more power, keep the Communist Party in power, you must dislodge the dollar. That is the nature of the currency war.

Larry Lindsey:            Oh, it's very important that it's certainly one front in their much larger war. The stated goal of the Communist Party of China is to become the world superpower, no later than 2049 – let me stress the word "the" world superpower, not one of the world's superpowers – and that means that's bad news for us. If part of that process is taking the dollar down, and if they succeed in doing that, then the U.S. is going to lose a big advantage that it has. If we're not the world reserve currency, it's going to be a lot harder for us to finance our deficits.

Dan Ferris:                 Which are growing in leaps and bounds as we speak.

Larry Lindsey:            Right, we peddle a lot of them to foreigners, and if we're not the world reserve currency, we are a lot less attractive as a place for investment.

Dan Ferris:                 OK, so, I was going to ask, it sounds like I know the direction you're headed here, but I was going to ask, since our audience is an audience of investors, mostly self-directed investors, maybe you could sort of make it a little tangible for them. It sounds like the tangible outcome is inflation, that is the key worry, do I have that right?

Larry Lindsey:            Sure, sure. And here's where we may, in the case of the currency war, be shooting ourselves a little bit in the foot, but we're doing it for other reasons. So, here's our problem, as a country, we have been trying to prop things up, now, for about a dozen years, by having an extremely accommodative monetary policy. Back in 2009 when all this started, it kind of made sense, because we were having a crash in the real estate market, and crashing prices are not good. So, stopping the crash was the goal of QE1, quantitative easing the first round of quantitative easing. What followed was, "Gee, we stopped the crash – maybe we could do a little bit more." And so, what they tried to do was not just stop prices from falling but tried to increase employment and GDP growth by printing money.

It worked a little bit, but it becomes addictive. And we are now totally addicted, and when the COVID situation came around, we had very large deficits to finance. And it would've shot interest rates through the roof if the Fed hadn't stepped in and become a much more aggressive buyer of Treasurys. So, they're in full bore. I don't think they're going to be getting out of this process quickly. Given the size of the deficits, if the Fed doesn't buy the bonds, it's going to be a scramble to find other people who will.

Dan Ferris:                 So, this portends a spiral of sorts.

Larry Lindsey:            Absolutely. Now, here is – this is hypothesis, but it's based [laughs] on logical thinking. Right now, the U.S. has a federal debt relative to GDP of about 120%. The yellow light goes off at 80%, the red light goes off at 100%, and we're beyond red, we're at red with the sirens screaming behind us, OK? So, how do you solve this problem? Well, it's tough. What you have to do is you have to get GDP growing faster than the debt. And I don't mean real GDP, meaning after inflation, I mean nominal GDP. Nominal GDP has to grow faster than the nominal debt.

And if you do that, then you ease the burden of the debt on the economy. Well, that's what we're trying to do. Nominal GDP, this year, is probably going to be growing something like 9 or 10%. The debt is growing just slightly less than that. And if we pare down the debt growth a little bit and pare up the inflation a little bit, we'll be able, over the course of the decade, to get rid of a lot of this debt burden. Your listeners, as you said, they're investors, might think about it another way.

Right now, the 10-year bond is yielding about 1.35%. OK, inflation, as reported this morning [laughs], was 5.4%, in the last 12 months. So, let's do some simple math. You just paid 4% to the government for the privilege of lending to it. Now, if we can get that up some more, so that you are paying the government 6 or 7% a year for the privilege of lending to it, then things get really easy for Uncle Sam. So, again, we started by talking about institutional self-interest. It's in the Fed's self-interest, it's in the government's self-interest to run inflation up, all the while telling everyone interest rates are not going to go up and the rise inflation is transitory.

Dan Ferris:                 Little sticking point here for me [laughs], it sounds like stuff that's good for these institutions, the Fed and the government, might be really bad for the rest of us.

Larry Lindsey:            I'm glad you're sitting down for that shock.

Dan Ferris:                 [Laughs]

Larry Lindsey:            Look, all institutions behave in their own self-interest. The one advantage that we have, that many other countries don't have, is the ability of, if they really don't do a good job, is to throw the bums out and put a new set of bums in, in their place. With the cautionary tale of, "Think about us, the voters." And so, that is ultimately how the inflation process is going to end, just like it was how the inflation process of the '70s ended. In 1980, inflation was the voting issue, Ronald Reagan was considered a rather risky choice, but at least he seemed to be more willing to tackle inflation than Jimmy Carter was, and so the country went with it. At some point, the public here will make the same decision. I don't think it'll be soon. I think we have a decade, roughly, of inflation ahead of us, and, roughly, the price level is going to double between 2020 and 2030.

Dan Ferris:                 Double. I have to push back a little bit, just a personal thing, the idea of throwing the bums out used to really appeal to me, but it seems to me like that other thing you said [laughs] about the institution being more important than the folks in it is the same in government, in the executive branch, in the legislative branch, as well. The institution just seems to steamroller in one direction, which is its own growth and its own power. And the narrative can change from things like inflation and deflation, or a loss of some civil liberties or gaining some civil liberties, over time. These narratives change, but the overall direction does not seem to change, and again, I worry about that. I worry that all empires kind of [laughs] evolve in one direction, and it's not good for us little folks.

Larry Lindsey:            No, that's right, I mean, that is what history suggests, and we just had a very good example of just what you're talking about. The country god fed up with the way the ruling class was operating, they put in a guy who was obviously a kind of risky person, and what did the ruling class do? They tried stamping on him from day one. Donald Trump was a threat to the swamp, to the institutions, and that's why we had Russiagate right away, which turned out to be a farce, and the rearguard action that the permanent bureaucracy had went on and on and on. So, yes, the swamp, the ruling class, whatever you want to call it, is not going to go down easy in terms of fighting for their own self-interest.

Dan Ferris:                 Right, and historically, growth in that institution [laughs] is the only rational expectation.

Larry Lindsey:            They certainly have all the advantages, that's for sure, and the – the Founding Fathers are not given enough credit. They realized exactly what you're talking about. And what they decided was, "So, how can we set it up so that at least it's as tough as possible for them to do that?" And that's what federalism is all about, that's what the constitution is all about, that's what the Bill of Rights is all about, that's what having a separate executive, legislature, and judicial branches are all about. So that way, the various players have to fight among themselves, and hopefully that will exhaust them, so they can't fight us, instead. I don't have a cynical bone in my body, by the way, [crosstalk].

Dan Ferris:                 [Laughs] Yeah, me neither. OK, so I want to talk more directly, though, about the currency war. I know you don't want to give away the book, because it's a fiction book, but we can talk about the real stuff, right? I wonder if you could make it something for our listener that they could get some handles on, to track. What are they looking for over the next – you said, 10 years, from 2020 to 2030, maybe we'll see inflation, and that'll be a big part of this. What does an investor, just a regular person, not an economist, what do we look for? What are the hallmarks where we say, "Oh, now, Larry Lindsey, he warned me about this"?

Larry Lindsey:            [Laughs] Well, yeah, you can just check this morning's Consumer Price Index release, or the Consumer Price Index for the last few months. It's interesting, since we had a change in government, we've had inflation accelerating constantly. We now have had inflation of almost 4%, in the first seven months of this year. So we're going to be ending the year with more than 6% inflation, that's what history tells us, unless they suddenly crack down on it, which they're not going to. So, investors should plan on this being the Fed's strategy, the government's strategy, and there are things that investors can do to get around it.

So here's – it's not a secret of the temple, it's a secret of history. You mentioned what empires do, we're technically not an empire, but the dynamic is the same. When they get in trouble, there are three things they can do: inflation, taxation, and confiscation. And in the end, they're going to try a little bit of all three, but inflation is generally the path of least resistance. As you've noticed, they are raising taxes, and what I found most interesting about the plan is they're trying to double down on inflation and taxation. So, let's say you make an investment, and it goes up with inflation, well, that's nice, except, they'll just raise the capital – or they're proposing to raise the capital gains tax rate to 39.6%. So, you keep up with inflation and they keep 40% of your so-called keeping up with it, and so therefore, once again, you're behind the game. And that makes it a real challenge.

Dan Ferris:                 And provides a massive incentive to speculate, right? The less of that gain you keep, the more gain you need.

Larry Lindsey:            Correct. And so the dynamic of the market, dynamics is driven by fear and greed, and when you're faced with the odds stacked against you, people do tend to get greedy, in order to try and beat it. I can't, because the SEC won't let me give investment advice, but I can tell you how I do it with my own portfolio. The best asset to avoid or minimize inflation, taxation, and confiscation probably is residential real estate. And you want to borrow long term at current low rates, because that way you're on the same side as the government. [laughs] When the inflation rate goes up, you're going to be paying back your mortgage in confetti, as opposed to what you borrowed it in.

Second, housing, in general, tends to rise along with inflation, so it gives you inflation protection. And it is so widely owned that, as long as we continue to have elections [laughs], the taxation and the confiscation pieces are going to be very difficult for the government. So, that would be one that is a significant portion of – I'm overweighed, I guess is the way you could say it, in residential real estate. One other option is miners, anybody who has stuff in the ground and takes it out. Now, this is a double whammy. First of all, their profit margins go up when the price of the commodity goes up with inflation. So, that's good for profits, but it's even better for the balance sheet because the value of all that stuff in the ground goes up, too.

So, I tend to invest more in miners than in commodities directly. And finally, there are good solid companies out there that, by and large, through equity participation, will probably at least keep up with inflation. You want to sort of buy and hold them, you don't want to turn them over and give Uncle Sam 40%[laughs] of your keeping up with inflation, but that would be a third leg of the stool. The only thing that really should not be in – excuse me – the only thing that is not in my portfolio, and I'm as short in it as I possibly can be, and that is long-term bonds. Long-term bonds are only going to go one way, down in price, up in yield.

Dan Ferris:                 And that, as we sit here with interest rates at what James Grant has called 5,000 – near 5,000-year lows, is a really controversial position, is it not? Bonds are only going to go one way? They've only gone one way, generally speaking, that's why we have these teeny-tiny and negative yields, even, in sovereign, European, and Japanese debt. So that's a controversial viewpoint. Plus, the other bit of evidence, there, that most folks would cite is the Fed can't tighten, they can't taper. I just want to point – I'm pointing this out more to our listener and asking you to reply, because it is such a controversial viewpoint. How do you answer that?

Larry Lindsey:            First of all, you're 100% correct. Basically, by betting against long-term bonds, particularly long-term government bonds, you're betting against the government. And as we talked about earlier, the government holds most of the cards, and they're going to be fighting you. So, most of the time, you don't want to fight the government, but every now and then, roughly, we'll call it, once in a generation, the government has boxed itself into a corner that it can't get out of. The best historic parallel is what Soros and Druckenmiller did to the Bank of England and Her Majesty's treasury, back in the '80s. There, the British government was trying to defend the indefensible, which was the peg they had established against the euro.

So, Soros and Druckenmiller would go in and bet against them. Well, they didn't like it, so what did they do? They took their reserves and threw their reserves in the battle against Soros and Druckenmiller. But these guys knew [laughs] that when they spent their gunpowder, they were depleting their ammunition, so they simply went in and doubled down, forcing them to expend more ammunition. And that process went on for quite a while, and then finally, the Bank of England and Her Majesty's treasury ran out of ammunition, capitulated, and devalued the pound. And that's how Soros and Druckenmiller made their first billion. In fact, they made substantially more than a billion on that trade.

So, that is a historic example. Where we are now is a little different but quite similar. How is the Fed going to try and keep interest rates low? They're going to print money. OK –

Dan Ferris:                 And buy bonds.

Larry Lindsey:            And buy bonds with it, exactly. You're trying to sell bonds, they're going to buy it. But every time they print money, they're burning their anti-inflation ammunition. They're basically pouring gasoline on the potential inflation fire. And so, at some point, they too are going to "run out of ammunition." The ammunition will be counterproductive, and that is when you will move in to clean up.

Dan Ferris:                 So, one of the counterarguments to this idea of the Fed printing money and creating inflation by doing so is the fact that, as we said, they print money, they buy bonds, that has the effect of raising bank reserves of the folks that they're buying the – the dealers they're buying bonds from. But if those bank reserves don't get lent and spent and multiplied throughout the economy, which they're kind of not so much, we don't get the sort of '70s burning inflation that can really play havoc with people's wages and the price of groceries and all those things. How do you respond to that?

Larry Lindsey:            Sure. Well, this time, they have found a way of spending the money, so let's go back to the original quantitative easings in the early part of the last decade. They were accompanied by very significant increases in the amount of reserves banks were expected to hold. First, they were short of reserves because they had just had loan losses, and then we passed legislation to raise the reserve requirement. So, most of that early round of money creation did go into bank reserves, didn't get spent, because the banks had no choice. Now the banks are swimming in reserves, they are not going to raise the reserve requirements anymore, but we have now found a spender.

And the spender is Uncle Sam. We give the money to Uncle Sam, which he either spends it directly or gives it to a consumer, who then, in turn, spends it. So, this time, the money is not going to go directly into bank reserves. It's going to get at least one round of being spent. And depending on what share of that one round ends up in reserves, it's actually probably going to get spent several times – fancy word for that is called "the multiplier." But finding a way around it, finding a spender is what's going to make this time different than the last time.

Dan Ferris:                 And the spender is Uncle Sam.

Larry Lindsey:            The spender is Uncle Sam and us – and us. Look, we gave – we, the U.S. government, technically, it is us, but, you know, meh – [Laughter]

Dan Ferris:                 Meh –

Larry Lindsey:            On their own, they gave, just this year, families $2,000 each, for each person, so a four-person family just got checks worth $8,000. Now, the median income of a four-person family is just 70%, so basically, Uncle Sam topped up that family's income by an astonishing 11%.

Dan Ferris:                 When you said 70%, did you mean $70,000?

Larry Lindsey:            I'm sorry, I meant $70,000, my apologies. So, each household, a household of four, now has 11% more money to spend. That is a lot. Now, I have a sneaking suspicion – of course, as I mentioned, I do tend to be a little bit cynical – that because next year is a year divisible by two, which matters a lot in Washington, not as much as years divisible by four, but years divisible by two still matter – and if they don't send out another check next year, that family is going to have 11% less money than it had the year before.

Dan Ferris:                 Right, and, Larry, isn't it true that – you mentioned the addiction paradigm, earlier. Eight grand isn't going to cut it next time around, right?

Larry Lindsey:            Well, right. Now, what they're probably going to do, because you do have more employment and wages going up, you probably don't need the full 2,000, but you probably need at least 1,000 to go out, just to break even. And then there's another problem. We had virtually no inflation, under 2% inflation, coming into this year, and we're going to be going into next year with, say, 6% inflation. So that means that $70,000 family is now $4,200 worse off in spending power, and you better help them out or they're going to take it out on you at the polls next November.

Dan Ferris:                 I see, the incentives are lining up.

Larry Lindsey:            Right, institutional self-interest.

Dan Ferris:                 So, you've actually, you've outlined a pretty clear – and for investors and just regular folks trying to earn a living – unpleasant picture, here. And made it and turned it into a sexy novel – we have to remind folks – called Currency War.

So, we're getting to the end of our time, and I ask all my guests the same final question, and, man, I can't wait to hear your answer. [Laughs] My standard final question – I'm usually interviewing asset managers and some other types of folks, generally, we're talking about investing, but you're a little different. You're an economist. You're talking about much bigger trends that affect absolutely everyone, whether you are an active investor or not. So, I'm very curious to know how you respond to my simple question, which is, If you could leave our listener with a single thought today, if you could plant a single thought in their mind to leave them with, what would it be, Larry Lindsey?

Larry Lindsey:            The next decade is going to be a scramble for survival. You need to think about it that way, and you need to prepare in order to have a prosperous future. The way to start is to go out and buy Currency War.

Dan Ferris:                 [Laughs] That's the way to start, yes, buy Larry Lindsey's book Currency War and you'll be fine for the next 10 years. But wow to your final idea," a scramble for survival." You don't mince words, do you?

Larry Lindsey:            Well, we're going to probably still be around, but this inflation is – inflation always causes a fraying of the social fabric. And to be blunt, we already have a pretty frayed social fabric, let's be honest. And so, I don't think it's only a matter of money. I think it's also a matter of what's going to be happening in society going forward, and that's why I think it really is a scramble. And there's some things you can control, some things you can't, but money helps you control as much as possible, and that's why you need to protect your financial position.

Dan Ferris:                 Wise words. Well, thank you very much for being here, Larry. I really enjoyed this a lot. We will hopefully be talking to you sooner rather than later again.

Larry Lindsey:            Thank you. Thank you very much.

Dan Ferris:                 [Music playing]

Wow, I really enjoyed that. That was a great conversation. You know, when they come to me and say, "Hey, we got this economist who wrote a fiction book," [laughs] you go, "Oh, my goodness, how is this going to turn out?" But I thought it was a great conversation, and I was really excited by a lot of the ideas that Larry had. And now I want to read his book. I mean, when a guy with his background with the Fed and everything answers the final question and says, "The next decade is going to be a scramble for survival," [laughs] whoa, it just blew me away. I did not expect that. Those are some of the best answers, aren't they, the ones that you just didn't see coming.

I didn't see that one coming. And it makes me want to read his book. So now I got to read this book, Currency War. And you can get it, you can get the book, Currency War, by Larry Lindsey, at currencywarbook.com – currencywarbook.com. Check it out. Wow, great conversation.

All right, let's do the mailbag, let's do it right now

[Music playing]

I want to mention the topic of inflation once again, because it's popping up more and more, and it's important you understand the impact inflation has on your wallet. I'm not the only one who wants to make sure you're aware of this. Billionaire John Catsimatidis recently came out saying he's expecting a 6% annualized rate of inflation by this coming October. He's not like most wealthy men and women the financial media are obsessed with these days. He's not a hedge-fund manager or a venture capitalist, he's not the founder of an electric car company or a software developer, he's not a cryptocurrency backer or a fintech entrepreneur. Instead, Catsimatidis made his billions the old-fashioned way, by focusing on two areas of life that affect nearly every American every single day: groceries and real estate.

That's why I think it's safe to say John Catsimatidis has a better handle on what's really happening in the economy and with the American consumer, compared to just about anybody else out there. And recently, he went public with an alarming prediction. He says, "A huge shift is looming in the U.S. economy and financial system, which will reveal itself in a dramatic way, this October, just two months from now." And a wealthy former Goldman Sachs banker agrees and says, "Most Americans are completely unprepared for what's about to take place in our country." Well, what exactly is going on, and what has these two successful and wealthy men so concerned?

Well, my friend and colleague, Doc Eifrig, has just issued an urgent warning, what he calls "a final wakeup call for any American who cares about their money, finances, or retirement." In his latest analysis, he explains exactly what's going on in America, why John Catsimatidis is so concerned about this coming October, and four steps that he recommends every American should take right now. Go online to learn more about this urgent warning by visiting www.cominginflation.com. That website, again, is www.cominginflation.com. Check it out.

[Music playing]

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 as many e-mails as time allows, and I respond to as many as possible. Or you can call our listener feedback line, 800-381-2357, tell us what's on your mind and hear your voice on the show.

First little bit of housekeeping in the mailbag, here, a couple of folks said they could not find the free copy, online, of George Gilder's book The 21st Century Case for Gold: A New Information Theory of Money. You can find it at americanprinciplesproject.org. If you go there and you click on the little thing up in the upper-left, there's some little horizontal lines next to it, and then you go down to – I think it says "APP," and under that it says "research." So, APP and then research, you click on that research, and then scroll down until you see the title of the book, The 21st Century Case for Gold. And it's there. It's a free PDF. It's about, it's a 106-page PDF, so not a long book, but I highly recommend it. If you're interested in the topic of gold and the value of money, man, it is – I haven't read anything like it, before. All right, that's that – and it's also available on Amazon as an audiobook, I found it there as an audiobook. So, if you want to pay to listen to it, you can do that, too.

First up in the mailbag is George O., and George O. says: "Hi, Dan. Great show. I disagree with Gilder's view of bitcoin. Bitcoin is not really limited. One bitcoin is, theoretically, infinitely divisible. Maybe at some time the number could be increased to greater than 21 million units. The demand and not manipulation will set the value, but not for many years. One Satoshi could be divided into smaller units, with time. George O."

I sort of agree with you, George. I had attributed bitcoin's extreme volatility to its newness and, you know, the rapidness of adoption and the – let's face it, there is speculation, though, [laughs] because nothing goes to 17 and crashes to three, and then goes to 65 and crashes to – let's just call it 30 or 29 or something. It's highly volatile, let's just get that – I've said this all along. Bitcoin trades like a biotech stock. So far, it trades like a biotech stock that people like [laughs], but it trades like a biotech stock, it's very, very volatile. And I don't know everything, I don't know that it's going to be $100,000 or half a million, or a million, one day, and that we'll have to divide it and divide it and divide it, in order to use it.

So, I don't want to pretend like I know everything. For me, it's a matter of prepare, don't predict. You've got to own a little bitcoin and just hang on to it, because it could be worth just a many, many multibagger, one day, if it really becomes adopted and used as currency. Anyway, that's my thoughts, and I just wanted to read your note and react a little bit, George. This is good stuff to think about, absolutely.

Next, we have a really long question [laughs] from Kate S. And I'm going to try to just kind of pick out the parts that I think are really important, here, Kate. So, thank you, Kate. I sent your question to Eric Wade, and he's going to – and I am going to read his answer. But Kate says, "Dan, love the show, love the guests, love the book recommendations, too. Five stars on all fronts." Thank you, Kate. And then Kate says, "I have a huge crypto question, so bear with me. The basic premise of crypto is decentralization, along with the security that structure provides. Banks are afraid, as are, likely, other industries, as the middleman on transactions disappears, as smart contracts enable two parties to make agreements and trade stuff or value without the assistance of the middleman and the fees that come with that."

"But in researching crypto IRAs in various coins, tokens, protocols, platforms, etc., it seems to me that of all the thousands upon thousands of cryptos that are out there, they all do different stuff in a few main categories: store of value, stable coins, smart contracts, etc. But the more I dig in, the more I see what sounds more like middleware to me, platforms that exist so these two other platforms can interact. So, isn't that essentially just another middleman taking fees for stuff?" And you had a lot of other backup and historical ideas here, Kate, but I want to simplify and get – that's the issue. And then you asked, later on in your e-mail, "What's Eric Wade got to say about this centralized decentralized pattern?" which you noted with historical examples.

"Does he see DeFi and all things crypto, all the zillions of platforms and protocols, some just existing so this token can be exchanged easily for that one, lasting a bit, and then the need of centralization rears its head again? I can't imagine it won't go that way at some point in the future. Aren't we just replacing the current banking system with the middleman fees, with a different system full of middleware and fees, just, instead of using fiat dollars, now it's all these tokens? And lastly, why do the creators of these protocols, platforms, and tokens give them all [laughs] such stupid names? I'm having a hard time dropping any good money into something named unicorn or sushi or polka dot."

"Like, what dude was sitting around and inventing a crypto protocol to allow cryptographic cross-chain transfer and thought, 'Hey, I'll name this polka dot.' Really? Thanks for reading my e-mail. I look forward to your thought-provoking answer. Kate S." I love the last question. Eric addressed that, too, and here's what Eric sent me this morning. Eric says, "Wow, that is a huge question. The answer is absolutely. Absolutely we cycle, and absolutely we'll follow the cycle – " I believe the cycle of centralization-decentralization that you talked about. But Eric continues: "But consider this, we're on a helix cycle, not a wave cycle.

"Granted, a helix looks like a wave, but we all know it just isn't a wave. What's the difference? What I'm watching for is what do we do with the capability for microtransactions that are immutable. Because, sure, the humans building many of these projects are guilty of 'I'm going to build something that replaces your middleware with our middleware,' that is an astute observation. But the difference is, I can't walk up to Visa or Salesforce or IBM and serve myself a $15 piece of their middleware in the way that I can with many of the DeFi projects out there. And sure, not everyone will be part of our system, but finally, the technology is being built that makes it possible."

"As for the stupid names [laughs], I half agree and the other half of me absolutely loves it. Of course, I have a thing for wackadoodle branding, but, yeah, I get it. You want me to trust something called PancakeSwap with bunnies wearing syrupy hotcakes on their heads with real money? [Laughs] Eric Wade." So that was Eric's answer. I hope you found it valuable, Kate, and thank you for writing in. I'm trying to get Eric to do Crypto Corner on the show on a regular basis. I'm going to keep badgering him about it. We'll see if we can get him on here.

Next comes Al M. Al, thank you for writing. Al writes in all the time, and I love reading your e-mails, Al. And in your current e-mail you said, "So here is my question for you, what are your thoughts on holding gold via PHYS – " which is the Sprott publicly traded gold trust – "or Sprott, as opposed to holding stocks such as your other recommendations?" meaning the other recommendations I've made in the Extreme Value newsletter, I believe he's talking about. "When guys like Dalio – " hedge-fund manager Ray Dalio – "suggest diversification due to the dollar being undermined, it seems gold might hold more value of savings than stocks. This might be the case, even though one can't see the dollar eroding in value, currently."

"Maybe the dollar will implode due to a sudden realization of its being undermined. Or maybe financial asset valuation will seep into inflation. Or maybe it is simply a factor of all currencies being undermined that is holding the dollar up," and he puts "up" in quotes. "Anyway, I would like to hear your thinking, in an overall way, on this entire issue. How does that thinking pertain to gold's behavior, currently? Al M." Al, gold's behavior currently meaning, it's not behaving great, lately, it's not going up lately. We shouldn't say it's not behaving great, because it's a 50-bagger since Nixon took us off the gold standard once and for all, in 1971. So, I think it's done OK. [Laughs]

But overall, I think you should hold some gold. I think… I think there's a Lindy effect, I've said this many times. Gold has been a store of value for most of the last 5,000 years. When I say "most," I figure at the beginning of those 5,000 years it was kind of gaining momentum. So, with thousands of years of history, I'm going to guess that we've got another 1,000 or so, at least, ahead of us, for gold to be a good store of value. I don't think that changes. Some people think gold is old and no good, and bitcoin is new and great and will replace it. I doubt that's the case. I think bitcoin, if it does anything, it'll just get adopted and be used in transactions. I don't think it's necessarily going to replace gold as a store of value.

And let's face it, without the heavy hand of government if the heavy hand of government weakens, at least in the currency department, more competition in stores of value seems to be a more rational expectation than less competition, right? So, there's "plenty of room for both gold and bitcoin" is the easy way to say that. Why gold is behaving the way it does, recently, like I said, short term, I don't care. And as you said "What are your thoughts on holding gold via PHYS or Sprott?" And I've recommended Sprott in my newsletter, so, the Sprott physical gold trust is a recommendation, that's not a bad way to hold gold at all. So, I hope that answers all your questions. I think I covered you there, but if not, write back in again. You write in a lot and I love your e-mails.

Finally, this week, is Dale T. Dale, I love your question, man, I love it. "What is the least expensive, highest-return, safest way to short the Nasdaq, Dow, and S&P 500? Dale T." [Laughs] God bless you, man. God bless you for wanting to be a bear right along with me. Or just maybe you just want to hedge a little bit. That's the thing about this, if you do what I personally do, which is to buy out-of-the-money put options – a small amount of money in out-of-the-money put options – if we get a big crash over the next, for me, I guess, 12 or 14 months, 12 or 16 months, maybe that'll – they'll probably go up a whole lot. If the market goes down a whole lot, they'll go up a whole lot, and I'll have some cash to put to work as equities become more attractive.

That's my favorite way. What is the least-expensive, highest-return, safest? First of all, "safe" implies that you're maintaining the value of your principal. You're not going to do that with shorting, not in my opinion. Some people would say, "Well, Dan, you could just buy bonds, that's short to market," and I don't think you should count on this negative correlation thing that people have been doing in bonds, for a few decades, where bonds go up and stocks go down, and all you need to do is own some of both and you're diversified. I don't think that's going to be true going forward, and I've cited Christopher Cole on that, in the past. And you've seen – I've seen other work on this in various press sources. People are starting to talk more about it.

I think there was an article in Barron's, to that effect, recently. I read too much stuff [laughs] – I need to write some of this down. I've seen it elsewhere is all I'm saying. Don't count on bonds being a short on stocks is the point. So, that would be like a relatively safe way to be short, right? So I don't know if a "safe" way to short stocks exists. You're probably best – I mean, for me – I won't say what your best, what it's best for you to do, Dale, because I don't want to give you individual advice. I can't do that from my position, here. But for me personally, I say, "Well, that little bit that I'm going to lose on put options if stocks don't go down a whole lot is like an insurance premium."

That really is all I can do is say, "OK, well, I'm willing to lose 100% of this, and it's a tiny position, so, it won't hurt me too bad." And to me, that's the least-expensive and potentially highest-return way. But this is not, like, if you're talking about speculating and being net short Nasdaq, Dow, S&P, [laughs] God bless you, go in peace. You're doing something entirely different than what I'm talking about, OK? I'm just talking about being hedged and preparing for that. I'm not talking about betting on it as a sure thing.

And you could short the ETFs, but that'll probably – that could cost you some money in terms of borrowing the shares. And that's all I got, Dale. It's not – shorting is not something that you can say is "safe." Or even high-return – most of the time, it just doesn't work out so well, and it's really, really hard. And maybe here – the last thing I have for you is cash, and it's a relative short, right? The more those equity prices go down, the more having a bunch of cash is valuable. And that's probably the least expensive, "safest" way, and highest relative return is the only way you can assess that, because it doesn't go up, you know, it just stays the same. Hope that helps, Dale – very good question, and I love it.

Well, that's another mailbag, and that's another episode of the Stansberry Investor Hour. I hope you enjoyed it as much as I did. We provide a transcript for every episode – just go to www.investorhour.com, click on the episode you want, and scroll all the way down and click on the word "transcript," and enjoy.

If you liked this episode, send somebody else a link to the podcast, so we can continue to grow. Anybody you know who might also enjoy the show, just tell them to check it out on their podcast app or at investorhour.com. And do me a favor, would you, 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. You can follow us on Twitter. Our handle there is @investor_hour. If you have a guest you want me to interview, drop me a note at [email protected], or call the listener feedback line at 800-381-2357. Tell us what's on your mind and hear your voice on the show.

Until next week, I'm Dan Ferris. Thanks for listening. [Music playing]

Announcer:                 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. [Music playing]