Mike Green on the Visible Hand, a Passive Singularity, and Pivoting to Optimism

domestic equity and bond portfolios because they tend to thrive during periods of economic growth and low inflation and we don't blame you it's been a great ride but it's a big world out there full of opportunities you may be ignoring sadly we live in a world dominated by a fear of missing out or fomo and in the last 10 years U.S equities and bonds have outperformed and generated massive amounts of fomo this hasn't always been the case in the mid-2000s the best performing markets were International equities especially Emerging Markets golden Commodities so what happens if growth collapses and inflation becomes the new Norm or what if the U.S dollar collapses and U.S assets are no longer attractive what will the new fomo markets be and will your portfolio keep up or be left behind inter-rational resolve adaptive asset allocation Fund ticker rdmix a strategy that is designed to thrive across different markets and economic regimes unlike most traditional strategies that keep allocation 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but it's all about fomo actually yeah it's all about the fomo the fomo and the YOLO all right yeah so well that's out of the gentleman Mike Green um Mike thanks so much I was trying to remember it's always a lot of fun yeah when was the last time we had Mike on it's been over a year I think I think that's probably right I mean Adam was really generous in reaching out after some of my Bitcoin debates in particular and giving me the opportunity to just Riff on you know life more broadly and express some of it in non-sound bite form I think it's probably been at least a year since I sat down with four you guys because I know we were in the thick of the pandemic Mike philbrick was you know remarkably hair you know like unshaven his hair hadn't been cut in a long time um for those who are listening in and missed the intro is his desire to dig into my gray matter takes on new meaning given he told us he was a fan of Jeffrey Dahmer uh before the show just keep coming they just can't yeah so Mike you'll be glad to know that that the other Mike is actually trying to grow out grow a ponytail right so you know yeah yeah I'm glad that Jeffrey Dahmer comet made it to live I thought that was going to be kept for the uh the background commentaries to be fair he said he's a fan of Domo right so we could be generous since he's a fan of the series I guess just just to put things in context I think I said I'm a Dahmer fan anyway yeah it's not let's not probe too deeply into any deeper meaning in that no we wouldn't have had any meaning whatsoever if it hadn't been for the comment about dig into my gray matter which you know I've never been afraid on a podcast before but a momentary now your second thinking especially with that black screen yeah that's right there might be something hiding behind me that's exactly correct black hair a little American Psycho back there noted if if you're if you're at greeny's house and he brings out a plastic sheet and lays it out just you know it that's right you know me and Chris and Christian Bale I'm noticing that resolve has uh the same conference room that both Adam and Richard and but in one it has the resolve on the left wall on the other has resolve on the right wall we're just at opposite sides of the room can't you telling one another behind each other's heads I might perform some visual gymnastics yeah we got to do something about that Adam we got to switch that up I know I keep thinking the same thing all right so so we're figuring out various ways to delay getting into interesting stuff right um let's get into it yeah I was going to get your take Mike on unless you had something you were just dying to talk about um I I was going to irritate because I feel like this year has been the Bizarro World version of of the the prior sort of of 10 or 12 years and I think that juxtaposition is an interesting place to start right so I thought it'd be kind of fun to maybe get your take on on how you'd characterize the market and the economic environment from kind of like 2009 to call it 20 you know into 2021 um if you want you can kind of end of 2019 pre-pandemic and maybe maybe the pandemic era is kind of its own regime but maybe let's let's take that what it what did that look like what were the drivers I am what did it what lessons did investors learn from that and then like juxtapose what we're currently facing um on that experience how does that sound like a good place to start sure that sounds that sounds really reasonable so I mean look I agree with you that this year has felt like bizarre world in the context of what we've seen over the last decade right um and more to the point I think the thing that I'm most distressed by this year like what feels most Bizarro to me is the apparent Glee that people have about an interventionist fed when it's hiking rates versus an intervention is fed when it's cutting rates right um and I I genuinely struggle with this I don't entirely understand why people who seem to be very much against an interventionist fed that seems to be working without a functioning model of how money interacts in the banking system how the banking system itself interacts with the real economy the financial markets interact with the real economy I struggle with how they've suddenly become so enthusiastic and have so deeply embraced this idea well obviously this is the right thing to do can I offer a thesis sure please um so do you think that there's a there's a there's an increasing and this this cohort has increased um over time over the last decade especially but I I would argue that you know this has been going on longer than just the last decade but I definitely think it's accelerated the ticket to to a new level um I think there's an increasing number of people who really felt left behind by the um the interventionist easy fed right the the fact that um the FED had intervened since 2009 consistently to bailout speculators to um incentivize um risky Behavior or bad behavior had amped up moral hazard and in so doing had left an increasing proportion of people out of the wealth generating functions of and you know especially of the U.S economy and one might argue other developed economies more so through the housing Channel than through the equity and bond Channel maybe but if there was a feeling that lower rates and and rewarding risky behavior and all of those other dynamics that were um that sort of went along with an interventionist fed from the 2009 to 2021 period um caused people to feel left out maybe there's a feeling that you know finally we're unwinding some of those Dynamics and there's a there's a possibility without having to resort to the kind of nihilistic behavior that we observed especially that sort of really ramped up in in 2021 with the Game Stops and the and the crypto and you know the hyper speculation um in the options markets Etc without having to resort to those types of nihilistic behavior that this kind of dynamic now is is [Music] um is equalizing the boat a little bit right um and so so let me just throw that out there and get your reaction on on that as a potential source of explanation so um so I definitely think that there is an element that people want to believe that right that um that there is I I might put it slightly deeper into the psyche and say that Americans as a country broadly embrace the German puritanical component of you know suffering for your sins right um so I think oddly we tend to enjoy punishment more than we enjoy reward um we constantly feel with reward that there's going to be something coming on the other side um and I guess I would push back pretty hard against the idea of the excessive speculation having been squashed particularly in the option space as we're now seeing roughly 50 roughly 50 percent of all option transactions are now happening within less than a week to expiry options right these are functionally as I've described it in my Twitter feed and various other things like this is this is you know okay put it on black right um yeah just as a side note gem karzan was our guest last week and he was speaking uh precisely to this point that the amount of options that have been traded by retail and specifically in the run-up to their expiry has thrown such a curveball to market makers then it's added to the complexity of the Dynamics that we see nowadays in the uh lack of uh signaling mechanism in the equity Market yeah I know I I think that's exactly right so um I think you guys know this I write a newsletter for tier one alpha that is another one of the businesses I'm involved with on this Dynamic of option Theory um and we're talking exactly about this right so we've started to develop some tools that allow us to think about this but this phenomenon has emerged in such a novel form in such a short period of time that it has substantively changed the game in the same way that I would argue the meme stock Behavior took short sellers by surprise right now I mean we've always seen components of this type of speculation before but you know I pointed this out yesterday for um on Tuesday I think it was with the Fed where um I went on Wednesday I'm sorry um where if you had bought at the open a you know zero data expiry call and then flipped it upon the release into a zero you know data expiry put you would have made something like 30 times your money over the course of the day right um if on the other hand you had actually transacted in those options for a two-day period right you would have lost money so I mean it was just like absolute rank speculation true path dependency no real opportunity for a meaningful investment framework and yet all the Dynamics that we know that individuals like Ben eifert and others have done such an excellent job uh gem Etc have done such an excellent job of describing the need for the Delta hedging and how this is in how this plays out in increasingly thin and illiquid markets all of that is now basically been short-circuited because zero data expiry options are pure gamma I mean they're just pure again they're either and just again to Define this I've tried to to help people think through these components remember what gamma is it's the change in Delta per unit of change in price right and so if you think about a zero data expiry option it has one of two states alive or dead and so every change that happens in that option is pure gamma change in Delta for change in price there's very little time value component to it other than you know just purely evaporating component Etc so in every theoretical model we've ever had the zero data expert option has been a sale now suddenly it's a you're you know there's extraordinary temptation to carry it to expirate and we're seeing the exact same behavior by the way that we saw in um in the meme stocks and the options associated with the meme stocks where the market makers are cranking the price of these up right so historically a zero day to expiry option will carry an element of implied volatility that reflects some jump to default risk but generally if you're Transit if you're transacting within one week of expiry those options are going to trade at a discount to the vix which in turn is going to trade at a discount to longer data the Vol surface tends to be upward sloping now we've got a volt surface that up into the last week basically spikes right so we're now carrying a significant premium in those last five days in part because market makers know that they can extract it from individuals who are gambling right I mean they don't actually care they just want to try and make that 30 to 1 payout right um somebody made money on you know again like I walked through this somebody transacted somebody made money but it was actually not 30 to one they made basically two to one on their money sort of thing it's like guys that's a terrible trade if you're trading a one-day option and you make two extra money over the you know and it's 50 50. like over the course of the year you're gonna lose all your money right you don't even need a year right I mean I don't care what you're betting frequency is or anything else like that's just a bad trade I almost will never enter into an option unless I have a reasonable expectation of payout on success of four to five to one precisely because it has such low a long option position precisely because it has such low payout probability in terms of its maximum expression right um so I just I you know I don't think we've actually killed the speculative component if anything I think we've amped up the nihilism where people are increasingly just saying something along the lines of I'm happy to go down as long as everybody else gets hurt too but yeah I mean if you're if you're feeling left out and you feel like there's no conceivable way that that you can achieve the American dream through the income Channel the way that you perceive yeah right yeah then you know you you can see how some would perceive that the gambling channel is kind of their only shot right and it's been enabled over the last couple of years um or Amplified by orders of magnitude by the fact that you know uh through fiscal stimulus we've kind of fire hosed trillions of dollars directly into people's bank accounts and so you you know we we've got checking deposits still at your record highs right um there's I think there's there's still 1.7 trillion dollars in excess Savings in demand deposits let's just be very very clear though that's all sitting in the pockets of Bill Gates and Ken Griffin at this point as compared to the median American right the the median American is now empirically worse off than they were going into covet standpoint and from a um yeah no no not just in real terms I mean like actual the the actual nominal cash balances for the average American household are now below where they were at the start of the pandemic forgetting inflationary components which are somewhere in the neighborhood cumulatively around 20 for the flexible components of CPI that adjust on your day-to-day purchases right so people have un unequivocally been put into a worse place the unemployment rate for those with less than a college degree is now above what it was in January 2020 so we're now actually starting to see deterioration in the employment prospects for those who are not among the relative Elite in our economy you're starting this year 2020 we were near we were pretty well there's cycle lows in terms of unemployment rates for for those typically underemployed cohorts right so you're referencing them like you're referencing a pretty strong labor market yes right the that low was a relative high that had only begun to retreat from the extremely high levels of the 1980s and 1990s towards the tail end of that cycle and you know I could show a couple of charts around those Dynamics but in just the simplest terms you know the demographic component of the Baby Boomers that drove the elevated unemployment in the 1960s and 1970s that need to absorb a large number of new entrants every single year that we were incapable of addressing through the growth of the economy particularly with the restrictions that were placed on it by the Federal Reserve that returned in a much smaller form with the Millennials right so we'd already been going through that the Dynamics of underemployment the Dynamics of people graduating with college degrees and significant quantities of college debt and then being unable to find jobs in their chosen field that allowed them to pay back their college student loans for example you know that was a very real phenomenon somewhere around one percent it's a little bit less than about 0.9 percent per year unemployment increase and the Persistence of the higher levels of unemployment was simply tied to the entrance of the Millennials into the labor force that's now fully retreated and is in part why we're seeing this persistent low level of unemployment right it looks much more like the 1950s in which I could flip that on its head and say you know the 2.6 unemployment rate or three percent unemployment rates that were common in the 1950s were largely a byproduct of women who had been in the labor force saying okay screw it I could leave the labor force and and you know go live with my husband and raise 2.3 children right um which is why we still see record low participation rates in the economy I guess the the irony is is that they know this so Leo Brainerd pointed this out and others appointed us out the demographically adjusted labor force participation rate is at its peak right like if we adjust to the fact that you have lower labor force participation rate amongst those who are above the age of 55. we are absolutely at our peaks in terms of what we should expect for labor force participation rights yet the FED is trying to give a veneer of uh fighting inequality with uh their current fight against inflation they're trying to frame it in these terms well that's to me that's part of the Bizarro world right because if I go back to you know Jay Powell and his entrance and and you know Grant Williams who I'm a huge fan of and a personal friend you know but if you remember his original comments I like the cut of his jib right um you know this Dynamic of this guy seems better than yelling Etc man I think he could very well go down as the worst Fed chair in history like this guy well you also think volcker was volcker would be your second worst veterans he your current your your words oh you're still my worst But the irony of course is that Jay Powell is now trying to be what he thinks volcker was right which man if you want to if you want a prescription for Mike Green thinking you're a terrible Fed chair like you know pick the guy I think is the worst and then try to do it without the underlying conditions being the same um congratulations like you're you're actually setting up a real disaster here [Music] yeah okay I wasn't going to go here go ahead Richard how you were on the thread no I just wanted to kind of follow up because when when Mike was last year on riffs uh he talked about sort of his take on the 1970s inflation which is which was not what the conventional wisman wisdom suggested it was the uh oil shocks he he went down the uh demographic route and he explained that and all nowadays we hear this this uh Milton Friedman truism that inflation is always an or and always and everywhere in monetary phenomenon which is which is true but it doesn't really explain what the inflation is actually caused by so supply chain disruptions is the most beaten to turn beaten to death term these days we obviously know that the fiscal outlays played a big role here what are your thoughts do you have any sort of controversial takes on the current uh uh causes of inflation that are outside of the mainstream narrative that the interplay between these two Dynamics well so so you know the as you said supply chain disruption is the most overused narrative and I just want to push back for a second on the description of the 1970s the oil shocks were a critical component of it but what they did was they restricted Supply all right so roughly a third of U.S industrial production at the time relied on oil as its source of energy as oil prices skyrocketed and is oil availability retreated the use of things like diesel generators Etc became uneconomic and factories were unable to expand production under a cost umbrella that would allow them to be under a price umbrella that would allow them to be profitable right if you just think about it in you know easily accessible commodity terms the cost curve shifted significantly those that used diesel as their underlying component in terms of an input were shifted out in the same way we're seeing for Germany right now with natural gas as an input right um so so that component played a critical role but the real issue in the 1960s and 1970s was this extraordinary growth in the population and the labor force that required a continual expansion of the capital investment in order to keep the capital labor ratio somewhat constant or growing which facilitates productivity and the way that we dealt with that in response to the FED hiking interest rates was basically by importing all those goods and services right so the auto manufacturers in Detroit were unable to expand to meet the needs of the Baby Boomers remember like this is the 1970s Auto Sales hit record levels home sales home building kit record levels in the 1970s despite population being less than half of what it is today right so that demand shock into the economy was very similar to what we had upon the reopening now I think we have better models of what's happened this time around in World War One and the reopenings after World War One and the reopenings after World War II in which we saw almost identical inflation Dynamics as we reopen the consumption economy right the consumer economy the economy was not set up to deliver three-ply toilet paper and said it was set up to deliver the rough stuff that we shipped off to GIS right when we change that around we entered into a supply shock that meant that there was demand without it being able to be met by Supply prices expanded and then they retreated in relatively short order we also had didn't we also have some price controls involved in there that were lifted and caused some inflationary spikes along the way that was that was more in the early 1940s yeah it was a little bit less of that that happened at the tail end but remember just like what we had in 19 in 2021 right the core fear as the gis returned and the stimulus retreated from World War II and even from World War one was that we would go back into a recession right that we'd go back into the Great Depression now the repaired balance sheets and everything else similar to what we experienced this time around meant that that didn't occur and I'd broadly point out that balance sheets were actually in pretty darn good shape going into covet right we'd had a period of elevated household savings the savings rate was higher people had paid down debt they'd begun the process of in of increasing their debt by adding to home ownership rates which again makes perfect sense as the Millennials began to try to acquire homes but the the simple reality was that we short-circuited all of that with the original sin of shutting down the economy and doing so in a truly chaotic way that we just like I I still don't think we have a reasonable explanation for why we behave the way that we did in in lockdowns and stuff well we probably don't need to debate that in retrospect it's not worth debating we chose to do it right let's just be very clear yeah and then in reaction to that we did what every population in history has done in reaction to a pandemic people fled the cities and sought out single-family homes right and there was a very clear increase in the utility value of a single family home right it went from a place in which you were you know spending basically 6 p.m at night until 8 A.M in the morning with your kids you know were home for a brief period of time if you were lucky enough to get them home in time for dinner you know they'd stay at your house and do homework at this at the kitchen table you know you and your wife would watch TV a little bit and then you'd go to bed and you'd start the next day by going off to school work etc we replaced that whole process with an environment in which we were locked into our homes we had to educate our children there we had to do our work from there we had to find all of our entertainment from there Etc that's a massive outward shift in the utility function of a home and what should happen in response to that prices should go up particularly in an environment in which Supply is constrained right now we're moving back in the opposite direction people are going back to work children were back in school for the first time consistently in 2022. right what should have happened to home prices in 2022 what was already underway they were slowing the supply of homes under construction had grown significantly we were facing a significant Retreat and then the FED decided to shoot the housing market in its head I mean like this was completely unnecessary in my analysis well I think if you go back Logan motashani's got some really good data on housing um Supply and the total housing Supply counting both sales of existing homes and new homes under development had been in Retreat for 10 or 12 years and that Trend hasn't even you know it hasn't accelerated to the downside we just continue to sort of be we're basically just manifesting or extending the exact same Trend that's been in place since sort of 2015 2016. the private sector has just not demonstrated a willingness or capacity to build homes to satisfy demand for at least the last seven or eight years even in the most favorable interest rate environment that anyone could ever wish for in terms of funding new developments so I I'm not sure that we can point to a Slowdown in a home in Home Building or um you know higher interest rates um motivating home builders to uh to shut in some development projects as being the causal factor in the lack of Home Supply I mean I think there's just a general failure of the private sector to deliver a sufficient number of homes to individuals especially in places where people want to form new families so near Urban centers that have the prospect of work that people want to pursue right so you know I I just I find it hard we haven't even seen a material roll over and we've certainly seen a rollover and turnover of of of homes we've seen a Slowdown in home building but you know as far as I can see whatever prices are still yeah what we've seen so far is the slowdown in housing starts but houses under construction are still at their Peak because of the relatively slow process of building a home and the delays associated with supply chain disruptions that meant that toilets from Japan didn't make it to the United States for example right right um but that's something you see that with lumber prices then I mean clearly there was a there was a supply problem like a year and a half ago but there's you know the basic building blocks for for building new homes I think it's I think it's hard to argue that that there are major supply chain disruptions for you know the last the last 18 months or so right 18 months I would push back on last six months I would definitely agree with you 18 months ago like it's easy to forget how long ago 18 months is right so you know we're we're October or November I guess actually you know 18 months ago basically it's February of 2021. you were very much in the thick of housing going absolutely bananas and I believe that at that point we had you know near the highest number because I remember writing about this at the time we had near the highest number of homes under construction in you know basically the past 20 years we actually were beginning to pass the levels of 2006 in terms of housing starts and and um the combined component of housing starts in slower development I would also you know I I just think it's really important like we we talk about a failure of the private sector if you and I had a Twitter thread that I put out on this where I highlighted this Dynamic right you know the idea was that homes are really really expensive what we actually did was We Made It particularly in the aftermath of the global financial crisis we made it really hard to get homes permitted and built and as a result the average size of a home Rose much more rapidly than it did even in the 2005-2006 time period right and so if you adjust on a per square foot basis you don't really see a meaningful increase in home prices until the very teeth of the pen you know the the home price increase associated with the pandemic that outward shift and the utility value and I could pull up the chart and show it but like we're we're very much we were going into this with homes representing relative value on a price per square foot even if we're taught before we begin to talk about the Dynamics of how much it costs us to finance them the price per Barefoot thing seems like something that we could we could discuss further but I I maybe I sort of let me let me drag it back up to kind of where where I started right because you know you're sort of taking issue you're saying you know we've got a hyper vocalized fed um under conditions that are that are actually much more challenging than volcker faced at the time and therefore the consequences of this of this misguided approach are much larger now which I think I'm bearing in summarizing your your perspective with that statement um well when you say it's much more difficult I mean under volcker at least you could make the argument that inflation expectations were deeply entrenched right um again I disagree with volcker's approach I think the evidence is actually very clear that the methodology meant that he made inflation worse rather than actually fixing inflation if I looked elsewhere around the world the demographic impacts meant that the inflation on a global basis peaked in 1979 as compared to 1981 as it did in the United States um let me let me just because because I was going somewhere with that and this was sort of that was sort of parenthetical I just wanted to sort of set the stage but like would you say that the period from 2009 to 20 to 2020 or to 2021 um that that we had a healthy policies in place oh God I I mean when when you define healthy policies they just like want to be really clear like no that's why I'm asking you to Define them so I think that we had I think that we engaged in some necessary emergency policies given our mistake of shutting the economy down in the early in the in the early parts and and through 2020. as we moved into the 2021 time period it is very clear that we overstimulated the economy no but I mean what what about from 2000 to to 2020 as well Mike right like was that were the policies during that period healthy I mean and maybe not 2009 because now we've got the GFC here and I think we could all agree that that extraordinary intervention is necessary at that point right but but let's sort of say 2011 2012 on from 2011 2012 on was this a healthy policy environment um I'd only was as unhealthy as everybody thinks I do think that we were too quick to respond I do think that we were too quick to decide to bail out the systems respond with interest rate policy or balance sheet expansions in QE2 3 Etc um and I think more importantly that we misused the opportunity right so you know what I've been on record is saying very clearly is mmt is correct in that it is descriptive of the system but it is not at all prescriptive meaning telling you what to do with the money that you can you can print oddly wasted the opportunity to make the Investments to improve our society so that we'd be better positioned coming out of this right I think the point might be that monetary policy is not enough right the the problem is that the the blunt tools that fed and other central banks have at their disposal only allows them to do so much and the second order effects and second third order effects of those policies create all these uh uh externalities that we're now coming to terms with right I I think perhaps what you're going with this is that fiscal policy and Regulation and and fighting nimbyism and all these other Dynamics are the the more uh the the more appropriate approach from a from a regulatory and policy perspective 100 that is the correct interpretation right and I would argue that if I'm complaining about monetary policy between 2009 and 2020. it's largely about the fact that monetary policy enabled fiscal policy to not do anything right we we dated a damnedest to try to make sure that no hard choices had to be made until we got to a degree of societal friction where it feels like we cannot make them a powerful opioid that numbed everybody into inaction I guess is the reasonable reasonable statement so what what type of environment motivates the type of action that we need from a fiscal standpoint or from a policy standpoint and how do we engineer an environment that produces that well so I think this is one of the great ironies is that we had started to have these very real conversations right and so when you talk about the desire to harmonize and equalize components of the system tax policy for example being much more Progressive and being much harder on billionaires than it is on individual Working Families strikes me as a very logical part of that process now the narrative takes various forms of well if you try to do that the billionaires are just going to leave all right well you know that's fine okay if they really want to go to New Zealand they really want to relocate to New Zealand or to various other places that absolutely should be their prerogative but there should also be disadvantageous conditions under tax policy if that's their choice right we should not allow corporations like Apple to decide that it is going to sell cheaply its IP into low tax regimes and then claim that the majority of its revenues and profits derived from Ireland right like that's just absurd we should not allow corporations like apple to engage in clearly anti-competitive Behavior with their employees in Silicon Valley entering into non-in non-solicitation agreement with other tech companies around their employees it results in a incredible number of employees being underpaid right relative to their free market value and a settlement for a company like apple where they pay 600 million dollars which is functionally sofa change right I mean like that's the thing it really is so let's say we're all in agreement on on that Mike so so I think we'd all also be in agreement with the fact that passing the types of of laws or regulations or or rolling back the types of laws and regulations that are required to facilitate those types of solutions are implausible in the current economic climate I actually think that there are increasingly plausible as compared to implausible I think the risk is that we actually have entered into an era of meanness in which somebody liked DeSantis who I would functionally are like I just want to be really clear like my biggest complaint against DeSantis is not the same as my complaint against Trump it's just he seems mean like what a nasty guy to load up immigrants and ship them off somewhere to make a point right I mean those are individuals those are human beings yes I understand the point that he's making and his point is absolutely valid but to use human beings to to display this pawns just disgusting okay but that that whole populistic move movement was in place before the pandemic and before the FED started to implement these types of policies right I mean it's never pandemics almost never changed the direction or these types of events don't change the direction they just magnify and bring forward right we were already moving towards work from home I already worked from home right we Advanced these Dynamics significantly you know massive online courses the moocs ETC right those were already available people were able to choose to do that Zoom existed Etc all we did was push this Dynamic forward so we didn't actually change anything and I would broadly argue that DeSantis is just the Fuller realization of much of the anger and frustration and desire to hurt people that largely embody Trump right I think he's a far better individual than Trump is I just want to be really clear on that but I'm not sure that the um full expression of that anger and frustration and that sense of how we're going to make people pay or I'm going to show you that's just not a it's it's not a helpful component in terms of drawing people back into discussion with each other agree so then how how are you getting to the conclusion that we're we're moving toward a more constructive political climate where we're going to be able to to move some of those um policies forward uh because I would actually broadly realize that I'm increasingly hearing that from both sides right people are increasingly saying I think AOC is ridiculous and I think Trump I think Trump slash desantis's behavior is ridiculous I I I don't have an empirical point that I can point to and say no that's fair you're the quitter component but the sentiment feels like it's shifting back towards a recognition that somebody at some point needs to say hey wait a second we all love our children we all want to make sure that the best happens for them right how do we actually engage in a constructive conversation so that we make that happen sure but but I think that the challenge is that certainly the perception is that um policies that will make it easier for our children have the potential to make it harder for for me right like policies that make it easier for my children to own a home and form a family close to where I live in downtown San Francisco or Oakland or or Manhattan or Boston or whatever [Music] um mean that you know maybe I will lose some rights or you know I'll have to to relinquish some of my nimbiest um perspectives I may have to live with lower home prices or give back some of the lottery gains that I've had on on my own home there's there's a at least a perception of a bit of a zero-sum um Dynamic at play right if the the Boomers let's just say the Boomers I don't want to but let's say homeowners homeowners have um won the lottery over the last 20 30 years right if you owned a home and and that's just accelerated over the last two or three but also over the last five Etc so if you know we're we can largely divide the population into those who've who've owned a home prior to kind of 2020 or you know 2015 and those who don't and are looking to Forum households and and start families near attractive Urban centers and so so how do we how do we reconcile that type of dynamic in a non zero-sum type of way so I think actually so again I would suggest that increasingly we're moving away from that so homeowners in San Francisco while recognizing that the theoretical price appreciation of their home is very high and would likely Retreat somewhat in the event of additional construction are increasingly saying hey wait a second unless we attract young vibrant families into San Francisco San Francisco is going to be overrun by homeless people all right nobody wants to live in San Francisco especially the people who live there just ask Paul Pelosi right like nobody actually wants to live there anymore except those who you know own multi-million dollar homes in in Greater San Francisco and and I mean obviously I'm gonna play yeah I actually increasingly would argue that those who are in those cities recognize that what they've established unless they truly turn them into gated cities right and gated communities they're facing increasingly third world conditions that mean that they can no longer enjoy the properties that they own what type of policies might come to fruition then as people begin and not just in San Francisco but in general no no I generalize this away from housing yeah right so you're already seeing this this is part of the point that I would make right the the recall of Chessa Boudin and replacement by a relative conservative in Jenkins you're seeing this in Los Angeles where they're doing the same thing even Portland is talking about coming Republican for God's sakes right no does Republican necessarily mean good absolutely not because we've got crazy policies on both sides I was you know just spending time complaining about the meanness associated with DeSantis right and the broad recognition that this just cannot stand we cannot actually have this type of behavior and expect to maintain coherence in our society right so I'm curious Mike if do do you really see a possibility with the current two-party system where the uh primaries are often uh decided by The Most Extreme of the party candidates because they're catering to the base you're not seeing perhaps what the uh stereotype argument now is that it's becoming more polarized you're actually seeing something of a move to the middle from both sides I I I do think you're starting to see that I genuinely do and it you know um I could be wrong on that I hope I'm right but I could be wrong like I just can't emphasize that enough right um and and I would broadly say that that increasingly everyone within both parties is recognizing that much of the behavior was performative right so support for Trump and the Dynamics of trumpism and you know the enjoyment of desantis's behavior Etc feels like it's retreating feels like people are saying you know what that was probably a little bit too much right let me um let me follow up with the economist is doing an interesting coverage of the upcoming midterms and talking about how uh elected officials in the states particularly in red States uh the more moderate Republicans are being replaced with the the Trump candidates and particularly the officials that would be validating elections are are coming in with the uh The Narrative of the stolen election of 2020 and so the the concern is that 2024 we're coming into a even larger crisis uh because of the potential for for the uh an actual stealing of an election now to to the other side have you been following uh these events at all how does that square with your with your take so I would broadly argue again that like we tend to focus on the last war right so effectively I would argue we're trying to construct imagine a line against something that I I would argue is not going to actually be particularly an effective approach um I I can't guarantee that because again I like this is a relatively hopeful observation in a morass of really bad policy making choices and it's one of the reasons that I'm so frightened of the behavior of the Federal Reserve because the you know the the clearly conventional wisdom is well we're going to have a recession but it's going to be really mild right um man I I I struggle like that frightens me more than anything else because recessions are inherently chaotic activities all right things get restructured in ways that we can't predict um it could be the case right I can certainly see how that happens I can also see how we enter into an environment which is an extraordinary degree of hysteresis and the um uh human capital skills that people have developed are replaced by a significant diminution of that right I mean there's again we go we're going into a recession with unemployment programs woefully unprepared state state finances woefully unprepared um household balance sheets and an extraordinary for the majority of U.S households in an extraordinarily weak framework we're looking at things like credit card debt that is non-dischargeable we're looking at a high probability that the Biden administration's attempt to eliminate student loan debt fails and suddenly people who thought that they had dropped twenty thousand dollars worth of debt find that not only do they have that twenty thousand dollars worth of debt but it's now non-dischargeable interests are higher right it's reset higher because of accumulated it like think about the potential that we're looking at here and everyone's saying boy you know if we just have a recession then that's really going to hurt Ken Griffin I guarantee you that Ken Griffin could care less he's gonna be fine he's well Griffin is an interesting example right it's clearly hurting the the oligarchs that that are the primary shareholders of the of the Fangs for example right like it's there's there's you're hurting it's clearly hurting right I mean well Jack Dorsey may look like a homeless man I have not yet seen them on a street corner collecting quarters agreed agreed impairing not not devastating but you know it's definitely we're balancing some of those things I guess my point is like what is is your recommendation that we should have been we should we should continue with the same types of looser monetary policy that we that we embraced from and again that was standing 2009 but but from the sort of 2012 to 2021 period in the face of continued Glock at the State political level in the National political level that is unlikely to unleash the types of other policies that we need to see in order to move in a more productive direction for the majority of of Americans um it's one thing if if there's some optimism that that um some of the ossification that we're observing in terms of political decision making is is um is is you know becoming more productive but I think in the short term it's hard to argue that right so if if we can't count on on government to make different decisions then does the FED really have a choice is it is your recommendation that we should have continued with the same kinds of of loose or stimulative monetary policies because we can't count on government to step in and do the right thing well again I think you're drawing a distinction between the fed and government that is false right it's the financing arm of the US government okay so to treat it as a separate political entity I think is a false distinction um what you're really saying is you know should the FED an unelected body sit by and pass judgment on the terrible policies that we have allowed to persist in our political system and I don't see how they possibly have that Authority but they did that from 2012 to 2021. again just in the opposite direction I'm not I'm not defending those choices but two wrongs do not make a right had the FED decided at any point in two I mean we actually saw this Behavior right saw what happened when the FED repeatedly tried to hike interest rates and then backed off because they were incapable of seeing the system through right the persistence and the Reliance on the dynamic of the FED responding under any conditions got worse and worse and worse and worse right so the easiest thing for the FED to do is to say you know what first thing we're going to do is is cause no harm we're going to adopt effectively the Hippocratic Oath that says we're not going to actually try to change economic outcomes ourselves what's up no action or just just maintaining the status quo with extreme policy is an action again the Dynamics of the extreme policy that were put in place in the pandemic they absolutely should have withdrawn components of that there was no reason to be providing significant support to the housing market once it was clear that the pandemic emergency was in place but remember what the FED actually did right the FED lowered interest rates by roughly 75 basis points right on mortgages which while material remember that if you're in a fixed rate 30-year mortgage you're still paying back the principal so all you're doing is reducing the interest component of it give or take on a 300 000 home it takes your payment from roughly twenty seven hundred dollars a month to somewhere in the neighborhood of twenty four hundred dollars a month yes that's an improvement but no that is not driving a 30 increase in home prices right the second thing that the FED does is that when the FED lowers those interest rates it facilitates a refinancing and a liquification of savings from those who are already locked into paying 2 700 a month allowing them to obtain an additional 300 a month in income if they sell their home and they liquefy a component of the gains in capital gains component bully for them that's fantastic but then they have to go out and find additional housing right so it's not there's not really much of a trade that's underway there unless you're willing to significantly take a step down and take cash out and that's always going to happen in every cycle right so the actual value that the Fed was able to bring into that process was in an environment in which unemployment spiked to 20 for a brief period of time and tremendous amounts of economic uncertainty existed we facilitated the fleeing to the countryside that has accompanied every pandemic in history right we had a choice we could either say to people nope you can't move anywhere because no bank is going to finance you or we can say you know what we're going to step in we're going to facilitate this transition if you really want to get out if you really want to have a place to educate your children if you really want to have a place to work from home we're going to actually make that possible for you and you actually see this in the purchase data which had a very minor Step Up in part because as Logan and others point out there was simply a lack of available inventory that does show up in higher prices people made bad choices around that and there would have been a natural Retreat from it right but to engage in a substantive and intentional punitive behavior in which you're then turning around and saying okay we're going to trap these people in their homes and their mortgages for an extended period of time and reduce the capacity of the economy to restructure Itself by hiking interest rates right and reducing that capacity for a fundamental restructuring strikes me as absurd policy in an environment in which you're trying to accomplish everything that you're saying okay so it sounds like we're not going to resolve this in particular at the moment let me flip it on it too yeah let's let's flip it yeah like what should the FED have done from your standpoint yes this is this is what yeah I want that's perfect well I think in in the context of a government that is unable to make decisions and pass and pass meaningful laws um I I think I think something needs to be done to provide younger Generations um hope that they may be able to live some manifestation of the dream that they probably grew up having right the vision of of life with family and and Etc that they watched their their parents have in fact watch their parents have with that vastly greater Effectiveness than even their parents probably anticipated because of massive windfall gains on portfolios and you've got Millennials who are looking at home prices that are unachievable using with with um with labor through the labor Channel um portfolios you know rates and Equity yields at pretty well the lowest in any generation so expected return on invested Capital near the lowest in a generation and wondering what to do so I think Mike's Point and which I agree and Mike you can correct me if I'm wrong is that these outcomes that you're uh hoping for are not achieved by tighter monetary policy particularly in this environment and I agree they're not but also if they're not continuing to make the situation worse the issue is that the FED is perhaps not the Avenue through which some of these policies should be enacted Mike I wonder if you might talk a little bit about is these issues came about and since no one else is willing or able to enact policies that might address the challenges then you know can the FED not be called upon to undo some of the errors of its of its own making yeah but I I went specifically to hear from from Mike with regards to the current inflationary issue uh the fact that we've had such uh only policy towards the energy industry in the U.S and particularly uh the the Shale Industries uh unwillingness increased production because they sense the hostility that continues to come from the Democratic party and and the the ESG Mantra that has permeated the Zeitgeist uh to a meaningful degree in in the last uh couple of years so I wonder if you might speak to that is that some of the uh one of the Avenues that you think government should be pursuing like a change in that uh policy framework to allow the U.S who should be energy independent to to actually uh realize that potential well first let's be really clear the U.S is by and large energy independent on a net basis right we actually are energy independent so you know um could we have even more and Export even more and become a Saudi Arabia Etc sure and should we have an industrial policy that favors growth over stagnation like you're you're basically asking me like you know should we behave like idiots or should we behave like sensible human beings right you know my response to that is we should behave like sensible human beings I do think that there is a very fundamental lie that we tell ourselves that the reason for the under investment in energy has been a function of ESG Frameworks right that's just not true we actually had massive expansion in fossil fuel production in the United States to the point that we had a tremendous crash created in the 2016-2017-2018 time period and negative prices briefly at the opening of the pandemic right that created the conditions under which nobody was willing to finance energy companies right now David Einhorn is a great friend of mine he's somebody I deeply deeply respect but remember he was going around in 2015 2016 highlighting the fact that you know the motherfracker was a a cash burning exercise and that you know these shell Drillers were never actually generating a return on cash and subsequently you know has become very favorable about production under the current price regime but like we did that ourselves right we generated terrible Returns on invested Capital to which investors understandably reacted by saying I don't want to put any more money into this space right like that was kind of the pre-esg era though right I mean like 2015 2016 the years six years ago the beginning we were just starting right but it's not like we were seeing massive divestment of of energy companies by by Major software wealth funds and major endowments in 2015 2016. The Narrative wasn't as we were in 2018 2019. again in the 2018-2019 time period what were oil prices right we got oil prices up into the mid 70s and at the the fourth quarter of 2018 and by the end of the fourth quarter or 2018 they'd crashed into the 40s right like yep was that a function of ESG no it wasn't a function of ESG right it was a function of overproduction and terrible financing choices right so like you know we have to be honest with ourselves if we're actually going to get this stuff done like do I think ESG is garbage yes I think yes she's by and large it's garbage right I actually think the great irony about ESG is is that it reinforces many of the components that I highlight with passive investing that it's completely absurd to think that these are passive entities that are not influencing Market Behavior right I mean the the wonderful thing that Larry Fink has actually done is he's exposed his Market power and now we're finally starting to see some Traction in terms of concern on the growth of passive from the antitrust perspective of the Democrats and from the ESG perspective of Republicans right they're kind of they're getting fired from both sides and they largely created it themselves right so like I'm actually in some ways very deeply thrilled to watch some of this going on but the idea okay so let's pivot to that Mike what's that go ahead yep sorry I do finish your thoughts no no like again this is part of the reason why I am kind of hopeful is I'm starting to actually see some growing awareness around many of the issues that I've talked about for a very long time that the capital allocation process in our economy is largely broken because we've subsumed markets that are designed for Capital allocation and turn them into vehicles that are designed to provide a risk-free retirement to our population oh that's just a stupid use of capital markets right so it falls under the the terrible policy choices of everything else that we're talking about right we're not yet at the point that we're actually challenging that framework we still talk about what should be the expected return of equities or et cetera you know what the answer to that is it depends if we make terrible choices it's going to be lower if we make great choices it's going to be higher right like congratulations good choices get rewarded like Mike Green brilliant podcast here we go I'm the smartest man alive I just told you make good choices things turned out better right that's the sum total of the advice I can offer for you right so we know that a lot of the stuff that we talk about is just like epic right that it's you know ESG it's the fault of AOC that we don't have you know adequate oil and gas production Etc like those are just not true statements right there so let's pivot to the um to the passive um theme because I did want to explore that as well and get an update on um where you are and your thinking has uh what we've observed this year and in the current environment in terms of flows has has that caused you to update anything and I'd love to pull on the thread of what's going on a black rock because I'm not intimately familiar with the um with what you're referring to there that has exposed the market power that BlackRock has and what some of the implications of that might be so let's pivot there sure so I I think the most interesting thing that's happened in the passive framework on a year-to-day basis is that we have not yet seen the negative flows that everybody's worried about myself especially right we've continued to see positive inflows particularly into the vehicles that are used for retirement right there's been some dominionation there are diminished whatever reduction versus what we saw in 2021 obviously there's less cash available there's less money going into the market but most of that decrease has actually come from the single stock space as compared to and you know the punting Dynamic of you know Dave Portnoy Etc we've not really seen a meaningful deterioration yet in retirement savings right those that are coming from employment um what we have seen is actually something else that you heard me talk about which is the impact of systematic strategies that rebalance between equities and bonds right and so I would argue that one of the things that the FED didn't fully appreciate going in and I would point out that almost all macro punters who made significant bets against rates actually made them in steepeners right their bet was that inflation would cause the long end to rise we were going to lose control of the long end people would no longer want to buy tenure and out Etc man that is 180 degrees from what actually happened right the short end was raised by the fed and well yeah nobody believed that the FED had a spine right nobody believed that the Fed was going to step in and and take a stand here right right and through the miracle of duration exposure you end up winning in a steepener if you've placed a similar nominal BET right notional bet in terms of the long end versus the short end because the sell-off ultimately pays off in a meaningful way if we go back a year ago most macro funds had not yet seen that sell off to the point that they were in the money on their long end that they were losing money on the steepener now we're in a position where everybody looks like a genius you know for betting against race right even if they made the wrong bet in terms of the steepener framework the um the second component that I guess that I would would highlight about that that people tended to under-appreciate was that the structure of bond indices created an extraordinary duration extension right so if you think about what happens when you cut interest rates which bonds go up most long duration low coupon bonds they have the highest sensitivity to interest rates I have a high coupon right I'm receiving more of my cash flows up front versus more my cash flows at the back I have less sensitivity so is the Fed lowered interest rates the bonds that were most responsive to this for things like the Austrian Century Bond right a hundred year bond that goes to 240 right well at 240 it becomes two and a half times the weight in the index incremental flows into bond funds mean that you buy more and more and more of that you extend the duration of the index creating extraordinary interest rate sensitivity and that's what we saw in government bond funds that's what we saw in high yield high yield went in with a duration closer to eight versus its historical four and a half right investment grade went in with a duration that I want to say it was probably close to 11. right as compared to a historical somewhere in the six or seven right so we have this extraordinary duration extension and the FED starts hiking interest rates we get hammered in bonds if I have a systematic allocation strategy that's supposed to be 60 40 bonds and I get hammered in my bond portion what do I have to do with my equities so right I have to sell equities buy bonds sell equities buy bonds fed keeps hiking what we've actually seen is global market cap of bonds has fallen off at almost exactly the same Pace as global market cap of equities right this is totally unprecedented but again makes perfect sense in the context of systematic strategies that automatically are continuously rebalancing one of the best charts people can pull up for 2022 is the ratio between the total return of vanguard's total market index you know proxy this with the vti ETF versus their Total Bond market index right BND is the ticker there it's unchanged it's functionally unchanged for the year it looks exactly like it was just rebalanced over and over and over again over the course of this year right I think this is one of the really key takeaways that people should have on a year-to-date basis this has not been about recession this is not about deteriorating earnings this is not about you know Apple's iPhone sales didn't actually meet expectations or sell out you know sold off significantly none of that happened s p earnings are at a peak they may Begin to Fall Right but they have not yet begun to fall Russell 2000 earnings are barely off at all they peaked roughly in July right but that's the cyclical aspect of our our um stock market we have almost no evidence whatsoever a recessionary pricing in those indices yeah Bridgewater's got with a really good chart showing that the if you just hold the discount rate constant where we were at the beginning of the year that actually Equity valuations are higher than they were in December 2021. right and again I would just highlight that I don't think that's actually how it works I don't think anybody actually does a like when was the last time an analyst actually sat down with you I was like okay well let's increase the cost of equity for Microsoft and run our DCF under unchanged cash flow assumptions at higher levels of interest rate and therefore we should be selling Microsoft right and that's not the discussion that's going on I I've yet to hear anyone actually say that other than maybe ask the modern at NYU right and he would say the exact same thing we've actually seen no meaningful expansion of the cost of equity in terms of a spread over bonds right so what we're actually doing in many ways is we're accommodating systematic rebalancing of equities and bonds by selling equities to accommodate much lower prices and bonds reallocating it into bonds very similar to the experience that I went in in 2000 as a value manager where suddenly people who had not had religion about rebalancing their exposure between small cap value and the NASDAQ suddenly became religious about it okay well every quarter we need to rebalance because we don't want to be caught in the wrong position right so it was an outperforming small cap value manager I was facing constant Redemption so that people could turn around and buy the NASDAQ and lose even more money right and by and large that's what we've seen okay so tie a bow on that so if I'm reading you correctly I think you're saying that the losses and equities are primarily or at least partially a rebalancing effect and don't really reflect changes in in discount rates so it's not really a fundamental effect that's more of a flows effect I think that's right and again that would be the key takeaway that I would offer around this this type of dynamic but the discount rate effect is still there even if that's not the reason why people are selling it is reflective what I think is interesting is that no one has really priced it and earned these recession into equities and uh what are your thoughts we haven't had an earnings recession let's be really clear right we have not had the expectation of one you know there's there's no evidence of that there's no evidence that we are yet doing that and in fact if I look across my universe of high-yield sensitive equities right those that need to refinance over the next two to three years if interest rates stay at these levels like they're just all bankrupt right they can't service their debt at these levels right you know there's a an an incorrect chart that was put up by Liz Ann Saunders saying you know the number of zombie companies is falling you know defined as a three-year average of ebit to interest rate well that's a trailing number right if I use a forward number to reflect the current level of interest rate you know I run a basket of about 100 names in the Russell 1000 that I treat as a junk basket every single one of those companies is incapable of servicing debt at current levels they just can't do it okay high yield indexes is refinancing from four percent to 12 percent can't be done and that's actually you know the Minsky framework is really important here and it's one of the reasons why I would push so hard against what the FED is doing right so people forget what the Minsky framework actually is the miskey framework is that you have companies that are capable of operating at a level of interest rate and companies that are incapable of operating at a level of interest rate you can influence that through interest rates right so what we've lived through is a model where you cut interest rates and households that had taken out a mortgage at five percent are able to refinance at three and a half increasing their liquidity raising their monthly take-home pay so that they can pay off other stuff right same thing is true for corporations I refinance from five percent to three and a half percent I now have additional money that I can use to theoretically pay down debt make investments pay my employees Etc continue as an ongoing concern right but if I flip that around and I go from three and a half to five right the initial impact is functionally zero right unless you happen to be trapped in an immediately adjustable rate mortgage or an immediately adjustable rate debt issuance it has no meaningful impact on your cash flow characteristics until you need to refinance and then you face that same deterioration and so there's a window of opportunity that I would argue that we exist in right now where the hedged companies the companies that are actually capable of servicing their debt are not yet incapable of servicing it but if we persist on this path we're going to face an extraordinary restructuring of the American Capital stack both in terms of households and because people that lose their jobs and ultimately have to sell their homes into this environment are going to face catastrophic circumstances right and those companies that need to refinance you're seeing this with Carnival cruise lines and others they're slowly converting their Capital stack but if you convert that entire Capital stack by staying here for an extended period of time those companies are just gone all right they're just gone total change of ownership and when that happens it's not going to it's not like Carnival Cruise Lines is going to be auctioned off to the 10th percentile in terms of income distribution in the U.S those assets are going to be sold to the wealthy okay I mean aside from the question of whether it's the fed's job to sustain businesses that are operating at imprudent levels of operating or financial leverage um are you suggesting there's two ways to take your comments right are you suggesting that the um the discount rate the change in discount rate is not yet priced into equities and therefore we have a substantial shift lower as equities repriced to higher discount rates um or are you suggesting it's a complete myth that anybody ever discounts um future cash flows as a way to Value equities and it's and it's purely just a relative basis relative to bonds and and based on the total amount of liquidity your savings in the economy um so that's that's kind of that's kind of well let's take that question first so first I would never say that that it's a total myth of anything right so everything that it is absolutely true that somebody in Seth clarman's shop is probably running a discounted cash flow analysis and saying at these levels of interest rates here's the opportunity that's created or here's a likely Catalyst and by the way I'm I'm engaged in those conversations as well I'm working with individuals who are starting to prepare to take advantage of a serious distress cycle that could potentially liberate significant quantities of capital similar to what happened with the Savings and Loan prices right now the irony of course is that those that will be most adversely affected by that type of dynamic are those who are trapped in systematic strategies like a Vanguard Total Bond Fund that has to sell on a ratings downgrade no discussion like is it what are the recoveries is this the you know um is this the Keystone collateral is this the part of the capital stack that you want to be in if it receives a rating downgrade it is no longer eligible for inclusion in in an IG graded fund right get it out of here whatever price right that's an incredible opportunity akin to the resolution trust Corp dumping valuable properties in the aftermath of the SNL right so things like that will present themselves when you talk about the adjustment Dynamics I'll share my screen for one second this is actually shared with me from a incredibly smart Trader let me see if can I yeah I can hit present right foreign are you there share screen there we go okay all right so this is looking at the effective mortgage rate for homes in the United States it's from Haver right obviously a ba et cetera versus Canada which has adjustable rate mortgages right like the US is the black line we have yet to see any meaningful increase right Canada on the other hand man that's going to be an interesting Christmas up north well yeah 30-year mortgages like the like the U.S does so we we can at most lock in our race for five years so when I heard that you guys are able to do that effectively I it was just uh the Shocker too is that obviously the Canadians who are over levered in real estate piled into the variable rate in order to capture the lowest possible payment rate in a big way they learned all the wrong lessons and they're gonna you know many of them are gonna learn the right lessons over the next five or ten years what is the right lesson right I mean that's should we be teaching everybody that that unproductive wealth generation via capital appreciation of like fixed homes is should be the dominant way that you generate wealth or should we be should we have rewarding labor productivity a second ago you were telling me that you know we should have policy that encourages the ability for people to buy homes right that they want to be able to participate in the system in the way that there are forebearers did that's not it I'm I'm suggesting that we need to have we need home prices that reflect responsible levels of Leverage in the consumer responsible level of the percentage of household capital in order to crystallize an American Dream I'm like I'm not saying we should give everyone a home I'm saying that everyone's you know should have a shot at a home through Labor income and the existing pricing mechanisms don't enable that when your grand great grandparents came to Canada did they move into on into downtown Toronto which was filled with skyscrapers and and pricey condos with gyms or did they scrape you know an existence out of a you know uh you know Hut it was barely insulated against the Canadian Winters you know the answer to that the latter of course yeah BT or b-tier city often industrial often Workforce into it Society they were farmers right I mean the simple reality is is like go go out go anywhere in the United States you'll find plenty of abandoned homesteads in which people were living in in structures that are functionally like the tent cities that we have in Oakland and San Francisco and Toronto right like that that was a standard of living that people were prepared to engage in I I do not think the pumpkin flavored latte mochachinos were available then and were a reasonable distance away from those encampments but that was actually home ownership back then right to not recognize the dramatic Improvement that is that accompanies urbanization is like disingenuous genuinely disingenuous well and I also think Canada represents a bit of policy that encouraged the speculation right the people upsized their home because it was their only tax uh zero tax investment right then they also fell into the funding of it and through policy in Canada through thoughtful policy to try and allow homeownership you have a household that now is extremely levered and extremely expensive so it's not you always work let's let's be honest about what really happened in Canada you also said to Chinese investors that were trying to park money away from China guess what we're not going to really check any of your data what motivated that decision to allow that what policy objective facilitated that decision uh that that that is a question that I would ask you to answer instead of me well I mean it if you if you want a normal housing market that makes homes available to citizens does it seem like a reasonable policy to open up um home ownership to Capital recycling from from other jurisdictions and make Canada a safe haven for investment Capital like it just seems like whenever clearly the prophecy in my mind was you're appusing voters by by causing home prices to go up yeah so so flip that on its head if you hiked interest rates right and created broadly unstable conditions for the young who could no longer afford these homes right nobody in Canada can afford these homes is anybody who's able to get their Capital out of China now phased by these levels of interest rates no they're actually like wow this is fantastic thank you I'm just going to pay cash there are policies also under that have been in place now for the last five years and they continue to ramp them up that penalize Capital movement into Canada for the purchase of home ownership right there's all kinds of tax disincentives Etc that keep ramping those up but they're doing it at a prudent rate so as to not Shock the market right they're shocking the market already with rates that's an astonishing thing that you just said they're doing it at a prudent rate in order not to shock the market so we're going to do it at a prudent rate in order to accommodate the Chinese but we're not going to do it at a prudent rate in order to accommodate young people who simply are trying to move out of the city and have children and what you're saying is we're going to be kinder to the Chinese than we are to our own citizens well I'm not suggesting that the rate of rate Rises is necessarily appropriate I don't have strong views on that it may be inappropriate but directionally I think that we have spent too long rewarding the wrong kind of behavior and I think we're moving at least in the right direction in this Dimension to start to reward a different kind of behavior or at least not continue to give future Generations the impression that you can not concentrate on labor productivity but instead just own a home and retire rich my if you actually believe that that is going to occur based on our existing policy then I'll be proven wrong I would argue that the policies that we're setting in place right now are almost certain to enrich the already wealthy far more effectively in the same way that Blackstone emerged with greater control of home ownership because they had access to financing in an environment to which home prices fell and everyone was willing to accommodate it we're seeing absolutely no indications that they're willing to or that they have any intention of reversing them very first person who's going to have access to financing at low prices Blackstone well in your recession generally everyone's going to have less and less they'll be a little financing so Mike on your other chart where the Canadian rates are rising can U.S rates are rising more slowly but what are your thoughts on sort of the you are in a bit of a freeze in the housing market for sort of upscaling homes is that going to have some impact in in the U.S or like the mobility the intermobility of the homes is something that is still impacted is it not in the in the U.S context help me understand what you mean by that so moving from like a smaller home to a slightly larger home or moving up yeah so doesn't the market sort of freeze because you've got to refinance whatever I I suppose you can carry some of your original mortgage over but no you can't I mean it's the whole thing yeah I know in the United States the more you just tied to the property so if I sell the property then I have to close out the existing mortgage right so so yes what you're describing is exactly what is going to transpire that we've created a system of extraordinary stasis right that the the system has functionally shut down and that further exacerbates conditions under which people are unable to reinvent themselves by moving from low employment areas to high employment areas right and so so 40 under the current model a three percent mortgage becomes a generational endowment right and so maybe so less tightening from the Fed and more uh tax policy is that is that was was that we we know that this right this is exactly the issue right and again Adam is correct we're doing a terrible job from our policy makers of making hard choices right but we as Financial investors should be leveling our ire at them and saying that's unacceptable and what the FED is doing is unacceptable what we had was a condition under which they were failing to show leadership and the Fed was at least kind of being accommodative to prevent a subsequent restructuring of society in an unelected framework now we're potentially facing a true Andrew Mellon liquidate stocks liquidate labor Etc right and and so um is it is that a function of the of the the very different objective functions of the fiscal policy driven by re-election and monetary policy having to adjust to that or have let's be very clear monetary policy was being driven by a re-election cycle as well it's just called appointment and it's for Powell right so he didn't want to behave in a fashion that would lead it to be perceived that he was anti-biden and so he held off until he was confirmed then suddenly he gets religion around inflation once Biden says hey this inflation thing's really a problem right and so he turns around and he starts behaving in a way that allows him to pretend that he is you know a significantly shorter Paul Walker yeah so I guess I think where Mike's trying to go is um where like what would what would have been the right path if if we acknowledged that that the government is not able to do the right thing or not willing to do the right thing what was the right path right I mean I because I think we are all sort of kind of in a way saying a similar thing right which is this is not the best path the way that that the FED is behaving is not the best path the way that they behaved later in the pandemic exacerbated the issue um the way that they behaved prior to the pandemic from sort of 2012 on also exacerbated the issue they enabled a dysfunctional government because they they stepped in instead of allowing the market to create crises that necessitated government decision making right so we've pushed all of this decision making out is there not an argument to be made the FED is now saying we're no longer going to defer the the um the kind of Crisis that will force that kind of decision making and if they hadn't taken this kind of policy stance that we would have just deferred those types of hard decisions indefinitely so whether that is true or not I actually just want to emphasize what you're saying you're saying that an unelected appointed body should have the right to express what it thinks is the right policy choices for fiscal legislators and that it should be able to effectively force them to choose along the lines that the FED thinks is correct I I don't but they but that is what you're saying right I'm saying they took steps before that short-circuited that now they're recognizing whoops and I'm not saying this is the motivation I'm just saying is it possible that recognizing whoops we probably shouldn't have done that because we had a bunch of missed opportunities where we could have allowed the the private sector to stand on its own feet or fall on its on its own which would have forced some decision making and hard decisions by government five years ago ten years ago Etc now they're looking at it saying we probably should have allowed those things to to play out then we didn't we've gotten ourselves into an even even more challenging situation now and we're not going to repeat the same mistake again we're simply going to normalize our balance sheet we're going to normalize rates and allow the economy to stand on its own two feet because and and allow the private sector to do what it does so that we finally have that an outcome that necessitates or motivates elected officials to make the decisions that they should have made five or ten years ago If the Fed hadn't been intervened in um so again I I I I find what you're saying logically inconsistent right and I just I I just want to emphasize this right you're saying what I wouldn't I would use a parenting analogy you're saying to your child I'm not going to tell you what to study in college but if you don't study engineering I'm not paying well you're saying I'm going to take a heart let's let me flip that around I'm a parent who said I'm going to take a hard line during High School you're gonna you're gonna study math and science because you're going to be an engineer and you you know for for three or four years you take a really hard line they don't get to go to parties they don't get to pursue their writing passion because they need to do math tutoring or whatever they go off to school you they're now styled because they're not able to to manifest their own destiny and the parents going okay you're right I made a mistake and now I'm going to let you you know make your own decisions and learn your own lessons and be your own adult so again like obviously given that and by the way this is what I did in parenting right was try to give as constructive criticism as I can when they're young so that they make better choices on their own depending on the kid that works very well for some works very poorly for others and I will also tell you like or sure one of the funniest parties you guys know because you follow me on Twitter I have a son who's at the US Naval Academy who's this these are serious badass absolutely fantastic but when he was five years old he and I are walking through Central Park and he asked me you know Dad um you know what's it like to be an actor and I pointed around Central Park and I'm like well what I told him first is like you know look son there are careers that are broad pyramids in terms of outcomes and very steep pyramids in terms of outcomes right if you're a very successful actor you do extraordinarily well but the minute you step down from the top tier you basically are waiting tables right if you're a teacher it's a very broad pyramid the top person is not doing nearly as well as the best actor but the worst teacher is doing significantly better than the worst actor right and I I forget the exact analogies that I use but I then used for acting I'm like acting is super steep the very top actors you know are guys like George Clooney and others and Tom Cruise who you know make a billion dollars and at the bottom of the tier are all the homeless people in Central Park right and he told me about that 10 years later he's like yeah you pretty much crushed my dreams of being an actor immediately right because I didn't want to be homeless in Central Park right and you can tell that to a five-year-old and you can laugh about what an you are afterwards right and I do like my son is a remarkably talented actor I think he would have done great but I'm really really happy that he's studying math at the U.S Naval Academy instead of you know trying to cut his teeth as an actor you know bussing tables in New York City right he's made a series of choices that are much better right but you can do that when they're five and you can do that when they're 15 but if you go to your 18 year old or 19 year old and after years of coddling them you suddenly turn around and say you know what I'm really thrilled that you got into Harvard um but unless you study math I'm not paying right after not having given them any of those expectations like you run a very real risk of creating far worse outcomes than you would have otherwise right now again there is no right answer and there can't be a right answer because we don't know what the future is but I I wanted to show another chart here very quickly so this is actually looking at this issue of home ownership rates right and this white line here is in the United States and unfortunately most of this data is only easily accessible to me for the United States that's fine this is looking at the Home Ownership rates the white line is the home ownership rate for those 35 to 44 years of age right in the United States first of all that's relatively high in the United States versus almost any other society and if I were to go back in time that's even more true so in the United States in the 1950s and 60s homeownership rates for those at 35 were around 62 percent by 2005 they'd climbed to 70 with the ownership society and and the subsidies for home ownership that had been created and by by 2015 following the global financial crisis and the dramatic tightening of financial conditions that we created for credit standards that caused FICO standards for mortgage applications to explode from their historical levels to basically you couldn't get perfect credit right that number had fallen to 58 now we're right back at 62 and a half percent and by the way here's the pandemic right here's what the FED did so here is interest rates going into the pandemic we managed to take them from 370 to a low of 290. like this was accommodative I'm not disputing that this is absurd right and the FED seems to believe that it has symmetrical tools it doesn't the reason it doesn't is because there's something like five trillion dollars worth of mortgages that were refinanced and sit in this price range when I cut interest rates from here to here all the mortgages that it accumulated over this roughly seven year period had the opportunity to refinance and create liquidity for the economy that was a net positive contribution to both the economic circumstances around the pandemic and absolutely the inflationary conditions that we saw right but if I cut this interest rate to here 200 basis points as compared to the 70 that I did here who refinances nobody yeah I mean Mike Mike Harris raises up the point that I was going to raise which is I mean if you cut if you cut interest rates to zero then everyone gets to own a home but no one actually owns the home the bank owns a home and he does infinitely rent the the home from the bank right I mean it's well it's just a weird situation that if you cut rates to zero then then you're right none of this none of this makes any sense and there's no you're at the zero bound and everything it's like trying to anticipate what happens in a black hole you know like it's uh all of the rules of Economics throughout the window well you know and again like people use language like that if we lower interest rates to zero everybody gets to own a home but that's actually not true right because particularly when you have fixed rate mortgages if I go from right if I buy a home make my life simple for 240 000 or 300 000 and I have a zero percent interest rate loan I still have to make principal payments extend the amortization period to 100 years yeah that's fine I'm just saying that like you you can you can extend the terms that's actually part that's part of the point we didn't do that we didn't extend it to 100 years we kept it standard at 30. so the actual degree of stimulus was really not that much we didn't change the components and in many ways what we saw in 2003 2004 2005 with arms negative amortization all sorts of stuff like that zero you know um uh interest-only loans Etc right that was far more accommodative than what we did during the period of the pandemic right like it's just not comparable and again I'm not defending the fact that the FED didn't withdraw that accommodation I think that Powell in his venality wanted to get reelected like every other you know elected representative except he's an appointed one right I expect better in that situation he has no real motivation he's worth a couple hundred million bucks he can behave better he chose not to so if he'd started to raise rates in or or simply May or June of 2021 right I mean right if the FED does not agree to buy every single mortgage because they're saying okay we want to reinterjack some credit risk associated with mortgages then mortgage spreads begin to rise relative to the broad financing rate and you begin to impact the housing sector right that's fine I get it that actually makes sense and I'm not arguing that they shouldn't have done that I'm actually arguing against the unique incompetence that is manifesting itself and hey I want to be just like Paul volcker when I grow up one you can't be six seven right and two po volcker was a jerk right so let's be really simple congratulations you want to be a miniature version a mini me version of a jerk so like it you know I just I find this whole thing absurd guys I wonder if we might and put a pin on yeah very sensible conversation and the Central Bank bashing just for a moment because I know that we're coming up on time we're an hour 40 minutes in but I did one again uh Mike's thoughts on a little bit of the geopolitical conversation if we have a few more minutes because uh I've I haven't heard you talk about this in a while and I know that you follow uh the arena pretty closely so I wonder if if you might share a few thoughts on what you're seeing currently uh with with China and and Taiwan and and what came out of the uh the party Congress that is essentially uh enshrined she for life and if you might comment a little bit as well on the Russia Ukraine and and what your thoughts are there yeah so um okay first on on G and the party Congress I think others have hit on this and said it remarkably well um one terrible that he is effectively um you know put all of his friends in charge right so this is the equivalent of Stalin basically stacking the deck and saying I'm never walking out of here right and that has broadly been the direction that China has chosen to go since 2013 when they decided not to engage in a genuine reopening of the economy and a rejection of the perestroika and glasnos dynamics that they correctly pointed to and said hey wait that led to the end of the CCP equivalent in in Russia right well then you have no other choice that you're going to follow the J curve back to North Korea right like you move to stalinist Russia if you don't go the path of Mikhail Gorbachev those are those are your only two choices there's only stability at the extremes um so we knew that this was underway this is simply a reinforcement of that the second thing that was really important was the appointment of effectively a covid czar that is not g right so that was the sign in my view and others have articulated this far better that we were going to see them start to remove some of the restrictions more importantly the restrictions on people coming into the country I would argue then money and people getting out because the simple reality is once you've started to lock down like that you can't let people out there not coming back right you can have people come in you can have them check their factories you can have them say to their workers boy aren't you lucky that you get to continue to work it's so bad outside you know the recession that's raging and Russia and Ukraine Etc and and you know if you want to continue to do business in China and you're smart you're going to remain highly controlled in your communication with anyone inside China you're certainly not going to go around and start throwing tomato soup at precious Chinese art right so you know that Dynamic is very straightforward they'll let people in they'll let the people that they let in out but they're not letting anybody else out this is not going to be Chinese tourists traveling all over the world right again my assessment what I'm seeing now on a positioning basis and the funds that I manage you know I bought call options on emerging market indices to protect against this risk that this is going to occur so far that seems to be working out okay but and those had actually become cheaper the implied volatility was below that of the s p like you know a lot of weird things had created conditions under which these seemed relatively attractive to me um so you know I I just think that there's going to be a a brief period of effectively honeymoon where people say oh China's reopening China's reopening that's true you'll be allowed to go back to China as a foreign investor you'll be able to go check on your factory you'll be able to go back and have your phone efficiently bugged your laptop hacked into all that sort of fun stuff that we take for granted when you travel to China and some of that may make it back if you're completely naive about it but China is not going to reopen in a pre-2013 or pre-2020 framework it's basically you can come here and do business in the same way that you could go to Austria and Transit across the Soviet border and quote unquote do business in Russia even when it was persona non grata on the world stage expecting an acceleration in in GDP or in industrial production or consumption in China though over the next couple of years anything I would say it's the opposite right you basically have now fully declared that we're going to become a slave state right and if you're not able to leave and you're not able to protest and you're not able to say I don't want to do this then the whole live flat thing becomes somewhat you know ridiculous and you start to enter into the Soviet era of we pretend to pay you you pretend to work sort of stuff and productivity will fall in China there'll be an element of you know racial homogeneity that exists that allow them to persist for a longer period perhaps than you might have had in Russia but functionally we've just watched it close down again will it reopen under different leadership you know New Management I I don't know that's a story to worry about in the future but that's my general read on this environment is that we're moving towards the regime of Stalin and the characteristics of a closed front particularly for those who are in the system and want to get out they just can't it's gone so um how does that impact the the global that you know the whole globalization deglobalization Dynamic if you've got China which we've spent the last 20 years Outsourcing to cheap labor and Outsourcing environmental externalities Etc um to China and China is going to slowly de-industrialize and or you know lose productivity we all we also know that they're going to lose a population uh just demographics I mean they're finally they lost 100 million in the census they lost 100 million in the census so they just admitted that they over counted by a hundred so it's not 1.4 it's 1.3 maybe that goes out in the wash because it's surrounding air at a billion but but let's be really clear 100 million is Japan they lost Japan right like that's hard to do like I lose money on the sofa and I you know I occasionally find it but like we're not finding 100 million people right so like that's a really really big deal you mentioned this Dynamic of de-industrialization when you enter into that regime what does it do well if I'm tearing down buildings anyway guess what happens to the Copper that was embedded in the wiring in those buildings I no longer need to import it from elsewhere around the world right people talk about the EV Revolution and the dynamic that that has on copper and 50 of the consumption of world copper was going into Chinese infrastructure residential power production Etc they're going to be liberating that and doing the opposite and using it to create effectively hard currency that they can use to buy things that they really need from the rest of the world right um energy would be one of them although they've managed to create a semi-captive source in Russia they're right they'll basically try to go back and forth um Russia's a little harder because it feels less stable right it doesn't have the characteristics of being able to shut down in the same way um and it has a more chaotic component to it then I would argue that China has so I like I guess I would just suspend I don't really know what's going to happen to Russia right now right um it is very clear that they have become effectively a vassal state of China whether there's going to be an overthrow of Putin and a re-evaluation or a further move towards the right you know they're just not as good at locking their population down as the Chinese are at least not now they may get better at it but everything that China has going from it from that standpoint right you know and I'm going to sound like a terrible human being for saying these things but like racial homogeneity right if you're Han Chinese you're presumed to be Chinese you're not allowed out of the country unless you have the appropriate papers from the communist government right Russia continues to be a collection of people who look radically different from you know the extreme ease to the West you know their ability to control those borders their ability to control those the the out migration the immigration Etc far less convincing than I would argue than what what you have and ironically I would argue the West is actually broadly helping them in that process um you know but very difficult to know I would just again I would I would beg out of it and say Russia is much more chaotic much less predictable um and candidly less relevant right I guess if you're China and you perceive Russia to be a de facto vassal state you don't really care if Russians flee you'll move your own population in there and make more effective use of the resources and um and get into the US is pushing China further down this path and then particularly with the uh restrictions on exports uh on chip manufacturing and chip technology uh do you see any analogy here with what the U.S did to Japan in the 1930s which uh arguably precipitated the attack on Pearl Harbor uh with uh the possibility of a Invasion to Taiwan given what we have done uh because they've been awfully quiet I mean obviously they voiced their dissatisfaction with all this but they haven't yet announced any sort of material retaliation from that move and I'm wondering if this is sort of that calm before the storm or if now that she has been anointed Emperor for life it just gives him the right amount of clout and power plus the narrative the backdrop that you see the West is trying to push us down keeping us the whole thucydides dynamic do you see that uh that Dynamic I play here with with regards to a possible conflict a precipitation of that possible invasion so so the quick answer to that is yes and if anything I would argue that the U.S you know what the U.S has quote unquote accomplished in the last year and a half if you really think about it it's like it's fairly mind-blowing right we've managed to shut down China's Advanced chip manufacturing industry we've managed to pull all the employees of U.S and European companies and Japanese companies that are working on Advanced chip technology in China and gotten them out right we've created conditions under which they cannot return we've functionally defeated Russia without putting a single soldier in on the ground in Europe right by using outdated technology to blow up their even more outdated technology and Technology techniques now that's rapidly modernizing I just want to be clear like it's the the move towards drones is an escalation there again that I would put into the chaos chaotic Dynamic where it's much less clear right um but if I'm looking at what the US has done like oh my God like we just showed the rest of the world in the same way you know congratulations China you've got Russia they're a vassal State Japan and Europe are now completely vassal states to the United States right like that's a pretty remarkable move and I say that you know cognizant that um that sounds offensive many of the things I do like I always have to apologize because my wife gets really pissed at me but the the the the the simple reality is it's a true statement right I mean we are much more powerful in the United States than we were 12 months ago relative to the rest of the world um if anything I would argue that we are baiting China and trying to get them to move because we know that it's a mistake for them to move fast and it works to our disadvantage if they increasingly enslave their population and move towards a german-style model where they re-militarize or aggressively militarize and say you know what we don't care if we lose 100 million people we'll lose 100 million people to accomplish these objectives by the way we just lost 100 million I was just going to say or they are right like see if we care right so like the US is very cognizant of that risk and that the U.S cannot tolerate losing a million people much less 100 million um so I would argue that we're effectively trying to bait China into moving faster and before they are prepared with actually the great irony being that there's you know if you just think about that Apex right China effectively can militarize and try to respond but it looks like that pyramid of being an actor in New York City it's going to last about six months before they can no longer sustain it and then it's going to start crashing down because their population can't handle it and they're increasingly being shut off from the rest of the world and their ability to provide goods and services that the rest of the world values right not to mention the the the the straights and the the uh geographically China is locked in such a way that it's actually quite easy to blockade access from oil tankers and other types of exports and you can't really build the pipelines to the Russian Eastern uh oil Productions in any reasonable time for that would take what a decade at least so it seems like uh it's China and it's War right so recognize that like there's lots of things you can do when you decide that you're really committed to doing it and you don't care about the loss of life and you don't you know you know they built we can accomplish great things with just throw enough death and suffering at it yeah I know and and I mean Mike unfortunately that's true right I mean if you if you really like stop worrying about the either down duck and say you know just screw it just Dynamite the whole thing you're gonna clear a lot of land right um and you can do a lot of stuff so you know I I'm not going to go so far as to say like they can't actually come up with Solutions you know necessity is the mother of invention both here and there but the faster we force them to move you know we effectively have them in in the chest term of Zog zwang right whatever they do is a deterioration of the existing system the existing position um you know all of that effectively means that a theory that I have put forward and you know it's it's similar to Peter's ahans Etc like the US is by far the best position the fear that I have but it goes back to all the discussions we're having around terrible policy Etc is that this is not the end of the American Empire it's the beginning of the American Empire and the end of the American Republic right that we're done having the conversations on what should we do and how do we incorporate all the touchy-feely stuff and make sure the people that have multiple pronouns can afford homes and you know various Urban environments right and we just moved to like nope you know what only way you get home is if you serve in the military right that's a solution right why not it Jazz with Victor schwetz's uh by the way I think if you go back and you look at my interview with Victor I'm going to be doing another one in in I believe it's February on simplify's Channel you know what I said very clearly is I hate this I absolutely hate this but everything I'm seeing suggests that you're correct right and and like I'm sure the YouTube channel is going to light up but like just seriously think about it what happens if the US government says serve in the military will give you a home right I mean in all seriousness my son they're giving a half million dollar education and at some point you know they're gonna hand over a piece of equipment to them that will cost more than you and I would ever make in our lives probably more than you know simplify currently manages and be like yeah you're a 24 year old kid try not to blow it up too fast right like would they give them a 350 000 home why not right that's what they did in Rome they gave them tracks of land yeah right so like there's all sorts of things we can do to change the outcomes and steer it in a direction that ultimately we want that feels deeply foreign and unsettling to how we're currently positioned seems like the possibility to end on a positive note has uh flown out the window really quickly hold on though we can still give the people what they want right so let's at least finish on an investment theme right so this wasn't what they wanted yeah I know yeah I think they probably did but but let's also give them the icing on the cake right so um you know what is the right approach from an investment standpoint here you know what's what is what's the the best way to diversify or hedge um the risks that we've been talking about and maximize opportunity in in the current environment or over the next five or ten years well I mean I'm going to leave you with just you know the very obvious answer the Bitcoin fixes this oh no a little joke all right you don't have to be taken out a couple texts and put all over over Twitter you see that you're gonna see that I know a couple of podcasters that are going to use that clip we've turned him we've turned him yeah actually the one of the funnier things is um uh you know nick uh Carter who basically started my whole adventures in Bitcoin land has now flipped on bitcoin and you know is inhabiting my DM and he's like man I'm really sorry I didn't realize what jerks these Bitcoin maximalists were um you know so it's actually pretty funny irony that went back in that direction um you know so so look um a lot of people have forward forwarded me Russell Napier's stuff and have highlighted you know this idea that okay Russell predicted higher inflation and that this is the direction that's going to go right I just want to emphasize that those that framework of you know Financial repression has been broadly in place since roughly 2012 with low interest rate environments um and the confusing part has been low measured inflation right now people have substituted all sorts of stuff that says you know oh well the inflation shows up in asset prices Etc I don't actually think that's the case I think that's largely a function of the passive Dynamic we've talked about that elsewhere I don't want to spend any more time on revisiting it um but I I broadly would argue that I think what is happening and the path that we're heading down forces us into Russell's world right because if the Federal Reserve can crank interest rates by 500 basis points in a year and take basically 30 of the Russell 3000 and turn it from businesses that are capable of operating to businesses that are incapable of refinancing themselves and continuing to operate in their current structure there is no investment that can occur without blessing from the emperor right like that's really the conditions that we're setting up for and so in that framework I would argue that people want to spend more and more time thinking about what are the priorities of the government not do I agree with them or disagree with them but how can I work alongside in a profiteer framework you know enabling the emperor to express more fully his point of view right I don't know who that Emperor is going to be it definitely is not Biden he's a caretaker along the process I doubt that it's the scientist although he has the requisite meanness to him right um are you suggesting the orange man is back absolutely not I think I I think we will actually find that the orange man does not return I certainly hope that that's the case the wonderful thing about Nancy Pelosi and Donald Trump and Joe Biden and all of that is that they're mortal and they're gonna die so we don't have to put up with them for that much longer right um boy they've been tough to kill yeah well you know there's been an attempt on Paul Pelosi's life we've had you know had an attempt on you know various forms of leadership we've seen Abe killed right like we're seeing the fourth turning type Dynamics in action right um you're seeing that it is no longer unacceptable to think legitimately that I can execute or assassinate the emperor um and I think unfortunately we're going to see more of that right so big Tech do you think they're going to be then I think big Tech will ultimately be cowed I think what you're seeing with Twitter is is probably the first signs of that right and also appropriated by the government increasingly right for the for the government's purposes and you know there's parts of it that are good right and there's parts of that that are bad um you know I think most of us are deeply uncomfortable with it but again that's part of Russell's point and I you know I would highlight that I don't actually think that Russell correctly diagnosed what transpired up to this point but I do think that the actions that have taken place from Powell and others has effectively put the nail in the coffin on the idea you know to steal from Dan Ox right you know if you're not doing macro macros doing you if you're not doing what the government wants you to do now man you have no certainty that you're going to be okay okay so how does a global optimism well yeah I know but I'm gonna I'm going I'm getting there like how do you how do you position for that right I mean Global cap weighted equities still skew pretty heavily to Tech um Global issuance weighted bonds you know it seems to me that your invoking a future environment that will be unkind to those um those waiting schemes or those types of those types of portfolios um how should people diversify you know what are some other ways to think about the problem um again like you know I'm just going to push it back into the same underlying framework right I think broadly that Russell has it correct we're talking about moving towards a more autocratic system we're talking about moving towards the system we're focused around National Security and autarky that means if you want to invest in Mountain Pass you know and have or Greenland and have you know rare Earths produced in the United States or on North American soil in a manner that facilitates the U.S national security interests like that probably seems like a pretty reasonable place to be if you can pull off what you know Elon Musk and others have pulled off which is favorable financing terms from the government that locks in a you know um a path of you know um certainty that is far from clear right um but I I actually tend to agree with you that it strikes me as far more likely that the ministry of Truth is managed by Google and cowed Google employees then it's managed by Lockheed Martin right right and like that it it it's you know I've said this 50 million times I don't know how else to say it like it deeply saddens me that that's the world that seems to be in front of us man it does seem like that's the path we're going right and it's the Natural Evolution of something that you've heard me talk about everywhere else like you know in all seriousness while I'm painting a ugly picture and something that you really don't want to hear where else are you going to go you're gonna go to Canada no the mortgages are six percent there all right okay Canada's got lots of awards right I mean are you going to go to New Zealand New Zealand's a population of five million people right and by the way they were even more intrusive in their lockdowns you're gonna go to Brazil so was Canada that seems like a great choice no it's just like where are you actually gonna go there's nowhere left yeah if you want to favor Industrials you want to favor um you know commodity producers in general energy producers in general um or maybe just broad Commodities because I mean we keep seeing that governments are unwilling to allow commodity companies to enjoy so-called windfall profits right so while the underlying Commodities may continue to do well the companies that will be relied upon to extract them may not um see a majority of the profit would otherwise accrue right so there's again not a not a terrible model and I would suggest if I look at other places around the world we're probably further down this path right I mean the nationalization that's occurred in places like Japan in Europe et cetera that is likely to take on much more explicit tones as we move forward you know one way of handling social policy as you say to the auto companies you can't fire people right like you know we we did that for years and years and years and we've forgotten how common that was uh in the early 1990s I worked on the restructuring of PepsiCo Spain and we you know we did the whole analysis and we're like uh well this is really easy you've just got too many workers and they're like oh yeah um they refused to be fired right um uh so you have to have a different solution okay wait a second the problem is you have too many workers and they refuse to be fired and the government will not allow you to fire them so how do we come up with a solution okay well you just have to accept lower profitability right and that is a method of transferring wealth to workers away from you know the the bourgeoisie right so you know that that does seem like a reasonable path on another show we'll have to explore ways to um move more power to labor um in a productive way that doesn't require this kind of authoritative for authoritarian uh Direction but we're now at two hours and 10 minutes and while I could I think we all could pick your brain for several more hours we probably should let you go and enjoy your weekend and uh I appreciate that very much my dogs just came running down to tell me that we've been on for two hours plus minutes and uh yeah and I'm thinking about you and your your assertion that I make sound bites so this is a two-hour sound like there we go I think I think actually in the last call the dog came down and pulled a boy to go for a walk too yeah that's the easiest way indicator of that dog you've been very generous with your time I really appreciate it always fun hanging out with you guys I'll talk to you later for sure enjoy your weekend see ya most investors feel comfortable with their domestic equity and bond portfolios because they tend to thrive during periods of economic growth and low inflation and we don't blame you it's been a great ride but it's a big world out there full of opportunities you may be ignoring sadly we live in a world dominated by a fear of missing out or fomo and in the last 10 years U.S equities and bonds have outperformed and generated massive amounts of fomo this hasn't always been the case in the mid-2000s the best performing markets were International equities especially Emerging Markets golden Commodities so what happens if growth collapses and inflation becomes the new Norm or what if the U.S dollar collapses and U.S assets are no longer attractive what will the new fomo markets be and will your portfolio keep up or be left behind inter-rational resolve adaptive asset allocation Fund ticker rdmix a strategy that is designed to thrive across different markets and economic regimes unlike most 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Channel: ReSolve Asset Management

Views: 10,319

Keywords: #inflation, asset allocation, asset management, diversification, equity momentum, evidence based investing, factor investing, global equity, hedge fund, liquid alternative, machine learning, managed futures, portfolio management, portfolio optimization, quant investing, resolve riffs, risk parity, security selection, systematic investing, tactical asset allocation, trend following, stock market, trading strategies, stocks, quant, Retirement Strategies, mike green

Id: U_tr-lWlY7Y

Length: 131min 46sec (7906 seconds)

Published: Fri Nov 04 2022