Stig Brodersen  6:13  

Yeah, I was really curious when the Prestom sent this to me. I’ve been following Warren Buffett for years and he very rarely talks about the current stock price level. That’s probably a wise thing, because if he did have a comment about the current price level and the stock market, he won’t be talking about anything else. He’s been known for talking about the stock market when it’s really extremely low. 

He’s quoted for saying something in 2009 and I’m probably completely going to mess up the quote again, but he was saying that you should probably start buying equities.  That was not what he said, but basically, that is what he meant. 

Then for instance, he was also famous for the speech he held in 1999, when he said that this is just going to explode. Again, that was not his exact quote, but that’s what he meant. He was completely right about both things, by the way. 

I think that was really what I took away from this article and this interview that Warren Buffett rarely speaks about the current level. The chairman of the Fed doesn’t speak about what they do now. That’s just quite interesting.

Preston Pysh  7:22  

I totally agree. I was talking with Calin Yablonksi from our Mastermind Group on Wednesday after the Janet Yellen comments. I said, “I’m not saying that this is a market top by no means but it is very rare that you see a Fed Chairman come out and say that they think that the market is overvalued. I just found that to be quite unprecedented.”

What she was trying to do with that comment and what she was trying to generate, I have no idea, but I just found it extremely rare. 

I don’t short sell or at least I never have short sold anything. I told Calin and I said but this is very tempting, whenever you have people like this saying those kinds of things. I did not go out and place a short sell on anything. I find it hilarious that the next day and Friday in the market, it was up tremendously from these comments. That just shows you how euphoric things can be. 

I just found it really funny after our conversation where I was just a total bear after hearing this kind of news, and the market just went wild on the two following days. 

For people that are listening to this in the future, you can just hear how we’re having this discussion where we think that it’s bearish conditions, but yet the market is continuing to go higher. It’s not even paying attention to these kinds of things. It’s looking at other factors. So it’s just fun to be able to document these conversations and to as we’re going through this.

That’s enough about current events. We’re going to go ahead and start talking about the book that Stig and I read. For anybody that wants to get our Cliff Notes version or executive summary of the book, you can sign up on our website.

In general, I think that this book was really good with respect to the information that it was sharing. It taught me a lot about currencies, but in general, there are a lot of things that I disagreed with in this book. I guess my biggest complaint or concern with the book is that after I was done reading it, you pretty much feel like the world’s going to have a total meltdown, which I don’t necessarily feel that I have that opinion. So that’s kind of where I had a little different perspective on this, but I did think that the book was good. 

We’ll just go ahead and go through the order that the book was presented. The book starts off with a discussion about what Mr. Rickards had a personal experience where he was working at a location called the APL, which is the Applied Physics Laboratory here in the United States.  

Mr. Rickards talks about how they went through basically a war game, but it was based on currencies. It was a financial war game that the government had done. And so, Mr. Rickards was part of this and he wrote about it in the book. 

He talks about how they had put different ideas for him and another gentleman were trying to really induce the idea of gold and how gold would play into currencies and currency wars amongst other countries. At the end of this war game that he was involved in, his takeaway was that most of the people that were involved didn’t really fully understand currencies or equities, or how markets interact, and that they were more like military people. People that really didn’t have that level of expertise that he and somebody else had. 

So from a style point of writing, he was definitely boasting about his knowledge of markets and things like that. I found the introduction of the book to be a little awkward. That was my personal pain. I’m really curious to hear what Stig thought of the intro of this book.

Stig Brodersen  11:29  

I don’t know what to say about this because I think it went on for like a chapter or two. The reason I’m saying this is that he was talking about the different rounds. For instance, round two  was something about North Korea.

Going through these rounds and discussing what would be appropriate in these different scenarios, I know that the title is currency wars. Like I was listening to the book so I didn’t have the table of contents. I am going to listen to 50 rounds of videos about currency wars.

Preston Pysh  12:07  

I had read a review on the book before I started reading it. One of the reviews was that the first chapter was horrible, but the rest of the book was good. When I was listening to it, I was like, “Okay, yeah, I agree with that person’s review. I don’t really particularly like this first chapter, but the book definitely got better after the first chapter.” 

Anyway, after the first two chapters, where he talks about this experience of working at the Applied Physics Laboratory at Johns Hopkins University, he then goes and talks about these reflections back on basically like the history of the gold standard and how gold interacted with currencies. 

He goes back to reflect on different currency wars. Rickards describes the benefits of the classical gold standard that was placed in the United States back from 1870 to 1914. He refers to this time as the best era in the history of gold with several countries like Japan, Germany, Austria, Spain, just to name a few. They were put into what was called the Gold Club. The US was the last one to join this club during that period. 

He says that during this time period, there was little to no inflation that occurred during that period. He has a discussion about that in the book. After that, he goes into another section where he talks about the very first currency war, which he put dates on, which he said was from 1921 to 1936. Anyone that knows their history knows that that coincides with the Great Depression and the Roaring 20s. 

What he really focuses on during this time period is the German currency, the mark. If anyone looks back at their history books, they remember the picture of the gentleman with the wheelbarrow and the whole wheelbarrow full of money. That was in the 1922 timeframe in Germany, where they were trying to pay back their war debts from the First World War. 

In order to do that, they went through this massive currency inflation, where they were just printing money like wild in Germany in order to try to devalue their currency and pay back their debts. So in order to talk about Germany’s currency, and how they had to pay back this World War One debt, Stig will discuss. 

Stig Brodersen  16:18  

I found this really interesting, because I think I knew from probably back in my school days that there was a lot of inflation, but I just looked up how much inflation there was. For one US dollar, that was equivalent to 3 trillion marks. That’s inflation. Before that, I think it was something like one to five or one to six. It was a massive inflation.

The reason for this was the war damage after the First World War. There was actually a lot of discussion going on about how much they should pay. You have really clever economists like Keynes saying that you should probably not be too cruel to Germany, even after this horrible war, because if they cannot pay this back, a lot of bad things will just happen. 

They actually decided on a really large amount of war reparations, and I can’t remember the exact amount, but it has to be paid back in hard currencies. 

What the German did, because they couldn’t pay it back in marks, was actually to print a lot of mark and then convert it to, for instance, US dollars. So that is why you see this rapid inflation and then pay the money back. The rest is history, as we say, because what happened was that you saw a massive instability and basically as a result of this, but not only as a result of this, but also a major *inaudible* Second World War, because it was just messing up the whole industry. Everything in the country didn’t work after the inflation.

Preston Pysh  17:56  

You get into what’s called what people commonly referred to as a power vacuum and you have this instability. I didn’t know about Keynes’ warning about that. 

He talks about this and this was the very first currency war that he attributes to, which was 1921 to 1936. Then he goes into another chapter where he talks about the second currency war, and that was from 1967 to 1987.

What he really talks about as being one of the key drivers in this timeframe was in 1971, Nixon announced his new economic policy that consisted of price controls, and immediate wages where the gold window would be closed. Then a hefty 10% would be applied on imports. 

For the first time, you’re really seeing the global peace really significantly play out, where as soon as the US came off, this gold standard, nothing was pegged anymore. You didn’t have the US dollar pegged to anything. 

At the time, the US dollar was really the thing that was driving the world economy. The US was definitely the leader in economic growth during that period. And so, when they came off the gold standard, you had a floating currency. 

As you study currencies, and you learn about currencies, they’re all relative. I think that’s probably the biggest takeaway that anyone could take away. So when we say that a currency is relative, what we’re saying is that the dollar is always compared to some other currency or as compared to gold or it’s compared to silver, the value has to be compared to something else. 

Then, if the US government decides that they’re going to print a whole bunch of US dollars, and add that to the monetary baseline, that’s going to have an impact as to the value of $1 in that overall system, compared to some other country’s currency or material or always has to be compared to something else. 

I think when you look at it through that lens, you’re going to have a much easier time understanding how currencies work, when you’re constantly comparing it back to something else. 

Ray Dalio has a very good piece on this discussion, where he talks about how currencies work. He used an example in one of his writings and we actually posted this on our Warren Buffett forums for some people to read. He compares it to loaves of bread. I think that this is a great example.

He said, “If I could pick, I can pick anything to do something else that’s relative. So if I’m pegging it to a loaf of bread, if I can go out and I can produce more loaves of bread, it’s harder for somebody to compare, let’s call it the dollar to a loaf of bread, it’s harder for you to compare those two in relative terms, because I can produce a lot more loaves of bread on a whim. But if I’m comparing the value of the dollar to something that I can’t produce more of, and that’s relatively fixed, that’s a great measure for me to be able to look at the relative value as it progresses over time.”

I found that the reading to be extremely valuable and interesting. We can provide a link to that discussion in the show notes to the forum where I point out where Ray gives 1000 times better than the way I just described that in his writing, because he’s a very good writer.  I highly recommend that people go and read that discussion. So you can understand currencies a little bit better. 

So we got a little bit off track there. But really, the main point where we were discussing the second currency war was that the US came off the gold standard. Jim Rickards talks about this discussion in the book, it’s a very good discussion. The impact that that had globally, where you had nothing but floating currencies around the world, and how it really kind of was a destabilizing event, because everyone’s currencies were floating. 

When that happens, they have this incentive to print more money, so they can devalue their currency and get investors from outside the country to invest inside their country, which helps their GDP growth, which sounds really counter intuitive, I think, to a lot of people that devalue your currency will spark growth. But that’s what happens. 

Now, this is where it gets really interesting. It leads into the third currency wars, which he’s dating from 2010 to the present and ongoing. So as we talk about this idea of countries devaluing their currency to spark and create GDP growth, you have a very interesting scenario, because from the individual standpoint, let’s just say I’m in Germany, okay. If I devalue my currency, it’s conducive for me to spark investment inside of my country. That’s good for Germany, but that’s bad for every other currency and every other country around the world. 

What you have is you have an event that’s great for your own self interest, meaning the country that does it, but bad for the global economy, because what you have is you have a competition. You have the Euro competing with the dollar. You have China competing with the dollar. You have this race of who can devalue their currency faster so that they can spark GDP growth. 

The collective impact then of that is bad for the world, because you’re having these countries that are continuing to devalue their currency, which I personally think and I don’t think Jim says this in the book, but what I think is creating a major gap between your lower class and your upper class, and the middle class has basically fallen apart because of this. That’s my personal opinion. I see Stig has a point that he wants to add.

Stig Brodersen  24:23  

Yeah, I think one thing that we should always remember when we’re talking about currencies is that it is really extremely important for financial stability.We just discussed what happened in Germany in the 20s and 30s. Again, the main reason for that was the instability. If you don’t know what you can buy for $1, if you don’t know what you can buy for a euro, if you think that your own central bank will start to print a lot of money or if you think that your largest trading partner will start, slamming down the prices of the goods, then it creates a lot of uncertainty, even though there’s always a lot of uncertainty in financial world.

If you push financial instability enough, basically you have a system that is falling down. It has many forms and shapes. That’s one of them, but what you also saw in the last financial crisis was financial instability too. It wasn’t a different form, it was not so much in currencies. But that is the end result that you see, if you have a currency war. That is basically chaos.  

One thing I want to talk about because it was really interesting when James starts to go into the current currency more. One thing is to go back to the two previous currency wars, but also when he’s talking about what is happening right now. 

The thing I found especially interesting was that he said that if you look at the US, China and euro zone, that would be 60% of the GDP. You see, there are major currency wars between these three regions, especially between the US dollars and the Chinese yuan. 

I actually found that to be one of the most insightful things. The way that this currency war works is that the Chinese have pegged their currencies to the US dollar. So basically, what that means is that the Chinese Central Bank is determining the exchange rate between the US dollars and yuan.

Let me just give you an example of how this works in practice, say that you are a Chinese company, and you want to sell the goods in America. You would receive like a million dollars, then you don’t receive a million dollars. It’s the Central bank who is actually converting that. Then you’ll get a corresponding amount in yuan, which is determined by the Central Bank. 

So this is a major problem, because as Preston was saying, before, when you have a currency that is worth less, you have a big competitive advantage because the US are not just competing with other US companies, they are always also competing with the Chinese companies. That was something I thought was really, really interesting. 

Preston Pysh  27:07  

What I found interesting is how there’s no relative change between the two of them. Now, you’re not seeing that with anyone else in the world. You’re seeing really more of a competition, but that’s the thing that I found really interesting. 

The other thing that I think is good to talk about is the idea that we had Larry Summers, we remember when we played Larry Summers’ comments at Davos. This was probably maybe five episodes ago or something like that. He made the comment about everybody standing up in the auditorium. 

He said: “Everyone right now is sitting down watching us, but if one person stands up, that person is going to be able to see better. But what the problem is, is when that one person stands up, the people behind them can’t see anymore. Their vision is worse. So they have to stand up.” 

Next thing, everybody in the auditorium is standing up, nobody’s seeing any better than they were whenever they were sitting down. But now all their legs are hurting. And so that example that he gave, and people might not have realized it at the time, but the example that he was providing is directly related to what we’re discussing here. 

What he means is, if one person stands up, meaning if one country is devaluing their currency, they’re actually making other countries want to stand up too, which would devalue their currency as well. Next thing you know you have everybody devaluing their currency. That’s what he was referring to in that comment. 

I don’t know if everybody really caught that during that conversation, but that’s what he was referring to. That’s what Jim Rickards is talking about in this particular point in the book. 

Stig Brodersen  28:47  

If you look at the American and Chinese relationship, I think what is really important to understand is that the war is fought on many fronts. It’s not just the Chinese who started to peg this. The Americans actually made a, just to use the terminology, a counter attack a few years ago. 

Back then, I think it was back in 2010, you actually heard Obama saying that the US should free themselves from this crisis and they should do that by adopting the export. This was an example that was really good in the book. 

What’s really important to understand here is that the American economy that’s driven mainly by consumption, it’s one of the economies in the world where *inaudible* goes by consumptions. 70% of GDP is by consumption.

Whereas the Chinese economy is not driven by consumption, but more with investments. Why is this important? Well, this is actually very important because what happened in 2010 to 2011? Well, you saw these different rounds. I think I actually saw this before with the QE. 

What the US was actually doing was to basically print a lot of money. This is really interesting, because by doing this, they were actually giving China two very, very hard choices. 

The first one is that China could not evaluate, if they choose not to reevaluate, which would be one thing to do, then there will be a lot of inflation, because they need to print more money to keep up. If they have more inflation, it’s a big problem for China. 

At this point of time, in the US you have very low growth, and you have very low inflation. Whereas in China, you have very high growth and very high inflation. So you’re basically exporting the inflation problem to China. That was the first choice. 

The other choice they can take was that if they did revaluate, which actually did. I don’t know how many people are following those exchange rates, but you can actually see that the Chinese, after the QE, decided to reevaluate. 

The result of this is that the American companies are now more competitive than the Chinese companies in comparison to before. So the currency wars that are actually talked about in this book, that is what you see right now.

Preston Pysh  31:10  

What’s really interesting, okay, is what’s the end state? Okay, where does this all take us? I think that the really fun discussion to be had is, if everyone’s got an incentive to devalue their currency at a modest rate, so that they continue to spark some form of GDP for their country, where does this end? 

Everybody continues to do this, every country continues to do this. You find yourself and I think that’s why Jim Rickards has such a negative stance on where this is all going, as he sees it all ending very badly.  

I guess I just don’t have such a pessimistic view on things. I think that there is a way out of this, but you have to have global currency starting to get pegged to something that is very standardized. 

Some people might highly criticize this comment, but I’m going to say it anyway, because I think that it’s really an interesting discussion. I really see that’s where cryptocurrencies come into play. Crypto currencies are designed to be a world currency. 

Let’s just say that you do have a cryptocurrency that has a finite amount of units, and that number cannot be manipulated. It is fixed, it can’t be inflated, if you will. We’re devalued. When you have that, and you have it on a global scale, you actually have something that would peg currencies to and then central banks are then forced to either peg their currency to it, or they’re going to be forced to continue to devalue, and then pay the consequences of doing that. 

That’s why I think cryptocurrencies really play a strategic and interesting role in all of this. Maybe that is the solution. I don’t know if that’s the solution, but I think that it’s something that’s definitely worthy of discussion.

In Jim’s book, he doesn’t talk about that at all. What Jim does talk about is that gold is what he is really, I guess, recommending, because he feels like that’s the form of currency that would pay everyone across the board so that you basically put an end to the madness. 

My problem with gold is that it doesn’t have any utility. You can’t go out to Walmart or whatever store you name and slap down some gold coins and pay for something. 

I do think that if there is a form of a cryptocurrency, it can do the same thing as gold, because you can’t devalue it. Okay, because of the algorithm and the way that the code on the program would be set up just like Bitcoin is. You have something that is standardized and you also have the utility piece that I think gold doesn’t have. I can pull out my smartphone. I can scan a QR code and I could pay for something. 

That’s where I see we’re really talking way off in the future. I don’t see that in the next couple of years. Though I could see something like this playing out 10 to 20 years from now. That might be your solution to something like this. I think that’s a more viable solution than everything goes to gold. I just don’t see countries doing that, because you don’t have the utility piece to it.

Stig Brodersen  34:40  

The thing I do share is that I’m not as pessimistic as Jim is. He would bring in statistics saying like, the dollar might fail and it’s not as used a reserve currency as it used to be.

Preston Pysh  34:56  

I’m sorry to interrupt but I have to say this. I am not as bad bearish on the dollar? As I think Jim is, when you look around, it’s a relative game, like we said so, is the dollar really the worst currency? No, it might be the best currency when compared to all the other currencies that are out there. 

Stig Brodersen  35:18  

I guess it also depends on how you look at statistics because if you look at the last five years, it is true that as a reserve currency, the magnitude of US dollars has been 71% before, and today it is 61-62%. But again, if you just look a few years back, say 1995, you can actually see that the US dollar, as a reserve currency, was even less public than it is today.

It also kind of depends on how you look at the numbers. I don’t think the dollar will fail. The current situation that we have right now, where the central bank can print the money, do we have problems with that? Yes, we do have inherent problems with that. 

I cannot compare it to democracy. I can find a lot of different mistakes. With democracy, yes, I can. Is it the least bad solution? Definitely. I can’t think of anything better than democracy so I would go with democracy.  

I kind of feel the same way about currencies. Do I have a problem with the US central bank that can do QE and print more money? It’s a problem. Do you have a better chance of it? I’m not really sure. It seems like a very defensive answer. It’s not like I have the right solution.

Preston Pysh  36:41  

When you can’t quantify your reason for having a different opinion, I guess you have to stick with what you got.

Stig Brodersen  36:50  

Yeah, you’re probably right. However, he is bringing real interesting thoughts about the special drawing rights. He’s talking about a global currency.  I think that you probably know better than me but your source has been talking about global currency for a long, long time.

Preston Pysh  37:09  

Yeah.  I think that that’s why he has that opinion. I think he’s had that opinion for a long time because he’s seen this thing growing. All these billionaires know exactly what’s going on. 

I think if you pull up Warren Buffett and Bill Gates, they’ve got a lot of opinions on currencies. In fact, that seems to be the interview that we were talking about at the start of the episode. The lady that was interviewing them asked each one of them what they thought of different currencies and which currencies they thought were the best. 

Buffett said that he thought the dollar was the best currency out there. Bill Gates surprisingly said that he thought that the Chinese currency was the best that was out there. After he said that, Buffett asked Gates, “How much Chinese currency do you have, Bill?” It’s just basically a jab. 

Anyway, interesting discussion. Just kind of concluding the book. I think we’re going to probably just summarize and just kind of wrap things up here. But at the end of the book, Jim really gets into a very negative position of basically, I don’t know what the solution is here. 

I just don’t think that’s people we’re going to solve, basically was where he got at. He felt that a currency that would go to a gold standard would have a major setback initially. 

However, in the long run, they would really have a major advantage over other currencies, which I think is true, but I don’t think that you’re going to find a country. I think Jim Rickards would agree with this. I don’t think you’re going to find a country that wants to take that initial hit and try to sell that to their citizens as they bear through maybe five or 10 years of having rough economic times, because they would do something like that and have a pegged currency. 

Okay. So that’s pretty much how the book ends. Basically he doesn’t see anybody really adopting a gold standard and that this is going to end in just economic disarray. 

Jim, if we summarized this wrong, let us know. Alright, so a really fun discussion here. I was really curious to know what other people think. If you go to our forum, WarrenBuffettForum.com, you’ll see that we have almost up to 100 posts where we’re discussing deleveraging currency debates and all this stuff. It’s really getting fun. 

Right now we’re going to go ahead and transition into a question from our audience. This question comes from Brendan.

Sender  44:56  

Hey, guys, it’s Brendan. I’m going to be a freshman in college this fall. I recently watched your videos and started listening to your podcast. I had a question with all these tools, techniques and numbers that an investor’s disposal. Why do some not experience success? In other words, what mistakes are commonly made by investing? 

Stig Brodersen  45:25  

Yeah. So the first thing I want to say is analysis paralysis. I know you’re saying that there’s so much information out there. Why do some people gain success? I think that’s the problem. There’s too much information out there. 

If you didn’t have any investment books, but just had Warren Buffett, then I guess a lot of people would be quite successful. Not even though you would like to pick an investing strategy that works for you. There’s just some underlying principles within investing that you just need to follow. I think that is something that really confuses a lot of people. 

So you might be saying, okay, I’m interested in stocks. So you would read one article about Warren Buffett, then you’ll read about *inaudible* analysis, which is like technical analysis. Then you would read one article about high frequency trading and you won’t understand. That’s probably the main problem. 

There’s a lot of different strategies that can make sense. But if you’re mixing all of those, and you’re not like doing one fillu, I think you’re really, really heading for trouble. 

Another thing is that I don’t think people spend enough time investing. I think that if you monitored one person throughout the year and looked at how many hours you spend on different activities, including investing, I think you will easily find 10 or 20 activities that he would spend more time on. You wouldn’t expect to master rock climbing, if you spend like one hour, every three months.

One more thing is that it’s very intransparent. In investing, it will take years to figure out whether or not you’re right or wrong, even then you can probably come up with a lot of excuses why you’re not doing well. 

Preston Pysh  47:53  

Brandon, I really liked this question. I think Stig gave you some really good advice to be quite honest with you. I like the idea of you studying a person that investing that you kind of have some similarities to.

For me, I started off studying Warren Buffett, I didn’t really look at anybody in the entire investing community for years. I just studied everything about Warren Buffett. I read every single shareholder letter. I read every single thing that he came out on. and I focused on nobody else. 

I think that that was good for me to be able to flush out a lot of other people’s different opinions. It was a good learning experience. I think it’s important for you to start off with somebody who has made it and somebody that has proof that their system works. Now whether that’s Warren Buffett, that’s Ray Dalio, that’s whoever, but you need to pick somebody. I think that you need to pick them based on their personality and see if your personality is similar to theirs. 

The other thing that I’ll tell you is there’s a lot of different approaches out there and there’s a lot of different approaches out there that work. I’m obviously a value investor, I think value investing works, but I also think that there’s people out there that can do…

Stig and I just finished reading the book “Hedge Fund Wizards” by Jack Schwager. After reading that book, I was like, I don’t know how this person can do this successfully. But the fact that they have 25 years without one down year, using these techniques, tells me that it works. 

The statistics of them doing that consistently, year after year is one in a billion or whatever it is. So the person obviously knows what they’re doing. I don’t understand that approach and that doesn’t mean that it’s wrong. 

What I would tell you is try to match your personality with somebody else that’s been successful, and study that person and stick to that person.Like Stig said, you have to dig into it. You can’t do this for an hour a week and think that you’re going to become a master at it. You got to really dedicate serious hours, until the point where you actually start feeling bad. It’s starting to come together and it’s starting to click. 

I’ve got one other point. For me investing in the stock market is all about investing in real businesses. Okay? I look at a stock, like it’s a miniature business, every single share is one business. I think that for anybody to look at it any differently, that doesn’t make sense to me. 

When you look at it through that context, I buy one share just the same way I would buy a business on Main Street. I look at the revenues, I look at the brand, I look at the customer base, I look at whether the revenues are increasing, decreasing the stability, I look at it through the same exact lens like I was going to buy a business on Main Street.

I think that that’s probably the best advice I could give somebody if you’re buying shares of stock in any other manner. For example, if you want to lend money to your buddy, and he’s in debt up to his eyeballs, and you think that because you’re going to get a 15% return, that that’s a good investment, I totally disagree with that.

I buy bonds in the exact same manner. Always try to bring things when you’re investing down to the micro scale of how you might understand it. If you were going to lend money to your friend, or if you were going to buy equity in a business that your friend owns, look at it through that same lens. 

Outro

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