In this week's episode, returning guest Hugh Hendry joins Dan for another round at the Stansberry Investor Hour table...
Hugh founded the now-defunct Eclectica Asset Management in 2005. He rose to fame as the "Scottish hedge-fund king" when his fund returned 30%-plus during the throes of the financial crisis. He's also well-known for his outspoken remarks and contrarian views. One time, he even duked it out with a Nobel Prize-winning economist on television, asking, "Um, hello? Can I tell you about the real world?"
These days, Hugh entertains a wide audience with his wit and energetic market commentary in his podcast, The Acid Capitalist.
Today's conversation begins with a bang, as Dan and Hugh tackle one of the biggest market headlines: the stock sell-off. Shares of "FAANG" giants like Netflix, Amazon, and Apple are tanking... And it's hard to see these behemoths – which were once among the best-performing tech companies in the world – as "risk free" businesses anymore. Instead, they could herald a recession. So, what does Hugh have to say on the matter?
It's going to be really long, but it's going to be entertaining. Wear comfortable clothing.
He and Dan chat about several other topics, including inflation's grim march, Bill Hwang's multibillion-dollar fraud indictment, the "malevolent shadow of the Federal Reserve" behind high prices in oil and mining industries, and bitcoin as a risk-on versus risk-off asset.
No one is safe from Hugh's wisecracks – not even the ultrawealthy. In addition to financial topics, he shares his thoughts on Elon Musk's latest follies, the real reason Bill Gates and Jeff Bezos vacationed in St. Barts, and what he thinks of Johnny Depp's biggest purchase
Founder Eclectica Macro Hedge Fund
Hugh Hendry is an award winning hedge fund manager, market commentator, real estate investor, podcaster & surfer. Hugh has 18 years' industry experience with Baillie Gifford, CSAM and Odey Asset Management. In 2005, he founded Eclectica Asset Management.
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 will talk with former hedge-fund manager Hugh Hendry. Nobody sees the world like Hugh. Listen in, you'll love it.
In the mailbag today, inflation, gold, Russia, and life lessons. Remember, you can call our listener feedback line: 800-381-2357. Tell us what's on your mind and hear your voice on the show. For my opening rant this week – OK, just a few last thoughts about Elon Musk and Twitter and Tesla and what it all means. That and more right now on the Stansberry Investor Hour.
Why do I keep talking about this? Well, it goes back to something that I told you many episodes ago. I've said it once or twice. I feel like at this point in my life and in my career it's my duty, it's my mission to help investors prepare for what I believe will be a rather dramatic and painful end to the longest bull market in history, and certainly the most expensive bull market in history. We've never seen valuations like this, not in 2000, not in 2008, certainly, and not in 1929... just not ever.
So I feel like it's my job to kind of underscore how extreme things got at the top, and we're still very close to the top, and to help investors get through it. So I'm constantly pointing not necessarily to specific metrics, although, yeah, you know, I cite as many numbers as any financial guy, I guess. But I want to tell the stories and I want to tell listeners and readers of our newsletters what it feels like. I want to remind you if you've been through this stuff before, what it felt like and that's what it feels like right now.
So what does it feel like to be at the end of a long bull market? What kinds of things happen? Well, I'll tell you one of the things that happens. [Laughs] People who have really benefited from the bull run, extremely successful people by that definition, they get really super rich and they do things with money – or they tend – the don't always – they tend to do things with money that are just a little too risky and they wind up blowing themselves up. And the classic mistake, of course, is to take on leverage.
And there are various characters throughout history. We'll talk about one or two of them with Hugh Hendry, but I'll mention Eike Batista, the Brazilian billionaire who blew up a bunch of commodity-related businesses. There's Aubrey McClendon, the guy who ran Chesapeake Energy. He took on a lot of personal leverage. That's a facet of this, too.
Eike Batista took on personal leverage, billions of personal debt, and McClendon took on margin loans to buy Chesapeake stock and that didn't work out well for him at all. And Batista's in prison, McClendon died in a car accident that sure looks like suicide. You know, there are many others that we could cite. And I'm afraid that Elon Musk has fallen into this.
We talked about this before. He took on a $12.5 billion margin loan to assist him in acquiring Twitter, and I'm just afraid that this is – you know, it's sort of another sign of the top, simply put. It's the type of thing you can count on happening because it's very hard – you know, Elon Musk is a brilliant guy, but he's just a human being, and I can't imagine what it's like to be the richest man in the world, worth some $250 billion according to Bloomberg Billionaires Index. You know, you can't imagine what it feels like.
But I'm pretty sure it's kind of an unnatural state of affairs for any human being. So he goes and buys Twitter and takes on $12.5 billion of personal debt, and he levers up the company, too. They'll have – I think Twitter has about $5 billion now. It'll have about $18 billion, or $17 billion or $18 billion after the deal is done. So there's leverage everywhere in this deal. Musk has said, "Oh, this isn't about making money, I don't care about the economics of the business. It's about free speech."
And so it's this very idealistic, highly levered, personally levered bet that is the typical thing that takes one of these guys apart. And I wish him well. I don't wish him ill. But I'm just telling you as an investor, we've seen it before and it never ends well. So there is that, and there's also – like we just had this horrendous April.
Worst month of any month of the year, worst month in the Nasdaq since 2008, you know, the financial crisis, the depths of the financial crisis. I'm afraid that this really – we may be in a bear market here. You'll never hear me say that we definitely are because I want to stress – one of the things I want to stress to you in handling this is that you won't know for sure that you're in a sustained downturn until it's maybe half over. If it's a two and a half year bear market, it'll be a year or a year and a half, something like that, until you go, oh, yeah, this is the end.
We're not going to think that 50 times sales or 70 times sales is a normal valuation for a SaaS company, Software as a Service. These are the software companies that got horrendously overvalued. And we're going to learn one more time how these things play out, like all the garbage got murdered, all the bubbles. The ARK Innovation Fund is down almost 70%. And I have to give myself a little pat on the back. I'm sorry.
I'm only human, too. I wrote about that fund February 11, 2021 in the Stansberry Digest. It peaked the next day and is down almost 70%. And lots of Nasdaq stocks are down 75% or more. What's happening now, I believe, is that as the Wall Street saying goes, they're shooting the generals. Netflix – bam.
Facebook – bam. And even Amazon is down quite significantly and dropped a lot in one day recently. You know, bam – Apple a little bit. Not so much. And it's when they start shooting the generals that things could be getting really bad, because what happens in portfolios is say you have some really high-quality stuff like Apple or Amazon, or let's just include Facebook and Netflix in that just for the heck of it, even though I think Netflix isn't the high quality everyone thought it was.
And so you old onto those and you believe in those. You say, "Oh, I'll never sell these. These are my solid stocks" Then you have all this speculative stuff, and the speculative stuff falls 20%, 30%, 40%, 50%, 60%, 70%, 80% and you go, ah, and you sell it all out, right? And then what's left are these higher-quality names and you're like, hey, I'm solid here. They're down 20%, 30%, but I'm good.
And then they start falling and you sell them too, right? It's a pile-on effect. The selling just spirals out of control. And I believe that we may have entered the shooting the generals phase of this where instead of it just being a washout of all the garbagey stuff, we're entering into a time of genuinely – this is when bear markets really get going, because nothing is safe, right? Nothing is safe.
So I think I'm going to leave you there, right? Musk, personal leverage, and leverage in Twitter is something we've seen before. It frequently doesn't end well. And Twitter's a pretty big company, but it's not one of these high-quality names. It's not like Amazon, Apple, Facebook, Netflix, and the high-quality names have sold off and are still kind of selling off, and that may be the beginning of the end. I don't know.
But if it is, this is the thing that I've been telling you to prepare, don't predict, right? Hold plenty of cash, hold your gold and silver. Do those basic preparations. And when you find – it's always a good idea when you find a very good business with good upside potential and minimal downside potential, it doesn't matter what's happening in the overall market, you know, you should seriously consider adding it to your portfolio. All right?
So I'll leave you there. Prepare, don't predict. I think this is it, man. I think it's underway. So, you know, I hope you are prepared for what may be about to happen.
All right. Now we're going to talk with Hugh Hendry, and listen, I talked with Hugh actually and he agreed. He said, "You know, sometimes I'm kind of hard to follow," and we know that, too. But I want you to give him a chance. Get out a paper and pencil or open Microsoft Word or whatever you do to take notes, and just follow along and take some notes.
He goes off on a tangent here and there, but he always tends to tie it back together, OK? Last time Hugh was on the show I got an e-mail or two that said, "I can't follow this guy. This was rambling. It was crazy." It's not crazy.
No one sees the world like Hugh Hendry. No one expresses themselves like Hugh Hendry. And I'll do my best to help along the way to show you why it's so valuable to listen to a guy like this and to try to interpret his commentary, OK? I love Hugh. I really want you to listen to this, OK?
Take notes, listen close, have fun. He's the funnest guy in the world. Let's do it. Let's talk with Hugh Hendry right now.
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So with that, Hugh Hendry, welcome back to the show.
Hugh Hendry: Always a delight to just be able to kind of riff with some enthusiastic and smart people.
Dan Ferris: So we didn't have any enthusiastic and smart people, but we have me. [Laughs] So there's no way that I can start with anything but Musk buying Twitter. And I had this thought, and I thought, Hugh is the guy to ask this question to. I don't think we'd be talking about this without living in the era of the hyper-accommodative Fed because Tesla's valuation makes this transaction work, right?
So Tesla gets a trillion-dollar valuation, Elon Musk can buy Twitter. But I wonder, would we even be talking about Musk as much as we are if we did not live in the era of going on three decades of pretty accommodative Federal Reserve policy?
Hugh Hendry: Well, I'm sure the Federal Reserve is going to be with us in this conversation back and forth, because I think it's clearly a trace element in the financial universe, and we can see it. The interpretation of what we see perhaps is not uniform, and I hope I have slightly more deviant slants on it. So with regard to Musk, I'm almost hesitant to kind of comment on Elon. He's just the master communicator. I mean, what he's achieved both in terms of the technology package, the car product, which isn't a car product – you know, it just seems to be like a revolution.
It's like Steve Jobs with the iPhone. It's just completely reinvented this ubiquitous and common item. I think that goes a long way to explaining things. But the hesitancy is that there are much smarter minds than my own which have never really taken to Elon and regard a lot of his efforts as promotional. And my goodness, the financial graveyard is full of really, really smart guys who just have fought at the rise and rise of Tesla to a $1 trillion company.
Now I want to bookend all that again with the Fed, because here we are close to May 2022 and some kind of little things are unraveling. So we had this exceptional experience for the world. We had what I like to refer to as an alien body invasion, the virus. That was a profound shock, and it led to one of the most immediate, sharpest, downturns in the global economy ever. And markets in their appraisal of risk, the first – the North Star was the risk-free rate the U.S. 10-year Treasury bond, and it came all the way down to just under 50 basis points.
As people said, "We were blindsided, we didn't see this thing. We already had concerns about this long, long economic recovery," which when I say recovery I'm still referencing 2008. Because we've never regained the kind of altitude or the cadence of economic growth. We were on a projectile in the 20, 30 years leading up to 2008, and we've never retained the surface, if you will, of that projectile in terms of economic growth. So I guess there's already heightened kind of risk aversion within the greater church of the financial community.
The virus was kind of the final straw. And so with regard to their equity selection, they said, "Hey, listen, find me risk-free equities," and that's a tad absurd. So it's all relative. Find me the relatively the most secure, commercially the most robust equities in the world, and that's what I'm going to own. That's not an impossible task, because against that profound and sudden economic weakness, great, strong businesses revealed themselves.
And they revealed themselves in the robustness of their P&L. There were businesses where profits were flat. There were businesses where revenues expanded and profits expanded. And so the great church of financial investors came in and went, boom, OK, I'm going to own Apple, and Apple tacked on $1 trillion in equity valuation. It was like, OK what else?
Alphabet – boom. I'm going to take that. What else? Facebook – boom. I'm going to take that. People are staying at home. Netflix – boom. You can see where this is going.
Boom, I'm going to take that. Tesla, you know – this is not a risk-free operation, but at this point it's a risk-free narrative. Boom, I'm going to take that. Tesla becomes $1 trillion. So you can see where I'm going with this. This year we've actually had markets kind of reappraising as more data points have emerged. Netflix is not a risk-free business as they've coughed up.
Facebook is not a risk-free business as they've coughed up. And so the danger with Elon's – is it bodacious? I mean, whatever he's doing with Twitter. He's decided to spend some of his wealth. Good on you sort of thing. But it's coming at a point where, you know, all the divots are coming out of the ship and it's like, oh my god.
And again, the assurity and the banks saying – there was a comment – these are cited – there was a comment by a banker, "What could possibly go wrong?" [Laughs] And it's like, ooh, I'm copying that, I'm pasting that for posterity. I wish him well. I'm sure nothing will go wrong, but heavens, you know, there was a feast of the vanities, if you will, with regard to Twitter and Tesla.
Dan Ferris: It's like he wants to tank the whole thing. And yet, you know, we're at the point now where even Apple and Amazon, as you and I speak, have reported – I mean, I got this feeling of it's over today. I'm like, minus 1.4 GDP. Netflix, Apple, Amazon. Jim Cramer wants to be long ETH. [Laughs]
I mean, you know, it's just all going to hell, right? This is the moment. This is the risk-off moment – we thought it was the first couple of months of the year, but maybe that was the overture. That wasn't the opera. [Laughs] The opera has begun.
Hugh Hendry: Yeah. And it's Germanic in that there's going to be many downturns. It's going to be really long. But it's going to be entertaining. You know, wear comfortable clothing. [Laughs] We're going to be here. But it's so interesting just now.
It's been incredibly rewarding for this hedge-fund model where you're incentivized to take – like where volatility's on your side. You go concentrated, go leveraged, and you might make $1 billion PA. If it doesn't work, you might find a job like as a horticulturalist. I mean, that kind of sounds fun, you know? You're working outdoors, plants, it's entertaining.
Who wouldn't take that bet, you know? And I think actually I think the really revealing thing is Bill Hwang, crazy Bill, in that he's actually very revelatory with regard to – he's actually exposing what everyone does, right? I mean, he was just gaming it. All the banks were ears closed, how much do you want, fine, we're in, OK, right?
And he went concentrated, he went leveraged. We saw this week, drawing to the close of a week, but the week began, I wasn't expecting a Black Monday, but I was expecting a kind of perilously weak Monday, because the week preceding we'd seen a number of new lows emerging in important indices, equity indices. We'd still seen the Treasury bonds just still being in intensive care. And then the big one was we saw a 3% – I'm not going to call it a devaluation, but we saw a 3% pop lower in the value of the Chinese mandate, and that's always been like a really, really "get out of the water" signal.
So markets last Friday reacted. And then Monday, hm. Back when I was managing money, there was this preposterous notion of the plunge protection squad. There was this really silly idea that the Treasury and the Fed – yeah, do you remember that? Somehow – you might remember the A-Team and Mr. T. So you had this crack SWAT squad driving around Manhattan in the early hours of the morning with a van full of technology, of trading screens, and when traders were asleep in the wee small hours of the night, when there's not much liquidity in the [inaudible] these guys would come in and they would large and leave a huge footprint.
And so traders would wake up the next morning – they'd go to bed and their game plan was, man, I've got to reduce across exposure here. This market's looking bad. And actually, because of the goon squad and the big futures move, you'd find actually you did nothing, you know? But that is not the plunge protection squad. The plunge protection squad is not a public entity. It's a private entity.
And they would reveal that. What do you need to protect? Your cherished concentrated portfolio names. You then come in with these invisible, anonymous contract for different equity swaps, and the one thing you've got to do today as a modern financial operator is avoid a lower tick. The next tick has to be higher, because lower ticks reveal the truth and you don't want anyone to see the truth because you've been naughty.
Dan Ferris: [Laughs] That's right. Yeah. And I was amazed by – as I read through the complaint against Bill Hwang and his cohorts in Archegos, I was amazed – I started counting the paragraphs of what they call misrepresentations, basically the lies he told to keep the financing coming. And I stopped counting the paragraphs at like 50. There's like 50 paragraphs of lies that he told to keep – and I'm like, let's think about the other side of this.
Did you not know you were being lied to? I mean, come on. It's ridiculous. You know, you've got to make your quarter. You've got to get to the end of the quarter and you've got to get your bonus. Of course, of course. Whatever you say, Bill. You got it, buddy. It's ridiculous.
Hugh Hendry: Absolutely. I've got three kids, and when they're in that puberty stage and the wires are still fusing together, they all go through that lie test, and they always – I mean, they all get it wrong, right? The default is to lie. Hey, who did this? Not me.
And they're the worst liars. You're like, I'm going to ask this again. Because the consequences for not just this but for lying on this are really severe, more severe than just coughing up, nope, wasn't me. Oh, geez.
Dan Ferris: We were talking before, of course, and I said as soon as I found out – and Hwang feeds into this – as soon as I found that Musk was taking out a $12.5 million margin loan to finance Twitter, and now that Hwang has come to light, I got whiffs of Eike Batista, I got a whiff of Aubrey McClendon, the guy from Chesapeake who he was indicted and looks like he killed himself the next day, but I guess we'll never know. And I just wonder about – and then I found out – I didn't know that Bill Hwang was Cathie Woods' mentor and that these people knew each other and they're part of like a financial prayer group or something. [Laughs] I just thought, yeah, yeah, right. You see it at ARK. I don't know, man. Elon seems like a different sort of guy. He really does. He doesn't look like Aubrey McClendon or Eike Batista or – Batista bribed the governor of Rio. Yeah.
Hugh Hendry: Well then they're all different, but they're all different. You know, they're really – Cathie and Bill have got that kind of weird religious thing.
Dan Ferris: Yeah. [Laughs]
Hugh Hendry: Eike liked girlfriends and sunbathing. Elon doesn't like commercial. He sold the houses. He's more in it for the stimulation. I mean, they're all different. But yeah, play with leverage at your peril, especially because – hey, listen, didn't you just say [laughs] – I mean Elon, et al, are entertaining, but did you not just begin this conversation by saying GDP in the first quarter fell in the United States of America?
Like the hardest economy in the world. Did you just tell me it fell? Aren't we talking about the Federal Reserve, which is about to hike rates? Not baby Fed rate hikes but like 50 with the promise to come again and again and again.
Dan Ferris: Yeah.
Hugh Hendry: Hm. That's –
Dan Ferris: Oh, yeah. They're flexing. Yeah, yeah. 50. Damn right. Maybe 75 at one point. Yeah.
Hugh Hendry: And the economy, the big drag was inventory. Yeah. And this is the big fear. This is the big fear. And again, we did something that's never happened before. We don't have a – the dataset is new. It's just emerging. We closed down global industrial activity.
Not just industrial – we closed down commercial operations globally for the best part of 18 months, and indeed, in the second-largest economy in the world it continues. And then when we reopened the biggest client market, the U.S., we reopened the smaller – you know, the U.S. is a service-sector economy, and when we sent those – not we, but when the government sent those checks to the population to spend, you couldn't go and send it on services because by and large they were still closed. Service consumption is still by quite a major factor below where it was in the year before COVID. So like 2019, I think we're trending maybe 15%, 20% below the absolute level.
So you put this ton of money, you can only spend it in this kind of very narrow faucet, if you will, and like the guys are still trying to remember the combination lock to reopen the factory, still wiping the cobwebs. And it's like a tidal wave of orders come in from all these crazy Americans. So the market has to go, "We're not ready for you." So who needs it most? Let's find out.
Let's raise prices. And then the Fed goes, whoa – well, you know, the Fed for the longest time is sensible and says we need more data on all this. But the politicians, of course, have got no time. They've got the American elections. The midterm elections are fast approaching. So the governing class are like, "What do you mean? You're appointed to take actions. Get your finger out and start doing something."
Here we are in a world where there is an irrational presumption that channels got massively overstocked. We now have, again, data point where the economy contracted because the inventory levels are like beyond absurd levels. But now the Fed finds itself tied into a rate hike cycle.
Dan Ferris: So there are some who think that what we have now is an indication in the futures market, and a lot of Fed talk, but that what will materialize is something much less aggressive by the time we even just get to the end of the year, maybe even the end of the second quarter.
Hugh Hendry: Yeah. I'd be in that camp. However, I worry about the damage done, because I fear the Fed is a repeat offender. So I'm going to keep coming back to this notion that the global economy is in a depression. The depression of the 1930s kind of gets exaggerated because we didn't have high-definition cameras and everything's a bit brown and pasty, and of course we had the coincidence of the profound meteorological events and the over-farming in the Midwestern states, which, you know, the Dust Bowl.
And so it really – but by and large, the 1930s statistically kind of looked like the last 10, 12 years. People have got jobs, but they're not great jobs, and then there's this kind of coterie of people who are doing absurdly well, and we just never keep finding the gear. Why don't we find the gear? Because the damn Feds keep getting in – the Feds and the market. So in 2009, the Feds, "Hey, look, we just can't risk the Great Depression 2 so we're going to do quantitative easing."
So then you have this profoundly pure and academic and financial market response, which is panic and to say this is Weimar. Now kind of I can absolve part of that because it was new data, but that then gave a green light to – I think you've got lots of buddies in mining and stuff – that gave a green light to anyone in the extractive industries, because all the seers were saying, "Hey, look, we want to own things in limited supply because the fiat currency is going to be infinitely expanded, and that's the opportunity." And between '09, '10, '11 – and of course at the same time China closing in commodities as well, so you had a massive capex boom in the extractive industries on top of what had happened '04, '05, '06, '07.
But the returns were catastrophic, because we got to 2013 and the Fed then kind of went – Bernanke went, "Uh, uh, yeah, uh." I think – you know, George Bush on the aircraft carrier, hey, job done, you know? And I think it's time to take the punch bowl away. We started doing quantitative tightening, and then the capital markets took their lead from the Fed. They pushed 10-year rates well above three when adult unemployment was still 7.5%. We had a massive instant tightening of credit and all of that extractive industry investment just got marked down to like 40 cents on the dollar.
It was a waste of time. And all of the people responsible for it, yeah, obliterated – wiped out. They've all been replaced. And on top of that, we've been introduced to the save the planet and the nihilism of extinction rebellion. No hydrocarbons. Certainly I can get it. No hydrocarbons maybe in 50, 60 years, but no hydrocarbons tomorrow? I mean, what are you people smoking?
It's stupid. You're doing damage to real people. So let's do a paradox. I want to say that owing to the Fed and its unsuccessful reading of the tea leaves, I want to say that the high prices we're seeing out of extractive industries from copper to oil to you name it, to iron, I think it's actually a function of the malevolent shadow of the Federal Reserve just closing them down.
We were well on track – I think 2018? We were well on track to the U.S. becoming the largest energy producer globally in the word. A lot of the shale, et al, were being funded by credit. And then the Fed – the last kind of modest, short, abbreviated hiking cycle, and it led to all that high yield credit being wiped out. So here we are now and there's a take on the Russian offense of we need the U.S. to be the undisputed global champion in energy. The oil prices more than tripled from an exaggerated low.
And yet, the executives are going, "I'm not –" because the capital providers, the debt providers are on the phone every day like, "Hank, I promise you, if you spend a dime expanding this business you're out of here. You're out of Texas. I'm going to find you. My boys, we're going to drag you out." And it's like, hey, I get it. I'm paying dividends and I'm doing share buybacks. That's the malevolence of the Federal Reserve.
Dan Ferris: What we're talking about here is this is – it's almost like a self-imposed discipline in the extractive industries, oil and gas, mining, where their DNA says get a dollar of capital, dig a damn big hole in the ground, and let the cards fall where they may. But that devil-may-care attitude seems to be gone and they have, if you will, learned. What they've learned is not especially healthy for the long-term prosperity of us all. But I want to know is when do they unlearn? What do we have to get, $150 oil?
Do we need $10 copper or some crazy thing like that? Where the hell is this going? And in the meantime, no matter what you think of CPI inflation, transitory, not, whatever, it certainly feels that way to everybody buying stuff. You know, how does it end?
Hugh Hendry: Well it's very Orwellian.
Dan Ferris: Yeah.
Hugh Hendry: When you say they learned, the goon squad have taken them to pieces. They've like said, "OK, raise your hand if you think in the extractive industries, when we get $1 we dig a hole?" And the old guys are like, "Yeah, yeah, over here, over here." And they're like, boom, executed. Boom, boom, boom, boom, boom. OK. I'm going to ask that question again.
And the younger guys are going…share buybacks? Good answer. You know? But where does it end? Where does it end? It's ending. It ends with the preposterous notion of Russia invading Ukraine, OK?
Because the power card, the only power card that the Russians have has been the docile incompetence of European political leaders for the last 30 years, you know, in accepting a supply commitment from the Russians. And why did they do it? They did because capital markets are saying to their corporations that there are extractive industries living on the European forces, and they've been warned not to seek licenses and permits for discovery. Governments have been listening to the constitution of their voters and they've been, again, very hostile to any permit applications. Europe has got five years of sustainable energy.
Five years. And the European state is now failing. You fail as a state when you fail to provide an independent and robust energy supply, and a state without energy is not a state. It's failed. It's failed to that point. So I think we are close. So we did start all a bit doom and bloom, and life's not like that.
There are always opportunities to make money. So the education or whatever, miseducation of the mining sector, actually turns the odds in your favor as an external minority investor because taking away their reflexive behavior to expand supply with higher prices simply means that higher prices are going to be with us longer, and so they're going to keep rewarding you as an investor. So part of society is going to be on your ass saying you're morally corrupt. It's them who are morally corrupt, but you've got to be able to take that on.
But the returns from the extractive industry are just glaringly obviously attractive. And then there are some massive platforms tech-wise which got wrongly ascribed as being risk free. That's fine because, you know, like a 75% price reduction kind of takes a lot of risk out of the equation. So, you know, there's things to be done. There are things to be done.
Dan Ferris: We mentioned before the poster child of this situation in mining possibly is Rio Tinto sporting an albeit backward-looking 11% dividend yield, which lately represents something like $13 billion going forward, and we're saying, yeah, yeah, it's a massive company and they would spend that much digging holes in the ground. And when they don't dig the holes, you could actually be looking at a double-digit yield from a mining company. It's like, you know, South Africa 1970s. I mean, it's just like we haven't seen this in a while. Pretty amazing.
Hugh Hendry: Well, I think it's – maybe the stock prices are capped for the longest time, but heavens, the yield's going to be very attractive. I mean, with what's happening – so qualitatively, the big risk on businesses such as Rio's is – I mean, let's call a spade black – the dire state of the Chinese economy. That's been an enormous engine in terms of guiding their profitability higher and higher and higher. I mean, I've always been a skeptic. I won't bore you with how if I'd only understood the Chinese zodiac and how it works – it tracks the movement of heavenly bodies over 12 years and not 12 months – I'd have saved myself grief.
But now that I understand the Chinese zodiac, the stars aligned to tell me that the great correction, which Kyle Bass really trumpeted round about 2014, 2015, I had about $1.5 billion notional short fund in 2012. We were too early. Remember that number. I closed in 2012, so it was 2010, the end of 2010 I launched that. So add 12 years on to 2010 and you are today, people. Let's see what happens to the currency.
So yeah, so commercially that's going to be felt by those mining stocks, but volume is going to be subject to some variance but the pricing is going to be the same, if not higher I think.
Dan Ferris: No argument here, man. I own that stuff all day long.
Hugh Hendry: As the second wiring of my head goes back into hedge-fund mode, you'd be very tempted to take a trace element of that dividend real from Rio's and be buying out of the money forward, call options on some of the metals. But again, we don't want to reward those who sell options because they get rewarded very well as it is. So let's say something smart. Nothing goes up in a linear fashion. If it does it's a fraud.
And so plan for big drawdowns. So look at Rio Tinto, and I have. I don't think there's a huge price downside risk in it, per se, when I kept trying to decipher where a legitimate trend would bottom out. I don't think it's that. But I'm saying that buying dips in the mining sector doesn't seem like the dumbest thing that one could do. I mean, we need a strategy, yeah. Everyone listening to this is like, hey –
Dan Ferris: And you're acknowledging, Hugh, are you not, that the dips are substantial?
Hugh Hendry: Oh, yeah. But I'm talking about dips in the portion that we're seeing in stocks formally thought of as being riskless. In terms of those majors, I'm talking about 20% price corrections, not 50%, 60% price corrections.
Dan Ferris: Yeah, that would make sense if pricing in the commodities continues to be strong, right?
Hugh Hendry: And actually have fun again with it. Have fun with it. So I'm just improving as you speak, but actually the ultimate fun with this thing is the paradox. And it's a paradox born out of deception. So the Fed is doing nothing. It has a rhetoric, which is to claim that it is printing money, and to validate that it uses the reference of bank reserves, which has been accumulating via the – or distributing rather to the banking sector via its accumulation of Treasury purchases.
But we're beginning to learn that that's not – you can't go – try going to a bar tonight and ordering a beer and trying to pay for it with bank reserves, right? [Laughs] You're going to get thrown out. It's not money, OK? They're not printing money. And because they're not printing money, that's why again we find ourselves in a depression, that the system needs some looseness of credit conditions which the Fed is failing. And the Fed is failing because we've pretty much – ever since the turn of the – in my podcast this week I try and reflect on this – but ever since the turn of the 20th century, so when America was China, 1900 to 1930, we had this technological revolution in terms of the step forward in telegrams and the telephone where you could have correspondent banking across the states.
And it led to government money being replaced by checks. You know, like people used checks to buy things. Up until that point it was still special, it was still gold coins, and you had to avoid Sherwood Forest because there were bandits in there and they might steal your gold and give it to the poor people, you know? But it was only 100 years ago. And that totally changed. And it changed because the banks wanted the Feds out of their hair.
These guys just always get it wrong. I mean, remember 1933, I don't know what the executive order is, but the one that banned households from owning gold, gold and silver special at home, that was thought out – that is just amazing, because gold played no part in the propulsion – in these high stock market levels which weren't regained for 25 years. It played no part in the devastation which befell the banking sector of the bankruptcy of almost every U.S. bank. Actually, that came more in the initial enthusiasm for this new money called checks, and the banks were smoking like to – like, yeah, yeah.
The distribution was like confetti. Now it produced amazing innovation but it also produced amazing overvaluation, which when it corrected, of course, it created the depression. But to show you the lameness, the Fed does not do good. It does bad. They came out and they said, "Yeah, ban gold. That'll sort it out." It's like, you just revealed that you understand nothing. Nothing.
Dan Ferris: It was opportunistic, right? They didn't want to let a crisis go to waste.
Hugh Hendry: Sorry, that was a rant. No, so forgive me. So let's be opportunistic. So actually – forgive me – we should edit all that out because cut to the chase. I think you should be owning 10-year, if not 30-year U.S. securities, government bonds, alongside your – my package would be I would own 10 or 30-year, I don't care, right? – I'd own a bit of coal options on zero fed-fund rates.
And I would own Rio Tinto. And I think there I'm really, really well covered. Because again, remember the big issue for you trying to talk down the dividend yield from Rio's is that China really falls over. And if it really falls over, the 10-year yielding three is going to change.
I mean, if I was running the world I would actually put a surcharge on 10-year Treasurys for all of these sovereign wealth funds that park their money in U.S. Treasurys. I would charge them for the privilege. Believe me, they would pay it gladly.
Dan Ferris: For the same reason that – that's cool, that's cool.
Hugh Hendry: I'm sorry. I'm just waking up. The coffee's kicking in.
Dan Ferris: No, for the same reason people are holding negative yielding. Yeah, yeah, they would pay it. Sure. And I've talked about this a little bit with our listeners. You know, it's what I call true diversification. It's hard, is it not – and I know you've expounded on this frequently over the years – you kind of specialized, one might say – it's hard not to be correlated, and that may be one of your – if not your greatest achievement in a [inaudible], right? It's hard not to be correlated.
And if you can do it simply, if you can buy Rio in 10s and 30s and call it good, that's pretty amazing, isn't it? I mean, we don't always get to do that.
Hugh Hendry: Well that was my setup, and thank you for identifying that. Because whatever, you know, I'm in St. Barts and I'm certainly not playing a violin. I'm playing my surfboard. But yeah, for 15 years I ran a macro fund that correlated with nothing, neither my peer group, the dollar, gold, equities, Treasurys. Now there wasn't a moment where I did not target a correlation to a particular asset class, but that changed over time, if you will.
And when you looked at that thing, as you say, it is the hardest – the huge hope and expectation for bitcoin – or I should put it the other way around – the huge lie embedded in bitcoin, take it – wherever your prejudice lies, I'm right at the apex and I'm watching, OK? To try and eliminate correlations you've got to eliminate prejudice. So I'm at the apex. But for bitcoin to grow into the bull market that many believe it's going to continue to enjoy, it has to resolve the correlation issue. It's got a correlation of one to Cathie Woods.
I mean, that's an exaggeration, but it's got a correlation of one to Nasdaq. Now that's not to do it down. I'm saying if you're heavily invested in it, the biggest risk that you're underwriting just now is that correlation. For it to be validated, you need a profound correlation switch. I don't know how we – it's possible, but for this moment I don't have the brain bandwidth to determine or describe to you the set of circumstances where it goes to zero correlation.
Dan Ferris: No. But we did have a guest, Mike McGlone from Bloomberg, and he said 2022 is the year. This is the year that bitcoin ceases to be this risk-on Nasdaq – I mean, I say it trades like a freaking biotech stock, whatever you want to call it – and starts becoming this risk-off asset that everyone claims that it is but has yet to reveal itself as. So this is it, man. [Laughs] This is the moment.
Hugh Hendry: In fairness to your listeners, they deserve more than just the day – OK, this year – because what happens – to talk me through it. Don't just make a bold – as a statement, it's a preposterous statement. Come into my hedge-fund office and that's all you got? OK, time to leave. So I'm trying to – if you've got your calculator – because it's too many zeros. So 200,000 metric tons of gold seems to be the median guesstimate of how much gold has ever been mined. Yeah? 200,000.
And there are 32,000 – oh my god – yeah, 32,000 ounces in a metric ton, OK? So that is 6.4 to the power of 9. I have no idea what that means. I think that means – I have no idea what that means. And then multiply it by – let's use $2,000 because it's just a round figure for the price of an ounce of gold. OK. And that takes us to 1.28 to the power of 13. That takes us to essentially the value of all the gold mined in the world at $2,000 is $13 trillion.
And the bitcoin argument is that as it grows into itself that bitcoin – and indeed it is, it's displacing gold, and therefore if no one seeks the sanctuary of gold anymore and they seek it for bitcoin, then bitcoin has to be a $13 trillion asset. So the checking account introduced by the U.S. banking sector with correspondence banking at the time of the 20th century effectively took governments out of money, and 100 years later with the technology of the World Wide Web, we're recreating the checking correspondence network via the blockchain, and the ultimate goal for that is to take the banking sector out of money. And that's interesting. Imagine taking the banking sector out of money. That's when it gets jazzy.
Dan Ferris: So it's maybe worth holding a little bitcoin as an option on all this, right? You don't even have to hold much of it if that's the potential.
Hugh Hendry: Indeed. You're right. You're talking about something that might make 50, 20 times. I mean, that itself is telling you that you shouldn't bet the house on it, but you should have something in it, you know? So in this environment – so again, let's extend that notional portfolio.
We've got Treasurys. We're buying a bit of end-of-the-world fat tail, like the Fed goes negative on rates. Why not? We're not going to spend much... 50 basis points. What did you say? The dividend yield was 13%, 13.5% from Rio's?
Dan Ferris: Well, 11% equates to something like $13 billion.
Hugh Hendry: Oh, forgive me. So about 11%. Hey, let me call it 10%.
Dan Ferris: Yeah, exactly.
Hugh Hendry: We'll take some of that. Whatever we have in Billiton, I would have maybe 20% of my Billiton holding in bitcoin, and I'd still have a bit in gold because technically breaking $2,000 just feels like you go to $3,000 very quickly. Why not? Again, it's a kind of circular hedge making your portfolio more robust.
And then you've got to have some uranium. Come on. We've all got mining friends. We understand mining. You've got to have a bit of uranium as well.
Dan Ferris: Got it.
Hugh Hendry: And you know what? Boom. You know?
Dan Ferris: And then you're on the beach at St. Barts and you're good. Well, Hugh, we've been actually talking for quite a while, and I'm really glad that we could do it. I have a final question that I ask all my guests, regardless of topic, and you can go anywhere with the answer that you'd like. But it's the same final question for every guest no matter what, and that is if I said you must leave our listener with a single thought today, what would it be?
Hugh Hendry: I don't think I can exceed the notion that – yeah, I think that the thought bubble is we're on the verge of taking banks out of money, OK? We're in a depression. The financial media are banned. It would seem – we discovered during COVID that there were things that you could say in printed media and things that you could not say. We weren't aware of that before.
And therefore, I want to say that the – I mean, did you not see the word depression in financial publications? It's as if it's being banned. Now depressions thankfully are very few and far between. Les Misérables, the – I was going to call it an opera – that's a musical, the Victor Hugo opera was talking about the first incidents of depression round about 1830 to 1850. And it's a general economic malaise felt by the ordinary Joe, and for the first time it wasn't a function of the corrupt kleptocracy, the king invading Russia or what have you.
It was a mysterious force unknown to civilization at that point, which is to say it was the banking sector winning in credit, OK? We had the second round about 1870 to 1900. We had the third 1930 to kind of into the second world war. And now we've got the fourth from 2008 until an unknown. We've always been – market-based capitalism is with us, has endured because there has been a financial innovation, which has resolved the money question, money being too tight.
And so the thought bubble is here we are in this fourth major piece that I call the depression, fourth in 200 years, and perhaps we will exit it, which is to say we will regain previously higher levels of GDP growth with the advent of a new monetary order, which removes – so having removed sovereigns and governments from the money process – I mean, that's called the eurodollar system. Eurodollar is a private banking system. It has no governments. This is why the Fed is blind.
The next step now, because the banks have made such a hash of the eurodollar system, that the banks need to be replaced, and they need to be replaced by – you know, I don't need bozos in my French bank. I don't have to sign 1,673 pages of documents. I've got a blockchain, I can get my fingerprint – boom, and money gets transferred and commerce operates. It's another ledger system. So I mean, hey, that's the best thought you can be left with, people. Let's take banking out of money.
Dan Ferris: Awesome.
Hugh Hendry: Come on. Let's enjoy the weekend.
Dan Ferris: I look forward to it. [Laughs] I'm happy to participate in it. Listen, thanks, Hugh. Man, I really appreciate you doing this with us. I have to say that I am interested in hearing what you say about these things almost more than any other guest. I mean, you're a true maverick, and thanks for coming on and talking with us.
Hugh Hendry: Well, that's very kind of you. Thank you.
Dan Ferris: So guys, listen, I know that when we have Hugh on he's going to be a little harder to follow than most of our guests, and he knows that too about himself, but he is what he is. And I just think that he's a true maverick. He really has a way of looking at things that is unlike any other. And I alluded to it during the interview. It's because he ran this fund for so many years that wasn't correlated to anything, and that's how he sees the world.
And you heard us talk about a hypothetical portfolio – Rio Tinto, 10- and 30-year Treasurys, maybe some gold, putting a little bit of your dividends from Rio Tinto or BPH Billiton into a little bit of bitcoin or something. I just want you to listen to the thought process that gets you a hypothetical portfolio that is probably not going to correlate with anything and could do really, really well, right? And all the historical information and the insight and just Hugh's passion, come on! There's nobody like him.
So, you know, I hope you enjoyed it as much as I did. I love talking to the guy. All right. That was fun. Let's check out the mailbag. Let's do it right now.
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In the mailbag each week, you and I have an honest conversation about investing or whatever is on your mind. Send questions, comments and politely-worded criticisms please to [email protected]. I read as many e-mails as time allows and respond to as many as possible. You can also call our listener feedback line: 800-381-2357. Tell us what's on your mind and hear your voice on the show.
First up this week is Anthony H. Great question, Anthony. I love you for this question. He says, "Dan, why are the government and Federal Reserve officials always pushing the need for inflation? Many Fed officials have stated the biggest threat to the economy is low inflation.
Wouldn't standard of living and consumer spending go up with less inflation? Is it some kind of conspiracy?" Anthony H. Well, Anthony, I don't know if it's a conspiracy, but it sort of comes off like one, right? It's a de facto conspiracy, because you are absolutely right. Inflation is bad.
If there's 2% inflation, which a long-time Federal Reserve target, we want to have 2% inflation, that's still bad. You know, over time you're still inflating away the power of your savings and your wages, and you are stoking the fires of speculation as well aren't you? Because the more your money gets eaten away the less you can put it in a bank and save it up. So you have to speculate to get a return on it.
And you're quite right, the standard of living and consumer spending would both go up with no inflation – less or no inflation. They make up stories about why they think we need a little bit of inflation, why that's good. But I think the truth of the matter is they're just trying to keep asset prices propped up, and that's all there is to it, right? They're trying to keep real estate and stocks and commodities, whatever else, just asset prices in general, they're trying to keep them propped up and looking good over time.
And they have this belief too – all these people studied economics in college, which ruined their brains – and they have this belief that deflation is the most horrible thing that could ever happen because of the Great Depression, right? Ben Bernanke, you know, he made his academic bones saying this, and so he unleashed quantitative easing and here we are many years later living with the effects of that kind of thinking. So yeah, I agree. It's ridiculous and it's really harmful. Great question, Anthony.
It should be asked frequently. Next up is Troy R. Troy says, "I have practiced emergency medicine since 1996, and one of my mentors used to say the more I do this the less I know. It took me a long time to understand that, but I truly get it now. My question for you is do you ever feel the same about finance? Keep up the great work, and look forward to the next episode." Troy R.
Yeah, I feel that way. I don't necessarily feel that way about analyzing the fundamentals of businesses. I feel that my knowledge has truly compounded in that area over time, and I think it can. But [laughs] when it comes to markets, whoa. I mean, it's an understatement to say the more I do the less I know. The more I watch the way markets behave, you know, the more I realize I don't know anything about it.
That's why I finally – you know, I just started saying I don't make predictions. Prepare, don't predict. That's the best we can do. I think it's the best we can do consistently. Every now and then you get a prediction right it makes you feel like you're smart, but you're fooled by randomness. You're just lucky in those instances.
So yeah, the more I do this, the more I watch the way markets behave, the more I realize I just don't know anything about it. Thank you, Troy. Again, that's the type of question that should be asked repeatedly, regularly. Next up is Jeff K., and he says, "Mr. Ferris, Russia has been hoarding gold for close to a decade. If they start selling it off in order to raise money to mitigate the numerous economic sanctions against them, won't that cause the price of gold to plunge?" Sincerely, Jeff K.
It could, it could. You know, I don't know. Temporarily? Permanently? Which of those two? I would guess temporarily, if at all, because I think we're coming into a time when gold and silver have become more desirable and will continue to be more desirable over the next five, 10 years-ish. So I think it could happen. You know, any big seller entering a market that is, let's face it, pretty small compared to stock and bond and currency markets, any big seller can have an effect on the market, but it's whether or not it's permanent.
And will other central banks in other countries start selling? I don't know. I doubt it. I think they all want to hold gold now. So yes, I don't think it would – my answer is yes, but I don't think it would be permanent. OK. Next Matt O. wrote in, and he's going to give me a chance to clarify.
I probably won't read Matt's whole question. He's writing in about something that I said when we were interviewing Patrick Yip, and I made it sound like using OneGold accounts to buy gold and silver was a way to get around – I forget the term I used, but yeah, Matt said it doesn't anyway – it's not away to get around the spot to physical premium, right? So I made it sound like you were getting around the need to pay an enormous premium on silver coins by having a OneGold account. Well that's not true because OneGold doesn't buy coins, right?
And this is – my wife says that I always start thoughts in the middle and don't complete them, [laughs] so maybe we can chalk it up to that. But Matt, you're absolutely right. Having a OneGold account does not mean you can buy coins at no premium. The coins are still at an enormous premium, silver coins. It just means you can buy silver bullion, and buying silver bullion, no matter where you buy it, has a much smaller – like a normal 2% kind of premium, as you point out in your e-mail.
So I just want everybody to know that I didn't mean to suggest that the folks at APMEX who also run OneGold have some secret way of getting around the enormous premium on silver coins, or that buying silver bullion was some secret way to get around – no, not at all. You're absolutely right, Matt. Not at all, right? Silver coins have huge premiums right now. The way to not pay that premium and still own silver is the point, is to buy regular silver bullion, like bullion bars.
And you can buy them in fractional amounts, effectively, with a small amount of money by having a OneGold account. That was the point. So Matt, thank you for giving me a chance to clarify. I appreciate it. And I'm glad you wrote in.
Next, I have two questions from our longtime listener and frequent correspondent Ludvig H. Wow, you really loaded up my e-mail this week. [Laughs] You must've written eight or nine of them. But I have these two. And the first one is, "Hi, Dan. Something to think about.
In what way, I think you want to say, is Russia different? What is Putin doing differently? All governments kill. All governments steal by taxation. All governments just take what they wish and don't compensate you."
And then he's talking about in the Netherlands they're talking about confiscating farmland and real estate being confiscated for refugee shelters. So Ludvig, yeah, I agree with you. I agree completely. All governments do what Putin does.
I frequently say they're all the same. I'm usually referring to conservatives and liberals, or so-called progressives, whatever, in the United States, but governments are governments. All governments seek to have a monopoly on violence in a given geographical region, and they use it to take whatever they want. So yeah, you're absolutely right. And if there was no invasion of Ukraine, the headlines about Ukraine would still be that it's one of the worst governments in Europe.
You're absolutely right to ask that question. It doesn't get asked enough, you know? And finally from Ludvig this week, he says, "Regarding your 60th birthday –" I turned 60 last November and talked about it a little bit –"regarding your 60th birthday, what are the big lessons in life? Can you do an episode on it?" [Laughs]
Well Ludvig, thank you for having the confidence that I might actually get a whole episode out of my 60th birthday, but no, it's just not that important. And it's not so much big lessons in life as things I've changed about my perspective. If there was a big lesson in my life so far, it's understanding via negativa, right? Via negativa, as Nassim Taleb put it, he said, "The learning of life is about what to avoid."
In any situation, figure out what to avoid and look for what's not being said and what's not being shown and what's not there and what is not. What is there is obvious, right? You can hear what the government wants you to hear. You know, they'll keep saying that all day long. But think about what they're not saying and what they don't want you to hear, for example.
And in an investment, you know, if you're looking at a public company, you can read what's there. You know, you can read what's written in the reports, but what's not in the reports? What are they not telling you? Ask those questions. They are very, very important.
So the big lesson in my life has been via negativa. The big change in my perspective as a result of turning 60 has been that I just – I think I've gotten a little crochety or something, and I just do what I want to do without worrying about who's offended by it. And I think also – we touched on this when we talked with Brent Cook a few episodes back – I have taken to – it's just a more natural thing for me to ask in any given moment, am I enjoying what I'm doing? And with the podcast it's like, yes, yes, yes, all day long.
It's like my favorite part of the week. That and writing the Stansberry Digest. I am loving that to death. So I get to do both of those things every week, and that's great. So if I don't enjoy something, like how can I either get rid of it or minimize it or, I don't know, change my attitude about it or what do I enjoy about it?
My enjoyment of things and what I like and love and want to do is much more a guiding force to me than, you know, some ambition about making money or something like that. Thank you for asking Ludvig. I appreciate it.
Well, that's another mailbag and that's another episode of the Stansberry Investor Hour. I hope you enjoyed it as much as I did. We provide a transcript for every episode. Just go to www.investorhour.com, click on the episode you want, scroll all the way down, click on the word "transcript," and enjoy. If you like this episode and know anybody else who might like it, tell them to check it out on their podcast app or at InvestorHour.com.
And 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. Follow us on Facebook and Instagram. Our handle is @investorhour. On Twitter, our handle is @investor_hour. Have a guest you want me to interview? Drop us a note: [email protected].
Or call the listener feedback line: 800-381-2357. Tell us what's on your mind and hear your voice on the show. Till next week, I'm Dan Ferris. Thanks for listening.
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