Lyn Alden on How Fiscal Dominance Reshapes Markets (TIP815)

Summary

• Macro Regime: The guest frames this as a macro-heavy decade driven by fiscal dominance, where higher rates expand deficits and blunt traditional monetary policy impacts.
• Gold: Strong case for gold as a long-term reserve and dilution hedge despite positive real rates, with rising relevance amid geopolitical fragmentation and reserve diversification.
• Energy: Higher oil prices redistribute power to exporters; most consumers suffer, and price controls risk shortages and underinvestment, while refining and crude-quality constraints add supply friction.
• Dollar Dynamics: A strong dollar benefits government, finance, and high-margin tech while eroding manufacturing; de-dollarization advances slowly due to deep network effects and cross-border dollar debts.
• Equity Opportunities: Pitched as constructive on banks/financials (benefit from deficits, cheap valuations) and energy and pipelines; watching SaaS for oversold levels and staying bullish on semiconductors on pullbacks.
• AI and Capex: Massive AI-driven capex creates a clear divide between beneficiaries (semis and infrastructure) and those constrained by tight monetary conditions.
• Leverage Insights: Highlights prudent currency-short strategies via corporate debt and insurance float, citing examples like Coca-Cola (KO), Apple (AAPL), and Berkshire Hathaway (BRK.B) to illustrate durable, low-cost leverage.

Transcript

(00:00) Back in the 70s, bank loan creation  was the biggest source of money supply growth   and fiscal deficits were a smaller portion  and federal debt the GDP was low. But today,   bank lending was not excessive at any  point during these inflationary spikes,   whether the postcoid inflation  or whether this inflation is   not because of excessive bank lending. (00:19) But you do have well over 100% debt   to GDP. And when you raise interest rates, you  actually blow out the federal deficit more than   you slow down total bank lending. So we're kind  of through the looking glass on monetary policy.   You know, it's it's kind of interesting. I we've  taking sort of a a pivot here recently and we're   talking more about equities and I've talked  to quite a few people about this pivot and   the feedback I get is is a bit surprising  to me because what they're telling me is   that that's all fine and well, but please  keep on bringing Lynn back to talk about  (00:52) macro. So, and that's kind of like  whenever you hear that from someone who's   very micro and you're like you're sort of  like especially if you come from the church   of Buffett and Munger, you're supposed to say,  "Oh, we don't want to hear about macro." So,   whenever hardcore value investors are telling you,  "Yes, but still, please talk to Len, you know,   that's at least in this echo chamber of value  investing that I'm in, that's like that's the   highest of the praise you can you can get. (01:16) " >> Of course, and I think it's a   symptom of the age we're in. I I've been  describing this as a macroheavy decade.   Uh and so the advice to either ignore macro  or include macro can very much depending on   the times. I think to Buffett and Munger's  point, I think during that that four decades   of falling interest rates, you know, from the  early 80s all the way up basically, you know,   to the global financial crisis and thereafter  really to 2020 in some ways, you could mostly   if you're in the US at least, you could (01:40) mostly ignore macro, focus on   value or or growth or reasonable price  investing or even passive and just do   exceptionally well. And I think really only  in this kind of age of fiscal dominance,   massive liquidity injections, record tightening of  of central banks after those injections and then   geopolitical issues and things like that. (02:01) Macro has kind of inserted itself   whether we like it or not. I think it's useful  to have it as an overlay more than we needed it,   you know, maybe in the in the '9s for  example. So yeah, I think different advice   for different ages of time. >> Well said,  uh, Lyn. And so jumping into to the first   question here, I have to start talking about gold. (02:21) Gold is now seen as a geopolitical hedge,   but we are also looking here at the current  Gulf Moore. And so the price of gold initially   it soared and then it plunged and at times it's  behaving more like a risk asset, Frank. So how   should investors think about gold here? Is it  still a reliable hedge? What role does inflation   expectation have and real yields? That is what  we traditional look at whenever we look at gold.  (02:44) Yeah, it's a great question. I think  a couple things. One is the tricky thing about   hedge is a hedge implies it pays off kind of the  moment you need it to. And gold is not necessarily   a hedge in a way that say a put option might be.  If your goal is to pay off when equities go down,   you know, a put would do that specifically. (03:01) Whereas gold, it's its own thing.   It's a hard money. It's a very, you know,  old asset. It has it certain properties.   those properties tend to give it riskoff  characteristics and safe haven characteristics   but it's not quite a hedge in the sense that the  timing is not always what people expect similarly   I mean during the March 2020 co selloff gold  went down not as much as silver not as much as   stocks perhaps but it did go down when you have  kind of a dollar shortage and a short squeeze   uh almost everything goes down compared to unit of (03:28) account the debts are denominated in I   wouldn't really rely on a timing basis and I  think for this particular crisis it's a symptom   of asked money. So I wouldn't overthink gold's  kind of general safe haven status just because   it didn't perform well this time because when  you look at the 18 months leading up to this   war there was a massive bid for gold. (03:48) We had like record overbought   uh you know according let's say you look at weekly  or monthly like RSI just overbought status on most   tactical indicators for gold. silver was like top  1% of like you know looking at the past century   right so you have all this fast money in it a lot  of enthusiasm and so when a war hits it's it's   easy for fast money to just go elsewhere or just  I think the bubble was already kind of breaking or   at least the I don't think they're fundamentally  in a bubble but I think there was like a technical   bubble a kind of a local bubble forming and (04:16) that I think was breaking pre-war and   the war didn't help it whereas ironically I mean  you know Bitcoin is often seen as risk on and it   sells off during crisis and actually held up  oddly Well, sometimes I get the question is,   is it a riskoff asset? Now, is it a safe haven?  I say, well, I wouldn't overthink that either.  (04:31) I would not make that claim because  I think it's a simple fact that there was no   fast money in it or most of the fast money was  already out. It already had a terrible 6 months   leading into the war. And so, there's really no  kind of flighty capital to go anywhere, unlike   gold and silver that had plenty of fast money. (04:48) And so sometimes a 6 to 18month trend   uh or cyclical trend can interfere with  what is otherwise kind of a structural   truth. And then for the real interest rates  phenomenon, I think the most interesting part   of the question is for a very long time gold  traded on real interest rates. Meaning that   you know you look at its main comparison is  the dollar or short-term treasuries and you   say okay we can get this much on treasuries. (05:08) uh here's inflation and so if you can   get a positive real rate you say well I can hold  gold and get paid nothing or even pay something   to store it securely or I can get paid on this  but during zer for example when you're getting   paid zero but there's still inflation you have a  negative real rate so everyone's like I might as   well hold gold then and you bid up the price  what's interesting is that we've we've had a   dislocation where despite positive real rates  gold has done very well so it dislocated to   the upside and I think a big factor for that (05:36) is fiscal dominance I think the fact   that the US is in structural fiscal dominance  that's kind of like changes the nature of the   game because the main difference there so back  in the 70s bank money lending bank loan creation   was the biggest source of money supply growth  and fiscal deficits were a smaller portion and   federal debt the GDP was low so when when  the central bank you know when Vulkar jacks   up interest rates super high it slows down  bank lending and while it does blow out the   fiscal interest expense a little bit when you (06:05) have low debt to GDP that's a smaller   factor than how much you just slow down bank  lending. But when you when you fast forward   to today, bank lending was not excessive at any  point during these inflationary spikes, whether   the postcoid inflation or whether this inflation  is not because of excessive bank lending,   but you do have, you know, well over 100% debt  to GDP with large demographics driven deficits.  (06:26) And when you raise interest rates, you  actually blow out the federal deficit more than   you slow down total bank lending. So, we're kind  of through the looking class on monetary policy.   And I think gold has, you know, gold market has  sensed that out. That's probably the key reason   why we've seen gold do well despite positive  real rates because positive real rates don't   really slow things down the way they used to. (06:49) >> Thank you, Lynn, for calling that   out. I think it's it's such an incredible  important topic and I'm worried of of course   I can't speak for all our listeners but I I am  worried that quite a few our listeners are just   not thinking about fiscal dominance because  you know as value investors we're sort of   like trained to put some things in the too hot  pile and that's probably okay if you're looking   at this obscure mining stock and you're like  oh this is too hard but like you have to pay   attention to what's going on with fiscal (07:16) dominance right now and I just   wanted to to mention I really like how We also  talked about the time horizon like whenever   people talking about like me uh does it behave  like a risk asset and you're like yeah but you   know whenever we talk about the heads it's not  like if you need the money tomorrow like that's   not the time frame at all we're looking at. (07:37) So I I really happy that you called   that out. I wanted to talk about that some  countries they're under a lot of pressure right   now with the higher energy prices and they might  need to mobilize reserves. Now to which extent   could energy shocks lead countries to sell gold or  otherwise use gold as liquidity source and and how   does that affect gold's role as a reserve asset  if any? >> Right? So when we think of reserves   there's there's different types of reserves or for  different purposes which is to say that gold is   often the reserves that countries don't plan on (08:07) selling ideally ever. I mean it's slow   to sell especially if they have it in their own  custody. you know, if they have it in New York   and they can just do a phone call and and have  it transferred to someone else's box, that's one   thing. But if they actually hold gold tonnage  in their own, you know, central bank vault,   selling it is not the quickest, easiest thing. (08:25) That's what treasuries and dollars are   for and other currency holdings. They can sell  those very quickly. And so, generally speaking,   you would see a trimming of other reserves before  you'd see a ton of gold tonnage. I mean, around   the margins, you can always sell some. Uh and then  there's the fact that there's all these mechanisms   in place now especially postco like foreign repo  facilities and stuff where entities like central   banks can get liquidity without selling reserves. (08:47) They can just pledge their reserves as   collateral. So for example in the US we have  the FEMA repo facility is specifically for   foreigners in addition to our domestic repo  facility. And so let's say a Gulf state right   now is in financial trouble. They want to keep  their currency pegged but they don't really   want to just fire or sell treasuries. (09:05) that one that could disrupt   the treasury market and two I mean  it's they're kind of like responding   to what is hopefully a temporary  problem with a permanent sale. So,   one thing they could do is put those treasuries  or some of those treasuries in that facility,   get dollars, and they're just using their reserves  as collateral for liquidity, and then, you know,   should the crisis resolve itself and their cash  flows get better, they pay back those dollars,   they get back their treasuries, and  they didn't have to sell those into   the market, potentially impair the price of (09:29) their own assets and all that because,   you know, during co when cash flows just instantly  dried up in the span of a week, it's like the   whole world just changed and yet all those debts,  all those crossber debts are still you know,   all these indebted entities are in trouble and  you know, there's a scramble for dollars and   then there's a rapid fire sale of treasuries. (09:47) It actually broke the treasury market   supposed to be the like the most liquid deep  market in the world and yet many off ther run   treasury markets just kind of went no baited and  so these types of facilities are kind of set up   to avoid or minimize those types of problems.  So I think that a lot of countries have options   before they were to resort to selling gold tonnage  although of course if if gold soarses maybe they   want to rebalance, right? So there's there are  some reasons why they might want to sell gold,   but I don't think most of them have to anytime (10:14) soon. >> Yeah, I'm happy you say that.   Actually, I wanted to talk about Igen Green's  new book here later, but I can't help but mention   now he has this amazing story about how Maduro is  chartering a Russian plane, sending it to Africa,   and selling gold bars. You know, once you  just buy the book just for that story alone,   it it was it's quite extraordinary. (10:35) It's not as as simple as it   sounds and it probably already sounds pretty  complicated. Anyways, I wanted to ask about   gold sensitivity to real yields and its role  as a reserve asset. Now, how should investors   think about gold in a world that may be moving  more towards fragmentation and less reliance   on the US dollar? I think a couple factors. (10:55) One is as you just said as we kind of   enter fragmentation there is value in holding  your own asset in self-custody whether it's an   individual or in this case a sovereign I  mean it's like are you truly sovereign if   100% of your reserves are held by another  country and can be frozen by that country.  (11:13) So if you hold any securities  whether it's government bonds, equities,   corporate bonds or bank deposits or potential  bank deposits, all those assets are basically   types of securities or security adjacent and  they can just be frozen with a stroke of a   pen by the country that oversees their issuance. (11:30) Some countries will hold gold but they'll   have it in other jurisdiction. They hold gold IUS  and again they can just be like, well, you know,   they're frozen now. Thanks for playing. Whereas  if you hold gold tonnage in your own jurisdiction,   nothing short of like war can come and get your  gold, right? So it's a form of kind of defense.  (11:49) So is diversifying your reserves so  that at least your IUs are spread out between   more than one jurisdiction. Some of those  jurisdictions might not like each other,   so they might not agree to collectively freeze  your reserves. So I do think that that's a really   big component. And then two, instead of real  rates, I think it's best to think of them in   terms of dilution rates, which is a higher hurdle. (12:09) So when we when we look at real rates,   people will look at what interest rates are,  say treasuries paying versus forward kind of   break even inflation expectations as  measured by like the tips market for   example. That's that's a common way to do it.  I think a better method is to look at money   supply growth for the jurisdiction in question. (12:26) Let's say the US. So in the US, money   supply growth is historically above inflation  levels because we have technological productivity   increases that offset some of that money supply  growth. So let's say every year money supply grows   by an average 7% a year. We get 3% more efficient  at making stuff. And so over the course of a   long time we have something like 4% inflation. (12:48) Obviously it's not it's bumpy. Sometimes   we have double digit inflation. Sometimes  we have sub 2% inflation. But let's say it   averages to four. Real interest rate market would  look at that 4%. Whereas the actual dilution rate   is at 7%. You know, if the money supply is  growing by 7% and you're holding treasuries   that are paying you 3 or four, you're getting  diluted by 3 or 4% a year in terms of like   your share of the overall dollar network. (13:11) Whereas when you look at gold,   gold on average according to most estimates  grows in supply by 1 to 2% per year. So around   1 and a.5% on average. And so that's your dilution  rate 1.5%. Whereas if you know if you're holding T   bills at 3% and the money supply is growing at  4% uh I mean 7% then you're getting diluted at   4%. And again in a timing sense that might not  matter in a given year because a lot of money   could rush into gold and rush out to gold. (13:37) So you can get you can get a 20% draw   down in gold and be like well how does that  help me when you know we're talking about a   couple percentage points of dilution either  way but over a multi-year multi-deade period   that really accumulates. So I think from an  investor standpoint whether it's gold whether   it's real estate whether it's cash and bonds  whether it's even equities you kind of want   to look at always are you getting diluted  or not and you know you want to kind of   gravitate toward assets where you're not (14:02) really being diluted for equities   gets a little bit more complicated than that but  that's a general principle that both individuals   and central banks I think are increasingly  going to factor in >> whenever you look   at financial history and I can't help myself  looking at that and and you look For example,   what happened after the Dutch Empire fell and  there were quite a few countries who said, "Oh,   by the way, now we don't owe you any money because  they know that that the repercussions of of doing   it versus what repercussion of of actually (14:31) paying the money would be and so they   basically just said it's just not valid  anymore." Do you see treasuries being   weaponized that way with growing conflict? I  know some people say it's already happening,   but you could be way more granular about how to  weaponize T- Bells than what you see right now.   Yeah, I think I mean whether or not it happens,  all countries have to consider the possibility   of it happening now, right? So that's the  first order thing is like you can't just   wait till it happens. Again, going back to the (14:58) question, are you sovereign if all your   reserves are in question or at least a really  big chunk of your reserves? So the less of your   reserves can be frozen with a stroke of a pen  or otherwise impaired, the more options that   country has. And so I mean the obviously the  main risk is just freezing or confiscation.  (15:15) No one really blinks their eye  when like the you know it happens like   Afghanistan you know the Taliban take over  and we're like okay those are not really   your reserves no one's really going to care uh  other than obviously the Taliban whereas when it   happened when Russia invades Ukraine it's a big  enough entity that that kind of multiple other   entities are like wait their reserves can  be you know frozen and then you can imagine   another level where the US especially because  we we're kind of erratic recently we're talking   about invading Greenland potentially we're you (15:43) know we're doing all sorts of stuff   unilaterally. We could have a president  that says, you know, we want to seize   their reserves unless they give us greenland  or unless they uh agreed to let us do XYZ,   unless they agree to have a base in their so we  could there's steps that go along the route. And   I think before you get to those extre situations  that might or may not never occur, countries have   to consider the possibility of those extremes. (16:06) In a similar way, I mean, if like Canada   when it was constructing pipelines or just  choosing whether to allow certain pipelines   or block them, they kind of made themselves  very dependent on the US and if the US says,   you know, we're going to use the  fact that you're dependent on us now,   that puts them in a really rough situation. (16:22) So then they scramble to say, hey,   all these pipelines we kind of put on hold. Maybe  we should reexplore those to have options on where   to send our energy efficiently. The same thing  happens with the reserves. Same thing happens   in multiple fields. And and I think we're we had  kind of a long stretch of kind of a uniolar world,   especially after the fall of the Soviet Union. (16:41) Call it a three decade stretch of kind   of peak globalization. Countries and companies  could optimize for efficiency over resiliency.   You know, just in time, supply chains just  assuming the global order is kind of clean   and is not going to change much. Whereas now  resiliency and backup plans and negotiating   power and resilience against just being  impaired by a stroke of a pen is more   important for years and decades in the future. (17:08) >> Interesting times definitely. I want   to talk a bit about the framing here of the dollar  because I think many of us and perhaps it's my   own bias but I I certainly benefit from a strong  dollar. I earn in dollars. I hold dollar assets.   my expenses is then effectively in euros. And  at the same time, we hear more and more about   structural risk of an overvalued reserve currency. (17:30) So if we strip away any thoughts of   patriotism, whatever we want to call them, we  just look at incentives. Now, who who actually   benefits from a persistent strong or overvalued  dollar and who's effectively paying the price for   it? And we can talk about this globally and  perhaps even within the US with the K-shaped   economy than than some people talk about. (17:52) >> It's a really good question.   So I think first we back up we back up and say  kind of how does reserve currency work and how   does it get overvalued. So most currencies  around the world that you don't have to own   but could own as a trader like if I want to buy  or sell Egyptian pounds for example you'll look   at it and say okay is is that country running a  trade surplus or a trade deficit? Is its economy   growing or shrinking? Is it a place where  capital wants to go into? Are they are they   confident in the rule of law? They want (18:16) to go invest in their equities,   their real estate and therefore, you know,  kind of prop up that economy. Do they want   to pull capital out? And then their industry  differentials. If I just hold their currency,   am I getting paid a rate? Going back to  the real industry question, am I getting   paid in line with the money supply growth or the  expected inflation rate of that currency or not?   uh and so all these you know currencies will trade  on each other based on principles like that and   their central banks can respond accordingly with (18:39) reserve purchases or sales or interest   rate changes and the dollar is no different to  start with in sense that it does trade on all   those things that's why it has big cycles over  time but then in addition to all those normal   factors there's also just a structural bid for the  dollar that's almost inflexible and it's because   unlike Egyptian pounds where you can choose to  hold it or not it doesn't really affect you that   much dollar is the biggest network effect in town. (19:05) It's the, you know, the main one that   most currency trading pairs are traded in.  So there's not a lot of liquidity between   Egyptian pounds and Korean Juan. But if you  want to go back and forth, you trade one for   dollars and dollars for the other. And that's  true for hundreds of different currency pairs.   In addition, when a country is going to hold  reserves, we talk about they can hold gold.  (19:22) Gold has some volatility to it. It's  also slow and clunky. You know, sending it   over in planes sometimes if you're literally  doing the whole self custodial route. And   dollars are very efficient. They're kind of the  most liquid, reliable bond market in the world.   And also dollars give you access to kind of the  broader US equity market, US real estate market,   very big, diverse, deep market compared  to Europe's kind of more fractured market.  (19:45) So same currency, but fractured  bond market, fractured equity market,   China with the capital controls and just  smaller market in general despite the size   of the economy. And so there's a structural bid  for dollars. And what that does is that overvalues   the dollar based on its normal kind of trade  characteristics that we would normally look at,   like the ones I previously discussed. (20:04) And it makes it so that Americans   have way more import power than we otherwise  would have, but our export competitiveness   is harmed. And it kind of starts with the lower  margin stuff, right? So it doesn't really impact   our super high tech. You know, if our currency  is 20% over value, it doesn't matter if we have   like the leading semiconductor chip in the world. (20:20) The people are going to buy it anyway. or   a pharmaceutical that's super high margin and  cures cancer. Whereas like our our low margin,   you know, metal thing, right? That's a thing  that's like, okay, we're we're going to stop   building that in the US. We're going to go  build that in China and Vietnam and elsewhere,   even even parts of Europe, even Japan. (20:39) Those places can still produce this   stuff. And another way of thinking about it is if  the whole world uses dollars, they need dollars,   right? So there's trillions of dollars  floating outside of the US. It's like,   well, how did those dollars get there? And  the answer is structural trade deficits. They   overvalue our dollar and therefore we run trade  deficits with the rest of the world for like 50   years straight and supply them with dollars. (21:02) And over time that builds up major   imbalances and that's where that's a long  way of getting to your initial question of   who wins and loses from it. So that the  for the most part the winners are those   who are in the dollar or dollar security  export business. So the US government   wins because their currency is overvalued. (21:19) they can run big fiscal deficits   and they won't have a list trust moment or at  least the the list trust moment is much harder   to get when there's all this structural bid  for dollars. So they can do more co stimulus   without kind of really paying as much of  a price as many other countries would.   Uh they can have 800 foreign military bases. (21:36) Their energy is priced in a currency   they can print. Americans don't have to  think about exchange rates. There's all   these advantages. If you're in New York and you're  selling securities, you know, you're investment   banking and things like that, the whole world  wants your securities. If you're a corporation   selling bonds, the whole world wants your bonds. (21:52) If if you're in the US, uh in Silicon   Valley, you're selling private securities.  Essentially, the world wants those. And so,   if you're in the dollar or dollar security export  business, so basically government or finance,   you're doing great. If you're high tech or  high margin in general, so pharmaceuticals,   tech, you're kind of neutral to good. (22:11) you're doing pretty good. You don't   really not impaired by it. And then if you travel  the world, it's nice to have a strong dollar and   you get all the kind of the privileges without  really the downsides. Whereas it hurts those   that are more in the manufacturing or lower  margin businesses, which is like the Midwest   area and in general just the the whole segment  of the population that even supports those.  (22:29) If you're running a restaurant next to  a manufacturing town or in a manufacturing town,   you're by extension impaired as well.  So both sector and geography. Now,   the tricky thing is that the further this goes,  the more imbalanced it gets, it can actually   start to harm some of those winners, too. (22:46) Like, if our industrial base is so   kind of stagnated that the military can't replace  its production as quickly as it could, you know,   decades ago. So, like we can only make so many  interceptors, for example, in a given month.   It actually starts to impact the government  in a way, too, or those in in more in that   dollar security or military industrial complex. (23:05) And so, if it gets imbalanced enough,   it can impact almost everyone. But  for the most part, there's that pretty   clear segmentation of winners. So having  the dollar as the global reserve status   really is good for like America  the empire or America the coasts,   America the finance hubs. And it's really not  great for America the heartland, America the   industrial powerhouse that we used to be. (23:27) Those are generally on the on the   losing side of that arrangement. >> Lyn, uh,  I wanted to talk a bit more about winners   and losers. And perhaps I'm making it a  bit too black and white, but I I do like   um probably because I'm I'm a trained economist,  but please don't hold it against me. But I kind   of feel like there was something to be said  about making a bit more simple and then sort   of like start building on the thesis. (23:51) And so I'm going to use that as   framework to talking about the investment case  we have here for, you know, energy and and oil   equities. And that's something you talked about  in the past and you've been right about that.   But if we just stay with oil here for a moment,  you know, we we have a current oil shock and that   redistribute economic power to some extent. (24:08) So could we simplistically say who   are the winners and losers from this so far  and both across country level and then across   sectors and then perhaps perhaps build on  that? Well, so on average if a country is a   a net exporter of energy, they're doing better  than if a country is a net importer of energy.   Sometimes that gets oversimplified in media  because you know if you're in a country that is   a net exporter of energy it might not be as bad if  you're in a net importer of energy but your energy   bills are generally still higher unless that (24:39) country is say subsidizing its own   energy with its own production like a little  bit more kind of a socialist kind of energy   situation. Uh so barring that in America right  now I mean energy producers are doing fine.   We're kind of there's talking points about how  the world's going to buy our energy. I mean,   it's not like we have a ton of spare  energy just sitting there, right? So,   that mean that that bids up our prices. (25:00) So, if someone is in America but   doesn't work in the energy industry, they're  not really getting any benefit and they're   paying higher energy at the pump. By extension,  uh they're paying higher diesel prices because   if these things persist, stores have to  raise prices on all the goods they transport   around on trucks and trains and all that. (25:19) higher tickets to fly an airplane   anywhere, whether domestically or  internationally, and higher rates   of cancellation on flights because all these  unprofitable flight routes are canceled that   they don't think they can raise prices enough. And  so, for the most part, the vast majority of people   do poorly when energy prices are higher. (25:35) There's relatively few winners,   those who produce them, those who invest in  them, and there's some that are just kind   of doing damage control by being in a country  that at least is not going to have shortages.   It's going to be somewhat self-sufficient.  But the vast majority of consumers globally,   including in those exporting countries on average,  don't really benefit from higher energy prices.  (25:53) We generally want our raw inputs to be  as cheap and abundant as possible. And whenever   there's bottlenecks or shortages or high prices  in those raw inputs, that's when you get a lot   of problems. >> Yeah. And I think it's also  really important to be talking about nominal   and and real numbers. I think we we all as  consumers have this natural tendency to be   looking at nominal numbers just it's easier  to relate to like you things are expensive.  (26:18) I know I'm not telling our listeners  something that that they don't know but I I think   I I want to to use that transition to the next  question about how the daily lives look different   from the average US and Egyptian consumer. At the  time of recording uh brand is trading 110. So, but   originally I sent you the question asking you how  does the daily life look like whenever it's 100   and 150 in those two countries call it average. (26:43) I know the average doesn't exist but   that's sort of like the primer. >> Yeah, good  question. So, zooming out for a second. I think   the world can take $1 to $150 oil. It's not  comfortable especially when you when you get   there very quickly like we have but especially  on inflate you point out the difference between   nominal and inflation adjusted are real. (27:01) I mean, this is it's not record   oil prices on an inflation adjusted basis. If  anything, ironically, the gold to oil ratio,   like oil's cheap compared to gold, and that's  kind of absorbed all this kind of decades of   money printing into the gold market. And so, both,  you know, multiple ways of looking at it, uh, it's   almost like $100 plus oils like a new baseline in  a sense, like that can encourage new production.  (27:25) You know, that's kind of a reasonable  balance or at least the high double digits. you   know, $60 oil is, I think, not that sustainable  because producers can't really make money down   there for the most part. And so I I think the  world can after some period of turmoil absorb 100   to 150 even maybe a little higher energy prices. (27:44) The higher you go from there and even at   that level, poorer countries on average are going  to be impacted first. So Egypt has something like   120th of the GDP per capita as the US. Now when  you factor out kind of wealth concentration,   okay, what about the median? It's still something  like 10x or more, right? So the median American   has just way more buffer or purchasing power. (28:04) Same thing with the median European,   the median, you know, XYZ. And so higher prices at  the pump are bad, but they're not as catastrophic.   In Egypt, for example, they just had a month-long  energy curfew, right? Because their natural gas   import bill tripled. when everyone's kind of  scrambling for LNG, Egyptians can't outbid Europe,   they can't outbid China, they can't outbid,  you know, wealthier countries, Japan, and so   they're more likely to just get acute shortages. (28:33) Basically, you can't out bid the prices.   So, you just get less natural gas to deal with.  And so, they start doing energy curfews so that   shops and cafes and stuff will have to close at  a certain time, which is especially tricky for   a desert country where more economic activity  happens on average later. So, closing at 9:00   p.m. in the suburbs that I live in here, people be  like, "Wait, things are not open anyway after 9,   right? But in in Cairo, that's a massive change. (28:58) " Now, the good news is it has eased a   little bit there. So, they've actually temporarily  they're ending their energy curfew because it's   obviously very unpopular, but there's a risk  that it could come back because, you know, energy   prices have kind of chopped a while, but if they  keep soaring, uh, you could see this happen again.  (29:15) And so, you know, on average, developing  country citizens are are more impacted. But it's   also, I mean, in the US and Europe, I mean, in the  US, for example, stocks are are near record highs,   but consumer sentiment is literally at record  lows, like since it's been measured nationwide,   going back to like the 50s. So, in like 70  years of data, I mean, this is like the going   through the late '7s malaise, going through the  global financial crisis, going through COVID,   you know, those were all low points. (29:39) this is somehow even lower   because people are working full-time and yet  having trouble making ends meet and not really   being confident in the direction of things.  And so it again it impacts negatively almost   everyone but yeah I think the world can absorb  100 to 150 nominal oil prices uh even though   it's unpleasant when you make that transition. (29:59) >> It certainly is not pleasant. I   wanted to ask you about the relationship between  public debt that we talked a bit about before   and then social unrest and then perhaps go back  to the gas prices afterwards, >> right? I mean,   when you have high public debt, it's a symptom  that things have not been in balance for a while.  (30:19) It's often aging demographics, sometimes  war, but often just aging demographics. And in the   US's case, we have just kind of couple things  are kind of happening at once. We have record   kind of payments to the older generation  compared to the younger generation which   is on average backwards from how you generally  think about kind of investing in your future.  (30:37) So we're kind of fueling older consumption  and you know we're not really like education   or families buying their first house to have a  start a family. Those things are all just really   expensive and kind of left for you know it's just  it's challenging and so you start to get more   just turmoil. you get intergenerational warfare or  you get more polarization because everybody feels   something's wrong but no one's sure why. (31:03) So you get across the aisle kind   of fingerpointing and and just more  extreme decision-m in general. And a   big part of whether a person or a company  is doing well starts with the question,   are you on the right side of fiscal deficits  or not? Right? So if you're in the business   that that is either receiving deficits or caters  to those that are on average receiving deficits,   you're probably doing pretty well right now. (31:24) Whereas if you're in a business that   is not really on the receiving side of deficits  and if anything is a little bit harmed by tight   monetary policy, if you're a realtor right  now, right? So no one wants to sell their   homes because they locked in their 3 and a  half% mortgage. No one really wants to buy   a home because they don't want to pay current  mortgage rates and they can't really afford the   high prices mixed with high interest rates. (31:48) So turnover is very low. Even though   there's not been a collapse in real estate  prices, but this turnover just has collapsed.   So if you're in the business where you  depend on volumes of real estate turnover,   you're just you're out of luck. It becomes  kind of very binary in that sense. Of course,   the other variable unrelated is AI capex spending. (32:04) It's so big these days. So if you're on   the right side of kind of fiscal deficit  or AI capex, you're on the good side of   the economy. And if you're on the losing side of  of tight monetary, at least not on the receiving   side of fiscal deficits, you're impaired. And  that of course leads to all sorts of political   polarization instead of just kind of when there's  kind of that strong of a thumb on the scale,   there's bigger debates on where that thumb  should go versus if that thumb was smaller.  (32:29) And then like I said before when you have  over 100% debt to GDP and if like in the US annual   fiscal deficits are bigger than all bank lending  combined on net uh so that the sum of new bank   loans year-over-year is smaller than the annual  fiscal deficit and even net new bank loans plus   bond is corporate bond issuance that's roughly  the same size as the entire federal deficit.  (32:54) And so when you when you get that much  kind of public debt to GDP and those large   deficits, when the central bank says, "Okay, we  want to slow stuff down. We want to slow credit   formation, slow money supply growth, so we're  going to raise interest rates." The problem   is you do slow down that private sector  stuff to some extent, but then you blow   up the fiscal deficit by an even bigger number. (33:13) So you actually in some ways accelerate   total credit growth by raising rates. And  that's that's a state of fiscal dominance   that Japan's been in for a while and the  US has kind of more recently entered.   It would be odd if we had an episode together  we didn't bash democracy or at least I didn't   bash democracy and again I I always invoke this  churchial quote that it's what is it that he's   saying like it's terrible but it's not as bad as  as the others but it was quite interesting for   example we had this spike in oil prices whenever  we had election going on I'm based in Denmark  (33:45) so there was election then uh oil prices  spiked and then all the parties went out and said   oh price control and because That's how it works  in a democracy. Uh, and especially if if there's   an election, why wouldn't you want price control?  You know, and first level thinking would say,   okay, why wouldn't we have $3 cap on gas at the  pump? Like, why not? Like, isn't it better if it's   $3 and it's $4? It certainly shouldn't be $5. (34:11) And so, of course, in economics,   you always have to ask, and then what? And  so, why is it not as simple as just saying,   let's just lower whatever? Let's just call it  $3 cuz then people are happier. Why doesn't   that solve all problems? >> Well, the shortage is  because you're more likely to get shortages. So,   generally speaking, when you have an  energy shortage uh and prices are going up.  (34:34) If you let prices going up, people can  still get it if they're willing and able to pay   the higher price. So, it provides an economic  incentive where if if you're kind of using   energy superfluously, you're more mindful of your  energy usage. So you reduce non-essential energy.   Energy still finds its way to the kind of the most  essential areas or those willing to pay for it.  (34:51) And by extension, I mean, there is  a somewhat unfair thing. You know, if you're   wealthy, you can just just pay for it frivolously,  where if you're poor, even for essential stuff,   you might have trouble paying for it. But at least  it's it's still kind of getting on average to more   important things. Whereas, if you just do a a flat  kind of price cap, there's less differentiation   between essential stuff and non-essential stuff. (35:11) And two, it it kind of prioritizes instead   of wealthy versus poor, prioritizes who gets  there first. Because if you only have so much   energy go around, the price is not going up,  so no one's rationing it. So whoever gets there   first gets it. Or the government says, "Okay,  your license plate can get gas on these days   and your license plate can get gas on these days. (35:27) " You have more more government control   and things. And then two, we talked before about  how wealthy nations can outbid poorer nations. So   if you have a region that's doing price controls,  well those places are not going to outbid other   places for energy. So if there's a limited amount  of LG or, you know, other types of fuels that can   go certain places, those places that are willing  to pay higher prices and able to pay higher prices   are going to get that that extra supply. (35:53) And then even more structurally,   if it stays elevated long enough, that's a signal  to producers to produce more of it. Whereas,   if the price is kind of artificially suppressed so  that producers aren't making money at that price,   there's a shortage, but there's an artificial  price cap, producers will say, "Well,   we're not going to produce more energy because,  you know, one, if we make a lot of profits,   they're going to get windfall taxed away  from us because we're the bad guys right now.  (36:16) " Or two, there's going to be price  controls that prevent us from making those   profits in the first place. So, we're not  going to take the risk of developing a   multi-year project for new energy. And so price  is a mechanism of coordination often without   the parties even knowing each other. Just  like if you say, "Okay, we're short energy.  (36:33) We're willing to pay more for it. Who's a  seller?" You find sellers. And this price controls   kind of distort that. If you spend any real time  investing, you've probably noticed something. The   longer you do this, the smaller the circle of  people you can actually talk to about it with   gets. Most people in your life are unfortunately  not spending their weekends reading 10Ks.  (36:55) And the internet is full of  noise as we know. Hot takes, meme stocks,   influencers with a camera and a conviction that  they can't defend. Well, that's the gap that the   mastermind community was built to fill. I'm Sha  Mali, and alongside my colleagues Stig Broersen,   Kyle Griev, and Daniel Mona, I help lead a small  applicationonly community of long-term investors   who are serious about getting better at this. (37:17) You'll join a like-minded peer group.   Enjoy direct access to us as hosts and to  high-profile guest speakers on private calls   and live events like roaming Omaha with us  during Birkshshire weekend. If you'd rather   compound your capital alongside people who  take investing as seriously as you do, apply   to join at the investorspodcast.com/mastermind. (37:36) That's thespodcast.com/mastermind. We'd   love to have you. It is such a powerful thing  whenever you have price signals and I think Adam   Smith and now we're again talking about financial  even he said you know with the invisible hand and   everything that that there are certain things you  probably shouldn't rely on your neighbors for but   by and large if you don't allow the markets  to have the market signals they're not going   to behave rationally so like right now we see  spiked oil prices from whatever kind of basis and  (38:10) and to your point Lynn perhaps this is  the new normal and you have to define what that   means and all a long time horizon and so on and  so forth but there is a lot of uncertainty in   the market and it takes a lot of time to ramp  up the production that's just the way the oil   market works for example and so it if we're  like now this is going to happen with you   know with with homers or whatnot and then the  next day no that's not going to like you like   okay but if it takes six months for us and  a lot of capex and we need to have so much  (38:42) certainty before we ramp up production  so the oil price can fall then we can act. So   as soon as you start to set those mechanism  out and you also have companies who are saying   oh okay but does that mean that we're going  to get a lot of windfall taxes to your point   afterwards like so even if we do spend that  capex but then we just still don't make the   money because not just because of the taxes  but also because of what can we then count   on what's going to happen. So, I don't know. (39:05) I kind of felt like I came across as   way too political whenever I say that. I probably  have too much of a bias to free and open markets.   But I I think that there is and perhaps I  come ac this comes across the wrong way,   but I think that there is something very powerful  and and beautiful about having those free and open   markets because you are fixing a lot of problems. (39:26) And it probably doesn't look like that at   first glance because why wouldn't we want to  pay $3 and not $4 at the pump? But there are   other reasons why. So anyways, let me throw back  over to you, Linda. >> Yeah, I think free and open   markets are kind of like it's like the quote about  democracy. It's like the least bad. Uh is it's   like obviously there are winners and losers. (39:45) There are situations that are tragic,   but it's the best mechanism we know of to  create prosperity and to efficiently move   around resources to where they're they're needed  most and to encourage the production of of more   resources that we need and to discourage the  production of things that we already have   too much of and that we're wasting labor and and  money and time on that are not being used that a   centralized system might just ignore those signals  and just keep pumping out and things like that.  (40:09) So often I mean capitalism is will be  criticized for environmental damage. It's like,   well, look at the environment under Soviet, you  know, Russia back then. I mean, that was like,   so often the case, all the kind of the  evils or ills you could point toward   free and open markets, it's often less  bad than if you don't have those things.  (40:28) And if I if I appeal to people on the  side that kind of wants those price controls   or wants the more state intervention, I would  kind of point out that that price controls are   kind of like the among the worst ways of  doing it. It's not to say that government   can never be involved in something. (40:42) and they can still set the   rules to have a level playing field. You know,  you can't have child labor. You have to have   certain building codes that don't fall down  in in, you know, a category one hurricane.   You can set ground rules so that efficient  operators are operating in a environment,   a rule of law with efficient arbitration and  all this and have kind of a level playing field.  (41:02) The government can have a stockpile. I  mean that's you know that's the forward way of   looking at it is that when energy prices are cheap  the government can you know build a facility and   have stockpiles or it can it can potentially  mandate like Japan does that the private sector   has to have a certain amount of stock piles. (41:18) There's fewer downsides of having those   things in place than something like price  controls. So there are other ways that the   government can help the private sector operate  in its most efficient and fair way and just than   price controls. price controls are kind of the  the most among the more interfering types that   actually can more often be counterproductive. (41:37) You can definitely point at free and   open markets say this is a problem and that is a  problem and it's full of so many problems but to   your point it may be the least bad and then we  have all the exceptions and I guess depending   on where you are and in your daily life then  the exceptions that you might lean into are are   different for for all of the listeners since  this is stock investing show I would be if I   didn't ask you about giving the combination  of energydriven inflation a more fragmented   global monetary system. Where do you see (42:08) the biggest mispricings and   opportunities in equities today? >> I've  been fairly constructive on banks and   financials because they're resilient  against defaults. I mean, they one,   they already have pretty high levels of reserves  and treasuries and and fairly safe assets. Two,   they're on the receiving side of fiscal deficits. (42:26) So, a lot of this interest expense is   going to banks and financials, and they're  pretty cheap. And so I've been using them as   kind of a value dividend play, including US ones,  Latin American ones, uh, and sometimes elsewhere.   I've been long energy. I didn't rush to buy energy  because of this crisis, but I've already been long   energy and energy pipelines and things like that. (42:48) I think that eventually software as a   service stocks will get to the point where  they're dramatically oversold. I I think   it's nobody wants to be a hero and rush in and  buy a falling knife. So, it's like people want   some sort of either technical bottom or  like a signal or um they want to see more   signs that these companies cash flows are not  being as impacted as much as the bears think.  (43:11) Uh so, it's like I don't know what that  level is, but it's I'll say it's an area that   I'm watching very closely. There's one stock I  started to get into probably a little early and   then there's other ones that I'm watching to say,  okay, I'm not going to just I'm not going to be   premature and just get all my capital in and  then be down another 30% and then, you know,   but it's like I'm potentially layering in and at  least watching very closely the software space   because I think that the baby will be thrown  all out with the bath water in some cases. I  (43:36) have been on the b on the more  growth side. I mean, I have been bullish on   semiconductors even though it's consensus.  I think the consensus was right there.   I mean now it's maybe getting overdone but uh  I think the consensus is right and whenever   that that turns against semiconductors  that's generally when I try to get back in.  (43:52) The value investor for me doesn't  like things that have gone up a ton. So I   tend to get out a little bit early but I tend  to look for dips in those things to get back in   because I think those are real bottlenecks.  And so I think there are still plenty of   opportunities in the market in the US globally. (44:07) It really comes down to valuation and   just how solid something is. something that's  very solid and I'm just shamelessly going to   say that this wonderful book, Money Without  Borders, it's uh Barry Ien Green's new book,   his book's always fantastic. >> He's great. Yeah.  >> Have you read it, Len? His new book. >> I've   not read I've not read his newest book. No. (44:27) >> Okay. So, some of the books are a   bit more technical. I think this one reads a bit  more like I wouldn't say it reads like a novel   cuz I think that's probably because I'm such  a nerd whenever it comes to financial history,   but it's a significant easier to  read than many of his other books.  (44:43) Anyways, he he says in the book, and  I'm just going to going to quote this here,   international currency status depends on the  issues ability to forge durable geopolitical   alliances. Central banks and governments  hold and use the currencies of the alliance   partners. Doing so is a gesture of goodwill.  Alliance partners are seen as a dependable   stewards of a country's foreign balances. (45:02) End quote, I should say. Now,   to what extent do you think the US still benefits  from that dynamics today? And as the global   system becomes more fragmented, are we seeing any  meaningful changes in the strength of durability   of the dollar's reserve status in the current  environment? >> Yeah, I think like I mentioned   before, we've had decades of these imbalances. (45:23) And while I do think that the US at   one time benefited from having a reserve  status, especially during the Cold War,   I think it was a massive tailwind. uh and then  even a little bit afterward. I think now the   de-industrialization we've had from being the  reserve currency issuer is now a bigger factor   than how well New York and the government have  done by being dollar and dollar security exporters   to the point where like I said before even the  military is like why can't we build enough stuff   and it's like well that's what happens when you (45:53) de-industrialize your industrial base   when you produce onetenth of the steel  that China can do for example their   economies kind of balance the entire  opposite way it's interesting Because   all those alliances are really important in  the beginning and the middle period of kind   of growing and maintaining that network. (46:10) The weird thing is it at a certain   point it kind of takes a life of its own where  you have this network effect and people often   refer to the petro dollar uh and it's like  okay if a handful of countries decide to price   something out you know their energy outside of  the dollar that they could unravel it quickly   but it's actually more resilient than people think  because the biggest factor is actually the dollar   denominated debts the crossborder dollar debts  and depending on what measure you look at there's   something like 18 trillion in crossborder dollar (46:35) loans and securities that are mostly   not owed to the US, they're owed to all these  different entities around the world. You know,   some entity in Brazil will owe dollars  to an entity in China, for example,   or some entity in Africa will owe dollars to  an entity in Europe. There's a game theory   where you it's hard to be the first to default. (46:52) I mean, it's not like they can it's not   like the whole world can just get together and  just default on all that and say we're doing a new   system now. More like you need in a very extreme  situation for that to become a real possibility.   In general, dollar creditors want their  dollars paid back to them and the dollar   debtors when their bills due, if they're the  first to default, they're the one that gets   the horrible credit rating and no one wants to  lend to them again in the future at any sort of   reasonable rate. And so all that crossber dollar (47:17) debt represents inflexible demand for   dollars and that's very and that can change over  time. I mean, you can, you know, a credit nation   like China can say, "Okay, here's dollars.  Pay back your dollar loans and now your debts   are denominated in our currency, right? And we'll  give you a swap line, right?" So, there are peace   meal ways to slowly chip away at that network  effect, but they're very kind of long processes.  (47:42) Kind of like how reshoring an  industrial base is a really long process.   you can't to snap your fingers and say, "Okay,  we're going to produce as much steel, electricity,   uh, and manufactured goods as China or we're going  to move that to other countries." It's just it's   it's way harder and longer than it sounds. (47:56) And the same thing is true for the   dollar system. So, yeah, I already think  we're in a world where the US we're in the   intermediate term, we can like right now we're  acting like a wrecking ball, but we don't really   see any sort of uptick in dolization because  again, those network effects are very strong.  (48:11) Now if you do this for many many years  you increasingly incentivize other workarounds   like when we sanction Russia we force them to  do business with China in their own currencies   for example the whole bricks and Shanghai  cooperation organization kind of the China   centered rest of the world the non-west world  is a growing kind of consortium of bilateral   or in some cases bigger moves to ddollarize  payments and I think the uptick in gold usage   is part of that that's you know It's not that  Chinese currency replaces the dollar. It's that  (48:45) one, neutral reserve assets like gold  gradually replace the dollar as a reserve. And   two, that just more payment options than just the  dollar exist at scale, which is that if a country   sanctioned, they can still do business in in other  currencies. And I think those are fully underway.   So the dollar kind of gradually goes from becoming  like the only game in town to like the biggest   but still a plurality, one of many big options. (49:12) And part of that is breaking alliances.   But part of that is even even if we were just  a completely nice neighbor, uh we were nice   to everyone, our de-industrialization process  still eventually impairs our ability because   when China has already be replaced the US is  like the biggest trading partner with the vast   majority of countries, that's already a huge  factor where they can come in and say, "Hey,   we want you to use our currency to buy from us and  of course you can use our currency to buy all of   the goods we sell you and we're your biggest (49:38) customer. We're your biggest trade   partners. We want that now." And so there's  a a gradual shift anyway, even if we were   super polite. And of course, us being more  erratic or obligerent around the margins can   potentially accelerate it, but it's still up  against those big network effects. >> Yeah,   I I think it's very important and it's going  to be a a theme that we have throughout this   episode that it takes a long time like and like  it's not going to work like one, two, three,   here's a tariff and now we can produce this (50:08) widgets like no like we can't do   that. we see something similar with a lot  of refineries where it's like no we we're   not getting the sweetness of this crude  oil to our refinery and that's how it's   being set up. So now we can't refine  it or if we are it's going to be super   super expensive because it's going to more or  less destroy the equipment that that we have   to refine the crude in the first place. (50:29) So it's kind of like interesting   whenever you're seeing all of these things  unraveling and then at the same time for   example whenever you look at crossber even for  Chinese trade how much of that that's not in   one right now like it's incredible and you would  be thinking well like there's such a big trading   partner they must be doing that with all of  their trades not at all and so so thank you   for paying some call around that speaking about  great books I'm sure you're familiar with this   one here I'm holding up to to the camera uh (50:55) for those of you who are who are   listening Lynn Olden's broken money. I can't  help but continue to speak to you about this   wonderful book, you and and everyone else. And  one of the favorite parts of the book is when   you talk about Coca-Cola effectively showing the  US dollar and about using leverage intelligently.  (51:14) And it made me think of this wonderful  quote from Buffett on leverage. And he says,   "If you're smart, you don't need  leverage. And if you're not smart,   you have no business using leverage in the first  place." And I uh I love that quote. There are   so many great quotes. But of course, whenever it  comes to Buffett, one thing is what he's saying,   another thing is what he's doing. (51:32) >> Yeah. >> And he is the   master of using modest leverage and he's been  doing that always. And so, uh, more recently,   well, in the history of Buffett, more  recently, actually, some time ago now,   but you know, famously, he he issued these yen  denominated bonds and they're close to no cost.  (51:48) And then he of course used the proceeds  to buy these high quality Japanese equities.   And so whenever you hear a quote like that, you  have to think about like what is it truly that   he means? And we're not talking about  using leverage as in credit card debt,   30% interest rate, and then you would go on to  your Robin Hood account and do I don't know, out   of the money call options expiring the next day. (52:10) That's not at all what we're talking about   here. But my question to you, Len, is how do you  short the fiat currencies in your own portfolio?   And how do you think about using leverage  to enhance your real investment returns if   any? >> Yeah, good question. So, yeah, I I operate  fairly unlevered. Uh I occasionally use leverage,   but for the most part, I look for other  entities that are using it effectively.  (52:33) You know, one of the things I've  said before is that the best like product   that Coca-Cola or Proctor Gamble ever sold was  their bonds. Or another way of looking at it is   Coca-Cola has been around for over a century.  They're almost always profitable. They've been   profitable like longer than we've been alive. (52:46) Why do they have any debt? Why do they   have $40 billion in debt? And the reason is  because they can. It's an arbitrage when, you   know, especially precoid, you know, before higher  rates, they could borrow at like 3% for like 30   years or 20 years. That's basically shorting  the currency. And whenever you can borrow at a   rate that is much lower than money supply growth. (53:03) So, if dollars are growing in supply by 7%   a year, and you can borrow at 3% and lock in that  rate for a super long time, you can use that money   to buy scarcer things, including your own stock,  an acquisition, more equipment, real estate. Uh   you can buy all these things. Uh and so the really  the winners of the system of the kind of the fiat   system over the past, call it 40 years, 50 years,  is those who short the currency in a safe enough   way that they don't blow up during recessions. (53:32) So they're not the most levered,   but they're structurally cautiously levered while  owning very high quality stuff. And Buffett,   he uses kind of two layers of leverage.  One is simply by owning equities,   he's benefiting from that because  equities are already doing that.   Coca-Cola is already doing that, for example. (53:50) Uh many other Apple's already doing that.   You know, Apple just famously didn't have to  issue a ton of debt, but it was like the most   attractive bond in the world. So, it just issued  tons and tons of debt, bought back its own shares,   and it was a huge gain for Buffett's  portfolio, Birkshshire's portfolio. Same   thing for Coca-Cola, same thing for many others. (54:07) So, he owns equities that are doing this   game structurally short fiat currency own scarcer  things. And then two, because he smartly got into   the insurance business, it's one of the best  decisions he's ever made because insurance is   one of the best types of leverage. The whole point  is you take in premiums and then you owe payouts   along the way and you're holding this float unlike  a bank deposit that can pulled out at any time.  (54:31) You're holding this kind of locked in  leverage and you can invest that leverage and   get a return on it. And most insurance  companies will buy a bunch of bonds and   make 4% and Buffett will, you know, he'll own  enough bonds to have low enough volatility,   but then he'll go out and buy blue chip stocks. (54:48) So, he's buying entities that benefit   from leverage in their own right, and then he's  buying them using like insurance float leverage   on top of it. So, he's got this very cautious  two stack of leverage that is very resilient   to most crises. And then occasionally,  like you said, he'll he'll go out and   make other idiosyncratic leverage decisions. (55:08) So, so those Japanese trading companies   that he bought, they themselves are already quite  levered in a good way because they're they're   borrowing yan at near zero. They own scarce  assets. They own like commodity deposits and   convenience stores and supply chain logistics,  you know, things. They own all these hard   assets. I actually, and I I'm still long those. (55:26) I bought those years ago, too. I didn't   do it on leverage because I just benefited from  their own leverage. So he buys these things that   are leveraged, but then further because he's  Birkshshire and he can do really big things,   he can borrow a ton of yen at low rates and then  buy these entities that are themselves leveraged.  (55:41) Kind of like the insurance float  situation. So he that kind of two stack of   leverage when applied prudently is is how he's  kind of made his fortune. I think going forward   it's a little bit harder because now we're  in this we're no longer at a 40year period   of falling interest rates. So when you have 40  years of falling interest rates, you have kind   of prices of everything kind of structurally  go up. Interest rates keep going down.  (56:02) You can keep refinancing at lower and  lower rates. When interest rates are kind of flat,   like choppy sideways, and asset prices are maybe  no longer as structurally up as they were before   because they're already at higher valuations  because they've already benefited from rates going   all the way down. It's less clear of a thing. (56:19) Like I think it' be even harder for   Buffett to do over the next 40 years than  it was over the past 40 years or 50 years.   But it's the same general principle still applies.  Like in my personal life, for example, you know,   we we got a house, we didn't need a  mortgage, but we're like, if they're   going to if they're going to let us borrow at 3. (56:36) 5% for 30 years, do I think my investments   like should I sell equities? Should I sell things  that I think are going to do better than 3 and a   half% to just buy this house free and clear? No.  And the same thing, we have an Egyptian property.   Money supply there is growing by 20% a year or  so, and we could borrow the equivalent of like 4%.  (56:54) It's like, "All right, we'll make that."  It's like a seven-year deal, and it's like,   "I'll I'll short the Egyptian pound for 4% a year  for seven years if you'll let me instead of having   to sell equities to buy that property." So, that's  kind of the only place I use. I use a kind of like   real estate tied, low interest rate, non-allable  leverage from time to time, but for the most part,   I let my entities, my equities do it for me. (57:19) I have to double click on what you said   there. You're paying the equivalent of 4% in Egypt  on a property. That's unbelievable. Wow. >> Yep.   Yeah. They their whole mortgage structure is  different. So it'll be structured so that it   doesn't look like an interest rate, but you can  calculate what the effective interest rate is. So   basically saying, okay, you can buy this house  for this pound amount today or you can do this   four-year payment term or this 5year payment  term, six or sevenyear payment term, and these   what the payments will be. And when you kind (57:45) of just do the math then okay all   those payment you know you get your spreadsheet  out and you see all those payments you say what   effective interest rate am I paying then on all  those payments compared to just buying the house   lump sum and in our case it came out to under  4%. So I'm like well I'll take the longest uh   term you'll give me then because uh if you  and the Egyptian pounds growing by 20% a   year and of course they kind of temporarily  kind of artificially peg it to the dollar   from time to time but then those pegs break. (58:13) So yeah. >> Wow. That fantastic. Thank   you for for sharing. I hope the listener don't  take away from this episode that they should   not use leverage and and it's only Buffett who  can do it. But also don't hope they, you know,   leave here and they're like, oh, I need to I need  to take on debt and invest in all kinds of stuff.  (58:36) I think the takeaway I want  to give people is they really need   to understand currencies. That's that's  where it all starts. And I'm shamelessly   going to say if you really want to understand  currencies, you need to pick up Lynn's book,   uh, Broken Money. Perhaps you also need to pick up  Lynn's new book. I I really wish I could advertise   that here, but um, you're doing that perfect. (58:54) >> Oh, yeah. >> Yes. And what's the   name of the book, Lynn? >> Uh, The Stogard  Incident, Sci-Fi Thriller. >> Wonderful. And   so I really wish I could advertise it here on the  video if you're following along video, but I uh,   ordered it as soon as it came out. This is  a bad advertising for the German Amazon. It   takes a month for the book to arrive. (59:13) So, I still haven't gotten a   chance to read it. But I wanted to weave a  bit of investment into into my next question   here about the book because I often find  inspiration for my investments in the most   unlikely places. I'm curious if you learned  anything new about investing from writing   your new fiction book, The Soul Incident. (59:31) >> It's an interesting question   because I'm not sure I learned anything new  about investing, but I think I learned new   about technologies, right? So the engineer in  me wants to try to make things realistic where   possible. I'm not like fully committing to like  hard sci-fi for example, but when I extrapolate   what a society could look like 50 years from  now, which is roughly the setting of of the book,   I inevitably have to go through an exercise  of thinking, okay, what does the world look   like in 50 years? What technologies kept (59:57) expanding at what what rate? What   technologies hit ceilings and maybe stagnated?  For example, like you know, if you look at like   the Jetsons or just any sort of envisions of  the future from decades ago, they thought our   aerospace capabilities would be way better today  than they are. Instead, what happened was we   ramped up our aerospace capabilities dramatically  and then we kind of hit a wall, you know, like we   had the Concord and we don't have that anymore. (1:00:20) They used to be shorter for civilians   to get from the United States to London than  it is now. We never really could find a way   to make that economic and safe and we kind of  hit these like hard limits and maybe eventually   we can pierce past them but it's not like a  linear improvement with aerospace. It's like   once we had the combination of hydrocarbons  and aluminum we kind of fixed thousands of   years of like not making any progress on flight. (1:00:41) We made all this progress in the span   of one human lifetime until we ran into a ceiling  and then we we kind of only incrementally better.   Like the electronics in planes get better.  We added wing tips, but for the most part,   a plane today looks the same as a plane from  1960. Uh, and as kind of part of writing the book,   I said, okay, what things keep getting  better? How dense is computing in that?   Do we run into kind of fundamental computing  limits? How good is AI get before it kind of   runs into certain limitations? How dense can (1:01:08) batteries become in that time? What will   those batteries look like? What types of energy  are people using? Is it economically flourishing   or is it economically stagnating? and if so, how  what's the wealth concentration look like? So,   I think it's it was more an exercise of seeing  kind of the comparative rate of technological   growth which then can influence investing more  so than directly coming up with like investment   ideas from from the book if that makes sense. (1:01:37) >> I love that. It makes me think of   the pitial quote. They promised us flying  cars and all we got was 160 characters.   I know that's probably a bit  extreme to think about it like that,   but you bring up such a good point. Like  we used to get around faster than what   we do today. It's kind of extraordinary. (1:01:54) Uh whenever you think about it,   Lynn, this has been amazing as always. Uh I have  now for the fourth time people to to go out and   get broken money. And also going to say make sure  to check out Lynn's blog. It's absolutely amazing.   I print it out every time that there's a new  edition and I sit there with my highlighters   like, "Oh, this is so insightful. (1:02:17) " It's unbelievable. So,   still, I don't know if I've advertised your  content enough, but Lynn, if if you have   anything you want to point people to, please  do so. >> Uh, people can check out lindal.com,   broken money, the Stogard Incident, and uh,  thanks for having me on. Always happy to be   here. >> You bet, Lynn. Thank you so much. (1:02:34) >> Thanks for listening to TIP.   Visit the investorspodcast.com for show  notes and educational resources. This   podcast is forformational and entertainment  purposes only and does not provide financial,   investment, tax, or legal advice. The content is  impersonal and does not consider your objectives,   financial situation or needs. (1:02:52) Investing involves   risk including possible loss of principle and  past performance is not a guarantee of future   results. Listeners should do their own research  and consult a qualified professional before   making any financial decisions. Nothing on this  show is a recommendation or solicitation to buy   or sell any security or other financial product. (1:03:08) Hosts, guests, and the investors podcast   network may hold positions in securities discussed  and may change those positions at any time without   notice. References to any third party products,  services, or advertisers do not constitute   endorsements, and the Investors Podcast Network  is not responsible for any claims made by them.  (1:03:22) Copyright by the Investors  Podcast Network. All rights reserved.   So, in some ways, losing dollar dominance is not  a bad thing. I think the bad thing would be losing   it while trying to gain it. If you do everything  in your power to maintain it and it gets taken   away from you, that's kind of like you're  pushing into the wall and the wall vanishes.  (1:03:47) It's better to  start easing away from the