Hari Ramachandra  5:56  

I agree with him. Many Silicon Valley entrepreneurs, including Peter Thiel, whom we have talked about in the past, and Reid Hoffman, the founder of LinkedIn, they all talk about a minimum viable product to go with first. In fact, Reid Hoffman has once said in an interview, that if you’re not embarrassed when you release your first version, you’re already too late to the market.

Preston Pysh  6:24  

So, I like the example they used in the book with this one. So, he was talking about a hamburger stand. He said, you know, at the end of the day, if you have a very focused product, your hamburger is going to be the best hamburger out there. So, if you’re in the United States, five guys kind of comes to mind for me. When you go in their restaurant, the things that they hang on the wall are these cardboard cutouts. It’s almost embarrassing how minimal that restaurant is. But the one thing that they do get right is that the hamburger is very good. I mean, if compared to McDonald’s or something else like that, there’s no comparison. 

And I think that the heart of what these guys are getting at in the book is, if you’re starting a new business, and your business is a hamburger stand, your total focus and all your effort needs to be on: “Is the hamburger good?” And I think they actually use a hotdog stand in the book. It’s been probably a month or two, since I read this. 

So, they talked about how the hotdog has to be fantastic. The condiments and everything else that you put on it, whatever, those are all secondary to the main product that you’re trying to launch. And that laser focus on the product itself needs to be the essence of what it is that you’re putting all your time and effort into because if you get that right, everything else is going to fall into place.

Hari Ramachandra  7:41  

Preston, you kind of made a very good segue into what I was planning to highlight as one of the key takeaway for me from this book, and that is focus. You’re absolutely right. In fact, many companies fail because they try to do too many things at the same time. Jeff Weiner, who is the CEO of LinkedIn, where I work often tells the employers to focus and to do few things really well. And one of the points that the authors make in this book is that, if you don’t focus on the most important customer needs, and if you try to create a product that is trying to be good for everyone, you end up pleasing no one.

Preston Pysh  8:25  

Hey, so it’s funny because there was a book and I’ve read this book a long time ago. In fact, I don’t even know which one it is. I think, it might have been the snowball that this conversation took place. And they talk about this discussion whenever Warren Buffett and Bill Gates first met each other, I guess, Warren Buffett came out to Bill Gates’s house. Bill Gates had his parents there. Bill Gates, his father posed the question to Warren Buffett and Bill Gates who had just met for the first time. 

He said, “What one thing, if you had to narrow down the one thing, that has led to all of your success for both of you two, what would it be?” I believe that Warren Buffett went first. Warren Buffett said that his focus was the main reason for his success because he was able to continually focus on the same thing and he became an expert and what that was. And so then, Bill Gates’ father looked at Bill, and said, “Well, what do you think it is?” And Bill Gates said, “Well, I think it’s the same thing. I think it’s focus.” 

He says, I focused on programming and  developing this software that was revolutionary. And because I focused on it so much, I was able to grow my business into what it is. So, I find it very ironic that two people, I mean, the list kind of changes, but really, the two wealthiest people in the world are saying that focus was the number one thing that led to their success. So I just want to piggyback off of that because that was a story I remember from a long time ago.

Stig Brodersen  9:51  

One thing in Rework that’s really related to this is women talking about working long hours. Now, when you read Rework, I would highly recommend that you do, you might also get the impression that the authors, they had this rant against corporate America. I don’t know if that’s why they created their own company. But I think that they have quite a few good points because they’re saying that it’s almost like an honorable title to be called a workaholic in corporate America. And what they’re saying instead is that, they would never hire people who cannot finish their jobs in 40 hours a week. That just means the very inefficient. 

Preston Pysh  10:29  

I love that point. I’m serious. I absolutely love that point. Go ahead, Hari.

Hari Ramachandra 10:33  

Yeah, I really like that point, Stig. Thanks for bringing that up. In fact, one of the famous entrepreneurs in India, his name is Narayan Murthy, he started this company called Infosys which is a famous outsourcing company. He once had sent an email to all his employers saying, if you’re working after six in the evening, you’re a liability to the company. And he’s reasoning was, if you’re working late, that means: one, you’re not managing your time well. That means you’re not a good employee; two, you might be stressed out, and you’re prone to making more mistakes which might cost the company.

Preston Pysh  11:14  

You know, as a manager and as a leader, as soon as I would see somebody that’s working way over the amount of hours that they should be working, you have a human capital allocation issue. You have a guy who’s taking on way too much responsibility, and you probably have other people that are sitting on their hands for half their day, and working for hours, even though they’re sitting at the seat for eight. I’d be going straight to the manager looking at him saying, “Why is this person here after hours and working so hard?” 

Either you’re not allocating the hours appropriately, or this person is extremely inefficient. So, that’s just a different way of looking at it. And I love how he debunks this in the book. In America, if you’re staying after hours, and you’re working real hard like that, it’s looked at as being a good thing. But it’s really a display of inefficiency either on the managers part or on the employees part. So, fantastic point, Stig. Go ahead. Do you have another one?

Stig Brodersen  12:11  

Yeah, I have a thing that I really disagree with. And that’s always, that’s always interesting. And it might be because it’s taken out of context. It might be because I have another approach to things, than the authors, or might just be that I’m not as original. But what he is saying, you cannot copy other people. You need to be very innovative. You need not be necessarily the first mover, but you have to think out of the box. And this is an argument I very often hear. And it’s not like I don’t buy the argument. It’s not like I don’t understand the argument. 

But I think, another approach, and this is an approach that one is probably right, which he talked a lot about. He’s saying that you can just copy the best people. If you met the best people in the world, so in this situation, it would be Warren Buffett, for instance. If you copy what Warren Buffett is doing, well basically, even though he might not be able to do it exactly as good as Warren Buffett, getting close is actually really, really good. 

This really takes me to think of something that if you do the same thing as everybody else, you end up with the same thing as everyone else. But if you do the same thing as successful people, you end up with success. I know that this might seem like a very reactive way of looking at things, but I just think that this is a very philosophical point to bring up and Hari, I could see that right away that you have something to say about that.

Hari Ramachandra 13:37  

Yes, I do. As always, I know that whenever you disagree, there is some learning. In fact, this was a point when I was reading this book, I still remember, I just paused for a while because the same part came to my mind, that is Mohnish Pabrai. And Pabrai calls it cloning. But he talks about the advantages of cloning. In fact, in a lunch with Charlie Munger, he asked him, “What are good investments?”. Munger, in a flash said, “Cloners, cannibals, and spin offs.”. Mungers reasoning behind it was, the early movers usually who don’t end up winning are taking away the value out of a market segment they created. However, I was trying to put some context into this particular comment in the book. And my part is that the authors are talking in the context of small niche entrepreneurs. The niche entrepreneurs are the small time entrepreneurs. They’re also called micro entrepreneurs. 

They don’t usually have the resources or to scale to go after established markets. And they don’t want to attract any big company. To put it in another way, they don’t want to get into segments where big guys can put in a lot of money, clone them, and just dry them out of the market. In that context, I believe, copying or cloning doesn’t work for product creation for small entrepreneurs. They need to figure out a niche that they can sell. 

As Pat would put it, Pat Flynn who we interviewed in one of the previous sessions, if you’re working on a niche that cannot be served by a magazine, where you can place an adverts at $200 to $300, then it’s too big. Because you will be overshadowed by big guys. I think that’s the context. 

Preston Pysh  15:41  

Yeah, and I agree with Hari as far as the context of their comments in the book. But you know, Stig, I thought the same thing whenever I was reading it. Well, I don’t necessarily agree with that because there’s a lot of things that I try to clone after people, or businesses, or ideas that I’ve seen that are successful. I think that it works out really well because you don’t have to reinvent the wheel here. You’re not trying to troubleshoot. You know it works. You can see what works. 

And I really think at the end of the day, my personal opinion is that a balance between: you’ve got to be creative and you’ve got to come up with new ideas, or else you’re going to be left in the dust; and you have to be dynamic too. 

But at the same time, if there is a proven path that works, you need to start there as your starting point and grow it, mold it, and develop it from there on. And I think that that’s kind of how I took it. I had the same opinion as you whenever I read it, Stig. I thought it was a little extreme and maybe a little overdone. But the one point that I wanted to highlight in the book was this idea of having a master plan. 

I really like this because I am a hardcore believer that you’ve got to have the roadmap and you’ve got to have the plan. And if you remember back when we talked about the Peter Thiel book, he was a huge proponent of having the roadmap of how you’re going to get from where you’re at right now to what it is that you’re trying to accomplish later on. 

But I think the authors of this book, because they were not for having this master plan, they were more for, ‘if you have an idea, go after it and be dynamic’ and ‘Where it takes you, run with it’, really, was kind of their plan. And again, I think that there’s a balance between those. I think that you’ve got to have the mission statement of, Hey, this is what I want to try to accomplish. How am I going to do that? I really don’t know. But this is my end state of where I want to be. And I think that you just start off with a template of what you think is going to work. And I do agree with the authors that you don’t want to get so detailed. I think a lot of people come up with their roadmap and their plan, and it’s so detailed. 

And they don’t have any flexibility, that they’re so rigid that they’re just like a robot and they just kind of fall over and place because they’re so drawn to the plan, but they can’t see how they can be dynamic and move with the current of opportunity and different things that present themselves. So again, I think it’s a balancing act that you got to have kind of both. And you’ve got to know, when is it time to deviate from the plan and when is it time to stick to the plan. Go ahead, Hari.

Hari Ramachandra  18:10  

Preston, that’s a very good point. In fact, I feel Charlie Munger would agree with the author’s. In an interview he said, “At Berkshire, we never have master plans.”. And when I asked why, he said, “One of the psychological factors that play in when you have a master plan is consistency and commitment by us.”. Once you make a master plan, you’re committed to it. You have shared that with your employees and your board of directors. And if you have to make changes to that, then you appear to be a loser or like somebody who didn’t really plan out things well. So then you stick to it at the detriment of your company’s future prospects.

Preston Pysh  18:55  

Alright, Stig, do you have any other points? Hari, do you have any other ones you want to throw out there? Let’s do one more and then we’ll move on to the second part of the episode.

Hari Ramachandra 19:02  

Sure. One last point that I wanted to highlight from this book is, we learn more from our success than failures. And this to me was a counter intuitive point because most books talk about failing fast. And,  I got…

Preston Pysh  19:23  

I got that one down.

Hari Ramachandra  19:26  

I was about  to say that, you know. I got that one down. I’m alive example. I followed it for a couple of years. I just fail fast. Well, nothing happens when we keep doing the same thing. I think Einstein might have said this, that trying to do the same thing over and over again is insanity. But the problem with learning from your failures is you will learn anti patterns. That is, you learn what not to do. But that will not take you anywhere until you learn what to do. 

Stig Brodersen  19:59  

And I think that’s a great point, Hari. And that comes to think about the book Outliers by Gladwell that we’re talking about last time, the last book we had. He was saying that he was using these hockey players and I don’t want to go into depth with the example. But he was saying that, if you were a hockey player, and you were born in the first three months of the year, you have more success. 

He says, you have more success because you are bigger, stronger. Therefore, you get selected for the best team, get a better coaching, get better teammates. I don’t know if the way of thinking is the same that if you’re successful in the business, it was very often, [you] find good people to work with, [the] more qualified people will try to connect with you, and that will just give you even more success and let the snowball rolling. 

I’ve heard the same thing, read the same books about failures, and yes, I also cut that one down. But I just thought that this other approach was really interesting from a very philosophical point of view, Preston.

Preston Pysh  20:51  

Yeah. II totally agree with the point that if you’re going to be successful time and time again, you have to know what success looks like in order to implement it, continually. I’m of the opinion, and I know Stig has the same opinion that the best way probably to do that is find out who’s the best at whatever it is you’re trying to understand how to do. Tony Robbins is huge on this. He goes out and he seeks the person who’s the best at it. He studies their critical variables of what it is that has made them successful. And then it’s just copy and repeat. 

And so ,that’s kind of taken this quote, or this idea that Hari mentions that, you can fail and you can keep on failing. But if you really never know what it is that you’ve got to do to be successful, you’re going to continue to fail. And there’s so many people out there that have failed business after failed business after failed business. And I think that if they would take the approach of who is going to be the person that I try to model, or who’s the best at this line of business, let me study them, understand why they are, and let me go that route. I think that’s how you can maybe take that idea and kind of run with it. Hari, you have a follow-up, go ahead.

Hari Ramachandra  21:59  

I have worked with serial entrepreneurs in my career in Silicon Valley. And I could really see the positive feedback loop that Stig was talking about, in action. These guys have succeeded in one startup. They have the capital. And more importantly, they have the connections with the VCs that are the trust of the VCs. And that really works for them when they start their second venture. I have rarely seen a serial entrepreneur fail in their second, third, or fourth venture because the snowball is just rolling for them.

Preston Pysh  22:36  

All right. Well, hey, let’s go to the second segment here. This is going to be a really fun discussion because if you’ve been on our forum, or you have seen some of the videos that we’ve been posting lately, where there’s a lot of talk that we’ve been throwing out there about this world deleveraging situation where interest rates have been at near zero for eight years, we’re getting the jitters and we’re just trying to talk about it and figure it out for ourselves, to be quite honest with you. 

And so Stig sent Hari, myself, and a couple others, this email a couple days ago of this discussion that they had at the World Economic Forum in Davos, Switzerland. And so, what we’re going to do is we’re going to play the comments. And we are really excited because Ray Dalio, who we track very closely, his net worth is $16 billion, and he’s the founder and manager at Bridgewater Associates which is the largest hedge fund in the entire world. 

And in addition to Ray, there was another gentleman by the name of Larry Summers. And Larry is a professor and former president of Harvard University. He also served as the 71st Secretary of the Treasury for President Clinton, and he was also the Director of the National Economic Council for President Obama. So this guy, whenever you hear him talk, you’re going to see how bright he is. And I think he’s somebody else that we’re trying to get to come on the show. I know that that’s probably a very lofty goal. 

But if you’re listening to this and you want to send a Larry Summers who is at Harvard University a message and tell him that he needs to come on The Investor’s Podcast, we will not tell you to hold that email back. So, Larry, if you’re listening, I’m sure you aren’t, we’d like to have you on the show. So let’s go ahead and play these comments we have from Davis. We’re going to start off with a comment from Ray Dalio. And then, we’ll just have a general discussion, afterwards. And then, we’ll play Larry’s comment and we’ll have another discussion. So here’s Ray Dalio, his comments.

Hari Ramachandra  24:33  

Just to be clear, I think the US is in a good place. I think, there’s the US and there’s the world. And I think they’re in different places, generally speaking. It’s just mechanistic when there’s no ability to change interest rates, particularly when there’s no ability to lower interest rates and have a transmission mechanism monetary policy. 

To ease is in a bad place. We don’t have an ability to ease, if we needed to ease. The two reasons the United States is in a good place is partially because of the quantitative easing that it did 25% of GDP was in quantitative easing, 3.8 billion, $3.8 trillion, 26% was in the UK. In Japan, it’s been 36% of GDP. 

In Europe, it’s been 3% of GDP. When you’re in a situation in which credit does not work the same way as it did before, we cannot have debt growth the way that we had before. We can’t look at debt growth the way we looked at it before. The interest rates to bring it down, debt service payments can’t decline. 

So, let’s not look to debt growth as the solution. That means that you can spend with either debt or you can spend with money. That means money is more important. That’s why when we see set transactions the way we see this ECB policy.

It needs to have more money into the system. Money can produce more purchases. It also means that when the two levers are interest rates and currency, it means when interest rate lever doesn’t work, currency lever becomes more effective. So, we necessarily must see more volatility in currencies. 

We must see a depreciation further in the Europe. We not see a depreciation further in the *inaudible*. The average cost of the MMSD structural reforms–structural reforms are important. The average cost of a Southern European after adjusting a person worker, after adjusting for the amount of time that they work, and vacation time, the work week, the retirement age, is about twice what it is in an American worker. So it’s expensive. Either that is going to have to lead to structural reforms in the form of changing to make that more efficient. 

There’s a lot of potential in Europe to make things more efficient and more economic. But the currency depreciation is going to have to be a part of it. And it’s the conversation that is not go like that. In other words, we could talk about changing interest rates but policymakers can talk about changing the exchange rate. And so, the currency will be a bigger influence in the years ahead. This will produce a dynamic, because the world has a lot of dollar denominated debt. 

That means that because there’s a lot of dollar denominated debt, there’s a lot of promises to deliver dollars that are becoming more expensive for various entities. So there’s a short squeeze emerging in the dollar. Very similar to 1980-1985.

Of course, the period today is very similar to ‘80 to ‘85 in that, there’s falling commodity prices, there’s falling oil prices, there’s a relatively strong economy with falling inflation. Back then, we could lower interest rates. We cannot lower interest rates now, so it’s a similar dynamic in terms of those deflationary pressures. 

I agree with Larry in that you have to wait to see the whites of the eyes of inflation. In 1980, if we didn’t lower interest rates, even though growth was strong, we would have had a disaster situation. It’s somewhat analogous to that now, I think.

Preston Pysh  28:26  

All right. So the first thing that I want to just talk about which was highlighted at the very start of Ray’s discussion was, we’re in a different situation now because we can’t lower interest rates any lower. When you look back to the 2000 crash, the yield curves back then, I want to say off of the top of my head, they were flat at around 5% or 6%. 

Even in 2008, the yield curve was pretty flat at about 5%. Where we’re at right now, it’s starting to go flat, but it’s still like 2%. So that’s a major issue. The other highlight that I wanted to just talk about that I found really interesting in his comments there, actually I have two points real fast, is the one that he says, it’s pretty much the only thing that we can do now. Credit isn’t going to work like it used to. So that means, we have to do something with currency, which means we’ve got to add more dollars to the monetary baseline. That’s what he’s saying there. That’s pretty much the way out of this for Europe. 

And I think he threw out the figure 3% was all the more to their GDP, of how many dollars they added to their monetary baseline. Whereas, the US was in excess of 25%. So that’s a big difference. That’s why I think you have seen such a change. 

This is the other interesting point is that whenever the US did that, when they added all these extra dollars to their monetary baseline, what they did is they weaken the dollar. I remember back in 2008 2009, there were tons of people from Europe and all around the world coming to the US because the dollar was so weak at that point. 

Now, what you’re seeing is the exact opposite. And it’s amazing how these things go in cycles. So you’re seeing the exact opposite.–the dollar is really strong right now. And what’s happening, that’s bad for the US because you’re not having these foreign investors in these foreign currencies coming into the country anymore because the dollar is strengthened. And you’re seeing the exact opposite flow in the opposite direction because now the Euro is really weak. 

And now, you’ll probably see a bunch of Americans start going on vacation over to Europe and things like that. So that strengthens it in the short term. But overall, I think Europe’s in a very tricky situation. But I want to throw it over to Stig and Hari and see if they have any comments on Ray’s talk there.

Stig Brodersen  30:39  

Yeah, so I have a few comments. But first, I’d like to piggyback off what you were saying before, Preston, about the currencies because I think that what we’re seeing right now is really interesting. Right now, they’re sending something like 60 billion euros a month out in the system. So I mean, things are really happening right now. And what is really interesting, as Preston was also talking about, is that it might sound counterintuitive that it’s really good to have a weak currency, but very often countries would like to have a weak currency because that makes it better to export. 

And in crisis like we’re seeing right now, we’re really relying a lot on export. So, we would have a very good incentive to have very cheap products because cheap products means that more people are buying them. And if we are looking at, this is definitely not something as I’m saying that we are, but if we are to be looking at a situation where you will see the Euro, or America, Yen in Japan, are competing to differentiate their own currency with money supply, then we really heading for trouble.

Hari Ramachandra  31:48  

Preston and Stig, I really like the way you described the cycle. Starting 2008, when dollar was really weakening and now, the cycle has reversed and dollar is stronger. And one of the points that you made was also very interesting. Historically, whenever a currency is stronger, their labor costs are higher and hence their products are more expensive…

Preston Pysh  32:14  

Japan. Look at Japan, perfect example.

Ray Dalio  32:17  

Exactly. And that kind of you know, plays against them and eventually no one wants to weaken their currency, they become more kind of more in advantageous situation to export their goods. India is a classic case. Whenever Indian currency weakens, the rest of the economy suffers. But the export industries, including the software outsourcing industry, does very well.

Preston Pysh  32:41  

Something that I want to say, because a lot of people are reading the gloom and doom and how we’re talking about how we’re so over leveraged, and there’s no room for interest rates to go but down. And I just want to highlight, it’s very important to understand that when you’re talking about macroeconomics, it’s very relative. 

So when you look at the world economy and I’m just going to kind of talk about the 80% here, and that’s really China, Japan, Europe, and US, those are really the big heavy hitters that are involved in the world economy here. And what you find is, in this current situation where we’re at right now, the US is actually sitting, believe it or not, in a better situation than China, Japan, and Europe. 

And so if that’s the case, I think that there’s a chance that during the next crash, whenever that would be, if anybody tells you that they know when it’s going to happen, run the other way. We think that it could potentially happen in the next few years. But at the end of the day, we really do not know for sure when it’s going to happen. 

But I will say that I think that going into this next crash, I think that the US is better prepared than the other major economic players. And that’s a good thing because as the currency is traded amongst these countries, it’s a very relative game even though our debt to GDP is extremely high. I’m not saying that it’s going to be a cakewalk as we go into this next crash. I’m not saying that at all. I’m just saying that of those countries, I think that the US is probably best prepared. 

And I think that when you look at the stress test that they just recently did on us banks, all of them did very well. They performed exceptionally well. And I think that the Fed has been monitoring that extremely close ever since 2008. And you know what, they don’t have a lot of money that they’re lending these days compared to 2008. It is significantly less. I think going into the next crash, the banks are going to be prepared. It’s just a matter of how much the market psychology really weighs in on the real understanding of what’s going on here. Stig, go ahead. I see you have a point.

Stig Brodersen  34:41  

So when Preston is talking about next crash, you might be thinking, is there some kind of news I didn’t hear about? That’s definitely not the situation. But we when we’re talking about the next crash, that is because we are working cycles. You might be hearing this from Ray Dalio, you might be hearing this from other people, but basically, even though you go back to the Bible, we’re talking about cycles. The economy works in cycles. 

So when we’re talking about the next crash, it’s not really because we’re trying to predict anything. It’s just because we know that we will have a crash at some point of time just as well as we will have a boom. I completely agree both with Ray Dalio and Preston. And Preston, it must be really nice to hear someone saying, I agree both with Ray Dalio and Preston. 

Preston Pysh  35:25  

Well, you know why they’re saying that,  it’s because my thoughts are Ray Dalio’s thoughts. They’re not original thoughts by Preston.

Stig Brodersen  35:35  

No, I definitely agree with you when you’re saying that if you look in those four big economies at the EU, US, Japan, and China, then America is probably best prepared for the next crisis. But I might want to regret those words years from now, I don’t know. 

But when I look at those four economies, I would say that America is average-prepared and the other three economies, they’re really poorly prepared. It’s not like I’m saying, I’m looking at the US and thinking they’re in shape at the moment. And what I think is more increasingly interesting is that these four economies are really all interconnected.

So for instance, when you’re hearing about China, they’re just low on their goals for the future growth. Well, the reason for that is because China is such a large exporter. And when things go wrong in the US and things go wrong in Europe, guess what? It hurts China. So yes, if we do look at those four economies, I definitely think the US is in a better state. But it’s really hard to judge just pick them apart because they’re also internet connected.

Preston Pysh  36:43  

Alright, so what I’m going to do now is I’m going to go ahead and play the comment that Larry Summers had during the same exchange. And just so you guys know, there’s a panel of five of the top level people, top economists, top economic thinkers in the world that we’re playing these comments from. 

So this comment is from Larry and he was the gentleman who we were saying that is the professor at Harvard and he worked under the Clinton-Obama administration.

Larry Summers  37:08  

I’m going to stay away from the Swiss. Just beyond observing, that it is a very useful reminder of how much deflationary risks are the main risks that we have to deal with. I think we need to emphasize what I think everyone in this panel is clear on, which is that a strategy of austerity and grudging acceptance of limited monetary accommodation. In the hope that that will be a driver of structural reform has proven itself to be substantially counterproductive, and is instead bringing radicals to the fore in most of the places where it is being applied. 

The situation in Europe is not yet in hand, I agree completely with you that the movements that have taken place in Europe have been desirable. I don’t think that any, and I agree with Christine, that QE has already had a significant impact. But that’s why I’m worried. 

We’ve already had a set of positive developments and the economic forecasts are pretty dismal from here. The kinds of policies we’re seeing are already built into those forecasts. So I don’t think we should make the mistake of supposing that the situation in Europe is at hand. 

I am for structural reform too, but I just want everybody to think about what I find to be one of the most surprising global economic facts when I look at it because It’s quite different from the conventional wisdom. 

Take men between the ages of 25 and 54. I choose that group because there’s a pretty strong expectation in most societies that they’ll all be working. Ask yourself about the non employment rate of men 25 to 54. In the dynamic flexible United States, it is several percentage points higher than its non employment rate than it is in France with all of France’s many, many rigidities. And that tells us something about the human magnitude of the human capital issues that the United States faces.

It tells us something about the consequences because the coming of technology is probably more advanced in the United States. It tells me that we can’t be completely serene–that if we just have flexibilizing and reform all will be well. Which is why I come back to the central importance of demand. And I would suggest, that is a very basic idea that Keynes had, that has largely eluded Europe’s largest economic power. And that is what Keynes called the fallacy of composition, which I would explain this way. 

If anybody in this audience stands up, they will see better. If everyone in this audience stands up, no one will see better, and everyone will be less comfortable. If any one country saves more, or any one bank hoards capital, it will strengthen its position. 

But if all countries save more, there will be less spending, which will mean less income, which will mean, less spending and the situation will not get better. If all banks simultaneously cut back on their lending, the result will be an across-the-board reduction in asset prices, and ironically, they will all end up with less capital, not with more capital, ones that works through. 

And it is the failure to recognize that a one-off model that worked to produce export led growth for Germany in the early part of the decade, when applied collectively is like everybody stands up. That leads to an outcome that’s worse for everyone. It is the failure of generalization and the failure of a suit, the error of assuming that a strategy for work for one once, when applied universally will work. That is the central error that is driving much of European Economic thought. And as long as it continues to drive European Economic thought the prospects for economic success in Europe are going to be very limited.

Preston Pysh  42:30  

So, I love this comment. I know it’s a little long, but hopefully, everyone was able to stay with us as we played all that. But the thing that I find just amazing is that last comment where he’s talking about this overgeneralization of what worked in one country at one point in time, is used as the thought process that’s just going to magically work as you apply that same model to a bigger problem that’s universal across the entire Euro. 

And I really liked his point before that too, where he’s talking about [how] we need a coordinated effort. It’s really what he’s saying. He’s saying, these Federal reserves, across the world, this has to be a joint effort. If we’re going, one versus the other versus the other, it’s just like this pushing of the water balloon from one economy, to the other economy, to the next one. Like our discussion where the dollar was really weak because we had this massive influx to increase our monetary baseline, which made our dollar weak which had an infusion of capital from foreign markets into the US back in the 09-10 timeframe. And now, all of a sudden the dollar is really strong. 

Right now, all we’re doing is just manipulating these cycles because we’re not working together as a unified group of countries in order to try to solve this problem. And really, the solution to the problem is, we got to print more money. And we’ve got to print more money in lockstep, and in unison, and we have to do it at a controlled pace, call at 10% every couple of years. That way, it’s not so dramatic and you have this massive collapse of the system. That Economic Forum, that’s where those discussions need to take place. 

These key leaders need to be doing that. But I think that you have politicians that are trying to get their country ahead and all they’re doing is they’re in a sprint for the first hundred meters, and then they run out of breath as the next country comes up, and gets in front of them. And then it’s just this back and forth, and back and forth. And so, amazing comments. It’s really exciting to see somebody saying something like that in this type of form. I just hope that other people are getting it. But go ahead, Stig. I see you have something.

Stig Brodersen  44:35  

Yeah, and what the professor said about income and spending, I thought that was really, really interesting because if you look at it, you’re really isolated, the best thing for the US would actually be if they saved, and the rest of the world will just go into a spending spree and buying American goods. But that’s not what’s going to happen. But ideally, that is what we want. But what he’s saying is, everybody needs to spend more because if we spend more, then we’ll produce more and more people will be employed, or pay more taxes and so on so forth. I completely agree with that. The interesting thing that we’re seeing right now is that we have a widening gap between the rich and the poor. 

And I don’t really want to be political. I’m not saying that something is right or something’s wrong. But what’s really interesting is that the growth is not growing as high as it could be, simply because we see this widening of income. Simply because if you have a lot of poor people, they will not spend as much. They’ll probably spend everything they have. And then you have the rich people. And what the rich people will do is they will buy financial assets. They will not buy twice as much food if they have a lot of money, but they will buy financial assets.

Preston Pysh  45:46  

They’ll increase their equity, exactly. They’re just going to continue to grow their pool of money or their money machine, if you will, that just keeps adding more and more dollars in their pocket, which then has the separation. Exactly.

Stig Brodersen  45:57  

Yeah. Two things will happen then. The first thing is, this would really not increase production, or at least it will not increase the same amount of production as if the world was *inaudible*. And the other thing is that it will create bubbles in the financial markets simply because we have a lot of money flowing in. And what is even happening more at the moment is that we see this quantitative easing. This money can only be spent for financial assets. That’s why you see this crazy price, especially in the bonds market because that is where they can be applied. 

So, again, it’s not like I’m seeing a crisis right now, but I’m just seeing a lot of factors where if something goes wrong, a lot of things can really go wrong. And it’s really interesting times.

Preston Pysh  46:40  

I think if you’d go back to 1981, at least in the US, it’s kind of that mark where everything started changing because that was the peak of your interest rates, and they’ve gone down ever since 1981. And I think if you’d go back and you look at that gap, Stig, between the ultra wealthy and the lower income people in the United States, that’s where you’d really start to see gap starting to widen ever since that critical point in time back in 1981. But go ahead Hari, you say your last comment, then we’re gonna have to wrap things up.

Hari Ramachandra  47:10  

Sure. Stig, I really liked your point about the widening gap between the rich and the poor. In fact, I remember this book, Stocks For The Long Run by Jeremy Siegel, where he talks about the unsustainability of the gap between the capitalist and the labor income. And he compares the average labor income in the United States to the overall market cap. And he cautions the growth of market cap or earnings while the labor income is not growing at the same time. I guess Larry Summers also made the point when he talked about the non employment rate. In US it’s much higher than France even though as an economy we are doing much better. All these boils down to the same point that the gap is widening.

Preston Pysh  48:06  

So folks, I just want to throw out there, some of this stuff might sound like Greek. If you’re hearing some of this for the first time. If you haven’t been on our forum and you haven’t watched some of these videos that we’ve been putting out by Ray Dalio in different comments. 

What we’re going to do in the show notes of this episode, we’re going to have all that stuff laid out for you. We’re going to have the video that this billionaire Ray Dalio has made that describes this deleveraging process. He makes it crystal clear in this video. It’s 30 minutes long. It’s called, “How the Economic Machine Works.” 

I’m really trying to have as many people as possible watch this video because it’s really going to help you in the long run. It’s well worth your time. I promise you that. There’s also a white paper that Dalio wrote. It’s probably like 300 pages or something like that. We’re going to have a link to that. Read that. That is going to increase your knowledge of macro economics and just kind of what’s coming down the pipe a whole lot better. We’re going to have that. 

There’s also another white paper that Ray Dalio wrote that is about this relative factor of currencies and how it relates to countries and their debt levels. We’re also going to have that up in our show notes too. I highly recommend that you read that. It is another powerful read. Anything Ray Dalio writes, in my opinion, is worth reading because he’s great at making things simple to understand. And I think that that’s really hard when you get into this type of discussion of macro economics. Most people cannot make it simple. 

So, we’ll have all that out there so that you can get caught up if you haven’t been reading any of this stuff. Definitely start with the video because it’s going to lay a really good foundation for you as you read some of these other things. And we’re going to continue this conversation. We have an ongoing discussion on our forum, that’s the warrenbuffettforum.com. If you go there, you can see Stig and I are on that.

 Anytime somebody posts something, we typically reply right away with our comments. And I think that that’s a spot where we can leverage our community as a whole, to try to help everyone navigate this potential storm that’s coming, together. Because to say I have all the solutions, that’s just a flat out lie. I do not have all the solutions. And if you think that I fully understand everything, you’re wrong. I’m trying to figure it out for myself, and so is Stig, and everybody else. 

So this is in uncharted territory. It is not normal to have interest rates at zero percent for eight years. That is not normal. And we’re just trying to make sure that we take the path, protect our principle, as we go through this. So help us out and we’ll try to help you out as we continue this dialogue. And we’ll do this occasionally at the end of the podcast, where we talk about different topics like this until we start to see things changing as we go through it. So, really appreciate what everyone’s doing for us on the forum. We are just having a blast interacting with different people that are sending us messages that are giving us recommendations for people to have on the show. 

Make sure you look up Larry Summers and send them a message and tell them we’re trying to get them on the show. I think that’d be really cool. He’s the second gentleman’s comments there. And if there’s anything that we can do, just make sure you shoot us a message on the forum, or by email, and we’ll try to get back to you and knock it out. So I hope everyone enjoyed the show. And we really enjoyed the book Rework will send out our executive summary of that for you. We’ll see you guys next week. 

So one of the things that Stig and I are very strict about is not endorsing any kind of service or product that we don’t personally use ourselves. So with that said, we give our full endorsement of our sponsors content realvisiontv.com. Real Vision is a site that Stig and I personally use ourselves and it has had a profound impact on the way that we view the financial markets. One of the most important things a person can do is seek the knowledge of highly successful investors and business leaders. More importantly, understand their thought process and how they make decisions. 

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Outro  53:17  

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