Market Outlook: October is historically a volatile month for stock markets, with new tariffs on pharmaceuticals and other goods potentially creating headwinds.
Investment Opportunities: The Department of Labor's new rules may allow private equity and cryptocurrency investments in 401k plans, raising concerns about the inclusion of high-risk, opaque assets.
Regulatory Changes: The shift in policy regarding 401k plans could expose retirement savers to complex and speculative assets, transferring risk from sophisticated investors to everyday workers.
Central Bank Independence: The podcast discusses the potential threats to Federal Reserve independence, with historical context on political pressures affecting monetary policy.
Global Currency Dynamics: The dollar's dominance is gradually eroding due to political unpredictability and the emergence of new alternatives like central bank digital currencies.
Geopolitical Risks: The discussion highlights the potential impact of fragmented globalization and selective isolationism on global financial stability.
Stablecoin Regulation: Concerns are raised about the deregulation of stablecoins, comparing it to the wildcat banking era, and the potential fiscal implications of future bailouts.
Transcript
This episode of The Disciplined Investor is sponsored by Interactive Brokers. And at Interactive Brokers, you don't have to wait for the markets to open. With around the clock trading, you can trade over 10,000 US listed stocks and ETFs, US equity index futures, and options. Also, US Treasury bonds, and even more. IBKR's overnight trading helps you stay ahead by allowing you to react instantly to market moving news and economic events whenever they happen. Capture more market opportunities and trade on your timeline during local market hours or whenever it's convenient for you. Enjoy bond trading with no markups, no built-in spreads, and low transparent commissions which can help you improve your returns. Rated the top online broker, Interactive Brokers has won awards from Baronss, Investopedia, and Stockbrokers.com and has been benzinga's number one overall online broker for bonds four years in a row. The best informed investors choose Interactive Brokers. Open an Interactive Brokers account today and discover more trading opportunities around the clock. Learn more at ibkr.com/aroundtheclock. Interactive Brokers is a member of SIPC. >> The disciplined investor is all about you, your money, and the markets. Sit back and get ready for this edition of the disciplined investor podcast. This episode of The Disciplined Investor is sponsored by Horowits & Company. If you're looking for a portfolio manager, look no further. Horowits & Company. From seed through harvest, cultivating financial success. [Music] [Applause] October. Will history repeat again? New tariffs announced again, again, again. Thinking about 401k plans. And our guest today, Dr. Barry Iiking Green, professor of economics studies at UC Berkeley. All this and much more on episode number 941 of the Disciplined Investor podcast. [Music] Hey, welcome to the discipline investor podcast. It is October and welcome to October. Or maybe uh we don't want to be in October because the color of the month, the official color of the month is red. 25% more volatile than other months and historically has been one of the worst months in uh in all of the 12 when it comes to stock markets. We know about that. Black Monday, Black Tuesday, the worst month during the financial crisis. Seasonality does not favor October. But then again, the bulls are buying and maybe it'll be different this time. We'll have to see. We see a lot of things that are going on right now that could push against and create some headwinds like the new tariffs that were announced at the end of the week on pharmaceuticals on uh certain trucks, big trucks as well as kitchen cabinets. I guess that was something. And uh that is going to possibly be very significant because they're talking about 100% tariffs on some things like pharmaceuticals unless you have some plants you're already building here. And this, you know, of course, all these little openings to each of these things and their own little peculiarity peculiarities. Is that the right word? Anyway, the bottom line here is that there are some things that are pushing and could impact October. But what before we get to our guest today, I was thinking about something. And you know, we had on last week Pat Kamuso and he was talking about taxation and about cryptocurrencies and uh we really focused in on the idea of stable coins and that was that was um something that I think was really interesting that that was two weeks ago actually. But why I was thinking about all week was because the new 401k rules that were enacted by executive order back in August. And what happened was the Department of Labor now is seemingly signaling this endorsement of private equity and cryptocurrency investments for investment inside of 401k plans. And for a very long period of time, both the cryptocurrency as long as they've been around and private equity has wanted to, I'll say infiltrate the market which has like trillions of dollars invested in it indefined contribution plans. And that was a big prize. as they're like if we can get in there the automatic investing even to three four 5% of the total which is the number that we're going to talk about of course as the number that everybody should have in their portfolio because that's what they want a little piece but all long access was restricted there was this stringent fiduciary standards that was under Orisa the employee retirement income security act and from my perspective what I was thinking about this was that ORISA basically was designed to to safeguard and it was it was designed to protect retirement savers by imposing this very high fiduciary standard on the plan sponsors and the and the administrators too. So it was the employer the employers and and the sponsors and the administrators of those plans everybody across the board had this massive amount of fiduciary responsibility and part of that was to safeguard the assets. So it required that those managing the defined contribution plans in this case the 401ks act with this total loyalty and care making decisions solely in the best interest of the participants. Okay, that's fine. And that also included applying a certain level of skill and prudence uh due diligence and that was really important. Okay. Now this whole framework that has been in place for a very long period of time, it served to protect to create a barrier against inclusion of of high risk, non-transparent or opaque and illquid investments inside of the 401k plan. And what are those two things that are now thinking about coming in? Well, they're opaque, high-risk, illlquid, private equity and cryptocurrencies. Cryptocurrencies being a little bit more liquid, of course, but that was basically designed to keep those kinds of things out of the reach of the average retirement investor inside of the 401k plan. They can do whatever they want outside of it. The idea was that while these asset classes maybe had some great opportunity, the elevated fees, the lack of transparency, the sophistication you had to have to understand what was going on in in these things. I got to tell you something. I know a lot of very well seasoned investment advisors that really can't tell what the hell is going on inside of some of this private equity or some of these hedge funds. So Orisa's intent was not necessarily designed to limit the opportunity, but it was really created and implemented to to uh to in to ensure that that that that opportunity didn't come at a major risk. That's what it was really that would swamp investors. So, back in 2020, there was a little bit of a change. the um Department of Labor issued some guidance that state that private equity could actually be included in professionally managed investment vehicles within 401k plans provided that the decision was made in accordance with ORIS' fiduciary principles which by basically it was weird because it it opened it up but then it closed it but the idea that they were saying that could be done was a significant shift. So plan sponsors started saying, "Well, maybe there's something we could do here." However, the central idea, the tenant of all that was going on with Orisa and the fiduciary standards and the prudent prudent manuals and all this other stuff remained with this fiduciary uh offer. basically employees that or participants of 401k plans that had no idea and understanding of any of this allow them to have this access to these trans you know this this opaque investment with these huge fees rather than just index funds because a lot of them didn't even disclose where their capital was being deployed. So, how do you how do you how do you have the mix of the Orisa rules and the fiduciary standards and all that with with regard to this and at the same time say yeah that's fine but yet you have these investments that you have no idea what's going on inside of them these are things that many professionals and sophisticated investors often say no uh I'm not sure I'm going to do that because very difficult to understand so the question then why why should retirement savers that really don't have that sophistication be the full back source of capital, which is essentially what they want to do. So, fast forward a year 2021 under the Biden administration, Department of Labor said, "Well, you know what? We're not forget it." They made a big cautionary comment about private equity investments and saying that these more complex plans that many fiduciaries might not possess the expertise, forget it. The warning was met with all this opposition at the same time from private equity firms of course and venture capitalists of course who saw it as a threat to their ability to raise capital and tap into this very lucid lucrative and very easy pickings 401k participant plan. They'll just make it look good and they'll throw it down there and you just check a box. Now that push back against the the guidance escalated and the Trump administration intervened and urged the agency to reverse course. So the do the department of labor labor reversed their course saying it had a chilling effect on innovation unfairly cast out on the comp competence of planned fiduciaries and effectively dismantled a key regulatory safeguard clearing the way for this broader inclusion of alternative assets. And I'm a big fan of alternative assets but not these inside of 401k plan. I think it's dumb. So this marked a really significant shift in the policy with regard to 401k plans and and that policy which prioritized um expanded investment access. But the story didn't end there. Not only did this change shift and allow for the potential for private equity venture capital inside of 401k plans, but also now cryptocurrency. another asset that's known for as we know volatility, complexity, and speculation, right? That's we that's kind of what it is. Now, the prudent standard was kind of being said that well, if they're allowing that, well, we can allow this and now the green lighted the whole thing. So, that raises a lot of concern. We know Bitcoin is about, you know, somewhere between 3 to 10 more volatile than the S&P. And while individuals can speculate all they want, could this expose 401k savers, which the 401k is the only retirement plan for most people these days to find benefit plans? Whereas you worked for a company for years and all of a sudden they say, you know what, thank you very much for your service. Here's 66% of your salary for the next indefinite period of time plus a cost of living adjustment and then you're fine. No, now you have to put away your own retirement, augment it with some obviously augmenting social security, which is a small amount, but the company no longer is providing a major long-term benefit. So, here's the deal. The deal is that this this this Department of Labor's stance is showing this the shift towards expanding investment choices, but it's also loosening of the pro of of the framework that they have protecting individual investors that has governed retirement savings for a very long period of time. And and by allowing these complex and high fee and speculative assets into 401k plans, the government is once again effectively transferring risk from sophisticated investors to everyday workers. You know, talk about, you know, hey, we got all this stuff. Uh we don't understand it. Let's unload it on somebody else. Well, who's it going to be? It's going to be the people in the 401k plans. And many of those who lack the financial literacy to navigate these options. And that's why we have such simple investment choices in a lot of 401k plans. Many people don't understand what exactly it is to be in an S&P 500 fund. And how are they going to understand how to be in the blah blah blah private equity fund that's invested in uh leverage credit in certain sectors of the real estate industry. Seriously, I mean that that's just dumb. And there is a new sense of stress and volatility that's showing up in some of the private equity where they can't get access because interest rates are higher than they were and people are not pwning up money as they were before and alternative asset managers are looking for these new sources of capital and that's why they're pushing on this retirement plans. The 401k plan obviously is their next frontier. But here's the question. Just the okay with all that information, let's think about this. Let's ponder this and and and I hope there's some people in areas of Congress or government or in power or maybe even plan administration administrators, employers that are listening to this. I really hope so because my question is very simple. Is this innovation or exploitation? Now, you know from what I've been talking, how I've been talking about it, what I've been saying, you know my thoughts on this. But what are you thinking? Are you going to allow this opaque, high cost, very sophisticated, very uh difficult to understand investments inside of your 401k if you have the choice? And by the way, if you do, are you going to take the responsibility as the fiduciary of that plan to allow it inside and then take the responsibility if it craps out with people that really had no idea what it was to begin with? Are you willing to take that risk? Is it necessary? Is it necessary? If most of the private equity can't actually be invested in anybody that has a net worth under a million dollars or certain level of sophistication and understanding about investments or on the other hand we say you know what people could do whatever the hell they want to do. Who cares? I don't see it that way. Exploitation innovation at the crossroads. So let's get moving on to our next section of the show. So, let's talk a little bit about Interactive Brokers. Because if you want to navigate political uncertainty, well, if you're a disciplined investor, don't panic. Because disciplined investors prepare. At Interactive Brokers, you can help protect your portfolio and hedge market risks with bonds, precious metals, and foreign exchange, all from one powerful platform. With advanced tools, global access, and low costs, IBKR helps you manage volatility and stay ahead even in uncertain times. The best informed investors choose Interactive Brokers. To learn more, visit ibkr.com/n. So, let me tell you a little bit about today's guest. His name is Barry Iiken Green. He's George C. Partardee and Helen N. Party professor of economics at UC Berkeley. He's distinguished professor of not only eco but political sciences as well. He's a leading expert on the international monetary system and global finance. And he researches all sorts of things. He covers the the history of global financial crisises, the international monetary system, economic history, and the causes and consequences of populism. He holds fellowships from several institutions including the National Bureau of Economic Research and the Academy American Academy of Arts and Sciences and has previously served as a senior policy adviser at the International Monetary Fund. So, professor or Barry, how are you? It's been a long time. >> It's been what 13 years. >> 13 years. Been 13 years. It's it's our bar mitzvah uh edition is what we're doing here today, I guess. So I I have a lot of things to talk to you about. I want to start with some of the beginnings for people that don't know you. You have both a degree in economics and history. >> And correct. >> I guess what's kind of interesting is I I drew some lines together, but I wanted you to draw the lines together on how you combined the both these disciplines in shaping your approach to economic analysis today. Well, I think um there has long been a strand of economic thinking that uh recognizes the importance of and insight that can be gleaned from history and that includes the uh history of financial markets. what you do Andrew there have been literally for centuries uh people who've looked back at earlier history to try to understand current financial events the 20th century then saw the advent of what we call macroeconomics with uh the great depression John Maynard Kanes and those who came after and a few of us then began in the 1970s and 1980s to look at macroeconomic history the history of business cycles, uh, monetary and fiscal policy, and what can be learned from earlier experiences of value for today. And that's what I've been trying to do ever since I've been in the business. >> And it's been changing ever since, though. >> Well, it it it's always changing clearly. When I started studying macroeconomic history in the 1970s, who could have uh anticipated that we would see the great moderation and then the global financial crisis and then the COVID crisis and many others. >> You've been doing this for a long time. We're we're going to go with decades. And you've been studying the international monetary systems for a very long period of time, writing some great things on it. What what was do you remember what was your first major research project that you did and how it kind of shaped your long-term interest in this area? When I was a graduate student in the late 1970s at Yale, um I was looking for a topic that would combine modern international economics where I could do some theorizing and model building with history. So I ended up looking at the 1931 devaluation of the pound sterling and the tariff that Britain then imposed in 1932. How did the tariff affect the exchange rate? How did the exchange rate affect the tariff? And here we are in 2025 with Donald Trump's tariffs and a weak dollar. So, um, that was the first project and I seem to always be coming back to something closely related. >> I guess it we talk about the whole history doesn't repeat but it rhymes concept, right? >> Well put, >> you know. So you recently authored a paper where you looked at poly markets and the betting markets and you looked at that and you were were looking at um central bank independence and I think you're talking about you know central bank under independence under pressure um and it was a kind of this central bank independence meets blockchain prediction market. Tell me a little bit about that. >> So that project was uh a lot of fun to do. I should shout out to my co-authors led by Ganesh Natraj who's at Warick Business School in the UK but there were four of us together on that paper. So poly market is a betting market that uh is populated by punters outside the United States, but they can bet on things like what's the probability that Donald Trump will fire Jay Powell by the end of the year? What will the Federal Open Market Committee do at its next meeting? what will uh happen to 10-year US Treasury yields uh in the next 3 months. And what's really neat about Poly Market is that the the bets the individual wallets are on the blockchain. So, we don't know the identity of the betters, but we know whether the same person bet that uh Trump would fire Powell and that the FOMC would cut rates. And that's what we see. the higher the uh the more money you put on Trump firing Powell, the more money you put on the uh FOMC cutting rates at its next meeting ma makes good sense. Um Trump's man, new man on the FOMC, um Steven Miran voted to cut rates even more than his colleagues. But the other thing we we find is that those same bers bet that the 10-year Treasury will go up uh in the next 3 months. They're betting on more inflation, in other words, going forward. So, people see how these things are linked. And the message I took from the paper is that Trump fiddles with Federal Reserve independence at his peril in so far as he wants lower interest rates. So he may get a lower setting on the policy rate but he may not get the lower interest costs that he's really after. >> This has been done and tried and failed with uh in Turkey or Eran, right? I mean, heron came up with this crazy notion that we all oh that's cra we all laughed, right? That the idea that lower interest rates would mean lower inflation. And we all I think anybody with any kind of economic background or interested in this subject would be like how does that exactly work? It makes no sense. And then I said at the time, all right, well, let's see what happens just for the heck of it, right? Well, obviously we know it didn't work. So I is is the idea that we don't care about inflation or there's there's another power out there trying to push this down so that I guess maybe our debt is at a lower cost or I don't how does this all work in in theory and why I don't think it works in theory. Andrew, you're trying to uh find a logical model behind uh Eragon or Trump's not entirely logical economic instincts. So they have a world uh in their minds where lower interest rates will be disinflationary and that does not correspond to any model of a normally functioning economy with reasonably well-developed financial markets. that I know. So it's not only the case of Turkey, but many historical cases down through the ages in Latin America and elsewhere where leaders uh advanced the view that lower interest rates would be good for the economy. Maybe lower interest rates would translate into faster economic growth. More supply would make for uh lower interest rates. That could be their implicit view. But more supply that's more than matched by more demand will make for higher interest rates. So the theory doesn't make sense when you think about it for more than 10 seconds. That does not prevent uh leaders confident in their ability to uh understand and dictate anything. Doesn't deter them from >> uh claiming they understand. But you know one point is hairbrain theories and the other point is uh weakening institutions like the central bank such that they come under pressure to implement hairbrain theories and the two together are much more dangerous than one or the other. So, uh, going back to your paper that you wrote, I think there was another piece of the paper that was a discussion and thought and a question posed. Why aren't markets reacting to more strongly to a threat against central bank independence? >> Yeah, I I'm not alone in in in wondering about that recently. Uh so I did write a piece for project syndicate actually laying out the paradox and speculating a little bit about why the market reaction has been so mild, so sanguin. And the the best I can come up with is that there is still residual confidence in uh the strength of the Fed to resist um uh pressure from the White House. That policy is not made by one or two newly appointed governors. It's not going to be made by whomever Trump appoints to succeed Jay Powell as chair in 2026. But it's made by a committee of 12 voting members at any point in time and they are not poodles. So they will stand up to the pressure. Uh the markets may believe the markets may have some residual faith in the Congress to stand up to the pressure when Trump uh uh tables a nominee who's not entirely qualified. I have my doubts about that guardrail. and they may have confidence in uh the Supreme Court to prevent Trump from arbitrarily firing uh Federal Reserve governors without cause. And I have my worries about that guard. >> I said ditto on the ditto on the end of that on the same comment about the guardrails. But what's interesting is one of the things that that made me take a moment and and do a just a just a breath uh was when the idea was floated I think by Steve Bannon but then picked up by the White House much later in the day was that the idea that Scott Besson the Treasury Secretary would serve dual roles uh of with with the uh Treasury Secretary and Fed chair. And now Bessant may say no no no no. But here's the thing that's really kind of I I I think odd. I I really don't understand is while there may be uh certain factions that can well the strength of the others the strength of the 12 let's say the strength of the 11 the 10 the fact is that we have almost like two areas there's supposed to be a Chinese wall right between the two of the US government and the federal reserve and that has been a mirin is is is a is a what would we call him. We call him a a spy that has two roles. I mean, understand, you know, he's he's working both sides. >> Well, Mirin presumably uh has to stay in Trump's good graces in order to uh resume his post at the Council of Economic Adviserss, assuming that's how things play out early next year. Uh there there's another scenario where he gets uh appointed to a full term. Uh after that, who knows? Um but here again I think history is informative. Before the uh banking act of 1935 I I I believe it was the Treasury Secretary did serve on uh on the board and it was decided that this was not an ideal arrangement. We moved away from it and you know I think we're seeing now another example of history being forgotten. that Chinese wall has always been uh permeable. It's never been uh secure. But I think it's important in the eyes of the markets, certainly in the eyes of all academics who study this matter to uh to respect that wall. >> I think you're being very polite with saying it's been permeable and not this. The difference is I think that there was always uh you know you listen you put a wall up you could always shout over the top of it and the other guy on the other side hears you right that's that's how it works but you really couldn't get through. I mean this is it seems to me like a full-on puncture o of it right now. >> No I think this is the most uh serious threat to Federal Reserve independence in our lifetimes. before I was born in 1951. It was Harry Truman summoned the entire FOMC to the White House and bered them uh about not cutting interest rates or not keeping interest rates low. That episode turned out poorly and it led to the Fed Treasury accord later that year where the uh Treasury decided it was decided the Treasury should maintain a handsoff stance toward the Fed. So uh you know in my lifetime I've never seen such a a serious threat to central bank independence and that's symptomatic of the broader uh uh uh uh erosion of guardrails and institutions and rule of law that international investors are worrying about. That's why the dollar has weakened by 10% this year. >> Yeah. But you in US investors infatuated by artificial intelligence may be directing their eyes elsewhere. This all dovetales into the discussion that you've had and this is I think something you haven't um really changed too much of in in the number of years because you you've warned many times about the dollar's dominant dominance is is potentially eroding and it's running faster more recently than expected due to political you know unpredict predictability. One of the things we know is when there's a strong country it's a strong dollar. when there's a strong not even strong when there's stabil stability that's a good word when there's stability in a country when in in in politics you know people will flock to it there's a lot of reasons why that happens interest rates up by the way dollar up because you know there there's a detraction in the in there but what specific risks do you see today in the current US policy I guess the landscape that could accelerate this shift something that you are very concerned In 2018 with a couple of co-authors at the European Central Bank, we put out a book called uh how global currencies work and our and we said the secret sauce for a global currency is the issuer has to have size, stability and liquidity. It has to uh be a big country that trades a lot. Tariffs are are are not a good thing for the dollar from that point of view. It has to be stable which means economically stable, financially stable and politically stable. So there I would say enough said there are are are you know at at we haven't seen a big financial blow up since Silicon Valley Bank but there are plenty of crypto and other risks out there and there's plenty of political risk. People worry about the integrity of elections past, present and future. And there have been a couple of episodes where the uh Treasury security market has kind of seized up and the Fed has had to leap into the market with both feet to maintain its liquidity. Will a future Federal Reserve under Scott Bessant uh will it be willing to do that? I see all of those as risks. You know, most fundamentally though, I see uh uh uh threats to rule of law, to checks and balances, political checks and balances to the division of powers in the United States. Will the courts and the Congress check an autocratic executive? I think international investors look to that. And the other thing that's important is international alliances, military and security alliances. Central banks and governments hold and use the currencies of their alliance partners because uh they trust their alliance partners. Holding and using their currencies is a show of good faith. So, we've had these violent uh shifts from the White House away from NATO, toward NATO, uh uh toward Russia, away from Russia, uh that raise questions in the minds of our um European and Asian allies about the strength and um prospects of those links. So that's where I that that's a long-winded answer to your question, Andrew, but I think there are a lot of risks. >> And by the way, those things that happen the uh with NATO against with NATO, with that's all things that happen before lunch uh on one given day, it seems those kinds of decisions. The the idea that the dollar could lose its reserve status, that's something that has come along. It's talked about, you know, we had the brick companies that brick brick countries that were trying to do it for a long time and, you know, they talk about the the Chinese and the yuan and they talk about um, you know, the remi and the euro and the you name the currency out there. One of the things you've talked about is this idea of chaotic a chaotic period of financial turmoil. I want to quote that because that was something you wrote about um talking about the dollar's reserve status and so far it seems that no matter what's happened and maybe I hate to say this is going to sound awful because somebody's going to you know this time is different but uh maybe um you know the idea that that something is going on that that we have not seen for decades and decades is is this going to be that moment and maybe it's not even those currencies that we're talking about maybe it's something So, uh, the late great MIT economist Rudy Dornbush had a line about how crises always take longer to erupt than you ever thought they could and then they turn out to be more violent once they erupt than you ever thought they could. So, the dollar's uh the erosion of dollar dominance has been very very gradual. If you look at the dollar's share of global reserves, it has been declining since the beginning of the 21st century about one half of a of a percentage point per year on average. So very slow erosion of the dollar's reserve currency role and part of the explanation as you say is the absence of viable alternatives that there aren't a lot of AAA rated euro denominated government bonds. China has capital controls and is starting out way behind. But maybe there are some new alternatives now where uh it's easier to trade non-traditional reserve currencies like the Canadian dollar, the Australian dollar, the uh Norwegian crona, the South Korean one, maybe uh with electronic trading platforms and the like new alternatives that we were not really conscious of when we focused on big countries with liquid markets only are arriving on the scene. Maybe central bank digital currencies and dedicated blockchainbased platforms on which they can be traded will open up more alternatives to the dollar and that erosion could accelerate. Which brings me back to I guess the comment you made earlier about uh Silicon Valley Bank and there's a few others in there that had their little problems. That little momentary, oh my god, what's happening? And I remember what what was the reason why that was uh solved so quickly was we just papered it over with lots of money and uh allowed for uh you know uh what was it? Uh uh uh in New York there was a bank oh New York City Bank Corp which my friend was president of the time or a good acquaintance of mine. um who is not anymore because somebody had a somebody had a role head had had a role um on the deal and there was a couple different companies and that was all based on the s again super leverage of a we'll call it a currency it was a it was a uh cryptocurrency uh in the background that they that they did and and they backed all this and then we had the bonds that were going up in up in uh rates and and price were coming down and that was another big problem that was papered over. So, we've papered over, right? When I say paper, we just threw money at stuff. You know, how many things since long-term capital, right? We just all Is that all we do? Is there is is that's part of the debt, but is there an end to that? Because I've always thought that, you know, who's going to bail out the homeowners back in 08 and it was like the banks. Okay. Well, who's going to bail out the banks? Well, that's going to be it's going to be the governments, right? Well, who's going to bail out the governments? >> Yeah. So let me give you another example of of the same thing. In July, the Congress passed and the president signed the Genius Act uh which will allow the regulators to license uh stable coin issuers. And people like Bessant think that stable coin circulation capitalization is going to exceed $2 trillion in a couple of years. uh when something goes wrong in a bank uh the banks have preunded a deposit insurance scheme. So that their own money in effect is is contributing to their own bailout. In the case of the Genius Act and stable coins, there is no deposit insurance. The government licensed them in effect implied they were safe. Then if there's a problem, there's going to be intense pressure on the Congress and the president to bail out these innocent stable coin holders. And where is that money going to come from? It's going to come from uh taxpayers uh who are already paying taxes but not enough taxes to fund the government's already existing activities. So um your your question Andrew kind of pivoted away from financial problems toward fiscal problems >> at the end. The implication being uh these bailouts and all the other things we're spending money on are translating into a potentially unsustainable increase in the federal government's debt. >> Right. >> And that's right. What is the solution to that? uh in in in in in my view, the only remaining solution is to figure out a way to raise more tax revenues in a manner that is politically acceptable to the American public because, you know, we we we can't really cut health care and defense spending much more and and social security uh going forward. >> And by the way, the Department of Defense is now called the Department of War, right? Uh, and how many bill millions of dollars did it cost to change those signs? >> Right. Right. And do we call it defense spending or do we call it war spending now? Just kind of wondering. And is it are they defense companies? Are they war companies? So, just something to think about. I do want to ask you about something uh something you may or may not have thought of. Um, the Genius Act. Do you know why it was called the Genius Act? I have an opinion on this. >> Um, no. But I have noticed that uh if it's not the Genius Act, it's the one big beautiful >> Yeah. Oba. >> So the Genius Act. The Genius Act. Do you remember when they called Trump a stable genius? >> Yeah, I see where you're going. >> And it's all about stable coin in the Genius Act. Stable genius act. That's what I think. That's my opinion for whatever it's worth, which is not a lot. Um, so the other things I want to talk about here is um, so there's a few things the the um, just to go back to some of this this uh, you compared the deregulation of stable coins. I I I think you're not totally thrilled with these things to the wildcat banking era of the 19th century, right? right? Where we have this lax regulation of state banks and their bank notes result in financial panics, huge losses. Um the one thing it seems to me that stable coins are really good for is they buy a whole heap of treasuries that maybe nobody else wants to buy to keep the the government afloat. But anyway, tell me about this whole comparison you have here. Well, let me let me start with the Treasury point, which um could could be correct if stable coin circulation rises into the trillions of dollars. But stable coin issuers are supposed to hold as collateral highly liquid short-term treasuries, right? So they provide an incentive for the Treasury to shorten the duration of its liabilities which increases its exposure to spikes in interest rates and other things that go haywire in financial markets. So I worry about relying on that source of demand for treasury securities. I also worry to come to your other point about the singleness of money. you know, uh the idea that every dollar is worth a dollar and you don't care which Federal Reserve Bank printed the dollar that somebody uh uh is handing you. Um I don't think we can be confident that under all circumstances uh Walmart coin and Amazon coin and Barry's coin and Andrewscoin will each be worth exactly the same thing. And if they're not, that will take us back to the period from the mid 1830s to the early 1860s when every state chartered bank in a bunch of states could issue their own banknotes subject to regulations that worked well in New York but worked poorly in Michigan. As a result of which, banknotes issued by banks in Michigan created at a discount relative to banknotes issued by banks in New York. And the corner shopkeeper had to keep a telephone book equivalent >> under the counter >> to look up the value of each and every bank note before he accepted it in payment. Is that uh financial world, a monetary world we want to go back to? >> No, obviously not. It's like in Myanmar, by the way, I don't know if you've been there, but in Myanmar, you go two things. Number one, you cannot hand in a a bill that has any creases in it. They will not accept it anywhere. Second thing is, you go into the bank and there are these ledger books, these gigantic Harry Potteresque ledger books that they're writing everything down in the most bizarre thing you've ever seen in your life in this one. But anyway, I want to go over and I want to talk about geopolitics or not geopolitics, geo geo um economics and something that I've taught about. We have this new era of fragmented globalization. I call it selective isolationism. This idea that we're choosing first of all there are choice being made by various governments to isolate themselves from others. whether you want to call nationalism, you want to call it um you know some kind of other anti-globalization, but it's this selective thing where we're saying, "Hey, you know what? We want to be around with the world. We want to trade the world, but not so much with China. We want not so much with this one." And I find it it's it's kind of creating this really strange um reaction. And what I want to know from you is the global financial stability potential with all of this going on right now. How do you see it? >> We used to call this friend shoring which you know it it makes sense to source uh dual use technologies and products things you need for your national security mainly from your friends. And we used to call it nearshoring in co days. it makes sense to ship stuff to uh economic partners nearby given the disruptions that can occur from globalized long to globalized long-distance shipping. Uh but you know those rational motives for favoring some partners over others have spilled over into kind of an unrestrained nationalism is isolationism what have you in some cases. So I guess the way I I see it having uh disagreed with everything that we have said about Scott Bessent earlier I will now agree with him and say decoupling complete and total decoupling between the United States and China is unlikely. We simply depend on one another. We depend on China for rare earths. They depend on us for a a variety of technologies. Those interdependencies are too valuable for complete and total decoupling to occur on economic grounds. But there can still be an accident and uh there can be a blow up between the two countries over Taiwan or something. So in the first scenario uh distancing but not total decoupling I do not necessarily see a threat to the stability of the monetary financial system. China is trying to build one centered on the renmanb and Shanghai and we have one centered on the dollar and New York. Uh but they overlap and they're interconnected and and that system continues to work. If there is a rupture between the two big economies, a complete and total breakdown for geopolitical reasons, then the financial system breaks down too into two uh unconnected blocks. And I think that adjustment would be chaotic and wrenching. >> Well, I thank you for your time today. There's so many things that are going on around the world that uh again, nothing's really well on the surface on the out, you know, what we've seen broken besides little bitty little bitty breaks in the dam here and there which don't qualify I don't think for bigger fractures right now and I think everybody's also aware of the mutually assured destruction concept economically around the world that we want to tread get as much as we can but not make it so that we anybody loses because we all lose if that's the case but thanks for joining me today Dr. Do is it doctor professor >> either either one or Barry >> Dr. Professor Barry, I'm happy to happy to end on that optimistic note. Thank you for providing that and uh let's talk again in 13 years. >> Yeah, thanks so much. All right, I'll see you. Thanks so much. Bye-bye. Bye. >> Another great episode. I learned a lot there. Started out talking about the 401ks. Hopefully that put a little bit of a thought process in your head with regard to whether it is appropriate or not to put some of those particular investments inside of the 401k plan. And then of course talking about some of these things that I found fascinating with with Professor Iiking Green. whole idea of, you know, geopolitics and what's going on with regard to uh w- with regard to the US dollar and how that goes and the Chinese and whether they're going to and the bricks, whether they're going to take over on their currencies and uh this the the the stable coin deregulation, how that rock rockets through the system and um really good stuff. I mean, I do this because I learn as well each and every week. The guests that I have always teach me something, keep me a breast of what's going on and the discipline investors that you are and you have become, you learn along with me at the same time. So, I appreciate that. Go over to the discipline.com website, check out all the things that are available to you right there. And one of the things that is available is the idea that you can see how we help people just like you invest and work towards that that that that level of financial security for your future. Thanks for joining me this week. Thanks for joining me every week. Make sure to tell your friends and I will see you right around the block in a couple of days. We have another great guest and another great episode. See you real soon. Bye-bye. This podcast is intended forformational purposes only and does not constitute personalized investment advice. Investing involves risk including the possible loss of principle and past performance is not indicative of future results. The views and opinions expressed are those of the host and any guess and may not necessarily reflect those of Horowits & Company Inc. an investment adviser registered with the US Securities and Exchange Commission. 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TDI Podcast: Decoupling Stability (#941)
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This episode of The Disciplined Investor is sponsored by Interactive Brokers. And at Interactive Brokers, you don't have to wait for the markets to open. With around the clock trading, you can trade over 10,000 US listed stocks and ETFs, US equity index futures, and options. Also, US Treasury bonds, and even more. IBKR's overnight trading helps you stay ahead by allowing you to react instantly to market moving news and economic events whenever they happen. Capture more market opportunities and trade on your timeline during local market hours or whenever it's convenient for you. Enjoy bond trading with no markups, no built-in spreads, and low transparent commissions which can help you improve your returns. Rated the top online broker, Interactive Brokers has won awards from Baronss, Investopedia, and Stockbrokers.com and has been benzinga's number one overall online broker for bonds four years in a row. The best informed investors choose Interactive Brokers. Open an Interactive Brokers account today and discover more trading opportunities around the clock. Learn more at ibkr.com/aroundtheclock. Interactive Brokers is a member of SIPC. >> The disciplined investor is all about you, your money, and the markets. Sit back and get ready for this edition of the disciplined investor podcast. This episode of The Disciplined Investor is sponsored by Horowits & Company. If you're looking for a portfolio manager, look no further. Horowits & Company. From seed through harvest, cultivating financial success. [Music] [Applause] October. Will history repeat again? New tariffs announced again, again, again. Thinking about 401k plans. And our guest today, Dr. Barry Iiking Green, professor of economics studies at UC Berkeley. All this and much more on episode number 941 of the Disciplined Investor podcast. [Music] Hey, welcome to the discipline investor podcast. It is October and welcome to October. Or maybe uh we don't want to be in October because the color of the month, the official color of the month is red. 25% more volatile than other months and historically has been one of the worst months in uh in all of the 12 when it comes to stock markets. We know about that. Black Monday, Black Tuesday, the worst month during the financial crisis. Seasonality does not favor October. But then again, the bulls are buying and maybe it'll be different this time. We'll have to see. We see a lot of things that are going on right now that could push against and create some headwinds like the new tariffs that were announced at the end of the week on pharmaceuticals on uh certain trucks, big trucks as well as kitchen cabinets. I guess that was something. And uh that is going to possibly be very significant because they're talking about 100% tariffs on some things like pharmaceuticals unless you have some plants you're already building here. And this, you know, of course, all these little openings to each of these things and their own little peculiarity peculiarities. Is that the right word? Anyway, the bottom line here is that there are some things that are pushing and could impact October. But what before we get to our guest today, I was thinking about something. And you know, we had on last week Pat Kamuso and he was talking about taxation and about cryptocurrencies and uh we really focused in on the idea of stable coins and that was that was um something that I think was really interesting that that was two weeks ago actually. But why I was thinking about all week was because the new 401k rules that were enacted by executive order back in August. And what happened was the Department of Labor now is seemingly signaling this endorsement of private equity and cryptocurrency investments for investment inside of 401k plans. And for a very long period of time, both the cryptocurrency as long as they've been around and private equity has wanted to, I'll say infiltrate the market which has like trillions of dollars invested in it indefined contribution plans. And that was a big prize. as they're like if we can get in there the automatic investing even to three four 5% of the total which is the number that we're going to talk about of course as the number that everybody should have in their portfolio because that's what they want a little piece but all long access was restricted there was this stringent fiduciary standards that was under Orisa the employee retirement income security act and from my perspective what I was thinking about this was that ORISA basically was designed to to safeguard and it was it was designed to protect retirement savers by imposing this very high fiduciary standard on the plan sponsors and the and the administrators too. So it was the employer the employers and and the sponsors and the administrators of those plans everybody across the board had this massive amount of fiduciary responsibility and part of that was to safeguard the assets. So it required that those managing the defined contribution plans in this case the 401ks act with this total loyalty and care making decisions solely in the best interest of the participants. Okay, that's fine. And that also included applying a certain level of skill and prudence uh due diligence and that was really important. Okay. Now this whole framework that has been in place for a very long period of time, it served to protect to create a barrier against inclusion of of high risk, non-transparent or opaque and illquid investments inside of the 401k plan. And what are those two things that are now thinking about coming in? Well, they're opaque, high-risk, illlquid, private equity and cryptocurrencies. Cryptocurrencies being a little bit more liquid, of course, but that was basically designed to keep those kinds of things out of the reach of the average retirement investor inside of the 401k plan. They can do whatever they want outside of it. The idea was that while these asset classes maybe had some great opportunity, the elevated fees, the lack of transparency, the sophistication you had to have to understand what was going on in in these things. I got to tell you something. I know a lot of very well seasoned investment advisors that really can't tell what the hell is going on inside of some of this private equity or some of these hedge funds. So Orisa's intent was not necessarily designed to limit the opportunity, but it was really created and implemented to to uh to in to ensure that that that that opportunity didn't come at a major risk. That's what it was really that would swamp investors. So, back in 2020, there was a little bit of a change. the um Department of Labor issued some guidance that state that private equity could actually be included in professionally managed investment vehicles within 401k plans provided that the decision was made in accordance with ORIS' fiduciary principles which by basically it was weird because it it opened it up but then it closed it but the idea that they were saying that could be done was a significant shift. So plan sponsors started saying, "Well, maybe there's something we could do here." However, the central idea, the tenant of all that was going on with Orisa and the fiduciary standards and the prudent prudent manuals and all this other stuff remained with this fiduciary uh offer. basically employees that or participants of 401k plans that had no idea and understanding of any of this allow them to have this access to these trans you know this this opaque investment with these huge fees rather than just index funds because a lot of them didn't even disclose where their capital was being deployed. So, how do you how do you how do you have the mix of the Orisa rules and the fiduciary standards and all that with with regard to this and at the same time say yeah that's fine but yet you have these investments that you have no idea what's going on inside of them these are things that many professionals and sophisticated investors often say no uh I'm not sure I'm going to do that because very difficult to understand so the question then why why should retirement savers that really don't have that sophistication be the full back source of capital, which is essentially what they want to do. So, fast forward a year 2021 under the Biden administration, Department of Labor said, "Well, you know what? We're not forget it." They made a big cautionary comment about private equity investments and saying that these more complex plans that many fiduciaries might not possess the expertise, forget it. The warning was met with all this opposition at the same time from private equity firms of course and venture capitalists of course who saw it as a threat to their ability to raise capital and tap into this very lucid lucrative and very easy pickings 401k participant plan. They'll just make it look good and they'll throw it down there and you just check a box. Now that push back against the the guidance escalated and the Trump administration intervened and urged the agency to reverse course. So the do the department of labor labor reversed their course saying it had a chilling effect on innovation unfairly cast out on the comp competence of planned fiduciaries and effectively dismantled a key regulatory safeguard clearing the way for this broader inclusion of alternative assets. And I'm a big fan of alternative assets but not these inside of 401k plan. I think it's dumb. So this marked a really significant shift in the policy with regard to 401k plans and and that policy which prioritized um expanded investment access. But the story didn't end there. Not only did this change shift and allow for the potential for private equity venture capital inside of 401k plans, but also now cryptocurrency. another asset that's known for as we know volatility, complexity, and speculation, right? That's we that's kind of what it is. Now, the prudent standard was kind of being said that well, if they're allowing that, well, we can allow this and now the green lighted the whole thing. So, that raises a lot of concern. We know Bitcoin is about, you know, somewhere between 3 to 10 more volatile than the S&P. And while individuals can speculate all they want, could this expose 401k savers, which the 401k is the only retirement plan for most people these days to find benefit plans? Whereas you worked for a company for years and all of a sudden they say, you know what, thank you very much for your service. Here's 66% of your salary for the next indefinite period of time plus a cost of living adjustment and then you're fine. No, now you have to put away your own retirement, augment it with some obviously augmenting social security, which is a small amount, but the company no longer is providing a major long-term benefit. So, here's the deal. The deal is that this this this Department of Labor's stance is showing this the shift towards expanding investment choices, but it's also loosening of the pro of of the framework that they have protecting individual investors that has governed retirement savings for a very long period of time. And and by allowing these complex and high fee and speculative assets into 401k plans, the government is once again effectively transferring risk from sophisticated investors to everyday workers. You know, talk about, you know, hey, we got all this stuff. Uh we don't understand it. Let's unload it on somebody else. Well, who's it going to be? It's going to be the people in the 401k plans. And many of those who lack the financial literacy to navigate these options. And that's why we have such simple investment choices in a lot of 401k plans. Many people don't understand what exactly it is to be in an S&P 500 fund. And how are they going to understand how to be in the blah blah blah private equity fund that's invested in uh leverage credit in certain sectors of the real estate industry. Seriously, I mean that that's just dumb. And there is a new sense of stress and volatility that's showing up in some of the private equity where they can't get access because interest rates are higher than they were and people are not pwning up money as they were before and alternative asset managers are looking for these new sources of capital and that's why they're pushing on this retirement plans. The 401k plan obviously is their next frontier. But here's the question. Just the okay with all that information, let's think about this. Let's ponder this and and and I hope there's some people in areas of Congress or government or in power or maybe even plan administration administrators, employers that are listening to this. I really hope so because my question is very simple. Is this innovation or exploitation? Now, you know from what I've been talking, how I've been talking about it, what I've been saying, you know my thoughts on this. But what are you thinking? Are you going to allow this opaque, high cost, very sophisticated, very uh difficult to understand investments inside of your 401k if you have the choice? And by the way, if you do, are you going to take the responsibility as the fiduciary of that plan to allow it inside and then take the responsibility if it craps out with people that really had no idea what it was to begin with? Are you willing to take that risk? Is it necessary? Is it necessary? If most of the private equity can't actually be invested in anybody that has a net worth under a million dollars or certain level of sophistication and understanding about investments or on the other hand we say you know what people could do whatever the hell they want to do. Who cares? I don't see it that way. Exploitation innovation at the crossroads. So let's get moving on to our next section of the show. So, let's talk a little bit about Interactive Brokers. Because if you want to navigate political uncertainty, well, if you're a disciplined investor, don't panic. Because disciplined investors prepare. At Interactive Brokers, you can help protect your portfolio and hedge market risks with bonds, precious metals, and foreign exchange, all from one powerful platform. With advanced tools, global access, and low costs, IBKR helps you manage volatility and stay ahead even in uncertain times. The best informed investors choose Interactive Brokers. To learn more, visit ibkr.com/n. So, let me tell you a little bit about today's guest. His name is Barry Iiken Green. He's George C. Partardee and Helen N. Party professor of economics at UC Berkeley. He's distinguished professor of not only eco but political sciences as well. He's a leading expert on the international monetary system and global finance. And he researches all sorts of things. He covers the the history of global financial crisises, the international monetary system, economic history, and the causes and consequences of populism. He holds fellowships from several institutions including the National Bureau of Economic Research and the Academy American Academy of Arts and Sciences and has previously served as a senior policy adviser at the International Monetary Fund. So, professor or Barry, how are you? It's been a long time. >> It's been what 13 years. >> 13 years. Been 13 years. It's it's our bar mitzvah uh edition is what we're doing here today, I guess. So I I have a lot of things to talk to you about. I want to start with some of the beginnings for people that don't know you. You have both a degree in economics and history. >> And correct. >> I guess what's kind of interesting is I I drew some lines together, but I wanted you to draw the lines together on how you combined the both these disciplines in shaping your approach to economic analysis today. Well, I think um there has long been a strand of economic thinking that uh recognizes the importance of and insight that can be gleaned from history and that includes the uh history of financial markets. what you do Andrew there have been literally for centuries uh people who've looked back at earlier history to try to understand current financial events the 20th century then saw the advent of what we call macroeconomics with uh the great depression John Maynard Kanes and those who came after and a few of us then began in the 1970s and 1980s to look at macroeconomic history the history of business cycles, uh, monetary and fiscal policy, and what can be learned from earlier experiences of value for today. And that's what I've been trying to do ever since I've been in the business. >> And it's been changing ever since, though. >> Well, it it it's always changing clearly. When I started studying macroeconomic history in the 1970s, who could have uh anticipated that we would see the great moderation and then the global financial crisis and then the COVID crisis and many others. >> You've been doing this for a long time. We're we're going to go with decades. And you've been studying the international monetary systems for a very long period of time, writing some great things on it. What what was do you remember what was your first major research project that you did and how it kind of shaped your long-term interest in this area? When I was a graduate student in the late 1970s at Yale, um I was looking for a topic that would combine modern international economics where I could do some theorizing and model building with history. So I ended up looking at the 1931 devaluation of the pound sterling and the tariff that Britain then imposed in 1932. How did the tariff affect the exchange rate? How did the exchange rate affect the tariff? And here we are in 2025 with Donald Trump's tariffs and a weak dollar. So, um, that was the first project and I seem to always be coming back to something closely related. >> I guess it we talk about the whole history doesn't repeat but it rhymes concept, right? >> Well put, >> you know. So you recently authored a paper where you looked at poly markets and the betting markets and you looked at that and you were were looking at um central bank independence and I think you're talking about you know central bank under independence under pressure um and it was a kind of this central bank independence meets blockchain prediction market. Tell me a little bit about that. >> So that project was uh a lot of fun to do. I should shout out to my co-authors led by Ganesh Natraj who's at Warick Business School in the UK but there were four of us together on that paper. So poly market is a betting market that uh is populated by punters outside the United States, but they can bet on things like what's the probability that Donald Trump will fire Jay Powell by the end of the year? What will the Federal Open Market Committee do at its next meeting? what will uh happen to 10-year US Treasury yields uh in the next 3 months. And what's really neat about Poly Market is that the the bets the individual wallets are on the blockchain. So, we don't know the identity of the betters, but we know whether the same person bet that uh Trump would fire Powell and that the FOMC would cut rates. And that's what we see. the higher the uh the more money you put on Trump firing Powell, the more money you put on the uh FOMC cutting rates at its next meeting ma makes good sense. Um Trump's man, new man on the FOMC, um Steven Miran voted to cut rates even more than his colleagues. But the other thing we we find is that those same bers bet that the 10-year Treasury will go up uh in the next 3 months. They're betting on more inflation, in other words, going forward. So, people see how these things are linked. And the message I took from the paper is that Trump fiddles with Federal Reserve independence at his peril in so far as he wants lower interest rates. So he may get a lower setting on the policy rate but he may not get the lower interest costs that he's really after. >> This has been done and tried and failed with uh in Turkey or Eran, right? I mean, heron came up with this crazy notion that we all oh that's cra we all laughed, right? That the idea that lower interest rates would mean lower inflation. And we all I think anybody with any kind of economic background or interested in this subject would be like how does that exactly work? It makes no sense. And then I said at the time, all right, well, let's see what happens just for the heck of it, right? Well, obviously we know it didn't work. So I is is the idea that we don't care about inflation or there's there's another power out there trying to push this down so that I guess maybe our debt is at a lower cost or I don't how does this all work in in theory and why I don't think it works in theory. Andrew, you're trying to uh find a logical model behind uh Eragon or Trump's not entirely logical economic instincts. So they have a world uh in their minds where lower interest rates will be disinflationary and that does not correspond to any model of a normally functioning economy with reasonably well-developed financial markets. that I know. So it's not only the case of Turkey, but many historical cases down through the ages in Latin America and elsewhere where leaders uh advanced the view that lower interest rates would be good for the economy. Maybe lower interest rates would translate into faster economic growth. More supply would make for uh lower interest rates. That could be their implicit view. But more supply that's more than matched by more demand will make for higher interest rates. So the theory doesn't make sense when you think about it for more than 10 seconds. That does not prevent uh leaders confident in their ability to uh understand and dictate anything. Doesn't deter them from >> uh claiming they understand. But you know one point is hairbrain theories and the other point is uh weakening institutions like the central bank such that they come under pressure to implement hairbrain theories and the two together are much more dangerous than one or the other. So, uh, going back to your paper that you wrote, I think there was another piece of the paper that was a discussion and thought and a question posed. Why aren't markets reacting to more strongly to a threat against central bank independence? >> Yeah, I I'm not alone in in in wondering about that recently. Uh so I did write a piece for project syndicate actually laying out the paradox and speculating a little bit about why the market reaction has been so mild, so sanguin. And the the best I can come up with is that there is still residual confidence in uh the strength of the Fed to resist um uh pressure from the White House. That policy is not made by one or two newly appointed governors. It's not going to be made by whomever Trump appoints to succeed Jay Powell as chair in 2026. But it's made by a committee of 12 voting members at any point in time and they are not poodles. So they will stand up to the pressure. Uh the markets may believe the markets may have some residual faith in the Congress to stand up to the pressure when Trump uh uh tables a nominee who's not entirely qualified. I have my doubts about that guardrail. and they may have confidence in uh the Supreme Court to prevent Trump from arbitrarily firing uh Federal Reserve governors without cause. And I have my worries about that guard. >> I said ditto on the ditto on the end of that on the same comment about the guardrails. But what's interesting is one of the things that that made me take a moment and and do a just a just a breath uh was when the idea was floated I think by Steve Bannon but then picked up by the White House much later in the day was that the idea that Scott Besson the Treasury Secretary would serve dual roles uh of with with the uh Treasury Secretary and Fed chair. And now Bessant may say no no no no. But here's the thing that's really kind of I I I think odd. I I really don't understand is while there may be uh certain factions that can well the strength of the others the strength of the 12 let's say the strength of the 11 the 10 the fact is that we have almost like two areas there's supposed to be a Chinese wall right between the two of the US government and the federal reserve and that has been a mirin is is is a is a what would we call him. We call him a a spy that has two roles. I mean, understand, you know, he's he's working both sides. >> Well, Mirin presumably uh has to stay in Trump's good graces in order to uh resume his post at the Council of Economic Adviserss, assuming that's how things play out early next year. Uh there there's another scenario where he gets uh appointed to a full term. Uh after that, who knows? Um but here again I think history is informative. Before the uh banking act of 1935 I I I believe it was the Treasury Secretary did serve on uh on the board and it was decided that this was not an ideal arrangement. We moved away from it and you know I think we're seeing now another example of history being forgotten. that Chinese wall has always been uh permeable. It's never been uh secure. But I think it's important in the eyes of the markets, certainly in the eyes of all academics who study this matter to uh to respect that wall. >> I think you're being very polite with saying it's been permeable and not this. The difference is I think that there was always uh you know you listen you put a wall up you could always shout over the top of it and the other guy on the other side hears you right that's that's how it works but you really couldn't get through. I mean this is it seems to me like a full-on puncture o of it right now. >> No I think this is the most uh serious threat to Federal Reserve independence in our lifetimes. before I was born in 1951. It was Harry Truman summoned the entire FOMC to the White House and bered them uh about not cutting interest rates or not keeping interest rates low. That episode turned out poorly and it led to the Fed Treasury accord later that year where the uh Treasury decided it was decided the Treasury should maintain a handsoff stance toward the Fed. So uh you know in my lifetime I've never seen such a a serious threat to central bank independence and that's symptomatic of the broader uh uh uh uh erosion of guardrails and institutions and rule of law that international investors are worrying about. That's why the dollar has weakened by 10% this year. >> Yeah. But you in US investors infatuated by artificial intelligence may be directing their eyes elsewhere. This all dovetales into the discussion that you've had and this is I think something you haven't um really changed too much of in in the number of years because you you've warned many times about the dollar's dominant dominance is is potentially eroding and it's running faster more recently than expected due to political you know unpredict predictability. One of the things we know is when there's a strong country it's a strong dollar. when there's a strong not even strong when there's stabil stability that's a good word when there's stability in a country when in in in politics you know people will flock to it there's a lot of reasons why that happens interest rates up by the way dollar up because you know there there's a detraction in the in there but what specific risks do you see today in the current US policy I guess the landscape that could accelerate this shift something that you are very concerned In 2018 with a couple of co-authors at the European Central Bank, we put out a book called uh how global currencies work and our and we said the secret sauce for a global currency is the issuer has to have size, stability and liquidity. It has to uh be a big country that trades a lot. Tariffs are are are not a good thing for the dollar from that point of view. It has to be stable which means economically stable, financially stable and politically stable. So there I would say enough said there are are are you know at at we haven't seen a big financial blow up since Silicon Valley Bank but there are plenty of crypto and other risks out there and there's plenty of political risk. People worry about the integrity of elections past, present and future. And there have been a couple of episodes where the uh Treasury security market has kind of seized up and the Fed has had to leap into the market with both feet to maintain its liquidity. Will a future Federal Reserve under Scott Bessant uh will it be willing to do that? I see all of those as risks. You know, most fundamentally though, I see uh uh uh threats to rule of law, to checks and balances, political checks and balances to the division of powers in the United States. Will the courts and the Congress check an autocratic executive? I think international investors look to that. And the other thing that's important is international alliances, military and security alliances. Central banks and governments hold and use the currencies of their alliance partners because uh they trust their alliance partners. Holding and using their currencies is a show of good faith. So, we've had these violent uh shifts from the White House away from NATO, toward NATO, uh uh toward Russia, away from Russia, uh that raise questions in the minds of our um European and Asian allies about the strength and um prospects of those links. So that's where I that that's a long-winded answer to your question, Andrew, but I think there are a lot of risks. >> And by the way, those things that happen the uh with NATO against with NATO, with that's all things that happen before lunch uh on one given day, it seems those kinds of decisions. The the idea that the dollar could lose its reserve status, that's something that has come along. It's talked about, you know, we had the brick companies that brick brick countries that were trying to do it for a long time and, you know, they talk about the the Chinese and the yuan and they talk about um, you know, the remi and the euro and the you name the currency out there. One of the things you've talked about is this idea of chaotic a chaotic period of financial turmoil. I want to quote that because that was something you wrote about um talking about the dollar's reserve status and so far it seems that no matter what's happened and maybe I hate to say this is going to sound awful because somebody's going to you know this time is different but uh maybe um you know the idea that that something is going on that that we have not seen for decades and decades is is this going to be that moment and maybe it's not even those currencies that we're talking about maybe it's something So, uh, the late great MIT economist Rudy Dornbush had a line about how crises always take longer to erupt than you ever thought they could and then they turn out to be more violent once they erupt than you ever thought they could. So, the dollar's uh the erosion of dollar dominance has been very very gradual. If you look at the dollar's share of global reserves, it has been declining since the beginning of the 21st century about one half of a of a percentage point per year on average. So very slow erosion of the dollar's reserve currency role and part of the explanation as you say is the absence of viable alternatives that there aren't a lot of AAA rated euro denominated government bonds. China has capital controls and is starting out way behind. But maybe there are some new alternatives now where uh it's easier to trade non-traditional reserve currencies like the Canadian dollar, the Australian dollar, the uh Norwegian crona, the South Korean one, maybe uh with electronic trading platforms and the like new alternatives that we were not really conscious of when we focused on big countries with liquid markets only are arriving on the scene. Maybe central bank digital currencies and dedicated blockchainbased platforms on which they can be traded will open up more alternatives to the dollar and that erosion could accelerate. Which brings me back to I guess the comment you made earlier about uh Silicon Valley Bank and there's a few others in there that had their little problems. That little momentary, oh my god, what's happening? And I remember what what was the reason why that was uh solved so quickly was we just papered it over with lots of money and uh allowed for uh you know uh what was it? Uh uh uh in New York there was a bank oh New York City Bank Corp which my friend was president of the time or a good acquaintance of mine. um who is not anymore because somebody had a somebody had a role head had had a role um on the deal and there was a couple different companies and that was all based on the s again super leverage of a we'll call it a currency it was a it was a uh cryptocurrency uh in the background that they that they did and and they backed all this and then we had the bonds that were going up in up in uh rates and and price were coming down and that was another big problem that was papered over. So, we've papered over, right? When I say paper, we just threw money at stuff. You know, how many things since long-term capital, right? We just all Is that all we do? Is there is is that's part of the debt, but is there an end to that? Because I've always thought that, you know, who's going to bail out the homeowners back in 08 and it was like the banks. Okay. Well, who's going to bail out the banks? Well, that's going to be it's going to be the governments, right? Well, who's going to bail out the governments? >> Yeah. So let me give you another example of of the same thing. In July, the Congress passed and the president signed the Genius Act uh which will allow the regulators to license uh stable coin issuers. And people like Bessant think that stable coin circulation capitalization is going to exceed $2 trillion in a couple of years. uh when something goes wrong in a bank uh the banks have preunded a deposit insurance scheme. So that their own money in effect is is contributing to their own bailout. In the case of the Genius Act and stable coins, there is no deposit insurance. The government licensed them in effect implied they were safe. Then if there's a problem, there's going to be intense pressure on the Congress and the president to bail out these innocent stable coin holders. And where is that money going to come from? It's going to come from uh taxpayers uh who are already paying taxes but not enough taxes to fund the government's already existing activities. So um your your question Andrew kind of pivoted away from financial problems toward fiscal problems >> at the end. The implication being uh these bailouts and all the other things we're spending money on are translating into a potentially unsustainable increase in the federal government's debt. >> Right. >> And that's right. What is the solution to that? uh in in in in in my view, the only remaining solution is to figure out a way to raise more tax revenues in a manner that is politically acceptable to the American public because, you know, we we we can't really cut health care and defense spending much more and and social security uh going forward. >> And by the way, the Department of Defense is now called the Department of War, right? Uh, and how many bill millions of dollars did it cost to change those signs? >> Right. Right. And do we call it defense spending or do we call it war spending now? Just kind of wondering. And is it are they defense companies? Are they war companies? So, just something to think about. I do want to ask you about something uh something you may or may not have thought of. Um, the Genius Act. Do you know why it was called the Genius Act? I have an opinion on this. >> Um, no. But I have noticed that uh if it's not the Genius Act, it's the one big beautiful >> Yeah. Oba. >> So the Genius Act. The Genius Act. Do you remember when they called Trump a stable genius? >> Yeah, I see where you're going. >> And it's all about stable coin in the Genius Act. Stable genius act. That's what I think. That's my opinion for whatever it's worth, which is not a lot. Um, so the other things I want to talk about here is um, so there's a few things the the um, just to go back to some of this this uh, you compared the deregulation of stable coins. I I I think you're not totally thrilled with these things to the wildcat banking era of the 19th century, right? right? Where we have this lax regulation of state banks and their bank notes result in financial panics, huge losses. Um the one thing it seems to me that stable coins are really good for is they buy a whole heap of treasuries that maybe nobody else wants to buy to keep the the government afloat. But anyway, tell me about this whole comparison you have here. Well, let me let me start with the Treasury point, which um could could be correct if stable coin circulation rises into the trillions of dollars. But stable coin issuers are supposed to hold as collateral highly liquid short-term treasuries, right? So they provide an incentive for the Treasury to shorten the duration of its liabilities which increases its exposure to spikes in interest rates and other things that go haywire in financial markets. So I worry about relying on that source of demand for treasury securities. I also worry to come to your other point about the singleness of money. you know, uh the idea that every dollar is worth a dollar and you don't care which Federal Reserve Bank printed the dollar that somebody uh uh is handing you. Um I don't think we can be confident that under all circumstances uh Walmart coin and Amazon coin and Barry's coin and Andrewscoin will each be worth exactly the same thing. And if they're not, that will take us back to the period from the mid 1830s to the early 1860s when every state chartered bank in a bunch of states could issue their own banknotes subject to regulations that worked well in New York but worked poorly in Michigan. As a result of which, banknotes issued by banks in Michigan created at a discount relative to banknotes issued by banks in New York. And the corner shopkeeper had to keep a telephone book equivalent >> under the counter >> to look up the value of each and every bank note before he accepted it in payment. Is that uh financial world, a monetary world we want to go back to? >> No, obviously not. It's like in Myanmar, by the way, I don't know if you've been there, but in Myanmar, you go two things. Number one, you cannot hand in a a bill that has any creases in it. They will not accept it anywhere. Second thing is, you go into the bank and there are these ledger books, these gigantic Harry Potteresque ledger books that they're writing everything down in the most bizarre thing you've ever seen in your life in this one. But anyway, I want to go over and I want to talk about geopolitics or not geopolitics, geo geo um economics and something that I've taught about. We have this new era of fragmented globalization. I call it selective isolationism. This idea that we're choosing first of all there are choice being made by various governments to isolate themselves from others. whether you want to call nationalism, you want to call it um you know some kind of other anti-globalization, but it's this selective thing where we're saying, "Hey, you know what? We want to be around with the world. We want to trade the world, but not so much with China. We want not so much with this one." And I find it it's it's kind of creating this really strange um reaction. And what I want to know from you is the global financial stability potential with all of this going on right now. How do you see it? >> We used to call this friend shoring which you know it it makes sense to source uh dual use technologies and products things you need for your national security mainly from your friends. And we used to call it nearshoring in co days. it makes sense to ship stuff to uh economic partners nearby given the disruptions that can occur from globalized long to globalized long-distance shipping. Uh but you know those rational motives for favoring some partners over others have spilled over into kind of an unrestrained nationalism is isolationism what have you in some cases. So I guess the way I I see it having uh disagreed with everything that we have said about Scott Bessent earlier I will now agree with him and say decoupling complete and total decoupling between the United States and China is unlikely. We simply depend on one another. We depend on China for rare earths. They depend on us for a a variety of technologies. Those interdependencies are too valuable for complete and total decoupling to occur on economic grounds. But there can still be an accident and uh there can be a blow up between the two countries over Taiwan or something. So in the first scenario uh distancing but not total decoupling I do not necessarily see a threat to the stability of the monetary financial system. China is trying to build one centered on the renmanb and Shanghai and we have one centered on the dollar and New York. Uh but they overlap and they're interconnected and and that system continues to work. If there is a rupture between the two big economies, a complete and total breakdown for geopolitical reasons, then the financial system breaks down too into two uh unconnected blocks. And I think that adjustment would be chaotic and wrenching. >> Well, I thank you for your time today. There's so many things that are going on around the world that uh again, nothing's really well on the surface on the out, you know, what we've seen broken besides little bitty little bitty breaks in the dam here and there which don't qualify I don't think for bigger fractures right now and I think everybody's also aware of the mutually assured destruction concept economically around the world that we want to tread get as much as we can but not make it so that we anybody loses because we all lose if that's the case but thanks for joining me today Dr. Do is it doctor professor >> either either one or Barry >> Dr. Professor Barry, I'm happy to happy to end on that optimistic note. Thank you for providing that and uh let's talk again in 13 years. >> Yeah, thanks so much. All right, I'll see you. Thanks so much. Bye-bye. Bye. >> Another great episode. I learned a lot there. Started out talking about the 401ks. Hopefully that put a little bit of a thought process in your head with regard to whether it is appropriate or not to put some of those particular investments inside of the 401k plan. And then of course talking about some of these things that I found fascinating with with Professor Iiking Green. whole idea of, you know, geopolitics and what's going on with regard to uh w- with regard to the US dollar and how that goes and the Chinese and whether they're going to and the bricks, whether they're going to take over on their currencies and uh this the the the stable coin deregulation, how that rock rockets through the system and um really good stuff. I mean, I do this because I learn as well each and every week. The guests that I have always teach me something, keep me a breast of what's going on and the discipline investors that you are and you have become, you learn along with me at the same time. So, I appreciate that. Go over to the discipline.com website, check out all the things that are available to you right there. And one of the things that is available is the idea that you can see how we help people just like you invest and work towards that that that that level of financial security for your future. Thanks for joining me this week. Thanks for joining me every week. Make sure to tell your friends and I will see you right around the block in a couple of days. We have another great guest and another great episode. See you real soon. Bye-bye. This podcast is intended forformational purposes only and does not constitute personalized investment advice. Investing involves risk including the possible loss of principle and past performance is not indicative of future results. The views and opinions expressed are those of the host and any guess and may not necessarily reflect those of Horowits & Company Inc. an investment adviser registered with the US Securities and Exchange Commission. 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