Stig Brodersen  01:22

Oh! It’s just sad. Things are crazy right now. If you just look at the S&P 500, it was $3,300 back in February, and it was down to $2,200 in March. Now it seems like the market has rebounded little up to around $2,800, so I’m very curious to see where this is going.

Preston Pysh  01:42

One of the things that I just wanted to talk about right out of the gate is this idea that you’re seeing some companies perform quite well, and you’re seeing a lot of other companies that are not. There were a few observations that some of the people that I follow closely on Twitter threw out there. Also, something interesting that we saw with our TIP finance tool on the momentum-side was some of the indexes, the ones that had really large quantities, call it the Russell 2000, are still read on our momentum tool. But some of the companies that are specially-oriented towards tech that have intangible assets, call it Amazon, and those types of businesses that fit into those indexes turned green pretty quickly.

One of the indexes that I’m referring to is the NASDAQ: QQQ, and it was kind of fascinating because it turned red a lot, like the S&P 500, back at the end of February. I think it was the 26th of February that all of our tools, all of our momentum statuses, started turning red. But for QQQ, it quickly turned back into the green as a momentum buy. On our tool, the NASDAQ turned green again on the 6th of April, and it’s continued to go up ever since that date. I just find that interesting.

I can’t tell you why I think that that’s happening. I kind of suspect that it has something to do with companies that have intangible assets versus tangible assets and their ability to reprice, readjust, and to conduct business from home versus in the office. Also, I just imagine that that index is made up of more companies like that than other indexes that have remained red on the momentum status. Whether that persists or not, I’m not quite sure, but I do find it fascinating that we’re seeing that trend.

I think you’re also seeing that on individual companies. We’ll talk a little bit more about that later in the show where we talk about a few companies that have really stood out as performers, that have good valuation metrics, and have good momentum metrics. We’ll talk about that later on.

With that initial comment or note, and I have a tweet, which we can provide a link to in the show notes, that goes into depth on this idea that we were just talking about it. It starts showing you all these different momentum statuses for different indexes. It’s a long, comprehensive, 30-tweets or so thread. I’ll provide a link to that in the show notes, so people can see some of the charts, and see some of the ideas that we’re talking about there. Anyway, let’s start the show here.

Stig, you were going to talk a little bit about the Fed, so I’m going to throw it over to you and let you hammer away at that.

Stig Brodersen  04:36

It’s always interesting to talk about what the Fed is doing, especially these days. I mean, what is the Fed not doing? I guess that is the right question to ask. This early May, the Fed has announced starting to buy back corporate bonds, both directly from the companies itself, but also in the market. What I’m looking for is how much of this is trickling into the real economy because, at the end of the day, as much as we talk about the stock market, it’s not the real economy. The fundamental value of the stock market is still a function of the real economy in the long term.

Also, these numbers are heavily debated. Some of the estimates that I’ve been looking at would say that corporate bond purchases would only trickle down to 10% into the real economy. I would like to talk about some of the arguments you have, both in favor of and against, doing this.

The first one is obvious. You could argue that if no one bought these bonds, remembering that a bond is really alone, then a lot of these companies will just bankrupt. I was going through the Berkshire Hathaway meeting just a few days ago. We’re going to cover that already next week, but a small thing that I took away from that was that Buffett said that he was starting to get calls from people who couldn’t find financing, and then the Fed started printing and the calls stopped. I think that was very interesting actually to hear him talking about because Buffett takes no prisoners. For things like this, he will dictate the terms.

Preston Pysh  05:40

It’s funny. I was listening to an interview with Sam Zell, who’s a billionaire in real estate and things like that. He had a very similar point. If I were to summarize this idea, I think what we’re really getting at is how you conduct economic calculation is failing right now because you have the markets so manipulated.

If the Fed is stepping in and providing liquidity, driving interest rates to nothing, then the cost of capital calculations and discount rates that you’re using in models, are they still accurate? That really becomes the question. I would say no, they’re not. To what extent? I have no idea, but I think it’s really important for people to consider that aspect.

When you take a business class, though, they’re going to teach you a discounted cash flow model because it’s like the basis of everything in business school for when you’re doing modeling for financial assets. Everyone walks into that discussion and into those math problems with a fundamental thesis, or a fundamental understanding, that the currency that you’re using for economic calculation is sound and not being manipulated. That’s an underlying assumption that everyone steps into the table. It’s never even discussed whether the currency is sound or not. But if it’s not, things get interesting.

07:42

In essence, that’s what Buffett’s talking about. If he’s been receiving calls, then all of a sudden, he’s not receiving calls, then something changed. Some other entity stepped in and adjusted the currency. It’s something that people really have to account for. As they are continuing to use these models, which we’ll be talking about using these models as we talk about the valuation of a few different companies later, I think it’s important to really understand what that means.

It’s one of the reasons Stig and I like to use an IRR (Internal Rate of Return) because, with it, we’re taking the price, and solve for the discount rate. That’s where it’s a little bit different. A lot of business schools do not like IRR because they say, “If you have negative cash flow, then you get to different valuations.” I love IRR. In fact, when we talked with Bill Miller, he does, too. He uses an IRR to figure out the intrinsic value. You’re solving for the discount rate by putting in the price that you already know the company is worth because it’s on the public markets and it’s getting a printed price every single day.

I think it’s important for people that are doing financial valuation to use IRRs because at least you can look at something relative to other companies, or relative to a 10-year bond, what the yield is. If I come up with an IRR of 20% on a company, mathematically, that is better than something that has a 5% or 10% IRR. I think that using IRR in this type of environment is very important for investors because you have this economic calculation being warped through the currency being manipulated.

Anyway, those are just some thoughts that I think people should consider as they’re doing the financial valuation. But I know Stig wants to talk a little bit more about the Fed, so we’re going to jump back into that.

Stig Brodersen  09:42

Continuing in terms of what the Fed is doing and what the Fed is not doing, we always have this discussion every time we have a crisis on how many companies the Fed or the government should be allowed. There’s definitely no doubt that a lot of these companies have behaved irresponsibly. You can even make the argument that perhaps some even expected the Fed to print money for them if something went wrong. Essentially, this is a political question, and we don’t want to talk too much about politics, but I do want to say, though, I do think that it’s important for the government to step in in times of crisis. That’s one of the reasons why we have a government. I have, however, been a little concerned about how some of the funds are prioritized, as well as some of the magnitudes behind that.

Speaking of which, I was reading this very interesting interview with Ben Bernanke from earlier this year. He talked about how good quantitive easing is and how important it is as a tool today. He also talked about how, during the 2008 crisis where he was the Fed Chairman, what he did with QE was the same as lowering the interest rate by 3%.

To me, that was a very interesting statement because, first of all, the interest rate was lowered by 5%. Also, if you add in the QE, that would be similar to about 8%. I just found that as a very interesting calculation because what textbooks and empirical evidence would tell us is that you would need between 3% to 5% lower interest rate to come out of recession.

Now, I don’t agree with Ben Bernanke. I’m sure he thinks that’s what he’s done. Why wouldn’t he be doing what he thought was best for the economy? But I think it’s also a legacy thing. Because if you do not buy into that premise, a lot of the problems we have today goes back to him, and I’m pretty sure he doesn’t feel responsible for that. But QE is not the same as a low interest rate. It has a very different implication. It’s not for the general population. It’s not as much for the general economy. It is very much skewed because you’re basically buying long-term securities of a very different quality, and really monetizing that debt.

Preston Pysh  11:51

Stig, I would describe it as hitting the afterburners on a jet. When you’re doing jet design and you are building a jet engine, as long as you’re under the speed of sound, the amount of fuel that you’re burning is not all that high, relatively speaking. But as soon as you start hitting Mach 1 or Mach 2, the amount of fuel that you’re burning becomes literally exponential. You can’t stay at that speed for any long period of time because you will literally chew through all of the fuel on that aircraft.

I would equate quantitative easing as hitting the afterburners as far as Fed actions, so they can do it, but they’re going to chew through it way faster. As everyone has seen, the amount of debasement that has happened just in the past two months is on par with what we had done previously throughout almost the entire decade as far as the amount of printing that’s occurred. And I will tell you, I think they’re just getting warmed up. I think the next thing on the plate is municipalities that will need to be bailed out.

So, I think once you step into that use of QE, you’re hitting the afterburners, and unlike a jet plane, you can’t throttle them back down. I think they have to stay on, and I think that you’re just going to hit the point where the current currency will eventually fail because of overuse.

Stig Brodersen  13:03

I think it’s interesting that you would mention that. Going back to the discussion between the real economy and the stock market, something QE definitely did was to drive up the stock market, but it didn’t help the real economy. We tend to look so much at the stock market as an indicator of how the economy is going, but the economy is doing very different numbers compared to the rebound that you now see in the stock market. They’re very different because the stock market is so manipulated. You can also argue that the real economy is, too, but definitely not to the same extent.

Now, you were talking about principalities before. One of the things that I’ve been thinking a lot about, which I’m sure a lot of other people have been, too, is if we will eventually see the Fed buy equities. An example of that would be Japan. Not too long ago, there was talk about toppling their controversial equity-buying program back to ¥12 trillion, which is equivalent to around $112 billion. I would like to make a comparison to Japan afterward, and why it might or might not be the case, but I’m curious to hear your thoughts, Preston. Do you think we will eventually see equities being bought by the Fed here in the States?

Preston Pysh  14:13

They have a lot to go through from a change in the way that the laws are constructed for them to do it. I think they’re definitely going to try to do it, but whether they receive the authorization to do it is the big question. I don’t think they’re going to be there anytime soon. I think it’s going to be a year plus before you start to see the big movement for the idea of purchasing equities. I’m not sure it will happen, but I think there’s going to be a lot of people championing the idea, though.

Stig Brodersen  14:44

That’s for sure. I think that a lot of people need to have an incentive for that to happen.

Anyway, I would really want to talk about Japan, and how it serves as a scary example of an economy going through a long time without growth and having very ineffective fiscal and monetary policies. I’ve been thinking a lot whether or not that is what we’ll see in the US.

What Japan is facing is typically referred to as a liquidity trap, which happens after a severe recession or even depression. It’s when consumers and businesses are afraid to spend no matter how much credit is available because the Fed has a gas pedal, and that’s credit. By providing more credit, it can only work under different scenarios. First of all, if no one wants to borrow money because there’s no confidence in spending it. It doesn’t really help. If you also have consumers who are not deemed credit-worthy by the banks, you’ll also have a bottleneck there.

You can’t just force money out even though you hear about expanding the monetary baseline. It’s true, you can do that, but it’s not the same as it going into the real economy. So, that’s what’s referred to as a liquidity trap. Basically, the implication is that the capital market does not work and a major balance sheet deleveraging has to happen.

You might be asking, “Why don’t people spend money? Shouldn’t that just happen whenever you’re forcing that out?” Keep in mind that companies don’t hire as they should. So wages remain stagnant or even become negative. Without rising incomes, consumers only buy when they need to, and they save the rest. Without inflation, there is no incentive to start spending. Especially if you have deflation instead of inflation because that just means that things will get cheaper. And so, you have this vicious spiral of that unraveling. We’ll also talk a lot about that.

16:39

Another comparison I would like to make is that both the US and Japan have a lot of debt. They both reached a 90% threshold of debt to GDP, where debt just keeps on feeding on itself. The ECB wrote a great report about that, and perhaps we can link to that in the show notes. The main conclusion is as evidenced throughout history. Reaching that level is a clear signal of lower long-term growth prospects.

Obviously, looking at the bigger macroeconomic picture, I don’t hope that the US would fall into that trap. I do think that there’s a risk of that happening if the Fed and the government are not careful. But I also would like to provide some counter-arguments why it might not be the case.

Culturally, there is a difference. The US has a culture of spending, and Japan has a money-saving culture. Also, I don’t think that it will be back to normal after COVID-19. Again, you can always make the argument “When is that done?” But it’s very much in terms of mindset. Japan has been in this mindset for decades, and that can definitely be self-reinforcing.

17:55

Going back to some of the numbers, in terms of GDP, 55% of Japan’s GDP is consumption, and it’s declining. Whereas it’s around 70% for the US, and it’s increasing right now. It’s very easy to say, “This is what’s happening in Japan. Can we just do a copy-paste for what’s happening to the US?” But it’s very different. I mentioned the cultural differences before. Just the whole taking care of each other in a family, and investing and saving for the older generation already has very different implications in terms of how both manage the real economy.

Immigration is another component. The US has a long tradition for immigration, whereas the Japanese do not. I know that immigration is a politically loaded topic, but I just wanted to outline some of the arguments why the US could fall into that liquidity trap, and why or why not it could happen.

I’m curious to hear if you have any thoughts, Preston, because I’m sure you must have been reading some of the arguments like of the US going to be the next Japan, and not meant in a positive way, but in terms of having a long period of very low growth.

Preston Pysh  18:55

I think there are some key differences between making that leap of saying, “Well, this happened in Japan starting in 1990,” and “That’s what we’re going to see here in the US.” I think one of the most important distinctions for people to understand is that back in 1990 was the top of their market. So, I think that there’s a key distinction between just making that leap of saying that America is now becoming like Japan.

The Japanese equity market peaked in 1990 and went through decades of a downturn in their equity market. Throughout this time, their interest rates got polarized down to 0%. I think that’s where a lot of people are making the analogous comparison, saying, “Interest rates are going to go to 0%. It’s going to force the stock market to go down.” Where I think that this is different is when you look at Japan’s interest rates going to 0% and their stock market going down, you have to look at it relative to where it’s at compared to every other country in the world. When you looked at every other country in the world, they had positive interest rates.

What you could argue is that in ’71, when the US came off the gold standard, so then everyone else came off it, too, as they were tied to the dollar, every single country at the snap of a finger became a fiat world. When that happened, Japan was the first to get to the practice of where they printed, printed, printed, took advantage of that, and kept adjusting their interest rates accordingly. And now they’re at 0%, and they created this Cantillon effect, which is a very, very important term that describes exactly what we’re going through. We’ll have a link to some different articles on this.

20:49

The Cantillon effect is when you print and you get into the zero interest rate environment, and central bankers are providing more fiat, more liquidity, into the system via financial assets. They’re saying, “Here’s a bunch of freshly-printed money. Let me buy some securities off of the open market, whether they’re bonds or will-be stocks.” They’re providing that liquidity into the hands of all the people that own those bonds. When those owners, equipped with that fresh cash, go out and spend it, whatever they spend it on is where money trickles into the economy. That’s, in essence, a very quick summarization of the Cantillon effect.

It goes into a lot more detail. This idea has been around for 500+ years. Many people don’t understand it or know about it, but I would tell you to do a lot of research on that because that’s exactly what you have playing out in Japan since 1990 through now. But now what you’re going to start seeing is all these other economies having that same thing play out. We’ve also seen that here in the US since 2008.

21:52

Going back to the original question, I think it’s important that people understand that what we’re seeing here in the US, and everywhere else, is now somewhat like Japan. But the reason that Japan was in that state for so long was that everybody else still had positive interest rates and still had these economies that hadn’t turned into Franken-economies as they had to base their currency so quickly. I think that’s an important consideration when you’re thinking about this.

22:21

I would like to provide an example of this Cantillon effect in a way that I think everyone can understand. Let’s pull out the game of Monopoly, okay, and let’s warp ourselves into the game, to the end of the scenario, which is total consolidation. Let’s say that you have four players and a banker that’s working the currency. One player has really dominated the game, and the three other players are still alive. They still have a little bit of money, but they don’t own much on the board as the one player has monopolized or consolidated a lot of it.

Now, what happens at this point if players start to go bankrupt? The other three players are barely surviving, right? What happens if they start going bankrupt, but we need them in the game so it looks like we have a real economy? The banker could say, “Well, I’m going to step in, and I’m going to provide liquidity to the game.”

How does the banker provide liquidity? Well, they could go the player who’s dominating, and say, “Hey, you have a lot of financial assets. Let me give you cash, then you hand me the cards for those properties.” So now, the player who’s already dominating the game is receiving cash, and the banker is taking the properties off the market, which would be the bonds. This is what we’ve seen for the last 10 years under quantitative easing. They’re taking those cards for the properties off the game, and they’re providing liquidity.

Now, about the player who’s winning and receiving all this cash, what do they want to buy with all that money? Well, they’ll want to buy whatever remaining properties are there that the other players have on the game, which isn’t that much. So now, you have a lot of cash chasing fewer and fewer assets. That’s a recipe for bidding prices up for financial assets. The financial assets go up in price.

You can see the dynamic that’s at play, yet every academic economist that would be watching this game would be saying, “There’s no inflation happening here.” They’d be saying there’s no monetary inflation. They’ll say that despite adding money into the system, the CPI is at 0.05% or 0%. But we all know, as we’re watching this, that more fiat or money is being added into the game. The monopoly player, the one who’s winning aggressively, doesn’t need any more milk. He won’t need any more of the CPI basket-type things to buy. He’s flush with cash, and he wants to buy more securities and assets that can increase his cash flow, right? Because he has enough money to sustain livelihood or the monthly burn rate of what he consumes. That’s what you’re seeing. That’s the Cantillon effect via monopoly.

25:03

You’re now seeing the Cantillon effect play out on a global scale. You’re seeing this play out in the US. You’ve seen it play out in Japan for a very long time, and it’s just that the rest of the world is finally catching up to it.

This is a unique environment. Do I think the banker is going to continue to provide liquidity via financial assets? Absolutely!

They have to because these governments cannot afford interest rates to go up. If interest rates go up, they can’t spend at the speed that they’ve been spending and allocating capital into their local districts. They have to keep interest rates at 0% because if interest rates go up, they won’t be able to afford all the government debt that they’ve been denominating. So they’re going to have to keep doing QE, but now they’re at a point where they have to start going straight to the other three players and providing them cash in the game. They can’t keep inserting it via the financial assets that they’re buying, which is QE. They have to now start going to the other three players and saying, “Hey, here’s $100. Please keep playing the game with this other person who’s been dominating you for the last 10 years. We need you to keep playing with him. So here’s $100, and then next time you go around the board, we’ll give you another $100. Isn’t this fun?”

Stig Brodersen  26:18

Oh, boy! Yeah, that was a great example. I think that ties perfectly into the next major topic that we’re going to talk about. Whether or not this is the next great depression, I will eventually go into a defense of the fee utterances. So just want to warn everyone out there, you can bring out the bats already. I had a quick call with Preston some time ago. I told Preston that I think that for the next episode, I would like to make a really strong argument for why fiat currencies are great.

I can’t remember if you laughed out loud, but I definitely remember that you made some sort of gesture signifying, “You’re either very, very courageous or very, very stupid.” Perhaps both. Who knows?

Preston Pysh  27:05

I can make a case for it, but not at this point in the cycle. Look at fiat currencies and what they brought us through all the years. It accelerated productivity to the left at a speed that we’ve never seen in the history of mankind because we did it on a global scale.

So, why do you think we’ve got all of these amazing technologies? Because you had a fiat currency that was being debased, and that was incentivizing the entire world to invest and produce at a pace that has never been seen. That’s what a fiat currency produces.

The problem that we’re seeing right now is you get to a point that as you overuse that fiat currency and you overuse that debasement. you have created an incentive structure that is so accelerative at this point, that it’s literally ripping the sides off the vehicle that you’re riding in. And so, if you’re going to make a case for fiat, that would be the only case you could make. But you’ll probably only want to do it in a very small dose, and whenever you stop doing it, you need to go back to some type of sound money to not rip the doors off the vehicle. Because that’s where I think we’re at right now.

Stig Brodersen  28:15

That’s an interesting argument you bring up. I actually wanted to go back to 1929. Let me, instead, go back to the 1500s. People are probably going to exclaim, “Oh, my God! This is going to be a long speech that Stig is going to make.”

I was reading this amazing book called Sapiens. I’ve probably been reading that three times for the past year. Originally, it was Guy Spier who told us about the book back in Episode 14. I’m a very slow learner, so I’ve been catching up over the past year, and there was an interesting section about why the economy was not growing until 1500.

I think that there are definite disagreements that could be made about what happened with the agricultural revolution, but it was about one of the reasons why credit systems almost didn’t exist before then. Back then, people sort of believed that the economy was a fixed pie. They believed that the king of England could be wealthier if he conquered France and took their gold. That was sort of the perception. They didn’t have this concept of investing if you have money, and investing more if you want more. They didn’t have a growing pie sentiment. All of that slowly happened when Columbus got to America and started creating whole credit cycles that were later adopted in the Netherlands. Eventually, Adam Smith wrote a fantastic book, The Wealth of Nations, about it in 1776.

But anyway, let me fast forward that. I just wanted to tie the whole credit system into this discussion, and perhaps, after, we can talk about some of the dangers of credit, which also is very evident throughout history.

29:52

I’ve been trying to go back in history and figure out which crisis resembles the one we have now the most. Of course, all crises are different. And, lazy as I am, I decided to watch an interview with Ray Dalio where he briefly mentioned that because he was asked that specific question. The question was basically, “Hey, what kind of crisis is this most similar to?” And he said, “We didn’t have COVID-19 before, but the most similar is 1929.” That was what he said. So, I looked at some of the data from 1929. That was a very interesting study. I think there are similarities, but there are definitely also huge differences.

One of the things that I really found interesting was that the stock market dropped by around 85%. It was a crazy number. There had been six major rallies. They weren’t just 10%. I think one of them was even 40% or 50% on the way down. It was insane. Looking back, it looks like it was just all going down. It must have been so difficult living through that and thinking, “The stock market’s up by 4%. Now is probably time to invest,” and then get absolutely smashed afterward.

Preston Pysh  31:01

As soon as you come out of your storm shelter, another tornado hits immediately as you open the storm shelter doors. I looked at that chart for years because people were going through that psychological bludgeoning for three years. It would have been one of the hardest times ever to experience that type of event that you’re describing, Stig.

Stig Brodersen  31:23

Talking about it like today, the stock market was just crushed in March. You hear people in April say, “Oh, we have the best month since I don’t know when, but it was up 30% or whatnot. Now’s the time to invest.” But the time period they were referencing is only from February. They’re not looking at years. The stock market took 25 years to recover, which is absolutely amazing when you think about it. We’re going to talk a lot more about Buffett the next few episodes, but he was alive in 1954, and he talked about how people said whenever they reached that, “Oh, is this the new 1929?”

Now, I don’t think it would necessarily take 25 years for the market to recover. It definitely won’t take 25 years in nominal terms. Real terms is always a very different discussion. That was a very nerdy joke even though it definitely had some truth to it. Let’s look at some of the similarities.

We had a rapid increase in double-digit unemployment. I think the latest number that came out was 30 million people in the US. Compare that to the labor force, not the population, in the US it is 164 million, so it’s high. It’s like 1929 high. You can even make the argument that a lot of the unemployment that we see right now is not being recorded. We also had a swift double-digit contraction in the economy and high inequality. I think that’s really important to understand. We haven’t had this type of inequality since 1929.

What hasn’t changed is that the economy is basically still goods and services. The rest is really just credit and accounting. I think that’s so important to understand. Whenever you hear me talking about these numbers, major contractions, and what’s going on, a lot of that is definitely in credit and in accounting.

33:11

What is also not different is that we have a system where those who control the system, just by definition, also benefits from the system, because that’s just how systems work. So, let’s look at some of those systems, and let’s look at what is different.

This is the time I’m going to try to make a case for fiat currencies. I really wanted to do that because I don’t think anyone has been bashing fiat currencies as much as Preston and I have on our show. I don’t necessarily want to drag Preston into this bias as he might have a different opinion, but it’s just as Charlie Munger says. You need to be able to argue from both sides. Being a lawyer, he would know. He also believes that if you find an -ism early in your life, it’s probably not going to be good for you. I really took that to heart after rereading Poor Charlie’s Almanack, and really tried to invert, really tried to think about how it could be good that we have fiat currencies.

Now, looking at what happened in 1929, at the time, the US dollar was pegged to gold, and to maintain that pick, had to tighten. By ‘tighten’, they needed to increase interest rates. There was a time when they probably wanted to lower the interest and exchange rates, which would have been good for competing in international markets. It also would make it easier to borrow whenever you are in crisis. They definitely wouldn’t want to hike the rate and depress growth even more. But at the time, they had to hike interest rates to attract more capital to the country. They wanted to incentivize, but what instead was happening was the interest rate went up despite not wanting that to happen.

And so, what Franklin Roosevelt did in 1933 when he took office was that he took the US off the gold standard. This has been debated since, but I would like to say that there was some sort of consensus about that. It was a very important step to get out of the depression at the time because he could increase the monitor baseline. He basically did that from the very beginning.

35:15

I don’t want this to sound like the fiat currencies are great, and the fixed currencies are not good. Each system has its own pros and cons. I would argue that it was as much needed to be taken off the gold standard in 1933 in the US, as it was for Germany, or the wider Republic, with hyperinflation for that matter, to be pegged to gold to ensure that stability in 1924. The reason I’m saying this is that it’s so important to understand that being on a gold standard is akin to having debt denominated in a foreign currency. So really, breaking the link for the US meant that they didn’t have to work with such a limited toolkit anymore. And thanks to fiat currencies, there’s a better probability of short-lived deflationary pressure.

So, let me just ask everyone a question here. What happened to the stock market when Nixon said that he would no longer allow for paper money to be turned into gold? What happened to the stock market? Did it go up or down? Perhaps some people out there might be thinking that the stock market went down after that announcement. You might think, “Hey, that might be bad for the economy,” but it actually went up. The stock market the very next day jumped 4%. You can just see that when you study it. Go back in history and you’ll see what happens whenever you have these devaluation effects. Now, what you also need to remember is that it went up 4% in nominal terms. That was because people expected inflation and that ties into the whole discussion whether or not inflation is a good or bad thing.

I promise I will soon stop geeking out as much about history, but I think for good reason, you can make a lot of comparisons to 1929. I also think that it was vastly, vastly different. One of the reasons is that the system we have is just different. I’m not just talking about whether we’re in a gold standard or not. At the time, the Fed could only help banks that were members, and only 35% of commercial banks were members. That basically meant that you had 4,000 banks that went bankrupt. The ripple effects of that were just catastrophic. That’s not the case today.

We are in a very, very different situation. The dollar shortage that you saw back then, we don’t have now. Yes, we do have a dollar shortage, but we have swap lines. We have hundreds of billions of dollars that are being swapped right now. So, it was just a very, very different system. As much as we can say bad things about the Fed and what they’ve been doing, and you probably should, we definitely have learned to tackle crisis better than 1929. We have more tools. And I would just like to add that now that I’ve been bashing fiat occurrences for so long, and quantitative easing, for that matter. That’s not my favorite tool. Let me put it like that. We are in a very different situation whenever we’re looking at that. And so, I’m very curious to hear if you have any thoughts about this Preston.

Preston Pysh  38:07

I think fiat currencies are a total abomination. I don’t think that there’s any reason that a country should have them other than their intention to debase them so that they can apply attacks across the entire population without the population having a vote in that. That’s pretty much the only reason to have a fiat currency. I mean, think of it like this. Let’s say you have a pegged currency, and you want to go to war. With a fiat currency, you can just debase the currency immediately without any of the citizens having a vote to pay for the war through debasement. But if you have a pegged currency, you have to issue war bonds. People will have to get behind the idea and fund it before you can go out there and spill the blood of the young citizens that are going to go fight it. I guess I just look at fiat currencies as being a total farce for a country to debase their currency and to universally tax everybody without their input as fast as they possibly can, so I just can’t make a case for it.

Stig Brodersen  39:12

One of the things that I’ve been thinking a lot about, and I think it’s definitely also on my record, are the issues that I do see in the fiat-based currency. I do want to make the counter-argument again, to be able to see from both sides and not to be too one-sided. I’m not saying that you are oppressed. I’m pretty sure that you thought about–

Preston Pysh  39:28

No, no, I’m very one-sided. I think they’re terrible.

Stig Brodersen  39:32

Do you think they’re terrible? Okay. No, I think it’s very dangerous in life, and especially when it comes to financing, whether or not you have the truth. I guess that’s one of my issues. That’s one of the things I’ve been thinking a lot about. Now, we’ve been doing this for six years, and we’ve been talking a lot about the issues with fiat currencies. That is why, six years in, I would like to make the case for it. This might sound a bit more philosophical, but I think that there’s something about considering that in terms of how to take in new information.

Regardless, one thing that I would like to talk about is what we think is going to happen. Do I see the system that we have now break down anytime soon? And how do I position myself as an investor? Whenever I think about that, I don’t think too many people, or at least not the people who can do something about it, will change the system. I don’t see too many people having an incentive to go away from a fiat-based currency system. And while we can definitely make the argument that that’s not a good system, I don’t necessarily see change happening. What I see most likely happening is that we will have a major redistribution of wealth, hopefully without too much social unrest. We would also probably see a redistribution in progressive taxes. I think that’s how it will unravel.

Preston Pysh  40:53

I think it’s really simple. The more that you fight it, the more that you prevent markets from being free and open, the more social unrest you’re going to have. The further you kick the can down the road through manipulation, the more you’re charging it. It’s almost like a spring. The more you push the spring and compact it and compact and compact it, the more abrupt the response you’re going to get whenever it comes to the table with the new solution to what’s happening. Because this is not sustainable. There’s no way this is sustainable for them to keep doing this.

Stig Brodersen  41:28

No, I don’t think that’s sustainable either. I think that one of the things that authorities would eventually do is to have this major redistribution. It might be in terms of UBI. I think there’s a case that that could happen. It has also gained a lot more political popularity recently. But if you ask me, I think that at least within the next decade or two –it’s very difficult to make predictions that go a lot longer than that. I think it will be within that currency system we have today, just with eventually more redistribution. I’m curious to hear how you think it will play out.

Preston Pysh  42:00

There’s a reason I own Bitcoin. For 2020, it’s up 29%. Since we talked about it on the last mastermind discussion, it’s up 15% while the rest of the market is down significantly. It’s been like this for 10 years. In some years, it’s been up by thousands of percent. So, either people buy into that narrative or not. If they don’t, then that’s their own prerogative. I feel like I’ve read a lot, and I’ve studied it for five years straight. So I feel like I understand it really well. I think if it performs really well, yeah, that’s my hedge for this entire scenario.

Stig Brodersen  42:34

All right. I just also want to say for the record that I also own Bitcoin, I think I told that before.

Preston Pysh  42:41

I think it’s about time you told the audience that you own Bitcoin.

Stig Brodersen  42:44

I hope I’ve done that for years. But I think it goes back to my previous hammer in terms of I need to be able to see from both sides and I see some major issues with the current system. That’s also one of the reasons why I own Bitcoin. I would like to talk to you more about trying to buy gold. I see some major issues, but for one thing, I don’t know if I’m right.

The other thing is I’m not that significant. What I want to happen and what I think would be best in terms of the monetary system is one thing, and what’s going to happen is the other. Those two are very different things. This might be a silly example, but there is this famous quote from Richard Feynman, who won the Nobel Prize in Physics. He was saying that people don’t change opinion because of better facts. The reason why we adopt new knowledge is that the people who do not believe die, and new generations adopt a new point of view. I’m not talking too much about Bitcoin, but I think that’s one of the things that I’m seeing people right now screaming from one corner to the other. It’s like now I have 10 more arguments about why Bitcoin is good. But the other corner says, “No!” It doesn’t matter how good or not good those arguments are. The other side just refuses to listen. And so, I don’t know what the future system is. I definitely have strong opinions on that, but I don’t think we will see a change just because one side has better arguments.

Preston Pysh  44:11

I totally agree with you. That’s what’s interesting about the whole Bitcoin argument. It doesn’t care what anyone’s argument is. It’s a mathematical protocol. It’s just ones and zeros, right? It’s just doing what it does. Whether you agree with it, or hate it, or love it, it doesn’t matter. It just keeps on doing what it does. And if country X, Y, and Z say that it’s banned in their country, then it’s going to be banned in their country. But it won’t be in all the other ones. It’s going to keep doing what it does. If you don’t like that, then hate it. Don’t buy it.

I just want to throw it out for the record, Stig has owned Bitcoin for a long time. He fights me on this show. Do you know why he does it? He does it because going back to what he was talking about earlier, he wants there to be a balanced argument. It goes back to what we both firmly believe, which is if you can’t argue both sides of it, and this is really big on Charlie Munger, then you don’t understand it well enough. And so, I think, the audience needs to understand that although he has a position, the reason he’s arguing or he’s taking the other side of it is for their benefit to hear two sides of an argument.

But anyway, let’s plow into just a couple different equity picks in this environment. You already heard my comment. I’m sure Stig agrees with me on the economic calculation because of what’s happening with the currency and how difficult that is. And so, when we talk about the intrinsic values of a couple of these picks, we’re using an IRR, and we’re going to compare it relative to other things out there just so you can see the relative comparison.

45:47

So, when I pull up our TIP filter tool, which basically goes through the entire US market, it prioritizes all the picks based on value investing principles that Warren Buffett, Benjamin Graham, et al. have taught us throughout their writings. When we go through this filter tool, we’re getting a lot of financial companies hitting the filter. Because of a lot of my opinions on the currencies, I’m a little hesitant to recommend a lot of those. But I have found a few that score high in the value filter, which also has good long term momentum trends. That’s something else that our tool provides, this green buying momentum status. And so, let me just talk through a couple of these.

46:33

The first pick is one that we talked about around the fourth quarter of 2019 or the first quarter of 2020, Biogen (BIIB). Here’s a company that, whenever I do an intrinsic value on, and I’m looking at the IRR, I would tell you, I think the IRR on this is around 13% to 12%, which is extremely high if you bought it at the current price. Today, it’s trading at $296. This is a large pharmaceutical development company. They’re doing $14 billion in topline revenue annually. When you look at their top line, it’s been growing like crazy. They have a lot of free cash flow. I think in this environment, this does well. Considering we’re dealing with a virus, you’re going to have a lot of drug development going forward. I don’t see the impairment in that. Maybe they could run into some issues as far as the development because of the facilities being able to manufacture it. With as far as Coronavirus in the coming year, I’m not quite sure what those implications would be. But as far as pure numbers and looking at the viability of the company, I think this is worthy of consideration.

47:54

Stig, I’ll just go through the three different stocks I have, and then we can discuss them. The next one I want to talk about is eBay (EBAY). This just recently started showing up on our filters. It also has a green momentum status, which is rare for a lot of the companies in our filters right now. When I do an intrinsic value assessment based on the free cash flows, this might be around an 8% to 10% return based on the free cash flows of the company moving forward. I really like this because I think you’re in an environment where a lot of people are struggling, and are probably wanting to sell some things. And so. then they’re going on to eBay and selling their items. You have other people that are trying to save money, so they’re not going to buy something new. They’re logging on eBay and they’re trying to buy the other side of it. I just like this. I like the valuation on it. I like that it’s counterplay to Amazon. I would tell people to go ahead and check this one out.

48:53

The third one that I have for you is Intel (INTC). Especially now that everything is going virtual, right? You’ve got people buying newer computers or trying to upgrade whatever it might be. You just have so many different things that are going to need processors in the future. This is a highly commoditized-type business, but there’s not a lot of competition. When I say ‘commoditized’, I’m thinking more of the speed at which they have to keep pumping out new technology to stay competitive. But there’s not a huge amount of competitors in the processing space. So, when you look at this company, their topline just continues to grow like crazy. They hit $71.9 billion in 2019. Here, let me do another conservative estimate on its intrinsic value so that I’m giving you guys something to chew on. I think you’re around maybe a 6% to 8% IRR return if you buy it at the current price, and it’s currently trading at $57.99. I think you’re around at 68% return on this one.

I would tell you those are three picks that I think might do well in the coming year even though we’re in this crazy environment. Who knows what in the world is going to happen moving forward. Stig, your thoughts?

Stig Brodersen  50:17

So Preston, is this the time where I’m going to pitch Bitcoin and gold? *laughs*

Preston Pysh  50:17

*laughs*

Stig Brodersen  50:21

Looking at the same filter, I think it’s very interesting to see the top three that have positive momentum in our large-cap filter. By the way, we have three different cap filters, large, medium, and small. We’ll only talk about the large-cap, which covers the most-known companies, Micron Technologies, Biogen, and then Allstate. It’s sort of fun because we pitched all three on our mastermind group. We already highlighted Biogen in the fourth quarter of 2019. We’ll make sure to link to that in the show notes. I was pitching Allstate, and Hari has previously pitched Micron Technologies.

For full disclosure, I went long on Micron. I think that’s a very interesting stock. Right now it’s trading at an expected return of around 14% or so. And, actually, our guest just last week, Mohnish Pabrai, has a significant position in Micron too. As much as he doesn’t want to talk about his current picks, he has actually gone on record about it. You can find that out on his YouTube channel, which is just a treasure trove of information. He briefly mentioned that he found Micron to be a compounder. So, in terms of looking at some of the momentum, Preston started out by talking about NASDAQ. NASDAQ turned green already last April 8. It’s interesting. Preston was touching on this before. These technology companies perform really, really well.

Another company I would like to highlight is Google. That also has positive momentum. I pitched Google a long time ago in a mastermind meeting too. Google has performed quite well during this recession. I think the year-over-year growth now is down to 15% constantly. I’m saying down to 15% because that’s actually a company that’s not performing because of COVID-19 right now.

A lot of technology companies are doing really well, but that also implies that traditional value companies have not been performing well. When you think about it, it does make a lot of sense why they haven’t performed well. Because a lot of those use equipment heavily. Airlines could be one example, and railroads could be another. A lot of those stocks have really, really not performed well.

In terms of talking about what I’ve been doing here since we had the last current market condition update, I’ve been going long on the US dollar for a long time. I think I’ve been around 90% to 95% invested in the US dollar, which is a lot, especially since I don’t live in the States. I definitely don’t recommend anyone to do this. I tend to be way too concentrated at times. I was quite sure that whenever the global economy would tank, I was quite confident that the dollar would soar. We see that play out now, so what I’m doing now, with a strong dollar in my bag, is I’ve started to diversify globally, both with my stock picks and currencies. Perhaps this is also the time where I transition just briefly to talking a bit about some of the currencies. I mean, I’ll hand it to you. I have been buying more Bitcoins.

Preston Pysh  52:25

Stig, people need to know. You were in Bitcoin during the last bull market.

Stig Brodersen  53:15

Oh, yeah.

Preston Pysh  53:16

I think people that are listening to this might think that you just bought it in the last year, but you’ve owned it for many years at this point.

Stig Brodersen  53:23

Yes, for many, many years. But just like I’m trying to bash you as much as I can, Preston, and luckily, we can record it, I have friends, too. I’m the guy who’s trying to not be ripped apart by people who are thinking, “That’s the stupidest thing I’ve ever heard!” Because of that, I’m also forced to come up with a good argument, why I have the position that I have. I would like to really emphasize that again. It’s one thing to think as a private person or citizen, of what is good and what you hope will happen, but you really need to be able to separate what you hope will happen from what will happen. Preston or I, for that matter, might be right in our thesis about this fixed monetary baseline. Jeff Booth, whom we had on two weeks ago, was amazing in the way he talked about currencies. He might intellectually be right in that. But if everyone in power just thinks about this very, very differently for decades to come, that’s how we’ll need to respond as investors. We’ll need to take that into account.

Now, I’ve definitely hatched some of that position away from fiat currencies, and since I’ve never sold, it’s also a much bigger part of my portfolio that hasn’t been in the past. One fun story I’d like to talk about, now that we’re talking about currencies, is gold. I was speaking to a friend of mine, a very wealthy individual who has been trying to buy a large quantity of gold. He was told that to get physical gold, which obviously is what he wanted because he doesn’t trust the system too much, it would take 6 to 12 months to fill that order. When he told me that, I thought, “I need to test this out too.” I called around quite a few places, both in Europe and in the States. It wasn’t as significant order as he would have been, but I was trying to fill an order with 100 ounces. Obviously, that’s a lot of money, but it’s still not a significant order. Still, it was very difficult to get a hold on fiscal gold. Most places said it would take at least a month. I was a bit surprised, but then again, I wasn’t surprised at all because the time that you need an alternative currency is the time that everyone needs another currency. I just found that to be a very interesting study to do yourself.

Preston Pysh  55:27

Stig, I have a really unpopular opinion about gold, and it’s evolved. I tell you, it’s changed in just the last two months, and I’m going to put this out there because I’m curious to have the audience yell at me on Twitter about why this idea is wrong, even if I think it’s very right. So, here’s my opinion. I think gold is going to do quite well in 2020, especially with all the debasement that’s happening. I think the next bailout is going to be announced tomorrow, and the one after that is going to be the day after tomorrow. I think these bailouts are going to continue. I think you’re going to see global governments just debasing like crazy, and I think it’s going to be a very strong environment for gold to perform, especially physical gold.

My concern goes back to Bitcoin. There’s this timing for how that protocol functions. We’ve got this halving event that’s happening on Monday. The 11th of May is when it’s supposed to happen. Historically, when these halving events happen, it reduces the amount of flow that’s then coming on the market by half. When that happens, you have less selling, fewer miners able to sell their position. Historically, when you look at this event, and what happens following this event, developments don’t happen immediately. It happens about a quarter after the halving event that you see the price really starts to run. I completely expect that exact same scenario to play out again. A lot of math and statistics have been done on this. Plan B, whom we had on our show, has modeled this. It has an R-squared value of about 95%. His model even further suggests that the price of Bitcoin is going to reach $100,000.

Now, I want to walk you through how that relates to gold. Based on the timing of the math of how this plays out, this means that Bitcoin should be around its previous all-time high around the Christmas timeframe. We’re talking $20,000 per Bitcoin. Today, it’s $9,000. If that happens, then we’ll see Bitcoin make this massive run between now and Christmas to $20,000, and it’s not stopping there. It’s going to keep running after that, and throughout all of 2021. For the people who have been hearing about Bitcoin now for over 10 years, if that happens, you’re going to see Bitcoin pass its previous all-time high. Historically, when it does that, it really runs after it passes its previous all-time high. The percentage gains that you’re also going to see will be somewhat mind-bending. The market cap for Bitcoin is going to be in the hundreds of billions, approaching a trillion dollars.

I just don’t know how gold that’s already sitting in a market cap of about a trillion dollars is going to possibly compete with this, especially when your clearance of transaction time is six months. With gold, you’re not talking about conducting a transaction in near-immediate terms, unlike in Bitcoin. To receive physical delivery of your gold, it would take six months to get it.

Stig Brodersen  59:49

Yes. Let me, just for a moment, not play devil’s advocate because I have the same concern. I’ve been trying to track some of the progress of buying gold and it’s definitely, in many ways, getting a lot easier than it has been in the past. But gold is just such a different creature compared to Bitcoin. It’s sort of like tuning your Škoda and comparing it to the second-fastest Formula 1 racer. It might not be the fastest, but it’s still pretty fast. It’s a silly analogy, but I think I would like to use that because I don’t want to have to own gold like that in my home. I called some brokers, and just had questions, like, how does it work? Where is it stored? I think it’s a very cumbersome system. I can drop by Switzerland, and pick it up, or they can send it to me to my home. Those are my two alternatives, and I don’t know if I like that system.

A lot of this also comes back to one of the arguments I had before about generations. It sounds morbid if I say, “Have to die,” but I guess we’re all going that way. Different things just happen in different generations. The best comparison I can make is that the millennial generation wants to own significantly less than their parents. It all just stands to show that they don’t need to own the same type of house. They don’t even own their own home, or at least, fewer do. They don’t need to own their own car. It’s a sharing economy, to a larger extent. One of the arguments that Tuur Demeester brought up when he was on our podcast, was that millennials are crazy about Bitcoin. That’s one asset that they hold the most. And no, they don’t have the most money now, but that’s because they’re millennials. It’s because of the age that they are now.

If you look at where wealth is, typically, the older you get, the more wealth you have because you have more time to accumulate that. I think that in itself is just a huge shift in terms of how things will be priced. So yeah, I’m bullish on gold for 2020, if that’s what we’re talking about, and if we look decades ahead. I think there is just something about the whole physical thing about gold and how looking at it, yes, it’s been money for 5,000 years, but then here’s another generation just thinks differently about money.

Preston Pysh  61:58

If you’re listening to this, and you still like gold, I think the way that I would want exposure to it is through gold companies. Trust me, I think it’s going to do well, but I don’t think I want to own physical gold at all simply because of the risk that we’re talking about. There is risk in the speed that you can offload it if something goes blowing by it at supersonic speed. If you own the equities, just sell the equity, and then buy bitcoin if you want to transition to something else. I think the way to get exposure to gold is through the gold mining companies because your clearance of transaction will be immediate if you’re within the eight hours of the five days that it trades. I said that kind of snarkily because Bitcoin trades 24 hours every single day, holidays included, everywhere in the world. But so, that’s how I would go about getting exposure if you do want to have gold in your portfolio. But those are the risks people need to hear about. They can go the direction that they want to.

62:58

Alright, so let’s go ahead and play a question from the audience. This question comes from George. Here it goes:

George  63:04

Hey, guys! Firstly, I just want to say thanks for what you do. I started learning about investing around six months ago and definitely couldn’t have gotten to where I am without your resources. A question is a simple one.

A few months ago, I could see that the market was looking pretty expensive and that we might be due for a correction soon. I didn’t think it would happen so soon, and it caught me off guard. Like I’m sure it did many other listeners. I keep hearing and reading the phrase, “Don’t catch a falling knife.” I get that. But what I’m finding hard as a new investor looking to invest just after a crash is not just, “How do you know that the knife is falling?” But, “Is this the time to be looking for those companies that were already under-valued and try to remain calm while you see blue chips selling for 50% less than their previous stock price?” Or, “Should I be looking at more of a momentum strategy to help minimize the risk of the falling knife? We’ve set selling by process working off momentum percentages.” Thanks!

Preston Pysh  64:01

George, I’m going to take a crack at answering this. What you’re talking about is exactly how I’m investing these days. I am obviously interested in the valuation metrics, but I am not putting on any position unless it has a positive momentum trend with it simply because I think that what we’re experiencing is very rare. When I say very rare, this isn’t your typical business cycle like we’ve seen in the past. I think this is way different, and going to be way more difficult to navigate successfully.

Let me just expound on that. Do I think the stock market can make a new all-time high right now? I do. I think that could happen. Do I think that we could see a 1929-type chart where it just progressively goes down after it gets bid 40%, but overall, the market keeps trending lower? I absolutely think that could happen. Somebody who hears that will say, “You’re basically saying it could go anywhere.” And you’re right, that is what I am saying.

I think the array of potential outcomes on the stock market is so wide that it’ll blow people’s socks off because what you’re seeing is total market manipulation. It’s not just in the US. You’re seeing it globally. The central bankers are doing things that we have never seen in our entire lives. As a result, I have no idea which direction it’s going to go. That’s why I think momentum is such an important part of the investing approach these days because it’s completely based on price action. It’s looking at “What was this statistical volatility in the past? When has it stepped outside of that statistical volatility?” If it did, and it’s red, then that’s a sell. I know that sounds really simple.

“Preston, so you’re not even considering 10-Ks and 10-Qs anymore?” No, that’s not what I’m saying. All I’m saying is that if I do buy something, I’m trying to not only find something that has great value characteristics but something that also is in a positive momentum status so that I can protect my downside risk. That’s it.

I have no idea whether we’re going to see a stock market hyperinflate as we saw in Venezuela. Go back, pull up any chart of a stock market during a hyperinflation scenario, and guess what? The stock market goes up. It just keeps on running, it and runs in a parabolic way. In the US, I think that could happen. I also think that we could see some type of deflationary spiral in prices. I don’t know because so much of it depends on government intervention. It also depends on some random technological solutions that may be stepping in and redefining what money is.

There are so many different outcomes, and we have no idea what those are going to be. But if I’m using some type of momentum strategy, it’s going to protect my downside risk. I do know that if the market goes lower. It’s also going to help me step back into the market if it’s going to run higher.

67:09

I think the best thing for people to do at this point is to have an extremely, extremely open mind as to the possibilities of what’s coming next, and then use sound principles. In my opinion, the most sound principle out there is a value-investing approach, mixed with momentum strategies. That’s exactly how I’m doing it, personally. Also, I know this is a very biased opinion, but I think somebody who does not have exposure to Bitcoin, I think is absolutely crazy. If you’re scared about the volatility, minimize your risk by position size. Have a 1% position, and if you’re wrong, well then you lost 1% of your portfolio. But if this is right, and you have 1% exposure, it could potentially cover the other 99% of your investment.

I’m not telling people what they need to invest in, but I think what people need to do is they need to educate themselves on what it is and what it isn’t, and the only way you can do that is going out there, and reading a ton of books. That’s the only way you’re going to get comfortable. And if you’re concerned, adjust your risk through position size is my recommendation.

Stig, I know that was really long. I’m sorry, but I was quite animated and excited about responding to that question. Let’s hear what you have.

Stig Brodersen  68:29

I think you need to use both, especially in times like these, where I wouldn’t say that value is out of style, but I would rather say that value is just manipulated. So much comes from that initial manipulation, and some of that can be difficult to cope with. For instance, quantitative easing is completely messing up the market, but whenever you take it away, even though it might not be supposed to be there in the first place, it’s like tightening. It’s just a very, very difficult environment to maneuver in. I think it’s still important to revert back to value especially in volatile markets like this because you might be tricked into thinking that companies can change the fundamental value by 10% almost on databases. The intrinsic value of companies just moves much slower than that. And even though you have definitely seen significant changes in the intrinsic value of some companies, because of COVID-19, it’s still a very sound principle to go back to.

At the end of the day, I don’t think buying and holding great companies will go out of business. Now might just be a more difficult time to do that than in a long time because the market just gives you very different signals than it used to. If you’re completely blank of what you should invest in, something like Vanguard Total World Stock ETF (VT)’s expense ratio is eight basis points, and you’ll have great diversification if you do that. The momentum of that is still red, so perhaps now is not the time to go into it. It did turn red last February 26, and it would still have been a good call for you if you had made that at that time. So the indicator still tells you to sit on your hands, but that might be a way to do it if you’re very unsure.

When is the momentum going to change? I don’t really have too much opinion on individual stocks. You might consider something like that specific world market ETF that’s just very cheap to buy into.

Preston Pysh  70:27

Stig, I would say people just need to be prepared for being whipsawed all over the place. Would you agree with that?

Stig Brodersen  70:34

Yeah, I never know where the stock market is going, but right now, it’s a very tricky time that we’re in because there are so many who have such huge incentives in terms of manipulating the markets. The future has always been difficult to predict, and this time is no different.

I talked a lot about history before, at least about the last hundred years. I don’t know when the market has been as manipulated as it has been right now. I’m not saying it’s going to be anything like 1929, but I think it’s important to say we just have a very different system. This system couldn’t be manipulated the same way in 1929 because the system was not set up to be manipulated the way it is today. And that manipulation may be good for some reason, but it’s also bad for other reasons.

For instance, as I mentioned before, the Fed couldn’t go and support the banks, so it was raw capitalism. Also, I can’t help but say, we talked about Berkshire Hathaway, and again, we’ll talk more about that later, but Warren Buffett, right now, is being punished for being a capitalist. It’s so interesting. He’s been sitting, waiting for phone calls of when people need cash as that’s whenever a true capitalist would make money. But guess what? He’s been getting no deals because they get free money from the Fed. And so, that sound principle that he was relying on, “When credit freezes when we face a huge crisis, that’s the time that I will make great returns.” I can easily understand if Buffett has been thinking that. That’s what happened in 2008. But what’s happening now is the Fed has printed trillions of dollars. Now, it’s just a different ballgame.

Preston Pysh  72:04

George, we just want to thank you for asking such a great question. Because you recorded your question at asktheinvestors.com and got it played on the show, we’re going to give you a 1-year subscription to our TIP Finance Tool. This tool filters the entire market. In fact, this is what I was using when I provided the three stock picks earlier in the show. It filters the whole market with value investing principles, then shows you the momentum trends like we’re talking about, and helps you find great picks among the many, many stocks that are out there on the market. Our momentum tool also covers indexes, so if you want to see the NASDAQ, or you want to see the S&O 500, those are also all covered in the momentum status to help people navigate these very trying times. So George, thank you for that, and I hope you enjoy your free subscription to TIP Finance.

Stig Brodersen  72:54

Alright, guys, that was all that Preston and I had for this week’s episode of The Investor’s Podcast. See you next week!

Outro  73:00

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