Is the ‘Fed Put’ a real thing?
On today’s opening rant, Dan reads some excerpts from a Barron’s article titled, “Yes, The ‘Fed Put’ Really Does Exist. That Could Be Bad News for Bulls.”
Dan examines the facts presented and unpacks what that means for you and your money.
Then during this week’s interview, Dan sits down for a conversation with Keith Kaplan. Keith is a veteran software architect with over 25 years of experience and is now CEO of Tradesmith. When he’s not running his business, Keith speaks frequently for large groups of investors nationwide about the psychology of investing and how our behavior is the #1 factor of investing success.
During their conversation, Keith shares a personal story of how developing factor-based investing software for Tradesmith helped turned his personal financial situation around.
Before, Keith was deeply in debt despite a good job and growing salary. The situation was so dire, he had to borrowed money from his children to help pay off some of his loans. Today, he’s practically debt-free (outside of a mortgage) with a healthy growing nestegg.
And finally, on this week’s mailbag, Dan answers a flurry of questions about Bitcoin, as the world’s most popular cryptocurrency nears all-time-highs… What are your thoughts on companies that pay interest on crypto? And could Bitcoin really withstand pressure from the U.S. government and Central Banks?
Listen to Dan’s address these concerns and more on this week’s episode.
CEO of TradeSmith
Keith Kaplan, the CEO of TradeSmith, is a veteran software architect with 25 years of trading and investing experience. He is recognized for his work in financial technology bringing easy to use software platforms to the general public to gain an edge on investing institutions.
Keith speaks frequently to large groups of investors nationwide focusing on the psychology of investing and how our behaviors are the #1 factor in our investing success. He has set out on a personal mission to provide the tools and education that anyone can use to make smarter, potentially more profitable investing decisions.
1:33 – Barron’s recently published a new article titled, “Yes, The ‘Fed Put’ Really Does Exist. That Could Be Bad News for Bulls.” Dan unpacks what that means for investors.
6:33 – The Fed spent $1 trillion in 2008, $3 trillion in 2020… What happens during the next crisis? “Whatever you think the Fed needs to do next, DOUBLE it!”
14:40 – Dan shares a quote from P.J. O’Rourke, “To rid ourselves of all the trouble in the world, we need to make money. And to make money, we need to be free…”
16:15 – This week, Dan invites Keith Kaplan onto the show for an interview. Keith is a veteran software architect with over 25 years of experience and is now CEO of Tradesmith. Keith speaks frequently for large groups of investors nationwide about the psychology of investing and how our behavior is the #1 factor of investing success.
19:45– Keith shares a story how he nearly went bankrupt… but was eventually able to climb out of it. “What I realized was… by taking on debt, I’m becoming some other investor’s benefit…”
28:30 – What is factor-based investing? “That term was pretty interesting to me, so I went deep… the best factors to look at are the factors that outperform major indexes like the S&P 500…”
32:17 – Dan explains his one big hang-up when it comes to factor-based investing… “There are these publicly traded factor ETFs, three or four public value ETFs… but the top holdings of the value factor ETF…”
36:54 – When Keith first started investing, he bought funds, but over time he grew to dislike them, “Funds are riddled with fees…”
39:54 – Dan asks Keith about the hot investment on many people’s minds, Bitcoin… “I love the blockchain, I love cryptocurrency, I love alternative forms of payment and currencies, but I do hate when people are sort of led astray to invest in cryptos that don’t really have any backing…”
44:59 – Keith tells Dan about some of his favorite TradeSmith products he personally uses in his investment portfolio, “I have two favorites, and they kind of do opposite things…”
49:02 – “We looked at the markets as a whole and we started measuring components within every single index, we covered 12 global indexes in this Ideas by Tradesmith product, and each index tells you how many stocks are in green, yellow, or red.”
54:53 – Keith leaves listeners who may be dealing with debt some helpful advice that turned his life around. “Do not let other people invest in you, make sure you are investing in yourself. If you have a lot of debt, it’s never too late to get out of debt… To be frank with you, you’re not going to go and make an options trade or stock investment and get lucky enough to just deal with your debt later…”
1:07:31 – This week in the mailbag, the topic that’s on everyone’s mind is Bitcoin… What do you think about companies like BlockFi that pay interest on crypto deposits? If the government rolled out a Digital Dollar, would that be the death of Bitcoin? Can Bitcoin really withstand competition from Central Banks? Dan answers these and more on this week’s episode.
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. Before we start today's episode, don't forget Trish Regan is now part of the Stansberry family. Check out her podcast, American Consequences With Trish Regan. The link will be in the description of this episode.
As for today, we'll talk with Keith Kaplan, CEO of TradeSmith. Keith Kaplan has a compelling personal investment story, and he will mostly talk about what he does with his own real investment dollars, which is really valuable stuff.
This week in the mailbag, everybody is asking about bitcoin. Our crypto guru, Eric Wade, will answer one listener question. I'll take on the others. Al M., our frequent correspondent, writes in with our only comment this week that is not about bitcoin, and I promise you his tale is chilling. You'll want to hear it.
In my opening rant this week, I'll talk about the Fed put, and I'll talk about why it's not all it's cracked up to be. That and more right now on the Stansberry Investor Hour.
The Fed put, do you remember this? People used to use this term all the time, and it very simply referred to the idea that, "Hey, if the market drops, the Fed's going to get involved. The Fed's going to push interest rates down, and that'll push the market back up eventually."
There was an article about this recently in Barron's, and the title of the article is "Yes, the 'Fed Put' Really Does Exist. That Could Be Bad News for Bulls." So there's a couple things to unpack there, and I want to talk about this. I wanted to talk about it last week, but I just ran out of time.
So the article, it's exactly what it says. They offer some research by some academic types in a paper that's called "The Economics of the Fed Put," OK? And what these people did in this paper is they just created a simple model that shows the predictive value of a 10% market decline on the Fed's actions.
It shows that you can expect the Fed the cut its target rate for its benchmark federal funds rate by 32 basis points following a 10% market decline, OK? And this model – get this. This blew me away. This model was a better predictor of Fed behavior than 38 macroeconomic indicators available on Bloomberg and the 85 indicators that comprise the Chicago Fed National Activity Index.
That's incredible to me. You can't predict the Fed behavior any better than just watching the market drop 10%. Then you know exactly what they're going to do because the Fed put is real.
So if you want to try to predict what the Fed will do, just wait for the next 10% market drop and then predict a 32-point basic cut. You'll be right in the ballpark. Of course, this is an average, right? You and I both know the Fed doesn't cut 32 basis points. They cut 25, 50, 100, whatever. So it's an average.
The cool thing about this study is that it was done before this year. So we had the big March COVID-response bear market. It provided a real-time test to see if this model was going to work.
The study's model would have predicted that the big drawdown in March, which was like 34%, would have resulted in a 109-basis point rate cut. The actual cut was 150 basis points. I totally agree with Barron's when they say in the messy world of economic forecasting, that prediction has to be judged a success, right?
They predicted 109, and it's 150. Let me tell you something. If you were an economist working for a hedge fund and you said, "I predict 109," and they cut 150, you'd get a bigger bonus, right, because interest rates would go down farther in your long bond bet would pay off more than if they cut 109.
I just think this is pretty cool that somebody took the time and trouble to suss this out and show that what we all – some of us may have thought it was even obvious. I am not surprised at the result. I am on not surprised that it's real. But it's nice to get somebody studying at it and looking at real data and saying, "You know what, this is real."
However, there is a wrinkle. The wrinkle is the real effect of this thing is only good – seems to be only good, based on the history of the data that they studied, when the market is not expecting it, which makes sense, right, because if the stock and bond markets are expecting a cut, they'll push stock and prices up at least some amount, maybe not the full amount of the expected rate cut, but at least some.
But this article seems to be saying that it works only when it's pretty much a surprise. The thing is they pointed out back in 2008, just that year alone the Fed was really viewed as coming in really heavy with a trillion dollars to support the market.
Well, what did they do this year? They came in really heavy. Everybody remembered 2008. In 2020, I promise you most people in the market remember 2008. So the Fed can't do a trillion in 2020. It did $3 trillion.
So whatever you think the Fed needs to do next, double it, triple it, because if they don't do that – it's just like on Wall Street. On Wall Street, what happens? They play beat and raise. They raised their estimates, and then the company better beat the new estimate or else the stock price is going to fall, right?
Same thing here. The Fed is playing beat and raise. I'm not saying they want to. That's the dynamic. That's how it winds up. It's insidious, isn't it, because there's a real drug addiction metaphor going on here, right, because what happens to the drug addict?
Well, the drug addict, he takes so much to get high the first time. He needs a little more the second time, a little more the third time. Eventually if what he's taking is dangerous enough, and if it's dangerous enough to get addicted, right, he's going to kill himself.
And I think the metaphor works here. I think that the expectation needs to be so great and the Fed's real action needs to be so great because that expectation just goes up and up and up over time because everybody remembers the last Fed action.
Everybody remembers the trillion dollars in 2008. Now everybody's going to remember the $3 trillion in 2020, and the next one's got to be bigger. If the Fed doesn't beat that expectation and really go big or go home, the market's not going to like it, and stock and maybe bond prices will fall.
I don't know necessarily if bond prices will because we are still more or less appear to be in that era where you can hedge your stocks with your bonds. But I think that may be coming to an end. We've talked about that before. I don't want to get into it. It's based on some research by Artemis Capital, Chris Cole, who we've had on the program.
But, yeah, this Fed thing is real. The Fed put is real, and it's not necessarily good if you're bullish because it looks like the only time that it's worth anything, first of all, is when the market is not expecting it, and then you need the drawdown ahead of it to really get the action afterward, to expect the Fed action to take place afterwards.
In other words, another way of looking at this, as I have said before, the Fed's primary business really, truly is supporting asset prices. That really is its primary business. This thing about the Fed dual mandate where they're supposed to be all about price stability and maximum sustainable employment where price stability is this two-percent inflation target – and then they updated that this year in August where Jerome Powell gave his virtual Jackson Hole speech at the Jackson Hole conference.
He said, "OK, well, we're going to let – our longer-run objective we've persistently undershot," right? They haven't been able to even get to 2% inflation. "And so we're going to shoot higher, and we're going to let it run. We're going to let inflation run higher than that. We can't even get it to 2%, but if we ever do and it goes above it, we're going to let it run hotter for longer, basically."
So it's ridiculous, isn't it? It's like the Fed is saying, "Look, we're not doing a good enough job of supporting our rich friends' asset prices with inflation, and we're not doing a good enough job of degrading the value of your wages and salaries, the rest of you working people.
Your money goes too far. We're not screwing up the currency badly enough quickly enough. So we need to get on the stick. We need to print more money. We need to figure out a way to create more inflation."
That's pretty much what I want to tell you this week. It's just part of this running theme that I have of this silly, stupid idea that pervades the modern era in which we actually – people actually believe that a few numskulls with advanced degrees and finance pedigrees can control and manipulate a hopelessly complex $20 trillion economy from the top-down with these simple levers of moving interest rates around, printing money, buying securities. It's ridiculous.
And we've talked about modern monetary theory. The MMT crowd, they think you can manipulate a hopelessly complex $20 trillion economy and make everything wonderful for everybody if you just print enough money at the right time and spend a big enough – create a big enough deficit in the federal budget at the right time and then raise taxes enough at the right time in case inflation gets out of hand.
All of these ideas are silly. Mankind cannot manage and control nature from the top-down. Mankind is not God, and that includes the societies and economies that develop within nature. If I look out my window, I see all these lovely homes in my neighborhood, and I see nice streets, and I have a nice piece of technology in front of me that I'm talking to. You probably have the same setup.
It's an amazing-looking world, and it doesn't look natural. But you know something? It is. The economy and the society that produced all of this technology, it's as natural as a bear taking a dump in the woods. It really is, I promise. And we're a part of nature. We don't manage nature.
That's why I use the metaphor with the forest fires. You remember? I talked about the Federal Reserve, and I said it's just like the forest fires, the big, destructive fires. The Forest Service has this policy – they've had it for decades and decades, most of the past 100 years in fact – of suppressing all the small fires.
And if you just let the small fires burn, they'll burn low down on the ground, and they'll eat up the fuel so that you won't get these big, destructive fires. But, no, they suppress 98% of the small fires, and then the other 2% that they don't suppress burn wildly out of control, destroy forests, destroy homes, kill people.
And it's all because mankind believes they know how to manage nature from the top-down. Even the forest grew lush and green and enormous without any human interaction whatsoever. They seem to have missed that part.
OK, I think that's just about all I have to say about that this week. You get the point. And part of the point here is that, remember, underneath all of this, I believe the Federal Reserve is essentially a machine for manufacturing tail risk because they're doing the financial and economic equivalent of suppressing this forest fire, and one day there's going to be one that's so big that it's going to burn down the economy.
Then you'd better have your gold and your bitcoin and, God forbid, even your guns and ammo and a place to hide. I hate to say it. I hate to say it. I don't want to be that guy, but you have to prepare for all manner of scenarios, a wide range of scenarios, right?
OK, before we get to our interview, it's time for my quote of the week. This one is a little shorter than the last two that I did. I was going through a box of index cards that I keep, and I write down quotes from things that I read on the index cards.
I was just thumbing through it yesterday, and I came upon this quote by P.J. O'Rourke. It's from his book, All the Trouble in the World: The Lighter Side of Overpopulation, Famine, Ecological Disaster, Ethnic Hatred, Plague, and Poverty.
And he says, "To rid ourselves of all the trouble in the world, we need to make money, and to make money, we need to be free." I think that's beautiful because that phrase, "make money," sums up all the benefits of leaving people to freely exchange goods and services and to build their lives from the bottom up.
When you do that, it's a pretty solid trend at this point throughout history. When you do that, that's how you get the United States of America and other advanced, still relatively free, developed economies. And that is why also more people have a higher standard of living in the world than ever before.
OK, let's talk with Keith Kaplan. Let's do that right now. My listeners know they need to secure their savings for the future, and after working with my friend and publisher, Porter Stansberry, for nearly two decades, I've seen him make one incredible investment call after another over the years.
So that's why I wanted to recommend Porter's one critical move you must make with your money. You can get his full take on the subject by vising www.NewAmericanCurrency.com. Don't miss out.
All right. It's time for our interview. Today's guest is Keith Kaplan. Keith Kaplan is the CEO of TradeSmith. He's a veteran software architect with 25 years of trading and investing experience. He is recognized for his work in financial technology, bringing easy-to-use software programs to the general public to gain an edge on investing institutions. Keith speaks frequently to large groups of investors nationwide, focusing on the psychology of investing and how our behaviors are the No. 1 factor in investing success. He has set out on a personal mission to provide the tools and education that anyone can use to make smarter, potentially more profitable trading decisions. Keith, welcome to the program. Good of you to be here.
Keith Kaplan: Hey, Dan. It's great to be here.
Dan Ferris: Yeah. So, Keith, let's dive in. You and I were talking earlier this week. And I thought, "Wow. This guy has a pretty good story," going back to like when you first got involved with financial markets as an investor. That was a lot [laughs] – in the earlier days, you were a lot different than what you've become today.
Keith Kaplan: Very true.
Dan Ferris: Tell me about that.
Keith Kaplan: Yeah, absolutely. So, you know, I always joke that there's sort of no financial literacy out there. And a lot of people look at me, and they say, "Well, what does that really mean?" And what I mean by that is that we go through all these years of school – elementary, middle, high school and even college – and nobody ever sits you down and says, "Hey, this is what it means to be an investor," or "This is what it means to have debt," or "This is what it means to have savings," and so forth. And you're kind of left out there to fend for yourself.
And so, I graduated college over 20 years ago. When I graduated, I had a degree in computer science. I was very strong at building software, and I could do all these great things. And one of my big strengths was always math. And so, when I tell people that I nearly went into what I would call really a debt apocalypse back in 2013 – where I even considered going bankrupt – you know, they're always shocked. And they're shocked really for two reasons. One is that I'm great at math.
And people just assume that if they're great at math, you can crunch numbers and you like money, you probably are great at doing good things with your money and investing and so forth. And the other reason was because I've always had great jobs. I've never lost my job, knock on wood. I've been very lucky. And I always made a lot more money – the year that I was in, than I did the year prior. So I had a great career where I'm making more and more money every time, and I'm really good at math.
So you would think I can manage my finances. And the total opposite was true. I mean, you know, I was taking loan after loan out. And I felt like I became a house-flipper back in 2008. I had multiple cars, which just made no sense. I mean, nothing too fancy, but it just made no sense. And what was happening was, everything from student loans to car loans to mortgages to whatever – what ended up happening was, I had to take out loans to pay off loans because I committed so much of my future income to the choices I was making today.
And so, the No. 1 thing that I sort of learned for going through that quest and also making some really bad investments – not lots of money but just buying stocks at the wrong time, selling them at the wrong time, buying the wrong amounts over 25 years... what I realized was that I was missing the No. 1 investment, which is myself. And I know that's cliché to say, but it's really me saying that by taking on debt I'm becoming some other investor's benefit. You know? I'm taking on debt, and I'm paying other people interest on that debt while I'm also trying to invest and grow a nest egg and build up my retirement.
So I think that's a really good way for us to sort of open up, is just for me to say the No. 1 investment I ever made in my career in my life, no matter how good I've gotten now, is that I paid off debts. I paid off almost all of my debts. All I've got left is a mortgage. I've got over a year of savings and I also have a great investing account, as well as a really good 401(k) that I'm making great choices in, just because I've gotten educated, and I've really woken up to the No. 1 investment... and that's me.
Dan Ferris: That is awesome. You actually said one of the things that, like... I mean, it's like the rich old man sitting in a leather chair smoking a pipe-thing where they say, "You know, poor people pay interest, and rich people earn it" – is sort of what you said, when you said when you borrow money, you're some other investor's interest payments, basically.
Keith Kaplan: Exactly.
Dan Ferris: Yeah. I hear you loud and clear. So I like this story because I've been trying to convince people that investing is very, very personal. It's not an off-the-shelf type product that you can just grab and plug in and it works for you. It's very personal. And that's why I like your story, because it rams that point home. And you integrate – I love the way, for you, the whole thing is just one seamless whole... your job, debts, investments, 401(k). It's all one seamless thing. And I think, Keith, you're absolutely right. And it's like one of those simple things that's so simple that people don't point to it often enough. So I wanted to underscore it. I wanted you to tell that story because it underscores the personal nature of investing and how it just gets into like... as an investor, you're the same you are as a person, right?
Keith Kaplan: Exactly.
Dan Ferris: Yeah, so all right, Keith. So where would you say you are today as an investor? Like if I said, "You know, what kind of an investor are you, and what's in your portfolio?" Tell me about that.
Keith Kaplan: That's a great question. So in 2013, when I sort of hit this state of really just a big mental meltdown – I’m not saying I mentally broke down, but it's sort of that realization where you wake up and you go to pay your mortgage... I had to borrow $2,000 for my young daughter who had a bank account, of all the gifts she ever received. You know, every time she got a check or cash at a birthday, we would put it in there... and I had to borrow $2,000 just to pay my mortgage. I woke up that day, and I was like, "I can't do this anymore." Like, "I can't live like this. I can't just sit there and keep saying, 'I'm going to put off the future.'"
So I went really deep into a lot of books, a lot of podcasts, audiobooks, anything I could get my hands on, and I actually joined Stansberry Research in early 2015 to really build some robust technology for them before I met TradeSmith. And, you know, it was then and there that I really homed in on my investing. I would say it's taken a couple of different paths over the years, and I finally am at a point where I sleep so well at night, just knowing my investments are tracked, and I get alerts from the tools that we have here at TradeSmith – which I'm very blessed to be able to be a part of.
But really, where my investing went was to a place where I realized over the years I was buying the right stocks, but I typically was buying them at the wrong times and the wrong amounts. And because I don't have that deep financial background that a lot of analysts such as yourself have, you know, I was really sort of investing on my emotions. So I could buy the right stock like Amazon in 2008 or AMD in 2016. But I couldn't execute the trades the right way. I would buy it... I would panic... I would sell too soon. I would lose money... I would make a little money.
But I wasn't staying in those trades long enough. And one of the big things I learned when I joined Stansberry back in early 2015 was that the best companies to buy are the ones that have a lot of money, that have products and management teams that aren't going anywhere and that are some of the best products and management teams out there, the companies are profitable and so forth. And so, stocks like Hershey's, McDonald's, even Amazon – I love those types of stocks, and I love buying them for the long haul.
But I leverage our product to help me determine when I should buy it – which is turning green in our system – and when I should sell it – which is turning red in our system. And those are based on momentum. So what I typically like to do and where I like to invest are in stocks that are healthy, in an uptrend, that have great stories behind them or really, really strong businesses behind them. Like, nobody can argue McDonald's has a great – they can't sit there and say McDonald's has a terrible business, or Walmart has a terrible business.
I mean, these are companies that have really moved with the times over the years, are still leaders in their space, they're capital-efficient and they're just great businesses to own. So when it comes to my investing, I like really solid, long-term businesses. And I also like to do a lot of options trading in the short-term – especially around earnings season, you know, predicting whether a company will go up or down, executing some options trades. Just for some short-term income. But I'm typically a long-term, lower-risk, more stable type of investor.
Dan Ferris: OK. There's the nugget: long-term, lower-risk, stable. Good businesses. You know, if you like the business, you like the stock. Does valuation mean anything to you? Is that part of the system or no?
Keith Kaplan: It definitely does. I wouldn’t shy away from a company that isn't quote-unquote "cheap." You know, the right kind of cheap. A lot of people think – and you know this better than anybody, Dan... I probably learned this from you. A lot of people think that a cheap stock is a stock that is low in price. But they don't understand really about the price-to-earnings ratio and what truly defines value in a stock. So I definitely like value stocks, but I care much more about how efficiently these companies run their business and how they're growing year over year than I would necessarily care about just finding value stocks.
Dan Ferris: I see. So, you know, it sounds like GARP, right? "Growth At a Reasonable Price" kind of investing.
Keith Kaplan: Exactly.
Dan Ferris: Yeah. And it sounds like a huge emphasis on what you see as a business that is going to be around for a long time, one that's been around for a while already and is a great business model and will be around for a long time.
Keith Kaplan: Exactly. I mean, I'm just not the kind of guy who wants to look at my brokerage account every single day to figure out if I'm doing well or not. I want to be able to take a break. I want to wait for alerts that tell me that it's time to get out. I don't want to be immersed in a brokerage account... I’m running a business, I have a family. And so, to me it's really important to have the best businesses in my brokerage account, the stocks that I own, so that way I can be invested in them for the long haul or get out of them when they turn against me and get back in once they're in a great uptrend.
Dan Ferris: Oh, I see. OK. That's really cool. Now, you and I... when we were talking earlier this week, you mentioned factor investing. And I've talked a little bit, very little, about that just in passing on the podcast before. There are quality factors and value factors and momentum factors. And I think it's Fama and French were the first guys who did research. One or both of those guys. But how do factors figure into what you do with your money?
Keith Kaplan: It's a great question. You know, I can't remember the year, but it was probably about five years ago when I was doing a lot of research. I found this style called factor-based investing. And, you know, being a guy with a pretty strong math and computer-science background, that sort of term was really interesting to me. And I went deep. When you look at factors in investing, they're just simply a thing that helps to really explain long-term risk and return performance of an asset over time. And the best factors to look at are the factors that outperform major indexes like the S&P 500. So for instance, size is a factor.
Dan Ferris: Mm-hmm.
Keith Kaplan: Long-term studies have shown that buying stocks with a low market cap tend to outperform S&P 500 over time. And that's probably because they're growing very strongly over time. And you can't just pick out a single stock. I mean, you've got to have a nice, blended set of stocks to look at over time to look at these factors.
Dan Ferris: Yep.
Keith Kaplan: Another factor, which is probably the one that returns the best results, is the momentum factor. So this is the idea that when you've had winning stocks, those will tend to continue to perform really, really well in the near-term. And I think I've even heard momentum called the persistence factor, and momentum is one of the things people get so wrong – it's so important. When a stock is rising and it's rising over time, it has a tendency to continue rising. It's the momentum that it has.
And when a stock is falling over time, it has the tendency to keep falling. And people typically invest the wrong way when a stock is falling. They'll buy more. They don't realize that that's the perfect time to get out. When you have a confirmed downtrend, that's the time to leave that stock in the dust. And when you have a confirmed uptrend, that's the time to be invested in a stock for maximum gains.
So, you know, size is a factor. Momentum's a factor. Value stocks... you know, value is a factor that tends to outperform major indexes over time. And when I fell in love with factors was when I realized that if you can take two factors that are totally uncorrelated about a stock and they both are in a positive direction, that is a perfect time to buy that stock because it has the highest likelihood of going up. And what I mean by that is, let's say we look at value as a factor. And we say, "This stock that I'm looking at" – let's say it's Hershey's – "has a great value to it. This is a great time to buy it because it is priced below what it should be at. It has great value." But let's say Hershey's is also in a confirmed uptrend. It has great momentum. The near term has Hershey's as a winning stock. It's going up.
So if you look at the fact that at that point, Hershey's has both momentum in its corner and it has a value sort of tag in its corner... so it's a value stock, and it has positive momentum – those are uncorrelated factors. They have nothing to do with each other. It doesn’t matter that the stock is trending up and it also has great value. Like, those are totally uncorrelated. So if Hershey's just had one of those two factors in its corner, it makes it a great investment because we know those factors outperform the markets in the long term.
But the fact that it has two totally uncorrelated factors, you know, at its back – like in its tailwind – it just means that Hershey's has a much higher likelihood of going up. And when you can look at different factors of a stock and you can see these different labels and you know when they're uncorrelated and they have great factors behind them, it just means that those stocks are ripe for gains. It's likely that they won't go against you, but they could. So that's why we always put good risk-management principles in play. But those are the perfect stocks for you to be buying anytime... bear market, bull market – doesn't matter. So I love factors, and I think everybody should love them as well.
Dan Ferris: So yeah, I have a sort of strange relationship with the factors because for example, just so our listeners know, there are publicly traded factor ETFs. So there's like three or four publicly traded value factor ETFs. And there's other factors. You can just type – just go to Yahoo or something and type "value factor," and three or four funds come up, for example. But the top holdings of the iShares Value Factor ETF are like AT&T, Intel, which are like 15% of the fund – 14.6% or 14.7% of the fund. And then, there's like Micron Technology.
Keith Kaplan: Mm-hmm.
Dan Ferris: General Motors, IBM, FedEx, Target, Pfizer, Citigroup, Ford... like, Micron's 25 times earnings. And, you know, IBM is a strange situation. I don't know [laughs] how crazy I would be about owning it. But the thing that has drove me nuts about factors is that, you know, the value factor can get expensive.
Keith Kaplan: Mm-hmm.
Dan Ferris: The value factor fund can get expensive. So, like, how does that work? It's a self-contradiction. You know? I guess what I'm saying is, the factor doesn't take care of you... you still have to take care of yourself. You still have to understand that there's a right moment and a wrong moment – a cheap and expensive moment for the value factor. And there's probably a good and bad moment for the others. And I know you have a system that kind of tells you when to buy things – green light, red light, amber light, I guess, etc.
But I just found it so odd. The other thing I think is odd, Keith, is that value is a factor. And that becomes more attractive as the price falls. But as you pointed out, momentum is also a factor that becomes less attractive as the price falls [laughs]. So, you know, you could even have the same stocks, and the stocks could overlap. And yet, one says they're more attractive, and one says they're less attractive. So what are we – what are we really paying for when we buy these factor funds?
Keith Kaplan: Yeah. There's a couple of different nuggets I want to point out in here. Hopefully I address them all. So the No. 1 is, as the price falls – you are right – that stock gets more value to it because the price is lower, and the price-to-earnings ends up being lower. And if it's a profitable company, it becomes a lot more attractive as a value investor. So the key right there is, the price is falling, which means momentum is going against us. In our system, that sock alone would be red, right? But the moment it has a confirmed uptrend – which will not be right after it bottoms – it'll be a little bit after it bottoms.
Maybe it's come up 5%, 10% from its bottom... we get that confirmed uptrend. Our moving average is on the way up, which is great. At that point, that stock has a lot of value in it because we're seeing that something is working out. Maybe the company is more profitable than they were the quarter before, and they're finally having a turn... their estimates were better,,, they built more product and sold more product than they expected to.
And now, the price is going up. Investors like it. That is the perfect time to be looking at these uncorrelated factors and checking both boxes that you have a value stock and a momentum stock. So that's the perfect time when you want to be buying that. Now, let's jump to funds. I actually hate funds. And I grew up loving funds. You know, one of the first investments I made in the '90s was buying Legg Mason Value Trust Fund. I think that's what it was called.
And it was because my father said, "Hey, Keith" – and by the way, I was a hard worker at 14. The first moment I could legally work, I was a very hard worker. "Hey, Keith. Let's invest together. Every dollar you put into the stock market, I'm going to put into the stock market." "OK, dad. What should we buy?" "Well, I think this Legg Mason Value Trust thing would work." "Great. Let's do it." So we each put in $5,000. We doubled our money. I forget over, you know, how long. But it was before the decade was out.
And we sold. And I sold because my father said, "Sell." And, you know, my first investment I doubled my money. I doubled $5,000 to $10,000 – which was massive for me at the time. Massive. I had no debt because I was, you know, young. [Laughs] I was living with my parents and made a lot of money... well, money that I'd already made. But over time, I grew to hate funds. And the reason I hate any type of fund... I mean, mutual funds I hate because they're riddled with fees. But any type of fund, you get – these stocks get into these funds based on a characteristic. But that characteristic changes over time and then, the funds a lot of times are weighted on market cap.
Dan Ferris: Yeah.
Keith Kaplan: And I don't think that really, you know, defines that that company should have more of the fund. I actually believe it should be based on volatility, which is something that we measure on every stock in our system in our product called TradeStops. We measure volatility on every single stock. And I actually think the best portfolios – we've proven this over and over. We've even studied your portfolio as you remember, Dan. We've proven over and over that when you blend stocks together based on their risk, based on the amount of volatility that they have in that stock, you can build your own fund – your own ETF, index fund, whatever it might be – by buying all of those same stocks but buying them in a much different proportion based on risk. And what happens is you have a much lower amount of risk built in.
And if you use that risk as a trailing stop, you get out of a falling stock way quicker than you would maybe an index fund or mutual fund or so forth. So the fact that there's a value-based fund just sort of pisses me off, to be honest. Because you have to manage that fund constantly. So if a stock doubled in price, is it still a value stock at that point? It might not be. But it's still in that fund. And then, it's weighted probably based on market cap. You'd have to confirm. I haven't looked at the value fund that you're talking about.
But it's weighted on market cap. And that doesn’t really mean anything. You know? It's like just saying, "Oh, a bigger company is a bigger part of this fund." And I just personally think that the right way to invest is blending your risk across a portfolio and treating a fund like it's just a portfolio of stocks or other funds, which sometimes is the case. And you should blend the risk across and build a portfolio that's in towards lower risk and higher returns. I think I've covered a bunch of different things here, but hopefully it covered the topics that you brought up.
Dan Ferris: No, you did. I was going to bring up the market cap weighting, because that strikes me as potentially the single most insane about all the publicly traded factor ETF's. And there are a ton of them. I mean, I'm just sitting here. I typed in "quality factor" into just Yahoo, you know. And there's like six of them or seven of them. And of course, the biggest in the iShares Quality Factor, the biggest stock is Apple. You know, the biggest market cap. It's kind of a little crazy. It's just, you know... it's a slice of the S&P 500 is all it is.
Keith Kaplan: Yeah.
Dan Ferris: But I want to shift gears a little bit, Keith. What about assets that are – basically we're talking about stocks and bonds here, or maybe not even bonds. We've mostly just been talking about funds and stocks. What about nonfinancial market assets? Like do you own bitcoin, or do you trade cryptos at all?
Keith Kaplan: I do, actually. I own – I don't remember how much. I haven't looked at it in a while, and luckily that's good because bitcoin's been on a rise. But I definitely own some bitcoin. I own Ethereum. I own a little bit of Litecoin. And really, my focus on that is – if you remember, I have an engineering background. And I haven't put nearly that much money into these. I mean, I don't even think I have a full percent of my worth in cryptos. I probably should have a little bit more, just to be more diversified.
But my thoughts on cryptos are that because I'm a software engineer, I understand blockchain technology. I think it's revolutionary. I've built many databases in my life. And if I had a way back in the day to make sure that I had full control of those databases but could verify its integrity based on blockchain, my life would've been much better, you know, in my development years. But I love cryptocurrencies. I love what they do.
What I hate about them – and I'm not saying I want regulation, but this is more for the people that invest in cryptocurrencies – what I hate about them is that people will buy cryptos based on a good story. And these cryptos are really supposed to be, in my mind, kind of like stocks where a stock represents a publicly traded company, a crypto typically will represent a technology or really a company, right? And bitcoin might not. But a lot of these cryptos do. And most of the cryptos that I've seen out there that I would call scams are ones that are backed by an idea, a white paper that says, "Here's what our company is going to do, and here's the crypto that we're offering."
And then, people sort of pump and dump those things. I mean, there's no regulation on it. And again. I'm not saying that I want regulation. I'm not the biggest fan of the cost of regulation and when regulation goes wrong. But I hate that people blindly invest in cryptos and can't find the right information. So for me, when I invest in cryptos it's because I am diversifying. I'm not saying I'm hedging, but I'm diversifying. I love the blockchain. I love the idea of cryptocurrencies. I love alternative forms of payment and currencies. But I do hate when people are sort of led astray to invest in cryptos that don't really have any backing... they don't have any sort of strength.
Dan Ferris: OK. I mean, we can – well said. And I take your point, and I'm totally on board. But we can say the same thing about huge swathes of the regular stock market and the bond market [laughs].
Keith Kaplan: Yeah. Of course.
Dan Ferris: Financial products in general. But yeah. In other words, cryptos are just like every other... you know, I started out saying, "What are you buying outside the financial system?" But yeah. They do suffer from that same problem. What about things like gold and silver? Do you buy those?
Keith Kaplan: I do buy gold, I have some. I also have gold- and silver-related stocks and to be honest with you, I follow Stansberry Research to get my investment recommendations around gold and silver stocks, for sure. But I do own gold. I love gold. You know, Porter had me convinced many years ago that the right thing to do is to buy gold over time – you know, incrementally add to it – store it in a safe and just pretend it doesn’t exist.
Dan Ferris: Yep. Yeah. It's savings. That's right.
Keith Kaplan: Exactly.
Dan Ferris: Yep. Savings that get you outside of the currency regime, the financial system. OK, well, you're like my kind of investor here. I mean, you want to – you don’t want to pay interest... you want to earn it. You want to have plenty of cash on hand. You like high-quality businesses, and you have a whole system that you – I mean, you're in the business of making and maintaining and selling the system. But you use it. Your money is where your mouth is.
Keith Kaplan: Exactly.
Dan Ferris: So, like, all I can say, Keith, is I wish every guest had his money where his mouth is to the extent that you do. And that even goes for myself. I work directly for Stansberry, so contractually I'm not allowed to buy – I talked about a couple companies from Extreme Value – Altius Minerals I talked about. I mentioned Starbucks. I've mentioned Waste Management. I mentioned Constellation Brands. But I don't own them because we are trying to avoid, you know, the Feds saying that we're a '40s Investment Company Act which would come with just heaps and heaps of Draconian regulation.
And it would basically ruin the whole business model. So, you know, I'm kind of jealous. [Laughs] I'm jealous of you. That's pretty cool. So you got a great story. You've got a really cool portfolio, it sounds like, and a whole system. Since I'm on the topic of you putting your money where your... like, what products that TradeSmith offers do you personally use? You mentioned that you use these things. But which ones specifically do you use?
Keith Kaplan: I have two favorites, and they do two opposite things. So my first favorite – which sort of is what I call the "buckle-down system." It gets you ground. It tells you exactly what's going on in your portfolio, it helps you set up alerts to figure out when to buy, when to sell, and really importantly, how much of a stock or fund or whatever you're buying to buy. Because you want to blend risk across your portfolio... You don't want to buy too much Tesla and not enough Johnson & Johnson, where Johnson & Johnson is super low-risk, has low volatility, but Tesla's all over the map as we know. It moves around up to 50% from highs and lows and can be a real roller coaster – especially if you get in and out at the right times. And so, the first product I use is TradeStops. And TradeStops, I sort of boil it down to it's a risk-management platform. And risk management is not a fun topic. If I went out there and said, "I've got the best risk management platform known to man," nobody would buy it.
But if I went out there and said, "I have a platform that you can easily synchronize your portfolio from Fidelity, TD Ameritrade, wherever it is, and it'll tell you what stocks are in there that are total grenades – they're read, you should sell them – and it'll tell you what stocks you should buy, whether you own them or not and how much of a stock to buy," it sort of solves the core problems for investors. And it even can look at all the newsletter subscriptions people have. So if you're a subscriber to Stansberry Research or Dan to Extreme Value – what you cover – Steve Sjuggerud or anybody inside the world that we live in, those stocks are all built into our system. As long as you have the subscription, you can see those stocks listed as portfolios and figure out what's healthy and what's not, and buy away, sell away, do whatever.
So I love TradeStops. It alerts me every night, any alerts that I have – which are typically buys and sell alerts. But we have other kinds of alerts as well. And then, I use this other product that I personally built back in 2018. So it's been around for two and a half years now. It's called Ideas by TradeSmith. And this does the opposite. So in TradeStops, we built a stoplight system that tells you when a stock is healthy, at a hold – there's some risk there, there's some concern, which is yellow – and then it's a sell, which is red. And the idea is that if a stock is green, you can buy it or buy more of it if you have it – it's trending in the right direction. And if it's red, you should sell it or avoid buying it if you don't own it.
Well, one of my biggest frustrations back in 2017 when I was really getting – you know, I was reading unbelievable amounts of articles every day, editorial books and so forth... I found that I would go to Yahoo Finance, and I would look at a stock and I would say, "Is this the right time to buy it?" All I see is a chart, and I see news, and I see ads." And I couldn't really figure out, "Should I be buying the stock right now, or should I invest in the S&P 500 versus the Nasdaq? Like, where should I put my money. And in looking at Yahoo finance and my frustration, I had this lightbulb moment where, in TradeStops, I realized that you could look up any single stock and find out, "Is this the right time to buy or not?" But we didn't have that for major indexes.
And I didn't want to do it based on an index fund. You know? They want to look at the SPX, which tracks the S&P 500 – which has about 500 components. It's actually usually a little bit more, which is always weird to me that you would call it the S&P 508 or however many components are in there. But, you know, you couldn't really see, "Should I be invested in this part of the market?" So we went to the drawing board, and we took a lot of different algorithms that we've had over the years – I mean, TradeSmith's been in business for 15 years – and we looked at the markets as a whole, and we started measuring all of the components within every single index. We covered 12 global indexes in this Ideas by TradeSmith product.
And each index tells you how many stocks are in green, yellow, or red. And it shows you how that's actually tracking as well, which is a momentum... it's almost like having the momentum factor on a full index of stocks but not looking at the index itself. So for instance. The S&P 500 about a year ago probably had about 70% of stocks in the green zone. By the time the market started breaking down at the end of February, there was only like 5% or 10% of stocks were in the green zone. So you can see we were trending very unfavorably for the S&P 500, which tells you that it's time to get out.
So we built these big signals – simple, easy-to-understand alerts. But they are big signals that look at every one of the 12 global indexes that we track. So S&P 500, Nasdaq, Dow... we have Japan index, China, U.K. – I mean, we're global. And it tells you how those indexes are performing as a whole so that you understand if you should even be invested in that part of the market. And you can still buy single stocks, you know, in those parts of the markets. But it's really helping you to understand, "How are these stocks performing as a whole?" Are they trending better or worse?" You always want to be buying when things are trending better regardless of whether you're in a bear market, bull market, whatever. You don't want to be buying stocks of trending against you. You know, that was a key.
But that was just one piece of what the product did. The other thing it did was, it brought factors to life. And this was one of my favorite [laughs] things that I've probably ever developed in my entire history of building software products – was that we took the value factor, we took what we call the billionaire factor – which are typically value investors. But we tracked billionaires in our system, and we track everything they're buying. And we say, "If more than one billionaire is buying something" – and by the way, backtesting backs up all of the work that we do to prove that these are really good strategies and algorithms to you, you know, over 40 years.
But we look at if multiple billionaires hold a stock. Well, we created our own factor called the billionaire "conviction" factor. We have a "moonshot" factor. That is where stocks are trending up, but they're trending faster and in a more volatile state than ever before, but they're trending up. And we have all sorts of factors. You know, we're looking at sectors, we're looking at value, growth, this billionaire conviction piece, and we combine them with momentum. Because if you remember, as I said earlier momentum is really that persistence factor. And when a stock is performing well and it's rising, it tends to keep performing well.
And we built those strategies right into the products so that you could click any day of the week and see 100 stocks that qualify for these different strategies, and you can invest alongside those stocks – or those strategies, I should say. We even had a dividend-grower strategy... something that, you know – I'll be honest, I learned about dividend growers from reading a book that you put out, God knows how long ago. I read it back in probably 2015 or 2016, talking about the world's greatest companies – world's greatest dividend-growing companies, I should say. So we have all those factors inside our system based on strategies. And we also have a way to find or own stocks. You can use our strategies with your criteria.
So let's say you want to find moonshot stocks that look like they're going up that are performing really, really well right now and moving to the upside. But you also want to make sure that they're profitable. Well, in our stock screener you can say you want a positive P/E ratio of at least 0.1 or 1. You know, whatever it might be. Let's say you want to buy billionaire stocks that qualify for our strategy, but you also want to make sure that... well, typically billionaires invest in profitable companies. So maybe you just want ones that also grow in dividend... you know, have a growing dividend every year. So it's like, "I want to get paid to own this company, and the company's going up, and multiple billionaires own it."
So that's really sort of the system in a nutshell. It's everything from defining what markets, what sectors, what commodities are healthy as a whole – which is bigger than single stocks – to finding single stocks that you can invest in any day of the week. So for me, I use that product to find investment ideas, including stocks that newsletter publishers like yourself recommend as well as the TradeStops product to really manage what I'm doing day-to-day – help me manage, I should say, day-to-day and give me alerts.
And whenever I say, "Today's the day I want to take some time and look for some stocks to invest in," I don't have to spend very long. I don't have to review the fundamentals of a company. I don't have to do too much. I can log in to the Ideas product, I can find a couple stocks I like and then I log in to TradeStops to figure out how much of that stock I'm going to buy. I buy it, and then it automatically starts to alert me if anything changes if a stock goes against me or if it rises more than I expected. Whatever it is, it then alerts me. So I can find in a matter of minutes great stocks to buy without having to do any reading, get it in my portfolio, and then have my portfolio alert me through TradeStops.
Dan Ferris: Wow. Sounds like you have it all worked out. Which most people don't. So that alone is a really good lesson, I think. So we're just about out of time. And I ask all my guests the same final question. And if you've already answered it, you can reiterate. That's totally fine. And the answer can be about anything. And the question is, if you could leave our listener with just one thought today, what would that be?
Keith Kaplan: To me, that's easy. Do not let other people invest in you. Make sure you are investing in yourself. If you have a lot of debt, it's never too late to get out of debt. And, you know, to be frank with you, you're not going to go and make an options trade or a stock investment and get lucky enough to just deal with your debt later. Stop putting off yourself. Stop putting off paying off debt. Get out of debt, build up your savings and then turn to really wise people like Dan and the crew at Stansberry Research to figure out what you should be invested in – and hopefully use our tools at the same time.
Dan Ferris: Right. And where can they find your tools?
Keith Kaplan: You can go to tradestops.com or tradesmith.com and be able to look at our different tools that we have. And, you know, certainly I'm sure we'll give you a link, Dan, to be able to post to show people how they can find out more about us.
Dan Ferris: OK, great. Yeah, we'd love that. All right, Keith. Thanks very much. I can tell you like – you're definitely going to be invited back. So, you know, maybe in the next six or 12 months or something. [Laughs] So look for that E-mail.
Keith Kaplan: Sounds great. Thank you so much, Dan. It was a pleasure.
Dan Ferris: Oh, yeah. My pleasure too, Keith. Thanks a lot. Wow. That was – I knew that was going to be good, but it was better than I thought, and I'm going to keep underscoring these two points. One, your personal finances and your investing and the way you live – it's all personal. It's all of a piece. It's all one thing. You know? You're probably not going to be like deep in debt up to your eyeballs with your credit cards on the one hand and, you know, a really great investor on the other hand.
So you got to get all that – Keith is right. You got to get all that working together. The other thing is, if you are going to go into the financial markets and pick your own stocks and pick your own investments, manage your own money, you have to be thoughtful and systematic about it, and you have to learn to control risk. I mean, how many times [laughs] have I said that on this podcast? I just keep coming back to it again and again and again and again. It's about controlling risk. It's not about, you know, being right all the time or knowing which stock is going to go up a million times and buying it right now and selling it in a week or something. It's about learning to control risk over the long-term. Great stuff. Great stuff. I can't wait till it's time to have Keith back. All right. Let's check out the mailbag.
My colleague and friend Dave Lashmet is on fire right now. His average close pick this year alone has returned 187%, almost triple your money. Today he's got a time-sensitive $13 stock pick that he believes is set to explode. This is an opportunity you don't want to miss. Listen to Dave's take, along with all of his evidence on the stock, over at InvestorHourTech.com. Check it out.
In the mailbag each week, you and I have an honest conversation about investing or whatever is on your mind. Just send your questions, comments, and politely worded criticisms to [email protected]. I read every word of every e-mail you send me, and I respond to as many as possible.
We had lots of good ones this week. Almost all of them are about bitcoin, and I didn't even include all of the ones I got about bitcoin. This is a smattering of all the ones I got about bitcoin.
OK, this one is actually from last week. I shot it over to our crypto guru, Eric Wade, and I had him weigh in on this one because I couldn't really answer it myself. So this is Will W. from last week, and Will says, "Dan, first time, long time." I'm not sure what that means. Maybe he means he's a first-time writer and long-term listener.
He says, "What is your take on services like BlockFi that pay interest on crypto deposits? For example, they are currently offering 6% on bitcoin payable in bitcoin. They are U.S.-based and say they are insured against certain types of fraud that have brought down similar companies. Best to keep your crypto in cold storage next to the ammo or OK to go for a little yield on top," he asks. "Thanks, Will W."
Will, here's what Eric Wade – his answer was longer than this, but I'm just getting down to the real nugget of it for you. Eric says, "I didn't initially like these services at all, but some of them, BlockFi included, have won me over as a reasonable risk return. However, we are no longer in a long accumulation phase."
Now earlier in his answer, he said his take on BlockFi was that he likes BlockFi when crypto is in these periods of long accumulation, and that makes sense. But now, to continue his answer, he says, "We are no longer in a long accumulation phase."
And then he says this week his advice to his paying subscribers is going to deal with the fact that he thinks this long accumulation is coming to an end. He says, "6% is nice, but we need to make sure we're only using these services for the risk portion of our holdings."
OK, so I'm going to let Eric's answer suffice. I have nothing to add to it. Will W., thank you for the question.
Next comes Al M. Al M. is a frequent correspondent. Sometimes he'll write two e-mails in one week. A really smart guy, I suspect he's a really successful investor. I'm just guessing wildly here, because he's really, really well informed.
And this week Al M. has quite a chilling tale to tell. He says, "I worked for Dow Corning and its subsidiary, Hemlock Semiconductor. I have seen Chinese theft in action.
We had Chinese employees that were planted in Dow Corning that were caught stealing Dow Corning intellectual property. They stole Hemlock Semiconductor secrets specifically on how to manufacture silicon metal, the primary ingredient in computer chips and solar panels.
One Chinese employee was caught with thousands of technical reports on his personal computer. These reports are Dow Corning's way of holding and transferring knowledge about manufacturing methods. Dow Corning was the world's largest silicon metal producer with 40% of the world market. The next largest was Wacker, a German company.
I used technical reports often in my career, and I used probably 100 technical reports total in 30 years. One thousand reports by a Chinese person is stealing, pure and simple. He was prosecuted, but Dow Corning never let out the information about him."
And then he says, "Furthermore, the Chinese came to 40 top Hemlock Semiconductor employees and offered them jobs in China. They knew who these top 40 engineers were. That's how much they know about industries they want to steal."
He then editorializes a bit about how they are liars and thieves and they won't stop until something forces them to stop, et cetera. Wow, thank you, Al. M. I'll let that stand on its own, and I'm sure there are probably folks on the other side of that who think China is wonderful. Maybe they'll write in and tell us so.
Next is Alan W. Alan W. says, "Hello, Dan. I listened to most of your Investor Hours, which are great, and I'm a longtime Extreme Value subscriber." Thank you for that, Alan.
He continues, "I just want to thank you for your contrarian advice on TLT with the idea of the U.S. dollar strengthening in the short term. I set up a call bull spread on TLT, which worked out very well over a week to produce an 80% gain. Great call on profit from your usual non-trading approach to investing. Cheers, Alan W."
Alan, that was all you, man. I don't do that kind of trading, so I'm glad that my idea worked out for you and that you had the skill to do something really cool with it.
Next is Tyler J. Tyler J. says, "Hey, Dan. Your podcast is great. I read Murray Rothbard's What Has Government Done to Our Money a few weeks ago when I was introduced to Gresham's law, which says roughly bad money chases out good money.
I've been thinking about what happens to bitcoin if or when the government or Federal Reserve or central bank or whoever decides to roll out a digital dollar. Is that a catalyst for the death of bitcoin? Would it be thrown into obscurity with the forced popularity of the state's competing money, or is this about people hoarding the good money and spending the inferior money?"
I'm going to stop you there. Yes, that is exactly it. If you can conduct your business in the inferior money, you're going to hoard the good stuff.
He continues, "How do you think I should view Gresham's law and the views of the state entering the digital money community? For the purpose of my hypothetical, ignore the other currently operating cryptocurrencies."
Oh, I see. "For the purpose of my hypothetical, should I ignore the other currently operating cryptocurrencies because they basically revolve around the basis of bitcoin? Also, they aren't really the competition to the free market, the state. Your thoughts?"
I'm not sure exactly with that last sentence, but I think I see what you're asking. Overall, you are doing what so many people have done. You're wringing your hands a little bit about what happens to bitcoin when the government decides it doesn't like it or wants to compete heavily with it.
My answer is the same, and you know what I'm going to do? I'm going to go ahead and read another one of these questions – actually, I'll read the next two. I only have two more – because I think my – I'm pretty sure my answer is the same for all of these. Obviously I read them in advance of saying them here. But I'm pretty sure there are no details in these that make my answer different. Let's just find that out right now.
Tyler J., that was your question. Here's John H. I'll just get straight to the question. He said a lot of nice things about us. He says, "Even though I bought bitcoin before the 2017 price run-up and held it through the lower prices," wow, John. Good for you. Amazing.
He says, "I don't plan to sell any time soon. I continue to learn so much about digital currencies, but having worked in government I don't trust them to do the right thing with bitcoin. Could you get Eric Wade on the program to have a good discussion for us about bitcoin and central bankers developing their version of a digital currency? Can bitcoin really withstand that kind of competition? John H."
Then Mark S., who is a frequent correspondent – and we interact on Twitter. He's a good guy. He says, "Hi, Dan. I hear the complaint on your show and even when talking to friends and family about bitcoin being banned. I agree with you that bitcoin itself can't really be banned.
Who would know you own it? You could even own it just by remembering your 12-word recovery phrase and have no physical wallet on your person. How would they ban that?
It seems like something is missing from your answer about it being banned, though. Governments could ban the ability to convert your bitcoin to cash by shutting down the exchanges. If you can't convert to cash, what good is your bitcoin?"
He said more that is really good comments, but just for clarity's sake on these three questions I'm going to stop there, right? Just as a reminder, what he just said, "If you can't covert to cash, what good is your bitcoin?"
Then John H. was saying, "Tell us about bitcoin and central bankers developing their version. Can bitcoin really withstand that competition?
Then Tyler J. said, "Is the state rolling out their digital dollar a catalyst for the death of bitcoin?"
I continue to think you guys are coming at this from the wrong angle. First of all, Mark, bitcoin is cash. Why do I need to convert it to anything? I can use this stuff to buy things at millions of stores, online and otherwise, around the world already.
And the market cap isn't even $400 billion of all the bitcoin in existence yet, which means it's in its early days. That's a way of saying it's in its early days. It's still pretty small.
But what about the market cap gets on par with, oh, I don't know, say gold at roughly, I don't know, I think it's like $10 trillion or $11 trillion total. And what if it starts eating into fiat currency usage? What if people really start hating the dollar and the yen and the euro so much that they just – it becomes easy to use bitcoin?
Bitcoin is cash. It's a medium of exchange. That's one of its purposes for being created.
You say, "What if the government bans the bitcoin exchanges?" I'm not sure how they're going to do that. Are they going to ban the Internet? Are they going to keep me from using the Internet? Are they going to keep us from – are they going to hack into all this?
You can protect anything with cryptography. If the exchange gets banned, it'll go into some dark corner of the Internet, and people who can get into it will get into it. Anybody with bitcoin will want to do that.
My point is this. I think the modern mind believes too deeply in the power of government to go everywhere and do everything, right? It believes that government can do anything and go anywhere, which is wrong, right? If you think government is the answer, you're the problem, and this is a version of that.
"Well, what if the government bans it?" Who cares? It was designed to be banned by the government. It was designed to go around all that stuff, right? You don't need a bank account. You don't need a checking account. It's not legal tender. It doesn't give a shit about the government. Bitcoin doesn't give a crap about the government.
That is the point of its whole existence, pretty much the same as gold. Gold doesn't give a crap about the government, either. If I want to pay gold for something and somebody wants to accept my gold in payment, what are they going to do, shoot us? Arrest us? How are they going to find out?
I'm passionate about this bitcoin thing. There's so much chatter about it. I'm getting so many questions about it, and it's like $19,000 as we speak, $19,000. it's really, really come up quite a bit recently.
I have to believe that – I'm not completely clueless about the fact that this medium of exchange and store of value is trading like a risk asset on fire, OK? We can't ignore that. We can't just be dogmatic about our viewpoint. You have to take a look at it.
So if it corrected, with all these people asking me about it, if it went to $21,000 or $22,000 or $23,000 and made a new high and then retreated back even as much as, I don't know, 50% or something, that would be pretty normal I think in the course of an asset that trades like this.
Anyway, that's just a side note on the way it trades. But I hear your questions and I hear your concerns, folks, about bitcoin being banned by the government. But either I'm way too optimistic that the thing was designed for its intended purpose or it was really designed well and it's going to work and it's not going to matter.
Now of course we don't like to represent anything in a totally binary way, so there are probably gradations. There's a continuum there, right? There's a continuum, and at one end the government bans it really hard. It's totally outlawed. And at the other end, the government just lets it continue on the way it is right now.
And then there's lots of stuff in between. The government obviously is interested in competing with – governments all over the world are interested in competing. They want to get their digital currency out there.
But the dollar is already a digital currency. The thing my wife gave me to put physical dollars in is worth more than the actual currency I have in my pocket. It's like $100 or something. I'm worth more than $100, OK? I have a teeny, teeny, teeny, tiny amount of physical currency. Everything I do is digital dollars, and I imagine you're the same way, right? We buy everything online now because we're all locked down.
I just think that the conversation from my point of view is not what happens when the government tries to ban it. It's how are they going to ban – how in the world are they going to stop us, right? This was in an Ayn Rand book. I forget what Ayn Rand book it was. It was either The Fountainhead or Atlas Shrugged.
It's funny. Porter Stansberry used to say this to me. In his early days as a budding entrepreneur in the newsletter business, he would say, "Who's going to let me? No, who's going to stop me?" That's the question, right? Not who's going to let me, who's going to stop me.
And this idea that we need the government to let us do things, I think it's a pathology in the modern mind, and we need to step back and remember what the world was like before 1913, which saw the advent of the income tax and the Federal Reserve and pretty soon after, the beginning of World War I.
Those things really made the world a much more state-centric place, right? Big government kind of took over in the years following those events. Really, a similar thing happened in the United States after the Civil War, right? These wars, these crises, the government seizes upon them the way they've seized upon COVID to get control of your life, and I think bitcoin was created because somebody got sick of that, right?
OK, I've said enough about that. Maybe there's something else you would like to write in about besides bitcoin. I mean, I'll talk about bitcoin if that's what you really want to talk about, but maybe there's something else besides bitcoin that you might be interested in.
OK, that's another mailbag, and that's another episode of the Stansberry Investor Hour. I hope you enjoyed it as much as I did. If you want to hear more from Stansberry Research, check out AmericanConsequences.com/podcast.
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