In This Episode

Dan’s weekly “rant” this episode may actually qualify as a rant – a 22-minute expose of a company about to go public that’s positioning itself as “the Facebook of fitness” even though it’s burning through cash at a rate like Netflix.

Then again, there’s no denying the cult-like following this company has built – including a subscription service with a more than 95% renewal rate, which Dan acknowledges would be enough to get Stansberry management their own private island. “I’m just so flabbergasted by it all.”

Dan then gets to the event some analysts are saying could add hundreds of billions of dollars in valuation to Amazon. “Of course this is gonna drive subscriptions, and people are gonna love it.”

Dan then gets to this week’s guest, Cullen Roche.

Cullen is the Founder of Orcam Financial Group, a financial services firm offering research, personal advisory, institutional consulting and educational services.  Prior to founding Orcam, Cullen ran a private investment partnership in which he generated substantial alpha (high risk adjusted returns) with no negative 12 month periods during one of the most turbulent periods in stock market history.  Cullen has also helped oversee $500M+ in assets under management with Merrill Lynch Global Wealth Management.

With so many investors these days clamoring for income and stability, you’ll want to hear Cullen’s insights on what rising interest rates will mean for bond portfolios, and why the stock market is so risky today.

Featured Guests

Cullen Roche
Cullen Roche
Cullen Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, personal advisory, institutional consulting and educational services. Prior to founding Orcam, Mr. Roche ran a private investment partnership in which he generated substantial alpha (high risk adjusted returns) with no negative 12 month periods during one of the most turbulent periods in stock market history. Before founding his own businesses, Mr. Roche helped oversee $500M+ in assets under management with Merrill Lynch Global Wealth Management.

Episode Extras

NOTES & LINKS           


2:05: Dan has to disclose “a great, big fat bias.” Turns out, after spending $10k on a product, he’s found it’s good for hanging clothing and not much else.

4:59: Here’s the first thing Dan has noticed about Peloton ahead of its imminent IPO: “They don’t seem to know what business they’re in.”

18:31: What does it mean for a company to be “weirdly profitable” when it’s losing $200 million a year? Here’s Dan’s theory on the company that truly is spending money to make money.

25:35: Dan gives a quick assessment on the trade war: “It’s a freakin’ romance novel.”

26:10: Dan gets into the catalyst that analysts predict could send Amazon up 50%. “We always have something arriving in this house, it’s like we never go out anymore.”

29:24: Dan introduces this week’s guest, Cullen Roche. Cullen is the Founder of Orcam Financial Group, a financial services firm offering research, personal advisory, institutional consulting and educational services.  Prior to founding Orcam, Cullen ran a private investment partnership in which he generated substantial alpha (high risk adjusted returns) with no negative 12-month periods during one of the most turbulent periods in stock market history.  Cullen has also helped oversee $500M+ in assets under management with Merrill Lynch Global Wealth Management.

31:06: Dan checks in on the macro situation with Cullen, asking whether the bond situation looks as crazy to Cullen as it does to him. Cullen replies: “It’s starting to.”

35:22: What’s the purpose of a 0% yield bond, and what would it look like? Cullen explains the bet that these bondholders are making.

40:24: Cullen lays out the extreme sensitivity that so many bond portfolios have to rising interest rates – here’s what even a 100 basis point hike could do.

46:25: Cullen explains why his long-term outlook for the stock market isn’t super negative, since corporations are likely to keep on padding their margins.

1:12:40 Dan answers a mailbag question from Jeff D., who asks Dan how he allocates his personal portfolio.


Announcer:                 Broadcasting from Baltimore, Maryland all around the world, you're listening to the Stansberry Investor Hour.


[Music plays]


                                    Tune in each Thursday on iTunes for the latest episodes of the Stansberry Investor Hour. Sign up for the free show archive at Here is your host, Dan Ferris.


Dan Ferris:                 Hello and welcome everyone to another episode of the Stansberry Investor Hour. I'm your host, Dan Ferris. I'm also the editor of Extreme Value. That's a value-investing service published by Stansberry Research. We have a great show lined up. But first, a rant.


  1. Now, this week it's going to sound a little bit more like a rant, like an actual ranting, raving Dan. And what I'm ranting and raving about is the company which is about to go public called Peloton. Now, the word "peloton" means pack or group. It refers to the group of bicyclists that you get in these bicycle road races like the Tour de France. So the main group is called the peloton. Or I guess it's peloton [with a French accent] or something like that. And Peloton is – they sell exercise equipment. They sell what we would call, in my generation, a stationary bike. And I think they call it an indoor cycle or something. With a big TV screen attached.


And you sign up for $39.00 a month and you get all these workouts that you can click on. And you do the workout that's happening on the screen and there's an instructor on the screen doing the exact same thing that you're doing, pedaling one of these bikes, looking into a camera. And it's spin class. The word "spin" is trademarked so they can't use it. But it's spin class on a screen in front of – virtual spin class. And the bike costs $2,000. Yes, $2,000. Now, I'll get to that later. But first I need to disclose a great big fat bias here. I have a great big fat bias. And my bias is I think exercise equipment is batshit stinking crazy stupid stuff. I think it's ridiculous. Exercise equipment is a ridiculous waste of money. And I know whereof I speak. I've spent at least $10,000 on this garbage over the years. I think we've hung more clothing on it than anything.

Although, admittedly, my wife is pretty good. She uses her Pilates machine. It's called a Reformer if I'm not mistaken. She uses that. But it was four-freaking-grand. And then we have the four-freaking-grand elliptical machine, and we had a $2,000 or $1,500 treadmill at one point that we got rid of. Of course we got rid of it. Because we didn't use it. So I'm really biased against exercise equipment. You don't need exercise equipment. It's total BS. It's totally unnecessary. If you want to be in shape, you don't dress in special clothing and wear special shoes and ride a special bike and all this garbage. You just walk, take a hike or a climb with your friends in the hills nearby. Or if you live in the city, take a walk around the city. Lift some weights. You don't even need special workouts. Just lift heavy things now and then. Really. Literally.

The fitness craze is not a fitness craze. The fitness craze is more like a soda craze or a burger craze. People are trying to sell you something, you know? They want to sell you something. That's what it is. It's the fitness marketing craze, and people are buying it because: "I want to get in shape, right? So therefore I need to spend $2,000." And Peloton says they're going after people that make – and I'm reading this from their public filing document. They say their total addressable market includes people making $50,000 a year. Now, unless all these people are single, there's no way they can afford this stupid thing. Of course, what does Peloton do? They democratize. They say, "We're democratizing fitness by lending you the money and charging you $58 a month to buy this $2,000 piece of crap you're going to hang clothes on."

Anyway, big source of bias, OK? Dan thinks exercise equipment is stupid. I don't think. I know. I know you don't need this garbage to get in shape. You want to get in shape? Take a walk. Lift heavy things. Play sports with your friends and family, right? Go to the beach. Go swimming in the ocean. Whatever. All this exercise equipment really burns me up because it's so stupid. It's such a sales pitch. It's awful.

Anyway, Peloton – the first thing about them I notice is they don't seem to know what business they're in, and that's a big tip-off. This is a typical sort of new-agey IPO like WeWork. You know the We companies, this guy Adam Neumann – he says their goal or their mission is to elevate the world's consciousness. Meanwhile, it's a crap business. It loses a ton of money. And Peloton – they say Peloton is profitable. We'll get to that later. It's losing money as well.

So what do they do? They really sell exercise bikes with a screen attached when they charge you $39 a month for the subscription to see this stuff on the screen. That's what they do. And they're planning a $4,000 also with a big TV screen attached and another $39-a-month subscription. So they say in their filing, "We are a technology company that meshes the physical and digital worlds" – I'm already starting to throw up a little in my mouth – "to create a completely new immersive, connected fitness experience." Yeah, immersive and connected, sitting in your home alone watching TV on a bike.

"We are also a media company that creates engaging-to-the-point-of-addictive original programming with the best instructors in the world. An interactive software company," blah blah blah, "A product design company," blah blah blah, "A social connection company, a direct-to-consumer multichannel retail company, an apparel company, a logistics company." "We don't know what we are." If you're hiring people for your business and they walk in the door and say, "I do everything; you don't need to hire anybody else," do you believe them or do you call total BS on them?

So they don't know what they are and they're telling me that they're all these kind of companies. They're selling exercise equipment and they're financing exercise equipment and they're selling you a subscription so you can watch somebody on a screen doing the exact same thing. And they're not making money at it. They did roughly $900 million of sales last year. And the sales of course are growing big. That's how you can do an IPO in this environment, right? If sales are growing big, you don't have to make any money. You just have to say that you're elevating the world's consciousness or that you're a media company with engaging-to-the-point-of-addictive original programming or whatever they think they are.

So sales were roughly – these are rough numbers – $200 million a couple years ago, $400 million a year after that, $900 million last year. And losses in those years, respectively, were $71 million, $47 million, and $195 million. So they're just selling more and more and losing more and more. And they say – a representative told Barron's in a Barron's article from just a few days ago – a representative of Peloton said, "Well, our bike business is really profitable but we're just growing it right now so we're spending a lot on marketing." And that almost – you could look at the financials and almost believe that. So far, they have to do all this marketing to sell, sell, sell.

And I suppose at some point – you know, they have like a million four subscribers. A million four. Let me tell you something. If Stansberry ever gets a million four subscribers, we're probably never going to hear from the management again because they're going to go buy an island somewhere. That's a lot of subscribers paying $39 a month. There's another service that costs $19.49 a month they say. And that gets you "access to our content library" on various devices I guess like your Apple or Android device, tablet, computer, phone, what have you. In addition to – so I guess you could take the workout anywhere, right? But without the bike, I don't know. I'm not sure how all this works. Admittedly. Look, I'm not a fitness expert here [laughs]. I'm not selling my fitness expertise. I'm just questioning Peloton.

So, what they do is very simple, and they represent it, of course, as magic, which: all businesses do that. And I've told you that I'm biased so you already know that. But how they sell the thing – there's a fantastic Twitter bit about this. So if you go on Twitter, you look for this guy named Clue – like C-L-U-E – Heywood – H-E-Y-W-O-O-D. And that's his Twitter handle: @ClueHeywood. And if you type "@ClueHeywood Peloton," this thing will come up. And it's hilarious. I don't want to spoil it for you but he basically takes every Peloton promotional photograph and puts a more true-to-life caption to it. So the guy is sitting in a high-rise and he's got this Peloton bike in the high-rise and it says, "I put my high-rise bike next to the window so I can literally look down my nose at people" [laughs]. And so on and so forth. And it's hilarious. But it's true.

The thing is super expensive and it's totally unnecessary. And they sell it by showing you all these obviously good-looking fit young people doing it in their extremely expensive homes, whether it's a high-rise or a mid-century modern or some glass box in the middle of the woods or something. So they're selling it by showing you the device being owned by the only people who have any people buying it in the first place, frankly. And then they tell you their total addressable market goes down to incomes with $50,000 a year. I guess if you're single, OK. But if you have even one more person to take care of on $50,000 a year, which after taxes, I don't know, $3,500 a month, being generous, $3,000 a month maybe. You don't have money to spend $2,000 on a bike. On a bike that doesn't go anywhere.

And of course I feel like with the Peloton, all my life, people have been trying to sell me things so they could send me a bunch of other crap with it. You remember the Stephen Covey – he had this little – they used to have these FranklinCovey stores in the mall when the mall was a thing. And I was in the mall and I was like, "Wow." I went into FranklinCovey and they sold me – they got me. They hooked me and landed me and fileted me and had me for dinner. And I forget how much money I spent – way too much – on this little leather planner. And you could buy the inserts. I think they even sold me a little bottle of leather conditioner for the leather planner so I could keep it looking supple and nice [laughing]. It's a wonder that people can still sell anything in this way. It's crazy. But they can.

Like, for example, you need a $100 pair of shoes just to get on this thing because there's special biker cleats or something, and there's only two kinds of pairs of shoes, according to this one article I read, that fit in the thing. I think Peloton has a pair for $125, and you're going to spend $100 on shoes. And then there's this mat, this nice mat that sits under the bike. That's another $50 or $60. And of course if you don't get the mat, you're going to scuff the crap out of your floor. And so on and so forth. If you go to the Peloton website I'm sure there's many more accessories than that.

And it just feels like another sales gauntlet that somebody's trying to run us through that is totally unnecessary. And so I could be wrong. Maybe this is a fitness revolution and people are getting fit. But I don't think it's a fitness revolution at all. Because you don't need any of this crap to get in shape. And you know I'm right. If you want to get in shape, you don't need a special machine. You don't need to spend $2,000. I promise you. The Peloton people are sitting around not talking about your fitness; they're talking about price points. They're sitting around brainstorming price points.

Because humans have this innate need to spend a certain amount of money on a thing so that they feel committed to it. And not only that they feel committed to it but that they feel they've got it taken care of. If I spend $2,000, I'm fit [laughs]. You know? that's the mental calculus. "Oh, I got that taken care of. Well, if I have $2,000, I won't need to spend anything else." Except for $100 on shoes, $50 for a mat, and God knows what else. And $39 a month for the subscription [laughing]. Then I've got it taken care of and I'll always be fit, you know? And it's not about fitness. It's about convincing – it's about using fitness to sell you a machine you don't need.

And so I'm skeptical of this. And I shouldn't be. Because people just continue to sell things in this manner and it works. That's why they can do it. But it's appealing to you in a way that these things always try to appeal to you, and it's not that at all. It's just a machine you don't need that you're going to hang your laundry on within a year or two. And the subscription will lapse. That's anther thing. There was an article that said their subscription – well, in the S-1 filing, they did say their subscription retention is like 95%.

Let me tell you something: if we had 95% renewal rates consistently across the board at Stansberry, the business would be larger and the management might be off buying that island somewhere. Because it's too hard to believe that – the article I read was I think Business Insider. It said there they were losing less than 1% of their subscribers, which implied a retention rate of more than 99%. And it said that it didn't pass the smell test. There's something that they're reporting differently than probably the reality of it. Although they do report that the number of workouts has risen per subscription. And they measure it – I forget how they measure it. It's somewhere buried in this gargantuan filing I have in front of me.

But basically it's like people were doing eight workouts maybe a week or a month or something and now they're doing 11, and that number has gone up the past three years. They don't have much of a history but the history they have is huge sales growth, people using the device more, doing more workouts, and the subscriptions rising with the device sales of course. Because you can't own this thing – you don't spend $2,000 on a bike with a giant TV screen and then not sign up for the workouts that you get. That's the only way the TV screen is useful. So, yeah, I'm real skeptical about the frickin' Peloton bike. I think it's just another thing they're selling us that you don't need.

You don't need Bowflex or Nautilus or Peloton. And the fact that there's a subscriber business attached to it means Wall Street will fall in love with this thing. They love subscriber businesses. The world has discovered – the public markets have discovered subscriber businesses. And things that weren't subscriber businesses before have become subscriber. Even like Amazon, right? They have the Prime, which is essentially a subscription. You pay $100 or I think it's up to $120 a year and you get free two-day shipping on most purchases and stuff. Microsoft used to be: you bought the update on the software or not. Well, now it's a subscription. So you just renew your subscription and you always have all the updates. Et cetera.

And people like that because Wall Street wants to sell – it can be sold on businesses that have lots of recurring revenue. And subscriber businesses have the potential for lots of recurring revenue if the subscription is something that people want to renew. And sometimes it is and sometimes it isn't. They're sold on it and they can sell investors on it. It's a way for them to sell securities, essentially, to say, "Hey, this is a subscriber business. Therefore it garners a higher valuation." And I've seen $8 billion on this thing. People are talking about evaluation of $8 billion, starting with an initial IPO of I think $500 million. $8 billion, just doing some quick math here, divided by – roughly nine times sales. I'm so bad at math I have to do math just for that. But yeah. So nine times sales. And it's unprofitable.

But the CEO, in a recent article, claimed it's weirdly profitable. He said it's weirdly profitable. Now, I don't know what he means by that because obviously they lost $200 million last year. I think what he means is that: "If we didn't have to spend so much money" – I think $325 million last year – "on sales and marketing, we'd be making a ton of money. We wouldn't be making $900 million in sales and spending $1.1 billion total. We'd be making money." Who knows where the profitability lies? Do they have to make $1.8 in sales or $3.6 billion? How many times does this have to double before we get to a place where they're not losing money and making it up on volume, so to speak? I don't know. And we don't know with any of these businesses, right?

Uber loses a ton of money. WeWork loses a ton of money. It hasn't gone public yet. And these guys lose money too. But that's the way of our age, right? You can sell people a vision and growth and losing money. And I heard Scott Galloway, who's a pretty smart analyst, who wrote a really great book about the FANG stocks called The Four about Facebook, Apple – actually he wrote about Facebook, Amazon, Apple, and Google. He has a lot of views worth listening to about these businesses. And he's been saying for a few years now: the investing public will engage you in a business that makes no money, that lights money on fire, if you have a vision and if you grow your sales at astronomical rates. If you just keep doing those two things, they will finance you. They'll buy your stock.

Of course, losing money can't last – a business that loses and loses and loses can't last forever. So at some point they will have to make money. And these guys – they've got as much vision as anybody. I mean, the S-1 filing starts out: "We believe physical activity is fundamental to a healthy and happy life." Couldn't agree more. And physical activity machines like you sell are totally not fundamental. And they go on – they say, "Our ambition is to empower people to improve their lives through fitness." If that were really your ambition, you'd be saying what I'm saying; you wouldn't be selling them a machine.

And then it goes on and says, "We're a technology, media, interactive software, product design, social connection" – a social connection company. "We're a social media company too." Great. "That develops beautiful and intuitive equipment that anticipates the needs of our member." In other words, "We're the Apple of fitness," right? "We're a social connection company that enables our community to support one another. We're the Facebook of fitness." These guys are drawing on every huge tech success of the past decade or two, right? "We're a direct-to-consumer multichannel retail company that facilities a seamless customer journey." "We're the Amazon of fitness." "We're an apparel company that allows members to display their passion for Peloton." "We're the Nike of fitness" [laughs].

"We're a logistics company that provides high-touch delivery setup and service for members." That would be somewhere near the Amazon or the FedEx of fitness. So, you see, it's ridiculous. Peloton is a ridiculous thing. I don't know if it's ever going to be profitable. I don't care if it's a great stock or not. This whole idea to me is garbage and I will avoid it like the plague. I may even short it at some point because it just makes no sense to me. At some point stuff that makes sense has to win out, right? Says the value investor after 10 years of value underperformance [laughing].

That's the rant. And, believe me, I could go on. I realize this was not my – I'm usually a little bit more organized with this but I'm just so flabbergasted by it all. That's the rant. Write us: [email protected] And tell me I'm way off base in a polite manner if you wish. But help me out here. Help me understand. I don't get it. I'm just an old guy who don't get it [laughs]. All right. Let's just talk about something else for God's sakes. What's new in the world?

[Music plays]

Well, what's new in the world – I noticed over the weekend – it's Labor Day Weekend. My wife and I like to watch races on TV. Just anything. I watch all the F1 practices, the Formula 1 practices and qualifying in the race and stuff. I get up at 6:00 a.m. Sunday morning and watch the Formula 1 race. And we watch NASCAR and IndyCar and almost any car [laughs] kind of race. We watch those airplane races when they race between the pylons. That's awesome. So we're having a good time.

And then I made the mistake – I think I looked at my phone, or I had my laptop out or something. And a headline – it was my phone. I was looking at Twitter. And a headline said something like, "S&P 500 futures down on stalled trade talks." And I thought, "I've heard this story before." My wife told me this story. We used to watch this program together called Outlander. Outlander is basically a romance novel turned into a TV series. I won't tell you what it's about because you can find out for yourself.

But my wife said, "You know how these things work, don't you?" And I said, "No, I don't. I don't know anything about romance novels." And she said, "Well, the couple gets together. And then they're separated. And then they make their way and they find each other again. Oh, and then they get separated again. And then they struggle and they get back together. And then they get separated. And then they're back together." And she's right. It was over and over and over again: this couple was separated and back together like a dozen times in a couple seasons of this show [laughing]. It was ridiculous. It was such a formula. And yet we kept watching it. Apparently it works, right?

And that's what the trade talks are. It's a romance novel. "Oh, trade talks not going well. Oh, market down a half a percent," or 2% or whatever, 3% that one time not too long ago. "Market's back up. Trade talks going well." We're always one Trump tweet away from another one or 2% rally based on the trade war between the U.S. and China. And we're going to talk today – we have a great interview today. And I did this on purpose. I'm trying to get a more macro-type investors on the show. And we have one today, Cullen Roche. We're going to talk to him about some of this. Maybe he'll help me understand the romance novel of trade war. But that's all I have to say about the trade war. It's a freakin' romance novel: together, apart, together, apart. Oy.

Next let's talk – we mentioned Amazon. Peloton is the Amazon of fitness [laughing]. But this RBC report – you know, RBC Capital Markets – Wall Street company that puts out reports. They say Amazon is going to rise 50% as one-day Prime shipping roles out. So Amazon's going to have one-day Prime shipping. And I mentioned that too during the Peloton rant. I said, "You sign up for Amazon and you get two-day free shipping with a lot of things on Amazon." So it's going to be one-day shipping now on Prime. Which is great. I love Prime. We always have something arriving at this house. It's like we never go out anymore. And so we use it like crazy. And one day will be even better. I'm waiting for one-minute shipping or one-hour shipping.

Of course this is going to drive subscriptions and people are going to love it and they're going to say, "One-day shipping. It's amazing what they're doing." And it is. And of course it should drive more household spend. I think the Prime household spend is around $1,300 or $1,400 a year now. I obviously don't keep great track of it. But last time I looked it was around $1,300 or $1,400. And one-day, the way my wife and I spend – I don't think we're unusual. One-day, I think it's going to be $13,000 or $14,000. Because basically Amazon's just going to take over all the boring parts of shopping, right? All the boring parts of shopping, all the stuff that you get – you go to Costco once a month and you go to the grocery store once a week and you get the same stuff every time. Why do you need to go there and get it? Just have Amazon send it to you, right?

So there is some sense behind this. Saying Amazon will rally 50%, that's RBC. I'm not saying that. But this does make sense to me. They raised their price target on Amazon to $2,600 a share from $2,250, representing an expected increase of roughly 46% from recent levels. And I don't know if Prime can make that much of a difference in the value of the company. But it could in the minds of investors. At this point, we know people can fall in love with stocks. Other than that, all I can say right now is that we've just had this crappy August and the best August in a long time, probably in years, maybe decades, in the bond market. And it was a crappy August in the stock market.

So right now of course all the sort of first-level-thinking macro theorists are wondering, "What's going to happen in September?" Because of course September, 2008 was – I forget what the number was. I want to say 2935 or something like that on the S&P 500. And of course, from there, the market tumbled almost 20% through Christmas Eve last year. So, wow. What's going to happen in September? I think a lot of people asking that question being ridden with anxiety suggests maybe it's not going to be as bad as they think. But who knows? Because of the romance novel of trade war, and we're always one tweet away from it going one way or the other, who knows? You won't hear me making any predictions about what's going to happen in the month of September.

You know what? I don't want to talk about what's new anymore. I want to talk to Cullen Roche.

[Music plays]

This week's guest is Cullen Roche. He is the founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, personal advisory, institutional consulting, and educational services. Prior to founding Orcam, Mr. Roche ran a private investment partnership in which he generated substantial alpha, which is high-risk-adjusted returns, with no negative 12-month periods, during one of the most turbulent periods in stock market history. Before founding his own businesses, Mr. Roche helped oversee $500 million in assets under management with Merrill Lynch Global Wealth Management. Cullen Roche, welcome to the program, sir.

Cullen Roche:             Hey, Dan. Thanks for having me.

Dan Ferris:                 Yeah. So, Cullen, we haven't talked in a couple years since you were kind enough to speak for us at the Stansberry event in Las Vegas. And, Cullen, you're one of my macro guys. I'm not a macro guy. So I check in with folks like you now and then to find out the state of things. And I particularly like to check in with you because your viewpoint is usually quite different from the narrative that I get in the press, which is often compelling, or else it wouldn't be there in the first place. So I need to go to you to kind of chill my jets and get the real story. So maybe we should do this by insanity of valuation and start with the bond market first [laughs].

Cullen Roche:             Right.

Dan Ferris:                 It looks super crazy to me. Does it look as super crazy to you as it does to me?

Cullen Roche:             It is starting to. I've been one who has downplayed the risk of rising interest rates for, God, pretty much as long as I can remember being an investor. I mean, I remember when I was at Merrill Lynch – gosh, this was the early 2000s. I remember that my bosses then were constantly selling this narrative that rates were low and they had only one direction to go, that they were going to go up at some point. And I just remember hearing that narrative for pretty much my entire career. And I mentioned this back at the event in Vegas back in late 2017, that one of my – probably my favorite risk-adjusted asset was long-term U.S. Treasury bonds.

And that dynamic has started to really change at this point. And the math on it just becomes somewhat unavoidable. I mean, when you have – I think there's over $17 trillion now of 0% or negative-yielding bonds in the world. And when you just run the math on it, the interest rate risk is really asymmetrical. It becomes increasingly asymmetrical as you approach zero. Because it's interesting: when interest rates are say three or four or even 5%, people remember the era of the 1970s and say, "Yeah, what if interest rates go up to 15? You have potentially only three or 4% of potential downside here and you have maybe 10% in rate increases in potential upside if we go back to the 1970s."

So it sounds like there's a lot of interest rate risk when rates are at three or 4%, but the math is actually that, as you go down to zero, bonds become what is called more convex, which means that they become basically more sensitive to interest rate risk as rates approach zero. So when you're moving from say three to zero, you can have huge, huge swings in the bond market, and that's, to some degree, what we've been seeing here, where the principle increases are really substantial as you approach zero. And once you reach zero and move negative, the risk-adjusted return becomes worse, in essence. Because what happens is you're now owning an instrument where there's no positive offset in essence.

So when you own a 3% interest-bearing bond that goes to zero, not only do you accrue the principal appreciation from the interest rate change, but you're still clipping that 3% coupon. So you have what is in essence a 3% risk barrier or risk-adjusted hedge basically when you own that instrument, versus when you own a 0% yielding bond – and let's just be extreme and say it moves to 3%. So the same exact type of 3% move that you get from the 3% bond. You've got the same principal change in essence, but you're not earning the interest rate. So if that bond moves against you, you're earning a far worse risk-adjusted return when the rates rise from a low-rate environment than you do when rates rise from a higher-yielding environment.

So, as you approach zero, there really is a lower bound in terms of how much risk you're taking in. The risk profile starts to look substantially worse for the bond market as you approach zero.

Dan Ferris:                 Right. So, just for our listeners who may not be sophisticated macro bond investors like yourself, you still get the coupon, right? It's just the yield to maturity has gone to zero because even if you collect all the interest, you've paid so much at that point that you still lose money.

Cullen Roche:             Right. When you own the 0% yielding bond, you're essentially making a bet that all of your return is going to come from a principal change. So you're basically betting that, if interest rates are zero, that your bond is going to appreciate, in essence, from a move to say -1%. And so it's almost like – people might better understand this by thinking of the analogy of a dividend-paying stock, something that is a super-safe, really well-known company. Say something like a utility stock that has been around for ages. Or a utility index might be a better example. Something that pays like a 3% dividend, and they just spit out a ton of their income through the dividend. And while that dividend isn't guaranteed, it's a pretty high-probability bet that utility companies will continue to pay dividends going forward.

So, rather than owning the utility – when you own a 0%  yielding bond, you own something more like a venture capital company, say a firm that is fairly new. They're not big enough and established enough to guarantee a dividend payment. So you're basically betting on only principal appreciation. And that's, in essence, what you're betting on when you buy a zero or negative-yielding bond. You're betting only on the principal rather than what is traditionally the thing that makes bonds super safe, which is the fact that they pay very predictable, consistent coupons.

Dan Ferris:                 Yeah. So at the zero bound, you cross from investment to speculation.

Cullen Roche:             Totally. And that's the weird thing. I haven't been a deflationist for the last 10 years but I was pretty vocal coming out of the financial crisis saying that high inflation probably wasn't a very high risk. Or certainly wasn't the risk that – a lot of people thought that the Fed was printing all this money and doing funny things with QE. And they were to some degree. But I always tried to describe quantitative easing as an asset swap rather than money printing. Because that's in essence what it was. It was swapping a checking account for essentially a savings account. A T bond is a lot like a savings account in the sense that you own something that has a little bit longer maturity that pays a fixed coupon. And people were essentially selling their Treasury bonds, their savings accounts, and swapping them out for a checking account, a 0% yielding reserve account or deposit account.

And if you think about it at a macro level, if everybody's doing that – when your checking account or your CD matures and the bank swaps it out for a checking account, how does your behavior change? It probably doesn't change very much. I mean, it certainly isn't going to cause you to go out and hyper-inflate goods and services. And that is essentially what QE was at a very macro level. And so there was no reason for that program to be inflationary. In fact, if anything, they were taking a little bit of interest income out of the private sector. So my argument was always that, if anything, QE is probably marginally deflationary or disinflationary, which basically means that the rate of positive inflation is slowing. So you're moving from a 2-percent CPI to say a 1.5% CPI over time. And that's essentially what's happened.

But what's weird about the current environment is that I don't think there's a strong argument that we're entering a persistent deflation or a truly Japanese-style environment. The Japanese had negative and 0% yielding rates forever because you basically have a – well, they had a hugely deflationary real estate and stock market bust occur at the same time. But they also have a really unique negative demographic trend which is pretty deflationary. And so they've had not only a lot of macro factors but they have a pretty unique demographic situation going on. And so I don't see the extreme nature of that occurring in the United States. I think there's more of an argument for it maybe a little bit in Europe.

But I do not see a deflationary environment occurring in the United States persistently for the next 10 years, which essentially is what the bond market is starting to price at this point. And that, to me, creates the potential for a lot of volatility in interest rates. You could easily see a 1% positive move in interest rates that causes a lot of people's bond portfolios to start to gyrate in a manner that creates a lot of risk in an asset class that is really, for investment purposes – you own bonds because they create principal stability in your portfolio. That's the whole purpose of owning a bond portfolio really. It's there to offset your equity market risk, in essence.

And what we're seeing now is the bond market I think is potentially starting to reach a point where it's going to start adding a lot of principal volatility to people's portfolios, which is – it's going to make a lot of people uncomfortable. It's going to make the next I think 10 years potentially really difficult to navigate. Especially when you start to look at the fact that the stock market is, on its own, probably an extremely risky asset relative to historical norms because we kind of  know that valuations are high and – gosh, I mean, typically just after a bull market like we've had, you tend to have more volatility going forward.

The stock market bull market has been an unusually sort of unidirectional low-volatility event compared to a lot of bull markets. And so there's a really strong argument that the next ten years, across all asset classes, are going to be extremely difficult to navigate, and potentially low-return and high-volatility, which is going to create a lot of behavioral risk across people's money management.

Dan Ferris:                 So I'm glad you mentioned the relationship between bonds and stocks. Because that was one of my questions for you. You may have seen this chart that goes around Twitter every now and then where they show you the last several decades of bonds versus stocks. And basically they correlate – hopefully I get this right. They correlate positively until maybe 20 years ago or so, and then from that point on, they go in opposite directions, right? So you can rely on that sort of hedging relationship that you talked about. But what I want to know from you is: do you think the data from that prior period means anything to us today? Does it make any sense to make that observation at all?

Cullen Roche:             It does to some degree. Because the thing is: when you have high interest rates, you have a bond environment that is – especially if you don't have a sustained high inflation, you have a likelihood of high returns basically. So if you go back in time and you look at the nominal returns from the bond market, they're likely to pretty much always be consistently positive between the years of 1950 and 2010. Just because interest rates were so much higher. So, in nominal terms, you were pretty much always – one of the things that's interesting to me is: when you look back at the period from 1940 to 1980, interest rates rose basically from about 2% to 15%. And you generated a positive nominal return across that entire period.

So people tend to think that rising interest rates mean that bond prices fall. That's kind of the basic principle that we all learn. But the reality is: if you own a 10-year bond and you actually treat that thing as a 10-year bond, let's say that thing yields 5%per year, you're going to earn your 5% every year. And unless the U.S. government defaults, which is extraordinarily unlikely, you're going to generate a positive nominal return across any 10-year period regardless of what the rate of inflation does.

Yeah, in a high-inflation environment, you're obviously going to lose money in real terms. But in nominal terms, you don't lose money. So even though rates might rise, that 5% yielding bond is still going to pay out whatever the contract dictated at the beginning of when you bought that contract. So it's one thing that people I think misunderstand: in the long term, the bond market is very likely to correlate with the stock market. I always try to describe the stock market as what is essentially a super-long-duration bond. It's basically an instrument that, in my view – if you own the stock market for 25 years, that thing is very similar to a 25-year bond that is very high-quality in nature, probably investment-grade, that's going to pay out about 7%.

But you  have to be really damn patient with that thing. You  have to have the time horizon of someone who is willing to hold that thing for multiple decades. Otherwise you're going to see a lot of volatility inside of any five, 10, or 20-year period. And so in the short term you get these periods where the stock market and the bond market are going to look like they're not correlated. But over any long-term period, they should look like they're at least somewhat correlated. But when interest rates fall and you have a dynamic like we do now where interest rates are say 0% in much of the world, you have an environment where, mathematically – I mean, a 10-year bond yielding 0% is not likely to correlate with the stock market very much. Even over the long term.

So I think the story changes. When you enter an environment like the current one where rates are so low, you are likely to have less correlation between the stock and the bond market. Just because the bond market isn't likely to keep up. I mean, I don't think that the long-term argument for the stock market has necessarily become super negative. I think that, in essence, corporations are likely to continue earning relatively high profits. Let's be even somewhat pessimistic and say that corporations only earn say 5%  profits going forward in the next 10 or 20 years. That's still going to look like a heck of a good return compared to a 0% yielding bond.

And so the math is pretty clean. The bond market is going to look probably a lot more volatile going forward, and, mathematically, it can't keep up with the stock market. And that makes it – especially on a risk-adjusted basis, it makes it a very difficult instrument to own going forward.

Dan Ferris:                 All right. I guess the next thing that occurs to me to ask you is about inflation then. Because that can be trouble for businesses, inflation. And therefore trouble for stocks. So, what's your outlook from here? Gold has come up substantially. Somebody has some kind of a macro worry when you see gold going up like that. We're told in the headlines that it's related to the trade war. What do you think? Do you have a view on why gold has come up and what inflation looks like maybe going forward?

Cullen Roche:             Yeah. There's so much contradicting information right now. When you look at a lot of the macroeconomic data, things are I think definitely slowing down a little bit, especially if you look at things from a global macro perspective. The U.S. looks much better than say even China or Europe at this point. But you've got some really negative data points coming out of places like South Korea and Germany. So there's definitely some fragility going on. The United States, on a relative basis, looks better. I think there's pockets of fragility even in the United States. I mean, I think there's an argument that there's kind of bubbly-looking locations in terms of real estate. Maybe places like the Pacific Northwest has really boomed. The San Francisco market has been out of control for a long time. And these markets are finally starting to soften.

But a lot of people look back and say they remember the last traumatic event that they went through. Like a shark-attack victim will never go back in the water because the shark attack was so traumatic. And the reality is the odds of them undergoing the same exact type of event are extremely low. And you tend to see this after any major event, terrorist attacks or car crashes or whatever: people tend to think that these things will be recurring events. And the probability is that the safest time to fly, for instance, was right after 9/11. Or the safest time to do anything is right after some sort of big traumatic event has occurred because we typically put measures in place that actually make it really safe to do whatever that event is.

And the stock market and the financial markets tend to be somewhat similar. So if you look at for instance the financial crisis, coming out of the financial crisis, we've put a lot of the safeguards in place that should protect us to some degree from another financial crisis. In fact, I think you could probably argue, to some degree, that some of the safeguards we've put in place have caused the slowdown in economic growth that have made the economy probably more robust to downturns but have also made it slower growth.

So I think that it's interesting in sort of a macro sense because you have now an environment where – I've described this sort of as an environment where we never really boomed in the last 10 years. There have been pockets of a boom but there haven't been the sort of boom that would create a big bust. And that tends to be what really precedes an event like a 2008. You need a big boom to precede a big bust in general. So, to kind of directly get to your question, I don't think there's a strong argument one way or another for a high inflation or a deflation.

I kind of think that the more likely scenario over the next 10 years is that you're likely to see a lot of these big macroeconomic trends really reinforce themselves. And those big trends are basically deflation in technology – demographic trends are negative in the U.S. in terms of: we have a slowing population growth and an aging population. And those two big trends I think put a lot of downward pressure on inflation and prices in general that make it very hard for me to envision a 1970s type of increase in rates. But I also don't think you've had the sort of boom that creates the risk of a big deflationary bust like we saw in 2008.

So I'm more inclined to think that I wouldn't be shocked if we were talking in say five years and interest rates were exactly where they are today. And the path getting there will be somewhat volatile. But I just don't think that the likelihood of rates moving in one direction or another is extremely high. And so you're going to have to be – navigating that environment is probably going to require being a little bit more nimble. I think this environment has turned everybody more so into sort of short-term thinkers. Just because you have to manage the risks more so in this environment because the risks have increased. And so there isn't going to be a big extreme move in one direction or the other I don't think. I think that the big macro forces are going to reinforce a pretty muddle-through type of environment where growth is somewhat slow and inflation doesn't boom and it doesn't bust.

Dan Ferris:                 So one could argue then: if whoever can affect this – say the Federal Reserve – sees what you see, they will try to do something about it. And you could even argue that they're doing that now because, after a huge bull market like we've had, why lower rates, right? How do you feel about that? How do you feel about the Fed's ability to affect not asset prices, but their ability to prevent a calamity, should they see one coming?

Cullen Roche:             Well, it depends I think specifically on where that calamity comes from. The Federal Reserve is basically just a big bank. So when it comes to a banking crisis, the Fed is really – they're the heart of the entire banking system. I mean, if you look back at basically the creation of the Federal Reserve, for instance, the Fed is basically just a public version of the New York Clearing House. So back in the early 1900s, the late 1800s, we had a series of bank panics.

We ultimately ended up forming the Federal Reserve because the clearing houses, which were private back then – they didn't function during banking panics. So typically they would shut down and the bankers who would meet at these clearing houses – they didn't trust each other during a panic. And so the clearing houses would basically stop clearing each other's payments. JPMorgan would go meet with a Citibank representative and say, "Oh, your balance sheet looks bad, man. I don't think I trust you very much. So let's wait a few days and see how these things go before we start clearing each other's payments."

What the Federal Reserve basically is is it's a publicly leveraged entity that basically comes in and says, "OK, Citibank. We're going to clear that payment regardless of whether or not JPMorgan has an opinion about you. Because, based on our opinion, you're not bankrupt. So we're going to support your payment needs no matter what the environment is." And that's essentially what 2008 kind of proved: the Fed came in and they kept liquidity going through the payment-clearing process regardless of what JPMorgan or Citibank's opinion was of each other. And what that does is it keeps the little guy from going out of business basically. So a lot of small businesses back then who say were clearing payments through JPMorgan – their payments cleared no matter what because the Fed was essentially clearing them. And so that reduces a lot of risk in the banking system specifically.

I think that the Fed has a lot more trouble impacting the broader economy just because it doesn't have the tools to really do so. And it kind of goes back to what I was saying with QE earlier and about how it's basically just a big asset swap. You know, a lot of people think that QE is printing money or that the Fed has this sort of Archimedean lever over the economy. And I just don't think that's really that true. The Fed basically has two big tools. They can change interest rates, which, when interest rates are basically already zero, that obviously is a pretty limited tool to begin with. And that kind of limits them to QE.

So I've been saying for a long time that the Fed's main tool going forward is going to be QE. And if you're of my opinion, that QE is basically just an asset swap that really changes checking accounts to savings accounts basically, well, at a household level, that doesn't really do much. And so here's the kicker with this: the Fed is legally limited in what it can purchase. And that's why I say that it's always just an asset swap. Because the Federal Reserve can only go out and buy government-guaranteed assets. They're limited by Congress with what they can do. And so they have to go in and they have to buy either mortgage-backed securities or Treasury bonds basically.

And this would all be very different if the Fed was able to say – the example that I always use is bags of dirt. If you could offer a bag of dirt to the Federal Reserve for say $1,000 – you just go out in your backyard and you fill a bag of dirt with say a gallon of dirt or whatever, or a pound of dirt or whatever, and you take it to the Federal Reserve and they offer you $1,000 for it or something like that, that's not an asset swap. That is an absolute printing of money in the purest sense, in the sense that everybody kind of I think generally uses the term.

Whereas when they print a reserve and they buy a Treasury bond, what they're basically doing is, yeah, they're technically printing money in the sense that they're printing a reserve, but they're then swapping it with a T bond and they're essentially retiring the T bond onto their balance sheet for however long until it matures. Because the Fed's not a shopper at Walmart. So even though their balance sheet expands, they're not taking that balance sheet and going out and leveraging it at Walmart and competing for goods and services. So when they leverage their balance sheet, yeah, technically they put cash into the private-sector economy. But they take T bonds out of the private-sector economy. And so it's a clean asset swap.

And so when it comes to the operational realities, the Fed I think just doesn't have the tools to cause a really high inflation. I mean, this isn't like the Argentinian Central Bank or the Weimar Republic or something like that where these guys literally at points would break out briefcases of paper dollars and just throw them on the ground in the same way that I just described the bags-of-dirt example. The Fed can't do that. The Fed legally is not allowed to do that. And so I think it's very difficult for the Federal Reserve to cause the type of inflation that they're typically either accused of causing or that they even might want to cause.

Dan Ferris:                 So even if they want to, they're legally prevented from doing so.

Cullen Roche:             Pretty much. Congress has pretty much tied their hands in a way that makes it very difficult for the Federal Reserve to cause a – there's a lot of theory behind what I'm saying. A lot of people would argue that – Paul Krugman famously said that a central bank that tries hard enough to be "credibly irresponsible," I think was the quote from him, could cause inflation no matter what. And a lot of that is based on I think sort of inaccurate or false theorizing about: if the Fed can kind of  communicate that they want high inflation – a lot of monitors call it a Chuck Norris effect. Chuck Norris doesn't have to punch you in the face; Chuck Norris just has to threaten to punch you in the face basically, and that's enough to make you back off basically.

And I've always described the Fed more as Bruce Lee. The famous Bruce Lee quote is: "Willing is not enough. You must do." And the Fed doesn't have the tools to do. You can't will the market into a high inflation. I just don't think the average person even knows basically what the Federal Reserve is, to be honest. So if the Fed goes out on their megaphone and starts screaming that they're going to cause high inflation, it doesn't actually filter through to a transmission mechanism. And that's ultimately what it comes down to. You need a transmission mechanism to actually punch people in the face and cause that high inflation response. And the Fed – they really – operationally, they don't have the tools to achieve what a lot of people think they can achieve in the United States.

Dan Ferris:                 So it sounds to me like all the hand wringing we hear about this is the result of – would be – correct me if I'm wrong: in your opinion, it's just a result of ignorance about how the Fed really operates and what it's really legally limited to do.

Cullen Roche:             That's my opinion. A lot of people – I've spent a lot of the last 10 years trying to prove to people that I'm not ignorant about all this.

Dan Ferris:                 I can imagine [laughs].

Cullen Roche:             [Laughs]. So, yeah, in essence, I would argue that the majority of people – even I would say the majority of economists – have misunderstood how the Federal Reserve operates and what their tools really are at their disposal. I think the last 10 years have somewhat vindicated my view. But I think the likelihood is that the next 10 years will likely continue to vindicate it. Because I think that when the Fed responds – if we have another recession, the Fed is going to respond by basically doing something very similar. They'll cut rates to 0%and then they'll blow up their balance sheet again. And I think that they go – their balance sheet is, what, $4.5 or $5 trillion right now, something like that? If they blow it up to $10 trillion, again, it's more asset swapping.

And I just don't think that that's going to really cause a lot of different stuff to go on in the economy. I'm not even a big believer in the idea that it causes a lot of asset-price inflation. I think that the markets are more fundamentally based than that sort of view. The stock market is going to do what – they're going to respond to how corporate profits respond more so than what the Federal Reserve is doing. And so I don't even think central banks can influence asset prices to the degree that a lot of people tend to think. That one is probably – arguably I get called ignorant about that a lot more often than I do about the inflation, the broader inflation prediction that I make. But, yeah, I basically think that the Fed is a big wimp when compared to the stature it is generally described as having in the mainstream media, and even economic textbooks.

Dan Ferris:                 Wow. So, we're actually coming to the end of our time. And I usually ask folks, "What would you leave our listener with if you could leave them with one thought?" But can you top that? Because you've outlined a fairly controversial viewpoint here. If you could top it, Cullen, go for it [laughs].

Cullen Roche:             Oh man. I probably can't top that. That's been by far my most controversial opinion for probably a decade running here. Yeah. At the end of the day, I don't have a real – I wish I had something really sexy to say. I wish that I thought the economy was going to crash or that there was a big stock market bubble or that the bond market was a great big bubble that was going to cause some sort of traumatic 50% decline in people's portfolios or something. And, as much as I try to look – I mean, I spend all my time looking for risks, big asymmetric risks in the economy. And I just don't see something really substantial out there. I kind of like to think of the U.S. economy as being a boxer who got knocked on his butt in 2008 and has got a hand on the ropes and one knee up, and that's where we are. And if we fall down again, falling from one knee is not as traumatic as falling from your feet.

So at the same time, where we're growing really slowly, there's not as much space to fall. And so I think people are going to be underwhelmed with the next recession. I think it's probably going to be a pretty mild one in nature. It might be longer than people are used to. But, yeah, I just don't have a really extreme view in one way or the other in terms of what the economy or the financial markets are going to do. So I just don't have a really – I wish I had something really fun and sexy to say about the stock and bond markets. But I think it's going to be kind of a slow, boring grind for potentially five or 10 years.

Dan Ferris:                 Hey, man, that's cool. You're probably going to tick enough people off with that Fed thing. So I think we're good [laughs].

Cullen Roche:             Good. Well, the e-mail is [email protected] Or I would prefer you e-mail Dan. Because Dan is really the cause of this conversation. So you should write him and express your disfavor with him before you reach out to me.

Dan Ferris:                 [Laughs]. Thanks. So, you know, we'll definitely have to have you back on and see how all of this played out in a year or two or three or however long it takes us to get you back in here.

Cullen Roche:             Great. Well, we'll find out how wrong I was [laughs].

Dan Ferris:                 [Laughs]. Well, so far so good, right? All right, Cullen. Thanks for joining us. I really appreciate it. And we will talk to you soon. And I encourage all our listeners to kind of search you out on Twitter and other places and find out what you have to say. Thanks a lot.

Cullen Roche:             Thanks, Dan. Good luck to everybody out there. It's going to probably be pretty tough.

Dan Ferris:                 All right. Thanks a lot. Bye-bye.

Cullen Roche:             All right. Thanks, Dan. Bye.

[Music plays]

Dan Ferris:                 It's time for the mailbag, folks. This is your chance to sort of talk to me after I've been talking to you. And if you write in to [email protected] with any questions or comments or politely-worded criticisms, I promise you I will read them.

So this week the first one that I want to get to is from Malcolm M. from down under. And Malcolm says, "Hi, Dan. Greetings from Australia. Love the podcast." And then he says, "Many Australians love juicy dividends. We are incentivized to love dividends due to" – I don't know this word – "franking tax credits." Maybe he misspelled something. "Due to franking tax credits, which follow most Australian shareholders and other holding entities. Superannuated retirees usually get the credits back in cash from the taxation office. Just as well as the standard company tax rate is a hefty 30%. My usual modus operandi is to start with shares with a gross yield of 8%. Many large, well-established companies fit this mold if you are patient. Double-digit yields are not impossible." Wow.

"Perhaps I should mention that the current Australian share market high is similar to that in 2007. So much for capital gains. I actually consider that dividends lead to efficient capital allocation. A company with a steady long-term flow of dividends is also much less likely to be dodgy. Besides Australia, could you tell me what you think about Brexiting British or protesting Hong Kong markets? With thanks, Malcolm from down under. P.S.: I did try a U.S. master limited partnership but there's a heavy taxation on foreigners from the U.S. end. P.S.S.: I like your opinions about toxic waste." So that's Malcolm M.

And I just have to say: this e-mail is so unusual because I don't really know anything about Australia taxes and dividends and stuff. And I'm just curious to hear from an actual Australian about it. Because I'll tell you something: when you see a gross dividend yield of 8% in the United States in September in the year 2019, you run [laughs]. You run fast. Because it usually means something is very very wrong. Because dividend yields are so stinking low in the U.S.. The fact that you can find success – and then Malcolm M. says double-digit yields are not impossible. They pretty much are impossible here. Because if you see them, you know the company is about to cut the freaking dividend. Thank you, Malcolm.

I don't have a big opinion on Brexit or even the Hong Kong markets. Although that is going on for a long time. And there was a – seemed like a leaked recording of I forget what they call her, the president of Hong Kong, talking about how difficult the whole situation was. And she didn't think China was ready to invade it with the military or anything like that. But in the case of Hong Kong, I have no sense for how long this will go on. They seem pretty upset. There has always been the question, ever since they were handed back over from Britain to Hong Kong, what would the Chinese do? Right? What will the Chinese do with it?

And so, for a long time now, nothing. They just kind of leave it alone and let it be. Because otherwise, if they try to turn it into their capitalist, communist, or whatever it is – whatever you want to call whatever China is – communist, capitalist; I don't know what you want to call it. But if they try to turn Hong Kong into the rest of China, they might really wreck it. So they just leave it alone. But now, just this one little change they want to make to extradite folks back to the mainland has caused this enormous upheaval, what looks like enormous upheaval from where I stand anyway. I haven't been to Asia since this begun. And it's really not clear to me, just from where I sit in my perch thousands of miles away, how long a thing like this could go on, or whether or not China will step in. So it's a giant question mark in my mind. And, fortunately, I don't believe I'm directly exposed to it in any way [laughs].

And as far as Brexit is concerned, I have always wondered – look, the UK needs to trade with – we all need to trade. All these developed countries need to trade. So I don't know what it will mean for trade going forward. So far, we've been led to believe by some that it will be a total disaster. I think the British pound has suffered because of this belief. And who knows? Maybe it's time to buy the British pound. I think it's 30% off the highs or some huge unbelievable amount. And I can have that wrong by – it could be 3%. Either one would be a big move. But I believe I saw someone post 35%, which is huge. And so is it time to buy assets in the UK? It could be. Thank you, Malcolm M.

So, here's one from Jeff D. Jeff D. says, "Dan, love the show. Your rants are great and your guests entertaining. I've grown to really align with your thinking and have read many of your book recommendations. I've always wondered how you or Doc, Steve, Porter allocate your personal portfolios or, broader, your net worth. I know you cannot provide personal specifics or any investment advice other than that provided in Extreme Value. But, if at all possible, can you provide any generic insight as to what you're personally doing as we sit atop this bubble? I know allocations of net worth change over time and are somewhat age-specific.

"But just a simple glimpse as to how someone like you – I'm a decade older than you – has allocations over" – and then he lists these asset classes – "cash, CDs, Treasuries, precious metals, equities, bonds, real estate outside equities, other, collectibles, nontraditional. Doc," meaning Doc Eifrig at Stansberry, "has provided net-worth allocation guidelines to his subscribers that I have been following. But I like your thoughts and investment style. Just curious, Dan. Not being nosy. I fully understand if you choose or cannot provide any high-level insight. Greatly appreciated, Jeff D."

So, Jeff D., I did this mailbag item of yours because I didn't want to say nothing. I don't want to say too much because I value my privacy, right? My biggest equity position – if you read my newsletter, you know I'm really big into these – I have three precious metals or commodity-related stocks that are either – two of them are royalty companies and one of them is royalty-like. And I've said in public many times that if – in one case I said, "If you forced me to, I'd put all of my money into just that one." Nobody's going to force me to so I don't have to do it.

But my largest equity position is a smaller, less liquid – it's so small and less liquid that I could never write about it in the newsletter because the price would be up tenfold in five minutes. It would be stupid. But it is a smaller, less liquid, but I think really good-quality precious-metals-based royalty company and prospect generator, similar to the one – we talked about Altius Minerals on the program. It's different than them but generically similar. So that's my biggest equity position. I own zero bonds. I do have a tiny position in long-dated, out of-the-money puts on junk bond ETFs. Precious metals.

I actually own very little gold at this point. I mostly own silver because I made a decision – I'm like 60 years old. Or I'm actually 57. I'll be 58 soon. So, to me, generically, I'm in the 60-year-old category of life and am thinking about things in that way. And it takes years to think about these things if you're me. So, anyway, in my sixth decade, let's say, I made the decision – I thought, "You know something? I can tolerate a bit more risk and I don't think I'm going to need to buy groceries with gold coins. But if I do need to buy them, I bet they'll take silver coins, and I think there's probably more upside in silver. Because there usually is in a big runup. So I'm going to hang onto my silver." And I exchanged some of my gold coins, actually quite a bit of them, for equities, gold equities. Mostly a bigger position in that company I just mentioned.

And that's a personal decision. I think I tolerate risk – a lot more risk than most people. I don't own real estate outside of equities. I don't own collectibles. A lot of people – you talk to Porter and these guys: they love real estate. I'm not as big a fan because I don't want – you have to be involved in the management of it somehow, even if it's paying someone to do it.

And I also live in the West. And we had some friends stop by and spend the night with us. They were driving up the coast and they spent the night with us. Must've been Saturday night I guess. And they were talking about all their real estate properties in Southern California. And they said, "Well, we had to do this and we had to do that and we had to do this and we had to do that." They were talking about maintaining and upgrading. And they have a management company that takes care of it. And of course you pay a management company I think it's like 20, 25%. You pay them quite a bit. And came out of the conversion: "Well, we don't actually make a profit. We don't actually make money on these." And that's been the case.

My wife and I went around – we lived in Southern Oregon at the time but it was 2008 or '09 or so, and we were like, "Well, we got cash. And nobody has cash. There's have to be some cheap property." And we looked and looked and looked. And even then, even then to buy for cash, it was tough to find rental homes that you could make a decent amount of income on. And I thought, "Man, this sucks." And I think it's just that way in the West with a lot of rental property. I know people who own dozens and dozens and dozens of them and don't make $100,000 a year in rents. It's just crazy to me. So, you know, I want a big fat yield on the thing, period. So I don't do it.

And that's about all I need to share. I do have plenty of cash right now. Although less. I buy out of-the-money puts on big indexes and I've added to some of that recently and then taken some of it off and added back. It's fairly active based on what's happening in the stock market. So that's all I'm willing to share. Again, this is what I'm doing. And it's not necessarily what you're doing. And one of the reasons I took your question here, Jeff, is that what I'm doing is appropriate, I feel, for me. And I have to decide that. But you need – and I realize you're just getting ideas. I'm not accusing you of anything. But I just want to underscore the point that you need to decide what's right for you. Right? Your asset allocation – it's such a personal thing. And I don't think there's a generic version of it.

I'm not saying Doc Eifrig can't shed a lot of light on this by giving people a basic framework. But, within that, there's probably a lot of leeway to do things different. But it's a good question. And thank you very much for it.

Let me just do one more of these. David Z. writes in, and David Z. says, "I fear lack of liquidity as a small investor with no computer algorithms to protect me. I want to let my winners run so I expect to sell past the top just like I only buy after an issue trends up so I am not catching a falling knife. You suggest trailing stops are protective when used properly but since I keep my stops offline, how can I execute a trailing stop based on the issue's normal volatility?" And then he says, "For example, TradeStops. Fast enough to avoid the big falls that can occur when the large investors bail out while I am at my day job. Is there a version of a trailing stop that accounts for decreasing liquidity that would trigger sooner than it would otherwise? Thanks, David Z."

David Z., thank you for the question. I don't know if there is. But if you're at your day job – and I'm guessing here. Obviously this can't be individual advice because I know nothing about you. And I'm guessing. But you're suggesting that while you're at your day job maybe a stop occurs and you get off work after the market closes so what do you do about it? Well, the way I do trailing stops anyway, and suggest that they be done, are by closing prices anyway. So I'm never finding out about a trailing stop until after the market closes anyway. So I'm not really sure. You sound like you're doing something a little different here from what I recommend people do, and, if I'm not very much mistaken, what has been consistently recommended by Stansberry editors ever since Steve Sjuggerud figured this out 20 or 25 years ago and started telling the whole world about it, using trailing stops.

So I just want to caution you against using intraday – or not against, but just question: why are you using intraday prices on trailing stops? I mean, is that some quirky feature of TradeStops that I haven't seen yet? I don't know. But that's my question for you and that's what I have to say about anybody else who might ask about this, OK?

That's it for this week, that's it for the mailbag, and that's it for this episode of the Stansberry Investor Hour. It's my privilege to come to you every week, including this week and next week and all the other weeks. Look, all of our episodes – you can see every single episode and get a transcript of every single episode at our website, I think this is pretty cool. I mean, maybe it's pretty normal but I think it's pretty cool. So you can see any show you want. You can just go there and browse through and see any show you want, any interview you want to listen to that we've done. And you can enter your e-mail there and get updates on all the episodes. So, you know, check it out: And I will definitely talk to you next week. Thank you so much. Bye-bye.

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