Gold and silver have soared higher and higher lately.
And many listeners are asking, “What happens to gold and silver next?”
But frankly, Dan thinks that’s the wrong way to look at it. On this week’s episode, Dan explains the mindset you should have about owning precious metals.
He also sits down to have a conversation with Marty Fridson, the Chief Investment Officer at Lehman, Livian, and Fridson Advisors, an SEC registered investment advisor. Marty is one of the most widely-respected fixed income analyst around. In 2000, he was the youngest person ever to be inducted into the Fixed Income Analyst Society Hall of Fame.
Dan and Marty discuss what’s happening in the high yield bond market, a massive market that people need to pay attention to, but sadly gets nowhere near the attention that equities do.
Listen to all this and more on this week’s new episode.
Chief Investment Officer, Lehmann, Livian, Fridson Advisors LLC.
Marty Fridson is the chief investment officer at Lehmann, Livian, Fridson Advisors (a SEC registered investment adviser) and a widely respected fixed-income analyst. He is one of Wall Street's most thoughtful and perceptive analysts. In 2000, Marty became the youngest person ever inducted into the Fixed Income Analysts Society Hall of Fame. The Financial Management Association named him its Financial Executive of the Year in 2002. He has been dubbed "The Dean of The High Yield Bond Market" in conjunction with being voted on to the Institutional Investor's All-America research team.
NOTES & LINKS
2:31 – What’s going to happen next to gold and silver? Frankly, Dan says that question misses the real point, “The real question is…”
7:29 – “You have to get the idea of a diversified portfolio firmly embedded in your mind and you have to understand that when you do that, some assets are going to perform well at some times and some assets are going to perform well at other times and it’s the net result in the end you’re looking for…”
14:50 – Could the U.S. Dollar lose its reserve currency status? “I don’t talk about the United States losing reserve currency status as this binary thing, all or nothing, however…”
18:52 – This week, Dan has a conversation with Marty Fridson, the Chief Investment Officer at Lehman, Livian, and Fridson Advisors, an SEC registered investment advisor. In 2000, Marty became the youngest person ever inducted into the Fixed Income Analyst Society Hall of Fame, and he’s been dubbed by many as the “Dean of the High Yield Bond Market.”
21:55 – Marty fills Dan in on what’s going on in the high yield bond market. “We’ve had a tremendous rebound from the low on March 23…”
25:55 – “…However you characterize it, the risk premium in the high yield market is way way out of line with anything we expect to see, absent that very strong hand by the Federal Reserve.”
31:20 – What kind of default rates could we be looking at in the future? Marty and Dan discuss the possibilities… “I think it’s very realistic to expect that we will have something on the order of a 9% default rate in the next 12 months…”
36:22 – Was the Fed to blame for the Great Depression? Could it have been avoided? Dan shares a new book he’s reading that presents this outsider view.
42:28 – Dan asks Marty about what he’s holding in his managed portfolios, “What about cash? Are you carrying a lot of that these days?”
45:53 – Marty shares some advice with the listeners, “Take a long term view, not overreacting to the extent of saying ‘sell everything! Let’s go all to cash…’ even under the worst possible conditions, continue to take a long term view of your investments.”
48:15 – During this week’s mailbag… A listener asks Dan for help understanding gold better… Another asks what is your take on investing in hard assets without physically inspecting them yourself? And finally, is it fair to lump cronyism and capitalism together?
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's your host, Dan Ferris.
Dan Ferris: Hello and welcome to The Stansberry Investor Hour. I'm your host, Dan Ferris. I'm also the editor of Extreme Value published by Stansberry Research. Today we'll talk with Marty Fridson, the dean of high-yield bonds. It's been a weird, crazy year, and I'm really, really curious to hear from him, given all that's happened in 2020.
This week in the mail bag, Stansberry Alliance member GP wants me to help him understand gold better. I'll take a crack at that. Plus, not one, but two questions about crony capitalism. In my opening rant this week I'll talk about gold, silver, reserve currencies, and what I think is likely to happen over the next 12 months and beyond. That and more, right now on the Stansberry Investor Hour.
I'm getting a lot of questions to the tune of what's going to happen next in gold and silver. This always happens. And what's going to happen next in the stock market, too, of course, because it's making so much. Don't want to talk about that so much, because I always talk about stocks. You know I think they're crazy expensive, and you know I think returns over the next 10 years are going to be poor. There. Done. Stocks, done.
But gold, silver, and I said I'd talk about reserve currencies, too. I don't think you can talk about one without talking about the other. So I put gold and silver in the same category. They're both monetary assets. And sure, we use gold for a few things. About 50% of the demand is for jewelry. And we use silver for jewelry and lots of other stuff. But they have always had a monetary use. In fact, you can find the use of gold and silver, there's a naturally occurring alloy of the two called electrum going back something like 6,000 years. So we've been using this stuff for a long time. I think we're going to be using it for a long time more. So that's why I threw gold and silver in together. But in general, I'll just talk about gold.
So what's going to happen next? Frankly, I understand the question all day long, but I'm afraid that the question misses the real point. The real point and for me the real question is, is it going to keep doing what I want it to do? Can I still hold it for the same reason I bought it?
OK, well, providing the reason you bought it wasn't to speculate on a quick price rise in 2020, the answer is yes. Because the reason you should have bought it is because we are in a time of crisis. I hate to use this word, but it's the truth. We've hit unprecedented levels of fiscal and monetary stimulus. Historically, that messes with the value of the currency. And that is the last resort of folks in power, of governments and central banks is degrading the value of the currency.
One of the oldest, and it may even be the oldest, one of the oldest treatises, pieces, on an economic problem is by a guy named Nicolas Oresme, I believe is how you say that. He was a monk and a scientist, one of these medieval monk scientist folks. And what did he write about? He wrote about inflation. Really, he wrote about degrading coins. So we don't write about that anymore, but the ideas are the same. People in power, they're trying to push economics around, and they wind up having to exercise this one last lever of degrading the value of the currency.
So then you go, okay, what's my insurance? Well, what's been money longer than anything else? Gold and silver. So you've got to own some. The problem, and the real question that I want to get to first is, this idea of holding a diversified portfolio, knowing why you hold it is the important thing. When you hear people talk about something like Amazon.com is a great example, you could have bought it at the top of the dot-com bubble, and you'd have made many, many times your money, let alone, for six dollars or whatever it was at the bottom. You could have bought it at the top. But you would have had to hold it through multiple, 30, 40, 50% drawdowns between then and now to get this enormous return.
Look, there's just no way you could hold anything without knowing why you're holding it. That's what holding is about. When your asset is not performing great, holding is about knowing why. And you have to have a strong conviction that it's a great time to hold, I would say, plenty of gold and silver, or else you're not going to make it through the inevitable periods of correction. Gold has run up to the low 2,000s here. You could use the '70s as an example. Gold ran from, who knows, tied to the dollar at $35 an ounce. They ended the Bretton Woods agreement, and eventually it peaked at 850. Very briefly. And that took place in less than a decade. Just about a decade.
So, during that time, there were multiple huge dips where the price in U.S. dollars dropped 40, 50%, and you had to know why you were holding it in order to continue doing so. And you hold it as an insurance policy against the degradation of the currency. And so that becomes the real question. Is there going to continue to be monetary stimulus and fiscal stimulus, which will require further debt financing? And I have to say the answer is yes. In fact, our man Scott Garliss at Stansberry was sending around his usual … he sends around a lot of stuff internally, and publishes a lot of stuff externally. He's talking about, he says there's more stimulus that they're talking about in Congress. So yeah, this is going to go on for a while. You can't shut down an economy without creating … a multitrillion-dollar economy if you're a big government without feeling like you have to fill in that hole you've created.
Personally, I'm not selling any metal-related investment. Not selling gold stocks, not selling gold, not selling silver. And you have to continue to hold. But since we've had this run-up … and especially in silver. That really took off like a rocket, didn't it? About time, for those of us long suffering holding our silver coins. But you have to expect correction of some kind. You have to expect the price to fall. But the next dip, if the next dip is 40, 50% in either one of those two, I'm going to probably buy more of it. I'm certainly not going to sell any of it.
That's point number one. You have to get the idea of a diversified portfolio firmly embedded in your mind, and you have to understand that when you do that, some assets are going to perform well sometimes, and some assets are going to perform well at other times. And it's the net result in the end that you're looking for. You're not looking for everything to go screaming up every week. That's not going to happen. But in my opinion, you can't afford not to hold that array of assets – stocks, cash, gold, [Inaudible comment] _____ [0:07:59] and just as a basic, truly diversified portfolio. There are obviously other things you can buy.
So, let's talk about this question that came up recently. We get this from readers and listeners. From time to time they talk about if the U.S. loses reserve currency status. And last week, you remember, we talked with Vitaliy Katsenelson, and he had a real good point. He said, "People tend to think in binary terms when they need to think more incrementally." And we put forth this scenario, and I said, "Well, the U.S. dollar right now is the biggest reserve currency, not the only one." The other two are the yen and the euro. And the yen is about 5% of reserves. The euro's around 30% of reserves. And that's obviously doesn't equal 100% altogether. So there's another five % scattered in who knows what.
You have to think, for example, what would change in the world? How would the world look differently if instead of the yen being 5% of global currency reserves, what if it shrunk to 4%, a 20% drop? That's one scenario. And what about the same move in the U.S. dollar, which would take it from 60 to about 48%? Whoa. I bet that would be a lot bigger effect, and probably result in huge move upward in gold, without canceling the dollar out as a reserve currency. There's still plenty of demand for dollars.
Right now it's 80% of global transaction volume. That ain't going to go away overnight. It's hard to sell anything, especially financial assets, without buying dollars. And even if you don't buy them in the initial sale, you often have to wind up buying them later, because so many people use the dollar. So it's hard to get away from it. And then, when you say it's hard to get away from the dollar, why is that? Why is it so hard to get away? Because it's hard to replace the U.S. economy in the global scheme of things.
And you say, well, what about China? They're up and coming. True, but you have to really look at the difference between China and the United States. Can you really see China replacing the United States as the number one economy in the world? Right at this moment, I don't see it. I think the understated wonderful thing about the United States economy is that it's not planned from the top down. Now, it has increasingly been planned from the top down, especially from about the 1930s onward. The 1930s were really, that was the seminal event. Before that, it wasn't assumed that the government should stick its business into anything, necessarily. If companies went bankrupt, they went bankrupt, even if it was a big company.
Wasn't necessarily assumed that the government would stick its nose into all aspects of American life, until the Great Depression came along and the sentiment was so poor, and so many people were out of work, largely due to really horrible government policies, perversely, and people said, "Do something. We want the government to do something." So we do have more top down management than ever, but still, on net balance, we have this economy where millions, tens of millions, a hundred million people are making decisions from the bottom up for themselves.
The government of the United States does not go into multiple towns and say, "You people are all going to move to the city, and we're going to make you move into the city, and we're going to level all these houses that you built." We just don't do that. And China does that. They tell everybody what to do and where to go. And of course, I'm sure we have listeners who know China and are familiar with China, and they're, "Oh, that's not the way it is." But it is. They don't have one of the essential pieces, in my humble opinion, that makes markets work, is entitlement to property. Private property. That is the ultimate decision. This is my property. I'm going to do with it as I please, because I have good legal title to it.
There's a guy named Hernando de Soto who wrote a whole book about this called The Mystery of Capital. And the point is it works, markets work, when you have good title to property. You can't get that in China, not really. You can get development rights. You can get the right to do things with land, but you don't really own it, because it's a top down, command control economy.
In my opinion, that creates limits to things like entrepreneurialism, and innovation. Sure there are entrepreneurs in China. Yes, I know. They're big businesses. Jack Ma, etc., etc. But I think the United States way is just naturally better at creating a more robust economic system. And that's really ultimately what's behind the U.S. dollar. So sure, is the currency mismanaged? Is the central bank a giant machine for creating huge systemic risk and tail risk in our economy? Yes.
We had Amity Shlaes on the program weeks ago, and she said, she quoted, I think it's Adam Smith actually that she quoted "There's a lot of ruin in the nation. There's a lot of ruin in the nation." There are a lot of bad decisions made at the top. But still, still I, for one, I'm a free markets guy. And I would have thought, man, the way the government has messed with the free market, especially over the last 90 years or so, we'd have been Soviet America by now, wouldn't we? No, absolutely not. It's just that ability of millions and millions and millions of people to make their own decisions, supports the United States dollar as the reserve currency. And it's really hard.
That self-organizing latticework in the economy supports the currency in a way that is more robust than I ever could have imagined. You can beat the crap out of this thing. Talk about take a licking and keep on ticking, the United States government hasn't destroyed this economy yet. Are you kidding me? Therefore, I don't talk about the United States losing reserve currency status as a binary thing, all or nothing. However, over time it will continue to be mismanaged, and there will continue to be an assault. It will continue to be the last resort of the Federal Reserve and the U.S. government. But ultimately, I don't think we lose our reserve currency status. It may be a smaller portion of foreign exchange reserves, but I think it's going to be bigger than the yen, certainly, and bigger than the euro.
So that's where I am. You hold gold and silver. You don't get sucked into binary thinking about the reserve currency status of the U.S. dollar. And I told you what I think is likely to happen over the next 12 months and beyond. Beyond is more of the same. Plus, the added feature of we're going to get a correction in gold and silver in U.S. dollar terms. You have to. It's just normal stuff. Gold and silver are volatile. But I do think, with the advent of Berkshire Hathaway buying a stake in Barrick Gold, I do think we're on the bleeding edge of the generalist institutional investment community starting to say, "You know something? Dan's right." None of them know who the hell I am but, "Dan's right. We need to own some gold because hey, after all, Warren Buffett owns some of Barrick."
So, I realize I covered a lot of ground here, but the basic idea is, you hold gold and silver as insurance. You don't worry about the corrections. You maintain that diversified portfolio, and you don't get yourself into too much binary thinking about outcomes. You don't want to have your portfolio depend on your, or anyone else's ability to predict. Predictive strategies are sucky. That's that binary thinking again. Event X is going to happen, so I'm going to put a whole bunch of money into security Y. And then X doesn't happen, and security Y eats up 60% of your capital or some big number. You don't want to do that. Just hold your diversified portfolio. Hold all your good stocks. Hold gold. Hold some silver. Hold plenty of cash. Buy some bitcoin. Do that, and do it because you know you understand what you're doing, not just because somebody said do it. Look into it, is what I'm really saying. Look into doing this. Learn to understand it.
Alright. I've beat this horse sufficiently to death. You get the point. Let's talk with Marty Fridson.
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OK, it's time for our interview. This week's guest is Marty Fridson. Marty Fridson is the Chief Investment Officer at Lehmann, Livian, and Fridson Advisors, an SEC-registered investment advisor, and a widely respected fixed income analyst. He is one of Wall Street's most thoughtful and perceptive analysts. In 2000, Marty became the youngest person ever inducted into the Fixed Income Analyst Society Hall of Fame. Financial Management Association named him its Financial Executive of the Year in 2002. He's been dubbed the Dean of the High Yield Bond Market, in conjunction with being voted to the Institutional Investors All America Research Team.
In 2013 he served as Special Assistant to the Director for Deferred Compensation in the Office of Management and Budget in New York City. Respected author, Marty has been ranked in the top 10 most widely published authors in finance from 1990 to 2001. In 2000, the Green Magazine called Fridson's Financial Statement Analysis: A Practitioner's Guide, "One of the most useful investment books ever." I totally agree. It's a great book. I have it right in front of me as we speak. The Boston Globe said his 2006 book, Unwarranted Intrusions: The Case Against Government Intervention in the Marketplace, should be short-listed for best business book of the decade. Wow. I'll have to read that one. Welcome, Marty Fridson. Thank you for being here.
Marty Fridson: Terrific to be with you.
Dan Ferris: So, Marty. We just have to check in with you. I think it's been almost exactly one year, just about one year to the day since we spoke with you. And things have changed a little bit, have they not?
Marty Fridson: It's been quite eventful, to say the least.
Dan Ferris: Yeah. Who saw 2020 coming? Just about nobody I've ever heard.
Marty Fridson: No, it's a reminder to remain humble about predicting the future. There are things that come out of left field, and theoretically, should be reflected, those unforeseeable, really off the wall kinds of events that should be embedded in prices in theory. It's a little hard to prove that, one way or the other, really. But we certainly had a sea change right around the beginning of this year.
Dan Ferris: Right. So in a heartbeat, the Fed cut – gosh, I can't even remember – just a couple hundred basis points, I guess, or close to it, off the Fed Funds rate and boom, here we are with the 10-year yielding something like .06%. And the S&P 500 yield, like 3 times that, weirdly, which just hasn't been in a long time – since the early '40s, you haven't had that ratio. But what I wonder is... so much for equities. They're hitting new highs as we speak, and they look really expensive to me, but I want to take another step or two up the capital structure in your bailiwick, and ask you, has the same thing happened in high yield? Have you just seen opportunity evaporate and spreads close up? Or what's happening there?
Marty Fridson: Yeah, we've had a tremendous rebound from the low on March 23. The highest B of A U.S. High Yield Index has a return of 23% from that time. And those are the kind of returns you hope to earn in equities. High-yield bonds are somewhere in between equities and higher-quality or Treasury bonds. But that's a heck of a return. Just as an aside, the energy sector, which is the largest component of the high-yield market has a 54 % return. And these are not annualized figures. These are just absolute returns. From the beginning of the year, it doesn't look quite as good. The high-yield market as a whole is just about flat, actually negative 12 basis points total return.
And one issue of concern there is that the lowest quality, the CCC and below segment of the speculative grade market, which runs from DD down, has actually been the weakest performing, both year to date and since the low point in March. And you ordinarily expect that in a roaring bull market, such as we've seen since March 23. You see the biggest pop in the riskiest bonds, and the debt has been exactly the opposite of what has happened.
But the spreads have tightened up quite a lot to the point where, by several measures, you're not getting paid really well for the underlying risk. It's really a market, essentially completely controlled by monetary policy right now.
Dan Ferris: Wow. So you sit around waiting for the Fed to decide what it's going to do to your business next, huh?
Marty Fridson: Yeah. It's putting less of a premium on fundamental analysis. Just to cite you one statistic, without getting too wonky, a data series that's available, that has a very strong connection over time with the risk premium on the high-yield market, is the credit availability measure that you see in the quarterly survey of senior loan officers that the Federal Reserve conducts. That was just recently updated. And the specific statistic is, you take the percentage of banks that say that they're tightening the standards – it's not the rates they're charging, but just how good a credit you have to be to qualify for a loan. You take the percentage that are tightening those standards, and subtract the percentage that are easing those standards. And that difference jumped from about 41% to 71%. So almost three quarters of the banks are currently tightening their standards on loans and none that are easing the standards.
Now that's 71%. In the past, when that percentage points measured 60% or higher, now it's 71%, the difference in yield between the high-yield index and Treasury bonds was never less than 16 percentage points, or 1600 basis points. Currently, that differential is 5 percentage points. I think that's about the best illustration I can give of how much the Fed intervention – you could say distorting... maybe you'd say, well, they don't have any choice but to implement this policy, and this is a side effect of that. However you characterize it, the risk premium in the high-yield market is way, way out of line with anything we would expect to see, absent that very strong hand by the Federal Reserve.
Dan Ferris: I read a lot of stuff by Howard Marks. And it wasn't too terribly long ago that, I think it was actually on a video that I saw him say something that surprised me a little. But it was very honest. And at that particular moment, he said there isn't a whole lot to do right now, but we have clients, and they expect us not to do nothing. And he's a really reputable guy. And, of course, they have a wonderful record of getting returns for clients, and they buy a lot of debt. And as soon as I heard that, I thought, I wonder what Marty would say about that.
Marty Fridson: Yeah. Well, Howard is, of course, widely solid. His letter is widely read, well beyond his own client base. He's written extensively about the markets, and I think it's well worth listening to. At Oak Tree they do a lot in the distressed-debt area. That includes bonds or other obligations of companies that have actually filed for bankruptcy after defaulting on their debt, failing to make scheduled interest or principal payments. We have had some major bankruptcies occur, particularly in the retailing sector. Some of the grand old names of the retail trade, they've gone into bankruptcy. But also within that distressed category are bonds that are trading at large risk premiums, again getting back to that difference in the yield between the bonds and the default risk-free Treasuries, which is the extra yield you're getting for taking that risk of default.
A number of years ago, I introduced a term known as the "distressed ratio," which is the percentage of issues in the high yield index that have a spread over the Treasury rate of 10 percentage points, 1000 basis points, or more. That percentage is a good leading indicator of the default rate. Now, the default rate over a long period of time averages about 4% lower than that during expansions, and much, much higher than that during recessions. Typically, you see default rates get to low double digits during a recession.
So one of the things that is interesting to look at is, what does the market expect the default rate to be over the next 12 months? I won't go into all the details of the calculations, but I derive a market-implied default-rate forecast for the next 12 months from that distressed ratio. Now that distressed ratio, during an ordinary recession – and this is far from an ordinary recession – ordinarily would get up at some point to about 30%, and it did get into that range earlier in the year before the Fed stepped in. But currently, it's at just 14%, which is not a particularly elevated level.
And I derive from that, the market expecting a default rate only in the range of about 4.5%. Again, that's not very different from the historical average for both expansions and recessions, but it's even more starkly contrasting with Moody's base case forecast of more than 9%. And that gap is really unprecedented, that the market would be that far out of line with what reasonably good models for forecasting the default rate indicates. So it's not surprising that Howard is saying it's not as if there are just great bargains left and right and they have more than they can handle, which has happened in some times. This is certainly not one of those times.
Dan Ferris: That disconnect strikes me as interesting. But frankly, the Moody's number doesn't surprise me, given what you were saying earlier about the really unexpectedly poor performance of CCC and the fact that we live in this bifurcated market where you can operate in lockdown or you can't operate in lock down. And if you can't, you're in real trouble. Restaurant companies and so forth are – they issue plenty of high yield. So it doesn't surprise me. Where are you in that difference? Do you think 4.5% makes more sense than 9%, or not?
Marty Fridson: Again, the methodology that Moody's uses is pretty good. Now they put out a base case, a pessimistic case, and an optimistic case. So, if the economy winds up performing better than economists expect, and Moody's tends to be in the mainstream, their base case would be consistent, generally, with a consensus forecast. They're not necessarily striving to do that exactly. They have their own economic forecast. But my observation is that they're not that far out of the pack, as far as that goes. So, I think it's very realistic to expect that we will have something on the order of a 9% default rate over the next 12 months, and maybe coming down a little bit as some of the economic numbers come in a little better.
But I think that the market's forecast is unrealistically low, but it's just a reflection of not allowing some of those bonds to trade at a level that reflects a significant near-term risk of default because there is just such a hunger for yield. If you've got the Treasury market yielding well below 1%, and you need to generate income as part of your portfolio, you have to make your choices from those that are available. There's a lot of criticism of portfolio managers currently saying, "Well, they're being unrealistic. They're foolishly buying paper yields that don't adequately compensate you for the risk." And I would observe that it's a lot easier to sit on the sidelines and criticize than to manage a portfolio, or to manage monetary policy from that standpoint because they're also severe critics of the Fed.
Again, if you're managing a portfolio and you don't have the option, as the manager of a high-yield bond mutual fund, for example, of fitting in cash while you wait for better opportunities to arise, that is just not an option that the mutual fund shareholders are willing to afford you. So you have to make the best selections from what is available, even including some that look like they could very well run into severe financial difficulties in the space of 12 months.
Dan Ferris: It sounds to me like the author of Unwarranted Intrusions: The Case Against Government Intervention in the Marketplace is a little sympathetic to what the Fed thinks it needs to do.
Marty Fridson: That's about the toughest job out there, running that monetary policy. And I have to say, the book didn't really deal with monetary policy, as much as things like controls on imports, trade barriers, rent controls, savings incentives, and a variety of other things. Monetary policy wasn't – matter of fact, I do have some views about that, naturally. Being involved in financial markets, I have to have some opinions about it. But I think that right now, the notion of saying, well, we really have to get back on track to where we were looking to raise rates, despite some opposition and hectoring. I think it's fair to characterize from the president trying to block that move. But up until not long before the Fed, we'd go back sometime in 2019, when the Fed started to back away from that stance, but the idea of going back to that anytime soon I don't think is a realistic option, given the severity of the economic difficulties.
There are criticisms of other things the Fed is doing because what the Fed is doing goes far beyond traditional monetary policy of controlling the money supply and interest rates, particularly interest rates in the short end of the market – and now going into the long-term end of the market and going beyond even what was done during the Great Recession of buying government bonds and government-sponsored mortgage-backed bonds, but now going to the extent of buying corporate bonds, even the so called junk bonds. It's done that to a very limited extent, but by virtue of stating that the Fed is prepared to do that, it has rallied the corporate bond market, including the speculative grade portion of it.
So, to the extent that there might be some valid criticism, it could come a little bit more in that category. There was just some media coverage today about the Fed's loan of around $450 million to the New York City Subway System, at a rate of about 80 basis points less than they were able to obtain in the bank loan market. And that might be questioned as an appropriate implementation of Fed policy because it really ventures more into the fiscal policy that's supposed to be the purview of other branches of the government.
Dan Ferris: Maybe we could talk about the Fed for a little bit here because I welcome a pretty wide array of opinions on this because I think in general, people tend to go a little too far placing blame for things at the Fed's feet. However, I have been reading a book called Banking in the Business Cycle that came out in 1937. It's sort of an Austrian view of the Great Depression. And they lay a lot of the blame at the Fed's feet for easing in 1924 and 1927. They say, well, we could have avoided this. It's man-made. And I wonder, I just quipped recently that they're in the business of manufacturing tail risk. And I wonder how you think about their very existence, the very existence of this central bank.
Marty Fridson: Well, we could go to the gold standard. And there's a recently nominated Fed governor who's been on the record with that view of things, which is an interesting comment on how that will work, with a governor taking that view, very different from previous governors. Yeah, certainly that would be a very radical step. I don't think politically that's realistic any time soon. I understand the sentiment for it. I am not crazy about the idea of viewing the role of the central bank as maintaining a 2% inflation rate and feeling thwarted by not being able to get inflation up to given positive rate because I think certainly the notion at the outset, and in the legislation regarding this idea, is maintaining a stable price level, which doesn't mean rising by 2% a year under, I think, any dictionary definition you would find.
But that's where the goal posts have been moved to on the theory that if there's no fire under consumers saying, well, if we don't make these big ticket purchases now it's going to cost us more a year from now. If you don't have that fire underneath the consumers, they're going to be too stingy and not engage in the spending that's necessary to keep the economy growing at an acceptable level.
A lot has entered into – one thing you point to is that there's nothing in Fed authorizing legislation that talks about the exchange value of the dollar. That's certainly the Treasury's concern, if it's to be managed at all. And yet, it would be unrealistic to say that the Fed doesn't pay attention to that, or to the level of financial markets, which is not in the legislation either.
But the Fed is subject to political pressures. Ultimately, if Congress were to become sufficiently dissatisfied with what the Fed was doing, it could greatly restrict the Fed's authority, which is certainly not something the Fed wants. And I think that a lot of economists would also not favor tying up or restricting the Fed's range of activity.
If you're not in favor of just doing away with the Fed or going to an intermediate step, which would be a more formula-driven setting of level for interest rates, giving less discretion to the Fed in that process – and that's also a proposal that's seriously discussed – if you're not for that kind of somewhat radical change in how the monetary policy is managed, you should be able to explain why you're not in favor of it. So I think it's absolutely appropriate to raise those questions from time to time.
Dan Ferris: Okay. Well, I appreciate that. So let's – I want to come back down from 30,000 feet. You're a practitioner. I want to milk that for my audience as much as possible here. And we talked about Howard Marks not finding things to do but telling the world, "Hey, my clients expect me to do something." Are you finding things to do? Are you finding securities to buy?
Marty Fridson: Yeah. Well, let me clarify that. Our money-management business is not a high-yield bond fund or anything of the kind. We manage money for individuals who are interested in generating income primarily. They also want to preserve their capital, grow it over a longer period. But their No. 1 objective is generating a high level of income. And that's not easy to do currently because of the low level of the underlying Treasury rates. But we do find opportunities in categories such as preferred stocks, closed-end funds that use leverage to boost the yield over whatever is underlying in that portfolio. We use real estate investment trusts. We've been doing less in the master limited partnerships, which are primarily in the energy sector, for a variety of reasons. But we find that in a diversified portfolio we're still able to generate the kind of 5% or so yields that'll vary a little bit with the risk profile of the particular investor.
But we feel comfortable with instruments that we find that are higher yielding within the range of what we own because of that spreading of risk. We're not putting more than 1% or 2% into any individual name. So we are mindful of that kind of out-of-the-blue surprise that we talked about earlier in the program that could affect any security out there. But we're limiting the exposure to that happening in any idiosyncratic way in a particular name.
Dan Ferris: Wow. It's interesting for me to talk to a whole bunch of people who manage other people's money and to hear all of them, just about every single one of them, quickly getting to the topic of risk management in general, but position sizing... They don't want to own too much of anything. A lot of them want to have gold, and they want to have enough cash. What about cash? Do you keep plenty of that on hand these days?
Marty Fridson: Not at an unusually high level. We did build up some cash during the worst of the crisis. We sold some issues that gave us concern due to their business model, either because of the very intense pressures during the first quarter on entertainment, travel, leisure, and some that, at that point, we just had longer-term concerns about their business models as well. So that built up some cash, but we did that specifically with an idea of taking advantage of opportunities that would arise.
So we don't want to penalize current income for our clients too much by having a large cash position again. They're not looking to maximize short-term total returns in the way that a hedge fund might go to 50% cash if they were really bearish and very aggressively redeploy that money. Going to those kind of extremes would impose a very substantial penalty on our income-oriented clients because the yields on genuine cash are so low at this time.
Dan Ferris: So you mentioned preferreds and the levered closed-end funds. What about something like, well, you mentioned REITs. What about mortgage REITs?
Marty Fridson: Yeah. That's one category that we look at. We do a variety of things in REITs. There are a variety of kinds of them. But that is an interesting category, it's one that we do make use of, but I think that this experience may motivate some particularly with greater opportunities to work at home. The residential part of the mortgage market has some positive characteristics, some with greater concerns. The flip side of that on the office sector, the malls, shopping centers, which is where we've had some concerns for a long time... Well before the current crisis, we had focused on the higher-end malls with strong anchor tenants just because the move toward online retailing and the obsolescence of a lot of retailing space was already becoming apparent, going back some time.
Dan Ferris: I see. I guess I just have my one final question for you, Marty, which is the same problem, I guess. If you could leave our listeners – this is going to be tough, I'm going to warn you – if you could leave our listeners with a single thought, advice, insight, just a single thought today, given all that's happened here in the first several months of 2020, what might that single thought be today?
Marty Fridson: I think that the lesson to take from this, as bleak as it looked at the low point, and there was good reason to suppose that the problems that were very severe at that time would continue for much longer than now appears to be the case. But even then, taking a long-term view, not overreacting to the extent of saying, "Well, sell everything. Let's go all cash." If there's, even under the worst possible conditions, to continue to take a long-term view of your investments.
Dan Ferris: Great idea. If ever there were a time for that advice... Alright. Well, thanks a lot, Marty. I'll really be curious to see what the world looks like the next time we check in with you.
Marty Fridson: Oh, yeah. It's going to be exciting and probably a lot different from anything we can envision right today.
Dan Ferris: Yeah. We might not wait a whole year next time, either.
Marty Fridson: Oh, I'd love to come back whenever you'd like.
Dan Ferris: Alright. Well, thanks a lot, Marty. And we will, like I say, we'll talk to you maybe sooner rather than later. Thanks once again.
Marty Fridson: Very good.
Dan Ferris: Okay. Always good to check in with Marty Fridson. If you have any thoughts about what's going on, just in the bond market in general, and in the high-yield market in particular, and income investing, as we got into that topic, in particular, he's definitely one of the must-check-in-with people. So it's been a year. It was time, and I hope you got as much out of that as I did.
Alright. Let's look at the mailbag...
When my friend and colleague Steve Sjuggerud talks, I listen. Steve predicted the rise of gold in 2003, the top of the dot-com bubble in 2000, and he even called the bottom of the Great Recession in 2009. Steve is once again pounding the table in a new prediction. He believes that a mania will hit the U.S. stock market and take most investors by surprise. He said that thousands, if not millions, of dollars will change hands as a result of the anomalies he found in the market. If you want to find out how you can profit from Steve's prediction, he has laid everything out in a video that just went viral. Go to www.investorhourtruewealth.com to watch the video and find out how you can profit in this roller coaster of a market. I watched it. And what Steve found is astonishing. Again, that's www.investorhourtruewealth.com.
Alright. Time for what is rapidly becoming my favorite part of the week, mailbag. 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. The exceptions, of course, are the extremely long ones, and those that contain crazy insults, and just crazy ideas that are too insane to even talk about. I wish I could tell you what I'm talking about, but it's just not even worth discussing. And also, I have to add another category. I have a hard time opening attachments because you never know what's attached to a file. So, don't send me an attachment. Just put it all in text in an email, to the greatest extent possible. Or you could send me a link. That's better, if there's a document somewhere on the Internet that you want me to see.
Alright. First up is a really good, thoughtful question. I'm going to read the whole thing. It's a little bit long, but I think we need to read the whole thing. And it's from G.B., Stansberry Alliance member G.B. G.B. says, "Dear Mr. Ferris. I'm trying to understand how gold works. I have read several things about gold, and they don't seem to hang together." And he's got three lists in here: No. 1, No. 2, No. 3.
"No. 1: Gold will maintain your purchasing power. Many articles say something like an ounce of gold will buy a man's good suit, whether it is 1920 or 2020. No. 2: Gold is insurance in case the dollar collapses a la inflation. No. 3: You only need to put a small percentage of your assets into gold to protect your portfolio. Some say 5%, some say 10% to 15%.
"So here is my problem. Say the purchasing power of the dollar collapses by 50%, and I had 5% of my portfolio in gold. That 5% in gold should double, since gold holds its purchasing power. But the other 95%, if it were all in cash or bonds, would lose half of its value. Not a good outcome at all. It seems like the only insurance you get is on the 5% that was actually in gold. When I think of insurance, it is a small amount, like a house insurance payment, that will keep me 100% whole if my house burns down. A small percentage in gold doesn't seem to be able to do that. It seems like the only way a small percentage in gold ownership would act like insurance is if the value goes way more than the value of the dollar goes down.
"This seems to violate item No. 1, that gold maintains purchasing power. If you start with gold at $35 in the 1930s and you think the dollar has lost 99% of its value, gold should be at $3,500 an ounce today, just to keep up. It is far from way up to help you keep the other 95% of your portfolio whole. I would appreciate hearing your thoughts on this subject."
So gold is around, lets just call it $2,000 an ounce today, and the right date, of course, is 1971. Because that's when the dollar was completely priced in the market. That's when it floated freely and was no longer tethered. That $35 price is meaningless. That was set by the government. So today, we have $2,000 divided by 35, well, so gold is a 57-bagger since 1971, when Nixon ended the Bretton Woods agreement.
So, gold has gone up a lot more. The dollar's down I think about 80% since then, or 60%. It depends. There's different calculators. They're online. But a couple of them said 80%, 85%. Done. So gold did its job and then some. It's been one of the best performing assets in the last 20 years, which is basically the era of huge, hard central bank easing and interference all over the world. I would say it's done a pretty bang-up job, especially the last 20 years. But the time that gold has floated freely and can be priced in whatever fiat currency you like, it's done great.
To me that's how I think about it. I can't go back to 1930 with $35 an ounce because that price was set by the government. We don't know what the price was then... It's like looking at economic data or unemployment data during WWII. We had a command control economy. People say, "Well, there was so little unemployment." Yeah, but it was a total of ultimately maybe 13 million men and women in the army. Considering the substantial risk, I think 1 in 8 was either killed or wounded. Maybe they were employed, technically speaking. I don't know if their lives were better.
So the data's useless. Same thing here. And when the data starts being useful, from that time to the present, gold's done a bang-up job. But great question, G.B. Fantastic question. I'm glad you asked it.
And our old friend, Ludwig H. has written in again. He says, "I have a question for you regarding investing. What is your take of investing in hard assets when you are unable to inspect them yourself? Let's say I like investing in U.S.A real estate. I can't enter the U.S.A, because the borders are closed," he's in Europe, I think. "I was looking at an agricultural investment in Vanuatu. Due to the border closure, I can't enter. The investment comes with a license to live there, which is always handy. What is your idea about this, and why do you think that? Best regards, Ludwig H."
Your basic idea is right. If you're going to buy a farm, let's say, you're either going to get on the ground and know something about farming in that country and inspect that farm on the ground there, or... Personally, I can't do that. Maybe you could. Maybe somebody could give you an idea on how this is okay. I'm sure there are people who probably bought land sight unseen in foreign countries. I can only tell you what I would do, and what I have not done. And I have not done that. I will not do it. You proceed as you think best. Good question.
Okay, so Trevor writes in and says, "Hi, Dan. Greetings from France. I enjoy your podcast. I just wanted to go back to the issue of stock splits. No matter whether Apple or Tesla or whomever, we all know splits don't move the value of the business. One issue I've not heard mentioned by anyone, even the talking heads on CNBC, is the effect that the stock splits will have on options trading. At present, it is very hard for us to do options trading on stocks which are sitting at elevated prices, as the amount of funds or margins blocked is too huge. Any comments? Best, Trevor."
Yeah, sure. Lower the price, and it invites a lot of smaller players into the market. Is that good? I don't know. When balanced, I'm sure all those people who can get in because they have small amounts of money, are not going to produce a wonderful return. Boom. That's all I have to say about that.
Okay. Then we have one comment and one question about the term "crony capitalism," which I used when I was talking about Kodak. And I'm going to do the comment first, actually. John S. says, "I loved your rant about Kodak fiasco, save for one thing. You characterized the corruption you described as crony capitalism. Under capitalism, where the government and the economy are separate, there can be no government favors dispensed to businesses. The Kodak deal is a feature of our mixed economy, part free, part controlled. I suggest you not sully the name of capitalism again with this adjective. Your loyal and admiring listener, John S."
Okay. I'm actually going to agree with you. It's just, the term's too convenient. That's what everybody calls it. But you're right. Joe H. writes in about the same topic and says, "Since you're a smart guy, at least smarter than I," I doubt that, Joe, but okay, "I wanted to get your thoughts on the term "crony capitalism." When I talk to friends and family, there's confusion on what crony capitalism really means. They think "crony" is just an adjective for capitalism, so they think capitalism is bad in general, when in fact, crony capitalism is really something completely different than free market capitalism. Basically," and he says, "it should be called crony socialism." And I agree with you, Joe H. And I agree with John S. as well. But the term, it's just convenient.
And what we mean by it, of course, is exactly as you both suggest. It's when people in government do favors for certain powerful business interests. Certain capitalists get favors from government. So it's cronyistic in that way. And maybe we should just call it cronyism, or economic cronyism, or something like that. I don't want to quibble too much about terms, but my point here is that, yes, I agree with you. This is not capitalism. Capitalism is the employment of capital. We talked in our opening rant today about having good title to property, which can be capital. So, that's capitalism. So when you attach the cronyistic element to it, do you lose good title to your property? Probably not. Do you lose the ability to make a profit from it? If your cronyistic move doesn't make you more money off your capital then you otherwise would have paid, you're not doing it right.
But yeah. So that's why I'm comfortable with the term crony capitalism because while I agree with both of you guys, the capital is still employed. So, it's a point worth mentioning, obviously.
Finally this week, Joseph W. He's got some criticism. And he politely worded it, which I appreciate, Joseph. He says, "Hi. I enjoy your program very much, but I am somewhat disturbed about your continued denigration of the government and all politicians. The government is not useless or incompetent. Indeed, most of the great industries that have been created in this country, including computers, jet aircraft, and the Internet are based on research and initiatives sponsored by the federal government. We need it. And all politicians are not alike. The reason the printing money and increasing the balance sheet of the Fed is such a problem is because we ran budget deficits at times when we shouldn't have. And I must say, Republican politicians ran huge deficits at times when they didn't need to, mostly by giving tax cuts, which were unnecessary to the wealthy that didn't need them. Democrats did not do that. I know you're reluctant to get into these questions, but I think you need to understand and face those facts. Joseph W."
None of these are facts, Joseph. I don't know where you're getting any of it from. Sure, we ran huge deficits. And you never heard me favor Republicans or Democrats. So I don't know why you're bringing that up. Yeah, we've run huge deficits. They all run huge deficits. It's how they live. They say, "Hey, it's not my money. We owe it to ourselves." And they spend and borrow and spend and borrow and spend and borrow. And as far as denigration of government and all politicians, man, they deserve it. They deserve it good and hard. They are mostly useless, and they are mostly incompetent. They're the Peter Principle writ large, promoted to the highest position of their ultimate incompetence.
And the point is not even that they're incompetent. They're probably competent lawyers and businessmen and other people who get elected in Congress. But it's the situation they're put into. It's the same as the Federal Reserve. There are 400 PhD economists there, but they can't do what they say they're going to do. They can't create 2% inflation. You and I are going to disagree about this. Do we need some government? Sure. But the government we need is nothing like the one we have. We need a lot less of it. There's no such thing as smart government. There is big government, and there is small government. Government is inherently not smart. It's a cudgel. It is a monopoly on violence. And that's all it will ever be.
You and I disagree, Joseph. But I appreciate some of the sentiment. You know, telling me I don't understand the facts, these aren't facts. And this idea you have about great industries, based on the research and initiatives sponsored by the federal government... wrong. That's so wrong. Computers, jet aircraft, Internet, they were all created by private individuals. Yeah, sure, they may have been enticed and incentivized and otherwise pressed into government service, but the government didn't do any of this. The government doesn't build roads and do things and make productive assets. It throws money at other people to do it. It is inherently cronyistic.
So, this idea that the government has created all the Internet and all this – Al Gore and the government created the Internet. Right, Joseph? Wrong. A bunch of fricking hackers. Tim Berners-Lee gets more credit than anybody, I think. Come on. This is wrong. This is not how the world works. The government doesn't create anything. It takes money out of people's pockets and redistributes it, and it messes with our lives, and it's not supposed to do that. End of rant on how you and I disagree on the government.
But you know something, Joseph? I'm sure if you and I had a drink together, it would be civil, and I might not even sound so worked up. Okay? Thank you for the question, and I hope you'll keep listening.
Alright. I'm out of breath after that one. That's another episode of the Stansberry Investor Hour. Hope you enjoyed it as much as I did. And man, I sure 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.
If you have a guest you want me to interview, drop us a note at [email protected]. Till next week, I'm Dan Ferris. Thank you for listening.
Announcer: Thank you for listening to this episode of the Stansberry Investor Hour. To access today's notes, and receive notice of upcoming episodes, go to investorhour.com and enter your e-mail. Have a question for Dan? Send him an e-mail, [email protected]. This broadcast is for entertainment purposes only and should not be considered personalized investment advice. Trading stocks and all other financial instruments involves risk. You should not make any investment decision based solely on what you hear. Stansberry Investor Hour is produced by Stansberry Research and is copyrighted by the Stansberry Radio Network.
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