After months of incredibly steady gains from the stock market, many retail investors are currently going all-in on stocks.
But Dan shares some startling facts about the global economy that every investor needs to consider before pushing their pile of chips to the center of the table.
Next, Dan brings Andrew Furman onto the show for this week’s interview, a man with 35 years of experience in energy, trading, and portfolio management.
Dan and Andrew have an in-depth discussion about the principles behind Andrew’s new book Risk is an Asset, where Andrew details how he uses risk to his advantage while trading options.
Andrew lays out a clear warning of the risks involved when traders become overconfident trading options, but assures listeners that “risk is good, as long as it’s intelligently managed.”
Listen to all this and more on this week’s new episode.
Risked Revenue Energy Associates
Andrew Furman has 35 years of experience in energy and trading. After graduating from MIT with a degree in chemical engineering, he spent 15 years trading Crude Oil options on the floor of the New York Mercantile Exchange. After serving as a portfolio manager at two hedge funds, Furman joined Risked Revenue Energy Associates in Houston, TX where he has spent the past 12 years delivering hedge solutions to senior management of public corporations, private firms, institutions, and utilities. Andrew has just authored the Forbes published book, Risk Is An Asset, which enables businesses to turn price uncertainty into a strategic advantage. In his spare time you can find him blogging and tweeting about his beloved NY Giants.
NOTES & LINKS
3:07 – As investors, sometimes we don’t have all the answers… and that’s okay, “The modern way is to pretend that you know…right? It’s that big mistake they made in grade school with us when we were kids. They pressured you to always have the correct answer, rather than pressuring you to think about something in a way that’s effective…”
7:01 – Many people are investing like they’re certain the economy will come roaring back. But Dan explains why you may want to be cautious… “A Bloomberg headline caught my eye, it said ‘Covid 19 wipes out an estimated 500 million jobs worldwide…'”
14:48 – Announcing a collaboration with Amazon is some of the best news a business can announce. In fact, some companies are announcing Amazon partnerships without their consent!
20:43 – This week, Dan sits down with an interview with Andrew Furman. Andrew has 35 years of experience in energy and trading. After graduating from MIT, with a degree in chemical engineering, he spent 15 years trading crude oil options with great success. Andrew worked his way up to become portfolio manager at two different hedge funds.
25:10 – Andrew explains how he was able to combine his passion for chemical engineering and investing…”My Dad wasn’t really too excited, he kind of thought me being in science and engineering was better, but I was able to marry the two, I was able to merge the two together, especially as an options trader.”
30:45 – Dan and Andrew talk options, where Andrew expands upon what amateur options traders often overlook… “Stock is for direction, up and down, and options are for volatility…”
33:00 – Andrew discusses the main idea behind his book, Risk is an Asset. He says that risk becomes an asset when you have some sort of informational advantage.
40:31 – Dan asks Andrew some questions about the logistics of using an options strategy, “…give me a hypothetical and tell me what a portfolio might look like just for the sake of our listeners.”
50:10 – Andrew’s track record with options has led to massive gains over the years, but Dan counters and asks him, “Is there a real discussion with clients about what you don’t know and can’t know?”
55:35 – After Andrew outlines the many risks of trading options, Dan asks if it’s best for retail investors to just avoid them all together? But Andrew says, “risk is good, as long as it is intelligently managed.”
1:04:12 – On the mailbag this week Dan takes some heat from a couple listeners… was Dan out of line when he criticized how the fires out west are being managed? Others ask, what do you think about putting Bitcoin in an IRA? And finally, is Jerome Powell really such a bad guy for trying to keep our monetary system afloat?
Recorded Voice: Broadcasting from the Investor Hour studios and all around the world you're listening to the Stansberry Investor Hour. Tune in each Thursday on iTunes, Google Play, and everywhere you find podcasts for the lastest episodes of the Stansberry Investor Hour. Signup 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 Andrew Furman. Andrew is a very experienced trader who will talk with us about turning risk into an asset. And I really want you to pay attention when he talks about binary thinking and having a plan for your trading, among other topics.
This week in the mailbag, I will get really riled up about two listeners who criticized by take on the forest fires raging out of control on the West Coast. Plus, questions about deflation of precious metals and whether or not Jay Powell is really a nice man. In my opening rant this week, I’ll talk about what we know and what we don't know, and I'll peruse some very interesting and potentially troubling news items, that and more right now on the Stansberry Investor Hour.
I have discussed before some of the folks that I follow in Twitter. I think one of the smarter ones is a guy named Paul Portesi. I asked him to be on the program and he said, "I'm just not in that kind of a space right now in my life, but thank you very much." He's a fantastic fellow. He's really polite, nice, and a very, smart, smart guy. It looks to me like he has plumbed the depths of the writings of Nassim Taleb and he's just squeezed out some excellent wisdom.
This week, he came across with something that I couldn't stop thinking about, and I couldn't turn away from it and I thought, "Well that's what I'm going to have to talk about on the podcast." He does these short little posts and they have the quality of, like you know, it's like little Zen poems, you know. But in one of them he said, "Modernity," modernity, right, modernness, "Modernity wants to try to convince you not knowing is the worst possible thing." And before that he said, "Get comfortable with not knowing."
We're going to talk to Andrew Furman today about this too. I like to talk to traders about that type of thing, especially a guy who specializes in hedging.
But I couldn't get away from this idea that the modern world wants to convince you that not knowing is the worst possible thing. I think it really is true. That if you look all over the Internet and try to take in the whole of this vast universe, and there's so much bullshit and that is the modern way. The modern way is to pretend that you know, right? It's like it's that big mistake they made in grade school with us when we were kids. They pressured you to always have the correct answer, rather than pressuring you to think about something in a way that's effective and works in the real world.
It's like generation after generation did that and it's all spilled out onto the Internet. And Paul comments frequently about what he calls "Macadamia," like macadamia nut. That modernity or modernness, you could think of it as the modern way of thinking plus academia. You know, because higher learning, the institution of higher learning is really guilty of all this kind of stuff. The institution of higher learning enforces this idea of knowing and it's even worse because bad ideas that don't work in reality can live along time in an academic institution. They can get you tenure. They can get you a raise, you know.
So you have to be careful of this idea that you can always have an answer. And I see a lot of this in financial markets more so than you know than you might think. You listen to me talking about his and you're like, "God, what does this have to do with investing?" I don't know. I've seen things online where people have like some huge amount of their portfolio, some people will say, "All in," like they have 100% in something like Tesla, right?
A highly speculative, still pretty new business... unprofitable business... run by kind of a kooky, you know, smart, accomplished-but-kooky guy who doesn’t seem like he's the right guy to run a public company and he says a lot of things that never happen and he just doesn't seem to understand what he's doing as the leader of a public company. The business is not great. They don't make money because it's a highly intensive, highly competitive, capital-intensive business.
I think a lot of people poured money into another electric-car... electric-vehicle and battery company called Nikola, right? Of course Tesla is named after Nikola Tesla, right? And Nikola is the first name of Tesla. So that company share price has recently collapsed. I think it started out around $10. I think it hit $65, if I'm not mistaken, and then it's crashed back because this really smart short-seller who runs a service called Hindenburg Research put out a thing that basically, he kind of accused them of fraud and stuff. And the stock is, you know, from a height of the 52-week high is $93. OK, I must have been looking at closing prices or something on a chart that only went to $65, but I see now the 52-week high is $93, geez.
It went from $10 to $93 and back to $25 because again, it was a highly risky thing and people ran it up to $90 because they thought it was a no-brainer. They thought it was binary. It was certain. They knew. They didn't want to say they don't know and they didn't know. And we don’t know also how the stock market seems to be assuming that the economy is going to come roaring back and I don't know if we can really assume that.
And today just for one data point, OK, I'm just throwing data points out. I realize it's statistically not great thing to do, but a Bloomberg headline caught my eye. It said "COVID-19 wipes out an estimated 500 million jobs worldwide." And this international labor organization, which actually was the first kind of specialized organization at the United Nations (this is a United Nations group), but been around a long time and they collect a lot of data. They say in the second quarter, working hours were 17% lower compared with the end of 2019, equivalent to almost 500 million jobs. That's where they come up with that. Up from 400 million projected in June, OK? So there's a chance and the gist of this article in Bloomberg is maybe things are a little worse than you think and maybe the outcome isn't as certain.
There was another headline today that grabbed me in that same vein and it said "Johnson & Johnson begins final-stage testing of COVID-19 vaccine" and then they also mentioned that four experimental coronavirus shots have now entered Phase III testing in the United States. Johnson & Johnson said earlier this week that they started a 60,000-person clinical trial of their single-dose COVID-19 vaccine on three continents. So that makes them the fourth of these vaccines to enter final-stage testing.
But I just feel like we've been talking about... Let's say we've been talking about a vaccine seriously since things really got ugly in March, so that's seven months. Like everybody who I talk to or who I think knows something says, "It takes more than seven months," you know? I realize it's September right now, but we've heard all this talk from President Trump and others about a vaccine in October. So that's the tenth month, minus the third month, seven months.
I just think that maybe we're getting ahead. I'm afraid we're getting afraid of ourselves and we're a little too confident. So I just I feel like there's too much, there's too many people operating under too much certainty. Howard Marks from Oaktree – who I quote a lot and I tell you to read his book, The Most Important Thing, a lot – he said this in June. He was saying, "You know there's a lot of people who seem to be very certain about some pretty bad ideas," including one of his main points at that time – and which I would reiterate today – is, you know the idea that the Federal Reserve can fix all this. And they basically have your back and can lead to sustainable, rising, excellent, wonderful investment returns. That they can backstop the stock market so effectively that you can bet on it, right? With certainty.
All this certainty is troubling especially when you read other headlines like Brookfield, the big... well they have Brookfield Property Partners as one of their affiliate companies, but Brookfield Asset Management is a huge asset management company in Canada run by some really smart guys, but they bought GGP – they bought General Growth Properties, the mall owner. And the timing on that doesn't seem real great to me. And now Brookfield Properties, you know the property affiliate that runs the malls, they're cutting 20% of their employees and they're selling malls.
They had this plan when they bought the malls they were saying, "Well," they said, "we're going to future-proof," they said this, the chief executive said this. "We're going to future-proof as many of these malls as possible by using them for other uses besides mall-based retail and effectively turning them into mini-cities" was the quote from a Financial Times article that I'm looking at.
I mean that sounds great. Again, you know, it's not highly certain you can do that, but it's highly certain now that they're accelerating their divestiture of the malls that won't be future proofed, right? He says, "Our experience in the past six months informs us that the opportunity to act on this plan has been accelerated and the time is now," meaning, "we are ditching this stuff now." And they've had a lot of problems. You know they only collected 35% of the rent due on their retail properties in the second quarter. They did not collect 65% of their rent and they've had to restructure some debt. It's been rough and it's not getting any better, and they're having to exit in a really distressed way.
This troubles me because historically, these guys have always been the ones who were buying the distressed assets that people were flying the hell out of at the bottom. And now they're the ones who are distressed.
At the other end of the spectrum, who's succeeding? Well, Carvana. Carvana is the company that has those big automobile vending-machine buildings. You know, you can buy a car and they say it takes minutes online to buy a car and you can get delivery. One of the ways you can get delivery is to show up at one of these glass buildings filled with cars, which is a giant car-vending machine.
The company has never posted a profit. The stock rallied 31% earlier this week and, what else... better than expected results. That's all you need. You know it wasn't as much of a disaster as it's been since it went public, so you know the stock's up 31%. The father-and-son duo that own the thing are – I think they're worth about $21 billion now, according to a Bloomberg article, because the stock has just roared.
So again, if they haven't made money at this thing yet, how certain is it? That somebody seems to think it's really certain. I have to say it, it's very dot-com-like. I continue to return to the example of Cisco Systems. I'm sorry if you're tired of hearing it, but it's just too good. The certainty in the air in March 2000 was palpable. No one had any doubts of any kind that you could pay any price – back then I think, split-adjusted $80 a share, it might have split again. Anyway, $80 a share and you know it bottomed out two years later, like almost 90% down at, I think, just below $9 a share.
So the certainty was palpable. It was in 10 of the top 10 mutual funds. Everybody knew that no matter what else happened to Microsoft... or Dell was a big darling back then and or Amazon or any of these other companies, Cisco was the no-brainer and the no-brainers has still not recovered to its dot-com high, 20 years later. I'm afraid that too many people are counting on that and it troubles me.
One last item... it's not necessarily related to this idea of certainty and admitting that you don't know what you don't know, and that is a real asset for you as a human being and as an investor saying you don't know what you don't know. But this other article that I couldn't turn away from was an article about Amazon. A company called Echelon is selling a $500 Prime bike in collaboration with Amazon. And you go on Amazon and they're doing a little branding in conjunction with Amazon.
Well Amazon came out and said, "No we're not. They made it up." Amazon told Echelon Fitness that said they had this partnership, they told them, "To stop selling the bike and stop promoting it and stop this branding that you're doing. It's not in collaboration with us. It's not in collaboration." They said, the quote from Amazon spokeswoman this Tuesday was, "This bike is not an Amazon product or related to Amazon Prime."
There was some talk that Amazon was going to get into the fitness bike business. And while there was talk of that, Peloton, the other company that's in the fitness-bike business whose stock has absolutely roared... soared, taking off like a rocket ship. While people were talking about this, that stock price fell. My point is, just a little bit of talk – this has been the way with Amazon – all they had to do is say, "We're going to get our own fleet of planes and do overnight delivery" and FedEx and UPS shares tanked. All they had to do was say, "We're going to you know buy Whole Foods and we're going to expand our grocery business," blah, blah, blah, and all the grocery stores' stocks tanked and all they had to do was say, "We're going to get into the fitness-bike business, but not with these people."
And even though the whole thing was a big mess and didn't really, isn't really true, there's still able to move... I mean Peloton recovered, OK, the stock price recovered, but for that moment, Amazon's power to kind of invade a new industry and disrupt things.,,
And in the end what is this Peloton Bike phenomenon? It's probably a pretty nice exercise bike and, you know, a screen with a bunch of videos that you can subscribe to and that's mostly what it looks like to me. If there's more to it, by all means write in and tell me about it. Because I've had people do this before. Tell me how much you love your Peloton and how Amazon could never make a dent in that market and never be a threat to Peloton.
But for now, having too much certainty about Peloton seems like a big mistake. That's what I have to say about that this week. Paul Portesi is right: "The modern world wants to try to convince you that not knowing something is the worst possible thing and, therefore, that you must have certainty about everything you do and that you must go into everything pretending that you know the outcome even when it's very obvious that you don't." You know, many times you don't know outcomes, you don't know the future.
This problem is it's insidious because it's everywhere you go. Everywhere you go, someone's pointing to you and saying and asking you a question expecting you to know the answer. You know, your spouse, your boss, your clients if you're a money manager, your readers if you’re me, your... everybody wants you to have the answers. And I'm telling you, it is much more valuable to draw a line around what you really know, your circle of confidence and stand up tall and say "I don't know" when you don't know.
Like the stuff that we're about to talk with Andrew Furman... with, I hope, we can get into it in a little bit, because it's hard to make it concrete, have a trading plan, be aware of things you don't know. It just sounds kind of fluffy and it's hard to make it concrete, but I'm trying to make it concrete with these financial examples. But I promise you, it really is this important. You know, write these things down, they're that important.
All right let's take with Andrew Furman and we'll get into more of this stuff. Let's do it right now.
Hey guys I want to talk to you about my colleague, Dave Lashmet, for a minute. He is absolutely one of the best biotech stock pickers on the planet in my opinion. Earlier this year, he recommended Inovio Pharmaceuticals and it went up 1,100% in four months. Since 2015, he's had 19 triple-digit winners, like double or more in his portfolio. I could tell you I have not had 19 triple-digit winners in the past five years – it's pretty phenomenal, especially in a risky area like biotech.
Right now he's working on this thing. He's found this tiny little drug company and they've discovered this huge breakthrough and he thinks 1,100% in four months is great, but he thinks this thing is going to be a lot bigger, like "20x" huge and he calls it his "pick of the decade," because they ______
. It leads to 10 times more deaths than COVID every year. Dave says, "Seven out of ten Americans could wind up being prescribed this new drug that this tiny little company is making." He says, "It will change the world. It will solve a global crisis if it works out." In particular he says, "It's been really bad in the United States over the past three decades," but these things don't stay secret forever, and this is a little tiny company going up against some Big Pharma companies, but their drug trial results are doing better and better and it looks like they're going to hit the market before the big companies. So Dave made this little video where he explains how this little company – it's a fraction of the size of these giant companies – made a huge discovery, and you know he thinks it could be a 20-bagger.
OK it's time for our interview. Really excited about this one. Today's guest is Andrew Furman. Andrew has 35 years of experience in energy and trading. After graduating from MIT with a degree in chemical engineering, he spent 15 years trading crude oil options on the floor of the New York Mercantile Exchange. Pretty cool.
After serving as a portfolio manager at two hedge funds, Furman joined Risk Revenue in Houston, Texas, where he has spent the past 12 years delivering hedge solutions to senior management of public corporations, private firms, institutions, and utilities. Andrew has just authored the Forbes published book, Risk Is an Asset. I have it right in front of me, "Which enables businesses to turn price uncertainty into a strategic advantage."
In his spare time, you can find him blogging and tweeting about his beloved New York Giants. He's a great Twitter follow, I can tell you from personal experience.
Andrew, welcome to the program.
Andrew Furman: Thanks for having me Dan.
Dan Ferris: Well, before we talk about how in the world risk could possibly be an asset, I'm curious with you know graduating from MIT with a degree in chemical engineering I'm inclined to just wonder when in the world you kind of got the finance bug and when you thought that would become your career direction? Like how, how early in life did that occur for you?
Andrew Furman: Well it was actually pretty early. My family has some of that DNA where, for example, my dad was on the commodity exchange and my brother was a silver broker and my stepfather was a platinum-and-palladium arbitrage spreader. So I had some family experience that really kind of led me in that direction.
And on top of that, I had some early years of, you know, some formative type of experiences. Like there was one where my dad gave my brother and my sister and myself – he gave us like 10 shares of four different stocks. I actually remember the names of them. They were: National Presto, MPK, American Ship Building, ABG, another 10 shares in Curtiss-Wright, another 10 shares in a company called Zapata Offshore, which was actually George Herbert Walker Bush.
So here it is. I've got these shares of stock in the early and mid-'70s and then all of a sudden, oil goes nuts and the stock that was $15 a share went up to $75 a share, and I had no idea why. But of course, now I can look back and knowing that oil prices went bananas in the 1970s, you know that's why Zapata went up.
Dan Ferris: So yeah, it's in your DNA, that's pretty neat. So you came out of MIT and were straight into finance then?
Andrew Furman: That's right. What happened was that I had a couple of plant trips with some engineering firms and my stepfather made me an offer. He said, "Come on down to the trading floor." You know, I had actually been a runner in silver in 1979 – in the summer of 1979 – so I knew what it was like from the trading floor. Yeah, here it is... I'm a 16-year-old kid and there's all this mayhem and craziness and excitement. There was never a dull day down on the trading floor.
Dan Ferris: Not in 1979.
Andrew Furman: Exactly, not in 1979 and the metals pitch, right?
Dan Ferris: That's right.
Andrew Furman: I mean I was literally like at ground zero of all of the tumult there. As a matter of fact, it's probably a little interesting side note to mention that the company that I worked for, they actually had Nelson Bunker Hunt as a client, so that was kind of crazy in terms of that kind of impact.
But anyway, so I was down on the trading floor, got that bug, and even when I was in college, I kind of knew about it. I knew about finance, I knew about, about the opportunities that were down there. I kind of framed the diploma a little bit and my dad wasn't really too excited about that. He kind of thought that for me to be in science and engineering was better. But I was able to marry the two – I was able to merge the two together, especially as an options trader.
Dan Ferris: That's pretty cool. The floor, your 15-years trading crude oil options on the New York Mercantile Exchange... during that 15 years, was there a big evolution from physical trading or in-person trading versus electronic? Did you see a big change over that time, or no?
Andrew Furman: I definitely did. There was a little bit of a transition in the 1990s. The Mercantile Exchange, the New York Mercantile Exchange had a platform called "Access" and they basically did this partnership back with with AT&T. This is back in, I think, like 1993... 1994. And at the time, it was kind of like a guard dog. Like they didn't really want electronic trading to kind of take out the floor. What they wanted to do was they wanted to have it there, just in case.
Then by the time that I left... I left actually in 2000... 2001... because I was afraid that the lights were going to go out and I was obviously a little bit too early. But you know, that was good for me. It was good for me to get out off the floor.
Dan Ferris: So we don't talk to a lot of people who have this type of experience, so I'm really kind of eager to, you know, exploit the opportunity here. Our listeners are individual investors, what might be called "retail investors" right? They're managing their own money and picking their own stocks and things. Is there anything about that experience trading on the floor of the Exchange there that you might say "if you only knew this, you'd never trade crude oil" or "if you only knew this, you'd make a lot more money trading crude oil"? I'm curious – is there something about that that you could share with us?
Andrew Furman: Well there's actually a lot of things, but I'm sure we don’t have the time to talk about all of them. I can certainly mention a few. One of them is that the leverage in commodities is really, really aggressive. You know, for example in stocks you have, like, 2-to-1 leverage, 50% margin.
In commodities, the leverage – I think the margins somewhere around like 15%, because the margin changes from time to time, depending upon volatility. But typically, you'd get 15% margin, which means that you could control six, seven times the amount of volume with your capital. And that edge cuts both ways. That's where it cuts both ways. So you have to be very, very careful with what you're doing when you're trading commodities, because you could easily blow out if you're not careful... if you're not managing your risk.
Another one that I would throw out is options trading. You know, I think that some of your listeners are going to be dabbling or trading options, and you really have to be careful with that as well. Because not only do you have to be right in direction, you have to be right in volatility. So that's a much, much trickier game and for most of your listeners it's probably wise to stay away from that. I know that one of the Stansberry products has covered writing that's going on and I think in that kind of sense that that might be able to be managed OK. But generally speaking, options are going to get you probably into more trouble than not.
Dan Ferris: Yeah and Nassim Taleb says, "Most people should never go anywhere near them because they're too," he calls them, "too multidimensional," basically too complicated, and I'm sure most people listen to what you just said and they're like, "What does he mean I don't understand the volatility?" "What does that even mean?"
Andrew Furman: You know, there are like four variables that we used to watch that we were tracking, and it was there was delta, vega, delta, gamma, theta, and vega. So delta is directional. These are literally derivatives. I mean the reason why they're called "derivatives" is that they are calculus derivatives. The delta of an option is the first derivative of the option price with respect to the futures or the stock price.
The second derivative of that is, you know, the first derivative of delta is gamma. And so, you have to as an options trader – you have to be watching all of these things. So these are the dimensions that Taleb is referring to, there are these four dimensions. So if you want to be expressing an opinion about what's going to be happening in the marketplace, you better be right on those accounts.
Dan Ferris: Right. So it's a whole bunch of complicated higher math that is probably best left to chemical engineers from MIT, that's my way of putting it today. [Chuckles] I'm glad we could make that point, because I think a lot of people they just view options as kind of like, it's a lottery ticket or something. They're saying, "Well you can make a lot more money and maybe if you only spend a little bit, you only lose a little bit," or something like that.
Andrew Furman: Yeah, the way that I like to describe it for people in terms of very good, simple explanation of how options work is just that stock is for direction – for up and for down – and options are for volatility and that's it. Options are a volatility game, stock is a directional game.
Dan Ferris: OK. So what does that mean? If you think volatility comes from, what, a lot of uncertainty about the future, let's say possibly the near-term future of some asset price or some stock price rather than somebody who just owns the shares might be looking forward and saying, "Well the business isn't changing that much. They're earning more money. I'm going to hold onto the stock," you know, that's what the, the shareholder might say, what would the option trader say? Would he say, "You know, earnings are coming up. There's a lot of uncertainty I'm going to, I'm going to try to do something," like that?
Andrew Furman: Well that's right. Like for example with an earnings announcement, you would actually have a clue as to the fact that something is going to happen in a certain time band. And that gives you a certain amount of help in terms of buying the options. The problem is just that the market is very sophisticated so the market is going to know about this earnings report just like you. And unless you have an extra piece of information that the market doesn't have then what's going to more likely than not happen is that the premium will be bid up in advance of the earnings release and you'll buy you're premium and then it will be very, very hard to get the kind of rewards given the risk of the higher premium that you paid.
Dan Ferris: Right. So you're playing – I mean what you just described is probably like one of the basic things that a retail investor does with options. And the problem with it is it's highly predictive, usually over a very short time frame. So you're predicting a securities price-move over a short time frame is like a loser's game. Period. You know, you're going to lose many more times than you're going to gain.
Andrew Furman: Well you really have to make sure that you have an advantage, you have some kind of informational advantage. And that's kind of good way for us to dovetail into the title of the book, which is Risk Is an Asset. Risk becomes an asset when you have some kind of advantage.
Dan Ferris: So informational advantages are really, really hard to get legally, right? It's really hard to get an informational advantage. If you read all the public filings and keep up with the news and research... the industry... that doesn't necessarily... that's like table stakes. That just gets you there and everybody tends to know all that stuff. So informational advantages are tough aren't they? I mean...
Andrew Furman: Yeah they are tough. You have to know what you don't know. So in this situation like this, for investors as an example, Stansberry is an informational advantage. OK, because you have people that are investing a lot of time into finding out, let's say, if there's good company there (and obviously this is a little bit of a plug for people that are listening here), but it's of note – you want to make sure that you have some kind of informational advantage with whatever you're doing.
Dan Ferris: OK, I mean sure you can have, you can build a research organization as Stansberry has done and you have a lot of people paying close attention to a lot of different things and retail investors can buy Stansberry Research, so OK that's, that's all of a piece. But then in addition to that it sounds like we're talking about all this complicated math and stuff it sounds like there's a lot more to do to build... to really what you're talking about turning risk into an asset and build a position and, and develop a strategy. Like the informational advantage sounds like, you know, it's the seed, it's not the tree, let alone like the leaves or the fruit or anything, right?
Andrew Furman: Well that is, you know, in terms of making risk an asset what we're talking about is just that there's, there's good opportunities and there's bad ones. There's good risk and bad risk.
You know let's, let's take a step back here for a second. There's a woman named Brené Brown who talks about becoming vulnerable and getting the power of vulnerability. What she's talking about is just the fact that you take risks. For example, you get into relationships that you could get hurt in a relationship but also, you can get married and you can have children and you can create. You can advance yourself and you can get meaningful experiences from taking on a risk.
It's the same way in investing or even trading. That what you do, is you set up a situation where you have more reward than you do have risk. Once you structurally have that, that's how you make risk an asset. You're managing your risk, you're identifying that your, for example, your downside is X and your upside is Y, and that your expected value... that your outcomes are going to be better. That your net outcome is going to be better.
You're making a series of decisions. You know, in the book like for example, we're walking hedgers through proper process, though a good process that enables them to be consistent, and it's the same thing in terms of investing. By making a series of decisions whether it's to hedge or to invest, what you're doing is you're giving yourself the opportunity to make smaller, incremental steps and actions so that they collectively are adding value.
There is... What I want to make sure that the listener understands is just that we want to get away from thinking binary. That it's not like, for example, I'm 100% invested in the stock market or I'm 0% invested in the stock market or I'm 100% invested in a single stock or I'm 0% invested in a single stock. If you start thinking about things – not from a zero or a one, not from absolute -in or absolute-out, that you can kind of wade your way in and wade your way out. That's how you make risk an asset... Just that you're able to define your risk, you're able to take the emotion out of it and you're able to make a series of above-average decisions.
Dan Ferris: I'm just curious as to what would you tell someone, you're having a beer at the bar and you tell them what you do and they say, "Oh I trade options" and, you know, it turns out they've been in the stock market for one year and, and they're buying call options on Tesla or something. [Chuckles] How would you tell that person what kind of portfolio you build with the knowledge that you possess? How, how would you explain it to them in a concrete way?
Andrew Furman: What I would first tell them is "don't trade options."
Dan Ferris: [Laughs] That's right, that's right.
Andrew Furman: And then the second thing that I would do, would be to tell them to, you know, as your listeners have heard a number of times, probably diversify. Make sure that your portfolio doesn't consist for example of, of just a couple of stocks, that you really want to have an opportunity to participate along a wider breadth of exposure, so that if one company makes a misstep or that there's some kind of new development in that industry that you're not going to be adversely affected.
So from a portfolio-construction perspective, you want to be looking at correlation. And as an example, you've mentioned gold. I mean, you know, investing in gold stocks, that offsets with other type of stocks, because the sectors aren't necessarily as correlated.
Dan Ferris: Right, yep. And you know, it's a different kind of hedge, isn't it? I was talking with someone this morning on Twitter about this. It's not about necessarily like inflation, per se, like consumer prices or asset prices, but it's just the threat of currency debasement... the risk of currency debasement, it kind of gets you outside that system. So it's kind of a bigger – it's like a micro-hedge, I view it as.
Andrew Furman: Yeah, actually gold is really driven by real interest rates. So that's the inflation rate minus – that's the interest rate minus inflation. So if, let's say, interest rates are zero and inflation is 2%, that's a minus 2% real negative interest rate. And when interest rates are negative, that's positive for gold and it's positive for gold miners. You're likely to see a situation where that, you know, that would work positively for those. Whereas, for example, that works negatively for bank stocks, right? Because banks want their interest rates to be higher so that they can get yield.
Dan Ferris: Yep, and you can see it in long term. I just recorded a presentation for the Stansberry Conference and you can just take a 10-year look at interest rates and take a 10-year look at currency values... and you know you can see the euro going down as interest rates go below zero... and you can see the yen going down as interest rates go below zero. You can see the U.S. dollar going down as interest rates head toward zero and, who knows, below, I don't know.
All right, Andrew. I want to get – I still want to get something more concrete out of you. So we read your little bio here, and it says you joined Risk Revenue in Houston where you spent 12 years providing hedge solutions for corporations, private firms, utilities, and other people I assume who use, you know, energy and commodities, or maybe even produce them. What do you do from day to day, I guess? What is your job there? What do you tell people? What do you do for them?
Andrew Furman: Well, we're helping people to manage their risk. What we do is we take a look at their assets, which could be a cost as an asset or production as an asset. Then we bring in their hedges into their portfolio and we look at the total picture. Then we decide... We look at what their free cash flow is going to be, and we look at their debt to EBITDA and we ask our client, "How do you determine success?"
So in each budgetary period – let's say, 2020, 2021, 2022, we drill down to what is success. And then we're able to defend that success by giving monthly risk reports and tracking changes in volatility... changes in commodity prices, changes in their production or their costs, you know, or changes in their usage. Then together each month, they'll get an updated report on where their risk is and where their revenue is going to be. Where all of these metrics are, that they're tracking.
So if we can actually pin down what the success is for that company. For example, let's say it's we want to keep the net debt to EBITDA below three. Then what we can do is – we can assist them with hedges so that they make sure that, that metric for success is being defended.
Dan Ferris: Right, so it sounds to me – this is a topic in your book, too – it sounds to me like a big part of this job is quantifying risk, right? Putting a number or, you know, a set of metrics around the risk of a particular business.
Andrew Furman: Well, that's right... that's absolutely right, Dan. What we do is we actually use options volatility to make an objective assessment of what that risk is. Because if you're paying, let's say, $2 in premium for an option, what that implies is a certain amount of annual movement in the commodity. So we take that expression and then we make a risk estimate which is objective and it's market-based, so it's not our opinion about where the market can go... it's the market's opinion. By using that, we can help our clients and say, "Hey look, this is not, not what we're saying – this is what the market saying."
And, you know, and then what we do is we actually go one step further. We go back in time historically to see what those estimates said, and then what happens to those estimates. In other words, like if you go back to, let's say, 2005 and you say, "Ah-ha, in 2007, the estimate was for the market to make a – let's say, a 40% move and it was going to, say, a 5% chance of going beyond a certain threshold up, or 5% chance of the threshold going down." Then what we do is we go back and we check all of those historical estimates for how they did. And it turns out that our estimates in the first 12 months are very, very good. They really, they really do a very good job of estimating how far markets can move.
Then we take a look at the year two and year three, but you know, months 13 through 36... it turns out those actually underestimate the risk, so those aren't necessarily accurate... they're more precise.
But the important thing for our clients is that they know that they're getting an objective, agnostic estimate on risk. And that it's quantified, and that they know how low is low. And that they have a probability expectation of what can happen, and they know that that can happen and does happen.
Dan Ferris: OK, so here's my question about quantifying risk. It seems to me given the – I mean, you obviously have a track record with this, you've demonstrated that you can do it, right? And I get that. But one of the things I worry about more nowadays than I kind of used too is the value of, of history, right, the value of backward-looking data just in general. You know, I tend to spend a lot of time these days wondering how the future could potentially be very, very much different from usually the fairly recent past, maybe the past five years or, or even 10 years at the most maybe.
It sounds to me like if you're in the business of quantifying risk, every now and then, something like March 2020 shows up and it kind of changes things. Because maybe nobody thought everything – you know, maybe nobody thought there was going to be negative oil prices and nobody thought that the market was going to go down 30 or whatever it was 34 or 5% in, in about a month.
My question for you Andrew after all that is: Do you take that into account? Do you tell your clients, "This is what we know, this is what we've done and our knowledge or our circle of competence ends here and this is what we don't know"? Is there like a real discussion with clients around what you don't know and can't know?
Andrew Furman: Absolutely, absolutely and the best way that we express that is by updating our risk estimates every month. Because we know that we can't, for example, give our client an estimate of risk in January of 2020 for – where oil can just go to sleep and then come back in April or May when there's a COVID firestorm going on, and then say, "Ah-ha, here we are." In other words, what we're doing is just that we're updating it not only, let's say, in December of 2019, we're updating it in January... at the end of January of 2020 and then, the end of February of 2020 and then, the end of March of 2020... all along the way. And if things even get volatile inside of the month we're able to assist them that way as well.
You know, these are the kinds of things that work for essentially anyone in any industry. I mean, if you're a gold miner, if you're an airline that is using fuel all of these... You know, these techniques can, can work really in terms of hedging for, for any business.
Dan Ferris: I see. My question though I'm more interested in the role of time, because we know that a whole lot of time can seem to be compressed, a whole lot of time was compressed into, like, one month in March of this year. Then the market goes up a little bit one year, it goes up a little bit the next year, it goes up a little bit, and then wham, it's down a whole bunch in one month. So it sounds to me like you guys must have been updating every day in March, right?
Andrew Furman: Yeah well, I think to be fair here, the move in oil, at least – for oil itself – I know that the stock market was a little bit different. But for our oil clients, this was not actually a one-month event – it really took place over about a four-month period. You know, we had back in December of 2019, the Saudis were trying to hold up oil. They did their IPO in the first or second week of December. Then in early January, there was a top and as a matter of fact our clients were alerted to the distinct possibility of a top – that's actually in the book, so that's there.
Then at the end of January we were alerting them again. And at the end of February, we were talking about a recession risk, because we, we already saw that, that air traffic was down because of China in January and February. So we were able to start seeing those things showing up. And, and so as long as we're paying attention and as long as our clients are paying attention this doesn’t haven't to be a situation where it's, it's literally one month it's OK and the next month it's not.
Granted, COVID in terms of the stock market was a little bit faster. You know, we went from I think the second or third week of February to the end of March and the market lost a significant amount of value in six weeks. So from that perspective, you'd have to be on top of it a lot more closely on the order of weeks instead of on the order of months.
Dan Ferris: Right. And what I'm hearing is that I mean the answer to my earlier question may not necessarily be, "Well you've got to wind up updating every day," but your normal process served you well and indeed prepared you for an event that realistically, like nobody really could have necessarily foreseen the utter swiftness and depth of that move in March. And yet it sounds like your normal process did just that. It did... It didn’t effectively foresee it, but it prepared you for it. You didn't predict it, but you were prepared.
Andrew Furman: Well that's right because you're updating it and that's part of your process. Your process is iteration in terms of being able to look at your assumptions and then volatility changes from, let's say December to January or from January to February. And as long as you're updating your assumptions and you've got your hands on the wheel, you know you're driving this car, your road conditions will change, and you're able to adapt to that and monitor it and make that series of hedge decisions or series of investment decisions. So that you can prune your risk and that you can make sure that you're managing to your success metric.
Dan Ferris: OK. So we're actually running out of time, but I don't want to let this go just yet. I have to tell you, Andrew, I'm like a little bit let down that the best we could do for our listener who is not one of these corporations that you guys are working for... the best that we could do is to say, "Don't trade options." [Laughs] I'm sure some people might feel a little let down by it. Can we do any better than that?
Andrew Furman: Well I'm sorry, Dan. Let's see if we can... see if we can sum up what we've got here.
Dan Ferris: OK.
Andrew Furman: We've got... What we want to do is we want to have a series of decisions, we want to have good portfolio construction, we want to have a process and a plan, and sticking to the plan. Very, very importantly, we want to match our time frame of our information to our holding periods. Meaning that for example, with these hedgers, we're talking about budgetary periods . And with an investor... if an investor gets advice about the next 10 years of a stock being better than the first 10 years of the stock. And that the first 10 years were excellent and the next 10 years are just going to be terrific, what's your holding period going to be?
So what you want to do is, you want to match to that. And that way, you put yourself in a position to have that risk be an asset, so that you're able to, you know, see the gains from that information.
Dan Ferris: OK, you said a bunch of things that I'm glad you said. One of them being have a plan. Like everybody we talk to about trading they just... And then the matching the time frame to the information. Everybody I talk to about trading no matter what their experience they wind up hitting like just about exactly the same points that you just hit.
And, you know, no apology necessary, Andrew. I didn't mean to say that you're disappointing – you're doing great. You're explaining a lot of complicated stuff in language that we can all understand. And I have to say, not having read every page of your book but having dipped into it in several places, it's written that way, too. It's actually fairly sophisticated stuff but anybody – any reasonably intelligent person who understands you know securities a little bit can appreciate your book. So I wanted to say that.
But you know, I didn't mean to criticize you in particular. You're doing great, but I'm grateful for what you just did for our listeners and I hope they write those bullet points down... And I hope they write those bullet points down, every time we talk to a trader, because they're going to be the same bullet points every time. So I thank you for that.
Now I've got one last job that is even a little bit more difficult than that. I ask all my guests, even if they did a brilliant job of summing things up like you just did, if there's one idea – just one, not a list – that you could leave our listener with today, what would that be?
Andrew Furman: Good risk is good. Risk is good. Risk is opportunity. You know, people are thinking that risk is harm and in fact, risk is very, very good as long as it's intelligently managed. That's the opportunity. There's a great quote from Baillie Gifford and it said "actual investors think in decades, not quarters." I think that when you think about your investments over a longer time frames, that's the way that you make risk an asset. That's the way that risk becomes an asset is by matching your time frame and letting a business express itself over a longer period of time so that you can take care of your retirement.
Dan Ferris: That's so good. You almost... I didn't mean, I don't mean to say that your comment is similar to what Gordon Gekko said in the movie Wall Street, but you just had a little bit of that panache, you know, risk is good, risk is right, just to paraphrase him. So that's excellent. Thank you for that and, and thanks for joining us.
Andrew Furman: Well thank you for having me.
Dan Ferris: You bet, man. I actually I meant to have you on sooner because I followed you on Twitter for quite some time and I really like your Twitter feed. You know, I'm glad that we could finally get together. I hope maybe we'll check in again in six or 12 months from here and see what you're thinking then.
Andrew Furman: OK, excellent. Thanks a lot Dan.
Dan Ferris: OK I'm glad that Andrew mentioned the Baillie Gifford quote, "You know real investors think in, in decades." My partner in the Extreme Value newsletter, Mike Barrett, if you're a Stansberry subscriber you should go look up in the Stansberry Digest archives and Mike Barrett wrote a brilliant Digest all about Baillie Gifford. I think he actually included that quote if I'm not very much mistaken, but go look it up. It's really terrific. I don't have the title of it, but you'll find it, it's very recent, it's by Mike Barrett, it will be easy to find.
And also again, I want to reiterate... did you hear what Andrew said at the end of that interview, man? He listed all the same stuff that all the traders talk about. And maybe it just sounds ordinary now because you've heard it so many times and I did I tried to get him to make it as concrete as possible. But I promise you, having a plan and matching the time frame to the information – and these other points that traders always hit on – they really are super important.
Having a plan is so important. And I'm – my fear is that the majority of the people within the sound of my voice right now don't really have a plan. You know, they get a hunch, bet a bunch. You know, they hear something from their brother-in-law or they hear – I guess people don't go to parties anymore because of COVID – but they read something on Twitter or Facebook or just in the newspaper. Or they see something on the news and they kind of react. And I feel like it's my job to help people to stop doing that.
So I keep having these traders on, and every single time I know where they're going. I know where they're going and now, you do too. Next time, I have a guy on and say, "He's been a trader for 27 years" or whatever it is... You know what's coming and you should listen and pay attention.
All right, that was great. Let's check out the mailbag.
Hey guys my friend, Matt McCall, recently came out with the name and ticker symbol of a company that he thinks is going to be the best-performing stock in 2020. And if you listened to our interview with Matt on Episode 172, you know that when this guy says something is going to be the best-performing stock, you better pay attention. He's had, like, I don't even know, I think it's like 200 triple-digit winners in his career. It's just crazy the huge gains that this guy is generating.
Matt got together with my other friend and colleague, Steve Sjuggerud, here at Stansberry and they made a video. Of course, you know Steve, he's predicting a Melt Up, right? He's saying the stock market is going to continue to soar to new heights and in a big sort of Melt Up event. You know, somewhat similar to what we got at the height of the dot-com bubble, but we're not like halfway there yet, I think, if Steve is right.
So what happens after that? Well, what if it's like a bear market and the market goes sideways for 10 years or something, right? If you're old enough this could be like your last chance to kind of build up your retirement war chest in the equities market. And Matt and Steve know this so they got together and they made this video called finalbullmarket.com, right? It's all about this idea of the final bull market.
And in that video, Matt will name the company that he believes will be the best-performing stock of 2020. No matter who you are – you're a professional or you're an individual investor just got into the stock market, whatever – you will walk away from this video a more knowledgeable investor, and you'll walk away with the name of Matt's best performing stock of 2020. So it's a pretty good deal, free of charge. Go to www.finalbullmarket.com. They'll tell you all the details – that's www.finalbullmarket.com. Check it out.
In the mailbag each week, you and I have an honest conversation about investing or whatever is on your mind. Just send your questions, comments, and politely worded criticisms to [email protected]. I read every word of every e-mail you send me and I respond to as many as possible.
OK, let's just get straight into it this week. Last week I mentioned in passing that we're having these enormous, highly destructive forest fires out west here where I live because the forests are mismanaged and it was just a passing comment, because basically everybody who lives out here who knows anything, little thing about it knows that what I said is not the least bit controversial of a statement. It's just the way it is. We all know it.
We all know for a hundred years, they've been doing the wrong thing with these forests and it fuels them up and, you know, they suppress the fire, they put 98% of them out way too soon and then the 2% they don't put out a good wind... That's what happened this time – a good wind comes along and boom. I mean, winds can send fire across freeways. Think about how wide a freeway really is, and it will send the fire across a freeway. It's crazy. And it can send embers like hundreds of yards К I've even heard like a mile or so.
So I know what I'm talking about, and yet I got a letter from – an e-mail from Joe K. and I got one from Levy N. Joe K. says, "I am a newer listener of your podcast and usually enjoy it. But during your recent rant you stated the forests are burning due to mismanagement. This seems like an overly simplistic view to an extraordinarily complex problem. You normally seem to believe in science, but on this topic you disregard it. I'm just curious. Thanks, Joe. K."
Then I'm going to read Levy N. and I’ll react to both of them.
Levy N. says, "I'm 12 minutes into your latest podcast. Love the show. Look forward to it every week. But you just said the California's forests are on fire because they've been mismanaged. It was a short, passing comment. As you finished that thought you went onto the next one. I had to pull over and write in. Dan, I really value your opinion and your independent thought, but to say that the forest has been mismanaged and not mention anything about," get ready for it folks, "climate change in the same sentence is both shortsighted and irresponsible. It came across as the same garbage and nonsense that Trump spews." Duh, duh, dunt, dunt. There, we got to the core of what's really bothering Levy N.
He continues, "Say what you want about climate change and those who forecast or predicted the facts remains temperatures are rising, things are getting drier. I live in Northern California." I have to believe you see the same thing as I had to write in, Levy N., and yeah, I see fires. Look, don't even take my word for it, OK? Here's the Sierra Club, the radical environmentalists at the Sierra Club they say, "Calls for regular fire in the Sierra Nevada continue to reduce unnatural fuel loads and reverse the trend towards larger, high severity fires which... " And they don’t like them because they destroy old growth.
You know, the low-severity fires don't destroy the old growth. I mean, have you ever stood next to a redwood or even the Doug firs in my backyard? I mean, they're a 100 feet – I think they're at least a 100 or so years old. I'm just spitballing there. You've got to measure them, you've got to go about five feet off the ground. You put a tape measure around it, you multiple it by 1.6, and that's the approximate age. I haven't done that, but they're old, they're big, old trees. You know, a little bit of fire isn't enough to burn them down, but a whole lot of fire – if you mismanage forests – is enough to burn them down.
Let's get to there, there was another part of this Sierra things that I wanted to read. Yeah they say, "The science... " This is the Sierra Club now, not Dan, this is the Sierra Club Levy N., listen close, "The scientific research is clear. For over a century the Forest Service logged large fire-resistant trees and clear cut," here's, here's the money shot, "while putting out every fire. Now there's an enormous buildup of forest fuels. The frequent and mostly low and moderate intensity fires under which the Sierra Nevada evolve have been replaced by larger and more severe fires, which burn even the large trees, which used to, usually survive," they say, which I would say you know used to survived before the large fires. "They continue the highest-priority ecological need and the Sierra is prescribed fire to maintain forest fuels at the level they should be."
Here's Science Magazine from September 2015, the article is called "Reform Forest Fire Management" and you could read – I could read almost any paragraph of this and it beats you over the head with the point I'm making. But I’ll just pick this paragraph: "Accumulated fuels in dry forests need to be reduced so that when fire occurs, rather than crowning out and killing most trees, it is more likely to burn along the surface at low-to-moderate intensity, consuming many small trees, restoring forest resilience to future drought and fire." That's the end of that quote.
There's another thing you'll hear people talk about out here who know what they're talking about, unlike Joe K. and Levy N. who clearly... Look, the way somebody doesn't know what they're talking about with fires is when they, when they get quickly to the topic of climate change, because it doesn’t matter in California that the average temperature went up three degrees over the last 10 years. You don't need to have these destructive fires.
And right in the same article it says what I said. It said, "In the United States for example 98% of wildfires are suppressed before reaching 120 hectares in size." And, you know, size doesn't necessarily mean intensity and severity and destructive power. But the 2% of wildfires that escape containment often burn under what did I say, "extreme weather conditions" in fuel-loaded forests and account for 97% of firefighting costs and total area burned, right?
So if you just let those other fires burn, you will reduce the firefighting costs dramatically and the forest will be much healthier. The fuel load will be smaller. We all know this out west. Like none of this is controversial.
And the reason why I'm so passionate about this is – especially Levy N., you said, "It came across as the same garbage and nonsense that Trump spews, shortsighted and irresponsible." That's not just your opinion. You're just wrong. It's just false. And this is exactly the kind of intellectual situation that an investor needs to get. You don't know what you're talking about. [Chuckles] You don't.
And Joe K., you said, "You normally seem to believe in science." Well it doesn't matter who believes in what, because science is whatever nature does, and nature has beat us over the head with... it has bludgeoned us, some of us to death, literally destroying lives and property and just vast amounts of this valuable resource. So, you know, I believe – I don't have to believe in anything, because the science is, is not complicated. You said, "It seems, seems to be... " You accuse me, Joe K., "of an overly simplistic view to an extraordinarily complex problem." Eh, wrong. It's not extraordinarily complex. We know how to do it.
We just don't for stupid political reasons like we're too busy spending money and time fighting climate change, which is a non-problem. It's a non-problem. We have much bigger environmental problems than climate change. You're joking me right now. Yikes.
All right, moving on. Al M., who I always love hearing from. Al M., he's a frequent correspondent and he says, "In the discussion with Matt McCall, you made the point about Japan and its 40-year history of stagnation despite constant excessive government stimulation. I've used his thinking over and over, arguing all this money printing doesn't create productivity or growth. However, this might be wrong, considering Matt's ideas. My thought and experience with Japan are that it's a very different country than the U.S. Japan has an incredible discipline of its population. America has an incredible innovative spirit." OK, and then – I'm sorry Al I can't read the whole thing.
Again, he says, "They have the discipline, but they lack the creative spirit of America." And he says, "I suspect Matt is correct when it comes to innovation and he's probably also correct that it will be in the medical field, given the entirely new perspective of genetic research, incredible opportunities. Hope this idea gives you some pause. Thanks for your diligence and search for value. Love your comments. I left Extreme Value but came back. Al M."
Al, welcome back to the fold in Extreme Value, first of all, but I think you're right. U.S. is very different from Japan and we have a great innovative spirit, but I still think that the point is valid about the money creation and quantitative easing pushing on a string and not really being... I think it's a poor tool for generating – for stimulating economic growth. The central bank actions are poor tools, still. So it's not that that's wrong. What you're telling me here though is that this innovative spirit kind of trumps that to a great degree and I think I agree with you. I think I agree with that. Thank you.
Next is from Leo A., and he says, "Please give us your opinion on putting bitcoins in an IRA, including gold coins." Sounds fine to me Leo. An IRA is just something that you do. You know, it's whatever you do with those pre-tax dollars, right? So you want to put bitcoin in there and you think that's a good idea... that's between you and God and the, and the IRA person that you're working with. [Laughs]
So yeah, you know anything you want to put in an IRA is kind of fine, I think. You know, there are some people who write in and say, "Is it legal to put such-and-such asset in an IRA?" "Can I put this in there?" "Can I put that in there?" And I don't answer those questions because, I don’t know, I haven't even encountered any anything about putting bitcoin in an IRA. But if you can do it – if it's legal – hey, why not?
The next one is Tearin S. and then in parenthesis, maybe "T.J." Should I call you T.J.? I’ll call you T.J. T.J. says, "Dan, I very much enjoyed the September 17 podcast. I do think however that your comment about Jay Powell, that he's keeping interest rates low for himself and his rich friends, was totally well over the top. I don't know Jay Powell, but I've listened to his speeches and seen interviews with him and he comes across as a genuine, nice man. I may be a Pollyanna on this, but I think he's trying to do a good job at what is probably the worst time to be Fed chair. Look, personally, I'm open to the idea of an anarcho-capitalist system with a non-fractional gold standard, but that's me. In that case, no central bank is needed. If we're going to have fiat money, you have to have a central bank as a lender of last resort. Like you, I don't think this is going to end well, but in the meantime Jay Powell is trying to keep afloat a doomed monetary system. He's not trying to make his friends rich. Best regards, T.J."
T.J., I have two problems here. One is, I'm not sure that you're not just making fun of me and that this whole e-mail isn't a joke. I thought about it, I looked at it. I think you're serious so forgive me if you're joking because I'm not going to take it seriously.
Jay Powell coming across as a genuine, nice man is meaningless. He is the chairman of the Federal Reserve. He is Agent Smith in The Matrix. Got it? He works for the enemy. He's trying to make everything more expensive to support asset prices for him and his rich friends. And to say that in one case, you say you're OK with an anarcho-capitalist system with non-fractional gold standard and then in the next, you're going to say "he's trying to keep afloat a doomed monetary system." I mean, I'm not sure what to make of all this. You appear to be contradicting yourself a bit.
Just so we're clear, "keeping afloat a doomed monetary system," which also happens to enrich everyone in the financial system, you know, that's evil. OK? [Laughs] That's wrong. Keeping afloat a doomed monetary system is wrong. If you were a good person you'd say out loud in public with a straight face where everyone could hear you, "This is a doomed monetary system." And keeping it afloat just enriches the top 1% or not even top 1%, just the 1/10th of 1% who got rich gaming the financial system, right? All the, you know, the Jamie Dimons of the world who achieved this generational wealth in a system where their mistakes are backed up and fixed by the government. They're bailed out, right? They're too big to fail. He can't be poor. He can only be rich because of Jay Powell.
So again, like the forest guys I don't think we differ in opinion, I just don't think you see the situation very clearly and I think you said, "I may be a Pollyanna." I started reading James Joyce's Ulysses recently and came across a word "jejune," which I hadn't seen in years and forgot what it meant, but it means "naïve." Think about it, just think about it. And if you thought about it and want to write back in and say "I thought about it," I'm sticking to my original saying "he's a nice man."
Bernie Madoff was a nice man to all the people who gave him money. I mean Ted Bundy was a nice man to the women he killed, before he killed them. I think he seduced – he sort of seduced some of them into sort of coming along with him, but some of them he just attacked them when he went crazy in, in a couple of instances. But still, you know, to some people he was a nice man.
OK, next comes Bill T. This is the last one this week. He says, "Hi Dan, thanks for your insights offered on your podcast. I've now taken an interest in learning more about macroeconomics and especially how it relates to being prepared for different outcomes. I've been long precious metals and bitcoin for a while and feel adequately prepared for inflation, stagflation, and even hyperinflation. However, a lot of the talking heads are pointing to deflation as our greatest risk and most probably outcome. How do gold and silver typically perform during deflationary times and what other investments besides cash would be recommended for such an eventuality? Thanks, and keep up the great work. Bill T."
So you know in a deflation, Bill, cash is king, period, right? Because asset prices go down, consumer prices go down. You're probably going to see lots of companies margins crimped if, if they're running a business model that depends on the power of their brand to get a thicker profit margin.
How do gold and silver typically perform? Well, you know since they became when they were money you wanted to have plenty of gold and silver, but you know now that they're not the currency, now that they are priced in the currency in dollars they will be very likely priced lower in deflationary times.
But what we get is this thing where interest rates are zero, which is not a sign of inflation, it's a sign of deflation, right? We get interest rates near zero, but they're near zero and the Federal Reserve prints money and buys securities and other things and, and executes these lending facilities and things in an effort to stimulate. So it's not just that there's a deflation, it's that the response of the central bank potentially degrades or debases the currency badly and so you end up wanting to own gold. So at the same time when interest rates are near zero gold is, is not far from its very recent all-time high, right? Strange, huh?
So my point there, it's kind of like the binary – don't think in too binary of terms like Andrew discussed in our interview today and others on the program, other guests have made the same point and I've made it. You know, you don't want to say, "Well it's either deflation and all the prices are going down and you have to have cash or not." That's part of the point of what I call "true diversification," stocks, plenty of cash, plenty of gold and silver, some bitcoin, is because it's not a binary thing. There's an interaction, right, it's dynamic, the situation is dynamic.
The reason why the government and the central bank screw everything up is that they assume stasis. They assume everything is a still target just sitting there waiting for you to shoot it. But every time they fire their bullets the target moves, people adjust, right? If you raise taxes on rich people in one particular state or another, they'll move to the state where the taxes are lower – that kind of thing, right? It's dynamic. So just be careful on how you think about these things. But very good question. I'm glad you asked it so that, so that we could sort of dive in and make that point. Thank you, Bill T.
And thank you, everyone. That's another episode of the Stansberry Investor Hour. I hope you enjoyed it as much as I did. Do me a favor subscribe to the show on iTunes, Google Play, or wherever you listen to podcasts. And while you're there help us grow with a rate and a review. You can also follow us on Facebook and Instagram, our handle is @investorhour. Also follow us on Twitter where our handle is @investor_hour.
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Until next week I'm Dan Ferris. Thanks for listening.
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