Dan opens up this week’s episode discussing the tragic death of George Floyd and the riots and protests that have erupted across the nation as a result.
Dan discusses the factors that make this situation feel different and the implications it could have on the market’s recovery. He also shares how this could have huge potential investment implications for investors down the road.
Then, Dan bring special guest, Jesse Felder, onto the podcast for this week’s interview. Jesse started his career at Bear Stearns & Co. and has professionally managed money for over 20 years. Since moving to Bend, OR and founding The Felder Report, Jesse’s writing and research have been featured in major publications and websites such as Barron’s, The Wall Street Journal, Yahoo Finance, Business Insider, Real Vision, and more.
During their conversation, Jesse shares his insights with Dan into where he thinks the market is headed. He also shares the name of a really undervalued stock that he’s been trading lately… Jesse says this company has no debt, over $1 billion in cash reserves, and is trading way below its liquidation value.
Then Dan answers questions from listeners during this week’s Mailbag. Why is it that those who claim fiat currency is collapsing want us to buy gold from them using US dollars? Wouldn’t they want gold over dollars? What would a long deflationary cycle do to the price of real estate, gold and Bitcoin?
NOTES & LINKS
2:24 – Dan opens the episode by discussing the tragic death of George Floyd and the riots and protests that have erupted in 350 cities all over the country as a result.
5:25 – “The right to peaceful assembly is in the Constitution. We have that right. You don’t have the right to vandalism, arson, assault, battery, murder… you don’t have the right to do any of those things and people doing those things should be arrested.”
13:20 – What’s different about these riots? Dan shares why we’re seeing more anger and violence today than in similar situations in the past.
15:50 – Dan has a conversation with today’s guest, Jesse Felder, who began his career at Bear Stearns & Co. and has been professionally managing money for over 20 years. Since moving to Bend, OR and founding The Felder Report, Jesse’s writing and research have been featured in major publications and websites such as Barron’s, The Wall Street Journal, Yahoo Finance, Business Insider, Real Vision, and more.
23:55 – Jesse shares the two main factors contributing to the rise of extreme stances like socialism and nationalism in today’s political atmosphere.
25:39 – Jesse shares why he deleted his Gmail, Facebook, and Instagram accounts. “This idea of surveillance capitalism is something that makes me uncomfortable…”
29:28 – Dan and Jesse discuss Warren Buffett’s influence on some of the largest tech companies. “I don’t necessarily blame the companies here as much as I do blame the political framework that allowed them to create these anti-competitive moats.”
36:08 – Stocks have been booming in recent weeks… are we out of the woods yet? “The path of the virus is going to determine the path of the economy… but until we have a vaccine, we’re not going to have a full recovery.”
39:32 – Dan and Jesse discuss what to do if we see a stagflationary period in the coming years. “Sounds like I’m buying gold and heading for the hills at this point…”
47:45 – Jesse shares an undervalued retail stock that he loves today. “I don’t think they have any debt coming due in the next 20 years, they’ve got over $1 billion in cash. The stock is trading well below its liquidation value right now…”
50:10 – Jesse shares the proper investing mindset to maintain during times of crisis, something he’s learned from studying the world’s greatest investors over the years. “We need to play defense, we need to preserve capital, we need to live to play another day.”
51:52 – Dan answers questions from listeners in the mailbag… why is it that those who claim fiat currency is collapsing want us to buy gold from them using US dollars? Wouldn’t they want gold over dollars? Do you think a deflationary cycle is coming? What would that do to the price of real estate, gold and Bitcoin?
Announcer: Broadcasting from the Investor Hour studios and all around the world, you’re listening to the Stansberry Investor Hour. Tune in each Thursday on iTunes, Google Play, and everywhere you find podcasts for the latest episodes of the Stansberry Investor Hour. Sign up for the free show archive at InvestorHour.com. Here is 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 Jesse Felder. Jesse has some really good insights about where the markets are headed, and he'll also share the name of a really cheap stock that he's been trading lately. In the mailbag, listener Mike B. asks about the business of selling gold for dollars, and listener Ray T. wants to know if we're headed for a big deflationary event.
And as always, my rant. This week, I'll tell you what I see as huge potential investment implications for investors due to the nationwide riots, and I'll throw in the secret to understanding the market impacts of big political and economic events. That and more right now on the Stansberry Investor Hour.
There is no way to avoid talking about the riots going on in major American cities. I saw one source last night that said that there were actually 350 different cities and towns that were seeing protests, and of course, the rioting that we've probably all seen on television at this point. That's a lot of protests and a lot of rioting. And when you look at the initial event that set this off, I mean, it's no wonder. The video is horrendous of George Floyd with this cop's knee on his neck. It's horrendous.
And he says, “I can't breathe” several times. And I'll tell you something. I've seen this a couple of dozen times because I've started watching this show called Live PD and Live PD just is what it sounds like. They follow like eight or 10 or 12 different police departments around for, I think it's like a two-hour show, and they answer calls and sometimes they chase suspects down and they usually, I've never seen on the neck like that, but they always do it on the back and I've often heard the person say “I can't breathe.”
And the cops always laugh at them and say, “Well, if you can't breathe, you can't talk.” And of course, as you probably know by now, that's false and I can do it right now. I can sit here and not breathe, and let's see how many times I can say “I can't breathe” not breathing. You're going to have to take my word for it. Ready? I can't breathe. I can't breathe. I can't breathe. I can't breathe. I can't breathe. Can't breathe. Can't breathe. Can't breathe. Can't breathe. I could probably have done it a few more if I was really under stress, but I did it like 11 times, I think. So, you can talk when you're not breathing. You can say “I can't breathe.” And of course, there were two autopsies. One was the county medical examiner and he said, "Well, this was basically heart failure." He used some medical term for heart failure.
And then there was an independent medical examiner who was the same guy who Jeffrey Epstein's brother hired to sit in on the autopsy of Jeffrey Epstein. I forget his name, Michael Baden, I think his name is. So, that guy says this guy died from asphyxiation. And he said in the press reports, he said, "Yeah, it's exactly what it looks like. He died of asphyxiation. The oxygen supply was cut off to his brain and it killed him."
I think at one point I heard a report that said there were abrasions or cuts or something on his face from this face being pushed into the asphalt. So, look. It's a horrendous situation. That cop was already written up like 18 times prior. This whole thing to say it never should have happened is rather obvious. And I don't know, I'm willing to buy this line that 90% of cops aren’t doing this stuff, but I don't know.
I mean, this TV show, I watch, this is a random sample of 10 or 12 police departments across the country, and they all do this, and the guy always says, “I can't breathe. I can't breathe.” And now one guy died because they do it. I mean, maybe they're criminals and they deserve to be tracked down or whatever, but killed like that and treated like that? I don't think so.
That's not the way we should do things in this country and the toxic soup of, of drug prohibition and gun control, and even like restrictions on cash transactions and the qualified immunity that police enjoy. Qualified immunity means we're all equal under the law except some people are more equal than others, like police. It was established during the '70s. There was unrest in the late '60s and '70s and the Supreme Court established this thing called qualified immunity, which just kind of looks to me like a license for the cops to abuse us and not face legal consequences.
And I think we're seeing the results of that. And I think qualified immunity is probably going to go away. I don't find it difficult to assess the behavior of the folks in the streets. The right to peaceful assembly is in the Constitution. We have that right. You don't have the right to vandalism, arson, assault, battery, murder. That one guy got killed. You don't have the right to do any of those things. And people doing those things should be arrested. They’re crimes and they should be arrested.
And of course, on TV, they make it look very black and white. Some people are just walking along, singing and chanting, and then other people are doing all these horrendous crimes. But I suspect that in the fog of protest and crowds and rioting and everything, it may be difficult for police to tell who's doing what. Also, the cops look like they're outnumbered. So, do you start arresting people and risk the mob turning on you?
I don't know. I'm not saying it's an easy situation, but I think it's relatively easy for us all to figure out that some people are peacefully protesting. Some people are violating the law. And they should be like, if you can't arrest them, they should be like shot with water cannons and rubber bullets and all that kind of stuff. Because that's criminal behavior. We don't tolerate it. We're not supposed to tolerate it.
So, the situation is what it is. We've got to live with it. The potential investment implication is not actually here yet. There's a potential here for stuff like this qualified immunity if this doesn't get taken care of. However small this effect may be now, we could get to a point where people look at us the way they look at other countries, right?
Because right now the U.S. enjoys TINA status, right? There is no alternative. Meaning U.S. equities are the best. We've got all the best companies, we got the best markets. This is the place where you want to buy equities in the world. That's what TINA means. There is no alternative. But people are going to find an alternative if they start to believe that the system of law and order in the United States is broken enough.
Broken enough could be anything short, something short of a total breakdown. You know, it's not like Venezuela. It doesn't have to be like Venezuela, I should say. But if it's worse enough than what people expect, they won't want to invest here and long-term for the next six months, who knows? To me, it looks like for the next six months, the market just kind of go straight up because there's lots of positive news economically coming out and people just they want to buy. They're getting into a buying frenzy.
The retail investor is participating as he has not participated in a long time, and we're coming out of the lockdown. So, it's a recipe for the market going straight up. And we're hearing also from Scott Garliss of Stansberry, he’s telling us that the CTAs – the commodity trading advisers, the folks who basically buy futures – they're long and short-term. They're turning long and short-term bullish now, so they're ramping up those positions, and he says it'll take some time.
So short-term, sure. Market straight up, whatever. But longer term, I have to believe that we’re going to see the decline of American hegemony. So, that could be seen as a decline in our ability to maintain law and order. Maybe. I don't know. Definitely I think at some point there will be a decline in the desire to hold dollars as the world's reserve currency. Right now, it’s about 60% of foreign exchange reserves around the world. And I've seen numbers, I saw 79% recently. That sounds pretty precise.
I'll say it's probably around 80% 75, 85. I don't know. But around 80% of world transactions, world trade is settled in probably in dollars these days. So, that's huge. And it could go from – instead of 60 and 80, it could be 30 and 40 or something. It doesn't have to... it could still be a huge share and decline a great deal.
The U.S. dollar is almost like an overvalued equity. It can go a lot higher and I think it will shoot a lot higher at some point, but then we're going to see the peak. We're going to see the end. And that's when you'll want to hold Bitcoin and gold. Until then it'll be cash, Bitcoin, and gold. But at some point those dollars will be like hot potatoes, I think.
And this kind of thing is like one of the symptoms, this riding. This is one of the symptoms that you should start smelling that peak. It may be years away. I suspect it is a couple of years away. But you should start smelling that kind of a thing off in the distance. And if you really want to watch markets and watch the political effects in markets, the big macro trends, which are usually really tied up closely with political developments, ignore the equity market. That's not going to tell you anything.
What's going to tell you something is the bond market and what's the bond market now? Well, actually in the very recent past here, just in the past several days, we've seen rates are coming up a little bit. I think people are selling bonds to buy stocks. OK. That makes some sense. But you just, you look at the longer-term trends and I think we’ll probably see lower rates. We may even see negative rates in U.S. dollar denominated U.S. Treasury debt, just like all over Europe and Japan, and for the same reasons, right?
It's an attempt to stimulate and we will see continued attempts by the Federal Reserve to stimulate. And I believe that will eventually result in negative Treasury yields, which means much higher stock prices. So, I think at this moment, do you do anything as an investor about the riots? No. No, you don't, but you just, I don't know, maybe you keep a file of this kind of stuff and you know, you’re saying "hmm." COVID-19 lockdown. The government has kind of just took over every economy in the world. That's not good. Rioting in the streets, that's not good.
And I talked about violence in the streets, but I didn't talk about it – I wrote about it in the Stansberry Digest and I mentioned it in an interview with Jessica Stone at StansberryResearch.com, but I was talking about violence in the streets relative to food shortages. I thought that had the potential to cause violence in the streets with everyone locked down, prevented from making a living. I thought they’re prevented from making living, they're locked down. Now we're going to get food shortages.
They’re going to blow their top. People are going to blow their top. They're going to start stealing, doing whatever they have to, and it could get really crazy, but it got really crazy for another reason in more than 300 cities and towns all over the country. And I have to say in a country where we're so obsessed, we've become so obsessed with baby-proofing the entire country for every toddler and octogenarian that we're willing to wage a war against people making a living and supporting their families, in a country that does that, of course you're going to get violence in the streets.
Of course. The COVID lockdown and the violence in the streets over the killing of George Floyd, they're not directly connected, but they make a lot of sense to me that those two things happen in relative close proximity in time to me. I don't think you can have one without something like the other. And of course it's 20/20 hindsight. You can go, well you can just correlate anything, can’t you?
And you're right. You're right. Like I've said before, this is Dan's gut. This is not me pouring over a spreadsheet and saying, “Oh, you see that?” No, it's not that. That's all I have for you right now. The investment implications are something large that happens over a long period of time, not happening right this minute, but keep an eye on the bond market if you really want to know what's happening and politically how politics is impacting the market. Keep an eye on the bond market, not the stock market.
The stock market's the least macro-sensitive thing. The bond market is the most macro-sensitive thing. OK? So, just take that lesson with you. And now I want to talk to somebody who knows more about all this than I do, Jesse Felder. Let's talk to him right now.
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Dan Ferris: OK, everybody, it's time for our interview. Cannot wait to talk once again with Jesse Felder. Jesse has been managing money for over 20 years. He began his professional career at Bear Stearns and Company, and later co-founded a multibillion-dollar hedge-fund firm headquartered in Santa Monica, California.
Since moving to Bend, Oregon in 2000 and founding the Felder Report shortly thereafter, his writing and research have been featured in major publications and websites like the Wall Street Journal, Barron's, Yahoo Finance, Business Insider, Real Vision, Investing.com and more. Jesse also hosts and produces the Super-investors and the Art of Worldly Wisdom podcast. Jesse Felder, welcome to the program, sir.
Jesse Felder: Hey, thanks, Dan. It's a pleasure to be back talking with you.
Dan Ferris: Yeah, you're somebody I just want to check in with now and then, and I think a good place to start would probably be with one of your recent blog posts. You did a really good blog post where you quoted Warren Buffett from November 1999. He was talking about corporate profits. They shouldn't really stay up much above 6% of GDP for very long because it sort of screws things up and creates imbalances and would lead to political issues.
And you pointed out, of course, as we all know by now, corporate profits went above 6% and kind of stayed there for a couple of decades here quite unexpectedly. And you believe that monetary policy has a role here, do you not?
Jesse Felder: Yeah, I think that it's definitely played a part. I mean this, I call it a bubble in corporate profits. I think Jeremy Grantham has called this one of the most mean-reverting series in all of finance. I think he called it the most mean-reverting series. And this is not what we've seen over the last 20 years. We haven't seen this revert back to any historical norm. And I think it's a few there's a few things at work. One is, we've allowed through a change in kind of our antitrust policy, allowed consolidation kind of beyond what we've allowed in the past.
So, we've seen a lot of different sectors across corporate America, duopolies and even monopolies in some cases. And that certainly boosts corporate profits at the expense of labor share. But I think also a big part of this, also, of course, demographics and globalization played a big part when companies could ship jobs overseas and keep costs of production lower than they otherwise would be without globalization and offshoring labor. That’s been another factor.
And those are actually starting to shift back the other direction. I think we're starting to see a rethink of our antitrust framework. We're starting to see Congress look into a lot of these kind of anti-competitive policies that companies have been able to put into place because they own so much of the market. And then globalization was already starting to kind of move into reverse as over the past 10 years, and now this pandemic I think is kind of going to kick that trend in the butt so that we're going to see a lot more reshoring of important production.
But I think people are missing the fact that the Fed did play a huge role in this too, in that promoting capital over, I mean, the Fed's dual mandate really pushes them to kind of keep inflation low or probably the way I would interpret it is that they should, we should have zero inflation, but they have a different interpretation. But the other half of that is full employment as part of their dual mandate. But their only kind of tools in dealing with that through the capital markets. It’s through lowering interest rates and buying assets.
And so, I think through the Fed’s propping up the capital markets, through trying to create wealth effects and these things too, it's done at least as much to exacerbate wealth inequality and the record low share for labor in relation to corporate province that we've seen. So, my point in writing that was just to point out to people who were upset about this wealth inequality and things that we're seeing is don't forget to, to lay some blame where I do think it's reasonably placed and that's at the hands of the Fed.
Dan Ferris: Yeah. So, you're not the only guy I've heard this from, and maybe I need to study more. I know there's been a lot of consolidation in a lot of industries. I'm aware of that. We study some of the better conglomerates with a view toward buying them if they ever aren't insanely expensive.
But when I think of people who own a whole big chunk of their market nowadays, I think of the FAANG stocks, right? Facebook and Apple in online advertising, and Amazon, and even Apple in smartphones, and there are others too, right? For example, would you be an advocate of breaking up these big tech companies?
Jesse Felder: I mean, that's a good question. I don't think we need to break them up, but I do think that they have been able to forestall or prevent any sort of healthy creative destruction. I mean, you look at the history of Facebook of the last five, seven years and they didn't buy Instagram because they thought it was going to be a great investment. They bought Instagram because they knew it was going to cut into their Facebook business. They've been systematically buying up competitors to preserve their market position.
And to me, I think that's probably the main thing to look at is to potentially unwind some of those acquisitions. So, I mean, I guess yeah, breaking them up in certain respects could be probably useful, but especially going forward just not allowing them to, I mean, I think Google has made dozens and dozens of acquisitions every single year for the past decade that has allowed them to increase, if not only preserve their market share in a variety of different areas, including search, but not just search in terms of banner ads and all of the other types of advertising that they've gotten into.
So, I think absolutely we're seeing this there's been a big push against the Chicago school of thinking in regards to antitrust. And I think a lot of that, we're probably going to see some sort of legislation or at least cracking down on companies wanting to make these kinds of anti-competitive acquisitions.
Dan Ferris: I see. So, no matter what you think politically or ideologically or whatever, no matter what your opinion may be in that regard. You just think it's prudent to suggest that the trend is peaking and people are going to start getting more upset and these laws are going to start happening.
Jesse Felder: Yeah. It comes back to that Buffett quote. Buffett said that there's no way corporate profits could stay above 6% of GDP for any length of time. Because if it did, it would create political problems. And so, that's exactly what we’re seeing is we're seeing labor share of income went down to record lows, and it's stayed there for 20 years, and corporate profits as a share of GDP have soared to record highs and stayed there for 20 years.
And that's why we're seeing both, I think, both political parties move to the extremes. We're seeing the Republican party move much towards nationalistic type of protectionist policies. I think Trump is kind of through the trade war and things kind of tackled the globalization side of it, but he's also been very critical of Amazon and its market power. And on the Democratic side you've seen, I think Democrats move more towards the socialist type of a framework, but both of those trends, those political trends are I think in direct response that's exactly the political problems that Buffett foresaw if labor share was to fall and remain low for a long period of time.
And so, I think it's inevitable that we're going to see this type of reversal and globalization that's probably going to be more of that conservative politics. More on the liberal side of politics will be, OK, let's find ways to promote labor share at the expense of corporate profits, and that's probably through reigning in antitrust and these types of things.
Dan Ferris: OK. So, we have you on the program because you're a smart, knowledgeable guy with lots of experience. But you're also a human being. And as a human being to me, like I can't resist free market ideas. I can't resist just bristling somewhat at the sound of the words, “antitrust policy.” It just bothers me, even though the existence of Google bothers me too. So, I know what you think, and I'm going to ask you a question. I never ask anyone questions like this, but what do you feel? Do you just, does Google bother you the way I'm suggesting it kind of bothers me?
And so, I do think that that's not a good thing for the users of their platforms. Of course, these companies have created tons of wonderful products that are largely free for people. Google search is an incredible innovation and creates terrific value. But the fact that Google uses all that information about us through our search, which they end up knowing more about us than we do about ourselves, through the search history and your Gmail history and all these things.
And then the fact that they can use that without any type of regulation to manipulate you to go to certain websites, buy certain products, do all these types of things. This idea of surveillance capitalism is something that makes me uncomfortable. And so, I do think that we do need to have, we've regulated all kinds of businesses to protect consumers from these types of things in the past.
We're seeing Europe is kind of leading the charge in protecting consumers against these things right now, but the U.S. is slowly kind of getting on board with the program. And so, there's going to be regulation and antitrust. I mean, that's what these companies are facing over the next 10-20 years, and I see it in only the very early stages of these trends.
Dan Ferris: Yeah, it feels like we're headed to some kind of a pressure point with this and other issues. But let me ask you one more thing about this issue that we’re on right now. You think Buffett has contributed to this? He's done a bit of rolling up over the years. I guess car insurance is really pretty competitive, but he's rolled up a bunch of reinsurance and a few other things, I guess. But do you think his company has contributed to this at all?
Jesse Felder: I do. I think that he and Bill Gates became good friends a long time ago, and I think that relationship kind of introduced Buffett on his thinking to Silicon Valley. When people were starting companies in the Valley 20 years ago, they were, they were trying to model what Bill Gates did. And Buffett's thinking, if there's anything you understand about the types of businesses he's looking for, it’s types of businesses that have a deep, wide moat around their business, that competitors just cannot get across that moat and can't touch them from a competitive standpoint.
And he’s saying, “These are the exact types of businesses I want to own.” And I really do think Silicon Valley has kind of taken that to heart and saying we want to create a moat. That that should be our goal is to create this Warren Buffett type moat that is going to accrue the greatest, profits to us. And that's not a bad thing in and of itself.
I've been a technophile my entire life. I was eight years old. My dad sent me to. Apple computer camp. This was probably 1982, ‘81, something like that, where I learned how to program Logo the turtle and this is the very early stages of programming. I was a huge fan of Google. I had the first Google phone.
So, I don’t necessarily blame the companies here as much as I do blame the political framework that allowed them to create these moats, these anti-competitive modes, which, I think even Buffett would recognize in a lot of cases. It’s much healthier for the economy, for capitalism, for investors to have a level competitive playing field rather than allow companies to really own an entire industry.
Dan Ferris: Right. So, Jesse, I want to go to the other end of this now. We've talked about Buffett and all these big conglomerates and big, big, powerful companies. So, I wonder what the effect is at the other end of the spectrum, because you've tweeted recently and you retweeted one of Jason Goepfert’s things from SentimenTrader where he was pointing out that maybe stocks are due for a pullback, but then you also, you were tweeting about how all the bored day traders are locked at home and they're obsessed and they're in a frenzy.
And you and Jason have both tweeted about this. So, there's like at the same time that we're seeing this kind of record inequality, it's almost we're also at the other end of the spectrum, you feel like it's like a record desperation to fix it kind of thing. You know, they're trying to participate, and of course, they picked the exact wrong moment, right?
Jesse Felder: Yeah. You know, I think that's one thing that people have been saying for the past, I mean, since the 2009 low and the latest bull market began is that we haven't really seen retail jump into the markets with both feet, and that's usually what it takes to see kind of a bull market comes to an end. But we've seen them jump in like they've never jumped in before. I mean, even during, I remember the dot-com mania very well.
I was the head trader at our hedge fund, and we had some individual accounts in LA where we're based and you know, Hollywood people. I had a stunt man who gave up his stunt man career to day trade, and it was pretty wild times. But you know, I think we're seeing a surge in call buying today by individual investors that’s greater than any interest even I think during the peak of the dot-com mania. I would just point out that I think a lot of this has less to do with them being enthusiastic about the companies and more a belief in the Fed's ability to mint millionaires through money printing and a fear of missing out.
I think over the last 10-plus years, a lot of these younger millennials, these are all millennials really that are jumping into the markets now through Robinhood accounts, E-Trade, Ameritrade, Schwab, free commissions. They've heard from their friends over the past five, seven years who have been buying dips that they've made a massive amount of money. Every time the market's pulled back, you've got to get in. And if you'd bought stocks in 2009, you would have been made three, four times your money.
And so, I think that it's those types of narratives that are driving this retail, push into the stock market. So, I think it's really much more to do with that narrative of you have to buy the dip. I mean, you look anywhere on any social media platform and you see the Reddit guys talking about when the money printer goes “bur”, you got to buy stocks. And so, with that narrative goes this big. It is a new mania in the stock market right now.
Dan Ferris: Yeah. You know, my colleague at Stansberry, Steve Sjuggerud, he’s been talking about the melt up for over a year now. The guy who works with me on Extreme Value, his name's Mike Barrett, we were kind of exchanging e-mails this morning and we figured, well, now Steve is going to get his melt up because everybody's just been whacked and nobody's really maybe looking for a melt up, but there is an extreme amount of interest in speculating on the market. So, maybe this thing blows off and then we have a really bad time for several years. How does that sound to you?
Jesse Felder: Yeah. I guess I would come back to the narrative that’s driving a lot of this retail participation. It's really regarding money printing and buying the dip. And I think it was really interesting to listen to Stan Druckenmiller talk about this a week or two ago when he gave an interview for the Economics Club of New York, and he talked about how all these traders are thinking the Fed has our backs, and he said his research shows that that's just not the case.
And so, I think there's a hole in that narrative that, that traders are saying the Fed is pumping in unprecedented liquidity. That's going to push stock prices up, but according to Stan, what they're missing is the other side of that liquidity narrative is not just money printing you have to pay attention to. It's how much new debt is the Treasury issuing. Because it's net liquidity that matters most. If the Fed's putting in a trillion and the Treasury is not, net issuance isn't close to that, then you're going to have, let's say Treasury net issuance is $500 billion.
You're going to have a net $500 billion that's going to probably push that's a net positive liquidity push markets higher. But the Fed has already expanded its balance sheet from $3... $4 trillion to just over $7 trillion last week. And that was much ahead of Treasury issuance. That was an unprecedented boost in liquidity that has clearly flowed into the stock market.
But now going forward from here, the money printing is continuing on a certain pace and Treasury insurance is going to go through the roof. And so, we're going to have net negative liquidity starting this month or next month from the Fed. And so, I think that's important to understand that it's not just money printing, it's net liquidity that matters most.
Dan Ferris: Interesting. So here we are. We've got every investor great and small cheering on the Fed and wanting more, more and more. But part of the narrative too, wouldn't you say, is lockdown is ending. Things are going to start back up and the virus curve is flattening. And I wonder, do you care about that at all? Do you like watch virus curve numbers or do you care about that at all?
Jesse Felder: Yeah, I pay a great deal of attention to it because the path of the virus is going to really determine the path of the economy. But I do think that we're not going to have, I agree with the Fed heads and you know, and economists who've come out and said that until we have a vaccine, we're not going to have a full recovery because no matter, you open the economies up, people are not going to go back out to restaurants, movie theaters, get on cruise ships again until they know they're safe. And so, we might be able to operate at 80% of where we were at until we have a vaccine, but until we get a vaccine, we're not going to get the full recovery that I think most people are hoping for right now.
Dan Ferris: Right. And the reality is we've tamped down the potential to establish herd immunity, and that's going to make it all more difficult, is it not? I think it is.
Jesse Felder: Absolutely. I think either you have to choose one or the other in terms of the paths forward through this. You take the Swedish model, which we're not going to lock down, and you just kind of advise people if you're vulnerable then you kind of self-isolate, or you take the path of, OK, we need to flatten the curve and we can't overwhelm the hospital system, so we're going to do rolling lockdowns to preserve our health care capacity. And I think we're probably, there's a good chance that we will have future lockdowns.
And I think the other things that most people don't understand is that we've never created a vaccine for a coronavirus before. We also don't know if it's even possible to create a vaccine, that if infection even allows for any type of immunity. It’s possible with a lot of these viruses that you get infected and it only confers immunity for a short period of time, and then you can get re-infected again. And so, there are a lot of unanswered questions here, but I do think that maybe 2% of Americans have gotten this thing, and so that if we are trying to get to herd immunity, you need 60, 70% of people to get it. It’s going to be a long slog without a vaccine.
Dan Ferris: So, if it's a long slog and the economy is not going to get back to where it was pre-virus, and I've been reading a bunch of books about the 1930s, so I'm so confirmation biased it’s ridiculous. But I fear that we're headed that way. Are you afraid that we're going to get this kind of long, depressed, really kind of ugly economy as much as I'm starting to get? I'm starting to get that way.
Jesse Felder: Yeah. I think the most likely thing we're going to see is a stagflationary environment for a prolonged period. I think it could be some combination of another depression, but also similar in some ways to a 1970s type of stagflationary environment. I think we're going to have this weak growth, this subpar growth paired with inflationary dynamics that are created by, and this is not a near term thing.
I do think we're seeing inflation, core inflation dropping dramatically, I mean, as a result of demand dropping dramatically in the short run, but any type of recovery we start seeing through these reopening the economy are going to be met with inflation. And so, I think we're likely facing a stagflationary period for prolonged period of time.
Dan Ferris: Ouch. So, what can I do? Sounds like I'm buying gold and I'm heading for the hills at that point.
Jesse Felder: Yeah. I mean, I'm really bullish on gold longer-term. I'm near term cautious partly because of the short-term kind of disinflationary dynamic that real rates are the primary short-term driver for gold price. And there's a potential, what's been really good for gold this year is that rates have fallen faster than inflation. So, real rates have gone deeply negative, which is very bullish for gold, but I think over the next two, three months, at least there's a potential for inflation to fall faster than interest rates.
And if that happens, that could be a short term, negative short term headwind for the gold price, but longer term, the main driver for gold is the fiscal deficit, and we're going to see a deficit of 18... 20% of GDP, which is just bigger than anything we've seen since the Great Depression. And that will be very bearish, I think for the dollar, which will also exacerbate those inflationary tendencies that you see the dollar really tank and be very bullish for the gold price.
Dan Ferris: What do you think of these guys who say that we're going to see extreme strength in the dollar because nobody's going to want anything else, and that is going to kind of break itself not by being extremely weak, but by being too strong? For example there's $10-plus trillion – let's just say of U.S. dollar denominated debt and it seems like every day in the news there's a new piece of input for this narrative where some foreign country is missing a payment or defaulting on debt, or you know, and it's just getting worse and worse. Does that sound plausible to you?
Jesse Felder: Well, in the short run, I think anything's possible for the dollar, and I've been wrong on the dollar for the last year, 18 months. I've been bearish since, what was it, late ‘15, early ’16 I think it peaked and rolled over. It’s had a good rally over the last year and a half or two years. But I do think for me there's three things I pay attention to with any asset class, any security, anything that's tradable. It’s fundamentals, sentiment, and the technical. And fundamentals are really the main thing, but I look at those other things to confirm the fundamentals.
To me, the two fundamental drivers for the dollar are this deficit to GDP. If you look at the deficit to GDP and the dollar over the last 25, 30 years, they're just joined at the hip. The last time we really had major dollar strength was kind of in that early 2000, 2001, 2002. Actually, last time we had a fiscal surplus. Then we had the dot-com bust. Fiscal deficits came back and we saw the dollar roll over. We're seeing the fiscal deficit just absolutely scream to three, three and a half, $4 trillion, maybe this year. That is such a fundamentally bearish dynamic for the dollar.
But then you also consider from fundamentals the relative valuation. And you look at things like purchasing power parity, the Big Mac index, these types of things. The dollar is overvalued, significantly overvalued against almost every currency on the planet, including the Euro and then yen, the two kind of majors, but it's really overvalued against the Chinese yuan.
I do think that fundamentally the dollar probably began a new bear market there in 2016, and it's going to roll over again as a function of these deficits. Technically, right now it's kind of just in a trading range, and sentiment is kind of not really confirming that either. Certainly, we could see a blow off from the dollar in the short run before these longer-term dynamics come into play.
Dan Ferris: All right. I'm just going to ask you if you if you even have an opinion on, we're talking about the dollar and the yuan and of course the headlines here that I feel like China's ratcheting up the rhetoric against, not only against the United States, but they ratchet it up against Hong Kong in a big way, of course. And they’re ratcheting up the rhetoric against Taiwan. And in the back of my mind, and they even use the phrase “cold war.”
And in the back of my mind, I feel like we're already in the midst of a period that mimics 1929 through 1945 and that ended with a big fat ugly war. In the back of my mind, I feel like my whole generation and the one before we’re just, we're not really ready for this. We're too soft. We just haven't seen anything like that. Do you worry about that? Do you think about it at all today?
Jesse Felder: I do. I mean, Ray Dalio has written a lot of – I mean, he's 100% focused on this right now it seems like, on this kind of the changing leadership among empires around the world through history, and he sees China overtaking the United States here. From just a strategic standpoint, if I'm China looking at the United States and looking at these deficits blowing up, and that we're already on essentially World War II type of spending, if the United States were ever vulnerable to not being able to fund a another Cold War or a hot war, God forbid, it's right now.
I mean, we're already spending $3, $4 trillion fighting coronavirus. That severely limits our ability to spend on another war. And so, I think China potentially is probably looking at this going like, you know what? If we're ever going to have an opportunity to really challenge the United States militarily then now's maybe that time, that they just cannot afford right now to go spend the kind of money it takes to fight a new Cold War effectively.
Dan Ferris: So, let me ask you, you've already said you like gold longer term. What else do you like? It's got to be a difficult time.
Jesse Felder: Yeah. No, I do think that the opportunity in value investing is really interesting right now. Value has been just absolutely trashed in the last few years. Over the last two weeks I've seen at least half a dozen major headlines, articles about Warren Buffett losing his touch, Berkshire Hathaway's performances in the toilet. These are the types of headlines you always see at a kind of a bull market top. In 2000 I remember Buffett just not in touch with the new economy. He didn't own the dotcom stocks.
I think the Wall Street Journal ran a really big spread in early 2000, around the time that the Nasdaq was peaking and rolling over. I think the opportunity and value today is interesting. I think when the market, I do think we're in a new bear market for stocks and we're going to roll over and test those March lows at some point before the end of the year and probably break down below those.
Already in small value stocks I'm finding opportunities where things are trading less than 50% of their liquidation value. And so, I do think there's an opportunity or there will be a terrific opportunity to put money to work in the equity market in these areas that have been essentially left for dead. They're not covered at all by ESG, by any passive index. There's just stocks that are just left for dead because they're not included in ETFs. And so, I do think there's opportunity there coming.
Dan Ferris: OK. You want to throw a name out or just an industry or anything besides gold?
Jesse Felder: Yeah. You know, a stock that I've been trading for almost a year now is Bed Bath and Beyond. I mean, the retail group has been absolutely crushed, but this is a company that is in the middle of a turnaround. They just hired Mark Tritton from Target who really did a phenomenal job turning Target’s private-label business around. He's doing the same thing at Bed Bath and Beyond. Bed Bath and Beyond is also really, really well positioned. I don't think they have any debt coming due in the next 20 years, so it's almost impossible for them to go bankrupt.
They've got over a billion dollars in cash. The stock is trading at well below its liquidation value right now. But like I said, I've been trading it, so when it gets oversold, I'm loading up on it. But then you see it like 150% rally and I'll take a bunch off. But I do think probably longer-term stocks worth $20, $30 a share, especially now that they're really ramping up their online business trying to compete with Amazon.
So, there’s things like that that, that I own on the long side, but to be very clear, I have zero general market risk to my portfolio. I'm fully hedged through mainly short-selling other things.
Dan Ferris: Well, you're a man after my own heart, Jesse, I'll tell you that, and you sound like you sound like an old soul too, value and gold and stuff trading at less than liquidation value. We're just about at the end of our time here, and I'm really glad we checked in with you because I know people are starved for ideas, and I thank you for that.
But if I could get you to leave us with a single thought for our listener as we prepare to end the lockdown and as retail investors are just more excited than ever, and the Fed has gone absolutely insane and has the biggest balance sheet has ever had. Is there, amidst all of this, is there any one thought that you could leave our listeners with that might be helpful?
Jesse Felder: Yeah. It would essentially be one of the things I've really tried to do for a long time now, and it was really the inspiration through my podcast was trying to really learn from the wisdom from people, from guys, older guys generally, that have been through many, many cycles. And when you listen to Warren Buffett and guys that have been around, Buffett was not optimistic, through his virtual annual meeting he had recently. The number one motto these guys have right now is not trying to shoot the lights out playing offense. It's we need to play defense.
We need to preserve capital. We need to live to play another day. And I do think that's really, Sam Zell is another one. My wife works for one of the most successful real estate investors here in the state of Oregon, and I've learned a lot from him over the last couple of years, and he has the same exact mindset. When things go bad, when the economy goes bad, this is what he told me recently.
You see in all sorts of markets, whether it's real estate, stocks, bonds, you see zero bids. And I think people should be prepared for an environment of zero bids, because it happens during every one of these crises, and I think that's what we're headed for. So, investors preserving capital and living, surviving to fight another day should be the mindset I think people should be in right now.
Dan Ferris: Thank you for that. I appreciate it. And we sure would love to check back in with you in several months’ time to see what you’re thinking.
Jesse Felder: I'd be happy to do it, Dan. It’s always a pleasure to talk with you.
Dan Ferris: Sounds good. Enjoy yourself and we'll talk to you again soon. All right. I'm glad we checked in with Jesse. Always a good thing to do. Smart guy, lots of good ideas and let's go and see what's in the mailbag now.
All right. 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 respond to as many as possible. There weren't a whole lot of them this week.
I only have two of them for you. The first one is from Mike B. Mike B. says, “Always enjoy the podcast. I agree with your stance about owning cash, gold, and bitcoin, but why is it that those who claim the fiat currency is collapsing want us to buy gold from them and pay them in U.S. dollars for the gold they are selling to us? Sems sort of strange to me. Why would they want dollars in exchange for gold? Mike B.”
Mike, don't get too confused about this. It's a business. If people are selling coins, they're in the coin business. Now you named a particular fellow in your e-mail, Peter Schiff, who he's known for his criticism of fiat currency and of wanting to sell people gold, but he's in that business, right? He's in the business of selling your gold.
So, there's that, and there's also the idea of holding gold, of the appeal of gold, the reasons why you hold gold. I mean, somebody has got to sell it to you, right? And in Schiff’s case, I would really bet money without knowing him, I've never met him, but without knowing him and knowing his portfolio, I'd be willing to bet his money is where his mouth is and he's holding gold.
But I don't know. It's a good question though, Mike. You're on your toes. I appreciate it. Next one is from Ray T., and Ray T says,
“Dear Dan, enjoyed your interview with Dr. Ron Paul last week. He makes me want to go buy a farm and buy gold and bury it in the barn for the coming apocalypse. He's been saying this for what, 30 or 40 years since his days in Congress Trouble is he will be right one day.
My question is on deflation. Some articles I read suggest possibly a long period, five to 10 years of deflation as we move from the post-COVID induced recession/depression. I guess due to the amount of dollars that are being printed and have been printed for a long time. Do you think a deflationary cycle is coming? And if so, what would that do to the price of real estate, gold, and Bitcoin in your opinion? Thanks. Your loyal listener, Ray T.”
Well, Ray, thanks for being a loyal listener, and I'm glad you enjoyed the Ron Paul interview. Boy, did I get some blowback on Twitter from that. I don't even think Ron Paul at this point is a very controversial character. Yes, there are people in the world called libertarians and they think we should have less government. Ooh, boy, that's just insane, isn't it? But I blocked maybe, I don't know, four or five people on Twitter because they were so obnoxious.
Yeah, I enjoyed interviewing him and he's a great guy. It's his job to worry about these things, so it sounds like he's always preaching the apocalypse for 30, 40 years, but I thought his tone was rather optimistic. He looks around and he always sees green shoots of liberty happening. At least that's the way I took a lot of his comments when we spoke last week. But your question, do you think a deflationary cycle is coming? If so, what would that do the price of real estate, gold, and Bitcoin?
You mentioned recession/depression, I guess, due to the amount of dollars being printed. Yeah, so governments print lots of money and capital gets misallocated and then asset prices deflate after that. But then they try to keep printing their way out of the deflations, and at some point, it does become inflationary. Governments run up debts, central banks print money, and it's a vicious cycle. And I think it will, as I said in my rant today, I think eventually it will result in the U.S. dollar losing its value and not being the global reserve currency anymore.
But do I think the deflationary cycle is coming? Yeah, I do. I think it's kind of here. And if so, what would that do to the price of real estate, gold and bitcoin? I'm going to say down, down at first, then up, and then down at first and then up. So, for gold and bitcoin, sure, you'll see some weakness. But I think eventually they will probably get ahead of the response, which I anticipate at some point will be too much for the market to bear.
At some point, the Fed will print so much money and buy so much in Treasurys and the government will be so deeply in debt that people won't be able to take it anymore and they'll say, “I've got to protect myself. I don't trust the currency anymore.” And they'll go to gold and Bitcoin. But yeah, price of real estate, that's actually a better question.
So, that'll take a hit too, but you know, when you ask European families who have hundreds of millions or billions of dollars, and they've been around for 200, 300 years, “How'd you do it?” They say, “Well, a third, a third and a third.” Land, gold, and art, old works of art, like Van Goghs and that kind of stuff. So, I don't know about art, but land and gold make a lot of sense to me to preserve wealth over a very long period of time and owning real estate. If you don't need the liquidity, I think over a long period of time, it tends to work out in a civilized country, in a country where you can trust law and order.
And you know, even some people, they lost their land in World War II, but they got it back. The system of land entitlement was restored and the property that had been seized by whoever, the Nazis or whoever, was returned to them. So, not a bad idea, real estate and gold and Bitcoin. Just as long-term holdings, you don't need the liquidity. You put it into these things and you leave it there. So, that's my opinion of those three things. Great question. Great insights, Ray, I thank you for them.
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.
Have a guest you'd like me to interview? Drop me a note at [email protected] Until next week, I'm Dan Ferris. Thanks for listening.
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